ital. Moreover, within the aggregate limit, total loans for all commercial, agricultural, multifamily or other non-1-to-4 family residential properties should not exceed 30 percent of total capital. An institution will come under increased supervisory scrutiny as the total of such loans approaches these levels.

In determining the aggregate amount of such loans, institutions should: (a) Include all loans secured by the same property if any one of those loans exceeds the supervisory loan-to-value limits; and (b) include the recourse obligation of any such loan sold with recourse. Conversely, a loan should no longer be reported to the directors as part of aggregate totals when reduction in principal or senior liens, or additional contribution of collateral or equity (e.g., improvements to the real property securing the loan), bring the loan-to-value ratio into compliance with supervisory limits.

EXCLUDED TRANSACTIONS

The agencies also recognize that there are a number of lending situations in which other factors significantly outweigh the need to apply the supervisory loan-to-value limits. These include:

• Loans guaranteed or insured by the U.S. government or its agencies, provided that the amount of the guaranty or insurance is at least equal to the portion of the loan that exceeds the supervisory loan-to-value limit.

• Loans backed by the full faith and credit of a State government, provided that the amount of the assurance is at least equal to the portion of the loan that exceeds the supervisory loan-to-value limit.

• Loans guaranteed or insured by a State, municipal or local government, or an agency thereof, provided that the amount of the guaranty or insurance is at least equal to the portion of the loan that exceeds the supervisory loan-to-value limit, and provided that the lender has determined that the guarantor or insurer has the financial capacity and willingness to perform under the terms of the guaranty or insurance agreement.

• Loans that are to be sold promptly after origination, without recourse, to a financially responsible third party.

• Loans that are renewed, refinanced, or restructured without the advancement of

2 For the state member banks, the term "total capital" means "total risk-based capital" as defined in appendix A to 12 CFR part 208. For insured state non-member banks, "total capital" refers to that term described in table I of appendix A to 12 CFR part 325. For national banks, the term "total capital" is defined at 12 CFR 3.2(e). For savings associations, the term "total capital" is defined at 12 CFR 567.5(c).

new funds or an increase in the line of credit (except for reasonable closing costs), or loans that are renewed, refinanced, or restructured in connection with a workout situation, either with or without the advancement of new funds, where consistent with safe and sound banking practices and part of a clearly defined and well-documented program to achieve orderly liquidation of the debt, reduce risk of loss, or maximize recovery on the loan.

• Loans that facilitate the sale of real estate acquired by the lender in the ordinary course of collecting a debt previously contracted in good faith.

• Loans for which a lien on or interest in real property is taken as additional collateral through an abundance of caution by the lender (e.g., the institution takes a blanket lien on all or substantially all of the assets of the borrower, and the value of the real property is low relative to the aggregate value of all other collateral).

• Loans, such as working capital loans, where the lender does not rely principally on real estate as security and the extension of credit is not used to acquire, develop, or construct permanent improvements on real property.

• Loans for the purpose of financing permanent improvements to real property, but not secured by the property, if such security interest is not required by prudent underwriting practice.

EXCEPTIONS TO THE GENERAL LENDING POLICY

Some provision should be made for the consideration of loan requests from creditworthy borrowers whose credit needs do not fit within the institution's general lending policy. An institution may provide for prudently underwritten exceptions to its lending policies, including loan-to-value limits, on a loan-by-loan basis. However, any exceptions from the supervisory loan-to-value limits should conform to the aggregate limits on such loans discussed above.

The board of directors is responsible for establishing standards for the review and approval of exception loans. Each institution should establish an appropriate internal process for the review and approval of loans that do not conform to its own internal policy standards. The approval of any such loan should be supported by a written justification that clearly sets forth all of the relevant credit factors that support the underwriting decision. The justification and approval documents for such loans should be maintained as a part of the permanent loan file. Each institution should monitor compliance with its real estate lending policy and individually report exception loans of a significant size to its board of directors.

SUPERVISORY REVIEW OF REAL ESTATE

LENDING POLICIES AND PRACTICES

The real estate lending policies of institutions will be evaluated by examiners during the course of their examinations to determine if the policies are consistent with safe and sound lending practices, these guidelines, and the requirements of the regulation. In evaluating the adequacy of the institution's real estate lending policies and practices, examiners will take into consideration the following factors:

• The nature and scope of the institution's real estate lending activities.

• The size and financial condition of the institution.

• The quality of the institution's management and internal controls.

• The expertise and size of the lending and loan administration staff.

• Market conditions.

Lending policy exception reports will also be reviewed by examiners during the course of their examinations to determine whether the institutions' exceptions are adequately documented and appropriate in light of all of the relevant credit considerations. An excessive volume of exceptions to an institution's real estate lending policy may signal a weakening of its underwriting practices, or may suggest a need to revise the loan policy.

DEFINITIONS

For the purposes of these Guidelines: Construction loan means an extension of credit for the purpose of erecting or rehabilitating buildings or other structures, including any infrastructure necessary for development.

Extension of credit or loan means:

(1) The total amount of any loan, line of credit, or other legally binding lending commitment with respect to real property; and

(2) The total amount, based on the amount of consideration paid, of any loan, line of credit, or other legally binding lending commitment acquired by a lender by purchase, assignment, or otherwise.

Improved property loan means an extension of credit secured by one of the following types of real property:

(1) Farmland, ranchland or timberland committed to ongoing management and agricultural production;

(2) 1- to 4-family residential property that is not owner-occupied;

(3) Residential property containing five or more individual dwelling units;

(4) Completed commercial property; or

(5) Other income-producing property that has been completed and is available for occupancy and use, except income-producing owner-occupied 1- to 4-family residential property.

Land development loan means an extension of credit for the purpose of improving unim

proved real property prior to the erection of structures. The improvement of unimproved real property may include the laying or placement of sewers, water pipes, utility cables, streets, and other infrastructure necessary for future development.

Loan origination means the time of inception of the obligation to extend credit (i.e., when the last event or prerequisite, controllable by the lender, occurs causing the lender to become legally bound to fund an extension of credit).

Loan-to-value or loan-to-value ratio means the percentage or ratio that is derived at the time of loan origination by dividing an extension of credit by the total value of the property(ies) securing or being improved by the extension of credit plus the amount of any readily marketable collateral and other acceptable collateral that secures the extension of credit. The total amount of all senior liens on or interests in such property(ies) should be included in determining the loanto-value ratio. When mortgage insurance or collateral is used in the calculation of the loan-to-value ratio, and such credit enhancement is later released or replaced, the loanto-value ratio should be recalculated.

Other acceptable collateral means any collateral in which the lender has a perfected security interest, that has a quantifiable value, and is accepted by the lender in accordance with safe and sound lending practices. Other acceptable collateral should be appropriately discounted by the lender consistent with the lender's usual practices for making loans secured by such collateral. Other acceptable collateral includes, among other items, unconditional irrevocable standby letters of credit for the benefit of the lender.

Owner-occupied, when used in conjunction with the term 1- to 4-family residential property means that the owner of the underlying real property occupies at least one unit of the real property as a principal residence of the owner.

Readily marketable collateral means insured deposits, financial instruments, and bullion in which the lender has a perfected interest. Financial instruments and bullion must be salable under ordinary circumstances with reasonable promptness at a fair market value determined by quotations based on actual transactions, on an auction or similarly available daily bid and ask price market. Readily marketable collateral should be appropriately discounted by the lender consistent with the lender's usual practices for making loans secured by such collateral.

Value means an opinion or estimate, set forth in an appraisal or evaluation, whichever may be appropriate, of the market value of real property, prepared in accordance with the agency's appraisal regulations and guidance. For loans to purchase an existing property, the term "value" means the lesser of

the actual acquisition cost or the estimate of value.

1- to 4-family residential property means property containing fewer than five individual dwelling units, including manufactured homes permanently affixed to the underlying property (when deemed to be real property under State law).

[57 FR 62896, Dec. 31, 1992; 58 FR 4460, Jan. 14, 1993]

Subpart E-Other Real Estate Owned

SOURCE: 58 FR 46535, Sept. 2, 1993, unless otherwise noted.

$34.81 Definitions.

(a) Other real estate owned is:

(1) Covered transactions real estate; (2) Debts previously contracted real estate; and

(3) Former banking premises.

(b) Covered transactions real estate is a parcel of debts previously contracted real estate or former banking premises that the national bank is in the process of disposing of in accordance with §34.83(a)(6).

(c) Debts previously contracted real estate means real estate (including capitalized and operating leases) acquired by a national bank through any means in full or partial satisfaction of a debt or debts previously contracted.

(d) Former banking premises means real estate (including capitalized and operating leases) for which banking use is no longer contemplated. This includes real estate originally acquired for future expansion that will no longer be used for future expansion or other banking purposes.

(e) Market value is determined in accordance with subpart C of this part.

(f) Recorded investment amount means: (1) The recorded loan balance, as defined by generally accepted accounting principles; or

(2) Net book value for former banking premises.

(g) Transaction value means the recorded investment amount.

$34.82 Holding period.

(a) Holding period for other real estate owned. Pursuant to 12 U.S.C. 29, a national bank may hold other real estate owned for a period not to exceed five

years, except that the Comptroller may approve an application by the bank to extend the holding period for up to an additional five years, if:

(1) The bank has made a good faith attempt to dispose of the other real estate owned within the five-year period;

or

(2) Disposal of the other real estate owned within the five-year period would be detrimental to the bank.

(b) When the holding period begins. The holding period begins on the date that:

(1) Ownership of the property is originally transferred to a national bank;

(2) Relocation from former banking premises to new banking premises is complete; or

(3) A decision is made not to use real estate acquired for future bank expansion.

(c) Effect of statutory redemption period on the beginning of the holding period. For debts previously contracted real estate that is subject to a redemption period imposed under state law, the holding period begins at the expiration of the redemption period.

$34.83 Disposition of real estate.

(a) Disposal. Other real estate owned shall be disposed of within the holding period permitted by 12 U.S.C. 29 at any time that prudent judgment dictates, but in no event later than the end of such holding period.

(1) A national bank may comply with its obligation under 12 U.S.C. 29 to dispose of other real estate owned by entering into a transaction that is accorded sales treatment under generally accepted accounting principles.

(2) A national bank may comply with its obligation under 12 U.S.C. 29 to dispose of other real estate owned by entering into a transaction that involves a loan guaranteed or insured by the United States government or by an agency of the United States government or a loan eligible for purchase by a federally sponsored instrumentality that purchases loans.

(3) A national bank may comply with its obligation under 12 U.S.C. 29 to dispose of other real estate owned by selling the property pursuant to a land contract or a contract for deed.

(4) A national bank may comply with its obligation under 12 U.S.C. 29 to dispose of debts previously contracted real estate by retaining the property for its own use as bank premises or by transferring it to a subsidiary or affiliate for use in the business of the subsidiary or affiliate.

(5) A national bank may comply with its obligation under 12 U.S.C. 29 to dispose of a capitalized or operating lease by obtaining an assignment or a coterminous sublease.

(6) A national bank that enters into a transaction that does not qualify for disposal under paragraphs (a) (1) through (5) of this section may comply with its obligation under 12 U.S.C. 29 to dispose of other real estate owned when it receives or accumulates from the purchaser an amount in cash, principal and interest payments, and private mortgage insurance totaling 10 percent of the sales price, as measured in accordance with generally accepted accounting principles.

(b) Disposal efforts and documentation. The national bank shall make diligent efforts to dispose of each parcel of other real estate owned and shall maintain documentation adequate to reflect those efforts.

(c) Future bank expansion. Real estate acquired for future bank expansion should normally be used within five years. After holding such real estate for one year, the bank shall state, by board of directors resolution or other official action, definite plans for its use. The resolution or other official action shall be available for inspection by national bank examiners.

$34.84 Appraisal requirements.

(a) In general. (1) Upon transfer to other real estate owned, the national bank shall substantiate the parcel's market value by obtaining either:

(1) An appraisal in accordance with subpart C of this part; or

(ii) An appropriate evaluation when the transaction value is equal to or less than the threshold amount in subpart C of this part.

(2) The national bank shall develop a prudent real estate collateral evaluation policy that allows the bank to monitor the value of each parcel of other real estate owned in a manner

consistent with prudent banking practice.

(b) Exception. If a national bank has a valid appraisal or an appropriate evaluation on a real estate loan, which was obtained in accordance with subpart C of this part, then the bank is not required to obtain another appraisal or evaluation when the bank acquires ownership of the property. However, the bank shall continue to follow the prudent real estate collateral evaluation policy required in paragraph (a)(2) of this section.

(c) Sales of other real estate owned. A national bank is not required to obtain a new appraisal or evaluation when selling other real estate owned if the sale was consummated based on a valid appraisal or an appropriate evaluation. $34.85 Additional expenditures and notification.

(a) Additional expenditures on other real estate owned. (1) Notification under paragraph (b)(1) of this section is not required for re-fitting an existing building for new tenants or for normal repairs and maintenance costs incurred to protect the value of the collateral. (2) For other real estate owned that is a development or improvement project, a national bank may make the prudent advances to complete project if they:

(i) Are reasonably calculated to reduce any shortfall between the parcel's market value and the bank's recorded investment amount; and

(ii) Are not made for the purpose of speculation in real estate.

(b) Notification procedures. (1) A national bank shall notify the appropriate supervisory office at least 30 days before implementing a development or improvement plan for other real estate owned when the sum of the plan's estimated cost, the bank's current recorded investment amount, and any unpaid prior liens on the property, exceeds 10 percent of the bank's capital and surplus, as defined in §3.100 of this title. Notification under this paragraph is required only once.

(2) The required notification must include any documentation necessary to demonstrate that the additional expenditure is consistent with the condi

tions and limitations in paragraphs (a)(2)(i) and (ii) of this section.

(3) If the appropriate supervisory office imposes no additional conditions or limitations on the national bank's plan within 30 days following receipt of the bank's notification by the OCC, then on the thirty-first day following receipt of the bank's notification by the OCC (or sooner if notified by the OCC), the bank may implement the plan to develop or improve the other real estate owned.

$34.86 Accounting treatment.

Other real estate owned and sales of it shall be accounted for in accordance with the Instructions for the preparation of the Consolidated Reports of Condition and Income.

(1) The deposits of which are insured by the Federal Deposit Insurance Corporation;

(2) Which is located in an area of the country the economy of which is dependent on agriculture;

(3) Which has total assets of $100,000,000 or less as of the most recent Report of Condition; and

(4) Which has (1) At least 25 percent of its total loans in qualified agricultural loans and agriculturally related other property, as defined below; or

(ii) Less than 25 percent of its total loans in qualified agricultural loans and agriculturally related other property, but which bank the OCC has recommended to the Federal Deposit Insurance Corporation for eligibility under this part. Qualified

(b) means:

Agricultural

Loans

(1) Loans qualifying as loans to finance agricultural production and other loans to farmers or as loans secured by farm land for purposes of Schedule RCC of the FFIEC Consolidated Reports of Condition and Income or such other comparable schedule that may be in effect;

(2) Loans secured by farm machinery; (3) Other loans or leases that a bank proves to be sufficiently related to agriculture for classification as an agricultural loan by the OCC; and

(4) The remaining unpaid balance of any loans, as described in paragraphs (b) (1), (2) and (3) of this section, that have been charged off since January 1, 1984, and that qualify for deferral under this part.

(c) Agriculturally related other property means any property, real or personal, that a bank owned on January 1, 1983, and any such additional property that it acquires prior to January 1, 1992, in connection with a qualified agricultural loan. For purposes of §§ 35.2(a)(4)(i) and 35.6(d) the value of such property includes amounts previously charged-off.

(d) Accepting Official means the head of the appropriate supervisory office designated by the OCC for the applicant bank.