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Federal R eserve Bank
OF DALLAS
R O B E R T D. M c T E E R , J R .
June 24, 1994
D A LLA S , TEXAS
75265-590 6
P R E S ID E N T
AND
C H IE F E X E C U T IV E
O F F IC E R
Notice 94-65
TO:
The Chief Executive Officer of each
member bank and others concerned in
the Eleventh Federal Reserve District
SUBJECT
Final Amendments to the
Real Estate Appraisal Requirements
DETAILS
The Board of Governors of the Federal Reserve System, along with
other regulatory agencies, issued final amendments to the real estate apprais
al requirements.
The amendments, which became effective June 7, 1994, will:
• increase to $250,000 the threshold level at or below which
appraisals are not required;
• expand and clarify the type of transactions that are exempt from
the appraisal requirement;
• narrow the type of exempt transactions for which evaluations are
required; and
• revise the requirements governing appraisal content and the use
of appraisals prepared by other financial services institutions.
ATTACHMENT
A copy of the agencies’ notice as it appears on pages 29482-503,
Vol. 59, No. 108, of the Federal Register dated June 7, 1994, is attached.
MORE INFORMATION
For more information, please contact Daniel Kirkland at (214)
922-6256. For additional copies of this Bank’s notice, please 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)
29482
Federal Register / Vol. 59, No. 108 / Tuesday, June 7, 1994 / Rules and Regulations
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the
Currency
12 CFR Part 34
[Docket No. 94-10]
RIN 1557-AB34
FEDERAL RESERVE SYSTEM
12 CFR Part 225
[Regulation Y; Docket No. R-0803J
RIN 7100-AB20
FEDERAL DEPOSIT INSURANCE
CORPORATION
12 CFR Part 323
RIN 3064-AB05
DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Parts 545,563, 564
[Docket No. 94-47]
RIN 1550-AA64
Real Estate Appraisals
AGENCIES: Office of the Comptroller of
the Currency, Treasury; Board of
Governors of the Federal Reserve
System; Federal Deposit Insurance
Corporation; and Office of Thrift
Supervision, Treasury.
ACTION: F in al rule.
SUMMARY: The Office of the Comptroller
of the Currency, the Board of Governors
of the Federal Reserve System, the
Federal Deposit Insurance Corporation,
and the Office of Thrift Supervision
(collectively the agencies) are amending
their regulations regarding appraisals of
real estate. This final rule is adopted
pursuant to Title XI of the Financial
Institutions Reform, Recovery, and
Enforcement Act of 1989.
The final rule increases to $250,000
the threshold at or below which
appraisals are not required pursuant to
Tide XI, expands and clarifies existing
exemptions to the Title XI appraisal
requirement, identifies additional
circumstances when appraisals are not
required under Title XI, and-specifies
when exempt transactions nevertheless
require appropriate evaluations. In
addition, the final rule amends existing
requirements governing appraisal
content and the use of appraisals
prepared by other financial services
institutions.
The agencies are adopting this final
rule to further federal financial and
public policy interests by reducing
regulatory burden, while requiring Title
XI appraisals when necessary to protect
the safety and soundness of financial
institutions or otherwise advance public
policy.
EFFECTIVE DATE: This final rule is
effective on June 7 ,1 99 4 .
seq., directs each Federal banking
agency to publish appraisal regulations
for federally related transactions within
its jurisdiction. The purpose of the
legislation is to protect federal financial
and public policy interests in real estate
related transactions by requiring that
real estate appraisals utilized in
connection with federally related
FOR FURTHER INFORMATION CONTACT:
transactions are performed in writing, in
accordance with uniform standards, and
Office o f the Comptroller o f the
by individuals whose competency has
Currency (OCC)
been demonstrated and whose
Thomas E. Watson, National Bank
professional conduct will be subject to
Examiner, Office of the Chief National effective supervision. See 12 U.S.C.
Bank Examiner, (202) 8 74-5170; or
3331.
Horace G. Sneed, Senior Attorney, or
Section 1121(4) of FIRREA, 12 U.S.C.
Stephen Freeland, Attorney, (202)
3350(4), defines a federally related
874—4460, Bank Operations and
transaction as a real estate-related
Assets Division; Office of the
financial transaction that is regulated or
Comptroller of the Currency, 250 E
engaged in by a federal financial
Street, SW , Washington, DC 20219.
institutions regulatory agency and
requires the services of an appraiser. A
Board o f Governors o f the Federal
real estate-related financial transaction
Reserve System (Board)
is defined as any transaction that
Roger T. Cole, Deputy Associate
involves:
Director, (202) 45 2-2618, Rhoger H
(i) The sale, lease, purchase,
Pugh, Assistant Director, (202) 7 2 8 investment in or exchange of real
5883, Stanley B. Rediger, Supervisory
property, including interests in
Financial Analyst (202) 45 2-2 6 2 9, or
property, or the financing thereof;
Virginia M. Gibbs, Supervisory
(ii) The refinancing of real property or
Financial Analyst, (202) 452-2521,
interests in real property; and
Division of Banking Supervision and
(iii) The use of real property or
Regulation; or Gregory A. Baer, Senior interests in real property as security for
Attorney (202) 4 52-3236, Legal
a loan or investment, including
Division; Board of Governors of the
mortgage-backed securities. See 12
Federal Reserve System, 20th Street
U.S.C. 3350(5) (FIRREA section
and Constitution Avenue, NW.,
1121(5)).
In their appraisal regulations, the
Washington, DC 20551.
agencies identify categories of real
Federal D eposit Insurance Corporation
estate-related financial transactions that
(FDIC)
do not require the services of an
Robert F. Miailovich, Associate Director, appraiser in order to protect federal
(202) 8 9 8-6918, James D. Leitner,
financial and public policy interests or
Examination Specialist, (202) 8 9 8 to satisfy principles of safe and sound
6790, Division of Supervision; or
banking. These real estate-related
Walter P. Doyle, Counsel, (202) 8 9 8 financial transactions are not federally
3682, Legal Division; Federal Deposit
related transactions under the statutory
Insurance Corporation, 550 17th
and regulatory definitions. Accordingly,
Street NW., Washington, DC 20429.
they are subject to neither Title XI of
FIRREA nor those provisions of the
Office o f Thrift Supervision (OTS)
agencies’ regulations governing
Robert Fishman, Senior Program
appraisals.
Manager. Credit Risk, Supervision
In December 1992, Congress
Policy, (202) 906-5672; Deirdre G.
confirmed that the agencies may set a
Kvartunas, Policy Analyst,
threshold level below which the
Supervision Policy, (202) 906-7933;
services of state certified or licensed
Ellen J. Sazzman, Counsel (Banking
appraisers are not required in
and Finance), Regulations and
connection with federally related
Legislation Division, Chief Counsel’s
transactions if the agencies determine in
Office, (202) 9 0 6-7133; Office of
writing that the threshold does not
Thrift Supervision, 1700 G Street
represent a threat to the safety and
NW., Washington, DC 20552.
soundness of financial institutions. See
Housing and Community Development
SUPPLEMENTARY INFORMATION:
Act of 1992, Public Law 1 02-550,
I. B a c k g ro u n d
section 954 (amending 12 U.S.C. 3341).
The agencies jointly published a
Title XI of the Financial Institutions
Reform, Recovery, and Enforcement Act proposed rule to amend their appraisal
regulations on June 4 ,1 9 9 3 . See 58 FR
of 1989 (FIRREA), 12 U.S.C. 3331 et
Federal Register / Vol. 59, No. 108 / Tuesday, June 7, 1994 / Rules and Regulations
31878. The agencies published a notice
of the availability of supplemental
information concerning the proposed
rule and invited further comments on
November 1 0 ,1 9 9 3 . See 58 FR 59688.
The agencies are issuing this joint
final rule under their authority to issue
rules to implement Title XI of FIRREA
and each agency’s authority to prescribe
rules and regulations to carry out its
responsibility to ensure that the
institutions under its supervision
conduct their activities in accordance
with safe and sound banking principles
This final rule is intended to protect
federal financial and public policy
interests and the safety and soundness
of financial institutions, while reducing
duplication, costs and regulatory
burden.
II. Comments on the Proposed Rule
A . Overview o f Comments
29483
proposed rule. In response to the June
4th Notice of Proposed Rulemaking, the
agencies received comment letters from
appraisers, bankers, and others as
shown in Table A. Comment letters
received in response to the November
10th Notice of Supplemental
Information were distributed as shown
in Table B.
Collectively, the agencies received
over 19,000 comment letters on the
T able A .— D is t r ib u t io n o f C o m m e n t s R e c e iv e d in R e s p o n s e t o J u n e 4 ,1 9 9 3 P r o p o s e d R ule
Letters from
appraisers
Agency
o c c ...................................................................................................................
Board ..........................................................................
FDIC....................................................................................................................
O T S .....................................................................................................................
Letters from bankers
1660 161 .............................
1608 259 .............................
1574 376 .............................
1298 40 (14 thrifts) .............
Letters from
others
168
276
149
134
Total
1989
2143
2099
1472
T a b le B — D is t r ib u t io n o f C o m m e n t s R e c e iv e d in R e s p o n s e t o N o v e m b e r 10, 199 3 N o t ic e o f S u p p l e m e n t a l
I n f o r m a t io n
Letters from
appraisers
Agency
OCC ......... ................................................. ........................................................
FDIC....................................................................................................................
O T S .....................................................................................................................
The agencies have reviewed and
considered all comments concerning the
proposed rule. The agencies discuss
general comments immediately below.
Responses to the agencies’ specific
requests for comment and comments
concerning specific amendments to the
appraisal regulation are discussed in the
section-by-section analysis.
B. General Com m ents on the Proposed
Rule
Regulated institutions generally
endorsed the proposed changes to the
appraisal regulations, though a small
number of savings associations, banks,
and other commenters opposed
changing the regulation. Appraisers
almost unanimously opposed changing
the threshold, and a large number of
appraisers opposed the business loan
exemption. However, appraisers
commented favorably on other parts of
the proposed rule.
A large number of appraisers
commented that the proposed changes
would lead to abuses that caused
savings associations to fail in the midto-late 1980s and that the changes
would violate the intent of Congress. In
the experience of the agencies, and in
the opinion of studies conducted on the
failures of the 1980s, abuses were
related to real estate acquisition Or
Letters from bankers
1878 659 .............................
1994 5 1 9 .............................
1818 1142...........................
1644 57 (22 thrifts) .............
development projects and larger loans.
The regulations issued today continue
to require appraisals for these
transactions. Moreover, the regulations
fully comply with the intent of Congress
by continuing to protect federal
financial and public policy interests in
real estate-related financial transactions
as well as the safety and soundness of
financial institutions.
Regulated institutions and appraisers
have over three years experience with
the appraisal regulations and have urged
changes in the regulations to improve
credit availability and reduce
duplication, costs, and regulatory
burden. Some commenters, focusing on
the proposed threshold, opposed
changing the regulations because they
believed that additional time was
needed to study the effect of the existing
regulations. Delaying the issuance of the
fined rule would deny regulated
institutions, appraisers, and borrowers
the benefits of these changes. To the
extent that subsequent events
demonstrate that additional changes are
needed, the agencies can further amend
the regulations.
One appraisal organization suggested
that several of the proposed exemptions
should be replaced with guidelines
regarding when to obtain Title XI
appraisals. Because regulated
Letters from
others
242
528
467
502
Total
2779
3041
3427
2203
institutions and appraisers can become
liable for substantial penalties for
violating the regulation, the agencies
believe that it benefits regulated
institutions, appraisers, and the public
for the agencies to identify categories of
exempt transactions in the regulation.
However, the agencies intend to provide
supplemental information about the
appraisal and evaluation practices of
regulated institutions in guidance.
Some commenters stated that they
were denied an opportunity to comment
on the supplemental information
identified in the November 10th notice
because the materials were available
only in Washington, DC, and the
comment period was 30 days. The
agencies believe that the public
procedures on the proposed
amendments to the appraisal regulations
fully complied with the requirements of
the Administrative Procedure Act and
accorded the public a full opportunity
to participate in the rulemaking.
The November 10th notice explained
that the supplemental materials were
available from each of the agencies. In
accordance with established procedures,
all agencies mailed copies of those
materials to any person requesting them,
as w ell as having the documents
available for review at each agency
<2£4£4
.Federal Register./ Vol. 39, No. JH8 / Taiesdey, Jane 7., 1994 / ■Rules.and Regulations
The-agencies also believe the^Orday
comment period was appropriate lor-the
second comment period on the
proposed amendments. T h e notice of
supplemental information.requested
conunerrt om naterialsthat dealt almost
exclusively with th e ‘appraisal
threshold. As-Shown in T a b le d above,
more ‘than 11 iOOO'comment letters •were
received in response to the November
10th notice.
III. Section-by-Section Analysis
§ __ _ .2
Definitions.
(d) Business'Loan
The agencies are-adopting the
proposed definition of “business loan”
as a-loan-or extension oif credit to any
•corporation, general or limited
partnership, business trust, joint
venture, pool, syndicate, sale
.proprietorship (including-an individual
engaged in farming), or other business
entity .T h e definition is used .in
connection with the exemption for
-business -loans of $1 million-or-less that
ace .not dependent on -the .sale of, -or
rental income'derived from, real estate
a s .the primaiy source of repayment.
Commenters suggested that the
agencies amend the definition ol
'business loan-to include loans to
individuals "for'business -purposes anti to
permit use of the exemption when
individuals le a seje a l estate to ajelated
business. "Loans to individuals are
included in the definition o f business
loan asloans to sole .proprietorships-and
other business entities. "This exemption
■does not apply to loans “to individuals
that are consumer or personal loans.
Therefore, the agencies do not believe
that it is necessary to amend the
definition.
(h) ReHl Estate or Realffiraparty
The (Beard >is adding a definition of
‘<reHl«estate” and “real propei$y” to
§ 2 2 5.6 2 U fite regulation. IheiBoard
proposed th is amendment to
incorporate the definition i>f seal estate
and realproperty employed b y th B other
agencies. That definition specifically
excludesm ineral nights, tim ber lights,
growing crops. water rights,arid sim ilar
interests.
Title
of FIRREA does not define
“real estate” or ‘‘realproperty” n o r does
the aontesct in which these -terms are
used suggest that the term s areintended
to have different technical-meanings.
See 5 5 *FR -27762 (July 5, J99Q).
T he Board used “realproperty” and
“real estate” interchangeably
throiyjhout its appraisal rule to mean
interests in an identified parcel ortract
of laird and improvements. However,
the Board did not intend these terms to
in ch id e .mineral-rights, tim ber .rights, or
growing crops when ih ey are considered
separately .from the parcel orlractxif
land. Valuation rff such interests
^generally requires th e servioes o f a
professional other than a real .estate
appraiser.
To clarify this distinction, the Board
has amended its regulation to define
“real property”-and “real-estate” lor
piuposes of the appraisal regulation as
anidentified parcel or'traat of land,
including improvements .easem ents,
rights of way, undivided or future
interests andsim ilar rights m a tract of
land, "but excluding minEral Tights,
timber rights, or growing crops.
■Fewoommenters-expressed an
■opinion on this proposed change. Those
few G o m m e n t e r s who opposed the
•definition stated that tim ber and
-growing crops .should ~nnt he excluded
from the definition of real estate in that
•the value rif su oh i terns is tied .to the
value of the :land. Gnmments opposing
th is definition .were generally irom
appraisers who perform farm and timber
appraisals.
In many states, minerals, timber, and
igrowing crops that have not been
■severed from the land are considered
interests in real estate or .real property.
Consequently, if mineral rights are
collateral for a loan in one of those
states, aquestion arises -whether the
institution m ust obtain a real estate
appraisal o f th ep a rcel nr tract-erf land
to which the.mineral rights are attached
but-in-which th e institution has no
interest.
TheiBoard's fin al -Tule<clarifies that
aregiilated institutions are n o t required to
obtain-appraisalsiofthe parcel of land to
which mineral rights, or similar
•severable interests in real -estate are
attach ed ,if5the transaction-only
mvo Ives the severable interest T tf f b e r
tb a n fh e p a rce le r tract'of land. W-here
mineral rights, tim ber lights,-or growing
crops, jm d th e associated parcel 'or tract
•tff tend, are the subject-ofa Teal estaterelated 'financial -transaction, th e
services ®Te licensed or certified
appraiser would be-required unless -tiie
transaction is'Otherwise exempt.
In addition, the contribution dT
relevant mineral rights,‘timber rights, or
growing .crops should be included when
appraising a parcel of land which
.possesses any of these features.
However, valuation of these interests
woifld not'be required if they are not
part o f the transaction or i f they axe,not
relevant to the analyses which Ih e
appraiser needs .toperform to arrive at
an estimate-sf-veQue Tor the parcel or
tract of land.
J ___ ..3(a) .Appraisals.requited
(1) Thredhdld
T h e agencies proposed an increase
fromS1Q0,000 to325D,D00 in the
threshold at or below which a Title'X l
appraisal is not required, and
specifically asked Gommenters whether
a$25£l,T)0D or some other threshold
would be appropriate, in addition, the
agencies requested information on lo ss
experience of depository institutions Tor
loans.greater than $250,000 and loans of
$250,DUO or less. On "November II),
1993, the agencies made available
supplemental information on the
proposed rule and extended the
comment period for 30 days in order to
allow commenters to consider and
■comment on the information. The
supplemental information related
primarily to the proposed increase in
the-threshold.
A majority of the commenters
-addressed the threshold issue. Almost
all of the commenters opposed to the
-increase were-apprai6ers, w hile almost
all o f -the>commenters in favor of the
increase were depository institutions.
"Most ol those opposed stated as the
'basis for their opposition that an
increase in the threshold would cause
substantial losses for depository
institutions, and thereby -forth e deposit
insurance funds. To support this view,
commenters generally cited the thrift
failures o l the ISBDs and asserted that
an-increase in the threshold would lead
to the same result.
A total o'f74 comment letters
provided data on lo ss experience. T h e
institutions providing the data .varied in
size, and included large regional multi’bartk holding com panies, as well as
small banks.'This data is discussed
below.
For the reasons set forth below, the
agencies have decided to raise the
threshold JErom.$100,000 to $250,0(00.
Such a n increase will 'benefit consumers
anil lpnHfirs-anri w ill not threaten .the
safety and soundness .of financial
institutions,,particularly as an
evaluation w ill he required for a ll loans
exempt amder th e threshold.
Benefits Jar Consumers and Lenders
o f an Increase In the Threshold. Many
commenters stated that an increase in
the threshold would bane'fit consumers
and lenders. Numerous barikand thrift
commenters pointed .to-the cost and
time neededin order to obtain an
appraisal, as an im pedim ent to lending.
The appraisal .was cited by-several
commenters a s thejnostim p ortant
Tactor .causing delay i n small .husiness
lend ing,and the cost.ofthe appraisal
was described as-high.respecially lo r
commercial-borrowers. Commenters
Federal Register / Vol. 59, No; 108 V Tuesday, June 7, 1994 / Rules and Regulatidns
reported that appraisal fees for
commercial transactions between
$100,000 and $250,000 could cost 5
percent of the loan amount to the
borrower. Banks and thrifts also
commented that increasing the
threshold would reduce regulatory
burden associated with making loans
below $250,000. Many appraisers,
however, commented that appraisal
costs have remained relatively steady.
Many appraisers also stated that
appraisals by certified or licensed
appraisers are necessary to protect the
consumer. The agencies believe that this
assertion mischaracterizes the role of
the institution’s determination of
collateral value in a typical consumer
transaction. The regulated institution
obtains the appraisal or evaluation as
part of its loan underwriting process in
order to make certain that it is
adequately secured. Any appraisal
ordered by a financial institution is not
designed, and generally comes too late,
to assist the consumer in negotiating a
contract price. In a purchase of real
estate, the purchase offer is generally
made before financing is sought and the
financial institution orders an appraisal.
Therefore, the appraisal represents an
after-the-fact cost. Further, even when a
Title XI appraisal is not required,
nothing prevents a consumer from
independently obtaining an appraisal by
a licensed or certified appraiser for the
consumer’s own use in the negotiating
process. Moreover, the agencies’ rules
require an institution to obtain an
appropriate evaluation of the real
property collateral for transactions
below the threshold, and that evaluation
would be available to the consumer.
The agencies believe that many of the
concerns about consumer protection are
addressed under statutory and
regulatory programs other than Title XI
of FIRREA, which focuses on bank and
thrift safety and soundness.
The Real Estate Settlement Procedures
Act (RESPA) establishes procedures for
lenders to disclose to consumers the
charges for a variety of settlement
services, including appraisals and
evaluations. To comply with the letter
and intent of the Board’s Regulation B
(implementing the Equal Credit
Opportunity Act), regulated institutions
must either disclose to the borrower the
right to receive a copy of the documents
the lender uses to value the collateral in
an application for a loan secured by a
dwelling, regardless of whether the
documents constitute a Title XI
appraisal or evaluation, or, as a matter
of course provide the borrower with the
appraisal or evaluation. Thus, to the
extent that a borrower benefits from
knowing the value the lender places on
the property the borrower has
contracted to purchase or pledged as
collateral, the borrower should be able
to benefit from that knowledge whether
it is in the form of a Title XI appraisal
or an evaluation.
Furthermore, although such a
disclosure is not required by RESPA,
Regulation B, or Title XI, the agencies
believe that a regulated institution
should advise consumers whether the
institution intends to have a licensed or
certified appraiser prepare the estimate
of value. This should be done early
enough in the loan application process
to allow the consumer to make an
informed decision that the intended
method of estimating the real estate’s
value meets his or her needs.
Effects on Safety and Soundness o f
Financial Institutions. The agencies
have concluded that a $250,000
threshold would not threaten the safety
and soundness of financial institutions.
Benefits to Safety and Soundness. The
agencies believe that the increase in the
threshold will have affirmative benefits
for safety and soundness. A decrease in
appraisal requirements should relieve
regulatory burden for banks and thrifts
and thereby improve their
competitiveness with non-regulated
lenders. Appraisal costs represent a
significant expense for certain small
loans, making such lending less
attractive to a potential borrower or less
profitable for the lender. Numerous
comments from lenders supported this
conclusion. The problem is particularly
troubling for lenders in small towns,
who must pay a premium for a licensed
or certified appraiser to visit the town.
A GAO survey of bankers in connection
with a study of small business lending
revealed that the minimum cost to
perform the necessary appraisal on
commercial real estate property used as
collateral for small business loans was
approximately $3,000.' See GAO Report
G G D -93-121, Bank Regulation:
Regulatory Impediments to Small
Business Lending Should Be Removed
(September. 1993).
Experience with the $ 100,000
Threshold. The Board has had a.
$100,000 threshold in place since
August 1990, and the other agencies
have had a $100,000 threshold since
March or April 1992. The experience of
the agencies has demonstrated that the
$100,000 threshold has posed no risk to
safety and soundness.
A survey by each of the agencies of its
senior examination staff indicates that
over a period of many years, with a few
1 The GAO noted that a survey performed by the
American Bankers Association reflected a lower
average cost.
29485
possible exceptions,2 no bank or thrift
has failed or suffered significant losses
as a result of appraisal problems with
loans under $100,000 or even up to
$250,000. Each of the regional
representatives of the Board, the FDIC,
and the OCC supported adoption of the
$250,000 threshold as consistent with
safety and soundness. Representatives
Of the OTS suggested that the threshold
should only apply to healthier thrifts.
As described below, this concern has
been addressed by the agencies in the
final regulation.
The $250,000 threshold was also
supported by the Conference of State
Bank Supervisors (CSBS), the
professional association for state
officials who supervise and regulate
state-chartered commercial and savings
banks. The CSBS concluded that the
increased threshold would reduce
unnecessary costs and would not
represent a threat to the safety and
soundness of financial institutions.
Numerous bank and thrift
commenters also reported that their
experience with the $100,000 threshold
had been good. Moreover, commenters
opposed to the increased threshold did
not identify institutions that had failed
or suffered significant losses because of
the existence of the $100,000 threshold.
The agencies believe that low loss
experience with a $100,000 threshold
provides justification for an increase in
the threshold to $250,000.
Data Indicate Sim ilarities Between the
$100,000 Threshold and $250,000
Threshold. A substantial body of
evidence provides strong reasons to
believe that exempting loans between
$100,000 and $250,000 from the Title X)
appraisal requirement will not present
materially greater risk than the prior
exemption for loans under $100,000.
Data from the commercial bank
Consolidated Reports of Condition and
Income (Call Reports) for year-end 1992
show that approximately 53 percent of
the dollar volume of all real estatesecured loans o f all sizes in the
commercial banking industry are loans
secured by l-to-4 family residential
2 The'Ceritral Region of the OTS was the only
OTS respondent to identify failures attributable to
inadequate appraisal practices. The Central Region
identified fewer than six failures over the previous
twelve years where appraisal issues for loans under
$250,000 were a major contributing factor to a
thrift’s failure. The Central Region noted that in
those failures w here inadequate appraisal practices
were a problem, other areas of loan underwriting
were usually found to be equally deficient.
One OCC survey respondent reported that one
institution h ad failed because of residential and
com mercial loans between $100,000 and $500,000.
The respondent noted that the problems occurred
before 1987, when the OCC issued guidelines that
would have prevented the institution's real estate
valuation problems.
25*486
iFederad Register f Vol. ®9, !No. HOB / Tuesday, fane 7, 1999 / 'Rules * n d RegttlsfSans
exempt transactions w hen ftd e e s not
prropfirtrRS. ® t f t a from the 'E k r if t
of non-fasm non-aesidential real-estate
Emancial ^tepcate JT-RB5) Jor'yeai-and
obtain «ppraiisak.
loans, 'which basrcelly•constitute
In adaition/there.is-evidencefeat -die
1 992 s h o w ithat i t h e . m m r b c r i s 177
business loans «Boured!)ty Teal «stste.
loss rates on ’loansbelow the $250(000
percaaritsfnttbe thrift industry.
They are.ulso required to report th e
threshold w ill fee Slow. For1 9 9 2 , the
Data onfM nsraesarerratjrepflrtedlfar
number and'dollar ameiirtt of^ll
commercial bank loss ;rate f o r farm -leans
residential inane am the C all'fep ort or
agricultural loans.
was .23 perQemt ^approximately tbe
TRR. ittowever, information S a m th e
The data from th e ^une 1993 Call
same loss rate -as for 1-to^4 fam ily leans)
National AHBaaatinn xcf {Realtors, -the
Reports show th a t 12 percent-of the
These lo ss rates on Tesidential and farm
GensiK & hbhu, and fe e Etepartmentnf
dollar volume of real estate-secured
loans-are significantly lower than fee
Mousing BMfl Urban-Deverfapmernft(FflJB) business lean s was below th e $1001000
loss rates fo rth ety p es of real-estate
indicate that approximately 29 -percent
threshold. Also by ddfktr‘volume,-orily
loans feat ere m uch less-likely'to M l
of th e dollar 'volume of M o -4 family real 11 percent ofou ts tending real-estatebelow d ie $2f5O‘000thpeshoH-—
estate ^pans to purchase new homes,
secured business loans 'fellbetw een
construction loans :(3.54% lo ss rate for
and 33 percent of the dollar vOlume-Of
S 100,000 and $250;000. ‘T erth rifts, fee
corrrmeraalbanks) an d m u lti Family
loansto finance fhepurcbase-of-exigting TFRs'show'fhat 10 percent-of‘the dollar
loans !(1 ,‘68% lo ss rete-for-commercial
homes, fellbetow'-the prior'$100,000
v o lu m eo fell Teal-estdte secured
threshold. Approximately 56 percent of
businessloans was‘below $100,000, and banks). T.oss rates farnon-farm nonresidential real estate loans at
the dollar volume for new M e 4 family
9 percent between $100*000 and
commercial -banks vwere 1.55 percent,
homes and 49 percent df th e dollar
$250,000.
higher -thari residential or farm'Joans,
volume tfor'existing homes feTl-'between
These “findings are consistent w ith
but stlll belew fee loss rates
SlO0,OOOend$Z5G,00O. In-sum, 85
data compiled in-the 1989 National
experienced fo r loans for construction
percent o fth e dollar volume-Of
Survey df Sm all'Business Finances,
or multffamily housing.
mortgages financing new hom es and ‘82
which -surveyed firm s with few erthan
Finally, in additionUo'fee relatively
percent o f fe e volume of mortgages
500 employees. 'See National Survey o f
lower-risk
o f th e portfolio ofreel estate
financing’purchases of existing :h ome s
'Small Business “fin an ces (1989)
related loansbetw een $JlOO,O0O and
will fall below the $250;000 threshold.
(cosponsored b y th e Federal 'Reserve
$ 2 50 ;8 00 ,th e fact remains feat the
Thus, increasing the threshold from
Board -and Sm all Business
dollar amount of eadh credit is relatrvdly
$100,'BBO to $250,000 is likely to more
Administration). A ccordingtothat
■small, in the experience Of fee agencies,
than double-the amount of lending for
survey, o f the 'commercial mortgages to
banks and -thri fts general ly do not fail
l-to-4 family residential real-estate loans small’busm esseshy depositoiy
because o frea l estate-related financial
exempt 'from fh e'T itle XI appraisal
institutions, 6 percent-ofthe dollar
transactrons under $250,000. It is
requirement. Inasmuch as a sdhd
volume-ofth ese loans was'in loans o f
generally large (construction and
•majorityoftotal real estate lending is
less th an $ 1 0 0 ;000, and 12 percent was
development loans that>hafve created
composed of l-to-4 fam ily'loans, fee
in loans betw een ‘$1 (JO;0OO and
•safety .and'soundness problems. F or
agencies'believe that l-to-4 family loans $250,000.
example, anuCh’.of'theJferift losses of fe e
wiH h e fb e largest block ofkrarrs
A snoted in th e regional exam iner
1980s were caused f l o s s e s in large,
exempted by die increase in "the
surveys,the‘$lO0,'0!D0 threshold has not
s^culatiw e seal-estate de-vellopment
threShcftd.
restflted in <6ignfficartt losses .even
projeate, sudh-as construction of Offices,
The hrcrease in 1-to-S famfly
thoughthat threshold captures 1 2
condominiums, and ^apartments. See,
residential real estate loans exempted by percent Ofthe dollaT volume o f small
e.g., GACDReport AFMD'85M52, Thrift
the $25O;O0O threshold w ill -not Uffect
business loans. 'The agencies do not
ftdhrresr CoStly Failures Resulted -from
safety and soundness, as these loans are believe th at a n increase in f e e threshold
Regulatory Violations -and (Unsafe
traditionally the safest in a lending
drat exempts another 1 1 percent of
PractidBS. rSudh projects generally
institution's portfolio. In 1992, th e net
business loans will-significantly
involve loan* in much greater amounts
loan -charge-oTfrate 3foT a fl uammercial
increase ■such ‘losses.
than $25O;O0O. The-experrence df the
bank 'loans secured by 1 -to-4 'family real
Call Report data-also show that 63
agendies-Gontimies to be fea t larger
estate w as 0:23 percent; lorthrifts. the
percent o fth e dollar volume d f
development and construction-loans are
net charge-off rate "for loans secured by
agricultural Teal estate loan s ’fell “below
most likely to-ca use-significant losses.
l-to-4'fam flyTesidentidl real estate was
th e $100,00.0 threshold, and 'feat J 5
Although many commentere
0.22percent. "Low loss rates for l-to -4
percent fell betw een $100',0D0 and
suggested th at .raising fe e threshold
fam ilyresidentialxeal estate loans
$250,000. F a rlh rifts .T F R data show
woiild result in lo sses‘shrtflar'to those
predate enactment df Title X I; for
that ¥ 6 -percent uftkrm loans*fellsbdlow
of fee-ferift failures dfthe T980s, they
examjfte, in l9 9 1 , when th e great
$100,000, and 36 .percent between
did net-offer'analysistD-support ftiose
majority d fl-to -4 fam ily loans had been
$100,000 a n d $Z ?0 ,000. Farm 'loans
statements. T h e agencies d o n o t hdlieve
originated prior to .implementation of
represented approximately one-half Of
that inadequate appraisals on loans
T itle’X liin August 1 9 9 0 ,th e cha^geToff
one percent (."58;%') df non-residential
under $25O;000,w ereasign ifican t cause
rate for 4 -to-4 fam ily Loans was-.fl.20
m ortgageshehdhylhiifts.'Thus, in the
tffth ose failures.
percent ifor-commercial hanks end 0.11
area dflarm loans, only a-relatively
-AdditiorralProtectiems. 'Significant
■percent'for thrifts. ’S ee TOfC'Quarterly
smaill am ount of addifional loan s w ill "be •protections-exist soitbat loans under
Bankiqg'Profile .(4th'Quarter 1991) and
exeniptedhy the raised threshold.
5 2 9 0 iBSO'wll not-create a-sefetym d
Thrift fin a n c ia l .Reports»(19934.
soundness prdblem once fe e ‘$23Q,’00C
Although the increase in the
JJeginningiJunae flfl, 1993, com m ercial
threshold w illincrease the dollar
threshdlfl is in place.
banks end'ferffts'areTequired to report
First, eacii agency-wfll, during each
Volume o f eK&n^ptlransaction.s, fhe
armuddyfhe num ber and-doTter amount agencies "believe that fhe quality -dFloans required ifull-^cope .oin site examiHdfion,
analyzethepruderroe Of‘each
and lending practices o f banks and
3 Thenfit>iean.eha«gB-Dffratejfi.d<rtHOTlinadby
institution'll aredit 'underwriting
taki^^g.^be^^iaU»^aInount:afjgIo•8:lo»•es,»ubt»»^tiIJg thrifts w illn o t change for these
practices, including 'appraisal 'and
transactions. Moreover, ad Ansiituiiai?
the amount leaaw j^ndriiaglingitbe^Multiby
evahiBtion .practices, h s epp>rcpri8te to
the average of outstanding loans.
must obtain evaluations for these
Federal Register / Vol. 59, No. 108 / Tuesday, June 7, 1994 / Rules and Regulations
the institution’s size and nature o f its
real estate-related activities. If an
institution is doing a poor job o f
evaluating real estate for transactions
under $250,000, then th e appropriate
agency may order th e institution to
obtain appraisals for certain loans or for
all loans above a certain amount that are
not subject to another exemption.4
Second,, even though a hank or thrift
w ill not generally be required to obtain
a Title XT appraisal for real estatesecured loans under $250,000, the
institution must determine the value of
the real estate before making the loan.
Under the appraisal regulations, banks
and thrifts must support any transaction
below th e threshold with an evaluation
that is consistent with the agencies’
guidelines. Evaluations w ill be
performed by persons who are capable
of rendering an appropriate estimate of
value of real estate as a result of their
real estate-related experience or
training.
As several commenters noted, a
$250,000 threshold will have its greatest
effect in smaller communities where
property values are lower. However, as
many community bank commenters
pointed out, local lenders in small
communities tend K>b e extremely
knowledgeable of property values. Also,
collateral for loans of th is size do not
typically represent complex problems of
analysis or valuation.
Third, a $250,000 threshold does not
prevent the use of appraisals when
needed. Banks and thrifts may obtain
appraisals prepared by licensed or
certified appraisers whenever the
institutions believe it is prudent, and
customer may independently obtain
such appraisals. If, as some commenters
contend, history demonstrates that such
appraisals are important to the decision
to lend and the failure to obtain such an
appraisal w ill lead to higher loss rates,
then banks and thrifts would
presumably have a strong incentive to
use appraisals. As several commenters
noted, institutions w ill obtain appraisals
when their underwriting criteria
warrant one, regardless of whether
regulations require it.
Fourth, in many cases involving
residential real estate, banks and thrifts
w ill be required to obtain the equivalent
of a Title XI appraisal in order to make
the loan eligible for sale in the
secondary market. According to HUD
data, in 1992, secondary mortgage
market purchasers, such as the Federal
National Mortgage Association (Fannie
Mae) and the Federal Home Loan
Mortgage Corporation (Freddie Mac)r
purchased approximately 63 percent of
a ll l-to-4 family mortgages originated in
the United States, fa addition to the: 63
percent that were purchased by major
secondary mortgage market entities,
other loans were originated so as to be
eligible for sale to such entities. The
agencies have concluded that the
appraisal requirements of these
government sponsored agencies should
protect federal financial and public
policy interests in the loans that are
eligible to be purchased by them. The
agencies also believe that compliance
with these appraisal requirements w ill
protect the safety and soundness of
regulated financial institutions.
Data Subm itted by Commenters. The
notice of proposed rulemaking asked
commenters to submit loan loss data for
different categories of real estatesecured loans above and below
$250,000. Many depository institution
commenters noted that they do not
maintain loss data by loan size and that
this information is not reasonably
accessible. Only a small number of
depository institutions submitted such
data. The agencies do not believe that
this response is sufficiently large to base
any conclusions about industry-wide
conditions. Nonetheless, the agencies
note that, the information provided by
commenters is consistent with the low
loss rates for real estate lending
indicated by other sources. The
responses that the agencies received are
summarized in the following table.
Outstanding
principal
amount of
loans1
(12/31/921
Number of
loans
Loss. on.
loansT (anLoss r«ue3
rijat net
, (calculated)
charge(percent)
offs)2
(12/31/92)
Reaf estate-secured loans
Size of loans
Loans seem ed by t-to-4 family residen
tial real estate.
Loans greater than $250,000 .................
7,151
3,169,918
4',.129
■ Loans o* $250,000 or less .....................
Loans greater than $250,000 ..... ...........
524,137
25,344
22,240,821
28,315,961
23,773
372,706
67,469
5,131,866
Loans secured by commercial seal es
tate.
Loans of $250,000 or less
29487
38,75t !
an
.TT
T.32
0.72
1 Dollars rounded to thousands.
2 Annual net charge-offs are determined by taking the dollar amount ol gross fosses and subtracting the amount recovered
3 The agencies have calculated the loss «ate for each of the categories of real estate-secured loans about which the agencies requested date
by dividing total annual net charge-offs by the total outstanding pnnapaf balance.
A defitmrraf Com m ents err the
$250,000 ThreshoM —OMB Study.
Several commenters opposing an
increase in the threshold pointed to an
August 1992 study by th e O ffice of
Management and Budget (OMB} entit led
Report to Congress: De Minimis Levels
for Commercial Real Estate Appraisals.
The GM B study did not oppose an
increase in th e threshold level but
instead stated* "O M B does not
4 As. imt»d!beinw,. t&e agendas a m wpun* an
appraisal far ktaua betw eaa ITOOUKH)*nii S2Sft£00>
(not o th«rw uenit4ec£ti*aii exemption) whan an
in a tita ta B is in Oruthiad aH K fi& w e » i the*
recommend—at this time—a de- m in im is
level higher than $100,000s . . ,’*OM B
study a tL
T h e agencies betieve that the m ajor
concerns identified by the OMB m
urging delay have beem adntressed with
the passage of tim e. M ost im portantly,
each of th e agencies now has an
additional year's experience w ith th e
$100,000 threshold. Furthermore, OM B
noted that FIRREA‘r appraisal
troubled tr a d itio n is aitritastable So m d a n w itiiif
problems in th e iaetitutian'e n a l estate Wan
portfolio.
requirements had not been implemented
in all states, but such implementation:
has now occurred.
Rulemaking Process. Several
commenters stated that th e agencies had
failed to justify increasing the threshold
from $ 100,000 to $250,000 because the
agencies had not produced a definitive
study showing that doing, so would not
increase loss rates-
29488
Federal Register / Vol. 59, No. 108 / Tuesday, June 7, 1994 / Rules and Regulations
Congress granted the agencies explicit
authority to establish a threshold
consistent with safety and soundness.
The delegation of authority was broad,
and no requirement for quantitative
analysis was included. Nor is it
reasonably feasible for the agencies to
conduct a definitive quantitative
analysis that isolates the effect of
obtaining Title XI appraisals on
institutions’ losses on real estatesecured loans given the many variables,
including changing market conditions
and varying loan underwriting
practices, that may affect institutions’
ultimate loss experience. For the same
reason, the agencies did not conduct a
random sampling of the experience of
financial institutions, as suggested by
one commenter. This does not mean,
however, that the final rule fails to rely
on objective data. Moreover, that data
was analyzed in light of the agencies’
experience and expertise.
As part of this rulemaking, the
agencies reviewed the data the agencies
currently collect from financial
institutions and sought out data that
would enable the agencies to analyze
the effect of the threshold on regulated
institutions. Consistent with statutory
requirements, the agencies have
carefully considered the effect o f raising
the threshold and determined that a
$250,000 threshold level does not
represent a threat to the safety and
soundness of financial institutions
based on the agencies’ judgment,
expertise, and experience. In making
this determination, the agencies have, as
described above, analyzed the available
data, the comments received during the
rulemaking, and relevant work of other
governmental agencies.
Appraiser Employment. Many
commenters from the appraisal industry
objected to the proposed increase in the
threshold on the grounds that it would
decrease their business and employment
in the appraisal industry.
In the event that an appraisal is not
required because the transaction falls
below $250,000, the appraisal regulation
nonetheless requires that an evaluation
of the property be conducted. The
agencies’ appraisal rules do not impede
licensed and certified appraisers from
performing these evaluations.
GAO Study. Several commenters
suggested that the agencies delay action
on any rulemaking pending completion
of General Accounting Office (GAO)
studies of the threshold scheduled for
completion in April 1994 and October
1995. Congress delegated authority to
the agencies to establish a threshold in
the same legislation that directed the
GAO to conduct two studies of the
appraisal threshold. Congress clearly
did not require the agencies to withhold
action on the threshold pending
completion of the GAO studies; nor did
it make agency action contingent on the
outcome of the GAO studies or any
other studies. Also, in the Interagency
Policy Statement on Credit Availability
issued March 1 0 ,1 9 9 3 , the agencies
identified a need to reexamine their
existing appraisal rules to make certain
that thresholds below which formal
appraisals are not needed are
reasonable. Therefore, the agencies
believe that it is appropriate to proceed
with the rulemaking. The agencies are
cooperating with the GAO by providing
information that it may use in preparing
its studies.
Private Mortgage Insurance Industry
Experience. A trade association
representing the private mortgage
insurance industry opposed increasing
the threshold level to $250,000, citing
substantial losses on loans under
$100,000. However, it also noted that for
loans originated in 1984, loans above
$250,000 had a relative claim rate more
than 50 percent higher than the claim
rate for loans originated under $100,000.
Information provided by this
commenter also showed that the relative
claim rates on loans below $100,000 and
loans between $100,000 and $250,000
were close for most years, w hile the
relative claim rate for loans above
$250,000 exceeded the claim rates for
loans below $250,000 in all years except
one. The commenter did not provide
actual claim rates nor dollar amounts of
claims. Nor did the commenter disclose
the average loan-to-value ratios for those
mortgages, a factor that could affect the
loss experience.
Although the trade association stated
its belief that a significant amount of the
claims experienced by its members were
related to inadequate appraisals, bank
and thrift commenters stated that losses
on foreclosed properties were more
directly related to deterioration in the
local real estate market, damage to the
property, or actions or inaction by the
borrower.
A pplication o f $100,000 Threshold to
Certain Troubled Institutions. As
described in more detail below, the
agencies are adopting substantially as
proposed a separate amendment stating
that each agency continues to reserve
the right ta require a regulated
institution to obtain a Title XI appraisal
whenever the agency believes that an
appraisal is necessary to address safety
and soundness concerns. This authority
may involve the agency requiring an
institution to obtain an appraisal for a
particular extension of credit or an
entire group of credits.
Whether an institution w ill be
required, pursuant to this provision or
existing safety and soundness authority,
to obtain an individual appraisal or
group of appraisals may depend on the
condition of that institution. If an
institution’s troubled condition is
attributable to real estate loan
underwriting problems, then the
appropriate agency may require
appraisals for all new real estate-related
transactions of more than $100,000 that
are not subject to an exemption.
Since thrift industry assets are
concentrated in real estate loans, OTS
believes that problem thrifts or thrifts in
troubled condition5 generally w ill have
real estate-related asset quality
problems. As a matter of policy, OTS
intends to require thrifts in troubled
condition to adhere to a $100,000
threshold.
Reassessm ent o f Threshold. Finally,
just as the agencies have reviewed their
experience with the $100,000 threshold
in determining whether a higher (or
lower) threshold was appropriate, so too
will the agencies review their
experience with the $250,000 threshold.
If the agencies should determine that
the increased threshold is causing safety
and soundness problems, then the
agencies w ill reassess that threshold.
(2) The “Abundance of Caution”
Exemption
The agencies are amending their
regulations to clarify and expand the
scope of the exemption for real estate
liens taken in an “abundance of
caution.” Under the amended rule,
regulated institutions w ill be able to
apply the abundance of caution
exemption to a broader range of
transactions in w hich real estate is taken
as additional collateral for an extension
of credit that is w ell supported by
income or other collateral of the
borrower.
Prior to adoption of this amendment,
the abundance of caution exemption
was available only for transactions in
which a lien on real estate had been
taken as collateral solely through an
abundance of caution and where the
terms of the transaction as a
consequence had not been made more
5 A “ problem” association is defined as an
association that: (1) Has a com posite MACRO rating
of 4 or 5; (2) is undercapitalized under prom pt
corrective action standards; (3) is subject to a
capital directive or a cease and desist order, a
consent order, or a formal w ritten agreement,
relating to the safety and soundness or financial
viability of the savings association, unless
otherwise informed in writing by the OTS; or (4)
has been notified in writing by the OTS that is has
been designated a problem association or an
association in troubled condition. (See Regulatory
Bulletin 27a. Executive Compensation.)
Federal Register / V o l..5 9 , No* 1 0 8 / Tu esd ay, Ju n e 7, 1 9 9 4 / R u le s and R egulations
favorable than they would have been in
the absence of a lien. In the agencies'
experience, however, this standard was
being interpreted too narrowly. As a
result, regulated institutions obtained
appraisals even though they were
unnecessary to protect federal fm a n ria l
and public policy interests in, the
transaction or hank and thrift safety and
soundness. Further, a transaction would
not qualify for the exemption if the
regulated institution, made the terms
more favorable to the borrower because
of the real estate collateral. Therefore,
bankers believed they were unable to
use this exemption when common
business practices would call for a
lower interest rate on a secured loaa
than an unsecured loan.
To qualify for the amended
exemption, the regulated institution's
decision to enter into the transaction
must be well supported by the
borrower’s income or collateral other
than real estate. The following examples
from the proposed rule help to explain
how this standard is applied.
too narrowly interpreted and supported the
proposal to extend the scope o fih e
exem ption.
O ther appraisers com m ented th at the
agencies should require an appraisal, lim ited
scope appraisal, o r evaluation any tone a
regulated institution takes real1estate as
collateral Some regulated institutions noted
that the prior ru le caused them to forgo liens
on real estate collateral in order to avo id the
expense of an appraisal, thus potentially
increasing their exposure unnecessarily.
The agencies are not requiring appraisals
for these transactions because an estim ate of
the real estate collateral’s value generally
w ould not assist the regulated in stitu tion to
m ake its lending decision. Therefore, am
appraisal generally w ould not further the
purposes o f Title XI of FIRREA u®r
significantly im prove the safety and
soundness of financial institutions.
(3) Loans Not Secured by Real Estate
The agencies are adopting a uniform
exemption for transactions that are not
secured by real estate. The exemption
makes clear that a regulated institution
is not required to obtain a Title XI real
estate appraisal in connection with a
loan used to acquire or invest in real
E xam ple J : A business w ith an established1
estate if the institution does not take a
cash Sow leaks a loan from a regulated
security interest in real estate.
institution to purchase an adjacent property
The prior appraisal regulations o f the
for expansion. As a common, business
OCC, FDIC and OTS exempted these
practice, the institutio n takes a Lien against
transactions, and the amendment does
real estate w henever available far greater
comfort. H ow ever, the in stitu tion ’s analysis
not result in any substantive change in
determ ines th a t the current incom e from the
regulatory requirements for these
business and personal property available as
agencies. The amendment elim inates
collateral support the decision to extend
minoT differences between the text of
credit w ithout knowing the real estate's
the rules adopted by the OCC and OTS
m arket value. During loan negotiations, the
institution offers to make th e loan on slightly and the text o f th e FDiC’s rule. Prior to
adoption o f the amendment, the Board’s
better term s for the borrower if it receives a
appraisal regulation did not specifically
lien on real estate. T he borrower accepts the
offer and provides the real estate as
exempt these transactions.
additional collateral.
Although a few appraisers stated that
The regulated institution, m ay reasonably
Title X I appraisals should be obtained
conclude that th e lien on d ie real estate was
for these transactions, other
taken in an abundance o f caution because the
commenters, including appraisers,
current income front th e business and
supported this exemption. Several
personal property taken as collateral support
commenters stated that Title XI was
the decision to extend c re d it Therefore; no
never intended to reach transactions
appraisal w ould be required.
that were not secured by real estate.
Exam ple 2: The ow ner of a sh o p seeks a
term loan from a regulated in stitu tion for
In transactions covered by this
m odernization of its facilities. The institution exemption, the value of the real estate
determ ines that other sources o f repaym ent
has no direct effect on th s regulated
and collateral do not sufficiently su pport the
institution’s decision to extend credit
decision to extend credit w ithout taking a
because the institution has no security
lien on th e real estate and know ing the real
interest in the real estate. The agencies
estate's market value. Therefore, in o rd e r to
conclude that federal financial and
extend credit to th e borrow er prudently, die
public policy interests would not be
institution needs, an appraisal.
T he regulated institution sho uld conclude
served fay requiring leaders and
that the real estate lien has not b een taken
borrowers to incur the cost o f obtaining
in an abundance o f caution because th e other Title XI appraisals in connection with
sources of repaym ent and collateral do not
these transactions.
support the decision to-extend credit w ithout
know ing the real estate’s m arket vakw. T his
transaction w ould not qualify for the
abundance of caution o ia n p tio n .
Regulated institutions generally su p p o rted
the proposed am endm ent. Some com m entew
representing appraisers agreed that die
abundance of caution exem ption h a d been
(4) Liens for Purposes O ther Than the
Real Estate’s Value
The agencies are adopting a new
exemption for transactions in which a
regulated institution takes a lien on real
estate far a purpose other than the value
29469
of th e real estate. This amendment w ill
permit regulated institutions to take
liens against real estate to protect rights
to, or control cnrer, collateral other than
the real estate without obtaining an
appraisal.
Regulated institutions frequently take
real estate liens to protect legal rights to
other collateral and not because of the
value of the real estate as an individual
asset. For example, in lending
associated with logging operations, a
regulated institution typically takes a
lien against the real estate upon which
the timber stands to ensure its access to
the timber in the event of default.
Sim ilarly, where the collateral for a loan
is a business or manufacturing facility,
a regulated institution may take a lien
against the land and improvements in
order to be able to sell the entire
business or facility as a going concern
if the borrower defaults.
A Title X I appraisal contains an
opinion of the market value of real
estate. When the market vahie of the
real estate as an individual asset is not
needed to support the regulated
institution’s decision to lend, no
purpose is served by requiring the
institution to obtain a Title XI appraisal.
Commenters generally favored
adopting an exemption addressing these
circumstances, agreeing that Title XI
appraisals did not enhance the safety
and soundness of these transactions
because the lenders were basing their
decision to extend credit on the vahie of
collateral other than real estate.
Som e commenters suggested that this
exemption could be combined with the
abundance of caution exemption.
Although there are situations in which
the two exemptions overlap, the
agencies believe that both exemptions
are necessary because there w ill be
transactions that qualify for one
exemption, but not the other.
(5) Real Estate-Secured Business Loans
of $1 M illion o r Less
The agencies are adopting a new
exemption for business loans with a
value of $1 m illion or less where the
sale of, or rental income derived from,
real estate is not th e primary source of
repayment. T he agencies also are
adopting the proposed definition of
"business loan’' as a loan or extension
of credit to any corporation, general or
limited partnership, business trust, joint
venture, pool, syndicate, sole
proprietorship (including an individual
engaged in farming), or other business
entity. T h is provision allows a regulated
institution to take real estate as security
in connection with a loan to a small- or
medium-sized husiness w hen the
primary source of repayment for the
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Federal Register / Vol. 59, No. 108 / Tuesday, June 7, 1994 / Rules and Regulations
loan does not depend on sale of, or
rental income derived from, real estate.
The final rule differs in two respects
from the proposed rule. First, the
exemption is available for business
loans of $1 m illion or less. The
proposed rule would have exempted
business loans less than $1 million. The
change was adopted to reduce confusion
by making this provision consistent
with the way other limits are treated in
the rule. The change affects the scope of
the exemption very slightly.
Second, under the final rule, the
exemption is available for business
loans that do not depend on real estate
sales and rental income as the primary
source of repayment for the loan. The
proposed rule would have exempted
business loans that were not dependent
on sale of, or rental income derived
from, the real estate taken as collateral
as the primary source of repayment. The
change narrows the scope of the
exemption by preventing a borrower
from qualifying for the exemption by
showing that the primary source of
repayment for the loan is income from
real estate sales and rentals involving
real estate other than the real estate in
which the lender has a security interest.
This means, for example, that a real
estate developer cannot qualify for the
exemption by showing that a real estatesecured l°an for one project, in which
the lender has taken a security interest,
will be repaid with income from real
estate sales or rentals from other real
estate projects, in w hich the lender does
not have a security interest.
The following examples illustrate the
application of this exemption.
Exam ple 1: The ow ner of a shop seeks a
term loan for $1 m illion or less from a
regulated institution. T he loan w ill be repaid
w ith income derived from operations. The
regulated institution w ould not extend credit
to the borrow er w ithout a lien against the real
estate.
However, because the loan is for $1 m illion
or less and the sale of, or rental income
derived from, real estate is not the primary
source o f repaym ent, a Title XI appraisal
w ould not be required for this transaction
u nd er this exem ption.
E xam ple 2: A com pany acquires an
adjacent parcel of land to construct an office
building. The com pany seeks a loan of $1
m illion or less from a regulated institution to
provide construction financing and a
perm anent mortgage for the office building.
The com pany intends to lease part of the
building and w ill use the rental income to
help repay the loan. T he lender estim ates
that operations of the business w ould
contribute approxim ately 45 percent of the
funds necessary to repay the loan an d rental
income approxim ately 55 percent.
The regulated institution sh o u ld conclude
that rental incom e derived from real estate
serves as the prim ary source o f repaym ent for
the loan. Therefore, assum ing no other
exem ption is applicable to the transaction, a
Title XI appraisal w ould be required.
Increased Lending to Sm all- and
M edium -Sized Businesses. In the
experience o fth e agencies, the appraisal
requirement may have adversely
affected the ability of small- and
medium-sized businesses to obtain
credit. In particular, there are
indications that the cost of an appraisal
may impede small- and medium-sized
businesses from receiving working
capital, operating loans, and other
business-related credits that otherwise
would be consistent with prudent
banking practice.
The majority of financial institutions
and financial institution trade
associations that responded to the
agencies’ request for comment on the
effect of the business loan exemption on
credit availability stated that the
proposed exemption would increase
credit availability by reducing the cost
and time to make real estate-secured
business loans. These commenters
generally stated that the changes would
have the most significant effect on credit
availability for small- and medium-sized
businesses. Some appraisers also stated
that the proposed changes would
increase credit availability.
A large number o f commenters
responding to the specific request for
comment thought that the changes
would have no effect on credit
availability. These commenters
included appraisers and appraiser trade
associations, a small number of
financial institutions, and other
commenters. Some of these commenters
stated that the ability of financial
institutions to earn a reasonable return
by making relatively risk-free
investments in U.S. government
securities was the cause of credit
availability problems.
The agencies believe that the final
rule may reduce the cost of real estatesecured loans to small- and mediumsized businesses and increase the
availability of loans to these borrowers.
E ffect on S a fety and Soundness. Som e
commenters stated that this exemption
would elim inate the requirement to
obtain Title XI appraisals for a large
portion of the real estate-secured
business loans in their communities.
Others stated that this exemption raised
safety and soundness concerns because
the only tangible collateral for many
businesses is real estate. Though real
estate may be an important asset of
many small- and medium-sized
businesses, the agencies have concluded
that this exemption for certain business
loans that do not rely on real estate as
the primary source of repayment will
not threaten the safety and soundness of
regulated institutions nor pose a threat
to federal financial and public policy
interests.
Although the agencies are not
requiring Title XI appraisals in
connection with these business loans,
the agencies are requiring regulated
institutions to obtain appropriate
evaluations of the real estate collateral.
The evaluation should provide the
institution with sufficient information
on the value of the real estate to satisfy
principles of safe and sound banking. In
addition, during each required fullscope, on-site examination, each agency
w ill analyze the prudence of each
institution’s credit underwriting
practices, including appraisal and
evaluation practices, as appropriate to
the institution’s size and nature of its
real estate-related activities.
Shortly after the agencies issued the
proposed rule, the GAO completed its
report entitled Regulatory Im pedim ents
to Sm all Business Lending Should Be
R em oved (September 1993). In the
report’s summary, the GAO stated:
“Specifically, we believe that real estate
appraisal requirements can be safely
modified when applied to collateral
taken as supplementary support for
traditional small business loans.
Therefore, we agree with those aspects
of the rule changes recently proposed by
the banking regulators to expand the
exemptions from mandatory appraisals
as they pertain to such loans.” The GAO
noted that the report and its comment
on the proposed appraisal regulations
were limited “to situations in which
real estate collateral is used to support
loans to small businesses for such
purposes as working capital and
equipment purchases.” This exemption
is intended to reach these loans, as well
as loans for other business purposes
where sale of, or rental income derived
from, real estate is not the primary
source of repayment.
The conclusion that exempting these
transactions w ill not threaten the safety
and soundness of financial institutions
is supported by responses to a 1993
OCC survey of its senior examining
staff. The survey asked for information
on the effect of the proposed business
loan exemption on bank safety and
soundness, as w ell as information on
the significance, by loan size, of losses
on loans secured by l-to-4 family
residential real estate and other
categories of real estate.
Eighteen o f the 20 respondents to the
OCC survey stated that the proposed
exemption for business loans would not
threaten the safety and soundness of
financial institutions, although some
respondents noted that the exemption
Federal Register / Vol. 59, No. 108 / Tuesday, June 7, 1994 /'R ules and Regulations
could present more serious risks for
small financial institutions.
Respondents to the survey identified
loans above $1 m illion secured by nonresidential real estate as the category of
transactions that had the most
significant losses attributable to
inadequate appraisals, followed by
loans secured by non-residential real
estate in the ranges $750,000 to $1
million and $500,000 to $750,000.
In general, respondents noted that
where real estate serves as only a
secondary source of repayment for a
business loan, an evaluation of the
collateral would be sufficient to address
safety and soundness issues. Although
the other bank regulatory agencies’
surveys did not include the specific
questions posed in the OCC survey, the
results of the other bank regulatory
agencies’ surveys also generally support
the business loan exemption.
In addition to the survey responses,
the data from the 1992 commercial bank
Call Reports and savings associations’
TFR indicate that the exposure to the
banking system from these transactions
is limited. All commercial loans secured
by non-farm non-residential real estate
in the range between $250,000 and $1
m illion (this includes both non-exempt
and exempt transactions) represent less
than 4 percent of all loans for
commercial banks and less than 3
percent of all loans for savings
associations. Furthermore, these loans
represent less than 27 percent of
commercial loans secured by non-farm
non-residential real estate at commercial
banks and less than 36 percent of
commercial loans secured by such real
estate at savings associations. This
generally agrees with the National
Survey of Small Business Finances
(1989), cosponsored by the Federal
Reserve Board and Small Business
Real estate-secured loans1
All real estate-secured business loans.............................................................................
Real estate-secured business loans less than $1 million that are not dependent on
the sale of, or rental income derived from, the real estate taken as collateral as the
primary source of repayment for the loan ....................................................................
Administration. The results of the
survey (adjusted to 1992 dollars) show
that 22 percent, of all commercial
mortgages were for amounts between
$250,000 and $1 million.
The agencies requested specific
comment on loss experience for real
estate-secured business loans. Only a
small number of banks and no thrifts
submitted the requested data. Although
the agencies do not believe the response
is large enough to reach conclusions
about industry-wide loss experience, the
data submitted is consistent with the
conclusion that regulated institutions
are not suffering high levels of losses in
connection with real estate-secured
business loans of $1 m illion or less that
do not depend on real estate sales or
rental income as the primary source of
repayment. The responses that the
agencies received are summarized in the
following table.
Outstanding
principal
amount of
loans2
(12/31/92)
Loss on
loans2 (an
nual net
chargeoffs)®
(12/31/92)
Loss rate4
(calculated)
(percent)
90,410
17,488,561
178,237
1.02
59,595
8,008,422
32,680
0.41
Number of
loans
(12/31/92)
''
29491
1None of the comment letters received by OTS included data on these loans.
2 Dollars rounded to thousands.
3 Annual net-charges are determined by taking the dollar amount of gross losses and subtracting the amount recovered.
4 The agencies have calculated the loss rate tor both categories of real estate-secured loans about which the agencies required data by divid
ing total annual net charge-offs by the total outstanding principal balance.
Lim ited to Business Loans o f $1
Million or Less. The exemption applies
only to transactions involving business
loans with a value of $1 m illion or less.
Capping the exemption at $1 m illion
serves two purposes. It helps to ensure
that the transactions involve small- and
medium-sized businesses. It also limits
the overall exposure of the banking
system to transactions exempt under
this provision.
Some commenters stated that a $1
million limit may be too high for small
institutions and suggested that the limit
be set at a percentage of the. institution’s
capital. Others stated that the exemption
should fcover business loans o f any size.
Regulated institutions typically are
subject to capital-based lending lim its
that restrict the amount of credit they
can extend to any one borrower. W hile
a $1 m illion business loan may be much
more significant to a smaller institution,
the agencies believe that a second
capital-based lim it in the appraisal
regulation is inappropriate because it
can place smaller institutions at a
competitive disadvantage to larger
institutions. In addition, the agencies
regularly examine the lending practices
of all regulated institutions and can
address problems with individual
institutions if they arise. The agencies
believe it is appropriate, however, to
place a limit on the size of loan that can
qualify for this exemption. Many
commenters agreed that a $1 million
dollar lim it was appropriate.
Primary Source o f Repaym ent. Some
commenters suggested that the
exemption should be available only if
the borrower could repay the loan
entirely from sources other than sale of,
or rental income derived from, real
estate. Commenters also suggested
specific percentage lim its on the
contribution of real estate to repayment
of the loan ranging'from 10 to 50
percent. Other commenters stated that
the exemption should allow a regulated
institution to determine whether a
business loan requires an appraisal,
regardless of the contribution of real
estate sales or rental income to the
borrower’s repayment of the loan.
The exemption is intended to improve
the ability of small- and medium-sized
businesses to obtain real estate-secured
loans for business purposes. As the
contribution of real estate sales and
rentals to the borrower’s sources for
repaying the loan increases, repayment
becomes more dependent on the
performance of the real estate market.
Therefore, in deciding whether a
transaction qualifies for this exemption,
regulated institutions should be guided
by the importance of the real estaterelated sources of income to the
borrower’s repayment of the loan, rather
than applying a universal numerical
cap. In no case, however, may a
business loan qualify for this exemption
if real estate-related sources of income
contribute more toward repayment of
the loan than non-real estate sources of
income.
Exempting these business loans will
reduce the adverse effects on small- and
medium-sized business lending
associated with the requirement to
obtain a Title XI appraisal. Moreover,
since repayment of these loans general] v
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Federal Register / Vol. 59, No. 108 / Tuesday, ’June 7, 1994 / Rules and Regulations
w ill not -depend prim arily on d ie
performance o f the real estate markets,
allowing ienders to make these business
loans on th e basis o f evaluations o f the
real estate collateral does not threaten
the safety and soundness o f financial
institutions.
Agricniturol Leading. The agencies
received comment letters from
appraisers in rural areas who stated that
the exemption should not apply to
agricultural production loans because
use o f th e real estate generates the
income for repayment of the loan. For
any transaction exempt under this
provision, the regulated institution is
responsible for documenting that the
borrower's -sources o f incom e are not
primarily dependent upon the sale of, or
rental income derived from, real estate.
The agencies do n o t view the sale of
growing crops as the sale of real estate,
nor as providing rental incom e derived
from real estate. The agencies have
concluded that transactions involving
agricultural operations present no
greater risk than other types of business
operations, prod d ed th e primary source
of repayment for th e loan is ncft .ssde off,
or rental incom e derived from, real
estate.
(6) Leases
The agencies did not propose -changes
to the existing exemption for leases.
Under this exemption, regulated
institutions are not required to obtain
appraisals o f leases that are not the
.econom ic equivalent of the purchase or
sale of real estate.
Even though 'die agencies -did not
propose changes to th is exemption,
some-cammenters suggested that Title
XI appraisals should be required if a
regukted institution takes any security
interest in a real testate lease. The
distinction between operating leases
and capital leases is w ell recognized in
accounting practice. Consistent w ith the
distinction in accounting $ar operating
and capital teases, th e ^ e n c ie s have
concluded d ia l, in general, operating
leases, w inch an®n o t equivalent to the
purchase or sate csf th e teased property
should n ot require T itle XI appraisals
given th e iim itsd Teal estate in te re s t
such leases represent
In transactions that involve capital
leases {leases theft are the econom ic
equivalent o f purchasing or selling real
estate}, th e given real estate interest is
of sufficient magnitude to be courted as
an asset o f the lessee under accounting
practices. Generally, die agencies w ill
continue *o reqaire regulated
institutions to obtain appraisals in
connection with transactions that
involve capital leases.
(7) 'Renewals, Refinancings, and Other
Subsequent Transactions
The agencies are adopting a modified
version of the proposed exemption for
renew als, refinancings, and other
subsequent transactions a t the lending
institution to simplify the -conditions
under which the exemption applies.
Under the final rule, regulated
institutions w ill be permitted to renew
or refinance "existing extensions o f credit
w ithout first obtaining a Title XI
appraisal for two general classes o f
transactions.
First, a subsequent transaction is
exem pt provided there has been no
obvious and material change in market
conditions or physical aspects o f the
property that threatens the adequacy o f
the institution's real estate collateral
protection after the transaction, even
with the advancement o f new funds.
This modification to the proposed rule
is intended to emphagi7.fi that an
institution must consider the effect of
changes in market conditions and
physical aspects of the property on its
collateral protection when it advances
funds in excess of reasonable.closing
costs as part o f a -renewal, refinancing,
or other subsequent transaction.
Second, a subsequent transaction is
exem pt provided that no new monies
are advanced other than funds necessary
to cover reasonable closing costs. The
proposed rule did not explicitly address
this class o f transactions.
The agencies note that this exemption
would not be applicable if a borrower
refinances a mortgage with a new
lender.
Prior to the adaption o f this
amendment, the agencies did not
require a Title XI appraisal for a
subsequent transaction that resulted
from a maturing extension of credit if:
(i) The -borrower had performed
satisfactorily according to the original
terms;
(ii) No new monies were advanced
other than as previously agreed;
(iiiO The credit standing of the
borrower had not deteriorated; and
(iv5 There had been no obvious and
material deterioration in market
conditiuirs or physical aspects n f die
property which -would threaten the
institution’s collateral protection.
In the agencies’ experience, th e
original exemption may n o t have
provided sufficient ‘fltxM H ty to
regulated institutions and borrowers
when a transactkm was -refinanced
before its maturity. This is particularly
true for refinancings to reduce a loan’s
interest rate. Further,bankers
questioned whether a T itle X ! appraisal
would he required fo ra refinancing
where th e borrower's payment history is
sound and future repayment prospects
are good, h ut fee 'borrower’s collateral
has -declined in value as a re salt o f a
general aa risrt «iec!tne. T h e agencies
believe that not requirin g* Title XI
appraisal in such refinancings is
consistent w ith saie *n d sound banking
pradioes because th e amount of the loan
(except fo r the addition o f reasonable
closing -costs} and the lender's collateral
remain th e sam e, and the low er loan
payments may improve the ability of the
borrower to repay the lo an without
adversely affecting the likelihood that
the lender w ill be repaid.
If a subsequent transaction that
includes "the advancement of additional
funds does not result in th e level of
collateral protection being threatened,
despite a-change in fhe market
conditions o r physical aspects of the
property, a Title X ! appraisal need not
be obtained. For-example, a loan
originally extended w ith a low loan-tovalue ratio could be renewed and
additional funds advanced above
dosing -costs without a Title XI
appraisal, even though market
conditions have deteriorated, if the
regulated institution, after verifying the
value of fhe collateral, concludes that
die new loaa-to-value ratio will provide
adequate protection.
Sim ilarly, if a borrower is refinancing
a loan where the real estate collateral is
located in a market that has experienced
significant appreciation, the institution
should ensure that th e advancement of
any new monies is based on
substantiated appreciation in value. An
institution ca n advance funds against an
appreciated property whose future use
is consistent with th e use described in
the -original appraisal. If an institution
makes a -substantial advance that-could
possibly threaten th e institution’s
collateral protection, i t should consider
the need to obtain a new T itle X!
appraisal. This-exemption would not be
available if a material -change in the use
o f the property produces the reported
appreciation, such as w hen property is
rezoned for a different use.
W hile a Title H appraisal is not
required for transactions that qualify for
th is exem ption, regulated institutions
are required to -obtain an appropriate
evaluation o f die collateral in
accordance with th e agencies’
guidelines. T h e level o f analysis and
information included in th e evaluation
should b e more detailed as the
institution's exposure in d ie transaction
increases.
Several txnmnenters raised questions
about the applicability o f this
exemption to loan restructurings and
workcrats. In such -situations, the
Federal Register / Vol. 59, No. 108 / Tuesday, June 7, 1994 / Rules and Regulations
commenters contended that requiring a
Title XI appraisal may impede an
institution’s ability to obtain additional
real estate collateral to shore-up its
position or to advance new funds to
protect its existing collateral position.
The agencies acknowledge that the time
and cost of obtaining a Title XI appraisal
may present barriers to institutions in
their negotiations with borrowers in a
loan restructuring or workout. The
agencies believe that this situation has
been addressed in the regulation and the
agencies’ guidance, such as the
November 7 ,1 9 9 1 Interagency Policy
Statement on the Review and
Classification of Commercial Real Estate
Loans. It is the agencies’ policy to
encourage lenders to work
constructively with their borrowers
when restructuring existing loans that
have credible support for repayment.
(8) Transactions Involving Real Estate
Notes
The agencies are adopting a modified
version of the proposed exemption for
transactions involving real estatesecured loans, loan participations,
pooled loans, interests in real property,
and mortgage-backed securities. The
amendment clarifies when regulated
institutions may engage in secondary
mortgage market transactions involving
real estate loans and other interests in
real estate without obtaining a new Title
XI appraisal.
The exemption adopted by the
agencies clarifies and allows regulated
institutions to purchase, sell, invest in,
exchange, or extend credit secured by,
real estate-secured notes or interests in
real estate without obtaining a new Title
XI appraisal if each note or real estate
interest is supported by an appraisal
that met the regulatory appraisal
requirements for the institution at the
time the real estate-secured note was
originated. The prior exemption referred
to purchases of these interests only. In
addition, the agencies have changed the
text of the final rule to more clearly state
the appraisal requirements that the
underlying notes must meet.
The exemption serves federal public
policy interests by helping to ensure
that the appraisal regulation does not
unnecessarily inhibit secondary
mortgage market transactions that
involve these real estate-secured loans
and real estate interests. The exemption
makes clear that a regulated institution
need not obtain new Title XI appraisals
for loans originated before the effective
date of the agencies’ regulations in order
to buy or sell them in the secondary
mortgage market.
The agencies have concluded thiat the
transactions exempted by this provision
do not require new Title XI appraisals
to protect federal financial and public
policy interests or the safety and
soundness of financial institutions.
Principles of safe and sound banking
practice require regulated institutions to
determine the suitability of purchasing
or investing in existing real estatesecured loans and real estate interests.
Typically, these transactions will have a
history of performance or will have been
originated according to secondary
mortgage market standards. The
additional information from these
sources, when coupled with the original
documentation, permits regulated
institutions to make appropriate
decisions regarding these transactions.
Some commenters stated that this
exemption raised safety and soundness
concerns because exempt transactions
may have appraisals performed before
Title XI appraisal requirements went
into effect. Because regulated
institutions w ill have other sources of
information about the performance of
these seasoned loans, the agencies
believe that new Title XI appraisals are
not necessary to ensure the safety and
soundness of these exempt transactions.
Some commenters urged the agencies
to expand the proposed exemption, or
adopt new exemptions, to eliminate the
Title XI appraisal requirement for all
mortgage-backed securities. In addition,
commenters suggested that the agencies
exempt residential mortgage
warehousing loans (loans to residential
mortgage lenders who ultimately sell
the mortgages to the secondary mortgage
market), transactions with credit ratings
by established rating agencies, or
transactions that were not subject to the
agencies’ jurisdiction at origination.
The agencies believe that to protect
federal financial and public policy
interests, the underlying loans or real
estate interests should have appraisals
that meet the requirements that were
applicable to regulated institutions
when the underlying transactions were
originated. For this reason, the agencies
are not adopting the suggestions for
exempting additional categories of
transactions under this provision.
Commenters also suggested that tne
agencies should permit a regulated
institution that purchases a pool of
loans, invests in mortgage-backed
securities, or secures a mortgage
warehousing loan with real estate notes,
to confirm that the loans have
appropriate appraisals without
reviewing the appraisal for each
underlying loan. The agencies agree that
it should not be necessary to review the
appraisal for each underlying loan in all
cases. The agencies believe that
regulated institutions may use sampling
29493
and audit procedures to determine
whether appraisals for the underlying
loans in a loan pool satisfy the
regulation’s requirements and to verify
the seller’s representations and
warranties.
The agencies also believe that a
regulated institution may presume that
the underlying loans in an investmentgrade, marketable, mortgage-backed
security satisfy the requirements of the
appraisal regulation whenever an issuer
makes a public statement, such as in a
prospectus, that the appraisals comply
with the agencies’ regulations. To be
considered investment grade, a security
must be rated in one of the top four
rating classifications of at least one
nationally recognized statistical rating
service. A marketable security is one
that may be sold with reasonable
promptness at a price that corresponds
to its fair value.
For mortgage warehousing loans, sale
to Fannie Mae or Freddie Mac of the
mortgages that secure the mortgage
warehouse loan may be used to
demonstrate that the underlying loans
complied with the appraisal
requirements of the agencies’
regulations. The institution, however,
must continue to monitor its borrower's
performance in selling loans to the
secondary market and take appropriate
steps, such as increased sampling and
auditing of the loans and their
documentation, if the borrower
experiences more than a minimal
rejection rate.
(9) Transactions Insured o r Guaranteed
by a U.S. Government Agency or U.S.
Government Sponsored Agency
The agencies are adopting a uniform
exemption for transactions that are
wholly or partially insured or
guaranteed by a United States
government agency or government
sponsored agency because these loans
pose little risk to insured institutions.
This exemption will eliminate the
confusion among regulated institutions
who may believe that two separate
appraisals are required—one meeting
the banking agencies’ regulations and
another meeting the federal loan
programs’ standards.
Tne prior regulations of the OCC,
FDIC, and OTS exempted many of these
transactions. However, they previously
required that these transactions be
supported by an appraisal that
conformed to the requirements of the
insuring or guaranteeing agency. Prior to
adoption of this amendment, the
Board’s appraisal regulation did not
specifically exempt these transactions.
Federally insured or guaranteed
transactions must meet all the
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Federal Register f Vol. 99, No, 1©8 4 Taesday, June 7, 1994 / Roles «nd Regulations
underwriting requirements o f th e
federal insurer o r guarantor, including
real estate appraisal requirements, in
order to reoeive th e insurance or
guarantee. H ie agencies believe that die
standards of these loan programs are
sufficient to protect the safety and
soundness o f regulated financial
institutions. Therefore, it is -unnecessary
to require that these transactions also
meet th e overlapping requirements o f
the banking and thrift -agencies’
appraisal regulations.
% ra e commenters suggested that the
agencies should lim it the application of
this exemption to federal loan programs
with appraisal requirements that
conform to th e Uniform Standards of
Professional Appraisal Practice (USPAP)
and require the use o f licensed or
certified -appraisers. In addition,
commenters raised concerns that some
loan programs may not have appraisal
standards and asked the agencies to list
those loan programs to w hich this
exemption applies.
OMB has directed federal agencies
with government guaranteed or in s u re d
loan programs to conduct real e s ta te
appraisal programs in a manner to
reduce default risks to the federal
government. Specifically, these federal
agencies are required to ensure that all
real estate credit transactions over
$100,U00have an appraisal performed
by a state licensed or certified appraiser
and that the appraisal be conducted
under appraisal standards that are
consistent with the USPAP.*
The agencies believe that the
authority-of O M B to ensure that federal
agencies adopt appropriate real estate
appraisal standards eliminates the need
to list specific loan programs Tor which
this exemption applies. Moreover, OM B
is monitoring the implementation o f
those appraisal programs and has
required any .federal agency not having
appraisal standards and practices in
place to subm it an im plementation plan
and schedule to OMB. I f the agencies
later determine that a particular federal
loan program poses a threat to the safety
and soundness of regulated institutions,
the agencies have retained the authority
to require appraisals in such situations.
This exemption also applies to certain
other real estate-related financial
transactions involving government
agencies or government sponsored
agencies. For exam ple, the UJS. Postal
Service typically contracts with a
developer to erect and lease a special
purpose building lo r the Postal Service’s
use. Applicable contract procedures
6 OMB Circular A-12JL 'lPoltey for fe d e ra l
l’rograms andTCoi^Tax -Receivables,” -revised
January 1993.
normally require on ly cost estim ates
when -determining who is awarded the
contract. The Postal Service also enters
into a lease w ife th e ^eveloper. The
l e a * payments, w hich are assigned to
fee lender, -roe sufficient to repay the
loan. Because th e developer is
complying w ife applicable contract
procedures, whidh require only cost
estimates, it would be an -unnecessary
burden for the developer or the lender
to also obtain a T itle XI appraisal.
(10) Transactions That Meet the
Qualifications for Sale to a United States
Government Agency o r Government
Sponsored Agency
The agencies are adopting a modified
version o f th e proposed exemption for
transactions that meet the qualifications
for sale to any U.S. government agency
or government sponsored agency. By
referring to any U .S. government agency
or sponsored agency, th e exemption
includes not only loans sold to federal
agencies, but also any transaction that
meets the qualifications for sale to
agencies established or chartered by the
federal government to serve public
purposes specified hy th e U .S. Congress.
These government sponsored agencies
are:
• Banks for Cooperatives.
• Federal Agricultural Mortgage
Corporation (Farmer Mac}.
•• Federal Farm Credit Banks.
• Federal Home Loan Banks (FHLBs).
» Federal Home Loan Mortgage
Corporation {Freddie Mac).
• Federal National Mortgage
Association {Fermie Mae).
• Student Locm Marketing
Association (Sallie Mae).
• Tennessee Valley Authority (TVA).
This exemption perm its regulated
institutions to originate, hold, buy, or
sell transactions feat meet fe e
qualifications for sale to any U .S.
government agency and the above listed
government sponsored agencies without
obtaining a separate appraisal
conforming to fe e agencies’ regulations.
The exemption contains a
modification to fe e original proposal
that permits regulated institutions to
accept appraisals performed in
accordance w ife fee appraisal standards
of Fannie M ae and Freddie M ac for any
residential real estate transaction, both
single family and multifamfty,
regardless o f whether fee loan is eligible
to be purchased hy Fannie Mae or
Freddie Mac. T h is modification clarifies
that a regulated institution’s '“jumbo” or
other residential real estate loans feat do
not conform to a ll fee underwriting
standards of Farmie M ae o r Freddie
Mac, but fea t are supported hy an
appraisal feat meets fe e appraisal
standards-of these agencies, w ill qualify
for this exemption.
T h is 'exemption expands th e prior
exception to the regulations o f fe e OCC,
FDIC, and O T S for transactions
involving l-to -4 family residential
properties fea t had appraisals
conforming to fe e appraisal standards o f
Fannie Mae and Freddie Mac. In
addition, th e O T S exception applied to
existing multifamily properties. These
transactions were not required to
com ply w ife fe e additional supervisory
standards set forth in fe e prior
regulations. The Board did not have a
similar exception in its prior regulation.
Som e commenters requested feat the
agencies continue fe e prior exception
allowing fee use o f Fannie Mae ot
Freddie Mac standards for any loans
involving l-to-4 family residential real
estate. O ther oommenters stated that fee
proposed exemption should not be
adopted because fee agencies would not
be meeting their statutory obligation to
set appraisal standards for transactions
within their jurisdiction.
The agencies believe th e appraisal
standards o f fee U.S. government
agencies or sponsored agencies
established to m aintain a secondary
market in various types of loans are
appropriate foT these exempt
transactions. Recently, Fannie Mae and
Freddie M ac revised their l-to-4 family
residential appraisal standards and
report forms to incorporate the USPAP
as the minimum appraisal standards.
Further, fe e appraisal standards and
forms of Fannie Mae and Freddie Mac
are recognized as fee appraisal
industry’s standard for residential real
estate appraisals. The agencies have
concluded feat those appraisal
standards should protect federal
financial and public policy interests in
the loans fea t are eligible for purchase
by U S . government agencies or
sponsored agencies. The agencies also
believe fe a t compliance with these
standards w ill protect the safety and
soundness o f regulated financial
institutions.
The agencies helieve feat permitting
regulated institutions to follow these
standardized appraisal requirements,
without th e necessity erf obtaining a
separate appraisal or an appraisal
supplement for conformance with fee
banking agencies’ regulations, w ill
reduce regulatory burden and increase
an institution's ability to huy and sell
these types o f loans, improving fe e
institution’s liquidity.
(11) Transactions by Regulated
Institutions as Fiduciaries
T h e agencies are adopting a new
exemption for transactions in w hich a
Federal Register / Vol. 59, No. 108 / Tuesday, June 7, 1994 / Rules and Regulations
regulated institution is acting in a
fiduciary capacity and is not required to
obtain an appraisal under other law.
T he amendment clarifies that regulated
institutions acting as fiduciaries are not
required to obtain appraisals under the
agencies’ appraisal regulations if no
appraisal is required under other law
governing their fiduciary
responsibilities in connection with
those transactions.
Prior to adoption of this amendment,
it was unclear whether the agencies’
appraisal regulations required
appraisals for all real estate-related
financial transactions in which
regulated institutions participated as
fiduciaries. For example, other law may
not require an appraisal in connection
with the sale of a parcel of real estate
to a beneficiary of a trust on terms
specified in the trust instrument.
W hile financial institutions were in
general agreement with the proposed
exemption, some of these commenters
stated that a fiduciary should be exempt
from meeting T itle XI appraisal
requirements regardless of whether
other laws require an appraisal.
Commenters opposing this exemption
believe that fiduciaries should be
required to obtain a T ide XI appraisal
for all their real estate-related
transactions.
The agencies have concluded that a
Title XI appraisal should not be
required when regulated institutions
engage in real estate-related financial
transactions as fiduciaries and no other
law (including state common law
establishing the responsibilities of
fiduciaries) requires appraisals for those
transactions. Losses as a result of these
transactions would not, absent some
negligence by the institution, be
incurred by the institution. Therefore,
exempting these transactions from the
Title XI appraisal requirement should
not adversely affect the safety and
soundness of financial institutions.
When a fiduciary transaction requires
an appraisal under other law, that
appraisal should conform to the
requirements of the agencies’
regulations.
(12) Appraisals Not Necessary To
Protect Federal Financial and Public
Policy Interests or the Safety and
Soundness of Financial Institutions
This provision was added to the rule
to make clear that the agencies retain
the authority to determine in a given
case when the services of an appraiser
are not required.
Only a few commenters addressed
this issue. One commenter expressed
the concern that the agencies are
granting themselves the authority to
20495
collateral when a T itle XI appraisal is
create new exemptions without the
not required. For some institutions, the
benefit o f public comment.
effect o f these provisions may have been
The agencies have the authority to
implement and interpret regulations
to require evaluations in cases where
under their jurisdiction. The specific
they did not assist in protecting the
exemptions of the regulation describe
institutions’ safety and soundness. The
agencies are amending their regulations
the major categories of transactions that
would not require appraisals. As a result to require regulated institutions to have
of their experience in implementing
evaluations only for those real estatetheir regulations, however, the agencies
related financial transactions where an
understanding of the real estate’s value
recognized that it is impossible to
is generally needed to assist the
identify all types of transactions for
institution in deciding whether to enter
w hich the services of an appraiser
should not be required under Tide XI of into the transaction.
Some commenters stated that
FIRREA and proposed this exemption to
evaluations should not be required for
confirm their authority to determine
any exempt transactions and that the
that individual transactions do not
require the services of an appraiser. The decision to obtain an evaluation should
agencies w ill adopt any new exemptions be left to the institution. Commenters
covering broad categories of transactions suggested that the agencies should
in accordance with notice and comment require appraisals for any transaction
that requires an evaluation and raised
rulemaking procedures.
questions about the qualifications and
§ ____ .3(b) Evaluations Required
independence of persons performing
The agencies are adopting a modified
evaluations. Some commenters stated
version of the proposed amendment
that only licensed or certified appraisers
concerning evaluations.
were qualified to perform evaluations.
The final rule requires regulated
The agencies believe that safety and
institutions to obtain evaluations for
soundness principles require
real estate-related financial transactions
institutions to obtain an understanding
that do not require T itle XI appraisals
of, and document, the value of the real
because they: (i) Are below the
estate involved in transactions that: (i)
threshold level; (ii) qualify for the
Are below the threshold level; (ii)
exemption for business loans of $1
qualify for the exemption for business
m illion or less where income from real
loans o f $1 m illion or less where income
estate is not the primary source of
from real estate is not the primary
repayment; or (iii) qualify for the
source of repayment; or (iii) involve an
exemption for subsequent transactions
existing extension of credit. In these
resulting from an existing extension of
cases, while a Title XI appraisal is not
credit. The agencies changed the text of
required to determine the value of the
real estate, the agencies have concluded
this amendment to make clear that
institutions must still obtain evaluations that regulated institutions must have an
estimate of the real estate’s value as a
for these exempt transactions. The
matter of safe and sound banking
regulation does not require the
practice. For this reason, the agencies
institution to have an evaluation if the
have decided that institutions should
transaction qualifies for an exemption
not have the discretion to decide
other than these three exemptions.
An evaluation provides a general
whether they will obtain evaluations for
estimate o f the value of real estate and
these transactions. However,
need not meet the detailed requirements institutions w ill have discretion, within
the lim its of safe and sound banking
o f a T itle XI appraisal. An evaluation
must provide appropriate information to practice as indicated in agency
enable the institution to make a prudent guidance, to determine the content and
form of the evaluation.
decision regarding the transaction.
W hile licensed or certified appraisers
Because institutions must tailor
may be qualified to perform evaluations,
evaluations to provide appropriate
the agencies do not believe these
information for different types of
appraisers are the only persons that can
transactions, the content and form of
render a competent estimate of the value
evaluations w ill vary for different
of real estate for exempt transactions.
transactions.
Requiring institutions to procure the
In their prior regulations, the OCC,
Board and OTS required evaluations for services o f a licensed or certified
appraiser to prepare evaluations or Title
all real estate-related financial
XI appraisals for exempt transactions
transactions that do not require
could impose significant additional
appraisals. The FDIC’s prior regulation
costs on lenders and borrowers without
stated that supervisory guidelines,
significantly increasing the safety and
general banking practices or other
soundness of the transactions. However,
prudent standards may require an
the agencies’ regulations do not, as
appropriate valuation of real property
29496
Federal Register i Vol. -59, No. 108 / Tuesday; June 7,1994 / Rules and Regulations
suggested by same commenters, prohibit
regulated institutions from using
licensed or certified appraisers to
prepare evaluations. Nor do the
regulations prevent regulated
institutions from obtaining Title X I
appraisals for exempt transactions.
The agencies also believe that
regulated institutions can take steps to
ensure that the individuals performing
evaluations are capable of providing an
unbiased estimate of value. Institutions
would generally be expected to check
that persons who prepare evaluations
are subject to adequate safeguards and
controls to assure the integrity of the
evaluation they perform. The agencies
intend that regulated institutions have
some flexibility in the safeguards they
erect to ensure the independence of the
person performing the evaluation.
The agencies’ experience with
transactions exempt under their prior
appraisal requirements indicates that
employees of a regulated institution
generally can provide an unbiased and
competent evaluation of real estate
collateral for exempt transactions.
If there are deficiencies in an
individual institution’s evaluation
procedures, including its procedures for
determining whether to order Title XI
appraisals for exempt transactions, the
agencies can take appropriate steps to
have the institution correct the problem.
This can include requiring the
institution to obtain appraisals for
exempt transactions to address safety
and soundness problems.
Several commenters requested that
the agencies provide additional
information on what is required in
evaluations and who may perform them.
The agencies intend to revise their
existing guidance on real estate
appraisal and evaluation programs for
regulated institutions to further address
these issues
§ ____ .3(c) Appraisals To A ddress
Safety and Soundness Concerns
-The agencies are adopting
substantially as proposed an
amendment stating that each agency
continues to reserve the right to require
a regulated institution to obtain a Title
XI appraisal whenever the agency
believes that an appraisal is necessary to
address safety and soundness concerns
This authority may involve the agency
requiring an institution to obtain an
appraisal for a particular extension of
credit or an entire group of credits.
Some commenters raised the concern
that the agencies’ authority to require a
T itle XI appraisal for safety and
soundness purposes should be exercised
only bn a prospective basis. Further,
several commenters noted that the
agencies’ authority to determine on a
case-by-case basis whether an appraisal
is required may lead to inconsistencies
among the agencies.
W hether an institution w ill be
required, pursuant to this provision or
existing safety and soundness authority,
to obtain an appraisal for a particular
extension o f credit, or an entire group of
credits, may depend on the condition of
that institution. If an institution is in
troubled condition, and that troubled
condition is attributable to underwriting
problems in the institution’s real estate
loan portfolio, then the agencies may
require such an institution to obtain an
appraisal for all new real estate-related
financial transactions below the
threshold that are not Subject to another
exemption. Thus, for example, a
troubled institution whose problems are
attributable to trading losses, investment
losses, or a defalcation might be allowed
to continue to operate under the
$250,000 threshold, whereas an
institution whose problems are
attributable to poor underwriting of real
estate loans may be subjected to a lower
threshold.
However, regardless of an institution’s
condition, an examiner may determine
that a particular real estate-related
financial transaction requires a Title XI
appraisal. This provision confirms that
the agencies have the authority to
require appraisals for a particular
transaction to address safety and
soundness concerns.
A determination that a particular
institution w ill have to obtain appraisals
below the threshold w ill be made by the
appropriate agency’s supervisory office.
Although this provision is intended to
be applied on a case-by-case basis to
address the problems of a particular
institution, the agencies w ill work to
maintain consistency.
As previously stated in the discussion
of the appraisal threshold, as a matter of
policy, OTS intends to require problem
institutions or institutions in troubled
condition to continue to obtain Title XI
appraisals for loans over $100X100.
Given the overall concentration of real
estate-related transactions in the thrift
industry, O TS believes that a problem
thrift or a thrift in troubled condition
w ill, in general, have real estate-related
asset quality problems.
§ __ _ . 4(a)
Standards
M inim um A ppraisal
The agencies are adopting five
minimum appraisal standards in place
of the 14 standards in the prior rule. The
final rule includes four modifications to
the proposed rule concerning minimum
appraisal standards. The final rule
requires all appraisals for federally
related transactions to:
(i) Conform to generally accepted
appraisal standards as evidenced by the
USPAP unless principles of safe and
sound banking require compliance with
stricter standards;
(ii) Be written and contain sufficient
information and analysis to support the
institution’s decision to engage in the
transaction;
(iii) Analyze and report appropriate
deductions and discounts for proposed
construction or renovation, partially
leased buildings, non-market lease
terms, and tract developments with
unsold units;
(iv) Be based upon the definition of
market value as set forth in the
regulation; and
Tv) Be performed by State licensed or
certified appraisers.
Adoption of these standards will
simplify compliance with the appraisal
regulation without affecting the
usefulness of the Title XI appraisals
prepared for federally related
transactions. The amendment allows
institutions to make use of the USPAP
Departure Provision and eliminates
several regulatory standards that
parallel existing USPAP standards.
The agencies proposed three
alternatives for meeting the statutory
requirement to use the USPAP in setting
minimum appraisal standards for
federally related transactions. Under the
first two alternatives, the agencies
would have published the USPAE as
part of their regulations (either as an
appendix to their rules or through
incorporation by reference). The
agencies have chosen to adopt the third
alternative that generally references
USPAP, but does not make USPAP a
part of the agencies’ regulations. The
agencies agree with many commenters
who believed that Alternative III was
the most workable approach because the
agencies would not have to republish
changes to the USPAP adopted by the
Appraisal Standards Board, and
references to USPAP in the regulation
could be assumed to always refer to the
most current USPAP edition. The
agencies believe that Alternative III
minimizes potential conflicts between
an institution’s duty to follow the
agencies’ appraisal requirements and an
appraiser’s professional obligation to
follow the latest USPAP version.
Since the agencies are adopting
Alternative ID, USPAP provisions
applicable to federally related
transactions w ill no longer be published
as Appendix A to the agencies’
appraisal regulations. Therefore, each
agency has deleted Appendix A from its
appraisal regulation.
Federal Register / Vol. 59, No. 108 / Tuesday, June 7, 1994 / Rules and Regulations
Because application of present or
future USPAP standards to federally
related transactions may be inconsistent
with maintaining the safety and
soundness of financial institutions, the
agencies have modified the standard on
compliance with the USPAP. This
modification makes clear that principles
of safe and sound banking may require
institutions to comply with stricter
standards than the USPAP. Although
the institution has the primary
responsibility for obtaining a Title XI
appraisal that meets its needs, the
agencies may by regulation or guidance
identify USPAP standards that are
inappropriate for federally related
transactions. For example, the USPAP
allows an appraiser to appraise property
even though the appraiser may have a
direct or indirect interest in the
property, if the appraiser discloses this
fact in the appraisal report. The agencies
believe, however, that federal financial
and public policy interests are better
served by requiring that an appraiser for
a federally related transaction not have
any direct or indirect interest, financial
or otherwise, in the transaction or the
property. The agencies have included
this requirement in the section of the
regulation that deals with appraiser
independence.
The minimum standards also permit
regulated institutions to use appraisals
prepared in accordance with die USPAP
Departure Provision for federally related
transactions. The Departure Provision
permits limited exceptions to specific
guidelines in the USPAP. Appraisers
preparing appraisals using the
Departure Provision still must comply
with all binding requirements of the
USPAP and must be sure that the
resulting appraisal w ill not be
misleading.
The agencies believe that regulated
institutions should be allowed to
determine, with the assistance of the
appraiser, whether an appraisal to be
prepared in accordance with the
Departure Provision is appropriate for a
particular transaction and consistent
with principles of safe and sound
banking practice.
The agencies are adopting a modified
version o f the proposed standard that
requires appraisals for federally related
transactions to be written. The
modification makes clear that the
written appraisal must contain
sufficient information and analysis to
support th e institution’s decision to
engage in the transaction. The
modification puts regulated institutions
on notice o f their responsibility to have
appraisals that are appropriate for the
particular federally related transaction.
The agencies are aware that the
Appraisal Standards Board of the
Appraisal Foundation has proposed
changing the USPAP to expand the
types of appraisal reports that appraisers
may prepare. The agencies believe that
the standard on written appraisals
permits regulated institutions to take
advantage of additional flexibility that
may be available if the USPAP is
amended, as long as the appraisal report
contains information and analysis to
ort the institution’s decision,
e agencies are retaining from the
prior rule the standard regarding
deductions and discounts. The USPAP
provision on this subject requires the
appraiser to include a discussion of
deductions and discounts only when it
is necessary to prevent an appraisal
from being misleading. Although
commenters were divided over the need
to retain this regulatory standard, the
agencies have decided that it is
appropriate to emphasize the need to
include an appropriate discussion of
deductions and discounts applicable to
the estimate of value in Title XI
appraisals for federally related
transactions.
For example, in order to properly
underwrite a loan, a regulated
institution may need to know a
prospective value of a property, in
addition to the market value as of the
date of the appraisal. A prospective
value of a property is based upon events
yet to occur, such as completion of
construction or renovation, reaching a
stabilized occupancy level, or some
other event to be determined. Thus,
more than one value may be reported in
an appraisal, as long as all values are
clearly described and reflect the
projected dates when future events
could occur.
The standard on deductions and
discounts is intended to make clear that
appraisers must analyze, apply, and
report appropriate discounts and
deductions when providing values
based on future events. In financing the
purchase of an existing home, there
typically would be no need to apply any
discounts or deductions to arrive at the
market vahie of the property since the
institution’s financing of the project
does not depend on events such as
further development of the property or
the sale of units in a tract development.
In place of the proposed standard on
market value, the agencies are retaining
the prior standard that required the
appraisal to be based on the definition
of market value contained in the
agencies’ rules. Use o f the standard from
the prior rule is intended to emphasize
that die agencies are not changing the
definition of market value or the manner
in which that definition is applied.
29497
The agencies are eliminating
regulatory standards that parallel or
duplicate requirements ofth e USPAP.
The regulatory standards originally were
put in place because of uncertainty
about the content of the USPAP and its
interpretation. Based on their
experience with the USPAP, the
agencies believe that the additional
standards may be eliminated.
Commenters generally agreed. The
majority of commenters responded to
three specific questions on the need for
additional regulatory standards by
indicating that it was unnecessary to
adopt separate standards on: (i) Analysis
of revenues, expenses and vacancies; (ii)
valuation of personal property; and (iii)
reconciliation of the three approaches to
value. The elimination of regulatory
standards that parallel USPAP standards
should simplify the preparation of
appraisals for federally related
transactions and reduce regulatory
burden.
As proposed, the agencies are adding
a new provision to make clear that all
appraisals for federally related
transactions must be prepared by
licensed or certified appraisers. This
requirement is mandated by Title XI of
FIRREA and repeated in other parts of
the appraisal regulation.
§ ____ A (b/c) Unavailability o f
Inform ation [hem oved]
The agencies are removing the
provision that required appraisers to
disclose and explain when information
necessary to the completion of an
appraisal is unavailable. The USPAP
currently requires appraisers to disclose
and explain the absence of infomiation
necessary to completion of an appraisal
that is not misleading. See USPAP
Standard Rule 2-2{k). Moreover, when
information that may materially affect
the estim ate of value is unavailable, the
agencies believe that generally accepted
appraisal standards require appraisers to
explain the absence o f that information
and its effect on the reliability of the
appraisal. Therefore, eliminating this
provision does not result in a
substantive change in the requirements
applicable to appraisals for federally
related transactions.
§ ____ ,4(c/d) A dditional Standards
[Removed]
The agencies are removing a provision
that merely confirmed the authority of
regulated institutions to require
appraisers they use to comply with
additional standards. The regulation’s
minimum appraisal standards for
federally related transactions do not
prevent a regulated institution from
requiring an appraiser to follow
29498
■Federal Register / Vol. 59, No. 108 / Tuesday, June 7, 1994 / Rules and Regulations
additional standards or provide
additional information to satisfy the
institution’s business needs and it is
unnecessary to restate this fact in the
appraisal regulation.
§ ____ .5(b) A ppraiser Independence
The agencies are adopting the
proposed amendment concerning the
use of appraisals prepared for financial
services institutions other than
institutions subject to Title XI of
FIRREA. The agencies’ prior appraisal
regulations provided that fee appraisers
,.must be engaged by the regulated
institution or its agent. An exception to
this requirement was permitted if the
appraiser was directly engaged by
another institution that is subject to
Title XI of FIRREA.
The agencies concluded that the prior
provision on the use of appraisals
prepared for other institutions was too
restrictive. It required a regulated
institution to obtain a new appraisal if
the borrower originally sought a loan
from an institution that was not subject
to Title XI of FIRREA and was not an
agent of that regulated institution. There
also was uncertainty about the meaning
of agent in these cases.
The amended provision permits a
regulated institution to use an appraisal
that was prepared for any financial
services institution, including mortgage
bankers, if certain conditions are met.
The appraiser must be engaged directly
by the financial services institution and
must not have a direct interest, financial
or otherwise, in the property or the
transaction. In addition, the regulated
institution must ensure that the
appraisal conforms to the requirements
of the regulation and is otherwise
acceptable. The prohibition on the
institution using an appraisal prepared
for the borrower remains in effect.
The majority of comments concerning
this provision favored the proposed
change. One commenter requested that
the agencies define financial services
institutions and include mortgage
brokers within that definition. Other
commenters requested clarification of
the circumstances under which a non
regulated institution can be an agent of
a regulated institution and whether
agents are prohibited from receiving a
commission on each transaction.
The agencies have decided not to
adopt a'specific definition of financial
services institution. This term is
intended to describe entities that
provide services in connection with real
estate lending transactions on an
ongoing basis.
The agencies do not intend to limit
the arrangements that regulated
institutions have with their agents,
provided those arrangements do not
place the agent in a conflict of interest
that prevents the agent from
representing the interests of the
regulated institution. For example, the
agencies do not require that there be a
written agreement between the
regulated institution and the agent, and
the agent may represent the regulated
institution solely with respect to
ordering appraisals. In addition, the
agencies’ regulations do not prohibit
agents from receiving a commission for
transactions on w hich they order
appraisals.
Some commenters opposed the
amendment because of their concern
that it would increase the pressure on
appraisers to render an estimate of value
that favors the interests of the borrower.
However, regulated institutions are not
required to accept appraisals that are
prepared for other financial services
institutions. Therefore, the institution
always retains complete control over the
process of ordering real estate
appraisals. In addition, institutions
must determine that the appraisal
ordered by the financial services
institution com plies with the
requirements of the agencies’
regulations and is otherwise acceptable.
This should include obtaining assurance
that the financial services institution
has an independent appraisal.
Other suggested changes to reduce the
burden on secondary market
transactions involving real estate notes,
particularly for mortgage warehousing
loans, are addressed in the exemption
for transactions in real estate notes.
IV. W aiver o f Delayed Effective Date
This final rule is effective on June 7,
1994. The 30-day delayed effective date
required under the Administrative
Procedure Act (APA) is waived
pursuant to 5 U.S.C. 553(d)(1), which
provides for waiver when a substantive
rule grants or recognizes an exemption
or relieves a restriction. The
amendments adopted in this final rule
exempt additional transactions from the
appraisal regulation, reduce appraisal
standards, and provide other
modifications that have the effect of
relieving perceived restrictions.
Consequently, all amendments in this
final rule meet the requirements for
waiver set forth in the APA.
V. Paperwork Reduction Act
OCC Paperwork Reduction A ct
The collection of information
contained in this final regulation has
been reviewed and approved by the
Office of Management and Budget in
accordance with the requirements of the
Paperwork Reduction Act (44 U.S.C.
3504(h)) under control number 1 5 5 70190. The estimated annual burden per
recordkeeper ranges from 0 hours to in
excess of 100 hours, depending on
individual circumstances, with an
estimated average of 34.5 hours.
Comments concerning the accuracy of
this burden estimate and suggestions for
reducing this burden should be directed
to the Comptroller of the Currency,
Legislative, Regulatory, and
International Activities, Attention:
1557-0190, 250 E Street SW.,
Washington, DC 20219, and to the
Office of Management and Budget,
Paperwork Reduction Project (15570190), Washington, DC 20503.
Board Paperwork Reduction A ct
The Board is adopting revisions to
Regulation Y in this rulemaking that
relate to recordkeeping requirements
under authority delegated to it by the
Office of Management and Budget, in
accordance with section 3507 of the
Paperwork Reduction Act of 1980, 44
U.S.C. chapter 35, and part 1320 of title
5, Code of Federal Regulations, 5 CFR
part 1320. In developing these revisions,
the Board has consulted with the OCC,
the FDIC, and the OTS.
The collection of information in this
regulation is in 12 CFR part 225. This
information is required by the Federal
Reserve System to protect federal
financial and public policy interests in
real estate-related financial transactions
requiring the services of an appraiser.
State member banks w ill use this
information in determining whether and
on what terms to enter into federally
related transactions, such as making
loans secured by real estate. The Federal
Reserve System will use this
information in its examination of State
member banks and bank holding
companies to ensure that they undertake
real estate-related financial transactions
in accordance with safe and sound
banking principles.
The likely recordkeepers are for-profit
institutions.
The estimated annual burden per
recordkeeper varies from.O hours to in
excess of 100 hours, depending on
individual circumstances, with an
estimated average of 25.1 hours.
Estimated number of recordkeepers:
1573.
FDIC Paperwork Reduction Act
The collection of information
contained in this final rule has been
submitted to the Office of Management
and Budget for review in accordance
with the Paperwork Reduction Act of
1980 (44 U.S.C. 3504(h)). Comments on
the collection of information should be
Federal Register / Vol. 59, No. 108 / Tuesday, June 7, 1994 / Rules and Regulations
sent to the Assistant Executive Secretary
(Administration), room F -4 0 0, 550 17th
Street, NW., Washington, DC 20429,
with a copy to the Office of Management
and Budget, Paperwork Reduction
Project 3064-0103, Washington, DC
20503.
The collection of information in this
final rule is in 12 CFR part 323. This
information is required by the FDIC to
protect federal financial and public
policy interests in real estate-related
financial transactions requiring the
services of an appraiser. State
nonmember banks w ill use this
information in determining whether and
on what terms to enter into federally
related transactions, such as making
loans secured by real estate. The FDIC
will use this information in its
examination of State nonmember banks
to ensure that they undertake real estaterelated financial transactions in
accordance with safe and sound banking
principles.
The likely recordkeepers are for-profit
institutions.
The estimated annual burden per
recordkeeper varies from 0 hours to in
excess of 100 hours, depending on
individual circumstances, with an
estimated average of 20.0 hours.
Estimated number of recordkeepers:
7,310.
standards, Reporting and recordkeeping
requirements.
12 CFR Part 225
2M499
§ 34.43 Appraisals required; transactions
requiring a State certified or licensed
appraiser.
(а) Appraisals required. An appraisal
performed by a State certified or
licensed appraiser is required for all real
estate-related financial transactions
except those in which:
(1) T he tran sactio n valu e is $250,000
12 CFR Part 323
or less;
Banks, banking, Mortgages, Real estate
(2) A lien on real estate has been
appraisals, Reporting and recordkeeping taken as collateral in an abundance of
requirements. State nonmember insured caution;
banks.
(3) The transaction is not secured by
real
estate;
12 CFR Part 545
(4) A lien on real estate has been
Accounting, Consumer protection.
taken for purposes other than the real
Credit, Electronic funds transfers,
estate’s value;
Investments, Manufactured homes,
(5) The transaction is a business loan
Mortgages, Reporting and recordkeeping that:
requirements. Savings associations.
(i) Has a transaction value of $1
million
or less; and
12 CFR Part 563
(ii) Is not dependent on the sale of, or
Accounting, Advertising, Crime,
rental income derived from, real estate
Currency, Flood insurance, Investments, as the primary source of repayment;
Reporting and recordkeeping
(б) A lease of real estate is entered
requirements, Savings associations,
into, unless the lease is the economic
Securities, Surety bonds.
equivalent of a purchase or sale of the
leased real estate;
12 CFR Part 564
(7) The transaction involves an
Appraisals, Real estate appraisals,
existing extension of credit at the
Reporting and recordkeeping
lending institution, provided that:
requirements, Savings associations.
(i) There has been no obvious and
material change in market conditions or
COMPTROLLER OF THE CURRENCY
physical aspects of the property that
threatens the adequacy of the
OTS Paperwork Reduction A ct
12 CFR Chapter I
institution’s real estate collateral
The collection of information
Authority and Issuance
protection after the transaction, even
contained in this final regulation has
with the advancement of new monies;
For
the
reasons
set
out
in
the
joint
been reviewed and approved by the
or
preamble, part 34 of chapter I of title 12
Office of Management and Budget in
(ii) There is no advancement of new
of
the
Code
of
Federal
Regulations
is
accordance with the requirements of the
monies, other than funds necessary to
amended
as
set
forth
below:
Paperwork Reduction Act (44 U.S.C.
cover reasonable closing costs;
3504(h)) under control number 1550.
(8) The transaction involves the
PART 34—REAL ESTATE LENDING
The estimated annual burden per
purchase, sale, investment in, exchange
AND APPRAISALS
recordkeeper ranges from 0 hours to in
of, or extension of credit secured by, a
excess of 100 hours, depending on
1. The authority citation for part 34
loan or interest in a loan, pooled loans,
individual circumstances, with an
continues to read as follows:
or interests in real property, including
estimated average of 59 hours.
A uthority: 12 U.S.C. 1 et seq., 93a, 371,
mortgaged-backed securities, and each
Comments concerning the accuracy of 1701j-3,1828(o), and 3331 et seq.
loan or interest in a loan, pooled loan,
this burden estimate and suggestions for
or real property interest met OCC
2. In § 34.42, existing paragraphs (d)
reducing this burden should be directed
regulatory requirements for appraisals at
through (1) are redesignated'as
to the Office of Management and
paragraphs (e) through (m), respectively, the time of origination;
Budget, Paperwork Reduction Project
(9) The transaction is wholly or
and a new paragraph (d) is added to
(1550), Washington, DC 20503, with
partially insured or guaranteed by a
read as follows:
copies to the Office of Thrift
United States government agency or
Supervision, 1700 G Street, NW.,
§34.42 Definitions.
United States government sponsored
*
*
*
*
*
Washington, DC 20552.
agency;
(d) Business loan means a loan or
(10) The transaction either:
VI. OCC and OTS Executive Order
extension of credit to any corporation,
(i)
Qualifies for sale to a United States
12866 Determination
general or limited partnership, business
government agency or United States
It has been determined that this final
trust, joint venture, pool, syndicate, sole government sponsored agency; or
rule is not a “Significant Regulatory
proprietorship, or other business entity.
(11) Involves a residential real estate
Action” under Executive Order 12866.
*
*
*
*
*
transaction in w hich the appraisal
conforms to the Federal National
3. In § 34.43, paragraph (a) is revised,
List o f Subjects
Mortgage Association or Federal Home
paragraphs (b) through (d) are
12 CFR Part 34
Loan Mortgage Corporation appraisal
redesignated as paragraphs (d) through
Mortgages, National banks, Real estate (f), respectively, and new paragraphs (b) standards applicable to that category of
real estate;
and (c) are added to read as follows:
appraisals, Real estate lending
Administrative practice and
procedure, Banks, banking, Holding
companies, Reporting and
recordkeeping requirements, Securities.
29500
Federal Register / Vol. 59, No. 108 / Tuesday, June 7, 1994 / Rules and Regulations
(11) The regulated institution is acting
in a fiduciary capacity and is not
required to obtain an appraisal under
other law; of
(12) The OCC determines that the
services of an appraiser are not
necessary in order to protect Federal
financial and public policy interests in
real estate-related financial transactions
or to protect the safety and soundness
of the institution.
(b) Evaluations required. For a
transaction that does not require the
services of a State certified or licensed
gppraiser under paragraph (a)(1), (a)(5)
or (a)(7) of this section, the institution
shall obtain an appropriate evaluation of
real property collateral that is consistent
with safe and sound banking practices.
(c) Appraisals to address safety and
soundness concerns. The OCC reserves
the right to require an appraisal under
this subpart whenever the agency
believes i t is necessary to address safety
and soundness concerns.
'*
*
*
*
*
financial or otherwise, in the property
or the transaction.
(2) A regulated institution also may
accept an appraisal that was prepared
by an appraiser engaged directly by
another financial services institution, if:
(i) The appraiser has no direct or
indirect interest, financial or otherwise,
in the property or the transaction; and
(ii) The regulated institution
determines that the appraisal conforms
to the requirements of this subpart and
is otherwise acceptable.
(b) and (c) as paragraphs (d) and (e) and
adding new paragraphs (b) and (c) to
read as follows:
§ 225.63 Appraisals required; transactions
requiring a State certified or licensed
appraiser.
(а) A ppraisals required. An appraisal
performed by a Slate certified or
licensed appraiser is required for all real
estate-related financial transactions
except those in which:
(1) The transaction.value is 3250,000
or less;
Appendix A to Subpart C [Removed}
(2) A lien on real estate has been
6.
Appendix A to subpart C, part 34, taken as collateral in an abundance of
caution;
is removed.
(3) The transaction is not secured by
Dated: M arch 31,1994.
real estate;
Eugene A. Ludwig,
(4) A lien on real estate has been
Comptroller o f the Currency.
taken for purposes other than the real
estate’s value;
FEDERAL RESERVE SYSTEM
(5) The transaction is a business loan
that:
12 CFR Chapter II
(i) Has a transaction value of $1
m illion or less; and
For the reasons set forth in the
(ii) Is not dependent on the sale of, or
common preamble, the Board amends
4. Section 34.44 is revised to read as
rental income derived from, real estate
12 CFR part 225 as set forth below:
follows:
as the primary source, of repayment;
PART 225—BANK HOLDING
(б) A lease of real estate is entered
§34.44 Minimum appraisal standards.
COMPANIES AND CHANGE IN BANK
into, unless the lease is the econom ic
F or federally related transactions, all
CONTROL (REGULATION Y)
equivalent of a purchase or sale of the
appraisals shall, at a minimum:
leased real estate;
1. The authority citation for part 225
(a) Conform to generally accepted
(7) The transaction involves an
is revised to read as follows:
appraisal standards as evidenced by the
existing extension o f credit at the
A uthority: 12U .S.C. 1817Tj')fl3), 1818,
Uniform Standards o f Professional
lending institution, provided that:
1831i, 1843(c)(8), 1844(b), 1972(1), 3106,
Appraisal Practice (USPAP)
(i) There has been no obvious and
3108,
3310,
3331-3351,
3907,
and
3909.
promulgated by the Appraisal Standards
material change in market conditions or
2. Section 225.62 is amended by
Board of the Appraisal Foundation,
physical aspects of the property that
redesignating paragraphs (d) through if)
1029 Vermont Aye., NW., Washington,
threatens the adequacy of the
and paragraphs (g) through (k) as
DC 20005, unless principles of safe and
institution^ real estate collateral
paragraphs.(e) through (g) and
sound banking require compliance with
protection after the transaction, even
paragraphs (i) through (m), respectively, with the advancement of new monies;
stricter standards;
and adding new paragraphs (d) and (h)
(b) Be written and.contain sufficient
or
to read as follows:
information and analysis to support the
(ii) There is no advancement of new
institution’s decision to engage in the
monies, other than funds necessary to
§225.62 Definitions.
transaction;
cover reasonable closing costs;
*
*
*
*
*
(8) The transaction involves the
(c) Analyze and report appropriate
(d) Business loan means a loan or
purchase, sale, investment in, exchange
deductions and discounts for proposed
extension of credit to any corporation,
of, or extension of credit secured by, a
construction or renovation, partially
general or limited partnership, business
loan or interest in a loan, pooled loans,
leased buildings, non-market lease
trust, joint venture, pool, syndicate, sole or interests in real property, including
terms, and tract developments with
proprietorship, or other business entity.
mortgaged-backed securities, and each
unsold units;
*
*
*
*
*
loan or interest in a loan, pooled loan,
(d) Be based upon the definition of
(h) Real estate or real property means or real property interest met Board
market value as set forth in this sub part;
an identified parcel or tract of land,
regulatory requirements for appraisals at
and
with improvements, and includes
the time of origination;
(e) Be performed by State licensed oi
easements, rights of way, undivided or
(9) The transaction is wholly or
certified appraisers in accordance with
future interests, or similar rights in a
partially insured or guaranteed by a
requirements set forth in this subpart.
tract of land, but does not include
United States government agency or
5. In § 34.45, paragraph (b) is revised
mineral rights, timber rights, growing
United States government sponsored
to read as follows:
crops, water rights, or similar interests
agency;
§34.45 Appraiser independence.
severable from the land when the
(10) The transaction either:
*
,. *
*
*
*
transaction does not involve the
(i)
Qualifies for sale to a United States
government agency or United States
(b) Fee appraisers. (1) If an appraisal associated parcel or tract o f land.
*
*
*
*
*
government sponsored agency; or
is prepared by a fee appraiser, the
appraiser shall be engaged directly by
(11) Involves a re sid e n tia l real estate
3. Section 225.63 is amended by
tran sactio n in w h ich th e ap p raisal
the regulated institution or its agent,
revising the sectio n iead in g, revising
conform s to th e F ed eral N ational
and have no d irecto r indirect interest
paragraph (a), redesignating paragraphs
Federal Register / Vol. 59, No. 108 / Tuesday, June 7, 1994 / Rules and Regulations
29501
§ 323.3 Appraisals required; transactions
Mortgage Association or Federal Home
appraiser shall be engaged directly by
requiring a State certified or licensed
Loan Mortgage Corporation appraisal
the regulated institution or its agent,
appraiser.
standards applicable to that category of
and have no direct or indirect interest,
(а) Appraisals required. An appraisal
real estate;
financial or otherwise, in the property
performed by a State certified or
(11) The regulated institution is acting or the transaction.
licensed appraiser is required for all real
in a fiduciary capacity and is not
(2) A regulated institution also may
estate-related financial transactions
required to obtain an appraisal under
accept an appraisal that was prepared
except those in which:
other law; or
by an appraiser engaged directly by
(1) The transaction value is $250,000
(12) The Board determines that the
another financial services institution, if:
or less;
services of an appraiser are not
(i) The appraiser has no direct or
(2) A lien on real estate has been
necessary in order to protect Federal
indirect interest, financial or otherwise,
taken as collateral in an abundance of
financial and public policy interests in
in the property or the transaction; and
caution;
real estate-related financial transactions
(3) The transaction is not secured by
or to protect the safety and soundness
(ii) The regulated institution
real
estate;
of the institution.
determines that the appraisal conforms
(4) A lien on real estate has been
(b) Evaluations required. For a
to the requirements of this subpart and
taken for purposes other than the real
transaction that does not require the
is otherwise acceptable.
estate’s value;
services of a State certified or licensed
Appendix A to Subpart G [Removed]
(5) The transaction is a business loan
appraiser under paragraph (a)(1), (a)(5)
that:
or (a)(7) of this section, the institution
6.
Appendix A to subpart G, part 225, (i) Has a transaction value of $1
shall obtain an appropriate evaluation of is removed.
m illion or less; and
real property collateral that is consistent
Dated: May 25, 1994.
(ii) Is not dependent on the sale of, or
with safe and sound banking practices.
rental income derived from, real estate
W illiam W. Wiles,
(c) Appraisals to address safety and
as the primary source of repayment;
soundness concerns. The Board reserves Secretary o f the Board.
(б) A lease of real estate is entered
the right to require an appraisal under
FEDERAL DEPOSIT INSURANCE
into, unless the lease is the economic
this subpart whenever the agency
equivalent of a purchase or sale of the
believes it is necessary to address safety CORPORATION
leased real estate;
and soundness concerns.
(7) The transaction involves an
12 CFR Chapter III
*
*
*
*
*
existing extension of credit at the
4. Section 225.64 is revised to read as
Authority and Issuance
lending institution, provided that:
follows:
(i) There has been no obvious and
For the reasons set out in the joint
material change in market conditions or
§ 225.64 Minimum appraisal standards.
preamble, part 323 of subchapter B of
physical aspects of the property that
For federally related transactions, all
chapter III of title 12 of the Code of
threatens the adequacy of the
appraisals shall, at a minimum:
Federal Regulations is amended as set
institution’s real estate collateral
(a) Conform to generally accepted
forth below:
protection after the transaction, even
appraisal standards as evidenced by the
with the advancement of new monies;
Uniform Standards of Professional
PART 323-APPRAISALS
or
Appraisal Practice promulgated by the
(ii) There is no advancement of new
1. The authority citation for part 323
Appraisal Standards Board of the
monies, other than funds necessary to
is revised to read as follows:
Appraisal Foundation, 1029 Vermont
cover reasonable closing costs;
Ave., NW., Washington, DC 20005,
Authority: 12 U.S.C. 1818,1819
(8) The transaction involves the
unless principles of safe and sound
("Seventh” and “T enth”], and 3331-3352.
purchase,
sale, investment in, exchange
banking require compliance with
of, or extension of credit secured by, a
2. Section 323.2 is amended by
stricter standards;
loan or interest in a loan, pooled loans,
redesignating paragraphs (d) through (1)
(b) Be written and contain sufficient
or interests in real property, including
as paragraphs (e) through (m),
information and analysis to support the
mortgaged-backed securities, and each
respectively, and adding a new
institution’s decision to engage in the
loan or interest in a loan, pooled loan,
paragraph (d) to read as follows:
transaction;
or real property interest met FDIC
(c) Analyze and report appropriate
§323.2 Definitions.
regulatory requirements for appraisals at
deductions and discounts for proposed
it
it
it
it
it
the time of origination;
construction or renovation, partially
(9) The transaction is wholly or
leased buildings, non-market lease
(d) Business loan means a loan or
partially insured or guaranteed by a
terms, and tract developments with
extension of credit to any corporation,
United States government agency or
unsold units;
general or limited partnership, business
United States government sponsored
(d) Be based upon the definition of
trust, joint venture, pool, syndicate, sole
agency;
market value as set forth in this subpart; proprietorship, or other business entity.
(10) The transaction either:
and
*
*
*
*
*
(i)
Qualifies for sale to a United States
(e) Be performed by State licensed or
government agency or United States
3. Section 323.3 is amended by
certified appraisers in accordance with
government sponsored agency; or
revising the section heading and
requirements set forth in this subpart.
(11) Involves a residential real estate
paragraph (a), revising the phrase in
5. Section 225.65 is amended by
transaction
in which the appraisal
paragraph
(d)
“paragraphs
(b)
and
(c)
of
revising paragraph (b) to read as follows:
conforms to the Federal National
this section” to read “this section”,
§ 225.65 Appraiser independence.
redesignating paragraphs (b) through (d) Mortgage Association or Federal Home
*
*
*
* . *
Loan Mortgage Corporation appraisal
as paragraphs (d) through (f),
standards applicable to that category of
(b) Fee appraisers. (1) If an appraisal respectively, and adding new
paragraphs (b) and (c) to read as follows: real estate;
is prepared by a fee appraiser, the
29502
Federal Register / Vol. 59, No. 108 / Tuesday, June 7, 1994 / Rules and Regulations
(11) The regulated institution is acting
in a fiduciary capacity and is not
required to obtain an appraisal under
other law; or
(12) The FDIC determines that the
services of an appraiser are not
necessary in order to protect Federal
financial and public policy interests in
real estate-related financial transactions
or to protect the safety and soundness
of the institution.
(b) Evaluations required. For a
transaction that does not require the
services of a State certified or licensed
appraiser under paragraph (a)(1), (a)(5)
or (a)(7) of this section, the institution
shall obtain an appropriate evaluation of
real property collateral that is consistent
with safe and sound banking practices.
(c) A ppraisals to address safety and
soundness concerns. The FDIC reserves
the right to require an appraisal under
this part whenever the agency believes
it is necessary to address safety and
soundness concerns.
*
*
*
*
*
4. Section 323.4 is revised to read as
follows:
§ 323.4 Minimum appraisal standards.
For federally related transactions, all
appraisals shall, at a minimum:
(a) Conform to generally accepted
appraisal standards as evidenced by the
Uniform Standards o f Professional
Appraisal Practice (USPAP)
promulgated by the Appraisal Standards
Board of the Appraisal Foundation,
1029 Vermont Ave., NW., Washington,
DC 20005, unless principles of safe and
sound banHng require compliance with
stricter standards;
(b) Be written and contain sufficient
information and analysis to support the
institution’s decision to engage in the
transaction;
(c) Analyze and report appropriate
deductions and discounts for proposed
construction or renovation, partially
leased buildings, non-market lease
terms, and tract developments with
unsold units;
(d) Be based upon the definition of
market value as set forth in this part;
and
(e) Be performed by State licensed or
certified appraisers in accordance with
requirements set forth in this p a rt
5. Section 323.5 is amended by
revising paragraph (b) to read as follows:
financial or otherwise, in the property
or the transaction.
(2) A regulated institution also may
accept an appraisal that was prepared
by an appraiser engaged directly by
another financial services institution, if:
(1) The appraiser has no direct or
indirect interest, financial or otherwise,
in the property or the transaction; and
(ii) The regulated institution
determines that the appraisal conforms
to the requirements of this part and is
otherwise acceptable.
Appendix IX [Removed]
6. Appendix A to Part 323 is removed.
By order of the Board of Directors.
D ated at W a s h in g to n , DC, th is 3 rd d a y o f
M ay 1994.
Federal Deposit Insurance Corporation.
Robert E. Feldm an,
Acting Executive Secretary.
OFFICE OF THRIFT SUPERVISION
12 CFR Chapter V
Authority and Issuance
Accordingly, for the reasons set forth
in the joint preamble, the Office of
Thrift Supervision hereby amends
chapter V, title 12 of the Code of Federal
Regulations, as set forth below:
Subchapter C— Regulations for Federal
Savings Associations
1. The authority citation for part 545
continues to read as follows:
A uthority: 12 U .S.C 1462a, 1463,1464,
1828.
2. Section 545.32 is amended by
revising the first sentence of paragraph
(b)(2) to read as follows:
§ 545.32
Real estate loans.
*
*
*
★
(b) Fee appraisers. (1) If an appraisal
is prepared by a fee appraiser, the
appraiser shall be engaged directly by
the regulated institution or its agent,
and have n o direct or indirect interest,
*
*
*
*
*
3. Section 545.103 is amended by
revising the second sentence of
paragraph (b) to read as follows:
*
*
*
(b) * * *
(2) Appraisals. A Federal savings
association may make a real estate loan
only after an appraiser has submitted a
signed appraisal of the security property
consistent with the requirements of part
564 of this chapter. * * *
§545.103
*
4. The authority citation for part 563
continues to read as follows:
A uthority: 12 U.S.C. 1462, 1462a, 1463,
1464, 1467, 1468, 1817, 1818, 3806; 42 U.S.C.
4106; Pub. L. 102-242, s e a 306,105 Stat.
2236, 2335 (1991).
5. Section 563.170 is amended by
revising paragraph (c)(l)(iv) to read as
follows:
§563.170 Examinations and audits;
appraisals; establishment and maintenance
of records.
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*
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*
(c) * * *
Cl) * * *
(iv) One or more written appraisal
reports, prepared at the request of the
lender or its agent and for the lender’s
use, and signed prior to the approval of
such application (except in the case of
an approval conditioned upon obtaining
an appraisal) that satisfies the
requirements of part 564 of this chapter:
Provided, however. That nothing in this
paragraph (c)(l)(iv) shall apply to
property improvement loans, as that
term is used in 24 CFR 200.167, insured
by the Federal Housing Administration
for which that agency does not require
an appraisal or certification of
valuation;
*
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PART 563— OPERATIONS
*
*
*
*
PART 545— OPERATIONS
§ 323.5 Appraiser independence.
*
Subchapter 0— Regulations Applicable to
All Savings Associations
*
Suretyship.
*
*
*
(b) * * * If real estate, the vahie must
be established by a signed appraisal
consistent with the requirements of part
564 of this chapter. * * *
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PART 564— APPRAISALS
6. The authority citation for part 564
is revised to read as follows:
A uthority: 12 U.S.C. 1 4 62 ,1462a, 1463,
1464, 1828(m), 3331 et seq.
.7. Section 564.2 is amended by
redesignating paragraphs (d) through (1)
as paragraphs (e) through (m),
respectively, and by adding a new
paragraph (d) to read as follows:
§ 564.2
Definitions.
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*
*
*
*
(d) Business loan means a loan or
extension of credit to any corporation,
general or lim ited partnership, business
trust, joint venture, pool, syndicate, sole
proprietorship, or other business entity.
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*
*
8.
Section 564.3 is amended by
revising paragraph (a), redesignating
paragraphs (b) through (d) as paragraphs
(d) through (f), and adding new
paragraphs (b) and (c) to read as follows:
§ 564.3 Appraisals required; transactions
requiring a State certified or licensed
appraiser.
(a) Appraisals required. An appraisal
performed by a State certified or
Federal Register / Vol. 59, No. 108 / Tuesday, June 7, 1994 / Rules and Regulations
licensed appraiser is required for all real
estate-related financial transactions
except those in which:
(1) The transaction value is $250,000
or less;
(2) A lien on real estate has been
taken as collateral in an abundance of
caution;
(3) The transaction is not secured by
real estate;
(4) A lien on real estate has been
taken for purposes other than the real
estate’s value;
(5) The transaction is a business loan
that:
(i) Has a transaction value of Si
million or less; and
(ii) Is not dependent on the sale of, or
rental income derived from, real estate
as the primary source of repayment;
(6) A lease of real estate is entered
into, unless the lease is the economic
equivalent of a purchase or sale of the
leased real estate;
(7) The transaction involves an
existing extension of credit at the
lending institution, provided that:
(i) There has been no obvious and
material change in market conditions or
physical aspects of the property that
threatens the adequacy of the
institution’s real estate collateral
protection after the transaction, even
with the advancement of new monies;
or
(ii) There is no advancement of new
monies, other than funds necessary to
cover reasonable closing costs;
(8) The transaction involves the
purchase, sale, investment in, exchange
of, or extension of credit secured by, a
loan or interest in a loan, pooled loans,
or interests in real property, including
mortgaged-backed securities, and each
loan or interest in a loan, pooled loan,
or real property interest met OTS
regulatory requirements for appraisals at
the time of origination;
(9) The transaction is wholly or
partially insured or guaranteed by a
United States government agency or
United States government sponsored
agency;
(10) The transaction either:
(i) Qualifies for sale to a United States
government agency or United States
government sponsored agency; or
(ii) Involves a residential real estate
transaction in which the appraisal
conforms to the Federal National
Mortgage Association or Federal Home
Loan Mortgage Corporation appraisal
standards applicable to that category of
real estate;
(11) The regulated institution is acting
in a fiduciary capacity and is not
required to obtain an appraisal under
other law; or
(12) The OTS determines that the
services of an appraiser are not
necessary in order to protect Federal
financial and public policy interests in
real estate-related financial transactions
or to protect the safety and soundness
of the institution.
(b) Evaluations required. For a
transaction that does not require the
services of a State certified or licensed
appraiser under paragraph (a)(1), (a)(5)
or (a)(7) of this section, the institution
shall obtain an appropriate evaluation of
real property collateral that is consistent
with safe and sound banking practices.
(c) Appraisals to address safety and
soundness concerns. The OTS reserves
the right to require an appraisal under
this part whenever the agency believes
it is necessary to address safety and
soundness concerns.
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(c) Analyze and report appropriate
deductions and discounts for proposed
construction or renovation, partially
leased buildings, non-market lease
terms, and tract developments with
unsold units;
(d) Be based upon the definition of
market value as set forth in this part;
and
(e) Be performed by State licensed or
certified appraisers in accordance with
requirements set forth in this part.
10. Section 564.5 is amended by
revising paragraph (b) to read as follows:
§564.5 Appraiser independence.
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<r
it
(b) Fee appraisers. (1) If an appraisal
is prepared by a fee appraiser, the
appraiser shall be engaged directly by
the regulated institution or its agent,
and have no direct or indirect interest,
financial or otherwise, in the property
or the transaction.
(2) A regulated institution also may
accept an appraisal that was prepared
by an appraiser engaged directly by
another financial services institution, if:
(i) The appraiser has no direct or
indirect interest, financial or otherwise,
in the property or the transaction; and
(ii) The regulated institution
determines that the appraisal conforms
to the requirements of this part and is
otherwise acceptable.
9.
Section 564.4 is revised to read as §564.8 [Amended]
follows:
11. Section 564.8 is amended by
removing paragraph (d)(1), by removing
§ 564.4 Minimum appraisal standards.
the colon following the introductory
For federally related transactions, all
text of paragraph (d), by revising the
appraisals shall, at a minimum:
word “Appraisals” to read “appraisals"
(a) Conform to generally accepted
in paragraph (d)(2), and by removing the
appraisal standards as evidenced by the
paragraph designation (d)(2).
Uniform Standards of Professional
Appraisal Practice (USPAP)
promulgated by the Appraisal Standards
Board of the Appraisal Foundation,
1029 Vermont Ave., NW., Washington,
DC 20005, unless principles of safe and
sound banking require compliance with
stricter standards;
(b) Be written and contain sufficient
information and analysis to support the
institution’s decision to engage in the
transaction;
Appendix A [Removed]
12. Appendix A to Part 564 is
removed.
D ated: A p ril 6, 1994.
By th e O ffice o f T h rift S u p e rv is io n .
Jonathan L. Fiechter,
A cting Director.
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BILLING CODE 4810-33-P , 6210-01-P . 6714-O t-P ,
6720-01-P
@FedFRASER