|Subject:||Administration of GFAs|
|Date of Memorandum:||05/06/1999|
|Expiration Date:|| |
|Signed By:||Smith, Roland|
|FCA Contact Person:||Olona, Orlando|
|List of Attachments:||None|
May 6, 1999
To: Chairman, Board of Directors
Chief Executive Officer
Each Farm Credit System Institution
From: Roland E. Smith, Chief Examiner
Office of Examination
Subject: Administration of General Financing Agreements (GFAs)
The purpose of this memorandum is to provide banks and associations information on how the Office of Examination (OE) will evaluate administration of the GFAs and interpret related Farm Credit Administration (FCA) regulations. It supersedes direction provided in my Informational Memorandum dated March 16, 1998, entitled “Reporting Requirements for Amended 12 CFR Parts 614 and 627.”
The board of directors of each Farm Credit Bank (FCB) and the Agricultural Credit Bank (ACB) is responsible for adopting policies and procedures governing the making of direct loans to and the discounting of loans for direct lender associations and other financing institutions (OFIs). A key component of the lending relationship is the GFA that establishes the terms and conditions of the loan. In past years, the FCA approved each GFA. The FCA now relies on regulations and the examination process to ensure GFAs provide a safe and sound framework for lending to associations and OFIs.
In February 1998, Parts 614 and 627 of the regulations were amended. Consistent with FCA’s initiative to remove unnecessary prior approvals, the rules were amended to eliminate the requirement that FCA prior approve GFAs. The amendments to the regulations provide institutions flexibility to address issues that pertain to their funding relationships. Part 614 governs the funding relationship between an FCB or ACB and a direct lender association or OFI. Part 627 permits the voluntary liquidation of Farm Credit System institutions, including service corporations, by means of an FCA Board-approved liquidation plan. With these amendments, the following regulations now provide guidance for GFA administration:
· 614.4120 – Requires the FCB and ACB to adopt policies and procedures governing extensions of credit to direct lender associations and OFIs. The policies and procedures must prescribe lending policies and loan underwriting standards that are consistent with sound financial and credit practices. The policies must prescribe standards for an evaluation of the creditworthiness of a direct lender association on the basis of credit factors and lending policies and to establish loan underwriting standards in accordance with Part 614, Subpart D. The regulations also require a periodic review of the lending relationship with each direct lender association and OFI at intervals consistent with the term of the GFA, but in no case longer than 5 years. While the stated term of a GFA shall not exceed 5 years, it may be automatically renewed for additional terms if neither party objects at the time of renewal. Finally, the term of any GFA that provides for unsecured lending to an association shall not exceed 1 year and may not be automatically renewed. During the examination process, examiners will evaluate GFA loan covenants to ensure they create a safe and sound lending relationship in compliance with underwriting standards.
· 614.4125(b) and 614.4130(b) -- Requires the FCB or ACB to deliver a copy of the executed GFA and all related documents to the Chief Examiner or to the FCA office that the Chief Examiner designates. All executed GFAs within a Farm Credit System district should be submitted to the following FCA Field Office responsible for that district’s bank examination within 10 business days after such document or amendment is executed. Please forward as follows:
FCB/ACB FCA Field Office
AgAmerica / Western Sacramento
· 614.4125(e) -- Requires simultaneous notification to FCA and to the Farm Credit System Insurance Corporation (FCSIC) in instances where an FCB and ACB provides notice to a direct lender association that it is in material default of its GFA, promissory note, security agreement, or other related documents. FCA notification should be sent to the Chief Examiner. FCSIC notification should be sent to the Director, Risk Management Division.
Generally, defaults are “material” when there is a substantial likelihood that a reasonable person would believe that the basis for the default, if uncorrected, could threaten the viability of the institution. Examiners will use this “materiality” definition to determine compliance with 12 CFR 614.4125(e). In evaluating if the GFA covenants provide a reliable basis for identifying material threats to viability, examiners will consider whether:
Ø The covenants are set at a level where their violation would indicate that the viability of the institution is threatened,
Ø covenants would capture unsafe and unsound management practices or control weaknesses which could threaten viability, and
Ø the default would trigger actions by the bank to limit financing or impose penalties that could threaten the ongoing availability of funds.
When an association is in material default of the GFA, we will evaluate whether the servicing actions taken by the bank are appropriate. At a minimum, we will expect the direct loan credit classification to reflect the risk in the direct loan, and a loan-servicing plan to be developed addressing the specific conditions of the association. For example, loans to associations with material defaults would typically be considered “Substandard” and the loan servicing on the direct loan should address actions to correct the well-defined weakness(es). These servicing plans should be customized to the conditions of the association. Failure to adequately service loans with a material credit weakness is considered an unsafe and unsound practice.
· 614.4125(f) -- Requires a direct lender association to provide written notification to FCA and FCSIC if it has been notified of being in material default under its GFA, loan agreement, promissory note, security agreement, or other related documents. FCA notification should be sent to the Chief Examiner. FCSIC notification should be sent to the Director, Risk Management Division.
· 614.4125(g) -- Requires that an FCB or ACB obtain prior written consent of FCA before taking any action that leads to or could lead to the liquidation of a direct lender association. Notification should be sent to the Chief Examiner. This notification should include a narrative justifying the need and basis for the proposed action.
· 627.2795(a) -- Requires the consent of the FCA Board before a Farm Credit System institution may voluntarily liquidate. Upon resolution to liquidate by its board of directors, the institution’s Chairman of the Board should immediately notify the Chief Examiner at (703) 883-4160. The institution’s board should then submit the proposed voluntary liquidation plan to the Secretary of the FCA Board within 5 business days after the action to liquidate is taken by the institution’s board.
If you have any questions regarding this document, please call me at 703-883-4160. Contact may also be made at the following e-mail address: firstname.lastname@example.org.