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4000 - Advisory Opinions

Whether Cancelling Revolving Loan Commitment and Establishing Installment Payment Schedule Constitutes a "Real Estate-Related Financial Transaction" or "Refinancing of Real Property" Under 12 C.F.R. § 323.2(g)


January 2, 1992

Walter P. Doyle, Counsel

Thank you for your December 17, 1991 letter concerning applicability of the FDIC appraisal regulation (12 C.F.R. 323) to certain changes in the terms of a revolving demand loan made in 1984 by a regulated institution and secured by assignment of a mortgage. Due to a default under the original loan terms and the inability of the borrower to repay the loan in full, the lender has the right under the loan to require that payments under the mortgage assigned as collateral be made directly to it (instead of to the borrower/assigner). In connection with the exercise of that right, the lender proposes to agree with the borrower to cancel the revolving feature of the original loan and to establish a schedule of required monthly installments to pay in full over a period of time all amounts due under the original loan.

As we discussed in our telephone conversation, the termination of the revolving commitment and the setting up of a realistic installment payment schedule consistent with the borrower's present ability to repay do not seem to be loan modifications that would meet the definition of "real estate-related financial transaction" set forth in § 323.2(g) of the FDIC appraisal regulation. Certainly such modifications would not amount to a "sale, lease, purchase, investment in or exchange of real property, . . . or the financing thereof" as referred to in § 323.2(g)(1). Nor would such modifications seem to be a "use of real property . . . as security for a loan." That "use" occurred in 1984 when the demand loan was made and the mortgage was taken as collateral therefor--long before the effective date of the FDIC regulation in September 1990.

The slightly more difficult issue is whether the two loan modifications amount to a "refinancing of real property" under § 323.2(g)(2). In our opinion a "refinancing'' does not normally occur when a regulated institution acts prudently to protect its own interests by modifying an existing extension of credit in order to facilitate orderly collection and thereby reduce its risk of loss. In such "work-out" circumstances, even the taking of a lien on real property for the purpose of strengthening the institution's credit position would not, in and of itself, ordinarily trigger the need for an appraisal conforming to the standards set forth in the regulation. "Refinancings" necessitating a conforming appraisal would normally entail loan modifications whose primary purpose is to accommodate the borrower rather than to reduce the institution's risk of loss on an existing loan; such as (1) advancing additional funds substantially in excess of the originally committed amount, (2) releasing or substituting collateral or borrowers, or (3) significantly lengthening the maturity or amortization schedule without a concomitant and commensurate reduction in the institution's risk of loss (such as the cancellation of the revolving credit commitment in this case).

Therefore, assuming the new repayment schedule is realistic in relation to the borrower's present ability to repay, the institution's agreement to such schedule as a modification to the original loan terms would not appear to constitute a "refinancing" under § 323.2(g)(2), or otherwise to amount to a "real-estate related financial transaction'' requiring an appraisal conforming to Part 323, particularly in view of the reduction in risk of loss to the institution that is apparently achieved by cancellation of the revolving loan commitment under the original loan terms.

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