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FEDERAL RESERVE BANK OF S^SEW YORK flL April 22, 1985 TRANSACTION'S IN U .8 .-GUARANTEED LOANS Revised Policy for Supervising Financial Institutions To A ll State M ember Banks, and Others Concerned, in the Second Federal Reserve District: The following statement has been issued by the Board of Governors of the Federal Reserve System: The Federal Reserve Board has adopted a revised policy for supervising financial institutions that participate in the purchase and sale of loans guaranteed by the U.S. government. The policy updates guidelines first approved in 1979 which established prudential standards for handling such loans. The revised policy reminds financial institutions that premiums received in lieu of servicing fees, with respect to the selling and servicing bank, are to be amortized over the life of the loan; and that, with respect to the purchasing bank, the premiums paid over the face value of the note are not guaranteed and are not paid by the guaranteeing federal agency when the loans are prepaid or in default. For this reason, the statement cautions banks against paying inappropriate or excessive premiums. The policy statement, which was originally recommended by the Federal Financial Institutions Examination Council, is reprinted on the following pages. Questions thereon may be directed to Thomas P. McQueeney, Assistant Chief Examiner (Tel. No. 212-791-7934). E. Gerald Corrigan, P r e s id e n t. Federal Financial Institutions 1776 G Street, N W , Council 7@1 ° Washington, DC 2000S Federal Financial Institutiong Examination Council Supervisory Policy THE SALE OF U oS o QQVERMMEMT GUAMANTEED LOAMS AMD SALE PREMIUMS Recommendations fog Originating end Selling Institutions Examiners should review th© extent and nature of activities in connection with th© sal© of government guaranteed loans*, Lass or improper management of th® soiling institution's servicing responsibilities should be criticised*, Qut°of°trad© area lending for th® purpose of resale of any portion of U 0g 0 government guaranteed loans should be carefully reviewed to ensure that the practice is conducted in a safe and sound manner*, All incos©? including servicing fees and premiums charged in lieu of servicing fees* associated with th© sal© of U 0S 0 government guaranteed loans? should be recognised only as earned and ©mortised to appropriate income accounts over the life of the loan* Recoaaendations for Purchasing Institutions Purchasers of UoS*, government guaranteed loans should be aware that the purchase premiums are not guaranteed and are not paid by the guaranteeing Federal agency when th© loans are prepaid*, Because payment of premiums which do not reasonably relate to the yield on the loan can distort published financial reports by overstating the value of a financial institution’s assets? it will generally be viewed as an unsafe and unsound banking practice for a financial institution to pay purchase premiums which result in a significant overstatement in the value of bank assetSo Many government guaranteed loans currently being originated and sold are variable rat©*, These variable rate loans normally should not trad® at anything more than a modest premium or discount' from par*, Examiners will be directed to carefully review any loans being sold or purchased at significant premiums and will criticise any involvement with excessive premiums as an unsafe and unsound business practice*, Excessive purchase premiums will be classified losso Th® loans will be required to be revalued to the market value at the time of the acquisition and the excessive premiums will be charged against current earnings*, In addition? any unaaortiged loan premium on a government guaranteed loan must be immediately charged against income if the loan is prepaid? regardless of whether payment is received fro® th© borrower or th® guaranteeing agency*, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation. Federal Home Loan Bank Board, National Credit Union Administration, Office of the Comptroller of the Currency 2 B o a r d of G o v e r n o r s of the F e d e r a l Insurance C o r p o r a t i o n , and Office Reserve System, Federal Deposit of the C o m p t r o l l e r of the C u r r e n c y Institutions supervised by the above agencies are advised that g u a r a n t e e d p o r t i o n s of UoSc g o v e r n m e n t g u a r a n t e e d l o a n s s h o u l d n o t b e r e c o r d e d o r c a r r i e d a s U . So g o v e r n m e n t o r f e d e r a l a g e n c y securitieso T h e y s h o u l d be c a r r i e d a n d r e p o r t e d as U.S. g o v e r n ment guaranteed loans. Additional Information Questions concerning this supervisory to the a p p r o p r i a t e r e g u l a t o r y a g e n c y . 3 policy should be addressed
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