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Legal Opinion Summary
Topic:Incidental Authority: Does a Farm Credit System bank or association have authority to serve as the principal agent in syndications to similar entities?
ID Number:06-01
Issue Date:12/13/2006

An association asked whether a Farm Credit System (System) bank or association has authority to serve as the principal agent in syndications to similar entities. It is our opinion that allowing System banks and associations to act as the principal agent in syndications to similar entities is a reasonable interpretation of section 3.1(11)(B) and 4.18A of the Farm Credit Act of 1971, as amended (Act). These two statutory provisions allow System banks and associations to take part with non-System lenders in syndications, and other types of multilender transactions, to similar entities under certain conditions. Sections 3.1 (11)(B)(i) and 4.18A(b) and 613.3300 impose the following four restrictions on the System's similar entity authorities (1) participations to a single credit risk cannot exceed 10 percent, (or 25 percent for FCBs and associations if their shareholders approve) of the total capital of the System institution, (2) System banks and associations, individually or collectively, must hold less than 50 percent of the principal amount of the loan, (3) the cumulative amount of outstanding similar entity credits cannot exceed 15 percent of the total assets of the System institution, and (4) non-farm rural homeowners cannot qualify as similar entities. This statutory framework clearly authorizes System banks and associations to take part in syndications to similar entities as long as they abide by the statutory restrictions listed above. The plain language and structure of the Act neither explicitly authorizes, nor prohibits, System banks or associations from serving as the principal agent in syndications to similar entities. In fact, the Act does not expressly articulate all of the specific functions that System lenders must perform when they extend credit to, and service loans for, borrowers. Instead, System banks and associations have authority under sections 1.5(21), 2.2(20), 2.12(20), and 3.1(16) of the Act to exercise all such incidental powers that are "necessary or expedient" to carry out their business.


System banks and associations regularly use their incidental powers when they make traditional loans by performing many necessary functions, such as processing applications, appraising security, performing credit reviews, and servicing the loans. As with the more traditional loan structures, acting as the principal agent in a syndication may better enable institutions to carry out their express authorities so they can better manage and diversify risks. Therefore, it is our opinion that acting as a principal agent in a syndication transaction to a similar entity is within the incidental authority of System banks and associations. However, System banks and associations cannot exercise their incidental powers in a manner that exceeds or circumvents their express statutory authorities and, therefore, System institutions must comply at all times with the restrictions in sections 3.1(11)(B)(i) or 4.18A(b) of the Act when they serve as principal agents in syndications to similar entities.