[Federal Register Volume 60, Number 7 (Wednesday, January 11, 1995)]
[Rules and Regulations]
[Pages 2683-2687]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-678]
=======================================================================
-----------------------------------------------------------------------
FARM CREDIT ADMINISTRATION
12 CFR Parts 614 and 618
RIN 3052-AB51
Loan Policies and Operations; General Provisions; Collateral
Evaluation Requirements, Actions on Applications, Review of Credit
Decisions, and Releasing Information
AGENCY: Farm Credit Administration.
ACTION: Notice of effective date; technical amendment.
-----------------------------------------------------------------------
SUMMARY: The Farm Credit Administration (FCA) published an interim rule
with request for comments on September 12, 1994 (59 FR 46725), amending
12 CFR parts 614 and 618 to change collateral evaluation requirements
for Farm Credit System (FCS or System) institutions. The rule also made
conforming changes related to Board of Governors of the Federal Reserve
(FRB) regulations interpreting the Equal Credit Opportunity Act (ECOA).
In accordance with 12 U.S.C. 2252, the effective date of the rule is 30
days from the date of publication in the Federal Register during which
either or both Houses of Congress are in session. Based on the records
of the sessions of Congress, the effective date of the regulations is
January 4, 1995.
DATES: The regulations amending 12 CFR parts 614 and 618, published on
September 12, 1994 (59 FR 46725) are effective January 4, 1995.
FOR FURTHER INFORMATION CONTACT:
Dennis K. Carpenter, Senior Policy Analyst, Office of Examination, Farm
Credit Administration, McLean, VA 22102-5090, (703) 883-4498, TDD (703)
883-4444, or
James M. Morris, Senior Attorney, Office of General Counsel, Farm
Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TDD (703)
883-4444.
SUPPLEMENTARY INFORMATION:
I. General
The amendments to 12 CFR parts 614 and 618, as published (59 FR
46725), address issues raised by recent regulatory revisions by the
other Federal financial institutions' regulatory agencies (Federal
regulatory agencies),\1\ comments received in response to the FCA's
published request for ``regulatory burden'' comments (58 FR 34003, June
23, 1993), and amendments made to
[[Page 2684]]
FRB regulations interpreting the Equal Credit Opportunity Act.\2\
---------------------------------------------------------------------------
\1\ The Office of the Comptroller of the Currency (OCC), Federal
Deposit Insurance Corporation (FDIC), Federal Reserve Board (FRB),
and the Office of Thrift Supervision (OTS).
\2\ The FRB published final regulations (Regulation B) on
December 16, 1993 (58 FR 65657) implementing the Equal Credit
Opportunity Act, 15 U.S.C. 1691-1691f, as amended by the FDIC
Improvement Act of 1991, Pub. L. 102-242, 105 Stat. 2236.
---------------------------------------------------------------------------
The FCA Board received six comment letters in response to its
request for comments on the interim rule. Comments were received from
the Farm Credit Council (FCC), two Farm Credit Banks (FCBs), one
agricultural credit association (ACA), the American Society of Farm
Managers and Rural Appraisers, Inc. (ASFMRA), and the American Society
of Appraisers (ASA).
Based upon a review of the comments received, the FCA has made a
technical revision to Sec. 614.4260(c)(5) to clarify what constitutes a
``subsequent loan transaction.'' However, the FCA does not find it
necessary to further amend the regulations as published on September
12, 1994 (59 FR 46725). The FCA does believe the comments raise some
issues needing clarification, and discusses those issues in the
following section-by-section analysis.
II. Section-by-Section Analysis
A. Section 614.4245--Collateral Evaluation Policies
An FCB commented that it would be appropriate to amend
Sec. 614.4245 to provide that the collateral evaluation policy adopted
by an institution's board shall identify when a collateral evaluation
will be required for a loan servicing transaction, but at a minimum
require a collateral evaluation when a loan servicing transaction
either involves the advancing of new funds, or would alter or affect
the institution's collateral position.
The FCA's position is that, at a minimum, a collateral valuation
will be completed on all ``subsequent loan transactions,'' (as
specified in Sec. 614.4260(c)(5), which include but are not limited to
servicing actions, reamortizations, modifications of loan terms,
partial releases, etc.). Depending upon the circumstances and nature of
the subsequent loan transaction and its impact upon the adequacy of the
collateral, such collateral valuations may take the form of an updated
report referencing previous evaluations or a more detailed evaluation.
The explanatory language of the interim regulation indicated that a new
real estate appraisal will be completed when there has been an
advancement of new funds (including capitalizing interest) and there
has been a material increase in the credit risk. If there are no new
funds advanced (other than reasonable closing costs) or, even if new
funds have been advanced but there has been no material increase in the
risk then a valuation may be sufficient, depending upon the
institution's policies and procedures and the individual circumstances.
The form and content of the valuation may range from an update,
referencing previous evaluations and any changes, to a more detailed
``limited'' or ``complete'' evaluation (as defined by USPAP).
B. Section 614.4255--Independence Requirements
The FCC requested clarification that the internal control
procedures may provide for post-review of credit decisions on a
sampling basis. The ACA commented that the wording in this section
implies that all credit decisions are either prior approved or post-
reviewed, and requested that credit decisions be post-reviewed on a
sampling basis.
Section 614.4255 requires the institution to have appropriate
internal controls in place if they intend to use officers and employees
as evaluators. The regulation refers the reader to Sec. 618.8430 for
guidance for the required internal controls. Section 618.8430 requires
institutions to establish appropriate internal control policies and
procedures that provide effective control over operations of the
institution, including standards for collateral evaluation and scope of
review selection. The regulation provides the institution the
flexibility to establish the scope of the collateral and credit review
(including sampling) as part of the institution's internal controls.
The FCA considers a sampling of individual credit decisions to be an
acceptable internal control as long as the scope of selection is
sufficient to adequately identify risk in the loan portfolio.
C. Section 614.4260--Evaluation Requirements
When an appraisal by a State licensed or certified appraiser is not
required, the FCC and ACA believe it would be more clear and less
susceptible to misinterpretation if, ``subsequent loan transaction''
were defined to include specific loan servicing actions, such as
reamortizations and partial releases. Similarly, an FCB believes it
would be helpful if the regulation itself clearly stated that
subsequent loan transactions include loan servicing transactions such
as reamortizations and releases.
It is the intent of the regulations that ``subsequent loan
transactions'' include, but are not limited to, transactions such as
renewals, reamortizations, partial releases, and modifications of loan
repayment terms and maturity dates. Therefore, the FCA has made a
technical change to the regulation (Sec. 614.4260(c)(5)) to further
identify examples of ``subsequent loan transactions'' where a real
estate appraisal may not be necessary.
Another FCB suggested that portions of FCA's explanatory comments
contained in the preamble seem to be in conflict as to when an
evaluation is needed on servicing actions. The FCB urges the FCA to
clarify that a new evaluation is required only when new funds are
advanced or there is a material increase in credit risk. The FCB also
contends that requiring a collateral evaluation on all subsequent loan
transactions is overly burdensome.
A similar comment has been addressed in the discussion of
Sec. 614.4245. Whenever there is a subsequent loan transaction the
institution must make a determination as to the effect upon the
adequacy of the collateral securing the loan as well as the impact upon
the overall credit characteristics of the loan. Depending upon the
circumstances, this can be accomplished through the completion of a
collateral valuation or a real estate appraisal. As stated earlier, the
form and content of the valuation may require nothing more than a
restricted report identifying the affected collateral, references to
previous evaluations, and recognition of any material changes. However,
depending upon the nature of the subsequent transaction and the effect
upon the collateral and the associated risk the institution may be
required to provide a more detailed evaluation report ranging from a
limited report to a full USPAP appraisal.
The ASFMRA was concerned that all of the Federal regulatory
agencies had fashioned too broad an exception for a business loan,
creating an effective ``de minimis'' of $1,000,000, regardless of the
purpose of the loan. The ASFMRA believes that a $250,000 limit should
apply where the purpose of the loan is for real estate acquisition or
permanent improvement.
The FCA recognizes the concern of the ASFMRA as it relates to the
application of the $1,000,000 business loan exception. However, the FCA
believes that, in accordance with the March 31, 1993 Presidential
directive, absent safety and soundness concerns, lenders must be
afforded additional flexibility to provide credit to small- and medium-
sized businesses. The Federal regulatory agencies have provided this
flexibility with the $1,000,000 exception provision. The
[[Page 2685]]
FCA does not believe that the $1,000,000 exception creates undue risk
for System institutions since the FCA's regulations still require full
compliance with the Uniform Standards of Professional Appraisal
Practices (USPAP) requirements for all loans in excess of the $250,000
de minimis level. The FCA regulation is conservative because it
establishes minimum criteria for all collateral evaluations, whether
completed under USPAP or not.\3\ These FCA criteria provide flexibility
for the presentation of the evaluation, but otherwise are comparable to
the ``departure provision'' minimums contained in USPAP.
---------------------------------------------------------------------------
\3\ Subsequent to the publication of the FCA's interim
collateral evaluation regulation revisions the other Federal
financial regulatory agencies adopted, on October 27, 1994, a set of
``Interagency Appraisal and Evaluation Guidelines'' which provide
guidance for the development and application of prudent appraisal
and evaluation policies, procedures, practices, and standards. Such
guidelines are similar to the guidelines established in the FCA's
collateral evaluation regulations.
---------------------------------------------------------------------------
The ASA strongly opposed those portions of the Interim Rule that it
felt would ``exempt the vast majority of farm credit loan transactions
from the appraisal requirements of Title XI of the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA).''
The ASA believes that FCA has underestimated the risk to safety and
soundness created by exempting 90 percent of the FCS's real estate loan
volume and close to 80 percent of total loan volume from professional
appraisal requirements. In addition, the ASA contends that the cost
differential between an appraisal and a valuation of approximately $300
per evaluation reported by the System is overestimated and does not
take into account the significant reduction in costs that will occur
once System institutions are permitted to obtain limited appraisals
prepared pursuant to USPAP's Departure Provision. The ASA further
stated that the FCA may have overlooked substantial opposition to the
Federal regulatory agencies' appraisal rule changes from Federal
regional banking and thrift regulatory officials, and even from the
thrift industry itself.
The FCA has reviewed the comments received from the ASA and
considered those comments in the context of their application to the
operations and risk of the FCS institutions. In addition to reviewing
ASA's written comments, the FCA, at the ASA's request, met with
representatives of the ASA to discuss the proposed final rule and their
concerns. The FCA understands the basis for the ASA's concerns with the
standards for state-sanctioned appraisers and risk in residential
lending markets but believes that the portfolio structure and
associated risks of the System are different. The FCS institutions'
portfolios contain only a small percentage of residential loans,
representing only 6 percent of the total real estate mortgage loan
volume and 13 percent of the total number of mortgage loans. It should
also be noted that FIRREA does not apply to FCS institutions. The FCA's
regulations do, however, address similar appraisal policies in addition
to concerns and issues specifically related to the FCS institutions and
their collateral evaluation requirements. As indicated by the
statistics cited earlier, the large majority of the System's loans and
related collateral is agricultural in nature, therefore requiring
agricultural-based knowledge and evaluation standards. The fact that an
individual is a State licensed or certified appraiser does not ensure
that the individual possesses the necessary training and expertise to
value a given agricultural property. On the other hand, there are
individuals who have the training and expertise to value such
properties, but have not obtained a State license or certification.
FCA's regulations require the FCS institutions to establish
criteria and standards concerning educational and expertise levels
necessary to adequately and competently value the types of collateral
found within the institution's portfolio. The FCA collateral
regulations constitute only one of a number of statutory and regulatory
controls placed on System institutions (e.g., maximum loan to value of
85 percent, first lien requirements for mortgage loans, and annual FCA
examinations). These statutory and regulatory requirements form the
framework for addressing certain safety and soundness concerns. In
addition, the System institutions are restricted by certain statutory
eligibility requirements which serve to limit the outer boundaries of
the FCS lending institutions' activities. Given the existence of these
additional statutory and regulatory requirements, the FCA believes that
the collateral evaluation requirements contained in the Interim Rule
adequately identify and address System risks from a safety and
soundness standpoint.
D. Section 614.4265--Real Property Evaluations
An FCB commented that the cost of compliance with this section of
the regulation is unjustified considering that other regulators do not
require this level of compliance with USPAP for real estate collateral
evaluations on ``business loans'' that are in excess of $250,000 and
not otherwise exempted by Sec. 614.4260(c). Therefore, the FCB urges
FCA to delete the requirement for USPAP compliance for business loans
over $250,000 and less than $1,000,000. Another FCB commented that most
appraisers with the training necessary to perform a real estate
evaluation in compliance with USPAP are in fact state-certified or
state-licensed and that this requirement therefore makes the exemption
meaningless, placing the System at a severe competitive disadvantage.
The ACA also maintained that the cost of compliance with this section
of the regulation is unjustified considering that other regulators do
not require this level of compliance with USPAP. Both FCBs and the ACA
believe that the requirement places System institutions at a
competitive disadvantage.
On the other hand, the ASFMRA applauded the FCA's action to require
that all evaluations above $250,000 meet the standards established
under USPAP, but it was troubled by the provision allowing valuations
to be completed by persons who are not licensed or certified. The
ASFMRA urged the FCA to consider extending the USPAP provision to
recognize that all valuations, irrespective of the ``de minimis''
level, be completed under USPAP or under the Departure provision of
USPAP.
The ASA stated that by requiring all real estate valuations to be
performed by licensed or certified appraisers in accordance with USPAP,
the FCA could achieve all of the regulatory flexibility it deems
necessary and reduce regulatory burden even below the level set by the
Interim Rule. The ASA contends that instead of easing the burden of
regulatory compliance, the Interim Rule only adds to the patchwork of
confusing exemption criteria under which the necessity for obtaining a
licensed or certified appraisal will be dependent on an analysis, for
each loan, of a variety of complex factors. They also contend that
because many of these factors are so subjective in nature that they
almost invite noncompliance. Both the ASA and ASFMRA proposed that the
FCA extend USPAP requirements to all FCS loan transactions where
collateral is valued.
The FCA believes that financial institutions operating in today's
environment must engage collateral evaluators that are cognizant of the
current appraisal industry standards, including knowledge of and
compliance with the USPAP standards. In order for lenders to accept
appraisal reports as support for their credit decisions there must be
an assurance that such reports
[[Page 2686]]
are accurate and adequate to withstand the legal and technical scrutiny
of borrower rights, foreclosure, bankruptcy, and other adverse credit
actions. Therefore, the FCA also believes that anyone valuing any form
of collateral should be familiar with, and, when required by the
regulations, comply with USPAP.
While it might be argued that there is some additional expense
involved with USPAP related training and compliance (e.g., field
training, USPAP compliance training, and compliance with basic
educational course requirements), such expenses are considered
necessary to comply with the industry standards and current prudent
lending practices. It is FCA's position that knowledge of current
appraisal industry practices (including USPAP standards) is a necessary
part of any evaluator training that is developed and provided by the
System institutions pursuant to the requirements of Sec. 614.4245. The
FCA's regulations do provide flexibility to the System relative to the
use of specific forms and the providing of necessary training
requirements. However, whether conducted internally or through various
appraiser affiliated educational programs, there is an expected level
of education, expertise, and familiarity with USPAP standards.
Therefore, the FCA does not view the requirement for USPAP on
transactions in excess of the $250,000 de minimis level to create an
unnecessary expense burden.
The FCA regulations provide basic criteria for collateral
evaluation practices in order to address safety and soundness concerns.
However, an additional intent of the regulations is to provide the FCS
institutions flexibility to administer their own programs within the
confines of state appraisal agencies and appraisal industry standards.
It is not the intent of the FCA to dictate the form of the evaluation
process, but rather to establish the basic criteria. The FCA believes
that adopting full USPAP compliance for all collateral-based loan
transactions would be unnecessary and overly burdensome. The FCA also
believes the regulations provide a balanced approach which addresses
the concerns of both the appraisal industry and the System.
E. Section 614.4443--Review Process
An FCB requested clarification of the deletion of the language ``or
a borrower who has applied for a restructuring'' that is now in the
existing regulation, lest it be read as excluding borrowers seeking
restructuring.''
By definition (Sec. 614.4440(b)) the term applicant means ``any
person who completes and executes a formal application for an extension
of credit from a qualified lender, or a borrower who completes an
application for restructuring.'' A borrower whose application for
restructuring has been denied has the rights specified in
Sec. 614.4443(c), including the right to obtain an independent
collateral evaluation. It is not the intent of the FCA to exclude
borrowers who have applied for restructuring.
F. Section 618.8320--Data Regarding Borrowers and Loan Applicants
An FCB urged FCA to consider seeking clarification of the Federal
Reserve Board's position on redacting confidential third-party
information from copies of appraisals provided to applicants.
The present amendment of Sec. 618.8320 conforms FCA regulations to
reflect the requirements of the Equal Credit Opportunity Act. Section
618.8320 is being amended to state that collateral evaluation reports
may be released to a loan applicant when required by the ECOA or
related regulations. The ECOA is interpreted by the FRB which has
amended its regulations to require release of ``appraisal reports.''
Those regulations define ``appraisal report'' to mean the documents
relied upon by a creditor in evaluating the value of the dwelling. (See
12 CFR 202.5a(c). The FRB, in its explanatory language concerning the
published final regulation (58 FR 65657, December 16, 1993), provided a
discussion of the appraisal report definition as follows:
The statute does not define an appraisal report; however, the
legislative history suggests that it is the complete appraisal
report signed by the appraiser, including all information submitted
to the lender by the appraiser for the purpose of determining the
value of residential property. The proposed definition was based on
the legislative history, and stated that an appraisal report
referred to the documents relied upon by a creditor in evaluating
the market value of residential property containing one-to-four
family units on which a lien will be taken as collateral for an
extension of credit, including reports prepared by the creditor. The
proposal stated that an appraisal report would not be limited to
reports prepared by third parties.
The final rule provides the same meaning for an appraisal report
as was proposed, but the definition has been shortened for clarity.
A consumer who requests a copy of the appraisal report will be
entitled to receive a copy of any third party appraisal that has
been performed. For consistency with the rules implementing the
prohibitions of the Fair Housing Act on discrimination in appraising
residential real property, an appraisal report includes all written
comments and other documents submitted to the creditor in support of
the appraiser's estimate or opinion of value. (See 24 CFR
100.135(b).)
The ``appraisal report'' does not include copies of ``review
appraisals,'' agency-issued statements of appraised value, or any
internal documents if a third party appraisal report was used to
establish the value of the security. Even when a third party
appraisal has been performed, however, a consumer requesting a copy
of the report also must receive a copy of documents that reflect the
creditor's valuation of the dwelling when that valuation is
different from that stated in the third party appraisal report. Such
documents would include staff appraisals or other notes indicating
why the value assigned by the third party appraiser is not the
appropriate valuation.
The right to receive a copy of an appraisal report provided
under Regulation B includes, but is not limited to, transactions in
which appraisals by a licensed or certified appraiser are required
by federal law. If the value of the dwelling has been determined by
the creditor and a third party appraiser has not been used, the
appraisal report would be the report of the creditor's staff
appraiser, where applicable, or the other documents of the creditor
which assign value to the dwelling.
The FCA believes that the aforementioned discussion taken from the
FRB's final rule publication provides a reasonable and thorough
explanation of what constitutes an ``appraisal report.'' However, any
further clarification of the scope of the Regulation B requirement
should be derived directly from the FRB.
List of Subjects in 12 CFR Part 614
Agriculture, Banks, banking, Foreign trade, Reporting and
recordkeeping requirements, Rural areas.
For reasons stated in the preamble, part 614 of chapter VI, title
12 of the Code of Federal Regulations is amended to read as follows:
PART 614--LOAN POLICIES AND OPERATIONS
1. The authority citation for part 614 continues to read as
follows:
Authority: Secs. 1.3, 1.5, 1.6, 1.7, 1.9, 1.10, 2.0, 2.2, 2.3,
2.4, 2.10, 2.12, 2.13, 2.15, 3.0, 3.1, 3.3, 3.7, 3.8, 3.10, 3.20,
3.28, 4.12, 4.12A, 4.13, 4.13B, 4.14, 4.14A, 4.14C, 4.14D, 4.14E,
4.18, 4.19, 4.36, 4.37, 5.9, 5.10, 5.17, 7.0, 7.2, 7.6, 7.7, 7.8,
7.12, 7.13, 8.0, 8.5 of the Farm Credit Act (12 U.S.C. 2011, 2013,
2014, 2015, 2017, 2018, 2071, 2073, 2074, 2075, 2091, 2093, 2094,
2096, 2121, 2122, 2124, 2128, 2129, 2131, 2141, 2149, 2183, 2184,
2199, 2201, 2202, 2202a, 2202c, 2202d, 2202e, 2206, 2207, 2219a,
2219b, 2243, 2244, 2252, 2279a, 2279a-2, 2279b, 2279b-1, 2279b-2,
2279f, 2279f-1, 2279aa, 2279aa-5); sec. 413 of Pub. L. 100-233, 101
Stat. 1568, 1639.
[[Page 2687]]
Subpart F--Collateral Evaluation Requirements
2. Section 614.4260 is amended by revising the introductory text of
paragraph (c)(5) to read as follows:
Sec. 614.4260 Evaluation requirements.
* * * * *
(c) * * *
(5) Subsequent loan transactions (which include but are not limited
to loan servicing actions, reamortizations, modifications of loan
terms, and partial releases), provided that either:
* * * * *
Dated: January 5, 1995.
Floyd Fithian,
Acting Secretary, Farm Credit Administration Board.
[FR Doc. 95-678 Filed 1-10-95; 8:45 am]
BILLING CODE 6705-01-P
