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Letters to Regulators

Borrower Rights

December 16, 2004

Mr. Robert Coleman
Director, Regulation and Policy Division
Office of Policy and Analysis
Farm Credit Administration,
1501 Farm Credit Drive,
McLean, Virginia 22102-5090

Re: Borrower Rights - RIN 3052-AC24

Dear Mr. Coleman:

We are sending this letter on behalf of the Independent Community Bankers of America (ICBA)1 and our community bank members. Our comments pertain to the Farm Credit Administration's (FCA) request for public comments in regard to proposed changes to the borrower rights provisions as they apply to loan syndication transactions. This letter is in response to the November 16th proposed rule published in the Federal Register.

Background: Historical Treatment of Loan Syndications

The FCA, on January 17, 2003, published a notice seeking comments on the regulatory treatment of loan syndications that Farm Credit System (FCS) institutions enter into with non-System lenders. According to the FCA, this was in response to requests from some System institutions that asked for FCA guidance on the treatment of such transactions. As noted by the FCA, several System institutions suggested that loan syndications should be treated as part of their participation authority rather than their direct loan authorities. The FCA has previously indicated that loan syndications are treated as part of the System's direct loan authorities, therefore subject to the stock purchase, borrowers rights, territorial concurrence, and first lien on real estate requirements of the Farm Credit Act.

Specifically, FCA asked three questions regarding loan syndications. 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 legislative 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?

On June 20, 2003 ICBA submitted comments to the FCA in response to the request regarding the regulatory treatment of loan syndications. In our comment letter, we noted that all of the suggested benefits that FCA outlined that could be achieved through loan syndications can more prudently be achieved through the current loan participation authorities available to the System. FCA has never explained why utilizing loan participations is not an adequate substitute in lieu of using loan syndications and ICBA requests that FCA does so.

Now that the FCS is allowed to purchase 100% loan participations from both System and non-System lenders, such loan participation arrangements have become a more favorable option in recent years. This is one of the few ways that the FCA has truly encouraged and facilitated cooperation and partnering between System and non-System lenders. Such transactions are beneficial to commercial bank lenders, the FCS, and the agricultural customers being served by such arrangements.

In responding to the FCA's direct question in the request for comments with respect to a waiver of borrower rights in loan syndication transactions, ICBA clearly stated that the FCA should not allow borrowers rights to be waived in such transactions with the FCS. We also questioned, and continue to do so, the legal authority of FCA to allow a borrower to waive their statutory rights under the Farm Credit Act.

Following the comment period in 2003, the FCA issued a notice on its regulatory guidance for the treatment of loan syndications to eligible FCS borrowers on February 24, 2004. The notice stated, "…reaffirms FCA's longstanding interpretation that syndicated loans to eligible borrowers come within System banks' and associations' lending powers, not their loan participation authorities". The FCA notice explains at length the difference between loan syndications and loan participations in several financial environments. As FCA has stated repeatedly, in a loan participation there is no contractual relationship between the borrower and participating lenders, only the lead lender extends credit directly to the borrower, and the lead lender is the only lender of record on all loan documents. These three distinctions clearly differentiate loan participations from loan syndications and are a fundamental basis for not providing the same regulatory treatment to both types of transactions.

The argument that the FCS continues to make regarding the regulatory treatment of loan syndications involving similar entities is not a valid case for treating syndications as participations. As FCA stated in its notice of February 24, 2004, Section 3.1(11)(B)(iii) of the Farm Credit Act explicitly applies the definition of participations to include syndications, but only when referring to similar entity participations that the FCS is authorized to engage in. This definition of loan participations cannot be applied to loan syndication transactions that the FCS is engaged in with eligible borrowers, borrowers that have a direct contractual relationship with the FCS, and therefore are entitled to receive borrower rights.

For the reasons stated above, which the FCA has already reaffirmed, we continue to maintain that loan syndications should not be treated as participations and all existing requirements for borrower rights, territorial consent, stock purchase requirements, and first lien requirements for real estate loans, should remain in effect, which the law requires.

ICBA Comments on Borrower Rights Waiver

We believe there is no authority within the Farm Credit Act that allows the FCA to provide for waivers of borrower rights for loan syndication transactions. This further bolsters our opposition to FCA's proposed rule to allow the waiver of borrower rights for these transactions. According to the current statute, FCS entities are required to provide FCS borrowers with credit reviews, distressed loan restructuring, and right of first refusal for real estate. Following are the relevant statutes of each respective provision from Title IV of the Farm Credit Act.

SEC. 4.14(b)(1) Reconsideration of Actions. (12 USC 2202)
DENIALS OR REDUCTIONS. Any applicant for a loan from a qualified lender that has received a written notice issued under section 4.13 of a decision to deny or reduce the loan applied for may submit a written request, not later than 30 days after receiving a notice denying or reducing the amount of the loan application, to obtain a review of the decision before the credit review committee.

SEC. 4.14A(b)(1) Restructuring Distressed Loans (12 USC 2202a) IN GENERAL. On a determination by a qualified lender that a loan made by the lender is or has become a distressed loan, the lender shall provide written notice to the borrower that the loan may be suitable for restructuring, and include with such notice- (A) a copy of the policy of the lender established under subsection (g) that governs the treatment of distressed loans; and (B) all materials necessary to enable the borrower to submit an application for restructuring on the loan.

SEC. 4.36(a) Right of First Refusal (12 U.S.C. 2219a)
GENERAL RULE. Agricultural real estate that is acquired by an institution of the System as a result of a loan foreclosure or a voluntary conveyance by a borrower (hereinafter in this section referred to as the "previous owner") who, as determined by the institution, does not have the financial resources to avoid foreclosure (hereinafter in this section referred to as "acquired real estate") shall be subject to the right of first refusal of the previous owner to repurchase or lease the property, as provided in this section.

From this clear reading of the Act, FCA does not have any legal basis to interpret the statute in a way that allows for borrower rights to be waived in loan syndications. The Act clearly states that these rights must be provided to FCS borrowers.

Thus, the proposed regulations from FCA do not comply with the Farm Credit Act. If the FCA and/or the FCS would like more flexibility in waiving borrower rights, FCA or FCS should seek those changes from Congress by amending the Farm Credit Act. Otherwise, the FCA should focus on regulating the FCS in accordance with the Act, rather than interpreting the Act to suit the desires of the FCS.

As FCA has pointed out, there is a current provision in regulation that allows for the waiver of borrower rights in two specific circumstances. One is when a loan is guaranteed by the Small Business Administration. The other is when a loan is sold to a non-FCS lender. Beyond these two exceptions, there is no further flexibility in the Act to provide for further waivers of borrower rights.

FCA's observation that borrowers engaged in loan syndication transactions are generally "sophisticated borrowers" and represented by legal counsel is not a legal justification for waiving borrower rights. In fact, FCA's proposed rule simply states in proposed 617.7010 (d) "…a borrower in a loan syndication must certify in writing that the borrower was advised by legal counsel prior to executing a waiver". The proposed regulations do not stipulate that the legal counsel must be the borrower's counsel. Further, for example, at any loan closing, there is a closing/settlement attorney to handle the transaction. What is to prevent such counsel from providing a very brief explanation of the waiver (i.e. five seconds), recommend the borrower sign it, and then proceed with the transaction. In this scenario, the borrower has not received sufficient advice by legal counsel that represents the borrower's best interest. Such a scenario would be allowed to happen under this proposed rule from FCA, allowing for abuse and conflict of interest. Regardless, advice by legal counsel is not a legal basis to ignore the law's clear wording.

OFIs - Borrower Rights

Conversely, on the application of borrower rights to OFI loans, we question how and where FCA gets the authority to require OFIs to impose borrower rights. The borrowers of an OFI are not borrowers of the FCS. Only FCS borrowers are required by the Farm Credit Act to receive borrower rights. Further, commercial banks are already heavily regulated financial institutions that must comply with countless regulations and disclosure requirements, including the Truth in Lending Act, which requires the proper disclosure of loan and rate information to borrowers.

However, FCA's current regulations require OFIs to provide the same borrower rights as any FCS entity must provide to its borrowers. But OFIs have no voting rights in an FCS entity, no representation on the boards of directors, receive no dividends and do not receive numerous other benefits afforded to FCS associations. The interpretation by FCA to require OFIs to provide borrower rights is an interpretation without any legal basis in the Farm Credit Act.

Therefore, we strongly urge the FCA, since it is now reviewing the borrower rights issue, to rescind the application of borrower rights requirements to OFIs, which would be an action consistent with the Act. OFIs should not be subject to double regulation by meeting their current regulatory requirements as a private sector, tax-paying financial institution, in addition to new requirements imposed by the FCA that have no basis in law. Since OFIs are not required by statute to impose borrower rights requirements, the FCA regulations should reflect the statute.

The real irony in this situation is that the FCA is currently proposing to exempt certain FCS loan transactions (syndications) from borrower rights requirements, while continuing to impose additional and unnecessary borrower rights requirements on OFIs. The Act clearly requires the borrower rights for FCS entities, which FCA proposes to waive, yet the Act does not, in any way, mention borrower rights for OFIs, yet FCA chose to add the additional requirement. This is discriminatory on the part of FCA. Furthermore, it seems to demonstrate that the FCA will look for ways to lessen the regulatory burden on FCS entities, while imposing unnecessary burdens on OFIs.

This is yet another example of the FCA favoring one sector of the agricultural credit marketplace at another's expense. These types of anti-banker actions only serve to further divide the agricultural credit market to the detriment of rural America.

Conclusion

The FCA has already looked at this issue and concluded there was not the legal basis to waive borrower rights (Question #2(a) of the earlier proposed rule referenced on page 1 of this letter). The FCA, realizing that its earlier syndicated loan proposal lacked legal foundation, already asked for legislative recommendations to make to Congress. FCA already understands that waiving borrower rights for "sophisticated borrowers" is unjustified and illegal. Therefore, if the agency wants such changes, it should go to the Congress.

As for the proposed rule from FCA, there is no interpretation of the statute that allows the waiver of borrower rights for FCS borrowers, whether those borrowers are part of a loan syndication transaction or not. Therefore, we request that FCA withdraw the proposed rule and focus on a proposal that would remove the borrower rights requirements from OFIs, since such requirements are without any legal foundation in the Farm Credit Act.

We appreciate the opportunity to comment on this proposed rule and to share our views. If you have any questions about this comment letter, please contact Mark Scanlan, Director, Office of Agriculture and Rural Policy or Reece Langley, Deputy Director, Office of Agriculture and Rural Policy at 202-659-8111.

Sincerely,

Camden R. Fine
President and CEO

1 The Independent Community Bankers of America represents the largest constituency of community banks of all sizes and charter types in the nation, and is dedicated exclusively to promoting the interests of the community banking industry. With nearly 5,000 members, ICBA members employ more than 225,000 Americans and hold more than $778 billion in total assets. For more information, visit ICBA's website at www.icba.org.






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