Title: FINAL RULE--Funding and Fiscal Affairs, Loan Policies and Operations, and Funding Operations--12 CFR Part 615
Issue Date: 01/27/1994
Federal Register Cite: 59 FR 3785
FARM CREDIT ADMINISTRATION
12 CFR Part 615
Funding and Fiscal Affairs, Loan Policies and Operations, and Funding Operations
ACTION: Final rule.
SUMMARY: The Farm Credit Administration (FCA), by the Farm Credit Administration Board (Board), adopts a final rule amending its regulations to allow Farm Credit System (FCS) institutions to document the existence of a first lien on the security for long-term real estate mortgage loans by obtaining title insurance or an attorney's certification. The current regulation requires that an attorney's certification be obtained for every long-term mortgage loan in order for that loan to qualify as collateral for FCS debt obligations. The regulation is being amended because title insurance has become the prevailing method used by the mortgage lending industry to ensure clear title. Additionally, the revised regulation permits FCS institutions greater flexibility in determining which method for validating first lien position (an attorney's certification or title insurance) provides the institution the most cost-effective and efficient protection.
EFFECTIVE DATE: The regulation shall become effective upon expiration of 30 days after publication in the Federal Register during which either or both Houses of Congress are in session. Notice of effective date will be published in the Federal Register.
FOR FURTHER INFORMATION CONTACT:
Laurie A. Rea, Policy Analyst, Regulation Development, Office of Examination, Farm Credit Administration, McLean, Virginia 22102-5090, (703) 883-4498, TDD (703) 883-4444, or
James M. Morris, Senior Attorney, Regulatory Operations Division, Office of General Counsel, Farm Credit Administration, McLean, Virginia 22102-5090, (703) 883-4020, TDD (703) 883-4444.
Section 1.10(a)(2) of the Farm Credit Act of 1971, as amended (Act), requires that long-term mortgage loans made by Farm Credit Banks (FCBs) under section 1.7 of the Act, or by associations under sections 1.7 and 7.6 of the Act, "be secured by first liens on interests in real estate of such classes as may be prescribed by regulations of the Farm Credit Administration." At present, § 615.5060 requires that an attorney's certification be obtained for long-term mortgage loans if such loans are to qualify as collateral for FCS debt obligations. However, title insurance is the prevailing method for ensuring clear title in the mortgage lending industry and is becoming more commonplace in FCS lending. Title insurance can provide a lender with protection that is comparable to an attorney's certification and in some instances may be more timely and less expensive to obtain. Under the present § 615.5060, even if FCS lenders obtain title insurance they must also obtain an attorney's certification, thus incurring unnecessary expense without providing any substantial additional protection. FCA reconsidered this requirement, and published a proposed rule on October 12, 1993 (58 FR 52701) to amend the regulation to permit institutions to obtain title insurance instead of an attorney's certificate to document the existence of a first lien, provided that the title insurance policy meets certain standards.
The FCA recognizes that practices within the mortgage lending industry continually change and is amending § 615.5060 to give FCS institutions additional flexibility while maintaining protection for them as well as for FCS investors and borrower-stockholders. The revised regulation allows FCS institutions to determine which method for validating first lien position (an attorney's certification or title insurance) provides them the best protection for the amount expended.
II. Synopsis of Comments
The comment period for the proposed amendments to § 615.5060 closed November 12, 1993. FCA received four comment letters during the public comment period from: The Farm Credit Council (FCC), a Farm Credit Bank (FCB), an agricultural credit association (ACA), and a Texas law firm. In addition, an FCB and a Federal land credit association (FLCA) commented on this regulation as part of their responses to the FCA Board's Statement on Regulatory Burden, which appeared in the Federal Register on June 23, 1993 (58 FR 34003), seeking public comment on the appropriateness of regulatory requirements imposed on the FCS.
All commentors strongly supported the amendments to the proposed regulation. In general, commentors believe that the revision would provide additional flexibility and allow FCS institutions to evaluate present practices and determine the best course of action. Further, commentors indicated that since many FCS institutions already require title insurance on real estate loans the proposed regulation would greatly simplify the closing process and reduce costs. One commentor stated that the FCA's existing requirement for long-term real estate loans is both antiquated and unduly burdensome, and it therefore fully endorsed the intent of FCA's proposed regulations.
In addition to general comments, the FCC and the ACA offered technical suggestions that they believe would [*3786] improve or clarify the regulation. Commentors were concerned that the words "at loan closing" in proposed § 615.5060(a)(2) created some ambiguity because it is often not possible to obtain a title insurance policy at the time of loan closing. One commentor stated that a loan is closed based on a title commitment and a final title insurance policy is not issued until after loan closing when there is satisfaction of the requirements set out in the commitment. Another commentor stated that it is a common practice to obtain the actual title policy at a later date, with the policy being issued "as of" the date the lien documents are recorded. Commentors asserted that FCS institutions would be unable to take advantage of the additional flexibility and cost savings the proposed regulation is intended to provide if the institutions were required to obtain a final title insurance policy at loan closing. FCA modified proposed § 615.5060(a)(2) by deleting the requirement that the policy be obtained "at loan closing" but notes that the Act authorizes an FCB to make a long-term mortgage loan only if that loan is secured by a first lien on real estate.
The FCC and the ACA also commented that, as currently written, proposed § 615.5060(a)(2)(ii) might be construed to mean that counsel must approve not only the standard form to be used, but also the way in which the form is completed in each particular case. Paragraph (a)(2)(ii) requires only that the final title policy be issued on a standard title insurance policy form that the counsel for the lending institution has approved. The language in paragraph (a)(2)(ii) was revised to make this clearer. Further, the FCC and the ACA suggested that, because many ACAs and FLCAs do not have their own in-house counsel, the regulation should be modified to allow counsel for either the association or the "supervising" bank to approve the standard form. The phrase "counsel for the lending institution" in § 615.5060 (a)(2)(ii) and (a)(2)(iv) is not meant to require that an association have in-house counsel. An association may, if it wishes, rely on counsel for the affiliated bank or the association's retained counsel if counsel agrees to act for the association in approving the form of the title insurance policy and prescribing these standards.
Proposed § 615.5060(a)(2)(iii) requires that the title insurance policy be issued "for an amount equal to the balance outstanding on the real estate mortgage loan." Commentors stated that multiple tracts of real estate are frequently offered as security for a loan and in some situations separate title insurance policies for various tracts are obtained from different insurers. The FCC further stated that title insurance companies often require that the insured amount be allocated among the various policies, and often refuse to issue a policy in an amount in excess of the value of the particular tract they are insuring. The FCC further stated that the amount of the title insurance that should be required should be directly related to the value of the lender's interest in the property that is being insured. Therefore, the FCC suggested that § 615.5060(a)(2)(iii) be revised to require that the final policy be issued for an amount equal to the balance outstanding on the real estate mortgage loan "or such lesser amount as is sufficient to protect the interest of the lending institution in the insured property." The FCC believes that such language would enable the lending institution to determine whether the title policy should be issued for the full amount of the loan or, when multiple tracts are taken as security, for the market or appraised value of the property being insured, whether that value is greater than or less than the amount of the loan.
The FCA Board conceptually agrees with the commentors that the title insurance should be issued for an amount that is sufficient to protect the interest of the lending institution. However, the FCA Board believes that the amount of title insurance necessary to protect the lender on a long-term real estate mortgage loan is no less than the outstanding loan balance. The Act and FCA regulations limit long-term real estate loans to a percentage of the appraised value of the real estate security. FCA's regulation does not require that an institution obtain title insurance for an amount that is in excess of the value of the real estate security, but rather requires coverage in an amount at least equal to the outstanding loan balance, an amount less than the value of the real estate security. In the case of multiple tracts, if a separate policy is issued for a tract, the minimum amount insured by that policy shall bear the same ratio to the outstanding balance that the appraised value of the tract bears to the appraised value of all the real estate security. Accordingly, the final rule requires that if only title insurance is used to document the existence of a first lien, the final title policy or policies must be issued for an amount at least equal to the outstanding loan balance.
Commentors also indicated that in loans with multiple tracts, title to some tracts may be evidenced by abstracts while other tracts are covered by title insurance. This comment indirectly raises the issue of whether the regulation permits the lender to decide, for each tract, whether to use an attorney lien certification or title insurance to document the existence of a first lien when more than one tract is involved in a single first mortgage loan. The regulation should not be read to preclude the use of different methods of lien documentation for different tracts. In the case of multiple tracts, if title insurance is relied upon for some tracts and attorney certifications are used for others, the minimum amount insured by a policy for a particular tract shall bear the same ratio to the outstanding balance that the appraised value of the tract bears to the appraised value of all the real estate security. For example, suppose a loan for $ 80,000 is secured by two properties with appraised values of $ 70,000 and $ 30,000. Insurance policies for the properties should be obtained in amounts of at least $ 56,000 and $ 24,000, respectively. If an attorney lien certification is used for the first property, then title insurance for the second property need only be obtained for $ 24,000-not the $ 80,000 loan amount.
Proposed paragraph (a)(2)(iv) requires that personnel with adequate training and experience in real estate title matters, designated by counsel, certify in writing that they reviewed the final policy and that the final policy insures a first lien or its equivalent on the primary real estate security for the loan. Commentors believe that it should suffice that a person performing this function meet certain standards of training and experience that are prescribed by the counsel for the lender, but that there should be no specific requirement that counsel actually designate the individual who performs this function. The FCA agrees with the commentors' observations and has modified paragraph (a)(2)(iv) to require that a person performing this function meet written standards for training and experience prescribed by the counsel for the lender, and to eliminate any implication that counsel actually has to designate the individual who performs this function.
Finally, the first sentence of § 615.5060(a) is revised to make it less awkward. The meaning of the sentence is not changed.
List of Subjects in 12 CFR Part 615
Accounting, Agriculture, Banks, Banking, Government securities, Investments, Rural areas.
For the reasons stated in the preamble, part 615 of chapter VI, title 12 of the Code of Federal Regulations is amended to read as follows: [*3787]
PART 615-FUNDING AND FISCAL AFFAIRS, LOAN POLICIES AND OPERATIONS, AND FUNDING OPERATIONS
1. The authority citation for part 615 continues to read as follows:
Authority: Secs. 1.5, 1.7, 1.10, 1.11, 1.12, 2.2, 2.3, 2.4, 2.5, 2.12, 3.1, 3.7, 3.11, 3.25, 4.3, 4.9, 4.14B, 4.25, 5.9, 5.17, 6.20, 6.26, 8.0, 8.4, 8.6, 8.7, 8.8, 8.10, 8.12 of the Farm Credit Act; 12 U.S.C. 2013, 2015, 2018, 2019, 2020, 2073, 2074, 2075, 2076, 2093, 2122, 2128, 2132, 2146, 2154, 2160, 2202b, 2211, 2243, 2252, 2278b, 2278b-6, 2279aa, 2279aa-4, 2279aa-6, 2279aa-7, 2279aa-8, 2279aa-10, 2279aa-12; sec. 301(a) of Pub. L. 100-233, 101 Stat. 1568, 1608.
2. Section 615.5060 is amended by revising paragraph (a) to read as follows:
§ 615.5060 -- Special collateral requirements.
(a) An attorney lien certification need not be obtained at the time a note is accepted as collateral if the counsel for the bank or association has determined, in writing, that the bank or association procedures provide sufficient safeguards to ensure that a real estate mortgage loan, within the meaning of section 1.7(a) of the Act, made by the bank or association will be secured by a first lien or its equivalent on the borrower's interest in the primary real estate security. However, the note shall be withdrawn from collateral upon the expiration of 1 year from the date of the loan closing, unless, before the end of such period:
(1) An attorney has certified that the bank or association has a first lien or its equivalent from a security standpoint in the primary real estate security for the loan; or
(2) The bank or association has obtained a title insurance policy insuring that it has a first lien or its equivalent from a security standpoint in the primary real estate security for the loan, and all of the following requirements are satisfied:
(i) The final policy was issued by a title insurance company that has been licensed to issue such policies by the appropriate state insurance regulatory body or bodies, has not been barred or suspended, and has been approved by the lending institution;
(ii) The standard form on which the final policy was issued has been approved by the counsel for the lending institution;
(iii) The final policy was issued for an amount at least equal to the balance outstanding on the real estate mortgage loan or, if separate policies are issued to insure separate tracts, the minimum amount insured by each policy shall bear the same ratio to the outstanding balance of the loan that the appraised value of the tract insured by that policy bears to the appraised value of all the real estate security for the loan; and
(iv) Personnel meeting written standards of training and experience in real estate title matters prescribed by the counsel for the lending institution certified in writing that:
(A) They reviewed the final policy and that the policy complies with standards prescribed by such counsel; and
(B) The final policy insures that a first lien or its equivalent from a security standpoint has been obtained on the primary real estate security for the loan.
* * * * *
Dated: January 13, 1994.
Curtis M. Anderson,
Secretary, Farm Credit Administration Board.
[FR Doc. 94-1763 Filed 1-26-94; 8:45 am]
BILLING CODE 6705-01-P