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Informational Memorandum
Subject:Long-Term Standby Purchase Commitments
Date of Memorandum:05/02/2012
Expiration Date:
Office:Office of Regulatory Policy
Signed By:Van Meter, Gary
FCA Contact Person:Gibbs, Paul
Contact Phone:703-883-4203
List of Attachments:

Printer-friendly version => IM-Attributed_Risk_Exposure_QA-02May2012.pdfIM-Attributed_Risk_Exposure_QA-02May2012.pdf



May 2, 2012

To: Chairman, Board of Directors
Chief Executive Officer
All Farm Credit System Institutions

From: Gary K. Van Meter, Director
Office of Regulatory Policy

Subject: Long-Term Standby Purchase Commitments

Purpose/Summary

This Informational Memorandum (IM) describes the treatment of Farm Credit System (System) loans covered by the Federal Agricultural Mortgage Corporation's (Farmer Mac) Long-Term Standby Purchase Commitment (Commitment) program for purposes of:



The conclusions we make are specifically based on our understanding of the Commitment program (Program) as of the date of this IM. Any changes to the Program could result in different conclusions.

Background

Farmer Mac has been providing Commitments on loans held by System institutions since 1999. The Program is one of numerous concentration risk mitigation arrangements available to System institutions. Commitments are established through agreements entered into between Farmer Mac and a System bank or association (institution). Under a Commitment agreement, the System institution places certain loans into a designated pool. The loans must meet Farmer Mac’s credit underwriting, collateral valuation, documentation and loan servicing requirements. Eligible loan collateral includes agricultural real estate that is a parcel or parcels of land, or buildings and structures affixed to the land, used for the production of one or more agricultural commodities or products. Agricultural real estate can also include certain primary residences located in rural areas.

Under the typical Commitment agreement, Farmer Mac agrees to a future purchase of one or more loans from the designated pool when certain criteria are met. Farmer Mac assumes, for a fee, the credit risk on the pool of loans. The System institution retains all loans in the loan pool in its portfolio until delivery of each such loan to Farmer Mac for purchase, which is normally when a loan becomes 90 or 120 days delinquent in its payments. On rare occasions, Farmer Mac has modified the standard Commitment structure to reduce the fee paid by a System institution. In such cases, the Commitment agreement requires the System institution to retain the credit risk on a certain percentage of the first losses on the pool of loans covered by the Commitment. Farmer Mac requires Commitment counterparties to make representations and warranties regarding conformity of loans to its underwriting standards. Farmer Mac may decline to purchase defaulted loans out of Commitment pools upon a material breach of these representations and warranties.

Questions and Answers

1. Is a Commitment agreement treated as a guarantee agreement "entered into by or among System banks and associations" under 614.4345 of FCA’s lending and leasing limits regulations?

2. Are the covered portions of loans in a Commitment pool excluded from the System institution’s lending limit calculations under 614.4358?

3. What is the effect on a System institution’s lending limit calculations under 614.4358 when there is a material breach of the representations and warranties with respect to a loan in a Commitment pool?
4. Does the FCA consider use of the Program a valid component of a System institution’s concentration risk mitigation policy?

1. What is the correct asset risk category under 615.5211 for loans covered by a Commitment?



2. Does the portion of credit risk retained on the first losses for loans covered by a Commitment meet the definition of “residual interest” as defined in 615.5201?

3. What is the appropriate treatment of the portion of credit risk retained on the first losses (residual interests), if any, for a pool of loans covered by a Commitment?

1. How are loans in the Program treated for purposes of regulatory reporting and disclosures related to asset quality statistics?


2. How should loans in the Program be rated for risk management purposes?


Contacts

If you have any questions about this memorandum, please contact Paul Gibbs, Senior Accountant, Office of Regulatory Policy, at (703) 883-4203 (gibbsp@fca.gov), or Gary Van Meter, Director, Office of Regulatory Policy, at (703) 883-4026 (vanmeterg@fca.gov).