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We have a farm production loan that is over $1,000,000.00 . The loan is secured by crops, equipment and real estate. The sale of crops will be used for the repayment of the loan. The real estate attached has always been taken as an abundance of caution, but now the value of the real estate is needed to secure the loan. We have an appraisal on file that is several years old and plan to order a new appraisal for the new loan. We will be issuing a new crop production loan annually. Will we be required to get a new appraisal every year for this business loan or can we validate the appraisal annually as long as there are no changes in the market?
Answer by Eric Collinsworth on 1-21-2020:
Good question! Once you have ordered your appraisal, as you renew the loan each year you can decide if a validation will work or if something new is needed. As long as there have been no changes in the market conditions or condition of the property, I would think a validation might be sufficient for a while, but your market will determine how long that would be acceptable. Keep in mind though, that once you determine validation would not be sufficient for that year’s renewal, the minimum required (unless there are any safety and soundness issues that might need consideration) the minimum required would be an evaluation and not an appraisal.
I was concerned about future validations on a business loan over $1,000,000.00, because the regulation defines subsequent transactions as renewals, refinancing of an existing loan, and modifications. I can’t find anything that addresses using a validation for a new loan with new money advanced for a business loan over $1,000,000.00.
I was concerned about using a validation for future business loans over $1,000,000.00, because the regulation defines subsequent transactions as renewals, refinancing of an existing loan, and modifications. I can’t find anything that addresses using a validation for a new business loan over $1,000,000.00.
Response by Eric Collinsworth on 1-21-2020:
It is my understanding you will be getting a new appraisal for the new loan. Once that has been done, then it is my assumption you would be renewing that loan annually and you are asking about validating the appraisal you get in 2020 for the real estate. If you plan to renew that loan then validating that report may be sufficient if you determine it to still be valid. There is great flexibility when it comes to validating an existing appraisal and/or evaluation and is left up to the bank to determine if the report in file is still valid. The longest I am aware of that a bank has done that was twice before getting a new appraisal at the third renewal. It will be up to you to determine if that would be sufficient. I suggest at each validation you would want to at least include new photos, discussion of current market conditions and new support (either sales or income data to support the value). If you plan to create a new loan each year though and not renew the existing loan, then it’s very possible an appraisal may be necessary as long as the loan amount makes it a requirement.
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