[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.
---------------------------------------------------------------------------

    \1\4GAO Report (GAO/GGD-94-144), May 25, 1994, Better Guidance 
Is Needed For Real Estate Evaluations.
---------------------------------------------------------------------------

    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