Adopted Amendments to 7 TAC §19.51

Title 7. Banking and Securities
Part 2. Texas Department of Banking
Chapter 19. Trust Company Loans and Investments
Subchapter C. Real Estate
7 TAC §19.51

NOTE: This document was submitted to the Texas Register on the date indicated below. This is not the actual publication; the editorial staff of the Texas Register sometimes edits the submission. The Texas Department of Banking therefore does not guarantee the exact accuracy of this document.

Date: October 18, 2013

The Finance Commission of Texas (the commission), on behalf of the Texas Department of Banking (the department), adopts amendments to §19.51, concerning other real estate owned, without changes to the proposed text as published in the August 30, 2013, issue of the Texas Register (38 TexReg 5626). The text will not be republished.

Section 19.51 provides detailed guidance to trust companies regarding investment in real estate other than for use in its own business. "Other real estate owned," commonly referred to as "OREO," is generally defined in §19.51(a)(10) as real property interests not used or intended to be used as trust company facilities.

In general, §19.51(g) and Finance Code, §184.003(c), require a state trust company to dispose of OREO within five years of the date it becomes OREO, although the banking commissioner may grant one or more extensions of time if the property remains unsold, despite the trust company's good faith efforts to market the property, or if immediate disposal would otherwise be detrimental to the trust company. However, with respect to OREO that once was property held for future use as a trust company facility, the Finance Code formerly required a state trust company to dispose of such property within two years instead of five.

The 83rd Texas Legislature recently enacted H.B. 1664, effective June 14, 2013 (Acts 2013, 83rd Leg., R.S., Ch. 940). Among other matters, H.B. 1664 was intended to lengthen the time period from two years to five years for disposal of OREO that once was property held for future use as a trust company facility, but that is no longer eligible to be held in that capacity. H.B. 1664 accomplished this goal but imperfectly, in that Finance Code, §184.002(c) and §184.003(c), now specify conflicting disposal periods. As amended, §19.51(g) implements the intent of the recently amended statutes by specifying a five-year period for disposing of OREO that is no longer held for future use as a trust company facility. The department will seek statutory amendments to eliminate the statutory conflict in a future legislative session.

H.B. 1664 also inadvertently deleted a requirement to account for investment in trust company facilities using regulatory accounting principles. As amended, §19.51(j) requires compliance with regulatory accounting principles for investment in trust company facilities in addition to accounting for OREO.

The Department received no comments regarding the proposed amendments.

The amendments are adopted pursuant to Finance Code, §184.003, which authorizes the commission to adopt rules regarding acquisition and retention of real estate. Additional authority is provided by Finance Code, §181.003, which authorizes the commission to adopt rules to accomplish the purpose of Subtitle F, relating to state trust companies.

§19.51. Other Real Estate Owned.

(a) Definitions. Words and terms used in this subchapter that are defined in Finance Code, §§181.001 et seq. have the same meanings as defined therein. The following words and terms when used in this subchapter shall have the following meanings unless the context clearly indicates the contrary.

(1) Appraisal--A written report by a state certified or licensed appraiser containing sufficient information to support the trust company’s evaluation of OREO taking into consideration market value, analyzing appropriate deductions or discounts, and conforming to generally accepted appraisal standards, unless principles of safety and soundness applicable to trust companies require stricter standards.

(2) Appraiser--A state certified or licensed staff appraiser or a state certified or licensed third party fee appraiser with relevant and competent experience and background as related to a particular appraisal assignment.

(3) Trust company facility--Real property, including improvements, owned or leased, to the extent the lease or the leasehold improvements are capitalized, by a trust company if the real estate is held for the purposes set forth in Finance Code, §184.001, and is not disqualified under Finance Code, §184.002(b). The term also includes capitalized leasehold improvements if held for the same purposes.

(4) Coterminous sublease--A lease with the same duration as the remainder of the master lease.

(5) Evaluation--A written report prepared by an evaluator describing the OREO and its condition, the source of information used in the analysis, the actual analysis and supporting information, and the estimate of the OREO’s market value, with any limiting conditions.

(6) Evaluator--An individual who has related real estate training or experience and knowledge of the market relevant to the OREO but who has no direct or indirect interest in the OREO. An appraiser may be an evaluator.

(7) Generally accepted appraisal standards--The Uniform Standards of Professional Appraisal Practice (USPAP) promulgated by the Appraisal Standards Board, Appraisal Foundation, Washington, D.C.

(8) Market value--The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:

(A) buyer and seller are typically motivated;

(B) both parties are well informed or well advised, and acting in what they consider their own best interests;

(C) a reasonable time is allowed for exposure in the open market;

(D) payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and

(E) the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.

(9) Non-coterminous sublease--A lease with a duration shorter than the remainder of the master lease.

(10) Other Real Estate Owned (OREO)–Real estate, including improvements, mineral interests, surface, and subsurface rights, owned in whole or in part or leased by a trust company, no matter how acquired, which is not a trust company facility as defined by paragraph (3) of this subsection or leasehold property as permitted under Finance Code, §184.203.

(11) Staff appraiser--An appraiser on the staff of a trust company who has no direct or indirect interest in the OREO.

(12) Third party fee appraiser--An appraiser who has an independent contractor relationship with a trust company and has no direct or indirect interest in the OREO.

(13) Year--For the purposes of this section, a calendar year.

(b) Prohibition on real estate ownership. A trust company may not acquire or hold real estate except as specifically provided under Finance Code, §§184.001-184.003 and 184.203, and this section.

(c) Acquisition of OREO with restricted capital. A trust company may hold OREO purchased with the restricted capital of the trust company only if acquired:

(1) by purchase under judicial or nonjudicial foreclosure, or through a deed in lieu of foreclosure, of real estate that is security for a debt or debts previously contracted in good faith;

(2) by purchase to protect its interest in a debt or debts previously contracted if prudent and necessary to avoid or minimize loss;

(3) with prior written approval of the banking commissioner, by an exchange of OREO or personal property for real estate to avoid or minimize loss on the real estate exchanged or to facilitate the disposition of OREO;

(4) with prior written approval of the banking commissioner, by purchase of additional real estate to avoid or minimize loss on OREO currently held;

(5) by involuntary acquisition of an ownership interest or leasehold interest in real estate as a result of or incidental to a judicial or nonjudicial foreclosure, or by adverse possession, or by operation of law without any action on the part of the trust company to obtain such interest; or

(6) by loss of designation of real estate owned or leased by the trust company as a trust company facility.

(d) Acquisition of OREO with secondary capital. A trust company may hold OREO purchased with the secondary capital of the trust company, subject to the exercise of prudent judgment using the factors set forth in Finance Code, §184.101(f).

(e) Appraisal requirements.

(1) Subject to paragraph (2) of this subsection, when OREO is acquired, a trust company must substantiate the market value of the OREO by obtaining an appraisal within 60 days of the date of acquisition. An evaluation may be substituted for an appraisal if the recorded book value of the OREO is less than $250,000.

(2) An additional appraisal or evaluation is not required when a trust company acquires OREO if a valid appraisal or appropriate evaluation was made in connection with a real estate loan that financed the acquisition of the OREO and the appraisal or evaluation is less than one year old.

(3) An evaluation shall be made on all OREO at least once a year. An appraisal shall be made at least once every three years on OREO with a recorded book value in excess of $250,000.

(4) Notwithstanding another provision of this section, the banking commissioner may require an appraisal of OREO if the banking commissioner considers an appraisal necessary to address safety and soundness concerns.

(f) Additional expenditures on OREO. A trust company may re-fit OREO for new tenants or make normal repairs and incur routine maintenance costs to preserve or protect the value of the OREO or to render the OREO in saleable condition without prior notification to or approval by the banking commissioner. Other advances or additional expenditures on OREO acquired with the restricted capital of the trust company must have the prior written approval of the banking commissioner, and must not be:

(1) made for the purpose of speculation in real estate;

(2) made for the purpose of changing or altering the current status or intended use of the OREO; or

(3) inconsistent with principles of safety and soundness applicable to trust companies.

(g) Holding period.

(1) A trust company must dispose of OREO acquired with the restricted capital of the trust company no later than five years after it was acquired or ceases to be used as a trust company facility, unless an extension of time for disposing of the real estate is granted in writing by the banking commissioner pursuant to Finance Code, §184.003(d).

(2) The holding period commences on the date that:

(A) ownership is acquired by the trust company pursuant to subsection (c)(1)-(5) of this section;

(B)  OREO is acquired by the trust company through merger/consolidation, conversion, or purchase and assumption;

(C) the trust company first learns of its ownership interest in real estate which has devolved to the trust company by operation of law under subsection (c)(6) of this section;

(D) the trust company ceases to use a former trust company facility or completes its relocation from a former trust company facility to a new trust company facility; or

(E) is three years following the acquisition of real estate as a trust company facility for future expansion or relocation of the trust company if the real estate has not been occupied by the trust company, unless the banking commissioner has granted written approval to a further delay in the improvement and occupation of the real estate.

(3) The banking commissioner may grant one or more additional extensions of time for disposing of OREO acquired with the restricted capital of the trust company if the commissioner finds that the trust company has made a good faith effort to dispose of the OREO or that disposal of the OREO would be detrimental to the safety and soundness of the trust company.

(h) Disposition efforts; documentation. A trust company must make diligent and ongoing efforts to dispose of OREO acquired with the restricted capital of the trust company and must maintain documentation adequate to reflect those efforts. Such documentation must be available for inspection by the commissioner. If secondary capital is adequate to reclassify OREO in a manner that does not impinge on restricted capital, this disposition requirement does not apply.

(i) Disposition of OREO. A trust company may dispose of OREO by:

(1) selling the OREO in a transaction that qualifies as a sale under regulatory accounting principles;

(2) selling the OREO pursuant to a land contract or contract for deed;

(3) retaining the property for its own use as a trust company facility, subject to the approval of the commissioner;

(4) transferring the OREO for market value to an affiliate, subject to Finance Code, §183.109, and applicable federal law, including 12 United States Code, §§371c, 371c-1, and 1828(j);

(5) if the OREO is a master lease, obtaining a coterminous sublease or an assignment of a coterminous sublease, provided that if the trust company acquires or obtains assignment of a non-coterminous sublease, the holding period during which the master lease must be divested is suspended for the duration of the sublease and will commence running again upon termination of the sublease; or

(6) entering into a transaction that does not qualify for disposal under paragraphs (1)-(5) of this subsection; provided that its obligation to dispose of the OREO is not met until the trust company receives or accumulates from the purchaser an amount in cash, principal and interest payments, and private mortgage insurance totaling 10% of the sales price, as measured in accordance with regulatory accounting principles.

(j) Accounting for investments in facilities and OREO. A state trust company shall comply with regulatory accounting principles in accounting for its:

(1) investment in and depreciation of facilities, furniture, fixtures, and equipment; and

(2) investment in OREO and disposition of OREO.

Effective date: November 7, 2013, 38 TexReg 7689.