|Legal Opinion Summary|
|Topic:||Effective Interest Rate Disclosure: Does the Farm Credit Act require a Farm Credit System lender to include the amount an existing borrower previously paid for stock in the effective interest rate calculation for subsequent loans to the same borrower?|
A Farm Credit System association has a stock purchase requirement of $1,000 per member and includes the cost of borrower stock in its effective interest rate (EIR) disclosure only when the stock is purchased. Thus, if $1,000 of stock is purchased in connection with an initial loan, the association includes the $1,000 in the EIR disclosed to the borrower at that time. If the borrower obtains an additional loan and no stock purchase is involved (because the borrower already owns the required minimum amount of stock), the association does not include the original purchase price of the stock in the EIR disclosure. If, however, due to stock retirement, the borrower owns, for example, $25 of stock at the time of the second loan, the borrower must purchase an additional $975 of stock and the association includes the $975 in its EIR disclosure for the second loan.
Section 4.13 of the Farm Credit Act (Act) requires “meaningful” disclosure to borrowers of the effect of purchases of stock or participation certificates on the effective rate of interest on “the loan.” New EIR disclosures must be given to an existing borrower only when a subsequent advance constitutes a new “loan,” by definition a new, separate transaction requiring new disclosures. OGC concluded that amounts paid to a lender in connection with an earlier, separate, loan transaction are not properly included as “interest” on a subsequent loan because the borrower is not paying that amount to the lender and the lender is not receiving that amount from the borrower in consideration for the subsequent loan. Disclosing costs paid in connection with an earlier loan in the EIR of a subsequent loan does not provide meaningful information about the cost of a subsequent loan.
Moreover, shares of stock in a corporation are personal property - an asset of the owner - and, as Congress made clear in the 1987 amendments to the Act, an at risk equity investment in a System institution. See Act § 4.13(a)(5) (12 U.S.C. § 2199(a)(5)). Treating the stock purchase as a continuing cost to the borrower (by continuing to include it in EIR calculation) is at odds with the nature of an at risk equity investment and confuses the meaning of the required section 4.13(a)(5) disclosure. OGC therefore concluded that the association’s disclosure practices are consistent with the Act.