Exhibit 99(2)
SECTION-BY-SECTION EXPLANATION
OF THE TITLE i OF THE
FARM CREDIT SYSTEM REPORT ACT 1996
(P.L. 104-105, 110 Stat. 162)
SECTION 1. SHORT TITLE.
Section 1 provides for the act to be cited as the "Farm
Credit System Reform Act of 1996" (hereinafter in this
section-by-section explanation referred to as the "Act").
Title I -- AGRICULTURAL MORTGAGE SECONDARY MARKET
SECTION 101. DEFINITION OF REAL ESTATE.
Section 101 amends section 8.0(1)(B)(ii) of the Farm
Credit Act of 1971 (hereinafter, all amendments, repeals or
references made by this Act relate to a section or other
provision of the Farm Credit Act of 1971, unless otherwise
expressly provided) to clarify that the word "dwelling" as
it is used in reference to the definition of rural housing
refers only to the residential structure and not to the land
on which it is affixed.
SECTION 102. DEFINITION OF CERTIFIED FACILITY.
Section 102, clause (1) makes a technical change in
section 8.0(3)(A), the definition of "certified facility",
to conform the reference therein to a "secondary marketing
agricultural loan facility" to the terminology used
elsewhere in the Farm Credit Act of 1971, namely
"agricultural mortgage marketing facility."
Clause (2) amends section 8.0(3)(B) to authorize Farmer
Mac to act in the capacity of a certified facility for
qualified loans under the Farmer Mac I program (i.e., to act
as a pooler), by striking from the definition existing
language that otherwise limits Farmer Mac's authority in
this capacity to loans that are guaranteed by the U.S.
Department of Agriculture and purchased under the Farmer Mac
II program.
SECTION 103. DUTIES OF FEDERAL AGRICULTURAL MORTGAGE CORPORATION.
Section 103 amends section 8.1(b), which sets forth the
enumerated duties of the Farmer Mac to add specific new
duties for the purchase of qualified loans and the issuance
of guaranteed securities representing interests in or
obligations backed by such loans, which are guaranteed by
Farmer Mac for the timely repayment of principal and
interest.
SECTION 104. POWERS OF THE CORPORATION.
Section 104 amends section 8.3, the enumerated "powers"
of the Corporation (Farmer Mac), to specifically grant
Farmer Mac the power to purchase, hold, sell or assign
qualified loans, to issue guaranteed securities representing
an interest in, or an obligation backed by, such loans, and
to perform all of the functions and responsibilities of an
agricultural mortgage marketing facility operating as a
certified facility under the Farmer Mac program.
SECTION 105. FEDERAL RESERVE BANKS AS DEPOSITORIES AND FISCAL
AGENTS.
Section 105, clause (1) amends section 8.3(d) to
require the Federal Reserve Banks to act as depositories and
fiscal agents for Farmer Mac's securities. Current law
authorizes, but does not require, the Federal Reserve banks
to act as depositories and to perform as fiscal agent for
Farmer Mac.
Clause (2) amends section 8.3(e) to provide Farmer Mac
access to the Federal Reserve System book-entry system for
purposes of trading its securities. Current law authorizes,
but does not require, the Department of the Treasury to
allow book-entry access to Farmer Mac's securities.
SECTION 106. CERTIFICATION OF AGRICULTURAL MORTGAGE MARKETING
FACILITIES.
Section 106, clause (1) amends section 8.5(a) by
inserting a parenthetical clause in two places to clarify
that the eligibility standards for the certification of
agricultural mortgage marketing facilities other than Farmer
Mac, set forth therein, do not apply to Farmer Mac, which is
designated by this Act to act as a certified agricultural
mortgage marketing facility.
Clause (2) amends section 8.5(e)(1) by striking a
parenthetical clause to clarify that Farmer Mac, alone or in
concert with other Farm Credit System institutions, may
establish and operate as an agricultural mortgage marketing
facility through an affiliated organization established for
that purpose.
SECTION 107. GUARANTEE OF QUALIFIED LOANS.
Section 107, clause (1) amends section 8.6(a)(1) to
clarify that Farmer Mac is authorized issue securities,
guaranteed as to the timely repayment of principal and
interest, that represent an interest in, or an obligation
fully backed by, a pool of qualified loans that meet the
standards for qualified loans established in section 8.8 and
that were purchased and held by Farmer Mac.
Clause (2) amends subsection 8.6(d) by striking out
paragraph (4) thereof, which under existing law would
prohibit the inclusion in a pool of loans guaranteed by
Farmer Mac any loan with recourse to the originator, and
renumbers the remaining paragraphs of this subsection.
Clause (3) amends subsection 8.6(g)(2) to include a
cross reference to section 8.0(9), the definition of
"qualified loan", which would authorize Farmer Mac to issue
debt obligations to fund the purchase of qualified loans
that meet the standards for the Farmer Mac I program, in
addition to Farmer Mac's existing authority to issue debt
obligations for the purchase of qualified loans under the
Farmer Mac II program (USDA guaranteed loans) and for
maintaining reasonable amounts of funds for business
operations.
SECTION 108. MANDATORY RESERVES AND SUBORNIDATED PARTICIPATION
INTERESTS ELIMINATED.
Section 108, subsection (a) repeals section 8.6(b).
Under existing law, section 8.6(b) requires a minimum 10%
cash reserve or subordinated participation interest to be
maintained (or sold to investors) by the lenders or poolers
originating and assembling the loans in each pool as a
condition of Farmer Mac's guarantee of the loan-backed
securities representing no more than 90% of the principal
value of the loans in each pool. The effect of this change
is to authorize Farmer Mac to guarantee securities backed by
pools of qualified loans under the program up to 100% of the
principal value of the loans in each pool.
Subsection (b) repeals section 8.7. Under existing
law, section 8.7 provides standards for the establishment of
cash reserves and subordinated participation interests
required to be maintained under section 8.6(b). The repeal
of section 8.6(b) in subsection (a) makes section 8.7
unnecessary.
SECTION 109. STANDARDS REQUIRING DIVERSIFIED POOLS.
Section 109, subsection (a) repeals subsection 8.6(c),
standards requiring diversified pools, and appropriately
redesignates the remaining subsections. This change allows
Farmer Mac to purchase individual qualified loans or small
groups of qualified loans, in its new capacity as an
agricultural mortgage marketing facility, that would not
meet the pool diversification requirements contained in
existing law.
Subsection (b) makes various technical changes to the
text of several sections of the Farm Credit Act of 1971 to
conform the language thereof to the amendments by this
section and other sections of this Act.
SECTION 110. SMALL FARMS.
Section 110 amends subsection 8.8(e) to require the
Board of Farmer Mac to promote and encourage the inclusion
of qualified loans for small farms and family farmers in the
agricultural mortgage secondary market. This change
preserves the existing law provision regarding small farms
and family farmers contained in subsection 8.6(c), which is
the section addressing the pool diversification requirements
that was repealed by section 109 of the Act.
SECTION 111. DEFINITION OF AN AFFILIATE.
Section 111 amends section 8.11(e), definition of
"affiliate", by deleting therefrom the references to
"certified facility" and to "paragraph (3)" of section 8.0.
This amendment authorizes Farmer Mac to establish an
affiliate to carry out its pooling functions. Under
existing law, Farmer Mac is authorized to establish
affiliates, but is prohibited from establishing an affiliate
to act as a certified facility.
SECTION 112. STATE USURY LAWS SUPERSEDED.
Section 112 amends section 8.12 by striking subsection
(d), which currently provides an exemption from State usury
laws for loans included in a pool guaranteed by Farmer Mac,
and inserting in lieu thereof a revised text which
incorporates the existing provision and, in addition, adds
specific reference to prepayment penalty (either fixed or
declining), yield maintenance, or make-whole payment
provisions charged, taken or received by an agricultural
lender or certified facility in connection with the full or
partial prepayment of a loan. The revision also provides
that any State usury law exempted under this section shall
not apply to an agricultural loan made in accordance with
Title VIII of the Farm Credit Act of 1971 for sale to Farmer
Mac or to a certified facility for inclusion in a pool for
which Farmer Mac has provided or has committed to provide a
guarantee, only if the loan is actually sold to Farmer Mac
or included in such a pool within 180 days after the date
the loan was made.
SECTION 113. EXTION OF CAPITAL TRANSITION PERIOD.
Section 113, clause (1) amends section 8.32(a), which
directs the Farm Credit Administration to establish a risk-
based capital test for Farmer Mac, by eliminating the
reference to the two-year period beginning on December 13,
1991 and providing for the promulgation of such risk-based
capital regulation by the Director of the Office of
Secondary Market Oversight within the FCA, beginning three
years after the enactment of the Act, but not sooner.
Clause (2) amends section 8.32(b)(2), by extending the
five-year period, established in that section, after which
the Director is required to examine and possibly revise the
risk-based capital test promulgated under subsection (a), to
eight years.
Clause (3) amends section 8.32(d) by adding a new
clause providing that the public notice of proposed
rulemaking to be issued by the Director in connection with
establishing the risk-based capital test provided for in
subsection (a), shall not be published for public comment
until after the expiration of the three-year time period as
set forth in subsection (a), and by reformatting the text of
this subsection into numbered paragraphs.
SECTION 114. MINIMUM CAPITALIZATION LEVEL.
Section 114 amends section 8.33 to provide for the
minimum level of core capital to be maintained by Farmer Mac
during a three-year transition period following the
enactment of the Act and thereafter, as described in the
following paragraphs.
New subsection 8.33(a) provides that the minimum
capital level for Farmer Mac shall be an amount of core
capital equal to the sum of 2.75 percent of Farmer Mac's
aggregate on-balance sheet assets, as determined by
generally accepted accounting principles, plus 0.75 percent
of the aggregate off-balance sheet obligations of Farmer Mac
specifically including: (A) the unpaid principal balance of
outstanding securities guaranteed by Farmer Mac and backed
by pools of qualified loans; (B) instruments issued or
guaranteed by Farmer Mac that are substantially equivalent
to the securities described in category (A); and (C) other
off-balance sheet obligations of Farmer Mac.
New subsection 8.33(b), paragraph (1) establishes a
transition period for Farmer Mac's minimum capital
requirements as follows:
(A) prior to January 1, 1997, Farmer Mac's minimum
amount of core capital shall be the sum of 0.45 percent
of the aggregate off-balance sheet obligations, plus
0.45 percent of designated on-balance sheet assets as
defined in paragraph (2), plus 2.50 percent of on-
balance sheet assets other than designated assets;
(B) during the 1-year period ending December 31,
1997, Farmer Mac's minimum capital shall be the sum of
0.55 percent of the aggregate off-balance sheet
obligations, plus 1.20 percent of designated on-balance
sheet assets, plus 2.55 percent of on-balance sheet
assets other than designated assets;
(C) during the 1-year period ending December 31,
1998, Farmer Mac's minimum capital shall be the sum of
0.65 percent of the aggregate off-balance sheet
obligations, plus 1.95 percent of designated on-balance
sheet assets, plus 2.65 percent of on-balance sheet
assets other than designated assets, except that if
Farmer Mac's core capital is less than $25,000,000 on
January 1, 1998, the amount of minimum capital level
shall be the amount specified under subsection (a); and
(D) on and after January 1, 1999, the minimum
capital level of Farmer Mac shall be the amount of
capital determined under subsection (a).
New subsection 8.33(b), paragraph (2) defines
"designated on-balance sheet assets of Farmer Mac to mean:
(A) the aggregate on-balance sheet assets acquired under the
Linked Portfolio option under section 8.6(e); plus (B) the
aggregate amount of qualified loans purchased and held by
Farmer Mac under section 8.3(c)(13).
SECTION 115. CRITICAL CAPITAL LEVEL.
Section 115 amends section 8.34(3) by clarifying that
Farmer Mac's critical capital level shall be an amount of
core capital equal to 50 percent of the total minimum
capital requirement under section 8.33.
SECTION 116. ENFORCEMENT LEVELS.
Section 116 makes a technical change in section 8.35(e)
to conform the grace period provided under the Act for
classifying Farmer Mac within level I capital compliance to
the actual effective date of the risk-based capital
regulation to be issued by the Director under section 8.32.
SECTION 117. RECAPITALIZATION OF THE CORPORATION.
Section 117 adds a new section 8.38, which provides for
the recapitalization of Farmer Mac within two years after
the enactment of the Act, as described in the following
paragraphs.
New subsection 8.38(a) provides for the mandatory
recapitalization of Farmer Mac by requiring it to increase
its total core capital to at least $25 million within 2
years after the enactment of the Act or within 180 days
after the end of the first calendar quarter that the
aggregate on-balance sheet assets of Farmer Mac, plus
outstanding off-balance sheet obligations equal or exceed $2
billion, whichever occurs sooner.
New subsection 8.38(b) provides that in carrying out
the provisions of this section Farmer Mac may use its
existing authorities to issue stock under section 8.4 or any
other recognized and legitimate means of raising core
capital within Farmer Mac's powers under section 8.3.
New subsection 8.38(c) provides that during the three-
year period following enactment of the Act, Farmer Mac's
total on-balance sheet assets plus off-balance sheet
obligations may not exceed $3 billion, unless and until
Farmer Mac's total core capital is at least $25 million
New subsection 8.38(d) provides that if Farmer Mac
fails to meet the requirements of subsection (a) to raise it
core capital level within the applicable time frame provided
for therein, it may not purchase new qualified loans or
issue or guarantee new loan-backed securities until its core
capital level is increased to $25 million or more. In
effect, this subsection sunsets Farmer Mac's authority to
buy new loans or issue new securities if it does not raise
its core capital to at least $25 million within the time
frames provided for in subsection (a).
Section 118. Liquidation of the Federal Agricultural
Mortgage Corporation.
SECTION 118. LIQUIDATION OF THE FEDERAL AGRICULTURAL
MORTGAGE CORPORATION.
Section 118 amends Title VIII of the Farm Credit Act of
1971 by adding at the end thereof a new Subtitle C entitled
"Receivership; Conservatorship; and Liquidation of the
Federal Agricultural Mortgage Corporation", including a new
section 8.41 entitled "Conservatorship; Liquidation;
Receivership." The provisions of the new section 8.41 are
described in the following paragraphs.
New subsection 8.41(a), Voluntary Liquidation, provides
that Farmer Mac may voluntarily liquidate only with the
consent of the Farm Credit Administration (FCA) Board and in
accordance with a plan of liquidation approved by the FCA
Board.
New subsection 8.41(b), Involuntary Liquidation,
provides that the FCA Board may appoint a conservator or
receiver for Farmer Mac under the circumstances specified in
section 4.12 (b) of the Farm Credit Act of 1971, and in the
case of the appointment of a conservator, also those
specified in section 8.37. In applying the provisions of
section 4.12(b) to Farmer Mac:
(1) Farmer Mac shall also be considered insolvent
if it is unable to pay its debts as they fall due in
the ordinary course of business;
(2) a conservator may also be appointed if Farmer
Mac's authority to purchase qualified loans or to issue
or guarantee loan-backed securities is suspended by
law; and
(3) a receiver may also be appointed for Farmer
Mac if: (A) Farmer Mac's authority to purchase
qualified loans or to issue or guarantee loan-backed
securities is suspended or Farmer Mac is classified
under section 8.35 as within enforcement level III or
IV, and the alternative actions available under
Subtitle B are not satisfactory; and (B) the FCA
determines that the appointment of a conservator would
not be appropriate.
New subsection 8.41(c), Appointment of Conservator or
Receiver, provides in paragraph (1) that notwithstanding the
provisions of section 4.12(b), a person qualified to serve
as a conservator of receiver of Farmer Mac shall be:
(A) the FCA or any government entity or employee,
including the FCS Insurance Corporation; or
(B) any person who has no claim against or
financial interest in Farmer Mac, or any other basis
for a conflict of interest, and has the financial and
management expertise to direct the affairs of and to
liquidate Farmer Mac if necessary.
Paragraph (2) provides that the conservator or receiver and
employees thereof are entitled to compensation in amounts no
greater than the compensation provided to federal employees
for similar services, except that the FCA may pay higher
rates, not in excess of the prevailing rates in the private
sector, if it determines this is necessary to retain
competent personnel. This paragraph also authorizes the
conservator or receiver to contract with any government
entity for the use of personnel, services and facilities on
terms mutually agreed to between the parties and authorizes
each such government entity to provide such. Paragraph (3)
provides that the conservator or receiver shall pay valid
claims for the expenses of the conservatorship or
receivership, including compensation and any loan made by
the conservator or receiver, before paying any other claim
against and that such claims may be secured as a first
priority lien against such property of Farmer Mac as the
receiver determines. Paragraph (4) provides that any
conservator or receiver who is not a federal entity or
federal employee shall not be personally liable for damages
in tort or otherwise for acts or omissions in connection
with carrying out the receivership except for gross
negligence or intentional tortuous or criminal conduct.
Paragraph (5) provides that the FCA may indemnify the
conservator or receiver on such terms as the FCA considers
appropriate.
New subsection 8.41(d), Judicial Review of Appointment,
provides that, notwithstanding the provisions of subsection
(i) for termination of the authorities of Farmer Mac, within
30 days after the appointment of a conservator or receiver,
Farmer Mac may seek an order in the U.S. District Court for
the District of Columbia to require that FCA remove the
conservator or receiver, and, based on the merits of the
case, the court shall either dismiss the action or direct
FCA to remove the conservator or receiver. On the
commencement of such action, all other judicial proceedings
to which Farmer Mac is a party shall be stayed pending the
outcome of such action.
New subsection 8.41(e), General Powers of Conservator
or Receiver, provides that the powers of the conservator or
receiver shall be provided for in regulations issued by the
FCA and that such powers shall be comparable to the powers
available to a conservator or receiver appointed for any
other System institution under section 4.12(b) of the Farm
Credit Act of 1971.
New subsection 8.41(f), Borrowings for Working Capital,
provides that, if the conservator or receiver determines
that it is likely there will be insufficient funds to pay
the administrative expenses of the conservatorship or
receivership or to fund maturing obligations thereof, the
conservator or receiver may borrower such funds, from such
sources, at such rates as the conservator or receiver
determines to be necessary to meet the expenses or the
liquidity needs of the conservatorship or receivership. FCS
banks are authorized to lend to the conservator or receiver
and to purchase the assets of Farmer Mac.
New subsection 8.41(g), Agreements Against Interests of
Conservator or Receiver, provides that no agreement which
tends to diminish or defeat the right, title, or interest of
the conservator or receiver in any assets acquired from
Farmer Mac shall be valid against the conservator or
receiver unless the agreement: (1) is in writing; (2) is
executed by Farmer Mac and the person asserting the adverse
interest, including the obligor, contemporaneously with the
acquisition of the asset by Farmer Mac; (3) is approved by
the Board, or an appropriate Board committee, and is
recorded in the minutes of such; and (4) has been,
continuously, from the time of its execution, an official
record of Farmer Mac.
New subsection 8.41(h), Report to the Congress,
provides that, upon a determination by the receiver that the
assets of Farmer Mac in receivership are inadequate to pay
all valid claims against Farmer Mac, the receiver shall
submit to the Secretary of the Treasury and to the House and
Senate Agriculture Committees a report of the financial
condition of the receivership.
New subsection 8.41(i), Termination of Authorities,
provides in paragraph (1) that Farmer Mac's charter is
canceled and its authority to do business under Title VIII
shall terminate on such date as determined by the FCA Board,
following the placement of Farmer Mac in receivership, but
not later than the termination of the receivership and
discharge of the receiver. Paragraph (2) provides that the
Office of Secondary Market Oversight of the FCA shall be
abolished and its authorities under section 8.11(a) and
subtitle B canceled 30 days after the charter of Farmer Mac
is canceled by the FCA, but not later than the termination
of the receivership and discharge of the receiver.
* * * * * * *
Title II of the Act contains two sections that amend
provisions of the Farm Credit Act of 1971 as they relate to
the participation of banks and associations of the Farm
Credit System in the programs of the Federal Agricultural
Mortgage Corporation
Section 206. Borrower Stock.
Section 206 adds a new subsection (f) to section 4.3A
of the Farm Credit Act of 1971 and appropriately
redesignates the remaining subsection thereof. The new
subsection (f) provides that, notwithstanding any other
provision of section 4.3A, the bylaws adopted by a bank or
association under subsection (b) may provide: (A) in the
case of a loan originated after the date of enactment of the
Act, that the requirements applicable to Farm Credit System
(FCS) borrowers to purchase voting stock or participation
certificates will not apply, if at the time the loan is made
it is designated for sale into the secondary market; and (B)
in the case of a loan made before the date of enactment of
the Act that is sold into the secondary market, that all
outstanding voting stock or participation certificates held
by the borrower on the loan will be retired. This
subsection shall apply regardless of whether the bank or
association holds a subordinated participation interest in
the loan or pool of loans or contributes to a cash reserve
with respect thereto. Further, this subsection provides
that the waiver of the borrower stock provisions under this
subsection shall not be effective with respect to any loan
that is not sold into the secondary market within 180 days
of the designation of the loan for such sale, but that the
bylaws adopted by a bank or association may provide that
borrower stock shall be retired if such loan is sold into
the secondary market after the 180-day period.
* * * * * * *
Section 208. Borrowers' Rights.
Section 208, subsection (a) adds a new subparagraph (B)
to section 4.14A(a)(5) of the Farm Credit Act of 1971 and
appropriately redesignates the remaining text thereof. The
new subparagraph (B) provides that the borrowers' rights
otherwise provided for in this section, applicable to loans
made by institutions of the Farm Credit System (FCS), shall
not apply to a FCS loan made on or after the date of
enactment of the Act that is designated at the time it is
made for sale into the secondary market. The new
subparagraph provides further that if a designated FCS loan
is not sold into the secondary market within 180 days after
the date of the designation, all borrowers' rights provided
for in the Farm Credit Act of 1971 shall become effective
with respect to the loan, except that if such a loan is
thereafter sold into the secondary market the borrowers'
rights shall not apply to the loan beginning on the date of
the sale.
Subsection (b) amends section 8.9(b), which makes
certain provisions with respect to borrowers' rights for FCS
loans originated for sale into the Farmer Mac secondary
market, by clarifying that the reference to "loan" in this
section shall have the same meaning as is given to the word
"loan" in section 4.14A(a)(5)(B) as amended by subsection
(a).
* * * * * * *