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Legal Opinion Summary
Topic:Incidental Authority/Excess Capacity: May a farm credit bank process loan applications, engage in loan underwriting, and prepare loan documentation for unaffiliated Farm Credit System (FCS) institutions and non-FCS financial institutions?
ID Number:99-01
Issue Date:01/06/1999


A farm credit bank (FCB) asked whether the Farm Credit Act (Act) and FCA regulations allow it to process loan applications, engage in loan underwriting, and prepare loan documentation for unaffiliated Farm Credit System (FCS) institutions and non-FCS financial institutions. The FCB has incidental authority under the Act to provide these services for affiliated institutions and has, in good faith, acquired excess capacity to perform this activity. OGC concluded, therefore, that the FCB may offer these services to other FCS and non-FCS institutions as long as it continues to maintain its excess capacity in good faith.

FCBs must develop expertise in loan processing (including underwriting) and document preparation to make loans to and to better evaluate the loan policies and standards of affiliated institutions, even though this development of expertise is not explicitly authorized by the Act. One way for FCBs to evaluate these policies and standards is to perform these services themselves. FCBs, therefore, have the incidental authority to provide these services to affiliated institutions. See Act 1.5(21) (12 U.S.C. 2013(21)) (authorizing FCBs to exercise “all such incidental powers as may be necessary or expedient” to carry on their business).

When an FCB acquires resources to perform loan processing and document preparation 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 FCB acquires excess capacity in “good faith” when it lawfully acquires the capacity to meet either its own needs or its customers’ needs. An FCB 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 use of excess capacity.

(December 30, 1998; clarified January 6, 1999)