analysis of each special lending program. Such analysis should cover the reasons for the program, the selectivity of borrowers included, the quality of service and control exercised over the loan, relative progress being made by individual borrowers, and the success or failure in meeting the objectives of the program.

(b) Each Federal intermediate credit bank policy shall provide for a credit review of other financing institutions borrowing or discounting paper. The bank's credit review program shall prescribe a scope of review for such institutions commensurate with the capability and responsibility of the institution and the ratio of peak debt to capital and collateral pledged. Frequency of review, and loan classification and reporting standards, will be generally the same as for production credit associations, recognizing that supervisory responsibility is not a factor.

[37 FR 28492, Dec. 27, 1972, as amended at 39 FR 29584, Aug. 16, 1974]

§ 614.4060 Association responsibilities. Associations shall conduct their credit operations within their vested or delegated authority in compliance with the guidelines of these regulations and procedures of the district bank. Demonstrated capability in extending sound credit, including the extent to which association boards have established policies and procedures with adequate controls and accountability, shall be weighed heavily by the bank in delegating authority and exercising its supervisory responsibility over association credit operations.

Subpart B-Chartered Territories § 614.4070 Loans outside the established territory-Federal land banks, Federal land bank associations, and production credit associations.

(a) A loan to finance operations wholly within the territory of a bank or association may be made regardless of the residence of the applicant.

(b) A loan to finance operations which are partially within and partially without the territory of an association may be made if such operations are regarded by the association and the bank as one farming or livestock unit. Concurrence of the supervising banks in whose territories the operation is located shall be obtained.

(c) A loan to finance operations wholly outside the chartered territory of

an association may be made, provided such loans are authorized under policies established by the bank board and approved by the Farm Credit Administration. If a loan is made to an eligible borrower whose operation is wholly outside the chartered territory of the lending association, concurrence of like associations and the supervising bank in whose territory the operation is located shall be obtained.

§ 614.4080 Loans outside of bank's territory-banks for cooperatives.

(a) A bank is authorized to make loans to cooperatives headquartered in the district served by the bank.

(b) Cooperatives operating in more than one district shall apply for loans to the bank in the district in which the headquarters office of the cooperative is located.

(c) A bank may make loans to an eligible cooperative headquartered in another district provided the following conditions are met.

(1) The interests of the borrowing cooperative would best be served.

(2) The bank in the district in which the cooperative is headquartered gives its consent.

(3) The Farm Credit Administration approves.

Subpart C-Lending Authorities § 614.4090 Federal land banks.

(a) The banks are authorized to make and participate with other Federal land banks in long-term real estate mortgage loans in rural areas for a term of not less than 5 years nor more than 40 years. Subject to limitations applicable to making long-term real estate mortgage loans, the banks are authorized to make continuing commitments to lend and to extend financial assistance of a similar nature. Policies as prescribed by the bank's board shall be used in making loans, continuing commitments for loans, and in extending other financial assistance. Borrowers shall be permitted to make advance payments on their loans or, under agreement with the banks, make advance conditional payments to be applied on future maturities or to be available for return to the borrower for purposes for which the bank would increase their existing loans. § 614.4100

banks.

Federal intermediate credit

(a) The banks are authorized to make loans and extend other similar financial

assistance to and discount for, or purchase from, production credit associations, with their endorsement or guaranty, any note, draft, and other obligation presented by such association. In addition, the banks may participate with such association(s) and one or more other intermediate credit banks in making loans to eligible borrowers.

(b) The banks are authorized to discount for, or purchase from commercial banks and other other financial institutions, with their endorsement or guaranty, notes and other obligations for loans which have been made for agricultural purposes in accordance with regulations contained in § 614.4540.

(c) All of the foregoing shall be subject to policies prescribed by the bank board.

§ 614.4110 Production credit associations.

Each production credit association, under policies established by the bank board and procedures prescribed by the bank, may make, guarantee, or participate with other lenders in short- and intermediate-term loans and other similar financial assistance to eligible borrowers for a term not exceeding 7 years.

§ 614.4120 Banks for cooperatives.

The banks are authorized to make loans and commitments to eligible cooperatives and to extend to them other filnancial assistance, including, but not limited to, discounting notes and other obligations, guarantees, collateral custody, or participation with other banks for cooperatives and commercial banks or other financial institutions in loans to eligible cooperatives under policies established by the bank board.

§ 614.4130 Approval.

All district policies mentioned in this Subpart C shall be subject to Farm Credit Administration approval. Subpart D-General Loan Policies for Banks and Associations

§ 614.4140 Sound loan.

A sound loan is one made to a responsible individual or entity of established integrity who has a creditable operating and financial record, or equivalent characteristics if a new business, in an amount sufficient to accomplish a useful purpose. It should be made in an amount and under terms and conditions that will

Five basic factors pertinent to a sound loan are as follows:

(a) The individual or entity: A prerequisite for a sound loan is an applicant of established integrity. Responsible and cooperative management must be evident. The importance of this factor is of such significance that it can affect the weight placed upon the other credit factors. Analysis shall include a careful evaluation of character, experience, record and prospects of management in finance and operation.

(b) Financial position and progress: Financial responsibility reflects ability to meet obligations, continue business operations and protect the lender against undue risk. The applicant's total assets controlled, equity owned, contingent liabilities and history of earnings to date are significant measures of financial responsibility.

(c) Repayment capacity: The determination of repayment capacity requires an analysis of cash flow history and projection. A cash flow projection shall reflect cash generation from the applicant's operation and all other sources. Generally the flow of cash shall be sufficient to meet all obligations and provide a remainder for contingencies.

(d) Basis of approval: The amount of loan, use of funds and loan terms are the principal factors over which the lender has direct control. Therefore, the loan shall be constructive in amount and purpose and practical as to repayment terms for both the borrower and lender. Loan conditions such as loan agreements, personal liability, additional collateral, insurance, etc., shall be required as conditions warrant.

(e) Collateral offered or available as security (section 1.9 Federal land bank, 2.15 production credit association, and 3.10(b) bank for cooperatives of the Act). Collateral needs are contingent upon the requirements of the law and as dictated by the strengths or weaknesses of all credit factors. The requirement of collateral and collateral taken shall reasonably protect the lender, provide the necessary control of equity and repay

(a) It is the objective of the Farm Credit System to ensure the availability of: (1) full credit, to the extent of credit worthiness, to the full-time bona fide farmer (farming is his primary business and vocation) and (2) 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 his farm income or who desires to supplement his off-farm income by living in a rural area and is carrying on a valid farming operation, shall have availability of credit for mortgages, other agricultural purposes, and family needs in the preferred position along with fulltime farmers. Loans to farmers shall be on an increasingly conservative basis as the emphasis moves away from the fulltime 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.

(b) It is also the objective of the Farm Credit System to provide a full range of credit services to farmer cooperatives to assist them in increasing the income of their members as patrons. The type of farmer cooperative operation, quality of management, and basic financial factors shall be carefully evaluated as to their effect upon the long-range benefit to members. Bank boards shall establish policies and banks for cooperatives, develop procedures for administration of quality standards that fully consider the needs of, support by, and service per

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formed for members, and risk protection afforded the lender.

(c) Each bank board shall adopt policies adequate to provide the direction it desires management to follow in administering credit and lending standards to ensure attainment of the System's objective. Bank management shall prescribe operating procedures to effectively administer board policies including provision that proper weight be given the infinite combination of person, property, and purpose which can exist. Guidelines shall be included which provide for identification of that portion of mixed value (agricultural and nonagricultural) assets which may be considered agricultural for lending purposes.

[38 FR 27837, Oct. 9, 1973]

(1) Specialized enterprises. Consideration can be given to organizing groups of similar borrowers into pools by which banks or associations may be afforded increased protection from the higher risk occasioned by financing their specialized enterprises.

(2) Young farmers. Consideration can be given to special lending programs for young farmers placing emphasis upon sound credit service to those entering farming in a low equity-high risk position but demonstrating high management ability and earning capacity, thereby providing service to high potential persons within the broad category of young farmers who might otherwise not have an opportunity to enter into farming. Programs shall limit total lending by a Federal land bank or production credit association to an amount not exceeding five percent of their preceding year's peak loans outstanding. This same limitation will generally be applied by Federal land banks when authorizing Federal land bank association programs.

(b) Where special lending programs are authorized, district and bank boards shall adopt appropriate policies that

(1) Assure coordination between banks,

All primary borrowers shall normally be fully liable for loans obtained from the Farm Credit System. Where acceptable to the bank or association when the primary borrower includes two or more persons as joint borrowers, the liability requirement may be met by each borrower assuming liability for a specified percentage of the loan provided the aggregate liability covers 100 percent of the loan and credit conditions support such action. Where personal guaranty is required from persons other than the primary borrower, such guarantor shall normally be fully liable unless the primary borrower or other guarantors provide adequate financial strength to result in a sound loan even though the personal liability of an individual guarantor may be limited.

Subpart F-Loan Terms and
Conditions

§ 614.4180 Federal land banks.

(a) Farm loans may be made for not less than 5 years nor more than 40 years. The basis of approval shall set out the terms and conditions under which a loan is approved. When necessary to assure proper understanding, provide needed controls and protect the lender, a formal written loan agreement shall be developed between the borrower and the bank.

(b) The outstanding loan balance on any farm loan shall not at any time during the life of the loan exceed an amount greater than 85 percent of the appraised value established by the most recent appraisal report on the primary real estate security. This shall not, however, prohibit protecting the security position by advancing taxes, advancing insurance premiums, rescheduling loan payments, granting partial releases, or other loan servicing actions when the loan, sub

sequent to the action, will be at least as well secured as it was prior to the action.

(c) The bank shall incorporate in the district's credit manual a sufficient number of basic repayment plans consistent with sound lending as are necessary to adequately serve the borrowers in its district. Adaptations within these plans will be permissible to tailor loans to the individual borrower's credit needs.

§ 614.4190 Federal intermediate credit banks.

(a) Loans made by a Federal intermediate credit bank in participation with a production credit association or another Federal intermediate credit bank, shall be made under terms and conditions prescribed in § 614.4200 for production credit associations.

(b) Direct loans to production credit associations. The bank may make direct loans to production credit associations either in lieu of discounting acceptable paper or in conjunction with a direct loan program which encompasses the discounting function. Except with the approval of the Farm Credit Administration, the total of all direct loans and loans discounted shall not at any time exceed the limitations outlined herein. Direct loans will normally be secured by pledge of loans and all other assets of the production credit association; except that where loans to members are discounted separately, direct loans may be unsecured in whole or in part, at the discretion of the bank. The amount loaned on an unsecured basis shall at all times be consistent with sound financial and credit practices.

(c) Direct loan limitation. The total credit extended to a production credit association under a direct loan and by discounting loans may not at any time exceed the total of that portion of the total loans, including participations purchased from other lenders, considered acceptable and problem (as defined by loan classification standards set forth in § 614.4051(a)(4)) in accordance with the percentage as classified in the bank's most recent credit review, or such percentages as may equitably represent the same percentages on a current basis, such alternate procedure to be subject to concurrence of the Farm Credit Administration, the total of investments under Commodity Credit Corporation programs, notes insured or guaranteed by Farmers Home Administration, and in farmers' notes to cooperatives and dealers, etc.;

and capital and surplus less the total of the amount invested in the Federal intermediate credit bank and any portion of capital and surplus invested in loans to members, and any estimated losses not protected by reserves.

(d) General Financing Agreement. Federal intermediate credit banks shall require execution of a General Financing Agreement, in form approved by the Farm Credit Administration, as a condition to making direct loans to production credit associations and other financing institutions. Direct loans and advances to other financing institutions will be evidenced by a separate promissory note. Direct loans and advances to production credit associations may be evidenced by a separate promissory note or as provdied in the General Financing Agreement.

[37 FR 11424, June 7, 1972, as amended at 38 FR 6377, Mar. 9, 1973; 39 FR 29585, Aug. 16, 1974]

§ 614.4200 Production credit associations.

(a) Operating loans will usually be made with maturities coinciding with the purpose of the loan and the normal marketing seasons for the enterprises being financed.

(b) Intermediate-terms loans may be made with maturities not to exceed 7 years from the date of initial disbursement, under policies established by the bank board and procedures prescribed by the bank.

(c) Special intermediate-term loans, exclusive of loans to nonfarm rural residents, and farm-related businesses, may be made with maximum maturity not to exceed 7 years realizing, however, when establishing repayment that forbearance or extension may be necessary under the following circumstances.

(1) When specific capital items are being financed, such as new equipment, new or remodeled buildings, or facilities with a useful life and value, after normal depreciation and obsolescence, which exceeds the term of the loan at all times. (2) When real estate mortgage credit is unavailable, not acceptable to the applicant, or impractical for reasons such as cost or delay in availability.

(3) When earnings' history, repayment record and net earnings projections satisfactorily support the loan and provide assurance for final repayment within three additional years if forbearance or extension is granted.

(4) Before any special intermediateterm loans shall be made, the district board shall adopt a policy, and the Federal intermediate credit bank and the Federal land bank of the district shall develop procedures regulating the making of such loans, all of which shall be subject to approval of the Farm Credit Administration. Such policies and procedures shall include but are not limited to the following.

(i) Provisions for cooperation between production credit associations and Federal land bank associations in the consideration of any loans bordering on the long-term mortgage category.

(ii) Procedures to be followed in credit reviews whereby loans of this type, made during the period covered by the review, will be reviewed and commented upon as to compliance with policy and procedures.

(iii) Provisions for adequate reporting on loans of this type to enable timely supervision by the bank.

(d) The basis of approval shall set out the terms and conditions under which a loan is approved and shall be clearly communicated to the borrower prior to disbursement of approved funds. When necessary to assure proper understanding, provide needed controls and protect the lender, a formal written loan agreement shall be developed between the borrower and the association or bank. [37 FR 11424, June 7, 1972, as amended at 38 FR 27837, Oct. 9, 1973; 39 FR 29585, Aug. 16, 1974]

§ 614.4210 Banks for cooperatives.

(a) Seasonal loans shall be primarily for financing current assets and shall normally be repaid within 18 months. Term loans shall be for financing noncurrent assets or working capital and should generally be made on an amortized basis.

(b) The basis of loan approval by a bank shall set out the terms and conditions under which a loan is approved. To assure proper communication and understanding, provide needed controls, and protect the lender, a loan agreement shall be executed between the borrower and the bank.

Subpart G-Security Requirements § 614.4220 General.

Primary real estate shall be valued on the basis of appraised value and primary chattel security or additional security