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FEDERAL RESERVE BANK
OF NEW YORK

Circular No. 8 7 1 3 T
December 20, 1979

[

J

New Supervisory Policy Regarding
Participation in Government Guaranteed Loan Programs
To All State Member Banks, and Others Concerned,
in the Second Federal Reserve District:

T h e B o a r d o f G o v e rn o rs o f the F e d e r a l R e se r v e S y ste m h a s a p p ro v e d a new s u p e r ­
v iso ry policy r e g a r d in g the p u rc h a se an d sale by S t a t e m em b er b a n k s o f G o v ern m en t
g u a r a n te e d lo an s. T h e fo llo w in g is q u o ted f r o m the B o a r d ’s an n o u n cem en t o f its a c tio n :
The policy adopted by the Board—which had been recommended to Federal agencies regulating
financial institutions by the Federal Financial Institutions Examination Council— concerns partici­
pation 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, account­
ing for fee income and asset liquidity.
P r in te d on the r e v e rse sid e o f th is c ir c u la r is the state m e n t o f policy a d o p ted by the
B o a r d . Q u e stio n s on th is policy m ay be d irected to o u r B a n k E x a m in a tio n s D e p a rtm e n t
(T e l. N o . 2 1 2 - 7 9 1 - 5 8 9 8 ).




T

homas

M. T

im l e n

,

First Vice President.

( over)

S u p e r v is o r y P o l i c y
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->U. 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
Curren cy
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 Home 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.