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Legal Opinion Summary
Topic:Incidental Authority/Excess Capacity: May an association accept residential mortgage applications on behalf of non-Farm Credit System lenders in communities with populations above 2,500?
ID Number:03-03
Issue Date:04/14/2003

An association that has excess capacity in its residential secondary market unit asked whether the Farm Credit Act (Act) and FCA regulations permit it to accept residential mortgage applications on behalf of non-Farm Credit System (FCS) lenders in communities with populations above 2,500 -- loans that are ineligible for System financing. Because demand for refinancing is currently high, the association's secondary market staff is very busy. When business is slower, however, this staff is not fully utilized. The specialty nature of this business requires personnel that typically have different training and professional backgrounds than the rest of the association's staff, and therefore it is impractical for the secondary market staff to work in other areas when times are slower. To utilize its staff more efficiently when business is slow, the association wishes to be able to accept loan applications and basic supporting documentation on behalf of non-FCS lenders for home loans that are not eligible for FCS financing. The association anticipates this new activity would range from 2 or 3% to 10% of its secondary market business. The association would not process, underwrite, close, or fund the loans.

OGC has previously concluded that the Act authorizes associations to accept applications for residential mortgage loans (including ineligible loans) on behalf of non-FCS lenders, provided the associations possess, in good faith, excess capacity in staffing in their loan functions. See OGC Legal Opinion Summary No. 01-05, issued September 27, 2001(and cases cited therein). The Act authorizes associations to make and participate in loans and to enter into contracts, and also authorizes them to exercise all such incidental powers as may be necessary or expedient in the conduct of their business. We have concluded that associations have the incidental authority to accept applications for ineligible loans on behalf of non-FCS lenders in order to minimize economic waste due to underutilized excess capacity maintained in good faith. In this case, the association maintains its excess capacity in good faith because it cannot feasibly reduce the number of employees needed for its business. If circumstances change and the association finds that it could feasibly reduce its number of employees, it would no longer maintain its excess capacity in good faith and would no longer be authorized to accept loan applications on behalf of non-FCS lenders under its incidental authority. Other FCS institutions that are similarly situated may perform similar loan application services. Because such issues are fact-specific, we expect institutions to consult with us before proceeding