What’s worse is that the FCA’s discussion of proposed changes in its appraisal regulations did not explicitly mention that it was liberalizing the regulation. FCA failed to discuss the potential negative implications for the FCS as well as for farmers and ranchers, should the regulation be adopted as proposed. The changes can be detected only by closely comparing the proposed rule with the FCA’s existing appraisal-related regulations (and it’s not easy reading):
- FCA Regulation, Part: Part 614, Loan Policies and Operations; Subpart F, Collateral Evaluation Requirements (6/28/2014)
- FCA Regulation, Part: Part 614, Loan Policies and Operations; Subpart F, Collateral Evaluation Requirements (6/24/2021)
Effectively, the new rule would raise from $250,000 to $1 million the minimum amount an FCS institution can lend without an appraisal performed by a qualified appraiser who is state licensed or certified. The proposed rule accomplishes this boost by eliminating an existing rule that “appraisals for real estate-related financial transactions with values of more than $250,000 shall be performed by a qualified appraiser,” while retaining another rule that “only a state-certified real estate appraiser may issue an appraisal report for real estate-related financial transactions over $1 million.”
The proposed rule covers the $750,000 gap by stating that an “evaluation” of real estate “may be used instead of an appraisal for a business loan with a transaction value at or below $1 million provided repayment of the loan “is not primarily dependent upon either income derived from the sale of real estate or income from the cash rental of real property being rented for nonagricultural purposes.” The proposed rule’s definition of a “business loan” includes loans to individuals and entities “engaged in farming enterprises.” So, it clearly will apply to FCS financing of agricultural real estate, which accounts for almost half of total FCS loans outstanding.
FCA tends to use the terms “appraisal” and “evaluation” and hence the terms “appraiser” and “evaluator,” interchangeably, yet evaluators are not licensed as such. Instead, an evaluator is an individual who supposedly is competent, reputable, impartial and has demonstrated sufficient training and experience in identifying values for assets. In effect, who is qualified to be an evaluator is left to the judgment of whoever is selecting or hiring the evaluator. While the proposed rule states that evaluators must have “independence from lending activities as well as real or perceived conflicts of interest,” evaluators are not subject to the regulatory rigor of appraiser licensing or certification.
The bottom line, of course, is whether FCA evaluators will exercise the independent judgment that licensed appraisers are supposed to use in valuing assets and specifically the real property securing agriculture real estate loans up to $1 million. The FCA has not made the case that evaluators will have sufficient expertise and can exercise sufficient independence in the evaluations they prepare. The recent relaxation of appraisal requirements for federally insured banks and credit unions does not justify a comparable relaxation for a government-sponsored enterprise, especially given the taxpayer bailout that FCS needed in the 1980s.
The proposed rule is flawed in another regard: It delegates far too much responsibility to individual FCS institutions to “adopt and maintain written policies on when and how to issue collateral appraisals and evaluations for all of the [FCS] lender’s credit functions, in keeping with regulatory requirements,” especially “when an evaluation will be used instead of an appraisal (when the regulations allow either to be used).” Such a delegation of authority likely will lead a variety of policies within the FCS, which will greatly complicate the ability of FCA examiners and supervisors to detect evaluation shortcomings and abuses.
The relaxed regulations reflected in the proposed rule could not only be damaging to FCS lenders but to ag banks and other rural lenders as well as to all of rural America if it leads to higher valuations that justify even higher farmland prices at a time when the increased likelihood of rising interest rates and reduced government payments could imperil the finances of farmers and ranchers as well as rural businesses and residents. The ag crisis of the 1980s did not occur so long ago that the lessons it taught can safely be ignored.
The proposed rule briefly discusses the use of automated valuation models in determining collateral values, including the usual warnings about the limitations in using AVMs in estimating collateral values. The greater danger, of course, is that evaluators, perhaps due to the pressure of time, will place excessive reliance on valuation numbers generated by an AVM. A more fundamental shortcoming of AVMs is that to the extent they use historic data, they will miss turning points in the value of real estate collateral due to external factors, such as changes in the direction of interest rates, government payments, taxes and the development potential of a particular parcel of farm ground.
Now is not the time to be relaxing the rigor in which agricultural real estate as well as other agricultural assets are valued for collateral purposes. Not only should the House and Senate agriculture committees question the rationale for the proposed rule, but so too should the House Financial Services Committee and the Senate Banking Committee. As we learned in the 1980s, financial problems in American agriculture can spread far beyond rural America.