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Legal Opinion Summary
Topic:Incidental Authority/Excess Capacity: May a Federal land credit association enter into an alliance with a wholesale mortgage bank to process loan application packages for rural home loans funded and serviced by the non-Farm Credit System lender?
ID Number:99-03
Issue Date:01/13/1999

A Federal land credit association (FLCA) asked whether the Farm Credit Act (Act) and FCA regulations permit it to enter into an alliance with a wholesale mortgage bank to process loan application packages for rural home loans funded and serviced by the bank. The FLCA has incidental authority to perform these services for loans that it makes, and it currently maintains excess capacity to perform these activities in good faith. OGC concluded, therefore, that the FLCA may enter into and remain in the alliance as long as it continues to maintain its excess capacity in good faith.

FLCAs are authorized to make rural home and other loans and to enter into contracts. See Act §§ 1.5, 1.7, 1.11, 2.12 and 7.6 (12 U.S.C. §§ 2013, 2015, 2019, 2093, 2279b); 12 C.F.R. § 614.4030. In addition, section 2.12(20) of the Act (12 U.S.C. § 2093(20)) grants FLCAs the authority to exercise “all such incidental powers as may be necessary or expedient in the conduct of their business.” FLCAs must be able to process loan applications in order to exercise their explicit right to make loans. FLCAs, therefore, are authorized pursuant to their “incidental authority” to perform these services for loans that they make.

When a FLCA 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. A FLCA 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. A FLCA 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.

(January 13, 1999)