A bank's existing loan on a retail building has $2.5 million outstanding. The borrower asks to refinance for $2.8 million, and local market conditions have changed obviously and materially in a way that threatens the bank's collateral protection. No other exemption applies. Under the Interagency Guidelines, what does the bank need?
Correct Answer
D) An appraisal, because new money is advanced amid a material market change
The $300,000 increase over the outstanding principal is an advance of new monies. When new monies are advanced and there has been an obvious and material change that threatens the collateral protection, the institution must obtain an appraisal unless another exemption applies. The refinancing exemption is lost here, and the new money is not a separate business loan.
Why This Is the Correct Answer
Option D is correct because the refinance increases the principal from $2.5 million to $2.8 million, advancing $300,000 of new monies. The guidelines state that when new monies are advanced and an obvious and material change threatens the collateral protection, the institution must obtain an appraisal unless another exemption applies. The stem rules out other exemptions.
Why the Other Options Are Wrong
Option A: An evaluation, because refinancing an existing credit is exempt
Option A treats any refinancing of an existing credit as exempt. The exemption for renewals and refinancings depends on there being no new monies or no obvious and material change; with both present, the exemption does not apply.
Option B: An evaluation, because the new money is below the business loan threshold
Option B looks at the $300,000 of new money against the business loan threshold. The transaction is the $2.8 million refinancing, and the stem states no other exemption applies, so the business loan exemption is not available.
Option C: No new valuation, because the original appraisal remains in the file
Option C relies on the original appraisal in the file. Reusing an existing valuation is possible when an evaluation is permitted and the valuation remains valid, but a material market change undermines validity and an appraisal is required here.
New money plus bad change
Either condition alone can still allow an evaluation, but new money combined with an obvious, material, threatening change calls for an appraisal.
How to use: Use this pairing whenever a renewal or refinancing question gives both a principal increase and a change in market or property conditions.
Exam Tip
Compute new monies by comparing the new principal with the principal outstanding before the refinancing, not with the original loan amount.
Common Mistakes to Avoid
- -Assuming any refinancing qualifies for an evaluation
- -Measuring new money against the original loan amount
- -Reusing an old appraisal after a material market change
Concept Deep Dive
Analysis
The question requires two determinations: whether new monies are advanced, and whether an obvious and material change threatens the collateral. The refinancing exemption needs either no new monies or no such change; here both bad conditions are present. With no other exemption available, an appraisal is required.
Background Knowledge
Subsequent transactions can be supported by evaluations when there is no obvious and material change that threatens the collateral or when no new monies beyond reasonable closing costs are advanced. New monies means an increase in principal over the amount outstanding before the renewal or refinancing.
Real-World Application
A borrower refinances a shopping center loan and takes cash out after a major anchor tenant leaves and nearby vacancies rise. The bank orders a new appraisal because it is advancing new funds against collateral whose market has materially weakened.
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