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Federal reserve Bank DALLAS, T E XA S of Dallas 75222 Circular No. 79-207 December 19, 1979 PURCHASE AND SALE OF GOVERNMENT GUARANTEED LOANS TO ALL STATE MEMBER BANKS AND OTHERS CONCERNED IN THE ELEVENTH FEDERAL RESERVE DISTRICT: Printed on the following pages is the Board's press release and statement of supervisory policy with respect to the purchase and sale of government guaranteed loans by state member banks. Any questions regarding the policy should be directed to Uzziah Anderson or M arvin C . McCoy of our Bank Supervision and Regulations Department, Ext. 6274. Sincerely yours, Robert H . Boykin First Vice President Banks and others are encouraged to use the fo llo w in g incom ing WATS num bers in co n ta ctin g th is Bank: 1-800-442-7140 (intrastate) and 1-800-527-9200 (interstate). For calls placed locally, please use 651 plus the extension referred to above. This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) EZ5 3 5 C g s ^ H EgSSSS S S B g g E E g i y •j j j FEDERAL RESERVE pressrelease ii E g s aaaBg g g g & • For immediate release _________ December 6, 1979 The Federal Reserve Board today approved a new supervisory policy with respect to the purchase and sale of government guaranteed loans by State member banks. The policy adopted by the Board -- which had been recommended to Federal agencies regulating financial institutions by the Federal Financial Institutions Examination Council — concerns participation in government guaranteed loan programs that: 1. Provide lenders a partial guarantee of principal and interest, and 2. Allow for separate sale of guaranteed portions of loans to third parties. Participating institutions may be originators, sellers, servicers or purchasers of such guaranteed loans. Adoption of the supervisory policy by all the Federal financial institutions regulators is intended to help achieve uniform and effective supervision of participating financial institutions. The policy addresses three major areas of supervisory concern: portfolio management, accounting for fee income and asset liquidity. The statement of supervisory policy adopted by the Board is attached. Supervisory Policy Originating and selling institutions • Examiners should review the extent and nature of activities in connection with the sale of government guaranteed loans. Lax or improper management of the selling institution's servicing respon sibilities should be criticized. Out-of-trade area lending for the purpose of resale of any portion of U. S. government guaranteed loans should be carefully reviewed to insure that the practice is conducted in a safe and sound manner. • All income, including servicing fees and premiums charged in lieu of servicing fees, associated with the sale of D. S. government guaranteed loans, should be recognized only as earned and amortized to appropriate income accounts over the life of the loan. Purchasing Institutions • Recognizing that investments in the guaranteed portions of U. S. government guaranteed loans currently have no formal secondary market which establishes a uniform pricing structure and that, therefore, these investments are somewhat less marketable than in vestments that do have such a market, the agencies take the following positions to assure against institution over reliance on such invest ments to maintain adequate levels of liquidity: A. Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency Guaranteed portions of .U. S. government guaranteed loans should not be recorded or carried as U. S. Government or Federal agency securities and should not be substituted for U. S. Government or Federal agency securities in regulatory formulas or procedures designed to monitor liquidity. B. Federal Home Loan Bank Board Pursuant to Federal Rome Loan Bank System Regulations, Section 523.10, the guaranteed portions of U. S. government guaranteed loans do not qualify as liquid assets. C. National Credit Union Administration Pursuant to Part 742 of the NCUA Rules and Regulations and Section 107(7) of the Federal Credit Union Act, the guaranteed portions of U. S. government guaranteed loans do not qualify as liquid assets except to the extent that any such investments have a remaining maturity of only one year or less. - 0 -