Type: FCA Regulation
PART 614 - LOAN POLICIES AND OPERATIONS
Subpart F - Collateral Evaluation Requirements
§ 614.4240 Collateral definitions.
For the purposes of this part, the following definitions shall apply:
(a) Abundance of caution, when used to describe decisions to require collateral, means that the collateral is taken in circumstances in which:
(1) It is not required by statute, regulation, or the institution's policies; and
(2) A prudent lender would extend credit based on a borrower's income and/or other collateral, absent the real estate, and the decision to extend credit was, in fact, based on other sources of revenue or collateral.
(b) Appraisal means a written statement independently and impartially prepared by a qualified appraiser setting forth an opinion as to the market value of an adequately described property as of a specific date(s), supported by the presentation and analysis of relevant market information.
(c) Appraisal Foundation means the Appraisal Foundation established on November 30, 1987, by professional appraisal organizations, as a not-for-profit corporation under the laws of Illinois, in order to enhance the quality of professional appraisals.
(d) Appraisal Subcommittee means the Appraisal Subcommittee of the Federal Financial Institutions Examination Council.
(e) Business loan means a loan or other extension of credit to any corporation, general or limited partnership, business trust, joint venture, sole proprietorship, or other business entity (including entities and individuals engaged in farming enterprises)
(f) Cost approach means the process by which an evaluator 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 and/or external obsolescence) evident in the structure from all causes, plus the market value of the land.
(g) Evaluation means a study of the nature, quality, or utility of, interest in, or aspects of, an asset. An evaluation may take the form of a valuation or an appraisal.
(h) Fee appraiser means a qualified evaluator who is not an employee of the party contracting for the completion of the evaluation and who performs an evaluation on a fee basis. For purposes of this subpart, a fee appraiser may include a staff evaluator from another Farm Credit System institution only if the employing institution is not operating under joint management with the contracting institution. In addition, for purposes of personal and intangible collateral evaluations, the term "fee appraiser" includes, but is not limited to, certified public accountants, equipment dealers, grain buyers, livestock buyers, and auctioneers.
(i) FIRREA means the Financial Institutions Recovery, Reform, and Enforcement Act of 1989.
(j) Highest and best use means the reasonable and most probable use of the property that would result in the highest market value of vacant land or improved property, as of the date of valuation; or that use, from among reasonably probable and legally alternative uses, found to be physically possible, appropriately supported, financially feasible, and which results in the highest land value.
(k) Income capitalization approach means the procedure that values property by measuring the present value of the expected future benefits of property ownership. This value is derived from either:
(1) 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
(2) Discounting the annual cashflows for the holding period and the reversion at a specified yield rate or specified yield rates which reflect market behavior.
(l) 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.
(m) Personal property, for purposes of this subpart, means all tangible and movable property not considered real property or fixtures.
(n) Qualified evaluator means an individual who is competent, reputable, impartial, and has demonstrated sufficient training and experience to properly evaluate property of the type that is the subject of the evaluation. For the purposes of this definition, the term "qualified evaluator" includes an appraiser or valuator.
(o) Real estate means an identified parcel or tract of land, including improvements, if any.
(p) Real estate-related financial transactions 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.
(q) Real property means all interests, benefits, and rights inherent in the ownership of real estate.
(r) Sales comparison approach means the procedure that values property by comparing the subject property to similar properties located in relatively close proximity, having similar size and utility, and having been recently sold in arm's-length transactions (comparable sales). The sales comparison approach requires the evaluator to estimate the degree of similarity and difference between the subject property and comparable sales. Such comparison shall be made on the basis of conditions of sale, financing terms, market conditions, location, physical characteristics, and income characteristics. Appropriate adjustments shall be made to the sales price of the comparable property based on the identified deficiencies or superiorities of the subject property to arrive at a probable price for which the subject property could be sold on the date of the collateral evaluation.
(s) State certified appraiser means any individual who has satisfied the requirements for and has been certified as a real estate 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 shall be a State certified appraiser unless such individual has achieved a passing grade on a suitable examination administered by a State or territory 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.
(t) State licensed appraiser means any individual who has satisfied the requirements for licensing and has been licensed as a real estate 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.
(u) 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.
(v) USPAP means the Uniform Standards of Professional Appraisal Practice adopted by the Appraisal Foundation.
(w) Valuation means the process of estimating a defined value of an identified interest or interests in a specific asset or assets as of a given date. A valuation results from the completion of a collateral evaluation that does not require an appraisal.
[59 FR 46730, Sept. 12, 1994]
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