R331-26. Ownership of Real Estate Other Than Property Used for Institution Business or Held as an Investment by Depository Institutions Subject to the Jurisdiction of the Department of Financial Institutions

R331-26-1. Authority, Scope, and Purpose

Latest version.

(1) This rule is issued pursuant to Sections 7-1-301, 7-3-18, 7-8-13, and 7-9-5.

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

(3) The purpose of this rule is to protect the safety and soundness of 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.

R331-26-2. Definitions

Latest version.

For the purposes of this rule:

(1) A "covered transaction" is a sale of a parcel of other real estate held by a depository institution where less than 10% of the total sales price is in cash; where the depository institution finances all or a portion of the sales price on terms more favorable than those customarily offered by the depository institution at that point in time when acting solely as lender; or where the transaction does not transfer from the depository institution 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 depository institution as a down payment together with that portion of the sales price guaranteed to the depository institution 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 depository institution resulting from a covered transaction, less the amount of any private mortgage insurance or equivalent guarantee, falls below 90% of the total sales price.

(2) "Depository institution" means depository institution as defined in Section 7-1-103.

(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 depository institution except premises and real property acquired and held as a permitted investment.

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

(6) 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.

(7) "Supervisor" means the appropriate supervisor within the Department of Financial Institutions.

R331-26-3. Purchasing, Holding, and Conveying Other Real Estate

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A state chartered depository institution 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 depository institution in the property;

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

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

R331-26-4. Limitations on the Holding of Other Real Estate

Latest version.

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

(2) A depository institution may expend funds for the development and improvement of other real estate if the board of directors of the depository institution has determined there is a reasonable likelihood that the expenditure will increase the depository institution's recovery from sale or other disposition of the property in an amount greater than the total amounts to be expended, and the depository institution'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 depository institution may assume or pay superior liens on other real estate if the depository institution's interest in the property is sufficient to justify such expenditure.

(4) A depository institution 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 depository institution 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 or net worth of the depository institution or $250,000, 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 depository institution must obtain annually from an independent qualified appraiser an appraisal, an updated appraisal, or an evaluation of the current fair value of each parcel of other real estate.

R331-26-5. Covered Transactions Authorized by Commissioner

Latest version.

The commissioner authorizes any covered transaction to be booked as a receivable in accordance with Financial Accounting Standards Board Accounting Standards Codification 360.20, Real Estate Sales, which is incorporated by reference.