[Federal Register Volume 59, Number 175 (Monday, September 12, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-22220]
[[Page Unknown]]
[Federal Register: September 12, 1994]
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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: Interim rule with request for comments.
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SUMMARY: The Farm Credit Administration (FCA), by the Farm Credit
Administration Board (Board), adopts interim regulations that amend FCA
regulations relating to collateral evaluation requirements for Farm
Credit System (FCS or System) institutions engaged in lending or
leasing. The FCA Board also requests comments on these regulations. The
amendments respond to issues raised by regulatory revisions recently
adopted 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
regulations of the Board of Governors of the Federal Reserve
(Regulation B) interpreting the Equal Credit Opportunity Act
(ECOA).2
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\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 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.
DATES: The regulations shall become effective October 31, 1994, or upon
the expiration of 30 days after publication during which either or both
Houses of Congress are in session, whichever is later. Written comments
must be submitted on or before October 10, 1994. Notice of the
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effective date will be published in the Federal Register.
ADDRESSES: Comments should be submitted in writing, in triplicate, to
Patricia W. DiMuzio, Associate Director, Regulation Development, Office
of Examination, Farm Credit Administration, McLean, Virginia 22102-
5090. Copies of all communications received will be available for
examination by interested parties in the Office of Examination, Farm
Credit Administration.
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 FCA Board adopted final collateral evaluation regulations on
November 12, 1992. The regulations were published in the Federal
Register on November 20, 1992 (57 FR 54683), and became effective March
1, 1993. The regulations addressed the System's collateral evaluation
practices and procedures, including the need for: (1) Consistent
methodology; (2) independence and controls; and (3) consistent
educational and qualification requirements. The regulations set basic
requirements for real property appraisals, including the use of State
licensed and/or certified appraisers, functional independence, and
compliance with Uniform Standards of Professional Appraisal Practices
(USPAP). The real property appraisal requirements adopted were similar
to the requirements of the other Federal regulatory agencies.
The objective of the present amendments is to provide additional
flexibility in appraisal and independence requirements, without
jeopardizing the overall integrity or enforceability of the FCA's
collateral evaluation regulations. By providing additional flexibility
in the use of State-sanctioned appraisers and relief from the more
stringent real estate appraisal requirements, the FCA addresses
regulatory burden concerns.
The amendments are being adopted as interim regulations with a
delayed effective date and request for comments in order to provide
interested parties an opportunity to comment on the regulations.
However, the FCA believes adopting the regulations in final is required
to provide System institutions with the necessary guidance to address
revisions to their collateral evaluation requirements and necessary
staffing needs. The regulatory revisions also establish requirements
that are similar to the requirements recently adopted by the Federal
regulatory agencies.
The FCA adopted, on May 5, 1994, a ``no action'' position relative
to the System institutions' compliance with certain real estate
appraisal requirements in response to the then-pending regulatory
revisions by the Federal regulatory agencies. The FCA's ``no action''
position was intended to serve as a temporary means of eliminating any
competitive disadvantage suffered by System institutions. However, the
``no action'' position provides more flexibility than the FCA would
consider a prudent long-term regulatory position. Therefore, these
regulatory revisions are intended to eliminate any competitive
disadvantage for the System institutions and establish the necessary
guidance and parameters for the System's collateral evaluation
practices and procedures.
These revisions to the FCA's collateral evaluation regulations only
address the issues associated with the real estate appraisal
requirements and do not lessen the overall requirements that have been
established for the basic collateral evaluation requirements or the
collateral valuation process. The FCA Board is aware of the System's
concern about informational requirements for small loans. The FCA has
received comments requesting consideration of guidance for ``minimum
information'' loan programs (including financial reporting and
collateral evaluation information) and related underwriting standards.
The FCA believes these regulations provide flexibility to accommodate
minimum information loan programs. However, the FCA will consider these
issues at a later date in response to the ``regulatory burden'' notice
published in the Federal Register on June 23, 1993 (58 FR 34003).
The regulations also make technical revisions to part 614, subpart
L, concerning credit denials and independent appraisal requirements.
Finally, the regulations reconcile FCA regulations pertaining to the
release of collateral evaluation information (part 618, subpart G),
with the requirements of the Equal Credit Opportunity Act as
interpreted by Regulation B.3
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\3\ The ECOA requires creditors to provide copies of real estate
appraisals to applicants/borrowers when the appraisal covers
residential collateral. The Federal Reserve Board, on December 16,
1993, published final regulation revisions (58 FR 65657) (Regulation
B) implementing this requirement. Institutional compliance was
required by June 14, 1994.
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II. Background
A. Bank and Thrift Federal Regulatory Agencies' Positions
On March 10, 1993, the four Federal regulatory agencies responsible
for regulating banks and thrifts issued a joint interagency statement
that eased certain regulatory constraints on the availability of credit
for small business loans (including farm loans). The ``Interagency
Policy Statement on Credit Availability'' (``Policy Statement'')
identified five areas of concern for possible regulatory and
operational revisions. The five areas are: (1) Lending to small- and
medium-sized businesses; (2) real estate lending and appraisals; (3)
appeals of examination decisions and complaint handling; (4)
examination processes and procedures; and (5) paperwork and regulatory
burdens.
While FCA was not a party to the Policy Statement released on March
10, 1993, it does have real property appraisal regulations in place
that are similar to those of the Federal regulatory agencies. In
addition, the Policy Statement includes farming operations as a segment
of the small- and medium-sized businesses to be covered by any
revisions arising from the Policy Statement. Therefore, any change in
the Federal regulatory agencies' real property appraisal
requirements4 will impact the FCA and the System in terms of the
consistency and application of the collateral evaluation requirements.
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\4\The OCC, FDIC, FRB, and OTS jointly published revised real
estate appraisal regulations on June 7, 1994 (59 FR 29482), which
were effective on that date.
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In discussing the real estate lending and appraisal concerns, the
Policy Statement asserted that ``in some cases currently required real
estate appraisals may not add to the safety and soundness of the credit
decision. Indeed, in some cases, appraisals may prove so expensive that
they make a sound small- or medium-sized business loan
uneconomical.''5 President Clinton directed the Federal regulatory
agencies to review the existing real property appraisal regulations and
address changes as appropriate. The policy position implemented by the
Federal regulatory agencies is considered to be ``one aspect of an
overall effort by the agencies to evaluate carefully and react
appropriately to risk in the United States financial services industry.
That overall effort envisions substantial oversight; in some cases,
more than we have now, in areas that pose greater risk to the system.
By the same token, regulatory burden will be reduced where risk is low,
especially for strong, well-managed banks and thrifts * * *.''6
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\5\ Issue No. 2 as addressed in the ``Interagency Policy
Statement on Credit Availability,'' jointly released on March 10,
1993, by the OCC, FDIC, FRB, and the OTS.
\6\ Ibid.
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The recent amendments to the other Federal regulatory agencies'
real estate appraisal requirements relate to: (1) Appraisals of real
estate offered as collateral for small- and medium-sized business
loans; (2) appropriate appraisal threshold levels (de minimis); and (3)
exemptions from requirements for the use of State-sanctioned
appraisers. In addition, the agencies have eliminated the regulatory
prohibition on the use of the Uniform Standards of Professional
Appraisal Practices (USPAP) ``departure provision''7 for real
property appraisals.
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\7\ As established by the Appraisal Standards Board of the
Appraisal Foundation, the Departure Provision of USPAP (revised
March 22, 1994, effective July 1, 1994) ``permits limited departures
from specific guidelines provided that the scope of the assignment
is not so limited as to confuse or mislead the client or the
intended users of the report; and provided that the appraiser
advises the client of the limitations and that the limitations will
be disclosed in the report; and the client has agreed that the
limited appraisal or consulting services would be appropriate.''
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On June 4, 1993, the bank and thrift Federal regulatory agencies
published proposed regulations (58 FR 31878) to amend the existing real
property appraisal regulations. On November 10, 1993, the Federal
regulatory agencies solicited additional comments on the database
supporting the de minimis level proposal (58 FR 59688). The OCC, FDIC,
FRB, and OTS subsequently adopted final regulations, which were
published on June 7, 1994 (59 FR 29482). The major changes made by the
final regulations are:
1. Increasing the de minimis level to $250,000 above which real
estate appraisals using State licensed and/or certified appraisers are
required.
2. Providing an exception for small- and medium-sized ``business
loans,'' including loans to entities and individuals engaged in farming
enterprises, with a transaction value of $1.0 million or less.
3. Clarifying the ``abundance of caution'' exception.
4. Providing additional exceptions to the use of State licensed
and/or certified real estate appraisers.
5. Clarifying appraisal standards and appraiser independence
requirements.
B. FCA's Consideration
On June 10, 1993, the FCA Board adopted a policy position
requesting public comment on possible regulatory burden issues
addressing a variety of subjects. This ``Regulatory Burden'' statement
was published on June 23, 1993 (58 FR 34003). On July 15, 1993, the FCA
Board directed staff to begin considering appropriate revisions of the
FCA's regulations and to monitor the progress of the regulatory
revisions proposed by the Federal regulatory agencies.
The FCA received 15 comment letters in response to its regulatory
burden statement from various System institutions and related parties
addressing collateral evaluation related issues. The commenters, in
general, supported the positions that had previously been proposed by
the Federal regulatory agencies. The commenters also expressed concerns
with the inclusion of specific standards of the collateral evaluation
regulations (i.e., general valuation and personal property
requirements) as well as specific requirements of part 614, subpart L,
as they pertain to the appraisal requirements for reconsideration of
loan denials. In addition, the FCA has received two additional sets of
comments requesting that the FCA consider the positions proposed by the
Federal regulatory agencies. The FCA responds to the comments received
in Section IV, Regulatory Revisions, of this document.
III. Historical Analysis
The FCA has not identified any System institution that has failed
solely because of poor or fraudulent appraisal activities. However,
there have been institutions that have failed where poor collateral
evaluation practices have been a contributing factor. A review of
several of the institutions that failed during the 1980s has indicated
that when such institutions failed, they exhibited characteristics such
as: (1) Poor credit administration practices; (2) poor internal
controls; (3) poor collateral evaluation practices; and (4) lack of
credit expertise to handle increased debt levels and loan volume. The
majority of the institutions that failed or required some form of
assistance did so because of losses experienced in a few large,
complex, and/or specialized loans. Poor collateral evaluation practices
coupled with one or more of the other characteristics described above
contributed to the problems faced by the institutions.
With the implementation of the FCA's collateral evaluation
regulations, the institutions have been required to establish and
implement appropriate collateral evaluation policies and procedures.
Such policies and procedures are needed to address collateral
evaluation independence requirements and basic evaluation and appraisal
standards, as well as educational and qualification requirements. The
development of such policies and procedures coupled with appropriate
internal controls, credit controls, and underwriting standards (i.e.,
lending limits, financial and repayment analysis, loan inspections,
etc.) will help ensure that past problems are not repeated.
The FCA's collateral evaluation regulations require that all System
institutions will perform a collateral evaluation on all secured loans
and leases. Such collateral evaluations will take the form of a basic
valuation or a more detailed real estate appraisal, depending on the
loan collateral and the specifics of the loan decision. The basic
requirements concerning individuals responsible for collateral
evaluations address minimum education, qualification, independence, and
methodology standards that are either established by the regulation or
must be established by the institution's policies and procedures
consistent with the requirements of the regulations.
The additional requirements for completion of real estate
appraisals, including the use of State-sanctioned appraisers, require a
higher degree of independence and higher education and methodology
standards. While higher standards are desirable, it has been argued by
the System, as well as by the banking and thrift industries, that
universal application of these higher standards and the additional cost
involved do not add to the safety and soundness of these institutions.
They argue that such higher standards add unnecessary costs and delays
to the credit process without providing a corresponding reduction in
loan defaults and losses in the institutions' smaller loans. The System
and commercial banking institutions further argue that collateral
valuations completed by qualified and experienced persons, other than
State licensed or certified appraisers, are more appropriate and cost-
effective for the majority of their loans and the associated risk.
The FCA believes that it is the responsibility of the institution
to establish adequate policies and procedures for collateral
evaluations, taking into consideration the basic requirements of the
FCA's regulations. The institutions are responsible for determining the
level of documentation required, depending on the size, complexity, and
specialization of the loan transaction. As an example, a $50,000 loan
that qualifies for an institution's minimum information program could
require considerably less support, information, and documentation than
a $500,000 loan to finance a large, complex dairy operation not typical
of the operations within an institution's territory. Under these
revised regulations, both loan transactions could qualify as collateral
valuations rather than as real estate appraisals; but the complexity,
size, and specialization of the loan for the dairy operation would call
for a higher degree of support information development and
documentation. The FCA notes that such flexibility already exists in
the current regulations.
The lending institution, not the collateral evaluator, is
ultimately responsible for its credit decisions. The collateral
evaluation is only one of several factors that must be considered when
making a credit decision. While the collateral evaluation report must
be completed by a qualified individual, institutions should not assume
that the acceptance of the collateral evaluation report substitutes for
or completes the credit decision process. The FCA expects the
institutions to consider all relevant credit factors (including the
collateral evaluation) as part of the credit decision. If an
institution is not comfortable with the reported value of the
collateral, the institution can request another evaluation, decrease
the loan amount accordingly, or, provided other statutory and
regulatory requirements are satisfied, change the terms of the loan
consideration in recognition of the perceived collateral risk.
An institution need not lend 85 percent of the value shown by an
evaluation. Rather it should limit the credit to the amount that can be
supported by consideration of the risk associated with all credit
factors, including the collateral evaluation. It is important to note
that as the complexity or specialization of the subject property
increases, the degree of support documentation should also increase and
should take into account the unique characteristics of the property
that make it complex or specialized.
IV. Regulatory Revisions
Taking into account the comments received in response to the FCA's
``regulatory burden'' notice, the FCA staff studied FCA's current
collateral evaluation regulations, compared current regulations with
those of the other Federal regulatory agencies, and completed a study
of data submitted to the FCA by the System. Based on its study, the FCA
has adopted the following positions.
A. Increased Appraisal Thresholds
The regulations amend Sec. 614.4260(b) to increase the existing de
minimis levels on the appraisal requirements of the System institutions
to $250,000. In addition, the threshold for the functional independence
requirements would also be increased in connection with the appraisal
de minimis level.
In 1992, the FCA completed an analysis to determine the segregation
by size of the collateral securing the System's loan portfolio. The
database for the analysis included a summary of the number and volume
of loans within the FCS banks and associations as of December 31, 1991,
that were unsecured, secured by personal property, secured by real
property, or secured by a combination of security types.
The data were further segregated by loan-size categories. The FCA
study has subsequently been updated to reflect the December 31, 1992,
and December 31, 1993, loan-size and collateralization information.
The FCA has also recently received the results of a study it
commissioned through the University of Illinois to perform
independently of the development of these regulations (University of
Illinois study). This study examined the loan origination volume,
associated defaults, and loan losses for a specific Farm Credit
district for a period between 1973 and 1992 to determine, among other
things, whether large loans have a higher default rate than small
loans.
In addition, the Farm Credit Council, on behalf of the System
institutions, has provided additional loan-size and loan-loss data to
the FCA for further consideration of the de minimis level. Finally, the
American Bankers Association (ABA) has also completed a survey,\8\
which included a sample of 246 commercial banks of various sizes and
portfolio structures. The survey stratified the loan portfolios by loan
size and by loan type (construction, farmland, multifamily, and
nonfarm).\9\
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\8\``Commercial Real Estate Appraisal Survey''; Surveys and
Statistics Division, American Bankers Association; Report of
Results, June 4, 1992.
\9\The total sample of the ABA survey consisted of 9,329 banks
of various sizes with 51,931 loans reported for a total sample
volume of $22 billion (average size loan is $424,000, average size
farmland loan is $83,900, and average commercial loan is $820,000).
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Upon review of the available data, the University of Illinois'
study data, the System's data, and the ABA's commercial bank data,
several conclusions can be drawn. Each of the studies attempted to
study the correlation between loan losses and loan size. There appears
to be very little difference in the average size of the ABA reported
farmland loans and the System institutions' loans. The establishment of
a consistent threshold level would encompass similar percentages of the
farmland-based loan portfolio of System institutions and commercial
banks. However, the System institutions will have a greater percentage
of farmland-based loan volume that would be in excess of a $250,000 de
minimis level. An increase in the de minimis level would result in the
System institutions being afforded the same flexibility as the
commercial lenders to perform collateral valuations rather than USPAP-
based, State-sanctioned appraisals. This will result in a significant
reduction in the number of loans that would require the use of a State-
sanctioned appraiser\10\ and thus result in cost savings to the
borrowers/consumers. The System data indicate that the difference in
the cost of an appraisal versus a valuation averages approximately $300
per evaluation. Such reported cost differences are consistent with cost
data that have been reported by the commercial banking industry.
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\1\0Under the current FCA de minimis level of $100,000
approximately 80 percent of the number (38 percent of the volume) of
FCBs' and associations' real estate loans would be exempted. With an
increase of the de minimis level to $250,000, 95 percent of the
number of loans and 66 percent of the loan volume would be exempted
from the appraisal requirements.
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The FCA recognizes that increasing the de minimis level will reduce
the number of transactions requiring a USPAP appraisal completed by a
State-sanctioned appraiser. The FCA's analysis of the available data
suggested that for loans in excess of $250,000, the rate of loss
justifies the cost of the USPAP appraisal requirement, while for loans
of less than $100,000, the cost of requiring USPAP appraisals may
exceed the volume of losses. For loans in the $100,000 to $250,000
range, the data do not clearly establish that the rate of loss
justifies the cost of requiring USPAP appraisals. Therefore, the FCA
believes that a de minimis level of $250,000 is a reasonable point
above which the additional appraisal requirements are justified. In
addition, the FCA is comfortable that safety and soundness concerns at
or below $250,000 can be adequately addressed by the collateral
valuation requirements of the regulations.
B. Business Loans
The regulations amend Sec. 614.4260(b) to provide the System
institutions with a $1.0 million threshold for requiring appraisals for
small- and medium-sized ``business loans'' where the loan repayment is
not derived from the sale or cash rental of real estate.
The purpose of this exemption is to provide greater flexibility for
institutions to provide credit to small- and medium-sized businesses
where the owners are subject to the risk of operational losses. The
exemption is not intended to ease credit requirements for real estate
investors or passive landowners. A $1.0 million exemption would be
consistent with the positions taken by the Federal regulatory agencies
and will afford the System institutions a ``level playing field'' with
respect to the required use of State-sanctioned appraisers. Based on
FCA's analysis of the data studies, it should be noted that, in
addition to the additional 15 percent (by number) of System loans
exempted by the new $250,000 de minimis level exception, approximately
an additional 5 percent of the number of loans will be exempted by the
$1.0 million ``business loan'' exemption.
However, within this $250,000 to the $1.0 million category, an
additional 25 percent of loan volume will be exempted by the new
business loan exemption. These additional loans represent a significant
proportion of System loan volume and arguably pose significant
additional risk for System institutions. Because of this concentration,
the FCA has provided additional criteria for the completion of
collateral evaluations for such small- and medium-sized business loans
by requiring all real estate collateral evaluations in excess of
$250,000, not otherwise exempted by Sec. 614.4260(c), to be completed
in conformance with the USPAP. Such collateral evaluations of
``business loans,'' while conforming with USPAP, will not necessitate
the use of a State-sanctioned appraiser or compliance with the
functional independence requirements.
While the regulations allow institutions to use either a State
licensed or State certified appraiser for loan transactions under the
$1.0 million level, the regulations require appraisals of real estate
transactions over $1.0 million to be completed by State certified
appraisers. The FCA notes that this requirement is consistent with the
requirements of the Financial Institutions Recovery, Reform, and
Enforcement Act of 1989 (FIRREA),11 which requires the use of a
State certified appraiser for a real estate transaction appraisal of
$1.0 million or more.
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\1\1See Pub. L. 101-73, Sec. 1113, 103 Stat. 183 (1989).
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C. Additional Collateral
The regulations expand the exceptions for the use of State licensed
and certified appraisers to include those instances where the real
estate is taken as additional collateral or where the loan is supported
through conclusive documentation of earnings capacity and repayment
ability evidencing that the real estate is not necessary to support the
loan decision.
Adoption of the additional collateral exception and clarifying the
``abundance of caution'' exception gives System institutions more
flexibility in relying on collateral valuations of real property rather
than USPAP-based State-sanctioned appraisals. However, the FCA believes
that the basic collateral valuation requirements and the institutions'
policies and procedures will provide sufficient analysis and detail to
address any safety and soundness concerns.
D. Limit Periodic Appraisals
The regulations amend Sec. 614.4260(c) to permit the use of
collateral valuations of real estate when a subsequent transaction is
related to the advancement of additional funds, a servicing action,
loan reamortization, etc., provided there has been no obvious and
material change in the market conditions or physical aspects of the
real estate that would threaten the adequacy of the institution's real
estate collateral protection after the transaction. The regulations
continue to require the institutions to develop appropriate policies
and procedures addressing the circumstances and frequency for the
completion of real property appraisals versus collateral valuations,
subject to the specific requirements of the regulation.
This revision would provide greater flexibility to the System
institutions in determining the appropriate collateral evaluation
method to employ (valuation vs. appraisal) and the appropriate level of
evaluator expertise required in relation to the associated credit risk.
This revision would allow institutions to use collateral valuations
instead of appraisals when a loan servicing action is required, a loan
is being reamortized, or even when additional funds are advanced as
long as the collateral risk has not materially increased. This revision
would also eliminate the requirement that a new appraisal be completed
if additional funds are advanced and an appraisal has not been
completed within 2 years, as was previously required by the
regulations.
These exemptions only address the use of real estate appraisals and
are not intended to eliminate the need for a review and update of the
value of the collateral through the use of a collateral valuation. The
FCA's regulation (Sec. 614.4260(c)(5)) would require a new evaluation
for reamortizations of loans if there has been a material increase in
the associated risk in concert with the advancement of new funds. This
position is consistent with the requirements of the Federal regulatory
agencies for transactions where new funds are advanced and there has
been a material increase in the associated risk. However, in addition,
the FCA, based on safety and soundness concerns identified in previous
System practices, has taken the position that any loan servicing action
(including reamortizations, collateral releases, etc.) should be
accompanied, at a minimum, by a collateral valuation that is consistent
with the requirements of these regulations.
E. USPAP ``Departure Provision''
The regulations amend Sec. 614.4265(h) to remove the prohibition on
the use of the USPAP ``Departure Provision.'' The removal of the
restriction will allow institutions to determine the best evaluation
method to support the credit decision consistent with safe and sound
lending practices that also best serves the borrower. The elimination
of this restriction will also provide more flexibility for the
institutions in the use of their appraiser resources by allowing State
licensed and certified appraisers to complete updated appraisals and
collateral valuations that would not otherwise meet the USPAP standards
requirements.
The FCA and the Federal regulatory agencies originally included the
restriction on the use of the ``departure provision'' because they were
concerned that the use of the provision would result in an evaluation
that is less than reliable. However, upon further discussion and
clarification from the Appraisal Foundation,\12\ the Federal regulatory
agencies now recognize that a ``departure provision'' appraisal
provides the basic information and valuation criteria required to
ensure a reliable valuation process.\13\ Therefore, the prohibition on
the use of the ``departure provision'' has been removed.
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\1\2The Appraisal Foundation was established on November 30,
1987, by professional appraisal organizations, as a not-for-profit
corporation under the laws of Illinois, in order to enhance the
quality of professional appraisal practices. The USPAP standards
were developed and published under the direction of the Appraisal
Standards Board of the Foundation. The Foundation also consists of
the Appraisal Qualifications Board, which establishes the education
and qualification standards for appraisers.
\1\3Appraisal Standards Board's (ASB) statement on Appraisal
Standards No. 7, Permitted Departure from Specific Guidelines for
Real Property Appraisals, was adopted by the ASB on March 22, 1994,
and became effective July 1, 1994.
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F. Technical Amendments
The regulations make technical amendments to subpart F pertaining
to issues such as an institution's review requirements for appraisals
completed by other financial institutions or government agencies. The
FCA has eliminated the review procedures from Sec. 614.4255(d), because
it is recognized that other U.S. Government agencies, Government-
Sponsored Enterprises and/or Federally regulated financial institutions
are all guided in their appraisal requirements by USPAP and FIRREA
requirements, which are at least as encompassing as FCA's regulatory
requirements.
In addition, the regulations make technical amendments to part 614,
subpart L, concerning an institution's responsibilities for accepting
an independent appraisal completed in response to a credit denial
action. In addition, the regulations make changes to part 618, subpart
G, concerning an institution's obligation to provide applicants with
copies of collateral evaluations on residential properties as required
by amended provisions of regulations implementing the Equal Credit
Opportunity Act.
Commenters, responding to the FCA's ``Regulatory Burden'' notice,
requested clarification as to the appropriateness of providing time
limits on how long an applicant can delay a credit reconsideration
while waiting for the completion of an independent appraisal. The FCA
believes that this is a valid concern, which should be addressed by a
revision to the regulation to require the completion of the evaluation
within a reasonable timeframe, depending on the nature and complexity
of the appraisal assignment.
The FCA has also noted that the Federal Reserve Board's amendment
of Regulation B, the regulations that implement the ECOA, requires that
System institutions provide copies of collateral evaluation reports,
containing all pertinent information, to unsuccessful applicants for
credit that would have been secured by residential real property.
Therefore, the FCA's current regulations pertaining to the release of
information must be revised to expressly permit the release of
collateral evaluation information when required by the provisions of
the ECOA and related regulations. The ECOA regulations generally
require the institution, in the case of residential properties, to
provide the applicant a copy of the complete evaluation report
including any third-party information if it is used as part of the
institution's evaluation process.
System institutions should note that, in those cases where
disclosure of such collateral evaluations is required by the ECOA,
there is no protection for confidential third-party information.
Therefore, System institutions should avoid the use of such
confidential information where disclosure is likely under the ECOA
(i.e., loans secured by residential properties, including farmland
loans where a dwelling is taken as part of the security). Confidential
third-party information does not include information that would
otherwise be publicly available (e.g., contained in the public land
records).
G. Other Comments
Several commenters have expressed concerns with the level of
requirements and standards for collateral valuations on real estate
and, in particular, the requirements for personal property valuations
and the use of the income approach for evaluations. The commenters
objected to requirements they felt were not consistent with the
requirements imposed by the other regulators on their regulated banking
institutions.
However, the General Accounting Office (GAO) has recently
recommended that the bank and thrift Federal regulatory agencies
establish a set of minimum standards for real estate evaluations where
the use of State-sanctioned appraisers and compliance with USPAP are
not required.14 The FCA, by previously adopting and publishing the
requirements of Sec. 614.4250 of the regulations, has addressed similar
concerns for the System institutions' valuation of real, personal, and
intangible property in general.
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\1\4GAO Report (GAO/GGD-94-144), May 25, 1994, Better Guidance
Is Needed For Real Estate Evaluations.
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In addition, the OCC has recently published proposed revisions to
its lending limit regulations that would require appraisals/evaluations
of collateral used to secure loans where the lender requires collateral
(including personal property) to support lending in excess of the 15-
percent lending limit. This position is also consistent with the
regulatory standards and guidance previously established by the FCA in
the collateral evaluation regulations. The FCA's willingness to adopt a
25-percent lending limit for FCBs and direct lender associations is
supported by the recognition that collateral evaluation requirements
serve as an essential control (58 FR 40311, July 28, 1993).
The FCA has also reviewed concerns previously expressed by the
System, which pertain to the required use of the income approach for
real estate evaluations in excess of the de minimis level (whether an
appraisal is required or not). The FCA has clarified in the regulations
that the income approach is one of the three prescribed methods of
valuing collateral under USPAP. Therefore, whenever USPAP standards are
employed the income approach must be considered. If it is not used as a
valuation method, there must be an explanation of why it was not used,
accompanied by the development of the initial income-producing
information to support its lack of relevance as a valuation method.
In Sec. 614.4265(d) the FCA requires the institution to develop and
document, as part of the supporting information for the credit
analysis, the income-producing capacity of the subject real estate as
well as the operations of the business. This information may or may not
be derived directly from the real estate evaluation process, but is
required as part of the credit analysis to support the debt repayment
analysis. Such information is intended to assist in identifying debt
coverage shortages that must be addressed by other sources of income.
However, the FCA strongly suggests that the income approach be used on
agricultural properties where the loan transaction exceeds the $250,000
de minimis level.
The income analysis requirement contained in the regulation does
not apply to loan transactions at the $250,000 de minimis level and
below. However, prudent business practices may dictate the development
and use of such information in a much wider range of loan transactions.
The institutions have the responsibility to identify those instances
where the credit risk and the associated credit decision would require
the support of the income and debt coverage analysis.
V. Summary
The present revisions of the FCA collateral evaluation requirements
will benefit the System institutions by allowing them to enjoy a
competitive playing field with the commercial banking industry and
relieving some requirements that have been identified as burdensome and
unnecessary. The FCA Board believes that these revisions can be made
without undermining the basic collateral evaluation requirements or
jeopardizing safety and soundness. Therefore, the FCA Board is able to
increase the flexibility of the regulations in order to ensure the
effectiveness and efficiency of the System's collateral evaluation
practices.
List of Subjects
12 CFR Part 614
Agriculture, Banks, banking, Foreign trade, Reporting and
recordkeeping requirements, Rural areas.
12 CFR Part 618
Agriculture, Archives and records, Banks, banking, Insurance,
Reporting and recordkeeping requirements, Rural areas, Technical
assistance.
For reasons stated in the preamble, parts 614 and 618 of chapter
VI, title 12 of the Code of Federal Regulations are 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.
2. Part 614 is amended by revising subpart F to read as follows:
Subpart F--Collateral Evaluation Requirements
Sec.
614.4240 Collateral definitions.
614.4245 Collateral evaluation policies.
614.4250 Collateral evaluation standards.
614.4255 Independence requirements.
614.4260 Evaluation requirements.
614.4265 Real property evaluations.
614.4266 Personal and intangible property evaluations.
614.4267 Professional association membership; competency.
Subpart F--Collateral Evaluation Requirements
Sec. 614.4240 Collateral definitions.
For the purposes of this part, the following definitions shall
apply:
(a) Abundance of caution, when used to describe decisions to
require collateral, means that the collateral is taken in circumstances
in which:
(1) It is not required by statute, regulation, or the institution's
policies; and
(2) A prudent lender would extend credit based on a borrower's
income and/or other collateral, absent the real estate, and the
decision to extend credit was, in fact, based on other sources of
revenue or collateral.
(b) Appraisal means a written statement independently and
impartially prepared by a qualified appraiser setting forth an opinion
as to the market value of an adequately described property as of a
specific date(s), supported by the presentation and analysis of
relevant market information.
(c) Appraisal Foundation means the Appraisal Foundation established
on November 30, 1987, by professional appraisal organizations, as a
not-for-profit corporation under the laws of Illinois, in order to
enhance the quality of professional appraisals.
(d) Appraisal Subcommittee means the Appraisal Subcommittee of the
Federal Financial Institutions Examination Council.
(e) Business loan means a loan or other extension of credit to any
corporation, general or limited partnership, business trust, joint
venture, sole proprietorship, or other business entity (including
entities and individuals engaged in farming enterprises).
(f) Cost approach means the process by which an evaluator
establishes an indicated value by measuring the current market cost to
construct a reproduction of or replacement for the improvements, minus
the amount of depreciation (physical deterioration, or functional and/
or external obsolescence) evident in the structure from all causes,
plus the market value of the land.
(g) Evaluation means a study of the nature, quality, or utility of,
interest in, or aspects of, an asset. An evaluation may take the form
of a valuation or an appraisal.
(h) Fee appraiser means a qualified evaluator who is not an
employee of the party contracting for the completion of the evaluation
and who performs an evaluation on a fee basis. For purposes of this
subpart, a fee appraiser may include a staff evaluator from another
Farm Credit System institution only if the employing institution is not
operating under joint management with the contracting institution. In
addition, for purposes of personal and intangible collateral
evaluations, the term ``fee appraiser'' includes, but is not limited
to, certified public accountants, equipment dealers, grain buyers,
livestock buyers, and auctioneers.
(i) FIRREA means the Financial Institutions Recovery, Reform, and
Enforcement Act of 1989.
(j) Highest and best use means the reasonable and most probable use
of the property that would result in the highest market value of vacant
land or improved property, as of the date of valuation; or that use,
from among reasonably probable and legally alternative uses, found to
be physically possible, appropriately supported, financially feasible,
and which results in the highest land value.
(k) Income capitalization approach means the procedure that values
property by measuring the present value of the expected future benefits
of property ownership. This value is derived from either:
(1) Capitalizing a single year's income expectancy or an annual
average of several years' income expectancies at a market-derived
capitalization rate that reflects a specific income pattern, return on
investment, and change in the value of the investment; or
(2) Discounting the annual cashflows for the holding period and the
reversion at a specified yield rate or specified yield rates which
reflect market behavior.
(l) Market value means the most probable price that a property
should bring in a competitive and open market under all conditions
requisite to a fair sale, the buyer and seller each acting prudently,
knowledgeably, and assuming neither is under duress. Implicit in this
definition is the consummation of a sale as of a specified date and the
passing of title from seller to buyer under conditions whereby:
(1) Buyer and seller are typically motivated;
(2) Both parties are well informed or well advised, and acting in
what they consider their best interests;
(3) A reasonable time is allowed for exposure in the open market;
(4) Payment is made in terms of cash in United States dollars or in
terms of financial arrangements comparable thereto; and
(5) The price represents the normal consideration for the property
sold unaffected by special or creative financing or sales concessions
granted by anyone associated with the sale.
(m) Personal property, for purposes of this subpart, means all
tangible and movable property not considered real property or fixtures.
(n) Qualified evaluator means an individual who is competent,
reputable, impartial, and has demonstrated sufficient training and
experience to properly evaluate property of the type that is the
subject of the evaluation. For the purposes of this definition, the
term ``qualified evaluator'' includes an appraiser or valuator.
(o) Real estate means an identified parcel or tract of land,
including improvements, if any.
(p) Real estate-related financial transactions means any
transaction involving:
(1) The sale, lease, purchase, investment in, or exchange of real
property, including interests in property or the financing thereof; or
(2) The refinancing of real property or interests in real property;
or
(3) The use of real property or interests in real property as
security for a loan or investment, including mortgage-backed
securities.
(q) Real property means all interests, benefits, and rights
inherent in the ownership of real estate.
(r) Sales comparison approach means the procedure that values
property by comparing the subject property to similar properties
located in relatively close proximity, having similar size and utility,
and having been recently sold in arm's-length transactions (comparable
sales). The sales comparison approach requires the evaluator to
estimate the degree of similarity and difference between the subject
property and comparable sales. Such comparison shall be made on the
basis of conditions of sale, financing terms, market conditions,
location, physical characteristics, and income characteristics.
Appropriate adjustments shall be made to the sales price of the
comparable property based on the identified deficiencies or
superiorities of the subject property to arrive at a probable price for
which the subject property could be sold on the date of the collateral
evaluation.
(s) State certified appraiser means any individual who has
satisfied the requirements for and has been certified as a real estate
appraiser by a State or territory whose requirements for certification
currently meet or exceed the minimum criteria for certification issued
by the Appraiser Qualification Board of the Appraisal Foundation. No
individual shall be a State certified appraiser unless such individual
has achieved a passing grade on a suitable examination administered by
a State or territory that is consistent with and equivalent to the
Uniform State Certification Examination issued or endorsed by the
Appraiser Qualification Board of the Appraisal Foundation. In addition,
the Appraisal Subcommittee must not have issued a finding that the
policies, practices, or procedures of the State or territory are
inconsistent with title XI of FIRREA.
(t) State licensed appraiser means any individual who has satisfied
the requirements for licensing and has been licensed as a real estate
appraiser by a State or territory in which the licensing procedures
comply with title XI of FIRREA and in which the Appraisal Subcommittee
has not issued a finding that the policies, practices, or procedures of
the State or territory are inconsistent with title XI of FIRREA.
(u) Transaction value means:
(1) For loans or other extensions of credit, the amount of the
loan, loan commitment, or other extensions of credit;
(2) For sales, leases, purchases, investments in, or exchanges of
real property, the market value of the property interest involved; and
(3) For the pools of loans or interests in real property, the
transaction value of the individual loans or the market value of the
real property interests comprising the pool.
(v) USPAP means the Uniform Standards of Professional Appraisal
Practice adopted by the Appraisal Foundation.
(w) Valuation means the process of estimating a defined value of an
identified interest or interests in a specific asset or assets as of a
given date. A valuation results from the completion of a collateral
evaluation that does not require an appraisal.
Sec. 614.4245 Collateral evaluation policies.
(a) The board of directors of each Farm Credit System institution
that engages in lending or leasing secured by collateral shall adopt
well-defined and effective collateral evaluation policies and
standards, that comply with the regulations in this subpart, to ensure
that collateral evaluations are:
(1) Sufficiently descriptive and detailed to provide ample support
to the institution's related credit decisions;
(2) Performed based on criteria established for the purpose of
determining the circumstances under which collateral evaluations will
be required and when they will be required. Such criteria must, at a
minimum:
(i) Establish when an institution will require a collateral
appraisal completed under the USPAP rather than a collateral valuation;
and
(ii) Take into account such factors as market trends, market
volatility, and various types of credit, loan servicing, collection,
and liquidation actions; and
(3) Completed by a qualified evaluator in an unbiased manner.
(b) The policies and standards required by this section shall, at a
minimum, address the criteria outlined in Secs. 614.4250 through
614.4267 of this subpart.
(c) A Federal land bank association shall, with the approval of its
respective Farm Credit bank, adopt collateral evaluation policies that
are consistent with the bank's policies and standards.
Sec. 614.4250 Collateral evaluation standards.
(a) When real, personal, or intangible property is taken as
security for a loan or is the subject of a lease, an evaluation of such
property shall be performed in accordance with Sec. 614.4260 and the
institutions' policies and procedures. Such a collateral evaluation
shall be identified as either a collateral valuation or a collateral
appraisal. Specifically, all collateral evaluations must:
(1) Value the subject property based upon market value as defined
in Sec. 614.4240(l);
(2) Be presented in a written format;
(3) Consider the purpose for which the property will be used and
the property's highest and best use, if different from the intended
use;
(4) Be sufficiently descriptive to enable the reader to ascertain
the reasonableness of the estimated market value and the rationale for
the estimate;
(5) Provide sufficient detail (including an identification and
description of the property) and depth of analysis to reflect the
relevant characteristics and complexity of the subject property;
(6) Analyze and report, as appropriate, for real, intangible, and/
or personal property, on:
(i) The current income producing capacity of the property;
(ii) A reasonable marketing period for the property;
(iii) The current market conditions and trends that will affect
projected income, to the extent such conditions will affect the value
of the property;
(iv) The appropriate deductions and discounts as they would apply
to the property, including but not limited to, those based on the
condition of the property, as well as the specialization of the
operation and property; and
(v) Potential liabilities, including those associated with any
hazardous waste or other environmental concerns; and
(7) Include in the evaluation report a certification that the
evaluation was not based on a requested minimum valuation or specific
valuation or approval of a loan.
(b) For purposes of determining appraisal value as required in
section 1.10(a) of the Act, the definition of market value and the
requirements of this subpart shall apply.
Sec. 614.4255 Independence requirements.
(a) Prohibitions. For all personal and intangible property, and for
all real property exempted under Sec. 614.4260(c) of this subpart, no
person may:
(1) Perform evaluations in connection with transactions in which
such person has a direct or indirect interest, financial or otherwise,
in the loan or subject property;
(2) As a director, vote on or approve a loan decision on which such
person performed a collateral evaluation; or
(3) As a director, perform a collateral evaluation in connection
with any transaction on which such person made or will be required to
make a credit decision.
(b) Officers and employees. If the institution's internal control
procedures required by Sec. 618.8430 of this chapter include
requirements for either a prior approval or post-review of credit
decisions, officers and employees may:
(1) Participate in a vote or approval involving assets on which
they performed a collateral evaluation; or
(2) Perform a collateral evaluation in connection with a
transaction on which they have made or will be required to make a
credit decision.
(c) Real estate appraiser. Except as provided in Sec. 614.4260(c)
of this subpart, all evaluations of real property that serve as the
primary security for a loan shall be performed by a qualified real
estate appraiser who has no direct or indirect interest, financial or
otherwise, in the loan or subject property and is not engaged in the
marketing, lending, collection, or credit decision processes of any of
the following:
(1) A Farm Credit System institution making or originating the
loan;
(2) A Farm Credit System institution operating under common
management with the institution making or originating the loan; or
(3) A Farm Credit System institution purchasing an interest in the
loan.
(d) Fee appraisers. Fee appraisers shall be engaged directly by the
Farm Credit System institution or its agent, and shall have no direct
or indirect interest, financial or otherwise, in the property or
transaction. A Farm Credit System institution may accept a real estate
appraisal that was prepared by an appraiser engaged directly by another
Farm Credit System institution, by a United States Government agency, a
Government-Sponsored Enterprise or by a financial institution subject
to title XI of FIRREA.
(e) Loan purchases. No employee who, acting as a State licensed or
State certified appraiser, performed a real estate appraisal on any
collateral supporting a loan shall subsequently participate in any
decision related to the loan purchase.
Sec. 614.4260 Evaluation requirements.
(a) Valuation. Valuations of personal and intangible property, as
well as real property exempted under paragraph (c) of this section,
shall be performed by qualified individuals who meet the established
standards of this subpart and the Farm Credit System institution
obtaining the collateral valuation.
(b) Appraisal.
(1) Appraisals for real estate-related financial transactions with
transaction values of more than $250,000 shall be performed by a
qualified appraiser who is a State licensed or a State certified real
estate appraiser.
(2) Appraisals for real estate-related financial transactions with
transaction values of more than $1,000,000 shall be performed by a
qualified appraiser who is a State certified real estate appraiser.
(c) Appraisals not required. An appraisal performed by a State
certified or State licensed appraiser is not required for any real
estate-related financial transaction in which any of the following
conditions are met:
(1) The transaction value is $250,000 or less;
(2) The transaction is a ``business loan'' as defined in
Sec. 614.4240(e) that:
(i) Has a transaction value of $1,000,000 or less; and
(ii) Is not dependent on income derived from the sale or cash
rental of real estate as the primary source of repayment;
(3) A lien on real property has been taken as collateral in an
abundance of caution, and the application, when evaluated on the five
basic credit factors, without considering the subject real estate,
would support the credit decision that was based on other sources of
repayment or collateral;
(4) A lien on real estate is not statutorily required and has been
taken for purposes other than the real estate's value;
(5) Subsequent loan transactions involving an existing extension of
credit, provided that either:
(i) The transaction does not involve the advancement of new loan
funds other than funds necessary to cover reasonable closing costs; or
(ii) There has been no obvious and material change in market
conditions or physical aspects of the property that threatens the
adequacy of the Farm Credit System institution's real estate collateral
protection, even with the advancement of new loan funds;
(6) A Farm Credit System institution purchases a loan or an
interest in a loan, pool of loans, or interests in real property,
including mortgage-backed securities, provided that:
(i) The appraisal prepared for each loan, pooled loan, or real
property interest, when originated, met the standards of this subpart,
other Federal regulations adopted pursuant to FIRREA, or the
requirements of the government-sponsored secondary market
intermediaries under whose auspices the interest is sold; and
(ii) There has been no obvious and material change in market
conditions or physical aspects of the property that would threaten the
Farm Credit System institution's collateral position, or
(7) A Farm Credit System institution makes or purchases a loan
secured by real estate, which loan is guaranteed by an agency of the
United States Government and is supported by an appraisal that conforms
to the requirements of the guaranteeing agency.
To qualify for exceptions in paragraphs (c)(1) through (c)(7) of
this section from the requirements of this subpart, the institution
must have documentation justifying the use of such exceptions in the
applicable loan file(s). In addition, the institution must document
that the repayment of a ``business loan'' is not dependent on income
derived from the sale or cash rental of real estate.
(d) FCA-required appraisals. The FCA reserves the right to require
an appraisal under this subpart whenever it believes it is necessary to
address safety and soundness issues.
(e) Reciprocity. The requirements of this subpart are satisfied by
the use of State certified or State licensed appraisers from any State
provided that:
(1) The appraiser is qualified to perform such appraisals;
(2) The applicable Farm Credit System institution has established
policies providing for such interstate appraisals; and
(3) The applicable State appraiser licensing and certification
agency recognizes the certification or license of the appraiser's State
of permanent certification or licensure.
Sec. 614.4265 Real property evaluations.
(a) Real estate shall be valued on the basis of market value.
(b) Market value shall be determined by a reasonable valuation
method that:
(1) Considers the income capitalization approach, the sales
comparison approach, and/or the cost approach, as appropriate, to
determine market value;
(2) Explains and documents the elimination of any approach not
used.
(3) Reconciles the market values of the applicable approaches; and
(c) Where real estate appraisals or real estate collateral
valuations for business loans in excess of $250,000 that would not
otherwise be exempted under Sec. 614.4260(c) are required, such
evaluations shall be completed in accordance with the USPAP and shall
include a legal description of the subject property.
(d) At a minimum, the institution shall develop and document the
evaluation of the income and debt servicing capacity for the property
and operation where the transaction value exceeds $250,000 and the real
estate taken as collateral:
(1) Is an integral part of and supports the principal source of
loan repayment; or
(2) Is not an integral part of and does not support the principal
source of loan repayment, but has demonstrable rental market appeal, is
statutorily required, and fully or partially constitutes an integral
part of an agricultural or aquatic operation.
(e) The income-earning and debt-servicing capacity established
under paragraph (d) of this section on such properties shall be
documented as part of the credit analysis for any related loan action,
whether or not the income capitalization approach value is used as the
basis for the market value conclusion stated in the evaluation report.
(f) Collateral closely aligned with, an integral part of, and
normally sold with real estate (fixtures) may be included in the value
of the real estate. All other collateral associated with the real
estate, but designated as personal property, shall be evaluated as
personal property in accordance with Secs. 614.4250 and 614.4266.
(g) The evaluation shall properly identify all nonagricultural
influences, including, but not limited to, urban development, mineral
deposits, and commercial building development value, and the reasoning
supporting the evaluator's highest and best-use conclusion.
(h) Where an evaluation of real property is completed by a fee
appraiser, as defined in Sec. 614.4240(g), the institution's standards
shall include provisions for periodic collateral inspections performed
by the institution's account officer or appropriate designee.
Sec. 614.4266 Personal and intangible property evaluations.
(a) Personal property and intangibles shall be valued on the basis
of market value in accordance with the institution's evaluation
standards and policies.
(b) Personal property evaluations shall include a source of
comparisons of value (i.e., equipment dealer listings, Blue Book,
market sales reports, etc.) and a description of the property being
evaluated, including location of the property and, where applicable,
quantity, species/variety, measure/weight, value per unit and in total,
type of identification (such as brand, bill of lading, or warehouse
receipt), quality, condition, and date.
(c) Evaluations of intangibles shall include a review and
description of the documents supporting the property interests and the
marketability of the intangible property, including applicable terms,
conditions, and restrictions contained in the document that would
affect the value of the property.
(d) Where an evaluation of personal or intangible property is
completed by a fee appraiser, as defined in Sec. 614.4240(g), the
institution's standards shall include provisions for periodic
collateral inspections and verification by the institution's account
officer or appropriate designee.
When a Farm Credit System institution deems an appraisal necessary,
personal or intangible property shall be appraised in accordance with
procedures and standards established by the institution by individuals
deemed qualified by the institution to complete the work under the
USPAP Competency and Ethics Provisions.
Sec. 614.4267 Professional association membership; competency.
(a) Membership in appraisal organizations. A State certified
appraiser or a State licensed appraiser may not be excluded from
consideration for an assignment for a real estate-related transaction
solely by virtue of membership or lack of membership in any particular
appraisal organization.
(b) Competency. All staff and fee evaluators, including appraisers,
performing evaluations in connection with real, personal, or intangible
property taken as collateral in connection with extensions of credit
must meet the qualification requirements of this subpart. However, an
evaluator (as defined in Sec. 614.4240(n)) may not be considered
competent solely by virtue of being certified, licensed, or accredited.
Any determination of competency shall be based on the individual's
experience and educational background as they relate to the particular
evaluation assignment for which such individual is being considered.
Subpart L--Actions on Applications; Review of Credit Decisions
3. Section 614.4443 is amended by revising paragraph (c) to read as
follows:
Sec. 614.4443 Review process.
* * * * *
(c) Independent collateral evaluations.
(1) An applicant for a loan that has been denied may, as part of
the request for a review, request an independent collateral evaluation
by an independent evaluator, as defined in Sec. 614.4440 of this
subpart, of any interests in property securing the loan (other than the
stock or participation certificates of the lender held by the
borrower).
(2) Within 30 days after a request for a collateral evaluation, the
credit review committee shall present the applicant or borrower with a
list of three independent evaluators approved by the qualified lender.
The borrower shall select and engage the services of an evaluator from
the list to perform the collateral evaluation. The collateral
evaluation must be completed within a reasonable period of time. The
cost of the evaluation shall be borne by the applicant or borrower.
(3) The credit review committee shall consider the results of any
such collateral evaluation in any final determination with respect to
the loan or restructuring, provided the applicant's or borrower's
evaluator has provided a copy of the evaluation report to the lender
not less than 15 business days prior to any scheduled meeting of the
credit review committee.
(4) Any such collateral evaluations that are not completed in
conformance with the collateral evaluation requirements described in
subpart F of this part, relative to collateral evaluation standards,
independence requirements, and qualification requirements, need not be
considered by the credit review committee. To facilitate the proper
completion of such collateral evaluations, a copy of part 614, subpart
F, shall be provided to the borrower for presentation to the borrower's
evaluator, and a copy signed by the borrower's evaluator shall be a
required exhibit in the subsequent evaluation report.
* * * * *
PART 618--GENERAL PROVISIONS
4. The authority citation for part 618 continues to read as
follows:
Authority: Secs. 1.5, 1.11, 1.12, 2.2, 2.4, 2.5, 2.12, 3.1, 3.7,
4.12, 4.13A, 4.25, 4.29, 5.9, 5.10, 5.17 of the Farm Credit Act (12
U.S.C. 2013, 2019, 2020, 2073, 2075, 2076, 2093, 2122, 2128, 2200,
2211, 2218, 2243, 2244, 2252).
Subpart G--Releasing Information
5. Section 618.8320 is amended by adding a new paragraph (b)(11) to
read as follows:
Sec. 618.8320 Data regarding borrowers and loan applicants.
* * * * *
(b) * * *
(11) Collateral evaluation reports may be released to a loan
applicant, when required by the Equal Credit Opportunity Act or related
regulations.
* * * * *
Sec. 618.8325 [Amended]
6. Section 618.8325 is amended by removing the words ``appraisal''
and ``an appraisal'' and adding in their place the words ``collateral
evaluation'' and ``a collateral evaluation'' consecutively in the
second and third sentences in paragraph (b).
Dated: September 1, 1994.
Curtis M. Anderson,
Secretary, Farm Credit Administration Board.
[FR Doc. 94-22220 Filed 9-9-94; 8:45 am]
BILLING CODE 6705-01-P
