The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
Federal Reserve Bank of Dallas ROBERT D. McTEER, JR. DALLAS, TEXAS 75265-5906 PRESIDENT AND CHIEF EXECUTIVE OFFICER December 17, 1998 Notice 98-118 TO: The Chief Executive Officer of each financial institution and others concerned in the Eleventh Federal Reserve District SUBJECT Final Amendment to the Appraisal Standards for Federally Related Transactions DETAILS The Board of Governors of the Federal Reserve System has approved an amendment to Subpart G of Regulation Y, Appraisal Standards for Federally Related Transactions, which exempts from the Board’s appraisal requirements transactions involving the underwriting or dealing of mortgage-backed securities. This amendment permits bank holding company subsid iaries engaged in underwriting and dealing in securities (so-called section 20 subsidiaries) to underwrite and deal in mortgage-backed securities without demonstrating that the loans underly ing the securities are supported by appraisals that meet the Board’s appraisal requirements. The amendment becomes effective December 28, 1998. ATTACHMENT A copy of the Board’s notice as it appears on pages 65530-32, Vol. 63, No. 228 of the Federal Register dated November 27, 1998, is attached. MORE INFORMATION For more information, please contact Rob Jolley at (214) 922-6071. For additional copies of this Bank’s notice, contact the Public Affairs Department at (214) 922-5254. Sincerely yours, For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal Reserve Bank of Dallas: Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012; Houston Branch Intrastate (800) 392-4162, Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810. This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) 65530 Federal Register/Vol. 63, No. 228/Friday, November 27, 1998/Rules and Regulations FEDERAL RESERVE SYSTEM 12CFR Part 225 [Regulation Y; Docket No. R -0 99 0 ] Appraisal Standards for Federally Related Transactions Board of Governors of the Federal Reserve System. ACTION: Final rule. AGENCY: The Board of Governors of the Federal Reserve System has approved an am endm ent to Subpart G of the Board’s Regulation Y, Appraisal Standards for Federally Related Transactions, w hich exempts from the Board’s appraisal requirem ents transactions involving the underw riting or dealing of mortgage-backed securities. This am endm ent permits bank holding com pany subsidiaries engaged in underw riting and dealing in securities (so-called section 20 subsidiaries) to underw rite and deal in mortgage-backed securities w ithout dem onstrating that the loans underlying the securities are supported by appraisals that m eet the Board’s appraisal requirem ents. EFFECTIVE DATE: December 28, 1998. SUMMARY: FOR FURTHER INFORMATION CONTACT: Norah M. Barger, A ssistant Director (202/452-2402), or Virginia M. Gibbs, Senior Supervisory Financial Analyst, (202/452-2521), Division of Banking Supervision and Regulation; or Mark Van Der Weide, Attorney (202/4522263), Legal Division; Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue, NW, W ashington, DC 20551. SUPPLEMENTARY INFORMATION: Background The Board is adopting an am endm ent to its appraisal regulation that exempts from the Board’s appraisal regulation transactions involving the underw riting or dealing of mortgage-backed securities. The am endm ent is designed to address the concerns raised by bank holding com panies regarding the extent to w hich the Board’s appraisal regulation restricts the ability of section 20 subsidiaries to actively participate in the commercial mortgage-backed securities (CMBS) market. In 1990, the Board adopted its appraisal regulation pursuant to the requirem ents of Title XI of the Financial Institutions Reform, Recovery, and Enforcement A ct of 1989 (12 U.S.C. 3331 et seq.). Title XI directed the federal banking agencies (the agencies) to publish appraisal rules for federally Federal Register/Vol. 63, No. 228/Friday, November 27, 1998/Rules and Regulations related transactio ns1 w ithin the jurisdiction of each agency. The stated purpose of the legislation is to protect federal financial and public policy interests in real estate-related financial transactions by requiring that real estate appraisals utilized in connection w ith federally related transactions are perform ed in writing, in accordance w ith uniform standards, and by individuals w hose com petency has been dem onstrated and w hose professional conduct w ill be subject to effective supervision.2 In their appraisal regulations, the agencies exem pted certain categories of real estate-related financial transactions that do not require the services of an appraiser in order to protect federal financial and public policy interests or to satisfy principles of safe and sound banking. In June 1994, several existing exem ptions to the agencies’ appraisal regulations were modified and new exem ptions were added. At that time, the agencies clarified that a regulated institution investing in, underw riting, or dealing in a mortgage-backed security or sim ilar instrum ent need not obtain new Title XI appraisals for the underlying real estate-secured loans so long as the loans met regulatory appraisal requirem ents for the institution at the time the loans w ere originated.3 W hen the agencies adopted the 1994 am endm ents to their appraisal rules, the mortgage-backed securities market consisted of securitized l-to-4 family residential loans, most of w hich were generated in accordance w ith the agencies’ appraisal requirem ents. Since 1994, the commercial real estate market has recovered and a market in CMBS has emerged and expanded significantly w ith the w ider acceptance of collateralized securities. Because m any commercial mortgages are originated by non-regulated institutions, they often do not fully m eet the agencies’ appraisal regulations. As a result, banking organizations have effectively been restricted in their ability to participate in the CMBS market. 1 Section 1121(4) of FIRREA, 12 U.S.C. 3350(4), defines a federally related transaction as a real estate-related financial transaction that is regulated or engaged in by a federal financial institutions regulatory agency and requires the services of an appraiser. Section 1121(5), in turn, defines a real estate-related financial transaction as any transaction that involves: (1) the sale, lease, purchase, investm ent in or exchange of real property, including interests in property, or the financing thereof; (2) the refinancing of real property or interests in real property; and (3) the use of real p roperty or interests in real property as security for a loan or investm ent, including mortgage-backed securities (em phasis added). 2 See Title XI’s Statem ent of Purpose. 12 U.S.C. 3331. 3 See 59 FR 29482 (1994). In December 1997, the Board issued a proposal to am end its real estate appraisal regulation to perm it bank holding companies and their nonbank subsidiaries to underw rite and deal in mortgage-backed securities w ithout dem onstrating that the loans underlying the securities are supported by appraisals that m eet the Board’s appraisal requirem ents.4 In issuing this proposal, the Board acknowledged that the am endm ent w ould affect only section 20 subsidiaries because section 20 subsidiaries are the only nonbank entities subject to the Board’s appraisal regulation th at are perm itted to underw rite or deal in mortgage-backed securities. Summary of Comments and Description of the Final Rule The Board received eleven comments on the proposed am endm ent to the appraisal regulation: four from banking associations, one from a bank holding company, one from a professional appraiser association, and five from Federal Reserve Banks. Ten of the com menters strongly favored the proposed am endm ent. The professional appraiser association did not express support for the proposal and urged the Board to consider w hether a uniform due diligence standard should be developed for the CMBS m arket before adopting this am endment. Several of the commenters stated that the appraisal regulation m ade it difficult for bank holding com panies and their section 20 subsidiaries to participate in the CMBS market. As one com menter stated, the am endm ent w ould strengthen the com petitiveness of bank holding companies by placing their section 20 subsidiaries on a more equal footing w ith nonbank com petitors. Ten commenters stated that the public rating and due diligence required by the market for mortgage-backed securities provided sufficient inform ation for the regulated institution to assess risks. One com m enter noted that the rating agencies perform sophisticated stress tests of mortgage-backed securities, w hich examine the ability of the real estate collateral to meet the associated debt obligation u nder adverse market conditions, to ensure the soundness of their rating. One com m enter contended that the CMBS market attributed little value to appraisals and that other characteristics of the CMBS market, such as public ratings and due diligence requirements, typically provide more protection to investors than the appraisal requirem ent. A nother com m enter stated 4 See 62 FR 64997 (1997). 65531 that obtaining appraisals is a costly and tim e-consum ing process that is im possible to com plete in the time constraints applicable to underw riting and dealing in CMBS. One com m enter suggested that the Board consider adopting additional exem ptions from the appraisal regulation for transactions involving: (1) the investm ent in investment-grade CMBS by bank holding companies and their bank and nonbank affiliates and (2) the w arehousing of commercial real estate loans by bank holding companies and their nonbank affiliates for the purpose of packaging and selling them as CMBS. In contrast, the com ment letter from the professional appraiser association contended that federal oversight and underw riting criteria, as w ell as due diligence procedures used by market participants, may not adequately address all safety and soundness issues that exist in the CMBS market. The com m enter expressed concern that w ithout guidance from the agencies regarding due diligence standards for CMBS, federally insured institutions could assum e undue or unacceptable risk. Further, this com m enter contended that m any of the underw riting criteria and investm ent decisions involving CMBS require that an appraisal be perform ed to check the validity, quality, and quantity of cash flow from the underlying property. The comm enter also expressed concern that increased com petition in the com m ercial real estate m arket m ay lead to increased risk taking and raised concern about the use of federally-insured deposits to fund CMBS activity. The Board believes that perm itting section 20 subsidiaries to underw rite and deal in mortgage-backed securities w ithout obtaining appraisals that m eet the Board’s appraisal requirem ents is not likely to create significant additional risks for bank holding companies or pose a systemic risk to the banking system. The Board notes that bank holding companies have substantial expertise in analyzing the risks associated w ith loans secured by residential and commercial real estate, and that section 20 subsidiaries have developed the necessary procedures to evaluate the credit risks involved in underw riting and dealing in mortgagebacked securities. In addition, section 20 subsidiaries that seek to underw rite or deal in CMBS are subject to an operational and managerial infrastructure inspection prior to being perm itted to engage in such activities. Periodic inspections by the Federal Reserve verify that proper underw riting 65532 Federal Register/Vol. 63, No. 228/Friday, November 27, 1998/Rules and Regulations and risk managem ent procedures are in place at section 20 subsidiaries. W hen a section 20 subsidiary serves as lead underw riter, it is responsible for performing adequate due diligence. In other instances, such as the dealing of an outstanding debt security, a section 20 subsidiary m ay rely on the due diligence perform ed by independent rating agencies. Due diligence efforts conducted by a section 20 subsidiary or an independent rating agency often include analyses of factors such as paym ent history, mortgage and security structure, borrow er’s income or property cash flow, credit enhancem ents, and seasoning. In m ost CMBS transactions, the underlying loans have dem onstrated their ability to perform over a period of time. As the underlying commercial real estate loans in a CMBS pool season, appraisals obtained at origination become increasingly less relevant to an investor’s decision to purchase the related CMBS because the market assum ptions upon w hich the appraisals were based m ay have become obsolete. Further, the public rating or due diligence th at m ust be obtained or conducted for CMBS provides investors w ith sufficient inform ation to assess the risks associated w ith the CMBS. A majority of the com m enters agreed w ith this assessm ent of the CMBS market. In response to the concerns expressed by one com m enter that exempting CMBS transactions from the appraisal regulation w ould pose u ndue or unacceptable risk to federally-insured depository institutions, the Board notes th at the proposed am endm ent relates solely to section 20 subsidiaries of bank holding com panies and w ould not affect the appraisal requirem ents applicable to any federally-insured depository institution. In addition, transactions betw een a federally-insured depository institution and an affiliated section 20 subsidiary w ould continue to be subject to applicable restrictions in section 23A and 23B of the Federal Reserve Act (12 U.S.C. 37k, 37k— At this time, the 1). Board is not considering any additional exem ptions from the appraisal regulation for other transactions related to the CMBS market. Further, since the agencies have uniform appraisal regulations, any proposal to exempt CMBS-related transactions for federallyinsured depository institutions w ould be addressed on an interagency basis. Regulatory Flexibility Act Analysis This am endm ent is not expected to have a significant economic im pact on a substantial num ber of small business entities w ithin the m eaning of the Regulatory Flexibility Act (5 U.S.C. 601 et seq.) because this am endm ent w ill only affect bank holding com panies that have section 20 subsidiaries, w hich generally are among the largest bank holding companies. Further, the am endm ent is not expected to impose any additional burdens on regulated institutions. Paperwork Reduction Act No collection of inform ation pursuant to section 3504(h) of the Paperwork Reduction Act (44 U.S.C. 3501 et seq.) is contained in this rulemaking. List of Subjects in 12 CFR Part 225 A dm inistrative practice and procedure, Banks, banking, Federal Reserve System, Holding companies, Reporting and recordkeeping requirem ents, Securities. For the reasons set forth in the preamble, the Board am ends 12 CFR part 225 as set forth below: PART 225— BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL (REGULATION Y) 1. The authority citation for part 225 continues to read as follows: Authority: 12 U.S.C. 1817(j)(13), 1818, 18280, 1831i, 1831p— 1843(c)(8), 1844(b), 1, 1972(1), 3106, 3108, 3310, 3 3 3 1 -3 3 5 1 , 3907, a n d 3909. 2. In Subpart G, § 225.63 is am ended by removing the word “or” at the end of paragraph (a)(ll), by redesignating paragraph (a)(12) as paragraph (a)(13), and by adding a new paragraph (a)(12) to read as follows: §2 2 5.6 3 Appraisals required; transactions requiring a State certified or licensed appraiser. (a) * * * (12) The transaction involves underw riting or dealing in mortgagebacked securities; or * * * * * By o rd er of th e B oard of G overnors o f th e Federal Reserve System . Dated: N ov em b er 2 0 ,1 9 9 8 . Robert deV. Frierson, Associate Secretary of the Board. [FR Doc. 9 8 -3 1 6 0 2 F iled 1 1 -2 5 -9 8 ; 8:45 am] BILLING CODE 6 2 10 -01 -P
@FedFRASER