4000 - Advisory Opinions
Depository Institution's Nonrecourse Financing of Third Party's Purchase of Mortgage Loans for 90% or 100% of Purchase Price is Exempt Under FDIC's Appraisal Regulation (12 C.F.R. § 323)
July 30, 1991
Walter P. Doyle, Counsel
Thank you for your July 10 letter regarding the applicability of FDIC's regulation on appraisals (12 C.F.R. 323) to purchases by nonmember insured banks (from FDIC, RTC and others) of loans and participations therein and to the nonrecourse financing of up to 100% of such purchases by third parties. You stipulate that most loans in such packages were originated prior to the regulation's effective date and, where such loans were subject to the regulation when originated, conforming appraisals were obtained at that time. You also state that in all cases the purchasing or lending bank makes "an appropriate evaluation of the real estate collateral for the mortgage loans in the package."
You are correct that new appraisals are not required for nonmember bank purchases of such loans or participations because of the exemption in § 323.3(a)(5). That being the case, you argue that nonrecourse bank financing of such purchases by third parties is or should be exempt also.
We believe that mortgages or other security interests in real estate are indeed "interests in real property" and that any purchase, sale, financing, refinancing, investment in or exchange of such interests, as well as their use as collateral for a loan, triggers both the letter and the spirit of Title XI of FIRREA and the appraisal requirements imposed thereunder--and we find your arguments to the contrary to be unpersuasive. However, your further argument that the rationale underlying the exemption for loan purchases by regulated institutions in § 323.3(a)(5) should also logically apply to bank loans to third parties to finance such purchases is more on target. While some would argue that the literal import of § 323.3(a)(5) is already broader than intended by some of its drafters and should be amended to restrict rather than further expand its scope, we believe that a regulated institution's nonrecourse financing of a third party's purchase of mortgage loans for up to 90% or 100% of the purchase price is, indeed, tantamount to a "purchase" of such loans by the institution as that term is used in the exemption in § 323.3(a)(5). Therefore, since you state that the underlying mortgages would either pre-date the effective date of the regulation or be supported by appraisals conforming to the regulation at the time of their origination, if applicable, we conclude that such transactions would be exempt under § 323.3(a)(5) and the realty would not need to be reappraised when the loan is made. In any event, as a matter of supervisory policy, we would expect the bank's files to reflect an adequate evaluation of the underlying real property collateral at the time of the loan that would justify the amount of credit being extended.
Please let us know if we can be of any further assistance.