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4000 - Advisory Opinions

Release of Collateral Is "Refinancing" Under 12 C.F.R. § 323.2(g)(2) if New Note Is Taken or if Release Constitutes a Material Modification of Original Loan Terms


August 21, 1992

Walter P. Doyle, Counsel

Thank you for your July 29 letter concerning the need for an appraisal under 12 CFR 323 when one of several "unrelated" pieces of real estate collateral for an outstanding loan that predates the regulation is subsequently sold and released from the mortgage by the regulated institution and the net sales proceeds are applied in full to reduce the outstanding debt secured by the mortgage.

It is our view that a release of collateral would be a "refinancing" under § 323.2(g)(2) if a new note is taken, or if the release constitutes a material modification of the original loan terms because it significantly reduces the lender's collateral protection [See FDIC Advisory Opinion 92--1]. Assuming that no new note is taken in the case you hypothesize, then the issue is whether the release of collateral could materially reduce the lender's collateral protection on the remaining mortgage debt. If so, then currently valid appraisals of the remaining collateral would be required under the regulation if the remaining balance of the loan exceeds $100,000. If the appraisals done at the time the loan was originated are no longer current (see FDIC Advisory Opinion 92--5), then an update of those appraisals may be incorporated in the lender's records to substantiate the current value of the remaining collateral. Another way for the lender to verify that the release does not materially reduce collateral protection for the loan is to reduce the outstanding loan balance by the currently appraised value of the collateral released and to include in its records a copy of the appraisal done in connection with the sale of the released collateral.

I hope this is fully responsive to your letter. If not, please let me know.

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