Risk Management Manual of Examination Policies - FDIC

LOANS Section 3.2
such funds, the matter should be discussed with
management. In such discussion, it is incumbent upon
examiners to inform management that their remarks are not
intended to cast doubt upon the financial strength of any
bank to whom Federal funds are sold. Rather, the intent is
to advise the banker of the potential risks of such practices
unless safeguards are developed. The need for policy
formulation and credit review on all Federal funds sold
should be reinforced via a comment in the Report of
Examination. Also, if Federal funds sold to any one buyer
equals or exceeds 100 percent of the selling bank's Tier 1
Capital, it should be listed on the Concentrations schedule
unless secured by U.S. Government securities. Based on
the circumstances, the examiner should determine the
appropriateness of additional comments regarding risk
diversification.
Securities purchased under an agreement to resell are
generally purchased at prevailing market rates of interest.
The purchasing bank must keep in mind that the
transaction merely represents another form of lending.
Therefore, considerations normally associated with
granting secured credit should be made. Repayment or
repurchases by the selling bank is a major consideration,
and the buying bank should satisfy itself that the selling
bank will be able to generate the necessary funds to
repurchase the securities on the prescribed date. Policy
guidelines should limit the amount of money extended to
one seller. Collateral coverage arrangements should be
controlled by procedures similar to the safeguards used to
control any type of liquid collateral. Securities held under
such an arrangement should not be included in the bank's
investment portfolio but should be reflected in the Report
of Examination under the caption Securities Purchased
Under Agreements to Resell. Transactions of this nature
do not require entries to the securities account of either
bank with the selling bank continuing to collect all interest
and transmit such payments to the buying bank.
FUNDAMENTAL LEGAL CONCEPTS
AND DEFINITIONS
Laws and regulations that apply to credit extended by
banks are more complicated and continually in a state of
change. However, certain fundamental legal principles
apply no matter how complex or innovative a lending
transaction. To avoid needless litigation and ensure that
each loan is a legally enforceable claim against the
borrower or collateral, adherence to certain rules and
prudent practices relating to loan transactions and
documentation is essential. An important objective of the
examiner's analysis of collateral and credit files is not only
to obtain information about the loan, but also to determine
if proper documentation procedures and practices are being
utilized. While examiners are not expected to be experts
on legal matters, it is important they be familiar with the
Uniform Commercial Code (UCC) adopted by their
respective states as well as other applicable State laws
governing credit transactions. A good working knowledge
of the various documents necessary to attain the desired
collateral or secured position, and how those documents
are to be used or handled in the jurisdiction relevant to the
bank under examination, is also essential.
Uniform Commercial Code –
Secured Transactions
Article 9 of the UCC governs secured transactions; i.e.,
those transactions which create a security interest in
personal property or fixtures including goods, documents,
instruments, general intangibles, chattel paper or accounts.
Article 9 was significantly revised effective July 1, 2001,
but each individual state must adopt the changes for it to
become law. Because some states have enacted modified
versions of the UCC and subsequent revisions, each
applicable State statute should be consulted.
General Provisions
A Security Agreement is an agreement between a debtor
and a secured party that creates or provides for a security
interest. The Debtor is the person that has an interest in
the collateral other than a security interest. The term
Debtor also includes a seller of payment intangibles or
promissory notes. The obligor is the person who owes on a
secured transaction. The Secured Party is the lender, seller
or other person in whose favor there is a security interest.
Grant of Security Interest
For a security interest to be enforceable against the debtor
or third party with respect to the collateral, the collateral
must be in the possession of the secured party pursuant to
agreement, or the debtor must sign a security agreement
which covers the description of the collateral.
Collateral
Any description of personal property or real estate is a
sufficient description of the collateral whether or not it is
specific if it reasonably identifies what is described. If the
parties seek to include property acquired after the signing
of the security agreement as collateral, additional
requirements must be met.
Unless otherwise agreed a security agreement gives the
secured party the rights to proceeds from the sale,
exchange, collection or disposition of the collateral.
DSC Risk Management Manual of Examination Policies 3.2-53 Loans (12-04)
Federal Deposit Insurance Corporation