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Legal Opinion Summary
Topic:Incidental Authority/Excess Capacity: Does an agricultural credit association have the authority to enter into alliances with non-Farm Credit System lenders to process and service loans?
ID Number:99-07
Issue Date:04/14/1999

An agricultural credit association (ACA) asked whether the Farm Credit Act (Act) and FCA regulations permit it to enter into alliances with non-FCS lenders to process and service eligible loans they fund. The association has incidental authority to perform these services for loans that it makes, and it maintains excess capacity to perform these activities in good faith. OGC concluded, therefore, that the association may enter into and remain in the alliances as long as it continues to maintain its excess capacity in good faith.

ACAs are authorized to make rural home and other loans and to enter into contracts. See Act 1.5, 2.2, 2.12, 7.6 and 7.8 (12 U.S.C. 2013, 2073, 2093, 2279b, 2279c-1); 12 C.F.R. 614.4050. In addition, the Act grants ACAs the authority to exercise all such incidental powers as may be necessary or expedient in the conduct of their business. See sections 1.5(21), 2.2(20) and 2.12(20) of the Act (12 U.S.C. 2013(21), 2073(20), 2093(20)). ACAs must be able to process and service loans in order to exercise their explicit right to make loans. ACAs therefore, are authorized pursuant to their “incidental authority” to perform these services for loans that they make.

When an ACA acquires resources to perform loan processing services, it may use any excess capacity, as long as it was acquired and is maintained in good faith, in a way that will make full economic use of these resources and avoid economic waste. An ACA acquires excess capacity in “good faith” either when it acquires resources intended to use them fully in the conduct of its business or when it is inefficient or impractical to acquire a lesser amount. An ACA maintains excess capacity in “good faith” when it cannot feasibly reduce the capacity, either because it is necessary for future expansion or to accommodate seasonal business cycles or because the resources that are necessary cannot realistically be decreased. Performing these services for other institutions is a permissible exercise of excess capacity. If, however, an ACA does not have realistic plans to utilize its excess capacity for its own business activity in the future and could feasibly reduce that excess capacity, then it cannot, in good faith, use that excess capacity to provide loan processing and servicing services to other institutions.

(April 14, 1999)