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4000 - Advisory Opinions
Request For Exemption From Appraisal Requirement
FDIC--94--44
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
{{2-28-95 p.4897}}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
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