shall be valued on the basis of recovery value.

(a) Appraised value. Appraised value shall be the basis for valuing primary real estate and is the reasonably supported market value except in the following circumstances.

(1) Property in areas of population pressure when the principal basis of value is from land uses such as commercial, industrial, residential or recreational development or speculation on such uses in the future. These may be adjacent to urban areas but could also be some distance from the population center, along or near bodies of water, in or near mountain ski developments, in dude ranch areas, and similar situations. The appraised value of such properties shall be adjusted downward to assure that loans based thereon are consistent with the objective to make primarily agricultural loans.

(2) Timber land shall be valued at market value when not affected by the other exceptions of this section; however, the timber stumpage, which when severed is a commodity and fluctuates widely in price, shall be valued on the basis of its normal commodity price.

(3) Properties on which long-term plantings such as citrus groves, orchards, nuts, vineyards, cranberries, etc., where there is evidence of abrupt fluctuation in market value due primarily to changes in the supply and price of the particular commodity. In these cases, a 5-year moving average of market value shall be used.

(4) Property where reliance for earnings and value is placed on leases or use permits and where there is a question about the continued availability of the lease or permit for the term of loan contemplated. The fee owned land shall be appraised at market value and the lease or permit contribution to value shall be on a basis which will maintain standards consistent with other real estate lending.

(5) Properties in areas where there is evidence of imminent serious problems resulting from a depleting water supply, deteriorating water quality, or lack of drainage, except where these problems are already reflected in the market value or can be appropriately protected against in the loan term and repayment schedule. These shall be appraised in such manner as to eliminate undue lending risks in the particular circumstances.

(6) Property in areas where mineral value or speculation on such value exists.

The appraised value shall be based on a comparison to similar areas where mineral influence is minimal.

(b) Market value. Market value is the amount which a property will bring if a reasonable time is allowed to find a purchaser and if both seller and prospective buyer are informed, neither being under abnormal pressure.

(1) The above definition contemplates the consummation of a sale and the passing of full title from seller to buyer, under the following conditions.

(i) Buyer and seller are free of undue stimulus and are motivated by no more than the reactions of typical owners.

(ii) Both parties are well-informed or well-advised and act prudently, each for what he considers his own best interest.

(iii) A reasonable time is allowed to test the market.

(iv) Payment is made in cash or in accordance with financing terms generally available in the community for this type of property.

(2) There is a difference between market price and market value. Market value represents the rationale of buyers collectively within the area while market price indicates what an individual property may have sold for.

(c) Recovery value. Recovery value applicable to both chattels and real estate is the amount, less estimated maintenance, selling costs, all prior liens and encumbrances, at the date of inspection or appraisal, which the lender should be able to realize from sale of property on reasonable terms. It is a modification of present market value as determined by a loan analyst or appraiser and lies between present market value and a forced sale value. Condition of the loan and of the farming operation, and the circumstances under which recovery would likely be attempted will need to be recognized in determining such value. It should be predicated on the basis of the active effort to dispose of the property when related to a workout loan situation. Values based on security in appraisal or inspection reports should clearly define the basis on which the value was established.

§ 614.4230 Federal land banks.

(a) Primary security for a Federal land bank loan shall consist of a first lien on interest in real estate. The real estate interest must be mortgagable interest under deeds or leases which rea

sonably may be considered adequate to afford the security of a first lien upon the rights and interests on which the loan is predicated. Collateral closely aligned with, an integral part of, and normally sold with real estate may be included in the appraised value of the security upon which a loan is based. Appraised value shall be determined within approved standards and shall include in the evaluation either farm land, eligible farm related businesses, or eligible rural residences whichever is appropriate for the type of loan being made.

(b) Additional security may be required to supplement primary real estate security. The value of such additional security shall be considered only for collateral protection and may not be included in the value of the security upon which the loan is based. Recovery value shall be the basis for measuring the collateral worth of additional security.

(c) Personal property used in farming operations and considered as collateral for short- and intermediate-term credit will normally not be included as additional security. Before taking such personal property as additional security, the Federal land bank and Federal land bank associations shall consider whether all or a portion of the credit needs might be met more satisfactorily by a shortor intermediate-term loan such as may be obtained through a production credit association in accordance with district board policies under §616.6020 of this chapter.

§ 614.4240 Federal intermediate credit banks.

(a) Participation loans. Loans made by a Federal intermediate credit bank in participation with a production credit association or another Federal intermediate credit bank shall adhere to the same security requirements as prescribed in § 614.4250 for production credit associations.

(b) Direct loans to production credit associations. Securities and other obligations pledged to the bank by a production credit association pursuant to a general pledge and direct loan agreement, shall be held by the bank as collateral for direct loans made by the bank against such securities, as general collateral to secure all paper discounted for the association, and as security for all other obligations of the association to the bank. In the event it is necessary for a bank to realize on such collateral the

proceeds therefrom will be applied in that order.

(c) Direct loans to other financing institutions shall be secured in accordance with regulations contained in § 614.4600. § 614.4250 Production credit associations.

(a) Both secured and unsecured loans may be made in accordance with procedures prescribed by the bank. Normally, primary security taken will consist of first liens on personal property and crops. While it is not intended that associations will ordinarily make first lien real estate mortgage loans to farmers, real estate or other security may be taken when deemed necessary for the protection of the association in making short- and intermediate-term loans for eligible purposes. Before taking a real estate mortgage, the association shall consider whether all or a portion of the credit needs might be met more satisfactorily by a real estate mortgage loan such as may be obtained through a Federal land bank association, in accordance with district board policies established under § 616.6020.

(b) Recovery value shall be the basis for measuring the collateral worth of security. However, the value of interest in real estate which constitutes primary security shall be the appraised value as determined within approved appraisal standards.

§ 614.4260 Banks for cooperatives.

Banks for cooperatives are authorized to make both secured and unsecured loans.

(a) Term loans may be secured or unsecured depending on the purpose, repayment period, and other credit factors. However, as a general practice loans scheduled for repayment over an extended period should be secured.

(b) Regular seasonal loans may be secured or unsecured.

(c) Seasonal loans made to finance commodities and qualifying for special interest rate (where applicable) and lending limit consideration shall be secured. Loans secured by a chattel mortgage, factor's lien, security agreement, or security other than warehouse receipts or other title documents shall not exceed 65 percent of the net value of unhedged or 85 percent of the net value of hedged commodities and the borrower must have sufficient working capital to keep the loan properly margined. Loans secured by

warehouse receipts or other title documents shall not exceed 75 percent of the unhedged net value of the commodity or 90 percent of the hedged net value and the borrower must have sufficient working capital to keep the loan properly margined.

(1) "Commodities" shall consist of goods and merchandise except for live animals which are transportable; can be accurately classified by standards of quality and quantity; and enjoy broad regional, national, or international markets within which similar items are regularly traded and the value thereof readily and regularly determined.

(2) A hedge will be considered valid if it is an enforceable contract with a reliable third party and includes point of delivery, time or period of delivery, quality, quantity, and price as specifications binding on the purchaser. Seller options will not generally invalidate the hedge classification unless of the nature to invalidate the entire contract. If options are provided the purchaser under the contract, the hedge value of the contract will be the worse combination of options.

(3) The Commodity Credit Corporation's (CCC) general offer to purchase may be accepted as a valid hedge if the conditions listed below for individual commodities exist, loan advance, expiration, and maturity dates conform with CCC established availability, and maturity dates and loan agreement restrictions insure compliance with CCC quality and crop year standards.

(1) Rice, soybeans, dry beans, honey. Borrower must possess a current letter recognizing it as CCC approved cooperative marketing association and pledged commodity must not have been previously financed by CCC.

(ii) Cotton. Borrower must have entered into a current Form G agreement with CCC and pledged cotton must not have been previously financed by CCC.

(iii) Peanuts. Borrower must be eligible to offer commodity to CCC and be a current member and signer of an area peanut marketing agreement.

(4) Trust receipts, negotiable bills of lading, shipping documents, drafts and acceptances may be accepted in such amounts and for such periods as reasonable prudence permits as necessary to allow the orderly marketing, handling, or processing of the commodities.

(5) Documents required in conjunction with these loans may be held by a custodian selected by the bank. In such cases

the bank shall provide the custodian written instructions outlining procedures and practices to be followed in the acceptance, handling, and release of all related documents. The custodian shall be adequately bonded. The bank shall provide for periodic review of custodial activities by bank officials and shall establish that activities of the custodian are subject to review and audit by the Farm Credit Administration.

[37 F.R. 11424, June 7, 1972, as amended at 37 FR 28493, Dec. 27, 1972; 39 FR 29585, Aug. 16, 1974]

§ 614.4261 Security and appraisal standards-bank for cooperatives.

Written security and appraisal standards shall be prepared and employed, where applicable, by each bank for cooperatives and approved by the Farm Credit Administration adopted standards should recognize that properties securing bank for cooperatives loans frequently are of the nature to which normal valuation standards do not apply. Much of the collateral securing bank for cooperatives loans is in the form of specialized assets for which individual judgments of potential values under various circumstances ranging from going concern to salvage values will need to be made.

Subpart H-Interest Rates and
Charges
Policy.

§ 614.4270

In setting rates and charges, it shall be the objective to provide the types of credit needed by eligible borrowers at the lowest reasonable cost on a sound business basis, taking into account the cost of money, necessary reserves and expenses, capital requirements, and services provided to borrowers and members.

§ 614.4280 Interest rates.

Loans (and discounts) made by each bank shall bear interest at a rate or rates as may be determined by the bank board with the approval of the Farm Credit Administration. Requests to Farm Credit Administration for interest rate plans or interest rate adjustments shall include justification for the plan or change.

§ 614.4290 Interest on past due loans

Provisions may be made in the approved interest rate programs of banks and production credit associations for the collection of interest at a higher rate after maturity of a loan or installment

if provision is made in the note or loan document.

§ 614.4300 Other charges and fees.

Banks and associations may impose reasonable charges or fees to members, borrowers, or applicants in connection with loans or other services rendered. Fees charged by the associations shall be subject to bank approval.

§ 614.4310 Interest rate limitation for Federal intermediate credit banks. The rate of interest charged borrowers on notes or other obligations that a Federal intermediate credit bank may purchase, discount, or accept as collateral for loans shall not exceed by more than 4 percent per annum the lending rate of the bank which was in effect at the time the loan was consummated. Notes with provisions for a payment of interest on other than a simple interest basis (add-on, interest after maturity, etc.) may be accepted provided the effective simple interest rate to the borrowers does not exceed such maximum.

§ 614.4320 Production credit associations.

The rate of interest charged by an association shall be the rate authorized by the bank, within programs prescribed by the bank board and approved by the Farm

Credit Administration. Interest shall be charged on loans for the actual number of days such loans are outstanding unless a different method is authorized by such programs.

§ 614.4321

Interest rate programs.

The following types of interest rate programs may be employed by banks and production credit associations.

(a) Fixed rates: The rate of interest specified in the note or loan document shall prevail as the maximum rate chargeable to the borrower during the period of the loan.

(b) Variable rates: The interest rate(s) on outstanding loan balances may be changed from time to time during the period of the loan, if provision is made in the note or loan document.

(c) Fixed interest spread: Interest rates shall be expressed in terms of a percentage to be added to the cost of money to the bank or association.

(d) Differential rates may be established for different classes of loans based on the type, purpose, amount or quality of loan or any combination of these ap

plicable factors. When the differential rate is based primarily on the amount of the loan, in order to provide equitable treatment between borrowers, the rate or rates may provide for a uniform rate up to a predetermined amount or amounts and a lower rate or rates on larger unpaid amounts. For clarification to the borrower, the above may be accomplished through the use of a blended rate.

Subpart I—Loan Participations § 614.4330 General.

Under policies prescribed by the boards of directors of the respective banks and approved by the Farm Credit Administration, Farm Credit banks and production credit associations may enter into loan participation programs to enable joint financing of eligible individuals or other legal entities meeting the lending standards of banks and associations. The program shall require that loan participation agreements define the provisions for disbursement and repayment of loan funds; sharing, division or assignment of collateral; the loan service plan; collection procedures; authorizations and conditions for action in the event of default by the borrower; sharing loss; conditions for termination of the agreement and any other applicable items. In lieu of executing separate notes and other legal documents, the participating institution may purchase certificates evidencing an equivalent legal participation interest in such loans. The amount of the loan held by an individual bank or association shall be subject to any prior approval requirements for that bank or association.

§ 614.4331 Federal land banks.

The banks may enter into loan participation agreements with one or more other Federal land banks under terms established by the participating banks. § 614.4332 Federal intermediate credit banks.

The banks may enter into loan participation agreements with one or more other Federal intermediate credit banks or with production credit associations under terms established by the participating institutions.

§ 614.4333 Production credit associations.

The associations may enter into participation agreements with one or more other production credit associations or with commercial banks and other lend

ers. All such agreements shall be subject to the prior approval of the Federal intermediate credit bank of the district. In addition to the provisions contained in § 614.4330, participation agreements between production credit associations and commercial banks or other lenders shall be subject to the following limitations:

(a) The association shall reserve the right to decline participation in any loan offered.

(b) Provisions restricting the association from providing full financing for the borrowers should be avoided. The agreement may, however, restrict either party soliciting full financing for these borrowers.

(c) To assure that such a participation agreement does not result in a commercial bank's substantially shifting its lending away from agriculture, the participating commercial bank shall fulfill one of the following; (1) retain at least 50 percent of the total of each participated loan, (2) retain at least 10 percent of the total of each participated loan provided that the commercial bank does not materially reduce its ratio of agricultural loans to total loans from the ratio maintained during the preceding 3 years, or (3) retain the maximum amount of the participated loan permitted by banking regulations to which the bank is subject.

(d) A lender other than a commercial bank shall provide evidence of financial responsibility and capability to service and control loans being made as a prerequisite to approval of a loan participation agreement.

(e) A copy of such participation agreements shall be forwarded to the Farm Credit Administration upon execution. § 614.4334 Banks for cooperatives.

A district bank for cooperatives shall first offer to the Central Bank for Cooperatives a participation in loans to a borrower when such loans exceed the lending limit of the bank. With the concurrence of the central bank, participations in loans in excess of a bank's lending limit may also be offered initially to other banks for cooperatives, then to commercial banks or other financial institutions. A bank for cooperatives may offer a participation to other banks for cooperatives in loans which are less than its lending limit; however, when total loans to such borrowers exceed the lending limit of the bank, further loans must first be offered to the Central Bank. Loans in excess of the lending limit

established by the Farm Credit Administration for the banks for cooperatives on a consolidated basis may be made only when such excess amounts are sold as participations to a commercial bank or other financial institution. The form of each participation agreement shall be subject to Farm Credit Administration approval. The names of participants, amounts, and dates shall not require approval.

Subpart J-Loss Sharing Agreements § 614.4340 General.

With approval of the boards of directors of the respective banks, Farm Credit banks and associations may enter into agreements with other institutions charted under the same title of the Act for mutually sharing losses resulting directly or indirectly from their lending operations. The loss sharing agreements shall cover, but are not limited to, terms and conditions for activation and dissolution, definition of terms, determination of loss sharing formula, limitations on required contributions, reimbursements, and provisions for amendment. All loss sharing agreements shall be subject to Farm Credit Administration approval.

§ 614.4345 Guaranty agreements.

In lieu of loss sharing agreements, with approval of the Farm Credit Administration, banks or associations may enter into guaranty agreements wherein one or more other banks or associations agree to assume a percentage of the risk associated with specific loans.

Subpart K-Lending Limits

§ 614.4350 General.

No Farm Credit Bank or association shall make a loan, advance, or commitment which will result in any one borrower being obligated to such bank or association in excess of limits stated herein. When these limitations are approached, banks or associations should consider the feasibility of arranging participation in large loans with other banks or associations to properly serve the credit needs of deserving large borrowers. Except as provided in § 614.4353, the limitations shall not apply where the bank or association participates in a loss sharing agreement or has obtained other bank or association guaranty adequate to absorb the increased risk.