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Legal Opinion Summary
Topic:Participations: Are Farm Credit System banks authorized to purchase 99% participation interests in loans originated by commercial banks and guarantee the remaining one-percent?
ID Number:99-04
Issue Date:02/14/1999

A farm credit bank (FCB) and an agricultural credit bank (ACB) asked whether they are authorized, in connection with a national trade credit program they manage on behalf of the Farm Credit System (FCS), to purchase a 99% participation interest in a loan originated by a commercial bank and guarantee the remaining one-percent. OGC concluded that the banks could purchase 99% participation interests because they are also acquiring the servicing rights to the loans, but that only the ACB, and not the FCB, can guarantee the remaining one-percent.

Under the trade credit program, a commercial bank originates short-term loans to eligible borrowers and sells participations to an association. The association sells its participation interest to one of the two managing banks, which in turn, pays a fee or sells a subparticipation interest in the loan to the FCS association where the borrower is located. The commercial bank wants to reduce the participation interest that it retains in these loans from 10 to one-percent. Under this plan, the FCS will buy the servicing rights for all new loans and many of the existing loans in this program. The commercial bank also asked the two managing banks to guarantee its one-percent participation interest in these loans. The commercial bank will retain other risks on these loans.

12 C.F.R. 614.4330(b) provides that a non-FCS lender that sells loan participations to System institutions must retain a 10% interest in these loans if it keeps the servicing rights. The 10% retention requirement would not apply in this case because the commercial bank will transfer the servicing rights to the System. Under the circumstances, OGC concluded that the FCS can purchase 99% participation interests in these loans.

However, under the Act, the authority of FCS banks and associations to guarantee loans is separate and distinct from their power to participate in such loans. Section 2.4(a) and 3.7(a) of the Act (12 U.S.C. 2075(a) and 2128) expressly authorize production credit associations and banks for cooperatives, respectively, to guarantee retail loans that other lenders make to eligible borrowers. In contrast, FCBs lack express authority to guarantee loans. For this reason, the managing ACB (holding cooperative lending powers under Title III of the Act) may guarantee the one-percent participation interest in these loans that the commercial bank retains. The association that purchases these participation interests may also guarantee the commercial bank’s one-percent interest in these loans. However, the FCB that operates under title I of the Act cannot guarantee any portion of these loans for the commercial bank. OGC also advised that the FCB could not guarantee these loans pursuant to its implied powers under section 1.5(21) of the Act (12 U.S.C. 2013(21)). Under REW Enterprises, Inc. v. Premier Bank, NA. 49 F3d 163, 166 (5th Cir. 1995), FCBs cannot invoke their implied powers to guarantee retail loans (to eligible borrowers) for non-FCS lenders because other FCS banks and associations have express power to guarantee loans.

(February 19, 1999)