| August 26, 1996 |
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Ms. Charla Jackson Dear Ms. Jackson: This is in response to your letter regarding the ability of American State Bank, Wilson, Arkansas ("Bank") under to section 23A of the Federal Reserve Act, 12 U.S.C. § 371c, to extend credit to farmers who use the loan proceeds to produce crops on farmland that is leased from an affiliate of Bank. According to your submission, Bank and the Lee Wilson & Company, Wilson, Arkansas ("Company"), are affiliates for purposes of section 23A because of common ownership. 12 U.S.C. § 371c(b)(1)(C). Company engages in various activities, including leasing land to farmers. Each crop year, Bank extends crop production loans to local farmers, including farmers who lease land from Company to produce crops. A copy of the lease commitment between Company and the farmer is provided to Bank as part of the loan application. Upon receipt of a loan application, the Bank conducts an independent credit evaluation of each borrower before extending credit. If funds are extended, Bank secures the loan with a crop lien that usually covers approximately 75 percent of the crop (depending on the type of crop). The income from the remaining 25 percent of the crop generally represents the amount of compensation that Company will receive for the lease. A portion of the proceeds of the loan may be used to purchase seed and other items needed in connection with the farming operations. According to the lease agreement between Company and the lessee farmer, Company is an active participant in the lessee's farming operations by providing advice to and consulting with the lessee and by making decisions with regard to the farming operations, including decisions regarding types of crops grown, and participation in government support programs. Although it is anticipated that the crop proceeds will be used to repay the loan, the farmer is responsible for the repayment of the loan even if the crop proceeds are not sufficient to cover the loan payments. Under section 23A, "any transaction by a member bank with any person shall be deemed to be a transaction with an affiliate to the extent that the proceeds of the transaction are used for the benefit of, or transferred, to that affiliate." 12 U.S.C. § 371c(a)(2). In this case, the proceeds of Bank's loan to the farmers are not directly '"transferred to" an affiliate because the loan proceeds are released to the farmer, and not Company, and because the farmer can purchase his supplies from any company. However, Bank is aware that the proceeds of the loan will benefit the affiliate because the lease agreement between Bank and Company is part of the Bank's loan documentation, and the loan is critical for the farmer's ability to produce the crops on the land that the farmer leases from Company. Moreover, according to the lease, Company actively participates with the farmer to determine how the land will be used and managed to help ensure that the farmer will be able to make his lease payments to Company. Accordingly, based on the facts you have provided, Bank's loan to the farmer where the farmer leases land from an affiliate results in a transaction where the proceeds "are used for the benefit of an affiliate." The loans, therefore, are "covered transactions" for purposes of section 23A, and are subject to the statute's quantitative and collateral requirements. If you have any additional questions, please contact Ms. Pamela G. Nardolilli of my staff at 202/452-3289.
Sincerely,
(signed) J. Virgil Mattingly
J. Virgil Mattingly
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