[Federal Register: February 24, 2004 (Volume 69, Number 36)]
[Notices]
[Page 8407-8412]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24fe04-76]
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FARM CREDIT ADMINISTRATION
RIN 3052-AC13
Loan Policies and Operations; Loan Syndication Transactions
AGENCY: Farm Credit Administration.
ACTION: Final notice.
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SUMMARY: The Farm Credit Administration (FCA or agency) provides, in
this notice, the guidance that the Farm Credit System (FCS or System)
requested about the regulatory treatment of syndicated loans to
eligible borrowers. This notice also reaffirms FCA's longstanding
interpretation that syndicated loans to eligible borrowers come within
System banks' and associations' lending powers, not their loan
participation authorities.
FOR FURTHER INFORMATION CONTACT: Dennis K. Carpenter, Senior Policy
Analyst, Office of Policy and Analysis, Farm Credit Administration,
McLean, VA 22102-5090, (703) 883-4498, TTY (703) 883-4434; or
Richard A. Katz, Senior Attorney, Office of General Counsel, Farm
Credit
[[Page 8408]]
Administration, McLean, VA 22102-5090, (703) 883-4020, TTY (703) 883-
2020.
SUPPLEMENTARY INFORMATION:
I. Brief Overview
System banks and associations engage in loan syndication
transactions for eligible borrowers under their direct lending
authorities. Therefore, syndications to eligible borrowers are subject
to all statutory and regulatory requirements that apply to direct
loans. Eligible borrowers must purchase and hold the voting stock of
FCS lenders that are parties to the syndication. Borrower rights and
territorial consent requirements apply when lenders operating under
title I or II of the Farm Credit Act of 1971, as amended, (Act) take
part in syndications made to eligible borrowers. All System lenders
that engage in loan syndication transactions must maintain a first-lien
position on borrower stock, and all FCS associations operating under
title I of the Act must hold a first lien on real estate pledged as
collateral. Farm Credit banks operating under title I of the Act cannot
enter directly into loan syndications after they have transferred their
direct lending authority to their affiliated associations. Finally, no
System bank or association has authority to purchase assignments in
loan syndications from non-System lenders.
II. Background
A. Distinctions Between Participations and Syndications
Many different types of arrangements enable lenders to work
together in multi-lender transactions. Participations and syndications
are two separate and distinct examples of multi-lender transactions.
The essential distinguishing factor between the two is the legal
relationships among the parties.
Loan participations involve two separate legal relationships. The
first relationship is between the borrower and loan originator (lead
lender), and the second relationship is between the lead lender and the
participating lenders. In a loan participation, only the lead lender
signs a loan agreement with, and receives a promissory note from, the
borrower. Participating lenders must look only to the lead lender for
satisfaction of their claims because they have no contractual
relationship with the borrower.
In syndications, the borrower signs a loan agreement with multiple
creditors, each of whom has a direct contractual relationship with the
borrower. Usually, each creditor in a syndicated loan transaction
receives its own promissory note from the borrower. Loan agreements
usually allow the original loan syndicators to sell both assignments
and participations in their portion of the credit to other lenders.
Thereafter, a purchaser of an assignment has a direct contractual
relationship with the borrower.
B. The FCA's Historical Position on Participations and Syndications
The FCA has consistently viewed syndications as loans under the
System's direct lending authority, not as participations. In 1991, the
preamble to a reproposed rule on loan participations and other
interests in loans stated:
The reproposed regulations do not address loan syndications,
whereby a borrower has a direct contractual relationship with more
than one lender but the loan negotiations with the borrower are
coordinated under the auspices of a lead bank(s). Such loans can be
made through the exercise of the institution's direct lending
authority provided * * * other statutory and regulatory requirements
* * * are met.
(Emphasis added). See 56 FR 2452 (Jan. 23, 1991).
Two more recent rulemakings reaffirmed that a System institution's
participation interest in a loan made by another lender does not result
in a direct contractual relationship with the borrower. The rulemakings
also recognized three factors that demonstrate that a participation
cannot be interpreted as a direct loan. In a participation, (1) There
is no contractual relationship between the borrower and participating
lenders, (2) only the lead lender extends credit directly to the
borrower, and (3) the lead lender is the only lender of record on all
loan documents. The FCA relied in part on these principles in 2000 when
it repealed several regulations that required out-of-territory consent
for loan participations that FCS lenders buy from non-System
lenders,\1\ and in 2002, when it authorized FCS banks and associations
to buy 100-percent participations from non-System lenders.\2\
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\1\ See 65 FR 24101 (Apr. 25, 2000).
\2\ See 67 FR 1282 (Jan. 10, 2002).
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C. The System's Petition and the FCA's Request for Input From the
Public
Syndicated loans are emerging as a more common method of financing
large agricultural operations. As a result, the System has asked the
FCA to change its approach to syndications so FCS banks and
associations would have greater flexibility to engage in such
transactions. A May 16, 2002 letter from the Farm Credit Council (FCC)
to the Chairman of the FCA stated that the agency's position places the
System at a competitive disadvantage with commercial lenders for
syndicated credits because (1) Associations must comply with borrower
rights requirements and obtain consent for out-of-territory loans, (2)
the agricultural credit bank (ACB) and associations must sell voting
stock to borrowers, and (3) all FCS institutions must maintain the
first-lien position on voting stock and, in certain cases, long-term
mortgage real estate pledged as collateral. The FCC also stated that as
long as these requirements apply, commercial banks that organize and
comprise a majority of lenders taking part in syndications would
probably exclude System institutions from most transactions. Borrower
rights, borrower stock, and territorial consent are not standard
practices in loan syndication transactions because they only apply to
the FCS. As a result, the FCC asserted that these requirements are
obstacles that block the System from assuming a meaningful role in
syndications to eligible borrowers.
The FCC attached a position paper and legal analysis to its letter,
which advocated the System's view that loan syndications are the
functional equivalent of loan participations because a System
institution (1) Acquires only a small fraction of the overall credit to
the borrower, and (2) cannot unilaterally make major credit decisions
about the loan.
As a result of the System's request, the FCA Board decided to
solicit comments from the public about the regulatory treatment of
syndications. On January 17, 2003, the FCA published a notice (See 68
FR 2540) in the Federal Register that asked the public to answer the
following questions:
1. What is the proper regulatory treatment of loan syndications?
2. Assuming syndication transactions are within the System's loan-
making authority, should the FCA consider regulatory changes that allow
(a) Borrowers to waive borrower rights in syndication transactions, and
(b) associations to take part in syndications to eligible borrowers who
are located in the chartered territories of other associations without
consent?
3. If the FCA would choose to recommend statutory changes to
Congress regarding the System's authority to engage in various types of
multi-lender transactions with non-System lenders, what specifically
should the FCA include in its recommendation?
[[Page 8409]]
The initial comment period expired on February 18, 2003. At the
request of the FCC, the FCA reopened the comment period on February 25,
2003 for 60 additional days.\3\ The FCA subsequently extended the
comment period twice, each time for an additional 60 days, as members
of the public requested.\4\ The comment period closed on August 19,
2003.
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\3\ See 68 FR 8764 (Feb. 25, 2003).
\4\ See 68 FR 19538 (Apr. 21, 2003); 68 FR 37824 (Jun. 25,
2003).
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D. Comments Received
The FCA received 152 comment letters from System and non-System
lenders and other interested parties. Fifty-six (56) letters came from
System banks and associations that asked the FCA to change its
interpretation and, in the future, treat syndications to eligible
borrowers as loan participations. Additionally, 10 commercial lenders
supported continued System involvement in loan syndication
transactions. The FCA received 86 comment letters from commercial
banks, their trade associations, and members of the general public that
favor retaining the current interpretation. These commenters opposed
any regulatory changes. Both System and non-System commenters opposed
the FCA asking Congress for new legislation on syndications.
The commenters who favor changing the FCA's current interpretation
advised the FCA that:
1. The trend in the markets is away from traditional participations
and toward syndications;
2. Syndications resemble participations because each party only has
a fractional interest in the entire credit and, in contrast to direct
loans, no party can unilaterally make major credit decisions;
3. Borrower rights, borrower stock, first-lien position, and
territorial consent requirements deter commercial lenders from inviting
System institutions to take part in loan syndications, and
4. Because the FCA has broad discretion in how it interprets the
Act, and is entitled to judicial deference, the FCA should extend the
definition of ``participation'' in the similar entity provisions of the
Act to syndications for eligible borrowers.
The commenters who favor retaining FCA's current interpretation
asked the FCA to consider that:
1. The law on this issue is settled, and the markets distinguish
syndications from participations and, therefore, the FCA's current
interpretation is correct;
2. Syndications are credits to large borrowers, whereas the System
should focus on young, beginning, and small farmers and ranchers and
other borrowers that are more closely involved in production
agriculture;
3. Congress gave borrower rights to farmers who borrow from the
System, and the FCA should protect those rights, and
4. A new interpretation that would exempt System associations from
territorial consent revives the national charter initiative and
encourages the associations to ``cherry pick'' large credits.
III. Review of Loan Syndications for Eligible Borrowers
After reviewing input from the public and conducting a thorough
legal review of the Act, its legislative history, and external sources,
the FCA reaffirms that syndications and assignments of interests in
syndicated loans do not fall within the statutory authority of FCS
banks and associations to participate in loans made by non-System
lenders to eligible borrowers. Under the Act, syndicated loans to
eligible borrowers are part of the System's direct lending authority.
For this reason, regulations that implement the Act and other guidance
from the FCA will continue to require System banks and associations to
(1) Treat syndications to eligible borrowers as direct loans, and (2)
comply with all statutory and regulatory requirements that apply to
direct loans.
A. The Rules of Statutory Construction
In interpreting the provisions of the Act that govern the System's
direct lending and participation authorities, the FCA is guided by the
rules of statutory construction that Federal courts use when they
review an agency's interpretation of the statute it administers. A
reviewing court examines the language and design of the whole statute
to determine whether or not Congress clearly expressed its intent about
the question at hand. If Congress' intent is clear, the inquiry ends,
and the unambiguously expressed intent of Congress is enforced. If the
applicable provisions of the statute are silent or ambiguous, the
agency's interpretation is entitled to judicial deference as long as it
is not arbitrary, capricious, or manifestly contrary to the statute.
The agency's reasonable interpretation of the statute is entitled to
judicial deference even if the reviewing court would not have
necessarily adopted the agency's position had it decided the issue. See
Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467
U.S. 837, 842-43 (1984).
B. The Text and Structure of the Act
In determining whether or not a statute is ambiguous, its
provisions ``must be read in their context and with a view to their
place in the overall statutory scheme.'' \5\ In other words, all the
parts of a statute must fit into a ``harmonious whole,'' \6\ and one
provision cannot be interpreted in a way that negates another provision
of the same statute. Furthermore, the words of a statute must be
interpreted according to their ``ordinary, contemporary, common
meaning,'' \7\ unless Congress clearly expressed a different intent.
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\5\ FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120, 133
(2000) (citing Davis v. Mich. Dept. of Treas., 489 U.S. 803, 809
(1989)).
\6\ Id. (citing FTC v. Mandel Bros, Inc., 359 U.S. 386, 389
(1959)).
\7\ Pioneer Investment Service Co. v. Brunswick Associates Ltd.
Partnership, 507 U.S. 380, 388 (1993).
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An examination of the text, structure, and history of the Act
indicates that Congress was not silent or ambiguous about this issue.
After applying these judicial rules of statutory construction to the
Act, the FCA reaffirms that syndicated loans to eligible borrowers are
part of the System's direct lending authority and do not fall within
the System's participation authority.
1. Definition of Participation and Syndication
As the rules of statutory construction require, the FCA examines
the ``ordinary, contemporary, common meaning'' of the terms in
question. ``Participate'' and ``participation'' is clearly different
from the meaning of ``syndications.'' Moreover, defining
``participate'' or ``participation'' to include syndications would
contradict the commonly understood meaning of these terms in the
financial, business, and legal communities. For example, a banking law
journal described the differences between participations and
syndications as follows:
Multiple lender transactions generally fall into two categories:
loan participations and loan syndications. The first category, loan
participations, involved transactions where a lead or originating
lender sells a part of or all of a loan to one or more purchasers.
Participation, thus, can be defined as a third party's acquisition
of a specified percentage of a prearranged loan.
* * * * *
The second type of multi-lender transaction, loan syndications,
involve two or more lenders who make a loan(s) to a borrower under a
common loan agreement. Each lender is a syndicate member. Unlike
participations, the borrower has direct relationships with each of
the lenders. Thus,
[[Page 8410]]
each syndicate member is in direct privity of contract with the
borrower.\8\
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\8\ N.C. Banking Institute 169, 172 (April 1999). See also,
Office of the Comptroller of the Currency Economic and Policy
Analysis Working Paper, ``Recent Trends in Bank Loan Syndications
Evidence for 1995 to 1999'' (December 2000) and ``Banks and Loan
Sales,'' 35 Journal of Monetary Economics 389, 394 (1995).
Case law \9\ and guidance from other Federal banking regulators
\10\ also distinguish between syndications and participations. A
passage in Bank of the West v. The Valley National Bank of Arizona,\11\
which cited Circular 181 of the Office of the Comptroller of the
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Currency, states:
\9\ In re Okura & Co., 249 B.R. 596, 608 (Bankr. S.D.N.Y.,
2000); Bank of the West v. The Valley Nat'l Bank of Arizona, 41 F.
3d 471, 473 (9th Cir, 1994); Banco Espanol de Credito v. Security
Pacific National Bank, 763 F. Supp. 36, 43 (S.D.N.Y., 1991) aff'd 73
F.2d 51 (2nd Cir. 1992), cert. denied 509 U.S. 903 (1993); Hibernia
Nat. Bank v. Federal Deposit Ins. Corp., 733 F.2d 1403, 1407 (10th
Cir. 1984); McVay v. Western Plains Corp., 823 F.2d 1395 (10th Cir.
1987).
\10\ Office of the Comptroller of the Currency Banking Circular,
OCC-BC-181 (Aug. 2, 1984).
\11\ Supra at 41 F. 3d 471, 473 (9th Cir, 1994).
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A loan participation, as distinguished from a multibank loan
transaction (syndicated loan), is an arrangement in which a bank
makes a loan to a borrower and then sells all or a portion of the
loan to a purchasing bank. All documentation of the loan is drafted
in the name of the selling bank.
In re Okura & Co stated that a loan participation ``involves two
independent, bilateral relationships: the first between the borrower
and the lead bank and the second between the lead bank and the
participants.'' \12\ The same passage notes, ``As a general rule, the
participants do not have privity of contract with underlying borrower *
* *. In a syndication agreement, the banks jointly lend money.'' \13\
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\12\ Supra at 249 B.R. 596, 608 (Bankr. S.D.N.Y., 2000).
\13\ Id. Citations omitted.
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A System bank, citing a law review article,\14\ stated
participations and syndications are treated the same under securities
laws. However, Federal securities statutes and regulations of the
Securities and Exchange Commission do not, as the commenter implies,
define ``syndications'' to mean ``participations.'' The point of the
article is not that syndications and participations are the same, but
that neither are generally considered securities. Furthermore, the same
section of text cited by the commenter as supporting its view, actually
supports the opposite view, namely that syndications are a form of
direct lending. The text describes the attributes of a syndication as
follows, ``[e]ach bank is a party to the syndicated loan agreement, is
in privity of contract with the borrower, and receives its own note and
security interest in the collateral.'' \15\ In summary, the commonly
accepted definition and legal effect of a syndication transaction
clearly bring it within the System's loan-making authority and not its
participation authority.
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\14\ See ``The Status of Note Participations Under the Federal
Securities Acts,'' 8 Harv. J.L & Pub. Pol'y 465, 468-69 & n. 18
(1985).
\15\ Id.
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2. Similar Entity Authority
Several System commenters asked the FCA to apply the definition of
``participate'' and ``participation'' in the similar entity provisions
of the Act to syndications and assignments for eligible borrowers. Many
of these commenters stated that section 3.1(11)(B)(iii) of the Act
demonstrates Congress' intent to treat syndications and participations
identically for all multi-lender transactions that System banks and
associations engage in. Some System commenters found it inconceivable
that Congress intended to exempt syndications for ineligible similar
entities from borrower rights, borrower stock, territorial consent, and
first-lien requirements, while imposing these same obligations on
syndications for eligible borrowers.
The FCA responds that the plain language of section 3.1(11)(B)(iii)
of the Act explicitly applies this definition to similar entities, not
extensions of credit to eligible borrowers. Sections 3.1(11)(B) and
4.18A of the Act authorize FCS lenders to ``participate'' in loans to
similar entities, which are not eligible for System loans, but are
functionally similar to eligible borrowers. Sections 3.1(11)(b)(iii)
and 4.18A(a)(1) of the Act, which were added by the Farm Credit System
Agricultural Export and Risk Management Act (1994 Act),\16\ expressly
define ``participate'' and ``participation'' for similar entity
transactions to include syndications and assignments.\17\ In contrast,
sections 1.5(12)(C), 2.2(13) and 3.1(11)(A) of the Act, which authorize
FCS banks and associations to participate in loans to eligible
borrowers, do not define ``participations'' to include syndications and
assignments.\18\ As explained above, the rules of statutory
construction require that the various provisions of the Act be ``read
in their context and with a view to their place in the overall
statutory scheme'' so they fit into a ``harmonious whole.'' Examination
of the structure of the Act demonstrates that Congress established two
different statutory schemes for participations to (1) Eligible
borrowers, and (2) similar entities. Congress did not amend the
provisions of sections 1.5, 2.2, and 3.1 of the Act, which govern loan
participations for eligible borrowers, in 1994 when it added the new
definition of ``participate'' and ``participation'' for similar
entities to section 3.1(11)(B)(iv) of the Act. Therefore, it is clear
that the 1994 Act did not authorize System banks and associations to
engage in syndication transactions for eligible borrowers under their
loan participation authorities.
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\16\ See Pub. L. 103-376, Section 2, 108 Stat. 3797 (Oct. 19,
1994).
\17\ Section 3.1(11)(b)(iii) of the Act states, ``as used in
this subparagraph, the term `participate' or `participation' refers
to multilender transactions, including syndications, assignments,
loan participations, subparticipations or other forms of the
purchase, sale or transfer or interests in loans, other extensions
of credit, or other technical and financial assistance.'' Section
4.18A(a)(1) incorporates this definition by reference into the
statutory provision that authorized banks and associations operating
under titles I and II of the Act to ``participate'' in similar-
entity transactions.
\18\ Certain statutory restrictions that only apply to similar
entity authority may explain why Congress chose a more flexible
definition of ``participation'' and ``participate'' for similar
entity transactions. First, the total amount of participations any
FCS lender has outstanding to a single similar entity cannot, in
most cases, exceed 10 percent of its total capital. Second, the
participation interest(s) that one or more FCS lender holds in the
same similar entity transaction cannot equal or exceed 50 percent of
the principal amount of the loan. Third, the total amount of
outstanding similar entity participations held by an FCS lender
cannot equal or exceed 15 percent of its total outstanding assets at
the end of the preceding fiscal year.
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C. Legislative History
The Farm Credit Act of 1971 granted production credit associations
(PCAs) and banks for cooperatives authority to participate in loans
with non-System lenders in 1971,\19\ while the Farm Credit Act
Amendments of 1980 \20\ (1980 Act) gave System mortgage lenders similar
authority. The legislative history to the 1980 Act confirms that
Congress believed that a participation interest does not entail a
contractual relationship between a borrower and a participating lender.
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\19\ See Pub. L. 92-181, 85 Stat. 583 (Dec. 10, 1971).
\20\ See Pub. L. 24-184, 94 Stat. 3437 (Dec. 24, 1980).
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Prior to 1980, it was not clear whether a PCA was required to issue
stock to a borrower when the PCA participated in a loan that a non-
System lender made. The legislative history to the 1980 Act stated
``[t]he requirement that farmers or aquatic borrowers purchase stock in
the association served to impede or complicate PCA-other lender
participations. It caused the association to become a visible party in
transactions in which the commercial lender was the
[[Page 8411]]
lead institution.''\21\ (Emphasis added). In order to resolve any
confusion and to remove the PCA as a ``visible party,'' the 1980 Act
allowed PCAs to satisfy the stock requirement by issuing stock to the
non-System lender instead of the borrower. If a participation
transaction entailed a direct contractual relationship between a PCA
and a borrower, the PCA would have been a ``visible party,'' whether or
not it issued stock to the borrower. However, Congress chose to resolve
this problem by changing the stock requirement. Therefore, it is clear
that Congress did not believe that a participation transaction resulted
in a direct contractual relationship between a PCA and a borrower.
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\21\ See H.R. 96-1287, 96th Cong. 2d. Sess., (Sept. 4, 1980), p.
25.
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After 1980, Congress did not substantively revise the provisions of
the Act that govern the System's authorities to participate in loans to
eligible borrowers but, as noted earlier, it added a new statutory
definition of ``participate'' and ``participation'' for similar entity
transactions in 1994. A System commenter cited two passages in the
legislative history to the 1994 Act to support its view that
syndications to eligible borrowers are within the System's loan
participation authority.
In the first passage, a Senator stated that the new definition of
``participations'' for similar entity authority would ``[c]larify the
System's current authority to participate in loans * * * permitting the
System to take part in syndications * * *.'' \22\ According to the
commenter, this statement indicates that the Senator believed that the
System already had authority to engage in syndications to eligible
borrowers. However, this interpretation would be inconsistent with the
actual text of the Act and the 1994 amendments thereto.\23\ The 1994
amendments did not change the System's existing participation
authority. Rather, it clarified the existing similar entity authority
for title III lending and added similar entity authority for titles I
and II.\24\
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\22\ July 19, 1994 Cong. Rec. at S9252 (Statement of Sen.
Lugar); Oct. 5, 1994 Cong. Rec. at 14236.
\23\ United States Supreme Court cases do not give much credence
to ``post-enactment'' statements by a bill's sponsor or a member of
the committee that reports out a bill. In Chrysler v. Brown, 441
U.S. 281, 331 (1979), the Supreme Court stated, ``The remarks of a
single legislator, even the sponsor, are not controlling in
analyzing legislative history.'' In Central Bank of Denver N.A. v.
First Interstate Bank of Denver, 511 U.S. 164, 185 (1994), the
Supreme Court opinion stated, ``we have observed on more than one
occasion that the interpretation given by one Congress (or a
committee or member thereof) to an earlier statute is of little
assistance in discerning the meaning of that statute.'' See also
United States v. United Mine Workers, 330 U.S. 258, 281-82 (1947).
\24\ Section 502 of the Farm Credit Banks and Associations
Safety and Soundness Act of 1992 granted title III banks new
authority to ``participate'' in similar entity loans with non-System
lenders. See Pub. L. 102-552, Sec. 502, 106 Stat. 4102, 4130 (Oct.
28, 1992). Two years later, section 5 of the 1994 Act granted
similar entity authority to title I and II lenders. See Pub. L. 103-
376, Sec. 5, 108 Stat. 3497, 3498 (Oct. 19, 1994). Section 2 of the
1994 Act added the definition of ``participation'' for similar
entities to section 3.1(11)(B) of the Act. Id. Sec. 2 at 3497.
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The second passage that the commenter relies on is an analysis of
the 1994 legislation that the FCA prepared and submitted to the House
Agriculture Committee, which was subsequently reprinted in the
Congressional Record. The FCA's analysis stated the proposed statutory
definition of ``participations'' for similar entities ``* * * is more
expansive than the current regulatory definition * * *'' and ``does not
require an undivided fractional interest in the principal amount of the
loans (as FCA regulations do) and hence does not require pro rata risk
sharing.''\25\ The commenter's reliance on this passage is misplaced.
The FCA's analysis discussed a regulatory, but not a statutory limit on
loan participations for eligible borrowers. Former Sec.
614.4325(a)(4), defined a ``participation'' to mean a fractional
undivided interest in a loan. Because the proposed statutory definition
was ``more expansive'' than the existing regulatory definition, the FCA
noted that the Act would not require an undivided fractional interest
for similar entity transactions. In 2002, the FCA revised Sec.
614.4325(a)(4) so FCS banks and associations could purchase
participations that equaled 100 percent of the principal amount of a
loan to an eligible borrower. However, this change is not relevant to
the present issue. Regardless of whether syndications are divided or
undivided interests, they still are direct loans and, therefore, come
within the System's direct lending authority.
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\25\ Sept. 29, 1994 Cong. Rec. at H10325.
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IV. Rules that Apply to Syndications for Eligible Borrowers
The foregoing analysis of the Act, its legislative history, and
applicable case law, affirm that syndications for eligible borrowers
come within the System's direct lending authority, not within its loan
participation authority. As a result, FCS banks and associations that
are direct lenders may take part in a syndicated loan to an eligible
borrower as long as they comply with the applicable provisions of the
Act and FCA regulations that govern lending to eligible borrowers. FCS
banks that are not direct lenders cannot take part directly in
syndicated loans to eligible borrowers, and no System lender may
purchase assignments in syndicated loans to eligible borrowers from
non-System lenders.
A. System Banks
System banks that have transferred their long-term mortgage lending
authority under section 7.6 of the Act to their associations can no
longer make loans directly to farmers, ranchers, and other eligible
borrowers. Therefore, these banks cannot directly take part in
syndicated loans to eligible borrowers. These banks may, however,
purchase a participation interest in a long-term mortgage syndicated
loan directly from a non-System lender. Additionally, these banks may
buy (long-or short-term) participations and other interests in
syndicated loans directly from other System banks or associations.
B. Assignments
Assignments in syndications are interests in loans. Sections
1.5(16), 2.2(11), and 3.1(13)(B) of the Act do not authorize FCS banks
and associations to buy interests in loans from non-System lenders.
However, System banks and associations may buy from and sell to each
other assignments in loans.
C. Borrower Rights
Borrower rights attach to all agricultural or aquatic loans made
under title I or II of the Act.\26\ Therefore, System associations that
take part in syndicated loans to eligible farmers, ranchers, and
aquatic producers and harvesters must adhere to borrower rights
requirements.
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\26\ Section 4.14A(a)(6) exempts title III banks from borrower
rights requirements.
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Our earlier notice (See 68 FR 2540, January 17, 2003) asked the
public whether the FCA should consider regulatory changes that allow a
borrower to waive borrower rights in syndications. Many System
commenters replied that borrower rights are an impediment that will
discourage commercial lenders from inviting FCS lenders into syndicated
loan transactions. Some of these commenters indicated that many, but
not all, non-System lenders may be more inclined to invite FCS
institutions into syndicated transactions if borrowers could waive
borrower rights. Commercial bank commenters opposed any regulatory
change that would allow borrowers to waive these rights.
The FCA believes that borrower rights should only be waived in
limited
[[Page 8412]]
circumstances. In the future, the FCA may consider whether to initiate
a rulemaking that would allow waivers of borrower rights in
syndications for certain sophisticated borrowers.
D. Stock and Membership Requirements
Section 4.3A of the Act requires all eligible farmers, ranchers,
aquatic producers and harvesters, and cooperatives, to buy voting stock
in the FCS institution that lends to them. This voting stock enables
these borrowers to own, control, and participate in the affairs of
their System lenders. Under the Act, a minimum stock purchase of $1,000
or 2 percent of the principal amount of the loan, whichever is less, is
required. For the reasons explained above, eligible borrowers in
syndicated loans must buy voting stock in FCS lenders that take part in
these transactions.
E. Territorial Concurrence Requirements
An FCA regulation, Sec. 614.4070, prohibits a System institution
that operates under title I or II of the Act from lending directly to
any borrower who is located in the chartered territory of another FCS
lender without its consent. The earlier notice (See 68 FR 2540, January
17, 2003) asked whether the FCA should consider revising this
regulation so that out-of-territory syndications to eligible borrowers
would no longer require consent from other FCS lenders. All commercial
bank commenters who replied to this question opposed repeal of the
territorial consent requirement for syndications. These commenters
expressed concerns that repealing the territorial consent requirements
for syndications would dilute local control of System associations and
allow them to operate nationally. The FCA received only a few responses
to this question from System commenters. These commenters expressed
concern that territorial concurrence for out-of-territory syndications
would sharply curtail System involvement in this market. Only one
System commenter thought that the FCA should consider revising Sec.
614.4070 if syndications are classified as direct loans. Two other FCS
commenters deemed changes to the regulation as unnecessary because
System lenders could resolve the territorial consent issues among
themselves.
After considering the views of these commenters, the FCA does not
plan, at this time, to initiate a rulemaking that would repeal the
territorial consent requirements for syndications. FCS associations can
resolve this issue through cross-territory consent agreements.
F. Lien Position Requirements
Sections 1.14, 2.6, and 3.10(c) of the Act require each Farm Credit
bank and association to hold a first-lien position on stock,
participation certificates, and other equity that they issue for the
payment of any liability owed by the shareholder-member. Separately,
section 1.10(a)(2) of the Act requires that all System institutions
operating under title I secure all long-term mortgages with a first
lien on interests in real estate. For these reasons, FCS banks and
associations must maintain priority lien positions on membership stock
and participation certificates, and (when applicable) on real estate
that cannot be subrogated to any non-System lender.
V. Other Concerns of the Commenters
A System commenter suggested that the FCA create a special
regulatory category for syndications and other multi-lender
transactions if the agency determined that syndications for eligible
borrowers are not within the System's loan participations authorities.
Under the commenter's proposal, multi-lender transactions involving a
direct contractual relationship between the borrower and all the
creditors would be exempt from borrower stock, borrower rights,
territorial concurrence, and first-lien requirements if (1) The
borrower was a customer of a non-System lender, (2) FCS institutions
held a pro rata interest in the credit, and (3) System lenders could
not unilaterally make major credit decisions on the loan. The FCA has
no basis under the Act to exempt syndications, assignments, and other
multilender transactions (where System lenders enter into a direct
contractual relationship with an eligible borrower) from the statutory
and regulatory requirements that apply to loans. For this reason, the
FCA declines the commenter's request.
Most commercial banks expressed concern that syndications to large,
integrated operators would cause System lenders to shift their energies
away from young, beginning, and small farmers, ranchers and other
borrowers that are more closely involved in production agriculture.
However, FCS lenders have legal authority to take part in syndications,
as explained above. Accordingly, System lenders may enter into
syndications that extend credit to eligible borrowers that have large,
integrated operations as long as they comply with all statutory and
regulatory requirements that apply to direct loans. Section 1.1(b) of
the Act states that the System's public policy mission is to ``* * * be
responsive to the credit needs of all types of agricultural producers
having a basis for credit. * * *'' Thus, the System may serve all
creditworthy agricultural and aquatic producers.
VI. Compliance with this Guidance
System institutions that take part in syndicated loans to eligible
borrowers must comply with all applicable provisions of the Act and
regulations. From a safety and soundness perspective, each FCS lender
must understand the risks associated with syndications, and the
policies of its board must establish methods for measuring and managing
these risks. The FCA also expects each System lender that takes part in
syndications to achieve clearly defined risk management and
diversification objectives. The Office of Examination will continue to
examine loan syndications to ensure safety and soundness and compliance
with the Act and regulations.
VII. Legislative Initiative
The January 17, 2003 notice also sought input from the public about
whether the FCA should seek legislative changes regarding the System's
authority to engage in various types of multi-lender transactions with
non-System lenders. The notice asked what specific statutory changes
the FCA should seek if it chose to recommend new legislation to
Congress.
All System and non-System commenters opposed any legislative
initiative by the FCA on this issue. At this time, the FCA does not
plan to propose new legislation to Congress about syndications and
other multi-lender transactions. However, given the increasing
importance of syndications in agricultural credit markets, the FCA may
reconsider its position and pursue legislation that would address this
matter in the future.
Dated: February 18, 2004.
James M. Morris,
Acting Secretary, Farm Credit Administration Board.
[FR Doc. 04-3888 Filed 2-23-04; 8:45 am]
BILLING CODE 6705-01-P