(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; (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. The policy shall provide a means of forbearance for cases when the borrower is cooperative, making an honest effort to meet the conditions of the loan contract and is capable of working out of the debt burden.

(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.

(4) Approved policies. Copies of the bank loan servicing policies required under this Subpart O and all subsequent revisions shall be furnished to the Farm Credit Administration.

§ 614.4511 Federal land bank association compensation.

Compensation may be paid to an association up to an amount which, in the judgment of the bank, represents the value of the services being rendered for the bank. The compensation plan is subject to the approval of the bank board and the Farm Credit Administration. § 614.4512 Compromise of indebtedness.

Because of the vested borrower ownership interest in the cooperative Farm Credit System, no compromise settlement of borrower indebtedness shall be made unless it can be determined from an analysis of all the facts and legal aspects that a compromise settlement results in the greatest net return to the lender. Bank boards shall set policies covering the limited instances where compromise settlements can be permitted. These

(a) To provide the best possible credit service to farmers, a district board may adopt policies permitting banks and associations to enter into agreements with agents, dealers, cooperatives, other lenders, and individuals to facilitate the making of loans to eligible farmers and ranchers, subject to approval by the bank.

(b) Federal land bank. A bank, or an association with bank approval, may enter into agreement which will accrue to the benefit of the borrower and lender which allows others to perform functions in loan making or servicing 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, a permissive agreement from all affected banks or associations is required. Reasonable compensation may be paid for services rendered.

(c) Production credit associations may enter into agreements with private dealers or cooperatives permitting them to take applications for loans from the association to purchase farm equipment, supplies, and machinery. Such agreements shall normally be limited to persons or businesses selling to farmers or ranchers 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, agreement of all banks and associations affected shall be obtained before making such loans. Reasonable compensation may be paid to a dealer or cooperative for services rendered in connection with such programs.

(d) Subject to the approval of the respective bank's board of directors, Federal land banks, Federal intermediate credit banks, banks for cooperatives and production credit associations may enter into memorandums 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 lender shall apply.

§ 614.4530 Special loans, production credit associations.

Under policies approved by the bank board and procedures developed by the bank, production credit associations may make the following special types of loans on commodities covered by price support programs. Nothwithstanding 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 Q-Federal

Intermediate

Credit Bank Financing of Other
Financing Institutions

§ 614.4540 General.

The Federal intermediate credit banks are authorized to discount for, or purchase from commercial banks and other financing institutions, with their endorsement or guaranty, notes and other obligations for loans which have been made for agricultural purposes to farmers and ranchers as set out in Section 3020. No paper shall be purchased from or discounted for a commercial bank, trust company or savings institution if the amount of such paper added to the aggregate liabilities of the institution, exclusive of deposit liabilities, exceeds the

lower of the amount of liabilities of the institution permitted under the laws of the jurisdiction creating the institution, or twice the paid-in and unimpaired capital and surplus of the institution. No paper shall be purchased from or discounted for any other financial institution if the amount of such paper added to the aggregate liabilities of the institution exceeds the lower of the amount of liabilities permitted under the laws of the jurisdiction creating the institution, or ten times the paid-in and unimpaired capital and surplus of the institution. Hereafter, in this part the term "other financing institution" means all financing institutions eligible to borrow from or discount paper with a Federal intermediate credit bank other than institutions of the Farm Credit System. [39 FR 29585, Aug. 16, 1974]

§ 614.4550 Financing responsibility of the Federal intermediate credit banks regarding other financing institutions.

It is the responsibility of the banks to provide a continuing dependable source of production financing to eligible farmers and ranchers in their districts. The banks shall attempt to meet this responsibility to agricultural producers by assuring to the extent possible the viable institutions actively involved in extending credit to such producers have adequate loan funds with which to perform their function. Therefore, consideration shall be given in cases in which other financing institutions applying for the discount privilege from banks present persuasive evidence that they are unable to meet legitimate needs of their eligible farmers and rancher clientele without access to the discount privilege. § 614.4560 Criteria which shall be used to determine whether a discount relationship should be established with an applicant other financing institution.

(a) Approval of an application for access to the discount privilege from any other financing institution shall be subject to proof that there is a continuing need for such discounts to permit the applicant to continue to serve the volume of agricultural loans at least equal to its average volume of such loans for the past 3.years and that the need is not the result of denial or restrictions on discount privileges or other means of obtaining lendable funds customarily available to it. The application shall also

establish a sufficiency of each of the following:

(1) Capital structure to support an economically feasible lending operation.

(2) Actual or potential loan volume to permit a reasonably efficient lending operation.

(3) Institution capability, including staff experience and expertise, to extend and administer the volume of lending anticipated on a sound basis.

(b) Approval of an application from a commercial bank or agricultural credit corporation affiliated with a commercial bank shall be further conditioned on the following requirements.

(1) The commercial bank involved as applicant or parent shall have not less than 25 percent of its total loan portfolio in agricultural loans. If this percentage is less than 25 percent, the applicant institution shall present sufficient evidence to show that it is making a special effort to serve the credit needs in its rural area, and the application shall be subject to prior approval of the Farm Credit Administration.

(2) Its gross loan to deposit ratio shall be not less than 60 percent at the seasonal peak. For purposes of this measure, gross loans should include all direct credit extension by the institution in its trade area. Such items as Federal funds or broker loans are to be excluded. If the applicant institution has a historical gross loan to deposit ratio of less than 60 percent at the seasonal peak, the application for access to the discount privilege shall be subject to prior approval of the Farm Credit Administration.

(3) The participation approach with the production credit associations is either unavailable or would not be of assistance to the institution in serving the credit needs of its borrowing farmers and ranchers, but the failure of the institution to participate with a production credit association shall not of itself be cause for denial or revocation of borrowing or discount privileges.

(c) Approval of an application from an agricultural credit corporation which is not affiliated with a commercial bank shall be further conditioned on the following requirements.

(1) Character of business. It shall be a body corporate engaged in the business of extending short- and intermediateterm credit to farmers and ranchers for agricultural purposes. A concern engaged in the business of manufacturing, mer

chandising, real estate brokerage, real estate loans, etc. is not eligible to obtain credit from a Federal intermediate credit bank merely because it has the power to make loans to farmers and ranchers and to borrow money. On the other hand, the fact that a corporation has powers not related to agricultural credit or receives income from other sources shall not of itself render it ineligible. Such institutions should be carefully investigated and each case decided on its merits.

(2) Compliance with statutes. It shall comply with State laws applicable to it. Violations of State laws will be cause for revocation by the bank of the borrowing and discounting rights of any other financing institution which does not promptly rectify such conditions upon notice from the bank. Special attention shall be given to the institutions' articles of incorporation and bylaws, capital stock and other securities transactions and, in the case of foreign corporations, evidence will be required that it has complied with the laws of each State in which it operates.

(d) In dealing with any other financing institution which is affiliated with a cooperative (through stock ownership, management, interlocking directorates or otherwise), the bank will consider the possible effects of such relationship on the operations and credit policies of the applicant corporation. A financing corporation which is a subsidiary of or affiliated with a farmers' cooperative and is otherwise eligible to borrow from and discount with a Federal intermediate credit bank may qualify to discount with its endorsement or borrow on the security of notes of farmers and ranchers (as distinguished from notes of cooperatives), evidencing loans to finance the cost of supplies, equipment or services obtained from such affiliated cooperative, if the bank board finds that an additional source of credit is needed to facilitate financing of such transactions and the primary benefits of such credit will inure to the borrowing farmers and ranchers.

§ 614.4570 Utilization of the discount privilege.

(a) The other financing institution shall remain in compliance with the approval criteria enumerated in § 614.4560 hereof except that another financing institution which has a discount agreement in force with a Federal inter

mediate credit bank at the effective date of these regulations shall not be required to meet the criteria included under § 614.4560 (b) hereof.

(b) The institution shall maintain reasonable credit quality in its total loan portfolio as well as that credit submitted for discount with the bank.

(c) The institution shall not significantly reduce its agricultural lending activity as a portion of its total credit activity and any substantial increase in the volume of loans tendered to the bank for discount shall be accepted subject to a showing that the increase is a result of the institution's increase in volume of agricultural loans rather than a reduction in the ratio of agricultural loans to nonagricultural loans held by it or to any restriction on its access to other sources of lendable funds.

§ 614.4590 Direct loans to other financing institutions.

A Federal intermediate credit bank is authorized to make loans and advances to other financing institutions, provided that no such loan or advance shall be made on the security of collateral other than notes or other such obligations of bona fide farmers and ranchers as defined in these regulations, unless such loan or advance is made to enable the financing institution to make or carry loans to such bona fide farmers and ranchers for agricultural purposes. In all cases, the amount of collateral required shall be not less than the principal amount of the indebtedness thereby secured.

(a) Classes of obligations approved as collateral. The following classes of obligations are approved as collateral for direct loans and advances to other financing institutions.

(1) Obligations of bona fide farmers and ranchers arising from direct credit extension by the financing institution.

(2) Bonds and other direct obligations of the United States.

(3) Federal Farm Loan Bonds and consolidated debentures of the banks for cooperatives.

(4) Soil and water conservation loans and farm ownership loans made under programs administered by the Farmers Home Administration, the payment of which is guaranteed by the United States.

(b) Purpose of direct loans or advances. In making loans or advances to any other financing institution on the se

curity of collateral other than that described in paragraph (a) of this section, the bank will assure itself that the proceeds of such loans or advances will be used to enable the financing institution to make or carry loans to farmers and ranchers for agricultural purposes.

§ 614.4600 General collateral.

Other financing institutions (except commercial banks), as a condition precedent to borrowing from or discounting with a Federal intermediate credit bank, shall pledge as collateral for any and all obligations to the bank, cash, U.S. Government securities, Federal Farm Loan Bonds, consolidated debentures of the banks for cooperatives, or other readily marketable securities of high rating in an amount equal to such portion of its capital as shall be determined by the bank. At the discretion of the bank, commercial banking institutions may also be required (unless prohibited by law or by supervisory authority) to deposit acceptable collateral. Securities and obligations pledged with the bank shall be deposited under a collateral pledge agreement pursuant to which all securities and obligations so piedged, including all substitutions and additions and the proceeds of any such collateral including all income derived, shall be available to secure any and all obligations to the bank whether direct or contingent, present or future.

§ 614.4610 Filing and recording assignments of security instruments.

Assignments of security instruments by other financing institutions may be accepted by the bank without requiring that such assignments be recorded or filed except where the risk involved or other circumstances surrounding the paper makes recording or filing advisable as a matter of sound credit policy. In lieu of a separate assignment of each instrument, the bank may accept from such institutions a single blanket assignment and an agreement to execute separate assignments to the bank whenever requested by it.

§ 614.4620 Suspension of right to borrow and discount.

In the event a financing institution shall fail to remain in compliance with the requirements for continuation of the discount relationship set forth in § 614.4560, or should the condition or the operations of an other financing institution become otherwise unsatisfactory to the

bank, its right to borrow and discount may be withdrawn or suspended by the bank until the noncompliance or unsatisfactory condition is corrected. Should it be determined that the debt to capital ratio of the institution exceeds the legal limits set forth herein, the right of such institution to borrow and discount shall be withdrawn or suspended forthwith and shall so remain until necessary correction has been effected. During any period of suspension no new paper shall be purchased from or discounted for the institution and no further advances shall be made to it pending correction, except to the extent necessary to cover commitments on paper held by the bank or to preserve the security and protect the interest of the bank in obligations held by it. Before making additional advances to any other financing institution whose right to borrow or discount has been suspended because the ratio of its total liabilities to unimpaired capital and surplus equals or exceeds the maximum permitted under law, the bank shall satisfy itself that the corporation will not violate any applicable law by assuming liability for such additional advances. § 614.4630 Credit to other financing institutions in special circumstances. When a financing institution is in need of funds in excess of the amount that can be made available through normal processes and if for credit reasons a bank is unwilling to discount or purchase a loan offered by such institution for its face amount, it may discount or purchase less than the full amount of the loan. In such transactions the institution shall be required to apply all repayments on the borrower's obligation first. to pay the bank the amount discounted or purchased by it.

§ 614.4640 Insolvency of other financ ing institutions.

(a) In the event an other financing institution having a discount or financing agreement with the bank becomes insolvent or is in process of liquidation, particularly if it fails to service its loans properly and where supervision or orderly liquidation will be facilitated by direct handling of the obligations of the note makers, the bank may, with the consent of the Farm Credit Administration, take over such paper for orderly liquidation. Notes on other obligations pledged with the bank by an other financing institution, either as collateral for a direct loan or as additional security for any and all indebtedness of the institution to the bank, also may be taken over and handled directly with the makers after a title has been acquired in accordance with the provisions of applicable laws and the terms of the pledge agreements executed by the institution involved. The bank's authority to handle the paper directly includes the authority to make additional advances, to grant renewals and extensions, and to take such other actions as may be needed to work out the problems involved. Direct liquidation of paper carried for an other financing institution should be resorted to only in cases where other measures have failed, and it is apparent that direct liquidation is the only practicable means available to the bank for protection of its interest.

(b) Paper handled for insolvent other financing institutions as provided in this section shall not be assigned as collateral for debentures and shall be carried in a separate account as provided in the chart and description of accounts for the banks.

(c) On paper which a bank has taken over from a defaulting financing institution for liquidation, interest shall be collected according to the terms of the loans. Renewals of such notes, when directly payable to the bank, shall bear interest at a rate not to exceed the maximum rate that may be charged other financing institutions on paper eligible for discount by the banks at the time of renewal.

§ 614.4660 General discount agreement.

As a condition precedent to making loans to or discounting paper for any other financing institution, the bank will require the corporation desiring such credit to execute a general discount loan