12 C.F.R. Subpart F—Collateral Evaluation Requirements
Title 12 - Banks and Banking
Source: 59 FR 46730, Sept. 12, 1994, unless otherwise noted.
For the purposes of this part, the following definitions shall apply: (a) Abundance of caution, when used to describe decisions to require collateral, means that the collateral is taken in circumstances in which: (1) It is not required by statute, regulation, or the institution's policies; and (2) A prudent lender would extend credit based on a borrower's income and/or other collateral, absent the real estate, and the decision to extend credit was, in fact, based on other sources of revenue or collateral. (b) Appraisal means a written statement independently and impartially prepared by a qualified appraiser setting forth an opinion as to the market value of an adequately described property as of a specific date(s), supported by the presentation and analysis of relevant market information. (c) Appraisal Foundation means the Appraisal Foundation established on November 30, 1987, by professional appraisal organizations, as a not-for-profit corporation under the laws of Illinois, in order to enhance the quality of professional appraisals. (d) Appraisal Subcommittee means the Appraisal Subcommittee of the Federal Financial Institutions Examination Council. (e) Business loan means a loan or other extension of credit to any corporation, general or limited partnership, business trust, joint venture, sole proprietorship, or other business entity (including entities and individuals engaged in farming enterprises). (f) Cost approach means the process by which an evaluator establishes an indicated value by measuring the current market cost to construct a reproduction of or replacement for the improvements, minus the amount of depreciation (physical deterioration, or functional and/or external obsolescence) evident in the structure from all causes, plus the market value of the land. (g) Evaluation means a study of the nature, quality, or utility of, interest in, or aspects of, an asset. An evaluation may take the form of a valuation or an appraisal. (h) Fee appraiser means a qualified evaluator who is not an employee of the party contracting for the completion of the evaluation and who performs an evaluation on a fee basis. For purposes of this subpart, a fee appraiser may include a staff evaluator from another Farm Credit System institution only if the employing institution is not operating under joint management with the contracting institution. In addition, for purposes of personal and intangible collateral evaluations, the term “fee appraiser” includes, but is not limited to, certified public accountants, equipment dealers, grain buyers, livestock buyers, and auctioneers. (i) FIRREA means the Financial Institutions Recovery, Reform, and Enforcement Act of 1989. (j) Highest and best use means the reasonable and most probable use of the property that would result in the highest market value of vacant land or improved property, as of the date of valuation; or that use, from among reasonably probable and legally alternative uses, found to be physically possible, appropriately supported, financially feasible, and which results in the highest land value. (k) Income capitalization approach means the procedure that values property by measuring the present value of the expected future benefits of property ownership. This value is derived from either: (1) Capitalizing a single year's income expectancy or an annual average of several years' income expectancies at a market-derived capitalization rate that reflects a specific income pattern, return on investment, and change in the value of the investment; or (2) Discounting the annual cashflows for the holding period and the reversion at a specified yield rate or specified yield rates which reflect market behavior. (l) Market value means the most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently, knowledgeably, and assuming neither is under duress. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: (1) Buyer and seller are typically motivated; (2) Both parties are well informed or well advised, and acting in what they consider their best interests; (3) A reasonable time is allowed for exposure in the open market; (4) Payment is made in terms of cash in United States dollars or in terms of financial arrangements comparable thereto; and (5) The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale. (m) Personal property, for purposes of this subpart, means all tangible and movable property not considered real property or fixtures. (n) Qualified evaluator means an individual who is competent, reputable, impartial, and has demonstrated sufficient training and experience to properly evaluate property of the type that is the subject of the evaluation. For the purposes of this definition, the term “qualified evaluator” includes an appraiser or valuator. (o) Real estate means an identified parcel or tract of land, including improvements, if any. (p) Real estate-related financial transactions means any transaction involving: (1) The sale, lease, purchase, investment in, or exchange of real property, including interests in property or the financing thereof; or (2) The refinancing of real property or interests in real property; or (3) The use of real property or interests in real property as security for a loan or investment, including mortgage-backed securities. (q) Real property means all interests, benefits, and rights inherent in the ownership of real estate. (r) Sales comparison approach means the procedure that values property by comparing the subject property to similar properties located in relatively close proximity, having similar size and utility, and having been recently sold in arm's-length transactions (comparable sales). The sales comparison approach requires the evaluator to estimate the degree of similarity and difference between the subject property and comparable sales. Such comparison shall be made on the basis of conditions of sale, financing terms, market conditions, location, physical characteristics, and income characteristics. Appropriate adjustments shall be made to the sales price of the comparable property based on the identified deficiencies or superiorities of the subject property to arrive at a probable price for which the subject property could be sold on the date of the collateral evaluation. (s) State certified appraiser means any individual who has satisfied the requirements for and has been certified as a real estate appraiser by a State or territory whose requirements for certification currently meet or exceed the minimum criteria for certification issued by the Appraiser Qualification Board of the Appraisal Foundation. No individual shall be a State certified appraiser unless such individual has achieved a passing grade on a suitable examination administered by a State or territory that is consistent with and equivalent to the Uniform State Certification Examination issued or endorsed by the Appraiser Qualification Board of the Appraisal Foundation. In addition, the Appraisal Subcommittee must not have issued a finding that the policies, practices, or procedures of the State or territory are inconsistent with title XI of FIRREA. (t) State licensed appraiser means any individual who has satisfied the requirements for licensing and has been licensed as a real estate appraiser by a State or territory in which the licensing procedures comply with title XI of FIRREA and in which the Appraisal Subcommittee has not issued a finding that the policies, practices, or procedures of the State or territory are inconsistent with title XI of FIRREA. (u) Transaction value means: (1) For loans or other extensions of credit, the amount of the loan, loan commitment, or other extensions of credit; (2) For sales, leases, purchases, investments in, or exchanges of real property, the market value of the property interest involved; and (3) For the pools of loans or interests in real property, the transaction value of the individual loans or the market value of the real property interests comprising the pool. (v) USPAP means the Uniform Standards of Professional Appraisal Practice adopted by the Appraisal Foundation. (w) Valuation means the process of estimating a defined value of an identified interest or interests in a specific asset or assets as of a given date. A valuation results from the completion of a collateral evaluation that does not require an appraisal. (a) The board of directors of each Farm Credit System institution that engages in lending or leasing secured by collateral shall adopt well-defined and effective collateral evaluation policies and standards, that comply with the regulations in this subpart, to ensure that collateral evaluations are: (1) Sufficiently descriptive and detailed to provide ample support to the institution's related credit decisions; (2) Performed based on criteria established for the purpose of determining the circumstances under which collateral evaluations will be required and when they will be required. Such criteria must, at a minimum: (i) Establish when an institution will require a collateral appraisal completed under the USPAP rather than a collateral valuation; and (ii) Take into account such factors as market trends, market volatility, and various types of credit, loan servicing, collection, and liquidation actions; and (3) Completed by a qualified evaluator in an unbiased manner. (b) The policies and standards required by this section shall, at a minimum, address the criteria outlined in §§614.4250 through 614.4267 of this subpart. (c) A Federal land bank association shall, with the approval of its respective Farm Credit bank, adopt collateral evaluation policies that are consistent with the bank's policies and standards. (d) An institution's board of directors may adopt specific collateral evaluation requirements, consistent with the regulations in this subpart, for loans designated as part of a minimum information program. [59 FR 46730, Sept. 12, 1994, as amended at 62 FR 51015, Sept. 30, 1997] (a) When real, personal, or intangible property is taken as security for a loan or is the subject of a lease, an evaluation of such property shall be performed in accordance with §614.4260 and the institutions' policies and procedures. Such a collateral evaluation shall be identified as either a collateral valuation or a collateral appraisal. Specifically, all collateral evaluations must: (1) Value the subject property based upon market value as defined in §614.4240(l); (2) Be presented in a written format; (3) Consider the purpose for which the property will be used and the property's highest and best use, if different from the intended use; (4) Be sufficiently descriptive to enable the reader to ascertain the reasonableness of the estimated market value and the rationale for the estimate; (5) Provide sufficient detail (including an identification and description of the property) and depth of analysis to reflect the relevant characteristics and complexity of the subject property; (6) Analyze and report, as appropriate, for real, intangible, and/or personal property, on: (i) The current income producing capacity of the property; (ii) A reasonable marketing period for the property; (iii) The current market conditions and trends that will affect projected income, to the extent such conditions will affect the value of the property; (iv) The appropriate deductions and discounts as they would apply to the property, including but not limited to, those based on the condition of the property, as well as the specialization of the operation and property; and (v) Potential liabilities, including those associated with any hazardous waste or other environmental concerns; and (7) Include in the evaluation report a certification that the evaluation was not based on a requested minimum valuation or specific valuation or approval of a loan. (b) For purposes of determining appraisal value as required in section 1.10(a) of the Act, the definition of market value and the requirements of this subpart shall apply. (a) Prohibitions. For all personal and intangible property, and for all real property exempted under §614.4260(c) of this subpart, no person may: (1) Perform evaluations in connection with transactions in which such person has a direct or indirect interest, financial or otherwise, in the loan or subject property; (2) As a director, vote on or approve a loan decision on which such person performed a collateral evaluation; or (3) As a director, perform a collateral evaluation in connection with any transaction on which such person made or will be required to make a credit decision. (b) Officers and employees. If the institution's internal control procedures required by §618.8430 of this chapter include requirements for either a prior approval or post-review of credit decisions, officers and employees may: (1) Participate in a vote or approval involving assets on which they performed a collateral evaluation; or (2) Perform a collateral evaluation in connection with a transaction on which they have made or will be required to make a credit decision. (c) Real estate appraiser. Except as provided in §614.4260(c) of this subpart, all evaluations of real property that serve as the primary security for a loan shall be performed by a qualified real estate appraiser who has no direct or indirect interest, financial or otherwise, in the loan or subject property and is not engaged in the marketing, lending, collection, or credit decision processes of any of the following: (1) A Farm Credit System institution making or originating the loan; (2) A Farm Credit System institution operating under common management with the institution making or originating the loan; or (3) A Farm Credit System institution purchasing an interest in the loan. (d) Fee appraisers. Fee appraisers shall be engaged directly by the Farm Credit System institution or its agent, and shall have no direct or indirect interest, financial or otherwise, in the property or transaction. A Farm Credit System institution may accept a real estate appraisal that was prepared by an appraiser engaged directly by another Farm Credit System institution, by a United States Government agency, a Government-Sponsored Enterprise or by a financial institution subject to title XI of FIRREA. (e) Loan purchases. No employee who, acting as a State licensed or State certified appraiser, performed a real estate appraisal on any collateral supporting a loan shall subsequently participate in any decision related to the loan purchase. (a) Valuation. Valuations of personal and intangible property, as well as real property exempted under paragraph (c) of this section, shall be performed by qualified individuals who meet the established standards of this subpart and the Farm Credit System institution obtaining the collateral valuation. (b) Appraisal. (1) Appraisals for real estate-related financial transactions with transaction values of more than $250,000 shall be performed by a qualified appraiser who is a State licensed or a State certified real estate appraiser. (2) Appraisals for real estate-related financial transactions with transaction values of more than $1,000,000 shall be performed by a qualified appraiser who is a State certified real estate appraiser. (c) Appraisals not required. An appraisal performed by a State certified or State licensed appraiser is not required for any real estate-related financial transaction in which any of the following conditions are met: (1) The transaction value is $250,000 or less; (2) The transaction is a “business loan” as defined in §614.4240(e) that: (i) Has a transaction value of $1,000,000 or less; and (ii) Is not dependent on income derived from the sale or cash rental of real estate as the primary source of repayment; (3) A lien on real property has been taken as collateral in an abundance of caution, and the application, when evaluated on the five basic credit factors, without considering the subject real estate, would support the credit decision that was based on other sources of repayment or collateral; (4) A lien on real estate is not statutorily required and has been taken for purposes other than the real estate's value; (5) Subsequent loan transactions (which include but are not limited to loan servicing actions, reamortizations, modifications of loan terms, and partial releases), provided that either: (i) The transaction does not involve the advancement of new loan funds other than funds necessary to cover reasonable closing costs; or (ii) There has been no obvious and material change in market conditions or physical aspects of the property that threatens the adequacy of the Farm Credit System institution's real estate collateral protection, even with the advancement of new loan funds; (6) A Farm Credit System institution purchases a loan or an interest in a loan, pool of loans, or interests in real property, including mortgage-backed securities, provided that: (i) The appraisal prepared for each loan, pooled loan, or real property interest, when originated, met the standards of this subpart, other Federal regulations adopted pursuant to FIRREA, or the requirements of the government-sponsored secondary market intermediaries under whose auspices the interest is sold; and (ii) There has been no obvious and material change in market conditions or physical aspects of the property that would threaten the Farm Credit System institution's collateral position, or (7) A Farm Credit System institution makes or purchases a loan secured by real estate, which loan is guaranteed by an agency of the United States Government and is supported by an appraisal that conforms to the requirements of the guaranteeing agency. To qualify for exceptions in paragraphs (c)(1) through (c)(7) of this section from the requirements of this subpart, the institution must have documentation justifying the use of such exceptions in the applicable loan file(s). In addition, the institution must document that the repayment of a “business loan” is not dependent on income derived from the sale or cash rental of real estate. (d) FCA-required appraisals. The FCA reserves the right to require an appraisal under this subpart whenever it believes it is necessary to address safety and soundness issues. (e) Reciprocity. The requirements of this subpart are satisfied by the use of State certified or State licensed appraisers from any State provided that: (1) The appraiser is qualified to perform such appraisals; (2) The applicable Farm Credit System institution has established policies providing for such interstate appraisals; and (3) The applicable State appraiser licensing and certification agency recognizes the certification or license of the appraiser's State of permanent certification or licensure. [59 FR 46730, Sept. 12, 1994, as amended at 60 FR 2687, Jan. 11, 1995] (a) Real estate shall be valued on the basis of market value. (b) Market value shall be determined by a reasonable valuation method that: (1) Considers the income capitalization approach, the sales comparison approach, and/or the cost approach, as appropriate, to determine market value; (2) Explains and documents the elimination of any approach not used. (3) Reconciles the market values of the applicable approaches; and (c) Where real estate appraisals or real estate collateral valuations for business loans in excess of $250,000 that would not otherwise be exempted under §614.4260(c) are required, such evaluations shall be completed in accordance with the USPAP and shall include a legal description of the subject property. (d) At a minimum, the institution shall develop and document the evaluation of the income and debt servicing capacity for the property and operation where the transaction value exceeds $250,000 and the real estate taken as collateral: (1) Is an integral part of and supports the principal source of loan repayment; or (2) Is not an integral part of and does not support the principal source of loan repayment, but has demonstrable rental market appeal, is statutorily required, and fully or partially constitutes an integral part of an agricultural or aquatic operation. (e) The income-earning and debt-servicing capacity established under paragraph (d) of this section on such properties shall be documented as part of the credit analysis for any related loan action, whether or not the income capitalization approach value is used as the basis for the market value conclusion stated in the evaluation report. (f) Collateral closely aligned with, an integral part of, and normally sold with real estate (fixtures) may be included in the value of the real estate. All other collateral associated with the real estate, but designated as personal property, shall be evaluated as personal property in accordance with §§614.4250 and 614.4266. (g) The evaluation shall properly identify all nonagricultural influences, including, but not limited to, urban development, mineral deposits, and commercial building development value, and the reasoning supporting the evaluator's highest and best-use conclusion. (h) Where an evaluation of real property is completed by a fee appraiser, as defined in §614.4240(g), the institution's standards shall include provisions for periodic collateral inspections performed by the institution's account officer or appropriate designee. (a) Personal property and intangibles shall be valued on the basis of market value in accordance with the institution's evaluation standards and policies. (b) Personal property evaluations shall include a source of comparisons of value (i.e., equipment dealer listings, Blue Book, market sales reports, etc.) and a description of the property being evaluated, including location of the property and, where applicable, quantity, species/variety, measure/weight, value per unit and in total, type of identification (such as brand, bill of lading, or warehouse receipt), quality, condition, and date. (c) Evaluations of intangibles shall include a review and description of the documents supporting the property interests and the marketability of the intangible property, including applicable terms, conditions, and restrictions contained in the document that would affect the value of the property. (d) Where an evaluation of personal or intangible property is completed by a fee appraiser, as defined in §614.4240(g), the institution's standards shall include provisions for periodic collateral inspections and verification by the institution's account officer or appropriate designee. (e) When a Farm Credit System institution deems an appraisal necessary, personal or intangible property shall be appraised in accordance with procedures and standards established by the institution by individuals deemed qualified by the institution to complete the work under the USPAP Competency and Ethics Provisions. [59 FR 46730, Sept. 12, 1994, as amended at 59 FR 50964, Oct. 6, 1994] (a) Membership in appraisal organizations. A State certified appraiser or a State licensed appraiser may not be excluded from consideration for an assignment for a real estate-related transaction solely by virtue of membership or lack of membership in any particular appraisal organization. (b) Competency. All staff and fee evaluators, including appraisers, performing evaluations in connection with real, personal, or intangible property taken as collateral in connection with extensions of credit must meet the qualification requirements of this subpart. However, an evaluator (as defined in §614.4240(n)) may not be considered competent solely by virtue of being certified, licensed, or accredited. Any determination of competency shall be based on the individual's experience and educational background as they relate to the particular evaluation assignment for which such individual is being considered.
Title 12: Banks and Banking
PART 614—LOAN POLICIES AND OPERATIONS
Subpart F—Collateral Evaluation Requirements
§ 614.4240 Collateral definitions.
§ 614.4245 Collateral evaluation policies.
§ 614.4250 Collateral evaluation standards.
§ 614.4255 Independence requirements.
§ 614.4260 Evaluation requirements.
§ 614.4265 Real property evaluations.
§ 614.4266 Personal and intangible property evaluations.
§ 614.4267 Professional association membership; competency.
