4000 - Advisory Opinions
Request For Exemption From Appraisal Requirement
August 23, 1994
Walter P. Doyle for
Christeena G. Naser, Attorney
This letter is in response to your letter of June 15, 1994 concerning the citation of your bank for failure to obtain an appraisal with respect to an extension of credit by your bank to Y Holding Corporation ("Y") in violation of Part 323 of the FDIC's rules. You have requested an exemption from the appraisal requirement of Part 323 for this loan.
I understand the facts to be as follows. The bank had an outstanding loan of approximately $450,000 to a company which loan was on non-accrual and had been recognized as a substandard credit in previous examination reports. It became evident that the company would have to be sold or its assets liquidated, and the saleability of Company's building was a significant issue. In 1992, Company entered into negotiations with Y for the sale of the business. Y had extensive experience in the garment business and intended to invest $400,000 in the new business. To minimize the bank's exposure in this matter, bank provided financing for the sale to Y, thereby reducing the bank's exposure from $450,000 to $372,000 by means of a term credit secured primarily by a mortgage on the building.
Based on the marked improvement in the bank's position as a result of the loan to Y, you have requested a determination that this transaction should qualify for an exemption from the appraisal requirement of Part 323. I assume this request to be either for a determination that the Y loan qualifies for the exemption for refinancing under 12 C.F.R. 323.3(a)(4) or for a more general exemption pursuant to FDIC's authority at 12 C.F.R. 323.3(a)(12).1 As discussed more fully below, neither of these provisions is applicable to the Y transaction.
12 C.F.R. 323.3(a)(4). This previous version of the "renewal" exemption was available with respect to subsequent transactions resulting from a maturing extension of credit provided that four conditions were satisfied: 1) the borrower performed satisfactorily according to the original terms; 2) no new money was advanced other than as previously agreed; 3) the credit standing of the borrower had not deteriorated; and 4) there was no deterioration in either the market or physical aspects of the property that would threaten the bank's collateral protection.
Applying these requirements to the facts of the transaction, it is clear that the Company could not satisfy the necessary criteria because its credit standing had deteriorated and it had not performed satisfactorily. Moreover, it is also clear that this exemption was intended to apply to a subsequent loan to the original borrower. Two of the elements of the exemption address the creditworthiness of the original borrower. In addition, the preamble to the rule described the exemption as applying to renewals because "there is little risk in renewing performing real estate loans to financially sound borrowers. 55 Federal Register 33879 (August 20, 1990).
The scope of this exemption was significantly expanded by the recent amendments to the regulation (see the newly revised § 323.3(a)(7) effective June 7, 1994). However, the Y transaction took place a year before that date.
12 C.F.R. 323.3(a)(12). This authority to exempt transactions on a case-by-case basis was also part of the revisions to Part 323 which became effective on June 7, 1994. 59 Federal Register 29482 (June 7, 1994). Its purpose was not to authorize waivers of past violations, but rather to permit consideration of pending transactions and the need for appraisals in connection therewith. The Y transaction, which took place in June 1993 is, therefore, not eligible for an exemption under this section.
In any event, while a violation may exist it is not FDIC policy to require appraisals merely to "rectify" past violations of the regulation in the absence of some independent reason for obtaining a current appraisal.
I hope the above information has answered your inquiry. If you have additional questions, please do not hesitate to write.
1The exemption under 12 C.F.R. 323.3(a)(4) for loan renewals was in effect from August 20, 1990 through June 6, 1994. The general authority for exemptions in § 323.3(a)(12) was part of a substantial revision to Part 323 which became effective on June 7, 1994; that provision did not exist prior to that date. Go back to Text