[Federal Register: March 30, 2004 (Volume 69, Number 61)]
[Rules and Regulations]
[Page 16455-16460]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr30mr04-1]
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Rules and Regulations
Federal Register
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[[Page 16455]]
FARM CREDIT ADMINISTRATION
12 CFR Parts 614 and 617
RIN 3052-AC04
Loan Policies and Operations; Borrower Rights; Effective Interest
Rate Disclosure
AGENCY: Farm Credit Administration.
ACTION: Final rule.
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SUMMARY: The Farm Credit Administration (FCA, agency, we, or our)
issues this final rule amending its regulations governing disclosure of
effective interest rates (EIR) and related information on loans. This
final rule clarifies when and how qualified lenders must disclose the
EIR and other loan information to borrowers; when and how the cost of
Farm Credit System (FCS or System) borrower stock must be disclosed to
borrowers; and how loan origination charges and other loan information
must be disclosed to borrowers. The final rule requires lenders to use
a discounted cash flow method in determining the EIR to provide
meaningful disclosures to borrowers but does not prescribe detailed
calculation procedures. To make the regulations easy to understand and
use by borrowers, lenders, and other users, we have rewritten the
existing regulations in part 614, subpart K, Disclosure of Loan
Information, in a question-and-answer format and moved them to part
617, Borrower Rights.
EFFECTIVE DATE: This regulation will be effective 30 days after
publication in the Federal Register during which either or both Houses
of Congress are in session. We will publish a notice of the effective
date in the Federal Register.
FOR FURTHER INFORMATION CONTACT:
Tong-Ching Chang, Senior Policy Analyst, Office of Policy and Analysis,
Farm Credit Administration, McLean, VA 22102-5090, (703) 883-4498; TTY
(703) 883-4434;
or
Howard Rubin, Senior Attorney, Office of General Counsel, Farm Credit
Administration, McLean, VA 22102-5090, (703) 883-4020, TTY (703) 883-
2020.
SUPPLEMENTARY INFORMATION:
I. Objectives
Our objectives for this rule are to:
Ensure that borrowers receive meaningful and
timely disclosure of the EIR and related information on loans;
Promote consistency in the method used to
determine the EIR; and
Make the regulations easy to understand and use
by borrowers, lenders, and other users.
II. Background
As discussed in the preamble to the proposed rule (See 68 FR 5587,
February 4, 2003), section 4.13(a) of the Farm Credit Act of 1971, as
amended (Act),\1\ requires the FCA to enact regulations requiring
``qualified lenders'' \2\ to provide borrowers, not later than the time
of loan closing, with meaningful and timely disclosure of:
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\1\ 12 U.S.C. 2199(a).
\2\ ``Qualified lenders'' include System lenders (except for a
bank for cooperatives), and non-System lenders (other financing
institutions (OFIs)) for loans that OFIs make with funding from a
Farm Credit bank. See 12 U.S.C. 2202a(a)(6).
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The current rate of interest on the loan;
The amount and frequency of interest rate
adjustments and the factors that the lender may take into account in
adjusting rates for adjustable or variable rate loans;
The effect of any loan origination charges or
purchases of stock or participation certificates on the rate of
interest on the loan;
A statement indicating that stock purchased is
at risk; and
A statement indicating the various types of loan
options available to borrowers.
The requirements of section 4.13 of the Act are applicable to all
loans made by ``qualified lenders'' not subject to the Truth in Lending
Act (TILA).\3\ Under section 4.13(a) of the Act, qualified lenders must
give borrowers notice of any change in the interest rate applicable to
a borrower's loan within a ``reasonable time'' after the change. In
addition, section 4.13(b) of the Act requires qualified lenders that
offer more than one rate of interest to borrowers, at the request of a
borrower, to: (1) Provide a review of the loan to determine if the
proper rate has been established; (2) explain to the borrower, in
writing, the basis for the interest rate charged; and (3) explain to
the borrower, in writing, how the credit status of the borrower may be
improved to receive a lower interest rate on the loan.
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\3\ 15 U.S.C. 1601, et seq. TILA applies to consumer loans and
specifically exempts agricultural loans.
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Current FCA regulations (initially adopted in 1988) implement the
disclosure requirements of the Act, but contain limited guidance on
several key issues. In recent years, new stock purchase requirements,
new loan programs, and varied methodologies for calculation of
effective interest rates has meant that compliance with current EIR
disclosure regulations has become more challenging and led to
inconsistent disclosure among qualified lenders. This final rule
rewrites our existing regulations to provide more guidance in a user-
friendly format.
The final rule is the second component of our current rulemaking on
borrower rights. This final rule amends part 617, Borrower Rights,
which was rearranged by the Distressed Loan Restructuring rule adopted
by the FCA Board on February 10, 2004, and published in the Federal
Register on March 9, 2004 (See 69 FR 10901). Consequently, part 617
will contain all regulations on borrower rights after both rules become
effective.
III. Comments
We received comments on the proposed rule from the Farm Credit
Council (Council), two Farm Credit banks, and 10 Farm Credit System
associations. In general, commenters expressed support for FCA's
efforts to clarify its EIR rules. However, a number of the comments
raised general and specific objections to various parts of the proposed
rule. FCA's responses to these comments are discussed in our section-
by-section analysis below.
In addition to comments on specific proposals, the Council urged
FCA, in light of the dramatic change in the nature and extent of System
stock purchase requirements since the 1980s, to ``evaluate the benefit
(if any) members receive from these disclosures
[[Page 16456]]
in the context of the costs incurred by the associations in making the
disclosures and their value to the customers (given the minimal
purchase requirements).'' Regardless of FCA's view of the benefit of
EIR disclosures, Congress mandated (in section 4.13 of the Act) that
qualified lenders make these disclosures. Therefore, FCA has sought, in
this rule, to make the required statutory disclosures as meaningful as
possible to borrowers without adding unnecessary regulatory burden to
qualified lenders.
After carefully considering the comments, we are adopting the final
rule as proposed with only one substantive and several technical
changes. Specifically, we are deleting proposed Sec. 617.7115(b) and
Sec. 617.7130(a)(5), which would have required qualified lenders to
separately disclose to borrowers all fees not included in ``loan
origination charges'' that borrowers are required to pay to obtain a
loan. Also, we are eliminating the proposed definitions of ``loan'' and
``qualified lender'' and other changes to the existing parts 611, 612,
614, and 617 from this rule because they have been implemented by the
Distressed Loan Restructuring rule.
IV. FCA's Section-by-Section Response to Comments
Subpart A--General
Section 617.7000--Definitions
One association suggested FCA add a definition for ``covered
loan,'' which would establish a maximum dollar amount for loans subject
to EIR disclosure regulations. However, section 4.13 of the Act
requires lenders to make disclosures to borrowers for ``all loans'' not
subject to TILA. We received no other comments on the definitions. As a
result, we eliminate the proposed definitions of ``loan'' and
``qualified lender'' from this rule because they have been implemented
by the Distressed Loan Restructuring rule and adopt other definitions
as proposed.
Subpart B--Disclosure of Effective Interest Rates
Section 617.7100--Who Must Make and Who Is Entitled To Receive an
Effective Interest Rate Disclosure?
One Farm Credit bank and six of its affiliated associations
objected to proposed Sec. 617.7100(b), which provides what a lender
must do when there is more than one borrower obligated on a loan. As
explained below, we adopt proposed Sec. 617.7100 as final without
change.
Current Sec. 614.4367(d) allows the lender to satisfy the
disclosure requirements by providing the disclosure to any one of the
primary obligors on the loan. The final rule will give borrowers the
opportunity to designate, in writing, the person they wish to receive
the disclosures. If the borrowers do not designate a particular
recipient, the lender must provide the disclosures to at least one
borrower primarily liable for repayment of the loan. The objecting
commenters asserted:
(1) There is no basis in the Act authorizing this designation;
(2) The regulation would create an unnecessary burden on System
lenders, including requiring lenders to prepare and maintain
documentation of the borrowers' designation choice; and
(3) In a default situation, a lender may be unable to locate or
contact the designee and, therefore, the regulation could be raised as
a legal impediment to a System lender's collection or foreclosure
actions.
First, while a strict reading of the Act would require that each
borrower receive disclosure, we believe that where there is one loan,
allowing disclosure to one borrower complies with the Act and is less
burdensome to lenders. We also believe that the proposed rule--giving
borrowers an opportunity to designate an EIR disclosure recipient--is
consistent with Congress's intent in creating ``borrower rights'' in
the Act. Second, we do not believe that the new regulation will be
unduly burdensome because all it requires is that qualified lenders
honor the borrowers' written designation request, if one is made. Many
System associations already allow borrowers to designate an EIR
disclosure recipient without reported incident or undue burden. Third,
Sec. 617.7100 applies only to EIR disclosures that are primarily made
at or before loan closing.
This rule would not apply to any other notices required by the Act
or otherwise and therefore has no plausible relationship to a loan
default situation. When a qualified lender determines that a loan is,
or has become, distressed, provisions in subpart E of part 617
regarding distressed loan restructuring apply. Under Sec. 617.7410(d),
the lender must notify all primary obligors. If the obligors identify
one party to receive notices, the qualified lender should send the
original notice to that person and send copies to the other obligors.
Section 617.7105--When Must a Qualified Lender Disclose the Effective
Interest Rate to a Borrower?
Section 617.7105 revises the criteria that establish the
circumstances in which EIR disclosure is necessary. Paragraph (b) of
this section provides that a qualified lender must provide a new EIR
disclosure to existing borrowers on or before the date the borrower:
(1) Executes a new promissory note or other comparable evidence of
indebtedness;
(2) Purchases additional stock or participation certificates as a
condition of obtaining new funds from the qualified lender; or
(3) Pays an additional loan origination charge to the qualified
lender as a condition of obtaining new funds.
The Council commended this clarification and stated that the new
rule will benefit System institutions. One association requested that
FCA state in the rule or preamble that no new EIR disclosure is
required for a ``loan servicing action.'' However, ``loan servicing
action'' is not defined in the Act or our regulations, and required
disclosure is not based on whether an action is described as a ``loan
servicing action.'' Instead, Sec. 617.7105 requires that if any loan
action does not result in a new note, purchase of new stock, or new
loan origination charges as a condition of obtaining new funds, no new
disclosure is required. If it does, new disclosure is required. We
believe that proposed Sec. 617.7105 provides clarity to qualified
lenders and adopt it as final.
Section 617.7110--How Should a Qualified Lender Disclose the Cost of
Borrower Stock or Participation Certificates?
Section 617.7110 provides that the cost of borrower stock or
participation certificates must be included in the EIR calculation only
at the time the stock or participation certificates is purchased in
connection with a loan transaction, whether purchased with cash,
included in a promissory note, or otherwise paid. For subsequent loans
to existing borrowers, only the cost of new stock or participation
certificates, if any, purchased in connection with the transaction must
be included in the EIR calculation. We received no comments on this
proposed provision and adopt it as final.
Section 617.7115--How Should a Qualified Lender Disclose Loan
Origination and Other Charges?
Many commenters commended FCA for clarifying in proposed Sec.
617.7115(a)
[[Page 16457]]
exactly what ``loan origination charges'' must be included in the EIR
calculation, indicating that the new rule should reduce regulatory
burden and result in greater accuracy in reflecting the true cost of
credit to the borrower.
We received negative comments from a Farm Credit bank and a number
of associations on proposed Sec. 617.7115(b), which provides that all
other payments that a borrower is required to make to obtain a loan,
but not included as a loan origination charge in the EIR calculation,
must be disclosed separately at the time of loan closing. Objections to
the proposal included:
(1) Requiring a separate list of all fees not included as loan
origination charges in the EIR calculation goes far beyond FCA's
authority;
(2) The new rule would mirror TILA and Regulation Z \4\
requirements, which are not applicable to agricultural loans;
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\4\ Federal Reserve Board regulation that implements TILA.
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(3) Developing a new automated form to include these items would be
costly to implement;
(4) A lender may have no knowledge of certain amounts a borrower
pays directly to third parties for items such as taxes or insurance.
Upon consideration of the comments, we are deleting the proposed
requirements of Sec. Sec. 617.7115(b) and 617.7130(a)(5).
Section 4.13(a)(3) of the Act requires qualified lenders to
disclose the effect of ``loan origination charges'' on the effective
rate of interest. Proposed Sec. 617.7115(a) identified what ``loan
origination charges'' must be disclosed for purposes of implementing
section 4.13(a)(3). The Act does not specifically require disclosure of
any other fees or costs not constituting ``loan origination charges.''
Additionally, as we discussed in the preamble to the proposed rule,
Congress specifically exempted agricultural loans from TILA coverage
and its more extensive disclosure requirements. For these reasons, we
are eliminating proposed paragraph (b) of this section in order to
avoid adding unnecessary regulatory burden to qualified lenders.
However, while we are not imposing this additional disclosure as a
requirement, we continue to believe, as one association commenter
stated, ``disclosure of such fees at or prior to loan closing is sound
lending practice.'' This is particularly true for inexperienced
borrowers, such as beginning farmers. Therefore, we encourage
additional voluntary disclosure by qualified lenders in loan
transactions.
Section 617.7120--How Should a Qualified Lender Present the Disclosures
to a Borrower?
Proposed Sec. 617.7120 was intended to provide reasonable
assurance that qualified lenders provide user-friendly, meaningful
disclosures to borrowers. We received no comments on proposed Sec.
617.7120 and adopt it as final.
Section 617.7125--How Should a Qualified Lender Determine the Effective
Interest Rate?
One association objected to the requirement of Sec. 617.7125(a)
that the EIR be calculated using a discounted cash flow methodology.
That association asserted:
(1) This is an inappropriate TILA-style requirement;
(2) This will impose an increased burden since there are a variety
of payment schedules employed to accommodate borrowers' agricultural
needs and non-FCS lenders do not have such a requirement.
As we discussed in the preamble to the proposed rule, while the
proposal is conceptually similar to the formula prescribed in
Regulation Z for determination of the annual percentage rate (APR) on
loans subject to TILA, a discounted cash flow is also the standard
accepted methodology used in the financial services industry as the
best measurement of the cost of credit over time and to develop loan
amortization schedules. As we also noted in the proposed rule preamble,
although the discounted cash flow method involves somewhat complex
mathematical computations, the FCA does not believe a requirement to
use this method would cause undue burden to lenders. A survey of System
lender disclosures we conducted in the spring of 2002 indicated that a
substantial majority (more than 80 percent) of FCS lenders have already
incorporated discounted cash flows in their EIR calculations. In
addition, a variety of computer-based tools for calculating effective
interest rates are readily available in the market place at a
reasonable cost.
Additionally, another association requested that we add a provision
establishing a tolerance level--similar to the Regulation Z provision--
for the accuracy of the EIR disclosure. Regulation Z provides that an
annual percentage rate is considered accurate (and the lender is not in
violation of Regulation Z) if the rate disclosed is within a tolerance
level. We considered, but rejected, that approach because, unlike
Regulation Z, our rules provide for flexibility in calculating the EIR.
FCA believes that the complexity of agricultural lending requires a
more flexible disclosure approach than provided for under Regulation Z.
Therefore, instead of a fixed formula mandated by FCA, we provide in
Sec. 617.7125(c) that lenders must establish policies and procedures
for disclosing the effect of the cost of borrower stock (or
participation certificates) and loan origination charges on the
interest rate of a loan. Qualified lenders will also be required to
establish policies and procedures for determining the major assumptions
used in calculating the EIR, such as for calculating the EIR for
adjustable rate loans, revolving or open-end lines of credit, or other
loans where key terms may vary or may not be fixed. The rule places
responsibility on a qualified lender to use due diligence in
calculating the EIR. Redisclosure would only be necessary if a lender
made a material error in the original calculation.
A third association opposed the requirement that the cost of the
required stock purchase be included as a ``borrowing expense'' with no
assumption of retirement at loan payoff allowed in the calculation of
the EIR, stating that the risk of loss of stock is extremely minimal
and to ``make the assumption that stock will not be recovered is to
raise unfounded concern on the part of the borrower that such loss is
anticipated.'' While the commenter may be factually correct in
asserting that the borrower's risk of loss of stock is minimal, we
believe the Act requires this result.
Congress provided in section 4.13(a)(3) of the Act that the
purchase of borrower stock must be disclosed as a cost of the credit in
determining the effective rate of interest on a loan. In other parts of
the Act, Congress further provided that borrower stock is an ``at-
risk'' equity investment. Assumption of stock retirement in the EIR
calculation is contrary to the at-risk feature of borrower stock. While
purchase of stock is a prerequisite for obtaining a loan, section 4.3A
of the Act \5\ precludes automatic retirement of borrower stock upon
loan payoff. Therefore, a qualified lender cannot explicitly or
implicitly guarantee or assume stock retirement.
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\5\ 12 U.S.C. 2154a.
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One association also objected to the requirement of proposed Sec.
617.7125(c) that qualified lenders must develop policies and procedures
establishing criteria on how the cost of borrower stock and loan
origination charges are assigned among multiple loans obtained
simultaneously. The association asserts that the requirement will be
[[Page 16458]]
burdensome and limits the association's flexibility. However, we
believe that policies and procedures establishing criteria are
necessary to ensure fairness and consistency in disclosure to borrowers
and to prevent misleading information. We continue to believe that the
proposed rule will allow an association to adopt policies and
procedures broad enough to allow some discretion and flexibility on a
case-by-case basis. For all the reasons discussed above, we adopt
proposed Sec. 617.7125 as final with one conforming change to
reference Sec. 617.7115 in paragraph (b)(3) of this section.
Section 617.7130--What Initial Disclosures Must a Qualified Lender Make
to a Borrower?
As discussed in the preamble to the proposed rule, the Council
previously stated that existing Sec. 614.4367(a)(3), which requires
the computation of EIR to be made on a transaction-specific basis, goes
beyond the requirement of Sec. 4.13(a)(3) of the Act. The Council made
the same comment about proposed Sec. 617.7130 (which keeps the
existing requirement), stating that the statutory requirement could be
satisfied by using a representative example based on a generic
transaction and recommended that FCA allow disclosure through the use
of a standard example.
As we stated in the proposed rule preamble (and in all prior
rulemakings in this area), we disagree with this approach and believe
that in order for borrower disclosure to be ``meaningful,'' as is
required by statute, the disclosure should take into account the
specific loan for which the disclosure is being provided. The EIR
disclosed should be derived from the interest rate and related charges
applicable to the loan being made to the borrower. However, for
adjustable or revolving loans where the terms and conditions are not
fixed or are subject to change, a disclosure of the EIR based on the
terms and conditions known at the inception of the loan, coupled with
representative examples showing the effect of changes in any of the
cost elements of the loan, e.g., borrower stock, loan origination
charges, or interest rate, on the EIR would be appropriate under the
circumstances. We received no other comments on proposed Sec. 617.7130
and adopt it as final with only one change to remove proposed paragraph
(a)(5) of this section in conformance with the change to proposed Sec.
617.7115.
Section 617.7135--What Subsequent Disclosures Must a Qualified Lender
Make to a Borrower?
As discussed in the proposed rule preamble, the Council recommended
that where an interest rate is based on a widely publicized external
index plus a spread, disclosure of a change of interest rate should not
be required when the index changes but should be required only when the
change in rate is caused by a change in the spread. The Council, a Farm
Credit bank, and five associations also reiterated this position in
their comments on proposed rule Sec. 617.7135. However, as we
discussed in the earlier preamble, we believe eliminating the notice of
interest rate changes for index rate loans is not appropriate. The Act
requires notice of ``any change in the interest rate applicable to the
borrower's loan.''\6\ While the contract rate (index plus spread) may
not have changed, it is clear that when the index changes, the rate of
interest the borrower pays on the loan has changed. There is nothing in
the legislative history of the Act to suggest that Congress intended to
exempt index rate loans from the disclosure requirement. Furthermore,
we believe it is important to remind borrowers that interest rate
changes will affect their payment amounts.
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\6\ 12 U.S.C. 2199(a)(4).
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In the preamble to the proposed rule, we indicated that any form of
correspondence to borrowers could satisfy the required written notice,
including a newsletter. The Council urged FCA to specifically authorize
that any required disclosure may be made on a System institution's Web
site or by calling a telephone information line. While sending an e-
mail to an individual borrower (in compliance with any applicable e-
commerce requirement, including the parties' agreement) would satisfy
the notice requirement of this section, we do not believe posting
information on a Web site or telephone information line would satisfy
statutory requirements. The Act requires that qualified lenders provide
``notice to the borrower'' of a change in the borrower's interest
rate.\7\ However, a ``widely publicized external index'' does not
provide notice directly to a borrower, and information available to
borrowers on the Web or by telephone does not provide such notice. For
these reasons, we adopt Sec. 617.7135 as final without change.
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\7\ 12 U.S.C. 2199(a)(4).
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Subpart C--Disclosure of Differential Interest Rates
Section 617.7200--What Disclosures Must a Qualified Lender Make to a
Borrower on Loans Offered With More Than One Rate of Interest?
We did not receive any comments on this section and adopt it as
final.
V. Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act (5
U.S.C. 601 et seq.), the FCA hereby certifies that the rule will not
have a significant economic impact on a substantial number of small
entities. Each of the banks in the System, considered together with
their affiliated associations and service corporations, has assets and
annual income in excess of the amounts that would qualify them as small
entities. Therefore, System institutions are not ``small entities'' as
defined in the Regulatory Flexibility Act.
List of Subjects
12 CFR Part 614
Agriculture, Banks, banking, Flood insurance, Foreign trade,
Reporting and recordkeeping requirements, Rural areas.
12 CFR Part 617
Banks, banking, Criminal referrals, Criminal transactions,
Embezzlement, Insider abuse, Investigations, Money laundering, Theft.
0
For the reasons stated in the preamble, parts 614 and 617 of chapter
VI, title 12 of the Code of Federal Regulations, are amended as
follows:
PART 614--LOAN POLICIES AND OPERATIONS
0
1. The authority citation for part 614 continues to read as follows:
Authority: 42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128; secs.
1.3, 1.5, 1.6, 1.7, 1.9, 1.10, 1.11, 2.0, 2.2, 2.3, 2.4, 2.10, 2.12,
2.13, 2.15, 3.0, 3.1, 3.3, 3.7, 3.8, 3.10, 3.20, 3.28, 4.12, 4.12A,
4.13B, 4.14, 4.14A, 4.14C, 4.14D, 4.14E, 4.18, 4.18A, 4.19, 4.25,
4.26, 4.27, 4.28, 4.36, 4.37, 5.9, 5.10, 5.17, 7.0, 7.2, 7.6, 7.8,
7.12, 7.13, 8.0, 8.5 of the Farm Credit Act (12 U.S.C. 2011, 2013,
2014, 2015, 2017, 2018, 2019, 2071, 2073, 2074, 2075, 2091, 2093,
2094, 2097, 2121, 2122, 2124, 2128, 2129, 2131, 2141, 2149, 2183,
2184, 2201, 2202, 2202a, 2202c, 2202d, 2202e, 2206, 2206a, 2207,
2211, 2212, 2213, 2214, 2219a, 2219b, 2243, 2244, 2252, 2279a,
2279a-2, 2279b, 2279c-1, 2279f, 2279f-1, 2279aa, 2279aa-5); sec. 413
of Pub. L. 100-233, 101 Stat. 1568, 1639.
[[Page 16459]]
Subpart K--[Removed]
0
2. Remove subpart K, consisting of Sec. Sec. 614.4365 through
614.4368.
PART 617--BORROWER RIGHTS
0
3. The authority citation for part 617 continues to read as follows:
Authority: Secs. 4.13, 4.13A, 4.13B, 4.14, 4.14A, 4.14C, 4.14D,
4.14E, 4.36, 5.9, 5.17 of the Farm Credit Act (12 U.S.C. 2199, 2200,
2201, 2202, 2202a, 2202c, 2202d, 2202e, 2219a, 2243, 2252(a)(9)).
Subpart A--General
0
4. Amend Sec. 617.7000 by adding the following definitions
alphabetically to read as follows:
Sec. 617.7000 Definitions.
* * * * *
Adjustable rate loan means a loan where the interest rate payable
over the term of the loan may change. This includes adjustable rate,
variable rate, or other similarly designated loans.
Effective interest rate means a measure of the cost of credit,
expressed as an annual percentage rate, that shows the effect of the
following costs, if any, on the interest rate on a loan charged by a
qualified lender to a borrower:
(1) The amount of any stock or participation certificates that a
borrower is required to buy to obtain the loan; and
(2) Any loan origination charges paid by a borrower to a qualified
lender to obtain the loan.
Interest rate means the stated contract rate of interest.
* * * * *
0
5. Amend part 617 by adding new subparts B and C to read as follows:
Subpart B--Disclosure of Effective Interest Rates
Sec.
617.7100 Who must make and who is entitled to receive an effective
interest rate disclosure?
617.7105 When must a qualified lender disclose the effective
interest rate to a borrower?
617.7110 How should a qualified lender disclose the cost of borrower
stock or participation certificates?
617.7115 How should a qualified lender disclose loan origination
charges?
617.7120 How should a qualified lender present the disclosures to a
borrower?
617.7125 How should a qualified lender determine the effective
interest rate?
617.7130 What initial disclosures must a qualified lender make to a
borrower?
617.7135 What subsequent disclosures must a qualified lender make to
a borrower?
Subpart B--Disclosure of Effective Interest Rates
Sec. 617.7100 Who must make and who is entitled to receive an
effective interest rate disclosure?
(a) A qualified lender must make the disclosures required by
subparts B and C of this part to borrowers for all loans not subject to
the Truth in Lending Act.
(b) For a single loan involving more than one borrower, a qualified
lender is required to provide only one set of disclosures to borrowers.
All borrowers may designate, in writing, one person who will receive
the effective interest rate disclosure. If the borrowers do not
designate a particular recipient, the lender may provide the disclosure
to at least one of the borrowers who is primarily liable for repayment
of the loan.
Sec. 617.7105 When must a qualified lender disclose the effective
interest rate to a borrower?
(a) Disclosure to prospective borrowers. A qualified lender must
provide written effective interest rate disclosure for each loan no
later than the time of loan closing.
(b) Disclosure to existing borrowers.
(1) A qualified lender must provide a new effective interest rate
disclosure to an existing borrower on or before the date:
(i) The borrower executes a new promissory note or other comparable
evidence of indebtedness;
(ii) The borrower purchases additional stock or participation
certificates as a condition of obtaining new funds from the qualified
lender; or
(iii) The borrower pays an additional loan origination charge to
the qualified lender as a condition of obtaining new funds.
(2) A qualified lender is not required to provide a new effective
interest rate disclosure when it advances new funds to an existing
borrower if none of the conditions of paragraph (b)(1) of this section
apply and the advance is made pursuant to a preexisting contract that
specifically provides for future advances.
Sec. 617.7110 How should a qualified lender disclose the cost of
borrower stock or participation certificates?
The cost of borrower stock or participation certificates must be
included in the effective interest rate calculation at the time the
stock or participation certificate is purchased in connection with a
loan transaction. For subsequent loans to existing borrowers, only the
cost of new stock or participation certificates, if any, purchased in
connection with a new loan or advance of new funds must be included in
the effective interest rate calculation for the transaction.
Sec. 617.7115 How should a qualified lender disclose loan origination
charges?
Any one-time charge paid by a borrower to a qualified lender in
consideration for making a loan must be included in the effective
interest rate as a loan origination charge. These include, but are not
limited to, loan origination fees, application fees, and conversion
fees. Loan origination charges also include any payments made by a
borrower to a qualified lender to reduce the interest rate that would
otherwise be charged, including any charges designated as ``points.''
Sec. 617.7120 How should a qualified lender present the disclosures
to a borrower?
A qualified lender must:
(a) Disclose the effective interest rate and other information
required by subparts B and C of this part clearly and conspicuously in
writing, in a form that is easy to read and understand and that the
borrower may keep; and
(b) Not combine the disclosures with any information not directly
related to the information required by Sec. Sec. 617.7130 and
617.7135.
Sec. 617.7125 How should a qualified lender determine the effective
interest rate?
(a) A qualified lender must calculate the effective interest rate
on a loan using the discounted cash flow method showing the effect of
the time value of money.
(b) For all loans, the cash flow stream used for calculating the
effective interest rate of a loan must include:
(1) Principal and interest;
(2) The cost of stock or participation certificates that a borrower
is required to purchase in connection with the loan; and
(3) Loan origination charges described in Sec. 617.7115.
(c) A qualified lender must establish policies and procedures for
EIR disclosures that clearly show the effect of the cost of borrower
stock (or participation certificates) and loan origination charges on
the interest rate of a loan. A qualified lender must also establish
policies and procedures for determining major assumptions used in
calculating the effective interest rate, e.g., criteria on how the cost
of borrower stock (or participation certificates) and loan origination
charges are assigned or allocated among multiple loans obtained by a
borrower simultaneously.
[[Page 16460]]
Sec. 617.7130 What initial disclosures must a qualified lender make
to a borrower?
(a) Required disclosures--in general. A qualified lender must
disclose in writing:
(1) The interest rate on the loan;
(2) The effective interest rate of the loan;
(3) The amount of stock or participation certificates that a
borrower is required to purchase in connection with the loan and
included in the calculation of the effective interest rate of the loan;
(4) All loan origination charges included in the effective interest
rate;
(5) That stock or participation certificates that borrowers are
required to purchase are at risk and may only be retired at the
discretion of the board of the institution; and
(6) The various types of loan options available to borrowers, with
an explanation of the terms and borrower rights that apply to each type
of loan.
(b) Adjustable rate loans. A lender must provide the following
information for adjustable rate loans in addition to the requirements
of paragraph (a) of this section:
(1) The circumstances under which the rate can be adjusted;
(2) How much the rate can be adjusted at any one time and how much
the rate can be adjusted during the term of the loan;
(3) How often the rate can be adjusted;
(4) Any limitations on the amount or frequency of adjustments; and
(5) The specific factors that the qualified lender may take into
account in making adjustments to the interest rate on the loan.
Sec. 617.7135 What subsequent disclosures must a qualified lender
make to a borrower?
(a) Notice of interest rate change.
(1) A qualified lender must provide written notice to a borrower of
any change in interest rate on the borrower's existing loan, containing
the following information:
(i) The new interest rate on the loan;
(ii) The date on which the new rate is effective; and
(iii) The factors used to adjust the interest rate on the loan.
(2) If the borrower's interest rate is directly tied to a widely
publicized external index, a qualified lender must provide written
notice to the borrower of the rate change within forty-five (45) days
after the effective date of the change.
(3) If the borrower's interest rate is not directly tied to a
widely publicized external index, a qualified lender must send written
notice to the borrower of the rate change within ten (10) days after
the effective date of the change.
(b) Notice of increase in stock purchase requirement. If a
qualified lender increases the amount of stock (or participation
certificates) a borrower must own during the term of a loan, the lender
must send a written notice to the borrower at least ten (10) days prior
to the effective date of the increase. The notice must state:
(1) The new effective interest rate on the outstanding balance for
the remaining term of the borrower's loan;
(2) The date on which the new rate is effective; and
(3) The reason for the increase in the borrower stock (or
participation certificates) purchase requirement.
Subpart C--Disclosure of Differential Interest Rates
Sec.
617.7200 What disclosures must a qualified lender make to a borrower
on loans offered with more than one rate of interest?
Subpart C--Disclosure of Differential Interest Rates
Sec. 617.7200 What disclosures must a qualified lender make to a
borrower on loans offered with more than one rate of interest?
A qualified lender that offers more than one rate of interest to
borrowers must notify each borrower of the right to request a review of
the interest rate charged on his or her loan no later than the time of
loan closing. At the request of a borrower, the lender must:
(a) Provide a review of the loan to determine if the proper
interest rate has been established;
(b) Explain to the borrower in writing the basis for the interest
rate charged; and
(c) Explain to the borrower in writing how the credit status of the
borrower may be improved to receive a lower interest rate on the loan.
Dated: March 23, 2004.
Jeanette C. Brinkley,
Secretary, Farm Credit Administration Board.
[FR Doc. 04-6968 Filed 3-29-04; 8:45 am]
BILLING CODE 6705-01-P