[Federal Register Volume 60, Number 7 (Wednesday, January 11, 1995)]
[Rules and Regulations]
[Pages 2683-2687]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-678]


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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: Notice of effective date; technical amendment.

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SUMMARY: The Farm Credit Administration (FCA) published an interim rule 
with request for comments on September 12, 1994 (59 FR 46725), amending 
12 CFR parts 614 and 618 to change collateral evaluation requirements 
for Farm Credit System (FCS or System) institutions. The rule also made 
conforming changes related to Board of Governors of the Federal Reserve 
(FRB) regulations interpreting the Equal Credit Opportunity Act (ECOA). 
In accordance with 12 U.S.C. 2252, the effective date of the rule is 30 
days from the date of publication in the Federal Register during which 
either or both Houses of Congress are in session. Based on the records 
of the sessions of Congress, the effective date of the regulations is 
January 4, 1995.

DATES: The regulations amending 12 CFR parts 614 and 618, published on 
September 12, 1994 (59 FR 46725) are effective January 4, 1995.

FOR FURTHER INFORMATION CONTACT:

Dennis K. Carpenter, Senior Policy Analyst, Office of Examination, Farm 
Credit Administration, McLean, VA 22102-5090, (703) 883-4498, TDD (703) 
883-4444, or
James M. Morris, Senior Attorney, Office of General Counsel, Farm 
Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TDD (703) 
883-4444.

SUPPLEMENTARY INFORMATION:

I. General

    The amendments to 12 CFR parts 614 and 618, as published (59 FR 
46725), address issues raised by recent regulatory revisions by the 
other Federal financial institutions' regulatory agencies (Federal 
regulatory agencies),\1\ comments received in response to the FCA's 
published request for ``regulatory burden'' comments (58 FR 34003, June 
23, 1993), and amendments made to

[[Page 2684]]

FRB regulations interpreting the Equal Credit Opportunity Act.\2\
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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 (Regulation B) on 
December 16, 1993 (58 FR 65657) implementing the Equal Credit 
Opportunity Act, 15 U.S.C. 1691-1691f, as amended by the FDIC 
Improvement Act of 1991, Pub. L. 102-242, 105 Stat. 2236.
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    The FCA Board received six comment letters in response to its 
request for comments on the interim rule. Comments were received from 
the Farm Credit Council (FCC), two Farm Credit Banks (FCBs), one 
agricultural credit association (ACA), the American Society of Farm 
Managers and Rural Appraisers, Inc. (ASFMRA), and the American Society 
of Appraisers (ASA).
    Based upon a review of the comments received, the FCA has made a 
technical revision to Sec. 614.4260(c)(5) to clarify what constitutes a 
``subsequent loan transaction.'' However, the FCA does not find it 
necessary to further amend the regulations as published on September 
12, 1994 (59 FR 46725). The FCA does believe the comments raise some 
issues needing clarification, and discusses those issues in the 
following section-by-section analysis.

II. Section-by-Section Analysis

A. Section 614.4245--Collateral Evaluation Policies

    An FCB commented that it would be appropriate to amend 
Sec. 614.4245 to provide that the collateral evaluation policy adopted 
by an institution's board shall identify when a collateral evaluation 
will be required for a loan servicing transaction, but at a minimum 
require a collateral evaluation when a loan servicing transaction 
either involves the advancing of new funds, or would alter or affect 
the institution's collateral position.
    The FCA's position is that, at a minimum, a collateral valuation 
will be completed on all ``subsequent loan transactions,'' (as 
specified in Sec. 614.4260(c)(5), which include but are not limited to 
servicing actions, reamortizations, modifications of loan terms, 
partial releases, etc.). Depending upon the circumstances and nature of 
the subsequent loan transaction and its impact upon the adequacy of the 
collateral, such collateral valuations may take the form of an updated 
report referencing previous evaluations or a more detailed evaluation. 
The explanatory language of the interim regulation indicated that a new 
real estate appraisal will be completed when there has been an 
advancement of new funds (including capitalizing interest) and there 
has been a material increase in the credit risk. If there are no new 
funds advanced (other than reasonable closing costs) or, even if new 
funds have been advanced but there has been no material increase in the 
risk then a valuation may be sufficient, depending upon the 
institution's policies and procedures and the individual circumstances. 
The form and content of the valuation may range from an update, 
referencing previous evaluations and any changes, to a more detailed 
``limited'' or ``complete'' evaluation (as defined by USPAP).

B. Section 614.4255--Independence Requirements

    The FCC requested clarification that the internal control 
procedures may provide for post-review of credit decisions on a 
sampling basis. The ACA commented that the wording in this section 
implies that all credit decisions are either prior approved or post-
reviewed, and requested that credit decisions be post-reviewed on a 
sampling basis.
    Section 614.4255 requires the institution to have appropriate 
internal controls in place if they intend to use officers and employees 
as evaluators. The regulation refers the reader to Sec. 618.8430 for 
guidance for the required internal controls. Section 618.8430 requires 
institutions to establish appropriate internal control policies and 
procedures that provide effective control over operations of the 
institution, including standards for collateral evaluation and scope of 
review selection. The regulation provides the institution the 
flexibility to establish the scope of the collateral and credit review 
(including sampling) as part of the institution's internal controls. 
The FCA considers a sampling of individual credit decisions to be an 
acceptable internal control as long as the scope of selection is 
sufficient to adequately identify risk in the loan portfolio.

C. Section 614.4260--Evaluation Requirements

    When an appraisal by a State licensed or certified appraiser is not 
required, the FCC and ACA believe it would be more clear and less 
susceptible to misinterpretation if, ``subsequent loan transaction'' 
were defined to include specific loan servicing actions, such as 
reamortizations and partial releases. Similarly, an FCB believes it 
would be helpful if the regulation itself clearly stated that 
subsequent loan transactions include loan servicing transactions such 
as reamortizations and releases.
    It is the intent of the regulations that ``subsequent loan 
transactions'' include, but are not limited to, transactions such as 
renewals, reamortizations, partial releases, and modifications of loan 
repayment terms and maturity dates. Therefore, the FCA has made a 
technical change to the regulation (Sec. 614.4260(c)(5)) to further 
identify examples of ``subsequent loan transactions'' where a real 
estate appraisal may not be necessary.
    Another FCB suggested that portions of FCA's explanatory comments 
contained in the preamble seem to be in conflict as to when an 
evaluation is needed on servicing actions. The FCB urges the FCA to 
clarify that a new evaluation is required only when new funds are 
advanced or there is a material increase in credit risk. The FCB also 
contends that requiring a collateral evaluation on all subsequent loan 
transactions is overly burdensome.
    A similar comment has been addressed in the discussion of 
Sec. 614.4245. Whenever there is a subsequent loan transaction the 
institution must make a determination as to the effect upon the 
adequacy of the collateral securing the loan as well as the impact upon 
the overall credit characteristics of the loan. Depending upon the 
circumstances, this can be accomplished through the completion of a 
collateral valuation or a real estate appraisal. As stated earlier, the 
form and content of the valuation may require nothing more than a 
restricted report identifying the affected collateral, references to 
previous evaluations, and recognition of any material changes. However, 
depending upon the nature of the subsequent transaction and the effect 
upon the collateral and the associated risk the institution may be 
required to provide a more detailed evaluation report ranging from a 
limited report to a full USPAP appraisal.
    The ASFMRA was concerned that all of the Federal regulatory 
agencies had fashioned too broad an exception for a business loan, 
creating an effective ``de minimis'' of $1,000,000, regardless of the 
purpose of the loan. The ASFMRA believes that a $250,000 limit should 
apply where the purpose of the loan is for real estate acquisition or 
permanent improvement.
    The FCA recognizes the concern of the ASFMRA as it relates to the 
application of the $1,000,000 business loan exception. However, the FCA 
believes that, in accordance with the March 31, 1993 Presidential 
directive, absent safety and soundness concerns, lenders must be 
afforded additional flexibility to provide credit to small- and medium-
sized businesses. The Federal regulatory agencies have provided this 
flexibility with the $1,000,000 exception provision. The

[[Page 2685]]

FCA does not believe that the $1,000,000 exception creates undue risk 
for System institutions since the FCA's regulations still require full 
compliance with the Uniform Standards of Professional Appraisal 
Practices (USPAP) requirements for all loans in excess of the $250,000 
de minimis level. The FCA regulation is conservative because it 
establishes minimum criteria for all collateral evaluations, whether 
completed under USPAP or not.\3\ These FCA criteria provide flexibility 
for the presentation of the evaluation, but otherwise are comparable to 
the ``departure provision'' minimums contained in USPAP.
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    \3\ Subsequent to the publication of the FCA's interim 
collateral evaluation regulation revisions the other Federal 
financial regulatory agencies adopted, on October 27, 1994, a set of 
``Interagency Appraisal and Evaluation Guidelines'' which provide 
guidance for the development and application of prudent appraisal 
and evaluation policies, procedures, practices, and standards. Such 
guidelines are similar to the guidelines established in the FCA's 
collateral evaluation regulations.
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    The ASA strongly opposed those portions of the Interim Rule that it 
felt would ``exempt the vast majority of farm credit loan transactions 
from the appraisal requirements of Title XI of the Financial 
Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA).'' 
The ASA believes that FCA has underestimated the risk to safety and 
soundness created by exempting 90 percent of the FCS's real estate loan 
volume and close to 80 percent of total loan volume from professional 
appraisal requirements. In addition, the ASA contends that the cost 
differential between an appraisal and a valuation of approximately $300 
per evaluation reported by the System is overestimated and does not 
take into account the significant reduction in costs that will occur 
once System institutions are permitted to obtain limited appraisals 
prepared pursuant to USPAP's Departure Provision. The ASA further 
stated that the FCA may have overlooked substantial opposition to the 
Federal regulatory agencies' appraisal rule changes from Federal 
regional banking and thrift regulatory officials, and even from the 
thrift industry itself.
    The FCA has reviewed the comments received from the ASA and 
considered those comments in the context of their application to the 
operations and risk of the FCS institutions. In addition to reviewing 
ASA's written comments, the FCA, at the ASA's request, met with 
representatives of the ASA to discuss the proposed final rule and their 
concerns. The FCA understands the basis for the ASA's concerns with the 
standards for state-sanctioned appraisers and risk in residential 
lending markets but believes that the portfolio structure and 
associated risks of the System are different. The FCS institutions' 
portfolios contain only a small percentage of residential loans, 
representing only 6 percent of the total real estate mortgage loan 
volume and 13 percent of the total number of mortgage loans. It should 
also be noted that FIRREA does not apply to FCS institutions. The FCA's 
regulations do, however, address similar appraisal policies in addition 
to concerns and issues specifically related to the FCS institutions and 
their collateral evaluation requirements. As indicated by the 
statistics cited earlier, the large majority of the System's loans and 
related collateral is agricultural in nature, therefore requiring 
agricultural-based knowledge and evaluation standards. The fact that an 
individual is a State licensed or certified appraiser does not ensure 
that the individual possesses the necessary training and expertise to 
value a given agricultural property. On the other hand, there are 
individuals who have the training and expertise to value such 
properties, but have not obtained a State license or certification.
    FCA's regulations require the FCS institutions to establish 
criteria and standards concerning educational and expertise levels 
necessary to adequately and competently value the types of collateral 
found within the institution's portfolio. The FCA collateral 
regulations constitute only one of a number of statutory and regulatory 
controls placed on System institutions (e.g., maximum loan to value of 
85 percent, first lien requirements for mortgage loans, and annual FCA 
examinations). These statutory and regulatory requirements form the 
framework for addressing certain safety and soundness concerns. In 
addition, the System institutions are restricted by certain statutory 
eligibility requirements which serve to limit the outer boundaries of 
the FCS lending institutions' activities. Given the existence of these 
additional statutory and regulatory requirements, the FCA believes that 
the collateral evaluation requirements contained in the Interim Rule 
adequately identify and address System risks from a safety and 
soundness standpoint.

D. Section 614.4265--Real Property Evaluations

    An FCB commented that the cost of compliance with this section of 
the regulation is unjustified considering that other regulators do not 
require this level of compliance with USPAP for real estate collateral 
evaluations on ``business loans'' that are in excess of $250,000 and 
not otherwise exempted by Sec. 614.4260(c). Therefore, the FCB urges 
FCA to delete the requirement for USPAP compliance for business loans 
over $250,000 and less than $1,000,000. Another FCB commented that most 
appraisers with the training necessary to perform a real estate 
evaluation in compliance with USPAP are in fact state-certified or 
state-licensed and that this requirement therefore makes the exemption 
meaningless, placing the System at a severe competitive disadvantage. 
The ACA also maintained that the cost of compliance with this section 
of the regulation is unjustified considering that other regulators do 
not require this level of compliance with USPAP. Both FCBs and the ACA 
believe that the requirement places System institutions at a 
competitive disadvantage.
    On the other hand, the ASFMRA applauded the FCA's action to require 
that all evaluations above $250,000 meet the standards established 
under USPAP, but it was troubled by the provision allowing valuations 
to be completed by persons who are not licensed or certified. The 
ASFMRA urged the FCA to consider extending the USPAP provision to 
recognize that all valuations, irrespective of the ``de minimis'' 
level, be completed under USPAP or under the Departure provision of 
USPAP.
    The ASA stated that by requiring all real estate valuations to be 
performed by licensed or certified appraisers in accordance with USPAP, 
the FCA could achieve all of the regulatory flexibility it deems 
necessary and reduce regulatory burden even below the level set by the 
Interim Rule. The ASA contends that instead of easing the burden of 
regulatory compliance, the Interim Rule only adds to the patchwork of 
confusing exemption criteria under which the necessity for obtaining a 
licensed or certified appraisal will be dependent on an analysis, for 
each loan, of a variety of complex factors. They also contend that 
because many of these factors are so subjective in nature that they 
almost invite noncompliance. Both the ASA and ASFMRA proposed that the 
FCA extend USPAP requirements to all FCS loan transactions where 
collateral is valued.
    The FCA believes that financial institutions operating in today's 
environment must engage collateral evaluators that are cognizant of the 
current appraisal industry standards, including knowledge of and 
compliance with the USPAP standards. In order for lenders to accept 
appraisal reports as support for their credit decisions there must be 
an assurance that such reports

[[Page 2686]]

are accurate and adequate to withstand the legal and technical scrutiny 
of borrower rights, foreclosure, bankruptcy, and other adverse credit 
actions. Therefore, the FCA also believes that anyone valuing any form 
of collateral should be familiar with, and, when required by the 
regulations, comply with USPAP.
    While it might be argued that there is some additional expense 
involved with USPAP related training and compliance (e.g., field 
training, USPAP compliance training, and compliance with basic 
educational course requirements), such expenses are considered 
necessary to comply with the industry standards and current prudent 
lending practices. It is FCA's position that knowledge of current 
appraisal industry practices (including USPAP standards) is a necessary 
part of any evaluator training that is developed and provided by the 
System institutions pursuant to the requirements of Sec. 614.4245. The 
FCA's regulations do provide flexibility to the System relative to the 
use of specific forms and the providing of necessary training 
requirements. However, whether conducted internally or through various 
appraiser affiliated educational programs, there is an expected level 
of education, expertise, and familiarity with USPAP standards. 
Therefore, the FCA does not view the requirement for USPAP on 
transactions in excess of the $250,000 de minimis level to create an 
unnecessary expense burden.
    The FCA regulations provide basic criteria for collateral 
evaluation practices in order to address safety and soundness concerns. 
However, an additional intent of the regulations is to provide the FCS 
institutions flexibility to administer their own programs within the 
confines of state appraisal agencies and appraisal industry standards. 
It is not the intent of the FCA to dictate the form of the evaluation 
process, but rather to establish the basic criteria. The FCA believes 
that adopting full USPAP compliance for all collateral-based loan 
transactions would be unnecessary and overly burdensome. The FCA also 
believes the regulations provide a balanced approach which addresses 
the concerns of both the appraisal industry and the System.

E. Section 614.4443--Review Process

    An FCB requested clarification of the deletion of the language ``or 
a borrower who has applied for a restructuring'' that is now in the 
existing regulation, lest it be read as excluding borrowers seeking 
restructuring.''
    By definition (Sec. 614.4440(b)) the term applicant means ``any 
person who completes and executes a formal application for an extension 
of credit from a qualified lender, or a borrower who completes an 
application for restructuring.'' A borrower whose application for 
restructuring has been denied has the rights specified in 
Sec. 614.4443(c), including the right to obtain an independent 
collateral evaluation. It is not the intent of the FCA to exclude 
borrowers who have applied for restructuring.

F. Section 618.8320--Data Regarding Borrowers and Loan Applicants

    An FCB urged FCA to consider seeking clarification of the Federal 
Reserve Board's position on redacting confidential third-party 
information from copies of appraisals provided to applicants.
    The present amendment of Sec. 618.8320 conforms FCA regulations to 
reflect the requirements of the Equal Credit Opportunity Act. Section 
618.8320 is being amended to state that collateral evaluation reports 
may be released to a loan applicant when required by the ECOA or 
related regulations. The ECOA is interpreted by the FRB which has 
amended its regulations to require release of ``appraisal reports.'' 
Those regulations define ``appraisal report'' to mean the documents 
relied upon by a creditor in evaluating the value of the dwelling. (See 
12 CFR 202.5a(c). The FRB, in its explanatory language concerning the 
published final regulation (58 FR 65657, December 16, 1993), provided a 
discussion of the appraisal report definition as follows:

    The statute does not define an appraisal report; however, the 
legislative history suggests that it is the complete appraisal 
report signed by the appraiser, including all information submitted 
to the lender by the appraiser for the purpose of determining the 
value of residential property. The proposed definition was based on 
the legislative history, and stated that an appraisal report 
referred to the documents relied upon by a creditor in evaluating 
the market value of residential property containing one-to-four 
family units on which a lien will be taken as collateral for an 
extension of credit, including reports prepared by the creditor. The 
proposal stated that an appraisal report would not be limited to 
reports prepared by third parties.
    The final rule provides the same meaning for an appraisal report 
as was proposed, but the definition has been shortened for clarity. 
A consumer who requests a copy of the appraisal report will be 
entitled to receive a copy of any third party appraisal that has 
been performed. For consistency with the rules implementing the 
prohibitions of the Fair Housing Act on discrimination in appraising 
residential real property, an appraisal report includes all written 
comments and other documents submitted to the creditor in support of 
the appraiser's estimate or opinion of value. (See 24 CFR 
100.135(b).)
    The ``appraisal report'' does not include copies of ``review 
appraisals,'' agency-issued statements of appraised value, or any 
internal documents if a third party appraisal report was used to 
establish the value of the security. Even when a third party 
appraisal has been performed, however, a consumer requesting a copy 
of the report also must receive a copy of documents that reflect the 
creditor's valuation of the dwelling when that valuation is 
different from that stated in the third party appraisal report. Such 
documents would include staff appraisals or other notes indicating 
why the value assigned by the third party appraiser is not the 
appropriate valuation.
    The right to receive a copy of an appraisal report provided 
under Regulation B includes, but is not limited to, transactions in 
which appraisals by a licensed or certified appraiser are required 
by federal law. If the value of the dwelling has been determined by 
the creditor and a third party appraiser has not been used, the 
appraisal report would be the report of the creditor's staff 
appraiser, where applicable, or the other documents of the creditor 
which assign value to the dwelling.

    The FCA believes that the aforementioned discussion taken from the 
FRB's final rule publication provides a reasonable and thorough 
explanation of what constitutes an ``appraisal report.'' However, any 
further clarification of the scope of the Regulation B requirement 
should be derived directly from the FRB.

List of Subjects in 12 CFR Part 614

    Agriculture, Banks, banking, Foreign trade, Reporting and 
recordkeeping requirements, Rural areas.

    For reasons stated in the preamble, part 614 of chapter VI, title 
12 of the Code of Federal Regulations is amended to read as follows:

PART 614--LOAN POLICIES AND OPERATIONS

    1. The authority citation for part 614 continues to read as 
follows:

    Authority: Secs. 1.3, 1.5, 1.6, 1.7, 1.9, 1.10, 2.0, 2.2, 2.3, 
2.4, 2.10, 2.12, 2.13, 2.15, 3.0, 3.1, 3.3, 3.7, 3.8, 3.10, 3.20, 
3.28, 4.12, 4.12A, 4.13, 4.13B, 4.14, 4.14A, 4.14C, 4.14D, 4.14E, 
4.18, 4.19, 4.36, 4.37, 5.9, 5.10, 5.17, 7.0, 7.2, 7.6, 7.7, 7.8, 
7.12, 7.13, 8.0, 8.5 of the Farm Credit Act (12 U.S.C. 2011, 2013, 
2014, 2015, 2017, 2018, 2071, 2073, 2074, 2075, 2091, 2093, 2094, 
2096, 2121, 2122, 2124, 2128, 2129, 2131, 2141, 2149, 2183, 2184, 
2199, 2201, 2202, 2202a, 2202c, 2202d, 2202e, 2206, 2207, 2219a, 
2219b, 2243, 2244, 2252, 2279a, 2279a-2, 2279b, 2279b-1, 2279b-2, 
2279f, 2279f-1, 2279aa, 2279aa-5); sec. 413 of Pub. L. 100-233, 101 
Stat. 1568, 1639.

[[Page 2687]]

Subpart F--Collateral Evaluation Requirements

    2. Section 614.4260 is amended by revising the introductory text of 
paragraph (c)(5) to read as follows:


Sec. 614.4260  Evaluation requirements.

* * * * *
    (c) * * *
    (5) Subsequent loan transactions (which include but are not limited 
to loan servicing actions, reamortizations, modifications of loan 
terms, and partial releases), provided that either:
* * * * *
    Dated: January 5, 1995.
Floyd Fithian,
Acting Secretary, Farm Credit Administration Board.
[FR Doc. 95-678 Filed 1-10-95; 8:45 am]
BILLING CODE 6705-01-P