[Federal Register Volume 86, Number 96 (Thursday, May 20, 2021)]
[Proposed Rules]
[Pages 27308-27323]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-10200]


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FARM CREDIT ADMINISTRATION

12 CFR Part 614

RIN 3052-AC94


Collateral Evaluation Requirements

AGENCY: Farm Credit Administration.

ACTION: Proposed rule.

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SUMMARY: The Farm Credit Administration (FCA, we, or our) proposes 
amendments updating our regulations on appraisal and evaluation 
requirements for property serving as collateral for loans made by the 
Farm Credit System (System). We propose reorganizing existing rules to 
remove redundancies and add clarity on the distinct valuation standards 
for each type of collateral. We also propose adding regulatory 
requirements for the use of automated valuation tools and releasing 
appraisal and evaluations to borrowers.

DATES: Comments on this proposed rule must be submitted on or before 
July 19, 2021.

ADDRESSES: We offer a variety of methods for you to submit comments. 
For accuracy and efficiency reasons, commenters are encouraged to 
submit comments by email or through the FCA's website. As facsimiles 
(fax) are difficult for us to process and achieve compliance with 
section 508 of the Rehabilitation Act, we do not accept comments 
submitted by fax. Regardless of the method you use, please do not 
submit your comment multiple times via different methods. You may 
submit comments by any of the following methods:
     Email: Send us an email at [email protected].
     FCA website: http://www.fca.gov. Click inside the ``I want 
to . . .'' field near the top of the page; select ``comment on a 
pending regulation'' from the dropdown menu; and click ``Go.'' This 
takes you to an electronic public comment form.
     Mail: Kevin J. Kramp, Director, Office of Regulatory 
Policy, Farm Credit Administration, 1501 Farm Credit Drive, McLean, VA 
22102-5090.
    You may review copies of all comments we receive at our office in 
McLean, Virginia, or on our website at http://www.fca.gov. Once you are 
in the website, click inside the ``I want to . . .'' field near the top 
of the page; select ``find comments on a pending regulation'' from the 
dropdown menu; and click ``Go.'' This will take you to the Comment 
Letters page where you can select the regulation for which you would 
like to read the public comments. We will show your comments as 
submitted, but for technical reasons we may omit some items such as 
logos and special characters. Identifying information that you provide, 
such as phone numbers and addresses, will be publicly available. 
However, we will attempt to remove email addresses to help reduce 
internet spam.

FOR FURTHER INFORMATION CONTACT:  Technical information: Darius J. 
Hale, Senior Policy Analyst, or Dennis K. Carpenter, Senior Policy 
Analyst, Office of Regulatory Policy, Farm Credit Administration, 
McLean, VA 22102-5090, (703) 883-4414, TTY (703) 883-4056.
    Legal information: Laura McFarland, Senior Counsel, Office of 
General Counsel, Farm Credit Administration, McLean, VA 22102-5090, 
(703) 883-4020, TTY (703) 883-4056.

SUPPLEMENTARY INFORMATION:

I. Objectives

    The objectives of this proposed rule are to:
     Improve the organization and readability of FCA appraisal 
and evaluation regulations;
     Clarify expectations for internal controls in appraisal 
and evaluation practices;
     Expand authorities on using various sources of appraisers 
and evaluators as well as specifically authorizing use of automated 
valuation tools; and
     Update existing terminology and make other grammatical 
changes.

[[Page 27309]]

II. Background

    The prevailing body of law for conducting collateral appraisals and 
evaluations in financial transactions is Title XI of the Financial 
Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA).\1\ 
Title XI of FIRREA created the Appraisal Subcommittee within the 
Federal Financial Institutions Examination Council (FFIEC) \2\ to 
provide federal oversight of state appraiser regulatory programs. Title 
XI of FIRREA also requires certain federally regulated lending 
institutions to use appraisers that are either state certified or state 
licensed under the Uniform Standards of Professional Appraisal Practice 
(USPAP).\3\ USPAP provides standards and qualifications for real estate 
appraisers and provides guidance on recognized valuation methods and 
techniques for all evaluation professionals.
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    \1\ Public Law 101--73, 103 Stat. 183, 12 U.S.C. 3331 et seq. 
(1989).
    \2\ The FFIEC was created in 1979 through Title X of Public Law 
95-630 and is composed of representatives from the following federal 
financial regulators: Board of Governors of the Federal Reserve 
System, Federal Deposit Insurance Corporation, National Credit Union 
Administration, the Office of the Comptroller of the Currency, and 
Consumer Financial Protection Bureau. As the federal safety and 
soundness regulator of the System, the Farm Credit Administration is 
not a member of the FFIEC.
    \3\ Title XI of FIRREA also requires appraisals used in 
connection with certain real estate-related financial transactions 
entered into by financial institutions to be written and conform to 
the appraisal standards promulgated by the Appraisal Standards Board 
of the Appraisal Foundation, as well as prescribes which categories 
of federally related transactions must have appraisals performed by 
a State certified appraiser and those where a State licensed 
appraiser may be used.
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    The Farm Credit Act of 1971, as amended (Act) \4\ charges FCA with 
issuing regulations establishing loan security requirements and the 
manner of conducting collateral security reviews.\5\ The Act requires 
System direct lenders to determine the value of loan security ``by 
appraisal under standards prescribed by the [institution] in accordance 
with [FCA] regulations.'' \6\ FCA is further tasked with examining the 
quality and sufficiency of collateral used to secure System loans.\7\ 
Because these provisions within the Act existed before passage of 
FIRREA--and for other reasons--Congress exempted the System from Title 
XI of FIRREA, including following USPAP. However, FCA's present 
collateral evaluation rules are generally similar, although not 
identical, to FIRREA requirements.
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    \4\ Public Law 92-181, 85 Stat. 583.
    \5\ See, for example, sections 1.10(a)(3), 5.17(a)(6), and 
5.17(a)(7) of the Act.
    \6\ See, for example, section 1.10(a)(3) of the Act (12 U.S.C. 
2018(a)(3)).
    \7\ 12 U.S.C. 2252(a)(6) and (a)(7).
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    In 1992, FCA issued subpart F of part 614, ``Collateral Evaluation 
Requirements'', which sets forth minimum regulatory standards for 
performing appraisals and evaluations of collateral securing extensions 
of credit (lending and leasing) by Farm Credit banks and 
associations.\8\ The 1992 rulemaking applied many of the evaluation 
standards used by the banking industry under Title XI of FIRREA, 
including requiring the use of USPAP in certain loan transactions.\9\ 
In deciding to use these standards where appropriate, FCA determined 
the underlying policy behind Title XI of FIRREA was relevant to the 
System's operations, particularly for ensuring that reports on 
collateral values accurately reflect the current market value of 
collateral at the time of a credit decision and that those values be 
recognized as valid within the financial sector. However, our 
regulations differ from Title XI of FIRREA and USPAP where needed to 
address the unique cooperative structure of the System and to address 
specific provisions in the Act. For example, Title XI of FIRREA 
provides that no USPAP appraisal is required for a loan secured by real 
estate when that loan is made based on cashflow and not the value of 
real estate collateral (i.e., abundance of caution collateral). The 
System cannot use this exception for loans made under the authorities 
of Title I of the Act because those loans require a first lien on the 
real estate. Meaning those loans would never be made without 
consideration of the real estate collateral's value.
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    \8\ 57 FR 54683, Nov. 20, 1992.
    \9\ FCA is not a FFIEC regulatory agency and therefore not 
required to follow FFIEC standards. However, we consider the policy 
positions of other regulators to decide if we should follow them or 
take a different approach if appropriate to implement the 
requirements and expectations of the Farm Credit Act of 1971, as 
amended.
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    Collectively, subpart F of Part 614 has not been updated in over 25 
years.\10\ As System institutions move toward increased use of fee 
appraisers and technology in loan making, we believe it is time to 
update our requirements for collateral appraisals and evaluations. We 
also believe our regulations should be updated to reflect the increased 
importance internal review and controls play in today's lending 
environment. Internal controls are an integral part of managing lending 
programs. Internal controls are also necessary to protect safety and 
soundness operations where institutions engage in credit programs using 
minimum information or where institutions move away from the use of 
staff appraisers and evaluators.
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    \10\ FCA regulation Sec.  614.4265 on valuing real estate was 
modified in 2006 to increase the business loan exception allowing 
evaluations instead of USPAP-compliant appraisals for transactions 
under $1 million. 71 FR 65387, Nov. 8, 2006.
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III. Section-by-Section Analysis

    We discuss the specifics of our proposal below in the same order as 
they would appear in the regulation.

A. Organization

    We propose general language changes to subpart F of Part 614 to 
enhance readability. We intend no change in the meaning of the affected 
regulatory provisions unless specifically stated in the discussions of 
those provisions. We also propose reorganizing existing provisions to 
consolidate like items, remove redundancy, and add clarity.
1. Section Consolidations
    Among these proposed organizational changes are:
     Consolidating into Sec.  614.4250 the existing basic 
appraisal and evaluation policies and standards of Sec. Sec.  
614.4245(a) and 614.4250(a) and proposing revisions to these policies 
and standards.
     Revising and consolidating into Sec.  614.4255 the 
existing appraiser and evaluator independence requirements of 
Sec. Sec.  614.4255, 614.4260(e), and 614.4267.
     Merging the existing contents of Sec.  614.4266(a) and (b) 
into Sec.  614.4260, to address in one section the evaluation 
requirements for all chattel, including personal and intangible 
property, while also revising the existing provisions of Sec.  
614.4266.
     Revising Sec.  614.4250 to add a discussion of internal 
controls for valuing collateral.
     Consolidating the existing appraisal and evaluation 
requirements of Sec. Sec.  614.4260, 614.4265, and 614.4266 into 
Sec. Sec.  614.4260 and 614.4265, as appropriate for the type of 
collateral under discussion.
     Adding a new Sec.  614.4270 discussing the use of 
appraisal and evaluation tools, including computer-based models.
     Moving to new Sec.  614.4275 the existing contents of 
Sec.  614.4260(d) regarding our authority to require appraisals and 
evaluations and proposing clarifications.
2. Section Removals
    We propose deleting as obsolete or redundant the exiting 
requirements of:
     Sec. Sec.  614.4250(b) and 614.4245(b), (c), and (d);
     Sec.  614.4260(a); and
     Sec. Sec.  614.4265(g) and 614.4266(d).

[[Page 27310]]

3. Section Headings
    In keeping with proposed reorganizational changes, we propose 
renaming the subpart and its section headings as follows:

Subpart F--Collateral Appraisal and Evaluation Requirements

    Sec.  614.4240 as ``Definitions'';
    Sec.  614.4245 as ``General'';
    Sec.  614.4250 as ``Policies, standards, and internal controls for 
valuing collateral'';
    Sec.  614.4255 as ``Appraiser and evaluator qualifications and 
independence'';
    Sec.  614.4260 as ``Valuing business chattel, personal, and 
intangible property'';
    Sec.  614.4265 as ``Valuing real property'';
    Sec.  614.4270 as ``Appraisal and evaluation tools''; and
    Sec.  614.4275 as ``Reservation of authority''.

B. Definitions [Existing Sec.  614.4240]

    We propose general grammatical changes to certain terms in Sec.  
614.4240 to enhance readability. We intend no change in the meaning of 
the affected terms unless specifically stated. We also propose 
clarification, removal, or addition of certain terms as discussed 
below.
1. Clarifications
    As a general matter, we propose adding introductory language 
explaining how certain terms (e.g., paper, record, provide) may be 
interpreted to permit the electronic equivalent if allowed under our e-
commerce regulations in part 609. We add this clarification to reduce 
questions on how technology adaptations in daily business activities 
are to be treated.
    We propose clarifying changes to the following definitions:
a. ``Abundance of Caution''
    We propose replacing the phrase ``real estate'' with ``asset'' when 
discussing an item taken out of an abundance of caution. We propose the 
change to recognize that not all collateral taken out of an abundance 
of caution is in the form of real estate. System lenders may hold 
collateral taken in an abundance of caution for real estate and non-
real estate financial transactions. As a conforming change, we also 
propose replacing a reference to collateral required by regulations or 
the institution policies with a reference to assets legally required to 
secure the type of credit being extended. This change is intended to 
capture the variations in loan underwriting requirements, which allow 
for secured and unsecured lending in certain situations. However, the 
proposed clarification does not change legal requirements to take real 
estate as security for financing offered under Title I of the Act nor 
allow real estate taken as collateral for Title I lending to be 
considered an abundance of caution type of security.
b. ``Appraisal''
    We propose clarifying that the term ``appraisal'' means USPAP 
compliant valuations of real estate completed by either a state 
licensed or state certified appraiser. We propose this change as part 
of our objective to clarify our regulations by restricting the term 
``appraisal'' to always mean a USPAP compliant real estate valuation. 
The proposed change would prevent using the term to identify non-USPAP 
valuations, including values assigned to non-real estate. We caution 
readers that our regulatory definition of ``appraisal'' is not meant to 
define the term as used in the Act. Instead, we believe both regulatory 
terms of ``appraisal'' and ``evaluation'' represent the appropriate 
interpretation of how the single term ``appraisal'' is used in the Act.
c. ``Business Loan''
    We propose adding cooperatives to the list of borrowing entities in 
recognition of lending authorities contained within Title III of the 
Act. In doing so, we propose changing the order of the list to aid in 
readability.
d. ``Evaluation''
    We propose clarifying changes to the meaning of ``evaluation'' to 
explain an evaluation is in writing and presents an independent and 
impartial opinion of market value supported by relevant information. 
This clarification would remove the necessity of repeating throughout 
subpart F that evaluations need to be in writing and prepared by 
independent evaluators.
e. ``Evaluator''
    We propose changing the existing term ``qualified evaluator'' to 
``evaluator'', using the same definition but with slight modifications. 
The term as proposed would explain an evaluator must always be 
qualified for the evaluation assignment by being trained and 
experienced in identifying values for the types of assets under review. 
For purposes of business chattel, personal and intangible property 
collateral evaluations, the term would continue to include eligible 
bank or association staff, certified public accountants, equipment 
dealers, grain buyers, livestock buyers, auctioneers, and other 
industry experts.
f. ``Fee Appraiser or Fee Evaluator''
    We propose clarifying the term to mean either an appraiser or 
evaluator of assets who is not employed by the System lender but acts 
as a third-party contractor. We make this change to further distinguish 
the term from appraisals or evaluations prepared by staff of the System 
lender. We also propose removing the last sentence of the existing 
definition that applies to personal and intangible evaluations. 
Instead, we propose moving that sentence to the term ``evaluator.'' In 
this definition we also propose conforming changes to use new or 
revised terms being proposed, such as replacing ``Farm Credit System 
institution'' with ``System lender.''
g. ``Highest and Best Use''
    We propose clarifying changes to the term ``highest and best use'' 
to explain it means the legal use of the asset and to remove language 
that gives the impression the term only applies to real estate and not 
other collateral.
h. ``Personal Property''
    We propose a clarifying change to the definition of ``personal 
property'' to exclude business chattel. As proposed, the term 
``personal property'' would refer to moveable non-real estate property 
that is not in the form of equipment, livestock or crops. We propose 
the distinction to facilitate proper valuation of business chattel, 
which is commonly used as security for System financing, from other 
forms of chattel, such as household goods, which require different 
valuation efforts and resources. As a conforming change, we also 
propose adding a new definition for ``business chattel'', which is 
discussed in section III.B.3 of this preamble.
i. ``Real Estate or Real Property''
    We propose adding ``or real property'' to the existing term ``real 
estate'' to recognize the interchangeable use of the two terms. We also 
propose clarifying that the term includes fixtures, easements, rights 
of way, and other rights commonly attached to the land (e.g., mineral, 
water, gas, timber). We make this clarification to ensure appropriate 
identification and value adjustments for these items are part of the 
appraisals or evaluations of real estate. As a conforming change, we 
propose deleting the existing separate definition for the term ``real 
property.''

[[Page 27311]]

j. ``State Certified Appraiser''
    We propose clarifying and conforming language to the definition of 
``state certified appraiser'' that explains no person will be accepted 
as meeting the FCA definition unless that person passed a state-
administered examination equivalent to those exams conducted under the 
jurisdiction of the FFIEC appraisal subcommittee. Currently, the 
definition makes a definitive statement of who is or is not a ``state 
certified appraiser.'' Because FCA does not actually certify any 
appraisers, we believe the clarification is necessary.
2. Removals and Relocations
    First, we propose moving the terms ``cost approach'', ``income 
capitalization approach'', and ``sales comparison approach'' from the 
definitions contained in Sec.  614.4240 and incorporating them into 
proposed Sec.  614.4265, discussing real estate appraisals. This 
proposed movement should facilitate compliance with the requirements of 
real estate appraisals by keeping the definitions with the terms in the 
only place they are used within the rule.
    Next, we propose deleting the term ``Appraisal Foundation'' because 
it is not used in the proposed rule text. We also propose removing the 
term ``valuation'' as the term has become a point of confusion. 
Currently, the term is defined as an evaluation that is not an 
appraisal. We propose removing this term and its definition, leaving 
only the terms ``evaluation'' and ``appraisal''. In conformance with 
this proposed change, we also propose revisions to the definitions of 
``evaluation'' and ``appraisal'', drawing a distinction between the two 
types of reports. That proposed distinction would use the term 
``appraisal'' only for USPAP compliance reports valuing real estate. 
All other reports of value, including those for business chattel, other 
personal property and intangible property, would be ``evaluations.''
3. Additions
    We propose adding six terms that would apply to all of subpart F, 
unless otherwise stated in the regulations. First, we propose adding a 
definition for ``appraiser'' to limit application of the term to only 
those persons state-certified or state-licensed under USPAP guidelines. 
The term as proposed would also specify that an appraiser has 
demonstrated experience in identifying values for real property under 
USPAP. We add this term as part of our efforts to differentiate USPAP 
required values from evaluations of non-real estate.
    Second, we propose adding a definition of ``automated valuation 
model'' or AVM, explaining it means a computer-based program that 
estimates a property's market value based on certain factors. As 
proposed, the definition would also explain certain sub-set models used 
for particular assets. We propose adding the term to make clear what 
constitutes an automated model, selecting a description closely aligned 
with the definition used by the FIRREA agencies. We chose to use a 
definition similar to FIRREA agencies in recognition that vendors of 
most AVMs design their models to comply with FIRREA standards.
    Third, we propose adding a new definition for ``business chattel'' 
that would apply to property kept for the carrying on of any 
agricultural activity, such as production or use in the farming of 
land. We believe adding the definition will help eliminate confusion 
with other forms of chattel not in the form of equipment, livestock or 
crops (i.e., household goods, personal property). We propose the 
distinction to facilitate proper valuation of business chattel separate 
from other chattel that may not be subject to a lienhold by the System 
lender. The new definition of ``business chattel'' would explain it 
also applies to both livestock (any creature not in the wild but 
regarded as an asset) used to produce food, wool, skins, fur or similar 
purposes, and crops (growing, harvested, or in storage) kept for 
production or use in the farming of land or the carrying on of any 
agricultural activity.
    Next, we propose adding a definition for ``intangible property'' to 
clarify the term refers to valuable items that are not physical in 
nature (i.e., copyrights, trademarks, goodwill, brand names, etc.). As 
discussed earlier, this proposed change would include a conforming 
change to the existing definition of ``personal property.''
    Fifth, we propose adding a definition of ``Other Financing 
Institutions (OFI)'', using a definition consistent with that used in 
other regulations.\11\ We propose specifically including the OFI 
definition to recognize the requirements of 12 CFR part 614, subpart P 
that OFIs comply with System underwriting standards, including 
collateral evaluation requirements.
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    \11\ ``OFI'' is defined elsewhere in our regulations to mean 
other financing institutions that have established an access 
relationship with a Farm Credit Bank or an agricultural credit bank 
under section 1.7(b)(1)(B) of the Act.
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    Lastly, we propose adding a definition of ``System lender'', using 
a definition consistent with the existing collateral evaluation 
regulations explaining subpart J of 12 CFR part 614 applies to any 
System institution engaged in lending or leasing activities secured by 
collateral. This proposal would add greater readability to the rule 
through the use of one term rather than the existing use of several 
terms (identifying various types of System institutions) explaining who 
is responsible for obtaining an appraisal or evaluation of collateral 
used to secure an extension of credit. We believe our proposed use of 
the term ``System lender'' is in keeping with the appraisal 
requirements of the Act.

B. General [Proposed Sec.  614.4245]

    We propose Sec.  614.4245 be an all-purpose section identifying the 
minimum expectations applicable to every collateral appraisal or 
evaluation. As part of the restructure, we propose moving existing 
Sec.  614.4245(a) to another section and deleting, due to redundancy, 
the exiting requirements of Sec.  614.4245(b), (c), and (d), along with 
other proposed changes.
1. Required Appraisals and Evaluations [Proposed Sec.  614.4245(a)]
    We propose adding as new Sec.  614.4245(a) the general rule that 
all collateral must be valuated via an evaluation or appraisal. This is 
not a new requirement, but rather a clarification of FCA's long-
standing position that collateral securing a loan must be assigned a 
value. FCA issued an Informational Memorandum containing this 
clarification in 2016 after our examination staff identified some 
institutions held the belief no valuation was required in certain 
credit transactions for certain types of collateral.\12\ We recognize 
that non-real estate collateral may not always be a primary 
consideration or factor in determining creditworthiness. However, we 
believe that all security, including property taken out of an abundance 
of caution, should be properly valued. We also recognize failing to 
assign a market value to all collateral may negatively affect capital 
treatment, servicing decisions and loan classifications, as well as 
create borrower confusion if the property is later assigned the true 
market value because it has become essential to the credit. Therefore, 
FCA believes that whenever property is used to secure a loan, a market 
value must be assigned and supported by an appraisal or evaluation.
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    \12\ FCA Informational Memorandum, ``Guidance on Addressing 
Personal and Intangible Property within Collateral Evaluation 
Policies and Procedures (Sec.  614.4245)'', dated August 29, 2016.

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[[Page 27312]]

    Also, we propose that, at a minimum, an appraisal or evaluation be 
obtained both when filing a lien against the property and when the 
lender expects to take liquidation actions. Ensuring an asset's value 
is the current market value at the identified times ensures credit 
decisions are using the best data available. As proposed, the rule 
would also require System lenders to act at other times to ensure 
existing values are adjusted when there are market fluctuations.
2. Format and Minimum Content Requirements [Proposed Sec.  614.4245(b)]
    We propose clarifying, reducing, and consolidating the existing 
minimum expectations for appraisals and evaluations into new Sec.  
614.4245(b). First, we propose adding a provision that explicitly 
requires appraisals to follow USPAP format requirements. Next, we 
propose adding language recognizing that an evaluation's format 
presentation will depend on the type of asset being valued and the 
tools and data sources used to set the value. For example, if equipment 
is being valued using an AVM, the evaluation format may be a computer 
screen shot of the recommended market value when that screen shows all 
the required information. Alternatively, the evaluation format may 
consist of several different documents with a cover synopsis. We 
propose this flexibility in recognition of the variety of data sources 
available and the different ways in which that data is obtained.
    We are also proposing to establish minimum content requirements 
needed to support the final opinion of value. We propose using some 
existing content requirements and removing others in the process. The 
existing content provisions come from Sec. Sec.  614.4245(a) and 
614.4250(a). As part of this consolidation, we propose grammatical 
changes as well as a few additional changes. As proposed, new Sec.  
614.4245(b) would require that all appraisals and evaluations:
     Have enough details to describe the asset, including 
relevant characteristics;
     Provide information to aid the reader in ascertaining the 
reasonableness of the value; and
     Identify the data sources used for setting the value, such 
as including the name and version of any AVM or other published source 
data used.

When applicable, we also propose that the appraisal or evaluation 
include a statement that different appraisal or evaluation standards 
were used but use of those standards was not a result of any prohibited 
discriminatory factors.
    We propose these requirements to provide the reader of the report 
with sufficient information as to how the appraiser or evaluator chose 
the final market value and to provide some assurance on the validity of 
the process used to reach a final value so that it is recognized by 
other lenders as a fair market value.
3. Age of Appraisal or Evaluation Reports [Proposed Sec.  614.4245(c)]
    We propose a new provision addressing when to obtain a new 
appraisal or evaluation (outside the two events proposed under Sec.  
614.4245(a)). We are not proposing specific evaluation or appraisal age 
requirements at this time. Instead, proposed Sec.  614.4245(c) would 
respect the existing practice of allowing appraisals and evaluations to 
be updated pursuant to the System lender's policies. This would include 
updating benchmarking methodologies used to track and identify market 
conditions for a specific type of asset. However, we propose adding a 
requirement that an appraisal or evaluation may only be used if the 
reported value reflects market conditions at the time the value is used 
by the lender.
    We had considered regulating the age of appraisals and evaluations 
but decided a fixed age may not capture market changes in an 
appropriate timeframe. Instead, we believe each System lender is in a 
better position to identify upward and downward movement in market 
conditions within its territory. For that reason, we maintain high 
expectations that each System lender will incorporate within its 
appraisal and evaluation policies and procedures timely reviews of 
collateral value.
4. Using the Appraisal of Another Lender [Proposed Sec.  614.4245(d)]
    We propose moving the existing provision regarding sharing fee 
appraisals among System institutions from Sec.  614.4255(d) to Sec.  
614.4245(d). We also propose expanding this authority to cover all 
types of real estate appraisals when the applicant or borrower 
consents. The ability to share collateral appraisals and/or evaluations 
for the sale and purchase of loans under subpart H of part 614 is 
unaffected by this proposal as System lenders are expected to address 
the sharing of collateral appraisals and/or evaluations in those 
transactions through their purchase of interests in loan agreements 
under Sec.  614.4325(c)(3), as appropriate and necessary to satisfy 
underwriting criteria.
    As proposed, a System lender may use the real estate appraisals of 
other lenders when the lender obtaining the appraisal will not be 
extending the requested credit and agrees to transfer the appraisal. 
FCA believes that it would be beneficial to System institutions and 
serve as a cost-savings measure for applicant to allow sharing 
appraisals among System lenders when one or more are involved in a 
credit transaction. To preserve the quality of the transferred 
appraisal, we propose retaining the existing requirement that such 
transfers may only occur with other System lenders or lenders subject 
to Title XI of FIRREA. Additionally, we propose that the System lender 
receiving the transferred appraisal assume responsibility for verifying 
the accuracy of the appraisal.
5. Releasing Appraisal or Evaluations [Proposed Sec.  614.4245(e)]
    We propose adding a provision on the release of appraisals and 
evaluations to applicants and borrowers. We are proposing this 
provision to further implement the requirements of section 4.13A of the 
Act, which provides that borrowers have the right to obtain reports 
valuing their assets anytime during the life of the loan. Specifically, 
borrowers must be given, when requested, ``copies of each appraisal of 
the borrower's assets made or used by the qualified lender.'' \13\ 
Additionally, we propose language specifying that a System lender is to 
release a copy of the collateral appraisal or evaluation to the 
applicant or borrower when issuing an adverse credit decision that 
relies in whole or part upon collateral values. This provision would 
align with provisions in Part 617 and our guidance regarding the 
contents of adverse credit decisions.
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    \13\ 12 U.S.C. 2200.
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    As proposed, appropriate duplication fees may be charged when more 
than one copy is given, excepting those copies included with notice of 
an adverse credit decision. We also propose that System lenders provide 
a copy of a collateral appraisal or evaluation within 7 days of the 
request. We are proposing a fixed time to ensure that applicants and 
borrowers receive the report within a reasonable time. We propose 7 
calendar days in consideration of other regulatory timeframes where the 
asset's value may affect an applicant's or borrower's decision making 
or review rights.
    In coordination with our proposed language on evaluation 
presentation format (Sec.  614.4245(b)), we propose that the appraisal 
or evaluation copies

[[Page 27313]]

provided to applicants and borrowers contain all the information 
required by regulation or USPAP. These copies serve an essential role 
in an applicant's or borrower's decision on whether to challenge the 
value assigned an asset before the Credit Review Committee (CRC). 
Ensuring the applicant or borrower receives the relevant information 
forming the appraisal or evaluation will also fulfill Congressional 
intent behind section 4.13A. Additionally, we believe that the 
information provided in the documentation should be presented in a 
manner that is easily understood by the applicant or borrower.
6. Recordkeeping [Proposed Sec.  614.4245(f)]
    We propose adding a requirement on the amount of time System 
lenders are required to maintain appraisal and evaluation reports. As 
proposed, a lender's general recordkeeping policies would apply to 
appraisals and evaluations, except the lender would be required, at a 
minimum, to maintain them for the same duration as the related credit 
file. We also specifically propose that the lender preserve the data 
set used in establishing the value in effect as of the date of the 
appraisal or evaluation. Our proposal is intended to ensure that the 
appraisals and evaluations used in the credit process are preserved in 
case questions arise about the credit decision that may lead back to 
asset values and to inform whether any updated value is required. 
Additionally, the proposed requirement to retain the data source(s) 
used for an appraisal or evaluation reconciles this provision with 
proposed Sec.  614.4245(e). Under new Sec.  614.4245(e) we propose 
requirements addressing the statutory authority of a borrower to 
request, at any time during the borrowing relationship, copies of all 
appraisals and/or evaluations used by the System lender.

C. Policies, Standards, and Internal Controls [Proposed Sec.  614.4250]

    We propose consolidating into Sec.  614.4250 the existing 
requirement that System lenders develop policies and standards for 
conducting appraisals and evaluations. The current requirements are 
located in Sec. Sec.  614.4245(a) and 614.4250(a). As part of this 
consolidation, we propose additional requirements and conforming 
changes.
1. Policies [Proposed Sec.  614.4250(a)]
    As proposed, Sec.  614.4250(a) would contain the existing 
requirement that System lenders adopt and maintain written policies on 
when and how to issue collateral appraisals or evaluations. The rule 
further proposes required minimum contents for the policies, including:
     Addressing when an evaluation instead of an appraisal will 
be used (where the regulations allow a choice);
     Establishing the frequency and timing of when to complete 
either an appraisal or evaluation;
     Monitoring market conditions;
     Authorizing or prohibiting the use of shared appraisals or 
using out-of-territory fee appraisers and evaluators;
     Setting parameters for using AVMs and other tools;
     Verifying the independence of those performing the 
valuation functions;
     Prohibiting any practice that would base an appraisal or 
evaluation on a requested minimum value or loan amount; and
     Outlining internal controls needed to ensure compliance 
with relevant laws and regulations.
    We believe these minimum requirements provide the basic foundation 
for a good appraisal and evaluation policy.
    Further, we propose requiring Farm Credit banks to address within 
their collateral appraisal and evaluation policies OFI compliance with 
those policies. Elsewhere in our regulations, OFI lending activities 
that are discounted with a Farm Credit bank are required to follow 
relevant policies and procedures contained in subpart P of 12 CFR 614. 
We believe specifically addressing OFIs in the collateral regulations 
and related institution policies will facilitate compliance with those 
regulations.
2. Standards [Proposed Sec.  614.4250(b)]
    We propose Sec.  614.4250(b) contain the existing requirement of 
Sec.  614.4250(a) that System lenders adopt and maintain written 
standards for appraisals and evaluations. In addition, we propose 
requiring those standards be designed to represent current market 
values to protect the lender's interest in maintaining adequate loan 
collateral. The rule would continue to identify minimum items the 
standards must address, including support for the identified market 
value, the selection process for appraisers and evaluators, continuous 
monitoring of market conditions, and addressing inspections of the 
subject property. The level of information each System lender requires 
within these standards is expected to be specific to the type and 
nature of the collateral securing the loan. A System lender might also 
include addressing what it considers appropriate evaluation techniques 
for complex and specialized assets or high-risk transactions. When 
valuing complex and specialized assets, additional information 
addressing the unique characteristics and conditions affecting the 
market value of such assets demands providing more than the minimums 
proposed to ensure a reader of the evaluation receives sufficient 
information on how the value was established. We believe the System 
lender is in the best position to determine the level of this 
additional information given territorial considerations.
    When considering how and in what manner to conduct property 
inspections, we expect the lender to include controls addressing the 
accuracy and integrity of the inspections. We are aware industry 
practices continue to place increased reliance on various types of 
technology to enhance or replace the physical inspection process. When 
other methods such as these are used, additional controls may be 
necessary to validate the data's accuracy. While we have not proposed 
prohibiting the use of such technology, we continue to believe physical 
inspections are the most appropriate method to verify assets in most 
cases.
3. Internal Controls [Proposed Sec.  614.4250(c)]
    We are proposing Sec.  614.4250(c) address internal controls in 
managing the collateral appraisal and evaluation process. We propose 
that each lender have written internal control policies and procedures 
specifically designed for the collateral appraisal and evaluation 
process. We believe the internal controls process for collateral 
valuations should be designed to protect the integrity of those values 
and the process by which they are determined. We propose requiring the 
controls include safeguarding the independence of those setting values 
from the credit process, verifying the condition of the asset being 
valued, and recognizing and reacting to changes in market conditions.
    We recognize that existing Sec.  618.8430 contains general 
requirements for internal controls in collateral valuations and other 
processes, but we believe there is a need for greater clarity on what 
the internal controls for collateral valuations should contain. We are 
not proposing any changes to Sec.  618.8430 and do not intend for the 
proposed Sec.  614.4250(c) to replace or supersede it. Instead, we 
intend proposed Sec.  614.4250(c) as an elaboration on the requirements 
of Sec.  618.8430. As such, we encourage commenters to advise us if

[[Page 27314]]

they read any conflict between the two provisions.

D. Appraiser and Evaluator Qualifications and Independence [Proposed 
Sec.  614.4255]

    We propose consolidating into new Sec.  614.4255 the existing 
appraiser and evaluator independence standards from Sec. Sec.  614.4255 
and 614.4267. We also propose that System lenders verify an appraiser's 
or evaluator's competency to value the type of collateral under review. 
In addition, we propose several clarifying changes to existing conflict 
of interest prohibitions for a lender's staff. As proposed, Sec.  
614.4255(b) would require lenders to establish written standards 
setting forth how independence from the credit decision will be 
determined. We had considered removing the ability of a single person 
to both establish the collateral value and make the related credit 
decision. However, we are mindful there are smaller associations or 
service offices where complete separation may not be possible. Also, we 
took into consideration the use of automated credit approval processes. 
As a result, we are not proposing to remove the current regulatory 
authority allowing one person to perform the valuation and credit 
function. However, we propose that those System lenders choosing to 
embrace such a practice implement a secondary review. We are proposing 
in Sec.  614.4255 (b) that a secondary review occur either before 
credit approval or soon after loan closing. We believe System 
institutions already have the policies and procedures in place to 
address this requirement. Additionally, we propose in Sec.  
614.4255(b)(3) and (4) that a review of that person's work be conducted 
by someone separate from the credit transaction and the CRC. We also 
propose clarifying language that the CRC may not be treated as a 
secondary review source. Notwithstanding this proposed provision, all 
aspects of the proposed Sec.  614.4255(b) would remain applicable to 
System lenders allowing a single person to both establish the 
collateral value and make the related credit decision.
    Finally, we propose moving existing prohibitions on who may perform 
collateral appraisals and evaluations to new Sec.  614.4255(c). We also 
propose clarifying that the existing prohibition against a fee 
appraiser or fee evaluator having a financial interest in the loan or 
subject property does not include fees earned for valuation services. 
In addition, we propose expanding the existing prohibition against 
directors, officers and employees of the System lender performing real 
estate appraisals and/or evaluations to include all assets where that 
person has a direct financial interest in the asset being valued. We do 
not propose extending this prohibition to those appraisals or 
evaluations prepared by the lender's staff where the staff is engaged 
in marketing, lending, collection, or credit decision process, but 
holds no financial interest in the asset and the appraisal or 
evaluation is subject to the aforementioned secondary review.
    We propose new language in paragraph(c)(6) to prohibit directors, 
officers and employees of the System lender from serving on the CRC 
when that same director, officer or employee performed an appraisal or 
evaluation that is under review by the CRC. To ensure continued 
independence in the valuation process, we believe it is important to 
restrict those performing the appraisal or evaluation from serving on 
the CRC when a credit decision involving the appraisal or evaluation 
prepared by that person is under review by the CRC.

E. Valuing Business Chattel, Personal, and Intangible Property 
[Proposed Sec.  614.4260]

    We propose renumbering existing Sec.  614.4266 as new Sec.  
614.4260 and keeping the existing requirements of Sec.  614.4266 that 
chattels are valued using market-values and contain detailed 
descriptions of the chattel as well as identify the source(s) used to 
set the value. We also propose providing a nonexclusive list of 
acceptable sources. Additionally, we propose adding language to make 
clear that evaluations of business chattel, personal and intangible 
properties must use recognized techniques and sources when deriving the 
final value. We believe limiting the manner of identifying values to 
recognized techniques and sources helps ensure the accuracy of assigned 
values, which in turn strengthens the soundness of the related credit 
decision. It also furthers the likelihood of those evaluations being 
recognized as valid market values within the financial sector. As a 
conforming change, we propose adding language to reference the proposed 
regulatory sections on minimum content, borrower access, and record-
keeping for chattel evaluations. However, for intangible property, we 
propose keeping, with slight modification, the existing requirements 
from Sec. Sec.  614.4250(a)(6) and 614.4266(c) that evaluations of 
intangible property include discussion of the asset's marketability.
    In developing this proposed rule, we considered proposing a ``score 
card'' exemption or, in the alternative, a reduced analysis for chattel 
taken out of an abundance of caution. Ultimately, we concluded that 
Congress expected all forms of chattel to be valued when making a loan. 
Within the Act, Congress established certain loan making actions to 
ensure safe and sound credit decisions and provided legal rights for 
borrowers regarding collateral. To satisfy these congressional 
requirements and expectations, all collateral needs a substantiated 
value. This is true particularly when an applicant seeks to challenge 
the value through the CRC process.\14\ Even though we have not proposed 
any exemptions or offered special provisions for chattel taken out of 
an abundance of caution, we believe our proposal to allow the expanded 
use of AVM and other source data procedures and our proposed changes in 
documentation required for chattel evaluations serve to address the 
majority of concerns expressed on the interaction of chattel 
evaluations and automated loan processes.
---------------------------------------------------------------------------

    \14\ Section 4.14 of the Act provides that applicants and 
borrowers may obtain a review of appraisals and evaluations used in 
the loan making or loan servicing decision by obtaining an 
independent evaluation and presenting it to the CRC.
---------------------------------------------------------------------------

F. Valuing Real Property [Proposed Sec.  614.4265]

    We propose revising the current requirements of Sec.  614.4265 by 
consolidating like provisions currently located in Sec.  614.4260, 
reorganizing and clarifying content, and adding some additional 
requirements.
1. General [Sec.  614.4265(a) and (b)]
    We propose clarifying in Sec.  614.4265(a) that all real estate 
collateral must be appraised unless an evaluation is specifically 
permitted by new Sec.  614.4265(c). We propose moving to new Sec.  
614.4265(b) the existing requirement of Sec.  614.4260(b)(2) that if a 
real estate-related financial transaction is over $1 million dollars, 
then only a state certified appraiser may issue the appraisal report 
for the real estate security. We also propose removing the existing 
Sec.  614.4260(b)(1) requirement that appraisals for transactions over 
$250,000 be completed by state-licensed or state-certified appraiser. 
Our other proposed changes, such as to the definition of ``appraisal,'' 
remove the need for this provision.
2. Permitted Use of Real Estate Evaluations [Existing Sec.  
614.4260(c); Proposed Sec.  614.4265(c)]
    We propose moving to new Sec.  614.4265(c) the existing exceptions 
in Sec.  614.4260(c) for when an evaluation of

[[Page 27315]]

real estate may be used instead of an appraisal. We also propose adding 
clarifications to their use because over the years we have had to issue 
guidance and address questions on the meaning and applicability of the 
regulatory exceptions. We intend no change to the original scope of the 
exceptions unless otherwise provided for in the regulation and as 
explained in this preamble. Specifically, we are proposing to keep the 
existing authorization to issue an evaluation, not an appraisal, for 
real estate collateral in the following loan transactions when use of 
an exception is justified.
a. Transactions Valued at or Below $250,000
    We propose moving the existing exception in Sec.  614.4260(c)(1) 
for transactions that do not include a business loan and which are 
valued at or below $250,000 to new Sec.  614.4265(c)(1) and naming it 
``non-business loan transactions''.
b. Business Loan Transactions
    We propose moving the existing exception in Sec.  614.4260(c)(2) 
for transactions that are business loans valued at or below $1 million 
to new Sec.  614.4265(c)(2) and naming it ``business loan 
transactions''. Those persons eligible for the business loan exception 
include individuals, corporations, sole proprietorships, et al. that 
meet the eligibility requirements of FCA regulations Sec. Sec.  
613.3000(b), 613.3010, and 613.3020.
    Additionally, we clarify that we propose no change to this 
exemption being used for first-lien real estate taken under 12 U.S.C. 
2018(a). The value of this first-lien security is used to establish the 
Loan-to-Value lending ratio (LTV) and so the Act requires it to be 
``appraised'' because Congress intended values used in the LTV be 
strong and supportable. When developing the existing rule in 1992, we 
set in Sec.  614.4265 the minimum requirement that all real estate 
evaluations determine market value after analyzing the property's value 
under three approaches: Income capitalization, sales comparison, and 
cost. This was to afford System lenders use of the FIRREA business loan 
transaction exemption for first-lien real estate taken under 12 U.S.C. 
2018(a) while also satisfying the requirements of the Act. For that 
reason, in this rulemaking we propose no changes to allowing use of the 
business loan transaction exemption for first lien real estate taken 
under 12 U.S.C. 2018(a). In coordination with this, we propose no 
change in the requirement to use three approaches when either 
appraising or evaluating real estate, as discussed in the following 
preamble section III.F.3., ``Determining value.''
    We are proposing changes to one of the conditions for using the 
business loan exception. Currently, our regulations state that the 
repayment of the business loan cannot be dependent on income derived 
from the sale or cash rental of real estate as the primary source of 
repayment if using the exception. We are proposing to relax this 
limitation by restricting it to repayment coming from cash rental from 
nonagricultural operations. That is, we propose allowing business loan 
transactions at or below $1 million to use evaluations when repayment 
of the loan is from rental income derived from agricultural sources. We 
believe renting land for agricultural purposes should not prevent use 
of this exception. Farmers or ranchers who receive cash rents from 
production on agricultural land should not have to bear the cost of an 
appraisal solely because the repayment of their loan is from cash rents 
off that land. This includes those farmers or ranchers who have set 
aside land and receive conservation payments from a federal or state 
program.
c. Subsequent Loan Transactions
    We propose moving the existing exception in Sec.  614.4260(c)(5) 
for subsequent transactions that do not involve new collateral or new 
monies to new Sec.  614.4265(c)(3) and naming it ``subsequent loan 
transactions''. We propose clarifying changes to the existing language, 
but propose no material change to this exception.
d. Pooled Loan Transactions
    We propose moving the existing exception in Sec.  614.4260(c)(6) 
for loan transactions where a System lender purchases an interest in a 
loan or pool of loans to new Sec.  614.4265(c)(4) and naming it 
``purchased loans''. We propose clarifying changes to existing 
language, but propose no material change to this exception.
e. Guaranteed Loan Transactions
    We propose moving the existing exception in Sec.  614.4260(c)(7) 
for loan transactions involving a U.S. Government guarantee to new 
Sec.  614.4265(c)(5) and naming it ``U.S. Government guarantee''. We 
propose clarifying changes to existing language, but propose no 
material change to this exception. Specifically, we propose clarifying 
the exception's applicability by converting the existing single 
sentence into two separate sentences: One for purchased loans already 
having a guarantee and one for when the lender is making the loan with 
a guarantee. We believe this clarification will facilitate use of the 
exception.
f. Additional Security in a Loan Transaction
    We propose moving and consolidating the existing exceptions in 
Sec.  614.4260(c)(3) and (c)(4) for loan transactions involving real 
property that is either not required by law or is taken for a purpose 
other than the land's value to new Sec.  614.4265(c)(6), ``Additional 
security''. As proposed, an evaluation process would be available for 
real estate taken under an abundance of caution. We believe this 
proposed change captures the intent of the existing exceptions but 
presents them in a simpler manner.
    We considered adding a commercial real estate transaction exception 
in response to an exception of this nature being added by those 
regulators subject to FIRREA. The commercial real estate transaction 
exception recently authorized by other regulators, such as the Federal 
Deposit Insurance Corporation, provides that a commercial loan using 
real estate security, but not involving a single 1-to-4 family 
residence,\15\ may use an evaluation instead of an appraisal for the 
real estate when the loan transaction is at or below $500,000. The 
unique nature of the System would have made the exception of little 
value. Farm Credit direct lenders are non-depository institutions who 
primarily make commercial business loans to the agricultural sector. 
These System lenders have authority to make owner-occupied home loans 
in rural areas populated by 2,500 persons or less, but these home loans 
may not make up more than 15 percent of the institution's loan 
portfolio. Further, a loan made to finance one of these homes would not 
be a business loan or a commercial transaction, so would be ineligible 
for a commercial real estate transaction exception. Additionally, 
System institutions may make the occasional consumer loan as part of an 
agricultural operation's `other credit needs' and these loans would 
also not qualify for a commercial real estate transaction exception 
because they too would be consumer transactions. However, System 
institutions may finance certain commercial transactions under the same 
`other credit needs' authority and, if no residence were

[[Page 27316]]

involved, these loans might qualify for a commercial real estate 
transaction exception. In evaluating the volume of loan transactions 
such an exception would cover and considering the fact that these loans 
would mainly be commercial transactions so most would already be 
eligible under the ``business loan'' exception (if the loan transaction 
is $1 million or less), we did not see the value in adding an 
additional exemption.
---------------------------------------------------------------------------

    \15\ A single 1 to 4 family residence is generally considered to 
be a single-family home, a duplex, a tri-plex or a four-plex. It 
generally does not include farm or ranch properties that have a 
residence on the farm or ranch-site unless the entire property is 
primarily residential.
---------------------------------------------------------------------------

3. Determining Value [Proposed Sec.  614.4265(d)]
    We propose consolidating in new Sec.  614.4265(d) the existing 
requirements of Sec. Sec.  614.4250(a)(6) and 614.4265. We also propose 
moving from the existing definitions those explanations for the ``cost 
approach'', ``income capitalization approach'', and ``sales comparison 
approach'', incorporating them into new Sec.  614.4265(d).
    As proposed, new Sec.  614.4265(d) would continue to require real 
estate be valued on the basis of market value but would add 
clarification of how to arrive at a market value. We propose clarifying 
that market value is identified only after considering the three 
valuation methods: Income capitalization, sales comparison, and cost 
approach. We propose this clarification in part through relocating the 
existing definitions for ``cost approach'', ``income capitalization 
approach'', and ``sales comparison approach'' to new paragraph (d)(1) 
through (3). We further propose clarifying that arriving at a market 
value includes identification of nonagricultural influences, as is 
currently required in existing Sec.  614.4265(f). Also, we propose 
requiring in all cases that real estate appraisals and evaluations 
contain detailed documentation of the best approach to value as part of 
the written report. We propose that details of the other approaches 
only be required when primarily used to identify the market value. We 
propose these modifications to provide better clarity as to why an 
appraiser or evaluator may not have chosen to use a specific valuation 
approach. It also increases transparency and allows the user to better 
understand the logic behind the final market value.
    In proposed new paragraph (d)(1), the income capitalization 
approach would be explained using the current definition of such. 
Similarly, proposed new paragraph (d)(2) would contain expectations for 
the sales comparison approach, using the current definition and adding 
new requirements for using at least three comparable sales, unless the 
appraiser or evaluator provides documentation that such comparable 
sales are not available. FCA believes that requiring appraisals and 
evaluations to contain at least three comparable properties provides 
adequate information to form an opinion on the market value of the 
property in question. Additionally, three comparable sales would 
provide the end user with an adequate range of values for the subject 
property for comparison purposes.
    Lastly, proposed new paragraph (d)(3) would contain expectations 
for the cost approach by using the current definition and adding a 
documentation requirement when the property has unique improvements. 
FCA believes adding the documentation requirement would allow end users 
to better understand the methodology chosen to derive the final 
recommended market value of the subject property. Additionally, we 
believe the documentation would provide greater transparency to the end 
user regarding the improvements on the property.
4. Valuation of Fixtures [Proposed Sec.  614.4265(e)]
    Proposed Sec.  614.4265(e) would retain the existing requirement 
that real estate fixtures be included in the value of real estate. As 
proposed, greater specificity would be added to clarify that buildings 
capable of being used for income-producing purposes related to 
agriculture must have an assigned value. However, we propose language 
preserving the discretion of the appraiser or evaluator to assign 
certain obsolete buildings no value. In the past, questions have arisen 
on whether such buildings should be assigned even a salvage value. 
Since appraisers and evaluators are trained in assessing market 
demands, we believe they need to retain the final authority on what 
value is given obsolete fixtures. To ensure the fixtures are not 
prematurely determined obsolete, we also propose that the value 
assigned be premised upon the average buyer. We believe this will 
alleviate potential disputes among the owner, the lender, the examiner, 
and the appraiser/evaluator on whether the building is obsolete or 
retains some contributory value in each individual's opinion.
5. Additional Content Requirements [Proposed Sec.  614.4265(f)]
    We propose keeping, with slight modification, the existing 
requirements from Sec. Sec.  614.4250(a)(6) that real property 
appraisals and evaluations include discussion of the land's 
marketability. We also propose requiring that appraisals and 
evaluations of real property include certain information in addition to 
the general contents proposed in new Sec.  614.4245(b). Specifically, 
we propose that the appraisal or evaluation include a description of 
any permanent fixtures, known water or mineral rights, and recorded 
access rights associated with the land being valued. In recent years, 
we have had several situations arise where these items were not 
properly noted, resulting in disputes when the lender later went to act 
on its lien or there was a land transfer matter. We believe having an 
appraisal or evaluation notate known permanent fixtures, water or 
mineral rights, and recorded access rights will further aid lenders in 
verifying the information against title reports. We also propose 
keeping the existing requirement that an appraisal or evaluation name 
the purpose(s) for which the property will be used by the applicant or 
borrower when that purpose will be different from the land's highest 
and best use.
    Next, we propose that an appraisal or evaluation of real property 
name readily observable conditions on the subject property that may 
pose an environmental hazard. As proposed, System lenders would have to 
inform the appraiser or evaluator of any reported or known potential 
hazards. FCA believes the identification of known hazards on the 
subject property provides valuable information in formalizing the 
valuation of the property.
    Finally, we propose requiring System lenders provide appraisers and 
evaluators Federal Emergency Management Agency (FEMA) forms prepared on 
the subject property. Specifically, when the property includes items 
listed in a Special Flood Hazard Area, the lender would have to supply 
to the appraiser or evaluator the FEMA form showing the location of the 
buildings. We propose this provision to align our appraisal and 
evaluation rules with our existing flood insurance rule of Sec.  
614.4940.

G. Computer-Based Models and Other Tools [Proposed Sec.  614.4270]

    We propose adding a new Sec.  614.4270 discussing the use of 
certain appraisal and evaluation tools. FCA previously issued 
Informational Memoranda addressing the use of automated analytical 
tools in assigning values to collateral \16\ and we propose 
incorporating most of that guidance into this new regulatory section.

[[Page 27317]]

Specifically, we propose allowing System institutions to establish 
computer-based analytical methods and technological tools for 
collateral appraisal and evaluations, provided the lender can 
demonstrate that the method(s) used to establish a value is consistent 
with safe and sound lending practices and contains sufficient 
information and analysis to provide a market value conclusion. As 
proposed, analysis tools may not be used as a standalone appraisal or 
evaluation because these tools are intended for use in assisting 
appraisers and evaluators in the collateral evaluation process, not 
replacing them. For example, computer-based models may be used if there 
is sufficient data available for the type of property being evaluated 
and if the lender has the necessary expertise to interpret the data.
---------------------------------------------------------------------------

    \16\ Referring to ORP-IM, ``Collateral Evaluation Requirements 
and Frequently Asked Questions'', dated April 21, 2008 and OE-IM, 
``Computer-Based Model Validation Expectations'', dated June 17, 
2002.
---------------------------------------------------------------------------

    We propose that use of automated valuation models (AVM) be limited 
to situations where the AVM uses information specific to the subject 
property, including the actual physical condition of the subject 
property, rather than generalized `assumptions.' As proposed, 
assumptions used by the evaluator will require sufficient support and 
the evaluator will have to demonstrate that the `assumption' is 
appropriate for the subject property. Appropriate due diligence is also 
essential when using these models, including conducting independent 
reviews to ensure institutions' boards of directors and senior managers 
are receiving clear and informative descriptions of the model's 
assumptions and limitations. As such, we propose that System lenders 
perform due diligence through an independent validation process. We 
also propose that System lenders retain staff or contract with persons 
who have experience in using the AVM chosen by the System lender. FCA 
believes that lenders who maintain staff with AVM expertise would be 
better positioned to respond to questions or concerns from the output 
of the AVM or in the event the AVM does not perform as anticipated.
    We further propose allowing the use of tax assessment values (TAV) 
when there is additional support to show a valid correlation between 
the TAV and market value but would limit TAV use to valuing real 
estate. As proposed, the lender would be required to document how the 
TAV is developed and updated by the tax authorities. We also propose 
using the TAV only in a manner consistent with safe and sound lending 
practices, which would involve using additional support for final 
recommended values rather than sole reliance upon the TAV. We are not 
proposing to allow use of TAVs for chattel and personal property. We 
are aware some states assess and tax chattel and personal property, but 
we do not believe those valuations processes are refined enough to use 
in credit decisions. As we understand them, chattel valuation processes 
vary widely by state, not all states provide such valuations, and the 
values do not consider any additional features or the actual condition 
of the chattel.
    Additionally, we propose requiring System lenders using these tools 
have policies and procedures in place that, among other things, include 
appropriate internal controls. In new Sec.  614.4270(c) we propose 
minimum control requirements that the policies and procedures must 
address. These requirements include ensuring staff training and 
expertise, validating model results and setting criteria when the 
models will be used and to what extent. We believe the proposed minimum 
internal control requirements are common industry practice and provide 
a sound basis for System institutions to develop additional 
institution-specific requirements.

H. Reservation of Authority [Proposed Sec.  614.4275]

    We propose moving to new Sec.  614.4275 the existing contents of 
Sec.  614.4260(d) regarding our authority to require appraisals and 
evaluations. We also propose clarifying that our collateral evaluation 
regulations do not prevent exercising this authority when safety and 
soundness issues or enforcement actions require it.

V. Regulatory Flexibility Act and Congressional Review Act Conclusions

    Pursuant to section 605(b) of the Regulatory Flexibility Act (5 
U.S.C. 601 et seq.), FCA hereby certifies that the proposed rule will 
not have a significant impact on a substantial number of small 
entities. Each of the banks in the Farm Credit System, considered 
together with its affiliated associations, has assets and annual income 
in excess of the amounts that would qualify them as small entities. 
Therefore, Farm Credit System institutions are not ``small entities'' 
as defined in the Regulatory Flexibility Act.

List of Subjects in 12 CFR Part 614

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

    For the reasons stated in the preamble, the Farm Credit 
Administration proposes to amend part 614 of chapter VI, title 12 of 
the Code of Federal Regulations as follows:

PART 614--DISCLOSURE TO SHAREHOLDERS

0
1. The authority citation for part 614 continues to read as follows:

    Authority:  42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128; 12 
U.S.C. 2011, 2013, 2014, 2015, 2017, 2018, 2019, 2071, 2073, 2074, 
2075, 2091, 2093, 2094, 2097, 2121, 2122, 2124, 2128, 2129, 2131, 
2141, 2149, 2183, 2184, 2201, 2202, 2202a, 2202d, 2202e, 2206, 
2206a, 2207, 2211, 2212, 2213, 2214, 2219a, 2219b, 2243, 2244, 2252, 
2279a, 2279a-2, 2279b, 2279c-1, 2279f, 2279f-1, 2279aa, 2279aa-5; 
sec. 413 of Pub. L. 100-233, 101 Stat. 1568, 1639 (12 U.S.C. 2121 
note).

0
2. Revise the heading of subpart F to read as follows:

Subpart F--Appraisal and Evaluation Requirements

0
3. Subpart F, consisting of Sec. Sec.  614.4240 through 614.4275, is 
revised to read as follows:
Subpart F--Appraisal and Evaluation Requirements
Sec.
614.4240 Definitions.
614.4245 General.
614.4250 Policies, standards, and internal controls for valuing 
collateral.
614.4255 Appraiser and evaluator qualifications and independence.
614.4260 Valuing business chattel, personal, and intangible 
property.
614.4265 Valuing real property.
614.4270 Appraisal and evaluation tools.
614.4275 Reservation of authority.


Sec.  614.4240   Definitions.

    For the purposes of this subpart, the following definitions apply 
excepting that terms such as copy, document, file, record, provide, 
written, and similar words generally should be interpreted to permit 
electronic transmissions and communications as allowable under 12 CFR 
part 609:
    Abundance of caution means a decision to require an asset as 
security for a loan when the asset is not used as a basis for extending 
credit, a prudent lender would extend credit without the asset, and the 
asset is not legally required as security for the type of credit being 
extended.
    Appraisal means a USPAP compliant written evaluation prepared and 
issued by a state licensed or state certified appraiser setting forth 
an independent and impartial opinion as to the market value of real 
estate as of a specific date(s), which value is supported by the 
presentation and analysis of relevant market information.
    Appraisal Subcommittee means the Appraisal Subcommittee of the 
Federal Financial Institutions Examination Council.

[[Page 27318]]

    Appraiser means a state-certified or state-licensed appraiser who 
is competent, reputable, impartial, and has demonstrated sufficient 
training and experience in identifying values for real property through 
issuance of USPAP compliant reports.
    Automated Valuation Model or AVM means a computer program that 
estimates a property's market value based on market, economic, and 
demographic factors using a quantitative method, system, or approach 
applying statistical, economic, financial, or mathematical theories, 
techniques, and assumptions. Hedonic models generally use property 
characteristics (such as square footage and room count) and 
methodologies to process information, often based on statistical 
regression. Index models generally use geographic repeat sales data 
over time rather than property characteristic data. Blended or hybrid 
models use elements of both hedonic and index models.
    Business chattel means livestock (e.g. any creature not in the wild 
which is regarded as an asset such as those to produce food, wool, 
skins, fur or similar purposes) and crops (growing, harvested, or in 
storage) kept for production or use in the farming of land or the 
carrying on of any agricultural activity. The term also encompasses 
equipment used in business operations, including agricultural 
equipment.
    Business loan means a loan or other extension of credit to finance 
the business activities of an individual, sole proprietorship, general 
or limited partnership, joint venture, cooperative, corporation, 
business trust, or other legal business entity (including those engaged 
in farming enterprises).
    Evaluation means an independent and impartial written opinion of 
market value for an identified interest in, or aspects of, an asset, 
which value is supported by the presentation and analysis of relevant 
market information.
    Evaluator means an individual who is competent, reputable, 
impartial, and has demonstrated sufficient training and experience in 
identifying values for assets. For purposes of business chattel, 
personal, and intangible collateral evaluations, the term may include, 
but is not limited to, System lender staff, certified public 
accountants, equipment dealers, grain buyers, livestock buyers, and 
auctioneers.
    Fee appraiser or fee evaluator means a qualified appraiser or 
evaluator of assets who is not an employee of the party contracting for 
the completion of the appraisal or evaluation and who performs an 
appraisal or evaluation on a fee basis. For purposes of this subpart, a 
fee appraiser or fee evaluator may include staff from another System 
lender only if the employing lender is not operating under joint 
management with the contracting System lender.
    FIRREA means the Financial Institutions Recovery, Reform, and 
Enforcement Act of 1989.
    Highest and best use means the reasonable and most probable legal 
use of the asset as of the date of valuation that is physically 
possible, appropriately supported, financially feasible, and results in 
the highest value.
    Intangible property means an item of worth that is not physical in 
nature, including, but not limited to, a copyright, trademark, 
goodwill, easement, lease, corporate logo or brand name.
    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.
    Other Financing Institutions or OFI means the entities described in 
12 U.S.C. 2015(b)(1)(B), but only with respect to loans discounted or 
pledged under 12 U.S.C. 2015.
    Personal property means all tangible and movable property not 
considered real property and its fixtures or business chattel.
    Real estate or real property means an identified parcel or tract of 
land, including fixtures, easements, rights of way, improvements, if 
any, and associated mineral, oil, gas, timber, or water rights attached 
to the parcel or tract of land.
    Real estate-related financial transaction 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.
    State certified appraiser means any individual who has satisfied 
the requirements for and has been certified as an 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 will be 
accepted under these regulations as a State certified appraiser who has 
not achieved a passing grade on a state-administered examination 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.
    State licensed appraiser means any individual who has satisfied the 
requirements for licensing and has been licensed as an 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.
    System lender means a chartered Farm Credit System institution that 
engages in lending or leasing secured by collateral.
    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.
    USPAP means the Uniform Standards of Professional Appraisal 
Practice adopted by the Appraisal Foundation.


Sec.  614.4245   General.

    (a) Required appraisals and evaluations. System lenders must obtain 
appraisals or evaluations of all collateral used to secure an extension 
of credit (including leasing activities) or the

[[Page 27319]]

purchased interest in credit extended by another lender. System lenders 
must maintain appraisals or evaluations reflecting current market 
conditions. At a minimum, every item of collateral must be appraised or 
evaluated both at the time a lien is obtained and when the System 
lender expects to liquidate its lienhold interest.
    (b) Format and minimum content requirements. An appraisal or 
evaluation is a written impartial opinion of an asset's market value, 
independently developed and supported by analysis of relevant market 
information. The market analysis supporting the final opinion of value 
may be conducted using a variety of appraisal and evaluation tools and 
data sources.
    (1) All appraisals must follow the format requirements of USPAP, or 
its successor. For evaluations, the presentation format may be in the 
form of a report, a synopsis, a computer-generated printout, or 
equivalent records, depending upon the asset and as permitted under the 
evaluation standards of 12 CFR 614.4250. The reporting format used for 
evaluations must be appropriate for both the type of asset being valued 
and the tools and data sources used in setting the value.
    (2) To support an opinion of value, each appraisal or evaluation 
must, at a minimum, include:
    (i) A description of the asset in sufficient detail to reflect the 
relevant characteristics and complexity of the subject asset;
    (ii) Information that will enable the reader to ascertain the 
reasonableness of the estimated market value;
    (iii) Identification of the data source(s) used for determining the 
final market value (e.g., real estate comparable properties, the name 
and model version of an AVM used, the name and date of reputable 
publications used, validated information specific to the System 
lenders' territory); and, if applicable,
    (iv) In those situations when different appraisal or evaluation 
standards are used than those normally employed for the type of asset 
being valued, the appraiser or evaluator must attest that use of the 
different standards was not due to any prohibited discriminatory 
factors like the age, race, or gender of the asset owner or buyer.
    (c) Age of appraisal or evaluation reports. It is the 
responsibility of the System lender to monitor market conditions and 
trends, loan risk, and collateral conditions to appropriately determine 
the frequency for performing new or updated collateral appraisals or 
evaluations in keeping with regulatory requirements. When making credit 
decisions or approving new or additional funds, the System lender may 
use existing collateral appraisals or evaluations reports only if the 
appraisals or evaluations reflect current market conditions at the time 
of use.
    (d) Using the appraisals of another lender. An appraisal ordered by 
another financial institution on assets of a loan applicant may be 
transferred to a System lender when:
    (1) The System lender will complete the credit transaction instead 
of the other financial institution;
    (2) The other financial institution and the applicant agree in 
writing to transfer the report;
    (3) The other financial institution is either subject to Title XI 
of FIRREA or a System lender; and
    (4) The System lender receiving and using the appraisal assumes 
full responsibility for the integrity, accuracy and thoroughness of the 
appraisal, including the methods used by the other financial 
institution to establish collateral values.
    (e) Releasing appraisals or evaluations to applicants and 
borrowers.
    (1) At any time during the life of the loan, an applicant or 
borrower may request a copy of each appraisal and evaluation made or 
used by the System lender in the credit relationship. The System lender 
must provide the copies within 7 calendar days of receiving the 
request. The copy of an appraisal or evaluation provided to an 
applicant or borrower must, at a minimum, contain the final opinion of 
value, the information required under 12 CFR 614.4245(b), and, as 
appropriate to the type of asset being valued, the information required 
under 12 CFR 614.4260 or 12 CFR 614.4265(d), (e), and (f). The first 
copy of each appraisal or evaluation given to the applicant or borrower 
must be provided free of charge, but the System lender may assess 
reasonable copying charges for any additional copies supplied during 
the life of the loan, excluding copies provided as part of an adverse 
credit decision.
    (2) When issuing an adverse credit decision, a System lender must 
include as an attachment to the decision letter copies of those 
collateral evaluations and appraisals used in the decision-making 
process. The applicant or borrower is not required to first request 
such copies and the copies must be provided at no cost to the applicant 
or borrower. The copy of an appraisal or evaluation provided to an 
applicant or borrower must, at a minimum, contain the final opinion of 
value, the information required under 12 CFR 614.4255(b), and, as 
appropriate to the type of asset being valued, the information required 
under 12 CFR 614.4260 or 12 CFR 614.4265(d), (e), and (f).
    (3) To the extent that an appraisal or evaluation may contain 
confidential third-party information, the lender may protect such 
confidential information as provided under 12 CFR 618.8325(b).
    (f) Records. The System lender must maintain collateral appraisals 
or evaluations for the duration required by the lender's recordkeeping 
policies. The records must capture source data used as of the date of 
the evaluation. At a minimum, collateral appraisals or evaluations made 
or used by a System lender for making or servicing a loan must be 
maintained in the related credit file for the life of the loan. 
Appraisals and evaluations used to deny a credit request from a new 
applicant must be maintained in the related credit file for the same 
amount of time as the lender's recordkeeping policies and procedures 
require the credit request to be maintained.


Sec.  614.4250   Policies, standards, and internal controls for valuing 
collateral.

    (a) Policies. The board of directors of each System lender must 
adopt and maintain written policies on when and how to issue collateral 
appraisals and evaluations for all of the System lender's credit 
functions. in keeping with regulatory requirements. Farm Credit banks 
must include OFIs in their policies and procedures for those lending 
and leasing activities conducted under 12 U.S.C. 2015(b)(1)(B). At a 
minimum, the policies must:
    (1) Identify when an evaluation will be used instead of an 
appraisal (when the regulations allow either to be used);
    (2) Establish parameters identifying the frequency and timing of 
appraisals and evaluations, including monitoring portfolio collateral 
values on an ongoing basis;
    (3) Authorize or prohibit the use of out-of-territory appraisers or 
sharing appraisals;
    (4) Establish parameters for using AVMs and other tools in 
identifying market values of real estate and/or chattel;
    (5) Ensure the independence of the persons ordering, performing, 
and reviewing appraisals and evaluations;
    (6) Prohibit basing an appraisal or evaluation on a requested 
minimum valuation, specific value, or loan amount;
    (7) Implement internal controls that promote compliance with 
applicable laws, rules and policies; and, as applicable,

[[Page 27320]]

    (8) Require OFIs to follow collateral appraisal and evaluation 
requirements.
    (b) Standards. Each System lender must adopt and maintain written 
standards for appraisals and evaluations that implement regulatory 
requirements, and which are designed both to protect the lender's 
interest and adequately represent real-time collateral values. At a 
minimum, the standards must address:
    (1) The level of information required to support the value assigned 
beyond regulatory minimum content requirements, including 
considerations for complex and specialized assets or high-risk 
transactions;
    (2) Using collateral appraisals and evaluations in a manner 
consistent with safe and sound practices;
    (3) The qualifications of individuals selected to perform an 
appraisal or evaluation;
    (4) Development and maintenance of a list of approved fee 
appraisers and fee evaluators, including the criteria to follow when 
selecting and engaging a fee appraiser or fee evaluator;
    (5) Providing fee appraisers and fee evaluators with a copy of the 
collateral appraisal and evaluation regulations contained in this 
subpart and instructing the fee appraiser or fee evaluator to apply the 
regulatory requirements in formation of the contracted appraisal or 
evaluation;
    (6) On-going reviews of market conditions, including how 
recognition of special events affecting values, such as natural 
disasters, will be handled;
    (7) The frequency and form of property inspections; and
    (8) How existing appraisals and evaluations will be handled in 
renewals, refinancings, and other subsequent credit transactions.
    (c) Internal Controls. Each System lender must have written 
internal control policies and procedures for managing its collateral 
appraisal and evaluation activities. The internal controls policies and 
procedures must be kept up-to-date and, at a minimum, include the 
following elements:
    (1) Protecting the integrity of the overall collateral appraisal 
and evaluation function;
    (2) Verifying the condition of pledged collateral is as listed in 
the appraisal or evaluation report;
    (3) Safeguarding the independence of appraisers and evaluators in 
activities conducted under this subpart;
    (4) Ensuring appraisals and evaluations are used to verify 
collateral market values contained within credit analysis and financial 
statements; and
    (5) Reviewing appraisals and evaluations periodically for 
compliance with applicable laws, regulations, policy and industry 
standards.


Sec.  614.4255   Appraiser and evaluator qualifications and 
independence.

    System lenders are responsible for verifying that persons 
performing appraisals and evaluations for use by the lender meet the 
requirements of this section.
    (a) Competency. An appraiser or evaluator must have the requisite 
knowledge and experience for both the specific asset being valued and 
the relevant market area.
    (1) An appraiser or evaluator may not be considered competent 
solely by virtue of being certified, licensed, or accredited. Any 
determination of competency must be based on the individual's 
experience and educational background as it relates to the specific 
appraisal or evaluation assignment for which such individual is being 
considered.
    (2) A State certified appraiser or a State licensed appraiser may 
not be excluded from consideration for an assignment solely by virtue 
of membership or lack of membership in any particular appraisal 
organization. System lenders may use State certified or State licensed 
appraisers from any State provided that:
    (i) The appraiser is competent to perform such appraisals;
    (ii) The applicable System lender has established policies 
providing for use of interstate appraisals; and
    (iii) The State appraiser licensing and certification agency where 
the subject property is located recognizes the certification or license 
of the appraiser's State of permanent certification or licensure.
    (b) Staff appraisers and evaluators. Each System lender must 
maintain written standards implementing regulatory requirements on 
appraiser and evaluator independence from lending activities, as well 
as real or perceived conflicts of interest, for collateral appraisal 
and evaluation functions performed by staff of the System lender. The 
standards must address how a separate secondary review of the assigned 
value(s) by a person not connected to the credit decision will be used 
and determine if the secondary review will happen before the final 
credit decision is made or soon after loan closing. The written 
standards on appraiser and evaluator independence from lending 
activities, at a minimum, must also:
    (1) Facilitate the exercise of independent judgment by staff 
appraisers and evaluators when developing collateral values by 
providing protections from undue influence by the loan production and 
collection processes;
    (2) Require staff appraisers and evaluators to have no direct, 
indirect, or prospective interest, financial or otherwise, in the asset 
being valued;
    (3) Require staff appraisers and evaluators to have no direct, 
indirect, or prospective interest, financial or otherwise, in the 
transaction for which the appraisal or evaluation will be used when 
there is no separate secondary review of the assigned value(s) by 
another person who is not connected to the credit decision nor a member 
of the Credit Review Committee (CRC) reviewing the credit decision; and
    (4) Restrict staff appraisers and evaluators from subsequent 
participation in any decision related to a loan connected to the 
collateral that the staff member is valuing, including the sale, 
purchase, or servicing of that loan, when there is no separate 
secondary review of the assigned value(s) by another person who is not 
connected to the credit decision (including through service on the CRC) 
or subsequent credit activities.
    (c) Prohibitions. In addition to required internal controls for 
managing a System lender's collateral appraisal and evaluation 
activities, the following prohibitions apply:
    (1) No person may be a fee appraiser or fee evaluator for the 
System lender when such person has a direct or indirect interest, 
financial or otherwise, in the loan or subject property being valued 
(excluding fees generated from performing an appraisal or evaluation).
    (2) No director of the System lender may vote on or approve a loan 
decision when that same person performed the collateral appraisal or 
evaluation for the loan under review.
    (3) No director of the System lender may perform a collateral 
appraisal or evaluation in connection with any transaction on which 
such person made, or will be required to make, a credit decision.
    (4) No director, officer, or employee of the System lender may 
perform an appraisal or evaluation of an asset serving as security for 
a credit request when that person has a direct or indirect interest, 
financial or otherwise, in the asset.
    (5) Absent a secondary review process, no person may perform an 
appraisal or evaluation of an asset serving as security for a credit 
request or loan when that person is engaged in the marketing, lending, 
collection, or credit decision processes of any of the following:

[[Page 27321]]

    (i) A System lender making or originating the loan;
    (ii) A System lender operating under common management with the 
System lender making or originating the loan; or
    (iii) A System lender purchasing an interest in the loan.
    (6) A director, officer, or employee of the System lender 
performing a collateral appraisal or evaluation for assets connected to 
a credit or servicing request may not also serve as a Credit Review 
Committee member at a committee meeting where that appraisal or 
evaluation report, whether alone or as part of a credit decision, is 
under review. This prohibition extends to any person performing the 
secondary review process for an appraisal or evaluation that was 
prepared by a staff appraiser or evaluator.


Sec.  614.4260   Valuing business chattel, personal, and intangible 
property.

    (a) General. A market value-based evaluation for business chattel, 
personal, or intangible property taken as collateral must employ the 
industry-recognized methods and techniques used to value similar 
property. Each System lender is responsible for identifying appropriate 
collateral evaluation data sources and applying proper criteria in 
evaluating business chattel, personal, and intangible property. When a 
request is made under 12 CFR 614.4245(e), the System lender must 
provide to the requestor the supporting information and criteria used 
in the evaluation of the subject asset(s).
    (b) Data source(s). Data sources used to establish the market value 
of business chattel, personal, or intangible property may include, but 
are not limited to, AVMs, reputable industry publications, validated 
information specific to the System lender's territory, equipment 
dealers, grain buyers, livestock buyers, auctioneers, commodities 
market, and market sales reports. Identification of data sources made 
pursuant to the requirements of 12 CFR 614.4245(b)(2)(iii) must include 
the name of the source and the date of the publication/contact or 
version of AVM used, as applicable.
    (c) Business chattel and personal property. When providing details 
of a subject asset under the requirements of 12 CFR 614.4245(b)(2), an 
evaluation for business chattel and personal property must explain the 
quality, condition, quantity, species, weight, value per unit, etc. of 
the asset, as applicable to the type of asset being valued. The 
evaluation must also describe the location of the chattel at time of 
valuation.
    (d) Intangible items. For intangibles only, the evaluation must 
include a review and description of the documents supporting the 
interest(s) in the asset and marketability of the intangible property, 
including applicable terms, conditions, and restrictions contained in 
the document that would affect the value of the property.


Sec.  614.4265   Valuing real property.

    (a) General. An appraisal is required for all real estate 
collateral unless an evaluation is specifically permitted by this 
section.
    (b) Appraiser limitations. Only a State certified real estate 
appraiser may issue an appraisal report for real estate-related 
financial transactions over $1,000,000.
    (c) Permitted use of evaluations. System lenders may establish the 
value of real estate collateral through an evaluation in any of the 
following loan transactions (if documentation justifies use of such 
exceptions):
    (1) Non-business loan transactions. An evaluation of real estate 
may be used instead of an appraisal for a non-business loan with a 
transaction value at or below $250,000.
    (2) Business loan transactions. An evaluation of real estate may be 
used instead of an appraisal for a business loan with a transaction 
value at or below $1,000,000 provided repayment of the loan is not 
primarily dependent upon either:
    (i) Income derived from the sale of real estate, or
    (ii) Income from the cash rental of real property being rented for 
nonagricultural purposes.
    (3) Subsequent loan transactions. An evaluation of real estate may 
be used instead of an appraisal for subsequent loan transactions that 
do not involve new collateral or the advancement of new loan funds, 
other than funds necessary to cover reasonable closing costs. 
Additionally, there must be no obvious or material change in the 
physical aspects of the existing real estate collateral or market 
conditions affecting the property.
    (4) Purchased loans. An evaluation of real estate may be used 
instead of an appraisal when a System lender 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 originating lender's real estate 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 or material change in market 
conditions or the physical aspects of the property that would threaten 
the System lender's secured position.
    (5) U.S. Government guarantee. An evaluation of real estate may be 
used instead of an appraisal when a System lender makes a loan secured 
by real estate and such loan is guaranteed by an agency of the United 
States Government and use of an evaluation conforms to the requirements 
of the guaranteeing agency. An evaluation of real estate may be used 
instead of an appraisal when a System lender purchases a loan secured 
by real estate and such loan is both guaranteed by an agency of the 
United States Government and otherwise supported by an appraisal that 
conforms to the requirements of the guaranteeing agency.
    (6) Additional security. When a System lender makes a loan secured, 
in part or in whole, by real estate and some or all of the real estate 
is taken out of an abundance of caution, an evaluation, in lieu of an 
appraisal, of the real estate taken out of an abundance of caution is 
permitted. All other real estate security must be appraised, absent 
another permitted use of evaluations being applicable.
    (d) Determining value. Real estate is valued on its market value, 
which must be developed from considering three approaches: The income 
capitalization approach, the sales comparison approach, and the cost 
approach. Consideration of all three approaches includes identifying 
all relevant influences, including, but not limited to, urban 
development, mineral deposits, and commercial activity in the area. All 
real estate appraisals and evaluations must include detailed 
documentation of the main approach used to identify the market value of 
the subject property, including an explanation of why that approach was 
the primary method relied upon by the appraiser or evaluator. The 
appraisal or evaluation must include a general discussion of the other 
approaches considered but not relied upon to reach the final market 
value. In situations where one or more of the three approaches must be 
excluded from consideration due to a lack of data, the appraisal or 
evaluation must include an explanation justifying the exclusion.
    (1) Income capitalization approach. The income capitalization 
approach measures the present value of the expected future benefits of 
property

[[Page 27322]]

ownership. This value is derived from either:
    (i) 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
    (ii) Discounting the annual cashflows for the holding period and 
the reversion at a specified yield rate or specified yield rates which 
reflect market behavior.
    (2) Sales comparison approach. The sales comparison approach 
compares the subject property to similar properties located in 
relatively close proximity, having similar size and utility, and which 
have been recently sold in arm's-length transactions (comparable 
sales). Not less than three comparable sales will be used unless the 
appraiser or evaluator provides documentation that such comparable 
sales are not available. Under this approach, the appraiser or 
evaluator must estimate the degree of similarity and difference between 
the subject property and comparable sales. Such comparison must be 
based on conditions of sale, financing terms, market conditions, 
location, physical characteristics, and income characteristics. 
Appropriate adjustments to the sales prices of comparable properties 
are allowed when there are identified deficiencies or superiorities of 
the subject property. The appraiser or evaluator must use his or her 
knowledge of the area and apply good judgment in the selection of 
comparable sales that are the best indicators of value for the subject 
property.
    (3) Cost approach. The cost approach 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 obsolescence) evident in the 
structure from all causes, plus the market value of the land. If the 
appraiser or evaluator considers the property to be unique or have 
specialized improvements, the appraiser or evaluator will identify the 
source of the cost estimates and will comment on the methodology used 
to estimate depreciation, effective age and remaining economic life.
    (e) Valuation of fixtures. Real estate fixtures closely aligned 
with, an integral part of, and normally sold with real estate are 
included in the value of the real estate and must be identified in the 
appraisal or evaluation. Structures principally used, or capable of 
being used, for income-producing agricultural or farming commercial 
enterprise purposes, such as barns, silos, commercial greenhouses, or 
livestock facilities, must be assigned a value. At the discretion of 
the appraiser or evaluator, non-dwelling structures no longer used for 
a commercial purpose and which the average buyer would consider as 
adding no contributory role to the real estate do not require 
assignment of a value.
    (f) Additional report content requirements. In addition to the 
minimum content requirements of 12 CFR 614.4245(b) and the requirements 
of paragraphs (d) and (e) of this section, an appraisal or evaluation 
for real estate must include all of the following:
    (1) A description of any permanent fixtures, known water and 
mineral rights, and recorded access rights associated with the real 
estate being valued.
    (2) The purpose for which the property is or will be used by the 
loan applicant or borrower, if different from the highest and best use.
    (3) A list of readily observable conditions that may pose a present 
environmental hazard. If the System lender knows, or is informed by 
another party, of a potential hazard, that information must be 
disclosed to the appraiser or evaluator before the appraisal or 
evaluation is completed.
    (4) Identification of any structures located in known flood hazard 
areas. When the real property being valued includes buildings or 
dwellings in a Special Flood Hazard Area, the appropriate Federal 
Emergency Management Agency form identifying the structure and its 
location on the property, as required by Sec.  614.4940 of this part, 
must be made available to the appraiser or evaluator before the 
appraisal or evaluation report is completed.
    (5) The reasonable sales exposure time, the current market 
conditions or trends affecting, or likely to affect, the value of the 
land, and the most probable marketplace for the land.


Sec.  614.4270   Appraisal and evaluation tools.

    A System lender may use a variety of analytical methods and 
technological tools in developing an appraisal or evaluation, provided 
the lender can demonstrate that the method(s) used is consistent with 
safe and sound lending practices and contains sufficient information 
and analysis to support the resulting market value conclusion. The 
tools by themselves do not constitute either an appraisal or 
evaluation.
    (a) Automated models (AVM). Values for real estate, business 
chattel, personal, and intangible property may be determined using 
computer-based models only when there is sufficient data enabling the 
model's statistical determination of accurate market values.
    (1) Scope of use. Use of an AVM must be commensurate with the 
System lender's credit risk exposure and due diligence in setting 
minimum performance criteria for the model. Any assumption used must be 
fully supported and appropriate for the subject property. A System 
lender must have or engage persons with expertise relative to a 
particular method or tool before using that analysis tool.
    (2) Validation. System lenders must establish an independent 
validation process to determine the appropriate application of AVMs. 
Persons overseeing the model validation must be independent of the loan 
underwriting and portfolio management process. If the System lender 
adopts a third-party vendor model, the lender must periodically 
document the integrity and applicability of the model and the vendor's 
maintenance of the model.
    (b) Tax assessment values (TAV). System lenders may use TAV only in 
the appraisal or evaluation of real estate. When using TAVs, the System 
lender must determine and document how the tax jurisdiction calculates 
the TAV and how frequently TAVs are updated. A System lender may rely 
on the data provided by local tax authorities to develop the resulting 
market value unless inconsistent with safe and sound lending practices 
or, when applicable, USPAP. The use of a TAV requires additional 
support to demonstrate a valid correlation between the TAV and market 
value.
    (c) Internal controls when using appraisal and evaluation tools. A 
System lender must establish and maintain written policies and 
procedures providing a sound process for using various methods or tools 
and for verifying that a valuation method or tool is employed in a 
consistent manner. At a minimum, the policies and procedures must:
    (1) Define the requisite expertise and training of staff in 
managing the selection, use, and validation of an analytical method or 
technological tool;
    (2) Address the selection, use, and validation of the analysis 
method or tool;
    (3) Establish criteria for determining whether a particular method 
or tool is appropriate for a given transaction or lending activity, 
considering associated risks for transaction size and purpose, credit 
quality, and leverage tolerance (loan-to-value);

[[Page 27323]]

    (4) Specify criteria identifying when a market event or risk factor 
would preclude the use of a particular method or tool;
    (5) Address standards for the use of multiple methods or tools, if 
applicable, for valuing the same property or to support a particular 
lending activity;
    (6) Provide criteria for ensuring that the method or tool used 
produces a reliable estimate of market value; and
    (7) Address the extent to which an inspection or research is 
necessary to ascertain the property's actual physical condition and 
what supplemental information is needed to assess the effect of market 
conditions or other factors on the AVM estimate of market value.


Sec.  614.4275   Reservation of authority.

    (a) Nothing in this subpart shall be read to limit the authority of 
the Farm Credit Administration to take supervisory or enforcement 
action, including action to address unsafe and unsound practices or 
conditions, or violations of law and regulation.
    (b) FCA reserves the right to require an appraisal or evaluation 
under this subpart whenever it believes it is necessary to address 
safety and soundness issues.
    (c) Nothing in this subpart prevents the FCA from accessing 
appraisals and evaluations during an examination, enforcement action, 
or other exercise of its regulatory authority.

    Dated: May 10, 2021.
Dale Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2021-10200 Filed 5-19-21; 8:45 am]
BILLING CODE 6705-01-P