Q. How are USDA Guaranteed Loan portions treated on my books?
A. USDA Guaranteed Loan portions purchased in the secondary market are carried as loans for call reporting purposes.
Q. What is the credit quality and risk weighting of purchased USDA guaranteed portions?
A. USDA guaranteed portions purchased in the secondary market are unconditionally guaranteed as to principal and accrued interest by the full faith and credit of the US Government, and are 20% Risk Weighted assets.
Q. Are the premiums I pay for the loans covered by the full faith and credit guarantee?
A. No. Premium dollars are not covered by the government guarantee, and represent the primary risk exposure to investors.
Q. How do I receive payments on USDA loans that I purchase?
A. The originating/servicing lenders remit principal & interest payments directly to the secondary market holders via wire transfer. Loan buyers receive a document package on the settlement day, including 4 transfer documents, each with original signatures. The buyer keeps one transfer document for their files, returns one to the broker-dealer for their files, sends one to the USDA office listed on the Assignment Guarantee Agreement, and sends one to the lender along with wiring instructions.
Q. What denominations are typically available?
A. We normally utilize a one time opportunity to break the loans into smaller denominations when the guaranteed portion is initially transferred into the secondary market. This typically allows investors to purchase denominations as small as $500,000 and enables them to build their portfolios with an eye to diversification.
Q. If my loan demand improves, can I resell the guaranteed portion back into the market?
A. Yes. USDA guaranteed loan portions are actively traded in the secondary market through a network of broker-dealers. Investors simply fill out a bid request form and submit it to the brokers they wish to get a bid from. It is suggested that sellers establish a bid deadline, and that they inform the winners shortly after the established deadline. Investors wishing to resell in the market are able to collect a number of competitive bids and confirm transactions with the winners on any given business day. Pricing is, of course, subject to market conditions.
Q. Are there CRA benefits associated with secondary market USDA guaranteed loans?
A. Assuming that the loan qualifies and that the borrower is in your institutions CRA assessment area, you may derive a CRA benefit for USDA loans that are purchased in the secondary market. Regulatory treatment may vary. Please check with your regulators for specifics.
Q. Can a secondary market guarantee be denied for any reason?
A. Only if the investor has been involved in perpetuating a fraud with the lender. Otherwise, the guarantee is an incontestable full faith and credit guarantee of the US Government as to principal and accrued interest.
Q. What if a USDA loan that I have purchased becomes past due?
A. Contact the lender and inquire as to the past due status of the loan. You may also include your broker in the communications, as they may be able to offer some useful perspective and/or assistance.
Q. Should I agree to a Loan Modification Request from the originating lender?
A. Sometimes, when a borrower is struggling to service the debt, a modification of terms may be proposed to remedy the situation. The lender may, for example, request an interest only period for a time to assist the struggling borrower. Or, in some cases, a modification is requested to lower the interest rate to prevent the borrower from refinancing the loan with another institution. Don’t hesitate to contact your broker for assistance when considering such a request. The broker can tell you what the market value of the loan would be under the revised scenario to assist you in reaching a decision. If you determine that accepting the proposed change of terms would be preferable to the alternative scenario, please indicate your concurrence to the lender in writing.
Q. How do I collect on the guarantee, if that becomes necessary?
A. If you have to collect on a guarantee, simply follow the procedures outlined in the Assignment Guarantee Agreement. The lender has the first right of refusal to repurchase the guaranteed portion at par, but few ever exercise that option. Instead, holders then file a demand with the USDA office listed on the Assignment Guarantee Agreement. The USDA office will then pay the investor all of the outstanding principal and accrued interest that they are due.
Q. Is it possible to put secondary market USDA guaranteed loan portions on a Colson Certificate?
A. Yes. Some investors prefer to take delivery of their purchased USDA loans on a Colson Depository Receipt Series “C” (DRC). Colson guarantee’s the monthly payments on a timely basis, and investors receive all payments from a single source. Colson charges an up front fee for certificating the loans, and an ongoing fee in the form of 0.125% of the coupon rate.