terminate the plan and any obligations thereunder, beyond those theretofore fully funded, and to discontinue the making of any payments after such termination. Failure to preserve such freedom could well operate to deprive those responsible in the future for the association's operation of the freedom necessary to adjust its affairs and obligations to changed conditions and means, and thus make the interests of officers and employees paramount to the interests of the members.

(e) Default of the institution. The plan or contract should provide that all obligations of the association thereunder which have not theretofore been fully funded shall terminate automatically in event of default as defined in Title IV of the National Housing Act.

[24 FR 9418, Nov. 24, 1959, as amended at 39 FR 28611, Aug. 9, 1974]

§ 570.3

Reserves; Federal insurance reserve; transfers from; undivided profits.

Section 563.11 of this subchapter requires that the Federal insurance reserve be used solely for the purpose of absorbing losses, permits only accounts so limited in use to be designated as the Federal insurance reserve, and provides that the general reserves of Federal associations are deemed to meet such requirement. No deduction may be made from, and no charge may be made against, such reserves for any purpose other than to absorb losses. No reduction of the Federal insurance reserve, through transfers therefrom to undivided profits or surplus, is permissible.

(29 F.R. 9606, July 16, 1964]

§ 570.4 Net worth.

(a) The term "net worth" is defined in § 561.13 of this chapter to mean the sum of all reserve accounts (except specific or valuation reserves), undivided profits, surplus, capital stock and any other nonwithdrawable accounts.

(b) Specific loss reserves required by the California Savings and Loan Commissioner under section 7255 of the California Savings and Loan Association Law are not specific reserves within the meaning of the foregoing exception clause unless established in respect of loans whose outstanding balance is in excess of the appraised value of the security property as determined by the Commissioner.

(c) Temporary designation of a portion of earned surplus or undivided profits as a specific loss reserve, and subsequent restoration to earned surplus or undivided profits, shall not be deemed to constitute a previous allocation to another net worth account within the meaning of paragraph (e) of § 563.13 of this chapter.

[29 F.R. 11334, Aug. 6, 1964, as amended at 30 FR. 8963, July 16, 1965]

§ 570.5

Credits to designated reserve.

(a) Section 563.11 of this chapter provides that, with the prior written approval of the Insurance Corporation, any reserve account, which by specific and adequate corporate action of an insured institution is made subject to charges for losses only, may be designated as the institution's Federal insurance reserve account.

(b) Specific loss reserves required by the California Savings and Loan Commissioner under section 7255 of the Callfornia Savings and Loan Association Law may be designated as a part of the Federal insurance reserve account unless established in respect of loans whose outstanding balance is in excess of the appraised value of the security property as determined by the Commissioner. When so designated, credits to such reserves would be considered as credits to the Federal insurance reserve account under § 563.13 of this chapter. [29 F.R. 11334, Aug. 6, 1964]

§ 570.7 Appraisals; payment for.

(a) Payment by the Institution. Paragraph (b) of § 563.17-1 of this subchapter provides, among other things, that if appraisals of real estate securing an insured institution's loans are obtained as part of an examination by the Insurance Corporation, the cost of such appraisals shall promptly be paid by the insured institution direct to the appraiser or appraisers. Failure to make payment for appraisals as provided in § 563.17-1 of this subchapter within 60 days after receipt of a statement of the cost of the appraisals approved by the Chief Examiner will be considered a violation of a regulation to which the insured institution is subject within the meaning of section 407 of the National Housing Act, as amended.

(b) Payment by the Corporation. In any instance where the cost of appraisals

has not been paid as provided in paragraph (a) of this section, the Corporation will make such payment to the appraiser or appraisers and, in turn, charge such cost to the insured institution as part of the cost of examination. Payment by the Corporation will not constitute correction by the insured institution of the violation of the regulation. [30 F.R. 11101, Aug. 27, 1965]

§ 570.8 Computation Computation of scheduled items, assets and specified assets.

(a) Insurance Regulation 563.17-2 provides for the establishment of specific reserves in connection with the reevaluation of assets of an insured institution.

(b) The amount of any specific reserve established to offset the overvaluation of any asset shall be deducted from the book value of the asset in determining scheduled items, assets and specified assets.

[30 F.R. 14196, Nov. 11, 1965]

§ 570.9 Lending territory; relocation of principal office.

(a) Section 403(b) of the National Housing Act, as amended, provides in part that each applicant for insurance shall file with Its application an agreement that, during the period insurance is in force, it will not make any loans beyond 100 miles from its principal office, except loans in the area beyond such 100 mile limit in which it was operating prior to June 27, 1934, and loans which are made pursuant to regulations of the Corporation. The lending territory, as fixed by the location of the principal office at the time insurance is granted, is a matter of contract between the Corporation and the institution.

(b) Section 403 (c) of the Act requires the Corporation to consider the financial condition of the applicant and other insured institutions in its area in determining whether to grant insurance. This consideration would be of limited significance, an institution could change its area of lending operations and of competitive impact simply by changing the location of its principal office.

(c) Therefore, the principal office contemplated by section 403(b) of the National Housing Act, as amended, for determination of an institution's lending territory, is the principal office of the applicant at the time insurance of accounts is granted. A subsequent reloca

tion of the principal office of an institution will not, without specific action by the Corporation, result in changing the lending territory of an insured institution.

(d) For the purpose of determining the normal lending territory of an insured institution under § 561.22, "principal office" refers to the principal office as it existed at the time insurance of accounts was granted.

[31 F.R. 5009, Mar. 26, 1966]

§ 570.10 Separate corporate existence of a service corporation.

(a) General. If an insured institution and its service corporation fail to maintain their separate corporate existence, a court, for equitable reasons in an extreme situation, might hold the institution liable for the obligations of its service corporation. To insure judicial recognition of the separate corporation existence of service corporations, the institution and its service corporations should operate so that (1) their respective business transactions, accounts, and records are not intermingled, (2) each observes the formalities of their separate corporate procedures, (3) each is adequately financed as a separate unit in the light of normal obligations reasonably foreseeable in a business of its size and character, (4) each is held out to the public as a separate enterprise, and (5) the insured institution does not dominate the service corporation to the extent that the latter is treated as a mere department of the former. In recommending such operating practices, the Board is not suggesting that a failure to follow one or more or all of such practices by an insured institution and its service corporation should cause a court to ignore the separate corporate existence of the service corporation.

(b) Operation of service corporations. Section 563.37(a) of this subchapter requires that an insured institution and its service corporations be operated in a manner which demonstrates their separate corporate existence. Failure to assure corporate separateness could result in serious risk to the insured institution and to the Corporation. In monitoring compliance with § 563.37(a) of this subchapter, the Corporation will look for attributes of corporate separateness such as those contained in paragraph (a) of this section.

[38 FR 26112, Sept. 18, 1973; 38 FR 29569, Oct. 26, 1973]

§ 571.1

Appraisal of real estate securing assets of insured institutions. Insurance Regulations 563.17-1 provides that the examination of an insured institution shall include appraisals when deemed advisable. It has been, and it now is, the policy of the Federal Home Loan Bank Board to have the real estate securing an insured institution's assets appraised when specific facts or information with respect to mortgage loans or lending, or with respect to operations in general give evidence that an institution's appraisals may be excessive that lending may be of a marginal nature, that appraisals policies and practices may not conform with generally accepted and established professional standards or that assest secured by real estate are overvalued. This statement of policy sets out the basic guidelines for a determination that appraisals should be obtained and the procedures to be employed in obtaining such appraisals.

(a) General. (1) Notwithstanding any provisions hereinafter set out in this statement of policy, appraisals may, and will, be made in any instance where, in the opinion of the Board, such appraisals are necessary to protect the interests of the Corporation, other insured institutions, or the public. Further, the Director of the Board's Office of Examinations and Supervision has been, and continues to be, authorized to direct that an examination, including such appraisals as he deems advisable, be made at any time of any insured institution and any statements made herein shall not act to modify or limit such authority.

39-057-75- -35

(2) As used in this statement of policy, the term "professional appraiser" means an individual whose qualifications are demonstrated by means of senior membership in a national appraisal organization or an individual who, in the opinion of a Chief Examiner for the Board qualifies under standards equivalent to those established by such national organizations. The fact that a professional appraiser is employed by an insured institution on a fee or salary basis need not, of itself, adversely affect the acceptability of any report of appraisal prepared by or under the direct supervision of such appraiser.

(3) A determination to obtain appraisals must be the product of a careful consideration of current facts and factors and, therefore, such a determination will usually be geared to the orderly processes of examination.

(4) The exercise of judgment in arriving at a decision to obtain appraisals has been, and must continue to be, a matter which requires consultation and close cooperation between all examining and supervisory personnel.

(b) Authority of Supervisory Agent to obtain appraisals. The Board's Supervisory Agent for the Federal Home Loan Bank district in which the home office of an insured institution is located is authorized to instruct the Board's Chief Examiner for such district to obtain, in connection with any examination of such insured institution, appraisals of real estate securing the institution's assets when, in the opinion of such Supervisory Agent, the institution's policies and practices and operating results and trends are such as to cause concern over the quality of such assets.

(c) Authority of Chief Examiner to obtain appraisals. The Board's Chief Examiner for the Federal Home Loan Bank district in which the home office of an insured institution is located is authorized to obtain, as a part of and in connection with an examination, appraisals of real estate securing such institution's loan and contracts when an examination discloses the following conditions or such conditions are otherwise known or found to exist:

(1) When the institution's independent public accountant disclaims an opinion on its financial statements in his report of audit because he is of the opinion that the fair market value of

real estate securing assets is materially less than book value of such assets.

(2) When the institution's independent public accountant expresses an opinion in his report of audit that the flnancial statements do not fairly present the institution's financial position or results of operations because of potential losses in the loan portfolio or on the sale of real estate owned.

(3) When a borrower agrees or otherwise obligates himself to pay, or does pay, fees or other consideration to a third party to induce an inflow of savings to the institution.

(4) When there has been two or more changes in record ownership of the security property in comparatively rapid succession within a short period of time, each such change being accompanied by a material increase in the reported purchase price.

(5) When the beneficial owner of the real estate is not directly obligated to the institution for the repayment of the debt.

(6) When an appraisal of incomeproducing real estate or vacant land, excepting such real estate being utilized in farming or similar agricultural pursuits, has not been made by a professional appraiser within a 3-year period preceding the Board's examination.

(7) When loan applications, contracts of sale, or other documents submitted to induce and support the granting of loans to finance the purchase of security properties do not disclose the true purchase prices.

(8) In the case of loans or contracts granted or made to facilitate the sale by the institution of real estate previously acquired by it as a result of foreclosure or voluntary deed in lieu thereof:

(1) When the appraisal supporting the loan or contract to facilitate exceeds by 10 percent or more the appraised value of the real estate at the time of acquisition by the institution, unless both appraisals were made by a professional appraiser or appraisers;

(1) When the sales price of the real estate sold by the institution is 10 percent or more above or below the appraised value of such real estate at the time of acquisition by the institution, unless the appraisal at the time of acquisition was made by a professional appraiser.

(9) When a loan involves real estate in which an officer, director, employee, or attorney of or for the institution, or any

owner of 10 percent or more of the institution's permanent, reserve, or guaranty stock, had a direct or indirect interest, financial or otherwise, of 10 percent or more, excepting real estate occupied by such officer, director, employee, attorney, or sockholder on his or her residence.

(10) When the original amount of a loan exceeds the greater of $100,000 or one-fourth of 1 percent of the institusion's assets at the time such loan was granted, except loans secured by singlefamily dwellings, and the security for which was not appraised by a professional appraiser.

(11) When real estate acquired since the date of the previous examination by foreclosure or voluntary deed in lieu thereof or in exchange for any scheduled items, which remains as real estate owned on the institution's books at the time of the examination, was not appraised by a professional appraiser at the time of acquisition, excepting real estate temporarily held pending transfer to an insuring or guaranteeing agency of the U.S. Government.

(12) When other real estate owned by the institution for a period of 3 or more years (excepting real estate occupied or to be occupied as a home, branch, or service office of such institution) has not been appraised by a professional appraiser within the 3-year period preceding the examination.

(d) Authority to obtain appraisals, after consultation. When the trend of the ratio of scheduled items to total assets is such that it raises serious question as to financial condition, when it is apparent that assets secured by real property are worth substantially less than the book value thereof, or when there are other indications of the need to evaluate appraisal practices and policies, the Chief Examiner, after consultation with the Supervisory Agent, is authorized to obtain, as a part of and in connection with an examination, appraisals of the real estate securing the insured institution's loans and contracts.

(e) Other bases for obtaining appraisals. It is not feasible to identify. or to state categorically or inflexibly, all of the other indications of the need to evaluate appraisal practices and policies. Many factors must be considered separately and in context in the light of the operations of each institution, and economic conditions as they exist. However, the following broad areas of oper

ation by an insured institution will be of paramount supervisory concern and essential facts and information with respect to such matters will in large measure constitute the basis for determining whether or not appraisals should be made.

(1) Increase in funds for mortgage lending. The extent to which the institution's expense ratio and dividend rate necessitate or have produced volume lending or lending at interest rates, or at interest rates plus fees, which materially exceed rates charged by responsible lenders in the area on prime real estate security-in order to provide suficient revenue to pay expenses and dividends are matters of much importance. In evaluating this aspect or area of an institution's operations consideration will be given not only to the dividend rate and expense ratio as compared to other comparable institutions in the same business area, but also to such matters as bonus (on top of a competitive dividend rate); inflow of savings from or through brokers; advertising of rate or rate increases in a manner or by means which indicate pressure solicitation of savings; extensive rate advertising in media outside the institution's normal business area; use of giveaways, direct or through brokers, and any solicitation practices generally recognized as being inconsistent with accepted standards in the conduct of responsible financial institutions. In order to evaluate the extent of any mortgage lending pressures to which the institution is subjecting itself, consideration may also need to be given to the use of borrowed money and to sales of loans for relending purposes.

(2) Increase in mortgage lending. A material increase in the amount of loans made, as compared to an approximate equal period next preceding that covered by an examination, might be indicative of lending policies and practices which would call for appraisals. A determination to have appraisals made in connection with an examination would be well based if any of the following conditions or practices are found, particularly when such conditions or practices are coupled to the mortgage lending pressures described above.

(i) A significant amount of loans made at interest and/or fee charges which are higher than charges generally being made by other comparable institutions in the area.

(ii) Loans made to borrowers with whom the institution has previously had material difficulty.

(iii) A series of loans or advances within a short period of time, on the same security property, particularly if these transactions are accompanied by increased appraisals without commensurate improvement of or addition to the security.

(iv) Material concentration of loans on real estate in declining areas, or to a few speculative or operative builders.

(v) Appraisal of real estate security at amounts which substantially exceed sales prices, particularly in the case of new construction which is sold on a competitive, free market and not subject to temporary adverse economic conditions in the community or to other considerations which in certain limited circumstances might justify an appraisal in excess of purchase price.

(vi) Disbursement of construction loan proceeds in advance of the progress of construction or of value at the time disbursement is made.

(vii) Inadequate loan applications, credit information, or documentation of the disbursement of proceeds of loans.

(viii) Granting or extension of mortgage credit to speculative builders when the borrower is already indebted to the institution on loans secured by properties which have remained unsold for a substantial period of time following completion.

(3) Other considerations. (1) While the condition and operations of an institution as measured by the factors enumerated above would generally be determinative, the identification of those matters is not intended as even a suggestion that consideration should not be given to other matters, separately or in context with one or more of the factors stated.

(ii) Among other considerations to which careful attention should be given in connection with a determination as to whether or not appraisals should be made are:

(a) Failure to follow an aggressive collection policy or to observe recognized standards in determining the ability of borrowers to undertake and to pay their mortgage obligations.

(b) Inventory of completed but unsold houses in the institution's lending area, particularly where the institution is continuing to make speculative con