Funding and Fiscal Affairs, Loan Policies and Operations, and Funding Operations

FARM CREDIT ADMINISTRATION

12 CFR Part 615

RIN 3052-AB45

Funding and Fiscal Affairs, Loan Policies and Operations, and

Funding Operations

AGENCY: Farm Credit Administration.

ACTION: Final rule.

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SUMMARY: The Farm Credit Administration (FCA), by the Farm Credit

Administration Board (Board), adopts a final rule amending its

regulations to allow Farm Credit System (FCS) institutions to document

the existence of a first lien on the security for long-term real estate

mortgage loans by obtaining title insurance or an attorney's

certification. The current regulation requires that an attorney's

certification be obtained for every long-term mortgage loan in order

for that loan to qualify as collateral for FCS debt obligations. The

regulation is being amended because title insurance has become the

prevailing method used by the mortgage lending industry to ensure clear

title. Additionally, the revised regulation permits FCS institutions

greater flexibility in determining which method for validating first

lien position (an attorney's certification or title insurance) provides

the institution the most cost-effective and efficient protection.

EFFECTIVE DATE: The regulation shall become effective upon expiration

of 30 days after publication in the Federal Register during which

either or both Houses of Congress are in session. Notice of effective

date will be published in the Federal Register.

FOR FURTHER INFORMATION CONTACT:

Laurie A. Rea, Policy Analyst, Regulation Development, Office of

Examination, Farm Credit Administration, McLean, Virginia 22102-5090,

(703) 883-4498, TDD (703) 883-4444, or

James M. Morris, Senior Attorney, Regulatory Operations Division,

Office of General Counsel, Farm Credit Administration, McLean, Virginia

22102-5090, (703) 883-4020, TDD (703) 883-4444.

SUPPLEMENTARY INFORMATION:

I. Background

Section 1.10(a)(2) of the Farm Credit Act of 1971, as amended

(Act), requires that long-term mortgage loans made by Farm Credit Banks

(FCBs) under section 1.7 of the Act, or by associations under sections

1.7 and 7.6 of the Act, ``be secured by first liens on interests in

real estate of such classes as may be prescribed by regulations of the

Farm Credit Administration.'' At present, Sec. 615.5060 requires that

an attorney's certification be obtained for long-term mortgage loans if

such loans are to qualify as collateral for FCS debt obligations.

However, title insurance is the prevailing method for ensuring clear

title in the mortgage lending industry and is becoming more commonplace

in FCS lending. Title insurance can provide a lender with protection

that is comparable to an attorney's certification and in some instances

may be more timely and less expensive to obtain. Under the present

Sec. 615.5060, even if FCS lenders obtain title insurance they must

also obtain an attorney's certification, thus incurring unnecessary

expense without providing any substantial additional protection. FCA

reconsidered this requirement, and published a proposed rule on October

12, 1993 (58 FR 52701) to amend the regulation to permit institutions

to obtain title insurance instead of an attorney's certificate to

document the existence of a first lien, provided that the title

insurance policy meets certain standards.

The FCA recognizes that practices within the mortgage lending

industry continually change and is amending Sec. 615.5060 to give FCS

institutions additional flexibility while maintaining protection for

them as well as for FCS investors and borrower-stockholders. The

revised regulation allows FCS institutions to determine which method

for validating first lien position (an attorney's certification or

title insurance) provides them the best protection for the amount

expended.

II. Synopsis of Comments

The comment period for the proposed amendments to Sec. 615.5060

closed November 12, 1993. FCA received four comment letters during the

public comment period from: The Farm Credit Council (FCC), a Farm

Credit Bank (FCB), an agricultural credit association (ACA), and a

Texas law firm. In addition, an FCB and a Federal land credit

association (FLCA) commented on this regulation as part of their

responses to the FCA Board's Statement on Regulatory Burden, which

appeared in the Federal Register on June 23, 1993 (58 FR 34003),

seeking public comment on the appropriateness of regulatory

requirements imposed on the FCS.

All commenters strongly supported the amendments to the proposed

regulation. In general, commenters believe that the revision would

provide additional flexibility and allow FCS institutions to evaluate

present practices and determine the best course of action. Further,

commenters indicated that since many FCS institutions already require

title insurance on real estate loans the proposed regulation would

greatly simplify the closing process and reduce costs. One commenter

stated that the FCA's existing requirement for long-term real estate

loans is both antiquated and unduly burdensome, and it therefore fully

endorsed the intent of FCA's proposed regulations.

In addition to general comments, the FCC and the ACA offered

technical suggestions that they believe would improve or clarify the

regulation. Commenters were concerned that the words ``at loan

closing'' in proposed Sec. 615.5060(a)(2) created some ambiguity

because it is often not possible to obtain a title insurance policy at

the time of loan closing. One commenter stated that a loan is closed

based on a title commitment and a final title insurance policy is not

issued until after loan closing when there is satisfaction of the

requirements set out in the commitment. Another commenter stated that

it is a common practice to obtain the actual title policy at a later

date, with the policy being issued ``as of'' the date the lien

documents are recorded. Commenters asserted that FCS institutions would

be unable to take advantage of the additional flexibility and cost

savings the proposed regulation is intended to provide if the

institutions were required to obtain a final title insurance policy at

loan closing. FCA modified proposed Sec. 615.5060(a)(2) by deleting the

requirement that the policy be obtained ``at loan closing'' but notes

that the Act authorizes an FCB to make a long-term mortgage loan only

if that loan is secured by a first lien on real estate.

The FCC and the ACA also commented that, as currently written,

proposed Sec. 615.5060(a)(2)(ii) might be construed to mean that

counsel must approve not only the standard form to be used, but also

the way in which the form is completed in each particular case.

Paragraph (a)(2)(ii) requires only that the final title policy be

issued on a standard title insurance policy form that the counsel for

the lending institution has approved. The language in paragraph

(a)(2)(ii) was revised to make this clearer. Further, the FCC and the

ACA suggested that, because many ACAs and FLCAs do not have their own

in-house counsel, the regulation should be modified to allow counsel

for either the association or the ``supervising'' bank to approve the

standard form. The phrase ``counsel for the lending institution'' in

Sec. 615.5060 (a)(2)(ii) and (a)(2)(iv) is not meant to require that an

association have in-house counsel. An association may, if it wishes,

rely on counsel for the affiliated bank or the association's retained

counsel if counsel agrees to act for the association in approving the

form of the title insurance policy and prescribing these standards.

Proposed Sec. 615.5060(a)(2)(iii) requires that the title insurance

policy be issued ``for an amount equal to the balance outstanding on

the real estate mortgage loan.'' Commenters stated that multiple tracts

of real estate are frequently offered as security for a loan and in

some situations separate title insurance policies for various tracts

are obtained from different insurers. The FCC further stated that title

insurance companies often require that the insured amount be allocated

among the various policies, and often refuse to issue a policy in an

amount in excess of the value of the particular tract they are

insuring. The FCC further stated that the amount of the title insurance

that should be required should be directly related to the value of the

lender's interest in the property that is being insured. Therefore, the

FCC suggested that Sec. 615.5060(a)(2)(iii) be revised to require that

the final policy be issued for an amount equal to the balance

outstanding on the real estate mortgage loan ``or such lesser amount as

is sufficient to protect the interest of the lending institution in the

insured property.'' The FCC believes that such language would enable

the lending institution to determine whether the title policy should be

issued for the full amount of the loan or, when multiple tracts are

taken as security, for the market or appraised value of the property

being insured, whether that value is greater than or less than the

amount of the loan.

The FCA Board conceptually agrees with the commenters that the

title insurance should be issued for an amount that is sufficient to

protect the interest of the lending institution. However, the FCA Board

believes that the amount of title insurance necessary to protect the

lender on a long-term real estate mortgage loan is no less than the

outstanding loan balance. The Act and FCA regulations limit long-term

real estate loans to a percentage of the appraised value of the real

estate security. FCA's regulation does not require that an institution

obtain title insurance for an amount that is in excess of the value of

the real estate security, but rather requires coverage in an amount at

least equal to the outstanding loan balance, an amount less than the

value of the real estate security. In the case of multiple tracts, if a

separate policy is issued for a tract, the minimum amount insured by

that policy shall bear the same ratio to the outstanding balance that

the appraised value of the tract bears to the appraised value of all

the real estate security. Accordingly, the final rule requires that if

only title insurance is used to document the existence of a first lien,

the final title policy or policies must be issued for an amount at

least equal to the outstanding loan balance.

Commenters also indicated that in loans with multiple tracts, title

to some tracts may be evidenced by abstracts while other tracts are

covered by title insurance. This comment indirectly raises the issue of

whether the regulation permits the lender to decide, for each tract,

whether to use an attorney lien certification or title insurance to

document the existence of a first lien when more than one tract is

involved in a single first mortgage loan. The regulation should not be

read to preclude the use of different methods of lien documentation for

different tracts. In the case of multiple tracts, if title insurance is

relied upon for some tracts and attorney certifications are used for

others, the minimum amount insured by a policy for a particular tract

shall bear the same ratio to the outstanding balance that the appraised

value of the tract bears to the appraised value of all the real estate

security. For example, suppose a loan for $80,000 is secured by two

properties with appraised values of $70,000 and $30,000. Insurance

policies for the properties should be obtained in amounts of at least

$56,000 and $24,000, respectively. If an attorney lien certification is

used for the first property, then title insurance for the second

property need only be obtained for $24,000--not the $80,000 loan

amount.

Proposed paragraph (a)(2)(iv) requires that personnel with adequate

training and experience in real estate title matters, designated by

counsel, certify in writing that they reviewed the final policy and

that the final policy insures a first lien or its equivalent on the

primary real estate security for the loan. Commenters believe that it

should suffice that a person performing this function meet certain

standards of training and experience that are prescribed by the counsel

for the lender, but that there should be no specific requirement that

counsel actually designate the individual who performs this function.

The FCA agrees with the commenters' observations and has modified

paragraph (a)(2)(iv) to require that a person performing this function

meet written standards for training and experience prescribed by the

counsel for the lender, and to eliminate any implication that counsel

actually has to designate the individual who performs this function.

Finally, the first sentence of Sec. 615.5060(a) is revised to make

it less awkward. The meaning of the sentence is not changed.

List of Subjects in 12 CFR Part 615

Accounting, Agriculture, Banks, Banking, Government securities,

Investments, Rural areas.

For the reasons stated in the preamble, part 615 of chapter VI,

title 12 of the Code of Federal Regulations is amended to read as

follows:

PART 615--FUNDING AND FISCAL AFFAIRS, LOAN POLICIES AND OPERATIONS,

AND FUNDING OPERATIONS

1. The authority citation for part 615 continues to read as

follows:

Authority: Secs. 1.5, 1.7, 1.10, 1.11, 1.12, 2.2, 2.3, 2.4, 2.5,

2.12, 3.1, 3.7, 3.11, 3.25, 4.3, 4.9, 4.14B, 4.25, 5.9, 5.17, 6.20,

6.26, 8.0, 8.4, 8.6, 8.7, 8.8, 8.10, 8.12 of the Farm Credit Act; 12

U.S.C. 2013, 2015, 2018, 2019, 2020, 2073, 2074, 2075, 2076, 2093,

2122, 2128, 2132, 2146, 2154, 2160, 2202b, 2211, 2243, 2252, 2278b,

2278b-6, 2279aa, 2279aa-4, 2279aa-6, 2279aa-7, 2279aa-8, 2279aa-10,

2279aa-12; sec. 301(a) of Pub. L. 100-233, 101 Stat. 1568, 1608.

Subpart B--Collateral

2. Section 615.5060 is amended by revising paragraph (a) to read as

follows:

Sec. 615.5060 Special collateral requirements.

(a) An attorney lien certification need not be obtained at the time

a note is accepted as collateral if the counsel for the bank or

association has determined, in writing, that the bank or association

procedures provide sufficient safeguards to ensure that a real estate

mortgage loan, within the meaning of section 1.7(a) of the Act, made by

the bank or association will be secured by a first lien or its

equivalent on the borrower's interest in the primary real estate

security. However, the note shall be withdrawn from collateral upon the

expiration of 1 year from the date of the loan closing, unless, before

the end of such period:

(1) An attorney has certified that the bank or association has a

first lien or its equivalent from a security standpoint in the primary

real estate security for the loan; or

(2) The bank or association has obtained a title insurance policy

insuring that it has a first lien or its equivalent from a security

standpoint in the primary real estate security for the loan, and all of

the following requirements are satisfied:

(i) The final policy was issued by a title insurance company that

has been licensed to issue such policies by the appropriate state

insurance regulatory body or bodies, has not been barred or suspended,

and has been approved by the lending institution;

(ii) The standard form on which the final policy was issued has

been approved by the counsel for the lending institution;

(iii) The final policy was issued for an amount at least equal to

the balance outstanding on the real estate mortgage loan or, if

separate policies are issued to insure separate tracts, the minimum

amount insured by each policy shall bear the same ratio to the

outstanding balance of the loan that the appraised value of the tract

insured by that policy bears to the appraised value of all the real

estate security for the loan; and

(iv) Personnel meeting written standards of training and experience

in real estate title matters prescribed by the counsel for the lending

institution certified in writing that:

(A) They reviewed the final policy and that the policy complies

with standards prescribed by such counsel; and

(B) The final policy insures that a first lien or its equivalent

from a security standpoint has been obtained on the primary real estate

security for the loan.

* * * * *

Dated: January 13, 1994.

Curtis M. Anderson,

Secretary, Farm Credit Administration Board.

[FR Doc. 94-1763 Filed 1-26-94; 8:45 am]

BILLING CODE 6705-01-P