Loan Policies and Operations; General Provisions; Collateral Evaluation Requirements, Actions on Applications, Review of Credit Decisions, and Releasing Information

FARM CREDIT ADMINISTRATION

12 CFR Parts 614 and 618

RIN 3052-AB51

Loan Policies and Operations; General Provisions; Collateral

Evaluation Requirements, Actions on Applications, Review of Credit

Decisions, and Releasing Information

AGENCY: Farm Credit Administration.

ACTION: Interim rule with request for comments.

-----------------------------------------------------------------------

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

Administration Board (Board), adopts interim regulations that amend FCA

regulations relating to collateral evaluation requirements for Farm

Credit System (FCS or System) institutions engaged in lending or

leasing. The FCA Board also requests comments on these regulations. The

amendments respond to issues raised by regulatory revisions recently

adopted by the other Federal financial institutions' regulatory

agencies (Federal regulatory agencies),1 comments received in

response to the FCA's published request for ``regulatory burden''

comments (58 FR 34003, June 23, 1993), and amendments made to

regulations of the Board of Governors of the Federal Reserve

(Regulation B) interpreting the Equal Credit Opportunity Act

(ECOA).2

---------------------------------------------------------------------------

\1\The Office of the Comptroller of the Currency (OCC), Federal

Deposit Insurance Corporation (FDIC), Federal Reserve Board (FRB),

and the Office of Thrift Supervision (OTS).

\2\The FRB published final regulations on December 16, 1993 (58

FR 65657) implementing the Equal Credit Opportunity Act, 15 U.S.C.

1691-1691f, as amended by the FDIC Improvement Act of 1991, Pub. L.

102-242, 105 Stat. 2236.

DATES: The regulations shall become effective October 31, 1994, or upon

the expiration of 30 days after publication during which either or both

Houses of Congress are in session, whichever is later. Written comments

must be submitted on or before October 10, 1994. Notice of the

---------------------------------------------------------------------------

effective date will be published in the Federal Register.

ADDRESSES: Comments should be submitted in writing, in triplicate, to

Patricia W. DiMuzio, Associate Director, Regulation Development, Office

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

5090. Copies of all communications received will be available for

examination by interested parties in the Office of Examination, Farm

Credit Administration.

FOR FURTHER INFORMATION CONTACT:

Dennis K. Carpenter, Senior Policy Analyst, Office of Examination, Farm

Credit Administration, McLean, VA 22102-5090, (703) 883-4498, TDD (703)

883-4444,

or

James M. Morris, Senior Attorney, Office of General Counsel, Farm

Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TDD (703)

883-4444.

SUPPLEMENTARY INFORMATION:

I. General

The FCA Board adopted final collateral evaluation regulations on

November 12, 1992. The regulations were published in the Federal

Register on November 20, 1992 (57 FR 54683), and became effective March

1, 1993. The regulations addressed the System's collateral evaluation

practices and procedures, including the need for: (1) Consistent

methodology; (2) independence and controls; and (3) consistent

educational and qualification requirements. The regulations set basic

requirements for real property appraisals, including the use of State

licensed and/or certified appraisers, functional independence, and

compliance with Uniform Standards of Professional Appraisal Practices

(USPAP). The real property appraisal requirements adopted were similar

to the requirements of the other Federal regulatory agencies.

The objective of the present amendments is to provide additional

flexibility in appraisal and independence requirements, without

jeopardizing the overall integrity or enforceability of the FCA's

collateral evaluation regulations. By providing additional flexibility

in the use of State-sanctioned appraisers and relief from the more

stringent real estate appraisal requirements, the FCA addresses

regulatory burden concerns.

The amendments are being adopted as interim regulations with a

delayed effective date and request for comments in order to provide

interested parties an opportunity to comment on the regulations.

However, the FCA believes adopting the regulations in final is required

to provide System institutions with the necessary guidance to address

revisions to their collateral evaluation requirements and necessary

staffing needs. The regulatory revisions also establish requirements

that are similar to the requirements recently adopted by the Federal

regulatory agencies.

The FCA adopted, on May 5, 1994, a ``no action'' position relative

to the System institutions' compliance with certain real estate

appraisal requirements in response to the then-pending regulatory

revisions by the Federal regulatory agencies. The FCA's ``no action''

position was intended to serve as a temporary means of eliminating any

competitive disadvantage suffered by System institutions. However, the

``no action'' position provides more flexibility than the FCA would

consider a prudent long-term regulatory position. Therefore, these

regulatory revisions are intended to eliminate any competitive

disadvantage for the System institutions and establish the necessary

guidance and parameters for the System's collateral evaluation

practices and procedures.

These revisions to the FCA's collateral evaluation regulations only

address the issues associated with the real estate appraisal

requirements and do not lessen the overall requirements that have been

established for the basic collateral evaluation requirements or the

collateral valuation process. The FCA Board is aware of the System's

concern about informational requirements for small loans. The FCA has

received comments requesting consideration of guidance for ``minimum

information'' loan programs (including financial reporting and

collateral evaluation information) and related underwriting standards.

The FCA believes these regulations provide flexibility to accommodate

minimum information loan programs. However, the FCA will consider these

issues at a later date in response to the ``regulatory burden'' notice

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

The regulations also make technical revisions to part 614, subpart

L, concerning credit denials and independent appraisal requirements.

Finally, the regulations reconcile FCA regulations pertaining to the

release of collateral evaluation information (part 618, subpart G),

with the requirements of the Equal Credit Opportunity Act as

interpreted by Regulation B.3

---------------------------------------------------------------------------

\3\ The ECOA requires creditors to provide copies of real estate

appraisals to applicants/borrowers when the appraisal covers

residential collateral. The Federal Reserve Board, on December 16,

1993, published final regulation revisions (58 FR 65657) (Regulation

B) implementing this requirement. Institutional compliance was

required by June 14, 1994.

---------------------------------------------------------------------------

II. Background

A. Bank and Thrift Federal Regulatory Agencies' Positions

On March 10, 1993, the four Federal regulatory agencies responsible

for regulating banks and thrifts issued a joint interagency statement

that eased certain regulatory constraints on the availability of credit

for small business loans (including farm loans). The ``Interagency

Policy Statement on Credit Availability'' (``Policy Statement'')

identified five areas of concern for possible regulatory and

operational revisions. The five areas are: (1) Lending to small- and

medium-sized businesses; (2) real estate lending and appraisals; (3)

appeals of examination decisions and complaint handling; (4)

examination processes and procedures; and (5) paperwork and regulatory

burdens.

While FCA was not a party to the Policy Statement released on March

10, 1993, it does have real property appraisal regulations in place

that are similar to those of the Federal regulatory agencies. In

addition, the Policy Statement includes farming operations as a segment

of the small- and medium-sized businesses to be covered by any

revisions arising from the Policy Statement. Therefore, any change in

the Federal regulatory agencies' real property appraisal

requirements4 will impact the FCA and the System in terms of the

consistency and application of the collateral evaluation requirements.

---------------------------------------------------------------------------

\4\The OCC, FDIC, FRB, and OTS jointly published revised real

estate appraisal regulations on June 7, 1994 (59 FR 29482), which

were effective on that date.

---------------------------------------------------------------------------

In discussing the real estate lending and appraisal concerns, the

Policy Statement asserted that ``in some cases currently required real

estate appraisals may not add to the safety and soundness of the credit

decision. Indeed, in some cases, appraisals may prove so expensive that

they make a sound small- or medium-sized business loan

uneconomical.''5 President Clinton directed the Federal regulatory

agencies to review the existing real property appraisal regulations and

address changes as appropriate. The policy position implemented by the

Federal regulatory agencies is considered to be ``one aspect of an

overall effort by the agencies to evaluate carefully and react

appropriately to risk in the United States financial services industry.

That overall effort envisions substantial oversight; in some cases,

more than we have now, in areas that pose greater risk to the system.

By the same token, regulatory burden will be reduced where risk is low,

especially for strong, well-managed banks and thrifts * * *.''6

---------------------------------------------------------------------------

\5\ Issue No. 2 as addressed in the ``Interagency Policy

Statement on Credit Availability,'' jointly released on March 10,

1993, by the OCC, FDIC, FRB, and the OTS.

\6\ Ibid.

---------------------------------------------------------------------------

The recent amendments to the other Federal regulatory agencies'

real estate appraisal requirements relate to: (1) Appraisals of real

estate offered as collateral for small- and medium-sized business

loans; (2) appropriate appraisal threshold levels (de minimis); and (3)

exemptions from requirements for the use of State-sanctioned

appraisers. In addition, the agencies have eliminated the regulatory

prohibition on the use of the Uniform Standards of Professional

Appraisal Practices (USPAP) ``departure provision''7 for real

property appraisals.

---------------------------------------------------------------------------

\7\ As established by the Appraisal Standards Board of the

Appraisal Foundation, the Departure Provision of USPAP (revised

March 22, 1994, effective July 1, 1994) ``permits limited departures

from specific guidelines provided that the scope of the assignment

is not so limited as to confuse or mislead the client or the

intended users of the report; and provided that the appraiser

advises the client of the limitations and that the limitations will

be disclosed in the report; and the client has agreed that the

limited appraisal or consulting services would be appropriate.''

---------------------------------------------------------------------------

On June 4, 1993, the bank and thrift Federal regulatory agencies

published proposed regulations (58 FR 31878) to amend the existing real

property appraisal regulations. On November 10, 1993, the Federal

regulatory agencies solicited additional comments on the database

supporting the de minimis level proposal (58 FR 59688). The OCC, FDIC,

FRB, and OTS subsequently adopted final regulations, which were

published on June 7, 1994 (59 FR 29482). The major changes made by the

final regulations are:

1. Increasing the de minimis level to $250,000 above which real

estate appraisals using State licensed and/or certified appraisers are

required.

2. Providing an exception for small- and medium-sized ``business

loans,'' including loans to entities and individuals engaged in farming

enterprises, with a transaction value of $1.0 million or less.

3. Clarifying the ``abundance of caution'' exception.

4. Providing additional exceptions to the use of State licensed

and/or certified real estate appraisers.

5. Clarifying appraisal standards and appraiser independence

requirements.

B. FCA's Consideration

On June 10, 1993, the FCA Board adopted a policy position

requesting public comment on possible regulatory burden issues

addressing a variety of subjects. This ``Regulatory Burden'' statement

was published on June 23, 1993 (58 FR 34003). On July 15, 1993, the FCA

Board directed staff to begin considering appropriate revisions of the

FCA's regulations and to monitor the progress of the regulatory

revisions proposed by the Federal regulatory agencies.

The FCA received 15 comment letters in response to its regulatory

burden statement from various System institutions and related parties

addressing collateral evaluation related issues. The commenters, in

general, supported the positions that had previously been proposed by

the Federal regulatory agencies. The commenters also expressed concerns

with the inclusion of specific standards of the collateral evaluation

regulations (i.e., general valuation and personal property

requirements) as well as specific requirements of part 614, subpart L,

as they pertain to the appraisal requirements for reconsideration of

loan denials. In addition, the FCA has received two additional sets of

comments requesting that the FCA consider the positions proposed by the

Federal regulatory agencies. The FCA responds to the comments received

in Section IV, Regulatory Revisions, of this document.

III. Historical Analysis

The FCA has not identified any System institution that has failed

solely because of poor or fraudulent appraisal activities. However,

there have been institutions that have failed where poor collateral

evaluation practices have been a contributing factor. A review of

several of the institutions that failed during the 1980s has indicated

that when such institutions failed, they exhibited characteristics such

as: (1) Poor credit administration practices; (2) poor internal

controls; (3) poor collateral evaluation practices; and (4) lack of

credit expertise to handle increased debt levels and loan volume. The

majority of the institutions that failed or required some form of

assistance did so because of losses experienced in a few large,

complex, and/or specialized loans. Poor collateral evaluation practices

coupled with one or more of the other characteristics described above

contributed to the problems faced by the institutions.

With the implementation of the FCA's collateral evaluation

regulations, the institutions have been required to establish and

implement appropriate collateral evaluation policies and procedures.

Such policies and procedures are needed to address collateral

evaluation independence requirements and basic evaluation and appraisal

standards, as well as educational and qualification requirements. The

development of such policies and procedures coupled with appropriate

internal controls, credit controls, and underwriting standards (i.e.,

lending limits, financial and repayment analysis, loan inspections,

etc.) will help ensure that past problems are not repeated.

The FCA's collateral evaluation regulations require that all System

institutions will perform a collateral evaluation on all secured loans

and leases. Such collateral evaluations will take the form of a basic

valuation or a more detailed real estate appraisal, depending on the

loan collateral and the specifics of the loan decision. The basic

requirements concerning individuals responsible for collateral

evaluations address minimum education, qualification, independence, and

methodology standards that are either established by the regulation or

must be established by the institution's policies and procedures

consistent with the requirements of the regulations.

The additional requirements for completion of real estate

appraisals, including the use of State-sanctioned appraisers, require a

higher degree of independence and higher education and methodology

standards. While higher standards are desirable, it has been argued by

the System, as well as by the banking and thrift industries, that

universal application of these higher standards and the additional cost

involved do not add to the safety and soundness of these institutions.

They argue that such higher standards add unnecessary costs and delays

to the credit process without providing a corresponding reduction in

loan defaults and losses in the institutions' smaller loans. The System

and commercial banking institutions further argue that collateral

valuations completed by qualified and experienced persons, other than

State licensed or certified appraisers, are more appropriate and cost-

effective for the majority of their loans and the associated risk.

The FCA believes that it is the responsibility of the institution

to establish adequate policies and procedures for collateral

evaluations, taking into consideration the basic requirements of the

FCA's regulations. The institutions are responsible for determining the

level of documentation required, depending on the size, complexity, and

specialization of the loan transaction. As an example, a $50,000 loan

that qualifies for an institution's minimum information program could

require considerably less support, information, and documentation than

a $500,000 loan to finance a large, complex dairy operation not typical

of the operations within an institution's territory. Under these

revised regulations, both loan transactions could qualify as collateral

valuations rather than as real estate appraisals; but the complexity,

size, and specialization of the loan for the dairy operation would call

for a higher degree of support information development and

documentation. The FCA notes that such flexibility already exists in

the current regulations.

The lending institution, not the collateral evaluator, is

ultimately responsible for its credit decisions. The collateral

evaluation is only one of several factors that must be considered when

making a credit decision. While the collateral evaluation report must

be completed by a qualified individual, institutions should not assume

that the acceptance of the collateral evaluation report substitutes for

or completes the credit decision process. The FCA expects the

institutions to consider all relevant credit factors (including the

collateral evaluation) as part of the credit decision. If an

institution is not comfortable with the reported value of the

collateral, the institution can request another evaluation, decrease

the loan amount accordingly, or, provided other statutory and

regulatory requirements are satisfied, change the terms of the loan

consideration in recognition of the perceived collateral risk.

An institution need not lend 85 percent of the value shown by an

evaluation. Rather it should limit the credit to the amount that can be

supported by consideration of the risk associated with all credit

factors, including the collateral evaluation. It is important to note

that as the complexity or specialization of the subject property

increases, the degree of support documentation should also increase and

should take into account the unique characteristics of the property

that make it complex or specialized.

IV. Regulatory Revisions

Taking into account the comments received in response to the FCA's

``regulatory burden'' notice, the FCA staff studied FCA's current

collateral evaluation regulations, compared current regulations with

those of the other Federal regulatory agencies, and completed a study

of data submitted to the FCA by the System. Based on its study, the FCA

has adopted the following positions.

A. Increased Appraisal Thresholds

The regulations amend Sec. 614.4260(b) to increase the existing de

minimis levels on the appraisal requirements of the System institutions

to $250,000. In addition, the threshold for the functional independence

requirements would also be increased in connection with the appraisal

de minimis level.

In 1992, the FCA completed an analysis to determine the segregation

by size of the collateral securing the System's loan portfolio. The

database for the analysis included a summary of the number and volume

of loans within the FCS banks and associations as of December 31, 1991,

that were unsecured, secured by personal property, secured by real

property, or secured by a combination of security types.

The data were further segregated by loan-size categories. The FCA

study has subsequently been updated to reflect the December 31, 1992,

and December 31, 1993, loan-size and collateralization information.

The FCA has also recently received the results of a study it

commissioned through the University of Illinois to perform

independently of the development of these regulations (University of

Illinois study). This study examined the loan origination volume,

associated defaults, and loan losses for a specific Farm Credit

district for a period between 1973 and 1992 to determine, among other

things, whether large loans have a higher default rate than small

loans.

In addition, the Farm Credit Council, on behalf of the System

institutions, has provided additional loan-size and loan-loss data to

the FCA for further consideration of the de minimis level. Finally, the

American Bankers Association (ABA) has also completed a survey,\8\

which included a sample of 246 commercial banks of various sizes and

portfolio structures. The survey stratified the loan portfolios by loan

size and by loan type (construction, farmland, multifamily, and

nonfarm).\9\

---------------------------------------------------------------------------

\8\``Commercial Real Estate Appraisal Survey''; Surveys and

Statistics Division, American Bankers Association; Report of

Results, June 4, 1992.

\9\The total sample of the ABA survey consisted of 9,329 banks

of various sizes with 51,931 loans reported for a total sample

volume of $22 billion (average size loan is $424,000, average size

farmland loan is $83,900, and average commercial loan is $820,000).

---------------------------------------------------------------------------

Upon review of the available data, the University of Illinois'

study data, the System's data, and the ABA's commercial bank data,

several conclusions can be drawn. Each of the studies attempted to

study the correlation between loan losses and loan size. There appears

to be very little difference in the average size of the ABA reported

farmland loans and the System institutions' loans. The establishment of

a consistent threshold level would encompass similar percentages of the

farmland-based loan portfolio of System institutions and commercial

banks. However, the System institutions will have a greater percentage

of farmland-based loan volume that would be in excess of a $250,000 de

minimis level. An increase in the de minimis level would result in the

System institutions being afforded the same flexibility as the

commercial lenders to perform collateral valuations rather than USPAP-

based, State-sanctioned appraisals. This will result in a significant

reduction in the number of loans that would require the use of a State-

sanctioned appraiser\10\ and thus result in cost savings to the

borrowers/consumers. The System data indicate that the difference in

the cost of an appraisal versus a valuation averages approximately $300

per evaluation. Such reported cost differences are consistent with cost

data that have been reported by the commercial banking industry.

---------------------------------------------------------------------------

\1\0Under the current FCA de minimis level of $100,000

approximately 80 percent of the number (38 percent of the volume) of

FCBs' and associations' real estate loans would be exempted. With an

increase of the de minimis level to $250,000, 95 percent of the

number of loans and 66 percent of the loan volume would be exempted

from the appraisal requirements.

---------------------------------------------------------------------------

The FCA recognizes that increasing the de minimis level will reduce

the number of transactions requiring a USPAP appraisal completed by a

State-sanctioned appraiser. The FCA's analysis of the available data

suggested that for loans in excess of $250,000, the rate of loss

justifies the cost of the USPAP appraisal requirement, while for loans

of less than $100,000, the cost of requiring USPAP appraisals may

exceed the volume of losses. For loans in the $100,000 to $250,000

range, the data do not clearly establish that the rate of loss

justifies the cost of requiring USPAP appraisals. Therefore, the FCA

believes that a de minimis level of $250,000 is a reasonable point

above which the additional appraisal requirements are justified. In

addition, the FCA is comfortable that safety and soundness concerns at

or below $250,000 can be adequately addressed by the collateral

valuation requirements of the regulations.

B. Business Loans

The regulations amend Sec. 614.4260(b) to provide the System

institutions with a $1.0 million threshold for requiring appraisals for

small- and medium-sized ``business loans'' where the loan repayment is

not derived from the sale or cash rental of real estate.

The purpose of this exemption is to provide greater flexibility for

institutions to provide credit to small- and medium-sized businesses

where the owners are subject to the risk of operational losses. The

exemption is not intended to ease credit requirements for real estate

investors or passive landowners. A $1.0 million exemption would be

consistent with the positions taken by the Federal regulatory agencies

and will afford the System institutions a ``level playing field'' with

respect to the required use of State-sanctioned appraisers. Based on

FCA's analysis of the data studies, it should be noted that, in

addition to the additional 15 percent (by number) of System loans

exempted by the new $250,000 de minimis level exception, approximately

an additional 5 percent of the number of loans will be exempted by the

$1.0 million ``business loan'' exemption.

However, within this $250,000 to the $1.0 million category, an

additional 25 percent of loan volume will be exempted by the new

business loan exemption. These additional loans represent a significant

proportion of System loan volume and arguably pose significant

additional risk for System institutions. Because of this concentration,

the FCA has provided additional criteria for the completion of

collateral evaluations for such small- and medium-sized business loans

by requiring all real estate collateral evaluations in excess of

$250,000, not otherwise exempted by Sec. 614.4260(c), to be completed

in conformance with the USPAP. Such collateral evaluations of

``business loans,'' while conforming with USPAP, will not necessitate

the use of a State-sanctioned appraiser or compliance with the

functional independence requirements.

While the regulations allow institutions to use either a State

licensed or State certified appraiser for loan transactions under the

$1.0 million level, the regulations require appraisals of real estate

transactions over $1.0 million to be completed by State certified

appraisers. The FCA notes that this requirement is consistent with the

requirements of the Financial Institutions Recovery, Reform, and

Enforcement Act of 1989 (FIRREA),11 which requires the use of a

State certified appraiser for a real estate transaction appraisal of

$1.0 million or more.

---------------------------------------------------------------------------

\1\1See Pub. L. 101-73, Sec. 1113, 103 Stat. 183 (1989).

---------------------------------------------------------------------------

C. Additional Collateral

The regulations expand the exceptions for the use of State licensed

and certified appraisers to include those instances where the real

estate is taken as additional collateral or where the loan is supported

through conclusive documentation of earnings capacity and repayment

ability evidencing that the real estate is not necessary to support the

loan decision.

Adoption of the additional collateral exception and clarifying the

``abundance of caution'' exception gives System institutions more

flexibility in relying on collateral valuations of real property rather

than USPAP-based State-sanctioned appraisals. However, the FCA believes

that the basic collateral valuation requirements and the institutions'

policies and procedures will provide sufficient analysis and detail to

address any safety and soundness concerns.

D. Limit Periodic Appraisals

The regulations amend Sec. 614.4260(c) to permit the use of

collateral valuations of real estate when a subsequent transaction is

related to the advancement of additional funds, a servicing action,

loan reamortization, etc., provided there has been no obvious and

material change in the market conditions or physical aspects of the

real estate that would threaten the adequacy of the institution's real

estate collateral protection after the transaction. The regulations

continue to require the institutions to develop appropriate policies

and procedures addressing the circumstances and frequency for the

completion of real property appraisals versus collateral valuations,

subject to the specific requirements of the regulation.

This revision would provide greater flexibility to the System

institutions in determining the appropriate collateral evaluation

method to employ (valuation vs. appraisal) and the appropriate level of

evaluator expertise required in relation to the associated credit risk.

This revision would allow institutions to use collateral valuations

instead of appraisals when a loan servicing action is required, a loan

is being reamortized, or even when additional funds are advanced as

long as the collateral risk has not materially increased. This revision

would also eliminate the requirement that a new appraisal be completed

if additional funds are advanced and an appraisal has not been

completed within 2 years, as was previously required by the

regulations.

These exemptions only address the use of real estate appraisals and

are not intended to eliminate the need for a review and update of the

value of the collateral through the use of a collateral valuation. The

FCA's regulation (Sec. 614.4260(c)(5)) would require a new evaluation

for reamortizations of loans if there has been a material increase in

the associated risk in concert with the advancement of new funds. This

position is consistent with the requirements of the Federal regulatory

agencies for transactions where new funds are advanced and there has

been a material increase in the associated risk. However, in addition,

the FCA, based on safety and soundness concerns identified in previous

System practices, has taken the position that any loan servicing action

(including reamortizations, collateral releases, etc.) should be

accompanied, at a minimum, by a collateral valuation that is consistent

with the requirements of these regulations.

E. USPAP ``Departure Provision''

The regulations amend Sec. 614.4265(h) to remove the prohibition on

the use of the USPAP ``Departure Provision.'' The removal of the

restriction will allow institutions to determine the best evaluation

method to support the credit decision consistent with safe and sound

lending practices that also best serves the borrower. The elimination

of this restriction will also provide more flexibility for the

institutions in the use of their appraiser resources by allowing State

licensed and certified appraisers to complete updated appraisals and

collateral valuations that would not otherwise meet the USPAP standards

requirements.

The FCA and the Federal regulatory agencies originally included the

restriction on the use of the ``departure provision'' because they were

concerned that the use of the provision would result in an evaluation

that is less than reliable. However, upon further discussion and

clarification from the Appraisal Foundation,\12\ the Federal regulatory

agencies now recognize that a ``departure provision'' appraisal

provides the basic information and valuation criteria required to

ensure a reliable valuation process.\13\ Therefore, the prohibition on

the use of the ``departure provision'' has been removed.

---------------------------------------------------------------------------

\1\2The Appraisal Foundation was established on November 30,

1987, by professional appraisal organizations, as a not-for-profit

corporation under the laws of Illinois, in order to enhance the

quality of professional appraisal practices. The USPAP standards

were developed and published under the direction of the Appraisal

Standards Board of the Foundation. The Foundation also consists of

the Appraisal Qualifications Board, which establishes the education

and qualification standards for appraisers.

\1\3Appraisal Standards Board's (ASB) statement on Appraisal

Standards No. 7, Permitted Departure from Specific Guidelines for

Real Property Appraisals, was adopted by the ASB on March 22, 1994,

and became effective July 1, 1994.

---------------------------------------------------------------------------

F. Technical Amendments

The regulations make technical amendments to subpart F pertaining

to issues such as an institution's review requirements for appraisals

completed by other financial institutions or government agencies. The

FCA has eliminated the review procedures from Sec. 614.4255(d), because

it is recognized that other U.S. Government agencies, Government-

Sponsored Enterprises and/or Federally regulated financial institutions

are all guided in their appraisal requirements by USPAP and FIRREA

requirements, which are at least as encompassing as FCA's regulatory

requirements.

In addition, the regulations make technical amendments to part 614,

subpart L, concerning an institution's responsibilities for accepting

an independent appraisal completed in response to a credit denial

action. In addition, the regulations make changes to part 618, subpart

G, concerning an institution's obligation to provide applicants with

copies of collateral evaluations on residential properties as required

by amended provisions of regulations implementing the Equal Credit

Opportunity Act.

Commenters, responding to the FCA's ``Regulatory Burden'' notice,

requested clarification as to the appropriateness of providing time

limits on how long an applicant can delay a credit reconsideration

while waiting for the completion of an independent appraisal. The FCA

believes that this is a valid concern, which should be addressed by a

revision to the regulation to require the completion of the evaluation

within a reasonable timeframe, depending on the nature and complexity

of the appraisal assignment.

The FCA has also noted that the Federal Reserve Board's amendment

of Regulation B, the regulations that implement the ECOA, requires that

System institutions provide copies of collateral evaluation reports,

containing all pertinent information, to unsuccessful applicants for

credit that would have been secured by residential real property.

Therefore, the FCA's current regulations pertaining to the release of

information must be revised to expressly permit the release of

collateral evaluation information when required by the provisions of

the ECOA and related regulations. The ECOA regulations generally

require the institution, in the case of residential properties, to

provide the applicant a copy of the complete evaluation report

including any third-party information if it is used as part of the

institution's evaluation process.

System institutions should note that, in those cases where

disclosure of such collateral evaluations is required by the ECOA,

there is no protection for confidential third-party information.

Therefore, System institutions should avoid the use of such

confidential information where disclosure is likely under the ECOA

(i.e., loans secured by residential properties, including farmland

loans where a dwelling is taken as part of the security). Confidential

third-party information does not include information that would

otherwise be publicly available (e.g., contained in the public land

records).

G. Other Comments

Several commenters have expressed concerns with the level of

requirements and standards for collateral valuations on real estate

and, in particular, the requirements for personal property valuations

and the use of the income approach for evaluations. The commenters

objected to requirements they felt were not consistent with the

requirements imposed by the other regulators on their regulated banking

institutions.

However, the General Accounting Office (GAO) has recently

recommended that the bank and thrift Federal regulatory agencies

establish a set of minimum standards for real estate evaluations where

the use of State-sanctioned appraisers and compliance with USPAP are

not required.14 The FCA, by previously adopting and publishing the

requirements of Sec. 614.4250 of the regulations, has addressed similar

concerns for the System institutions' valuation of real, personal, and

intangible property in general.

---------------------------------------------------------------------------

\1\4GAO Report (GAO/GGD-94-144), May 25, 1994, Better Guidance

Is Needed For Real Estate Evaluations.

---------------------------------------------------------------------------

In addition, the OCC has recently published proposed revisions to

its lending limit regulations that would require appraisals/evaluations

of collateral used to secure loans where the lender requires collateral

(including personal property) to support lending in excess of the 15-

percent lending limit. This position is also consistent with the

regulatory standards and guidance previously established by the FCA in

the collateral evaluation regulations. The FCA's willingness to adopt a

25-percent lending limit for FCBs and direct lender associations is

supported by the recognition that collateral evaluation requirements

serve as an essential control (58 FR 40311, July 28, 1993).

The FCA has also reviewed concerns previously expressed by the

System, which pertain to the required use of the income approach for

real estate evaluations in excess of the de minimis level (whether an

appraisal is required or not). The FCA has clarified in the regulations

that the income approach is one of the three prescribed methods of

valuing collateral under USPAP. Therefore, whenever USPAP standards are

employed the income approach must be considered. If it is not used as a

valuation method, there must be an explanation of why it was not used,

accompanied by the development of the initial income-producing

information to support its lack of relevance as a valuation method.

In Sec. 614.4265(d) the FCA requires the institution to develop and

document, as part of the supporting information for the credit

analysis, the income-producing capacity of the subject real estate as

well as the operations of the business. This information may or may not

be derived directly from the real estate evaluation process, but is

required as part of the credit analysis to support the debt repayment

analysis. Such information is intended to assist in identifying debt

coverage shortages that must be addressed by other sources of income.

However, the FCA strongly suggests that the income approach be used on

agricultural properties where the loan transaction exceeds the $250,000

de minimis level.

The income analysis requirement contained in the regulation does

not apply to loan transactions at the $250,000 de minimis level and

below. However, prudent business practices may dictate the development

and use of such information in a much wider range of loan transactions.

The institutions have the responsibility to identify those instances

where the credit risk and the associated credit decision would require

the support of the income and debt coverage analysis.

V. Summary

The present revisions of the FCA collateral evaluation requirements

will benefit the System institutions by allowing them to enjoy a

competitive playing field with the commercial banking industry and

relieving some requirements that have been identified as burdensome and

unnecessary. The FCA Board believes that these revisions can be made

without undermining the basic collateral evaluation requirements or

jeopardizing safety and soundness. Therefore, the FCA Board is able to

increase the flexibility of the regulations in order to ensure the

effectiveness and efficiency of the System's collateral evaluation

practices.

List of Subjects

12 CFR Part 614

Agriculture, Banks, banking, Foreign trade, Reporting and

recordkeeping requirements, Rural areas.

12 CFR Part 618

Agriculture, Archives and records, Banks, banking, Insurance,

Reporting and recordkeeping requirements, Rural areas, Technical

assistance.

For reasons stated in the preamble, parts 614 and 618 of chapter

VI, title 12 of the Code of Federal Regulations are amended to read as

follows:

PART 614--LOAN POLICIES AND OPERATIONS

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

follows:

Authority: Secs. 1.3, 1.5, 1.6, 1.7, 1.9, 1.10, 2.0, 2.2, 2.3,

2.4, 2.10, 2.12, 2.13, 2.15, 3.0, 3.1, 3.3, 3.7, 3.8, 3.10, 3.20,

3.28, 4.12, 4.12A, 4.13, 4.13B, 4.14, 4.14A, 4.14C, 4.14D, 4.14E,

4.18, 4.19, 4.36, 4.37, 5.9, 5.10, 5.17, 7.0, 7.2, 7.6, 7.7, 7.8,

7.12, 7.13, 8.0, 8.5 of the Farm Credit Act (12 U.S.C. 2011, 2013,

2014, 2015, 2017, 2018, 2071, 2073, 2074, 2075, 2091, 2093, 2094,

2096, 2121, 2122, 2124, 2128, 2129, 2131, 2141, 2149, 2183, 2184,

2199, 2201, 2202, 2202a, 2202c, 2202d, 2202e, 2206, 2207, 2219a,

2219b, 2243, 2244, 2252, 2279a, 2279a-2, 2279b, 2279b-1, 2279b-2,

2279f, 2279f-1, 2279aa, 2279aa-5); sec. 413 of Pub. L. 100-233, 101

Stat. 1568, 1639.

2. Part 614 is amended by revising subpart F to read as follows:

Subpart F--Collateral Evaluation Requirements

Sec.

614.4240 Collateral definitions.

614.4245 Collateral evaluation policies.

614.4250 Collateral evaluation standards.

614.4255 Independence requirements.

614.4260 Evaluation requirements.

614.4265 Real property evaluations.

614.4266 Personal and intangible property evaluations.

614.4267 Professional association membership; competency.

Subpart F--Collateral Evaluation Requirements

Sec. 614.4240 Collateral definitions.

For the purposes of this part, the following definitions shall

apply:

(a) Abundance of caution, when used to describe decisions to

require collateral, means that the collateral is taken in circumstances

in which:

(1) It is not required by statute, regulation, or the institution's

policies; and

(2) A prudent lender would extend credit based on a borrower's

income and/or other collateral, absent the real estate, and the

decision to extend credit was, in fact, based on other sources of

revenue or collateral.

(b) Appraisal means a written statement independently and

impartially prepared by a qualified appraiser setting forth an opinion

as to the market value of an adequately described property as of a

specific date(s), supported by the presentation and analysis of

relevant market information.

(c) Appraisal Foundation means the Appraisal Foundation established

on November 30, 1987, by professional appraisal organizations, as a

not-for-profit corporation under the laws of Illinois, in order to

enhance the quality of professional appraisals.

(d) Appraisal Subcommittee means the Appraisal Subcommittee of the

Federal Financial Institutions Examination Council.

(e) Business loan means a loan or other extension of credit to any

corporation, general or limited partnership, business trust, joint

venture, sole proprietorship, or other business entity (including

entities and individuals engaged in farming enterprises).

(f) Cost approach means the process by which an evaluator

establishes an indicated value by measuring the current market cost to

construct a reproduction of or replacement for the improvements, minus

the amount of depreciation (physical deterioration, or functional and/

or external obsolescence) evident in the structure from all causes,

plus the market value of the land.

(g) Evaluation means a study of the nature, quality, or utility of,

interest in, or aspects of, an asset. An evaluation may take the form

of a valuation or an appraisal.

(h) Fee appraiser means a qualified evaluator who is not an

employee of the party contracting for the completion of the evaluation

and who performs an evaluation on a fee basis. For purposes of this

subpart, a fee appraiser may include a staff evaluator from another

Farm Credit System institution only if the employing institution is not

operating under joint management with the contracting institution. In

addition, for purposes of personal and intangible collateral

evaluations, the term ``fee appraiser'' includes, but is not limited

to, certified public accountants, equipment dealers, grain buyers,

livestock buyers, and auctioneers.

(i) FIRREA means the Financial Institutions Recovery, Reform, and

Enforcement Act of 1989.

(j) Highest and best use means the reasonable and most probable use

of the property that would result in the highest market value of vacant

land or improved property, as of the date of valuation; or that use,

from among reasonably probable and legally alternative uses, found to

be physically possible, appropriately supported, financially feasible,

and which results in the highest land value.

(k) Income capitalization approach means the procedure that values

property by measuring the present value of the expected future benefits

of property ownership. This value is derived from either:

(1) Capitalizing a single year's income expectancy or an annual

average of several years' income expectancies at a market-derived

capitalization rate that reflects a specific income pattern, return on

investment, and change in the value of the investment; or

(2) Discounting the annual cashflows for the holding period and the

reversion at a specified yield rate or specified yield rates which

reflect market behavior.

(l) Market value means the most probable price that a property

should bring in a competitive and open market under all conditions

requisite to a fair sale, the buyer and seller each acting prudently,

knowledgeably, and assuming neither is under duress. Implicit in this

definition is the consummation of a sale as of a specified date and the

passing of title from seller to buyer under conditions whereby:

(1) Buyer and seller are typically motivated;

(2) Both parties are well informed or well advised, and acting in

what they consider their best interests;

(3) A reasonable time is allowed for exposure in the open market;

(4) Payment is made in terms of cash in United States dollars or in

terms of financial arrangements comparable thereto; and

(5) The price represents the normal consideration for the property

sold unaffected by special or creative financing or sales concessions

granted by anyone associated with the sale.

(m) Personal property, for purposes of this subpart, means all

tangible and movable property not considered real property or fixtures.

(n) Qualified evaluator means an individual who is competent,

reputable, impartial, and has demonstrated sufficient training and

experience to properly evaluate property of the type that is the

subject of the evaluation. For the purposes of this definition, the

term ``qualified evaluator'' includes an appraiser or valuator.

(o) Real estate means an identified parcel or tract of land,

including improvements, if any.

(p) Real estate-related financial transactions means any

transaction involving:

(1) The sale, lease, purchase, investment in, or exchange of real

property, including interests in property or the financing thereof; or

(2) The refinancing of real property or interests in real property;

or

(3) The use of real property or interests in real property as

security for a loan or investment, including mortgage-backed

securities.

(q) Real property means all interests, benefits, and rights

inherent in the ownership of real estate.

(r) Sales comparison approach means the procedure that values

property by comparing the subject property to similar properties

located in relatively close proximity, having similar size and utility,

and having been recently sold in arm's-length transactions (comparable

sales). The sales comparison approach requires the evaluator to

estimate the degree of similarity and difference between the subject

property and comparable sales. Such comparison shall be made on the

basis of conditions of sale, financing terms, market conditions,

location, physical characteristics, and income characteristics.

Appropriate adjustments shall be made to the sales price of the

comparable property based on the identified deficiencies or

superiorities of the subject property to arrive at a probable price for

which the subject property could be sold on the date of the collateral

evaluation.

(s) State certified appraiser means any individual who has

satisfied the requirements for and has been certified as a real estate

appraiser by a State or territory whose requirements for certification

currently meet or exceed the minimum criteria for certification issued

by the Appraiser Qualification Board of the Appraisal Foundation. No

individual shall be a State certified appraiser unless such individual

has achieved a passing grade on a suitable examination administered by

a State or territory that is consistent with and equivalent to the

Uniform State Certification Examination issued or endorsed by the

Appraiser Qualification Board of the Appraisal Foundation. In addition,

the Appraisal Subcommittee must not have issued a finding that the

policies, practices, or procedures of the State or territory are

inconsistent with title XI of FIRREA.

(t) State licensed appraiser means any individual who has satisfied

the requirements for licensing and has been licensed as a real estate

appraiser by a State or territory in which the licensing procedures

comply with title XI of FIRREA and in which the Appraisal Subcommittee

has not issued a finding that the policies, practices, or procedures of

the State or territory are inconsistent with title XI of FIRREA.

(u) Transaction value means:

(1) For loans or other extensions of credit, the amount of the

loan, loan commitment, or other extensions of credit;

(2) For sales, leases, purchases, investments in, or exchanges of

real property, the market value of the property interest involved; and

(3) For the pools of loans or interests in real property, the

transaction value of the individual loans or the market value of the

real property interests comprising the pool.

(v) USPAP means the Uniform Standards of Professional Appraisal

Practice adopted by the Appraisal Foundation.

(w) Valuation means the process of estimating a defined value of an

identified interest or interests in a specific asset or assets as of a

given date. A valuation results from the completion of a collateral

evaluation that does not require an appraisal.

Sec. 614.4245 Collateral evaluation policies.

(a) The board of directors of each Farm Credit System institution

that engages in lending or leasing secured by collateral shall adopt

well-defined and effective collateral evaluation policies and

standards, that comply with the regulations in this subpart, to ensure

that collateral evaluations are:

(1) Sufficiently descriptive and detailed to provide ample support

to the institution's related credit decisions;

(2) Performed based on criteria established for the purpose of

determining the circumstances under which collateral evaluations will

be required and when they will be required. Such criteria must, at a

minimum:

(i) Establish when an institution will require a collateral

appraisal completed under the USPAP rather than a collateral valuation;

and

(ii) Take into account such factors as market trends, market

volatility, and various types of credit, loan servicing, collection,

and liquidation actions; and

(3) Completed by a qualified evaluator in an unbiased manner.

(b) The policies and standards required by this section shall, at a

minimum, address the criteria outlined in Secs. 614.4250 through

614.4267 of this subpart.

(c) A Federal land bank association shall, with the approval of its

respective Farm Credit bank, adopt collateral evaluation policies that

are consistent with the bank's policies and standards.

Sec. 614.4250 Collateral evaluation standards.

(a) When real, personal, or intangible property is taken as

security for a loan or is the subject of a lease, an evaluation of such

property shall be performed in accordance with Sec. 614.4260 and the

institutions' policies and procedures. Such a collateral evaluation

shall be identified as either a collateral valuation or a collateral

appraisal. Specifically, all collateral evaluations must:

(1) Value the subject property based upon market value as defined

in Sec. 614.4240(l);

(2) Be presented in a written format;

(3) Consider the purpose for which the property will be used and

the property's highest and best use, if different from the intended

use;

(4) Be sufficiently descriptive to enable the reader to ascertain

the reasonableness of the estimated market value and the rationale for

the estimate;

(5) Provide sufficient detail (including an identification and

description of the property) and depth of analysis to reflect the

relevant characteristics and complexity of the subject property;

(6) Analyze and report, as appropriate, for real, intangible, and/

or personal property, on:

(i) The current income producing capacity of the property;

(ii) A reasonable marketing period for the property;

(iii) The current market conditions and trends that will affect

projected income, to the extent such conditions will affect the value

of the property;

(iv) The appropriate deductions and discounts as they would apply

to the property, including but not limited to, those based on the

condition of the property, as well as the specialization of the

operation and property; and

(v) Potential liabilities, including those associated with any

hazardous waste or other environmental concerns; and

(7) Include in the evaluation report a certification that the

evaluation was not based on a requested minimum valuation or specific

valuation or approval of a loan.

(b) For purposes of determining appraisal value as required in

section 1.10(a) of the Act, the definition of market value and the

requirements of this subpart shall apply.

Sec. 614.4255 Independence requirements.

(a) Prohibitions. For all personal and intangible property, and for

all real property exempted under Sec. 614.4260(c) of this subpart, no

person may:

(1) Perform evaluations in connection with transactions in which

such person has a direct or indirect interest, financial or otherwise,

in the loan or subject property;

(2) As a director, vote on or approve a loan decision on which such

person performed a collateral evaluation; or

(3) As a director, perform a collateral evaluation in connection

with any transaction on which such person made or will be required to

make a credit decision.

(b) Officers and employees. If the institution's internal control

procedures required by Sec. 618.8430 of this chapter include

requirements for either a prior approval or post-review of credit

decisions, officers and employees may:

(1) Participate in a vote or approval involving assets on which

they performed a collateral evaluation; or

(2) Perform a collateral evaluation in connection with a

transaction on which they have made or will be required to make a

credit decision.

(c) Real estate appraiser. Except as provided in Sec. 614.4260(c)

of this subpart, all evaluations of real property that serve as the

primary security for a loan shall be performed by a qualified real

estate appraiser who has no direct or indirect interest, financial or

otherwise, in the loan or subject property and is not engaged in the

marketing, lending, collection, or credit decision processes of any of

the following:

(1) A Farm Credit System institution making or originating the

loan;

(2) A Farm Credit System institution operating under common

management with the institution making or originating the loan; or

(3) A Farm Credit System institution purchasing an interest in the

loan.

(d) Fee appraisers. Fee appraisers shall be engaged directly by the

Farm Credit System institution or its agent, and shall have no direct

or indirect interest, financial or otherwise, in the property or

transaction. A Farm Credit System institution may accept a real estate

appraisal that was prepared by an appraiser engaged directly by another

Farm Credit System institution, by a United States Government agency, a

Government-Sponsored Enterprise or by a financial institution subject

to title XI of FIRREA.

(e) Loan purchases. No employee who, acting as a State licensed or

State certified appraiser, performed a real estate appraisal on any

collateral supporting a loan shall subsequently participate in any

decision related to the loan purchase.

Sec. 614.4260 Evaluation requirements.

(a) Valuation. Valuations of personal and intangible property, as

well as real property exempted under paragraph (c) of this section,

shall be performed by qualified individuals who meet the established

standards of this subpart and the Farm Credit System institution

obtaining the collateral valuation.

(b) Appraisal.

(1) Appraisals for real estate-related financial transactions with

transaction values of more than $250,000 shall be performed by a

qualified appraiser who is a State licensed or a State certified real

estate appraiser.

(2) Appraisals for real estate-related financial transactions with

transaction values of more than $1,000,000 shall be performed by a

qualified appraiser who is a State certified real estate appraiser.

(c) Appraisals not required. An appraisal performed by a State

certified or State licensed appraiser is not required for any real

estate-related financial transaction in which any of the following

conditions are met:

(1) The transaction value is $250,000 or less;

(2) The transaction is a ``business loan'' as defined in

Sec. 614.4240(e) that:

(i) Has a transaction value of $1,000,000 or less; and

(ii) Is not dependent on income derived from the sale or cash

rental of real estate as the primary source of repayment;

(3) A lien on real property has been taken as collateral in an

abundance of caution, and the application, when evaluated on the five

basic credit factors, without considering the subject real estate,

would support the credit decision that was based on other sources of

repayment or collateral;

(4) A lien on real estate is not statutorily required and has been

taken for purposes other than the real estate's value;

(5) Subsequent loan transactions involving an existing extension of

credit, provided that either:

(i) The transaction does not involve the advancement of new loan

funds other than funds necessary to cover reasonable closing costs; or

(ii) There has been no obvious and material change in market

conditions or physical aspects of the property that threatens the

adequacy of the Farm Credit System institution's real estate collateral

protection, even with the advancement of new loan funds;

(6) A Farm Credit System institution purchases a loan or an

interest in a loan, pool of loans, or interests in real property,

including mortgage-backed securities, provided that:

(i) The appraisal prepared for each loan, pooled loan, or real

property interest, when originated, met the standards of this subpart,

other Federal regulations adopted pursuant to FIRREA, or the

requirements of the government-sponsored secondary market

intermediaries under whose auspices the interest is sold; and

(ii) There has been no obvious and material change in market

conditions or physical aspects of the property that would threaten the

Farm Credit System institution's collateral position, or

(7) A Farm Credit System institution makes or purchases a loan

secured by real estate, which loan is guaranteed by an agency of the

United States Government and is supported by an appraisal that conforms

to the requirements of the guaranteeing agency.

To qualify for exceptions in paragraphs (c)(1) through (c)(7) of

this section from the requirements of this subpart, the institution

must have documentation justifying the use of such exceptions in the

applicable loan file(s). In addition, the institution must document

that the repayment of a ``business loan'' is not dependent on income

derived from the sale or cash rental of real estate.

(d) FCA-required appraisals. The FCA reserves the right to require

an appraisal under this subpart whenever it believes it is necessary to

address safety and soundness issues.

(e) Reciprocity. The requirements of this subpart are satisfied by

the use of State certified or State licensed appraisers from any State

provided that:

(1) The appraiser is qualified to perform such appraisals;

(2) The applicable Farm Credit System institution has established

policies providing for such interstate appraisals; and

(3) The applicable State appraiser licensing and certification

agency recognizes the certification or license of the appraiser's State

of permanent certification or licensure.

Sec. 614.4265 Real property evaluations.

(a) Real estate shall be valued on the basis of market value.

(b) Market value shall be determined by a reasonable valuation

method that:

(1) Considers the income capitalization approach, the sales

comparison approach, and/or the cost approach, as appropriate, to

determine market value;

(2) Explains and documents the elimination of any approach not

used.

(3) Reconciles the market values of the applicable approaches; and

(c) Where real estate appraisals or real estate collateral

valuations for business loans in excess of $250,000 that would not

otherwise be exempted under Sec. 614.4260(c) are required, such

evaluations shall be completed in accordance with the USPAP and shall

include a legal description of the subject property.

(d) At a minimum, the institution shall develop and document the

evaluation of the income and debt servicing capacity for the property

and operation where the transaction value exceeds $250,000 and the real

estate taken as collateral:

(1) Is an integral part of and supports the principal source of

loan repayment; or

(2) Is not an integral part of and does not support the principal

source of loan repayment, but has demonstrable rental market appeal, is

statutorily required, and fully or partially constitutes an integral

part of an agricultural or aquatic operation.

(e) The income-earning and debt-servicing capacity established

under paragraph (d) of this section on such properties shall be

documented as part of the credit analysis for any related loan action,

whether or not the income capitalization approach value is used as the

basis for the market value conclusion stated in the evaluation report.

(f) Collateral closely aligned with, an integral part of, and

normally sold with real estate (fixtures) may be included in the value

of the real estate. All other collateral associated with the real

estate, but designated as personal property, shall be evaluated as

personal property in accordance with Secs. 614.4250 and 614.4266.

(g) The evaluation shall properly identify all nonagricultural

influences, including, but not limited to, urban development, mineral

deposits, and commercial building development value, and the reasoning

supporting the evaluator's highest and best-use conclusion.

(h) Where an evaluation of real property is completed by a fee

appraiser, as defined in Sec. 614.4240(g), the institution's standards

shall include provisions for periodic collateral inspections performed

by the institution's account officer or appropriate designee.

Sec. 614.4266 Personal and intangible property evaluations.

(a) Personal property and intangibles shall be valued on the basis

of market value in accordance with the institution's evaluation

standards and policies.

(b) Personal property evaluations shall include a source of

comparisons of value (i.e., equipment dealer listings, Blue Book,

market sales reports, etc.) and a description of the property being

evaluated, including location of the property and, where applicable,

quantity, species/variety, measure/weight, value per unit and in total,

type of identification (such as brand, bill of lading, or warehouse

receipt), quality, condition, and date.

(c) Evaluations of intangibles shall include a review and

description of the documents supporting the property interests and the

marketability of the intangible property, including applicable terms,

conditions, and restrictions contained in the document that would

affect the value of the property.

(d) Where an evaluation of personal or intangible property is

completed by a fee appraiser, as defined in Sec. 614.4240(g), the

institution's standards shall include provisions for periodic

collateral inspections and verification by the institution's account

officer or appropriate designee.

When a Farm Credit System institution deems an appraisal necessary,

personal or intangible property shall be appraised in accordance with

procedures and standards established by the institution by individuals

deemed qualified by the institution to complete the work under the

USPAP Competency and Ethics Provisions.

Sec. 614.4267 Professional association membership; competency.

(a) Membership in appraisal organizations. A State certified

appraiser or a State licensed appraiser may not be excluded from

consideration for an assignment for a real estate-related transaction

solely by virtue of membership or lack of membership in any particular

appraisal organization.

(b) Competency. All staff and fee evaluators, including appraisers,

performing evaluations in connection with real, personal, or intangible

property taken as collateral in connection with extensions of credit

must meet the qualification requirements of this subpart. However, an

evaluator (as defined in Sec. 614.4240(n)) may not be considered

competent solely by virtue of being certified, licensed, or accredited.

Any determination of competency shall be based on the individual's

experience and educational background as they relate to the particular

evaluation assignment for which such individual is being considered.

Subpart L--Actions on Applications; Review of Credit Decisions

3. Section 614.4443 is amended by revising paragraph (c) to read as

follows:

Sec. 614.4443 Review process.

* * * * *

(c) Independent collateral evaluations.

(1) An applicant for a loan that has been denied may, as part of

the request for a review, request an independent collateral evaluation

by an independent evaluator, as defined in Sec. 614.4440 of this

subpart, of any interests in property securing the loan (other than the

stock or participation certificates of the lender held by the

borrower).

(2) Within 30 days after a request for a collateral evaluation, the

credit review committee shall present the applicant or borrower with a

list of three independent evaluators approved by the qualified lender.

The borrower shall select and engage the services of an evaluator from

the list to perform the collateral evaluation. The collateral

evaluation must be completed within a reasonable period of time. The

cost of the evaluation shall be borne by the applicant or borrower.

(3) The credit review committee shall consider the results of any

such collateral evaluation in any final determination with respect to

the loan or restructuring, provided the applicant's or borrower's

evaluator has provided a copy of the evaluation report to the lender

not less than 15 business days prior to any scheduled meeting of the

credit review committee.

(4) Any such collateral evaluations that are not completed in

conformance with the collateral evaluation requirements described in

subpart F of this part, relative to collateral evaluation standards,

independence requirements, and qualification requirements, need not be

considered by the credit review committee. To facilitate the proper

completion of such collateral evaluations, a copy of part 614, subpart

F, shall be provided to the borrower for presentation to the borrower's

evaluator, and a copy signed by the borrower's evaluator shall be a

required exhibit in the subsequent evaluation report.

* * * * *

PART 618--GENERAL PROVISIONS

4. The authority citation for part 618 continues to read as

follows:

Authority: Secs. 1.5, 1.11, 1.12, 2.2, 2.4, 2.5, 2.12, 3.1, 3.7,

4.12, 4.13A, 4.25, 4.29, 5.9, 5.10, 5.17 of the Farm Credit Act (12

U.S.C. 2013, 2019, 2020, 2073, 2075, 2076, 2093, 2122, 2128, 2200,

2211, 2218, 2243, 2244, 2252).

Subpart G--Releasing Information

5. Section 618.8320 is amended by adding a new paragraph (b)(11) to

read as follows:

Sec. 618.8320 Data regarding borrowers and loan applicants.

* * * * *

(b) * * *

(11) Collateral evaluation reports may be released to a loan

applicant, when required by the Equal Credit Opportunity Act or related

regulations.

* * * * *

Sec. 618.8325 [Amended]

6. Section 618.8325 is amended by removing the words ``appraisal''

and ``an appraisal'' and adding in their place the words ``collateral

evaluation'' and ``a collateral evaluation'' consecutively in the

second and third sentences in paragraph (b).

Dated: September 1, 1994.

Curtis M. Anderson,

Secretary, Farm Credit Administration Board.

[FR Doc. 94-22220 Filed 9-9-94; 8:45 am]

BILLING CODE 6705-01-P