4000 - Advisory Opinions
Questions Concerning What Constitutes "Refinancing of Real Property" Under 12 C.F.R. § 323.2(g)(2)
January 16, 1992
Walter P. Doyle, Counsel
Your January 8, 1992 letter raises several questions regarding what constitutes "refinancing" under the FDIC appraisal regulation (12 C.F.R. Part 323).
As you know, § 323.2(g)(2) of our regulation incorporates statutory language that subjects the "refinancing of real property" to the requirements of Part 323. However, the term is defined neither in the statute nor in the regulation. Clearly, when an old note is paid and a new note is taken (even to the same borrower), a refinancing has occurred. As to other modifications, we believe the interpretation of "refinancing" should depend primarily upon whether or not the modification in loan terms could reasonably have more than a negligible adverse effect on the lending institution's collateral protection. Some changes in loan terms would clearly have little or no effect on the collateral protection. One of these situations is where the existing lender agrees to reduce the applicable interest rate and make a commensurate adjustment to the monthly payment amounts on an existing note, without advancing any new funds or making any other change in the loan terms. On the other hand, advancing additional funds to cover closing costs, or extending the original maturity schedule by more than a few months, or taking a new note, would seem to constitute "refinancings" requiring a current appraisal.
Of course, where an existing loan has already deteriorated in quality and the lender is trying to restructure the loan to make the best of a bad situation, then regulators will normally be somewhat less alacritous in concluding that a "refinancing" has taken place. In those "work-out" circumstances the effort would be to avoid placing road blocks in the way of an institution that is trying to act prudently to protect its own interests by modifying loan terms to facilitate orderly collection and reduce its risk of loss.
As your letter suggests, the exemption in § 323.3(a)(4) may obviate the need for an appraisal in connection with a refinancing where the conditions of that exemption are met. However, the advancing of any new monies not previously agreed to would preclude use of that exemption.
Another possibility is that the appraisal done "a few months earlier" when the loan was originated (as stated in your letter) might still be current under market conditions obtaining in Hawaii. If so, that appraisal could be relied upon in connection with the refinancing. In this regard, it may be noted that the useful life of an appraisal will vary depending upon the circumstances of the property and the marketplace. In determining whether an appraisal may be used for a subsequent transaction, an institution must decide if any changes have occurred that would affect the market value reported. A few examples of factors affecting value are (1) passage of time, (2) volatility of the local market, (3) availability of financing, (4) inventory of competing properties, (5) new improvements to, or lack of maintenance of, the property or neighborhood, (6) change in zoning, or (7) environmental contamination. When using a preexisting appraisal, the institution must document its information sources and analysis.
Finally, I agree with you that a real estate-secured line of credit may be extended at maturity without obtaining a new appraisal, if all the conditions of § 323.3(a)(4) are met, even though the interest rate on the line is increased. I must admit, however, that I do not believe I fully grasp the thrust of your question in this regard.