Whenever the amount in the legal reserve account exceeds 25 percent of the capital stock and participation certificates outstanding at the end of any fiscal year, such excess may be distributed, in full or in part, if the board of directors of the bank so determines, oldest allocations first, in class B stock and participation certificates issued as of the date of the allocations and, whenever the bank has no class A stock outstanding, also in money.

§ 640.153-22 Same; absorption of losses.

When net losses are charged to the legal reserve account, as provided in § 640.152, such losses shall reduce the amounts allocated to production credit associations and other financing institutions, most recent allocations first. All allocations for each year shall be fully absorbed before any losses are charged against allocations for an earlier year. Charges that are less than the full amount of all allocations issued for a specified year shall be on a pro rata basis. § 640.153-23 Same; disposition in the

event of merger or consolidation of a production credit association or other financing institution.

In the event of a merger or consolidation of two or more production credit associations, the reserve account allocations of the respective associations shall be disposed of in the manner provided in the agreement of merger or consolidation. In the event of a merger or cosolidation of another financing institution, the reserve account allocations of such institution shall be transferred to its successors in interest. § 640.153-24

Same; disposition on liquidation of credit bank.

In the event of a liquidation or dissolution of a credit bank, the remaining reserve account allocations shall be paid to the owners of record or their successors in interest.

§ 640.154 Patronage refunds; general. Patronage refunds may be paid to production credit associations and other

financing institutions only. The amount payable to each such institution shall be in the proportion that the amount of interest earned by the bank on loans to and discounts for that institution bears to the total interest on loans to and discounts for all production credit associations and other financing institutions outstanding during the fiscal year, and shall be paid as provided in §§ 640.1541 and 640.154–2.

§ 640.154-1

Same; if there is class A stock outstanding at the end of the fiscal year.

Payments of patronage refunds shall be made in class B stock to production credit associations and in participation certificates to other financing institutions borrowing from or discounting with the bank during the fiscal year. § 640.154-2 Same; if there is no class A stock outstanding at the end of the fiscal year.

Payments of patronage refunds may be made in cash, or in class B stock to production credit associations and in participation certificates to other financing institutions as provided in § 640.154-1, as may be authorized by the board of directors.

§ 640.161-1 Examinations of Federal intermediate credit banks; by farm credit examiners.

The Farm Credit Administration is required by law (12 U.S.C. 1091) to examine and audit each intermediate credit bank at least once each year. Such examinations are made by Farm Credit examiners appointed pursuant to section 3 of the Federal Farm Loan Act, as amended (12 U.S.C. 656).

§ 640.161-2 Audits by General Accounting Office.

Federal intermediate credit banks are subject to audit by the General Accounting Office, as provided in the Government Corporation Control Act for any year during which any Government-owned class A stock is outstanding (31 U.S.C. 841, 856-858).

§ 640.162-1 Examinations of production credit associations; general.

(a) At least once each year each production credit association is required to be examined by examiners designated by the Governor of the Farm Credit Administration (12 U.S.C. 1138a). Such examinations ordinarily are made in two parts, as follows:

(1) The records and accounts of the associations are examined by Farm Credit examiners; and

(2) Credit examinations are made by employees of the credit bank when designated for that purpose by the Farm Credit Administration. Such credit examinations are required to be made in accordance with the principles and procedures prescribed by the Farm Credit Administration as set forth in the Manual for Credit Examinations of Production Credit Associations.

(b) Credit examinations of production credit associations and analyses of their loans also may be made by Farm Credit examiners.

(a) Verification requests referred to the bank by the resident examiner should be followed up in the most economical and practical manner. In some cases the bank may be able to clear up exceptions on confirmed accounts through information in its files, or through its knowledge of circumstances in particular cases. When a verification request is assigned by the bank for field followup, the contact should be made in the regular course of business, unless circumstances warrant special attention.

(b) On completion of its followup, the bank will return one copy of the list of accounts submitted for verification to the resident examiner showing thereon the results of the followup, together with exceptions that were not cleared. In the event exceptions are reported which indicate the possible existence of a shortage, the circumstances should be reported as prescribed in § 640.361. § 640.163 Other financing institutions.

So long as an institution is indebted to the Federal intermediate credit bank, either directly or indirectly, the bank shall keep itself informed regarding the condition and operations of the institution. In the case of banks, such information ordinarily may be obtained by reviewing reports of examinations made by supervisory authorities. Each agricultural credit corporation, livestock loan company, or other similar institution, except when examined by Farm Credit examiners, should be examined periodically by the credit bank. Ordinarily, examinations of active corporations should be made not less frequently than once each year.

All costs of supervision and related services furnished production credit associations by an intermediate credit bank will be borne by the bank in accordance with provisions of section 101(b) of the Farm Credit Act of 1956 (12 U.S.C. 1027(b)).

§ 640.172 Charging of fees or commissions unauthorized.

No Federal intermediate credit bank may charge or receive from any production credit association or other financing institution "any fee, commission, bonus, gift, or other consideration" not specifically authorized by law (12 U.S.C. 1129). § 640.173-1 Recoverable expenditures;

credit examinations-production credit associations.

Section 61 of the Farm Credit Act of 1933 (12 U.S.C. 1138a) requires each production credit association to pay the cost of its examination made pursuant to the Act. The cost of credit examinations made by employees of the bank, as provided in § 640.162-1, shall be assessed to and paid by the associations examined. Since each credit examination is made in connection with the overall credit review of an association's lending and loan servicing operations, only that part of the total cost which is attributable to the credit examination itself will be charged to the association. The amount to be recovered and the basis of allocation among the associations will be determined as follows:

(a) The total costs attributable to credit examinations will be determined each year by the bank and will include the following elements:

(1) One-half of the salary cost and travel expense, including subsistence, of the examiners for the time devoted to the entire credit review, including preexamination training;

(2) The salary cost and travel expense of officers or other supervisory employees for the time devoted to supervising the credit examination work, as estimated by the bank;

(3) Salary costs incurred in typing, checking, and assembling the examination reports;

(4) Cost of forms, supplies, etc., used in making credit examinations; and

(5) A charge to cover overhead costs, which shall be computed at 6 percent of

the sum of subparagraphs (1) through (4) of this paragraph.

Salary cost in subparagraphs (1), (2), and (3) of this paragraph will include a proportionate share of the cost of retirement, annual and sick leave, and other fringe benefits, as determined by the bank.

(b) The cost of making the credit examinations, determined as provided above, will be allocated among the associations upon such equitable basis as may be determined by the bank, taking into consideration such factors as the time devoted to making the examinations, the number of loans reviewed and any other elements having a bearing upon the resulting costs of the current year's credit examinations.

(c) Each bank is expected to assess and recover the full cost of each credit examination each calendar year. In the interest of economy and efficient operations the bank may defer its calculation of cost and its assessments until after the close of the calendar year involved; provided, the assessments are made within a reasonable period after the close of such year; and provided further, that the time of making the assessments shall normally follow a consistent pattern so that each association will have to include the cost of only one credit examination in its expenses each year.

A copy of each bank's plans for computing examination cost and for the allocation of such costs among the associations under a and b above shall be submitted to the Farm Credit Administration.

§ 640.173-2 Examinations of other financing institutions made by the bank.

Examinations of financing institutions other than production credit associations are made by the bank for its own account, under the terms of the General Rediscount, Loan and Pledge Agreement entered into between the borrowing institution and the bank. Such examinations are not made for the Farm Credit Administration, nor are they based upon any direct supervisory authority vested in the bank. Each bank is authorized to assess the cost of such examinations, in whole or in part, against the institutions examined, upon such basis as the bank determines to be equitable.

When, by reason of a production credit association's inability or failure to employ competent personnel, a bank finds it necessary to assign an officer or employee of the bank to perform the functions of association employees, the bank may require the association to reimburse it for salary, subsistence, and necessary travel expense incurred in the performance of such work, upon such basis as the bank determines to be equitable. In this connection, care should be exercised to differentiate between actual performance of association work and the training of association employees. The latter is regarded as a supervisory function of the bank, the cost of which will be absorbed by the bank.

When it is found advantageous to the production credit associations to have certain items or services provided on a group or pool basis and to have the related expense paid by the bank and allocated to them on a basis agreed upon, the bank may handle such transactions for the associations concerned and at their expense. The association may contribute to an imprest fund for the payment of such costs, or the bank may carry the expense as accounts receivable and recover from the associations concerned. Among the classes of items which may be treated in this manner are:

(a) Purchasing and carrying an inventory of forms, supplies, etc., for the associations, which may be billed at prices which provide the bank with a margin sufficient to cover estimated inventory losses through deterioration or obsolescence, etc.;

(b) Cost of meeting rooms and other expenses of association conferences;

(c) Expenses of trust committees handling association retirement plans; expenses of handling association investments; assembling data, making reports, filing claims, etc., in connection with association insurance programs; and outof-pocket costs for procuring and distributing advertising materials, displays, building signs, etc.

'The foregoing list is not intended to be all inclusive but to illustrate the types of expenditures which an intermediate

The cost of each examination of a production credit association, whether regular or special, will be allocated to and assessed against the association or the bank by the Farm Credit Administration as follows:

(a) The cost of each regular periodic examination made pursuant to § 640.162– 1(a), will be assessed against the association examined; and

(b) Because of wide variations in circumstances which may result in special examinations of associations (including special audits, investigations, credit analyses, or other reviews) the Farm Credit Administration will determine the allocation to be made of the resulting cost and will assess the amount involved against the bank or the association, or both, on the basis of such determination. In general, if a special examination of a production credit association is made by Farm Credit examiners because of conditions or developments in or affecting the association, the resulting cost will be chargeable to the association. On the other hand, if the primary purpose of a special examination is to develop information concerning the operations and activities of the bank, such as determining the quality of credit examinations made by bank employees, reviewing its supervisory activities, obtaining or verifying information needed to complete an examination of the bank, or other matters pertaining to the bank's affairs, the resulting cost will be borne by the

bank as a part of the cost of its examination. If it appears to the Farm Credit Administration that the character, purpose, and scope of a special examination are such that the cost should be shared by both the bank and the association, it will assess each institution for the amount determined to be chargeable to it.

Subpart B-Loans and Discounts § 640.201 Lending powers.

In general, the lending powers of the Federal intermediate credit banks are set forth in section 202(a) of the Federal Farm Loan Act, as amended (12 U.S.C. 1031), as follows:

The Federal intermediate credit banks, when chartered and established, shall have power, subject solely to the restrictions, limitations, and conditions contained in this Act or as may be prescribed by the Farm Credit Administration not inconsistent with the provisions of this Act

(1) To discount for, or purchase from, any production credit association organized under the Farm Credit Act of 1933, as amended, with its endorsement, any note, draft, or other such obligation presented by such association; and to make loans and advances to any such association secured by such collateral as may be approved by the Governor of the Farm Credit Administration or without collateral to the extent authorized under rules and regulations prescribed by the Farm Credit Administration;

(2) To discount for, or purchase from, any national bank, State bank, trust company, agricultural credit corporation, incorporated livestock loan company, savings institution, credit union, and any association of agricultural producers engaged in the making of loans to farmers and ranchers, with its endorsement, any note, draft, or other such obligation the proceeds of which have been advanced or used in the first instance for any agricultural purpose, including the breeding, raising, fattening, or marketing of livestock; and to make loans and advances to any such financing institution secured by such collateral as may be approved by the Governor of the Farm Credit Administration: Provided, That, no such loan or advance shall be made upon the security of collateral other than notes or other such obligations of farmers and ranchers eligible for discount or purchase under the provisions of this section, unless such loan or advance is made to enable the financing institution to make or carry loans for any agricultural purpose;

(3) To make loans to and discount paper for any other Federal intermediate credit bank, any Federal land bank, or any bank

for cooperatives organized under the Farm Credit Act of 1933, as amended, all upon terms and at rates of interest or discount approved by the Farm Credit Administration; and

(4) To purchase for investment obligations of the Federal land banks and the banks for cooperatives and, to the extent authorized by the Farm Credit Administration, obligations of any agencies of the United States. § 640.201-1 Same; terms denoting different classes of borrowing and discounting institutions.

Except as indicated otherwise, the term "financing institutions" as used in this part shall be understood to include both production credit associations and all institutions of the types listed in paragraph (2) of section 202 (a) of the Act, quoted in § 640.201. The term "other financing institutions" includes only those listed in such paragraph (2). The term "banks of the Farm Credit System" includes only those institutions listed in paragraph (3).

§ 640.201-2 Federal credit unions.

Following is an excerpt from the Federal Credit Union Act of June 26, 1934, as amended (12 U.S.C. 1757):

It must be engaged in the business of extending short- and intermediate-term credit to farmers and ranchers for agricultural purposes, including the breeding, raising, fattening, or marketing of livestock. A concern engaged in the business of manufacturing, merchandising, real estate brokerage, real estate loans, etc., will not be classified as an institution eligible to obtain credit from a credit bank merely because it has the power to make loans to farmers and stockmen 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, will not of itself render it ineligible. Such institutions should be carefully investigated and each case decided on its merits. § 640.203-2 Same; incorporation and capital structure.

It must be incorporated; have a capital structure commensurate with the volume of business it expects to handle; and have prospective income sufficient to cover operating costs and establish reserves for possible losses.

It must 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 institution which does not promptly rectify such conditions upon notice from the bank. Special attention should be given to the institution's 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.

§ 640.203-4 Same; affiliated with other

concerns.

(a) In the case of any financing institution which is affiliated with a bank, cooperative association, or other concern (through stock ownership, management, interlocking directorates, or otherwise) the bank will consider the possible effects of such relationship upon the operations