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Informational Memorandum
Subject:Effective Interest Rate Disclosure
Date of Memorandum:07/01/2002
Expiration Date:
Signed By:Smith, Roland
FCA Contact Person:Smith, Roland
Contact Phone:703-883-4121
List of Attachments:FCA Examination Bulletin EIR Disclosure 2002-2


July 1, 2002

To: Chairman, Board of Directors
Chief Executive Officer
Each Farm Credit System Institution From: Roland E. Smith, Chief Examiner Subject: Effective Interest Rate Disclosure
Recent examinations have found that practices vary among Farm Credit System (System) lenders when providing effective interest rate (EIR) disclosures as required by Farm Credit Administration (FCA) Regulations 12 CFR 614.4366 and 614.4367. The issue at hand is – “After a borrower has purchased and currently owns the amount of stock required by the institution’s capitalization bylaws, does the Farm Credit Act of 1971, as amended (Act) require the System institution to continue to include the amount the borrower paid for the original stock purchased on a previous loan in the EIR calculation for subsequent loans to the same borrower?” It has been determined that the Act does not require this result because to include previously paid amounts in EIR calculations for subsequent loans does not accurately inform borrowers of the true cost of obtaining new or continuing credit from a System institution. Therefore, inclusion of previously incurred costs does not constitute “meaningful” disclosure to borrowers under Section 4.13 of the Act.

To address this issue and to promote consistent application of statutory and regulatory requirements regarding EIR disclosures, the attached examination bulletin (bulletin) was sent to our examiners. The bulletin addresses acceptable practices under the Act and FCA Regulations for determining the impact on the EIR disclosure of a loan that may or may not require the purchase of borrower stock or participation certificates under an institution’s capitalization bylaws.

Please review the attached bulletin and share it with appropriate staff in your institution. If you have any questions regarding the information contained in the bulletin, please call the director of your respective FCA field office, or me at (703) 883-4160, or correspond on the Internet at e-mail address