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Legal Opinion Summary
Topic: Incidental Authority/Excess Capacity: May an association process ineligible residential mortgage applications on behalf of non-Farm Credit System secondary market lenders?
ID Number:03-04
Issue Date:07/31/2003

An agricultural credit association that has excess capacity in its residential secondary market unit asked whether the Farm Credit Act (Act) and FCA regulations permit it to process ineligible residential mortgage applications on behalf of non-Farm Credit System (FCS) secondary market lenders. These applications are referred to the association by builders, realtors, and association customers, who may not understand the limits of the association's rural home lending authority. The association has a staff of rural home lending specialists who have the expertise to process these ineligible loans and, during times of off-peak demand in processing eligible home loans, would have time to process some of the ineligible loans. The specialty nature of this business requires personnel that typically have different training and professional backgrounds than other association staff. To utilize its staff more efficiently when business is slow, the association wishes to process loan applications on behalf of non-FCS lenders for home loans that are not eligible for FCS financing. The association intends to limit the amount of ineligible loan processing to 20 percent of all home loans processed.

OGC previously concluded that associations have incidental authority under the Act to accept applications for ineligible loans on behalf of non-FCS lenders in order to minimize economic waste due to underutilized excess capacity maintained in good faith. See OGC Legal Opinion Summary No. 03-03, issued April 14, 2003 (and cases cited therein). The Act authorizes associations to make and participate in loans and to enter into contracts, and it also authorizes them to exercise all such incidental powers as may be necessary or expedient in the conduct of their business. Although loan processing is not explicitly authorized by the Act, it is an integral and necessary part of lending and therefore falls within the association's incidental authority. In this case, the association maintains excess capacity its rural home lending specialists in good faith because it needs this staff to process eligible home loans. If circumstances change and the association finds that it could feasibly reduce its staff, it would no longer maintain its excess capacity in good faith and would no longer be authorized to accept loan applications on behalf of non-FCS lenders under its incidental authority. Other FCS institutions that are similarly situated may perform similar loan application services. Because such issues are fact-specific, we expect institutions to consult with us before proceeding.