Last updated on April 11th, 2024 at 11:13 pm
Title 12—Banks and Banking–Volume 7
CHAPTER VI—FARM CREDIT ADMINISTRATION
SUBCHAPTER A—ADMINISTRATIVE PROVISIONS
PART 600—ORGANIZATION AND FUNCTIONS
Subpart A—Farm Credit Administration
§ 600.1 The Farm Credit Act.
The Farm Credit Act of 1971, Public Law 92-181 recodified and replaced the prior laws under which the Farm Credit Administration (FCA) and the institutions of the Farm Credit System (System or FCS) were organized and operated. The prior laws, which were repealed and superseded by the Act, are identified in section 5.40(a) of the Act. Subsequent amendments to the Act and enactment dates are as follows: Public Law 94-184, December 31, 1975; Public Law 95-443, October 10, 1978; Public Law 96-592, December 24, 1980; Public Law 99-190, December 19, 1985; Public Law 99-198, December 23, 1985; Public Law 99-205, December 23, 1985; Public Law 99-509, October 21, 1986; Public Law 100-233, January 6, 1988; Public Law 100-399, August 17, 1988; Public Law 100-460, October 1, 1988; Public Law 101-73, August 9, 1989; Public Law 101-220, December 12, 1989; Public Law 101-624, November 28, 1990; Public Law 102-237, December 13, 1991; Public Law 102-552, October 28, 1992; Public Law 103-376, October 19, 1994; Public Law 104-105, February 10, 1996; Public Law 104-316, October 19, 1996; Public Law 107-171, May 13, 2002; Public Law 110-246, June 18, 2008. The law is codified at 12 U.S.C. 2000, et seq.
§ 600.2 Farm Credit Administration.
(a) Background. The Farm Credit Administration is an independent, non-appropriated fund agency in the executive branch of the Federal Government. The FCA Board and employees carry out the FCA’s functions, powers, and duties.
(b) Locations. FCA’s headquarters address is 1501 Farm Credit Drive, McLean, Virginia 22102-5090. The FCA has the following field offices:
§ 600.3 Farm Credit Administration Board.
(a) FCA Board. The President appoints the three full-time Board members with the advice and consent of the Senate. The Board manages, administers, and establishes policies for FCA. The Board promulgates the rules and regulations implementing the Farm Credit Act of 1971, as amended, and provides for the examination of Farm Credit System institutions.
(b) Chairman of the FCA Board. The Chairman of the Board is FCA’s Chief Executive Officer. The Chairman directs the implementation of the policies and regulations adopted by the Board and, after consulting the Board, the execution of the administrative functions and duties of FCA. In carrying out the Board’s policies, the Chairman acts as the spokesperson for the Board and represents the Board and FCA in their official relations within the Federal Government.
§ 600.4 Organization of the Farm Credit Administration.
(a) Offices and functions. The primary offices of the FCA are:
(1) Office of Inspector General. The Office of Inspector General conducts independent audits, inspections, and investigations of Agency programs and operations and reviews proposed legislation and regulations.
(2) Secretary to the Board. The Secretary to the Board serves as the parliamentarian for the Board and keeps permanent and complete records and minutes of the acts and proceedings of the Board.
(3) Equal Employment and Inclusion Director. The Office of Equal Employment and Inclusion manages and directs the Agency-wide Diversity, Inclusion, and Equal Employment Opportunity Program for FCA and FCSIC. The office serves as the chief liaison with the Equal Employment Opportunity Commission and the Office of Personnel Management on all EEO, diversity, and inclusion issues. The office provides counsel and leadership to Agency management to carry out its continuing policy and program of nondiscrimination, affirmative action, and diversity.
(4) Designated Agency Ethics Official. The Designated Agency Ethics Official is designated by the FCA Chairman to administer the provisions of title I of the Ethics in Government Act of 1978, as amended, to coordinate and manage FCA’s ethics program and to provide liaison to the Office of Government Ethics with regard to all aspects of FCA’s ethics program.
(5) Office of Congressional and Public Affairs. The Office of Congressional and Public Affairs performs Congressional liaison duties and coordinates and disseminates Agency communications.
(6) Office of Secondary Market Oversight. The Office of Secondary Market Oversight regulates and examines the Federal Agricultural Mortgage Corporation for safety and soundness and compliance with law and regulations.
(7) Office of the Chief Operating Officer. The Chief Operating Officer has broad responsibility for planning, directing, and controlling the operations of the Offices of Agency Services, Chief Financial Officer, Examination, Regulatory Policy, Information Technology, Data Analysis and Economics, and General Counsel in accordance with the operating philosophy and policies of the FCA Board.
(8) Office of Agency Services. The Office of Agency Services, manages human capital and administrative services for the Agency. This includes providing the following services to the Agency: Staffing and placement, personnel security programs, job evaluation, compensation and benefits, payroll administration, performance management and awards, employee relations, employee training and development, contracting, acquisitions, records and property management, supply services, agency purchase cards, design, publication, and mail service.
(9) Office of the Chief Financial Officer. The Office of the Chief Financial Officer, manages and delivers timely, accurate, and reliable financial services to the Agency. The office establishes financial policies and procedures and oversees the formulation and execution of the Agency’s budget. The office reports periodically on the status of the Agency’s financial position, results of operations, and budgetary resources. It also oversees the Agency’s travel management and internal controls.
(10) Office of Regulatory Policy. The Office of Regulatory Policy develops policies and regulations for the FCA Board’s consideration; evaluates regulatory and statutory prior approvals; manages the Agency’s chartering activities; and analyzes policy and strategic risks to the System.
(11) Office of Examination. The Office of Examination evaluates the safety and soundness of FCS institutions and their compliance with law and regulations and manages FCA’s enforcement and supervision functions.
(12) Office of Information Technology. The Office of Information Technology manages and delivers the Agency’s information technology, data analysis infrastructure, and the security supporting Agency technology resources.
(13) Office of Data Analytics and Economics. The Office of Data Analytics and Economics evaluates strategic risks to the System using data, analytics, economic trends, and other risk factors. The Office serves as a steward for Agency data and as a provider of information for objective, evidence-based decision making across the Agency. The Office facilitates an agency wide strategy for analytics and collaborates across Offices on business intelligence tools and development of models to meet the strategic needs of the Agency.
(14) Office of General Counsel. The Office of General Counsel provides legal advice and services to the FCA Chairman, the FCA Board, and Agency staff.
(b) Additional information. You may obtain more information on the FCA’s organization by visiting our website at http://www.fca.gov. You may also contact the Office of Congressional and Public Affairs:
(1) In writing at FCA, 1501 Farm Credit Drive, McLean, Virginia 22102-5090;
(2) By email at [email protected]; or
(3) By telephone at (703) 883-4056.
Subpart B—Rules and Procedures for Service Upon the Farm Credit Administration
§ 600.10 Service of Process.
(a) Except as otherwise provided in the Farm Credit Administration regulations, the Federal Rules of Civil Procedure or by order of a court with jurisdiction over the Farm Credit Administration, any legal process upon the Farm Credit Administration shall be duly issued and served upon the Secretary to the Farm Credit Administration Board, 1501 Farm Credit Drive, McLean, Virginia 22102-5090.
(b) Service of process upon the Secretary to the Farm Credit Administration Board may be effected by personally delivering a copy of the documents to the Secretary or by sending a copy of the documents to the Secretary by registered or certified mail.
(c) The Secretary shall promptly forward a copy of all documents to the General Counsel and to any Farm Credit Administration personnel named in the caption of the documents.
PART 601—EMPLOYEE RESPONSIBILITIES AND CONDUCT
§ 601.100 Cross-references to employee ethical conduct standards and financial disclosure regulations.
Board members, officers, and other employees of the Farm Credit Administration are subject to the Standards of Ethical Conduct for Employees of the Executive Branch at 5 CFR part 2635, the Farm Credit Administration regulation at 5 CFR part 4101, which supplements the Executive Branch-wide Standards, and the executive branch-wide financial disclosure regulations at 5 CFR part 2634.
PART 602—RELEASING INFORMATION
Subpart A—Information and Records Generally
§ 602.1 Purpose and scope.
This part contains FCA’s rules for disclosing our records or information; processing requests for records under the Freedom of Information Act (5 U.S.C. 552, as amended)(FOIA); FOIA fees; disclosing otherwise exempt information in litigation when FCA is not a party; and getting documents in public rulemaking files. Part 603 of this chapter tells you how to get records about yourself under the Privacy Act of 1974, 5 U.S.C. 552a.
§ 602.2 Disclosing reports of examination and other non-public information.
(a) Disclosure by FCA. Reports of examination are FCA property. We prepare them for our confidential use and the use of the institution examined. We do not give reports of examination to the public. Except as provided in this section, only the Chairman or the Chairman’s designee may consent to disclosing reports of examination of Farm Credit System institutions and other institutions subject to our examination. You may send a written request to our General Counsel that explains why we should give permission.
(b) Disclosure by Farm Credit System institutions. An institution that we have examined may disclose its report of examination to its officers, directors, and agents, such as its attorney or accountant, if they agree to keep the report confidential. In addition, banks may disclose their reports of examination to their affiliated associations, associations may disclose their reports to their supervisory bank, and service corporations may disclose their reports of examination to the institutions that own them. An institution may not disclose these institutions’ reports of examination to any other person without our written permission.
(c) Disclosure to the Farm Credit System Insurance Corporation. Without waiving any privilege or limiting any of the requirements of section 5.59 of the Farm Credit Act of 1971, as amended, we may disclose reports of examination and other examination and non-public information, including data from reports of System accounts and exposures received pursuant to § 621.15 of this chapter, to the Farm Credit System Insurance Corporation pursuant to confidentiality and data security agreements executed between the agencies.
(d) Disclosure to governmental entities. Without waiving any privilege, we will disclose reports of examination to other Federal government entities:
(1) In response to a Federal court order;
(2) In response to a request of either House or a Committee or Subcommittee of Congress; or
(3) When requested for confidential use in an official investigation by authorized representatives of other Federal agencies.
Subpart B—Availability of Records of the Farm Credit Administration
§ 602.3 Definitions.
Appeal means a request under the FOIA asking for the reversal of a decision.
Business information means trade secrets or other commercial or financial information that is privileged or confidential.
Business submitter means any person or entity that gives business information to the Government.
FOIA request means a written request for FCA records, made by any person or entity that either directly or indirectly invokes the FOIA or this part.
Record means all documentary materials, such as books, papers, maps, photographs, and machine-readable materials, regardless of physical form or characteristics (for example, electronic format) in our possession and control when we receive your FOIA request.
§ 602.4 How to make a request.
(a) How to make and address a request. Your request for records must be in writing and addressed to the FOIA Officer, Farm Credit Administration. You may send it:
(1) By mail to 1501 Farm Credit Drive, McLean, Virginia 22102-5090;
(2) By facsimile to (703) 790-0052; or
(3) By E-mail to [email protected].
(b) Description of requested records. You must describe the requested records in enough detail to let us find them with a reasonable effort. If the description is inadequate, we will ask you to provide more information and the 20-day response period under § 602.5(a) will not begin until we receive your reply.
(c) Faster response. You may ask for a faster response to your FOIA request by giving us a statement, certified to be true, that you have a “compelling need.” The FOIA Officer will tell you within 10 calendar days after receiving the request whether we will respond to it faster. If so, we will respond to your request as soon as we can. A compelling need means:
(1) Someone’s life or physical safety may be in danger if we do not respond to the request faster; or
(2) You urgently need to tell the public about Federal government activity as a representative of the news media.
(d) Request for personal information. If you or your representative requests your personal information, we may require you to give us a notarized request, identify yourself under penalty of perjury, or provide other proof of your identity.
(e) Fees. When making a request, you must tell us the most you are willing to pay. Our charges are in the fee tables in §§ 602.11 and 602.12. You may also want to tell us the purpose of your request so we can classify your request for fee purposes.
(f) Other requests. To ensure the public has timely information about our activities, the Office of Congressional and Public Affairs will make available copies of public documents, such as the FCA annual report and media advisories.
§ 602.5 FCA response to requests for records.
(a) Response time. Within 20 business days of receiving your request, the FOIA Officer will tell you whether we have granted or denied it. If you send your request to the wrong address, the 20-day response time will not begin until the FOIA Officer receives your request.
(b) Extension of response time. In “unusual circumstances,” the FOIA Officer may extend the 20-day response time for up to 10 more business days by telling you in writing why we need more time and the date we will mail you our response. As used in this subpart, “unusual circumstances” means our need to:
(1) Search for and get the requested records from field offices or other locations;
(2) Search for, get, and review many records identified in a single request;
(3) Consult with another Federal agency having a substantial interest in the request; or
(4) Consult with two or more FCA offices having a substantial interest in the request.
(c) Referrals. If you ask for records we have that another Federal agency originated, we will refer the request to the originating agency and tell you about the referral. If you should have sent your request to another Federal agency, we will refer the request to that agency and so advise you.
§ 602.6 FOIA exemptions.
The FOIA allows agencies to withhold documents in certain categories. For instance, we do not have to give you documents that relate to our examination of institutions or that would violate the personal privacy of an individual. If we do not give you a document because the FOIA does not require us to, we will tell you which FOIA exemption applies to our decision.
§ 602.7 Confidential business information.
(a) FCA disclosure. FCA may disclose business information from a business submitter only under this section. This section will not apply if:
(1) We decide the business submitter has no valid basis to object to disclosure;
(2) The information has been published lawfully or made available to the public; or
(3) Law (other than the FOIA) requires disclosure of the information.
(b) Notice by FCA. When we receive a request for confidential business information, the FOIA Officer will promptly tell the requester and the business submitter in writing that the responsive records may be free from disclosure under the FOIA. We will give the business submitter a reasonable time to object to the proposed disclosure of the responsive records and tell the requester whenever:
(1) The business submitter has in good faith labeled the information a trade secret or commercial or financial information that is privileged or confidential. We will provide such notice for 10 years after receiving the information unless the business submitter justifies the need for a longer period; or
(2) We believe that disclosing the information may result in commercial or financial injury to the business submitter.
(c) Objection to release. A business submitter who objects to our releasing the requested information should tell us in writing why the information is a trade secret or commercial or financial information that is privileged or confidential.
(d) FCA response. (1) We will consider carefully a business submitter’s objections. If we decide to disclose business information over the submitter’s objection, the FOIA Officer will explain to the submitter in writing why we disagreed with the submitter’s objection and describe the business information to be disclosed.
(2) We will tell the requester and the submitter the proposed disclosure date at the same time.
(3) If a submitter sues to prevent release, we will promptly tell the requester and will not disclose the business information until after the court’s decision.
(4) If a requester sues to compel disclosure, we will promptly tell the business submitter.
§ 602.8 Appeals.
(a) How to appeal. You may appeal a total or partial denial of your FOIA request within 90 calendar days of the date of the denial letter. Your appeal must be in writing and addressed to the Director, Office of Agency Services (OAS), Farm Credit Administration. You may send it:
(1) By mail to 1501 Farm Credit Drive, McLean, Virginia 22102-5090;
(2) By facsimile to (703) 893-2608; or
(3) By Email to [email protected]. You also have the right to seek dispute resolution services from FCA’s FOIA Public Liaison and the Office of Government Information Services.
(b) FCA action on appeal. Within 20 business days of receiving your appeal, the OAS Director will tell you, in writing, whether we have granted or denied it. If you send your appeal to the wrong address, the 20-day response time will not begin until the OAS Director receives your appeal.
(c) Unusual circumstances. In unusual circumstances, the OAS Director may extend the 20-day response time by telling you in writing why we need more time and the date we will mail you our response. All extensions, including any extension of the response time for the first request, may not total more than 10 business days.
(d) How to seek dispute resolution services. Requesters may seek dispute resolution services from:
(1) FCA’s FOIA Public Liaison;
(i) By mail addressed to FOIA Public Liaison, 1501 Farm Credit Drive, McLean, Virginia 22101-5090;
(ii) By facsimile at 703-790-3260; or
(iii) By Email at [email protected].
(2) Office of Government Information Services;
(i) By mail to Office of Government Information Services, National Archives and Records Administration, 8601 Adelphi Road—OGIS, College Park, Maryland, 20740-6001;
(ii) By facsimile at (202) 741-5769; or
(iii) By Email at [email protected].
§ 602.9 Current FOIA index.
FCA will make a current index available for public inspection and copying, as required by the FOIA. We will give you an index for the cost of copying it. Because we rarely receive requests for an index, we have not published one in the
Subpart C—FOIA Fees
§ 602.10 Definitions.
Commercial use request means an information request by an individual or entity seeking information for a use or purpose that furthers the commercial, trade, or profit interests of that individual or entity.
Direct costs means the costs FCA incurs in searching for and reproducing documents to respond to a FOIA request. For a commercial use request, it also means the costs we incur in reviewing documents to respond to the request. Direct costs include the pro rated cost of the salary of the employee performing the work (based on the basic rate of pay plus 16 percent to cover benefits) and the cost of operating reproduction equipment. They do not include overhead expenses.
Educational institution means a preschool, a public or private elementary or secondary school, an institution of undergraduate or graduate higher education, an institution of professional education, or an institution of vocational education that runs a program of scholarly research.
Noncommercial scientific institution means a nonprofit institution that conducts scientific research that is not intended to promote any particular product or industry.
Pages mean 8-1/2 × 11 inch or 11 × 14 inch paper copies.
Representative of the news media means any person actively gathering news for an entity that publishes or broadcasts news to the public. News means information about current events or of current interest to the public.
Reproduce (or reproduction) means copying a record.
Review means looking at documents found in response to a FOIA request to decide whether any portion should be withheld. It does not include the time spent resolving legal or policy issues.
Search means all time spent looking for material responsive to a FOIA request, including page-by-page or line-by-line identification of material within documents.
§ 602.11 Fees by type of requester.
Depending on your identity and the purpose of your request, the FCA may charge you the direct costs of searching for responsive records, reviewing the records, and reproducing them. If necessary, we will seek clarification before classifying the request.
(a) Educational institutions and noncommercial scientific institutions. We charge fees for reproduction costs only. The first 100 pages are free. You must show that the request is sanctioned by an educational or noncommercial scientific institution and that you seek the records for scholarly or scientific research, not for a commercial use.
(b) Representatives of the news media. We charge fees for reproduction costs only. The first 100 pages are free. You must be a representative of the news media, and the request must not be made for a commercial use. A request for records supporting news distribution is not a request for a commercial use.
(c) Commercial use. We charge the direct cost for search, review, and reproduction. Commercial use requesters are not entitled to free search time or free reproduction. We will charge you even if we do not disclose any records.
(d) All others. The first 2 hours of search time and the first 100 pages of reproduction are free. After that, we will charge you for search and reproduction costs. We will charge you for a search even if we do not disclose any records.
(e) Fee table. The fee information in paragraphs (a) through (d) of this section is presented in the table to this paragraph. You may apply for a waiver if your request is not mostly in your commercial interest and the disclosure is in the public interest. See § 602.13.
Fee Table
| Type of requester | Charges for | Reproduction | |
|---|---|---|---|
| Search time | Review time | ||
| •Educational •Noncommercial scientific users •News media | No Charge | No charge | First 100 pages free, $ 0.15 a page after that. |
| Commercial Users 1 | All direct costs | All direct costs | $0.15 a page. |
| All others 1 | First 2 hours free, all direct costs after that | No charge | First 100 pages free, $0.15 a page after that. |
1 You are responsible for fees even if we do not disclose any records.
§ 602.12 Fees.
(a) FCA may charge:
(1) For manual searches for records and for review, the pro rated cost of the salary of the employee doing the work.
(2) For computer searches for records, the direct costs of computer search time and supply or material costs.
(3) For each page made by photocopy or similar method, fifteen cents a page, and for other forms of copying, the direct costs.
(4) The direct costs of elective services, such as certifying records as true copies or sending records by special methods.
(b) We will not charge fees when total assessed fees are less than $15.00.
(c) You must pay by personal check, bank draft drawn on a United States bank, or postal money order made payable to the Treasury of the United States.
(d) We treat a request about yourself under Privacy Act fee rules.
(e) The information in paragraphs (a) and (b) of this section is presented in the table to this paragraph. Direct costs means the costs FCA incurs in searching for, reviewing, and reproducing documents to respond to a request. Direct costs include pro rated salary and reproduction costs. We will not charge fees when they total less than $15.00.
Fee Amounts Table
| Type of fee | Amount of fee |
|---|---|
| Manual Search and Review | Pro rated Salary Costs. |
| Computer Search | Direct Costs. |
| Photocopy | $0.15 a page. |
| Other Reproduction Costs | Direct Costs. |
| Elective Services | Direct Costs. |
(f) We will not assess fees if we fail to comply with any time limit under the FOIA or these regulations, and have not timely notified the requester, in writing, that an unusual circumstance exists. If an unusual circumstance exists, and timely, written notice is given to the requester, we may be excused an additional 10 working days before fees are automatically waived under this paragraph.
(g) If we determine that unusual circumstances apply and more than 5,000 pages are necessary to respond to a request, we may charge fees if we provided a timely, written notice to the requester and discussed with the requester via mail, Email, or telephone (or made at least three good-faith attempts to do so) how the requester could effectively limit the scope of the request.
(h) If a court has determined that exceptional circumstances exist, a failure to comply with time limits imposed by these regulations or FOIA shall be excused for the length of time provided by court order.
§ 602.13 Fee waiver.
We may waive or reduce fees if disclosure is not mostly in your commercial interest but, instead, is in the public interest because it will advance public understanding of the Federal government’s operations or activities.
§ 602.14 Advance payments—notice.
(a) If fees will be more than $25.00 and you have not told us in advance that you will pay estimated fees, we will tell you the estimated amount and ask that you agree to pay it. Except as noted in this section, we will begin processing the FOIA request when we receive your agreement to pay.
(b) If estimated fees exceed $250.00 and you have a history of promptly paying fees charged for information requests, we may respond to your request based on your agreement to pay.
(c) If estimated fees exceed $250.00 and you have no history of paying fees, we may require you to pay in advance.
(d) If you have previously failed to pay fees for information requests or paid them late, you must pay any fees still owed, plus interest calculated under § 602.15, and the estimated fees before we will respond to a new or a pending request.
(e) If we require advance payment or an advance agreement to pay, we will not consider your request to be received and will not respond to it until you meet the requirement.
§ 602.15 Interest on unpaid fees.
If you fail to pay fees on time, FCA may charge you interest starting on the 31st calendar day following the date we bill you. We will charge you interest at the rate allowed by law (31 U.S.C. 3717) on the billing date.
§ 602.16 Combining requests.
You may not avoid paying fees by filing multiple requests at the same time. When FCA reasonably believes that you, alone or with others, are breaking down one request into a series of requests to avoid fees, we will combine the requests and charge accordingly.
Subpart D—Testimony and Production of Documents in Legal Proceedings in Which FCA is Not a Named Party
§ 602.17 Policy.
(a) The rules in this subpart preserve the confidentiality of FCA’s documents and information, conserve employees’ time for official duties, uphold fairness in litigation, and help the Chairman decide when to allow testimony and to produce documents. This subpart does not affect access to documents under the FOIA or the Privacy Act. See subpart B of this part and part 603 of this chapter.
(b) Generally, we will not produce documents voluntarily and employees will not appear as witnesses voluntarily in any legal proceeding. However, in limited circumstances, the Chairman may allow the production of documents or testimony when the Chairman decides it would be in the best interest of FCA or the public. All privileged documents produced under this subpart remain our property. Any employee having information or privileged documents may disclose them only as allowed by the Chairman.
§ 602.18 Definitions.
Court means any entity conducting a legal proceeding.
Demand means any order, subpoena, or other legal process for testimony or documents.
Direct costs means FCA’s costs to search for, review, and reproduce documents to respond to a request. Direct costs include the pro rated cost of the salary of the employee performing the work (based on the basic rate of pay plus 16 percent to cover benefits) and the cost of operating reproduction equipment.
Document means any record or other documentary materials, such as books, papers, maps, photographs, and machine-readable materials, regardless of physical form or characteristics (for example, electronic format) in our possession and control when we receive the request.
Employee means any present or former FCA employee, any present or former FCA Board member, any former Federal Farm Credit Board member, any present or former FCA-appointed receiver or conservator, and any present or former agent or contractor.
FCA Counsel means the General Counsel, a Department of Justice attorney, or counsel authorized by FCA to act for the FCA or an employee.
General Counsel means the FCA’s General Counsel or designee.
Legal proceeding means any administrative, civil, or criminal proceeding, including a discovery proceeding, before a court when FCA is not a named party and has not instituted the legal proceeding.
§ 602.19 Request for testimony or production of documents.
(a) How to make and address a request. Your request for an employee’s testimony about official matters or the production of documents must be in writing and addressed to the General Counsel, 1501 Farm Credit Drive, McLean, Virginia 22102-5090.
(b) Your request must contain the following:
(1) Title of the case;
(2) Forum;
(3) Your interest in the case;
(4) Summary of the litigation issues;
(5) Reasons for the request;
(6) Why the confidential information is important; and
(7) An explanation of why the testimony or document you want is not reasonably available from another source. If you want testimony, you must also state how you intend to use the testimony, provide a subject matter summary of the requested testimony, and explain why a document could not be used instead.
(c) The General Counsel may ask you to limit your request to make it less burdensome or to give us information to help us decide if providing documents or testimony is in the public interest.
§ 602.20 Testimony of FCA employees.
(a) An employee may testify only as the Chairman approves in writing. Generally, an employee may testify only by deposition or written interrogatory. An employee may give only factual testimony and may not give opinion testimony.
(b) If, in response to your request, the Chairman decides that an employee may testify, you must serve the employee with a subpoena under applicable Federal or State rules of procedure and at the same time send a copy of the subpoena by registered mail to the General Counsel.
(c) Normally, depositions will be taken at the employee’s office, at a time convenient to the employee and the FCA. FCA counsel may represent FCA’s interests at the deposition.
(d) If you request the deposition, you must give the General Counsel a copy of the deposition transcript at no charge.
§ 602.21 Production of FCA documents.
(a) An FCA employee may produce documents only as the Chairman allows.
(b) Before we will release any documents, the requesting party must get an acceptable protective order from the court before which the action is pending that will preserve the confidentiality of the documents to be released.
(c) On request, we may provide certified or authenticated copies of documents.
§ 602.22 Fees.
(a) For documents released under this subpart, FCA will charge:
(1) The direct costs of searching for responsive records, including the use of a computer, reviewing the records, and reproducing them. We also will charge for the direct costs of any other services and materials that we provide at your request.
(2) Fifteen cents a copy for each page made by photocopy or similar process.
(3) The direct costs for each certification or authentication of documents.
(b) You must pay by personal check, bank draft drawn on a United States bank, or postal money order made payable to FCA. We will waive fees of $15.00 or less. We will send the documents after we receive your payment.
§ 602.23 Responses to demands served on FCA employees.
(a) An employee served with a demand or a subpoena in a legal proceeding must immediately tell the General Counsel of such service, the testimony or documents described in the demand, and all relevant facts.
(b) When the Chairman does not allow testimony or production of documents, FCA Counsel will provide the regulations in this subpart to the party or court issuing the demand and explain that the employee may not testify or produce documents without the Chairman’s prior approval.
(c) If the court rules the employee must comply with the demand regardless of the Chairman’s instructions not to do so, the employee must respectfully refuse to comply.
(d) FCA’s decision under this subpart to comply or not to comply with any demand is not a waiver, an assertion of privilege, or an objection based on relevance, technical deficiency, or any other ground. We may oppose any demand on any legal ground.
§ 602.24 Responses to demands served on non-FCA employees or entities.
If you are not an employee and are served with a demand or a subpoena in a legal proceeding directing you to produce or testify about an FCA report of examination, other document created or adopted by FCA, or any related document, you must object and immediately tell the General Counsel of such service, the testimony or documents described in the demand, and all relevant facts. You also must object to the production of any documents on the basis that they are FCA’s property and cannot be released without FCA’s consent. You should tell the requester the production of documents or testimony must follow the procedures in this part.
Subpart E—Release of Records in Public Rulemaking Files
§ 602.25 General.
FCA has a public rulemaking file for each regulation. You may get copies of documents in the public rulemaking file by sending a written request to the Director, Office of Regulatory Policy, Farm Credit Administration, 1501 Farm Credit Drive, McLean, Virginia 22102-5090. We will charge fifteen cents a copy for each page. We will waive fees of $15.00 or less.
PART 603—PRIVACY ACT REGULATIONS
§ 603.300 Purpose and scope.
(a) This part is published by the Farm Credit Administration pursuant to the Privacy Act of 1974 (Pub. L. 93-579, 5 U.S.C. 552a) which requires each Federal agency to promulgate rules to establish procedures for notification and disclosure to an individual of agency records pertaining to that person, and for review of such records.
(b) The records covered by this part include:
(1) Personnel and employment records maintained by the Farm Credit Administration which are not covered by §§ 293.101 through 293.108 of the regulations of the Office of Personnel Management (5 CFR 293.101 through 293.108), and
(2) Other records contained in record systems maintained by the Farm Credit Administration.
§ 603.305 Definitions.
For the purposes of this part:
(a) Agency means the Farm Credit Administration.
(b) Individual means a citizen of the United States or an alien lawfully admitted for permanent residence;
(c) Maintain includes maintain, collect, use, or disseminate;
(d) Record means any item, collection, or grouping of information about an individual that is maintained by an agency including, but not limited to, that person’s education, financial transactions, medical history, and criminal or employment history, and that contains that person’s name, or the identifying number, symbol, or other identifying particular assigned to the individual, such as a finger or voice print or photograph;
(e) Routine use means, with respect to the disclosure of a record, the use of such record for a purpose that is compatible with the purpose for which it was collected;
(f) Statistical record means a record in a system of records maintained for statistical research or reporting purposes only and not used in whole or in part in making any determination about an identifiable individual, except as provided by 13 U.S.C. 8;
(g) System of records means a group of any records under the control of any agency from which information is retrieved by the name of an individual or by some identifying number, symbol, or other identifying particular assigned to the individual.
§ 603.310 Procedures for requests pertaining to individual records in a record system.
(a) Any present or former employee of the Farm Credit Administration seeking access to that person’s official civil service records maintained by the Farm Credit Administration shall submit a request in such manner as is prescribed by the Office of Personnel Management.
(b) Individuals shall submit their requests in writing to the Privacy Act Officer, Office of General Counsel, Farm Credit Administration, McLean, Virginia 22102-5090, when seeking to obtain from the Farm Credit Administration:
(1) Notification of whether the agency maintains a record pertaining to that person in a system of records;
(2) Notification of whether the agency has disclosed a record for which an accounting of disclosure is required to be maintained and made available to that person;
(3) A copy of a record pertaining to that person or the accounting of its disclosure;
(4) The review of a record pertaining to that person or the accounting of its disclosure. The request shall state the full name and address of the individual, and identify the system or systems of records believed to contain the information or record sought.
§ 603.315 Times, places, and requirements for identification of individuals making requests.
The individual making written requests for information or records ordinarily will not be required to verify that person’s identity. The signature upon such requests shall be deemed to be a certification by the requester that he or she is the individual to whom the record pertains, or the parent of a minor, or the duly appointed legal guardian of the individual to whom the record pertains. The Privacy Act Officer, however, may require such additional verification of identity in any instance in which the Privacy Act Officer deems it advisable.
§ 603.320 Disclosure of requested information to individuals.
(a) The Privacy Act Officer shall, within a reasonable period of time after the date of receipt of a request for information of records:
(1) Determine whether or not such request shall be granted,
(2) Notify the requester of the determination and, if the request is denied, of the reasons therefor, and
(3) Notify the requester that fees for reproducing copies of records may be charged as provided in § 603.345 of this part.
(b) If access to a record is denied because the information therein has been compiled by the Farm Credit Administration in reasonable anticipation of a civil or criminal action proceeding, the Privacy Act Officer shall notify the requester of that person’s right to judicial appeal under 5 U.S.C. 552a(g).
(c)(1) If access to a record is granted, the requester shall notify the Officer whether the requested record is to be copied and mailed to the requester or whether the record is to be made available for personal inspection.
(2) A requester who is an individual may be accompanied by an individual selected by the requester when the record is disclosed, in which case the requester may be required to furnish a written statement authorizing the discussion of the record in the presence of the accompanying person.
(d) If the record is to be made available for personal inspection, the requester shall arrange with the Privacy Act Officer a mutually agreeable time in the offices of the Farm Credit Administration for inspection of the record.
§ 603.325 Special procedures for medical records.
Medical records in the custody of the Farm Credit Administration which are not subject to Office of Personnel Management regulations shall be disclosed either to the individual to whom they pertain or that person’s authorized or legal representative or to a licensed physician named by the individual.
§ 603.330 Request for amendment to record.
(a) If, after disclosure of the requested information, an individual believes that the record is not accurate, relevant, timely, or complete, that person may request in writing that the record be amended. Such a request shall be submitted to the Privacy Act Officer and shall contain identification of the system of records and the record or information therein, a brief description of the material requested to be changed, the requested change or changes, and the reason for such change or changes.
(b) The Privacy Act Officer shall acknowledge receipt of the request within 10 days (excluding Saturdays, Sundays, and legal holidays) and, if a determination has not been made, advise the individual when that person may expect to be advised of action taken on the request. The acknowledgment may contain a request for additional information needed to make a determination.
§ 603.335 Agency review of request for amendment of record.
Upon receipt of a request for amendment of a record, the Privacy Act Officer shall:
(a) Correct any portion of a record which the individual making the request believes is not accurate, relevant, timely, or complete and thereafter inform the individual in writing of such correction, or
(b) Inform the individual in writing of refusal to amend the record and of the reasons therefor, and advise that the individual may appeal such determination as provided in § 603.340 of this part.
§ 603.340 Appeal of an initial adverse determination of a request to amend a record.
(a) Not more than 10 days (excluding Saturdays, Sundays, and legal holidays) after receipt by an individual of an adverse determination on the individual’s request to amend a record or otherwise, the individual may appeal to the Director, Office of Agency Services.
(b) The appeal shall be by letter, mailed or delivered to the Director, Office of Agency Services, Farm Credit Administration, McLean, Virginia 22102-5090. The letter shall identify the records involved in the same manner they were identified to the Privacy Act Officer, shall specify the dates of the request and adverse determination, and shall indicate the expressed basis for that determination. Also, the letter shall state briefly and succinctly the reasons why the adverse determination should be reversed.
(c) The review shall be completed and a final determination made by the Director not later than 30 days (excluding Saturdays, Sundays, and legal holidays) from receipt of the request for such review, unless the Director extends such 30-day period for good cause. If the 30-day period is extended, the individual shall be notified of the reasons therefor.
(d) If the Director refuses to amend the record in accordance with the request, the individual shall be notified of the right to file a concise statement setting forth that person’s disagreement with the final determination and that person’s right under 5 U.S.C. 552a(g)(1)(A) to a judicial review of the final determination.
(e) If an amendment of a record as requested upon review is refused, there shall be included in the disputed portion of the record a copy of the concise statement filed by the individual together with a concise statement of the reasons for not amending the record as requested. Such statements will be included when disclosure of the disputed record is made to persons and agencies as authorized under 5 U.S.C. 552a.
§ 603.345 Fees for providing copies of records.
Fees for providing copies of records shall be charged in accordance with §§ 602.11 and 602.12 of this chapter.
§ 603.350 Criminal penalties.
Section 552a (i)(3) of the Privacy Act (5 U.S.C. 552a(i)(3)) makes it a misdemeanor, subject to a maximum fine of $5,000, to knowingly and willfully request or obtain any record concerning any individual from an agency under false pretenses. Sections 552a (i) (1) and (2) of the Act (5 U.S.C. 552a (i) (1), (2)) provide penalties for violation by agency employees of the Act or regulations established thereunder.
§ 603.355 Exemptions.
(a) Specific. Pursuant to 5 U.S.C. 552a(k)(2), the investigatory material compiled for law enforcement purposes in the following systems of records is exempt from subsections (c)(3), (d), (e)(1), (e)(4) (G), (H), and (I) and (f) of 5 U.S.C. 552a and from the provisions of this part:
(b) General. (1) In addition, pursuant to 5 U.S.C. 552a (j)(2), investigatory materials compiled for criminal law enforcement in the system of records described in (b)(2) are exempt from all subsections of 5 U.S.C. 552a, except (b), (c) (1) and (2), (e)(4) (A) through (F), (e) (6), (7), (9), (10), and (11), and (i). Exemptions from the particular subsections are justified for the following reasons:
(i) From subsection (c)(3) because making available to a record subject the accounting of disclosures from records concerning him/her would reveal investigative interest on the part of the OIG. This would enable record subjects to impede the investigation by, for example, destroying evidence, intimidating potential witnesses, or fleeing the area to avoid inquiries or apprehension by law enforcement personnel.
(ii) From subsection (c)(4) because this system is exempt from the access provisions of subsection (d) pursuant to subsection (j)(2) of the Privacy Act.
(iii) From subsection (d) because the records contained in this system relate to official Federal investigations. Individual access to those records might compromise ongoing investigations, reveal confidential informants or constitute unwarranted invasions of the personal privacy of third parties who are involved in a certain investigation. Amendment of the records would interfere with ongoing criminal law enforcement proceedings and impose an impossible administrative burden by requiring criminal investigations to be continuously reinvestigated.
(iv) From subsections (e) (1) and (5) because in the course of law enforcement investigations, information may occasionally be obtained or introduced the accuracy of which is unclear or which is not strictly relevant or necessary to a specific investigation. In the interests of effective law enforcement, it is appropriate to retain all information that may aid in establishing patterns of criminal activity. Moreover, it would impede the specific investigative process if it were necessary to assure the relevance, accuracy, timeliness and completeness of all information obtained.
(v) From subsection (e)(2) because in a law enforcement investigation the requirement that information be collected to the greatest extent possible from the subject individual would present a serious impediment to law enforcement in that the subject of the investigation would be informed of the existence of the investigation and would therefore be able to avoid detection, apprehension, or legal obligations or duties.
(vi) From subsection (e)(3) because to comply with the requirements of this subsection during the course of an investigation could impede the information gathering process, thus hampering the investigation.
(vii) From subsections (e)(4) (G), and (H), and (I), (e)(8), (f), (g) and (h) because this system is exempt from the access provisions of subsection (d) pursuant to subsection (j) of the Privacy Act.
(2) Office of Inspector General Investigative Files—FCA.
PART 604—FARM CREDIT ADMINISTRATION BOARD MEETINGS
§ 604.400 Definitions.
For purposes of this part:
(a) Agency means the Farm Credit Administration.
(b) Board means the Farm Credit Administration Board.
(c) Exempt meeting and exempt portion of a meeting mean, respectively, a meeting or that part of a meeting designated as provided in § 604.430 of this part as closed to the public by reason of one or more of the exemptive provisions listed in § 604.420 of this part.
(d) Meeting means the deliberations of at least two (quorum) members of the Board where such deliberations determine or result in joint conduct or disposition of official Farm Credit Administration business.
(e) Member means any one of the members of the Board.
(f) Open meeting means a meeting or portion of a meeting which is not an exempt meeting or an exempt portion of a meeting.
(g) Public observation means the right of any member of the public to attend and observe, but not participate or interfere in any way in, an open meeting of the Board, within the limits of reasonable and comfortable accommodations made available for such purpose by the Farm Credit Administration.
§ 604.405 Notice of public observation.
(a) A member of the public is not required to give advance notice to the Farm Credit Administration of an intention to exercise the right of public observation of an open meeting of the Board. However, in order to permit the Farm Credit Administration to determine the amount of space and number of seats which must be made available to accommodate individuals who desire to exercise the right of public observation, such individuals are requested to give notice to the Farm Credit Administration at least two business days before the start of the open meeting of the intention to exercise such right.
(b) Notice of intention to exercise the right of public observation may be given in writing, in person, or by telephone to the official designated in § 604.440 of this part.
(c) Individuals who have not given advance notice of intention to exercise the right of public observation will not be permitted to attend and observe the open meeting of the Board if the available space and seating are necessary to accommodate individuals who gave advance notice of such intention to the Farm Credit Administration.
§ 604.410 Scope of application.
The provisions of this part apply to meetings of the Board, and do not apply to conferences or other gatherings of employees of the Farm Credit Administration who meet or join with others, except at meetings of the Board, to deliberate official agency business.
§ 604.415 Open meetings.
Every meeting and portion of a meeting of the Board shall be open to public observation unless the Board determines that such meeting or portion of a meeting will involve the discussion of matters which are within one or more of the exemptive provisions listed in § 604.420 of this part, and that the public interest is not served by the discussion of such matters in an open meeting.
§ 604.420 Exemptive provisions.
Except in a case where the Board determines that the public interest requires otherwise, a meeting or portion of a meeting may be closed to public observation where the Board determines that the meeting or portion of the meeting is likely to:
(a) Disclose matters that are:
(1) Specifically authorized under criteria established by an Executive order to be kept secret in the interests of national defense or foreign policy, and
(2) In fact properly classified pursuant to such Executive order;
(b) Relate solely to the internal personnel rules and practices of the Farm Credit Administration;
(c) Disclose matters specifically exempted from disclosure by statute (other than 5 U.S.C. 552): Provided, That such statute:
(1) Requires that the matters be withheld from the public in such a manner as to leave no discretion on the issue, or
(2) Establishes particular types of matters to be withheld;
(d) Disclose trade secrets and privileged or confidential commercial or financial information obtained from a person;
(e) Involve accusing any person of a crime, or formally censuring any person;
(f) Disclose information of a personal nature where disclosure would constitute a clearly unwarranted invasion of personal privacy;
(g) Disclose investigator records compiled for law enforcement purposes, or information which if written would be contained in such records, but only to the extent that the production of such records or information would:
(1) Interfere with enforcement proceedings;
(2) Deprive a person of a right to a fair trial or an impartial adjudication;
(3) Constitute an unwarranted invasion of personal privacy;
(4) Disclose the identity of a confidential source and, in the case of a record compiled by a criminal law enforcement authority in the course of a criminal investigation, or by an agency conducting a lawful national security intelligence investigation, confidential information furnished only by the confidential source;
(5) Disclose investigative techniques and procedures; or
(6) Endanger the life or physical safety of law enforcement personnel;
(h) Disclose information contained in or related to examination, supervision, operating, or condition reports prepared by, on behalf of, or for the use of the Farm Credit Administration;
(i) Disclose information the premature disclosure of which would:
(1) Significantly endanger the stability of any Farm Credit System institution, including banks, associations, service corporations chartered under the Act, or the Funding Corporation; or
(2) Be likely to significantly frustrate implementation of a proposed action of the Farm Credit Administration: Provided, said Administration has not already disclosed to the public the content or nature of its proposed action, or is not required by law to make such disclosure on its own initiative prior to taking final action on such proposal; or
(j) Specifically concern participation by the Farm Credit Administration in a civil action or proceeding otherwise involving a determination on the record before an opportunity for a hearing.
§ 604.425 Announcement of meetings.
(a) The Board meets in the offices of the Farm Credit Administration, 1501 Farm Credit Drive, McLean, Virginia 22102-5090, on the second Thursday of each month, unless the Board fixes a different time and/or place for a meeting and follows the requirements of paragraph (b) of this section.
(b)(1) The Farm Credit Administration shall make available for public inspection the time, place, and subject matter of the meeting, and whether it is to be open or closed, by posting notice on its public notice board or on its public Web site except to the extent that such information is exempt from disclosure under the provisions of § 604.420 of this part. The public announcement must be made at least 1 week before the meeting, unless a majority of the FCA Board determines by a recorded vote that agency business requires that a meeting be called on lesser notice, in which case the announcement shall be made at the earliest practicable time.
(2) Once a meeting has been announced, the time, place, and subject matter of the meeting and whether it is open or closed to the public may be changed following the requirements of the Government in the Sunshine Act, 5 U.S.C. 552b.
§ 604.430 Closure of meetings.
(a) A majority of the meetings or portions of a majority of the meetings of the board are exempt by reason of § 604.420 (d), (h), (i)(1), or (j) of this part. An exempt meeting or an exempt portion of a meeting shall be closed to the public when at least two members of the Board vote by a recorded vote of the Board at the beginning of the exempt meeting or exempt portion of a meeting to close such meeting or such exempt portion, and the General Counsel, Farm Credit Administration, publicly certifies that, in his or her opinion, the meeting or portion of the meeting may be closed to the public stating each relevant exemptive provision listed in § 604.420 of this part.
(b) A copy of the vote of the Board to close a meeting or an exempt portion thereof reflecting the vote of each member on the question, and a copy of the certification of General Counsel, shall be made available for public inspection in the offices of the Farm Credit Administration, or pursuant to telephonic or written requests.
(c) A copy of the certification of the General Counsel, together with a statement from the presiding officer of the meeting setting forth the time and place of an exempt meeting or an exempt portion of a meeting which was closed and the persons present, shall be retained by the Farm Credit Administration for a period of at least 2 years after the date of such closed meeting or closed portion of a meeting.
§ 604.435 Record of closed meetings or closed portion of a meeting.
(a) The Farm Credit Administration shall maintain a complete transcript or electronic recording adequate to record fully the proceedings of each closed meeting or closed portion of a meeting, except that in the case of a meeting or portion of a meeting closed to the public pursuant to § 604.420 (d), (h), (i)(1), or (j) of this part, the Farm Credit Administration shall maintain either such transcript, recording, or a set of minutes.
(b) Any minutes so maintained shall fully and clearly describe all matters discussed and shall provide a full and accurate summary of any actions taken, and the reasons therefor, including a description of each of the views expressed on any item and the record of any roll call vote. All documents considered in connection with any action shall be identified in the minutes.
(c) The Farm Credit Administration shall promptly make available to the public, in its offices, the transcript, electronic recording, or minutes, of the discussion of any item on the agenda of a closed meeting, or closed portion of a meeting, except for such item or items of discussion which the Farm Credit Administration determines to contain information which may be withheld under § 604.420 of this part. Copies of such transcript or minutes, or a transcription of such recording disclosing the identity of each speaker, shall be furnished to any person at the actual cost of duplication or transcription.
(d) The Farm Credit Administration shall maintain a complete verbatim copy of the transcript, a complete copy of the minutes, or a complete electronic recording of each closed meeting or closed portion of a meeting for a period of 2 years after the date of such closed meeting or closed portion of a meeting.
(e) All actions required or permitted by this section to be undertaken by the Farm Credit Administration shall be by or under the authority of the Secretary to the Board.
§ 604.440 Requests for information.
Requests to the Farm Credit Administration for information about the time, place, and subject matter of a meeting, whether it or any portion thereof is closed to the public, and any requests for copies of the transcript or minutes, or of a transcript of an electronic recording of a closed meeting, or closed portion of a meeting, to the extent not exempt from disclosure by the provisions of § 604.420 of this part, shall be addressed to the Secretary to the Board, Farm Credit Administration, 1501 Farm Credit Drive, McLean, Virginia 22102-5090.
PART 605—INFORMATION
§ 605.500 Policy.
It is the policy of the Farm Credit Administration to act in matters relating to national security information in accordance with Executive Order 13292 and directives issued thereunder by the Information Security Oversight Office (ISOO).
§ 605.501 Information Security Officer.
(a) The Information Security Officer of the Farm Credit Administration shall be responsible for implementation and oversight of the information security program and procedures adopted by the Agency pursuant to the Executive order. This officer shall be the recipient of questions, suggestions, and complaints regarding all elements of this program and shall be solely responsible for changes to it and for the assurance that it is at all times consistent with the Executive order and ISOO directive.
(b) The Information Security Officer shall be the Farm Credit Administration’s official contact for requests for declassification of materials submitted under the Executive order, regardless of the point of origin of such requests, and shall assure that such requests for records in the Farm Credit Administration’s possession that were originated by another agency shall be forwarded to the originating agency. The Farm Credit Administration shall include a copy of the records requested together with its recommendation for action. Upon receipt, the originating agency shall process the request in accordance with 32 CFR 2001.33(a)(2)(i). Upon request, the originating agency shall communicate its declassification determination to the Farm Credit Administration. The Farm Credit Administration shall inform the requester of the determination within 1 year from the date of receipt, except in unusual circumstances. If an appeal is made on a denial of a mandatory declassification review request, the originating agency’s appellate authority shall normally make a determination within 30 working days following the receipt of an appeal. If additional time is required to make a determination, the originating appellate authority shall notify the requester of the additional time needed and provide the requester with the reason for extension. The originating agency’s appellate authority shall notify the requester in writing of the final determination and of the reasons for any denial. Such officer shall also assure that requests for declassification submitted under the Freedom of Information Act are handled in accordance with that Act.
§ 605.502 Program and procedures.
(a) The Farm Credit Administration has no authority for the original classification of information for national security purposes. Only those agencies described in the Executive order may so classify information.
(b) Derivative classification. “Derivative classification” means the incorporating, paraphrasing, restating or generating in new form information that is already classified, and marking the newly developed material consistent with the classification markings that apply to the source information. Derivative classification includes the classification of information based on classification guidance. The duplication or reproduction of existing classified information is not derivative classification.
(c) Mandatory declassification review. “Mandatory declassification review” means the review for declassification of classified information in response to a request for declassification that meets the requirements under section 3.5 of the Executive order. All requests for review for declassification under the mandatory review provisions of the Executive order shall be handled by the Information Security Officer or his/her designee.
(d) Handling of classified documents. All documents bearing the terms “Top Secret,” “Secret,” and “Confidential” shall be delivered to the Information Security Officer or his/her designee immediately upon receipt. All potential recipients of such documents shall be advised of the names of such designees. In the event that the Information Security Officer or his/her designee is not available to receive such documents, they shall be sent to the FCA mailroom and stored in the combination safe and secured unopened until the Information Security Officer is available. Under no cirumstances shall classified materials that cannot be delivered be stored other than in the designated safe. All materials not immediately deliverable or able to be secured in the designated safe shall be returned to the sender, under appropriate cover, for redelivery to the FCA at the next earliest opportunity.
(e) Reproduction. Reproduction of classified materials shall take place only in accordance with section 4.2(g) of the Executive order and any limitations imposed by the originator. Should copies be made, they shall be subject to the same controls as the original document. Records showing the number and distribution of copies shall be maintained by the Information Security Officer or his/her designee, and the log stored with the original documents. These measures shall not restrict reproduction for the purposes of Mandatory Review.
(f) Storage. In accordance with 32 CFR 2001.43, all classified documents shall be stored in combination safes located at the primary headquarters and/or a Field Office, Office of Examination, Farm Credit Administration. The combinations shall be changed as required by directives issued by ISOO. The combinations shall be known only to the Information Security Officer and his/her designees who have appropriate security clearances.
(g) Employee education. All employees who have been granted a security clearance and who have occasion to handle classified materials shall be advised of handling, reproduction, and storage procedures and shall be required to review the Executive order and appropriate ISOO directives.
(h) Agency terminology. No official of the Farm Credit Administration shall use the terms “Top Secret”, “Secret”, or “Confidential” except in relation to materials classified for national security purposes. As a Federal regulatory agency, the Farm Credit Administration maintains certain internal documents that relate to its examination and supervision of the institutions of the Farm Credit System. Such documents are limited in use and distribution. Material that is of a sensitive nature to the Farm Credit Administration may be designated “Executive Document.”
(i) Nondisclosure agreement. In accordance with 32 CFR 2003.20, the Farm Credit Administration requires that any person whose position requires access to classified information must execute a nondisclosure agreement on Standard Form 312—Classified Information Nondisclosure Agreement. Persons not executing such nondisclosure agreements are subject to sanctions of Executive Order 13292. It is the policy of the Farm Credit Administration that any employee authorized access to classified information holds a personal responsibility for safeguarding against unlawful disclosures, and such employees are prohibited from disclosure without consent of the FCA Information Security Officer. Any such unauthorized disclosure will be reported to the Information Security Oversight Office, the Department of Justice, the Department of State, the Federal Emergency Management Agency, and to any other Federal agency for which the Farm Credit Administration has access to classified information, as such reportings are subject to interpretation as required by statute and Executive order. Any employee who knowingly disclosed classified information or who refuses to cooperate with an investigation may be subject to mandatory administrative sanctions, including as a minimum, denial of further access to classified information. Further sanctions could include demotion or dismissal depending on the circumstances of a particular case.
(j) Freedom of Information request. All inquiries regarding requests for classified information under the Freedom of Information Act (5 U.S.C. 552), including those from the news media, shall be referred to the FCA FOI Officer, Office of Congressional and Public Affairs, Farm Credit Administration, and shall be handled in accordance with provisions of that statute and applicable regulations.
PART 606—ENFORCEMENT OF NONDISCRIMINATION ON THE BASIS OF HANDICAP IN PROGRAMS OR ACTIVITIES CONDUCTED BY THE FARM CREDIT ADMINISTRATION
§ 606.601 Purpose.
The purpose of this part is to effectuate section 119 of the Rehabilitation Comprehensive Services, and Developmental Disabilities Amendments of 1978, which amended section 504 of the Rehabilitation Act of 1973 to prohibit discrimination on the basis of handicap in programs or activities conducted by Executive agencies or the United States Postal Service.
§ 606.602 Application.
(a) This part applies to all programs or activities conducted by the agency. For example, members of the public may participate in the following “programs and activities” of the FCA:
(1) Attending open meetings of the Farm Credit Board.
(2) Making inquiries or filing complaints.
(3) Using the FCA library in McLean, Virginia.
(4) Seeking employment with FCA.
(5) Attending any meeting, conference, seminar, or other program open to the public.
(b) This regulation does not apply to the institutions that are regulated or examined by the FCA. However, this regulation governs the conduct of FCA personnel, in their interaction with employees of such institutions and employees of other Federal agencies, while discharging their official FCA duties.
§ 606.603 Definitions.
For purposes of this part, the term:
(a) Agency means the Farm Credit Administration.
(b) Assistant Attorney General means the Assistant Attorney General, Civil Rights Division, United States Department of Justice.
(c) Auxiliary aids means services or devices that enable persons with impaired sensory, manual, or speaking skills to have an equal opportunity to participate in, and enjoy the benefits of, programs or activities conducted by the agency. For example, auxiliary aids useful for persons with impaired vision include readers, Brailled materials, audio recordings, and other similar services and devices. Auxiliary aids useful for persons with impaired hearing include telephone handset amplifiers, telephones compatible with hearing aids, telecommunication devices for deaf persons (TDDs), interpreters, note-takers, written materials, and other similar services and devices.
(d) Complete complaint means a written statement that contains the complainant’s name and address and describes the agency’s alleged discriminatory action in sufficient detail to inform the agency of the nature and date of the alleged violation of section 504. It shall be signed by the complainant or by someone authorized to do so on his or her behalf. Complaints filed on behalf of classes or third parties shall describe or identify (by name, if possible) the alleged victims of discrimination.
(e) Facility means all or any portion of buildings, structures, equipment, roads, walks, parking lots, rolling stock or other conveyances, or other real or personal property.
(f) Individual with handicaps means any person who has a physical or mental impairment that substantially limits one or more major life activities, has a record of such an impairment, or is regarded as having such an impairment. As used in this definition, the phrase:
(1) Physical or mental impairment includes:
(i) Any physiological disorder or condition, cosmetic disfigurement, or anatomical loss affecting one or more of the following body systems: Neurological; musculoskeletal; special sense organs; respiratory, including speech organs; cardiovascular; reproductive; digestive; genitourinary; hemic and lymphatic; skin; and endocrine; or
(ii) Any mental or psychological disorder, such as mental retardation, organic brain syndrome, emotional or mental illness, and specific learning disabilities. The term physical or mental impairment includes, but is not limited to, such diseases and conditions as orthopedic, visual, speech, and hearing impairments, cerebral palsy, epilepsy, muscular dystrophy, multiple sclerosis, cancer, heart disease, diabetes, mental retardation, emotional illness, and drug addiction and alcoholism.
(2) Major life activities includes functions such as caring for oneself, performing manual tasks, walking, seeing, hearing, speaking, breathing, learning, and working.
(3) Has a record of such an impairment means has a history of, or has been misclassified as having, a mental or physical impairment that substantially limits one more major life activities.
(4) Is regarded as having an impairment means:
(i) Has a physical or mental impairment that does not substantially limit major life activities but is treated by the agency as constituting such a limitation;
(ii) Has a physical or mental impairment that substantially limits major life activities only as a result of the attitudes of others toward such impairment; or
(iii) Has none of the impairments defined in paragraph (f)(1) of this definition but is treated by the agency as having such an impairment.
(g) Qualified individual with handicaps means an individual with handicaps who meets the essential eligibility requirements for participation in the program or activity conducted by the agency. With respect to employment, a qualified individual with handicaps is one who meets the definition of qualified handicapped person set forth in 29 CFR 1613.702(f), which is made applicable to this part by § 606.640 of this rule.
(h) Section 504 means section 504 of the Rehabilitation Act of 1973 (Pub. L. 93-112, 87 Stat. 394 (29 U.S.C. 794)), as amended by the Rehabilitation Act Amendments of 1974 (Pub. L. 93-516, 88 Stat. 1617); the Rehabilitation, Comprehensive Services, and Developmental Disabilities Amendments of 1978 (Pub. L. 95-602, 92 Stat. 2955); and the Rehabilitation Act Amendments of 1986 (Pub. L. 99-506, 100 Stat. 1810).
§§ 606.604-606.609 [Reserved]
§ 606.610 Self-evaluation.
(a) The agency shall, within one year of the effective date of this part, evaluate its current policies and practices, and the effects thereof, that do not or may not meet the requirements of this part, and, to the extent modification of any such policies and practices is required, the agency shall proceed to make the necessary modifications.
(b) The agency shall provide an opportunity to interested persons, including individuals with handicaps or organizations representing individuals with handicaps, to participate in the self-evaluation process by submitting comments (both oral and written).
(c) The agency shall, for at least three years following completion of the evaluation required under paragraph (a) of this section, maintain on file and make available for public inspection:
(1) A list of the interested persons who commented, with copies of comments received;
(2) A description of areas examined and any problems identified; and
(3) A description of any modifications made.
§ 606.611 Notice.
The agency shall make available to employees, applicants, participants, beneficiaries, and other interested persons such information regarding the provisions of this part and its applicability to the programs or activities conducted by the agency, and make such information available to them in such manner as the agency head finds necessary to apprise such persons of the protections against discrimination assured them by section 504 and this regulation.
§§ 606.612-606.629 [Reserved]
§ 606.630 General prohibitions against discrimination.
(a) No qualified individual with handicaps, on the basis of handicap, shall be excluded from participation in, be denied the benefits of, or otherwise be subjected to discrimination under any program or activity of the agency.
(b)(1) The agency, in providing any aid, benefit, or service, may not, directly or through contractual or other arrangements, on the basis of handicap:
(i) Deny a qualified individual with handicaps the oportunity to participate in or benefit from the activity, aid, benefit, or service;
(ii) Afford a qualified individual with handicaps an opportunity to participate in or benefit from the aid, benefit, or service that is not equal to that afforded others;
(iii) Provide a qualified individual with handicaps with an aid, benefit, or service that is not as effective in affording equal opportunity to obtain the same result, to gain the same benefit, or to reach the same level of achievement as that provided to others;
(iv) Provide different or separate aid, benefits, or services to individuals with handicaps or to any class of individuals with handicaps than is provided to others unless such action is necessary to provide qualified individuals with handicaps with aid, benefits, or services that are as effective as those provided to others;
(v) Deny a qualified individual with handicaps the opportunity to participate as a member of planning or advisory boards;
(vi) Otherwise limit a qualified individual with handicaps in the enjoyment of any right, privilege, advantage, or opportunity enjoyed by others receiving the aid, benefit, or service.
(2) The agency may not deny a qualified individual with handicaps the opportunity to participate in programs or activities that are not separate or different, despite the existence of permissibly separate or different programs or activities.
(3) The agency may not, directly or through contractual or other arrangements, utilize criteria or methods of administration the purpose or effect of which would:
(i) Subject qualified individuals with handicaps to discrimination on the basis of handicap; or
(ii) Defeat or substantially impair accomplishment of the objectives of a program or activity with respect to individuals with handicaps.
(4) The agency may not, in determining the site or location of a facility, make selections the purpose or effect of which would:
(i) Exclude individuals with handicaps from, deny them the benefits of, or otherwise subject them to discrimination under any program or activity conducted by the agency; or
(ii) Defeat or substantially impair the accomplishment of the objectives of a program or activity with respect to individuals with handicaps.
(5) The agency, in the selection of procurement contractors, may not use criteria that subject qualified individuals with handicaps to discrimination on the basis of handicap.
(c) The exclusion of nonhandicapped persons from the benefits of a program limited by Federal statute or Executive order to individuals with handicaps or the exclusion of a specific class of individuals with handicaps from a program limited by Federal statute or Executive order to a different class of individuals with handicaps is not prohibited by this part.
(d) The agency shall administer programs and activities in the most integrated setting appropriate to the needs of qualified individuals with handicaps.
§§ 606.631-606.639 [Reserved]
§ 606.640 Employment.
No qualified individual with handicaps shall, on the basis of handicap, be subjected to discrimination in employment under any program or activity conducted by the agency. The definitions, requirements, and procedures of section 501 of the Rehabilitation Act of 1973 (29 U.S.C. 791), as established by the Equal Employment Opportunity Commission in 29 CFR part 1613, shall apply to employment in the agency.
§§ 606.641-606.648 [Reserved]
§ 606.649 Program accessibility: Discrimination prohibited.
Except as otherwise provided in § 606.650, no qualified individual with handicaps shall, because the agency’s facilities are inaccessible to or unusable by individuals with handicaps, be denied the benefits of, be excluded from participation in, or otherwise be subjected to discrimination under any program or activity conducted by the agency.
§ 606.650 Program accessibility: Existing facilities.
(a) General. The agency shall operate each program or activity so that the program or activity, when viewed in its entirety, is readily accessible to and usable by individuals with handicaps. This paragraph does not:
(1) Necessarily require the agency to make each of its existing facilities accessible to and usable by individuals with handicaps;
(2) Require the agency to take any action that it can demonstrate would result in a fundamental alteration in the nature of a program or activity or in undue financial and administrative burdens. In those circumstances where agency personnel believe that the proposed action would fundamentally alter the program or activity or would result in undue financial and administrative burdens, the agency has the burden of proving that compliance with paragraph (a) of this section would result in such alteration or burdens. The decision that compliance would result in such alteration or burdens must be made by the agency head or his or her designee after considering all agency resources available for use in the funding and operation of the conducted program or activity, and must be accompanied by a written statement of the reasons for reaching that conclusion. In preparing the report, the agency shall make reasonable efforts to ensure that the person(s) to be accommodated has an opportunity to provide relevant information. If an action would result in such an alteration or such burdens, the agency shall take any other action that would not result in such an alteration or such burdens but would nevertheless ensure that individuals with handicaps receive the benefits and services of the program or activity.
(b) Methods. The agency may comply with the requirements of this section through such means as redesign of equipment, reassignment of services to accessible buildings, assignment of aides to beneficiaries, home visits, delivery of services at alternate accessible sites, alteration of existing facilities and construction of new facilities, or any other methods that result in making its programs or activities readily accessible to and usable by individuals with handicaps. The agency is not required to make structural changes in existing facilities where other methods are effective in achieving compliance with this section. The agency, in making alterations to existing buildings, shall meet accessibility requirements to the extent compelled by the Architectural Barriers Act of 1968, as amended (42 U.S.C. 4151 through 4157), and any regulations implementing it. In choosing among available methods for meeting the requirements of this section, the agency shall give priority to those methods that offer programs and activities to qualified individuals with handicaps in the most integrated setting appropriate.
(c) Time period for compliance. The agency shall comply with the obligations established under this section within sixty days of the effective date of this part except that where structural changes in facilities are undertaken, such changes shall be made within three years of the effective date of this part, but in any event as expeditiously as possible.
(d) Transition plan. In the event that structural changes to facilities will be undertaken to achieve accessibility, the agency shall develop, within six months of the effective date of this part, a transition plan setting forth the steps necessary to complete such changes. The agency shall provide an opportunity to interested persons, including individuals with handicaps or organizations representing individuals with handicaps, to participate in the development of the transition plan by submitting comments (both oral and written). A copy of the transition plan shall be made available for public inspection. The plan shall, at a minimum:
(1) Identify physical obstacles in the agency’s facilities that limit the accessibility of its programs or activities to individuals with handicaps;
(2) Describe in detail the methods that will be used to make the facilities accessible;
(3) Specify the schedule for taking the steps necessary to achieve compliance with this section, and if the time period of the transition plan is longer than one year, identify steps that will be taken during each year of the transition period;
(4) Indicate the official responsible for implementation of the plan; and
(5) Identify the persons or groups who commented on the plan.
§ 606.651 Program accessibility: New construction and alterations.
Each building or part of a building that is constructed or altered by, on behalf of, or for the use of the agency shall be designed, constructed, or altered so as to be readily accessible to and usable by individuals with handicaps. The definitions, requirements, and standards of the Architectural Barriers Act (42 U.S.C. 4151 through 4157), as established in 41 CFR 101-19.600 to 101-19.607, apply to buildings covered by this section.
§§ 606.652-606.659 [Reserved]
§ 606.660 Communications.
(a) The agency shall take appropriate steps to ensure effective communication with applicants, participants, personnel of other Federal entities, and members of the public.
(1) The agency shall furnish appropriate auxiliary aids where necessary to afford an individual with handicaps an equal opportunity to participate in and enjoy the benefits of a program or activity conducted by the agency.
(i) In determining what type of auxiliary aid is necessary, the agency shall give primary consideration to the requests of the individual with handicaps.
(ii) The agency need not provide individually prescribed devices, readers for personal use or study, or other devices of a personal nature.
(2) Where the agency communicates with applicants and beneficiaries by telephone, telecommunication devices for deaf persons (TDDs) or equally effective telecommunication systems shall be used.
(b) The agency shall ensure that interested persons, including persons with impaired vision or hearing, can obtain information as to the existence and location of accessible services, activities, and facilities.
(c) The agency shall provide signage at a primary entrance to each of its inaccessible facilities directing users to a location at which they can obtain information about accessible facilities. The international symbol for accessibility shall be used at each primary entrance of an accessible facility.
(d) This section does not require the agency to take any action that it can demonstrate would result in a fundamental alteration in the nature of a program or activity or in undue financial and administrative burdens. In those circumstances where agency personnel believe that the proposed action would fundamentally alter the program or activity or would result in undue financial and administrative burdens, the agency has the burden of proving that compliance with this section would result in such alteration or burdens. The decision that compliance would result in such alteration or burdens must be made by the agency head or his or her designee after considering all agency resources available for use in the funding and operation of the conducted program or activity, and must be accompanied by a written statement of the reasons for reaching that conclusion. In preparing the report, the agency shall make reasonable efforts to ensure that the person(s) to be accommodated has an opportunity to provide relevant information. If an action required to comply with this section would result in such an alteration or such burdens, the agency shall take any other action that would not result in such an alteration or such burdens but would nevertheless ensure that, to the maximum extent possible, individuals with handicaps receive the benefits and services of the program or activity.
§§ 606.661-606.669 [Reserved]
§ 606.670 Compliance procedures.
(a) Except as provided in paragraph (b) of this section, this section applies to all allegations of discrimination on the basis of handicap in programs and activities conducted by the agency.
(b) The agency shall process complaints alleging violations of section 504 with respect to employment according to the procedures established by the Equal Employment Opportunity Commission in 29 CFR part 1613 pursuant to section 501 of the Rehabilitation Act of 1973 (29 U.S.C. 791).
(c) Responsibility for implementation and operation of this section shall be vested in the Director, Office of Agency Services, Farm Credit Administration, 1501 Farm Credit Drive, McLean, VA 22102-5090.
(d) The agency shall accept and investigate all complete complaints for which it has jurisdiction. All complete complaints must be filed within 180 days of the alleged act of discrimination. The agency may extend this time period for good cause.
(e) If the agency receives a complaint over which it does not have jurisdiction, it shall promptly notify the complainant and shall make reasonable efforts to refer the complaint to the appropriate Government entity.
(f) The agency shall notify the Architectural and Transportation Barriers Compliance Board upon receipt of any complaint alleging that a building or facility that is subject to the Architectural Barriers Act of 1968, as amended (42 U.S.C. 4151 through 4157), is not readily accessible to and usable by individuals with handicaps.
(g) Within 180 days of the receipt of a complete complaint for which it has jurisdiction, the agency shall notify the complainant of the results of the investigation in a letter containing:
(1) Findings of fact and conclusions of law;
(2) A description of a remedy for each violation found; and
(3) A notice of the right to appeal.
(h) Appeals of the findings of fact and conclusions of law or remedies must be filed by the complainant within 90 days of receipt from the agency of the letter required by this paragraph. The agency may extend this time for good cause.
(i) Timely appeals shall be accepted and processed by the Equal Employment Opportunity and Inclusion Director, or his/her designee, Farm Credit Administration, 1501 Farm Credit Drive, McLean, VA 22102-5090.
(j) The head of the agency shall notify the complainant of the results of the appeal within 60 days of the receipt of the request. If the head of the agency determines that additional information is needed from the complainant, he or she shall have 60 days from the date of receipt of the additional information to make his or her determination on the appeal.
(k) The time limits cited in paragraphs (g) and (j) of this section may be extended with the permission of the Assistant Attorney General.
(l) The agency may delegate its authority for conducting complaint investigations to other Federal agencies, except that the authority for making the final determination may not be delegated to another agency.
§§ 606.671-606.999 [Reserved]
PART 607—ASSESSMENT AND APPORTIONMENT OF ADMINISTRATIVE EXPENSES
§ 607.1 Purpose and scope.
The regulations in part 607 implement the provisions of section 5.15 of the Farm Credit Act of 1971, 12 U.S.C. 2001 et seq. (Act) relating to Farm Credit Administration (FCA) assessments. The regulations prescribe the procedures for the equitable apportionment of FCA annual administrative expenses and necessary reserves among Farm Credit System (System) institutions. Pursuant to section 5.15(a) of the Act, the regulations also provide for the separate assessment of the FCA’s costs of supervising and examining the Federal Agricultural Mortgage Corporation (FAMC). The regulations further provide for the reimbursement of expenses incurred in performing statutorily required examinations of non-System entities.
§ 607.2 Definitions.
For the purpose of this part, the following definitions shall apply:
(a) Assessment means the annual amount to be paid by each System institution to the Farm Credit Administration in accordance with section 5.15 of the Act.
(b) Average risk-adjusted asset base means the average of the risk-adjusted asset base (as defined in § 615.5201 of this chapter) of banks, associations, and designated other System entities, calculated as follows:
(1) For a bank, association, or designated other System entity with four quarters of risk-adjusted assets as of June 30 of each year, the sum of the average daily risk-adjusted assets as of the last day of the quarter for the most recent four quarters immediately preceding each September 15, divided by four;
(2) Except as provided in paragraphs (b)(3) and (b)(4) of this section, for a bank, association, or designated other System entity with less than four quarters of risk-adjusted assets as of June 30 of each year, the sum of the average daily risk-adjusted assets as of the last day of the quarter for the quarters in which it was in existence immediately preceding September 15, divided by the number of quarters in which it was in existence immediately preceding September 15;
(3) For a bank, association, or designated other System entity that is the continuing institution after a merger of existing institutions or a newly formed institution formed through a consolidation of existing institutions and that has less than four quarters of risk-adjusted assets as of June 30 of each year, the sum of the average daily risk-adjusted assets as of the last day of the quarter for the most recent four quarters immediately preceding September 15 for all the institutions that were merged or consolidated, divided by four;
(4) For a bank, association, or designated other System entity chartered during the period July 1 through September 30 of each year that is not the continuing institution after a merger of existing institutions or a newly formed institution formed through a consolidation of existing institutions, the total of the average daily risk-adjusted assets as of the last day of the quarter ending September 30.
(c) Composite Financial Institution Rating System (FIRS) rating means the composite numerical assessment of the financial condition of an institution assigned to the institution by the FCA based on its most recent examination of the institution. The FIRS factors are generally considered to be important indicators of an institution’s financial health. Institutions are rated on each of the factors during an examination. The composite FIRS rating ranges from 1 to 5, with a lower number indicating a better financial condition than a higher number.
(d) Delinquent amount means an amount owed to the FCA that has not been paid by the date specified in the FCA’s Notice of Assessment or billing.
(e) Designated other System entities means other System entities designated by the FCA in § 607.3(c) to be assessed on the same basis as banks and associations under § 607.3.
(f) Direct expenses means the expenses of the FCA attributable to the performance of examinations.
(g) Indirect expenses means all FCA expenses that are not attributable to the performance of examinations.
(h) Non-System entities means the National Consumer Cooperative Bank, the National Cooperative Bank Development Corporation, and any other entity that is required to be examined, supervised, or otherwise regulated by the FCA that is not a System institution.
(i) Notice of Assessment means a written notice to each System institution showing the total amount assessed and owing, the fiscal year covered by the assessment, the amounts of installment payments, and the due dates for such payments. For banks, associations, and designated other System entities, the Notice of Assessment shall also include an individualized assessment table showing the assessment under § 607.3(b)(2), where applicable.
(j) Other System entities means any service corporation chartered under section 4.25 of the Act, the FAMC, the Federal Farm Credit Banks Funding Corporation, the Farm Credit Finance Corporation of Puerto Rico, and any other entity statutorily designated as a System institution that is not a bank or association.
(k) System institutions means banks, associations, and other System entities.
§ 607.3 Assessment of banks, associations, and designated other System entities.
(a) Banks, associations, and other System entities designated in paragraph (c) of this section will be assessed annually pursuant to this section for funds to cover a portion of the FCA’s administrative expenses and for such funds as may be required to maintain a necessary reserve. The total amount of the annual assessment of banks, associations, and designated other System entities shall be based on the FCA budget for each fiscal year plus such amount as may be required to maintain a necessary reserve, excluding amounts to be assessed against other System entities and reimbursements received from non-System entities.
(b) The assessment shall be apportioned among the banks, associations, and designated other System entities as follows:
(1) Thirty (30) percent of the assessment under this section shall be apportioned to each bank, association, and designated other System entity on the basis of each institution’s pro rata share of the total average risk-adjusted asset base.
(2) Seventy (70) percent of the assessment under this section shall be apportioned to each bank, association, and designated other System entity based upon the amounts of the institution’s average risk-adjusted assets that fall within the graduated risk-adjusted asset tiers contained in the following table. An institution’s total assessment under this paragraph is the sum of the amounts assessed for risk-adjusted assets falling into each applicable tier, subject to adjustment for its FIRS rating as required in paragraphs (b)(2)(i) and (b)(2)(ii) of this section. The same assessment rate (designated as X
| Average risk-adjusted asset size range (in millions) | Assessment rate | |
|---|---|---|
| Over | To | |
| $0 | $25 | X |
| 25 | 50 | .85X |
| 50 | 100 | .75X |
| 100 | 500 | .60X |
| 500 | 1,000 | .50X |
| 1,000 | 7,000 | .35X |
| 7,000 | 10,000 | .20X |
| 10,000 | .10X | |
| X | = | $22,925 |
| .85X | = | 19,500 |
| .75X | = | 34,400 |
| .60X | = | 220,000 |
| .50X | = | 183 |
| Total Assessment under § 607.3(b)(2) | = | 297,008 |
(i) If the FCA assigns a bank, association, or designated other System entity a composite FIRS rating of 3 following its most recent examination of the institution prior to the date of assessment, the assessment provided for in paragraph (b)(2) of this section shall be increased by 20 percent.
(ii) If the FCA assigns a bank, association, or designated other System entity a composite FIRS rating of 4 or 5 following its most recent examination of the institution prior to the date of assessment, the assessment provided for in paragraph (b)(2) of this section shall be increased by 40 percent.
(iii) Banks, associations, and designated other System entities that were formed through mergers or consolidations and have not been examined before their initial assessment under this section shall be deemed to have a composite FIRS rating equivalent to the best composite FIRS rating assigned to the merged or consolidated institutions in the FCA’s most recent examination of the individual institutions prior to the date of merger or consolidation. Newly chartered institutions not formed through mergers or consolidations that have not been examined before their initial assessment under this section shall be deemed to have a composite FIRS rating of 2.
(3) Each bank, association, and designated other System entity shall pay a minimum assessment of $20,000 regardless of the result of the application of the assessment formula established by paragraphs (b)(1) and (b)(2) of this section. If such a minimum assessment is apportioned to an institution, that institution’s average risk-adjusted asset base shall be deducted from the total average risk-adjusted asset base, and $20,000 shall be deducted from the total assessment amount for purposes of determining the assessments of banks, associations, and designated other System entities paying more than the $20,000 minimum assessment.
(c) Other System entities designated to be assessed in accordance with this section are:
The Farm Credit Services Leasing Corporation.
(d) Assessments may be adjusted periodically to reflect:
(1) Changes in the FCA budget and necessary reserve; and
(2) Any overpayment or underpayment by a bank, association, or designated other System entity in the prior fiscal year.
§ 607.4 Assessment of other System entities.
(a)(1) Unless otherwise designated to be assessed under § 607.3, and with the exception of FAMC as provided in paragraph (b) of this section, other System entities will be assessed for estimated direct expenses plus an allocated portion of FCA indirect expenses and such amount as may be required to maintain a necessary reserve. The estimate for direct expenses shall take into account the direct expenses incurred in the most recent examination of the entity preceding each September 15 and expected increases or decreases in examination work for the next fiscal year. A proportional amount of FCA indirect expenses will be allocated to each entity based on the estimated direct expenses related to the particular entity as a percentage of the total budgeted direct expenses of the agency (excluding direct expenses under paragraph (b) of this section) for the fiscal year covered by the assessment.
(2) Assessments of other System entities under paragraph (a)(1) of this section may be adjusted periodically to reflect:
(i) Changes in the FCA budget and necessary reserve; and
(ii) Any overpayment or underpayment by such other System entity in the prior fiscal year.
(b) Assessment of Federal Agricultural Mortgage Corporation. The FCA shall assess FAMC for the estimated cost of FCA’s regulation, supervision, and examination of FAMC, including reasonably related administrative and overhead expenses. FAMC’s assessment may be adjusted periodically to reflect changes in the FCA budget and to reconcile differences between FAMC’s assessment and FCA’s actual expenditures for regulation of FAMC in the prior fiscal year.
§ 607.5 Notice of assessment.
(a) Except as provided in paragraph (b) of this section, prior to September 15 of each year, the FCA shall determine the amount of assessment to be collected from each System institution for the next fiscal year under §§ 607.3 and 607.4 and shall provide each System institution with a Notice of Assessment. The total amount assessed each System institution in the Notice of Assessment shall be an obligation of each institution on October 1 of each fiscal year. The total amount assessed each System institution shall be payable not less often than quarterly in equal installments during each fiscal year, subject to adjustment pursuant to §§ 607.3(d), 607.4(a)(2), 607.4(b), and 607.10.
(b) For banks, associations and designated other System entities chartered during the period July 1 through September 30 of each year, the FCA shall, prior to December 15, determine the amount of assessment to be collected from each such institution for the remainder of the fiscal year and provide the institution with a Notice of Assessment. The total amount of the assessment becomes an obligation of the institution on January 1 and shall be payable in equal installments, subject to adjustment pursuant to §§ 607.3(d) and 607.10, not less often than quarterly for the remainder of the fiscal year. The first installment shall be due on January 1. This paragraph shall not apply to banks, associations, and designated other System entities formed by merger, consolidation, or transfer of direct lending authority.
(c) In the event of the proposed cancellation of the charter of a System institution, the unpaid installments of the total amount of the institution’s assessment shall be provided for prior to the cancellation of the charter.
§ 607.6 Payment of assessment.
(a) System institutions shall pay the amounts due as scheduled in the FCA Notice of Assessment. Payment shall be made by electronic funds transfer (EFT) for credit to the FCA’s account in the Department of the Treasury, by check to the FCA for deposit, or by such other means as the FCA may authorize.
(b) Payments made by EFT that are not received by the close of business on the due date shall be considered delinquent in accordance with § 607.7.
(c) Payments made by check that are not received by the FCA before the close of business on the third workday preceding the due date shall be considered delinquent in accordance with § 607.7.
§ 607.7 Late-payment charges on assessments.
(a) If any portion of a scheduled installment of a System institution’s total assessment or the reimbursement billed to a non-System entity is not paid by the due date, the overdue amount shall be considered delinquent.
(b) Delinquent amounts shall be charged late-payment interest at the United States Treasury Department’s current value of funds rate published in the
(c) The FCA shall waive the collection of interest on the delinquent amounts if such amounts are paid within 30 days of the date interest begins to accrue. The FCA may waive interest due on delinquent amounts upon finding no fault with the performance of the remitter.
(d) The FCA shall charge an amount necessary to cover the administrative costs incurred as a result of collection of any delinquent amount.
(e) The FCA shall charge a penalty of 6 percent per annum on any portion of a delinquent amount that is more than 90 days past due. Such penalty shall accrue from the date the amount became delinquent.
§ 607.8 Reimbursements for services to non-System entities.
Non-System entities shall be assessed for direct expenses plus an amount for FCA indirect expenses reasonably related to the services rendered to the non-System entity. Such related indirect expenses shall be calculated as a percentage of the FCA’s overall indirect expenses based on the extent of FCA activities with respect to the non-System entity during the period since the entity’s most recent assessment.
§ 607.9 Reimbursable billings.
The FCA shall bill the amounts due for services to non-System entities each year subsequent to the issuance of their respective Reports of Examination. Amounts billed are due in full within 30 days from the date billed. If the billed amount or any portion thereof remains unpaid at close of business on the due date, such amount or portion shall be considered delinquent in accordance with § 607.7.
§ 607.10 Adjustments for overpayment or underpayment of assessments.
Where adjustments for overpayment or underpayment of assessments are made pursuant to §§ 607.3(d), 607.4(a)(2), and 607.4(b), credits for overpayments or charges for underpayments shall be based on FCA administrative operating expenses incurred in the applicable fiscal year and on funds required to be maintained pursuant to section 5.15 of the Act. Such credits or charges shall be applied to the next applicable assessment payment due during the current or subsequent fiscal year. Where such adjustments are made, the FCA shall provide the institution with a statement of adjustment at least 15 days prior to the date when the institution’s next assessment payment is due. Adjustments in assessments shall be made in principal amount only. Overdue amounts under § 607.7 are not underpayments for assessment adjustment purposes.
§ 607.11 Report of assessments and expenses.
By January 15 of each calendar year, the FCA shall provide each assessed System institution with a report of assessments and expenses for the preceding fiscal year showing total assessments and other income received as applied to expenses incurred by major budget category and amounts set aside for a necessary reserve.
PART 608—COLLECTION OF CLAIMS OWED THE UNITED STATES
Subpart A—Administrative Collection of Claims
§ 608.801 Authority.
The regulations of this part are issued under the Federal Claims Collection Act of 1966, as amended by the Debt Collection Act of 1982, 31 U.S.C. 3701-3719 and 5 U.S.C. 5514, and in conformity with the joint regulations issued under that Act by the General Accounting Office and the Department of Justice (joint regulations) prescribing standards for administrative collection, compromise, suspension, and termination of agency collection actions, and referral to the General Accounting Office and to the Department of Justice for litigation of civil claims for money or property owed to the United States (4 CFR parts 101-105).
§ 608.802 Applicability.
This part applies to all claims of indebtedness due and owing to the United States and collectible under procedures authorized by the Federal Claims Collection Act of 1966, as amended by the Debt Collection Act of 1982. The joint regulations and this part do not apply to conduct in violation of antitrust laws, tax claims, claims between Federal agencies, or to any claim which appears to involve fraud, presentation of a false claim, or misrepresentation on the part of the debtor or any other party having an interest in the claim, unless the Justice Department authorizes the Farm Credit Administration, pursuant to 4 CFR 101.3, to handle the claim in accordance with the provisions of 4 CFR parts 101-105. Additionally, this part does not apply to Farm Credit Administration assessments under part 607 of this chapter.
§ 608.803 Definitions.
In this part (except where the term is defined elsewhere in this part), the following definitions shall apply:
(a) Administrative offset or offset, as defined in 31 U.S.C. 3701(a)(1), means withholding money payable by the United States Government to, or held by the Government for, a person to satisfy a debt the person owes the Government.
(b) Agency means a department, agency, or instrumentality in the executive or legislative branch of the Government.
(c) Claim or debt means money or property owed by a person or entity to an agency of the Federal Government. A “claim” or “debt” includes amounts due the Government from loans insured by or guaranteed by the United States and all other amounts due from fees, leases, rents, royalties, services, sales of real or personal property, overpayment, penalties, damages, interest, and fines.
(d) Claim certification means a creditor agency’s written request to a paying agency to effect an administrative offset.
(e) Creditor agency means an agency to which a claim or debt is owed.
(f) Debtor means the person or entity owing money to the Federal Government.
(g) FCA means the Farm Credit Administration.
(h) Hearing official means an individual who is responsible for reviewing a claim under § 608.810 of this part.
(i) Paying agency means an agency of the Federal Government owing money to a debtor against which an administrative or salary offset can be effected.
(j) Salary offset means an administrative offset to collect a debt under 5 U.S.C. 5514 by deductions at one or more officially established pay intervals from the current pay account of a debtor.
The FCA official(s) designated by the Chairman of the Farm Credit Administration are authorized to perform all duties which the Chairman is authorized to perform under these regulations, the Federal Claims Collection Act of 1966, as amended, and the joint regulations issued under that Act.
§ 608.805 Responsibility for collection.
(a) The collection of claims shall be aggressively pursued in accordance with the provisions of the Federal Claims Collection Act of 1966, as amended, the joint regulations issued under that Act, and these regulations. Debts owed to the United States, together with charges for interest, penalties, and administrative costs, should be collected in one lump sum unless otherwise provided by law. If a debtor requests installment payments, the debtor, as requested by the FCA, shall provide sufficient information to demonstrate that the debtor is unable to pay the debt in one lump sum. When appropriate, the FCA shall arrange an installment payment schedule. Claims which cannot be collected directly or by administrative offset shall be either written off as administratively uncollectible or referred to the General Counsel for further consideration.
(b) The Chairman, or designee of the Chairman, may compromise claims for money or property arising out of the activities of the FCA, where the claim (exclusive of charges for interest, penalties, and administrative costs) does not exceed $100,000. When the claim exceeds $100,000 (exclusive of charges for interest, penalties, and administrative costs), the authority to accept a compromise rests solely with the Department of Justice. The standards governing the compromise of claims are set forth in 4 CFR part 103.
(c) The Chairman, or designee of the Chairman, may suspend or terminate the collection of claims which do not exceed $100,000 (exclusive of charges for interest, penalties, and administrative costs) after deducting the amount of any partial payments or collections. If, after deducting the amount of any partial payments or collections, a claim exceeds $100,000 (exclusive of charges for interest, penalties, and administrative costs), the authority to suspend or terminate rests solely with the Department of Justice. The standards governing the suspension or termination of claim collections are set forth in 4 CFR part 104.
(d) The FCA shall refer claims to the Department of Justice for litigation or to the General Accounting Office (GAO) for claims arising from audit exceptions taken by the GAO to payments made by the FCA in accordance with 4 CFR part 105.
§ 608.806 Demand for payment.
(a) A total of three progressively stronger written demands at not more than 30-day intervals should normally be made upon a debtor, unless a response or other information indicates that additional written demands would either be unnecessary or futile. When necessary to protect the Government’s interest, written demands may be preceded by other appropriate actions under Federal law, including immediate referral for litigation and/or administrative offset.
(b) The initial demand for payment shall be in writing and shall inform the debtor of the following:
(1) The amount of the debt, the date it was incurred, and the facts upon which the determination of indebtedness was made;
(2) The payment due date, which shall be 30 calendar days from the date of mailing or hand delivery of the initial demand for payment;
(3) The right of the debtor to inspect and copy the records of the agency related to the claim or to receive copies if personal inspection is impractical. The debtor shall be informed that the debtor may be assessed for the cost of copying the documents in accordance with § 608.807;
(4) The right of the debtor to obtain a review of the FCA’s determination of indebtedness;
(5) The right of the debtor to offer to enter into a written agreement with the agency to repay the amount of the claim. The debtor shall be informed that the acceptance of such an agreement is discretionary with the agency;
(6) That charges for interest, penalties, and administrative costs will be assessed against the debtor, in accordance with 31 U.S.C. 3717, if payment is not received by the payment due date;
(7) That if the debtor has not entered into an agreement with the FCA to pay the debt, has not requested the FCA to review the debt, or has not paid the debt by the payment due date, the FCA intends to collect the debt by all legally available means, which may include initiating legal action against the debtor, referring the debt to a collection agency for collection, collecting the debt by offset, or asking other Federal agencies for assistance in collecting the debt by offset;
(8) The name and address of the FCA official to whom the debtor shall send all correspondence relating to the debt; and
(9) Other information, as may be appropriate.
(c) If, prior to, during, or after completion of the demand cycle, the FCA determines to collect the debt by either administrative or salary offset, the FCA shall follow, as applicable, the requirements for a Notice of Intent to Collect by Administrative Offset or a Notice of Intent to Collect by Salary Offset set forth in § 608.822.
(d) If no response to the initial demand for payment is received by the payment due date, the FCA shall take further action under this part, under the Federal Claims Collection Act of 1966, as amended, under the joint regulations (4 CFR parts 101-105), or under any other applicable State or Federal law. These actions may include reports to credit bureaus, referrals to collection agencies, termination of contracts, debarment, and salary or administrative offset.
§ 608.807 Right to inspect and copy records.
The debtor may inspect and copy the FCA records related to the claim. The debtor shall give the FCA reasonable advance notice that it intends to inspect and copy the records involved. The debtor shall pay copying costs unless they are waived by the FCA. Copying costs shall be assessed pursuant to §§ 602.11 and 602.12 of this chapter.
§ 608.808 Right to offer to repay claim.
(a) The debtor may offer to enter into a written agreement with the FCA to repay the amount of the claim. The acceptance of such an offer and the decision to enter into such a written agreement is at the discretion of the FCA.
(b) If the debtor requests a repayment arrangement because payment of the amount due would create a financial hardship, the FCA shall analyze the debtor’s financial condition. The FCA may enter into a written agreement with the debtor permitting the debtor to repay the debt in installments if the FCA determines, in its sole discretion, that payment of the amount due would create an undue financial hardship for the debtor. The written agreement shall set forth the amount and frequency of installment payments and shall, in accordance with § 608.812, provide for the imposition of charges for interest, penalties, and administrative costs unless waived by the FCA.
(c) The written agreement may require the debtor to execute a confess-judgment note when the total amount of the deferred installments will exceed $750. The FCA shall provide the debtor with a written explanation of the consequences of signing a confess-judgment note. The debtor shall sign a statement acknowledging receipt of the written explanation. The statement shall recite that the written explanation was read and understood before execution of the note and that the debtor signed the note knowingly and voluntarily. Documentation of these procedures will be maintained in the FCA’s file on the debtor.
§ 608.809 Right to agency review.
(a) If the debtor disputes the claim, the debtor may request a review of the FCA’s determination of the existence of the debt or of the amount of the debt. If only part of the claim is disputed, the undisputed portion should be paid by the payment due date.
(b) To obtain a review, the debtor shall submit a written request for review to the FCA official named in the initial demand letter, within 15 calendar days after receipt of the letter. The debtor’s request for review shall state the basis on which the claim is disputed.
(c) The FCA shall promptly notify the debtor, in writing, that the FCA has received the request for review. The FCA shall conduct its review of the claim in accordance with § 608.810.
(d) Upon completion of its review of the claim, the FCA shall notify the debtor whether the FCA’s determination of the existence or amount of the debt has been sustained, amended, or canceled. The notification shall include a copy of the written decision issued by the hearing official pursuant to § 608.810(e). If the FCA’s determination is sustained, this notification shall contain a provision which states that the FCA intends to collect the debt by all legally available means, which may include initiating legal action against the debtor, referring the debt to a collection agency for collection, collecting the debt by offset, or asking other Federal agencies for assistance in collecting the debt by offset.
§ 608.810 Review procedures.
(a) Unless an oral hearing is required by § 608.823(d), the FCA’s review shall be a review of the written record of the claim.
(b) If an oral hearing is required under § 608.823(d), the FCA shall provide the debtor with a reasonable opportunity for such a hearing. The oral hearing, however, shall not be an adversarial adjudication and need not take the form of a formal evidentiary hearing. All significant matters discussed at the hearing, however, will be carefully documented.
(c) Any review required by this part, whether a review of the written record or an oral hearing, shall be conducted by a hearing official. In the case of a salary offset, the hearing official shall not be under the supervision or control of the Chairman of the Farm Credit Administration.
(d) The FCA may be represented by legal counsel. The debtor may represent himself or herself or may be represented by an individual of the debtor’s choice and at the debtor’s expense.
(e) The hearing official shall issue a final written decision based on documentary evidence and, if applicable, information developed at an oral hearing. The written decision shall be issued as soon as practicable after the review but not later than 60 days after the date on which the request for review was received by the FCA, unless the debtor requests a delay in the proceedings. A delay in the proceedings shall be granted if the hearing official determines, in his or her sole discretion, that there is good cause to grant the delay. If a delay is granted, the 60-day decision period shall be extended by the number of days by which the review was postponed.
(f) Upon issuance of the written opinion, the FCA shall promptly notify the debtor of the hearing official’s decision. Said notification shall include a copy of the written decision issued by the hearing official pursuant to paragraph (e) of this section.
§ 608.811 Special review.
(a) An employee subject to salary offset, under subpart C of this part, or a voluntary repayment agreement, may, at any time, request a special review by the FCA of the amount of the salary offset or voluntary repayment, based on materially changed circumstances such as, but not limited to, catastrophic illness, divorce, death, or disability.
(b) To determine whether an offset would prevent the employee from meeting essential subsistence expenses (costs incurred for food, housing, clothing, transportation, and medical care), the employee shall submit a detailed statement and supporting documents for the employee, his or her spouse, and dependents indicating:
(1) Income from all sources;
(2) Assets;
(3) Liabilities;
(4) Number of dependents;
(5) Expenses for food, housing, clothing, and transportation;
(6) Medical expenses; and
(7) Exceptional expenses, if any.
(c) If the employee requests a special review under this section, the employee shall file an alternative proposed offset or payment schedule and a statement, with supporting documents, showing why the current salary offset or payments result in an extreme financial hardship to the employee.
(d) The FCA shall evaluate the statement and supporting documents, and determine whether the original offset or repayment schedule imposes an undue financial hardship on the employee. The FCA shall notify the employee in writing of such determination, including, if appropriate, a revised offset or payment schedule.
§ 608.812 Charges for interest, administrative costs, and penalties.
(a) Except as provided in paragraph (d) of this section, the FCA shall:
(1) Assess interest on unpaid claims;
(2) Assess administrative costs incurred in processing and handling overdue claims; and
(3) Assess penalty charges not to exceed 6 percent a year on any part of a debt more than 90 days past due. The imposition of charges for interest, administrative costs, and penalties shall be made in accordance with 31 U.S.C. 3717.
(b)(1) Interest shall accrue from the date of mailing or hand delivery of the initial demand for payment or the Notice of Intent to Collect by either Administrative or Salary Offset if the amount of the claim is not paid within 30 days from the date of mailing or hand delivery of the initial demand or notice.
(2) The 30-day period may be extended on a case-by-case basis if the FCA reasonably determines that such action is appropriate. Interest shall only accrue on the principal of the claim and the interest rate shall remain fixed for the duration of the indebtedness, except, as provided in paragraph (c) of this section, in cases where a debtor has defaulted on a repayment agreement and seeks to enter into a new agreement, or if the FCA reasonably determines that a higher rate is necessary to protect the interests of the United States.
(c) If a debtor defaults on a repayment agreement and seeks to enter into a new agreement, the FCA may assess a new interest rate on the unpaid claim. In addition, charges for interest, administrative costs, and penalties which accrued but were not collected under the original repayment agreement shall be added to the principal of the claim to be paid under the new repayment agreement. Interest shall accrue on the entire principal balance of the claim, as adjusted to reflect any increase resulting from the addition of these charges.
(d) The FCA may waive charges for interest, administrative costs, and/or penalties if it determines that:
(1) The debtor is unable to pay any significant sum toward the claim within a reasonable period of time;
(2) Collection of charges for interest, administrative costs, and/or penalties would jeopardize collection of the principal of the claim;
(3) Collection of charges for interest, administrative costs, or penalties would be against equity and good conscience; or
(4) It is otherwise in the best interest of the United States, including the situation where an installment payment agreement or offset is in effect.
§ 608.813 Contracting for collection services.
The Chairman, or designee of the Chairman, may contract for collection services in accordance with 31 U.S.C. 3718 and 4 CFR 102.6 to recover debts.
§ 608.814 Reporting of credit information.
The Chairman, or designee of the Chairman, may disclose to a consumer reporting agency information that an individual is responsible for a debt owed to the United States. Information will be disclosed to reporting agencies in accordance with the terms and conditions of agreements entered into between the FCA and the reporting agencies. The terms and conditions of such agreements shall specify that all of the rights and protection afforded to the debtor under 31 U.S.C. 3711(f) have been fulfilled. The FCA shall notify each consumer reporting agency, to which a claim was disclosed, when the debt has been satisfied.
§ 608.815 Credit report.
In order to aid the FCA in making appropriate determinations regarding the collection and compromise of claims; the collection of charges for interest, administrative costs, and penalties; the use of administrative offset; the use of other collection methods; and the likelihood of collecting the claim, the FCA may institute, consistent with the provisions of the Fair Credit Reporting Act (15 U.S.C. 1681, et seq.), a credit investigation of the debtor immediately following a determination that the claim exists.
Subpart B—Administrative Offset
§ 608.820 Applicability.
(a) The provisions of this subpart shall apply to the collection of debts by administrative [or salary] offset under 31 U.S.C. 3716, 5 U.S.C. 5514, or other statutory or common law.
(b) Offset shall not be used to collect a debt more than 10 years after the Government’s right to collect the debt first accrued, unless facts material to the Government’s right to collect the debt were not known and could not reasonably have been known by the official or officials of the Government who were charged with the responsibility of discovering and collecting such debt.
(c) Offset shall not be used with respect to:
(1) Debts owed by other agencies of the United States or by any State or local government;
(2) Debts arising under or payments made under the Social Security Act, the Internal Revenue Code of 1986, as amended, or tariff laws of the United States; or
(3) Any case in which collection by offset of the type of debt involved is explicitly provided for or prohibited by another statute.
(d) Unless otherwise provided by contract or law, debts or payments which are not subject to offset under 31 U.S.C. 3716 or 5 U.S.C. 5514 may be collected by offset if such collection is authorized under common law or other applicable statutory authority.
§ 608.821 Collection by offset.
(a) Collection of a debt by administrative [or salary] offset shall be accomplished in accordance with the provisions of these regulations, of 4 CFR 102.3, and 5 CFR part 550, subpart K. It is not necessary for the debt to be reduced to judgment or to be undisputed for offset to be used.
(b) The Chairman, or designee of the Chairman, may determine that it is feasible to collect a debt to the United States by offset against funds payable to the debtor.
(c) The feasibility of collecting a debt by offset will be determined on a case-by-case basis. This determination shall be made by considering all relevant factors, including the following:
(1) The degree to which the offset can be accomplished in accordance with law. This determination should take into consideration relevant statutory, regulatory, and contractual requirements;
(2) The degree to which the FCA is certain that its determination of the existence and amount of the debt is correct;
(3) The practicality of collecting the debt by offset. The cost, in time and money, of collecting the debt by offset and the amount of money which can reasonably be expected to be recovered through offset will be relevant to this determination; and
(4) Whether the use of offset will substantially interfere with or defeat the purpose of a program authorizing payments against which the offset is contemplated. For example, under a grant program in which payments are made in advance of the grantee’s performance, the imposition of offset against such a payment may be inappropriate.
(d) The collection of a debt by offset may not be feasible when there are circumstances which would indicate that the likelihood of collection by offset is less than probable.
(e) The offset will be effected 31 days after the debtor receives a Notice of Intent to Collect by Administrative Offset (or Notice of Intent to Collect by Salary Offset if the offset is a salary offset), or upon the expiration of a stay of offset, unless the FCA determines under § 608.824 that immediate action is necessary.
(f) If the debtor owes more than one debt, amounts recovered through offset may be applied to them in any order. Applicable statutes of limitation would be considered before applying the amounts recovered to any debts owed.
§ 608.822 Notice requirements before offset.
(a) Except as provided in § 608.824, the FCA will provide the debtor with 30 calendar days’ written notice that unpaid debt amounts shall be collected by administrative [or salary] offset (Notice of Intent to Collect by Administrative [or Salary] Offset) before the FCA imposes offset against any money that is to be paid to the debtor.
(b) The Notice of Intent to Collect by Administrative [or Salary] Offset shall be delivered to the debtor by hand or by mail and shall provide the following information:
(1) The amount of the debt, the date it was incurred, and the facts upon which the determination of indebtedness was made;
(2) In the case of an administrative offset, the payment due date, which shall be 30 calendar days from the date of mailing or hand delivery of the Notice;
(3) In the case of a salary offset: (i) The FCA’s intention to collect the debt by means of deduction from the employee’s current disposable pay account until the debt and all accumulated interest is paid in full; and
(ii) The amount, frequency, proposed beginning date, and duration of the intended deductions;
(4) The right of the debtor to inspect and copy the records of the FCA related to the claim or to receive copies if personal inspection is impractical. The debtor shall be informed that the debtor shall be assessed for the cost of copying the documents in accordance with § 608.807;
(5) The right of the debtor to obtain a review of, and to request a hearing, on the FCA’s determination of indebtedness, the propriety of collecting the debt by offset, and, in the case of salary offset, the propriety of the proposed repayment schedule (i.e., the percentage of disposable pay to be deducted each pay period). The debtor shall be informed that to obtain a review, the debtor shall deliver a written request for a review to the FCA official named in the Notice, within 15 calendar days after the debtor’s receipt of the Notice. In the case of a salary offset, the debtor shall also be informed that the review shall be conducted by an official arranged for by the FCA who shall be a hearing official not under the control of the Chairman of the Farm Credit Administration, or an administrative law judge;
(6) That the filing of a petition for hearing within 15 calendar days after receipt of the Notice will stay the commencement of collection proceedings;
(7) That a final decision on the hearing (if one is requested) will be issued at the earliest practical date, but not later than 60 days after the filing of the written request for review unless the employee requests, and the hearing official grants, a delay in the proceedings;
(8) The right of the debtor to offer to enter into a written agreement with the FCA to repay the amount of the claim. The debtor shall be informed that the acceptance of such an agreement is discretionary with the FCA;
(9) That charges for interest, penalties, and administrative costs shall be assessed against the debtor, in accordance with 31 U.S.C. 3717, if payment is not received by the payment due date. The debtor shall be informed that such assessments must be made unless excused in accordance with the Federal Claims Collection Standards (4 CFR parts 103 and 104);
(10) The amount of accrued interest and the amount of any other penalties or administrative costs which may have been added to the principal debt;
(11) That if the debtor has not entered into an agreement with the FCA to pay the debt, has not requested the FCA to review the debt, or has not paid the debt prior to the date on which the offset is to be imposed, the FCA intends to collect the debt by administrative [or salary] offset or by requesting other Federal agencies for assistance in collecting the debt by offset. The debtor shall be informed that the offset shall be imposed against any funds that might become available to the debtor, until the principal debt and all accumulated interest and other charges are paid in full;
(12) The date on which the offset will be imposed, which shall be 31 calendar days from the date of mailing or hand delivery of the Notice. The debtor shall be informed that the FCA reserves the right to impose an offset prior to this date if the FCA determines that immediate action is necessary;
(13) That any knowingly false or frivolous statements, representations, or evidence may subject the debtor to:
(i) Penalties under the False Claims Act, sections 3729 through 3731 of title 31, United States Code, or any other applicable statutory authority;
(ii) Criminal penalties under sections 286, 287, 1001, and 1002 of title 18, United States Code, or any other applicable statutory authority; and, with regard to employees,
(iii) Disciplinary procedures appropriate under chapter 75 of title 5, United States Code; part 752 of title 5, Code of Federal Regulations, or any other applicable statute or regulation;
(14) The name and address of the FCA official to whom the debtor shall send all correspondence relating to the debt or the offset;
(15) Any other rights and remedies available to the debtor under statutes or regulations governing the program for which the collection is being made;
(16) That unless there are applicable contractual or statutory provisions to the contrary, amounts paid on or deducted for the debt, which are later waived or found not owed to the United States, will be promptly refunded to the employee; and
(17) Other information, as may be appropriate.
(c) When the procedural requirements of this section have been provided to the debtor in connection with the same debt or under some other statutory or regulatory authority, the FCA is not required to duplicate those requirements before effecting offset.
§ 608.823 Right to review of claim.
(a) If the debtor disputes the claim, the debtor may request a review of the FCA’s determination of the existence of the debt, the amount of the debt, the propriety of collecting the debt by offset, and in the case of salary offset, the propriety of the proposed repayment schedule. If only part of the claim is disputed, the undisputed portion should be paid by the payment due date.
(b) To obtain a review, the debtor shall submit a written request for review to the FCA official named in the Notice of Intent to Collect by Administrative [or Salary] Offset within 15 calendar days after receipt of the notice. The debtor’s written request for review shall state the basis on which the claim is disputed and shall specify whether the debtor requests an oral hearing or a review of the written record of the claim. If an oral hearing is requested, the debtor shall explain in the request why the matter cannot be resolved by a review of the documentary evidence alone.
(c) The FCA shall promptly notify the debtor, in writing, that the FCA has received the request for review. The FCA shall conduct its review of the claim in accordance with § 608.810.
(d) The FCA’s review of the claim, under this section, shall include providing the debtor with a reasonable opportunity for an oral hearing if:
(1) An applicable statute authorizes or requires the FCA to consider waiver of the indebtedness, the debtor requests waiver of the indebtedness, and the waiver determination turns on an issue of credibility or veracity; or
(2) The debtor requests reconsideration of the debt and the FCA determines that the question of the indebtedness cannot be resolved by reviewing the documentary evidence; for example, when the validity of the debt turns on an issue of credibility or veracity.
(e) A debtor waives the right to a hearing and will have his or her debt offset in accordance with the proposed offset schedule if the debtor:
(1) Fails to file a written request for review within the timeframe set forth in paragraph (b) of this section, unless the FCA determines that the delay was the result of circumstances beyond his or her control; or
(2) Fails to appear at an oral hearing of which he or she was notified unless the hearing official determines that the failure to appear was due to circumstances beyond the employee’s control.
(f) Upon completion of its review of the claim, the FCA shall notify the debtor whether the FCA’s determination of the existence or amount of the debt has been sustained, amended, or canceled. The notification shall include a copy of the written decision issued by the hearing official, pursuant to § 608.810(e). If the FCA’s determination is sustained, this notification shall contain a provision which states that the FCA intends to collect the debt by offset or by requesting other Federal agencies for assistance in collecting the debt.
(g) When the procedural requirements of this section have been provided to the debtor in connection with the same debt or under some other statutory or regulatory authority, the FCA is not required to duplicate those requirements before effecting offset.
§ 608.824 Waiver of procedural requirements.
(a) The FCA may impose offset against a payment to be made to a debtor prior to the completion of the procedures required by this part, if:
(1) Failure to impose the offset would substantially prejudice the Government’s ability to collect the debt; and
(2) The timing of the payment against which the offset will be imposed does not reasonably permit the completion of those procedures.
(b) The procedures required by this part shall be complied with promptly after the offset is imposed. Amounts recovered by offset, which are later found not to be owed to the Government, shall be promptly refunded to the debtor.
§ 608.825 Coordinating offset with other Federal agencies.
(a)(1) Any creditor agency which requests the FCA to impose an offset against amounts owed to the debtor shall submit to the FCA a claim certification which meets the requirements of this paragraph. The FCA shall submit the same certification to any agency that the FCA requests to effect an offset.
(2) The claim certification shall be in writing. It shall certify the debtor owes the debt and that all of the applicable requirements of 31 U.S.C. 3716 and 4 CFR part 102 have been met. If the intended offset is to be a salary offset, a claim certification shall instead certify that the debtor owes the debt and that the applicable requirements of 5 U.S.C. 5514 and 5 CFR part 550, subpart K, have been met.
(3) A certification that the debtor owes the debt shall state the amount of the debt, the factual basis supporting the determination of indebtedness, and the date on which payment of the debt was due. A certification that the requirements of 31 U.S.C. 3716 and 4 CFR part 102 have been met shall include a statement that the debtor has been sent a notice of Intent to Collect by Administrative Offset at least 31 calendar days prior to the date of the intended offset or a statement that pursuant to 4 CFR 102.3(b)(5) said Notice was not required to be sent. A certification that the requirements of 5 U.S.C. 5514 and 5 CFR part 550, subpart K, have been met shall include a statement that the debtor has been sent a Notice of Intent to Collect by Salary Offset at least 31 calendar days prior to the date of the intended offset or a statement that pursuant to 4 CFR 102.3(b)(5) said Notice was not required to be sent.
(b)(1) The FCA shall not effect an offset requested by another Federal agency without first obtaining the claim certification required by paragraph (a) of this section. If the FCA receives an incomplete claim certification, the FCA shall return the claim certification with notice that a claim certification which complies with the requirements of paragraph (a) of this section must be submitted to the FCA before the FCA will consider effecting an offset.
(2) The FCA may rely on the information contained in the claim certification provided by a requesting creditor agency. The FCA is not authorized to review a creditor agency’s determination of indebtedness.
(c) Only the creditor agency may agree to enter into an agreement with the debtor for the repayment of the claim. Only the creditor agency may agree to compromise, suspend, or terminate collection of the claim.
(d) The FCA may decline, for good cause, a request by another agency to effect an offset. Good cause includes that the offset might disrupt, directly or indirectly, essential FCA operations. The refusal and the reasons shall be sent in writing to the creditor agency.
§ 608.826 Stay of offset.
(a)(1) When a creditor agency receives a debtor’s request for inspection of agency records, the offset is stayed for 10 calendar days beyond the date set for the record inspection.
(2) When a creditor agency receives a debtor’s offer to enter into a repayment agreement, the offset is stayed until the debtor is notified as to whether the proposed agreement is acceptable.
(3) When a review is conducted, the offset is stayed until the creditor agency issues a final written decision.
(b) When offset is stayed, the amount of the debt and the amount of any accrued interest or other charges will be withheld from payments to the debtor. The withheld amounts shall not be applied against the debt until the stay expires. If withheld funds are later determined not to be subject to offset, they will be promptly refunded to the debtor.
(c) If the FCA is the creditor agency and the offset is stayed, the FCA will immediately notify an offsetting agency to withhold the payment pending termination of the stay.
§ 608.827 Offset against amounts payable from Civil Service Retirement and Disability Fund.
The FCA may request that monies payable to a debtor from the Civil Service Retirement and Disability Fund be administratively offset to collect debts owed to the FCA by the debtor. The FCA must certify that the debtor owes the debt, the amount of the debt, and that the FCA has complied with the requirements set forth in this part, 4 CFR 102.3, and the Office of Personnel Management regulations. The request shall be submitted to the official designated in the Office of Personnel Management regulations to receive the request.
Subpart C—Offset Against Salary
§ 608.835 Purpose.
The purpose of this subpart is to implement section 5 of the Debt Collection Act of 1982 (Pub. L. 97-365)(5 U.S.C. 5514), which authorizes the collection of debts owed by Federal employees to the Federal Government by means of salary offsets. These regulations provide procedures for the collection of a debt owed to the Government by the imposition of a salary offset against amounts payable to a Federal employee as salary. These regulations are consistent with the regulations on salary offset published by the Office of Personnel Management, codified in 5 CFR part 550, subpart K. Since salary offset is a type of administrative offset, this subpart supplements subpart B.
§ 608.836 Applicability of regulations.
(a) These regulations apply to the following cases:
(1) Where the FCA is owed a debt by an individual currently employed by another agency;
(2) Where the FCA is owed a debt by an individual who is currently employed by the FCA; or
(3) Where the FCA currently employs an individual who owes a debt to another Federal agency. Upon receipt of proper certification from the creditor agency, the FCA will offset the debtor-employee’s salary in accordance with these regulations.
(b) These regulations do not apply to the following:
(1) Debts or claims rising under the Internal Revenue Code of 1986, as amended (26 U.S.C. 1 et seq.); the Social Security Act (42 U.S.C. 301 et seq.); the tariff laws of the United States; or to any case where collection of a debt by salary offset is explicitly provided for or prohibited by another statute (e.g., travel advances in 5 U.S.C. 5705 and employee training expenses in 5 U.S.C. 4108).
(2) Any adjustment to pay arising from an employee’s election of coverage or a change in coverage under a Federal benefits program requiring periodic deductions from pay if the amount to be recovered was accumulated over four pay periods or less.
(3) A claim which has been outstanding for more than 10 years after the creditor agency’s right to collect the debt first accrued, unless facts material to the Government’s right to collect were not known and could not reasonably have been known by the official or officials charged with the responsibility for discovery and collection of such debts.
§ 608.837 Definitions.
In this subpart, the following definitions shall apply:
(a) Agency means:
(1) An executive agency as defined by 5 U.S.C. 105, including the United States Postal Service and the United States Postal Rate Commission;
(2) A military department as defined in 5 U.S.C. 102;
(3) An agency or court of the judicial branch, including a court as defined in 28 U.S.C. 610, the District Court for the Northern Mariana Islands, and the Judicial Panel on Multi-district Litigation;
(4) An agency of the legislative branch, including the United States Senate and the United States House of Representatives; or
(5) Other independent establishments that are entities of the Federal Government.
(b) Disposable pay means, for an officially established pay interval, that part of current basic pay, special pay, incentive pay, retired pay, retainer pay, or, in the case of an employee not entitled to basic pay, other authorized pay, remaining after the deduction of any amount required by law to be withheld. The FCA shall allow the deductions described in 5 CFR 581.105 (b) through (f).
(c) Employee means a current employee of the FCA or other agency, including a current member of the Armed Forces or Reserve of the Armed Forces of the United States.
(d) Waiver means the cancellation, remission, forgiveness, or nonrecovery of a debt allegedly owed by an employee to the FCA or another agency as permitted or required by 5 U.S.C. 5584 or 8346(b), 10 U.S.C. 2774, 32 U.S.C. 716, or any other law.
§ 608.838 Waiver requests and claims to the General Accounting Office.
(a) The regulations contained in this subpart do not preclude an employee from requesting a waiver of an overpayment under 5 U.S.C. 5584 or 8346(b), 10 U.S.C. 2774, 32 U.S.C. 716, or in any way questioning the amount or validity of a debt by submitting a subsequent claim to the General Accounting Office in accordance with the procedures prescribed by the General Accounting Office.
(b) These regulations also do not preclude an employee from requesting a waiver pursuant to other statutory provisions pertaining to the particular debts being collected.
§ 608.839 Procedures for salary offset.
(a) The Chairman, or designee of the Chairman, shall determine the amount of an employee’s disposable pay and the amount to be deducted from the employee’s disposable pay at regular pay intervals.
(b) Deductions shall begin within three official pay periods following the date of mailing or delivery of the Notice of Intent to Collect by Salary Offset.
(c)(1) If the amount of the debt is equal to or is less than 15 percent of the employee’s disposable pay, such debt should be collected in one lump-sum deduction.
(2) If the amount of the debt is not collected in one lump-sum deduction, the debt shall be collected in installment deductions over a period of time not greater than the anticipated period of employment. The size and frequency of installment deductions will bear a reasonable relation to the size of the debt and the employee’s ability to pay. However, the amount deducted from any pay period will not exceed 15 percent of the employee’s disposable pay for that period, unless the employee has agreed in writing to the deduction of a greater amount.
(3) A deduction exceeding the 15-percent disposable pay limitation may be made from any final salary payment pursuant to 31 U.S.C. 3716 in order to liquidate the debt, whether the employee is being separated voluntarily or involuntarily.
(4) Whenever an employee subject to salary offset is separated from the FCA and the balance of the debt cannot be liquidated by offset of the final salary check pursuant to 31 U.S.C. 3716, the FCA may offset any later payments of any kind against the balance of the debt.
(d) In instances where two or more creditor agencies are seeking salary offsets against current employees of the FCA or where two or more debts are owed to a single creditor agency, the FCA, at its discretion, may determine whether one or more debts should be offset simultaneously within the 15-percent limitation. Debts owed to the FCA should generally take precedence over debts owed to other agencies.
§ 608.840 Refunds.
(a) In instances where the FCA is the creditor agency, it shall promptly refund any amounts deducted under the authority of 5 U.S.C. 5514 when:
(1) The debt is waived or otherwise found not to be owed to the United States (unless expressly prohibited by statute or regulations); or
(2) An administrative or judicial order directs the FCA to make a refund.
(b) Unless required or permitted by law or contract, refunds under this section shall not bear interest.
§ 608.841 Requesting current paying agency to offset salary.
(a) To request a paying agency to impose a salary offset against amounts owed to the debtor, the FCA shall provide the paying agency with a claim certification which meets the requirements set forth in § 608.825(a). The FCA shall also provide the paying agency with a repayment schedule determined under the provisions of § 608.839 or in accordance with a repayment agreement entered into with the debtor.
(b) If the employee separates from the paying agency before the debt is paid in full, the paying agency shall certify the total amount collected on the debt. A copy of this certification shall be sent to the employee and a copy shall be sent to the FCA. If the paying agency is aware that the employee is entitled to payments from the Civil Service Retirement and Disability Fund, or other similar payments, it must provide written notification to the agency responsible for making such payments that the debtor owes a debt (including the amount) and that the provisions of this section have been fully complied with. However, the FCA must submit a properly certified claim to the agency responsible for making such payments before the collection can be made.
(c) When an employee transfers to another paying agency, the FCA is not required to repeat the due process procedures set forth in 5 U.S.C. 5514 and this part to resume the collection. The FCA shall, however, review the debt upon receiving the former paying agency’s notice of the employee’s transfer to make sure the collection is resumed by the new paying agency.
(d) If a special review is conducted pursuant to § 608.811 and results in a revised offset or repayment schedule, the FCA shall provide a new claim certification to the paying agency.
§ 608.842 Responsibility of the FCA as the paying agency.
(a) When the FCA receives a claim certification from a creditor agency, deductions should be scheduled to begin at the next officially established pay interval. The FCA shall send the debtor written notice which provides:
(1) That the FCA has received a valid claim certification from the creditor agency;
(2) The date on which salary offset will begin;
(3) The amount of the debt; and
(4) The amount of such deductions.
(b) If, after the creditor agency has submitted the claim certification to the FCA, the employee transfers to a different agency before the debt is collected in full, the FCA must certify the total amount collected on the debt. The FCA shall send a copy of this certification to the creditor agency and a copy to the employee. If the FCA is aware that the employee is entitled to payments from the Civil Service Retirement Fund and Disability Fund, or other similar payments, it shall provide written notification to the agency responsible for making such payments that the debtor owes a debt (including the amount).
§ 608.843 Nonwaiver of rights by payments.
An employee’s involuntary payment of all or any portion of a debt being collected under this subpart shall not be construed as a waiver of any rights the employee may have under 5 U.S.C. 5514 or any other provisions of a written contract or law unless there are statutory or contractual provisions to the contrary.
SUBCHAPTER B—FARM CREDIT SYSTEM
PART 609—ELECTRONIC COMMERCE
Subpart A—General Rules
§ 609.905 Background.
The Farm Credit Administration (FCA) wants to create a flexible regulatory environment that facilitates electronic commerce (E-commerce) and allows Farm Credit System (System) institutions and their customers to use new technologies. System institutions may use E-commerce but must establish good business practices that ensure safety and soundness while doing so.
§ 609.910 Compliance with the Electronic Signatures in Global and National Commerce Act (Public Law 106-229) (E-SIGN).
(a) General. E-SIGN makes it easier to conduct E-commerce. With some exceptions, E-SIGN permits the use and establishes the legal validity of electronic contracts, electronic signatures, and records maintained in electronic rather than paper form. It governs transactions relating to the conduct of business, consumer, or commercial affairs between two or more persons. E-commerce is optional; all parties to a transaction must agree before it can be used.
(b) Consumer transactions. E-SIGN contains extensive consumer disclosure provisions that apply whenever another consumer protection law, such as the Equal Credit Opportunity Act, requires the disclosure of information to a consumer in writing. Consumer means an individual who obtains, through a transaction, products or services, including credit, used primarily for personal, family, or household purposes. You must follow E-SIGN’s specific procedures to make the required consumer disclosures electronically. E-SIGN’s special disclosure rules for consumer transactions do not apply to business transactions. Under E-SIGN, some System loans qualify as consumer transactions, while others are business transactions. You will need to distinguish between the two types of transactions to comply with E-SIGN.
(c) Specific exceptions. E-SIGN does not permit electronic notification for notices of default, acceleration, repossession, foreclosure, eviction, or the right to cure, under a credit agreement secured by, or a rental agreement for, a person’s primary residence. These notices require paper notification. The law also requires paper notification to cancel or terminate life insurance. Thus, System institutions cannot use electronic notification to deliver some notices that must be provided under part 617, subparts A, D, E, and G of this chapter. In addition, E-SIGN does not apply to the writing or signature requirements imposed under the Uniform Commercial Code, other than sections 1-107 and 1-206 and Articles 2 and 2A.
(d) Promissory notes. E-SIGN establishes special technological and business process standards for electronic promissory notes secured by real estate. To treat an electronic version of such a promissory note as the equivalent of a paper promissory note, you must conform to E-SIGN’s detailed requirements for transferable records. A transferable record is an electronic record that:
(1) Would be a note under Article 3 of the Uniform Commercial Code if the electronic record were in writing;
(2) The issuer of the electronic record has expressly agreed is a transferable record; and
(3) Relates to a loan secured by real property.
(e) Effect on State and Federal law. E-SIGN preempts most State and Federal statutes or regulations, including the Farm Credit Act of 1971, as amended (Act), and its implementing regulations, that require contracts or other business, consumer, or commercial records to be written, signed, or in non-electronic form. Under E-SIGN, an electronic record or signature generally satisfies any provision of the Act, or its implementing regulations that requires such records and signatures to be written, signed, or in paper form. Therefore, unless an exception applies or a necessary condition under E-SIGN has not been met, an electronic record or signature satisfies any applicable provision of the Act or its implementing regulations.
(f) Document integrity and signature authentication. Each System institution must verify the legitimacy of an E-commerce communication, transaction, or access request. Document integrity ensures that the same document is provided to all parties. Signature authentication proves the identities of all parties. The parties to the transaction may determine how to ensure document integrity and signature authentication.
(g) Records retention. Each System institution may maintain all records electronically even if originally they were paper records. The stored electronic record must accurately reflect the information in the original record. The electronic record must be accessible and capable of being reproduced by all persons entitled by law or regulations to review the original record.
§ 609.915 Compliance with Federal Reserve Board Regulations B, M, and Z.
The regulations in this part require fair practices and meaningful disclosures for certain lending and leasing activities. System institutions must comply with Federal Reserve Board Regulations B (Equal Credit Opportunity), M (Consumer Leasing), and Z (Truth in Lending) (12 CFR parts 202, 213, and 226).
Subpart B—Interpretations and Definitions
§ 609.920 Interpretations.
(a) E-SIGN preempts most statutes and regulations, including the Act and its implementing regulations that require paper copies and handwritten signatures in business, consumer, or commercial transactions. E-SIGN requires that statutes and regulations be interpreted to allow E-commerce as long as the safeguards of E-SIGN are met and its exceptions recognized. Generally, an electronic record or signature satisfies any provision of the Act or its implementing regulations that require such records and signatures to be written, signed, or in paper form.
(b) System institutions may interpret the Act and its implementing regulations broadly to allow electronic transmissions, communications, records, and submissions, as provided by E-SIGN. This means that the terms address, copy, distribute, document, file, mail, notice, notify, record, provide, send, signature, sent, written, writing, and similar words generally should be interpreted to permit electronic transmissions, communications, records, and submissions in business, consumer, or commercial transactions.
§ 609.925 Definitions.
We provide the following definitions that apply to the Act and its implementing regulations:
(a) Electronic means relating to technology having electrical, digital, magnetic, wireless, optical, electromagnetic, or similar capabilities.
(b) Electronic communication means a message that can be transmitted electronically and displayed on equipment as visual text. An example is a message displayed on a personal computer monitor screen. This does not include audio- and voice-response telephone systems.
(c) Electronic business (E-business) or electronic commerce (E-commerce) means buying, selling, producing, or working in an electronic medium.
(d) Electronic mail (E-mail) means:
(1) To send or submit information electronically; or
(2) A communication received electronically.
(e) Electronic signature means an electronic sound, symbol, or process, attached to or logically associated with a contract or other record and executed or adopted by a person with the intent to sign the record. Electronic signature describes a category of electronic processes that can be substituted for a handwritten signature.
Subpart C—Standards for Boards and Management
§ 609.930 Policies and procedures.
The FCA supports E-commerce and wants to facilitate it and other new technologies and innovations to enhance the efficient conduct of business and the delivery of safe and sound credit and closely related services. Through E-commerce, System institutions can enhance customer service, access information, and provide alternate communication systems. At the same time, E-commerce presents challenges and risks that your board must carefully consider in advance. Before engaging in E-commerce, you must weigh its business risks against its benefits. You must also adopt E-commerce policies and procedures to ensure your institution’s safety and soundness and compliance with law and regulations. Among other concerns, the policies and procedures must address, when applicable:
(a) Security and integrity of System institution and borrower data;
(b) The privacy of your customers as well as visitors to your Web site;
(c) Notices to customers or visitors to your Web site when they link to an affiliate or third party Web site;
(d) Capability of vendor or application providers;
(e) Business resumption after disruption;
(f) Fraud and money laundering;
(g) Intrusion detection and management;
(h) Liability insurance; and
(i) Prompt reporting of known or suspected criminal violations associated with E-commerce to law enforcement authorities and FCA under part 612, subpart B of this chapter.
§ 609.935 Business planning.
When engaging in E-commerce, the business plan required under part 618 of this chapter, subpart J, must describe the E-commerce initiative, including intended objectives, business risks, security issues, relevant markets, and legal compliance.
§ 609.940 Internal systems and controls.
When applicable, internal systems and controls must provide reasonable assurances that System institutions will:
(a) Follow and achieve business plan objectives and policies and procedures requirements regarding E-commerce; and
(b) Prevent and detect material deficiencies on a timely basis.
§ 609.945 Records retention.
Records stored electronically must be accurate, accessible, and reproducible for later reference.
Subpart D—General Requirements for Electronic Communications
§ 609.950 Electronic communications.
(a) Agreement. In accordance with E-SIGN, System institutions may communicate electronically in business, consumer, or commercial transactions. E-commerce transactions require the agreement of all parties when you do business.
(b) Communications with consumers. E-SIGN and Federal Reserve Board Regulations B, M, and Z (12 CFR parts 202, 213, and 226) outline specific disclosure requirements for communications with consumers.
(c) Communications with parties other than consumers. The consumer disclosure requirements of E-SIGN and of Federal Reserve Board Regulation B (12 CFR part 202) do not apply to your communications with parties other than consumers. (Federal Reserve Board Regulations M and Z (12 CFR parts 213 and 226) apply to consumers only.) Nonetheless, you must ensure that your communications, including those disclosures required under the Act and the regulations in this part, demonstrate good business practices in the delivery of credit and closely related services and in your obtaining goods and services.
PART 610—REGISTRATION OF MORTGAGE LOAN ORIGINATORS
§ 610.101 Cross reference.
The rules formerly at 12 CFR part 610 have been recodified by the Consumer Financial Protection Bureau at 12 CFR part 1007, “S.A.F.E. Mortgage Licensing Act—Federal Registration of Residential Mortgage Loan Originators (Regulation G)”.
PART 611—ORGANIZATION
Subpart A—General
§ 611.100 Definitions.
The following definitions apply for the purpose of this part:
(a) Business day means a day the institution is open for business, excluding the legal public holidays identified in 5 U.S.C. 6103(a).
(b) FCA means the Farm Credit Administration.
(c) Mail ballot means a ballot cast by regular or electronic mail.
(d) Online meeting means a meeting that is conducted over the Internet through the use of mediating technologies, such as online services, computer hardware and software, etc., where technology is used to generate objects and environments that are presented to users through a number of senses (e.g., vision and hearing). The mediating technologies allow people or objects at remote locations to appear locally present or at least allow them to be treated that way during the course of the meeting.
(e) Online meeting space means an online environment where Farm Credit institutions can hold stockholder meetings that allow stockholders to communicate, collaborate, and share information. Any stockholder with the necessary technology requirements and access (e.g., password-protected meetings) must be allowed to connect to his or her institution’s online meeting space.
(f) Regional election means the apportionment of a Farm Credit institution’s territory into regions in which a director or directors from a region are elected only by those voting stockholders who reside or conduct agricultural or aquatic operations in that same region.
(g) Stockholder-association means an association within a Farm Credit bank district holding voting stock in that bank.
(h) Stockholder-elected director means a director who is elected by the majority vote of the voting stockholders voting to serve as a member of a Farm Credit institution’s board of directors.
(i) Voting record date or record date means the official date set by a Farm Credit institution whereby a stockholder must own voting stock in that institution in order to cast a vote.
(j) Voting record date list or record date list means the list of names, addresses, and classes of stock held by stockholders in the Farm Credit institution who are eligible to vote as of a specific voting record date.
§ 611.110 Meetings of stockholders.
(a) Requirement. Associations must have annual meetings of stockholders for the purpose of conducting annual director elections. Farm Credit banks are encouraged to hold annual or periodic meetings of stockholders. The bylaws of each Farm Credit bank and association must specify the quorum requirements for stockholder meetings. Associations must elect at least one director at each annual meeting, but the vote on the election of a director or directors by mail ballot may only occur in the period following an annual meeting. An online meeting space may be used in addition to a physical meeting space to conduct a stockholders’ meeting or director election. A physical meeting space must always exist for association meetings involving director elections and other stockholders’ votes.
(b) Notice. Each association, and those Farm Credit banks holding annual meetings, must issue an Annual Meeting Information Statement in accordance with the requirements of §§ 620.20 and 620.21 of this chapter.
(c) Online meeting. Each Farm Credit bank and association using an online meeting space as part of a meeting or election must have policies and procedures in place addressing how the online meeting space will be accessed and used by participants. The policies and procedures must specifically identify any technological adaptations necessary to address the confidentiality and security in voting requirements of § 611.340.
Subpart B—Bank and Association Board of Directors
§ 611.210 Director qualifications and training.
(a) Qualifications. (1) Each bank and association board of directors must establish and maintain a policy identifying desirable director qualifications. The policy must explain the type and level of knowledge and experience desired for board members, explaining how the desired qualifications were identified. The policy must be periodically updated and provided to the institution’s nominating committee.
(2) Each Farm Credit institution board must have a director who is a financial expert. Boards of directors for associations with $500 million or less in total assets as of January 1 of each year may satisfy this requirement by retaining an advisor who is a financial expert. The financial advisor must report to the board of directors and be free of any affiliation with the external auditor or institution management. A financial expert is one recognized as having education or experience in: Accounting, internal accounting controls, or preparing or reviewing financial statements for financial institutions or large corporations consistent with the breadth and complexity of accounting and financial reporting issues that can reasonably be expected to be raised by the institution’s financial statements.
(b) Training. Each bank and association board of directors must establish and maintain a policy for director training that includes appropriate implementing procedures. The policy must identify training areas supporting desired director qualifications. Each Farm Credit bank and association must require newly elected or appointed directors to complete director orientation training within 1 year of assuming their position and require incumbent directors to attend training periodically to advance their skills.
§ 611.220 Outside directors.
(a) Eligibility, number and term—(1) Eligibility. No candidate for an outside director position may be a director, officer, employee, agent, or stockholder of an institution in the Farm Credit System. Farm Credit banks and associations must make a reasonable effort to select outside directors possessing some or all of the desired director qualifications identified pursuant to § 611.210(a) of this part.
(2) Number. Stockholder-elected directors must constitute at least 60 percent of the members of each institution’s board.
(i) Each Farm Credit bank must have at least two outside directors.
(ii) Associations with total assets exceeding $500 million as of January 1 of each year must have no fewer than two outside directors on the board. However, this requirement does not apply if it causes the percent of stockholder-elected directors to be less than 75 percent of the board.
(iii) Associations with $500 million or less in total assets as of January 1 of each year must have at least one outside director.
(3) Terms of office. Banks and associations may not establish a different term of office for outside directors than that established for stockholder-elected directors.
(b) Removal. Each institution must establish and maintain procedures for removal of outside directors. When the removal of an outside director is sought before the expiration of the outside director’s term, the reason for removal must be documented. An institution’s director removal procedures must allow for removal of an outside director by a majority vote of all voting stockholders voting, in person or by proxy, or by a two-thirds majority vote of the full board of directors. The outside director subject to the removal action is prohibited from voting in his or her own removal action.
Subpart C—Election of Directors and Other Voting Procedures
§ 611.310 Eligibility for membership on bank and association boards and subsequent employment.
(a) No person shall be eligible for membership on a bank or association board who is or has been, within 1 year preceding the date the term of office begins, a salaried officer or employee of any bank or association in the System.
(b) No bank or association director shall be eligible to continue to serve in that capacity and his or her office shall become vacant if after election as a member of the board, he or she becomes legally incompetent or is convicted of any criminal offense involving dishonesty or breach of trust or held liable in damages for fraud.
(c) No bank director shall, within 1 year after the date when he or she ceases to be a member of the board, serve as a salaried officer or employee of such bank, or any association with which the bank has a discount or agent relationship.
(d) No director of an association shall, within 1 year after he or she ceases to be a member of the board, serve as a salaried officer or employee of such association.
(e) No person shall be eligible for membership on a Farm Credit bank or association board of directors in the same election cycle for which the Farm Credit institution’s nominating committee is identifying candidates if that person was elected to serve on that institution’s nominating committee and attended any meeting called by the nominating committee.
(f) Out-of-territory borrowers who hold voting stock in the association may serve as association directors unless prohibited by the association’s bylaws. If an association’s bylaws prohibit it, that association must inform, in writing and at the time of loanmaking, each out-of-territory borrower that out-of-territory borrowers may not serve as directors.
§ 611.320 Impartiality in the election of directors.
(a) Each Farm Credit institution shall adopt policies and procedures that are designed to assure that the elections of board members are conducted in an impartial manner.
(b) No employee or agent of a Farm Credit institution shall take any part, directly or indirectly, in the nomination or election of members to the board of directors of a Farm Credit institution, or make any statement, either orally or in writing, which may be construed as intended to influence any vote in such nominations, or elections. This paragraph shall not prohibit employees or agents from providing biographical and other similar information or engaging in other activities pursuant to policies and procedures for nominations and elections. This paragraph does not affect the right of an employee or agent to nominate or vote for stockholder-elected directors of an institution in which the employee or agent is a voting member.
(c) No property, facilities, or resources, including information technology and human or financial resources, of any Farm Credit institution shall be used by any candidate for nomination or election or by any other person for the benefit of any candidate for nomination or election, unless the same property, facilities, or resources are simultaneously available and made known to be available for use by all declared candidates, including floor nominees. For the limited purpose of Farm Credit bank board elections, each Farm Credit bank may allow its stockholder-associations to use stockholder-association property, facilities, or resources in support of bank director candidates. Any Farm Credit bank permitting this activity by its stockholder-associations must have a policy in place approved by its board of directors establishing reasonable standards that stockholder-associations must follow, and those standards must give appropriate consideration to the various sizes of stockholder-associations within a bank’s district and include a maximum amount that a stockholder-association may expend in support of a bank director candidate.
(d) No director, employee, or agent of a Farm Credit institution shall, for the purpose of furthering the interests of any candidates for nomination or election, furnish or make use of records that are not made available for use by all declared candidates.
(e) No Farm Credit institution may in any way distribute or mail, whether at the expense of the institution or another, any campaign materials for director candidates. Institutions may request biographical information, as well as the disclosure information required under § 611.330, from all declared candidates who certify that they are eligible, restate such information in a standard format, and distribute or mail it with ballots or proxy ballots.
(f) No director of a Farm Credit institution shall, in his or her capacity as a director, make any statement, either orally or in writing, which may be construed as intending to influence any vote in that institution’s director nominations or elections. This paragraph shall not prohibit director candidates from engaging in campaign activities on their own behalf.
§ 611.325 Bank and association nominating committees.
Each Farm Credit bank and association may have only one nominating committee in any one election cycle. Each Farm Credit bank and association’s board of directors must establish and maintain policies and procedures on its nominating committee, describing the formation, composition, operation, resources, and duties of the committee, consistent with current laws and regulations. Each nominating committee must conduct itself in the impartial manner prescribed by the policies and procedures adopted by its institution under § 611.320 and this section.
(a) Composition. The voting stockholders of each bank and association must elect a nominating committee of no fewer than three members. Unless prohibited by association bylaws, out-of-territory borrowers who hold voting stock may serve as members of an association’s nominating committee. If an association’s bylaws prohibit it, that association must inform, in writing and at the time of loanmaking, each out-of-territory borrower that out-of-territory borrowers may not serve on the association’s nominating committee.
(b) Election. Farm Credit banks and associations may use in-person (including use of an online medium and proxy ballots) or mail balloting procedures to elect a nominating committee.
(1) Farm Credit banks and associations must provide voting stockholders the opportunity to vote on the candidates for each nominating committee position.
(2) Association nominating committee members may only be elected to a 1-year term. Farm Credit Banks must use weighted voting, with no cumulative voting permitted, when electing members to serve on a nominating committee. Farm Credit banks and associations may permit nominating committee members to be re-nominated and stand for re-election to serve successive terms.
(c) Conflicts of interest. No individual may serve on a nominating committee who, at the time of election to, or during service on, a nominating committee, is an employee, director, or agent of that bank or association. A nominating committee member may not be a candidate for election to the board in the same election for which the committee is identifying nominees. A nominating committee member may resign from the committee to run for election to the board only if the individual did not attend any nominating committee meeting.
(d) Responsibilities. It is the responsibility of each nominating committee to identify, evaluate, and nominate candidates for stockholder election to a Farm Credit bank or association board of directors. A nominating committee’s responsibilities are limited to the following:
(1) Nominate individuals who the committee determines meet the eligibility requirements to run for open director positions. The committee must endeavor to ensure representation from all areas of the Farm Credit bank’s or association’s territory and, as nearly as possible, all types of agriculture practiced within the territory.
(2) Evaluate the qualifications of the director candidates. The evaluation process must consider whether there are any known obstacles preventing a candidate from performing the duties of the position.
(3) Nominate at least two candidates for each director position being voted on by stockholders. If two nominees cannot be identified, the nominating committee must provide written explanation to the existing board of the efforts to locate candidates or the reasons for disqualifying any other candidate that resulted in fewer than two nominees.
(4) Maintain records of its meetings, including a record of attendance at meetings.
(5) Identify, evaluate, and nominate eligible individuals for service on the next nominating committee, if permitted by the institution.
(e) Resources. Each Farm Credit bank and association must provide its nominating committee reasonable access to administrative resources in order for the committee to perform its duties. Each Farm Credit bank and association must, at a minimum, provide its nominating committee with FCA regulations and guidance on nominating committees, a current list of stockholders, the most recent bylaws, the current director qualifications policy, and a copy of the policies and procedures that the bank or the association has adopted pursuant to § 611.320(a) ensuring impartial elections. On the request of the nominating committee, the institution must also provide a summary of the current board self-evaluation. The bank or association may require a pledge of confidentiality by committee members prior to releasing evaluation documents.
§ 611.326 Floor nominations for open Farm Credit bank and association director positions.
(a) Each floor nominee must be eligible for the director position for which the person has been nominated.
(b)(1) Voting stockholders of associations must be allowed to make floor nominations for every open stockholder-elected director position. Associations using only mail ballots must allow nominations from the floor at every session of an annual meeting. Associations permitting stockholders to cast votes during annual meetings may only allow nominations from the floor at the first session of the annual meeting.
(2) If floor nominations are permitted by a Farm Credit bank’s election policies and procedures, voting stockholders must be allowed to make floor nominations for every open stockholder-elected director position and a physical meeting space must exist. Before every director election by a Farm Credit bank, the bank must inform voting stockholders whether floor nominations will be accepted.
(c) Each association’s board of directors must adopt policies and procedures for making and accepting floor nominations of candidates to stand for election to its board of directors. Each Farm Credit bank’s board of directors allowing nominations from the floor must also adopt policies and procedures for making and accepting floor nominations. Policies and procedures for floor nominations must, at a minimum, provide that:
(1) Floor nominations may only be made after the nominating committee has provided its list of director-nominees.
(2) No more than a second by a voting stockholder to a nomination from the floor is required. After receiving a floor nomination, the floor nominee must state if he or she accepts the nomination.
(3) Floor nominees must make the disclosures required by § 611.330 of this part.
§ 611.330 Disclosures of Farm Credit bank and association director-nominees.
(a) Each Farm Credit bank and association’s board of directors must adopt policies and procedures that ensure a disclosure statement is prepared by each director-nominee. At a minimum, each disclosure statement for each nominee must:
(1) State the nominee’s name, city and state of residence, business address if any, age, and business experience during the last 5 years, including each nominee’s principal occupation and employment during the last 5 years.
(2) List all business interests on whose board of directors the nominee serves or is otherwise employed in a position of authority and state the principal business in which the business interest is engaged.
(3) Identify any family relationship of the nominee that would be reportable under part 612 of this chapter if elected to the institution’s board.
(b)(1) Floor nominees who are not incumbent directors must provide to the Farm Credit bank or association the information referred to in this section and in § 620.6(e) and (f) of this chapter. The information must be provided in either paper or electronic form within the time period prescribed by the institution’s bylaws or policies and procedures. If the institution does not have a prescribed time period, each floor nominee must provide this information to the institution within 5 business days of the nomination. If stockholders will not vote solely by mail ballot upon conclusion of the meeting, each floor nominee must provide the information at the first session at which voting is held.
(2) For each nominee who is not an incumbent director or a nominee from the floor, the nominee must provide the information referred to in this section and in § 620.6(e) and (f) of this chapter.
(c) Each Farm Credit bank and association must distribute director-nominee disclosure information to all stockholders eligible to vote in the election. Institutions may either restate such information in a standard format or provide complete copies of each nominee’s disclosure statement.
(1) Disclosure information for each director-nominee must be provided as part of the Annual Meeting Information Statement (AMIS) issued for director elections in accordance with § 620.21(b) of this chapter.
(2) Disclosure information for each director-nominee must be distributed or mailed with ballots or proxy ballots. Farm Credit banks and associations must ensure that the disclosure information on floor nominees is provided to voting stockholders by delivering ballots for the election of directors in the same format as the comparable information contained in the AMIS.
(d) No person may be a nominee for director who does not make the disclosures required by this section.
§ 611.340 Confidentiality and security in voting.
(a) Each Farm Credit bank and association’s board of directors must adopt policies and procedures that:
(1) Ensure the security of all records and materials related to a stockholder vote including, but not limited to, ballots, proxy ballots, and other related materials.
(2) Ensure that ballots and proxy ballots are provided only to stockholders who are eligible to vote as of the record date set for the stockholder vote.
(3) Provide for the establishment of a tellers committee or an independent third party who will be responsible for validating ballots and proxies and tabulating voting results. A tellers committee may only consist of voting stockholders who are not employees, directors, director-nominees, or members of that election cycle’s nominating committee.
(4) Ensure that a list of eligible voting stockholders (or identity codes of eligible voting stockholders) as of the voting record date is provided to the tellers committee or independent third party that will be tabulating the vote to ensure the validity of the votes cast. A small number of specifically authorized administrative employees of the institution may assist the tellers committee in such verifications, provided the institution implements procedures to ensure the confidentiality and security of the information made available to the employees. If an institution is using a tellers committee, verification of voter eligibility must be done separate and apart from the opening and tabulating of the actual ballots and may be done in advance of the vote tabulation, any time after the list of eligible voting stockholders has been provided to the tellers committee.
(5) Ensure that all information and materials regarding how or whether an individual stockholder has voted remain confidential, including protecting the information from disclosure to the institution’s directors, stockholders, or employees, or any other person except:
(i) A duly appointed tellers committee;
(ii) A small number of specifically authorized administrative employees assisting the tellers committee by validating stockholders’ eligibility to vote;
(iii) An independent third party tabulating the vote; or
(iv) The Farm Credit Administration.
(b) No Farm Credit bank or association may use signed ballots in stockholder votes. A bank or association may use balloting procedures, such as an identity code, that can be used to identify whether an individual stockholder is eligible to vote or has previously submitted a vote. In weighted voting, the votes must be tabulated by an independent third party.
(c) An independent third party or each member of the tellers committee that tabulates the votes, and any administrative employees assisting the tellers committee in verifying stockholder eligibility to vote, must sign a certificate declaring that such party, member, or employee will not disclose to any person (including the institution, its directors, stockholders, or employees) any information about how or whether an individual stockholder has voted, except that the information must be disclosed to the Farm Credit Administration, if requested.
(d) Once a Farm Credit bank or association receives a ballot, the vote of that stockholder is final, except that a stockholder may withdraw a proxy ballot before balloting begins at a stockholders’ meeting. A Farm Credit bank or association may give a stockholder voting by proxy an opportunity to give voting discretion to the proxy of the stockholder’s choice, provided that the proxy is also a stockholder eligible to vote.
(e) Ballots and proxy ballots must be safeguarded before the time of distribution or mailing to voting stockholders and after the time of receipt by the bank or association until disposal. When stockholder meetings are held for the purpose of conducting elections or other votes, only proxy ballots may be accepted prior to any or all sessions of the stockholders’ meeting and mail ballots may only be distributed after the conclusion of the meeting. 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. In other stockholder votes, ballots, proxy ballots, and records must be retained for at least 3 years after the vote.
(f) An institution and its officers, directors, and employees may not make any public announcement of the results of a stockholder vote before the tellers committee or independent third party has validated the results of the vote.
§ 611.350 Application of cooperative principles to the election of directors.
In the election of directors, each Farm Credit institution shall comply with the following cooperative principles as well as those set forth in § 615.5230 of this chapter, unless otherwise required by statute or regulation.
(a) Each voting stockholder of an association or bank for cooperatives has only one vote, regardless of the number of shares owned or the number of loans outstanding. Each voting stockholder-association of a Farm Credit Bank has only one vote that is assigned a weight proportional to the number of that association’s voting stockholders. Each voting stockholder of an agricultural credit bank has only one vote, unless another voting scheme has been approved by the Farm Credit Administration.
(b) If an association apportions its territory into geographic regions for director nomination or election purposes, out-of-territory voting stockholders must be assigned to a geographic region.
(c) All voting stockholders of a Farm Credit institution have the right to vote in any stockholder vote to remove any director.
§ 611.360 [Reserved]
Subpart D—Compensation Practices of Farm Credit Banks and Associations
§ 611.400 Compensation of bank board members.
(a) Farm Credit banks are authorized to pay fair and reasonable compensation to directors for services performed in an official capacity at a rate not to exceed the level established in section 4.21 of the Farm Credit Act of 1971, as amended, unless the FCA determines that such a level adversely affects the safety and soundness of the institution.
(b) The bank director compensation level established in section 4.21 of the Act shall be adjusted to reflect changes in the Consumer Price Index (CPI) for all urban consumers, as published by the Bureau of Labor Statistics, in the following manner: Current year’s maximum compensation = Prior year’s maximum compensation adjusted by the prior year’s annual average percent change in the CPI for all urban consumers. Adjustments will be made to the bank director statutory compensation limit beginning from October 28, 1992 (the date of enactment of the Farm Credit Banks and Associations Safety and Soundness Act of 1992). Additionally, each year the FCA will communicate the CPI adjusted bank director statutory compensation limit.
(c)(1) A Farm Credit bank is authorized to pay a director up to 30 percent more than the statutory compensation limit in exceptional circumstances where the director contributes extraordinary time and effort in the service of the bank and its shareholders.
(2) Banks must document the exceptional circumstances justifying additional director compensation. The documentation must describe:
(i) The exceptional circumstances justifying the additional director compensation, including the extraordinary time and effort the director devoted to bank business; and
(ii) The amount and the terms and conditions of the additional director compensation.
(d) Each bank board shall adopt a written policy regarding compensation of bank directors. The policy shall address, at a minimum, the following areas:
(1) The activities or functions for which attendance is necessary and appropriate and may be compensated, except that a Farm Credit bank shall not compensate any director for rendering services on behalf of any other Farm Credit System institution or a cooperative of which the director is a member, or for performing other assignments of a non-official nature;
(2) The methodology for determining each director’s rate of compensation; and
(3) The exceptional circumstances under which the board would pay additional compensation for any of its directors as authorized by paragraph (c) of this section.
(e) Directors may also be reimbursed for reasonable travel, subsistence, and other related expenses in accordance with the bank’s policy.
§ 611.410 [Reserved]
Subpart E—Transfer of Authorities
§ 611.500 General.
Each Farm Credit Bank or Agricultural Credit Bank is authorized, in accordance with section 7.6 of the Act, to transfer certain authorities to Federal land bank associations. The regulations in this subpart set forth the procedures and voting and approval requirements applicable to such transfers.
§ 611.501 Procedures.
(a) The boards of directors of a bank and an association which seek to transfer authorities may adopt appropriate resolutions approving such transfer and providing for the submission of such a proposal to their respective stockholders for a vote.
(b) The resolutions accompanied by the following information shall be submitted to the Farm Credit Administration for review and approval:
(1) Any proposed amendments to the charters of the institutions;
(2) A copy of the transfer plan as required under § 611.520 of this part;
(3) An information statement that complies with the requirements of § 611.515;
(4) The proposed bylaws of the bank and the association, as applicable; and
(5) Any additional information the boards of directors wish to submit in support of the request or that the Farm Credit Administration requests.
§ 611.505 Farm Credit Administration review.
(a) Upon receipt of the board of directors resolution and the accompanying documents, the Farm Credit Administration shall review the request and either deny or give its preliminary approval to the request.
(b) If the request is denied, written notice stating the reasons for the denial shall be transmitted to the chief executive officer of the bank and the association who shall promptly notify their respective boards of directors.
(c) Upon approval of the proposed transfer of authorities by the stockholders as provided in § 611.510, the secretary of the bank and the secretary of the association shall forward to the Farm Credit Administration a certified record of the results of the stockholder votes.
(d) Each institution shall notify its stockholders not later than 30 days after the stockholder vote of the final results of the vote. If no petition for reconsideration is filed with the Farm Credit Administration in accordance with § 611.525, the transfer shall be effective on the date specified in the transfer plan, or at such later date as may be required by the Farm Credit Administration to grant final approval. Notice of final approval shall be transmitted to the institutions involved.
(e) The effective date of a transfer may not be less than 35 days after mailing of the notification to stockholders of the results of the stockholder vote, or 15 days after the date of submission to the Farm Credit Administration of all required documents for the Agency’s consideration of final approval, whichever occurs later. If a petition for reconsideration is filed within 35 days after the date of mailing of the notification of stockholder vote, the constituent institutions must agree on a second effective date to be used in the event the transfer is approved on reconsideration. The second effective date may not be less than 60 days after stockholder notification of the results of the first vote, or 15 days after the date of the reconsideration vote, whichever occurs later.
§ 611.510 Approval procedures.
(a) Upon receipt of approval of a resolution by the Farm Credit Administration, the bank and the association shall call a meeting of their voting stockholders. Each institution shall notify each stockholder that the resolution has been filed and that a meeting will be held in accordance with the institution’s bylaws. The stockholders meeting of the bank and the association shall be held within 60 days of receipt of the approval from the Farm Credit Administration.
(b) The notice of meeting to consider and act upon the directors’ resolution shall be accompanied by an information statement that complies with the requirements of § 611.515.
(c) The proposal shall be approved if agreed to by:
(1) A majority of the stockholders of the bank voting in person or by proxy, with each association entitled to cast a number of votes equal to the number of its voting stockholders;
(2) A majority of the stockholders of the association voting, in person or by proxy;
(3) The Farm Credit Administration.
§ 611.515 Information statement.
(a) The bank and association shall prepare an information statement which will inform stockholders about the provisions of the proposed transfer of authorities and the effect of the proposal on the bank and the association.
(b) The information statement for each institution involved shall contain the following materials as applicable to the institution:
(1) A statement either on the first page of the materials or on the notice of the stockholders meeting, in capital letters and boldface type, that:
(2) A description of the material provisions of the plan under § 611.520 and the effect of the transaction on the institution, its stockholders, and the territory to be served.
(3) A statement enumerating the potential advantages and disadvantages of the proposed transfer including, but not limited to, changes in operating efficiencies, one-stop service, branch offices, local control, and financial condition.
(4) A summary of the provisions of the charter and bylaws following the transfer that differ materially from the charter or bylaws currently existing.
(5) A brief statement by the board of directors of the institution setting forth the board’s opinion on the advisability of the transfer.
(6) A presentation of the following financial data:
(i) An audited balance sheet and income statement and notes thereto of the bank or the association, as applicable, for the preceding 2 fiscal years.
(ii) If the transfer of authority includes any material transfer of assets, a balance sheet and income statement of the bank and the association showing its financial condition before the transfer of authority and a pro forma balance sheet and income statement for the bank or association, as applicable, showing its financial condition after the transfer. The statements shall meet the following conditions:
(A) Such financial statements shall be presented in columnar form, showing the financial condition as of the end of the most recent quarter of the institution, and operating results since the end of the last fiscal year through the end of the most recent quarter of the institution.
(B) If the request is made within 90 days after the end of the fiscal year, the institution’s financial statements shall be as of the most recent fiscal yearend.
(C) If the request is made within 45 days after the end of the most recent quarter, the institution’s financial statements shall be as of the end of the quarter preceding the quarter just ended.
(D) If the request is made more than 45 days after the end of the most recent quarter, the institution’s financial statements shall be as of the end of that quarter.
(E) The financial statements must be accompanied by appropriate notes, describing any assets being transferred and including data relating to high-risk assets and other property owned, allowance for credit losses, and current year-to-date chargeoffs.
(F) The amount and nature of start-up costs estimated to be associated with the transfer.
(7) A description of the type and dollar amount of any financial assistance that has been provided to the bank or the association, as applicable, during the past year; the conditions on which the financial assistance was extended, the terms of repayment or retirement, if any; and, the liability for repayment of this assistance by the bank or the association if the transfer were approved.
(8) A statement as to whether the bank or the association, as applicable, would require financial assistance during the first 3 years of operation, the estimated type and dollar amount of the assistance, and terms of repayment or retirement, if known.
(9) A statement indicating the possible tax consequences to stockholders and whether any legal opinion, ruling or external auditor’s opinion has been obtained on the matter.
(10) A presentation of the association’s interest rate and fee programs, interest collection policy, capitalization plan and other factors that would affect a borrower’s cost of doing business with the association.
(11) A description of any event subsequent to the date of the last quarterly report, but prior to the stockholder vote, that would have a material impact on the financial condition of the bank or the association.
(12) A statement of any other material fact or circumstances that a stockholder would need in order to make an informed and responsible decision, or that would be necessary in order to provide a disclosure that is not misleading.
(13) A form of written proxy, together with instructions on its purpose, use and authorization by the stockholder. The proxy instructions must ensure the secrecy of the stockholder’s ballot if the stockholder votes by proxy.
(14) A copy of the plan of transfer provided for in § 611.520 of this part.
(c) No bank or association director, officer, or employee shall make any untrue or misleading statement of a material fact, or fail to disclose any material fact necessary under the circumstances to make statements made not misleading, to a stockholder of the association in connection with a transfer under this subpart.
§ 611.520 Plan of transfer.
The transfer of authorities and assets, as appropriate, shall occur pursuant to a written plan which shall be agreed to by the bank and the association involved. The written plan shall include the following:
(a) An explanation of the value of the equity ownership as of the last monthend held by stockholders of the bank and the association and the impact, if any, of the transfer on the value of that equity.
(b) If the plan provides for a transfer of assets, a description of the terms and conditions upon which such transfer will occur, including, but not limited to, any warranties or representations regarding the value of such assets.
(c) A description of how the association would obtain loan funds after the transfer.
(d) A statement on how the expenses connected with the transfer are to be borne by the affected parties.
(e) A statement of any conditions which must be satisfied prior to the effective date of the transfer, including but not limited to approval by stockholders and approval by the Farm Credit Administration.
(f) A statement that prior to the effective date of the transfer the board of directors of the bank or the association may rescind its resolution and void the transfer, with the concurrence of the Farm Credit Administration, on the basis that:
(1) The information disclosed to stockholders contained material errors or omissions;
(2) Material misrepresentations were made to stockholders regarding the impact of the transfer;
(3) Fraudulent activities were used to obtain the stockholders’ approval; or,
(4) An event occurred between the time of the vote and the transfer that would have a significant adverse impact on the future viability of the association.
(g) A designation of those persons who have authority to carry out the plan of transfer, including the authority to execute any documents necessary to perfect title, on behalf of the bank and the association.
§ 611.525 Stockholder reconsideration.
(a) Stockholders have the right to reconsider the approval of the transfer provided that a petition signed by 15 percent of the stockholders of either institution involved in the transfer is filed with the Farm Credit Administration within 35 days after the date of mailing of the notification of the final results of the stockholder vote required under § 611.505(d) and such petition is approved by the Farm Credit Administration.
(b) A special stockholders meeting shall be called by the institution to vote on the reconsideration following the Farm Credit Administration’s approval of a stockholder petition to reconsider the transfer. If a majority of stockholders of any institution involved in the transfer votes against the transfer, the transfer is not approved.
Subpart F—Bank Mergers, Consolidations and Charter Amendments
(a) An amendment to a Farm Credit bank charter may relate to any provision that is properly the subject of a charter, including, but not limited to, the name of the bank, the location of its offices, or the territory served.
(b) The FCA may make changes in the charter of a Farm Credit bank as may be requested by that bank and approved by the FCA pursuant to § 611.1010 of this part.
(c) The FCA may, on its own initiative, make changes in the charter of a Farm Credit bank, and any chartered service corporation thereof, where the FCA determines that the change is necessary to accomplish the purposes of the Act.
§ 611.1010 Farm Credit bank charter amendment procedures.
(a) A Farm Credit bank may recommend a charter amendment to accomplish any of the following actions:
(1) A merger or consolidation with any other Farm Credit bank or banks operating under title I or III of the Act;
(2) A transfer of territory with any other Farm Credit bank operating under the same title of the Act;
(3) A change to its name or location;
(4) Any other change that is properly the subject of a Farm Credit bank charter;
(b) Upon approval of an appropriate resolution by the Farm Credit bank board, the certified resolution, together with supporting documentation, must be submitted to the FCA for preliminary or final approval, as the case may be.
(c) The FCA will review the material submitted and either approve or disapprove the request. The FCA may require submission of any supplemental information and analysis it deems appropriate. If the request is for merger, consolidation, or transfer of territory, the approval of the FCA will be preliminary only, with final approval subject to a vote of the Farm Credit bank’s stockholders.
(d) Following receipt of the FCA’s written preliminary approval, the proposal must be submitted for approval to the voting stockholders of the Farm Credit bank. A proposal will be considered approved if agreed to by a majority of the voting stockholders of each Farm Credit bank voting, in person or by proxy, at a duly authorized stockholder meeting with each stockholder-association entitled to cast a number of votes equal to the number of the association’s voting shareholders, unless another voting scheme has been approved by the FCA.
(e) Upon approval by the stockholders of the Farm Credit bank, the request for final approval and issuance of the appropriate charter or amendments to charter for the Farm Credit banks involved must be submitted to the FCA.
§ 611.1020 Requirements for mergers or consolidations of Farm Credit banks.
(a) As authorized under sections 7.0 and 7.12 of the Act, a Farm Credit bank may merge or consolidate with one or more Farm Credit banks operating under the same or different titles of the Act.
(b) The plan to merge or consolidate two or more Farm Credit banks is subject to the requirements of §§ 611.1122, 611.1123, and 611.1126 of this part, unless otherwise instructed by the FCA. In interpreting those sections, the phrase “Farm Credit bank(s)” will be read for the word “association(s)” and references to “funding bank” are to be ignored.
§ 611.1030 [Reserved]
§ 611.1040 Creation of new associations.
Any application for the issuance of a charter to a new production credit association or Federal land bank association must meet the requirements of sections 2.0 or 2.10, respectively, of the Act. Any application for the issuance of a charter for an agricultural credit association must meet the requirements of section 2.0 of the Act.
Subpart G—Mergers, Consolidations, and Charter Amendments of Associations
(a) An amendment to an association charter may relate to any provision that is properly the subject of a charter, including, but not limited to, the name of the association, the location of its offices, or the territory served.
(b) The FCA may make changes in the charter of an association as may be requested by that association and approved by the FCA pursuant to § 611.1121 of this part.
(c) The FCA may, on its own initiative, make changes in the charter of an agricultural credit association, Federal land bank association, or a production credit association, and any chartered service corporation thereof, where the FCA determines that the change is necessary to accomplish the purposes of the Act.
§ 611.1121 Association charter amendment procedures.
(a) An association that proposes to amend its charter must submit a request to its funding bank containing the following information:
(1) A statement of the provision(s) of the charter that the association proposes to amend and the proposed amendment(s);
(2) A statement of the reasons for the proposed amendment(s), the impact of the amendment(s) on the association and its stockholders, and the requested effective date of the amendment(s);
(3) A certified copy of the resolution of the board of directors of the association approving the amendment(s);
(4) Any additional information or documents that the association wishes to submit in support of the request or that may be requested by the funding bank.
(b) Upon receipt of a proposed amendment from an association, the funding bank must review the materials submitted and provide the association with its analysis of the proposal within a reasonable period of time. Concurrently, the funding bank must communicate its recommendation on the proposal to the FCA, including the reasons for the recommendation, and any analysis the bank believes appropriate. Following review by the bank, the association must transmit the proposed amendment with attachments to the FCA.
(c) Upon receipt of an association’s request for a charter amendment, the FCA will review the materials submitted and either approve or disapprove the request. The FCA may require submission of any supplemental information and analysis it deems appropriate.
(d) The FCA will notify the association of its approval or disapproval of the amendment request, including a copy of the amended charter with the approval notification, and provide a copy of such communication to the funding bank.
§ 611.1122 Requirements for association mergers or consolidations.
(a) Where two or more associations plan to merge or consolidate, or where the funding bank board has adopted a reorganization plan for the associations in the district, the associations involved must jointly submit a request to the funding bank containing the following:
(1) In the case of a merger, a copy of the charter of the continuing association reflecting any proposed amendments. In the case of consolidation, a copy of the proposed charter of the new association;
(2) A statement of the reasons for the proposed merger or consolidation, the impact of the proposed transaction on the associations and their stockholders, and the planned effective date of the merger or consolidation;
(3)(i) A certified copy of the resolution of the board of directors of each association recommending approval of the merger or consolidation; or
(ii) In the case of a district reorganization plan, a certified copy of the resolution of the board of directors of each association recommending either approval or disapproval of the proposal.
(4) A copy of the agreement of merger or consolidation;
(5) Two signed copies of the continuing or proposed Articles of Association;
(6) All of the information specified in paragraph (e) of this section;
(7) Any additional information or documents each association wishes to submit in support of the request; and
(8) All additional information and documentation that the funding bank or the FCA requests.
(b) Upon receipt of a request for approval of an association merger or consolidation, the funding bank must review the materials submitted to determine whether they comply with the requirements of these regulations and must communicate with the associations concerning any deficiency. When the bank approves the request to merge or consolidate it must notify the associations. The bank must also notify the FCA of its approval together with the reasons for its approval and any supporting analysis. The associations must jointly submit the proposal together with required documentation to the FCA for preliminary approval.
(c) Upon receipt of a complete association merger or consolidation request, the FCA will review the request and either deny or give its written preliminary approval to the request within 60 days. The FCA will notify the requesting associations when the 60-day preliminary approval review period begins. The FCA may require submission of any supplemental information and analysis it deems appropriate for its consideration of the merger or consolidation request.
(1) When a request is denied, written notice stating the reasons for the denial will be transmitted to the associations and a copy provided to the funding bank(s).
(2) When a request is preliminarily approved, written notice of the preliminary approval will be given to the associations and a copy provided to the funding bank(s). Preliminary approval by the FCA does not constitute approval of the merger or consolidation. Approval of a merger or consolidation is only issued pursuant to this subpart. In connection with granting preliminary approval, the FCA may impose conditions in writing.
(d) Upon receipt of preliminary approval by the FCA of a merger or consolidation request, each constituent association must call a meeting of its voting stockholders. The FCA may also require, when considered appropriate to the merger or consolidation request under review, the associations to hold informational meetings before a stockholder vote. The stockholder meeting to vote on a merger or consolidation must:
(1) Be called on written notice to each stockholder entitled to vote on the transaction as of the record date and be held in accordance with the terms of each association’s bylaws.
(2) Follow the voting procedures of § 611.340, except associations may not use tellers committees to validate ballots and tabulate votes on the merger or consolidation.
(3) Require the affirmative vote of a majority of the voting stockholders of each association present and voting, either in person or by written proxy, at a meeting at which a quorum is present to constitute stockholder approval of a merger or consolidation proposal.
(e) Notice of the stockholder meeting to consider and act upon a proposed merger or consolidation must be accompanied by the information required under this paragraph. The notice and accompanying information must not be sent to stockholders until preliminary approval of the merger or consolidation has been given by the FCA.
(1) A statement either on the first page of the materials or on the notice of the stockholders’ meeting, in capital letters and bold face type, that:
(2) A description of the material provisions of the agreement of merger or consolidation and the effect of the proposed merger or consolidation on the associations, their stockholders, the new or continuing board of directors, and the territory to be served. In addition, a copy of the agreement must be furnished with the notice to stockholders.
(3) A summary of the provisions of the charter and bylaws of the continuing or new association that differ materially from the existing charter or bylaw provisions of the constituent associations.
(4) A brief statement by the boards of directors of the constituent associations setting forth the basis for the boards’ recommendation on the merger or consolidation.
(5) A description of any agreement or arrangement between a constituent association and any of its officers relating to employment or termination of employment and arising from the merger or consolidation.
(6) A presentation of the following financial data:
(i) A balance sheet and income statement for each constituent association for each of the 2 preceding fiscal years.
(ii) A balance sheet for each constituent association as of a date within 90 days of the date the request for preliminary approval is forwarded to the FCA presented on a comparative basis with the corresponding period of the prior fiscal year.
(iii) An income statement for the interim period between the end of the last fiscal year and the date of the required balance sheet presented on a comparative basis with the corresponding period of the preceding fiscal year. The balance sheet and income statement format must be that contained in the association’s annual report to stockholders; must contain any significant changes in accounting policies that differ from those in the latest association annual report to stockholders; and must contain appropriate footnote disclosures, including data relating to high-risk assets and other property owned, and allowance for credit
losses, including net chargeoffs as required in paragraph (e)(10) of this section.
(7) The financial statements (balance sheet and income statement) must be in sufficient detail to show separately all significant categories of interest-earning assets and interest-bearing liabilities and the income or expense accrued thereon.
(8) Attached to the financial statements for each constituent association, either:
(i) A statement signed by the chief executive officer and each member of the board of directors of the association that the various financial statements are unaudited, but have been prepared in all material respects in accordance with generally accepted accounting principles (except as otherwise disclosed therein) and are, to the best of the knowledge of the board, a fair and accurate presentation of the financial condition of the association; or
(ii) A signed opinion by an independent certified public accountant that the various financial statements have been examined in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as were considered necessary in the circumstances, and, as of the date of the statements, present fairly the financial position of the association in conformity with generally accepted accounting principles applied on a consistent basis, except as otherwise noted thereon.
(9) A presentation for each constituent association regarding its policy on accounting for loan performance, together with the number and dollar amount of loans in all performance categories, including those categorized as high-risk assets.
(10) Information of each constituent association concerning the amount of loans charged off in each of the 2 fiscal years preceding the date of the balance sheet, the current year-to-date net chargeoff amount, and the balance in the allowance for credit losses account and a statement regarding whether, in the opinion of management, the allowance for credit losses is adequate to absorb the risk currently existing in the loan portfolio. This information may be appropriately included in the footnotes to the financial statements.
(11) A management discussion and analysis of the financial condition and results of operation for the past 2 fiscal years for each constituent institution. This requirement can be satisfied by including the materials contained in the management discussion and analysis of each institution’s most recent annual report.
(12) A discussion of any material changes in financial condition of each constituent institution from the end of the last fiscal year to the date of the interim balance sheet provided.
(13) A discussion of any material changes in the results of operations of each constituent institution with respect to the most recent fiscal-year-to-date period for which an income statement is provided.
(14) A discussion of any change in the tax status of the new institution from those of the constituent institutions as a result of merger or consolidation. A statement on any adverse tax consequences to the stockholders of the institution as a result of the change in tax status.
(15) A statement on the proposed institution’s relationship with an independent public accountant, including any change that may occur as a result of the merger or consolidation.
(16) A pro forma balance sheet of the continuing or consolidated association presented as if the merger or consolidation had occurred as of the date on the balance sheets required in paragraph (e)(6) of this section, as recommended to the stockholders. A pro forma summary of earnings for the continuing or consolidated association presented as if the merger or consolidation had been effective at the beginning of the interim period between the end of the last fiscal year and the date of the balance sheets.
(17) A description of the type and dollar amount of any financial assistance that has been provided during the past year or will be provided by the funding bank or other party to assist the constituent or the continuing or new association(s), the conditions on which financial assistance has been or will be extended, the terms of repayment or retirement, if any, and the impact of the assistance on the subject association(s) or the stockholders.
(18) A presentation for each constituent association of interest rate comparisons for the last 2 fiscal years preceding the date of the balance sheet, together with a statement of the continuing or new association’s proposed interest rate and fee programs, interest collection policies, capitalization rates, dividends or patronage refunds, and other factors that would affect a borrower’s cost of doing business with the continuing or new association. Where agreement has not been reached on such matters, current related information must be presented for each constituent association.
(19) A description for each constituent association of any event subsequent to the date of the financial statements, but prior to the merger or consolidation vote, that would have a material impact on the financial condition of the constituent or continuing or new association(s).
(20) A statement of any other material fact or circumstance that a stockholder would need in order to make an informed decision on the merger or consolidation proposal, or that is necessary to make the required disclosures not misleading.
(21) Where proxies are to be solicited, a form of written proxy, together with instructions on the purpose and authority for its use, and the proper method for signature by the stockholder.
(f) Where a proposed merger or consolidation will involve more than three associations, the FCA may require the supplementation, or allow the condensation or omission of any information required under paragraph (e) of this section in furtherance of meaningful disclosure to stockholders. Any waiver sought under this paragraph must be obtained before preparation of the financial statements and accompanying schedules required under paragraph (e) of this section.
(g) The effective date of a merger or consolidation may not be less than 35 days after the date of mailing of the notification to stockholders of the results of the stockholder vote, or 15 days after the date of submission to the FCA of all required documents for the FCA’s consideration of final approval, whichever occurs later.
(1) The constituent institutions must agree on a second effective date to be used in the event the merger or consolidation is approved on reconsideration. The second effective date may not be less than 60 days after stockholder notification of the results of the first vote, or 15 days after the date of the reconsideration vote, whichever occurs later.
(2) If no reconsideration petition is filed with the FCA, upon final approval by the FCA, the merger or consolidation will be effective on the date specified in the merger agreement or at such later date as may be required by the FCA.
(h) Each constituent association must notify its stockholders not later than 30 days after the stockholder vote of the final results of the vote. Upon approval of a proposed merger or consolidation by the stockholders of the constituent associations, each association must submit to the FCA a certified copy of the stockholders’ resolution on which the stockholders cast their votes and a certification of the stockholder vote from the independent third party(s) used to tally the vote. After the time for submitting reconsideration petitions has expired, and if no petition is filed, the FCA will make a final approval decision on the merger or consolidation, imposing conditions as appropriate. The FCA will send written notice of the final FCA approval decision to the associations and provide a copy to the affiliated funding bank(s).
(i) No Farm Credit institution, or any director, officer, employee, agent, or other person participating in the conduct of the affairs thereof, may make any untrue or misleading statement of a material fact, or fail to disclose any material fact necessary under the circumstances to make statements made not misleading, to a stockholder of any association in connection with an association merger or consolidation.
(1) No Farm Credit institution or any director, officer, employee, agent, or other person participating in the conduct of the affairs of a Farm Credit institution may make an oral or written representation to any person that a preliminary or final approval by the FCA of a merger or consolidation constitutes, directly or indirectly, either a recommendation on the merits of the transaction or an assurance concerning the adequacy or accuracy of any information provided to any association’s stockholders in connection therewith.
(2) When a Farm Credit institution, or any of its employees, officers, directors, agents, or other person participating in the conduct of the affairs thereof, make disclosures or representations in connection with an association merger or consolidation that, in the judgment of the FCA, are incomplete, inaccurate, or misleading, whether or not such disclosure or representation is made in disclosure statements required by this subpart, such institution must make such additional or corrective disclosure as directed by the FCA and as is necessary to provide stockholders and the general public with full and fair disclosure.
§ 611.1123 Association merger or consolidation agreements.
(a) Associations operating under the same title of the Act may merge or consolidate voluntarily, but only pursuant to a written agreement. The agreement must set forth all of the terms of the transaction, including, but not limited to, the following:
(1) The proposed effective date of the merger or consolidation.
(2) The proposed name and headquarters location of the continuing or consolidated association.
(3) The names of the persons nominated to serve as directors until the first regular annual meeting of the continuing or consolidated association to be held after the effective date of the merger or consolidation. Any director of a constituent association may be designated in the agreement to serve as a director of the continuing or consolidated association for a period not to exceed his or her current term, after which he or she must stand for reelection. However, the terms of the agreement must provide for the election of at least one director at each annual meeting subsequent to the effective date of the merger or consolidation. The bylaws of the continuing or consolidated association must reflect the provisions of the merger or consolidation agreement regarding director terms.
(4) A statement of the formula to be used to exchange the stock of the constituent associations for the stock of the continuing or consolidated association. No fractional shares of stock may be issued.
(5) A statement of any conditions which must be satisfied prior to the effective date of the proposed transaction, including but not limited to approval by stockholders, the funding bank, and the FCA.
(6) A statement of the representations or warranties, if any, made or to be made by any association, or its officers, directors, or employees that is a party to the proposed transactions.
(7) A statement that the board of directors of each constituent association can terminate the agreement before the effective date upon a determination by an association, with the concurrence of the FCA, that:
(i) The information disclosed to stockholders contained material errors or omissions;
(ii) Material misrepresentations were made to stockholders regarding the impact of the merger or consolidation;
(iii) Fraudulent activities were used to obtain stockholders’ approval; or
(iv) An event occurred between the time of the vote and the merger that would have a significant adverse impact on the future viability of the continuing or consolidated association.
(8) A description of the legal opinions or rulings (including those related to tax matters), if any, that have been obtained or furnished by any party in connection with the proposed transaction. Also, refer to paragraph (a)(5) of this section.
(9) The capitalization plan and capital structure for the continuing or consolidated association and a statement that the capitalization plan must comply with applicable FCA regulations.
(10) Provision for the employee benefits plan, its subsequent continuation or adaptation by the board of directors of the continuing or consolidated association following the merger or consolidation.
(11) A statement of the authority of those persons designated to carry out the terms of the agreement, including the authority to waive provisions of the agreement and to execute any documents necessary to perfect title, on behalf of the constituent associations.
(b) As an attachment to the agreement, the constituent associations must set forth those provisions of the charter and bylaws of the continuing or consolidated association which differ from the existing charter or bylaw provisions of the constituent associations.
§ 611.1124 Territorial adjustments.
This section applies to any request submitted to the FCA to modify association charters for the purpose of transferring territory from one association to another.
(a) Territorial adjustments, except as specified in paragraph (m) of this section, require approval of a majority of the voting stockholders of each association present and voting or voting by written proxy at a duly authorized meeting at which a quorum is present.
(b) When two or more associations agree to transfer territory, each association must submit a proposal to the funding bank containing the following:
(1) A statement of the reasons for the proposed transfer and the impact the transfer will have on its stockholders and holders of participation certificates;
(2) A certified copy of the resolution of the board of directors of each association approving the proposed territory transfer;
(3) A copy of the agreement to transfer territory that contains the following information:
(i) A description of the territory to be transferred;
(ii) Transferor association’s plan to transfer loans and the types of loans to be transferred;
(iii) Transferor association’s plan to retire and transferee association’s plan to issue equities held by holders of stock, participation certificates, and allocated equities, if any, and a statement by each association that the book value of its equities is at least equal to par;
(iv) An inventory of the assets to be sold by the transferor association and purchased by the transferee association;
(v) An inventory of the liabilities to be assumed from the transferor association by the transferee association;
(vi) A statement that the holders of stock and participation certificates whose loans are subject to transfer have 60 days from the effective date of the territory transfer to inform the transferor association of their decision to remain with the transferor association for normal servicing until the current loan is paid;
(vii) A statement that the transfer is conditioned upon the approval of the stockholders of each constituent association; and
(viii) The effective date of the proposed territory transfer.
(4) A copy of the stockholder disclosure statement provided for in paragraph (f) of this section; and
(5) Any additional relevant information or documents that the association wishes to submit in support of its request or that may be required by the FCA.
(c) Upon receipt of documents supporting a proposed territory transfer, the funding bank must review the materials submitted and provide the associations with its analysis of the proposal within a reasonable period of time. The funding bank must concurrently advise the FCA of its recommendation regarding the proposed territory transfer. Following review by the bank, the associations must transmit the proposal to the FCA together with all required documents.
(d) Upon receipt of an association’s request to transfer territory, the FCA will review the request and either deny or grant preliminary approval to the request. The FCA may require submission of any supplemental information and analysis it deems appropriate for its consideration of the request to transfer territory.
(1) When a request is denied, written notice stating the reasons for the denial will be transmitted to the associations, and a copy provided to the funding bank.
(2) When a request is preliminarily approved, written notice of the preliminary approval will be transmitted to the associations, and a copy provided to the funding bank. Preliminary approval by the FCA does not constitute approval of the territory transfer. Final approval is granted only in accordance with paragraph (h) of this section. In connection with granting preliminary approval, the FCA may impose conditions in writing.
(e) Upon receipt of preliminary approval by the FCA, each constituent association must, by written notice, and in accordance with its bylaws, call a meeting of its voting stockholders. The affirmative vote of a majority of the voting stockholders of each association present and voting or voting by written proxy at a meeting at which a quorum is present is required for stockholder approval of a territory transfer.
(f) Notice of the meeting to consider and act upon a proposed territory transfer must be accompanied by the following information covering each constituent association:
(1) A statement either on the first page of the materials or on the notice of the stockholders’ meeting, in capital letters and bold face type, that:
(2) A copy of the Agreement to Transfer Territory and a summary of the major provisions of the Agreement;
(3) The reason the territory transfer is proposed;
(4) A map of the association’s territory as it would look after the transfer;
(5) A summary of the differences, if any, between the transferor and transferee associations’ interest rates, interest rate policies, collection policies, service fees, bylaws, and any other items of interest that would impact a borrower’s lending relationship with the institution;
(6) A statement that all loans of the transferor association that finance operations located in the transferred territory will be transferred to the transferee association except as otherwise provided for in this section or in accordance with agreements between the associations as provided for in § 614.4070;
(7) Where proxies are to be solicited, a form of written proxy, together with instructions on the purpose and authority for its use, and the proper method for signature by the stockholders; and
(8) A statement that the associations’ bylaws, financial statements for the previous 3 years, and any financial information prepared by the associations concerning the proposed transfer of territory are available on request to the stockholders of any association involved in the transaction.
(g) No Farm Credit institution, or director, officer, employee, agent, or other person participating in the conduct of the affairs thereof, may make any untrue or misleading statement of a material fact, or fail to disclose any material fact necessary under the circumstances to make statements made not misleading, to a stockholder of any Farm Credit institution in connection with a territory transfer.
(h) Upon approval of a proposed territory transfer by the stockholders of the constituent associations, a certified copy of the stockholders’ resolution for each constituent association and one executed Agreement to Transfer Territory must be forwarded to the FCA. The territory transfer will be effective when thereafter finally approved and on the date as specified by the FCA. Notice of final approval will be transmitted to the associations and a copy provided to the bank.
(i) No director, officer, employee, agent, or other person participating in the conduct of the affairs of a Farm Credit institution may make an oral or written representation to any person that a preliminary or final approval by the FCA of a territory transfer constitutes, directly or indirectly, a recommendation on the merits of the transaction or an assurance concerning the adequacy or accuracy of any information provided to any association’s stockholders in connection therewith.
(j) When a Farm Credit institution, or any of its employees, officers, directors, agents, or other persons participating in the conduct of the affairs thereof, make disclosures or representations that, in the judgment of the FCA, are incomplete, inaccurate, or misleading in connection with a territory transfer, whether or not such disclosure or representation is made in disclosure statements required by this subpart, such institution must make such additional or corrective disclosure as directed by the FCA and as is necessary to provide stockholders and the general public with full and fair disclosure.
(k) The notice and accompanying information required under paragraph (f) of this section may not be sent to stockholders until preliminary approval of the territory transfer has been granted by the FCA.
(l) Where a territory transfer is proposed simultaneously with a merger or consolidation, both transactions may be voted on by stockholders at the same meeting. Only stockholders of a transferee or transferor association may vote on a territory transfer.
(m) Each borrower whose real estate or operations is located in a territory that will be transferred must be provided with a written Notice of Territory Transfer immediately after the FCA has granted final approval of the territory transfer. The Notice must inform the borrower of the transfer of the borrower’s loan to the transferee association and the exchange of related equities for equities of like kinds and amounts in the transferee association. If a like kind of equity is not available in the transferee association, similar equities must be offered that will not adversely affect the interest of the owner. The Notice must give the borrower 60 days from the effective date of the territory transfer to notify the transferor association in writing if the borrower decides to stay with the transferor association for normal servicing until the current loan is paid. Any application by the borrower for renewal or for additional credit must be made to the transferee association, except as otherwise provided for by an agreement between associations in accordance with § 614.4070.
(n) This section does not apply to territory transfers initiated by order of the FCA or to territory transfers due to the liquidation of the transferor association.
(o) Where a proposed action involves the transfer of a portion of an association’s territory to an association operating in a different district, such proposal must comply with the provisions of this section and section 5.17(a) of the Act.
§ 611.1125 Treatment of associations not approving districtwide mergers.
(a) Issuance of charters. When issuing charters or certificates of territory for districtwide mergers or consolidations of associations, the FCA will not issue any charters or certificates of territory that include the territory of one or more associations whose stockholders voted to disapprove the merger or consolidation.
(b) A funding bank must not take any of the following actions with respect to an association that has determined to not participate in a districtwide merger or consolidation:
(1) Discriminate in the provision of any financial service and assistance, including, but not limited to, access to loan funds and rates of interest on loans and discounts offered by the funding bank to associations and their member/borrowers;
(2) Discriminate in the provision of any related services that are offered by the funding bank to associations and their member/borrowers;
(3) Discriminate in the provision of any professional assistance that may be normally provided by the funding bank to associations; or
(4) Discriminate in the provision of any technical assistance that may be normally provided by the funding bank to associations.
(c) This regulation does not prohibit a funding bank from taking any action with respect to an association, including, but not limited to, charging different rates of interest or different prices for services, or declining to provide financial assistance; provided that any such action is fully documented and based on an objective analysis of applicable criteria that are uniformly and consistently applied by the funding bank to all associations in the district.
§ 611.1126 Reconsiderations of mergers and consolidations.
(a) Voting stockholders have the right to reconsider their approval of a merger or consolidation, provided that a petition is filed with the FCA. The petition must be signed by 15 percent of the stockholders (who were eligible to vote on the merger or consolidation proposal) of one or more of the constituent associations. The reconsideration petition must be filed with the FCA within 35 days after the date when the association mailed the notification of the final results of the stockholder vote pursuant to § 611.1122(h).
(b) Voting stockholders that intend to file a reconsideration petition have a right to obtain from the association of which they are a voting stockholder the voting record date list used by that association for the merger or consolidation vote. The association must provide the voting record date list as soon as possible, but not later than 7 days after receipt of the request. The list must be provided pursuant to the provisions of § 618.8310(b) of this chapter.
(c) A reconsideration petition must be addressed to the Secretary of the FCA Board and filed with the FCA on or before the deadline described in paragraph (a) of this section. Reconsideration petitions must identify a contact person and provide contact information for that person.
(1) Filing of a reconsideration petition may only be accomplished through in-person delivery during normal business hours to any FCA employee in official duty status or by sending the petition by mail, facsimile, electronic transmission, carrier delivery, or other similar means to an FCA office.
(2) The FCA will use the postmark, ship date, electronic stamp, or similar evidence as the date of filing the reconsideration petition.
(d) The FCA will notify the named contact on the reconsideration petition whether the petition was filed on time. On the timely receipt of a reconsideration petition, the FCA will review the petition to determine whether it complies with the requirements of section 7.9 of the Act. Following a determination that the petition was timely filed and complies with applicable requirements, the FCA will give notice to the associations involved in the merger or consolidation for which the reconsideration petition was filed. The associations are not entitled to either a copy of the petition or the names of the petitioners.
(e) Following FCA notification that a reconsideration petition has been properly filed, a special stockholders meeting must be called by the association(s) to reconsider the merger or consolidation vote. The reconsideration vote must be conducted according to the merger and consolidation voting requirements of § 611.1122(d). If a majority of the stockholders voting, in person or by proxy, at a duly authorized stockholders’ meeting from any one of the constituent associations vote against the merger or consolidation under the reconsideration vote, the merger or consolidation will not take place. In the event that the merger or consolidation is approved on reconsideration, the constituent associations must use the second effective date developed under § 611.1122(g)(1).
Subpart H—Rules for Inter-System Fund Transfers
§ 611.1130 Inter-System transfer of funds and equities.
(a) Section 5.17(a)(6) of the Act authorizes the FCA to regulate the borrowing, repayment, and transfer of funds and equities between institutions of the System, including banks, associations, and service corporations chartered under the Act. This section sets forth the circumstances and procedures under which the FCA may direct such a transfer of funds and equities based on its determination with respect to the financial condition of one or more institutions of the System. For purposes of this section, the term “bond” refers to long-term notes, bonds, debentures, or other similar obligations, or short-term discount notes issued by one or more banks pursuant to section 4.2 of the Act.
(b) The FCA may direct a transfer of funds or equities by one or more banks of the System to another bank of the System where it determines that:
(1) The receiving institution will not be able to make payments of principal or interest on bonds for which it is primarily liable within the meaning of section 4.4(a) of the Act; or
(2) The common or preferred stock, participation certificates, or allocated equities of the receiving institution have a book value less than their par or stated values; or
(3) The total bonds outstanding for which the receiving institution is primarily liable exceed 20 times the combined capital and surplus accounts of the bank; or
(4) Based on application to it of one or more of the following ratios, the receiving institution is not financially viable in that it will not be able to continue to extend new or additional credit or financial assistance to its eligible borrowers:
(i) The ratio of stock to earned net worth (including legal reserve, unallocated and reserved surplus, undistributed earnings, and allowance for credit losses) exceeds 2 to 1;
(ii) The ratio of the outstanding bonds to capital and surplus exceeds 15 to 1;
(iii) Nonearning assets (any noninterest-bearing assets, including but not limited to cash, noninterest-earning loans, net fixed assets, other property owned, accrued interest receivable, and accounts receivable) exceed 15 percent of total assets;
(iv) Lendable net worth (interest-earning assets less interest-bearing liabilities) is zero or less.
(c) The FCA may direct a transfer of funds or equities between two or more Federal land bank associations or two or more production credit associations in district where it determines that such transfer:
(1) Is necessary to provide financial support to the district bank in which those associations are stockholders based on application of the criteria to the bank as set forth in paragraph (b) of this section; or
(2) Is necessary to provide financial support to one or more other like associations in the district based on application of the criteria set forth in paragraph (b)(2) or (b)(4) of this section to the associations, provided that in applying paragraph (b)(4)(ii) of this section the ratio of outstanding indebtedness to capital and surplus of the receiving association(s) shall not exceed 9 to 1; or
(3) Is an integral part of a plan that has been adopted by other institutions of the System, and approved by the FCA, under which those institutions will extend financial assistance to the district bank in which those associations are stockholders.
(d) A direction by the FCA for a transfer of funds or equities pursuant to this section shall be signed by the Chairman and shall establish the amount, timing, duration, repayment, and other terms of assessments necessary to accomplish such transfer, taking into consideration the financial condition of each institution to be assessed. Where the FCA directs a transfer of funds or equities between associations under paragraph (c) (1) or (2) of this section, it may authorize the district bank in which such associations are stockholders to accomplish the necessary assessments through debits and credits to the accounts of the bank.
Subpart I—Service Corporations
§ 611.1135 Incorporation of service corporations.
(a) What is the process for chartering a service corporation? A Farm Credit bank or association (you or your) may organize a corporation acting alone or with other Farm Credit banks or associations to perform, for you or on your behalf, any function or service that you are authorized to perform under the Act and Farm Credit Administration (we, us, or our) regulations, with two exceptions. Those exceptions are that your corporation may not extend credit or provide insurance services. To organize a service corporation, you must submit an application to us following the applicable requirements of paragraph (c) of this section. If what you propose in your application meets the requirements of the Act, our regulations, and any other conditions we may impose, we may issue a charter for your service corporation making it a federally chartered instrumentality of the United States. Your service corporation will be subject to examination, supervision, and regulation by us.
(b) Who may own equities in your service corporation? (1) Your service corporation may only issue voting and non-voting stock to:
(i) One or more Farm Credit banks and associations; and
(ii) Persons that are not Farm Credit banks or associations, provided that at least 80 percent of the voting stock is at all times held by Farm Credit banks or associations.
(2) For the purposes of this subpart, we define persons as individuals or legal entities organized under the laws of the United States or any state or territory thereof.
(c) What must be included in your application to form a service corporation? Your application for a corporate charter must include:
(1) The certified resolution of the board of each organizing bank or association authorizing the incorporation;
(2) A request signed by the president(s) of the organizing bank(s) or association(s) to us to issue a charter, supported by a detailed statement demonstrating the need and the justification for the proposed entity; and
(3) The proposed articles of incorporation addressing, at a minimum, the following:
(i) The name of your corporation;
(ii) The city and state where the principal offices of your corporation are to be located;
(iii) The general purposes for the formation of your corporation;
(iv) The general powers of your corporation;
(v) The procedures for a Farm Credit bank or association or persons that are not Farm Credit institutions to become a stockholder;
(vi) The procedures to adopt and amend your corporation’s bylaws;
(vii) The title, par value, voting and other rights, and authorized amount of each class of stock that your corporation will issue and the procedures to retire each class;
(viii) The notice and quorum requirement for a meeting of shareholders, and the vote required for shareholder action on various matters;
(ix) The procedures and shareholder voting requirements for the merger, voluntary liquidation, or dissolution of your corporation or the distribution of corporate assets;
(x) The standards and procedures for the application and distribution of your corporation’s earnings; and
(xi) The length of time your corporation will exist.
(4) The proposed bylaws, which must include the provisions required by § 615.5220(b) of this chapter;
(5) A statement of the proposed amounts and sources of capitalization and operating funds;
(6) Any agreements between the organizing banks and associations relating to the organization or the operation of the corporation; and
(7) Any other supporting documentation that we may request.
(d) What will we do with your application? If we approve your completed application, we will issue a charter for your service corporation as a corporate body and a federally chartered instrumentality. We may condition the issuance of a charter, including imposing minimum capital requirements, as we deem appropriate. For good cause, we may deny your application.
(e) Once your service corporation is formed, how are its articles of incorporation amended? Your service corporation’s articles of incorporation may be amended in either of two ways:
(1) The board of directors of the corporation may request that we amend the articles of incorporation by sending us a certified resolution of the board of directors of the service corporation that states the:
(i) Section(s) to be amended;
(ii) Reason(s) for the amendment;
(iii) Language of the articles of incorporation provision, as amended; and
(iv) Requisite shareholder approval has been obtained. The request will be subject to our approval as stated in paragraphs (a) and (c) of this section.
(2) We may at any time make any changes in the articles of incorporation of your service corporation that are necessary and appropriate for the accomplishment of the purposes of the Act.
(f) When your service corporation issues equities, what are the disclosure requirements? Your service corporation must provide the disclosures described in § 615.5255 of this chapter.
§ 611.1136 Regulation and examination of service corporations.
(a) What regulations apply to a service corporation? Because a service corporation is formed by banks and associations, it is subject to applicable Farm Credit Administration (we, our) regulations.
(b) Who examines a service corporation? We examine service corporations.
(c) What types of service corporations are subject to our regulations and examination? All incorporated service corporations formed by banks and associations are subject to our regulations and examination.
§ 611.1137 Title VIII service corporations.
(a) What is a title VIII service corporation? A title VIII service corporation is a service corporation organized for the purpose of exercising the authorities granted under title VIII of the Act to act as an agricultural mortgage marketing facility.
(b) How do I form a title VIII service corporation? A title VIII service corporation is formed and subject to the same requirements as a service corporation formed under § 611.1135, with one exception. The Federal Agricultural Mortgage Corporation or its affiliates may not form or own stock in a title VIII service corporation.
Subpart J—Unincorporated Business Entities
§ 611.1150 Purpose and scope.
(a) Purpose. This subpart sets forth the parameters for one or more Farm Credit System (System) institutions to organize or invest in an Unincorporated Business Entity (UBE) in accordance with the Farm Credit Act of 1971, as amended (Act).
(b) Scope. Except as authorized under these regulations, no System institution may manage, control, become a member or partner, or invest in a State-organized or chartered business entity. This subpart applies to each System institution that organizes or invests in a UBE, including a UBE organized for the express purpose of investing in a Rural Business Investment Company. This subpart does not apply to UBEs that one or more System institutions have the authority to establish as Rural Business Investment Companies pursuant to the provisions of title VI of the Farm Security and Rural Investment Act of 2002, as amended (FSRIA) and United States Department of Agriculture regulations implementing FSRIA.
§ 611.1151 Definitions.
For purposes of this subpart, the following definitions apply:
Articles of formation means registration certificates, charters, articles of organization, partnership agreements, membership or trust agreements, operating, administration or management agreements, fee agreements or any other documentation on the establishment, ownership, or operation of a UBE.
Control means that one System institution, directly or indirectly, owns more than 50 percent of the UBE’s equity or serves as the general partner of an LLLP, or constitutes the sole manager or the managing member of a UBE. However, under generally accepted accounting principles (GAAP), the power to control may also exist with a lesser percentage of ownership, for example, if a System institution is the UBE’s primary beneficiary, exercises significant influence over the UBE or establishes control under other facts and circumstances in accordance with GAAP. Under this definition, a System institution also will be deemed to have control over the UBE if it exercises decision-making authority in a principal capacity of the UBE as defined under GAAP.
Equity investment means a System institution’s contribution of money or assets to the operating capital of a UBE that provides ownership rights in return.
System institution means each System bank under titles I or III of the Act, each System association under title II of the Act, and each service corporation chartered under section 4.25 of the Act.
Third-party UBE means a UBE that is owned or controlled by one or more non-System persons or entities as the term “control” is defined under GAAP.
UBE means a Limited Partnership (LP), Limited Liability Partnership (LLP), Limited Liability Limited Partnership (LLLP), Limited Liability Company (LLC), Business or other Trust Entity (TE), or other business entity established and maintained under State law that is not incorporated under any law or chartered under Federal law.
UBE business activity means the services and functions delivered by a UBE for one or more System institutions.
Unusual and complex collateral means acquired property that may expose the owner to risks beyond those commonly associated with loans, including, but not limited to, acquired industrial or manufacturing properties where there is increased risk of incurring potential environmental or other liabilities that may accrue to the owners of such properties.
§ 611.1152 Authority over equity investments in UBEs for business activity.
(a) Regulation, supervisory, oversight, examination and enforcement authority. FCA has regulatory, supervisory, oversight, examination and enforcement authority over each System institution’s equity investment in or control of a UBE and the services and functions that a UBE performs for the System institution. This includes FCA’s authority to require a System institution’s dissolution of, disassociation from, or divestiture of an equity investment in a UBE, or to otherwise condition the approval of equity investments in UBEs.
(b) Assessing UBE investments and business activity. In accordance with section 5.15 of the Act, the cost of regulating and examining System institutions’ activities involving UBEs will be taken into account when assessing a System institution for the cost of administering the Act.
§ 611.1153 General restrictions and prohibitions on the use of UBEs.
(a) Authorized UBE business activity. All UBE business activity must be:
(1) Necessary or expedient to the business of one or more System institutions owning the UBE; and
(2) In no instance greater than the functions and services that one or more System institutions owning the UBE are authorized to perform under the Act and as determined by the FCA.
(b) Circumvention of cooperative principles. System institutions are prohibited from using UBEs to engage in direct lending activities or any other activity that would circumvent the application of cooperative principles, including borrower rights as described in section 4.14A of the Act, or stock ownership, voting rights or patronage as described in section 4.3A of the Act.
(c) Transparency and the avoidance of conflicts of interest. Each System institution must ensure that:
(1) The UBE is held out to the public as a separate or subsidiary entity;
(2) The business transactions, accounts, and records of the UBE are not commingled with those of the System institution; and
(3) All transactions between the UBE and System institution directors, officers, employees, and agents are conducted at arm’s length, in the interest of the System institution, and in compliance with the standards of conduct rules in 12 CFR 612, subpart A of this chapter.
(d) Limit on one-member UBEs. A UBE owned solely by a single System institution (including between and among a parent agricultural credit association and its production credit association and Federal land credit association subsidiaries and between a parent agricultural credit bank and its subsidiary Farm Credit Bank) as a one-member UBE is limited to the following special purposes:
(1) Acquiring and managing the unusual or complex collateral associated with loans; and
(2) Providing limited services such as electronic transaction, fixed asset, trustee or other services that are integral to the daily internal operations of a System institution.
(e) Limit on UBE partnerships. A System institution operating through a parent-subsidiary structure may not create a UBE partnership between or among the parent agricultural credit association and its production credit association and Federal land credit association subsidiaries or between a parent Agricultural Credit Bank and its Farm Credit Bank subsidiary.
(f) Prohibition on UBE subsidiaries. Except as provided in this paragraph, a System institution may not create a subsidiary of a UBE that it has organized or invested in under this subpart or enable the UBE itself to create a subsidiary or any other type of affiliated entity. A System institution may establish a UBE as a subsidiary of a UBE formed pursuant to paragraph (d)(1) of this section to hold each investor’s pro-rata interest in acquired property provided that the loan collateral at issue involves a multi-lender transaction that includes System and non-System lenders.
(g) Limit on potential liability. (1) Each System institution’s equity investment in a UBE must be established in a manner that will limit potential exposure of the System institution to no more than the amount of its investment in the UBE.
(2) A System institution cannot become a general partner of any partnership other than an LLLP.
(h) Limit on amount of equity investment in UBEs. The aggregate amount of equity investments that a single System institution is authorized to hold in UBEs must not exceed one percent of the institution’s total outstanding loans, calculated at the time of each investment. On a case-by-case basis, FCA may approve an exception to this limitation that would exceed the one-percent aggregate limit. Conversely, FCA may impose a percentage limit lower than the one-percent aggregate limit based on safety or soundness and other relevant concerns. This one-percent aggregate limit does not apply to equity investments in one-member UBEs formed for acquired property as permitted in paragraph (d)(1) of this section. Any equity investment made in a UBE by a service corporation must be attributed to its System institution owners based on the ownership percentage of each bank or association.
(i) Prohibition on relationship with a third-party UBE. A System institution is prohibited from:
(1) Making any equity investment in a third-party UBE except as may be authorized on a case-by-case basis under § 615.5140(e) of this chapter for de minimis and passive investments. Such requests would be considered outside of this rule.
(2) Serving as the general partner or manager of a third-party UBE; or
(3) Being designated as the primary beneficiary of a third-party UBE, either alone or with other System institutions.
(j) Limitation on non-System equity investments. Non-System persons or entities may not invest in a UBE that is controlled by a System institution except that non-System persons or entities may own 20 percent or less of the equity of a System-controlled UBE organized to deliver services integral to the daily internal operations of a System institution.
(k) UBEs formed for acquiring and managing collateral. The provisions of paragraphs (i) and (j) of this section do not apply to UBEs formed for the purpose of acquiring and managing unusual or complex collateral associated with multiple-lender loan transactions in which non-System persons or entities are participants.
§ 611.1154 Notice of equity investments in UBEs.
(a) Applicability. This notice provision is applicable only to System institutions that wish to make an equity investment in UBEs whose activities are limited to the following purposes:
(1) Acquiring and managing unusual or complex collateral associated with loans;
(2) Providing hail or multi-peril crop insurance services in collaboration with another System institution in accordance with § 618.8040 of this chapter; and
(3) Any other UBE business activity that FCA determines to be appropriate for this notice provision.
(b) Notice requirements. System institutions must provide written notice to FCA so that the notice is received by FCA no later than 10 business days in advance of making an equity investment in a UBE for authorized UBE business activity described in paragraph (a) of this section. The notice must include:
(1) The UBE’s articles of formation, including its name and the State in which it is organized, length of time it will exist, its partners or members, and its management structure;
(2) The dollar amount of the System institution’s equity investment in the UBE;
(3) A certified resolution of the System institution’s board of directors authorizing the equity investment in, and business activity of, the UBE and the board’s approval to submit the notice to the FCA. For UBEs organized to acquire and manage unusual or complex collateral associated with loans as identified in paragraph (a)(1) of this section, the board of directors may adopt a blanket board resolution to cover all such UBEs that the System institution will organize.
(4) Except for those UBEs identified in paragraph (a)(1) of this section, a board statement included with the certified board resolution affirming that the UBE:
(i) Is needed to achieve operating efficiencies and benefits;
(ii) Is necessary or expedient to the System institution’s business;
(iii) Will operate with transparency;
(iv) Will conduct its business activity in a manner designed to prevent conflicts of interest between its purpose and operations and the mission and operations of the System institution(s);
(v) Will otherwise be in compliance with applicable Federal, State, and local laws; and
(vi) Will not be used by the System institution to make direct loans; perform any functions or provide any services that the System institution is not authorized to perform or provide under the Act and FCA regulations; or to exceed the stated purpose of the UBE as set forth in its articles of formation.
(5) A letter from the funding bank that it has approved the institution’s equity investment in the UBE. For those UBEs organized to acquire and manage unusual or complex collateral associated with loans as identified in paragraph (a)(1) of this section, the funding bank may provide a blanket approval letter to cover all such UBEs that its district associations may invest in or organize.
(6) Any additional information the System institution wishes to submit.
(c) Supplementation or omission of information. FCA may require the supplementation or allow the omission of any information required under paragraph (b) of this section.
(d) Other requirements. A System institution may not organize or invest in those UBEs identified in paragraph (a) of this section if the FCA notifies the institution before the end of the 10 business day advance notice period that such investment requires FCA approval under the provisions of § 611.1155.
§ 611.1155 Approval of equity investments in UBEs.
(a) Request. System institutions must receive FCA approval before organizing or investing in any UBE that does not qualify for the notice provision set forth in § 611.1154(a). A request for approval under this section must include the following information:
(1) A detailed statement of the risk characteristics of the investment, as required by § 615.5140(e) of this chapter and the initial amount of equity investment;
(2) A detailed statement on the purpose and objectives of the UBE; the need for the UBE and the operating efficiencies and benefits that will be achieved by using the UBE;
(3) The proposed articles of formation addressing, at a minimum, the following:
(i) The UBE’s name, the State in which it is organized, the city and State in which its principal office is to be located, and its partners or members and management structure;
(ii) Specific business activities that the UBE will conduct;
(iii) General powers of the UBE;
(iv) Ownership, voting, partnership, membership and operating agreements for the UBE;
(v) Procedures to adopt and amend the partnership, membership or operating agreement of the UBE;
(vi) The standards and procedures for the application and distribution of the UBE’s earnings; and
(vii) Length of time the UBE will exist.
(4) A certified resolution of the System institution’s board of directors authorizing the equity investment in the UBE and the UBE business activity and the board’s approval to submit the request to the FCA. The certified board resolution must include a board statement affirming that the UBE:
(i) Is necessary or expedient to the System institution’s business;
(ii) Will operate with transparency;
(iii) Will conduct its business activity in a manner designed to prevent conflicts of interest between its purpose and operations and the mission and operations of the System institution(s);
(iv) Will comply with applicable Federal, State, and local laws; and
(v) Will not be used by the System institution to make direct loans; perform any functions or provide any services that the System institution is not authorized to perform or provide under the Act and FCA regulations; or exceed the purpose of the UBE as stated in its articles of formation.
(5) A letter from the funding bank that it has approved the institution’s equity investment in the UBE;
(6) Any additional information the System institution wishes to submit.
(b) Supplementation or omission of information. FCA may require the supplementation or allow the omission of any information required under paragraph (a) of this section based on the complex or noncomplex nature of the proposed UBE.
(c) Denial of a request. The FCA will specify in writing to the submitting System institutions the reasons for denial of any request to organize or invest in a UBE.
§ 611.1156 Ongoing requirements.
A System institution that organizes or invests in a UBE must also comply with the following requirements:
(a) Maintain and ensure FCA’s access to all books, papers, records, agreements, reports and other documents of each UBE necessary to document and protect the institution’s interest in each entity;
(b) Divest, as soon as practicable, the institution’s equity or beneficial interest in, and sever any relationship with a UBE:
(1) That conducts activities beyond those authorized to carry out its limited purpose or that are contrary to the Act or FCA regulations, or as otherwise directed to do so by FCA; or
(2) Where non-System persons or entities obtain control as defined under GAAP. This paragraph does not apply to UBEs formed for the purpose of acquiring and managing unusual or complex collateral associated with multiple-lender loan transactions in which non-System persons or entities are participants.
§ 611.1157 Disclosure and reporting requirements.
(a) Annual report to shareholders. In its annual report to shareholders, as set forth in § 620.5(a)(12) of this chapter, a System institution must provide information on its UBE investment and business activity.
(b) Periodic reports as directed. As directed by FCA, a System institution must submit periodic reports to FCA on any equity investment in a UBE or UBE status as provided under § 621.12 of this chapter, and in accordance with §§ 621.13 and 621.14 of this chapter.
(c) Dissolution of a UBE. A System institution must submit a timely report to FCA on the dissolution of a UBE that it controls.
§ 611.1158 Grandfather provision.
(a) Scope. The following equity investments in UBEs are grandfathered from the Notice and Approval provisions under §§ 611.1154 and 611.1155, respectively.
(1) Those UBE formations or equity investments that received specific, written approval by FCA prior to the effective date of this regulation; and
(2) Those UBE formations or equity investments that occurred prior to the effective date of this regulation to acquire or manage unusual or complex collateral associated with loans.
(b) System institutions’ obligations. All System institutions with grandfathered UBEs:
(1) Remain subject to their conditions of approval;
(2) Are subject to the ongoing requirements of § 611.1156 and the disclosure and reporting requirements of § 611.1157; and
(3) May not change or expand the authorized business activity, service, or function of the UBE as approved by FCA, add or increase the level of non-System ownership in the UBE to the extent such ownership is authorized under § 611.1153(j), or change control of the UBE as control is defined in § 611.1151 without giving written notice of such changes to FCA at least 10 business days in advance of any such change or expansion.
(4) A System institution may not proceed with any change or expansion as defined in paragraph (b)(3) of this section if the FCA notifies the institution before the end of the 10 business day advance notice period that the proposed change or expansion is material and must be submitted for FCA approval under the provisions of § 611.1155.
(c) System institution investments or reinvestments in grandfathered UBEs. System institutions investing for the first time in grandfathered UBEs or reinvesting after having previously divested their equity investment must provide notice to FCA or obtain FCA approval under either the notice provision in § 611.1154 or the approval provision in § 611.1155 depending on the function, service, or activity of the grandfathered UBE in which the institution seeks to invest or reinvest.
Subparts K-O [Reserved]
Subpart P—Termination of System Institution Status
§ 611.1200 Applicability of this subpart.
The regulations in this subpart apply to each bank and association that desires to terminate its System institution status and become chartered as a bank, savings association, or other financial institution.
§ 611.1205 Definitions that apply in this subpart.
Assets means all assets determined in conformity with GAAP, except as otherwise required in this subpart.
Business days means days the FCA is open for business.
Days means calendar days.
Equity holders means holders of stock, participation certificates, or other equities such as allocated equities.
GAAP means “generally accepted accounting principles” as that term is defined in § 621.2 of this chapter.
OFI means an “other financing institution” that has a funding and discount agreement with a Farm Credit bank under section 1.7(b)(1) of the Act.
Successor institution means the bank, savings association, or other financial institution that the terminating bank or association will become when we revoke its Farm Credit charter.
§ 611.1210 Advance notices—commencement resolution and notice to equity holders.
(a) Adoption of commencement resolution. Your board of directors must begin the termination process by adopting a commencement resolution stating your intention to terminate Farm Credit status under section 7.10 of the Act. Immediately after you adopt the commencement resolution, send a certified copy by overnight mail to us and to the Farm Credit System Insurance Corporation (FCSIC). If your institution is an association, also send a copy to your affiliated bank. If your institution is a bank, also send a copy to your affiliated associations, the other Farm Credit banks, and the Federal Farm Credit Banks Funding Corporation (Funding Corporation).
(b) Advance notice. Within 5 business days after adopting the commencement resolution, you must:
(1) Send us copies of all contracts and agreements related to the termination.
(2) Subject to paragraph (b)(2)(ii) of this section:
(i) Send an advance notice to all equity holders stating you are taking steps to terminate System status. Immediately upon mailing the notice to equity holders, you must also place it in a prominent location on your Web site. The advance notice must describe the following:
(A) The process of termination;
(B) The expected effect of termination on borrowers and other equity holders, including the effect on borrower rights and the consequences of any stock retirements before termination;
(C) The type of charter the successor institution will have; and
(D) Any bylaw creating a special class of borrower stock and participation certificates under paragraph (f) of this section.
(ii) Send us a draft of the advance notice by facsimile or electronic mail before mailing it to your equity holders. If we have not contacted you within 2 business days of our receipt of the draft notice regarding modifications, you may mail the notice to your equity holders.
(c) Bank negotiations on joint and several liability. If your institution is a terminating bank, within 10 days of adopting the commencement resolution, your bank and the other Farm Credit banks must begin negotiations to provide for your satisfaction of liabilities (other than your primary liability) under section 4.4 of the Act. The Funding Corporation may, at its option, be a party to the negotiations to the extent necessary to fulfill its duties with respect to financing and disclosure. The agreement must comply with the requirements in § 611.1270(c).
(d) Disclosure to loan applicants and equity holders after commencement resolution. Between the date your board of directors adopts the commencement resolution and the termination date, you must give the following information to your loan applicants and equity holders:
(1) For each loan applicant who is not a current stockholder, describe at the time of loan application:
(i) The effect of the proposed termination on the prospective loan; and
(ii) Whether, after the proposed termination, the borrower will continue to have any of the borrower rights provided under the Act and regulations.
(2) For any equity holders who ask to have their equities retired, explain that the retirement would extinguish the holder’s right to exchange those equities for an interest in the successor institution. In addition, inform holders of equities entitled to your residual assets in liquidation that retirement before termination would extinguish their right to dissent from the termination and have their equities retired.
(e) Terminating bank’s right to continue issuing debt. Through the termination date, a terminating bank may continue to participate in the issuance of consolidated and System-wide obligations to the same extent it would be able to participate if it were not terminating.
(f) Special class of stock. Notwithstanding any requirements to the contrary in § 615.5230(c) of this chapter, you may adopt bylaws providing for the issuance of a special class of stock and participation certificates between the date of adoption of a commencement resolution and the termination date. Your voting stockholders must approve the special class before you adopt the commencement resolution. The equities must comply with section 4.3A of the Act and be identical in all respects to existing classes of equities that are entitled to the residual assets of the institution in a liquidation, except for the value a holder will receive in a termination. In a termination, the holder of the special class of stock receives value equal to the lower of either par (or face) value, or the value calculated under § 611.1280(c) and (d). A holder must have the same right to vote (if the equity is held on the voting record date) and to dissent as holders of similar equities issued before the commencement resolution. If the termination does not occur, the special classes of stock and participation certificates must automatically convert into shares of the otherwise identical equities.
§ 611.1211 Special requirements.
(a) Special assessments, analyses, studies, and rulings. At any time after we receive your commencement resolution, and as we deem necessary or useful to evaluate your proposal, we may require you to engage independent experts, acceptable to us, to conduct assessments, analyses, or studies, or to request rulings, including, but not limited to:
(1) Assessments of fair value;
(2) Analyses and rulings on tax implications; and
(3) Studies of the effect of your proposal on equity holders (including the effect on holders in their capacity as borrowers), the System, and other parties.
(b) Informational meetings. After the advance notice, but before the stockholder vote, we may require you to hold regional or local informational meetings in convenient locations, at convenient times, and in a manner conducive to accommodating all equity holders that wish to attend, to discuss equity holder issues and answer questions. These meetings are subject to the plain language requirements of § 611.1217(b) regarding balanced statements.
§ 611.1215 Communications with the public and equity holders.
(a) Communications after commencement resolution and before termination. The terminating institution may communicate with equity holders and the public regarding the proposed termination, as long as written communications (other than non-public communications among participants, i.e., persons or entities that are parties to a proposed corporate restructuring involving the successor institution, or their agents) made in connection with or relating to the proposed termination and any related transactions are filed in accordance with paragraph (c) of this section and the conditions in this section are satisfied.
(b) To rely on this section, you must include the following legend in each communication in a prominent location:
Equity holders should read the plan of termination that they have received or will receive (as appropriate) because it contains important information, including an enumerated statement of the anticipated benefits and potential disadvantages of the proposal.
(c) All your written communications and all written communications by your directors, employees, and agents in connection with or relating to the proposed termination or any related transactions must be filed with us under this section on or before the date of first use.
(d) We will require you to correct communications that we deem are misleading or inaccurate.
(e) In addition to the filings we require under paragraph (c) of this section, we may require you to file timely any written communications you have knowledge of that are made by any other participants or their agents in connection with or related to the proposed termination or to any transaction related to the proposed termination.
(f) An immaterial or unintentional failure to file or a delay in filing a written communication described in this section will not result in a violation of this section, as long as:
(1) A good faith and reasonable effort was made to comply with the filing requirement; and
(2) The written communication is filed as soon as practicable after discovery of the failure to file.
(g) Communications that exist in electronic form must be filed electronically with the FCA as we direct. For communications that do not exist in electronic form, you must timely notify us by electronic mail and send us a copy by regular mail.
(h) You do not need to file a written communication that does not contain new or different information from that which you have previously publicly disclosed and filed under this section.
(a) We may post on our Web site, or require you to post on your Web site:
(1) Results of any special assessments, analyses, studies, and rulings required under § 611.1211;
(2) Documents you submit to us or file with us under § 611.1215; and
(3) Documents you submit to us under section 7.11 of the Act that are related directly or indirectly to the proposed termination, including but not limited to contracts entered into in connection with or relating to the proposed termination and any related transactions.
(b) We will not post confidential information on our Web site and will not require you to post it on your Web site.
(c) You may request that we treat specific information as confidential under the Freedom of Information Act, 5 U.S.C. 552 (see 12 CFR part, 602 subpart B). You should draft your request for confidential treatment narrowly to extend only to those portions of a document you consider to be confidential. If you request confidential treatment for information that we do not consider to be confidential, we may post that information on our Web site after providing notice to you. On our own initiative, we may determine that certain information should be treated as confidential and, if so, we will not make that information public.
§ 611.1217 Plain language requirements.
(a) Plain language presentation. All communications to equity holders required under §§ 611.1210, 611.1223, 611.1240, and 611.1280 must be clear, concise, and understandable. You must:
(1) Use short, explanatory sentences, bullet lists or charts where helpful, and descriptive headings and subheadings;
(2) Minimize the use of glossaries or defined terms;
(3) Write in the active voice when possible; and
(4) Avoid legal and highly technical business terminology.
(b) Balanced statements. Communications to equity holders that describe or enumerate anticipated benefits of the proposed termination should also describe or enumerate the potential disadvantages to the same degree of detail.
§ 611.1218 Role of directors.
(a) Statements by directors. Directors may not be prohibited by confidentiality agreements or otherwise from publicly or privately commenting orally or in writing on the termination proposal and related matters.
(b) Directors’ right to obtain independent advice. One or more directors of a terminating institution or an institution that is considering terminating have the right to obtain independent legal and financial advice regarding the proposed termination and related transactions. The institution must pay for such advice and related expenses as are reasonable in light of the circumstances. A request by a director or directors for the institution to pay such expenses cannot be denied unless the board of directors, by at least a two-thirds vote of the full board (the total number of current directors), denies the request. The institution must act on any request in a timely manner. For any denial of payment, the board must provide notice to the FCA within 1 business day of the denial, fully document the reasons for such a denial, and ensure that the institution discloses the nature of the request and the reasons for any denial to the terminating institution’s equity holders in the plan of termination.
§ 611.1219 Prohibited acts.
(a) Statements about termination. Neither the institution nor any director, officer, employee, or agent may make any untrue or misleading statement of a material fact, or fail to disclose any material fact, to the FCA or a current or prospective equity holder about the proposed termination and any related transactions.
(b) Representations regarding FCA approval. Neither the institution nor any director, officer, employee, or agent may make an oral or written representation to anyone that our approval of the plan of termination or the termination is, directly or indirectly, either a recommendation on the merits of the proposal or an assurance that the information you give to your equity holders is adequate or accurate.
§ 611.1220 Termination resolution.
No more than 1 week before you submit your plan of termination to us, your board of directors must adopt a termination resolution stating its support for terminating your status as a System institution and authorizing:
(a) Submission to us of a plan of termination and other required submissions that comply with § 611.1223; and
(b) Submission of the plan of termination to the voting stockholders if we approve the plan of termination under § 611.1230 or, if we take no action, after the end of our approval period.
§ 611.1221 Submission to FCA of plan of termination and disclosure information; other required submissions.
(a) Filing. Send us an original and five copies of the plan of termination, including the disclosure information, and other required submissions. You may not file the plan of termination until at least 30 days after you mail the equity holder notice under § 611.1210(b). If you send us the plan of termination in electronic form, you must send us at least one hard copy with original signatures.
(b) Plan contents. The plan of termination must include your equity holder disclosure information that complies with § 611.1223.
(c) Other submissions. You must also submit the following:
(1) A statement of how you will transfer assets to, and have your liabilities assumed by, the successor institution;
(2) A copy of the charter application for the successor institution, with any exhibits or other supporting information; and
(3) A statement, if applicable, whether the successor institution will continue to borrow from a Farm Credit bank and how such a relationship will affect your provision for payment of debts. You must also provide evidence of any agreement and plan for satisfaction of outstanding debts.
§ 611.1223 Plan of termination—contents.
(a) Disclaimer. Place the following statement in boldface type in the material to be sent to equity holders, either on the notice of meeting or the first page of the plan of termination:
The Farm Credit Administration has not determined if this information is accurate or complete. You should not rely on any statement to the contrary.
(b) Summary. The first part of the plan of termination must be a summary that concisely explains:
(1) Which stockholders have a right to vote on the termination and related transactions;
(2) The material changes the termination will cause to the rights of borrowers and other equity holders;
(3) The effect of those changes;
(4) The anticipated benefits and potential disadvantages of the termination;
(5) The right of certain equity holders to dissent and receive payment for their existing equities; and
(6) The estimated termination date.
(7) If applicable, an explanation of any corporate restructuring that the successor institution expects to engage in within 18 months after the date of termination.
(c) Remaining requirements. You must also disclose the following information to equity holders:
(1) Termination resolution. Provide a certified copy of the termination resolution required under § 611.1220.
(2) Plan of termination. Summarize the plan of termination.
(3) Benefits and disadvantages. Provide an enumerated statement of the anticipated benefits and potential disadvantages of the termination.
(4) Recommendation. Explain the board’s basis for recommending the termination.
(5) Exit fee. Explain the preliminary exit fee estimate, with any adjustments we require, and estimated expenses of termination and organization of the successor institution.
(6) Initial board of directors. List the initial board of directors and senior officers for the successor institution, with a brief description of the business experience of each person, including principal occupation and employment during the past 5 years.
(7) Relevant contracts and agreements. Include copies of all contracts and agreements related to the termination, including any proposed contracts in connection with the termination and subsequent operations of the successor institution. The FCA may, in its discretion, permit or require you to provide a summary or summaries of the documents in the disclosure information to be submitted to equity holders instead of copies of the documents.
(8) Bylaws and charter. Summarize the provisions of the bylaws and charter of the successor institution that differ materially from your bylaws and charter. The summary must state:
(i) Whether the successor institution will require a borrower to hold an equity interest as a condition for having a loan; and
(ii) Whether the successor institution will require equity holders to do business with the institution.
(9) Changes to equity. Explain any changes in the nature of equity investments in the successor institution, such as changes in dividends, patronage, voting rights, preferences, retirement of equities, and liquidation priority. If equities protected under section 4.9A of the Act are outstanding, the plan of termination must state that the Act’s protections will be extinguished on termination.
(10) Effect of termination on statutory and regulatory rights. Explain the effect of termination on rights granted to equity holders by the Act and FCA regulations. You must explain the effect termination will have on borrower rights granted in the Act and part 617 of this chapter.
(11) Loan refinancing by borrowers. (i) State, as applicable, that borrowers may seek to refinance their loans with the System institutions that already serve, or will be permitted to serve, your territory. State that no System institution is obligated to refinance your loans.
(ii) If we have assigned the chartered territory you serve to another System institution before the plan of termination is mailed to equity holders, or if another System institution is already chartered to make the same type of loans you make in the chartered territory, identify such institution(s) and provide the following information:
(A) The name, address, and telephone number of the institution; and
(B) An explanation of the institution’s procedures for borrowers to apply for refinancing.
(iii) If we have not assigned the territory before you mail the plan of termination, give the name, address, and telephone number of the System institution specified by us and state that borrowers may contact the institution for information about loan refinancing.
(12) Equity exchanges. Explain the formula and procedure to exchange equity in your institution for equity in the successor institution.
(13) Employment, retirement, and severance agreements. Describe any employment agreement or arrangement between the successor institution and any of your senior officers or directors. Describe any severance and retirement plans that cover your employees or directors and state the costs you expect to incur under the plans in connection with the termination.
(14) Final exit fee and its calculation. Explain how the final exit fee will be calculated under § 611.1255 and how it will be paid.
(15) New charter. Describe the nature and type of financial institution the successor institution will be and any conditions of approval of the new chartering authority or regulator.
(16) Differences in successor institution’s programs and policies. Summarize any differences between you and the successor institution on:
(i) Interest rates and fees;
(ii) Collection policies;
(iii) Services provided; and
(iv) Any other item that would affect a borrower’s lending relationship with the successor institution, including whether a stockholder’s ability to borrow from the institution will be restricted.
(17) Capitalization. Discuss expected capital requirements of the successor institution, and the amount and method of capitalization.
(18) Sources of funding. Explain the sources and manner of funding for the successor institution’s operations.
(19) Contingent liabilities. Describe how the successor institution will address any contingent liability it will assume from you.
(20) Tax status. Summarize the differences in tax status between your institution and the successor institution, and explain how the differences may affect equity holders.
(21) Regulatory environment. Describe briefly how the regulatory environment for the successor institution will differ from your current regulatory environment, and any effect on the cost of doing business or the value of stockholders’ equity.
(22) Dissenters’ rights. Explain which equity holders are entitled to dissenters’ rights and what those rights are. The explanation must include the estimated liquidation value of the stock, procedures for exercising dissenters’ rights, and a statement of when the rights may be exercised.
(23) Financial information. (i) Present the following financial data:
(A) A balance sheet and income statement for each of the 3 preceding fiscal years;
(B) A balance sheet as of a date within 90 days of the date you send the plan of termination to us, presented on a comparative basis with the corresponding period of the previous 2 fiscal years;
(C) An income statement for the interim period between the end of the last fiscal year and the date of the balance sheet required by paragraph (d)(23)(i)(B) of this section, presented on a comparative basis with the corresponding period of the previous 2 fiscal years;
(D) A pro forma balance sheet of the successor institution presented as if termination had occurred as of the date of the most recent balance sheet presented in the plan of termination; and
(E) A pro forma summary of earnings for the successor institution presented as if the termination had been effective at the beginning of the interim period between the end of the last fiscal year and the date of the balance sheet presented under paragraph (d)(23)(i)(D) of this section.
(ii) The format for the balance sheet and income statement must be the same as the format in your annual report and must contain appropriate footnote disclosures, including data on high-risk assets, other property owned, and allowance for credit losses.
(iii) The financial statements must include either:
(A) A statement signed by the chief executive officer and each board member that the various financial statements are unaudited but have been prepared in all material respects in conformity with GAAP (except as otherwise disclosed) and are, to the best of each signer’s knowledge, a fair and accurate presentation of the financial condition of the institution; or
(B) A signed opinion by an independent certified public accountant that the various financial statements have been examined in conformity with generally accepted auditing standards and included such tests of the accounting records and other such auditing procedures as were considered necessary in the circumstances, and, as of the date of the statements, present fairly the financial position of the institution in conformity with GAAP applied on a consistent basis, except as otherwise disclosed.
(24) Subsequent financial events. Describe any event after the date of the financial statements, but before the date you send the plan of termination to us, that would have a material impact on your financial condition or the condition of the successor institution.
(25) Other subsequent events. Describe any event after you send the plan of termination to us that could have a material impact on any information in the plan of termination.
(26) Other material disclosures. Describe any other material fact or circumstance that a stockholder would need to know to make an informed decision on the termination, or that is necessary to make the disclosures not misleading. We may require you to disclose any assessments, analyses, studies, or rulings we require under § 611.1211.
(27) Ballot and proxy. Include a ballot and proxy, with instructions on the purpose and authority for their use, and the proper method for the stockholder to sign the proxy.
(28) Board of directors certification. Include a certification signed by the entire board of directors as to the truth, accuracy, and completeness of the information contained in the plan of termination. If any director refuses to sign the certification, the director must inform us of the reasons for refusing.
(29) Directors’ statements. You must include statements, if any, by directors regarding the proposed termination.
(d) Requirement to provide updated information. After you send us the plan of termination, you must immediately send us:
(1) Any material change to information in the plan of termination, including financial information, that occurs between the date you file the plan of termination and the termination date;
(2) Copies of any additional written information on the termination that you have given or give to current or prospective equity holders before termination; and
(3) A description of any subsequent event(s) that could have a material impact on any information in the plan of termination or on the termination.
§ 611.1230 FCA review and approval—plan of termination.
(a) FCA review period. No later than 60 days after we receive the plan of termination, we will review it and either approve or disapprove the plan for submission to your equity holders. If we take no action on the plan of termination within the 60 days, you may submit the plan to your equity holders. The 60-day review period under section 7.11 of the Act will begin on the date we receive a complete plan of termination. We will advise you in writing when the 60-day period begins.
(b) FCA approval of the plan of termination. Our approval of the plan of termination for submission to your equity holders:
(1) Is not our approval of the termination; and
(2) May be subject to any condition we impose.
§ 611.1235 Plan of termination—distribution.
(a) Reaffirmation resolution. Not more than 14 days before mailing the plan of termination to your equity holders, your board of directors must adopt a resolution reaffirming support of the termination. A certified copy of the resolution must be sent to us and must accompany the plan of termination when it is distributed to stockholders.
(b) Notice of meeting and distribution of plan. You must provide all equity holders with a notice of meeting and the plan of termination at least 45 days before the stockholder vote. You must also provide a copy of the plan to us when you provide it to your equity holders.
§ 611.1240 Voting record date and stockholder approval.
(a) Stockholder meeting. You must call the meeting by written notice in compliance with your bylaws. The stockholder meeting to vote on the termination must occur at least 60 days after our approval of the plan of termination (or, if we take no action, at least 60 days after the end of our approval period).
(b) Voting record date. The voting record date may not be more than 70 days before the stockholders’ meeting.
(c) Quorum requirement for termination vote. At least 30 percent, unless your bylaws provide for a higher quorum, of the voting stockholders of the institution must be present at the meeting either in person or by proxy in order to hold the vote on the termination.
(d) Approval requirement. The affirmative vote of a majority of the voting stockholders of the institution present and voting or voting by proxy at the duly authorized meeting at which a quorum is present as prescribed in paragraph (c) of this section is required for approval of the termination.
(e) Voting procedures. The voting procedures must comply with § 611.340. You must have an independent third party count the ballots. If a voting stockholder notifies you of the stockholder’s intent to exercise dissenters’ rights, the tabulator must be able to verify to you that the stockholder voted against the termination. Otherwise, the votes of stockholders must remain confidential.
(f) Notice to FCA and equity holders of voting results. Within 10 days of the termination vote, you must send us a certified record of the results of the vote. You must notify all equity holders of the results within 30 days after the stockholder meeting. If the stockholders approve the termination, you must give the following information to equity holders:
(1) Stockholders who voted against termination and equity holders who were not entitled to vote have a right to dissent as provided in § 611.1280; and
(2) Voting stockholders have a right, under § 611.1245, to file a petition with the FCA for reconsideration within 35 days after the date you mail to them the notice of the results of the termination vote.
(g) Requirement to notify new equity holders. You must provide the information described in paragraph (f)(1) of this section to each person that becomes an equity holder after the termination vote and before termination.
§ 611.1245 Stockholder reconsideration.
(a) Right to reconsider termination. Voting stockholders have the right to reconsider their approval of the termination if a petition signed by at least 15 percent of the voting stockholders is filed with us within 35 days after you mail notices to stockholders that the termination was approved. If we determine that the petition complies with the requirements of section 7.9 of the Act, you must call a special stockholders’ meeting to reconsider the vote. The meeting must occur within 60 days after the date on which you mailed to stockholders the results of the termination vote.
(b) Quorum requirement for termination reconsideration vote. At least 30 percent, unless your bylaws provide for a higher quorum, of the voting stockholders of the institution must be present at the stockholders’ meeting either in person or by proxy in order to hold the reconsideration vote. If a majority of the voting stockholders voting in person or by proxy vote against the termination, the termination may not take place.
(c) Stockholder list and expenses. You must, at your expense, timely give stockholders who request it a list of the names and addresses of stockholders eligible to vote in the reconsideration vote. The petitioners must pay all other expenses for the petition. You must pay expenses that you incur for the reconsideration vote.
§ 611.1246 Filing of termination application and its contents.
(a) Filing of termination application. Send us your termination application no later than 90 days after you send us notice of the stockholder vote approving the termination. Please send us an original and five copies of the termination application for review and approval. If you send us the termination application in electronic form, you must send us at least one hard copy with original signatures.
(b) Contents of termination application. The application must contain:
(1) A certified copy of the termination and reaffirmation resolutions;
(2) A certification signed by the board of directors that the board continues to support the termination, there has been no material change to any of the information contained in the plan of termination or information statement after the FCA approved the plan of termination, and there have not been any subsequent events that could have a material impact on any of the information in the plan of termination or the termination; and
(3) Any additional information that is required under this subpart, that we request or that your board of directors wishes to submit in support of the application.
§ 611.1247 FCA review and approval—termination.
(a) FCA action on application. After we receive the termination application, we will review it and either approve or disapprove the termination.
(b) Basis for disapproval. We will disapprove the termination if we determine that there are one or more appropriate reasons for disapproval consistent with our authorities under the Act and our regulations. We will inform you of our reason(s) for disapproval in writing.
(c) Conditions of FCA approval. We will approve your termination application only if:
(1) Your stockholders have voted in favor of termination in the termination vote and in any reconsideration vote;
(2) You have given us executed copies of all contracts, agreements, and other documents submitted under §§ 611.1221 and 611.1223;
(3) You have paid or made adequate provision for payment of debts, including responsibility for any contingent liabilities, and for retirement of equities;
(4) A Federal or State chartering authority has granted a new charter to the successor institution;
(5) You deposit into escrow an amount equal to 110 percent of the estimated exit fee plus 110 percent of the estimated amount you must pay to retire equities of dissenting stockholders and Farm Credit institutions, as described in § 611.1255(c); and
(6) You have fulfilled any condition of termination we impose.
(d) Effective date of termination. If we approve the termination, we will revoke your charter, and the termination will be effective on the date that we provide, but no earlier than the last to occur of:
(1) Fulfillment of all conditions listed in or imposed under paragraph (c) of this section;
(2) Your proposed termination date;
(3) Ninety (90) days after we receive your termination application described in § 611.1246; or
(4) Fifteen (15) days after any reconsideration vote.
§ 611.1250 Preliminary exit fee estimate.
(a) Preliminary exit fee estimate—terminating association. You must provide a preliminary exit fee estimate to us when you submit the plan of termination under § 611.1221. Calculate the preliminary exit fee estimate in the following order:
(1) Base your exit fee calculation on the average daily balances of assets and liabilities for the 12-month period as of the quarter end immediately before the date you send us your plan of termination.
(2) Any amounts we refer to in this section are average daily balances unless we specify that they are not. Amounts that are not average daily balances will be referred to as “dollar amount.”
(3) Compute the average daily balances based on financial statements that comply with GAAP. The financial statements, as of the quarter end immediately before the date you send us your plan of termination, must be independently audited by a qualified public accountant. We may, in our discretion, waive the audit requirement if an independent audit was performed as of a date less than 6 months before you submit the plan of termination.
(4) Make adjustments to assets as follows:
(i) Add back expenses you have incurred related to termination. Related expenses include, but are not limited to, legal services, accounting services, tax services, studies, auditing, business planning, equity holder meetings, and application fees for the termination and reorganization. Do not add back to assets expenses related to a requirement by the FCA to engage independent experts to conduct assessments, analyses, or studies, or to request rulings that solely address the impact of the termination on the System or parties other than the terminating institution and its stockholders.
(ii) Subtract the dollar amount of estimated current and deferred tax expenses, if any, due to the termination.
(iii) Add the dollar amount of estimated current and deferred tax benefits, if any, due to the termination.
(iv) Adjust for the dollar amount of significant transactions you reasonably expect to occur between the quarter end before you file your plan of termination and date of termination. Examples of these transactions include, but are not limited to, gains or losses on the sale of assets, retirements of equity, loan repayments, and patronage distributions. Do not make adjustments for future expenses related to termination, such as severance or special retirement payments, or stock retirements to dissenting stockholders and Farm Credit institutions.
(5) Subtract from liabilities any liability that we treat as regulatory capital under the capital or collateral requirements in subparts H and K of part 615 of this chapter.
(6) Make any adjustments we require under paragraph (c) of this section.
(7) After making these adjustments to assets and liabilities, subtract liabilities from assets. This is your preliminary total capital for purposes of termination.
(8) Multiply assets as adjusted above by 6 percent, and subtract this amount from preliminary total capital. This is your preliminary exit fee estimate.
(b) Preliminary exit fee estimate—terminating bank. (1) Affiliated associations that are terminating with you must calculate their individual preliminary exit fee estimates as described in paragraph (a) of this section.
(2) Base your exit fee calculation on the average daily balances of assets and liabilities for the 12-month period as of the quarter end immediately before the date you send us your plan of termination.
(3) Any amounts we refer to in this section are average daily balances unless we specify that they are not. Amounts that are not average daily balances will be referred to as “dollar amount.”
(4) Compute the average daily balances based on bank-only financial statements that comply with GAAP. The financial statements, as of the quarter end immediately before the date you send us your plan of termination, must be independently audited by a qualified public accountant. We may, in our discretion, waive this requirement if an independent audit was performed as of a date less than 6 months before you submit the plan of termination.
(5) Make adjustments to assets and liabilities as follows:
(i) Add back to assets the following:
(A) Expenses you have incurred related to termination. Related expenses include, but are not limited to, legal services, accounting services, tax services, studies, auditing, business planning, equity holder meetings, and application fees for the termination and reorganization. Do not add back to assets expenses related to a requirement by the FCA to engage independent experts to conduct assessments, analyses, or studies, or to request rulings that solely address the impact of the termination on the System or parties other than the terminating institution and its stockholders.
(B) Any specific allowance for losses, and a pro rata portion of any general allowance for credit losses, on direct loans to associations that you do not expect to incur before or at termination.
(ii) Subtract from your assets and liabilities an amount equal to your direct loans to your affiliated associations that are not terminating.
(iii) Subtract the following from assets:
(A) Equity investments in your institution that are held by nonterminating associations and that you expect to transfer to another System bank before or at termination. A nonterminating association’s investment consists of purchased equities, allocated equities, and a share of the bank’s unallocated surplus calculated in accordance with the bank’s bylaw provisions on liquidation. We may require a different calculation method for the unallocated surplus if we determine that using the liquidation provision would be inequitable to stockholders; and
(B) The dollar amount of estimated current and deferred tax expenses, if any, due to the termination.
(iv) Add the dollar amount of current and deferred estimated tax benefits, if any, due to the termination.
(v) Subtract from liabilities any liability that we treat as regulatory capital under the capital or collateral requirements in subparts H and K of part 615 of this chapter.
(vi) Adjust for the dollar amount of significant transactions you reasonably expect to occur between the quarter end before you file your plan of termination and date of termination. Examples of these transactions include, but are not limited to, retirements of equity, loan repayments, and patronage distributions. Do not make adjustments for future expenses related to termination, such as severance or special retirement payments, or stock retirements to dissenting stockholders and Farm Credit institutions.
(6) Make any adjustments we require under paragraph (c) of this section.
(7) After the above adjustments, combine your balance sheet with the balance sheets of your terminating associations after they have made the adjustments required in paragraph (a) of this section. Subtract liabilities from assets. This is your preliminary total capital estimate for purposes of termination.
(8) Multiply the assets of the combined balance sheet after the above adjustments by 6 percent. Subtract this amount from the preliminary total capital estimate of the combined balance sheet. The remainder is the preliminary exit fee estimate of the bank and terminating affiliated associations.
(9) Your preliminary exit fee estimate is the amount by which the preliminary exit fee estimate for the combined entity exceeds the total of the individual preliminary exit fee estimates of your affiliated terminating associations.
(c) Adjustments. (1) We will review your account balances, transactions over the 3 years before the date of the termination resolution under § 611.1220, and any subsequent transactions. Our review will include, but not be limited to, the following:
(i) Additions to or subtractions from any allowance for losses;
(ii) Additions to assets or liabilities, or subtractions from assets or liabilities, due to transactions that are outside your ordinary course of business;
(iii) Dividends or patronage refunds exceeding your usual practices;
(iv) Changes in the institution’s capital plan, or in implementing the plan, that increased or decreased the level of borrower investment;
(v) Contingent liabilities, such as loss-sharing obligations, that can be reasonably quantified; and
(vi) Assets, including real property and servicing rights, that may be overvalued, undervalued, or not recorded on your books.
(2) If we determine the account balances do not accurately show the value of your assets and liabilities (whether the assets and liabilities were booked before or during the 3-year look-back adjustment period), we will make any adjustments we deem necessary.
(3) We may require you to reverse the effect of a transaction if we determine that:
(i) You have retired capital outside the ordinary course of business;
(ii) You have taken any other actions unrelated to your core business that have the effect of changing the exit fee; or
(iii) You incurred expenses related to termination prior to the 12-month average daily balance period on which the exit fee calculation is based.
(4) We may require you to make these adjustments to the preliminary exit fee estimate that is disclosed in the information statement, the final exit fee calculation, and the calculations of the value of equities held by dissenting stockholders, Farm Credit institutions that choose to have their equities retired at termination, and reaffiliating associations.
§ 611.1255 Exit fee calculation.
(a) Final exit fee calculation—terminating association. Calculate the final exit fee in the following order:
(1) Base your exit fee calculation on the average daily balances of assets and liabilities for the 12-month period preceding the termination date. Assume for this calculation that you have not paid or accrued the items described in paragraph (a)(4)(ii) and (iii) of this section.
(2) Any amounts we refer to in this section are average daily balances unless we specify that they are not. Amounts that are not average daily balances will be referred to as “dollar amount.”
(3) Compute the average daily balances based on financial statements that comply with GAAP. The financial statements, as of the termination date, must be independently audited by a qualified public accountant.
(4) Make adjustments to assets and liabilities as follows:
(i) Add back expenses related to the termination. Related expenses include, but are not limited to, legal services, accounting services, tax services, studies, auditing, business planning, payments of severance and special retirements, equity holder meetings, and application fees for the termination and reorganization. Do not add back to assets expenses related to a requirement by the FCA to engage independent experts to conduct assessments, analyses, or studies, or to request rulings that solely address the impact of the termination on the System or parties other than the terminating institution and its stockholders.
(ii) Subtract from assets the dollar amount of current and deferred tax expenses, if any, due to the termination.
(iii) Add to assets the dollar amount of current and deferred tax benefits, if any, due to the termination.
(iv) Subtract from liabilities any liability that we treat as regulatory capital under the capital or collateral requirements in subparts H and K of part 615 of this chapter.
(v) Make the adjustments that we require under § 611.1250(c). For the final exit fee, we will review and may require additional adjustments for transactions between the date you adopted the termination resolution and the termination date.
(5) After making these adjustments to assets and liabilities, subtract liabilities from assets. This is your total capital for purposes of termination.
(6) Multiply assets by 6 percent, and subtract this amount from total capital. This is your final exit fee.
(b) Final exit fee calculation—terminating bank. (1) The individual exit fees of affiliated associations that are terminating with you must be calculated as described in paragraph (a) of this section.
(2) Base your exit fee calculation on the average daily balances of assets and liabilities for the 12-month period preceding the termination date. Assume for this calculation that you have not paid or accrued the items described in paragraph (b)(5)(iii)(B) and (b)(5)(iv) of this section.
(3) Any amounts we refer to in this section are average daily balances unless we specify that they are not. Amounts that are not average daily balances will be referred to as “dollar amount.”
(4) Compute the average daily balances based on bank-only financial statements that comply with GAAP. The financial statements, as of the termination date, must be independently audited by a qualified public accountant.
(5) Make adjustments to assets and liabilities as follows:
(i) Add back the following to your assets:
(A) Expenses you have incurred related to termination. Related expenses include, but are not limited to, legal services, accounting services, tax services, studies, auditing, business planning, payments of severance and special retirements, equity holder meetings, and application fees for the termination and reorganization. Do not add back to assets expenses related to a requirement by the FCA to engage independent experts to conduct assessments, analyses, or studies, or to request rulings that solely address the impact of the termination on the System or parties other than the terminating institution and its stockholders.
(B) Any specific allowance for losses, and a pro rata share of any general allowance for credit losses, on direct loans to associations that are paid off or transferred before or at termination.
(ii) Subtract from your assets and liabilities your direct loans to affiliated associations that were paid off or transferred in the 12-month period before termination or at termination.
(iii) Subtract from your assets the following:
(A) Equity investments held in your institution by affiliated associations that you transferred at termination or during the 12 months before termination; and
(B) The dollar amount of current and deferred tax expenses, if any, due to the termination;
(iv) Add to assets, the dollar amount of estimated current and deferred tax benefits, if any, due to the termination.
(v) Subtract from liabilities any liability that we treat as regulatory capital (or that we do not treat as a liability) under the capital or collateral requirements in subparts H and K of part 615 of this chapter.
(vi) Make the adjustments that we require under § 611.1250(c). For the final exit fee, we will review and may require additional adjustments for transactions between the date you adopted the termination resolution and the termination date.
(6) After the above adjustments, combine your balance sheet with the balance sheets of terminating associations after making the adjustments required in paragraph (a) of this section.
(7) Subtract combined liabilities from combined assets. This is the total capital of the combined balance sheet.
(8) Multiply the assets of the combined balance sheet after the above adjustments by 6 percent. Subtract this amount from the total capital of the combined balance sheet. This amount is the combined final exit fee for your institution and the terminating affiliated associations.
(9) Your final exit fee is the amount by which the combined final exit fee exceeds the total of the individual final exit fees of your affiliated terminating associations.
(c) Payment of exit fee. On the termination date, you must:
(1) Deposit into an escrow account acceptable to us and the FCSIC an amount equal to 110 percent of the preliminary exit fee estimate, adjusted to account for stock retirements to dissenting stockholders and Farm Credit institutions, and any other adjustments we require.
(2) Deposit into an escrow account acceptable to us an amount equal to 110 percent of the equity you must retire for dissenting stockholders and System institutions holding stock that would be entitled to a share of the remaining assets in a liquidation.
(d) Pay-out of escrow. Following the independent audit of the institution’s account balances as of the termination date, we will determine the amount of the final exit fee and the amounts owed to stockholders to retire their equities. We will then direct the escrow agent to:
(1) Pay the exit fee to the Farm Credit Insurance Fund;
(2) Pay the amounts owed to dissenting stockholders and Farm Credit institutions; and
(3) Return any remaining amounts to the successor institution.
(e) Additional payment. If the amount held in escrow is not enough to pay the amounts under paragraph (d)(1) and (d)(2) of this section, the successor institution must pay any remaining liability to the escrow agent for distribution to the appropriate parties. The termination application must include evidence that, after termination, the successor institution will pay any remaining amounts owed.
§ 611.1260 Payment of debts and assessments—terminating association.
(a) General rule. If your institution is a terminating association, you must pay or make adequate provision for the payment of all outstanding debt obligations and assessments.
(b) No OFI relationship. If the successor institution will not become an OFI, you must either:
(1) Pay debts and assessments owed to your affiliated Farm Credit bank at termination; or
(2) With your affiliated Farm Credit bank’s concurrence, arrange to pay any obligations or assessments to the bank after termination.
(c) Obligations to other Farm Credit institutions. You must pay or make adequate provision for payment of obligations to any Farm Credit institution (other than your affiliated bank) under any loss-sharing or other agreement.
§ 611.1265 Retirement of a terminating association’s investment in its affiliated bank.
(a) Safety and soundness restrictions. Notwithstanding anything in this subpart to the contrary, we may prohibit a bank from retiring the equities you hold in the bank if the retirement would cause the bank to fall below its regulatory capital requirements after retirement, or if we determine that the bank would be in an unsafe or unsound condition after retirement.
(b) Retirement agreement. Your affiliated bank may retire the purchased and allocated equities held by your institution in the bank according to the terms of the bank’s capital revolvement plan or an agreement between you and the bank.
(c) Retirement in absence of agreement. Your affiliated bank must retire any equities not subject to an agreement or revolvement plan no later than when you or the successor institution pays off your loan from the bank.
(d) No retirement of unallocated surplus. When your bank retires equities you own in the bank, the bank must pay par or face value for purchased and allocated equities, less any impairment. The bank may not pay you any portion of its unallocated surplus.
(e) Exclusion of equities from capital ratios. If another Farm Credit institution makes an agreement to retire equities you hold in that institution after termination, we may require that institution to exclude part or all of those equities from assets and capital when the institution calculates its regulatory capital under parts 615 and 628 of this chapter.
§ 611.1270 Repayment of obligations—terminating bank.
(a) General rule. If your institution is a terminating bank, you must pay or make adequate provision for the payment of all outstanding debt obligations, and provide for your responsibility for any probable contingent liabilities identified.
(b) Satisfaction of primary liability on consolidated or System-wide obligations. After consulting with the other Farm Credit banks, the Funding Corporation, and the FCSIC, you must pay or make adequate provision for payment of your primary liability on consolidated or System-wide obligations in a method that we deem acceptable. Before we make a final decision on your proposal and as we deem necessary, we may consult with the other Farm Credit banks, the Funding Corporation, and the FCSIC.
(c) Satisfaction of joint and several liability and liability for interest on individual obligations. (1) You and the other Farm Credit banks must enter into an agreement, which is subject to our approval, covering obligations issued under section 4.2 of the Act and outstanding on the termination date. The agreement must specify how you and your successor institution will make adequate provision for the payment of your joint and several liability to holders of obligations other than those obligations on which you are primarily liable, in the event we make calls for payment under section 4.4 of the Act. You and your successor institution must also provide for your liability under section 4.4(a)(1) of the Act to pay interest on the individual obligations issued by other System banks. As a part of the agreement, you must also agree that your successor institution will provide ongoing information to the Funding Corporation to enable it to fulfill its funding and disclosure duties. The Funding Corporation may, at its option, be a party to the agreement to the extent necessary to fulfill its duties with respect to financing and disclosure.
(2) If you and the other Farm Credit banks are unable to reach agreement within 90 days before the proposed termination date, we will specify the manner in which you will make adequate provision for the payment of the liabilities in question and how we will make joint and several calls for those obligations outstanding on the termination date.
(3) Notwithstanding any other provision in these regulations, the successor institution will be jointly and severally liable for consolidated and System-wide debt outstanding on the termination date (other than the obligations on which you are primarily liable). The successor institution will also be liable for interest on other banks’ individual obligations as described in section 4.4(a)(1) of the Act and outstanding on the termination date. The termination application must include evidence that the successor institution will continue to be liable for consolidated and System-wide debt and for interest on other banks’ individual obligations.
§ 611.1275 Retirement of equities held by other System institutions.
(a) Retirement at option of equity holder. If your institution is a terminating institution, System institutions that own your equities have the right to require you to retire the equities on the termination date.
(b) Value of equity holders’ interests. You must retire the equities in accordance with the liquidation provisions in your bylaws unless we determine that the liquidation provisions would result in an inequitable distribution to stockholders. If we make such a determination, we will require you to distribute the equity in accordance with another method that we deem equitable to stockholders. Before you retire any equity, you must make the following adjustments to the amount of stockholder equity as stated in the financial statements on the termination date:
(1) Make deductions for any taxes due to the termination that have not yet been recorded;
(2) Deduct the amount of the exit fee; and
(3) Make any adjustments described under § 611.1250(c) that we may require as we deem appropriate.
(c) Transfer of affiliated association’s investment. As an alternative to equity retirement, an affiliated association that reaffiliates with another Farm Credit bank instead of terminating with its bank has the right to require the terminating bank to transfer its investment to its new affiliated bank when it reaffiliates. If your institution is a terminating bank, at the time of reaffiliation you must transfer the purchased and allocated equities held by the association, as well as its share of unallocated surplus, to the new affiliated bank. Calculate the association’s share before deduction of the exit fee as of the month end preceding the reaffiliation date (or the termination date if it is the same as the reaffiliation date) in accordance with the liquidation provisions of your bylaws, unless we determine that the liquidation provisions would result in an inequitable distribution. If we make such a determination, we will require you to distribute the association’s share of your unallocated surplus in accordance with another method that we deem equitable to stockholders. Before you distribute any unallocated surplus, you must make the following adjustments to stockholder equity as stated in the financial statements as of the month end preceding the reaffiliation date (or the termination date if it is the same as the reaffiliation date):
(1) Add back any taxes due to the termination, and the exit fee; and
(2) Make any adjustments described under § 611.1250(c) that we may require as we deem appropriate.
(d) Prohibition on certain affiliations. No Farm Credit institution may retain an equity interest otherwise prohibited by law in a successor institution
§ 611.1280 Dissenting stockholders’ rights.
(a) Definition. A dissenting stockholder is an equity holder (other than a System institution) in a terminating institution on the termination date who either:
(1) Was eligible to vote on the termination resolution and voted against termination;
(2) Was an equity holder on the voting record date but was not eligible to vote; or
(3) Became an equity holder after the voting record date.
(b) Retirement at option of a dissenting stockholder. A dissenting stockholder may require a terminating institution to retire the stockholder’s equity interest in the terminating institution.
(c) Value of a dissenting stockholder’s interest. You must pay a dissenting stockholder according to the liquidation provision in your bylaws, except that you must pay at least par or face value for eligible borrower stock (as defined in section 4.9A(d)(2) of the Act). If we determine that the liquidation provision is inequitable to stockholders, we will require you to calculate their share in accordance with another formula that we deem equitable.
(d) Calculation of interest of a dissenting stockholder. Before you retire any equity, you must make the following adjustments to the amount of stockholder equity as stated in the financial statements on the termination date:
(1) Deduct any taxes due to the termination that you have not yet recorded;
(2) Deduct the amount of the exit fee; and
(3) Make any adjustments described under § 611.1250(c) that we may require as we deem appropriate.
(e) Form of payment to a dissenting stockholder. You must pay dissenting stockholders for their equities as follows:
(1) Pay cash for the par or face value of purchased stock, less any impairment;
(2) For equities other than purchased equities, you may:
(i) Pay cash;
(ii) Cause or otherwise provide for the successor institution to issue, on the date of termination, subordinated debt to the stockholder with a face value equal to the value of the remaining equities. This subordinated debt must have a maturity date of 7 years or less, must have priority in liquidation ahead of all equity, and must carry a rate of interest not less than the rate (at the time of termination) for debt of comparable maturity issued by the U.S. Treasury plus 1 percent; or
(iii) Provide for a combination of cash and subordinated debt as described above.
(f) Payment to holders of special class of stock. If you have adopted bylaws under § 611.1210(f), you must pay a dissenting stockholder who owns shares of the special class of stock an amount equal to the lower of the par (or face) value or the value of such stock as determined under § 611.1280(c) and (d).
(g) Notice to equity holders. The notice to equity holders required in § 611.1240(f) must include a form for stockholders to send back to you, stating their intention to exercise dissenters’ rights. The notice must contain the following information:
(1) A description of the rights of dissenting stockholders set forth in this section and the approximate value per share that a dissenting stockholder can expect to receive. State whether the successor institution will require borrowers to be stockholders or whether it will require stockholders to be borrowers.
(2) A description of the current book and par value per share of each class of equities, and the expected book and market value of the stockholder’s interest in the successor institution.
(3) A statement that a stockholder must return the enclosed form to you within 30 days if the stockholder chooses to exercise dissenters’ rights.
(h) Notice to subsequent equity holders. Equity holders that acquire their equities after the termination vote must also receive the notice described in paragraph (g) of this section. You must give them at least 5 business days to decide whether to request retirement of their stock.
(i) Reconsideration. If a reconsideration vote is held and the termination is disapproved, the right of stockholders to exercise dissenters’ rights is rescinded. If a reconsideration vote is held and the termination is approved, you must retire the equities of dissenting stockholders as if there had been no reconsideration vote.
§ 611.1285 Loan refinancing by borrowers.
(a) Disclosure of credit and loan information. At the request of a borrower seeking refinancing with another System institution before you terminate, you must give credit and loan information about the borrower to such institution.
(b) No reassignment of territory. If, at the termination date, we have not assigned your territory to another System institution, any System institution may lend in your territory, to the extent otherwise permitted by the Act and the regulations in this chapter.
§ 611.1290 Continuation of borrower rights.
You may not require a waiver of contractual borrower rights provisions as a condition of borrowing from and owning equity in the successor institution. Institutions that become other financing institutions on termination must comply with the applicable borrower rights provisions in the Act and part 617 of this chapter.
PART 612—STANDARDS OF CONDUCT AND REFERRAL OF KNOWN OR SUSPECTED CRIMINAL VIOLATIONS
Subpart A—Standards of Conduct
§ 612.2130 Definitions.
For purposes of this subpart, the following terms and definitions apply excepting that words like document, record, certify, report, sign, and write generally should be interpreted to permit their electronic equivalents:
Agent means any person, other than a director or employee of the institution, with the power to act for the institution either by contract or apparent authority and who currently either represents the System institution in contacts with third parties or provides professional or fiduciary services to the institution.
Code of Ethics means a written statement of the principles and values the System institution follows to establish a culture of ethical conduct for directors and employees, including, at a minimum, the core principles established under this subpart.
Conflicts of interest means a set of circumstances or appearance thereof where a person has a financial interest in a transaction, relationship, or activity that could or does actually affect (or has the appearance of affecting) that person’s ability to perform official duties and responsibilities in a totally impartial manner and in the best interest of the institution when viewed from the perspective of a reasonable person with knowledge of the relevant facts.
Employee means any individual working on a part-time, full-time, or temporary basis by the System institution, including those identified as officers of the institution. Persons not maintained on the institution’s payroll (i.e., independent contractors) are not employees for purposes of this subpart.
Entity means a corporation, company, association, firm, joint venture, partnership (general or limited), trust (business or otherwise) or other business operation whether or not incorporated.
Family means parents, spouses or civil union partners, children, siblings, uncles, aunts, nephews, nieces, grandparents, grandchildren, and the spouses of the foregoing, whether arising from biological, adoptive, marital, or other legal means (e.g., stepparents, stepchildren, half-siblings, in-laws). The term also includes anyone residing in the household or who is a legal or financial dependent, regardless of any familial relationship.
Financial interest means an interest in an activity, transaction, property, or relationship with a person that involves receiving or providing something of monetary value or other present or deferred compensation.
Financially obligated with means having a legally enforceable joint obligation with, being financially obligated on behalf of (contingently or otherwise), having an enforceable legal obligation secured by property owned by another person, or owning property that secures an enforceable legal obligation of another.
Material, when applied to a financial interest or transaction (including a series of transactions viewed in the aggregate), means that the interest or transaction is of sufficient magnitude that a reasonable person with knowledge of the relevant facts would question the ability of the person who has the interest or is party to such transaction(s) to perform the person’s official duties objectively and impartially and in the best interest of the institution and its statutory purpose.
Mineral interest means any interest in minerals, oil, or gas, including but not limited to, any right derived directly or indirectly from a mineral, oil, or gas lease, deed, or royalty conveyance.
Officer means the chief executive officer, president, chief operating officer, vice president, secretary, treasurer, general counsel, chief financial officer, and chief credit officer of the System institution, and any person not so designated but who holds a similar position of authority.
Ordinary course of business, when applied to a transaction, means:
(1) A transaction that is usual and customary in the business in question on terms that are not preferential; or
(2) A transaction with a person who is in the business of offering the goods or services that are the subject of the transaction on terms that are not preferential.
Person means individual or entity (including sole proprietorships).
Preferential means that the transaction is not on the same terms as those prevailing at the same time for comparable transactions for other persons who are not directors, employees or agents of a System institution.
Reportable business entity means an entity in which the reporting individual, directly or indirectly, or acting through or in concert with one or more persons:
(1) Owns a material percentage of the equity;
(2) Owns, controls, or has the power to vote a material percentage of any class of voting securities; or
(3) Has the power to exercise a material influence over the management of policies of such entity from his or her status as a partner, director, officer, or majority shareholder in the entity.
Resolved means an actual or apparent conflict of interest that has been addressed with an action such as recusal, divestiture, approval or exception, job reassignment, employee supervision, employment separation or other action, with the result that a reasonable person with knowledge of the relevant facts would conclude that the conflicting interest is unlikely to adversely affect the person’s performance of official duties in an objective and impartial manner and in furtherance of the interests and statutory purposes of the Farm Credit System.
Standards of Conduct Official or “SOCO” means a person appointed by the institution’s board of directors pursuant to this subpart to administer and report on the institution’s Standards of Conduct Program, as well as investigate allegations of misconduct by institution directors, employees or agents.
Standards of Conduct Program or SOC program means the policies and procedures, internal controls and other actions a System institution must implement to put into practice the requirements of this subpart.
Supervised institution is a term that only applies within the context of a Farm Credit bank or employee of a Farm Credit bank and refers to each association supervised by that Farm Credit bank.
Supervising institution is a term that only applies within the context of an association or employee of an association and refers to the Farm Credit bank that supervises that association.
System institution and institution means any Farm Credit System bank, association, or service corporation chartered under section 4.25 of the Act, and the Funding Corporation. It does not include the Federal Agricultural Mortgage Corporation.
§ 612.2135 Standards of conduct—core principles.
(a) Conduct. If you are a System institution director or employee, you must:
(1) Maintain high ethical standards, including high standards of care, honesty, integrity, and fairness.
(2) Act in the best interest of the institution.
(3) Preserve the reputation of the institution and the public’s confidence in the Farm Credit System.
(4) Exercise diligence and good business judgment in carrying out official duties and responsibilities.
(5) Report to the Standards of Conduct Official conflicts of interest and circumstances or transactions that have the appearance of creating a conflict of interest involving yourself, your family, or your reportable business entity.
(6) Work with the Standards of Conduct Official to identify conflicts and resolve reported conflicts of interest and appearances of conflicts of interest.
(7) Avoid self-dealing and acceptance of gifts or favors that may be deemed as offered, or have the appearance of being offered, to influence official actions or decisions.
(b) Responsibilities. To achieve the high standards of conduct of this subpart, every institution director and employee must:
(1) Comply with the standards of conduct and Code of Ethics policies and procedures maintained at his or her institution.
(2) Comply with all applicable laws and regulations.
(3) Timely report to the Standards of Conduct Official, or use the institution’s anonymous reporting procedures, any known or suspected:
(i) Illegal or unethical activity; or
(ii) Violation of the institution’s standards of conduct and Code of Ethics.
(c) Fiduciary duties. Every officer or director of a System institution must fulfill his or her fiduciary duties to the institution and its stockholders.
§ 612.2137 Elements of a Standards of Conduct Program.
Each System institution board of directors is ultimately responsible for the implementation, oversight of, and compliance with, the Standards of Conduct Program. In fulfilling these responsibilities, each System institution board of directors must do the following:
(a) Establish a SOC program. Each institution’s board of directors must establish and maintain a Standards of Conduct Program that sets forth the core principles of § 612.2135 and meets the requirements of this subpart. The board must act to ensure the SOC program has adequate resources for its implementation and operation. The SOC program must include maintaining conflicts of interest and other reports required under this subpart, along with any investigations, determinations, and supporting documentation, for a minimum of 6 years.
(b) Appoint a Standards of Conduct Official. Each institution must have a Standards of Conduct Official who is appointed pursuant to § 612.2170. An institution may use one of its officers to serve as SOCO or may use a chartered service corporation or third-party to provide the services of a SOCO. Institutions may also use another institution’s SOCO or hire a SOCO under a shared contract with other System institutions when each institution has a separate confidential relationship with the person serving as SOCO.
(c) Adopt a written Code of Ethics. Each institution as part of its SOC program must adopt and maintain an up-to-date written Code of Ethics. The Code must establish the institution’s values and expectations for the ethical conduct of directors and employees in business transactions and include a general statement of expectations for appropriate professional conduct. The entire Code of Ethics must be available to all directors, employees, agents, and shareholders of the institution. The institution must post on its external website a statement that it has adopted a professional Code of Ethics, summarizing what that Code is, and advising the public the entire Code of Ethics is available on request at no cost.
(d) Establish Standards of Conduct policies and procedures. Each institution’s board of directors must adopt policies and procedures to implement the institution’s SOC program. These policies and procedures must address all aspects of the SOC program, including, but not limited to, the following:
(1) Requiring conflict of interest reporting from all directors and employees pursuant to § 612.2145. The frequency of conflicts of interest reporting and other disclosures must be addressed in SOC program policies and procedures using the institution’s fiscal year calendar. At a minimum, each person must annually report to the SOCO known conflicts occurring in the current year. Pursuant to § 612.2145(c), the board must also require directors and officers to give the SOCO the disclosures required under § 620.6(a), (e), and (f) of this chapter, regardless of who else in the institution receives the disclosures.
(2) Explaining what constitutes SOC program compliance, including setting criteria for documentation submitted with conflicts of interest reports and providing instructions to help directors and employees identify and report on interests or circumstances that could give rise to an actual or apparent conflict of interest.
(i) The board must explain within the policies and procedures what transactions are likely to present real or potential conflicts, setting benchmarks and thresholds for both single and aggregate activities. The policies and procedures must also explain how transactions in the ordinary course of business are identified.
(ii) The board must explain within the policies and procedures, setting benchmarks and thresholds, how materiality of a conflict is identified. The materiality guidelines must be used when evaluating conflicts of interest reports filed by employees and directors. An exception for those matters affecting all shareholders or borrowers may be used in making the determination of materiality.
(3) Addressing the process by which real and apparent conflicts will be resolved. The procedures must also explain action(s) to be taken when a conflict cannot be resolved to the satisfaction of the institution. The procedures must explain the role and authorities of the SOCO in resolving conflicts.
(4) Addressing the conduct of third-party relationships. The board of directors at each institution must adopt conflict-of-interest policies for third-party relationships and develop safeguards for use in contractual obligations that require third-party service providers to perform services on behalf of the institution in an ethical manner. At a minimum, the policies for third-party relationships must set forth expectations for disclosing known conflicts of interest to the institution. The policies must also implement the requirements of § 612.2180 for agents of the institution.
(5) Setting criteria for accepting gifts that are not otherwise prohibited by this subpart. The criteria must explain the scope of application and may make appropriate exceptions for non-business events where the gift is not viewed by the institution as attempting to influence official institution business. The gift criteria must include de minimis dollar thresholds for all permissible gifts, regardless of the gift giving reason. The thresholds must apply both per gift and in the aggregate per recipient, per year. The institution must also establish disclosure requirements for gifts received as well as procedures for disposing of impermissible gifts.
(6) Identifying the appropriate actions that may be taken against any director or employee who violates the standards of conduct policies and procedures, Code of Ethics, or regulations under this subpart. The board must also identify who is authorized to take which action and when. The board must address how the SOCO exercises his or her authority under § 612.2170 to investigate certain conduct issues.
(7) Providing for anonymous reporting by individuals of known or suspected violations of the institution’s Standards of Conduct Program and Code of Ethics, through a hotline or other venue.
(e) Monitor the SOC program through internal controls. Each institution’s board of directors must establish a system of internal controls for its SOC program that includes, at a minimum, a process to:
(1) Protect against unauthorized disclosure of confidential information maintained by the institution.
(2) Conduct scheduled periodic reviews of the Standards of Conduct Program that determine the continued adequacy of the program. Each review must look for consistency with institution practices, financial services industry best practices, and Farm Credit Administration (FCA) regulations in this chapter, identifying any required updates.
(3) Perform internal audits of the Standards of Conduct Program. The board of directors, with the assistances of the SOCO and appropriate officers of the institution, must determine the scope and depth of the audit. The board is responsible for identifying who will conduct the internal audit. The audit findings must be given directly to the institution’s board or designated board committee. The audit itself must be designed to:
(i) Review the effectiveness of advancing the core principles;
(ii) Identify weaknesses;
(iii) Recommend and report necessary corrective actions; and
(iv) Cover the entire Standards of Conduct Program across the institution, including all activities conducted through a System institution unincorporated business entity (UBE) formed under § 611.1150(b) of this chapter, including UBEs organized for the express purpose of investing in a Rural Business Investment Company.
(f) Train institution personnel. Each institution’s board of directors must establish a training program to administer periodic Standards of Conduct and Code of Ethics training to directors and employees. The training must be given by the SOCO and the board must address how the SOCO will exercises his or her training responsibilities under § 612.2170. The Standards of Conduct training must be administered under the following timeframes:
(1) Newly elected or appointed directors must receive Standards of Conduct training within 60 calendar days of the director assuming his or her position.
(2) New employees must receive Standards of Conduct training within 10 business days of beginning work.
(3) Periodic training for all directors and employees must occur at least annually but may be more frequent.
§ 612.2140 [Reserved]
§ 612.2145 Disclosing and reporting conflicts of interest.
(a) Responsibilities. As a director or employee of a System institution you must identify, disclose, and report on any interest or circumstances that does or could constitute a conflict of interest and potential conflict of interest. You must carry out this responsibility to the best of your knowledge and belief. You must cooperate with, and provide information requested by, the Standards of Conduct Official for use in determining the materiality of a conflict and to resolve conflicts of interest and potential conflicts of interest.
(1) If you have a conflict of interest in a matter, transaction, or activity subject to official action by the institution or before the board of directors then you must disclose it and refrain from participating in official action or board discussion of the matter, transaction, or activity. You must also avoid voting on or influencing any decision directed at the matter, transaction, or activity.
(2) You must report, either to the SOCO or by using the institution’s anonymous reporting procedures, any known or suspected activity by a person affiliated with the institution that you suspect is illegal, unethical, or a violation of the institution’s standards of conduct and Code of Ethics.
(b) Reporting conflicts of interest. As a director or employee of a System institution, you must file with the SOCO reports on any real or potential conflicts of interest. The reports must be filed at least annually and at such other times as may be required by your institution policies and procedures. The reports must be in sufficient detail for a reasonable person to make a conflict of interest determination and decide if the conflict is material. You must file a report with the SOCO that contains the disclosures required by this section and those required by the institution’s SOC program policies and procedures. At a minimum, the report must be signed by you and include:
(1) Any interest you have in any business matter, including any loan or loan application, to be considered by the System institution, or supervised or supervising institution in the current year;
(2) All material financial interests, including those arising in the ordinary course of business, you have with any director, employee, agent, or borrower of your System institution, or a supervised or supervising institution;
(3) The name(s) of your reportable business entities that you know or have reason to know in the current year transacted business with:
(i) Your System institution;
(ii) Any supervised or supervising institution; or
(iii) A borrower that transacts business with your System institution, or any supervised or supervising institution.
(4) The name(s) of your family members you know or have reason to know transacted business with your System institution or any supervised or supervising institution in the current year.
(5) Reportable gifts received or disposed of under the institution’s SOC program policies and procedures.
(c) Other required disclosures for directors and officers. If you are a director or officer at the institution, you must give the SOCO the disclosures required under § 620.6(a), (e), and (f) of this chapter, regardless of who else in the institution has been provided them. The timing and frequency of disclosing the information to the SOCO, or any updates to them, is determined by your institution’s SOC program policies and procedures but must occur no less than annually and at issuance of the institution’s Annual Meeting Information Statement.
§ 612.2150 Prohibited conduct.
(a) General. If you are a System institution director or employee you must not act inconsistently with the Standards of Conduct core principles set forth in this subpart. You also must not act in the following manner:
(1) Use your position for personal gain or advantage. Do not participate in deliberations on, or the determination of, any matter affecting your financial interest either directly or indirectly. Matters affecting your financial interest include financial interests of family or reportable business entities. You also may not use your position as a director or employee of the institution to obtain special advantage or favoritism for yourself, your family, or a reportable business entity. However, you may participate in matters of general applicability affecting shareholders or borrowers of a particular class if your participation occurs in a nondiscriminatory way.
(2) Divulge confidential information. Do not make use of or disclose any fact, information, or document not generally available to the public that you acquired by virtue of your position as a director or employee of the institution. You may use confidential information in the performance of your official duties.
(3) Accept prohibited gifts. Do not solicit, obtain, or accept (directly or indirectly), any gift, fee, or other compensation that is offered or requested based on your position as a director or employee of an institution if it could be viewed as being offered to influence your decision-making, an official action, or to obtain information related to your institution’s operations.
(4) Purchase property owned by the institution. Do not knowingly purchase or otherwise acquire (directly or indirectly) any interest (including mineral interests) in any real or personal property that currently is owned, or within the past 12 months was owned, by your institution, your supervising institution, or institutions supervised by your institution as a result of foreclosure, deed in lieu, or similar action. The prohibition in this paragraph (a)(4) extends to property held or sold by a chartered service corporation or a System unincorporated business entity. The prohibition does not apply in the following situations:
(i) You acquire the property by inheritance.
(ii) You are exercising your rights of first refusal under section 4.36 of the Act.
(iii) If you are a director of the institution, you may purchase property from a System institution when the property is sold through public auction or similar open, competitive bidding process. The exception in this paragraph (a)(4)(iii) only applies if you did not participate in the decision to foreclose upon the property nor did you participate in deciding how the institution would dispose of the property. Participating in these decisions includes setting the sale terms or receiving information as a result of your position with the institution that could give you an advantage over other potential bidders or purchasers of the property.
(5) Enter into transactions with prohibited sources. Do not directly or indirectly borrow from, lend to, or become financially obligated with or on behalf of a director, employee, or agent of your institution, your supervising institution, or institution supervised by your institution. You are also prohibited from directly or indirectly borrowing, lending to, or becoming financially obligated with or on behalf of a borrower or loan applicant of your institution. The transaction prohibition does not apply to:
(i) Transactions with family members.
(ii) Transactions that occur in the ordinary course of business as determined and documented by the written policies and procedures of your institution.
(iii) Transactions undertaken in an official capacity and in connection with the institution’s discounting, lending, or participation relationships with other financing institutions (OFIs) and other lenders.
(6) Purchase System obligations. Do not purchase any obligation of a System institution, including any joint, consolidated or System-wide obligation, unless such obligation is part of an offering available to the public and you either purchase it through a dealer or dealer bank affiliated with a member of the selling group designated by the Funding Corporation or purchase it in the secondary markets.
(i) Do not purchase or retire any stock in advance of the release of material, non-public, information concerning the institution to other stockholders.
(ii) If you are a director or employee of the Funding Corporation, do not purchase or otherwise acquire, directly or indirectly, except by inheritance, any obligation or equity of a System institution, including any joint, consolidated or System-wide obligations, unless it is a common cooperative equity as defined in § 628.2 of this chapter.
(b) Employees only. In addition to the prohibitions under paragraph (a) of this section, if you are an institution employee you must not:
(1) Serve as a director or employee of certain entities. Do not serve as a director or employee of any commercial bank, savings and loan, or other non-System financial institution. You may not serve as a director or employee of a non-System entity that transacts business with a System institution within your institution’s district unless specifically allowed in this paragraph (b). For the purpose of this paragraph (b)(1), “transacts business” does not include loans by a System institution to a family-owned entity or a reportable business entity; service on the board of directors of the Federal Agricultural Mortgage Corporation; transactions with non-profit entities; or transactions with entities in which the System institution has an ownership interest. The prohibition in this paragraph (b)(1) does not apply in the following situations:
(i) You may serve as a director or employee of an employee credit union.
(ii) You may serve as a director of a cooperative that borrows from the System under the Act’s Title III authorities if you are not employed at an institution with Title III lending authority and your employing institution approves your service on the cooperative’s board.
(2) Act as a real estate agent or broker. Do not act as a real estate agent or broker unless you are buying or selling real estate for your own use or for family.
(3) Act as an insurance agent or broker. Do not act as an insurance agent or broker for the sale and placement of insurance, unless authorized by section 4.29 of the Act.
(4) Serve as a joint employee. Do not serve as an employee for your supervising institution if you are an officer at your association. Do not serve as an employee for a supervised institution if you are an officer at your Farm Credit bank. The prohibition in this paragraph (b)(4) does not apply in the following situations:
(i) You may be both a non-officer employee at a Farm Credit bank and a supervised association if the employment expenses are appropriately reflected in each institution’s financial statements.
(ii) If you are currently employed with a Farm Credit bank as other than an officer, in extraordinary circumstances, FCA may approve your serving as an officer of a supervised association. This requires the boards at both institutions to agree to the joint service and for the duties and compensation at each institution to be delineated in the board approval documents. The board documents, along with the request, must be sent at least 10 business days before the effective date to the Director of Regulatory Policy, Farm Credit Administration.
§§ 612.2155-612.2165 [Reserved]
§ 612.2170 Standards of Conduct Official.
(a) Authority. The Standards of Conduct Official must be appointed by the board of directors for the institution and the board of directors must empower the appointed SOCO with all of the following:
(1) Direct access to the board (or designated board committee) for the purpose of discussing and reporting on matters related to the institution’s Standards of Conduct Program and Code of Ethics;
(2) Authority to carry out the responsibilities set forth in this section;
(3) Accessibility to all directors, employees, and agents of the institution;
(4) Legal authority to receive confidential SOC program communications from all directors, employees, and agents of the institution; and
(5) Resources adequate for implementing a successful Standards of Conduct Program.
(b) Program administration. The Standards of Conduct Official must implement the institution’s Standards of Conduct Program as determined by the written policies and procedures of his or her institution and FCA regulations in this chapter. This may include, but is not limited to, the following:
(1) Providing guidance and information to directors and employees on conflicts of interest, including aiding in the identification of reportable conflicts of interest and reportable financial interests in accordance with this subpart;
(2) Receiving reports required under this subpart from directors, employees, and agents;
(3) Receiving from directors and officers the disclosures required under § 620.6(a), (e), and (f) of this chapter for treatment as a supplement to an individual’s conflicts of interest report;
(4) Reviewing and acting upon all SOC program reports and disclosures, including documenting resolved and unresolved conflicts of interest that are material, and making written determinations on how conflicts of interest will be resolved;
(5) Maintaining all SOC program records for the required period of time, including documentation that explains how conflicts are being handled;
(6) Conducting investigations as either authorized under this subpart or by the institution’s SOC program policies and procedures;
(7) Reporting promptly to the institution’s board of directors (or designated board committee) those SOC program or Code of Ethics matters required by the institution’s SOC program policies and procedures or FCA regulations in this chapter; and
(8) Reporting to the institution’s board of directors those activities investigated pursuant to paragraph (d) of this section.
(c) Training duties. The Standards of Conduct Official must give standards of conduct training to all directors and employees at the institution. The training must comply with the requirement of § 612.2137 and the institution’s Standards of Conduct policies and procedures. In addition to other matters, periodic training must cover updates or revisions to the institution’s SOC program and Code of Ethics. The SOCO must obtain written participation certifications from every director and employee taking the training.
(d) Investigative duties. The Standards of Conduct Official is responsible for investigating complaints alleging misconduct or possible criminal behavior by the institution, its directors, or its employees.
(1) At a minimum, the Standards of Conduct Official must investigate, or cause to be investigated, all cases involving:
(i) Possible violations of criminal statutes;
(ii) Possible violations of director or employee prohibited conduct regulations in § 612.2150, and the applicable institution policies and procedures;
(iii) Complaints of misconduct received against directors and employees of the institution;
(iv) Possible violations of other provisions of this part; and
(v) Suspected activities of a sensitive nature which could affect continued public confidence in the Farm Credit System.
(2) The SOCO serves as the reporting official for all cases investigated under subpart B of this part (criminal referrals). In this capacity, the SOCO must report to both the institution’s board and the Farm Credit Administration’s Office of General Counsel all cases where:
(i) A preliminary investigation indicates that a Federal criminal statute may have been violated;
(ii) An investigation results in the removal of a director or discharge of an employee; or
(iii) A violation may have an adverse impact on continued public confidence in the System or any of its institutions.
§ 612.2180 Standards of conduct for agents.
(a) Agents. Agents of System institutions must maintain high standards of honesty, integrity, and impartiality in order to ensure the proper performance of System business and continued public confidence in the System and all its institutions. The avoidance of misconduct and conflicts of interest is indispensable to the maintenance of these standards.
(b) Institutions. Each institution must use safe and sound business practices in the engagement, utilization, and retention of agents. These practices shall provide for the selection of qualified and reputable agents. The institution is responsible for the administration of relationships with its agents and must take appropriate investigative and corrective action in the case of a breach of fiduciary duties by an agent or failure of an agent to carry out other duties as required by contract, FCA regulations in this chapter, or law.
(c) Control. System institutions are responsible for exercising special diligence and control, through good business practices, to avoid or control situations that have inherent potential for sensitivity, either real or perceived. These areas include:
(1) The employment of agents who are related to directors or employees of the institutions;
(2) The solicitation and acceptance of gifts, contributions, or special considerations by agents; and
(3) The use of System and borrower information obtained in the course of the agent’s work with the institution.
(d) Enforcement. Agents of System institutions are “institution-affiliated parties” as that term is defined in the Act and therefore subject to certain FCA enforcement authorities contained in part C of title V of the Act. An “institution-affiliated party” is:
(1) A director, officer, employee, shareholder, or agent of a System institution;
(2) An independent contractor (including an attorney, appraiser, or accountant) who knowingly or recklessly participates in:
(i) A violation of law (including regulations) that is associated with the operations and activities of one or more System institutions;
(ii) A breach of fiduciary duty; or
(iii) An unsafe practice that causes or is likely to cause more than a minimum financial loss to, or a significant adverse effect on, a System institution; or
(3) Any other person, as determined by the Farm Credit Administration (by regulation or on a case-by-case basis) who participates in the conduct of the affairs of a System institution.
§§ 612.2260-612.2270 [Reserved]
Subpart B—Referral of Known or Suspected Criminal Violations
§ 612.2300 Purpose and scope.
(a) This part applies to all institutions of the Farm Credit System as defined in section 1.2(a) of the Farm Credit Act of 1971, as amended, (Act) (12 U.S.C. 2002(a)) including, but not limited to, associations, banks, service corporations chartered under section 4.25 of the Act, the Federal Farm Credit Banks Funding Corporation, the Farm Credit Leasing Services Corporation, and the Federal Agricultural Mortgage Corporation (hereinafter, institutions). The purposes of this part are to ensure public confidence in the Farm Credit System, to ensure the reporting of known or suspected criminal activity, to reduce potential losses to institutions, and to ensure the safety and soundness of institutions. This part requires that institutions use the Farm Credit Administration Criminal Referral Form (hereinafter FCA Referral Form) to notify the appropriate Federal authorities when any known or suspected Federal criminal violations of the type described in § 612.2301 are discovered by institutions.
(b) The specific referral requirements of this part apply to known or suspected criminal violations of the United States Code involving the assets, operations, or affairs of an institution. This part prescribes procedures for referring those violations to the proper Federal authorities and the Farm Credit Administration. No specific procedural requirements apply to the referral of violations of State or local laws.
(c) Nothing in this part should be construed as reducing in any way an institution’s ability to report known or suspected criminal activities to the appropriate investigatory or prosecuting authorities, whether Federal, State, or local, even when the circumstances in which a report is required under § 612.2301 are not present.
(d) It shall be the responsibility of each System institution to determine whether there appears to be a reasonable basis to conclude that a criminal violation has been committed and, if so, to report the matter to the proper law enforcement authorities for consideration of prosecution.
(e) Each referral required by § 612.2301(a) shall be made on the FCA Referral Form in accordance with the FCA Referral Form instructions relating to its filing and distribution.
§ 612.2301 Referrals.
(a) Each institution and its board of directors shall exercise due diligence to ensure the discovery, appropriate investigation, and reporting of criminal activity. Within 30 calendar days of determining that there is a known or suspected criminal violation of the United States Code involving or affecting its assets, operations, or affairs, the institution shall refer such criminal violation to the appropriate regional offices of the United States Attorney, and the Federal Bureau of Investigation or the United States Secret Service or both, using the FCA Referral Form. A copy of the completed FCA Referral Form, accompanied by any relevant documentation, shall be provided at the same time to the Farm Credit Administration’s Office of General Counsel. In the event that a Farm Credit bank makes a loan through a Federal land bank association which services the loan, the Federal land bank association must inform the Farm Credit bank of any known or suspected violation involving that loan and the Farm Credit bank shall refer the violation to Federal law enforcement authorities under this section. A report is required in circumstances where there is:
(1) Any known or suspected criminal activity (e.g., theft, embezzlement), mysterious disappearance, unexplained shortage, misapplication, or other defalcation of property and/or funds, regardless of amount, where an institution employee, officer, director, agent, or other person participating in the conduct of the affairs of such an institution is suspected;
(2) Any known or suspected criminal activity involving an actual or potential loss of $5,000 or more, through false statements or other fraudulent means, where the institution has a substantial basis for identifying a possible suspect or group of suspects and the suspect(s) is not an institution employee, officer, director, agent, or other person participating in the conduct of the affairs of such an institution;
(3) Any known or suspected criminal activity involving an actual or potential loss of $25,000 or more, through false statements or other fraudulent means, where the institution has no substantial basis for identifying a possible suspect or group of suspects; or
(4) Any known or suspected criminal activity involving a financial transaction in which the institution was used as a conduit for such criminal activity (such as money laundering/structuring schemes).
(b) In circumstances where there is a known or suspected violation of State or local criminal law, the institution shall notify the appropriate State or local law enforcement authorities.
(c) In addition to the requirements of paragraph (a) of this section, the institution shall immediately notify by telephone the appropriate Federal law enforcement authorities and FCA offices specified on the FCA Referral Form upon determining that a known or suspected criminal violation of Federal law requiring urgent attention has occurred or is ongoing. Such cases include, but are not limited to, those where:
(1) There is a likelihood that the suspect(s) will flee;
(2) The magnitude or the continuation of the known or suspected criminal violation may imperil the institution’s continued operation; or
(3) Key institution personnel are involved.
§ 612.2302 Notification of board of directors and bonding company.
(a) The institution’s board of directors shall be promptly notified of any criminal referral by the institution, except that if the criminal referral involves a member of the board of directors, discretion may be exercised in notifying such member of the referral.
(b) The institution involved shall promptly make all required notifications under any applicable surety bond or other contract for protection.
§ 612.2303 Institution responsibilities.
Each institution shall establish effective policies and procedures designed to ensure compliance with this part, including, but not limited to, adequate internal controls.
PART 613—ELIGIBILITY AND SCOPE OF FINANCING
Subpart A—Financing Under Titles I and II of the Farm Credit Act
§ 613.3000 Financing for farmers, ranchers, and aquatic producers or harvesters.
(a) Definitions. For purposes of this subpart, the following definitions apply:
(1) Bona fide farmer or rancher means a person owning agricultural land or engaged in the production of agricultural products, including aquatic products under controlled conditions.
(2) Legal entity means any partnership, corporation, estate, trust, or other legal entity that is established pursuant to the laws of the United States, any State thereof, the Commonwealth of Puerto Rico, the District of Columbia, or any tribal authority and is legally authorized to conduct a business.
(3) Person means a legal entity or an individual who is a citizen of the United States or a foreign national who has been lawfully admitted into the United States either for permanent residency pursuant to 8 U.S.C. 1101(a)(20) or on a visa pursuant to a provision in 8 U.S.C. 1101(a)(15) that authorizes such individual to own property or operate or manage a business or a legal entity.
(4) Producer or harvester of aquatic products means a person engaged in producing or harvesting aquatic products for economic gain in open waters under uncontrolled conditions.
(b) Eligible borrower. Farm Credit institutions that operate under titles I or II of the Act may provide financing to a bona fide farmer or rancher, or producer or harvester of aquatic products for any agricultural or aquatic purpose and for other credit needs.
§ 613.3005 Lending objective.
It is the objective of each bank and association, except for banks for cooperatives, to provide full credit, to the extent of creditworthiness, to the full-time bona fide farmer (one whose primary business and vocation is farming, ranching, or producing or harvesting aquatic products); and conservative credit to less than full-time farmers for agricultural enterprises, and more restricted credit for other credit requirements as needed to ensure a sound credit package or to accommodate a borrower’s needs as long as the total credit results in being primarily an agricultural loan. However, the part-time farmer who needs to seek off-farm employment to supplement farm income or who desires to supplement off-farm income by living in a rural area and is carrying on a valid agricultural operation, shall have availability of credit for mortgages, other agricultural purposes, and family needs in the preferred position along with full-time farmers. Loans to farmers shall be on an increasingly conservative basis as the emphasis moves away from the full-time bona fide farmer to the point where agricultural needs only will be financed for the applicant whose business is essentially other than farming. Credit shall not be extended where investment in agricultural assets for speculative appreciation is a primary factor.
§ 613.3010 Financing for processing or marketing operations.
(a) Eligible borrowers. A borrower is eligible for financing for a processing or marketing operation under titles I and II of the Act only if the borrower:
(1) Is a bona fide farmer, rancher, or producer or harvester of aquatic products who regularly produces some portion of the throughput used in the processing or marketing operation; or
(2) Is a legal entity not eligible under paragraph (a)(1) of this section in which eligible borrowers under § 613.3000(b) own more than 50 percent of the voting stock or equity and regularly produce some portion of the throughput used in the processing or marketing operation; or
(3) Is a legal entity not eligible under paragraph (a)(1) of this section in which eligible borrowers under § 613.3000(b) own 50 percent or less of the voting stock or equity, regularly produce some portion of the throughput used in the processing or marketing operation and:
(i) Exercise majority voting control over the legal entity; or
(ii) Constitute a majority of the directors of a corporation, general partners of a limited partnership, or managing members of a limited liability company who exercise control over the legal entity by determining and overseeing the policies, business practices, management, and decision-making process of the legal entity; or
(4) Is a legal entity not eligible under paragraph (a)(1) of this section in which eligible borrowers under § 613.3000(b) meet all of the following criteria:
(i) Own at least 25 percent of the voting stock or equity in the processing or marketing operation;
(ii) Regularly produce 20 percent or more of the throughput used in the processing or marketing operation;
(iii) Maintain representation on the board of directors or in the applicable management structure of the entity.
(5) Is a legal entity not eligible under paragraph (a)(1) of this section that is a direct extension or outgrowth of an eligible borrower’s operation and meets all of the following criteria:
(i) The legal entity was created for the primary purpose of processing or marketing the eligible borrower’s throughput and would not exist but for the eligible borrower’s involvement,
(ii) The legal entity fulfills a business need and supports the operation of the eligible borrower through product branding or other value-added business activity directly related to the operations of the eligible borrower,
(iii) The legal entity and the eligible borrower coordinate to operate in a functionally integrated manner, and
(iv) The legal entity regularly receives throughput produced by the eligible borrower representing either:
(A) At least 20 percent of the throughput used by the legal entity in the processing or marketing operation; or
(B) At least 50 percent of the eligible borrower’s total output of the commodity processed or marketed.
(b) Portfolio restrictions for certain processing and marketing loans. Processing or marketing loans to eligible borrowers who regularly supply less than 20 percent of the throughput are subject to the following restrictions:
(1) Bank limitation. The aggregate of such processing and marketing loans made by a Farm Credit bank shall not exceed 15 percent of all its outstanding retail loans at the end of the preceding fiscal year.
(2) Association limitation. The aggregate of such processing and marketing loans made by all direct lender associations affiliated with the same Farm Credit bank shall not exceed 15 percent of the aggregate of their outstanding retail loans at the end of the preceding fiscal year. Each Farm Credit bank, in conjunction with all its affiliated direct lender associations, shall ensure that such processing or marketing loans are equitably allocated among its affiliated direct lender associations.
(3) Calculation of outstanding retail loans. For the purposes of this paragraph, “outstanding retail loans” includes loans, loan participations, and other interests in loans that are either bought without recourse or sold with recourse.
(c) Reporting requirements. Each System institution shall include information on loans made under authority of this section in the Reports of Condition and Performance required under § 621.12 of this chapter, in the format prescribed by FCA reporting instructions.
(d) Institution policies. The board of directors of each System institution making processing and marketing loans to legal entities under authority of this section must adopt a policy that addresses eligibility requirements for such entities and ensures that the institution, at a minimum, develops and implements:
(1) Procedures on how, at or before the time a loan is made, the institution will document:
(i) Eligible borrower ownership, control, throughput, integration of operations and other factors, as applicable, sufficient to establish eligibility of legal entities at the time a loan is made under this section; and
(ii) Each legal entity’s plan and intent for maintaining eligible borrower ownership, control, throughput, and integration of operations, as applicable, during the duration of the loan;
(2) Procedures that encourage financing under paragraph (a)(4) of this section of credit-worthy entities whose operations directly benefit producers, have local community investment support and provide accessible ownership opportunities for local farmers and ranchers.
(3) Procedures for determining functional integration for loans made under paragraph (a)(5) of this section that require consideration of all relevant facts and circumstances, which include the extent to which:
(i) The operations share resources such as management, employees, facilities, and equipment;
(ii) The operations are conducted in coordination with or reliance upon each other; and
(iii) The eligible borrower and legal entity are dependent upon each other for economic success.
(4) Portfolio restrictions necessary to comply with paragraph (b) of this section and any board-defined limits on financing provided under this section; and
(5) Reporting requirements necessary to comply with paragraph (c) of this section and any board-defined reporting on financing provided under this section.
(a) Eligibility. An individual or legal entity that furnishes farm-related services to farmers and ranchers that are directly related to their agricultural production is eligible to borrow from a Farm Credit bank or association that operates under titles I or II of the Act.
(b) Purposes of financing. A Farm Credit Bank, agricultural credit bank, or direct lender association may finance:
(1) All of the farm-related business activities of an eligible borrower who derives more than 50 percent of its annual income (as consistently measured on either a gross sales or net sales basis) from furnishing farm-related services that are directly related to the agricultural production of farmers and ranchers; or
(2) Only the farm-related services activities of an eligible borrower who derives 50 percent or less of its annual income (as consistently measured on either a gross sales or net sales basis) from furnishing farm-related services that are directly related to the agricultural production of farmers and ranchers.
(c) Limitation. The authority of Farm Credit banks and associations operating under section 1.7(a) of the Act to finance eligible farm-related service businesses under paragraphs (b)(1) and (b)(2) of this section is limited to necessary capital structures, equipment, and initial working capital.
§ 613.3030 Rural home financing.
(a) Definitions. (1) Rural homeowner means an individual who resides in a rural area and is not a bona fide farmer, rancher, or producer or harvester of aquatic products.
(2) Rural home means a single-family moderately priced dwelling located in a rural area that will be owned and occupied as the rural homeowner’s principal residence.
(3) Rural area means open country within a State or the Commonwealth of Puerto Rico, which may include a town or village that has a population of not more than 2,500 persons.
(4) Moderately priced means the price of any rural home that either:
(i) Satisfies the criteria in section 8.0 of the Act pertaining to rural home loans that collateralize securities that are guaranteed by the Federal Agricultural Mortgage Corporation; or
(ii) Is otherwise determined to be moderately priced for housing values for the rural area where it is located, as documented by data from a credible, independent, and recognized national or regional source, such as a Federal, State, or local government agency, or an industry source. Housing values at or below the 75th percentile of values reflected in such data will be deemed moderately priced.
(b) Eligibility. Any rural homeowner is eligible to obtain financing on a rural home. No borrower shall have a loan from the Farm Credit System on more than one rural home at any one time.
(c) Purposes of financing. Loans may be made to rural homeowners for the purpose of buying, building, remodeling, improving, repairing rural homes, and refinancing existing indebtedness thereon.
(d) Portfolio limitations. (1) The aggregate of retail rural home loans by any Farm Credit Bank or agricultural credit bank shall not exceed 15 percent of the total of all of its outstanding loans at any one time.
(2) The aggregate of rural home loans made by each direct lender association shall not exceed 15 percent of the total of its outstanding loans at the end of its preceding fiscal year, except with the prior approval of its funding bank.
(3) The aggregate of rural home loans made by all direct lender associations that are funded by the same Farm Credit bank shall not exceed 15 percent of the total outstanding loans of all such associations at the end of the funding bank’s preceding fiscal year.
Subpart B—Financing for Banks Operating Under Title III of the Farm Credit Act
§ 613.3100 Domestic lending.
(a) Definitions. For purposes of this subpart, the following definitions apply:
(1) Cooperative means any association of farmers, ranchers, producers or harvesters of aquatic products, or any federation of such associations, or a combination of such associations and farmers, ranchers, or producers or harvesters of aquatic products that conducts business for the mutual benefit of its members and has the power to:
(i) Process, prepare for market, handle, or market farm or aquatic products;
(ii) Purchase, test, grade, process, distribute, or furnish farm or aquatic supplies; or
(iii) Furnish business and financially related services to its members.
(2) Farm or aquatic supplies and farm or aquatic business services are any goods or services normally used by farmers, ranchers, or producers and harvesters of aquatic products in their business operations, or to improve the welfare or livelihood of such persons.
(3) Public utility means a cooperative or other entity that is licensed under Federal, State, or local law to provide electric, telecommunication, cable television, water, or waste treatment services.
(4) Rural area means all territory of a State that is not within the outer boundary of any city or town having a population of more than 20,000 inhabitants based on the latest decennial census of the United States.
(5) Service cooperative means a cooperative that is involved in providing business and financially related services (other than public utility services) to farmers, ranchers, aquatic producers or harvesters, or their cooperatives.
(b) Cooperatives and other entities that serve agricultural or aquatic producers—(1) Eligibility of cooperatives. A bank for cooperatives or an agricultural credit bank may lend to a cooperative that satisfies the following requirements:
(i) Unless the bank’s board of directors establishes by resolution a higher voting control threshold for any type of cooperative, the percentage of voting control of the cooperative held by farmers, ranchers, producers or harvesters of aquatic products, or cooperatives shall be 80 percent except:
(A) Sixty (60) percent for a service cooperative;
(B) Sixty (60) percent for local farm supply cooperatives that have historically served the needs of a community that would not be adequately served by other suppliers and have experienced a reduction in the percentage of membership by agricultural or aquatic producers due to changed circumstances beyond their control; and
(C) Sixty (60) percent for local farm supply cooperatives that provide or will provide needed services to a community, and are or will be in competition with a cooperative specified in § 613.3100(b)(1)(i)(B);
(ii) The cooperative deals in farm or aquatic products, or products processed therefrom, farm or aquatic supplies, farm or aquatic business services, or financially related services with or for members in an amount at least equal in value to the total amount of such business it transacts with or for non-members, excluding from the total of member and non-member business, transactions with the United States, or any agencies or instrumentalities thereof, or services or supplies furnished by a public utility; and
(iii) The cooperative complies with one of the following two conditions:
(A) No member of the cooperative shall have more than one vote because of the amount of stock or membership capital owned therein; or
(B) The cooperative restricts dividends on stock or membership capital to the maximum percentage per year permitted by applicable state law.
(iv) Any cooperative that has received a loan from a bank for cooperatives or an agricultural credit bank shall, without regard to the requirements in paragraph (b)(1) of this section, continue to be eligible for as long as more than 50 percent (or such higher percentage as is established by the bank board) of the voting control of the cooperative is held by farmers, ranchers, producers or harvesters of aquatic products, or other eligible cooperatives.
(2) Other eligible entities. The following entities are eligible to borrow from banks for cooperatives and agricultural credit banks:
(i) Any legal entity that holds more than 50 percent of the voting control of a cooperative that is an eligible borrower under paragraph (b)(1) of this section and uses the proceeds of the loan to fund the activities of its cooperative subsidiary on the terms and conditions specified by the bank;
(ii) Any legal entity in which an eligible cooperative (or a subsidiary or other entity in which an eligible cooperative has an ownership interest) has an ownership interest, provided that if the percentage of ownership attributable to the eligible cooperative is less than 50 percent, financing may not exceed the percentage of ownership attributable to the eligible cooperative multiplied by the value of the total assets of such entity; or
(iii) Any creditworthy private entity operated on a non-profit basis that satisfies the requirements for a service cooperative and complies with the requirements of either paragraphs (b)(1)(i)(A) and (b)(1)(iii) of this section, or paragraph (b)(1)(iv) of this section, and any subsidiary of such entity. An entity that is eligible to borrow under this paragraph shall be organized to benefit agriculture in furtherance of the welfare of the farmers, ranchers, and aquatic producers or harvesters who are its members.
(c) Electric and telecommunication utilities—(1) Eligibility. A bank for cooperatives or an agricultural credit bank may lend to:
(i) Electric and telephone cooperatives as defined by section 3.8(a)(4)(A) of the Act that satisfy the eligibility criteria in paragraph (b)(1) of this section;
(ii) Cooperatives and other entities that:
(A) Have received a loan, loan commitment, insured loan, or loan guarantee from the Rural Utilities Service of the United States Department of Agriculture to finance rural electric and telecommunication services;
(B) Have received a loan or a loan commitment from the Rural Telephone Bank of the United States Department of Agriculture; or
(C) Are eligible under the Rural Electrification Act of 1936, as amended, for a loan, loan commitment, or loan guarantee from the Rural Utilities Service or the Rural Telephone Bank.
(iii) The subsidiaries of cooperatives or other entities that are eligible under paragraph (c)(1)(ii) of this section.
(iv) Any legal entity that holds more than 50 percent of the voting control of any public utility that is an eligible borrower under paragraph (c)(1)(ii) of this section, and uses the proceeds of the loan to fund the activities of the eligible subsidiary on the terms and conditions specified by the bank.
(v) Any legal entity in which an eligible utility under paragraph (c)(1)(ii) of this section (or a subsidiary or other entity in which an eligible utility under paragraph (c)(1)(ii) has an ownership interest) has an ownership interest, provided that if the percentage of ownership attributable to the eligible utility is less than 50 percent, financing may not exceed the percentage of ownership attributable to the eligible utility multiplied by the value of the total assets of such entity.
(2) Purposes for financing. A bank for cooperatives or agricultural credit bank may extend credit to entities that are eligible to borrow under paragraph (c)(1) of this section in order to provide electric or telecommunication services in a rural area. A subsidiary that is eligible to borrow under paragraph (c)(1)(iii) of this section may also obtain financing from a bank for cooperatives or agricultural credit bank for energy-related or public utility-related purposes that cannot be financed by the lenders referred to in paragraph (c)(1)(ii), including, without limitation, financing to operate a licensed cable television utility.
(d) Water and waste disposal facilities—(1) Eligibility. A cooperative or a public agency, quasi-public agency, body, or other public or private entity that, under the authority of state or local law, establishes and operates water and waste disposal facilities in a rural area, as that term is defined by paragraph (a)(4) of this section, is eligible to borrow from a bank for cooperatives or an agricultural credit bank.
(2) Purposes for financing. A bank for cooperatives or agricultural credit bank may extend credit to entities that are eligible under paragraph (d)(1) of this section solely for installing, maintaining, expanding, improving, or operating water and waste disposal facilities in rural areas.
(e) Domestic lessors. A bank for cooperatives or agricultural credit bank may lend to domestic parties to finance the acquisition of facilities or equipment that will be leased to shareholders of the bank for use in their operations located inside of the United States.
§ 613.3200 International lending.
(a) Definitions. For the purpose of this section only, the following definitions apply:
(1) Agricultural supply includes:
(i) A farm supply; and
(ii) Agriculture-related processing equipment, agriculture-related machinery, and other capital goods related to the storage or handling of agricultural commodities or products.
(2) Farm supply refers to an input that is used in a farming or ranching operation.
(b) Import transactions. The following parties are eligible to borrow from a bank for cooperatives or an agricultural credit bank pursuant to section 3.7(b) of the Act for the purpose of financing the import of agricultural commodities or products therefrom, aquatic products, and agricultural supplies into the United States:
(1) An eligible cooperative as defined by § 613.3100(b);
(2) A counterparty with respect to a specific import transaction with a voting stockholder of the bank for the substantial benefit of the shareholder; and
(3) Any foreign or domestic legal entity in which eligible cooperatives hold an ownership interest.
(c) Export transactions. Pursuant to section 3.7(b)(2) of the Act, a bank for cooperatives or an agricultural credit bank is authorized to finance the export (including the cost of freight) of agricultural commodities or products therefrom, aquatic products, or agricultural supplies from the United States to any foreign country. The board of directors of each bank for cooperatives and agricultural credit bank shall adopt policies that ensure that exports of agricultural products and commodities, aquatic products, and agricultural supplies which originate from eligible cooperatives are financed on a priority basis. The total amount of balances outstanding on loans made under this paragraph shall not, at any time, exceed 50 percent of the capital of any bank for cooperatives or agricultural credit bank for loans that:
(1) Finance the export of agricultural commodities and products therefrom, aquatic products, or agricultural supplies that are not originally sourced from an eligible cooperative; and
(2) At least 95 percent of the loan amount is not guaranteed by a department, agency, bureau, board, or commission of the United States or a corporation that is wholly owned directly or indirectly by the United States.
(d) International business operations. A bank for cooperatives or an agricultural credit bank may finance a domestic or foreign entity which is at least partially owned by eligible cooperatives described in § 613.3100(b), and facilitates the international business operations of such cooperatives.
(e) Restrictions. (1) When eligible cooperatives own less than 50 percent of a foreign or domestic legal entity, the amount of financing that a bank for cooperatives or agricultural credit bank may provide to the entity for imports, exports, or international business operations shall not exceed the percentage of ownership that eligible cooperatives hold in such entity multiplied by the value of the total assets of such entity; and
(2) A bank for cooperatives or agricultural credit bank shall not finance the relocation of any plant or facility from the United States to a foreign country.
Subpart C—Similar Entity Authority Under Sections 3.1(11)(B) and 4.18A of the Act
§ 613.3300 Participations and other interests in loans to similar entities.
(a) Definitions. (1) Participate and participation, for the purpose of this section, refer to multi-lender transactions, including syndications, assignments, loan participations, subparticipations, other forms of the purchase, sale, or transfer of interests in loans, or other extensions of credit, or other technical and financial assistance.
(2) Similar entity means a party that is ineligible for a loan from a Farm Credit bank or association, but has operations that are functionally similar to the activities of eligible borrowers in that a majority of its income is derived from, or a majority of its assets are invested in, the conduct of activities that are performed by eligible borrowers.
(b) Similar entity transactions. A Farm Credit bank or a direct lender association may participate with a lender that is not a Farm Credit System institution in loans to a similar entity that is not eligible to borrow directly under § 613.3000, § 613.3010, § 613.3020, § 613.3100, or § 613.3200, for purposes similar to those for which an eligible borrower could obtain financing from the participating FCS institution.
(c) Restrictions. Participations by a Farm Credit bank or association in loans to a similar entity under this section are subject to the following limitations:
(1) Lending limits—(i) Farm Credit banks operating under title I of the Act and direct lender associations. The total amount of all loan participations that any Farm Credit bank, agricultural credit bank, or direct lender association has outstanding under paragraph (b) of this section to a single credit risk shall not exceed:
(A) Ten (10) percent of its total capital; or
(B) Twenty-five (25) percent of its total capital if a majority of voting stockholders voting of the respective Farm Credit bank or direct lender association so approve.
(ii) Farm Credit banks operating under title III of the Act. The total amount of all loan participations that any bank for cooperatives or agricultural credit bank has outstanding under paragraph (b) of this section to a single credit risk shall not exceed 10 percent of its total capital;
(2) 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; and
(3) Portfolio limitations. The total amount of participations that any Farm Credit bank or direct lender association has outstanding under paragraph (b) of this section shall not exceed 15 percent of its total outstanding assets at the end of its preceding fiscal year.
(d) Approval by other Farm Credit System institutions. A bank for cooperatives or agricultural credit bank may not participate in a loan to a similar entity under title III of the Act if the similar entity has a loan or loan commitment outstanding with a Farm Credit Bank or an association chartered under the Act, unless agreed to by the Farm Credit Bank or association.
PART 614—LOAN POLICIES AND OPERATIONS
Subpart A—Lending Authorities
§ 614.4000 Farm Credit Banks.
(a) Long-term real estate lending. Except to the extent such authorities are transferred pursuant to section 7.6 of the Act, Farm Credit Banks are authorized, subject to the requirements in § 614.4200 of this part, to make real estate mortgage loans with maturities of not less than 5 years nor more than 40 years and continuing commitments to make such loans.
(b) Extensions of credit to Farm Credit direct lender associations. Farm Credit Banks are authorized to make loans and extend other similar financial assistance to associations with direct lending authority and discount for or purchase from such associations, with the association’s endorsement or guaranty, any note, draft, and other obligations for loans that have been made in accordance with the provisions of subparts D and E of part 614 of these regulations. Such extensions of credit shall be made pursuant to a written financing agreement meeting the requirements of § 614.4125.
(c) Extensions of credit to other financing institutions. Farm Credit Banks are authorized to make loans and extend other similar financial assistance to any national bank, State bank, trust company, agricultural credit corporation, incorporated livestock loan company, savings institution, credit union, or any association of agricultural producers or any corporation engaged in the making of loans to farmers and ranchers or producers or harvesters of aquatic products (collectively, “other financing institutions”), for purposes eligible for financing by a production credit association in accordance with § 614.4130 and subpart P of this part. Farm Credit Banks are authorized to discount for or purchase from such institutions, with the institution’s endorsement or guaranty, notes, drafts, and other obligations or loans made to persons and for purposes eligible for financing by a production credit association, in accordance with § 614.4130 and subpart P of this part.
(d) Loan participations. Subject to the requirements of subpart H of part 614, a Farm Credit Bank may enter into loan participation agreements with:
(1) Farm Credit banks and associations that are direct lenders and lenders that are not Farm Credit institutions on loans of the type it is authorized to make under title I of the Act;
(2) Farm Credit banks and associations that are direct lenders on loans it is not authorized to make, provided the borrower eligibility, membership, term, amount, loan security, and stock or participation certificate requirements of the originating institution are met; and
(3) The Federal Agricultural Mortgage Corporation to the extent provided in § 614.4055.
(e) Other interests in loans. (1) Subject to the requirements of subpart H of this part, Farm Credit Banks may sell interests in loans only to:
(i) Farm Credit System institutions authorized to purchase such interests;
(ii) Other lenders that are not Farm Credit System institutions; and
(iii) Any certified agricultural mortgage marketing facility, as defined by section 8.0(3) of the Act, for the purpose of pooling and securitizing such loans under title VIII of the Act.
(2) Subject to the requirements of subpart H of this part, Farm Credit Banks may purchase interests other than participation interests in loans and nonvoting stock from other Farm Credit System institutions.
(3) Farm Credit Banks, in their capacity as certified agricultural mortgage marketing facilities under title VIII of the Act, may purchase interests in loans (other than participation interests authorized in paragraph (d) of this section) from institutions other than Farm Credit System institutions only for the purpose of pooling and securitizing such loans under title VIII of the Act.
(f) Residual powers after the transfer of lending authority to an association. After transferring its authority to make and participate in long-term real estate loans to an agricultural credit association or a Federal land credit association pursuant to section 7.6(a) of the Act and subpart E of part 611 of these regulations, a Farm Credit Bank retains residual authority to:
(1) Enter into loan participation agreements pursuant to paragraph (d) of this section;
(2) Purchase or sell other interests in loans in accordance with paragraph (e) of this section; and
(3) Make long-term real estate loans in accordance with paragraph (a) of this section in areas of its chartered territory where no active association operates.
§ 614.4010 Agricultural credit banks.
(a) Long-term real estate lending. Except to the extent such authorities are transferred pursuant to section 7.6 of the Act, agricultural credit banks are authorized, subject to the requirements of § 614.4200, to make real estate mortgage loans with maturities of not less than 5 years nor more than 40 years and continuing commitments to make such loans.
(b) Extensions of credit to Farm Credit direct lender associations. Agricultural credit banks are authorized to make loans and extend other similar financial assistance to associations with direct lending authority and discount for or purchase from such associations, with the association’s endorsement or guaranty, any note, draft, and other obligations for loans made by the association in accordance with the provisions of this part. Such extensions of credit shall be made pursuant to a written financing agreement meeting the requirements of § 614.4125.
(c) Extensions of credit to other financing institutions. Agricultural credit banks are authorized to make loans and extend other similar financial assistance to any national bank, State bank, trust company, agricultural credit corporation, incorporated livestock loan company, savings institution, credit union, or any association of agricultural producers or corporation engaged in the making of loans to farmers, ranchers, or producers or harvesters of aquatic products (collectively, “other financing institutions”), for purposes eligible for financing by a production credit association, in accordance with § 614.4130 and subpart P of this part. Agricultural credit banks are authorized to discount for or purchase from such other financing institutions, with the institution’s endorsement or guaranty, notes, drafts, and other obligations or loans made to persons and for purposes eligible for financing by a production credit association, in accordance with the requirements of § 614.4130 and subpart P of this part.
(d) Extensions of credit to or on behalf of eligible cooperatives. Agricultural credit banks are authorized to make loans and commitments and extend other technical and financial assistance, including but not limited to, collateral custody, discounting notes and other obligations, guarantees, and currency exchanges necessary to service transactions financed under paragraphs (d)(4) and (d)(5) of this section, to:
(1) Eligible cooperatives, as defined in § 613.3100(b)(1), in accordance with §§ 614.4200, 614.4231, 614.4232, 614.4233, and subpart Q of part 614;
(2) Other eligible entities, as defined in § 613.3100(b)(2), in accordance with §§ 614.4200, 614.4231, and 614.4232;
(3) Domestic lessors, for the purpose of providing leased assets to stockholders of the bank eligible to borrow under section 3.7(a) of the Act for use in such stockholders’ operations in the United States, in accordance with § 614.4232;
(4) Domestic or foreign parties with respect to a transaction with a voting stockholder of the bank, for the import of agricultural commodities, farm supplies, or aquatic products through purchases, sales or exchanges, provided such stockholder substantially benefits as a result of such extension of credit or assistance, in accordance with policies of the bank’s board, § 614.4233, and subpart Q of part 614; and
(5) Domestic or foreign parties in which a voting stockholder of the bank has a minimum ownership interest, for the purpose of facilitating such stockholder’s import operations of the type described in paragraph (d)(4) of this section, provided the stockholder substantially benefits as a result of such extension of credit or assistance, in accordance with policies of the bank’s board, § 614.4233, and subpart Q of part 614.
(6) Any party, subject to the requirements in § 613.3200(c) of this chapter, for the export (including the cost of freight) of agricultural commodities or products therefrom, aquatic products, or farm supplies from the United States to any foreign country, in accordance with § 614.4233 and subpart Q of this part 614; and
(7) Domestic or foreign parties in which eligible cooperatives, as defined in § 613.3100 of this chapter, hold an ownership interest, for the purpose of facilitating the international business operations of such cooperatives pursuant to the requirements of § 613.3200 (d) and (e) of this chapter.
(e) Loan participations. Subject to the requirements of subpart H of this part, an agricultural credit bank may enter into loan participation agreements with:
(1) Farm Credit banks and associations that are direct lenders and lenders that are not Farm Credit institutions on loans of the type it is authorized to make under the Act;
(2) Farm Credit banks and associations that are direct lenders on loans it is not authorized to make, provided the borrower eligibility, membership, term, amount, loan security, and stock or participation certificate requirements of the originating institution are met; and
(3) The Federal Agricultural Mortgage Corporation to the extent provided in § 614.4055.
(f) Other interest in loans. (1) Subject to subpart H of this part, agricultural credit banks may sell interests in real estate mortgage loans identified in paragraph (a) of this section to Farm Credit System institutions authorized to purchase such interests, other lenders, and certified agricultural mortgage marketing facilities for the Federal Agricultural Mortgage Corporation. Agricultural credit banks may also sell interests in the types of loans listed in paragraph (d) of this section to other Farm Credit System institutions that are authorized to purchase such interests.
(2) Subject to the requirements of subpart H of this part, agricultural credit banks may purchase interests other than participation interests in loans and nonvoting stock from other Farm Credit System institutions.
(3) Agricultural credit banks, in their capacity as certified agricultural mortgage marketing facilities under title VIII of the Act, may purchase interests in loans (other than participation interests authorized in paragraph (e) of this section) from institutions other than Farm Credit System institutions only for the purpose of pooling and securitizing such loans under title VIII of the Act.
(g) Residual powers after the transfer of lending authority to an association. After transferring its authority to make and participate in long-term real estate loans to an agricultural credit association or a Federal land credit association pursuant to section 7.6(a) of the Act and subpart E of part 611 of these regulations, an agricultural credit bank retains residual authority to:
(1) Enter into loan participation agreements pursuant to paragraph (e) of this section;
(2) Purchase or sell other interests in loans in accordance with paragraph (f) of this section; and
(3) Make long-term real estate loans in accordance with paragraph (a) of this section in areas of its chartered territory where no active association operates.
§ 614.4020 Banks for cooperatives.
(a) Banks for cooperatives are authorized to make loans and commitments and extend other technical and financial assistance, including but not limited to, collateral custody, discounting notes and other obligations, guarantees, and currency exchanges necessary to service transactions financed under paragraphs (a)(4) and (a)(5) of this section, to:
(1) Eligible cooperatives, as defined in § 613.3100(b)(1), in accordance with §§ 614.4200, 614.4231, 614.4232, 614.4233, and subpart Q of this part;
(2) Other eligible entities as defined in § 613.3100(b)(2), in accordance with §§ 614.4200, 614.4231, and 614.4232;
(3) Domestic lessors, for the purpose of providing leased assets to stockholders of the bank eligible to borrow under section 3.7(a) of the Act for use in such stockholder’s operations in the United States, in accordance with § 614.4232;
(4) Domestic or foreign parties with respect to a transaction with a voting stockholder of the bank, for the import of agricultural commodities, farm supplies, or aquatic products through purchases, sales or exchanges, provided such stockholder substantially benefits as a result of such extension of credit or assistance, in accordance with policies of the bank’s board, § 614.4233, and subpart Q of this part; and
(5) Domestic or foreign parties in which a voting stockholder of the bank has an ownership interest, for the purpose of facilitating the import operations of the type described in paragraph (a)(4) of this section, in accordance with policies of the bank’s board, § 614.4233, and subpart Q of this part.
(6) Any party, subject to the requirements in § 613.3200(c) of this chapter, for the export (including the cost of freight) of agricultural commodities or products therefrom, aquatic products, or farm supplies from the United States to any foreign country, in accordance with § 614.4233 and subpart Q of this part; and
(7) Domestic or foreign parties in which eligible cooperatives, as defined in § 613.3100 of this chapter, hold an ownership interest, for the purpose of facilitating the international business operations of such cooperatives pursuant to the requirements in § 613.3200 (d) and (e) of this chapter.
(b) Loan participations. Subject to the requirements of subpart H of this part, a bank for cooperatives may enter into loan participation agreements with:
(1) Farm Credit banks and associations that are direct lenders and lenders that are not Farm Credit institutions on loans of the type it is authorized to make under title III of the Act;
(2) Farm Credit banks and associations that are direct lenders on loans of the type it is not authorized to make, provided the borrower eligibility, membership, term, amount, loan security, and stock or participation certificate requirements of the originating institution are met; and
(3) The Federal Agricultural Mortgage Corporation to the extent provided in § 614.4055.
§ 614.4030 Federal land credit associations.
(a) Long-term real estate lending. Federal land credit associations are authorized, subject to the requirments of § 614.4200, to make real estate mortgage loans with maturities of not less than 5 years nor more than 40 years and continuing commitments to make such loans.
(b) Loan participations. Subject to the requirements of subpart H of this part, Federal land credit associations may enter into participation agreements with:
(1) Farm Credit banks and associations that are direct lenders and lenders that are not Farm Credit institutions on loans of the type it is authorized to make under title I of the Act;
(2) Farm Credit banks and associations that are direct lenders on loans it is not authorized to make, provided the borrower eligibility, membership, term, amount, loan security, and stock or participation certificate requirements of the originating institution are met; and
(3) The Federal Agricultural Mortgage Corporation to the extent provided in § 614.4055.
(c) Other interests in loans. (1) Subject to the requirements of subpart H of this part and the supervision of their respective funding banks, Federal land credit associations may sell interests in loans made under paragraph (a) of this section only to:
(i) Farm Credit System institutions, as authorized by their respective funding banks;
(ii) Other lenders that are not Farm Credit System institutions, as authorized by their respective funding banks; and
(iii) Any certified agricultural mortgage marketing facility, as defined by section 8.0(3) of the Act, for the purpose of pooling and securitizing such loans under title VIII of the Act.
(2) Subject to the requirements of subpart H of this part, Federal land credit associations may purchase interests in loans that comply with the requirements of paragraph (a) of this section and nonvoting stock from Farm Credit System institutions.
(3) Federal land credit associations, in their capacity as certified agricultural mortgage marketing facilities under title VIII of the Act, may purchase interests in loans (other than participation interests under paragraph (b) of this section) from institutions other than Farm Credit System institutions for the purpose of pooling and securitizing such loans under title VIII of the Act.
§ 614.4040 Production credit associations.
(a) Short- and intermediate-term loans. Production credit associations are authorized to make or guarantee short- and intermediate-term loans and provide other financial assistance for a term of:
(1) Not more than 7 years;
(2) More than 7 years, but not more than 10 years, as set forth in policies approved by the funding bank; or
(3) Not more than 15 years to producers and harvesters of aquatic products for major capital expenditures, including but not limited to the purchase of vessels, construction or purchase of shore facilities, and similar purposes directly related to the operations of producers or harvesters of aquatic products.
(b) Loan participations. Subject to the requirements of subpart H of this part, a production credit association may enter into participation agreements with:
(1) Farm Credit banks and associations that are direct lenders and lenders that are not Farm Credit institutions on loans of the type it is authorized to make under title II of the Act;
(2) Farm Credit banks and associations that are direct lenders on loans it is not authorized to make, provided the borrower eligibility, membership, term, amount, loan security, and stock or participation certificate requirements of the originating institution are met; and
(3) The Federal Agricultural Mortgage Corporation to the extent provided in § 614.4055.
(c) Other interests in loans. (1) Subject to the requirements of subpart H of this part and the supervision of their respective funding banks, production credit associations may sell interests in loans that are made under paragraph (a) of this section to:
(i) Banks of the Farm Credit System, as authorized by their respective funding banks; and
(ii) Any certified agricultural mortgage marketing facility, as defined by section 8.0(3) of the Act, for the purpose of pooling and securitizing such loans under title VIII of the Act.
(2) Subject to the requirements of subpart H of this part, production credit associations, as authorized by their respective funding banks, may purchase interests in loans that comply with the requirements of paragraph (a) of this section and nonvoting stock from banks of the Farm Credit System.
(3) Production credit associations, in their capacity as certified mortgage marketing facilities under title VIII of the Act, may purchase from Farm Credit System institutions and institutions that are not Farm Credit System institutions interests in loans (other than participation interests authorized by paragraph (c) of this section) for the purpose of pooling and securitizing such loans under title VIII of the Act.
§ 614.4050 Agricultural credit associations.
(a) Terms to maturity on loans. Agricultural credit associations are authorized to make or guarantee, subject to requirements of § 614.4200:
(1) Long-term real estate mortgage loans with maturities of not less than 5 nor more than 40 years, and continuing commitments to make such loans; and
(2) Short- and intermediate-term loans and provide other similar financial assistance for a term of not more than:
(i) 10 years; or
(ii) 15 years to aquatic producers and harvesters for their aquatic operations.
(b) Loan participations. Subject to the requirements of subpart H of this part, agricultural credit associations may enter into participation agreements with:
(1) Farm Credit banks and associations that are direct lenders and lenders that are not Farm Credit institutions on loans of the type it is authorized to make under titles I and II of the Act;
(2) Farm Credit banks and associations that are direct lenders on loans of the type it is not authorized to make, provided the borrower eligibility, membership, term, amount, loan security, and stock or participation certificate requirements of the originating institution are met; and
(3) The Federal Agricultural Mortgage Corporation to the extent provided in § 614.4055.
(c) Other interests in loans. (1) Subject to the requirements of subpart H of this part and the supervision of their respective funding banks, agricultural credit associations may sell:
(i) Interests in loans made under paragraph (a)(1) of this section only to:
(A) Farm Credit System institutions, as authorized by their respective funding banks;
(B) Lenders that are not Farm Credit System institutions, as authorized by their respective funding banks; and
(C) Any certified agricultural mortgage marketing facility, as defined by section 8.0(3) of the Act, for the purpose of pooling and securitizing such loans under title VIII of the Act.
(ii) Interests in loans made under paragraph (a)(2) of this section only to:
(A) Banks of the Farm Credit System, as authorized by their respective funding banks; and
(B) Any certified agricultural mortgage marketing facility, as defined by section 8.0(3) of the Act, for the purpose of pooling and securitizing such loans under title VIII of the Act.
(2) Subject to the requirements of subpart H of this part, agricultural credit associations may purchase:
(i) Interests in loans that comply with the requirements in paragraph (a)(1) of this section from institutions of the Farm Credit System;
(ii) Interests in loans that comply with the requirements of paragraph (a)(2) of this section from banks of the Farm Credit System; and
(iii) Nonvoting stock from institutions of the Farm Credit System.
(3) Agricultural credit associations, in their capacity as certified agricultural mortgage marketing facilities under title VIII of the Act, may purchase interests in loans, other than participation interests authorized by paragraph (b) of this section, from institutions other than Farm Credit System institutions for the purpose of pooling and securitizing such loans under title VIII of the Act.
§ 614.4055 Federal Agricultural Mortgage Corporation loan participations.
Subject to the requirements of subpart H of this part 614:
(a) Any Farm Credit System bank or direct lender association may buy from, and sell to, the Federal Agricultural Mortgage Corporation, participation interests in “qualified loans.”
(b) The Federal Agricultural Mortgage Corporation may buy from, and sell to, any Farm Credit System bank or direct lender association, or lender that is not a Farm Credit System institution, participation interests in “qualified loans.”
(c) For purposes of this section, “qualified loans” means qualified loans as defined in section 8.0(9) of the Act.
§ 614.4060 Affiliates established pursuant to section 8.5(e)(1) of the Farm Credit Act of 1971.
An affiliate established by one or more Farm Credit System institutions pursuant to section 8.5(e)(1) of the Act and § 611.1137 of this chapter, as a certified agricultural mortgage marketing facility, may purchase loans from Farm Credit System institutions and institutions other than Farm Credit System institutions in accordance with title VIII of the Act and any applicable regulation promulgated thereunder.
Subpart B—Chartered Territories
§ 614.4070 Loans and chartered territory—Farm Credit Banks, agricultural credit banks, Federal land bank associations, Federal land credit associations, production credit associations, and agricultural credit associations.
(a) A bank or association chartered under title I or II of the Act may finance eligible borrower operations conducted wholly within its chartered territory regardless of the residence of the applicant.
(b) A bank or association operating under title I or II of the Act may finance the operations of a borrower headquartered and operating in its territory even though the operation financed is conducted partially outside its territory, provided notice is given to all Farm Credit institutions providing similar credit in the territory(ies) in which the operations being financed are conducted. A bank or association operating under title I or II of the Act may lend to a borrower headquartered outside its territory to finance eligible borrower operations that are conducted partially within its territory and partially outside its territory only if the concurrence of Farm Credit institutions providing similar credit for the territories in which the operations are conducted is obtained.
(c) A bank or association chartered under title I or II of the Act may finance eligible borrower operations conducted wholly outside its chartered territory, provided such loans are authorized by the policies of the bank and/or association involved, do not constitute a significant shift in loan volume away from the bank or association’s assigned territory, and are made and administered in accordance with paragraphs (c)(1) and (c)(2) of this section.
(1) If a loan is made to an eligible borrower whose operations are conducted wholly outside the chartered territory of the lending bank or association, the lending institution shall obtain concurrence of all Farm Credit institutions providing similar credit in the territory(ies) in which the operation being financed is conducted.
(2) Loans to finance eligible borrower operations conducted wholly outside a bank’s or association’s territory shall be appropriately designated by the bank or association to provide adequate identification of the number and volume of such loans, which shall be monitored by the bank or association.
(d) A bank or association chartered under title I or II of the Act may finance eligible borrower operations conducted wholly or partially outside its chartered territory through the purchase of loans from the Federal Deposit Insurance Corporation in compliance with § 614.4325(b)(3), provided:
(1) Notice is given to the Farm Credit System institution(s) chartered to serve the territory where the headquarters of the borrower’s operation being financed is located; and
(2) After loan purchase, additional financing of eligible borrower operations complies with paragraphs (a), (b), and (c) of this section.
§ 614.4080 Loans and chartered territory—banks for cooperatives.
Loans made under title III by banks for cooperatives and agricultural credit banks may be made to eligible domestic parties domiciled within any territory that may be served by Farm Credit institutions under section 1.2 of the Act and to eligible foreign parties without regard to domicile.
Subpart C—Bank/Association Lending Relationship
§ 614.4100 Policies governing lending through Federal land bank associations.
(a) Farm Credit Banks and agricultural credit banks may delegate authority to make credit decisions to Federal land bank associations that demonstrate the ability to extend and administer credit soundly, provided the association develops, implements and maintains adequate credit administration guidelines, standards, and practices.
(b) The board of directors of each Farm Credit Bank and each agricultural credit bank lending through Federal land bank associations shall adopt policies and procedures governing the exercise of statutory and delegated authorities by such associations. Policies governing the delegated authorities shall:
(1) Define authorities to be delegated;
(2) Require the documented evaluation of the capability and responsibility of individuals exercising delegated authorities;
(3) Provide for reporting of actions taken under delegated authority to the delegating bank;
(4) Provide procedures for periodic review and enforcement;
(5) Provide for withdrawal of authority where appropriate; and
(6) Where redelegation from the association’s board to association employees is authorized, require similar control measures to be used.
(a) Upon the transfer of authority to make and participate in long-term agricultural real estate mortgage loans by a Farm Credit Bank or agricultural credit bank to a Federal land bank association pursuant to section 7.6(a) of the Act and subpart E of part 611 of these regulations, the association shall be designated a Federal land credit association and shall have the powers set forth in § 614.4030.
(b) Upon the transfer of the authority to make and participate in long-term real estate loans by a Farm Credit Bank or agricultural credit bank to an agricultural credit association pursuant to section 7.6(d) of the Act, the association shall have all of the powers set forth in § 614.4050.
(c) An association to which such long-term lending authority is to be transferred shall have in place, prior to the transfer, policies and procedures guiding the extension and administration of credit within its territory.
§ 614.4120 Policies governing extensions of credit to direct lender associations and OFIs.
The board of directors of each Farm Credit Bank and agricultural credit bank shall adopt policies and procedures governing the making of direct loans to and the discounting of loans for direct lender associations and OFIs. The policies and procedures shall prescribe lending policies and loan underwriting standards that are consistent with sound financial and credit practices. The policies shall require a periodic review of the lending relationship with each direct lender association and OFI at intervals consistent with the term of the general financing agreement but in no case longer than 5 years. The policies shall require an evaluation of the creditworthiness of a direct lender association on the basis of credit factors and lending policies and loan underwriting standards set forth in part 614, subpart D, and may permit lending to such an institution on an unsecured basis only if the overall condition of the institution warrants. The stated term of a general financing agreement shall not exceed 5 years but may be automatically renewable for additional terms not to exceed 5 years if neither party objects at the time of renewal. The term of any general financing agreement that provides for unsecured lending to a direct lender association shall not exceed 1 year and may not be automatically renewed.
§ 614.4125 Funding and discount relationships between Farm Credit Banks or agricultural credit banks and direct lender associations.
(a) A Farm Credit Bank or agricultural credit bank shall not advance funds to, or discount loans for, any direct lender association except pursuant to a general financing agreement. Each general financing agreement must require that the amount of financing available to a direct lender association not be based on loans that are ineligible under the Act and the regulations in this chapter. If financing under a general financing agreement is based on a loan that FCA determines is ineligible under the Act and the regulations in this chapter, then the amount of financing available must be recalculated without that ineligible loan.
(b) The Farm Credit Bank or agricultural credit bank shall deliver a copy of the executed general financing agreement and all related documents, such as a promissory note or security agreement, and all amendments of any of these documents, within 10 business days after any such document or amendment is executed, to the Chief Examiner, Farm Credit Administration, or to the Farm Credit Administration office that the Chief Examiner designates.
(c) The general financing agreement shall address only those matters that are reasonably related to the debtor/creditor relationship between the Farm Credit Bank or agricultural credit bank and the direct lender association.
(d) The total credit extended to a direct lender association, through direct loan or discounts, shall be consistent with the Farm Credit Bank’s or agricultural credit bank’s lending policies and loan underwriting standards and the creditworthiness of the direct lender association. The general financing agreement or promissory note shall establish a maximum credit limit determined by objective standards as established by the Farm Credit Bank or agricultural credit bank.
(e) A Farm Credit Bank or agricultural credit bank that provides notice to a direct lender association that it is in material default of any covenant, term, or condition of the general financing agreement, promissory note, security agreement, or other related documents simultaneously shall provide written notification to the Chief Examiner, Farm Credit Administration, or to the Farm Credit Administration office that the Chief Examiner designates and the Director, Risk Management, Farm Credit System Insurance Corporation.
(f) A direct lender association shall provide written notification to the Chief Examiner, Farm Credit Administration, or to the Farm Credit Administration office that the Chief Examiner designates, and the Director, Risk Management, Farm Credit System Insurance Corporation immediately upon receipt of a notice that it is in material default under any general financing agreement, loan agreement, promissory note, security agreement, or other related documents with a Farm Credit Bank, agricultural credit bank or non-Farm Credit institution.
(g) A Farm Credit Bank or agricultural credit bank shall obtain prior written consent of the Farm Credit Administration before it takes any action that leads to or could lead to the liquidation of a direct lender association.
(h) No direct lender association shall obtain financing from any party unless the parties agree to the requirements of this paragraph. No Farm Credit Bank, agricultural credit bank, or other party shall petition any Federal or State court to appoint a conservator, receiver, liquidation agent, or other administrator to manage the affairs of or liquidate a direct lender association.
§ 614.4130 Funding and discount relationships between Farm Credit Banks or agricultural credit banks and OFIs.
(a) A Farm Credit Bank or agricultural credit bank shall not advance funds to, or discount loans for, an OFI, as defined in § 611.1205 of this chapter, except pursuant to a general financing agreement.
(b) The Farm Credit Bank or agricultural credit bank shall deliver a copy of the executed general financing agreement and all related documents, such as a promissory note or security agreement, and all amendments of any of these documents, within 10 business days after any such document or amendment is executed, to the Chief Examiner, Farm Credit Administration, or to the Farm Credit Administration office that the Chief Examiner designates.
(c) The total credit extended to the OFI, through direct loan or discounts, shall be consistent with the Farm Credit Bank’s or agricultural credit bank’s lending policies and loan underwriting standards and the creditworthiness of the OFI. The general financing agreement or promissory note shall establish a maximum credit limit determined by objective standards as established by the Farm Credit Bank or agricultural credit bank.
Subpart D—General Loan Policies for Banks and Associations
§ 614.4150 Lending policies and loan underwriting standards.
Under the policies of its board, each institution shall adopt written standards for prudent lending and shall issue written policies, operating procedures, and control mechanisms that reflect prudent credit practices and comply with all applicable laws and regulations. Written policies and procedures shall, at a minimum, prescribe:
(a) The minimum supporting credit and financial information, frequency for collection of information, and verification of information required in relation to loan size, complexity and risk exposure
(b) The procedures to be followed in credit analysis
(c) The minimum standards for loan disbursement, servicing and collections
(d) Requirements for collateral and methods for its administration
(e) Loan approval delegations and requirements for reporting to the board
(f) Loan pricing practices
(g) Loan underwriting standards that include measurable standards:
(1) For determining that an applicant has the operational, financial, and management resources necessary to repay the debt from cashflow
(2) That are appropriate for each loan program and the institution’s risk-bearing ability; and
(3) That consider the nature and type of credit risk, amount of the loan, and enterprises being financed
(h) Requirements that loan terms and conditions are appropriate for the loan; and
(i) Such other requirements as are necessary for the professional conduct of a lending organization, including documentation for each loan transaction of compliance with the loan underwriting standards or the compensating factors or extenuating circumstances that establish repayment of the loan notwithstanding the failure to meet any one or more loan underwriting standard.
§ 614.4155 Interest rates.
Loans made by each bank and direct lender association shall bear interest at a rate or rates as may be determined by the institution board. The board shall set interest rates or approve individual interest rate changes either on a case-by-case basis or pursuant to an interest rate plan within which management may establish rates. Any interest rate plan shall set loan-pricing policies and objectives, provide guidance regarding the circumstances under which management may adjust rates, and provide the upper and lower limits on management authority. Any interest rate plan adopted shall be reviewed on a continuing basis by the board, as well as in conjunction with its review and approval of the institution’s operational and strategic business plan.
§ 614.4160 Differential interest rate programs.
Pursuant to policies approved by the board of directors, differential interest rates may be established for loans based on a variety of factors that may include type, purpose, amount, quality, funding or operating costs, or similar factors or combinations of factors. Differential interest rate programs should achieve equitable rate treatment within categories of borrowers. In the adoption of differential interest rate programs, institutions may consider, among other things, the effect that such interest rate structures will have on the achievement of objectives relating to the special credit needs of young, beginning or small farmers.
§ 614.4165 Young, beginning, and small farmers and ranchers.
(a) Definitions.
(1) For purposes of this subpart, the term “credit” includes:
(i) Loans made to farmers, ranchers, and producers or harvesters of aquatic products under title I or II of the Act; and
(ii) Interests in participations made to farmers, ranchers, and producers or harvesters of aquatic products under title I or II of the Act.
(2) For purposes of this subpart, the term “services” includes:
(i) Leases made to farmers, ranchers, and producers or harvesters of aquatic products under title I or II of the Act; and
(ii) Related services to farmers, ranchers, and producers or harvesters of aquatic products under title I or II of the Act.
(b) Farm Credit banks oversight.
(1) Each Farm Credit Bank and Agricultural Credit Bank must adopt written policies that direct:
(i) The board of each affiliated direct lender association to establish a program to provide sound and constructive credit and related services to young, beginning, and small farmers, ranchers, and producers or harvesters of aquatic products (YBS farmers and ranchers or YBS);
(ii) Each affiliated direct lender association to include in its YBS program provisions ensuring coordination with other System institutions in the territory and other governmental and private sources of credit; and
(iii) The bank to provide the FCA a complete and accurate annual report summarizing the YBS program operations and achievements of its affiliated direct lender associations.
(2) Annually, the YBS program of each direct lender association must be reviewed and approved by its funding bank, provided review and approval shall solely be to determine whether the YBS program contains all required components as set forth in paragraph (d) of this section. Any conclusion by the bank that a YBS program is incomplete must be communicated in writing to the direct lender association and to the FCA within 30 days.
(3) Each Farm Credit Bank and Agricultural Credit Bank must implement internal controls for requirements in paragraphs (b)(1)(iii) and (b)(2) of this section.
(c) Direct lender association YBS plan.
(1) YBS program components outlined in paragraph (d) of this section must be included in each direct lender association’s operational and strategic business plan for at least the succeeding 3 years (as set forth in § 618.8440 of this chapter).
(2) The YBS portion of the operational and strategic business plan must:
(i) Analyze the direct lender association’s performance in the previous year toward achieving the components in paragraph (d) of this section;
(ii) Discuss variances and reasons for the results; and
(iii) Identify how the qualitive factors and quantitative goals in paragraph (d) of this section assist and expand access to credit and education for YBS farmers and ranchers.
(d) Direct lender association YBS programs. The board of directors of each direct lender association must establish a program to provide sound and constructive credit and services to YBS farmers and ranchers in its territory. Each YBS program must operate in a safe and sound manner and within the direct lender association’s risk-bearing capacity, while meeting the unique needs of YBS farmers and ranchers. Such a program must include the following minimum components:
(1) Qualitative factors—
(i) Corporate governance.
(A) A mission statement describing program objectives and specific means for achieving such objectives.
(B) Internal controls that establish clear lines of responsibility for YBS strategic plan development and the corresponding YBS program implementation, tracking YBS program performance, and YBS quarterly reporting to the direct lender association’s board of directors.
(ii) Credit and related services.
(A) Efforts to offer credit and related services, either directly or in coordination with others, that are responsive to the needs of the YBS farmers and ranchers in the territory. Examples include customized loan underwriting standards, loan guarantee programs, fee waivers, or other credit enhancements commensurate with the credit risk approved by the board of directors.
(B) Coordination with other System institutions in the territory and other governmental and private sources who offer credit and services to YBS farmers and ranchers.
(iii) Marketing, outreach, and education. Implementation of effective outreach programs to attract and retain YBS farmers and ranchers, which may include the use of advertising campaigns, educational programs, and advisory committees comprised of YBS farmers and ranchers and/or a YBS mentoring program to better serve and understand the needs of this lending segment.
(2) Quantitative goals—
(i) Annual quantitative goals. Annual quantitative goals for credit to YBS farmers and ranchers based on an understanding of reliable demographic data for the lending territory. Direct lender associations must identify the sources of data used to establish the goals. Such goals must include at least one of the following:
(A) Loan volume and loan number goals for YBS farmers and ranchers in the territory;
(B) Percentage goals representative of the demographics for YBS farmers and ranchers in the territory;
(C) Percentage goals for loans made to new borrowers qualifying as YBS farmers and ranchers in the territory; or
(D) Goals for capital committed to loans made YBS farmers and ranchers in the territory.
(ii) Board of directors approval and review. Goals must be approved by the direct lender association’s board of directors and reviewed quarterly with adjustments made as needed.
§ 614.4170 General.
Direct lenders shall be responsible for the servicing of the loans that they make. However, loan participation agreements may designate specific loan servicing efforts to be accomplished by a participating institution. Each direct lender shall adopt loan servicing policies and procedures to assure that loans will be serviced fairly and equitably for the borrower while minimizing the risk for the lender. Procedures shall include specific plans that help preserve the quality of sound loans and that help correct credit deficiencies as they develop.
(a) The Farm Credit Bank shall provide guidelines for the servicing of loans by the Federal land bank associations. The servicing may be accomplished either under the direct supervision of the bank or under delegated authority.
(b) The servicing of loans which are participated in by Farm Credit System institutions shall be in accordance with § 614.4325.
(c) In the development of loan servicing policies and procedures, the following criteria shall be included:
(1) Term loans. The objective shall be to provide borrowers with prompt and efficient service with respect to actions in such areas as personal liability, partial release of security, insurance requirements or adjustments, loan divisions or transfers, or conditional payments. Procedures shall provide for adequate inspections, reanalyses, reappraisals, controls on payment of insurance and taxes (and for payment when necessary), and prompt exercise of legal options to preserve the lender’s collateral position or guard against loss. Loan servicing policies for rural home loans shall recognize the inherent differences between agricultural and rural home lending.
(2) Operating loans. The objective shall be to service such loans to assure disbursement in accordance with the basis of approval, repayment from the sources obligated or pledged, and to minimize risk exposure to the lender. Procedures shall require:
(i) The procurement of periodic operating data essential for maintaining control, for the proper analysis of such data, and prompt action as needed;
(ii) Inspections, reappraisals, and borrower visits appropriate to the nature and quality of the loan; and
(iii) Controls on insurance, margin requirements, warehousing, and the prompt exercise of legal options to preserve the lender’s collateral position and guard against loss.
(3) Legal entity loans. In addition to the foregoing servicing objectives for term and operating loans, procedures for servicing these loans shall require procurement of data on changes in ownership, control, and management; review of business objectives, financing programs, organizational structure, and operating methods, and appropriate analysis of such changes with provision for action as needed.
§ 614.4175 Uninsured voluntary and involuntary accounts.
(a) Borrowers may make voluntary advance payments on their loans or, under agreement with a System institution, may make voluntary advance conditional payments intended to be applied to future maturities. The monies in the advance conditional payment accounts may be available for return to the borrower in lieu of increasing his loan. System institutions may pay interest on advance conditional payments for the time the funds are held unapplied at a rate not to exceed the rate charged on the related loan(s). System institutions shall hold any advance conditional payments received in accordance with this section in voluntary advance payment accounts.
(b) System institutions may establish involuntary payment accounts including, but not limited to, funds held for the borrower, such as loan proceeds to be disbursed for which the borrower is obligated; the unapplied insurance proceeds arising from any insured loss; and total insurance premiums and applicable taxes collected in advance in connection with any loan.
Subpart E—Loan Terms and Conditions
§ 614.4200 General requirements.
(a) Terms and conditions. (1) The terms and conditions of each loan made by a Farm Credit bank or association shall be set forth in a written document or documents, such as a loan agreement, promissory note, or other instrument(s) appropriate to the type and amount of the credit extension, in order to establish loan conditions and performance requirements. Copies of all documents executed by the borrower in connection with the closing of a loan made under titles I or II of the Act shall be provided to the borrower at the time of execution and at any time thereafter that the borrower requests additional copies.
(2) The terms and conditions of all loans shall be adequately disclosed in writing to the borrower not later than loan closing. For loans made under titles I and II of the Act, the institution shall provide prompt written notice of the approval of the loan.
(3) Applicants shall be provided notification of the action taken on each credit application in compliance with the requirements of 12 CFR 202.9.
(b) Security. (1) Long-term real estate mortgage loans must be secured by a first lien interest in real estate, except that the loans may be secured by a second lien interest if the institution also holds the first lien on the property. No funds shall be advanced, under a legally binding commitment or otherwise, if the outstanding loan balance after the advance would exceed 85 percent (or 97 percent as provided in section 1.10(a) of the Act) of the appraised value of the real estate, except that a loan on which private mortgage insurance is obtained may exceed 85 percent of the appraised value of the real estate to the extent that the loan amount in excess of 85 percent is covered by such insurance. The real estate that is used to satisfy the loan-to-value limitation must be comprised primarily of agricultural or rural property, including agricultural land and improvements thereto, a farm-related business, a marketing or processing operation, a rural residence, or real estate used as an integral part of an aquatic operation.
(2) Notwithstanding the requirements of paragraph (b)(1) of this section, the lending institution may advance funds for the payment of taxes or insurance premiums with respect to the real estate, reschedule loan payments, grant partial releases of security interests in the real estate, and take other actions necessary to protect the lender’s collateral position. Any action taken that results in exceeding the loan-to-value limitation shall be in accordance with a policy of the institution’s board of directors and adequately documented in the loan file.
(3) Short- and intermediate-term loans may be secured or unsecured as the documented creditworthiness of the borrower warrants.
(4) In addition to the requirements in paragraph (b)(1) of this section, a long-term, non-farm rural home loan, including a revolving line of credit, shall be secured by a first lien on the property, except that it may be secured by a second lien if the institution also holds the first lien on the property. A short- or intermediate-term loan on a rural home, including a revolving line of credit, must be secured by a lien on the property unless the financing is provided exclusively for repairs, remodeling, or other improvements to the rural home, in which case the loan may be secured by other property or unsecured if warranted by the documented creditworthiness of the borrower.
(5) Except as provided in § 614.4231, loans made under title III of the Act may be secured or unsecured, as appropriate for the purpose of the loan and the documented creditworthiness of the borrower.
(c) Loan amortization. If a direct lender amortizes a loan over a period of time that is longer than the term to maturity under § 614.4000(a), § 614.4010(a), § 614.4030(a), § 614.41040(a), or § 614.4050(a)(1) or (2), it must establish a loan amortization schedule that is:
(1) Consistent with its loan underwriting standards adopted pursuant to § 614.4150; and
(2) Appropriate to the type and purpose of the loan, expected useful life of the asset being financed, and the repayment capacity of the borrower.
§ 614.4231 Certain seasonal commodity loans to cooperatives.
Loans on certain commodities that are part of government programs shall comply with the criteria established for those programs. Security taken on program commodities shall be consistent with prudent lending practices and ensure compliance with the government program. The bank shall provide for periodic review by bank officials of any custodial activities and shall provide notice to the custodians that their activities are subject to review and examination by the Farm Credit Administration.
§ 614.4232 Loans to domestic lessors.
Loans and financial assistance extended by banks for cooperatives and agricultural credit banks to domestic lessors to finance equipment or facilities leased by a stockholder of the bank shall be subject to the following terms and conditions:
(a) The term of the loan shall not be longer than the total period of the lease;
(b) The contract between the lessor and lessee shall establish that the leased assets are effectively under the control of the lessee and that such control shall continue in effect for essentially all of the term of the lease;
(c) The lessee must hold at least one share of stock or one participation certificate; and
(d) The leased equipment and facilities must be primarily for use in the lessee’s operations in the United States.
§ 614.4233 International loans.
Term loans made by banks for cooperatives and agricultural credit banks under the authority of section 3.7(b) of the Act and § 613.3200 of this chapter to foreign or domestic parties who are not shareholders of the bank shall be subject to the following conditions:
(a) The loan shall be denominated in a currency to eliminate foreign exchange risk on repayment.
(b) The borrower’s obligations shall be guaranteed or insured against default under such policies as are available in the United States and other countries. Exceptions may be made where a prospective borrower has had a longstanding successful business relationship with an eligible cooperative borrower or an eligible cooperative which is not a borrower if the prospective borrower has a high credit rating as determined by the bank.
(c) For a borrower in which a voting stockholder of the bank has a majority ownership interest, financing may be extended for the full value of the transaction; otherwise, financing may be extended only to approximate the percent of ownership.
Subpart F—Collateral Evaluation Requirements
§ 614.4240 Collateral definitions.
For the purposes of this part, the following definitions shall apply:
(a) Abundance of caution, when used to describe decisions to require collateral, means that the collateral is taken in circumstances in which:
(1) It is not required by statute, regulation, or the institution’s policies; and
(2) A prudent lender would extend credit based on a borrower’s income and/or other collateral, absent the real estate, and the decision to extend credit was, in fact, based on other sources of revenue or collateral.
(b) Appraisal means a written statement independently and impartially prepared by a qualified appraiser setting forth an opinion as to the market value of an adequately described property as of a specific date(s), supported by the presentation and analysis of relevant market information.
(c) Appraisal Foundation means the Appraisal Foundation established on November 30, 1987, by professional appraisal organizations, as a not-for-profit corporation under the laws of Illinois, in order to enhance the quality of professional appraisals.
(d) Appraisal Subcommittee means the Appraisal Subcommittee of the Federal Financial Institutions Examination Council.
(e) Business loan means a loan or other extension of credit to any corporation, general or limited partnership, business trust, joint venture, sole proprietorship, or other business entity (including entities and individuals engaged in farming enterprises).
(f) Cost approach means the process by which an evaluator establishes an indicated value by measuring the current market cost to construct a reproduction of or replacement for the improvements, minus the amount of depreciation (physical deterioration, or functional and/or external obsolescence) evident in the structure from all causes, plus the market value of the land.
(g) Evaluation means a study of the nature, quality, or utility of, interest in, or aspects of, an asset. An evaluation may take the form of a valuation or an appraisal.
(h) Fee appraiser means a qualified evaluator who is not an employee of the party contracting for the completion of the evaluation and who performs an evaluation on a fee basis. For purposes of this subpart, a fee appraiser may include a staff evaluator from another Farm Credit System institution only if the employing institution is not operating under joint management with the contracting institution. In addition, for purposes of personal and intangible collateral evaluations, the term “fee appraiser” includes, but is not limited to, certified public accountants, equipment dealers, grain buyers, livestock buyers, and auctioneers.
(i) FIRREA means the Financial Institutions Recovery, Reform, and Enforcement Act of 1989.
(j) Highest and best use means the reasonable and most probable use of the property that would result in the highest market value of vacant land or improved property, as of the date of valuation; or that use, from among reasonably probable and legally alternative uses, found to be physically possible, appropriately supported, financially feasible, and which results in the highest land value.
(k) Income capitalization approach means the procedure that values property by measuring the present value of the expected future benefits of property ownership. This value is derived from either:
(1) Capitalizing a single year’s income expectancy or an annual average of several years’ income expectancies at a market-derived capitalization rate that reflects a specific income pattern, return on investment, and change in the value of the investment; or
(2) Discounting the annual cashflows for the holding period and the reversion at a specified yield rate or specified yield rates which reflect market behavior.
(l) Market value means the most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently, knowledgeably, and assuming neither is under duress. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:
(1) Buyer and seller are typically motivated;
(2) Both parties are well informed or well advised, and acting in what they consider their best interests;
(3) A reasonable time is allowed for exposure in the open market;
(4) Payment is made in terms of cash in United States dollars or in terms of financial arrangements comparable thereto; and
(5) The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.
(m) Personal property, for purposes of this subpart, means all tangible and movable property not considered real property or fixtures.
(n) Qualified evaluator means an individual who is competent, reputable, impartial, and has demonstrated sufficient training and experience to properly evaluate property of the type that is the subject of the evaluation. For the purposes of this definition, the term “qualified evaluator” includes an appraiser or valuator.
(o) Real estate means an identified parcel or tract of land, including improvements, if any.
(p) Real estate-related financial transactions means any transaction involving:
(1) The sale, lease, purchase, investment in, or exchange of real property, including interests in property or the financing thereof; or
(2) The refinancing of real property or interests in real property; or
(3) The use of real property or interests in real property as security for a loan or investment, including mortgage-backed securities.
(q) Real property means all interests, benefits, and rights inherent in the ownership of real estate.
(r) Sales comparison approach means the procedure that values property by comparing the subject property to similar properties located in relatively close proximity, having similar size and utility, and having been recently sold in arm’s-length transactions (comparable sales). The sales comparison approach requires the evaluator to estimate the degree of similarity and difference between the subject property and comparable sales. Such comparison shall be made on the basis of conditions of sale, financing terms, market conditions, location, physical characteristics, and income characteristics. Appropriate adjustments shall be made to the sales price of the comparable property based on the identified deficiencies or superiorities of the subject property to arrive at a probable price for which the subject property could be sold on the date of the collateral evaluation.
(s) State certified appraiser means any individual who has satisfied the requirements for and has been certified as a real estate appraiser by a State or territory whose requirements for certification currently meet or exceed the minimum criteria for certification issued by the Appraiser Qualification Board of the Appraisal Foundation. No individual shall be a State certified appraiser unless such individual has achieved a passing grade on a suitable examination administered by a State or territory that is consistent with and equivalent to the Uniform State Certification Examination issued or endorsed by the Appraiser Qualification Board of the Appraisal Foundation. In addition, the Appraisal Subcommittee must not have issued a finding that the policies, practices, or procedures of the State or territory are inconsistent with title XI of FIRREA.
(t) State licensed appraiser means any individual who has satisfied the requirements for licensing and has been licensed as a real estate appraiser by a State or territory in which the licensing procedures comply with title XI of FIRREA and in which the Appraisal Subcommittee has not issued a finding that the policies, practices, or procedures of the State or territory are inconsistent with title XI of FIRREA.
(u) Transaction value means:
(1) For loans or other extensions of credit, the amount of the loan, loan commitment, or other extensions of credit;
(2) For sales, leases, purchases, investments in, or exchanges of real property, the market value of the property interest involved; and
(3) For the pools of loans or interests in real property, the transaction value of the individual loans or the market value of the real property interests comprising the pool.
(v) USPAP means the Uniform Standards of Professional Appraisal Practice adopted by the Appraisal Foundation.
(w) Valuation means the process of estimating a defined value of an identified interest or interests in a specific asset or assets as of a given date. A valuation results from the completion of a collateral evaluation that does not require an appraisal.
§ 614.4245 Collateral evaluation policies.
(a) The board of directors of each Farm Credit System institution that engages in lending or leasing secured by collateral shall adopt well-defined and effective collateral evaluation policies and standards, that comply with the regulations in this subpart, to ensure that collateral evaluations are:
(1) Sufficiently descriptive and detailed to provide ample support to the institution’s related credit decisions;
(2) Performed based on criteria established for the purpose of determining the circumstances under which collateral evaluations will be required and when they will be required. Such criteria must, at a minimum:
(i) Establish when an institution will require a collateral appraisal completed under the USPAP rather than a collateral valuation; and
(ii) Take into account such factors as market trends, market volatility, and various types of credit, loan servicing, collection, and liquidation actions; and
(3) Completed by a qualified evaluator in an unbiased manner.
(b) The policies and standards required by this section shall, at a minimum, address the criteria outlined in §§ 614.4250 through 614.4267 of this subpart.
(c) A Federal land bank association shall, with the approval of its respective Farm Credit bank, adopt collateral evaluation policies that are consistent with the bank’s policies and standards.
(d) An institution’s board of directors may adopt specific collateral evaluation requirements, consistent with the regulations in this subpart, for loans designated as part of a minimum information program.
§ 614.4250 Collateral evaluation standards.
(a) When real, personal, or intangible property is taken as security for a loan or is the subject of a lease, an evaluation of such property shall be performed in accordance with § 614.4260 and the institutions’ policies and procedures. Such a collateral evaluation shall be identified as either a collateral valuation or a collateral appraisal. Specifically, all collateral evaluations must:
(1) Value the subject property based upon market value as defined in § 614.4240(l);
(2) Be presented in a written format;
(3) Consider the purpose for which the property will be used and the property’s highest and best use, if different from the intended use;
(4) Be sufficiently descriptive to enable the reader to ascertain the reasonableness of the estimated market value and the rationale for the estimate;
(5) Provide sufficient detail (including an identification and description of the property) and depth of analysis to reflect the relevant characteristics and complexity of the subject property;
(6) Analyze and report, as appropriate, for real, intangible, and/or personal property, on:
(i) The current income producing capacity of the property;
(ii) A reasonable marketing period for the property;
(iii) The current market conditions and trends that will affect projected income, to the extent such conditions will affect the value of the property;
(iv) The appropriate deductions and discounts as they would apply to the property, including but not limited to, those based on the condition of the property, as well as the specialization of the operation and property; and
(v) Potential liabilities, including those associated with any hazardous waste or other environmental concerns; and
(7) Include in the evaluation report a certification that the evaluation was not based on a requested minimum valuation or specific valuation or approval of a loan.
(b) For purposes of determining appraisal value as required in section 1.10(a) of the Act, the definition of market value and the requirements of this subpart shall apply.
§ 614.4255 Independence requirements.
(a) Prohibitions. For all personal and intangible property, and for all real property exempted under § 614.4260(c) of this subpart, no person may:
(1) Perform evaluations in connection with transactions in which such person has a direct or indirect interest, financial or otherwise, in the loan or subject property;
(2) As a director, vote on or approve a loan decision on which such person performed a collateral evaluation; or
(3) As a director, perform a collateral evaluation in connection with any transaction on which such person made or will be required to make a credit decision.
(b) Officers and employees. If the institution’s internal control procedures required by § 618.8430 of this chapter include requirements for either a prior approval or post-review of credit decisions, officers and employees may:
(1) Participate in a vote or approval involving assets on which they performed a collateral evaluation; or
(2) Perform a collateral evaluation in connection with a transaction on which they have made or will be required to make a credit decision.
(c) Real estate appraiser. Except as provided in § 614.4260(c) of this subpart, all evaluations of real property that serve as the primary security for a loan shall be performed by a qualified real estate appraiser who has no direct or indirect interest, financial or otherwise, in the loan or subject property and is not engaged in the marketing, lending, collection, or credit decision processes of any of the following:
(1) A Farm Credit System institution making or originating the loan;
(2) A Farm Credit System institution operating under common management with the institution making or originating the loan; or
(3) A Farm Credit System institution purchasing an interest in the loan.
(d) Fee appraisers. Fee appraisers shall be engaged directly by the Farm Credit System institution or its agent, and shall have no direct or indirect interest, financial or otherwise, in the property or transaction. A Farm Credit System institution may accept a real estate appraisal that was prepared by an appraiser engaged directly by another Farm Credit System institution, by a United States Government agency, a Government-Sponsored Enterprise or by a financial institution subject to title XI of FIRREA.
(e) Loan purchases. No employee who, acting as a State licensed or State certified appraiser, performed a real estate appraisal on any collateral supporting a loan shall subsequently participate in any decision related to the loan purchase.
§ 614.4260 Evaluation requirements.
(a) Valuation. Valuations of personal and intangible property, as well as real property exempted under paragraph (c) of this section, shall be performed by qualified individuals who meet the established standards of this subpart and the Farm Credit System institution obtaining the collateral valuation.
(b) Appraisal. (1) Appraisals for real estate-related financial transactions with transaction values of more than $250,000 shall be performed by a qualified appraiser who is a State licensed or a State certified real estate appraiser.
(2) Appraisals for real estate-related financial transactions with transaction values of more than $1,000,000 shall be performed by a qualified appraiser who is a State certified real estate appraiser.
(c) Appraisals not required. An appraisal performed by a State certified or State licensed appraiser is not required for any real estate-related financial transaction in which any of the following conditions are met:
(1) The transaction value is $250,000 or less;
(2) The transaction is a “business loan” as defined in § 614.4240(e) that:
(i) Has a transaction value of $1,000,000 or less; and
(ii) Is not dependent on income derived from the sale or cash rental of real estate as the primary source of repayment;
(3) A lien on real property has been taken as collateral in an abundance of caution, and the application, when evaluated on the five basic credit factors, without considering the subject real estate, would support the credit decision that was based on other sources of repayment or collateral;
(4) A lien on real estate is not statutorily required and has been taken for purposes other than the real estate’s value;
(5) Subsequent loan transactions (which include but are not limited to loan servicing actions, reamortizations, modifications of loan terms, and partial releases), provided that either:
(i) The transaction does not involve the advancement of new loan funds other than funds necessary to cover reasonable closing costs; or
(ii) There has been no obvious and material change in market conditions or physical aspects of the property that threatens the adequacy of the Farm Credit System institution’s real estate collateral protection, even with the advancement of new loan funds;
(6) A Farm Credit System institution purchases a loan or an interest in a loan, pool of loans, or interests in real property, including mortgage-backed securities, provided that:
(i) The appraisal prepared for each loan, pooled loan, or real property interest, when originated, met the standards of this subpart, other Federal regulations adopted pursuant to FIRREA, or the requirements of the government-sponsored secondary market intermediaries under whose auspices the interest is sold; and
(ii) There has been no obvious and material change in market conditions or physical aspects of the property that would threaten the Farm Credit System institution’s collateral position, or
(7) A Farm Credit System institution makes or purchases a loan secured by real estate, which loan is guaranteed by an agency of the United States Government and is supported by an appraisal that conforms to the requirements of the guaranteeing agency.
To qualify for exceptions in paragraphs (c)(1) through (c)(7) of this section from the requirements of this subpart, the institution must have documentation justifying the use of such exceptions in the applicable loan file(s). In addition, the institution must document that the repayment of a “business loan” is not dependent on income derived from the sale or cash rental of real estate.
(d) FCA-required appraisals. The FCA reserves the right to require an appraisal under this subpart whenever it believes it is necessary to address safety and soundness issues.
(e) Reciprocity. The requirements of this subpart are satisfied by the use of State certified or State licensed appraisers from any State provided that:
(1) The appraiser is qualified to perform such appraisals;
(2) The applicable Farm Credit System institution has established policies providing for such interstate appraisals; and
(3) The applicable State appraiser licensing and certification agency recognizes the certification or license of the appraiser’s State of permanent certification or licensure.
§ 614.4265 Real property evaluations.
(a) Real estate shall be valued on the basis of market value.
(b) Market value shall be determined by a reasonable valuation method that:
(1) Considers the income capitalization approach, the sales comparison approach, and/or the cost approach, as appropriate, to determine market value;
(2) Explains and documents the elimination of any approach not used.
(3) Reconciles the market values of the applicable approaches; and
(c) At a minimum, the institution shall develop and document the evaluation of the income and debt servicing capacity for the property and operation where the transaction value exceeds $250,000 and the real estate taken as collateral:
(1) Is an integral part of and supports the principal source of loan repayment; or
(2) Is not an integral part of and does not support the principal source of loan repayment, but has demonstrable rental market appeal, is statutorily required, and fully or partially constitutes an integral part of an agricultural or aquatic operation.
(d) The income-earning and debt-servicing capacity established under paragraph (c) of this section on such properties shall be documented as part of the credit analysis for any related loan action, whether or not the income capitalization approach value is used as the basis for the market value conclusion stated in the evaluation report.
(e) Collateral closely aligned with, an integral part of, and normally sold with real estate (fixtures) may be included in the value of the real estate. All other collateral associated with the real estate, but designated as personal property, shall be evaluated as personal property in accordance with §§ 614.4250 and 614.4266.
(f) The evaluation shall properly identify all nonagricultural influences, including, but not limited to, urban development, mineral deposits, and commercial building development value, and the reasoning supporting the evaluator’s highest and best-use conclusion.
(g) Where an evaluation of real property is completed by a fee appraiser, as defined in § 614.4240(g), the institution’s standards shall include provisions for periodic collateral inspections performed by the institution’s account officer or appropriate designee.
§ 614.4266 Personal and intangible property evaluations.
(a) Personal property and intangibles shall be valued on the basis of market value in accordance with the institution’s evaluation standards and policies.
(b) Personal property evaluations shall include a source of comparisons of value (i.e., equipment dealer listings, Blue Book, market sales reports, etc.) and a description of the property being evaluated, including location of the property and, where applicable, quantity, species/variety, measure/weight, value per unit and in total, type of identification (such as brand, bill of lading, or warehouse receipt), quality, condition, and date.
(c) Evaluations of intangibles shall include a review and description of the documents supporting the property interests and the marketability of the intangible property, including applicable terms, conditions, and restrictions contained in the document that would affect the value of the property.
(d) Where an evaluation of personal or intangible property is completed by a fee appraiser, as defined in § 614.4240(g), the institution’s standards shall include provisions for periodic collateral inspections and verification by the institution’s account officer or appropriate designee.
(e) When a Farm Credit System institution deems an appraisal necessary, personal or intangible property shall be appraised in accordance with procedures and standards established by the institution by individuals deemed qualified by the institution to complete the work under the USPAP Competency and Ethics Provisions.
§ 614.4267 Professional association membership; competency.
(a) Membership in appraisal organizations. A State certified appraiser or a State licensed appraiser may not be excluded from consideration for an assignment for a real estate-related transaction solely by virtue of membership or lack of membership in any particular appraisal organization.
(b) Competency. All staff and fee evaluators, including appraisers, performing evaluations in connection with real, personal, or intangible property taken as collateral in connection with extensions of credit must meet the qualification requirements of this subpart. However, an evaluator (as defined in § 614.4240(n)) may not be considered competent solely by virtue of being certified, licensed, or accredited. Any determination of competency shall be based on the individual’s experience and educational background as they relate to the particular evaluation assignment for which such individual is being considered.
Subpart G [Reserved]
Subpart H—Loan Purchases and Sales
§ 614.4325 Purchase and sale of interests in loans.
(a) Definitions. For the purposes of this subpart, the following definitions shall apply:
(1) Interests in loans means ownership interests in the principal amount, interest payments, or any aspect of a loan transaction and transactions involving a pool of loans, including servicing rights.
(2) Lead lender means a lending institution having a direct contractual relationship with a borrower to advance funds, which institution sells or assigns an interest or interests in such loan to one or more other lenders.
(3) Loan means any extension of credit or similar financial assistance of the type authorized under the Act, such as guarantees, letters of credit, and other similar transactions.
(4) Participating institution means an institution that purchases a participation interest in a loan originated by another lender.
(5) Sale with recourse means a sale of a loan or an interest in a loan in which the seller:
(i) Retains some risk of loss from the transferred asset for any cause except the seller’s breach of usual and customary warranties or representations designed to protect the purchaser against fraud or misrepresentation; or
(ii) Has an obligation to make payments of principal or interest to any party resulting from:
(A) Default on the payment of principal or interest on the loan by the borrower or guarantor or any other deficiencies in the obligor’s performance;
(B) Changes in the market value of the assets after transfer;
(C) Any contractual relationship between the seller and purchaser incident to the transfer that, by its terms, could continue even after final payment, default, or other termination of the assets transferred; or
(D) Any other cause, except the retention at servicing rights alone shall not constitute recourse.
(6) Subordinated participation interest means an interest in a loan that bears the first risk of loss, including the retention of such an interest when a loan is sold to a pooler certified by the Federal Agricultural Mortgage Corporation pursuant to title VIII of the Act, or an interest in a pool of subordinated participation interests purchased to satisfy the requirements of title VIII of the Act with respect to a loan sold to such a certified pooler.
(b) Authority to purchase and sell interests in loans. Loans and interests in loans may only be sold in accordance with each institution’s lending authorities, as set forth in subpart A of this part. No Farm Credit System institution may purchase any interest in a loan from an institution that is not a Farm Credit System institution, except:
(1) For the purpose of pooling and securitizing such loans under title VIII of the Act;
(2) Purchases of a participation interest that qualifies under the institution’s lending authority, as set forth in subpart A of this part, and meets the requirements of § 614.4330 of this subpart;
(3) Loans purchased from the Federal Deposit Insurance Corporation, provided that the Farm Credit System institution with direct lending authority under title I, II or III of the Act:
(i) Conducts a thorough due diligence prior to purchase to ensure that the loan, or pool of loans, qualifies under the institution’s lending authority as set forth in subpart A of this part, and meets scope of financing and eligibility requirements in subpart A or subpart B of part 613;
(ii) Obtains funding bank approval if a Farm Credit System association purchases loans or pools of loans that exceed 10 percent of total its capital;
(iii) Establishes a program whereby each eligible borrower of the loan purchased is offered an opportunity to acquire the institution’s required minimum amount of voting stock;
(iv) Determines whether each loan purchased, except for loans purchased that could be financed only by a bank for cooperatives under title III of the Act, is a distressed loan as defined in § 617.7000, and provides borrowers of purchased loans who acquire voting stock the rights afforded in § 617.7000, subparts A, and D through G if the loan is distressed; and
(v) Divests eligible purchased loans when the borrowers elect not to acquire stock under the program offered in paragraph (b)(3)(iii) of this section in the same manner it would divest loans under its current business practices.
(vi) Includes information on loans purchased under authority of this section in the Reports of Condition and Performance required under § 621.12 of this chapter, in the format prescribed by FCA reporting instructions.
(c) Policies. Each Farm Credit System institution that is authorized to sell or purchase interests in loans under subpart A of this part shall exercise that authority in accordance with a policy adopted by its board of directors that addresses the following matters:
(1) The types of purchasers to which the institution is authorized to sell interests in loans;
(2) The types of loans in which the institution may purchase or sell an interest and the types of interests which may be purchased or sold;
(3) The underwriting standards to be applied in the purchase of interests in loans:
(4) Such limitations on the aggregate principal amount of interests in loans that the institution may purchase from a single institution as are necessary to diversify risk, and such limitations on the aggregate amount the institution may purchase from all institutions as are necessary to assure that service to the territory is not impeded;
(5) Provision for the identification and reporting of loans in which interests are sold or purchased;
(6) Requirements for providing and securing in a timely manner adequate credit and other information needed to make an independent credit judgment; and
(7) Any limitations or conditions to which sales or purchases are subject that the board deems appropriate, including arbitration.
(d) Purchase and sale agreements. Agreements to purchase or sell an interest in a loan shall, at a minimum:
(1) Identify the particular loan(s) to be covered by the agreement;
(2) Provide for the transfer of credit and other borrower information on a timely and continuing basis;
(3) Provide for sharing, dividing, or assigning collateral;
(4) Identify the nature of the interest(s) sold or purchased;
(5) Set forth the rights and obligations of the parties and the terms and conditions of the sale; and
(6) Contain any terms necessary for the appropriate administration of the loan and the protection of the interests of the Farm Credit System institution.
(e) Independent credit judgment. Each institution that purchases an interest in a loan shall make a judgment on the creditworthiness of the borrower that is independent of the originating or lead lender and any intermediary seller or broker prior to the purchase of the interest and prior to any servicing action that alters the terms of the original agreement, which judgment shall not be delegated to any person(s) not employed by the institution. A Farm Credit System institution that purchases a loan or any interest therein may use information, such as appraisals or collateral inspections, furnished by the originating or lead lender, or any intermediary seller or broker; however, the purchasing Farm Credit System institution shall independently evaluate such information when exercising its independent credit judgment. No employee who performed a real estate appraisal on any collateral supporting a loan shall participate in the decision to purchase that loan. The independent credit judgment shall be documented by a credit analysis that considers factors set forth in the loan underwriting standards adopted pursuant to § 614.4150 of this part and is independent of the originating institution and any intermediary seller or broker. The credit analysis shall consider such credit and other borrower information as would be required by a prudent lender and shall include an evaluation of the capacity and reliability of the servicer. Boards of directors of jointly managed institutions shall adopt procedures to ensure that the interests of their respective shareholders are protected in participation between such institutions.
(f) Limitations. The aggregate principal amount of interests in loans purchased from a single lead lender and the aggregate principal amount of interests in loans purchased from other institutions shall not exceed the limits set in the institution’s policy.
(g) Sales with recourse. When a loan or interest in a loan is sold with recourse, it shall be accorded the following treatment:
(1) The loan shall be considered, to the extent of the recourse, an extension of credit by the purchaser to the seller, as well as an extension of credit from the seller to the borrower(s), for the purpose of determining whether credit extensions to a borrower are within the lending limits established in subpart J of this part.
(2) The amount of the loan subject to the recourse agreement shall be considered a loan sold with recourse for the purpose of computing permanent capital ratios.
(h) Transactions through agents. Transactions pertaining to purchases of loans, including the judgement on creditworthiness, may be performed through an agent, provided that:
(1) The institution establishes the necessary criteria in a written agency agreement that outlines, at a minimum, the scope of the agency relationship and obligates the agent to comply with the institution’s underwriting standards;
(2) The institution periodically reviews the agency relationship to determine if the agent’s actions are in the best interest of the institution;
(3) The agent must be independent of the seller or intermediate broker in the transaction; and
(4) If an association’s funding bank serves as its agent, the agency agreement must provide that:
(i) The association can terminate the agreement upon no more than 60 days notice to the bank;
(ii) The association may, in its discretion, require the bank to purchase from the association any interest in a loan that the association determines does not comply with the terms of the agency agreement or the association’s loan underwriting standards.
§ 614.4330 Loan participations.
Agreements to purchase or sell a participation interest shall be subject to the provisions of § 614.4325 of this subpart, and, in addition, shall satisfy the requirements of this section.
(a) Participation agreements. Agreements to purchase or sell a participation interest in a loan shall, in addition to meeting the requirements of § 614.4325(d) of this subpart, at a minimum:
(1) Define the duties and responsibilities of the participating institution and the lead lender, and/or the servicing institution, if different from the lead lender.
(2) Provide for loan servicing and monitoring of the servicer;
(3) Set forth authorization and conditions for action in the event of borrower distress or default;
(4) Provide for sharing of risk;
(5) Set forth conditions for the offering and acceptance of the loan participation and termination of the agreement;
(6) Provide for sharing of fees, interest charges, and costs between participating institutions;
(7) Provide for a method of resolution of disagreements arising under the agreement between two or more institutions;
(8) Specify whether the contract is assignable by either party; and
(9) Provide for the issuance of certificates evidencing a participation interest in a loan.
(b) Intrasystem participations. Loans participated between or among Farm Credit System institutions shall meet the borrower eligibility, membership, loan term, loan amount, loan security, and stock purchase requirements of the originating lender.
§ 614.4335 Borrower stock requirements.
(a) In general. Except as provided in paragraph (b) of this section, a borrower shall meet the minimum borrower stock purchase requirements as a condition of obtaining a loan.
(b) Loans designated for sale into a secondary market. (1) An institution’s bylaws may provide that the institution’s minimum borrower stock purchase requirements do not apply if a loan is designated, at the time it is made, for sale into a secondary market.
(2) If a loan designated for sale under paragraph (b)(1) of this section is not sold into a secondary market during the 180-day period that begins on the date of designation, the institution’s minimum borrower stock purchase requirements shall apply.
(c) Retirement of borrower stock—(1) In general. Borrower stock may be retired only if the institution meets the minimum permanent capital requirements imposed by the FCA pursuant to the Act or regulations and, except as provided in paragraph (c)(2) of this section, in accordance with the following:
(i) Borrower stock may be retired if the entire loan is sold without recourse, provided that when the loan is sold without recourse to another Farm Credit System institution, the borrower may elect to hold stock in either the selling or purchasing institution.
(ii) Borrower stock may not be retired when the entire loan is sold with recourse.
(iii) When an interest in a loan is sold without recourse, a proportionate amount of borrower stock may be retired, but in no event may stock be retired below the institution’s minimum stock purchase requirements for the interest retained.
(iv) If an institution repurchases a loan on which the stock has been retired, the borrower shall be required to repurchase stock in the amount of the minimum stock purchase requirement.
(2) Loans sold into a secondary market. An institution’s bylaws may provide that all outstanding voting stock held by a borrower with respect to a loan shall be retired when the loan is sold into a secondary market.
(d) Applicability. In the case of a loan sold into a secondary market under title VIII of the Act, paragraphs (b)(1) and (c)(2) of this section apply regardless of whether the institution retains a subordinated participation interest in a loan or pool of loans or contributes to a cash reserve.
§ 614.4337 Disclosure to borrowers.
When a loan or an interest in a loan other than a participation interest is sold with servicing rights, the disclosure shall be made to the borrower in accordance with this section:
(a) The selling institution shall disclose to the borrower at least 10 days prior to the borrower’s next payment date;
(1) The name, address, and telephone number of the purchasing institution;
(2) The name and address of the party to whom payment is to be made;
(3) A description of the impact of the sale on statutory borrower rights after the sale;
(4) Any terms in the agreement that would permit a purchaser to change the terms or conditions of the loan.
(b) A Farm Credit System institution that purchases a loan or a non-participation interest therein shall not take any servicing action that adversely affects the borrower until it ensures that disclosure has been made to the borrower of:
(1) The name, address, and telephone number of the purchasing institution; and
(2) The address where the payment should be sent.
Subpart I—Loss-Sharing Agreements
§ 614.4340 General.
(a) Upon the approval of the board of directors of the respective Farm Credit System institutions, any System bank, association, or service corporation or service association may enter into an agreement to share loan and other losses with any other institution(s) of the System. As appropriate, a loss-sharing agreement may contain provisions relating to definitions of terms, terms and conditions for activation, determinations of assessment formulas, limitations on assessments, reimbursements, administration, arbitration, and provisions for amendment and termination.
(b) System institutions may agree among themselves to share losses for the purpose of protecting against the impairment of capital stock or participation certificates, or for any other purpose. Agreements may provide for sharing losses that arise in the future or that were recognized by one or more of the signatory institutions before the date of the agreement. Agreements may contain provisions that are not entirely reciprocal among the signatories to the agreement. Loss-sharing agreements can provide for the sharing of loan losses, operating losses, casualty losses, losses on high risk assets, or any other losses.
§ 614.4345 Guaranty agreements.
Guaranty agreements under which a percentage of the risk associated with specific loans is assumed may be entered into by or among System banks and associations.
Subpart J—Lending and Leasing Limits
§ 614.4350 Definitions.
For purposes of this subpart, the following definitions shall apply:
(a) Borrower means an individual, partnership, joint venture, trust, corporation, or other business entity to which an institution has made a loan or a commitment to make a loan either directly or indirectly. Excluded are a Farm Credit System association or other financing institution that comply with the criteria in section 1.7(b) of the Act and the regulations in subpart P of this part. For the purposes of this subpart, the term “borrower” includes any customer to whom an institution has made a lease or a commitment to make a lease.
(b) Commitment means a legally binding obligation to extend credit, enter into lease financing, purchase or participate in loans or leases, or pay the obligation of another, which becomes effective at the time such commitment is made.
(c) Loan means any extension of, or commitment to extend, credit authorized under the Act whether it results from direct negotiations between a lender and a borrower or is purchased from or discounted for another lender. This includes participation interests. The term “loan” includes loans and leases outstanding, obligated but undisbursed commitments to lend or lease, contracts of sale, notes receivable, other similar obligations, guarantees, and all types of leases. An institution “makes a loan or lease” when it enters into a commitment to lend or lease, advances new funds, substitutes a different borrower or lessee for a borrower or lessee who is released, or where any other person’s liability is added to the outstanding loan, lease or commitment.
(d) Primary liability means an obligation to repay that is not conditioned upon an unsuccessful prior demand on another party.
(e) Secondary liability means an obligation to repay that only arises after an unsuccessful demand on another party.
§ 614.4351 Computation of lending and leasing limit base.
(a) Lending and leasing limit base. An institution’s lending and leasing limit base is composed of the total capital (tier 1 and tier 2) of the institution, as defined in § 628.2 of this chapter, with adjustments applicable to the institution provided for in § 628.22 of this chapter, and with the following further adjustments:
(1) [Reserved]
(2) Eligible third-party capital that is required to be excluded from total capital under § 628.23 of this chapter may be included in the lending limit base.
(b) Timing of calculation. The lending limit base will be calculated on a monthly basis as of the preceding month end.
§ 614.4352 Farm Credit Banks and agricultural credit banks.
(a) Farm Credit Banks. No Farm Credit Bank may make or discount a loan to a borrower if the consolidated amount of all loans outstanding and undisbursed commitments to that borrower exceed 15 percent of the bank’s lending and leasing limit base.
(b) Agricultural credit banks. (1) No agricultural credit bank may make or discount a loan to a borrower under the authority of title I of the Act if the consolidated amount of all loans outstanding and undisbursed commitments to that borrower exceed 15 percent of the bank’s lending and leasing limit base.
(2) No agricultural credit bank may make or discount a loan to a borrower under the authority of title III of the Act if the consolidated amount of all loans outstanding and undisbursed commitments to that borrower exceed the lending and leasing limits prescribed in § 614.4355 of this subpart.
§ 614.4353 Direct lender associations.
No direct lender association may make a loan to a borrower if the consolidated amount of all loans outstanding and undisbursed commitments to that borrower exceed 15 percent of the association’s lending and leasing limit base.
§ 614.4354 [Reserved]
§ 614.4355 Banks for cooperatives.
No bank for cooperatives may make a loan if the consolidated amount of all loans outstanding and undisbursed commitments to that borrower exceeds the following percentages of the lending and leasing limit base of the bank:
(a) Basic limit. (1) Term loans to eligible cooperatives: 25 percent.
(2) Term loans to foreign and domestic parties: 10 percent.
(3) Lease loans qualifying under § 614.4020(a)(3) and applying to the lessee: 25 percent.
(4) Standby letters of credit qualifying under § 614.4810: 35 percent.
(5) Guarantees qualifying under § 614.4800: 35 percent.
(6) Seasonal loans exclusive of commodity loans qualifying under § 614.4231: 35 percent.
(7) Foreign trade receivables qualifying under § 614.4700: 50 percent.
(8) Commodity loans qualifying under § 614.4231: 50 percent.
(9) Export and import letters of credit qualifying under § 614.4720: 50 percent.
(b) Total limit. (1) The sum of term and seasonal loans exclusive of commodity loans qualifying under § 614.4231: 35 percent.
(2) The sum of paragraphs (a)(1) through (a)(9) of this section: 50 percent.
§ 614.4356 Farm Credit Leasing Services Corporation.
The Farm Credit Leasing Services Corporation may enter into a lease agreement with a lessee if the consolidated amount of all leases and undisbursed commitments to that lessee or any related entities does not exceed 15 percent of its lending and leasing limit base.
§ 614.4357 Banks for cooperatives look-through notes.
Where a bank for cooperatives makes a loan to an eligible borrower that is secured by notes of individuals or business entities, the basic lending limits provided in § 614.4355 may be applied to each original notemaker rather than to the loan to the eligible borrower, if:
(a) Each note is current and carries a full recourse endorsement or unconditional guarantee by the borrower;
(b) The bank determines the financial condition, repayment capacity, and other credit factors of the loan to the original maker reasonably justify the credit granted by the endorser; and
(c) The loans are fully supported by documented loan files, which include, at a minimum:
(1) A credit report supporting the bank’s finding that the financial condition, repayment capacity, and other factors of the maker of the notes being pledged justify the credit extended by the bank and/or endorser;
(2) A certification by a bank officer designated for that purpose by the loan or executive committee that the financial responsibility of the original notemaker has been evaluated by the loan committee and the bank is relying primarily on each such maker for the payment of the obligation; and
(3) Other credit information normally required of a borrower when making and administering a loan.
§ 614.4358 Computation of obligations.
(a) Inclusions. The computation of total loans to each borrower for the purpose of computing their lending and leasing limit shall include:
(1) The total unpaid principal of all loans and lease balances outstanding and the total amount of undisbursed commitments except as excluded by paragraph (b) of this section. This amount shall include loans that have been charged off on the books of the institution in whole or in part but have not been collected, except to the extent that such amounts are not legally collectible;
(2) Purchased interests in loans, including participation interests, to the extent of the amount of the purchased interest, including any undisbursed commitment;
(3) Loans attributed to a borrower in accordance with § 614.4359.
(b) Exclusions. The following loans when adequately documented in the loan file, may be excluded from loans to a borrower subject to the lending and leasing limit:
(1) Any loan or portion of a loan that carries a full faith and credit performance guaranty or surety of any department, agency, bureau, board, commission, or establishment of the United States government, provided there is no evidence to suggest that the guaranty has become unenforceable and the institution can demonstrate that it is in compliance with the terms and conditions of the guaranty.
(2) Any loan or portion of a loan guaranteed by a Farm Credit System institution, pursuant to the provisions of § 614.4345 on guaranty agreements. This exclusion does not apply to the institution providing the guaranty.
(3) Any loan or portion of a loan that is secured by bonds, notes, certificates of indebtedness, or Treasury bills of the United States or by other obligations guaranteed as to principal and interest by the United States government, provided the loans are fully secured by the current market value of such obligations. If the market value of the collateral declines to below the balance of the loan, and the entire loan, individually, or when combined with other loans and undisbursed commitments to or attributed to the borrower, causes the borrower’s total indebtedness to exceed the institution’s lending limit, the institution shall have 5 business days to bring the loan into conformance before it shall be deemed to be in violation of the lending limit.
(4) Interests in loans sold, including participation interests, when the sale agreement meets the following requirements:
(i) The interest must be sold without recourse; and
(ii) The agreement under which the interest is sold must provide for the sharing of all payments of principal, collection expenses, collateral proceeds, and risk of loss on a pro rata basis according to the percentage interest in the principal amount of the loan. Agreements that provide for the pro rata sharing to commence at the time of default or similar event, as defined in the agreement under which the interest is sold, shall be considered to be pro rata agreements, notwithstanding the fact that advances are made and payments are distributed on a basis other than pro rata prior to that time.
(5) Interests in leases sold when the sale agreement provides that:
(i) The interest sold must be:
(A) An undivided interest in all the lease payments or the residual value of all the leased property; or
(B) A fractional undivided interest in the total lease transaction;
(ii) The interest must be sold without recourse; and
(iii) Sharing of all lease payments must be on a pro rata basis according to the percentage interest in the lease payments.
(6) Loans sold in their entirety to a pooler certified by the Federal Agricultural Mortgage Corporation, if an interest in a pool of subordinated participation interests is purchased to satisfy the requirements of title VIII of the Act.
§ 614.4359 Attribution rules.
(a) For the purpose of applying the lending and leasing limit to the indebtedness of a borrower, loans to a related borrower shall be combined with loans outstanding to the borrower and attributed to the borrower when any one of the following three conditions exist:
(1) Liability. (i) The borrower has primary or secondary liability on a loan made to the related borrower. The amount of such loan attributable to the borrower is limited to the amount of the borrower’s liability.
(ii) This section does not require attribution of a guarantee taken out of an abundance of caution. To qualify for the abundance of caution exception to the requirements of this subpart, the institution must document in the loan file that the loan, when evaluated under the loan underwriting standards adopted pursuant to § 614.4150 of this part without considering the guarantee, would support the credit decision under the same basic terms and conditions.
(iii) For the banks for cooperatives and agricultural credit banks operating under title III authorities of the Act, look-through notes are exempt from the lending limit provisions provided they meet the criteria of § 614.4357.
(2) Financial interdependence. The operations of a borrower and related borrower are financially interdependent. Financial interdependence exists if the borrower is the primary source of repayment for a related borrower’s loan, or if the operations of the borrower and the related borrower are commingled.
(i) The borrower shall be considered the primary source of repayment on the loan to the related borrower if the borrower is obligated to supply 50 percent or more of the related borrower’s annual gross receipts, and reliance on the income from one another is such that, regardless of the solvency and liquidity of the borrower’s operations, the debt service obligation of the related borrower could not be met if income flow from the borrower is interrupted or terminated. For the purpose of this paragraph, gross receipts include, but are not limited to, revenues, intercompany loans, dividends and capital contributions.
(ii) The assets or operations of the borrower and related borrower are considered to be commingled if they cannot be separated without materially impacting the economic survival of the individual operations and their ability to repay their loans.
(3) Control. The borrower directly or indirectly controls the related borrower. A borrower is deemed to control a related borrower if either paragraph (a)(3)(i) or (a)(3)(ii) of this section exist:
(i) The borrower, directly or acting through one or more other persons, owns 50 percent or more of the stock of the related borrower; or
(ii) The borrower, directly or acting through one or more other persons, owns or has the power to vote 25 percent or more of the voting stock of a related borrower, and meets at least one of the following three conditions:
(A) The borrower shares a common directorate or management with a related borrower. A common directorate is deemed to exist when a majority of the directors, trustees, or other persons performing similar functions of one borrower also serves the other borrower in a like capacity. A common management is deemed to exist if any employee of the borrower holds the position of chief executive officer, chief operating officer, chief financial officer, or an equivalent position in the related borrower’s organization.
(B) The borrower controls in any manner the election of a majority of directors of a related borrower.
(C) The borrower exercises or has the power to exercise a controlling influence over management of a related borrower’s operations through the provisions of management placement or marketing agreements, or providing services such as insurance carrier or bookkeeping.
(b) Each institution shall make provisions for appropriately designating loans to a related borrower that are combined with the borrower’s loan and attributed to the borrower to ensure that loans to the borrower are within the lending and leasing limits.
(c) Attribution rules table. For the purposes of applying the lending and leasing limit to the indebtedness of a borrower, loans to a related borrower shall be combined with loans outstanding to the borrower and attributed to the borrower when any one of three attribution rules are met as outlined in Table 1.
Table 1
| Attribution rule | Criteria per § 614.4359 | Attribute |
|---|---|---|
| (A) Liability | Borrower has primary or secondary liability | Yes.* |
| *to the extent of the borrower’s liability | Borrower’s liability is taken out of an abundance of caution | No.* |
| Look-through notes (BC only) | No. | |
| (B) Financial Interdependence | Source of Repayment: | |
| (Economic survival of the borrower’s operation will materially impact economic survival of the related borrowers operation) | Borrower is obligated to supply 50 percent or more of related borrower’s annual gross receipts, | Yes. |
| Commingled Operations: | ||
| Assets or operations of the borrowers are commingled and cannot be separated without materially impacting the borrowers’ repayment capacity | Yes. | |
| (C) Control | The borrower owns 50 percent or more of the stock of the related borrower | Yes. |
| (The borrower, directly or indirectly, controls the related borrower) | The borrower owns or has the power to vote 25 percent or more of the voting stock of a related borrower, and (1) Shares a common directorate or management with a related borrower, or (2) Controls the election of a majority of directors of a related borrower, or (3) Exercises a controlling influence over management of a related borrower’s operations through the provisions of management placement or marketing agreements, or providing services such as insurance carrier or bookkeeping | Yes. |
§ 614.4360 Lending and leasing limit violations.
(a) Each loan, except loans that are grandfathered under the provisions of § 614.4361, shall be in compliance with the lending and leasing limit on the date the loan is made, and at all times thereafter. Except as provided for in paragraph (b) of this section, loans which are in violation of the lending and leasing limit shall comply with the provisions of § 615.5090 of this chapter.
(b) Under the following conditions a loan that violates the lending and leasing limit shall be exempt from the provisions of § 615.5090 of this chapter:
(1) A loan in which the total amount of principal outstanding and undisbursed commitments exceed the lending and leasing limit because of a decline in permanent capital after the loan was made.
(2) Loans on which funds are advanced pursuant to a commitment that was within the lending and leasing limit at the time the commitment was made, even if the lending and leasing limit subsequently declines.
(3) A loan that exceeds the lending and leasing limit as a result of the consolidation of the debt of two or more borrowers as a consequence of a merger or the acquisition of one borrower’s operations by another borrower. Such a loan may be extended or renewed, for a period not to exceed 1 year from the date of such merger or acquisition, during which period the institution may advance and/or readvance funds not to exceed the greater of:
(i) 110 percent of the advances to the borrower in the prior calendar year; or
(ii) 110 percent of the average of the advances to the borrower in the past 3 calendar years.
(c) For all lending and leasing limit violations except those exempted under § 614.4360(b)(3), within 90 days of the identification of the violation, the institution must develop a written plan prescribing the specific actions that will be taken by the institution to bring the total amount of loans and commitments outstanding or attributed to that borrower within the new lending and leasing limit, and must document the plan in the loan file.
(d) All leases, except those permitted under § 614.4361, reading “effective date of this subpart” in § 614.4361(a) and “effective date of these regulations” in § 614.4361(b) as “effective date of this amendment,” must comply with the lending and leasing limit on the date the lease is made, and at all times after that.
(e) Nothing in this section limits the authority of the FCA to take administrative action, including, but not limited to, monetary penalties, as a result of lending and leasing limit violations.
§ 614.4361 Transition.
(a) A loan (not including a commitment) made or attributed to a borrower prior to the effective date of this subpart, which does not comply with the limits contained in this subpart, will not be considered a violation of the lending and leasing limits during the existing contract terms of such loans. A new loan must conform with the rules set forth in this subpart. A new loan includes but is not limited to:
(1) Funds advanced in excess of existing commitment;
(2) A different borrower is substituted for a borrower who is subsequently released; or
(3) An additional person becomes an obligor on the loan.
(b) A commitment made prior to the effective date of these regulations which exceeds the lending and leasing limit may be funded to the full extent of the legal commitment. Any advances that exceed the lending and leasing limit are subject to the provisions prescribed in § 614.4360.
§ 614.4362 Loan and lease concentration risk mitigation policy.
The board of directors of each title I, II, and III System institution must adopt and ensure implementation of a written policy to effectively measure, limit and monitor exposures to concentration risks resulting from the institution’s lending and leasing activities.
(a) Policy elements. The policy must include:
(1) A purpose and objective;
(2) Clearly defined and consistently used terms;
(3) Quantitative methods to measure and limit identified exposures to significant and reasonably foreseeable loan and lease concentration risks (as set forth in paragraph (b) of this section); and
(4) Internal controls that delineate authorities delegated to management, authorities retained by the board, and a process for addressing exceptions and reporting requirements.
(b) Quantitative methods. (1) At a minimum, the quantitative methods included in the policy must measure and limit identified exposures to significant and reasonably foreseeable concentration risks emanating from:
(i) A single borrower;
(ii) A single-industry sector;
(iii) A single counterparty; or
(iv) Other lending activities unique to the institution because of its territory, the nature and scope of its activities and its risk-bearing capacity.
(2) In determining concentration limits, the policy must consider other risk factors that could identify significant and reasonably foreseeable loan and lease losses. Such risk factors could include borrower risk ratings, the institution’s relationship with the borrower, the borrower’s knowledge and experience, loan structure and purpose, type or location of collateral (including loss given default ratings), loans to emerging industries or industries outside of an institution’s area of expertise, out-of-territory loans, counterparties, or weaknesses in due diligence practices.
Subparts K-L [Reserved]
Subpart M—Loan Approval Requirements
§ 614.4450 General requirements.
Authority for loan approval is vested in the Farm Credit banks and associations.
§ 614.4460 Loan approval responsibility.
Approval of the following loans is the responsibility of each district board of directors. The responsibility may be discharged by prior approval of such loans by the appropriate bank board, or establishment of a policy under which the authority to approve such loans is delegated to bank management (except paragraphs (d) and (e) of this section which cannot be delegated to management). If the approval of such loans is to be delegated to bank management, the loans are to be submitted promptly for post review by the bank board and a report disclosing all material facts relating to the credit relationship involved shall be submitted annually by bank management to the district board.
(a) Loans to a member of the Farm Credit Administration Board.
(b) Loans to a member of the district board.
(c) Loans to a cooperative of which a member of a bank board of directors is a member of the board of directors, an officer, or employee.
(d) Loans to the president of a Farm Credit bank.
(e) Loans to employees of the Farm Credit Administration.
(f) Loans where directors, officers or employees designated above:
(1) Are to receive proceeds of the loan in excess of an amount prescribed by an appropriate bank board, or
(2) Are stockholders or owners of equity in a legal entity to which the loan is to be made wherein they have a significant personal or beneficial interest in the loan proceeds thereof or the security, or
(3) Are endorsers, guarantors or co-makers in excess of an amount prescribed by an appropriate bank board.
§ 614.4470 Loans subject to bank approval.
(a) The following loans (unless such loans are of a type prohibited under part 612) shall be subject to prior approval of the bank supervising the association in which the loan application originates:
(1) Loans to a director of the association.
(2) Loans to a director of an association which is under joint management when the application originates in one of the associations.
(3) Loans to an employee of the association.
(4) Loans to an employee of an association which is under joint management when the application originates in one of the associations.
(5) Loans to bank employees when the application originates in one of the associations supervised by the employing bank.
(b) Loans to any borrower shall be subject to the prior approval of the bank supervising the association in which the loan application originates whenever a director or an employee of the association or an employee of the bank supervising the association:
(1) Will receive proceeds of the loan in excess of the amount prescribed by the supervising bank board, or
(2) Has a significant personal or beneficial interest in the loan, the proceeds, or the security, or controls the borrower, or
(3) Is an endorser, guarantor, or comaker with respect to the loan in excess of an amount prescribed by the supervising bank board.
(c) Any loan which will result in any one borrower being obligated (as defined in subpart J of this part) in excess of an amount established by the supervising bank under its policies for delegation of authority to associations shall be subject to prior approval of the supervising bank.
Subpart N [Reserved]
Subpart O—Special Lending Programs
§ 614.4525 General.
(a) To provide the best possible credit service to farmers, ranchers, and producers or harvesters of aquatic products, bank and association boards may adopt policies permitting the bank or association to enter into agreements with agents, dealers, cooperatives, other lenders, and individuals to facilitate its making of loans to eligible farmers, ranchers, and producers or harvesters of aquatic products.
(b) A bank or association, pursuant to its board policies, may enter into an agreement with third parties that will accrue to the benefit of the borrower and the lender to perform functions in the making or servicing of loans other than the evaluation and approval of loans. When such an agreement is developed, and the territory covered by the agreement extends outside the territorial limits of the originating association or bank, the written consent of all affected banks or associations is required. Reasonable compensation may be paid for services rendered.
(c) Production credit associations and agricultural credit associations may enter into agreements with private dealers or cooperatives permitting them to take applications for loans from the association to purchase farm or aquatic equipment, supplies, and machinery. Such agreements shall normally be limited to persons or businesses selling to farmers, ranchers, or producers or harvesters of aquatic products and shall contain credit limits consistent with sound credit standards. When the sales territory of a dealer or cooperative extends outside the territory of the originating association or the Farm Credit district, written consent of each bank and association affected shall be obtained before making such loans. Reasonable compensation may be paid or charged to a dealer or cooperative for services rendered in connection with such programs.
(d) Farm Credit System institutions that are direct lenders may enter into memoranda of understanding among themselves or with other lenders for the simultaneous processing and closing of loans to a mutual borrower. The basic policies and principles of each System lender shall apply.
§ 614.4530 Special loans, production credit associations and agricultural credit associations.
Under policies approved by the bank board and procedures developed by the bank, production credit associations and agricultural credit associations may make the following special types of loans on commodities covered by price support programs. Notwithstanding the regulations covering other loans made by an association, loans may be made to members on any commodity for which a Commodity Credit Corporation price support program is in effect, at such rate of interest and upon such terms as the bank board may prescribe subject to the following conditions:
(a) The commodity offered as security for the loan shall be eligible for price support under a Commodity Credit Corporation price support program and shall be stored in a bonded public warehouse, holding storage agreement for such commodity approved by Commodity Credit Corporation.
(b) The member shall have complied with all Commodity Credit Corporation eligibility requirements.
(c) The loan shall mature not later than 30 days prior to the expiration of the period during which the Commodity Credit Corporation loan or other price support may be obtained on the commodity and shall be secured by pledge of negotiable warehouse receipts covering the commodity.
(d) The borrower shall appoint the association as his attorney-in-fact to obtain a Commodity Credit Corporation loan (or other such price support as is available) in the event that the borrower fails to do so prior to maturity or repayment of the loan.
Subpart P—Farm Credit Bank and Agricultural Credit Bank Financing of Other Financing Institutions
§ 614.4540 Other financing institution access to Farm Credit Banks and agricultural credit banks for funding, discount, and other similar financial assistance.
(a) Basic criteria for access. Any national bank, State bank, trust company, agriculture credit corporation, incorporated livestock loan company, savings association, credit union, or any association of agricultural producers engaged in the making of loans to farmers and ranchers, and any corporation engaged in the making of loans to producers or harvesters of aquatic products may become an other financing institution (OFI) that funds, discounts, and obtains other similar financial assistance from a Farm Credit Bank or agricultural credit bank in order to extend short- and intermediate-term credit to eligible borrowers for authorized purposes pursuant to sections 1.10(b) and 2.4(a) and (b) of the Act. Each OFI shall be duly organized and qualified to make loans and leases under the laws of each jurisdiction in which it operates.
(b) Assured access. Each Farm Credit Bank or agricultural credit bank must fund, discount, or provide other similar financial assistance to any creditworthy OFI that:
(1) Maintains at least 15 percent of its loan volume at a seasonal peak in loans and leases to farmers, ranchers, aquatic producers and harvesters. The Farm Credit Bank or agricultural credit bank shall not include the loan assets of the OFI’s parent, affiliates, or subsidiaries when determining compliance with the requirement of this paragraph; and
(2) Executes a general financing agreement with the Farm Credit Bank or agricultural credit bank that establishes a financing or discount relationship for at least 2 years.
(c) Underwriting standards. Each Farm Credit Bank and agricultural credit bank shall establish objective policies, procedures, pricing guidelines, and loan underwriting standards for determining the creditworthiness of each OFI applicant. A copy of such policies, procedures, guidelines, and standards shall be made available, upon request to each OFI and OFI applicant.
(d) Denial of OFI access. A Farm Credit Bank or an agricultural credit bank may deny the funding request of any creditworthy OFI that meets the conditions in paragraph (b) of this section only when such request would:
(1) Adversely affect a Farm Credit Bank or agricultural credit bank’s ability to:
(i) Achieve and maintain established or projected capital levels; or
(ii) Raise funds in the money markets; or
(2) Otherwise expose the Farm Credit Bank or agricultural credit bank to safety and soundness risks.
(e) Notice to applicants. Each Farm Credit Bank or agricultural credit bank shall render its decision on an OFI application in as expeditious a manner as is practicable. Upon reaching a decision on an application, the Farm Credit Bank or agricultural credit bank shall provide prompt written notice of its decision to the applicant. When the Farm Credit Bank or agricultural credit bank makes an adverse credit decision on an application, the written notice shall include the specific reason(s) for the decision.
(f) Reports to the board of directors. Each Farm Credit Bank and agricultural credit bank shall provide its board of directors with a written annual report regarding the scope of OFI program activities during the preceding fiscal year.
§ 614.4550 Place of discount.
A Farm Credit Bank or agricultural credit bank may provide funding, discounting, or other similar financial assistance to any OFI applicant. However, a Farm Credit Bank or agricultural credit bank cannot fund, discount, or extend other similar financial assistance to an OFI that maintains its headquarters, or has more than 50 percent of its outstanding loan volume to eligible borrowers who conduct agricultural or aquatic operations in the chartered territory of another Farm Credit bank unless it notifies such bank in writing within five (5) business days of receiving the OFI’s application for financing. Two or more Farm Credit banks cannot simultaneously fund the same OFI.
§ 614.4560 Requirements for OFI funding relationships.
(a) As a condition for extending funding, discount and other similar financial assistance to an OFI, each Farm Credit Bank or agricultural credit bank shall require every OFI to:
(1) Execute a general financing agreement pursuant to the regulations in subpart C of part 614; and
(2) Purchase non-voting stock in its Farm Credit Bank or agricultural credit bank pursuant to the bank’s bylaws.
(b) A Farm Credit Bank or agricultural credit bank shall extend funding, discount and other similar financial assistance to an OFI only for purposes and terms authorized under sections 1.10(b) and 2.4(a) and (b) of the Act.
(c) Rural home loans to borrowers who are not bona fide farmers, ranchers, and aquatic producers and harvesters are subject to the restrictions in § 613.3030 of this chapter. Loans that an OFI makes to processing and marketing operators who supply less than 20 percent of the throughput shall be included in the calculation that § 613.3010(b)(1) of this chapter establishes for Farm Credit Banks and agricultural credit banks.
(d) The borrower rights requirements in part C of title IV of the Act, and the regulations in part 617 of this chapter shall apply to all loans that an OFI funds or discounts through a Farm Credit Bank or agricultural credit bank, unless such loans are subject to the Truth-in-Lending Act, 15 U.S.C. 1601 et seq.
(e) As a condition for obtaining funding, discount and other similar financial assistance from a Farm Credit Bank or agricultural credit bank, all State banks, trust companies, or State-chartered savings associations shall execute a written consent that authorizes their State regulators to furnish examination reports to the Farm Credit Administration upon its request. Any OFI that is not a depository institution shall consent in writing to examination by the Farm Credit Administration as a condition precedent for obtaining funding, discount and other similar financial assistance from a Farm Credit Bank or agricultural credit bank, and file such consent with its Farm Credit funding bank.
§ 614.4570 Recourse and security.
(a) Full recourse and guarantee. All obligations that are funded or discounted through a Farm Credit Bank or agricultural credit bank shall be endorsed with the full recourse or unconditional guarantee of the OFI.
(b) General collateral. (1) Each Farm Credit Bank and agricultural credit bank shall take as collateral all notes, drafts, and other obligations that it funds or discounts for each OFI; and
(2) Each Farm Credit Bank and agricultural credit bank shall perfect, in accordance with State law, a senior security interest in any and all obligations and the proceeds thereunder that the OFI pledges as collateral.
(c) Supplemental collateral. (1) Each Farm Credit Bank and agricultural credit bank shall develop policies and loan underwriting standards that establish uniform and objective requirements to determine the need and amount of supplemental collateral or other credit enhancements that each OFI shall provide as a condition for obtaining funding, discount and other similar financial assistance from such Farm Credit bank.
(2) The amount, type, and quality of supplemental collateral or other credit enhancements required for each OFI shall be established in the general financing agreement and shall be proportional to the level of risk that the OFI poses to the Farm Credit Bank or agricultural credit bank.
§ 614.4580 Limitation on the extension of funding, discount and other similar financial assistance to an OFI.
(a) No obligation shall be purchased from or discounted for and no loan shall be made or other similar financial assistance extended by a Farm Credit Bank or agricultural credit bank to an OFI if the amount of such obligation added to the aggregate liabilities of such OFI, whether direct or contingent (other than bona fide deposit liabilities), exceeds ten times the paid-in and unimpaired capital and surplus of such OFI or the amount of such liabilities permitted under the laws of the jurisdiction creating such OFI, whichever is less.
(b) It shall be unlawful for any national bank that is indebted to any Farm Credit Bank or agricultural credit bank, on paper discounted or purchased, to incur any additional indebtedness, if by virtue of such additional indebtedness its aggregate liabilities, direct or contingent, will exceed the limitation described in paragraph (a) of this section.
§ 614.4590 Equitable treatment of OFIs and Farm Credit System associations.
(a) Each Farm Credit Bank and agricultural credit bank shall apply comparable and objective loan underwriting standards and pricing requirements to both OFIs and Farm Credit System direct lender associations.
(b) The total charges that a Farm Credit Bank or agricultural credit bank assesses an OFI through capitalization requirements, interest rates, and fees shall be comparable to the charges that the same Farm Credit Bank or agricultural credit bank imposes on its direct lender associations. Any variation between the overall funding costs that OFIs and direct lender associations are charged by the same funding bank shall result from differences in credit risk and administrative costs to the Farm Credit Bank or agricultural credit bank.
(c) Upon request, each Farm Credit Bank or agricultural credit bank must provide each OFI and OFI applicant, that has or is seeking to establish a funding relationship with the Farm Credit Bank or agricultural credit bank, a copy of its policies, procedures, loan underwriting standards, and pricing guidelines for OFIs. The pricing guidelines must identify the specific components that make up the cost of funds for OFIs, and the amount of these components expressed in basis points.
(d) Upon request of any OFI or OFI applicant, that has or is seeking to establish a funding relationship with the Farm Credit Bank or agricultural credit bank, the bank must explain in writing the reasons for any variation in the overall funding costs it charges to OFIs and affiliated direct lender associations. The written explanation must compare the cost of funds that the Farm Credit Bank or agricultural credit bank charges the OFIs and affiliated direct lender associations. When possible, the written explanation shall compare the costs of funding that the bank charges several OFIs and Farm Credit associations that are similar in size. However, the Farm Credit Bank or agricultural credit bank must not disclose financial or confidential information about any individual Farm Credit association.
§ 614.4595 Public disclosure about OFIs.
A Farm Credit Bank or agricultural credit bank may disclose to members of the public the name, address, telephone number, and Internet Web site address of any affiliated OFI only if such OFI, through a duly authorized officer, consents in writing. Each Farm Credit Bank and agricultural credit bank must adopt policies and procedures for requesting, obtaining, and maintaining the consent of its OFIs and for disclosing this information to the public.
§ 614.4600 Insolvency of an OFI.
If an OFI that is indebted to a Farm Credit Bank or agricultural credit bank becomes insolvent, is in process of liquidation, or fails to service its loans properly, the Farm Credit Bank or agricultural credit bank may take over such loans and other assets that the OFI pledged as collateral. Once the Farm Credit Bank or agricultural credit bank exercises its remedies, it shall have the authority to make additional advances, to grant renewals and extensions, and to take such other actions as may be necessary to collect and service loans to the OFI’s borrower. The funding Farm Credit Bank or agricultural credit bank may also liquidate the OFI’s loans and other assets in order to achieve repayment of the debt.
Subpart Q—Banks for Cooperatives and Agricultural Credit Banks Financing International Trade
§ 614.4700 Financing foreign trade receivables.
(a) Banks for cooperatives and agricultural credit banks, under policies adopted by their boards of directors, are authorized to finance foreign trade receivables on behalf of eligible cooperatives to include the following:
(1) Advances against collections;
(2) Trade acceptances;
(3) Factoring; and
(4) Open accounts.
(b) To reduce credit, political, and other risks associated with foreign trade receivable financing, the banks for cooperatives and agricultural credit banks shall avail themselves of such guarantee and insurance plans as are available in the United States and other countries, such as the Foreign Credit Insurance Association and the Export-Import Bank of the United States. Exceptions may be made where a prospective borrower has had a longstanding successful business relationship with the eligible cooperative borrower or an eligible cooperative which is not a borrower if the prospective borrower has a high credit rating as determined by the bank.
(c) When financing a draft drawn on a foreign importer, the banks should retain recourse to the exporter unless their credit evaluation of and experience with the importer indicate recourse is not necessary or unless appropriate guarantees or insurance plans are used.
(d) The financing of foreign trade receivables shall be limited by the policies of each bank’s board of directors. The policies shall provide a method of determining the maximum amount in dollars, by country, to be financed and establishing a maximum percentage of the amount of a draft drawn on a foreign party against which the bank may advance funds. The banks shall take into consideration the following factors:
(1) The reputation and financial strength of the foreign importer.
(2) The reputation and payment record of the class of importers in the same country as the subject importer in regard to prompt payment of drafts drawn upon them.
(3) The quality of the supporting documents offered with the draft.
(4) The degree of ease with which necessary foreign exchange conversion can be made, or the extent to which foreign currency exposure may be hedged by forward or future contracts.
(5) The reputation and financial strength of the exporter.
(e) The banks may establish foreign trade receivable financing programs by which eligible parties pledge collections to the bank, and then may borrow from the bank up to a stated maximum percentage of the total amount of receivables pledged at any one time.
(f) When financing foreign trade receivables, the banks shall take such precautions and obtain such credit information as necessary to ascertain that all parties to the transaction(s) being financed are reputable and capable of performing their responsibilities under the contract of sale.
(g) When financing foreign trade receivables, the banks shall determine that all shipments are covered by maritime insurance while on the high seas.
(h) Countries where credit is to be extended will be analyzed periodically and systematically on a centralized basis. The resulting country studies will be disseminated to all banks for cooperatives and agricultural credit banks to be used as inputs in credit grading decisions.
§ 614.4710 [Reserved]
§ 614.4720 Letters of credit.
Banks for cooperatives and agricultural credit banks, under policies adopted by their boards of directors, may issue, advise, or confirm import or export letters of credit in accordance with the Uniform Commercial Code, or the Uniform Customs and Practice for Documentary Credits, to or on behalf of its customers. In addition, as a matter of sound banking practice, letters of credit shall be issued in conformity with the list which follows.
(a) Each letter of credit shall be in writing and shall conspicuously state that it is a letter of credit, or be conspicuously entitled as such.
(b) The letter of credit shall contain a specified expiration date or be for a definite term.
(c) The letter of credit shall contain a sum certain.
(d) The bank’s obligation to pay should arise only upon fulfilling the terms and conditions as specified in the letter of credit. The bank must not be called upon to determine questions of fact or law at issue between the account party and the beneficiary.
(e) The bank’s customer should have an unqualified obligation to reimburse the bank for payments made under the letter of credit.
(f) All letters of credit shall be irrevocable.
§ 614.4800 Guarantees and contracts of suretyship.
A bank for cooperatives or an agricultural credit bank, under a policy approved by the bank’s board of directors, may lend its credit, be itself a surety to indemnify another, or otherwise become a guarantor if an eligible cooperative substantially benefits from the performance of the transaction involved. A bank may guarantee the debt of eligible cooperatives and foreign parties or otherwise agree to make payments on the occurrence of readily ascertainable events if the guarantee or agreement specifies a maximum monetary liability. Guarantees may be secured or unsecured, and can include, but are not limited to, such events as nonpayment of taxes, rentals, customs duties, costs of transport, and loss of or nonconformance of shipping documents. The bank’s customer shall have an unqualified obligation to reimburse the bank for payments made under a guarantee or surety.
§ 614.4810 Standby letters of credit.
(a) The banks for cooperatives and agricultural credit banks are authorized to issue on behalf of parties eligible for financing under regulations § 614.4010(d) or § 614.4020 standby letters of credit that represent an obligation to the beneficiary on the part of the issuer:
(1) To repay money borrowed by, advanced to, or for the account of the account party, or
(2) To make payment on account of any indebtedness undertaken by the account party, or
(3) To make payment on account of any default by the account party in the performance of an obligation.
(b) As a matter of sound banking practice, banks for cooperatives and agricultural credit banks shall evaluate applications for standby letters of credit on the basis of the loan underwriting standards adopted pursuant to § 614.4150 of the regulations.
§ 614.4900 Foreign exchange.
(a) Before a bank for cooperatives or an agricultural credit bank may engage in any financial transaction which transports monetary instruments from any place within the United States to or through any place outside the United States or to any place within the United States, the bank must have policies adopted by the bank’s board of directors governing such transactions and must have established bank procedures to safeguard the interests of the stockholders of the bank in regard to such transactions.
(b) Under policies adopted by the bank’s board of directors, a bank for cooperatives or an agricultural credit bank may engage in currency exchange activities necessary to service individual transactions that may be financed under the regulations authorizing export, import, and other internationally related credit and financial services. These currency exchange activities shall not include any loans or commitments intended to finance speculative futures transactions by eligible borrowers in foreign currencies. The bank may engage, on behalf of the eligible borrowers or on its own behalf, in bona fide hedging transactions and positions, where such transactions or positions normally reduce risks in the conduct and management of international financial activities. The bank’s policies should include established guidelines for:
(1) Net overnight positions, by currency.
(2) Maturity distribution, by currency, of foreign currency assets, liabilities, and foreign exchange contracts.
(3) Outstanding contracts with individual customers and banks.
(4) Credit approval procedures safeguarding against delivery or settlement risk.
(5) Total value of outstanding contracts—spot and forward.
(c) A bank for cooperatives or an agricultural credit bank is responsible for its compliance with the laws of the United States in regard to reporting requirements of the Department of the Treasury pertaining to currency exchange activities and international transfers of monetary instruments.
(d) A bank for cooperatives or an agricultural credit bank engaged in foreign exchange trading shall have written policies describing the scope of trading activity authorized, delegation of authority, types of services offered, trading limits, reporting requirements, and internal accounting controls.
(e) The bank’s trading guideline policies should provide for reporting procedures adequate to inform management properly of trading activities and to facilitate detection of lack of compliance with policy directives.
(f) The bank’s policies shall establish foreign exchange delivery limits for eligible customers with relationship to the customer’s financial capability to bear the financial risks assumed. The bank will be expected to maintain documentary evidence that a customer’s delivery exposure is reasonable, and that responsible bank officers routinely review outstanding delivery exposure of individual customers.
(g) The bank’s personnel policies shall include written standards of conduct for those involved with foreign exchange activities, including the following which should be prohibited:
(1) Trading with entities affiliated with the bank or with members of the board of directors.
(2) Foreign exchange and deposit transactions with other bank employees.
(3) Personal business relationships with foreign exchange and money brokers with whom the bank deals.
(h) The bank’s policies should provide detailed instructions regarding the need for bank officers to disclose the limits of responsibility and liability of the bank when it holds positions or executes contracts for the account of eligible parties. The bank’s policies regarding the respective procedures should provide reasonable assurance that reports on trading activities are current and complete, and that the opportunity for concealment of unauthorized transactions is kept at the absolute minimum.
(i) The banks for cooperatives and agricultural credit banks shall use the Funding Corporation for purposes of trading foreign exchange. All foreign exchange transactions shall be made by the Funding Corporation on behalf of the banks consistent with instructions received from the respective banks.
(j) Guidelines (b) through (i) of this section will not apply if a bank purchases or sells foreign exchange through a commercial bank and has no foreign exchange risk exposure.
Subpart R—Secondary Market Authorities
(a) Any bank or association of the Farm Credit System, except a bank for cooperatives, with direct lending authority may originate agricultural real estate loans for sale to one or more certified agricultural mortgage marketing facilities under title VIII of the Act.
(b) Any bank or association of the Farm Credit System, except a bank for cooperatives, may operate as an agricultural mortgage marketing facility under title VIII of the Act, either acting alone or jointly with other banks and/or associations, if so certified by the Federal Agricultural Mortgage Corporation.
Subpart S—Flood Insurance Requirements
§ 614.4920 Purpose and scope.
(a) Purpose. This subpart implements the National Flood Insurance Act of 1968 and the Flood Disaster Protection Act of 1973, as amended (42 U.S.C. 4001-4129).
(b) Scope. This subpart, except for §§ 614.4940 and 614.4950, applies to loans secured by buildings or mobile homes located or to be located in areas determined by the Administrator of the Federal Emergency Management Agency to have special flood hazards. Sections 614.4940 and 614.4950 apply to loans secured by buildings or mobile homes, regardless of location.
§ 614.4925 Definitions.
For purposes of this subpart:
1968 Act means the National Flood Insurance Act of 1968 and the Flood Disaster Protection Act of 1973, as amended (42 U.S.C. 4001-4129).
Administrator of FEMA means the Administrator of the Federal Emergency Management Agency.
Building means a walled and roofed structure, other than a gas or liquid storage tank, that is principally above ground and affixed to a permanent site, and a walled and roofed structure while in the course of construction, alteration, or repair.
Community means a State or a political subdivision of a State that has zoning and building code jurisdiction over a particular area having special flood hazards.
Designated loan means a loan secured by a building or mobile home that is located or to be located in a special flood hazard area in which flood insurance is available under the 1968 Act.
Mobile home means a structure, transportable in one or more sections, that is built on a permanent chassis and designed for use with or without a permanent foundation when attached to the required utilities. The term mobile home does not include a recreational vehicle. For purposes of this subpart, the term mobile home means a mobile home on a permanent foundation. The term mobile home includes a manufactured home as that term is used in the NFIP.
Mutual aid society means an organization—
(1) Whose members share a common religious, charitable, educational, or fraternal bond;
(2) That covers losses caused by damage to members’ property pursuant to an agreement, including damage caused by flooding, in accordance with this common bond; and
(3) That has a demonstrated history of fulfilling the terms of agreements to cover losses to members’ property caused by flooding.
NFIP means the National Flood Insurance Program authorized under the 1968 Act.
Private flood insurance means an insurance policy that:
(1) Is issued by an insurance company that is:
(i) Licensed, admitted, or otherwise approved to engage in the business of insurance by the insurance regulator of the State or jurisdiction in which the property to be insured is located; or
(ii) Recognized, or not disapproved, as a surplus lines insurer by the insurance regulator of the State or jurisdiction in which the property to be insured is located in the case of a policy of difference in conditions, multiple peril, all risk, or other blanket coverage insuring nonresidential commercial property;
(2) Provides flood insurance coverage that is at least as broad as the coverage provided under an SFIP for the same type of property, including when considering deductibles, exclusions, and conditions offered by the insurer. To be at least as broad as the coverage provided under an SFIP, the policy must, at a minimum:
(i) Define the term “flood” to include the events defined as a “flood” in an SFIP;
(ii) Contain the coverage specified in an SFIP, including that relating to building property coverage; personal property coverage, if purchased by the insured mortgagor(s); other coverages; and increased cost of compliance coverage;
(iii) Contain deductibles no higher than the specified maximum, and include similar non-applicability provisions, as under an SFIP, for any total policy coverage amount up to the maximum available under the NFIP at the time the policy is provided to the lender;
(iv) Provide coverage for direct physical loss caused by a flood and may only exclude other causes of loss that are excluded in an SFIP. Any exclusions other than those in an SFIP may pertain only to coverage that is in addition to the amount and type of coverage that could be provided by an SFIP or have the effect of providing broader coverage to the policyholder; and
(v) Not contain conditions that narrow the coverage provided in an SFIP;
(3) Includes all of the following:
(i) A requirement for the insurer to give written notice 45 days before cancellation or non-renewal of flood insurance coverage to:
(A) The insured; and
(B) The System institution that made the designated loan secured by the property covered by the flood insurance, or the servicer acting on its behalf;
(ii) Information about the availability of flood insurance coverage under the NFIP;
(iii) A mortgage interest clause similar to the clause contained in an SFIP; and
(iv) A provision requiring an insured to file suit not later than one year after the date of a written denial of all or part of a claim under the policy; and
(4) Contains cancellation provisions that are as restrictive as the provisions contained in an SFIP.
Residential improved real estate means real estate upon which a home or other residential building is located or to be located.
Servicer means the person responsible for:
(1) Receiving any scheduled, periodic payments from a borrower under the terms of a loan, including amounts for taxes, insurance premiums, and other charges with respect to the property securing the loan; and
(2) Making payments of principal and interest and any other payments from the amounts received from the borrower as may be required under the terms of the loan.
SFIP means, for purposes of § 614.4925, a standard flood insurance policy issued under the NFIP in effect as of the date private flood insurance is provided to a System institution.
Special flood hazard area means the land in the flood plain within a community having at least a one percent chance of flooding in any given year, as designated by the Administrator of FEMA.
Table funding means a settlement at which a loan is funded by a contemporaneous advance of loan funds and an assignment of the loan to the person advancing the funds.
§ 614.4930 Requirement to purchase flood insurance where available.
(a) In general. A System institution shall not make, increase, extend, or renew any designated loan unless the building or mobile home and any personal property securing the loan is covered by flood insurance for the term of the loan. The amount of insurance must be at least equal to the lesser of the outstanding principal balance of the designated loan or the maximum limit of coverage available for the particular type of property under the 1968 Act. Flood insurance coverage under the 1968 Act is limited to the building or mobile home and any personal property that secures a loan and not the land itself.
(b) Table funded loans. A System institution that acquires a loan from a mortgage broker or other entity through table funding shall be considered to be making a loan for the purposes of this subpart.
(c) Private flood insurance—(1) Mandatory acceptance. A System institution must accept private flood insurance, as defined in § 614.4925, in satisfaction of the flood insurance purchase requirement in paragraph (a) of this section if the policy meets the requirements for coverage in paragraph (a) of this section.
(2) Compliance aid for mandatory acceptance. A System institution may determine that a policy meets the definition of private flood insurance in § 614.4925, without further review of the policy, if the following statement is included within the policy or as an endorsement to the policy: “This policy meets the definition of private flood insurance contained in 42 U.S.C. 4012a(b)(7) and the corresponding regulation.”
(3) Discretionary acceptance. A System institution may accept a flood insurance policy issued by a private insurer that is not issued under the NFIP and that does not meet the definition of private flood insurance in § 614.4925 in satisfaction of the flood insurance purchase requirement of this section if the policy:
(i) Provides coverage in the amount required by paragraph (a) of this section;
(ii) Is issued by an insurer that is licensed, admitted, or otherwise approved to engage in the business of insurance by the insurance regulator of the State or jurisdiction in which the property to be insured is located; or in the case of a policy of difference in conditions, multiple peril, all risk, or other blanket coverage insuring nonresidential commercial property, is issued by a surplus lines insurer recognized, or not disapproved, by the insurance regulator of the State or jurisdiction where the property to be insured is located;
(iii) Covers both the mortgagor(s) and the mortgagee(s) as loss payees, except in the case of a policy that is provided by a condominium association, cooperative, homeowners association, or other applicable group and for which the premium is paid by the condominium association, cooperative, homeowners association, or other applicable group as a common expense; and
(iv) Provides sufficient protection of the designated loan, consistent with general safety and soundness principles, and the System institution documents its conclusion regarding sufficiency of the protection of the loan in writing.
(4) Mutual aid societies. Notwithstanding the requirements of paragraph (c)(3) of this section, a System institution may accept a plan issued by a mutual aid society, as defined in § 614.4925, in satisfaction of the flood insurance purchase requirement of this section if:
(i) The FCA has determined that such plans qualify as flood insurance for purposes of the Act;
(ii) The plan provides coverage in the amount required by paragraph (a) of this section;
(iii) The plan covers both the mortgagor(s) and the mortgagee(s) as loss payees; and
(iv) The plan provides sufficient protection of the designated loan, consistent with general safety and soundness principles, and the System institution documents its conclusion regarding sufficiency of the protection of the loan in writing.
§ 614.4932 Exemptions.
The flood insurance requirement prescribed by § 614.4930 does not apply with respect to:
(a) Any State-owned property covered under a policy of self-insurance satisfactory to the Administrator of FEMA, who publishes and periodically revises the list of States falling within this exemption;
(b) Property securing any loan with an original principal balance of $5,000 or less and a repayment term of one year or less; or
(c) Any structure that is a part of any residential property but is detached from the primary residential structure of such property and does not serve as a residence. For purposes of this paragraph (c):
(1) “A structure that is a part of a residential property” is a structure used primarily for personal, family, or household purposes, and not used primarily for agricultural, commercial, industrial, or other business purposes;
(2) A structure is “detached” from the primary residential structure if it is not joined by any structural connection to that structure; and
(3) “Serve as a residence” shall be based upon the good faith determination of the System institution that the structure is intended for use or actually used as a residence, which generally includes sleeping, bathroom, or kitchen facilities.
§ 614.4935 Escrow requirement.
(a) In general—(1) Applicability. Except as provided in paragraph (a)(2) or paragraph (c) of this section, a System institution, or a servicer acting on its behalf, shall require the escrow of all premiums and fees for any flood insurance required under § 614.4930 for any designated loan secured by residential improved real estate or a mobile home that is made, increased, extended, or renewed on or after January 1, 2016, payable with the same frequency as payments on the designated loan are required to be made for the duration of the loan.
(2) Exceptions. Paragraph (a)(1) of this section does not apply if:
(i) The loan is an extension of credit primarily for business, commercial, or agricultural purposes;
(ii) The loan is in a subordinate position to a senior lien secured by the same residential improved real estate or mobile home for which the borrower has obtained flood insurance coverage that meets the requirements of § 614.4930;
(iii) Flood insurance coverage for the residential improved real estate or mobile home is provided by a policy that:
(A) Meets the requirements of § 614.4930;
(B) Is provided by a condominium association, cooperative, homeowners association, or other applicable group; and
(C) The premium for which is paid by the condominium association, cooperative, homeowners association, or other applicable group as a common expense;
(iv) The loan is a home equity line of credit;
(v) The loan is a nonperforming loan, which is a loan that is 90 or more days past due and remains nonperforming until it is permanently modified or until the entire amount past due, including principal, accrued interest, and penalty interest incurred as the result of past due status, is collected or otherwise discharged in full; or
(vi) The loan has a term of no longer than 12 months.
(3) Duration of exception. If a System institution, or a servicer acting its behalf, determines at any time during the term of a designated loan secured by residential improved real estate or a mobile home that is made, increased, extended, or renewed on or after January 1, 2016, that an exception under paragraph (a)(2) of this section does not apply, then the System institution, or the servicer acting on its behalf, shall require the escrow of all premiums and fees for any flood insurance required under § 614.4930 as soon as reasonably practicable and, if applicable, shall provide any disclosure required under section 10 of the Real Estate Settlement Procedures Act of 1974 (12 U.S.C. 2609) (RESPA).
(4) Escrow account. The System institution, or a servicer acting on its behalf, shall deposit the flood insurance premiums and fees on behalf of the borrower in an escrow account. This escrow account will be subject to escrow requirements adopted pursuant to section 10 of RESPA, which generally limits the amount that may be maintained in escrow accounts for certain types of loans and requires escrow account statements for those accounts, only if the loan is otherwise subject to RESPA. Following receipt of a notice from the Administrator of FEMA or other provider of flood insurance that premiums are due, the System institution, or a servicer acting on its behalf, shall pay the amount owed to the insurance provider from the escrow account by the date when such premiums are due.
(b) Notice. For any loan for which a System institution is required to escrow under paragraph (a)(1) or paragraph (c)(2) of this section or may be required to escrow under paragraph (a)(3) of this section during the term of the loan, the System institution, or a servicer acting on its behalf, shall mail or deliver a written notice with the notice provided under § 614.4955 informing the borrower that the System institution is required to escrow all premiums and fees for required flood insurance, using language that is substantially similar to model clauses on the escrow requirement in appendix A to this subpart.
(c) Small lender exception—(1) Qualification. Except as may be required under applicable State law, paragraphs (a), (b), and (d) of this section do not apply to a System institution:
(i) That has total assets of less than $1 billion as of December 31 of either of the two prior calendar years; and
(ii) On or before July 6, 2012:
(A) Was not required under Federal or State law to deposit taxes, insurance premiums, fees, or any other charges in an escrow account for the entire term of any loan secured by residential improved real estate or a mobile home; and
(B) Did not have a policy of consistently and uniformly requiring the deposit of taxes, insurance premiums, fees, or any other charges in an escrow account for any loans secured by residential improved real estate or a mobile home.
(2) Change in status. If a System institution previously qualified for the exception in paragraph (c)(1) of this section, but no longer qualifies for the exception because it had assets of $1 billion or more for two consecutive calendar year ends, the System institution must escrow premiums and fees for flood insurance pursuant to paragraph (a) of this section for any designated loan made, increased, extended, or renewed on or after July 1 of the first calendar year of changed status.
(d) Option to escrow—(1) In general. A System institution, or a servicer acting on its behalf, shall offer and make available to the borrower the option to escrow all premiums and fees for any flood insurance required under § 614.4930 for any loan secured by residential improved real estate or a mobile home that is outstanding on January 1, 2016, or July 1 of the first calendar year in which the System institution has had a change in status pursuant to paragraph (c)(2) of this section, unless:
(i) The loan or the System institution qualifies for an exception from the escrow requirement under paragraph (a)(2) or (c) of this section, respectively;
(ii) The borrower is already escrowing all premiums and fees for flood insurance for the loan; or
(iii) The System institution is required to escrow flood insurance premiums and fees pursuant to paragraph (a) of this section.
(2) Notice. For any loan subject to paragraph (d) of this section, the System institution, or a servicer acting on its behalf, shall mail or deliver to the borrower no later than June 30, 2016, or September 30 of the first calendar year in which the System institution has had a change in status pursuant to paragraph (c)(2) of this section, a notice in writing, or if the borrower agrees, electronically, informing the borrower of the option to escrow all premiums and fees for any required flood insurance and the method(s) by which the borrower may request the escrow, using language similar to the model clause in appendix B to this subpart.
(3) Timing. The System institution, or the servicer acting on its behalf, must begin escrowing premiums and fees for flood insurance as soon as reasonably practicable after the System institution, or servicer, receives the borrower’s request to escrow.
§ 614.4940 Required use of standard flood hazard determination form.
(a) Use of form. A System institution shall use the standard flood hazard determination form developed by the Administrator of FEMA when determining whether the building or mobile home offered as collateral security for a loan is or will be located in a special flood hazard area in which flood insurance is available under the 1968 Act. The standard flood hazard determination form may be used in a printed, computerized, or electronic manner. A System institution may obtain the standard flood hazard determination form from FEMA’s Web site at www.fema.gov.
(b) Retention of form. A System institution shall retain a copy of the completed standard flood hazard determination form, in either hard copy or electronic form, for the period of time the System institution owns the loan.
§ 614.4945 Force placement of flood insurance.
(a) Notice and purchase of coverage. If a System institution, or a servicer acting on behalf of the System institution, determines at any time during the term of a designated loan, that the building or mobile home and any personal property securing the designated loan is not covered by flood insurance or is covered by flood insurance in an amount less than the amount required under § 614.4930, then the System institution, or a servicer acting on its behalf, shall notify the borrower that the borrower should obtain flood insurance, at the borrower’s expense, in an amount at least equal to the amount required under § 614.4930, for the remaining term of the loan. If the borrower fails to obtain flood insurance within 45 days after notification, then the System institution, or its servicer, shall purchase insurance on the borrower’s behalf. The System institution, or its servicer, may charge the borrower for the cost of premiums and fees incurred in purchasing the insurance, including premiums or fees incurred for coverage beginning on the date on which flood insurance coverage lapsed or did not provide a sufficient coverage amount.
(b) Termination of force-placed insurance—(1) Termination and refund. Within 30 days of receipt by a System institution, or by a servicer acting on its behalf, of a confirmation of a borrower’s existing flood insurance coverage, the System institution, or its servicer, shall:
(i) Notify the insurance provider to terminate any insurance purchased by the System institution, or its servicer, under paragraph (a) of this section; and
(ii) Refund to the borrower all premiums paid by the borrower for any insurance purchased by the System institution, or by its servicer, under paragraph (a) of this section during any period during which the borrower’s flood insurance coverage and the insurance coverage purchased by the System institution, or its servicer, were each in effect, and any related fees charged to the borrower with respect to the insurance purchased by the System institution, or its servicer, during such period.
(2) Sufficiency of demonstration. For purposes of confirming a borrower’s existing flood insurance coverage under paragraph (b) of this section, a System institution, or a servicer acting on its behalf, shall accept from the borrower an insurance policy declarations page that includes the existing flood insurance policy number and the identity of, and contact information for, the insurance company or agent.
§ 614.4950 Determination fees.
(a) General. Notwithstanding any Federal or State law other than the Flood Disaster Protection Act of 1973, as amended (42 U.S.C. 4001-4129), any System institution, or a servicer acting on behalf of the System institution, may charge a reasonable fee for determining whether the building or mobile home securing the loan is located or will be located in a special flood hazard area. A determination fee may also include, but is not limited to, a fee for life-of-loan monitoring.
(b) Borrower fee. The determination fee authorized by paragraph (a) of this section may be charged to the borrower if the determination:
(1) Is made in connection with a making, increasing, extending, or renewing of the loan that is initiated by the borrower;
(2) Reflects the Administrator of FEMA’s revision or updating of flood plain areas or flood-risk zones;
(3) Reflects the Administrator of FEMA’s publication of a notice or compendium that:
(i) Affects the area in which the building or mobile home securing the loan is located; or
(ii) By determination of the Administrator of FEMA, may reasonably require a determination whether the building or mobile home securing the loan is located in a special flood hazard area; or
(4) Results in the purchase of flood insurance coverage by the lender, or its servicer, on behalf of the borrower under § 614.4945.
(c) Purchaser or transferee fee. The determination fee authorized by paragraph (a) of this section may be charged to the purchaser or transferee of a loan in the case of the sale or transfer of the loan.
§ 614.4955 Notice of special flood hazards and availability of Federal disaster relief assistance.
(a) Notice requirement. When a System institution makes, increases, extends, or renews a loan secured by a building or a mobile home located or to be located in a special flood hazard area, the System institution shall mail or deliver a written notice to the borrower and to the servicer in all cases whether or not flood insurance is available under the 1968 Act for the collateral securing the loan.
(b) Contents of notice. The written notice must include the following information:
(1) A warning, in a form approved by the Administrator of FEMA, that the building or the mobile home is or will be located in a special flood hazard area;
(2) A description of the flood insurance purchase requirements set forth in section 102(b) of the Flood Disaster Protection Act of 1973, as amended (42 U.S.C. 4012a(b));
(3) A statement, where applicable, that flood insurance coverage is available from private insurance companies that issue standard flood insurance policies on behalf of the NFIP or directly from the NFIP;
(4) A statement that flood insurance that provides the same level of coverage as a standard flood insurance policy under the NFIP also may be available from a private insurance company that issues policies on behalf of the company;
(5) A statement that the borrower is encouraged to compare the flood insurance coverage, deductibles, exclusions, conditions, and premiums associated with flood insurance policies issued on behalf of the NFIP and policies issued on behalf of private insurance companies and that the borrower should direct inquiries regarding the availability, cost, and comparisons of flood insurance coverage to an insurance agent; and
(6) A statement whether Federal disaster relief assistance may be available in the event of damage to the building or mobile home caused by flooding in a Federally declared disaster.
(c) Timing of notice. The System institution shall provide the notice required by paragraph (a) of this section to the borrower within a reasonable time before the completion of the transaction, and to the servicer as promptly as practicable after the System institution provides notice to the borrower and in any event no later than the time the System institution provides other similar notices to the servicer concerning hazard insurance and taxes. Notice to the servicer may be made electronically or may take the form of a copy of the notice to the borrower.
(d) Record of receipt. The System institution shall retain a record of the receipt of the notices by the borrower and the servicer for the period of time it owns the loan.
(e) Alternate method of notice. Instead of providing the notice to the borrower required by paragraph (a) of this section, a System institution may obtain satisfactory written assurance from a seller or lessor that, within a reasonable time before the completion of the sale or lease transaction, the seller or lessor has provided such notice to the purchaser or lessee. The System institution shall retain a record of the written assurance from the seller or lessor for the period of time it owns the loan.
(f) Use of sample form of notice. A System institution will be considered to be in compliance with the requirement for notice to the borrower of this section by providing written notice to the borrower containing the language presented in appendix A to this subpart within a reasonable time before the completion of the transaction. The notice presented in appendix A to this subpart satisfies the borrower notice requirements of the 1968 Act.
§ 614.4960 Notice of servicer’s identity.
(a) Notice requirement. When a System institution makes, increases, extends, renews, sells, or transfers a loan secured by a building or mobile home located or to be located in a special flood hazard area, it shall notify the Administrator of FEMA (or the Administrator’s designee) in writing of the identity of the servicer of the loan. The Administrator of FEMA has designated the insurance provider to receive the System institution’s notice of the servicer’s identity. This notice may be provided electronically if electronic transmission is satisfactory to the Administrator of FEMA’s designee.
(b) Transfer of servicing rights. The System institution shall notify the Administrator of FEMA (or the Administrator’s designee) of any change in the servicer of a loan described in paragraph (a) of this section within 60 days after the effective date of the change. This notice may be provided electronically if electronic transmission is satisfactory to the Administrator of FEMA’s designee. Upon any change in the servicing of a loan described in paragraph (a) of this section, the duty to provide notice under this paragraph (b) shall transfer to the transferee servicer.
Appendix A to Subpart S of Part 614—Sample Form of Notice of Special Flood Hazards and Availability of Federal Disaster Relief Assistance
We are giving you this notice to inform you that:
The building or mobile home securing the loan for which you have applied is or will be located in an area with special flood hazards.
The area has been identified by the Administrator of the Federal Emergency Management Agency (FEMA) as a special flood hazard area using FEMA’s Flood Insurance Rate Map or the Flood Hazard Boundary Map for the following community: ______. This area has a one percent (1%) chance of a flood equal to or exceeding the base flood elevation (a 100-year flood) in any given year. During the life of a 30-year mortgage loan, the risk of a 100-year flood in a special flood hazard area is 26 percent (26%).
Federal law allows a lender and borrower jointly to request the Administrator of FEMA to review the determination of whether the property securing the loan is located in a special flood hazard area. If you would like to make such a request, please contact us for further information.
____ The community in which the property securing the loan is located participates in the National Flood Insurance Program (NFIP). Federal law will not allow us to make you the loan that you have applied for if you do not purchase flood insurance. The flood insurance must be maintained for the life of the loan. If you fail to purchase or renew flood insurance on the property, Federal law authorizes and requires us to purchase the flood insurance for you at your expense.
• At a minimum, flood insurance purchased must cover the lesser of:
(1) The outstanding principal balance of the loan; or
(2) the maximum amount of coverage allowed for the type of property under the NFIP.
Flood insurance coverage under the NFIP is limited to the building or mobile home and any personal property that secures your loan and not the land itself.
• Federal disaster relief assistance (usually in the form of a low-interest loan) may be available for damages incurred in excess of your flood insurance if your community’s participation in the NFIP is in accordance with NFIP requirements.
• Although you may not be required to maintain flood insurance on all structures, you may still wish to do so, and your mortgage lender may still require you to do so to protect the collateral securing the mortgage. If you choose not to maintain flood insurance on a structure and it floods, you are responsible for all flood losses relating to that structure.
Flood insurance coverage under the NFIP may be purchased through an insurance agent who will obtain the policy either directly through the NFIP or through an insurance company that participates in the NFIP. Flood insurance that provides the same level of coverage as a standard flood insurance policy under the NFIP may be available from private insurers that do not participate in the NFIP. You should compare the flood insurance coverage, deductibles, exclusions, conditions, and premiums associated with flood insurance policies issued on behalf of the NFIP and policies issued on behalf of private insurance companies and contact an insurance agent as to the availability, cost, and comparisons of flood insurance coverage.
Federal law may require a lender or its servicer to escrow all premiums and fees for flood insurance that covers any residential building or mobile home securing a loan that is located in an area with special flood hazards. If your lender notifies you that an escrow account is required for your loan, then you must pay your flood insurance premiums and fees to the lender or its servicer with the same frequency as you make loan payments for the duration of your loan. These premiums and fees will be deposited in the escrow account, which will be used to pay the flood insurance provider.]
____ Flood insurance coverage under the NFIP is not available for the property securing the loan because the community in which the property is located does not participate in the NFIP. In addition, if the non-participating community has been identified for at least one year as containing a special flood hazard area, properties located in the community will not be eligible for Federal disaster relief assistance in the event of a Federally declared flood disaster.
Appendix B to Subpart S of Part 614—Sample Clause for Option to Escrow for Outstanding Loans
You have the option to escrow all premiums and fees for the payment on your flood insurance policy that covers any residential building or mobile home that is located in an area with special flood hazards and that secures your loan. If you choose this option:
• Your payments will be deposited in an escrow account to be paid to the flood insurance provider.
• The escrow amount for flood insurance will be added to the regular mortgage payment that you make to your lender or its servicer.
• The payments you make into the escrow account will accumulate over time and the funds will be used to pay your flood insurance policy when your lender or servicer receives a notice from your flood insurance provider that the flood insurance premium is due.
To choose this option, follow the instructions below. If you have any questions about the option, contact [Insert Name of Lender or Servicer] at [Insert Contact Information].
[Insert Instructions for Selecting to Escrow]
PART 615—FUNDING AND FISCAL AFFAIRS, LOAN POLICIES AND OPERATIONS, AND FUNDING OPERATIONS
Subpart A—Funding
§ 615.5000 General responsibilities.
(a) The System banks, acting through the Federal Farm Credit Banks Funding Corporation (Funding Corporation), have the primary responsibility for obtaining funds for the lending operations of the System institutions.
(b) The System’s funding operations have a significant impact upon the investment community, the general public, and the national economy in both the volume and the manner by which funds are raised. The Farm Credit Administration supervises compliance with the statutory collateral requirements for the debt obligations issued. The Chairman of the Farm Credit Administration, under policies adopted by the Board, consults with the Secretary of the Treasury concerning the System’s funding activities, pursuant to section 5.10 of the Act.
§ 615.5010 Funding Corporation.
(a) The Funding Corporation shall issue, market, and handle the obligations of the banks issued under section 4.2(b) through (d) of the Act and interbank or intersystem flow of funds as may from time to time be required, and, upon request of the banks, shall handle investment portfolios. The Funding Corporation shall maintain accurate and timely records. The System banks shall provide for the sale of such obligations through the Funding Corporation by negotiation, offer, bid, or syndicate sale, and for the delivery of such obligations by book entry, wire transfer, or such other means as may be appropriate.
(b) The interaction of the System with the financial community shall be conducted principally through the Funding Corporation. The Funding Corporation shall be subject to regulation and examination by the Farm Credit Administration.
§ 615.5030 Borrowings from commercial banks.
Each System bank board, by resolution, shall authorize all commercial bank borrowings by that System bank.
§ 615.5040 Borrowings from financial institutions other than commercial banks.
The Farm Credit banks may borrow from other financial institutions, such as insurance companies, Federal agencies, or Federal reserve banks.
Subpart B—Collateral
§ 615.5045 Definitions.
(a) Cost means the actual amount paid for any asset.
(b) Market value means the price at which a willing seller would sell to a willing buyer, neither under any compulsion to buy or sell.
(c) Unpaid balance means total principal and accrued interest owed.
(d) Secured interbank loan means a loan from one Farm Credit System bank to another Farm Credit System bank, secured by assets of the borrowing Farm Credit System bank.
§ 615.5050 Collateral requirements.
(a) Each bank shall have on hand at the time of issuance of any notes, bonds, debentures, or other similar obligations, and at all times thereafter maintain, free from any lien or other pledge, assets consisting of notes and other obligations representing loans made under the authority of the Act, real or personal property acquired in connection with loans made under the Act, obligations of the United States or any agency thereof direct or fully guaranteed, other bank assets (including marketable securities) approved by the Farm Credit Administration, cash, or cash equivalents approved by the Farm Credit Administration, in an aggregate value equal to the total amount of notes, bonds, debentures, or other similar obligations outstanding for which the bank is primarily liable.
(b) The collateral value of eligible investments (as defined in § 615.5140) shall be the lower of cost or market value.
(c)(1) Except as otherwise provided in this paragraph, the collateral value of notes and other obligations representing loans made under the authority of any Farm Credit Act shall be the unpaid balance of such loans adjusted for any allowance for credit losses (except as provided for in § 615.5090).
(2) The collateral value of loans in process of liquidation or foreclosure, judgments, and sales contracts shall be the unpaid balance of such loans, judgments, and contracts adjusted for any allowance for credit losses.
(3) The collateral value of loans which have been restructured by any action, such as an extension, deferment, or partial release, shall be the new unpaid balance of the loans adjusted for any allowance for credit losses.
(4) The collateral value of property acquired in the liquidation of loans shall be the book value of such property adjusted for any allowance for credit losses.
(5) Collateral shall not include the amount of any loan that exceeds the maximum amount authorized under the Act or part 614 of these regulations.
(6) Collateral may include the collateral value of secured interbank loans, computed as provided in § 615.5050(c)(1), provided that the assets securing the loan could serve as collateral supporting the issuance of obligations under § 615.5050(a). In computing its eligible collateral, the borrowing bank shall not count the assets securing such loan.
(d) Each bank shall have procedures which will ensure that the bank is in compliance with the statutory requirements for maintenance of collateral. Such procedures shall include provisions for:
(1) Adequate safekeeping facilities;
(2) Methods to determine that debt instruments meet all requirements of law and regulations;
(3) A report signed by an authorized bank officer at each regular meeting of the board of directors certifying the eligibility and the adequacy of collateral. Items to be reported will include but not be limited to the total amount of eligible collateral, amount of ineligible loans, amount of deductions, and the amount of excess collateral; and
(4) Written procedures and practices to ensure that there will be a high degree of accuracy in protecting and accounting for the collateral.
§ 615.5060 Special collateral requirement.
(a) An attorney lien certification need not be obtained at the time a note is accepted as collateral if the counsel for the bank or association has determined, in writing, that the bank or association procedures provide sufficient safeguards to ensure that a real estate mortgage loan, within the meaning of section 1.7(a) of the Act, made by the bank or association will be secured by a first lien or its equivalent on the borrower’s interest in the primary real estate security. However, the note shall be withdrawn from collateral upon the expiration of 1 year from the date of the loan closing, unless, before the end of such period:
(1) An attorney has certified that the bank or association has a first lien or its equivalent from a security standpoint in the primary real estate security for the loan; or
(2) The bank or association has obtained a title insurance policy insuring that it has a first lien or its equivalent from a security standpoint in the primary real estate security for the loan, and all of the following requirements are satisfied:
(i) The final policy was issued by a title insurance company that has been licensed to issue such policies by the appropriate state insurance regulatory body or bodies, has not been barred or suspended, and has been approved by the lending institution;
(ii) The standard form on which the final policy was issued has been approved by the counsel for the lending institution;
(iii) The final policy was issued for an amount at least equal to the balance outstanding on the real estate mortgage loan or, if separate policies are issued to insure separate tracts, the minimum amount insured by each policy shall bear the same ratio to the outstanding balance of the loan that the appraised value of the tract insured by that policy bears to the appraised value of all the real estate security for the loan; and
(iv) Personnel meeting written standards of training and experience in real estate title matters prescribed by the counsel for the lending institution certified in writing that:
(A) They reviewed the final policy and that the policy complies with standards prescribed by such counsel; and
(B) The final policy insures that a first lien or its equivalent from a security standpoint has been obtained on the primary real estate security for the loan.
(b) A loan participation agreement to which a System bank or association is a participant and involving a loan originated by another lender shall constitute an obligation meeting the collateral requirements of § 615.5050(a).
§ 615.5090 Reduction in carrying value of collateral.
When the bank or Farm Credit Administration determines that a loan did not conform to the requirements of the law or regulations at the time the loan was closed, such loan shall be withdrawn from collateral until the cause of ineligibility is remedied. When a loan has been classified as a loss loan, the bank shall adjust the collateral value of the loan accordingly.
Subpart C—Issuance of Bonds, Notes, Debentures and Similar Obligations
§ 615.5100 Authority to issue.
The Act authorizes each bank of the System, subject to the collateral requirements of section 4.3(c) of the Act, to issue:
(a) Notes, bonds, debentures, or other similar obligations;
(b) Consolidated obligations, together with any or all banks organized and operating under the same title of the Act;
(c) Systemwide obligations, together with other banks of the System; and
(d) Investment bonds to the authorized purchasers subject to the limitations contained in the regulations set forth in subpart D.
§ 615.5101 Requirements for issuance.
Except as provided in section 4.2(e) of the Act, each debt obligation shall meet the following requirements:
(a) Each debt obligation shall be issued through the Federal Farm Credit Banks Funding Corporation acting for System banks.
(b) Each debt obligation shall be authorized by resolution of the board(s) of directors of the issuer(s). Each participating bank shall provide, in its authorizing resolution, for its primary liability on the portion of any consolidated or Systemwide obligation issued on its behalf and be jointly and severally liable for the payment of any additional sums as called upon by the Farm Credit Administration, in accordance with section 4.4 of the Act, in the event any bank primarily liable therefor is unable to pay.
(c) Each issuance of debt obligations shall meet the collateral requirements set forth in subpart B.
(d) Each issuance of debt obligations shall be approved by the Farm Credit Administration.
(e)(1) Consultation with the Secretary of the Treasury required by 31 U.S.C. 9108 shall be conducted by System representatives and shall have occurred prior to each debt issuance.
(2) Under policies adopted by the Board of the Farm Credit Administration, the Chairman will consult with the Secretary of the Treasury on a regular basis concerning the exercise by the System of the powers conferred under section 4.2 of the Act.
§ 615.5102 Issuance of debt obligations through the Funding Corporation.
(a) The amount, maturities, rates or interest, terms and conditions of participation by the System banks in each issue of joint, consolidated or Systemwide obligations shall be determined by the Funding Corporation established pursuant to section 4.9 of the Act, acting for the banks of the System, subject to the approval of the Farm Credit Administration in accordance with § 615.5102.
(b) The Funding Corporation shall plan and develop funding guidelines, priorities, and objectives based upon the asset/liability management policies of the System institutions and the requirements of the market. The guidelines, priorities, and objectives shall be designed to ensure that the debt marketing responsibilities of the Funding Corporation will continue to provide flexibility for the banks and are fiscally sound.
(c) For all debt issuances conducted by the Funding Corporation, the specific prior approval of the Farm Credit Administration must be obtained prior to the distribution and sale of the obligation pursuant to section 4.9 of the Act.
§§ 615.5103-615.5104 [Reserved]
§ 615.5105 Consolidated Systemwide notes.
Consolidated Systemwide notes authorized under § 615.5100(b) shall be subject to the following provisions unless otherwise approved by the Farm Credit Administration:
(a) Maturities shall be not less than five days nor more than 365 days.
(b) Prices shall be on a discount yield basis or as determined by the Funding Corporation.
Subpart D—Other Funding
§ 615.5110 Authority to issue (other funding).
Any Farm Credit bank may issue Farm Credit Investment Bonds directly to those eligible as set forth in § 615.5120(a). The bonds are subject to the limitations contained in the Federal Reserve Board’s Regulation Q.
§ 615.5120 Purchase eligibility requirement.
(a) Limitations. Eligibility to purchase Farm Credit Investment Bonds shall be limited to members and employees of the Farm Credit banks and associations, except any bank officers, directors, and employees who are involved in setting the term or rate, to retired employees who are beneficiaries of a pension or retirement program of the Farm Credit banks or associations, and to retired employees of the Farm Credit Administration. A member of a Farm Credit association or a bank for cooperatives need not be an active borrower to be eligible. A member of any Farm Credit institution may purchase investment bonds from any of the institutions in the district which offer the purchase program. Patrons, members, employees, or stockholder of other financing institutions discounting loans with a Farm Credit Bank or agricultural credit bank or of any legal entity which is a borrower from any Farm Credit institution as such are ineligible as they are not members of a Farm Credit institution. Stock or participation certificates shall not be sold merely to qualify a party for the purchase of Farm Credit Investment Bonds. For purposes of this section “member” means a stockholder or participation certificate holder who acquired stock or participation certificates to obtain a loan, to purchase stock for investment or to qualify for other services of the association or bank. A person who assumes a loan is not a member unless he becomes a stockholder or participation certificate holder in connection with that loan. Employee means a regular full-time employee of a Farm Credit bank or association. Retired employee means a retiree who is a direct beneficiary of a pension or retirement program of a Farm Credit bank or association or the Farm Credit Administration under civil service retirement.
(b) Form and ownership. Farm Credit Investment Bonds are registered bonds issued in definitive or book-entry form depending on investor preference. The registration used must express the actual ownership of an interest in the bond and will be considered by the issuing institution as conclusive of such ownership and interest. No designation of an attorney, agent, or other representative to request or receive payment on behalf of the owner or coowner, nor any restriction on the right of the owner or coowner to receive payment of the bond or interest, except as provided in this section may be made in the registration or otherwise. Registrations requested in applications for the purchase shall be clear, accurate, complete, and conform with one of the registration provisions set forth in this section, and include the appropriate taxpayer identifying number. Registrations requested will be inscribed on the face of the bond if in definitive form or on the confirmation of investment if in book-entry form. The following provisions shall apply for registration of Farm Credit Investment Bonds:
(1) In all cases the member’s name (whether a natural person, fiduciary, or legal entity) or employee’s name must appear as owner of the bond.
(2) A bond may be registered in the name of a fiduciary only if the fiduciary is in fact the member.
(3) A member or employee may not use a form of registration (such as a gift to a minor, irrevocable trust, etc.) which would divest himself of ownership. However, a minor may be named as coowner or beneficiary.
(4) If a member is a natural person, a second natural person, member or nonmember, may be named as coowner or beneficiary. Coownership may not involve a fiduciary or private organization.
(5) In the coownership form the connective “or” shall serve the same purpose as “joint tenants with right of survivorship.”
§ 615.5130 Procedures.
Procedures relating to issuance, pricing, payment of interest, redemption, replacement of lost or stolen bonds and other matters shall be promulgated under the authority of this regulation as operating instructions to banks and associations.
Subpart E—Investment Management
§ 615.5131 Definitions.
For purposes of this subpart, the following definitions apply:
Asset-backed securities (ABS) mean investment securities that provide for ownership of a fractional undivided interest or collateral interests in specific assets of a trust that are sold and traded in the capital markets. For the purposes of this subpart, ABS exclude mortgage-backed securities that are defined in this section.
Asset class means a group of securities that exhibit similar characteristics and behave similarly in the marketplace. Asset classes include, but are not limited to, money market instruments, municipal securities, corporate bond securities, MBS, ABS, and any other asset class as determined by FCA.
Country risk classification (CRC) as defined in § 628.2 of this chapter.
Diversified investment fund (DIF) means an investment company registered under section 8 of the Investment Company Act of 1940.
Government-sponsored enterprise (GSE) means an entity established or chartered by the United States Government to serve public purposes specified by the United States Congress but whose debt obligations are not explicitly guaranteed by the full faith and credit of the United States Government.
Loans are defined by § 621.2 of this chapter and they are calculated quarterly (as of the last day of March, June, September, and December) by using the average daily balance of loans during the quarter.
Market risk means the risk to the financial condition of your institution because the value of your holdings may decline if interest rates or market prices change. Exposure to market risk is measured by assessing the effect of changing rates and prices on either the earnings or economic value of an individual instrument, a portfolio, or the entire institution.
Mortgage-backed securities (MBS) means securities that are either:
(1) Pass-through securities or participation certificates that represent ownership of a fractional undivided interest in a specified pool of residential (excluding home equity loans), multifamily or commercial mortgages; or
(2) A multiclass security (including collateralized mortgage obligations and real estate mortgage investment conduits) that is backed by a pool of residential, multifamily or commercial real estate mortgages, pass through MBS, or other multiclass MBSs.
Obligor means an issuer, guarantor, or other person or entity who has an obligation to pay a debt, including interest due, by a specified date or when payment is demanded.
Resecuritization as defined in § 628.2 of this chapter.
Sponsor means a person or entity that initiates a transaction by selling or pledging to a specially created issuing entity, such as a trust, a group of financial assets that the sponsor either has originated itself or has purchased.
United States (U.S.) Government agency means an instrumentality of the U.S. Government whose obligations are fully guaranteed as to the timely payment of principal and interest by the full faith and credit of the U.S. Government.
You means a Farm Credit bank, association, or service corporation.
§ 615.5132 Investment purposes.
(a) Each Farm Credit bank may hold eligible investments, listed under § 615.5140, in an amount not to exceed 35 percent of its total outstanding loans, to comply with its liquidity requirements in § 615.5134, manage surplus short-term funds, and manage interest rate risk under § 615.5180. To comply with this calculation, the 30-day average daily balance of investments is divided by loans. Investments are calculated at amortized cost. Loans are calculated as defined in § 615.5131. For the purpose of this calculation, loans include accrued interest and do not include any allowance for credit loss adjustments. Compliance with the calculation is measured on the last day of every month.
(b) The following investments may be excluded when calculating the amount of eligible investments held by the Farm Credit bank pursuant to § 615.5132(a):
(1) Eligible investments listed under § 615.5140 that are pledged by a Farm Credit bank to meet margin requirements for derivative transactions; and
(2) Any other investments FCA determines are appropriate for exclusion.
§ 615.5133 Investment management.
(a) Responsibilities of board of directors. The board of directors must adopt written policies for managing the institution’s investment activities. The board must also ensure that management complies with these policies and that appropriate internal controls are in place to prevent loss. At least annually, the board, or a designated committee of the board, must review the sufficiency of these investment policies.
(b) Investment policies—general requirements. Investment policies must address the purposes and objectives of investments; risk tolerance; delegations of authority; internal controls; due diligence; and reporting requirements. The investment policies must fully address the extent of pre-purchase analysis that management must perform for various classes of investments. The investment policies must also address the means for reporting, and approvals needed for, exceptions to established policies. A Farm Credit bank’s investment policy must address portfolio diversification and obligor limits under paragraphs (f) and (g) of this section. Investment policies must be sufficiently detailed, consistent with, and appropriate for the amounts, types, and risk characteristics of its investments.
(c) Investment policies—risk tolerance. Investment policies must establish risk limits for eligible investments and for the entire investment portfolio. The investment policies must include concentration limits to ensure prudent diversification of credit, market, and, as applicable, liquidity risks in the investment portfolio. Risk limits must be based on all relevant factors, including the institution’s objectives, capital position, earnings, and quality and reliability of risk management systems and must take into consideration the interest rate risk management program required by § 615.5180 or § 615.5182, as applicable. Investment policies must identify the types and quantity of investments that the institution will hold to achieve its objectives and control credit risk, market risk, and liquidity risk as applicable. Each association or service corporation that holds significant investments and each Farm Credit bank must establish risk limits in its investment policies, as applicable, for the following types of risk:
(1) Credit risk. Investment policies must establish:
(i) Credit quality standards. Credit quality standards must be established for single or related obligors, sponsors, secured and unsecured exposures, and asset classes or obligations with similar characteristics.
(ii) Concentration limits. Concentration limits must be established for single or related obligors, sponsors, geographical areas, industries, unsecured exposures, asset classes or obligations with similar characteristics.
(iii) Criteria for selecting brokers and, dealers. Each institution must buy and sell eligible investments with more than one securities firm. The institution must define its criteria for selecting brokers and dealers used in buying and selling investments.
(iv) Collateral margin requirements on repurchase agreements. To the extent the institution engages in repurchase agreements, it must regularly mark the collateral to fair market value and ensure appropriate controls are maintained over collateral held.
(2) Market risk. Investment policies must set market risk limits for specific types of investments and for the investment portfolio.
(3) Liquidity risk—(i) Liquidity at Farm Credit banks. Investment policies must describe the liquidity characteristics of eligible investments that the bank will hold to meet its liquidity needs and other institutional objectives.
(ii) Liquidity at associations. Investment policies must describe the liquid characteristics of eligible investments that the association will hold.
(4) Operational risk. Investment policies must address operational risks, including delegations of authority and internal controls under paragraphs (d) and (e) of this section.
(d) Delegation of authority. All delegations of authority to specified personnel or committees must state the extent of management’s authority and responsibilities for investments.
(e) Internal controls. Each institution must:
(1) Establish appropriate internal controls to detect and prevent loss, fraud, embezzlement, conflicts of interest, and unauthorized investments.
(2) Establish and maintain a separation of duties between personnel who supervise or execute investment transactions and personnel who supervise or engage in all other investment-related functions.
(3) Maintain records and management information systems that are appropriate for the level and complexity of the institution’s investment activities.
(4) Implement an effective internal audit program to review, at least annually, the investment management practices including internal controls, reporting processes, and compliance with FCA regulations. This annual review’s scope must be appropriate for the size, risk and complexity of the investment portfolio.
(f) Farm Credit bank portfolio diversification—(1) Well-diversified portfolio. Subject to the exemptions set forth in paragraph (f)(3) of this section, each Farm Credit bank must maintain a well-diversified investment portfolio as set forth in paragraph (f)(2) of this section.
(2) Investment portfolio diversification requirements. A well-diversified investment portfolio means that, at a minimum, investments are comprised of different asset classes, maturities, industries, geographic areas, and obligors. These diversification requirements apply to each individual security that the Farm Credit bank holds within a DIF. In addition, except as exempted by paragraph (f)(3) of this section, no more than 15 percent of the investment portfolio may be invested in any one asset class. Securities within each DIF count toward the appropriate asset class. Measurement of this diversification requirement must be based on the portfolio valued at amortized cost.
(3) Exemptions from investment portfolio diversification requirements. The following investments are not subject to the 15-percent investment portfolio diversification requirement specified in paragraph (f)(2) of this section:
(i) Investments that are fully guaranteed as to the timely payment of principal and interest by a U.S. Government agency;
(ii) Investments that are fully and explicitly guaranteed as to the timely payment of principal and interest by a GSE, except that no more than 50 percent of the investment portfolio may be comprised of GSE MBS. Investments in Farmer Mac securities are governed by § 615.5174 and are not subject to this limitation; and
(iii) Money market instruments identified in § 615.5131.
(g) Farm Credit bank obligor limit. No more than 10 percent of a Farm Credit bank’s total capital (Tier 1 and Tier 2) as defined by § 628.2 of this chapter may be invested in any one obligor. This obligor limit does not apply to investments in obligations that are fully guaranteed as to the timely payment of principal and interest by U.S. Government agencies or fully and explicitly guaranteed as to the timely payment of principal and interest by GSEs. For a DIF, both the DIF itself and the entities obligated to pay the underlying debt are obligors.
(h) Due diligence—(1) Pre-purchase analysis—(i) Eligibility and compliance with investment policies. Before purchasing an investment, the institution must conduct sufficient due diligence to determine whether the investment is eligible under § 615.5140 and complies with its board’s investment policies. The institution must document its assessment and retain any supporting information used in that assessment. The institution may hold an investment that does not comply with its investment policies only with the prior approval of its board.
(ii) Valuation. Prior to purchase, the institution must verify the fair market value of the investment (unless it is a new issue) with a source that is independent of the broker, dealer, counterparty or other intermediary to the transaction.
(iii) Risk assessment. At purchase, the institution must at a minimum include an evaluation of the credit risk (including country risk when applicable), liquidity risk, market risk, interest rate risk, and underlying collateral of the investment, as applicable. This assessment must be commensurate with the complexity and type of the investment. The institution must also perform stress testing on any structured investment that has uncertain cash flows, including all MBS and ABS, before purchase. The stress test must be commensurate with the type and complexity of the investment and must enable the institution to determine that the investment does not expose its capital, earnings, or liquidity if applicable, to risks that are greater than those specified in its investment policies. The stress testing must comply with the requirements in paragraph (h)(4)(ii) of this section. The institution must document and retain its risk assessment and stress tests conducted on investments purchased.
(2) Ongoing value determination. At least monthly, the institution must determine the fair market value of each investment in its portfolio and the fair market value of its whole investment portfolio.
(3) Ongoing analysis of credit risk. The institution must establish and maintain processes to monitor and evaluate changes in the credit quality of each investment in its portfolio and in its whole investment portfolio on an ongoing basis.
(4) Quarterly stress testing. (i) The institution must stress test its entire investment portfolio, including stress tests of each investment individually and the whole portfolio, at the end of each quarter. The stress tests must enable the institution to determine that its investment securities, both individually and on a portfolio-wide basis, do not expose its capital, earnings, or liquidity if applicable, to risks that exceed the risk tolerance specified in its investment policies. If the institution’s portfolio risk exceeds its investment policy limits, the institution must develop a plan to comply with those limits.
(ii) The institution’s stress tests must be defined in a board-approved policy and must include defined parameters for the security types purchased. The stress tests must be comprehensive and appropriate for the institution’s risk profile. At a minimum, the stress tests must be able to measure the price sensitivity of investments over a range of possible interest rates and yield curve scenarios. The stress test methodology must be appropriate for the complexity, structure, and cash flows of the investments in the institution’s portfolio. The institution must rely to the maximum extent practicable on verifiable information to support all its stress test assumptions, including prepayment and interest rate volatility assumptions. The institution must document the basis for all assumptions used to evaluate the security and its underlying collateral. The institution must also document all subsequent changes in its assumptions.
(5) Presale value verification. Before the institution sells an investment, it must verify its fair market value with an independent source not connected with the sale transaction.
(i) Reports to the board of directors. At least quarterly, the institution’s management must report on the following to its board of directors or a designated board committee:
(1) Plans and strategies for achieving the board’s objectives for the investment portfolio;
(2) Whether the investment portfolio effectively achieves the board’s objectives;
(3) The current composition, quality, and the risk and liquidity profiles of the investment portfolio;
(4) The performance of each class of investments and the entire investment portfolio, including all gains and losses realized during the quarter on individual investments that the institution sold before maturity and why they were liquidated;
(5) Potential risk exposure to changes in market interest rates as identified through quarterly stress testing and any other factors that may affect the value of its investment holdings;
(6) How investments affect its capital, earnings, and overall financial condition;
(7) Any deviations from the board’s policies (must be specifically identified);
(8) The status and performance of each investment described in § 615.5143(a) and (b) or that does not comply with the institution’s investment policies; including the expected effect of these investments on its capital, earnings, liquidity, as applicable, and collateral position; and
(9) The terms and status of any required divestiture plan or risk reduction plan.
§ 615.5134 Liquidity reserve.
(a) Liquidity policy—(1) Board responsibility. The board of each Farm Credit bank must adopt a written liquidity policy. The liquidity policy must be compatible with the investment management policies that the bank’s board adopts pursuant to § 615.5133 of this part. At least once every year, the bank’s board must review its liquidity policy, assess the sufficiency of its liquidity policy, and make any revisions it deems necessary. The board of each Farm Credit bank must ensure that adequate internal controls are in place so that management complies with and carries out this liquidity policy.
(2) Policy content. At a minimum, the liquidity policy of each Farm Credit bank must address:
(i) The purpose and objectives of the liquidity reserve;
(ii) Diversification requirements for the liquidity reserve portfolio;
(iii) The target amount of days of liquidity that the bank needs based on its business model and risk profile;
(iv) Delegations of authority pertaining to the liquidity reserve; and
(v) Reporting requirements, which at a minimum must require management to report to the board at least once every quarter about compliance with the bank’s liquidity policy and the performance of the liquidity reserve portfolio. However, management must report any deviation from the bank’s liquidity policy, or failure to meet the board’s liquidity targets to the board before the end of the quarter if such deviation or failure has the potential to cause material loss to the bank.
(b) Liquidity reserve requirement. Each Farm Credit bank must maintain at all times a liquidity reserve sufficient to fund at least 90 days of the principal portion of maturing obligations and other borrowings of the bank. At a minimum, each Farm Credit Bank must hold instruments in its liquidity reserve listed and discounted in the Table below that are sufficient to cover:
(1) Days 1 through 15 only with Level 1 instruments;
(2) Days 16 through 30 only with Level 1 and Level 2 instruments; and
(3) Days 31 through 90 with Level 1, Level 2, and Level 3 instruments.
| Liquidity level | Instruments | Discount (multiply by) | |
|---|---|---|---|
| Level 1 | • Cash, including cash due from traded but not yet settled debt | 100 percent | |
| • Overnight money market investment | 100 percent | ||
| • Obligations of U.S. Government agencies with a final remaining maturity of 3 years or less | 97 percent | ||
| • GSE senior debt securities that mature within 60 days, excluding securities issued by the Farm Credit System | 95 percent | ||
| • Diversified investment funds comprised exclusively of Level 1 instruments | 95 percent | ||
| Level 2 | • Obligations of U.S. Government agencies with a final remaining maturity of more than 3 years | 97 percent | |
| • MBS that are fully guaranteed by a U.S. Government agency as to the timely repayment of principal and interest | 95 percent | ||
| • Diversified investment funds comprised exclusively of Levels 1 and 2 instruments | 95 percent | ||
| Level 3 | • GSE senior debt securities with maturities exceeding 60 days, excluding senior debt securities of the Farm Credit System | 93 percent for all Level 3 instruments | |
| • MBS that are fully guaranteed by a GSE as to the timely repayment of principal and interest | |||
| • Money market instruments maturing within 90 days | |||
| • Diversified investment funds comprised exclusively of levels 1, 2, and 3 instruments |
(c) Unencumbered. All investments that a Farm Credit bank holds in its liquidity reserve and supplemental liquidity buffer in accordance with this section must be unencumbered. For the purpose of this section, an investment is unencumbered if it is free of lien, and it is not explicitly or implicitly pledged to secure, collateralize, or enhance the credit of any transaction. Additionally, an unencumbered investment held in the liquidity reserve cannot be used as a hedge against interest rate risk if liquidation of that particular investment would expose the bank to a material risk of loss.
(d) Marketable. All investments that a Farm Credit bank holds in its liquidity reserve in accordance with this section must be readily marketable. For the purposes of this section, an investment is marketable if it:
(1) Can be easily and quickly converted into cash with little or no loss in value;
(2) Exhibits low credit and market risks;
(3) Has ease and certainty of valuation; and
(4) Except for money market instruments, can be easily bought and sold in active and sizeable markets without significantly affecting prices.
(e) Supplemental liquidity buffer. Each Farm Credit bank must hold supplemental liquid assets in excess of the 90-day minimum liquidity reserve. The supplemental liquidity buffer must be comprised of cash and qualified eligible investments authorized by § 615.5140 of this part. A Farm Credit bank must be able to liquidate any qualified eligible investment in its supplemental liquidity buffer within the liquidity policy timeframe established in the bank’s liquidity policy at no less than 80 percent of its book value. A Farm Credit bank must remove from its supplemental liquidity buffer any investment that has, at any time, a market value that is less than 80 percent of its book value. Each investment in the supplemental liquidity buffer that has a market value of at least 80 percent of its book value, but does not qualify for Levels 1, 2, or 3 of the liquidity reserve, must be discounted to (multiplied by) 90 percent of its market value. The amount of supplemental liquidity that each Farm Credit bank holds, at minimum, must meet the requirements of its board’s liquidity policy, provide excess liquidity beyond the days covered by the liquidity reserve, and satisfy the applicable portions of the bank’s CFP in accordance with paragraph (f).
(f) Contingency Funding Plan (CFP). The board of each Farm Credit bank must adopt a CFP to ensure sources of liquidity are sufficient to fund normal operations under a variety of stress events. Such stress events include, but are not limited to market disruptions, rapid increase in loan demand, unexpected draws on unfunded commitments, difficulties in renewing or replacing funding with desired terms and structures, requirements to pledge collateral with counterparties, and reduced market access. Each Farm Credit bank must maintain an adequate level of unencumbered and marketable assets in its liquidity reserve that can be converted into cash to meet its net liquidity needs for 30 days based on estimated cash inflows and outflows under an acute stress scenario. The board of directors must review and approve the CFP at least once every year and make adjustments to reflect changes in the bank’s risk profile and market conditions. The CFP must:
(1) Be customized to the financial condition and liquidity risk profile of the bank and the board’s liquidity risk tolerance policy.
(2) Identify funding alternatives that the Farm Credit bank can implement whenever access to funding is impeded, which must include, at a minimum, arrangements for pledging collateral to secure funding and possible initiatives to raise additional capital.
(3) Require periodic stress testing that analyzes the possible effects on the bank’s cash inflows and outflows, liquidity position, profitability and solvency under a variety of stress scenarios.
(4) Establish a process for managing events that imperil the bank’s liquidity, and assign appropriate personnel and implement executable action plans that carry out the CFP.
§ 615.5136 Emergencies impeding normal access of Farm Credit banks to capital markets.
An emergency shall be deemed to exist whenever a financial, economic, agricultural, national defense, or other crisis could impede the normal access of Farm Credit banks to the capital markets. Whenever the Farm Credit Administration determines, after consultation with the Federal Farm Credit Banks Funding Corporation to the extent practicable, that such an emergency exists, the Farm Credit Administration Board may, in its sole discretion, adopt a resolution that:
(a) Modifies the amount, qualities, and types of eligible investments that Farm Credit banks are authorized to hold pursuant to § 615.5132 of this subpart;
(b) Modifies or waives the liquidity requirement(s) in § 615.5134 of this subpart; and/or
(c) Authorizes other actions as deemed appropriate.
§ 615.5140 Eligible investments.
(a) Farm Credit banks—(1) Investment eligibility criteria. A Farm Credit bank may purchase an investment only if it satisfies the following investment eligibility criteria:
(i) The investment must be purchased and held for one or more investment purposes authorized in § 615.5132.
(ii) The investment must be one of the following:
(A) A non-convertible senior debt security;
(B) A money market instrument with a maturity of 1 year or less;
(C) A portion of an MBS or ABS that is fully guaranteed as to the timely payment of principal and interest by a U.S. Government agency;
(D) A portion of an MBS or ABS that is fully and explicitly guaranteed as to the timely payment of principal and interest by a GSE;
(E) The senior-most position of an MBS or ABS that a U.S. Government agency does not fully guarantee as to the timely payment of principal and interest or a GSE does not fully and explicitly guarantee as to the timely payment of principal and interest, provided that the MBS satisfies the definition of “mortgage related security” in 15 U.S.C. 78c(a)(41);
(F) An obligation of an international or multilateral development bank in which the U.S. is a voting member; or
(G) Shares of a diversified investment fund registered under the Investment Company Act of 1940, if its portfolio consists solely of securities that satisfy paragraph (a)(1)(ii)(A), (B), (C), (D), (E), or (F) of this section, or are eligible under § 615.5174. The investment company’s risk and return objectives and use of derivatives must be consistent with the Farm Credit bank’s investment policies.
(iii) At least one obligor of the investment must have very strong capacity to meet its financial commitment for the expected life of the investment. If any obligor whose capacity to meet its financial commitment is being relied upon to satisfy this requirement is located outside the U.S., either:
(A) That obligor’s sovereign host country must have the highest or second-highest consensus Country Risk Classification (0 or 1) as published by the Organization for Economic Cooperation and Development (OECD) or be an OECD member that is unrated; or
(B) The investment must be fully guaranteed as to the timely payment of principal and interest by a U.S. Government agency.
(iv) The investment must exhibit low credit risk and other risk characteristics consistent with the purpose or purposes for which it is held.
(v) The investment must be denominated in U.S. dollars.
(2) Resecuritizations. Notwithstanding any other provision of this section, System banks may not purchase resecuritizations (except when both principal and interest are fully and explicitly guaranteed by the U.S. Government or a GSE) without approval under paragraph (e) of this section.
(b) Farm Credit associations—(1) Risk management investments. Each Farm Credit System association, with the approval of its funding bank, may purchase and hold investments to manage risks. Each association must identify and evaluate how the investments that it purchases contributes to management of its risks. Only securities that are issued by, or are unconditionally guaranteed or insured as to the timely payment of principal and interest by, the United States Government or its agencies are investments that associations may acquire for risk management purposes under this paragraph (b).
(2) Secondary market Government-guaranteed loans. In addition to investing in the securities described in paragraph (b)(1) of this section, each Farm Credit System association may also manage risk by holding those portions of loans that:
(i) Lenders, which are not Farm Credit System institutions, originate and then sell in the secondary market; and
(ii) The United States Department of Agriculture fully and unconditionally guarantees or insures as to both principal and interest.
(3) Risk management requirements. Each association that purchases investments pursuant to paragraphs (b)(1) and (2) of this section must document how its investment activities contribute to managing risks as required by paragraph (b)(1) of this section. Such documentation must address and evidence that the association:
(i) Complies with § 615.5133(a), (b), (c), (d), (e), (h), and (i). These investment management processes must be appropriate for the size, risk and complexity of the association’s investment portfolio.
(ii) Complies with § 615.5182 for investments that exhibit interest rate risk that could lead to significant declines in net income or in the market value of capital.
(iii) Assesses how these investments impact the association’s overall credit risk profile and how these investment purchases aid in diversifying, hedging, or mitigating overall credit risk.
(iv) Considers and evaluates any other relevant factors unique to the association or to the nature of the investments that could affect the association’s overall risk-bearing capacity, including but not limited to management experience and capability to understand and manage unique risks in investments purchased.
(4) Association investment portfolio limit. The total amount of investments purchased and held under this section must not exceed 10 percent of the association’s total outstanding loans. In computing this limit:
(i) Include in the numerator the daily (point-in-time) balance of all investments purchased and held under this section. Unless otherwise directed by FCA, associations must use the investment balance on the last business day of the quarter when calculating the numerator of the portfolio limit under this paragraph. For this calculation, value investments at amortized cost and accrued interest.
(ii) Include in the denominator the 90-day average daily balance of total outstanding loans as defined in § 615.5131. For this calculation, value loans at amortized cost and include accrued interest. The denominator does not include any allowance for credit loss adjustments.
(iii) Exclude from the numerator the following:
(A) Equity investments in unincorporated business entities authorized in § 611.1150 of this chapter;
(B) Equity investments in Rural Business Investment Companies organized under 7 U.S.C. 2009cc et seq.;
(C) Equity investments in Class B Farmer Mac stock authorized in § 615.5173; and
(D) Farmer Mac agricultural mortgage-backed securities under § 615.5174.
(5) Funding bank supervision of association investments. (i) The association must not purchase and hold investments without the funding bank’s prior approval. The bank must review the association’s prior approval requests and explain in writing its reasons for approving or denying the request. The prior approval is required before the association engages in investment activities and with any significant change(s) in investment strategy.
(ii) In deciding whether to approve an association’s request to purchase and hold investments, the bank must evaluate and document that the association:
(A) Has adequate policies, procedures, and controls, in place for its investment accounting and reporting;
(B) Has capable staff with the necessary expertise to manage the risks in investments; and
(C) Complies with paragraph (b)(3) of this section.
(iii) The bank must review annually the investment portfolio of every association that it funds. This annual review must evaluate whether the association’s investments manage risks over time, and the continued adequacy of the associations’ risk management practices.
(6) Transition for association investments. (i) An association is not required to divest of any investment held on January 1, 2019 that was authorized under § 615.5140 as contained in 12 CFR part 615 revised as of January 1, 2018 or otherwise by official written FCA action that allowed the association to continue to hold such investment. Once such investment matures, the association must not renew it unless the investment is authorized pursuant to this section.
(ii) No association is required to divest of investments if a decline in total outstanding loans causes it to exceed the portfolio limit in paragraph (b)(4) of this section. However, the institution must not purchase new investments unless, after they are purchased, the total amount of investments held falls within the portfolio limit.
(c) Reservation of authority. FCA may, on a case-by-case basis, determine that a particular investment you are holding poses inappropriate risk, notwithstanding that it satisfies the investment eligibility criteria. If so, we will notify you as to the proper treatment of the investment.
(d) [Reserved]
(e) Other investments approved by FCA. You may purchase and hold investments that we approve. Your request for our approval must explain the risk characteristics of the investment and your purpose and objectives for making the investment.
§ 615.5142 [Reserved]
(a) Investments ineligible when purchased. Investments that do not satisfy the eligibility criteria set forth in § 615.5140(a) or (b) or investments FCA had not approved under § 615.5140(e), as applicable, at the time of purchase are ineligible. System institutions must not purchase ineligible investments. If the institution determines that it has purchased an ineligible investment, it must notify FCA within 15 calendar days after the determination. The institution must divest of the investment no later than 60 calendar days after determining that the investment is ineligible unless FCA approves, in writing, a plan that authorizes the institution to divest the investment over a longer period. Until the institution divests of the ineligible investment:
(1) A Farm Credit bank must not use the ineligible investment to satisfy its liquidity requirement(s) under § 615.5134;
(2) The institution must include the ineligible investment in the portfolio limit calculation defined in § 615.5132 or § 615.5140(b)(4), as applicable; and
(3) A Farm Credit bank must exclude the ineligible investment as collateral under § 615.5050.
(b) Investments that no longer satisfy investment eligibility criteria. If the institution determines that an investment (that satisfied the eligibility criteria set forth in § 615.5140(a) or (b), as applicable, when purchased) no longer satisfies the criteria, or that an investment that FCA approved pursuant to § 615.5140(e), no longer satisfies the conditions of approval, the institution may continue to hold the investment, subject to the following requirements:
(1) The institution must notify FCA within 15 calendar days after such determination;
(2) A Farm Credit bank must not use the ineligible investment to satisfy its liquidity requirement(s) under § 615.5134;
(3) The institution must include the ineligible investment in the portfolio limit calculation defined in § 615.5132 or § 615.5140(b)(4), as applicable;
(4) A Farm Credit bank may continue to include the investment as collateral under § 615.5050 at the lower of cost or market value; and
(5) The institution must develop a plan to reduce the investment’s risk to the institution.
(c) Reservation of authority. FCA retains the authority to require the institution to divest of any investment at any time for failure to comply with § 615.5132(a) or § 615.5140(a), (b), or (e), or for safety and soundness reasons. The timeframe set by FCA will consider the expected loss on the transaction (or transactions) and the effect on the institution’s financial condition and performance.
§ 615.5144 Banks for cooperatives and agricultural credit banks.
As may be authorized by the banks for cooperatives’ or agricultural credit banks boards of directors ownership investment may be made in foreign business entities solely for the purpose of obtaining credit information and other services needed to facilitate transactions which may be financed under section 3.7(b) of the Farm Credit Act Amendments of 1980. Such an investment shall not exceed the level required to access credit and other services of the entity and shall not be made for earnings purposes. The business entity shall be deemed to be principally engaged in providing credit information to and performing such servicing functions for its members where such activities constitute a materially important line of business to its members. Also, investments must be made by a bank for cooperatives or agricultural credit bank for its own account and not on behalf of its members. The bank for cooperatives or agricultural credit bank shall use only those services provided by the business entity as necessary to facilitate transactions authorized by section 3.7(b) of the Farm Credit Act Amendments of 1980.
Subpart F—Property, Transfers of Capital, and Other Investments
§ 615.5170 Real and personal property.
Real estate and personal property may be acquired, held, or disposed of by any Farm Credit institution for the necessary and normal operations of its business. The purchase, lease, or construction of office quarters shall be limited to facilities reasonably necessary to meet the foreseeable requirements of the institution. Property shall not be acquired if it involves, or appears to involve, a bank or association in the real estate or other unrelated business.
§ 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.
§ 615.5172 Production credit association and agricultural credit association investment in farmers’ notes given to cooperatives and dealers.
(a) In accordance with policies prescribed by the board of directors of the Farm Credit Bank or agricultural credit bank and each production credit association and agricultural credit association (hereinafter association(s)), such association(s) may invest in notes, conditional sales contracts, and other similar obligations given to cooperatives and private dealers by farmers and ranchers eligible to borrow from such associations.
(b) Such notes and other obligations evidencing purchases of farm machinery, supplies, equipment, home appliances, and other items of a capital nature handled by cooperatives and private dealers will be eligible for purchase as investments.
(c) The total amount which an association may invest in such obligations at any one time shall not exceed 15 percent of the balance of its loans outstanding at the close of the association’s preceding fiscal year. In addition, the total amount which an association may invest in such obligations that are originated by any one cooperative or private dealer, at any one time, shall not exceed 50 percent of association capital and surplus.
(d) All notes in which an association invests shall be endorsed with full recourse against the cooperative or dealer. The association shall contact each notemaker who meets the association’s credit standards to encourage him to become a borrower.
§ 615.5173 Stock of the Federal Agricultural Mortgage Corporation.
Banks and associations of the Farm Credit System are authorized to purchase and hold Class B common stock of the Federal Agricultural Mortgage Corporation pursuant to section 8.4 of the Farm Credit Act.
§ 615.5174 Farmer Mac securities.
(a) General authority. You may purchase and hold mortgage securities that are issued or guaranteed as to both principal and interest by the Federal Agricultural Mortgage Corporation (Farmer Mac securities). You may purchase and hold Farmer Mac securities for the purposes of managing credit and interest rate risks, and furthering your mission to finance agriculture. The total value of your Farmer Mac securities cannot exceed your total outstanding loans, as defined by § 615.5131.
(b) Board and management responsibilities. Your board of directors must adopt written policies that will govern your investments in Farmer Mac securities. All delegations of authority to specified personnel or committees must state the extent of management’s authority and responsibilities for managing your investments in Farmer Mac securities. The board of directors must also ensure that appropriate internal controls are in place to prevent loss, in accordance with § 615.5133(e). Management must submit quarterly reports to the board of directors on the performance of all investments in Farmer Mac securities. Annually, your board of directors must review these policies and the performance of your Farmer Mac securities and make any changes that are needed.
(c) Policies. Your board of directors must establish investment policies for Farmer Mac securities that include your:
(1) Objectives for holding Farmer Mac securities.
(2) Credit risk parameters including:
(i) The quantities and types of Farmer Mac mortgage securities that are collateralized by qualified agricultural mortgages, rural home loans, and loans guaranteed by the Farm Service Agency.
(ii) Product and geographic diversification for the loans that underlie the security; and
(iii) Minimum pool size, minimum number of loans in each pool, and maximum allowable premiums or discounts on these securities.
(3) Liquidity risk tolerance and the liquidity characteristics of Farmer Mac securities that are suitable to meet your institutional objectives. A bank may not include Farmer Mac mortgage securities in the liquidity reserve maintained to comply with § 615.5134.
(4) Market risk limits based on the effects that the Farmer Mac securities have on your capital and earnings.
(d) Stress test. You must perform stress tests, in accordance with § 615.5133(h)(1)(iii) and (h)(4), on mortgage securities, issued or guaranteed by Farmer Mac, that are backed by loans that you did not originate.
(e) You. Means a Farm Credit bank, association, or service corporation.
§ 615.5175 Investments in Farm Credit System institution preferred stock.
Except as provided for in § 615.5171, Farm Credit banks, associations and service corporations may only purchase preferred stock issued by another Farm Credit System institution, including the Federal Agricultural Mortgage Corporation, with the written prior approval of the Farm Credit Administration. The request for approval should explain the terms and risk characteristics of the investment and the purpose and objectives for making the investment.
Subpart G—Risk Assessment and Management
§ 615.5180 Bank interest rate risk management program.
(a) The board of directors of each Farm Credit bank must develop, implement, and effectively oversee an interest rate risk management program tailored to the needs of the institution. The program must establish a risk management process that effectively identifies, measures, monitors, and controls interest rate risk. The board of directors of each Farm Credit bank must be knowledgeable of the nature and level of interest rate risk taken by the institution.
(b) Senior management is responsible for ensuring that interest rate risk is properly managed on both a long-range and a day-to-day basis.
(c) The board of directors of each Farm Credit bank must adopt an interest rate risk management section of an asset/liability management policy that establishes interest rate risk exposure limits as well as the criteria to determine compliance with these limits. At a minimum, the interest rate risk management section must establish policies and procedures for the bank to:
(1) Address the purpose and objectives of interest rate risk management;
(2) Identify and analyze the causes of risks within its existing balance sheet structure;
(3) Measure the potential effect of these risks on projected earnings and market values by conducting interest rate shock tests and simulations of multiple economic scenarios at least on a quarterly basis and by considering the effect of investments on interest rate risk based on the results of the stress testing required under § 615.5133(h)(4);
(4) Describe and implement actions needed to obtain its desired risk management objectives;
(5) Identify exception parameters and approvals needed for any exceptions to the requirements of the board’s policies;
(6) Describe delegations of authority;
(7) Describe reporting requirements, including exceptions to limits contained in the board’s policies;
(8) Consider the nature and purpose of derivative contracts and establish counterparty risk thresholds and limits for derivatives.
(d) At least quarterly, management of each Farm Credit bank must report to its board of directors, or a designated committee of the board, describing the nature and level of interest rate risk exposure. Any deviations from the board’s policy on interest rate risk must be specifically identified in the report and approved by the board or designated committee of the board.
§ 615.5182 Interest rate risk management by associations and other Farm Credit System institutions other than banks.
Any association or other Farm Credit System institution other than Farm Credit banks, excluding the Federal Agricultural Mortgage Corporation, with interest rate risk that could lead to significant declines in net income or in the market value of capital must comply with the requirements of § 615.5180. The interest rate risk management program required under § 615.5180 must be commensurate with the level of interest rate risk of the institution.
Subpart H—Capital Adequacy
§ 615.5200 Capital planning.
(a) The Board of Directors of each System institution shall determine the amount of regulatory capital needed to assure the System institution’s continued financial viability and to provide for growth necessary to meet the needs of its borrowers. The minimum capital standards specified in this part and part 628 of this chapter are not meant to be adopted as the optimal capital level in the System institution’s capital adequacy plan. Rather, the standards are intended to serve as minimum levels of capital that each System institution must maintain to protect against the credit and other general risks inherent in its operations.
(b) Each Board of Directors shall establish, adopt, and maintain a formal written capital adequacy plan as a part of the financial plan required by § 618.8440 of this chapter. The plan shall include the capital targets that are necessary to achieve the System institution’s capital adequacy goals as well as the minimum permanent capital, common equity tier 1 (CET1) capital, tier 1 capital, total capital, and tier 1 leverage ratios (including the unallocated retained earnings (URE) and URE equivalents minimum) standards. The plan shall expressly acknowledge the continuing and binding effect of all board resolutions adopted in accordance with § 628.20(b)(1)(xiv), (c)(1)(xiv), and (d)(1)(xi) of this chapter, and with § 628.21 of this chapter. The plan shall address any projected dividend payments, patronage payments, equity retirements, or other action that may decrease the System institution’s capital or the components thereof for which minimum amounts are required by this part and part 628 of this chapter. The plan shall set forth the circumstances and minimum timeframes in which equities may be redeemed or revolved consistent with the System institution’s applicable bylaws or board of directors’ resolutions.
(c) In addition to factors that must be considered in meeting the minimum standards, the board of directors shall also consider at least the following factors in developing the capital adequacy plan:
(1) Capability of management and the board of directors (the assessment of which may be a part of the assessments required in paragraphs (b)(2)(ii) and (b)(7)(i) of § 618.8440 of this chapter);
(2) Quality of operating policies, procedures, and internal controls;
(3) Quality and quantity of earnings;
(4) Asset quality and the adequacy of the allowance for credit losses to absorb potential loss within the loan and lease portfolios;
(5) Sufficiency of liquid funds;
(6) Needs of a System institution’s customer base; and
(7) Any other risk-oriented activities, such as funding and interest rate risks, potential obligations under joint and several liability, contingent and off-balance-sheet liabilities or other conditions warranting additional capital.
§ 615.5201 Definitions.
For the purpose of this subpart, the following definitions apply:
Allocated investment means earnings allocated but not paid in cash by a System bank to an association or other recipient.
Deferred tax assets (DTAs) means an amount of income taxes refundable or recoverable in future years as a result of temporary differences and net operating loss or tax credit carryforwards that exist at the reporting date. There are three types of DTAs and they arise from:
(1) A temporary difference that a System institution could realize through a net loss carryback;
(2) A temporary difference that a System institution could not realize through net loss carryback; and
(3) An operating loss and tax credit carryforward.
Nonagreeing association means an association that does not have an allotment agreement in effect with a Farm Credit Bank or agricultural credit bank pursuant to § 615.5207(b)(2).
Permanent capital, subject to adjustments as described in § 615.5207, includes:
(1) Current year earnings;
(2) Allocated and unallocated earnings (which, in the case of earnings allocated in any form by a System bank to any association or other recipient and retained by the bank, must be considered, in whole or in part, permanent capital of the bank or of any such association or other recipient as provided under an agreement between the bank and each such association or other recipient);
(3) All surplus;
(4) Stock issued by a System institution, except:
(i) Stock that may be retired by the holder of the stock on repayment of the holder’s loan, or otherwise at the option or request of the holder;
(ii) Stock that is protected under section 4.9A of the Act or is otherwise not at risk;
(iii) Farm Credit Bank equities required to be purchased by Federal land bank associations in connection with stock issued to borrowers that is protected under section 4.9A of the Act;
(iv) Capital subject to revolvement, unless:
(A) The bylaws of the System institution clearly provide that there is no express or implied right for such capital to be retired at the end of the revolvement cycle or at any other time; and
(B) The System institution clearly states in the notice of allocation that such capital may only be retired at the sole discretion of the board of directors in accordance with statutory and regulatory requirements and that the institution does not grant any express or implied right to have such capital retired at the end of the revolvement cycle or at any other time;
(5) [Reserved]
(6) Financial assistance provided by the Farm Credit System Insurance Corporation that the FCA determines appropriate to be considered permanent capital; and
(7) Any other debt or equity instruments or other accounts the FCA has determined are appropriate to be considered permanent capital. The FCA may permit one or more System institutions to include all or a portion of such instrument, entry, or account as permanent capital, permanently or on a temporary basis, for purposes of this part.
Preferred stock means stock that is permanent capital and has dividend and/or liquidation preference over common stock.
Risk-adjusted asset base means “standardized total risk-weighted assets” as defined in § 628.2 of this chapter, adjusted in accordance with § 615.5207 and excluding the deduction in paragraph (2) of that definition for the amount of the System institution’s adjusted allowance for credit losses that is not included in tier 2 capital.
Stock means stock and participation certificates.
System bank means a Farm Credit bank as defined in § 619.9140 of this chapter, which includes Farm Credit Banks, agricultural credit banks, and banks for cooperatives.
System institution means a System bank, an association of the Farm Credit System, and their successors, and any other institution chartered by the Farm Credit Administration (FCA) that the FCA determines should be considered a System institution for the purposes of this subpart.
Term preferred stock means preferred stock with an original maturity of at least 5 years and on which, if cumulative, the board of directors has the option to defer dividends, provided that, at the beginning of each of the last 5 years of the term of the stock, the amount that is eligible to be counted as permanent capital is reduced by 20 percent of the original amount of the stock (net of redemptions).
§ 615.5205 Minimum permanent capital standards.
Each institution shall at all times maintain permanent capital at a level of at least 7 percent of its risk-adjusted asset base.
§ 615.5206 Permanent capital ratio computation.
(a) The System institution’s permanent capital ratio is determined on the basis of the financial statements of the System institution prepared in accordance with generally accepted accounting principles.
(b) The System institution’s asset base and permanent capital are computed using average daily balances for the most recent 3 months.
(c) The System institution’s permanent capital ratio is calculated by dividing the System institution’s permanent capital, adjusted in accordance with § 615.5207 (the numerator), by the risk-adjusted asset base (the denominator) as defined in § 615.5201, to derive a ratio expressed as a percentage.
§ 615.5207 Capital adjustments and associated reductions to assets.
For the purpose of computing the System institution’s permanent capital ratio, the following adjustments must be made prior to assigning assets to risk-weight categories and computing the ratio:
(a) Where two System institutions have stock investments in each other, such reciprocal holdings must be eliminated to the extent of the offset. If the investments are equal in amount, each System institution must deduct from its assets and its permanent capital an amount equal to the investment. If the investments are not equal in amount, each System institution must deduct from its permanent capital and its assets an amount equal to the smaller investment. The elimination of reciprocal holdings required by this paragraph must be made prior to making the other adjustments required by this section.
(b) Where an association has an equity investment in a System bank, the double counting of capital is eliminated in the following manner:
(1) For a purchased investment, each association must deduct its investment in a System bank from its permanent capital. Each System bank will consider all purchased stock investments as its permanent capital.
(2) For an allocated investment, each System bank and each of its affiliated associations may enter into an agreement that specifies, for computing permanent capital only, a dollar amount and/or percentage allotment of the association’s allocated investment between the bank and the association. Section 615.5208 provides conditions for allotment agreements or defines allotments in the absence of such agreements.
(c) A Farm Credit Bank or agricultural credit bank and a recipient, other than an affiliated association, of allocated earnings from such bank may enter into an agreement specifying a dollar amount and/or percentage allotment of the recipient’s allocated earnings in the bank between the bank and the recipient. Such agreement must comply with § 615.5208, except that, in the absence of an agreement, the allocated investment must be allotted 100 percent to the allocating bank and 0 percent to the recipient. All equities of the bank that are purchased by a recipient are considered as permanent capital of the issuing bank.
(d) A bank for cooperatives and a recipient of allocated earnings from such bank may enter into an agreement specifying a dollar amount and/or percentage allotment of the recipient’s allocated earnings in the bank between the bank and the recipient. Such agreement must comply with § 615.5208, except that, in the absence of an agreement, the allocated investment must be allotted 100 percent to the allocating bank and 0 percent to the recipient. All equities of a bank that are purchased by a recipient shall be considered as permanent capital of the issuing bank.
(e) Where a System institution has an equity investment in another System institution to capitalize a loan participation interest, the investing System institution must deduct from its permanent capital an amount equal to its investment in the participating System institution.
(f) Each System institution must deduct from permanent capital any equity investment in a service corporation chartered under section 4.25 of the Act or the Funding Corporation chartered under section 4.9 of the Act.
(g) Each System institution must deduct from its permanent capital an amount equal to all goodwill, whenever acquired.
(h) Each System institution must deduct from its risk-adjusted asset base any item deducted from permanent capital under this section.
(i) Where a System bank and an association have an enforceable written agreement to share losses on specifically identified assets on a predetermined quantifiable basis, such assets must be counted in each System institution’s risk-adjusted asset base in the same proportion as the System institutions have agreed to share the loss.
(j) The permanent capital of a System institution must exclude any accumulated other comprehensive income (loss) as reported under GAAP.
(k) For purposes of calculating capital ratios under this part, deferred-tax assets are subject to the conditions, limitations, and restrictions described in § 628.22(a)(3) of this chapter.
(l) [Reserved]
§ 615.5208 Allotment of allocated investments.
(a) The following conditions apply to agreements that a System bank enters into with an affiliated association pursuant to § 615.5207(b)(2):
(1) The agreement must be for a term of 1 year or longer.
(2) The agreement must be entered into on or before its effective date.
(3) The agreement may be amended according to its terms, but no more frequently than annually except in the event that a party to the agreement is merged or reorganized.
(4) On or before the effective date of the agreement, a certified copy of the agreement, and any amendments thereto, must be sent to the field office of the Farm Credit Administration responsible for examining the System institution. A copy must also be sent within 30 calendar days of adoption to the bank’s other affiliated associations.
(5) Unless the parties otherwise agree, if the System bank and the association have not entered into a new agreement on or before the expiration of an existing agreement, the existing agreement will automatically be extended for another 12 months, unless either party notifies the Farm Credit Administration in writing of its objection to the extension prior to the expiration of the existing agreement.
(b) In the absence of an agreement between a System bank and one or more associations, or in the event that an agreement expires and at least one party has timely objected to the continuation of the terms of its agreement, the following formula applies with respect to the allocated investments held by those associations with which there is no agreement (nonagreeing associations), and does not apply to the allocated investments held by those associations with which the bank has an agreement (agreeing associations):
(1) The allotment formula must be calculated annually.
(2) The permanent capital ratio of the System bank must be computed as of the date that the existing agreement terminates, using a 3-month average daily balance, excluding the allocated investment from nonagreeing associations but including any allocated investments of agreeing associations that are allotted to the bank under applicable allocation agreements. The permanent capital ratio of each nonagreeing association must be computed as of the same date using a 3-month average daily balance, and must be computed excluding its allocated investment in the bank.
(3) If the permanent capital ratio of the System bank calculated in accordance with paragraph (b)(2) of this section is 7 percent or above, the allocated investment of each nonagreeing association whose permanent capital ratio calculated in accordance with paragraph (b)(2) of this section is 7 percent or above must be allotted 50 percent to the bank and 50 percent to the association.
(4) If the permanent capital ratio of the System bank calculated in accordance with paragraph (b)(2) of this section is 7 percent or above, the allocated investment of each nonagreeing association whose capital ratio is below 7 percent must be allotted to the association until the association’s capital ratio reaches 7 percent or until all of the investment is allotted to the association, whichever occurs first. Any remaining unallotted allocated investment must be allotted 50 percent to the bank and 50 percent to the association.
(5) If the permanent capital ratio of the System bank calculated in accordance with paragraph (b)(2) of this section is less than 7 percent, the amount of additional capital needed by the bank to reach a permanent capital ratio of 7 percent must be determined, and an amount of the allocated investment of each nonagreeing association must be allotted to the System bank, as follows:
(i) If the total of the allocated investments of all nonagreeing associations is greater than the additional capital needed by the bank, the allocated investment of each nonagreeing association must be multiplied by a fraction whose numerator is the amount of capital needed by the bank and whose denominator is the total amount of allocated investments of the nonagreeing associations, and such amount must be allotted to the bank. Next, if the permanent capital ratio of any nonagreeing association is less than 7 percent, a sufficient amount of unallotted allocated investment must then be allotted to each nonagreeing association, as necessary, to increase its permanent capital ratio to 7 percent, or until all such remaining investment is allotted to the association, whichever occurs first. Any unallotted allocated investment still remaining must be allotted 50 percent to the bank and 50 percent to the nonagreeing association.
(ii) If the additional capital needed by the bank is greater than the total of the allocated investments of the nonagreeing associations, all of the remaining allocated investments of the nonagreeing associations must be allotted to the bank.
§§ 615.5209-615.5212 [Reserved]
§ 615.5215 Distribution of earnings.
The boards of directors of System institutions may not reduce the permanent capital of the institution through the payment of patronage refunds or dividends, or the retirement of stock or allocated equities except retirements pursuant to §§ 615.5280 and 615.5290 if, after or due to the action, the permanent capital of the institution would fail to meet the minimum permanent capital adequacy standard established under § 615.5205 for that period. This limitation shall not apply to the payment of noncash patronage refunds by any institution exempt from Federal income tax if the entire refund paid qualifies as permanent capital at the issuing institution. Any System institution subject to Federal income tax may pay patronage refunds partially in cash if the cash portion of the refund is the minimum amount required to qualify the refund as a deductible patronage distribution for Federal income tax purposes and the remaining portion of the refund paid qualifies as permanent capital.
§ 615.5216 [Reserved]
Subpart I—Issuance of Equities
§ 615.5220 Capitalization bylaws.
(a) The board of directors of each System bank and association shall, pursuant to section 4.3A of the Farm Credit Act of 1971 (Act), adopt capitalization bylaws, subject to the approval of its voting shareholders, that set forth:
(1) Classes of equities and the manner in which they shall be issued, transferred, converted and retired;
(2) For each class of equities, a description of the class(es) of persons to whom such stock may be issued, voting rights, dividend rights and preferences, and priority upon liquidation, including rights, if any, to share in the distribution of the residual estate;
(3) The number of shares and par value of equities authorized to be issued for each class of equities. However, the bylaws need not state a number or value limit for these equities:
(i) Equities that are required to be purchased as a condition of obtaining a loan, lease, or related service.
(ii) Non-voting stock resulting from the conversion of voting stock due to repayment of a loan.
(iii) Non-voting equities that are issued to an association’s funding bank in conjunction with any agreement for a transfer of capital between the association and the bank.
(iv) Equities resulting from the distribution of earnings.
(4) For Farm Credit Banks, agricultural credit banks (with respect to loans other than to cooperatives), and associations, the percentage or dollar amount of equity investment (which may be expressed as a range within which the board of directors may from time to time determine the requirement) that will be required to be purchased as a condition for obtaining a loan, which amount shall be not less than 2 percent of the loan amount or $1,000, whichever is less;
(5) For banks for cooperatives and agricultural credit banks (with respect to loans to cooperatives), the percentage or dollar amount of equity or guaranty fund investment (which may be expressed as a range within which the board may from time to time determine the requirement) that serves as a target level of investment in the bank for patronage-sourced business, which amount shall not be less than, 2 percent of the loan amount or $1,000, whichever is less;
(6) The manner in which equities will be retired, including a provision stating that equities other than those protected under section 4.9A of the Act are retireable at the sole discretion of the board, provided minimum capital adequacy standards established by the Farm Credit Administration, and the capital requirements established by the board of directors of the System institution, are met;
(7) The manner in which earnings will be allocated and distributed, including the basis on which patronage will be paid, which shall be in accord with cooperative principles; and
(8) For System banks, the manner in which the capitalization requirements of the Farm Credit bank shall be allocated and equalized from time to time among its owners.
(b) The board of directors of each service corporation (including the Farm Credit Leasing Services Corporation) shall adopt capitalization bylaws, subject to the approval of its voting shareholders, that set forth the requirements of paragraphs (a)(1), (2), and (3) of this section to the extent applicable. Such bylaws shall also set forth the manner in which equities will be retired and the manner in which earnings will be distributed.
§ 615.5230 Implementation of cooperative principles.
(a) Voting stockholders of Farm Credit banks and associations shall be accorded full voting rights in accordance with cooperative principles, including those set forth in § 611.350 of this chapter. Except as otherwise required by statute or regulation, and except as modified by paragraphs (b) and (c) of this section, the voting rights of each voting shareholder are as follows:
(1) Each voting stockholder of a Farm Credit Bank has only one vote that is assigned a weight proportional to the number of that association’s voting stockholders and has the right to vote in the election of each stockholder-elected director and to cumulate such votes and distribute them among the candidates in the stockholder’s discretion, except that cumulative voting for directors may be eliminated if 75 percent of the associations that are stockholders of the Farm Credit Bank vote in favor of elimination. In a vote to eliminate cumulative voting, each association shall be accorded one vote.
(2) Each voting stockholder of an agricultural credit bank has only one vote, unless another voting scheme has been approved by the Farm Credit Administration.
(3) Each voting stockholder of an association or bank for cooperatives has only one vote, regardless of the number of shares owned or the number of loans outstanding. Unless regional election of directors is provided for in the bylaws pursuant to § 615.5230(b), each voting stockholder of an association or bank for cooperatives has the right to vote in the election of each stockholder-elected director. Unless otherwise provided in the capitalization bylaws, each voting stockholder of an association or bank for cooperatives is allowed to cumulate such votes and distribute them among the candidates in the stockholder’s discretion. Cumulative voting is not allowed in the regional election of stockholder-elected directors.
(b) The regional election of stockholder-elected directors is only permitted under the following conditions:
(1) A bylaw establishing regional elections is approved by a majority of voting stockholders, voting in person or by proxy, prior to implementation.
(2) The bylaw provides that the use of regional election of stockholder-elected directors does not prevent all voting stockholders of the institution, regardless of the region where they reside or conduct agricultural or aquatic operations, from voting in any stockholder vote to remove a director.
(3) There are an approximately equal number of voting stockholders in each of the institution’s voting regions. Regions will have an approximately equal number of voting stockholders if the number of voting stockholders in any one region does not exceed the number of voting stockholders in any other region by more than 25 percent. At least once every 3 years, the institution must count the number of voting stockholders in each region and, if the regions do not have an approximately equal number of stockholders, the regional boundaries must be adjusted to achieve such result.
(4) An institution may provide for more than one director to represent a region. Institutions providing for more than one director to represent a region will determine the equitability of the regions by dividing the number of voting stockholders in that region by the number of director positions representing that region, and the resulting quotient shall be the number that is compared to the number of voting stockholders in other regions.
(5) Each voting stockholder is accorded the right to vote in the election of each stockholder-elected director for his or her region.
(c) Each equityholder of each institution shall be equitably treated in the operation of the institution.
(1) Each issuance of preferred stock (other than preferred stock outstanding on October 5, 1988, and stock into which such outstanding stock is converted that has substantially similar preferences) shall be approved by a majority of the shares voting of each class of equities adversely affected by the preference, voting as a class, whether or not such classes are otherwise authorized to vote;
(2) Any dividends paid to the holders of common stock and participation certificates shall be on a per share basis and without preference as to rate or priority of payment between classes of common stock, between classes of participation certificates, between classes of common stock and classes of participation certificates, or between holders of the same class of stock or participation certificates, except that any class of common stock or participation certificates that result from the conversion of allocated surplus may be subordinated to other classes of common stock and participation certificates in the payment of dividends.
(3) Any patronage refunds that are paid shall be paid in accordance with cooperative principles, on an equitable and nondiscriminatory basis determined by the board of directors in accordance with the capitalization bylaws, provided that any earning pools that may be established for the payment of patronage shall be established on a rational and equitable basis that will ensure that each patron of the institution receives its fair share of the earnings of the institution and bears its fair share of the expenses of the institution.
(4) All classes of common stock and participation certificates (except those resulting from a conversion of allocated surplus) must be accorded the same priority with respect to impairment and restoration of impairment and have the same rights and priority upon liquidation.
§ 615.5240 Regulatory capital requirements.
(a) The capitalization bylaws shall enable the institution to meet the capital adequacy standards established under subpart H of this part, part 628 of this chapter, and the capital requirements established by the board of directors of the System institution.
(b) In order to qualify as permanent capital, equities issued under the bylaws must meet the following requirements:
(1) Retirement must be solely at the discretion of the board of directors and not upon a date certain (other than the original maturity date of preferred stock) or upon the happening of any event, such as repayment of the loan, and not pursuant to any automatic retirement or revolvement plan;
(2) Retirement must be at not more than book value;
(3) The institution must have made the disclosures required by this subpart;
(4) For common stock and participation certificates, dividends must be noncumulative and payable only at the discretion of the board; and
(5) For cumulative preferred stock, the board of directors must have discretion to defer payment of dividends.
§ 615.5245 Limitations on association preferred stock.
(a) The board of directors of each association offering preferred stock must adopt a policy that addresses the association’s conditions or limits on the amount of preferred stock that any one holder, or small number of holders may acquire.
(b) Each association offering preferred stock must make the stock available for purchase to each of its members on the same basis.
(c) An association may not extend credit for purchases of preferred stock in the association.
§ 615.5250 Disclosure requirements for sales of borrower stock.
(a) For sales of borrower stock, which for this subpart means equities purchased as a condition for obtaining a loan, a System institution must provide a prospective borrower with the following documents prior to loan closing:
(1) The institution’s most recent annual report filed under part 620 of this chapter;
(2) The institution’s most recent quarterly report filed under part 620 of this chapter, if more recent than the annual report;
(3) A copy of the institution’s capitalization bylaws; and
(4) A written description of the terms and conditions under which the equity is issued. In addition to specific terms and conditions, the description must disclose:
(i) That the equity is an at-risk investment and not a compensating balance;
(ii) That the equity is retireable only at the discretion of the board of directors consistent with the institution’s bylaws and only if minimum capital standards established under subpart H of this part and part 628 of this chapter are met and that such retirement may also require the approval of the FCA;
(iii) Whether the institution presently meets its minimum capital standards established under subpart H of this part and part 628 of this chapter;
(iv) Whether the institution knows of any reason the institution may not meet its capital standards on the next earnings distribution date; and
(v) The rights, if any, to share in patronage payments.
(b) Notwithstanding the provisions of paragraph (a) of this section, no materials previously provided to a purchaser (except the disclosures required by paragraph (a)(4) of this section) need be provided again unless the purchaser requests such materials.
§ 615.5255 Disclosure and review requirements for sales of other equities.
(a) A bank, association, or service corporation must submit a proposed disclosure statement to the Farm Credit Administration (FCA) for review and clearance prior to the proposed sale of any other equities, which for this subpart means equities not purchased as a condition for obtaining a loan.
(b) An institution may not offer to sell other equities until a disclosure statement is reviewed and cleared by the FCA.
(c) A disclosure statement must include:
(1) All of the information required by parts 620 and 628 of this chapter in the annual report to shareholders as of a date within 135 days of the proposed sale. An institution may satisfy this requirement by referring to its most recent annual report to shareholders and the most recent quarterly report filed with the FCA, provided such reports contain the required information;
(2) The information required by § 615.5250(a)(3) and (4); and
(3) A discussion of the intended use of the sale proceeds.
(d) An institution is not required to provide the materials identified in paragraphs (c)(1) and (2) of this section to a purchaser who previously received them unless the purchaser requests it.
(e) For any class of stock where each purchaser and each subsequent transferee acquires at least $250,000 of the stock and meets the definition of “accredited investor” or “qualified institutional buyer” contained in 17 CFR 230.501 and 230.144A, a disclosure statement submitted pursuant to this section is deemed reviewed and cleared by the FCA and an institution may treat stock that meets all requirements of this part as permanent capital for the purpose of meeting the minimum permanent capital standards established under subpart H of this part, unless the FCA notifies the institution to the contrary within 30 days of receipt of a complete disclosure statement submission. A complete disclosure statement submission includes the proposed disclosure statement plus any additional materials requested by the FCA.
(f) For all other issuances, a disclosure statement submitted pursuant to this section is deemed cleared by the FCA, and an institution may treat stock that meets all requirements of this part as permanent capital for the purpose of meeting the minimum permanent capital standards established under subpart H unless the FCA notifies the institution to the contrary within 60 days of receipt of a complete disclosure statement submission. A complete disclosure statement submission includes the proposed disclosure statement plus any additional materials requested by the FCA.
(g) Upon request, the FCA will inform the institution how it will treat the proposed issuance for other regulatory capital ratios or computations.
(h) No institution, officer, director, employee, or agent shall, in connection with the sale of equities, make any disclosure, through a disclosure statement or otherwise, that is inaccurate or misleading, or omit to make any statement needed to prevent other disclosures from being misleading.
(i) Each bank and association must establish a method to disclose and make information on insider preferred stock purchases and retirements readily available to the public. At a minimum, each institution offering preferred stock must make this information available upon request.
(j) The requirements of this section do not apply to the sale of Farm Credit System institution equities to:
(1) Other Farm Credit System institutions;
(2) Other financing institutions in connection with a lending or discount relationship; or
(3) Non-Farm Credit System lenders that purchase equities in connection with a loan participation transaction.
(k) In addition to the requirements of this section, each institution is responsible for ensuring its compliance with all applicable Federal and state securities laws.
Subpart J—Retirement of Equities and Payment of Dividends
§ 615.5260 Retirement of eligible borrower stock.
(a) Definitions. For the purposes of this subpart the following definitions shall apply:
(1) Eligible borrowers stock means:
(i) Stock, participation certificates or allocated equities outstanding on January 6, 1988, or purchased as a condition of obtaining a loan prior to the earlier of the date of shareholder approval of capitalization bylaws under section 4.3A of the Act or October 6, 1988; and
(ii) Any stock, participation certificates or allocated equities for which such eligible borrower stock is exchanged in connection with a merger, consolidation, or other reorganization or a transfer of territory. Eligible borrower stock does not include equities for which eligible borrower stock is required to be exchanged pursuant to the bylaws adopted under section 4.3A or equities for which eligible borrower stock is voluntarily exchanged except in connection with a merger, consolidation or other reorganization or a transfer of territory.
(2) Retirement in the ordinary course of business means:
(i) Retirement upon repayment of a loan or under a retirement or revolvement plan in effect prior to January 6, 1988, and for eligible borrower stock issued after that date, at the time the loan was made; or
(ii) Retirement pursuant to §§ 615.5280 and 615.5290.
(3) Par value means:
(i) In the case of stock, par value;
(ii) In the case of participation certificates and other equities, face or equivalent value; or
(iii) In the case of participation certificates and allocated surplus subject to retirement under a revolving cycle and retired out or order pursuant to §§ 615.5280 and 615.5290 or otherwise under the Act, par or face value discounted at a rate determined by the institution to reflect the present value of the equity as of the date of such retirement.
(b) When an institution retires eligible borrower stock in the ordinary course of business, such equities shall be retired at par, even if book value is less than par.
(c) When a Farm Credit Bank retires stock for the sole purpose of enabling an association to retire eligible borrower stock that was issued in connection with a long term real estate loan, such stock shall be retired at par even if its book value is less than par.
§ 615.5270 Retirement of other equities.
(a) Equities other than eligible borrower stock shall be retired at not more than their book value.
(b) Subject to the redemption restrictions in part 628 of this chapter, no equities shall be retired, except pursuant to §§ 615.5280 and 615.5290 or term stock at its stated maturity, unless after retirement the institution would continue to meet the minimum permanent capital standards established under subpart H of this part, part 628 of this chapter, and the capital requirements established by the board of directors of the System institution.
(c) A System bank, association, or service corporation board of directors may delegate authority to retire at-risk stock to institution management if:
(1) The board has determined that the institution’s capital position is adequate;
(2) All retirements are in accordance with applicable provisions of part 628 of this chapter and the institution’s capital adequacy plan or capital restoration plan;
(3) After any retirements, the institution’s permanent capital ratio will be in excess of 9 percent, its capital conservation buffer set forth in § 628.11 of this chapter will be above 2.5 percent, and its leverage buffer set forth in § 628.11 of this chapter will be above 1.0 percent;
(4) The institution will continue to satisfy all applicable regulatory capital standards after any retirements; and
(5) Management reports the aggregate amount and net effect of stock purchases and retirements to the board of directors each quarter.
(d) Each board of directors of a System bank, association, or service corporation that issues preferred stock must adopt a written policy covering the retirement of preferred stock that complies with this paragraph and part 628 of this chapter. The policy must, at a minimum:
(1) Establish any delegations of authority to retire preferred stock and the conditions of delegation, which must meet the requirements of paragraph (c) of this section and include minimum levels for regulatory capital standards as applicable and commensurate with the volatility of the preferred stock.
(2) Identify limitations on the amount of stock that may be retired during a single quarterly (or shorter) time period;
(3) Ensure that all stockholder requests for retirement are treated fairly and equitably;
(4) Prohibit any insider, including institution officers, directors, employees, or agents, from retiring any preferred stock in advance of the release of material non-public information concerning the institution to other stockholders; and
(5) Establish when insiders may retire their preferred stock.
(e) The institution’s board must review its policy at least annually to ensure that it continues to be appropriate for the institution’s current financial condition and consistent with its long-term goals established in its capital adequacy plan.
§ 615.5280 Retirement in event of default.
(a) When the debt of a holder of eligible borrower stock issued by a production credit association, Federal land bank association, Federal land credit association or agricultural credit association is in default, such institution may, but shall not be required to, retire at par eligible borrower stock owned by such borrower on which the institution has a lien, in total or partial liquidation of the debt.
(b) When the debt of a holder of stock, participation certificates or other equities issued by a production credit association, Federal land bank association, Federal land credit association or agricultural credit association is in default, such institution may, but shall not be required to, retire at book value not to exceed par all or part of such equities, other than eligible borrower stock as defined in § 615.5260(a)(1), owned by such borrower on which the institution has a lien, in total or partial liquidation of the debt.
(c) When the debt of a holder of equities or guaranty fund certificates issued by a bank for cooperatives or agricultural credit bank is in default the bank may, but shall not be required to, retire all or part of such equities qualify or guaranty fund investments owned by the borrower on which the bank has a lien, in total or partial liquidation of the debt. If such investments qualify as eligible borrower stock, it shall be retired at par, as defined in § 615.5260(a)(3). All other investments shall be retired at a rate determined by the institution to reflect its present value on the date of retirement.
(d) When the debt of a holder of the equities of a Farm Credit Bank or agricultural credit bank is in default the bank may, but shall not be required to, retire all or part of such equities owned by the borrower on which the bank has a lien, in total or partial liquidation of the debt. If such equities qualify as eligible borrower stock or are retired solely to permit a Federal land bank association to retire eligible borrower stock under § 615.5280(a), they shall be retired at par. All other equities shall be retired at book value not to exceed par.
(e) Any retirements made under this section by a Federal land bank association shall be made only upon the specific approval of, or in accordance with, approval procedures issued by the association’s funding bank.
(f) Prior to making any retirement pursuant to this section, except retirements pursuant to paragraphs (c) and (d) of this section, the institution shall provide the borrower with written notice of the following matters;
(1) A statement that the institution has declared the borrower’s loan to be in default;
(2) A statement that the institution will retire all or part of the equities of the borrower in total or partial liquidation of his or her loan;
(3) A description of the effect of the retirement on the relationship of the borrower to the institution;
(4) A statement of the amount of the outstanding debt that will be owed to the institution after the retirement of the borrower’s equities; and
(5) The date on which the institution will retire the equities of the borrower.
(g) The notice required by this section shall be provided in person at least 10 days prior to the retirement of any equities of a holder, or by mailing a copy of the notice by first class mail to the last known address of the equity holder at least 13 days prior to the retirement of such person’s equities.
(h) The requirements of this section may be satisfied by notices given pursuant to §§ 617.7405, 617.7410, 617.7420, and 617.7425 of this chapter that contain the information required by this section.
§ 615.5290 Retirement of capital stock and participation certificates in event of restructuring.
(a) If a Farm Credit Bank or agricultural credit bank forgives and writes off, under § 617.7415 of this chapter, any of the principal outstanding on a loan made to any borrower, where appropriate the Federal land bank association of which the borrower is a member and stockholder shall cancel the same dollar amount of borrower stock held by the borrower in respect of the loan, up to the total amount of such stock, and to the extent provided for in the bylaws of the Bank relating to its capitalization, the Farm Credit Bank or agricultural credit bank shall retire an equal amount of stock owned by the Federal land bank association.
(b) If an association forgives and writes off, under § 617.7415 of this chapter, any of the principal outstanding on a loan made to any borrower, the association shall cancel the same dollar amount of borrower stock held by the borrower in respect of the loan, up to the total amount of such loan.
(c) Notwithstanding paragraphs (a) and (b) of this section, the borrower shall be entitled to retain at least one share of stock to maintain the borrower’s membership and voting interest.
§ 615.5295 Payment of dividends.
(a) The board of directors of a bank, association, or service corporation must declare a dividend on a class of stock before any dividends may be paid to stockholders.
(b) No bank, association, or service corporation may declare or pay any dividend unless after declaration or payment of the dividend the institution would continue to meet its regulatory capital standards under this part.
(c) Each System bank, association, and service corporation must exclude any accrued but unpaid dividends from regulatory capital computations under this part and part 628 of this chapter.
Subpart K [Reserved]
Subpart L—Establishment of Minimum Capital Ratios for an Individual Institution
§ 615.5350 General—Applicability.
(a) The rules and procedures specified in this subpart are applicable to a proceeding to establish required minimum capital ratios that would otherwise be applicable to an institution under §§ 615.5205 and 628.10 of this chapter. The Farm Credit Administration is authorized to establish such minimum capital requirements for an institution as the Farm Credit Administration, in its discretion, deems to be necessary or appropriate in light of the particular circumstances of the institution. Proceedings under this subpart also may be initiated to require an institution having capital ratios greater than those set forth in § 615.5205 or § 628.10 of this chapter to continue to maintain those higher ratios.
(b) The Farm Credit Administration may require higher minimum capital ratios for an individual institution in view of its circumstances. For example, higher capital ratios may be appropriate for:
(1) An institution receiving special supervisory attention;
(2) An institution that has, or is expected to have, losses resulting in capital inadequacy;
(3) An institution with significant exposure due to operational risk, interest rate risk, the risks from concentrations of credit, certain risks arising from other products, services, or related activities, or management’s overall inability to monitor and control financial risks presented by concentrations of credit and related services activities;
(4) An institution exposed to a high volume of, or particularly severe, problem loans;
(5) An institution that is growing rapidly; or
(6) An institution that may be adversely affected by the activities or condition of System institutions with which it has significant business relationships or in which it has significant investments.
(7) An institution with significant exposures to declines in net income or in the market value of its capital due to a change in interest rates and/or the exercising of embedded or explicit options.
§ 615.5351 Standards for determination of appropriate individual institution minimum capital ratios.
The appropriate minimum capital ratios for an individual institution cannot be determined solely through the application of a rigid mathematical formula or wholly objective criteria. The decision is necessarily based in part on subjective judgment grounded in Agency expertise. The factors to be considered in the determination will vary in each case and may include, for example:
(a) The conditions or circumstances leading to the Farm Credit Administration’s determination that higher minimum capital ratios are appropriate or necessary for the institution;
(b) The exigency of those circumstances or potential problems;
(c) The overall condition, management strength, and future prospects of the institution and, if applicable, affiliated institutions;
(d) The institution’s capital, adverse assets (including nonaccrual and nonperforming loans), allowance for credit loss, and other ratios compared to the ratios of its peers or industry norms; and
(e) The views of the institution’s directors and senior management.
§ 615.5352 Procedures.
(a) Notice. When the Farm Credit Administration determines that minimum capital ratios greater than those set forth in § 615.5205 or § 628.10 of this chapter are necessary or appropriate for a particular institution, the Farm Credit Administration will notify the institution in writing of the proposed minimum capital ratios and the date by which they should be reached (if applicable) and will provide an explanation of why the ratios proposed are considered necessary or appropriate for the institution.
(b) Response. (1) The institution may respond to any or all of the items in the notice. The response should include any matters which the institution would have the Farm Credit Administration consider in deciding whether individual minimum capital ratios should be established for the institution, what those capital ratios should be, and, if applicable, when they should be achieved. The response must be in writing and delivered to the designated Farm Credit Administration official within 30 days after the date on which the institution received the notice. In its discretion, the Farm Credit Administration may extend the time period for good cause. The Farm Credit Administration may shorten the time period with the consent of the institution or when, in the opinion of the Farm Credit Administration, the condition of the institution so requires, provided that the institution is informed promptly of the new time period.
(2) Failure to respond within 30 days or such other time period as may be specified by the Farm Credit Administration shall constitute a waiver of any objections to the proposed minimum capital ratios or the deadline for their achievement.
(c) Decision. After the close of the institution’s response period, the Farm Credit Administration will decide, based on a review of the institution’s response and other information concerning the institution, whether individual minimum capital ratios should be established for the institution and, if so, the ratios and the date the requirements will become effective. The institution will be notified of the decision in writing. The notice will include an explanation of the decision, except for a decision not to establish individual minimum capital requirements for the institution.
(d) Submission of plan. The decision may require the institution to develop and submit to the Farm Credit Administration, within a time period specified, an acceptable plan to reach the minimum capital ratios established for the institution by the date required.
(e) Reconsideration based on change in circumstances. If, after the Farm Credit Administration’s decision in paragraph (c) of this section, there is a change in the circumstances affecting the institution’s capital adequacy or its ability to reach the required minimum capital ratios by the specified date, either the institution or the Farm Credit Administration may propose a change in the minimum capital ratios for the institution, the date when the minimums must be achieved, or the institution’s plan (if applicable). The Farm Credit Administration may decline to consider proposals that are not based on a significant change in circumstances or are repetitive or frivolous. Pending a decision on reconsideration, the Farm Credit Administration’s original decision and any plan required under that decision shall continue in full force and effect.
§ 615.5353 Relation to other actions.
In lieu of, or in addition to, the procedures in this subpart, the required minimum capital ratios for an institution may be established or revised through a written agreement or cease and desist proceedings under part C of title V of the Act, or as a condition for approval of an application.
§ 615.5354 Enforcement.
An institution that does not have or maintain the minimum capital ratios applicable to it, whether required in subpart H of this part or part 628 of this chapter, in a decision pursuant to this subpart, in a written agreement or temporary or final order under part C of title V of the Act, or in a condition for approval of an application, or an institution that has failed to submit or comply with an acceptable plan to attain those ratios, will be subject to such administrative action or sanctions as the Farm Credit Administration considers appropriate. These sanctions may include the issuance of a capital directive pursuant to subpart M of this part or other enforcement action, assessment of civil money penalties, and/or the denial or condition of applications.
Subpart M—Issuance of a Capital Directive
§ 615.5355 Purpose and scope.
(a) This subpart is applicable to proceedings by the Farm Credit Administration to issue a capital directive under sections 4.3(b) and 4.3A(e) of the Act. A capital directive is an order issued to an institution that does not have or maintain capital at or greater than the minimum ratios set forth in § 615.5205 or § 628.10 of this chapter; or established for the institution under subpart L of this part, by a written agreement under part C of title V of the Act, or as a condition for approval of an application. A capital directive may order the institution to:
(1) Achieve the minimum capital ratios applicable to it by a specified date;
(2) Adhere to a previously submitted plan to achieve the applicable capital ratios;
(3) Submit and adhere to a plan acceptable to the Farm Credit Administration describing the means and time schedule by which the institution shall achieve the applicable capital ratios;
(4) Take other action, such as reduction of assets or the rate of growth of assets, restrictions on the payment of dividends or patronage, or restrictions on the retirement of stock, to achieve the applicable capital ratios, or reduce levels of interest rate and other risk exposures, or strengthen management expertise, or improve management information and measurement systems; or
(5) A combination of any of these or similar actions.
(b) A capital directive may also be issued to the board of directors of an institution, requiring such board to comply with the requirements of section 4.3A(d) of the Act prohibiting the reduction of permanent capital.
(c) A capital directive issued under this rule, including a plan submitted under a capital directive, is enforceable in the same manner and to the same extent as an effective and outstanding cease and desist order which has become final as defined in section 5.25 of the Act. Violation of a capital directive may result in assessment of civil money penalties in accordance with section 5.32 of the Act.
§ 615.5356 Notice of intent to issue a capital directive.
The Farm Credit Administration will notify an institution in writing of its intention to issue a capital directive. The notice will state:
(a) The reasons for issuance of the capital directive;
(b) The proposed contents of the capital directive, including the proposed date for achieving the minimum capital requirement; and
(c) Any other relevant information concerning the decision to issue a capital directive.
§ 615.5357 Response to notice.
(a) An institution may respond to the notice by stating why a capital directive should not be issued and/or by proposing alternative contents for the capital directive or seeking other appropriate relief. The response shall include any information, mitigating circumstances, documentation, or other relevant evidence that supports its position. The response may include a plan for achieving the minimum capital ratios applicable to the institution. The response must be in writing and delivered to the Farm Credit Administration within 30 days after the date on which the institution received the notice. In its discretion, the Farm Credit Administration may extend the time period for good cause. The Farm Credit Administration may shorten the 30-day time period:
(1) When, in the opinion of the Farm Credit Administration, the condition of the institution so requires, provided that the institution shall be informed promptly of the new time period;
(2) With the consent of the institution; or
(3) When the institution already has advised the Farm Credit Administration that it cannot or will not achieve its applicable minimum capital ratios.
(b) Failure to respond within 30 days or such other time period as may be specified by the Farm Credit Administration shall constitute a waiver of any objections to the proposed capital directive.
§ 615.5358 Decision.
After the closing date of the institution’s response period, or receipt of the institution’s response, if earlier, the Farm Credit Administration may seek additional information or clarification of the response. Thereafter, the Farm Credit Administration will determine whether or not to issue a capital directive, and if one is to be issued, whether it should be as originally proposed or in modified form.
§ 615.5359 Issuance of a capital directive.
(a) A capital directive will be served by delivery to the institution. It will include or be accompanied by a statement of reasons for its issuance.
(b) A capital directive is effective immediately upon its receipt by the institution, or upon such later date as may be specified therein, and shall remain effective and enforceable until it is stayed, modified, or terminated by the Farm Credit Administration.
§ 615.5360 Reconsideration based on change in circumstances.
Upon a change in circumstances, an institution may request the Farm Credit Administration to reconsider the terms of its capital directive or may propose changes in the plan to achieve the institution’s applicable minimum capital ratios. The Farm Credit Administration also may take such action on its own motion. The Farm Credit Administration may decline to consider requests or proposals that are not based on a significant change in circumstances or are repetitive or frivolous. Pending a decision on reconsideration, the capital directive and plan shall continue in full force and effect.
§ 615.5361 Relation to other administrative actions.
A capital directive may be issued in addition to, or in lieu of, any other action authorized by law, including cease and desist proceedings, civil money penalties, or the conditioning or denial of applications. The Farm Credit Administration also may, in its discretion, take any action authorized by law, in lieu of a capital directive, in response to an institution’s failure to achieve or maintain the applicable minimum capital ratios.
Subpart N [Reserved]
Subpart O—Book-Entry Procedures for Farm Credit Securities
§ 615.5450 Definitions.
In this subpart, unless the context otherwise requires or indicates:
(a) Adverse claim means a claim that a claimant has a property interest in a security and that it is a violation of the rights of the claimant for another person to hold, transfer, or deal with the security.
(b) Book-entry security means a Farm Credit security issued or maintained in the Book-entry System.
(c) Book-entry System means the automated book-entry system operated by the Federal Reserve Banks, acting as the fiscal agent for the Farm Credit banks, through which book-entry securities are issued, recorded, transferred and maintained in book-entry form.
(d) Definitive Farm Credit security means a Farm Credit security in engraved or printed form, or that is otherwise represented by a certificate.
(e) Eligible book-entry security means a book-entry security issued or maintained in the Book-entry System, which by the terms of its securities documentation, is eligible to be converted from book-entry into definitive form.
(f) Entitlement Holder means a person to whose account an interest in a book-entry security is credited on the records of a securities intermediary.
(g) Farm Credit banks means one or more Farm Credit Banks, agricultural credit banks, and banks for cooperatives.
(h) Farm Credit securities means consolidated notes, bonds, debentures, or other similar obligations of the Farm Credit banks and Systemwide notes, bonds, debentures, or similar obligations of the Farm Credit banks issued under sections 4.2(c) and 4.2(d), respectively, of the Act, or laws repealed thereby.
(i) Federal Reserve Bank means a Federal Reserve Bank or Branch acting as agent for the Farm Credit banks and the Funding Corporation.
(j) Federal Reserve Bank Operating Circular means the publication issued by each Federal Reserve Bank that sets forth the terms and conditions under which the Federal Reserve Bank maintains book-entry securities accounts and transfers book-entry securities.
(k) Funding Corporation means the Federal Farm Credit Banks Funding Corporation established pursuant to section 4.9 of the Act, which issues Farm Credit securities on behalf of the Farm Credit banks.
(l) Funds Account means a reserve and/or clearing account at a Federal Reserve Bank to which debits or credits are posted for transfers against payment, book-entry securities transaction fees, or principal and interest payments.
(m) Participant means a person that maintains a participant’s securities account with a Federal Reserve Bank.
(n) Participant’s Securities Account means an account in the name of a participant at a Federal Reserve Bank to which book-entry securities held for a participant are or may be credited.
(o) Person means an individual, corporation, company, governmental entity, association, firm, partnership, trust, estate, representative and any other similar organization, but does not mean the United States, a Farm Credit bank, the Funding Corporation or a Federal Reserve Bank.
(p) Revised Article 8 means Uniform Commercial Code, Revised Article 8, Investment Securities (with Conforming and Miscellaneous Amendments to Articles 1, 3, 4, 5, 9, and 10) 1994 Official Text, and has the same meaning as in 31 CFR 357.2.
(q) Securities Documentation means the applicable statement of terms, trust indenture, securities agreement, offering circular or other documents establishing the terms of a book-entry security.
(r) Securities Intermediary means:
(1) A person that is registered as a “clearing agency” under the Federal securities laws; a Federal Reserve Bank; any other person that provides clearance or settlement services with respect to a book-entry security that would require it to register as a clearing agency under the Federal securities laws but for an exclusion or exemption from the registration requirement, if its activities as a clearing corporation, including promulgation of rules, are subject to regulation by a Federal or State governmental authority; or
(2) A person (other than an individual, unless such individual is registered as a broker or dealer under the Federal securities laws) including a bank or broker, that in the ordinary course of its business maintains securities accounts for others and is acting in that capacity.
(s) Security means a Farm Credit security as defined in paragraph (h) of this section.
(t) Security Entitlement means the rights and property interest of an entitlement holder with respect to a book-entry security.
(u) State means any State of the United States, the District of Columbia, Puerto Rico, the Virgin Islands, or any other territory or possession of the United States.
(v) Transfer Message means an instruction of a participant to a Federal Reserve Bank to effect a transfer of a book-entry security maintained in the Book-entry System, as set forth in Federal Reserve Bank Operating Circulars.
§ 615.5451 Book-entry and definitive securities.
Subject to subpart C of this part:
(a) Farm Credit banks operating under the same title of the Act may issue consolidated securities in book-entry form.
(b) Farm Credit banks may issue Systemwide securities in book-entry form.
(c) Consolidated and Systemwide securities also may be issued in either registered or bearer definitive form.
§ 615.5452 Law governing rights and obligations of Federal Reserve Banks, Farm Credit banks, and Funding Corporation; rights of any person against Federal Reserve Banks, Farm Credit banks, and Funding Corporation.
(a) Except as provided in paragraph (b) of this section, the following are governed solely by the regulations contained in this subpart O, the securities documentation, and Federal Reserve Bank Operating Circulars:
(1) The rights and obligations of the Farm Credit banks, the Funding Corporation, and the Federal Reserve Banks with respect to:
(i) A book-entry security or security entitlement, and
(ii) The operation of the Book-entry System as it applies to Farm Credit securities; and
(2) The rights of any person, including a participant, against the Farm Credit banks, the Funding Corporation, and the Federal Reserve Banks with respect to:
(i) A book-entry security or security entitlement, and
(ii) The operation of the Book-entry System as it applies to Farm Credit securities.
(b) A security interest in a security entitlement that is in favor of a Federal Reserve Bank from a participant and that is not recorded on the books of a Federal Reserve Bank pursuant to § 615.5454(c)(1) of this subpart, is governed by the law (not including the conflict-of-law rules) of the jurisdiction where the head office of the Federal Reserve Bank maintaining the participant’s securities account is located. A security interest in a security entitlement that is in favor of a Federal Reserve Bank from a person that is not a participant, and that is not recorded on the books of a Federal Reserve Bank pursuant to § 615.5454(c)(1)of this subpart, is governed by the law determined in the manner specified in § 615.5453 of this subpart.
(c) If the jurisdiction specified in the first sentence of paragraph (b) of this section is a State that has not adopted revised Article 8 (see 31 CFR 357.2) then the law specified in paragraph (b) of this section shall be the law of that State as though revised Article 8 had been adopted by that State.
§ 615.5453 Law governing other interests.
(a) To the extent not inconsistent with these regulations, the law (not including the conflict-of-law rules) of a securities intermediary’s jurisdiction governs:
(1) The acquisition of a security entitlement from the securities intermediary;
(2) The rights and duties of the securities intermediary and entitlement holder arising out of a security entitlement;
(3) Whether the securities intermediary owes any duties to an adverse claimant to a security entitlement;
(4) Whether an adverse claim can be asserted against a person who acquires a security entitlement from the securities intermediary or a person who purchases a security entitlement or interest therein from an entitlement holder; and
(5) Except as otherwise provided in paragraph (c) of this section, the perfection, effect of perfection or non-perfection and priority of a security interest in a security entitlement.
(b) The following rules determine a “securities intermediary’s jurisdiction” for purposes of this section:
(1) If an agreement between the securities intermediary and its entitlement holder specifies that it is governed by the law of a particular jurisdiction, that jurisdiction is the securities intermediary’s jurisdiction.
(2) If an agreement between the securities intermediary and its entitlement holder does not specify the governing law as provided in paragraph (b)(1) of this section, but expressly specifies that the securities account is maintained at an office in a particular jurisdiction, that jurisdiction is the securities intermediary’s jurisdiction.
(3) If an agreement between the securities intermediary and its entitlement holder does not specify a jurisdiction as provided in paragraph (b)(1) or (b)(2) of this section, the securities intermediary’s jurisdiction is the jurisdiction in which is located the office identified in an account statement as the office serving the entitlement holder’s account.
(4) If an agreement between the securities intermediary and its entitlement holder does not specify a jurisdiction as provided in paragraph (b)(1) or (b)(2) of this section and an account statement does not identify an office serving the entitlement holder’s account as provided in paragraph (b)(3) of this section, the securities intermediary’s jurisdiction is the jurisdiction in which is located the chief executive office of the securities intermediary.
(c) Notwithstanding the general rule in paragraph (a)(5) of this section, the law (but not the conflict-of-law rules) of the jurisdiction in which the person creating a security interest is located governs whether and how the security interest may be perfected automatically or by filing a financing statement.
(d) If the jurisdiction specified in paragraph (b) of this section is a State that has not adopted revised Article 8 (see 31 CFR 357.2), then the law for the matters specified in paragraph (a) of this section shall be the law of that State as though revised Article 8 had been adopted by that State. For purposes of the application of the matters specified in paragraph (a) of this section, the Federal Reserve Bank maintaining the securities account is a clearing corporation, and the participant’s interest in a book-entry security is a security entitlement.
§ 615.5454 Creation of participant’s security entitlement; security interests.
(a) A participant’s security entitlement is created when a Federal Reserve Bank indicates by book entry that a book-entry security has been credited to a participant’s securities account.
(b) A security interest in a security entitlement of a participant in favor of the United States to secure deposits of public money, including without limitation deposits to the Treasury tax and loan accounts, or other security interest in favor of the United States that is required by Federal statute, regulation, or agreement, and that is marked on the books of a Federal Reserve Bank is thereby effected and perfected, and has priority over any other interest in the securities. Where a security interest in favor of the United States in a security entitlement of a participant is marked on the books of a Federal Reserve Bank, such Federal Reserve Bank may rely, and is protected in relying, exclusively on the order of an authorized representative of the United States directing the transfer of the security. For purposes of this paragraph, an “authorized representative of the United States” is the official designated in the applicable regulations or agreement to which a Federal Reserve Bank is a party, governing the security interest.
(c)(1) The Farm Credit Banks, the Funding Corporation, and the Federal Reserve Banks have no obligation to agree to act on behalf of any person or to recognize the interest of any transferee of a security interest or other limited interest in favor of any person except to the extent of any specific requirement of Federal law or regulation or to the extent set forth in any specific agreement with the Federal Reserve Bank on whose books the interest of the participant is recorded. To the extent required by such law or regulation or set forth in an agreement with a Federal Reserve Bank, or the Federal Reserve Bank Operating Circular, a security interest in a security entitlement that is in favor of a Federal Reserve Bank, a Farm Credit Bank, the Funding Corporation, or a person may be created and perfected by a Federal Reserve Bank marking its books to record the security interest. Except as provided in paragraph (b) of this section, a security interest in a security entitlement marked on the books of a Federal Reserve Bank shall have priority over any other interest in the securities.
(2) In addition to the method provided in paragraph (c)(1) of this section, a security interest, including a security interest in favor of a Federal Reserve Bank, may be perfected by any method by which a security interest may be perfected under applicable law as described in § 615.5452(b) or § 615.5453 of this subpart. The perfection, effect of perfection or non-perfection and priority of a security interest are governed by that applicable law. A security interest in favor of a Federal Reserve Bank shall be treated as a security interest in favor of a clearing corporation in all respects under that law, including with respect to the effect of perfection and priority of the security interest. A Federal Reserve Bank Operating Circular shall be treated as a rule adopted by a clearing corporation for such purposes.
§ 615.5455 Obligations of the Farm Credit banks and the Funding Corporation; no adverse claims.
(a) Except in the case of a security interest in favor of the United States or a Federal Reserve Bank or otherwise as provided in § 615.5454(c)(1), for the purposes of this subpart O, the Farm Credit banks, the Funding Corporation and the Federal Reserve Banks shall treat the participant to whose securities account an interest in a book-entry security has been credited as the person exclusively entitled to issue a transfer message, to receive interest and other payments with respect thereof and otherwise to exercise all the rights and powers with respect to such security, notwithstanding any information or notice to the contrary. The Federal Reserve Banks, the Farm Credit banks, and the Funding Corporation are not liable to a person asserting or having an adverse claim to a security entitlement or to a book-entry security in a participant’s securities account, including any such claim arising as a result of the transfer or disposition of a book-entry security by a Federal Reserve Bank pursuant to a transfer message that the Federal Reserve Bank reasonably believes to be genuine.
(b) The obligation of the Farm Credit banks and the Funding Corporation to make payments (including payments of interest and principal) with respect to book-entry securities is discharged at the time payment in the appropriate amount is made as follows:
(1) Interest or other payments on book-entry securities are either credited by a Federal Reserve Bank to a funds account maintained at the Federal Reserve Bank or otherwise paid as directed by the participant.
(2) Book-entry securities are redeemed in accordance with their terms by a Federal Reserve Bank withdrawing the securities from the participant’s securities account in which they are maintained and by either crediting the amount of the redemption proceeds, including both principal and interest, where applicable, to a funds account at the Federal Reserve Bank or otherwise paying such principal and interest as directed by the participant. No action by the participant is required in connection with the redemption of a book-entry security.
§ 615.5456 Authority of Federal Reserve Banks.
(a) Each Federal Reserve Bank is hereby authorized as fiscal agent of the Farm Credit banks and the Funding Corporation to perform functions with respect to the issuance of book-entry securities offered and sold by the Farm Credit banks and the Funding Corporation to which this subpart applies, in accordance with the terms of the securities documentation and the provisions of this subpart:
(1) To service and maintain book-entry securities in accounts established for such purposes;
(2) To make payments of principal and interest, as directed by the Farm Credit banks and the Funding Corporation;
(3) To effect transfer of book-entry securities between participants’ securities accounts as directed by the participants;
(4) To effect conversions between book-entry securities and definitive Farm Credit securities with respect to those securities as to which conversion rights are available pursuant to the applicable securities documentation; and
(5) To perform such other duties as fiscal agent as may be requested by the Farm Credit banks and the Funding Corporation.
(b) Each Federal Reserve Bank may issue Operating Circulars not inconsistent with this subpart, governing the details of its handling of book-entry securities, security entitlements, and the operation of the Book-entry System under this subpart.
§ 615.5457 Withdrawal of eligible book-entry securities for conversion to definitive form.
(a) Eligible book-entry securities may be withdrawn from the Book-entry System by requesting delivery of like definitive Farm Credit securities.
(b) A Federal Reserve Bank shall, upon receipt of appropriate instructions to withdraw eligible book-entry securities from book-entry in the Book-entry System, convert such securities into definitive Farm Credit securities and deliver them in accordance with such instructions.
(c) Farm Credit securities which are to be delivered upon withdrawal may be issued in either registered or bearer form, to the extent permitted by the applicable securities documentation.
(d) All requests for withdrawal of eligible book-entry securities must be made prior to the maturity or the applicable date of call of the Farm Credit securities.
§ 615.5458 Waiver of regulations.
The Farm Credit Administration reserves the right, in the Farm Credit Administration’s discretion, to waive any provision(s) of the regulations in this subpart in any case or class of cases for the convenience of the Farm Credit banks and the Funding Corporation or in order to relieve any person(s) of unnecessary hardship, if such action is not inconsistent with law, does not adversely affect any substantial existing rights, and the Farm Credit Administration is satisfied that such action will not subject the Farm Credit banks and the Funding Corporation to any substantial expense or liability.
§ 615.5459 Liability of Farm Credit banks, Funding Corporation and Federal Reserve Banks.
The Farm Credit banks, the Funding Corporation, and the Federal Reserve Banks may rely on the information provided in a transfer message or other transaction documentation, and are not required to verify the information. The Farm Credit banks, the Funding Corporation, and the Federal Reserve Banks shall not be liable for any action taken in accordance with the information set out in the transfer message, other transaction documentation, or evidence submitted in support thereof.
§ 615.5460 Additional provisions.
(a) Additional requirements. In any case or any class of cases arising under the regulations in this subpart, the Farm Credit banks and the Funding Corporation may require such additional evidence and a bond of indemnity, with or without surety, as may in the judgment of the Farm Credit banks and the Funding Corporation be necessary for the protection of the interests of the Farm Credit banks and the Funding Corporation.
(b) Notice of attachment for Farm Credit securities in the Book-entry System. The interest of a debtor in a security entitlement may be reached by a creditor only by legal process upon the securities intermediary with whom the debtor’s securities account is maintained, except where a security entitlement is maintained in the name of a secured party, in which case the debtor’s interest may be reached by legal process upon the secured party. These regulations do not purport to establish whether a Federal Reserve Bank is required to honor an order or other notice of attachment in any particular case or class of cases.
(c) Conversion of definitive securities into book-entry securities. Definitive Farm Credit securities may be converted to book-entry form in accordance with the terms of the applicable securities documentation and Federal Reserve Operating Circular.
§ 615.5461 Lost, stolen, destroyed, mutilated or defaced Farm Credit securities, including coupons.
(a) Relief on the account of the loss, theft, destruction, mutilation, or defacement of any definitive consolidated or Systemwide securities of the Farm Credit banks and coupons of such securities may be granted on the same basis and to the same extent as relief may be granted under the statutes of the United States and the regulations of the Department of the Treasury on the account of the loss, theft, destruction, mutilation, or defacement of United States securities and coupons of such securities.
(b) Applicants for relief under paragraph (a) of this section, shall present claims and proof of loss:
(1) To the Division of Special Investments, Bureau of the Public Debt, P.O. Box 396, Parkersburg, WV 26102-0396, in the case of consolidated or Systemwide securities of the Farm Credit banks issued prior to May 1, 1978; or
(2) To the Federal Farm Credit Banks Funding Corporation, 10 Exchange Place, Suite 1401, Jersey City, NJ 07302, in the case of consolidated or Systemwide securities issued on or after May 1, 1978.
§ 615.5462 Restrictive endorsement of bearer securities.
When consolidated and Systemwide bearer securities of the Farm Credit banks are being presented to Federal Reserve Banks, for redemption, exchange, or conversion to book entry, such securities may be restrictively endorsed. The restrictive endorsement shall be placed thereon in substantially the same manner and with the same effects as prescribed in United States Treasury Department regulations, now or hereafter in force, governing like transactions in United States bonds; and consolidated or Systemwide securities of the Farm Credit banks so endorsed shall be prepared for shipment and shipped in the manner prescribed in such regulations for United States bearer securities. (See 31 CFR part 328.)
Subpart P—Global Debt Securities
§ 615.5500 Definitions.
In this subpart, unless the context otherwise requires or indicates:
(a) Global debt securities means consolidated Systemwide debt securities issued by the Funding Corporation on behalf of the Farm Credit banks under section 4.2(d) of the Act through a fiscal agent or agents and distributed either exclusively outside the United States or simultaneously inside and outside the United States.
(b) Global agent means any fiscal agent, other than the Federal Reserve Banks, used by the Funding Corporation to facilitate the sale of global debt securities.
§ 615.5502 Issuance of global debt securities.
(a) The Funding Corporation may provide for the sale of global debt securities on behalf of the Farm Credit banks through a global agent or agents by negotiation, offer, bid, or syndicate sale, and deliver such obligations by book-entry, wire transfer, or such other means as may be appropriate.
(b) The Funding Corporation Board of Directors shall establish appropriate criteria for the selection of global agents and shall approve each global agent.
Subpart Q—Bankers’ Acceptances
§ 615.5550 Bankers’ acceptances.
Banks for cooperatives may rediscount with other purchasers the acceptances they have created. The bank for cooperatives’ board of directors, under established policies, may delegate this authority to management.
Subpart R [Reserved]
Subpart S—Federal Agricultural Mortgage Corporation Securities
§ 615.5570 Book-entry procedures for Federal Agricultural Mortgage Corporation Securities.
(a) The Federal Agricultural Mortgage Corporation (Farmer Mac) is a Federally chartered instrumentality of the United States and an institution of the Farm Credit System, subject to the examination and regulation of the Farm Credit Administration.
(b) Farmer Mac, either in its own name or through an affiliate controlled or owned by Farmer Mac, is authorized by section 8.6 of the Act:
(1) To issue and/or guarantee the timely payment of principal and interest on securities representing interests in or obligations backed by pools of agricultural real estate loans (guaranteed securities); and
(2) To issue debt obligations (which, together with the guaranteed securities described in paragraph (b)(1) of this section, are referred to as Farmer Mac securities). Farmer Mac may prescribe the forms, the denominations, the rates of interest, the conditions, the manner of issuance, and the prices of Farmer Mac securities.
(c) Farmer Mac securities shall be governed by §§ 615.5450, and 615.5452 through 615.5460. In interpreting those sections for purposes of this subpart, unless the context requires otherwise, the term “Farmer Mac securities” shall be read for “Farm Credit securities,” and “Farmer Mac” shall be read for “Farm Credit banks” and “Funding Corporation.” These terms shall be read as though modified where necessary to effectuate the application of the designated sections of subpart O of this part to Farmer Mac.
PART 616—LEASING
§ 616.600 Definitions.
For the purposes of this part, the following definitions apply:
(a) Interests in leases means ownership interests in any aspect of a lease transaction, including, but not limited to, servicing rights.
(b) Lease means any contractual obligation to own and lease, or lease with the option to purchase, equipment or facilities used in the operations of persons eligible to borrow under part 613 of this chapter.
(c) Sale with recourse means a sale of a lease or an interest in a lease in which the seller:
(1) Retains some risk of loss from the transferred asset for any cause except the seller’s breach of usual and customary warranties or representations designed to protect the purchaser against fraud or misrepresentation; or
(2) Has an obligation to make payments to any party resulting from:
(i) Default on the lease by the lessee or guarantor or any other deficiencies in the lessee’s performance;
(ii) Changes in the market value of the assets after transfer;
(iii) Any contractual relationship between the seller and purchaser incident to the transfer that, by its terms, could continue even after final payment, default, or other termination of the assets transferred; or
(iv) Any other cause, except that the retention of servicing rights alone shall not constitute recourse.
§ 616.6100 Purchase and sale of interests in leases.
(a) Authority to buy interests in leases. A Farm Credit System institution may buy leases and interests in leases.
(b) Policies. Each Farm Credit System institution that sells or buys interests in leases must do so only under a policy adopted by its board of directors that addresses the following:
(1) The types of leases in which the institution may buy or sell an interest and the types of interests which may be bought or sold;
(2) The underwriting standards for the purchase of interests in leases;
(3) Such limits on the aggregate lease payments and residual amount of interests in leases that the institution may buy from a single institution as are necessary to diversify risk, and such limits on the aggregate amounts the institution may buy from all institutions as are necessary to assure that service to the territory is not impeded;
(4) Identification and reporting of leases in which interests are sold or bought;
(5) Requirements for securing from the selling lessor in a timely manner adequate financial and other information about the lessee needed to make an independent judgment; and
(6) Any limits or conditions to which sales or purchases are subject that the board considers appropriate, including arbitration.
(c) Purchase and sale agreements. Each agreement to buy or sell an interest in a lease must, at a minimum:
(1) Identify the particular lease(s) to be covered by the agreement;
(2) Provide for the transfer of lessee information on a timely and continuing basis;
(3) Identify the nature of the interest(s) sold or bought;
(4) Specify the rights and obligations of the parties and the terms and conditions of the sale;
(5) Contain any terms necessary for the appropriate administration of the lease, including lease servicing and monitoring of the servicer and authorization and conditions for action in the event of lessee distress or default;
(6) Provide for a method of resolution of disagreements arising under the agreement;
(7) Specify whether the contract is assignable by either party; and
(8) In the case of lease transactions through agents, comply with § 614.4325(h) of this chapter, reading the term “lease” or “leases” in place of the term “loan” or “loans,” as applicable.
(d) Independent judgment. Each institution that buys an interest in a lease must make a judgment on the payment ability of the lessee that is independent of the originating or lead lessor and any intermediary seller or broker. This must occur before the purchase of the interest and before any servicing action that alters the terms of the original agreement. The institution must not delegate such judgment to any person(s) not employed by the institution. A Farm Credit System institution that buys a lease or any interest in a lease may use information, such as appraisals or inspections, provided by the originating or lead lessor, or any intermediary seller or broker; however, the buying Farm Credit System institution must independently evaluate such information when exercising its judgment. The independent judgment must be documented by a payment analysis that considers factors set forth in § 616.6300. The payment analysis must consider such financial and other lessee information as would be required by a prudent lessor and must include an evaluation of the capacity and reliability of the servicer. Boards of directors of jointly managed institutions must adopt procedures to ensure the interests of their respective shareholders are protected in participation between such institutions.
(e) Sales with recourse. When a lease or interest in a lease is sold with recourse:
(1) For the purpose of determining the lending and leasing limit in subpart J of part 614 of this chapter, the lease must be considered, to the extent of the recourse or guaranty, a lease by the buyer to the seller, and in addition, the seller must aggregate the lease with other obligations of the lessee; and
(2) The lease subject to the recourse agreement must be considered an asset sold with recourse for the purpose of computing capital ratios.
(f) Similar entity lease transactions. The provisions of § 613.3300 of this chapter that apply to interests in loans made to similar entities apply to interests in leases made to similar entities. In applying these provisions, the term “loan” shall be read to include the term “lease” and the term “principal amount” shall be read to include the term “lease amount.”
§ 616.6200 Out-of-territory leasing.
A System institution may make leases outside its chartered territory.
§ 616.6300 Leasing policies, procedures, and underwriting standards.
The board of each institution engaged in lease underwriting must adopt a written policy (or policies). Management, at the direction of the board, must develop procedures that reflect lease practices that control risk and comply with all applicable laws and regulations. Any leasing activity must comply with the lending policies and loan underwriting requirements in § 614.4150 of this chapter. An institution engaged in the making, buying, or syndicating of leases also must adopt written policies and procedures that address the additional risks associated with leasing. Written policies and procedures must address the following, if applicable:
(a) Appropriateness of the lease amount, purpose, and terms and conditions, including the residual value established at the inception of the lease;
(b) Process for estimating the leased asset’s market value during the lease term;
(c) Types of equipment and facilities the institution will lease;
(d) Remarketing of leased property and associated risks;
(e) Property tax and sales tax reporting;
(f) Title and ownership of leased assets;
(g) Title and licensing for motor vehicles;
(h) Liability associated with ownership, including any environmental hazards or risks;
(i) Insurance requirements for both the lessor and lessee;
(j) Classification of leases in accordance with generally accepted accounting principles; and
(k) Tax treatment of lease transactions and associated risks.
§ 616.6400 Documentation.
Each institution must document that any asset it leases is within its statutory authority.
§ 616.6500 Investment in leased assets.
An institution may acquire property to be leased that is consistent with current or planned leasing programs.
§ 616.6600 Leasing limit.
All leases made by Farm Credit System institutions shall be subject to the lending and leasing limit in subpart J of part 614 of this chapter.
§ 616.6700 Stock purchase requirements.
(a) Each System institution, except the Farm Credit Leasing Services Corporation, making an equipment lease under titles II or III of the Act must require the lessee to buy or own at least one share of stock or one participation certificate in the institution making the lease, in accordance with its bylaws.
(b) The disclosure requirements of § 615.5250(a) and (b) of this chapter apply to stock (or participation certificates) bought as a condition for obtaining a lease.
§ 616.6800 Disclosure requirements.
(a) Each System institution must give to each lessee a copy of all lease documents signed by the lessee within a reasonable time following lease closing.
(b) Each System institution must make its decision on a lease application as soon as possible and provide prompt written notice of its decision to the applicant.
PART 617—BORROWER RIGHTS
Subpart A—General
§ 617.7000 Definitions.
For the purposes of this part, the following terms apply:
Adjustable rate loan means a loan where the interest rate payable over the term of the loan may change. This includes adjustable rate, variable rate, or other similarly designated loans.
Adverse credit decision means a credit decision where a qualified lender:
(1) Decides not to make a loan to an applicant;
(2) Approves a loan in an amount less than the applicant requested; or
(3) Denies an application for restructuring.
Applicant means any person who completes and executes a loan application from a qualified lender.
Application for restructuring means a written request from a borrower to restructure a distressed loan. The request must be submitted on the appropriate forms prescribed by the qualified lender and accompanied by sufficient financial information and repayment projections, where appropriate, as required by the qualified lender to support a sound credit decision.
Distressed loan means a loan that the borrower does not have the financial capacity to pay according to its terms, as determined by the qualified lender, and exhibits one or more of the following characteristics:
(1) The borrower is demonstrating adverse financial and repayment trends.
(2) The loan is delinquent or past due under the terms of the loan contract.
(3) One or both of the factors listed in paragraphs (1) and (2) of this section, together with inadequate collateralization, present a high probability of loss to the qualified lender.
Effective interest rate means a measure of the cost of credit, expressed as an annual percentage rate, that shows the effect of the following costs, if any, on the interest rate on a loan charged by a qualified lender to a borrower:
(1) The amount of any stock or participation certificates that a borrower is required to buy to obtain the loan; and
(2) Any loan origination charges paid by a borrower to a qualified lender to obtain the loan.
Foreclosure proceeding means:
(1) A foreclosure or similar legal proceeding to enforce a lien on property, whether real or personal, that secures a non-interest-earning asset or distressed loan; or
(2) The seizing of and realizing on non-real property collateral, other than collateral subject to a statutory lien arising under titles I and II of the Act, to effect collection of a nonaccrual or distressed loan.
Independent evaluator means an individual who is a qualified evaluator and who satisfies the standards of § 614.4260, subpart F of this chapter, and the standards set by the qualified lender for the type of property to be evaluated. The independent evaluator may not be an employee or agent of a qualified lender or have a relationship with the lender or any of its officers or directors in contravention of part 612 of this chapter.
Interest rate means the stated contract rate of interest.
Loan means an extension of credit made to a farmer, rancher, or producer or harvester of aquatic products, for any agricultural or aquatic purpose and other credit needs of the borrower, including financing for basic processing and marketing that directly relates to the borrower’s operations and those of other eligible farmers, ranchers, and producers or harvesters of aquatic products.
Loan application means a complete oral or written request for an extension of credit made in accordance with a qualified lender’s procedures for the type of credit requested. An application is complete when the qualified lender receives all the information normally obtained and used in evaluating applications for credit. This information may include credit reports, supporting information for the credit requested, and reports by governmental agencies or other persons necessary to guarantee, insure, or provide security for the credit or collateral.
Qualified lender means:
(1) A System institution, except a bank for cooperatives, that makes loans as defined in this section; and
(2) Each bank, institution, corporation, company, credit union, and association described in section 1.7(b)(1)(B) of the Act (commonly referred to as an other financing institution), but only with respect to loans discounted or pledged under section 1.7(b)(1).
Restructure and restructuring of a loan means a reamortization, renewal, deferral of principal or interest, monetary concessions, or the taking of any other action to modify the terms of, or forbear on, a loan.
§ 617.7005 When may electronic communications be used in the borrower rights process?
Qualified lenders may use, with the parties’ agreement, electronic commerce (E-commerce), including electronic communications for borrower rights disclosures. Part 609 of this chapter addresses when a qualified lender may use E-commerce. Consistent with these rules, a qualified lender should interpret part 617 broadly to allow electronic transmissions, communications, records, and submissions. However, electronic communications may not be used for a notice of default, acceleration, repossession, foreclosure, eviction, or the right to cure when a borrower’s primary residence secures the loan. In these instances, a qualified lender must use paper disclosures.
§ 617.7010 May borrower rights be waived?
(a) A qualified lender may not obtain a waiver of borrower rights, except as indicated in paragraphs (b) and (c) of this section.
(b) A borrower may waive rights relating to distressed loan restructuring, credit reviews, and the right of first refusal when a loan is guaranteed by the Small Business Administration or in connection with a loan sale as provided in § 617.7015. Waivers obtained pursuant to this paragraph must be voluntary and in writing. The document evidencing the waiver must clearly explain the rights the borrower is being asked to waive.
(c) A borrower may waive all borrower rights provided for in part 617 of these regulations in connection with a loan syndication transaction with non-System lenders that are otherwise not required by section 4.14A(a)(6) of the Act to provide borrower rights. For purposes of this paragraph, a “loan syndication” is a multi-lender transaction in which each member of the lending syndicate has a direct contractual relationship with the borrower, but does not include a transaction created for the primary purpose of avoiding borrower rights. Waivers obtained pursuant to this paragraph must be voluntary and in writing. The document evidencing the waiver must clearly disclose the rights the borrower is waiving. Additionally, the borrower’s written waiver must contain a statement that the borrower was represented by legal counsel in connection with execution of the waiver.
§ 617.7015 What happens to borrower rights when a loan is sold?
(a) What happens when a qualified lender sells a loan to another qualified lender? A loan made by a qualified lender and subsequently sold, in whole or in part, to another qualified lender is subject to the borrower rights provisions of title IV of the Act.
(b) What happens when a qualified lender sells a loan into the secondary market? (1) Except as provided in paragraph (b)(2) of this section, the borrower rights provisions of sections 4.14, 4.14A, 4.14B, 4.14C, 4.14D, and 4.36 of the Act do not apply to a loan made on or after February 10, 1996, and designated for sale into a secondary market at the time the loan was made.
(2) Borrower rights apply to a loan designated for sale under paragraph (b)(1) of this section but not sold into a secondary market during the 180-day period that begins on the date of designation. The provisions of paragraph (b)(1) of this section will subsequently apply on the date of sale if the loan is later sold into a secondary market.
(c) What happens when a qualified lender sells a loan to a nonqualified lender? (1) Except for loans sold to another qualified lender or designated for sale into a secondary market, a qualified lender must comply with one of the following requirements before selling a loan or interest in a loan subject to borrower rights:
(i) The qualified lender and borrower must agree to include provisions in the loan contract with the borrower, or a written modification thereto, that ensure that the buyer of the loan will be obligated to provide the borrower the same rights a qualified lender must provide; or
(ii) The qualified lender must obtain from the borrower a signed written consent to the sale, which clearly states the borrower waives statutory borrower rights.
(2) Before the qualified lender obtains the borrower’s consent to the sale of the loan and the waiver of borrower rights under paragraph (c)(1)(ii) of this section, the qualified lender must disclose in writing to the borrower:
(i) A complete description of the statutory rights the borrower will waive;
(ii) Any changes in the loan terms or conditions that will occur if the qualified lender does not sell the loan;
(iii) That waiving borrower rights will not become effective unless the qualified lender sells the loan; and
(iv) That borrower rights will become effective again if any qualified lender repurchases the loan or any interest in the loan.
(3) The consent to the loan sale and waiver of borrower rights shall have no effect until the qualified lender sells the loan. Borrower rights become effective again if any qualified lender repurchases the loan or any interest in the loan.
(4) A qualified lender may not make a loan conditioned on the borrower consenting to the loan’s sale and a waiver of borrower rights.
Subpart B—Disclosure of Effective Interest Rates
§ 617.7100 Who must make and who is entitled to receive an effective interest rate disclosure?
(a) A qualified lender must make the disclosures required by subparts B and C of this part to borrowers for all loans not subject to the Truth in Lending Act.
(b) For a single loan involving more than one borrower, a qualified lender is required to provide only one set of disclosures to borrowers. All borrowers may designate, in writing, one person who will receive the effective interest rate disclosure. If the borrowers do not designate a particular recipient, the lender may provide the disclosure to at least one of the borrowers who is primarily liable for repayment of the loan.
§ 617.7105 When must a qualified lender disclose the effective interest rate to a borrower?
(a) Disclosure to prospective borrowers. A qualified lender must provide written effective interest rate disclosure for each loan no later than the time of loan closing.
(b) Disclosure to existing borrowers. (1) A qualified lender must provide a new effective interest rate disclosure to an existing borrower on or before the date:
(i) The borrower executes a new promissory note or other comparable evidence of indebtedness;
(ii) The borrower purchases additional stock or participation certificates as a condition of obtaining new funds from the qualified lender; or
(iii) The borrower pays an additional loan origination charge to the qualified lender as a condition of obtaining new funds.
(2) A qualified lender is not required to provide a new effective interest rate disclosure when it advances new funds to an existing borrower if none of the conditions of paragraph (b)(1) of this section apply and the advance is made pursuant to a preexisting contract that specifically provides for future advances.
§ 617.7110 How should a qualified lender disclose the cost of borrower stock or participation certificates?
The cost of borrower stock or participation certificates must be included in the effective interest rate calculation at the time the stock or participation certificate is purchased in connection with a loan transaction. For subsequent loans to existing borrowers, only the cost of new stock or participation certificates, if any, purchased in connection with a new loan or advance of new funds must be included in the effective interest rate calculation for the transaction.
§ 617.7115 How should a qualified lender disclose loan origination charges?
Any one-time charge paid by a borrower to a qualified lender in consideration for making a loan must be included in the effective interest rate as a loan origination charge. These include, but are not limited to, loan origination fees, application fees, and conversion fees. Loan origination charges also include any payments made by a borrower to a qualified lender to reduce the interest rate that would otherwise be charged, including any charges designated as “points.”
§ 617.7120 How should a qualified lender present the disclosures to a borrower?
A qualified lender must:
(a) Disclose the effective interest rate and other information required by subparts B and C of this part clearly and conspicuously in writing, in a form that is easy to read and understand and that the borrower may keep; and
(b) Not combine the disclosures with any information not directly related to the information required by §§ 617.7130 and 617.7135.
§ 617.7125 How should a qualified lender determine the effective interest rate?
(a) A qualified lender must calculate the effective interest rate on a loan using the discounted cash flow method showing the effect of the time value of money.
(b) For all loans, the cash flow stream used for calculating the effective interest rate of a loan must include:
(1) Principal and interest;
(2) The cost of stock or participation certificates that a borrower is required to purchase in connection with the loan; and
(3) Loan origination charges described in § 617.7115.
(c) A qualified lender must establish policies and procedures for EIR disclosures that clearly show the effect of the cost of borrower stock (or participation certificates) and loan origination charges on the interest rate of a loan. A qualified lender must also establish policies and procedures for determining major assumptions used in calculating the effective interest rate, e.g., criteria on how the cost of borrower stock (or participation certificates) and loan origination charges are assigned or allocated among multiple loans obtained by a borrower simultaneously.
§ 617.7130 What initial disclosures must a qualified lender make to a borrower?
(a) Required disclosures—in general. A qualified lender must disclose in writing:
(1) The interest rate on the loan;
(2) The effective interest rate of the loan;
(3) The amount of stock or participation certificates that a borrower is required to purchase in connection with the loan and included in the calculation of the effective interest rate of the loan;
(4) All loan origination charges included in the effective interest rate;
(5) That stock or participation certificates that borrowers are required to purchase are at risk and may only be retired at the discretion of the board of the institution; and
(6) The various types of loan options available to borrowers, with an explanation of the terms and borrower rights that apply to each type of loan.
(b) Adjustable rate loans. A qualified lender must provide the following information for adjustable rate loans in addition to the requirements of paragraph (a) of this section:
(1) The circumstances under which the rate can be adjusted;
(2) How much the rate can be adjusted at any one time and how much the rate can be adjusted during the term of the loan;
(3) How often the rate can be adjusted;
(4) Any limitations on the amount or frequency of adjustments;
(5) The specific factors that the qualified lender may take into account in making adjustments to the interest rate on the loan; and
(6) If the borrower’s interest rate is directly tied to a widely publicized external index:
(i) How and where the borrower may obtain information on changes to the index; and
(ii) When the qualified lender will provide written notice of changes to the borrower’s interest rate.
§ 617.7135 What subsequent disclosures must a qualified lender make to a borrower?
(a) Notice of interest rate change. (1) A qualified lender must provide written notice to a borrower of any change in interest rate on the borrower’s existing loan, containing the following information:
(i) The new interest rate on the loan;
(ii) The date on which the new rate is effective; and
(iii) The factors used to adjust the interest rate on the loan.
(2) If the borrower’s interest rate is directly tied to a widely publicized external index, a qualified lender must provide written notice to the borrower of the rate change either:
(i) Within forty-five (45) days after the effective date of the change; or
(ii) As part of the borrower’s first regularly scheduled billing statement affected by the rate change.
(3) If the borrower’s interest rate is not directly tied to a widely publicized external index, a qualified lender must send written notice to the borrower of the rate change within ten (10) days after the effective date of the change.
(b) Notice to adjustable rate loan borrowers with interest rates directly tied to a widely publicized external index. A qualified lender must provide the written disclosure required by § 617.7130(b)(6) to applicable borrowers who were not previously given the disclosure no later than the qualified lender’s next regularly scheduled correspondence to those borrowers occurring after April 1, 2010.
(c) Notice of increase in stock purchase requirement. If a qualified lender increases the amount of stock (or participation certificates) a borrower must own during the term of a loan, the lender must send a written notice to the borrower at least ten (10) days prior to the effective date of the increase. The notice must state:
(1) The new effective interest rate on the outstanding balance for the remaining term of the borrower’s loan;
(2) The date on which the new rate is effective; and
(3) The reason for the increase in the borrower stock (or participation certificates) purchase requirement.
Subpart C—Disclosure of Differential Interest Rates
§ 617.7200 What disclosures must a qualified lender make to a borrower on loans offered with more than one rate of interest?
A qualified lender that offers more than one rate of interest to borrowers must notify each borrower of the right to request a review of the interest rate charged on his or her loan no later than the time of loan closing. At the request of a borrower, the lender must:
(a) Provide a review of the loan to determine if the proper interest rate has been established;
(b) Explain to the borrower in writing the basis for the interest rate charged; and
(c) Explain to the borrower in writing how the credit status of the borrower may be improved to receive a lower interest rate on the loan.
Subpart D—Actions on Applications; Review of Credit Decisions
§ 617.7300 When acting on a loan application, what are the notice requirements and review rights?
Each qualified lender must make its decision on a loan application as quickly as possible. The qualified lender must provide prompt written notice of its decision to the applicant. The qualified lender is required to notify all primary applicants. If a loan application has more than one primary applicant, the qualified lender may send the original notice to the applicant designated to receive notices and may send copies to all other applicants. If the qualified lender makes an adverse credit decision on a loan application, the notice must include:
(a) The specific reasons for the qualified lender’s decision;
(b) A statement that the applicant may request a review of the decision;
(c) A statement that a written request for review must be made within 30 days after the applicant receives the qualified lender’s notice; and
(d) A brief explanation of the process for seeking review of the decision, including the independent collateral evaluation review process, whom to contact for access to information, and the applicant’s right to appear in person before the credit review committee (CRC).
§ 617.7305 What is a CRC and who are the members?
The board of directors of each qualified lender must establish one or more CRCs to review adverse credit decisions made by a qualified lender. The CRC may only review adverse credit decisions at the request of the applicant or borrower. The CRC has the ultimate decision-making authority on the loan or application under review. CRC members are selected by the board of directors of each qualified lender and must include at least one of the qualified lender’s farmer-elected board members. The loan officer involved in the adverse credit decision being reviewed may not serve on the CRC when it reviews that loan.
§ 617.7310 What is the review process of the CRC?
(a) How will an applicant or borrower know when the CRC will consider the review request? The qualified lender must inform the applicant or borrower 15 days in advance of the CRC meeting where the applicant or borrower’s request will be reviewed.
(b) Who may make a personal appearance before the CRC? Each applicant or borrower who has requested a review may appear in person before the CRC. The applicant or borrower may be accompanied by counsel or other representative when seeking a reversal of a decision on a loan or an application for restructuring.
(c) What documents may the CRC consider? An applicant or borrower may submit any documents or other evidence to support the information contained in the loan or application for restructuring. The documents should demonstrate that the application for a loan or restructuring satisfies the credit standards of the qualified lender and is an eligible loan or application for restructuring. Additionally, the applicant or borrower is entitled to a copy of each independent collateral evaluation used by the qualified lender.
(d) May an applicant obtain a new collateral evaluation even if collateral was not a reason for the adverse credit decision? As part of a CRC review, an applicant may request an independent collateral evaluation of the agricultural real estate securing the loan or being offered as security, regardless of whether collateral was an identified reason for the adverse credit decision. The independent collateral evaluation may be for any interest(s) in the property securing the loan, except stock or participation certificates issued by the qualified lender and held by the applicant or borrower.
(1) Who may conduct an independent collateral evaluation? The independent collateral evaluation must be conducted by an independent evaluator. The CRC must provide the applicant or borrower with a list of three independent evaluators approved by the qualified lender within 30 days of the request for an independent collateral evaluation. The applicant or borrower must select and engage the services of an evaluator from the list. The evaluation must comply with the collateral evaluation requirements of part 614, subpart F, of this chapter. The qualified lender must provide the applicant or borrower a copy of part 614, subpart F, for presentation to the selected independent evaluator. A copy of part 614, subpart F, signed by the evaluator is a required exhibit in the subsequent evaluation report.
(2) When must an applicant or borrower obtain the independent collateral evaluation and who pays for the evaluation? The applicant or borrower must enter into a contractual arrangement for evaluation services within 30 days of receiving the names of three approved independent evaluators. The contractual arrangement must be a written contract for services that complies with the lender’s appraisal standards. The evaluation must be completed within a reasonable period of time, taking into consideration any extenuating circumstance. The applicant or borrower is responsible for the costs of the independent evaluation.
(3) How does the CRC use an independent collateral evaluation when making a decision? The CRC will consider the results of any independent collateral evaluation before making a final determination with respect to the loan or restructuring, except the CRC is not required to consider a collateral evaluation that does not conform to the collateral evaluation standards described in part 614, subpart F, of this chapter.
(e) When must the CRC issue a decision? The CRC must reach a decision, and it must be the final decision of the qualified lender, not later than 30 days after the meeting on the request under review. The CRC must make every reasonable effort to conduct reviews and render decisions in as expeditious a manner as possible. After making its decision, the committee must promptly notify the applicant or borrower in writing of the decision and the reasons for the decision.
§ 617.7315 What records must the qualified lender maintain on behalf of the CRC?
A qualified lender must maintain a complete file of all requests for CRC reviews, including participation in state mediation programs, the minutes of each CRC meeting, and the disposition of each review by the CRC.
Subpart E—Distressed Loan Restructuring; State Agricultural Loan Mediation Programs
§ 617.7400 What protections exist for borrowers who meet all loan obligations?
(a) A qualified lender may not foreclose on a loan because the borrower failed to post additional collateral when the borrower has made all accrued payments of principal, interest, and penalties on the loan.
(b) A qualified lender may not require a borrower to reduce the outstanding principal balance of a loan by any amount that exceeds the regularly scheduled principal installment when due and payable, unless:
(1) The borrower sells or otherwise disposes of part, or all, of the collateral without the prior approval of the qualified lender and the proceeds from the sale or disposition are not applied to the loan; or
(2) The parties agree otherwise in writing.
(c) After a borrower has made all accrued payments of principal, interest, and penalties on a loan, the qualified lender may not enforce acceleration of the borrower’s repayment schedule due to the borrower’s untimely payment of those principal, interest, or penalty payments.
(d) If a qualified lender places a loan in non-interest-earning status and this results in an adverse action being taken against the borrower, such as revoking any undisbursed loan commitment, the lender must document the change of status and promptly notify the borrower in writing of the action and the reasons for taking it. If the borrower was not delinquent on any principal, interest, or penalty payment at the time of such action and the borrower’s request to have the loan placed back into accrual status is denied, the borrower may obtain a review of the denial before the CRC pursuant to § 617.7310 of this part. The borrower must request this review within 30 days after receiving the lender’s notice.
§ 617.7405 On what policies are loan restructurings based?
Loan restructurings must be made in accordance with the policy adopted by the supervising bank board of directors under section 4.14A(g) of the Act.
§ 617.7410 When and how does a qualified lender notify a borrower of the right to seek loan restructuring?
(a) What are the notice requirements? When a qualified lender determines that a loan is, or has become, distressed, the lender must provide one of the following written notices to the borrower stating that the loan may be suitable for restructuring.
(1) A notice stating that the loan has been identified as distressed and that the borrower has the right to request a restructuring of the loan (nonforeclosure notice).
(2) A notice that the loan has been identified as distressed, that the borrower has the right to request a restructuring of the loan, and that the alternative to restructuring may be foreclosure (45-day notice). The qualified lender must provide this notice to the borrower no later than 45 days before the qualified lender begins foreclosure proceedings with respect to any loan outstanding to the borrower. This notice must specifically state that if the loan is restructured and the borrower does not perform under the restructure agreement (as described in § 617.7410(e)), the qualified lender may initiate foreclosure proceedings without further notice.
(b) What should each notice include? (1) A copy of the policy the qualified lender established governing the treatment of distressed loans; and
(2) All materials necessary for the borrower to submit an application for restructuring.
(c) What notice should a qualified lender send to a borrower who is a debtor in a bankruptcy proceeding? The qualified lender should send a notice that identifies the loan as distressed and the statutory right to file an application for a restructuring. The notice may also restate the language from the automatic stay provision to emphasize that the notice is not intended as an attempt to collect, assess, or recover a claim.
(d) Whom should the qualified lender notify? The qualified lender is required to notify all primary obligors. If the obligors identify one party to receive notices, the qualified lender should send the original notice to that person and send copies to the other obligors. For borrowers in a bankruptcy proceeding, the qualified lender should send the notice to the borrower and, if retained, the borrower’s counsel.
(e) When is a qualified lender required to send another restructure notice to a borrower whose loan was previously restructured? A qualified lender must notify a borrower of the right to file another application to restructure the loan if the qualified lender sent the nonforeclosure notice to the borrower and the borrower has performed on the previous restructure agreement. Performance means that a borrower has made six consecutive monthly payments, four consecutive quarterly payments, three consecutive semiannual payments, or two consecutive annual payments. However, a qualified lender is not required to send another notice if they previously sent a 45-day notice, as described in § 617.7410(a)(2), and a borrower did not perform under a restructure agreement, as described above.
(f) Does the borrower have the opportunity to meet with the qualified lender after receiving the restructure notice? The qualified lender must provide any borrower to whom a notice has been sent with a reasonable opportunity to meet personally with a representative of the lender. The borrower and lender may meet to review the status of the loan, the financial condition of the borrower, and the suitability of the loan for restructuring. A meeting to discuss a loan that is in a non-interest-earning status may also involve developing a plan for restructuring, if the qualified lender determines the loan is suitable for restructuring.
(g) May the qualified lender voluntarily consider restructuring for a borrower who did not submit a restructuring application? A qualified lender may, in the absence of an application for restructuring from a borrower, propose restructuring to an individual borrower.
§ 617.7415 How does a qualified lender decide to restructure a loan?
(a) What criteria does a qualified lender use to evaluate an application for restructuring? The qualified lender should consider the following:
(1) Whether the cost to the lender of restructuring the loan is equal to or less than the cost of foreclosure, considering all relevant criteria. These criteria include:
(i) The present value of interest and principal foregone by the lender in carrying out the application for restructuring;
(ii) Reasonable and necessary administrative expenses involved in working with the borrower to finalize and implement the application for restructuring;
(iii) Whether the borrower’s application for restructuring included a preliminary restructuring plan and cash flow analysis, taking into account income from all sources to be applied to the debt and all assets to be pledged, that show a reasonable probability that orderly debt retirement will occur as a result of the proposed restructuring; and
(iv) Whether the borrower has furnished, or is willing to furnish, complete and current financial statements in a form acceptable to the qualified lender.
(2) Whether the borrower is applying all income over and above necessary and reasonable living and operating expenses to the payment of primary obligations;
(3) Whether the borrower has the financial capacity and the management skills to protect the collateral from diversion, dissipation, or deterioration;
(4) Whether the borrower is capable of working out existing financial difficulties, taking into consideration any prior restructuring of the loan, reestablishing a viable operation, and repaying the loan on a rescheduled basis; and
(5) In the case of a distressed loan that is not delinquent, whether restructuring consistent with sound lending practices may be taken to reasonably ensure that the loan will not have to be placed into non-interest-earning status in the future.
(b) What should be included in determining the cost of foreclosure? (1) The difference between the outstanding balance due, as provided by the loan documents, and the liquidation value of the loan, taking into consideration the borrower’s repayment capacity and the liquidation value of the collateral used to secure the loan;
(2) The estimated cost of maintaining a loan classified as a high-risk asset;
(3) The estimated cost of administrative and legal actions necessary to foreclose a loan and dispose of property acquired as the result of the foreclosure, including attorneys’ fees and court costs;
(4) The estimated cost of value changes in collateral used to secure a loan during the period beginning on the date of the initiation of an action to foreclose or liquidate the loan and ending on the date of the disposition of the collateral; and
(5) All other costs incurred as the result of the foreclosure or liquidation of a loan.
(c) What should the qualified lender do if the borrower and the qualified lender cannot agree on the financial projections used in the application for restructuring? If the borrower and lender are not able to agree on supportable or realistic financial projections, the lender may use benchmarks to determine the operational input costs and chattel security values. These benchmarks may include, but are not limited to, the borrower’s 5-year production average; averages in the county where the farming operation is located, based on data from United States Department of Agriculture, local colleges or universities, or other recognized authority; and other such reasonable sources.
(d) How does the qualified lender decide whether to restructure or foreclose? If a qualified lender determines the potential cost to the lender of restructuring the loan as proposed in the application for restructuring is less than or equal to the potential cost of foreclosure, the qualified lender must restructure the loan. If two or more restructuring alternatives are available, the qualified lender must restructure the loan using the alternative that results in the least cost to the lender.
(e) What documentation should the qualified lender retain? In the event that an application for restructuring is denied, a qualified lender must maintain sufficient documentation to demonstrate compliance with paragraphs (a), (b), and (c) of this section, as applicable.
§ 617.7420 How will a decision on an application for restructuring be issued?
(a) When must a qualified lender make a decision on an application for restructuring? Each qualified lender must provide a written decision on an application for restructuring and provide this decision to the borrower within 15 days from the conclusion of the negotiations used to develop the application for restructuring.
(b) How does a qualified lender notify the borrower of the decision? On reaching a decision on an application for restructuring, the qualified lender must provide written notice in any manner that requires a primary obligor to acknowledge receipt of the lender’s decision. In the case of a loan involving one or more primary obligors, the original notice may be provided to the primary obligor identified to receive such notice, with copies provided by regular mail to the other obligors.
(c) What notice is required if the restructuring request is denied? When an application for restructuring is denied, the notice must include:
(1) The specific reason(s) for the denial and any critical assumptions and relevant information on which the specific reasons are based, except that any confidential information shall not be disclosed;
(2) A statement that the borrower may request a review of the denial;
(3) A statement that any request for review must be made in writing within 7 days after receiving such notice.
(4) A brief explanation of the process for seeking review of the denial, including the appraisal review process and the right to appear before the CRC, pursuant to § 617.7310 of this part, accompanied by counsel or any other representative, if the borrower chooses.
§ 617.7425 What type of notice should be given to a borrower before foreclosure?
The qualified lender must send the 45-day notice, as described in § 617.7410(a)(2), no later than 45 days before any qualified lender begins foreclosure proceedings. The notice informs the borrower in writing that the loan may be suitable for restructuring and that the qualified lender will review any suitable loan for possible restructuring. The 45-day notice must include a copy of the policy and the materials described in § 617.7410(b). The notice must also state that if the loan is restructured, the borrower must perform under this restructure agreement. If the borrower does not perform, the qualified lender may initiate foreclosure.
(a) Does the notice have to inform the borrower that foreclosure is possible? The notice must inform the borrower that the alternative to restructuring may be foreclosure. If the notice does not inform the borrower of potential foreclosure, then the qualified lender must send a second notice at least 45 days before foreclosure is initiated.
(b) How are borrowers who are debtors in a bankruptcy proceeding notified? A qualified lender must restate the language from the automatic stay provision to emphasize that the notice is not intended to be an attempt to collect, assess, or recover a claim. The qualified lender should send the notice to the borrower and, if retained, the borrower’s counsel.
(c) May a qualified lender foreclose on a loan when there is a restructuring application on file? No qualified lender may foreclose or continue any foreclosure proceeding with respect to a distressed loan before the lender has completed consideration of any pending application for restructuring and CRC consideration, if applicable. This section does not prevent a lender from taking any action necessary to avoid the dissipation of assets or the diversion, dissipation, or deterioration of collateral if the lender has reasonable grounds to believe that such diversion, dissipation, or deterioration may occur.
§ 617.7430 Are institutions required to participate in state agricultural loan mediation programs?
(a) If initiated by a borrower, System institutions must participate in state mediation programs certified under section 501 of the Agricultural Credit Act of 1987 and present and explore debt restructuring proposals advanced in the course of such mediation. If provided in the certified program, System institutions may initiate mediation at any time.
(b) System institutions must cooperate in good faith with requests for information or analysis of information made in the course of mediation under any loan mediation program.
(c) No System institution may make a loan secured by a mortgage or lien on agricultural property to a borrower on the condition that the borrower waive any right under the agricultural loan mediation program of any state.
(d) A state mediation may proceed at the same time as the loan restructuring process of § 617.7415 or at any other appropriate time.
Subpart F—Distressed Loan Restructuring Directive
§ 617.7500 What is a directive used for and what may it require?
(a) A distressed loan restructuring directive is an order issued to a qualified lender when FCA has determined that the lender has violated section 4.14A of the Act.
(b) A distressed loan restructuring directive requires the qualified lender to comply with the specific distressed loan restructuring requirements in the Act.
(c) A distressed loan restructuring directive is enforceable in the same manner and to the same extent as an effective and outstanding cease and desist order that has become final. Any violation of a distressed loan restructuring directive may result in FCA assessing civil money penalties or seeking a court order pursuant to section 5.31 or 5.32 of the Act.
§ 617.7505 How will the qualified lender know when FCA is considering issuing a distressed loan restructuring directive?
When FCA intends to issue a distressed loan restructuring directive, it will notify the qualified lender in writing. The notice will state:
(a) The reasons FCA intends to issue a distressed loan restructuring directive;
(b) The proposed contents of the distressed loan restructuring directive; and
(c) Any other relevant information.
§ 617.7510 What should the qualified lender do when it receives notice of a distressed loan restructuring directive?
(a) A qualified lender should respond to the notice by stating why FCA should not issue a distressed loan restructuring directive, by proposing changes to the directive, or by seeking other suitable relief. The response must include any information, documentation, or other relevant evidence that supports the qualified lender’s position. The response may include a plan for achieving compliance with the distressed loan restructuring requirements of the Act. The response must be in writing and delivered to FCA within 30 days after the date on which the qualified lender received the notice. In its discretion, FCA may extend the time period for good cause. FCA may shorten the 30-day period with the consent of the qualified lender or when FCA determines that providing the full 30 days would result in a borrower not receiving distressed loan restructuring rights.
(b) If the qualified lender fails to respond within 30 days or such other time period specified by FCA, this failure will constitute a waiver of any objections to the proposed distressed loan restructuring directive.
§ 617.7515 How does the FCA decide whether to issue a directive?
After the closing date of the qualified lender’s response period, or following receipt of the qualified lender’s response, FCA must decide if there is sufficient information to support the issuance of a directive or if additional information is necessary. Once FCA has received sufficient information, it must decide whether to issue a directive as originally proposed or as modified.
§ 617.7520 How does the FCA issue a directive and when will it be effective?
A distressed loan restructuring directive is effective immediately on receipt by the qualified lender, or on such later date as may be specified by FCA, and will remain effective and enforceable until it is stayed, modified, or terminated by FCA.
§ 617.7525 May FCA use other enforcement actions?
FCA may issue a distressed loan restructuring directive in addition to, or instead of, any other action allowed by law, including cease and desist proceedings, civil money penalties, or the granting or conditioning of any application or other requests by the System institution.
Subpart G—Right of First Refusal
§ 617.7600 What are the definitions used in this subpart?
In addition to the definitions in § 617.7000, the following definitions apply to this subpart.
Acquired agricultural real estate or property means agricultural real estate acquired by a System institution as a result of a loan foreclosure or a voluntary conveyance by a borrower who, as determined by the institution, does not have the financial resources to avoid foreclosure.
Previous owner means:
(1) The prior record owner who was a borrower from a System institution and did not have the financial resources, as determined by the institution, to avoid foreclosure on acquired agricultural real estate; or
(2) The prior record owner who is not a borrower and whose acquired agricultural real estate was used as collateral for a loan to a System borrower.
System institution means a Farm Credit System institution, except a bank for cooperatives, which makes loans as defined in § 617.7000.
§ 617.7605 How should System institutions document whether the borrower had the financial resources to avoid foreclosure?
The right of first refusal applies only to borrowers who did not have the financial resources to avoid foreclosure or voluntary conveyance. A System institution must clearly document in its files whether the borrower had the resources to avoid foreclosure or voluntary conveyance.
§ 617.7610 What should the System institution do when it decides to sell acquired agricultural real estate?
(a) Notify the previous owner,
(1) Within 15 days of the System institution’s decision to sell acquired agricultural real estate, it must notify the previous owner, by certified mail, of the property’s appraised fair market value as established by an accredited appraiser and of the previous owner’s right to:
(i) Buy the property at the appraised fair market value, or
(ii) Offer to buy the property at a price less than the appraised value.
(2) That any offer must be received within 30 days of receipt of the notice.
(b) Act on an offer to buy the acquired agricultural real estate at the appraised value. Within 15 days after the receipt of the previous owner’s offer to buy the acquired agricultural real estate at the appraised value, the System institution must accept the offer and sell the property to the previous owner if the offer was received within 30 days of the notice required in paragraph (a)(2) of this section.
(c) Act on an offer to buy the acquired agricultural real estate at less than the appraised value.
(1) The System institution must consider the offer if it was received within 30 days of the notice required in paragraph (a)(2) of this section.
(2) If the System institution accepts this offer, it must notify the previous owner of the decision and sell the acquired agricultural real estate to the previous owner within 15 days of receiving the offer to buy the acquired agricultural real estate at a value less than the appraised value.
(3) If the System institution rejects this offer, it must notify the previous owner of the decision within 15 days of receiving the offer to buy the acquired agricultural real estate at a value less than the appraised value. The previous owner has 15 days from receipt of the notice to submit an offer to buy at such price or under such terms and conditions. The System institution may not sell the acquired agricultural real estate to any other person:
(i) At a price equal to, or less than, that offered by the previous owner; or
(ii) On different terms or conditions than those extended to the previous owner without first notifying the previous owner by certified mail and providing an opportunity to buy the property at such price or under such terms and conditions.
(d) For purposes of this section, financing by the System institution is not a term or condition of the sale of acquired agricultural real estate. A System institution is not required to provide financing to the previous owner for purchase of acquired agricultural real estate.
§ 617.7615 What should the System institution do when it decides to lease acquired agricultural real estate?
(a) Notify the previous owner,
(1) Within 15 days of the System institution’s decision to lease acquired agricultural real estate, it must notify the previous owner, by certified mail, of the property’s appraised rental value, as established by an accredited appraiser, and of the previous owner’s right to:
(i) Lease the property at a rate equivalent to the appraised rental value of the property, or
(ii) Offer to lease the property at rate that is less than the appraised rental value of the property.
(2) That any offer must be received within 15 days of receipt of the notice.
(b) Act on an offer to lease the acquired agricultural real estate at a rate equivalent to the appraised rental value of the property.
(1) Within 15 days after receipt of such offer, the System institution may accept the offer to lease the property at the appraised rental value and lease the property to the previous owner, or
(2) Within 15 days after receipt of such offer, the System institution may reject the offer to lease the property at the appraised rental value when the institution determines that the previous owner:
(i) Does not have the resources available to conduct a successful farming or ranching operation; or
(ii) Cannot meet all the payments, terms, and conditions of such lease.
(c) Act on an offer to lease the acquired agricultural real estate at a rate that is less than the appraised rental value of the property.
(1) The System institution must consider the offer to lease the property at a rate that is less than the appraised rental value of the property. Notice of the decision to accept or reject such offer must be provided to the previous owner within 15 days of receipt of the offer.
(2) If the System institution accepts the offer to lease the property at less than the appraised rental value, it must notify the previous owner and lease the property to the previous owner.
(3) If the institution rejects the offer, the System institution must notify the previous owner of this decision. The previous owner has 15 days after receipt of the notice in which to agree to lease the property at such rate or under such terms and conditions. The System institution may not lease the property to any other person:
(i) At a rate equal to or less than that offered by the previous owner; or
(ii) On different terms and conditions than those that were extended to the previous owner without first informing the previous owner by certified mail and providing an opportunity to lease the property at such rate or under such terms and conditions.
§ 617.7620 What should the System institution do when it decides to sell acquired agricultural real estate at a public auction?
System institutions electing to sell or lease acquired agricultural real estate or a portion of it through a public auction, competitive bidding process, or other similar public offering must:
(a) Notify the previous owner, by certified mail, of the availability of such property. The notice must contain the minimum amount, if any, required to qualify a bid as acceptable to the institution and any terms or conditions to which such sale or lease will be subject;
(b) Accept the offer by the previous owner if the System institution receives two or more qualified bids in the same amount, the bids are the highest received, and one of the qualified bids is from the previous owner; and
(c) Not discriminate against a previous owner in these proceedings.
§ 617.7625 Whom should the System institution notify?
Each certified mail notice requirement in this section is fully satisfied by mailing one certified mail notice to the last known address of the previous owner or owners.
§ 617.7630 Does this Federal requirement affect any state property laws?
The rights provided under section 4.36 of the Act and this section do not affect any right of first refusal under the law of the state in which the property is located.
PART 618—GENERAL PROVISIONS
Subpart A—Related Services
§ 618.8000 Definitions.
For the purposes of this subpart, the following definitions shall apply:
(a) Program means the method or procedures used to deliver a related service. This distinguishes the particulars of how a related service will be provided from the type of activity or concept.
(b) Related service means any service or type of activity provided by a System bank or association that is appropriate to the recipient’s operations, including control of related financial matters. The term “related service” includes, but is not limited to, technical assistance, financial assistance, financially related services and insurance, but does not include lending or leasing activities.
(c) System banks and associations means Farm Credit Banks, agricultural credit banks, banks for cooperatives, agricultural credit associations, production credit associations, Federal land bank associations, Federal land credit associations, and service corporations formed pursuant to section 4.25 of the Act.
§ 618.8005 Eligibility.
(a) Farm Credit Banks and associations may offer related services appropriate to on-farm and aquatic operations to persons eligible to borrow as defined in §§ 613.3000 (a) and (b), 613.3010, and 613.3300 of this chapter.
(b) Banks for cooperatives may offer related services to entities eligible to borrow as defined in §§ 613.3100, 613.3200, and 613.3300 of this chapter.
(c) Agricultural credit banks may offer related services appropriate to on-farm and aquatic operations of persons eligible to borrow specified in paragraph (a) of this section and may offer related services to entities eligible to borrow as specified in paragraph (b) of this section.
(d) Service corporations formed pursuant to section 4.25 of the Act may offer related services to persons eligible to borrow from the owners of the service corporation, pursuant to paragraphs (a), (b), (c), and (e) of this section.
(e) System banks and associations may provide related services to recipients that do not otherwise meet the requirements of this section in connection with loan applications, loan servicing, and other transactions between these recipients and persons eligible to borrow as defined in paragraphs (a), (b), or (c) of this section, as long as the service provided is requested by an eligible borrower or necessary to the transaction between the parties. Such services include, but are not limited to, fee appraisals of agricultural assets provided to any Federal agency, commercial banks, and other lenders.
(a) Authorities. System banks and associations may only offer related services that meet the criteria specified in this regulation and are authorized by the FCA.
(b) New service proposals. (1) A System bank or association that proposes or intends to offer a related service that the FCA has not previously authorized must submit to the FCA, in writing, a proposal that includes a description of the service, a statement of how it meets the regulatory definition of “related services” in § 618.8000(b), and the risk analysis cited in § 618.8020(b)(3). The FCA will evaluate the proposed service based on the information submitted, and may also consider whether there are extenuating circumstances or other compelling reasons that justify the proposed service or support a determination that the service is not authorized. This evaluation will focus primarily on Systemwide issues rather than on institution or program-specific factors.
(2) When authorizing a proposed related service, at its discretion, the FCA may impose special conditions or limitations on any related service or program to offer a related service.
(3) At its discretion the FCA may, at any time during its evaluation of a proposed related service, publish the proposed related service in the
(4) Within 60 days of the FCA receiving a completed proposal, including any additional information the FCA may require, the FCA will act on the request to authorize a new service. The FCA shall approve the request, deny the request, or publish the service for public comment in the
(5) Within the time period established in paragraph (b)(4) of this section, the FCA shall notify the requesting institution of its actions. Following notification of the requesting institution, the FCA will notify all System banks and associations of its determination on the proposed service by bookletter or other means. If a service is not authorized, the reasons for denial will be included in the notifications to the System and the requesting institution.
(c) Previously authorized services. (1) For related services that have been authorized by the FCA, any System bank or association may develop a program and subsequently offer the related service to eligible recipients, subject to any special conditions or institutional limits placed by the FCA. These programs will be subject to review and evaluation during the examination and enforcement process.
(2) The FCA shall make available to all System banks and associations a list of such related services (“related services list” or “list”) and will update the list in accordance with paragraph (b)(5) of this section. The list will contain the following:
(i) A description of each related service; and
(ii) The types of institutions authorized to offer each type of related service;
(iii) Identification of any special conditions on how the related service may be offered. The special conditions and description of the service will be fully detailed in FCA’s notice to System institutions under paragraph (b)(5) of this section.
(3) At least 10 business days prior to implementing a related service program already on the list, the System bank or association must notify the FCA Office of Examination field office responsible for examining that institution in writing and provide it with a description of the proposed related service program.
§ 618.8015 Policy guidelines.
(a) The board of directors of each System bank or association providing related services must adopt a policy addressing related services. The policy shall include clearly stated purposes, objectives, and operating parameters for offering related services and a requirement that each service offered be consistent with the institution’s business plan and long-term strategic goals. Such policy shall also be subject to review under an appropriate internal control policy.
(b) All related services must be offered to recipients on an optional basis. If the institution requires a related service as a condition to borrow, it must inform the recipient that the related service can be obtained from the institution or from any other person or entity offering the same or similar related services.
(c) All fees for related services must be separately identified from loan interest charges and disclosed to the recipient of the service prior to providing or implementing the service.
§ 618.8020 Feasibility requirements.
For every related service program a System bank or association provides, it must document program feasibility. The feasibility analysis shall include the following:
(a) Support for the determination that the related service is authorized; and
(b) An overall cost-benefit analysis that demonstrates program feasibility, taking into consideration the following items:
(1) An analysis of how the program relates to or promotes the institution’s business plan and strategic goals, and whether offering the service is consistent with the long-term goals described in its capital plan;
(2) An analysis of the expected financial returns of the program which, at a minimum, must include an evaluation of market, pricing, competition issues, and expected profitability. This analysis should include an explanation of how the program will contribute to the overall financial health of the institution; and
(3) An analysis of the risk in the program, including:
(i) An evaluation of the operational costs and risks involved in offering the program, such as management and personnel requirements, training requirements, and capital outlays;
(ii) An evaluation of the financial liability that may be incurred as a result of offering the program and any insurance or other measures that are necessary to minimize these risks; and
(iii) An evaluation of the conflicts of interest, whether real or perceived, that may arise as a result of offering the program and any steps that are necessary to eliminate or appropriately manage these conflicts.
§ 618.8025 Feasibility reviews.
(a) Prior to an association offering a related service program for the first time or offering a service that it did not offer during the most recently completed business cycle (generally 1 year), the board of directors of the funding bank must verify that the association has performed a feasibility analysis pursuant to § 618.8020. The bank review is limited to a determination that the feasibility analysis is complete and that the analysis establishes that it is feasible for the association to provide the program. Any conclusion by the bank that the feasibility analysis is incomplete or fails to demonstrate program feasibility must be fully supported and communicated to the association in writing within 60 days of its submission to the bank.
(b) Prior to a service corporation offering a service for the first time or offering a service that it did not offer during the most recently completed business cycle (generally 1 year), the owners of the service corporation must verify that the service corporation has performed a feasibility analysis pursuant to § 618.8020. If the owners all agree, one bank with a significant ownership interest can be delegated this responsibility.
(a) System banks and associations may offer related services outside their chartered territories subject to the following conditions:
(1) The System bank or association obtains consent from all chartered institutions currently offering the same type of service in the territory in which the service is to be provided; or
(2) If no System bank or association is currently offering the same type of service in the territory, then the out-of-territory institution must obtain the consent of at least one direct lender institution chartered in the territory in which the related service is to be provided.
(3) The consent obtained pursuant to paragraphs (a)(1) and (a)(2) of this section shall be in the form of a written agreement with specific terms and conditions including timeframes.
(b) System banks and associations providing out-of-territory services must fulfill all requirements of subparts A and B of this part 618.
(c) An institution that consents to another bank or association providing a related service in its chartered territory must meet the requirements of this section, but need not comply with the other requirements of subparts A and B of this part 618, unless the program consented to imposes a financial obligation on the consenting institution. If a financial obligation exists, then the consenting institution must comply with §§ 618.8015, 618.8020 and 618.8025.
(d) Service corporations must follow the requirements of this section in offering related services out-of-territory. A service corporation cannot consent to an out-of-territory institution providing services in its chartered territory.
Subpart B—Member Insurance
§ 618.8040 Authorized insurance services.
(a) Farm Credit System banks (excluding banks for cooperatives) (hereinafter banks) and associations may sell to their members and borrowers, on an optional basis, credit or term life and credit disability insurance appropriate to protect the loan commitment in the event of death or disability of the debtors. The sale of other insurance necessary to protect a member’s or borrower’s farm or aquatic unit is permitted, but limited to hail and multiple-peril crop insurance, title insurance, and insurance necessary to protect the facilities and equipment of aquatic members and borrowers. A member or borrower shall have the option, without coercion from the bank or association, to accept or reject such insurance.
(b) Bank and association board policies governing the provision of member insurance programs shall be established within the following general guidelines:
(1) A System bank or association may provide credit or term-life or credit-disability insurance only to persons who have a loan or lease with any System bank or association, without regard to whether such institution is the provider. Term-life insurance coverage may continue after the loan has been repaid or the lease terminated, provided the member can reasonably be expected to borrow again within 2 years, and provided the continuation of insurance is not contrary to state law.
(2) A debtor-creditor relationship is not required for the sale of other insurance specified in paragraph (a) of this section, as long as purchasers are members of a System bank or association. For the purposes of this section, “member” means someone eligible to borrow who is a stockholder or participation certificate holder and who acquired stock or participation certificates to obtain a loan, for investment purposes, or to qualify for other services of the association or bank.
(3) In making insurance available through private insurers, each bank shall approve the programs of more than two insurers for each type of insurance offered in the bank’s chartered territory, provided that more than two insurers for each type of insurance have proposed programs to the bank that will, in all likelihood, have long-term viability, and meet the requirements of § 618.8040(b)(4)(i) of this section. The banks shall make a reasonable and good faith effort to attract more than two qualified insurers for each insurance program offered to borrowers in all States of the bank’s chartered territory. Where the bank is unable to approve more than two insurers, the bank shall document its efforts to attract additional qualified insurers for the affected insurance program and State. The banks may provide comparative information relating to costs and quality of approved programs and the financial condition of approved companies.
(4) Member insurance services may be offered only if:
(i) The insurance program has been approved by the bank or association from among eligible programs made available to it by insurers—
(A) Meeting reasonable financial and quality of service standards prescribed by the bank; and
(B) Licensed under State law to do business in the State(s) in which the insurance is offered:
(ii) The bank or association has the capacity to render authorized insurance services in an effective and efficient manner;
(iii) There exists the probability that the service will generate sufficient revenue to cover all costs;
(iv) Rendering the insurance service will not have an adverse effect on the credit or other operations of the bank or association; and
(v) In making insurance available through approved insurers, the board of directors of the bank or association shall make a reasonable and good faith effort to select and offer at least two approved insurers for each type of insurance made available to the members and borrowers. In the event that the bank or association has selected less than two insurers for any insurance program, such bank or association shall document the reasons why it is unable to offer members and borrowers additional insurers for the affected insurance program.
(5) All costs to members and borrowers for insurance services provided shall be disclosed separately from interest charges.
(6) Bank and association personnel shall not benefit from insurance sales by receipt of commissions or gifts from underwriting insurance companies. However, employees may participate in an incentive plan under which incentive compensation is provided based on the sale of insurance.
(i) In any single year, for all employees except full-time insurance personnel or full-time supervisors or managers of insurance departments, incentive compensation attributable to sales of all types of insurance cannot exceed an amount equivalent to 5 percent of the recipient’s annual base salary.
(ii) In any single year, for full-time insurance personnel and full-time supervisors and managers of insurance departments, incentive compensation for sales of credit life and similar types of insurance (i.e. insurance that pays on a loan or mortgage upon the death or disability of the debtor) cannot exceed an amount equivalent to 5 percent of the recipient’s annual base salary.
(iii) No incentive compensation limit applies to sales of other insurance (crop, title, etc.) by full-time insurance personnel or full-time supervisors or managers of insurance departments.
(7) Term insurance may be written for the amount of coverage desired by the member or borrower, but in no case may the amount of term insurance, credit life insurance, or a combination of the two with an institution of the System, be in excess of total loan commitments to the member or borrower by the institution writing the insurance.
(8) The banks may, only by agreement with an insurer, offer services traditionally furnished by insurers to the Farm Credit System. This shall include master marketers when considering the sale of Federal crop insurance. The banks shall not underwrite insurance, adjust claim payments or settlements, or train and school or service adjustors or insurance agents.
(9) No bank or association shall, directly or indirectly, condition the extension of credit or provision of other service on the purchase of insurance sold or endorsed by a bank or association. At the time insurance sold or endorsed by a bank or association is offered to a member or borrower, a bank or association shall present a written notice that the service is optional. The notice shall be in prominent type and separately signed by the member or borrower. The bank or association shall explain to the member or borrower that purchase of insurance from the association is optional and that the member or borrower will not be discriminated against for obtaining the insurance elsewhere.
(10) No bank or association shall, directly or indirectly, discriminate in any manner against any agent, broker, or insurer that is not affiliated with such bank or association, or against any party who purchases insurance through any such nonaffiliated insurance agent, broker, or insurer.
(11) Bank supervision shall ensure that insurance services offered by approved insurers consistently provide members or borrowers with a high quality and cost-effective service as prescribed by policies of the bank’s board of directors, but such supervision shall be without any coercion or suasion from any bank in favor of any agent or insurer.
(12) Records must be maintained by banks and associations in sufficient detail to facilitate the review and supervision required herein.
Subparts C-F [Reserved]
Subpart G—Releasing Information
§ 618.8300 General regulation.
Except as necessary in performing official duties or as authorized by Farm Credit Administration regulations (§§ 618.8300 through 618.8330), no director or employee of a bank, association, or agency thereof shall disclose information of a type not ordinarily contained in published reports or press releases regarding any such banks or associations or their borrowers or members.
§ 618.8310 Lists of borrowers and stockholders.
(a) Any System institution, for the purpose of protecting the security position of the institution, may provide lists of borrowers to buyers, warehousemen, and others who deal in produce or livestock of the kind that secures such loans, except to the extent such actions are prohibited by State laws adopted in accordance with the Food Security Act of 1985, Pub. L. 99-198, 99 Stat. 1354. Lists of borrowers or stockholders shall not otherwise be released by any bank or association except in accordance with paragraph (b) of this section.
(b)(1) Within 7 days after receipt of a written request by a stockholder, each Farm Credit bank or association must provide a current list of its stockholders’ names, addresses, and classes of stock held to such requesting stockholder. As a condition to providing the list, the bank or association may only require that the stockholder agree and certify in writing that the stockholder will:
(i) Utilize the list exclusively for communicating with stockholders for permissible purposes; and
(ii) Not make the list available to any person, other than the stockholder’s attorney or accountant, without first obtaining the written consent of the institution.
(2) As an alternative to receiving a list of stockholders, a stockholder may request the institution mail or otherwise furnish to each stockholder a communication for a permissible purpose on behalf of the requesting stockholder. This alternative may be used at the discretion of the requesting stockholder, provided that the requester agrees to defray the reasonable costs of the communication. In the event the requester decides to exercise this option, the institution must provide the requester with a written estimate of the costs of handling and mailing the communication as soon as practicable after receipt of the stockholder’s request to furnish a communication. However, a stockholder may not exercise this option when requesting the list to distribute campaign material for election to the institution board or board committees. Farm Credit banks and associations are prohibited from distributing or mailing campaign material under § 611.320(e) of this chapter.
(3) For purposes of paragraph (b) of this section “permissible purpose” is defined to mean matters relating to the business operations of the institutions. This includes matters relating to the effectiveness of management, the use of institution assets, the distribution by stockholder candidates of campaign material for election to the institution board or board committees, and the performance of directors and officers. This does not include communications involving commercial, social, political, or charitable causes, communications relating to the enforcement of a personal claim or the redress of a personal grievance, or proposals advocating that the bank or association violate any Federal, State, or local law or regulation.
(c) In connection with preparing and submitting an electronic report of all System accounts and exposures to the Farm Credit Administration in accordance with the requirements of § 621.15 of this chapter, each bank and association may provide information from its lists of borrowers and stockholders to the Reporting Entity as defined in § 621.2 of this chapter.
§ 618.8320 Data regarding borrowers and loan applicants.
(a) Except as provided in paragraph (b) of this section, the directors, officers, and employees of every bank and association shall hold in strict confidence all information regarding the character, credit standing, and property of borrowers and applicants for loans. They shall not exhibit or quote the following documents: Loan applications; supplementary statements by applicants; letters and statements relative to the character, credit standing, and property of borrowers and applicants; recommendations of loan committees; and reports of inspectors, fieldmen, investigators, and appraisers.
(b) The requirements of paragraph (a) of this section are subject to the following exceptions.
(1) Examiners and other authorized representatives of the Farm Credit Administration and the bank concerned shall have free access to all information, records, and files.
(2) In connection with a legitimate law enforcement inquiry, accredited representatives of any agency or department of the United States may be given access to information upon presentation of official identification and a written request specifying:
(i) The particular information desired; and
(ii) That the information is relevant to the law enforcement inquiry and will be used only for the purpose for which it is sought.
(3) The chairman of the presidents committees and the presidents of the banks may supply statistical and other impersonal information pertaining to groups of borrowers, applicants, and loans, in response to requests from any department or independent office of the Government of the United States, or responsible private organizations, with the understanding that the information will not be published.
(4) Information concerning borrowers may be given for the confidential use of any Farm Credit institution in contemplation of the extension of credit, administration of credit, or the collection of loans.
(5) Impersonal information based solely on transactions or experience with a borrower, such as amounts of loans, terms, and payment records, may be given by a bank or association to any reliable organization for its confidential use in contemplation of the extension of credit or to a consumer reporting agency.
(6) Credit information concerning any borrower may be given when such borrower consents thereto in writing.
(7) An unsuccessful applicant for credit which primarily is for personal, family, or household purposes, if his application was rejected either wholly or partly because of information contained in a consumer report from a consumer reporting agency shall be advised as required in section 615(a) of the Fair Credit Reporting Act (84 Stat. 1133), and if his application was rejected either wholly or partly because of information obtained from a person other than a consumer reporting agency shall be advised as required in section 615(b) thereof.
(8)(i) Any information or analysis of information requested during the course of mediation by a State agency, governor’s office or mediator under any State mediation program certified under section 501 of the Agricultural Credit Act of 1987, may be provided to the State agency, governor’s office or mediator, with the approval of the borrower.
(ii) Information concerning borrowers contained in an appraisal report may be given by a Farm Credit institution to any State agency certifying and licensing real estate appraisers provided that the Farm Credit institution:
(A) Certifies that the information is required in connection with an employee’s application for certification and licensure and that the institution has taken appropriate steps to protect the confidentiality of any borrower information that is not essential to the State’s evaluation of the application; and
(B) Determines that the State certification and licensing program makes reasonable provisions for protecting the confidentiality of the borrower information contained in the appraisal report.
(9) Collateral evaluation reports may be released to a loan applicant, when required by the Equal Credit Opportunity Act or related regulations.
(10) In connection with preparing and submitting an electronic report of all System accounts and exposures to the Farm Credit Administration in accordance with the requirements of § 621.15 of this chapter, each bank and association may provide data on its accounts and exposures to the Reporting Entity as defined in § 621.2 of this chapter.
(c) The exceptions in paragraph (b) of this section shall be exercised by Farm Credit institutions with full awareness of the requirements of the Fair Credit Reporting Act.
§ 618.8325 Disclosure of loan documents.
(a) For purposes of this section, the following definitions shall apply:
(1) Borrower means any signatory to a loan contract who is either primarily or secondarily liable on such contract, including guarantors, endorsers, cosigners or the like.
(2) Execution of the loan means the time at which the borrower and the qualified lender have entered into a legal, binding, and enforceable loan contract and any subsequent amendment or modification of such contract.
(3) Loan means a loan made to a farmer, rancher, or producer or harvester of aquatic products, for any agricultural or aquatic purpose and other credit needs of the borrower, including financing for basic processing and marketing directly related to the borrower’s operations and those of other eligible farmers, ranchers, and producers or harvesters of aquatic products.
(4) Loan contract means any written agreement under which a qualified lender lends or agrees to lend funds to a borrower in consideration for, among other things, the borrower’s promise to repay the loaned funds at an agreed-upon rate of interest.
(5) Loan document means any form, application, agreement, contract, instrument, or other writing to which a borrower affixes his signature or seal and which the qualified lender intends to retain in its files as evidence relating to the loan contract entered into between it and the borrower, but shall not include any document related to a loan which the borrower has not signed.
(6) Qualified lender means:
(i) A System institution that makes loans (as defined in paragraph (a)(3) of this section) except a bank for cooperatives; and
(ii) Each bank, institution, corporation, company, union, and association described in section 1.7(b)(1)(B) of the Act, but only with respect to loans discounted or pledged under section 1.7(b)(1) of the Act.
(b) Each qualified lender shall provide a copy of all loan documents to the borrower or the borrower’s legal representative at the execution of the loan. Subsequently, upon written request of a borrower or a borrower’s legal representative, a qualified lender shall provide, as soon as practicable, a copy of any loan documents signed by the borrower, a copy of other documents delivered by such borrower to that qualified lender, and a copy of each collateral evaluation of the borrower’s assets made or used by the qualified lender. To the extent that a collateral evaluation may contain confidential third party information, the lender may protect such confidential third party information by withholding any information that would disclose identifying characteristics of the third party or his property. One copy shall be furnished free of charge. The lender may assess reasonable copying charges for any additional copies requested by the borrower.
(c) Each System bank and association shall have available in its offices copies of the institution’s articles of incorporation or charter and bylaws for inspection and shall furnish a copy of such documents to any owner of stock or participation certificates upon request.
§ 618.8330 Production of documents and testimony during litigation.
(a) If your bank or association is a party to litigation with a borrower or a successor in interest, you or your directors, officers, or employees may disclose confidential information about that borrower or the successor in interest during the litigation.
(b) If the Government or your bank or association is not a party to litigation, you or your directors, officers, or employees may produce confidential documents or testimony only if a court of competent jurisdiction issues a lawful order signed by a judge.
§ 618.8340 [Reserved]
Subpart H—Disposition of Obsolete Records
§ 618.8360 [Reserved]
§ 618.8370 [Reserved]
Subpart I [Reserved]
Subpart J—Internal Controls
§ 618.8430 Internal controls.
Each Farm Credit institution’s board of directors must adopt an internal control policy, providing adequate direction to the institution in establishing effective control over, and accountability for, operations, programs, and resources. The policy must include, at a minimum, the following:
(a) Direction to management which assigns responsibility for the internal control function (financial, credit, credit review, collateral, and administrative) to an officer (or officers) of the institution.
(b) Adoption of internal audit and control procedures that evidence responsibility for review and maintenance of comprehensive and effective internal controls.
(c) Direction for the operation of a program to review and assess its assets. These policies shall include standards which address the administration of this program, described in the list which follows:
(1) Loan, loan-related assets, and appraisal review standards, including standards for scope of review selection and standards for workpapers and supporting documentation.
(2) Asset quality classification standards to be utilized in accordance with a standardized classification system consistent among associations within a district and their funding Farm Credit Bank or agricultural credit bank.
(3) Standards for assessing credit administration, including the appraisal of collateral.
(4) Standards for the training required to initiate the program.
(d) The role of the audit committee in providing oversight and review of the institution’s internal controls.
§ 618.8440 Planning.
(a) Business plan requirement. No later than 30 days after the commencement of each calendar year, the board of directors of each Farm Credit System institution must adopt an operational and strategic business plan for at least the succeeding 3 years.
(b) Content of business plan. The plan must include, at a minimum, the following:
(1) A mission statement.
(2) An annual review of the internal and external factors likely to affect the institution during the planning period. The review must:
(i) Incorporate the description and assessment of workforce and management strengths and weaknesses required by paragraph (b)(7)(i) of this section;
(ii) Include an assessment of the needs of the board, including skills and diversity, based on the annual self-evaluation of the board’s performance; and
(iii) Include strategies for correcting identified weaknesses.
(3) Quantifiable goals and objectives.
(4) Pro forma financial statements for each year of the plan.
(5) A detailed operating budget for the first year of the plan.
(6) The capital adequacy plan adopted pursuant to § 615.5200(b) of this chapter.
(7) A human capital plan that includes, at a minimum, the items specified in this paragraph (b)(7). These items may be contained in other board-approved documents that are adopted annually, provided the items are summarized in, and incorporated by reference into, the human capital plan.
(i) A description of the institution’s workforce and management and an assessment of their strengths and weaknesses;
(ii) A description of the institution’s workforce and management succession programs; and
(iii) Strategies and actions to strive for diversity and inclusion within the institution’s workforce and management.
(8) For each Farm Credit System institution in its exercise of title III lending authorities and direct lender association, a marketing plan that strategically addresses how the institution will further the objective of the Act, set forth in section 1.1(b) of the Act, that the System be responsive to the credit needs of all types of agricultural producers having a basis for credit. The marketing plan must include, at a minimum, the items specified in this paragraph (b)(8). These items may be contained in other board-approved documents that are adopted annually, provided the items are summarized in, and incorporated by reference into, the marketing plan.
(i) A description of the institution’s chartered territory by market segment, including the characteristics of demography, geography, and types of agriculture practiced; and
(ii) Strategies and actions to market the institution’s products and services to all eligible and creditworthy persons, with specific outreach toward diversity and inclusion within each market segment.
(c) Board reporting requirements. (1) Each institution must report annually to its board of directors on the progress the institution has made in accomplishing the strategies and actions required by paragraph (b)(7)(iii) of this section.
(2) Each institution subject to paragraph (b)(8) of this section must report annually to its board of directors on the progress the institution has made in accomplishing the strategies and actions required by paragraph (b)(8)(ii) of this section.
PART 619—DEFINITIONS
§ 619.9000 The Act.
The Farm Credit Act of 1971; Pub. L. 92-181 and amendments.
§ 619.9010 Additional security.
Supplementary collateral to the primary security taken in connection with the loan.
§ 619.9015 Agricultural credit associations.
Agricultural credit associations are associations created by the merger of one or more Federal land bank associations or Federal land credit associations and one or more production credit associations and which have received a transfer of authority to make and participate in long-term real estate mortgage loans pursuant to section 7.6 of the Act.
§ 619.9020 Agricultural credit banks.
Agricultural credit banks are those banks created by the merger of a Farm Credit Bank and a bank for cooperatives pursuant to section 7.0 of the Act.
§ 619.9025 Agricultural land.
Land improved or unimproved which is devoted to or available for the production of crops and other products such as but not limited to fruits and timber or for the raising of livestock.
§ 619.9050 Associations.
The term associations includes (individually or collectively) Federal land bank associations, Federal land credit associations, production credit associations, and agricultural credit associations.
§ 619.9060 Bank for cooperatives.
A bank for cooperatives is a bank that is operating under section 3.0 of the Act.
§ 619.9110 Consolidation.
Creation of one new organizational entity from two or more existing entities or parts thereof.
§ 619.9130 Differential interest rates.
An interest rate program under which different rates of interest may be made applicable to individual or classes of loans on the basis of type, purpose, amount, quality of loan, or a combination of these factors.
§ 619.9135 Direct lender.
The term direct lender refers to Farm Credit banks and associations (production credit associations, agricultural credit associations, and Federal land credit associations) authorized to lend to eligible borrowers identified in § 613.3000.
§ 619.9140 Farm Credit bank(s).
Except as otherwise defined, the term Farm Credit bank(s) includes Farm Credit Banks, agricultural credit banks, and banks for cooperatives, but excludes bridge System banks chartered by the Farm Credit Administration Board pursuant to section 5.61C(h)(2) of the Act.
§ 619.9145 Farm Credit Bank.
The term Farm Credit Bank refers to a bank resulting from the mandatory merger of the Federal land bank and the Federal intermediate credit bank in each Farm Credit district pursuant to section 410 of the Agricultural Credit Act of 1987, Pub. L. 100-233, or any bank resulting from a merger of two or more Farm Credit Banks.
§ 619.9146 Farm Credit institutions.
Except as otherwise defined, the term Farm Credit institutions refers to all institutions identified in section 1.2 of the Act and are chartered and regulated by the Farm Credit Administration but excludes bridge System banks chartered by the Farm Credit Administration Board pursuant to section 5.61C(h)(2) of the Act.
§ 619.9155 Federal land credit association.
The term Federal land credit association refers to a Federal land bank association that has received a transfer of direct long-term real estate lending authority pursuant to section 7.6 of the Act.
§ 619.9170 Fixed interest rate.
The rate of interest specified in the note or loan document which will prevail as the maximum rate chargeable to the borrower during the period of the loan.
§ 619.9180 Fixed interest spread.
A percentage to be added to the cost of money to the bank or association as the means of establishing a lending rate.
§ 619.9185 Funding Corporation.
The term Funding Corporation refers to the Federal Farm Credit Banks Funding Corporation established pursuant to section 4.9 of the Act.
§ 619.9195 [Reserved]
§ 619.9200 Loss-sharing agreements.
A contractual arrangement under which the parties agree to share losses associated with loans or otherwise, as may be provided for in the agreement.
§ 619.9210 Merger.
Combining of one or more organizational entities into another similar entity.
§ 619.9230 Open-end mortgage loan plans.
A mortgage loan which permits the borrower to obtain additional sums during the term of the loan.
§ 619.9235 Outside director.
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.
§ 619.9240 Participation agreement.
A contract under which a lender agrees to sell a portion of a loan to one or more purchasers under specific terms set forth in the agreement.
§ 619.9250 Participation certificates.
Evidence of investment in a bank or association to which all the rights and obligations of stock attach with the exception of the right to vote in the affairs of the institution.
§ 619.9260 Primary security.
The basic collateral securing the loan.
§ 619.9270 Qualified Public Accountant or External Auditor.
A qualified public accountant or external auditor is a person who:
(a) Holds a valid and unrevoked certificate, issued to such person by a legally constituted State authority, identifying such person as a certified public accountant;
(b) Is licensed to practice as a public accountant by an appropriate regulatory authority of a State or other political subdivision of the United States;
(c) Is in good standing as a certified and licensed public accountant under the laws of the State or other political subdivision of the United States in which is located the home office or corporate office of the institution that is to be audited;
(d) Is not suspended or otherwise barred from practice as an accountant or public accountant before the Securities and Exchange Commission (SEC) or any other appropriate Federal or State regulatory authority; and
(e) Is independent of the institution that is to be audited. For the purposes of this definition, the term “independent” has the same meaning as under the rules and interpretations of the authoritative body governing overall audit performance. At a minimum, an accountant hired to audit a System institution is not independent if he or she functions in the role of management, audits his or her own work, or serves in an advocacy role for the institution.
§ 619.9310 Senior officer.
The Chief Executive Officer, the Chief Operations Officer, the Chief Financial Officer, the Chief Credit Officer, and the General Counsel, or persons in similar positions; and any other person responsible for a major policy-making function.
A holder of any equity interest in a Farm Credit institution.
§ 619.9330 Speculative purposes.
To buy or sell with the expectation of profiting by fluctuations in price.
§ 619.9335 Supplemental retirement plan or supplemental executive retirement plan.
A nonqualified retirement plan that provides benefits in addition to those covered by other retirement plans for all employees and funded in whole or part by a Farm Credit institution.
§ 619.9338 Unincorporated business entities.
An Unincorporated Business Entity means a Limited Partnership (LP), Limited Liability Partnership (LLP), Limited Liability Limited Partnership (LLLP), Limited Liability Company (LLC), Business or other Trust Entity (TE), or other business entity established and maintained under State law that is not incorporated under any law or chartered under Federal law.
§ 619.9340 Variable interest rate.
An interest rate on the outstanding loan balances, which may be changed from time to time during the period of the loan, if provision is made in the note or loan document.
PART 620—DISCLOSURE TO SHAREHOLDERS
Subpart A—General
§ 620.1 Definitions.
For the purpose of this part, the following definitions shall apply:
(a) Affiliated organization means any organization, other than a Farm Credit organization, of which a director, senior officer or nominee for director of the reporting institution is a partner, director, officer, or majority shareholder.
(b) Association means any of the associations as described in § 619.9050 of this chapter.
(c) Bank means any of the Farm Credit banks as described in § 619.9140 of this chapter.
(d) Direct lender association means any association that is a direct lender as described in § 619.9135 of this chapter.
(e) Immediate family means spouse, parents, siblings, children, mothers- and fathers-in-law, brothers- and sisters-in-law, and sons- and daughters-in-law.
(f) Institution means any bank or association chartered by the Act.
(g) Loan means any extension of credit or lease that is recorded as an asset of a reporting institution, whether made directly or purchased from another lender. The term “loan” includes, but is not limited to, loans originated through direct negotiations between the reporting institution and a borrower; purchased loans or interests in loans, including participation interests, retained subordinated participation interests in loans sold, interests in pools of subordinated participation interests that are held in lieu of retaining a subordinated participation interest in loans sold; contracts of sale; notes receivable; and other similar obligations and lease financings.
(h) Material. The term material, when used to qualify a requirement to furnish information as to any subject, limits the information required to those matters to which there is a substantial likelihood that a reasonable person would attach importance in making shareholder decisions or determining the financial condition of the institution.
(i) Normal risk of collectibility means the ordinary risk inherent in the lending operation. Loans that are deemed to have more than a normal risk of collectibility include, but are not limited to, any adversely classified loans.
(j) Permanent capital shall have the same meaning as set forth in § 615.5201 of this chapter.
(k) Protected borrower capital means eligible borrower stock as defined in § 615.5260 of this chapter.
(l) Related association means an association within the reporting bank’s chartered territory that generates loans for the bank or whose operations the bank funds.
(m) Related bank means a reporting association’s funding bank or the bank for which it generates loans.
(n) Related organization means any Farm Credit institution that is a shareholder of the reporting institution or in which the reporting institution has an ownership interest.
(o) Report refers to the annual report, quarterly report, notice, or information statement, regardless of form, required by this part unless otherwise specified.
(p) Signed, when referring to paper form, means a manual signature, and, when referring to electronic form, means marked in a manner that authenticates each signer’s identity.
(q) Significant event means any event that is likely to have a material impact on the reporting institution’s financial condition, results of operations, cost of funds, or reliability of sources of funds. The term “significant event” includes, but is not limited to, actual or probable noncompliance with the regulatory minimum permanent capital standards or capital adequacy requirements, stock impairment, the imposition of or entering into enforcement actions, execution of financial assistance agreements with other institutions, collateral deficiencies that impact a bank’s ability to obtain loan funds, or defaults on debt obligations.
§ 620.2 Preparing and filing reports.
For the purposes of this part, the following shall apply:
(a) Copies of each report required by this part, including financial statements and related schedules, exhibits, and all other papers and documents that are a part of the report, must be sent to the Farm Credit Administration according to our instructions. Submissions must comply with the requirements of § 620.3 of this part. The Farm Credit Administration must receive the report within the period prescribed under applicable subpart sections.
(b) The reports must be available for public inspection at the issuing institution and the Farm Credit Administration office with which the reports are filed. Farm Credit bank reports must also be available for public inspection at each related association’s office(s).
(c) The reports sent to shareholders must comply with the requirements of § 620.3 and electronic delivery of those reports requires shareholder agreement.
(d) Information in any part of a report may be incorporated by reference in answer or partial answer to any other item of the report, unless instructions for the report state otherwise.
(e) All items of essentially the same character as items required to be reported in the reports of condition and performance pursuant to part 621 of this chapter shall be prepared in accordance with the rules set forth in part 621.
(f) No disclosure required by subparts B and E of this part shall be deemed to violate any regulation of the Farm Credit Administration.
(g) Each Farm Credit institution shall present its reports in accordance with generally accepted accounting principles and in a manner that provides the most meaningful disclosure to shareholders.
(1) Any Farm Credit institution that presents its annual and quarterly financial statements on a combined or consolidated basis shall also include in the report the statement of condition and statement of income of the institution on a stand-alone basis. The stand-alone statements may be in summary form and shall disclose the basis of presentation if different from accounting policies of the combined or consolidated statements.
(2) Any Farm Credit bank that prepares its annual financial statements on a stand-alone basis must also provide financial information on its related associations as part of its annual report. The information on the related associations must be presented on a combined basis with the bank’s financial information and, at a minimum, include both a condensed statement of condition and a statement of income. The combined bank and association financial information may either be in the footnotes of the bank’s annual report or located in a supplement to the report. All combined information provided through either a footnote or a supplement will be considered part of the bank’s annual report, subject to the same annual report preparation, distribution, and accuracy requirements of part 620.
(i) The combined bank and association financial information may be unaudited but must disclose the basis of presentation if different from accounting policies used for the bank-only financial statements.
(ii) If the combined bank and association financial information is presented in the form of a supplement, the supplement must be referenced within the bank’s annual report and accompany the annual report when distributed.
(h)(1) Each institution’s annual report or notice must state, in a prominent location within the report or notice:
(i) That the institution’s quarterly reports are available free of charge on request;
(ii) The approximate dates the quarterly reports will be available; and
(iii) The telephone numbers and addresses (including information on any other distribution method the institution makes available) where shareholders can request or obtain copies of the quarterly reports.
(2) Each association must state, in a prominent location within each report:
(i) That the shareholders’ investment in the association may be materially affected by the financial condition and results of operations of the related bank;
(ii) That (if not otherwise provided) a copy of the bank’s financial reports to shareholders will be made available free of charge on request; and
(iii) The telephone numbers and addresses (including information on any other distribution method the association makes available) where shareholders can request or obtain copies of the related bank’s financial reports.
(3) Each institution shall, after receiving a request for a report, provide the report to the requestor. The first copy of the requested report shall be provided to the requestor free of charge.
(i) Any events that have affected one or more related organizations of the reporting institution that are likely to have a material effect on the financial condition, results of operations, cost of funds, or reliability of sources of funds of the reporting institution shall be considered significant events for the reporting institution and shall be disclosed in the reports. Any significant event affecting the reporting institution that occurred during the preceding fiscal quarters that continues to have a material effect on the reporting institution shall be considered significant events of the current fiscal quarter and shall be disclosed in the reports.
§ 620.3 Accuracy of reports and assessment of internal control over financial reporting.
(a) Prohibition against incomplete, inaccurate, or misleading disclosures. No institution and no employee, officer, director, or nominee for director of the institution shall make any disclosure to shareholders or the general public concerning any matter required to be disclosed by this part that is incomplete, inaccurate, or misleading. When any such person makes disclosure that, in the judgment of the Farm Credit Administration, is incomplete, inaccurate, or misleading, whether or not such disclosure is made in disclosure statements required by this part, such institution or person shall make such additional or corrective disclosure as is necessary to provide shareholders and the general public with a full and fair disclosure. Unless otherwise determined by the Farm Credit Administration (FCA), the appropriate use of the limited disclosure authorized by § 628.62(c) of this chapter does not create an incomplete disclosure.
(b) Signatures. The name and position title of each person signing the report must be printed beneath his or her signature. If any person required to sign the report has not signed the report, the name and position title of the individual and the reason(s) such individual is unable or refuses to sign must be disclosed in the report. All reports must be dated and signed on behalf of the institution by:
(1) The chief executive officer (CEO);
(2) The chief financial officer (CFO), or if the institution has no CFO, the officer responsible for preparing financial reports; and
(3) A board member formally designated by action of the board to certify reports on behalf of individual board members.
(c) Certification of financial accuracy. The report must be certified as financially accurate by the signatories to the report. If any signatory is unable to, or refuses to, certify the report, the institution must disclose the individual’s name and position title and the reason(s) such individual is unable or refuses to certify the report. At a minimum, the certification must include a statement that:
(1) The signatories have reviewed the report,
(2) The report has been prepared in accordance with all applicable statutory or regulatory requirements, and
(3) The information is true, accurate, and complete to the best of signatories’ knowledge and belief. If the report contains the limited disclosure authorized by § 628.62(c) of this chapter, the statement may be modified to explain that the completeness of the report was determined in consideration of § 628.62(c).
(d) Management assessment of internal control over financial reporting. Annual reports of those institutions with over $1 billion in total assets (as of the end of the prior fiscal year) must include a report by management assessing the effectiveness of the institution’s internal control over financial reporting. The assessment must be conducted during the reporting period and be reported to the institution’s board of directors. Quarterly and annual reports for those institutions with over $1 billion in total assets (as of the end of the prior fiscal year) must disclose any material change(s) in the internal control over financial reporting occurring during the reporting period.
§ 620.4 Preparing and providing the annual report.
(a) Each institution of the Farm Credit System must:
(1) Prepare and send to the Farm Credit Administration an electronic copy of its annual report within 75 calendar days of the end of its fiscal year;
(2) Publish a copy of its annual report on its Web site when it sends the report electronically to the Farm Credit Administration;
(3) Provide prior written notification to its shareholders that the institution will publish its annual report on the institution’s Web site when the report is sent electronically to the Farm Credit Administration; and
(4) Within 90 calendar days of the end of its fiscal year, prepare and provide to its shareholders an annual report substantively identical to the copy of the report sent to the Farm Credit Administration under paragraph (a)(1) of this section.
(b)(1) A bank must provide its annual report to the shareholders of all related associations if the bank experiences a significant event that has a material effect on those associations.
(2) Any bank that is required by paragraph (b)(1) of this section to provide its annual report must coordinate its distribution with its related associations.
(c) The report must contain, at a minimum, the information required by §§ 620.5 and 620.6. In addition, the report must contain such other information as is necessary to make the required statements, in light of the circumstances under which they are made, not misleading.
The report must contain the following items in substantially the same order:
(a) Description of business. The description must include a brief discussion of the following items:
(1) The territory served;
(2) The persons eligible to borrow;
(3) The types of lending activities engaged in and related services offered. Each bank shall also briefly describe the lending and related services offered by its related associations, as well as related services offered to the borrowers in the bank’s chartered territory by any service corporation chartered under the Act in which it has an ownership interest. Each association shall briefly describe the lending and related services offered by its related organizations or incorporate by reference relevant portions of the related bank’s report, if such report is provided to association shareholders;
(4) Any significant developments within the last 5 years that had or could have a material impact on earnings, interest rates to borrowers, patronage, or dividends, including, but not limited to, changes in the reporting entity, changes in patronage policies and practices, and financial assistance provided by or to the institution through loss-sharing or capital preservation agreements or from any other source;
(5) Any acquisition or disposition of material assets during the last fiscal year, other than in the ordinary course of business;
(6) Any material change during the last fiscal year in the manner of conducting the business;
(7) Any seasonal characteristics of the institution’s business;
(8) Any concentrations of more than 10 percent of its assets in particular commodities or particular types of agricultural activity or business, and the institution’s dependence, if any, upon a single customer, or a few customers, including other financing institutions (OFIs), the loss of any one of which would have a material effect on the institution; and
(9) A brief description of the business of any related Farm Credit institution, as described in § 619.9146 of this chapter, and the nature of the institution’s relationship with such organization.
(10) For associations, in a separate section of the annual report, discuss the interdependent relationship between the association and its funding bank, including, but not limited to, the financial relationship, a service provider relationship, other material operational relationships, and other specific issues or areas that create a material interdependent relationship between the association and its funding bank. This separate section may incorporate by reference information from other sections of the annual report. At a minimum, the separate section must include the statement required by § 620.2(h)(2)(i) of this part and the following information required elsewhere in this section, if applicable:
(i) The association’s obligation to borrow only from the bank unless the bank gives the association approval to borrow elsewhere;
(ii) The major terms of any capital preservation, loss sharing, or financial assistance agreements between the association and the bank;
(iii) Any statutory or bank bylaw provisions authorizing bank access to the capital of the association; and
(iv) The extent the bank assumed the association’s exposure to interest rate risk.
(11) For banks and associations, business relationships with unincorporated business entities (UBEs).
(i) Except as provided in paragraph (a)(12)(ii) of this section, describe the business relationship with any UBE, as defined in § 611.1151 of this chapter, that was organized by the bank or association or in which the bank or association has an equity interest. Include in the description the name of the UBE, the type of business entity, the purpose for which the UBE was organized, the scope of its activities, and the level of ownership. If the bank or association does not have an equity interest, but manages the operations of a UBE that is controlled by a System institution, describe this business relationship and any fees received.
(ii) If the UBE is organized for the purpose of acquiring and managing unusual or complex collateral associated with loans, the bank or association need only disclose the name of the UBE, the type of business entity, and the purpose for which the UBE was organized.
(b) Description of property. State the location of and briefly describe the principal offices, i.e., headquarters, and major facilities where the institution makes and services its loans, and other materially important physical properties (other than property acquired in the course of collecting a loan) of the institution.
(c) Legal proceedings and enforcement actions. (1) Describe briefly any material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the institution is a party, of which any of its property is the subject, or which involved claims that the institution may be required by contract or operation of law, to satisfy.
(2) Describe the type of and reason for each enforcement action in effect, i.e., agreements, cease and desist orders, temporary cease and desist orders, prohibitions and removals of officers or directors, or civil money penalties, if any, imposed or assessed on the institution or its officers or directors and the amount of any civil money penalties assessed.
(d) Description of capital structure. (1) Describe each class of stock and participation certificates the institution is authorized to issue and the rights, duties, and liabilities of each class. The description shall include:
(i) The number of shares of each class outstanding;
(ii) The par or face value;
(iii) The voting and dividend rights;
(iv) The order of priority upon impairment or liquidation;
(v) The institution’s retirement policies and restrictions on transfer;
(vi) The statutory requirement that a borrower purchase stock as a condition to obtaining a loan;
(vii) The manner in which the stock is purchased (i.e., promissory note to the issuer, or cash not advanced by issuing institution);
(viii) The statutory authority of the institution to require additional capital contributions, if any; and
(ix) The statutory and regulatory restrictions regarding retirement of stock and distribution of earnings pursuant to § 615.5215 of this chapter, and any requirements to add capital under a plan approved by the Farm Credit Administration pursuant to § 615.5350, § 615.5351, § 615.5353, § 615.5357, or § 628.301 of this chapter.
(2) Describe regulatory minimum capital standards, and the institution’s compliance with such standards. For banks, also discuss any related associations that are not currently in compliance with the standards.
(3) State whether the institution is currently prohibited from retiring stock or distributing earnings by the statutory and regulatory restrictions described in paragraph (d)(1)(ix) of this section, or knows of any reason such prohibitions may apply during the fiscal year subsequent to the fiscal year just ended.
(4) Describe the institution’s capital adequacy requirements and the minimum stock purchase requirement in effect.
(e) Description of liabilities. (1) Describe separately the institution’s insured and uninsured debt, indicating the type, amount, maturity, and interest rates of each category of obligations outstanding at the end of the fiscal year just ended. Describe the nature of the insurance provided under part E of title V of the Act. Describe any applicable statutory and regulatory restrictions on the institution’s ability to incur debt.
(2) Describe fully the institution’s rights and obligations under any agreement, formal or informal, between the institution and any other person or entity having to do with capital preservation, loss sharing, or any other form of financial assistance.
(3) Describe any statutory authorities or obligations to contribute to or on behalf of another institution of the Farm Credit System.
(4) Describe supplemental retirement plans funded by the institution on behalf of senior officers and employees. The description for each plan must include the:
(i) Plan name;
(ii) Present value of accumulated benefits;
(iii) Payments made during the reporting period;
(iv) Funded and unfunded obligations; and
(v) Off-balance sheet amounts, including benefits earned but not vested.
(f) Selected financial data. Furnish in comparative columnar form for each of the last 5 fiscal years the following financial data, if material:
(1) For banks and direct lender associations—(i) Balance sheet.
(A) Total assets.
(B) Investments.
(C) Loans.
(D) Allowance for credit losses.
(E) Net loans.
(F) Other property owned.
(G) Total liabilities.
(H) Obligations with maturities less than 1 year.
(I) Obligations with maturities longer than 1 year.
(J) Protected borrower capital.
(K) At-risk capital.
(1) Stock and participation certificates.
(2) Allocated surplus.
(3) Unallocated surplus.
(ii) Statement of income. (A) Net interest income.
(B) Provision for credit losses.
(C) Extraordinary items.
(D) Net income.
(iii) Key financial ratios. (A) Return on average assets.
(B) Return on average protected borrower capital and at-risk capital.
(C) Net interest margin as a percentage of average earning assets.
(D) Protected and at-risk capital-to-total assets.
(E) Net chargeoffs-to-average loans.
(F) Allowance for credit losses-to-loans.
(iv) Net income distributed. (A) Dividends.
(B) Patronage refunds.
(1) Cash.
(2) Stock.
(3) Allocated surplus.
(2) For all banks (on a bank-only basis):
(i) Permanent capital ratio.
(ii) CET1 capital ratio.
(iii) Tier 1 capital ratio.
(iv) Total capital ratio.
(v) Tier 1 leverage ratio.
(3) For all associations:
(i) Permanent capital ratio.
(ii) CET1 capital ratio.
(iii) Tier 1 capital ratio.
(iv) Total capital ratio.
(v) Tier 1 leverage ratio.
(4) For all banks (on a bank only basis) and for all associations. The following ratios shall be disclosed in comparative columnar form in each annual report through fiscal year end 2021, only as long as these ratios are part of the previous 5 fiscal years of financial data required under paragraphs (f)(2) and (3) of this section:
(i) Core surplus ratio.
(ii) Total surplus ratio.
(iii) For banks only, net collateral ratio.
(g) Management’s discussion and analysis of financial condition and results of operations. Fully discuss any material aspects of the institution’s financial condition, changes in financial condition, and results of operations during the last 2 fiscal years, identifying favorable and unfavorable trends, and significant events or uncertainties. In addition to the items enumerated below, the discussion shall provide such other information as is necessary to an understanding of the institution’s financial condition, changes in financial condition, and results of operations.
(1) Loan portfolio. (i) Describe the types of loans in the portfolio by major category (e.g., agricultural real estate mortgage loans, rural home loans, agricultural production loans, processing and marketing loans, farm business loans, and international loans), indicating the approximate percentage of the total dollar portfolio represented by each major category. Associations that make agricultural production loans shall provide the information required for such loans by major subcategory (e.g., cash grains, field crops, livestock, dairy, poultry, and timber). For each category and subcategory, discuss any special features of the loans that may be material to the evaluation of risk and any economic or business conditions that have had or are likely to have a material impact on their collectibility. For banks, also disclose separately the aggregate amount of loans outstanding to related associations and other financial institutions.
(ii) Describe the geographic distribution of the loan portfolio by State or other significant geographic division, if any.
(iii) Purchases and sales of loans. (A) Describe any material participation in the Federal Agricultural Mortgage Corporation program or origination of loans for resale.
(B) Disclose the amount of purchased loans, loans sold with recourse, retained subordinated participation interests in loans sold, and interests in pools of subordinated participation interests that are held in lieu of retaining a subordinated participation interest in the loans sold.
(iv) Risk exposure. For the periods covered by the financial statements provide:
(A) An analysis of high-risk assets and loan performance categories, to include, but not limited to, a discussion of the nature and extent of significant potential credit risks within the loan portfolio, or other information that could adversely impact performance of the loan portfolio in the near future;
(B) An analysis of the allowance for credit losses that includes the ratios of the allowance for credit losses to loans and net chargeoffs to average loans, and a discussion of the adequacy of the allowance for credit losses given reasonable and supportable forecasts;
(C) Financial assistance given or received under districtwide or Systemwide loss-sharing or capital preservation agreements or otherwise;
(D) For banks, a description in the aggregate of the recent loss experience of related associations that are its shareholders, including the items enumerated in paragraphs (g)(1)(iv) (A), (B), and (C) of this section.
(E) Describe any material obligations with respect to loans sold and the amount of any material contributions made in connection with loans sold into the secondary market. Further disclose the amount of risk of loss associated with such obligations and the amount included in the allowance for credit losses to provide for such risk.
(2) Results of operations. (i) Describe, on a comparative basis, changes in the major components of net interest income during the last 2 fiscal years, describing significant factors that contributed to the changes and quantifying the amount of change(s) due to an increase in volume or the introduction of new services and the amount due to changes in interest rates earned and paid, based on averages for each period.
(ii) Describe any unusual or infrequent events or transactions or any significant economic changes, including, but not limited to, financial assistance received or paid that materially affected reported income. In each case, indicate the extent to which income was so affected.
(iii) Discuss the factors underlying the material changes, if any, in the return on average assets, the return on average protected borrower capital and at-risk capital, and the permanent capital ratio as determined in accordance with part 615, subpart H of this chapter. An explanation of the basis of the calculation of ratios relating to permanent capital and at-risk capital shall be included.
(iv) Describe, on a comparative basis, the major components of operating expense, indicating the reasons for significant increases or decreases.
(v) Describe any other significant components of income or expense, including, but not limited to, income from investments, that should be described in order to understand the institution’s results of operations.
(vi) Discuss any events affecting a related organization that are likely to have a material effect on the reporting institution’s financial condition, results of operations, cost of funds, or reliability of sources of funds.
(vii) Describe any known trends or uncertainties that have had, or that the institution reasonably expects will have, a material impact on net interest income or net income. Disclose any events known to management that will cause a material change in the relationship between costs and revenues.
(3) Liquidity and funding sources—(i) Funding sources. (A) Describe the average and year end amounts, maturities, and interest rates on outstanding consolidated System-wide debt obligations, bond obligations, or any other obligations used to fund the institution’s lending operations.
(B) Describe existing lines of credit and their terms.
(C) Describe the institution’s capital accounts and other sources of lendable funds.
(ii) Liquidity. (A) Discuss the institution’s liquidity policy and the components of asset liquidity, including, but not limited to, cash, investment securities, and maturing loan repayments. Assess the ability of the institution to generate adequate amounts of cash to fund its operations and meet its obligations.
(B) Discuss any known trends that are likely to result in a liquidity deficiency and the course of action management intends to take to resolve it. Discuss any material increase or decrease in liquidity that is likely to occur.
(C) Discuss the institution’s participation in the Federal Agricultural Mortgage Corporation secondary market programs authorized by title VIII of the Act and the origination of loans for resale under other authorities, if any.
(iii) Funds management. (A) Discuss the institution’s interest rate programs and the institution’s ability to control interest rate margins.
(B) Discuss changes in net interest margin (net interest income as a percentage of average earning assets), explaining the reasons therefor.
(4) Capital resources. (i) Describe any material commitments to purchase capital assets and the anticipated sources of funding.
(ii) Describe any material trends or changes in the mix and cost of debt and capital resources. The discussion shall consider changes in permanent capital, CET1 capital, tier 1 capital, total capital, the tier 1 leverage ratio, debt, and any off-balance-sheet financial arrangements.
(iii) Describe any favorable or unfavorable trends in the institution’s capital resources.
(iv) Discuss and explain any material changes in capital ratios, noting any material adverse variances from regulatory guidelines.
(v) Discuss the adequacy of the current capital position and any material changes in the capital plan adopted pursuant to § 615.5200 of this chapter, to the extent that such changes may have an effect on the institution’s minimum stock purchase requirements and its ability to retire stock and distribute earnings.
(vi) Discuss any trends, commitments, contingencies, or events that are reasonably likely to have a materially adverse effect upon the institution’s ability to meet the regulatory minimum capital standards and capital adequacy requirements.
(h) Directors and senior officers. In a separate section of the annual report, make the disclosures required in § 620.6 of this part.
(i) Relationship with qualified public accountant. (1) If a change or changes in qualified public accountants have taken place since the last annual report to shareholders or if a disagreement with a qualified public accountant has occurred that the institution would be required to report to the Farm Credit Administration under part 621 of this chapter, the information required by § 621.4(c) and (d) of this chapter must be disclosed.
(2) Disclose the total fees, by the category of services provided, paid during the reporting period to the qualified public accountant engaged to conduct the institution’s financial statement audit. At a minimum, identify fees paid for audit services, tax services, and non-audit related services. The types of non-audit services must be identified and indicate audit committee approval of the services.
(j) Financial statements. (1) Furnish financial statements and related footnotes that have been prepared in accordance with generally accepted accounting principles and instructions and other requirements of the Farm Credit Administration and that have been audited in accordance with generally accepted auditing standards by a qualified public accountant and an opinion expressed thereon. The statements shall include the following statements and related footnotes for the last 3 fiscal years: balance sheet, statement of income, statement of changes in protected borrower capital and at-risk capital, and statement of cash flows.
(2) State that the financial statements were prepared under the oversight of the audit committee, identifying the members of the audit committee.
(k) Credit and services to young, beginning, and small farmers and ranchers and producers or harvesters of aquatic products. (1) Each direct lender association must describe the YBS demographics in its territory and the source of the demographic data. If there are differences in the methods by which the demographic and YBS data are presented, these differences must be described.
(2) Each direct lender association must provide a description of its YBS program, including a status report on each program component as set forth in § 614.4165 (d) of this chapter and the definitions of “young,” “beginning,” and “small” farmers and ranchers. The discussion must provide such other information necessary for a comprehensive understanding of the direct lender association’s YBS program and its results.
(3) Each Farm Credit bank must include a summary report of the quantitative YBS data from its affiliated direct lender associations as described in FCA’s instructions for the annual YBS yearend report. The report must include the definitions of “young,” “beginning,” and “small” farmers and ranchers. A narrative report may be necessary for an ample understanding of the YBS mission results.
(a) General. (1) List the names of all directors and senior officers of the institution, indicating the position title and term of office of each director, and the position, title, and date each senior officer commenced employment in his or her current position.
(2) Briefly describe the business experience during the past 5 years of each director and senior officer, including each person’s principal occupation and employment during the past 5 years.
(3) For each director and senior officer, list any other business interest where the director or senior officer serves on the board of directors or as a senior officer. Name the position held and state the principal business in which the business is engaged.
(b) Compensation of directors. Describe the arrangements under which directors of the institution are compensated for all services as a director (including total cash compensation and noncash compensation). Noncash compensation with an annual aggregate value of less than $5,000 does not have to be reported. State the total cash and reportable noncash compensation paid to all directors as a group during the last fiscal year. For the purposes of this paragraph, disclosure of compensation paid to and days served by directors applies to any director who served in that capacity at any time during the reporting period. If applicable, describe any exceptional circumstances justifying the additional director compensation as authorized by § 611.400(c) of this chapter. For each director, state:
(1) The number of days served at board meetings;
(2) The total number of days served in other official activities, including any board committee(s);
(3) Any additional compensation paid for service on a board committee, naming the committee; and
(4) The total cash and noncash compensation paid to each director during the last fiscal year. Reportable compensation includes cash and the value of noncash items provided by a third party to a director for services rendered by the director on behalf of the reporting Farm Credit institution. Noncash compensation with an annual aggregate value of less than $5,000 does not have to be reported.
(c) Compensation of senior officers. Disclose the information on senior officer compensation and compensation plans as required by this paragraph. The institution must disclose the total amount of compensation paid to senior officers in substantially the same manner as the tabular form specified in the Summary Compensation Table (Compensation Table), located in paragraph (c)(3) of this section.
(1) For each of the last 3 completed fiscal years, report the total amount of compensation paid and the amount of each component of compensation paid to the institution’s chief executive officer (CEO), naming the individual. If more than one person served in the capacity of CEO during any given fiscal year, individual compensation disclosures must be provided for each CEO.
(2) For each of the last 3 completed fiscal years, report the aggregate amount of compensation paid, and the components of compensation paid, to all senior officers as a group, stating the number of officers in the group without naming them.
(i) If applicable, when any employee who is not a senior officer has annual compensation at a level that is among the five highest paid by the institution during the reporting period, include the highly compensated employee(s) in the aggregate number and amount of compensation reported in the Compensation Table. However, exclude any such employee from the Compensation Table if the employee would be considered highly compensated solely because of payments related to or change(s) in value of the employee’s qualified pension plan provided that the plan was available to all similarly situated employees on the same basis at the time the employee joined the plan.
(ii) The report containing the aggregate compensation disclosure must include a statement that disclosure of information on the total compensation paid during the last fiscal year to any senior officer, or to any other employee included in the aggregate, is available and will be disclosed to shareholders of the institution and shareholders of related associations (if applicable) upon request. This statement must be located directly beneath the Compensation Table.
(3) The institution must complete the Compensation Table, or something substantially similar, according to the following instructions:
Summary Compensation Table
| Annual | ||||||
|---|---|---|---|---|---|---|
| Name of individual or number in group | Year | Salary | Bonus | Deferred/ perquisite | Other | Total |
| (a) | (b) | (c) | (d) | (e) | (f) | (g) |
| CEO | 20XX | $ | $ | $ | $ | $ |
| 20XX | ||||||
| 20XX | ||||||
| Aggregate No. of Senior Officers ( | ||||||
| (X) | 20XX | |||||
| (X) | 20XX | |||||
| (X) | 20XX | |||||
(i) Amounts shown as “Salary” (column (c)) and “Bonus” (column (d)) must reflect the dollar value of salary and bonus earned by the senior officer during the fiscal year. Amounts contributed during the fiscal year by the senior officer pursuant to a plan established under section 401(k) of the Internal Revenue Code, or similar plan, must be included in the salary column or bonus column, as appropriate. If the amount of salary or bonus earned during the fiscal year is not calculable by the time the report is prepared, the reporting institution must provide its best estimate of the compensation amount(s) and disclose that fact in a footnote to the table.
(ii) Amounts shown as “deferred/perquisites” (column (e)) must reflect the dollar value of other annual compensation not properly categorized as salary or bonus, including but not limited to:
(A) Deferred compensation earned during the fiscal year, whether or not paid in cash; or
(B) Perquisites and other personal benefits, including the value of noncash items, unless the annual aggregate value of such perquisites is less than $5,000. Reportable perquisites include cash and the value of noncash items provided by a third party to a senior officer for services rendered by the officer on behalf of the reporting institution.
(iii) Compensation amounts reported under the category “Other” (column (f)) must reflect the dollar value of all other compensation not properly reportable in any other column. Items reported in this column must be specifically identified and described in a footnote to the table. “Other” compensation includes, but is not limited to:
(A) The amount paid to the senior officer pursuant to a plan or arrangement in connection with the resignation, retirement, or termination of such officer’s employment with the institution.
(B) The amount of contributions by the institution on behalf of the senior officer to a vested or unvested defined contribution plan unless the plan is made available to all employees on the same basis.
(C) The dollar value of any tax reimbursement provided by the institution.
(D) Any changes in the value of pension benefits.
(iv) Amounts displayed under “Total” (column (g)) shall reflect the sum total of amounts reported in columns (c), (d), (e), and (f).
(4) If the institution provides a defined benefit plan or a supplemental executive retirement plan (SERP) to its senior officers, the institution must complete the following Pension Benefits Table, or something substantially similar, for each plan according to the following instructions:
Pension Benefits Table
| As of most recent fiscal year-end | |||
|---|---|---|---|
| Name of individual | Years of credited service | Present value of accumulated benefits | Payments made during reporting period |
| CEO | $ | $ | |
| Senior Officers as a Group ( | |||
(i) Report the credited years of service for the CEO and the average credited years of service for the senior officer group under the plan.
(ii) Report the present value of accumulated benefits for the CEO and the senior officer group under the plan.
(iii) Report payments made during the reporting period under the plan for the CEO and the senior officer group.
(5) Provide a description of all compensation, retirement, incentive, and performance plans (plans) pursuant to which cash or noncash compensation was paid or distributed during the last fiscal year, or is proposed to be paid or distributed in the future for performance during the last fiscal year, to those individuals included in the Compensation Table. Provide the information individually for the chief executive officer and as a group for the senior officers. Information provided for the senior officer group includes any highly compensated employees whose compensation is reported in the Compensation Table. The description of each plan must include, but not be limited to:
(i) A summary of how each plan operates and who is covered by the plan. The summary must include the criteria used to determine amounts payable, including any performance formula or measure, as well as the time period over which the measurement of compensation will be determined, payment schedules, and any material amendments to the plan during the last fiscal year.
(ii) The overall risk and reward structure of the plan as it relates to senior officers’ compensation. The description must include, at a minimum, how each plan is compatible with and promotes the institution’s goals and business strategy and the mission as a Government-sponsored enterprise.
(iii) A discussion of the relationship between the CEO and senior officers’ compensation to the reporting institution’s overall performance. The disclosure must also discuss the relationship between the CEO’s and senior officers’ compensation to their performance.
(6) Associations may disclose the information required by paragraph (c) of this section in the Annual Meeting Information Statement (AMIS) pursuant to subpart E of this part. Associations exercising this option must include a reference in the annual report stating that the senior officer compensation information is included in the AMIS and that the AMIS is available for public inspection at the reporting association offices pursuant to § 620.2(b).
(d) Travel, subsistence, and other related expenses. (1) Briefly describe your policy addressing reimbursements for travel, subsistence, and other related expenses as it applies to directors and senior officers. The report shall include a statement that a copy of the policy is available to shareholders of the institution and shareholders of related associations (if applicable) upon request.
(2) For each of the last 3 fiscal years, state the aggregate amount of reimbursement for travel, subsistence, and other related expenses for all directors as a group.
(e) Transactions with senior officers and directors. (1) State the institution’s policies, if any, on loans to and transactions with officers and directors of the institution.
(2) Transactions other than loans. For each person who served as a senior officer or director on January 1 of the year following the fiscal year of which the report is filed, or at any time during the fiscal year just ended, describe briefly any transaction or series of transactions other than loans that occurred at any time since the last annual meeting between the institution and such person, any member of the immediate family of such person, or any organization with which such person is affiliated.
(i) For transactions relating to the purchase or retirement of preferred stock issued by the institution, state the name of each senior officer or director that held preferred stock issued by the institution during the reporting period, the current amount of preferred stock held by the senior officer or director, the average dividend rate on the preferred stock currently held, and the amount of purchases and retirements by the individual during the reporting period.
(ii) For all other transactions, state the name of the senior officer or director who entered into the transaction or whose immediate family member or affiliated organization entered into the transaction, the nature of the person’s interest in the transaction, and the terms of the transaction. No information need be given where the purchase price, fees, or charges involved were determined by competitive bidding or where the amount involved in the transaction (including the total of all periodic payments) does not exceed $5,000, or the interest of the person arises solely as a result of his or her status as a stockholder of the institution and the benefit received is not a special or extra benefit not available to all stockholders.
(3) Loans to senior officers and directors. (i) To the extent applicable, state that the institution (or in the case of an association that does not carry loans to its senior officers and directors on its books, its related bank) has had loans outstanding during the last full fiscal year to date to its senior officers and directors, their immediate family members, and any organizations with which such senior officers or directors are affiliated that:
(A) Were made in the ordinary course of business; and
(B) Were made on the same terms, including interest rate, amortization schedule, and collateral, as those prevailing at the time for comparable transactions with other persons.
(ii) To the extent applicable, state that no loan to a senior officer or director, or to any organization affiliated with such person, or to any immediate family member who resides in the same household as such person or in whose loan or business operation such person has a material financial or legal interest, involved more than the normal risk of collectability; provided that no such statement need be made with respect to any director or senior officer who has resigned before the time for filing the applicable report with the Farm Credit Administration (but in no case later than the actual filing), or whose term of office will expire or terminate no later than the date of the meeting of stockholders to which the report relates.
(iii) If the conditions stated in paragraphs (e)(3)(i) and (ii) of this section do not apply to the loans of the persons or organizations specified therein, with respect to such loans state:
(A) The name of the officer or director to whom the loan was made or to whose relative or affiliated organization the loan was made.
(B) The largest aggregate amount of each indebtedness outstanding at any time during the last fiscal year.
(C) The nature of the loan(s);
(D) The amount outstanding as of the latest practicable date.
(E) The reasons the loan does not comply with the criteria contained in paragraphs (e)(3)(i) and (e)(3)(ii) of this section.
(F) If the loan does not comply with paragraph (e)(3)(i)(B) of this section, the rate of interest payable on the loan and the repayment terms.
(G) If the loan does not comply with paragraph (e)(3)(ii) of this section, the amount past due, if any, and the reason the loan is deemed to involve more than a normal risk of collectability.
(f) Involvement in certain legal proceedings. Describe any of the following events that occurred during the past 5 years and that are material to an evaluation of the ability or integrity of any person who served as director or senior officer on January 1 of the year following the fiscal year for which the report is filed or at any time during the fiscal year just ended:
(1) A petition under the Federal bankruptcy laws or any State insolvency law was filed by or against, or a receiver, fiscal agent, or similar officer was appointed by a court for the business or property of such person, or any partnership in which such person was a general partner at or within 2 years before the time of such filing, or any corporation or business association of which such person was a senior officer at or within 2 years before the time of such filing;
(2) Such person was convicted in a criminal proceeding or is a named party in a pending criminal proceeding (excluding traffic violations and other misdemeanors);
(3) Such person was the subject of any order, judgment, or decree, not subsequently reversed, suspended, or vacated, by any court of competent jurisdiction, permanently or temporarily enjoining or otherwise limiting such person from engaging in any type of business practice.
Subpart C—Quarterly Report
§ 620.10 Preparing the quarterly report.
(a) Each institution of the Farm Credit System must:
(1) Prepare and send to the Farm Credit Administration an electronic copy of its quarterly report within 40 calendar days after the end of each fiscal quarter, except that no report need be prepared for the fiscal quarter that coincides with the end of the fiscal year of the institution;
(2) Publish a copy of its quarterly report on its Web site when it electronically sends the report to the Farm Credit Administration; and
(3) Ensure the report complies with the applicable provisions of §§ 620.2 and 620.3.
(b) The report shall contain, at a minimum, the information specified in § 620.11 and, in addition, such other material information (including significant events) as is necessary to make the required disclosures, in light of the circumstances under which they are made, not misleading.
(c) Institutions may use the quarterly report to deliver any notice required under § 620.15. Notices required under § 620.17 must be issued separately from the quarterly report, unless otherwise authorized by the Farm Credit Administration.
(a) General. The information required to be included in the quarterly report may be presented in any format deemed suitable by the institution, except as otherwise required by this section. The report must be organized in an easily understandable format and not presented in a manner that is misleading.
(b) Rules for condensation. For purposes of this section, major captions to be provided in the financial statements are the same as those provided in the financial statements contained in the institution’s annual report to shareholders, except that the financial statements included in the quarterly report may be condensed into major captions in accordance with the rules prescribed under this paragraph. If any amount that would otherwise be required to be shown by this subpart with respect to any item is not material, it need not be separately shown. The combination of insignificant items is permitted.
(1) Interim balance sheets. When any major balance sheet caption is less than 10 percent of total assets and the amount in the caption has not increased or decreased by more than 25 percent since the end of the preceding fiscal year, the caption may be combined with others.
(2) Interim statements of income. When any major income statement caption is less than 15 percent of average net income for the 3 most recent fiscal years and the amount in the caption has not increased or decreased by more than 20 percent since the corresponding interim period of the preceding fiscal year, the caption may be combined with others. In calculating average net income, loss years should be excluded. If losses were incurred in each of the 3 most recent fiscal years, the average loss shall be used for purposes of this test.
(3) The interim financial information shall include disclosure either on the face of the financial statements or in accompanying footnotes sufficient to make the interim information presented not misleading. Institutions may presume that users of the interim financial information have read or have access to the audited financial statements for the preceding fiscal year and the adequacy of additional disclosure needed for a fair presentation may be determined in that context. Accordingly, footnote disclosure that would substantially duplicate the disclosure contained in the most recent audited financial statements (such as a statement of significant accounting policies and practices), and details of accounts that have not changed significantly in amount or composition since the end of the most recent completed fiscal year may be omitted. However, disclosure shall be provided of events occurring subsequent to the end of the most recent fiscal year that have a material impact on the institution. Disclosures should encompass, for example, significant changes since the end of the most recently completed fiscal year in such items as accounting principles and practices; estimates inherent in the preparation of financial statements; status of long-term contracts; capitalization, including significant new indebtedness or modification of existing financing agreements; and the reporting entity resulting from business combinations or dispositions.
(4) The interim financial statements furnished shall reflect all adjustments that are, necessary to a fair statement of the results for the interim periods presented. A statement to that effect shall be included. Furnish any material information necessary to make the information called for not misleading, such as a statement that the results for interim periods are not necessarily indicative of results to be expected for the year.
(c) Required content. A quarterly report must, at a minimum, contain the following items:
(1) Management’s discussion and analysis of financial condition and results of operations. Discuss material changes, if any, to the information provided to shareholders pursuant to § 620.5(g) that have occurred during the periods specified in paragraphs (c)(2)(i) and (ii) of this section. Such additional information as is needed to enable the reader to assess material changes in financial condition and results of operations between the periods specified in paragraphs (c)(2)(i) and (ii) of this section shall be provided.
(i) Material changes in financial condition. Discuss any material changes in financial condition from the end of the preceding fiscal year to the date of the most recent interim balance sheet provided. If the interim financial statements include an interim balance sheet as of the corresponding interim date of the preceding fiscal year, any material changes in financial conditions from that date to the date of the most recent interim balance sheet provided also shall be discussed. If discussions of changes from both the end and the corresponding interim date of the preceding fiscal year are required, the discussions may be combined at the discretion of the institution.
(ii) Material changes in results of operations. Discuss any material changes in the institution’s results of operations with respect to the most recent fiscal year-to-date period for which an income statement is provided and the corresponding year-to-date period of the preceding fiscal year. Such discussion also shall cover material changes with respect to that fiscal quarter and the corresponding fiscal quarter in the preceding fiscal year. In addition, if the institution has elected to provide an income statement for the 12-month period ended as of the date of the most recent interim balance sheet provided, the discussion also shall cover material changes with respect to that 12-month period and the 12-month period ended as of the corresponding interim balance sheet date of the preceding fiscal year.
(2) Interim financial statements. The following financial statements must be provided:
(i) An interim balance sheet as of the end of the most recent fiscal quarter and as of the end of the preceding fiscal year. A balance sheet for the comparable quarter of the preceding fiscal year is optional.
(ii) Interim statements of income for the most recent fiscal quarter, for the period between the end of the preceding fiscal year and the end of the most recent fiscal quarter, and for the comparable periods for the previous fiscal year.
(iii) Interim statements of changes in protected borrower capital and at-risk capital for the period between the end of the preceding fiscal year and the end of the most recent fiscal quarter, and for the comparable period for the preceding fiscal year.
(iv) For banks, interim statements of cash flows for the period between the end of the preceding fiscal year and the end of the most recent fiscal quarter, and for the comparable period for the preceding fiscal year. For associations, interim statements of cash flows are optional.
(3) Other related financial items. State that the financial statements were prepared under the oversight of the audit committee. The interim financial information need not be audited or reviewed by a qualified public accountant or external auditor prior to filing. If, however, a review of the data is made in accordance with the established professional standards and procedures for such a review, the institution may state that a qualified public accountant or external auditor has performed such a review under the supervision of the institution’s audit committee. If such a statement is made, the report of a qualified public accountant or external auditor on such review must accompany the interim financial information.
(d) Notices. Institutions using the quarterly report to deliver any notice required under § 620.15 must put the notice information at the beginning of the quarterly report. The notice must be conspicuous and may not be part of any footnotes to the quarterly report.
§ 620.15 Notice of significant or material events.
When a Farm Credit bank or association determines that it has a significant or material event, the institution must prepare and provide to its shareholders and the Farm Credit Administration a notice disclosing the event(s).
(a) Each bank and association board of directors must establish and maintain a policy identifying the categories and types of events that may result in a notice under this section. At a minimum, events covered under this provision include significant events defined in § 620.1(q) and material events defined in § 620.1(h). The policy must identify how the significance or materiality of an event will be determined.
(b) A notice issued under this section must be made as soon as possible, but not later than 90 days after occurrence of the event.
(1) Each institution must electronically provide the notice to the Farm Credit Administration at the same time as distribution of the notice to shareholders.
(2) Delivery of the notice to shareholders may be accomplished by direct communications with the shareholders, posting the notice on the institution’s Web site, as part of the quarterly report to shareholders, or by publishing the notice in any publication with circulation wide enough to reasonably assure that all of the institution’s shareholders have access to the information in a timely manner. No matter how the notice is distributed, it must comply with all the provisions of this section.
(c) Every notice must be dated and signed in a manner similar to the requirements of § 620.3(b).
(d) The information required to be included in a notice issued under this section must be conspicuous, easily understandable, complete, accurate, and not misleading.
(e) A Farm Credit System institution may be required to issue a notice under this section at the direction of the Farm Credit Administration.
(a) For purposes of this section, “regulatory capital ratios” include the capital ratios specified in § 628.10 of this chapter and the permanent capital standard prescribed under § 615.5205 of this chapter.
(b) When a Farm Credit bank or association determines that it is not in compliance with one or more applicable minimum regulatory capital ratios, that institution must prepare and provide to its shareholders and the FCA a notice stating that the institution has initially determined it is not in compliance with the minimum regulatory capital ratio or ratios. Such notice must be given within 30 days following the month end.
(c) When notice is given under paragraph (b) of this section, the institution must also notify its shareholders and the FCA when the regulatory capital ratio or ratios that are the subject of such notice decrease by one half of 1 percent or more from the level reported in the original notice, or from that reported in a subsequent notice provided under this paragraph (c). This notice must be given within 45 days following the end of every quarter at which the institution’s regulatory capital ratio or ratios decrease as specified.
(d) Each institution required to prepare a notice under paragraph (b) or (c) of this section shall provide the notice to shareholders or publish it in any publication with circulation wide enough to be reasonably assured that all of the institution’s shareholders have access to the information in a timely manner. The information required to be included in this notice must be conspicuous, easily understandable, and not misleading.
(e) A notice, at a minimum, shall include:
(1) A statement that:
(i) Briefly describes the minimum regulatory capital ratios established by the FCA and the notice requirement of paragraph (b) of this section;
(ii) Indicates the institution’s current level of capital; and
(iii) Notifies shareholders that the institution’s capital is below the FCA minimum regulatory capital ratio or ratios.
(2) A statement of the effect that noncompliance has had on the institution and its shareholders, including whether the institution is currently prohibited by statute or regulation from retiring stock or distributing earnings or whether the FCA has issued a capital directive or other enforcement action to the institution.
(3) A complete description of any event(s) that may have significantly contributed to the institution’s noncompliance with the minimum regulatory capital ratio or ratios.
(4) A statement that the institution is required by regulation to provide another notice to shareholders within 45 days following the end of any subsequent quarter at which the regulatory capital ratio or ratios decrease by one half of 1 percent or more from the level reported in the notice.
Subpart E—Annual Meeting Information Statements and Other Information To Be Furnished in Connection with Annual Meetings and Director Elections
§ 620.20 Preparing and distributing the information statement.
(a)(1) Each Farm Credit bank and association must prepare and provide an information statement (“statement” or “AMIS”) to its shareholders at least 10 business days, but not more than 30 business days, before any annual meeting or any director elections.
(2) Each Farm Credit bank and association must provide the Farm Credit Administration an electronic copy of the AMIS when issued.
(3) In addition to the mailed AMIS, each Farm Credit bank and association may post its AMIS on its Web site. Any AMIS posted on an institution’s Web site must remain on the Web site for a reasonable period of time, but not less than 30 calendar days.
(b) Every AMIS must be dated and signed in accordance with the requirements of § 620.3(b) of this part.
(c) Every AMIS must be available for public inspection at all offices of the issuing institution pursuant to § 620.2(b) of this part.
§ 620.21 Contents of the information statement.
(a) An AMIS must, at a minimum, address the following items:
(1) Date, time, and place of the meeting(s). Notice of the date, time, and meeting location(s) must be provided at least 10 business days, but no more than 30 business days, before the meeting. If the Farm Credit bank or association will use an online meeting space as part of its meeting, the notice must also specify the date, time, and means of accessing the online meeting space. This information does not need to be part of an AMIS issued by a Farm Credit bank if no meeting is held.
(2) Voting shareholders. For each class of stock entitled to vote at the meeting, state the number of shareholders entitled to vote and, when shareholders are asked to vote on preferred stock, the number of shares entitled to vote. State the record date as of which the shareholders entitled to vote will be determined and the voting requirements for each matter to be voted upon. If association directors are nominated or elected by region, describe the regions and state the number of voting shareholders entitled to vote in each region.
(3) Financial updates. Each AMIS must reference the most recently issued annual report required by subpart B of this part. The AMIS must also include such other information considered material and necessary to make the required contents of the AMIS, in light of the circumstances under which it is made, not misleading.
(i) If any transactions between the institution and its senior officers and directors of the type required to be disclosed in the annual report to shareholders under § 620.6(e), or any of the events required to be disclosed in the annual report to shareholders under § 620.6(f) have occurred since the end of the last fiscal year and were not disclosed in the annual report to shareholders, the disclosures required by § 620.6(e) and (f) shall be made with respect to such transactions or events in the information statement. If any material change in the matters disclosed in the annual report to shareholders pursuant to § 620.6(e) and (f) has occurred since the annual report to shareholders was prepared, disclosure shall be made of such change in the information statement.
(ii) If a Farm Credit institution has had a change or changes in its external auditor(s) since the last annual report to shareholders, or if a disagreement with an external auditor has occurred, the institution shall disclose the information required by § 621.4(c) and (d) of this chapter.
(4) Directors. State the names and ages of persons currently serving as directors of the institution, their terms of office, and the periods during which such persons have served. Institutions must also state the type or types of agriculture or aquaculture engaged in by each director. No information need be given with respect to any director whose term of office as a director will not continue after any meeting to which the statement relates.
(i) Identify by name any incumbent director who attended fewer than 75 percent of the board meetings or any meetings of board committees on which he or she served during the last fiscal year.
(ii) If any director resigned or declined to stand for reelection since the last annual meeting because of a policy disagreement with the board, and if the director has provided a notice requesting disclosure of the nature of the disagreement, state the date of the director’s resignation and summarize the director’s description of the disagreement. If the institution holds a different view of the disagreement, the institution’s view may be summarized as well.
(b) An AMIS issued for director elections must also include the information required by this paragraph.
(1) Provide the nominating committee’s slate of director-nominees. If fewer than two director-nominees for each position are named, describe the efforts of the nominating committee to locate two willing nominees.
(2) Provide, as part of the AMIS, the director-nominee disclosure information collected under § 611.330 of this chapter. Institutions may either restate such information in a standard format or provide complete copies of each nominee’s disclosure statement.
(3) State whether nominations will be accepted from the floor and explain the procedures for making floor nominations.
(c) When the nominating committee will be elected during director elections, notice to voting shareholders of this event must be included in the AMIS. The AMIS must describe the balloting procedures that will be used to elect the nominating committee, including whether floor nominations for committee members will be permitted. The AMIS must state the number of committee positions to be filled and the names of the nominees for the committee.
(d) If shareholders are asked to vote on matters not normally required to be submitted to shareholders for approval, the AMIS must describe fully the material circumstances surrounding the matter, the reason shareholders are asked to vote, and the vote required for approval of the proposition. The AMIS must describe any other matter that will be discussed at the meeting upon which shareholder vote is not required.
Subpart F—Bank and Association Audit and Compensation Committees
§ 620.30 Audit committees.
Each Farm Credit bank and association must establish and maintain an audit committee. An audit committee is established by adopting a written charter describing the committee’s composition, authorities, and responsibilities in accordance with this section. All audit committees must maintain records of meetings, including attendance, for at least 3 fiscal years.
(a) Composition. Each member of an audit committee must be a member of the Farm Credit institution’s board of directors. An audit committee may not consist of less than three members and must include any director designated as a financial expert under § 611.210(a)(2) of this chapter. All audit committee members should be knowledgeable in at least one of the following: Public and corporate finance, financial reporting and disclosure, or accounting procedures.
(b) Independence. Every audit committee member must be free from any relationship that, in the opinion of the board, would interfere with the exercise of independent judgment as a committee member.
(c) Resources. Farm Credit institutions must permit their audit committees to contract for independent legal counsel and expert advisors. If an institution hires a financial expert advisor pursuant to § 611.210(a)(2), that advisor will also serve as an advisor to the audit committee. Each institution is responsible for providing monetary and nonmonetary resources to enable its audit committee to contract for external auditors, outside advisors, and ordinary administrative expenses. A two-thirds majority vote of the full board of directors is required to deny an audit committee’s request for resources.
(d) Duties. Each audit committee must report only to the board of directors. In its capacity as a committee of the board, the audit committee is responsible for the following:
(1) Financial reports. Each audit committee must oversee management’s preparation of the report to shareholders; review the impact of any significant accounting and auditing developments; review accounting policy changes relating to preparation of financial statements; and review annual and quarterly reports prior to release. After the audit committee reviews a financial policy, procedure, or report, it must record in its minutes its agreement or disagreement with the item(s) under review.
(2) External auditors. The external auditor must report directly to the audit committee. Each audit committee must:
(i) Determine the appointment, compensation, and retention of external auditors issuing audit reports of the institution;
(ii) Review the external auditor’s work;
(iii) Give prior approval for any non-audit services performed by the external auditor, except the audit committee may not approve those non-audit services specifically prohibited by FCA regulation; and
(iv) Comply with the auditor independence provisions of part 621 of this chapter.
(3) Internal controls. Each audit committee must oversee the institution’s system of internal controls relating to preparation of financial reports, including controls relating to the institution’s compliance with applicable laws and regulations. Any internal audit functions of the institution must also be subject to audit committee review and supervision.
§ 620.31 Compensation committees.
Each Farm Credit bank and association must establish and maintain a compensation committee by adopting a written charter describing the committee’s composition, authorities, and responsibilities in accordance with this section. The compensation committee must report only to the board of directors. All compensation committees are required to maintain records of meetings, including attendance, for at least 3 fiscal years.
(a) Composition. Each compensation committee must consist of at least three members and all committee members must be members of the institution’s board of directors. Every member must be free from any relationship that, in the opinion of the board, would interfere with the exercise of independent judgment as a committee member.
(b) Responsibilities. It is the responsibility of each compensation committee to review the compensation policies and plans for senior officers and employees and to approve the overall compensation program for senior officers. In fulfilling its responsibilities, the compensation committee must document that it determined the:
(1) Institution’s projected long-term compensation and retirement benefit obligations are appropriate to the services performed and not excessive;
(2) Incentive-based compensation programs and payments are reasonable and proportionate to the services performed and structured so the payout schedule considers the potential for future losses or undue risks to the institution;
(3) Senior officer compensation, incentive, and benefit programs support the institution’s long-term business strategy and mission, as well as promote safe and sound business practices; and
(4) Compensation programs designed for specific groups of employees, other than senior officers, pose no imprudent risks to the institution.
(c) Resources. Each institution must provide monetary and nonmonetary resources to enable its compensation committee to perform its duties.
PART 621—ACCOUNTING AND REPORTING REQUIREMENTS
Subpart A—Purpose and Definitions
§ 621.1 Purpose and applicability.
This part sets forth accounting and reporting requirements to be followed by all banks, associations, and service corporations chartered under the Act; the Federal Farm Credit Banks Funding Corporation; and, where specifically indicated, the Federal Agricultural Mortgage Corporation. The requirements set forth in this part are of both general and specific applicability. Certain requirements focus on areas of financial condition and operating performance that are of special importance for generating, presenting, and disclosing accurate and reliable information.
§ 621.2 Definitions.
For the purposes of this part, the following definitions shall apply:
Accounts and exposures means data related to any loan, lease, letter of credit, derivative, or, any other asset, liability, other balance sheet account, or off-balance-sheet exposure of a System institution.
Accrual basis of accounting means the accounting method in which expenses are recorded when incurred, whether paid or unpaid, and income is reported when earned, whether received or not received.
Adequately secured means the loan is secured by either or both:
(1) Collateral in the form of perfected security interests in, or pledges of, real and/or personal property (including securities with an estimable value) having a net realizable value sufficient to repay the loan’s outstanding principal and accrued interest.
(2) The guarantee of a financially responsible party in an amount sufficient to repay the loan’s outstanding principal and accrued interest.
Banks and associations mean all Farm Credit Banks, Agricultural credit banks, and associations.
Borrowing entity means the individual(s), partnership, joint venture, trust, corporation, or other business entity, or any combination thereof, that is primarily obligated on the loan instrument.
Central data repository means a central data warehouse that electronically collects and stores current and historical data and is created by integrating data from one or more disparate sources.
Generally accepted accounting principles means that body of conventions, rules, and procedures necessary to define accepted accounting practices at a particular time, as promulgated by the Financial Accounting Standards Board (FASB) and other authoritative sources recognized as setting standards for the accounting profession in the United States. Generally accepted accounting principles include not only broad guidelines of general application but also detailed practices and procedures that constitute standards by which financial presentations are evaluated.
Generally accepted auditing standards means the standards and guidelines that are generally accepted in the United States of America and that are adopted by the authoritative body that governs the overall quality of audit performance.
In the process of collection means debt collection or loan servicing efforts are proceeding in due course and are reasonably expected to result in the recovery of the loan’s principal balance, accrued interest and penalties or reinstatement of the loan to current status within a reasonable time period.
Institution means any bank, association, or service corporation chartered under the Act; the Federal Farm Credit Banks Funding Corporation, and where specifically noted, the Federal Agricultural Mortgage Corporation.
Loan means any extension of credit or lease that is recorded as an asset of a reporting institution, whether made directly or purchased from another lender. The term “loan” includes, but is not limited to:
(1) Loans originated through direct negotiations between the reporting institution and a borrower;
(2) Purchased loans or interests in loans, including participation interests, retained subordinated participation interests in loans sold, and interests in pools of subordinated participation interests that are held in lieu of retaining a subordinated participation interest in loans sold;
(3) Contracts of sale; notes receivable; and
(4) Other similar obligations and lease financing.
Material means the magnitude of an omission or misstatement of accounting information that, in light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement.
Net realizable value means the net amount the lender would expect to be realized from the acquisition and subsequent sale or disposition of a loan’s underlying collateral. Generally, net realizable value is equal to the estimated selling price in the ordinary course of business, less estimated costs of acquisition, completion, and disposal.
Past due means a contractually scheduled loan payment has not been received in full on or before the contractual due date and remains due.
Recorded investment means the face amount of the loan increased or decreased by applicable accrued interest and unamortized premium, discount, finance charges, or acquisition costs, and may also reflect a previous direct write-down of the investment.
Reporting entity means the Federal Farm Credit Banks Funding Corporation, or other entity approved by the Farm Credit Administration.
Shared asset means any account or exposure where two or more Farm Credit institutions have assumed a portion of the asset’s benefits or risks. An institution’s share in the asset may be established through means such as syndications, participation agreements, assignments, or other arrangements with System entities.
Sustained performance means the borrower has resumed on-time payment of the full amount of scheduled contractual loan payments over a sustained period. In accordance with the contractual payment schedule, the sustained on-time repayment period is demonstrated by making 6 consecutive monthly payments, 4 consecutive quarterly payments, 3 consecutive semiannual payments, or 2 consecutive annual payments. The payments considered are those listed in the loan contract as due during the sustained performance period, regardless of whether scheduled payments are interest-only, unequally amortized principal and interest, equally amortized principal and interest, or a combination of payment amounts.
Subpart B—General Rules
§ 621.3 Application of generally accepted accounting principles.
Each institution shall:
(a) Prepare and maintain, on an accrual basis, accurate and complete records of its business transactions as necessary to prepare financial statements and reports, including reports to the Farm Credit Administration, in accordance with generally accepted accounting principles, except as otherwise directed by statutory and regulatory requirements;
(b) Prepare its financial statements and reports, including reports to the shareholders, investors, boards of directors, institution management and the Farm Credit Administration, in accordance with generally accepted accounting principles, except as otherwise directed by statutory and regulatory requirements; and
(c) Prepare and maintain its books and records in such a manner as to facilitate reconciliation with financial statements and reports prepared from them.
§ 621.4 Audit by qualified public accountant.
(a) Each institution shall, at least annually, have its financial statements audited by a qualified public accountant in accordance with generally accepted auditing standards.
(b) The qualified public accountant’s opinion of each institution’s financial statements must be included as a part of each annual report to shareholders. The accountant must comply with the auditor independence provisions of subpart E of this part.
(c) If an institution disagrees with the opinion of a qualified public accountant required by paragraph (b) of this section, the following actions shall be taken immediately:
(1) The institution shall prepare a brief but thorough written description of the scope and content of the disagreement, noting each point of disagreement and citing, in all cases, the specific provisions of generally accepted accounting principles and generally accepted auditing standards upon which the institution’s position in the disagreement is based;
(2) A copy of the institution’s final description of the disagreement shall be given to the accountant who provided the opinion with which the institution disagrees;
(3) The accountant shall have 10 business days to develop and provide a brief but thorough final response to the institution’s description of the disagreement, including all items believed to be incorrect or incomplete, and citing, in all cases, the specific provisions of generally accepted accounting principles and generally accepted auditing standards upon which the accountant’s position in the disagreement is based;
(4) Both the institution’s final description of the disagreement and the accountant’s final response to it shall be included in the institution’s annual report to shareholders directly following the accountant’s opinion of the institution’s financial statements; and
(5) The institution shall immediately notify the Chief Examiner, Farm Credit Administration, of any disagreement with its accountant and shall furnish the Farm Credit Administration with the written documentation required by paragraphs (c) (1) through (4) of this section.
(d) If an institution selects a qualified public accountant to audit its financial statements and provide an opinion thereon for its annual report who is different from the accountant whose opinion appeared in the institution’s most recent annual report, the following items shall be sent to the Farm Credit Administration no later than 15 days after the end of the month in which the change took place and shall be included in the institution’s annual meeting information statement and annual report to shareholders for the year in which the change of accountants took place:
(1) The name and address of the accountant whose opinion appeared in the institution’s most recent annual report to shareholders;
(2) A brief but thorough statement of the reasons the accountant selected for the most recent annual report was not selected for the current annual report. If the change resulted from a disagreement with the accountant, the statement shall describe the institution’s disagreement with the accountant’s opinion and the accountant’s final response to the institution’s disagreement prepared pursuant to paragraph (c) of this section; and
(3) The identification of the highest ranking officer, committee of officers, or board of directors, as appropriate, that recommended, approved, or otherwise made the decision to change qualified public accountants.
§ 621.5 Accounting for the allowance for credit losses and chargeoffs.
Each institution shall:
(a) Maintain at all times an allowance for credit losses that is determined according to generally accepted accounting principles.
(b) Develop, adopt, and consistently apply policies and procedures governing the establishment and maintenance of the allowance for credit losses which, at a minimum, conform to the rules, definitions, and standards set forth in this part and any other applicable requirements.
(c) Charge-off loans, wholly or partially, as appropriate, at the time they are determined to be uncollectible.
(d) Ensure that when an institution or the Farm Credit Administration determines that the value of a loan or other asset recorded on its books and records exceeds the amount that can reasonably be expected to be collectible, or when the documentation supporting the recorded asset value is inadequate, the institution shall immediately charge off the asset in the amount determined to be uncollectible. If the amount determined to be uncollectible by the institution is different from the amount determined to be uncollectible by the Farm Credit Administration, the institution shall charge off such amount as the Farm Credit Administration shall direct.
Subpart C—Loan Performance and Valuation Assessment
§ 621.6 Categorizing high-risk loans and other property owned.
Each institution must employ the practices of this section when categorizing high-risk loans and loan-related assets. A loan must not be put into more than one performance category.
(a) Nonaccrual loans. A loan is categorized as nonaccrual if there is a known risk to the continued collection of principal or interest. Once a loan is categorized as nonaccrual, it must remain in that category until reinstated to accrual status pursuant to § 621.9. Loans placed into nonaccrual status when current are also subject to the notice and review provisions of part 617 of this chapter. A loan must be categorized as nonaccrual if one or more of the following conditions exist:
(1) The loan may or may not be past due, but the institution has determined collection of the outstanding principal and interest, plus future interest accruals, over the full term of the loan is not expected because of a documented deterioration in the financial condition of the borrower;
(2) The loan is 90 days or more past due and is not otherwise eligible for categorization under paragraph (c) of this section; or
(3) Legal action, including foreclosure or other forms of collateral conveyance, has been initiated to collect the outstanding principal and interest.
(b) Formally restructured loans (TDR). A loan is categorized as a formally restructured loan (Troubled Debt Restructure(TDR)) if the restructuring is determined to be a TDR under generally accepted accounting principles and the guidance issued by the Financial Accounting Standards Board.
(c) Loans 90 days past due still accruing interest. A loan is categorized as 90 days past due still accruing interest when it is 90 days or more contractually past due, adequately secured, and in the process of collection. If the loan is not adequately secured, it cannot be categorized under this category unless there is evidence to suggest repayment within a reasonable time period of either the past due amount or the remaining principal and interest owed.
(d) Other property owned. Any real or personal property, other than an interest-earning asset, that has been acquired as a result of full or partial liquidation of a loan, through foreclosure, deed in lieu of foreclosure, or other legal means.
§ 621.7 Rule of aggregation.
(a) When one loan to a borrower is placed in nonaccrual, an institution must immediately evaluate whether its other loans to that borrower, or related borrowers, should also be placed in nonaccrual. All loans on which a borrowing entity, or a component of a borrowing entity, is primarily obligated to the reporting institution shall be considered as one loan unless a review of all pertinent facts supports a reasonable determination that a particular loan constitutes an independent credit risk and such determination is adequately documented in the loan file.
(1) A loan shall be considered an independent credit risk if a substantial portion of the loan is guaranteed as to principal and interest by a government agency.
(2) Other loans shall be considered independent credit risks if and so long as:
(i) The primary sources of repayment are independent for each loan;
(ii) The loans are not cross-collateralized; and
(iii) The principal obligors are different person(s) and/or entity(ies). Related loans will not be considered independent credit risks if the operations of a related borrower are so financially interdependent with the borrower’s operations that the economic survival of one will materially affect the economic survival of the other, determined in accordance with § 614.4359(a)(2) of this chapter.
(b) If the evaluation required by paragraph (a) of this section results in a determination that the borrower’s other loans with the institution do not represent an independent credit risk, and full collection of such loans is not expected, then all of the borrower’s loans must be aggregated and classified as nonaccrual. If such other loans represent an independent credit risk and are fully collectible, then they may remain in their current performance category.
(c) When an institution becomes aware that a borrower has a loan that has been classified nonaccrual by any other lender, the institution must re-evaluate the credit risk in its loan to the borrower and then determine whether an independent credit risk exists.
§ 621.8 Application of payments and income recognition on nonaccrual loans.
Each institution shall employ the following practices with respect to application of cash payments on nonaccrual loans:
(a) If the ultimate collectibility of the recorded investment, in whole or in part, is in doubt, any payment received on such loan shall be applied to reduce the recorded investment to the extent necessary to eliminate such doubt.
(b) Once the ultimate collectibility of the recorded investment is no longer in doubt, payments received in cash on such loan may qualify for recognition as interest income if all of the following characteristics are met at the time the payment is received:
(1) The loan does not have a remaining unrecovered prior chargeoff associated with it, except in cases where the prior chargeoff was taken as part of a formal restructuring of the loan;
(2) The payment received has come from a source of repayment detailed in the plan of collection;
(3) The loan, after considering the payment, is not contractually past due more than 90 days and is not expected to become 90 days past due, or a repayment pattern has been established that reasonably demonstrates future repayment capacity.
(c) The institution shall employ the following practices with respect to earned but uncollected interest income on loans, leases, contracts, and similar assets that are determined not to be fully collectible:
(1) Earned but uncollected interest income that was accrued in the current fiscal year and is determined to be uncollectible shall be reversed from interest income; and
(2) Earned but uncollected interest income that was accrued in prior fiscal years and is determined to be uncollectible shall be charged off against the allowance for credit losses.
§ 621.9 Reinstatement to accrual status.
(a) Before being reinstated to accrual status, a loan must be current on contractual payments and the borrower offered servicing in accordance with the institution’s policies maintained under either § 614.4170 or part 617 of this chapter, whichever is applicable. Additional reinstatement eligibility requirements are dependent upon certain characteristics of the loan under review.
(1) A loan that was current when placed in nonaccrual status pursuant to § 621.6(a)(1) may be reinstated to accrual status if the known risks to the continued collection of principal or interest have been mitigated. If the loan was past due when placed in nonaccrual status, it may only be reinstated under either paragraph (a)(2) or (a)(3) of this section, as applicable.
(2) A loan placed in nonaccrual status when past due and not adequately secured must remain current on contractual payments for a period of sustained performance before it may be reinstated.
(3) A loan placed in nonaccrual status when past due and adequately secured must have a recent repayment pattern demonstrating future repayment capacity to make on-time payments before it may be reinstated. The repayment pattern is established in one of two ways:
(i) Sustained performance in making on-time contractual payments, or
(ii) A recent history of making on-time partial payments in amounts the same or greater than newly restructured payment amounts.
(b) Nothing in this section prevents a current loan from being reinstated to accrual status in response to a Credit Review Committee decision issued under section 4.14D(d) of the Farm Credit Act of 1971, as amended, when that decision was made in compliance with applicable laws, regulations, and in accordance with generally accepted accounting principles.
§ 621.10 Monitoring of performance categories and other property owned.
(a) Each institution shall:
(1) Account for, report, and disclose to shareholders, investors, boards of directors, and the Farm Credit Administration all material items with respect to performance categories and other property owned in accordance with the rules and definitions set forth in this part and any other applicable requirements;
(2) In accordance with § 620.5(g)(1)(iv)(A) of this chapter, disclose to shareholders, investors, boards of directors, and the Farm Credit Administration the nature and extent of significant potential credit risks within the loan portfolio, or other information that could adversely impact performance of the loan portfolio in the near future;
(3) Develop, adopt, and consistently apply policies and procedures governing performance categories and other property owned, which, at a minimum, conform to the definitions, rules, and standards set forth in this part and such other requirements and procedures as may be required by the Farm Credit Administration;
(4) Review the loan portfolio at least quarterly to ensure that all high-risk loans have been assigned the appropriate performance category; and
(5) Review all high-risk loans in the loan portfolio at least quarterly to determine the collectibility of accrued but uncollected income, if any.
(b) Measures taken to enhance the collectibility of a loan shall not be deemed to relieve an institution of the requirement to monitor and evaluate the loan for the purpose of determining its performance status.
Subpart D—-Reports of Condition and Performance and Accounts and Exposures
§ 621.12 Reports of condition and performance.
(a) Each institution, including the Federal Agricultural Mortgage Corporation, shall prepare and file such reports of condition and performance as may be required by the Farm Credit Administration.
(b) Reports of condition and performance shall be filed four times each year, and at such other times as the Farm Credit Administration may require. The reports shall be prepared on the accrual basis of accounting and shall fairly represent the financial condition and performance of each institution at the end of, and over the period of, each calendar quarter, provided that such additional reports as may be necessary to ensure timely, complete, and accurate monitoring and evaluation of the affairs, condition, and performance of Farm Credit institutions may be required, as determined by the Chief Examiner, Farm Credit Administration.
(c) All reports of condition and performance shall be submitted electronically in accordance with the instructions prescribed by the Farm Credit Administration and located on its Web site.
§ 621.13 Content and standards—general rules.
Each institution, including the Federal Agricultural Mortgage Corporation, shall prepare reports of condition and performance:
(a) In accordance with all applicable laws, regulations, standards, and such instructions and specifications and on such media as may be prescribed by the Farm Credit Administration;
(b) In accordance with generally accepted accounting principles and such other accounting requirements, standards, and procedures as may be prescribed by the Farm Credit Administration; and
(c) In such manner as to facilitate their reconciliation with the books and records of reporting institutions.
§ 621.14 Certification of correctness.
Each report of financial condition and performance filed with the Farm Credit Administration shall be certified as having been prepared in accordance with all applicable regulations and instructions and to be a true and accurate representation of the financial condition and performance of the institution to which it applies. The reports shall be certified by the officer of the reporting institution named for that purpose by action of the reporting institution’s board of directors. If the board of directors of the institution has not acted to name an officer to certify the correctness of its reports of condition and performance, then the reports shall be certified by the president or chief executive officer of the reporting institution.
§ 621.15 Reports of accounts and exposures.
(a) Responsibilities of banks and associations for preparing and submitting reports. The banks and associations must prepare and submit an accurate and complete report of all bank and association accounts and exposures electronically to the Farm Credit Administration pursuant to the requirements of this part. In order to accomplish such submission, each bank and association must:
(1) Prepare and submit an accurate and complete report of its accounts and exposures electronically to the Reporting Entity:
(i) In accordance with the instructions prescribed by the Farm Credit Administration, or as may be required by the Farm Credit Administration; and
(ii) Within 20 calendar days after each quarter-end date, and at such other times as the Farm Credit Administration may require.
(2) Submit to the Farm Credit Administration and the Reporting Entity a written certification that the information provided in the report of accounts and exposures has been prepared in accordance with all applicable regulations and instructions, and is a true and accurate record of the data maintained by the bank or association, to the best of its knowledge and belief. The reports shall be certified by the officer of the reporting bank or association named for that purpose by action of the reporting bank’s or association’s board of directors. If the board of directors of the bank or association has not acted to name an officer to certify to the accuracy of its reports of accounts and exposures, then the reports shall be certified by the president or chief executive officer of the reporting bank or association. In the event the bank or association learns of a material error or misstatement in the information submitted to the Reporting Entity, it must notify the Reporting Entity and the Farm Credit Administration immediately of the error or misstatement and prepare and submit corrected information as soon as practicable.
(3) Respond promptly to any questions by the Reporting Entity related to information provided under this section in connection with the preparation of a report of accounts and exposures, including any data required to establish, implement and maintain consistent, accurate, and complete shared asset identification and reporting of shared asset exposures to the Farm Credit Administration.
(4) Develop, implement, and maintain an effective system of internal controls over the data included in the report of accounts and exposures, including controls for maintaining the confidentiality of borrower information. The system of internal controls, at a minimum, must comply with the requirements of applicable Farm Credit Administration regulations, including § 618.8430 of this chapter.
(b) Responsibilities of the Reporting Entity for preparing and submitting reports. The Reporting Entity must:
(1) Collect, store, and manage the information submitted to it by each bank and association under the requirements of this section in a central data repository in accordance with Farm Credit Administration regulations and prescribed instructions.
(2) Prepare and submit an electronic quarterly report of the accounts and exposures of all banks and associations to the Farm Credit Administration in accordance with the instructions prescribed by the Farm Credit Administration or as may be required by the Farm Credit Administration.
(3) Establish, implement, and maintain an automated mechanism to ensure the reliable, timely, accurate and consistent identification of the banks’ and associations’ shared asset exposures, and report these exposures and the shared asset identifiers in the electronic quarterly report of accounts and exposures to the Farm Credit Administration. In connection with establishing and implementing the automated shared asset identification mechanism, the Reporting Entity may provide the banks and associations information from the central data repository to identify and report shared asset exposures.
(4) Submit to the Farm Credit Administration a written certification that the information provided to the Farm Credit Administration in the report of accounts and exposures of all banks and associations accurately represents the information provided to it by the banks and associations and that the Reporting Entity has complied with the requirements of § 621.15(b). The reports shall be certified by the president or chief executive officer of the Reporting Entity. In the event the Reporting Entity learns of a material error or misstatement in the information submitted to the Farm Credit Administration, it must notify the Farm Credit Administration immediately of the error or misstatement and prepare and submit corrected information as soon as practicable.
(5) Develop, implement, and maintain an effective system of internal controls over the central data repository, including controls for maintaining the confidentiality of borrower information. The system of internal controls, at a minimum, must comply with the requirements of applicable Farm Credit Administration regulations, including § 618.8430 of this chapter and require that the Reporting Entity:
(i) Develop policies and procedures to ensure that the information submitted in the report of accounts and exposures to the Farm Credit Administration is complete and consistent with the information submitted to the Reporting Entity from the banks and associations under § 621.15(a); and
(ii) Specify procedures for monitoring any material corrections or adjustments, in a timely manner, and provide timely notification and resubmission of the report of accounts and exposures to the Farm Credit Administration.
(6) Notify the Farm Credit Administration if it is unable to prepare and submit the quarterly report of accounts and exposures in compliance with the requirements of § 621.15(b)(1) through (b)(3). The notification:
(i) Must be signed by the chief executive officer, or person in an equivalent position, and submitted to the Farm Credit Administration as soon as the Reporting Entity becomes aware of its inability to comply;
(ii) Must explain the reasons for its inability to prepare and submit the report; and
(iii) May include a request that the Farm Credit Administration extend the due date for the quarterly report of accounts and exposures.
(7) In the event there is a breach of information, immediately provide written notice of the breach to:
(i) The Farm Credit Administration; and
(ii) Each bank and association concerned;
(iii) For the purposes of this section, “breach of information” means any actual or attempted unauthorized access, possession, use, disclosure, disruption, modification, or destruction of information in the central data repository, any reports of accounts and exposures, or any other information received pursuant to § 621.15(a)(1).
(8) Notify the Farm Credit Administration in writing of any request for data contained in the reports of accounts and exposures that are not explicitly allowed for in § 618.8320(b) of this chapter.
Subpart E—Auditor Independence
§ 621.30 General.
Each Farm Credit institution must ensure the independence of all qualified public accountants conducting the institution’s audit by establishing and maintaining policies and procedures governing the engagement of external auditors. The policies and procedures must incorporate the provisions of this subpart and § 612.2180 of this chapter.
§ 621.31 Non-audit services.
Non-audit services are any professional services provided by a qualified public accountant during the period of an audit engagement which are not connected to an audit or review of an institution’s financial statements.
(a) A qualified public accountant engaged to conduct a Farm Credit institution’s audit may not perform the following non-audit services for that institution:
(1) Bookkeeping,
(2) Financial information systems design,
(3) Appraisal and valuation services,
(4) Actuarial services,
(5) Internal audit outsourcing services,
(6) Management or human resources functions,
(7) Legal and expert services unrelated to the audit, and
(8) Advocating an institution’s interests in litigation, regulatory or administrative investigations and proceedings unrelated to external audit work.
(b) A qualified public accountant engaged to conduct a Farm Credit institution’s audit may only perform non-audit services, not otherwise prohibited in this section, if the institution’s audit committee pre-approves the services and the services are fully disclosed in the annual report.
§ 621.32 Conflicts of interest and rotation.
(a) Conflicts of interest. (1) A Farm Credit institution may not engage a qualified public accountant to conduct the institution’s audit if the accountant uses a partner, concurring partner, or lead member in the audit engagement team who was a director, officer or employee of the Farm Credit institution within the past year.
(2) A Farm Credit institution may not make an employment offer to a partner, concurring partner, or lead member serving on the institution’s audit engagement team during the audit or within 1 year of the conclusion of the audit engagement.
(b) Rotation. Each institution may engage the same lead and reviewing audit partners of a qualified public accountant to conduct the institution’s audit for no more than 5 consecutive years. The institution must then require the lead and reviewing audit partners assigned to the institution’s audit team to rotate out of the audit team for 5 years. At the end of 5 years, the institution may again engage the audit services of those lead and reviewing audit partners.
PART 622—RULES OF PRACTICE AND PROCEDURE
Subpart A—Rules Applicable to Formal Hearings
§ 622.1 Scope of regulations.
This subpart prescribes rules of practice and procedure in connection with any formal hearing before the Farm Credit Administration (FCA) that is required by the Farm Credit Act of 1971, as amended (Act) or is ordered for other reasons by the FCA. In connection with any particular matter, reference should also be made to any special requirements of practice and procedure that may be contained in applicable provisions of the Act or the rules adopted by the FCA in subpart B of this part, which special requirements are controlling. The rules in subpart A do not apply to the informal hearings described in subpart C of this part, to any other informal hearing that may be ordered by the FCA, or to formal investigations described in subpart D of this part.
§ 622.2 Definitions.
As used in this part:
(a) Act means the Farm Credit Act of 1971, as amended. 12 U.S.C. 2001, et seq.
(b) FCA means the Farm Credit Administration.
(c) Board means the Farm Credit Administration Board.
(d) The terms institution in the System, System institution and institution mean all institutions enumerated in section 1.2 of the Act, any institution chartered pursuant to or established by the Act, except for the Farm Credit System Assistance Board and the Farm Credit System Insurance Corporation, and any service corporation chartered under the Act.
(e) Party means the FCA or a person or institution named as a party in any notice that commences a proceeding, or any person or institution who is admitted as a party or who has filed a written request and is entitled as of right to be a party.
(f) Presiding officer means an administrative law judge or any FCA employee or other person designated by the Board to conduct a hearing.
(g) Ex parte communication means an oral or written communication not on the record with respect to which reasonable prior notice to all parties is not given. It does not include requests for status reports.
§ 622.3 Appearance and practice.
(a) Appearance before the Board or a presiding officer—(1) By nonattorneys. An individual may appear in his or her own behalf; a member of a partnership may represent the partnership; a duly authorized officer or other agent of a corporation, trust association or other entity not specifically listed herein may represent the corporation, trust association, or other entity; and a duly authorized officer or employee of any government unit, agency or authority may represent that unit, agency or authority. Any person appearing in a representative capacity shall file a written notice of appearance with the Board which shall contain evidence of his or her authority to act in such capacity.
(2) By attorneys. A party may be represented by an attorney who is a member in good standing of the bar of the highest court of any State, possession, territory, Commonwealth or the District of Columbia, and who has not been suspended or debarred from practice before the FCA in accordance with the provisions of part 623 of this chapter. Prior to appearing, an attorney representing a person in a proceeding shall file a written notice of appearance with the Board, which shall contain a declaration that he or she is currently qualified as provided by paragraph (a)(2) of this section and is authorized to represent the party on whose behalf he or she acts.
(3) Representation of multiple interests. A person shall not represent more than one party without informing each party of any actual or potential conflict of interest that may be involved in such representation. Such person shall file a statement with the Board indicating that such disclosure has been made. The presiding officer has authority to take protective measures at any stage of a proceeding, including the authority to prohibit multiple representation when deemed appropriate.
(b) Summary suspension. Dilatory, obstructionist, egregious, contemptuous, contumacious, or other unethical or improper conduct at any proceeding before the Board or a presiding officer shall be grounds for exclusion therefrom and suspension for the duration of the proceeding, or other appropriate action by the Board or presiding officer.
§ 622.4 Commencement of proceedings.
Proceedings under this subpart are commenced by the issuance of a notice by the Board. Such notice shall state the time, place, and nature of the hearing, the name and address of the presiding officer if one has been designated, and a statement of the matters of fact and law constituting the grounds for the hearing. The matters of fact and law alleged in a notice may be amended by the Board at any stage of the proceeding and such amended notice may require an answer from the party or parties served and may set a new hearing date. A copy of any notice served by the FCA on any System association, director, officer or other person participating in the conduct of the affairs of the association will also be sent to the supervisory bank.
§ 622.5 Answer.
(a) Answer is required. Unless a different period is specified by the Board, a party who does not wish to consent to a final order must file an answer within 20 days after being served with a notice that commences the proceeding. Any subsequent notice which contains amended allegations and by its terms requires an answer must similarly be answered within 20 days after service.
(b) Requirements of answer; effect of failure to deny. An answer filed under this section shall concisely state any defenses and specifically admit or deny each allegation in the notice. A party who lacks information or knowledge sufficient to form a belief as to the truth of any particular allegation shall so state and this shall have the effect of a denial. Any allegation not denied shall be deemed to be admitted. A party who intends in good faith to deny only a part of or to qualify an allegation shall specify so much of it as is true and shall deny only the remainder.
(c) Admitted allegations. If a party filing an answer under this section elects not to contest any of the allegations of fact set forth in the notice, the answer shall consist of a statement admitting all of the allegations to be true. Such answer constitutes a waiver of hearing as to the facts alleged in the notice, and together with the notice will provide a record basis on which the presiding officer shall file with the Board a recommended decision in accordance with 5 U.S.C. 557. The recommended decision shall be served on the party, who may file exceptions thereto within the time provided in § 622.13.
(d) Effect of failure to answer. Failure of a party to file an answer required by this section within the time provided constitutes a waiver of the party’s right to appear and contest the allegations in the notice and authorizes the presiding officer, without further notice to the party, to find the facts to be as alleged in the notice and to file with the Board a recommended decision containing such findings and appropriate conclusions. The Board or the presiding officer may, for good cause shown, permit the filing of a delayed answer after the time for filing and the answer has expired.
§ 622.6 Opportunity for informal settlement.
Any interested party may at any time submit to the Board for consideration written offers or proposals for settlement of a proceeding, without prejudice to the rights of the parties. No offer or proposal shall be admissible into evidence over the objection of any party in any hearing in connection with such proceeding. The foregoing provisions of this section shall not preclude settlement of any proceeding through the regular adjudicatory process by the filing of an answer as provided in § 622.5(c), or by submission of the case to the presiding officer on a stipulation of facts and an agreed order.
§ 622.7 Conduct of hearings.
(a) Authority of presiding officer. All hearings governed by this subpart shall be conducted in accordance with the provisions of chapter 5 of title 5 of the United States Code. The presiding officer designated by the Board to preside at any such hearing shall have complete charge of the hearing, shall have the duty to conduct it in a fair and impartial manner and shall take all necessary action to avoid delay in the disposition of the proceeding. Such officer shall have all powers necessary to that end, including the following:
(1) To administer oaths and affirmations;
(2) To issue subpoenas and subpoenas duces tecum, as authorized by law, and to revoke, quash, or modify any such subpoena;
(3) To receive relevant evidence and to rule upon the admission of evidence and offers of proof;
(4) To take or cause depositions to be taken;
(5) To regulate the course of the hearing and the conduct of the parties and their counsel;
(6) To hold conferences for the settlement or simplification of issues or for any proper purpose; and
(7) To consider and rule upon, as justice may require, all procedural and other motions appropriate in a proceeding under this subpart, except that a presiding officer shall not have power to decide any motion to dismiss the proceeding or other motion which results in a final determination of the merits of the proceeding. This power rests only with the Board. Without limitation on the foregoing, the presiding officer shall, subject to the provisions of this subpart, have all the authority set forth in 5 U.S.C. 556(c).
(b) Prehearing conference. The presiding officer may, on his or her own initiative or at the request of any party, direct counsel for all parties to meet with him or her at a specified time and place prior to the hearing, or to submit suggestions to him or her in writing, for the purpose of considering any or all of the following:
(1) Simplification and clarification of the issues;
(2) Stipulations, admissions of fact and of the contents and authenticity of documents;
(3) Matters of which official notice will be taken; and
(4) Such other matters as may aid in the orderly disposition of the proceeding.
(c) Exchange of information. Thirty (30) days prior to the hearing, parties shall exchange a list of the names of witnesses with a general description of their expected testimony, and a list and one copy of all documents or other physical exhibits which will be introduced in evidence in the course of the proceeding.
(d) Attendance at hearings. All hearings shall be private and shall be attended only by the parties, their counsel or authorized representatives, witnesses while testifying, and other persons having an official interest in the proceeding. However, if the Board, in its discretion, after fully considering the views of the party afforded the hearing, determines that a public hearing is necessary to protect the public interest, the Board may in its sole discretion order that the hearing be public.
(e) Transcript of testimony. Hearings shall be recorded. A copy of the transcript of the testimony taken at any hearing, duly certified by the reporter, together with all exhibits accepted into evidence shall be filed with the presiding officer. The presiding officer shall promptly serve notice upon all parties of such filing. The parties shall make their own arrangements with the person recording the testimony for copies of the testimony and exhibits. The presiding officer shall have authority to correct the record sua sponte with notice to all parties and to rule upon motions to correct the record. In the event the hearing is public, transcripts will be furnished to interested persons upon payment of the cost thereof.
(f) Continuances and changes or extensions of time and changes of place of hearing. Except as otherwise provided by law, the presiding officer may extend time limits prescribed by these rules or by any notice or order issued in the proceedings, may change the time for beginning any hearing, continue or adjourn a hearing from time to time, and/or change the location of the hearing. Prior to the appointment of a presiding officer and after the filing of a recommended decision pursuant to § 622.12, the Board may grant such extensions or changes. Subject to the approval of the presiding officer, the parties may by stipulation change the time limits specified by these rules or any notice or order issued hereunder.
(g) Closing of hearing. The record of the hearing shall be closed by an announcement to that effect by the presiding officer when the taking of evidence has been concluded. In the discretion of the presiding officer, the record may be closed as of a future date in order to permit the admission into the record, under circumstances determined by the presiding officer, of exhibits to be prepared.
(h) Call for further evidence, oral arguments, briefs, reopening of hearing. The presiding officer may call for the production of further evidence upon any issue, may permit oral argument and submission of briefs at the hearing and, upon appropriate notice, may reopen any hearing at any time prior to the filing of his or her recommended decision. The Board may reopen the record at anytime permitted by law.
(i) Order of procedure. The FCA shall open and close.
(j) Ex parte communications. (1) No person shall make or knowingly cause to be made an ex parte communication relevant to the merits of the proceeding to the presiding officer or anyone who is or may reasonably be expected to be involved in the decisional process.
(2) No person who is or may reasonably be expected to be involved in the decisional process shall make or knowingly cause to be made an ex parte communication relevant to the merits of the proceeding to any person.
(3) Except as authorized by law, the presiding officer shall not consult anyone on any fact in issue, unless upon notice and opportunity for all parties to participate. The presiding officer shall not be responsible to, or subject to the supervision or direction of, any officer, employee, or agent of the FCA engaged in the performance of investigative or prosecuting functions. An officer, employee or agent engaged in the performance of such functions in any case shall not, in that case or a factually related case, participate or advise in the decision of the presiding officer, except as a witness or counsel in the proceedings, or as otherwise authorized by law.
(4) If an ex parte communication is made or knowingly caused to be made, all such communications, and any responses, shall be placed in the record.
(5) Upon receipt of a communication knowingly made or caused to be made in violation of paragraph (j) of this section, the responsible party may be required to show cause why such party’s claim or interest should not be dismissed, denied, or otherwise adversely affected. To the extent consistent with the interests of justice, a knowing violation of paragraph (j) of this section may be grounds for a decision adverse to a party in violation.
(6) The prohibitions against ex parte communications apply from the time a proceeding is noticed for hearing. However, when the person responsible for the communication has knowledge that the proceeding will be noticed, the prohibitions apply from the time such knowledge is acquired.
§ 622.8 Rules of evidence.
(a) Evidence. Every party shall have the right to present a case or defense by oral and documentary evidence, to submit rebuttal evidence, and to conduct such cross-examination as may be required for a full and true disclosure of the facts. Irrelevant, immaterial or unduly repetitious evidence shall be excluded.
(b) Objections. Objections to the admission or exclusion of evidence shall be in short form, stating the grounds of objection relied upon but no argument thereon shall be permitted, except as ordered, allowed, or requested by the presiding officer. Rulings on such objections and all other matters shall be part of the transcript. Failure to object timely to the admission or exclusion of evidence or to any ruling constitutes a waiver of such objection.
(c) Stipulations. Independently of the orders or rulings issued as provided by § 622.7(b), the parties may stipulate as to any relevant matters of fact or the authenticity of any relevant documents. Such stipulations may be received in evidence at the hearing, and when so received shall be binding on the parties with respect to the matters therein stipulated.
(d) Official notice. All matters officially noticed by the presiding officer shall appear on the record.
§ 622.9 Subpoenas.
(a) Issuance. The presiding officer or, in the event he or she is unavailable, the Board may issue subpoenas and subpoena duces tecum at the request of any party requiring the attendance of witnesses or the production of documents at a designated place. The person seeking the subpoena may be required, as a condition precedent to the issuance of the subpoena, to show the general relevance and reasonable scope of the testimony or other evidence sought. Where it appears to the presiding officer that a subpoena may be unreasonable, oppressive, excessive in scope, unduly burdensome, or delay the proceeding, the presiding officer has discretion to refuse to issue a subpoena or to issue it only upon such conditions as fairness requires.
(b) Motions to quash. Any person to whom a subpoena is directed may, prior to the time specified therein for compliance but in no event more than 10 days after the date the subpoena was served, with notice to the party requesting the subpoena, apply to the presiding officer, or in the event he or she is unavailable to the Board, to quash or modify the subpoena, accompanying such application with a brief statement of the reasons therefor. The presiding officer may deny the application or, upon notice to the party on whose behalf the subpoena was issued and after affording that party an opportunity to reply, may quash or modify the subpoena or impose reasonable conditions including, in the case of a subpoena duces tecum, a requirement that the party on whose behalf the subpoena was issued pay in advance the reasonable cost of copying and transporting the documentary evidence to the designated place.
(c) Service of subpoena. A subpoena may be served upon the person named therein by personal service or certified mail with a return receipt to the last known address of the person. The fees for one day’s attendance and mileage as specified in paragraph (d) of this section must be tendered at the time of service unless the subpoena is issued on behalf of the FCA. If personal service is made by a U.S. marshal, a deputy U.S. marshal, or an employee of the FCA, such service shall be evidenced by the return thereon. If personal service is made by any other person, such person shall sign an affidavit describing the manner in which service is made, and return such affidavit with a copy of the subpoena. In case of failure to make service, reasons for the failure shall be stated on the original subpoena. The original or a copy of the subpoena, bearing or accompanied by the required return, affidavit, statement or return receipt, shall be returned without delay to the presiding officer.
(d) Attendance of witnesses. The attendance of witnesses at a designated place may be required from any place in any State or territory subject to the jurisdiction of the United States. Witnesses who are subpoenaed shall be paid the same fees and mileage that are paid witnesses in the district courts of the United States. Fees required by this paragraph shall be paid by the party upon whose application the subpoena is issued.
(e) Production of documents. The production of documents at a designated place may be required from any place in any State or territory subject to the jurisdiction of the United States. In lieu of an original document, a certified or authenticated copy may be produced. However, any party has the right to inspect the original document.
§ 622.10 Depositions.
(a) Application to take deposition. Any party desiring to take the deposition of any person shall make written application to the presiding officer setting forth the name and address of the witness, the subject matter concerning which the witness is expected to testify, its relevance, the time and place of the deposition, and the reasons why such deposition should be taken. The application may include a request that specified documents be produced at the deposition. A copy of the application shall be served on the other parties at the same time the application is filed with the presiding officer.
(b) Subpoena; notice to other parties. Upon a showing that the testimony or other evidence sought will be material, and the taking of the deposition will not result in any undue burden to the witness or any party or undue delay of the proceedings, the presiding officer may issue a subpoena or subpoena duces tecum. Notice of the issuance of such subpoena shall be served upon all parties at least 10 days in advance of the date set for deposition.
(c) Deposition by notice. The requirements of paragraphs (a) and (b) of this section may be waived by agreement of the parties and the witness whose testimony or documentary evidence is sought. Such agreement shall be embodied in a stipulation which becomes part of the record and may provide for the taking of depositions upon notice without leave of the presiding officer.
(d) Procedure on deposition. Depositions may be taken before any person having the power to administer oaths. Each witness whose testimony is taken by deposition shall be duly sworn before any question is propounded. Examination and cross-examination of deponents may proceed as permitted at the hearing. Objections to questions or documents shall be in short form, stating the grounds relief upon for the objection. Failure to object to questions or evidence is deemed a waiver if the ground of the objection is one which might have been obviated or removed if presented at that time. The questions propounded and the answers thereto, together with all objections made (but not including argument or debate) shall be recorded by or under the direction of the person before whom the deposition is taken. The deposition shall be signed by the witness, unless the parties by stipulation waive the signing or the witness is physically unable to sign, cannot be found, or refuses to sign. The deposition shall also be certified as a true and complete transcript by the person recording the testimony. If the deposition is not signed by the witness, the person recording the testimony shall state this fact and the reason therefor on the record. The person before whom the deposition is taken shall promptly file the transcript and all exhibits with the presiding officer. Interested parties shall make their own arrangements with the person recording the testimony for copies of the testimony and exhibits.
(e) Introduction as evidence. Subject to appropriate rulings by the presiding officer on such objections and answers as were noted at the time the deposition was taken or as would be valid were the witness personally present and testifying at the hearing, the deposition or any part thereof may be received in evidence by the presiding officer in his or her discretion. Only such part of a deposition as is received in evidence at a hearing shall constitute a part of the record upon which a decision may be based.
(f) Payment of fees. Deponents whose depositions are taken and the reporter taking the same shall be entitled to the same fees as are paid for like services in the district courts of the United States, which fees shall be paid by the party upon whose application the deposition is taken.
§ 622.11 Motions.
(a) How made. An application or request for an order or ruling not otherwise specifically provided for in this subpart, unless made during a hearing, shall be made by written motion supported by a memorandum which concisely states the grounds therefor.
(b) Opposition. Within 10 days after service of any written motion, or within such other period of time as may be fixed by the presiding officer, any party may file a memorandum in opposition thereto. The moving party has no right to reply except as permitted by the presiding officer. The presiding officer has discretion to waive the requirements of this section as to motions for extension of time and may rule upon such motions ex parte.
(c) Oral argument. No oral argument will be heard on motions except as otherwise directed by the presiding officer or the Board.
(d) Rulings and orders. Except as otherwise provided in this subpart, the presiding officer shall rule on all motions and may issue appropriate orders, except that motions may be referred to the Board if the presiding officer is unavailable or determines that such motion should be referred to the Board. Prior to the appointment of a presiding officer and after a recommended decision is filed pursuant to § 622.12, the Board shall rule on motions filed by the parties.
(e) Appeal from rulings on motions. All answers, motions, objections and rulings shall become part of the record. Rulings of a presiding officer on any motion may not be appealed to the Board prior to its consideration of the presiding officer’s recommended decision, except by special permission of the Board. However, such rulings shall be considered by the Board in reviewing the record. Requests to the Board for special permission to appeal from a ruling of the presiding officer shall be filed in writing within 5 days of the ruling, and shall briefly state the grounds relied on. The moving party shall immediately serve a copy thereof on every other party to the proceeding who may then respond to such request within 5 days after service.
(f) Continuation of hearing. Unless otherwise ordered by the presiding officer or the Board, the hearing shall continue pending the determination of any request or motion by the Board.
§ 622.12 Proposed findings and conclusions; recommended decision.
(a) Proposed findings and conclusions by parties. Within 30 days after the hearing transcript has been filed, any party may file proposed findings of fact and conclusions of law. Such proposals shall be supported by citation of such statutes, decisions, and other authorities, and by specific page references to such portions of the record as may be relevant. All such proposals shall become a part of the record.
(b) Recommended decision by presiding officer. Within 30 days after the expiration of time allowed under paragraph (a) of this section, or within such further time as the Board for good cause allows, the presiding officer shall file the entire hearing record, including a recommended decision and findings and conclusions, the transcript, exhibits (including on request of any of the parties any exhibits excluded from evidence or tender of proof), exceptions, rulings and all briefs and memoranda filed in connection with the hearing. Promptly upon such filing, the presiding officer shall serve a copy of the recommended decision, findings and conclusions upon each party to the proceeding.
(c) Board as presiding officer. In proceedings in which the Board or one or more of its members has presided at the reception of evidence, the presiding officer’s recommended decision, findings of fact, and conclusions of law will be omitted. In such proceedings the proposed findings and conclusions, briefs, and other submissions permitted under paragraph (a) of this section shall be filed with the Board for consideration.
§ 622.13 Exceptions.
(a) Filing. Within 15 days after service of the recommended decision of the presiding officer, any party may file exceptions thereto or to any portion thereof, or to the failure of the presiding officer to make any recommendation, finding, or conclusion, or to the admission or exclusion of evidence, or to any other ruling of the presiding officer.
(b) Contents. Each exception shall be supported by a concise argument and by citation of such statutes, decisions and other authorities, and by page references to such portions of the record as may be relevant. If the exception relates to the admission or exclusion of evidence, the substance of the evidence admitted or excluded shall be set forth in the brief with appropriate references to the transcript.
(c) Waiver. Failure of a party to file exceptions to those matters specified in paragraph (a) of this section within the time prescribed shall be a waiver of objection thereto.
§ 622.14 Briefs.
(a) Contents. Any brief filed in a proceeding shall be confined to the particular matters in issue, citing statutes, decisions, and other authorities, and page references to such portions of the record or the recommended decision of the presiding officer as may be relevant.
(b) Reply briefs. Reply briefs may be filed within 10 days after service of original briefs of opposing parties, and shall be confined to matters in such briefs. Further briefs may be filed only with permission of the presiding officer or the Board with respect to a matter before the Board.
(c) Delayed filing. Briefs not filed on or before the time fixed in this subpart or by the presiding officer will be received only upon special permission of the Board.
§ 622.15 Oral argument before the Board.
Upon its own initiative or upon written request by any party, the Board, in its discretion, may order the matter to be set down for oral argument before the Board or one or more members thereof. Any request for oral argument by a party filing exceptions shall be made within the time prescribed for filing such exceptions, or by any other party, within the time prescribed for the filing of a reply brief. Oral argument before the Board shall be recorded unless otherwise ordered by the Board.
§ 622.16 Notice of submission to the Board.
Upon the filing of the record with the Board, and upon the expiration of the time for the filing of exceptions and all briefs, including reply briefs or any further briefs permitted by the presiding officer or the Board, and upon the hearing of oral argument by the Board, if ordered by the Board, the Board shall notify the parties in writing that the case has been submitted for final decision.
§ 622.17 Decision of the Board.
Any person who has not engaged in the performance of investigative or prosecuting functions in the case, or in a factually related case, may advise and assist the Board in the consideration of the case. Copies of the decision and order of the Board shall be served upon the parties. A copy of the order will also be sent to the supervisory bank if the order relates to a System association, director, officer, or other person participating in the conduct of the affairs of the association.
§ 622.18 Filing.
(a) Filing. Papers required or permitted to be filed with the Board shall be filed with the Chairman of the Board, FCA, 1501 Farm Credit Drive, McLean, VA 22102-5090 or with the person designated to receive papers for the agency in a proceeding. Papers sent by mail must be postmarked or received within the prescribed time limit for filing. Papers sent by any other means must be received within the prescribed time limit for filing.
(b) Formal requirements. All filed papers shall be printed, typewritten, or otherwise reproduced, and copies shall be clear and legible. The original of all papers filed by a party shall be signed and dated as of the date of execution by the party filing the same, or a duly authorized agent or attorney. The signer’s address and telephone number must appear on the original. Counsel for the FCA shall sign the original of all papers filed on behalf of the FCA. All papers filed must name in the heading or on a title page, the parties, the docket number and the subject of the papers.
(c) Copies. Parties shall file an original and three copies of all documents and papers required or permitted to be filed under this subpart (except the transcript of testimony and exhibits), unless otherwise specifically provided by the Board.
§ 622.19 Service.
(a) Service. Except as otherwise provided in these rules, each party who files papers is responsible for serving a copy thereof upon the presiding officer and upon every other party or the attorney or representative of record of that party. A copy of all papers filed by the presiding officer or the Board, except for the transcript of testimony and exhibits, shall be served upon each of the parties. Service may be by personal service, private delivery service, or by express, certified or regular first-class mail. If a party is not represented, service shall be made at the last known address of the party or an officer thereof as shown on the records of the FCA.
(b) Proof of service. Proof of service of papers filed by a party shall be filed before action is to be taken thereon. The proof shall show the date and manner of service, and may be by written acknowledgment of service, by declaration of the person making service, or by certificate of an attorney or other representative of record. Failure to make proof of service shall not affect the validity of service. The presiding officer may allow the proof to be amended or supplied, unless to do so would result in material prejudice to a party.
§ 622.20 Documents in proceedings confidential.
Unless otherwise ordered by the Board or required by law, the entire record in any proceeding under this subpart, including the notice of hearing, transcript, exhibits, proposed findings and conclusions, recommended decision of the presiding officer, exceptions thereto, decision and order of the Board, and any other papers which are filed in connection with the proceeding shall not be made public, and shall be for the confidential use only of the FCA and its staff, the presiding officer, the parties, and other appropriate supervisory authorities.
§ 622.21 Computing time.
(a) General rule. In computing any period of time prescribed or allowed by this subpart, the date of the act or event from which the designated period of time begins to run is not to be included. The last day so computed shall be included, unless it is a Saturday, Sunday or Federal holiday, in which event the period shall run until the end of the next day which is not a Saturday, Sunday, or Federal holiday. When the period of time prescribed or allowed is 10 days or less, intermediate Saturdays, Sundays, and Federal holidays shall not be included in the computation.
(b) Service by mail. Whenever any party has the right or is required to do some act within the period of time prescribed in this subpart after the service upon the party of any document or other paper of any kind, and such service is made by mail, three days shall be added to the prescribed period from the date when the matter served is deposited in the United States mail.
Nothing is this part is in derogation of powers of examination and investigation conferred on the FCA by any provision of law.
§§ 622.23-622.50 [Reserved]
Subpart B—Rules and Procedures for Assessment and Collection of Civil Money Penalties
§ 622.51 Definitions.
Unless noted otherwise, the definitions set forth in § 622.2 of subpart A shall apply to this subpart.
§ 622.52 Purpose and scope.
The rules and procedures specified in this subpart and in subpart A are applicable to proceedings by the FCA to assess and collect civil money penalties:
(a) For violations of the terms of a final cease and desist order issued under section 5.25 or 5.26 of the Act;
(b) For violations of any provision of the Act or any regulation issued under the Act; or
(c) For violations of the National Flood Insurance Reform Act (Reform Act) as set forth in 42 U.S.C. 4012a(f) or any regulation issued under the Reform Act.
§§ 622.53-622.54 [Reserved]
§ 622.55 Notice of assessment of civil money penalty.
(a) Notice of assessment. The notice of assessment for a civil money penalty will state:
(1) The legal authority for the assessment;
(2) The amount of the civil money penalty being assessed;
(3) The date by which the civil money penalty must be paid;
(4) The matter of fact or law constituting the grounds for assessment of the civil money penalty;
(5) The right of the institution or person being assessed to a formal hearing to challenge the assessment;
(6) That failure to request a hearing constitutes a waiver of the opportunity for a hearing and the notice of assessment will constitute a final and unappealable order; and
(7) The time limit to request such a formal hearing.
(b) Service. The notice of assessment may be served upon the institution or person being assessed by personal service or by certified mail with a return receipt to the institution’s or the person’s last known address. Such service constitutes issuance of the notice.
§ 622.56 Request for formal hearing on assessment.
An institution or person being assessed may request a formal hearing to challenge the assessment of a civil money penalty. The request must be filed in writing, within 10 days of the issuance of the notice of assessment, with the Chairman of the Board, FCA, 1501 Farm Credit Drive, McLean, VA 22102-5090.
§ 622.57 Waiver of hearing; consent.
(a) Waiver. Failure to request a hearing pursuant to § 622.56 constitutes a waiver of the opportunity for a hearing and the notice of assessment issued pursuant to § 622.55 will constitute a final and unappealable order.
(b) Consent. Any party afforded a hearing who does not appear at the hearing personally or by a duly authorized representative is deemed to have consented to the issuance of an assessment order.
§ 622.58 Hearing on assessment.
(a) Time and place. An institution or person requesting a hearing will be informed by order of the Board of the time and place set for hearing.
(b) Answer; procedures. The hearing order may require the institution or person requesting the hearing to file an answer as prescribed in § 622.5 of subpart A. The procedures of the Administrative Procedure Act (5 U.S.C. 554-557) and subpart A of these rules will apply to the hearing.
§ 622.59 Assessment order.
(a) Consent. In the event of consent of the parties concerned to an assessment, or if, upon the record made at a hearing ordered under this subpart, the Board finds that the grounds for having assessed the penalty have been established, the Board may issue an order of assessment of civil money penalty. In its assessment order, the Board may reduce the amount of the penalty specified in the notice of assessment.
(b) Effective date and period. An assessment order is effective immediately upon issuance, or upon such other date as may be specified therein, and will remain effective and enforceable unless it is stayed, modified, terminated, or set aside by action of the board or a reviewing court.
(c) Service. An assessment order may be served by personal service or by certified mail with a return receipt to the last known address of the institution or person being assessed. Such service constitutes issuance of the order.
§ 622.60 Payment of civil money penalty.
(a) Payment date. Generally, the date designated in the notice of assessment for payment of the civil money penalty will be 60 days from the issuance of the notice. If, however, the Board finds, in a specific case, that the purposes of the relevant statutes would be better served if the 60-day period were changed, the Board may shorten or lengthen the period or make the civil money penalty payable immediately upon receipt of the notice of assessment. If a timely request for a formal hearing to challenge an assessment of a civil money penalty is filed, payment of the penalty will not be required unless and until the Board issues a final order of assessment following the hearing. If an assessment order is issued, it will specify the date by which the civil money penalty is to be paid or collected.
(b) Method of payment. Checks in payment of civil money penalties must be made payable to the “Farm Credit Administration.” Upon collection, the FCA will forward payment for penalties described in § 622.52(a) and (b) to the United States Department of Treasury. The FCA will forward payment for penalties described in § 622.52(c) to the National Flood Mitigation Fund as required by 42 U.S.C. 4012a(f)(8).
§ 622.61 Adjustment of civil money penalties by the rate of inflation under the Federal Civil Penalties Inflation Adjustment Act of 1990, as amended.
(a) The maximum amount of each civil money penalty within FCA’s jurisdiction is adjusted in accordance with the Federal Civil Penalties Inflation Adjustment Act of 1990, as amended (28 U.S.C. 2461 note), as follows:
(1) Amount of civil money penalty imposed under section 5.32 of the Act for violation of a final order issued under section 5.25 or 5.26 of the Act: The maximum daily amount is $2,830 for violations that occur on or after January 15, 2024.
(2) Amount of civil money penalty for violation of the Act or regulations: the maximum daily amount is $1,280 for each violation that occurs on or after January 15, 2024.
(b) The maximum civil money penalty amount assessed under 42 U.S.C. 4012a(f) is $2,661 for each violation that occurs on or after January 15, 2024, with no cap on the total amount of penalties that can be assessed against any single institution during any calendar year.
§§ 622.62-622.75 [Reserved]
Subpart C—Rules and Procedures Applicable to Suspension or Removal of an Individual Where Certain Crimes Are Charged or Proven
§ 622.76 Definitions.
Unless noted otherwise, the definitions set forth in § 622.2 of subpart A shall apply to this subpart.
§ 622.77 Purpose and scope.
The rules and procedures set forth in this subpart apply to informal hearings afforded to any officer, director, or other person participating in the conduct of the affairs of a System institution who has been suspended or removed from office or prohibited from further participation in any manner in the conduct of the institution’s affairs by a notice or order issued by the Board upon the grounds set forth in section 5.29 of the Act.
§ 622.78 Suspension, prohibition or removal.
(a) Content. The Board may serve a notice of suspension or prohibition or order of removal upon a director, officer or other person participating in the conduct of the affairs of an institution. A copy of such notice or order shall also be served upon the institution, whereupon the individual concerned shall immediately cease service to the institution or participation in the affairs of the institution. Any notice or order shall indicate the basis for the suspension, prohibition, or removal and shall inform the individual of the right to request in writing, within 30 days of being served with such notice or order, an opportunity to show at an informal hearing that continued service to or participation in the conduct of the affairs of the institution does not, or is not likely to, pose a threat to the interests of the institution’s shareholders or the investors in Farm Credit System obligations or threaten to impair public confidence in the institution or the Farm Credit System.
(b) Service. A notice or order of suspension, removal or prohibition may be served by personal service or by certified mail with a return receipt to the last known address of the person being served.
§ 622.79 Petition for informal hearing.
(a) Filing. To obtain a hearing, the subject individual must file an original and three copies of a petition with the Board within 30 days of being served with the notice or order.
(b) Content. The petition shall:
(1) State whether the petitioner is requesting termination or modification of the notice or order;
(2) State with particularity how the petitioner intends to show that his or her continued service to or participation in the conduct of the affairs of the institution would not, or is not likely to, pose a threat to the interests of the institution’s shareholders or the investors in Farm Credit System obligations or threaten to impair public confidence in the institution or the Farm Credit System;
(3) Include a request to present oral testimony or witnesses at the hearing, if the petitioner desires to do so. The request should specify the names of the witnesses and a summary of their expected testimony; and
(4) Indicate whether the petitioner desires oral argument or elects to have the matter determined solely on the basis of written submissions.
§ 622.80 Informal hearing.
(a) Time and place. Upon receipt of a timely petition for a hearing, the Board shall notify the petitioner of the time and place fixed for the hearing and shall designate one or more Board members or FCA employees to preside (“designated FCA representative”). The hearing shall be scheduled to be held no later than 30 days from the date a petition for hearing is received unless the time is extended at the request of the petitioner. Notice of the hearing shall also be sent to the FCA’s Office of General Counsel.
(b) Appearance. A petitioner may appear personally or through counsel to submit relevant written materials and oral argument. An attorney is subject to all the requirements and limitations imposed on attorneys in § 622.3 of subpart A. A representative(s) of the FCA’s Office of General Counsel may participate in the hearing to the extent such representative deems appropriate.
(c) Written material. Any written material the petitioner wishes to have considered must be submitted to the designated FCA representative and the FCA’s Office of General Counsel at least 10 days prior to the date of the hearing.
(d) Oral testimony. Oral testimony may be presented only if expressly permitted by the Board in the notice of hearing. The designated FCA representative may ask questions of any witness.
(e) Transcripts. Oral testimony, if any, and oral argument shall be recorded. A copy of the transcript shall be filed with the designated FCA representative, who shall have authority to correct the record sua sponte upon notice, or upon the motion of the petitioner or the representative of the FCA’s Office of General Counsel. The designated FCA representative shall promptly serve notice upon the petitioner and the FCA’s Office of General Counsel of such filing. Such parties shall make arrangements with the person recording the testimony or argument for copies of the transcript.
(f) Closing of record. Upon the request of the petitioner or representative of the FCA’s Office of General Counsel, the record shall remain open for a period of 5 business days following the hearing, during which time additional submissions for the record may be made. Thereafter, the record shall be closed.
(g) Rules of evidence and procedure. Neither the formal rules of evidence nor the adjudicative procedures of the Administrative Procedure Act (5 U.S.C. 554-557) or subpart A of these rules shall apply to the informal hearing ordered under this subpart unless the Board orders that they apply in whole or in part.
§ 622.81 Default.
If the subject individual fails to file a petition for a hearing, or fails to appear at a hearing, either in person or by an attorney, or fails to submit a written argument where oral argument has been waived, the notice shall remain in effect until the information, indictment, or complaint is finally disposed of and the order shall remain in effect until terminated by the Board.
§ 622.82 Decision of the Board.
(a) Recommended decision. Within 30 days of the hearing, the designated FCA representative shall make a recommendation with findings and conclusions to the Board concerning the notice or order of suspension, removal, or prohibition.
(b) Final decision. Within 60 days of the hearing, the Board shall notify the subject individual and the FCA’s Office of General Counsel whether the suspension or removal from office, or prohibition from participation in any manner in the affairs of the institution, will be continued, terminated, or otherwise modified. The Board’s final decision, if adverse to the individual, shall contain a statement of the basis thereof. The Board may satisfy this requirement where it adopts the recommended decision of the designated FCA representative.
(c) Guilt not an issue. In deciding upon any suspension of prohibition by notice, the ultimate question of the guilt or innocence of the individual with respect to the criminal charge that is outstanding will not be considered. A finding of not guilty or other disposition of the charge shall not preclude the Board from thereafter instituting removal proceedings pursuant to section 5.28 of the Act.
(d) Effective period. A removal or prohibition by order remains in effect until terminated by the Board. A suspension or prohibition by notice remains in effect until the criminal charge is finally disposed of or until terminated by the Board.
(e) Reconsideration. A suspended or removed individual may petition the Board to reconsider the decision any time after the expiration of a 12-month period from the date of the decision, but no petition for reconsideration may be made within 12 months of a previous petition. A petition shall state with particularity the relief sought and the grounds therefor and may be accompanied by a supporting memorandum and any other documentation the petitioner wishes to have considered. No hearing need be granted on the petition for reconsideration.
§§ 622.83-622.100 [Reserved]
Subpart D—Rules and Procedures Applicable to Formal Investigations
§ 622.101 Definitions.
Unless noted otherwise, the definitions set forth in § 622.2 of subpart A shall apply to this subpart.
§ 622.102 Scope.
The rules in this subpart apply to formal investigations initiated by order of the Board and pertain to the exercise of powers specified in section 5.37 of the Act. These rules do not restrict or in any way affect the authority of the FCA, including but not limited to the powers enumerated in section 5.37 of the Act, to conduct examinations of System institutions.
§ 622.103 Formal investigations are confidential.
Information or documents obtained or testimony recorded in the course of a formal investigation shall be confidential and shall be disclosed only in accordance with the provisions of 12 CFR part 602.
§ 622.104 Order to conduct formal investigation.
A formal investigation begins with the issuance of an order by the Board. The order shall designate the person or persons who will conduct the investigation, issue, revoke, quash or modify subpoenas and subpoenas duces tecum, take or cause to be taken depositions, administer oaths, and receive affirmations as to any matter under investigation by the FCA. Upon application and for good cause shown, the Board may limit, modify, or withdraw the order at any stage of the proceeding.
§ 622.105 Conduct of investigation.
(a) Review of order. Any person who is compelled or requested to furnish testimony, documentary evidence, or other information with respect to any matter under formal investigation shall upon request be shown the order initiating such investigation.
(b) Right to counsel. Any person who, in a formal investigation, is compelled to appear and testify or who appears and testifies by request or permission of the Board may be accompanied, represented, and advised by counsel. The right to be accompanied, represented, and advised by counsel shall mean the right of a person testifying to have an attorney present at all times while testifying and to have this attorney:
(1) Advise such person before, during and after the conclusion of testimony;
(2) Question such person briefly at the conclusion of testimony to clarify any of the answers given; and
(3) Make summary notes during the testimony solely for the use of such person.
(c) Appearance. The provisions of § 622.3 are applicable to this subpart.
(d) Exclusion. (1) Any person who has given or will give testimony, and counsel representing such person, may be excluded from the taking of testimony of any other witness in the discretion of the designated FCA representative conducting the investigation.
(2) The designated FCA representative conducting the investigation shall report to the Board any instances where any person has been guilty of dilatory, obstructionist, egregious, contemptuous, contumacious or other unethical or improper conduct during the course of the proceeding or any other instance involving a violation of these rules. The Board may thereupon take such action as the circumstances may warrant, including exclusion of the offending individual or individual from participation in the proceeding.
§ 622.106 Service of subpoena and payment of witness fees.
(a) Service. A subpoena may be served upon the person named therein by personal service or certified mail with a return receipt to the last known address of the person. Witnesses who are subpoenaed shall be paid the same fees and mileage that are paid witnesses in the district courts of the United States. The fees and mileage need not be tendered at the time a subpoena is served.
(b) Motions to quash. Any person to whom a subpoena is directed may, prior to the time specified therein for compliance, but in no event more than 5 days after the date of service of such subpoena, apply to the FCA representative authorized in the order, or if unavailable to the Board, to quash or modify such subpoena, accompanying such application with a brief statement of the reasons therefor. The FCA representative, or the Board, may:
(1) Deny the application;
(2) Quash or revoke the subpoena;
(3) Modify the subpoena; or
(4) Condition the granting of the application on such terms as the FCA representative or the Board, determines in his, her, or its discretion, to be just, reasonable, and proper.
§ 622.107 Transcripts.
Transcripts, if any, of an investigative proceeding shall be recorded by any means authorized by the designated FCA representative conducting the investigation. A person who has given testimony in an investigative proceeding (or counsel for such person) upon proper identification shall have the right to inspect the transcript of the person’s testimony but may not obtain a copy if the FCA’s representative conducting the investigation has cause to believe that the contents should not be disclosed.
PART 623—PRACTICE BEFORE THE FARM CREDIT ADMINISTRATION
§ 623.1 Scope of part.
This part prescribes rules with regard to persons who may practice before the Farm Credit Administration and the circumstances under which attorneys, accountants, appraisers, or other persons may be suspended or debarred, either temporarily or permanently, from practicing before the Farm Credit Administration. In connection with any particular matter, reference also should be made to any special requirements of procedure and practice that may be contained in the particular statute involved or the rules and forms adopted by the Farm Credit Administration thereunder, which special requirements are controlling. In addition to any suspension hereunder, a person may be excluded from further participation in a particular adjudicative proceeding in accordance with § 622.3 or in a formal investigation in accordance with § 622.105.
§ 623.2 Definitions.
As used in this part:
(a) FCA means the Farm Credit Administration.
(b) Board means the Farm Credit Administration Board.
(c) Act means the Farm Credit Act of 1971, as amended. 12 U.S.C. 2001, et seq.
(d) The terms institution in the System, System institution and institution mean all institutions enumerated in section 1.2 of the Act, any institution chartered pursuant to or established by the Act, except for the Farm Credit System Assistance Board and the Farm Credit System Insurance Corporation and any service corporation chartered under the Act.
(e) The term presiding officer includes the Board, one or more members thereof, FCA employees, or an administrative law judge. As used in this part, the term shall be construed to refer to whichever of the above-identified individuals presides at a hearing or other proceeding, except as otherwise specified in the text;
(f) The term attorney means any person who is a member in good standing of the bar of the highest court of any State, possession, territory, Commonwealth or the District of Columbia;
(g) The term practice means transacting any business with the FCA, including but not limited to:
(1) The representation of another person at any adjudicatory, investigatory, removal or rulemaking proceeding conducted before the FCA or a presiding officer;
(2) The preparation or certification of any statement, opinion, report of financial condition and performance, financial statement, appraisal report, audit report, or other document or report by any attorney, accountant, appraiser or other person which is filed with or submitted to the FCA, with such person’s consent or knowledge in connection with any filing with the FCA;
(3) A presentation to the FCA or a presiding officer at a conference or meeting relating to an institution’s or person’s rights, privileges or liabilities under the laws administered by the FCA and rules and regulations promulgated thereunder;
(4) Any business correspondence or communication with the FCA or a presiding officer; and
(5) The transaction of any other business with the FCA on behalf of another, in the capacity of an attorney, accountant, appraiser, licensed expert or any other capacity.
§ 623.3 Who may practice.
(a) By nonattorneys. (1) An individual may appear on his or her own behalf; a member of a partnership may represent the partnership; a bona fide and duly authorized officer or other designated representative of a corporation, trust, association or other entity not specifically listed herein may represent the corporation, trust, association or other entity; and an authorized officer or other designated representative of any government unit, agency or authority may represent that unit, agency or authority.
(2) Any accountant, appraiser or licensed expert may practice before the FCA in a professional capacity.
(b) By attorneys. Any entity noted in paragraph (a) of this section may be represented in any proceeding or other matter before the FCA by an attorney.
(c) Any person transacting business with the FCA in a representative capacity may be required to show evidence of his or her authority to act in such capacity and certification of credentials.
§ 623.4 Suspension and debarment.
(a) Grounds. The Board may censure any person practicing before the FCA or may deny, temporarily or permanently, the privilege of any person to practice before the FCA if such person is found by the Board, after notice of and opportunity for hearing in the matter:
(1) Not to possess the requisite qualifications to represent others;
(2) To be lacking in character or professional integrity;
(3) To have engaged in any dilatory, obstructionist, egregious, contemptuous, contumacious or other unethical or improper conduct before FCA; or
(4) To have willfully violated, or willfully aided and abetted the violation of, any provision of the laws administered by the FCA or the rules and regulations promulgated thereunder.
(b) Automatic suspension. (1) Any person who, after being licensed as a professional or expert by any competent authority, has been convicted by a Federal or State court of a felony, or of a misdemeanor involving moral turpitude, personal dishonesty or breach of trust, shall be suspended automatically from practicing before the FCA without a hearing.
(2) Any accountant, appraiser or licensed expert whose license to practice has been revoked in any State, possession, territory, Commonwealth or the District of Columbia, or who has been suspended or otherwise barred from practice before any Federal or State regulatory authority, shall be suspended automatically from practicing before the FCA without a hearing.
(3) Any attorney who has been suspended or disbarred by a court of the United States or in any State, possession, territory, Commonwealth or the District of Columbia, shall be suspended automatically from practicing before the FCA without a hearing.
(4) A conviction (including a judgment or order on a plea of nolo contendere), revocation, suspension or disbarment under paragraphs (b)(1), (2) and (3) of this section shall be deemed to have occurred when the convicting, revoking, suspending or disbarring agency or tribunal enters its judgment or order, regardless of whether an appeal is pending or could be taken.
(5) For purposes of this section, it shall be irrelevant that any attorney, accountant, appraiser or licensed expert who has been suspended, disbarred or otherwise disqualified from practice before a court, regulatory authority, or in a jurisdiction continues in professional good standing before other courts, regulatory authorities, or in other jurisdictions.
(c) Temporary suspension. (1) The Board, with due regard to the public interest and without preliminary hearing, by order, may temporarily suspend any person from appearing or practicing before it who by name, has been:
(i) Permanently enjoined (whether by consent, default or summary judgment or after trial) by any court of competent jurisdiction or by the Board in a final administrative order, by reason of his or her misconduct in any action brought by the FCA based upon violations of, or aiding and abetting the violation of any provision of any law that is administered by the FCA or of any rule or regulation promulgated thereunder; or
(ii) Found by any court of competent jurisdiction (whether by consent, default, upon summary judgment or after hearing) or in any administrative proceeding in which the FCA is a complainant and he or she is a party, to have willfully committed, caused, aided or abetted a violation of any provision of any law that is administered by the FCA, or of any rule or regulation promulgated thereunder.
(2) An order of temporary suspension shall become effective when served by certified mail with a return receipt directed to the last known business or residential address of the person involved. No order of temporary suspension shall be entered by the Board pursuant to paragraph (c)(1) of this section more than 3 months after the final judgment or order entered in a judicial or administrative proceeding described in paragraph (c)(1) (i) or (ii) of this section has become effective and all review or appeal procedures have been completed or are no longer available.
(3) Any person temporarily suspended from appearing and practicing before the FCA in accordance with paragraph (c)(1) of this section may, within 30 days after service of the order of temporary suspension, petition the Board to lift such suspension. If no petition is received by the Board within 30 days, the suspension shall become permanent.
(4) Within 30 days after the filing of a petition in accordance with paragraph (c)(3) of this section, the Board shall either lift the temporary suspension or set the matter down for hearing at a time and place to be designated by the Board, or both. After opportunity for hearing, the Board may censure the petitioner or may suspend the petitioner from appearing or practicing before the FCA temporarily or permanently. In any case in which the temporary suspension has not been lifted, the hearing and any other action taken pursuant to this paragraph shall be expedited by the Board in order to ensure the petitioner’s right to address the allegations.
(5) In any hearing held on a petition filed in accordance with paragraph (c)(3) of this section, a showing that the petitioner has been enjoined or has been found to have committed, caused, aided or abetted violations as described in paragraph (c)(1) of this section, without more, may be a basis for suspension or debarment; that showing having been made, the burden shall then be on the petitioner to show why the petitioner should not be censured or be temporarily or permanently suspended or debarred. A petitioner will not be permitted to contest any findings against the petitioner or any admissions made by the petitioner in the judicial or administrative proceedings upon which the proposed censure, suspension or debarment is based. A petitioner who has consented to the entry of a permanent injunction or order as described in paragraph (c)(1)(i) of this section, without admitting the facts set forth in the complaint, shall nevertheless be presumed for all purposes under this section to have been enjoined or ordered by reason of the misconduct alleged in the complaint.
§ 623.5 Reinstatement.
(a) Any person who is suspended from practicing before the FCA under § 623.4 (a) or (c) of this part may file an application for reinstatement at any time. Denial of the privilege of practicing before the FCA shall continue unless and until the applicant has been reinstated by order of the Board for good cause shown.
(b) Any person suspended under § 623.4(b) shall be reinstated by the Board, upon appropriate application, if all of the grounds for application of the provisions of that paragraph are removed subsequently by a reversal of the conviction or termination of the suspension, disbarment of revocation. An application for reinstatement on any other grounds by any person suspended under § 623.4(b) may be filed at any time. Such application shall state with particularity the relief requested and the grounds therefor and shall include supporting evidence, when available. The applicant shall be accorded an opportunity for an informal hearing in the matter, unless the applicant has waived a hearing in the application and, instead, has elected to have the matter determined on the basis of written submissions. Such hearing shall utilize the procedures established in part 622, subpart C. However, such suspension shall continue unless and until the applicant has been reinstated by order of the Board for good cause shown.
§ 623.6 Duty to file information concerning adverse judicial or administrative action.
Any person appearing or practicing before the FCA who has been or is the subject of a conviction, suspension, debarment, license revocation, injunction or other finding of the kind described in § 623.4 (b) or (c) of this part is an action not instituted by the FCA shall promptly file a copy of the relevant order, judgment or decree with the Board together with any related opinion or statement of the agency or tribunal involved. Any person who fails to file a copy of such an order, judgment or decree within 30 days after the later of the entry of the order, judgment or decree, or the date such person initiates practice before the FCA, for that reason alone may be disqualified from practicing before the FCA until such time as the appropriate filing shall be made, but neither the filing of these documents nor the failure of a person to file them shall in any way impair the operation of any other provision of this part.
§ 623.7 Proceeding under this part.
(a) Rules. All hearings required or permitted to be held under paragraphs (a) and (c) of § 623.4 of this part shall be held before a presiding officer utilizing the procedures established in the rules of practice and procedure under part 622, subpart A.
(b) Closed hearings. All hearings held under this part shall be closed to the public unless the Board directs otherwise on its own motion or upon the request of a party.
(c) Collateral proceedings. Any proceeding brought under any section of this part shall not preclude a proceeding under any other section of this part or any other part of the FCA’s regulations.
PART 624—MARGIN AND CAPITAL REQUIREMENTS FOR COVERED SWAP ENTITIES
§ 624.1 Authority, purpose, scope, exemptions and compliance dates.
(a) Authority. This part is issued by the Farm Credit Administration (FCA) under section 4s(e) of the Commodity Exchange Act (7 U.S.C. 6s(e)), section 15F(e) of the Securities Exchange Act of 1934 (15 U.S.C. 78o-10(e)), and sections 4.3, 5.9, 5.17, and 8.32 of the Farm Credit Act (12 U.S.C. 2154, 12 U.S.C. 2243, 12 U.S.C. 2252, and 12 U.S.C. 2279bb-1).
(b) Purpose. Section 4s of the Commodity Exchange Act (7 U.S.C. 6s) and section 15F of the Securities Exchange Act of 1934 (15 U.S.C. 78o-10) require the FCA to establish capital and margin requirements for any System institution, including the Federal Agricultural Mortgage Corporation, chartered under the Farm Credit Act of 1971, as amended (12 U.S.C. 2001 et seq.) that is registered as a swap dealer, major swap participant, security-based swap dealer, or major security-based swap participant with respect to all non-cleared swaps and non-cleared security-based swaps. This regulation implements section 4s of the Commodity Exchange Act and section 15F of the Securities Exchange Act of 1934 by defining terms used in the statute and related terms, establishing capital and margin requirements, and explaining the statutes’ requirements.
(c) Scope. This part establishes minimum capital and margin requirements for each covered swap entity subject to this part with respect to all non-cleared swaps and non-cleared security-based swaps. This part applies to any non-cleared swap or non-cleared security-based swap entered into by a covered swap entity on or after the relevant compliance date set forth in paragraph (e) of this section. Nothing in this part is intended to prevent a covered swap entity from collecting margin in amounts greater than are required under this part.
(d) Exemptions—(1) Swaps. The requirements of this part (except for § 624.12) shall not apply to a non-cleared swap if the counterparty:
(i) Qualifies for an exception from clearing under section 2(h)(7)(A) of the Commodity Exchange Act of 1936 (7 U.S.C. 2(h)(7)(A)) and implementing regulations;
(ii) Qualifies for an exemption from clearing under a rule, regulation, or order that the Commodity Futures Trading Commission issued pursuant to its authority under section 4(c)(1) of the Commodity Exchange Act of 1936 (7 U.S.C. 6(c)(1)) concerning cooperative entities that would otherwise be subject to the requirements of section 2(h)(1)(A) of the Commodity Exchange Act of 1936 (7 U.S.C. 2(h)(1)(A)); or
(iii) Satisfies the criteria in section 2(h)(7)(D) of the Commodity Exchange Act of 1936 (7 U.S.C. 2(h)(7)(D)) and implementing regulations.
(2) Security-based swaps. The requirements of this part (except for § 624.12) shall not apply to a non-cleared security-based swap if the counterparty:
(i) Qualifies for an exception from clearing under section 3C(g)(1) of the Securities Exchange Act of 1934 (15 U.S.C. 78c-3(g)(1)) and implementing regulations; or
(ii) Satisfies the criteria in section 3C(g)(4) of the Securities Exchange Act of 1934 (15 U.S.C. 78c-3(g)(4)) and implementing regulations.
(e) Compliance dates. Covered swap entities shall comply with the minimum margin requirements of this part on or before the following dates for non-cleared swaps and non-cleared security-based swaps entered into on or after the following dates:
(1) September 1, 2016 with respect to the requirements in § 624.3 for initial margin and § 624.4 for variation margin for any non-cleared swaps and non-cleared security-based swaps, where both:
(i) The covered swap entity combined with all its affiliates; and
(ii) Its counterparty combined with all its affiliates, have an average daily aggregate notional amount of non-cleared swaps, non-cleared security-based swaps, foreign exchange forwards and foreign exchange swaps for March, April and May 2016 that exceeds $3 trillion, where such amounts are calculated only for business days; and
(iii) In calculating the amounts in paragraphs (e)(1)(i) and (ii) of this section, an entity shall count the average daily aggregate notional amount of a non-cleared swap, a non-cleared security-based swap, a foreign exchange forward or a foreign exchange swap between the entity and an affiliate only one time, and shall not count a swap or security-based swap that is exempt pursuant to paragraph (d) of this section.
(2) March 1, 2017 with respect to the requirements in § 624.4 for variation margin for any other covered swap entity with respect to non-cleared swaps and non-cleared security-based swaps entered into with any other counterparty.
(3) September 1, 2017 with respect to the requirements in § 624.3 for initial margin for any non-cleared swaps and non-cleared security-based swaps, where both:
(i) The covered swap entity combined with all its affiliates; and
(ii) Its counterparty combined with all its affiliates, have an average daily aggregate notional amount of non-cleared swaps, non-cleared security-based swaps, foreign exchange forwards and foreign exchange swaps for March, April and May 2017 that exceeds $2.25 trillion, where such amounts are calculated only for business days; and
(iii) In calculating the amounts in paragraphs (e)(3)(i) and (ii) of this section, an entity shall count the average daily aggregate notional amount of a non-cleared swap, a non-cleared security-based swap, a foreign exchange forward or a foreign exchange swap between the entity and an affiliate only one time, and shall not count a swap or security-based swap that is exempt pursuant to paragraph (d) of this section.
(4) September 1, 2018 with respect to the requirements in § 624.3 for initial margin for any non-cleared swaps and non-cleared security-based swaps, where both:
(i) The covered swap entity combined with all its affiliates; and
(ii) Its counterparty combined with all its affiliates, have an average daily aggregate notional amount of non-cleared swaps, non-cleared security-based swaps, foreign exchange forwards and foreign exchange swaps for March, April and May 2018 that exceeds $1.5 trillion, where such amounts are calculated only for business days; and
(iii) In calculating the amounts in paragraphs (e)(4)(i) and (ii) of this section, an entity shall count the average daily aggregate notional amount of a non-cleared swap, a non-cleared security-based swap, a foreign exchange forward or a foreign exchange swap between the entity and an affiliate only one time, and shall not count a swap or security-based swap that is exempt pursuant to paragraph (d) of this section.
(5) September 1, 2019 with respect to the requirements in § 624.3 for initial margin for any non-cleared swaps and non-cleared security-based swaps, where both:
(i) The covered swap entity combined with all its affiliates; and
(ii) Its counterparty combined with all its affiliates, have an average daily aggregate notional amount of non-cleared swaps, non-cleared security-based swaps, foreign exchange forwards and foreign exchange swaps for March, April and May 2019 that exceeds $0.75 trillion, where such amounts are calculated only for business days; and
(iii) In calculating the amounts in paragraphs (e)(5)(i) and (ii) of this section, an entity shall count the average daily aggregate notional amount of a non-cleared swap, a non-cleared security-based swap, a foreign exchange forward or a foreign exchange swap between the entity and an affiliate only one time, and shall not count a swap or security-based swap that is exempt pursuant to paragraph (d) of this section.
(6) September 1, 2021 with respect to requirements in § 624.3 for initial margin for any non-cleared swaps and non-cleared security-based swaps, where both:
(i) The covered swap entity combined with all its affiliates; and
(ii) Its counterparty combined with all its affiliates, have an average daily aggregate notional amount of non-cleared swaps, foreign exchange forwards and foreign exchange swaps for March, April and May 2021 that exceeds $50 billion, where such amounts are calculated only for business days; and
(iii) In calculating the amounts in paragraphs (e)(6)(i) and (ii) of this section, an entity shall count the average daily aggregate notional amount of a non-cleared swap, a non-cleared security-based swap, a foreign exchange forward or a foreign exchange swap between the entity and an affiliate only one time, and shall not count a swap or security-based swap that is exempt pursuant to paragraph (d) of this section.
(7) September 1, 2022 with respect to requirements in § 624.3 for initial margin for any other covered swap entity with respect to non-cleared swaps and non-cleared security-based swaps entered into with any other counterparty.
(f) Once a covered swap entity must comply with the margin requirements for non-cleared swaps and non-cleared security-based swaps with respect to a particular counterparty based on the compliance dates in paragraph (e) of this section, the covered swap entity shall remain subject to the requirements of this part with respect to that counterparty.
(g)(1) If a covered swap entity’s counterparty changes its status such that a non-cleared swap or non-cleared security-based swap with that counterparty becomes subject to stricter margin requirements under this part (such as if the counterparty’s status changes from a financial end user without material swaps exposure to a financial end user with material swaps exposure), then the covered swap entity shall comply with the stricter margin requirements for any non-cleared swap or non-cleared security-based swap entered into with that counterparty after the counterparty changes its status.
(2) If a covered swap entity’s counterparty changes its status such that a non-cleared swap or non-cleared security-based swap with that counterparty becomes subject to less strict margin requirements under this part (such as if the counterparty’s status changes from a financial end user with material swaps exposure to a financial end user without material swaps exposure), then the covered swap entity may comply with the less strict margin requirements for any non-cleared swap or non-cleared security-based swap entered into with that counterparty after the counterparty changes its status as well as for any outstanding non-cleared swap or non-cleared security-based swap entered into after the applicable compliance date in paragraph (e) of this section and before the counterparty changed its status.
(h) Legacy swaps. Covered swaps entities are required to comply with the requirements of this subpart for non-cleared swaps and non-cleared security-based swaps entered into on or after the relevant compliance dates for variation margin and for initial margin established in paragraph (e) of this section. Any non-cleared swap or non-cleared security-based swap entered into before such relevant date shall remain outside the scope of this subpart if amendments are made to the non-cleared swap or non-cleared security-based swap by method of adherence to a protocol, other amendment of a contract or confirmation, or execution of a new contract or confirmation in replacement of and immediately upon termination of an existing contract or confirmation, as follows:
(1) Amendments to the non-cleared swap or non-cleared security-based swap solely to comply with the requirements of 12 CFR part 47, 12 CFR part 252 subpart I, or 12 CFR part 382, as applicable;
(2) The non-cleared swap or non-cleared security-based swap was amended under the following conditions:
(i) The swap was originally entered into before the relevant compliance date established in paragraph (e) of this section and one party to the swap booked it at, or otherwise held it at, an entity (including a branch or other authorized form of establishment) located in the United Kingdom;
(ii) The entity in the United Kingdom subsequently arranged to amend the swap, solely for the purpose of transferring it to an affiliate, or a branch or other authorized form of establishment, located in any European Union member state or the United States, in connection with the entity’s planning for or response to the event described in paragraph (h)(2)(iii) of this section, and the transferee is:
(A) A covered swap entity, or
(B) A covered swap entity’s counterparty to the swap, and the counterparty represents to the covered swap entity that the counterparty performed the transfer in compliance with the requirements of paragraphs (h)(2)(i) and (ii) of this section;
(iii) The law of the European Union ceases to apply to the United Kingdom pursuant to Article 50(3) of the Treaty on European Union, without conclusion of a Withdrawal Agreement between the United Kingdom and the European Union pursuant to Article 50(2);
(iv) The amendments do not modify any of the following: The payment amount calculation methods, the maturity date, or the notional amount of the swap;
(v) The amendments cause the transfer to take effect on or after the date of the event described in paragraph (h)(2)(iii) of this section transpires; and
(vi) The amendments cause the transfer to take effect by the later of:
(A) The date that is one year after the date of the event described in paragraph (h)(2)(iii) of this section; or
(B) Such other date permitted by transitional provisions under Article 35 of Commission Delegated Regulation (E.U.) No. 2016/2251, as amended.
(3)(i) Amendments to the non-cleared swap or non-cleared security-based swap that are made solely to accommodate the replacement of:
(A) An interbank offered rate (IBOR) including, but not limited to, the London Interbank Offered Rate (LIBOR), the Tokyo Interbank Offered Rate (TIBOR), the Bank Bill Swap Rate (BBSW), the Singapore Interbank Offered Rate (SIBOR), the Canadian Dollar Offered Rate (CDOR), Euro Interbank Offered Rate (EURIBOR), and the Hong Kong Interbank Offered Rate (HIBOR);
(B) Any other interest rate that a covered swap entity reasonably expects to be replaced or discontinued or reasonably determines has lost its relevance as a reliable benchmark due to a significant impairment; or
(C) Any other interest rate that succeeds a rate referenced in paragraph (h)(3)(i)(A) or (B) of this section. An amendment made under this paragraph (h)(3)(i)(C) could be one of multiple amendments made under this paragraph (h)(3)(i)(C). For example, an amendment could replace an IBOR with a temporary interest rate and later replace the temporary interest rate with a permanent interest rate.
(ii) Amendments to accommodate replacement of an interest rate described in paragraph (h)(3)(i) of this section may also incorporate spreads or other adjustments to the replacement interest rate and make other necessary technical changes to operationalize the determination of payments or other exchanges of economic value using the replacement interest rate, including changes to determination dates, calculation agents, and payment dates. The changes may not extend the maturity or increase the total effective notional amount of the non-cleared swap or non-cleared security-based swap beyond what is necessary to accommodate the differences between market conventions for an outgoing interest rate and its replacement.
(iii) Amendments to accommodate replacement of an interest rate described in paragraph (h)(3)(i) of this section may also be effectuated through portfolio compression between or among covered swap entities and their counterparties. Portfolio compression under this paragraph is not subject to the limitations in paragraph (h)(4) of this section, but any non-cleared swap[s] or non-cleared security-based swaps resulting from the portfolio compression may not extend the maturity or increase the total effective notional amount more than what is necessary to accommodate the differences between market conventions for an outgoing interest rate and its replacement.
(4) Amendments solely to reduce risk or remain risk-neutral through portfolio compression between or among covered swap entities and their counterparties, as long as any non-cleared swaps or non-cleared security-based swaps resulting from the portfolio compression do not:
(i) Exceed the sum of the total effective notional amounts of all of the swaps that were submitted to the compression exercise that had the same or longer remaining maturity as the resulting swap; or
(ii) Exceed the longest remaining maturity of all the swaps submitted to the compression exercise.
(5) The non-cleared swap or non-cleared security-based swap was amended solely for one of the following reasons:
(i) To reflect technical changes, such as addresses, identities of parties for delivery of formal notices, and other administrative or operational provisions as long as they do not alter the non-cleared swap’s or non-cleared security-based swap’s underlying asset or reference, the remaining maturity, or the total effective notional amount; or
(ii) To reduce the notional amount, so long as:
(A) All payment obligations attached to the total effective notional amount being eliminated as a result of the amendment are fully terminated; or
(B) All payment obligations attached to the total effective notional amount being eliminated as a result of the amendment are fully novated to a third party, who complies with applicable margin rules for the novated portion upon the transfer.
§ 624.2 Definitions.
Affiliate. A company is an affiliate of another company if:
(1) Either company consolidates the other on financial statements prepared in accordance with U.S. Generally Accepted Accounting Principles, the International Financial Reporting Standards, or other similar standards;
(2) Both companies are consolidated with a third company on a financial statement prepared in accordance with such principles or standards;
(3) For a company that is not subject to such principles or standards, if consolidation as described in paragraph (1) or (2) of this definition would have occurred if such principles or standards had applied; or
(4) The FCA has determined that a company is an affiliate of another company, based on FCA’s conclusion that either company provides significant support to, or is materially subject to the risks or losses of, the other company.
Bank holding company has the meaning specified in section 2 of the Bank Holding Company Act of 1956 (12 U.S.C. 1841).
Broker has the meaning specified in section 3(a)(4) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(4)).
Business day means any day other than a Saturday, Sunday, or legal holiday.
Clearing agency has the meaning specified in section 3(a)(23) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(23)).
Company means a corporation, partnership, limited liability company, business trust, special purpose entity, association, or similar organization.
Counterparty means, with respect to any non-cleared swap or non-cleared security-based swap to which a person is a party, each other party to such non-cleared swap or non-cleared security-based swap.
Covered swap entity means any institution chartered under the Farm Credit Act of 1971, as amended (12 U.S.C. 2001 et seq.) that is a swap entity, or any other entity that the FCA determines.
Cross-currency swap means a swap in which one party exchanges with another party principal and interest rate payments in one currency for principal and interest rate payments in another currency, and the exchange of principal occurs on the date the swap is entered into, with a reversal of the exchange of principal at a later date that is agreed upon when the swap is entered into.
Currency of settlement means a currency in which a party has agreed to discharge payment obligations related to a non-cleared swap, a non-cleared security-based swap, a group of non-cleared swaps, or a group of non-cleared security-based swaps subject to a master agreement at the regularly occurring dates on which such payments are due in the ordinary course.
Day of execution means the calendar day at the time the parties enter into a non-cleared swap or non-cleared security-based swap, provided:
(1) If each party is in a different calendar day at the time the parties enter into the non-cleared swap or non-cleared security-based swap, the day of execution is deemed the latter of the two dates; and
(2) If a non-cleared swap or non-cleared security-based swap is:
(i) Entered into after 4:00 p.m. in the location of a party; or
(ii) Entered into on a day that is not a business day in the location of a party, then the non-cleared swap or non-cleared security-based swap is deemed to have been entered into on the immediately succeeding day that is a business day for both parties, and both parties shall determine the day of execution with reference to that business day.
Dealer has the meaning specified in section 3(a)(5) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(5)).
Depository institution has the meaning specified in section 3(c) of the Federal Deposit Insurance Act (12 U.S.C. 1813(c)).
Derivatives clearing organization has the meaning specified in section 1a(15) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(15)).
Eligible collateral means collateral described in § 624.6.
Eligible master netting agreement means a written, legally enforceable agreement provided that:
(1) The agreement creates a single legal obligation for all individual transactions covered by the agreement upon an event of default following any stay permitted by paragraph (2) of this definition, including upon an event of receivership, conservatorship, insolvency, liquidation, or similar proceeding, of the counterparty;
(2) The agreement provides the covered swap entity the right to accelerate, terminate, and close-out on a net basis all transactions under the agreement and to liquidate or set-off collateral promptly upon an event of default, including upon an event of receivership, conservatorship, insolvency, liquidation, or similar proceeding, of the counterparty, provided that, in any such case,
(i) Any exercise of rights under the agreement will not be stayed or avoided under applicable law in the relevant jurisdictions, other than:
(A) In receivership, conservatorship, or resolution under the Federal Deposit Insurance Act (12 U.S.C. 1811 et seq.), Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5381 et seq.), the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended (12 U.S.C. 4617), or the Farm Credit Act of 1971, as amended (12 U.S.C. 2183 and 2279cc), or laws of foreign jurisdictions that are substantially similar to the U.S. laws referenced in this paragraph (2)(i)(A) in order to facilitate the orderly resolution of the defaulting counterparty; or
(B) Where the agreement is subject by its terms to, or incorporates, any of the laws referenced in paragraph (2)(i)(A) of this definition; and
(ii) The agreement may limit the right to accelerate, terminate, and close-out on a net basis all transactions under the agreement and to liquidate or set-off collateral promptly upon an event of default of the counterparty to the extent necessary for the counterparty to comply with the requirements of part 47, subpart I of part 252 or part 382 of title 12, as applicable;
(3) The agreement does not contain a walkaway clause (that is, a provision that permits a non-defaulting counterparty to make a lower payment than it otherwise would make under the agreement, or no payment at all, to a defaulter or the estate of a defaulter, even if the defaulter or the estate of the defaulter is a net creditor under the agreement); and
(4) A covered swap entity that relies on the agreement for purposes of calculating the margin required by this part must:
(i) Conduct sufficient legal review to conclude with a well-founded basis (and maintain sufficient written documentation of that legal review) that:
(A) The agreement meets the requirements of paragraph (2) of this definition; and
(B) In the event of a legal challenge (including one resulting from default or from receivership, conservatorship, insolvency, liquidation, or similar proceeding), the relevant court and administrative authorities would find the agreement to be legal, valid, binding, and enforceable under the law of the relevant jurisdictions; and
(ii) Establish and maintain written procedures to monitor possible changes in relevant law and to ensure that the agreement continues to satisfy the requirements of this definition.
Financial end user means:
(1) Any counterparty that is not a swap entity and that is:
(i) A bank holding company or an affiliate thereof; a savings and loan holding company; a U.S. intermediate holding company established or designated for purposes of compliance with 12 CFR 252.153; or a nonbank financial institution supervised by the Board of Governors of the Federal Reserve System under Title I of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5323);
(ii) A depository institution; a foreign bank; a Federal credit union or State credit union as defined in section 2 of the Federal Credit Union Act (12 U.S.C. 1752(1) & (6)); an institution that functions solely in a trust or fiduciary capacity as described in section 2(c)(2)(D) of the Bank Holding Company Act (12 U.S.C. 1841(c)(2)(D)); an industrial loan company, an industrial bank, or other similar institution described in section 2(c)(2)(H) of the Bank Holding Company Act (12 U.S.C. 1841(c)(2)(H));
(iii) An entity that is state-licensed or registered as:
(A) A credit or lending entity, including a finance company; money lender; installment lender; consumer lender or lending company; mortgage lender, broker, or bank; motor vehicle title pledge lender; payday or deferred deposit lender; premium finance company; commercial finance or lending company; or commercial mortgage company; except entities registered or licensed solely on account of financing the entity’s direct sales of goods or services to customers;
(B) A money services business, including a check casher; money transmitter; currency dealer or exchange; or money order or traveler’s check issuer;
(iv) A regulated entity as defined in section 1303(20) of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended (12 U.S.C. 4502(20)) or any entity for which the Federal Housing Finance Agency or its successor is the primary federal regulator;
(v) Any institution chartered in accordance with the Farm Credit Act of 1971, as amended, 12 U.S.C. 2001 et seq., that is regulated by the Farm Credit Administration;
(vi) A securities holding company; a broker or dealer; an investment adviser as defined in section 202(a) of the Investment Advisers Act of 1940 (15 U.S.C. 80b-2(a)); an investment company registered with the U.S. Securities and Exchange Commission under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.); or a company that has elected to be regulated as a business development company pursuant to section 54(a) of the Investment Company Act of 1940 (15 U.S.C. 80a-53(a));
(vii) A private fund as defined in section 202(a) of the Investment Advisers Act of 1940 (15 U.S.C. 80-b-2(a)); an entity that would be an investment company under section 3 of the Investment Company Act of 1940 (15 U.S.C. 80a-3) but for section 3(c)(5)(C); or an entity that is deemed not to be an investment company under section 3 of the Investment Company Act of 1940 pursuant to Investment Company Act Rule 3a-7 (17 CFR 270.3a-7) of the U.S. Securities and Exchange Commission;
(viii) A commodity pool, a commodity pool operator, or a commodity trading advisor as defined, respectively, in section 1a(10), 1a(11), and 1a(12) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(10), 1a(11), and 1a(12)); a floor broker, a floor trader, or introducing broker as defined, respectively, in 1a(22), 1a(23) and 1a(31) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(22), 1a(23), and 1a(31)); or a futures commission merchant as defined in 1a(28) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(28));
(ix) An employee benefit plan as defined in paragraphs (3) and (32) of section 3 of the Employee Retirement Income and Security Act of 1974 (29 U.S.C. 1002);
(x) An entity that is organized as an insurance company, primarily engaged in writing insurance or reinsuring risks underwritten by insurance companies, or is subject to supervision as such by a State insurance regulator or foreign insurance regulator;
(xi) An entity, person or arrangement that is, or holds itself out as being, an entity, person, or arrangement that raises money from investors, accepts money from clients, or uses its own money primarily for the purpose of investing or trading or facilitating the investing or trading in loans, securities, swaps, funds or other assets for resale or other disposition or otherwise trading in loans, securities, swaps, funds or other assets; or
(xii) An entity that would be a financial end user described in paragraph (1) of this definition or a swap entity, if it were organized under the laws of the United States or any State thereof.
(2) The term “financial end user” does not include any counterparty that is:
(i) A sovereign entity;
(ii) A multilateral development bank;
(iii) The Bank for International Settlements;
(iv) An entity that is exempt from the definition of financial entity pursuant to section 2(h)(7)(C)(iii) of the Commodity Exchange Act of 1936 (7 U.S.C. 2(h)(7)(C)(iii)) and implementing regulations; or
(v) An affiliate that qualifies for the exemption from clearing pursuant to section 2(h)(7)(D) of the Commodity Exchange Act of 1936 (7 U.S.C. 2(h)(7)(D)) or section 3C(g)(4) of the Securities Exchange Act of 1934 (15 U.S.C. 78c-3(g)(4)) and implementing regulations.
Foreign bank means an organization that is organized under the laws of a foreign country and that engages directly in the business of banking outside the United States.
Foreign exchange forward has the meaning specified in section 1a(24) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(24)).
Foreign exchange swap has the meaning specified in section 1a(25) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(25)).
Initial margin means the collateral as calculated in accordance with § 624.8 that is posted or collected in connection with a non-cleared swap or non-cleared security-based swap.
Initial margin collection amount means:
(1) In the case of a covered swap entity that does not use an initial margin model, the amount of initial margin with respect to a non-cleared swap or non-cleared security-based swap that is required under appendix A of this part; and
(2) In the case of a covered swap entity that uses an initial margin model pursuant to § 624.8, the amount of initial margin with respect to a non-cleared swap or non-cleared security-based swap that is required under the initial margin model.
Initial margin model means an internal risk management model that:
(1) Has been developed and designed to identify an appropriate, risk-based amount of initial margin that the covered swap entity must collect with respect to one or more non-cleared swaps or non-cleared security-based swaps to which the covered swap entity is a party; and
(2) Has been approved by the FCA pursuant to § 624.8.
Initial margin threshold amount means an aggregate credit exposure of $50 million resulting from all non-cleared swaps and non-cleared security-based swaps between a covered swap entity and its affiliates, and a counterparty and its affiliates. For purposes of this calculation, an entity shall not count a swap or security-based swap that is exempt pursuant to § 624.1(d).
Investment grade means the issuer of a security has an adequate capacity to meet financial commitments under the security for the projected life of the asset or exposure. An issuer has an adequate capacity to meet financial commitments if the risk of default by the obligor is low and the full and timely repayment of principal and interest is expected.
Major currency means:
(1) United States Dollar (USD);
(2) Canadian Dollar (CAD);
(3) Euro (EUR);
(4) United Kingdom Pound (GBP);
(5) Japanese Yen (JPY);
(6) Swiss Franc (CHF);
(7) New Zealand Dollar (NZD);
(8) Australian Dollar (AUD);
(9) Swedish Kronor (SEK);
(10) Danish Kroner (DKK);
(11) Norwegian Krone (NOK); or
(12) Any other currency as determined by the FCA.
Margin means initial margin and variation margin.
Market intermediary means a securities holding company; a broker or dealer; a futures commission merchant as defined in 1a(28) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(28)); a swap dealer as defined in section 1a(49) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(49)); or a security-based swap dealer as defined in section 3(a)(71) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(71)).
Material swaps exposure for an entity means that an entity and its affiliates have an average daily aggregate notional amount of non-cleared swaps, non-cleared security-based swaps, foreign exchange forwards, and foreign exchange swaps with all counterparties for June, July, and August of the previous calendar year that exceeds $8 billion, where such amount is calculated only for business days. An entity shall count the average daily aggregate notional amount of a non-cleared swap, a non-cleared security-based swap, a foreign exchange forward or a foreign exchange swap between the entity and an affiliate only one time. For purposes of this calculation, an entity shall not count a swap or security-based swap that is exempt pursuant to § 624.1(d).
Multilateral development bank means the International Bank for Reconstruction and Development, the Multilateral Investment Guarantee Agency, the International Finance Corporation, the Inter-American Development Bank, the Asian Development Bank, the African Development Bank, the European Bank for Reconstruction and Development, the European Investment Bank, the European Investment Fund, the Nordic Investment Bank, the Caribbean Development Bank, the Islamic Development Bank, the Council of Europe Development Bank, and any other entity that provides financing for national or regional development in which the U.S. government is a shareholder or contributing member or which the FCA determines poses comparable credit risk.
Non-cleared security-based swap means a security-based swap that is not, directly or indirectly, submitted to and cleared by a clearing agency registered with the U.S. Securities and Exchange Commission pursuant to section 17A of the Securities Exchange Act of 1934 (15 U.S.C. 78q-1) or by a clearing agency that the U.S. Securities and Exchange Commission has exempted from registration by rule or order pursuant to section 17A of the Securities Exchange Act of 1934 (15 U.S.C. 78q-1).
Non-cleared swap means a swap that is not cleared by a derivatives clearing organization registered with the Commodity Futures Trading Commission pursuant to section 5b(a) of the Commodity Exchange Act of 1936 (7 U.S.C. 7a-1(a)) or by a clearing organization that the Commodity Futures Trading Commission has exempted from registration by rule or order pursuant to section 5b(h) of the Commodity Exchange Act of 1936 (7 U.S.C. 7a-1(h)).
Prudential regulator has the meaning specified in section 1a(39) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(39)).
Savings and loan holding company has the meaning specified in section 10(n) of the Home Owners’ Loan Act (12 U.S.C. 1467a(n)).
Securities holding company has the meaning specified in section 618 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 1850a).
Security-based swap has the meaning specified in section 3(a)(68) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(68)).
Sovereign entity means a central government (including the U.S. government) or an agency, department, ministry, or central bank of a central government.
State means any State, commonwealth, territory, or possession of the United States, the District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, American Samoa, Guam, or the United States Virgin Islands.
Subsidiary. A company is a subsidiary of another company if:
(1) The company is consolidated by the other company on financial statements prepared in accordance with U.S. Generally Accepted Accounting Principles, the International Financial Reporting Standards, or other similar standards;
(2) For a company that is not subject to such principles or standards, if consolidation as described in paragraph (1) of this definition would have occurred if such principles or standards had applied; or
(3) The FCA has determined that the company is a subsidiary of another company, based on FCA’s conclusion that either company provides significant support to, or is materially subject to the risks of loss of, the other company.
Swap has the meaning specified in section 1a(47) of the Commodity Exchange Act of 1936 (7 U.S.C. 1a(47)).
Swap entity means a person that is registered with the Commodity Futures Trading Commission as a swap dealer or major swap participant pursuant to the Commodity Exchange Act of 1936 (7 U.S.C. 1 et seq.), or a person that is registered with the U.S. Securities and Exchange Commission as a security-based swap dealer or a major security-based swap participant pursuant to the Securities Exchange Act of 1934 (15 U.S.C. 78a et seq.).
U.S. Government-sponsored enterprise means an entity established or chartered by the U.S. government to serve public purposes specified by federal statute but whose debt obligations are not explicitly guaranteed by the full faith and credit of the U.S. government.
Variation margin means collateral provided by one party to its counterparty to meet the performance of its obligations under one or more non-cleared swaps or non-cleared security-based swaps between the parties as a result of a change in value of such obligations since the last time such collateral was provided.
Variation margin amount means the cumulative mark-to-market change in value to a covered swap entity of a non-cleared swap or non-cleared security-based swap, as measured from the date it is entered into (or, in the case of a non-cleared swap or non-cleared security-based swap that has a positive or negative value to a covered swap entity on the date it is entered into, such positive or negative value plus any cumulative mark-to-market change in value to the covered swap entity of a non-cleared swap or non-cleared security-based swap after such date), less the value of all variation margin previously collected, plus the value of all variation margin previously posted with respect to such non-cleared swap or non-cleared security-based swap.
§ 624.3 Initial margin.
(a) Collection of margin. A covered swap entity shall collect initial margin with respect to any non-cleared swap or non-cleared security-based swap from a counterparty that is a financial end user with material swaps exposure or that is a swap entity in an amount that is no less than the greater of:
(1) Zero; or
(2) The initial margin collection amount for such non-cleared swap or non-cleared security-based swap less the initial margin threshold amount (not including any portion of the initial margin threshold amount already applied by the covered swap entity or its affiliates to other non-cleared swaps or non-cleared security-based swaps with the counterparty or its affiliates), as applicable.
(b) Posting of margin. A covered swap entity shall post initial margin with respect to any non-cleared swap or non-cleared security-based swap to a counterparty that is a financial end user with material swaps exposure. Such initial margin shall be in an amount at least as large as the covered swap entity would be required to collect under paragraph (a) of this section if it were in the place of the counterparty.
(c) Timing. A covered swap entity shall comply with the initial margin requirements described in paragraphs (a) and (b) of this section on each business day, for a period beginning on or before the business day following the day of execution and ending on the date the non-cleared swap or non-cleared security-based swap terminates or expires.
(d) Other counterparties. A covered swap entity is not required to collect or post initial margin with respect to any non-cleared swap or non-cleared security-based swap described in § 624.1(d). For any other non-cleared swap or non-cleared security-based swap between a covered swap entity and a counterparty that is neither a financial end user with a material swaps exposure nor a swap entity, the covered swap entity shall collect initial margin at such times and in such forms and such amounts (if any), that the covered swap entity determines appropriately addresses the credit risk posed by the counterparty and the risks of such non-cleared swap or non-cleared security-based swap.
§ 624.4 Variation margin.
(a) General. After the date on which a covered swap entity enters into a non-cleared swap or non-cleared security-based swap with a swap entity or financial end user, the covered swap entity shall collect variation margin equal to the variation margin amount from the counterparty to such non-cleared swap or non-cleared security-based swap when the amount is positive and post variation margin equal to the variation margin amount to the counterparty to such non-cleared swap or non-cleared security-based swap when the amount is negative.
(b) Timing. A covered swap entity shall comply with the variation margin requirements described in paragraph (a) of this section on each business day, for a period beginning on or before the business day following the day of execution and ending on the date the non-cleared swap or non-cleared security based swap terminates or expires.
(c) Other counterparties. A covered swap entity is not required to collect or post variation margin with respect to any non-cleared swap or non-cleared security-based swap described in § 624.1(d). For any other non-cleared swap or non-cleared security-based swap between a covered swap entity and a counterparty that is neither a financial end user nor a swap entity, the covered swap entity shall collect variation margin at such times and in such forms and such amounts (if any), that the covered swap entity determines appropriately addresses the credit risk posed by the counterparty and the risks of such non-cleared swap or non-cleared security-based swap.
§ 624.5 Netting arrangements, minimum transfer amount and satisfaction of collecting and posting requirements.
(a) Netting arrangements. (1) For purposes of calculating and complying with the initial margin requirements of § 624.3 using an initial margin model as described in § 624.8, or with the variation margin requirements of § 624.4, a covered swap entity may net non-cleared swaps or non-cleared security-based swaps in accordance with this subsection.
(2) To the extent that one or more non-cleared swaps or non-cleared security-based swaps are executed pursuant to an eligible master netting agreement between a covered swap entity and its counterparty that is a swap entity or financial end user, a covered swap entity may calculate and comply with the applicable requirements of this part on an aggregate net basis with respect to all non-cleared swaps and non-cleared security-based swaps governed by such agreement, subject to paragraph (a)(3) of this section.
(3)(i) Except as permitted in paragraph (a)(3)(ii) of this section, if an eligible master netting agreement covers non-cleared swaps and non-cleared security-based swaps entered into on or after the applicable compliance date set forth in § 624.1(e) or (g), all the non-cleared swaps and non-cleared security-based swaps covered by that agreement are subject to the requirements of this part and included in the aggregate netting portfolio for the purposes of calculating and complying with the margin requirements of this part.
(ii) An eligible master netting agreement may identify one or more separate netting portfolios that independently meet the requirements in paragraph (1) of the definition of “Eligible master netting agreement” in § 624.2 and to which collection and posting of margin applies on an aggregate net basis separate from and exclusive of any other non-cleared swaps or non-cleared security-based swaps covered by the eligible master netting agreement. Any such netting portfolio that contains any non-cleared swap or non-cleared security-based swap entered into on or after the applicable compliance date set forth in § 624.1(e) or (g) is subject to the requirements of this part. Any such netting portfolio that contains only non-cleared swaps or non-cleared security-based swaps entered into before the applicable compliance date is not subject to the requirements of this part.
(4) If a covered swap entity cannot conclude after sufficient legal review with a well-founded basis that the netting agreement described in this section meets the definition of eligible master netting agreement set forth in § 624.2, the covered swap entity must treat the non-cleared swaps and non-cleared security based swaps covered by the agreement on a gross basis for the purposes of calculating and complying with the requirements of this part to collect margin, but the covered swap entity may net those non-cleared swaps and non-cleared security-based swaps in accordance with paragraphs (a)(1) through (3) of this section for the purposes of calculating and complying with the requirements of this part to post margin.
(b) Minimum transfer amount. Notwithstanding § 624.3 or § 624.4, a covered swap entity is not required to collect or post margin pursuant to this part with respect to a particular counterparty unless and until the combined amount of initial margin and variation margin that is required pursuant to this part to be collected or posted and that has not yet been collected or posted with respect to the counterparty is greater than $500,000.
(c) Satisfaction of collecting and posting requirements. A covered swap entity shall not be deemed to have violated its obligation to collect or post margin from or to a counterparty under § 624.3, § 624.4, or § 624.6(e) if:
(1) The counterparty has refused or otherwise failed to provide or accept the required margin to or from the covered swap entity; and
(2) The covered swap entity has:
(i) Made the necessary efforts to collect or post the required margin, including the timely initiation and continued pursuit of formal dispute resolution mechanisms, or has otherwise demonstrated upon request to the satisfaction of the FCA that it has made appropriate efforts to collect or post the required margin; or
(ii) Commenced termination of the non-cleared swap or non-cleared security-based swap with the counterparty promptly following the applicable cure period and notification requirements.
§ 624.6 Eligible collateral.
(a) Non-cleared swaps and non-cleared security-based swaps with a swap entity. For a non-cleared swap or non-cleared security-based swap with a swap entity, a covered swap entity shall collect initial margin and variation margin required pursuant to this part solely in the form of the following types of collateral:
(1) Immediately available cash funds that are denominated in:
(i) U.S. dollars or another major currency; or
(ii) The currency of settlement for the non-cleared swap or non-cleared security-based swap;
(2) With respect to initial margin only:
(i) A security that is issued by, or unconditionally guaranteed as to the timely payment of principal and interest by, the U.S. Department of the Treasury;
(ii) A security that is issued by, or unconditionally guaranteed as to the timely payment of principal and interest by, a U.S. government agency (other than the U.S. Department of Treasury) whose obligations are fully guaranteed by the full faith and credit of the United States government;
(iii) A security that is issued by, or fully guaranteed as to the payment of principal and interest by, the European Central Bank or a sovereign entity that is assigned no higher than a 20 percent risk weight under the capital rules applicable to the covered swap entity as set forth in § 624.12;
(iv) A publicly traded debt security issued by, or an asset-backed security fully guaranteed as to the payment of principal and interest by, a U.S. Government-sponsored enterprise that is operating with capital support or another form of direct financial assistance received from the U.S. government that enables the repayments of the U.S. Government-sponsored enterprise’s eligible securities;
(v) A publicly traded debt security that meets the terms of investment grade as defined in § 624.2 and is issued by a U.S. Government-sponsored enterprise not operating with capital support or another form of direct financial assistance from the U.S. government, and is not an asset-backed security;
(vi) A security that is issued by, or fully guaranteed as to the payment of principal and interest by, the Bank for International Settlements, the International Monetary Fund, or a multilateral development bank;
(vii) A security solely in the form of:
(A) Publicly traded debt not otherwise described in paragraph (a)(2) of this section that meets the terms of investment grade as defined in § 624.2 and is not an asset-backed security;
(B) Publicly traded common equity that is included in:
(1) The Standard & Poor’s Composite 1500 Index or any other similar index of liquid and readily marketable equity securities as determined by the FCA; or
(2) An index that a covered swap entity’s supervisor in a foreign jurisdiction recognizes for purposes of including publicly traded common equity as initial margin under applicable regulatory policy, if held in that foreign jurisdiction;
(viii) Securities in the form of redeemable securities in a pooled investment fund representing the security-holder’s proportional interest in the fund’s net assets and that are issued and redeemed only on the basis of the market value of the fund’s net assets prepared each business day after the security-holder makes its investment commitment or redemption request to the fund, if:
(A) The fund’s investments are limited to the following:
(1) Securities that are issued by, or unconditionally guaranteed as to the timely payment of principal and interest by, the U.S. Department of the Treasury, and immediately-available cash funds denominated in U.S. dollars; or
(2) Securities denominated in a common currency and issued by, or fully guaranteed as to the payment of principal and interest by, the European Central Bank or a sovereign entity that is assigned no higher than a 20 percent risk weight under the capital rules applicable to the covered swap entity as set forth in § 624.12, and immediately-available cash funds denominated in the same currency; and
(B) Assets of the fund may not be transferred through securities lending, securities borrowing, repurchase agreements, reverse repurchase agreements, or other means that involve the fund having rights to acquire the same or similar assets from the transferee; or
(ix) Gold.
(b) Non-cleared swaps and non-cleared security-based swaps with a financial end user. For a non-cleared swap or non-cleared security-based swap with a financial end user, a covered swap entity shall collect and post initial margin and variation margin required pursuant to this part solely in the form of the following types of collateral:
(1) Immediately available cash funds that are denominated in:
(i) U.S. dollars or another major currency; or
(ii) The currency of settlement for the non-cleared swap or non-cleared security-based swap;
(2) A security that is issued by, or unconditionally guaranteed as to the timely payment of principal and interest by, the U.S. Department of the Treasury;
(3) A security that is issued by, or unconditionally guaranteed as to the timely payment of principal and interest by, a U.S. government agency (other than the U.S. Department of Treasury) whose obligations are fully guaranteed by the full faith and credit of the United States government;
(4) A security that is issued by, or fully guaranteed as to the payment of principal and interest by, the European Central Bank or a sovereign entity that is assigned no higher than a 20 percent risk weight under the capital rules applicable to the covered swap entity as set forth in § 624.12;
(5) A publicly traded debt security issued by, or an asset-backed security fully guaranteed as to the payment of principal and interest by, a U.S. Government-sponsored enterprise that is operating with capital support or another form of direct financial assistance received from the U.S. government that enables the repayments of the U.S. Government-sponsored enterprise’s eligible securities;
(6) A publicly traded debt security that meets the terms of investment grade as defined in § 624.2 and is issued by a U.S. Government-sponsored enterprise not operating with capital support or another form of direct financial assistance from the U.S. government, and is not an asset-backed security;
(7) A security that is issued by, or fully guaranteed as to the payment of principal and interest by, the Bank for International Settlements, the International Monetary Fund, or a multilateral development bank;
(8) A security solely in the form of:
(i) Publicly traded debt not otherwise described in this paragraph (b) that meets the terms of investment grade as defined in § 624.2 and is not an asset-backed security;
(ii) Publicly traded common equity that is included in:
(A) The Standard & Poor’s Composite 1500 Index or any other similar index of liquid and readily marketable equity securities as determined by the FCA; or
(B) An index that a covered swap entity’s supervisor in a foreign jurisdiction recognizes for purposes of including publicly traded common equity as initial margin under applicable regulatory policy, if held in that foreign jurisdiction;
(9) Securities in the form of redeemable securities in a pooled investment fund representing the security-holder’s proportional interest in the fund’s net assets and that are issued and redeemed only on the basis of the market value of the fund’s net assets prepared each business day after the security-holder makes its investment commitment or redemption request to the fund, if:
(i) The fund’s investments are limited to the following:
(A) Securities that are issued by, or unconditionally guaranteed as to the timely payment of principal and interest by, the U.S. Department of the Treasury, and immediately-available cash funds denominated in U.S. dollars; or
(B) Securities denominated in a common currency and issued by, or fully guaranteed as to the payment of principal and interest by, the European Central Bank or a sovereign entity that is assigned no higher than a 20 percent risk weight under the capital rules applicable to the covered swap entity as set forth in § 624.12, and immediately-available cash funds denominated in the same currency; and
(ii) Assets of the fund may not be transferred through securities lending, securities borrowing, repurchase agreements, reverse repurchase agreements, or other means that involve the fund having rights to acquire the same or similar assets from the transferee; or
(10) Gold.
(c)(1) The value of any eligible collateral collected or posted to satisfy margin requirements pursuant to this part is subject to the sum of the following discounts, as applicable:
(i) An 8 percent discount for variation margin collateral denominated in a currency that is not the currency of settlement for the non-cleared swap or non-cleared security-based swap, except for immediately available cash funds denominated in U.S. dollars or another major currency;
(ii) An 8 percent discount for initial margin collateral denominated in a currency that is not the currency of settlement for the non-cleared swap or non-cleared security-based swap, except for eligible types of collateral denominated in a single termination currency designated as payable to the non-posting counterparty as part of the eligible master netting agreement; and
(iii) For variation and initial margin non-cash collateral, the discounts described in appendix B of this part.
(2) The value of variation margin or initial margin collateral is computed as the product of the cash or market value of the eligible collateral asset times one minus the applicable discounts pursuant to paragraph (c)(1) of this section expressed in percentage terms. The total value of all variation margin or initial margin collateral is calculated as the sum of those values for each eligible collateral asset.
(d) Notwithstanding paragraphs (a) and (b) of this section, eligible collateral for initial margin and variation margin required by this part does not include a security issued by:
(1) The party or an affiliate of the party pledging such collateral;
(2) A bank holding company, a savings and loan holding company, a U.S. intermediate holding company established or designated for purposes of compliance with 12 CFR 252.153, a foreign bank, a depository institution, a market intermediary, a company that would be any of the foregoing if it were organized under the laws of the United States or any State, or an affiliate of any of the foregoing institutions; or
(3) A nonbank financial institution supervised by the Board of Governors of the Federal Reserve System under Title I of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5323).
(e) A covered swap entity shall monitor the market value and eligibility of all collateral collected and posted to satisfy the minimum initial margin and minimum variation margin requirements of this part. To the extent that the market value of such collateral has declined, the covered swap entity shall promptly collect or post such additional eligible collateral as is necessary to maintain compliance with the margin requirements of this part. To the extent that the collateral is no longer eligible, the covered swap entity shall promptly collect or post sufficient eligible replacement collateral to comply with the margin requirements of this part.
(f) A covered swap entity may collect or post initial margin and variation margin that is required by § 624.3(d) or § 624.4(c) or that is not required pursuant to this part in any form of collateral.
§ 624.7 Segregation of collateral.
(a) A covered swap entity that posts any collateral other than for variation margin with respect to a non-cleared swap or a non-cleared security-based swap shall require that all funds or other property other than variation margin provided by the covered swap entity be held by one or more custodians that are not the covered swap entity or counterparty and not affiliates of the covered swap entity or the counterparty.
(b) A covered swap entity that collects initial margin required by § 624.3(a) with respect to a non-cleared swap or a non-cleared security-based swap shall require that such initial margin be held by one or more custodians that are not the covered swap entity or counterparty and not affiliates of the covered swap entity or the counterparty.
(c) For purposes of paragraphs (a) and (b) of this section, the custodian must act pursuant to a custody agreement that:
(1) Prohibits the custodian from rehypothecating, repledging, reusing, or otherwise transferring (through securities lending, securities borrowing, repurchase agreement, reverse repurchase agreement or other means) the collateral held by the custodian, except that cash collateral may be held in a general deposit account with the custodian if the funds in the account are used to purchase an asset described in § 624.6(a)(2) or (b), such asset is held in compliance with this § 624.7, and such purchase takes place within a time period reasonably necessary to consummate such purchase after the cash collateral is posted as initial margin; and
(2) Is a legal, valid, binding, and enforceable agreement under the laws of all relevant jurisdictions, including in the event of bankruptcy, insolvency, or a similar proceeding.
(d) Notwithstanding paragraph (c)(1) of this section, a custody agreement may permit the posting party to substitute or direct any reinvestment of posted collateral held by the custodian, provided that, with respect to collateral collected by a covered swap entity pursuant to § 624.3(a) or posted by a covered swap entity pursuant to § 624.3(b), the agreement requires the posting party to:
(1) Substitute only funds or other property that would qualify as eligible collateral under § 624.6, and for which the amount net of applicable discounts described in appendix B of this part would be sufficient to meet the requirements of § 624.3; and
(2) Direct reinvestment of funds only in assets that would qualify as eligible collateral under § 624.6, and for which the amount net of applicable discounts described in appendix B of this part would be sufficient to meet the requirements of § 624.3.
§ 624.8 Initial margin models and standardized amounts.
(a) Standardized amounts. Unless a covered swap entity’s initial margin model conforms to the requirements of this section, the covered swap entity shall calculate the amount of initial margin required to be collected or posted for one or more non-cleared swaps or non-cleared security-based swaps with a given counterparty pursuant to § 624.3 on a daily basis pursuant to appendix A of this part.
(b) Use of initial margin models. A covered swap entity may calculate the amount of initial margin required to be collected or posted for one or more non-cleared swaps or non-cleared security-based swaps with a given counterparty pursuant to § 624.3 on a daily basis using an initial margin model only if the initial margin model meets the requirements of this section.
(c) Requirements for initial margin model. (1) A covered swap entity must obtain the prior written approval of the FCA before using any initial margin model to calculate the initial margin required in this part.
(2) A covered swap entity must demonstrate that the initial margin model satisfies all of the requirements of this section on an ongoing basis.
(3) A covered swap entity must notify the FCA in writing 60 days prior to:
(i) Extending the use of an initial margin model that the FCA has approved under this section to an additional product type;
(ii) Making any change to any initial margin model approved by the FCA under this section that would result in a material change in the covered swap entity’s assessment of initial margin requirements; or
(iii) Making any material change to modeling assumptions used by the initial margin model.
(4) The FCA may rescind its approval of the use of any initial margin model, in whole or in part, or may impose additional conditions or requirements if the FCA determines, in its sole discretion, that the initial margin model no longer complies with this section.
(d) Quantitative requirements. (1) The covered swap entity’s initial margin model must calculate an amount of initial margin that is equal to the potential future exposure of the non-cleared swap, non-cleared security-based swap or netting portfolio of non-cleared swaps or non-cleared security-based swaps covered by an eligible master netting agreement. Potential future exposure is an estimate of the one-tailed 99 percent confidence interval for an increase in the value of the non-cleared swap, non-cleared security-based swap or netting portfolio of non-cleared swaps or non-cleared security-based swaps due to an instantaneous price shock that is equivalent to a movement in all material underlying risk factors, including prices, rates, and spreads, over a holding period equal to the shorter of ten business days or the maturity of the non-cleared swap, non-cleared security-based swap or netting portfolio.
(2) All data used to calibrate the initial margin model must be based on an equally weighted historical observation period of at least one year and not more than five years and must incorporate a period of significant financial stress for each broad asset class that is appropriate to the non-cleared swaps and non-cleared security-based swaps to which the initial margin model is applied.
(3) The covered swap entity’s initial margin model must use risk factors sufficient to measure all material price risks inherent in the transactions for which initial margin is being calculated. The risk categories must include, but should not be limited to, foreign exchange or interest rate risk, credit risk, equity risk, and commodity risk, as appropriate. For material exposures in significant currencies and markets, modeling techniques must capture spread and basis risk and must incorporate a sufficient number of segments of the yield curve to capture differences in volatility and imperfect correlation of rates along the yield curve.
(4) In the case of a non-cleared cross-currency swap, the covered swap entity’s initial margin model need not recognize any risks or risk factors associated with the fixed, physically-settled foreign exchange transaction associated with the exchange of principal embedded in the non-cleared cross-currency swap. The initial margin model must recognize all material risks and risk factors associated with all other payments and cash flows that occur during the life of the non-cleared cross-currency swap.
(5) The initial margin model may calculate initial margin for a non-cleared swap or non-cleared security-based swap or a netting portfolio of non-cleared swaps or non-cleared security-based swaps covered by an eligible master netting agreement. It may reflect offsetting exposures, diversification, and other hedging benefits for non-cleared swaps and non-cleared security-based swaps that are governed by the same eligible master netting agreement by incorporating empirical correlations within the following broad risk categories, provided the covered swap entity validates and demonstrates the reasonableness of its process for modeling and measuring hedging benefits: Commodity, credit, equity, and foreign exchange or interest rate. Empirical correlations under an eligible master netting agreement may be recognized by the initial margin model within each broad risk category, but not across broad risk categories.
(6) If the initial margin model does not explicitly reflect offsetting exposures, diversification, and hedging benefits between subsets of non-cleared swaps or non-cleared security-based swaps within a broad risk category, the covered swap entity must calculate an amount of initial margin separately for each subset within which such relationships are explicitly recognized by the initial margin model. The sum of the initial margin amounts calculated for each subset of non-cleared swaps and non-cleared security-based swaps within a broad risk category will be used to determine the aggregate initial margin due from the counterparty for the portfolio of non-cleared swaps and non-cleared security-based swaps within the broad risk category.
(7) The sum of the initial margin amounts calculated for each broad risk category will be used to determine the aggregate initial margin due from the counterparty.
(8) The initial margin model may not permit the calculation of any initial margin collection amount to be offset by, or otherwise take into account, any initial margin that may be owed or otherwise payable by the covered swap entity to the counterparty.
(9) The initial margin model must include all material risks arising from the nonlinear price characteristics of option positions or positions with embedded optionality and the sensitivity of the market value of the positions to changes in the volatility of the underlying rates, prices, or other material risk factors.
(10) The covered swap entity may not omit any risk factor from the calculation of its initial margin that the covered swap entity uses in its initial margin model unless it has first demonstrated to the satisfaction of the FCA that such omission is appropriate.
(11) The covered swap entity may not incorporate any proxy or approximation used to capture the risks of the covered swap entity’s non-cleared swaps or non-cleared security-based swaps unless it has first demonstrated to the satisfaction of the FCA that such proxy or approximation is appropriate.
(12) The covered swap entity must have a rigorous and well-defined process for re-estimating, re-evaluating, and updating its internal margin model to ensure continued applicability and relevance.
(13) The covered swap entity must review and, as necessary, revise the data used to calibrate the initial margin model at least annually, and more frequently as market conditions warrant, to ensure that the data incorporate a period of significant financial stress appropriate to the non-cleared swaps and non-cleared security-based swaps to which the initial margin model is applied.
(14) The level of sophistication of the initial margin model must be commensurate with the complexity of the non-cleared swaps and non-cleared security-based swaps to which it is applied. In calculating an initial margin collection amount, the initial margin model may make use of any of the generally accepted approaches for modeling the risk of a single instrument or portfolio of instruments.
(15) The FCA may in its sole discretion require a covered swap entity using an initial margin model to collect a greater amount of initial margin than that determined by the covered swap entity’s initial margin model if the FCA determines that the additional collateral is appropriate due to the nature, structure, or characteristics of the covered swap entity’s transaction(s), or is commensurate with the risks associated with the transaction(s).
(e) Periodic review. A covered swap entity must periodically, but no less frequently than annually, review its initial margin model in light of developments in financial markets and modeling technologies, and enhance the initial margin model as appropriate to ensure that the initial margin model continues to meet the requirements for approval in this section.
(f) Control, oversight, and validation mechanisms. (1) The covered swap entity must maintain a risk control unit that reports directly to senior management and is independent from the business trading units.
(2) The covered swap entity’s risk control unit must validate its initial margin model prior to implementation and on an ongoing basis. The covered swap entity’s validation process must be independent of the development, implementation, and operation of the initial margin model, or the validation process must be subject to an independent review of its adequacy and effectiveness. The validation process must include:
(i) An evaluation of the conceptual soundness of (including developmental evidence supporting) the initial margin model;
(ii) An ongoing monitoring process that includes verification of processes and benchmarking by comparing the covered swap entity’s initial margin model outputs (estimation of initial margin) with relevant alternative internal and external data sources or estimation techniques. The benchmark(s) must address the chosen model’s limitations. When applicable, the covered swap entity should consider benchmarks that allow for non-normal distributions such as historical and Monte Carlo simulations. When applicable, validation shall include benchmarking against observable margin standards to ensure that the initial margin required is not less than what a derivatives clearing organization or a clearing agency would require for similar cleared transactions; and
(iii) An outcomes analysis process that includes backtesting the initial margin model. This analysis must recognize and compensate for the challenges inherent in back-testing over periods that do not contain significant financial stress.
(3) If the validation process reveals any material problems with the initial margin model, the covered swap entity must promptly notify the FCA of the problems, describe to the FCA any remedial actions being taken, and adjust the initial margin model to ensure an appropriately conservative amount of required initial margin is being calculated.
(4) The covered swap entity must have an internal audit function independent of business-line management and the risk control unit that at least annually assesses the effectiveness of the controls supporting the covered swap entity’s initial margin model measurement systems, including the activities of the business trading units and risk control unit, compliance with policies and procedures, and calculation of the covered swap entity’s initial margin requirements under this part. At least annually, the internal audit function must report its findings to the covered swap entity’s board of directors or a committee thereof.
(g) Documentation. The covered swap entity must adequately document all material aspects of its initial margin model, including the management and valuation of the non-cleared swaps and non-cleared security-based swaps to which it applies, the control, oversight, and validation of the initial margin model, any review processes and the results of such processes.
(h) Escalation procedures. The covered swap entity must adequately document internal authorization procedures, including escalation procedures, that require review and approval of any change to the initial margin calculation under the initial margin model, demonstrable analysis that any basis for any such change is consistent with the requirements of this section, and independent review of such demonstrable analysis and approval.
§ 624.9 Cross-border application of margin requirements.
(a) Transactions to which this rule does not apply. The requirements of §§ 624.3 through 624.8 and §§ 624.10 through 624.12 shall not apply to any foreign non-cleared swap or foreign non-cleared security-based swap of a foreign covered swap entity.
(b) For purposes of this section, a foreign non-cleared swap or foreign non-cleared security-based swap is any non-cleared swap or non-cleared security-based swap with respect to which neither the counterparty to the foreign covered swap entity nor any party that provides a guarantee of either party’s obligations under the non-cleared swap or non-cleared security-based swap is:
(1) An entity organized under the laws of the United States or any State (including a U.S. branch, agency, or subsidiary of a foreign bank) or a natural person who is a resident of the United States;
(2) A branch or office of an entity organized under the laws of the United States or any State; or
(3) A swap entity that is a subsidiary of an entity that is organized under the laws of the United States or any State.
(c) For purposes of this section, a foreign covered swap entity is any covered swap entity that is not:
(1) An entity organized under the laws of the United States or any State, including a U.S. branch, agency, or subsidiary of a foreign bank;
(2) A branch or office of an entity organized under the laws of the United States or any State; or
(3) An entity that is a subsidiary of an entity that is organized under the laws of the United States or any State.
(d) Transactions for which substituted compliance determination may apply—(1) Determinations and reliance. For non-cleared swaps and non-cleared security-based swaps entered into by covered swap entities described in paragraph (d)(3) of this section, a covered swap entity may satisfy the provisions of this part by complying with the foreign regulatory framework for non-cleared swaps and non-cleared security-based swaps that the prudential regulators jointly, conditionally or unconditionally, determine by public order satisfy the corresponding requirements of §§ 624.3 through 624.8 and §§ 624.10 through 624.12.
(2) Standard. In determining whether to make a determination under paragraph (d)(1) of this section, the prudential regulators will consider whether the requirements of such foreign regulatory framework for non-cleared swaps and non-cleared security-based swaps applicable to such covered swap entities are comparable to the otherwise applicable requirements of this part and appropriate for the safe and sound operation of the covered swap entity, taking into account the risks associated with non-cleared swaps and non-cleared security-based swaps.
(3) Covered swap entities eligible for substituted compliance. A covered swap entity may rely on a determination under paragraph (d)(1) of this section only if:
(i) The covered swap entity’s obligations under the non-cleared swap or non-cleared security-based swap do not have a guarantee from:
(A) An entity organized under the laws of the United States or any State (other than a U.S. branch or agency of a foreign bank) or a natural person who is a resident of the United States; or
(B) A branch or office of an entity organized under the laws of the United States or any State; and
(ii) The covered swap entity is:
(A) A foreign covered swap entity;
(B) A U.S. branch or agency of a foreign bank; or
(C) An entity that is not organized under the laws of the United States or any State and is a subsidiary of a depository institution, Edge corporation, or agreement corporation.
(4) Compliance with foreign margin collection requirement. A covered swap entity satisfies its requirement to post initial margin under § 624.3(b) by posting to its counterparty initial margin in the form and amount, and at such times, that its counterparty is required to collect pursuant to a foreign regulatory framework, provided that the counterparty is subject to the foreign regulatory framework and the prudential regulators have made a determination under paragraph (d)(1) of this section, unless otherwise stated in that determination, and the counterparty’s obligations under the non-cleared swap or non-cleared security-based swap do not have a guarantee from:
(i) An entity organized under the laws of the United States or any State (including a U.S. branch, agency, or subsidiary of a foreign bank) or a natural person who is a resident of the United States; or
(ii) A branch or office of an entity organized under the laws of the United States or any State.
(e) Requests for determinations. (1) A covered swap entity described in paragraph (d)(3) of this section may request that the prudential regulators make a determination pursuant to this section. A request for a determination must include a description of:
(i) The scope and objectives of the foreign regulatory framework for non-cleared swaps and non-cleared security-based swaps;
(ii) The specific provisions of the foreign regulatory framework for non-cleared swaps and non-cleared security-based swaps that govern:
(A) The scope of transactions covered;
(B) The determination of the amount of initial margin and variation margin required and how that amount is calculated;
(C) The timing of margin requirements;
(D) Any documentation requirements;
(E) The forms of eligible collateral;
(F) Any segregation and rehypothecation requirements; and
(G) The approval process and standards for models used in calculating initial margin and variation margin;
(iii) The supervisory compliance program and enforcement authority exercised by a foreign financial regulatory authority or authorities in such system to support its oversight of the application of the non-cleared swap or non-cleared security-based swap regulatory framework and how that framework applies to the non-cleared swaps or non-cleared security-based swaps of the covered swap entity; and
(iv) Any other descriptions and documentation that the prudential regulators determine are appropriate.
(2) A covered swap entity described in paragraph (d)(3) of this section may make a request under this section only if the non-cleared swap or non-cleared security-based swap activities of the covered swap entity are directly supervised by the authorities administering the foreign regulatory framework for non-cleared swaps and non-cleared security-based swaps.
(f) Segregation unavailable. Sections 624.3(b) and 624.7 do not apply to a non-cleared swap or non-cleared security-based swap entered into by:
(1) A foreign branch of a covered swap entity that is a depository institution; or
(2) A covered swap entity that is not organized under the laws of the United States or any State and is a subsidiary of a depository institution, Edge corporation, or agreement corporation, if:
(i) Inherent limitations in the legal or operational infrastructure in the foreign jurisdiction make it impracticable for the covered swap entity and the counterparty to post any form of eligible initial margin collateral recognized pursuant to § 624.6(b) in compliance with the segregation requirements of § 624.7;
(ii) The covered swap entity is subject to foreign regulatory restrictions that require the covered swap entity to transact in the non-cleared swap or non-cleared security-based swap with the counterparty through an establishment within the foreign jurisdiction and do not accommodate the posting of collateral for the non-cleared swap or non-cleared security-based swap outside the jurisdiction;
(iii) The counterparty to the non-cleared swap or non-cleared security-based swap is not, and the counterparty’s obligations under the non-cleared swap or non-cleared security-based swap do not have a guarantee from:
(A) An entity organized under the laws of the United States or any State (including a U.S. branch, agency, or subsidiary of a foreign bank) or a natural person who is a resident of the United States; or
(B) A branch or office of an entity organized under the laws of the United States or any State;
(iv) The covered swap entity collects initial margin for the non-cleared swap or non-cleared security-based swap in accordance with § 624.3(a) in the form of cash pursuant to § 624.6(b)(1), and posts and collects variation margin in accordance with § 624.4(a) in the form of cash pursuant to § 624.6(b)(1); and
(v) The FCA provides the covered swap entity with prior written approval for the covered swap entity’s reliance on this paragraph (f) for the foreign jurisdiction.
(g) Guarantee means an arrangement pursuant to which one party to a non-cleared swap or non-cleared security-based swap has rights of recourse against a third-party guarantor, with respect to its counterparty’s obligations under the non-cleared swap or non-cleared security-based swap. For these purposes, a party to a non-cleared swap or non-cleared security-based swap has rights of recourse against a guarantor if the party has a conditional or unconditional legally enforceable right to receive or otherwise collect, in whole or in part, payments from the guarantor with respect to its counterparty’s obligations under the non-cleared swap or non-cleared security-based swap. In addition, any arrangement pursuant to which the guarantor has a conditional or unconditional legally enforceable right to receive or otherwise collect, in whole or in part, payments from any other third party guarantor with respect to the counterparty’s obligations under the non-cleared swap or non-cleared security-based swap, such arrangement will be deemed a guarantee of the counterparty’s obligations under the non-cleared swap or non-cleared security-based swap by the other guarantor.
(h)(1) A covered swap entity described in paragraphs (d)(3)(i) and (ii) of this section is not subject to the requirements of § 624.3(a) or § 624.11(a) for any non-cleared swap or non-cleared security-based swap executed with an affiliate of the covered swap entity; and
(2) For purposes of paragraph (h)(1) of this section, “affiliate” has the same meaning provided in § 624.11(d).
§ 624.10 Documentation of margin matters.
A covered swap entity shall execute trading documentation with each counterparty that is either a swap entity or financial end user regarding credit support arrangements that:
(a) Provides the covered swap entity and its counterparty with the contractual right to collect and post initial margin and variation margin in such amounts, in such form, and under such circumstances as are required by this subpart, and at such time as initial margin or variation margin is required to be collected or posted under § 624.3 or § 624.4, as applicable; and
(b) Specifies:
(1) The methods, procedures, rules, and inputs for determining the value of each non-cleared swap or non-cleared security-based swap for purposes of calculating variation margin requirements; and
(2) The procedures by which any disputes concerning the valuation of non-cleared swaps or non-cleared security-based swaps, or the valuation of assets collected or posted as initial margin or variation margin, may be resolved; and
(c) Describes the methods, procedures, rules, and inputs used to calculate initial margin for non-cleared swaps and non-cleared security based swaps entered into between the covered swap entity and the counterparty.
§ 624.11 Special rules for affiliates.
(a)(1) A covered swap entity shall calculate on each business day an initial margin collection amount for each counterparty that is a swap entity or financial end user with a material swaps exposure and an affiliate of the covered swap entity.
(2) If the aggregate of all initial margin collection amounts calculated under paragraph (a)(1) of this section does not exceed 15 percent of the covered swap entity’s tier 1 capital, the requirements for a covered swap entity to collect initial margin under § 624.3(a) do not apply with respect to any non-cleared swap or non-cleared security-based swap with a counterparty that is an affiliate.
(3) On each business day that the aggregate of all initial margin collection amounts calculated under paragraph (a)(1) of this section exceeds 15 percent of the covered swap entity’s tier 1 capital:
(i) The covered swap entity shall collect initial margin under § 624.3(a) for each additional non-cleared swap and non-cleared security-based swap executed that business day with a counterparty that is a swap entity or financial end user with a material swaps exposure and an affiliate of the covered swap entity, commencing on the day after execution and continuing on a daily basis as required under § 624.3(c), until the earlier of;
(A) The termination date of such non-cleared swap or non-cleared security-based swap, or
(B) The business day on which the aggregate of all initial margin collection amounts calculated under paragraph (a)(1) of this section falls below 15 percent of the covered swap entity’s tier 1 capital;
(ii) Notwithstanding § 624.7(b), to the extent the covered swap entity collects initial margin pursuant to paragraph (a)(3)(i) of this section in the form of collateral other than cash collateral, the custodian for such collateral may be the covered swap entity or an affiliate of the covered swap entity; and
(4) For purposes of this paragraph (a), “tier 1 capital” means:
(i) For Farm Credit System banks and associations, the sum of common equity tier 1 capital as defined in 12 CFR 628.20(b) and additional tier 1 capital as defined in 12 CFR 628.20(c), and as reported in the institution’s most recent Uniform Reports of Financial Condition and Performance (Call Report); or
(ii) For the Federal Agricultural Mortgage Corporation, as defined and required in in 12 CFR 652.61, and as reported in the institution’s most recent Call Report.
(5) If any subsidiary of the covered swap entity (including a subsidiary described in § 624.9(h)) executes any non-cleared swap or non-cleared security-based swap with any counterparty that is a swap entity or financial end user with a material swaps exposure and an affiliate of the covered swap entity:
(i) The covered swap entity shall treat such non-cleared swap or security-based swap as its own for purposes of this paragraph (a); and
(ii) If the subsidiary is itself a covered swap entity, the compliance by its parent covered swap entity with this paragraph (a)(5) shall be deemed to establish the subsidiary’s compliance with the requirements of § 624.11(a) and to exempt the subsidiary from the requirements for a covered swap entity to collect initial margin under § 624.3(a) from an affiliate.
(b) The requirement for a covered swap entity to post initial margin under § 624.3(b) does not apply with respect to any non-cleared swap or non-cleared security-based swap with a counterparty that is an affiliate.
(c) Section 624.3(d) shall apply to a counterparty that is an affiliate in the same manner as it applies to any counterparty that is neither a financial end user without a material swap exposure nor a swap entity.
(d) For purposes of this section:
(1) An affiliate means:
(i) An affiliate as defined in § 624.2; or
(ii) Any company that controls, is controlled by, or is under common control with the covered swap entity through the direct or indirect exercise of controlling influence over the management or policies of the controlled company.
(2) A subsidiary means:
(i) A subsidiary as defined in § 624.2; or
(ii) Any company that is controlled by the covered swap entity through the direct or indirect exercise of controlling influence over the management or policies of the controlled company.
§ 624.12 Capital.
A covered swap entity shall comply with:
(a) In the case of the Federal Agricultural Mortgage Corporation, the capital adequacy regulations set forth in part 652 of this chapter; and
(b) In the case of any Farm Credit System institution other than the Federal Agricultural Mortgage Corporation, the capital regulations set forth in parts 615 and 628 of this chapter.
Appendix A to Part 624—Standardized Minimum Initial Margin Requirements for Non-Cleared Swaps and Non—Cleared Security-Based Swaps
Table A—Standardized Minimum Gross Initial Margin Requirements for Non-cleared Swaps and Non-cleared Security-Based Swaps
1
| Asset Class | Gross initial margin (% of notional exposure) |
|---|---|
| Credit: 0-2 year duration | 2 |
| Credit: 2-5 year duration | 5 |
| Credit: 5+ year duration | 10 |
| Commodity | 15 |
| Equity | 15 |
| Foreign Exchange/Currency | 6 |
| Cross Currency Swaps: 0-2 year duration | 1 |
| Cross-Currency Swaps: 2-5 year duration | 2 |
| Cross-Currency Swaps: 5+ year duration | 4 |
| Interest Rate: 0-2 year duration | 1 |
| Interest Rate: 2-5 year duration | 2 |
| Interest Rate: 5+ year duration | 4 |
| Other | 15 |
1 The initial margin amount applicable to multiple non-cleared swaps or non-cleared security-based swaps subject to an eligible master netting agreement that is calculated according to Appendix A will be computed as follows:
Initial Margin=0.4xGross Initial Margin +0.6x NGRxGross Initial Margin
where;
Gross Initial Margin = the sum of the product of each non-cleared swap’s or non-cleared security-based swap’s effective notional amount and the gross initial margin requirement for all non-cleared swaps and non-cleared security-based swaps subject to the eligible master netting agreement;
and
NGR = the net-to-gross ratio (that is, the ratio of the net current replacement cost to the gross current replacement cost). In calculating NGR, the gross current replacement cost equals the sum of the replacement cost for each non-cleared swap and non-cleared security-based swap subject to the eligible master netting agreement for which the cost is positive. The net current replacement cost equals the total replacement cost for all non-cleared swaps and non-cleared security-based swaps subject to the eligible master netting agreement. In cases where the gross replacement cost is zero, the NGR should be set to 1.0.
Appendix B to Part 624—Margin Values for Eligible Noncash Margin Collateral
Table B—Margin Values for Eligible Noncash Margin Collateral
| Asset class | Discount (%) |
|---|---|
| Eligible government and related (e.g., central bank, multilateral development bank, GSE securities identified in § 624.6(a)(2)(iv) or (b)(5) debt: residual maturity less than one-year | 0.5 |
| Eligible government and related (e.g., central bank, multilateral development bank, GSE securities identified in § 624.6(a)(2)(iv) or (b)(5) debt: residual maturity between one and five years | 2.0 |
| Eligible government and related (e.g., central bank, multilateral development bank, GSE securities identified in § 624.6(a)(2)(iv) or (b)(5) debt: residual maturity greater than five years | 4.0 |
| Eligible GSE debt securities not identified in § 624.6(a)(2)(iv) or (b)(5): residual maturity less than one-year | 1.0 |
| Eligible GSE debt securities not identified in § 624.6(a)(2)(iv) or (b)(5): residual maturity between one and five years: | 4.0 |
| Eligible GSE debt securities not identified in § 624.6(a)(2)(iv) or (b)(5): residual maturity greater than five years: | 8.0 |
| Other eligible publicly traded debt: residual maturity less than one-year | 1.0 |
| Other eligible publicly traded debt: residual maturity between one and five years | 4.0 |
| Other eligible publicly traded debt: residual maturity greater than five years | 8.0 |
| Equities included in S&P 500 or related index | 15.0 |
| Equities included in S&P 1500 Composite or related index but not S&P 500 or related index | 25.0 |
| Gold | 15.0 |
1 The discount to be applied to an eligible investment fund is the weighted average discount on all assets within the eligible investment fund at the end of the prior month. The weights to be applied in the weighted average should be calculated as a fraction of the fund’s total market value that is invested in each asset with a given discount amount. As an example, an eligible investment fund that is comprised solely of $100 of 91 day Treasury bills and $100 of 3 year US Treasury bonds would receive a discount of (100/200)*0.5+(100/200)*2.0=(0.5)*0.5+(0.5)*2.0=1.25 percent.
PART 625—APPLICATION FOR AWARD OF FEES AND OTHER EXPENSES UNDER THE EQUAL ACCESS TO JUSTICE ACT
Subpart A—General Provisions
§ 625.1 Purpose.
These rules implement the Equal Access to Justice Act, 5 U.S.C. 504 (EAJA). The EAJA provides for the award of attorney fees and other expenses to eligible individuals and entities who are parties to certain administrative proceedings (designated by the EAJA as “adversary adjudications”) before Federal agencies. An eligible party may receive an award when it prevails over an agency, unless the agency’s position was substantially justified or special circumstances make an award unjust. The rules in this part explain how the EAJA applies to Farm Credit Administration (FCA) proceedings. The rules describe the parties eligible for awards, how such parties may apply for awards, and the procedures and standards that govern FCA consideration of applications.
§ 625.2 Proceedings covered.
(a) The EAJA applies to adversary adjudications conducted by the FCA either on its own behalf or in connection with any other agency of the United States that participates in or in any way is a part of the adversary adjudication. Adversary adjudications are:
(1) Adjudications under 5 U.S.C. 554 in which the position of the FCA or other agency is presented by an attorney or other representative who enters an appearance and participates in the proceeding; and
(2) Enforcement proceedings under 12 U.S.C. 2261-2273.
(b) The failure of the FCA to identify a type of proceeding as an adversary adjudication shall not preclude the filing of an application by a party who believes that the proceeding is covered by the EAJA; whether the proceeding is covered shall then be an issue for resolution in proceedings on the application.
(c) If a proceeding includes both matters covered and excluded from coverage by the EAJA, any award made will include only fees and expenses related to covered issues.
(d) Proceedings under this part may be conducted by the FCA Board (Board) or by the presiding officer (referred to as the “adjudicative officer” in the EAJA), as defined in § 622.2(f) of this chapter. If the Board conducts proceedings, reference to the “presiding officer” in this part shall mean the Board, in applicable context. Where the Board presides, the recommended decision under § 625.26 of this part will be omitted and the Board will make a final decision on the application in accordance with § 625.27 of this part.
(e) If a court reviews the underlying decision of the adversary adjudication, an award for fees and other expenses may be made only pursuant to 28 U.S.C. 2412(d)(3).
§ 625.3 Eligibility of applicants.
(a) To be eligible for an award under the EAJA, an applicant must be a prevailing party named or admitted to the adversary adjudication for which an award is sought. The applicant must show that it meets all conditions of eligibility set out in this subpart and in subpart B of this part.
(b) The types of eligible applicants are as follows:
(1) An individual with a net worth of $2 million or less;
(2) The sole owner of an unincorporated business who has both a net worth of $7 million or less (including personal and business interests), and 500 or fewer employees;
(3) A charitable or other tax-exempt organization described in section 501(c)(3) of the Internal Revenue Code (26 U.S.C. 501(c)(3)) with 500 or fewer employees;
(4) A cooperative association as defined in section 15(a) of the Agricultural Marketing Act (12 U.S.C. 1141j(a)) with 500 or fewer employees; and
(5) Any other partnership, corporation, association, unit of local government, or organization with a net worth of $7 million or less and 500 or fewer employees.
(c) For eligibility purposes, the net worth and number of employees of an applicant shall be determined as of the date the adversary adjudication was initiated.
(d) An applicant who owns an unincorporated business will be considered as an “individual” rather than a “sole owner of an unincorporated business” if the issues on which the applicant prevails are related primarily to personal interests rather than to business interests.
(e) The employees of an applicant include all persons who regularly perform services for remuneration for that applicant, under the applicant’s direction and control. Part-time employees shall be included on a proportional basis.
(f) The net worth and number of employees of the applicant and all of its affiliates shall be aggregated to determine eligibility unless the presiding officer determines that aggregation would be unjust and contrary to the purposes of the EAJA in light of the actual relationship between the affiliated entities.
(1) For purposes of this part, an affiliate is:
(i) Any individual, corporation, or other entity that directly or indirectly controls or owns a majority of the voting shares or other interests of the applicant; or
(ii) Any corporation or other entity of which the applicant directly or indirectly owns or controls a majority of the voting shares or other interests.
(2) The presiding officer may determine that financial relationships of the applicant other than those described in paragraph (f)(1) of this section constitute special circumstances that would make an award unjust.
(g) An applicant that participates in an adversary adjudication primarily on behalf of one or more other persons or entities that would be ineligible is not itself eligible for an award.
§ 625.4 Standards for awards.
(a) If an eligible applicant prevails over the FCA in an adversary adjudication, or in a significant and discrete substantive portion thereof, the applicant may receive an award for fees and expenses incurred in the adjudication, or portion thereof, unless the position of the FCA over which the applicant prevailed was substantially justified.
(b) The position of the FCA includes:
(1) The position taken by the FCA in the adversary adjudication; and
(2) The action or inaction of the FCA upon which the adversary adjudication is based.
(c) Except as provided in paragraph (d) of this section, the FCA must prove that its position was substantially justified before an award may be denied to an otherwise eligible applicant.
(d) An award will be reduced or denied if the applicant has unduly or unreasonably protracted the adversary adjudication or if special circumstances make the award sought unjust.
§ 625.5 Allowable fees and expenses.
(a) Awards will be based on rates customarily charged by persons engaged in the business of acting as attorneys, agents, and expert witnesses, even if the services were made available without charge or at a reduced rate to the applicant.
(b) No award for the fee of an attorney or agent under these rules may exceed $75 per hour. No award to compensate an expert witness may exceed the highest rate at which the FCA pays expert witnesses. However, an award also may include the reasonable expenses of the attorney, agent, or expert witness as a separate item, if the attorney, agent, or expert witness ordinarily charges clients separately for such expenses.
(c) In determining the reasonableness of the fee sought for an attorney, agent, or expert witness, the presiding officer shall consider the following:
(1) If the attorney, agent, or expert witness is in private practice, his or her customary fees for similar services, or, if an employee of the applicant, the fully allocated costs of the services;
(2) The prevailing rate for similar services in the community in which the attorney, agent, or expert witness ordinarily performs services;
(3) The time actually spent in the representation of the applicant;
(4) The time reasonably spent in light of the difficulty or complexity of the issues in the adversary adjudication; and
(5) Such other factors as may bear on the value of the services provided.
(d) The reasonable cost of any study, analysis, audit, engineering report, test, project, or similar matter prepared on behalf of a party may be awarded, to the extent that the charge for the service does not exceed the prevailing rate for similar services, and the study or other matter was necessary for the preparation of the applicant’s case.
§ 625.6 Rulemaking on maximum rates for attorney fees.
(a) If warranted by an increase in the cost of living or by special circumstances (such as limited availability of attorneys qualified to handle certain types of proceedings), the FCA may adopt regulations providing that attorney fees may be awarded at a rate higher than $75 per hour in some or all of the types of proceedings covered by this part. The FCA will conduct any rulemaking proceedings for this purpose under the informal rulemaking procedures of the Administrative Procedure Act.
(b) Any person may file with the FCA a petition for rulemaking to increase the maximum rate for attorney fees. The petition should identify the rate the petitioner believes the FCA should establish and the types of proceedings in which the rate should be used. It should also explain fully the reasons why the higher rate is warranted. The FCA will respond to the petition within 90 days after it is filed, by initiating a rulemaking proceeding, denying the petition, or taking other appropriate action.
§ 625.7 Awards against other agencies.
If an applicant is entitled to an award because it prevails over another agency of the United States that participates in or in any way is a part of an adversary adjudication before the FCA and that agency’s position is not substantially justified, the award or an appropriate portion of the award shall be made against that agency.
Subpart B—Applicant Information Required
§ 625.10 Contents of application.
(a) An application for an award of fees and other expenses under the EAJA shall identify the applicant and the adversary adjudication for which an award is sought. The application shall show that the applicant has prevailed in the adversary adjudication. If the application is made on the basis of significant and discrete substantive issues on which the applicant prevailed, the issues must be specifically identified. The application also shall identify each position of the FCA or other agencies that the applicant alleges was not substantially justified. Unless the applicant is an individual, the application shall describe briefly the type and purpose of its organization or business and state the number of persons employed.
(b) The application shall include a statement that the applicant’s net worth does not exceed $2 million (if an individual) or $7 million (for all other applicants, including their affiliates). However, an applicant may omit this statement if:
(1) It states that it has 500 employees or fewer and attaches a copy of a ruling by the Internal Revenue Service that it qualifies as an organization described in section 501(c)(3) of the Internal Revenue Code (26 U.S.C. 501(c)(3)) or, in the case of a tax-exempt organization not required to obtain a ruling from the Internal Revenue Service on its exempt status, a statement that describes the basis for the applicant’s belief that it qualifies under such section; or
(2) It states that it is a cooperative association as defined in section 15(a) of the Agricultural Marketing Act (12 U.S.C. 1141j(a)) with 500 or fewer employees.
(c) The application shall state the total amount of fees and other expenses for which an award is sought.
(d) The application may include any other relevant matters that the applicant wishes the FCA to consider in determining whether and in what amount an award should be made.
(e) The application shall be signed by the applicant or an authorized officer or attorney of the applicant. The application must contain a written verification under oath or under penalty of perjury that the information provided in the application and any supporting documents is accurate.
§ 625.11 Net worth exhibit.
(a) Each applicant, except a qualified tax-exempt organization or cooperative association, must provide with its application a detailed exhibit showing the net worth of the applicant and any affiliates (as defined in § 625.3(f)(1) of this part) as of the date when the adversary adjudication was initiated. The exhibit may be in any convenient form that provides full disclosure of the assets and liabilities of the applicant and its affiliates and is otherwise sufficient to demonstrate that the applicant qualifies under the standards in this part. The presiding officer may require an applicant to file additional information supporting its eligibility for an award.
(b) An applicant that objects to public disclosure of information in any portion of the net worth exhibit and believes there are legal grounds for withholding it from disclosure may submit that portion of the exhibit directly to the presiding officer in a sealed envelope labeled “Confidential Financial Information,” accompanied by a motion under § 622.11 of this chapter to withhold the information from public disclosure. The motion shall describe the information sought to be withheld and explain, in detail, why it falls within one or more of the specific exemptions from mandatory disclosure under the Freedom of Information Act, 5 U.S.C. 552(b) (1)-(9), why public disclosure of the information would adversely affect the applicant, and why disclosure is not required in the public interest. The material in question shall be served on counsel representing the FCA, but need not be served on any other party to the application proceeding. If the presiding officer, or the FCA Board pursuant to § 622.11(e) of this chapter, finds that the information should not be withheld from disclosure, it shall be placed in the public record of the application proceeding. Otherwise, any request to inspect or copy the exhibit shall be treated in accordance with the FCA’s procedures regarding release of information (12 CFR part 602).
§ 625.12 Documentation of fees and expenses.
The application shall be accompanied by full documentation of the fees and expenses, including the cost of any study, analysis, audit, engineering report, test, project, or similar matter, for which an award is sought. A separate itemized statement shall be submitted for each professional firm or individual whose services are covered by the application, showing the hours spent in connection with the proceeding by each individual, a description of the specific services performed, the rates at which each fee has been computed, any expenses for which reimbursement is sought, and the total amount paid or payable by the applicant or by any other person or entity for the services provided. Under § 625.25 of this part, the presiding officer may require the applicant to provide vouchers, receipts, logs, or other substantiation for any fees or expenses claimed.
§ 625.13 When an application may be filed.
(a) An application may be filed whenever the applicant has prevailed in the adversary adjudication, or in a significant and discrete substantive portion thereof, but in no case later than 30 days after the FCA’s final disposition of the adversary adjudication.
(b) For purposes of this rule, final disposition means the date on which a decision or order disposing of the merits of the adversary adjudication is issued or any other complete resolution of the adversary adjudication, such as a settlement or voluntary dismissal, becomes final and is unreviewable by the FCA, any other administrative body, or the courts.
(c) If review, reconsideration, or appeal is sought or taken of an adversary adjudication decision as to which an applicant believes it has prevailed, application proceedings for any award of fees and other expenses shall be stayed pending final disposition of the underlying controversy.
Subpart C—Procedures for Considering Applications
§ 625.20 Settlement.
A prevailing party and the FCA through its counsel may agree on a proposed settlement of an award at any time, either in connection with a settlement of the underlying adversary adjudication or after the underlying adversary adjudication has been concluded. If a prevailing party and the FCA counsel agree on a proposed settlement of an award, the proposed settlement must be submitted to the presiding officer for a recommended decision pursuant to § 625.26 of this part. If it has not been previously filed, the application must be submitted to the presiding officer along with the proposed settlement.
§ 625.21 Filing and service of documents.
Any application for an award or other pleading or document related to an application shall be filed and served on all parties to the adversary adjudication in the same manner as other pleadings in the adversary adjudication (see §§ 622.18 and 622.19 of this chapter), except as provided in § 625.11(b) of this part for confidential financial information.
§ 625.22 Answer to application.
(a) Within 30 days after service, counsel for the FCA may file an answer to the application. Unless the FCA counsel requests an extension of time for filing or a statement of intent to negotiate under paragraph (c) of this section is filed, the presiding officer, upon a satisfactory showing of entitlement by the applicant, may make an award for the applicant’s fees and other expenses under the EAJA.
(b) The answer shall set forth any objections to the requested award and identify the facts relied on in support of the FCA’s position. If the answer is based on any alleged facts not already in the record of the adversary adjudication, the FCA counsel shall include with the answer either supporting affidavits or a request for further proceedings under § 625.25 of this part.
(c) If the FCA counsel and the applicant believe that the issues in the fee application can be settled, they may jointly file a statement of their intent to negotiate a settlement. The filing of this statement shall extend the time for filing an answer for an additional 30 days, and further extensions may be granted by the presiding officer upon request by the FCA counsel and the applicant.
§ 625.23 Reply.
Within 15 days after service of an answer, the applicant may file a reply. If the reply is based on any alleged facts not already in the record of the adversary adjudication, the applicant shall include with the reply either supporting affidavits or a request for further proceedings under § 625.25 of this part.
§ 625.24 Comments by other parties.
Any party to a proceeding other than the applicant and FCA counsel may file comments on an application within 30 days after it is served or on an answer within 15 days after it is served. A commenting party may not participate further in proceedings on the application unless the presiding officer determines that the public interest requires such participation in order to permit full exploration of matters raised in the comments.
§ 625.25 Further proceedings.
(a) The determination of an award shall be made on the basis of the written record unless the presiding officer finds that further proceedings are necessary for full and fair resolution of the issues arising from the application. Such further proceedings may be at the request of either the applicant or the FCA counsel, or on the presiding officer’s own initiative, and shall be conducted as promptly as possible. Further proceedings may include an informal conference, oral argument, additional written submissions, or other actions required by the presiding officer, but may not include discovery or an evidentiary hearing with respect to the issue of whether the agency’s position was substantially justified.
(b) Whether or not the position of the agency was substantially justified shall be determined on the basis of the administrative record, as a whole, which is made in the adversary adjudication for which fees and other expenses are sought.
(c) A request that the presiding officer order further proceedings under this section shall specifically identify the information sought or the disputed issues and shall explain why the additional proceedings are necessary to resolve the issues.
§ 625.26 Recommended decision.
The presiding officer shall file a recommended decision within 30 days after completion of proceedings on the application, and, promptly upon filing, shall serve a copy of the recommended decision upon each party to the proceedings. The decision shall include written findings and conclusions on the applicant’s eligibility, status as a prevailing party, the recommended amount of the award, if any, and an explanation of the reasons for any difference between the amount requested and the amount awarded. The decision shall also include, if at issue, findings on whether the FCA’s position was substantially justified, whether the applicant unduly protracted the adversary adjudication, or whether special circumstances make an award unjust. If the applicant has sought an award against more than one agency, the decision shall allocate responsibility for payment of any award made among the agencies, and shall explain the reasons for the allocation made.
§ 625.27 Board decision.
Following filing of the recommended decision with the Board, the Board shall render a final decision on the application. The Board maintains full discretion to uphold, reverse, remand, or alter the recommended decision. The Board may order further proceedings (including those set forth in §§ 622.11 and 622.13 through 622.16 of this chapter) upon request by any party to the application proceeding or on its own initiative, but such proceedings may not include discovery or an evidentiary hearing with respect to the issue of whether the agency’s position was substantially justified.
§ 625.28 Judicial review.
Judicial review of final FCA decisions on awards may be sought as provided in 5 U.S.C. 504(c)(2).
§ 625.29 Payment of award.
(a) An applicant seeking payment of an award shall submit to the Secretary to the Board a copy of the final decision granting the award, accompanied by a certification that the applicant will not seek judicial review of the decision. The required submission and certification should be sent to: Secretary to the Board, Farm Credit Administration, 1501 Farm Credit Drive, McLean, Virginia 22102-5090.
(b) The FCA will pay the amount awarded to the applicant within 60 days of receipt of the applicant’s submission and certification.
PART 626—NONDISCRIMINATION IN LENDING
§ 626.6000 Definitions.
For the purpose of this subpart, the following definitions shall apply:
(a) Applicant means any person who requests or who has received an extension of credit from a creditor and includes any person who is or may become contractually liable regarding an extension of credit.
(b) Dwelling means any building, structure, or portion thereof which is occupied as, or designed or intended for occupancy as, a residence by one or more families, and any vacant land which is offered for sale or lease for the construction or location thereon of any such building, structure, or portion thereof.
(c) Familial status means one or more individuals (who have not attained the age of 18 years) being domiciled with:
(1) A parent or another person having legal custody of such individual or individuals; or
(2) The designee of such parent or other person having such custody, with the written permission of such parent or other person.
The protections afforded against discrimination on the basis of familial status shall apply to any person who is pregnant or is in the process of securing legal custody of any individual who has not attained the age of 18 years.
(d) Handicap means, with respect to a person:
(1) A physical or mental impairment which substantially limits one or more of such person’s major life activities,
(2) A record of having such an impairment, or
(3) Being regarded as having such an impairment,
(e) Residential real estate-related transaction means any of the following:
(1) The making or purchasing of loans or providing other financial assistance:
(i) For purchasing, constructing, improving, repairing, or maintaining a dwelling; or
(ii) Secured by residential real estate.
(2) The selling, brokering, or appraising of residential real property.
§ 626.6005 Nondiscrimination in lending and other services.
(a) No Farm Credit institution may discriminate in making credit or other financial assistance available in a residential real estate-related transaction, or in the terms or conditions of such a transaction, because of race, color, religion, sex, handicap, familial status, or national origin.
(b) No Farm Credit institution may discriminate in any aspect of a credit transaction or a financial service involving a credit transaction because of:
(1) Race, color, religion, national origin, sex, marital status, or age (provided that the applicant has the capacity to enter into a binding contract); or
(2) The fact that all or part of the applicant’s income derives from any public assistance program; or
(3) The fact that the applicant has in good faith exercised any right under title VII (Equal Credit Opportunity Act) of the Consumer Credit Protection Act.
(c) Prohibited practices under this section include, but are not limited to, discrimination in fixing the amount, interest rate, duration, or other terms or conditions of any loan or a financial service involving a credit transaction or in the purchase of loans and securities on the basis of race, color, religion, sex, handicap, familial status (having one or more children under the age of 18), marital status, age (provided the applicant has the capacity to enter into a binding contract), or national origin.
(d) Nothing in this subpart shall be deemed to change the eligibility requirements imposed by the Farm Credit Act of 1971, as amended, or any Farm Credit Administration regulation adopted pursuant thereto.
§ 626.6010 Nondiscrimination in applications.
(a) No Farm Credit institution may discourage or refuse to allow, receive, or consider any application, request, or inquiry regarding an eligible loan or other eligible credit service or discriminate in imposing conditions upon, or in processing, any such application, request, or inquiry on the basis of:
(1) Race, color, religion, sex, marital status, age (provided that the applicant has the capacity to enter into a binding contract), or national origin, as prescribed under title VII (the Equal Credit Opportunity Act) of the Consumer Credit Protection Act, as amended by the Equal Credit Opportunity Act Amendments of 1976 (15 U.S.C. 1601 et seq.), and the Board of Governors of the Federal Reserve System’s implementing regulation (12 CFR part 202); and
(2) Race, color, religion, sex, national origin, handicap, or familial status, as prescribed under title VIII (the Fair Housing Act) of the Civil Rights Act of 1968, as amended by the Fair Housing Amendments Act of 1988 (42 U.S.C. 3601 et seq.), and the Department of Housing and Urban Development’s implementing regulations (24 CFR part 100).
(b) The provisions of paragraph (a) of this section shall apply whenever:
(1) An application is made for any such loan or other credit service; or
(2) A request is made for forms or papers to be used to make application for any such loan or other credit service; or
(3) An inquiry is made about the availability of such loan or other credit service.
§ 626.6015 Nondiscriminatory appraisal.
No Farm Credit institution shall discriminate against any person on the basis of race, color, religion, sex, handicap, familial status, or national origin when conducting, using, or relying upon an appraisal of residential real property that is subject to sale, rental, or other financing transaction.
§ 626.6020 Nondiscriminatory advertising.
(a) A Farm Credit institution that directly or through third parties engages in any form of advertising shall not use words, phrases, symbols, directions, forms, or models in such advertising which express, imply or suggest a policy of discrimination or exclusion in violation of the provisions of title VIII (the Fair Housing Act) of the Civil Rights Act of 1968, as amended by the Fair Housing Amendments Act of 1988 (42 U.S.C. 3601-3631); the Department of Housing and Urban Development’s implementing regulations (24 CFR parts 100 and 109), and title VII (the Equal Credit Opportunity Act) of the Consumer Credit Protection Act, as amended by the Equal Credit Opportunity Act Amendments of 1976 (15 U.S.C. 1691-1691f); and the Board of Governors of the Federal Reserve System’s implementing regulation (12 CFR part 202), or this subpart.
(b) Written advertisements relating to dwellings shall include a facsimile of the following logotype and legend:
§ 626.6025 Equal housing lender poster.
(a) Each Farm Credit institution that makes loans for the purpose of purchasing, constructing, improving, repairing, or maintaining a dwelling or any loan secured by a dwelling shall post and maintain an Equal Housing Lender Poster in the lobby of each of its offices. The poster shall be in a prominent place readily apparent to all persons seeking such loans.
(b) The Equal Housing Lender Poster shall be at least 11 inches by 14 inches in size, and shall bear the logotype and legend set forth in § 626.6020(b) of this subpart and the following text:
(The Civil Rights Act of 1968, as amended by the Fair Housing Amendments Act of 1988)
UNDER THE FEDERAL FAIR HOUSING ACT, IT IS ILLEGAL, ON THE BASIS OF RACE, COLOR, NATIONAL ORIGIN, RELIGION, SEX, HANDICAP, OR FAMILIAL STATUS (HAVING CHILDREN UNDER THE AGE OF 18), TO:
• Deny a loan for the purpose of purchasing, constructing, improving, repairing, or maintaining a dwelling, or deny any loan secured by a dwelling; or
• Discriminate in fixing the amount, interest rate, duration, application procedures, or other terms or conditions of such a loan, or in appraising property.
(The Consumer Credit Protection Act, as amended by the Equal Credit Opportunity Act Amendments of 1976)
• On the basis of race, color, national origin, religion, sex, marital status, or age,
• Because income is from public assistance, or
• Because a right was exercised under the Consumer Credit Protection Act.
§ 626.6030 Complaints.
(a) Complaints regarding discrimination in lending by a Farm Credit institution under the Fair Housing Act shall be referred to the Assistant Secretary for Fair Housing and Equal Opportunity, United States Department of Housing and Urban Development, Washington, DC 20410, and to the Office of Congressional and Public Affairs, Farm Credit Administration, McLean, Virginia 22102-5090.
(b) Complaints regarding discrimination in lending by a Farm Credit institution under the Equal Credit Opportunity Act shall be referred to the Office of Congressional and Public Affairs, Farm Credit Administration, McLean, Virginia 22102-5090.
PART 627—TITLE IV CONSERVATORS, RECEIVERS, BRIDGE SYSTEM BANKS, AND VOLUNTARY LIQUIDATIONS
Subpart A—General Provisions
§ 627.1 Applicability.
The provisions of this part apply to conservatorships, receiverships, and voluntary liquidations of System institutions chartered under titles I, II, III, IV, and VII of the Act.
§ 627.2 Definitions.
For the purposes of this part, the following definitions apply:
Act means the Farm Credit Act of 1971, as amended.
Conservator means the Farm Credit System Insurance Corporation acting in its capacity as the conservator of a Farm Credit institution.
Farm Credit institution(s) or institution(s) means all Farm Credit banks, associations, service corporations chartered under title IV of the Act, and the Federal Farm Credit Banks Funding Corporation. These two terms do not include any bridge System bank chartered by FCA, in accordance with section 5.61C(h)(2) of the Act.
FCSIC means the Farm Credit System Insurance Corporation.
Receiver means FCSIC acting in its capacity as the receiver of a Farm Credit institution.
§ 627.3 Grounds for appointing FCSIC as conservator or receiver.
(a) FCA may, in its discretion, appoint a conservator or receiver of a Farm Credit institution if FCA determines that one or more of the grounds in paragraph (b) of this section exists. FCA must appoint FCSIC as conservator or receiver of a Farm Credit institution. To the extent practicable, FCA will consult with FCSIC before taking a pre-resolution action that may result in a conservatorship or receivership of a Farm Credit institution.
(b) The grounds for appointing FCSIC as a conservator or receiver of a System institution are:
(1) The institution is insolvent because the value of its assets is less than its obligations to creditors and others, including its members. For the purpose of determining insolvency, “obligations to members” does not include stock or allocated equites held by current or former borrowers.
(2) There has been a substantial dissipation of assets or earnings of the institution due to the violation of any law, rule, or regulation, or one or more unsafe or unsound practice(s).
(3) The institution is in an unsafe or unsound condition to transact business, including having insufficient capital levels or otherwise. For the purpose of this part, “unsafe or unsound condition” includes, but is not limited to, the following conditions:
(i) For associations, a default by the association of one or more terms of its general financing agreement with its funding bank that the Farm Credit Administration determines to be a material default;
(ii) For all institutions, permanent capital of less than one-half the minimum required level for the institution; or
(iii) For associations, stock impairment.
(4) The institution has committed a willful violation of a final cease and desist order issued by the Farm Credit Administration Board.
(5) The institution is concealing its books, papers, records, or assets, or is refusing to submit its books, papers, records, assets, or other material relating to the affairs of the institution for inspection to any examiner or to any lawful agent of the Farm Credit Administration Board.
(6) A Farm Credit bank is unable to make a timely payment of principal or interest on any insured obligation(s) defined in section 5.51(3) of the Act issued by the bank individually, or on which it is primarily liable.
§ 627.4 Action for the removal of the conservator or receiver.
Within 30 days after the Farm Credit Administration Board appoints FCSIC as the conservator or receiver of a Farm Credit institution, pursuant to § 627.3, the institution may bring an action in the United States District Court for the judicial district in which its home office is located, or the United States District Court for the District of Columbia, for an order requiring the Farm Credit Administration Board to remove such conservator or receiver and, if the charter has been canceled, to rescind the cancellation of the charter. The institution’s board of directors is empowered to meet subsequent to the appointment of a conservator or receiver and authorize the filing of an action in Federal court to remove the conservator or receiver. Only the institution’s board of directors has the power to authorize an action to remove the conservator or receiver.
Subpart B—Conservator and Conservatorships
§ 627.10 FCSIC as Conservator.
(a) Appointment. (1) The Farm Credit Administration Board may exercise its authority under section 4.12(b) of the Act and § 627.3 to appoint FCSIC as the conservator of a Farm Credit institution upon finding that one or more of the grounds identified in § 627.3(b) exists. The Farm Credit Administration Board may appoint, ex parte and without notice, FCSIC as conservator for any Farm Credit institution.
(2) Upon appointing FCSIC as the conservator of an institution, the Chairman of the Farm Credit Administration shall immediately notify such institution and, in the case of an association, its funding bank. The Farm Credit Administration will immediately publish notice of the appointment of the conservator in the
(b) Conservatorship. (1) Once the Farm Credit Administration Board issues the order placing a Farm Credit institution in conservatorship, all rights, privileges, and powers of its members, board of directors, officers, and employees, are transferred to and vested exclusively in FCSIC as conservator, except that the board of directors of the institution retains authority to initiate an action in a Federal district court to remove the conservator pursuant to § 627.4.
(2) The Farm Credit Administration will continue to examine Farm Credit institutions in conservatorship in accordance with section 5.19 of the Act.
(3) A qualified public accountant must audit a Farm Credit institution in conservatorship in accordance with part 621 of this chapter.
(4) Pursuant to the requirements of part 621 of this chapter, each institution in conservatorship must prepare and file with the Farm Credit Administration financial reports, certified by FCSIC, as required by § 621.14.
(5) Each institution in conservatorship must prepare and issue published financial reports in accordance with the requirements of part 620 of this chapter. FCSIC, as the conservator of the institution, will provide the signatures and certifications required by § 620.3.
(c) Termination of the conservatorship. (1) Whenever the Farm Credit Administration Board determines the problem(s) or condition(s) that led to the conservatorship have been corrected and resolved, and the institution is in a position to resume normal operations, it may terminate the conservatorship and direct FCSIC to turn over the institution’s operations to such management that FCA designates. Once new management is in place, the conservatorship terminates and FCA discharges FCSIC as conservator; or
(2) Whenever the Farm Credit Administration Board determines the institution should be placed in receivership, the Farm Credit Administration Board will appoint FCSIC as the receiver of such institution.
Subpart C—Receiver and Receiverships
§ 627.20 FCSIC as receiver.
(a) Appointment. (1) The Farm Credit Administration Board may exercise its authority under section 4.12(b) of the Act and § 627.3 to appoint FCSIC as the receiver of a Farm Credit institution upon finding that one or more of the grounds identified in § 627.3(b) exists. The Farm Credit Administration Board may appoint, ex parte and without notice, FCSIC as receiver for any Farm Credit institution.
(2) Upon appointing FCSIC as the receiver of an institution, the Chairman of the Farm Credit Administration shall immediately notify such institution and, in the case of an association, its funding bank. The Farm Credit Administration will immediately publish notice of the appointment of the receiver in the
(b) Funding bank role for association in liquidation. In the event of the voluntary or involuntary liquidation of an association, the funding bank must institute appropriate measures to minimize the adverse effect of the liquidation on those borrowers whose loans are purchased by, or otherwise transferred to another System institution.
(c) Receivership. (1) Once the Farm Credit Administration Board issues the order placing a Farm Credit institution in receivership, all rights, privileges, and powers of its members, the board of directors, officers, and employees, are transferred to and vested exclusively in FCSIC as receiver, except that the institution’s board of directors retains authority to initiate an action in a Federal district court to remove the receiver pursuant to § 627.4.
(2) The Farm Credit Administration Board simultaneously will cancel the charter of the institution when it appoints FCSIC as receiver.
(d) Uninsured accounts. Once the Farm Credit Administration Board has placed an institution into receivership, FCSIC, in accordance with section 4.37 of the Act will, as soon as practicable, notify every borrower who holds an uninsured voluntary or involuntary account, as described in § 614.4175 of this subchapter, at the institution that:
(1) Such accounts ceased earning interest from the date the Farm Credit Administration Board placed the institution into receivership; and
(2) FCSIC, as receiver, will immediately apply the funds in a borrower’s uninsured account(s) as payment against the outstanding balance of the borrower’s loan(s).
(e) Final discharge and release of the receiver. The receivership terminates after FCSIC makes a final distribution of the assets of the liquidated institution. Then, the Farm Credit Administration Board will completely and finally release and discharge the receiver.
Subpart D—Voluntary Liquidation
§ 627.40 Voluntary liquidation.
(a) A Farm Credit institution may voluntarily liquidate by a resolution of its board of directors, but only with the consent of, and in accordance with a plan of liquidation approved by, the Farm Credit Administration Board. Upon adoption of such resolution to liquidate, the Farm Credit institution shall submit the proposed voluntary liquidation plan to the Farm Credit Administration for preliminary approval. The Farm Credit Administration Board, in its discretion, may appoint a receiver as part of an approved liquidation plan. If a receiver is appointed for the Farm Credit institution as part of a voluntary liquidation, the receivership shall be conducted pursuant to subpart
C of this part, except to the extent that an approved plan of liquidation provides otherwise.
(b) If the Farm Credit Administration Board gives preliminary approval to the liquidation plan, the board of directors of the Farm Credit institution shall submit the resolution to liquidate and the liquidation plan to the stockholders for approval.
(c) The resolution to liquidate and the liquidation plan shall be approved by the stockholders if agreed to by at least a majority of the voting stockholders of the institution voting, in person or by written proxy, at a duly authorized stockholders’ meeting.
(d) The Farm Credit Administration Board will consider final approval of the liquidation plan after an affirmative stockholder vote on the resolution to liquidate.
(e) Any subsequent amendments, modifications, revisions, or adjustments to the liquidation plan shall require Farm Credit Administration Board approval.
(f) The Farm Credit Administration Board, in its discretion, reserves the right to terminate or modify the liquidation plan at any time.
§ 627.41 Preservation of equity.
(a) Immediately upon the adoption of a resolution by its board of directors to voluntarily liquidate a Farm Credit institution, the capital stock, participation certificates, equity reserves, and allocated equities of the Farm Credit institution shall not be issued, allocated, retired, sold, distributed, transferred, assigned, or applied against any indebtedness of the owners of such equities. Such activities could resume if the stockholders of the Farm Credit institution disapprove the resolution to liquidate or the Farm Credit Administration Board disapproves the liquidation plan. In the event the resolution to liquidate is approved by the stockholders of the Farm Credit institution and the liquidation plan is approved by the Farm Credit Administration Board, the liquidation plan shall govern disposition of the equities of the Farm Credit institution.
(b) Notwithstanding paragraph (a) of this section, eligible borrower stock shall be retired in accordance with section 4.9A of the Act.
PART 628—CAPITAL ADEQUACY OF SYSTEM INSTITUTIONS
Subpart A—General Provisions
(a) Purpose. This part establishes minimum capital requirements and overall capital adequacy standards for System institutions. This part includes methodologies for calculating minimum capital requirements, public disclosure requirements related to the capital requirements, and transition provisions for the application of this part.
(b) Limitation of authority. Nothing in this part limits the authority of FCA to take action under other provisions of law, including action to address unsafe or unsound practices or conditions, deficient capital levels, or violations of law or regulation under part C of title V of the Farm Credit Act.
(c) Applicability. Subject to the requirements in paragraph (d) of this section:
(1) Minimum capital requirements and overall capital adequacy standards. Each System institution must calculate its minimum capital requirements and meet the overall capital adequacy standards in subpart B of this part.
(2) Regulatory capital. Each System institution must calculate its regulatory capital in accordance with subpart C of this part.
(3) Risk-weighted assets. (i) Each System institution must use the methodologies in subpart D of this part to calculate total risk-weighted assets.
(ii) [Reserved]
(4) Disclosures. (i) All System banks must make the public disclosures described in subpart D of this part.
(ii)-(iii) [Reserved]
(d) Reservation of authority—(1) Additional capital in the aggregate. FCA may require a System institution to hold an amount of regulatory capital greater than otherwise required under this part if FCA determines that the System institution’s capital requirements under this part are not commensurate with the System institution’s credit, market, operational, or other risks according to part 615, subparts L and M, of this chapter.
(2) Regulatory capital elements. (i) If FCA determines that a particular common equity tier 1 (CET1), additional tier 1 (AT1), or tier 2 capital element has characteristics or terms that diminish its permanence or its ability to absorb losses, or otherwise present safety and soundness concerns, FCA may require the System institution to exclude all or a portion of such element from CET1 capital, AT1 capital, or tier 2 capital, as appropriate.
(ii) Notwithstanding the criteria for regulatory capital instruments set forth in subpart C of this part, FCA may find that a capital element may be included in a System institution’s CET1 capital, AT1 capital, or tier 2 capital on a permanent or temporary basis consistent with the loss absorption capacity of the element and in accordance with § 628.20(e).
(3) Risk-weighted asset amounts. If FCA determines that the risk-weighted asset amount calculated under this part by the System institution for one or more exposures is not commensurate with the risks associated with those exposures, FCA may require the System institution to assign a different risk-weighted asset amount to the exposure(s) or to deduct the amount of the exposure(s) from its regulatory capital.
(4) Total leverage. If FCA determines that the leverage exposure amount, or the amount reflected in the System institution’s reported average total consolidated assets, for a balance sheet exposure calculated by a System institution under § 628.10 is inappropriate for the exposure(s) or the circumstances of the System institution, FCA may require the System institution to adjust this exposure amount in the numerator and the denominator for purposes of the leverage ratio calculations.
(5) [Reserved]
(6) Other reservation of authority. With respect to any deduction or limitation required under this part, FCA may require a different deduction or limitation, provided that such alternative deduction or limitation is commensurate with the System institution’s risk and consistent with safety and soundness.
(e) Notice and response procedures. In making a determination under this section, FCA will apply notice and response procedures in the same manner as the notice and response procedures in § 615.5352 of this chapter.
(f) [Reserved]
§ 628.2 Definitions.
As used in this part:
Additional tier 1 capital (AT1) is defined in § 628.20(c).
Adjusted allowances for credit losses (AACL) means valuation allowances that have been established through a charge against earnings or retained earnings for expected credit losses on financial assets measured at amortized cost and a lessor’s net investment in leases that have been established to reduce the amortized cost basis of the assets to amounts expected to be collected as determined in accordance with GAAP. For purposes of this part, adjusted allowances for credit losses includes allowances for expected credit losses on off-balance sheet credit exposures not accounted for as insurance as determined in accordance with GAAP. Adjusted allowances for credit losses excludes allowances created that reflect credit losses on purchased credit deteriorated assets and available-for-sale debt securities.
Allocated equities means stock or surplus representing a patronage payment to a member-borrower that a System institution has retained for the benefit of its membership.
Bank holding company means a bank holding company as defined in section 2 of the Bank Holding Company Act.
Bank Holding Company Act means the Bank Holding Company Act of 1956, as amended (12 U.S.C. 1841 et seq.).
Bankruptcy remote means, with respect to an entity or asset, that the entity or asset would be excluded from an insolvent entity’s estate in receivership, insolvency, liquidation, or similar proceeding.
Borrower stock means the capital investment a borrower holds in a System institution in connection with a loan.
Call Report means reports of condition and performance, as described in subpart D of part 621 of this chapter.
Carrying value means, with respect to an asset, the value of the asset on the balance sheet of the System institution, determined in accordance with GAAP. For all assets other than available-for-sale debt securities or purchased credit deteriorated assets, the carrying value is not reduced by any associated credit loss allowance that is determined in accordance with GAAP.
Central counterparty (CCP) means a counterparty (for example, a clearinghouse) that facilitates trades between counterparties in one or more financial markets by either guaranteeing trades or novating contracts.
CFTC means the U.S. Commodity Futures Trading Commission.
Clean-up call means a contractual provision that permits an originating System institution or servicer to call securitization exposures before their stated maturity or call date.
Cleared transaction means an exposure associated with an outstanding derivative contract or repo-style transaction that a System institution or clearing member has entered into with a central counterparty (that is, a transaction that a central counterparty has accepted).
(1) The following transactions are cleared transactions:
(i)-(ii) [Reserved]
(iii) A transaction between a clearing member client System institution and a clearing member where the clearing member acts as a financial intermediary on behalf of the clearing member client and enters into an offsetting transaction with a CCP, provided that the requirements set forth in § 628.3(a) are met; or
(iv) A transaction between a clearing member client System institution and a CCP where a clearing member guarantees the performance of the clearing member client System institution to the CCP and the transaction meets the requirements of § 628.3(a)(2) and (3).
(2) [Reserved]
Clearing member means a member of, or direct participant in, a CCP that is entitled to enter into transactions with the CCP.
Clearing member client means a party to a cleared transaction associated with a CCP in which a clearing member either acts as a financial intermediary with respect to the party or guarantees the performance of the party to the CCP.
Collateral agreement means a legal contract that specifies the time when, and circumstances under which, a counterparty is required to pledge collateral to a System institution for a single financial contract or for all financial contracts in a netting set and confers upon the System institution a perfected, first-priority security interest (notwithstanding the prior security interest of any custodial agent), or the legal equivalent thereof, in the collateral posted by the counterparty under the agreement. This security interest must provide the System institution with a right to close-out the financial positions and liquidate the collateral upon an event of default of, or failure to perform by, the counterparty under the collateral agreement. A contract would not satisfy this requirement if the System institution’s exercise of rights under the agreement may be stayed or avoided:
(1) Under applicable law in the relevant jurisdictions, other than:
(i) In receivership, conservatorship, or resolution under the Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under any similar insolvency law applicable to Government-sponsored enterprises (GSEs), or laws of foreign jurisdictions that are substantially similar to the U.S. laws referenced in this paragraph (1)(i) in order to facilitate the orderly resolution of the defaulting counterparty;
(ii) Where the agreement is subject by its terms to, or incorporates, any of the laws referenced in paragraph (1)(i) of this definition; or
(2) Other than to the extent necessary for the counterparty to comply with the requirements of part 47, subpart I of part 252, or part 382 of this title, as applicable.
Commitment means any legally binding arrangement that obligates a System institution to extend credit or to purchase assets.
Commodity derivative contract means a commodity-linked swap, purchased commodity-linked option, forward commodity-linked contract, or any other instrument linked to commodities that gives rise to similar counterparty credit risks.
Commodity Exchange Act means the Commodity Exchange Act of 1936 (7 U.S.C. 1 et seq.).
Common cooperative equity issuance date means the date in which the holding period for purchased stock (excluding statutory minimum borrower stock and third-party stock) and allocated equities start:
(1) For allocated equities, the calendar quarter-ending in which:
(i) The System institution’s Board of Directors has passed a resolution declaring a patronage refund; and
(ii) The System institution has completed the applicable accounting treatment by segregating the new allocated equities from its unallocated retained earnings.
(2) For purchased stock (excluding statutory minimum borrower stock and third-party stock), the calendar quarter-ending in which the stock is acquired by the holder and recognized on the institution’s balance sheet.
Common cooperative equity or equities means common equities in the form of member-borrower stock, participation certificates, and allocated equities issued or allocated by a System institution to its current and former members.
Common equity tier 1 capital (CET1) is defined in § 628.20(b).
Company means a corporation, partnership, limited liability company, depository institution, business trust, special purpose entity, System institution, association, or similar organization.
Corporate exposure means an exposure to a company that is not:
(1) An exposure to a sovereign, the Bank for International Settlements, the European Central Bank, the European Commission, the International Monetary Fund, a multi-lateral development bank (MDB), a depository institution, a foreign bank, a credit union, or a public sector entity (PSE);
(2) An exposure to a GSE;
(3) A residential mortgage exposure;
(4)-(6) [Reserved]
(7) A cleared transaction;
(8) [Reserved]
(9) A securitization exposure;
(10) An equity exposure; or
(11) An unsettled transaction.
Country risk classification (CRC) with respect to a sovereign, means the most recent consensus CRC published by the Organization for Economic Cooperation and Development (OECD) as of December 31st of the prior calendar year that provides a view of the likelihood that the sovereign will service its external debt.
Credit derivative means a financial contract executed under standard industry credit derivative documentation that allows one party (the protection purchaser) to transfer the credit risk of one or more exposures (reference exposure(s)) to another party (the protection provider) for a certain period of time.
Credit-enhancing interest-only strip (CEIO) means an on-balance sheet asset that, in form or in substance:
(1) Represents a contractual right to receive some or all of the interest and no more than a minimal amount of principal due on the underlying exposures of a securitization; and
(2) Exposes the holder of the CEIO to credit risk directly or indirectly associated with the underlying exposures that exceeds a pro rata share of the holder’s claim on the underlying exposures, whether through subordination provisions or other credit-enhancement techniques.
Credit-enhancing representations and warranties means representations and warranties that are made or assumed in connection with a transfer of underlying exposures (including loan servicing assets) and that obligate a System institution to protect another party from losses arising from the credit risk of the underlying exposures. Credit-enhancing representations and warranties include provisions to protect a party from losses resulting from the default or nonperformance of the counterparties of the underlying exposures or from an insufficiency in the value of the collateral backing the underlying exposures. Credit-enhancing representations and warranties do not include:
(1) Early default clauses and similar warranties that permit the return of, or premium refund clauses covering, 1-4 family residential first mortgage loans that qualify for a 50-percent risk weight for a period not to exceed 120 days from the date of transfer. These warranties may cover only those loans that were originated within 1 year of the date of transfer;
(2) Premium refund clauses that cover assets guaranteed, in whole or in part, by the U.S. Government, a U.S. Government agency or a Government-sponsored enterprise (GSE), provided the premium refund clauses are for a period not to exceed 120 days from the date of transfer; or
(3) Warranties that permit the return of underlying exposures in instances of misrepresentation, fraud, or incomplete documentation.
Credit risk mitigant means collateral, a credit derivative, or a guarantee.
Credit union means an insured credit union as defined under the Federal Credit Union Act (12 U.S.C. 1752 et seq.).
Current exposure means, with respect to a netting set, the larger of 0 or the fair value of a transaction or portfolio of transactions within the netting set that would be lost upon default of the counterparty, assuming no recovery on the value of the transactions. Current exposure is also called replacement cost.
Current exposure methodology means the method of calculating the exposure amount for over-the-counter derivative contracts in § 628.34(a).
Custodian means a company that has legal custody of collateral provided to a CCP.
Depository institution means a depository institution as defined in section 3 of the Federal Deposit Insurance Act.
Depository institution holding company means a bank holding company or savings and loan holding company.
Derivative contract means a financial contract whose value is derived from the values of one or more underlying assets, reference rates, or indices of asset values or reference rates. Derivative contracts include interest rate derivative contracts, exchange rate derivative contracts, equity derivative contracts, commodity derivative contracts, credit derivative contracts, and any other instrument that poses similar counterparty credit risks. Derivative contracts also include unsettled securities, commodities, and foreign exchange transactions with a contractual settlement or delivery lag that is longer than the lesser of the market standard for the particular instrument or 5 business days.
Dodd-Frank Act means the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Pub. L. 111-203, 124 Stat. 1376).
Early amortization provision means a provision in the documentation governing a securitization that, when triggered, causes investors in the securitization exposures to be repaid before the original stated maturity of the securitization exposures, unless the provision:
(1) Is triggered solely by events not directly related to the performance of the underlying exposures or the originating System institution (such as material changes in tax laws or regulations); or
(2) Leaves investors fully exposed to future draws by borrowers on the underlying exposures even after the provision is triggered.
Effective notional amount means, for an eligible guarantee or eligible credit derivative, the lesser of the contractual notional amount of the credit risk mitigant and the exposure amount of the hedged exposure, multiplied by the percentage coverage of the credit risk mitigant.
Eligible clean-up call means a clean-up call that:
(1) Is exercisable solely at the discretion of the originating System institution or servicer;
(2) Is not structured to avoid allocating losses to securitization exposures held by investors or otherwise structured to provide credit enhancement to the securitization; and
(3)(i) For a traditional securitization, is only exercisable when 10 percent or less of the principal amount of the underlying exposures or securitization exposures (determined as of the inception of the securitization) is outstanding; or
(ii) For a synthetic securitization, is only exercisable when 10 percent or less of the principal amount of the reference portfolio of underlying exposures (determined as of the inception of the securitization) is outstanding.
Eligible credit derivative means a credit derivative in the form of a credit default swap, n
(1) The contract meets the requirements of an eligible guarantee and has been confirmed by the protection purchaser and the protection provider;
(2) Any assignment of the contract has been confirmed by all relevant parties;
(3) If the credit derivative is a credit default swap or n
(i) Failure to pay any amount due under the terms of the reference exposure, subject to any applicable minimal payment threshold that is consistent with standard market practice and with a grace period that is closely in line with the grace period of the reference exposure; and
(ii) Receivership, insolvency, liquidation, conservatorship or inability of the reference exposure issuer to pay its debts, or its failure or admission in writing of its inability generally to pay its debts as they become due, and similar events;
(4) The terms and conditions dictating the manner in which the contract is to be settled are incorporated into the contract;
(5) If the contract allows for cash settlement, the contract incorporates a robust valuation process to estimate loss reliably and specifies a reasonable period for obtaining post-credit event valuations of the reference exposure;
(6) If the contract requires the protection purchaser to transfer an exposure to the protection provider at settlement, the terms of at least one of the exposures that is permitted to be transferred under the contract provide that any required consent to transfer may not be unreasonably withheld;
(7) If the credit derivative is a credit default swap or n
(8) If the credit derivative is a total return swap and the System institution records net payments received on the swap as net income, the System institution records offsetting deterioration in the value of the hedged exposure (either through reductions in fair value or by an addition to reserves).
Eligible guarantee means a guarantee from an eligible guarantor that:
(1) Is written;
(2) Is either:
(i) Unconditional; or
(ii) A contingent obligation of the U.S. Government or its agencies, the enforceability of which is dependent upon some affirmative action on the part of the beneficiary of the guarantee or a third party (for example, meeting servicing requirements);
(3) Covers all or a pro rata portion of all contractual payments of the obligated party on the reference exposure;
(4) Gives the beneficiary a direct claim against the protection provider;
(5) Is not unilaterally cancelable by the protection provider for reasons other than the breach of the contract by the beneficiary;
(6) Except for a guarantee by a sovereign, is legally enforceable against the protection provider in a jurisdiction where the protection provider has sufficient assets against which a judgment may be attached and enforced;
(7) Requires the protection provider to make payment to the beneficiary on the occurrence of a default (as defined in the guarantee) of the obligated party on the reference exposure in a timely manner without the beneficiary first having to take legal actions to pursue the obligor for payment; and
(8) Does not increase the beneficiary’s cost of credit protection on the guarantee in response to deterioration in the credit quality of the reference exposure.
Eligible guarantor means:
(1) A sovereign, the Bank for International Settlements, the International Monetary Fund, the European Central Bank, the European Commission, a Federal Home Loan Bank, Federal Agricultural Mortgage Corporation (Farmer Mac), a multilateral development bank (MDB), a depository institution, a bank holding company, a savings and loan holding company, a credit union, a foreign bank, or a qualifying central counterparty; or
(2) An entity (other than a special purpose entity):
(i) That at the time the guarantee is issued or anytime thereafter, has issued and outstanding an unsecured debt security without credit enhancement that is investment grade;
(ii) Whose creditworthiness is not positively correlated with the credit risk of the exposures for which it has provided guarantees; and
(iii) That is not an insurance company engaged predominately in the business of providing credit protection (such as a monoline bond insurer or re-insurer).
Eligible margin loan means:
(1) An extension of credit where:
(i) The extension of credit is collateralized exclusively by liquid and readily marketable debt or equity securities, or gold;
(ii) The collateral is marked-to-fair value daily, and the transaction is subject to daily margin maintenance requirements; and
(iii) The extension of credit is conducted under an agreement that provides the System institution the right to accelerate and terminate the extension of credit and to liquidate or set-off collateral promptly upon an event of default, including upon an event of receivership, insolvency, liquidation, conservatorship, or similar proceeding, of the counterparty, provided that, in any such case:
(A) Any exercise of rights under the agreement will not be stayed or avoided under applicable law in the relevant jurisdictions, other than:
(1) In receivership, conservatorship, or resolution under the Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under any similar insolvency law applicable to GSEs,
(2) Where the agreement is subject by its terms to, or incorporates, any of the laws referenced in paragraph (1)(iii)(A)(1) of this definition; and
(B) The agreement may limit the right to accelerate, terminate, and close-out on a net basis all transactions under the agreement and to liquidate or set-off collateral promptly upon an event of default of the counterparty to the extent necessary for the counterparty to comply with the requirements of part 47, subpart I of part 252, or part 382 of this title, as applicable.
(2) In order to recognize an exposure as an eligible margin loan for purposes of this subpart, a System institution must comply with the requirements of § 628.3(b) with respect to that exposure.
Eligible servicer cash advance facility means a servicer cash advance facility in which:
(1) The servicer is entitled to full reimbursement of advances, except that a servicer may be obligated to make non-reimbursable advances for a particular underlying exposure if any such advance is contractually limited to an insignificant amount of the outstanding principal balance of that exposure;
(2) The servicer’s right to reimbursement is senior in right of payment to all other claims on the cash flows from the underlying exposures of the securitization; and
(3) The servicer has no legal obligation to, and does not make advances to the securitization if the servicer concludes the advances are unlikely to be repaid.
Equity derivative contract means an equity-linked swap, purchased equity-linked option, forward equity-linked contract, or any other instrument linked to equities that gives rise to similar counterparty credit risks.
Equity exposure means:
(1) A security or instrument (whether voting or non-voting) that represents a direct or an indirect ownership interest in, and is a residual claim on, the assets and income of a company, unless:
(i) The issuing company is consolidated with the System institution under GAAP;
(ii) The System institution is required to deduct the ownership interest from tier 1 or tier 2 capital under this part;
(iii) The ownership interest incorporates a payment or other similar obligation on the part of the issuing company (such as an obligation to make periodic payments); or
(iv) The ownership interest is a securitization exposure;
(2) A security or instrument that is mandatorily convertible into a security or instrument described in paragraph (1) of this definition;
(3) An option or warrant that is exercisable for a security or instrument described in paragraph (1) of this definition; or
(4) Any other security or instrument (other than a securitization exposure) to the extent the return on the security or instrument is based on the performance of a security or instrument described in paragraph (1) of this definition.
ERISA means the Employee Retirement Income and Security Act of 1974 (29 U.S.C. 1001 et seq.).
Exchange rate derivative contract means a cross-currency interest rate swap, forward foreign-exchange contract, currency option purchased, or any other instrument linked to exchange rates that gives rise to similar counterparty credit risks.
Exposure means an amount at risk.
Exposure amount means:
(1) For the on-balance sheet component of an exposure (other than an available-for-sale or held-to-maturity security; an OTC derivative contract; a repo-style transaction or an eligible margin loan for which the System institution determines the exposure amount under § 628.37; a cleared transaction; or a securitization exposure), the System institution’s carrying value of the exposure.
(2) For a security (that is not a securitization exposure, equity exposure, or preferred stock classified as an equity security under GAAP) classified as available-for-sale or held-to-maturity, the System institution’s carrying value (including net accrued but unpaid interest and fees) for the exposure less any net unrealized gains on the exposure and plus any net unrealized losses on the exposure.
(3) For available-for-sale preferred stock classified as an equity security under GAAP, the System institution’s carrying value of the exposure less any net unrealized gains on the exposure that are reflected in such carrying value but excluded from the System institution’s regulatory capital components.
(4) For the off-balance sheet component of an exposure (other than an OTC derivative contract; a repo-style transaction or an eligible margin loan for which the System institution calculates the exposure amount under § 628.37; a cleared transaction; or a securitization exposure), the notional amount of the off-balance sheet component multiplied by the appropriate credit conversion factor (CCF) in § 628.33.
(5) For an exposure that is an OTC derivative contract, the exposure amount determined under § 628.34.
(6) For an exposure that is a cleared transaction, the exposure amount determined under § 628.35.
(7) For an exposure that is an eligible margin loan or repo-style transaction for which the bank calculates the exposure amount as provided in § 628.37, the exposure amount determined under § 628.37.
(8) For an exposure that is a securitization exposure, the exposure amount determined under § 628.42.
Farm Credit Act means the Farm Credit Act of 1971, as amended (12 U.S.C. 2001 et seq.).
Federal Deposit Insurance Act means the Federal Deposit Insurance Act (12 U.S.C. 1813).
Federal Deposit Insurance Corporation Improvement Act means the Federal Deposit Insurance Corporation Improvement Act of 1991 (12 U.S.C. 4401).
Financial collateral means collateral:
(1) In the form of:
(i) Cash on deposit at a depository institution or Federal Reserve Bank (including cash held for the System institution by a third-party custodian or trustee);
(ii) Gold bullion;
(iii) Long-term debt securities that are not resecuritization exposures and that are investment grade;
(iv) Short-term debt instruments that are not resecuritization exposures and that are investment grade;
(v) Equity securities that are publicly traded;
(vi) Convertible bonds that are publicly traded; or
(vii) Money market fund shares and other mutual fund shares if a price for the shares is publicly quoted daily; and
(2) In which the System institution has a perfected, first-priority security interest or, outside of the United States, the legal equivalent thereof (with the exception of cash on deposit at a depository institution or Federal Reserve Bank and notwithstanding the prior security interest of any custodial agent).
First-lien residential mortgage exposure means a residential mortgage exposure secured by a first lien.
Foreign bank means a foreign bank as defined in § 211.2 of the Federal Reserve Board’s Regulation K (12 CFR 211.2) (other than a depository institution).
Forward agreement means a legally binding contractual obligation to purchase assets with certain drawdown at a specified future date, not including commitments to make residential mortgage loans or forward foreign exchange contracts.
GAAP means generally accepted accounting principles as used in the United States.
Gain-on-sale means an increase in the equity capital of a System institution (as reported on the Call Report) resulting from a traditional securitization (other than an increase in equity capital resulting from the System institution’s receipt of cash in connection with the securitization or reporting of a mortgage servicing asset on the Call Report).
General obligation means a bond or similar obligation that is backed by the full faith and credit of a public sector entity (PSE).
Government-sponsored enterprise (GSE) means an entity established or chartered by the U.S. Government to serve public purposes specified by the U.S. Congress but whose debt obligations are not explicitly guaranteed by the full faith and credit of the U.S. Government.
Guarantee means a financial guarantee, letter of credit, insurance, or other similar financial instrument (other than a credit derivative) that allows one party (beneficiary) to transfer the credit risk of one or more specific exposures (reference exposure) to another party (protection provider).
Home country means the country where an entity is incorporated, chartered, or similarly established.
Insurance company means an insurance company as defined in section 201 of the Dodd-Frank Act (12 U.S.C. 5381).
Insurance underwriting company means an insurance company as defined in section 201 of the Dodd-Frank Act (12 U.S.C. 5381) that engages in insurance underwriting activities.
Insured depository institution means an insured depository institution as defined in section 3 of the Federal Deposit Insurance Act.
Interest rate derivative contract means a single-currency interest rate swap, basis swap, forward rate agreement, purchased interest rate option, when-issued securities, or any other instrument linked to interest rates that gives rise to similar counterparty credit risks.
International Lending Supervision Act means the International Lending Supervision Act of 1983 (12 U.S.C. 3907).
Investment fund means a company:
(1) Where all or substantially all of the assets of the company are financial assets; and
(2) That has no material liabilities.
Investment grade means that the entity to which the System institution is exposed through a loan or security, or the reference entity with respect to a credit derivative, has adequate capacity to meet financial commitments for the projected life of the asset or exposure. Such an entity or reference entity has adequate capacity to meet financial commitments if the risk of its default is low and the full and timely repayment of principal and interest is expected.
Junior-lien residential mortgage exposure means a residential mortgage exposure that is not a first-lien residential mortgage exposure.
Member means a borrower or former borrower from a System institution that holds voting or nonvoting cooperative equities of the institution.
Money market fund means an investment fund that is subject to 17 CFR 270.2a-7 or any foreign equivalent thereof.
Mortgage servicing assets (MSAs) means the contractual rights owned by a System institution to service for a fee mortgage loans that are owned by others.
Multilateral development bank (MDB) means the International Bank for Reconstruction and Development, the Multilateral Investment Guarantee Agency, the International Finance Corporation, the Inter-American Development Bank, the Asian Development Bank, the African Development Bank, the European Bank for Reconstruction and Development, the European Investment Bank, the European Investment Fund, the Nordic Investment Bank, the Caribbean Development Bank, the Islamic Development Bank, the Council of Europe Development Bank, and any other multilateral lending institution or regional development bank in which the U.S. Government is a shareholder or contributing member or which the FCA determines poses comparable credit risk.
National Bank Act means the National Bank Act (12 U.S.C. 24).
Netting set means a group of transactions with a single counterparty that are subject to a qualifying master netting agreement or a qualifying cross-product master netting agreement. For purposes of calculating risk-based capital requirements using the internal models methodology in subpart E of this part, this term does not cover a transaction:
(1) That is not subject to such a master netting agreement; or
(2) Where the System institution has identified specific wrong-way risk.
Nonqualified allocated equities mean a patronage payment to a member-borrower in the form of stock or surplus that a System institution retains as equity for the benefit of the membership. A System institution does not deduct this patronage payment from its current taxable income according to the Internal Revenue Code sections 1382(b) and 1383. Nonqualified allocated equities also include allocated surplus in a tax-exempt institution or subsidiary. When a System institution revolves a nonqualified allocation, the System institution deducts the allocation from its taxable income, if any, and the borrower generally recognizes the tax liability, if any, as ordinary income. System institutions pay two types of nonqualified allocated equities through written notices of allocation to the borrowers:
(1) Those subject to revolvement; and
(2) Those not subject to revolvement. The second type for GAAP purposes is generally considered an equivalent of unallocated surplus and consolidated with unallocated surplus on externally prepared shareholder reports.
N
Operating entity means a company established to conduct business with clients with the intention of earning a profit in its own right and that generally produces goods or provides services beyond the business of investing, reinvesting, holding, or trading in financial assets. All System banks, associations, and service corporations, and all unincorporated business entities, are operating entities.
Original maturity with respect to an off-balance sheet commitment means the length of time between the date a commitment is issued and:
(1) For a commitment that is not subject to extension or renewal, the stated expiration date of the commitment; or
(2) For a commitment that is subject to extension or renewal, the earliest date on which the System institution can, at its option, unconditionally cancel the commitment.
Originating System institution, with respect to a securitization, means a System institution that:
(1) Directly or indirectly originated the underlying exposures included in the securitization; or
(2) [Reserved]
Other financing institution (OFI) means any entity referred to in section 1.7(b)(1)(B) of the Farm Credit Act.
Over-the-counter (OTC) derivative contract means a derivative contract that is not a cleared transaction.
Participation certificate means borrower stock held by a borrower or customer of a System institution that does not have voting rights.
Patronage payment means a cash declaration or equity allocation to member-borrowers that pursuant to Internal Revenue Code section 1381(a) is based on a System institution’s net income and allocated to borrowers based on business conducted with the institution. Patronage payments may be paid as cash, allocated equity (stock or surplus), or a combination of cash and allocated equity.
Performance standby letter of credit (or performance bond) means an irrevocable obligation of a System institution to pay a third-party beneficiary when a customer (account party) fails to perform on any contractual nonfinancial or commercial obligation. To the extent permitted by law or regulation, performance standby letters of credit include arrangements backing, among other things; subcontractors’ and suppliers’ performance, labor; and materials contracts, and construction bids.
Protection amount (P) means, with respect to an exposure hedged by an eligible guarantee or eligible credit derivative, the effective notional amount of the guarantee or credit derivative, reduced to reflect any currency mismatch, maturity mismatch, or lack of restructuring coverage (as provided in § 628.36).
Publicly traded means traded on:
(1) Any exchange registered with the Securities and Exchange Commission (SEC) as a national securities exchange under section 6 of the Securities Exchange Act; or
(2) Any non-U.S.-based securities exchange that:
(i) Is registered with, or approved by, a national securities regulatory authority; and
(ii) Provides a liquid, two-way market for the instrument in question.
Public sector entity (PSE) means a state, local authority, or other governmental subdivision below the sovereign level.
Qualified allocated equities means patronage allocated to a member-borrower, in the form of stock or surplus, that a System institution retains as equity for the benefit of the membership. A System institution can deduct this patronage from its current taxable income provided that the borrower has agreed to include the patronage in its taxable income. A System institution must pay at least 20 percent of a qualified patronage payment in cash to borrowers. A System institution must provide the borrowers with a qualified written notice of allocation when they allocate qualified patronage payments pursuant to Internal Revenue Code section 1381(b) and 1388(c). A System institution revolves qualified allocated equities according to a board-approved plan.
Qualifying central counterparty (QCCP) means a central counterparty that:
(1)(i) Is a designated financial market utility (FMU), as defined in section 803 of the Dodd-Frank Act;
(ii) If not located in the United States, is regulated and supervised in a manner equivalent to a designated FMU; or
(iii) Meets the following standards:
(A) The central counterparty requires all parties to contracts cleared by the counterparty to be fully collateralized on a daily basis;
(B) The System institution demonstrates to the satisfaction of the FCA that the central counterparty:
(1) Is in sound financial condition;
(2) Is subject to supervision by the Board, the CFTC, or the Securities Exchange Commission (SEC), or, if the central counterparty is not located in the United States, is subject to effective oversight by a national supervisory authority in its home country; and
(3) Meets or exceeds the risk-management standards for central counterparties set forth in regulations established by the Board, the CFTC, or the SEC under title VII or title VIII of the Dodd-Frank Act; or if the central counterparty is not located in the United States, meets or exceeds similar risk-management standards established under the law of its home country that are consistent with international standards for central counterparty risk management as established by the relevant standard setting body of the Bank of International Settlements; and
(2)(i) Provides the System institution with the central counterparty’s hypothetical capital requirement or the information necessary to calculate such hypothetical capital requirement, and other information the System institution is required to obtain under § 628.35(d)(3);
(ii) Makes available to the FCA and the CCP’s regulator the information described in paragraph (2)(i) of this definition; and
(iii) Has not otherwise been determined by the FCA to not be a QCCP due to its financial condition, risk profile, failure to meet supervisory risk management standards, or other weaknesses or supervisory concerns that are inconsistent with the risk weight assigned to qualifying central counterparties under § 628.35.
(3) A QCCP that fails to meet the requirements of a QCCP in the future may still be treated as a QCCP under the conditions specified in § 628.3(f).
Qualifying master netting agreement means a written, legally enforceable agreement provided that:
(1) The agreement creates a single legal obligation for all individual transactions covered by the agreement upon an event of default following any stay permitted by paragraph (2) of this definition, including upon an event of receivership, conservatorship, insolvency, liquidation, or similar proceeding, of the counterparty;
(2) The agreement provides the System institution the right to accelerate, terminate, and close-out on a net basis all transactions under the agreement and to liquidate or set-off collateral promptly upon an event of default, including upon an event of receivership, conservatorship, insolvency, liquidation, or similar proceeding, of the counterparty, provided that, in any such case:
(i) Any exercise of rights under the agreement will not be stayed or avoided under applicable law in the relevant jurisdictions, other than:
(A) In receivership, conservatorship, or resolution under the Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under any similar insolvency law applicable to GSEs, or laws of foreign jurisdictions that are substantially similar to the U.S. laws referenced in this paragraph (2)(i)(A) in order to facilitate the orderly resolution of the defaulting counterparty; or
(B) Where the agreement is subject by its terms to, or incorporates, any of the laws referenced in paragraph (2)(i)(A) of this definition; and
(ii) The agreement may limit the right to accelerate, terminate, and close-out on a net basis all transactions under the agreement and to liquidate or set-off collateral promptly upon an event of default of the counterparty to the extent necessary for the counterparty to comply with the requirements of part 47, subpart I of part 252, or part 382 of this title, as applicable;
(3) The agreement does not contain a walkaway clause (that is, a provision that permits a non-defaulting counterparty to make a lower payment than it otherwise would make under the agreement, or no payment at all, to a defaulter or the estate of a defaulter, even if the defaulter or the estate of the defaulter is a net creditor under the agreement); and
(4) In order to recognize an agreement as a qualifying master netting agreement for purposes of this subpart, a System institution must comply with the requirements of § 628.3(d) with respect to that agreement.
Repo-style transaction means a repurchase or reverse repurchase transaction, or a securities borrowing or securities lending transaction, including a transaction in which the System institution acts as agent for a customer and indemnifies the customer against loss, provided that:
(1) The transaction is based solely on liquid and readily marketable securities, cash, or gold;
(2) The transaction is marked-to-fair value daily and subject to daily margin maintenance requirements;
(3)(i) The transaction is a “securities contract” or “repurchase agreement” under section 555 or 559, respectively, of the Bankruptcy Code (11 U.S.C. 555 or 559), a qualified financial contract under section 11(e)(8) of the Federal Deposit Insurance Act, or a netting contract between or among financial institutions under sections 401-407 of the Federal Deposit Insurance Corporation Improvement Act or the Federal Reserve’s Regulation EE (12 CFR part 231); or
(ii) If the transaction does not meet the criteria set forth in paragraph (3)(i) of this definition, then either:
(A) The transaction is executed under an agreement that provides the System institution the right to accelerate, terminate, and close-out the transaction on a net basis and to liquidate or set-off collateral promptly upon an event of default, including upon an event of receivership, insolvency, liquidation, or similar proceeding, of the counterparty, provided that, in any such case:
(1) Any exercise of rights under the agreement will not be stayed or avoided under applicable law in the relevant jurisdictions, other than:
(i) In receivership, conservatorship, or resolution under the Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under any similar insolvency law applicable to GSEs, or laws of foreign jurisdictions that are substantially similar to the U.S. laws referenced in this paragraph (3)(ii)(A)(1)(i) in order to facilitate the orderly resolution of the defaulting counterparty;
(ii) Where the agreement is subject by its terms to, or incorporates, any of the laws referenced in paragraph (3)(ii)(A)(1)(i) of this definition; and
(2) The agreement may limit the right to accelerate, terminate, and close-out on a net basis all transactions under the agreement and to liquidate or set-off collateral promptly upon an event of default of the counterparty to the extent necessary for the counterparty to comply with the requirements of part 47, subpart I of part 252, or part 382 of this title, as applicable; or
(B) The transaction is:
(1) Either overnight or unconditionally cancelable at any time by the System institution; and
(2) Executed under an agreement that provides the System institution the right to accelerate, terminate, and close-out the transaction on a net basis and to liquidate or set-off collateral promptly upon an event of counterparty default; and
(4) In order to recognize an exposure as a repo-style transaction for purposes of this subpart, a System institution must comply with the requirements of § 628.3(e) with respect to that exposure.
Resecuritization means a securitization which has more than one underlying exposure and in which one or more of the underlying exposures is a securitization exposure.
Resecuritization exposure means:
(1) An on- or off-balance sheet exposure to a resecuritization; or
(2) An exposure that directly or indirectly references a resecuritization exposure.
Residential mortgage exposure means an exposure (other than a securitization exposure or equity exposure) that is:
(1) An exposure that is primarily secured by a first or subsequent lien on one-to-four family residential property, provided that the dwelling (including attached components such as garages, porches, and decks) represents at least 50 percent of the total appraised value of the collateral secured by the first or subsequent lien; or
(2) [Reserved]
Revenue obligation means a bond or similar obligation that is an obligation of a PSE, but which the PSE is committed to repay with revenues from the specific project financed rather than general tax funds.
Savings and loan holding company means a savings and loan holding company as defined in section 10 of the Home Owners’ Loan Act (12 U.S.C. 1467a).
Securities and Exchange Commission (SEC) means the U.S. Securities and Exchange Commission.
Securities Exchange Act means the Securities Exchange Act of 1934 (15 U.S.C. 78).
Securitization exposure means:
(1) An on-balance sheet or off-balance sheet credit exposure (including credit-enhancing representations and warranties) that arises from a traditional securitization or synthetic securitization (including a resecuritization); or
(2) An exposure that directly or indirectly references a securitization exposure described in paragraph (1) of this definition.
Securitization special purpose entity (securitization SPE) means a corporation, trust, or other entity organized for the specific purpose of holding underlying exposures of a securitization, the activities of which are limited to those appropriate to accomplish this purpose, and the structure of which is intended to isolate the underlying exposures held by the entity from the credit risk of the seller of the underlying exposures to the entity.
Servicer cash advance facility means a facility under which the servicer of the underlying exposures of a securitization may advance cash to ensure an uninterrupted flow of payments to investors in the securitization, including advances made to cover foreclosure costs or other expenses to facilitate the timely collection of the underlying exposures.
Small Business Act means the Small Business Act (15 U.S.C. 632).
Small Business Investment Act means the Small Business Investment Act of 1958 (15 U.S.C. 682).
Sovereign means a central government (including the U.S. Government) or an agency, department, ministry, or central bank of a central government.
Sovereign default means noncompliance by a sovereign with its external debt service obligations or the inability or unwillingness of a sovereign government to service an existing loan according to its original terms, as evidenced by failure to pay principal and interest timely and fully, arrearages, or restructuring.
Sovereign exposure means:
(1) A direct exposure to a sovereign; or
(2) An exposure directly and unconditionally backed by the full faith and credit of a sovereign.
Standardized total risk-weighted assets means:
(1) The sum of:
(i) Total risk-weighted assets for general credit risk as calculated under § 628.31;
(ii) Total risk-weighted assets for cleared transactions as calculated under § 628.35;
(iii) Total risk-weighted assets for unsettled transactions as calculated under § 628.38;
(iv) Total risk-weighted assets for securitization exposures as calculated under § 628.42;
(v) Total risk-weighted assets for equity exposures as calculated under §§ 628.52 and 628.53; minus
(vi) [Reserved]
(2) Any amount of the System institution’s adjusted allowance for credit losses that is not included in tier 2 capital.
Subsidiary means, with respect to a company, a company controlled by that company.
Synthetic exposure means an exposure whose value is linked to the value of an investment in the System institution’s own capital instrument.
Synthetic securitization means a transaction in which:
(1) All or a portion of the credit risk of one or more underlying exposures is retained or transferred to one or more third parties through the use of one or more credit derivatives or guarantees (other than a guarantee that transfers only the credit risk of an individual retail exposure);
(2) The credit risk associated with the underlying exposures has been separated into at least two tranches reflecting different levels of seniority;
(3) Performance of the securitization exposures depends upon the performance of the underlying exposures; and
(4) All or substantially all of the underlying exposures are financial exposures (such as loans, commitments, credit derivatives, guarantees, receivables, asset-backed securities, mortgage-backed securities, other debt securities, or equity securities).
System bank means a Farm Credit Bank, an agricultural credit bank, and a bank for cooperatives.
System institution means a System bank, an association of the Farm Credit System, and their successors, and any other institution chartered by the Farm Credit Administration (FCA) that the FCA determines should be considered a System institution for the purposes of this subpart.
Tier 1 capital means the sum of common equity tier 1 capital and additional tier 1 capital.
Tier 2 capital is defined in § 628.20(d).
Total capital means the sum of tier 1 capital and tier 2 capital.
Traditional securitization means a transaction in which:
(1) All or a portion of the credit risk of one or more underlying exposures is transferred to one or more third parties other than through the use of credit derivatives or guarantees;
(2) The credit risk associated with the underlying exposures has been separated into at least two tranches reflecting different levels of seniority;
(3) Performance of the securitization exposures depends upon the performance of the underlying exposures;
(4) All or substantially all of the underlying exposures are financial exposures (such as loans, commitments, credit derivatives, guarantees, receivables, asset-backed securities, mortgage-backed securities, other debt securities, or equity securities);
(5) The underlying exposures are not owned by an operating entity;
(6) The underlying exposures are not owned by a rural business investment company described in 7 U.S.C. 2009cc et seq.;
(7) [Reserved]
(8) The FCA may determine that a transaction in which the underlying exposures are owned by an investment firm that exercises substantially unfettered control over the size and composition of its assets, liabilities, and off-balance sheet exposures is not a traditional securitization based on the transaction’s leverage, risk profile, or economic substance;
(9) The FCA may deem a transaction that meets the definition of a traditional securitization, notwithstanding paragraph (5), (6), or (7) of this definition, to be a traditional securitization based on the transaction’s leverage, risk profile, or economic substance; and
(10) The transaction is not:
(i) An investment fund;
(ii) A collective investment fund (as defined in [12 CFR 9.18 (national bank) and 12 CFR 151.40 (Federal saving association) (OCC); 12 CFR 208.34 (Board)];
(iii) An employee benefit plan (as defined in paragraphs (3) and (32) of section 3 of ERISA), a “governmental plan” (as defined in 29 U.S.C. 1002(32)) that complies with the tax deferral qualification requirements provided in the Internal Revenue Code, or any similar employee benefit plan established under the laws of a foreign jurisdiction;
(iv) A synthetic exposure to the capital of a System institution to the extent deducted from capital under § 628.22; or
(v) Registered with the SEC under the Investment Company Act of 1940 (15 U.S.C. 80a-1) or foreign equivalents thereof.
Tranche means all securitization exposures associated with a securitization that have the same seniority level.
Two-way market means a market where there are independent bona fide offers to buy and sell so that a price reasonably related to the last sales price or current bona fide competitive bid and offer quotations can be determined within 1 day and settled at that price within a relatively short timeframe conforming to trade custom.
Unallocated retained earnings (URE) means accumulated net income that a System institution has not allocated to a member-borrower.
Unallocated retained earnings (URE) equivalents means nonqualified allocated equities, other than equities allocated to other System institutions, and paid-in capital resulting from a merger of System institutions or from a repurchase of third-party capital that a System institution:
(1) Designates as URE equivalents at the time of allocation (or on or before March 31, 2017, if allocated prior to January 1, 2017) and undertakes in its capitalization bylaws or a currently effective board of directors resolution not to change the designation without prior FCA approval; and
(2) Undertakes, in its capitalization bylaws or a currently effective board of directors resolution, not to exercise its discretion to revolve except upon dissolution or liquidation and not to offset against a loan in default except as required under final order of a court of competent jurisdiction or if required under § 615.5290 of this chapter in connection with a restructuring under part 617 of this chapter.
Unconditionally cancelable means, with respect to a commitment that a System institution may, at any time, with or without cause, refuse to extend credit under the commitment (to the extent permitted under applicable law).
Underlying exposures means one or more exposures that have been securitized in a securitization transaction.
U.S. Government agency means an instrumentality of the U.S. Government whose obligations are fully guaranteed as to the timely payment of principal and interest by the full faith and credit of the U.S. Government.
§ 628.3 Operational requirements for certain exposures.
For purposes of calculating risk-weighted assets under subpart D of this part:
(a) Cleared transaction. In order to recognize certain exposures as cleared transactions pursuant to paragraph (1)(ii), (iii), or (iv) of the definition of “cleared transaction” in § 628.2, the exposures must meet all of the requirements set forth in this paragraph (a).
(1) The offsetting transaction must be identified by the CCP as a transaction for the clearing member client.
(2) The collateral supporting the transaction must be held in a manner that prevents the System institution from facing any loss due to an event of default, including from a liquidation, receivership, insolvency, or similar proceeding of either the clearing member or the clearing member’s other clients. Omnibus accounts established under 17 CFR parts 190 and 300 satisfy the requirements of this paragraph (a).
(3) The System institution must conduct sufficient legal review to conclude with a well-founded basis (and maintain sufficient written documentation of that legal review) that in the event of a legal challenge (including one resulting from a default or receivership, insolvency, liquidation, or similar proceeding) the relevant court and administrative authorities would find the arrangements of paragraph (a)(2) of this section to be legal, valid, binding and enforceable under the law of the relevant jurisdictions.
(4) The offsetting transaction with a clearing member must be transferable under the transaction documents and applicable laws in the relevant jurisdiction(s) to another clearing member should the clearing member default, become insolvent, or enter receivership, insolvency, liquidation, or similar proceedings.
(b) Eligible margin loan. In order to recognize an exposure as an eligible margin loan as defined in § 628.2, a System institution must conduct sufficient legal review to conclude with a well-founded basis (and maintain sufficient written documentation of that legal review) that the agreement underlying the exposure:
(1) Meets the requirements of paragraph (1)(iii) of the definition of “eligible margin loan” in § 628.2; and
(2) Is legal, valid, binding, and enforceable under applicable law in the relevant jurisdictions.
(c) [Reserved]
(d) Qualifying master netting agreement. In order to recognize an agreement as a qualifying master netting agreement as defined in § 628.2, a System institution must:
(1) Conduct sufficient legal review to conclude with a well-founded basis (and maintain sufficient written documentation of that legal review) that:
(i) The agreement meets the requirements of paragraph (2) of the definition of “qualifying master netting agreement” in § 628.2; and
(ii) In the event of a legal challenge (including one resulting from default or from receivership, insolvency, liquidation, or similar proceeding) the relevant court and administrative authorities would find the agreement to be legal, valid, binding, and enforceable under the law of the relevant jurisdictions; and
(2) Establish and maintain written procedures to monitor possible changes in relevant law and to ensure that the agreement continues to satisfy the requirements of the definition of “qualifying master netting agreement” in § 628.2.
(e) Repo-style transaction. In order to recognize an exposure as a repo-style transaction as defined in § 628.2, a System institution must conduct sufficient legal review to conclude with a well-founded basis (and maintain sufficient written documentation of that legal review) that the agreement underlying the exposure:
(1) Meets the requirements of paragraph (3) of the definition of “repo-style transaction” in § 628.2, and
(2) Is legal, valid, binding, and enforceable under applicable law in the relevant jurisdictions.
(f) Failure of a QCCP to satisfy the rule’s requirements. If a System institution determines that a CCP ceases to be a QCCP due to the failure of the CCP to satisfy one or more of the requirements set forth in paragraph (2)(i) through (iii) of the definition of a “QCCP” in § 628.2, the System institution may continue to treat the CCP as a QCCP for up to 3 months following the determination. If the CCP fails to remedy the relevant deficiency within 3 months after the initial determination, or the CCP fails to satisfy the requirements set forth in paragraph (2)(i) through (iii) of the definition of a QCCP continuously for a 3-month period after remedying the relevant deficiency, a System institution may not treat the CCP as a QCCP for the purposes of this part until after the System institution has determined that the CCP has satisfied the requirements in paragraph (2)(i) through (iii) of the definition of a QCCP for 3 continuous months.
§§ 628.4-628.9 [Reserved]
Subpart B—Capital Ratio Requirements and Buffers
§ 628.10 Minimum capital requirements.
(a) Computation of regulatory capital ratios. A System institution’s regulatory capital ratios are determined on the basis of the financial statements of the institution prepared in accordance with GAAP using average daily balances for the most recent 3 months.
(b) Minimum capital requirements. A System institution must maintain the following minimum capital ratios:
(1) A common equity tier 1 (CET1) capital ratio of 4.5 percent.
(2) A tier 1 capital ratio of 6 percent.
(3) A total capital ratio of 8 percent.
(4) A tier 1 leverage ratio of 4 percent, of which at least 1.5 percent must be composed of URE and URE equivalents.
(5) [Reserved]
(6) A permanent capital ratio of 7 percent.
(c) Capital ratio calculations. A System institution’s regulatory capital ratios are as follows:
(1) CET1 capital ratio. A System institution’s CET1 capital ratio is the ratio of the System institution’s CET1 capital to total risk-weighted assets;
(2) Tier 1 capital ratio. A System institution’s tier 1 capital ratio is the ratio of the System institution’s tier 1 capital to total risk-weighted assets;
(3) Total capital ratio. A System institution’s total capital ratio is the ratio of the System institution’s total (tier 1 and tier 2) capital to total risk-weighted assets; and
(4) Tier 1 leverage ratio. (i) A System institution’s leverage ratio is the ratio of the institution’s tier 1 capital to the institution’s average total consolidated assets as reported on the institution’s Call Report net of deductions and adjustments from tier 1 capital under §§ 628.22(a), (b), and (c) and 628.23.
(ii) To calculate the measure of URE and URE equivalents described in paragraph (b)(4) of this section, a System institution must adjust URE and URE equivalents to reflect all the deductions and adjustments required under § 628.22(a), (b), and (c), and must use the denominator of the tier 1 leverage ratio.
(5) Permanent capital ratio. A System institution’s permanent capital ratio is the ratio of the institution’s permanent capital to its total risk-adjusted asset base as reported on the institution’s Call Report, calculated in accordance with the regulations in part 615, subpart H, of this chapter.
(d) [Reserved]
(e) Capital adequacy. (1) Notwithstanding the minimum requirements in this part, a System institution must maintain capital commensurate with the level and nature of all risks to which the System institution is exposed. FCA may evaluate a System institution’s capital adequacy and require the institution to maintain higher minimum regulatory capital ratios using the factors listed in § 615.5350 of this chapter.
(2) A System institution must have a process for assessing its overall capital adequacy in relation to its risk profile and a comprehensive strategy for maintaining an appropriate level of capital under § 615.5200 of this chapter.
§ 628.11 Capital buffer amounts.
(a) Capital conservation buffer and leverage buffer—(1) Composition of the capital conservation buffer and leverage buffer. (i) The capital conservation buffer for the CET1 capital ratio, tier 1 capital ratio, and total capital ratio is composed solely of CET1 capital.
(ii) The leverage buffer for the tier 1 leverage ratio is composed solely of tier 1 capital.
(2) Definitions. For purposes of this section, the following definitions apply:
(i) Eligible retained income. The eligible retained income of a System institution is the System institution’s net income for the 4 calendar quarters preceding the current calendar quarter, based on the System institution’s quarterly Call Reports, net of any capital distributions and associated tax effects not already reflected in net income.
(ii) Maximum payout ratio. The maximum payout ratio is the percentage of eligible retained income that a System institution can pay out in the form of capital distributions and discretionary bonus payments during the current calendar quarter. The maximum payout ratio is based on the System institution’s capital conservation buffer, calculated as of the last day of the previous calendar quarter, as set forth in Table 1 to § 628.11.
(iii) Maximum payout amount. A System institution’s maximum payout amount for the current calendar quarter is equal to the System institution’s eligible retained income, multiplied by the applicable maximum payout ratio, as set forth in Table 1 to § 628.11.
(iv) [Reserved]
(v) Maximum leverage payout ratio. The maximum leverage payout ratio is the percentage of eligible retained income that a System institution can pay out in the form of capital distributions and discretionary bonus payments during the current quarter. The maximum leverage payout ratio is based on the System institution’s leverage buffer, calculated as of the last day of the previous quarter, as set forth in Table 2 to § 628.11.
(vi) Maximum leverage payout amount. A System institution’s maximum leverage payout amount for the current calendar quarter is equal to the System institution’s eligible retained income, multiplied by the applicable maximum leverage payout ratio, as set forth in Table 2 of § 628.11.
(vii) Capital distribution means:
(A) A reduction of tier 1 capital through the repurchase, redemption, or revolvement of a tier 1 capital instrument or by other means, except when a System institution, within the same quarter when the repurchase is announced, fully replaces a tier 1 capital instrument it has repurchased, redeemed, or revolved by issuing a purchased capital instrument that meets the eligibility criteria for:
(1) A CET1 capital instrument if the instrument being repurchased, redeemed, or revolved was part of the System institution’s CET1 capital; or
(2) A CET1 or AT1 capital instrument if the instrument being repurchased, redeemed, or revolved was part of the System institution’s tier 1 capital;
(B) A reduction of tier 2 capital through the repurchase, redemption prior to maturity, or revolvement of a tier 2 capital instrument or by other means, except when a System institution, within the same quarter when the repurchase, redemption, or revolvement is announced, fully replaces a tier 2 capital instrument it has repurchased, redeemed, or revolved by issuing a purchased capital instrument that meets the eligibility criteria for a tier 1 or tier 2 capital instrument;
(C) A dividend declaration or payment on any tier 1 capital instrument;
(D) A dividend declaration or interest payment on any capital instrument other than a tier 1 capital instrument if the System institution has full discretion to permanently or temporarily suspend such payments without triggering an event of default;
(E) A cash patronage declaration or payment;
(F) A patronage declaration in the form of allocated equities that did not qualify as tier 1 or tier 2 capital; or
(G) Any similar transaction that the FCA determines to be in substance a distribution of capital.
(viii) Discretionary bonus payment means a payment made to a senior officer of a System institution, where:
(A) The System institution retains discretion as to whether to make, and the amount of, the payment until the payment is awarded to the senior officer;
(B) The amount paid is determined by the System institution without prior promise to, or agreement with, the senior officer; and
(C) The senior officer has no contractual right, whether express or implied, to the bonus payment.
(ix) Senior officer means the Chief Executive Officer, the Chief Operations Officer, the Chief Financial Officer, the Chief Credit Officer, and the General Counsel, or persons in similar positions; and any other person responsible for a major policy-making function.
(3) Calculation of capital conservation buffer and leverage buffer. (i) A System institution’s capital conservation buffer is equal to the lowest of paragraphs (a)(3)(i)(A), (B), and (C) of this section, and the leverage buffer is equal to paragraph (a)(3)(i)(D) of this section, calculated as of the last day of the previous calendar quarter based on the System institution’s most recent Call Report:
(A) The System institution’s CET1 capital ratio minus the System institution’s minimum CET1 capital ratio requirement under § 628.10;
(B) The System institution’s tier 1 capital ratio minus the System institution’s minimum tier 1 capital ratio requirement under § 628.10;
(C) The System institution’s total capital ratio minus the System institution’s minimum total capital ratio requirement under § 628.10; and
(D) The System institution’s tier 1 leverage ratio minus the System institution’s minimum tier 1 leverage ratio requirement under § 628.10.
(ii) Notwithstanding paragraphs (a)(3)(i)(A) through (D) of this section, if the System institution’s CET1 capital ratio, tier 1 capital ratio, total capital ratio or tier 1 leverage ratio is less than or equal to the System institution’s minimum CET1 capital ratio, tier 1 capital ratio, total capital ratio or tier 1 leverage ratio requirement under § 628.10, respectively, the System institution’s capital conservation buffer or leverage buffer is zero.
(4) Limits on capital distributions and discretionary bonus payments. (i) A System institution must not make capital distributions or discretionary bonus payments or create an obligation to make such capital distributions or payments during the current calendar quarter that, in the aggregate, exceed the maximum payout amount or, as applicable, the maximum leverage payout amount.
(ii) A System institution that has a capital conservation buffer that is greater than 2.5 percent and a leverage buffer that is greater than 1.0 percent is not subject to a maximum payout amount or maximum leverage payout amount under this section.
(iii) Negative eligible retained income. Except as provided in paragraph (a)(4)(iv) of this section, a System institution may not make capital distributions or discretionary bonus payments during the current calendar quarter if the System institution’s:
(A) Eligible retained income is negative; and
(B) Capital conservation buffer was less than 2.5 percent, or the leverage buffer was less than 1.0 percent, as of the end of the previous calendar quarter.
(iv) Prior approval. Notwithstanding the limitations in paragraphs (a)(4)(i) through (iii) of this section, FCA may permit a System institution to make a capital distribution or discretionary bonus payment upon a request of the System institution, if FCA determines that the capital distribution or discretionary bonus payment would not be contrary to the purposes of this section, or to the safety and soundness of the System institution. In making such a determination, FCA will consider the nature and extent of the request and the particular circumstances giving rise to the request.
Table 1 to § 628.11—Calculation of Maximum Payout Amount
| Capital conservation buffer | Maximum payout ratio (as a percentage of eligible retained income) |
|---|---|
| >2.500 percent | No limitation. |
| ≤2.500 percent, and >1.875 percent | 60 percent. |
| ≤1.875 percent, and >1.250 percent | 40 percent. |
| ≤1.250 percent, and >0.625 percent | 20 percent. |
| ≤0.625 percent | 0 percent. |
Table 2 to § 628.11—Calculation of Maximum Leverage Payout Amount
| Leverage buffer | Maximum leverage payout ratio (as a percentage of eligible retained income) |
|---|---|
| >1.00 percent | No limitation. |
| ≤1.00 percent, and >0.75 percent | 60 percent. |
| ≤0.75 percent, and >0.50 percent | 40 percent. |
| ≤0.50 percent, and >0.25 percent | 20 percent. |
| ≤0.25 percent | 0 percent. |
(v) Other limitations on capital distributions. Additional limitations on capital distributions may apply to a System institution under subpart C of this part and under part 615, subparts L and M, of this chapter.
(vi) A System institution is subject to the lower of the maximum payout amount as determined under paragraph (a)(2)(iii) of this section and the maximum leverage payout amount as determined under paragraph (a)(2)(vi) of this section.
(b) [Reserved]
§§ 628.12-628.19 [Reserved]
Subpart C—Definition of Capital
§ 628.20 Capital components and eligibility criteria for tier 1 and tier 2 capital instruments.
(a) Regulatory capital components. A System institution’s regulatory capital components are:
(1) CET1 capital;
(2) AT1 capital; and
(3) Tier 2 capital.
(b) CET1 capital. CET1 capital is the sum of the CET1 capital elements in paragraph (b) of this section, minus regulatory adjustments and deductions in § 628.22. The CET1 capital elements are:
(1) Any common cooperative equity instrument issued by a System institution that meets all of the following criteria:
(i) The instrument is paid-in, issued directly by the System institution, and represents the most subordinated claim in a receivership, insolvency, liquidation, or similar proceeding of the System institution;
(ii) The holder of the instrument is entitled to a claim on the residual assets of the System institution after all senior claims have been satisfied in a receivership, insolvency, liquidation, or similar proceeding;
(iii) The instrument has no maturity date, can be redeemed only at the discretion of the System institution and with the prior approval of FCA, and does not contain any term or feature that creates an incentive to redeem;
(iv) The System institution did not create, through any action or communication, an expectation that it will buy back, cancel, redeem, or revolve the instrument, and the instrument does not include any term or feature that might give rise to such an expectation, except that the establishment of a revolvement period of 7 years or more, or the practice of redeeming or revolving the instrument no less than 7 years after issuance or allocation, will not be considered to create such an expectation;
(v) Any cash dividend payments on the instrument are paid out of the System institution’s net income or unallocated retained earnings, and are not subject to a limit imposed by the contractual terms governing the instrument;
(vi) The System institution has full discretion at all times to refrain from paying any dividends without triggering an event of default, a requirement to make a payment-in-kind, or an imposition of any other restrictions on the System institution;
(vii) Dividend payments and other distributions related to the instrument may be paid only after all legal and contractual obligations of the System institution have been satisfied, including payments due on more senior claims;
(viii) The holders of the instrument bear losses as they occur before any losses are borne by holders of preferred stock claims on the System institution and holders of any other claims with priority over common cooperative equity instruments in a receivership, insolvency, liquidation, or similar proceeding;
(ix) The instrument is classified as equity under GAAP;
(x) The System institution, or an entity that the System institution controls, did not purchase or directly or indirectly fund the purchase of the instrument, except that where there is an obligation for a member of the institution to hold an instrument in order to receive a loan or service from the System institution, an amount of that loan equal to no more than $1,000 of the borrower stock requirement under section 4.3A of the Act will not be considered as a direct or indirect funding where:
(A) The purpose of the loan is not the purchase of capital instruments of the System institution providing the loan; and
(B) The purchase or acquisition of one or more member equities of the institution is necessary in order for the beneficiary of the loan to become a member of the System institution;
(xi) The instrument is not secured, not covered by a guarantee of the System institution, and is not subject to any other arrangement that legally or economically enhances the seniority of the instrument;
(xii) The instrument is issued in accordance with applicable laws and regulations and with the institution’s capitalization bylaws;
(xiii) The instrument is reported on the System institution’s regulatory financial statements separately from other capital instruments; and
(xiv) The System institution’s capitalization bylaws, or a resolution adopted by its board of directors under § 628.21, provides that the institution:
(A) Establishes a minimum redemption or revolvement period of 7 years for equities included in CET1; and
(B) Shall not redeem, revolve, cancel, or remove any equities included in CET1 without prior approval of the FCA under paragraph (f) of this section, except that the statutory borrower stock described in paragraph (b)(1)(x) of this section, not to exceed $1,000, may be redeemed without a minimum period outstanding after issuance and without the prior approval of the FCA, as long as after the redemption, the System institution continues to comply with all minimum regulatory capital requirements.
(2) Unallocated retained earnings.
(3) Paid-in capital resulting from a merger of System institutions or repurchase of third-party capital.
(4)-(5) [Reserved]
(c) AT1 capital. AT1 capital is the sum of additional tier 1 capital elements and related surplus, minus the regulatory adjustments and deductions in §§ 628.22 and 628.23. AT1 capital elements are:
(1) Instruments and related surplus, other than common cooperative equities, that meet the following criteria:
(i) The instrument is issued and paid-in;
(ii) The instrument is subordinated to general creditors and subordinated debt holders of the System institution in a receivership, insolvency, liquidation, or similar proceeding;
(iii) The instrument is not secured, not covered by a guarantee of the System institution and not subject to any other arrangement that legally or economically enhances the seniority of the instrument;
(iv) The instrument has no maturity date and does not contain a dividend step-up or any other term or feature that creates an incentive to redeem;
(v) If callable by its terms, the instrument may be called by the System institution only after a minimum of 5 years following issuance, except that the terms of the instrument may allow it to be called earlier than 5 years upon the occurrence of a regulatory event that precludes the instrument from being included in AT1 capital, or a tax event. In addition:
(A) The System institution must receive prior approval from FCA to exercise a call option on the instrument.
(B) The System institution does not create at issuance of the instrument, through any action or communication, an expectation that the call option will be exercised.
(C) Prior to exercising the call option, or immediately thereafter, the System institution must either replace the instrument to be called with an equal amount of instruments that meet the criteria under paragraph (b) of this section or this paragraph (c),
(vi) Redemption or repurchase of the instrument requires prior approval from FCA;
(vii) The System institution has full discretion at all times to cancel dividends or other distributions on the instrument without triggering an event of default, a requirement to make a payment-in-kind, or an imposition of other restrictions on the System institution except in relation to any distributions to holders of common cooperative equity instruments or other instruments that are pari passu with the instrument;
(viii) Any distributions on the instrument are paid out of the System institution’s net income, unallocated retained earnings, or surplus related to other AT1 capital instruments;
(ix) The instrument does not have a credit-sensitive feature, such as a dividend rate that is reset periodically based in whole or in part on the System institution’s credit quality, but may have a dividend rate that is adjusted periodically independent of the System institution’s credit quality, in relation to general market interest rates or similar adjustments;
(x) The paid-in amount is classified as equity under GAAP;
(xi) The System institution did not purchase or directly or indirectly fund the purchase of the instrument;
(xii) The instrument does not have any features that would limit or discourage additional issuance of capital by the System institution, such as provisions that require the System institution to compensate holders of the instrument if a new instrument is issued at a lower price during a specified timeframe; and
(xiii) [Reserved]
(xiv) The System institution’s capitalization bylaws, or a resolution adopted by its board of directors under § 628.21, provides that the institution:
(A) Establishes a minimum redemption or no-call period of 5 years for equities included in additional tier 1; and
(B) Shall not redeem, revolve, cancel, or remove any equities included in additional tier 1 capital without prior approval of the FCA under paragraph (f) of this section.
(2)-(3) [Reserved]
(4) Notwithstanding the criteria for AT1 capital instruments referenced in paragraph (c)(1) of this section:
(i) [Reserved]
(ii) An instrument with terms that provide that the instrument may be called earlier than 5 years upon the occurrence of a rating agency event does not violate the criterion in paragraph (c)(1)(v) of this section provided that the instrument was issued and included in a System institution’s core surplus capital prior to January 1, 2017, and that such instrument satisfies all other criteria under this § 628.20(c).
(d) Tier 2 Capital. Tier 2 capital is the sum of tier 2 capital elements and any related surplus minus regulatory adjustments and deductions in §§ 628.22 and 628.23. Tier 2 capital elements are:
(1) Instruments (plus related surplus) that meet the following criteria:
(i) The instrument is issued and paid-in;
(ii) The instrument is subordinated to general creditors of the System institution;
(iii) The instrument is not secured, not covered by a guarantee of the System institution and not subject to any other arrangement that legally or economically enhances the seniority of the instrument in relation to more senior claims;
(iv) The instrument has a minimum original maturity of at least 5 years. At the beginning of each of the last 5 years of the life of the instrument, the amount that is eligible to be included in tier 2 capital is reduced by 20 percent of the original amount of the instrument (net of redemptions) and is excluded from regulatory capital when the remaining maturity is less than 1 year. In addition, the instrument must not have any terms or features that require, or create significant incentives for, the System institution to redeem the instrument prior to maturity;
(v) The instrument, by its terms, may be called by the System institution only after a minimum of 5 years following issuance, except that the terms of the instrument may allow it to be called sooner upon the occurrence of an event that would preclude the instrument from being included in tier 2 capital, or a tax event. In addition:
(A) The System institution must receive the prior approval of FCA to exercise a call option on the instrument.
(B) The System institution does not create at issuance, through action or communication, an expectation the call option will be exercised.
(C) Prior to exercising the call option, or immediately thereafter, the System institution must either: replace any amount called with an equivalent amount of an instrument that meets the criteria for regulatory capital under this section;
(vi) The holder of the instrument must have no contractual right to accelerate payment of principal, dividends, or interest on the instrument, except in the event of a receivership, insolvency, liquidation, or similar proceeding of the System institution;
(vii) The instrument has no credit-sensitive feature, such as a dividend or interest rate that is reset periodically based in whole or in part on the System institution’s credit standing, but may have a dividend rate that is adjusted periodically independent of the System institution’s credit standing, in relation to general market interest rates or similar adjustments;
(viii) The System institution has not purchased and has not directly or indirectly funded the purchase of the instrument, except that where common cooperative equity instruments are held by a member of the institution in connection with a loan, and the institution funds the acquisition of such instruments, that loan shall not be considered as a direct or indirect funding where:
(A) The purpose of the loan is not the purchase of capital instruments of the System institution providing the loan;
(B) The purchase or acquisition of one or more capital instruments of the institution is necessary in order for the beneficiary of the loan to become a member of the System institution; and
(C) The capital instruments are in excess of $1,000.
(ix) [Reserved]
(x) Redemption of the instrument prior to maturity or repurchase is at the discretion of the System institution and requires the prior approval of the FCA;
(xi) The System institution’s capitalization bylaws, or a resolution adopted by its board of directors under § 628.21, provides that the institution:
(A) Establishes a minimum call, redemption or revolvement period of 5 years for equities included in tier 2 capital; and
(B) Shall not call, redeem, revolve, cancel, or remove any equities included in tier 2 capital without prior approval of the FCA under paragraph (f) of this section.
(2) [Reserved]
(3) AACL up to 1.25 percent of the System institution’s total risk-weighted assets not including any amount of the AACL.
(4)-(6) [Reserved]
(e) FCA approval of a capital element. (1) A System institution must receive FCA prior approval to include a capital element (as listed in this section) in its CET1 capital, AT1 capital, or tier 2 capital unless the element is equivalent, in terms of capital quality and ability to absorb losses with respect to all material terms, to a regulatory capital element FCA determined may be included in regulatory capital pursuant to paragraph (e)(3) of this section.
(i)-(ii) [Reserved]
(2) [Reserved]
(3) After determining that a regulatory capital element may be included in a System institution’s CET1 capital, AT1 capital, or tier 2 capital, FCA will make its decision publicly available.
(f) FCA prior approval of capital redemptions and dividends included in tier 1 and tier 2 capital. (1) Subject to the provisions of paragraphs (f)(5) and (6) of this section, a System institution must obtain the prior approval of the FCA before paying cash dividend payments, cash patronage payments, or redeeming equities included in tier 1 or tier 2 capital, other than term equities redeemed on their maturity date.
(2) At least 30 days prior to the intended action, the System institution must submit a request for approval to the FCA. The FCA’s 30-day review period begins on the date on which the FCA receives the request.
(3) The request is deemed to be granted if the FCA does not notify the System institution to the contrary before the end of the 30-day review period.
(4)(i) A System institution may request advance approval to cover several anticipated cash dividend or patronage payments, or equity redemptions, provided that the institution projects sufficient current net income during those periods to support the amount of the cash dividend or patronage payments and equity redemptions. In determining whether to grant advance approval, the FCA will consider:
(A) The reasonableness of the institution’s request, including its historical and projected cash dividend and patronage payments and equity redemptions;
(B) The institution’s historical trends and current projections for capital growth through earnings retention;
(C) The overall condition of the institution, with particular emphasis on current and projected capital adequacy as described in § 628.10(e); and
(D) Any other information that the FCA deems pertinent to reviewing the institution’s request.
(ii) After considering these standards, the FCA may grant advance prior approval of an institution’s request to pay cash dividends and patronage or to redeem or revolve equity. Notwithstanding any such approval, an institution may not declare a dividend or patronage payment or redeem or revolve equities if, after such declaration, redemption, or revolvement, the institution would not meet its regulatory capital requirements set forth in this part and part 615 of this chapter.
(5) Subject to any capital distribution restrictions specified in § 628.11, a System institution is deemed to have FCA prior approval for revolvements and redemptions of common cooperative equities, for cash dividend payments on all equities, and for cash patronage payments on all cooperative equities, provided that:
(i) For redemptions or revolvements of common cooperative equities included in CET1 capital or tier 2 capital, other than as provided in paragraph (f)(6) of this section, the institution issued or allocated such equities at least 7 years ago for CET1 capital and at least 5 years ago for tier 2 capital;
(ii) After such cash payments have been declared and defined by resolution of the board, the dollar amount of the System institution’s CET1 capital at quarter-end equals or exceeds the dollar amount of CET1 capital on the same quarter-end in the previous calendar year; and
(iii) The System institution continues to comply with all regulatory capital requirements and supervisory or enforcement actions.
(6) The following equities are eligible to be redeemed or revolved under paragraph (f)(5)(i) of this section in less than the applicable minimum required holding period (7 years for CET1 inclusion and 5 years for tier 2 inclusion), provided that the requirements of paragraphs (f)(5)(ii) and (iii) of this section are met:
(i) Equities mandated to be redeemed or retired by a final order of a court of competent jurisdiction;
(ii) Equities held by the estate of a deceased former borrower; and
(iii) Equities that the institution is required to cancel under § 615.5290 of this chapter in connection with a restructuring under part 617 of this chapter.
§ 628.21 Capital bylaw or board resolution to include equities in tier 1 and tier 2 capital.
In order to include otherwise eligible purchased and allocated equities in tier 1 capital and tier 2 capital, the System institution must adopt a capitalization bylaw, or its board of directors must adopt a binding resolution, which resolution must be acknowledged by the board on an annual basis in the capital adequacy plan described in § 615.5200, in which the institution undertakes the following, as applicable:
(a) The institution shall obtain prior FCA approval under § 628.20(f) before:
(1) Redeeming or revolving the equities included in common equity tier 1 (CET1) capital;
(2) Redeeming or calling the equities included in additional tier 1 capital; and
(3) Redeeming, revolving, or calling instruments included in tier 2 capital other than limited life preferred stock or subordinated debt on the maturity date.
(b) The equities shall have a minimum redemption or revolvement period as follows:
(1) 7 years for equities included in CET1 capital, except that the statutory borrower stock described in § 628.20(b)(1)(x) may be redeemed without a minimum holding period and that equities designated as unallocated retained earnings (URE) equivalents cannot be revolved without submitting a written request to the FCA for prior approval;
(2) a minimum no-call, repurchase, or redemption period of 5 years for additional tier 1 capital; and
(3) a minimum no-call, repurchase, redemption, or revolvement period of 5 years for tier 2 capital.
(c) The institution shall submit to FCA a written request for prior approval before:
(1) Redesignating URE equivalents as equities that the institution may exercise its discretion to redeem other than upon dissolution or liquidation;
(2) Removing equities or other instruments from CET1, additional tier 1, or tier 2 capital other than through repurchase, cancellation, redemption or revolvement; and
(3) Redesignating equities included in one component of regulatory capital (CET1 capital, additional tier 1 capital, or tier 2 capital) for inclusion in another component of regulatory capital.
(d) The institution shall not exercise its discretion to revolve URE equivalents except upon dissolution or liquidation and shall not offset URE equivalents against a loan in default except as required under final order of a court of competent jurisdiction or if required under § 615.5290 in connection with a restructuring under part 617 of this chapter.
(e) The minimum redemption and revolvement period (holding period) for purchased and allocated equities starts on the common cooperative equity issuance date, as defined in § 628.2.
§ 628.22 Regulatory capital adjustments and deductions.
(a) Regulatory capital deductions from CET1 capital. A System institution must deduct from the sum of its CET1 capital elements the items set forth in this paragraph (a):
(1) Goodwill, net of associated deferred tax liabilities (DTLs) in accordance with paragraph (e) of this section;
(2) Intangible assets, other than mortgage servicing assets (MSAs), net of associated DTLs in accordance with paragraph (e) of this section;
(3) Deferred tax assets (DTAs) that arise from net operating loss and tax credit carryforwards net of any related valuation allowances and net of DTLs in accordance with paragraph (e) of this section;
(4) Any gain-on-sale in connection with a securitization exposure;
(5) Any defined benefit pension fund net asset, net of any associated DTL in accordance with paragraph (e) of this section, except that, with FCA prior approval, this deduction is not required for any defined benefit pension fund net asset to the extent the institution has unrestricted and unfettered access to the assets in that fund;
(6) The System institution’s allocated equity investment in another System institution or service corporation; and
(7) [Reserved]
(8) If, without the required prior FCA approval, the System institution redeems or revolves purchased or allocated equities included in its CET1 capital that have been outstanding for less than 7 years, the FCA may take appropriate supervisory or enforcement actions against the institution, which may include requiring the institution to deduct a portion of its purchased and allocated equities from CET1 capital.
(b) Regulatory adjustments to CET1 capital. (1) Any accrual of a patronage or dividend payable or receivable recognized in the financial statements prior to a related board declaration or resolution must be reversed to or from unallocated retained earnings for purposes of calculating CET1 capital.
(2) [Reserved]
(c) Deductions from regulatory capital.
(2) Corresponding deduction approach. For purposes of subpart C of this part, the corresponding deduction approach is the methodology used for the deductions from regulatory capital related to purchased equity investments in another System institution (as described in paragraph (c)(5) of this section). Under the corresponding deduction approach, a System institution must make deductions from the component of capital for which the underlying instrument would qualify if it were issued by the System institution itself. If the System institution does not have a sufficient amount of a specific component of capital to effect the required deduction, the shortfall must be deducted according to paragraph (f) of this section.
(i)-(iii) [Reserved]
(3)-(4) [Reserved]
(5) Purchased equity investments in another System institution. System institutions must deduct all purchased equity investments in another System institution, service corporation, or the Funding Corporation by applying the corresponding deduction approach. The deductions described in this section are net of associated DTLs in accordance with paragraph (e) of this section. With prior written approval of FCA, for the period stipulated by FCA, a System institution is not required to deduct an investment in the capital of another institution in distress if such investment is made to provide financial support to the System institution as determined by FCA.
(d) [Reserved]
(e) Netting of DTLs against assets subject to deduction. (1) The netting of DTLs against assets that are subject to deduction under this section is required, if the following conditions are met:
(i) The DTL is associated with the asset; and
(ii) The DTL would be extinguished if the associated asset becomes impaired or is derecognized under GAAP.
(2) A DTL may only be netted against a single asset.
(3)-(4) [Reserved]
(5) A System institution must net DTLs against assets subject to deduction under this section in a consistent manner from reporting period to reporting period.
(f) Insufficient amounts of a specific regulatory capital component to effect deductions. Under the corresponding deduction approach, if a System institution does not have a sufficient amount of a specific component of capital to effect the required deduction after completing the deductions required under paragraph (c) of this section, the System institution must deduct the shortfall from the next higher (that is, more subordinated) component of regulatory capital.
(g) Treatment of assets that are deducted. A System institution must exclude from total risk-weighted assets any item deducted from regulatory capital under paragraphs (a) and (c) of this section.
(h) [Reserved]
§ 628.23 Limit on inclusion of third-party capital in total (tier 1 and tier 2) capital.
The combined amount of third-party capital instruments that a System institution may include in total (tier 1 and tier 2) capital is equal to the greater of the following:
(a) The then existing limit, if any; or
(b) The lesser of:
(1) Forty percent of total capital, calculated by taking two thirds of the average of the previous 4 quarters of total capital reported on the institution’s Call Report filed with the FCA, less any amounts of third-party capital reported in total capital; or
(2) The average of the previous 4 quarters of CET1 capital reported on its Call Report filed with the FCA.
(c) Treatment of assets that are deducted. A System institution must exclude from total risk-weighted assets any item deducted from regulatory capital under this section.
§§ 628.24-628.29 [Reserved]
Subpart D—Risk-Weighted Assets—Standardized Approach
§ 628.30 Applicability.
(a) This subpart sets forth methodologies for determining risk-weighted assets for purposes of the generally applicable risk-based capital requirements for all System institutions.
(b) [Reserved]
Risk-Weighted Assets for General Credit Risk
§ 628.31 Mechanics for calculating risk-weighted assets for general credit risk.
(a) General risk-weighting requirements. A System institution must apply risk weights to its exposures as follows:
(1) A System institution must determine the exposure amount of each on-balance sheet exposure, each OTC derivative contract, and each off-balance sheet commitment, trade and transaction-related contingency, guarantee, repo-style transaction, financial standby letter of credit, forward agreement, or other similar transaction that is not:
(i) An unsettled transaction subject to § 628.38;
(ii) A cleared transaction subject to § 628.35;
(iii) [Reserved]
(iv) A securitization exposure subject to §§ 628.41 through 628.45; or
(v) An equity exposure (other than an equity OTC derivative contract) subject to §§ 628.51 through 628.53.
(2) The System institution must multiply each exposure amount by the risk weight appropriate to the exposure based on the exposure type or counterparty, eligible guarantor, or financial collateral to determine the risk-weighted asset amount for each exposure.
(b) Total risk-weighted assets for general credit risk equals the sum of the risk-weighted asset amounts calculated under this section.
§ 628.32 General risk weights.
(a) Sovereign exposures—(1) Exposures to the U.S. Government. (i) Notwithstanding any other requirement in this subpart, a System institution must assign a 0-percent risk weight to:
(A) An exposure to the U.S. Government, its central bank, or a U.S. Government agency; and
(B) The portion of an exposure that is directly and unconditionally guaranteed by the U.S. Government, its central bank, or a U.S. Government agency. This includes a deposit or other exposure, or the portion of a deposit or other exposure that is insured or otherwise unconditionally guaranteed by the Federal Deposit Insurance Corporation or National Credit Union Administration.
(ii) A System institution must assign a 20-percent risk weight to the portion of an exposure that is conditionally guaranteed by the U.S. Government, its central bank, or a U.S. Government agency. This includes an exposure, or the portion of an exposure, that is conditionally guaranteed by the Federal Deposit Insurance Corporation or National Credit Union Administration.
(2) Other sovereign exposures. In accordance with Table 1 to § 628.32, a System institution must assign a risk weight to a sovereign exposure based on the Country Risk Classification (CRC) applicable to the sovereign or the sovereign’s Organization for Economic Cooperation and Development (OECD) membership status if there is no CRC applicable to the sovereign.
Table 1 to § 628.32—Risk Weights for Sovereign Exposures
| Risk weight (in percent) | |
|---|---|
| CRC: | |
| 0-1 | 0 |
| 2 | 20 |
| 3 | 50 |
| 4-6 | 100 |
| 7 | 150 |
| OECD Member with no CRC | 0 |
| Non-OECD Member with no CRC | 100 |
| Sovereign Default | 150 |
(3) Certain sovereign exposures. Notwithstanding paragraph (a)(2) of this section, a System institution may assign to a sovereign exposure a risk weight that is lower than the applicable risk weight in table 1 to § 628.32 if:
(i) The exposure is denominated in the sovereign’s currency;
(ii) The System institution has at least an equivalent amount of liabilities in that currency; and
(iii) The risk weight is not lower than the risk weight that the sovereign allows banking organizations under its jurisdiction to assign to the same exposures to the sovereign.
(4) Exposures to a non-OECD member sovereign with no CRC. Except as provided in paragraphs (a)(3), (5), and (6) of this section, a System institution must assign a 100-percent risk weight to a sovereign exposure if the sovereign does not have a CRC.
(5) Exposures to an OECD member sovereign with no CRC. Except as provided in paragraph (a)(6) of this section, a System institution must assign a 0-percent risk weight to an exposure to a sovereign that is a member of the OECD if the sovereign does not have a CRC.
(6) Sovereign default. A System institution must assign a 150-percent risk weight to a sovereign exposure immediately upon determining that an event of sovereign default has occurred, or if an event of sovereign default has occurred during the previous 5 years.
(b) Certain supranational entities and multilateral development banks (MDBs). A System institution must assign a 0-percent risk weight to an exposure to the Bank for International Settlements, the European Central Bank, the European Commission, the International Monetary Fund, or an MDB.
(c) Exposures to Government-sponsored enterprises (GSEs). (1) A System institution must assign a 20-percent risk weight to an exposure to a GSE other than an equity exposure or preferred stock.
(2) A System institution must assign a 100-percent risk weight to preferred stock issued by a non-System GSE.
(3) Purchased equity investments (including preferred stock investments) in other System institutions do not receive a risk weight, because they are deducted from capital in accordance with § 628.22.
(d) Exposures to depository institutions, foreign banks, and credit unions—(1) Exposures to U.S. depository institutions and credit unions. A System institution must assign a 20-percent risk weight to an exposure to a depository institution or credit union that is organized under the laws of the United States or any state thereof, except as otherwise provided in this paragraph (d). This risk weight applies to an exposure a System bank has to another financing institution (OFI) that is a depository institution or credit union organized under the laws of the United States or any state thereof or is owned and controlled by such an entity that guarantees the exposure. If the OFI exposure does not satisfy these requirements, it must be assigned a risk weight as a corporate exposure pursuant to paragraph (f)(1)(ii) or (f)(2) of this section.
(2) Exposures to foreign banks. (i) Except as otherwise provided under paragraph (d)(2)(iv) of this section, a System institution must assign a risk weight to an exposure to a foreign bank, in accordance with table 2 to § 628.32, based on the CRC rating that corresponds to the foreign bank’s home country or the OECD membership status of the foreign bank’s home country if there is no CRC applicable to the foreign bank’s home country.
Table 2 to § 628.32—Risk Weights for Exposures to Foreign Banks
| Risk weight (in percent) | |
|---|---|
| CRC: | |
| 0-1 | 20 |
| 2 | 50 |
| 3 | 100 |
| 4-7 | 150 |
| OECD Member with No CRC | 20 |
| Non-OECD with No CRC | 100 |
| Sovereign Default | 150 |
(ii) A System institution must assign a 20-percent risk weight to an exposure to a foreign bank whose home country is a member of the OECD and does not have a CRC.
(iii) A System institution must assign a 100-percent risk weight to an exposure to a foreign bank whose home country is not a member of the OECD and does not have a CRC, with the exception of self-liquidating, trade-related contingent items that arise from the movement of goods, and that have a maturity of 3 months or less, which may be assigned a 20-percent risk weight.
(iv) A System institution must assign a 150-percent risk weight to an exposure to a foreign bank immediately upon determining that an event of sovereign default has occurred in the bank’s home country, or if an event of sovereign default has occurred in the foreign bank’s home country during the previous 5 years.
(3) [Reserved]
(e) Exposures to public sector entities (PSEs)—(1) Exposures to U.S. PSEs. (i) A System institution must assign a 20-percent risk weight to a general obligation exposure to a PSE that is organized under the laws of the United States or any state or political subdivision thereof.
(ii) A System institution must assign a 50-percent risk weight to a revenue obligation exposure to a PSE that is organized under the laws of the United States or any state or political subdivision thereof.
(2) Exposures to foreign PSEs. (i) Except as provided in paragraphs (e)(1) and (3) of this section, a System institution must assign a risk weight to a general obligation exposure to a foreign PSE, in accordance with Table 3 to § 628.32, based on the CRC that corresponds to the PSE’s home country or the OECD membership status of the PSE’s home country if there is no CRC applicable to the PSE’s home country.
(ii) Except as provided in paragraphs (e)(1) and (3) of this section, a System institution must assign a risk weight to a revenue obligation exposure to a foreign PSE, in accordance with Table 4 to § 628.32, based on the CRC that corresponds to the PSE’s home country; or the OECD membership status of the PSE’s home country if there is no CRC applicable to the PSE’s home country.
(3) A System institution may assign a lower risk weight than would otherwise apply under tables 3 and 4 to § 628.32 to an exposure to a foreign PSE if:
(i) The PSE’s home country supervisor allows banks under its jurisdiction to assign a lower risk weight to such exposures; and
(ii) The risk weight is not lower than the risk weight that corresponds to the PSE’s home country in accordance with table 1 to § 628.32.
Table 3 to § 628.32—Risk Weights for Non-U.S. PSE General Obligations
| Risk weight (in percent) | |
|---|---|
| CRC: | |
| 0-1 | 20 |
| 2 | 50 |
| 3 | 100 |
| 4-7 | 150 |
| OECD Member with No CRC | 20 |
| Non-OECD Member with No CRC | 100 |
| Sovereign Default | 150 |
Table 4 to § 628.32—Risk Weights for Non-U.S. PSE Revenue Obligations
| Risk weight (in percent) | |
|---|---|
| CRC: | |
| 0-1 | 50 |
| 2-3 | 100 |
| 4-7 | 150 |
| OECD Member with No CRC | 50 |
| Non-OECD Member with No CRC | 100 |
| Sovereign Default | 150 |
(4) Exposures to PSEs from an OECD member sovereign with no CRC. (i) A System institution must assign a 20-percent risk weight to a general obligation exposure to a PSE whose home country is a OECD member sovereign with no CRC.
(ii) A System institution must assign a 50-percent risk weight to a revenue obligation exposure to a PSE whose country is an OECD member sovereign with no CRC.
(5) Exposures to PSEs whose home country is not an OECD member sovereign with no CRC. A System institution must assign a 100-percent risk weight to an exposure to a PSE whose home country is not a member of the OECD and does not have a CRC.
(6) A System institution must assign a 150-percent risk weight to a PSE exposure immediately upon determining that an event of sovereign default has occurred in a PSE’s home country or if an event of sovereign default has occurred in the PSE’s home country during the previous 5 years.
(f) Corporate exposures—(1) 100-percent risk weight. Except as provided in paragraph (f)(2) of this section, a System institution must assign a 100-percent risk weight to all its corporate exposures. Assets assigned a risk weight under this provision include:
(i) Borrower loans such as agricultural loans and consumer loans, regardless of the corporate form of the borrower, unless those loans qualify for different risk weights under other provisions of this subpart D;
(ii) System bank exposures to OFIs that do not satisfy the requirements for a 20-percent risk weight pursuant to paragraph (d)(1) of this section or a 50-percent risk weight pursuant to paragraph (f)(2) of this section; and
(iii) Premises, fixed assets, and other real estate owned.
(2) 50-percent risk weight. Unless the OFI satisfies the requirements for a 20-percent risk weight pursuant to paragraph (d)(1) of this section, a System institution must assign a 50-percent risk weight to an exposure to an OFI that satisfies at least one of the following requirements:
(i) The OFI is investment grade or is owned and controlled by an investment grade entity that guarantees the exposure; or
(ii) The OFI meets capital, risk identification and control, and operational standards similar to the OFIs identified in paragraph (d)(1) of this section.
(g) Residential mortgage exposures. (1) A System institution must assign a 50-percent risk weight to a first-lien residential mortgage exposure that:
(i) Is secured by a property that is either owner-occupied or rented;
(ii) Is made in accordance with prudent underwriting standards suitable for residential property, including standards relating to the loan amount as a percent of the appraised value of the property;
(iii) Is not 90 days or more past due or carried in nonaccrual status; and
(iv) Is not restructured or modified.
(2) A System institution must assign a 100-percent risk weight to a first-lien residential mortgage exposure that does not meet the criteria in paragraph (g)(1) of this section, and to junior-lien residential mortgage exposures.
(3) For the purpose of this paragraph (g), if a System institution holds the first-lien and junior-lien(s) residential mortgage exposures, and no other party holds an intervening lien, the System institution must combine the exposures and treat them as a single first-lien residential mortgage exposure.
(4) A loan modified or restructured solely pursuant to the U.S. Treasury’s Home Affordable Mortgage Program is not modified or restructured for purposes of this section.
(h)-(j) [Reserved]
(k) Past due and nonaccrual exposures. Except for a sovereign exposure or a residential mortgage exposure, a System institution must determine a risk weight for an exposure that is 90 days or more past due or in nonaccrual status according to the requirements set forth in this paragraph (k).
(1) A System institution must assign a 150-percent risk weight to the portion of the exposure that is not guaranteed or that is not secured by financial collateral.
(2) A System institution may assign a risk weight to the guaranteed portion of a past due or nonaccrual exposure based on the risk weight that applies under § 628.36 if the guarantee or credit derivative meets the requirements of that section.
(3) A System institution may assign a risk weight to the portion of a past due or nonaccrual exposure that is collateralized by financial collateral based on the risk weight that applies under § 628.37 if the financial collateral meets the requirements of that section.
(l) Other assets. (1) A System institution must assign a 0-percent risk weight to cash owned and held in all offices of the System institution or in transit; to gold bullion held in the System institution’s own vaults or held in a depository institution’s vaults on an allocated basis, to the extent the gold bullion assets are offset by gold bullion liabilities; and to exposures that arise from the settlement of cash transactions (such as equities, fixed income, spot foreign exchange (FX), and spot commodities) with a central counterparty where there is no assumption of ongoing counterparty credit risk by the central counterparty after settlement of the trade.
(2) A System institution must assign a 20-percent risk weight to cash items in the process of collection.
(3) A System institution must assign a 100-percent risk weight to deferred tax assets (DTAs) arising from temporary differences in relation to net operating loss carrybacks.
(4) A System institution must assign a 100-percent risk weight to all MSAs.
(5) A System institution must assign a 100-percent risk weight to all assets that are not specifically assigned a different risk weight under this subpart and that are not deducted from tier 1 or tier 2 capital pursuant to § 628.22.
(6) [Reserved]
§ 628.33 Off-balance sheet exposures.
(a) General. (1) A System institution must calculate the exposure amount of an off-balance sheet exposure using the credit conversion factors (CCFs) in paragraph (b) of this section.
(2) Where a System institution commits to provide a commitment, the System institution may apply the lower of the two applicable CCFs.
(3) Where a System institution provides a commitment structured as a syndication or participation, the System institution is only required to calculate the exposure amount for its pro rata share of the commitment.
(4) Where a System institution provides a commitment, enters into a repurchase agreement, or provides a credit enhancing representation and warranty, and such commitment, repurchase agreement, or credit-enhancing representation and warranty is not a securitization exposure, the exposure amount shall be no greater than the maximum contractual amount of the commitment, repurchase agreement, or credit-enhancing representation and warranty, as applicable.
(5) The exposure amount of a System bank’s commitment to an association or OFI is the difference between the association’s or OFI’s maximum credit limit with the System bank (as established by the general financing agreement or promissory note, as required by § 614.4125(d) of this chapter), and the amount the association or OFI has borrowed from the System bank.
(b) Credit conversion factors—(1) Zero-percent (0%) CCF. A System institution must apply a 0-percent CCF to a commitment that is unconditionally cancelable by the System institution.
(2) Twenty-percent (20%) CCF. A System institution must apply a 20-percent CCF to the amount of:
(i) Commitments, other than a System bank’s commitment to an association or OFI, with an original maturity of 14 months or less that are not unconditionally cancelable by the System institution.
(ii) Self-liquidating, trade-related contingent items that arise from the movement of goods, with an original maturity of 14 months or less.
(iii) A System bank’s commitment to an association or OFI that is not unconditionally cancelable by the System bank, regardless of maturity.
(3) Fifty-percent (50%) CCF. A System institution must apply a 50-percent CCF to the amount of:
(i) Commitments, other than a System bank’s commitment to an association or OFI, with an original maturity of more than 14 months that are not unconditionally cancelable by the System institution.
(ii) Transaction-related contingent items, including performance bonds, bid bonds, warranties, and performance standby letters of credit.
(4) One hundred-percent (100%) CCF. A System institution must apply a 100-percent CCF to the following off-balance sheet items and other similar transactions:
(i) Guarantees;
(ii) Repurchase agreements (the off-balance sheet component of which equals the sum of the current fair values of all positions the System institution has sold subject to repurchase);
(iii) Credit-enhancing representations and warranties that are not securitization exposures;
(iv) Off-balance sheet securities lending transactions (the off-balance sheet component of which equals the sum of the current fair values of all positions the System institution has lent under the transaction);
(v) Off-balance sheet securities borrowing transactions (the off-balance sheet component of which equals the sum of the current fair values of all non-cash positions the System institution has posted as collateral under the transaction);
(vi) Financial standby letters of credit; and
(vii) Forward agreements.
§ 628.34 OTC derivative contracts.
(a) Exposure amount—(1) Single OTC derivative contract. Except as modified by paragraph (b) of this section, the exposure amount for a single OTC derivative contract that is not subject to a qualifying master netting agreement is equal to the sum of the System institution’s current credit exposure and potential future credit exposure (PFE) on the OTC derivative contract.
(i) Current credit exposure. The current credit exposure for a single OTC derivative contract is the greater of the mark-to-fair value of the OTC derivative contract or 0.
(ii) PFE. (A) The PFE for a single OTC derivative contract, including an OTC derivative contract with a negative mark-to-fair value, is calculated by multiplying the notional principal amount of the OTC derivative contract by the appropriate conversion factor in Table 1 to § 628.34.
(B) For purposes of calculating either the PFE under this paragraph or the gross PFE under paragraph (a)(2) of this section for exchange rate contracts and other similar contracts in which the notional principal amount is equivalent to the cash flows, notional principal amount is the net receipts to each party falling due on each value date in each currency.
(C) For an OTC derivative contract that does not fall within one of the specified categories in Table 1 to § 628.34, the PFE must be calculated using the appropriate “other” conversion factor.
(D) A System institution must use an OTC derivative contract’s effective notional principal amount (that is, the apparent or stated notional principal amount multiplied by any multiplier in the OTC derivative contract) rather than the apparent or stated notional principal amount in calculating PFE.
(E) The PFE of the protection provider of a credit derivative is capped at the net present value of the amount of unpaid premiums.
Table 1 to § 628.34—Conversion Factor Matrix for Derivative Contracts
1
| Remaining maturity 2 | Interest rate | Foreign exchange rate and gold | Credit (investment grade reference asset) 3 | Credit (non- investment- grade reference asset) | Equity | Precious metals (except gold) | Other |
|---|---|---|---|---|---|---|---|
| One (1) year or less | 0.00 | 0.01 | 0.05 | 0.10 | 0.06 | 0.07 | 0.10 |
| Greater than one (1) year and less than or equal to five (5) years | 0.005 | 0.05 | 0.05 | 0.10 | 0.08 | 0.07 | 0.12 |
| Greater than five (5) years | 0.015 | 0.075 | 0.05 | 0.10 | 0.10 | 0.08 | 0.15 |
1 For a derivative contract with multiple exchanges of principal, the conversion factor is multiplied by the number of remaining payments in the derivative contract.
2 For an OTC derivative contract that is structured such that on specified dates any outstanding exposure is settled and the terms are reset so that the fair value of the contract is 0, the remaining maturity equals the time until the next reset date. For an interest rate derivative contract with a remaining maturity of greater than 1 year that meets these criteria, the minimum conversion factor is 0.005.
3 A System institution must use the column labeled “Credit (investment-grade reference asset)” for a credit derivative whose reference asset is an outstanding unsecured long-term debt security without credit enhancement that is investment grade. A System institution must use the column labeled “Credit (non-investment-grade reference asset)” for all other credit derivatives.
(2) Multiple OTC derivative contracts subject to a qualifying master netting agreement. Except as modified by paragraph (b) of this section, the exposure amount for multiple OTC derivative contracts subject to a qualifying master netting agreement is equal to the sum of the net current credit exposure and the adjusted sum of the PFE amounts for all OTC derivative contracts subject to the qualifying master netting agreement.
(i) Net current credit exposure. The net current credit exposure is the greater of the net sum of all positive and negative mark-to-fair values of the individual OTC derivative contracts subject to the qualifying master netting agreement or 0.
(ii) Adjusted sum of the PFE amounts. The adjusted sum of the PFE amounts, Anet, is calculated as:
(b) Recognition of credit risk mitigation of collateralized OTC derivative contracts. (1) A System institution may recognize the credit risk mitigation benefits of financial collateral that secures an OTC derivative contract or multiple OTC derivative contracts subject to a qualifying master netting agreement (netting set) by using the simple approach in § 628.37(b).
(2) Alternatively, if the financial collateral securing a contract or netting set described in paragraph (b)(1) of this section is marked-to-fair value on a daily basis and subject to a daily margin maintenance requirement, a System institution may recognize the credit risk mitigation benefits of financial collateral that secures the contract or netting set by using the collateral haircut approach in § 628.37(c).
(c) Counterparty credit risk for OTC credit derivatives—(1) Protection purchasers. A System institution that purchases an OTC credit derivative that is recognized under § 628.36 as a credit risk mitigant is not required to compute a separate counterparty credit risk capital requirement under § 628.32 provided that the System institution does so consistently for all such credit derivatives. The System institution must either include all or exclude all such credit derivatives that are subject to a qualifying master netting agreement from any measure used to determine counterparty credit risk exposure to all relevant counterparties for risk-based capital purposes.
(2) Protection providers. (i) A System institution that is the protection provider under an OTC credit derivative must treat the OTC credit derivative as an exposure to the underlying reference asset. The System institution is not required to compute a counterparty credit risk capital requirement for the OTC credit derivative under § 628.32, provided that this treatment is applied consistently for all such OTC credit derivatives. The System institution must either include all or exclude all such OTC credit derivatives that are subject to a qualifying master netting agreement from any measure used to determine counterparty credit risk exposure.
(ii) The provisions of paragraph (c)(2) of this section apply to all relevant counterparties for risk-based capital purposes.
(d) Counterparty credit risk for OTC equity derivatives. (1) A System institution must treat an OTC equity derivative contract as an equity exposure and compute a risk-weighted asset amount for the OTC equity derivative contract under §§ 628.51 through 628.53.
(2) [Reserved]
(3) If the System institution risk weights the contract under the Simple Risk-Weight Approach (SRWA) in § 628.52, the System institution may choose not to hold risk-based capital against the counterparty credit risk of the OTC equity derivative contract, as long as it does so for all such contracts. Where the OTC equity derivative contracts are subject to a qualifying master netting agreement, a System institution using the SRWA must either include all or exclude all of the contracts from any measure used to determine counterparty credit risk exposure.
(e) [Reserved]
§ 628.35 Cleared transactions.
(a) General requirements—(1) Clearing member clients. A System institution that is a clearing member client must use the methodologies described in paragraph (b) of this section to calculate risk-weighted assets for a cleared transaction.
(2) [Reserved]
(b) Clearing member client System institutions—(1) Risk-weighted assets for cleared transactions. (i) To determine the risk-weighted asset amount for a cleared transaction, a System institution that is a clearing member client must multiply the trade exposure amount for the cleared transaction, calculated in accordance with paragraph (b)(2) of this section, by the risk weight appropriate for the cleared transaction, determined in accordance with paragraph (b)(3) of this section.
(ii) A clearing member client System institution’s total risk-weighted assets for cleared transactions is the sum of the risk-weighted asset amounts for all its cleared transactions.
(2) Trade exposure amount. (i) For a cleared transaction that is either a derivative contract or netting set of derivative contracts, the trade exposure amount equals:
(A) The exposure amount for the derivative contract or netting set of derivative contracts, calculated using the current exposure method (CEM) for OTC derivative contracts under § 628.34; plus
(B) The fair value of the collateral posted by the clearing member client System institution and held by the central counterparty (CCP), clearing member, or custodian in a manner that is not bankruptcy remote.
(ii) For a cleared transaction that is a repo-style transaction, the trade exposure amount equals:
(A) The exposure amount for the repo-style transaction calculated using the collateral haircut methodology under § 628.37(c); plus
(B) The fair value of the collateral posted by the clearing member client System institution and held by the CCP or a clearing member in a manner that is not bankruptcy remote.
(3) Cleared transaction risk weights. (i) For a cleared transaction with a qualifying CCP (QCCP), a clearing member client System institution must apply a risk weight of:
(A) Two (2) percent if the collateral posted by the System institution to the QCCP or clearing member is subject to an arrangement that prevents any losses to the clearing member client System institution due to the joint default or a concurrent insolvency, liquidation, or receivership proceeding of the clearing member and any other clearing member clients of the clearing member; and the clearing member client System institution has conducted sufficient legal review to conclude with a well-founded basis (and maintains sufficient written documentation of that legal review) that in the event of a legal challenge (including one resulting from default or from liquidation, insolvency, or receivership proceeding) the relevant court and administrative authorities would find the arrangements to be legal, valid, binding and enforceable under the law of the relevant jurisdictions; or
(B) Four (4) percent if the requirements of paragraph (b)(3)(i)(A) of this section are not met.
(ii) For a cleared transaction with a CCP that is not a QCCP, a clearing member client System institution must apply the risk weight appropriate for the CCP according to § 628.32.
(4) Collateral. (i) Notwithstanding any other requirements in this section, collateral posted by a clearing member client System institution that is held by a custodian (in its capacity as custodian) in a manner that is bankruptcy remote from the CCP, the custodian, clearing member and other clearing member clients of the clearing member, is not subject to a capital requirement under this section.
(ii) A clearing member client System institution must calculate a risk-weighted asset amount for any collateral provided to a CCP, clearing member, or custodian in connection with a cleared transaction in accordance with the requirements under § 628.32.
(c)-(d) [Reserved]
§ 628.36 Guarantees and credit derivatives: Substitution treatment.
(a) Scope—(1) General. A System institution may recognize the credit risk mitigation benefits of an eligible guarantee or eligible credit derivative by substituting the risk weight associated with the protection provider for the risk weight assigned to an exposure, as provided under this section.
(2) This section applies to exposures for which:
(i) Credit risk is fully covered by an eligible guarantee or eligible credit derivative; or
(ii) Credit risk is covered on a pro rata basis (that is, on a basis in which the System institution and the protection provider share losses proportionately) by an eligible guarantee or eligible credit derivative.
(3) Exposures on which there is a tranching of credit risk (reflecting at least two different levels of seniority) generally are securitization exposures subject to §§ 628.41 through 628.45.
(4) If multiple eligible guarantees or eligible credit derivatives cover a single exposure described in this section, a System institution may treat the hedged exposure as multiple separate exposures each covered by a single eligible guarantee or eligible credit derivative and may calculate a separate risk-weighted asset amount for each separate exposure as described in paragraph (c) of this section.
(5) If a single eligible guarantee or eligible credit derivative covers multiple hedged exposures described in paragraph (a)(2) of this section, a System institution must treat each hedged exposure as covered by a separate eligible guarantee or eligible credit derivative and must calculate a separate risk-weighted asset amount for each exposure as described in paragraph (c) of this section.
(b) Rules of recognition. (1) A System institution may only recognize the credit risk mitigation benefits of eligible guarantees and eligible credit derivatives.
(2) A System institution may only recognize the credit risk mitigation benefits of an eligible credit derivative to hedge an exposure that is different from the credit derivative’s reference exposure used for determining the derivative’s cash settlement value, deliverable obligation, or occurrence of a credit event if:
(i) The reference exposure ranks pari passu with, or is subordinated to, the hedged exposure; and
(ii) The reference exposure and the hedged exposure are to the same legal entity, and legally enforceable cross-default or cross-acceleration clauses are in place to ensure payments under the credit derivative are triggered when the obligated party of the hedged exposure fails to pay under the terms of the hedged exposure.
(c) Substitution approach—(1) Full coverage. If an eligible guarantee or eligible credit derivative meets the conditions in paragraphs (a) and (b) of this section and the protection amount (P) of the guarantee or credit derivative is greater than or equal to the exposure amount of the hedged exposure, a System institution may recognize the guarantee or credit derivative in determining the risk-weighted asset amount for the hedged exposure by substituting the risk weight applicable to the guarantor or credit derivative protection provider under § 628.32 for the risk weight assigned to the exposure.
(2) Partial coverage. If an eligible guarantee or eligible credit derivative meets the conditions in §§ 628.36(a) and 628.37(b) and the protection amount (P) of the guarantee or credit derivative is less than the exposure amount of the hedged exposure, the System institution must treat the hedged exposure as two separate exposures (protected and unprotected) in order to recognize the credit risk mitigation benefit of the guarantee or credit derivative.
(i) The System institution may calculate the risk-weighted asset amount for the protected exposure under § 628.32, where the applicable risk weight is the risk weight applicable to the guarantor or credit derivative protection provider.
(ii) The System institution must calculate the risk-weighted asset amount for the unprotected exposure under § 628.32, where the applicable risk weight is that of the unprotected portion of the hedged exposure.
(iii) The treatment provided in this section is applicable when the credit risk of an exposure is covered on a partial pro rata basis and may be applicable when an adjustment is made to the effective notional amount of the guarantee or credit derivative under paragraph (d), (e), or (f) of this section.
(d) Maturity mismatch adjustment. (1) A System institution that recognizes an eligible guarantee or eligible credit derivative in determining the risk-weighted asset amount for a hedged exposure must adjust the effective notional amount of the credit risk mitigant to reflect any maturity mismatch between the hedged exposure and the credit risk mitigant.
(2) A maturity mismatch occurs when the residual maturity of a credit risk mitigant is less than that of the hedged exposure(s).
(3) The residual maturity of a hedged exposure is the longest possible remaining time before the obligated party of the hedged exposure is scheduled to fulfill its obligation on the hedged exposure. If a credit risk mitigant has embedded options that may reduce its term, the System institution (protection purchaser) must use the shortest possible residual maturity for the credit risk mitigant. If a call is at the discretion of the protection provider, the residual maturity of the credit risk mitigant is at the first call date. If the call is at the discretion of the System institution (protection purchaser), but the terms of the arrangement at origination of the credit risk mitigant contain a positive incentive for the System institution to call the transaction before contractual maturity, the remaining time to the first call date is the residual maturity of the credit risk mitigant.
(4) A credit risk mitigant with a maturity mismatch may be recognized only if its original maturity is greater than or equal to 1 year and its residual maturity is greater than 3 months.
(5) When a maturity mismatch exists, the System institution must apply the following adjustment to reduce the effective notional amount of the credit risk mitigant:
(e) Adjustment for credit derivatives without restructuring as a credit event. If a System institution recognizes an eligible credit derivative that does not include as a credit event a restructuring of the hedged exposure involving forgiveness or postponement of principal, interest, or fees that results in a credit loss event (that is, a charge-off, specific provision, or other similar debit to the profit and loss account), the System institution must apply the following adjustment to reduce the effective notional amount of the credit derivative:
(f) Currency mismatch adjustment. (1) If a System institution recognizes an eligible guarantee or eligible credit derivative that is denominated in a currency different from that in which the hedged exposure is denominated, the System institution must apply the following formula to the effective notional amount of the guarantee or credit derivative:
(2) A System institution must set H
(3) A System institution must adjust H
§ 628.37 Collateralized transactions.
(a) General. (1) To recognize the risk-mitigating effects of financial collateral, a System institution may use:
(i) The simple approach in paragraph (b) of this section for any exposure.
(ii) The collateral haircut approach in paragraph (c) of this section for repo-style transactions, eligible margin loans, collateralized derivative contracts, and single-product netting sets of such transactions.
(2) A System institution may use any approach described in this section that is valid for a particular type of exposure or transaction; however, it must use the same approach for similar exposures or transactions.
(b) The simple approach—(1) General requirements. (i) A System institution may recognize the credit risk mitigation benefits of financial collateral that secures any exposure.
(ii) To qualify for the simple approach, the financial collateral must meet the following requirements:
(A) The collateral must be subject to a collateral agreement for at least the life of the exposure;
(B) The collateral must be revalued at least every 6 months; and
(C) The collateral (other than gold) and the exposure must be denominated in the same currency.
(2) Risk-weight substitution. (i) A System institution may apply a risk weight to the portion of an exposure that is secured by the fair value of financial collateral (that meets the requirements of paragraph (b)(1) of this section) based on the risk weight assigned to the collateral under § 628.32. For repurchase agreements, reverse repurchase agreements, and securities lending and borrowing transactions, the collateral is the instruments, gold, and cash the System institution has borrowed, purchased subject to resale, or taken as collateral from the counterparty under the transaction. Except as provided in paragraph (b)(3) of this section, the risk weight assigned to the collateralized portion of the exposure may not be less than 20 percent.
(ii) A System institution must apply a risk weight to the unsecured portion of the exposure based on the risk weight assigned to the exposure under this subpart.
(3) Exceptions to the 20-percent risk-weight floor and other requirements. Notwithstanding paragraph (b)(2)(i) of this section:
(i) A System institution may assign a 0-percent risk weight to an exposure to an OTC derivative contract that is marked-to-fair on a daily basis and subject to a daily margin maintenance requirement, to the extent the contract is collateralized by cash on deposit.
(ii) A System institution may assign a 10-percent risk weight to an exposure to an OTC derivative contract that is marked-to-fair value daily and subject to a daily margin maintenance requirement, to the extent that the contract is collateralized by an exposure to a sovereign that qualifies for a 0-percent risk weight under § 628.32.
(iii) A System institution may assign a 0-percent risk weight to the collateralized portion of an exposure where:
(A) The financial collateral is cash on deposit; or
(B) The financial collateral is an exposure to a sovereign that qualifies for a 0-percent risk weight under § 628.32, and the System institution has discounted the fair value of the collateral by 20 percent.
(c) Collateral haircut approach—(1) General. A System institution may recognize the credit risk mitigation benefits of financial collateral that secures an eligible margin loan, repo-style transaction, collateralized derivative contract, or single-product netting set of such transactions by using the standard supervisory haircuts in paragraph (c)(3) of this section.
(2) Exposure amount equation. A System institution must determine the exposure amount for an eligible margin loan, repo-style transaction, collateralized derivative contract, or a single-product netting set of such transactions by setting the exposure amount equal to max:
(3) Standard supervisory haircuts. (i) A System institution must use the haircuts for fair value price volatility (Hs) provided in Table 1 to § 628.37, as adjusted in certain circumstances in accordance with the requirements of paragraphs (c)(3)(iii) and (iv) of this section:
Table 1 to § 628.37—Standard Supervisory Market Price Volatility Haircut
1
| Residual maturity | Haircut (in percent) assigned based on | Investment grade securitization exposures (in percent) | |||||
|---|---|---|---|---|---|---|---|
| Sovereign issuers risk weight under § 628.32 2 | Non-sovereign issuers risk weight under § 628.32 | ||||||
| Zero | 20% or −50% | 100% | 20% | 50% | 100% | ||
| Less than or equal to 1 year | 0.5 | 1.0 | 15.0 | 1.0 | 2.0 | 25.0 | 4.0% |
| Great than 1 years and less than and equal to 5 years | 2.0 | 3.0 | 15.0 | 4.0 | 6.0 | 25.0 | 12.0% |
| Greater than 5 years | 4.0 | 6.0 | 15.0 | 8.0 | 12.0 | 25.0 | 24.0% |
| Main index equities (including convertible bonds) and gold | 15.0% | ||||||
| Other publically traded equities (including convertible bonds) | 25.0% | ||||||
| Mutual funds | Highest haircut applicable to any security in which the fund can invest | ||||||
| Cash collateral | 0% | ||||||
1 The market price volatility haircut in Table 1 to § 628.37 are based on 10-day holding period.
2 Includes a foreign PSE that receives a 0-percent risk weight.
(ii) For currency mismatches, a System institution must use a haircut for foreign exchange rate volatility (H
(iii) For repo-style transactions, a System institution may multiply the standard supervisory haircuts provided in paragraphs (c)(3)(i) and (ii) of this section by the square root of
(iv) If the number of trades in a netting set exceeds 5,000 at any time during a quarter, a System institution must adjust the supervisory haircuts provided in paragraphs (c)(3)(i) and (ii) of this section upward on the basis of a holding period of 20 business days for the following quarter except in the calculation of the exposure amount for purposes of § 628.35. If a netting set contains one or more trades involving illiquid collateral or an OTC derivative that cannot be easily replaced, a System institution must adjust the supervisory haircuts upward on the basis of a holding period of 20 business days. If over the 2 previous quarters more than two margin disputes on a netting set have occurred that lasted more than the holding period, then the System institution must adjust the supervisory haircuts upward for that netting set on the basis of a holding period that is at least two times the minimum holding period for that netting set. A System institution must adjust the standard supervisory haircuts upward using the following formula:
(v) If the instrument a System institution has lent, sold subject to repurchase, or posted as collateral does not meet the definition of financial collateral in § 628.2, the System institution must use a 25-percent haircut for fair value price volatility (H
(4) [Reserved]
Risk-Weighted Assets for Unsettled Transactions
§ 628.38 Unsettled transactions.
(a) Definitions. For purposes of this section:
(1) Delivery-versus-payment (DvP) transaction means a securities or commodities transaction in which the buyer is obligated to make payment only if the seller has made delivery of the securities or commodities and the seller is obligated to deliver the securities or commodities only if the buyer has made payment.
(2) Payment-versus-payment (PvP) transaction means a foreign exchange transaction in which each counterparty is obligated to make a final transfer of one or more currencies only if the other counterparty has made a final transfer of one or more currencies.
(3) A transaction has a normal settlement period if the contractual settlement period for the transaction is equal to or less than the fair value standard for the instrument underlying the transaction and equal to or less than 5 business days.
(4) Positive current exposure of a System institution for a transaction is the difference between the transaction value at the agreed settlement price and the current fair value price of the transaction, if the difference results in a credit exposure of the System institution to the counterparty.
(b) Scope. This section applies to all transactions involving securities, foreign exchange instruments, and commodities that have a risk of delayed settlement or delivery. This section does not apply to:
(1) Cleared transactions that are marked-to-fair value daily and subject to daily receipt and payment of variation margin;
(2) Repo-style transactions, including unsettled repo-style transactions;
(3) One-way cash payments on OTC derivative contracts; or
(4) Transactions with a contractual settlement period that is longer than the normal settlement period (which are treated as OTC derivative contracts as provided in § 628.34).
(c) System-wide failures. In the case of a system-wide failure of a settlement, clearing system or central counterparty, the FCA may waive risk-based capital requirements for unsettled and failed transactions until the situation is rectified.
(d) Delivery-versus-payment (DvP) and payment-versus-payment (PvP) transactions. A System institution must hold risk-based capital against any DvP or PvP transaction with a normal settlement period if the System institution’s counterparty has not made delivery or payment within 5 business days after the settlement date. The System institution must determine its risk-weighted asset amount for such a transaction by multiplying the positive current exposure of the transaction for the System institution by the appropriate risk weight in Table 1 to § 628.38.
Table 1 to § 628.38—Risk Weights for Unsettled DVP and PVP Transactions
| Number of business days after contractual settlement date | Risk weight to be applied to positive current exposure (in percent) |
|---|---|
| From 5 to 15 | 100.0 |
| From 16 to 30 | 625.0 |
| From 31 to 45 | 937.5 |
| 46 or more | 1,250.0 |
(e) Non-DvP/non-PvP (non-delivery-versus-payment/non-payment-versus-payment) transactions. (1) A System institution must hold risk-based capital against any non-DvP/non-PvP transaction with a normal settlement period if the System institution has delivered cash, securities, commodities, or currencies to its counterparty but has not received its corresponding deliverables by the end of the same business day. The System institution must continue to hold risk-based capital against the transaction until the System institution has received its corresponding deliverables.
(2) From the business day after the System institution has made its delivery until 5 business days after the counterparty delivery is due, the System institution must calculate the risk-weighted asset amount for the transaction by treating the current fair value of the deliverables owed to the System institution as an exposure to the counterparty and using the applicable counterparty risk weight under § 628.32.
(3) If the System institution has not received its deliverables by the 5th business day after counterparty delivery was due, the System institution must assign a 1,250-percent risk weight to the current fair value of the deliverables owed to the System institution.
(f) Total risk-weighted assets for unsettled transactions. Total risk-weighted assets for unsettled transactions is the sum of the risk-weighted asset amounts of all DvP, PvP, and non-DvP/non-PvP transactions.
§§ 628.39-628.40 [Reserved]
Risk-Weighted Assets for Securitization Exposures
§ 628.41 Operational requirements for securitization exposures.
(a) Operational criteria for traditional securitizations. A System institution that transfers exposures it has originated or purchased to a third party in connection with a traditional securitization may exclude the exposures from the calculation of its risk-weighted assets only if each condition in this section is satisfied. A System institution that meets these conditions must hold risk-based capital against any credit risk it retains in connection with the securitization. A System institution that fails to meet these conditions must hold risk-based capital against the transferred exposures as if they had not been securitized and must deduct from CET1 capital, pursuant to § 628.22, any after-tax gain-on-sale resulting from the transaction. The conditions are:
(1) The exposures are not reported on the System institution’s consolidated balance sheet under GAAP;
(2) The System institution has transferred to one or more third parties credit risk associated with the underlying exposures;
(3) Any clean-up calls relating to the securitization are eligible clean-up calls; and
(4) The securitization does not:
(i) Include one or more underlying exposures in which the borrower is permitted to vary the drawn amount within an agreed limit under a line of credit; and
(ii) Contain an early amortization provision.
(b) Operational criteria for synthetic securitizations. For synthetic securitizations, a System institution may recognize for risk-based capital purposes the use of a credit risk mitigant to hedge underlying exposures only if each condition in this paragraph is satisfied. A System institution that meets these conditions must hold risk-based capital against any credit risk of the exposures it retains in connection with the synthetic securitization. A System institution that fails to meet these conditions or chooses not to recognize the credit risk mitigant for purposes of this section must instead hold risk-based capital against the underlying exposures as if they had not been synthetically securitized. The conditions are:
(1) The credit risk mitigant is:
(i) Financial collateral;
(ii) A guarantee that meets all criteria set forth in the definition of “eligible guarantee” in § 628.2, except for the criteria in paragraph (3) of that definition; or
(iii) A credit derivative that meets all criteria as set forth in the definition of “eligible credit derivative” in § 628.2, except for the criteria in paragraph (3) of the definition of “eligible guarantee” in § 628.2.
(2) The System institution transfers credit risk associated with the underlying exposures to one or more third parties, and the terms and conditions in the credit risk mitigants employed do not include provisions that:
(i) Allow for the termination of the credit protection due to deterioration in the credit quality of the underlying exposures;
(ii) Require the System institution to alter or replace the underlying exposures to improve the credit quality of the pool of underlying exposures;
(iii) Increase the System institution’s cost of credit protection in response to deterioration in the credit quality of the underlying exposures;
(iv) Increase the yield payable to parties other than the System institution in response to a deterioration in the credit quality of the underlying exposures; or
(v) Provide for increases in a retained first loss position or credit enhancement provided by the System institution after the inception of the securitization;
(3) The System institution obtains a well-reasoned opinion from legal counsel that confirms the enforceability of the credit risk mitigant in all relevant jurisdictions; and
(4) Any clean-up calls relating to the securitization are eligible clean-up calls.
(c) Due diligence requirements. (1) Except for exposures that are deducted from CET1 capital (pursuant to § 628.22) and exposures subject to § 628.42(h), if a System institution is unable to demonstrate to the satisfaction of the FCA a comprehensive understanding of the features of a securitization exposure that would materially affect the performance of the exposure, the System institution must assign the securitization exposure a risk weight of 1,250 percent. The System institution’s analysis must be commensurate with the complexity of the securitization exposure and the materiality of the exposure in relation to its capital.
(2) A System institution must demonstrate its comprehensive understanding of a securitization exposure under paragraph (c)(1) of this section for each securitization exposure by:
(i) Conducting an analysis of the risk characteristics of a securitization exposure prior to acquiring the exposure, and documenting such analysis within 3 business days after acquiring the exposure, considering:
(A) Structural features of the securitization that would materially impact the performance of the exposure, for example, the contractual cash flow waterfall, waterfall-related triggers, credit enhancements, liquidity enhancements, fair value triggers, the performance of organizations that service the exposure, and deal-specific definitions of default;
(B) Relevant information regarding the performance of the underlying credit exposure(s), for example, the percentage of loans 30, 60, and 90 days past due; default rates; prepayment rates; loans in foreclosure; property types; occupancy; average credit score or other measures of creditworthiness; average loan-to-value (LTV) ratio; and industry and geographic diversification data on the underlying exposure(s);
(C) Relevant market data of the securitization, for example, bid-ask spread, most recent sales price and historic price volatility, trading volume, implied market rating, and size, depth and concentration level of the market for the securitization; and
(D) For resecuritization exposures, performance information on the underlying securitization exposures, for example, the issuer name and credit quality, and the characteristics and performance of the exposures; and
(ii) On an on-going basis (no less frequently than quarterly), evaluating, reviewing, and updating as appropriate the analysis required under paragraph (c)(1) of this section for each securitization exposure.
§ 628.42 Risk-weighted assets for securitization exposures.
(a) Securitization risk weight approaches. Except as provided in this section or in § 628.41:
(1) A System institution must deduct from CET1 capital any after-tax gain-on-sale resulting from a securitization (as provided in § 628.22) and must apply a 1,250-percent risk weight to the portion of a credit-enhancing interest-only strip (CEIO) that does not constitute after-tax gain-on-sale.
(2) If a securitization exposure does not require deduction under paragraph (a)(1) of this section, a System institution may assign a risk weight to the securitization exposure using the simplified supervisory formula approach (SSFA) in accordance with § 628.43(a) through (d) and subject to the limitation under paragraph (e) of this section. Alternatively, a System institution may assign a risk weight to the purchased securitization exposure using the gross-up approach in accordance with § 628.43(e), provided however, that such System institution must apply either the SSFA or the gross-up approach consistently across all of its securitization exposures, except as provided in paragraphs (a)(1), (3), and (4) of this section.
(3) If a securitization exposure does not require deduction under paragraph (a)(1) of this section and the System institution cannot or chooses not to apply the SSFA or the gross-up approach to the exposure, the System institution must assign a risk weight to the exposure as described in § 628.44.
(4) If a securitization exposure is a derivative contract (other than protection provided by a System institution in the form of a credit derivative) that has a first priority claim on the cash flows from the underlying exposures (notwithstanding amounts due under interest rate or currency derivative contracts, fees due, or other similar payments), a System institution may choose to set the risk-weighted asset amount of the exposure equal to the amount of the exposure as determined in paragraph (c) of this section.
(b) Total risk-weighted assets for securitization exposures. A System institution’s total risk-weighted assets for securitization exposures equals the sum of the risk-weighted asset amount for securitization exposures that the System institution risk weights under paragraph (a)(1) of this section, §§ 628.41(c), and 628.43, 628.44, or § 628.45, except as provided in paragraphs (e) through (j) of this section, as applicable.
(c) Exposure amount of a securitization exposure. (1) [Reserved]
(2) On-balance sheet securitization exposures (available-for-sale or held-to-maturity securities). The exposure amount of an on-balance sheet securitization exposure that is an available-for-sale or held-to-maturity security is the System institution’s carrying value (including net accrued but unpaid interest and fees), less any net unrealized gains on the exposure and plus any net unrealized losses on the exposure.
(3) Off-balance sheet securitization exposures. (i) Except as provided in paragraph (j) of this section, the exposure amount of an off-balance sheet securitization that is not a repo-style transaction, an eligible margin loan, a cleared transaction (other than a credit derivative), or an OTC derivative contract (other than a credit derivative) is the notional amount of the exposure.
(ii)-(iii) [Reserved]
(4) Repo-style transactions, eligible margin loans, and derivative contracts. The exposure amount of a securitization exposure that is a repo-style transaction, an eligible margin loan, or a derivative contract (other than a credit derivative) is the exposure amount of the transaction as calculated under § 628.34 or § 628.37 as applicable.
(d) Overlapping exposures. If a System institution has multiple securitization exposures that provide duplicative coverage to the underlying exposures of a securitization, the System institution is not required to hold duplicative risk-based capital against the overlapping position. Instead, the System institution may apply to the overlapping position the applicable risk-based capital treatment that results in the highest risk-based capital requirement.
(e) Implicit support. If a System institution provides support to a securitization in excess of the System institution’s contractual obligation to provide credit support to the securitization (implicit support):
(1) The System institution must include in risk-weighted assets all of the underlying exposures associated with the securitization as if the exposures had not been securitized and must deduct from CET1 capital (pursuant to § 628.22) any after-tax gain-on-sale resulting from the securitization; and
(2) The System institution must disclose publicly:
(i) That it has provided implicit support to the securitization; and
(ii) The risk-based capital impact to the System institution of providing such implicit support.
(f) Undrawn portion of an eligible servicer cash advance facility. (1) Notwithstanding any other provision of this subpart, a System institution that is a servicer under an eligible servicer cash advance facility is not required to hold risk-based capital against potential future cash advance payments that it may be required to provide under the contract governing the facility.
(2) For a System institution that acts as a servicer, the exposure amount for a servicer cash advance facility that is not an eligible cash advance facility is equal to the amount of all potential future cash payments that the System institution may be contractually required to provide during the subsequent 12-month period under the governing facility.
(g) Interest-only mortgage-backed securities. Regardless of any other provisions of this subpart, the risk weight for a non-credit-enhancing interest-only mortgage-backed security may not be less than 100 percent.
(h) Small-business loans and leases on personal property transferred with retained contractual exposure. (1) Regardless of any other provisions of this subpart, a System institution that has transferred small-business loans and leases on personal property (small-business obligations) must include in risk-weighted assets only its contractual exposure to the small-business obligations if all the following conditions are met:
(i) The transaction must be treated as a sale under GAAP.
(ii) The System institution establishes and maintains, pursuant to GAAP, a non-capital reserve sufficient to meet the System institution’s reasonably estimated liability under the contractual obligation.
(iii) The small business obligations are to businesses that meet the criteria for a small-business concern established by the Small Business Administration under section 3(a) of the Small Business Act.
(iv) [Reserved]
(2) The total outstanding amount of contractual exposure retained by a System institution on transfers of small-business obligations receiving the capital treatment specified in paragraph (h)(1) of this section cannot exceed 15 percent of the System institution’s total capital.
(3) If a System institution exceeds the 15-percent capital limitation provided in paragraph (h)(2) of this section, the capital treatment under paragraph (h)(1) of this section will continue to apply to any transfers of small-business obligations with retained contractual exposure that occurred during the time that the System institution did not exceed the capital limit.
(4) [Reserved]
(i)-(ii) [Reserved]
(i) N
(2)-(3) [Reserved]
(4) Protection purchaser—(i) First-to-default credit derivatives. A System institution that obtains credit protection on a group of underlying exposures through a first-to-default credit derivative that meets the rules of recognition of § 628.36(b) must determine its risk-based capital requirement for the underlying exposures as if the System institution synthetically securitized the underlying exposure with the smallest risk-weighted asset amount and had obtained no credit risk mitigant on the other underlying exposures. A System institution must calculate a risk-based capital requirement for counterparty credit risk according to § 628.34 for a first-to-default credit derivative that does not meet the rules of recognition of § 628.36(b).
(ii) Second-or-subsequent-to-default credit derivatives. (A) A System institution that obtains credit protection on a group of underlying exposures through a nth-to-default credit derivative that meets the rules of recognition of § 628.36(b) (other than a first-to-default credit derivative) may recognize the credit risk mitigation benefits of the derivative only if:
(1) The System institution also has obtained credit protection on the same underlying exposures in the form of first-through-(n-1)-to-default credit derivatives; or
(2) If n-1 of the underlying exposures have already defaulted.
(B) If a System institution satisfies the requirements of paragraph (i)(4)(ii)(A) of this section, the System institution must determine its risk-based capital requirement for the underlying exposures as if the System institution had only synthetically securitized the underlying exposure with the nth smallest risk-weighted asset amount and had obtained no credit risk mitigant on the underlying exposures.
(C) A System institution must calculate a risk-based capital requirement for counterparty credit risk according to § 628.34 for a nth-to-default credit derivative that does not meet the rules of recognition of § 628.36(b).
(j) Guarantees and credit derivatives other than nth-to-default credit derivatives—(1) Protection provider. For a guarantee or credit derivative (other than an nth-to-default credit derivative) provided by a System institution that covers the full amount or a pro rata share of a securitization exposure’s principal and interest, the System institution must risk weight the guarantee or credit derivative in accordance with FCA guidance.
(2) Protection purchaser. (i) A System institution that purchases a guarantee or OTC credit derivative (other than an nth-to-default credit derivative) that is recognized under § 628.45 as a credit risk mitigant (including via collateral recognized under § 628.37) is not required to compute a separate credit risk capital requirement under § 628.31, in accordance with § 628.34(c).
(ii) If a System institution cannot, or chooses not to, recognize a purchased credit derivative as a credit risk mitigant under § 628.45, the System institution must determine the exposure amount of the credit derivative under § 628.34.
(A) If the System institution purchases credit protection from a counterparty that is not a securitization special purpose entity (SPE), the System institution must determine the risk weight for the exposure according to general risk weights under § 628.32.
(B) If the System institution purchases the credit protection from a counterparty that is a securitization SPE, the System institution must determine the risk weight for the exposure according to this section, including paragraph (a)(4) of this section for a credit derivative that has a first priority claim on the cash flows from the underlying exposures of the securitization SPE (notwithstanding amounts due under interest rate or currency derivative contracts, fees due, or other similar payments).
§ 628.43 Simplified supervisory formula approach (SSFA) and the gross-up approach.
(a) General requirements for the SSFA. To use the SSFA to determine the risk weight for a securitization exposure, a System institution must have data that enables it to assign accurately the parameters described in paragraph (b) of this section. Data used to assign the parameters described in paragraph (b) of this section must be the most currently available data; if the contract governing the underlying exposures of the securitization require payment on a monthly or quarterly basis, the data used to assign the parameters described in paragraph (b) of this section must be no more than 91 calendar days old. A System institution that does not have the appropriate data to assign the parameters described in paragraph (b) of this section must assign a risk weight of 1,250 percent to the exposure.
(b) SSFA parameters. To calculate the risk weight for a securitization exposure using the SSFA, a System institution must have accurate information on the following five inputs to the SSFA calculation:
(1) K
(2) Parameter W is expressed as a decimal value between 0 and 1. Parameter W is the ratio of the sum of the dollar amounts of any underlying exposures within the securitized pool that meet any of the criteria as set forth in paragraphs (b)(2)(i) through (vi) of this section to the balance, measured in dollars, of underlying exposures:
(i) Ninety (90) days or more past due;
(ii) Subject to a bankruptcy or insolvency proceeding;
(iii) In the process of foreclosure;
(iv) Held as real estate owned;
(v) Has contractually deferred interest payments for 90 days or more, other than principal or interest payments deferred on:
(A) Federally guaranteed student loans, in accordance with the terms of those guarantee programs; or
(B) Consumer loans, including non-federally guaranteed student loans, provided that such payments are deferred pursuant to provisions included in the contract at the time funds are disbursed that provide for periods(s) of deferral that are not initiated based on changes in the creditworthiness of the borrower; or
(vi) Is in default.
(3) Parameter A is the attachment point for the exposure, which represents the threshold at which credit losses will first be allocated to the exposure. Except as provided in § 628.42(i) for nth-to-default credit derivatives, parameter A equals the ratio of the current dollar amount of underlying exposures that are subordinated to the exposure of the System institution to the current dollar amount of underlying exposures. Any reserve account funded by the accumulated cash flows from the underlying exposures that is subordinated to the System institution’s securitization exposure may be included in the calculation of parameter A to the extent that cash is present in the account. Parameter A is expressed as a decimal value between 0 and 1.
(4) Parameter D is the detachment point for the exposure, which represents the threshold at which credit losses of principal allocated to the exposure would result in a total loss of principal. Except as provided in § 628.42(i) for nth-to-default credit derivatives, parameter D equals parameter A plus the ratio of the current dollar amount of the securitization exposures that are pari passu with the exposure (that is, have equal seniority with respect to credit risk) to the current dollar amount of the underlying exposures. Parameter D is expressed as a decimal value between 0 and 1.
(5) A supervisory calibration parameter, p, is equal to 0.5 for securitization exposures that are not resecuritization exposures and equal to 1.5 for resecuritization exposures.
(c) Mechanics of the SSFA. K
(1) When the detachment point, parameter D, for a securitization exposure is less than or equal to K
(2) When the attachment point, parameter A, for a securitization exposure is greater than or equal to K
(3) When A is less than K
(i) The weight assigned to 1,250 percent equals:
(ii) The weight assigned to 1,250 percent times K
(iii) The risk weight will be set equal to:
(d) SSFA equation. (1) The System institution must define the following parameters:
(2) Then the System institution must calculate K
(3) The risk weight for the exposure (expressed as a percent) is equal to K
(e) Gross-up approach—(1) Applicability. A System institution may apply the gross-up approach set forth in this section instead of the SSFA to determine the risk weight of its securitization exposures, provided that it applies the gross-up approach to all of its securitization exposures, except as otherwise provided for certain securitization exposures in §§ 628.44 and 628.45.
(2) To use the gross-up approach, a System institution must calculate the following four inputs:
(i) Pro rata share A, which is the par value of the System institution’s securitization exposure X as a percent of the par value of the tranche in which the securitization exposure resides Y:
(ii) Enhanced amount B, which is the value of tranches that are more senior to the tranche in which the System institution’s securitization resides;
(iii) Exposure amount (carrying value) C of the System institution’s securitization exposure calculated under § 628.42(c); and
(iv) Risk weight (RW), which is the weighted-average risk weight of underlying exposures in the securitization pool as calculated under this subpart. For example, RW for an asset-backed security with underlying car loans would be 100 percent.
(3) Credit equivalent amount (CEA). The CEA of a securitization exposure under this section equals the sum of:
(i) The exposure amount C of the System institution’s securitization exposure; plus
(ii) The pro rata share A multiplied by the enhanced amount B, each calculated in accordance with paragraph (e)(2) of this section:
(4) Risk-weighted assets (RWA). To calculate RWA for a securitization exposure under the gross-up approach, a System institution must apply the RW calculated under paragraph (e)(2) of this section to the CEA calculated in paragraph (e)(3) of this section:
(f) Limitations. Notwithstanding any other provision of this section, a System institution must assign a risk weight of not less than 20 percent to a securitization exposure.
§ 628.44 Securitization exposures to which the SSFA and gross-up approach do not apply.
(a) General requirement. A System institution must assign a 1,250-percent risk weight to all securitization exposures to which the System institution does not apply the SSFA or the gross up approach under § 628.43.
(b) [Reserved]
§ 628.45 Recognition of credit risk mitigants for securitization exposures.
(a) General. (1) An originating System institution that has obtained a credit risk mitigant to hedge its exposure to a synthetic or traditional securitization that satisfies the operational criteria provided in § 628.41 may recognize the credit risk mitigant under § 628.36 or § 628.37, but only as provided in this section.
(2) An investing System institution that has obtained a credit risk mitigant to hedge a securitization exposure may recognize the credit risk mitigant under § 628.36 or § 628.37, but only as provided in this section.
(b) Mismatches. A System institution must make any applicable adjustment to the protection amount of an eligible guarantee or credit derivative as required in § 628.36(d), (e), and (f) for any hedged securitization exposure. In the context of a synthetic securitization, when an eligible guarantee or eligible credit derivative covers multiple hedged exposures that have different residual maturities, the System institution must use the longest residual maturity of any of the hedged exposures as the residual maturity of all hedged exposures.
§§ 628.46-628.50 [Reserved]
Risk-Weighted Assets for Equity Exposures
§ 628.51 Introduction and exposure measurement.
(a) General. (1) To calculate its risk-weighted asset amounts for equity exposures that are not equity exposures to an investment fund, a System institution must use the Simple Risk-Weight Approach (SRWA) provided in § 628.52. A System institution must use the look-through approaches provided in § 628.53 to calculate its risk-weighted asset amounts for equity exposures to investment funds. Equity investments (including preferred stock investments) in other System institutions, service corporations, and the Funding Corporation do not receive a risk weight, because they are deducted from capital in accordance with § 628.22.
(2)-(3) [Reserved]
(b) Adjusted carrying value. For purposes of §§ 628.51 through 628.53, the adjusted carrying value of an equity exposure is:
(1) For the on-balance sheet component of an equity exposure (other than an equity exposure that is classified as available-for-sale), the System institution’s carrying value of the exposure;
(2) For the on-balance sheet component of an equity exposure that is classified as available-for-sale, the System institution’s carrying value of the exposure less any net unrealized gains on the exposure that are reflected in such carrying value but excluded from the System institution’s regulatory capital components;
(3) For the off-balance sheet component of an equity exposure that is not an equity commitment, the effective notional principal amount of the exposure, the size of which is equivalent to a hypothetical on-balance sheet position in the underlying equity instrument that would evidence the same change in fair value (measured in dollars) given a small change in the price of the underlying equity instrument, minus the adjusted carrying value of the on-balance sheet component of the exposure as calculated in paragraph (b)(1) of this section; and
(4) For a commitment to acquire an equity exposure (an equity commitment), the effective notional principal amount of the exposure is multiplied by the following conversion factors (CFs):
(i) Conditional equity commitments with an original maturity of 14 months or less receive a CF of 20 percent.
(ii) Conditional equity commitments with an original maturity of over 14 months receive a CF of 50 percent.
(iii) Unconditional equity commitments receive a CF of 100 percent.
§ 628.52 Simple risk-weight approach (SRWA).
(a) General. Under the SRWA, a System institution’s total risk-weighted assets for equity exposures equals the sum of the risk-weighted asset amounts for each of the System institution’s individual equity exposures (other than equity exposures to an investment fund) as determined under this section and the risk-weighted asset amounts for each of the System institution’s individual equity exposures to an investment fund as determined under § 628.53.
(b) SRWA computation for individual equity exposures. A System institution must determine the risk-weighted asset amount for an individual equity exposure (other than an equity exposure to an investment fund) by multiplying the adjusted carrying value of the equity exposure or the effective portion and ineffective portion of a hedge pair (as defined in paragraph (c) of this section) by the lowest applicable risk weight in this paragraph.
(1) Zero-percent (0%) risk weight equity exposures. An equity exposure to a sovereign, the Bank for International Settlements, the European Central Bank, the European Commission, the International Monetary Fund, an MDB, and any other entity whose credit exposures receive a 0-percent risk weight under § 628.32 may be assigned a 0-percent risk weight.
(2) Twenty-percent (20%) risk weight equity exposures. An equity exposure to a PSE or the Federal Agricultural Mortgage Corporation (Farmer Mac) must be assigned a 20-percent risk weight.
(3) One hundred-percent (100%) risk weight equity exposures. The equity exposures set forth in this paragraph (b)(3) must be assigned a 100-percent risk weight:
(i) [Reserved]
(ii) Effective portion of hedge pairs. The effective portion of a hedge pair.
(iii) Non-significant equity exposures. Equity exposures, excluding exposures to an investment firm that would meet the definition of a traditional securitization in § 628.2 were it not for the application of paragraph (8) of that definition and has greater than immaterial leverage, to the extent that aggregate adjusted carrying value of the exposures does not exceed 10 percent of the System institution’s total capital.
(A) Equity exposures subject to paragraph (b)(3)(iii) of this section include:
(1) Equity exposures to unconsolidated unincorporated business entities and equity exposures held through consolidated unincorporated business entities, as authorized by subpart J of part 611 of this chapter; and
(2) [Reserved]
(3) Equity exposures to an unconsolidated rural business investment company and equity exposures held through a consolidated rural business investment company described in 7 U.S.C. 2009cc et seq.
(B) To compute the aggregate adjusted carrying value of a System institution’s equity exposures for purposes of this section, the System institution may exclude equity exposures described in paragraphs (b)(1) and (2) and (b)(3)(ii) of this section, the equity exposure in a hedge pair with the smaller adjusted carrying value, and a proportion of each equity exposure to an investment fund equal to the proportion of the assets of the investment fund that are not equity exposures or that meet the criterion of paragraph (b)(3)(i) of this section. If a System institution does not know the actual holdings of the investment fund, the System institution may calculate the proportion of the assets of the fund that are not equity exposures based on the terms of the prospectus, partnership agreement, or similar contract that defines the fund’s permissible investments. If the sum of the investment limits for all exposure classes within the fund exceeds 100 percent, the System institution must assume for purposes of this section that the investment fund invests to the maximum extent possible in equity exposures.
(C) When determining which of a System institution’s equity exposures qualify for a 100-percent risk weight under this paragraph, a System institution first must include equity exposures to unconsolidated rural business investment companies or held through consolidated rural business investment companies described in 7 U.S.C. 2009cc et seq.; then must include equity exposures to unconsolidated unincorporated business entities and equity exposures held through consolidated unincorporated business entities, as authorized by subpart J of part 611 of this chapter; then must include publicly traded equity exposures (including those held indirectly through investment funds); and then must include non-publicly traded equity exposures (including those held indirectly through investment funds).
(4) Other equity exposures. The risk weight for any equity exposure that does not qualify for a risk weight under paragraph (b)(1), (2), (3), or (7) of this section will be determined by the FCA.
(5)-(6) [Reserved]
(7) Six hundred-percent (600%) risk weight equity exposures. An equity exposure to an investment firm must be assigned a 600-percent risk weight, provided that the investment firm:
(i) Would meet the definition of a traditional securitization in § 628.2 were it not for the application of paragraph (8) of that definition; and
(ii) Has greater than immaterial leverage.
(c) Hedge transactions—(1) Hedge pair. A hedge pair is two equity exposures that form an effective hedge so long as each equity exposure is publicly traded or has a return that is primarily based on a publicly traded equity exposure.
(2) Effective hedge. Two equity exposures form an effective hedge if the exposures either have the same remaining maturity or each has a remaining maturity of at least 3 months; the hedge relationship is formally documented in a prospective manner (that is, before the System institution acquires at least one of the equity exposures); the documentation specifies the measure of effectiveness (E) the System institution will use for the hedge relationship throughout the life of the transaction; and the hedge relationship has an E greater than or equal to 0.8. A System institution must measure E at least quarterly and must use one of three alternative measures of E as set forth in this paragraph (c):
(i) Under the dollar-offset method of measuring effectiveness, the System institution must determine the ratio of value change (RVC). The RVC is the ratio of the cumulative sum of the changes in value of one equity exposure to the cumulative sum of the changes in the value of the other equity exposure. If RVC is positive, the hedge is not effective and E equals 0. If RVC is negative and greater than or equal to −1 (that is, less than 0 and greater than or equal to −1), then E equals the absolute value of RVC. If RVC is negative and less than −1, then E equals 2 plus RVC.
(ii) Under the variability-reduction method of measuring effectiveness:
(iii) Under the regression method of measuring effectiveness, E equals the coefficient of determination of a regression in which the change in value of one exposure in a hedge pair is the dependent variable and the change in value of the other exposure in a hedge pair is the independent variable. However, if the estimated regression coefficient is positive, then E equals 0.
(3) The effective portion of a hedge pair is E multiplied by the greater of the adjusted carrying values of the equity exposures forming a hedge pair.
(4) The ineffective portion of a hedge pair is (1-E) multiplied by the greater of the adjusted carrying values of the equity exposures forming a hedge pair.
§ 628.53 Equity exposures to investment funds.
(a) Available approaches. (1) A System institution must determine the risk-weighted asset amount of an equity exposure to an investment fund under the full look-through approach described in paragraph (b) of this section, the simple modified look-through approach described in paragraph (c) of this section, or the alterative modified look-through approach described paragraph (d) of this section, provided, however, that the minimum risk weight that may be assigned to an equity exposure under this section is 20 percent.
(2) [Reserved]
(3) If an equity exposure to an investment fund is part of a hedge pair and the System institution does not use the full look-through approach, the System institution must use the ineffective portion of the hedge pair as determined under § 628.52(c) as the adjusted carrying value for the equity exposure to the investment fund. The risk-weighted asset amount of the effective portion of the hedge pair is equal to its adjusted carrying value.
(b) Full look-through approach. A System institution that is able to calculate a risk-weighted asset amount for its proportional ownership share of each exposure held by the investment fund (as calculated under this subpart as if the proportional ownership share of the adjusted carrying value of each exposure were held directly by the System institution) may set the risk-weighted asset amount of the System institution’s exposure to the fund equal to the product of:
(1) The aggregate risk-weighted asset amounts of the exposures held by the fund as if they were held directly by the System institution; and
(2) The System institution’s proportional ownership share of the fund.
(c) Simple modified look-through approach. Under the simple modified look-through approach, the risk-weighted asset amount for a System institution’s equity exposure to an investment fund equals the adjusted carrying value of the equity exposure multiplied by the highest risk weight that applies to any exposure the fund is permitted to hold under the prospectus, partnership agreement, or similar agreement that defines the fund’s permissible investments (excluding derivative contracts that are used for hedging rather than speculative purposes and that do not constitute a material portion of the fund’s exposures).
(d) Alternative modified look-through approach. Under the alternative modified look-through approach, a System institution may assign the adjusted carrying value of an equity exposure to an investment fund on a pro rata basis to different risk weight categories under this subpart based on the investment limits in the fund’s prospectus, partnership agreement, or similar contract that defines the fund’s permissible investments. The risk-weighted asset amount for the System institution’s equity exposure to the investment fund equals the sum of each portion of the adjusted carrying value assigned to an exposure type multiplied by the applicable risk weight under this subpart. If the sum of the investment limits for all exposure types within the fund exceeds 100 percent, the System institution must assume that the fund invests to the maximum extent permitted under its investment limits in the exposure type with the highest applicable risk weight under this subpart and continues to make investments in order of the exposure type with the next highest applicable risk weight under this subpart until the maximum total investment level is reached. If more than one exposure type applies to an exposure, the System institution must use the highest applicable risk weight. A System institution may exclude derivative contracts held by the fund that are used for hedging rather than for speculative purposes and do not constitute a material portion of the fund’s exposures.
§§ 628.54-628.60 [Reserved]
Disclosures
§ 628.61 Purpose and scope.
Sections 628.62 and 628.63 establish public disclosure requirements for each System bank related to the capital requirements contained in this part.
§ 628.62 Disclosure requirements.
(a) A System bank must provide timely public disclosures each calendar quarter of the information in the applicable tables in § 628.63. The System bank must make these disclosures in its quarterly and annual reports to shareholders required in part 620 of this chapter. The System bank need not make these disclosures in the format set out in the applicable tables or all in the same location in a report, as long as a summary table specifically indicating the location(s) of all such disclosures is provided. If a significant change occurs, such that the most recent reported amounts are no longer reflective of the System bank’s capital adequacy and risk profile, then a brief discussion of this change and its likely impact must be disclosed as soon as practicable thereafter. This disclosure requirement may be satisfied by providing a notice under § 620.15 of this chapter. Qualitative disclosures that typically do not change each quarter (for example, a general summary of the System bank’s risk management objectives and policies, reporting system, and definitions) may be disclosed annually after the end of the 4th calendar quarter, provided that any significant changes are disclosed in the interim.
(b) A System bank must have a formal disclosure policy approved by the board of directors that addresses its approach for determining the disclosures it makes. The policy must address the associated internal controls and disclosure controls and procedures. The board of directors and senior management are responsible for establishing and maintaining an effective internal control structure over financial reporting, including the disclosures required by this subpart, and must ensure that appropriate review of the disclosures takes place. The chief executive officer, the chief financial officer, and a designated board member must attest that the disclosures meet the requirements of this subpart.
(c) If a System bank concludes that disclosure of specific proprietary or confidential commercial or financial information that it would otherwise be required to disclose under this section would compromise its position, then the System bank is not required to disclose that specific information pursuant to this section, but must disclose more general information about the subject matter of the requirement, together with the fact that, and the reason why, the specific items of information have not been disclosed.
§ 628.63 Disclosures.
(a) Except as provided in § 628.62, a System bank must make the disclosures described in Tables 1 through 10 of this section. The System bank must make these disclosures publicly available for each of the last 3 years (that is, 12 quarters) or such shorter period beginning on January 1, 2017.
(b) A System bank must publicly disclose each quarter the following:
(1) CET1 capital, tier 1 capital, and total capital ratios, including all the regulatory capital elements and all the regulatory adjustments and deductions needed to calculate the numerator of such ratios;
(2) Total risk-weighted assets, including the different regulatory adjustments and deductions needed to calculate total risk-weighted assets;
(3) [Reserved]
(4) A reconciliation of regulatory capital elements using month-end balances as they relate to its balance sheet in any applicable audited consolidated financial statements. The reconciliation must include a statement that compliance with the regulatory capital requirements outlined in subpart B of this part is determined using average daily balances for the most recent 3 months.
Table 1 to § 628.63—Scope of Application
| Qualitative Disclosures | (a) The name of the top corporate entity in the group to which this subpart applies. 1 |
| (b) A brief description of the differences in the basis for consolidating entities 2 for accounting and regulatory purposes, with a description of those entities: | |
| (1) That are fully consolidated; | |
| (2) That are deconsolidated and deducted from total capital; | |
| (3) For which the total capital requirement is deducted; and | |
| (4) That are neither consolidated nor deducted (for example, where the investment in the entity is assigned a risk weight in accordance with this subpart). | |
| (c) Any restrictions, or other major impediments, on transfer of funds or total capital within the group. | |
| Quantitative Disclosures | (d) [Reserved] |
| (e) The aggregate amount by which actual total capital is less than the minimum total capital requirement in all subsidiaries, with total capital requirements and the name(s) of the subsidiaries with such deficiencies. |
1 The System bank is the top corporate entity.
2 Entities include any subsidiaries authorized by the FCA, including operating subsidiaries, service corporations, and unincorporated business entities.
Table 2 to § 628.63—Capital Structure
| Qualitative Disclosures | (a) Summary information on the terms and conditions of the main features of all regulatory capital instruments. |
| Quantitative Disclosures | (b) The amount of common equity tier 1 capital, with separate disclosure of: |
| (1) Common cooperative equities | |
| a. Statutory minimum purchased borrower stock; | |
| b. Other required member purchased stock; | |
| c. Allocated equities (stock or surplus): | |
| 1. Qualified allocated equities subject to retirement; | |
| 2. Nonqualified allocated equities subject to retirement; | |
| 3. Nonqualified allocated equities not subject to retirement; | |
| (2) Unallocated retained earnings (URE); | |
| (3) Paid-in capital; and | |
| (4) Regulatory adjustments and deductions made to common equity tier 1 capital. | |
| (c) The amount of tier 1 capital, with separate disclosure of: | |
| (1) Additional tier 1 capital elements; and | |
| (2) Regulatory adjustments and deductions made to tier 1 capital. | |
| (d) The amount of total capital, with separate disclosure of: | |
| (1) Common cooperative equities not included in common equity tier 1 capital; | |
| (2) Tier 2 capital elements, including tier 2 capital instruments; and | |
| (3) Regulatory adjustments and deductions made to total capital, including deductions of third-party capital under § 628.23. |
Table 3 to § 628.63—Capital Adequacy
| Qualitative disclosures | (a) A summary discussion of the System bank’s approach to assessing the adequacy of its capital to support current and future activities. |
| Quantitative disclosures | (b) Risk-weighted assets for: |
| (1) Exposures to sovereign entities; | |
| (2) Exposures to certain supranational entities and MDBs; | |
| (3) Exposures to GSEs; | |
| (4) Exposures to depository institutions, foreign banks, and credit unions, including OFI exposures that are risk weighted as exposures to U.S. depository institutions and credit unions; | |
| (5) Exposures to PSEs; | |
| (6) Corporate exposures, including borrower loans (including agricultural and consumer loans) and OFI exposures that are not risk weighted as exposures to U.S. depository institutions and credit unions; | |
| (7) Residential mortgage exposures; | |
| (8) [Reserved] | |
| (9) Past due and nonaccrual exposures; | |
| (10) Exposures to other assets; | |
| (11) Cleared transactions; | |
| (12) Unsettled transactions; | |
| (13) Securitization exposures; and | |
| (14) Equity exposures. | |
| (c) [Reserved] | |
| (d) Common equity tier 1, tier 1 and total risk-based capital ratios for the System bank. | |
| (e) Total standardized risk-weighted assets. |
Table 4 to § 628.63—Capital Buffers
| Quantitative Disclosures | (a) At least quarterly, the System bank must calculate and publicly disclose the capital conservation buffer and leverage buffer as described under § 628.11. |
| (b) At least quarterly, the System bank must calculate and publicly disclose the eligible retained income of the System bank, as described under § 628.11. | |
| (c) At least quarterly, the System bank must calculate and publicly disclose any limitations it has on distributions and discretionary bonus payments resulting from the buffer framework described under § 628.11, including the maximum payout amount and/or maximum leverage payout amount for the quarter. |
(c) General qualitative disclosure requirement. For each separate risk area described in tables 5 through 10 of this section, the System bank must describe its risk management objectives and policies, including: Strategies and processes; the structure and organization of the relevant risk management function; the scope and nature of risk reporting and/or measurement systems; policies for hedging and/or mitigating risk and strategies and processes for monitoring the continuing effectiveness of hedges/mitigants.
Table 5 to § 628.63
1—Credit Risk: General Disclosures
| Qualitative Disclosures | (a) The general qualitative disclosure requirement with respect to credit risk (excluding counterparty credit risk disclosed in accordance with Table 6 of this section), including the: |
| (1) Policy for determining past due or delinquency status; | |
| (2) Policy for placing loans in nonaccrual status; | |
| (3) Policy for returning loans to accrual status; | |
| (4) Definition of and policy for identifying impaired loans (for financial accounting purposes); | |
| (5) Description of the methodology that the System bank uses to estimate its adjusted allowance for credit losses, including statistical methods used where applicable; | |
| (6) Policy for charging-off uncollectible amounts; and | |
| (7) Discussion of the System bank’s credit risk management policy. | |
| Quantitative Disclosures | (b) Total credit risk exposures and average credit risk exposures, after accounting offsets in accordance with GAAP, without taking into account the effects of credit risk mitigation techniques (for example, collateral and netting not permitted under GAAP), over the period categorized by major types of credit exposure. For example, System banks could use categories similar to that used for financial statement purposes. Such categories might include, for instance: |
| (1) Loans, off-balance sheet commitments, and other non-derivative off-balance sheet exposures; | |
| (2) Debt securities; and | |
| (3) OTC derivatives. 2 | |
| (c) Geographic distribution of exposures, categorized in significant areas by major types of credit exposure. 3 | |
| (d) Industry or counterparty type distribution of exposures, categorized by major types of credit exposure. | |
| (e) By major industry or counterparty type: | |
| (1) Amount of impaired loans for which there was a related allowance under GAAP; | |
| (2) Amount of impaired loans for which there was no related allowance under GAAP; | |
| (3) Amount of loans past due 90 days and in nonaccrual status; | |
| (4) Amount of loans past due 90 days and still accruing; 4 | |
| (5) The balance in the adjusted allowance for credit losses at the end of each period according to GAAP; and | |
| (6) Charge-offs during the period. | |
| (f) Amount of impaired loans and, if available, the amount of past due loans categorized by significant geographic areas including, if practical, the amounts of allowances related to each geographical area, 5 further categorized as required by GAAP. | |
| (g) Reconciliation of changes in adjusted allowance for credit losses. 6 | |
| (h) Remaining contractual maturity delineation (for example, one year or less) of the whole portfolio, categorized by credit exposure. |
1 This Table 5 does not cover equity exposures, which should be reported in Table 9 of this section.
2
3 A System bank can satisfy this requirement by describing the geographic distribution of its loan portfolio by State or other significant geographic division, if any.
4 A System bank is encouraged also to provide an analysis of the aging of past-due loans.
5 The portion of the general allowance that is not allocated to a geographical area should be disclosed separately.
6 The reconciliation should include the following: A description of the allowance; the opening balance of the allowance; charge-offs taken against the allowance during the period; amounts provided (or reversed) for estimated credit losses during the period; any other adjustments (for example, exchange rate differences, business combinations, acquisitions and disposals of subsidiaries), including transfers between allowances; and the closing balance of the allowance. Charge-offs and recoveries that have been recorded directly to the income statement should be disclosed separately.
Table 6 to § 628.63—General Disclosure for Counterparty Credit Risk-Related Exposures
| Qualitative Disclosures | (a) The general qualitative disclosure requirement with respect to OTC derivatives, eligible margin loans, and repo-style transactions, including a discussion of: |
| (1) The methodology used to assign credit limits for counterparty credit exposures; | |
| Policies for securing collateral, valuing and managing collateral, and establishing credit reserves; | |
| (3) The primary types of collateral taken; and | |
| (4) The impact of the amount of collateral the System bank would have to provide given deterioration in the System bank’s own creditworthiness. | |
| Quantitative Disclosures | (b) Gross positive fair value of contracts, collateral held (including type, for example, cash, government securities), and net unsecured credit exposure. 1 A System bank also must disclose the notional value of credit derivative hedges purchased for counterparty credit risk protection and the distribution of current credit exposure by exposure type. 2 |
| (c) Notional amount of purchased credit derivatives used for the System bank’s own credit portfolio. |
1 Net unsecured credit exposure is the credit exposure after considering both the benefits from legally enforceable netting agreements and collateral arrangements without taking into account haircuts for price volatility, liquidity, etc.
2 This may include interest rate derivative contracts, foreign exchange derivative contracts, equity derivative contracts, credit derivatives, commodity or other derivative contracts, repo-style transactions, and eligible margin loans.
Table 7 to § 628.63—Credit Risk Mitigation
1 2
| Qualitative Disclosures | (a) The general qualitative disclosure requirement with respect to credit risk mitigation, including: |
| (1) Policies and processes for collateral valuation and management; | |
| (2) A description of the main types of collateral taken by the System bank; | |
| (3) The main types of guarantors/credit derivative counterparties and their creditworthiness; and | |
| (4) Information about (market or credit) risk concentrations with respect to credit risk mitigation. | |
| Quantitative Disclosures | (b) For each separately disclosed credit risk portfolio, the total exposure that is covered by eligible financial collateral, and after the application of haircuts. |
| (c) For each separately disclosed portfolio, the total exposure that is covered by guarantees/credit derivatives and the risk-weighted asset amount associated with that exposure. |
1 At a minimum, a System bank must provide the disclosures in this Table 7 in relation to credit risk mitigation that has been recognized for the purposes of reducing capital requirements under this subpart. Where relevant, System banks are encouraged to give further information about mitigants that have not been recognized for that purpose.
2 Credit derivatives that are treated, for the purposes of this subpart, as synthetic securitization exposures should be excluded from the credit risk mitigation disclosures and included within those relating to securitization (Table 8 of this section).
Table 8 to § 628.63—Securitization
1
| Qualitative Disclosures | (a) The general qualitative disclosure requirement with respect to a securitization (including synthetic securitizations), including a discussion of: |
| (1) The System bank’s objectives for securitizing assets, including the extent to which these activities transfer credit risk of the underlying exposures away from the System bank to other entities and including the type of risks assumed and retained with resecuritization activity; 2 | |
| (2) The nature of the risks ( | |
| (3) The roles played by the System bank in the securitization process 3 and an indication of the extent of the System bank’s involvement in each of them; | |
| (4) The processes in place to monitor changes in the credit and market risk of securitization exposures including how those processes differ for resecuritization exposures; | |
| (5) The System bank’s policy for mitigating the credit risk retained through securitization and resecuritization exposures; and | |
| (6) The risk-based capital approaches that the System bank follows for its securitization exposures including the type of securitization exposure to which each approach applies. | |
| (b) [Reserved] | |
| (c) Summary of the System bank’s accounting policies for securitization activities, including: | |
| (1) Whether the transactions are treated as sales or financings; | |
| (2) Recognition of gain-on-sale; | |
| (3) Methods and key assumptions applied in valuing retained or purchased interests; | |
| (4) Changes in methods and key assumptions from the previous period for valuing retained interests and impact of the changes; | |
| (5) Treatment of synthetic securitizations; | |
| (6) How exposures intended to be securitized are valued and whether they are recorded under subpart D of this part; and | |
| (7) Policies for recognizing liabilities on the balance sheet for arrangements that could require the System bank to provide financial support for securitized assets. | |
| (d) An explanation of significant changes to any quantitative information since the last reporting period. | |
| Quantitative Disclosures | (e) The total outstanding exposures securitized by the System bank in securitizations that meet the operational criteria provided in § 628.41 (categorized into traditional and synthetic securitizations), by exposure type. 4 |
| (f) For exposures securitized by the System bank in securitizations that meet the operational criteria in § 628.41: | |
| (1) Amount of securitized assets that are impaired/past due categorized by exposure type; 5 and | |
| (2) Losses recognized by the System bank during the current period categorized by exposure type. 6 | |
| (g) The total amount of outstanding exposures intended to be securitized categorized by exposure type. | |
| (h) Aggregate amount of: | |
| (1) On-balance sheet securitization exposures retained or purchased categorized by exposure type; and | |
| (2) Off-balance sheet securitization exposures categorized by exposure type. | |
| (i) (1) Aggregate amount of securitization exposures retained or purchased and the associated capital requirements for these exposures, categorized between securitization and resecuritization exposures, further categorized into a meaningful number of risk weight bands and by risk-based capital approach ( | |
| (2) Exposures that have been deducted entirely from tier 1 capital, CEIOs deducted from total capital (as described in § 628.42(a)(1)), and other exposures deducted from total capital should be disclosed separately by exposure type. | |
| (j) Summary of current year’s securitization activity, including the amount of exposures securitized (by exposure type), and recognized gain or loss on sale by exposure type. | |
| (k) Aggregate amount of resecuritization exposures retained or purchased categorized according to: | |
| (1) Exposures to which credit risk mitigation is applied and those not applied; and | |
| (2) Exposures to guarantors categorized according to guarantor creditworthiness categories or guarantor name. |
1 A System bank is not authorized to perform every role in a securitization, and nothing in these capital rules authorizes a System bank to engage in activities relating to securitizations that are not otherwise authorized.
2 The System bank should describe the structure of resecuritizations in which it participates; this description should be provided for the main categories of resecuritization products in which the System bank is active.
3 Roles in securitizations generally could include originator, investor, servicer, provider of credit enhancement, sponsor, liquidity provider, or swap provider. As noted in footnote 1 of this table, however, a System bank is not authorized to perform all of these roles.
4 “Exposures securitized” include underlying exposures originated by the System bank, whether generated by them or purchased, and recognized in the balance sheet, from third parties, and third-party exposures included in sponsored transactions. Securitization transactions (including underlying exposures originally on the System bank’s balance sheet and underlying exposures acquired by the System bank from third-party entities) in which the originating System bank (as an originating System institution) does not retain any securitization exposure should be shown separately but need only be reported for the year of inception. System banks are required to disclose exposures regardless of whether there is a capital charge under this part.
5 Include credit-related other than temporary impairment (OTTI).
6 For example, charge-offs/allowances (if the assets remain on the System bank’s balance sheet) or credit-related OTTI of interest-only strips and other retained residual interests, as well as recognition of liabilities for probable future financial support required of the System bank with respect to securitized assets.
Table 9 to § 628.63—Equities
| Qualitative Disclosures | (a) The general qualitative disclosure requirement with respect to equity risk: |
| (1) Differentiation between holdings on which capital gains are expected and those taken under other objectives including for relationship and strategic reasons; and | |
| (2) Discussion of important policies covering the valuation of and accounting for equity. This includes the accounting techniques and valuation methodologies used, including key assumptions and practices affecting valuation as well as significant changes in these practices. | |
| Quantitative Disclosures | (b) Value disclosed on the balance sheet of investments, as well as the fair value of those investments; for securities that are publicly traded, a comparison to publicly quoted share values where the share price is materially different from fair value. |
| (c) The types and nature of investments, including the amount that is: | |
| (1) Publicly traded; and | |
| (2) Non-publicly traded. | |
| (d) The cumulative realized gains (losses) arising from sales and liquidations in the reporting period. | |
| (e) (1) Total unrealized gains (losses). 1 | |
| (2) Total latent revaluation gains (losses). 2 | |
| (3) Any amounts of the above included in tier 1 or tier 2 capital. | |
| (f) [Reserved] |
1 Unrealized gains (losses) recognized on the balance sheet but not through earnings.
2 Unrealized gains (losses) not recognized either on the balance sheet or through earnings.
Table 10 to § 628.63—Interest Rate Risk for Non-Trading Activities
| Qualitative disclosures | (a) The general qualitative disclosure requirement, including the nature of interest rate risk for non-trading activities and key assumptions, including assumptions regarding loan prepayments and behavior of non-maturity deposits, and frequency of measurement of interest rate risk for non-trading activities. |
| Quantitative disclosures | (b) The increase (decline) in earnings or economic value (or market value of equity or other relevant measure used by management) for upward and downward rate shocks according to management’s method for measuring interest rate risk for non-trading activities, categorized by currency (as appropriate). |
§§ 628.64-628.99 [Reserved]
Subparts E-F [Reserved]
Subpart G—Transition Provisions
§ 628.300 Transitions.
(a) Capital conservation buffer. (1) [Reserved]
(2) Beginning January 1, 2017 through December 31, 2019 a System institution’s maximum capital conservation buffer payout ratio must be determined as set forth in Table 1 to § 628.300.
Table 1 to § 628.300
| Transition Period | Capital conservation buffer | Maximum payout ratio (as a percentage of eligible retained income) |
|---|---|---|
| Calendar year 2017 | >0.625 percent | No limitation. |
| ≤0.625 percent, and >0.469 percent | 60 percent. | |
| ≤0.469 percent, and >0.313 percent | 40 percent. | |
| ≤0.313 percent, and >0.156 percent | 20 percent. | |
| ≤0.156 percent | 0 percent. | |
| Calendar year 2018 | >1.25 percent | No limitation. |
| ≤1.25 percent, and >0.938 percent | 60 percent. | |
| ≤0.938 percent, and >0.625 percent | 40 percent. | |
| ≤0.625 percent, and >0.313 percent | 20 percent. | |
| ≤0.313 percent | 0 percent. | |
| Calendar year 2019 | >1.875 percent | No limitation. |
| ≤1.875 percent, and >1.406 percent | 60 percent. | |
| ≤1.406 percent, and >0.938 percent | 40 percent. | |
| ≤0.938 percent, and >0.469 percent | 20 percent. | |
| ≤0.469 percent | 0 percent. |
(b)-(e) [Reserved]
§ 628.301 Initial compliance and reporting requirements.
(a) A System institution that fails to satisfy one or more of its minimum applicable CET1, tier 1, or total risk-based capital ratios or its tier 1 leverage ratio at the end of the quarter in which these regulations become effective shall report its initial noncompliance to the FCA within 20 days following such quarterend and shall also submit a capital restoration plan for achieving and maintaining the standards, demonstrating appropriate annual progress toward meeting the goal, to the FCA within 60 days following such quarterend. If the capital restoration plan is not approved by the FCA, the FCA will inform the institution of the reasons for disapproval, and the institution shall submit a revised capital restoration plan within the time specified by the FCA.
(b) Approval of compliance plans. In determining whether to approve a capital restoration plan submitted under this section, the FCA shall consider the following factors, as applicable:
(1) The conditions or circumstances leading to the institution’s falling below minimum levels, the exigency of those circumstances, and whether or not they were caused by actions of the institution or were beyond the institution’s control;
(2) The overall condition, management strength, and future prospects of the institution and, if applicable, affiliated System institutions;
(3) The institution’s capital, adverse assets (including nonaccrual and nonperforming loans), ALL, and other ratios compared to the ratios of its peers or industry norms;
(4) How far an institution’s ratios are below the minimum requirements;
(5) The estimated rate at which the institution can reasonably be expected to generate additional earnings;
(6) The effect of the business changes required to increase capital;
(7) The institution’s previous compliance practices, as appropriate;
(8) The views of the institution’s directors and senior management regarding the plan; and
(9) Any other facts or circumstances that the FCA deems relevant.
(c) An institution shall be deemed to be in compliance with the regulatory capital requirements of this subpart if it is in compliance with a capital restoration plan that is approved by the FCA within 180 days following the end of the quarter in which these regulations become effective.
Appendix A to Part 628—XXX
PART 630—DISCLOSURE TO INVESTORS IN SYSTEMWIDE AND CONSOLIDATED BANK DEBT OBLIGATIONS OF THE FARM CREDIT SYSTEM
Subpart A—General
§ 630.1 Purpose.
This part sets forth the requirements for preparation and publication by the Farm Credit System (FCS or System) of annual and quarterly reports to investors and potential investors in Systemwide and consolidated bank debt obligations of the System and to other users of the reports in the general public.
§ 630.2 Definitions.
For purposes of this part, the following definitions shall apply:
(a) Bank means any bank chartered under the Farm Credit Act of 1971, as amended (Act).
(b) Combined financial statements means financial statements prepared on a combined basis by a group of affiliated entities that share the same financial interest, regardless of whether any of the entities has the ability to exercise control over another. For purposes of this part, unless otherwise specified, combined financial data of a bank and its related associations includes financial data of the bank’s consolidated subsidiaries.
(c) Disclosure entity means any Farm Credit bank and the Federal Farm Credit Banks Funding Corporation (Funding Corporation).
(d) Engagement letter means the proposal, contract, letter, and other documents reflecting the understandings between the audit committee or board of directors of a bank or an association and its independent public accountant regarding the scope, terms, and nature of the audit services to be performed.
(e) Farm Credit System means, collectively, the banks, associations, and such other institutions that are or may be made a part of the System under the Act, all of which are chartered by and subject to regulation by the Farm Credit Administration (FCA). For purposes of this part, the System does not include the Federal Agricultural Mortgage Corporation (Farmer Mac).
(f) FCS debt obligation means, collectively, notes, bonds, debentures, and other debt securities issued by banks pursuant to section 4.2(c) (consolidated bank debt securities) and section 4.2(d) (Systemwide debt securities) of the Act.
(g) Report to investors or report means a report that presents the Systemwide combined financial statements, supplemental financial statement information, and related financial and nonfinancial information pertaining to the System required by this part.
(h) Systemwide combined financial statements means the combined financial statements required by this part.
§ 630.3 Publishing and filing the report to investors.
(a) The disclosure entities shall jointly publish the following reports in order to provide meaningful information pertaining to the financial condition and results of operations of the System to investors and potential investors in FCS debt obligations and other users of the report:
(1) An annual report to investors within 75 calendar days after the end of each fiscal year;
(2) A quarterly report to investors within 45 calendar days after the end of each quarter, except for the quarter that coincides with the end of the fiscal year.
(3) Interim reports, as required by the Funding Corporation’s written policies and procedures, disclosing significant events or material changes in information occurring since the most recently published report to investors.
(b) Each report to investors shall present Systemwide combined financial statements and related footnotes deemed appropriate for the purpose of the report to provide investors with the most meaningful presentation pertaining to the financial condition and results of operations of the System.
(c) All items of essentially the same character as items required to be reported in the reports of condition and performance pursuant to part 621 of this chapter shall be prepared in accordance with the rules set forth in part 621 of this chapter.
(d) Each report to investors shall contain the information required by subparts B and C of this part, as applicable, and such other information as is necessary to make the required statements, in light of the circumstances under which they are made, not misleading.
(e) Information in any part of the report may be referenced or incorporated in answer or partial answer to any other item of the report. Information required by this part may be presented in any order deemed suitable by the Funding Corporation.
(f) Information in documents prepared for investors in connection with the offering of debt securities issued through the Funding Corporation may be incorporated by reference in the annual and quarterly reports in answer or partial answer to any item required in the reports under this part. A complete description of any offering documents incorporated by reference must be clearly identified in the report (e.g., Federal Farm Credit Banks Consolidated System-wide Bonds and Discount Notes—Offering Circular issued on [insert date]). Offering documents incorporated by reference in either an annual or quarterly report prepared under this part must be filed with the Farm Credit Administration according to our instructions either prior to or at the time of submission of the report under paragraph (h) of this section. Any offering document incorporated by reference is subject to the delivery and availability requirements set forth in § 630.4(a)(5) and (a)(6).
(g) The report shall include a statement in a prominent location that Systemwide debt securities and consolidated bank debt obligations are joint and several liabilities of individual banks and that copies of each bank’s recent periodic reports to shareholders are available upon request. The report shall also include addresses and telephone numbers where copies of the report to investors and the periodic reports of individual banks can be obtained. Copies of the report to investors shall be available for public inspection at the Funding Corporation.
(h) Complete copies of the report must be filed with the Farm Credit Administration according to our instructions. All copies must comply with the requirements of § 630.5 of this part.
§ 630.4 Responsibilities for preparing the report to investors.
(a) Responsibilities of the Funding Corporation. The Funding Corporation shall:
(1) Prepare the reports to investors required by § 630.3(a), including the Systemwide combined financial statements and notes thereto, and such other disclosures, supplemental information, and related analysis as are required by this part to make the reports meaningful and not misleading.
(2) Establish a system of internal controls sufficient to reasonably ensure that any information it releases to investors and the general public concerning any matter required to be disclosed by this part is true and that there are no omissions of material information. The system of internal controls, at a minimum, shall require that the Funding Corporation:
(i) Maintain written policies and procedures, approved by the System Audit Committee, to be carried out by the disclosure entities for preparation of the report to investors;
(ii) Provide instructions to the disclosure entities regarding the information needed for preparation of the Systemwide combined financial statements and disclosures required to be presented in the report to investors;
(iii) Review the information submitted to it for preparation of the report to investors, and make reasonable inquiries to ascertain whether the information is reliable, accurate, and complete; and
(iv) Specify procedures for monitoring interim disclosures of System institutions and disclose, in a timely manner, any material changes in information contained in the most recently published report to investors.
(3) Collect from each disclosure entity financial data and related analyses and other information needed for preparation of the report to investors, including any information that is material to the disclosure entity.
(4) File the reports with the FCA in accordance with § 630.3(f) and (h) and § 630.5.
(5) Ensure prompt delivery of sufficient copies of each report to selling group dealers for distribution to investors and potential investors in FCS debt obligations.
(6) Make the report available to the general public upon request.
(7) Notify the FCA if it is unable to prepare and publish the report to investors in compliance with the requirements of this part because one or more banks have failed to comply with the requirements of paragraph (c) of this section. A notification, signed by the officer(s) designated by the board of directors of the Funding Corporation to certify the report to investors and by the chief executive officer, shall be made to the FCA as soon as the Funding Corporation becomes aware of its inability to comply. The Funding Corporation shall explain the reasons for the notification and may request that the FCA extend the due date for the report to investors.
(8) Include in the report a statement that briefly explains the respective responsibilities of the disclosure entities and states that the Funding Corporation has policies and procedures in place to ensure, to the best of the knowledge and belief of management and the board of the Funding Corporation, that the information contained in the report is true, accurate, and complete. The statement shall be signed by the chief executive officer and the chairperson of the board of the Funding Corporation.
(9) Request the FCA to provide information regarding the content of the latest Reports of Examination of any banks and related associations, if such information is necessary for preparation of a report that is meaningful and not misleading and is not forthcoming from a bank in accordance with paragraph (c) of this section. The request shall be made to the Chief Examiner, Farm Credit Administration, McLean, Virginia 22102-5090.
(b) Responsibilities of banks. Each bank shall:
(1) Provide to the Funding Corporation annual, quarterly, and interim financial and other information in accordance with instructions of the Funding Corporation for preparation of the report to investors, including:
(i) Financial data of the bank or, if the bank is required under generally accepted accounting principles (GAAP) to prepare its financial statements on a consolidated basis with its subsidiaries, consolidated financial data of the bank and its consolidated subsidiaries; and
(ii) Combined financial data of the bank (including any consolidated subsidiaries of the bank) and related associations of the bank.
(2) Respond to Funding Corporation inquiries and provide any followup information requested by the Funding Corporation in connection with the preparation of the report to investors in accordance with instructions of the Funding Corporation.
(3) Notify the Funding Corporation promptly of any events occurring subsequent to publication of the report that may be material either to the financial condition and results of operations of the bank or to the combined financial condition and results of operations of the bank and its related associations. Furnish the Funding Corporation with any information necessary to provide interim Systemwide disclosure to investors to make the most recently published report to investors not misleading.
(4) Respond to inquiries from the Funding Corporation relating to preparation of the report.
(5) Certify to the Funding Corporation that all information needed for preparation of the report to investors has been submitted in accordance with the instructions of the Funding Corporation and the information submitted complies with the signature and certification provisions of § 620.3(b) and (c), respectively.
(c) Responsibilities of associations. Each association must:
(1) Provide its related bank with the information necessary to allow the bank to provide accurate and complete information regarding the bank and its related associations to the Funding Corporation for preparation of the report. The financial information provided by the association to its related bank must be signed and certified in the same manner as provided in § 620.3(b) and (c), respectively.
(2) Respond to inquiries of the related bank pertaining to preparation of the combined financial data of the association and its related bank.
§ 630.5 Accuracy of reports and assessment of internal control over financial reporting.
(a) Prohibition against incomplete, inaccurate, or misleading disclosure. Neither the Funding Corporation, nor any institution supplying information to the Funding Corporation under this part, nor any employee, officer, director, or nominee for director of the Funding Corporation or of such institutions, shall make or cause to be made any disclosure to investors and the general public required by this part that is incomplete, inaccurate, or misleading. When any such institution or person makes or causes to be made disclosure under this part that, in the judgment of the FCA, is incomplete, inaccurate, or misleading, whether or not such disclosure is made in published statements required by this part, such institution or person shall promptly furnish to the Funding Corporation, and the Funding Corporation shall promptly publish, such additional or corrective disclosure as is necessary to provide full and fair disclosure to investors and the general public. Nothing in this section shall prevent the FCA from taking additional actions to enforce this section pursuant to its authority under title V, part C of the Act.
(b) Signatures. The name and position title of each person signing the report must be printed beneath his or her signature. If any person required to sign the report has not signed the report, the name and position title of the individual and the reasons such individual is unable to, or refuses to, sign must be disclosed in the report. All reports must be dated and signed on behalf of the Funding Corporation by:
(1) The chief executive officer (CEO);
(2) The officer in charge of preparing financial statements; and
(3) A board member formally designated by action of the board to certify reports of condition and performance on behalf of individual board members.
(c) Certification of financial accuracy. The report must be certified as financially accurate by the signatories to the report. If any signatory is unable to, or refuses to, certify the report, the institution must disclose the individual’s name and position title and the reason(s) such individual is unable or refuses to certify the report. At a minimum, the certification must include a statement that:
(1) The signatories have reviewed the report,
(2) The report has been prepared in accordance with all applicable statutory or regulatory requirements, and
(3) The information is true, accurate, and complete to the best of signatories’ knowledge and belief.
(d) Management assessment of internal control over financial reporting. (1) Annual reports must include a report by the Funding Corporation’s management assessing the effectiveness of the internal control over financial reporting for the System-wide report to investors. The assessment must be conducted during the reporting period and be reported to the Funding Corporation’s board of directors. Quarterly and annual reports must disclose any material change(s) in the internal control over financial reporting occurring during the reporting period.
(2) The Funding Corporation must require its external auditor to issue an attestation report, which must express an opinion on the effectiveness of internal control over financial reporting. The resulting attestation report must accompany management’s assessment and be included in the annual report.
§ 630.6 Funding Corporation committees.
(a) System Audit Committee. The Funding Corporation must establish and maintain a System Audit Committee (SAC) by adopting a written charter describing the committee’s composition, authorities, and responsibilities in accordance with this section. The SAC must maintain records of meetings, including attendance, for at least 3 fiscal years.
(1) Composition. All SAC members should be knowledgeable in at least one of the following: Public and corporate finance, financial reporting and disclosure, or accounting procedures.
(i) At least one-third of the SAC members must be representatives from the Farm Credit System.
(ii) The SAC may not consist of less than three members and at least one member must be a financial expert. A financial expert is one who either has experience with internal controls and procedures for financial reporting or experience in preparing or auditing financial statements.
(iii) The chair of the SAC must be a financial expert.
(2) Independence. Every audit committee member must be free from any relationship that, in the opinion of the Funding Corporation board, would interfere with the exercise of independent judgment as a committee member.
(3) Resources. The Funding Corporation must provide the SAC monetary and nonmonetary resources the SAC determines necessary to enable it to perform the duties listed in paragraph (a)(4) of this section. The Funding Corporation must permit the SAC to contract, for reasons directly related to the duties listed in paragraph (a)(4) of this section, the services of external auditors, independent legal counsel, and outside advisors. The SAC must only use the resources of the Funding Corporation in a manner that complies with laws and regulations and for the purpose of preserving and promoting the safety and soundness of the System. The SAC must provide the Funding Corporation board of directors a quarterly accounting of expenditures made pursuant to this section.
(4) Duties. The SAC reports only to the Funding Corporation board of directors. In its capacity as a committee of the board, the SAC is responsible for the following:
(i) Financial reports. The SAC must oversee the Funding Corporation’s preparation of the report to stockholders and investors; review the impact of any significant accounting and auditing developments; review accounting policy changes relating to preparation of the System-wide combined financial statements; and review annual and quarterly reports prior to release. After the SAC reviews a financial policy, procedure, or report, it must record in its minutes its agreement or disagreement with the item(s) under review.
(ii) External auditors. The external auditor must report directly to the SAC. The SAC must:
(A) Determine, with the agreement of the Funding Corporation board of directors, the appointment, compensation, and retention of the external auditors issuing System-wide audit reports;
(B) Review the external auditor’s work;
(C) Give prior approval for any non-audit services performed by the external auditor, except the audit committee may not approve those non-audit services specifically prohibited by FCA regulation; and
(D) Comply with the auditor independence provisions of part 621 of this chapter.
(iii) Internal controls. The SAC must oversee the Funding Corporation’s system of internal controls relating to preparation of financial reports, including controls relating to the Farm Credit System’s compliance with applicable laws and regulations.
(b) Compensation committee. The Funding Corporation must establish and maintain a compensation committee by adopting a written charter describing the committee’s composition, authorities, and responsibilities in accordance with this section. The compensation committee must report only to the board of directors. The compensation committee is required to maintain records of meetings, including attendance, for at least 3 fiscal years.
(1) Composition. The committee must consist of at least three members and all members must be members of the Funding Corporation’s board of directors. Every compensation committee member must be free from any relationship that, in the opinion of the board, would interfere with the exercise of independent judgment as a committee member.
(2) Responsibilities. It is the responsibility of the compensation committee to review the compensation policies and plans for senior officers and employees and to approve the overall compensation program for senior officers. In fulfilling its responsibilities, the compensation committee must document that it determined the:
(i) Funding Corporation’s projected long-term compensation and retirement benefit obligations are appropriate to the services performed and not excessive;
(ii) Incentive-based compensation programs and payments are reasonable and proportionate to the services performed and structured so the payout schedule considers the potential for future losses or undue risks to the Funding Corporation; and
(iii) Senior officer compensation, incentive, and benefit programs support the Funding Corporation’s long-term business strategy and mission, as well as promote safe and sound business practices.
(3) Resources. The Funding Corporation must provide monetary and nonmonetary resources to enable its compensation committee to perform its duties.
Subpart B—Annual Report to Investors
§ 630.20 Contents of the annual report to investors.
The annual report must contain the following:
(a) Description of business. (1) The description shall include a brief discussion of the following:
(i) The System’s overall organizational structure, its lending institutions by type and their respective authorities, the relationships between different types of institutions, and the overall geographic area and eligible borrowers served by those institutions;
(ii) The types of lending activities engaged in and financial services offered by System institutions;
(iii) Any significant developments within the last 5 years that have had or could have a material impact on the System’s organizational structure and the manner in which System institutions conduct business, including, but not limited to, statutory or regulatory changes, mergers or liquidations of System institutions, terminations of System institution status, and financial assistance provided by or to System institutions through loss-sharing or capital preservation agreements or from any other source;
(iv) Any acquisition or disposition of material assets during the last fiscal year that took place outside the ordinary course of business;
(v) Any concentrations of more than 10 percent of total assets in particular types of agricultural activities or businesses, and any dependence of an institution or a group of institutions of the System upon a specific activity or business, a single customer, or a few customers, including other financing institutions (OFIs), the loss of any one of which would have a material effect on the System; and
(vi) The authority of System institutions to purchase and sell interests in loans in secondary markets and the risk involved in such activities.
(2) List the address of the headquarters of each disclosure entity and service corporation of the System.
(b) Federal regulation and insurance—(1) Farm Credit Administration. Describe the regulatory and enforcement authority of the FCA over System institutions under the Act.
(2) Farm Credit System Insurance Corporation. (i) Describe the role and authorities of the Farm Credit System Insurance Corporation (FCSIC) under part E of title V of the Act. Describe specifically the role of the FCSIC in insuring the timely payment of principal and interest on FCS debt obligations and in providing assistance to System institutions.
(ii) Describe the FCSIC’s status as a Government corporation and state that System institutions have no control over the management of the FCSIC or the discretionary expenditures from the Farm Credit Insurance Fund (Insurance Fund), which are the sole prerogative of the FCSIC.
(c) Description of legal proceedings and enforcement actions. (1) Describe any material pending legal proceedings in which one or more System institutions are a party, or that involve claims that a System institution(s) may be required by contract or operation of law to satisfy, and the potential impact of such proceedings, to the extent known, on the System.
(2) Provide a summary of the types of enforcement actions in effect during the year, and any material impact of such proceedings on the System.
(d) Description of liabilities. (1) Describe how the System funds its lending operations, including:
(i) System banks’ authority to borrow, and issue notes, bonds, debentures, and other obligations, and limitations thereof under section 4.2 of the Act;
(ii) A description of the types of debt obligations authorized to be issued under the Act, the types of debt obligations currently issued, the manner and form in which they are issued, rights of securities holders, risk factors, use of proceeds, tax effects of holding securities, market information, and other pertinent information;
(iii) For each of the types of obligations that may be issued, whether it is insured, and the extent of any joint and several liability for the obligations; and
(iv) Any applicable statutory and regulatory requirements affecting a bank’s ability to incur debt.
(2) Describe agreements among System banks and the Funding Corporation affecting a bank’s ability to incur debt.
(3) Describe agreements among System institutions regarding capital preservation, loss sharing, or any other forms of financial assistance.
(e) Description of capital. (1) Describe the capitalization of the System, including capital structure, types of stock and participation certificates, and voting rights of holders of stock and participation certificates.
(2) Describe the statutory requirement that a borrower purchase stock as a condition of obtaining a loan; how such stock is purchased, transferred, and retired; and how earnings are distributed.
(3) Describe any statutory or other authority of a System institution to require additional capital contributions from stockholders.
(4) Describe regulatory minimum permanent capital standards and capital adequacy requirements for banks and associations. State the number of institutions, if any, categorized by banks and associations, that are not currently in compliance with such standards and include a brief discussion of the reasons for the noncompliance.
(5) Describe any statutory and regulatory restrictions on retirement of stock and distribution of earnings by System institutions. State the number of System institutions, if any, categorized by banks and associations, that are currently affected by such restrictions and provide a summary of the causes of such prohibitions.
(f) Selected financial data. At a minimum, furnish the following combined financial data of the System in comparative columnar form for each of the last 5 fiscal years, if material.
(1) Balance sheet.
(i) Loans.
(ii) Allowance for credit losses.
(iii) Net loans.
(iv) Cash and investments.
(v) Other property owned.
(vi) Total assets.
(vii) FCS debt obligations and other bonds, notes, debentures, and obligations, presented by type, with a descriptive title.
(viii) Total liabilities.
(ix) Capital stock and surplus.
(2) Statement of income.
(i) Net interest income.
(ii) Net other expenses.
(iii) Provision for credit losses.
(iv) Extraordinary items.
(v) Provision for income taxes.
(vi) Net income (loss).
(3) Key financial ratios. (i) Return on average assets.
(ii) Return on average capital stock and surplus.
(iii) Net interest income as a percentage of average earning assets.
(iv) Net loan chargeoffs as a percentage of average loans.
(v) Allowance for credit losses as a percentage of gross loans outstanding at yearend.
(vi) Capital stock and surplus as a percentage of total assets at yearend.
(vii) Debt to capital stock and surplus at yearend.
(g) Discussion and analysis. Fully discuss any material aspects of financial condition, changes in financial condition, and results of operations of System institutions, on a combined basis, for the comparative years required by paragraph (g)(6)(ii) of this section or such other time periods specified in the following paragraphs of this section. Identify favorable and unfavorable trends, and significant events or uncertainties necessary to understand the financial condition and results of operations of the System. At a minimum, the discussion shall include the following:
(1) Loan portfolio—(i) Categorization. Describe the loan portfolio of the System by major loan purpose category, indicating the amount and approximate percentage of the total dollar portfolio represented by each major category.
(ii) Risk exposure. (A) Describe and analyze all high-risk assets, including an analysis of the nature and extent of significant current and potential credit risks within the loan portfolio and of other information that could adversely affect the loan portfolio and other property owned.
(B) An analysis of the allowance for credit losses to loans and net chargeoffs to average loans and a discussion of the adequacy of the allowance for credit losses given reasonable and supportable forecasts.
(iii) Secondary market activities. (A) If material, quantify System institutions’ secondary market activities and the risk involved in such activities.
(B) If material, provide an analysis of historical loss experience and the amount provided for risk of loss associated with secondary market activities.
(2) Results of operations. (i) Describe, on a comparative basis, changes in the major components of net interest income. Include a discussion of significant factors that contributed to the changes and quantify the amount of change(s) due to an increase or decrease in volume and the amount due to changes in interest rates earned and paid, based on averages for each period.
(ii) Describe any unusual or infrequent events or transactions, or any significant economic changes that materially affected reported income and, in each case, indicate the extent to which income was so affected.
(iii) Discuss the factors underlying any material changes in the return on average assets and return on average capital stock and surplus.
(iv) Describe, on a comparative basis, the major components of operating expense and any other significant components of income or expense, indicating the reasons for any significant increases or decreases.
(v) Describe any known trends or uncertainties that have had, or that are reasonably expected to have, a material impact on net interest income or net income. Disclose any known events that will cause a material change in the relationship between costs and revenues.
(vi) Explain the changes that have taken place, by major components on a comparative basis, in Insurance Fund assets and related restricted capital and how such changes affected reported income.
(3) Funding sources and liquidity—(i) Funding sources. (A) Provide, in tabular form, the component amounts and the total amount of FCS debt obligations, debt obligations issued by banks individually, and Financial Assistance Corporation debt obligations outstanding at yearend for each of the past 2 fiscal years. List debt obligations issued by System institutions separately by type, also separating insured obligations from uninsured obligations. For each type of debt obligation listed, provide the following, at a minimum, for each fiscal year listed:
(1) The beginning balance, the total amount of debt issued, the total amount of debt retired, and the yearend balance; and
(2) The average maturities and average interest rates on debt outstanding at yearend, and the average maturities and average interest rates of new debt issued during the year.
(B) Summarize any other sources of funds, including lines of credit with commercial lenders, and their terms.
(ii) Liquidity. (A) Include a brief overview of any FCA regulations or System policies with regard to liquidity and liquidity reserves.
(B) Identify any known trends, demands, commitments, events, or uncertainties that will result in, or that are reasonably likely to result in, System liquidity increasing or decreasing in any material way. If a material liquidity deficiency is identified, indicate the course of action that has been taken or is proposed to be taken by management of affected System institutions to remedy the deficiency.
(iii) Investment. Provide a brief overview of the System’s investment policies and objectives, any regulatory limitations thereon, and the contents of the System’s existing investment portfolio.
(iv) Interest rate sensitivity. (A) Provide a brief overview of the System’s asset and liability management practices, including interest rate risk measurement systems, and methods used to control interest rate risk, such as the use of investments, derivatives, and other off-balance-sheet transactions.
(B) Provide an analysis of the System’s exposure to interest rate risk and its ability to control such risk.
(4) Capital resources. (i) Describe any material commitments to purchase capital assets and the anticipated sources of funding.
(ii) Describe any material trends, favorable or unfavorable, in the System’s capital resources, including any material changes in the mix of capital and debt, the relative cost of capital resources, and any off-balance- sheet financing arrangements.
(iii) Provide a general discussion of any trends, commitments, contingencies, or events that are reasonably likely to have a material adverse effect on System institutions’ ability to comply with regulatory capital standards.
(5) Insurance Fund. (i) Describe the purposes for which expenditures from the Insurance Fund may be made and the statutory requirements for making such expenditures.
(ii) Provide a schedule itemizing the amount of Insurance Fund assets that have been specifically identified by the FCSIC for payment of estimated obligations of the FCSIC and the amount of Insurance Fund assets for which no specific use has been identified or designated by the FCSIC. Information provided shall be as of the end of the most recent fiscal year.
(iii) Explain how FCSIC expenditures or designations of Insurance Fund assets for payment of future obligations affect the combined assets and capital of the System, and quantify the effect, if any.
(6) Instructions for discussion and analysis. (i) The purpose of the discussion and analysis (D&A) shall be to provide to investors and other users information relevant to an assessment of the combined financial condition and results of operations of System institutions as determined by evaluating the amounts and certainty of cashflows from operations and from outside sources. The information provided pursuant to this section need only include that which is available to System institutions and which does not clearly appear in the combined financial statements.
(ii) The D&A of the financial statements and other statistical data shall be presented in a manner designed to enhance a reader’s understanding of the combined financial condition, results of operations, cashflows, and changes in capital of System institutions. Unless otherwise specified in § 630.20(g), the discussion shall cover the period covered by the financial statements and shall use year-to-year comparisons or any other understandable format. Where trend information is relevant, reference to the 5-year selected financial data required by paragraph (f) of this section may be necessary.
(iii) The D&A shall focus specifically on material events and uncertainties known at the time of reporting that would cause reported financial information not to be necessarily indicative of future operating results or of future financial condition. This should include descriptions and amounts of:
(A) Matters that would have an impact on future operations but that have not had an impact in the past; and
(B) Matters that have had an impact on reported operations but are not expected to have an impact on future operations.
(h) Directors and management—(1) Board of directors. Briefly describe the composition of boards of directors of the disclosure entities. List the name of each director of such entities, including the director’s term of office and principal occupation during the past 5 years, or state that such information is available upon request.
(2) Senior officers. List the names of all senior officers employed by the disclosure entities, including position title and length of service at current position.
(i) Compensation of directors and senior officers. State that information on the compensation of directors and senior officers of Farm Credit banks is contained in each bank’s annual report to shareholders and that the annual report of each bank is available to investors upon request pursuant to § 630.3(g).
(j) Related party transactions. (1) Briefly describe how System institutions, in the ordinary course of business and subject to regulation by the FCA, may enter into loan transactions with related parties, including their directors, officers, and employees, the immediate family members (as defined in § 620.1(e) of this chapter) of such persons, and any organizations with which such persons and their immediate family members are affiliated.
(2) On a comparative basis for each of the fiscal years covered by the balance sheet, state the aggregate amount of the following:
(i) Loans made to related parties;
(ii) Loans outstanding at yearend to related parties;
(iii) Loans outstanding at yearend to related parties that are made on more favorable terms than those prevailing at the time for comparable transactions with unrelated borrowers; and
(iv) Loans outstanding at yearend to related parties that involve more than a normal risk of collectibility (as defined in § 620.1(i) of this chapter).
(k) Relationship with qualified public accountant. (1) If a change in the qualified public accountant who has previously examined and expressed an opinion on the System-wide combined financial statements has taken place since the last annual report to investors or if a disagreement with a qualified public accountant has occurred that the Funding Corporation would be required to report to the FCA under part 621 of this chapter, disclose the information required by § 621.4(c) and (d).
(2) Disclose the total fees paid during the reporting period to the qualified public accountant by the category of services provided. At a minimum, identify fees paid for audit services, tax services, and non-audit services. The types of non-audit services must be identified and indicate audit committee approval of the services.
(l) Financial statements. Furnish System-wide combined financial statements and related footnotes prepared in accordance with GAAP, and accompanied by supplemental information prepared in accordance with the requirements of § 630.20(m). The System-wide combined financial statements shall provide investors and potential investors in FCS debt obligations with the most meaningful presentation pertaining to the financial condition and results of operations of the System. The System-wide combined financial statement and accompanying supplemental information shall be audited in accordance with generally accepted auditing standards by a qualified public accountant. The System-wide combined financial statements shall include the following:
(1) A balance sheet as of the end of each of the 2 most recent fiscal years; and
(2) Statements of income, statements of changes in capital stock and surplus (or, if applicable, statements of changes in protected borrower capital and capital stock and surplus), and statements of cash flows for each of the 3 most recent fiscal years.
(m) Supplemental information. Furnish supplemental information regarding the components of the Systemwide combined financial statements that has been prepared in accordance with the requirements of this paragraph and any additional guidance or instructions provided by the FCA.
(1) At a minimum, the supplemental information shall include the following:
(i) Supplemental balance sheet information as of the end of the most recent fiscal year; and
(ii) Supplemental income statement information for the most recently completed fiscal year.
(2) At a minimum, the report shall present supplemental information showing combined financial data for the following components on a stand-alone basis:
(i) Banks;
(ii) Associations;
(iii) Combined financial data of the System without the Insurance Fund;
(iv) The Insurance Fund and related combination entries; and
(v) Combined financial data of the System with the Insurance Fund.
(3) The supplemental information shall be presented in a columnar format and include, at a minimum, the selected financial data listed in the schedules in appendix A of this part. The prescribed components shall be designated as column headings and they may be abbreviated in the schedules. The financial data required by § 630.20(m)(2)(i) shall include the financial data required to be submitted by each bank pursuant to the requirement of § 630.4(c)(1)(i).
(4) The supplemental information may be presented separately or in accompanying notes to the Systemwide combined financial statements and shall contain additional disclosures sufficient to explain the basis of the presentation of the supplemental information, the components, and any adjustments contained therein to enable readers to understand the effect of each component on the Systemwide combined financial statements.
(n) System Audit Committee. The Funding Corporation must include in the System-wide Report to Investors a description of the System Audit Committee and its activities during the reporting period. At a minimum, the description must:
(1) List the names of the System Audit Committee members, including each member’s term of office and principal occupation during the past 5 years. For each member, state the total cash and noncash compensation paid for services on the System Audit Committee during the reporting period.
(2) Disclose by category the monetary and nonmonetary resources used by the System Audit Committee during the reporting period. Discuss only those categories where the resources used within a category equaled or exceeded a total aggregate value of $5,000 during the reporting period. Fees paid for the audit of the System-wide financial statements, which are disclosed under paragraph (k)(2) of this section, are not included in any category under this paragraph. At a minimum, there must be separate categories for:
(i) Administrative expenses,
(ii) Contracted legal services,
(iii) Contracted consultants and advisors, and
(iv) Other contracted services, identifying the services.
(o) Include a detailed index setting forth the major disclosure captions of this subpart and the page or pages on which the required information appears in the report.
(p) Credit and services to young, beginning, and small farmers and ranchers and producers or harvesters of aquatic products. The Farm Credit banks must include a report on consolidated YBS lending data of their affiliated associations. The report must include the definitions of “young,” “beginning,” and “small” farmers and ranchers. A narrative report may be necessary for an ample understanding of the YBS mission results.
Subpart C—Quarterly Reports to Investors
§ 630.40 Contents of the quarterly report to investors.
(a) General. The quarterly report to investors shall contain the information specified in this section along with any other material information necessary to make the required disclosures, in light of the circumstances under which they are made, not misleading. The quarterly report must be presented in a format that is easily understandable and not misleading.
(b) Rules for condensation. For purposes of this subpart, major captions to be provided in interim financial statements are the same as those provided in the financial statements contained in the annual report to investors, except that the financial statements included in the quarterly report may be condensed into major captions in accordance with the rules prescribed under this paragraph.
(1) Interim balance sheets. When any major balance sheet caption is less than 10 percent of total assets and the amount in the caption has not increased or decreased by more than 25 percent since the end of the preceding fiscal year, the caption may be combined with others.
(2) Interim statements of income. When any major income statement caption is less than 15 percent of average net income for the 3 most recent fiscal years and the amount in the caption has not increased or decreased by more than 20 percent since the corresponding interim period of the preceding fiscal year, the caption may be combined with others. In calculating average net income, loss years should be excluded. If losses were incurred in each of the 3 most recent fiscal years, the average loss shall be used for purposes of this test.
(3) The interim financial information shall include disclosure either on the face of the financial statements or in accompanying footnotes sufficient to make the interim information presented not misleading. It may be presumed that users of the interim financial information have read or have access to the audited financial statements for the preceding fiscal year, and the adequacy of additional disclosure needed for a fair presentation may be determined in that context. Accordingly, footnote disclosure that would substantially duplicate the disclosure contained in the most recent audited financial statements (such as a statement of significant accounting policies and practices) and details of accounts that have not changed significantly in amount or composition since the end of the most recently completed fiscal year may be omitted.
(4) Interim reports shall disclose events that have occurred subsequent to the end of the most recently completed fiscal year that have a material impact on the System. Disclosures should encompass, for example, significant changes since the end of the most recently completed fiscal year in such items as accounting principles and practices, estimates used in the preparation of financial statements, status of long-term contracts, capitalization, significant new indebtedness or modification of existing financing agreements, financial assistance received, significant business combinations and liquidations of System institutions, and terminations of System institution status. Notwithstanding the provisions of this paragraph, where material contingencies exist, disclosure of such matters shall be provided even though a significant change since yearend may not have occurred.
(5) In addition to meeting the reporting requirements specified by existing accounting pronouncements for accounting changes, state the date of any material accounting change and the reasons for making it.
(6) Any material prior period adjustment made during any period covered by the interim financial statements shall be disclosed, together with its effect upon net income and upon the balance of surplus for any prior period included. If results of operations for any period presented have been adjusted retroactively by such an item subsequent to the initial reporting of such period, similar disclosure of the effect of the change shall be made.
(7) Interim financial statements furnished shall reflect all adjustments that are necessary to a fair statement of the results for the interim periods presented. A statement to that effect shall be included. Furnish any material information necessary to make the information called for not misleading, such as a statement that the results for interim periods are not necessarily indicative of results to be expected for the year.
(8) If any amount that would otherwise be required to be shown by this section with respect to any item is not material, it need not be separately shown. The combination of insignificant items is permitted.
(c) Discussion and analysis of interim financial condition and results of operations. Discuss any material changes to the information disclosed to investors pursuant to § 630.20(g) that have occurred during the periods specified in paragraphs (d)(1) and (d)(2) of this section. Provide any additional information needed to enable the reader to assess material changes in financial condition and results of operations between the periods specified in paragraphs (d)(1) and (d)(2) of this section.
(1) Material changes in financial condition. Discuss any material changes in financial condition from the end of the preceding fiscal year to the date of the most recent interim balance sheet provided.
(2) Material changes in results of operations. Discuss any material changes in the combined results of operations of the System with respect to the most recent fiscal year-to-date period for which an income statement is provided and the corresponding year-to-date period of the preceding fiscal year. Such discussion shall also cover material changes with respect to the most recent fiscal quarter and the corresponding fiscal quarter in the preceding fiscal year.
(d) Financial statements. Interim combined financial statements must be provided in the quarterly report to investors as set forth in paragraphs (d)(1) through (4). Indicate that the financial statements were prepared under the oversight of the System Audit Committee.
(1) An interim balance sheet as of the end of the most recent fiscal quarter and a balance sheet as of the end of the preceding fiscal year.
(2) Interim statements of income for the most recent fiscal quarter, for the period between the end of the preceding fiscal year and the end of the most recent fiscal quarter, and for the comparable periods for the previous fiscal year.
(3) Interim statements of changes in capital stock and surplus (or, if applicable, interim statements of changes in protected borrower capital and capital stock and surplus) for the period between the end of the preceding fiscal year and the end of the most recent fiscal quarter, and for the comparable period for the preceding fiscal year.
(4) Interim statements of cash flows for the period between the end of the preceding fiscal year and the end of the most recent fiscal quarter, and for the comparable period for the preceding fiscal year.
(e) Supplemental information. The interim report shall present supplemental information in accordance with the requirements of § 630.20 (m)(2), (m)(3), and (m)(4), as well as other requirements and instructions of the FCA, and shall include, at a minimum, the following:
(1) Supplemental balance sheet information as of the end of the most recent quarter; and
(2) Supplemental income statement information for the period between the end of the preceding fiscal year and the end of the most recent fiscal quarter.
(f) Review by independent public accountant. Unless otherwise ordered by the FCA as a result of a supervisory action, the interim financial statements and supplemental information need not be audited or reviewed by an independent public accountant prior to filing. If, however, a review of the report is made in accordance with the established professional standards and procedures for such a review, a statement that the independent accountant has performed such a review may be included. If such a statement is made, the report of the independent accountant on such review shall accompany the interim financial information.
Appendix A to Part 630—Supplemental Information Disclosure Guidelines
Supplemental information required by §§ 630.20(m) and 630.40(e) shall contain, at a minimum, the current year financial data for the components listed in the following tables and be presented in the columnar format illustrated in the following tables:
Table A—Supplemental Balance Sheet Information
| Banks 1 | Associations 2 | Financial assistance corporation | Eliminations | Combined without insurance fund 3 | Insurance fund and related combination entries | Combined with insurance fund | |
|---|---|---|---|---|---|---|---|
| Cash and investments | |||||||
| Net loans | |||||||
| Restricted assets | |||||||
| Other Assets | |||||||
| Total assets | |||||||
| Total liabilities | |||||||
| Protected borrower capital 4 | |||||||
| Restricted capital | |||||||
| Capital stock and surplus | |||||||
| Total liabilities, protected borrower capital, and capital stock and surplus |
1 Provided combined financial data of all FCS banks, including any consolidated subsidiaries of the banks.
2 Provide association-only combined financial data of all FCS associations.
3 Provide the combined financial data of all columns on the left.
4 Any item that is no longer applicable,
Table B—Supplemental Income Statement Information
| Banks 1 | Associations 2 | Financial assistance corporation | Eliminations | Combined without insurance fund 3 | Insurance fund and related combination entries | Combined with insurance fund | |
|---|---|---|---|---|---|---|---|
| Net interest income | |||||||
| Provision for credit losses | |||||||
| Other income | |||||||
| Other expenses | |||||||
| Net Income |
1 Provide combined financial data of all FCS banks, including any consolidated subsidiaries of the banks.
2 Provide association-only combined financial data of all FCS associations.
3 Provide the combined financial data of all columns on the left.
PART 650—FEDERAL AGRICULTURAL MORTGAGE CORPORATION GENERAL PROVISIONS
Subpart A—Regulation, Examination and Enforcement
§ 650.1 Definitions.
The following definitions apply to this part:
Act or Authorizing statute means the Farm Credit Act of 1971, as amended.
Business day means a day the Corporation is open for business, excluding the legal public holidays identified in 5 U.S.C. 6103(a).
Corporation or Farmer Mac means the Federal Agricultural Mortgage Corporation and its affiliates.
FCA means the Farm Credit Administration, an independent Federal agency of the executive branch.
NYSE means the New York Stock Exchange, a listing exchange.
OSMO means the FCA Office of Secondary Market Oversight, which is responsible for the general supervision of the safe and sound exercise of the Corporation’s powers, functions, and duties and compliance with laws and regulations.
Our or we means the FCA or OSMO, as appropriate to the context of the provision employing the term.
SEC means the Securities and Exchange Commission.
Securities Act means the Securities Act of 1933 (15 U.S.C. 77a et seq.) or the Exchange Act of 1934 (15 U.S.C. 78a et seq.), or both, as appropriate to the context of the provision employing the term.
Signed, when referring to paper form, means a manual signature, and, when referring to electronic form, means marked in a manner that authenticates each signer’s identity.
(a) General. The Corporation is a for-profit Government-sponsored enterprise developed to provide a secondary market for qualified agricultural, USDA-guaranteed, and rural utility loans, with public policy objectives included in its statutory charter. The Corporation is regulated by the FCA, operating through OSMO. The Corporation also lists securities on the NYSE, making it subject to certain SEC listing and disclosure requirements.
(b) Primary regulator. The FCA, operating through OSMO, holds primary regulatory, examination, and enforcement authority over the Corporation. The FCA, operating through OSMO, is responsible for the general supervision of the safe and sound exercise of the Corporation’s powers, functions, and duties and compliance with applicable laws and regulations.
(c) Other regulatory authorities. The Corporation registers its common stock and certain offerings of Farmer Mac Guaranteed Securities under the Securities Act and related regulations so must comply with certain SEC reporting requirements.
§ 650.3 Supervision and enforcement.
The Act provides FCA, acting through OSMO, with enforcement authority to protect the financial safety and soundness of the Corporation and to ensure that the Corporation’s powers, functions, and duties are exercised in a safe and sound manner.
(a) General supervision. When we determine the Corporation has violated a law, rule, or regulation or is engaging in an unsafe or unsound condition or practice, we have enforcement authority that includes, but is not limited to, the following:
(1) Issue an order to cease and desist;
(2) Issue a temporary order to cease and desist;
(3) Assess civil monetary penalties against the Corporation and its directors, officers, employees, and agents; and
(4) Issue an order to suspend, remove, or prohibit directors and officers.
(b) Financial safety and soundness of the Corporation. When we determine the Corporation is taking excessive risks that adversely impact the adequacy of Regulatory Capital, we have authority to address that risk. This includes, but is not limited to, requiring capital restoration plans, restricting dividend distributions, requiring changes in the Corporation’s obligations and assets, requiring the acquisition of new capital and restricting those Corporation activities determined to create excessive risk to the Corporation’s Regulatory Capital.
§ 650.4 Access to Corporation records and personnel.
(a) The Corporation must make its records available promptly upon request by OSMO, at a location and in a form and manner acceptable to OSMO.
(b) The Corporation must make directors, officers, employees and other individuals or entities engaged by the Corporation to participate in the conduct of the Corporation’s business available to OSMO during the course of an examination or supervisory action when OSMO determines it necessary to facilitate an examination or supervisory action.
§ 650.5 Reports of examination.
The Corporation is subject to the provisions in 12 CFR part 602 regarding FCA Reports of Examination.
§ 650.6 Criminal referrals.
The rules at 12 CFR part 612, subpart B, regarding “Referral of Known or Suspected Criminal Violations” are applicable to the Corporation.
Subpart B—Conservators, Receivers, and Liquidations
§ 650.10 Voluntary liquidation.
(a) The Corporation may voluntarily liquidate by a resolution of its board of directors, but only with the consent of, and in accordance with a plan of liquidation approved by, the Farm Credit Administration Board. Upon adoption of such resolution, the Corporation shall submit the resolution and proposed voluntary liquidation plan to the Farm Credit Administration Board for preliminary approval. The Farm Credit Administration Board, in its discretion, may appoint a receiver as part of an approved liquidation plan. If a receiver is appointed for the Corporation as part of a voluntary liquidation, the receivership shall be conducted pursuant to the regulations of this part, except to the extent that an approved plan of liquidation provides otherwise.
(b) If the Farm Credit Administration Board gives preliminary approval to the liquidation plan, the board of directors of the Corporation shall submit the resolution to liquidate to the stockholders for a vote in accordance with the bylaws of the Corporation.
(c) The Farm Credit Administration Board will consider final approval of the resolution to voluntarily liquidate and the liquidation plan after an affirmative stockholder vote on the resolution.
§ 650.13 Grounds for appointment of a receiver or conservator.
(a) The grounds for the appointment of a receiver or conservator for the Corporation are:
(1) The Corporation is insolvent. For purposes of this paragraph, insolvent means:
(i) The assets of the Corporation are less than its obligations to its creditors and others; or
(ii) The Corporation is unable to pay its debts as they fall due in the ordinary course of business;
(2) There has been a substantial dissipation of the assets or earnings of the Corporation due to the violation of any law, rule, or regulation, or the conduct of an unsafe or unsound practice;
(3) The Corporation is in an unsafe or unsound condition to transact business;
(4) The Corporation has committed a willful violation of a final cease-and-desist order issued by the Farm Credit Administration Board;
(5) The Corporation is concealing its books, papers, records, or assets, or is refusing to submit its books, papers, records, assets, or other material relating to the affairs of the Corporation for inspection to any examiner or any lawful agent of the Farm Credit Administration Board.
(b) In addition to the grounds set forth in paragraph (a) of this section, a receiver can be appointed for the Corporation if the Farm Credit Administration Board determines that the appointment of a conservator would not be appropriate when one of the following conditions exists:
(1) The authority of the Corporation to purchase qualified loans or issue or guarantee loan-backed securities is suspended; or
(2) The Corporation is classified under section 8.35 of the Act as within enforcement level III or IV and the alternative actions available under subtitle B of title VIII of the Act are not satisfactory.
(c) In addition to the grounds set forth in paragraph (a) of this section, a conservator can be appointed for the Corporation if:
(1) The Corporation is classified under section 8.35 of the Act as within enforcement level III or IV; or
(2) The authority of the Corporation to purchase qualified loans or issue or guarantee loan-backed securities is suspended.
§ 650.14 Action for removal of receiver or conservator.
Upon the appointment of a receiver or conservator for the Corporation by the Farm Credit Administration Board pursuant to § 650.50 of this subpart, the Corporation may, within 30 days of such appointment, bring an action in the United States District Court for the District of Columbia, for an order requiring the Farm Credit Administration Board to remove the receiver or conservator and, if the charter has been canceled, to rescind the cancellation of the charter. Notwithstanding any other provision of this part, the Corporation’s board of directors is empowered to meet subsequent to such appointment and authorize the filing of an action for removal. An action for removal may be authorized only by the Corporation’s board of directors.
§ 650.15 Appointment of a receiver.
(a) The Farm Credit Administration Board may in its discretion appoint, ex parte and without prior notice, a receiver for the Corporation provided that one or more of the grounds for appointment as set forth in § 650.50 of this subpart exist.
(b) Upon the appointment of the receiver, the Chairman of the Farm Credit Administration Board shall immediately notify the Corporation and shall publish a notice of the appointment in the
(c) Upon the issuance of the order placing the Corporation into liquidation and appointing the receiver, all rights, privileges, and powers of the board of directors, officers, and employees of the Corporation shall be vested exclusively in the receiver. The Farm Credit Administration Board may cancel the charter of the Corporation on such date as the Farm Credit Administration Board determines is appropriate, but not later than the conclusion of the receivership and discharge of the receiver.
§ 650.20 Powers and duties of the receiver.
(a) General. (1) Upon appointment as receiver, the receiver shall take possession of the Corporation in order to wind up the business operations of the Corporation, collect the debts owed to the Corporation, liquidate its property and assets, pay its creditors, and distribute the remaining proceeds to stockholders. The receiver is authorized to exercise all powers necessary to the efficient termination of the Corporation’s operation as provided for in this part.
(2) Upon its appointment as receiver, the receiver automatically succeeds to:
(i) All rights, titles, powers, and privileges of the Corporation and of any stockholder, officer, or director of the Corporation with respect to the Corporation and the assets of the Corporation; and
(ii) Title to the books, records, and assets of the Corporation in the possession of any other legal custodian of the Corporation.
(3) The receiver of the Corporation serves as the trustee of the receivership estate and conducts its operations for the benefit of the creditors and stockholders of the Corporation.
(b) Specific powers. The receiver may:
(1) Exercise all powers as are conferred upon the officers and directors of the Corporation under law and the charter, articles, and bylaws of the Corporation.
(2) Take any action the receiver considers appropriate or expedient to carry on the business of the Corporation during the process of liquidating its assets and winding up its affairs.
(3) Borrow funds in accordance with section 8.41(f) of the Act to meet the ongoing administrative expenses or other liquidity needs of the receivership.
(4) Pay any sum the receiver deems necessary or advisable to preserve, conserve, or protect the Corporation’s assets or property or rehabilitate or improve such property and assets.
(5) Pay any sum the receiver deems necessary or advisable to preserve, conserve, or protect any asset or property on which the Corporation has a lien or in which the Corporation has a financial or property interest, and pay off and discharge any liens, claims, or charges of any nature against such property.
(6) Investigate any matter related to the conduct of the business of the Corporation, including, but not limited to, any claim of the Corporation against any individual or entity, and institute appropriate legal or other proceedings to prosecute such claims.
(7) Institute, prosecute, maintain, defend, intervene, and otherwise participate in any legal proceeding by or against the Corporation or in which the Corporation or its creditors or stockholders have any interest, and represent in every way the Corporation, its stockholders and creditors.
(8) Employ attorneys, accountants, appraisers, and other professionals to give advice and assistance to the receivership generally or on particular matters, and pay their retainers, compensation, and expenses, including litigation costs.
(9) Hire any agents or employees necessary for proper administration of the receivership.
(10) Execute, acknowledge, and deliver, in person or through a general or specific delegation, any instrument necessary for any authorized purpose, and any instrument executed under this paragraph shall be valid and effective as if it had been executed by the Corporation’s officers by authority of its board of directors.
(11) Sell for cash or otherwise any mortgage, deed of trust, chose in action, note, contract, judgment or decree, stock, or debt owed to the Corporation, or any property (real or personal, tangible or intangible).
(12) Purchase or lease office space, automobiles, furniture, equipment, and supplies, and purchase insurance, professional, and technical services necessary for the conduct of the receivership.
(13) Release any assets or property of any nature, regardless of whether the subject of pending litigation, and repudiate, with cause, any lease or executory contract the receiver considers burdensome.
(14) Settle, release, or obtain release of, for cash or other consideration, claims and demands against or in favor of the Corporation or receiver.
(15) Pay, out of the assets of the Corporation, all expenses of the receivership (including compensation to personnel employed to represent or assist the receiver) and all costs of carrying out or exercising the rights, powers, privileges, and duties as receiver.
(16) Pay, out of the assets of the Corporation, all approved claims of indebtedness in accordance with the priorities established in this part.
(17) Take all actions and have such rights, powers, and privileges as are necessary and incident to the exercise of any specific power.
(18) Take such actions, and have such additional rights, powers, privileges, immunities, and duties as the Farm Credit Administration Board authorizes by order or by amendment of any order or by regulation.
§ 650.25 Report to Congress.
On a determination by the receiver that there are insufficient assets of the receivership to pay all valid claims against the receivership, the receiver shall submit to the Secretary of the Treasury and Congress a report on the financial condition of the receivership.
§ 650.30 Preservation of equity.
(a) Except as provided for upon final distribution of the assets of the Corporation pursuant to § 650.62 of this subpart, no capital stock, equity reserves, or other allocated equities of the Corporation in receivership shall be issued, allocated, retired, sold, distributed, transferred, or assigned.
(b) Immediately upon the adoption of a resolution by its board of directors to voluntarily liquidate the Corporation, the capital stock, equity reserves, and allocated equities of the Corporation shall not be issued, allocated, retired, sold, distributed, transferred, or assigned. Such activities could resume if the stockholders of the Corporation or the Farm Credit Administration Board disapprove the resolution. In the event the resolution is approved by the stockholders of the Corporation and the Farm Credit Administration Board, the liquidation plan shall govern disposition of the equities of the Corporation as provided in § 650.52 of this subpart.
§ 650.35 Notice to stockholders.
As soon as practicable after a receiver takes possession of the Corporation, the receiver shall notify, by first class mail, each holder of stock of the following matters:
(a) The number of shares such holder owns;
(b) That the stock and other equities of the Corporation may not be retired or transferred until the liquidation is completed, whereupon the receiver will distribute a liquidating dividend, if any, to the stockholders; and
(c) Such other matters as the receiver or the Farm Credit Administration Board deems necessary.
§ 650.40 Creditor claims.
(a) Upon appointment, the receiver shall promptly publish a notice to creditors to present their claims against the Corporation, with proof thereof, to the receiver by a date specified in the notice, which shall be not less than 90 calendar days after the first publication. The notice shall be republished approximately 30 days and 60 days after the first publication. The receiver shall promptly send, by first class mail, a similar notice to any creditor shown on the Corporation’s books at the creditor’s last address appearing thereon. Claims filed after the specified date shall be disallowed except as the receiver may approve them for full or partial payment from the Corporation’s assets remaining undistributed at the time of approval.
(b) The receiver shall allow any claim that is timely received and proved to the receiver’s satisfaction. The receiver may disallow in whole or in part any creditor’s claim or claim of security, preference, or priority that is not proved to the receiver’s satisfaction or is not timely received and shall notify the claimant of the disallowance and reason therefor. Sending the notice of disallowance by first class mail to the claimant’s address appearing on the proof of claim shall be sufficient notice. The disallowance shall be final unless, within 30 days after the notice of disallowance is mailed, the claimant files a written request for payment regardless of the disallowance. The receiver shall reconsider any claim upon the timely request of the claimant and may approve or disapprove such claim in whole or in part.
(c) Creditors’ claims that are allowed shall be paid by the receiver from time to time, to the extent funds are available therefor and in accordance with the priorities established in this part and in such manner and amounts as the receiver deems appropriate. In the event the Corporation has a claim against a creditor of the Corporation, the receiver shall offset the amount of such claim against the claim asserted by such creditor.
§ 650.45 Priority of claims.
The following priority of claims shall apply to the distribution of the assets of the Corporation in liquidation:
(a) All costs, expenses, and debts incurred by the receiver in connection with the administration of the receivership, all Farm Credit Administration assessments for the costs of supervising and examining the Corporation, and any amounts borrowed pursuant to § 650.56(b)(3).
(b) Administrative expenses of the Corporation, provided that such expenses were incurred within 60 days prior to the receiver’s taking possession, and that such expenses shall be limited to reasonable expenses incurred for services actually provided by accountants, attorneys, appraisers, examiners, or management companies, or reasonable expenses incurred by employees that were authorized and reimbursable under a preexisting expense reimbursement policy and that, in the opinion of the receiver, are of benefit to the receivership, and shall not include wages or salaries of employees of the Corporation.
(c) If authorized by the receiver, claims for wages and salaries, including vacation pay, earned prior to the appointment of the receiver by an employee of the Corporation whom the receiver determines it is in the best interest of the receivership to engage or retain for a reasonable period of time.
(d) If authorized by the receiver, claims for wages and salaries, including vacation pay, earned prior to the appointment of the receiver, up to a maximum of three thousand dollars ($3,000) per person as adjusted for inflation, by an employee of the Corporation not engaged or retained by the receiver. The adjustment for inflation shall be the percentage by which the Consumer Price Index (as prepared by the Department of Labor) for the calendar year preceding the appointment of the receiver exceeds the Consumer Price Index for the calendar year 1992.
(e) All claims for taxes.
(f) All claims of creditors which are secured by specific assets of the Corporation, with priority of conflicting claims of creditors within this same class to be determined in accordance with priorities of applicable Federal or State law.
(g) All claims of general creditors.
§ 650.50 Payment of claims.
(a) All claims of each class described in § 650.61 of this subpart shall be paid in full or provisions shall be made for such payment prior to the payment of any claim of a lesser priority. If there are insufficient funds to pay all claims in a class in full, distribution to that class will be on a pro rata basis.
(b) Following the payment of all claims, the receiver shall distribute the remainder of the assets of the Corporation, if any, to the owners of stock and other equities in accordance with the priorities for impairment set forth in section 8.4(e)(3) of the Act and the bylaws of the Corporation.
§ 650.55 Inventory, audit, and reports.
(a) As soon as practicable after taking possession of the Corporation, the receiver shall take an inventory of the assets and liabilities as of the date possession was taken.
(b) The receivership shall be audited on an annual basis by a certified public accountant selected by the receiver.
(c) The receiver shall make an annual accounting or report, as appropriate, available for review upon request to any stockholder of the Corporation or any member of the public, with a copy provided to the Farm Credit Administration.
(d) As soon as practicable after final distribution, the receiver shall send to each stockholder of record a report summarizing the disposition of the assets of the receivership and claims against the receivership.
§ 650.60 Final discharge and release of the receiver.
After the receiver has made a final distribution of the assets of the receivership, the receivership shall be terminated, the charter shall be canceled by the Farm Credit Administration Board if such cancellation has not previously occurred, and the receiver shall be finally discharged and released.
§ 650.65 Appointment of a conservator.
(a) The Farm Credit Administration Board may in its discretion appoint, ex parte and without prior notice, a conservator for the Corporation provided that one or more of the grounds for appointment as set forth in § 650.50 of this subpart exist;
(b) Upon the appointment of a conservator, the Chairman of the Farm Credit Administration shall immediately notify the Corporation and shall publish a notice of the appointment in the
(c) As soon as practicable after the conservator takes possession of the Corporation, the conservator shall notify, by first class mail, each holder of stock in the Corporation of the establishment of the conservatorship and shall describe the effect of the conservatorship on the Corporation’s operations and equity holdings.
(d) Upon the issuance of the order placing the Corporation in conservatorship, all rights, privileges, and powers of the board of directors, officers, and employees of the Corporation are vested exclusively in the conservator.
(e) The Farm Credit Administration Board may, at any time, terminate the conservatorship and direct the conservator to turn over the Corporation’s operations to such management as the Farm Credit Administration Board may designate, in which event the provisions of this subpart shall no longer apply.
§ 650.70 Powers and duties of the conservator.
(a) The conservator shall direct the Corporation’s further operation until the Farm Credit Administration Board decides that the Corporation can operate without the conservatorship or places the Corporation into receivership. Upon correction or resolution of the problem or condition that provided the basis for the appointment, the Farm Credit Administration Board may turn the Corporation over to such management as the Farm Credit Administration Board may direct.
(b) The conservator shall exercise all powers necessary to continue the ongoing operations of the Corporation, to conserve and preserve the Corporation’s assets and property, and otherwise protect the interests of the Corporation, its stockholders, and creditors as provided in this subpart.
(c) The conservator serves as the trustee of the Corporation and conducts its operations for the benefit of the creditors and stockholders of the Corporation.
(d) The conservator may exercise the powers that a receiver of the Corporation may exercise under any of the provisions of § 650.56(b) of this subpart, except paragraphs (b)(2) and (b)(16). In interpreting the applicable paragraphs for purposes of this section, the terms “conservator” and “conservatorship” shall be read for “receiver” and “receivership”.
(e) The conservator may also take any other action the conservator considers appropriate or expedient to the continuing operation of the Corporation.
§ 650.75 Inventory, examination, and reports to stockholders.
(a) As soon as practicable after taking possession of the Corporation, the conservator shall take an inventory of the assets and liabilities of the Corporation as of the date possession was taken. One copy of the inventory shall be filed with the Farm Credit Administration.
(b) The conservatorship shall be examined by the Farm Credit Administration in accordance with section 8.11 of the Act.
(c) The conservatorship shall prepare and file financial reports and other documents in accordance with the requirements of § 655.1 and part 621 of this chapter. The conservator of the Corporation shall provide the certification required in § 621.14 of this chapter.
§ 650.80 Final discharge and release of the conservator.
At such time as the conservator shall be relieved of its conservatorship duties, the conservator shall file a report on the conservator’s activities with the Farm Credit Administration. The conservator shall thereupon be completely and finally released.
PART 651—FEDERAL AGRICULTURAL MORTGAGE CORPORATION GOVERNANCE
Subpart A—General
§ 651.1 Definitions.
The following definitions apply to this part:
Act or Authorizing statute means the Farm Credit Act of 1971, as amended.
Affiliate means any entity established under authority granted to the Corporation under section 8.3(c)(14) of the Act.
Agent means any person (other than a director, officer, or employee of the Corporation) who represents the Corporation in contacts with third parties or who provides professional services such as legal, accounting, or appraisal services to the Corporation.
Appointed director means a member of the Corporation’s board of directors who was appointed to the Corporation board by the President of the United States of America.
Business day means a day the Corporation is open for business, excluding the legal public holidays identified in 5 U.S.C. 6103(a).
Class A stockholders means holders of common stock in the Corporation that are insurance companies, banks, or other financial institutions or entities.
Class B stockholders means holders of common stock in the Corporation that are Farm Credit System institutions.
Conflict-of-interest means a director, officer, or employee of the Corporation has an interest in a transaction, relationship, or activity that might adversely affect, or appear to adversely affect, the ability of the director, officer, or employee to perform his or her official duties on behalf of the Corporation in an objective and impartial manner in furtherance of the interest of the Corporation and its statutory purposes.
Corporation means the Federal Agricultural Mortgage Corporation and its affiliates.
Director elections mean the process of searching for director candidates, conducting director nominations, and voting for directors.
Elected director means a member of the Corporation’s board of directors who was elected by either Class A or Class B stockholders.
Employee means any salaried individual working part-time, full-time, or temporarily for the Corporation.
Entity means a corporation, company, association, firm, joint venture, partnership (general or limited), society, joint stock company, trust (business or otherwise), fund, or other organization or institution.
FCA means the Farm Credit Administration, an independent Federal agency of the executive branch.
Material means conflicting interests of sufficient magnitude or significance that a reasonable person with knowledge of the relevant facts would question the ability of the person having such interest to discharge official duties in an objective and impartial manner in furtherance of the interests and statutory purposes of the Corporation.
Officer means the salaried president, vice presidents, secretary, treasurer, and general counsel, or other person, however designated, who holds a position of similar authority in the Corporation.
OSMO means the FCA Office of Secondary Market Oversight, which is responsible for the general supervision of the safe and sound exercise of the Corporation’s powers, functions, and duties and compliance with laws and regulations.
Our or we means the FCA or OSMO, as appropriate to the context of the provision employing the term.
Person means individual or entity.
Reasonable person means a person under similar circumstances exercising the average level of care, skill, and judgment in his or her conduct.
Resolved means an actual or potential material conflict-of-interest that has been altered so that a reasonable person with knowledge of the relevant facts would conclude that the conflicting interest would not adversely affect the person’s performance of official duties in an objective and impartial manner and in furtherance of the interests and statutory purposes of the Corporation.
Signed, when referring to paper form, means a manual signature, and, when referring to electronic form, means marked in a manner that authenticates each signer’s identity.
§ 651.2 [Reserved]
Subpart B—Standards of Conduct
§ 651.21 [Reserved]
§ 651.22 Conflict-of-interest policy.
The Corporation shall establish and administer a conflict-of-interest policy that will provide reasonable assurance that the directors, officers, employees, and agents of the Corporation discharge their official responsibilities in an objective and impartial manner in furtherance of the interests and statutory purposes of the Corporation. The policy shall, at a minimum:
(a) Define the types of transactions, relationships, or activities that could reasonably be expected to give rise to potential conflicts of interest. For the purpose of determining whether a potential conflict of interest exists, the following interests shall be imputed to a person subject to this regulation as if they were that person’s own interests:
(1) Interests of any individual residing in that person’s household;
(2) Interests of any individual identified as a legal dependent of that person;
(3) Interests of that person’s general business partner;
(4) Interests of an organization or entity that the person serves as officer, director, trustee, general partner or employee; and
(5) Interests of a person, organization, or entity with which that person is negotiating for or has an arrangement concerning current or prospective employment.
(b) Require each director, officer, and employee to report in writing, annually, and at such other times as conflicts may arise, sufficient information about financial interests, transactions, relationships, and activities to inform the Corporation of potential conflicts of interest;
(c) Require each director, officer, and employee who had no transaction, relationship, or activity required to be reported under paragraph (b) of this section at any time during the year to file a signed statement to that effect;
(d) Establish guidelines for determining when a potential conflict is material in accordance with this subpart;
(e) Establish procedures for resolving or disclosing material conflicts of interest.
(f) Provide internal controls to ensure that reports are filed as required and that conflicts are resolved or disclosed in accordance with this subpart.
(g) Notify directors, officers, and employees of the conflict-of-interest policy and any subsequent changes thereto and allow them a reasonable period of time to conform to the policy.
§ 651.23 Implementation of policy.
(a) The Corporation shall disclose any unresolved material conflicts of interest involving its directors, officers, and employees to:
(1) Shareholders through annual reports and proxy statements; and
(2) Investors and potential investors through disclosure documents supplied to them.
(b) The Corporation shall make available to any shareholder, investor, or potential investor, upon request, a copy of its policy on conflicts of interest. The Corporation may charge a nominal fee to cover the costs of reproduction and handling.
(c) The Corporation shall maintain all reports of all potential conflicts of interest and documentation of materiality determinations and resolutions of conflicts of interest for a period of 6 years.
§ 651.24 Director, officer, employee, and agent responsibilities.
(a) Each director, officer, employee, and agent of the Corporation shall:
(1) Conduct the business of the Corporation following high standards of honesty, integrity, impartiality, loyalty, and care, consistent with applicable law and regulation in furtherance of the Corporation’s public purpose;
(2) Adhere to the requirements of the conflict-of-interest policy established by the Corporation and provide any information the Corporation deems necessary to discharge its responsibilities under this subpart.
(b) Directors, officers, employees, and agents of the Corporation shall be subject to the penalties of part C of title V of the Farm Credit Act of 1971, as amended, for violations of this regulation, including failure to adhere to the conflict-of-interest policy established by the Corporation.
Subpart C—Board Governance
§ 651.30 [Reserved]
§ 651.35 [Reserved]
§ 651.40 [Reserved]
§ 651.50 Committees of the Corporation’s board of directors.
(a) General. No committee of the board of directors may be delegated the authority of the board of directors to amend Corporation bylaws. No committee of the board of directors shall relieve the board of directors or any board member of a responsibility imposed by law or regulation.
(b) Required committees. The board of directors of the Corporation must have committees, however styled, that address risk management, audit, compensation, and corporate governance. Neither the risk management committee nor the audit committee may be combined with any other committees. This provision does not prevent the board of directors from establishing any other committees that it deems necessary or useful to carrying out its responsibilities.
(c) Charter. Each committee required by this section must develop a formal written charter that specifies the scope of the committee’s powers and responsibilities, as well as the committee’s structure, processes, and membership requirements. To be effective, the charter must be approved by action of the full board of directors. No director may serve as chairman of more than one of the board committees required by this section.
(d) Frequency of meetings and records. Each committee of the board of directors required by this section must meet with sufficient frequency to carry out its obligations and duties under applicable laws, regulations, and its operating charter. Each of these committees must maintain minutes of its meetings. The minutes must record attendance, the agenda (or equivalent list of issues under discussion), a summary of the relevant discussions held by the committee during the meeting, and any resulting recommendations to the board. Such minutes must be retained for a minimum of 3 years and must be available to the entire board of directors and to OSMO.
PART 652—FEDERAL AGRICULTURAL MORTGAGE CORPORATION FUNDING AND FISCAL AFFAIRS
Subpart A—Investment Management
§ 652.1 Purpose.
The purpose of this subpart is to ensure safety and soundness, continuity of funding, and appropriate use of non-program investments considering the Federal Agricultural Mortgage Corporation’s (Farmer Mac or Corporation) special status as a Government-sponsored enterprise (GSE). The subpart contains requirements for Farmer Mac’s board of directors to adopt policies covering such areas as investment management, interest rate risk, and liquidity reserves. The subpart also requires Farmer Mac to comply with various reporting requirements.
§ 652.5 Definitions.
For purposes of this subpart, the following definitions will apply:
Affiliate means any entity established under authority granted to the Corporation under section 8.3(c)(14) of the Farm Credit Act of 1971, as amended.
Asset-backed securities (ABS) mean investment securities that provide for ownership of a fractional undivided interest or collateral interests in specific assets of a trust that are sold and traded in the capital markets. For the purpose of this subpart, ABS exclude mortgage-backed securities that are defined below.
Cash means cash balances held at Federal Reserve Banks, proceeds from traded-but-not-yet-settled debt, and deposit accounts at Federal Deposit Insurance Corporation-insured banks.
Diversified investment fund (DIF) means an investment company registered under section 8 of the Investment Company Act of 1940.
Farmer Mac, Corporation, you, and your means the Federal Agricultural Mortgage Corporation and its affiliates.
FCA, our, us, or we means the Farm Credit Administration.
Government-sponsored enterprise (GSE) means an entity established or chartered by the United States Government to serve public purposes specified by the United States Congress but whose debt obligations are not explicitly guaranteed by the full faith and credit of the United States Government.
Long-Term Standby Purchase Commitment (LTSPC) is a commitment by Farmer Mac to purchase specified eligible loans on one or more undetermined future dates. In consideration for Farmer Mac’s assumption of the credit risk on the specified loans underlying an LTSPC, Farmer Mac receives an annual commitment fee on the outstanding balance of those loans in monthly installments based on the outstanding balance of those loans.
Market risk means the risk to your financial condition because the value of your holdings may decline if interest rates or market prices change. Exposure to market risk is measured by assessing the effect of changing rates and prices on either the earnings or economic value of an individual instrument, a portfolio, or the entire Corporation.
Maturing obligations means maturing debt and other obligations that may be expected, such as buyouts of long-term standby purchase commitments or repurchases of agricultural mortgage securities.
Mortgage-backed securities (MBS) means securities that are either:
(1) Pass-through securities or participation certificates that represent ownership of a fractional undivided interest in a specified pool of residential (excluding home equity loans), multifamily or commercial mortgages, or
(2) A multiclass security (including collateralized mortgage obligations and real estate mortgage investment conduits) that is backed by a pool of residential, multifamily or commercial real estate mortgages, pass through MBS, or other multiclass MBS.
(3) This definition does not include agricultural mortgage-backed securities guaranteed by Farmer Mac itself.
Non-program investments means investments other than those in:
(1) “Qualified loans” as defined in section 8.0(9) of the Farm Credit Act of 1971, as amended; or
(2) Securities collateralized by “qualified loans.”
OSMO means FCA’s Office of Secondary Market Oversight.
Program assets means on-balance sheet “qualified loans” as defined in section 8.0(9) of the Farm Credit Act of 1971, as amended.
Program obligations means off-balance sheet “qualified loans” as defined in section 8.0(9) of the Farm Credit Act of 1971, as amended.
Regulatory capital means your core capital plus an allowance for losses and guarantee claims, as determined in accordance with generally accepted accounting principles.
U.S. Government agency means an instrumentality of the U.S. Government whose obligations are fully guaranteed as to the payment of principal and interest by the full faith and credit of the U.S. Government.
§ 652.10 Investment management.
(a) Responsibilities of the board of directors. Your board of directors must adopt written policies for managing your non-program investment activities. Your board must also ensure that management complies with these policies and that appropriate internal controls are in place to prevent loss. At least annually, your board, or a designated committee of the board, must review the sufficiency of these investment policies. Any changes to the policies must be adopted by the board. You must report any changes to these policies to the OSMO within 10 business days of adoption.
(b) Investment policies—general requirements. Your investment policies must address the purposes and objectives of investments, risk tolerance, delegations of authority, internal controls, due diligence, and reporting requirements. Moreover, your investment policies must fully address the extent of pre-purchase analysis that management must perform for various types, classes, and structure of investments. Furthermore, the policies must include reporting requirements and approvals needed for exceptions to the board’s policies. Investment policies must be sufficiently detailed, consistent with, and appropriate for the amounts, types, and risk characteristics of your investments. You must document in the Corporation’s records any analyses used in formulating your policies or amendments to the policies.
(c) Investment policies—risk tolerance. Your investment policies must establish risk limits for the various types, classes, and sectors of eligible investments. These policies must include concentration limits to ensure prudent diversification of credit, market, and liquidity risks in the investment portfolio. Risk limits must be based on all relevant factors, including the Corporation’s objectives, capital position, earnings, and quality and reliability of risk management systems. Your policies must identify the types and quantity of investments that you will hold to achieve your objectives and control credit, market, liquidity, and operational risks. Your policies must establish risk limits for the following types of risk:
(1) Credit risk. Your investment policies must establish:
(i) Credit quality standards, limits on counterparty risk, and risk diversification standards that limit concentrations in a single or related counterparty(ies), industry sectors, and asset classes or obligations with similar characteristics.
(ii) Criteria for selecting brokers, dealers, and investment bankers (collectively, securities firms). You must buy and sell eligible investments with more than one securities firm. As part of your review of your investment policies required under paragraph (a) of this section, your board of directors, or a designated committee of the board, must review the criteria for selecting securities firms. Any changes to the criteria must be approved by the board.
(iii) Collateral margin requirements on repurchase agreements. You must regularly mark the collateral to market and ensure appropriate controls are maintained over collateral held.
(2) Market risk. Your investment policies must set market risk limits for specific types of investments and for the investment portfolio.
(3) Liquidity risk. Your investment policies must describe the liquidity characteristics of eligible investments that you will hold to meet your liquidity needs and the Corporation’s other objectives.
(4) Operational risk. Investment policies must address operational risks, including delegations of authority and internal controls in accordance with paragraphs (d) and (e) of this section.
(5) Concentration risk. Your investment policies must set risk diversification standards. Diversification parameters must be based on the carrying value of investments. You may not invest more than 10 percent of your Regulatory Capital in allowable investments issued by any single entity, issuer, or obligor. Only investments in obligations backed by U.S. Government agencies or GSEs may exceed the 10-percent limit.
(d) Delegation of authority. All delegations of authority to specified personnel or committees must state the extent of management’s authority and responsibilities for investments.
(e) Internal controls. You must:
(1) Establish appropriate internal controls to detect and prevent loss, fraud, embezzlement, conflicts of interest, and unauthorized investments.
(2) Establish and maintain a separation of duties between personnel who supervise or execute investment transactions and personnel who supervise or engage in all other investment-related functions.
(3) Maintain records and management information systems that are appropriate for the level and complexity of your investment activities.
(4) Implement an effective internal audit program to review, at least annually, your investment management functions, controls, processes, and compliance with FCA regulations. The scope of the annual review must be appropriate for the size, risk, and complexity of the investment portfolio.
(f) Due diligence—(1) Pre-purchase analysis—(i) Objective, eligibility, and compliance with investment policies. Before you purchase an investment, you must conduct sufficient due diligence to determine whether the investment is eligible under § 652.20, is for an authorized purpose under § 652.15(a), and complies with your board-approved investment policies. You must document its eligibility, purpose, and investment policy compliance and your investment objective. Your investment policies must fully address the extent of pre-purchase analysis that management must perform for various types, classes, and structure of investments. Your board must approve your decision to hold an investment that does not comply with your written investment policy requirements.
(ii) Valuation. Prior to purchase, you must verify the value of the investment (unless it is a new issue) with a source that is independent of the broker, dealer, counterparty or other intermediary to the transaction.
(iii) Risk assessment. Your risk assessment must be documented and, at a minimum, include an evaluation of credit risk, market risk, and liquidity risk and the underlying collateral of the investment. You must conduct stress testing before you purchase any investment that is structured or that has uncertain cash flows, including all mortgage-backed securities or asset-backed securities. The stress testing must be commensurate with the risk and complexity of the investments and must comply with the requirements of paragraph (f)(4) of this section.
(2) Monthly fair value determination. At least monthly, you must determine the fair market value of each investment in your portfolio and the fair market value of your whole investment portfolio.
(3) Ongoing analysis of credit risk. You must establish and maintain processes to monitor and evaluate changes in the credit quality of each security and the whole investment portfolio on an ongoing basis.
(4) Quarterly stress testing. (i) You must stress test your entire investment portfolio, including stress tests of all investments individually and stress tests of the portfolio as a whole, at the end of each quarter. The stress tests must enable you to determine that your investment securities, both individually and on a portfolio-wide basis, do not expose your capital, earnings, or liquidity to risks that exceed the risk tolerance specified in your investment policies. If your portfolio risk exceeds your investment policy limits, you must develop a plan to reduce risk and comply with your investment policy limits.
(ii) Your stress tests must be comprehensive and appropriate for the risk profile of your investment portfolio and the Corporation. At a minimum, the stress tests must be able to measure the price sensitivity of investments over a range of possible interest rate/yield curve scenarios. The methodology that you use to analyze investment securities must be appropriate for the complexity, structure, and cash flows of the investments in your portfolio. You must rely to the maximum extent practicable on verifiable information to support all your assumptions, including prepayment and interest rate volatility assumptions, when you apply your stress tests. Your assumptions must be prudent and based on sound judgment, and you must document the basis for all assumptions that you use to evaluate the security and its underlying collateral. You must also document all subsequent changes in your assumptions.
(5) Presale value verification. Before you sell an investment, you must verify its value with a source that is independent of the broker, dealer, counterparty, or other intermediary to the transaction.
(g) Reports to the board of directors. At least quarterly, executive management must report on the following to the board of directors or a designated committee of the board:
(1) Plans and strategies for achieving the board’s objectives for the investment portfolio;
(2) Whether the investment portfolio effectively achieves the board’s objectives;
(3) The current composition, quality, and liquidity profile of the investment portfolio;
(4) The performance of each class of investments and the entire investment portfolio, including all gains and losses that you incurred during the quarter on individual securities that you sold before maturity and why they were liquidated;
(5) Potential risk exposure to changes in market interest rates as identified through quarterly stress testing and any other factors that may affect the value of your investment holdings;
(6) How investments affect your capital, earnings, and overall financial condition;
(7) Any deviations from the board’s policies. These deviations must be formally approved by the board of directors.
§ 652.15 Non-program investment purposes and limitation.
(a) Farmer Mac is authorized to hold eligible non-program investments listed under § 652.20 for the purposes of enterprise risk management, including complying with its interest rate risk requirements in § 652.30; complying with its liquidity requirements in § 652.40; managing surplus short-term funds; and complementing program business activities.
(b) Non-program investments cannot exceed 35 percent of program assets and program obligations, excluding 75 percent of the program assets that are guaranteed by the United States Department of Agriculture as described in section 8.0(9)(B) of the Farm Credit Act of 1971, as amended. When calculating the total amount of non-program investments under this section, exclude investments pledged to meet margin requirements on derivative transactions.
§ 652.20 Eligible non-program investments.
(a) Eligible investments consist of:
(1) A non-convertible senior debt security.
(2) A money market instrument with a maturity of 1 year or less.
(3) A portion of an ABS or MBS that is fully guaranteed by a U.S. Government agency.
(4) A portion of an ABS or MBS that is fully and explicitly guaranteed as to the timely payment of principal and interest by a GSE.
(5) The senior-most position of an ABS or MBS that is not fully guaranteed by a U.S. Government agency or fully and explicitly guaranteed as to the timely payment of principal and interest by a GSE, provided that the MBS satisfies the definition of “mortgage related security” in 15 U.S.C. 78c(a)(41).
(6) An obligation of an international or multilateral development bank in which the U.S. is a voting member.
(7) Shares of a diversified investment fund, if its portfolio consists solely of securities that satisfy investments listed in paragraphs (b)(1) through (b)(3) of this section.
(b) Farmer Mac may only purchase those eligible investments satisfying all of the following:
(1) At a minimum, at least one obligor of the investment has a very strong capacity to meet financial commitments for the life of the investment, even under severely adverse or stressful conditions, and generally presents a very low risk of default. Investments whose obligors are located outside the U.S., and whose obligor capacity to meet financial commitments is being relied upon to satisfy this requirement, must also be fully guaranteed by a U.S. Government agency.
(2) The investment must exhibit low credit risk and other risk characteristics consistent with the purpose or purposes for which it is held.
(3) The investment must be denominated in U.S. dollars.
§ 652.23 Other non-program investments.
(a) Farmer Mac may make a written request for our approval to purchase and hold other non-program investments that do not satisfy the requirements of § 652.20. Your request for our approval to purchase and hold other non-program investments at a minimum must:
(1) Describe the investment structure;
(2) Explain the purpose and objectives for making the investment; and
(3) Discuss the risk characteristics of the investment, including an analysis of the investment’s impact to capital.
(b) We may impose written conditions in conjunction with our approval of your request to invest in other non-program investments.
(c) For purposes of applying the provisions of this subpart, except § 652.20, investments approved under this section are treated the same as eligible non-program investments unless our conditions of approval state otherwise.
§ 652.25 Ineligible investments.
(a) Investments ineligible when purchased. Non-program investments that do not satisfy the eligibility criteria set forth in § 652.20(a) or have not been approved by the FCA pursuant to § 652.23 at the time of purchase are ineligible. You must not purchase ineligible investments. If you determine that you have purchased an ineligible investment, you must notify us within 15 calendar days after such determination. You must divest of the investment no later than 60 calendar days after you determine that the investment is ineligible unless we approve, in writing, a plan that authorizes you to divest the investment over a longer period of time. Until you divest of the investment, it may not be used to satisfy your liquidity requirement(s) under § 652.40, but must continue to be included in the § 652.15(b) investment portfolio limit calculation.
(b) Investments that no longer satisfy eligibility criteria. If you determine that a non-program investment no longer satisfies the criteria set forth in § 652.20 or no longer satisfies the conditions of approval issued under § 652.23, you must notify us within 15 calendar days after such determination. If approved by the FCA in writing, you may continue to hold the investment, subject to the following and any other conditions we impose:
(1) You may not use the investment to satisfy your § 652.40 liquidity requirement(s);
(2) The investment must continue to be included in your § 652.15 investment portfolio limit calculation; and
(3) You must develop a plan to reduce the investment’s risk to you.
FCA retains the authority to require you to divest of any investment at any time for failure to comply with applicable regulations, for safety and soundness reasons, or failure to comply with written conditions of approval. The timeframe set by FCA for such required divestiture will consider the expected loss on the transaction (or transactions) and the effect on your financial condition and performance. FCA may also, on a case-by-case basis, determine that a particular non-program investment poses inappropriate risk, notwithstanding that it satisfies investment eligibility criteria or received prior approval from us. If so, we will notify you as to the proper treatment of the investment.
§ 652.30 Interest rate risk management.
(a) The board of directors of Farmer Mac must provide effective oversight (direction, controls, and supervision) of interest rate risk management and must be knowledgeable of the nature and level of interest rate risk taken by Farmer Mac.
(b) The board of directors of Farmer Mac must adopt an interest rate risk management policy that establishes appropriate interest rate risk exposure limits based on the Corporation’s risk-bearing capacity and reporting requirements in accordance with paragraphs (c) and (d) of this section. At least annually, the board of directors, or a designated committee of the board, must review the policy. Any changes to the policy must be approved by the board of directors. You must report any changes to the policy to the OSMO within 10 business days of adoption.
(c) The interest rate risk management policy must, at a minimum:
(1) Address the purpose and objectives of interest rate risk management;
(2) Identify the causes of interest rate risk and set appropriate quantitative limits consistent with a clearly articulated board risk tolerance;
(3) Require management to establish and implement comprehensive procedures to measure the potential effect of these risks on the Corporation’s projected earnings and market values by conducting interest rate stress tests and simulations of multiple economic scenarios at least quarterly. Your stress tests must gauge how interest rate fluctuations affect the Corporation’s capital, earnings, and liquidity position. The methodology that you use must be appropriate for the complexity of the structure and cash flows of your on- and off-balance sheet positions, including the nature and purpose of derivative contracts, and establish counterparty risk thresholds and limits for derivatives. It must also ensure an appropriate level of consistency with the stress-test scenarios considered under § 652.10(f)(4). Assumptions applied in stress tests must, to the maximum extent practicable, rely on verifiable information. You must document the basis for all assumptions that you use.
(4) Describe and authorize management to implement actions needed to achieve Farmer Mac’s desired risk management objectives;
(5) Ensure procedures are established to evaluate and document, at least quarterly, whether actions taken have actually met the Corporation’s desired risk management objectives;
(6) Identify exception parameters and approvals needed for any exceptions to the policy’s requirements;
(7) Describe delegations of authority; and,
(8) Describe reporting requirements, including exceptions to policy limits.
(d) At least quarterly, management must report to the Corporation’s board of directors, or a designated committee of the board, describing the nature and level of interest rate risk exposure. Any deviations from the board’s policy on interest rate risk must be specifically identified in the report and approved by the board, or a designated committee of the board.
§ 652.35 Liquidity management.
(a) Liquidity policy—board responsibilities. Farmer Mac’s board of directors must adopt a liquidity policy, which may be integrated into a comprehensive asset-liability management or enterprise-wide risk management policy. The risk tolerance embodied in the liquidity policy must be consistent with the investment management policies required by § 652.10 of this subpart. The board must ensure that management uses adequate internal controls to ensure compliance with its liquidity policy. At least annually, the board of directors or a designated committee of the board must review the sufficiency of the liquidity policy. The board of directors must approve any changes to the policy. You must provide a copy of the revised liquidity policy to the OSMO within 10 business days of adoption.
(b) Policy content. Your liquidity policy must contain at a minimum the following:
(1) The purpose and objectives of liquidity reserves;
(2) Diversification requirements for your liquidity reserve portfolio;
(3) The minimum and target (or optimum) amounts of liquidity that the board has established for Farmer Mac, expressed in days of maturing obligations;
(4) The maximum amount of non-program investments that can be held for meeting Farmer Mac’s liquidity needs, expressed as a percentage of program assets and program obligations;
(5) Exception parameters and approvals needed with respect to the liquidity reserve;
(6) Delegations of authority pertaining to the liquidity reserve;
(7) Reporting requirements which must comply with the requirements under paragraph (c) of this section;
(c) Reporting requirements—(1) Board reporting—(i) Periodic. At least quarterly, Farmer Mac’s management must report to Farmer Mac’s board of directors or a designated committee of the board describing, at a minimum, the status of Farmer Mac’s compliance with board policy and the performance of the liquidity reserve portfolio.
(ii) Special. Management must report any deviation from Farmer Mac’s liquidity policy, or failure to meet the board’s liquidity targets to the board before the end of the quarter if such deviation or failure has the potential to cause material loss.
(2) OSMO reporting. Farmer Mac must report, in writing, to the OSMO no later than the next business day following the discovery of any breach of the minimum liquidity reserve requirement in § 652.40 of this subpart.
(d) Liability maturity management plan. Farmer Mac must have a liability maturity management plan (LMMP) that its board of directors reviews and approves at least once each year. The LMMP must establish a funding strategy that provides for effective diversification of the sources and tenors of funding, and considers Farmer Mac’s risk profile and current market conditions. The LMMP must include targets of acceptable ranges of the proportion of debt maturing within specific time periods.
(e) Contingency funding plan. (1) General. Farmer Mac must have a CFP to ensure sources of liquidity are sufficient to fund normal operations under a variety of stress events. Such stress events include, but are not limited to market disruptions, rapid increase in contractually required loan purchases, unexpected requirements to fund commitments or revolving lines of credit or to fulfill guarantee obligations, difficulties in renewing or replacing funding with desired terms and structures, requirements to pledge collateral with counterparties, and reduced market access.
(2) CFP requirements. Farmer Mac must maintain an adequate level of unencumbered and marketable assets (as defined in § 652.40(a) and (b) of this subpart) in its liquidity reserve that can be converted into cash to meet its net liquidity needs for 30 days based on estimated cash inflows and outflows under an acute stress scenario. The board of directors must review and approve the CFP at least once each year and must make adjustments to reflect changes in the results of stress tests, Farmer Mac’s risk profile, and market conditions.
(3) The CFP must:
(i) Be customized to the financial condition and liquidity risk profile of Farmer Mac, the board’s liquidity risk tolerance, and Farmer Mac’s business model;
(ii) Identify funding alternatives that can be implemented as access to funding is impeded;
(iii) Establish a process for managing events that imperil Farmer Mac’s liquidity. The process must assign appropriate personnel and executable action plans to implement the CFP;
(iv) Require periodic stress testing that analyzes the possible impacts on Farmer Mac’s cash flows, liquidity position, profitability, and solvency for a wide variety of stress scenarios.
§ 652.40 Liquidity reserve requirement and supplemental liquidity.
(a) Unencumbered. All investments that Farmer Mac holds in its liquidity reserve and as supplemental liquidity in accordance with this section must be unencumbered. For the purposes of this section, an investment is unencumbered if it is free of lien, and it is not explicitly or implicitly pledged to secure, collateralize, or enhance the credit of any transaction. Additionally, an unencumbered investment held in the liquidity reserve cannot be used as a hedge against interest rate risk if liquidation of that particular investment would expose Farmer Mac to a material risk of loss.
(b) Marketable. All investments that Farmer Mac holds in its liquidity reserve in accordance with this section must be readily marketable. For purposes of this section, an investment is readily marketable if it:
(1) Can be easily and quickly converted into cash with little or no loss in value;
(2) Exhibits low credit and market risk;
(3) Has ease and certainty of valuation; and,
(4) Except for money market instruments, can be easily sold or converted to cash through repurchase agreements in active and sizable markets without significantly affecting prices.
(c) Liquidity reserve requirement, supplemental liquidity, and discounts. Farmer Mac must maintain at all times a liquidity reserve sufficient to fund at least 90 days of the principal portion of maturing obligations and other borrowings. Farmer Mac must also hold supplemental liquid assets sufficient to fund obligations and other borrowings maturing after 90 calendar days to meet board liquidity policy in accordance with § 652.35. At a minimum, Farmer Mac must hold instruments in the liquidity reserve, and as supplemental liquidity, that are listed and discounted in accordance with the following table, and are sufficient to cover:
(1) Days 1 through 15 only with Level 1 instruments;
(2) Days 16 through 30 only with Level 1 and Level 2 instruments; and,
(3) Days 31 through 90 with Level 1, Level 2, and Level 3 instruments.
Table to § 652.40(c)
| Liquidity level | Instruments | Discount (multiply market value by) |
|---|---|---|
| Level 1 | Cash, including cash due from traded but not yet settled debt | 100 percent. |
| Overnight money market instruments, including repurchase agreements secured exclusively by Level 1 investments | 100 percent. | |
| Obligations of U.S. Government agencies with a final remaining maturity of 3 years or less | 97 percent. | |
| GSE senior debt securities that mature within 60 days, excluding securities issued by the Farm Credit System | 95 percent. | |
| Diversified investment funds comprised exclusively of Level 1 instruments | 95 percent. | |
| Level 2 | Additional Level 1 investments | Discount for each Level 1 investment applies. |
| Obligations of U.S. Government agencies with a final remaining maturity of more than 3 years | 97 percent. | |
| MBS that are fully guaranteed by a U.S. Government agency | 95 percent. | |
| Diversified investment funds comprised exclusively of Level 1 and 2 instruments | 95 percent. | |
| Level 3 | Additional Level 1 or Level 2 investments | Discount for each Level 1 or Level 2 investment applies. |
| GSE senior debt securities with maturities exceeding 60 days, excluding senior debt securities of the Farm Credit System | 93 percent for all instruments in Level 3. | |
| MBS that are fully guaranteed by a GSE as to the timely repayment of principal and interest | ||
| Money market instruments maturing within 90 days | ||
| Diversified investment funds comprised exclusively of Levels 1, 2, and 3 instruments | ||
| Qualifying securities backed by Farmer Mac program assets (loans) guaranteed by the United States Department of Agriculture (excluding the portion that would be necessary to satisfy obligations to creditors and equity holders in Farmer Mac II LLC) | ||
| Supplemental Liquidity | Eligible investments under § 652.20 and those approved under § 652.23 | 90 percent except discounts for Level 1, 2 or 3 investments apply to such investments held as supplemental liquidity. |
§ 652.45 Temporary regulatory waivers or modifications for extraordinary situations.
Whenever the FCA determines that an extraordinary situation exists that necessitates a temporary regulatory waiver or modification, the FCA may, in its sole discretion:
(a) Modify or waive the minimum liquidity reserve requirement in § 652.40 of this subpart;
(b) Modify the amount, qualities, and types of eligible investments that you are authorized to hold pursuant to § 652.20 of this subpart; and/or
(c) Take other actions as deemed appropriate.
Subpart B—Risk-Based Capital Requirements
§ 652.50 Definitions.
For purposes of this subpart, the following definitions will apply:
AgVantage Plus means both the product by that name used by Farmer Mac and other similarly structured program volume that Farmer Mac might finance in the future under other names. Those AgVantage securities with initial principal amounts under $25 million and whose issuers were part of the original AgVantage program are excluded from this definition.
Farmer Mac, Corporation, you, and your means the Federal Agricultural Mortgage Corporation and its affiliates as defined in subpart A of this part.
Our, us, or we means the Farm Credit Administration.
Regulatory capital means the sum of the following as determined in accordance with generally accepted accounting principles:
(1) The par value of outstanding common stock;
(2) The par value of outstanding preferred stock;
(3) Paid-in capital, which is the amount of owner investment in Farmer Mac in excess of the par value of stock;
(4) Retained earnings; and,
(5) Any allowances for losses on loans and guaranteed securities.
Risk-based capital means the amount of regulatory capital sufficient for Farmer Mac to maintain positive capital during a 10-year period of stressful conditions as determined by the risk-based capital stress test described in § 652.65.
Rural utility guarantee fee means the actual guarantee fee charged for off-balance sheet volume and the earnings spread over Farmer Mac’s funding costs for on-balance sheet volume on rural utility loans.
§ 652.55 General.
You must hold risk-based capital in an amount determined in accordance with this subpart.
§ 652.60 Corporate business planning.
(a) Farmer Mac’s board of directors is responsible for ensuring that Farmer Mac maintain capital at a level that is sufficient to ensure continued financial viability and provide for growth. In addition, Farmer Mac’s capital must be sufficient to meet statutory and regulatory requirements as well as the goals and objectives required by paragraph (b)(5) of this section, including the Tier 1 ratio required in § 652.61(c)(2)(ii)(A). Farmer Mac must notify the OSMO within 10 calendar days of determining that capital is not sufficient to meet those goals and objectives.
(b) No later than 65 days after the end of each calendar year, Farmer Mac’s board of directors must adopt an operational and strategic business plan for at least the next 3 years. The plan must include:
(1) A mission statement;
(2) A business and organizational overview and an assessment of management capabilities;
(3) An assessment of Farmer Mac’s strengths and weaknesses;
(4) A review of the internal and external factors that are likely to affect Farmer Mac during the planning period;
(5) Measurable goals and objectives;
(6) A discussion of how these factors might impact Farmer Mac’s current financial position and business goals;
(7) Forecasted income, expense, and balance sheet statements for each year of the plan;
(8) A marketing plan, and
(9) A capital plan in accordance with § 652.61.
§ 652.61 Capital planning.
(a) Purpose. This section establishes capital planning requirements for Farmer Mac.
(b) Definitions. For purposes of this section and § 652.62, the following definitions apply:
Basel III means the Basel Committee on Banking Supervision’s document “Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems,” June 2011 and as it may be updated from time to time.
Capital action means any issuance of an equity capital instrument, and any capital distribution, as well as any similar action that OSMO determines could impact Farmer Mac’s consolidated capital.
Capital distribution means a redemption or repurchase of any equity capital instrument, a payment of common or preferred stock dividends, a payment that may be temporarily or permanently suspended by the issuer on any instrument that is eligible for inclusion in the numerator of any minimum capital ratio, and any similar transaction that OSMO determines to be in substance a distribution of capital.
Capital plan means a written presentation of Farmer Mac’s capital planning strategies and capital adequacy process that includes the mandatory elements set forth in paragraph (c)(2) of this section.
Capital policy means Farmer Mac’s written assessment of the principles and guidelines used for capital planning, capital issuance, usage and distributions, including internal capital goals; the quantitative or qualitative guidelines for dividend and stock repurchases; the strategies for addressing potential capital shortfalls; and the internal governance procedures around capital policy principles and guidelines.
Planning horizon means the period of at least 12 quarters, beginning with the quarter preceding the quarter in which Farmer Mac submits its capital plan, over which the relevant projections extend.
Tier 1 Capital means the components meeting the criteria of Common Equity Tier 1 Capital and Additional Tier 1 Capital and the regulatory adjustments as set forth in Basel III, or Tier 1 Capital as defined in regulations of the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve, or the Federal Deposit Insurance Corporation, as revised from time to time; or another measure of high quality capital as approved for use under this regulation by the Director of OSMO.
Tier 1 ratio means the ratio of Farmer Mac’s Tier 1 Capital to Total Risk-Weighted Assets.
Total Risk-Weighted Assets means a risk-weighting approach that is appropriate given Farmer Mac’s business activities and consistent with broadly accepted banking practices and standards (e.g., one of the frameworks of the Basel Committee on Banking Supervision or similar U.S. regulations).
(c) General requirements—(1) Annual capital planning. (i) Farmer Mac must develop and maintain a capital plan each year.
(ii) Farmer Mac must submit its complete annual capital plan to OSMO by March 1 or such later date as directed by OSMO, after consultation with the FCA Board.
(iii) Prior to submission of the capital plan under paragraph (c)(1)(ii) of this section, Farmer Mac’s board of directors must:
(A) Review the robustness of Farmer Mac’s process for assessing capital adequacy,
(B) Ensure that any deficiencies in Farmer Mac’s process for assessing capital adequacy are appropriately remedied; and
(C) Approve Farmer Mac’s capital plan.
(2) Mandatory elements of capital plan. The capital plan must contain at least the following elements:
(i) An assessment of the expected uses and sources of capital over the planning horizon that reflects Farmer Mac’s size, complexity, risk profile, and scope of operations, assuming both expected and stressful conditions, including:
(A) Projected revenues, losses, reserves, and pro forma capital levels, including the core capital and regulatory capital ratios required by sections 8.32 and 8.33 of the Act, the Tier 1 ratio as defined in this section, and any additional capital measures deemed relevant by Farmer Mac, over the planning horizon under expected conditions and under a range of at least two progressively severe stress scenarios developed by Farmer Mac appropriate to its business model and portfolios, as well as any scenarios provided by the Director of OSMO. At least 15 calendar days prior to this stress testing, Farmer Mac must provide to OSMO a description of the expected and stressed scenarios that Farmer Mac intends to use to conduct its annual stress test under this section.
(B) A description of all planned capital actions over the planning horizon.
(ii) A detailed description of Farmer Mac’s process for assessing capital adequacy, including:
(A) A discussion of how Farmer Mac will, under expected and stressed conditions, maintain capital commensurate with its risks, maintain capital above the minimum core capital and regulatory capital ratios and above the Tier 1 ratio set in accordance with a well-articulated risk tolerance policy established by the board of directors;
(B) A discussion of how Farmer Mac will, under expected and stressed conditions, maintain sufficient capital to continue its operations by maintaining ready access to funding, meeting its obligations to creditors and other counterparties, and continuing to serve its statutory purposes; and
(C) A discussion of the results of the risk-based stress test required by section 8.32 of the Act and the stress tests required by this section, as well as any other stress test required by law or regulation, and an explanation of how the capital plan takes these results into account.
(iii) Farmer Mac’s capital policy; and
(iv) A discussion of any expected changes to Farmer Mac’s business plan that are likely to have a material impact on the Corporation’s capital adequacy or liquidity.
(d) Review of capital plan by OSMO. (1) OSMO will consider the following factors in reviewing Farmer Mac’s capital plan:
(i) The comprehensiveness of the capital plan, including the extent to which the analysis underlying the capital plan captures and addresses risks stemming from activities across Farmer Mac’s business lines and operations;
(ii) The reasonableness of Farmer Mac’s assumptions and analysis underlying the capital plan and its methodologies for reviewing the robustness of its capital adequacy process; and
(iii) Farmer Mac’s ability to maintain capital above the minimum core capital and regulatory capital ratios and above a Tier 1 ratio set in accordance with a risk tolerance policy established by the board of directors on a pro forma basis under expected and stressful conditions throughout the planning horizon, including but not limited to any stressed scenarios required under paragraphs (c)(2)(i)(A) and (c)(2)(ii) of this section.
(iv) All supervisory information about Farmer Mac and its subsidiaries;
(v) Farmer Mac’s regulatory and financial reports, as well as supporting data that would allow for an analysis of its loss, revenue, and projections;
(vi) As applicable, OSMO’s own pro forma estimates of Farmer Mac’s potential losses, revenues, and resulting capital adequacy measurements under expected and stressful conditions, including but not limited to any stressed scenarios required under paragraphs (c)(2)(i)(A) and (c)(2)(ii) of this section, as well as the results of any other stress tests conducted by Farmer Mac or OSMO; and
(vii) Other information requested or required by OSMO, as well as any other information relevant to Farmer Mac’s capital adequacy.
(e) OSMO action on a capital plan. (1) OSMO will review the capital plan and provide an assessment to Farmer Mac of the capital adequacy and planning process through its ongoing examination and oversight process.
(2) Upon a request by OSMO, Farmer Mac must provide OSMO with sufficient information regarding its planning assumptions, stress test strategies and results and any other relevant qualitative or quantitative information requested by OSMO to facilitate review of Farmer Mac’s capital plan under this section.
(3) OSMO may require Farmer Mac to revise and re-submit its capital plan.
(f) Farmer Mac response to OSMO’s assessment. Regardless of whether re-submission is required, Farmer Mac must take the results of the stress tests conducted under paragraphs (c)(2)(i)(A) and (c)(2)(ii) of this section (including any revisions required under paragraph (e)(3) of this section) as well as OSMO’s assessment into account in making changes, as appropriate, to Farmer Mac’s capital structure (including the level and composition of capital); its exposures, concentrations, and risk positions; any plans for recovery and resolution; and to improve overall risk management. Farmer Mac must document in writing its actions in response to the stress tests and assessment, as well as decisions not to take actions in response to any issues raised in the assessment.
§ 652.62 Notice to OSMO of capital distributions.
(a) Farmer Mac must provide OSMO with notice 15 calendar days prior to a board consideration of a declaration of a capital distribution or any material changes in capital distributions policies.
(b) Except as provided in paragraph (c), notice under paragraph (a) of this section is not required with respect to capital distributions set forth (i.e., specifically scheduled as to amount and timing along with a discussion of the planned distribution) in the capital plan or a regular periodic payment of dividends on common stock and preferred stock when there is no change in the amount of payment per share from the previous period.
(c) In the event that OSMO determines a capital plan has not adequately taken into account OSMO’s assessment as required under § 652.61(f), the exception described in paragraph (b) of this section shall not apply, and Farmer Mac must provide notification of any and all capital distributions as set forth in paragraph (a) of this section.
§ 652.65 Risk-based capital stress test.
You will perform the risk-based capital stress test as described in summary form below and as described in detail in appendix A to this subpart. The risk-based capital stress test spreadsheet is also available electronically at http://www.fca.gov. The risk-based capital stress test has five components:
(a) Data requirements. You will use the following data to implement the risk-based capital stress test.
(1) You will use Corporation loan-level data to implement the credit risk component of the risk-based capital stress test.
(2) You will use Call Report data as the basis for Corporation data over the 10-year stress period supplemented with your interest rate risk measurements and tax data.
(3) You will use other data, including the 10-year Constant Maturity Treasury (CMT) rate and the applicable Internal Revenue Service corporate income tax schedule, as further described in appendix A to this subpart.
(b) Credit risk. The credit risk part estimates loan losses during a period of sustained economic stress.
(1) For each loan in the Farmer Mac I portfolio, you will determine a default probability by using the logit functions specified in appendix A to this subpart with each of the following variables:
(i) Borrower’s debt-to-asset ratio at loan origination;
(ii) Loan-to-value ratio at origination, which is the loan amount divided by the value of the property;
(iii) Debt-service-coverage ratio at origination, which is the borrower’s net income (on- and off-farm) plus depreciation, capital lease payments, and interest, less living expenses and income taxes, divided by the total term debt payments;
(iv) The origination loan balance stated in 1997 dollars based on the consumer price index; and,
(v) The worst-case percentage change in farmland values (23.52 percent).
(2) You will then calculate the loss rate by multiplying the default probability for each loan by the estimated loss-severity rate, which is the average loss of the defaulted loans in the data set (20.9 percent).
(3) You will calculate losses by multiplying the loss rate by the origination loan balances stated in 1997 dollars.
(4) You will adjust the losses for loan seasoning, based on the number of years since loan origination, according to the functions in appendix A to this subpart.
(5) You will calculate loss rates on rural utility loans as further described in appendix A.
(6) You will further adjust losses for loans that collateralize the general obligation of AgVantage Plus volume, and for loans where the program loan counterparty retains a subordinated interest in accordance with appendix A to this subpart.
(7) The losses must be applied in the risk-based capital stress test as specified in appendix A to this subpart.
(c) Interest rate risk. (1) During the first year of the stress period, you will adjust interest rates for two scenarios, an increase in rates and a decrease in rates. You must determine your risk-based capital level based on whichever scenario would require more capital.
(2) You will calculate the interest rate stress based on changes to the quarterly average of the 10-year CMT. The starting rate is the 3-month average of the most recent CMT monthly rate series. To calculate the change in the starting rate, determine the average yield of the preceding 12 monthly 10-year CMT rates. Then increase and decrease the starting rate by:
(i) 50 percent of the 12-month average if the average rate is less than 12 percent; or
(ii) 600 basis points if the 12-month average rate is equal to or higher than 12 percent.
(3) Following the first year of the stress period, interest rates remain at the new level for the remainder of the stress period.
(4) You will apply the interest rate changes scenario as indicated in appendix A to this subpart.
(5) You may use other interest rate indices in addition to the 10-year CMT subject to our concurrence, but in no event can your risk-based capital level be less than that determined by using only the 10-year CMT.
(d) Cashflow generator. (1) You must adjust your financial statements based on the credit risk inputs and interest rate risk inputs described above to generate pro forma financial statements for each year of the 10-year stress test. The cashflow generator produces these financial statements. You may use the cashflow generator spreadsheet that is described in appendix A to this subpart and available electronically at http://www.fca.gov. You may also use any reliable cashflow program that can develop or produce pro forma financial statements using generally accepted accounting principles and widely recognized financial modeling methods, subject to our concurrence. You may disaggregate financial data to any greater degree than that specified in appendix A to this subpart, subject to our concurrence.
(2) You must use model assumptions to generate financial statements over the 10-year stress period. The major assumption is that cashflows generated by the risk-based capital stress test are based on a steady-state scenario. To implement a steady-state scenario, when on- and off-balance sheet assets and liabilities amortize or are paid down, you must replace them with similar assets and liabilities (AgVantage Plus volume is not replaced when it matures). Replace amortized assets from discontinued loan programs with current loan programs. In general, keep assets with small balances in constant proportions to key program assets.
(3) You must simulate annual pro forma balance sheets and income statements in the risk-based capital stress test using Farmer Mac’s starting position, the credit risk and interest rate risk components, resulting cashflow outputs, current operating strategies and policies, and other inputs as shown in appendix A to this subpart and the electronic spreadsheet available at http://www.fca.gov.
(e) Calculation of capital requirement. The calculations that you must use to solve for the starting regulatory capital amount are shown in appendix A to this subpart and in the electronic spreadsheet available at http://www.fca.gov.
§ 652.70 Risk-based capital level.
The risk-based capital level is the sum of the following amounts:
(a) Credit and interest rate risk. The amount of risk-based capital determined by the risk-based capital test under § 652.65.
(b) Management and operations risk. Thirty (30) percent of the amount of risk-based capital determined by the risk-based capital test in § 652.65.
§ 652.75 Your responsibility for determining the risk-based capital level.
(a) You must determine your risk-based capital level using the procedures in this subpart, appendix A to this subpart, and any other supplemental instructions provided by us. You will report your determination to us as prescribed in § 652.90. At any time, however, we may determine your risk-based capital level using the procedures in § 652.65 and appendix A to this subpart, and you must hold risk-based capital in the amount we determine is appropriate.
(b) You must at all times comply with the risk-based capital levels established by the risk-based capital stress test and must be able to determine your risk-based capital level at any time.
(c) If at any time the risk-based capital level you determine is less than the minimum capital requirements set forth in section 8.33 of the Act, you must maintain the statutory minimum capital level.
§ 652.80 When you must determine the risk-based capital level.
(a) You must determine your risk-based capital level at least quarterly, or whenever changing circumstances occur that have a significant effect on capital, such as exposure to a high volume of, or particularly severe, problem loans or a period of rapid growth.
(b) In addition to the requirements of paragraph (a) of this section, we may require you to determine your risk-based capital level at any time.
(c) If you anticipate entering into any new business activity that could have a significant effect on capital, you must determine a pro forma risk-based capital level, which must include the new business activity, and report this pro forma determination to the Director, Office of Secondary Market Oversight, at least 10-business days prior to implementation of the new business program.
§ 652.85 When to report the risk-based capital level.
(a) You must file a risk-based capital report with us each time you determine your risk-based capital level as required by § 652.80.
(b) You must also report to us at once if you identify in the interim between quarterly or more frequent reports to us that you are not in compliance with the risk-based capital level required by § 652.70.
(c) If you make any changes to the data used to calculate your risk-based capital requirement that cause a material adjustment to the risk-based capital level you reported to us, you must file an amended risk-based capital report with us within 5-business days after the date of such changes;
(d) You must submit your quarterly risk-based capital report for the last day of the preceding quarter by the earlier of the reporting deadlines for Securities and Exchange Commission Forms 10-K and 10-Q, or the 40th day after each of the quarters ending March 31st, June 30th, and September 30th, and the 75th day after the quarter ending on December 31st.
§ 652.90 How to report your risk-based capital determination.
(a) Your risk-based capital report must contain at least the following information:
(1) All data integral for determining the risk-based capital level, including any business policy decisions or other assumptions made in implementing the risk-based capital test;
(2) Other information necessary to determine compliance with the procedures for determining risk-based capital as specified in appendix A to this subpart; and
(3) Any other information we may require in written instructions to you.
(b) You must submit each risk-based capital report in such format or medium, as we require.
§ 652.95 Failure to meet capital requirements.
(a) Determination and notice. At any time, we may determine that you are not meeting your risk-based capital level calculated according to § 652.65, your minimum capital requirements specified in section 8.33 of the Act, or your critical capital requirements specified in section 8.34 of the Act. We will notify you in writing of this fact and the date by which you should be in compliance (if applicable).
(b) Submission of capital restoration plan. Our determination that you are not meeting your required capital levels may require you to develop and submit to us, within a specified time period, an acceptable plan to reach the appropriate capital level(s) by the date required.
§ 652.100 Audit of the risk-based capital stress test.
You must have a qualified, independent external auditor review your implementation of the risk-based capital stress test every 3 years and submit a copy of the auditor’s opinion to us.
Appendix A to Subpart B of Part 652—Risk-Based Capital Stress Test
a. Appendix A provides details about the risk-based capital stress test (stress test) for Farmer Mac. The stress test calculates the risk-based capital level required by statute under stipulated conditions of credit risk and interest rate risk. The stress test uses loan-level data from Farmer Mac’s agricultural mortgage portfolio or proxy data as described in section 4.1 d.(3) below, as well as quarterly Call Report and related information to generate pro forma financial statements and calculate a risk-based capital requirement. The stress test also uses historic agricultural real estate mortgage performance data, rural utility guarantee fees, relevant economic variables, and other inputs in its calculations of Farmer Mac’s capital needs over a 10-year period.
b. Appendix A establishes the requirements for all components of the stress test. The key components of the stress test are: Specifications of credit risk, interest rate risk, the cashflow generator, and the capital calculation. Linkages among the components ensure that the measures of credit and interest rate risk pass into the cashflow generator. The linkages also transfer cashflows through the financial statements to represent values of assets, liabilities, and equity capital. The 10-year projection is designed to reflect a steady state in the scope and composition of Farmer Mac’s assets.
Loan loss rates are determined by applying the loss-frequency equation and the loss-severity factor to Farmer Mac loan-level data. Using this equation and severity factor, you must calculate loan losses under stressful economic conditions assuming Farmer Mac’s portfolio remains at a “steady state.” Steady state assumes the underlying characteristics and risks of Farmer Mac’s portfolio remain constant over the 10 years of the stress test. Loss rates discussed in this section apply to all loans, unless otherwise indicated. Loss rates are computed from estimated dollar losses for use in the stress test. The loan volume subject to loss throughout the stress test is then multiplied by the loss rate. Lastly, the stress test allocates losses to each of the 10 years assuming a time pattern for loss occurrence as discussed in section 4.3, “Risk Measures.”
a. Credit risks are modeled in the stress test using historical time series loan-level data to measure the frequency and severity of losses on agricultural mortgage loans. The model relates loss frequency and severity to loan-level characteristics and economic conditions through appropriately specified regression equations to account explicitly for the effects of these characteristics on loan losses. Loan losses for Farmer Mac are estimated from the resulting loss-frequency equation combined with the loss-severity factor by substituting the respective values of Farmer Mac’s loan-level data or proxy data as described in section 4.1 d.(3) below, and applying stressful economic inputs.
b. The loss-frequency equation and loss-severity factor were estimated from historical agricultural real estate mortgage loan data from the Farm Credit Bank of Texas (FCBT). Due to Farmer Mac’s relatively short history, its own loan-level data are insufficiently developed for use in estimating the default frequency equation and loss-severity factor. In the future, however, expansions in both the scope and historic length of Farmer Mac’s lending operations may support the use of its data in estimating the relationships.
c. To estimate the equations, the data used included FCBT loans, which satisfied three of the four underwriting standards Farmer Mac currently uses (estimation data). The four standards specify: (1) The debt-to-assets ratio (D/A) must be less than 0.50, (2) the loan-to-value ratio (LTV) must be less than 0.70, (3) the debt-service-coverage ratio (DSCR) must exceed 1.25, (4) and the current ratio (current assets divided by current liabilities) must exceed 1.0. Furthermore, the D/A and LTV ratios were restricted to be less than or equal to 0.85.
d. Several limitations in the FCBT loan-level data affect construction of the loss-frequency equation. The data contained loans that were originated between 1979 and 1992, but there were virtually no losses during the early years of the sample period. As a result, losses attributable to specific loans are only available from 1986 through 1992. In addition, no prepayment information was available in the data.
e. The FCBT data used for estimation also included as performing loans, those loans that were re-amortized, paid in full, or merged with a new loan. Including these loans may lead to an understatement of loss-frequency probabilities if some of the re-amortized, paid, or merged loans experience default or incur losses. In contrast, when the loans that are re-amortized, paid in full, or merged are excluded from the analysis, the loss-frequency rates are overstated if a higher proportion of loans that are re-amortized, paid in full, or combined (merged) into a new loan are non-default loans compared to live loans.
f. The structure of the historical FCBT data supports estimation of loss frequency based on origination information and economic conditions. Under an origination year approach, each observation is used only once in estimating loan default. The underwriting variables at origination and economic factors occurring over the life of the loan are then used to estimate loan-loss frequency.
g. The final loss-frequency equation is based on origination year data and represents a lifetime loss-frequency model. The final equation for loss frequency is:
h. The estimated logit coefficients and p-values are:
| Coefficients | p-value | |
|---|---|---|
| Intercept | −12.62738 | |
| X | 1.91259 | 0.0001 |
| X | 0.33830 | |
| X | −0.19596 | 0.0002 |
| X | 4.55390 | |
| X | 2.49482 |
i. The low p-values on each coefficient indicate a highly significant relationship between the probability ratio of loan-loss frequency and the respective independent variables. Other goodness-of-fit indicators are:
| Hosmer and Lemeshow goodness-of-fit p-value | 0.1718 |
| Max-rescaled R 2 | 0.2015 |
| Concordant | 85.2% |
| Disconcordant | 12.0% |
| Tied | 2.8% |
j. These variables have logical relationships to the incidence of loan default and loss, as evidenced by the findings of numerous credit-scoring studies in agricultural finance.
k. When applying the equation to Farmer Mac’s portfolio, you must get the input values for X
l. Forecasting with data outside the range of the estimation data requires special treatment for implementation. While the estimation data embody Farmer Mac values for various loan characteristics, the maximum farmland price decline experienced in Texas was −16.69 percent, a value below the benchmark experience of −23.52 percent. To control for this effect, you must apply a procedure that restricts the slope of all the independent variables to that observed at the maximum land value decline observed in the estimation data. Essentially, you must approximate the slope of the loss-frequency equation at the point −16.69 percent in order to adjust the probability of loan default and loss occurrence for data beyond the range in the estimating data. The adjustment procedure is shown in step 4 of section 2.3 entitled, “Example Calculation of Dollar Loss on One Loan.”
m. Loss severity was not found to vary systematically and was considered constant across the tested loan characteristics and lending conditions. Thus, the simple weighted average by loss volume of 20.9 percent is used in the stress test.
n. Using original loan balance results in estimated probabilities of loss frequency over the entire life of a loan. To account for loan seasoning, you must reduce the loan-loss exposure by the cumulative probability of loss already experienced by each loan as discussed in section 2.2 entitled, “Loan-Seasoning Adjustment.” This subtraction is based on loan age and reduces the loss estimated by the loss-frequency and loss-severity equations. The result is an age-adjusted lifetime dollar loss that can be used in subsequent calculations of loss rates as discussed in section 2.4, “Calculation of Loss Rates for Use in the Stress Test.”
a. You must use the seasoning function supplied by FCA to adjust the calculated probability of loss for each Farmer Mac loan for the cumulative loss exposure already experienced based on the age of each loan. The seasoning function is based on the same data used to determine the loss-frequency equation and an assumed average life of 14 years for agricultural mortgages. If we determine that the relationship between the loss experience in Farmer Mac’s portfolio over time and the seasoning function can be improved, we may augment or replace the seasoning function.
b. The seasoning function is parameterized as a beta distribution with parameters of p = 4.288 and q = 5.3185.
Here is an example of the calculation of the dollar losses for an individual loan with the following characteristics and input values:
| Loan Origination Year | 1996 |
| Loan Origination Balance | $1,250,000 |
| LTV at Origination | 0.5 |
| D/A at Origination | 0.5 |
| DSCR at Origination | 1.3984 |
| Maximum Percentage Land Price Decline (MAX) | −23.52 |
Step 1: Convert 1996 Origination Value to 1997 dollar value (LOAN) based on the consumer price index and transform as follows:
Step 2: Calculate the default probabilities using −16.64 percent and −16.74 percent land value declines as follows:
Step 3: Calculate the slope adjustment. You must calculate slope by subtracting the difference between “Loss-Frequency Probability at −16.64 percent” and “Loss-Frequency Probability at −16.74 percent” and dividing by −0.1 (the difference between −16.64 percent and −16.74 percent) as follows:
Step 4: Make the linear adjustment. You make the adjustment by increasing the loss-frequency probability where the dampened stressed farmland value input is less than −16.69 percent to reflect the stressed farmland value input, appropriately discounted. As discussed previously, the stressed land value input is discounted to reflect the declining effect that the maximum land value decline has on the probability of default when it occurs later in a loan’s life.
Step 5: Multiply loan default probability times the average severity of 0.209 as follows:
Step 6: Multiply the loss rate times the origination loan balance as follows:
Step 7: Adjust the origination based dollar losses for 4 years of loan seasoning as follows:
You must calculate the age-adjusted loss rates for these loans that include adjustments to scale losses according to the proportion of total submitted collateral to the guaranteed amount as provided for in the “Dollar Losses” column of the transformed worksheets in the Credit Loss Module based on new data inputs required in the “Coefficients” worksheet of the Credit Loss Module. Then, you must adjust the calculated loss rates as follows.
a. For loans in which the seller retains a subordinated interest, subtract from the total estimated age-adjusted dollar losses on the pool the amount equal to current unpaid principal times the subordinated interest percentage.
b. Some pools of loans underlying specific transactions could include loan collateral volume pledged to Farmer Mac in excess of Farmer Mac’s guarantee amount (“overcollateral”). Overcollateral can be either: (i) Contractually required according to the terms of the transaction, or (ii) not contractually required, but pledged in addition to the contractually required amount at the discretion of the counterparty, often for purposes of administrative convenience regarding the collateral substitution process, or (iii) both (i) and (ii).
1. If a pool of loans includes collateral pledged in excess of the guaranteed amount, you must adjust the age-adjusted, loan-level dollar losses by a factor equal to the ratio of the guarantee amount to total submitted collateral. For example, consider a pool of two loans serving as security for a Farmer Mac guarantee on a note with a total issuance face value of $2 million and on which the counterparty has submitted 10-percent overcollateral. The two loans in the example have the following characteristics and adjustments.
| Loan | Origination balance | Age-adjusted loss rate (percent) | Estimated age-adjusted losses | Guarantee amount scaling adjustment (2/2.2) (Percent) | Losses adjusted for overcollateral |
|---|---|---|---|---|---|
| 1 | $1,080,000 | 7.0 | $75,600 | 90.91 | $68,727 |
| 2 | 1,120,000 | 5.0 | 56,000 | 90.91 | 50,909 |
2. If a pool of loans includes collateral pledged in excess of the guaranteed amount that is required under the terms of the transaction, you must further adjust the dollar losses as follows. Calculate the total losses on the subject portfolio of loans after age adjustments and any adjustments related to total submitted overcollateral as described in “1.” above. Calculate the total dollar amount of contractually required overcollateral in the subject pool. Subtract the total dollars of contractually required overcollateral from the adjusted total losses on the subject pool. If the result is less than or equal to zero, input a loss rate of zero for this transaction pool in the Data Inputs worksheet of the RBCST. A new category must be created for each such transaction in the RBCST. If the loss rate after subtracting contractually required overcollateral is greater than zero, proceed to additional adjustment for the risk-reducing effects of the counterparty’s general obligation described in “3.” below.
3. Loans with a positive loss estimate remaining after adjustments in “1.” and “2.” above are further adjusted for the security provided by the general obligation of the counterparty. To make this adjustment in our example, multiply the estimated dollar losses remaining after adjustments in “1.” and “2.” above by the appropriate general obligation adjustment (GOA) factor based on the counterparty’s whole-letter issuer credit rating by a nationally recognized statistical rating organization (NRSRO) and the ratio of the counterparty’s concentration of risk in the same industry sector as the loans backing the AgVantage Plus volume, as determined by the Director.
A. The Director will make final determinations of concentration ratios on a case-by-case basis by using publicly reported data on counterparty portfolios, non-public data submitted and certified by Farmer Mac as part of its RBCST submissions, and will generally recognize rural electric cooperatives and rural telephone cooperatives as separate rural utility sectors. The following table sets forth the GOA factors and their components by whole-letter credit rating (Adjustment Factor = Default Rate × Severity Rate × 3), which may be further adjusted for industry sector concentration by the Director.
| A | B | C | D | E | F | G |
|---|---|---|---|---|---|---|
| Whole-letter rating | Default rate (percent) | Severity rate (percent) | V3.0 GOA factor (percent) | V4.0 GOA factors (D × 3) (percent) | Concentration ratio (e.g., 25%) (percent) | Factor with concentration adjustment 1− ((1−E) × (1−F)) (percent) |
| AAA | 0.897 | 54 | 0.48 | 1.41 | 25.00 | 26.06 |
| AA | 2.294 | 54 | 1.24 | 3.70 | 25.00 | 27.78 |
| A | 2.901 | 54 | 1.57 | 5.13 | 25.00 | 28.84 |
| BBB | 7.061 | 54 | 3.82 | 11.48 | 25.00 | 33.61 |
| Below BBB and Unrated | 26.827 | 54 | 14.50 | 44.52 | 25.00 | 58.39 |
B. The adjustment factors will be updated annually as Moody’s annual report on Default and Recovery Rates of Corporate Bond Issuers becomes available, normally in January or February of each year. In the event that there is an interruption of Moody’s publication of this annual report, or FCA determines that the format of the report has changed enough to prevent or call into question the identification of updated factors, the prior year’s factors will remain in effect until FCA revises the process through rulemaking.
4. Continuing the previous example, the pool contains two loans on which Farmer Mac is guaranteeing a total of $2 million and with total submitted collateral of 110 percent of the guaranteed amount. Of the 10-percent total overcollateral, 5 percent is contractually required under the terms of the transaction. The pool consists of two loans of slightly over $1 million. Total overcollateral is $200,000 of which $100,000 is contractually required. The counterparty has a single “A” credit rating, a 25-percent concentration ratio, and after adjusting for contractually required overcollateral, estimated losses are greater than zero. The net loss rate is calculated as described in the steps in the table below.
| Loan A | Loan B | |
|---|---|---|
| 1 Guaranteed Volume | $2,000,000 | |
| 2 Origination Balance of 2-Loan Portfolio | $1,080,000 | $1,120,000 |
| 3 Age-Adjusted Loss Rate | 7% | 5% |
| 4 Estimated Age-Adjusted Losses | $75,600 | $56,000 |
| 5 Guarantee Volume Scaling Factor | 90.91% | 90.91% |
| 6 Losses Adjusted for Total Overcollateral | $68,727 | $50,909 |
| 7 Contractually Required Overcollateral on Pool (5%) | $100,000 | |
| 8 Net Losses on Pool Adjusted for Contractually Required Overcollateral | $19,636 | |
| 9 GOA Factor for “A” Issuer with 25% Concentration Ratio | 28.84% | |
| 10 Losses Adjusted for “A” General Obligation | $5,664 | |
| 11 Loss Rate Input in the RBCST for this Pool | 0.28% | |
A. The net, fully adjusted losses are distributed over time on a straight-line basis. When a transaction reaches maturity within the 10-year modeling horizon, the losses are distributed on a straightline over a timepath that ends in the year of the transaction’s maturity.
B. [Reserved]
a. You must compute the loss rates by state as the dollar weighted average seasoned loss rates from the Cash Window and Standby loan portfolios by state. The spreadsheet entitled, “Credit Loss Module.XLS” can be used for these calculations. This spreadsheet is available for download on our Web site, www.fca.gov, or will be provided upon request. The blended loss rates for each state are copied from the “Credit Loss Module” to the stress test spreadsheet for determining Farmer Mac’s regulatory capital requirement.
b. The stress test use of the blended loss rates is further discussed in section 4.3, “Risk Measures.”
You must submit the outstanding principal, maturity date of the loan, maturity date of the AgVantage Plus contract (if applicable), and the rural utility guarantee fee percentage for each loan in Farmer Mac’s rural utility loan portfolio on the date at which the stress test is conducted. You must multiply the rural utility guarantee fee by two to calculate the loss rate on rural utility loans under stressful economic conditions and then multiply the loss rate by the total outstanding principal. To arrive at the net rural utility loan losses, you must next apply the steps “5” through “11” of section 2.4.b.4 of this Appendix. For loans under an AgVantage Plus-type structure, the calculated losses are distributed over time on a straight-line basis. For loans that are not part of an AgVantage Plus-type structure, losses are distributed over the 10-year modeling horizon, consistent with other non-AgVantage Plus loan volume.
The stress test explicitly accounts for Farmer Mac’s vulnerability to interest rate risk from the movement in interest rates specified in the statute. The stress test considers Farmer Mac’s interest rate risk position through the current structure of its balance sheet, reported interest rate risk shock-test results,
a. The stress test uses the 10-year Constant Maturity Treasury (10-year CMT) released by the Federal Reserve in HR. 15, “Selected Interest Rates.” The stress test uses the 10-year CMT to generate earnings yields on assets, expense rates on liabilities, and changes in the market value of assets and liabilities. For stress test purposes, the starting rate for the 10-year CMT is the 3-month average of the most recent monthly rate series published by the Federal Reserve. The 3-month average is calculated by summing the latest monthly series of the 10-year CMT and dividing by three. For instance, you would calculate the initial rate on June 30, 1999, as:
| Month end | 10-year CMT monthly series |
|---|---|
| 04/1999 | 5.18 |
| 05/1999 | 5.54 |
| 06/1999 | 5.90 |
| Average | 5.54 |
b. The amount by which the stress test shocks the initial rate up and down is determined by calculating the 12-month average of the 10-year CMT monthly series. If the resulting average is less than 12 percent, the stress test shocks the initial rate by an amount determined by multiplying the 12-month average rate by 50 percent. However, if the average is greater than or equal to 12 percent, the stress test shocks the initial rate by 600 basis points. For example, determine the amount by which to increase and decrease the initial rate for June 30, 1999, as follows:
| Month end | 10-year CMT monthly series |
|---|---|
| 07/1998 | 5.46 |
| 08/1998 | 5.34 |
| 09/1998 | 4.81 |
| 10/1998 | 4.53 |
| 11/1998 | 4.83 |
| 12/1998 | 4.65 |
| 01/1999 | 4.72 |
| 02/1999 | 5.00 |
| 03/1999 | 5.23 |
| 04/1999 | 5.18 |
| 05/1999 | 5.54 |
| 06/1999 | 5.90 |
| 12-Month Average | 5.10 |
| Calculation of shock amount | |
|---|---|
| 12-Month Average Less than 12% | Yes. |
| 12-Month Average | 5.10. |
| Multiply the 12-Month Average by | 50%. |
| Shock in basis points equals | 255. |
c. You must run the stress test for two separate changes in interest rates: (i) An immediate increase in the initial rate by the shock amount; and (ii) immediate decrease in the initial rate by the shock amount. The stress test then holds the changed interest rate constant for the remainder of the 10-year stress period. For example, at June 30, 1999, the stress test would be run for an immediate and sustained (for 10 years) upward movement in interest rates to 8.09 percent (5.54 percent plus 255 basis points) and also for an immediate and sustained (for 10 years) downward movement in interest rates to 2.99 percent (5.54 percent minus 255 basis points). The movement in interest rates that results in the greatest need for capital is then used to determine Farmer Mac’s risk-based capital requirement.
a. This section describes the elements that are required for implementation of the stress test and assessment of Farmer Mac capital performance through time. An Excel spreadsheet named FAMC RBCST, available at http://www.fca.gov, contains the stress test, including the cashflow generator. The spreadsheet contains the following seven worksheets:
(1) Data Input;
(2) Assumptions and Relationships;
(3) Risk Measures (credit risk and interest rate risk);
(4) Loan and Cash Flow Accounts;
(5) Income Statements;
(6) Balance Sheets; and
(7) Capital.
b. Each of the components is described in further detail below with references where appropriate to the specific worksheets within the Excel spreadsheet. The stress test may be generally described as a set of linked financial statements that evolve over a period of 10 years using generally accepted accounting conventions and specified sets of stressed inputs. The stress test uses the initial financial condition of Farmer Mac, including earnings and funding relationships, and the credit and interest rate stressed inputs to calculate Farmer Mac’s capital performance through time. The stress test then subjects the initial financial conditions to the first period set of credit and interest rate risk stresses, generates cashflows by asset and liability category, performs necessary accounting postings into relevant accounts, and generates an income statement associated with the first interval of time. The stress test then uses the income statement to update the balance sheet for the end of period 1 (beginning of period 2). All necessary capital calculations for that point in time are then performed.
c. The beginning of the period 2 balance sheet then serves as the departure point for the second income cycle. The second period’s cashflows and resulting income statement are generated in similar fashion as the first period’s except all inputs (i.e., the periodic loan losses, portfolio balance by category, and liability balances) are updated appropriately to reflect conditions at that point in time. The process evolves forward for a period of 10 years with each pair of balance sheets linked by an intervening set of cashflow and income statements. In this and the following sections, additional details are provided about the specification of the income-generating model to be used by Farmer Mac in calculating the risk-based capital requirement.
The stress test requires the initial financial statement conditions and income generating relationships for Farmer Mac. The worksheet named “Data Inputs” contains the complete data inputs and the data form used in the stress test. The stress test uses these data and various assumptions to calculate pro forma financial statements. For stress test purposes, Farmer Mac is required to supply:
a. Call Report Schedules RC: Balance Sheet and RI: Income Statement. These schedules form the starting financial position for the stress test. In addition, the stress test calculates basic financial relationships and assumptions used in generating pro forma annual financial statements over the 10-year stress period. Financial relationships and assumptions are in section 4.2, “Assumptions and Relationships.”
b. Cashflow Data for Asset and Liability Account Categories. The necessary cashflow data for the spreadsheet-based stress test are book value, weighted average yield, weighted average maturity, conditional prepayment rate, weighted average amortization, and weighted average guarantee fees and rural utility guarantee fees. The spreadsheet uses this cashflow information to generate starting and ending account balances, interest earnings, guarantee fees, rural utility guarantee fees, and interest expense. Each asset and liability account category identified in this data requirement is discussed in section 4.2 “Assumptions and Relationships.”
c. Interest Rate Risk Measurement Results. The stress test uses the results from Farmer Mac’s interest rate risk model to represent changes in the market value of assets, liabilities, and off-balance sheet positions during upward and downward instantaneous shocks in interest rates of 300, 250, 200, 150, and 100 basis points. The stress test uses these data to calculate a schedule of estimated effective durations representing the market value effects from a change in interest rates. The stress test uses a linear interpolation of the duration schedule to relate a change in interest rates to a change in the market value of equity. This calculation is described in section 4.4 entitled, “Loan and Cashflow Accounts,” and is illustrated in the referenced worksheet of the stress test.
d. Loan-Level Data for all Farmer Mac I Program Assets.
(1) The stress test requires loan-level data for all Farmer Mac I program assets to determine lifetime age-adjusted loss rates. The specific loan data fields required for running the credit risk component are:
(2) From the loan-level data, you must identify the geographic distribution by state of Farmer Mac’s loan portfolio and enter the current loan balance for each state in the “Data Inputs” worksheet. The lifetime age-adjustment of origination year loss rates was discussed in section 2.0, “Credit Risk.” The lifetime age-adjusted loss rates are entered in the “Risk Measures” worksheet of the stress test. The stress test application of the loss rates is discussed in section 4.3, “Risk Measures.”
(3) Under certain circumstances, described below, you must substitute the following data proxies for the variables LTV, DSCR, and D/A: LTV = 0.70, DSCR = 1.25, and D/A = 0.50. The substitution must be done whenever any of these data are missing, i.e., cells are blank, or one or more of the conditions in the following table is true.
| Condition | Apply |
|---|---|
| 1. Total Assets = 0 | Proxy D/A. |
| 2. Total Liabilities = 0 | Proxy D/A. |
| 3. Total assets less total liabilities | Proxy D/A. |
| 4. Total debt service = 0 or not calculable | Proxy DSCR. |
| 5. Net farm income = 0 | Proxy DSCR. |
| 6. LTV ratio = 0 | Proxy LTV. |
| 7. Total assets less than original appraised value | Proxy LTV, D/A. |
| 8. Total liabilities less than the original loan amount | Proxy D/A. |
| 9. Total debt service is less than original scheduled principal and interest payment | Proxy DSCR. |
| 10. Depreciation, interest on capital debt, capital lease payments, or living expenses are reported as less than zero | Proxy DSCR. |
| 11. Original Scheduled Principal and Interest is greater than Total Debt Service | Proxy DSCR. |
| 12. Calculated LTV (original loan amount divided by original appraised value) does not equal the submitted LTV ratio | The greater of the two LTV ratios. |
| 13. Any of the fields referenced in “1.” through “12.” above are blank or contain spaces, periods, zeros, negative amounts, or fonts formatted to any setting other than numbers | Proxy all related ratios. |
In addition, the following loan data adjustments must be made in response to the situations listed below:
| Situation | Data adjustment |
|---|---|
| Original loan balance is less than scheduled loan balance | Substitute scheduled balance for origination. |
| Purchase (commitment) date (a.k.a. “cutoff” date) field and Origination date field are both blank | Insert the quarter end “as of” date of the RBCST submission. |
| Origination date field is blank | Model based on Cutoff date. |
| Seasoned Standby loans that include loan data | Proxy data applied.* |
* Application of proxy data recognizes that underwriting data on seasoned Standby loans are not reviewed by Farmer Mac in favor of other criteria and frequently not origination data.
Further, because it would not be possible to compile an exhaustive list of loan data anomalies, FCA reserves the authority to require an explanation on other data anomalies it identifies and to apply the loan data proxies on such cases until the anomaly is adequately addressed by the Corporation.
e. Loan-Level Data for All Rural Utility Program Volume. The stress test requires loan-level data for all rural utility program volume. The specific loan data fields required for calculating the credit risk are outstanding principal, maturity date of the loan, maturity date of the AgVantage Plus contract (if applicable), and the rural utility guarantee fee percentage for each loan in Farmer Mac’s rural utility loan portfolio on the date at which the stress test is conducted.
f. Weighted Haircuts for Non-Program Investments. For non-program investments, the stress test adjusts the weighted average yield data referenced in section 4.1.b. to reflect counterparty risk. Non-program investments are defined in § 652.5. The Corporation must calculate the haircut to be applied to each investment based on the lowest whole-letter credit rating the investment received from an NRSRO using the haircut levels in effect at the time. Haircut levels shall be the same amounts calculated for the GOA factor in section 2.4.b.3 above. The first table provides the mappings of NRSRO ratings to whole-letter ratings for purposes of applying haircuts. Any “ + ” or “−” signs appended to NRSRO ratings that are not shown in the table should be ignored for purposes of mapping NRSRO ratings to FCA whole-letter ratings. The second table provides the haircut levels by whole-letter rating category.
FCA Whole-Letter Credit Ratings Mapped to Rating Agency Credit Ratings
| FCA Ratings Category | AAA | AA | A | BBB | Below BBB and Unrated. |
| Standard & Poor’s Long-Term | AAA | AA | A | BBB | Below BBB and Unrated. |
| Fitch Long-Term | AAA | AA | A | BBB | Below BBB and Unrated. |
| Standard & Poor’s Short-Term | A-1 + SP-1 + | A-1 SP-1 | A-2 SP-2 | A-3 | SP-3, B, or Below and Unrated. |
| Fitch Short-Term | F-1 + | F-1 | F-2 | F-3 | Below F-3 and Unrated. |
| Moody’s | Prime-MIG12 VMIg1 | Prime-2 MIG2 VMIG2 | Prime-3 MIG3 VMIG3 | Not Prime, SG and Unrated. | |
| Fitch Bank Ratings | A | B A/B | C B/C | D C/D | E. D/E. |
| Moody’s Bank Financial Strength Rating | A | B | C | D | E. |
Farmer Mac RBCST Maximum Haircut by Ratings Classification
| Ratings classification | Non-program investment counterparties (excluding derivatives) (percent) |
|---|---|
| Cash | 0.00 |
| AAA | 1.41 |
| AA | 3.70 |
| A | 5.13 |
| BBB | 11.48 |
| Below BBB or Unrated | 44.52 |
1. Certain special cases will receive the following treatment. For an investment structured as a collateralized obligation backed by the issuer’s general obligation and, in turn, a pool of collateral, reference the Issuer Rating or Financial Strength Rating of that issuer as the credit rating applicable to the security. Unrated securities that are fully guaranteed by Government-sponsored enterprises (GSE) such as the Federal National Mortgage Corporation (Fannie Mae) will receive the same treatment as AAA securities. Unrated securities backed by the full faith and credit of the U.S. Government will not receive a haircut. Unrated securities that are not fully guaranteed by a GSE will receive the haircut level in place at that time for “Below BBB and Unrated” investments unless the Director, at the Director’s discretion, determines to apply a lesser haircut. In making this determination, the Director will consider the risk characteristics associated with the structure of individual instruments.
2. If portions of investments are later sold by Farmer Mac according to their specific risk characteristics, the Director will take reasonable measures to adjust the haircut level applied to the investment to recognize the change in the risk characteristics of the retained portion. The Director will consider relevant similar methods for dealing with capital requirements adopted by other Federal financial institution regulators in similar situations.
3. Individual investment haircuts must then be aggregated into weighted-average haircuts by investment category and submitted in the “Data Inputs” worksheet. The spreadsheet uses these inputs to reduce the weighted-average yield on the investment category to account for counterparty insolvency according to a 10-year linear phase-in of the haircuts. Each asset account category identified in this data requirement is discussed in section 4.2, “Assumptions and Relationships.”
a. The stress test assumptions are summarized on the worksheet called “Assumptions and Relationships.” Some of the entries on this page are direct user entries. Other entries are relationships generated from data supplied by Farmer Mac or other sources as discussed in section 4.1, “Data Inputs.” After current financial data are entered, the user selects the date for running the stress test. This action causes the stress test to identify and select the appropriate data from the “Data Inputs” worksheet. The next section highlights the degree of disaggregation needed to maintain reasonably representative financial characterizations of Farmer Mac in the stress test. Several specific assumptions are established about the future relationships of account balances and how they evolve.
b. From the data and assumptions, the stress test computes pro forma financial statements for 10 years. The stress test must be run as a “steady state” with regard to program balances (with the exception of AgVantage Plus volume, in which case maturities are recognized by the model), and where possible, will use information gleaned from recent financial statements and other data supplied by Farmer Mac to establish earnings and cost relationships on major program assets that are applied forward in time. As documented in the stress test, entries of “1” imply no growth and/or no change in account balances or proportions relative to initial conditions with the exception of pre-1996 loan volume being transferred to post-1996 loan volume. The interest rate risk and credit loss components are applied to the stress test through time. The individual sections of that worksheet are:
(1) Elements related to cashflows, earnings rates, and disposition of discontinued program assets.
(A) The stress test accounts for earnings rates by asset class and cost rates on funding. The stress test aggregates investments into the categories of: Cash and money market securities; commercial paper; certificates of deposit; agency mortgage-backed securities and collateralized mortgage obligations; and other investments. With FCA’s concurrence, Farmer Mac is permitted to further disaggregate these categories. Similarly, we may require new categories for future activities to be added to the stress test. Loan items requiring separate accounts include the following:
(i) Farmer Mac I program assets post-1996 Act;
(ii) Farmer Mac I program assets post-1996 Act Swap balances;
(iii) Farmer Mac I program assets pre-1996 Act;
(iv) Farmer Mac I AgVantage securities;
(v) Loans held for securitization;
(vi) Farmer Mac II program assets; and
(vii) Rural Utility program volume on balance sheet.
(B) The stress test also uses data elements related to amortization and prepayment experience to calculate and process the implied rates at which asset and liability balances terminate or “roll off” through time. Further, for each category, the stress test has the capacity to track account balances that are expected to change through time for each of the above categories. For purposes of the stress test, all assets are assumed to maintain a “steady state” with the implication that any principal balances retired or prepaid are replaced with new balances. The exceptions are that expiring pre-1996 Act program assets are replaced with post-1996 Act program assets and AgVantage Plus volume maturities are recognized by the model.
(2) Elements related to other balance sheet assumptions through time. As well as interest earning assets, the other categories of the balance sheet that are modeled through time include interest receivable, guarantee fees receivable, rural utility guarantee fees receivable, prepaid expenses, accrued interest payable, accounts payable, accrued expenses, reserves for losses (loans held and guaranteed securities), and other off-balance sheet obligations. The stress test is consistent with Farmer Mac’s existing reporting categories and practices. If reporting practices change substantially, the above list will be adjusted accordingly. The stress test has the capacity to have the balances in each of these accounts determined based upon existing relationships to other earning accounts, to keep their balances either in constant proportions of loan or security accounts, or to evolve according to a user-selected rule. For purposes of the stress test, these accounts are to remain constant relative to the proportions of their associated balance sheet accounts that generated the accrued balances.
(3) Elements related to income and expense assumptions. Several other parameters that are required to generate pro forma financial statements may not be easily captured from historic data or may have characteristics that suggest that they be individually supplied. These parameters are the gain on agricultural mortgage-backed securities (AMBS) sales, miscellaneous income, operating expenses, reserve requirement, guarantee fees, rural utility guarantee fees, and loan loss resolution timing.
(A) The stress test applies the actual weighted average gain rate on sales of AMBS over the most recent 3 years to the dollar amount of AMBS sold during the most recent four quarters in order to estimate gain on sale of AMBS over the stress period.
(B) The stress test assumes miscellaneous income at a level equal to the average of the most recent 3-year’s actual miscellaneous income as a percent of the sum of; cash, investments, guaranteed securities, and loans held for investment.
(C) The stress test assumes that short-term cost of funds is incurred in relation to the amount of defaulting loans purchased from off-balance sheet pools. The remaining unpaid principal balance on this loan volume is the origination amount reduced by the proportion of the total portfolio that has amortized as of the end of the most recent quarter. This volume is assumed to be funded at the short-term cost of funds and this expense continues for a period equal to the loan loss resolution timing period (LLRT) period minus 1. We will calculate the LLRT period from Farmer Mac data. In addition, during the LLRT period, all guarantee income associated with the loan volume ceases.
(D) The stress test generates no interest income on the estimated volume of defaulted on-balance sheet loan volume required to be carried during the LLRT period, but continues to accrue funding costs during the remainder of the LLRT period.
(E) You must update the LLRT period in response to changes in the Corporation’s actual experience with each quarterly submission.
(F) Operating costs are determined in the model using weighted moving average of operating expenses as a percentage of the sum of on-balance sheet assets and off-balance sheet program activities over the previous four quarters inclusive of the current submission date. The share will then be applied forward to the balances of the same categories throughout the 10-year period of the RBCST model. As additional data accumulate, the specification will be re-examined and modified if we deem changing the specification results in a more appropriate representation of operating expenses.
(G) The reserve requirement as a fraction of loan assets can also be specified. However, the stress test is run with the reserve requirement set to zero. Setting the parameter to zero causes the stress test to calculate a risk-based capital level that is comparable to regulatory capital, which includes reserves. Thus, the risk-based capital requirement contains the regulatory capital required, including reserves. The amount of total capital that is allocated to the reserve account is determined by GAAP. The stress test applies quarterly updates of the weighted average guarantee rates for post-1996 Farmer Mac I assets, pre-1996 Farmer Mac I assets, and Farmer Mac II assets.
(4) Elements related to earnings rates and funding costs.
(A) The stress test can accommodate numerous specifications of earnings and funding costs. In general, both relationships are tied to the 10-year CMT interest rate. Specifically, each investment account, each loan item, and each liability account can be specified as fixed rate, or fixed spread to the 10-year CMT with initial rates determined by actual data. The stress test calculates specific spreads (weighted average yield less initial 10-year CMT) by category from the weighted average yield data supplied by Farmer Mac as described earlier. For example, the fixed spread for Farmer Mac I program post-1996 Act mortgages is calculated as follows:
(B) The resulting fixed spread of 1.40 percent is then added to the 10-year CMT when it is shocked to determine the new yield. For instance, if the 10-year CMT is shocked upward by 300 basis points, the yield on Farmer Mac I program post-1996 Act loans would change as follows:
(C) The adjusted yield is then used for income calculations when generating pro forma financial statements. All fixed-spread asset and liability classes are computed in an identical manner using starting yields provided as data inputs from Farmer Mac. The fixed-yield option holds the starting yield data constant for the entire 10-year stress test period. You must run the stress test using the fixed-spread option for all accounts except for discontinued program activities, such as Farmer Mac I program loans made before the 1996 Act. For discontinued loans, the fixed-rate specification must be used if the loans are primarily fixed-rate mortgages.
(5) Elements related to interest rate shock test. As described earlier, the interest rate shock test is implemented as a single set of forward interest rates. The stress test applies the up-rate scenario and down-rate scenario separately. The stress test also uses the results of Farmer Mac’s shock test, as described in paragraph c. of section 4.1, “Data Inputs,” to calculate the impact on equity from a stressful change in interest rates as discussed in section 3.0 titled, “Interest Rate Risk.” The stress test uses a schedule relating a change in interest rates to a change in the market value of equity. For instance, if interest rates are shocked upward so that the percentage change is 262 basis points, the linearly interpolated effective estimated duration of equity is −6.7405 years given Farmer Mac’s interest rate measurement results at 250 and 300 basis points of −6.7316 and 76.7688 years, respectively found on the effective duration schedule. The stress test uses the linearly interpolated estimated effective duration for equity to calculate the market value change by multiplying duration by the base value of equity before any rate change from Farmer Mac’s interest rate risk measurement results with the percentage change in interest rates.
a. This section describes the elements of the stress test in the worksheet named “Risk Measures” that reflect the interest rate shock and credit loss requirements of the stress test.
b. As described in section 3.1, the stress test applies the statutory interest rate shock to the initial 10-year CMT rate. It then generates a series of fixed annual interest rates for the 10-year stress period that serve as indices for earnings yields and cost of funds rates used in the stress test. (See the “Risk Measures” worksheet for the resulting interest rate series used in the stress test.)
c. The Credit Loss Module’s state-level loss rates, as described in section 2.4 entitled, “Calculation of Loss Rates for Use in the Stress Test,” are entered into the “Risk Measures” worksheet and applied to the loan balances that exist in each state. The distribution of loan balances by state is used to allocate new loans that replace loan products that roll off the balance sheet through time. The loss rates are applied both to the initial volume and to new loan volume that replaces expiring loans. The total life of loan losses that are expected at origination are then allocated through time based on a set of user entries describing the time-path of losses.
d. The loss rates estimated in the credit risk component of the stress test are based on an origination year concept, adjusted for loan seasoning. All losses arising from loans originated in a particular year are expressed as lifetime age-adjusted losses irrespective of when the losses actually occur. The fraction of the origination year loss rates that must be used to allocate losses through time are 43 percent to year 1, 17 percent to year 2, 11.66 percent to year 3, and 4.03 percent for the remaining years. The total allocated losses in any year are expressed as a percent of loan volume in that year to reflect the conversion to exposure year.
e. The credit loss exposure on rural utility volume, described in section 2.6, “Calculation of Loss Rates on Rural Utility Volume for Use in the Stress Test,” is entered into the “Risk Measures” worksheet applied to the volume balance. All losses arising from rural utility loans are expressed as annual loss rates and distributed over the weighted average maturity of the rural utility AgVantage Plus Volume, or as annual loss across the full 10-year modeling horizon in the case of rural utility Cash Window loans.
The worksheet labeled “Loan and Cashflow Data” contains the categorized loan data and cashflow accounting relationships that are used in the stress test to generate projections of Farmer Mac’s performance and condition. The steady-state formulation results in account balances that remain constant except for the effects of discontinued programs, maturing AgVantage Plus positions, and the LLRT adjustment. For assets with maturities under 1 year, the results are reported for convenience as though they matured only one time per year with the additional convention that the earnings/cost rates are annualized. For the pre-1996 Act assets, maturing balances are added back to post-1996 Act account balances. The liability accounts are used to satisfy the accounting identity, which requires assets to equal liabilities plus owner equity. In addition to the replacement of maturities under a steady state, liabilities are increased to reflect net losses or decreased to reflect resulting net gains. Adjustments must be made to the long- and short-term debt accounts to maintain the same relative proportions as existed at the beginning period from which the stress test is run with the exception of changes associated with the funding of defaulted loans during the LLRT period. The primary receivable and payable accounts are also maintained on this worksheet, as is a summary balance of the volume of loans subject to credit losses.
a. Information related to income performance through time is contained on the worksheet named “Income Statements.” Information from the first period balance sheet is used in conjunction with the earnings and cost-spread relationships from Farmer Mac supplied data to generate the first period’s income statement. The same set of accounts is maintained in this worksheet as “Loan and Cashflow Accounts” for consistency in reporting each annual period of the 10-year stress period of the test with the exception of the line item labeled “Interest reversals to carry loan losses” which incorporates the LLRT adjustment to earnings from the “Risk Measures” worksheet. Loans that defaulted do not earn interest or guarantee and commitment fees during LLRT period. The income from each interest-bearing account is calculated, as are costs of interest-bearing liabilities. In each case, these entries are the associated interest rate for that period multiplied by the account balances.
b. The credit losses described in section 2.0, “Credit Risk,” are transmitted through the provision account, as is any change needed to re-establish the target reserve balance. For determining risk-based capital, the reserve target is set to zero as previously indicated in section 4.2. Under the income tax section, it must first be determined whether it is appropriate to carry forward tax losses or recapture tax credits. The tax section then establishes the appropriate income tax liability that permits the calculation of final net income (loss), which is credited (debited) to the retained earnings account.
a. The worksheet named “Balance Sheets” is used to construct pro forma balance sheets from which the capital calculations can be performed. As can be seen in the Excel spreadsheet, the worksheet is organized to correspond to Farmer Mac’s normal reporting practices. Asset accounts are built from the initial financial statement conditions, and loan and cashflow accounts. Liability accounts including the reserve account are likewise built from the previous period’s results to balance the asset and equity positions. The equity section uses initial conditions and standard accounts to monitor equity through time. The equity section maintains separate categories for increments to paid-in-capital and retained earnings and for mark-to-market effects of changes in account values. The process described below in the “Capital” worksheet uses the initial retained earnings and paid-in-capital account to test for the change in initial capital that permits conformance to the statutory requirements. Therefore, these accounts must be maintained separately for test solution purposes.
b. The market valuation changes due to interest rate movements must be computed utilizing the linearly interpolated schedule of estimated equity effects due to changes in interest rates, contained in the “Assumptions & Relationships” worksheet. The stress test calculates the dollar change in the market value of equity by multiplying the base value of equity before any rate change from Farmer Mac’s interest rate risk measurement results, the linearly interpolated estimated effective duration of equity, and the percentage change in interest rates. In addition, the earnings effect of the measured dollar change in the market value of equity is estimated by multiplying the dollar change by the blended cost of funds rate found on the “Assumptions & Relationships” worksheet. Next, divide by 2 the computed earnings effect to approximate the impact as a theoretical shock in the interest rates that occurs at the mid-point of the income cycle from period t
c. After one cycle of income has been calculated, the balance sheet as of the end of the income period is then generated. The “Balance Sheet” worksheet shows the periodic pro forma balance sheets in a format convenient to track capital shifts through time.
d. The stress test considers Farmer Mac’s balance sheet as subject to interest rate risk and, therefore, the capital position reflects mark-to-market changes in the value of equity. This approach ensures that the stress test captures interest rate risk in a meaningful way by addressing explicitly the loss or gain in value resulting from the change in interest rates required by the statute.
The “Capital” worksheet contains the results of the required capital calculations as described below, and provides a method to calculate the level of initial capital that would permit Farmer Mac to maintain positive capital throughout the 10-year stress test period.
a. The stress test computes regulatory capital as the sum of the following:
(1) The par value of outstanding common stock;
(2) The par value of outstanding preferred stock;
(3) Paid-in capital;
(4) Retained earnings; and
(5) Reserve for loan and guarantee losses.
b. Inclusion of the reserve account in regulatory capital is an important difference compared to minimum capital as defined by the statute. Therefore, the calculation of reserves in the stress test is also important because reserves are reduced by loan and guarantee losses. The reserve account is linked to the income statement through the provision for loan-loss expense (provision). Provision expense reflects the amount of current income necessary to rebuild the reserve account to acceptable levels after loan losses reduce the account or as a result of increases in the level of risky mortgage positions, both on- and off-balance sheet. Provision reversals represent reductions in the reserve levels due to reduced risk of loan losses or loan volume of risky mortgage positions. The liabilities section of the “Balance Sheets” worksheet also includes separate line items to disaggregate the Guarantee and commitment obligation related to the Financial Accounting Standards Board Accounting Standards Codification Topic 460, Guarantees. This item is disaggregated to permit accurate calculation of regulatory capital post-adoption of FIN 45. When calculating the stress test, the reserve is maintained at zero to result in a risk-based capital requirement that includes reserves, thereby making the requirement comparable to the statutory definition of regulatory capital. By setting the reserve requirement to zero, the capital position includes all financial resources Farmer Mac has at its disposal to withstand risk.
a. Risk-based capital is calculated in the stress test as the minimum initial capital that would permit Farmer Mac to remain solvent for the ensuing 10 years. To this amount, an additional 30 percent is added to account for managerial and operational risks not reflected in the specific components of the stress test.
b. The relationship between the solvency constraint (i.e., future capital position not less than zero) and the risk-based capital requirement reflects the appropriate earnings and funding cost rates that may vary through time based on initial conditions. Therefore, the minimum capital at a future point in time cannot be directly used to determine the risk-based capital requirement. To calculate the risk-based capital requirement, the stress test includes a section to solve for the minimum initial capital value that results in a minimum capital level over the 10 years of zero at the point in time that it would actually occur. In solving for initial capital, it is assumed that reductions or additions to the initial capital accounts are made in the retained earnings accounts, and balanced in the debt accounts at terms proportionate to initial balances (same relative proportion of long- and short-term debt at existing initial rates). Because the initial capital position affects the earnings, and hence capital positions and appropriate discount rates through time, the initial and future capital are simultaneously determined and must be solved iteratively. The resulting minimum initial capital from the stress test is then reported on the “Capital” worksheet of the stress test. The “Capital” worksheet includes an element that uses Excel’s “solver” or “goal seek” capability to calculate the minimum initial capital that, when added (subtracted) from initial capital and replaced with debt, results in a minimum capital balance over the following 10 years of zero.
PART 653—FEDERAL AGRICULTURAL MORTGAGE CORPORATION RISK MANAGEMENT
§ 653.1 Definitions.
The following definitions apply to this part:
Corporation means the Federal Agricultural Mortgage Corporation and its affiliates.
FCA means the Farm Credit Administration, an independent Federal agency of the executive branch.
OSMO means the FCA Office of Secondary Market Oversight, which is responsible for the general supervision of the safe and sound exercise of the Corporation’s powers, functions, and duties and compliance with laws and regulations.
§ 653.2 General.
The Corporation’s board of directors must approve the overall risk-appetite of the Corporation and regularly monitor internal controls to provide reasonable assurance that risk-taking activities are conducted in a safe and sound manner.
§ 653.3 Risk management.
(a) Risk management program. The Corporation’s board of directors must establish, maintain, and periodically update an enterprise-wide risk management program addressing how the Corporation’s activities are exercised in a safe and sound manner. The implementation of the risk management program may reside with senior management. The risk management program at a minimum must:
(1) Periodically assess and document the Corporation’s risk profile.
(2) Align the Corporation’s risk profile with the board-approved risk appetite and the Corporation’s operational planning strategies and objectives.
(3) Specify management’s authority to carry out risk management responsibilities.
(4) Integrate risk management and control objectives into management goals and compensation structures.
(5) Comply with all applicable FCA regulations and policies.
(b) Risk committee. The Corporation’s board-level risk committee assists the full board of directors in the oversight of the enterprise-wide risk management program of the Corporation.
(1) The risk committee must have at least one member with an understanding of risk management commensurate with the Corporation’s capital structure, risk profile, complexity, activities, size, and other appropriate risk-related factors.
(2) The responsibilities of the risk committee include, but are not limited to:
(i) Periodically assessing management’s implementation of the enterprise-wide risk management program;
(ii) Recommending changes to the risk management program to keep the program commensurate with the Corporation’s capital structure, risk appetite, complexity, activities, size, and other appropriate risk-related factors; and
(iii) Receiving and reviewing regular reports directly from personnel responsible for implementing the Corporation’s risk management program.
(c) Management of risk. The Corporation must have a risk officer, however styled, who is responsible for implementing and maintaining the enterprise-wide risk management practices of the Corporation. The risk officer must have risk management experience commensurate with the Corporation’s capital structure, risk appetite, complexity, activities, and size. The responsibilities of the risk officer include, but are not limited to:
(1) Identifying and monitoring compliance with risk limits, exposures, and controls;
(2) Implementing risk management policies, procedures, and risk controls;
(3) Developing appropriate processes and systems for identifying and reporting risks, including emerging risks;
(4) Reporting on risk management issues, emerging risks, and compliance concerns; and
(5) Making recommendations on adjustments to the risk management policies, procedures, and risk controls of the Corporation.
§ 653.4 Internal controls.
(a) The Corporation’s board of directors must adopt an internal controls policy that provides adequate directions for, and identifies expectations in, establishing effective safety and soundness control over, and accountability for, the Corporation’s operations, programs, and resources.
(b) The internal controls system must address:
(1) The efficiency and effectiveness of the Corporation’s activities;
(2) Safeguarding the assets of the Corporation;
(3) Evaluating the reliability, completeness, and timely reporting of financial and management information;
(4) Compliance with applicable laws, regulations, regulatory directives, and the policies of the Corporation’s board of directors and senior management;
(5) The appropriate segregation of duties among the Corporation personnel so that personnel are not assigned conflicting responsibilities; and
(6) The completeness and quality of information provided to the Corporation’s board of directors.
(c) The Corporation is responsible for establishing and implementing an effective system to identify internal controls weaknesses and taking action to correct detected weaknesses. The Corporation must document:
(1) The process used to identify weaknesses,
(2) Any found weaknesses, and
(3) How identified weaknesses were addressed.
PART 654 [RESERVED]
PART 655—FEDERAL AGRICULTURAL MORTGAGE CORPORATION DISCLOSURE AND REPORTING REQUIREMENTS
Subpart A—General
§ 655.1 Definitions.
The following definitions apply to this part:
Act or authorizing statute means the Farm Credit Act of 1971, as amended.
Business day means a day the Corporation is open for business, excluding the legal public holidays identified in 5 U.S.C. 6103(a).
Corporation means the Federal Agricultural Mortgage Corporation and its affiliates.
FCA means the Farm Credit Administration, an independent Federal agency of the executive branch.
Material, when used to qualify a requirement to furnish information as to any subject, means the information required for those matters to which there is a substantial likelihood that a reasonable person would attach importance in making investor decisions or determining the financial condition of the Corporation.
NYSE means the New York Stock Exchange, a listing exchange.
OSMO means the FCA Office of Secondary Market Oversight, which is responsible for the general supervision of the safe and sound exercise of the Corporation’s powers, functions, and duties and compliance with laws and regulations.
Our or us means the FCA or OSMO, as appropriate to the context of the provision employing the term.
Person means individual or entity.
SEC means the Securities and Exchange Commission.
Securities Act means the Securities Act of 1933 (15 U.S.C. 77a et seq.) or the Exchange Act of 1934 (15 U.S.C. 78a et seq., or both, as appropriate to the context of the provision employing the term.
Signed, when referring to paper form, means a manual signature, and, when referring to electronic form, means marked in a manner that authenticates each signer’s identity.
Subpart B—Reports of Condition of the Federal Agricultural Mortgage Corporation
§ 655.10 Reports of condition.
(a) General. The Corporation must prepare and publish annual reports to its shareholders of its condition, including financial statements and related schedules, exhibits, and other documents that are part of the reports. The contents of each report must be equivalent in content to the annual report to shareholders required by the Securities Act unless we issue instructions otherwise.
(b) Signatures and certification. Each report issued under this subpart must be signed. The Corporation must designate the representatives who will sign each report. The name and position title of each person signing the report must be printed beneath his or her signature. The signatories must certify the report by using the SEC rules on certifications for disclosures in annual reports to shareholders.
(c) Distribution. The Corporation must distribute the signed annual report of condition to its shareholders within 120 days of its fiscal year-end. Within 5 days of signing, the Corporation must provide to us an electronic copy of every signed report that is distributed to its shareholders. If it is impossible to provide an electronic copy, a paper copy must be submitted within the required time frame and an electronic copy as soon as possible after that.
(1) The Corporation must publish on its Web site a copy of each annual report to shareholders within 3 business days of filing the report with us. The report must remain on the Web site until the next report is posted. When the reports are the same as those filed with the SEC, electronic links to the SEC filings Web site may be used in satisfaction of this requirement.
(2) Upon receiving a request for an annual report of condition from a stockholder, investor, or the public, the Corporation must promptly provide the requester the most recent annual report issued in compliance with this section.
§ 655.15 Interim reports, notices, and proxy statements.
(a) The Corporation must provide to us an electronic copy of every interim report, notice, and proxy statement filed with the SEC within 1 business day of filing the item with the SEC, including all papers and documents that are a part of the report, notice, or statement. If it is impossible to provide an electronic copy, a paper copy must be submitted within the required time frame and an electronic copy as soon as possible after that.
(b) The Corporation must publish a copy of each interim report, notice, and proxy statement on its Web site within 5 business days of filing the document(s) with the SEC. The Corporation may omit from these postings confidential, non-public information contained in the interim report, notice, or proxy statement. The interim report, notice, or proxy statement must remain on the Web site for 6 months or until the next annual report of condition is posted, whichever is later. Electronic links to the SEC filings Web site may be used in satisfaction of this requirement.
Subpart C—Reports Relating to Securities Activities of the Federal Agricultural Mortgage Corporation
§ 655.20 Securities not registered under the Securities Act.
The Corporation must make special filings with the Director of OSMO for securities either issued or guaranteed by the Corporation that are not registered under the Securities Act. These filings include, but are not limited to:
(a) Either one paper or one electronic copy of any offering circular, private placement memorandum, or information statement prepared in connection with the securities offering at or before the time of the securities offering.
(b) For securities backed by qualified loans as defined in section 8.0(9)(A) of the Act, either one paper or one electronic copy of the following within 1 business day of the finalization of the transaction:
(1) The private placement memoranda for securities sold to investors; and
(2) The final agreement and all supporting documents material to the Corporation’s purchase of a security under section 8.6(e) of the Act.
(c) For securities backed by qualified loans as defined in section 8.0(9)(B) of the Act, the Corporation must provide summary information on such securities issued during each calendar quarter in the form prescribed by us. Such summary information must be provided with each report of condition and performance (Call report) filed pursuant to § 621.12, and at such other times as we may require.
§ 655.21 Filings and communications with the U.S. Treasury, the SEC, and NYSE.
(a) The Corporation must send us an electronic copy of every filing made with U.S. Treasury, the SEC, or NYSE, including financial statements and related schedules, exhibits, and other documents that are a part of the filing. Such items must be filed with us no later than 1 business day after the U.S. Treasury, SEC, or NYSE filing. For those filings with the NYSE that duplicate ones made to the SEC, the Corporation may send only the SEC filing to us. If the filing is one addressed in subpart B of this part, no action under this paragraph is required. If it is impossible to provide an electronic copy, a paper copy must be submitted within the required time frame and an electronic copy as soon as possible after that.
(b) The Corporation must send us, within 3 business days and according to instructions provided by us, electronic copies of all substantive correspondence between the Corporation and the U.S. Treasury, the SEC, or NYSE that are directed at the activities of the Corporation.
(c) The Corporation must notify us within 1 business day if it becomes exempt or claims exemption from the filing requirements of the Securities Act. Notice is not required when the Corporation claims an exemption that is generally available under SEC rules and regulations to similarly situated filers.
PARTS 656-699 [RESERVED]
CHAPTER VII—NATIONAL CREDIT UNION ADMINISTRATION
SUBCHAPTER A—REGULATIONS AFFECTING CREDIT UNIONS
PART 700—DEFINITIONS
§ 700.1 Scope.
The definitions in § 700.2 apply to terms used in this chapter unless the context indicates otherwise. Many additional definitions appear in the parts where the terms are used.
§ 700.2 Definitions.
As used in this chapter:
Act means the Federal Credit Union Act (12 U.S.C. 1751, et seq.).
Administration means the National Credit Union Administration.
Board or NCUA Board refer to the Board of the National Credit Union Administration.
Credit union means a nonprofit financial cooperative chartered under the Federal Credit Union Act or under the laws of any State, the District of Columbia, the several territories and possessions of the United States, or the Commonwealth of Puerto Rico, which laws provide for the organization of financial cooperatives similar in principle and objectives to cooperatives chartered under the Federal Credit Union Act.
Federally insured credit union means any credit union whose member accounts are insured by NCUA according to the provisions of Title II of the Federal Credit Union Act (12 U.S.C. 1782 et seq.).
Insolvency. (1) A credit union will be determined to be insolvent when the total amount of its shares exceeds the present cash value of its assets after providing for liabilities unless:
(i) It is determined by the Board that the facts that caused the deficient share-asset ratio no longer exist; and
(ii) The likelihood of further depreciation of the share-asset ratio is not probable; and
(iii) The return of the share-asset ratio to its normal limits within a reasonable time for the credit union concerned is probable; and
(iv) The probability of a further potential loss to the insurance fund is negligible.
(2) For purposes of this section, the following definitions are used:
(i) Cash value of assets. Recorded value will be considered the cash value of any asset account providing accepted accounting principles and practices are followed and the provisions of law, regulation, and bylaws are met.
(ii) Liabilities. Recorded liabilities which are due and payable, excluding shares of members and non-members, are considered liabilities.
NCUA refers to the National Credit Union Administration.
Net worth. Unless otherwise noted, the term “net worth,” as applied to credit unions, has the same meaning as set forth in § 702.2 of this chapter.
Non-federally insured credit union means a credit union chartered under the laws of any State, the District of Columbia, the several territories and possessions of the United States, the Panama Canal Zone, or the Commonwealth of Puerto Rico, whose member accounts are not insured by the NCUA.
ONES credit union means a credit union subject to supervision by the Office of National Examinations and Supervision (ONES) and includes tier II and tier III credit unions, as defined under part 702 of this chapter. Tier I credit unions are subject to supervision by the appropriate Regional Office.
Paid-in and unimpaired capital and surplus or unimpaired capital and surplus mean shares plus post-closing, undivided earnings. This does not include regular reserves or special reserves required by law, regulation or special agreement between the credit union and its regulator or share insurer. “Paid-in and unimpaired capital and surplus” for purposes of the Central Liquidity Facility is defined in § 725.2(o) of this chapter.
Regional Director means the representative of NCUA in the designated geographical area in which the office of the federally insured credit union is located or, for ONES credit unions, the Director of the Office of National Examinations and Supervision.
Regional Office means the office of NCUA located in the designated geographical areas in which the office of the federally insured credit union is located or, for ONES credit unions, the Office of National Examinations and Supervision.
State means a state of the United States, the District of Columbia, any of the several territories and possessions of the United States, and the Commonwealth of Puerto Rico.
Troubled condition means: (1) In the case of an insured natural person credit union:
(i) A federal credit union that has been assigned a 4 or 5 CAMELS composite rating by NCUA; or
(ii) A federally insured, state-chartered credit union that has been assigned a 4 or 5 CAMELS composite rating by either NCUA, after an on-site contact, or its state supervisor; or
(iii) A federal credit union or a federally insured, state-chartered credit union that has been granted assistance under section 208 of the Federal Credit Union Act, 12 U.S.C. 1788, that remains outstanding and unextinguished.
(2) In the case of an insured corporate credit union:
(i) A Federal credit union that has been assigned a 4 or 5 CAMELS rating by NCUA; or
(ii) A federally insured, state-chartered credit union that has been assigned a 4 or 5 CAMELS rating by either NCUA, after an on-site contact, or its state supervisor; or
(iii) A Federal credit union or a federally insured, state-chartered credit union that has been granted assistance under section 208 of the Federal Credit Union Act, 12 U.S.C 1788, that remains outstanding and unextinguished.
Unimpaired capital and surplus means the same as “paid-in and unimpaired capital and surplus,” as defined in paragraph (f) of this section.
PART 701—ORGANIZATION AND OPERATION OF FEDERAL CREDIT UNIONS
§ 701.1 Federal credit union chartering, field of membership modifications, and conversions.
National Credit Union Administration policies concerning chartering, field of membership modifications, and conversions, also known as the Chartering and Field of Membership Manual, are set forth in appendix B to this part and are available on-line at http://www.ncua.gov.
§ 701.2 Federal credit union bylaws.
(a) Federal credit unions must operate in accordance with their approved bylaws. The Federal Credit Union Bylaws are hereby published as appendix A to part 701 pursuant to 5 U.S.C. 552(a)(1) and accompanying regulations. Federal credit unions may adopt amendments to their bylaws as provided in the Bylaws, with the approval of the Board.
(b) Copies of the Federal Credit Union Bylaws may be obtained at http://www.ncua.gov or by request addressed to [email protected] or National Credit Union Administration, 1775 Duke Street, Alexandria, VA 22314.
(c) The National Credit Union Administration may issue revisions or amendments of the Federal Credit Union Bylaws from time to time. An historic file of amendments or revisions is maintained and made available for inspection at the National Credit Union Administration, 1775 Duke Street, Alexandria, VA 22314.
§ 701.3 Member inspection of credit union books, records, and minutes.
(a) Member inspection rights. A group of members of a Federal credit union has the right, upon submission of a petition to the credit union as described in paragraph (b) of this section, to inspect and copy nonconfidential portions of the credit union’s:
(1) Accounting books and records; and
(2) Minutes of the proceedings of the credit union’s members, board of directors, and committees of directors.
(b) Petition for inspection. The petition must describe the particular records to be inspected and state a proper purpose for the inspection, that is, a purpose related to the protection of the members’ financial interests in the credit union. The petition must state that the petitioners as a whole, or certain named petitioners, agree to pay the direct and reasonable costs associated with search and duplication of requested material. The petition must also state that the inspection is not desired for any purpose other than the stated purpose; that the members signing the petition will not sell or offer for sale any information obtained from the credit union; and that the members signing the petition have not within five years preceding the signature date sold or offered for sale any information acquired from the credit union or aided or abetted any person in procuring any information from the credit union for purposes of sale. The petition must name one member, and one alternate member, who will represent the petitioners on issues such as inspection procedures, costs, and potential disputes. At least one percent of the credit union’s members, with a minimum of 20 members and a maximum of 500 members, must sign the petition. Each member who signs the petition must have been a member of the credit union for at least 180 days at the time the petitioners submit the petition to the credit union.
(c) Inspection procedures. (1) A Federal credit union must respond to petitioners within 14 days of receiving a petition. In its response, a credit union must inform petitioners either that it will provide inspection of the requested material and, if so, when, or, if a credit union is going to withhold all or part of the requested material, it must inform petitioners what part of the requested material it intends to withhold and the reasons for withholding the requested material. As soon as possible after receiving a petition, a credit union must schedule inspection and copying of nonconfidential requested material it determines petitioners may inspect and copy.
(2) Inspection may be made in person or by agent or attorney and at any reasonable time or times. The credit union may, at its option, skip inspection and deliver copies of requested documents directly to the petitioners. Member inspection rights under this section are in addition to any other member inspection rights afforded by the credit union’s charter or bylaws or other Federal law or Federal regulation.
(3) If the credit union denies inspection because the petitioners have failed to obtain the minimum number of valid signatures, the credit union must inform the petitioners which signatures were not valid and why.
(d) Confidential books, records, and minutes. Members do not have the right to inspect any portion of the books, records, or minutes of a Federal credit union if:
(1) Federal law or regulation prohibits disclosure of that portion;
(2) The publication of that portion could cause the credit union predictable and substantial financial harm;
(3) That portion contains nonpublic personal information as defined in 12 CFR 1016.3; or
(4) That portion contains information about credit union employees or officials the disclosure of which would constitute a clearly unwarranted invasion of personal privacy.
(e) Costs. A Federal credit union may charge petitioners the direct and reasonable costs associated with search and duplication. The credit union may not charge for other costs, including indirect costs or attorney’s fees.
(f) Dispute resolution. (1) In the event of a dispute between a federal credit union and its members concerning a petition for inspection or the associated costs, either party may submit the dispute to the regional director. The regional director, after obtaining the views of both parties, will direct the credit union either to withhold the disputed materials or to make them available for member inspection and copying. The regional director may place conditions upon release. The decision of the regional director is a final agency decision and is not appealable to the Board.
(2) The regional director has the discretion to refer any dispute to the credit union’s supervisory committee for review and resolution. If petitioners are not satisfied with the supervisory committee’s response, they may resubmit the dispute to the regional director.
(a) General direction and control of a Federal credit union. The board of directors is responsible for the general direction and control of the affairs of each Federal credit union. While a Federal credit union board of directors may delegate the execution of operational functions to Federal credit union personnel, the ultimate responsibility of each Federal credit union’s board of directors for that Federal credit union’s direction and control is non-delegable.
(b) Duties of Federal credit union directors. Each Federal credit union director has the duty to:
(1) Carry out his or her duties as a director in good faith, in a manner such director reasonably believes to be in the best interests of the membership of the Federal credit union as a whole, and with the care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances;
(2) Administer the affairs of the Federal credit union fairly and impartially and without discrimination in favor of or against any particular member;
(3) At the time of election or appointment, or within a reasonable time thereafter, not to exceed six months, have at least a working familiarity with basic finance and accounting practices, including the ability to read and understand the Federal credit union’s balance sheet and income statement and to ask, as appropriate, substantive questions of management and the internal and external auditors; and
(4) Direct management’s operations of the Federal credit union in conformity with the requirements set forth in the Federal Credit Union Act, this chapter, other applicable law, and sound business practices.
(c) Authority regarding staff and outside consultants. (1) In carrying out its duties and responsibilities, each Federal credit union’s board of directors and all its committees have authority to retain staff and outside counsel, independent accountants, financial advisors, and other outside consultants at the expense of the Federal credit union.
(2) Federal credit union staff providing services to the board of directors or any committee of the board under paragraph (c)(1) of this section may be required by the board of directors or such committee to report directly to the board or such committee, as appropriate.
(3) In discharging board or committee duties a director who does not have knowledge that makes reliance unwarranted is entitled to rely on information, opinions, reports or statements, including financial statements and other financial data, prepared or presented by any of the persons specified in paragraph (d).
(d) Reliance. A director may rely on:
(1) One or more officers or employees of the Federal credit union who the director reasonably believes to be reliable and competent in the functions performed or the information, opinions, reports or statements provided;
(2) Legal counsel, independent public accountants, or other persons retained by the Federal credit union as to matters involving skills or expertise the director reasonably believes are matters:
(i) Within the particular person’s professional or expert competence, and
(ii) As to which the particular person merits confidence; and
(3) A committee of the board of directors of which the director is not a member if the director reasonably believes the committee merits confidence.
§ 701.5 [Reserved]
§ 701.6 Fees paid by Federal credit unions.
(a) Basis for assessment. Each calendar year, or as otherwise directed by the NCUA Board, each Federal credit union shall pay an operating fee to the NCUA for the current fiscal year (January 1 to December 31) in accordance with a schedule fixed by the Board from time to time.
(1) General. The operating fee shall be based on the average of total assets of each Federal credit union based on data reported in NCUA Forms 5300 and 5310 from the four quarters immediately preceding the time the Board approves the agency’s budget or as otherwise determined pursuant to paragraph (b) of this section.
(2) Exclusions from total assets. For purposes of calculating the operating fee, total assets shall not include any loans on the books of a natural person Federal credit union made under the Small Business Administration’s Paycheck Protection Program, 15 U.S.C. 636(a)(36), or any similar program approved for exclusion by the NCUA Board.
(b) Coverage. The operating fee shall be paid by each Federal credit union engaged in operations as of January 1 of each calendar year in accordance with paragraph (a) of this section, except as otherwise provided by this paragraph (b).
(1) New charters. A newly chartered Federal credit union will not pay an operating fee until the year following the first full calendar year after the date chartered.
(2) Conversions. (i) In the first calendar year following conversion:
(A) A federally insured state-chartered credit union that converts to a Federal credit union charter must pay an operating fee based on the average assets reported in the year of conversion on NCUA Forms 5300 or 5310 from the four quarters immediately preceding the time the Board approves the agency’s budget in the year of conversion.
(B) An entity not insured by the NCUA that converts to a Federal credit union charter must pay an operating fee based on the assets, or average thereof, reported on NCUA Forms 5300 or 5310 for any one or more quarters immediately preceding the time the Board approves the agency’s budget in the year of conversion.
(ii) A Federal credit union converting to a different charter will not receive a refund of any operating fees paid to the NCUA.
(3) Mergers. (i) In the first calendar year following merger:
(A) A continuing Federal credit union that has merged with one or more federally insured credit unions must pay an operating fee based on the average combined total assets of the Federal credit union and any merged federally insured credit unions as reported on NCUA Forms 5300 or 5310 in the four quarters immediately preceding the time the Board approves the agency’s budget in the merger year.
(B) For purposes of this paragraph (b)(3), a purchase and assumption transaction where the continuing Federal credit union purchases all or essentially all of the assets of another depository institution shall be deemed a merger.
(ii) A Federal credit union that merges with a Federal or state-chartered credit union, or an entity not insured by the NCUA, will not receive a refund of any operating fee paid to the NCUA.
(4) Liquidations. A Federal credit union placed in liquidation will not pay any operating fee after the date of liquidation.
(c) Notification. Each Federal credit union shall be notified at least 30 days in advance of the schedule of fees to be paid. A Federal credit union may submit written comments to the Board for consideration regarding the existing fee schedule. Any subsequent revision to the schedule shall be provided to each Federal credit union at least 15 days before payment is due.
(d) Assessment of Administrative Fee and Interest for Delinquent Payment. Each Federal credit union shall pay to the Administration an administrative fee, the costs of collection, and interest on any delinquent payment of its operating fee. A payment will be considered delinquent if it is postmarked later than the date stated in the notice to the credit union provided under § 701.6(c). The National Credit Union Administration may waive or abate charges or collection of interest if circumstances warrant.
(1) The administrative fee for a delinquent payment shall be an amount fixed from time to time by the National Credit Union Administration Board and based upon the administrative costs of such delinquent payments to the Administration in the preceding year.
(2) The costs of collection shall be the actual hours expended by Administration personnel multiplied by the average hourly salary and benefits costs of such personnel as determined by the National Credit Union Administration Board.
(3) The interest rate charged on any delinquent payment shall be the U.S. Department of the Treasury Tax and Loan Rate in effect on the date when the payment is due as provided in 31 U.S.C. 3717.
(4) If a credit union makes a combined payment of its operating fee and its share insurance deposit as provided in § 741.4 of this chapter and such payment is delinquent, only one administrative fee will be charged and interest will be charged on the total combined payment.
§§ 701.7-701.13 [Reserved]
§ 701.14 Change in official or senior executive officer in credit unions that are newly chartered or are in troubled condition.
(a) Statement of scope and purpose. Section 212 of the Federal Credit Union Act (12 U.S.C. 1790a) sets forth conditions under which a credit union must notify NCUA in writing of any proposed changes in its board of directors, committee members or senior executive staff. The regulation only applies in cases of newly chartered credit unions and credit unions in troubled condition.
(b) Definitions. For the purposes of this section:
(1) Committee member means any individual who serves as an official of the credit union in the capacity of a credit committee member or supervisory committee member.
(2) Senior executive officer means a credit union’s chief executive officer (typically this individual holds the title of president or treasurer/manager), any assistant chief executive officer (e.g., any assistant president, any vice president or any assistant treasurer/manager) and the chief financial officer (controller). The term “senior executive officer” also includes employees of an entity, such as a consulting firm, hired to perform the functions of positions covered by the regulation.
(3) In the case of an insured natural person credit union, Troubled condition means:
(i) A federal credit union that has been assigned a 4 or 5 CAMELS composite rating by NCUA; or
(ii) A federally insured, state-chartered credit union that has been assigned a 4 or 5 CAMELS composite rating by either NCUA, after an on-site contact, or its state supervisor; or
(iii) A federal credit union or a federally insured, state-chartered credit union that has been granted assistance under section 208 of the Federal Credit Union Act, 12 U.S.C. 1788, that remains outstanding and unextinguished.
(4) In the case of an insured corporate credit union, Troubled condition means:
(i) A Federal credit union that has been assigned a 4 or 5 CAMELS rating by NCUA; or
(ii) A federally insured, state-chartered credit union that has been assigned a 4 or 5 CAMELS rating by either NCUA, after an on-site contact, or its state supervisor; or
(iii) A Federal credit union or a federally insured, state-chartered credit union that has been granted assistance under section 208 of the Federal Credit Union Act, 12 U.S.C. 1788, that remains outstanding and unextinguished.
(c) Procedures for Notice of Proposed Change in Official or Senior Executive Officer—(1) Prior Notice Requirement. An insured credit union must give NCUA written notice at least 30 days before the effective date of any addition or replacement of a member of the board of directors or committee member or the employment or change in responsibilities of any individual to a position of senior executive officer if:
(i) The credit union has been chartered for less than two years; or
(ii) The credit union meets the definition of troubled condition in paragraph (b)(3) or (4) of this section.
(2) Waiver of Prior Notice—(i) Waiver requests. Parties may petition the appropriate Regional Director for a waiver of the prior notice required under this section. Waiver may be granted if it is found that delay could harm the credit union or the public interest.
(ii) Automatic waiver. In the case of the election of a new member of the board of directors or credit committee member at a meeting of the members of a federally insured credit union, the prior 30-day notice is automatically waived and the individual may immediately begin serving, provided that a complete notice is filed with the appropriate Regional Director within 48 hours of the election. If NCUA disapproves a director or credit committee member, the board of directors of the credit union may appoint its own alternate, to serve until the next annual meeting, contingent on NCUA approval.
(iii) Effect on disapproval authority. A waiver does not affect the authority of NCUA to issue a Notice of Disapproval within 30 days of the waiver or within 30 days of any subsequent required notice.
(3) Filing procedures—(i) Where to file. Notices will be filed with the appropriate Regional Director or, in the case of a corporate credit union or a ONES credit union under part 700 of this chapter, with the Director of the Office of National Examinations and Supervision. All references to Regional Director will, for corporate credit unions and ONES credit unions under part 700 of this chapter, mean the Director of Office of National Examinations and Supervision. State-chartered federally insured credit unions will also file a copy of the notice with their state supervisor.
(ii) Contents. The notice must contain information about the competence, experience, character, or integrity of the individual on whose behalf the notice is submitted. The Regional Director or his or her designee may require additional information. The information submitted must include the identity, personal history, business background, and experience of the individual, including material business activities and affiliations during the past five years, and a description of any material pending legal or administrative proceedings in which the individual is a party and any criminal indictment or conviction of the individual by a state or federal court. Each individual on whose behalf the notice is filed must attest to the validity of the information filed. At the option of the individual, the information may be forwarded to the Regional Director by the individual; however, in such cases, the credit union must file a notice to that effect.
(iii) Processing. Within ten calendar days after receiving the notice, the Regional Director will inform the credit union either that the notice is complete or that additional, specified information is needed and must be submitted within 30 calendar days. If the initial notice is complete, the Regional Director will issue a written decision of approval or disapproval to the individual and the credit union within 30 calendar days of receipt of the notice. If the initial notice is not complete, the Regional Director will issue a written decision within 30 calendar days of receipt of the original notice plus the amount of time the credit union takes to provide the requested additional information. If the additional information is not submitted within 30 calendar days of the Regional Director’s request, the Regional Director may either disapprove the proposed individual or review the notice based on the information provided. If the credit union and the individual have submitted all requested information and the Regional Director has not issued a written decision within the applicable time period, the individual is approved.
(d) Commencement of Service. A proposed director, committee member, or senior executive officer may begin service after the end of the 30-day period or any other additional period as provided under paragraph (c)(3)(iii) of this section, unless the NCUA disapproves the notice before the end of the period.
(e) Notice of disapproval. NCUA may disapprove the individual serving as a director, committee member or senior executive officer if it finds that the competence, experience, character, or integrity of the individual with respect to whom a notice under this section is submitted indicates that it would not be in the best interests of the members of the credit union or of the public to permit the individual to be employed by, or associated with, the credit union. The Notice of Disapproval will advise the parties of their rights to request reconsideration from the Regional Director and/or file an appeal with the NCUA Board in accordance with the procedures set forth in subpart B to part 746 of this chapter.
§§ 701.15-701.18 [Reserved]
§ 701.19 Benefits for employees of Federal credit unions.
(a) General authority. A federal credit union may provide employee benefits, including retirement benefits, to its employees and officers who are compensated in conformance with the Act and the bylaws, individually or collectively with other credit unions. The kind and amount of these benefits must be reasonable given the federal credit union’s size, financial condition, and the duties of the employees.
(b) Plan trustees and custodians. Where a federal credit union is the benefit plan trustee or custodian, the plan must be authorized and maintained in accordance with the provisions of part 724 of this chapter. Where the benefit plan trustee or custodian is a party other than a federal credit union, the benefit plan must be maintained in accordance with applicable laws governing employee benefit plans, including any applicable rules and regulations issued by the Secretary of Labor, the Secretary of the Treasury, or any other federal or state authority exercising jurisdiction over the plan.
(c) Investment authority. A federal credit union investing to fund an employee benefit plan obligation is not subject to the investment limitations of the Act and part 703 or, as applicable, part 704, of this chapter and may purchase an investment that would otherwise be impermissible if the investment is directly related to the federal credit union’s obligation or potential obligation under the employee benefit plan and the federal credit union holds the investment only for as long as it has an actual or potential obligation under the employee benefit plan.
(d) Defined benefit plans. Under paragraph (c) of this section, a federal credit union may invest to fund a defined benefit plan if the investment meets the conditions provided in that paragraph. If a federal credit union invests to fund a defined benefit plan that is not subject to the fiduciary responsibility provisions of part 4 of the Employee Retirement Income Security Act of 1974, it should diversify its investment portfolio to minimize the risk of large losses unless it is clearly prudent not to do so under the circumstances.
(e) Liability insurance. No federal credit union may occupy the position of a fiduciary, as defined in the Employee Retirement Income Security Act of 1974 and the rules and regulations issued by the Secretary of Labor, unless it has obtained appropriate liability insurance as described and permitted by Section 410(b) of the Employee Retirement Income Security Act of 1974.
(f) Definitions. For this section, defined benefit plan has the same meaning as in 29 U.S.C. 1002(35) and employee benefit plan has the same meaning as in 29 U.S.C. 1002(3).
§ 701.20 Suretyship and guaranty.
(a) Scope. This section authorizes a federal credit union to enter into a suretyship or guaranty agreement as an incidental powers activity. This section does not apply to the guaranty of public deposits or the assumption of liability for member accounts.
(b) Definitions. A suretyship binds a federal credit union with its principal to pay or perform an obligation to a third person. Under a guaranty agreement, a federal credit union agrees to satisfy the obligation of the principal only if the principal fails to pay or perform. The principal is the person primarily liable, for whose performance of his obligation the surety or guarantor has become bound.
(c) Requirements. The suretyship or guaranty agreement must be for the benefit of a principal that is a member and is subject to the following conditions:
(1) The federal credit union limits its obligations under the agreement to a fixed dollar amount and a specified duration;
(2) The federal credit union’s performance under the agreement creates an authorized loan that complies with the applicable lending regulations, including the limitations on loans to one member or associated members or officials for purposes of §§ 701.21(c)(5), (d); 723.4(c); and
(3) The federal credit union obtains a segregated deposit from the member that is sufficient in amount to cover the federal credit union’s total potential liability.
(d) Collateral. A segregated deposit under this section includes collateral:
(1) In which the federal credit union has perfected its security interest (for example, if the collateral is a printed security, the federal credit union must have obtained physical control of the security, and, if the collateral is a book entry security, the federal credit union must have properly recorded its security interest); and
(2) That has a market value, at the close of each business day, equal to 100 percent of the federal credit union’s total potential liability and is composed of:
(i) Cash;
(ii) Obligations of the United States or its agencies;
(iii) Obligations fully guaranteed by the United States or its agencies as to principal and interest; or
(iv) Notes, drafts, or bills of exchange or banker’s acceptances that are eligible for rediscount or purchase by a Federal Reserve Bank; or
(3) That has a market value equal to 110 percent of the federal credit union’s total potential liability and is composed of:
(i) Real estate, the value of which is established by a signed appraisal or evaluation in accordance with part 722 of this chapter. In determining the value of the collateral, the federal credit union must factor in the value of any existing senior mortgages, liens or other encumbrances on the property except those held by the principal to the suretyship or guaranty agreement; or
(ii) Marketable securities that the federal credit union is authorized to invest in. The federal credit union must ensure that the value of the security is 110 percent of the obligation at all times during the term of the agreement.
§ 701.21 Loans to members and lines of credit to members.
(a) Statement of scope and purpose. Section 701.21 complements the provisions of section 107(5) of the Federal Credit Union Act (12 U.S.C. 1757(5)) authorizing Federal credit unions to make loans to members and issue lines of credit (including credit cards) to members. Section 107(5) of the Act contains limitations on matters such as loan maturity, rate of interest, security, and prepayment penalties. Section 701.21 interprets and implements those provisions. In addition, § 701.21 states the NCUA Board’s intent concerning preemption of state laws, and expands the authority of Federal credit unions to enforce due-on-sale clauses in real property loans. Also, while § 701.21 generally applies to Federal credit unions only, certain provisions apply to loans made by federally insured, state-chartered credit unions as specified in § 741.203 of this chapter. Part 722 of this chapter sets forth requirements for appraisals for certain real estate secured loans made under § 701.21 and any other applicable lending authority. Finally, it is noted that § 701.21 does not apply to loans by Federal credit unions to other credit unions (although certain statutory limitations in section 107 of the Act apply), nor to loans to credit union organizations which are governed by section 107(5)(D) of the Act and part 712 of this chapter.
(b) Relation to other laws—(1) Preemption of state laws. Section 701.21 is promulgated pursuant to the NCUA Board’s exclusive authority as set forth in section 107(5) of the Federal Credit Union Act (12 U.S.C 1757(5)) to regulate the rates, terms of repayment and other conditions of Federal credit union loans and lines of credit (including credit cards) to members. This exercise of the Board’s authority preempts any state law purporting to limit or affect:
(i)(A) Rates of interest and amounts of finance charges, including:
(1) The frequency or the increments by which a variable interest rate may be changed;
(2) The index to which a variable interest rate may be tied;
(3) The manner or timing of notifying the borrower of a change in interest rate;
(4) The authority to increase the interest rate on an existing balance;
(B) Late charges; and
(C) Closing costs, application, origination, or other fees;
(ii) Terms of repayment, including:
(A) The maturity of loans and lines of credit;
(B) The amount, uniformity, and frequency of payments, including the accrual of unpaid interest if payments are insufficient to pay all interest due;
(C) Balloon payments; and
(D) Prepayment limits;
(iii) Conditions related to:
(A) The amount of the loan or line of credit;
(B) The purpose of the loan or line of credit;
(C) The type or amount of security and the relation of the value of the security to the amount of the loan or line of credit;
(D) Eligible borrowers; and
(E) The imposition and enforcement of liens on the shares of borrowers and accommodation parties.
(2) Matters not preempted. Except as provided by paragraph (b)(1) of this section, it is not the Board’s intent to preempt state laws that do not affect rates, terms of repayment and other conditions described above concerning loans and lines of credit, for example:
(i) Insurance laws;
(ii) Laws related to transfer of and security interests in real and personal property (see, however, paragraph (g)(6) of this section concerning the use and exercise of due-on-sale clauses);
(iii) Conditions related to:
(A) Collection costs and attorneys’ fees;
(B) Requirements that consumer lending documents be in “plain language;” and
(C) The circumstances in which a borrower may be declared in default and may cure default.
(3) Other Federal law. Except as provided by paragraph (b)(1) of this section, it is not the Board’s intent to preempt state laws affecting aspects of credit transactions that are primarily regulated by Federal law other than the Federal Credit Union Act, for example, state laws concering credit cost disclosure requirements, credit discrimination, credit reporting practices, unfair credit practices, and debt collection practices. Applicability of state law in these instances should be determined pursuant to the preemption standards of the relevant Federal law and regulations.
(4) Examination and enforcement. Except as otherwise agreed by the NCUA Board, the Board retains exclusive examination and administrative enforcement jurisdiction over Federal credit unions. Violations of Federal or applicable state laws related to the lending activities of a Federal credit union should be referred to the appropriate NCUA regional office.
(5) Definition of State law. For purposes of paragraph (b) of this section “state law” means the constitution, laws, regulations and judicial decisions of any state, the District of Columbia, the several territories and possessions of the United States, and the Commonwealth of Puerto Rico.
(c) General rules—(1) Scope. The following general rules apply to all loans to members and, where indicated, all lines of credit (including credit cards) to members, except as otherwise provided in the remaining provisions of § 701.21.
(2) Written policies. The board of directors of each Federal credit union shall establish written policies for loans and lines of credit consistent with the relevant provisions of the Act, NCUA’s regulations, and other applicable laws and regulations.
(3) Credit applications and overdrafts. Consistent with policies established by the board of directors, the credit committee or loan officer shall ensure that a credit application is kept on file for each borrower supporting the decision to make a loan or establish a line of credit. A credit union may advance money to a member to cover an account deficit without having a credit application from the borrower on file if the credit union has a written overdraft policy. The policy must: set a cap on the total dollar amount of all overdrafts the credit union will honor consistent with the credit union’s ability to absorb losses; establish a time limit not to exceed forty-five calendar days for a member either to deposit funds or obtain an approved loan from the credit union to cover each overdraft; limit the dollar amount of overdrafts the credit union will honor per member; and establish the fee and interest rate, if any, the credit union will charge members for honoring overdrafts.
(4) Maturity—(i) In general. The maturity of a loan to a member may not exceed 15 years. Lines of credit are not subject to a statutory or regulatory maturity limit. Amortization of line of credit balances and the type and amount of security on any line of credit shall be as determined by contract between the Federal credit union and the member/borrower. In the case of a lending action that qualifies as a “new loan” under GAAP, the new loan’s maturity is calculated from the new date of origination.
(ii) Exceptions. Notwithstanding the general 15-year maturity limit on loans to members, a federal credit union may make loans with maturities:
(A) As specified in the law, regulations or program under which a loan is secured, in full or in part, by the insurance or guarantee of, or with an advance commitment to purchase the loan, in full or in part, by the Federal Government, a State government or any agency of either, as provided in paragraph (e) of this section;
(B) of up to 20 years or such longer term as is provided in paragraph (f) of this section; and
(C) of up to 40 years or such longer term as is provided in paragraph (g) of this section.
(5) Ten percent limit. No loan or line of credit advance may be made to any member if such loan or advance would cause that member to be indebted to the Federal credit union upon loans and advances made to the member in an aggregate amount exceeding 10% of the credit union’s total unimpaired capital and surplus. In the case of loan participations as defined in § 701.22(a) of this part and commercial loans as defined in § 723.2 of this chapter, additional limitations apply as set forth in § 701.22(b)(5)(iv) of this part and § 723.4(c) of this chapter.
(6) Early payment. A member may repay a loan, or outstanding balance on a line of credit, prior to maturity in whole or in part on any business day without penalty.
(7) Loan interest rates—(i) General. Except when the Board establishes a higher maximum rate, federal credit unions may not extend credit to members at rates exceeding 15 percent per year on the unpaid balance inclusive of all finance charges. Federal credit unions may use variable rates of interest but only if the effective rate over the term of a loan or line of credit does not exceed the maximum permissible rate.
(ii) Temporary rates. (A) At least every 18 months, the Board will determine if federal credit unions may extend credit to members at an interest rate exceeding 15 percent. After consultation with appropriate congressional committees, the Department of Treasury, and other federal financial institution regulatory agencies, the Board may establish a rate exceeding the 15 percent per year rate, if it determines money market interest rates have risen over the preceding six-month period and prevailing interest rate levels threaten the safety and soundness of individual federal credit unions as evidenced by adverse trends in liquidity, capital, earnings, and growth.
(B) When the Board establishes a higher maximum rate, the Board will provide notice to federal credit unions of the adjusted rate by issuing a Letter to Federal Credit Unions, as well as providing information in other NCUA publications and in a statement for the press.
(C) Federal credit unions may continue to charge rates exceeding the established maximum rate only on existing loans or lines of credit made before the effective date of any lowering of the maximum rate.
(iii) Payday alternative loans (PALs I)—(A) Minimum requirements for PALs I. Notwithstanding any other provision of this section, a federal credit union may charge an interest rate that is 1000 basis points above the maximum interest rate established by the Board under paragraph (c)(7)(ii) of this section provided the federal credit union is offering closed-end credit, as defined in § 1026.2(a)(10) of this title, in accordance with the following conditions:
(1) The principal of the payday alternative loan is not less than $200 or more than $1,000;
(2) The payday alternative loan has a minimum maturity of one month and a maximum maturity of six months;
(3) The federal credit union does not make more than three payday alternative loans provided under either this paragraph (c)(7)(iii) or paragraph (c)(7)(iv) of this section in any rolling six-month period to any one borrower and does not make more than one payday alternative loan provided under either this paragraph (c)(7)(iii) or paragraph (c)(7)(iv) of this section at a time to any borrower;
(4) The federal credit union does not rollover any payday alternative loan provided under this paragraph (c)(7)(iii) or paragraph (c)(7)(iv) of this section, provided that the prohibition against rollovers does not apply to an extension of a payday alternative loan term within the maximum loan term set forth in paragraph (c)(7)(iii)(A)(3) of this section that does not include any additional fees assessed or extend additional credit to the borrower;
(5) The federal credit union fully amortizes the payday alternative loan;
(6) The federal credit union requires the borrower to be a member of the credit union for at least one month before receiving a payday alternative loan provided under this paragraph (c)(7)(iii);
(7) The federal credit union charges a reasonable application fee to all members applying for a new payday alternative loan offered under this paragraph (c)(7)(iii) that reflects the actual costs associated with processing the application, but that in no case exceeds $20; and
(8) The federal credit union includes, in its written lending policies, a limit on the aggregate dollar amount of payday alternative loans made under this paragraph (c)(7)(iii) and paragraph (c)(7)(iv) of this section that does not exceed an aggregate of 20% of net worth and implements appropriate underwriting guidelines to minimize risk, such as, requiring a borrower to verify employment by providing at least two recent pay stubs.
(B) PALs I guidance and best practices. In developing a successful payday alternative loan program, a federal credit union should consider how the program would benefit a member’s financial well-being while considering the higher degree of risk associated with this type of lending. The guidance and best practices are intended to help federal credit unions minimize risk and develop a successful program, but are not an exhaustive checklist and do not guarantee a successful program with a low degree of risk.
(1) Program features. Several features that may increase the success of a payday alternative loan program and enhance member benefit include adding a savings component, financial education, reporting of members’ payment of payday alternative loans to credit bureaus, or electronic loan transactions as part of a payday alternative loan program. In addition, although a federal credit union cannot require members to authorize a payroll deduction, a federal credit union should encourage or incentivize members to utilize payroll deduction.
(2) Underwriting. Federal credit unions should develop minimum underwriting standards that account for a member’s need for quickly available funds, while adhering to principles of responsible lending. Underwriting standards should address required documentation for proof of employment or income, including at least two recent paycheck stubs. Federal credit unions should be able to use a borrower’s proof of recurring income as the key criterion in developing standards for maturity lengths and loan amounts so a borrower can manage repayment of the loan. For members with established accounts, federal credit unions should only need to review a member’s account records and proof of recurring income or employment.
(3) Risk avoidance. Federal credit unions should consider risk avoidance strategies, including requiring members to participate in direct deposit and conducting a thorough evaluation of the federal credit union’s resources and ability to engage in a payday alternative loan program.
(iv) Payday alternative loans (PALs II)—(A) Minimum requirements for PALs II. Notwithstanding any other provision of this section, a federal credit union may charge an interest rate that is 1000 basis points above the maximum interest rate established by the Board under paragraph (c)(7)(ii) of this section provided the federal credit union is offering closed-end credit, as defined in § 1026.2(a)(10) of this title, in accordance with the following conditions:
(1) The principal of the payday alternative loan is not more than $2,000;
(2) The payday alternative loan has a minimum maturity of one month and a maximum maturity of 12 months;
(3) The federal credit union does not make more than three payday alternative loans provided either under paragraph (c)(7)(iii) of this section or this paragraph (c)(7)(iv) in any rolling six-month period to any one borrower and does not make more than one payday alternative loan provided under either paragraph (c)(7)(iii) of this section or this paragraph (c)(7)(iv) at a time to any borrower;
(4) The federal credit union does not rollover any payday alternative loan provided under paragraph (c)(7)(iii) of this section or this paragraph (c)(7)(iv), provided that the prohibition against rollovers does not apply to an extension of a payday alternative loan term within the maximum loan term set forth in paragraph (c)(7)(iv)(A)(3) of this section that does not include any additional fees assessed or extend additional credit to the borrower;
(5) The federal credit union fully amortizes the payday alternative loan;
(6) The federal credit union charges a reasonable application fee to all members applying for a new payday alternative loan offered under this paragraph (c)(7)(iv) that reflects the actual costs associated with processing the application, but that in no case exceeds $20;
(7) The federal credit union does not assess a fee or charge, including a non-sufficient funds fee, on the borrower’s account pursuant to the federal credit union’s overdraft service, as defined in § 1005.17(a) of this title, in connection with any payday alternative loan provided under this paragraph (c)(7)(iv); and
(8) The federal credit union includes, in its written lending policies, a limit on the aggregate dollar amount of payday alternative loans made under paragraph (c)(7)(iii) of this section and this paragraph (c)(7)(iv) that does not exceed an aggregate of 20% of net worth and implements appropriate underwriting guidelines to minimize risk, such as, requiring a borrower to verify employment by providing at least two recent pay stubs.
(B) PALs II guidance and best practices. In developing a successful payday alternative loan program, a federal credit union should consider how the program would benefit a member’s financial well-being while considering the higher degree of risk associated with this type of lending. The guidance and best practices are intended to help federal credit unions minimize risk and develop a successful program, but are not an exhaustive checklist and do not guarantee a successful program with a low degree of risk.
(1) Program features. Several features that may increase the success of a payday alternative loan program and enhance member benefit include adding a savings component, financial education, reporting of members’ payment of payday alternative loans to credit bureaus, or electronic loan transactions as part of a payday alternative loan program. In addition, although a federal credit union cannot require members to authorize a payroll deduction, a federal credit union should encourage or incentivize members to utilize payroll deduction.
(2) Underwriting. Federal credit unions should develop minimum underwriting standards that account for a member’s need for quickly available funds, while adhering to principles of responsible lending. Underwriting standards should address required documentation for proof of employment or income, including at least two recent paycheck stubs. Federal credit unions should be able to use a borrower’s proof of recurring income as the key criterion in developing standards for maturity lengths and loan amounts so a borrower can manage repayment of the loan. For members with established accounts, federal credit unions should only need to review a member’s account records and proof of recurring income or employment.
(3) Risk avoidance. Federal credit unions should consider risk avoidance strategies, including requiring members to participate in direct deposit and conducting a thorough evaluation of the federal credit union’s resources and ability to engage in a payday alternative loan program.
(8)(i) Except as otherwise provided herein, no official or employee of a Federal credit union, or immediate family member of an official or employee of a Federal credit union, may receive, directly or indirectly, any commission, fee, or other compensation in connection with any loan made by the credit union.
(ii) For the purposes of this section:
Compensation includes non-monetary items, except those of nominal value.
Immediate family member means a spouse or other family member living in the same household.
Loan includes line of credit.
Official means any member of the board of directors or a volunteer committee.
Person means an individual or an organization.
Senior management employee means the credit union’s chief executive officer (typically, this individual holds the title of President or Treasurer/Manager), any assistant chief executive officers (e.g., Assistant President, Vice President, or Assistant Treasurer/Manager), and the chief financial officer (Comptroller).
Volunteer official means an official of a credit union who does not receive compensation from the credit union solely for his or her service as an official.
(iii) This section does not prohibit:
(A) Payment, by a Federal credit union, of salary to employees;
(B) Payment, by a Federal credit union, of an incentive or bonus to an employee based on the credit union’s overall financial performance;
(C) Payment, by a Federal credit union, of an incentive or bonus to an employee, other than a senior management employee, in connection with a loan or loans made by the credit union, provided that the board of directors of the credit union establishes written policies and internal controls in connection with such incentive or bonus and monitors compliance with such policies and controls at least annually.
(D) Receipt of compensation from a person outside a Federal credit union by a volunteer official or non-senior-management employee of the credit union, or an immediate family member of a volunteer official or employee of the credit union, for a service or activity performed outside the credit union, provided that no referral has been made by the credit union or the official, employee, or family member.
(9) Indirect lending and indirect leasing arrangements—(i) Definitions. For purposes of this chapter, the following definitions apply:
Indirect leasing arrangement means a written agreement to purchase leases from the leasing company where the purchaser makes the final underwriting decision, and the lease agreement is assigned to the purchaser very soon after it is signed by the member and the leasing company.
Indirect lending arrangement means a written agreement to purchase loans from the loan originator where the purchaser makes the final underwriting decision regarding making the loan, and the loan is assigned to the purchaser very soon after the inception of the obligation to extend credit.
(ii) Indirect lending. A loan acquired pursuant to an indirect lending arrangement, and that meets the requirements of this section, is classified as a loan and not the purchase of a loan for purposes of this chapter.
(iii) Indirect leasing. A lease acquired pursuant to an indirect leasing arrangement, and that meets the requirements of part 714 of this chapter, is classified as a lease and not the purchase of a lease for purposes of this chapter.
(d) Loans and lines of credit to officials—(1) Purpose. Sections 107(5)(A) (iv) and (v) of the Act require the approval of the board of directors of the Federal credit union in any case where the aggregate of loans to an official and loans on which the official serves as endorser or guarantor exceeds $20,000 plus pledged shares. This paragraph implements the requirement by establishing procedures for determining whether board of directors’s approval is required. The section also prohibits preferential treatment of officials.
(2) Official. An “official” is any member of the board of directors, credit committee or supervisory committee.
(3) Initial approval. All applications for loans or lines of credit on which an official will be either a direct obligor or an endorser, cosigner or guarantor shall be initially acted upon by either the board of directors, the credit committee or a loan officer, as specified in the Federal credit union’s bylaws.
(4) Board of Directors’ review. The board of directors shall, in any case, review and approve or deny an application on which an official is a direct obligor, endorser, cosigner or guarantor if the following computation produces a total in excess of $20,000:
(i) Add:
(A) The amount of the current application.
(B) The outstanding balances of loans, including the used portion of an approved line of credit, extended to or endorsed, cosigned or guaranteed by the official.
(C) The total unused portion of approved lines of credit extended to or endorsed, cosigned or guaranteed by the official.
(ii) From the above total subtract:
(A) The amount of shares pledged by the official on loans or lines of credit extended to or endorsed, cosigned or guaranteed by the official.
(B) The amount of shares to be pledged by the official on the loan or line of credit applied for.
(5) Nonpreferential treatment. The rates, terms and conditions on any loan or line of credit either made to, or endorsed or guaranteed by—
(i) An official,
(ii) An immediate family member of an official, or
(iii) Any individual having a common ownership, investment or other pecuniary interest in a business enterprise with an official or with an immediate family member of an official shall not be more favorable than the rates, terms and conditions for comparable loans or lines of credit to other credit union members. “Immediate family member” means a spouse or other family member living in the same household.
(e) Insured, guaranteed, and advance commitment loans. Notwithstanding the general 15-year maturity limit on loans to members in paragraph (c)(4) of this section, a loan secured, in full or in part, by the insurance or guarantee of, or with an advance commitment to purchase the loan, in full or in part, by the Federal Government, a State government or any agency of either, may be made for the maturity and under the terms and conditions, including rate of interest, specified in the law, regulations or program under which the insurance, guarantee or commitment is provided.
(f) 20-Year Loans. (1) Notwithstanding the general 15-year maturity limit on loans to members in paragraph (c)(4) of this section, a federal credit union may make loans with maturities of up to 20 years in the case of:
(i) A loan to finance the purchase of a mobile home if the mobile home will be used as the member-borrower’s residence and the loan is secured by a first lien on the mobile home, and the mobile home meets the requirements for the home mortgage interest deduction under the Internal Revenue Code,
(ii) A second mortgage loan (or a nonpurchase money first mortgage loan in the case of a residence on which there is no existing first mortgage) if the loan is secured by a residential dwelling which is the residence of the member-borrower, and
(iii) A loan to finance the repair, alteration, or improvement of a residential dwelling which is the residence of the member-borrower.
(2) For purposes of this paragraph (f), mobile home may include a recreational vehicle, house trailer or boat.
(3) Notwithstanding the general 20-year maturity limit on second mortgage loans, a federal credit union participating in the Department of the Treasury’s Making Home Affordable Program may extend the term of a modified second mortgage to match the term of a modified first mortgage, in accordance with applicable program guidelines.
(g) Long-Term Mortgage Loans—(1) Authority. Notwithstanding the general 15-year maturity limit on loans to members in paragraph (c)(4) of this section, a federal credit union may make residential real estate loans to members, including loans secured by manufactured homes permanently affixed to the land, with maturities of up to 40 years, or such longer period as may be permitted by the NCUA Board on a case-by-case basis, subject to the conditions of this paragraph (g).
(2) Statutory limits. The loan shall be made on a one to four family dwelling that is or will be the principal residence of the member-borrower and the loan shall be secured by a perfected first lien in favor of the credit union on such dwelling (or a perfected first security interest in the case of either a residential cooperative or a leasehold or ground rent estate).
(3) Loan application. The loan application shall be a completed standard Federal Housing Administration, Veterans Administration, Federal Home Loan Mortgage Corporation, Federal National Mortgage Association or Federal Home Loan Mortgage Corporation/Federal National Mortgage Association application form. In lieu of use of a standard application the Federal credit union may have a current attorney’s opinion on file stating that the forms in use meet the requirements of applicable Federal, state and local laws.
(4) Security instrument and note. The security instrument and note shall be executed on the most current version of the FHA, VA, FHLMC, FNMA, or FHLMC/FNMA Uniform Instruments for the jurisdiction in which the property is located. No prepayment penalty shall be allowed, although a Federal credit union may require that any partial prepayments be made on the date monthly installments are due and be in the amount of that part of one or more monthly installments that would be applicable to principal. In lieu of use of a standard security instrument and note, the Federal credit union may have a current attorney’s opinion on file stating that the security instrument and note in use meet the requirements of applicable Federal, state and local laws.
(5) First lien, territorial limits. The loan shall be secured by a perfected first lien or first security interest in favor of the credit union supported by a properly executed and recorded security instrument. No loan shall be secured by a residence located outside the United States of America, its territories and possessions, or the Commonwealth of Puerto Rico.
(6) Due-on-sale clauses. (i) Except as otherwise provided herein, the exercise of a due-on-sale clause by a Federal credit union is governed exclusively by section 341 of Pub. L. 97-320 and by any regulations issued by the Federal Home Loan Bank Board implementing section 341.
(ii) In the case of a contract involving a long-term (greater than fifteen years), fixed rate first mortgage loan which was made or assumed, including a transfer of the liened property subject to the loan, during the period beginning on the date a State adopted a constitutional provision or statute prohibiting the exercise of due-on-sale clauses, or the date on which the highest court of such state has rendered a decision (or if the highest court has not so decided, the date on which the next highest court has rendered a decision resulting in a final judgment if such decision applies statewide) prohibiting such exercise, and ending on October 15, 1982, a Federal credit union may exercise a due-on-sale clause in the case of a transfer which occurs on or after November 18, 1982, unless exercise of the due-on-sale clause would be based on any of the following:
(A) The creation of a lien or other encumbrance subordinate to the lender’s security instrument which does not relate to a transfer of rights of occupancy in the property;
(B) The creation of a purchase money security interest for household appliances;
(C) A transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety;
(D) The granting of a leasehold interest of 3 years or less not containing an option to purchase;
(E) A transfer to a relative resulting from the death of a borrower;
(F) A transfer where the spouse or children of the borrower become an owner of the property;
(G) A transfer resulting from a decree of a dissolution of marriage, a legal separation agreement, or from an incidental property settlement agreement, by which the spouse of the borrower becomes an owner of the property;
(H) A transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property; or
(I) Any other transfer or disposition described in regulations promulgated by the Federal Home Loan Bank Board.
(7) Assumption of real estate loans by nonmembers. A Federal credit union may permit a nonmember to assume a member’s mortgage loan in conjunction with the nonmember’s purchase of the member’s principal residence, provided that the nonmember assumes only the remaining unpaid balance of the loan, the terms of the loan remain unchanged, and there is no extension of the original maturity date specified in the loan agreement with the member. An assumption is impermissible if the original loan was made with the intent of having a nonmember assume the loan.
(h) Third-party servicing of indirect vehicle loans. (1) A federally insured credit union must not acquire any vehicle loan, or any interest in a vehicle loan, serviced by a third-party servicer if the aggregate amount of vehicle loans and interests in vehicle loans serviced by that third-party servicer and its affiliates would exceed:
(i) 50 percent of the credit union’s net worth during the initial thirty months of that third-party servicing relationship; or
(ii) 100 percent of the credit union’s net worth after the initial thirty months of that third-party servicing relationship.
(2) Regional directors may grant a waiver of the limits in paragraph (h)(1) of this section to permit greater limits upon written application by a credit union. In determining whether to grant or deny a waiver, a regional director will consider:
(i) The credit union’s understanding of the third-party servicer’s organization, business model, financial health, and the related program risks;
(ii) The credit union’s due diligence in monitoring and protecting against program risks;
(iii) If contracts between the credit union and the third-party servicer grant the credit union sufficient control over the servicer’s actions and provide for replacing an inadequate servicer; and
(iv) Other factors relevant to safety and soundness.
(3) A regional director will provide a written determination on a waiver request within 45 calendar days after receipt of the request; however, the 45-day period will not begin until the requesting credit union has submitted all necessary information to the regional director. If the regional director does not provide a written determination within the 45-day period the request is deemed denied. A credit union may request the regional director to reconsider a denied waiver request and/or file an appeal with the NCUA Board in accordance with the procedures set forth in subpart B to part 746 of this chapter.
(4) For purposes of paragraph (h) of this section:
(i) The term “third-party servicer” means any entity, other than a federally-insured depository institution or a wholly-owned subsidiary of a federally-insured depository institution, that receives any scheduled, periodic payments from a borrower pursuant to the terms of a loan and distributes payments of principal and interest and any other payments with respect to the amounts received from the borrower as may be required pursuant to the terms of the loan. The term also excludes any servicing entity that meets the following three requirements:
(A) Has a majority of its voting interests owned by federally-insured credit unions;
(B) Includes in its servicing agreements with credit unions a provision that the servicer will provide NCUA with complete access to its books and records and the ability to review its internal controls as deemed necessary by NCUA in carrying out NCUA’s responsibilities under the Act; and
(C) Has its credit union clients provide a copy of the servicing agreement to their regional directors.
(ii) The term “its affiliates,” as it relates to the third-party servicer, means any entities that:
(A) Control, are controlled by, or are under common control with, that third-party servicer; or
(B) Are under contract with that third-party servicer or other entity described in paragraph (h)(4)(ii)(A) of this section.
(iii) The term “vehicle loan” means any installment vehicle sales contract or its equivalent that is reported as an asset under generally accepted accounting principles. The term does not include:
(A) Loans made directly by a credit union to a member, or
(B) Loans in which neither the third-party servicer nor any of its affiliates are involved in the origination, underwriting, or insuring of the loan or the process by which the credit union acquires its interest in the loan.
(iv) The term “net worth” means the retained earnings balance of the credit union at quarter end as determined under generally accepted accounting principles and as further defined in § 702.2 of this chapter.
§ 701.22 Loan participations.
This section applies only to loan participations as defined in paragraph (a) of this section. It does not apply to the purchase of an investment interest in a pool of loans. This section establishes the requirements a federally insured credit union must satisfy to purchase a participation in a loan. Federally insured, state-chartered credit unions are required by § 741.225 of this chapter to comply with the loan participation requirements of this section. This section does not apply to corporate credit unions, as that term is defined in § 704.2 of this chapter.
(a) For purposes of this section, the following definitions apply:
Associated borrower means any other person or entity with a shared ownership, investment, or other pecuniary interest in a business or commercial endeavor with the borrower. This means any person or entity named as a borrower or debtor in a loan or extension of credit, or any other person or entity, such as a drawer, endorser, or guarantor, engaged in a common enterprise with the borrower, or deriving a direct benefit from the loan to the borrower. Exceptions to this definition for partnerships, joint ventures and associations are as follows:
(1) If the borrower is a partnership, joint venture or association, and the other person with a shared ownership, investment, or other pecuniary interest in a business or commercial endeavor with the borrower is a member or partner of the borrower, and neither a direct benefit nor a common enterprise exists, such other person is not an associated borrower.
(2) If the borrower is a member or partner of a partnership, joint venture, or association, and the other entity with a shared ownership, investment, or other pecuniary interest in a business or commercial endeavor with the borrower is the partnership, joint venture, or association and the borrower is a limited partner of that other entity, and by the terms of a partnership or membership agreement valid under applicable law, the borrower is not held generally liable for the debts or actions of that other entity, such other entity is not an associated borrower.
(3) If the borrower is a member or partner of a partnership, joint venture, or association, and the other person with a shared ownership, investment, or other pecuniary interest in a business or commercial endeavor with the borrower is another member or partner of the partnership, joint venture, or association, and neither a direct benefit nor a common enterprise exists, such other person is not an associated borrower.
Common enterprise means:
(1) The expected source of repayment for each loan or extension of credit is the same for each borrower and no individual borrower has another source of income from which the loan (together with the borrower’s other obligations) may be fully repaid. An employer will not be treated as a source of repayment because of wages and salaries paid to an employee, unless the standards described in paragraph (2) are met;
(2) Loans or extensions of credit are made:
(i) To borrowers who are related directly or indirectly through common control, including where one borrower is directly or indirectly controlled by another borrower; and
(ii) Substantial financial interdependence exists between or among the borrowers. Substantial financial interdependence means 50 percent or more of one borrower’s gross receipts or gross expenditures (on an annual basis) are derived from transactions with another borrower. Gross receipts and expenditures include gross revenues or expenses, intercompany loans, dividends, capital contributions, and similar receipts or payments; or
(3) Separate borrowers obtain loans or extensions of credit to acquire a business enterprise of which those borrowers will own more than 50 percent of the voting securities or voting interests.
Control means a person or entity directly or indirectly, or acting through or together with one or more persons or entities:
(1) Owns, controls, or has the power to vote 25 percent or more of any class of voting securities of another person or entity;
(2) Controls, in any manner, the election of a majority of the directors, trustees, or other persons exercising similar functions of another person or entity; or
(3) Has the power to exercise a controlling influence over the management or policies of another person or entity.
Credit union means any federal or state-chartered credit union.
Credit union organization means any credit union service organization meeting the requirements of part 712 of this chapter. This term does not include trade associations or membership organizations principally composed of credit unions.
Direct benefit means the proceeds of a loan or extension of credit to a borrower, or assets purchased with those proceeds, that are transferred to another person or entity, other than in a bona fide arm’s-length transaction where the proceeds are used to acquire property, goods, or services.
Eligible organization means a credit union, credit union organization, or financial organization.
Financial organization means any federally chartered or federally insured financial institution; and any state or federal government agency and its subdivisions.
Loan participation means a loan where one or more eligible organizations participate pursuant to a written agreement with the originating lender, and the written agreement requires the originating lender’s continuing participation throughout the life of the loan.
Originating lender means the participant with which the borrower initially or originally contracts for a loan and who, thereafter or concurrently with the funding of the loan, sells participations to other lenders. Originating lender includes a participant that acquires a loan through an indirect lending arrangement as defined under § 701.21(c)(9).
(b) A federally insured credit union may purchase a participation interest in a loan from an eligible organization only if the loan is one the purchasing credit union is empowered to grant and the following additional conditions are satisfied:
(1) The purchase complies with all regulatory requirements to the same extent as if the purchasing federally insured credit union had originated the loan, including, for example, the loans-to-one-borrower provisions in § 701.21(c)(5) of this part for federal credit unions and § 723.4 of the member business loans rule in part 723 of this chapter for all federally insured credit unions;
(2) The purchasing federally insured credit union has executed a written loan participation agreement with the originating lender and the agreement meets the minimum requirements for a loan participation agreement as described in paragraph (d) of this section;
(3) The originating lender retains an interest in each participated loan. If the originating lender is a federal credit union, the retained interest must be at least 10 percent of the outstanding balance of the loan through the life of the loan. If the originating lender is any other type of eligible organization, the retained interest must be at least 5 percent of the outstanding balance of the loan through the life of the loan, unless a higher percentage is required under applicable state law;
(4) The borrower becomes a member of one of the participating credit unions before the purchasing federally insured credit union purchases a participation interest in the loan; and
(5) The purchase complies with the purchasing federally insured credit union’s internal written loan participation policy, which, at a minimum, must:
(i) Establish underwriting standards for loan participations;
(ii) Establish a limit on the aggregate amount of loan participations that may be purchased from any one originating lender, not to exceed the greater of $5,000,000 or 100 percent of the federally insured credit union’s net worth, unless this amount is waived by the appropriate regional director, and, in the case of a federally insured state-chartered credit union, with prior written concurrence of the appropriate state supervisory authority;
(iii) Establish limits on the amount of loan participations that may be purchased by each loan type, not to exceed a specified percentage of the federally insured credit union’s net worth; and
(iv) Establish a limit on the aggregate amount of loan participations that may be purchased with respect to a single borrower, or group of associated borrowers, not to exceed 15 percent of the federally insured credit union’s net worth, unless waived by the appropriate regional director, and, in the case of a federally insured state-chartered credit union, with prior written concurrence of the appropriate state supervisory authority.
(c) To seek a waiver from any of the limitations in paragraph (b) of this section, a federally insured credit union must submit a written request to its regional director with a full and detailed explanation of why it is requesting the waiver. Within 45 calendar days of receipt of a completed waiver request, including all necessary supporting documentation and, if appropriate, any written concurrence, the regional director will provide the federally insured credit union a written response. The regional director’s decision will be based on safety and soundness and other considerations; however, the regional director will not grant a waiver to a federally insured State-chartered credit union without the prior written concurrence of the appropriate State supervisory authority. A federally insured credit union may request the regional director to reconsider a denied waiver request and/or file an appeal with the NCUA Board in accordance with the procedures set forth in subpart B to part 746 of this chapter.
(d) A loan participation agreement must:
(1) Be properly executed by authorized representatives of all parties under applicable law;
(2) Be properly authorized by the federally insured credit union’s board of directors or, if the board has so delegated in its policy, a designated committee or senior management official, under the federally insured credit union’s bylaws and all applicable law;
(3) Be retained in the federally insured credit union’s office (original or copies); and
(4) Include provisions which, at a minimum, address the following:
(i) Prior to purchase, the identification of the specific loan participation(s) being purchased, either directly in the agreement or through a document which is incorporated by reference into the agreement;
(ii) The interest that the originating lender will retain in the loan to be participated. If the originating lender is a federal credit union, the retained interest must be at least 10 percent of the outstanding balance of the loan through the life of the loan. If the originating lender is any other type of eligible organization, the retained interest must be at least 5 percent of the outstanding balance of the loan through the life of the loan, unless a higher percentage is required under state law;
(iii) The location and custodian for original loan documents;
(iv) An explanation of the conditions under which parties to the agreement can gain access to financial and other performance information about a loan, the borrower, and the servicer so the parties can monitor the loan;
(v) An explanation of the duties and responsibilities of the originating lender, servicer, and participants with respect to all aspects of the participation, including servicing, default, foreclosure, collection, and other matters involving the ongoing administration of the loan; and
(vi) Circumstances and conditions under which participants may replace the servicer.
§ 701.23 Purchase, sale, and pledge of eligible obligations.
This section governs a Federal credit union’s purchase, sale, or pledge of all or part of a loan to one of its own members, subject to certain exceptions. For purchases of eligible obligations, except as otherwise described under paragraph (b) of this section, the borrower must be a member of the purchasing Federal credit union before the purchase is made.
(a) Definitions. For purposes of this section:
Eligible obligation means a whole loan or part of a loan (other than a note held by a liquidating credit union) that does not meet the definition of a loan participation under § 701.22(a).
Liquidating credit union means:
(i) In the case of a voluntary liquidation, a credit union is a liquidating credit union as of the date the members vote to approve liquidation.
(ii) In the case of an involuntary liquidation, a credit union is a liquidating credit union as of the date the board of directors is served an order of liquidation issued by either the NCUA or the state supervisory authority.
Student loan means a loan granted to finance the borrower’s attendance at an institution of higher education or at a vocational school, which is secured by and on which payment of the outstanding principal and interest has been deferred in accordance with the insurance or guarantee of the Federal Government, of a state government, or any agency of either.
(b) Purchase of loans—(1) Purchase of obligations from any source. A Federal credit union may purchase, in whole or in part, within the limitations of the board of directors’ written purchase policies:
(i) Eligible obligations. Eligible obligations of its members, from any source, if either: (A) They are loans it is empowered to grant or (B) they are refinanced with the consent of the borrowers, within 60 days after they are purchased, so that they are loans it is empowered to grant;
(ii) Notes of a liquidating credit union’s individual members. Notes of a liquidating credit union’s individual members, from the liquidating credit union;
(iii) Student loans. Student loans, from any source, if the purchaser is granting student loans on an ongoing basis and if the purchase will facilitate the purchasing credit union’s packaging of a pool of such loans to be sold or pledged on the secondary market; and
(iv) Real estate-secured loans. Real estate-secured loans, from any source, if the purchaser is granting real estate-secured loans pursuant to § 701.21 on an ongoing basis and if the purchase will facilitate the purchasing credit union’s packaging of a pool of such loans to be sold or pledged on the secondary mortgage market. A pool must include a substantial portion of the credit union’s members’ loans and must be sold promptly.
(2) Purchases of obligations from a FICU. A Federal credit union may purchase and hold the following obligations, provided that it would be empowered to grant them:
(i) Eligible obligations. Eligible obligations without regard to whether they are obligations of its members, provided they are purchased from a federally
insured credit union and the obligations are either:
(A) Loans the purchasing credit union is empowered to grant; or
(B) Loans refinanced with the consent of the borrowers, within 60 days after they are purchased, so that they are loans the purchasing credit union is empowered to grant;
(ii) Notes of a liquidating credit union. Notes of a liquidating credit union, without regard to whether they are notes of the liquidating credit union’s members;
(iii) Student loans. Student loans provided they are purchased from a federally insured credit union only;
(iv) Real estate-secured loans. Real estate-secured loans provided they are purchased from a federally insured credit union only;
(3) Other requirements. A Federal credit union may make purchases in accordance with this paragraph (b), provided:
(i) The board of directors or investment committee approves the purchase;
(ii) A written agreement and a schedule of the eligible obligations covered by the agreement are retained by the purchaser; and
(iii) For purchases under paragraph (b)(1)(ii) of this section, any advance written approval required by § 741.8 of this chapter is obtained before consummation of such purchase.
(4) Five-percent limitation. The aggregate of the unpaid balance of notes purchased under paragraphs (b)(1)(ii) and (b)(2)(ii) of this section shall not exceed 5 percent of the unimpaired capital and surplus of the purchaser.
(5) Grandfathered purchases. Subject to safety and soundness considerations, a Federal credit union may hold any of the loans described in paragraph (b) of this section that were acquired before October 30, 2023; provided the transaction complied with this section at the time the transaction was executed.
(6) Written purchase policies. Purchases of eligible obligations and notes of liquidating credit unions must comply with the purchasing Federal credit union’s internal written purchase policies, which must:
(i) Require that the purchasing Federal credit union conduct due diligence on the seller of the loans and other counterparties to the transaction prior to the purchase.
(ii) Establish risk assessment and risk management process requirements that are commensurate with the size, scope, type, complexity, and level of risk posed by the planned loan purchase activities.
(iii) Establish internal underwriting and ongoing monitoring standards that are commensurate with the size, scope, type, complexity, and level of risk posed by the loan purchase activities. Underwriting and ongoing monitoring standards must address the borrower’s creditworthiness and ability to repay, and the support provided by collateral if the collateral was used as part of the credit decision.
(iv) Require that the written purchase agreement include:
(A) The specific loans being purchased (either directly in the agreement or through a document that is incorporated by reference into the agreement);
(B) The location and custodian for the original loan documents;
(C) An explanation of the duties and responsibilities of the seller, servicer, and all parties with respect to all aspects of the loans being purchased, including servicing, default, foreclosure, collection, and other matters involving the ongoing administration of the loans, if applicable; and
(D) The circumstances and conditions under which the parties to the agreement may replace the servicer when the seller retains the servicing rights for the loans being purchased, if applicable.
(v) Establish portfolio concentration limits by loan type and risk category in relation to net worth that are commensurate with the size, scope, and complexity of the credit union’s loan purchases. The policy limits must consider the potential impact of loan concentrations on the purchasing credit union’s earnings, loan loss reserves, and net worth.
(vi) Address when a legal review of agreements or contracts will be performed to ensure that the legal and business interests of the credit union are protected against undue risk.
(c) Sale. A Federal credit union may sell, in whole or in part, to any source, eligible obligations of its members, eligible obligations purchased in accordance with paragraph (b)(1)(ii) of this section, student loans purchased in accordance with paragraph (b)(1)(iii) of this section, and real estate loans purchased in accordance with paragraph (b)(1)(iv) of this section, within the limitations of the board of directors’ written sale policies, Provided:
(1) The board of directors or investment committee approves the sale;
(2) A written agreement, and a schedule of the eligible obligations covered by the agreement, is retained by the selling credit union that identifies the specific loans being sold either directly in the agreement or through a document that is incorporated by reference into the agreement; and
(3) A review of the written agreement is completed that includes the terms, recourse, and risk-sharing arrangements, and, as applicable, loan administration and controls, to ensure that the selling Federal credit union’s legal and business interests are protected from undue risks.
(d) Pledge. (1) A Federal credit union may pledge, in whole or in part, to any source, eligible obligations of its members, eligible obligations purchased in accordance with paragraph (b)(1)(ii) of this section, student loans purchased in accordance with paragraph (b)(1)(iii) of this section, and real estate loans purchased in accordance with paragraph (b)(1)(iv) of this section, within the limitations of the board of directors’ written pledge policies, Provided:
(i) The board of directors or investment committee approves the pledge;
(ii) Copies of the original loan documents are retained; and
(iii) A written agreement covering the pledging arrangement is retained by the credit union that pledges the eligible obligations.
(2) The pledge agreement shall identify the eligible obligations covered by the agreement.
(e) Servicing. A Federal credit union may agree to service any eligible obligation it purchases or sells in whole or in part.
(f) 10 Percent limitation. The total indebtedness owing to any Federal credit union by any person, inclusive of retained and reacquired interests, shall not exceed 10 percent of its unimpaired capital and surplus.
(g) Payments and compensation—(1) Conflicts of interest. No federal credit union official, employee, or their immediate family member may receive, directly or indirectly, any compensation in connection with that credit union’s purchase, sale, or pledge of an eligible obligation under the provisions of § 701.23.
(2) Permissible payments. This section does not prohibit:
(i) A federal credit union’s payment of salary to employees;
(ii) A federal credit union’s payment of an incentive or bonus to an employee based on the credit union’s overall financial performance;
(iii) A federal credit union’s payment of an incentive or bonus to an employee, other than a senior management employee, in connection with that credit union’s purchase, sale or pledge of an eligible obligation. This payment is permissible if the board of directors establishes a written policy and internal controls for the incentive or bonus program and monitors compliance with the policy and controls at least annually; and
(iv) Payment by a person other than the federal credit union of compensation to a volunteer official, non-senior management employee, or their immediate family member, for a service or activity performed outside the credit union provided that the federal credit union, the official, employee, or their immediate family member has not made a referral.
(3) Business associates and family members. All transactions under this section with business associates or family members not specifically prohibited by paragraph (g)(1) of this section must be conducted at arm’s length and in the interest of the federal credit union.
(4) Definitions. The definitions in § 701.21(c)(8)(ii) of this part apply to this section.
(h) Additional authority—(1) Expanded purchase authority. A federal credit union may submit a written request to its regional director seeking expanded authority to purchase loans described in paragraph (b)(2) of this section, if it is not otherwise authorized by this section. The written request must include the following:
(i) A copy of the credit union’s purchase policy;
(ii) The types of eligible obligations under paragraph (b)(2) of this section that the credit union seeks to purchase;
(iii) An explanation of the need for additional authority; and
(iv) An analysis of the credit union’s prior experience with the purchase of eligible obligations.
(2) Approval process. A regional director will provide a written determination on a request for expanded authority within 60 calendar days after receipt of the request; however, the 60-day period will not begin until the requesting credit union has submitted all necessary information to the regional director. The regional director will inform the requesting credit union, in writing, of the date the request was received and of any additional documentation that the regional director requires in support of the request. If the regional director approves the request, the regional director will establish a limit on loan purchases as appropriate and subject to the limitations in this section. If the regional director does not notify the credit union of the action taken on its request within 60 calendar days of the receipt of the request or the receipt of additional requested supporting information, whichever occurs later, the credit union may purchase loans it requested under paragraph (b)(2) of this section.
(3) Appeal to NCUA Board. A Federal credit union may request the regional director to reconsider a denied request for expanded authority and/or file an appeal with the NCUA Board in accordance with the procedures set forth in subpart B to part 746 of this chapter.
§ 701.24 Refund of interest.
(a) The board of directors of a Federal credit union may authorize an interest refund to members who paid interest to the credit union during any dividend period and who are members of record at the close of business on the last day of such dividend period. Interest refunds may be made for a dividend period only if dividends on share accounts have been declared and paid for that period.
(b) The amount of interest refund to each member shall be determined as a percentage of the interest paid by the member. Such percentage may vary according to the type of extension of credit and the interest rate charged.
(c) The board of directors may exclude from an interest refund:
(1) A particular type of extension of credit;
(2) Any extension of credit made at a particular interest rate; and
(3) Any extension of credit that is presently delinquent or has been delinquent within the period for which the refund is being made.
§ 701.25 Loans to credit unions.
(a) Limits. A Federal credit union may make loans, including investments in Subordinated Debt, to other credit unions, including corporate credit unions and privately insured credit unions, subject to the following limits:
(1) Aggregate limit. The aggregate principal amount of loans to other credit unions may not exceed 25 percent of the Federal credit union’s paid-in and unimpaired capital and surplus.
(2) Single borrower limit. The aggregate principal amount of loans made to any one credit union may not exceed the greater of 15 percent of the Federal credit union’s net worth, as defined in part 702 of this chapter, at the time of the closing of the loan or $100,000, plus an additional 10 percent of the Federal credit union’s net worth if the amount that exceeds the Federal credit union’s 15 percent general limit is fully secured at all times with a perfected security interest by readily marketable collateral as defined in § 723.2 of this chapter.
(b) Approval and policies. A Federal credit union’s board of directors must approve all loans to other credit unions and establish written policies for making such loans. The written policies must, at a minimum, include the following:
(1) How the Federal credit union will manage the credit risk of loans to other credit unions; and
(2) The limits on the aggregate principal amount of loans the Federal credit union can make to other credit unions. The policies must specify the limits on the aggregate principal amount of loans the Federal credit union can make to all other credit unions and the aggregate principal amount of loans the Federal credit union can make to any single credit union; provided that any limits included in such policies do not exceed the limits in this section.
(c) Investment in Subordinated Debt—(1) Eligibility. A Federal credit union may only invest, directly or indirectly, in the Subordinated Debt of federally insured, natural person credit unions, or in loans or obligations issued by a privately insured credit union that are subordinate to the private insurer; provided that the investing Federal credit union:
(i) Has at the time of the investment, a capital classification of “well capitalized,” as defined in part 702 of this chapter;
(ii) Does not have any outstanding Subordinated Debt or Grandfathered Secondary Capital, in each case with respect to which it was the Issuing Credit Union (as defined in part 702 of this chapter); and
(iii) Is not eligible to issue Subordinated Debt or Grandfathered Secondary Capital pursuant to an unexpired approval from the NCUA under subpart D of part 702 of this chapter.
(2) Aggregate limit—(i) Aggregate limit. A Federal credit union’s aggregate investment (direct or indirect) in the Subordinated Debt and Grandfathered Secondary Capital of any federally insured, natural person credit union, and in loans or obligations issued by a privately insured credit union that are subordinate to the private insurer, may not cause such aggregate investment to exceed, at the time of the investment, the lesser of:
(A) 25 percent of the investing Federal credit union’s net worth at the time of the investment; and
(B) Any amount of net worth in excess of seven percent (7%) of total assets.
(ii) Calculation of aggregate limit. The amount subject to the limit in paragraph (c)(2)(i)(A) of this section is calculated at the time of investment, and is based on a Federal credit union’s aggregate outstanding:
(A) Investment in Subordinated Debt;
(B) Investment in Grandfathered Secondary Capital;
(C) Investment in loans or obligations issued by a privately insured credit union that are subordinate to the private insurer; and
(D) Loans or portion of loans made by the credit union that is secured by any Subordinated Debt, Grandfathered Secondary Capital, or loans or obligations issued by a privately insured credit union that are subordinate to the private insurer.
(3) Indirect investment. A Federal credit union must determine its indirect exposure by calculating its proportional ownership share of each exposure held in a fund, or similar indirect investment. The Federal credit union’s exposure to the fund is equal to the exposure held by the fund as if they were held directly by the Federal credit union, multiplied by the Federal credit union’s proportional ownership share of the fund.
§ 701.26 Credit union service contracts.
A Federal credit union may act as a representative of and enter into a contractual agreement with one or more credit unions or other organizations for the purpose of sharing, utilizing, renting, leasing, purchasing, selling, and/or joint ownership of fixed assets or engaging in activities and/or services which relate to the daily operations of credit unions. Agreements must be in writing, and shall advise all parties subject to the agreement that the goods and services provided shall be subject to examination by the NCUA Board to the extent permitted by law.
§§ 701.27-701.29 [Reserved]
§ 701.30 Services for nonmembers within the field of membership.
Federal credit unions may provide the following services to persons within their fields of membership, regardless of membership status:
(a) Selling negotiable checks including travelers checks, money orders, and other similar money transfer instruments (including international and domestic electronic fund transfers and remittance transfers, as defined in section 919 of the Electronic Fund Transfer Act); and
(b) Cashing checks and money orders for a fee.
§ 701.31 Nondiscrimination requirements.
(a) Definitions. As used in this part, the term:
(1) Application carries the meaning of that term as defined in 12 CFR 1002.2(f) (Regulation B)
(2) Dwelling carries the meaning of that term as defined in 42 U.S.C. 3602(b) (Fair Housing Act), which is as follows: “Any building, structure, or portion thereof which is occupied as, or designed or intended for occupancy as, a residence by one or more families, and any vacant land which is offered for sale or lease for the construction or location thereon of any building, structure, or portion thereof”; and
(3) Real estate-related loan means any loan for which application is made to finance or refinance the purchase, construction, improvement, repair, or maintenance of a dwelling.
(b) Nondiscrimination in Lending. (1) A Federal credit union may not deny a real estate-related loan, nor may it discriminate in setting or exercising its rights pursuant to the terms or conditions of such a loan, nor may it discourage an application for such a loan, on the basis of the race, color, national origin, religion, sex, handicap, or familial status (having children under the age of 18) of:
(i) Any applicant or joint applicant;
(ii) Any person associated, in connection with a real estate-related loan application, with an applicant or joint applicant;
(iii) The present or prospective owners, lessees, tenants, or occupants of the dwelling for which a real estate-related loan is requested;
(iv) The present or prospective owners, lessees, tenants, or occupants of other dwellings in the vicinity of the dwelling for which a real estate-related loan is requested.
(2) With regard to a real estate-related loan, a Federal credit union may not consider a lending criterion or exercise a lending policy which has the effect of discriminating on the basis of race, color, national origin, religion, sex, handicap, or familial status (having children under the age of 18). Guidelines concerning possible exceptions to this provision appear in paragraph (e)(1) of this section.
(3) Consideration of any of the following factors in connection with a real estate-related loan is not necessary to a Federal credit union’s business, generally has a discriminatory effect, and is therefore prohibited:
(i) The age or location of the dwelling;
(ii) Zip code of the applicant’s current residence;
(iii) Previous home ownership;
(iv) The age or location of dwellings in the neighborhood of the dwelling;
(v) The income level of residents in the neighborhood of the dwelling.
(c) Nondiscrimination in appraisals. (1) A Federal credit union may not rely upon an appraisal of a dwelling if it knows or should know that the appraisal is based upon consideration of the race, color, national origin, religion, sex, handicap, or familial status (having children under the age of 18) of:
(i) Any applicant or joint applicant;
(ii) Any person associated, in connection with a real estate-related loan application, with an applicant or joint applicant;
(iii) The present or prospective owners, lessees, tenants, or occupants of the dwelling for which a real estate-related loan is requested;
(iv) The present or prospective owners, lessees, tenants, or occupants of other dwellings in the vicinity of the dwelling for which a real estate-related loan is requested.
(2) With respect to a real-estate related loan, a Federal credit union may not rely upon an appraisal of a dwelling if it knows or should know that the appraisal is based upon consideration of a criterion which has the effect of discriminating on the basis of race, color, national origin, religion, sex, handicap, or familial status (having children under the age of 18). Guidelines concerning possible exceptions to this provision appear in paragraph (e)(1) of this section.
(3) A Federal credit union may not rely upon an appraisal that it knows or should know is based upon consideration of any of the following criteria, for such criteria generally have a discriminatory effect, and are not necessary to a Federal credit union’s business:
(i) The age or location of the dwelling;
(ii) The age or location of dwellings in the neighborhood of the dwelling;
(iii) The income level of the residents in the neighborhood of the dwelling.
(4) Notwithstanding paragraph (c)(3) of this section, it is recognized that there may be factors concerning location of the dwelling which can be properly considered in an appraisal. If any such factor(s) is relied upon, it must be specifically documented in the appraisal, accompanied by a brief statement demonstrating the necessity of using such factor(s). Guidelines concerning the consideration of location factors appear in paragraph (e)(3) of this section.
(5) Each Federal credit union shall make available, to any requesting member/applicant, a copy of the appraisal used in connection with that member’s application for a loan to be secured by a subordinate lien on a dwelling. The appraisal shall be available for a period of 25 months after the applicant has received notice from the Federal credit union of the action taken by the Federal credit union on the application for a loan to be secured by a subordinate lien on a dwelling.
(d) Nondiscrimination in advertising. No federal credit union may engage in any form of advertising of real estate-related loans that indicates the credit union discriminates on the basis of race, color, religion, national origin, sex, handicap, or familial status in violation of the Fair Housing Act. Advertisements must not contain any words, symbols, models or other forms of communication that suggest a discriminatory preference or policy of exclusion in violation of the Fair Housing Act or the Equal Credit Opportunity Act.
(1) Advertising notice of nondiscrimination compliance. Any federal credit union that advertises real estate-related loans must prominently indicate in such advertisement, in a manner appropriate to the advertising medium and format used, that the credit union makes such loans without regard to race, color, religion, national origin, sex, handicap, or familial status.
(i) With respect to written and visual advertisements, a credit union may satisfy the notice requirement by including in the advertisement a copy of the logotype, with the legend “Equal Housing Lender,” from the poster described in paragraph (d)(3) of this section or a copy of the logotype, with the legend “Equal Housing Opportunity,” from the poster described in § 110.25(a) of the United States Department of Housing and Urban Development’s (HUD) regulations (24 CFR 110.25(a)).
(ii) With respect to oral advertisements, a credit union may satisfy the notice requirement by a spoken statement that the credit union is an “Equal Housing Lender” or an “Equal Opportunity Lender.”
(iii) When an oral advertisement is used in conjunction with a written or visual advertisement, the use of either of the methods specified in paragraphs (d)(1)(i) or (ii) of this section will satisfy the notice requirement.
(iv) A credit union may use any other method reasonably calculated to satisfy the notice requirement.
(2) Lobby notice of nondiscrimination. Every federal credit union that engages in real estate-related lending must display a notice of nondiscrimination. The notice must be placed in the public lobby of the credit union and in the public area of each office where such loans are made and must be clearly visible to the general public. The notice must incorporate either a facsimile of the logotype and language appearing in paragraph (d)(3) of this section or the logotype and language appearing at 24 CFR 110.25(a). Posters containing the logotype and language appearing in paragraph (d)(3) of this section may be obtained from the regional offices of the National Credit Union Administration.
(3) Logotype and notice of nondiscrimination compliance. The logotype and text of the notice required in paragraph (d)(2) of this section shall be as follows:
(e) Guidelines. (1) Compliance with the Fair Housing Act is achieved when each loan applicant’s creditworthiness is evaluated on an individual basis, without presuming that the applicant has certain characteristics of a group. If certain lending policies or procedures do presume group characteristics, they may violate the Fair Housing Act, even though the characteristics are not based upon race, color, sex, national origin, religion, handicap, or familial status. Such a violation occurs when otherwise facially nondiscriminatory lending procedures (either general lending policies or specific criteria used in reviewing loan applications) have the effect of making real estate-related loans unavailable or less available on the basis of race, color, sex, national origin, religion, handicap, or familial status. Note, however, that a policy or criterion which has a discriminatory effect is not a violation of the Fair Housing Act if its use achieves a legitimate business necessity which cannot be achieved by using less discriminatory standards. It is also important to note that the Equal Credit Opportunity Act and Regulation B prohibit discrimination, either per se or in effect, on the basis of the applicant’s age, marital status, receipt of public assistance, or the exercise of any rights under the Consumer Credit Protection Act.
(2) Paragraph (b)(3) of this section prohibits consideration of certain factors because of their likely discriminatory effect and because they are not necessary to make sound real estate-related loans. For purposes of clarification, the prohibited use of location factors in this section is intended to prevent abandonment of areas in which a Federal credit union’s members live or want to live. It is not intended to require loans in those areas that are geographically remote from the FCU’s main or branch offices or that contravene the parameters of a Federal credit union’s charter. Further, this prohibition does not preclude requiring a borrower to obtain flood insurance protection pursuant to the National Flood Insurance Act and part 760 of NCUA’s Rules and Regulations, nor does it preclude involvement with Federal or state housing insurance programs which provide for lower interest rates for the purchase of homes in certain urban or rural areas. Also, the legitimate use of location factors in an appraisal does not constitute a violation of the provision of paragraph (b)(3) of this section, which prohibits consideration of location of the dwelling. Finally, the prohibited use of prior home ownership does not preclude a Federal credit union from considering an applicant’s payment history on a loan which was made to obtain a home. Such action entails consideration of the payment record on a previous loan in determining creditworthiness; it does not entail consideration of prior home ownership.
(3)(i) Paragraph (c)(3) of this section prohibits consideration of the age or location of a dwelling in a real estate-related loan appraisal. These restrictions are intended to prohibit the use of unfounded or unsubstantiated assumptions regarding the effect upon loan risk of the age of a dwelling or the physical or economic characteristics of an area. Appraisals should be based on the present market value of the property offered as security (including consideration of specific improvements to be made by the borrower) and the likelihood that the property will retain an adequate value over the term of the loan.
(ii) The term “age of the dwelling” does not encompass structural soundness. In addition, the age of the dwelling may be used by an appraiser as a basis for conducting further inspections of certain structural aspects of the dwelling. Paragraph (c)(3) of this section does, however, prohibit an unsubstantiated determination that a house over X years in age is not structurally sound.
(iii) With respect to location factors, paragraph (c)(4) of this section recognizes that there may be location factors which may be considered in an appraisal, and requires that the use of any such factors be specifically documented in the appraisal. These factors will most often be those location factors which may negatively affect the short range future value (up to 3-5 years) of a property. Factors which in some cases may cause the market value of a property to decline are recent zoning changes or a significant number of abandoned homes in the immediate vicinity of the property. However, not all zoning changes will cause a decline in property values, and proximity to abandoned buildings may not affect the market value of a property because the cause of abandonment is unrelated to high risk. Proper considerations include the condition and utility of the improvement and various physical factors such as street conditions, amenities such as parks and recreation areas, availability of public utilities and municipal services, and exposure to flooding and land faults.
(a) Authority. A Federal credit union may, to the extent permitted under Section 107(6) of the Act and this section, receive payments on shares, (regular shares, share certificates, and share draft accounts) from public units and political subdivisions thereof (as those terms are defined in § 745.1) and nonmember credit unions, and to the extent permitted under the Act, this section and § 701.34, receive payments on shares (regular shares, share certificates, and share draft accounts) from other nonmembers.
(b) Limitations—(1) Aggregate limit on public unit and nonmember shares. Except as permitted under paragraph (c) of this section, a federal credit union may not receive public unit and nonmember shares in excess of the greater of:
(i) 50 percent of the net amount of paid-in and unimpaired capital and surplus less any public unit and nonmember shares, as measured at the time of acceptance of each public unit or nonmember share (i.e.,
(ii) $3 million.
(2) Required due diligence. Before receiving public unit or nonmember shares that, taken together with any borrowings, exceed 70 percent of paid-in and unimpaired capital and surplus, the board of directors must adopt a specific written plan concerning the intended use of these funds that is consistent with prudent risk management principles.
(c) The limitations herein do not apply to accounts maintained in accordance with § 701.37 (Treasury Tax and Loan Depositaries; Depositaries and Financial Agents of the Government) and matching funds required by § 705.5(g) (Community Development Revolving Loan Program for Credit Unions). Once a loan granted pursuant to part 705 is repaid, nonmember share deposits accepted to meet the matching requirement are subject to this section.
§ 701.33 Reimbursement, insurance, and indemnification of officials and employees.
(a) Official. An official is a person who is or was a member of the board of directors, credit committee or supervisory committee, or other volunteer committee established by the board of directors.
(b) Compensation. (1) Only one board officer, if any, may be compensated as an officer of the board. The bylaws must specify the officer to be compensated, if any, as well as the specific duties of each of the board officers. No other official may receive compensation for performing the duties or responsibilities of the board or committee position to which the person has been elected or appointed.
(2) For purposes of this section, the term compensation specifically excludes:
(i) Payment (by reimbursement to an official or direct credit union payment to a third party) for reasonable and proper costs incurred by an official in carrying out the responsibilities of the position to which that person has been elected or appointed, if the payment is determined by the board of directors to be necessary or appropriate in order to carry out the official business of the credit union, and is in accordance with written policies and procedures, including documentation requirements, established by the board of directors. Such payments may include the payment of travel costs for officials and one guest per official;
(ii) Provision of reasonable health, accident and related types of personal insurance protection, supplied for officials at the expense of the credit union: Provided, that such insurance protection must exclude life insurance; must be limited to areas of risk, including accidental death and dismemberment, to which the official is exposed by reason of carrying out the duties or responsibilities of the official’s credit union position; must cease immediately upon the insured person’s leaving office, without providing residual benefits other than from pending claims, if any; except that a credit union must comply with federal and state laws providing departing officials the right to maintain health insurance coverage at their own expense and
(iii) Indemnification and related insurance consistent with paragraph (c) of this section.
(c) Indemnification. (1) A Federal credit union may indemnify its officials and current and former employees for expenses reasonably incurred in connection with judicial or administrative proceedings to which they are or may become parties by reason of the performance of their official duties.
(2) Indemnification shall be consistent either with the standards applicable to credit unions generally in the state in which the principal or home office of the credit union is located, or with the relevant provisions of the Model Business Corporation Act. A Federal credit union that elects to provide indemnification shall specify whether it will follow the relevant state law or the Model Business Corporation Act. Indemnification and the method of indemnification may be provided for by charter or bylaw amendment, contract or board resolution, consistent with the procedural requirements of the applicable state law or the Model Business Corporation Act, as specified. A charter or bylaw amendment must be approved by the National Credit Union Administration.
(3) A Federal credit union may purchase and maintain insurance on behalf of its officials and employees against any liability asserted against them and expenses incurred by them in their official capacities and arising out of the performance of their official duties to the extent such insurance is permitted by the applicable state law or the Model Business Corporation Act.
(4) Notwithstanding paragraphs (c)(1) through (3) of this section, a federal credit union may not indemnify a dual employee for duties performed for any employer other than the federal credit union. For purposes of this subsection, a dual employee is a federal credit union employee who also performs work functions for another entity as part of a sharing arrangement between the federal credit union and the other entity.
(5) Notwithstanding paragraphs (c)(1) through (3) of this section, a Federal credit union may not indemnify an official or employee for personal liability related to any decision made by that individual on a matter significantly affecting the fundamental rights and interests of the Federal credit union’s members where the decision giving rise to the claim for indemnification is determined by a court to have constituted gross negligence, recklessness, or willful misconduct. Matters affecting the fundamental rights and interests of Federal credit union members include charter and share insurance conversions and terminations.
(6) A Federal credit union may, before final disposition of a proceeding referred to in paragraph (c)(5) of this section, advance funds to pay for or reimburse the expenses, including legal fees, reasonably incurred in connection with the proceeding by an official or employee who is a party to the proceeding because that individual is or was an official or employee of the credit union if:
(i) The disinterested members of the credit union’s board of directors (or in the event there are fewer than two disinterested directors, the supervisory committee), in good faith, determine in writing after due investigation and consideration that the official or employee acted in good faith and in a manner he or she reasonably believed to be in the best interests of the credit union’s members;
(ii) The disinterested members of the credit union’s board of directors (or the supervisory committee, as the case may be), in good faith, determine in writing after due investigation and consideration that the payment or reimbursement of the expenses will not materially adversely affect the credit union’s safety and soundness; and
(iii) The official or employee provides:
(A) A written affirmation of the individual’s reasonable good faith belief that the relevant standard of conduct described in § 701.4(b) of this chapter has been met by the individual; and
(B) A written undertaking to repay the credit union for any funds advanced or reimbursed, to the extent not covered by payments from insurance, if the official or employee is not entitled to indemnification under paragraph (c)(5) of this section.
(7) To the extent a Federal credit union has elected to follow State law or the Model Business Corporation Act in accordance with paragraph (c)(2) of this section, the credit union must substitute the phrase “in the best interests of the members” for any language indicating that fiduciary duties are owed to persons or entities other than the members of the credit union, including, but not limited to, language such as “in the best interests of the credit union” or “in the best interests of the corporation.”
§ 701.34 Designation of low income status.
(a) Designation of low-income status. (1) Based on data obtained through examinations, NCUA will notify a federal credit union that it qualifies for designation as a low-income credit union if a majority of its membership qualifies as low-income members. A federal credit union that wishes to receive the designation must notify NCUA in writing within 90 days of receipt of any NCUA notifications.
(2) Low-income members are those members whose family income is 80% or less than the median family income for the metropolitan area where they live or national metropolitan area, whichever is greater, or those members who earn 80% or less than the total median earnings for individuals for the metropolitan area where they live or national metropolitan area, whichever is greater. NCUA will use the statewide or national, non-metropolitan area median family income instead of the metropolitan area or national metropolitan area median family income for members living outside a metropolitan area. Member earnings will be estimated based on data reported by the U.S. Census Bureau for the geographic area where the member lives. The term “low-income members” also includes those members enrolled as students in a college, university, high school, or vocational school.
(3) Federal credit unions that do not receive notification that they qualify for a low-income credit union designation but believe they qualify may submit information to NCUA to demonstrate they qualify for a low-income credit union designation. For example, federal credit unions may provide actual member income from loan applications or surveys to demonstrate a majority of their membership is low-income members. Actual member income data must be compared to a like category of statistical data, for example, actual individual member income may only be compared to total median earnings for individuals for the metropolitan area where they live or national metropolitan area, whichever is greater. A Federal credit union may rely on a sample of membership income data drawn from loan files or a member survey provided the Federal credit union can demonstrate the sample is a statistically valid, random sample by submitting with its data a narrative describing its sampling technique and evidence supporting the validity of the analysis, including the actual data set used in the analysis. The random sample must be representative of the membership, must be sufficient in both number and scope on which to base conclusions, and must have a minimum confidence level of 95% and a confidence interval of 5%. A Federal credit union must draw the sample either entirely from loan files or entirely from the survey, and must not combine a loan file review with a survey. NCUA will provide a response to the Federal credit union within 60 days of its submission.
(4) If NCUA determines a low-income designated Federal credit union no longer meets the criteria for the designation, NCUA will notify the Federal credit union in writing, and the Federal credit union must, within five years, meet the criteria for the designation or come into compliance with the regulatory requirements applicable to Federal credit unions that do not have a low-income designation. The designation will remain in effect during the five-year period. If a Federal credit union does not requalify and has secondary capital or nonmember deposit accounts with a maturity beyond the five-year period, NCUA may extend the time for a Federal credit union to come into compliance with regulatory requirements to allow the Federal credit union to satisfy the terms of any account agreements. A Federal credit union may request NCUA to reconsider a determination that it no longer meets the criteria for the designation and/or file an appeal with the NCUA Board in accordance with the procedures set forth in subpart B to part 746 of this chapter.
(5) Any credit union with a low-income credit union designation on January 1, 2009 will have five years from that date to meet the criteria for low-income designation under paragraph (a)(1) of this section, unless NCUA determines a longer time is required to allow the low-income credit union to satisfy the terms of a secondary capital or nonmember deposit account agreement.
(6) Definitions. The following definitions apply to this section:
Median family income and total median earnings for individuals are income statistics reported by the U.S. Census Bureau. The applicable income data can be obtained via the American Community Survey on the Census Bureau’s web page at http://www.census.gov.
Metropolitan area means an area designated by the Office of Management and Budget pursuant to 31 U.S.C. 1104(d), 44 U.S.C. 3504(c), and Executive Order 10253 (June 13, 1951) (as amended).
(b) [Reserved]
(a) Federal credit unions may offer share, share draft, and share certificate accounts in accordance with section 107(6) of the Act (12 U.S.C. 1757(6)) and the board of directors may declare dividends on such accounts as provided in section 117 of the Act (12 U.S.C. 1763).
(b) A Federal credit union shall accurately represent the terms and conditions of its share, share draft, and share certificate accounts in all advertising, disclosures, or agreements, whether written or oral
(c) A Federal credit union may, consistent with this section, parts 707 and 740 of this subchapter, other federal law, and its contractual obligations, determine the types of fees or charges and other matters affecting the opening, maintaining and closing of a share, share draft or share certificate account. State laws regulating such activities are not applicable to federal credit unions.
(d) For purposes of this section, “state law” means the constitution, statutes, regulations, and judicial decisions of any state, the District of Columbia, the several territories and possessions of the United States, and the Commonwealth of Puerto Rico.
§ 701.36 Federal credit union occupancy and disposal of acquired and abandoned premises.
(a) Scope. Section 107(4) of the Federal Credit Union Act (12 U.S.C. 1757(4)) authorizes a federal credit union to purchase, hold, and dispose of property necessary or incidental to its operations. This section interprets and implements that provision by establishing occupancy and disposal requirements for acquired and abandoned premises, and by prohibiting certain transactions. This section applies only to federal credit unions.
(b) Definitions. For purposes of this section:
Abandoned premises means premises previously used to transact credit union business but no longer used for that purpose. It also means premises originally acquired to transact future credit union business but no longer intended for that purpose.
Immediate family member means a spouse or other family member living in the same household.
Partially occupy means occupation and use, on a full-time basis, of at least fifty percent of each of the premises by the federal credit union, or the federal credit union and a credit union service organization in which the federal credit union has a controlling interest in accordance with Generally Accepted Accounting Principles (GAAP).
Premises means any office, branch office, suboffice, service center, parking lot, other facility, or real estate where the federal credit union transacts or will transact business.
Senior management employee means the federal credit union’s chief executive officer, any assistant chief executive officers, and the chief financial officer. For example, these individuals typically hold the title of President or Treasurer/Manager, Assistant President, Vice President or Assistant Treasurer/Manager, and Comptroller.
Unimproved land or unimproved real property means:
(1) Raw land or land without development, significant buildings, structures, or site preparation;
(2) Land that has never had improvements;
(3) Land that was improved at one time but has functionally reverted to its unimproved state; or
(4) Land that has been improved, but the improvements serve no purpose for the federal credit union’s planned use of the property.
(c) Premises not currently used to transact credit union business. (1) If a federal credit union acquires premises, including unimproved land or unimproved real property, it must partially occupy each of them within a reasonable period, but no later than six years after the date of acquisition. NCUA may waive the partial occupation requirements. To seek a waiver, a federal credit union must submit a written request to its Regional Office and fully explain why it needs the waiver. The Regional Director will provide the federal credit union a written response, either approving or disapproving the request. The Regional Director’s decision will be based on safety and soundness considerations.
(2) A federal credit union must make diligent efforts to dispose of abandoned premises and any other real property it does not intend to use in transacting business. The federal credit union must seek fair market value for the property, and record its efforts to dispose of abandoned premises. After premises have been abandoned for four years, the federal credit union must publicly advertise the property for sale. The federal credit union must complete the sale within five years of abandonment, unless NCUA waives this requirement. To seek a waiver, a federal credit union must submit a written request to its Regional Office and fully explain why it needs the waiver. The Regional Director will provide the federal credit union a written response, either approving or disapproving the request. The Regional Director’s decision will be based on safety and soundness considerations.
(d) Prohibited transactions. (1) A federal credit union must not acquire, or lease for one year or longer, premises from any of the following, unless NCUA waives this prohibition:
(i) A member of the federal credit union’s board of directors, credit committee, supervisory committee, or senior management, or an immediate family member of such individual;
(ii) A corporation in which a member of the federal credit union’s board of directors, credit committee, supervisory committee, or senior management, or an immediate family member of such individual, is an officer or director, or has a stock interest of 10 percent or more; or
(iii) A partnership, limited liability company, or other entity in which a member of the federal credit union’s board of directors, credit committee, supervisory committee, or senior management, or an immediate family member of such individual, is a general partner, or a limited partner or entity member with an interest of 10 percent or more.
(2) A federal credit union must not lease for one year or longer premises from any of its employees if the employee is directly involved in acquiring premises, unless the federal credit union’s board of directors determines the employee’s involvement is not a conflict of interest.
(3) All transactions with business associates or family members not specifically prohibited by this section must be conducted at arm’s length and in the interest of the federal credit union.
(4) To seek a waiver from any of the prohibitions in this paragraph (d), a federal credit union must submit a written request to its Regional Office and fully explain why it needs the waiver. Within 45 days of the receipt of the waiver request or all necessary documentation, whichever is later, the Regional Director will provide the federal credit union a written response, either approving or disapproving its request. The Regional Director’s decision will be based on safety and soundness considerations and a determination as to whether a conflict of interest exists.
§ 701.37 Treasury tax and loan depositaries; depositaries and financial agents of the Government.
(a) Definitions. (1) Treasury Tax and Loan (TT&L) Remittance Account means a nondividend-paying account, the balance of which is subject to the right of immediate withdrawal, established for receipt of payments of Federal taxes and certain United States obligations under United States Treasury Department regulations.
(2) TT&L Note Account means an account subject to the right of immediate call, evidencing funds held by depositaries electing the note option under United States Treasury Department regulations.
(3) Treasury General Account means an account, established under United States Treasury Department regulations, in which a zero balance may be maintained and from which the entire balance may be withdrawn by the depositor immediately under all circumstances except closure of the credit union.
(4) U.S. Treasury Time Deposit—Open Account means a nondividend-bearing account, established under United States Treasury Department regulations, which generally may not be withdrawn until the expiration of 14 days after the date of the United States Treasury Department’s written notice of intent to withdraw.
(b) Subject to regulation of the United States Treasury Department, a Federal credit union may serve as a Treasury tax and loan depositary, a depositary of Federal taxes, a depositary of public money, and a financial agent of the United States Government. In serving in these capacities, a Federal credit union may maintain the accounts defined in subsection (a), pledge collateral, and perform the services described under United States Treasury Department regulations for institutions acting in these capacities.
(c) Funds held in a TT&L Remittance Account, a TT&L Note Account, a Treasury General Account, and a U.S. Treasury Time Deposit—Open Account shall be considered deposits of public funds. Funds held in a TT&L Remittance Account and a TT&L Note Account shall be added together and insured up to a maximum of $250,000 in the aggregate. Funds held in a Treasury General Account and a U.S. Treasury Time Deposit—Open Account shall be added together and insured up to a maximum of $250,000 in the aggregate.
(d) Funds held in a TT&L Remittance Account, a TT&L Note Account, a Treasury General Account, and U.S. Treasury Time Deposit—Open Account are not subject to the 60-day notice requirement of Article III, section 5(a) of the Federal Credit Union Bylaws.
§ 701.38 Borrowed funds.
(a) Federal credit unions may borrow funds from any source; provided that:
(1) The borrowing is evidenced by a written contract, such as a signed promissory note, that sets forth the terms and conditions including, at a minimum, maturity, prepayment, interest rate, method of computation of interest, and method of payment; and
(2) The written contract and any solicitation with respect to such borrowing contain clear and conspicuous language indicating that:
(i) The funds represent money borrowed by the Federal credit union; and
(ii) The funds do not represent shares and, therefore, are not insured by the National Credit Union Administration.
(b) A Federal credit union is subject to the maximum borrowing authority of an aggregate amount not exceeding 50 percent of its paid-in and unimpaired capital and surplus. Provided that any Federal credit union may discount with or sell to any Federal intermediate credit bank any eligible obligations up to the amount of its paid-in and unimpaired capital (12 U.S.C. 1757(9)).
§ 701.39 Statutory lien.
(a) Definitions. Within this section, each of the following terms has the meaning prescribed below:
(1) Except as otherwise provided by law or except as otherwise provided by federal law is a qualifying phrase referring to a federal and/or state law, as the case may be, which supersedes a requirement of this section. It is the responsibility of the credit union to ascertain whether such statutory or case law exists and is applicable;
(2) Impress means to attach to a member’s account and is the act which makes the lien enforceable against that account;
(3) Member means any member who is primarily, secondarily or otherwise responsible for an outstanding financial obligation to the credit union, including without limitation an obligor, maker, co-maker, guarantor, co-signer, endorser, surety or accommodation party;
(4) Notice means written notice to a member disclosing, in plain language, that the credit union has the right to impress and enforce a statutory lien against the member’s shares and dividends in the event of failure to satisfy a financial obligation, and may enforce the right without further notice to the member. Such notice must be given at the time, or at any time before, the member incurs the financial obligation;
(5) Statutory lien means the right granted by section 107(11) of the Federal Credit Union Act, 12 U.S.C. 1757(11), to a federal credit union to establish a right in or claim to a member’s shares and dividends equal to the amount of that member’s outstanding financial obligation to the credit union, as that amount varies from time to time.
(b) Superior claim. Except as otherwise provided by law, a statutory lien gives the federal credit union priority over other creditors when claims are asserted against a member’s account(s).
(c) Impressing a statutory lien. Except as otherwise provided by federal law, a credit union can impress a statutory lien on a member’s account(s)—
(1) Account records. By giving notice thereof in the member’s account agreement(s) or other account opening documentation; or
(2) Loan documents. In the case of a loan, by giving notice thereof in a loan document signed or otherwise acknowledged by the member(s); or
(3) By-Law or policy. Through a duly adopted credit union by-law or policy of the board of directors, of which the member is given notice.
(d) Enforcing a statutory lien—(1) Application of funds. Except as otherwise provided by federal law, a federal credit union may enforce its statutory lien against a member’s account(s) by debiting funds in the account and applying them to the extent of any of the member’s outstanding financial obligations to the credit union.
(2) Default required. A federal credit union may enforce its statutory lien against a member’s account(s) only when the member fails to satisfy an outstanding financial obligation due and payable to the credit union.
(3) Neither judgment nor set-off required. A federal credit union need not obtain a court judgment on the member’s debt, nor exercise the equitable right of set-off, prior to enforcing its statutory lien against the member’s account.
Appendix A to Part 701—Federal Credit Union Bylaws
The National Credit Union Administration (NCUA) Board first incorporated the Federal Credit Union (FCU) Bylaws as Appendix A to Part 701 of the NCUA’s regulations on November 30, 2007. FCUs may retain previously adopted versions of the FCU Bylaws including the November 30, 2007 version. Unless an FCU has adopted bylaws before January 2, 2020, it must adopt these revised bylaws.
Although FCUs may retain any previously approved version of the FCU Bylaws, the NCUA Board encourages FCUs to adopt the revised bylaws because it believes they provide greater clarity and flexibility for credit unions and their officials and members. FCUs may also adopt portions of the revised bylaws and retain the remainder of previously approved bylaws, but the NCUA Board cautions FCUs to be extremely careful in making the decision. FCUs must be careful because they run the risk of having inconsistent or conflicting provisions because of the various options the revised bylaws provide, as well as other revisions in the text.
1. The FCU Bylaws contain provisions allowing FCU boards to select from an option or range of options or to fill in a blank. The “fill-in-the-blank” provisions are changes to the FCU’s bylaws. Thus, they require a two-thirds vote of the FCU’s board of directors. As long as the board selects from the permissible options, the FCU does not need to submit the change to the NCUA for its approval.
2. FCUs continue to have the flexibility to request bylaw amendments. The NCUA must approve all bylaw amendments except for the provisions noted above. In the past, the NCUA has published a “Standard Bylaw Amendments” booklet containing a list of “standard” preapproved and optional amendments not included in the FCU Bylaws. That document remains on the NCUA’s website for historical purposes. However, FCUs may not adopt amendments from the “Standard Bylaw Amendments” booklet, as the FCU Bylaws include sufficient flexibility to make a separate list of standard bylaw amendments unnecessary. Thus, the NCUA no longer makes a distinction between “standard” and “nonstandard” bylaw amendments. Consequently, the NCUA considers any change to the FCU Bylaws that is not a “fill-in-the-blank” provision or part of a range of options to be a bylaw amendment that requires the NCUA approval.
3. The procedure for approval of a bylaw amendment is as follows:
a. The FCU must submit its request to the Office of Credit Union Resources and Expansion (CURE).
b. The request must include:
1. The section of the FCU Bylaws to be amended;
2. The reason for, or purpose of, the amendment;
3. An explanation of why the amendment is desirable and what it will accomplish for the federal credit union; and
4. The specific wording of the proposed amendment.
c. CURE will advise the credit union within 60 days if it approved the proposed amendment after its review and, if necessary, consultation with the NCUA’s Office of General Counsel. If CURE does not reach a decision within 60 days, the proposed amendment is considered to be denied unless CURE requests an extension of time from the federal credit union and the credit union agrees to such a request. If CURE reaches an adverse decision or CURE fails to render a decision within the agreed timeframe, the credit union may appeal that decision in accordance with the procedures set out in subpart B to part 746 of this chapter. If CURE fails to render a timely decision, within thirty days it must provide the FCU with a written notice of its failure to render a timely decision and a statement of any concerns that CURE has with the bylaw amendment request.
4. Federal credit unions considering an amendment may find it useful to review the bylaws section of the agency website, which includes the NCUA’s Office of General Counsel opinions on proposed bylaw amendments.
Because each decision by CURE is made on a case-by-case basis that depends on the unique facts and circumstances applicable to each FCU, the credit union must submit a proposed amendment to the NCUA for review under the procedure listed above, even if the NCUA previously approved an identical or similar amendment for another credit union.
1. The Federal Credit Union Act requires the NCUA Board to prepare bylaws for federal credit unions.
The FCU Bylaws supplement the broad provisions of:
• A federal credit union’s charter, which establishes the existence of a federal credit union;
• The Federal Credit Union Act, which establishes the powers of federal credit unions; and
• The NCUA’s regulations, which implement the Federal Credit Union Act.
As a legal matter, a federal credit union’s bylaws must conform to, and cannot be inconsistent with, any provision of its charter, the Federal Credit Union Act, the NCUA’s regulations, or other laws or regulations applicable to the credit union’s operations.
2. The NCUA expects federal credit unions and their members will make every effort to resolve bylaw disputes using the credit union’s internal member complaint resolution process. If a bylaw dispute cannot be resolved internally, credit union officials or members should contact the regional office with oversight over the credit union for assistance in resolving the dispute.
3. The NCUA has discretion to take administrative actions when a credit union is not in compliance with its bylaws. If a potential violation is identified, the NCUA will carefully consider all of the facts and circumstances in deciding whether to take enforcement action. The NCUA will not generally take action against minor or technical violations, but emphasizes that it retains discretion to enforce the FCU Bylaws in appropriate cases, such as safety and soundness concerns or threats to fundamental, material credit union member rights.
Section 1. Name. The name of this credit union is as stated in Section 1 of its charter (approved organization certificate).
Section 2. Purposes. This credit union is a member-owned, democratically operated, not-for-profit organization managed by a volunteer board of directors. Its stated mission is to meet the credit and savings needs of members, especially individuals of modest means. The purpose of this credit union is to promote thrift among its members by affording them an opportunity to accumulate their savings and to create a source of credit for provident or productive purposes. The credit union may add business as one of its purposes by placing a comma after “provident” and inserting “business.”
Section 1. Field of membership. The field of membership of this credit union is limited to that stated in Section 5 of its charter.
Section 2. Membership application procedures. Persons eligible for membership under Section 5 of the charter must sign a membership application on approved forms. The applicant becomes a member upon approval of the application by a membership officer, after subscription to at least one share, payment of the initial installment, and payment of a uniform entrance fee if required by the board. If the membership officer denies a person’s membership application, the credit union must explain the reasons for the denial in writing upon written request.
Section 3. Maintenance of membership share required. A member who withdraws all shareholdings or fails to comply with the time requirements for restoring his or her account balance to par value in Article III, section 3, ceases to be a member. By resolution, the board may require persons readmitted to membership to pay another entrance fee.
Section 4. Continuation of membership.
(a) Once a member, always a member. Once a member, always a member until the person or organization chooses to withdraw its membership or is expelled under the Act and Article XIV of these bylaws.
(b) Limitation of services. Notwithstanding any provision of these bylaws, the board of directors may adopt a policy that limits credit union services to any member not in good standing.
Section 5. Member in good standing. Members in good standing retain all their rights and privileges in the credit union. A member not in good standing may be subject to a policy that limits credit union services. A member not in good standing is one who has engaged in any of the conduct in Article XIV, section 3, related to for-cause expulsion. In the event of a suspension of service, the member will be notified of what accounts or services have been discontinued. Subject to Article XIV and any applicable limitation of services policy approved by the board, members not in good standing retain their right to attend, participate, and vote at the annual and special meetings of the members and maintain a share account.
Section 1. Par value. The par value of each share is $________. Subscriptions to shares are payable at the time of subscription, or in installments of at least $________ per month.
FCUs may establish differing par values for different classes of members or types of accounts (such as students, minors, or non-natural persons), provided this action does not violate any federal, state or local antidiscrimination laws. Below are some options an FCU can choose. The FCU may also establish differing par values for other classes of members not listed below. List all established par values in Section 1.
Section 2. Cap on shares held by one person. The board may establish, by resolution, the maximum amount of shares that any one member may hold.
Section 3. Time periods for payment and maintenance of membership share. The credit union will terminate from membership a member who:
• Fails to complete payment of one share within __________ of admission to membership, or
• Fails to complete payment of one share within ________ from the increase in the par value of shares, or
• Reduces the share balance below the par value of one share and does not increase the balance to at least the par value of one share within ________ of the reduction.
Section 4. Transferability. Members may transfer shares to another member in any form approved by the board. Shares that accrue credits for unpaid dividends retain those credits when transferred.
Section 5. Withdrawals. Members may withdraw money paid in on shares provided that:
(a) The board has the right, at any time, to require members, or a subset of members, to give up to 60 days written notice of intention to withdraw all or part of the amounts they paid in.
(b) [Reserved].
(c) A member delinquent on any loan or obligation to the credit union may not withdraw their shares below the delinquent amount without the written approval of the credit committee or loan officer. This withdrawal restriction also applies if the member is a comaker, endorser, or guarantor of a delinquent loan. Coverage of overdrafts under an overdraft protection policy does not constitute delinquency for purposes of this paragraph. Shares issued in an irrevocable trust as provided in Section 6 of this article are not subject to withdrawal restrictions except as stated in the trust agreement.
(d) The share account of a deceased member (other than one held in joint tenancy with another member) may be continued until the close of the dividend period in which the administration of the deceased’s estate is completed.
(e) The board can impose a fee for excessive share withdrawals from regular share accounts. By resolution, the board can set the number of withdrawals not subject to a fee and the amount of the fee subject to regulations relevant to the advertising and disclosure of terms and conditions on member accounts.
Section 6. Trusts. Shares may be issued in a revocable or irrevocable trust, subject to the following:
Shares issued in a revocable trust—the settlor must be a member of this credit union in his or her own right.
Shares issued in an irrevocable trust—either the settlor or the beneficiary must be a member of this credit union.
Both a revocable and irrevocable trust must state the name of the beneficiary. A trust may be a member of the credit union as an entity if all parties to the trust, including all settlors, beneficiaries and trustees, are within the credit union’s field of membership.
Shares issued through a pension plan authorized by the rules and regulations will be treated as an irrevocable trust unless otherwise indicated in the rules and regulations.
Section 7. Joint accounts and membership requirements. Select one option and check the box corresponding to that option.
Owners of a joint account may both be members of the credit union without opening separate accounts. For joint membership, both owners are required to fulfill all of the membership requirements including each member purchasing and maintaining at least one share in the account and filling out the membership card.
Each member must purchase and maintain at least one share in a share account that names the member as the sole or primary owner. Being named as a joint owner of a joint account is not sufficient to establish membership.
Section 1. Annual meeting. The board must hold the annual meeting of the members [insert time for annual meeting, for example, “during the month of March/on the third Saturday of April/no later than March 31”], in the county in which any office of the credit union is located or within a radius of 100 miles of an office, at the time and place as the board determines and announces in the notice of the annual meeting. This credit union may permit virtual attendance and participation in the annual meeting, provided that an in-person meeting complying with the geographic requirements of this paragraph is also held.
Section 2. Notice of meetings required. a. The secretary must give written notice to each member at least 30 but no more than 75 days before the date of any annual meeting. The secretary must give written notice to each member at least 7 days before the date of any special meeting of the members and at least 45 but no more than 90 days before the date of any meeting to vote on a merger with another credit union. The secretary may deliver the notice in person, by mail to the member’s address, or, for members who have opted to receive statements and notices electronically, by electronic mail. The secretary must give notice of the annual meeting by posting the notice in a conspicuous place in the office of this credit union where members may read it at least 30 days before the meeting. The secretary must also prominently display the notice on the credit union’s website if such credit union maintains a website.
b. All special meeting notices must state the purpose of the meeting. The officials and members may only transact business related to the stated purpose at the meeting.
Section 3. Special meetings. a. The board chair, the board of directors by majority vote, or the supervisory committee as provided in these bylaws may call a special meeting of the members. The chair must call and hold a special meeting within 30 days of the receipt of a written request from 25 members or 5% of the members as of the date of the request, whichever number is larger. However, a request of no more than 750 members may be required to call a special meeting.
b. The credit union may hold a special meeting at any location permitted for the annual meeting.
Section 4. Items of business for annual meeting and rules of order for annual and special meetings. The suggested order of business at annual meetings of members is—
(a) Ascertain that a quorum is present.
(b) Reading and approval or correction of the minutes of the last meeting.
(c) Report of directors, if there is one. For credit unions participating in the Community Development Revolving Loan Program, the directors must report on the credit union’s progress on providing needed community services, if required by NCUA Regulations.
(d) Report of the financial officer or the chief management official.
(e) Report of the credit committee, if there is one.
(f) Report of the supervisory committee, as required by Section 115 of the Act.
(g) Unfinished business.
(h) New business other than elections.
(i) Elections, as required by Section 111 of the Act.
(j) Adjournment.
(k) To the extent consistent with these bylaws, the board will conduct all meetings of the members according to ________. The order of business for the annual meeting may vary from the suggested order, provided it includes all required items and complies with the rules of procedure adopted by the credit union.
The credit union must fill in the blank with one of the following authorities, noting the edition to be used: Democratic Rules of Order, The Modern Rules of Order, Robert’s Rules of Order, or Sturgis’ Standard Code of Parliamentary Procedure.
Section 5. Quorum. Except as otherwise provided, 15 members constitute a quorum at annual or special meetings. If a quorum is not present, the board may adjourn to a date at least 7 but not more than 14 days thereafter. The members present at any adjourned meeting will constitute a quorum, regardless of the number of members present. The board must give the same notice for the adjourned meeting as prescribed in Section 2 of this article for the original meeting, except that they must give notice at least 5 days before the date of the meeting fixed in the adjournment.
The Credit Union must select one of the four voting options. The board may print the credit union’s bylaws with the option selected or retain this copy and check the box of the option selected. All options continue with Section 3 of this article.
Section 1. Nomination procedures. At least 30 days before each annual meeting, the chair will appoint a nominating committee of three or more members. The nominating committee will nominate at least one member for each vacancy, including any unexpired term vacancy, for which elections are being held, and determine that the members nominated are agreeable to the placing of their names in nomination and will accept office if elected. The nominating committee must widely publicize the call for nominations to all members by any medium and interview each member that meets any qualifications established by the nominating committee.
Section 2. Election procedures. After placing the nominations of the nominating committee before the members, the chair calls for nominations from the floor. When nominations are closed, the chair appoints election tellers. The election tellers distribute the ballots, collect the ballots and tally the votes, and the chair announces the results. Except when there is only one nominee for each open office, all elections are by ballot and determined by the plurality of vote. If there is only one nominee for each open office, the chair may take a voice vote or declare the election of each nominee by general consent or acclamation.
Section 1. Nomination procedures. a. At least 120 days before each annual meeting the chair will appoint a nominating committee of three or more members. The nominating committee will nominate at least one member for each vacancy, including any unexpired term vacancy, for which elections are being held, and determine that the members nominated are agreeable to the placing of their names in nomination and will accept office if elected. The nominating committee must widely publicize the call for nominations to all members by any medium and interview each member that meets any qualifications established by the nominating committee.
b. At least 90 days before the annual meeting, the nominating committee files its nominations with the secretary of the credit union. At least 75 days before the annual meeting, the secretary notifies, in writing, all members eligible to vote that they may make nominations for vacancies by petition signed by 1% of the members with a minimum of 20 and a maximum of 500. The secretary may use electronic mail to notify members who have opted to receive notices or statements electronically.
c. The written notice must specify that the credit union will not conduct the election by ballot and there will be no nominations from the floor when the number of nominees equals the number of open positions.
d. The notice will include, in a form approved by the board of directors, a brief statement of qualifications and biographical data for each nominee submitted by the nominating committee. Each nominee by petition must submit a similar statement of qualifications and biographical data with the petition.
e. The written notice must state the closing date for receiving nominations by petition. At least 40 days before the annual meeting, nominee(s) must file the nomination petition with the secretary of the credit union. To be effective, nominee(s) must include a signed certificate with the nomination petition stating that they are agreeable to nomination and will serve if elected to office.
f. At least 35 days before the annual meeting, the secretary will post the nominations by petition along with those of the nominating committee in a conspicuous place in each credit union office and on the credit union’s website (if the credit union maintains a website).
Section 2. Election procedures. a. The secretary must place all persons nominated by either the nominating committee or by petition before the members. When nominations are closed, the chair appoints the election tellers. The election tellers distribute the ballots, collect the ballots, and tally the votes, and the chair announces the results. Except when there is only one nominee for each open office, all elections are by ballot and determined by the plurality of vote.
b. There are no nominations from the floor if there are sufficient nominations by the nominating committee or by petition to provide at least one nominee for each open position. If there are nominations from the floor and they result in more nominees than open positions, the chair will close nominations, and appoint election tellers. The election tellers distribute the ballots, collect the ballots and tally the votes, and the chair announces the results. If there is only one nominee for each open office, the chair may take a voice vote or declare the election of each nominee by general consent or acclamation.
Section 1. Nomination procedures. a. At least 120 days before each annual meeting, the chair will appoint a nominating committee of three or more members. The nominating committee will nominate at least one member for each vacancy, including any unexpired term vacancy, for which elections are being held, and determine that the members nominated are agreeable to the placing of their names in nomination and will accept office if elected. The nominating committee must widely publicize the call for nominations to all members by any medium and interview each member that meets any qualifications established by the nominating committee.
b. At least 90 days before the annual meeting, the nominating committee files its nominations with the secretary of the credit union. At least 75 days before the annual meeting, the secretary notifies, in writing, all members eligible to vote that they may make nominations for vacancies by petition signed by 1% of the members with a minimum of 20 and a maximum of 500. The secretary may use electronic mail to notify members who have opted to receive notices or statements electronically.
c. The written notice must specify that the credit union will not conduct the election by ballot and there will be no nominations from the floor when the number of nominees equals the number of open positions.
d. The notice will include, in a form approved by the board of directors, a brief statement of qualifications and biographical data for each nominee submitted by the nominating committee. Each nominee by petition must submit a similar statement of qualifications and biographical data with the petition.
e. The written notice must state the closing date for receiving nominations by petition. At least 40 days before the annual meeting, nominee(s) must file the nomination petition with the secretary of the credit union. To be effective, nominee(s) must include a signed certificate with the nomination petition stating that they are agreeable to nomination and will serve if elected to office.
f. At least 35 days before the annual meeting, the secretary will post the nominations by petition along with those of the nominating committee in a conspicuous place in each credit union office and on the credit union’s website (if the credit union maintains a website).
Section 2. Election procedures. The plurality of the vote determines all elections. The election is conducted by ballot boxes or voting machines, subject to the following conditions:
(a) The board of directors will appoint the election tellers;
(b) At least 10 days before the annual meeting, the secretary will direct the preparation and placement of ballot boxes, printed ballots, or voting machines if there are sufficient nominations made by the nominating committee or by petition to provide more nominees than open positions. The secretary will place the boxes or voting machines in conspicuous locations as determined by the board of directors. The secretary will post the names of the candidates near the boxes or voting machines. The posting will include a brief statement of the candidates’ qualifications and biographical data in a form approved by the board of directors;
(c) The members have 24 hours to vote at conspicuous locations as the board determines. After 24 hours, election tellers will open the ballot boxes or voting machines, tally the vote, place the tally in the ballot boxes, and reseal the ballot boxes. The election tellers are responsible at all times for the ballot boxes or voting machines and the integrity of the vote. The election tellers will keep a record of all persons voting and must assure themselves that each person voting is entitled to vote; and
(d) The election tellers will take the ballot boxes to the annual meeting and place them in conspicuous locations with the names of the candidates posted near them. At the annual meeting, the election tellers will distribute printed ballots to those in attendance who have not voted. Members will deposit their votes in the ballot boxes placed by the election tellers. After giving the members an opportunity to vote at the annual meeting, the chair will close balloting. The election tellers will open the ballot boxes, tally the vote, and add the vote to the previous count. The chair will then announce the result of the vote.
Section 1. Nomination procedures. a. At least 120 days before each annual meeting, the chair will appoint a nominating committee of three or more members. The nominating committee will nominate at least one member for each vacancy, including any unexpired term vacancy, for which elections are being held, and determine that the members nominated are agreeable to the placing of their names in nomination and will accept office if elected. The nominating committee must widely publicize the call for nominations to all members by any medium and interview each member that meets any qualifications established by the nominating committee.
b. At least 90 days before the annual meeting, the nominating committee files its nominations with the secretary of the credit union. At least 75 days before the annual meeting, the secretary notifies, in writing, all members eligible to vote that they may make nominations for vacancies by petition signed by 1% of the members with a minimum of 20 and a maximum of 500. The secretary may use electronic mail to notify members who have opted to receive notices or statements electronically.
c. The written notice must specify that the credit union will not conduct the election by ballot and there will be no nominations from the floor when the number of nominees equals the number of open positions.
d. The notice will include, in a form approved by the board of directors, a brief statement of qualifications and biographical data for each nominee submitted by the nominating committee. Each nominee by petition must submit a similar statement of qualifications and biographical data with the petition.
e. The written notice must state the closing date for receiving nominations by petition. At least 40 days before the annual meeting, nominee(s) must file the nomination petition with the secretary of the credit union. To be effective, nominee(s) must include a signed certificate with the nomination petition stating that they are agreeable to nomination and will serve if elected to office.
f. At least 35 days before the annual meeting, the secretary will post the nominations by petition along with those of the nominating committee in a conspicuous place in each credit union office and on the credit union’s website (if the credit union maintains a website).
Section 2. Election procedures. The plurality of vote determines all elections. The election is conducted by electronic device or mail ballot, subject to the following conditions:
(a) The board of directors will appoint the election tellers;
(b) At least 30 days before the annual meeting, the secretary will ensure either a printed ballot or notice of ballot is mailed to all members eligible to vote if there are sufficient nominations made by the nominating committee or by petition to provide more nominees than open positions. The secretary may use electronic mail to provide the notice of ballot to members who have opted to receive notices or statements electronically;
(c) If the credit union conducts its elections electronically, the secretary will ensure the transmission of the following materials to each eligible voter using the following procedures:
(1) One notice of balloting stating the names of the candidates for the board of directors and the candidates for other separately identified offices or committees. The notice must include a brief statement of qualifications and biographical data for each candidate in a form approved by the board of directors. The secretary may use electronic mail to provide the notice of ballot to members who have opted to receive notices or statements electronically.
(2) One mail ballot that conforms to Section 2(d) of this article, as well as instructions for the electronic election procedure, including how to access and use the system and the timeframe for voting. The instructions will state that members without the requisite electronic device necessary to vote on the system may vote by submitting the enclosed mail ballot and specify the date the mail ballot must be received by the credit union. For members who have opted to receive notices or statements electronically, the mail ballot is not required and the secretary may use electronic mail to provide the instructions for the electronic election procedure.
(3) The election tellers verify, or cause to be verified, the name of the voter and their credit union account number as registered in the electronic balloting system. The election tellers will test the integrity of the balloting system at regular intervals during the election period.
(4) Election tellers must receive ballots no later than midnight, 5 calendar days before the annual meeting.
(5) Election tellers will tally the vote and the chair will make the result of the vote public at the annual meeting.
(6) If the electronic balloting system malfunctions, the board of directors may, in its discretion, hold the election by mail ballot only. The mail ballots must conform to Section 2(d) of this article and the secretary must mail them once more to all eligible members 30 days before the annual meeting. The board may make reasonable adjustments to the voting time frames above, or postpone the annual meeting when necessary, to complete the elections before the annual meeting.
(d) If the credit union conducts its election by mail ballot, the secretary will ensure the mailing of the following materials to each member using the following procedures:
(1) One ballot, clearly identified as the ballot, with the names of the candidates for the board of directors and the candidates for other separately identified offices or committees printed in random order. A brief statement of qualifications and biographical data for each candidate, in a form approved by the board of directors, will accompany the ballot;
(2) One ballot envelope, with instructions to place the completed ballot placed in the envelope and seal the envelope;
(3) One identification form the member completes that includes their name, address, signature and credit union account number;
(4) One mailing envelope that instructs the member to insert the sealed ballot envelope and the identification form. The mailing envelope must have prepaid postage and be preaddressed for return to the election tellers;
(5) When properly designed with features that preserve the secrecy of the ballot, the ballot, identification form, and prepaid postage and preaddressed return envelope may be combined;
(6) The election tellers will verify, or cause to be verified, the name and credit union account number of the voter as appearing on the identification form. The tellers will retain the verified identification form and the sealed ballot envelope until the vote count is completed. In the event of a questionable or challenged identification form, the tellers must retain the identification form and sealed ballot envelope together until the verification or challenge is resolved;
(7) Election tellers must receive ballots mailed to them no later than midnight 5 days before the date of the annual meeting;
(8) The election tellers will tally the vote. They will verify the result at the annual meeting and the chair will make the result of the vote public at the annual meeting.
Section 3. Order of nominations. Nominations may be in the following order:
(a) Nominations for directors.
(b) Nominations for credit committee members, if applicable. Elections may be by separate ballots following the same order as the above nominations or, if preferred, may be by one ballot for all offices.
Section 4. Proxy and agent voting. Members cannot vote by proxy. A member other than a natural person may vote through an agent designated in writing for the purpose.
Section 5. One vote per member. Irrespective of the number of shares, no member has more than one vote.
Section 6. Submission of information regarding credit union officials to NCUA. The secretary must forward the names and business addresses of board members, board officers, executive committee, credit committee members, if applicable, and supervisory committee members to the Administration in accordance with the Act and regulations in the manner as required by the Administration.
Section 7. Minimum age requirement. Members must be at least ________ years of age by the date of the meeting (or for appointed offices, the date of appointment) in order to vote at meetings of the members, hold elective or appointive office, sign nominating petitions, or sign petitions requesting special meetings.
The credit union may select the following option:
Section 7. Members must be at least ________years of age by the date of the meeting in order to vote at meetings of the members, sign nominating petitions, or sign petitions requesting special meetings. Members must be at least ________ years of age to hold elective or appointive office.
The Credit Union’s board should adopt a resolution inserting an age no greater than 18, or the age of majority under the state law applicable to the credit union, in the blank space for voting, or not greater than 21 for holding elective or appointive office.
The Credit Union may select the absentee ballot provision in conjunction with the selected voting procedure. The board may do this by printing the credit union’s bylaws with this provision or by retaining this copy and checking the box.
(a) The board of directors will appoint the election tellers;
(b) If there are sufficient nominations made by the nominating committee or by petition to provide more than one nominee for each open position, at least 30 days before the annual meeting, the secretary will ensure a printed ballot is mailed to all members of the credit union who are eligible to vote and who have submitted a written or electronic request for an absentee ballot;
(c) The secretary will ensure the following materials are mailed to each eligible voter who submitted a written or electronic request for an absentee ballot:
(1) One ballot, clearly identified as the ballot, with the names of the candidates for the board of directors and the candidates for other separately identified offices or committees printed in random order. A brief statement of qualifications and biographical data for each candidate, in a form approved by the board of directors, will accompany the ballot;
(2) One ballot envelope clearly marked with instructions to place the completed ballot placed in the envelope and seal the envelope;
(3) One identification form the member completes that includes their name, address, signature and credit union account number;
(4) One mailing envelope that instructs the member to insert the sealed ballot envelope and the identification form. The mailing envelope must have prepaid postage and be preaddressed for return to the election tellers;
(5) When properly designed with features that preserve the secrecy of the ballot, the ballot, identification form, and prepaid postage and preaddressed return envelope may be combined;
(d) The election tellers will verify, or cause to be verified, the name and credit union account number of the voter as appearing on the identification form. The tellers will retain the verified identification and the sealed ballot envelope until the vote count is completed. In the event of a questionable or challenged identification form, the tellers must retain the identification form and the sealed ballot envelope together until the verification or challenge is resolved. If more than one voting procedure is used, the tellers must verify that no eligible voter voted more than one time;
(e) Election tellers must receive ballots mailed to them no later than midnight 5 days before the date of the annual meeting;
(f) Members or authorized personnel will deposit absentee ballots in the ballot boxes taken to the annual meeting or included in a precount in accordance with procedures specified in Article V, Section 2; and
(g) If a member has chosen to receive statements and notices electronically, the credit union may provide notices required in this section by email and provide instructions for voting by electronic means instead of mail ballots.
Section 1. Number of members. The board consists of ________ directors, all of whom must be members. By resolution, the board may change the number of directors to an odd number not fewer than 5 or more than 15. The board may not reduce the number of directors unless there is a corresponding vacancy as a result of a death, resignation, expiration of a term of office, or other action provided by these bylaws. The board must file a copy of the resolution covering any increase or decrease in the number of directors with the official copy of the bylaws.
Section 2. Composition of board and committees.
The total number of directors serving who fall into the categories below must not constitute a majority of the board:
• Management official plus assistant management official(s) plus other employees;
• Immediate family members or persons in the same household as the management official, assistant management official(s), and other employees; or
• Management official plus assistant management official(s) plus other employees, plus immediate family members or persons in the same household as management officials, assistant management officials, and other employees.
The board may also choose the option below:
You can also add “unless the employee position to be filled exists as a result of a death or disability” after committee member.
For this section, you can correct the syntax by omitting the plural(s) if applicable.
Section 3. Terms of office. Terms for directors are for periods of 2 or 3 years as decided by the board. All terms must be for the same number of years and until the election and qualification of successors. Terms are set and staggered at the first meeting, or when the number of directors changes, so that approximately an equal number of terms expire at each annual meeting.
Section 4. Vacancies. The directors, by majority vote, will fill any vacancy on the board, credit committee, if applicable, or supervisory committee as soon as possible. If all director positions become vacant at once, the supervisory committee immediately becomes the temporary board of directors and must follow the procedures in Article IX, Section 3. Directors and credit committee members appointed to fill a vacancy hold office only until the next annual meeting. The FCU’s members then vote to select a candidate to fill the remainder of the original director’s unexpired term. Members of the supervisory committee appointed to fill a vacancy on the supervisory committee hold office through the remainder of the unexpired term.
Section 5. Regular and special meetings. The board must hold a regular meeting each month at the time and place fixed by resolution. The board must conduct one regular meeting each calendar year in person. If a quorum of the board is present at the in-person meeting, the remaining board members may participate by audio or video teleconference. The board may conduct the other regular meetings by audio or video teleconference. The chair, or in the chair’s absence the ranking vice chair, may call a special meeting of the board at any time and must do so upon written request of a majority of the directors. The chair, or in the chair’s absence the ranking vice chair, will fix the time and place of special meetings unless the board directs otherwise. The board will give notice of all meetings in the manner set by resolution. The board may conduct special meetings by audio or video teleconference. The board may take action and vote on resolutions without a meeting. The board must first obtain unanimous consent for the action in writing or by electronically recorded means.
Section 6. Board responsibilities. The board has the general direction and control of the affairs of this credit union. The board is responsible for performing all the duties customarily done by boards of directors. This includes but is not limited to:
(a) Directing the affairs of the credit union in accordance with the Act, these bylaws, the rules and regulations and sound business practices.
(b) Establishing programs to achieve the purposes of this credit union as stated in Article I, Section 2, of these bylaws.
(c) Establishing lending policies, a loan collection program, and authorizing the charge-off of uncollectible loans.
(d) Establishing policies to address training for directors and volunteer officials in areas such as ethics and fiduciary responsibility, regulatory compliance, and accounting.
(e) Ensuring that staff and volunteers who handle the receipt, payment or custody of money or other property of this credit union; or property in its custody as collateral or otherwise, are properly bonded in accordance with the Act and regulations.
(f) Performing additional acts and exercising additional powers as required or authorized by applicable law and regulation.
If the credit union has an elected credit committee, you do not need to check a box. If the credit union has no credit committee check Option 1, and if it has an appointed credit committee check Option 2.
(g) Reviewing denied loan applications of members who file written requests for review.
(h) Appointing one or more loan officers and delegating to those officers the power to approve or disapprove loans, lines of credit or advances from lines of credit.
(i) In its discretion, appointing a loan review (the credit union may fill in another name if desired) committee to review loan denials and delegating to the committee the power to overturn denials of loan applications. The committee will function as a mid-level appeal committee for the board. The board must review all loans denied by the committee upon written request of the member.
The credit union may select one of three options for the makeup and term of the committee. Enter the option selected ________
Option A. The committee must consist of three members with a term of office of____ (enter no more than 3) years. The committee may not have more than one loan officer.
Option B. The committee must consist of three members and two alternates. The term of office of the committee members will be for ________ (enter no more than 3) years. The board may appoint any number of lending professionals within the organization to the committee, provided that no loan officer may review any loan that he or she denied. At least 3 members of the committee must review loan denials, none of whom have been a party to denying the loan.
Option C. The board may, by resolution, change the number of committee members to an odd number no less than three and no more than seven. The board will determine the length of each committee member’s term upon appointment and stagger terms as necessary to prevent a complete turnover of committee members. The board must file a copy of the resolution covering any increase or decrease in the number of committee members with the official copy of the bylaws of this credit union. The committee will act by majority vote of members present at a meeting. The committee may not have more than one loan officer.
(g) Appointing an odd number of credit committee members as provided in Article VIII of these bylaws.
Section 7. Quorum. A majority of directors, including any vacant positions, constitutes a quorum for the transaction of business at any meeting. A majority of the directors holding office constitutes a quorum to fill any vacancies as stated in Section 4 of this article. Less than a quorum may adjourn from time to time until a quorum is in attendance.
Section 8. Attendance and removal. a. If a director or a credit committee member, if applicable, fails to attend regular meetings of the board or credit committee, respectively, for 3 consecutive months, (choose one of the following) ________ or 4 meetings within a calendar year, or ________ 4 meetings within any 12 consecutive months or otherwise fails to perform any significant duties as a director or a credit committee member, the board may declare the office vacant and fill the vacancy as provided in the bylaws.
b. The board may remove any board officer from office for failure to perform any significant duties as an officer. Prior to removal, the board must give the officer reasonable notice and an opportunity to respond to the issues.
c. When any board officer, membership officer, executive committee member or investment committee member is absent, disqualified, or otherwise unable to perform the duties of the office, the board may by resolution designate another member of this credit union to fill the position temporarily. The board may also, by resolution, designate another member or members of this credit union to act on the credit committee when necessary in order to obtain a quorum.
Section 9. Suspension of supervisory committee members. The board may suspend any member of the supervisory committee by a majority vote. In the event of a suspension, the board must hold a special meeting of the members at least 7 but no more than 14 days after any suspension. The members will decide whether to remove or to restore the suspended committee member of the supervisory committee.
The credit union may add the optional Section 10 if desired.
Section 10. Director Emeritus. The board of directors may appoint any former director who served on the board at least ________ (fill in the number) years as “Director Emeritus.” The board may substitute suitable volunteer service time for some of the board service time provided the candidate has served at least ________ (fill in the number) years on the board. The individuals appointed directors emeritus function as an advisory committee to the board of directors. Terms for directors emeritus are ________ (fill in the number) years. The board may increase or decrease the number of directors emeritus, or shorten or extend any director emeritus’s term, by resolution. Unless separately elected or appointed, directors emeritus are not members of any other committee of the credit union. Directors emeritus are not a member or officer of the board of directors; they may not vote on any matter before the board or any other committee of the credit union; they may not receive any compensation from the credit union; and they are not required to attend any meetings or authorized to perform any duties other than providing advice to the credit union’s board, staff and other committees as needed.
Section 1. Board officers. The board elects the following officers from their number: a chair, one or more vice chairs, a financial officer, and a secretary. The board determines the title and rank of each board officer and records them in the addendum to this article. The board may compensate one board officer, the ________, for services as they determine. If the board elects more than one vice chair, the board determines their rank as first vice chair, second vice chair, and so on. The same person may hold the offices of the financial officer and secretary. If the board permits a management official or assistant management official to serve on the board, he or she may not serve as the chair. Unless removed as provided in these bylaws, the board officers elected at the first meeting of the board hold office until the first meeting of the board following the first annual meeting of the members and until the election and qualification of their respective successors.
Section 2. Election and term of office. The board must hold a meeting not later than 7 days after the annual meeting to elect officers. Board officers hold office for a 1-year term and until the election and qualification of their respective successors. Any person elected to fill a vacancy caused by the death, resignation, or removal of an officer is elected by the board to serve only for the unexpired term of that officer and until a successor is duly elected and qualified.
Section 3. Duties of Chair. The chair presides at all meetings of the members and at all meetings of the board, unless disqualified through suspension by the supervisory committee. The chair also performs other duties customarily assigned to the office of the chair or duties directed to perform by resolution of the board that are not inconsistent with the Act, regulations, and these bylaws.
Section 4. Approval required. The board must approve all individuals authorized to sign all notes, checks, drafts, and other orders for disbursement of credit union funds.
Section 5. Vice chair. The ranking vice chair has and may exercise all the powers, authority, and duties of the chair during the chair’s absence or inability to act.
Section 6. Duties of financial officer. i. The financial officer manages this credit union under the control and direction of the board unless the board has appointed a management official to act as general manager. Subject to limitations, controls and delegations the board may impose, the financial officer will:
(a) Have charge over all funds, securities, valuable papers and other assets of this credit union.
(b) Provide and maintain full and complete records of all the assets and liabilities of this credit union in accordance with prescribed law, regulation, and Administration guidance.
(c) Within 20 days after the close of each month, prepare and submit to the board a financial statement showing the condition of this credit union as of the end of the month, including a summary of delinquent loans; and post a copy of the statement in a conspicuous place in the office of the credit union where it will remain until replaced by the next month’s financial statement.
(d) Ensure that financial and other reports the Administration may require are prepared and sent.
(e) Within standards and limitations set by the board, employ sufficient staff to run the credit union, and have the power to remove these employees.
(f) Perform other duties customarily assigned to the office of the financial officer or duties assigned by board resolution that are not inconsistent with the Act, regulations, and these bylaws.
ii. The board may employ one or more assistant financial officers, none of whom may also hold office as chair or vice chair. The board may authorize them, under the direction of the financial officer, to perform any of the duties falling to the financial officer, including the signing of checks. When designated by the board, any assistant financial officer may also act as financial officer during the financial officer’s temporary absence or temporary inability to act.
Section 7. Duties of management official and assistant management official. The board may appoint a management official who is under the direction and control of the board or of the financial officer as determined by the board. The board may assign any or all of the responsibilities of the financial officer described in Section 6 of this article. The board will determine the title and rank of each management official and record them in the addendum to this article. The board may employ one or more assistant management officials. The board may authorize assistant management officials under the direction of the management official, to perform any of the duties falling to the management official, including the signing of checks. When designated by the board, any assistant management official may also act as management official during the management official’s temporary absence or temporary inability to act.
Section 8. Board powers regarding employees. The board employs, fixes the compensation, and prescribes the duties of employees as necessary, and has the power to remove employees, unless it has delegated these powers to the financial officer or management official. Management does not have the power or duty to employ, prescribe the duties of, or remove necessary clerical and auditing assistance employed or used by the supervisory committee or remove any loan officer appointed by the credit committee.
The credit union may select one of the following options and add it to the end of Section 8.
No director or committee member, who is not then a paid employee of the credit union, may become a paid employee of this credit union for a minimum of ________ (Fill in the number, which may be zero) years from the date the official terminates his or her position as a director or committee member.
No director, committee member, immediate family member of a director or committee member, or person in the same household as a director or committee member, who is not then a paid employee of this credit union, may become a paid employee of the credit union for a minimum of ________ (Fill in the number, which may be zero) years from the date the official terminates his or her position as a director or committee member.
No director, committee member, immediate family member of a director or committee member, or person in the same household as a director or committee member, who is not then a paid employee of the credit union, may become a paid employee of this credit union for a minimum of ________ (Fill in the number, which may be zero) years from the date the official terminates his or her position as a director or committee member, unless the employee position to be filled exists as a result of a death or disability.
No official, who is not already a paid employee of this credit union, may become a paid employee of this credit union for a minimum of ________ (Fill in the number, which may be zero) years from the date the official terminates his or her position as a director or committee member, unless the employee position to be filled exists as a result of death or disability. The term “official” in this bylaw means a person who is a member of the board of directors, supervisory committee, or other volunteer committee established by the board of directors.
Section 9. Duties of secretary. The secretary prepares and maintains full and correct records of all meetings of the members and of the board. The secretary will prepare a record of each respective meeting within 7 days after its completion. The secretary must promptly inform the Administration in writing of any change in the address of the office of this credit union or the location of its principal records. The secretary provides the proper notice of all meetings of the members in the manner prescribed in these bylaws. The secretary also performs other duties as directed by resolution of the board that are not inconsistent with the Act, regulation, and these bylaws. The board may employ one or more assistant secretaries, none of whom may also hold office as chair, vice chair, or financial officer, and may authorize them under direction of the secretary to perform any of the duties assigned to the secretary.
Section 10. Executive committee. As authorized by the Act, the board may appoint an executive committee of not fewer than three directors to serve at its pleasure, to act for it with respect to the board’s specifically delegated functions. When making delegations to the executive committee, the board must be specific with regard to the committee’s authority and limitations related to the particular delegation. The board may also authorize any of the following to act upon membership applications under conditions the board and these bylaws may prescribe: an executive committee; a membership officer(s) appointed by the board from the membership, other than a board member paid as an officer; the financial officer; any assistant to the paid officer of the board or to the financial officer; or any loan officer. The board may not compensate the executive committee member or membership officer as such.
Section 11. Investment committee. The board may appoint an investment committee composed of not less than two, to serve at its pleasure to have charge of making investments under rules and procedures established by the board. The board may not compensate any member of the investment committee as such.
Addendum: The board must list the positions of the board officers and management officials of this credit union. They are as follows:
| Position | Credit union title | Officer or official name |
|---|---|---|
| Board Chair. | ||
| Vice Chair. | ||
| Treasurer. | ||
| Secretary. | ||
| Management Official. | ||
| Other 1. | ||
| Other 2. | ||
| Other 3. | ||
| Other 4. |
Select Option 1 if the credit union has a credit committee and Option 2 if it does not have a credit committee.
Section 1. Credit committee members. The credit committee consists of ________ members. All the members of the credit committee must be members of this credit union. The board determines the number of members on the credit committee, which must be an odd number and may not be fewer than 3 and no more than 7. The board may not reduce the number of members unless there is a corresponding vacancy as a result of a death, resignation, expiration of a term of office, or other action provided by these bylaws. The board must file a copy of the resolution covering any increase or decrease in the number of committee members with the official copy of the bylaws of this credit union.
Section 2. Terms of office. Regular terms of office for elected credit committee members are for periods of either 2 or 3 years as the board determines. All regular terms are for the same number of years and until the election and qualification of successors. The board will fix the regular terms at the beginning or upon any increase or decrease in the number of committee members so that approximately an equal number of regular terms expire at each annual meeting. The board determines the periods for the regular terms of office for appointed credit committee members and records these periods in the board’s minutes.
Section 3. Officers of credit committee. The credit committee chooses from their number a chair and a secretary. The secretary of the committee prepares and maintains full and correct records of all actions taken by it. They must prepare those records within 3 days after the action. The same person may hold the offices of the chair and secretary.
Section 4. Credit committee powers. The credit committee may, by majority vote of its members, appoint one or more loan officers to serve at its pleasure. The committee may delegate to them the power to approve loan applications, share withdrawals, releases and substitutions of security, within limits specified by the committee and within limits of applicable law and regulations. The committee may not appoint more than one of its members as a loan officer. Each loan officer must furnish to the committee a record of each approved or not approved transaction within 7 days of the date of the filing of the application or request. This record becomes a part of the committee’s records. The committee must act on all applications or requests not approved by a loan officer. No individual may disburse funds of this credit union for any application or share withdrawal that the individual has approved as a loan officer.
Section 5. Credit committee meetings. The credit committee must hold at least one meeting a month and as frequently as required to complete the business of this credit union. The committee will give notice of meetings to its members in the manner it prescribes by resolution.
Section 6. Credit committee duties. For each loan, the credit committee or loan officer must review the character and financial condition of the applicant and their surety, if any. The credit committee or loan officer will ascertain the applicant’s ability to fully and promptly repay the loan. The credit union may use an automated loan processing system to conduct this review, subject to the conditions set forth in Section 7, below. Where appropriate, the credit committee or loan officers should provide, or refer applicants to, financial counseling assistance.
Section 7. Unapproved loans prohibited. The credit committee must approve all loans. If the credit union uses an automated lending system, the credit committee must review all loan applications the system has denied and review at least a sample of approved loans to screen for fraud and ensure the automated system is functioning within the lending policies the board has established.
Section 8. Lending procedures. The credit committee, loan officer, or automated system determines the required security, if any, and the terms of repayment for each application. All lending decisions and loan terms must comply with applicable law and regulations, these bylaws, and board policy. The security furnished must be adequate in quality and character as well as consistent with sound lending practices. When the credit union does not have the funds available to make all the loans requested, the credit committee should give preference, in all cases, to the smaller applications if the need and credit factors are nearly equal.
Section 1. Records of loan officer; prohibition on loan officer disbursing funds. Each loan officer must maintain a record of each approved or not approved transaction within 7 days of the filing of the application or request. This record then becomes a part of the records of the credit union. No individual may disburse funds of this credit union for any application or share withdrawal that the individual has approved as a loan officer.
Section 2. Loan officer duties. For each loan, the loan officer must review the character and financial condition of the applicant and their surety, if any. The loan officer will ascertain the applicant’s ability to fully and promptly repay the loan. The credit union may use an automated loan processing system to conduct this review, subject to the conditions set forth in Section 3, below. Where appropriate, the loan officer should provide, or refer applicants to, financial counseling assistance.
Section 3. Unapproved loans prohibited. The loan officer must approve all loans. Loan terms and rates must comply with applicable law and regulations. If the credit union uses an automated lending system, the loan officer must review all loan applications the system has denied, and review at least a sample of approved loans to screen for fraud and ensure the automated system is functioning within the lending policies the board has established.
Section 4. Lending procedures. The loan officer or automated lending system determine the required security, if any, and the terms of repayment for each application. All lending decisions and loan terms must comply with applicable law and regulation, these bylaws, and board policy. The security furnished must be adequate in quality and character as well as consistent with sound lending practices. When the credit union does not have the funds available to make all the loans requested, the loan officer should give preference, in all cases, to the smaller applications if the need and credit factors are nearly equal.
Section 1. Appointment and membership. The board appoints the supervisory committee from members of this credit union. One of the committee members may be a director other than the financial officer or the paid officer of the board. The board determines the number of members on the committee, which may not be fewer than 3 or more than 5. No member of the credit committee, if applicable, or employee of this credit union may be appointed to the committee. Terms of committee members are for periods of 1, 2, or 3 years as decided by the board.
However, all terms are for the same number of years and until the appointment and qualification of successors. Terms are set and staggered at the beginning, or on the increase or decrease in the number of committee members so that approximately an equal number of terms expire at each annual meeting.
Section 2. Officers of supervisory committee. The supervisory committee members choose from their number a chair and a secretary. The secretary prepares, maintains, and has custody of all records of the committee’s actions. The same person may hold the offices of chair and secretary.
Section 3. Duties of supervisory committee.
a. The supervisory committee makes, or arranges for, the audits, and prepares and submits the written reports required by the Act and regulations. The committee may employ and use the clerical and auditing assistance required to carry out its responsibilities. The committee may request the board to provide compensation for this assistance. It will prepare and forward to the Administration required reports.
b. If all director positions become vacant at once, the supervisory committee immediately assumes the role of the board of directors. The supervisory committee acting as the board must generally call and hold a special meeting to elect a board. That board will serve until the next annual meeting. They must hold the special meeting at least 7 but no more than 14 days after all director positions became vacant. Nominations for the board at the special meeting are by petition or from the floor. However, the supervisory committee may forego the special meeting if the next annual meeting will occur within 45 days after all the director positions become vacant.
c. The supervisory committee acting as the board may not act on policy matters. However, directors elected at a special meeting have the same powers as directors elected at the annual meeting.
Section 4. Verification of accounts. The supervisory committee will cause the verification of the accounts of members with the records of the financial officer from time to time and not less frequently than as required by the Act and regulations. The committee must maintain a record of this verification.
Section 5. Powers of supervisory committee—removal of directors and credit committee members. By unanimous vote, the supervisory committee may suspend any director, board officer, or member of the credit committee. In the event of a suspension, the supervisory committee must call a special meeting of the members to act on the suspension. They must hold the meeting at least 7 but no more than 14 days after the suspension. The chair of the committee acts as chair of the meeting unless the members select another person to act as chair.
Section 6. Powers of supervisory committee—special meetings. By majority vote, the supervisory committee may call a special meeting of the members to: consider any violation of the provisions of the Act, the regulations, the credit union’s charter or bylaws; or to consider any practice of this credit union the committee deems to be unsafe or unauthorized.
Section 1. Initial meeting. When making an application for a federal credit union charter, the subscribers to the organization certificate must meet to elect a board of directors and a credit committee, if applicable. The Agency may revoke the charter for failure to start operations within 60 days after receipt of the approved organization certificate unless the Agency approves an extension of time.
Section 2. Election of directors and credit committee. The subscribers elect a chair and a secretary for the meeting. The subscribers then elect a board of directors and a credit committee, if applicable. The elected directors or committee members will hold office until the first annual meeting of the members and until the election of their respective successors. Every person elected under this section or appointed under Section 3 of this article, must become a member within 30 days if they are not already. If any person elected as a director or committee member or appointed as a supervisory committee member does not become a member within 30 days of election or appointment, the office will automatically become vacant and be filled by the board.
Section 3. Election of board officers. Promptly after the elections held under the provisions of Section 2 of this article, the board must meet to elect the board officers. The officers will hold office until the first meeting of the board of directors after the first annual meeting of the members and until the election of their respective successors. The board also appoints a supervisory committee at this meeting as provided in Article IX, Section 1, of these bylaws and a credit committee, if applicable. The appointed members hold office until the first regular meeting of the board after the first annual meeting of the members and until the appointment of their respective successors.
After five years of operation, the credit union may select the following:
Article X of the bylaws shall be amended to read as follows:
Section 1. Loan purposes. The credit union may make loans to members for provident or productive purposes in accordance with applicable law and regulations.
The credit union may add business as one of its purposes by placing a comma after “provident” and inserting “business.”.
Section 2. Delinquency. Any member whose loan is delinquent may be required to pay a late charge as determined by the board of directors.
Section 1. Power of board to declare dividends. The board sets dividend periods and declares dividends as permitted by the Act and applicable law and regulation.
Section 1. Expulsion procedure. A credit union may expel a member in one of three ways. The first way is through a special meeting. Under this option, a credit union must call a special meeting of the members, provide the member the opportunity to be heard, and obtain a two-thirds vote of the members present at the special meeting to expel a member. The second way to expel a member is under a nonparticipation policy given to each member that follows the requirements found in the Act. The third way to expel a member is by a two-thirds vote of a quorum of the directors of the credit union. A credit union can only expel a member for cause and through a vote of the directors of the credit union if it follows the policy for expulsion in section 2.
Section 2. A credit union’s directors may vote to expel a member for cause if the credit union has provided a written copy of this Article or the optional standard disclosure notice to each member of the credit union. The communication of the policy, along with all notices required under this section, must be legible, written in plain language, reasonably understandable by ordinary members, and may be provided electronically only in the case of members who have elected to receive electronic communications from the credit union.
If a member will be subject to expulsion, the member shall be notified in writing in advance, along with the reason for such expulsion. The notice must include, at minimum, (i) relevant dates, (ii) sufficient detail for the member to understand the grounds for expulsion, (iii) the member’s right to request a hearing, (iv) how to request a hearing, (v) the procedures related to the hearing, (vi) notification that, if a hearing is not requested, membership will terminate after 60 calendar days, and (vii) if applicable, a general statement on the effect of expulsion related to the member’s accounts or loans at the credit union. The notice cannot include only conclusory statements regarding the reason for the member’s expulsion. The notice must also tell the member that any complaints related to the member’s potential expulsion should be submitted to NCUA’s Consumer Assistance Center if the complaint cannot be resolved directly with the credit union. The FCU must maintain a copy of the provided notice for its records. The notice shall be provided in person, by mail to the member’s address, or, if the member has elected to receive electronic communications from the credit union, may be provided electronically.
A member shall have 60 calendar days from the date of receipt of a notification to request a hearing from the board of directors of the credit union. A member is not entitled to attend the hearing in person, but the member must be provided a meaningful opportunity to present the member’s case orally to the FCU board through a videoconference hearing. The member may choose to provide a written submission to the Board instead of a hearing with oral statements. If a member cannot participate in a videoconference hearing, then the FCU may offer a telephonic hearing. If a member does not request a hearing or provide a written submission, the member shall be expelled after the end of the 60-day period after receipt of the notice. If a member requests a hearing, the board of directors must provide the member with a hearing. At the hearing, the board of directors may not raise any rationale for expulsion that is not explicitly included in the notice to the member.
After the hearing, the board of directors of the credit union must hold a vote within 30 calendar days on expelling the member. If a member is expelled, either through the expiration of the 60-day period or a vote to expel the member after a hearing, written notice of the expulsion must be provided to the member in person, by mail to the member’s address, or, if the member has elected to receive electronic communications from the credit union, may be provided electronically. The notice must provide information on the effect of the expulsion, including information related to account access and any deductions by the credit union related to amounts due. The notice must also tell the member that any complaints related to their expulsion should be submitted to NCUA’s Consumer Assistance Center if the complaint cannot be resolved directly with the credit union. The notice must also state that the member has an opportunity to request reinstatement.
A member expelled under this authority must be given an opportunity to request reinstatement of membership. The FCU may act on a reinstatement request through a majority vote of a quorum of the directors of the credit union, a majority vote of the members of the credit union present at a special meeting, or a majority vote of members at an annual meeting, provided the annual meeting occurs within 90 days of the member’s reinstatement request. If the FCU holds a meeting of the members to vote on the reinstatement request, an in-person vote is not required. An FCU is only required to hold a board vote or special meeting in response to a member’s first reinstatement request following expulsion.
FCUs are required to maintain records related to any member expelled through a vote of the directors of the credit union for six years.
Section 3. The term cause in this Article means (A) a substantial or repeated violation of the membership agreement of the credit union; (B) a substantial or repeated disruption, including dangerous or abusive behavior, to the operations of a credit union, as defined below; or (C) fraud, attempted fraud, or conviction of other illegal conduct in relation to the credit union, including the credit union’s employees conducting business on behalf of the credit union.
If the FCU is considering expulsion of a member due to repeated non-substantial violations of the membership agreement or repeated disruptions to the credit union’s operations, the credit union must provide written notice to the member at least once prior to the notice of expulsion, and the violation or conduct must be repeated within two years after having been notified of the violation. The written notice must state the specific nature of the violation or conduct and that if the violation or conduct occurs again, the member may be expelled from the credit union.
Dangerous or abusive behavior includes the following: (1) violence, intimidation, physical threats, harassment, or physical or verbal abuse of officials or employees of the credit union, members, or agents of the credit union. This only includes (a) actions while on credit union premises or otherwise related to credit union activities, and through use of telephone, mail, email, or other electronic method; (b) behavior that causes or threatens damage to credit union property; or (c) unauthorized use or access of credit union property. Expressions of frustration with the credit union or its employees through elevated volume and tone; expressions of intent to seek lawful recourse, regardless of perceived merit; or repeated interactions with credit union employees are insufficient to constitute dangerous or abusive behavior. Additionally, members cannot be expelled due to or in retaliation for their complaints to the NCUA or any other regulatory agency or law enforcement, and members who are employees or former employees of the FCU cannot be expelled for any protected whistleblower activities.
Section 4. Expulsion or withdrawal does not relieve a member of any liability to the credit union. The credit union will pay all of the member’s shares upon the member’s expulsion or withdrawal less any amounts due to the credit union.
Section 5. An expulsion of a member pursuant to section 2 shall be done individually, on a case-by-case basis, and neither the NCUA Board nor any credit union may expel a class of members.
Section 1. Minors permitted to own shares. The credit union may issue shares in the name of a minor. State law governs the rights of minors to transact business with this credit union.
Section 1. Compliance with law and regulation. The members, directors, officers, and employees of this credit union must exercise all power, authority, duties, and functions according to the provisions of these bylaws in strict conformity with the provisions of applicable law and regulations, and the credit union’s charter and bylaws.
Section 2. Confidentiality. The officers, directors, members of committees and employees of this credit union must keep all member transactions and all information respecting their personal affairs in confidence, unless otherwise directed by state or federal law.
Section 3. Removal of directors and committee members. Notwithstanding any other provisions in these bylaws, any director or committee member of this credit union may be removed from office by the affirmative vote of a majority of the members present at a special meeting called for the purpose, but only after an opportunity has been given to be heard. If member votes at a special meeting result in the removal of all directors, the supervisory committee immediately becomes the temporary board of directors and must follow the procedures in Article IX, Section 3.
Section 4. Conflicts of interest prohibited. No director, committee member, officer, agent, or employee of this credit union may participate in any manner, directly or indirectly, in the consideration or determination of any question affecting his or her pecuniary or personal interest or the pecuniary interest of any corporation, partnership, or association (other than this credit union) in which he or she is directly or indirectly interested.
If the board receives a matter affecting any director’s interest, the director must withdraw from the consideration or determination of that matter. If the remaining qualified directors present at the meeting plus the disqualified director or directors constitute a quorum, the remaining qualified directors, by majority vote, may exercise with respect to this matter all the powers of the board. In the event of the disqualification of any member of the credit committee, if applicable, or the supervisory committee, that committee member must withdraw from the deliberation or determination.
Section 5. Records. The board must preserve copies of the organization certificate of this credit union, its bylaws, any amendments to the bylaws, and any special authorizations by the Administration. The board must attach copies of the organization certificate and field of membership amendments as an appendix to these bylaws. The board must record all returns of nominations, elections, and proceedings of all regular and special meetings of the members and directors in the minutes of this credit union. The respective chair or presiding officer and the person serving as secretary of the meeting must sign all minutes of the meetings of the members, the board, and the committees. All copies and records maintained under this section may be stored physically or electronically provided that the information is readily accessible to the directors, committee members of this credit union, members, and the Administration. Moreover, signatures may be provided electronically where permissible under federal or state law.
Section 6. Availability of credit union records. All books of account and other records of this credit union must be available upon request at all times to the directors, committee members of this credit union, and members provided they have a proper purpose for obtaining the records. If this credit union maintains a website currently or in the future, the board must post the bylaws of this credit union on the website. The board must also make the charter and bylaws of this credit union available for inspection by any member, upon request. If the member requests a copy of the charter or bylaws, the board will provide a copy to the member. The board may provide this copy to the member in physical or electronic copy. If the member requests a physical copy, the board may charge a reasonable fee for the physical copy.
Section 7. Member contact information. Members must keep the credit union informed of their current mailing address or, if the member has elected to receive electronic communications, their current email address.
Section 8. Indemnification. (a) Subject to the limitations in § 701.33(c)(5) through (c)(7) of the regulations, the credit union may elect to indemnify to the extent authorized by (check one).
[ ] Law of the State of ________:
[ ] Model Business Corporation Act:
The following individuals from any liability asserted against them and expenses reasonably incurred by them in connection with judicial or administrative proceedings to which they are or may become parties by reason of the performance of their official duties (check as appropriate).
[ ] Current officials.
[ ] Former officials.
[ ] Current employees.
[ ] Former employees.
(b) The credit union may purchase and maintain insurance on behalf of the individuals indicated in paragraph (a) of this section against any liability asserted against them and expenses reasonably incurred by them in their official capacities and arising out of the performance of their official duties to the extent such insurance is permitted by the applicable State law or the Model Business Corporation Act.
(c) The term “official” in this bylaw means a person who is a member of the board of directors, credit committee, supervisory committee, other volunteer committee (including elected or appointed loan officers or membership officers), established by the board of directors.
Section 9. Pronouns, Singular and Plural. Unless the context requires otherwise, words denoting the singular may be construed as denoting the plural, words of the plural may be construed as denoting the singular, and words of one gender may be construed as denoting such other gender as is appropriate.
Section 1. Amendment procedures. The board may adopt amendments of these bylaws by an affirmative two-thirds vote of the directors. Written NCUA approval is required for the amendment of the bylaws to become effective. After adopting amendments, the credit union will update the bylaws posted on its website (if such credit union maintains a website) and ensure that members seeking to inspect the bylaws receive the most current version of the bylaws. To adopt amendments to the credit union’s charter, board members must vote at a duly held meeting after receiving prior written notice of the meeting and a copy of the proposed amendment or amendments with the notice. Written NCUA approval is required for the amendment to the charter to become effective.
Section 1. General definitions. When used in these bylaws the terms:
“Act” means the Federal Credit Union Act, as amended.
“Administration” means the National Credit Union Administration.
“Agency” means the Regional Director, the Director of the Office of National Examinations and Supervision, or the Director of the Office of Credit Union Resources and Expansion.
“Applicable law and regulations” means the Federal Credit Union Act and rules and regulations issued thereunder or other applicable federal and state statutes and rules and regulations issued thereunder as the context indicates.
“Board” means board of directors of the federal credit union.
“Board officers” means:
1. “Chair” means Presiding Board officer, President of the Board, Presiding Board Officer, or Chairperson.
2. “Vice Chair” means Vice President.
3. “Financial Officer” means Treasurer.
4. “Secretary” means Recording Officer.
5. “Management Official” means General Manager, Manager, President, or Chief Executive Officer.
“Charter” means the approved organization certificate and field of membership issued by the National Credit Union Administration or one of its predecessors. It is the document that authorizes a group to operate as a credit union, defines the fundamental limits of its operating authority, and includes the persons the credit union is permitted to accept for membership.
“Field of membership” means the persons (including organizations and other legal entities) a credit union is permitted to accept for membership.
“Immediate family member” means spouse, child, sibling, parent, grandparent, grandchild, stepparents, stepchildren, stepsiblings, and adoptive relationships.
“Loans” means any type of loan product the credit union offers. This includes, but is not limited to, consumer loans, lines of credit, credit cards, member business loans, commercial loans, and real estate loans.
“Management” means the Board, Financial Officer, and Management Official.
“Member” means a person must:
1. Be eligible for membership under Section 5 of the charter;
2. Sign membership forms as approved by the credit union board;
3. Subscribe to at least one share (par value) of stock;
4. Pay the initial installment;
5. Pay an entrance fee, if required; and
6. Be eligible to vote upon reaching the minimum age the credit union establishes for voting and participation in the affairs of the credit union.
“Membership Officer” means a majority of the board of directors, a majority of the members of a duly authorized executive committee, or an individual(s) appointed by the board of directors to serve as such.
“NCUA Board” means the Board of the National Credit Union Administration.
“Person in the same household” means an individual living in the same residence maintaining a single economic unit.
“Regulation” or “regulations” means rules and regulations issued by the NCUA Board.
“Share” or “shares” means all classes of shares and share certificates that may be held in accordance with applicable law and regulations.
i. Entrance fee: FCUs may not vary the entrance fee among different classes of members (such as students, minors, or non-natural persons) because the Act requires a uniform fee. FCUs may, however, eliminate the entrance fee for all applicants.
ii. Membership application procedures: Under section 113 of the Act,
(iii) Violent, belligerent, disruptive, or abusive members: Many credit unions have confronted the issue of handling a violent, belligerent, disruptive, or abusive individual. Doing so is not a simple matter insofar as it requires the credit union to balance the need to preserve the safety of individual staff, other members, and the integrity of the workplace, on one hand, with the rights of the affected member on the other. In accordance with the Act and applicable legal interpretations, there is a reasonably wide range within which FCUs may fashion a policy that addresses these interrelated responsibilities.
Thus, an individual who has become violent, belligerent, disruptive, or abusive may be prohibited from entering the premises or making telephone contact with the credit union, and the individual may be severely restricted in terms of eligibility for products or services. So long as the individual is not barred from exercising the right to vote at annual meetings and is allowed to maintain a regular share account, the FCU may fashion and implement a policy that is reasonably designed to preserve the safety of its employees and the integrity of the workplace. The policy need not be identical nor applied uniformly in all cases; there is room for flexibility and a customized approach to fit the circumstances. In fact, the NCUA anticipates that in some circumstances, such as violence or a credible threat of violence against another member or credit union staff in the FCU or its surrounding property, an FCU may take immediate action to restrict most, if not all, services to the member. This may occur along a parallel track as the credit union begins the process of expelling the member under Article XIV. In other situations, such as a member who frequently writes checks with insufficient funds, the FCU may attempt to resolve the matter with the member before limiting check writing services. Once a limitation of services policy is adopted or revised, members must receive notice. The FCU should disclose the policy to new members when they join and notify existing members of the policy at least 30 calendar days before it becomes effective. The credit union’s board has the option to adopt the amendment addressing members in good standing.
i. Installments: FCUs may insert zero for the number of installments. The Act allows membership upon the payment of the initial installment of a membership share, but the NCUA no longer views this provision as requiring FCUs to offer the option of paying for the membership share in installments.
ii. Par value: FCUs may establish differing par values for different classes of members or types of accounts (such as students, minors, or non-natural persons), provided this action does not violate any federal, state or local antidiscrimination laws. For example, an FCU may want to establish a higher par value for recent credit union members, without requiring long-time members to bring their accounts up to the new par value. A differing par value may also be permissible for different types of accounts, such as requiring a higher par value for a member with only a share draft account. If a credit union adopts differing par values, all of the possible par values must be stated in section 1. The FCU Bylaws include several options for differing par values. The credit union may select one or more of these or establish its own.
iii. Regular share account: To establish membership, the member must subscribe to one par value of share. The share does not have to be in a regular share account. The bylaws include two options. One option requires the member to have a regular share account to open membership, and one option allows them to use any other account. The board may select which option to use. If the board does not select an option, the member must have a regular share account to open an account. Please note, if the board selects an account other than the regular share, the requirements of Article III, section 3 still apply. The member must maintain one share to remain a member.
iv. Reduction in share balance below par value: When a member’s account balance falls below the par value, section 3 of this article requires FCUs to allow members a minimum time period to restore their account balance to the par value before membership is terminated. FCUs may not delete this requirement or delete references to this requirement in Article II, section 3. If the share balance falls below the par value and does not increase the balance within the time set by the board, membership is terminated.
v. Trusts: Trusts and shares issued in trust can be a complicated subject. For purposes of the FCU Bylaws, perhaps the main issue is the distinction between revocable and irrevocable trusts. In the case of a revocable trust, the individual who establishes the trust is essentially still in control of the funds during his lifetime. Thus, the account owner can change the designated beneficiary at any time, and he or she can determine whether the identified beneficiary actually receives any money simply by deciding to withdraw the funds before his or her own death. Accordingly, the requirement in the case of revocable trust accounts is simply that the owner of the funds be a member of the FCU. Furthermore, provided the owner of the funds is within the field of membership and eligible for membership, he or she may use the vehicle of the payable-on-death or revocable trust account itself as the method of becoming a member. There is no requirement that the account holder first establish a regular share account to become a member. In accordance with legal opinions issued by the NCUA’s Office of General Counsel, an individual may fulfill the requirement of becoming a member by subscribing to the equivalent of the par value of one share, which can be done through the opening of any type of account the credit union offers.
There is no requirement that the beneficiaries be members, since they may never actually come to own the funds or have a right to them. Furthermore, in the case of a revocable trust, since it is essentially indistinguishable from the member, there is no need for the trust to have a separate account number assigned or for it to be viewed as a legal entity separate from the member who set it up.
In the case of an irrevocable trust, the requirements are somewhat different. Membership requirements here may be met though either the settlor, who is the original owner of the funds, or the beneficiary, who obtains an equitable, beneficial interest in the funds once the trust is established. So long as one or the other is eligible for membership, the credit union may accept the account. Furthermore, as with revocable trusts, the membership obligation can be met through the opening of the trust account itself; it is not required that the beneficiary or the settlor have previously established a separate, regular share account. Most irrevocable trusts have a trustee who has administrative responsibility for the account, and so the credit union will typically deal with the trustee for purposes such as sending monthly statements and year-end tax reporting. However, the trustee need not actually be a member of the credit union, and the credit union need not necessarily view the trust account as a separate legal entity, with its own separate tax ID number. Instead, it need only verify and confirm the eligibility of either the settlor or the beneficiary (or all of the settlors or all of the beneficiaries in the case of multiple settlors or beneficiaries) to join the credit union.
A trust itself, either revocable or irrevocable, may be a member of the credit union in its own right if all parties to the trust, including all settlors, beneficiaries and trustees, are within the field of membership.
i. Annual and special meetings: FCUs are encouraged to provide a live webcast of annual and special meetings for interested members, and/or post a video of the annual meeting on the FCU’s website. The NCUA Board encourages this policy for FCUs that currently have a website.
i. Eligibility requirements: The Act and the FCU Bylaws contain the only eligibility requirements for membership on an FCU’s board of directors, which are as follows:
(a) The individual must be a member of the FCU before distribution of ballots;
(b) The individual cannot have been convicted of a crime involving dishonesty or breach of trust unless the NCUA Board has waived the prohibition for the conviction; and
(c) The individual meets the minimum age requirement established under Article V, § 7 of the FCU Bylaws.
Anyone meeting the three eligibility requirements may run for a seat on the board of directors if properly nominated. It is the nominating committee’s duty to ascertain that all nominated candidates, including those nominated by petition, meet the eligibility requirements.
ii. Nomination criteria for nominating committee: The Act and the FCU Bylaws do not prohibit a board of directors from establishing reasonable criteria, in addition to the eligibility requirements, for a nominating committee to follow in making its nominations, such as financial experience, years of membership, or conflict of interest provisions. The board’s nomination criteria, however, applies only to individuals nominated by the nominating committee; they cannot be imposed on individuals who meet the eligibility requirements and are properly nominated from the floor or by petition.
iii. Candidates’ names on ballots: When producing an election ballot, the FCU’s secretary may order the names of the candidates on the ballot using any method for selection provided it is random and used consistently from year to year so as to avoid manipulation or favoritism.
iv. Secret ballots: An FCU must establish an election process that assures members their votes remain confidential and secret from all interested parties. If the election process does not separate the member’s identity from the ballot, FCUs should use a third-party teller that has sole control over completed ballots. If the ballots are designed so that members’ identities remain secret and are not disclosed on the ballot, FCUs may use election tellers from the FCU. In any case, FCU employees, officials, and members must not have access to ballots identifying members or to information that links members’ votes to their identities.
v. Plurality voting: At least one nominee must be nominated for each vacant seat. When there are more nominees than seats open for election, the nominees who receive the greatest number of votes are elected to the vacant seats.
vi. Minimum age requirement: The age the board selects may not be greater than eighteen or the age of majority under the state law applicable to the credit union, whichever is lower.
vii. Electronic voting: Some members lack digital access or wish to have a choice to vote non-electronically. The FCU Bylaws protect members who cannot or choose not to vote electronically. For those members who vote electronically, credit unions have the flexibility to use as many forms of electronic voting (phone, internet, etc.) as they wish.
viii. Voting methods: Options A1, A2 and A3 provide for in-person voting at the annual meeting, or, for Option A3, by voting machine. Option A4 provides for remote voting by electronic device or mail ballot. The NCUA has approved several bylaw amendments for FCUs that combine in-person and remote options for member voting. The NCUA encourages FCUs using one of the first three options to consider whether they can also incorporate mail ballots or electronic voting. Likewise, the NCUA encourages FCUs using Option A4 to consider whether they can also provide a means to vote for members who come to the annual meeting but have not voted in the election, such as a paper ballot.
ix. Uncontested elections: Options A2, A3 and A4 provide for election by acclamation or consensus when the number of nominees for board positions equals the number of positions to be filled. These options do not permit nominations from the floor at the meeting, so a petition is the only way for members to nominate a candidate not on the nominating committee’s slate. Accordingly, section (1)(c) in each of these options requires the notice to members to include the fact that there are no nominations from the floor at the meeting, as well as a notice that the credit union will not conduct a vote by ballot if the number of nominees equals the number of positions to be filled. The FCU Bylaws do not require a particular procedure for uncontested elections.
The contents of the notice to members required in section (1)(c) does not alter the basic election procedures the credit union has selected. Should the number of the nominating committee nominees fall below the number of positions to be filled after the member notice is sent, this section does not permit nominations from the floor. Only option A1 permits nominations from the floor.
x. Nomination procedures: Under all options under this Article, the nominating committee must widely publicize the call for nominations to all members by any medium. This requirement can be satisfied by publicizing the information to a large audience, whether by newsletter, email, or any other satisfactory medium that reaches as many members as possible. The NCUA emphasizes that member participation is important during an election, and FCUs must make sure that members are aware of the nomination process.
i. Vacancies: In accordance with the Act, when a vacancy on the board of directors occurs between annual elections, the remaining directors are to appoint a replacement. This replacement will serve as a director until the next annual meeting. The vacancy is then to be filled at the next annual meeting through the normal membership voting process, with the newly elected director serving out the remainder of the original term.
ii. Director emeritus: As a matter of board policy, the board may establish the position of director emeritus for former directors who faithfully fulfilled their responsibilities as members of the board for at least a specified minimum number of years. The board may determine that director emeritus status confers authority to attend board meetings and to participate in discussions and other board events; however, directors emeritus may not vote on any matter before the board or exercise any official duties of a director. The position is essentially an honorary title designed to recognize and reward the good service of those designated and to retain some of their institutional knowledge for the benefit of the board and the FCU. The decision to establish a director emeritus position, as well as the selection of individuals to become directors emeritus, is solely within the discretion of the board. The board may establish a director emeritus position by adopting either the optional bylaw amendment or a board policy.
To assist them in providing advice, Directors emeriti have access to confidential information, including but not limited to the credit union’s examination reports and CAMEL ratings, to the same extent as members of the board. Directors emeriti are also subject to the same confidentiality and conflict of interest standards applicable to directors.
iii. Associate directors: The board may also establish the position of associate director through board policy. This position is designed to provide qualified individuals with an opportunity to gain exposure to board meetings and discussions but without formal director responsibility or the right to vote. It may be thought of as an apprenticeship position in which the incumbent receives training and knowledge about the business of the board, with the expectation that the experience will prepare him or her for an eventual election to a director position. As with the director emeritus position, the decision to establish an associate director position, as well as the selection of individuals to become associate directors, is solely within the discretion of the board.
To assist their learning process, the board may determine to permit associate directors to have access to confidential information, including but not limited to the credit union’s examination reports and CAMEL ratings, to the same extent as members of the board. Associate directors are also subject to the same confidentiality and conflict of interest standards applicable to directors.
iv. Composition of the board: The NCUA Board encourages the composition of the board of directors to reflect the field of membership of the FCU.
v. Notice to members of change in size of board: The NCUA encourages FCUs changing the size of their boards to post a notice of the change on the FCU’s website (if the FCU maintains a website). An FCU is not required to establish and maintain a website solely for this purpose, however. An FCU that does not maintain a website can post such a notice in a conspicuous place in the office of the FCU, such as at the teller window or on the front door of the FCU.
i. Board officers: As specified in this bylaw, members of the board are elected by the credit union membership to the board itself. Once on the board, the directors themselves vote to select individuals from among their number to serve as officers of the board (chair, one or more vice chairs, secretary and financial officer). One board officer may be compensated as such for services he or she performs in that capacity. The offices of financial officer and secretary may be held by the same person.
Members of the board must hold the vote for the specified officer positions at the first board meeting following the annual meeting of the members. This board meeting should be held not later than seven days after the annual meeting. The Act requires the credit union to file a record of the names and addresses of the executive offices, members of the supervisory committee, credit committee, and loan officers with the Administration within ten days after election or appointment.
Officers hold their respective officer positions for a term of one year, until the first board meeting that follows the next annual meeting of the members. At that board meeting, officer positions are again filled. Each board officer holds his or her position until the election and qualification of his or her successor. Thus, a board officer who is re-elected to the position he or she is currently holding serves for another year. Where another director is chosen to fill the position, he or she takes office effective as of the date of the election, assuming he or she is qualified—meaning simply that he or she was properly elected by the membership to the board in the first place and is in good standing as a director.
As specified in this bylaw, the board chair presides at all board meetings. In the absence of the chair or his or her inability to act, the vice chair presides at the meeting. In the absence or inability to act of both the chair and the vice chair, those directors who are present may select from among their number an individual director to act as temporary chair for that particular meeting. Actions taken by the board under the direction of the temporary chair have the same validity and effect as if taken under the direction of the chair or the vice chair, provided a quorum of the board, including the temporary chair, is present. If the board secretary is absent for any reason from a meeting, the chair (or acting chair) must select another director to fulfill the secretary’s function at the meeting.
ii. Committee Membership: The NCUA encourages FCUs to publicize the names of the members of each FCU committee to FCU members. FCUs could provide this information either on the FCU’s public website or to the portion of the website only accessible to members after logging in. The NCUA encourages this policy for FCUs that have a website. An FCU is not required to establish and maintain a website solely for this purpose, however. Providing a short description of the committee’s duties also assists members in better understanding the leadership structure of the FCU.
Many FCUs now use automated systems for accepting loan applications, loan underwriting, and loan processing, as permitted by several of the NCUA Office of General Counsel’s legal opinions. The bylaws reflect that FCUs may use automated lending systems, as long as the credit committee or a loan officer: (1) reviews the loans the automated system granted for fraud and other purposes; and (2) reviews loans the automated system denied.
i. Nominations: The Act requires that the FCU’s board appoint the members of the Supervisory Committee. It is permissible for the board to seek nominations from members before making Supervisory Committee appointments.
As noted in the commentary to Article II, there is a wide range of measures available to the credit union in responding to abusive or unreasonably disruptive members. A credit union can limit services under Article II for a member not in good standing. A credit union may also expel the member for cause after a two-thirds vote of the credit union’s directors.
A credit union must provide notice of the expulsion to the member. The notice must include the reason for the expulsion, and if a hearing was conducted or written testimony provided, the credit union should provide a response to the member’s statements. The notice must be specific and not just include conclusory statements regarding the reason for the member’s expulsion. For example, a general statement that the member’s behavior has been deemed abusive and the member is being subject to expulsion procedures would be insufficient as an explanation. A credit union is prohibited from expelling a class of members under this provision. That would include a board acting to remove all delinquent members or class of delinquent members.
If a special meeting of the members is called to expel the member, only in-person voting is permitted in conjunction with the special meeting, so that the affected member has an opportunity to present the member’s case and respond to the credit union’s concerns. However, an in-person meeting is not required if a member is expelled by a two-thirds vote of the board of directors. In addition, FCUs should consider the commentary under Article XVI about members using accounts for unlawful purposes.
We may terminate your membership in [name of FCU] in one of three ways. The first way is through a special meeting. Under this option, we may call a special meeting of the members, provide you an opportunity to be heard, and obtain a two-thirds vote of the members present at the special meeting in favor of your expulsion. The second way to terminate your membership is under a nonparticipation policy given to each member that follows certain requirements. The third way to terminate your membership is by a two-thirds vote of a quorum of the directors of the credit union for cause.
Cause is defined as follows: (A) a substantial or repeated violation of [name of membership agreement] with [us]; (B) a substantial or repeated disruption, including dangerous or abusive behavior, to the credit union’s operations; or (C) fraud, attempted fraud, or a conviction of other illegal conduct that a member has been convicted of in relation to [us], including in connection with our employees conducting business on behalf of us.
Before the board votes on an expulsion, [we] must provide written notice to your mail address (or email, if applicable) on record or personally provide the written notice. [We] must provide the specific reasons for the expulsion and allow you an opportunity to rebut those reasons through a hearing if you choose. It is your responsibility to keep your contact information with [us] up to date, and to open and read notices from [us]. Unless [we] determine to allow otherwise, there is no right to an in-person hearing with the board. If you fail to request a hearing within 60 calendar days of receipt of the notice, you will be expelled. You may submit any complaints about your pending expulsion or expulsion to NCUA’s Consumer Assistance Center if the complaint cannot be resolved with the credit union.
[We] will confirm any expulsion with a letter with information on the effect of the expulsion and how you can request reinstatement. Expulsion or withdrawal from membership does not relieve a member of liability to the credit union, and we may demand immediate repayment of the money you owe to us after expulsion, subject to any applicable contract terms and conditions.
For additional information on expulsion and a copy of our expulsion policy, see [Article XIV of our Bylaws].
i. Special meeting requirements: To remove a director under section 3 of this Article requires a majority vote of members present at a special meeting called for the purpose of voting on removal. The bylaw requires that the affected director have the “opportunity to be heard.” NCUA interprets this provision as requiring the vote to occur at an in-person meeting rather than by mail ballot. At an in-person meeting, the director subject to the removal vote can make his or her case before the members. The director removal provisions derive from provisions of the Act, as follows:
• The bylaws govern the conduct of special meetings;
• Members must have the opportunity to vote, at a meeting, on the Supervisory Committee’s suspension of a director;
• FCU members may be expelled by vote of members present at a meeting called for that purpose.
ii. Unlawful purposes: FCUs expressed concerns that some members may be using their accounts for unlawful purposes. Section 1 of this Article specifies that the credit union, its powers and duties, and the functions of its members, officers and directors, are all strictly circumscribed by law and regulation. Insofar as this provision is included in the bylaws, an FCU need not adopt a specific policy or requirement that members conform their use of credit union products or services to lawful purposes. Furthermore, the existence of this bylaw provides ample support should an FCU determine to impose strict limits on products and services available to any individual who is found to be using the FCU in furtherance of unlawful purposes.
iii. Posting of bylaws on website: FCUs that maintain a website must post a copy of the FCU’s bylaws on the website. After adopting amendments, FCUs must post an updated copy of the bylaws. An FCU is not required to establish and maintain a website solely for this purpose, however.
Appendix B to Part 701—Chartering and Field of Membership Manual
The National Credit Union Administration’s (NCUA) chartering and field of membership policies are directed toward achieving the following goals:
• To encourage the formation of credit unions;
• To uphold the provisions of the Federal Credit Union Act;
• To promote thrift and credit extension;
• To promote credit union safety and soundness; and
• To make quality credit union service available to all eligible persons.
NCUA may grant a charter to single occupational/associational groups, multiple groups, or communities if:
• The occupational, associational, or multiple groups possess an appropriate common bond or the community represents a well-defined local community, neighborhood, or rural district;
• The subscribers are of good character and are fit to represent the proposed credit union; and
• The establishment of the credit union is economically advisable.
Generally, these are the primary criteria that NCUA will consider. In unusual circumstances, however, NCUA may examine other factors, such as other federal law or public policy, in deciding if a charter should be approved.
Unless otherwise noted, the policies outlined in this manual apply only to federal credit unions.
The Federal Credit Union Act recognizes three types of federal credit union charters— single common bond (occupational and associational), multiple common bond (more than one group each having a common bond of occupation or association), and community.
The requirements that must be met to charter a federal credit union are described in Chapter 2. Special rules for credit unions serving low-income groups are described in Chapter 3.
If a federal credit union charter is granted, Section 5 of the charter will describe the credit union’s field of membership, which defines those persons and entities eligible for membership. Generally, federal credit unions are only able to grant loans and provide services to persons within the field of membership who have become members of the credit union.
Federal credit unions are generally organized by persons who volunteer their time and resources and are responsible for determining the interest, commitment, and economic advisability of forming a federal credit union. The organization of a successful federal credit union takes considerable planning and dedication.
Persons interested in organizing a Federal credit union should contact one of the credit union trade associations or the NCUA Office of Credit Union Resources and Expansion. Lists of NCUA offices and credit union trade associations are shown in the appendices. NCUA will provide information to groups interested in pursuing a federal charter and will assist them in contacting an organizer.
While anyone may organize a credit union, a person with training and experience in chartering new federal credit unions is generally the most effective organizer. However, extensive involvement by the group desiring credit union service is essential.
The functions of the organizer are to provide direction, guidance, and advice on the chartering process. The organizer also provides the group with information about a credit union’s functions and purpose as well as technical assistance in preparing and submitting the charter application. Close communication and cooperation between the organizer and the proposed members are critical to the chartering process.
The Federal Credit Union Act requires that seven or more natural persons—the “subscribers”—present to NCUA for approval a sworn organization certificate stating at a minimum:
• The name of the proposed federal credit union;
• The location of the proposed federal credit union and the territory in which it will operate;
• The names and addresses of the subscribers to the certificate and the number of shares subscribed by each;
• The initial par value of the shares;
• The detailed proposed field of membership; and
• The fact that the certificate is made to enable such persons to avail themselves of the advantages of the Federal Credit Union Act.
Willfully and knowingly making false statements on any of the required documentation filed in obtaining a federal credit union charter may be grounds for federal criminal prosecution under 18 U.S.C. 1001.
Before chartering a federal credit union, NCUA must be satisfied that the institution will be viable and that it will provide needed services to its members. Economic advisability, which is a key factor in determining whether a potential charter will have a reasonable opportunity to succeed, is essential in order to qualify for a credit union charter.
NCUA will conduct an independent on-site investigation of each charter application to ensure that the proposed credit union can be successful. In general, the success of any credit union depends on: (a) The character and fitness of management; (b) the depth of the members’ support; and (c) present and projected market conditions.
The Federal Credit Union Act requires NCUA to ensure that the subscribers are of good “general character and fitness.” Prospective officials and employees will be the subject of credit and background investigations. The investigation report must demonstrate each applicant’s ability to effectively handle financial matters. Employees and officials should also be competent, experienced, honest and of good character. Factors that may lead to disapproval of a prospective official or employee include criminal convictions, indictments, and acts of fraud and dishonesty. Further, factors such as serious or unresolved past due credit obligations and bankruptcies disclosed during credit checks may disqualify an individual.
NCUA also needs reasonable assurance that the management team will have the requisite skills—particularly in leadership and accounting—and the commitment to dedicate the time and effort needed to make the proposed federal credit union a success.
Section 701.14 of NCUA’s Rules and Regulations sets forth the procedures for NCUA approval of officials of newly chartered credit unions. If the application of a prospective official or employee to serve is not acceptable to the Office of Credit Union Resources and Expansion Director, the group can propose an alternate to act in that individual’s place. If the charter applicant feels it is essential that the disqualified individual be retained, the individual may appeal the Office of Credit Union Resources and Expansion Director’s decision to the NCUA Board. If an appeal is pursued, action on the application may be delayed. If the appeal is denied by the NCUA Board, an acceptable new applicant must be provided before the charter can be approved.
Economic advisability is a major factor in determining whether the credit union will be chartered. An important consideration is the degree of support from the field of membership. The charter applicant must be able to demonstrate that membership support is sufficient to ensure viability.
NCUA has not set a minimum field of membership size for chartering a federal credit union. Consequently, groups of any size may apply for a credit union charter and be approved if they demonstrate economic advisability. However, it is important to note that often the size of the group is indicative of the potential for success. For that reason, a charter application with fewer than 3,000 primary potential members (e.g., employees of a corporation or members of an association) may not be economically advisable. Therefore, a charter applicant with a proposed field of membership of fewer than 3,000 primary potential members may have to provide more support than an applicant with a larger field of membership. For example, a small occupational or associational group may be required to demonstrate a commitment for long-term support from the sponsor.
The ability to provide effective service to members, to compete in the marketplace, and to adapt to changing market conditions are key to the survival of any enterprise. Before NCUA will charter a credit union, a business plan based on realistic and supportable projections and assumptions must be submitted.
The business plan should contain, at a minimum, the following elements:
• Mission statement;
• Analysis of market conditions, including if applicable, geographic, demographic, employment, income, housing, and other economic data;
• Evidence of member support;
• Goals for shares, loans, and for number of members;
• Financial services needed/desired;
• Financial services to be provided to members of all segments within the field of membership;
• How/when services are to be implemented;
• Organizational/management plan addressing qualification and planned training of officials/employees;
• Continuity plan for directors, committee members and management staff;
• Operating facilities, to include office space/equipment and supplies, safeguarding of assets, insurance coverage, etc.;
• Type of record-keeping and data processing system;
• Detailed semiannual pro forma financial statements (balance sheet, income and expense projections) for 1st and 2nd year, including assumptions—e.g., loan and dividend rates;
• Plans for operating independently;
• Written policies (shares, lending, investments, funds management, capital accumulation, dividends, collections, etc.);
• Source of funds to pay expenses during initial months of operation, including any subsidies, assistance, etc., and terms or conditions of such resources; and
• Evidence of sponsor commitment (or other source of support) if subsidies are critical to success of the federal credit union. Evidence may be in the form of letters, contracts, financial statements from the sponsor, and any other such document on which the proposed federal credit union can substantiate its projections.
While the business plan may be prepared with outside assistance, the subscribers and proposed officials must understand and support the submitted business plan.
Following the guidance contained throughout this policy, the organizers should submit wording for the proposed field of membership (the persons, organizations and other legal entities the credit union will serve) to NCUA early in the application process for written preliminary approval. The proposed field of membership must meet all common bond or community requirements.
Once the field of membership has been given preliminary approval, the organizer should conduct an organizational meeting to elect seven to ten persons to serve as subscribers. The subscribers should locate willing individuals capable of serving on the board of directors, credit committee, supervisory committee, and as chief operating officer/manager of the proposed credit union.
Subsequent organizational meetings may be held to discuss the progress of the charter investigation, to announce the proposed slate of officials, and to respond to any questions posed at these meetings.
If NCUA approves the charter application, the subscribers, as their final duty, will elect the board of directors of the proposed federal credit union. The new board of directors will then appoint the supervisory committee.
As discussed previously in this Chapter, the organizer of a federal credit union charter must, at a minimum, provide evidence that:
• The group(s) possess an appropriate common bond or the geographical area to be served is a well-defined local community, neighborhood, or rural district;
• The subscribers, prospective officials, and employees are of good character and fitness; and
• The establishment of the credit union is economically advisable.
As part of the application process, the organizer must submit the following forms, which are available in appendix 4 of this Manual:
• Federal Credit Union Investigation Report, NCUA 4001;
• Organization Certificate, NCUA 4008;
• Report of Official and Agreement To Serve, NCUA 4012;
• Application and Agreements for Insurance of Accounts, NCUA 9500; and
• Certification of Resolutions, NCUA 9501.
Each of these forms is described in more detail in the following sections.
The application for a new federal credit union will be submitted on NCUA 4001. State-chartered credit unions applying for conversion to a federal charter will use NCUA 4000. (See Chapter 4 for a full discussion.) The organizer is required to certify the information and recommend approval or disapproval, based on the investigation of the request.
This document, which must be completed by the subscribers, includes the seven criteria established by the Federal Credit Union Act. NCUA staff assigned to the case will assist in the proper completion of this document.
This form documents general background information of each official and employee of the proposed federal credit union. Each official and employee must complete and sign this form. The organizer must review each of the NCUA 4012s for elements that would prevent the prospective official or employee from serving. Further, such factors as serious, unresolved past due credit obligations and bankruptcies disclosed during credit checks may disqualify an individual.
This document contains the agreements with which federal credit unions must comply in order to obtain National Credit Union Share Insurance Fund (NCUSIF) coverage of member accounts. The document must be completed and signed by both the chief executive officer and chief financial officer. A federal credit union must qualify for federal share insurance.
This document certifies that the board of directors of the proposed federal credit union has resolved to apply for NCUSIF insurance of member accounts and has authorized the chief executive officer and recording officer to execute the Application and Agreements for Insurance of Accounts. Both the chief executive officer and recording officer of the proposed federal credit union must sign this form.
It is the responsibility of the federal credit union organizers or officials of an existing credit union to ensure that the proposed federal credit union name or federal credit union name change does not constitute an infringement on the name of any corporation in its trade area. This responsibility also includes researching any service marks or trademarks used by any other corporation (including credit unions) in its trade area. NCUA will ensure, to the extent possible, that the credit union’s name:
• Is not already being officially used by another federal credit union;
• Will not be confused with NCUA or another federal or state agency, or with another credit union; and
• Does not include misleading or inappropriate language.
The last three words in the name of every credit union chartered by NCUA must be “Federal Credit Union.”
The word “community,” while not required, can only be included in the name of federal credit unions that have been granted a community charter.
Once NCUA receives a complete charter application package, an acknowledgment of receipt will be sent to the organizer. During the review process, a staff member will be assigned to perform an on-site contact with the proposed officials and others having an interest in the proposed federal credit union.
NCUA staff will review the application package and verify its accuracy and reasonableness. A staff member will inquire into the financial management experience and the suitability and commitment of the proposed officials and employees, and will make an assessment of economic advisability. The staff member will also provide guidance to the subscribers in the proper completion of the Organization Certificate, NCUA 4008.
Credit and background investigations may be conducted concurrently by NCUA with other work being performed by the organizer and subscribers to reduce the likelihood of delays in the chartering process.
The staff member will analyze the prospective credit union’s business plan for realistic projections, attainable goals, adequate service to all segments of the field of membership, sufficient start-up capital, and time commitment by the proposed officials and employees. Any concerns will be reviewed with the organizer and discussed with the prospective credit union’s officials. Additional on-site contacts by NCUA staff may be necessary. The organizer and subscribers will be expected to take the steps necessary to resolve any issues or concerns. Such resolution efforts may delay processing the application.
NCUA staff will then make a recommendation to the Office of Credit Union Resources and Expansion Director regarding the charter application. The recommendation may include specific provisions to be included in a Letter of Understanding and Agreement. In most cases, NCUA will require the prospective officials to adhere to certain operational guidelines. Generally, the agreement is for a limited term of two to four years. A sample Letter of Understanding and Agreement is found in appendix 2.
Once approved, the board of directors of the newly formed federal credit union will receive a signed charter and standard bylaws from the Office of Credit Union Resources and Expansion Director. Additionally, the officials will be advised of the name of the examiner assigned responsibility for supervising and examining the credit union.
When the Office of Credit Union Resources and Expansion Director disapproves any charter application, in whole or in part, the organizer will be informed in writing of the specific reasons for the disapproval. Where applicable, the Office of Credit Union Resources and Expansion Director will provide information concerning options or suggestions that the applicant could consider for gaining approval or otherwise acquiring credit union service. The letter of denial will include the procedures for appealing the decision.
If the Office of Credit Union Resources and Expansion Director denies a charter application, in whole or in part, that decision may be appealed to the NCUA Board in accordance with the procedures set forth in subpart B to part 746 of this chapter.
Before appealing, the prospective group may, within 30 days of the denial, provide supplemental information to the Office of Credit Union Resources and Expansion Director for reconsideration. A request for reconsideration should contain new and material evidence addressing the reasons for the initial denial. The Office of Credit Union Resources and Expansion Director will have 30 days from the date of the receipt of the request for reconsideration to make a final decision. If the request is again denied, the applicant may proceed with the appeal process within 60 days of the date of the last denial.
Assistance in commencing operations is generally available through the various credit union trade organizations listed in appendix 5.
All new federal credit unions are also encouraged to establish a mentor relationship with a knowledgeable, experienced credit union individual or an existing, well-operated credit union. The mentor should provide guidance and assistance to the new credit union through attendance at meetings and general oversight. Upon request, NCUA will provide assistance in finding a qualified mentor.
Each federal credit union will be examined regularly by NCUA to determine that it remains in compliance with applicable laws and regulations and to determine that it does not pose undue risk to the NCUSIF. The examiner will contact the credit union officials shortly after approval of the charter in order to arrange for the initial examination (usually within the first six months of operation).
The examiner will be responsible for monitoring the progress of the credit union and providing the necessary advice and guidance to ensure it is in compliance with applicable laws and regulations. The examiner will also monitor compliance with the terms of any required Letter of Understanding and Agreement. Typically, the examiner will require the credit union to submit copies of monthly board minutes and financial statements.
The Federal Credit Union Act requires all newly chartered credit unions, up to two years after the charter anniversary date, to obtain NCUA approval prior to appointment of any new board member, credit or supervisory committee member, or senior executive officer. Section 701.14 of the NCUA Rules and Regulations sets forth the notice and application requirements. If NCUA issues a Notice of Disapproval, the newly chartered credit union is prohibited from making the change.
NCUA may disapprove an individual serving as a director, committee member or senior executive officer if it finds that the competence, experience, character, or integrity of the individual indicates it would not be in the best interests of the members of the credit union or of the public to permit the individual to be employed by or associated with the credit union. If a Notice of Disapproval is issued, the credit union may appeal the decision to the NCUA Board.
A corporate federal credit union is one that is operated primarily for the purpose of serving other credit unions. Corporate federal credit unions are not governed by this manual, but instead operate under and are administered by the NCUA Office of National Examinations and Supervision.
NCUA will attempt to assist any group in chartering a credit union or joining an existing credit union. If the group is not eligible for federal credit union service, NCUA will refer the group to the appropriate state supervisory authority where different requirements may apply.
NCUA will designate a credit union based on the following criteria:
Single Occupational: If a credit union serves a single occupational sponsor, such as ABC Corporation, it will be designated as an occupational credit union. A single occupational common bond credit union may also serve a trade, industry, or profession (TIP), such as all teachers.
Single Associational: If a credit union serves a single associational sponsor, such as the Knights of Columbus, it will be designated as an associational credit union.
Multiple Common Bond: If a credit union serves more than one group, each of which has a common bond of occupation and/or association, it will be designated as a multiple common bond credit union.
Community: All community credit unions will be designated as such, followed by a description of their geographic boundaries, including but not limited to city or county boundaries, roadways, rivers, transportation lines.
Credit unions desiring to confirm or submit an application to change their designations should contact the Office of Credit Union Resources and Expansion.
A federal credit union is permitted to serve foreign nationals within its field of membership wherever such individuals reside if management has the ability and resources to serve them. Before a credit union opens a branch outside the United States, it must submit an application to do so and have prior written approval of the regional director or Office of National Examinations and Supervision Director. A federal credit union may establish a service facility on a United States military installation or United States embassy without prior NCUA approval.
As set forth in Chapter 1, the Federal Credit Union Act provides for three types of federal credit union charters—single common bond (occupational or associational), multiple common bond (multiple groups), and community. Section 109 (12 U.S.C. 1759) of the Federal Credit Union Act addresses the membership requirements for each type of charter.
The field of membership, which is specified in Section 5 of the charter, defines those persons and entities eligible for membership. A single common bond federal credit union consists of one group having a common bond of occupation or association. A multiple common bond federal credit union consists of more than one group, each of which has a common bond of occupation or association. A community federal credit union consists of persons or organizations within a well-defined local community, neighborhood, or rural district.
Once chartered, a federal credit union can amend its field of membership; however, the same common bond or community requirements for chartering the credit union must be satisfied. Since there are differences in the three types of charters, special rules apply to each, which are fully discussed in the following sections of this Chapter.
Generally, federal credit unions can only grant loans and provide services to persons who have joined the credit union. The Federal Credit Union Act states that one of the purposes of federal credit unions is “to serve the productive and provident credit needs of individuals of modest means.” Although field of membership requirements are applicable, special rules set forth in Chapter 3 may apply to low-income designated credit unions and those credit unions assisting low-income groups or to a federal credit union that adds an underserved community to its field of membership.
A single occupational common bond federal credit union may include in its field of membership all persons and entities who share that common bond. NCUA permits a person’s membership eligibility in a single occupational common bond group to be established in five ways:
• Employment (or a contractual relationship equivalent to employment) in a single corporation or other legal entity makes that person part of a single occupational common bond;
• Employment in a corporation or other legal entity with a controlling ownership interest (which shall not be less than 10 percent) in or by another legal entity makes that person part of a single occupational common bond;
• Employment in a corporation or other legal entity which is related to another legal entity (such as a company under contract and possessing a strong dependency relationship with another company) makes that person part of a single occupational common bond;
• Employment or attendance at a school makes that person part of a single occupational common bond (see Chapter 2, Section III.A.1); or
• Employment in the same Trade, Industry, or Profession (TIP) (see Chapter 2, Section II.A.2).
A geographic limitation is not a requirement for a single occupational common bond. However, for purposes of describing the field of membership, the geographic areas being served may be included in the charter. For example:
• Employees, officials, and persons who work regularly under contract in Miami, Florida for ABC Corporation and subsidiaries;
• Employees of ABC Corporation who are paid from * * *;
• Employees of ABC Corporation who are supervised from * * *;
• Employees of ABC Corporation who are headquartered in * * *; and/or
• Employees of ABC Corporation who work in the United States.
The corporation or other legal entity (i.e., the employer) may also be included in the common bond—e.g., “ABC Corporation.” The corporation or legal entity will be defined in the last clause in Section 5 of the credit union’s charter.
A charter applicant must provide documentation to establish that the single occupational common bond requirement has been met.
Some examples of valid single occupational common bonds are:
• Employees of the Hunt Manufacturing Company who work in West Chester, Pennsylvania. (common bond—same employer with geographic definition);
• Employees of the Buffalo Manufacturing Company who work in the United States. (common bond—same employer with geographic definition);
• Employees, elected and appointed officials of municipal government in Parma, Ohio. (common bond—same employer with geographic definition);
• Employees of Johnson Soap Company and its majority owned subsidiary, Johnson Toothpaste Company, who work in, are paid from, are supervised from, or are headquartered in Augusta and Portland, Maine. (common bond—parent and subsidiary company with geographic definition);
• Employees of MMLLJS contractor who work regularly at the U.S. Naval Shipyard in Bremerton, Washington. (common bond—employees of contractors with geographic definition);
• Employees, doctors, medical staff, technicians, medical and nursing students who work in or are paid from the Newport Beach Medical Center, Newport Beach, California. (single corporation with geographic definition);
• Employees of JLS, Incorporated and MJM, Incorporated working for the LKM Joint Venture Company in Catalina Island, California. (common bond—same employer—ongoing dependent relationship);
• Employees of and students attending Georgetown University. (common bond—same occupation);
• Employees of all the schools supervised by the Timbrook Board of Education in Timbrook, Georgia. (common bond—same employer); or
• All licensed nurses in Fairfax County, Virginia. (occupational common bond TIP).
In contrast, some examples of insufficiently defined single occupational common bonds are:
• Employees of manufacturing firms in Seattle, Washington. (no defined occupational sponsor; overly broad TIP);
• Persons employed or working in Chicago, Illinois. (no occupational common bond).
A common bond based on employment in a trade, industry, or profession can include employment at any number of corporations or other legal entities that—while not under common ownership—have a common bond by virtue of producing similar products, providing similar services, or participating in the same type of business.
While proposed or existing single common bond credit unions have some latitude in defining a trade, industry, or profession occupational common bond, it cannot be defined so broadly as to include groups in fields which are not closely related. For example, the manufacturing industry, energy industry, communications industry, retail industry, or entertainment industry would not qualify as a TIP because each industry lacks the necessary commonality. However, textile workers, realtors, nurses, teachers, police officers, or U.S. military personnel are closely related and each would qualify as a TIP.
The common bond relationship must be one that demonstrates a narrow commonality of interests within a specific trade, industry, or profession. If a credit union wants to serve a physician TIP, it can serve all physicians, but that does not mean it can also serve all clerical staff in the physicians’ offices. However, if the TIP is based on the health care industry, then clerical staff would be able to be served by the credit union because they work in the same industry and have the same commonality of interests.
If a credit union wants to include the airline services industry, it can serve airline and airport personnel but not passengers. Clients or customers of the TIP are not eligible for credit union membership (e.g., patients in hospitals). Any company that is involved in more than one industry cannot be included in an industry TIP (e.g., a company that makes tobacco products, food products, and electronics). However, employees of these companies may be eligible for membership in a variety of trade/profession occupational common bond TIPs.
Although a TIP should be narrowly defined, and ordinarily would not include third-party vendors and other suppliers, it may include, on a case by case basis, employees of types of entities that have a “strong dependency relationship” and work directly with other types of entities within the industry. In this context, a “strong dependency relationship” between a TIP entity and its supplier/vendor must be demonstrated by their reliance on each other as measured by the presence of indicators of a likelihood that the absence of one would cause the other to suffer a material decline in either revenue, functionality or productivity.
Under this definition, a firm whose employees are specially trained to protect nuclear facilities, and whose employees work primarily at such facilities, could be a part of a TIP based on the firm’s participation in the nuclear energy industry.
Other “strong relationship” indicators NCUA would consider include the regularity or frequency of work that employees of the entity perform at facilities directly related to the industry, or the degree to which employees must adjust their work practices to adapt to the needs of the industry. For example, a company’s focus on producing specialized confectionary products for a hotel chain could add that company to a hospitality industry TIP. A credit union seeking to include a clause of this type in its TIP charter must provide a brief narrative identifying indicators that support the existence of a strong dependency relationship between the TIP entity and its individual supplier/vendors.
Likewise, an FCU may serve employees of companies within the commercial airline industry that have a strong dependency relationship with airlines or airports, without the limitation that these employees work at an airport. However, these employees must work directly with the following: Air transportation of freight, air courier services; air passenger services; airport baggage handling; airport security; commercial airport janitorial services; maintenance, servicing, and repair services; and on board airline food services. The employees of those entities have a narrow commonality of interests, share the single occupational common bond, and can be included within the Air Transportation Industry field of membership.
In general, except for credit unions serving a national field of membership or operating in multiple states, a geographic limitation is required for a TIP credit union. The geographic limitation will be part of the credit union’s charter and generally correspond to its current or planned operational area. More than one federal credit union may serve the same trade, industry, or profession, even if both credit unions are in the same geographic location.
This type of occupational common bond is only available to single common bond credit unions. A TIP cannot be added to a multiple common bond or community field of membership.
To obtain a TIP designation, the proposed or existing credit union must submit a request to the Office of Credit Union Resources and Expansion Director. New charter applicants must follow the documentation requirements in Chapter 1. New charter applicants and existing credit unions must submit a business plan on how the credit union will serve the group with the request to serve the TIP. The business plan also must address how the credit union will verify the TIP. Examples of such verification include state licenses, professional licenses, organizational memberships, pay statements, union membership, or employer certification. The Office of Credit Union Resources and Expansion Director must approve this type of field of membership before a credit union can serve a TIP. Credit unions converting to a TIP can retain members of record but cannot add new members from its previous group or groups, unless the group or groups are part of the TIP.
Section II.B on Occupational Common Bond Amendments does not apply to a TIP common bond. Removing or changing a geographical limitation will be processed as a housekeeping amendment. If safety and soundness concerns are present, the Office of Credit Union Resources and Expansion Director may require additional information before the request can be processed.
Section II.H, on Other Persons Eligible for Credit Union Membership, applies to TIP based credit unions except for the corporate account provision which only applies to industry based TIPs. Credit unions with industry based TIPs may include corporations as members because they have the same commonality of interests as all employees in the industry. For example, an airline service TIP (industry) can serve an airline carrier (corporate account); however, a nurses TIP (profession) could not serve a hospital (corporate account) because not everyone working in the hospital shares the same profession.
If a TIP designated credit union wishes to convert to a different TIP or employer-based occupational common bond, or different charter type, it only retains members of record after the conversion. The Office of Credit Union Resources and Expansion Director, for safety and soundness reasons, may approve a TIP designated credit union to convert to its original field of membership.
Section 5 of every single occupational federal credit union’s charter defines the field of membership the credit union can legally serve. Only those persons or legal entities specified in the field of membership can be served. There are a number of instances in which Section 5 must be amended by NCUA.
First, a group sharing the credit union’s common bond is added to the field of membership. This may occur through various ways including agreement between the group and the credit union directly, or through a merger, corporate acquisition, purchase and assumption (P&A), or spin-off.
Second, if the entire field of membership is acquired by another corporation, the credit union can serve the employees of the new corporation and any subsidiaries after receiving NCUA approval.
Third, a federal credit union qualifies to change its common bond from:
• A single occupational common bond to a single associational common bond;
• A single occupational common bond to a community charter; or
• A single occupational common bond to a multiple common bond.
Fourth, a federal credit union removes a portion of the group from its field of membership through agreement with the group, a spin-off, or because a portion of the group is no longer in existence.
An existing single occupational common bond federal credit union that submits a request to amend its charter must provide documentation to establish that the occupational common bond requirement has been met. The Office of Credit Union Resources and Expansion Director must approve all amendments to an occupational common bond credit union’s field of membership.
If the single common bond group that comprises a federal credit union’s field of membership undergoes a substantial restructuring, the result is often that portions of the group are sold or spun off. This requires a change to the credit union’s field of membership. NCUA will not permit a single common bond credit union to maintain in its field of membership a sold or spun-off group to which it has been providing service unless the group otherwise qualifies for membership in the credit union or the credit union converts to a multiple common bond credit union.
If the group comprising the single common bond of the credit union merges with, or is acquired by, another group, the credit union can serve the new group resulting from the merger or acquisition after receiving a housekeeping amendment.
Prior to granting a common bond expansion, NCUA will examine the amendment’s likely effect on the credit union’s operations and financial condition. In most cases, the information needed for analyzing the effect of adding a particular group will be available to NCUA through the examination and financial and statistical reports; however, in particular cases, the Office of Credit Union Resources and Expansion Director may require additional information prior to making a decision.
A federal credit union requesting a common bond expansion must submit an Application for Field of Membership Amendment (NCUA 4015-EZ) to the Office of Credit Union Resources and Expansion Director. An authorized credit union representative must sign the request.
All requests for approval to amend a federal credit union’s charter must be submitted to the Office of Credit Union Resources and Expansion Director.
NCUA staff will review all amendment requests in order to ensure compliance with NCUA policy.
Before acting on a proposed amendment, the Office of Credit Union Resources and Expansion Director may require an on-site review. In addition, the Office of Credit Union Resources and Expansion Director may, after taking into account the significance of the proposed field of membership amendment, require the applicant to submit a business plan addressing specific issues.
The financial and operational condition of the requesting credit union will be considered in every instance. NCUA will carefully consider the economic advisability of expanding the field of membership of a credit union with financial or operational problems.
In most cases, field of membership amendments will only be approved for credit unions that are operating satisfactorily. Generally, if a federal credit union is having difficulty providing service to its current membership, or is experiencing financial or other operational problems, it may have more difficulty serving an expanded field of membership.
Occasionally, however, an expanded field of membership may provide the basis for reversing current financial problems. In such cases, an amendment to expand the field of membership may be granted notwithstanding the credit union’s financial or operational problems. The applicant credit union must clearly establish that the expanded field of membership is in the best interest of the members and will not increase the risk to the NCUSIF.
If the Office of Credit Union Resources and Expansion Director approves the requested amendment, the credit union will be issued an amendment to Section 5 of its charter.
When the Office of Credit Union Resources and Expansion Director disapproves any application, in whole or in part, to amend the field of membership under this chapter, the applicant will be informed in writing of the:
• Specific reasons for the action;
• Options to consider, if appropriate, for gaining approval; and
• Appeal procedure.
If the Office of Credit Union Resources and Expansion Director denies a field of membership expansion request, merger, or spin-off, that decision may be appealed to the NCUA Board in accordance with the procedures set forth in subpart B to part 746 of this chapter.
Before appealing, the credit union may, within 30 days of the denial, provide supplemental information to the Office of Credit Union Resources and Expansion Director for reconsideration. A request for reconsideration should contain new and material evidence addressing the reasons for the initial denial. The Office of Credit Union Resources and Expansion Director will have 30 days from the date of the receipt of the request for reconsideration to make a final decision. If the request is again denied, the applicant may proceed with the appeal process within 60 days of the date of the last denial.
In general, other than the addition of common bond groups, there are three additional ways a federal credit union with a single occupational common bond can expand its field of membership:
• By taking in the field of membership of another credit union through a common bond or emergency merger;
• By taking in the field of membership of another credit union through a common bond or emergency purchase and assumption (P&A); or
• By taking a portion of another credit union’s field of membership through a common bond spin-off.
Generally, the requirements applicable to field of membership expansions found in this chapter apply to mergers where the continuing credit union has a federal charter. That is, the two credit unions must share a common bond.
Where the merging credit union is state-chartered, the common bond rules applicable to a federal credit union apply.
Mergers must be approved by the NCUA regional director or Office of National Examinations and Supervision Director where the continuing credit union is headquartered, with the concurrence of the regional director or Office of National Examinations and Supervision Director of the merging credit union, and, as applicable, the state regulators.
If a single occupational credit union wants to merge into a multiple common bond or community credit union, Section IV.D or Section V.D of this Chapter, respectively, should be reviewed.
An emergency merger may be approved by NCUA without regard to common bond or other legal constraints. An emergency merger involves NCUA’s direct intervention and approval. The credit union to be merged must either be insolvent or in danger of insolvency, as defined in the Glossary, and NCUA must determine that:
• An emergency requiring expeditious action exists;
• Other alternatives are not reasonably available; and
• The public interest would best be served by approving the merger.
If not corrected, conditions that could lead to insolvency include, but are not limited to:
• Abandonment by management;
• Loss of sponsor;
• Serious and persistent recordkeeping problems; or
• Serious and persistent operational concerns.
In an emergency merger situation, NCUA will take an active role in finding a suitable merger partner (continuing credit union). NCUA is primarily concerned that the continuing credit union has the financial strength and management expertise to absorb the troubled credit union without adversely affecting its own financial condition and stability.
As a stipulated condition to an emergency merger, the field of membership of the merging credit union may be transferred intact to the continuing federal credit union without regard to any common bond restrictions. Under this authority, therefore, a single occupational common bond federal credit union may take into its field of membership any dissimilar charter type.
The common bond characteristic of the continuing credit union in an emergency merger does not change. That is, even though the merging credit union is a multiple common bond or community, the continuing credit union will remain a single common bond credit union. Similarly, if the merging credit union is also an unlike single common bond, the continuing credit union will remain a single common bond credit union. Future common bond expansions will be based on the continuing credit union’s original single common bond.
Emergency mergers involving federally insured credit unions in different NCUA field regions must be approved by the regional director or Office of National Examinations and Supervision Director where the continuing credit union is headquartered, with the concurrence of the regional director or Office of National Examinations and Supervision Director of the merging credit union and, as applicable, the state regulators.
Another alternative for acquiring the field of membership of a failing credit union is through a consolidation known as a P&A. A P&A has limited application because, in most cases, the failing credit union must be placed into involuntary liquidation. In the few instances where a P&A may be appropriate, the assuming federal credit union, as with emergency mergers, may acquire the entire field of membership if the emergency merger criteria are satisfied. However, if the P&A does not meet the emergency merger criteria, it must be processed under the common bond requirements.
In a P&A processed under the emergency criteria, specified loans, shares, and certain other designated assets and liabilities, without regard to common bond restrictions, may also be acquired without changing the character of the continuing federal credit union for purposes of future field of membership amendments.
If the purchased and/or assumed credit union’s field of membership does not share a common bond with the purchasing and/or assuming credit union, then the continuing credit union’s original common bond will be controlling for future common bond expansions.
P&As involving federally insured credit unions in different NCUA regions must be approved by the regional director or Office of National Examinations and Supervision Director where the continuing credit union is headquartered, with the concurrence of the regional director or Office of National Examinations and Supervision Director of the purchased and/or assumed credit union and, as applicable, the state regulators.
A spin-off occurs when, by agreement of the parties, a portion of the field of membership, assets, liabilities, shares, and capital of a credit union are transferred to a new or existing credit union. A spin-off is unique in that usually one credit union has a field of membership expansion and the other loses a portion of its field of membership.
All common bond requirements apply regardless of whether the spun-off group becomes a new credit union or goes to an existing federal charter.
The request for approval of a spin-off must be supported with a plan that addresses, at a minimum:
• Why the spin-off is being requested;
• What part of the field of membership is to be spun off;
• Whether the affected credit unions have a common bond (applies only to single occupational credit unions);
• Which assets, liabilities, shares, and capital are to be transferred;
• The financial impact the spin-off will have on the affected credit unions;
• The ability of the acquiring credit union to effectively serve the new members;
• The proposed spin-off date; and
• Disclosure to the members of the requirements set forth above.
The spin-off request must also include current financial statements from the affected credit unions and the proposed voting ballot.
For federal credit unions spinning off a group, membership notice and voting requirements and procedures are the same as for mergers (see part 708 of the NCUA Rules and Regulations), except that only the members directly affected by the spin-off—those whose shares are to be transferred—are permitted to vote. Members whose shares are not being transferred will not be afforded the opportunity to vote. All members of the group to be spun off (whether they voted in favor, against, or not at all) will be transferred if the spin-off is approved by the voting membership. Voting requirements for federally insured state credit unions are governed by state law.
Spin-offs involving federally insured credit unions in different NCUA regions must be approved by all regional directors and, if applicable, Office of National Examinations and Supervision Director where the credit unions are headquartered and the state regulators, as applicable. Spin-offs in the same region also require approval by the state regulator, as applicable. Spin-offs involving the creation of a new federally insured credit union require the approval of the Office of Credit Union Resources and Expansion Director. The Office of Credit Union Resources and Expansion also provides advice regarding field of membership compatibility when appropriate.
An overlap exists when a group of persons is eligible for membership in two or more credit unions. NCUA will permit single occupational federal credit unions to overlap any other charter without performing an overlap analysis.
A federal credit union’s field of membership will always be governed by the common bond descriptions contained in Section 5 of its charter. Where a sponsor organization expands its operations internally, by acquisition or otherwise, the credit union may serve these new entrants to its field of membership if they are part of the common bond described in Section 5. NCUA will permit a complete overlap of the credit unions’ fields of membership.
If a sponsor organization sells off a group, new members can no longer be served unless they otherwise qualify for membership in the credit union or it converts to a multiple common bond charter.
Credit unions must submit documentation explaining the restructuring and providing information regarding the new organizational structure.
An exclusionary clause is a limitation precluding the credit union from serving the primary members of a portion of a group otherwise included in its field of membership. NCUA no longer grants exclusionary clauses. Those granted prior to the adoption of this new Chartering and Field of Membership Manual will remain in effect unless the credit unions agree to remove them or one of the affected credit unions submits a housekeeping amendment to have it removed.
A single occupational common bond federal credit union may apply to convert to a community charter provided the field of membership requirements of the community charter are met. Groups within the existing charter which cannot qualify in the new charter cannot be served except for members of record, or groups or communities obtained in an emergency merger or P&A. A credit union must notify all groups that will be removed from the field of membership as a result of conversion. Members of record can continue to be served. Also, in order to support a case for a conversion, the applicant federal credit union may be required to develop a detailed business plan as specified in Chapter 2, Section V.A.3.
A single occupational common bond federal credit union may apply to convert to a multiple common bond charter by adding a non-common bond group that is within a reasonable proximity of a service facility. Groups within the existing charter may be retained and continue to be served. However, future amendments, including any expansions of the original single common bond group, must be done in accordance with multiple common bond policy.
A credit union may request removal of a portion of the common bond group from its field of membership for various reasons. The most common reasons for this type of amendment are:
• The group is within the field of membership of two credit unions and one wishes to discontinue service;
• The federal credit union cannot continue to provide adequate service to the group;
• The group has ceased to exist;
• The group does not respond to repeated requests to contact the credit union or refuses to provide needed support; or
• The group initiates action to be removed from the field of membership.
When a federal credit union requests an amendment to remove a group from its field of membership, the Office of Credit Union Resources and Expansion Director will determine why the credit union desires to remove the group. If the Office of Credit Union Resources and Expansion Director concurs with the request, membership will continue for those who are already members under the “once a member, always a member” provision of the Federal Credit Union Act.
A number of persons, by virtue of their close relationship to a common bond group, may be included, at the charter applicant’s option, in the field of membership. These include the following:
• Spouses of persons who died while within the field of membership of this credit union;
• Employees of this credit union;
• Persons retired as pensioners or annuitants from the above employment;
• Volunteers;
• Members of the immediate family or household;
• Honorably discharged veterans who served in any of the Armed Services of the United States listed in this charter;
Organizations of such persons; and
• Corporate or other legal entities in this charter.
Immediate family is defined as spouse, child, sibling, parent, grandparent, or grandchild. This includes stepparents, stepchildren, stepsiblings, and adoptive relationships.
Household is defined as persons living in the same residence maintaining a single economic unit.
Membership eligibility is extended only to individuals who are members of an “immediate family or household” of a credit union member. It is not necessary for the primary member to join the credit union in order for the immediate family or household member of the primary member to join, provided the immediate family or household clause is included in the field of membership. However, it is necessary for the immediate family member or household member to first join in order for that person’s immediate family member or household member to join the credit union. A credit union can adopt a more restrictive definition of immediate family or household.
Volunteers, by virtue of their close relationship with a sponsor group, may be included. Examples include volunteers working at a hospital or school.
Under the Federal Credit Union Act, once a person becomes a member of the credit union, such person may remain a member of the credit union until the person chooses to withdraw or is expelled from the membership of the credit union. This is commonly referred to as “once a member, always a member.” The “once a member, always a member” provision does not prevent a credit union from restricting services to members who are no longer within the field of membership.
A single associational federal credit union may include in its field of membership, regardless of location, all members and employees of a recognized association. A single associational common bond consists of individuals (natural persons) and/or groups (non-natural persons) whose members participate in activities developing common loyalties, mutual benefits, and mutual interests. Separately chartered associational groups can establish a single common bond relationship if they are integrally related and share common goals and purposes. For example, two or more churches of the same denomination, Knights of Columbus Councils, or locals of the same union can qualify as a single associational common bond. Individuals and groups eligible for membership in a single associational credit union can include the following:
• Natural person members of the association (for example, members of a union or church members);
• Non-natural person members of the association;
• Employees of the association (for example, employees of the labor union or employees of the church); and
• The association.
Generally, a single associational common bond does not include a geographic definition and can operate nationally. However, a proposed or existing federal credit union may limit its field of membership to a single association or geographic area. NCUA may impose a geographic limitation if it is determined that the applicant credit union does not have the ability to serve a larger group or there are other operational concerns. All single associational common bonds should include a definition of the group that may be served based on the association’s charter, bylaws, and any other equivalent documentation.
Applicants for a single associational common bond federal credit union charter or a field of membership amendment to include an association must provide, at the request of NCUA, a copy of the association’s charter, bylaws, or other equivalent documentation, including any legal documents required by the state or other governing authority. The associational sponsor itself may also be included in the field of membership—e.g., “Sprocket Association”—and will be shown in the last clause of the field of membership.
As a threshold matter, when reviewing an application to include an association in a federal credit union’s field of membership, NCUA will determine if the association has been formed primarily for the purpose of expanding credit union membership. If NCUA makes such a determination, then the analysis ends and the association is denied inclusion in the federal credit union’s field of membership. If NCUA determines that the association was formed to serve some other separate function as an organization, then NCUA will apply the following totality of the circumstances test to determine if the association satisfies the associational common bond requirements. The totality of the circumstances test consists of the following factors:
1. Whether the association provides opportunities for members to participate in the furtherance of the goals of the association;
2. Whether the association maintains a membership list;
3. Whether the association sponsors other activities;
4. Whether the association’s membership eligibility requirements are authoritative;
5. Whether members pay dues;
6. Whether the members have voting rights; to meet this requirement, members need not vote directly for an officer, but may vote for a delegate who in turn represents the members’ interests;
7. The frequency of meetings; and
8. Separateness—NCUA reviews if there is corporate separateness between the group and the federal credit union. The group and the federal credit union must operate in a way that demonstrates the separate corporate existence of each entity. Specifically, this means the federal credit union’s and the group’s respective business transactions, accounts, and corporate records are not intermingled.
No one factor alone is determinative of membership eligibility as an association. The totality of the circumstances controls over any individual factor in the test. However, NCUA’s primary focus will be on factors 1-4.
NCUA automatically approves the below groups as satisfying the associational common bond provisions. NCUA only approves regular members of an approved group. Honorary, affiliate, or non-regular members do not qualify.
These groups are:
1. Alumni associations;
2. Religious organizations, including churches or groups of related churches;
3. Electric cooperatives;
4. Homeowner associations;
5. Labor unions;
6. Scouting groups;
7. Parent teacher associations (PTAs) organized at the local level to serve a single school district;
8. Chamber of commerce groups (members only and not employees of members);
9. Athletic booster clubs whose members have voting rights;
10. Fraternal organizations or civic groups with a mission of community service whose members have voting rights;
11. Organizations having a mission based on preserving or furthering the culture of a particular national or ethnic origin; and
12. Organizations promoting social interaction or educational initiatives among persons sharing a common occupational profession.
A support group whose members are continually changing or whose duration is temporary may not meet the single associational common bond criteria. Each class of member will be evaluated based on the totality of the circumstances. Individuals or honorary members who only make donations to the association are not eligible to join the credit union.
Student groups (e.g., students enrolled at a public, private, or parochial school) may constitute either an associational or occupational common bond. For example, students enrolled at a church sponsored school could share a single associational common bond with the members of that church and may qualify for a federal credit union charter. Similarly, students enrolled at a university, as a group by itself, or in conjunction with the faculty and employees of the school, could share a single occupational common bond and may qualify for a federal credit union charter.
Tenant groups, consumer groups, and other groups of persons having an “interest in” a particular cause and certain consumer cooperatives may also qualify as an association.
Associations based primarily on a client-customer relationship do not meet associational common bond requirements. Health clubs are an example of a group not meeting associational common bond requirements, including YMCAs. However, having an incidental client-customer relationship does not preclude an associational charter as long as the associational common bond requirements are met. For example, a fraternal association that offers insurance, which is not a condition of membership, may qualify as a valid associational common bond.
If the association’s membership or geographical definitions in its charter and bylaws are changed subsequent to the effective date stated in the field of membership, the credit union must submit the revised charter or bylaws for NCUA’s consideration and approval prior to serving members of the association added as a result of the change.
Some examples of associational common bonds are:
• Regular members of Locals 10 and 13, IBEW, in Florida, who qualify for membership in accordance with their charter and bylaws in effect on May 20, 2001;
• Members of the Hoosier Farm Bureau in Grant, Logan, or Lee Counties of Indiana, who qualify for membership in accordance with its charter and bylaws in effect on March 7, 1997;
• Members of the Shalom Congregation in Chevy Chase, Maryland;
• Regular members of the Corporate Executives Association, located in Westchester, New York, who qualify for membership in accordance with its charter and bylaws in effect on December 1, 1997;
• Members of the University of Wisconsin Alumni Association, located in Green Bay, Wisconsin;
• Members of the Marine Corps Reserve Officers Association; or
• Members of St. John’s Methodist Church and St. Luke’s Methodist Church, located in Toledo, Ohio.
Some examples of insufficiently defined single associational common bonds are:
• All Lutherans in the United States (too broadly defined); or
• Veterans of U.S. military service (group is too broadly defined; no formal association of all members of the group).
Some examples of unacceptable single associational common bonds are:
• Alumni of Amos University (no formal association);
• Customers of Fleetwood Insurance Company (policyholders or primarily customer/client relationships do not meet associational standards);
• Employees of members of the Reston, Virginia, Chamber of Commerce (not a sufficiently close tie to the associational common bond); or
• Members of St. John’s Lutheran Church and St. Mary’s Catholic Church located in Anniston, Alabama (churches are not of the same denomination).
Section 5 of every associational federal credit union’s charter defines the field of membership the credit union can legally serve. Only those persons who, or legal entities that, join the credit union and are specified in the field of membership can be served. There are three instances in which Section 5 must be amended by NCUA.
First, a group that shares the credit union’s common bond is added to the field of membership. This may occur through various ways including agreement between the group and the credit union directly, or through a merger, purchase and assumption (P&A), or spin-off.
Second, a federal credit union qualifies to change its common bond from:
• A single associational common bond to a single occupational common bond;
• A single associational common bond to a community charter; or
• A single associational common bond to a multiple common bond.
Third, a federal credit union removes a portion of the group from its field of membership through agreement with the group, a spin-off, or a portion of the group that is no longer in existence.
An existing single associational federal credit union that submits a request to amend its charter must provide documentation to establish that the associational common bond requirement has been met. The Office of Credit Union Resources and Expansion Director must approve all amendments to an associational common bond credit union’s field of membership.
If the single common bond group that comprises a federal credit union’s field of membership undergoes a substantial restructuring, the result is often that portions of the group are sold or spun off. This is an event requiring a change to the credit union’s field of membership. NCUA may not permit a single associational credit union to maintain in its field of membership a sold or spun-off group to which it has been providing service unless the group otherwise qualifies for membership in the credit union or the credit union converts to a multiple common bond credit union.
If the group comprising the single common bond of the credit union merges with, or is acquired by, another group, the credit union can serve the new group resulting from the merger or acquisition after receiving a housekeeping amendment.
Prior to granting a common bond expansion, NCUA will examine the amendment’s likely impact on the credit union’s operations and financial condition. In most cases, the information needed for analyzing the effect of adding a particular group will be available to NCUA through the examination and financial and statistical reports; however, in particular cases, the Office of Credit Union Resources and Expansion Director may require additional information prior to making a decision.
A federal credit union requesting a common bond expansion must submit an Application for Field of Membership Amendment (NCUA 4015-EZ) to the Office of Credit Union Resources and Expansion Director. An authorized credit union representative must sign the request.
All requests for approval to amend a federal credit union’s charter must be submitted to the Office of Credit Union Resources and Expansion Director.
NCUA staff will review all amendment requests in order to ensure conformance to NCUA policy.
Before acting on a proposed amendment, the Office of Credit Union Resources and Expansion Director may require an on-site review. In addition, the Office of Credit Union Resources and Expansion Director may, after taking into account the significance of the proposed field of membership amendment, require the applicant to submit a business plan addressing specific issues.
The financial and operational condition of the requesting credit union will be considered in every instance. The economic advisability of expanding the field of membership of a credit union with financial or operational problems must be carefully considered.
In most cases, field of membership amendments will only be approved for credit unions that are operating satisfactorily. Generally, if a federal credit union is having difficulty providing service to its current membership, or is experiencing financial or other operational problems, it may have more difficulty serving an expanded field of membership.
Occasionally, however, an expanded field of membership may provide the basis for reversing current financial problems. In such cases, an amendment to expand the field of membership may be granted notwithstanding the credit union’s financial or operational problems. The applicant credit union must clearly establish that the expanded field of membership is in the best interest of the members and will not increase the risk to the NCUSIF.
If the Office of Credit Union Resources and Expansion Director approves the requested amendment, the credit union will be issued an amendment to Section 5 of its charter.
When the Office of Credit Union Resources and Expansion Director disapproves any application, in whole or in part, to amend the field of membership under this chapter, the applicant will be informed in writing of the:
• Specific reasons for the action;
• Options to consider, if appropriate, for gaining approval; and
• Appeal procedures.
If the Office of Credit Union Resources and Expansion Director denies a field of membership expansion request, merger, or spin-off, that decision may be appealed to the NCUA Board in accordance with the procedures set forth in subpart B to part 746 of this chapter.
Before appealing, the credit union may, within 30 days of the denial, provide supplemental information to the Office of Credit Union Resources and Expansion Director for reconsideration. A request for reconsideration should contain new and material evidence addressing the reasons for the initial denial or explain extenuating circumstances that precluded the inclusion of existing material evidence or information that should have been filed with the request for reconsideration. The Office of Credit Union Resources and Expansion Director will have 30 days from the date of the receipt of the request for reconsideration to make a final decision. If the request is again denied, the applicant may proceed with the appeal process within 60 days of the date of the last denial. A petitioner may seek a second reconsideration based on new material evidence or information or extenuating circumstances that precluded the inclusion of such information in the previous request.
In general, other than the addition of common bond groups, there are three additional ways a federal credit union with a single associational common bond can expand its field of membership:
• By taking in the field of membership of another credit union through a common bond or emergency merger;
• By taking in the field of membership of another credit union through a common bond or emergency purchase and assumption (P&A); or
• By taking a portion of another credit union’s field of membership through a common bond spin-off.
Generally, the requirements applicable to field of membership expansions found in this section apply to mergers where the continuing credit union is a federal charter. That is, the two credit unions must share a common bond.
Where the merging credit union is state-chartered, the common bond rules applicable to a federal credit union apply.
Mergers must be approved by the NCUA regional director or Office of National Examinations and Supervision Director where the continuing credit union is headquartered, with the concurrence of the regional director or Office of National Examinations and Supervision Director of the merging credit union, and, as applicable, the state regulators.
If a single associational credit union wants to merge into a multiple common bond or community credit union, Section IV.D or Section V.D of this Chapter, respectively, should be reviewed.
An emergency merger may be approved by NCUA without regard to common bond or other legal constraints. An emergency merger involves NCUA’s direct intervention and approval. The credit union to be merged must either be insolvent or in danger of insolvency, as defined in the Glossary, and NCUA must determine that:
• An emergency requiring expeditious action exists;
• Other alternatives are not reasonably available; and
• The public interest would best be served by approving the merger.
If not corrected, conditions that could lead to insolvency include, but are not limited to:
• Abandonment by management;
• Loss of sponsor;
• Serious and persistent record-keeping problems; or
• Serious and persistent operational concerns.
In an emergency merger situation, NCUA will take an active role in finding a suitable merger partner (continuing credit union). NCUA is primarily concerned that the continuing credit union has the financial strength and management expertise to absorb the troubled credit union without adversely affecting its own financial condition and stability.
As a stipulated condition to an emergency merger, the field of membership of the merging credit union may be transferred intact to the continuing federal credit union without regard to any common bond restrictions. Under this authority, therefore, a single associational common bond federal credit union may take into its field of membership any dissimilar charter type.
The common bond characteristic of the continuing credit union in an emergency merger does not change. That is, even though the merging credit union is a multiple common bond or community, the continuing credit union will remain a single common bond credit union. Similarly, if the merging credit union is an unlike single common bond, the continuing credit union will remain a single common bond credit union. Future common bond expansions will be based on the continuing credit union’s single common bond.
Emergency mergers involving federally insured credit unions in different NCUA regions must be approved by the regional director or Office of National Examinations and Supervision Director where the continuing credit union is headquartered, with the concurrence of the regional director or Office of National Examinations and Supervision Director of the merging credit union and, as applicable, the state regulators.
Another alternative for acquiring the field of membership of a failing credit union is through a consolidation known as a P&A. A P&A has limited application because, in most cases, the failing credit union must be placed into involuntary liquidation. In the few instances where a P&A may be appropriate, the assuming federal credit union, as with emergency mergers, may acquire the entire field of membership if the emergency merger criteria are satisfied. However, if the P&A does not meet the emergency merger criteria, it must be processed under the common bond requirements.
In a P&A processed under the emergency criteria, specified loans, shares, and certain other designated assets and liabilities, without regard to common bond restrictions, may also be acquired without changing the character of the continuing federal credit union for purposes of future field of membership amendments.
If the purchased and/or assumed credit union’s field of membership does not share a common bond with the purchasing and/or assuming credit union, then the continuing credit union’s original common bond will be controlling for future common bond expansions.
P&As involving federally insured credit unions in different NCUA regions must be approved by the regional director or Office of National Examinations and Supervision Director where the continuing credit union is headquartered, with the concurrence of the regional director or Office of National Examinations and Supervision Director of the purchased and/or assumed credit union and, as applicable, the state regulators.
A spin-off occurs when, by agreement of the parties, a portion of the field of membership, assets, liabilities, shares, and capital of a credit union are transferred to a new or existing credit union. A spin-off is unique in that usually one credit union has a field of membership expansion and the other loses a portion of its field of membership.
All common bond requirements apply regardless of whether the spun-off group becomes a new credit union or goes to an existing federal charter.
The request for approval of a spin-off must be supported with a plan that addresses, at a minimum:
• Why the spin-off is being requested;
• What part of the field of membership is to be spun off;
• Whether the affected credit unions have the same common bond (applies only to single associational credit unions);
• Which assets, liabilities, shares, and capital are to be transferred;
• The financial impact the spin-off will have on the affected credit unions;
• The ability of the acquiring credit union to effectively serve the new members;
• The proposed spin-off date; and
• Disclosure to the members of the requirements set forth above.
The spin-off request must also include current financial statements from the affected credit unions and the proposed voting ballot.
For federal credit unions spinning off a group, membership notice and voting requirements and procedures are the same as for mergers (see part 708 of the NCUA Rules and Regulations), except that only the members directly affected by the spin-off—those whose shares are to be transferred—are permitted to vote. Members whose shares are not being transferred will not be afforded the opportunity to vote. All members of the group to be spun off (whether they voted in favor, against, or not at all) will be transferred if the spin-off is approved by the voting membership. Voting requirements for federally insured state credit unions are governed by state law.
Spin-offs involving federally insured credit unions in different NCUA regions must be approved by all regional directors and, if applicable, Office of National Examinations and Supervision Director where the credit unions are headquartered and the state regulators, as applicable. Spin-offs in the same region also require approval by the state regulator, as applicable. Spin-offs involving the creation of a new federally insured credit union require the approval of the Office of Credit Union Resources and Expansion Director. The Office of Credit Union Resources and Expansion also provides advice regarding field of membership compatibility when appropriate.
An overlap exists when a group of persons is eligible for membership in two or more credit unions. NCUA will permit single associational federal credit unions to overlap any other charters without performing an overlap analysis.
A federal credit union’s field of membership will always be governed by the common bond descriptions contained in Section 5 of its charter. Where a sponsor organization expands its operations internally, by acquisition or otherwise, the credit union may serve these new entrants to its field of membership if they are part of the common bond described in Section 5. NCUA will permit a complete overlap of the credit unions’ fields of membership. If a sponsor organization sells off a group, new members can no longer be served unless they otherwise qualify for membership in the credit union or it converts to a multiple common bond.
Credit unions must submit documentation explaining the restructuring and providing information regarding the new organizational structure.
An exclusionary clause is a limitation precluding the credit union from serving the primary members of a portion of a group otherwise included in its field of membership. NCUA no longer grants exclusionary clauses. Those granted prior to the adoption of this new Chartering and Field of Membership Manual will remain in effect unless the credit unions agree to remove them or one of the affected credit unions submits a housekeeping amendment to have it removed.
A single associational common bond federal credit union may apply to convert to a community charter provided the field of membership requirements of the community charter are met. Groups within the existing charter which cannot qualify in the new charter cannot be served except for members of record, or groups or communities obtained in an emergency merger or P&A. A credit union must notify all groups that will be removed from the field of membership as a result of conversion. Members of record can continue to be served. Also, in order to support a case for a conversion, the applicant federal credit union may be required to develop a detailed business plan as specified in Chapter 2, Section V.A.3.
A single associational common bond federal credit union may apply to convert to a multiple common bond charter by adding a non-common bond group that is within a reasonable proximity of a service facility. Groups within the existing charter may be retained and continue to be served. However, future amendments, including any expansions of the original single common bond group, must be done in accordance with multiple common bond policy.
A credit union may request removal of a portion of the common bond group from its field of membership for various reasons. The most common reasons for this type of amendment are:
• The group is within the field of membership of two credit unions and one wishes to discontinue service;
• The federal credit union cannot continue to provide adequate service to the group;
• The group has ceased to exist;
• The group does not respond to repeated requests to contact the credit union or refuses to provide needed support; or
• The group initiates action to be removed from the field of membership.
When a federal credit union requests an amendment to remove a group from its field of membership, the Office of Credit Union Resources and Expansion Director will determine why the credit union desires to remove the group. If the Office of Credit Union Resources and Expansion Director concurs with the request, membership will continue for those who are already members under the “once a member, always a member” provision of the Federal Credit Union Act.
A number of persons by virtue of their close relationship to a common bond group may be included, at the charter applicant’s option, in the field of membership. These include the following:
• Spouses of persons who died while within the field of membership of this credit union;
• Employees of this credit union;
• Volunteers;
• Members of the immediate family or household;
• Honorably discharged veterans who served in any of the Armed Services of the United States in this charter;
Organizations of such persons; and
• Corporate or other legal entities in this charter.
Immediate family is defined as spouse, child, sibling, parent, grandparent, or grandchild. This includes stepparents, stepchildren, stepsiblings, and adoptive relationships.
Household is defined as persons living in the same residence maintaining a single economic unit.
Membership eligibility is extended only to individuals who are members of an “immediate family or household” of a credit union member. It is not necessary for the primary member to join the credit union in order for the immediate family or household member of the primary member to join, provided the immediate family or household clause is included in the field of membership. However, it is necessary for the immediate family member or household member to first join in order for that person’s immediate family member or household member to join the credit union. A credit union can adopt a more restrictive definition of immediate family or household.
Volunteers, by virtue of their close relationship with a sponsor group, may be included. One example is volunteers working at a church.
Under the Federal Credit Union Act, once a person becomes a member of the credit union, such person may remain a member of the credit union until the person chooses to withdraw or is expelled from the membership of the credit union. This is commonly referred to as “once a member, always a member.” The “once a member, always a member” provision does not prevent a credit union from restricting services to members who are no longer within the field of membership.
A federal credit union may be chartered to serve a combination of distinct, definable single occupational and/or associational common bonds. This type of credit union is called a multiple common bond credit union. Each group in the field of membership must have its own occupational or associational common bond. For example, a multiple common bond credit union may include two unrelated employers, or two unrelated associations, or a combination of two or more employers or associations. Additionally, these groups must be within reasonable geographic proximity of the credit union. That is, the groups must be within the service area of one of the credit union’s service facilities. These groups are referred to as select groups. A multiple common bond credit union cannot include a TIP or expand using single common bond criteria.
Employment in a corporation or other legal entity which is related to another legal entity (such as a company under contract to, and possessing a strong dependency relationship with, the other company) makes that person part of the occupational common bond of a select employee group within a multiple common bond. In this context, a “strong dependency relationship” is a relationship in which the entities rely on each other as measured by a pattern of regularly doing business with each other, for example, as documented by the number, the term length, and the dollar volume of prior and pending contracts between them.
A multiple common bond credit union’s charter may also combine individual occupational groups that each consist of employees of a retailer or other business tenant of an industrial park, a shopping mall, office park or office building (each “a park”). To be able to have this type of clause in its charter, the multiple common bond credit union first must receive a request from an authorized representative of the group or the park to establish credit union service. The park must be within the multiple common bond credit union’s service area, and each occupational group must have fewer than 3,000 employees, who are eligible for membership only for so long as each is employed by a park tenant. Under this clause, a multiple common bond credit union can enroll group employees only while the group’s retail or business employer is a park tenant, but such credit unions are free to serve employees of new groups under the above conditions as each respective employer becomes a park tenant.
A federal credit union’s service area is the area that can reasonably be served by the service facilities accessible to the groups within the field of membership. The service area will most often coincide with that geographic area primarily served by the service facility. Additionally, the groups served by the credit union must have access to the service facility. The non-availability of other credit union service is a factor to be considered in determining whether the group is within reasonable proximity of a credit union wishing to add the group to its field of membership.
A service facility for multiple common bond credit unions is defined as a place where shares are accepted for members’ accounts, loan applications are accepted, or loans are disbursed. This definition includes a credit union-owned branch, a mobile branch, an office operated on a regularly scheduled weekly basis, a credit union-owned ATM, or a credit union-owned electronic facility that meets, at a minimum, these requirements. A service facility also includes a shared branch or a shared branch network location, including a shared ATM or electronic facility that meets the above requirements, if the credit union participates in a shared branching network. This definition does not include the credit union’s internet website.
The select group as a whole will be considered to be within a credit union’s service area when:
• A majority of the persons in a select group live, work, or gather regularly within the service area;
• The group’s headquarters is located within the service area; or
• The group’s “paid from” or “supervised from” location is within the service area.
An example of a multiple common bond field of membership is:
“The field of membership of this federal credit union shall be limited to the following:
1. Employees of Teltex Corporation who work in Wilmington, Delaware;
2. Partners and employees of Smith & Jones, Attorneys at Law, who work in Wilmington, Delaware;
3. Members of the M&L Association in Wilmington, Delaware, who qualify for membership in accordance with its charter and bylaws in effect on December 31, 1997;
4. Employees of tenants of MJB Office Park under the following conditions:
Section 5 of every multiple common bond federal credit union’s charter defines the field of membership and select groups the credit union can legally serve. Only those persons or legal entities specified in the field of membership can be served. There are a number of instances in which Section 5 must be amended by NCUA.
First, a new select group is added to the field of membership. This may occur through agreement between the group and the credit union directly, or through a merger, corporate acquisition, purchase and assumption (P&A), or spin-off.
Second, a federal credit union qualifies to change its charter from:
• A single occupational or associational charter to a multiple common bond charter;
• A multiple common bond to a single occupational or associational charter;
• A multiple common bond to a community charter; or
• A community to a multiple common bond charter.
Third, a federal credit union removes a group from its field of membership through agreement with the group, a spin-off, or because the group no longer exists.
An existing multiple common bond federal credit union that submits a request to amend its charter must provide documentation to establish that the multiple common bond requirements have been met. The Office of Credit Union Resources and Expansion Director must approve all amendments to a multiple common bond credit union’s field of membership.
NCUA will approve groups to a credit union’s field of membership if the agency determines in writing that the following criteria are met:
• The credit union has not engaged in any unsafe or unsound practice, as determined by the Office of Credit Union Resources and Expansion Director, with input from the appropriate regional director or Office of National Examinations and Supervision Director, which is material during the one year period preceding the filing to add the group;
• The credit union is “adequately capitalized” pursuant to Part 702 of NCUA’s Rules and Regulations. For low-income credit unions or credit unions chartered less than ten years, the Office of Credit Union Resources and Expansion Director, with input from the appropriate regional director or Office of National Examinations and Supervision Director, may determine that a less than “adequately capitalized” credit union can qualify for an expansion if it is making reasonable progress toward becoming “adequately capitalized.” For any other credit union, the Office of Credit Union Resources and Expansion Director, with input from the appropriate regional director or Office of National Examinations and Supervision Director, may determine that a less than “adequately capitalized” credit union can qualify for an expansion if it is making reasonable progress toward becoming “adequately capitalized,” and the addition of the group would not adversely affect the credit union’s capitalization level;
• The credit union has the administrative capability to serve the proposed group and the financial resources to meet the need for additional staff and assets to serve the new group;
• Any potential harm the expansion may have on any other credit union and its members is clearly outweighed by the probable beneficial effect of the expansion. With respect to a proposed expansion’s effect on other credit unions, the requirements on overlapping fields of membership set forth in Section IV.E of this Chapter are also applicable; and
• If the formation of a separate credit union by such group is not practical and consistent with reasonable standards for the safe and sound operation of a credit union.
The Federal Credit Union Act presumes that a group of 3,000 or more primary potential members is able to form its own stand-alone credit union unless NCUA determines that it is infeasible to do so for reasons such as:
(i) The group lacks sufficient volunteer and other resources to support the efficient and effective operation of its own credit union;
(ii) the group does not meet criteria that the Board has determined to be an important indicator of success in establishing and managing a new credit union, including demographic characteristics such as the geographic location of members, the diversity of ages and income levels among members, and other factors that may affect such a credit union’s financial viability and stability; or
(iii) the group would be unlikely to operate a safe and sound credit union.
As such, NCUA requires additional information when a multiple common bond credit union applies to add a group of 3,000 or more primary potential members. For groups between 3,000 and 4,999 potential members, NCUA requires documentation indicating the group has a lack of available subsidies, interest among the group’s members, and sufficient resources. For such cases NCUA, in its discretion, will accept a written statement indicating these conditions exist as sufficient documentation the group cannot form its own credit union. Groups with 5,000 or more members will be subject to the standard document requirements as discussed later in this chapter, requiring a group to fully describe its inability to establish a new single common bond credit union.
A multiple common bond credit union requesting a select group expansion must submit a formal written request, using the Application for Field of Membership Amendment (NCUA 4015-EZ, NCUA 4015-A or NCUA 4015) to the Office of Credit Union Resources and Expansion Director. An authorized credit union representative must sign the request.
The NCUA 4015-EZ (for groups less than 3,000 potential members) must be accompanied by the following:
• A letter, or equivalent documentation, from the group requesting credit union service. This letter must indicate:
• That the group wants to be added to the applicant federal credit union’s field of membership;
• The number of persons currently included within the group to be added and their locations; and
• The group’s proximity to the credit union’s nearest service facility.
• The most recent copy of the group’s charter and bylaws or equivalent documentation (for associational groups).
The NCUA 4015-A (for groups between 3,000 and 4,999 primary potential members) must be accompanied by the following:
• A letter, or equivalent documentation, from the group requesting credit union service. This letter must indicate:
• That the group wants to be added to the federal credit union’s field of membership;
• The number of persons currently included within the group to be added and their locations;
• The group’s proximity to credit union’s nearest service facility, and
• Why the formation of a separate credit union for the group is not practical or consistent with safety and soundness standards because of a lack of available subsidies, interest among the group’s members, and sufficient resources.
The NCUA 4015 (for groups of 5,000 or more primary potential members) must be accompanied by the following:
• A letter, or equivalent documentation, from the group requesting credit union service. This letter must indicate:
• That the group wants to be added to the federal credit union’s field of membership;
• Whether the group presently has other credit union service available;
• The number of persons currently included within the group to be added and their locations;
• The group’s proximity to credit union’s nearest service facility, and
• Why the formation of a separate credit union for the group is not practical or consistent with safety and soundness standards. A credit union need not address every item on the list, simply those issues that are relevant to its particular request:
Member location—whether the membership is widely dispersed or concentrated in a central location.
Demographics—the employee turnover rate, economic status of the group’s members, and whether the group is more apt to consist of savers and/or borrowers.
Market competition—the availability of other financial services.
Desired services and products—the type of services the group desires in comparison to the type of services a new credit union could offer.
Sponsor subsidies—the availability of operating subsidies.
The desire of the sponsor—the extent of the sponsor’s interest in supporting a credit union charter.
Employee interest—the extent of the employees’ interest in obtaining a credit union charter.
Evidence of past failure—whether the group previously had its own credit union or previously filed for a credit union charter.
Administrative capacity to provide services—will the group have the management expertise to provide the services requested.
• If the group is eligible for membership in any other credit union, documentation must be provided to support inclusion of the group under the overlap standards set forth in Section IV.E of this Chapter; and
• The most recent copy of the group’s charter and bylaws or equivalent documentation (for associational groups).
If a select group within a federal credit union’s field of membership undergoes a substantial restructuring, a change to the credit union’s field of membership may be required if the credit union is to continue to provide service to the select group. NCUA permits a multiple common bond credit union to maintain in its field of membership a sold, spun-off, or merged select group to which it has been providing service. This type of amendment to the credit union’s charter is not considered an expansion; therefore, the criteria relating to adding new groups are not applicable.
When two groups merge and each is in the field of membership of a credit union, then both (or all affected) credit unions can serve the resulting merged group, subject to any existing geographic limitation and without regard to any overlap provisions. However, the credit unions cannot serve the other multiple groups that may be in the field of membership of the other credit union.
All requests for approval to amend a federal credit union’s charter must be submitted to the Office of Credit Union Resources and Expansion Director.
NCUA staff will review all amendment requests in order to ensure conformance to NCUA policy.
Before acting on a proposed amendment, the Office of Credit Union Resources and Expansion Director may require an on-site review. In addition, the Office of Credit Union Resources and Expansion Director may, after taking into account the significance of the proposed field of membership amendment, require the applicant to submit a business plan addressing specific issues.
The financial and operational condition of the requesting credit union will be considered in every instance. An expanded field of membership may provide the basis for reversing adverse trends. In such cases, an amendment to expand the field of membership may be granted notwithstanding the credit union’s adverse trends. The applicant credit union must clearly establish that the approval of the expanded field of membership meets the requirements of Section IV.B.2 of this Chapter and will not increase the risk to the NCUSIF.
If the Office of Credit Union Resources and Expansion Director approves the requested amendment, the credit union will be issued an amendment to Section 5 of its charter.
When the Office of Credit Union Resources and Expansion Director disapproves any application, in whole or in part, to amend the field of membership under this chapter, the applicant will be informed in writing of the:
• Specific reasons for the action;
• Options to consider, if appropriate, for gaining approval; and
• Appeal procedure.
If the Office of Credit Union Resources and Expansion Director denies a field of membership expansion request, merger, or spin-off, that decision may be appealed to the NCUA Board in accordance with the procedures set forth in subpart B to part 746 of this chapter.
Before appealing, the credit union may, within 30 days of the denial, provide supplemental information to the Office of Credit Union Resources and Expansion Director for reconsideration. A request for reconsideration should contain new and material evidence addressing the reasons for the initial denial or explain extenuating circumstances that precluded the inclusion of existing material evidence or information that should have been filed with the request for reconsideration. The Office of Credit Union Resources and Expansion Director will have 30 days from the date of the receipt of the request for reconsideration to make a final decision. If the request is again denied, the applicant may proceed with the appeal process within 60 days of the date of the last denial. A petitioner may seek a second reconsideration based on new material evidence or information or extenuating circumstances that precluded the inclusion of such information in the previous request.
In general, other than the addition of select groups, there are three additional ways a multiple common bond federal credit union can expand its field of membership:
• By taking in the field of membership of another credit union through a merger;
• By taking in the field of membership of another credit union through a purchase and assumption (P&A); or
• By taking a portion of another credit union’s field of membership through a spin-off.
A voluntary merger of two or more federal credit unions is permissible as long as each select group in the merging credit union’s field of membership has less than 3,000 primary potential members. While the merger requirements outlined in Section 205 of the Federal Credit Union Act must still be met, the requirements of Chapter 2, Section IV.B.2 of this manual are not applicable.
If the merging credit unions serve the same group, and the group consists of 3,000 or more primary potential members, then the ability to form a separate credit union analysis is not required for that group. If the merging credit union has any other groups consisting of 3,000 or more primary potential members, special requirements apply. NCUA will analyze each group of 3,000 or more primary potential members, except as noted above, to determine whether the formation of a separate credit union by such a group is practical. If the formation of a separate credit union by such a group is not practical because the group lacks sufficient volunteer and other resources to support the efficient and effective operations of a credit union or does not meet the economic advisable criteria outlined in Chapter 1, the group may be merged into a multiple common bond credit union. If the formation of a separate credit union is practical, the group must be spun-off before the merger can be approved.
A financially healthy single common bond credit union with a primary potential membership of 3,000 or more cannot merge into a multiple common bond credit union, absent supervisory reasons, unless the continuing credit union already serves the same group.
If the merger is approved, the qualifying groups within the merging credit union’s field of membership will be transferred intact to the continuing credit union and can continue to be served.
Where the merging credit union is state-chartered, the field of membership rules applicable to a federal credit union apply.
Mergers must be approved by the applicable NCUA regional or Office of National Examinations and Supervision Director where the continuing credit union is headquartered, with the concurrence of the regional director or Office of National Examinations and Supervision Director of the merging credit union, and, as applicable, the state regulators.
The NCUA may approve the merger of any federally insured credit union when safety and soundness concerns are present without regard to the 3,000 numerical limitation. The credit union need not be insolvent or in danger of insolvency for NCUA to use this statutory authority. Examples constituting appropriate reasons for using this authority are: abandonment of the management and/or officials and an inability to find replacements, loss of sponsor support, serious and persistent record-keeping problems, sustained material decline in financial condition, or other serious or persistent circumstances.
An emergency merger may be approved by NCUA without regard to common bond or other legal constraints. An emergency merger involves NCUA’s direct intervention and approval. The credit union to be merged must either be insolvent or in danger of insolvency, as defined in the Glossary, and NCUA must determine that:
• An emergency requiring expeditious action exists;
• Other alternatives are not reasonably available; and
• The public interest would best be served by approving the merger.
If not corrected, conditions that could lead to insolvency include, but are not limited to:
• Abandonment by management;
• Loss of sponsor;
• Serious and persistent record-keeping problems; or
• Serious and persistent operational concerns.
In an emergency merger situation, NCUA will take an active role in finding a suitable merger partner (continuing credit union). NCUA is primarily concerned that the continuing credit union has the financial strength and management expertise to absorb the troubled credit union without adversely affecting its own financial condition and stability.
As a stipulated condition to an emergency merger, the field of membership of the merging credit union may be transferred intact to the continuing federal credit union without regard to any field of membership restrictions including numerical limitation requirements. Under this authority, any single occupational or associational common bond, multiple common bond, or community charter may merger into a multiple common bond credit union and that credit union can continue to serve the merging credit union’s field of membership. Subsequent field of membership expansions of the continuing multiple common bond credit union must be consistent with multiple common bond policies.
Emergency mergers involving federally insured credit unions in different NCUA regions must be approved by the regional director or Office of National Examinations and Supervision Director where the continuing credit union is headquartered, with the concurrence of the regional director or Office of National Examinations and Supervision Director of the merging credit union and, as applicable, the state regulators.
Another alternative for acquiring the field of membership of a failing credit union is through a consolidation known as a P&A. Generally, the requirements applicable to field of membership expansions found in this chapter apply to purchase and assumptions where the purchasing credit union is a federal charter.
A P&A has limited application because, in most cases, the failing credit union must be placed into involuntary liquidation. However, in the few instances where a P&A may occur, the assuming federal credit union, as with emergency mergers, may acquire the entire field of membership if the emergency criteria are satisfied. Specified loans, shares, and certain other designated assets and liabilities, without regard to field of membership restrictions, may also be acquired without changing the character of the continuing federal credit union for purposes of future field of membership amendments. Subsequent field of membership expansions must be consistent with multiple common bond policies.
P&As involving federally insured credit unions in different NCUA regions must be approved by the regional director or Office of National Examinations and Supervision Director where the continuing credit union is headquartered, with the concurrence of the regional director or Office of National Examinations and Supervision Director of the purchased and/or assumed credit union and, as applicable, the state regulators.
A spin-off occurs when, by agreement of the parties, a portion of the field of membership, assets, liabilities, shares, and capital of a credit union are transferred to a new or existing credit union. A spin-off is unique in that usually one credit union has a field of membership expansion and the other loses a portion of its field of membership.
All common bond requirements apply regardless of whether the spun-off group becomes a new charter or goes to an existing federal charter.
The request for approval of a spun-off group must be supported with a plan that addresses, at a minimum:
• Why the spin-off is being requested;
• What part of the field of membership is to be spun off;
• Which assets, liabilities, shares, and capital are to be transferred;
• The financial impact the spin-off will have on the affected credit unions;
• The ability of the acquiring credit union to effectively serve the new members;
• The proposed spin-off date; and
• Disclosure to the members of the requirements set forth above.
The spin-off request must also include current financial statements from the affected credit unions and the proposed voting ballot.
For federal credit unions spinning off a group, membership notice and voting requirements and procedures are the same as for mergers (see part 708 of the NCUA Rules and Regulations), except that only the members directly affected by the spin-off—those whose shares are to be transferred—are permitted to vote. Members whose shares are not being transferred will not be afforded the opportunity to vote. All members of the group to be spun off (whether they voted in favor, against, or not at all) will be transferred if the spin-off is approved by the voting membership. Voting requirements for federally insured state credit unions are governed by state law.
Spin-offs involving federally insured credit unions in different NCUA regions must be approved by all regional directors and, if applicable, the Office of National Examinations and Supervision Director where the credit unions are headquartered and the state regulators, as applicable. Spin-offs in the same region also require approval by the state regulator, as applicable.
An overlap exists when a group of persons is eligible for membership in two or more credit unions, including state charters. An overlap is permitted when the expansion’s beneficial effect in meeting the convenience and needs of the members of the group proposed to be included in the field of membership outweighs any adverse effect on the overlapped credit union.
Credit unions must investigate the possibility of an overlap with federally insured credit unions prior to submitting an expansion request if the group has 5,000 or more primary potential members. If cases arise where the assurance given to the Office of Credit Union Resources and Expansion Director concerning the unavailability of credit union service is inaccurate, the misinformation may be grounds for removal of the group from the federal credit union’s charter.
When an overlap situation requiring analysis does arise, officials of the expanding credit union must ascertain the views of the overlapped credit union. If the overlapped credit union does not object, the applicant must submit a letter or other documentation to that effect. If the overlapped credit union does not respond, the expanding credit union must notify NCUA in writing of its attempt to obtain the overlapped credit union’s comments.
NCUA will approve an overlap if the expansion’s beneficial effect in meeting the convenience and needs of the members of the group outweighs any adverse effect on the overlapped credit union.
In reviewing the overlap, the Office of Credit Union Resources and Expansion Director will consider:
• The view of the overlapped credit union(s);
• Whether the overlap is incidental in nature—the group of persons in question is so small as to have no material effect on the original credit union;
• Whether there is limited participation by members or employees of the group in the original credit union after the expiration of a reasonable period of time;
• Whether the original credit union fails to provide requested service;
• Financial effect on the overlapped credit union;
• The desires of the group(s);
• The desire of the sponsor organization; and
• The best interests of the affected group and the credit union members involved.
Generally, if the overlapped credit union does not object, and NCUA determines that there is no safety and soundness problem, the overlap will be permitted.
Potential overlaps of a federally insured state credit union’s field of membership by a federal credit union will generally be analyzed in the same way as if two federal credit unions were involved. Where a federally insured state credit union’s field of membership is broadly stated, NCUA will exclude its field of membership from any overlap protection.
NCUA will permit multiple common bond federal credit unions to overlap community charters without performing an overlap analysis.
A federal credit union’s field of membership will always be governed by the field of membership descriptions contained in Section 5 of its charter. Where a sponsor organization expands its operations internally, by acquisition or otherwise, the credit union may serve these new entrants to its field of membership if they are part of any select group listed in Section 5. Where acquisitions are made which add a new subsidiary, the group cannot be served until the subsidiary is included in the field of membership through a housekeeping amendment.
A federal credit union’s field of membership will always be governed by the field of membership descriptions contained in Section 5 of its charter. Where a sponsor organization expands its operations internally, by acquisition or otherwise, the credit union may serve these new entrants to its field of membership if they are part of any select group listed in Section 5. Where acquisitions are made which add a new subsidiary, the group cannot be served until the subsidiary is included in the field of membership through a housekeeping amendment.
Overlaps may occur as a result of restructuring or merger of the parent organization. When such overlaps occur, each credit union must request a field of membership amendment to reflect the new groups each wishes to serve. The credit union can continue to serve any current group in its field of membership that is acquiring a new group or has been acquired by a new group.
The new group cannot be served by the credit union until the field of membership amendment is approved by NCUA.
Credit unions affected by organizational restructuring or merger should attempt to resolve overlap issues among themselves. Unless an agreement is reached limiting the overlap resulting from the corporate restructuring, NCUA will permit a complete overlap of the credit unions’ fields of membership. When two groups merge, or one group is acquired by the other, and each is in the field of membership of a credit union, both (or all affected) credit unions can serve the resulting merged or acquired group, subject to any existing geographic limitation and without regard to any overlap provisions. This is accomplished through a housekeeping amendment.
Credit unions must submit to NCUA documentation explaining the restructuring and provide information regarding the new organizational structure.
An exclusionary clause is a limitation precluding the credit union from serving the primary members of a portion of a group otherwise included in its field of membership. NCUA no longer grants exclusionary clauses. Those granted prior to the adoption of this new Chartering and Field of Membership Manual will remain in effect unless the credit unions agree to remove them or one of the affected credit unions submits a housekeeping amendment to have it removed.
A multiple common bond federal credit union may apply to convert to a community charter provided the field of membership requirements of the community charter are met. Groups within the existing charter which cannot qualify in the new charter cannot be served except for members of record, or groups or communities obtained in an emergency merger or P&A. A credit union must notify all groups that will be removed from the field of membership as a result of conversion. Members of record can continue to be served. Also, in order to support a case for a conversion, the applicant federal credit union may be required to develop a detailed business plan as specified in Chapter 2, Section V.A.3.
A multiple common bond federal credit union may apply to convert to a single occupational or associational common bond charter provided the field of membership requirements of the new charter are met. Groups within the existing charter, which do not qualify in the new charter, cannot be served except for members of record, or groups or communities obtained in an emergency merger or P&A. A credit union must notify all groups that will be removed from the field of membership as a result of conversion.
A credit union may request removal of a group from its field of membership for various reasons. The most common reasons for this type of amendment are:
• The group is within the field of membership of two credit unions and one wishes to discontinue service;
• The federal credit union cannot continue to provide adequate service to the group;
• The group has ceased to exist;
• The group does not respond to repeated requests to contact the credit union or refuses to provide needed support;
• The group initiates action to be removed from the field of membership; or
• The federal credit union wishes to convert to a single common bond.
When a federal credit union requests an amendment to remove a group from its field of membership, the Office of Credit Union Resources and Expansion Director will determine why the credit union desires to remove the group. If the Office of Credit Union Resources and Expansion Director concurs with the request, membership will continue for those who are already members under the “once a member, always a member” provision of the Federal Credit Union Act.
NCUA has in place quality control processes that protect the integrity of its field of membership requirements. As part of this obligation, NCUA’s Office of Credit Union Resources and Expansion will randomly select groups added through NCUA’s Field of Membership Internet Application (FOMIA) system for quality assurance reviews even if the expansion application meets all the conditions for approval. Each FCU is responsible for obtaining certain documentation when seeking to add groups to its field of membership through FOMIA. In addition, as indicated in the FOMIA User Instruction Guide, available on NCUA’s Web site, an FCU must permanently retain the documentation from the select group requesting service and the Confirmation Certificate generated at the time the FOMIA request is submitted to NCUA.
As part of the quality assurance process, the Office of Credit Union Resources and Expansion reserves the right to request this documentation at any time. If the FCU fails to provide this documentation when the Office of Credit Union Resources and Expansion requests it, the director of the Office of Credit Union Resources and Expansion may consider removing the group from the FCU’s field of membership and restricting the FCU from using the FOMIA system for future requests. Specifically, as part of the FOMIA quality assurance process, the Office of Credit Union Resources and Expansion staff will do the following:
1. Within 10 days of receiving an application selected for a quality assurance review, notify the FCU of the documentation the Office of Credit Union Resources and Expansion requires. The FCU will have 15 days to provide the necessary documentation. the Office of Credit Union Resources and Expansion will respond to the FCU with a determination on the quality assurance review of the association within 15 days of receiving the requested information;
2. After receiving the additional documentation, if any concerns remain outstanding, the Office of Credit Union Resources and Expansion will again correspond with the FCU and provide a 15-day time frame for correcting the concern. the Office of Credit Union Resources and Expansion will respond to the FCU with a determination on the quality assurance review of the association within 15 days of receiving the requested information; and
3. If the FCU does not provide the requested documentation, or cannot correct the concern, the Office of Credit Union Resources and Expansion Director will deny the application and notify the credit union of its appeal rights.
NCUA’s Office of Credit Union Resources and Expansion is responsible for investigating field of membership complaints from the public, and matters referred to it from the field. It also pursues corrective action as needed for FCUs with confirmed field of membership violations. Although circumstances can vary with each case, the Office of Credit Union Resources and Expansion will generally adhere to the following process for investigating and addressing potential field of membership violations:
1. Initially correspond with management to outline concerns and request clarifying information within 60 days. the Office of Credit Union Resources and Expansion will also provide context as to the source of NCUA’s concerns, such as the discovery of new information about a particular group or an examination finding brought to the attention of the Office of Credit Union Resources and Expansion;
2. If the Office of Credit Union Resources and Expansion does not receive the requested information within 60 days, it will notify the FCU and again request the required information be provided within 30 days;
3. After receiving the additional documentation, if any concerns remain outstanding, the Office of Credit Union Resources and Expansion will again correspond with the FCU to provide a 60-day time frame for addressing the concern; and
4. If the FCU is unable to correct the concern, and after consultation with the Office of General Counsel and the appropriate Regional Office or Office of National Examinations and Supervision Director, and in accordance with agency guidelines for administrative actions, the Director of the Office of Credit Union Resources and Expansion will remove the group from the FCU’s field of membership pursuant to authority delegated by the NCUA Board. Removal of a group is treated the same as an initial denial under the Chartering Manual. In any adverse final determination on removal under the above delegations, the Office of Credit Union Resources and Expansion will notify the FCU of its appeal rights.
NCUA considers the removal of an association from an FCU’s field of membership as an action of last resort. If a group is removed, the FCU can no longer add new members from the group, but can continue serving those who are already members of the FCU under the “once a member, always a member” provision of the Federal Credit Union Act. Also, if the group subsequently qualifies due to changes to the group itself, management can submit a new application at that time.
A number of persons, by virtue of their close relationship to a common bond group, may be included, at the charter applicant’s option, in the field of membership. These include the following:
• Spouses of persons who died while within the field of membership of this credit union;
• Employees of this credit union;
• Persons retired as pensioners or annuitants from the above employment;
• Volunteers;
• Members of the immediate family or household;
• Honorably discharged veterans who served in any of the Armed Services of the United States in this charter;
• Organizations of such persons; and
• Corporate or other legal entities in this charter.
Immediate family is defined as spouse, child, sibling, parent, grandparent, or grandchild. This includes stepparents, stepchildren, stepsiblings, and adoptive relationships.
Household is defined as persons living in the same residence maintaining a single economic unit.
Membership eligibility is extended only to individuals who are members of an “immediate family or household” of a credit union member. It is not necessary for the primary member to join the credit union in order for the immediate family or household member of the primary member to join, provided the immediate family or household clause is included in the field of membership. However, it is necessary for the immediate family member or household member to first join in order for that person’s immediate family member or household member to join the credit union. A credit union can adopt a more restrictive definition of immediate family or household.
Volunteers, by virtue of their close relationship with a sponsor group, may be included. Examples include volunteers working at a hospital or church.
Under the Federal Credit Union Act, once a person becomes a member of the credit union, such person may remain a member of the credit union until the person chooses to withdraw or is expelled from the membership of the credit union. This is commonly referred to as “once a member, always a member.” The “once a member, always a member” provision does not prevent a credit union from restricting services to members who are no longer within the field of membership
There are two types of community charters. One is based on a single, geographically well- defined local community or neighborhood; the other is a rural district. More than one credit union may serve the same community.
NCUA recognizes four types of affinity on which both a community charter and a rural district can be based—persons who live in, worship in, attend school in, or work in the community or rural district. Businesses and other legal entities within the community boundaries or rural district may also qualify for membership.
NCUA has established the following requirements for community charters:
• The geographic area’s boundaries must be clearly defined; and
• The area is a well-defined local community or a rural district.
In addition to the documentation requirements in Chapter 1 to charter a credit union, a community credit union applicant must provide additional documentation addressing the proposed area to be served and community service policies, as well as the business plan requirements set forth in this Chapter. An applicant must meet all of these requirements to obtain NCUA approval.
An applicant has the burden of demonstrating to NCUA that the proposed community area meets the statutory requirements of being: (1) Well-defined, and (2) a local community or rural district. The applicant also has the burden of demonstrating that with respect to the proposed community, it has the capacity to provide financial services to low- and moderate-income areas of the community. The agency will reject any application that fails to establish the criteria set forth above.
For an applicant seeking a community charter for a Statistical Area with multiple political jurisdictions with a population of 2.5 million people or more, the Office of Credit Union Resources and Expansion (CURE) shall: (1) Publish a notice in the
“Well-defined” means the proposed area has specific geographic boundaries. Geographic boundaries may include a city, township, county (single, multiple, or portions of a county) or a political equivalent, school districts, or a clearly identifiable neighborhood.
The well-defined local community requirement is met if:
• Single Political Jurisdiction—the area to be served is a recognized Single Political Jurisdiction, i.e., a city, county, or their political equivalent, or any single portion thereof.
• Statistical Area—A statistical area is all or an individual portion of a Combined Statistical Area (CSA) or a Core-Based Statistical Area (CBSA) designated by the U.S. Census Bureau, including a Metropolitan Statistical Area. To meet the well-defined local community requirement, the CSA or CBSA or a portion thereof, must be contiguous and have a population of 2.5 million or less people. An individual portion of a statistical area need not conform to internal boundaries within the area, such as metropolitan division boundaries within a Core-Based Statistical Area.
• Compelling Evidence of Common Interests or Interaction—In lieu of a statistical area as defined above, this option is available when a credit union seeks to initially charter a community credit union; to expand an existing community; or to convert to a community charter. Under this option, the credit union must demonstrate that the areas in question are contiguous and further demonstrate a sufficient level of common interests or interaction among area residents to qualify the area as a local community. For that purpose, an applicant must submit for NCUA approval a narrative, supported by appropriate documentation, establishing that the area’s residents meet the requirements of a local community.
To assist a credit union in developing its narrative, Appendix 6 of this Manual identifies criteria a narrative should address, and which NCUA will consider in deciding a credit union’s application to: Initially charter a community credit union; to expand an existing community, including by an adjacent area addition; or to convert to a community charter. In any case, the credit union must demonstrate, through its business and marketing plans, its ability and commitment to serve the entire community for which it seeks NCUA approval.
An area of any geographic size qualifies as a Rural District if:
• The proposed district has well-defined, contiguous geographic boundaries;
• The total population of the proposed district does not exceed 1,000,000;
• Either more than 50% of the proposed district’s population resides in census blocks or other geographic units that are designated as rural by either the Consumer Financial Protection Bureau or the United States Census Bureau, OR the district has a population density of 100 persons or fewer per square mile; and
• The boundaries of the well-defined rural district do not exceed the outer boundaries of the states that are immediately contiguous to the state in which the credit union maintains its headquarters (i.e., not to exceed the outer perimeter of the layer of states immediately surrounding the headquarters state).
The common bond affinity groups that apply to well-defined local communities also apply to Rural Districts.
The requirements in Chapter 2, Sections V.A.4 through V.G also apply to a credit union that serves a rural district.
If NCUA has determined that a specific geographic area is a well-defined local community, then a new applicant need not reestablish that fact as part of its application to serve the exact area. The new applicant must, however, note NCUA’s previous determination as part of its overall application. An applicant applying for an area that is not exactly the same as a previously approved well defined local community must comply with the current criteria in place for determining a well-defined local community.
A community credit union is frequently more susceptible to competition from other local financial institutions and generally does not have substantial support from any single sponsoring company or association. As a result, a community credit union will often encounter financial and operational factors that differ from an occupational or associational charter. Its diverse membership may require special marketing programs targeted to different segments of the community. For example, the lack of payroll deduction creates special challenges in the development and promotion of savings programs and in the collection of loans. Accordingly, to support an application for a community charter, an applicant Federal credit union must develop a business plan incorporating the following data:
• Pro forma financial statements for a minimum of 24 months after the proposed conversion, including the underlying assumptions and rationale for projected member, share, loan, and asset growth;
• Anticipated financial impact on the credit union, including the need for additional employees and fixed assets, and the associated costs;
• A description of the current and proposed office/branch structure, including a general description of the location(s); parking availability, public transportation availability, drive-through service, lobby capacity, or any other service feature illustrating community access;
• A marketing plan addressing how the community will be served for the 24-month period after the proposed conversion to a community charter, including detailing: How the credit union will implement its business plan; the unique needs of the various demographic groups in the proposed community; how the credit union will market to each group, particularly underserved groups; which community-based organizations the credit union will target in its outreach efforts; the credit union’s marketing budget projections dedicating greater resources to reaching new members; and the credit union’s timetable for implementation, not just a calendar of events;
• Details, terms and conditions of the credit union’s financial products, programs, and services to be provided to the entire community; and
• Maps showing the current and proposed service facilities, ATMs, political boundaries, major roads, and other pertinent information.
An existing Federal credit union may apply to convert to a community charter. Groups currently in the credit union’s field of membership, but outside the new community credit union’s boundaries, may not be included in the new community charter. Therefore, the credit union must notify groups that will be removed from the field of membership as a result of the conversion. Members of record can continue to be served.
Before approval of an application to convert to a community credit union, NCUA must be satisfied that the credit union will be viable and capable of providing services to its members.
Community credit unions will be expected to regularly review and to follow, to the fullest extent economically possible, the marketing and business plans submitted with their applications. Additionally, NCUA will follow-up with an FCU every year for three years after the FCU has been granted a new or expanded community charter, and at any other intervals NCUA believes appropriate, to determine if the FCU is satisfying the terms of its marketing and business plans.
An FCU failing to satisfy those terms will be subject to supervisory action. As part of this review process, the regional office or Office of National Examinations and Supervision Director will report to the NCUA Board instances where an FCU is failing to satisfy the terms of its marketing and business plan and indicate what supervisory actions the region or ONES intends to take.
The geographic boundaries of a community Federal credit union are the areas defined in its charter. The boundaries can usually be defined using political borders, streets, rivers, railroad tracks, or other static geographical feature.
A community that is a recognized legal entity may be stated in the field of membership— for example, “Gus Township, Texas,” “Isabella City, Georgia,” or “Fairfax County, Virginia.”
A community that is an entire United States Census Bureau designated Core Based Statistical Area or Combined Statistical Area may be stated in the field of membership—for example, “Fort Wayne, IN Metropolitan Statistical Area,” “Albany, GA Metropolitan Statistical Area,” or “Syracuse-Auburn, NY Combined Statistical Area.”
A community field of membership may include persons who work or attend school in a particular industrial park, shopping mall, office building or complex, or similar development. The proposed field of membership must have clearly defined geographic boundaries.
A community charter does not have to include all four affinities (i.e., live, work, worship, or attend school in a community). Some examples of community fields of membership are:
• Persons who live, work, worship, or attend school in, and businesses located in the area of Johnson City, Tennessee, bounded by Fern Street on the north, Long Street on the east, Fourth Street on the south, and Elm Avenue on the west;
• Persons who live or work in Green County, Maine;
• Persons who live, worship, work (or regularly conduct business in), or attend school on the University of Dayton campus, in Dayton, Ohio;
• Persons who work for businesses located in Clifton Country Mall, in Clifton Park, New York;
• Persons who live, work, or worship in the Binghamton, New York, Core Based Statistical Area, consisting of Broome and Tioga Counties, New York (a qualifying Core Based Statistical Area in its entirety);
• Persons who live, work, worship, or attend school in the portion of the Oklahoma City, OK Metropolitan Statistical Area that includes Canadian and Oklahoma counties, Oklahoma (two contiguous counties in a portion of a qualifying Core Based Statistical Area that has seven counties in total); or
• Persons who live, work, worship, or attend school in Uinta County or Lincoln County, Wyoming, a rural district.
Some examples of insufficiently defined local communities, neighborhoods, or rural districts are:
• Persons who live or work within and businesses located within a ten-mile radius of Washington, DC (not a permitted community);
• Persons who live or work in the industrial section of New York, New York. (not well- defined nor a permitted community); or
• Persons who live or work in the greater Boston area. (not well-defined).
Some examples of unacceptable local communities, neighborhoods, or rural districts are:
• Persons who live or work in the State of California. (not a permitted community). Persons who live in the first congressional district of Florida. (not a permitted community).
The NCUA will not approve an application for a community charter consisting of all or a portion of a CSA or a CBSA, including an initial application, amendment, or expansion, unless the applicant demonstrates in its business and marketing plan that (1) the credit union will serve a community that is contiguous and (2) the credit union will provide financial services to low- and moderate-income and underserved people, and that the credit union has not selected its service area in order to exclude low- and moderate-income and underserved people or to engage in illegal discrimination. Upon receipt of this material, the NCUA will evaluate the business and marketing plan to ensure that low- and moderate-income and underserved people will be served and that the credit union has not selected the service area in order to exclude such people or to engage in illegal discrimination. This requirement is in addition to the requirement to document in the business and marketing plan the realistic assumptions that support the credit union’s viability and its plan to serve its entire FOM.
The NCUA may conduct such further inquiry or evaluation as it deems appropriate, as authorized by 12 U.S.C. 1754 and consistent with the principles of this Manual, other federal laws, and public policy. If the NCUA determines that the credit union’s submission is inaccurate or unsupported, it may deny that application on those grounds, regardless of whether the application satisfies the other criteria for initial chartering, amendment, or expansion.
A community credit union may amend its field of membership by adding additional affinities or removing exclusionary clauses. This can be accomplished with a housekeeping amendment.
A community credit union also may expand its geographic boundaries. Persons who live, work, worship, or attend school within the proposed well-defined local community, neighborhood or rural district must have common interests and/or interact. The credit union must follow the requirements of Section V.A.4 and Section V.A.8 of this chapter.
A community credit union that is based on a Single Political Jurisdiction, a Statistical Area (e.g., Core Based Statistical Area or Combined Statistical Area) or a rural district may expand its geographic boundaries to add a bordering area, provided the area is well defined and the credit union demonstrates that persons who live, work, worship, or attend school within the proposed expanded community (i.e., on both sides of the boundary separating the existing community and the bordering area) have common interests and/or interact. Such a credit union applying to expand its geographic boundaries to add a bordering area must follow a streamlined version of the business plan requirements of Section V.A.4 of this chapter and the expanded community would be subject to the corresponding population limit—2.5 million in the case of a Single Political Jurisdiction, or a Statistical Area and 1 million in the case of a rural district. The streamlined business plan requirements for adding a bordering area are:
• Anticipated marginal financial impact on the credit union of adding the proposed bordering area, including the need for additional employees and fixed assets, and the associated costs;
• A description of the current and, if applicable, proposed office/branch structure specific to serving the proposed bordering area;
• A marketing plan addressing how the new community will be served for the 24-month period after the proposed expansion of a community charter, including detailing how the credit union will address the unique needs of any demographic groups in the proposed bordering community not presently served by the credit union and how the credit union will market to any new groups; and
• Details, terms and conditions of any new financial products, programs, and services to be introduced as part of this expansion.
All requests for approval to amend a community credit union’s charter must be submitted to the Office of Credit Union Resources and Expansion Director. If a decision cannot be made within a reasonable period of time, the Office of Credit Union Resources and Expansion Director will notify the credit union.
The financial and operational condition of the requesting credit union will be considered in every instance. The economic advisability of expanding the field of membership of a credit union with financial or operational problems must be carefully considered.
In most cases, field of membership amendments will only be approved for credit unions that are operating satisfactorily. Generally, if a federal credit union is having difficulty providing service to its current membership, or is experiencing financial or other operational problems, it may have more difficulty serving an expanded field of membership.
Occasionally, however, an expanded field of membership may provide the basis for reversing current financial problems. In such cases, an amendment to expand the field of membership may be granted notwithstanding the credit union’s financial or operational problems. The applicant credit union must clearly establish that the expanded field of membership is in the best interest of the members and will not increase the risk to the NCUSIF.
If the requested amendment is approved by NCUA, the credit union will be issued an amendment to Section 5 of its charter.
When NCUA disapproves any application to amend the field of membership, in whole or in part, under this chapter, the applicant will be informed in writing of the:
• Specific reasons for the action;
• If appropriate, options or suggestions that could be considered for gaining approval; and
• Appeal procedures.
If the Office of Credit Union Resources and Expansion Director denies a field of membership expansion request, merger, or spin-off, that decision may be appealed to the NCUA Board in accordance with the procedures set forth in subpart B to part 746 of this chapter.
Before appealing, the credit union may, within 30 days of the denial, provide supplemental information to the Office of Credit Union Resources and Expansion Director for reconsideration. A request for reconsideration should contain new and material evidence addressing the reasons for the initial denial or explain extenuating circumstances that precluded the inclusion of existing material evidence or information that should have been filed with the request for reconsideration. The Office of Credit Union Resources and Expansion Director will have 30 days from the date of the receipt of the request for reconsideration to make a final decision. If the request is again denied, the applicant may proceed with the appeal process within 60 days of the date of the last denial. A petitioner may seek a second reconsideration based on new material evidence or information or extenuating circumstances that precluded the inclusion of such information in the previous request.
There are three additional ways a community federal credit union can expand its field of membership:
• By taking in the field of membership of another credit union through a merger;
• By taking in the field of membership through a purchase and assumption (P&A); or
• By taking a portion of another credit union’s field of membership through a spin-off.
Generally, the requirements applicable to field of membership expansions apply to mergers where the continuing credit union is a community federal charter.
Where both credit unions are community charters, the continuing credit union must meet the criteria for expanding the community boundaries. A community credit union cannot merge into a single occupational/associational, or multiple common bond credit union, except in an emergency merger. However, a single occupational or associational, or multiple common bond credit union can merge into a community charter as long as the merging credit union has a service facility within the community boundaries or a majority of the merging credit union’s field of membership would qualify for membership in the community charter. While a community charter may take in an occupational, associational, or multiple common bond credit union in a merger, it will remain a community charter.
Groups within the merging credit union’s field of membership located outside of the community boundaries may not continue to be served. The merging credit union must notify groups that will be removed from the field of membership as a result of the merger. However, the credit union may continue to serve members of record.
Where a state-chartered credit union is merging into a community federal credit union, the continuing federal credit union’s field of membership will be worded in accordance with NCUA policy. Any subsequent field of membership expansions must comply with applicable amendment procedures.
Mergers must be approved by the NCUA regional director or Office of National Examinations and Supervision Director where the continuing credit union is headquartered, with the concurrence of the regional director or Office of National Examinations and Supervision Director of the merging credit union, and, as applicable, the state regulators.
An emergency merger may be approved by NCUA without regard to common bond or other legal constraints. An emergency merger involves NCUA’s direct intervention and approval. The credit union to be merged must either be insolvent or in danger of insolvency, as defined in the Glossary, and NCUA must determine that:
• An emergency requiring expeditious action exists;
• Other alternatives are not reasonably available; and
• The public interest would best be served by approving the merger.
If not corrected, conditions that could lead to insolvency include, but are not limited to:
• Abandonment by management;
• Loss of sponsor;
• Serious and persistent record-keeping problems; or
• Serious and persistent operational concerns.
In an emergency merger situation, NCUA will take an active role in finding a suitable merger partner (continuing credit union). NCUA is primarily concerned that the continuing credit union has the financial strength and management expertise to absorb the troubled credit union without adversely affecting its own financial condition and stability.
As a stipulated condition to an emergency merger, the field of membership of the merging credit union may be transferred intact to the continuing federal credit union without regard to any field of membership restrictions, including the service facility requirement. Under this authority, a federal credit union may take in any dissimilar field of membership.
Even though the merging credit union is a single common bond credit union or multiple common bond credit union or community credit union, the continuing credit union will remain a community charter. Future community expansions will be based on the continuing credit union’s original community area.
Emergency mergers involving federally insured credit unions in different NCUA regions must be approved by the regional director or Office of National Examinations and Supervision Director where the continuing credit union is headquartered, with the concurrence of the regional director or Office of National Examinations and Supervision Director of the merging credit union and, as applicable, the state regulators.
Another alternative for acquiring the field of membership of a failing credit union is through a consolidation known as a P&A. Generally, the requirements applicable to community expansions found in this chapter apply to purchase and assumptions where the purchasing credit union is a federal charter.
A P&A has limited application because, in most instances, the failing credit union must be placed into involuntary liquidation. However, in the few instances where a P&A may occur, the assuming federal credit union, as with emergency mergers, may acquire the entire field of membership if the emergency criteria are satisfied.
In a P&A processed under the emergency criteria, specified loans, shares, and certain other designated assets and liabilities may also be acquired without regard to field of membership restrictions and without changing the character of the continuing federal credit union for purposes of future field of membership amendments.
If the P&A does not meet the emergency criteria, then only members of record can be obtained unless they otherwise qualify for membership in the community charter.
P&As involving federally insured credit unions in different NCUA regions must be approved by the regional director or Office of National Examinations and Supervision Director where the continuing credit union is headquartered, with the concurrence of the regional director or Office of National Examinations and Supervision Director of the purchased and/or assumed credit union and, as applicable, the state regulators.
A spin-off occurs when, by agreement of the parties, a portion of the field of membership, assets, liabilities, shares, and capital of a credit union are transferred to a new or existing credit union. A spin-off is unique in that usually one credit union has a field of membership expansion and the other loses a portion of its field of membership.
All field of membership requirements apply regardless of whether the spun-off group goes to a new or existing federal charter.
The request for approval of a spin-off must be supported with a plan that addresses, at a minimum:
• Why the spin-off is being requested;
• What part of the field of membership is to be spun off;
• Whether the field of membership requirements are met;
• Which assets, liabilities, shares, and capital are to be transferred;
• The financial impact the spin-off will have on the affected credit unions;
• The ability of the acquiring credit union to effectively serve the new members;
• The proposed spin-off date; and
• Disclosure to the members of the requirements set forth above.
The spin-off request must also include current financial statements from the affected credit unions and the proposed voting ballot.
For federal credit unions spinning off a portion of the community, membership notice and voting requirements and procedures are the same as for mergers (see part 708 of the NCUA Rules and Regulations), except that only the members directly affected by the spin-off—those whose shares are to be transferred—are permitted to vote. Members whose shares are not being transferred will not be afforded the opportunity to vote. All members of the group to be spun off (whether they voted in favor, against, or not at all) will be transferred if the spin-off is approved by the voting membership. Voting requirements for federally insured state credit unions are governed by state law.
Generally, an overlap exists when a group of persons is eligible for membership in two or more credit unions. NCUA will permit community credit unions to overlap any other charters without performing an overlap analysis.
An exclusionary clause is a limitation precluding the credit union from serving the primary members of a portion of a group or community otherwise included in its field of membership.
NCUA no longer grants exclusionary clauses. Those granted prior to the adoption of this new Chartering and Field of Membership Manual will remain in effect unless the credit unions agree to remove them or one of the affected credit unions submits a housekeeping amendment to have it removed.
A community federal credit union may convert to a single occupational or associational, or multiple common bond credit union. The converting credit union must meet all occupational, associational, and multiple common bond requirements, as applicable. The converting credit union may continue to serve members of record of the prior field of membership as of the date of the conversion, and any groups or communities obtained in an emergency merger or P&A. A change to the credit union’s field of membership and designated common bond will be necessary.
A community credit union may convert to serve a new geographical area provided the field of membership requirements of V.A.3 of this chapter are met. Members of record of the original community can continue to be served.
A number of persons who have a close relationship to the community may be included, at the charter applicant’s option, in the field of membership. These include the following:
• Spouses of persons who died while within the field of membership of this credit union;
• Employees of this credit union;
• Volunteers in the community;
• Members of the immediate family or household; and
• Organizations of such persons
Immediate family is defined as spouse, child, sibling, parent, grandparent, or grandchild. This includes stepparents, stepchildren, stepsiblings, and adoptive relationships.
Household is defined as persons living in the same residence maintaining a single economic unit.
Membership eligibility is extended only to individuals who are members of an “immediate family or household” of a credit union member. It is not necessary for the primary member to join the credit union in order for the immediate family or household member of the primary member to join, provided the immediate family or household clause is included in the field of membership. However, it is necessary for the immediate family member or household member to first join in order for that person’s immediate family member or household member to join the credit union. A credit union can adopt a more restrictive definition of immediate family or household.
Under the Federal Credit Union Act, once a person becomes a member of the credit union, such person may remain a member of the credit union until the person chooses to withdraw or is expelled from the membership of the credit union. This is commonly referred to as “once a member, always a member.” The “once a member, always a member” provision does not prevent a credit union from restricting services to members who are no longer within the field of membership.
One of the primary reasons for the creation of federal credit unions is to make credit available to people of modest means for provident and productive purposes. To help NCUA fulfill this mission, the agency has established special operational policies for federal credit unions that serve low-income groups and underserved areas. The policies provide a greater degree of flexibility that will enhance and invigorate capital infusion into low-income groups, low-income communities, and underserved areas. These unique policies are necessary to provide credit unions serving low-income groups with financial stability and potential for controlled growth and to encourage the formation of new charters as well as the delivery of credit union services in low-income communities.
A credit union serving predominantly low-income members may be designated as a low- income credit union. Section 701.34 of NCUA’s Rules and Regulations defines the term “low- income members” as those members:
• Who make less than 80 percent of the average for all wage earners as established by the Bureau of Labor Statistics; or
• Whose median family income falls at or below 80 percent of the median family income for the nation as established by the Census Bureau.
The term “low-income members” also includes members who are full-time or part-time students in a college, university, high school, or vocational school.
To obtain a low-income designation from NCUA, an existing credit union must establish that a majority of its members meet the low-income definition. An existing community credit union that serves a geographic area where a majority of residents meet the annual income standard is presumed to be serving predominantly low-income members. A low-income designation for a new credit union charter may be based on a majority of the potential membership.
A credit union with a low-income designation has greater flexibility in accepting nonmember deposits insured by the NCUSIF, are exempt from the aggregate loan limit on business loans, and may offer secondary capital accounts to strengthen its capital base. It also may participate in special funding programs such as the Community Development Revolving Loan Program for Credit Unions (CDRLP) if it is involved in the stimulation of economic development and community revitalization efforts.
The CDRLP provides both loans and grants for technical assistance to low-income credit unions. The requirements for participation in the revolving loan program are in part 705 of the NCUA Rules and Regulations. Only operating credit unions are eligible for participation in this program.
A federal credit union charter applicant or existing credit union wishing to receive a low- income designation should forward a separate request for the designation to the Office of Credit Union Resources and Expansion Director, along with appropriate documentation supporting the request.
For community charter applicants, the supporting material should include the median family income or annual wage figures for the community to be served. If this information is unavailable, the applicant should identify the individual zip codes or census tracts that comprise the community and NCUA will assist in obtaining the necessary demographic data.
Similarly, if single occupational or associational or multiple common bond charter applicants cannot supply income data on its potential members, they should provide the Office of Credit Union Resources and Expansion Director with a list which includes the number of potential members, sorted by their residential zip codes, and NCUA will assist in obtaining the necessary demographic data.
An existing credit union can perform a loan or membership survey to determine if the credit union is primarily serving low-income members.
A low-income federal credit union charter applicant may contract with a third party to assist in the chartering and low-income designation process. If the charter is granted, a low-income credit union may contract with a third party to provide necessary management services. Such contracts should not exceed the duration of one year subject to renewal.
In recognition of the unique efforts needed to help make credit union service available to low-income groups, NCUA has adopted special rules that pertain to low-income credit union charters, as well as field of membership additions for low-income credit unions. These special rules provide additional latitude to enable underserved, low-income individuals to gain access to credit union service.
NCUA permits credit union chartering and field of membership amendments based on associational groups formed for the sole purpose of making credit union service available to low- income persons. The association must be defined so that all of its members will meet the low- income definition of Section 701.34 of the NCUA Rules and Regulations. Any multiple common bond credit union can add low-income associations to their fields of membership.
A low-income designated community federal credit union has additional latitude in serving persons who are affiliated with the community. In addition to serving members who live, work, worship, or attend school in the community, a low-income community federal credit union may also serve persons who participate in programs to alleviate poverty or distress, or who participate in associations headquartered in the community.
Examples of a low-income designated community and an associational-based low-income federal credit union are as follows:
• Persons who live in [the target area]; persons who work, worship, attend school, or participate in associations headquartered in [the target area]; persons participating in programs to alleviate poverty or distress which are located in [the target area]; incorporated and unincorporated organizations located in [the target area] or maintaining a facility in [the target area]; and organizations of such persons.
• Members of the Canarsie Economic Assistance League, in Brooklyn, NY, an association whose members all meet the low-income definition of Section 701.34 of the NCUA Rules and Regulations.
A multiple common bond federal credit union may include in its field of membership, without regard to location, an “underserved area” as defined by the Federal Credit Union Act. 12 U.S.C. 1759(c)(2).
The addition of an “underserved area” will not change the charter type of the multiple common bond federal credit union. More than one multiple common-bond federal credit union can serve the same “underserved area,” provided each credit union is approved as provided below.
By adding an “underserved area,” a multiple common bond federal credit union does not become eligible to receive the benefits afforded to low-income designated credit unions, such as expanded use of nonmember deposits and access to the Community Development Revolving Loan Program for Credit Unions.
The Federal Credit Union Act defines an “underserved area” as (1) a “local community, neighborhood, or rural district” that (2) meets the definition of an “investment area” under section 103(16) of the Community Development Banking and Financial Institutions Act of 1994 (“CDFI”), 12 U.S.C. 4702(16), and (3) is “underserved by other depository institutions” based on data of the NCUA Board and the federal banking agencies.
To be eligible for approval as “underserved,” a proposed area must be a well-defined local community, neighborhood, or rural district as defined in Chapter 2, sections V.A.1. and V.A.2. of this Manual.
To be approved as an “underserved area,” the proposed area must meet the CDFI definition of an “investment area.” Id. § 4702(16). A proposed area that, at the time the credit union applies, is designated in its entirety as an Empowerment Zone or Enterprise Community (id. § 1391) automatically qualifies as an “investment area”; no further criteria of an “investment area” must be met. Id. § 4702(16)(B). A proposed area that is not designated as such must qualify as an “investment area” under “the objective criteria of economic distress” developed by the CDFI Fund (“distress criteria”) based on current decennial U.S. Census data, and also must have “significant unmet needs” for loans and financial services that credit unions are authorized to offer to their members. Id. § 4702(16)(A).
Geographic Unit(s) By Proposed Area’s Location. The location of a proposed “underserved area” either within or outside of a Metropolitan Statistical Area corresponding to the most recent completed decennial census published by the U.S. Bureau of the Census (“decennial Census”) determines the geographic unit(s) that apply to determine whether the area meets the distress criteria.
Within a Metropolitan Statistical Area. For a proposed area located, in whole or in part, within a Metropolitan Statistical Area, the permissible geographic units (“Metro units”) for implementing the economic distress criteria are: (i) A census tract; (ii) a block group; and (iii) an American Indian or Alaskan Native area. 12 CFR 1805.201(b)(3)(ii)(B) (2008). For ease of implementation, it is advisable to use a census tract as the proposed area’s Metro unit.
Outside a Metropolitan Statistical Area. For a proposed area that is located entirely outside a Metropolitan Statistical Area, the permissible units (“Non-Metro units”) for implementing the economic distress criteria are: (i) A county or equivalent area; (ii) a minor civil division that is a unit of local government; (iii) an incorporated place; (iv) a census tract; (v) a block numbering area; (vi) a block group; and (vii) an American Indian or Alaskan Native area. Id. For ease of implementation, it is advisable to use either a census tract or county, as the case may be, as the proposed area’s Non-Metro unit.
Proposed Area Consisting of a Single Metro Unit. A proposed area consisting of a single whole Metro unit (e.g., a single census tract located within a Metropolitan Statistical Area) must meet one of the following distress criteria, as reported by the most recent decennial Census:
• Unemployment. The proposed area’s unemployment rate is at least 1.5 times the national average; or
• Poverty. At least 20 percent (20%) of the proposed area’s population lives in poverty; or
• Median Family Income. The proposed area’s Median Family Income (“MFI”) is at or below 80 percent (80%) of either the MFI of the corresponding Metropolitan Statistical Area, or of the national MFI for Metro Areas, whichever is greater; or
• Other Criterion. Any other economic distress criterion the CDFI Fund may adopt in the future.
Id. § 1805.201(b)(3)(ii)(D)(1), (2)(i) and (3) (2008).
Proposed Area Consisting of a Single Non-Metro Unit. A proposed area consisting of a single whole Non-Metro unit (e.g., a single county located outside a Metropolitan Statistical Area) must meet one of the following distress criteria, as reported by the most recent decennial Census:
• Unemployment. The proposed area’s unemployment rate is at least 1.5 times the national average; or
• Poverty. At least 20 percent (20%) of the proposed area’s population lives in poverty; or
• Median Family Income. The proposed area’s MFI is at or below 80 percent (80%) of either the corresponding state’s Non-Metro MFI or the national MFI for Non-Metro Areas, whichever is greater; or
• Other Criterion. Any other economic distress criterion the CDFI Fund may adopt in the future.
•
Id. § 1805.201(b)(3)(ii)(D)(1), (2)(ii) and (3) (2008). Alternatively, a proposed area consisting of a single Non-Metro county (located outside a Metropolitan Statistical Area) may instead meet either of the following two criteria, as reported by the decennial Census:
• County Population Loss. County’s population loss of at least 10 percent (10%) between the most recent and the preceding decennial Census; or
• County Migration Loss. County’s net migration loss of at least 5 percent (5%) in the 5- year period preceding the most recent decennial Census.
Id. § 1805.201(b)(3)(ii)(D)(4)-(5) (2008).
Proposed Area Consisting of Multiple Contiguous Units. When a proposed area consists of either multiple contiguous Metro units (e.g., a group of adjoining census tracts) or multiple contiguous Non-Metro units (e.g., a group of adjoining counties), a population threshold applies when implementing the economic distress criteria. At least 85 percent (85%) of the area’s total population must reside within the units that are “distressed,” i.e., that meet one of the applicable economic distress criteria above, as reported by the decennial Census (Unemployment, Poverty and MFI for census tracts plus, for counties only, Population Loss and Migration Loss); the balance of the area’s population may reside in the non-“distressed” tract(s). The population threshold is met, and the whole proposed area qualifies as “distressed,” when the “distressed” units represent at least 85 percent of the area’s total population.
A proposed area that is “distressed” also must display “significant unmet needs” for loans or for one or more of the financial services credit unions are authorized to offer. To meet this criterion, the credit union must include within its Business Plan a section, one page in length, entitled “Significant Unmet Needs for Credit Union Services” (“SUN section”) that establishes the existence of such unmet needs by identifying the credit and depository needs of the community and detailing how the credit union plans to serve those needs. The credit union may choose which among the following “credit and depository needs” to address in the SUN section: loans, share draft accounts, savings accounts, check cashing, money orders, certified checks, automated teller machines, deposit taking, safe deposit box services, and similar services. The existence of each “credit and depository need” the credit union identifies and plans to serve must be supported by objective reasons and/or accompanying documentation derived from an identified, authoritative source of the credit union’s choice. Third-party documentation generally is the most compelling.
A proposed area that meets the CDFI definition of an “investment area” (i.e., is “distressed” and has “significant unmet needs”) must also be underserved by other insured depository institutions, including credit unions. 12 U.S.C. 1759(c)(2)(A)(ii). This statutory criterion is met when the concentration of depository institution facilities among the population of the proposed area’s non-“distressed” tracts—which sets a benchmark level of adequate service—is greater than the concentration of facilities among the population of all of the proposed area’s census tracts combined. This establishes the area’s concentration of facilities ratio. If there are no non- “distressed” tracts within a proposed area, a non-“distressed” census tract or larger geographic unit (e.g., city or county) of the credit union’s choice that adjoins the proposed area may be used to set the benchmark concentration ratio.
Without regard to a proposed area’s location within or outside a Metropolitan Statistical Area, this criterion compares two ratios: the ratio of facilities to the population of the non- “distressed” tracts (the benchmark) versus the same facilities-to-population ratio among all the tracts of the proposed area as a whole. If the benchmark ratio is greater than the ratio for the whole area, then the area is “underserved by other depository institutions,” and vice versa.
When, as the result of an initial Concentration of Facilities ratio calculation, a proposed area does not qualify as “underserved by other depository institutions,” NCUA will exclude non- depository banks (e.g., trust companies) and non-community credit unions (i.e., those institutions unable to serve the general public) from the computation. For the purposes of this analysis, a multiple common bond credit union already serving the area as an underserved area is considered able to serve the general public and thus would not be excluded. With both of these exclusions, NCUA will recalculate the concentration of facilities ratio to determine whether, as a result, the proposed area qualifies as “underserved by other depository institutions.”
As one alternative to the concentration of facilities ratio, a proposed area will qualify as “underserved by other depository institutions” if it is designated an “underserved county” by NCUA based on data produced by the Consumer Financial Protection Bureau (available at: http://www.consumerfinance.gov/guidance/#ruralunderserved). NCUA will make its list of “underserved counties” available on its Web site.
As another alternative to the concentration of facilities ratio, a proposed area will qualify as “underserved by other depository institutions” if the credit seeking to serve it, using a metric of its own choosing, provided that it is based on NCUA or other Federal banking agency data, that establishes to NCUA that the proposed area is “underserved by other depository institutions.”
If NCUA approves the request to add an “underserved area,” the credit union will be issued an amendment to Section 5 of its charter.
Once a credit union is initially approved to serve an “underserved area,” other credit unions that subsequently apply may be approved to serve the same area. To be approved, the area must qualify as “underserved” at the time the new applicant applies. An applicant must demonstrate that the area continues to be “distressed”, as provided above, only if a new decennial Census has been published since the date the area was last approved. In any case, the applicant must demonstrate that the area still has “significant unmet needs” for loans or credit union services (to qualify as an “investment area”), and remains “underserved by other depository institutions” (to qualify as “underserved”).
A federal credit union that desires to include an underserved community in its field of membership must first develop, and submit for approval, a business plan specifying how it will serve the community. In addition, the business plan must include a SUN section as provided in section III.B.2.b. above. The credit union will be expected to regularly review the business plan to determine if the community is being adequately served. The Office of Credit Union Resources and Expansion Director may require periodic service status reports from a credit union about the “underserved area” to ensure that the needs of the community are being met, and must require such reports before NCUA allows a multiple common bond federal credit union to add an additional “underserved area.”
Once an “underserved area” has been added to a federal credit union’s field of membership, the credit union must establish within two years, and maintain, an office or service facility in the community. A service facility is defined as a place where shares are accepted for members’ accounts, loan applications are accepted and loans are disbursed. By definition, a service facility includes a credit union-owned branch, a shared branch, a mobile branch, an office operated on a regularly scheduled weekly basis, or a credit union-owned electronic facility that meets, at a minimum, the above requirements. A service facility also includes a shared branch or a shared branch network location, including an electronic facility that meets the above requirements, if a credit union participates in a shared branching network.
This definition does not include an ATM or the credit union’s internet website.
When NCUA disapproves any application to add an “underserved area” in whole or in part, under this chapter, the applicant will be informed in writing of the:
• Specific reasons for the action;
• Options to consider, if appropriate, for gaining approval; and
• Appeal procedures.
If the Office of Credit Union Resources and Expansion Director denies an “underserved area” request, the Federal credit union may appeal that decision to the NCUA Board in accordance with the procedures set forth in subpart B to part 746 of this chapter.
Before appealing, the credit union may, within 30 days of the denial, provide supplemental information to the Office of Credit Union Resources and Expansion Director for reconsideration. A request for reconsideration should contain new and material evidence addressing the reasons for the initial denial or explain extenuating circumstances that precluded the inclusion of existing material evidence or information that should have been filed with the request for reconsideration. The Office of Credit Union Resources and Expansion Director will have 30 days from the date of the receipt of the request for reconsideration to make a final decision. If the request is again denied, the applicant may proceed with the appeal process within 60 days of the date of the last denial. A petitioner may seek a second reconsideration based on new material evidence or information or extenuating circumstances that precluded the inclusion of such information in the previous request.
A charter conversion is a change in the jurisdictional authority under which a credit union operates.
Federal credit unions receive their charters from NCUA and are subject to its supervision, examination, and regulation.
State-chartered credit unions are incorporated in a particular state, receiving their charter from the state agency responsible for credit unions and subject to the state’s regulator. If the state-chartered credit union’s deposits are federally insured, it will also fall under NCUA’s jurisdiction.
A federal credit union’s power and authority are derived from the Federal Credit Union Act and NCUA Rules and Regulations. State-chartered credit unions are governed by state law and regulation. Certain federal laws and regulations also apply to federally insured state chartered credit unions.
There are two types of charter conversions: federal charter to state charter and state charter to federal charter. Common bond and community requirements are not an issue from NCUA’s standpoint in the case of a federal to state charter conversion. The procedures and forms relevant to both types of charter conversion are included in appendix 4.
Any state-chartered credit union may apply to convert to a federal credit union. In order to do so it must:
• Comply with state law regarding conversion and file proof of compliance with NCUA;
• File the required conversion application, proposed federal credit union organization certificate, and other documents with NCUA;
• Comply with the requirements of the Federal Credit Union Act, e.g., chartering and reserve requirements; and
• Be granted federal share insurance by NCUA.
Conversions are treated the same as any initial application for a federal charter, including an on-site examination by NCUA where appropriate. NCUA will also consult with the appropriate state authority regarding the credit union’s current financial condition, management expertise, and past performance. Since the applicant in a conversion is an ongoing credit union, the economic advisability of granting a charter is more readily determinable than in the case of an initial charter applicant.
A converting state credit union’s field of membership must conform to NCUA’s chartering policy. The field of membership will be phrased in accordance with NCUA chartering policy. However, if the converting credit union is a multiple group charter and the new federal charter is a multiple group, then the new federal charter may retain in its field of membership any group that the state credit union was serving at the time of conversion. Subsequent changes must conform to NCUA chartering policy in effect at that time.
If the converting credit union is a community charter and the new federal charter is community-based, it must meet the community field of membership requirements set forth in Chapter 2, Section V of this manual. If the state-chartered credit union’s community boundary is more expansive than the approved federal boundary, only members of record outside of the new community boundary may continue to be served.
The converting credit union, regardless of charter type, may continue to serve members of record. The converting credit union may retain in its field of membership any group or community added pursuant to state emergency provisions.
The following documents must be submitted with the conversion proposal:
• Conversion of State Charter to Federal Charter (NCUA 4000);
• Organization Certificate (NCUA 4008). Only Part (3) and the signature/notary section should be completed and, where applicable, signed by the credit union officials.
• Report of Officials and Agreement to Serve (NCUA 4012);
• The Application to Convert From State Credit Union to Federal Credit Union (NCUA 4401);
• The Application and Agreements for Insurance of Accounts (NCUA 9500);
• Certification of Resolution (NCUA 9501);
• Written evidence regarding whether the state regulator is in agreement with the conversion proposal; and
• Business plan, as appropriate, including the most current financial report and delinquent loan schedule.
If the state charter is applying to become a federal community charter, it must also comply with the documentation requirements included in Chapter 2, Section V.A.2 of this manual.
The application will be reviewed to determine that it is complete and that the proposal is in compliance with Section 125 of the Federal Credit Union Act. This review will include a determination that the state credit union’s field of membership is in compliance with NCUA’s chartering policies. The Office of Credit Union Resources and Expansion Director may make further investigation into the proposal and may require the submission of additional information to support the request to convert.
NCUA may conduct an on-site examination of the books and records of the credit union. Non-federally insured credit unions will be assessed an insurance application fee.
The conversion will be approved by the Office of Credit Union Resources and Expansion Director if it is in compliance with Section 125 of the Federal Credit Union Act and meets the criteria for federal insurance. Where applicable, the Office of Credit Union Resources and Expansion Director will specify any special conditions that the credit union must meet in order to convert to a federal charter, including changes to the credit union’s field of membership in order to conform to NCUA’s chartering policies. Some of these conditions may be set forth in a Letter of Understanding and Agreement (LUA), which requires the signature of the officials and the appropriate NCUA regional director or Office of National Examinations and Supervision Director.
The Office of Credit Union Resources and Expansion Director will notify both the credit union and the state regulator of the decision on the conversion.
When NCUA disapproves any application to convert to a federal charter, the applicant will be informed in writing of the:
• Specific reasons for the action;
• Options to consider, if appropriate, for gaining approval; and
• Appeal procedures.
If a conversion to a Federal charter is denied by the Office of Credit Union Resources and Expansion Director, the applicant credit union may appeal that decision to the NCUA Board in accordance with the procedures set forth in subpart B to part 746 of this chapter.
Before appealing, the credit union may, within 30 days of the denial, provide supplemental information to the Office of Credit Union Resources and Expansion Director for reconsideration. A request for reconsideration should contain new and material evidence addressing the reasons for the initial denial or explain extenuating circumstances that precluded the inclusion of existing material evidence or information that should have been filed with the request for reconsideration. The Office of Credit Union Resources and Expansion Director will have 30 days from the date of the receipt of the request for reconsideration to make a final decision. If the request is again denied, the applicant may proceed with the appeal process within 60 days of the date of the last denial. A petitioner may seek a second reconsideration based on new material evidence or information or extenuating circumstances that precluded the inclusion of such information in the previous request.
Upon being informed of the Office of Credit Union Resources and Expansion Director’s preliminary approval, the board must:
• Comply with all requirements of the state regulator that will enable the credit union to convert to a federal charter and cease being a state credit union;
• Obtain a letter or official statement from the state regulator certifying that the credit union has met all of the state requirements and will cease to be a state credit union upon its receiving a federal charter. A copy of this document must be submitted to the Office of Credit Union Resources and Expansion Director;
• Obtain a letter from the private share insurer (includes excess share insurers), if applicable, certifying that the credit union has met all withdrawal requirements. A copy of this document must be submitted to the Office of Credit Union Resources and Expansion Director; and
• Submit a statement of the action taken to comply with any conditions imposed by the Office of Credit Union Resources and Expansion Director in the preliminary approval of the conversion proposal and, if applicable, submit the signed LUA.
When the Office of Credit Union Resources and Expansion Director has received evidence that the board of directors has satisfactorily completed the actions described above, the Federal charter and new Certificate of Insurance will be issued.
The credit union may then complete the conversion as discussed in the following section. A credit union may request the Office of Credit Union Resources and Expansion Director to reconsider a denial of a conversion application and/or appeal a denial to the NCUA Board. For more information, refer to Section II.C.6 of this chapter.
The date on which the Office of Credit Union Resources and Expansion Director approves the Organization Certificate and the Application and Agreements for Insurance of Accounts is the date on which the credit union becomes a federal credit union. The Office of Credit Union Resources and Expansion Director will notify the credit union and the state regulator of the date of the conversion.
As of the effective date of the conversion, the federal credit union will be the owner of all of the assets and will be responsible for all of the liabilities and share accounts of the state credit union.
Upon receipt of its federal charter, the board will hold its first meeting as a federal credit union. At this meeting, the board will transact such business as is necessary to complete the conversion as approved and to operate the credit union in accordance with the requirements of the Federal Credit Union Act and NCUA Rules and Regulations.
As of the commencement of operations, the accounting system, records, and forms must conform to the standards established by NCUA.
Changing of the credit union’s name on all signage, records, accounts, investments, and other documents should be accomplished as soon as possible after conversion. The credit union has 180 days from the effective date of the conversion to change its signage and promotional material. This requires the credit union to discontinue using any remaining stock of “state credit union” stationery immediately, and discontinue using credit cards, ATM cards, etc., within 180 days after the effective date of the conversion, or the reissue date whichever is later. The Office of Credit Union Resources and Expansion Director has the discretion to extend the timeframe for an additional 180 days. Member share drafts with the state-chartered name can be used by the members until depleted.
Within 10 business days after commencement of operations, the recently converted federal credit union must submit to the Office of Credit Union Resources and Expansion Director the following:
• Report of Officials (NCUA 4501); and
• Financial and Statistical Reports, as of the commencement of business of the federal credit union.
Any federal credit union may apply to convert to a state credit union. In order to do so, it must:
• Notify NCUA prior to commencing the process to convert to a state charter and state the reason(s) for the conversion;
• Comply with the requirements of Section 125 of the Federal Credit Union Act that enable it to convert to a state credit union and to cease being a federal credit union; and
• Comply with applicable state law and the requirements of the state regulator.
It is important that the credit union provide an accurate disclosure of the reasons for the conversion. These reasons should be stated in specific terms, not as generalities. The federal credit union converting to a state charter remains responsible for the entire operating fee for the year in which it converts.
If the federal credit union intends to continue federal share insurance after the conversion to a state credit union, it must submit an Application for Insurance of Accounts (NCUA 9600) to the Office of Credit Union Resources and Expansion Director at the time it requests approval of the conversion proposal. The Office of Credit Union Resources and Expansion Director has the authority to approve or disapprove the application.
If the converting federal credit union does not intend to continue federal share insurance or if its application for continued insurance is denied, insurance will cease in accordance with the provisions of Section 206 of the Federal Credit Union Act.
If, upon its conversion to a state credit union, the federal credit union will be terminating its federal share insurance or converting from federal to non-federal share insurance, it must comply with the membership notice and voting procedures set forth in Section 206 of the Federal Credit Union Act and part 708 of NCUA’s Rules and Regulations, and address the criteria set forth in Section 205(c) of the Federal Credit Union Act.
Where the state credit union will be non-federally insured, federal insurance ceases on the effective date of the charter conversion. If it will be otherwise uninsured, then federal insurance will cease one year after the date of conversion subject to the restrictions in Section 206(d)(1) of the Federal Credit Union Act. In either case, the state credit union will be entitled to a refund of the federal credit union’s NCUSIF capitalization deposit after the final date on which any of its shares are federally insured.
The NCUA Board reserves the right to delay the refund of the capitalization deposit for up to one year if it determines that payment would jeopardize the NCUSIF.
Upon approval of a proposition for conversion by a majority vote of the board of directors at a meeting held in accordance with the federal credit union’s bylaws, the conversion proposal will be submitted to the Office of Credit Union Resources and Expansion Director and will include:
• A current financial report;
• A current delinquent loan schedule;
• An explanation and appropriate documents relative to any changes in insurance of member accounts;
• A resolution of the board of directors;
• A proposed Notice of Special Meeting of the Members (NCUA 4221);
• A copy of the ballot to be sent to all members (NCUA 4506);
• If the credit union intends to continue with federal share insurance, an application for insurance of accounts (NCUA 9600);
• Evidence that the state regulator is in agreement with the conversion proposal; and
• A statement of reasons supporting the request to convert.
The proposal will be reviewed to determine that it is complete and is in compliance with Section 125 of the Federal Credit Union Act. The Office of Credit Union Resources and Expansion Director may make further investigation into the proposal and require the submission of additional information to support the request.
The Office of Credit Union Resources and Expansion Director will specify any special conditions that the credit union must meet in order to proceed with the conversion.
The proposal will be approved by the Office of Credit Union Resources and Expansion Director if it is in compliance with Section 125 and, in the case where the state credit union will no longer be federally insured, the notice and voting requirements of Section 206 of the Federal Credit Union Act.
The Office of Credit Union Resources and Expansion Director will notify both the credit union and the state regulator of the decision on the proposal.
When NCUA disapproves any application to convert to a state charter, the applicant will be informed in writing of the:
• Specific reasons for the action;
• If appropriate, options or suggestions that could be considered for gaining approval; and
• Appeal procedures.
If the Office of Credit Union Resources and Expansion Director denies a conversion to a State charter, the Federal credit union may appeal that decision to the NCUA Board in accordance with the procedures set forth in subpart B to part 746 of this chapter.
Before appealing, the credit union may, within 30 days of the denial, provide supplemental information to the Office of Credit Union Resources and Expansion Director for reconsideration. The Office of Credit Union Resources and Expansion Director will have 30 business days from the date of the receipt of the request for reconsideration to make a final decision. If the application is again denied, the credit union may proceed with the appeal process to the NCUA Board within 60 days of the date of the last denial by the Office of Credit Union Resources and Expansion Director.
The members may not vote on the proposal until it is approved by the Office of Credit Union Resources and Expansion Director. Once approval of the proposal is received, the following actions will be taken by the board of directors:
• The proposal must be submitted to the members for approval and a date set for a meeting to vote on the proposal. The proposal may be acted on at the annual meeting or at a special meeting for that purpose. The members must also be given the opportunity to vote by written ballot to be filed by the date set for the meeting.
• Members must be given advance notice (NCUA 4221) of the meeting at which the proposal is to be submitted. The notice must:
• Specify the purpose, time and place of the meeting;
• Include a brief, complete, and accurate statement of the reasons for and against the proposed conversion, including any effects it could have upon share holdings, insurance of member accounts, and the policies and practices of the credit union;
• Specify the costs of the conversion, i.e., changing the credit union’s name, examination and operating fees, attorney and consulting fees, tax liability, etc.;
• Inform the members that they have the right to vote on the proposal at the meeting, or by written ballot to be filed not later than the date and time announced for the annual meeting, or at the special meeting called for that purpose;
• Be accompanied by a Federal to State Conversion—Ballot for Conversion Proposal (NCUA 4506); and
• State in
• The proposed conversion must be approved by a majority of all of the members who vote on the proposal, a quorum being present, in order for the credit union to proceed further with the proposition, provided federal insurance is maintained. If the proposed state-chartered credit union will not be federally insured, 20 percent of the total membership must participate in the voting, and of those, a majority must vote in favor of the proposal. Ballots cast by members who did not attend the meeting but who submitted their ballots in accordance with instructions above will be counted with votes cast at the meeting. In order to have a suitable record of the vote, the voting at the meeting should be by written ballot as well.
• The board of directors shall, within 10 days, certify the results of the membership vote to the Office of Credit Union Resources and Expansion Director. The statement shall be verified by affidavits of the Chief Executive Officer and the Recording Officer on NCUA 4505.
If the proposal for conversion is approved by a majority of all members who voted, the board of directors will:
• Ensure that all requirements of state law and the state regulator have been accommodated;
• Ensure that the state charter or the license has been received within 90 days from the date the members approved the proposal to convert; and
• Ensure that the Office of Credit Union Resources and Expansion Director is kept informed as to progress toward conversion and of any material delay or of substantial difficulties which may be encountered.
If the conversion cannot be completed within the 90-day period, the Office of Credit Union Resources and Expansion Director should be informed of the reasons for the delay. The Office of Credit Union Resources and Expansion Director may set a new date for the conversion to be completed.
In order for the conversion to be completed, the following steps are necessary:
• The board of directors will submit a copy of the state charter to the Office of Credit Union Resources and Expansion Director within 10 days of its receipt. This will be accompanied by the federal charter and the federal insurance certificate. A copy of the financial reports as of the preceding month-end should be submitted at this time.
• The Office of Credit Union Resources and Expansion Director will notify the credit union and the state regulator in writing of the receipt of evidence that the credit union has been authorized to operate as a state credit union.
• The credit union shall cease to be a federal credit union as of the effective date of the state charter.
• If the Office of Credit Union Resources and Expansion Director finds a material deviation from the provisions that would invalidate any steps taken in the conversion, the credit union and the state regulator shall be promptly notified in writing. This notice may be either before or after the copy of the state charter is filed with the Office of Credit Union Resources and Expansion Director. The notice will inform the credit union as to the nature of the adverse findings. The conversion will not be effective and completed until the improper actions and steps have been corrected.
• Upon ceasing to be a federal credit union, the credit union shall no longer be subject to any of the provisions of the Federal Credit Union Act, except as may apply if federal share insurance coverage is continued. The successor state credit union shall be immediately vested with all of the assets and shall continue to be responsible for all of the obligations of the federal credit union to the same extent as though the conversion had not taken place. Operation of the credit union from this point will be in accordance with the requirements of state law and the state regulator.
• If the Office of Credit Union Resources and Expansion Director is satisfied that the conversion has been accomplished in accordance with the approved proposal, the federal charter will be canceled.
• There is no federal requirement for closing the records of the federal credit union at the time of conversion or for the manner in which the records shall be maintained thereafter. The converting credit union is advised to contact the state regulator for applicable state requirements.
• The credit union shall neither use the words “Federal Credit Union” in its name nor represent itself in any manner as being a federal credit union.
• Changing of the credit union’s name on all signage, records, accounts, investments, and other documents should be accomplished as soon as possible after conversion. Unless it violates state law, the credit union has 180 days from the effective date of the conversion to change its signage and promotional material. This requires the credit union to discontinue using any remaining stock of “federal credit union” stationery immediately, and discontinue using credit cards, ATM cards, etc., within 180 days after the effective date of the conversion, or the reissue date, whichever is later. The Office of Credit Union Resources and Expansion Director has the discretion to extend the timeframe for an additional 180 days. Member share drafts with the federal chartered name can be used by the members until depleted. If the state credit union is not federally insured, it must change its name and must immediately cease using any credit union documents referencing federal insurance.
• If the state credit union is to be federally insured, the Office of Credit Union Resources and Expansion Director will issue a new insurance certificate.
These definitions apply only for use with this Manual. Definitions are not intended to be all inclusive or comprehensive. This Manual, the Federal Credit Union Act, and NCUA Rules and Regulations, as well as state laws, may be used for further reference.
Adequately capitalized—A credit union is considered “adequately capitalized” when it meets the “adequately capitalized” definition in Part 702 of NCUA’s Rules and Regulations. A multiple common bond credit union must be “adequately capitalized” in order to add new groups to its charter. The Office of Credit Union Resources and Expansion director, with input from the appropriate regional director or Office of National Examinations and Supervision Director, may determine that a less than “adequately capitalized” credit union can qualify for an expansion if it is making reasonable progress toward becoming “adequately capitalized,” and the addition of the group would not adversely affect the credit union’s capitalization level.
Affinity—A relationship upon which a community charter is based. Acceptable affinities include living, working, worshiping, or attending school in a community.
Appeal—The right of a credit union or charter applicant to request a formal review of the Office of Credit Union Resources and Expansion, regional director’s or Office of National Examinations and Supervision Director’s adverse decision by the National Credit Union Administration Board.
Associational common bond—A common bond comprised of members and employees of a recognized association. It includes individuals (natural persons) and/or groups (non-natural persons) whose members participate in activities developing common loyalties, mutual benefits, and mutual interests.
Business plan—Plan submitted by a charter applicant or existing federal credit union addressing the economic advisability of a proposed charter or field of membership addition.
Charter—The document which authorizes a group to operate as a credit union and defines the fundamental limits of its operating authority, generally including the persons the credit union is permitted to accept for membership. Charters are issued by the National Credit Union Administration for federal credit unions and by the designated state chartering authority for credit unions organized under the laws of that state.
Common bond—The characteristic or combination of characteristics which distinguishes a particular group of persons from the general public. There are two common bonds which can serve as a basis for a group forming a federal credit union or being included in an existing federal credit union’s field of membership: Occupational—employment by the same company, related companies or in a trade, industry, or profession (TIP); and associational—membership in the same association.
Community credit union—A credit union whose field of membership consists of persons who live, work, worship, or attend school in the same well-defined local community, neighborhood, or rural district.
Credit union—A member-owned, not-for-profit cooperative financial institution formed to permit those in the field of membership specified in the charter to save, borrow, and obtain related financial services.
Economic advisability—An overall evaluation of the credit union’s or charter applicant’s ability to operate successfully.
Emergency merger—Pursuant to Section 205(h) of the Federal Credit Union Act, authority of NCUA to merge two credit unions without regard to common bond policy.
Exclusionary clause—A limitation, written in a credit union’s charter, which precludes the credit union from serving a portion of a group which otherwise could be included in its field of membership.
Federal share insurance—Insurance coverage provided by the National Credit Union Share Insurance Fund and administered by the National Credit Union Administration. Coverage is provided for qualified accounts in all federal credit unions and participating state credit unions.
Field of membership—The persons (including organizations and other legal entities) a credit union is permitted to accept for membership.
Household—Persons living in the same residence maintaining a single economic unit.
Housekeeping Amendment—A field of membership amendment to delete groups, change group names, change group locations, remove exclusionary clauses, and to add other persons eligible for credit union membership by virtue of their close relationship to a common bond group or the community for community charters.
Immediate family member—A spouse, child, sibling, parent, grandparent, or grandchild. This includes stepparents, stepchildren, stepsiblings, and adoptive relationships.
In danger of insolvency—In making the determination that a particular credit union is in danger of insolvency, NCUA will establish that the credit union falls into one or more of the following categories:
1. The credit union’s net worth is declining at a rate that will render it insolvent within 30 months. In projecting future net worth, NCUA may rely on data in addition to Call Report data. The trend must be supported by at least 12 months of historic data.
2. The credit union’s net worth is declining at a rate that will take it under two percent (2%) net worth within 18 months. In projecting future net worth, NCUA may rely on data in addition to Call Report data. The trend must be supported by at least 12 months of historic data.
3. The credit union’s net worth, as self-reported on its Call Report, is significantly undercapitalized, and NCUA determines that there is no reasonable prospect of the credit union becoming adequately capitalized in the succeeding 36 months. In making its determination on the prospect of achieving adequate capitalization, NCUA will assume that, if adverse economic conditions are affecting the value of the credit union’s assets and liabilities, including property values and loan delinquencies related to unemployment, these adverse conditions will not further deteriorate.
4. The credit union has been granted or received assistance under section 208 of the Federal Credit Union Act, 12 U.S.C. 1788, in the 15 months prior to the Region’s determination that the credit union is in danger of insolvency.
Letter of Understanding and Agreement—Agreement between NCUA and federal credit union officials not to engage in certain activities and/or to establish reasonable operational goals. These are normally entered into with new charter applicants for a limited time.
Mentor—An individual who provides guidance and assistance to newly chartered, small, or low-income credit unions. All new federal credit unions are encouraged to establish a mentor relationship with a trained, experienced credit union individual or an existing credit union.
Metropolitan Statistical Area—The Office of Management and Budget defines a metropolitan statistical area as an urbanized area that has at least one urbanized area in excess of 50,000 and “comprises the central county or counties containing the core, plus adjacent outlying counties having a high degree of social and economic integration with the central county as measured through commuting.”
Merger—Absorption by one credit union of all of the assets, liabilities and equity of another credit union. Mergers must be approved by the National Credit Union Administration and by the appropriate state regulator whenever a state credit union is involved.
Multiple common bond credit union—A credit union whose field of membership consists of more than one group, each of which has a common bond of occupation or association.
Occupational common bond—Employment by the same entity or related entities or a Trade, Industry, or Profession.
Once a member, always a member—A provision of the Federal Credit Union Act which permits an individual to remain a member of the credit union until he or she chooses to withdraw or is expelled from the membership of the credit union. Under this provision, leaving a group that is named in the credit union’s charter does not terminate an individual’s membership in the credit union.
Organizations of such persons—An organization or organizations composed exclusively of persons who are within the field of membership of the credit union.
Overlap—The situation which results when a group is eligible for membership in more than one credit union.
Primary potential members—Members or employees who belong to an associational or occupational group.
Purchase and assumption—Purchase of all or part of the assets of and assumption of all or part of the liabilities of one credit union by another credit union. The purchased and assumed credit union must first be placed into involuntary liquidation.
Service area—The area that can reasonably be served by the service facilities accessible to the groups within the field of membership.
Service facility—A place where shares are accepted for members’ accounts, loan applications are accepted or loans are disbursed. This definition includes a credit union-owned branch, a mobile branch, an office operated on a regularly scheduled weekly basis, a credit union-owned ATM, or a credit union-owned electronic facility that meets, at a minimum, these requirements. A service facility also includes a shared branch or a shared branch network location, including a shared ATM or other electronic facility, if a credit union participates in a shared branching network. For purposes of serving an underserved area: (1) A service facility is a place where shares are accepted for members’ accounts, loan applications are accepted, and loans are disbursed; and (2) a service facility does not include an ATM or shared ATM.
The credit union’s internet website is not a service facility.
Single associational common bond credit union—A credit union whose field of membership includes members and employees of a recognized association.
Single common bond credit union—A credit union whose field of membership consists of one group which has a common bond of occupation or association.
Single occupational common bond credit union—A credit union whose field of membership consists of employees of the same entity or related entities or part of a Trade, Industry, or Profession (TIP).
Spin-off—The transfer of a portion of the field of membership, assets, liabilities, shares, and capital of one credit union to a new or existing credit union.
Subscribers—For a federal credit union, at least seven individuals who sign the charter application and pledge at least one share.
Trade, Industry, or Profession (TIP)—A single occupational common bond credit union based on employment in a trade, industry, or profession including employment at any number of corporations or other legal entities that while not under common ownership—have a common bond by virtue of producing similar products, providing similar services, or participating in the same type of business.
Underserved community—A local community, neighborhood, or rural district that is an “investment area” as defined in Section 103(16) of the Community Development Banking and Financial Institutions Act of 1994. The area must also be underserved based on other NCUA and federal banking agency data.
Unsafe or unsound practice—Any action, or lack of action, which would result in an abnormal risk or loss to the credit union, its members, or the National Credit Union Share Insurance Fund.
The Divisions of Consumer Access (East, Central, and West) within CURE share the responsibility for chartering and field-of-membership matters, low-income designations, charter conversions, and bylaw amendments.
States in the Eastern Region include: Connecticut, Delaware, the District of Columbia, Maine, Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Rhode Island, Vermont, Virginia, and West Virginia.
States in the Southern Region include: Alabama, Arkansas, Florida, Georgia, Indiana, Kentucky, Louisiana, Mississippi, North Carolina, South Carolina, Oklahoma, Tennessee, and Texas, as well as Puerto Rico and the U.S. Virgin Islands.
States in the Western Region include: Alaska, Arizona, California, Colorado, Hawaii, Idaho, Illinois, Iowa, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Nevada, Oregon, South Dakota, Utah, Washington, Wisconsin, and Wyoming, as well as Guam.
PART 702—CAPITAL ADEQUACY
(a) Authority. Subparts A and B of this part and subpart L of part 747 of this chapter are issued by the National Credit Union Administration (NCUA) pursuant to sections 120 and 216 of the Federal Credit Union Act (FCUA), 12 U.S.C. 1766 and 1790d (section 1790d), as revised by section 301 of the Credit Union Membership Access Act, Public Law 105-219, 112 Stat. 913 (1998).
(b) Purpose. The express purpose of prompt corrective action under section 1790d is to resolve the problems of federally insured credit unions at the least possible long-term loss to the National Credit Union Share Insurance Fund. Subparts A and B of this part carry out the purpose of prompt corrective action by establishing a framework of minimum capital requirements, and mandatory and discretionary supervisory actions applicable according to a credit union’s capital classification, designed primarily to restore and improve the capital adequacy of federally insured credit unions.
(c) Scope. Subparts A and B of this part implement the provisions of section 1790d as they apply to federally insured credit unions, whether federally- or state-chartered; to such credit unions defined as “new” pursuant to section 1790d(b)(2); and to such credit unions defined as “complex” pursuant to section 1790d(d). Certain of these provisions also apply to officers and directors of federally insured credit unions. Subpart C applies capital planning and stress testing to credit unions defined as covered credit unions under § 702.302. This part does not apply to corporate credit unions. Unless otherwise provided, procedures for issuing, reviewing and enforcing orders and directives issued under this part are set forth in subpart L of part 747 of this chapter.
(d) Other supervisory authority. Neither section 1790d nor this part in any way limits the authority of the NCUA Board or appropriate state official under any other provision of law to take additional supervisory actions to address unsafe or unsound practices or conditions, or violations of applicable law or regulations. Action taken under this part may be taken independently of, in conjunction with, or in addition to any other enforcement action available to the NCUA Board or appropriate state official, including issuance of cease and desist orders, orders of prohibition, suspension and removal, or assessment of civil money penalties, or any other actions authorized by law.
§ 702.2 Definitions.
Unless otherwise provided in this part, the terms used in this part have the same meanings as set forth in FCUA sections 101 and 216, 12 U.S.C. 1752, 1790d. All accounting terms not otherwise defined in this section have meanings consistent with the commonly-accepted meanings under United States generally accepted accounting principles (U.S. GAAP). The following definitions apply to this part:
Allowances for loan and lease losses (ALLL) means valuation allowances that have been established through a charge against earnings to cover estimated credit losses on loans, lease financing receivables or other extensions of credit as determined in accordance with GAAP.
Amortized cost means the purchase price of a security adjusted for amortizations of premium or accretion of discount if the security was purchased at other than par or face value.
Appropriate state official means the state commission, board or other supervisory authority that chartered the affected credit union.
Call Report means the Call Report required to be filed by all credit unions under § 741.6(a)(2) of this chapter.
Carrying value means the value of the asset or liability on the statement of financial condition of the credit union, determined in accordance with GAAP.
CCULR means the complex credit union leverage ratio. It is calculated in the same manner as the net worth ratio under § 702.2.
Central counterparty (CCP) means a counterparty (for example, a clearing house) that facilitates trades between counterparties in one or more financial markets by either guaranteeing trades or novating contracts.
Charitable donation account means an account that satisfies all of the conditions in § 721.3(b)(2)(i), (b)(2)(ii), and (b)(2)(v) of this chapter.
Commercial loan means any loan, line of credit, or letter of credit (including any unfunded commitments) for commercial, industrial, and professional purposes, but not for investment or personal expenditure purposes. Commercial loan excludes loans to CUSOs, first- or junior-lien residential real estate loans, and consumer loans.
Commitment means any legally binding arrangement that obligates the credit union to extend credit, purchase or sell assets, enter into a borrowing agreement, or enter into a financial transaction.
Consumer loan means a loan or lease for household, family, or other personal expenditures, including any loans or leases that, at origination, are wholly or substantially secured by vehicles generally manufactured for personal, family, or household use regardless of the purpose of the loan or lease. Consumer loan excludes commercial loans, loans to CUSOs, first- and junior-lien residential real estate loans, and loans for the purchase of one or more vehicles to be part of a fleet of vehicles.
Contractual compensating balance means the funds a commercial loan borrower must maintain on deposit at the lender credit union as security for the loan in accordance with the loan agreement, subject to a proper account hold and on deposit as of the measurement date.
Credit conversion factor (CCF) means the percentage used to assign a credit exposure equivalent amount for selected off-balance sheet accounts.
Credit derivative means a financial contract executed under standard industry credit derivative documentation that allows one party (the protection purchaser) to transfer the credit risk of one or more exposures (reference exposure(s)) to another party (the protection provider) for a certain period of time.
Credit union means a federally insured, natural person credit union, whether federally- or state-chartered.
Current means, with respect to any loan or lease, that the loan or lease is less than 90 days past due, not placed on non-accrual status, and not restructured.
CUSO means a credit union service organization as defined in part 712 and 741 of this chapter.
Custodian means a financial institution that has legal custody of collateral as part of a qualifying master netting agreement, clearing agreement, or other financial agreement.
Depository institution means a financial institution that engages in the business of providing financial services; that is recognized as a bank or a credit union by the supervisory or monetary authorities of the country of its incorporation and the country of its principal banking operations; that receives deposits to a substantial extent in the regular course of business; and that has the power to accept demand deposits. Depository institution includes all federally insured offices of commercial banks, mutual and stock savings banks, savings or building and loan associations (stock and mutual), cooperative banks, credit unions and international banking facilities of domestic depository institutions, and all privately insured state chartered credit unions.
Derivative contract means a financial contract that derives its value from the value and performance of some other underlying financial instrument or variable, such as an index or interest rate.
Derivatives Clearing Organization has the meaning as defined by the Commodity Futures Trading Commission (CFTC) in 17 CFR 1.3.
Equity investment means investments in equity securities and any other ownership interests, including, for example, investments in partnerships and limited liability companies.
Equity investment in CUSOs means the unimpaired value of the credit union’s equity investments in a CUSO as recorded on the statement of financial condition in accordance with GAAP.
Exchange means a central financial clearing market where end users can enter into derivative transactions.
Excluded goodwill means the outstanding balance, maintained in accordance with GAAP, of any goodwill originating from a supervisory merger or combination that was completed on or before December 28, 2015.
Excluded other intangible assets means the outstanding balance, maintained in accordance with GAAP, of any other intangible assets such as core deposit intangible, member relationship intangible, or trade name intangible originating from a supervisory merger or combination that was completed on or before December 28, 2015.
Exposure amount means:
(1) The amortized cost for investments classified as held-to-maturity and available-for-sale, and the fair value for trading securities.
(2) The outstanding balance for Federal Reserve Bank Stock, Central Liquidity Facility Stock, Federal Home Loan Bank Stock, nonperpetual capital and perpetual contributed capital at corporate credit unions, and equity investments in CUSOs.
(3) The carrying value for non-CUSO equity investments, and investment funds.
(4) The carrying value for the credit union’s holdings of general account permanent insurance, and separate account insurance.
(5) The amount calculated under § 702.105 of this part for derivative contracts.
Fair value has the same meaning as provided in GAAP.
Financial collateral means collateral approved by both the credit union and the counterparty as part of the collateral agreement in recognition of credit risk mitigation for derivative contracts.
First-lien residential real estate loan means a loan or line of credit primarily secured by a first-lien on a one-to-four family residential property where:
(1) The credit union made a reasonable and good faith determination at or before consummation of the loan that the member will have a reasonable ability to repay the loan according to its terms; and
(2) In transactions where the credit union holds the first-lien and junior lien(s), and no other party holds an intervening lien, for purposes of this part the combined balance will be treated as a single first-lien residential real estate loan.
Forward agreement means a legally binding contractual obligation to purchase assets with certain drawdown at a specified future date, not including commitments to make residential mortgage loans or forward foreign exchange contracts.
GAAP means generally accepted accounting principles in the United States as set forth in the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC).
General account permanent insurance means an account into which all premiums, except those designated for separate accounts are deposited, including premiums for life insurance and fixed annuities and the fixed portfolio of variable annuities, whereby the general assets of the insurance company support the policy.
General obligation means a bond or similar obligation that is backed by the full faith and credit of a public sector entity.
Goodwill means an intangible asset, maintained in accordance with GAAP, representing the future economic benefits arising from other assets acquired in a business combination (e.g., merger) that are not individually identified and separately recognized. Goodwill does not include excluded goodwill.
Government guarantee means a guarantee provided by the U.S. Government, FDIC, NCUA or other U.S. Government agency, or a public sector entity.
Government-sponsored enterprise (GSE) means an entity established or chartered by the U.S. Government to serve public purposes specified by the U.S. Congress, but whose debt obligations are not explicitly guaranteed by the full faith and credit of the U.S. Government.
Grandfathered Secondary Capital means any secondary capital issued under § 701.34 of this chapter, before January 1, 2022 or, in the case of a federally insured, state-chartered credit union, with § 741.204(c) of this chapter, before January 1, 2022. (12 CFR 701.34 was recodified as § 702.414 as of January 1, 2022). This term also includes issuances of secondary capital to the U.S. Government or any of its subdivisions, under applications approved before January 1, 2022, pursuant to § 701.34 or § 741.204(c) of this chapter, irrespective of the date of issuance.
Guarantee means a financial guarantee, letter of credit, insurance, or similar financial instrument that allows one party to transfer the credit risk of one or more specific exposures to another party.
Identified losses means those items that have been determined by an evaluation made by NCUA, or in the case of a state chartered credit union the appropriate state official, as measured on the date of examination in accordance with GAAP, to be chargeable against income, equity or valuation allowances such as the allowances for loan and lease losses. Examples of identified losses would be assets classified as losses, off-balance sheet items classified as losses, any provision expenses that are necessary to replenish valuation allowances to an adequate level, liabilities not shown on the books, estimated losses in contingent liabilities, and differences in accounts that represent shortages.
Industrial development bond means a security issued under the auspices of a state or other political subdivision for the benefit of a private party or enterprise where that party or enterprise, rather than the government entity, is obligated to pay the principal and interest on the obligation.
Intangible assets mean assets, maintained in accordance with GAAP, other than financial assets, that lack physical substance.
Investment fund means an investment with a pool of underlying investment assets. Investment fund includes an investment company that is registered under section 8 of the Investment Company Act of 1940, and collective investment funds or common trust investments that are unregistered investment products that pool fiduciary client assets to invest in a diversified pool of investments.
Junior-lien residential real estate loan means a loan or line of credit secured by a subordinate lien on a one-to-four family residential property.
Loan secured by real estate means a loan that, at origination, is secured wholly or substantially by a lien(s) on real property for which the lien(s) is central to the extension of the credit. A lien is “central” to the extension of credit if the borrowers would not have been extended credit in the same amount or on terms as favorable without the liens on real property. For a loan to be “secured wholly or substantially by a lien(s) on real property,” the estimated value of the real estate collateral at origination (after deducting any more senior liens held by others) must be greater than 50 percent of the principal amount of the loan at origination.
Loan to a CUSO means the outstanding balance of any loan from a credit union to a CUSO as recorded on the statement of financial condition in accordance with GAAP.
Loans transferred with limited recourse means the total principal balance outstanding of loans transferred, including participations, for which the transfer qualified for true sale accounting treatment under GAAP, and for which the transferor credit union retained some limited recourse (i.e., insufficient recourse to preclude true sale accounting treatment). Loans transferred with limited recourse excludes transfers that qualify for true sale accounting treatment but contain only routine representation and warranty clauses that are standard for sales on the secondary market, provided the credit union is in compliance with all other related requirements, such as capital requirements.
Mortgage-backed security (MBS) means a security backed by first- or junior-lien mortgages secured by real estate upon which is located a dwelling, mixed residential and commercial structure, residential manufactured home, or commercial structure.
Mortgage partnership finance program means a Federal Home Loan Bank program through which loans are originated by a depository institution that are purchased or funded by the Federal Home Loan Banks, where the depository institution receives fees for managing the credit risk of the loans. The credit risk must be shared between the depository institution and the Federal Home Loan Banks.
Mortgage servicing assets mean those assets, maintained in accordance with GAAP, resulting from contracts to service loans secured by real estate (that have been securitized or owned by others) for which the benefits of servicing are expected to more than adequately compensate the servicer for performing the servicing.
Multilateral development bank (MDB) means the International Bank for Reconstruction and Development, the Multilateral Investment Guarantee Agency, the International Finance Corporation, the Inter-American Development Bank, the Asian Development Bank, the African Development Bank, the European Bank for Reconstruction and Development, the European Investment Bank, the European Investment Fund, the Nordic Investment Bank, the Caribbean Development Bank, the Islamic Development Bank, the Council of Europe Development Bank, and any other multilateral lending institution or regional development bank in which the U.S. government is a shareholder or contributing member.
NCUSIF means the National Credit Union Share Insurance Fund as defined by 12 U.S.C. 1783.
Net worth means, with respect to any federally insured, natural person credit union, as of any date of determination:
(1) The retained earnings balance of the credit union at the most recent quarter end, as determined in accordance with U.S. GAAP, subject to paragraph (3) of this definition.
(2) With respect to a low-income designated credit union, the outstanding principal amount of Subordinated Debt treated as Regulatory Capital in accordance with § 702.407, and the outstanding principal amount of Grandfathered Secondary Capital treated as Regulatory Capital in accordance with § 702.414, in each case that is:
(i) Uninsured; and
(ii) Subordinate to all other claims against the credit union, including claims of creditors, shareholders, and the National Credit Union Share Insurance Fund.
(3) For a credit union that acquires another credit union in a mutual combination, net worth also includes the retained earnings of the acquired credit union, or of an integrated set of activities and assets, less any bargain purchase gain recognized in either case to the extent the difference between the two is greater than zero. The acquired retained earnings must be determined at the point of acquisition under GAAP. A mutual combination, including a supervisory combination, is a transaction in which a credit union acquires another credit union or acquires an integrated set of activities and assets that is capable of being conducted and managed as a credit union.
(4) The term “net worth” also includes loans to and accounts in an insured credit union, established pursuant to section 208 of the Act [12 U.S.C. 1788], provided such loans and accounts:
(i) Have a remaining maturity of more than 5 years;
(ii) Are subordinate to all other claims including those of shareholders, creditors, and the NCUSIF;
(iii) Are not pledged as security on a loan to, or other obligation of, any party;
(iv) Are not insured by the NCUSIF;
(v) Have non-cumulative dividends;
(vi) Are transferable; and
(vii) Are available to cover operating losses realized by the insured credit union that exceed its available retained earnings.
Net worth ratio means the ratio of the net worth of the credit union to the total assets of the credit union, expressed as a percentage rounded to two decimal places.
New credit union has the same meaning as in § 702.201.
Nonperpetual capital has the same meaning as in § 704.2 of this chapter.
Non-security beneficial interest is defined as the residual equity interest in the Special Purpose Entity (SPE) that represents a right to receive possible future payments after specified payment amounts are made to third-party investors in the securitized receivables. For purposes of this definition, a SPE means a trust, bankruptcy remote entity or other special purpose entity which is wholly owned, directly or indirectly, by the credit union and which is formed for the purpose of, and engages in no material business other than, acting as an issuer or a depositor in a securitization.
Off-balance sheet exposure means:
(1) For unfunded commitments, excluding unconditionally cancellable commitments, the remaining unfunded portion of the contractual agreement.
(2) For loans transferred with limited recourse, or other seller-provided credit enhancements, and that qualify for true sales accounting, the maximum contractual amount the credit union is exposed to according to the agreement, net of any related valuation allowance.
(3) For loans transferred under the Federal Home Loan Bank (FHLB) mortgage partnership finance program, the outstanding loan balance as of the reporting date, net of any related valuation allowance.
(4) For financial standby letters of credit, the total potential exposure of the credit union under the contractual agreement.
(5) For forward agreements that are not derivative contracts, the future contractual obligation amount.
(6) For sold credit protection through guarantees and credit derivatives, the total potential exposure of the credit union under the contractual agreement.
(7) For off-balance sheet securitization exposures, the notional amount of the off-balance sheet credit exposure (including any credit enhancements, representations, or warranties that obligate a credit union to protect another party from losses arising from the credit risk of the underlying exposures) that arises from a securitization.
(8) For securities borrowing or lending transactions, the amount of all securities borrowed or lent against collateral or on an uncollateralized basis.
Off-balance sheet items means off-balance sheet exposures and the off-balance sheet exposure amount of repurchase transactions.
On-balance sheet means a credit union’s assets, liabilities, and equity, as disclosed on the statement of financial condition at a specific point in time.
Other intangible assets means intangible assets, other than servicing assets and goodwill, maintained in accordance with GAAP. Other intangible assets does not include excluded other intangible assets.
Over-the-counter (OTC) interest rate derivative contract means a derivative contract that is not cleared on an exchange.
Part 703 compliant investment fund means an investment fund that is restricted to holding only investments that are permissible under § 703.14(c) of this chapter.
Perpetual contributed capital has the same meaning as in § 704.2 of this chapter.
Public sector entity (PSE) means a state, local authority, or other governmental subdivision of the United States below the sovereign level.
Qualifying master netting agreement means a written, legally enforceable agreement, provided that:
(1) The agreement creates a single legal obligation for all individual transactions covered by the agreement upon an event of default, including upon an event of conservatorship, receivership, insolvency, liquidation, or similar proceeding, of the counterparty;
(2) The agreement provides the credit union the right to accelerate, terminate, and close out on a net basis all transactions under the agreement and to liquidate or set off collateral promptly upon an event of default, including upon an event of conservatorship, receivership, insolvency, liquidation, or similar proceeding, of the counterparty, provided that, in any such case, any exercise of rights under the agreement will not be stayed or avoided under applicable law in the relevant jurisdictions, other than in receivership, conservatorship, resolution under the Federal Deposit Insurance Act, Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act, or under any similar insolvency law applicable to GSEs;
(3) The agreement does not contain a walkaway clause (that is, a provision that permits a non-defaulting counterparty to make a lower payment than it otherwise would make under the agreement, or no payment at all, to a defaulter or the estate of a defaulter, even if the defaulter or the estate is a net creditor under the agreement); and
(4) In order to recognize an agreement as a qualifying master netting agreement for purposes of this part, a credit union must conduct sufficient legal review, at origination and in response to any changes in applicable law, to conclude with a well-founded basis (and maintain sufficient written documentation of that legal review) that:
(i) The agreement meets the requirements of paragraph (2) of this definition; and
(ii) In the event of a legal challenge (including one resulting from default or from conservatorship, receivership, insolvency, liquidation, or similar proceeding), the relevant court and administrative authorities would find the agreement to be legal, valid, binding, and enforceable under the law of relevant jurisdictions.
Recourse means a credit union’s retention, in form or in substance, of any credit risk directly or indirectly associated with an asset it has transferred that exceeds a pro rata share of that credit union’s claim on the asset and disclosed in accordance with GAAP. If a credit union has no claim on an asset it has transferred, then the retention of any credit risk is recourse. A recourse obligation typically arises when a credit union transfers assets in a sale and retains an explicit obligation to repurchase assets or to absorb losses due to a default on the payment of principal or interest or any other deficiency in the performance of the underlying obligor or some other party. Recourse may also exist implicitly if the credit union provides credit enhancement beyond any contractual obligation to support assets it has transferred.
Repurchase transactions means either a transaction in which a credit union agrees to sell a security to a counterparty and to repurchase the same or an identical security from that counterparty at a specified future date and at a specified price or a transaction in which an investor agrees to purchase a security from a counterparty and to resell the same or an identical security to that counterparty at a specified future date and at a specified price. The off-balance sheet exposure amount for a repurchase transaction equals all of the positions the credit union has sold or bought subject to repurchase or resale, which equals the sum of the current fair values of all such positions.
Residential mortgage-backed security means a mortgage-backed security backed by loans secured by a first-lien on residential property.
Residential property means a house, condominium unit, cooperative unit, manufactured home, or the construction thereof, and unimproved land zoned for one-to-four family residential use. Residential property excludes boats or motor homes, even if used as a primary residence, or timeshare property.
Restructured means, with respect to any loan, a restructuring of the loan in which a credit union, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider. Restructured excludes loans modified or restructured solely pursuant to the U.S. Treasury’s Home Affordable Mortgage Program.
Revenue obligation means a bond or similar obligation that is an obligation of a PSE, but which the PSE is committed to repay with revenues from the specific project financed rather than general tax funds.
Risk-based capital ratio means the percentage, rounded to two decimal places, of the risk-based capital ratio numerator to risk-weighted assets, as calculated in accordance with § 702.104(a).
Risk-weighted assets means the total risk-weighted assets as calculated in accordance with § 702.104(c).
Secured consumer loan means a consumer loan associated with collateral or other item of value to protect against loss where the creditor has a perfected security interest in the collateral or other item of value.
Senior executive officer means a senior executive officer as defined by § 701.14(b)(2) of this chapter.
Separate account insurance means an account into which a policyholder’s cash surrender value is supported by assets segregated from the general assets of the carrier.
Share-secured loan means a loan fully secured by shares, and does not include the imposition of a statutory lien under § 701.39 of this chapter.
Shares means deposits, shares, share certificates, share drafts, or any other depository account authorized by federal or state law.
STRIPS means a separately traded registered interest and principal security.
Structured product means an investment that is linked, via return or loss allocation, to another investment or reference pool.
Subordinated means, with respect to an investment, that the investment has a junior claim on the underlying collateral or assets to other investments in the same issuance. An investment that does not have a junior claim to other investments in the same issuance on the underlying collateral or assets is non-subordinated. A Security that is junior only to money market eligible securities in the same issuance is also non-subordinated.
Subordinated Debt has the meaning as provided in subpart D of this part.
Supervisory merger or combination means a transaction that involved the following:
(1) An assisted merger or purchase and assumption where funds from the NCUSIF were provided to the continuing credit union;
(2) A merger or purchase and assumption classified by NCUA as an “emergency merger” where the acquired credit union is either insolvent or “in danger of insolvency” as defined under appendix B to Part 701 of this chapter; or
(3) A merger or purchase and assumption that included NCUA’s or the appropriate state official’s identification and selection of the continuing credit union.
Swap Dealer has the meaning as defined by the CFTC in 17 CFR 1.3.
Total assets means a credit union’s total assets as measured by either:
(1)(i) Average quarterly balance. The credit union’s total assets measured by the average of quarter-end balances of the current and three preceding calendar quarters;
(ii) Average monthly balance. The credit union’s total assets measured by the average of month-end balances over the three calendar months of the applicable calendar quarter;
(iii) Average daily balance. The credit union’s total assets measured by the average daily balance over the applicable calendar quarter; or
(iv) Quarter-end balance. The credit union’s total assets measured by the quarter-end balance of the applicable calendar quarter as reported on the credit union’s Call Report.
(2) For each quarter, a credit union must elect one of the measures of total assets listed in paragraph (1) of this definition to apply for all purposes under this part except §§ 702.103 through 702.105 (risk-based capital requirement).
(3) Notwithstanding paragraph (1) of this definition, a credit union may exclude loans pledged as collateral for a non-recourse loan that is provided as part of the Paycheck Protection Program Lending Facility, announced by the Federal Reserve Board on April 7, 2020, from the calculation of total assets for the purpose of calculating its net worth ratio. For the purpose of this provision, a credit union’s liability under the Facility must be reduced by the principal amount of the loans pledged as collateral for funds advanced under the Facility.
Trading assets means securities or other assets acquired, not including loans originated by the credit union, for the purpose of selling in the near term or otherwise with the intent to resell in order to profit from short-term price movements. Trading assets would not include shares of a registered investment company or a collective investment fund used for liquidity purposes.
Trading liabilities means the total liability for short positions of securities or other liabilities held for trading purposes.
Tranche means one of a number of related securities offered as part of the same transaction. Tranche includes a structured product if it has a loss allocation based off of an investment or reference pool.
Unconditionally cancelable means with respect to a commitment, that a credit union may, at any time, with or without cause, refuse to extend credit under the commitment (to the extent permitted under applicable law).
Unsecured consumer loan means a consumer loan not secured by collateral.
U.S. Government agency means an instrumentality of the U.S. Government whose obligations are fully and explicitly guaranteed as to the timely payment of principal and interest by the full faith and credit of the U.S. Government. U.S. Government agency includes NCUA.
Subpart A—Prompt Corrective Action
§ 702.101 Capital measures, capital adequacy, effective date of classification, and notice to NCUA.
(a) Capital measures. For purposes of this part, a credit union must determine its capital classification at the end of each calendar quarter using the following measures:
(1) The net worth ratio; and
(2) If determined to be applicable under § 702.103, either the risk-based capital ratio under § 702.104(a) through (c) or the CCULR framework under § 702.104(d).
(b) Capital adequacy. (1) Notwithstanding the minimum requirements in this part, a credit union defined as complex must maintain capital commensurate with the level and nature of all risks to which the institution is exposed.
(2) A credit union defined as complex must have a process for assessing its overall capital adequacy in relation to its risk profile and a comprehensive written strategy for maintaining an appropriate level of capital.
(c) Effective date of capital classification. For purposes of this part, the effective date of a federally insured credit union’s capital classification shall be the most recent to occur of:
(1) Quarter-end effective date. The last day of the calendar month following the end of the calendar quarter;
(2) Corrected capital classification. The date the credit union received subsequent written notice from NCUA or, if state-chartered, from the appropriate state official, of a decline in capital classification due to correction of an error or misstatement in the credit union’s most recent Call Report; or
(3) Reclassification to lower category. The date the credit union received written notice from NCUA or, if state-chartered, the appropriate state official, of reclassification on safety and soundness grounds as provided under § 702.102(b) or § 702. 202(d).
(d) Notice to NCUA by filing Call Report. (1) Other than by filing a Call Report, a federally insured credit union need not notify the NCUA Board of a change in its capital measures that places the credit union in a lower capital category;
(2) Failure to timely file a Call Report as required under this section in no way alters the effective date of a change in capital classification under paragraph (b) of this section, or the affected credit union’s corresponding legal obligations under this part.
§ 702.102 Capital classification.
(a) Capital categories. Except for credit unions defined as “new” under subpart B of this part, a credit union shall be deemed to be classified (Table 1 of this section)—
(1) Well capitalized if:
(i)(A) Net worth ratio. The credit union has a net worth ratio of 7.0 percent or greater; and
(B) Risk-based capital ratio. The credit union, if complex, has a risk-based capital ratio of 10 percent or greater; or
(ii) Complex credit union leverage ratio. (A) The complex credit union is a qualifying complex credit union that has opted into the CCULR framework under § 702.104(d) and it has a CCULR of 9.0 percent or greater; or
(B) The complex credit union is a qualifying complex credit union that has opted into the CCULR framework under § 702.104(d), is in the grace period, as defined in § 702.104(d)(7), and has a CCULR of 7.0 percent or greater.
(2) Adequately capitalized if:
(i) Net worth ratio. The credit union has a net worth ratio of 6.0 percent or greater; and
(ii) Risk-based capital ratio. The credit union, if complex, has a risk-based capital ratio of 8.0 percent or greater; and
(iii) Does not meet the definition of a well capitalized credit union.
(3) Undercapitalized if:
(i) Net worth ratio. The credit union has a net worth ratio of 4.0 percent or more but less than 6.0 percent; or
(ii) Risk-based capital ratio. The credit union, if complex, has a risk-based capital ratio of less than 8.0 percent.
(4) Significantly undercapitalized if:
(i) The credit union has a net worth ratio of 2.0 percent or more but less than 4.0 percent; or
(ii) The credit union has a net worth ratio of 4.0 percent or more but less than 5.0 percent, and either—
(A) Fails to submit an acceptable net worth restoration plan within the time prescribed in § 702.110;
(B) Materially fails to implement a net worth restoration plan approved by the NCUA Board; or
(C) Receives notice that a submitted net worth restoration plan has not been approved.
(5) Critically undercapitalized if it has a net worth ratio of less than 2.0 percent.
Table 1 to § 702.102—Capital Categories
| Capital classification | Net worth ratio | Risk-based capital ratio, if applicable | CCULR, if applicable | And subject to following condition(s) . . . | ||
|---|---|---|---|---|---|---|
| Well Capitalized | 7% or greater | And | 10% or greater | Or | 9% or greater * | |
| Adequately Capitalized | 6% or greater | And | 8% or greater | Or | N/A | And does not meet the criteria to be classified as well capitalized. |
| Undercapitalized | 4% to 5.99% | Or | Less than 8% | Or | N/A | |
| Significantly Undercapitalized | 2% to 3.99% | N/A | N/A | Or if “undercapitalized at | ||
| Critically Undercapitalized | Less than 2% | N/A | N/A |
* A qualifying complex credit union opting into the CCULR framework should refer to 12 CFR 702.104(d)(7) if its CCULR falls below 9.0 percent.
(b) Reclassification based on supervisory criteria other than net worth. The NCUA Board may reclassify a well capitalized credit union as adequately capitalized and may require an adequately capitalized or undercapitalized credit union to comply with certain mandatory or discretionary supervisory actions as if it were classified in the next lower capital category (each of such actions hereinafter referred to generally as “reclassification”) in the following circumstances:
(1) Unsafe or unsound condition. The NCUA Board has determined, after providing the credit union with notice and opportunity for hearing pursuant to § 747.2003 of this chapter, that the credit union is in an unsafe or unsound condition; or
(2) Unsafe or unsound practice. The NCUA Board has determined, after providing the credit union with notice and opportunity for hearing pursuant to § 747.2003 of this chapter, that the credit union has not corrected a material unsafe or unsound practice of which it was, or should have been, aware.
(c) Non-delegation. The NCUA Board may not delegate its authority to reclassify a credit union under paragraph (b) of this section.
(d) Consultation with state officials. The NCUA Board shall consult and seek to work cooperatively with the appropriate state official before reclassifying a federally insured state-chartered credit union under paragraph (b) of this section, and shall promptly notify the appropriate state official of its decision to reclassify.
§ 702.103 Applicability of risk-based capital measures.
For purposes of § 702.102, a credit union is defined as “complex” and a risk-based capital measure is applicable only if the credit union’s quarter-end total assets exceed five hundred million dollars ($500,000,000), as reflected in its most recent Call Report. A complex credit union may calculate its risk-based capital measure either by using the risk-based capital ratio under § 702.104(a) through (c), or, for a qualifying complex credit union opting into the CCULR framework, by using the CCULR framework under § 702.104(d).
§ 702.104 Risk-based capital ratio.
A complex credit union must calculate its risk-based capital measure in accordance with this section. A complex credit union may calculate its risk-based capital measure either by using the risk-based capital ratio under paragraphs (a) through (c) of this section, or, for a qualifying complex credit union opting into the CCULR framework, by using the CCULR framework under paragraph (d) of this section.
(a) Calculation of the risk-based capital ratio. To determine its risk-based capital ratio, a complex credit union must calculate the percentage, rounded to two decimal places, of its risk-based capital ratio numerator as described in paragraph (b) of this section, to its total risk-weighted assets as described in paragraph (c) of this section.
(b) Risk-based capital ratio numerator. The risk-based capital ratio numerator is the sum of the specific capital elements in paragraph (b)(1) of this section, minus the regulatory adjustments in paragraph (b)(2) of this section.
(1) Capital elements of the risk-based capital ratio numerator. The capital elements of the risk-based capital numerator are:
(i) Undivided earnings;
(ii) Appropriation for non-conforming investments;
(iii) Other reserves;
(iv) Equity acquired in merger;
(v) Net income
(vi) ALLL, maintained in accordance with GAAP;
(vii) The outstanding principal amount of Subordinated Debt treated as Regulatory Capital in accordance with § 702.407 and the outstanding principal amount of Grandfathered Secondary Capital treated as Regulatory Capital in accordance with § 702.414; and
(viii) Section 208 assistance included in net worth (as defined in § 702.2).
(2) Risk-based capital ratio numerator deductions. The elements deducted from the sum of the capital elements of the risk-based capital ratio numerator are:
(i) NCUSIF Capitalization Deposit;
(ii) Goodwill;
(iii) Other intangible assets;
(iv) Identified losses not reflected in the risk-based capital ratio numerator; and
(v) Mortgage servicing assets that exceed 25 percent of the sum of the capital elements in paragraph (b)(1) of this section, less deductions required under paragraphs (b)(2)(i) thorough (iv) of this section.
(c) Risk-weighted assets—(1) General. Risk-weighted assets includes risk- weighted on-balance sheet assets as described in paragraphs (c)(2) and (3) of this section, plus the risk-weighted off-balance sheet assets in paragraph (c)(4) of this section, plus the risk-weighted derivatives in paragraph (c)(5) of this section, less the risk-based capital ratio numerator deductions in paragraph (b)(2) of this section. If a particular asset, derivative contract, or off balance sheet item has features or characteristics that suggest it could potentially fit into more than one risk weight category, then a credit union shall assign the asset, derivative contract, or off balance sheet item to the risk weight category that most accurately and appropriately reflects its associated credit risk.
(2) Risk weights for on-balance sheet assets. The risk categories and weights for assets of a complex credit union are as follows:
(i) Category 1—zero percent risk weight. A credit union must assign a zero percent risk weight to:
(A) The balance of:
(1) Cash, currency and coin, including vault, automatic teller machine, and teller cash.
(2) share-secured loans, where the shares securing the loan are on deposit with the credit union.
(B) The exposure amount of:
(1) An obligation of the U.S. Government, its central bank, or a U.S. Government agency that is directly and unconditionally guaranteed, excluding detached security coupons, ex-coupon securities, and interest-only mortgage-backed-security STRIPS.
(2) Federal Reserve Bank stock and Central Liquidity Facility stock.
(3) An obligation of the Bank for International Settlements, the European Central Bank, the European Commission, the International Monetary Fund, the European Stability Mechanism, the European Financial Stability Facility, or an MDB.
(C) Insured balances due from FDIC-insured depositories or federally insured credit unions.
(D) Covered loans issued under the Small Business Administration’s Paycheck Protection Program, 15 U.S.C. 636(a)(36).
(ii) Category 2—20 percent risk weight. A credit union must assign a 20 percent risk weight to:
(A) The uninsured balances due from FDIC-insured depositories, federally insured credit unions, and all balances due from privately-insured credit unions.
(B) The exposure amount of:
(1) A non-subordinated obligation of the U.S. Government, its central bank, or a U.S. Government agency that is conditionally guaranteed, excluding interest-only mortgage-backed-security STRIPS.
(2) A non-subordinated obligation of a GSE other than an equity exposure or preferred stock, excluding interest-only GSE mortgage-backed-security STRIPS.
(3) Securities issued by PSEs that represent general obligation securities.
(4) Part 703 compliant investment funds that are restricted to holding only investments that qualify for a zero or 20 percent risk-weight under this section.
(5) Federal Home Loan Bank stock.
(C) The balances due from Federal Home Loan Banks.
(D) The balance of share-secured loans, where the shares securing the loan are on deposit with another depository institution.
(E) The portions of outstanding loans with a government guarantee.
(F) The portions of commercial loans secured with contractual compensating balances.
(iii) Category 3—50 percent risk weight. A credit union must assign a 50 percent risk weight to:
(A) The outstanding balance (net of government guarantees), including loans held for sale, of current first-lien residential real estate loans less than or equal to 35 percent of assets.
(B) The exposure amount of:
(1) Securities issued by PSEs in the U.S. that represent non-subordinated revenue obligation securities.
(2) Other non-subordinated, non-U.S. Government agency or non-GSE guaranteed, residential mortgage-backed security, excluding interest-only mortgage-backed security STRIPS.
(iv) Category 4—75 percent risk weight. A credit union must assign a 75 percent risk weight to the outstanding balance (net of government guarantees), including loans held for sale, of:
(A) Current first-lien residential real estate loans greater than 35 percent of assets.
(B) Current secured consumer loans.
(v) Category 5—100 percent risk weight. A credit union must assign a 100 percent risk weight to:
(A) The outstanding balance (net of government guarantees), including loans held for sale, of:
(1) First-lien residential real estate loans that are not current.
(2) Current junior-lien residential real estate loans less than or equal to 20 percent of assets.
(3) Current unsecured consumer loans.
(4) Current commercial loans, less contractual compensating balances that comprise less than 50 percent of assets.
(5) Loans to CUSOs.
(B) The exposure amount of:
(1) Industrial development bonds.
(2) Interest-only mortgage-backed security STRIPS.
(3) Part 703 compliant investment funds, with the option to use the look-through approaches in paragraph (c)(3)(iii)(B) of this section.
(4) Corporate debentures and commercial paper.
(5) Nonperpetual capital at corporate credit unions.
(6) General account permanent insurance.
(7) GSE equity exposure or preferred stock.
(8) Non-subordinated tranches of any investment, with the option to use the gross-up approach in paragraph (c)(3)(iii)(A) of this section.
(9) Natural person credit union Subordinated Debt, Grandfathered Secondary Capital, and loans or obligations issued by a privately insured credit union that are subordinate to the private insurer.
(C) All other assets listed on the statement of financial condition not specifically assigned a different risk weight under this subpart.
(vi) Category 6—150 percent risk weight. A credit union must assign a 150 percent risk weight to:
(A) The outstanding balance, net of government guarantees and including loans held for sale, of:
(1) Current junior-lien residential real estate loans that comprise more than 20 percent of assets.
(2) Junior-lien residential real estate loans that are not current.
(3) Consumer loans that are not current.
(4) Current commercial loans (net of contractual compensating balances), which comprise more than 50 percent of assets.
(5) Commercial loans (net of contractual compensating balances), which are not current.
(B) The exposure amount of:
(1) Perpetual contributed capital at corporate credit unions.
(2) Equity investments in CUSOs.
(vii) Category 7—250 percent risk weight. A credit union must assign a 250 percent risk weight to the carrying value of mortgage servicing assets not deducted from the risk-based capital numerator pursuant to § 702.104(b).
(viii) Category 8—300 percent risk weight. A credit union must assign a 300 percent risk weight to the exposure amount of:
(A) Publicly traded equity investments, other than a CUSO investment.
(B) Investment funds that do not meet the requirements under § 703.14(c) of this chapter, with the option to use the look-through approaches in paragraph (c)(3)(iii)(B) of this section.
(C) Separate account insurance, with the option to use the look-through approaches in paragraph (c)(3)(iii)(B) of this section.
(ix) Category 9—400 percent risk weight. A credit union must assign a 400 percent risk weight to the exposure amount of non-publicly traded equity investments, other than equity investments in CUSOs.
(x) Category 10—1,250 percent risk weight. A credit union must assign a 1,250 percent risk weight to the exposure amount of any subordinated tranche of any investment, with the option to use the gross-up approach in paragraph (c)(3)(iii)(A) of this section. However, a credit union may not use the gross-up approach for non-security beneficial interests.
(3) Alternative risk weights for certain on-balance sheet assets—(i) Non-significant equity exposures—(A) General. Notwithstanding the risk weights assigned in paragraph (c)(2) of this section, a credit union must assign a 100 percent risk weight to non-significant equity exposures.
(B) Determination of non-significant equity exposures. A credit union has non-significant equity exposures if the aggregate amount of its equity exposures does not exceed 10 percent of the sum of the credit union’s capital elements of the risk-based capital ratio numerator (as defined under paragraph (b)(1) of this section).
(C) Determination of the aggregate amount of equity exposures. When determining the aggregate amount of its equity exposures, a credit union must include the total amounts (as recorded on the statement of financial condition in accordance with GAAP) of the following:
(1) Equity investments in CUSOs,
(2) Perpetual contributed capital at corporate credit unions,
(3) Nonperpetual capital at corporate credit unions, and
(4) Equity investments subject to a risk weight in excess of 100 percent.
(ii) Charitable donation accounts. Notwithstanding the risk weights assigned in paragraph (c)(2) of this section, a credit union may assign a 100 percent risk weight to a charitable donation account.
(iii) Alternative approaches. Notwithstanding the risk weights assigned in paragraph (c)(2) of this section, a credit union may determine the risk weight of investment funds, and non-subordinated or subordinated tranches of any investment as follows:
(A) Gross-up approach. A credit union may use the gross-up approach under appendix A of this part to determine the risk weight of the carrying value of non-subordinated or subordinated tranches of any investment.
(B) Look-through approaches. A credit union may use one of the look-through approaches under appendix A of this part to determine the risk weight of the exposure amount of any investment funds, the holdings of separate account insurance, or both.
(4) Risk weights for off-balance sheet items. The risk weighted amounts for all off-balance sheet items are determined by multiplying the off-balance sheet exposure amount by the appropriate CCF and the assigned risk weight as follows:
(i) For the outstanding balance of loans transferred to a Federal Home Loan Bank under the mortgage partnership finance program, a 20 percent CCF and a 50 percent risk weight.
(ii) For other loans transferred with limited recourse, a 100 percent CCF applied to the off-balance sheet exposure and:
(A) For commercial loans, a 100 percent risk weight.
(B) For first-lien residential real estate loans, a 50 percent risk weight.
(C) For junior-lien residential real estate loans, a 100 percent risk weight.
(D) For all secured consumer loans, a 75 percent risk weight.
(E) For all unsecured consumer loans, a 100 percent risk weight.
(iii) For unfunded commitments:
(A) For a commitment that is unconditionally cancelable, a 0 percent CCF.
(B) For commercial loans, a 50 percent CCF with a 100 percent risk weight.
(C) For first-lien residential real estate loans, a 10 percent CCF with a 50 percent risk weight.
(D) For junior-lien residential real estate loans, a 10 percent CCF with a 100 percent risk weight.
(E) For all secured consumer loans, a 10 percent CCF with a 75 percent risk weight.
(F) For all unsecured consumer loans, a 10 percent CCF with a 100 percent risk weight.
(iv) For financial standby letter of credits, a 100 percent CCF and a 100 percent risk weight.
(v) For forward agreements that are not derivative contracts, a 100 percent CCF and a 100 percent risk weight.
(vi) For sold credit protection through guarantees and credit derivatives, a 100 percent CCF and a 100 percent risk weight for guarantees; for credit derivatives the risk weight is determined by the applicable provisions of 12 CFR 324.34 or 324.35.
(vii) For off-balance sheet securitization exposures, a 100 percent CCF, and the risk weight is determined as if the exposure is an on-balance sheet securitization exposure.
(viii) For securities borrowing or lending transactions, a 100 percent CCF and a 100 percent risk weight. A credit union may recognize the credit risk mitigation benefits of financial collateral, as defined under 12 CFR 324.2, by risk weighting the collateralized portion of the exposure under the applicable provisions of 12 CFR 324.35 or 324.37.
(ix) For the off-balance sheet portion of repurchase transactions, a 100 percent CCF and a 100 percent risk weight. A credit union may recognize the credit risk mitigation benefits of financial collateral, as defined by 12 CFR 324.2, by risk weighting the collateralized portion of the exposure under the applicable provisions of 12 CFR 324.35 or 324.37.
(x) For all other off-balance sheet exposures not explicitly provided a CCF or risk weight in this paragraph (c) that meet the definition of a commitment, a 100 percent CCF and a 100 percent risk weight.
(5) Derivative contracts. A complex credit union must assign a risk-weighted amount to any derivative contracts as determined under § 702.105.
(6) Asset Securitizations Issued by Complex Credit Unions. A credit union must follow the requirements of the applicable provisions of 12 CFR 324.41 when it transfers exposures in connection with a securitization. A credit union may only exclude the transferred exposures from the calculation of its risk-weighted assets if each condition in 12 CFR 324.41 is satisfied. A credit union that meets these conditions, but retains any credit risk for the transferred exposures, must hold risk-based capital against the credit risk it retains in connection with the securitization.
(d) Complex Credit Union Leverage Ratio (CCULR) Framework—(1) General. A qualifying complex credit union that has opted into the CCULR framework under paragraph (d)(5) of this section is considered to have met the capital ratio requirements for the well capitalized capital category under § 702.102(a)(1) if it has a CCULR of 9.0 percent or greater.
(2) Qualifying Complex Credit Union. For purposes of this part, a qualifying complex credit union means a complex credit union under § 702.103 that satisfies all of the following criteria:
(i) Has a CCULR of 9.0 percent or greater;
(ii) Has total off-balance sheet exposures of 25 percent or less of its total assets;
(iii) Has the sum of total trading assets and total trading liabilities of 5 percent or less of its total assets; and
(iv) Has the sum of total goodwill and total other intangible assets of 2 percent or less of its total assets.
(3) Calculation of Qualifying Criteria. Each of the qualifying criteria in paragraph (d)(2) of this section is calculated based on data reported in the Call Report as of the end of the most recent calendar quarter.
(4) Calculation of the CCULR. A qualifying complex credit union opting into the CCULR framework under this paragraph (d) calculates its CCULR in the same manner as its net worth ratio under § 702.2.
(5) Opting into the CCULR Framework. (i) A qualifying complex credit union may opt into the CCULR framework by completing the applicable reporting requirements of its Call Report.
(ii) A qualifying complex credit union can opt into the CCULR framework at the end of each calendar quarter.
(6) Opting Out of the CCULR Framework. (i) A qualifying complex credit union may voluntarily opt out of the framework at the end of each calendar quarter.
(ii) [Reserved]
(7) Treatment when ceasing to meet the qualifying complex credit union requirements. (i) If a qualifying complex credit union that has opted into the CCULR framework ceases to meet the qualifying criteria in paragraph (d)(2) of this section, the credit union has two calendar quarters (grace period) either to satisfy the requirements to be a qualifying complex credit union or to calculate its risk-based capital ratio under paragraphs (a) through (c) of this section.
(ii) The grace period begins at the end of the calendar quarter in which the credit union no longer satisfies the criteria to be a qualifying complex credit union. The grace period ends on the last day of the second consecutive calendar quarter following the beginning of the grace period.
(iii) During the grace period, the credit union continues to be treated as a qualifying complex credit union for the purpose of this part and must continue calculating and reporting its CCULR, unless the qualifying complex credit union has opted out of using the CCULR framework under paragraph (d)(6) of this section. The qualifying complex credit union also continues to be considered to have met the capital ratio requirements for the well capitalized capital category under § 702.102(a)(1). However, if the qualifying complex credit union has a CCULR of less than seven percent, it will not be considered to have met the capital ratio requirements for the well capitalized capital category under § 702.102(a)(1) and its capital classification is determined by its net worth ratio.
(iv) [Reserved]
(v) A qualifying complex credit union that ceases to meet the qualifying criteria in paragraph (d)(2) of this section as a result of a merger or acquisition that is not a supervisory merger or combination has no grace period and must comply with the risk-based capital ratio under paragraphs (a) through (c) of this section in the quarter it ceases to be a qualifying complex credit union.
(e) Reservation of authority. The NCUA may require a complex credit union that otherwise would meet the definition of a qualifying complex credit union to comply with the risk-based capital ratio under paragraphs (a) through (c) of this section if the NCUA determines that the complex credit union’s capital requirements under paragraph (d) of this section are not commensurate with its risks. Any credit union required to comply with the risk-based capital ratio under this paragraph (e), would be permitted a minimum of a two-quarter grace period before being subject to risk-based capital requirements.
§ 702.105 Derivative contracts.
(a) OTC interest rate derivative contracts—(1) Exposure amount—(i) Single OTC interest rate derivative contract. Except as modified by paragraph (a)(2) of this section, the exposure amount for a single OTC interest rate derivative contract that is not subject to a qualifying master netting agreement is equal to the sum of the credit union’s current credit exposure and potential future credit exposure (PFE) on the OTC interest rate derivative contract.
(A) Current credit exposure. The current credit exposure for a single OTC interest rate derivative contract is the greater of the fair value of the OTC interest rate derivative contract or zero.
(B) PFE. (1) The PFE for a single OTC interest rate derivative contract, including an OTC interest rate derivative contract with a negative fair value, is calculated by multiplying the notional principal amount of the OTC interest rate derivative contract by the appropriate conversion factor in Table 1 of this section.
(2) A credit union must use an OTC interest rate derivative contract’s effective notional principal amount (that is, the apparent or stated notional principal amount multiplied by any multiplier in the OTC interest rate derivative contract) rather than the apparent or stated notional principal amount in calculating PFE.
Table 1 to § 702.105—Conversion Factor Matrix for Interest Rate Derivative Contracts
2
| Remaining maturity | Conversion factor |
|---|---|
| One year or less | 0.00 |
| Greater than one year and less than or equal to five years | 0.005 |
| Greater than five years | 0.015 |
2 Non-interest rate derivative contracts are addressed in paragraph (d) of this section.
(ii) Multiple OTC interest rate derivative contracts subject to a qualifying master netting agreement. Except as modified by paragraph (a)(2) of this section, the exposure amount for multiple OTC interest rate derivative contracts subject to a qualifying master netting agreement is equal to the sum of the net current credit exposure and the adjusted sum of the PFE amounts for all OTC interest rate derivative contracts subject to the qualifying master netting agreement.
(A) Net current credit exposure. The net current credit exposure is the greater of the net sum of all positive and negative fair value of the individual OTC interest rate derivative contracts subject to the qualifying master netting agreement or zero.
(B) Adjusted sum of the PFE amounts (Anet). The adjusted sum of the PFE amounts is calculated as Anet = (0.4 × Agross) + (0.6 × NGR × Agross), where:
(1) Agross equals the gross PFE (that is, the sum of the PFE amounts as determined under paragraph (a)(1)(i)(B) of this section for each individual derivative contract subject to the qualifying master netting agreement); and
(2) Net-to-gross Ratio (NGR) equals the ratio of the net current credit exposure to the gross current credit exposure. In calculating the NGR, the gross current credit exposure equals the sum of the positive current credit exposures (as determined under paragraph (a)(1)(i) of this section) of all individual derivative contracts subject to the qualifying master netting agreement.
(2) Recognition of credit risk mitigation of collateralized OTC derivative contracts. A credit union may recognize credit risk mitigation benefits of financial collateral that secures an OTC derivative contract or multiple OTC derivative contracts subject to a qualifying master netting agreement (netting set) by following the requirements of paragraph (c) of this section.
(b) Cleared transactions for interest rate derivatives—(1) General requirements. A credit union must use the methodologies described in paragraph (b) of this section to calculate risk-weighted assets for a cleared transaction.
(2) Risk-weighted assets for cleared transactions. (i) To determine the risk weighted asset amount for a cleared transaction, a credit union must multiply the trade exposure amount for the cleared transaction, calculated in accordance with paragraph (b)(3) of this section, by the risk weight appropriate for the cleared transaction, determined in accordance with paragraph (b)(4) of this section.
(ii) A credit union’s total risk-weighted assets for cleared transactions is the sum of the risk-weighted asset amounts for all its cleared transactions.
(3) Trade exposure amount. For a cleared transaction the trade exposure amount equals:
(i) The exposure amount for the derivative contract or netting set of derivative contracts, calculated using the methodology used to calculate exposure amount for OTC interest rate derivative contracts under paragraph (a) of this section; plus
(ii) The fair value of the collateral posted by the credit union and held by the, clearing member, or custodian.
(4) Cleared transaction risk weights. A credit union must apply a risk weight of:
(i) Two percent if the collateral posted by the credit union to the DCO or clearing member is subject to an arrangement that prevents any losses to the credit union due to the joint default or a concurrent insolvency, liquidation, or receivership proceeding of the clearing member and any other clearing member clients of the clearing member; and the clearing member credit union has conducted sufficient legal review to conclude with a well-founded basis (and maintains sufficient written documentation of that legal review) that in the event of a legal challenge (including one resulting from an event of default or from liquidation, insolvency, or receivership proceedings) the relevant court and administrative authorities would find the arrangements to be legal, valid, binding and enforceable under the law of the relevant jurisdictions; or
(ii) Four percent if the requirements of paragraph (b)(4)(i) are not met.
(5) Recognition of credit risk mitigation of collateralized OTC derivative contracts. A credit union may recognize the credit risk mitigation benefits of financial collateral that secures a cleared derivative contract by following the requirements of paragraph (c) of this section.
(c) Recognition of credit risk mitigation of collateralized interest rate derivative contracts. (1) A credit union may recognize the credit risk mitigation benefits of financial collateral that secures an OTC interest rate derivative contract or multiple interest rate derivative contracts subject to a qualifying master netting agreement (netting set) or clearing arrangement by using the simple approach in paragraph (c)(3) of this section.
(2) As an alternative to the simple approach, a credit union may recognize the credit risk mitigation benefits of financial collateral that secures such a contract or netting set if the financial collateral is marked-to-fair value on a daily basis and subject to a daily margin maintenance requirement by applying a risk weight to the exposure as if it were uncollateralized and adjusting the exposure amount calculated under paragraph (a) or (b) of this section using the collateral approach in paragraph (c)(3) of this section. The credit union must substitute the exposure amount calculated under paragraphs (b) or (c) of this section in the equation in paragraph (c)(3) of this section.
(3) Collateralized transactions—(i) General. A credit union may use the approach in paragraph (c)(3)(ii) of this section to recognize the risk-mitigating effects of financial collateral.
(ii) Simple collateralized derivatives approach. To qualify for the simple approach, the financial collateral must meet the following requirements:
(A) The collateral must be subject to a collateral agreement for at least the life of the exposure;
(B) The collateral must be revalued at least every six months; and
(C) The collateral and the exposure must be denominated in the same currency.
(iii) Risk weight substitution. (A) A credit union may apply a risk weight to the portion of an exposure that is secured by the fair value of financial collateral (that meets the requirements for the simple collateralized approach of this section) based on the risk weight assigned to the collateral as established under § 702.104(c).
(B) A credit union must apply a risk weight to the unsecured portion of the exposure based on the risk weight applicable to the exposure under this subpart.
(iv) Exceptions to the 20 percent risk weight floor and other requirements. Notwithstanding the simple collateralized derivatives approach in paragraph (c)(3)(ii) of this section:
(A) A credit union may assign a zero percent risk weight to an exposure to a derivatives contract that is marked-to-market on a daily basis and subject to a daily margin maintenance requirement, to the extent the contract is collateralized by cash on deposit.
(B) A credit union may assign a 10 percent risk weight to an exposure to a derivatives contract that is marked-to-market daily and subject to a daily margin maintenance requirement, to the extent that the contract is collateralized by an exposure that qualifies for a zero percent risk weight under § 702.104(c)(2)(i).
(v) A credit union may assign a zero percent risk weight to the collateralized portion of an exposure where:
(A) The financial collateral is cash on deposit; or
(B) The financial collateral is an exposure that qualifies for a zero percent risk weight under § 702.104(c)(2)(i), and the credit union has discounted the fair value of the collateral by 20 percent.
(4) Collateral haircut approach. (i) A credit union may recognize the credit risk mitigation benefits of financial collateral that secures a collateralized derivative contract by using the standard supervisory haircuts in paragraph (c)(3) of this section.
(ii) The collateral haircut approach applies to both OTC and cleared interest rate derivatives contracts discussed in this section.
(iii) A credit union must determine the exposure amount for a collateralized derivative contracts by setting the exposure amount equal to the max {0,[(exposure amount − value of collateral) + (sum of current fair value of collateral instruments * market price volatility haircut of the collateral instruments)]}, where:
(A) The value of the exposure equals the exposure amount for OTC interest rate derivative contracts (or netting set) calculated under paragraphs (a)(1)(i) and (ii) of this section.
(B) The value of the exposure equals the exposure amount for cleared interest rate derivative contracts (or netting set) calculated under paragraph (b)(3) of this section.
(C) The value of the collateral is the sum of cash and all instruments under the transaction (or netting set).
(D) The sum of current fair value of collateral instruments as of the measurement date.
(E) A credit union must use the standard supervisory haircuts for market price volatility in Table 2 to this section.
Table 2 to § 702.105—Standard Supervisory Market Price Volatility Haircuts
[Based on a 10 business-day holding period]
| Residual maturity | Haircut (in percent) assigned based on: | |
|---|---|---|
| Collateral risk weight (in percent) | ||
| Zero | 20 or 50 | |
| Less than or equal to 1 year | 0.5 | 1.0 |
| Greater than 1 year and less than or equal to 5 years | 2.0 | 3.0 |
| Greater than 5 years | 4.0 | 6.0 |
| Cash collateral held | Zero | |
| Other exposure types | 25.0 | |
(d) All other derivative contracts and transactions. Credit unions must follow the requirements of the applicable provisions of 12 CFR part 324, when assigning risk weights to exposure amounts for derivatives contracts not addressed in paragraphs (a) or (b) of this section.
§ 702.106 Prompt corrective action for adequately capitalized credit unions.
(a) Earnings retention. Beginning on the effective date of classification as adequately capitalized or lower, a federally insured credit union must increase the dollar amount of its net worth quarterly either in the current quarter, or on average over the current and three preceding quarters, by an amount equivalent to at least 1/10th percent (0.1%) of its total assets (or more by choice), until it is well capitalized.
(b) Decrease in retention. Upon written application received no later than 14 days before the quarter end, the NCUA Board, on a case-by-case basis, may permit a credit union to increase the dollar amount of its net worth by an amount that is less than the amount required under paragraph (a) of this section, to the extent the NCUA Board determines that such lesser amount:
(1)(i) Is necessary to avoid a significant redemption of shares; and
(ii) Would further the purpose of this part.
(2) Notwithstanding paragraph (a) of this section, from February 28, 2022, until March 31, 2023, for a credit union that is adequately capitalized:
(i) The NCUA Board may issue an administrative order specifying temporary revisions to the earnings retention requirement, to the extent the NCUA Board determines that such lesser amount—
(A) Is necessary to avoid a significant redemption of shares; and
(B) Would further the purpose of this part.
(ii) Despite the issuance of an administrative order under paragraph (b)(2) of the section, the Regional Director may require a credit union to submit an earnings retention waiver under paragraph (b)(1) if the credit union poses an undue risk the National Credit Union Share Insurance Fund or exhibits material safety and soundness concerns.
(c) Decrease by FISCU. The NCUA Board shall consult and seek to work cooperatively with the appropriate state official before permitting a federally insured state-chartered credit union to decrease its earnings retention under paragraph (b) of this section.
(d) Periodic review. A decision under paragraph (b) of this section to permit a credit union to decrease its earnings retention is subject to quarterly review and revocation except when the credit union is operating under an approved net worth restoration plan that provides for decreasing its earnings retention as provided under paragraph (b) of this section.
§ 702.107 Prompt corrective action for undercapitalized credit unions.
(a) Mandatory supervisory actions by credit union. A credit union which is undercapitalized must—
(1) Earnings retention. Increase net worth in accordance with § 702.106;
(2) Submit net worth restoration plan. Submit a net worth restoration plan pursuant to § 702.111, provided however, that a credit union in this category having a net worth ratio of less than five percent (5%) which fails to timely submit such a plan, or which materially fails to implement an approved plan, is classified significantly undercapitalized pursuant to § 702.102(a)(4)(i);
(3) Restrict increase in assets. Beginning the effective date of classification as undercapitalized or lower, not permit the credit union’s assets to increase beyond its total assets for the preceding quarter unless—
(i) Plan approved. The NCUA Board has approved a net worth restoration plan which provides for an increase in total assets and—
(A) The assets of the credit union are increasing consistent with the approved plan; and
(B) The credit union is implementing steps to increase the net worth ratio consistent with the approved plan;
(ii) Plan not approved. The NCUA Board has not approved a net worth restoration plan and total assets of the credit union are increasing because of increases since quarter-end in balances of:
(A) Total accounts receivable and accrued income on loans and investments; or
(B) Total cash and cash equivalents; or
(C) Total loans outstanding, not to exceed the sum of total assets plus the quarter-end balance of unused commitments to lend and unused lines of credit provided however that a credit union which increases a balance as permitted under paragraphs (a)(3)(ii)(A), (B) or (C) of this section cannot offer rates on shares in excess of prevailing rates on shares in its relevant market area, and cannot open new branches;
(4) Restrict member business loans. Beginning the effective date of classification as undercapitalized or lower, not increase the total dollar amount of member business loans (defined as loans outstanding and unused commitments to lend) as of the preceding quarter-end unless it is granted an exception under 12 U.S.C. 1757a(b).
(b) Second tier discretionary supervisory actions by NCUA. Subject to the applicable procedures for issuing, reviewing and enforcing directives set forth in subpart L of part 747 of this chapter, the NCUA Board may, by directive, take one or more of the following actions with respect to an undercapitalized credit union having a net worth ratio of less than five percent (5%), or a director, officer or employee of such a credit union, if it determines that those actions are necessary to carry out the purpose of this part:
(1) Requiring prior approval for acquisitions, branching, new lines of business. Prohibit a credit union from, directly or indirectly, acquiring any interest in any business entity or financial institution, establishing or acquiring any additional branch office, or engaging in any new line of business, unless the NCUA Board has approved the credit union’s net worth restoration plan, the credit union is implementing its plan, and the NCUA Board determines that the proposed action is consistent with and will further the objectives of that plan;
(2) Restricting transactions with and ownership of a CUSO. Restrict the credit union’s transactions with a CUSO, or require the credit union to reduce or divest its ownership interest in a CUSO;
(3) Restricting dividends paid. Restrict the dividend rates the credit union pays on shares to the prevailing rates paid on comparable accounts and maturities in the relevant market area, as determined by the NCUA Board, except that dividend rates already declared on shares acquired before imposing a restriction under this paragraph may not be retroactively restricted;
(4) Prohibiting or reducing asset growth. Prohibit any growth in the credit union’s assets or in a category of assets, or require the credit union to reduce its assets or a category of assets;
(5) Alter, reduce or terminate activity. Require the credit union or its CUSO to alter, reduce, or terminate any activity which poses excessive risk to the credit union;
(6) Prohibiting nonmember deposits. Prohibit the credit union from accepting all or certain nonmember deposits;
(7) Dismissing director or senior executive officer. Require the credit union to dismiss from office any director or senior executive officer, provided however, that a dismissal under this clause shall not be construed to be a formal administrative action for removal under 12 U.S.C. 1786(g);
(8) Employing qualified senior executive officer. Require the credit union to employ qualified senior executive officers (who, if the NCUA Board so specifies, shall be subject to its approval); and
(9) Other action to carry out prompt corrective action. Restrict or require such other action by the credit union as the NCUA Board determines will carry out the purpose of this part better than any of the actions prescribed in paragraphs (b)(1) through (8) of this section.
(c) First tier application of discretionary supervisory actions. An undercapitalized credit union having a net worth ratio of five percent (5%) or more, or which is classified undercapitalized by reason of failing to maintain a risk-based capital ratio equal to or greater than 8 percent under § 702.104, is subject to the discretionary supervisory actions in paragraph (b) of this section if it fails to comply with any mandatory supervisory action in paragraph (a) of this section or fails to timely implement an approved net worth restoration plan under § 702.111, including meeting its prescribed steps to increase its net worth ratio.
§ 702.108 Prompt corrective action for significantly undercapitalized credit unions.
(a) Mandatory supervisory actions by credit union. A credit union which is significantly undercapitalized must—
(1) Earnings retention. Increase net worth in accordance with § 702.106;
(2) Submit net worth restoration plan. Submit a net worth restoration plan pursuant to § 702.111;
(3) Restrict increase in assets. Not permit the credit union’s total assets to increase except as provided in § 702.107(a)(3); and
(4) Restrict member business loans. Not increase the total dollar amount of member business loans (defined as loans outstanding and unused commitments to lend) as provided in § 702.107(a)(4).
(b) Discretionary supervisory actions by NCUA. Subject to the applicable procedures for issuing, reviewing and enforcing directives set forth in subpart L of part 747 of this chapter, the NCUA Board may, by directive, take one or more of the following actions with respect to any significantly undercapitalized credit union, or a director, officer or employee of such credit union, if it determines that those actions are necessary to carry out the purpose of this part:
(1) Requiring prior approval for acquisitions, branching, new lines of business. Prohibit a credit union from, directly or indirectly, acquiring any interest in any business entity or financial institution, establishing or acquiring any additional branch office, or engaging in any new line of business, except as provided in § 702.107(b)(1);
(2) Restricting transactions with and ownership of CUSO. Restrict the credit union’s transactions with a CUSO, or require the credit union to divest or reduce its ownership interest in a CUSO;
(3) Restricting dividends paid. Restrict the dividend rates that the credit union pays on shares as provided in § 702.107(b)(3);
(4) Prohibiting or reducing asset growth. Prohibit any growth in the credit union’s assets or in a category of assets, or require the credit union to reduce assets or a category of assets;
(5) Alter, reduce or terminate activity. Require the credit union or its CUSO(s) to alter, reduce, or terminate any activity which poses excessive risk to the credit union;
(6) Prohibiting nonmember deposits. Prohibit the credit union from accepting all or certain nonmember deposits;
(7) New election of directors. Order a new election of the credit union’s board of directors;
(8) Dismissing director or senior executive officer. Require the credit union to dismiss from office any director or senior executive officer, provided however, that a dismissal under this clause shall not be construed to be a formal administrative action for removal under 12 U.S.C. 1786(g);
(9) Employing qualified senior executive officer. Require the credit union to employ qualified senior executive officers (who, if the NCUA Board so specifies, shall be subject to its approval);
(10) Restricting senior executive officers’ compensation. Except with the prior written approval of the NCUA Board, limit compensation to any senior executive officer to that officer’s average rate of compensation (excluding bonuses and profit sharing) during the four (4) calendar quarters preceding the effective date of classification of the credit union as significantly undercapitalized, and prohibit payment of a bonus or profit share to such officer;
(11) Other actions to carry out prompt corrective action. Restrict or require such other action by the credit union as the NCUA Board determines will carry out the purpose of this part better than any of the actions prescribed in paragraphs (b)(1) through (10) of this section; and
(12) Requiring merger. Require the credit union to merge with another financial institution if one or more grounds exist for placing the credit union into conservatorship pursuant to 12 U.S.C. 1786(h)(1)(F), or into liquidation pursuant to 12 U.S.C. 1787(a)(3)(A)(i).
(c) Discretionary conservatorship or liquidation if no prospect of becoming adequately capitalized. Notwithstanding any other actions required or permitted to be taken under this section, when a credit union becomes significantly undercapitalized (including by reclassification under § 702.102(b)), the NCUA Board may place the credit union into conservatorship pursuant to 12 U.S.C. 1786(h)(1)(F), or into liquidation pursuant to 12 U.S.C. 1787(a)(3)(A)(i), provided that the credit union has no reasonable prospect of becoming adequately capitalized.
§ 702.109 Prompt corrective action for critically undercapitalized credit unions.
(a) Mandatory supervisory actions by credit union. A credit union which is critically undercapitalized must—
(1) Earnings retention. Increase net worth in accordance with § 702.106;
(2) Submit net worth restoration plan. Submit a net worth restoration plan pursuant to § 702.111;
(3) Restrictions on payments on Subordinated Debt. Beginning 60 days after the effective date of a federally insured, natural person credit union being classified by the NCUA as “critically undercapitalized”, that credit union shall not pay principal of or interest on its Subordinated Debt, except that unpaid interest shall continue to accrue under the terms of the related Subordinated Debt Note (as defined in subpart D of this part), to the extent permitted by law;
(4) Restrict increase in assets. Not permit the credit union’s total assets to increase except as provided in § 702.107(a)(3); and
(5) Restrict member business loans. Not increase the total dollar amount of member business loans (defined as loans outstanding and unused commitments to lend) as provided in § 702.107(a)(4).
(b) Discretionary supervisory actions by NCUA. Subject to the applicable procedures for issuing, reviewing and enforcing directives set forth in subpart L of part 747 of this chapter, the NCUA Board may, by directive, take one or more of the following actions with respect to any critically undercapitalized credit union, or a director, officer or employee of such credit union, if it determines that those actions are necessary to carry out the purpose of this part:
(1) Requiring prior approval for acquisitions, branching, new lines of business. Prohibit a credit union from, directly or indirectly, acquiring any interest in any business entity or financial institution, establishing or acquiring any additional branch office, or engaging in any new line of business, except as provided by § 702.107(b)(1);
(2) Restricting transactions with and ownership of CUSO. Restrict the credit union’s transactions with a CUSO, or require the credit union to divest or reduce its ownership interest in a CUSO;
(3) Restricting dividends paid. Restrict the dividend rates that the credit union pays on shares as provided in § 702.107(b)(3);
(4) Prohibiting or reducing asset growth. Prohibit any growth in the credit union’s assets or in a category of assets, or require the credit union to reduce assets or a category of assets;
(5) Alter, reduce or terminate activity. Require the credit union or its CUSO(s) to alter, reduce, or terminate any activity which poses excessive risk to the credit union;
(6) Prohibiting nonmember deposits. Prohibit the credit union from accepting all or certain nonmember deposits;
(7) New election of directors. Order a new election of the credit union’s board of directors;
(8) Dismissing director or senior executive officer. Require the credit union to dismiss from office any director or senior executive officer, provided however, that a dismissal under this clause shall not be construed to be a formal administrative action for removal under 12 U.S.C. 1786(g);
(9) Employing qualified senior executive officer. Require the credit union to employ qualified senior executive officers (who, if the NCUA Board so specifies, shall be subject to its approval);
(10) Restricting senior executive officers’ compensation. Reduce or, with the prior written approval of the NCUA Board, limit compensation to any senior executive officer to that officer’s average rate of compensation (excluding bonuses and profit sharing) during the four (4) calendar quarters preceding the effective date of classification of the credit union as critically undercapitalized, and prohibit payment of a bonus or profit share to such officer;
(11) Restrictions on payments on Grandfathered Secondary Capital. Beginning 60 days after the effective date of classification of a credit union as “critically undercapitalized”, prohibit payments of principal, dividends or interest on the credit union’s Grandfathered Secondary Capital (as defined in subpart D of this part), except that unpaid dividends or interest shall continue to accrue under the terms of the account to the extent permitted by law;
(12) Requiring prior approval. Require a critically undercapitalized credit union to obtain the NCUA Board’s prior written approval before doing any of the following:
(i) Entering into any material transaction not within the scope of an approved net worth restoration plan (or approved revised business plan under subpart C of this part);
(ii) Extending credit for transactions deemed highly leveraged by the NCUA Board or, if state-chartered, by the appropriate state official;
(iii) Amending the credit union’s charter or bylaws, except to the extent necessary to comply with any law, regulation, or order;
(iv) Making any material change in accounting methods; and
(v) Paying dividends or interest on new share accounts at a rate exceeding the prevailing rates of interest on insured deposits in its relevant market area;
(13) Other action to carry out prompt corrective action. Restrict or require such other action by the credit union as the NCUA Board determines will carry out the purpose of this part better than any of the actions prescribed in paragraphs (b)(1) through (12) of this section; and
(14) Requiring merger. Require the credit union to merge with another financial institution if one or more grounds exist for placing the credit union into conservatorship pursuant to 12 U.S.C. 1786(h)(1)(F), or into liquidation pursuant to 12 U.S.C. 1787(a)(3)(A)(i).
(c) Mandatory conservatorship, liquidation or action in lieu thereof—(1) Action within 90 days. Notwithstanding any other actions required or permitted to be taken under this section (and regardless of a credit union’s prospect of becoming adequately capitalized), the NCUA Board must, within 90 calendar days after the effective date of classification of a credit union as critically undercapitalized—
(i) Conservatorship. Place the credit union into conservatorship pursuant to 12 U.S.C. 1786(h)(1)(G); or
(ii) Liquidation. Liquidate the credit union pursuant to 12 U.S.C. 1787(a)(3)(A)(ii); or
(iii) Other corrective action. Take other corrective action, in lieu of conservatorship or liquidation, to better achieve the purpose of this part, provided that the NCUA Board documents why such action in lieu of conservatorship or liquidation would do so, provided however, that other corrective action may consist, in whole or in part, of complying with the quarterly timetable of steps and meeting the quarterly net worth targets prescribed in an approved net worth restoration plan.
(2) Renewal of other corrective action. A determination by the NCUA Board to take other corrective action in lieu of conservatorship or liquidation under paragraph (c)(1)(iii) of this section shall expire after an effective period ending no later than 180 calendar days after the determination is made, and the credit union shall be immediately placed into conservatorship or liquidation under paragraphs (c)(1)(i) and (ii) of this section, unless the NCUA Board makes a new determination under paragraph (c)(1)(iii) of this section before the end of the effective period of the prior determination;
(3) Mandatory liquidation after 18 months—(i) Generally. Notwithstanding paragraphs (c)(1) and (2) of this section, the NCUA Board must place a credit union into liquidation if it remains critically undercapitalized for a full calendar quarter, on a monthly average basis, following a period of 18 months from the effective date the credit union was first classified critically undercapitalized.
(ii) Exception. Notwithstanding paragraph (c)(3)(i) of this section, the NCUA Board may continue to take other corrective action in lieu of liquidation if it certifies that the credit union—
(A) Has been in substantial compliance with an approved net worth restoration plan requiring consistent improvement in net worth since the date the net worth restoration plan was approved;
(B) Has positive net income or has an upward trend in earnings that the NCUA Board projects as sustainable; and
(C) Is viable and not expected to fail.
(iii) Review of exception. The NCUA Board shall, at least quarterly, review the certification of an exception to liquidation under paragraph (c)(3)(ii) of this section and shall either—
(A) Recertify the credit union if it continues to satisfy the criteria of paragraph (c)(3)(ii) of this section; or
(B) Promptly place the credit union into liquidation, pursuant to 12 U.S.C. 1787(a)(3)(A)(ii), if it fails to satisfy the criteria of paragraph (c)(3)(ii) of this section.
(4) Nondelegation. The NCUA Board may not delegate its authority under paragraph (c) of this section, unless the credit union has less than $5,000,000 in total assets. A credit union shall have a right of direct appeal to the NCUA Board of any decision made by delegated authority under this section within ten (10) calendar days of the date of that decision.
(d) Mandatory liquidation of insolvent federal credit union. In lieu of paragraph (c) of this section, a critically undercapitalized federal credit union that has a net worth ratio of less than zero percent (0%) may be placed into liquidation on grounds of insolvency pursuant to 12 U.S.C. 1787(a)(1)(A).
§ 702.110 Consultation with state officials on proposed prompt corrective action.
(a) Consultation on proposed conservatorship or liquidation. Before placing a federally insured state-chartered credit union into conservatorship (pursuant to 12 U.S.C. 1786(h)(1)(F) or (G)) or liquidation (pursuant to 12 U.S.C. 1787(a)(3)) as permitted or required under subparts A or B of this part to facilitate prompt corrective action—
(1) The NCUA Board shall seek the views of the appropriate state official (as defined in § 702.2), and give him or her an opportunity to take the proposed action;
(2) The NCUA Board shall, upon timely request of the appropriate state official, promptly provide him or her with a written statement of the reasons for the proposed conservatorship or liquidation, and reasonable time to respond to that statement; and
(3) If the appropriate state official makes a timely written response that disagrees with the proposed conservatorship or liquidation and gives reasons for that disagreement, the NCUA Board shall not place the credit union into conservatorship or liquidation unless it first considers the views of the appropriate state official and determines that—
(i) The NCUSIF faces a significant risk of loss if the credit union is not placed into conservatorship or liquidation; and
(ii) Conservatorship or liquidation is necessary either to reduce the risk of loss, or to reduce the expected loss, to the NCUSIF with respect to the credit union.
(b) Nondelegation. The NCUA Board may not delegate any determination under paragraph (a)(3) of this section.
(c) Consultation on proposed discretionary action. The NCUA Board shall consult and seek to work cooperatively with the appropriate state official before taking any discretionary supervisory action under §§ 702.107(b), 702.108(b), 702.109(b), 702.204(b) and 702.205(b) with respect to a federally insured state-chartered credit union; shall provide prompt notice of its decision to the appropriate state official; and shall allow the appropriate state official to take the proposed action independently or jointly with NCUA.
§ 702.111 Net worth restoration plans (NWRP).
(a) Schedule for filing—(1) Generally. A credit union shall file a written net worth restoration plan (NWRP) with the appropriate Regional Director and, if state-chartered, the appropriate state official, within 45 calendar days of the effective date of classification as either undercapitalized, significantly undercapitalized or critically undercapitalized, unless the NCUA Board notifies the credit union in writing that its NWRP is to be filed within a different period.
(2) Exception. An otherwise adequately capitalized credit union that is reclassified undercapitalized on safety and soundness grounds under § 702.102(b) is not required to submit a NWRP solely due to the reclassification, unless the NCUA Board notifies the credit union that it must submit an NWRP.
(3) Filing of additional plan. Notwithstanding paragraph (a)(1) of this section, a credit union that has already submitted and is operating under a NWRP approved under this section is not required to submit an additional NWRP due to a change in net worth category (including by reclassification under § 702.102(b)), unless the NCUA Board notifies the credit union that it must submit a new NWRP. A credit union that is notified to submit a new or revised NWRP shall file the NWRP in writing with the appropriate Regional Director within 30 calendar days of receiving such notice, unless the NCUA Board notifies the credit union in writing that the NWRP is to be filed within a different period.
(4) Failure to timely file plan. When a credit union fails to timely file an NWRP pursuant to this paragraph, the NCUA Board shall promptly notify the credit union that it has failed to file an NWRP and that it has 15 calendar days from receipt of that notice within which to file an NWRP.
(b) Assistance to small credit unions. Upon timely request by a credit union having total assets of less than $10 million (regardless how long it has been in operation), the NCUA Board shall provide assistance in preparing an NWRP required to be filed under paragraph (a) of this section.
(c) Contents of NWRP. An NWRP must—
(1) Specify—
(i) A quarterly timetable of steps the credit union will take to increase its net worth ratio, and risk-based capital measure if applicable, so that it becomes adequately capitalized by the end of the term of the NWRP, and to remain so for four (4) consecutive calendar quarters;
(ii) The projected amount of net worth increases in each quarter of the term of the NWRP as required under § 702.106(a), or as permitted under § 702.106(b);
(iii) How the credit union will comply with the mandatory and any discretionary supervisory actions imposed on it by the NCUA Board under this subpart;
(iv) The types and levels of activities in which the credit union will engage; and
(v) If reclassified to a lower category under § 702.102(b), the steps the credit union will take to correct the unsafe or unsound practice(s) or condition(s);
(2) Include pro forma financial statements, including any off-balance sheet items, covering a minimum of the next two years; and
(3) Contain such other information as the NCUA Board has required.
(4) Notwithstanding paragraphs (c)(1), (2), and (3) of this section, the Board may permit a credit union that is undercapitalized to submit to the Regional Director a streamlined NWRP attesting that its reduction in capital was caused by share growth and that such share growth is a temporary condition due to the COVID-19 pandemic. A streamlined NWRP plan may be accepted from February 28, 2022, until March 31, 2023.
(d) Criteria for approval of NWRP. The NCUA Board shall not accept a NWRP plan unless it—
(1) Complies with paragraph (c) of this section;
(2) Is based on realistic assumptions, and is likely to succeed in restoring the credit union’s net worth; and
(3) Would not unreasonably increase the credit union’s exposure to risk (including credit risk, interest-rate risk, and other types of risk).
(e) Consideration of regulatory capital. To minimize possible long-term losses to the NCUSIF while the credit union takes steps to become adequately capitalized, the NCUA Board shall, in evaluating an NWRP under this section, consider the type and amount of any form of regulatory capital which may become established by NCUA regulation, or authorized by state law and recognized by NCUA, which the credit union holds, but which is not included in its net worth.
(f) Review of NWRP—(1) Notice of decision. Within 45 calendar days after receiving an NWRP under this part, the NCUA Board shall notify the credit union in writing whether the NWRP has been approved, and shall provide reasons for its decision in the event of disapproval.
(2) Delayed decision. If no decision is made within the time prescribed in paragraph (f)(1) of this section, the NWRP is deemed approved.
(3) Consultation with state officials. In the case of an NWRP submitted by a federally insured state-chartered credit union (whether an original, new, additional, revised or amended NWRP), the NCUA Board shall, when evaluating the NWRP, seek and consider the views of the appropriate state official, and provide prompt notice of its decision to the appropriate state official.
(g) NWRP not approved—(1) Submission of revised NWRP. If an NWRP is rejected by the NCUA Board, the credit union shall submit a revised NWRP within 30 calendar days of receiving notice of disapproval, unless it is notified in writing by the NCUA Board that the revised NWRP is to be filed within a different period.
(2) Notice of decision on revised NWRP. Within 30 calendar days after receiving a revised NWRP under paragraph (g)(1) of this section, the NCUA Board shall notify the credit union in writing whether the revised NWRP is approved. The Board may extend the time within which notice of its decision shall be provided.
(3) Disapproval of reclassified credit union’s NWRP. A credit union which has been classified significantly undercapitalized shall remain so classified pending NCUA Board approval of a new or revised NWRP.
(4) Submission of multiple unapproved NWRPs. The submission of more than two NWRPs that are not approved is considered an unsafe and unsound condition and may subject the credit union to administrative enforcement actions under section 206 of the FCUA, 12 U.S.C. 1786 and 1790d.
(h) Amendment of NWRP. A credit union that is operating under an approved NWRP may, after prior written notice to, and approval by the NCUA Board, amend its NWRP to reflect a change in circumstance. Pending approval of an amended NWRP, the credit union shall implement the NWRP as originally approved.
(i) Publication. An NWRP need not be published to be enforceable because publication would be contrary to the public interest.
(j) Termination of NWRP. For purposes of this part, an NWRP terminates once the credit union is classified as adequately capitalized and remains so for four consecutive quarters. For example, if a credit union with an active NWRP attains the classification as adequately classified on December 31, 2015 this would be quarter one and the fourth consecutive quarter would end September 30, 2016.
§ 702.112 Reserves.
Each credit union shall establish and maintain such reserves as may be required by the FCUA, by state law, by regulation, or in special cases by the NCUA Board or appropriate state official.
§ 702.113 Full and fair disclosure of financial condition.
(a) Full and fair disclosure defined. “Full and fair disclosure” is the level of disclosure which a prudent person would provide to a member of a credit union, to NCUA, or, at the discretion of the board of directors, to creditors to fairly inform them of the financial condition and the results of operations of the credit union.
(b) Full and fair disclosure implemented. The financial statements of a credit union shall provide for full and fair disclosure of all assets, liabilities, and members’ equity, including such valuation (allowance) accounts as may be necessary to present fairly the financial condition; and all income and expenses necessary to present fairly the statement of income for the reporting period.
(c) Declaration of officials. The Statement of Financial Condition, when presented to members, to creditors or to NCUA, shall contain a dual declaration by the treasurer and the chief executive officer, or in the latter’s absence, by any other officer designated by the board of directors of the reporting credit union to make such declaration, that the report and related financial statements are true and correct to the best of their knowledge and belief and present fairly the financial condition and the statement of income for the period covered.
(d) Charges for loan and lease losses. Full and fair disclosure demands that a credit union properly address charges for loan losses as follows:
(1) Charges for loan and lease losses shall be made timely and in accordance with GAAP;
(2) The ALLL must be maintained in accordance with GAAP; and
(3) At a minimum, adjustments to the ALLL shall be made prior to the distribution or posting of any dividend to the accounts of members.
§ 702.114 Payment of dividends.
(a) Restriction on dividends. Dividends shall be available only from net worth, net of any special reserves established under § 702.112, if any.
(b) Payment of dividends and interest refunds. The board of directors must not pay a dividend or interest refund that will cause the credit union’s capital classification to fall below adequately capitalized under this subpart unless the appropriate Regional Director and, if state-chartered, the appropriate state official, have given prior written approval (in an NWRP or otherwise). The request for written approval must include the plan for eliminating any negative retained earnings balance.
Subpart B—Alternative Prompt Corrective Action for New Credit Unions
§ 702.201 Scope and definition.
(a) Scope. This subpart B applies in lieu of subpart A of this part exclusively to credit unions defined in paragraph (b) of this section as “new” pursuant to section 216(b)(2) of the FCUA, 12 U.S.C. 1790d(b)(2).
(b) New credit union defined. A “new” credit union for purposes of this subpart is a credit union that both has been in operation for less than ten (10) years and has total assets of not more than $10 million. Once a credit union reports total assets of more than $10 million on a Call Report, the credit union is no longer new, even if its assets subsequently decline below $10 million.
(c) Effect of spin-offs. A credit union formed as the result of a “spin-off” of a group from the field of membership of an existing credit union is deemed to be in operation since the effective date of the spin-off. A credit union whose total assets decline below $10 million because a group within its field of membership has been spun-off is deemed “new” if it has been in operation less than 10 years.
(d) Actions to evade prompt corrective action. If the NCUA Board determines that a credit union was formed, or was reduced in asset size as a result of a spin-off, or was merged, primarily to qualify as “new” under this subpart, the credit union shall be deemed subject to prompt corrective action under subpart A of this part.
§ 702.202 Net worth categories for new credit unions.
(a) Net worth measures. For purposes of this part, a new credit union must determine its capital classification quarterly according to its net worth ratio.
(b) Effective date of net worth classification of new credit union. For purposes of subpart B of this part, the effective date of a new credit union’s classification within a capital category in paragraph (c) of this section shall be determined as provided in § 702.101(c); and written notice of a decline in net worth classification in paragraph (c) of this section shall be given as required by § 702.101(c).
(c) Net worth categories. A credit union defined as “new” under this section shall be classified—
(1) Well capitalized if it has a net worth ratio of seven percent (7%) or greater;
(2) Adequately capitalized if it has a net worth ratio of six percent (6%) or more but less than seven percent (7%);
(3) Moderately capitalized if it has a net worth ratio of three and one-half percent (3.5%) or more but less than six percent (6%);
(4) Marginally capitalized if it has a net worth ratio of two percent (2%) or more but less than three and one-half percent (3.5%);
(5) Minimally capitalized if it has a net worth ratio of zero percent (0%) or greater but less than two percent (2%); and
(6) Uncapitalized if it has a net worth ratio of less than zero percent (0%).
Table 1 to § 702.202—Capital Categories for New Credit Unions
| A new credit union’s capital classification is | If it’s net worth ratio is |
|---|---|
| Well Capitalized | 7% or above. |
| Adequately Capitalized | 6 to 7%. |
| Moderately Capitalized | 3.5% to 5.99%. |
| Marginally Capitalized | 2% to 3.49%. |
| Minimally Capitalized | 0% to 1.99%. |
| Uncapitalized | Less than 0%. |
(d) Reclassification based on supervisory criteria other than net worth. Subject to § 702.102(b), the NCUA Board may reclassify a well capitalized, adequately capitalized or moderately capitalized new credit union to the next lower capital category (each of such actions is hereinafter referred to generally as “reclassification”) in either of the circumstances prescribed in § 702.102(b).
(e) Consultation with state officials. The NCUA Board shall consult and seek to work cooperatively with the appropriate state official before reclassifying a federally insured state-chartered credit union under paragraph (d) of this section, and shall promptly notify the appropriate state official of its decision to reclassify.
§ 702.203 Prompt corrective action for adequately capitalized new credit unions.
Beginning on the effective date of classification, an adequately capitalized new credit union must increase the dollar amount of its net worth by the amount reflected in its approved initial or revised business plan in accordance with § 702.204(a)(2), or in the absence of such a plan, in accordance with § 702.106 until it is well capitalized.
§ 702.204 Prompt corrective action for moderately capitalized, marginally capitalized, or minimally capitalized new credit unions.
(a) Mandatory supervisory actions by new credit union. Beginning on the date of classification as moderately capitalized, marginally capitalized or minimally capitalized (including by reclassification under § 702.202(d)), a new credit union must—
(1) Earnings retention. Increase the dollar amount of its net worth by the amount reflected in its approved initial or revised business plan;
(2) Submit revised business plan. Submit a revised business plan within the time provided by § 702.206 if the credit union either:
(i) Has not increased its net worth ratio consistent with its then-present approved business plan;
(ii) Has no then-present approved business plan; or
(iii) Has failed to comply with paragraph (a)(3) of this section; and
(3) Restrict member business loans. Not increase the total dollar amount of member business loans (defined as loans outstanding and unused commitments to lend) as of the preceding quarter-end unless it is granted an exception under 12 U.S.C. 1757a(b).
(b) Discretionary supervisory actions by NCUA. Subject to the applicable procedures set forth in subpart L of part 747 of this chapter for issuing, reviewing and enforcing directives, the NCUA Board may, by directive, take one or more of the actions prescribed in § 702.109(b) if the credit union’s net worth ratio has not increased consistent with its then-present business plan, or the credit union has failed to undertake any mandatory supervisory action prescribed in paragraph (a) of this section.
(c) Discretionary conservatorship or liquidation. Notwithstanding any other actions required or permitted to be taken under this section, the NCUA Board may place a new credit union which is moderately capitalized, marginally capitalized or minimally capitalized (including by reclassification under § 702.202(d)) into conservatorship pursuant to 12 U.S.C. 1786(h)(1)(F), or into liquidation pursuant to 12 U.S.C. 1787(a)(3)(A)(i), provided that the credit union has no reasonable prospect of becoming adequately capitalized.
§ 702.205 Prompt corrective action for uncapitalized new credit unions.
(a) Mandatory supervisory actions by new credit union. Beginning on the effective date of classification as uncapitalized, a new credit union must—
(1) Earnings retention. Increase the dollar amount of its net worth by the amount reflected in the credit union’s approved initial or revised business plan;
(2) Submit revised business plan. Submit a revised business plan within the time provided by § 702.206, providing for alternative means of funding the credit union’s earnings deficit, if the credit union either:
(i) Has not increased its net worth ratio consistent with its then-present approved business plan;
(ii) Has no then-present approved business plan; or
(iii) Has failed to comply with paragraph (a)(3) of this section; and
(3) Restrict member business loans. Not increase the total dollar amount of member business loans as provided in § 702.204(a)(3).
(b) Discretionary supervisory actions by NCUA. Subject to the procedures set forth in subpart L of part 747 of this chapter for issuing, reviewing and enforcing directives, the NCUA Board may, by directive, take one or more of the actions prescribed in § 702.109(b) if the credit union’s net worth ratio has not increased consistent with its then-present business plan, or the credit union has failed to undertake any mandatory supervisory action prescribed in paragraph (a) of this section.
(c) Mandatory liquidation or conservatorship. Notwithstanding any other actions required or permitted to be taken under this section, the NCUA Board—
(1) Plan not submitted. May place into liquidation pursuant to 12 U.S.C. 1787(a)(3)(A)(ii), or conservatorship pursuant to 12 U.S.C. 1786(h)(1)(F), an uncapitalized new credit union which fails to submit a revised business plan within the time provided under paragraph (a)(2) of this section; or
(2) Plan rejected, approved, implemented. Except as provided in paragraph (c)(3) of this section, must place into liquidation pursuant to 12 U.S.C. 1787(a)(3)(A)(ii), or conservatorship pursuant to 12 U.S.C. 1786(h)(1)(F), an uncapitalized new credit union that remains uncapitalized one hundred twenty (120) calendar days after the later of:
(i) The effective date of classification as uncapitalized; or
(ii) The last day of the calendar month following expiration of the time period provided in the credit union’s initial business plan (approved at the time its charter was granted) to remain uncapitalized, regardless whether a revised business plan was rejected, approved or implemented.
(3) Exception. The NCUA Board may decline to place a new credit union into liquidation or conservatorship as provided in paragraph (c)(2) of this section if the credit union documents to the NCUA Board why it is viable and has a reasonable prospect of becoming adequately capitalized.
(d) Discretionary liquidation of an uncapitalized new credit union. In lieu of paragraph (c) of this section, an uncapitalized new credit union may be placed into liquidation on grounds of insolvency pursuant to 12 U.S.C. 1787(a)(1)(A).
§ 702.206 Revised business plans (RBP) for new credit unions.
(a) Schedule for filing—(1) Generally. Except as provided in paragraph (a)(2) of this section, a new credit union classified moderately capitalized or lower must file a written revised business plan (RBP) with the appropriate Regional Director and, if state-chartered, with the appropriate state official, within 30 calendar days of either:
(i) The last of the calendar month following the end of the calendar quarter that the credit union’s net worth ratio has not increased consistent with the-present approved business plan;
(ii) The effective date of classification as less than adequately capitalized if the credit union has no then-present approved business plan; or
(iii) The effective date of classification as less than adequately capitalized if the credit union has increased the total amount of member business loans in violation of § 702.204(a)(3).
(2) Exception. The NCUA Board may notify the credit union in writing that its RBP is to be filed within a different period or that it is not necessary to file an RBP.
(3) Failure to timely file plan. When a new credit union fails to file an RBP as provided under paragraphs (a)(1) or (a)(2) of this section, the NCUA Board shall promptly notify the credit union that it has failed to file an RBP and that it has 15 calendar days from receipt of that notice within which to do so.
(b) Contents of revised business plan. A new credit union’s RBP must, at a minimum—
(1) Address changes, since the new credit union’s current business plan was approved, in any of the business plan elements required for charter approval under chapter 1, section IV.D. of appendix B to part 701 of this chapter, or for state-chartered credit unions under applicable state law;
(2) Establish a timetable of quarterly targets for net worth during each year in which the RBP is in effect so that the credit union becomes adequately capitalized by the time it no longer qualifies as “new” per § 702.201;
(3) Specify the projected amount of earnings of net worth increases as provided under § 702.204(a)(1) or 702.205(a)(1);
(4) Explain how the new credit union will comply with the mandatory and discretionary supervisory actions imposed on it by the NCUA Board under this subpart;
(5) Specify the types and levels of activities in which the new credit union will engage;
(6) In the case of a new credit union reclassified to a lower category under § 702.202(d), specify the steps the credit union will take to correct the unsafe or unsound condition or practice; and
(7) Include such other information as the NCUA Board may require.
(c) Criteria for approval. The NCUA Board shall not approve a new credit union’s RBP unless it—
(1) Addresses the items enumerated in paragraph (b) of this section;
(2) Is based on realistic assumptions, and is likely to succeed in building the credit union’s net worth; and
(3) Would not unreasonably increase the credit union’s exposure to risk (including credit risk, interest-rate risk, and other types of risk).
(d) Review of revised business plan—(1) Notice of decision. Within 30 calendar days after receiving an RBP under this section, the NCUA Board shall notify the credit union in writing whether its RBP is approved, and shall provide reasons for its decision in the event of disapproval. The NCUA Board may extend the time within which notice of its decision shall be provided.
(2) Delayed decision. If no decision is made within the time prescribed in paragraph (e)(1) of this section, the RBP is deemed approved.
(3) Consultation with state officials. When evaluating an RBP submitted by a federally insured state-chartered new credit union (whether an original, new or additional RBP), the NCUA Board shall seek and consider the views of the appropriate state official, and provide prompt notice of its decision to the appropriate state official.
(e) Plan not approved—(1) Submission of new revised plan. If an RBP is rejected by the NCUA Board, the new credit union shall submit a new RBP within 30 calendar days of receiving notice of disapproval of its initial RBP, unless it is notified in writing by the NCUA Board that the new RBP is to be filed within a different period.
(2) Notice of decision on revised plan. Within 30 calendar days after receiving an RBP under paragraph (f)(1) of this section, the NCUA Board shall notify the credit union in writing whether the new RBP is approved. The Board may extend the time within which notice of its decision shall be provided.
(3) Submission of multiple unapproved RBPs. The submission of more than two RBPs that are not approved is considered an unsafe and unsound condition and may subject the credit union to administrative enforcement action pursuant to section 206 of the FCUA, 12 U.S.C. 1786 and 1790d.
(f) Amendment of plan. A credit union that has filed an approved RBP may, after prior written notice to and approval by the NCUA Board, amend it to reflect a change in circumstance. Pending approval of an amended RBP, the new credit union shall implement its existing RBP as originally approved.
(g) Publication. An RBP need not be published to be enforceable because publication would be contrary to the public interest.
§ 702.207 Consideration of Subordinated Debt and Grandfathered Secondary Capital for new credit unions.
(a) Exception from prompt corrective action for new credit unions. The requirements of §§ 702.204 and 702.205 do not apply to a new credit union if, as of the applicable date of determination, each of the following conditions is satisfied:
(1) The new credit union has outstanding Subordinated Debt or Grandfathered Secondary Capital;
(2) The Subordinated Debt or Grandfathered Secondary Capital would be treated as Regulatory Capital under subpart D of this part if the new credit union were a complex credit union or a low income-designated credit union;
(3) The ratio of the new credit union’s net worth (including the amount of its Subordinated Debt and Grandfathered Secondary Capital treated as Regulatory Capital (as defined in subpart D of this part)) to its total assets is at least seven percent (7%); and
(4) The new credit union’s net worth is increasing in a manner consistent with the new credit union’s approved initial business plan or RBP.
(b) Consideration of Subordinated Debt and Grandfathered Secondary Capital in evaluating an RBP. The NCUA shall, in evaluating an RBP under this subpart, consider a new credit union’s aggregate outstanding principal amount of Subordinated Debt and Grandfathered Secondary Capital.
(c) Prompt corrective action based on other supervisory criteria—(1) Application of prompt corrective action to an exempt new credit union. The NCUA Board may apply prompt corrective action to a new credit union that is otherwise exempt under paragraph (a) of this section in the following circumstances:
(i) Unsafe or unsound condition. The NCUA Board has determined, after providing the new credit union with written notice and opportunity for hearing pursuant to § 747.2003 of this chapter, that the new credit union is in an unsafe or unsound condition; or
(ii) Unsafe or unsound practice. The NCUA Board has determined, after providing the new credit union with written notice and opportunity for hearing pursuant to § 747.2003 of this chapter, that the new credit union has not corrected a material unsafe or unsound practice of which it was, or should have been, aware.
(2) Non-delegation. The NCUA Board may not delegate its authority under paragraph (c) of this section.
(3) Consultation with state officials. The NCUA Board shall consult and seek to work cooperatively with the appropriate state official before taking action under paragraph (c) of this section and shall promptly notify the appropriate state official of its decision to take action under paragraph (c) of this section.
(d) Discretionary liquidation. Notwithstanding paragraph (a) of this section, the NCUA may place a new credit union into liquidation pursuant to 12 U.S.C. 1787(a)(3)(A), provided that the new credit union’s ratio under paragraph (a)(3) of this section is, as of the applicable date of determination, below six percent (6%) and the new credit union has no reasonable prospect of becoming “adequately capitalized” under § 702.202.
(e) Restrictions on payments on Subordinated Debt. Beginning 60 days after the effective date of a new credit union being classified by the NCUA as “uncapitalized”, the new credit union shall not pay principal of or interest on its Subordinated Debt, except that unpaid interest shall continue to accrue under the terms of the related Subordinated Debt Note, to the extent permitted by law.
§ 702.208 Incentives for new credit unions.
(a) Assistance in revising business plans. Upon timely request by a credit union having total assets of less than $10 million (regardless how long it has been in operation), the NCUA Board shall provide assistance in preparing a revised business plan required to be filed under § 702.206.
(b) Assistance. Management training and other assistance to new credit unions will be provided in accordance with policies approved by the NCUA Board.
(c) Small credit union program. A new credit union is eligible to join and receive comprehensive benefits and assistance under NCUA’s Small Credit Union Program.
§ 702.209 Reserves.
Each new credit union shall establish and maintain such reserves as may be required by the FCUA, by state law, by regulation, or in special cases by the NCUA Board or appropriate state official.
§ 702.210 Full and fair disclosure of financial condition.
(a) Full and fair disclosure defined. “Full and fair disclosure” is the level of disclosure which a prudent person would provide to a member of a new credit union, to NCUA, or, at the discretion of the board of directors, to creditors to fairly inform them of the financial condition and the results of operations of the credit union.
(b) Full and fair disclosure implemented. The financial statements of a new credit union shall provide for full and fair disclosure of all assets, liabilities, and members’ equity, including such valuation (allowance) accounts as may be necessary to present fairly the financial condition; and all income and expenses necessary to present fairly the statement of income for the reporting period.
(c) Declaration of officials. The Statement of Financial Condition, when presented to members, to creditors or to NCUA, shall contain a dual declaration by the treasurer and the chief executive officer, or in the latter’s absence, by any other officer designated by the board of directors of the reporting credit union to make such declaration, that the report and related financial statements are true and correct to the best of their knowledge and belief and present fairly the financial condition and the statement of income for the period covered.
(d) Charges for loan and lease losses. Full and fair disclosure demands that a new credit union properly address charges for loan losses as follows:
(1) Charges for loan and lease losses shall be made timely in accordance with generally accepted accounting principles (GAAP);
(2) The ALLL must be maintained in accordance with GAAP; and
(3) At a minimum, adjustments to the ALLL shall be made prior to the distribution or posting of any dividend to the accounts of members.
§ 702.211 Payment of dividends.
(a) Restriction on dividends. Dividends shall be available only from net worth, net of any special reserves established under § 702.208, if any.
(b) Payment of dividends and interest refunds. The board of directors may not pay a dividend or interest refund that will cause the credit union’s capital classification to fall below adequately capitalized under subpart A of this part unless the appropriate regional director and, if state-chartered, the appropriate state official, have given prior written approval (in an RBP or otherwise). The request for written approval must include the plan for eliminating any negative retained earnings balance.
Subpart C—Capital Planning and Stress Testing
(a) Authority. This subpart is issued by the National Credit Union Administration (NCUA).
(b) Purpose. This subpart requires covered credit unions to develop and maintain capital plans and describes stress testing requirements and actions on covered credit union capital plans.
(c) Reservation of authority. Notwithstanding any other provisions of this subpart, NCUA may modify some or all of the requirements of this subpart. Any exercise of authority under this section by NCUA will be in writing and will consider the financial condition, size, complexity, risk profile, scope of operations, and level of capital of the covered credit union, in addition to any other relevant factors. Nothing in this subpart limits the authority of NCUA under any other provision of law or regulation to take supervisory or enforcement action, including action to address unsafe and unsound practices or conditions, or violations of law or regulation.
§ 702.302 Definitions.
For purposes of this subpart—
Baseline scenario means a scenario that reflects the consensus views of the economic and financial outlook.
Capital plan means a written presentation of a covered credit union’s capital planning strategies and capital adequacy process that includes the mandatory elements set forth in this subpart.
Capital planning process means development of a capital policy and formulation of a capital plan that conforms to this part.
Covered credit union means a federally insured credit union whose assets are $10 billion or more.
(1) Timing. A credit union that crosses the asset threshold as of March 31 of a given calendar year is subject to the applicable requirements of this subpart in the following calendar year.
(2) Regulatory relief for 2021 and 2022. If a federally insured credit union reaches or crosses an asset size threshold under this subpart on March 31, 2021, the NCUA will use the assets the federally insured credit union reported on March 31, 2020 for the purpose of determining the applicability of those thresholds.
Planning horizon means the period of 3 years over which capital planning projections extend.
Pre-provision net revenue means the sum of net interest income and non-interest income, less expenses, before adjusting for loss provisions.
Provision for loan and lease losses means the provision for loan and lease losses as reported by the covered credit union on its Call Report.
Reverse stress test means a test that defines severely unfavorable outcomes and then identifies events or scenarios that lead to these outcomes. Examples of severely unfavorable outcomes are breaching regulatory capital, failing to meet obligations, or being unable to continue independent operations.
Scenarios are those sets of conditions that affect the U.S. economy or the financial condition of a covered credit union that serve as the basis for stress testing, including, but not limited to, NCUA-established baseline, scenarios and stress scenarios.
Sensitivity testing means testing the relationship between specific variables, parameters, and inputs and their impacts on analytical results.
Stress scenario means a scenario that is more adverse than that associated with the baseline scenario.
Stress test means the process to assess the potential impact of expected and stressed economic conditions on the consolidated earnings, losses, and capital of a covered credit union over the planning horizon, taking into account the current state of the covered credit union and the covered credit union’s risks, exposures, strategies, and activities.
Stress test capital means net worth (less assistance provided under Section 208 of the Federal Credit Union Act, subordinated debt included in net worth, and NCUSIF deposit) under stress test scenarios.
Stress test capital ratio means a covered credit union’s stress test capital divided by its total consolidated assets less NCUSIF deposit.
Tier I credit union means a covered credit union that has less than $15 billion in total assets.
Tier II credit union means a covered credit union that has $15 billion or more in total assets but less than $20 billion in total assets, or is otherwise designated as a tier II credit union by NCUA.
Tier III credit union means a covered credit union that has $20 billion or more in total assets, or is otherwise designated as a tier III credit union by NCUA.
§ 702.303 Capital policy.
(a) General requirements. The extent and sophistication of a covered credit union’s governance over its capital planning and analysis process must align with the extent and sophistication of that process. The process must be consistent with the financial condition, size, complexity, risk profile, scope of operations, and level of capital of the covered credit union. The ultimate responsibility for governance over a covered credit union’s capital planning and analysis process rests with the credit union’s board of directors. Senior management must establish a comprehensive, integrated, and effective process that fits into the broader risk management of the credit union. Senior management responsible for capital planning and analysis must provide regular reports on capital planning and analysis to the credit union’s board of directors (or a designated committee of the board).
(b) Mandatory elements. A covered credit union’s board of directors (or a designated committee of the board) must review and approve a capital policy, along with procedures to implement it. The capital policy must:
(1) State goals and limits for capital levels and risk exposure.
(2) Establish requirements for reviewing and reporting capital levels and breaches of capital limits, with contingency plans for remedying any breaches.
(3) State the governance over the capital analysis process, including all the activities that contribute to the analysis;
(4) Specify capital analysis roles and responsibilities, including controls over external resources used for any part of capital analysis (such as vendors and data providers);
(5) Specify the internal controls that govern capital planning, including review by internal audit, control of changes in capital planning procedures, and required documentation;
(6) Describe the frequency with which capital analyses will be conducted;
(7) State how capital analysis results are used and by whom; and
(8) Be reviewed at least annually and updated as necessary to ensure that it remains current with changes in market conditions, credit union products and strategies, credit union risk exposures and activities, the credit union’s established risk appetite, and industry practices.
§ 702.304 Capital planning.
(a) Annual capital planning. (1) A covered credit union must develop and maintain a capital plan. Tier I and tier II credit unions must complete this plan and their capital policy by December 31 each year, but are not required to submit this plan to the NCUA. For tier I and tier II credit unions, the plan must be based on the credit union’s financial data from either of the two calendar quarters preceding the quarter in which the plan is approved by the credit union’s board of directors (or a designated committee of the board). A tier III credit union must submit this plan and its capital policy to NCUA by May 31 each year, or such later date as directed by NCUA. For tier III credit unions, the plan must be based on the credit union’s financial data as of December 31 of the preceding calendar year, or such other date as directed by NCUA.
(2) A covered credit union’s board of directors (or a designated committee of the board) must at least annually, and for tier III credit unions, prior to the submission of the capital plan under paragraph (a)(1) of this section:
(i) Review the credit union’s process for assessing capital adequacy;
(ii) Ensure that any deficiencies in the credit union’s process for assessing capital adequacy are appropriately remedied; and
(iii) Approve the credit union’s capital plan.
(b) Mandatory elements. A capital plan must contain at least the following elements:
(1) A quarterly assessment of the expected sources and levels of stress test capital over the planning horizon that reflects the covered credit union’s financial state, size, complexity, risk profile, scope of operations, and existing level of capital, assuming both expected and unfavorable conditions, including:
(i) Estimates of projected revenues, losses, reserves, and pro forma capital levels, over each quarter of the planning horizon under expected and unfavorable conditions; and
(ii) A detailed description of the credit union’s process for assessing capital adequacy;
(2) A discussion of how the credit union will, under expected and unfavorable conditions, maintain stress test capital commensurate with all of its risks, including reputational, strategic, legal, and compliance risks;
(3) A discussion of how the credit union will, under expected and unfavorable conditions, maintain ready access to funding, meet its obligations to all creditors and other counterparties, and continue to serve as an intermediary for its members;
(4) A discussion of any expected changes to the credit union’s business plan that are likely to have a material impact on the credit union’s capital adequacy and liquidity; and
(5) A program to:
(i) Conduct sensitivity testing to analyze the effect on the credit union’s stress test capital of changes in variables, parameters, and inputs used by the credit union in preparing its capital plan;
(ii) Conduct reverse stress testing to identify events and circumstances that cause severely unfavorable outcomes for the credit union; and
(iii) Analyze the impact of credit risk and interest rate risk to capital under unfavorable economic conditions, both separately and in combination with each other.
§ 702.305 NCUA action on capital plans.
(a) Timing—(1) Tier I & tier II credit unions. NCUA will address any deficiencies in the capital plans submitted by tier I and tier II credit unions through the supervisory process.
(2) Tier III credit unions. NCUA will notify tier III credit unions of the acceptance or rejection of their capital plans by August 31 of the year in which their plan is submitted.
(b) Grounds for rejection of capital plan. NCUA may reject a capital plan if it determines that:
(1) The covered credit union has material unresolved supervisory issues associated with its capital planning process;
(2) The capital analysis underlying the covered credit union’s capital plan, or the covered credit union’s methodologies for reviewing the robustness of its capital adequacy, are not reasonable or appropriate;
(3) Data utilized for the capital analysis is insufficiently detailed to capture the risks of the covered credit union, or the data lacks integrity;
(4) The plan does not meet all of the requirements of § 702.304;
(5) Unacceptable weakness in the capital plan or policy, the capital planning analysis, or any critical system or process supporting capital analysis;
(6) The covered credit union’s capital planning process constitutes an unsafe or unsound practice, or would violate any law, regulation, NCUA order, directive, or any condition imposed by, or written agreement with, NCUA. In determining whether a capital plan would constitute an unsafe or unsound practice, NCUA considers whether the covered credit union is and would remain in sound financial condition after giving effect to the capital plan.
(c) Notification in writing. NCUA will notify the credit union in writing of the reasons for a decision to reject a capital plan.
(d) Resubmission of a capital plan. If NCUA rejects a tier III credit union’s capital plan, the credit union must update and resubmit an acceptable capital plan to NCUA by November 30 of the year in which the credit union submitted its plan. The resubmitted capital plan must, at a minimum, address:
(1) NCUA-noted deficiencies in the credit union’s original capital plan or policy; and
(2) Remediation plans for unresolved supervisory issues contributing to the rejection of the credit union’s original capital plan.
(e) Supervisory actions. Any tier III credit union operating without a capital plan accepted by NCUA may be subject to supervisory actions on the part of NCUA.
(f) Consultation on proposed action. Before taking any action under this section on the capital plan of a federally insured, state-chartered credit union, NCUA will consult and work cooperatively with the appropriate State official.
§ 702.306 Annual supervisory stress testing.
(a) General requirements. Only tier II and tier III credit unions are required to conduct supervisory stress tests. The supervisory stress tests consist of a baseline scenario, and stress scenarios, which NCUA will provide by February 28 of each year. The tests will be based on the credit union’s financial data as of December 31 of the preceding calendar year, or such other date as directed by NCUA. The tests will take into account all relevant exposures and activities of the credit union to evaluate its ability to absorb losses in specified scenarios over a planning horizon.
(b) Credit union-run supervisory stress tests—(1) General. All supervisory stress tests must be conducted according to NCUA’s instructions.
(2) Tier III credit unions. When conducting its stress test, a tier III credit union must apply the minimum stress test capital ratio to all time periods in the planning horizon. The minimum stress test capital ratio is 5 percent.
(3) NCUA tests. NCUA reserves the right to conduct the tests described in this section on any covered credit union at any time. Where both NCUA and a covered credit union have conducted the tests, the results of NCUA’s tests will determine whether the covered credit union has met the requirements of this subpart.
(c) Potential impact on capital. In conducting stress tests under this subpart, the credit union, or the NCUA if it elects to conduct the stress test under paragraph (b)(3) of this section, will estimate the following for each scenario during each quarter of the planning horizon:
(1) Losses, pre-provision net revenues, loan and lease loss provisions, and net income; and
(2) The potential impact on the stress test capital ratio, incorporating the effects of any capital action over the planning horizon and maintenance of an allowance for loan losses appropriate for credit exposures throughout the horizon. The credit union, or the NCUA if it elects to conduct the stress test under paragraph (b)(3) of this section, will conduct the stress tests without assuming any risk mitigation actions on the part of the credit union, except those existing and identified as part of the credit union’s balance sheet, or off-balance sheet positions, such as derivative positions, on the date of the stress test.
(d) Information collection. Upon request, the covered credit union must provide NCUA with any relevant qualitative or quantitative information requested by NCUA pertinent to the capital plans or stress tests under this part.
(e) Stress test results. A credit union required to conduct stress tests under this section must incorporate the results of its tests in its capital plan. A credit union required to conduct stress tests must submit its stress test results to NCUA by May 31 of each year.
(f) Supervisory actions. (1) If a credit union-run stress test shows a tier III credit union does not have the ability to maintain a stress test capital ratio of 5 percent or more under expected and stressed conditions in each quarter of the planning horizon, the credit union must incorporate, into its capital plan, a stress test capital enhancement plan that shows how it will meet that target.
(2) If an NCUA-run stress test shows that a tier III credit union does not have the ability to maintain a stress test capital ratio of 5 percent or more under expected and stressed conditions in each quarter of the planning horizon, the credit union must provide NCUA, by November 30 of the calendar year in which NCUA conducted the tests, a stress test capital enhancement plan showing how it will meet that target.
(3) A tier III credit union operating without an NCUA approved stress test capital enhancement plan required under this section may be subject to supervisory actions.
(g) Consultation on proposed action. Before taking any action under this section against a federally insured, state-chartered credit union, NCUA will consult and work cooperatively with the appropriate State official.
Subpart D—Subordinated Debt, Grandfathered Secondary Capital, and Regulatory Capital
§ 702.401 Purpose and scope.
(a) Subordinated Debt. This subpart sets forth the requirements applicable to all Subordinated Debt issued by a federally insured, natural person credit union, including the NCUA’s review and approval of that credit union’s application to issue or prepay Subordinated Debt. This subpart shall apply to a federally insured, state-chartered credit union only to the extent that such federally insured, state-chartered credit union is permitted by applicable state law to issue debt instruments of the type described in this subpart. To the extent that such state law is more restrictive than this subpart with respect to the issuance of such debt instruments, that state law shall apply. Except as provided in the next sentence, any secondary capital, as that term is used in the Federal Credit Union Act, issued after January 1, 2022, is Subordinated Debt and subject to the requirements of this subpart. Issuances of secondary capital, as that term is used in the Federal Credit Union Act, to the U.S. Government or any of its subdivisions, under applications approved before January 1, 2022, pursuant to § 701.34 or § 741.204(c) of this chapter, are not subject to the requirements applicable to Subordinated Debt, discussed elsewhere in this subpart, irrespective of the date of issuance.
(b) Grandfathered Secondary Capital. Any secondary capital defined as “Grandfathered Secondary Capital” under § 702.402, is governed by § 702.414. Grandfathered Secondary Capital will no longer be treated as Regulatory Capital as of the later of 30 years from the date of issuance or January 1, 2052.
§ 702.402 Definitions.
To the extent they differ, the definitions in this section apply only to Subordinated Debt and not to Grandfathered Secondary Capital. (Definitions applicable to Grandfathered Secondary Capital are in § 702.414.) All other terms in this subpart and not expressly defined in this section have the meanings assigned to them elsewhere in this part. For ease of use, certain key terms are included in this section using cross citations to other sections of this part where those terms are defined.
Accredited Investor means a Natural Person Accredited Investor or an Entity Accredited Investor, as applicable.
Appropriate Supervision Office means, with respect to any credit union, the Regional Office or Office of National Examinations and Supervision that is responsible for supervision of that credit union.
Complex credit union has the same meaning as in subpart A of this part.
Entity Accredited Investor means an entity that, at the time of offering and closing of the issuance and sale of Subordinated Debt to that entity, meets the requirements of 17 CFR 230.501(a).
Grandfathered Secondary Capital means any secondary capital issued under § 701.34 of this chapter before January 1, 2022, or, in the case of a federally insured, state-chartered credit union, with § 741.204(c) of this chapter, before January 1, 2022. (12 CFR 701.34 was recodified as § 702.414 as of January 1, 2022). This term also includes issuances of secondary capital to the U.S. Government or any of its subdivisions, under applications approved before January 1, 2022, pursuant to § 701.34 or § 741.204(c) of this chapter, irrespective of the date of issuance.
Immediate Family Member means spouse, child, sibling, parent, grandparent, or grandchild (including stepparents, stepchildren, stepsiblings, and adoptive relationships).
Issuing Credit Union means, for purposes of this subpart, a credit union that has issued, or is in the process of issuing, Subordinated Debt or Grandfathered Secondary Capital in accordance with the requirements of this subpart.
Low-income designated credit union (LICU) is a credit union designated as having low-income status in accordance with § 701.34 of this chapter.
Natural Person Accredited Investor means a natural person who, at the time of offering and closing of the issuance and sale of Subordinated Debt to that person, meets the requirements of 17 CFR 230.501(a); provided that, for purposes of purchasing or holding any Subordinated Debt Note, this term shall not include any board member or Senior Executive Officer of the Issuing Credit Union or any Immediate Family Member of any board member or Senior Executive Officer of the Issuing Credit Union.
Net worth has the same meaning as in § 702.2.
Net worth ratio has the same meaning as in § 702.2.
New credit union has the same meaning as in § 702.201.
Offering Document means the document(s) required by § 702.408, including any term sheet, offering memorandum, private placement memorandum, offering circular, or other similar document used to offer and sell Subordinated Debt Notes.
Pro Forma Financial Statements means projected financial statements that show the effects of proposed transactions as if they actually occurred in a variety of plausible scenarios, including both optimistic and pessimistic assumptions, over measurement horizons that align with the credit union’s expected activities.
Qualified Counsel means an attorney licensed to practice law who has expertise in the areas of Federal and state securities laws and debt transactions similar to those described in this subpart.
Regulatory Capital means:
(1) With respect to an Issuing Credit Union that is a LICU and not a complex credit union, the aggregate outstanding principal amount of Subordinated Debt and, until the later of 30 years from the date of issuance or January 1, 2052, Grandfathered Secondary Capital that is included in the credit union’s net worth ratio;
(2) With respect to an Issuing Credit Union that is a complex credit union and not a LICU, the aggregate outstanding principal amount of Subordinated Debt that is included in the credit union’s RBC ratio, if applicable;
(3) With respect to an Issuing Credit Union that is both a LICU and a complex credit union, the aggregate outstanding principal amount of Subordinated Debt and, until the later of 30 years from the date of issuance or January 1, 2052, Grandfathered Secondary Capital that is included in its net worth ratio and in its RBC ratio, if applicable; and
(4) With respect to a new credit union, the aggregate outstanding principal amount of Subordinated Debt and, until the later of 30 years from the date of issuance or January 1, 2052, Grandfathered Secondary Capital that is considered pursuant to § 702.207.
Retained Earnings has a meaning that is consistent with the one for this term under United States GAAP.
Risk-based capital (RBC) ratio has the same meaning as in § 702.2.
Senior Executive Officer means a credit union’s chief executive officer (for example, president or treasurer/manager), any assistant chief executive officer (e.g., any assistant president, any vice president or any assistant treasurer/manager) and the chief financial officer (controller). The term “Senior Executive Officer” also includes employees and contractors of an entity, such as a consulting firm, hired to perform the functions of positions covered by the term Senior Executive Officer.
Subordinated Debt means an Issuing Credit Union’s borrowing that meets the requirements of this subpart, including all obligations and contracts related to such borrowing.
Subordinated Debt Note means the written contract(s) evidencing the Subordinated Debt.
§ 702.403 Eligibility.
(a) Subject to receiving approval under § 702.408 or § 702.409, a credit union may issue Subordinated Debt only if, at the time of such issuance, the credit union is:
(1) A complex credit union with a capital classification of at least “undercapitalized,” as defined in § 702.102;
(2) A LICU;
(3) Able to demonstrate to the satisfaction of the NCUA that it reasonably anticipates becoming either a complex credit union meeting the requirements of paragraph (a)(1) of this section or a LICU within 24 months after issuance of the Subordinated Debt Notes; or
(4) A new credit union with Retained Earnings equal to or greater than one percent (1%) of assets.
(b) At the time of issuance of any Subordinated Debt, an Issuing Credit Union may not have any investments, direct or indirect, in Subordinated Debt or Grandfathered Secondary Capital (or any interest therein) of another credit union. If a credit union acquires Subordinated Debt or Grandfathered Secondary Capital in a merger or other consolidation, the Issuing Credit Union may still issue Subordinated Debt, but it may not invest (directly or indirectly) in the Subordinated Debt or Grandfathered Secondary Capital of any other credit union while any Subordinated Debt Notes issued by the Issuing Credit Union remain outstanding.
(c) If the Issuing Credit Union is a complex credit union that is not also a LICU, the aggregate outstanding principal amount of all Subordinated Debt issued by that Issuing Credit Union may not exceed 100 percent of its net worth, as determined at the time of each issuance of Subordinated Debt.
§ 702.404 Requirements of the Subordinated Debt Note.
(a) Requirements. At a minimum, the Subordinated Debt or the Subordinated Debt Note, as applicable, must:
(1) Be in the form of a written, unconditional promise to pay on a specified date a sum certain in money in return for adequate consideration in money;
(2) Have, at the time of issuance, a fixed stated maturity of at least five years. The stated maturity of the Subordinated Debt Note may not reset and may not contain an option to extend the maturity. A credit union seeking to issue Subordinated Debt Notes with maturities longer than 20 years from the date of issuance must provide the information required in § 702.408(b)(14) as part of its application for preapproval to issue Subordinated Debt;
(3) Be subordinate to all other claims in liquidation under § 709.5(b) of this chapter, and have the same payout priority as all other outstanding Subordinated Debt and Grandfathered Secondary Capital;
(4) Be properly characterized as debt in accordance with U.S. GAAP;
(5) Be unsecured, including, without limitation, prohibiting the establishment of any legally enforceable claim against funds earmarked for payment of the Subordinated Debt through:
(i) A compensating balance or any other funds or assets subject to a legal right of offset, as defined by applicable state law; or
(ii) A sinking fund, such as a fund formed by periodically setting aside money for the gradual repayment of the Subordinated Debt;