Farm Credit Administration for cancellation.

(g) Immaterial mutilation or defacement. Where a mutilation or defacement of a debenture is so slight that the debenture may be identified fully, and the missing fragments could not by any possibility form the basis of a claim against the Farm Credit Administration or any Federal intermediate credit bank, the Farm Credit Administration, upon application therefor, and the surrender of the defaced or mutilated debenture, may authorize the issuance of a new debenture in lieu thereof without requiring an affidavit or indemnity bond, or such debenture may be accepted and paid, at maturity, as if no mutilation or defacement had occurred.

§ 40.148 Restrictive endorsements of bearer securities.

When consolidated debentures issued by the 12 Federal intermediate credit banks are being presented to Federal Reserve Banks or Branches, or to the Treasurer of the United States, by or through banks (including Federal intermediate credit banks) for redemption, such debentures may be restrictively endorsed. The restrictive endorsement shall be placed thereon in substantially the same manner and with the same effects as prescribed in United States Treasury Department regulations, now or hereafter in force, governing like transactions in United States bonds; and consolidated debentures issued by the 12 Federal intermediate credit banks so endorsed shall be prepared for shipment and shipped in the manner prescribed in such regulations for United States bonds. (See 31 CFR 328.1-328.6.)

§ 40.153 Patronage refunds.

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 §§ 40.153-1, 40.153-2.

§ 40.153-1

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 rediscounting with the bank during the fiscal year. § 40.153-2 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 § 40.153-1 hereof, as may be authorized by the board of directors.

§ 40.172

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).

Subpart B-Loans and Discounts

§ 40.201 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;

(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; and

(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. § 40.201-1 Same; terms denoting different classes of borrowing and rediscounting 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 § 40.201. 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).

§ 40.202 General rediscount agreement.

As a condition precedent to making loans to or discounting paper for any production credit association or other financing institution the bank will require the association or corporation desiring such credit to execute a general rediscount, loan, and pledge agreement in form approved by the Farm Credit Administration.

§ 40.203 Qualifications of other financing institutions.

Except that banking institutions and credit unions are not subject to the requirement in § 40.203-1 relating to the character of business in which engaged, all other financing institutions must meet the requirements in §§ 40.203-140.203-5 in order to obtain credit from a Federal intermediate credit bank. § 40.203-1 Same; character of business.

It must be engaged in the business of extending short- and intermediate-term credit to farmers and ranchers for agricultural purposes, including the breed

ing, 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.

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 rediscounting 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.

§ 40.203-4 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 and credit policies of the applicant institution. It is important that the bank keep informed concerning the management, financial condition, and operations of such affiliated concern, in order to assure itself that the practices and policies of the affiliate will not jeopardize the interests of the bank.

(b) A financing institution which is a subsidiary of or affiliated with a farmers cooperative association, and is otherwise

eligible to borrow from and to rediscount with a Federal intermediate credit bank, may qualify to rediscount, with its endorsement, or borrow on the security of notes of farmers and stockmen (as distinguished from notes of cooperative associations) evidencing loans to finance the cost of supplies, equipment or services obtained from such affiliated cooperative association, if the board of directors of the bank finds that (1) an additional source of credit is needed to facilitate financing of such transactions; and (2) the primary benefits of such credit will inure to the borrowing farmers and stockmen.

§ 40.203-5 Same; examinations, financial statements, reports, etc.

As a condition precedent to making loans to or discounting paper for any financing institution the bank will require such institution to agree to furnish the bank, the Farm Credit Administration, or any Farm Credit examiner, at any time upon call, full and current information regarding its financial condition and operations, including a detailed financial statement in such form as may be prescribed by the bank or by the Farm Credit Administration; and its agreement to submit, at its own expense, to periodic examinations by examiners of the bank, by national bank examiners, or by Farm Credit examiners; provided, however, that any bank, trust company, or savings institution operating under the supervision of State or national authorities, in lieu of such agreement may submit its authorization to such supervising authority, in writing, to furnish the bank or the Farm Credit Administration upon request, any report of condition, report of examination, or other confidential information in the possession of such supervising authority. In connection with the initial application for credit submitted by an agricultural credit corporation, livestock loan company, or similar institution, the bank should make a careful and thorough examination; provided, however, that in the case of a newly organized institution having only liquid assets (such as cash and bonds) and no liabilities of consequence, the bank may waive such initial examination.

§ 40.211 Limitations upon amount of credit; ratio of total liabilities to unimpaired capital and surplus. Within the limitations of the Act, it is the responsibility of the bank to

determine the amount of credit that may be granted safely to any institution. Sound credit policy requires that careful consideration be given to the character and ability of the management of each institution; to its actual unimpaired capital and surplus; to the manner in which such capital is invested; to the nature and extent of its other liabilities; as well as to the quality of the paper offered and to the amount of general collateral pledged with the bank. Since these factors are subject to change from time to time, it is important that they be reviewed by the bank at frequent intervals.

§ 40.212 Maximum ratios permitted.

The limitations set out in §§ 40.2121-40.212-4 are maximum ratios and may not be exceeded in any event. § 40.212-1 Same; production credit associations.

No credit may be granted to any production credit association if the amount involved, added to its other liabilities, will exceed 10 times its paid-in and unimpaired capital and surplus. § 40.212-2

Same; other financing in

stitutions.

No credit may be granted to any other financing institution of the classes listed in paragraph 2 of section 202(a) of the Act, quoted in § 40.201 (other than banks and credit unions) if the amount involved, added to its other liabilities, exceeds the liabilities which the institution may incur under the laws governing its operations or, in any event, exceeds 10 times its paid-in and unimpaired capital and surplus.

§ 40.212-3 Same; banking institutions.

No credit may be granted to any banking institution if the amount involved, added to its other liabilities (other than bona fide deposit liabilities), exceeds the amount of such liability permitted under the laws of the jurisdiction creating such bank, or exceeds twice its paid-in and unimpaired capital and surplus.

A corporation engaged in a banking business and operating under the banking laws of a State, but having the powers of an agricultural credit corporation, livestock loan company, or similar financing institution, must be limited to the amount of credit which may be granted to a banking institution as provided in this section.

§ 40.212-4 Same; credit unions.

No credit may be granted to a credit union if the amount thereof, added to its other liabilities, exceeds the amount of such liability permitted under the laws of the jurisdiction creating such credit union, or exceeds the amount of its paid-in and unimpaired capital.

§ 40.213 Computation of debt-to-capital

ratios.

In computing the debt-to-capital ratio of an institution, the bank will include all liabilities (other than bona fide deposit liabilities in the case of banks) whether owing to the credit bank or to others. The unimpaired capital and surplus will include the following:

(a) That portion of the institution's authorized and subscribed capital which has actually been paid in and (except in the case of production credit associations) for which stock certificates are outstanding in the names of bona fide stockholders; and

(b) Its paid-in surplus (if any) and surplus created out of net earnings or savings specifically set aside to augment its effective capital; less

(c) Any losses (whether fully realized or determined to be in prospect) which are not provided for or offset by reserves and undivided profits or otherwise.

§ 40.221 Credit standards.

Paper offered to a credit bank by a financing institution, for discount or as collateral security for a loan, should be of such character as to assure liquidation of the obligation within a reasonable time, consistent with sound lending and agricultural practices. The integrity and financial condition of the notemaker, the collateral security offered, the productive capacity of the notemaker's farming and livestock operation, the adequacy and practicability of the plan of repayment, and other credit factors, when considered together, should afford reasonable assurance that under ordinary circumstances the income of the notemaker will be sufficient to repay the loan and discharge his other obligations.

§ 40.222 Loan purposes.

(a) Loans discounted for or purchased from a production credit association shall have been made to qualified farmers or ranchers for general agricultural purposes, and for other requirements of the borrowers related to their farm and

ranch businesses and the needs of their families. (See § 50.111 of this chapter.)

(b) The proceeds of loans discounted for or purchased from other financing institutions shall have been advanced to farmers or ranchers and have been used in the first instance for an agricultural purpose, including the breeding, raising, fattening or marketing of livestock (12 U.S.C. 1031 (2)).

(c) In determining whether the purpose of a loan offered for discount is "agricultural" the bank will apply the term on a practical and constructive basis rather than in a purely technical sense. Eligibility should be judged in line with the usually accepted requirements of farm and ranch operations, including the support and maintenance of the farm or ranch family.

(a) Notes evidencing direct loans to financing institutions, and notes or other obligations discounted or accepted as collateral for loans by an intermediate credit bank usually will be drawn with maturities coinciding with the normal marketing seasons for the crops or livestock from which liquidation is expected, ordinarily not more than 12 months. Intermediate-term loans for capital purposes, made in accordance with policies and procedures prescribed by the bank with maturities not to exceed 7 years, may be discounted or accepted as collateral for loans.

(b) Investment securities and other obligations of the classes described in §§ 40.231 and 40.232, even though having more than 7 years to run to maturity, may be accepted as collateral security for direct loans to production credit associations and other financing institutions. § 40.224 Interest rates.

To be eligible for discount or as collateral for a loan to a financing institution, the rate of interest or discount charged the maker of a note offered to the bank shall not exceed the rate permitted by regulations of the Farm Credit Administration. (See § 40.262-40.2622, 40.262-4.)

§ 40.225 Fees and other charges.

No paper shall be eligible for discount, or as collateral for a loan by the credit bank, if the offering financing institution imposes any fee or other charge, aside from interest, at a rate higher than that approved by the bank. If, in the

To be eligible for discount for a production credit association, notes of a corporation must meet the requirements of §§ 50.102 and 50.103 of this chapter. § 40.226-2 Same; other financing institutions.

Notes of a corporation may be discounted for a financing institution other than a production credit association if the borrowing corporation is engaged in actual farming operations or livestock production and meets the following requirements:

(a) At least 75 percent in value and number of shares of its capital stock must be owned by the individuals personally actually conducting the farming or livestock operations of the corporation; or

(b) The major portion of the assets of the corporation must consist of property actually devoted to farming or livestock production and at least half of its gross income must be derived from such operations; and

(c) Either the holder or holders of at least a majority of its outstanding shares of voting stock, or with the consent of the Federal intermediate credit bank, a principal stockholder or stockholders must (1) endorse, or sign as co-makers, all notes evidencing such loans; or (2) execute a continuing guaranty of all indebtedness of such corporation to the payee lending institution.

§ 40.226-3 Same; stockholder endorsements, general.

Stockholder endorsements or guaranties required pursuant to § 40.226-1 (as

set forth in § 50.103 of this chapter), and in § 40.226-2(c) shall be such as to establish personal liability for the debt on the part of individual stockholders. If such personal liability of stockholders of the borrowing corporation cannot be obtained by reason of ownership of its capital stock by another corporation, the stockholder liability requirement of this section may be met by like endorsement or guaranty on the part of an individual stockholder or stockholders of such parent or affiliated corporation.

§ 40.227 Notes given to merchants not eligible.

Notes given by farmers and stockmen to dealers, merchants or others for the purchase of livestock, machinery, farm supplies, fertilizer, services, etc., ordinarily are not eligible for discount by or as collateral for loans from a credit bank. Where the proceeds of such notes are used primarily for the benefit of a merchant or dealer, rather than a farmer (e.g., to finance a merchant's credit sales) the purpose is commercial, or mercantile, not agricultural.

§ 40.231

Direct loans or advances to production credit associations.

A Federal intermediate credit bank may make direct loans or advances to a production credit association secured by such collateral as may be approved by the Governor of the Farm Credit Administration. Securities and other obligations approved for investment by production credit associations, as provided in §§ 50.201 and 50.202 of this chapter, as well as loans eligible for discount, are approved as collateral for direct loans to such associations. In all cases the amount of collateral required shall be not less than the principal amount of the indebtedness thereby secured.

§ 40.232 Direct loans or advances to other financing institutions.

As provided in paragraph (2) of section 202 (a) of the Act, quoted in § 40.201, a Federal intermediate credit bank is authorized to make loans and advances to any financing institution (other than a production credit association), 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