Collateral Evaluation Requirements

• Citation: 86 FR 27308
• Record Number: 2021-10200
• Published date: 20 May 2021
• Court: Farm Credit Administration

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Federal Register / Vol. 86, No. 96 / Thursday, May 20, 2021 / Proposed Rules

second instance of ‘‘prerinse spray

valve’’ refers to the spring-style deck-

mounted prerinse unit defined in

section 6.8. In lieu of using

manufacturer installation instructions or

packaging, always connect the

commercial prerinse spray valve to the

flex tubing for testing. Normalize the

weight of the water to calculate flow

rate using Equation 1, where W

water

is

the weight normalized to a 1 minute

time period, W

1

is the weight of the

water in the carboy at the conclusion of

the flow rate test, and t

1

is the total

recorded time of the flow rate test.

(ii) Perform calculations in

accordance with section 11.3.1

(Calculation and Report). Record the

water temperature (°F) and dynamic

water pressure (psi) once at the start for

each run of the test. Record the time

(min), the normalized weight of water in

the carboy (lb) and the resulting flow

rate (gpm) once at the end of each run

of the test. Record flow rate

measurements of time (min) and weight

(lb) at the resolutions of the test

instrumentation. Perform three runs on

each unit, as specified in section 10.2.5

of ASTM F2324, but disregard any

references to Annex A1. Then, for each

unit, calculate the mean of the three

flow rate values determined from each

run. Round the final value for flow rate

to two decimal places and record that

value.

(2) Spray force. Test each unit in

accordance with the test requirements

specified in sections 6.2 and 6.4 through

6.9 (Apparatus), 9.1 through 9.5.3.2

(Preparation of Apparatus), and 10.3.1

through 10.3.8 (Procedure) of ASTM

F2324. In section 9.1 of ASTM F2324,

the second instance of ‘‘prerinse spray

valve’’ refers to the spring-style deck-

mounted prerinse unit defined in

section 6.8. In lieu of using

manufacturer installation instructions or

packaging, always connect the

commercial prerinse spray valve to the

flex tubing for testing. Record the water

temperature (°F) and dynamic water

pressure (psi) once at the start for each

run of the test. In order to calculate the

mean spray force value for the unit

under test, there are two measurements

per run and there are three runs per test.

For each run of the test, record a

minimum of two spray force

measurements and calculate the mean of

the measurements over the 15-second

time period of stabilized flow during

spray force testing. Record the time

(min) once at the end of each run of the

test. Record spray force measurements

at the resolution of the test

instrumentation. Conduct three runs on

each unit, as specified in section 10.3.8

of ASTM F2324, but disregard any

references to Annex A1. Ensure the unit

has been stabilized separately during

each run. Then for each unit, calculate

and record the mean of the spray force

values determined from each run.

Round the final value for spray force to

one decimal place.

* * * * *

[FR Doc. 2021–09708 Filed 5–19–21; 8:45 am]

BILLING CODE 6450–01–P

FARM CREDIT ADMINISTRATION

12 CFR Part 614

RIN 3052–AC94

Collateral Evaluation Requirements

AGENCY

: Farm Credit Administration.

ACTION

: Proposed rule.

SUMMARY

: The Farm Credit

Administration (FCA, we, or our)

proposes amendments updating our

regulations on appraisal and evaluation

requirements for property serving as

collateral for loans made by the Farm

Credit System (System). We propose

reorganizing existing rules to remove

redundancies and add clarity on the

distinct valuation standards for each

type of collateral. We also propose

adding regulatory requirements for the

use of automated valuation tools and

releasing appraisal and evaluations to

borrowers.

DATES

: Comments on this proposed rule

must be submitted on or before July 19,

2021.

ADDRESSES

: We offer a variety of

methods for you to submit comments.

For accuracy and efficiency reasons,

commenters are encouraged to submit

comments by email or through the

FCA’s website. As facsimiles (fax) are

difficult for us to process and achieve

compliance with section 508 of the

Rehabilitation Act, we do not accept

comments submitted by fax. Regardless

of the method you use, please do not

submit your comment multiple times

via different methods. You may submit

comments by any of the following

methods:

•Email: Send us an email at reg-

comm@fca.gov.

•FCA website: http://www.fca.gov.

Click inside the ‘‘I want to . . .’’ field

near the top of the page; select

‘‘comment on a pending regulation’’

from the dropdown menu; and click

‘‘Go.’’ This takes you to an electronic

public comment form.

•Mail: Kevin J. Kramp, Director,

Office of Regulatory Policy, Farm Credit

Administration, 1501 Farm Credit Drive,

McLean, VA 22102–5090.

You may review copies of all

comments we receive at our office in

McLean, Virginia, or on our website at

http://www.fca.gov. Once you are in the

website, click inside the ‘‘I want to

. . .’’ field near the top of the page;

select ‘‘find comments on a pending

regulation’’ from the dropdown menu;

and click ‘‘Go.’’ This will take you to the

Comment Letters page where you can

select the regulation for which you

would like to read the public comments.

We will show your comments as

submitted, but for technical reasons we

may omit some items such as logos and

special characters. Identifying

information that you provide, such as

phone numbers and addresses, will be

publicly available. However, we will

attempt to remove email addresses to

help reduce internet spam.

FOR FURTHER INFORMATION CONTACT

:

Technical information: Darius J. Hale,

Senior Policy Analyst, or Dennis K.

Carpenter, Senior Policy Analyst, Office

of Regulatory Policy, Farm Credit

Administration, McLean, VA 22102–

5090, (703) 883–4414, TTY (703) 883–

4056.

Legal information: Laura McFarland,

Senior Counsel, Office of General

Counsel, Farm Credit Administration,

McLean, VA 22102–5090, (703) 883–

4020, TTY (703) 883–4056.

SUPPLEMENTARY INFORMATION

:

I. Objectives

The objectives of this proposed rule

are to:

•Improve the organization and

readability of FCA appraisal and

evaluation regulations;

•Clarify expectations for internal

controls in appraisal and evaluation

practices;

•Expand authorities on using various

sources of appraisers and evaluators as

well as specifically authorizing use of

automated valuation tools; and

•Update existing terminology and

make other grammatical changes.

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1)

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1

Public Law 101—73, 103 Stat. 183, 12 U.S.C.

3331 et seq. (1989).

2

The FFIEC was created in 1979 through Title X

of Public Law 95–630 and is composed of

representatives from the following federal financial

regulators: Board of Governors of the Federal

Reserve System, Federal Deposit Insurance

Corporation, National Credit Union Administration,

the Office of the Comptroller of the Currency, and

Consumer Financial Protection Bureau. As the

federal safety and soundness regulator of the

System, the Farm Credit Administration is not a

member of the FFIEC.

3

Title XI of FIRREA also requires appraisals used

in connection with certain real estate-related

financial transactions entered into by financial

institutions to be written and conform to the

appraisal standards promulgated by the Appraisal

Standards Board of the Appraisal Foundation, as

well as prescribes which categories of federally

related transactions must have appraisals performed

by a State certified appraiser and those where a

State licensed appraiser may be used.

4

Public Law 92–181, 85 Stat. 583.

5

See, for example, sections 1.10(a)(3), 5.17(a)(6),

and 5.17(a)(7) of the Act.

6

See, for example, section 1.10(a)(3) of the Act

(12 U.S.C. 2018(a)(3)).

7

12 U.S.C. 2252(a)(6) and (a)(7).

8

57 FR 54683, Nov. 20, 1992.

9

FCA is not a FFIEC regulatory agency and

therefore not required to follow FFIEC standards.

However, we consider the policy positions of other

regulators to decide if we should follow them or

take a different approach if appropriate to

implement the requirements and expectations of the

Farm Credit Act of 1971, as amended.

10

FCA regulation §614.4265 on valuing real

estate was modified in 2006 to increase the business

loan exception allowing evaluations instead of

USPAP-compliant appraisals for transactions under

$1 million. 71 FR 65387, Nov. 8, 2006.

II. Background

The prevailing body of law for

conducting collateral appraisals and

evaluations in financial transactions is

Title XI of the Financial Institutions

Reform, Recovery, and Enforcement Act

of 1989 (FIRREA).

1

Title XI of FIRREA

created the Appraisal Subcommittee

within the Federal Financial Institutions

Examination Council (FFIEC)

2

to

provide federal oversight of state

appraiser regulatory programs. Title XI

of FIRREA also requires certain

federally regulated lending institutions

to use appraisers that are either state

certified or state licensed under the

Uniform Standards of Professional

Appraisal Practice (USPAP).

3

USPAP

provides standards and qualifications

for real estate appraisers and provides

guidance on recognized valuation

methods and techniques for all

evaluation professionals.

The Farm Credit Act of 1971, as

amended (Act)

4

charges FCA with

issuing regulations establishing loan

security requirements and the manner of

conducting collateral security reviews.

5

The Act requires System direct lenders

to determine the value of loan security

‘‘by appraisal under standards

prescribed by the [institution] in

accordance with [FCA] regulations.’’

6

FCA is further tasked with examining

the quality and sufficiency of collateral

used to secure System loans.

7

Because

these provisions within the Act existed

before passage of FIRREA—and for other

reasons—Congress exempted the System

from Title XI of FIRREA, including

following USPAP. However, FCA’s

present collateral evaluation rules are

generally similar, although not

identical, to FIRREA requirements.

In 1992, FCA issued subpart F of part

614, ‘‘Collateral Evaluation

Requirements’’, which sets forth

minimum regulatory standards for

performing appraisals and evaluations

of collateral securing extensions of

credit (lending and leasing) by Farm

Credit banks and associations.

8

The

1992 rulemaking applied many of the

evaluation standards used by the

banking industry under Title XI of

FIRREA, including requiring the use of

USPAP in certain loan transactions.

9

In

deciding to use these standards where

appropriate, FCA determined the

underlying policy behind Title XI of

FIRREA was relevant to the System’s

operations, particularly for ensuring that

reports on collateral values accurately

reflect the current market value of

collateral at the time of a credit decision

and that those values be recognized as

valid within the financial sector.

However, our regulations differ from

Title XI of FIRREA and USPAP where

needed to address the unique

cooperative structure of the System and

to address specific provisions in the

Act. For example, Title XI of FIRREA

provides that no USPAP appraisal is

required for a loan secured by real estate

when that loan is made based on

cashflow and not the value of real estate

collateral (i.e., abundance of caution

collateral). The System cannot use this

exception for loans made under the

authorities of Title I of the Act because

those loans require a first lien on the

real estate. Meaning those loans would

never be made without consideration of

the real estate collateral’s value.

Collectively, subpart F of Part 614 has

not been updated in over 25 years.

10

As

System institutions move toward

increased use of fee appraisers and

technology in loan making, we believe

it is time to update our requirements for

collateral appraisals and evaluations.

We also believe our regulations should

be updated to reflect the increased

importance internal review and controls

play in today’s lending environment.

Internal controls are an integral part of

managing lending programs. Internal

controls are also necessary to protect

safety and soundness operations where

institutions engage in credit programs

using minimum information or where

institutions move away from the use of

staff appraisers and evaluators.

III. Section-by-Section Analysis

We discuss the specifics of our

proposal below in the same order as

they would appear in the regulation.

A. Organization

We propose general language changes

to subpart F of Part 614 to enhance

readability. We intend no change in the

meaning of the affected regulatory

provisions unless specifically stated in

the discussions of those provisions. We

also propose reorganizing existing

provisions to consolidate like items,

remove redundancy, and add clarity.

1. Section Consolidations

Among these proposed organizational

changes are:

•Consolidating into § 614.4250 the

existing basic appraisal and evaluation

policies and standards of §§ 614.4245(a)

and 614.4250(a) and proposing revisions

to these policies and standards.

•Revising and consolidating into

§ 614.4255 the existing appraiser and

evaluator independence requirements of

§§ 614.4255, 614.4260(e), and 614.4267.

•Merging the existing contents of

§ 614.4266(a) and (b) into §614.4260, to

address in one section the evaluation

requirements for all chattel, including

personal and intangible property, while

also revising the existing provisions of

§ 614.4266.

•Revising § 614.4250 to add a

discussion of internal controls for

valuing collateral.

•Consolidating the existing appraisal

and evaluation requirements of

§§ 614.4260, 614.4265, and 614.4266

into §§ 614.4260 and 614.4265, as

appropriate for the type of collateral

under discussion.

•Adding a new § 614.4270

discussing the use of appraisal and

evaluation tools, including computer-

based models.

•Moving to new § 614.4275 the

existing contents of § 614.4260(d)

regarding our authority to require

appraisals and evaluations and

proposing clarifications.

2. Section Removals

We propose deleting as obsolete or

redundant the exiting requirements of:

•§§ 614.4250(b) and 614.4245(b), (c),

and (d);

•§ 614.4260(a); and

•§§ 614.4265(g) and 614.4266(d).

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3. Section Headings

In keeping with proposed

reorganizational changes, we propose

renaming the subpart and its section

headings as follows:

Subpart F—Collateral Appraisal and

Evaluation Requirements

§ 614.4240 as ‘‘Definitions’’;

§ 614.4245 as ‘‘General’’;

§ 614.4250 as ‘‘Policies, standards,

and internal controls for valuing

collateral’’;

§ 614.4255 as ‘‘Appraiser and

evaluator qualifications and

independence’’;

§ 614.4260 as ‘‘Valuing business

chattel, personal, and intangible

property’’;

§ 614.4265 as ‘‘Valuing real property’’;

§ 614.4270 as ‘‘Appraisal and

evaluation tools’’; and

§ 614.4275 as ‘‘Reservation of

authority’’.

B. Definitions [Existing § 614.4240]

We propose general grammatical

changes to certain terms in § 614.4240 to

enhance readability. We intend no

change in the meaning of the affected

terms unless specifically stated. We also

propose clarification, removal, or

addition of certain terms as discussed

below.

1. Clarifications

As a general matter, we propose

adding introductory language

explaining how certain terms (e.g.,

paper, record, provide) may be

interpreted to permit the electronic

equivalent if allowed under our e-

commerce regulations in part 609. We

add this clarification to reduce

questions on how technology

adaptations in daily business activities

are to be treated.

We propose clarifying changes to the

following definitions:

a. ‘‘Abundance of Caution’’

We propose replacing the phrase ‘‘real

estate’’ with ‘‘asset’’ when discussing an

item taken out of an abundance of

caution. We propose the change to

recognize that not all collateral taken

out of an abundance of caution is in the

form of real estate. System lenders may

hold collateral taken in an abundance of

caution for real estate and non-real

estate financial transactions. As a

conforming change, we also propose

replacing a reference to collateral

required by regulations or the

institution policies with a reference to

assets legally required to secure the type

of credit being extended. This change is

intended to capture the variations in

loan underwriting requirements, which

allow for secured and unsecured

lending in certain situations. However,

the proposed clarification does not

change legal requirements to take real

estate as security for financing offered

under Title I of the Act nor allow real

estate taken as collateral for Title I

lending to be considered an abundance

of caution type of security.

b. ‘‘Appraisal’’

We propose clarifying that the term

‘‘appraisal’’ means USPAP compliant

valuations of real estate completed by

either a state licensed or state certified

appraiser. We propose this change as

part of our objective to clarify our

regulations by restricting the term

‘‘appraisal’’ to always mean a USPAP

compliant real estate valuation. The

proposed change would prevent using

the term to identify non-USPAP

valuations, including values assigned to

non-real estate. We caution readers that

our regulatory definition of ‘‘appraisal’’

is not meant to define the term as used

in the Act. Instead, we believe both

regulatory terms of ‘‘appraisal’’ and

‘‘evaluation’’ represent the appropriate

interpretation of how the single term

‘‘appraisal’’ is used in the Act.

c. ‘‘Business Loan’’

We propose adding cooperatives to

the list of borrowing entities in

recognition of lending authorities

contained within Title III of the Act. In

doing so, we propose changing the order

of the list to aid in readability.

d. ‘‘Evaluation’’

We propose clarifying changes to the

meaning of ‘‘evaluation’’ to explain an

evaluation is in writing and presents an

independent and impartial opinion of

market value supported by relevant

information. This clarification would

remove the necessity of repeating

throughout subpart F that evaluations

need to be in writing and prepared by

independent evaluators.

e. ‘‘Evaluator’’

We propose changing the existing

term ‘‘qualified evaluator’’ to

‘‘evaluator’’, using the same definition

but with slight modifications. The term

as proposed would explain an evaluator

must always be qualified for the

evaluation assignment by being trained

and experienced in identifying values

for the types of assets under review. For

purposes of business chattel, personal

and intangible property collateral

evaluations, the term would continue to

include eligible bank or association

staff, certified public accountants,

equipment dealers, grain buyers,

livestock buyers, auctioneers, and other

industry experts.

f. ‘‘Fee Appraiser or Fee Evaluator’’

We propose clarifying the term to

mean either an appraiser or evaluator of

assets who is not employed by the

System lender but acts as a third-party

contractor. We make this change to

further distinguish the term from

appraisals or evaluations prepared by

staff of the System lender. We also

propose removing the last sentence of

the existing definition that applies to

personal and intangible evaluations.

Instead, we propose moving that

sentence to the term ‘‘evaluator.’’ In this

definition we also propose conforming

changes to use new or revised terms

being proposed, such as replacing

‘‘Farm Credit System institution’’ with

‘‘System lender.’’

g. ‘‘Highest and Best Use’’

We propose clarifying changes to the

term ‘‘highest and best use’’ to explain

it means the legal use of the asset and

to remove language that gives the

impression the term only applies to real

estate and not other collateral.

h. ‘‘Personal Property’’

We propose a clarifying change to the

definition of ‘‘personal property’’ to

exclude business chattel. As proposed,

the term ‘‘personal property’’ would

refer to moveable non-real estate

property that is not in the form of

equipment, livestock or crops. We

propose the distinction to facilitate

proper valuation of business chattel,

which is commonly used as security for

System financing, from other forms of

chattel, such as household goods, which

require different valuation efforts and

resources. As a conforming change, we

also propose adding a new definition for

‘‘business chattel’’, which is discussed

in section III.B.3 of this preamble.

i. ‘‘Real Estate or Real Property’’

We propose adding ‘‘or real property’’

to the existing term ‘‘real estate’’ to

recognize the interchangeable use of the

two terms. We also propose clarifying

that the term includes fixtures,

easements, rights of way, and other

rights commonly attached to the land

(e.g., mineral, water, gas, timber). We

make this clarification to ensure

appropriate identification and value

adjustments for these items are part of

the appraisals or evaluations of real

estate. As a conforming change, we

propose deleting the existing separate

definition for the term ‘‘real property.’’

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11

‘‘OFI’’ is defined elsewhere in our regulations

to mean other financing institutions that have

established an access relationship with a Farm

Credit Bank or an agricultural credit bank under

section 1.7(b)(1)(B) of the Act.

12

FCA Informational Memorandum, ‘‘Guidance

on Addressing Personal and Intangible Property

within Collateral Evaluation Policies and

Procedures (§614.4245)’’, dated August 29, 2016.

j. ‘‘State Certified Appraiser’’

We propose clarifying and conforming

language to the definition of ‘‘state

certified appraiser’’ that explains no

person will be accepted as meeting the

FCA definition unless that person

passed a state-administered examination

equivalent to those exams conducted

under the jurisdiction of the FFIEC

appraisal subcommittee. Currently, the

definition makes a definitive statement

of who is or is not a ‘‘state certified

appraiser.’’ Because FCA does not

actually certify any appraisers, we

believe the clarification is necessary.

2. Removals and Relocations

First, we propose moving the terms

‘‘cost approach’’, ‘‘income capitalization

approach’’, and ‘‘sales comparison

approach’’ from the definitions

contained in § 614.4240 and

incorporating them into proposed

§ 614.4265, discussing real estate

appraisals. This proposed movement

should facilitate compliance with the

requirements of real estate appraisals by

keeping the definitions with the terms

in the only place they are used within

the rule.

Next, we propose deleting the term

‘‘Appraisal Foundation’’ because it is

not used in the proposed rule text. We

also propose removing the term

‘‘valuation’’ as the term has become a

point of confusion. Currently, the term

is defined as an evaluation that is not an

appraisal. We propose removing this

term and its definition, leaving only the

terms ‘‘evaluation’’ and ‘‘appraisal’’. In

conformance with this proposed change,

we also propose revisions to the

definitions of ‘‘evaluation’’ and

‘‘appraisal’’, drawing a distinction

between the two types of reports. That

proposed distinction would use the

term ‘‘appraisal’’ only for USPAP

compliance reports valuing real estate.

All other reports of value, including

those for business chattel, other

personal property and intangible

property, would be ‘‘evaluations.’’

3. Additions

We propose adding six terms that

would apply to all of subpart F, unless

otherwise stated in the regulations.

First, we propose adding a definition for

‘‘appraiser’’ to limit application of the

term to only those persons state-

certified or state-licensed under USPAP

guidelines. The term as proposed would

also specify that an appraiser has

demonstrated experience in identifying

values for real property under USPAP.

We add this term as part of our efforts

to differentiate USPAP required values

from evaluations of non-real estate.

Second, we propose adding a

definition of ‘‘automated valuation

model’’ or AVM, explaining it means a

computer-based program that estimates

a property’s market value based on

certain factors. As proposed, the

definition would also explain certain

sub-set models used for particular

assets. We propose adding the term to

make clear what constitutes an

automated model, selecting a

description closely aligned with the

definition used by the FIRREA agencies.

We chose to use a definition similar to

FIRREA agencies in recognition that

vendors of most AVMs design their

models to comply with FIRREA

standards.

Third, we propose adding a new

definition for ‘‘business chattel’’ that

would apply to property kept for the

carrying on of any agricultural activity,

such as production or use in the farming

of land. We believe adding the

definition will help eliminate confusion

with other forms of chattel not in the

form of equipment, livestock or crops

(i.e., household goods, personal

property). We propose the distinction to

facilitate proper valuation of business

chattel separate from other chattel that

may not be subject to a lienhold by the

System lender. The new definition of

‘‘business chattel’’ would explain it also

applies to both livestock (any creature

not in the wild but regarded as an asset)

used to produce food, wool, skins, fur

or similar purposes, and crops (growing,

harvested, or in storage) kept for

production or use in the farming of land

or the carrying on of any agricultural

activity.

Next, we propose adding a definition

for ‘‘intangible property’’ to clarify the

term refers to valuable items that are not

physical in nature (i.e., copyrights,

trademarks, goodwill, brand names,

etc.). As discussed earlier, this proposed

change would include a conforming

change to the existing definition of

‘‘personal property.’’

Fifth, we propose adding a definition

of ‘‘Other Financing Institutions (OFI)’’,

using a definition consistent with that

used in other regulations.

11

We propose

specifically including the OFI definition

to recognize the requirements of 12 CFR

part 614, subpart P that OFIs comply

with System underwriting standards,

including collateral evaluation

requirements.

Lastly, we propose adding a definition

of ‘‘System lender’’, using a definition

consistent with the existing collateral

evaluation regulations explaining

subpart J of 12 CFR part 614 applies to

any System institution engaged in

lending or leasing activities secured by

collateral. This proposal would add

greater readability to the rule through

the use of one term rather than the

existing use of several terms (identifying

various types of System institutions)

explaining who is responsible for

obtaining an appraisal or evaluation of

collateral used to secure an extension of

credit. We believe our proposed use of

the term ‘‘System lender’’ is in keeping

with the appraisal requirements of the

Act.

B. General [Proposed § 614.4245]

We propose § 614.4245 be an all-

purpose section identifying the

minimum expectations applicable to

every collateral appraisal or evaluation.

As part of the restructure, we propose

moving existing § 614.4245(a) to another

section and deleting, due to

redundancy, the exiting requirements of

§ 614.4245(b), (c), and (d), along with

other proposed changes.

1. Required Appraisals and Evaluations

[Proposed § 614.4245(a)]

We propose adding as new

§ 614.4245(a) the general rule that all

collateral must be valuated via an

evaluation or appraisal. This is not a

new requirement, but rather a

clarification of FCA’s long-standing

position that collateral securing a loan

must be assigned a value. FCA issued an

Informational Memorandum containing

this clarification in 2016 after our

examination staff identified some

institutions held the belief no valuation

was required in certain credit

transactions for certain types of

collateral.

12

We recognize that non-real

estate collateral may not always be a

primary consideration or factor in

determining creditworthiness. However,

we believe that all security, including

property taken out of an abundance of

caution, should be properly valued. We

also recognize failing to assign a market

value to all collateral may negatively

affect capital treatment, servicing

decisions and loan classifications, as

well as create borrower confusion if the

property is later assigned the true

market value because it has become

essential to the credit. Therefore, FCA

believes that whenever property is used

to secure a loan, a market value must be

assigned and supported by an appraisal

or evaluation.

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12 U.S.C. 2200.

Also, we propose that, at a minimum,

an appraisal or evaluation be obtained

both when filing a lien against the

property and when the lender expects to

take liquidation actions. Ensuring an

asset’s value is the current market value

at the identified times ensures credit

decisions are using the best data

available. As proposed, the rule would

also require System lenders to act at

other times to ensure existing values are

adjusted when there are market

fluctuations.

2. Format and Minimum Content

Requirements [Proposed § 614.4245(b)]

We propose clarifying, reducing, and

consolidating the existing minimum

expectations for appraisals and

evaluations into new § 614.4245(b).

First, we propose adding a provision

that explicitly requires appraisals to

follow USPAP format requirements.

Next, we propose adding language

recognizing that an evaluation’s format

presentation will depend on the type of

asset being valued and the tools and

data sources used to set the value. For

example, if equipment is being valued

using an AVM, the evaluation format

may be a computer screen shot of the

recommended market value when that

screen shows all the required

information. Alternatively, the

evaluation format may consist of several

different documents with a cover

synopsis. We propose this flexibility in

recognition of the variety of data sources

available and the different ways in

which that data is obtained.

We are also proposing to establish

minimum content requirements needed

to support the final opinion of value.

We propose using some existing content

requirements and removing others in

the process. The existing content

provisions come from §§ 614.4245(a)

and 614.4250(a). As part of this

consolidation, we propose grammatical

changes as well as a few additional

changes. As proposed, new

§ 614.4245(b) would require that all

appraisals and evaluations:

•Have enough details to describe the

asset, including relevant characteristics;

•Provide information to aid the

reader in ascertaining the

reasonableness of the value; and

•Identify the data sources used for

setting the value, such as including the

name and version of any AVM or other

published source data used.

When applicable, we also propose that

the appraisal or evaluation include a

statement that different appraisal or

evaluation standards were used but use

of those standards was not a result of

any prohibited discriminatory factors.

We propose these requirements to

provide the reader of the report with

sufficient information as to how the

appraiser or evaluator chose the final

market value and to provide some

assurance on the validity of the process

used to reach a final value so that it is

recognized by other lenders as a fair

market value.

3. Age of Appraisal or Evaluation

Reports [Proposed § 614.4245(c)]

We propose a new provision

addressing when to obtain a new

appraisal or evaluation (outside the two

events proposed under § 614.4245(a)).

We are not proposing specific

evaluation or appraisal age requirements

at this time. Instead, proposed

§ 614.4245(c) would respect the existing

practice of allowing appraisals and

evaluations to be updated pursuant to

the System lender’s policies. This

would include updating benchmarking

methodologies used to track and

identify market conditions for a specific

type of asset. However, we propose

adding a requirement that an appraisal

or evaluation may only be used if the

reported value reflects market

conditions at the time the value is used

by the lender.

We had considered regulating the age

of appraisals and evaluations but

decided a fixed age may not capture

market changes in an appropriate

timeframe. Instead, we believe each

System lender is in a better position to

identify upward and downward

movement in market conditions within

its territory. For that reason, we

maintain high expectations that each

System lender will incorporate within

its appraisal and evaluation policies and

procedures timely reviews of collateral

value.

4. Using the Appraisal of Another

Lender [Proposed § 614.4245(d)]

We propose moving the existing

provision regarding sharing fee

appraisals among System institutions

from § 614.4255(d) to §614.4245(d). We

also propose expanding this authority to

cover all types of real estate appraisals

when the applicant or borrower

consents. The ability to share collateral

appraisals and/or evaluations for the

sale and purchase of loans under

subpart H of part 614 is unaffected by

this proposal as System lenders are

expected to address the sharing of

collateral appraisals and/or evaluations

in those transactions through their

purchase of interests in loan agreements

under § 614.4325(c)(3), as appropriate

and necessary to satisfy underwriting

criteria.

As proposed, a System lender may

use the real estate appraisals of other

lenders when the lender obtaining the

appraisal will not be extending the

requested credit and agrees to transfer

the appraisal. FCA believes that it

would be beneficial to System

institutions and serve as a cost-savings

measure for applicant to allow sharing

appraisals among System lenders when

one or more are involved in a credit

transaction. To preserve the quality of

the transferred appraisal, we propose

retaining the existing requirement that

such transfers may only occur with

other System lenders or lenders subject

to Title XI of FIRREA. Additionally, we

propose that the System lender

receiving the transferred appraisal

assume responsibility for verifying the

accuracy of the appraisal.

5. Releasing Appraisal or Evaluations

[Proposed § 614.4245(e)]

We propose adding a provision on the

release of appraisals and evaluations to

applicants and borrowers. We are

proposing this provision to further

implement the requirements of section

4.13A of the Act, which provides that

borrowers have the right to obtain

reports valuing their assets anytime

during the life of the loan. Specifically,

borrowers must be given, when

requested, ‘‘copies of each appraisal of

the borrower’s assets made or used by

the qualified lender.’’

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Additionally,

we propose language specifying that a

System lender is to release a copy of the

collateral appraisal or evaluation to the

applicant or borrower when issuing an

adverse credit decision that relies in

whole or part upon collateral values.

This provision would align with

provisions in Part 617 and our guidance

regarding the contents of adverse credit

decisions.

As proposed, appropriate duplication

fees may be charged when more than

one copy is given, excepting those

copies included with notice of an

adverse credit decision. We also

propose that System lenders provide a

copy of a collateral appraisal or

evaluation within 7 days of the request.

We are proposing a fixed time to ensure

that applicants and borrowers receive

the report within a reasonable time. We

propose 7 calendar days in

consideration of other regulatory

timeframes where the asset’s value may

affect an applicant’s or borrower’s

decision making or review rights.

In coordination with our proposed

language on evaluation presentation

format (§ 614.4245(b)), we propose that

the appraisal or evaluation copies

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provided to applicants and borrowers

contain all the information required by

regulation or USPAP. These copies

serve an essential role in an applicant’s

or borrower’s decision on whether to

challenge the value assigned an asset

before the Credit Review Committee

(CRC). Ensuring the applicant or

borrower receives the relevant

information forming the appraisal or

evaluation will also fulfill Congressional

intent behind section 4.13A.

Additionally, we believe that the

information provided in the

documentation should be presented in a

manner that is easily understood by the

applicant or borrower.

6. Recordkeeping [Proposed

§ 614.4245(f)]

We propose adding a requirement on

the amount of time System lenders are

required to maintain appraisal and

evaluation reports. As proposed, a

lender’s general recordkeeping policies

would apply to appraisals and

evaluations, except the lender would be

required, at a minimum, to maintain

them for the same duration as the

related credit file. We also specifically

propose that the lender preserve the

data set used in establishing the value

in effect as of the date of the appraisal

or evaluation. Our proposal is intended

to ensure that the appraisals and

evaluations used in the credit process

are preserved in case questions arise

about the credit decision that may lead

back to asset values and to inform

whether any updated value is required.

Additionally, the proposed requirement

to retain the data source(s) used for an

appraisal or evaluation reconciles this

provision with proposed § 614.4245(e).

Under new § 614.4245(e) we propose

requirements addressing the statutory

authority of a borrower to request, at

any time during the borrowing

relationship, copies of all appraisals

and/or evaluations used by the System

lender.

C. Policies, Standards, and Internal

Controls [Proposed § 614.4250]

We propose consolidating into

§ 614.4250 the existing requirement that

System lenders develop policies and

standards for conducting appraisals and

evaluations. The current requirements

are located in §§ 614.4245(a) and

614.4250(a). As part of this

consolidation, we propose additional

requirements and conforming changes.

1. Policies [Proposed § 614.4250(a)]

As proposed, § 614.4250(a) would

contain the existing requirement that

System lenders adopt and maintain

written policies on when and how to

issue collateral appraisals or

evaluations. The rule further proposes

required minimum contents for the

policies, including:

•Addressing when an evaluation

instead of an appraisal will be used

(where the regulations allow a choice);

•Establishing the frequency and

timing of when to complete either an

appraisal or evaluation;

•Monitoring market conditions;

•Authorizing or prohibiting the use

of shared appraisals or using out-of-

territory fee appraisers and evaluators;

•Setting parameters for using AVMs

and other tools;

•Verifying the independence of those

performing the valuation functions;

•Prohibiting any practice that would

base an appraisal or evaluation on a

requested minimum value or loan

amount; and

•Outlining internal controls needed

to ensure compliance with relevant laws

and regulations.

We believe these minimum

requirements provide the basic

foundation for a good appraisal and

evaluation policy.

Further, we propose requiring Farm

Credit banks to address within their

collateral appraisal and evaluation

policies OFI compliance with those

policies. Elsewhere in our regulations,

OFI lending activities that are

discounted with a Farm Credit bank are

required to follow relevant policies and

procedures contained in subpart P of 12

CFR 614. We believe specifically

addressing OFIs in the collateral

regulations and related institution

policies will facilitate compliance with

those regulations.

2. Standards [Proposed § 614.4250(b)]

We propose § 614.4250(b) contain the

existing requirement of § 614.4250(a)

that System lenders adopt and maintain

written standards for appraisals and

evaluations. In addition, we propose

requiring those standards be designed to

represent current market values to

protect the lender’s interest in

maintaining adequate loan collateral.

The rule would continue to identify

minimum items the standards must

address, including support for the

identified market value, the selection

process for appraisers and evaluators,

continuous monitoring of market

conditions, and addressing inspections

of the subject property. The level of

information each System lender requires

within these standards is expected to be

specific to the type and nature of the

collateral securing the loan. A System

lender might also include addressing

what it considers appropriate evaluation

techniques for complex and specialized

assets or high-risk transactions. When

valuing complex and specialized assets,

additional information addressing the

unique characteristics and conditions

affecting the market value of such assets

demands providing more than the

minimums proposed to ensure a reader

of the evaluation receives sufficient

information on how the value was

established. We believe the System

lender is in the best position to

determine the level of this additional

information given territorial

considerations.

When considering how and in what

manner to conduct property

inspections, we expect the lender to

include controls addressing the

accuracy and integrity of the

inspections. We are aware industry

practices continue to place increased

reliance on various types of technology

to enhance or replace the physical

inspection process. When other

methods such as these are used,

additional controls may be necessary to

validate the data’s accuracy. While we

have not proposed prohibiting the use of

such technology, we continue to believe

physical inspections are the most

appropriate method to verify assets in

most cases.

3. Internal Controls [Proposed

§ 614.4250(c)]

We are proposing § 614.4250(c)

address internal controls in managing

the collateral appraisal and evaluation

process. We propose that each lender

have written internal control policies

and procedures specifically designed for

the collateral appraisal and evaluation

process. We believe the internal controls

process for collateral valuations should

be designed to protect the integrity of

those values and the process by which

they are determined. We propose

requiring the controls include

safeguarding the independence of those

setting values from the credit process,

verifying the condition of the asset

being valued, and recognizing and

reacting to changes in market

conditions.

We recognize that existing § 618.8430

contains general requirements for

internal controls in collateral valuations

and other processes, but we believe

there is a need for greater clarity on

what the internal controls for collateral

valuations should contain. We are not

proposing any changes to § 618.8430

and do not intend for the proposed

§ 614.4250(c) to replace or supersede it.

Instead, we intend proposed

§ 614.4250(c) as an elaboration on the

requirements of § 618.8430. As such, we

encourage commenters to advise us if

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Section 4.14 of the Act provides that applicants

and borrowers may obtain a review of appraisals

and evaluations used in the loan making or loan

servicing decision by obtaining an independent

evaluation and presenting it to the CRC.

they read any conflict between the two

provisions.

D. Appraiser and Evaluator

Qualifications and Independence

[Proposed § 614.4255]

We propose consolidating into new

§ 614.4255 the existing appraiser and

evaluator independence standards from

§§ 614.4255 and 614.4267. We also

propose that System lenders verify an

appraiser’s or evaluator’s competency to

value the type of collateral under

review. In addition, we propose several

clarifying changes to existing conflict of

interest prohibitions for a lender’s staff.

As proposed, § 614.4255(b) would

require lenders to establish written

standards setting forth how

independence from the credit decision

will be determined. We had considered

removing the ability of a single person

to both establish the collateral value and

make the related credit decision.

However, we are mindful there are

smaller associations or service offices

where complete separation may not be

possible. Also, we took into

consideration the use of automated

credit approval processes. As a result,

we are not proposing to remove the

current regulatory authority allowing

one person to perform the valuation and

credit function. However, we propose

that those System lenders choosing to

embrace such a practice implement a

secondary review. We are proposing in

§ 614.4255 (b) that a secondary review

occur either before credit approval or

soon after loan closing. We believe

System institutions already have the

policies and procedures in place to

address this requirement. Additionally,

we propose in § 614.4255(b)(3) and (4)

that a review of that person’s work be

conducted by someone separate from

the credit transaction and the CRC. We

also propose clarifying language that the

CRC may not be treated as a secondary

review source. Notwithstanding this

proposed provision, all aspects of the

proposed § 614.4255(b) would remain

applicable to System lenders allowing a

single person to both establish the

collateral value and make the related

credit decision.

Finally, we propose moving existing

prohibitions on who may perform

collateral appraisals and evaluations to

new § 614.4255(c). We also propose

clarifying that the existing prohibition

against a fee appraiser or fee evaluator

having a financial interest in the loan or

subject property does not include fees

earned for valuation services. In

addition, we propose expanding the

existing prohibition against directors,

officers and employees of the System

lender performing real estate appraisals

and/or evaluations to include all assets

where that person has a direct financial

interest in the asset being valued. We do

not propose extending this prohibition

to those appraisals or evaluations

prepared by the lender’s staff where the

staff is engaged in marketing, lending,

collection, or credit decision process,

but holds no financial interest in the

asset and the appraisal or evaluation is

subject to the aforementioned secondary

review.

We propose new language in

paragraph(c)(6) to prohibit directors,

officers and employees of the System

lender from serving on the CRC when

that same director, officer or employee

performed an appraisal or evaluation

that is under review by the CRC. To

ensure continued independence in the

valuation process, we believe it is

important to restrict those performing

the appraisal or evaluation from serving

on the CRC when a credit decision

involving the appraisal or evaluation

prepared by that person is under review

by the CRC.

E. Valuing Business Chattel, Personal,

and Intangible Property [Proposed

§ 614.4260]

We propose renumbering existing

§ 614.4266 as new §614.4260 and

keeping the existing requirements of

§ 614.4266 that chattels are valued using

market-values and contain detailed

descriptions of the chattel as well as

identify the source(s) used to set the

value. We also propose providing a

nonexclusive list of acceptable sources.

Additionally, we propose adding

language to make clear that evaluations

of business chattel, personal and

intangible properties must use

recognized techniques and sources

when deriving the final value. We

believe limiting the manner of

identifying values to recognized

techniques and sources helps ensure the

accuracy of assigned values, which in

turn strengthens the soundness of the

related credit decision. It also furthers

the likelihood of those evaluations being

recognized as valid market values

within the financial sector. As a

conforming change, we propose adding

language to reference the proposed

regulatory sections on minimum

content, borrower access, and record-

keeping for chattel evaluations.

However, for intangible property, we

propose keeping, with slight

modification, the existing requirements

from §§ 614.4250(a)(6) and 614.4266(c)

that evaluations of intangible property

include discussion of the asset’s

marketability.

In developing this proposed rule, we

considered proposing a ‘‘score card’’

exemption or, in the alternative, a

reduced analysis for chattel taken out of

an abundance of caution. Ultimately, we

concluded that Congress expected all

forms of chattel to be valued when

making a loan. Within the Act, Congress

established certain loan making actions

to ensure safe and sound credit

decisions and provided legal rights for

borrowers regarding collateral. To

satisfy these congressional requirements

and expectations, all collateral needs a

substantiated value. This is true

particularly when an applicant seeks to

challenge the value through the CRC

process.

14

Even though we have not

proposed any exemptions or offered

special provisions for chattel taken out

of an abundance of caution, we believe

our proposal to allow the expanded use

of AVM and other source data

procedures and our proposed changes in

documentation required for chattel

evaluations serve to address the

majority of concerns expressed on the

interaction of chattel evaluations and

automated loan processes.

F. Valuing Real Property [Proposed

§ 614.4265]

We propose revising the current

requirements of § 614.4265 by

consolidating like provisions currently

located in § 614.4260, reorganizing and

clarifying content, and adding some

additional requirements.

1. General [§ 614.4265(a) and (b)]

We propose clarifying in § 614.4265(a)

that all real estate collateral must be

appraised unless an evaluation is

specifically permitted by new

§ 614.4265(c). We propose moving to

new § 614.4265(b) the existing

requirement of § 614.4260(b)(2) that if a

real estate-related financial transaction

is over $1 million dollars, then only a

state certified appraiser may issue the

appraisal report for the real estate

security. We also propose removing the

existing § 614.4260(b)(1) requirement

that appraisals for transactions over

$250,000 be completed by state-licensed

or state-certified appraiser. Our other

proposed changes, such as to the

definition of ‘‘appraisal,’’ remove the

need for this provision.

2. Permitted Use of Real Estate

Evaluations [Existing § 614.4260(c);

Proposed § 614.4265(c)]

We propose moving to new

§ 614.4265(c) the existing exceptions in

§ 614.4260(c) for when an evaluation of

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A single 1 to 4 family residence is generally

considered to be a single-family home, a duplex, a

tri-plex or a four-plex. It generally does not include

farm or ranch properties that have a residence on

the farm or ranch-site unless the entire property is

primarily residential.

real estate may be used instead of an

appraisal. We also propose adding

clarifications to their use because over

the years we have had to issue guidance

and address questions on the meaning

and applicability of the regulatory

exceptions. We intend no change to the

original scope of the exceptions unless

otherwise provided for in the regulation

and as explained in this preamble.

Specifically, we are proposing to keep

the existing authorization to issue an

evaluation, not an appraisal, for real

estate collateral in the following loan

transactions when use of an exception is

justified.

a. Transactions Valued at or Below

$250,000

We propose moving the existing

exception in § 614.4260(c)(1) for

transactions that do not include a

business loan and which are valued at

or below $250,000 to new

§ 614.4265(c)(1) and naming it ‘‘non-

business loan transactions’’.

b. Business Loan Transactions

We propose moving the existing

exception in § 614.4260(c)(2) for

transactions that are business loans

valued at or below $1 million to new

§ 614.4265(c)(2) and naming it

‘‘business loan transactions’’. Those

persons eligible for the business loan

exception include individuals,

corporations, sole proprietorships, et al.

that meet the eligibility requirements of

FCA regulations §§ 613.3000(b),

613.3010, and 613.3020.

Additionally, we clarify that we

propose no change to this exemption

being used for first-lien real estate taken

under 12 U.S.C. 2018(a). The value of

this first-lien security is used to

establish the Loan-to-Value lending

ratio (LTV) and so the Act requires it to

be ‘‘appraised’’ because Congress

intended values used in the LTV be

strong and supportable. When

developing the existing rule in 1992, we

set in § 614.4265 the minimum

requirement that all real estate

evaluations determine market value

after analyzing the property’s value

under three approaches: Income

capitalization, sales comparison, and

cost. This was to afford System lenders

use of the FIRREA business loan

transaction exemption for first-lien real

estate taken under 12 U.S.C. 2018(a)

while also satisfying the requirements of

the Act. For that reason, in this

rulemaking we propose no changes to

allowing use of the business loan

transaction exemption for first lien real

estate taken under 12 U.S.C. 2018(a). In

coordination with this, we propose no

change in the requirement to use three

approaches when either appraising or

evaluating real estate, as discussed in

the following preamble section III.F.3.,

‘‘Determining value.’’

We are proposing changes to one of

the conditions for using the business

loan exception. Currently, our

regulations state that the repayment of

the business loan cannot be dependent

on income derived from the sale or cash

rental of real estate as the primary

source of repayment if using the

exception. We are proposing to relax

this limitation by restricting it to

repayment coming from cash rental

from nonagricultural operations. That is,

we propose allowing business loan

transactions at or below $1 million to

use evaluations when repayment of the

loan is from rental income derived from

agricultural sources. We believe renting

land for agricultural purposes should

not prevent use of this exception.

Farmers or ranchers who receive cash

rents from production on agricultural

land should not have to bear the cost of

an appraisal solely because the

repayment of their loan is from cash

rents off that land. This includes those

farmers or ranchers who have set aside

land and receive conservation payments

from a federal or state program.

c. Subsequent Loan Transactions

We propose moving the existing

exception in § 614.4260(c)(5) for

subsequent transactions that do not

involve new collateral or new monies to

new § 614.4265(c)(3) and naming it

‘‘subsequent loan transactions’’. We

propose clarifying changes to the

existing language, but propose no

material change to this exception.

d. Pooled Loan Transactions

We propose moving the existing

exception in § 614.4260(c)(6) for loan

transactions where a System lender

purchases an interest in a loan or pool

of loans to new § 614.4265(c)(4) and

naming it ‘‘purchased loans’’. We

propose clarifying changes to existing

language, but propose no material

change to this exception.

e. Guaranteed Loan Transactions

We propose moving the existing

exception in § 614.4260(c)(7) for loan

transactions involving a U.S.

Government guarantee to new

§ 614.4265(c)(5) and naming it ‘‘U.S.

Government guarantee’’. We propose

clarifying changes to existing language,

but propose no material change to this

exception. Specifically, we propose

clarifying the exception’s applicability

by converting the existing single

sentence into two separate sentences:

One for purchased loans already having

a guarantee and one for when the lender

is making the loan with a guarantee. We

believe this clarification will facilitate

use of the exception.

f. Additional Security in a Loan

Transaction

We propose moving and consolidating

the existing exceptions in

§ 614.4260(c)(3) and (c)(4) for loan

transactions involving real property that

is either not required by law or is taken

for a purpose other than the land’s value

to new § 614.4265(c)(6), ‘‘Additional

security’’. As proposed, an evaluation

process would be available for real

estate taken under an abundance of

caution. We believe this proposed

change captures the intent of the

existing exceptions but presents them in

a simpler manner.

We considered adding a commercial

real estate transaction exception in

response to an exception of this nature

being added by those regulators subject

to FIRREA. The commercial real estate

transaction exception recently

authorized by other regulators, such as

the Federal Deposit Insurance

Corporation, provides that a commercial

loan using real estate security, but not

involving a single 1-to-4 family

residence,

15

may use an evaluation

instead of an appraisal for the real estate

when the loan transaction is at or below

$500,000. The unique nature of the

System would have made the exception

of little value. Farm Credit direct

lenders are non-depository institutions

who primarily make commercial

business loans to the agricultural sector.

These System lenders have authority to

make owner-occupied home loans in

rural areas populated by 2,500 persons

or less, but these home loans may not

make up more than 15 percent of the

institution’s loan portfolio. Further, a

loan made to finance one of these homes

would not be a business loan or a

commercial transaction, so would be

ineligible for a commercial real estate

transaction exception. Additionally,

System institutions may make the

occasional consumer loan as part of an

agricultural operation’s ‘other credit

needs’ and these loans would also not

qualify for a commercial real estate

transaction exception because they too

would be consumer transactions.

However, System institutions may

finance certain commercial transactions

under the same ‘other credit needs’

authority and, if no residence were

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Referring to ORP–IM, ‘‘Collateral Evaluation

Requirements and Frequently Asked Questions’’,

dated April 21, 2008 and OE–IM, ‘‘Computer-Based

Model Validation Expectations’’, dated June 17,

2002.

involved, these loans might qualify for

a commercial real estate transaction

exception. In evaluating the volume of

loan transactions such an exception

would cover and considering the fact

that these loans would mainly be

commercial transactions so most would

already be eligible under the ‘‘business

loan’’ exception (if the loan transaction

is $1 million or less), we did not see the

value in adding an additional

exemption.

3. Determining Value [Proposed

§ 614.4265(d)]

We propose consolidating in new

§ 614.4265(d) the existing requirements

of §§ 614.4250(a)(6) and 614.4265. We

also propose moving from the existing

definitions those explanations for the

‘‘cost approach’’, ‘‘income capitalization

approach’’, and ‘‘sales comparison

approach’’, incorporating them into new

§ 614.4265(d).

As proposed, new § 614.4265(d)

would continue to require real estate be

valued on the basis of market value but

would add clarification of how to arrive

at a market value. We propose clarifying

that market value is identified only after

considering the three valuation

methods: Income capitalization, sales

comparison, and cost approach. We

propose this clarification in part

through relocating the existing

definitions for ‘‘cost approach’’,

‘‘income capitalization approach’’, and

‘‘sales comparison approach’’ to new

paragraph (d)(1) through (3). We further

propose clarifying that arriving at a

market value includes identification of

nonagricultural influences, as is

currently required in existing

§ 614.4265(f). Also, we propose

requiring in all cases that real estate

appraisals and evaluations contain

detailed documentation of the best

approach to value as part of the written

report. We propose that details of the

other approaches only be required when

primarily used to identify the market

value. We propose these modifications

to provide better clarity as to why an

appraiser or evaluator may not have

chosen to use a specific valuation

approach. It also increases transparency

and allows the user to better understand

the logic behind the final market value.

In proposed new paragraph (d)(1), the

income capitalization approach would

be explained using the current

definition of such. Similarly, proposed

new paragraph (d)(2) would contain

expectations for the sales comparison

approach, using the current definition

and adding new requirements for using

at least three comparable sales, unless

the appraiser or evaluator provides

documentation that such comparable

sales are not available. FCA believes

that requiring appraisals and

evaluations to contain at least three

comparable properties provides

adequate information to form an

opinion on the market value of the

property in question. Additionally,

three comparable sales would provide

the end user with an adequate range of

values for the subject property for

comparison purposes.

Lastly, proposed new paragraph (d)(3)

would contain expectations for the cost

approach by using the current definition

and adding a documentation

requirement when the property has

unique improvements. FCA believes

adding the documentation requirement

would allow end users to better

understand the methodology chosen to

derive the final recommended market

value of the subject property.

Additionally, we believe the

documentation would provide greater

transparency to the end user regarding

the improvements on the property.

4. Valuation of Fixtures [Proposed

§ 614.4265(e)]

Proposed § 614.4265(e) would retain

the existing requirement that real estate

fixtures be included in the value of real

estate. As proposed, greater specificity

would be added to clarify that buildings

capable of being used for income-

producing purposes related to

agriculture must have an assigned value.

However, we propose language

preserving the discretion of the

appraiser or evaluator to assign certain

obsolete buildings no value. In the past,

questions have arisen on whether such

buildings should be assigned even a

salvage value. Since appraisers and

evaluators are trained in assessing

market demands, we believe they need

to retain the final authority on what

value is given obsolete fixtures. To

ensure the fixtures are not prematurely

determined obsolete, we also propose

that the value assigned be premised

upon the average buyer. We believe this

will alleviate potential disputes among

the owner, the lender, the examiner, and

the appraiser/evaluator on whether the

building is obsolete or retains some

contributory value in each individual’s

opinion.

5. Additional Content Requirements

[Proposed § 614.4265(f)]

We propose keeping, with slight

modification, the existing requirements

from §§ 614.4250(a)(6) that real property

appraisals and evaluations include

discussion of the land’s marketability.

We also propose requiring that

appraisals and evaluations of real

property include certain information in

addition to the general contents

proposed in new § 614.4245(b).

Specifically, we propose that the

appraisal or evaluation include a

description of any permanent fixtures,

known water or mineral rights, and

recorded access rights associated with

the land being valued. In recent years,

we have had several situations arise

where these items were not properly

noted, resulting in disputes when the

lender later went to act on its lien or

there was a land transfer matter. We

believe having an appraisal or

evaluation notate known permanent

fixtures, water or mineral rights, and

recorded access rights will further aid

lenders in verifying the information

against title reports. We also propose

keeping the existing requirement that an

appraisal or evaluation name the

purpose(s) for which the property will

be used by the applicant or borrower

when that purpose will be different

from the land’s highest and best use.

Next, we propose that an appraisal or

evaluation of real property name readily

observable conditions on the subject

property that may pose an

environmental hazard. As proposed,

System lenders would have to inform

the appraiser or evaluator of any

reported or known potential hazards.

FCA believes the identification of

known hazards on the subject property

provides valuable information in

formalizing the valuation of the

property.

Finally, we propose requiring System

lenders provide appraisers and

evaluators Federal Emergency

Management Agency (FEMA) forms

prepared on the subject property.

Specifically, when the property

includes items listed in a Special Flood

Hazard Area, the lender would have to

supply to the appraiser or evaluator the

FEMA form showing the location of the

buildings. We propose this provision to

align our appraisal and evaluation rules

with our existing flood insurance rule of

§ 614.4940.

G. Computer-Based Models and Other

Tools [Proposed § 614.4270]

We propose adding a new § 614.4270

discussing the use of certain appraisal

and evaluation tools. FCA previously

issued Informational Memoranda

addressing the use of automated

analytical tools in assigning values to

collateral

16

and we propose

incorporating most of that guidance into

this new regulatory section.

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Specifically, we propose allowing

System institutions to establish

computer-based analytical methods and

technological tools for collateral

appraisal and evaluations, provided the

lender can demonstrate that the

method(s) used to establish a value is

consistent with safe and sound lending

practices and contains sufficient

information and analysis to provide a

market value conclusion. As proposed,

analysis tools may not be used as a

standalone appraisal or evaluation

because these tools are intended for use

in assisting appraisers and evaluators in

the collateral evaluation process, not

replacing them. For example, computer-

based models may be used if there is

sufficient data available for the type of

property being evaluated and if the

lender has the necessary expertise to

interpret the data.

We propose that use of automated

valuation models (AVM) be limited to

situations where the AVM uses

information specific to the subject

property, including the actual physical

condition of the subject property, rather

than generalized ‘assumptions.’ As

proposed, assumptions used by the

evaluator will require sufficient support

and the evaluator will have to

demonstrate that the ‘assumption’ is

appropriate for the subject property.

Appropriate due diligence is also

essential when using these models,

including conducting independent

reviews to ensure institutions’ boards of

directors and senior managers are

receiving clear and informative

descriptions of the model’s assumptions

and limitations. As such, we propose

that System lenders perform due

diligence through an independent

validation process. We also propose that

System lenders retain staff or contract

with persons who have experience in

using the AVM chosen by the System

lender. FCA believes that lenders who

maintain staff with AVM expertise

would be better positioned to respond to

questions or concerns from the output of

the AVM or in the event the AVM does

not perform as anticipated.

We further propose allowing the use

of tax assessment values (TAV) when

there is additional support to show a

valid correlation between the TAV and

market value but would limit TAV use

to valuing real estate. As proposed, the

lender would be required to document

how the TAV is developed and updated

by the tax authorities. We also propose

using the TAV only in a manner

consistent with safe and sound lending

practices, which would involve using

additional support for final

recommended values rather than sole

reliance upon the TAV. We are not

proposing to allow use of TAVs for

chattel and personal property. We are

aware some states assess and tax chattel

and personal property, but we do not

believe those valuations processes are

refined enough to use in credit

decisions. As we understand them,

chattel valuation processes vary widely

by state, not all states provide such

valuations, and the values do not

consider any additional features or the

actual condition of the chattel.

Additionally, we propose requiring

System lenders using these tools have

policies and procedures in place that,

among other things, include appropriate

internal controls. In new § 614.4270(c)

we propose minimum control

requirements that the policies and

procedures must address. These

requirements include ensuring staff

training and expertise, validating model

results and setting criteria when the

models will be used and to what extent.

We believe the proposed minimum

internal control requirements are

common industry practice and provide

a sound basis for System institutions to

develop additional institution-specific

requirements.

H. Reservation of Authority [Proposed

§ 614.4275]

We propose moving to new

§ 614.4275 the existing contents of

§ 614.4260(d) regarding our authority to

require appraisals and evaluations. We

also propose clarifying that our

collateral evaluation regulations do not

prevent exercising this authority when

safety and soundness issues or

enforcement actions require it.

V. Regulatory Flexibility Act and

Congressional Review Act Conclusions

Pursuant to section 605(b) of the

Regulatory Flexibility Act (5 U.S.C. 601

et seq.), FCA hereby certifies that the

proposed rule will not have a significant

impact on a substantial number of small

entities. Each of the banks in the Farm

Credit System, considered together with

its affiliated associations, has assets and

annual income in excess of the amounts

that would qualify them as small

entities. Therefore, Farm Credit System

institutions are not ‘‘small entities’’ as

defined in the Regulatory Flexibility

Act.

List of Subjects in 12 CFR Part 614

Agriculture, Banks, banking, Foreign

trade, Reporting and recordkeeping

requirements, Rural areas.

For the reasons stated in the

preamble, the Farm Credit

Administration proposes to amend part

614 of chapter VI, title 12 of the Code

of Federal Regulations as follows:

PART 614—DISCLOSURE TO

SHAREHOLDERS

■1. The authority citation for part 614

continues to read as follows:

Authority: 42 U.S.C. 4012a, 4104a, 4104b,

4106, and 4128; 12 U.S.C. 2011, 2013, 2014,

2015, 2017, 2018, 2019, 2071, 2073, 2074,

2075, 2091, 2093, 2094, 2097, 2121, 2122,

2124, 2128, 2129, 2131, 2141, 2149, 2183,

2184, 2201, 2202, 2202a, 2202d, 2202e, 2206,

2206a, 2207, 2211, 2212, 2213, 2214, 2219a,

2219b, 2243, 2244, 2252, 2279a, 2279a–2,

2279b, 2279c–1, 2279f, 2279f–1, 2279aa,

2279aa–5; sec. 413 of Pub. L. 100–233, 101

Stat. 1568, 1639 (12 U.S.C. 2121 note).

■2. Revise the heading of subpart F to

read as follows:

Subpart F—Appraisal and Evaluation

Requirements

■3. Subpart F, consisting of §§ 614.4240

through 614.4275, is revised to read as

follows:

Subpart F—Appraisal and Evaluation

Requirements

Sec.

614.4240 Definitions.

614.4245 General.

614.4250 Policies, standards, and internal

controls for valuing collateral.

614.4255 Appraiser and evaluator

qualifications and independence.

614.4260 Valuing business chattel,

personal, and intangible property.

614.4265 Valuing real property.

614.4270 Appraisal and evaluation tools.

614.4275 Reservation of authority.

§ 614.4240 Definitions.

For the purposes of this subpart, the

following definitions apply excepting

that terms such as copy, document, file,

record, provide, written, and similar

words generally should be interpreted to

permit electronic transmissions and

communications as allowable under 12

CFR part 609:

Abundance of caution means a

decision to require an asset as security

for a loan when the asset is not used as

a basis for extending credit, a prudent

lender would extend credit without the

asset, and the asset is not legally

required as security for the type of

credit being extended.

Appraisal means a USPAP compliant

written evaluation prepared and issued

by a state licensed or state certified

appraiser setting forth an independent

and impartial opinion as to the market

value of real estate as of a specific

date(s), which value is supported by the

presentation and analysis of relevant

market information.

Appraisal Subcommittee means the

Appraisal Subcommittee of the Federal

Financial Institutions Examination

Council.

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Appraiser means a state-certified or

state-licensed appraiser who is

competent, reputable, impartial, and has

demonstrated sufficient training and

experience in identifying values for real

property through issuance of USPAP

compliant reports.

Automated Valuation Model or AVM

means a computer program that

estimates a property’s market value

based on market, economic, and

demographic factors using a quantitative

method, system, or approach applying

statistical, economic, financial, or

mathematical theories, techniques, and

assumptions. Hedonic models generally

use property characteristics (such as

square footage and room count) and

methodologies to process information,

often based on statistical regression.

Index models generally use geographic

repeat sales data over time rather than

property characteristic data. Blended or

hybrid models use elements of both

hedonic and index models.

Business chattel means livestock (e.g.

any creature not in the wild which is

regarded as an asset such as those to

produce food, wool, skins, fur or similar

purposes) and crops (growing,

harvested, or in storage) kept for

production or use in the farming of land

or the carrying on of any agricultural

activity. The term also encompasses

equipment used in business operations,

including agricultural equipment.

Business loan means a loan or other

extension of credit to finance the

business activities of an individual, sole

proprietorship, general or limited

partnership, joint venture, cooperative,

corporation, business trust, or other

legal business entity (including those

engaged in farming enterprises).

Evaluation means an independent

and impartial written opinion of market

value for an identified interest in, or

aspects of, an asset, which value is

supported by the presentation and

analysis of relevant market information.

Evaluator means an individual who is

competent, reputable, impartial, and has

demonstrated sufficient training and

experience in identifying values for

assets. For purposes of business chattel,

personal, and intangible collateral

evaluations, the term may include, but

is not limited to, System lender staff,

certified public accountants, equipment

dealers, grain buyers, livestock buyers,

and auctioneers.

Fee appraiser or fee evaluator means

a qualified appraiser or evaluator of

assets who is not an employee of the

party contracting for the completion of

the appraisal or evaluation and who

performs an appraisal or evaluation on

a fee basis. For purposes of this subpart,

a fee appraiser or fee evaluator may

include staff from another System

lender only if the employing lender is

not operating under joint management

with the contracting System lender.

FIRREA means the Financial

Institutions Recovery, Reform, and

Enforcement Act of 1989.

Highest and best use means the

reasonable and most probable legal use

of the asset as of the date of valuation

that is physically possible,

appropriately supported, financially

feasible, and results in the highest

value.

Intangible property means an item of

worth that is not physical in nature,

including, but not limited to, a

copyright, trademark, goodwill,

easement, lease, corporate logo or brand

name.

Market value means the most

probable price that a property should

bring in a competitive and open market

under all conditions requisite to a fair

sale, the buyer and seller each acting

prudently, knowledgeably, and

assuming neither is under duress.

Implicit in this definition is the

consummation of a sale as of a specified

date and the passing of title from seller

to buyer under conditions whereby:

(1) Buyer and seller are typically

motivated;

(2) Both parties are well informed or

well advised, and acting in what they

consider their best interests;

(3) A reasonable time is allowed for

exposure in the open market;

(4) Payment is made in terms of cash

in United States dollars or in terms of

financial arrangements comparable

thereto; and

(5) The price represents the normal

consideration for the property sold

unaffected by special or creative

financing or sales concessions granted

by anyone associated with the sale.

Other Financing Institutions or OFI

means the entities described in 12

U.S.C. 2015(b)(1)(B), but only with

respect to loans discounted or pledged

under 12 U.S.C. 2015.

Personal property means all tangible

and movable property not considered

real property and its fixtures or business

chattel.

Real estate or real property means an

identified parcel or tract of land,

including fixtures, easements, rights of

way, improvements, if any, and

associated mineral, oil, gas, timber, or

water rights attached to the parcel or

tract of land.

Real estate-related financial

transaction means any transaction

involving:

(1) The sale, lease, purchase,

investment in, or exchange of real

property, including interests in property

or the financing thereof; or

(2) The refinancing of real property or

interests in real property; or

(3) The use of real property or

interests in real property as security for

a loan or investment, including

mortgage-backed securities.

State certified appraiser means any

individual who has satisfied the

requirements for and has been certified

as an appraiser by a State or territory

whose requirements for certification

currently meet or exceed the minimum

criteria for certification issued by the

Appraiser Qualification Board of the

Appraisal Foundation. No individual

will be accepted under these regulations

as a State certified appraiser who has

not achieved a passing grade on a state-

administered examination that is

consistent with, and equivalent to, the

Uniform State Certification Examination

issued or endorsed by the Appraiser

Qualification Board of the Appraisal

Foundation. In addition, the Appraisal

Subcommittee must not have issued a

finding that the policies, practices, or

procedures of the State or territory are

inconsistent with title XI of FIRREA.

State licensed appraiser means any

individual who has satisfied the

requirements for licensing and has been

licensed as an appraiser by a State or

territory in which the licensing

procedures comply with title XI of

FIRREA and in which the Appraisal

Subcommittee has not issued a finding

that the policies, practices, or

procedures of the State or territory are

inconsistent with title XI of FIRREA.

System lender means a chartered

Farm Credit System institution that

engages in lending or leasing secured by

collateral.

Transaction value means:

(1) For loans or other extensions of

credit, the amount of the loan, loan

commitment, or other extensions of

credit;

(2) For sales, leases, purchases,

investments in, or exchanges of real

property, the market value of the

property interest involved; and

(3) For the pools of loans or interests

in real property, the transaction value of

the individual loans or the market value

of the real property interests comprising

the pool.

USPAP means the Uniform Standards

of Professional Appraisal Practice

adopted by the Appraisal Foundation.

§ 614.4245 General.

(a) Required appraisals and

evaluations. System lenders must obtain

appraisals or evaluations of all collateral

used to secure an extension of credit

(including leasing activities) or the

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purchased interest in credit extended by

another lender. System lenders must

maintain appraisals or evaluations

reflecting current market conditions. At

a minimum, every item of collateral

must be appraised or evaluated both at

the time a lien is obtained and when the

System lender expects to liquidate its

lienhold interest.

(b) Format and minimum content

requirements. An appraisal or

evaluation is a written impartial opinion

of an asset’s market value,

independently developed and

supported by analysis of relevant market

information. The market analysis

supporting the final opinion of value

may be conducted using a variety of

appraisal and evaluation tools and data

sources.

(1) All appraisals must follow the

format requirements of USPAP, or its

successor. For evaluations, the

presentation format may be in the form

of a report, a synopsis, a computer-

generated printout, or equivalent

records, depending upon the asset and

as permitted under the evaluation

standards of 12 CFR 614.4250. The

reporting format used for evaluations

must be appropriate for both the type of

asset being valued and the tools and

data sources used in setting the value.

(2) To support an opinion of value,

each appraisal or evaluation must, at a

minimum, include:

(i) A description of the asset in

sufficient detail to reflect the relevant

characteristics and complexity of the

subject asset;

(ii) Information that will enable the

reader to ascertain the reasonableness of

the estimated market value;

(iii) Identification of the data source(s)

used for determining the final market

value (e.g., real estate comparable

properties, the name and model version

of an AVM used, the name and date of

reputable publications used, validated

information specific to the System

lenders’ territory); and, if applicable,

(iv) In those situations when different

appraisal or evaluation standards are

used than those normally employed for

the type of asset being valued, the

appraiser or evaluator must attest that

use of the different standards was not

due to any prohibited discriminatory

factors like the age, race, or gender of

the asset owner or buyer.

(c) Age of appraisal or evaluation

reports. It is the responsibility of the

System lender to monitor market

conditions and trends, loan risk, and

collateral conditions to appropriately

determine the frequency for performing

new or updated collateral appraisals or

evaluations in keeping with regulatory

requirements. When making credit

decisions or approving new or

additional funds, the System lender may

use existing collateral appraisals or

evaluations reports only if the

appraisals or evaluations reflect current

market conditions at the time of use.

(d) Using the appraisals of another

lender. An appraisal ordered by another

financial institution on assets of a loan

applicant may be transferred to a

System lender when:

(1) The System lender will complete

the credit transaction instead of the

other financial institution;

(2) The other financial institution and

the applicant agree in writing to transfer

the report;

(3) The other financial institution is

either subject to Title XI of FIRREA or

a System lender; and

(4) The System lender receiving and

using the appraisal assumes full

responsibility for the integrity, accuracy

and thoroughness of the appraisal,

including the methods used by the other

financial institution to establish

collateral values.

(e) Releasing appraisals or

evaluations to applicants and

borrowers.

(1) At any time during the life of the

loan, an applicant or borrower may

request a copy of each appraisal and

evaluation made or used by the System

lender in the credit relationship. The

System lender must provide the copies

within 7 calendar days of receiving the

request. The copy of an appraisal or

evaluation provided to an applicant or

borrower must, at a minimum, contain

the final opinion of value, the

information required under 12 CFR

614.4245(b), and, as appropriate to the

type of asset being valued, the

information required under 12 CFR

614.4260 or 12 CFR 614.4265(d), (e),

and (f). The first copy of each appraisal

or evaluation given to the applicant or

borrower must be provided free of

charge, but the System lender may

assess reasonable copying charges for

any additional copies supplied during

the life of the loan, excluding copies

provided as part of an adverse credit

decision.

(2) When issuing an adverse credit

decision, a System lender must include

as an attachment to the decision letter

copies of those collateral evaluations

and appraisals used in the decision-

making process. The applicant or

borrower is not required to first request

such copies and the copies must be

provided at no cost to the applicant or

borrower. The copy of an appraisal or

evaluation provided to an applicant or

borrower must, at a minimum, contain

the final opinion of value, the

information required under 12 CFR

614.4255(b), and, as appropriate to the

type of asset being valued, the

information required under 12 CFR

614.4260 or 12 CFR 614.4265(d), (e),

and (f).

(3) To the extent that an appraisal or

evaluation may contain confidential

third-party information, the lender may

protect such confidential information as

provided under 12 CFR 618.8325(b).

(f) Records. The System lender must

maintain collateral appraisals or

evaluations for the duration required by

the lender’s recordkeeping policies. The

records must capture source data used

as of the date of the evaluation. At a

minimum, collateral appraisals or

evaluations made or used by a System

lender for making or servicing a loan

must be maintained in the related credit

file for the life of the loan. Appraisals

and evaluations used to deny a credit

request from a new applicant must be

maintained in the related credit file for

the same amount of time as the lender’s

recordkeeping policies and procedures

require the credit request to be

maintained.

§ 614.4250 Policies, standards, and

internal controls for valuing collateral.

(a) Policies. The board of directors of

each System lender must adopt and

maintain written policies on when and

how to issue collateral appraisals and

evaluations for all of the System

lender’s credit functions. in keeping

with regulatory requirements. Farm

Credit banks must include OFIs in their

policies and procedures for those

lending and leasing activities conducted

under 12 U.S.C. 2015(b)(1)(B). At a

minimum, the policies must:

(1) Identify when an evaluation will

be used instead of an appraisal (when

the regulations allow either to be used);

(2) Establish parameters identifying

the frequency and timing of appraisals

and evaluations, including monitoring

portfolio collateral values on an ongoing

basis;

(3) Authorize or prohibit the use of

out-of-territory appraisers or sharing

appraisals;

(4) Establish parameters for using

AVMs and other tools in identifying

market values of real estate and/or

chattel;

(5) Ensure the independence of the

persons ordering, performing, and

reviewing appraisals and evaluations;

(6) Prohibit basing an appraisal or

evaluation on a requested minimum

valuation, specific value, or loan

amount;

(7) Implement internal controls that

promote compliance with applicable

laws, rules and policies; and, as

applicable,

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(8) Require OFIs to follow collateral

appraisal and evaluation requirements.

(b) Standards. Each System lender

must adopt and maintain written

standards for appraisals and evaluations

that implement regulatory requirements,

and which are designed both to protect

the lender’s interest and adequately

represent real-time collateral values. At

a minimum, the standards must address:

(1) The level of information required

to support the value assigned beyond

regulatory minimum content

requirements, including considerations

for complex and specialized assets or

high-risk transactions;

(2) Using collateral appraisals and

evaluations in a manner consistent with

safe and sound practices;

(3) The qualifications of individuals

selected to perform an appraisal or

evaluation;

(4) Development and maintenance of

a list of approved fee appraisers and fee

evaluators, including the criteria to

follow when selecting and engaging a

fee appraiser or fee evaluator;

(5) Providing fee appraisers and fee

evaluators with a copy of the collateral

appraisal and evaluation regulations

contained in this subpart and

instructing the fee appraiser or fee

evaluator to apply the regulatory

requirements in formation of the

contracted appraisal or evaluation;

(6) On-going reviews of market

conditions, including how recognition

of special events affecting values, such

as natural disasters, will be handled;

(7) The frequency and form of

property inspections; and

(8) How existing appraisals and

evaluations will be handled in renewals,

refinancings, and other subsequent

credit transactions.

(c) Internal Controls. Each System

lender must have written internal

control policies and procedures for

managing its collateral appraisal and

evaluation activities. The internal

controls policies and procedures must

be kept up-to-date and, at a minimum,

include the following elements:

(1) Protecting the integrity of the

overall collateral appraisal and

evaluation function;

(2) Verifying the condition of pledged

collateral is as listed in the appraisal or

evaluation report;

(3) Safeguarding the independence of

appraisers and evaluators in activities

conducted under this subpart;

(4) Ensuring appraisals and

evaluations are used to verify collateral

market values contained within credit

analysis and financial statements; and

(5) Reviewing appraisals and

evaluations periodically for compliance

with applicable laws, regulations, policy

and industry standards.

§ 614.4255 Appraiser and evaluator

qualifications and independence.

System lenders are responsible for

verifying that persons performing

appraisals and evaluations for use by

the lender meet the requirements of this

section.

(a) Competency. An appraiser or

evaluator must have the requisite

knowledge and experience for both the

specific asset being valued and the

relevant market area.

(1) An appraiser or evaluator may not

be considered competent solely by

virtue of being certified, licensed, or

accredited. Any determination of

competency must be based on the

individual’s experience and educational

background as it relates to the specific

appraisal or evaluation assignment for

which such individual is being

considered.

(2) A State certified appraiser or a

State licensed appraiser may not be

excluded from consideration for an

assignment solely by virtue of

membership or lack of membership in

any particular appraisal organization.

System lenders may use State certified

or State licensed appraisers from any

State provided that:

(i) The appraiser is competent to

perform such appraisals;

(ii) The applicable System lender has

established policies providing for use of

interstate appraisals; and

(iii) The State appraiser licensing and

certification agency where the subject

property is located recognizes the

certification or license of the appraiser’s

State of permanent certification or

licensure.

(b) Staff appraisers and evaluators.

Each System lender must maintain

written standards implementing

regulatory requirements on appraiser

and evaluator independence from

lending activities, as well as real or

perceived conflicts of interest, for

collateral appraisal and evaluation

functions performed by staff of the

System lender. The standards must

address how a separate secondary

review of the assigned value(s) by a

person not connected to the credit

decision will be used and determine if

the secondary review will happen

before the final credit decision is made

or soon after loan closing. The written

standards on appraiser and evaluator

independence from lending activities, at

a minimum, must also:

(1) Facilitate the exercise of

independent judgment by staff

appraisers and evaluators when

developing collateral values by

providing protections from undue

influence by the loan production and

collection processes;

(2) Require staff appraisers and

evaluators to have no direct, indirect, or

prospective interest, financial or

otherwise, in the asset being valued;

(3) Require staff appraisers and

evaluators to have no direct, indirect, or

prospective interest, financial or

otherwise, in the transaction for which

the appraisal or evaluation will be used

when there is no separate secondary

review of the assigned value(s) by

another person who is not connected to

the credit decision nor a member of the

Credit Review Committee (CRC)

reviewing the credit decision; and

(4) Restrict staff appraisers and

evaluators from subsequent

participation in any decision related to

a loan connected to the collateral that

the staff member is valuing, including

the sale, purchase, or servicing of that

loan, when there is no separate

secondary review of the assigned

value(s) by another person who is not

connected to the credit decision

(including through service on the CRC)

or subsequent credit activities.

(c) Prohibitions. In addition to

required internal controls for managing

a System lender’s collateral appraisal

and evaluation activities, the following

prohibitions apply:

(1) No person may be a fee appraiser

or fee evaluator for the System lender

when such person has a direct or

indirect interest, financial or otherwise,

in the loan or subject property being

valued (excluding fees generated from

performing an appraisal or evaluation).

(2) No director of the System lender

may vote on or approve a loan decision

when that same person performed the

collateral appraisal or evaluation for the

loan under review.

(3) No director of the System lender

may perform a collateral appraisal or

evaluation in connection with any

transaction on which such person made,

or will be required to make, a credit

decision.

(4) No director, officer, or employee of

the System lender may perform an

appraisal or evaluation of an asset

serving as security for a credit request

when that person has a direct or indirect

interest, financial or otherwise, in the

asset.

(5) Absent a secondary review

process, no person may perform an

appraisal or evaluation of an asset

serving as security for a credit request

or loan when that person is engaged in

the marketing, lending, collection, or

credit decision processes of any of the

following:

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(i) A System lender making or

originating the loan;

(ii) A System lender operating under

common management with the System

lender making or originating the loan; or

(iii) A System lender purchasing an

interest in the loan.

(6) A director, officer, or employee of

the System lender performing a

collateral appraisal or evaluation for

assets connected to a credit or servicing

request may not also serve as a Credit

Review Committee member at a

committee meeting where that appraisal

or evaluation report, whether alone or as

part of a credit decision, is under

review. This prohibition extends to any

person performing the secondary review

process for an appraisal or evaluation

that was prepared by a staff appraiser or

evaluator.

§ 614.4260 Valuing business chattel,

personal, and intangible property.

(a) General. A market value-based

evaluation for business chattel,

personal, or intangible property taken as

collateral must employ the industry-

recognized methods and techniques

used to value similar property. Each

System lender is responsible for

identifying appropriate collateral

evaluation data sources and applying

proper criteria in evaluating business

chattel, personal, and intangible

property. When a request is made under

12 CFR 614.4245(e), the System lender

must provide to the requestor the

supporting information and criteria

used in the evaluation of the subject

asset(s).

(b) Data source(s). Data sources used

to establish the market value of business

chattel, personal, or intangible property

may include, but are not limited to,

AVMs, reputable industry publications,

validated information specific to the

System lender’s territory, equipment

dealers, grain buyers, livestock buyers,

auctioneers, commodities market, and

market sales reports. Identification of

data sources made pursuant to the

requirements of 12 CFR

614.4245(b)(2)(iii) must include the

name of the source and the date of the

publication/contact or version of AVM

used, as applicable.

(c) Business chattel and personal

property. When providing details of a

subject asset under the requirements of

12 CFR 614.4245(b)(2), an evaluation for

business chattel and personal property

must explain the quality, condition,

quantity, species, weight, value per unit,

etc. of the asset, as applicable to the

type of asset being valued. The

evaluation must also describe the

location of the chattel at time of

valuation.

(d) Intangible items. For intangibles

only, the evaluation must include a

review and description of the

documents supporting the interest(s) in

the asset and marketability of the

intangible property, including

applicable terms, conditions, and

restrictions contained in the document

that would affect the value of the

property.

§ 614.4265 Valuing real property.

(a) General. An appraisal is required

for all real estate collateral unless an

evaluation is specifically permitted by

this section.

(b) Appraiser limitations. Only a State

certified real estate appraiser may issue

an appraisal report for real estate-related

financial transactions over $1,000,000.

(c) Permitted use of evaluations.

System lenders may establish the value

of real estate collateral through an

evaluation in any of the following loan

transactions (if documentation justifies

use of such exceptions):

(1) Non-business loan transactions.

An evaluation of real estate may be used

instead of an appraisal for a non-

business loan with a transaction value at

or below $250,000.

(2) Business loan transactions. An

evaluation of real estate may be used

instead of an appraisal for a business

loan with a transaction value at or

below $1,000,000 provided repayment

of the loan is not primarily dependent

upon either:

(i) Income derived from the sale of

real estate, or

(ii) Income from the cash rental of real

property being rented for

nonagricultural purposes.

(3) Subsequent loan transactions. An

evaluation of real estate may be used

instead of an appraisal for subsequent

loan transactions that do not involve

new collateral or the advancement of

new loan funds, other than funds

necessary to cover reasonable closing

costs. Additionally, there must be no

obvious or material change in the

physical aspects of the existing real

estate collateral or market conditions

affecting the property.

(4) Purchased loans. An evaluation of

real estate may be used instead of an

appraisal when a System lender

purchases a loan or an interest in a loan,

pool of loans, or interests in real

property, including mortgage-backed

securities, provided that:

(i) The originating lender’s real estate

appraisal prepared for each loan, pooled

loan, or real property interest, when

originated, met the standards of this

subpart, other Federal regulations

adopted pursuant to FIRREA, or the

requirements of the government-

sponsored secondary market

intermediaries under whose auspices

the interest is sold; and

(ii) There has been no obvious or

material change in market conditions or

the physical aspects of the property that

would threaten the System lender’s

secured position.

(5) U.S. Government guarantee. An

evaluation of real estate may be used

instead of an appraisal when a System

lender makes a loan secured by real

estate and such loan is guaranteed by an

agency of the United States Government

and use of an evaluation conforms to the

requirements of the guaranteeing

agency. An evaluation of real estate may

be used instead of an appraisal when a

System lender purchases a loan secured

by real estate and such loan is both

guaranteed by an agency of the United

States Government and otherwise

supported by an appraisal that conforms

to the requirements of the guaranteeing

agency.

(6) Additional security. When a

System lender makes a loan secured, in

part or in whole, by real estate and some

or all of the real estate is taken out of

an abundance of caution, an evaluation,

in lieu of an appraisal, of the real estate

taken out of an abundance of caution is

permitted. All other real estate security

must be appraised, absent another

permitted use of evaluations being

applicable.

(d) Determining value. Real estate is

valued on its market value, which must

be developed from considering three

approaches: The income capitalization

approach, the sales comparison

approach, and the cost approach.

Consideration of all three approaches

includes identifying all relevant

influences, including, but not limited to,

urban development, mineral deposits,

and commercial activity in the area. All

real estate appraisals and evaluations

must include detailed documentation of

the main approach used to identify the

market value of the subject property,

including an explanation of why that

approach was the primary method

relied upon by the appraiser or

evaluator. The appraisal or evaluation

must include a general discussion of the

other approaches considered but not

relied upon to reach the final market

value. In situations where one or more

of the three approaches must be

excluded from consideration due to a

lack of data, the appraisal or evaluation

must include an explanation justifying

the exclusion.

(1) Income capitalization approach.

The income capitalization approach

measures the present value of the

expected future benefits of property

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ownership. This value is derived from

either:

(i) Capitalizing a single year’s income

expectancy or an annual average of

several years’ income expectancies at a

market-derived capitalization rate that

reflects a specific income pattern, return

on investment, and change in the value

of the investment; or

(ii) Discounting the annual cashflows

for the holding period and the reversion

at a specified yield rate or specified

yield rates which reflect market

behavior.

(2) Sales comparison approach. The

sales comparison approach compares

the subject property to similar

properties located in relatively close

proximity, having similar size and

utility, and which have been recently

sold in arm’s-length transactions

(comparable sales). Not less than three

comparable sales will be used unless the

appraiser or evaluator provides

documentation that such comparable

sales are not available. Under this

approach, the appraiser or evaluator

must estimate the degree of similarity

and difference between the subject

property and comparable sales. Such

comparison must be based on

conditions of sale, financing terms,

market conditions, location, physical

characteristics, and income

characteristics. Appropriate adjustments

to the sales prices of comparable

properties are allowed when there are

identified deficiencies or superiorities

of the subject property. The appraiser or

evaluator must use his or her knowledge

of the area and apply good judgment in

the selection of comparable sales that

are the best indicators of value for the

subject property.

(3) Cost approach. The cost approach

establishes an indicated value by

measuring the current market cost to

construct a reproduction of, or

replacement for, the improvements,

minus the amount of depreciation

(physical deterioration, or functional

obsolescence) evident in the structure

from all causes, plus the market value

of the land. If the appraiser or evaluator

considers the property to be unique or

have specialized improvements, the

appraiser or evaluator will identify the

source of the cost estimates and will

comment on the methodology used to

estimate depreciation, effective age and

remaining economic life.

(e) Valuation of fixtures. Real estate

fixtures closely aligned with, an integral

part of, and normally sold with real

estate are included in the value of the

real estate and must be identified in the

appraisal or evaluation. Structures

principally used, or capable of being

used, for income-producing agricultural

or farming commercial enterprise

purposes, such as barns, silos,

commercial greenhouses, or livestock

facilities, must be assigned a value. At

the discretion of the appraiser or

evaluator, non-dwelling structures no

longer used for a commercial purpose

and which the average buyer would

consider as adding no contributory role

to the real estate do not require

assignment of a value.

(f) Additional report content

requirements. In addition to the

minimum content requirements of 12

CFR 614.4245(b) and the requirements

of paragraphs (d) and (e) of this section,

an appraisal or evaluation for real estate

must include all of the following:

(1) A description of any permanent

fixtures, known water and mineral

rights, and recorded access rights

associated with the real estate being

valued.

(2) The purpose for which the

property is or will be used by the loan

applicant or borrower, if different from

the highest and best use.

(3) A list of readily observable

conditions that may pose a present

environmental hazard. If the System

lender knows, or is informed by another

party, of a potential hazard, that

information must be disclosed to the

appraiser or evaluator before the

appraisal or evaluation is completed.

(4) Identification of any structures

located in known flood hazard areas.

When the real property being valued

includes buildings or dwellings in a

Special Flood Hazard Area, the

appropriate Federal Emergency

Management Agency form identifying

the structure and its location on the

property, as required by § 614.4940 of

this part, must be made available to the

appraiser or evaluator before the

appraisal or evaluation report is

completed.

(5) The reasonable sales exposure

time, the current market conditions or

trends affecting, or likely to affect, the

value of the land, and the most probable

marketplace for the land.

§ 614.4270 Appraisal and evaluation tools.

A System lender may use a variety of

analytical methods and technological

tools in developing an appraisal or

evaluation, provided the lender can

demonstrate that the method(s) used is

consistent with safe and sound lending

practices and contains sufficient

information and analysis to support the

resulting market value conclusion. The

tools by themselves do not constitute

either an appraisal or evaluation.

(a) Automated models (AVM). Values

for real estate, business chattel,

personal, and intangible property may

be determined using computer-based

models only when there is sufficient

data enabling the model’s statistical

determination of accurate market

values.

(1) Scope of use. Use of an AVM must

be commensurate with the System

lender’s credit risk exposure and due

diligence in setting minimum

performance criteria for the model. Any

assumption used must be fully

supported and appropriate for the

subject property. A System lender must

have or engage persons with expertise

relative to a particular method or tool

before using that analysis tool.

(2) Validation. System lenders must

establish an independent validation

process to determine the appropriate

application of AVMs. Persons

overseeing the model validation must be

independent of the loan underwriting

and portfolio management process. If

the System lender adopts a third-party

vendor model, the lender must

periodically document the integrity and

applicability of the model and the

vendor’s maintenance of the model.

(b) Tax assessment values (TAV).

System lenders may use TAV only in

the appraisal or evaluation of real estate.

When using TAVs, the System lender

must determine and document how the

tax jurisdiction calculates the TAV and

how frequently TAVs are updated. A

System lender may rely on the data

provided by local tax authorities to

develop the resulting market value

unless inconsistent with safe and sound

lending practices or, when applicable,

USPAP. The use of a TAV requires

additional support to demonstrate a

valid correlation between the TAV and

market value.

(c) Internal controls when using

appraisal and evaluation tools. A

System lender must establish and

maintain written policies and

procedures providing a sound process

for using various methods or tools and

for verifying that a valuation method or

tool is employed in a consistent manner.

At a minimum, the policies and

procedures must:

(1) Define the requisite expertise and

training of staff in managing the

selection, use, and validation of an

analytical method or technological tool;

(2) Address the selection, use, and

validation of the analysis method or

tool;

(3) Establish criteria for determining

whether a particular method or tool is

appropriate for a given transaction or

lending activity, considering associated

risks for transaction size and purpose,

credit quality, and leverage tolerance

(loan-to-value);

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(4) Specify criteria identifying when a

market event or risk factor would

preclude the use of a particular method

or tool;

(5) Address standards for the use of

multiple methods or tools, if applicable,

for valuing the same property or to

support a particular lending activity;

(6) Provide criteria for ensuring that

the method or tool used produces a

reliable estimate of market value; and

(7) Address the extent to which an

inspection or research is necessary to

ascertain the property’s actual physical

condition and what supplemental

information is needed to assess the

effect of market conditions or other

factors on the AVM estimate of market

value.

§ 614.4275 Reservation of authority.

(a) Nothing in this subpart shall be

read to limit the authority of the Farm

Credit Administration to take

supervisory or enforcement action,

including action to address unsafe and

unsound practices or conditions, or

violations of law and regulation.

(b) FCA reserves the right to require

an appraisal or evaluation under this

subpart whenever it believes it is

necessary to address safety and

soundness issues.

(c) Nothing in this subpart prevents

the FCA from accessing appraisals and

evaluations during an examination,

enforcement action, or other exercise of

its regulatory authority.

Dated: May 10, 2021.

Dale Aultman,

Secretary, Farm Credit Administration Board.

[FR Doc. 2021–10200 Filed 5–19–21; 8:45 am]

BILLING CODE 6705–01–P

DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

14 CFR Part 39

[Docket No. FAA–2006–24733; Project

Identifier MCAI–2021–00139–R]

RIN 2120–AA64

Airworthiness Directives; Airbus

Helicopters (Type Certificate

Previously Held by Eurocopter France)

and Eurocopter France Helicopters

AGENCY

: Federal Aviation

Administration (FAA), DOT.

ACTION

: Supplemental notice of

proposed rulemaking (SNPRM).

SUMMARY

: The FAA is revising a notice

of proposed rulemaking (NPRM) to

supersede AD 2002–08–16, which

applies to certain Eurocopter France

SA341G, SA342J, and SA–360C

helicopters. The NPRM proposed to

require removing certain main rotor

head torsion tie bars (tie bars) from

service and revising the limitations

section of the existing maintenance

manual for your helicopter by adding

life limits for those tie bars. The NPRM

was prompted by the determination that

another part-numbered tie bar was

affected by the same unsafe condition.

This action reopens the comment period

because a significant amount of time has

elapsed since the NPRM was published.

This action also revises the NPRM by

updating the type certificate holder’s

name, updating the estimated cost

information, clarifying the requirements

and compliance times, and adding parts

installation prohibitions. The FAA is

proposing this airworthiness directive

(AD) to address the unsafe condition on

these products. Since these actions

would impose an additional burden

over those in the NPRM, the agency is

requesting comments on this SNPRM.

DATES

: The FAA must receive comments

on this SNPRM by June 21, 2021.

ADDRESSES

: You may send comments,

using the procedures found in 14 CFR

11.43 and 11.45, by any of the following

methods:

•Federal eRulemaking Portal: Go to

https://www.regulations.gov. Follow the

instructions for submitting comments.

•Fax: (202) 493–2251.

•Mail: U.S. Department of

Transportation, Docket Operations,

M–30, West Building Ground Floor,

Room W12–140, 1200 New Jersey

Avenue SE, Washington, DC 20590.

•Hand Delivery: Deliver to Mail

address between 9 a.m. and 5 p.m.,

Monday through Friday, except Federal

holidays.

For Eurocopter service information

identified in this SNPRM, contact

Airbus Helicopters, 2701 N. Forum

Drive, Grand Prairie, TX 75052;

telephone 972–641–0000 or 800–232–

0323; fax 972–641–3775; or at https://

www.airbus.com/helicopters/services/

technical-support.html. You may view

this service information at the FAA,

Office of the Regional Counsel,

Southwest Region, 10101 Hillwood

Pkwy., Room 6N–321, Fort Worth, TX

76177. For information on the

availability of this material at the FAA,

call (817) 222–5110.

Examining the AD Docket

You may examine the AD docket at

https://www.regulations.gov by

searching for and locating Docket No.

FAA–2006–24733; or in person at

Docket Operations between 9 a.m. and

5 p.m., Monday through Friday, except

Federal holidays. The AD docket

contains the NPRM, this SNPRM, the

Direction Generale De L’Aviation Civile

(DGAC) ADs, any comments received,

and other information. The street

address for Docket Operations is listed

above.

FOR FURTHER INFORMATION CONTACT

: Hal

Jensen, Aerospace Engineer, Operational

Safety Branch, FAA, 950 L’Enfant Plaza

N SW, Washington, DC 20024;

telephone (202) 267–9167; email

hal.jensen@faa.gov.

SUPPLEMENTARY INFORMATION

:

Comments Invited

The FAA invites you to send any

written relevant data, views, or

arguments about this proposal. Send

your comments to an address listed

under

ADDRESSES

. Include ‘‘Docket No.

FAA–2006–24733; Project Identifier

MCAI–2021–00139–R’’ at the beginning

of your comments. The most helpful

comments reference a specific portion of

the proposal, explain the reason for any

recommended change, and include

supporting data. The FAA will consider

all comments received by the closing

date and may again revise this proposal

because of those comments.

Except for Confidential Business

Information (CBI) as described in the

following paragraph, and other

information as described in 14 CFR

11.35, the FAA will post all comments

received, without change, to https://

www.regulations.gov, including any

personal information you provide. The

agency will also post a report

summarizing each substantive verbal

contact received about this proposed

AD.

Confidential Business Information

CBI is commercial or financial

information that is both customarily and

actually treated as private by its owner.

Under the Freedom of Information Act

(FOIA) (5 U.S.C. 552), CBI is exempt

from public disclosure. If your

comments responsive to this SNPRM

contain commercial or financial

information that is customarily treated

as private, that you actually treat as

private, and that is relevant or

responsive to this SNPRM, it is

important that you clearly designate the

submitted comments as CBI. Please

mark each page of your submission

containing CBI as ‘‘PROPIN.’’ The FAA

will treat such marked submissions as

confidential under the FOIA, and they

will not be placed in the public docket

of this SNPRM. Submissions containing

CBI should be sent to Hal Jensen,

Aerospace Engineer, Operational Safety

Branch, FAA, 950 L’Enfant Plaza N SW,

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