[Federal Register Volume 59, Number 18 (Thursday, January 27, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-1763]
[[Page Unknown]]
[Federal Register: January 27, 1994]
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FARM CREDIT ADMINISTRATION
12 CFR Part 615
RIN 3052-AB45
Funding and Fiscal Affairs, Loan Policies and Operations, and
Funding Operations
AGENCY: Farm Credit Administration.
ACTION: Final rule.
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SUMMARY: The Farm Credit Administration (FCA), by the Farm Credit
Administration Board (Board), adopts a final rule amending its
regulations to allow Farm Credit System (FCS) institutions to document
the existence of a first lien on the security for long-term real estate
mortgage loans by obtaining title insurance or an attorney's
certification. The current regulation requires that an attorney's
certification be obtained for every long-term mortgage loan in order
for that loan to qualify as collateral for FCS debt obligations. The
regulation is being amended because title insurance has become the
prevailing method used by the mortgage lending industry to ensure clear
title. Additionally, the revised regulation permits FCS institutions
greater flexibility in determining which method for validating first
lien position (an attorney's certification or title insurance) provides
the institution the most cost-effective and efficient protection.
EFFECTIVE DATE: The regulation shall become effective upon expiration
of 30 days after publication in the Federal Register during which
either or both Houses of Congress are in session. Notice of effective
date will be published in the Federal Register.
FOR FURTHER INFORMATION CONTACT:
Laurie A. Rea, Policy Analyst, Regulation Development, Office of
Examination, Farm Credit Administration, McLean, Virginia 22102-5090,
(703) 883-4498, TDD (703) 883-4444, or
James M. Morris, Senior Attorney, Regulatory Operations Division,
Office of General Counsel, Farm Credit Administration, McLean, Virginia
22102-5090, (703) 883-4020, TDD (703) 883-4444.
SUPPLEMENTARY INFORMATION:
I. Background
Section 1.10(a)(2) of the Farm Credit Act of 1971, as amended
(Act), requires that long-term mortgage loans made by Farm Credit Banks
(FCBs) under section 1.7 of the Act, or by associations under sections
1.7 and 7.6 of the Act, ``be secured by first liens on interests in
real estate of such classes as may be prescribed by regulations of the
Farm Credit Administration.'' At present, Sec. 615.5060 requires that
an attorney's certification be obtained for long-term mortgage loans if
such loans are to qualify as collateral for FCS debt obligations.
However, title insurance is the prevailing method for ensuring clear
title in the mortgage lending industry and is becoming more commonplace
in FCS lending. Title insurance can provide a lender with protection
that is comparable to an attorney's certification and in some instances
may be more timely and less expensive to obtain. Under the present
Sec. 615.5060, even if FCS lenders obtain title insurance they must
also obtain an attorney's certification, thus incurring unnecessary
expense without providing any substantial additional protection. FCA
reconsidered this requirement, and published a proposed rule on October
12, 1993 (58 FR 52701) to amend the regulation to permit institutions
to obtain title insurance instead of an attorney's certificate to
document the existence of a first lien, provided that the title
insurance policy meets certain standards.
The FCA recognizes that practices within the mortgage lending
industry continually change and is amending Sec. 615.5060 to give FCS
institutions additional flexibility while maintaining protection for
them as well as for FCS investors and borrower-stockholders. The
revised regulation allows FCS institutions to determine which method
for validating first lien position (an attorney's certification or
title insurance) provides them the best protection for the amount
expended.
II. Synopsis of Comments
The comment period for the proposed amendments to Sec. 615.5060
closed November 12, 1993. FCA received four comment letters during the
public comment period from: The Farm Credit Council (FCC), a Farm
Credit Bank (FCB), an agricultural credit association (ACA), and a
Texas law firm. In addition, an FCB and a Federal land credit
association (FLCA) commented on this regulation as part of their
responses to the FCA Board's Statement on Regulatory Burden, which
appeared in the Federal Register on June 23, 1993 (58 FR 34003),
seeking public comment on the appropriateness of regulatory
requirements imposed on the FCS.
All commenters strongly supported the amendments to the proposed
regulation. In general, commenters believe that the revision would
provide additional flexibility and allow FCS institutions to evaluate
present practices and determine the best course of action. Further,
commenters indicated that since many FCS institutions already require
title insurance on real estate loans the proposed regulation would
greatly simplify the closing process and reduce costs. One commenter
stated that the FCA's existing requirement for long-term real estate
loans is both antiquated and unduly burdensome, and it therefore fully
endorsed the intent of FCA's proposed regulations.
In addition to general comments, the FCC and the ACA offered
technical suggestions that they believe would improve or clarify the
regulation. Commenters were concerned that the words ``at loan
closing'' in proposed Sec. 615.5060(a)(2) created some ambiguity
because it is often not possible to obtain a title insurance policy at
the time of loan closing. One commenter stated that a loan is closed
based on a title commitment and a final title insurance policy is not
issued until after loan closing when there is satisfaction of the
requirements set out in the commitment. Another commenter stated that
it is a common practice to obtain the actual title policy at a later
date, with the policy being issued ``as of'' the date the lien
documents are recorded. Commenters asserted that FCS institutions would
be unable to take advantage of the additional flexibility and cost
savings the proposed regulation is intended to provide if the
institutions were required to obtain a final title insurance policy at
loan closing. FCA modified proposed Sec. 615.5060(a)(2) by deleting the
requirement that the policy be obtained ``at loan closing'' but notes
that the Act authorizes an FCB to make a long-term mortgage loan only
if that loan is secured by a first lien on real estate.
The FCC and the ACA also commented that, as currently written,
proposed Sec. 615.5060(a)(2)(ii) might be construed to mean that
counsel must approve not only the standard form to be used, but also
the way in which the form is completed in each particular case.
Paragraph (a)(2)(ii) requires only that the final title policy be
issued on a standard title insurance policy form that the counsel for
the lending institution has approved. The language in paragraph
(a)(2)(ii) was revised to make this clearer. Further, the FCC and the
ACA suggested that, because many ACAs and FLCAs do not have their own
in-house counsel, the regulation should be modified to allow counsel
for either the association or the ``supervising'' bank to approve the
standard form. The phrase ``counsel for the lending institution'' in
Sec. 615.5060 (a)(2)(ii) and (a)(2)(iv) is not meant to require that an
association have in-house counsel. An association may, if it wishes,
rely on counsel for the affiliated bank or the association's retained
counsel if counsel agrees to act for the association in approving the
form of the title insurance policy and prescribing these standards.
Proposed Sec. 615.5060(a)(2)(iii) requires that the title insurance
policy be issued ``for an amount equal to the balance outstanding on
the real estate mortgage loan.'' Commenters stated that multiple tracts
of real estate are frequently offered as security for a loan and in
some situations separate title insurance policies for various tracts
are obtained from different insurers. The FCC further stated that title
insurance companies often require that the insured amount be allocated
among the various policies, and often refuse to issue a policy in an
amount in excess of the value of the particular tract they are
insuring. The FCC further stated that the amount of the title insurance
that should be required should be directly related to the value of the
lender's interest in the property that is being insured. Therefore, the
FCC suggested that Sec. 615.5060(a)(2)(iii) be revised to require that
the final policy be issued for an amount equal to the balance
outstanding on the real estate mortgage loan ``or such lesser amount as
is sufficient to protect the interest of the lending institution in the
insured property.'' The FCC believes that such language would enable
the lending institution to determine whether the title policy should be
issued for the full amount of the loan or, when multiple tracts are
taken as security, for the market or appraised value of the property
being insured, whether that value is greater than or less than the
amount of the loan.
The FCA Board conceptually agrees with the commenters that the
title insurance should be issued for an amount that is sufficient to
protect the interest of the lending institution. However, the FCA Board
believes that the amount of title insurance necessary to protect the
lender on a long-term real estate mortgage loan is no less than the
outstanding loan balance. The Act and FCA regulations limit long-term
real estate loans to a percentage of the appraised value of the real
estate security. FCA's regulation does not require that an institution
obtain title insurance for an amount that is in excess of the value of
the real estate security, but rather requires coverage in an amount at
least equal to the outstanding loan balance, an amount less than the
value of the real estate security. In the case of multiple tracts, if a
separate policy is issued for a tract, the minimum amount insured by
that policy shall bear the same ratio to the outstanding balance that
the appraised value of the tract bears to the appraised value of all
the real estate security. Accordingly, the final rule requires that if
only title insurance is used to document the existence of a first lien,
the final title policy or policies must be issued for an amount at
least equal to the outstanding loan balance.
Commenters also indicated that in loans with multiple tracts, title
to some tracts may be evidenced by abstracts while other tracts are
covered by title insurance. This comment indirectly raises the issue of
whether the regulation permits the lender to decide, for each tract,
whether to use an attorney lien certification or title insurance to
document the existence of a first lien when more than one tract is
involved in a single first mortgage loan. The regulation should not be
read to preclude the use of different methods of lien documentation for
different tracts. In the case of multiple tracts, if title insurance is
relied upon for some tracts and attorney certifications are used for
others, the minimum amount insured by a policy for a particular tract
shall bear the same ratio to the outstanding balance that the appraised
value of the tract bears to the appraised value of all the real estate
security. For example, suppose a loan for $80,000 is secured by two
properties with appraised values of $70,000 and $30,000. Insurance
policies for the properties should be obtained in amounts of at least
$56,000 and $24,000, respectively. If an attorney lien certification is
used for the first property, then title insurance for the second
property need only be obtained for $24,000--not the $80,000 loan
amount.
Proposed paragraph (a)(2)(iv) requires that personnel with adequate
training and experience in real estate title matters, designated by
counsel, certify in writing that they reviewed the final policy and
that the final policy insures a first lien or its equivalent on the
primary real estate security for the loan. Commenters believe that it
should suffice that a person performing this function meet certain
standards of training and experience that are prescribed by the counsel
for the lender, but that there should be no specific requirement that
counsel actually designate the individual who performs this function.
The FCA agrees with the commenters' observations and has modified
paragraph (a)(2)(iv) to require that a person performing this function
meet written standards for training and experience prescribed by the
counsel for the lender, and to eliminate any implication that counsel
actually has to designate the individual who performs this function.
Finally, the first sentence of Sec. 615.5060(a) is revised to make
it less awkward. The meaning of the sentence is not changed.
List of Subjects in 12 CFR Part 615
Accounting, Agriculture, Banks, Banking, Government securities,
Investments, Rural areas.
For the reasons stated in the preamble, part 615 of chapter VI,
title 12 of the Code of Federal Regulations is amended to read as
follows:
PART 615--FUNDING AND FISCAL AFFAIRS, LOAN POLICIES AND OPERATIONS,
AND FUNDING OPERATIONS
1. The authority citation for part 615 continues to read as
follows:
Authority: Secs. 1.5, 1.7, 1.10, 1.11, 1.12, 2.2, 2.3, 2.4, 2.5,
2.12, 3.1, 3.7, 3.11, 3.25, 4.3, 4.9, 4.14B, 4.25, 5.9, 5.17, 6.20,
6.26, 8.0, 8.4, 8.6, 8.7, 8.8, 8.10, 8.12 of the Farm Credit Act; 12
U.S.C. 2013, 2015, 2018, 2019, 2020, 2073, 2074, 2075, 2076, 2093,
2122, 2128, 2132, 2146, 2154, 2160, 2202b, 2211, 2243, 2252, 2278b,
2278b-6, 2279aa, 2279aa-4, 2279aa-6, 2279aa-7, 2279aa-8, 2279aa-10,
2279aa-12; sec. 301(a) of Pub. L. 100-233, 101 Stat. 1568, 1608.
Subpart B--Collateral
2. Section 615.5060 is amended by revising paragraph (a) to read as
follows:
Sec. 615.5060 Special collateral requirements.
(a) An attorney lien certification need not be obtained at the time
a note is accepted as collateral if the counsel for the bank or
association has determined, in writing, that the bank or association
procedures provide sufficient safeguards to ensure that a real estate
mortgage loan, within the meaning of section 1.7(a) of the Act, made by
the bank or association will be secured by a first lien or its
equivalent on the borrower's interest in the primary real estate
security. However, the note shall be withdrawn from collateral upon the
expiration of 1 year from the date of the loan closing, unless, before
the end of such period:
(1) An attorney has certified that the bank or association has a
first lien or its equivalent from a security standpoint in the primary
real estate security for the loan; or
(2) The bank or association has obtained a title insurance policy
insuring that it has a first lien or its equivalent from a security
standpoint in the primary real estate security for the loan, and all of
the following requirements are satisfied:
(i) The final policy was issued by a title insurance company that
has been licensed to issue such policies by the appropriate state
insurance regulatory body or bodies, has not been barred or suspended,
and has been approved by the lending institution;
(ii) The standard form on which the final policy was issued has
been approved by the counsel for the lending institution;
(iii) The final policy was issued for an amount at least equal to
the balance outstanding on the real estate mortgage loan or, if
separate policies are issued to insure separate tracts, the minimum
amount insured by each policy shall bear the same ratio to the
outstanding balance of the loan that the appraised value of the tract
insured by that policy bears to the appraised value of all the real
estate security for the loan; and
(iv) Personnel meeting written standards of training and experience
in real estate title matters prescribed by the counsel for the lending
institution certified in writing that:
(A) They reviewed the final policy and that the policy complies
with standards prescribed by such counsel; and
(B) The final policy insures that a first lien or its equivalent
from a security standpoint has been obtained on the primary real estate
security for the loan.
* * * * *
Dated: January 13, 1994.
Curtis M. Anderson,
Secretary, Farm Credit Administration Board.
[FR Doc. 94-1763 Filed 1-26-94; 8:45 am]
BILLING CODE 6705-01-P