Preproposal statement of inquiry was filed as WSR 09-09-076.
Title of Rule and Other Identifying Information: The proposed rule provides standards for credit unions in the management of "other real estate owned" (OREO), dealing with the mitigation of losses for loans collateralized by real property or acquired as the result of loan defaults.
Hearing Location(s): John A. Cherberg Building, Senate Office Building, State Capitol Campus, Olympia, Washington 98501, on October 28, 2009, at 2 p.m. to 4 p.m.
Date of Intended Adoption: November 24, 2009.
Submit Written Comments to: Joanne Conrad, P.O. Box 41200, Olympia, WA 98504-1200, e-mail email@example.com, fax (360) 704-6490, by October 28, 2009.
Assistance for Persons with Disabilities: Contact Rhonda Mires by October 28, 2009, firstname.lastname@example.org, or (360) 902-8718.
Purpose of the Proposal and Its Anticipated Effects, Including Any Changes in Existing Rules: There is no existing rule for credit unions regarding the management of OREO. The purpose of the proposed rule is to provide standards for credit unions handing [handling] portfolios of OREO property. The anticipated effect is that credit unions will be encouraged to follow industry safe and sound practices and develop their own policies on the prudent management of OREO, helping to mitigate possible loss.
Reasons Supporting Proposal: Recent economic problems have increased the holding of foreclosed properties by financial institutions. Many credit unions have limited experience in the management of OREO. This rule will provide useful standards, and enable credit unions to minimize the impact of foreclosures through analysis and management policy.
Statutory Authority for Adoption: RCW 31.12.404, 31.12.426, 31.12.428, 31.12.436, 31.12.516.
Statute Being Implemented: Chapter 31.12 RCW.
Rule is not necessitated by federal law, federal or state court decision.
Name of Proponent: Department of financial institutions, division of credit unions, governmental.
Name of Agency Personnel Responsible for Drafting: Joanne Conrad, 150 Israel Road S.W., Tumwater, WA 98501, (360) 902-8813; Implementation and Enforcement: Linda Jekel, 150 Israel Road S.W., Tumwater, WA 98501, (360) 902-8778.
No small business economic impact statement has been prepared under chapter 19.85 RCW. This rule does not increase the administrative burden of the regulated financial institutions, but rather provides standards of prudent practice, to mitigate loss through policy development. The policy required in this rule is customized by each credit union to which it applies, and is an express statement of the practice and analysis in which each credit union should prudently engage. If a credit union does not have any OREO, it is not even required to draft an OREO policy; therefore small credit unions with limited real estate exposure will have few, if any, requirements as a result of the proposed rule.
A cost-benefit analysis is not required under RCW 34.05.328. Not applicable to the proposed rule.
September 22, 2009
Linda K. Jekel, Director
Division of Credit Unions
CREDIT UNION -- OTHER REAL ESTATE OWNED
The department of financial institutions (DFI), division of credit unions, is responsible for regulating to protect the integrity of credit unions as cooperative institutions, and to ensure that they remain viable and competitive. RCW 31.12.015. It is important to provide regulatory standards for safe and sound management of OREO. RCW 31.12.005(24).
"Appraisal" means a written report by a certified or licensed appraiser containing sufficient information to support the credit union's evaluation of OREO, taking into consideration market value, analyzing appropriate deductions or discounts, and conforming to generally accepted appraisal standards, unless principles of safe and sound credit union practices require stricter standards.
"DCU" means the division of credit unions of the Washington state department of financial institutions.
"DFI" means the Washington state department of financial institutions.
"Director" means the director of the department of financial institutions, or the director's designee, typically the assistant director of the division of credit unions. RCW 43.320.050.
"Fair value" and "fair market value" mean the cash price that might reasonably be anticipated in a current sale under all conditions requisite to a fair sale, in which the buyer and the seller are each acting prudently, knowledgeably and under no necessity to buy or sell. An appraisal at "fair value" primarily relies upon an estimate of 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. This is known as the "market data approach." However, an appraisal at "fair value" may, in appropriate circumstances, be based upon the "cost approach" with regard to real estate improvements, including current replacement cost.
(a) The involuntary termination of all rights of a trustor/grantor or mortgagor in the property covered by a deed of trust or mortgage, by means of statutory power of sale or judicial foreclosure; or by
(b) A deed in lieu of foreclosure, the voluntary transfer (usually by quitclaim) of a trustor/grantor's or mortgagor's interest in real estate to the beneficiary of a deed of trust or mortgagee, in lieu of the beneficiary or mortgagee exercising the statutory power of sale or obtaining a judicial decree of foreclosure.
"GAAP" means "generally accepted accounting principles," as codified in the financial accounting standards board accounting standards codification (FASB ASC).
"Other real estate owned" (OREO) means real estate acquired by a credit union in whole or partial satisfaction of a debt owed to a credit union, by means of:
(a) Foreclosure or deed in lieu of foreclosure of the credit union's deed of trust or mortgage; or
(b) Acquisition by the credit union and subsequent foreclosure, or deed in lieu of foreclosure of a superior lien interest.
OREO is then held in inventory until sold.
"OREO" does not mean real property held for the credit union's own business use or expansion under RCW 31.12.438.
When does the holding period begin? The holding period begins on the date that the credit union takes title to the OREO property.
What if the OREO is not sold within the initial holding period? An application to hold other real estate owned beyond the five year initial holding period must be filed no less than six months prior to the end of the initial five years, on a form provided by DFI. In addition to the form, the director may require justifying information, data and reports. The granting of an additional holding period of up to five years is at the regulatory discretion of the director.
Where can GAAP be accessed and researched? The definitive text of U.S. GAAP, as codified, may be found at http://asc.fasb.org or as a link from fasb.org.
Can the DCU require charge offs or special reserves for OREO property? Yes, the DCU has authority to require a credit union to charge off or set a special reserve for OREO property. RCW 31.12.545 (2)(c).
(a) Accurate accounting for OREO. Refer to the accounting section of this rule at WAC 208-476-200;
(b) Obtaining independent written appraisals, or determinations of fair value, depending upon the nature of the loan, and updated periodically, to reflect changed market conditions;
(c) Diligent marketing efforts, including a written marketing plan, updated periodically to reflect changed market conditions;
(d) Compliance with any determination, order or directive issued by the director regarding the acquisition, holding, management or disposition of OREO.
(2) Are there requirements for credit union management of OREO? Yes. A credit union that is managing OREO property must have a board-approved policy that assures that the board is regularly informed of the nature and extent of the credit union's OREO holdings. In most cases, this requirement may necessitate the creation of a special assets committee, or some combination of executive staff, to oversee OREO management and report to the board, no less than quarterly.
(3) Are credit unions required to have a written OREO policy? Yes, if a credit union has OREO, the credit union must have a written OREO policy.
(4) What should be included in a credit union OREO policy? At a minimum, the following elements should be covered in a credit union's written OREO policy:
(a) The credit union's staffing requirements for qualified management of OREO;
(b) The credit union's plan to obtain legal advice from an attorney regarding the acquisition, holding and disposition of OREO;
(c) The credit union's intended holding period for OREO;
(d) The appraisal policy, or fair value methodology, for OREO;
(e) The credit union's authorization to expend funds to improve and protect OREO;
(f) The plan to market and dispose of OREO;
(g) Identification of the person responsible for OREO management;
(h) The OREO property management plan;
(i) OREO internal controls;
(j) Special assets committee (or other OREO reporter) responsibilities, including monitoring and reporting plan, and frequency of review by board and management;
(k) The accounting policy for the acquisition, holding and disposition phases of OREO;
(l) Independent audit policy for OREO;
(m) Responsibility for OREO file maintenance, document organization, storage, retrieval and retention.
DFI recognizes that not all of the elements of the policy will apply to every OREO property.
(5) What should a credit union do if there are questions about the management of OREO? A credit union may call the division of credit unions at 360-902-8701, if questions arise during the life cycle of OREO ownership. Information is also available on the DCU web site www.dfi.wa.gov/cu/default.htm and in the DCU "OREO Owner's Manual" guidance book.