Loan Performance Categories and Financial Reporting

FARM CREDIT ADMINISTRATION <CFR>12 CFR Part 621</CFR> <RIN>RIN 3052-AD63</RIN> <SUBJECT>Loan Performance Categories and Financial Reporting</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Farm Credit Administration. <HD SOURCE="HED">ACTION:</HD> Proposed rule and request for comment. <SUM> <HD SOURCE="HED">SUMMARY:</HD> The Farm Credit Administration (FCA, we, or our) proposes to amend our regulatory high-risk loan performance categories by removing “Formally restructured loans (TDR),” also known as troubled debt restructurings. In 2022, changes in generally accepted accounting principles (GAAP) eliminated the accounting guidance for TDRs, enhanced disclosure requirements for certain loan refinancings and restructurings undertaken when a borrower is experiencing financial difficulty and changed existing vintage year disclosure requirements for public business entities. We propose removing TDRs from our regulatory loan performance categories to reflect changes in GAAP. Further, we seek comments on our determination no regulatory changes are needed for the enhanced disclosures related to loan refinancings and restructurings or the amended vintage year disclosure requirements, as these disclosures are already required under applicable GAAP. Additionally, comments are requested on retaining the “90 days past due still accruing interest” loan performance category. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> Comments on this proposed rule must be submitted on or before February 3, 2026. </EFFDATE> <HD SOURCE="HED">ADDRESSES:</HD> For accuracy and efficiency, please submit comments by email or through FCA's website. We do not accept comments submitted by fax because faxes are difficult to process. Also, please do not submit comments multiple times; submit your comment only once, using one of the following methods: • Send an email to <E T="03">reg-comm@fca.gov.</E> • <E T="03">Use the public comment form on our website:</E> 1. Go to <E T="03">https://www.fca.gov.</E> 2. Click inside the “I want to . . .” field near the top of the page. 3. Select “comment on a pending regulation” from the dropdown menu. 4. Click “Go.” This takes you to the comment form. • <E T="03">Send the comment by mail to the following:</E> Autumn R. Agans, Deputy Director, Office of Regulatory Policy, Farm Credit Administration, 1501 Farm Credit Drive, McLean, VA 22102-5090. We post all comments on the FCA website. We will show your comments as submitted, including any supporting information; however, for technical reasons, we may omit items such as logos and special characters. Personal information that you provide, such as phone numbers and addresses, will be publicly available. However, we will attempt to remove email addresses to help reduce internet spam. To review comments on our website, go to <E T="03">https://www.fca.gov</E> and follow these steps: 1. Click inside the “I want to . . .” field near the top of the page. 2. Select “find comments on a pending regulation” from the dropdown menu. 3. Click “Go.” This will take you to a list of regulatory projects. 4. Select the project in which you're interested. If we have received comments on that project, you will see a list of links to the individual comments. You may also review comments in person at the FCA office in McLean, Virginia between 9:00 a.m. and 3:00 p.m., Eastern Time, Monday through Friday of each week except Federal holidays. Please call us at (703) 883-4056 or email us at <E T="03">reg-comm@fca.gov</E> to make an appointment. <E T="03">Assistance to Individuals with Disabilities in Reviewing the Rulemaking Record:</E> On request, we will provide an appropriate accommodation or auxiliary aid to an individual with a disability who needs assistance to review the comments or other documents in the public rulemaking record for the proposed regulation. To schedule an appointment for this type of accommodation or auxiliary aid, please contact (703) 883-4056. <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> <E T="03">Technical information:</E> Sherita J. Olla, Senior Policy Analyst, Office of Regulatory Policy, Farm Credit Administration, 703-883-4414, TTY (703) 883-4056. <E T="03">Legal information:</E> Laura McFarland, Senior Counsel, Office of General Counsel, Farm Credit Administration, 703-883-4020, TTY (703) 883-4056. </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">I. Objectives</HD> The objectives of this proposed rule are to: • Amend FCA's high-risk loan performance categories due to changes in GAAP; and • Clarify Farm Credit bank and association reporting expectations for vintage disclosures and disclosures of loan modifications to borrowers experiencing financial difficulties. <HD SOURCE="HD1">II. Background</HD> The Farm Credit Act of 1971, as amended (Farm Credit Act), establishes Farm Credit System (System) institutions as federally chartered instrumentalities of the United States. <SU>1</SU> <FTREF/> The Farm Credit Act, at section 5.19(b), requires each System institution to prepare audited financial statements in accordance with GAAP  <SU>2</SU> <FTREF/> for inclusion in the respective institution's annual report of condition. <SU>3</SU> <FTREF/> This provision of the Farm Credit Act also requires annual reports to “contain such additional information” as FCA, by regulation, may require. Various FCA regulations in 12 CFR parts 620, 621, 630 and 655 implement the Farm Credit Act's financial reporting requirements. <SU>4</SU> <FTREF/> <FTNT> <SU>1</SU>   <E T="03">See, for example,</E> 12 U.S.C. 2011, 2071, 2091 and 2121. </FTNT> <FTNT> <SU>2</SU>  GAAP, as issued and revised by the Financial Accounting Standards Board, are the standard accounting rules for preparing, presenting, and reporting financial statements in the United States. </FTNT> <FTNT> <SU>3</SU>  12 U.S.C. 2254(b). </FTNT> <FTNT> <SU>4</SU>  FCA regulations in Part 621 generally apply to all chartered System institutions. However, the Federal Agricultural Mortgage Corporation (Farmer Mac) is required to follow only those provisions where specifically indicated, which would include section 621.6. For purposes of this preamble, we do not include separate exceptions for Farmer Mac but expect Farmer Mac to self-identify those areas. <E T="03">Refer to</E> 12 CFR 621.1 and 621.2 (which defines the term “institution” within part 621 to include Farmer Mac). </FTNT> Relevant to this proposed rulemaking is FCA regulation § 621.6 on high-risk loan performance categories, located in subpart C of 12 CFR part 621, “Loan Performance and Valuation Assessment.”  <SU>5</SU> <FTREF/> The current § 621.6 high-risk loan performance categories include TDRs. We have historically based our part 621 regulatory performance categories on information from various sources, including SEC Industry Guide 3, “Statistical Disclosure by Bank Holding Companies,”  <SU>6</SU> <FTREF/> the Federal Financial Institutions Examination Council's (FFIEC)  <SU>7</SU> <FTREF/> guidance on nonperforming loans, and GAAP. FCA last updated the § 621.6 regulatory high risk performance categories in a 2020 rulemaking on nonaccrual loans. <SU>8</SU> <FTREF/> <FTNT> <SU>5</SU>  FCA first adopted regulations on accounting for high risk assets on March 13, 1986 (51 FR 8644), explaining at the time that performance categories serve two purposes: (1) to communicate to readers of the annual report the risks associated with loans that do not perform according to contractual terms, and (2) to establish objective standards consistently applied by System institutions for both FCA oversight purposes and the consolidation of “accurate and meaningful aggregate [financial] data” in the Systemwide Report to Investors. </FTNT> <FTNT> <SU>6</SU>  SEC Guide 3 was rescinded, effective January 1, 2023. </FTNT> <FTNT> <SU>7</SU>  The FFEIC is an interagency body that establishes consistent principles, standards, and report forms for the banking regulators' federal examinations. Neither FCA, nor the System, is subject to the FFIEC's reporting standards. However, FCA's high-risk accounting classification rules are generally similar, though not identical, to FFIEC standards. </FTNT> <FTNT> <SU>8</SU>  85 FR 52253, August 25, 2020. </FTNT> On March 31, 2022, the Financial Accounting Standards Board (FASB)  <SU>9</SU> <FTREF/> issued Accounting Standards Update (ASU) No. 2022-02, “Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures,” which, in part, eliminated TDR recognition and measurement guidance under GAAP. <SU>10</SU> <FTREF/> Now, entities that follow GAAP are to evaluate those loans, which previously would have been TDRs, in a manner consistent with the guidance for other loan modifications. Additionally, ASU 2022-02 requires enhanced disclosures for certain loan modifications when a borrower is experiencing financial difficulty. <FTNT> <SU>9</SU>  FASB is an independent, private sector organization responsible for establishing accounting and financial reporting standards in the United States for nongovernmental organizations that follow GAAP. </FTNT> <FTNT> <SU>10</SU>  The updates in ASU 2022-02 eliminated the accounting guidance for TDRs in Subtopic 310-40, “Receivables—Troubled Debt Restructurings by Creditors” and enhanced disclosure requirements for certain loan refinancings and restructurings by creditors when borrowers are experiencing financial difficulty. </FTNT> The ASU 2022-02 updates related to TDRs affect all entities adopting ASU 2016-13 “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” and the current expected credit losses (CECL) methodology. <S ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 32k characters. 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