Financial Institutions, Banks

Rule R333-11

Ownership by State-Chartered Banks of Real Estate Other Than Property Used for Bank Business or Held as an Investment

Notice of Proposed Rule

(Repeal)

DAR File No.: 34206
Filed: 11/01/2010 04:34:48 PM

RULE ANALYSIS

Purpose of the rule or reason for the change:

With the current economic downturn, depository institutions are now experiencing a greater number of foreclosures and acquiring portfolios of Other Real Estate Owned (OREO) property. It is important to provide regulatory standards for safe and sound management of OREO. The Department has concluded that it would be beneficial to have a uniform rule for all depositories under its jurisdiction. As a result, Rule R333-11 is being repealed and replaced with Rule R331-26. (DAR NOTE: The proposed new Rule R331-26 is under DAR No. 34207 in this issue, November 15, 2010, of the Bulletin.)

Summary of the rule or change:

Rule R333-11, applicable to state-chartered banks, is being repealed in its entirety and replaced with new Rule R331-26. The purpose of the new rule is to protect the safety and soundness of all state-chartered depository institutions by prescribing requirements and restrictions for the prudent management of real estate held for purposes other than conducting the depository institution's business. The rule sets forth uniform regulatory standards for the safe and sound management of OREO by depositories under the jurisdiction of the Department of Financial Institutions.

State statutory or constitutional authorization for this rule:

• Section 7-1-301
• Section 7-3-18

Anticipated cost or savings to:

the state budget:

The repeal of Rule R333-11 and the proposed new rule will not require additional appropriations.

local governments:

Local governments are not involved in regulating depository institutions and are therefore not subject to this rule.

small businesses:

Depository institutions, under the jurisdiction of the Department, are currently required to comply with minimum accounting standards for the treatment of OREO under generally accepted accounting principles (GAAP) and compliance to the new rule should have minimal budgetary impact.

persons other than small businesses, businesses, or local governmental entities:

Depository institutions, under the jurisdiction of the Department, are currently required to comply with minimum accounting standards for the treatment of OREO under GAAP and compliance to the new rule should have minimal budgetary impact.

Compliance costs for affected persons:

Depository institutions, under the jurisdiction of the Department, are currently required to comply with minimum accounting standards for the treatment of OREO under GAAP and compliance to the new rule should have minimal budgetary impact.

Comments by the department head on the fiscal impact the rule may have on businesses:

Depository institutions, under the jurisdiction of the Department, are currently required to comply with minimum accounting standards for the treatment of OREO under GAAP and compliance to the new rule should have minimal budgetary impact.

Edward Leary, Commissioner

The full text of this rule may be inspected, during regular business hours, at the Division of Administrative Rules, or at:

Financial Institutions
Banks
324 S STATE ST
SALT LAKE CITY, UT 84111-2393

Direct questions regarding this rule to:

• Paul Allred at the above address, by phone at 801-538-8854, by FAX at 801-538-8894, or by Internet E-mail at [email protected]

Interested persons may present their views on this rule by submitting written comments to the address above no later than 5:00 p.m. on:

12/15/2010

This rule may become effective on:

02/01/2011

Authorized by:

Edward Leary, Commissioner

R333. Financial Institutions, Banks.

[ R333-11. Ownership by State-Chartered Banks of Real Estate Other Than Property Used for Bank Business or Held as an Investment.

R333-11-1. Authority, Scope, and Purpose.

(1) This rule is issued pursuant to Sections 7-1-301 and 7-3-18.

(2) This rule applies to all banks chartered by the State of Utah.

(3) The purpose of this rule is to protect the safety and soundness of state chartered banks by prescribing requirements and restrictions for the prudent management of real estate held for purposes other than conducting the bank's business.

 

R333-11-2. Definitions.

For the purposes of this rule:

(1) "Bank premises" means real property recorded as an asset on a bank's books or otherwise held by a bank which is used in the conduct of the bank's business, including leasehold improvements and capital leases of real property. It also includes real property acquired and held for future banking use where the minutes of the board of directors show the bank in good faith intends to utilize such property in the conduct of the bank's business within three years.

(2) A "covered transaction" is a sale of a parcel of other real estate held by a bank where less than 10% of the total sales price is in cash; where the bank finances all or a portion of the sales price on terms more favorable than those customarily offered by the bank at that point in time when acting solely as lender; or where the transaction does not transfer from the bank to the buyer substantially all of the usual risks and benefits of ownership. A transaction ceases to be covered when all of the aforementioned conditions no longer apply. It will be deemed that 10% of the sales price has been paid in cash when the cash received by the bank as a down payment together with that portion of the sales price guaranteed to the bank by private mortgage insurance or an equivalent guarantee equals or exceeds 10% of the total sales price, or when the unpaid principal balance of any debt to the bank resulting from a covered transaction, less the amount of any private mortgage insurance or equivalent guarantee, falls below 90% of the total sales price.

(3) "Fair value" is the cash price that might reasonably be anticipated in a current sale under all conditions requisite to a fair sale. A fair sale means that buyer and seller are each acting prudently, knowledgeably and under no necessity to buy or sell. Any related appraisal should estimate the cash price that might be received upon exposure to the open market for a reasonable time, considering the property type and local market conditions. When it is unlikely that the sale can be completed within 12 months, the appraisal must discount all cash flows generated by the property to obtain the estimate of fair values. These cash flows include those arising from ownership, development, operation, and sale of the property. The discount applied shall reflect the appraiser's judgment of what a prudent, knowledgeable purchaser under no necessity to buy would be willing to pay to purchase the property in a current sale.

(4) "Other real estate" means all real property held by a bank except bank premises and real property acquired and held as a permitted investment.

(5) The "recorded investment in the debt satisfied" is the unpaid balance of the debt, accrued and uncollected interest, any legal fees or direct costs of acquiring title to the property, unamortized premium and loan acquisition costs, if any, less any prior direct writedowns, unamortized discount, and finance charges.

 

R333-11-3. Purchasing, Holding, and Conveying Other Real Estate.

A state chartered bank may purchase, hold, and convey other real estate which is:

(1) taken to satisfy, in whole or part, a debt previously contracted;

(2) purchased at a sale to foreclose a lien or other security interest claimed by the bank in the property;

(3) former bank premises or property originally acquired for use as bank premises but no longer used or intended to be used as such within the next three years; or

(4) real property sold by a bank in a covered transaction after the effective date of this rule.

 

R333-11-4. Limitations on the Holding of Other Real Estate.

(1) A bank may not hold any parcel of other real estate for a period longer than five years from the date title is transferred to the bank without the prior written approval of the Supervisor of Banks.

(2) A bank may expend funds for the development and improvement of other real estate if the board of directors of the bank has determined there is a reasonable likelihood that the expenditure will increase the bank's recovery from sale or other disposition of the property in an amount greater than the total amounts to be expended, and the bank's interest in the property is otherwise sufficient to justify the expenditure. These requirements shall not apply to expenditures for routine repair and maintenance of the property nor to expenditures not exceeding $100,000 or 5% of the gross value of the property, whichever is less.

(3) A bank may assume or pay superior liens on other real estate if the bank's interest in the property is sufficient to justify such expenditure.

(4) A bank must diligently pursue all reasonable means to dispose of each parcel of other real estate and shall maintain a current record of all such efforts.

(5) Each parcel of other real estate will be accounted for at the lower of the recorded investment in the debt satisfied or its fair value on the date the property was transferred to other real estate. Any excess of the recorded investment in the debt satisfied over the fair value of the property must be charged against the reserve for loan losses.

(6) Real estate no longer used for banking business will be accounted for at the lower of its net book value or its fair value at the date of transfer to other real estate owned. Any excess of net book value over fair value shall be charged to expense for the current period.

(7) For each parcel of other real estate where the recorded investment in the loan satisfied is in excess of 5% of the equity capital of the bank or $150,000, whichever is less:

(a) prior to transfer to other real estate, fair value must be established by an appraisal prepared by an independent, qualified appraiser, and

(b) the bank must obtain annually from an independent qualified appraiser an appraisal or a certification in letter form of the current fair value of each parcel of other real estate.

 

R333-11-5. Covered Transactions Authorized by Commissioner.

The commissioner may authorize any covered transaction to be booked as a receivable in accordance with Financial Accounting Standards Board Statement of Financial Accounting Standards No. 66, Accounting for Sales of Real Estate, which is incorporated by reference.

 

KEY: banks and banking, real estate, real estate investment

Date of Enactment or Last Substantive Amendment: 1995

Notice of Continuation: May 25, 2007

Authorizing, and Implemented or Interpreted Law: 7-1-301; 7-3-18 ]