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FEDERAL RESERVE BANK
OF NEW YORK
Circular No. 10362
July 24, 1990
[
1
REAL ESTATE APPRAISAL STANDARDS
Amendments to Regulations H and Y
To All State Member Banks and Bank Holding Companies
in the Second Federal Reserve District, and Others Concerned:
The following statement has been issued by the Board of Governors of the Federal Reserve
System:
The Federal Reserve Board has announced approval of amendments to Regulation H (Membership
of State Banking Institutions in the Federal Reserve System) and Regulation Y (Bank Holding Companies
and Change in Bank Control) to implement provisions in the Financial Institutions Reform, Recovery
and Enforcement Act of 1989 (FIRREA) regarding real estate appraisal standards.
The amendments are designed to protect Federal financial and public policy interests in real estate
transactions requiring the services of an appraiser.
The amendments identify which transactions require an appraiser, set forth minimum standards for
performing appraisals, and distinguish those appraisals requiring the services of a State-certified apprais
er from those requiring a State-licensed appraiser.
The effective dates are August 9, 1990 for the appraisal standards, and July 1, 1991 for the appraiser
certification and licensing requirements.
Enclosed is the text of the Board’s official notice, including the text of the amendments, as
published in the F ed era l R e g iste r of July 5. Questions on this matter may be directed to Albert Toss,
Assistant Chief Examiner, of our Domestic Banking Department (Tel. No. 212-720-5895).
E.
G
erald
C o r r ig a n ,
P resid en t.
Thursday
July 5, 1990
Part II
Federal Reserve
System
12 CFR Parts 208 and 225
Appraisal Standards for Federally Related
Transactions; Final Rule
(Amendments to Regulations H and Y)
c
c
(
(
■
FEDERAL RESERVE SYSTEM
12CFR Parts 208 and 225
tRegulation H, Regulation Y; Docket No. RC685]
Appraisal Standards for Federally
Reluted Transactions
AGENCY: Board o f Governors
Federal Reserve System.
a c t io n : Final rule.
of
the
Title XI o f the Federal
Financial Institutions Reform. Recovery,
and Enforcement Act o f 1989
( “FIRREA") 1 requires the Board to
adopt regulations regarding the
performance and utilization o f
appraisals by 9tate member banks, bank
holding companies, and nonbank
r ibsidiories of bank holding companies.
Tule XI and these implementing
regulations are intended to protect
federal financial and public policy
interests in real estate-related financial
transactions requiring the services o f an
appraiser. This regulation, and similar
'cgulations adopted by the other
financial institutions regulatory
cgencie3 1 and the Resolution Trust
Corporation ("RTC”), provide affected
parties with added assurance that real
estate appraisals used in connection
with federally related transactions are
p erformed in accordance with uniform
standards by individuals w'hose
competency has been d e m o n s tr a te d a n d
w hose professional conduct will be
subject to effective supervision. Toward
this end, the regulation identifies which
transactions require an appraiser, sets
lo’th minimum standards for performing
appraisals, and distinguishes those
appraisals requiring the services of a
State certified appraiser from those
requiring a State licensed appraiser.
DATES: E ffe c tiv e D a te : August 9 ,1 9 9 0 .
C o m p lia n c e D a te s : Appraisals
performed in connection with federally
related transactions are to comply with
the standards set forth in this regulation
by August 9,1990. State certif.ed or
licensed appraisers, as appropriate,
must be used for federally related
transactions by July 1,1991, unless this
deadline is extended by the Appraisal
Subcommittee of the Federal Financial
Institutions Examination Council for a
given state pursuant to provisions of
title XI. Appraisals for real estaterelated financial transactions entered
SUMMARY:
1 Pub. L No. 101-73,103 Stat. 183 11989); 12 U.S C.
3310. 3331-3351.
* The Federal Deposit Insurance Corporation
("FDIC"), the Office of the Comptroller of the
Currency ("OCC”), the Office of Thrift Supervision
("OTS"), and the National Credit Union
Administration ("NCUA").
into before August 9,1990, do not have
to comply with the standards of this
regulation: moreover, sales of loans that
were originated before August 9,1990,
will not require an appraisal to be
performed in accordance with this
regulation. A transaction will be deemed
entered into and a loan will be deemed
originated if there is a binding
commitment to perform before the
effective date of this regulation.
FOR FURTHER INFORMATION CONTACT:
Roger T. Cole, Assistant Director (202/
452-2618), Stanley B. Rediger, Senior
Financial Analyst (202/452-2629), or
Virginia M. Gibbs, Senior Financial
Analyst (202/452-2521), Division of
Eanking Supervision and Regulation; or
Michael J. O'Rourke. Senior Attorney
(202/452-3288) or Mark J. Tenhundfeld,
Attorney (202/452-3612). Legal Division.
For the hearing impaired only.
Telecommunication Device for the Deaf
(TDD), Eamestine Hill or Dorothea
Thompson (202/452-3544).
SUPPLEMENTARY INFORMATION:
A. Background
Title XI of FIRREA requires the Board
to establish standards for performing
appraisals in connection with federally
related transactions within the Board's
jurisdiction. In addition, title XI requires
the Board to identify those
circumstances that require a State
certified appraiser and those that
require a State certified or licensed
appraiser. In response to this legislative
mandate, the Board has adopted this
regulation which is designed to address
problems perceived by Congress and the
Board.
Section 1121 of FIRREA defines a
“federally related transaction" as a real
estate-related financial transaction
which, inter alia, requires the services of
an appraiser. The Board has required
State certified or licensed appraisers to
be used for all real estate-related
financial transactions except those
transactions in which (i) a lien is placed
on real property solely through an
abundance of caution, (ii) the
transaction value (as defined in the
proposed regulation) is less than or
equal to $100,000, (iii) the transaction
involves a lease that is not the economic
equivalent of a purchase or sale; (iv)
there is a transaction resulting from a
maturing extension cf credit under
certain circumstances; and (v) there is
an acquisition of interests in loans that
complied with this regulation. The
Board, acting pursuant to section 1112 of
FIRREA, has identified which categories
of federally related transactions will
require a State certified appraiser and
3
which will require a State licensed
appraiser.
In addition, the Board has adopted
standards, pursuant to section 1113 of
FIRREA, for the performance of
appraisals in connection with federally
related transactions within the Board’s
jurisdiction. As mandated by title XI,
these standards require that all such
appraisals be written and that they
conform to the Uniform Standards of
Professional Appraisal Practice
(“USPAP”) promulgated by the
Appraisal Standards Board of the
Appraisal Foundation.**3 Further, the
Board has adopted additional standards
set forth in this regulation.
This regulation is intended to
supplement the Board's appraisal
guidelines 4 currently in effect. These
guidelines continue to remain in effect,
subject to amendment.
The Board has adopted this regulation
to improve the safety and soundness cf
all financial institutions covered by title
XI within the Board's jurisdiction. The
soundness of real estate loans and
investments made by financial
institutions covered by title XI depends
upon the adequacy of the underwriting
or analysis used to support these
transactions. A real estate appraisal is
one of several essential components of
the lending process. Accordingly, this
regulation, coupled writh existing
guidance on real estate appraisals, is
intended to provide the affected entities
with a reasonable degree of assurance
that real estate appraisals used in
connection with federally related
transactions will be reliable.
The appraisal standards set forth
herein are required to be effective not
later than August 9,1990. As indicated
above, title XI mandates that these
standards require compliance with, at a
m in im um , the USPAP. The Board is
awaiting final revisions to relevant
provisions of the USPAP, which are
currently being prepared by the
Appraisal Standards Board. Upon
receipt of these changes, the Board
intends to solicit comment on the
revised USPAP in order to collect the
broadest possible comment regarding
appraisal standards for federally related
transactions, including those standards
incorporated by reference. Upon receipt
of those comments, the Board thereafter
* Tie Appraisal Foundation was established by
several professional appraisal organizations as a
not-for-profit corporation under the laws of Illinois
la order to enhance the quality of professional
•ppraisala.
4 See Guidelines for Real Estate Appraisal
Policies and Review Procedures, S.R. 87-42 (FIS),
adopted by the various divisions of bank
supervision at the FDIC, the OCC, and the Board.
may propose amendments to this
regulation, should it be deemed
appropriate,
B. Comments
On February 0,1990 (55 FR 4810
(February 9,1990)), the Board issued for
comment proposed rules to implement
title XI of FIRREA. The Board received
206 comments from interested
individuals and organizations. The
principal issues raised by the comments
are discussed below. In addition, the
ensuing section-by-section analysis
addresses many of the specific concerns
raised by the comments.
Section 225.61 Authority. Purpose, and
Scope
A few commenters suggested that title
XI of FIRREA does not specifically
authorize the Board to prohibit a
regulated institution from selecting an
appraiser solely on the basis of
membership or lack of membership in an
appraisal organization. The Board
believes that this provision is consistent
with both the letter and the spirit of title
XI. Moreover, the Board believes that
the safety and soundness of regulated
institutions is advanced by this
provision. To emphasize this point and
to provide an additional authority for
this requirement, the Board has
amended this section to include a
citation to the provisions granting the
Board general supervisory authority
over State member banks, bank holding
companies, and nonbank subsidiaries of
bank holding companies.
Section 225.62 Definitions
The Board received a significant
number of comments on the following
definitions.
“Complex l-to-4 residential property
appraisal. ” Thirty-four comments raised
concerns about this definition. Of these,
nine suggested that an appraiser would
be required in order to determine
whether a given appraisal is complex.
Many were concerned that the list of
factors suggested in the definition would
result in virtually all appraisals being
deemed complex. Several others were
concerned that the list was too
subjective, and that a regulated
institution might be found to have
violated the rule because an examiner
disagreed with the institution’s
determination. Three people suggested
that the Board should eliminate the
concept and focus solely on the value of
the property, while others suggested the
elimination or deletion of various
proposed factors.
In response to these comments, the
Board has amended this definition.
Under the final rule, an appraisal will be
deemed to be complex if the property to
be appraised, the form of ownership, or
market conditions are atypical. The list
of factors that might make an appraisal
complex has been moved to the
preamble to emphasize that this list is
only illustrative. Moreover, the Board
has adopted a presumption that
appraisals of l-to-4 family residential
property will be non-complex if the
transaction value is less than $1,000,000.
However, as discussed more fully
below, the regulated institution
maintains the ultimate responsibility for
determining whether a given appraisal is
complex. Finally, appraisals of any type
of property rendered in connection with
a transaction having a transaction value
less than $250,000 may be performed by
a competent licensed appraiser.
“Federally related transaction. "
Several comments requested that
various transactions not be subject to
this regulation, because by their nature
the transactions would not require the
services of an appraiser. As noted
below, the Board has expanded the
circumstances when a certified or
licensed appraiser will not be required,
thereby excluding the affected
transactions from the definition of
“federally related transaction.”
However, the Board has not amended
this definition, which was derived from
title XI, in order to remain fully
consistent with the intent of the statute.
“Market value. ” Five people
commented on this definition. Several
suggested changes to the definition to
allow for a going concern value or
consideration of favorable financing or
special value to a specific user. The
remaining comments recommended that
market value should be calculated as of
the date of consummation, and that the
footnote in the preamble should be
inserted into the text of the regulation.
The Board believes that this
definition, which is widely accepted by
mortgage lenders and many government
agencies, requires no amendment. The
proposed amendments relating to going
concern value or consideration of other
factors may contribute to a misleading
or inaccurate appraisal.
“Real estate-related financial
transaction." Several comments
suggested that certain transactions not
be considered “real estate-related
financial transactions,” including a
refinancing by the same institution, an
extension of balloon payments not
related to the borrower’s inability to
repay, and the taking of real estate
collateral to protect a bank against
losses stemming from credit extended to
unrelated third parties. Four comments
recommended that “other real estate
owned” property be exemnt.
4
The Board agrees that certain
transactions do not require the services
of an appraiser, as discussed below.
However, the Board believes that this
definition, which was taken from title
XI, is consistent with the intent of the
statute. Accordingly, the Board has not
amended this definition.
“State certified appraiser." One
commenter pointed out that certification
criteria will be adopted by the Appraisal
Qualifications Board of the Appraisal
Foundation. The Board has amended
this definition accordingly.
“Transaction value." A comment
requested clarification on the
transaction value of an interest in
pooled loans or mortgage-backed
securities. The Board has amended the
regulation to provide that this definition
applies to each loan in a pool, but not to
the pool itself. In addition, the Board has
clarified that a purchase of a loan or
interest in a loan will not require an
appraisal of the property that serves as
collateral, provided that the property
was appraised in conformance with this
regulation. As a consequence, a
regulated institution purchasing an
interest in a pool will not require each
property securing a loan to be
reappraised. However, if a regulated
institution intends to purchase a pool of
loans that do not have conforming
appraisals, then appraisals will have to
be performed on the nonconforming
underlying real estate collateral prior to
the purchase. In such instances, the
transaction values will be the individual
amounts of the loans, not the aggregate
amount of the pool.
Section 225.63 Appraisals Not
Required; Transactions Requiring a
State Certified or Licensed Appraiser
(a) Appraisals not required.
De minimis test. The comment
received most often was a request that
the Board raise the de minimis figure
below which an appraisal performed by
a certified or licensed appraiser would
not be required. Sixty-five comments
requested that the Board raise this
figure, with suggested cutoffs ranging
from $25,000 to $250,000. The figure most
often suggested was $100,000. Twentythree commenters stated th at in their
experience, very few losses could be
attributed to improper or fraudulent
appraisals of real estate rendered in
connection with transactions having a
transaction value below the range of de
minimis amounts proposed.
An argument consistently raised by
these commenters was that the
increased protection afforded by
appraisals would not outweigh the
burdens on the regulated institutions
and their customers for comparatively
small transactions. Several noted that
the proposed rule would have a
disproportionate impact on small
businesses and people with low and
moderate incomes.
In response to these comments, and
after consultation with the other
financial institutions regulatory agencies
and the RTC, the Board has raised the
de minimis amount to $100,000.
However, the Board has required that
transactions falling below this amount
(and other transactions not requiring a
State certified or licensed appraiser)
must comply with the existing inter
agency guidelines regarding appraisals.
The Board believes that the $100,000 de
minimis figure is appropriate both in
light of the absence of evidence that
transactions below $100,000 have posed
systemic risks as well as the protections
afforded to individual regulated
institutions by the inter-agency
appraisal guidelines.
Another forty comments proposed
alternatives to the de minimis test,
including exempting transactions if the
ratio of the loan amount to the value of
collateral was sufficiently small, setting
higher de minimis cutoffs based on the
strength of the institution in question,
and exempting either small towns or
certain types of transactions altogether.
The Board considered the advantages of
the alternatives proposed, but has
concluded that each presents significant
problems. For instance, an appraisal
w'ould be necessary in many cases
before one could accurately determine
the loan-to-value ratio. In addition, an
exemption of small towns or certain
types of institutions appears to go
beyond the intent of title XI. The Board
believes that the increased de minimis
amount addresses many of the concerns
underlying such suggestions.
Abundance of caution. A few
comments requested clarification of this
term. The Board has not amended the
regulation, but has clarified in the
preamble that this exception is to be
applied only in those circumstances
where the terms of a transaction have
not been made more favorable than they
would have been in the absence of a lien
on real property.
Leases. Several comments suggested
that an appraisal should not be required
for many leases. The Board agrees that
significant losses arising from leases are
likely to occur primarily with leases that
are the economic equivalent of the
purchase of real estate. Accordingly, the
Board has added leases that are not
equivalent to a purchase as a category
of transactions not requiring the services
of a State certified or licensed appraiser.
Renewals, refinancings, etc. A few
comments requested the Board to
exempt renewals of performing loans
from the requirements of the regulation.
The Board believes that many such
transactions do not require reappraisals,
and thus has amended the regulation to
exempt transactions resulting from
maturing extensions of credit under
certain circumstances. This amendment
is likely to lessen the burden of
complying with this regulation without
adding any significant degree of risk.
Purchases of interests in real estate
loans. As noted above, the Board
received requests for clarification on
how the regulation applies to the
purchase of interests in real estate
loans, such as the purchase of a pool of
loans. The Board believes that such
purchases should not require additional
appraisals on the underlying real estate
collateral. Thus, the Board has
exempted such transactions from the
regulation, provided that the loans being
purchased were supported by appraisals
conforming to this regulation.
(b)
Transactions requiring State
certified appraisers. Forty-one
comments were received related to this
subsection. Many of these comments
suggested that certified appraisers
would be in short supply, particularly in
rural areas, and that regulated
institutions would have to hire someone
from another town or city who might not
be familiar with the local market. Others
stated that the Board should allow
licensed appraisers to appraise some
commercial property. A few comments
maintained that the proposed Tier 1 test
would place smaller institutions at a
competitive disadvantage. Others noted
that title XI requires a certified
appraiser only when the size,
complexity, and type of transaction so
warrants, and requested greater
flexibility in using licensed appraisers
for complex appraisals rendered in
connection with small transactions.
In response to these comments, the
Board has amended the provision
governing when State certified
appraisers are required. Under the
revised rule, a certified appraiser will be
required in three instances: First, for all
transactions having a transaction value
of $1,000,000 or more; second, for
transactions involving an interest in real
estate other than a l-to-4 family
residence, if the transaction value is
$250,000 or more; and third, for
transactions involving an interest in 1to-4 family residential real estate if the
transaction value is $250,000 or more
and the appraisal is complex.
As noted above, the Board also has
established a presumption that
5
appraisals of l-to-4 family residential
properties are non-complex. Procedures
are provided for completing an appraisal
inappropriately begun by a licensed
appraiser.
(c)
Transactions requiring either a
State certified or licensed appraiser.
Consistent with the changes outlined
above, licensed or certified appraisers
will be permitted to perform all
appraisals rendered in connection with
a transaction having a transaction value
less than $250,000, and for all non
complex appraisals of l-to-4 family
residential properties if the transaction
value is below $1,000,000.
Section 225.64 Appraisal Standards.
(a) Minimum standards. (1)
Compliance with USPAP; departure
provision. Several comments expressed
concern that the Appraisal Foundation
is not representative of the entire
appraisal industry, and thus the Board
should not adopt the Appraisal
Foundation’s standards. Two others
questioned whether the public has had
an adequate opportunity to comment on
the standards set forth in the USPAP.
Six comments requested that the Board
allow the use of the Departure Provision
in the USPAP for federally related
transactions.
The Board’s rule requires compliance
with the USPAP and additional
standards established by the Board.
This is consistent with the requirement
of title XI that institutions regulated by
the Board must have appraisals that
conform, at a minimum, to the USPAP
for all federally related transactions.
Thus, the Board has not deleted the
reference to the Appraisal Foundation,
although the Board has clarified that the
standards have been adopted by the
Appraisal Standards Board of the
Appraisal Foundation.
As noted above, the Appraisal
Standards Board of the Appraisal
Foundation currently is revising the
USPAP. Upon completion of the
revisions to the USPAP standards that
are relevant to federally related
transactions, the Board will solicit
public comment on those revised
standards, and may amend this
regulation in response to comments
received.
For the reasons stated in the sectionby-section analysis of the appraisal
standards, the Board remains of the
opinion that the Departure Provision in
the USPAP is inconsistent with the
intent of title XI, and therefore has not
amended this part of the standard.
(5) Prior sales history. One comment
recommended that disclosure of prior
sales of a given property be required
only if this information is reasonably
available. The Board believes that this
information is vital to an accurate
understanding of the appraisal, and has
not amended this standard.
(6)
Revenues, expenses, and
vacancies. The Board received a
comment requesting that an appraiser
be allowed to use projected future rents
and vacancies in determining market
value. The Board believes that such
projections may result in an inaccurate
or misleading appraisal, and therefore
has not amended the regulation.
Another comment suggested that the
Board also require an analysis of current
expenses as well as revenues and
vacancies. The regulation has been
changed to incorporate this suggestion.
Finally, the term “rents" has been
changed to "revenues” to clarify that
income may be generated from sources
other than rents.
(9) Deductions and discounts. Five
commenters expressed their concern
that requiring an “as is" value of the
appraised property would severely
restrict the ability of a regulated
institution to make construction loans.
The Board has clarified in the preamble
discussion of this standard that an “as
is" value is only one component of an
appraisal, and that it is necessary to
enable the regulated institution to
adequately protect its interests under
differing scenarios.
(12) Legal description. Two comments
sought clarification on how to define
“legal description.” The Board ha3
amended the preamble to this standard
to clarify that the description contained
ir a deed is sufficient.
(13) Personal property, fixtures, and
intangible items. The Board received
one comment requesting that an
appraiser not be required to value
personal property that is located on the
real estate. The Board remains of the
view that certain items of personal
property may affect the market value of
real estate, and therefore has not
amended this standard.
(14) Use of recognized appraisal
approaches. A few comments stated
that it is unnecessary to use all three
recognized approaches for every
appraisal. The Board agrees with these
comments, and has amended the
preamble language to clarify that a
given approach may be inapplicable for
a particular appraisal. However, the
standard still requires an appraiser to
explain why an approach was not used.
Section 225.65 Appraiser
Independence
Twenty-one comments raised
questions concerning this provision.
Four stated that complete separation of
in-house appraisers from loan officers is
impossible in small banks. Another four
comments suggested that a bank should
be allowed to decide when to use inhouse appraisers, while several others
proposed that in-house appraisers
should be allowed for transactions with
values up to suggested limits. Two
others requested that banks be allowed
to provide a customer with a list of
preapproved appraisers and let the
borrower select the appraiser. Several
requested that the borrower be allowed
to hire the appraiser. Other comments
requested that an appraisal performed
for one regulated institution be able to
be used by another institution.
Several comments requested that the
Beard require greater separation than
the proposed rule required. Two
suggested that a bank not be allowed to
pay bonuses based on loan production.
One recommended that individuals who
are vested with the authority to hire,
discipline, or promote staff appraisers
should not be appointed by individuals
who are involved in the lending,
investment, or collection function.
The Board agrees that a borrower who
has contacted several banks about
obtaining a loan should not have to pay
for different appraisals prepared at the
request of the lending institutions. For
this reason, the Board has amended the
provision regarding fee appraisers to
permit an appraisal to be used by more
than one regulated institution under
certain circumstances. However, the
Board has not made any additional
amendments to this provision. The
Board recognizes that different regulated
institutions may comply with this
standard in differing ways. For instance,
one institution may engage fee
appraisers to perform all appraisals,
while another may establish a separate
in-house department. The Board also
recognizes that in certain instances
creating an in-house appraisal
department is not feasible, and in such
instances the Board allows the
separation of the appraisal and lending
functions in a manner best suited to a
particular institution. The Board
believes that this section provides
regulated institutions with enough
flexibility to design solutions that will
comply with the regulation while not
having to implement any one structure.
Accordingly, the Board has not
otherwise amended this provision.
Section 225.66 Membership in
Appraisal Organizations
As noted above, the Board received a
number of comments questioning
whether title XI empowered the
financial institution regulatory agencies
to preclude hiring based solely on
6
membership or lack of membership in a
particular appraisal organization. The
Board believes that this subsection of
the regulation properly implements the
protections provided by section 1122(c)
of FIRREA. Moreover, the Board
believes that the safety and soundness
of regulated institutions is best
protected by requiring an institution to
look beyond the designation of an
individual to his or her education and
experience when determining
competency. Accordingly, this provision
has not been amended.
C. Section-by-Section Analysis.
Section 225.61 Authority, Purpose, and
Scope
This section identifies title XI of
FIRREA as the authority under which
this regulation is promulgated. Further, it
identifies those institutions, including
the Board and institutions regulated by
the Board (“regulated institutions”),
which must comply with the regulation.
State member banks, bank holding
companies, and nonbank subsidiaries of
bank holding companies are specifically
covered.
Section 225.62 Definitions
Except where noted below, the
definitions set forth in Title XI shall
apply to the terms used in this
regulation.
—“Appraisal." This definition currently
is used by nineteen federal agencies.5
The Board believes that this
widespread use and acceptance will
produce consistent appraisals.
—“Complex l-to-4 family residential
property appraisal.” Section 1113 of
FIRREA allows the use of a State
licensed appraiser for, among other
federally related transactions, l-to-4
family residential property appraisals,
“unless the size and complexity
requires a State certified appraiser.”
The Board deems a "complex l-to-4
family residential property appraisal"
to be one in which the property to be
appraised, form of ownership, or
market conditions are atypical.
Examples of atypical factors may
include age of improvements,
architectural style, size of
improvements, size of lot,
neighborhood land use, potential
environmental hazard liability,
leasehold interests, or other unusual
factors. This list is illustrative only.
—"Market value." This definition is
commonly used in connection with•
• See 49 CPR part 24. “Uniform Relocation
Assistance and Real Property Acquisition
Regulations for Federal and Federally Assisted
Programs.” 54 Federal Register 8.913 (1989).
mortgage lending by a number of
government agencies and others. The
definition contemplates the
consummation of a sale as of a
specified date and the passing of title
from seller to buyer under open and
competitive market conditions
requisite to a fair sale. It is designed
to provide an accurate and reliable
measure of the economic potential of
property involved in federally related
transactions. Moreover, the Board
believes that widespread acceptance
and use of this definition will provide
consistency to appraisals.
In applying this definition of market
value, adjustments to the comparables
must be made for special or creative
financing or sales concessions. No
adjustments are necessary for those
costs that are normally paid by sellers
as a result of tradition or law in a
market area; these costs are readily
identifiable since the seller pays these
costs in virtually all sales transactions.
Special or creative financing
adjustments can be made to the
comparable property by comparisons to
financing terms offered by a third party
financial institution that is not already
involved in the property or transaction.
Any adjustment should not be
calculated on a mechanical dollar-fordollar cost of the financing or
concession, but the dollar amount of any
adjustment should approximate the
market’s reaction to the financing or
concessions based on the appraiser’s
judgment.6
—"Real estate-related financial
transaction." This definition is the
same as that set forth in section
1121(5) of FIRREA, except that “and”
is replaced with "or” throughout so as
to comply with the intent of Congress.
—"State certified appraiser." This
classification applies to appraisers
who are recognized by the States as
being more knowledgeable of and
experienced in appraisals than are
licensed appraisers. Section 1116 of
FIRREA contemplates that each state
or territory will adopt standards and
procedures, consistent with the
purposes of title XI, for obtaining the
designation of "State certified
appraiser." To be consistent with title
XI. each state's standards and
procedures must require its certified•
• This paragraph regarding comparables is taken
from the standard definition of "market value" used
by the Federal Home Loan Mortgage Corporation
("FHLMC"), the Federal National Mortgage
Association ("FNMA"), and OTS. among others. By
Including this paragraph in the preamble rather than
the regulation, the Board does not intend to suggest
any change in the interpretation or application of
the definition of "market value" as this term
currently is used.
appraisers to meet, at a minimum, the
criteria for certification issued by the
Appraisal Qualifications Board of the
Appraisal Foundation. Moreover, no
state or territory may certify an
appraiser under title XI unless that
individual passes an examination,
administered by the state or territory,
that is consistent with and equivalent
to the Uniform State Certification
Examination issued or endorsed by
the Appraisal Foundation. The final
regulation does not prevent a state
from establishing additional
certification criteria.
Under FIRREA, the Board is
authorized to establish certification
criteria in addition to those adopted by
a given state. Additionally, the
Appraisal Subcommittee of the Federal
Financial Institutions Examination
Council may issue a written finding that
the certification criteria of a state or
territory are inadequate for specified
reasons. Thus, an individual may be a
"State certified appraiser" only if (a) the
individual complies with all stateimposed criteria and additional criteria,
if any, imposed by the Board, and (b) the
appraiser certifications and licenses of a
state have not been rejected by the
Appraisal Subcommittee.
—"State licensed appraiser.” Each state
may elect to adopt licensing criteria
that are less rigorous than
certification criteria. However,
licensing criteria must be adequate to
protect federal financial and public
policy interests. For example, simply
"grandfathering” all existing
appraisers generally would not be
acceptable. Rather, the states and
territories are to design criteria that
will ensure that licensed appraisers
will have the experience and training
sufficient to perform appraisals that
comply with this regulation.
As with State certified appraiser
criteria, the Board is authorized to
impose additional licensing
requirements. Moreover, as noted above
the Appraisal Subcommittee is charged
with monitoring state appraiser
certifying and licensing agencies, and
may reject state certifications and
licenses if a state’s appraisal policies,
practices, or procedures are found to be
inconsistent with title XI.
—“Tract development." A tract
development may be units in a
subdivision, condominium project,
timeshare project, or any similar
project meant to be sold as individual
units over a period of time. A project
will be deemed to be a tract
development if it is currently, or is
intended to be, offered for sale as a
single development.
7
‘Transaction value.” This definition is
used to determine in part which
transactions require a State certified
appraiser and which require a State
licensed appraiser. The Board will
consider a series of related transactions
as one transaction if it appears that a
regulated institution i3 attempting to
evade the requirements of title XI of
FIRREA or this regulation.
Section 225.63 Transactions Requiring
State Certified or Licensed Appraiser
(a)
Appraisal not required. Section
1121(4) of FIRREA defines a federally
related transaction as a real estaterelated financial transaction that, among
other things, requires the services o? an
appraiser. The Board recognizes that not
all real estate-related financial
transactions will require an appraiser.
For instance, an appraisal would not be
needed where a lien on real property
has been taken as collateral solely
through an abundance of caution.
Collateral will be deemed to be taken in
an abundance of caution where the loan
terms as a consequence have not been
made more favorable than they would
have been in the absence of the lien.
Accordingly, this exception is intended
to have very limited application. In
addition, the Board does not require a
State certified or licensed appraiser for
real estate-related financial transactions
having a transaction value less than or
equal to $100,000.
A third instance where a State
certified or licensed appraiser is not
required is a lease that is not the
economic equivalent of a purchase or
sale of real estate. An example of such a
lease is a sublease by a bank of a
portion of its premises to an unrelated
third party. On the other hand, an
assignment of a lease as collateral for
the extension of credit would be an
example of the economic equivalent of a
purchase or sale.
Fourth, the Board will not require a
State certified or licensed appraiser for
transactions resulting from a maturing
extension of credit, provided that the
borrower has made all scheduled
payments under the note, no new funds
are advanced, the borrower remains
creditworthy, and the market conditions
and collateral have not significantly
deteriorated.
Finally, a State certified or licensed
appraiser will not be required if a
regulated institution purchases an
interest in property or in a loan secured
by real property if the property has been
appraised in accordance with this
regulation. If the property was not
adequately appraised, then the
regulated institution must order an
appraisal for that property.
Any real estate-related financial
transaction that does not require a State
certified or licensed appraiser still will
have to comply with the Board’s
Guidelines for Real Estate Appraisal
Policies and Review Procedures (the
"Guidelines”), if applicable. The Board
expects that such transactions will be
supported by evaluations of real estate
collateral in a manner that is consistent
with safe and sound banking practices.
Determinations regarding when a
regulated institution shall require a
reappraisal, updated appraisal, or new
appraisal of property are governed by
the Guidelines. These Guidelines
identify concerns relevant to making
such a determination.
(b)
Transactions requiring State
certified appraiser. Title XI requires a
State certified appraiser to be used if the
size of the transaction and the
complexity of the appraisal warrants the
expertise of the State certified appraiser.
The Board’s regulation requires a State
certified appraiser to be used in three
instances. First, all appraisals rendered
in connection with federally related
transactions having a transaction value
of $1,000,000 or more require a State
certified appraiser, regardless of
complexity. Second, all federally related
transactions having a transaction value
equal to or greater than $250,000, except
those involving appraisals of l-to-4
family residential properties, require a
State certified appraiser. Third, l-to-4
family residential property appraisals
require a State certified appraiser if the
transaction value is $250,000 or more
and the appraisal will be complex.
Before hiring an appraiser, the
institution should assess the property to
determine the qualifications that an
appraiser will need to complete the
appraisal assignment and whether the
transaction, due to its complexity, would
require a certified appraiser. A regulated
institution may presume that appraisals
of l-to-4 family residential property are
not complex, unless the institution has
readily available information that a
given appraisal will be complex. Such
information may be provided, for
instance, on a loan application. If a
licensed appraiser discovers during the
assignment that the appraisal is
complex or beyond the appraiser’s
expertise, then he or she is required to
disclose this situation to the institution
and take the necessary action to remedy
the deficiency. A certified appraiser
could then be employed or the licensed
appraiser could complete the appraisal
and have a certified appraiser review
and co-sign the appraisal report.
to appraisals conducted in connection
with federally related transactions
within the Board’s jurisdiction. The
Board believes that the Departure
Provision allows appraisal services to
be performed which produce something
different from an “appraisal" as
contemplated by title XI of FIRREA. For
instance, in accordance with the
Departure Provision and consistent with
current USPAP requirements, a letter
opinion might be produced that could be
silent about trends of rents, vacancies,
or overbuilding. Explanatory comments
in the USPAP regarding the Departure
Provision in the USPAP cite examples of
when the departure provision might
apply;10 however, for purposes of the
Section 225.64 Appraisal Standards
proposed regulation, such services are
(a)
Minimum standards. Section 1110 not appraisals as this term is used in
of F1RREA instructs the Board to
title XI. The Board believes that the
prescribe appropriate standards for the
Departure Provision in the USPAP could
performance of appraisals made in
allow for the omission of data that
connection with federally related
should be included in developing and
transactions within its jurisdiction.
reporting appraisals rendered in
Further, section 1110 mandates that the
connection with federally related
standards require, at a minimum, that
transactions and, therefore, has
appraisals be written and that they
determined that the Departure Provision
conform to the generally accepted
shall not apply to such appraisals.
appraisal standards promulgated by the
The Board (or other appropriate body)
Appraisal Standards Board of the
will solicit comment on any revisions to
Appraisal Foundation. The Board is
the USPAP that are relevant to federally
empowered to require compliance with
related
transactions. Changes to the
additional appraisal standards if it
USPAP
made after the date this
makes a written determination that such
regulation is published shall not be
additional standards are required in
applicable to federally related
order to properly carry out its statutory
transactions until there has been notice
responsibilities. This section includes
of
the changes and the opportunity for
the minimum standards set forth in the
interested
persons to comment.
s ta tu te , while listing additional
(2) Disclosure of competency. An
standards that shall apply to all
•1
appraisals performed in connection with appraiser is required to have the
appropriate knowledge and experience
federally related transactions.
that will be required to complete an
In enacting title XI of FIRREA,
assignment competently. If such
Congress was responding to perceived
knowledge and experience is initially
problems in the appraisal industry.
lacking, the appraiser must disclose in
These problems were identified by the
the appraisal both this fact and the steps
House Committee on Government
taken to comply with the Competency
Operations during a series of hearings,7
Provision in die USPAP.
and have been cited repeatedly in the
(3) Market value. This standard
legislative history of title XI.•* The Board
requires an appraisal to document an
has adopted the following standards to
appraiser’s opinion of a property’s
further the intent of title XI in
“market value” as this term is defined.
addressing these problems. These
The definition of "market value” was
standards are designed to contribute to
developed by FNMA and FHLMC with
safe and sound banking practices by
the input of many professional appraisal
requiring reliable appraisals.
(1)
Compliance with USPAP;
departure provision. This standard
100-1001.100th Cong. 2d Sess. p t 1. at 19. 21-28; 133
Cong. Rec. H10709 (daily ed. Nov. 20.1987)
requires compliance with the USPAP,
(statement of Conq. Barnard); 132 Cong. Rec. H3452
and clarifies that the Departure
(daily ed. June 6.1966) (statement of Cong. Barnard).
Provision 9 in the USPAP is inapplicable
• The Departure Provision enables appraisers to
(c)
Transactions requiring either a
State certified or licensed appraiser.
Any federally related transaction that
does not require the services of a State
certified appraiser must be performed
by, at a minimum, a State licensed
appraiser. State licensed appraisers may
perform appraisals rendered in
connection with any federally related
transaction having a transaction value
up to, but not including, $250,000. In
addition, State licensed appraisers may
perform appraisals of l-to-4 family
residential property for transactions.
with a value up to, but not including,
$1,000,000 if the appraisal will not be
complex.
1 House Comm, on Government Operations.
Impact of Appraisal Problems on Real Estate
Lending, Mortgage Insurance, and Investment in the
Secondary Market, H.R. 99-691, 99th Cong^ 2d Sess.
(1966).
• See. e.g.. 135 Cong. Rec. S4004 (daily ed. April
17.1969) (statement of Sea Dodd); H.R. Rep. No.
8
“perform an assignment that calls for something less
than or different from the work that would
otherwise be required by the (USPAP)."
10 These examples include introducing into
evidence during a judicial proceeding a one page
summary that incorporates by reference an
appraiser's file or preparing a brief update of a
previously prepared appraisal.
w
organizations. Without such a standard.
a lender might select a definition of
value that allows the value of real
property to be increased by favorable
financing, going concern value, or
special value to a specific user. This
standard proposes to provide to
interested parties the information
necessary to determine the value of a
property.
(4) Written cppraisais; forms. This
standard sets forth the legislative
mandate that all appraisals be written.
Moreover, it requires an appraisal to be
sufficiently descriptive to enable a
reviewer to readily ascertain the
estimated value reported and the
rationale for that estimate. The
appraisal may be in a narrative format
or on a form chosen by en appraiser., but
the appraisal must comply with all other
provisions of the regulation. A form not
initially designed for use in connection
with federally related transactions may
be used provided that it is modified as
necessary to comply with the
requirements of title XI and this
regulation. Regardless of the format
selected, the appraisal must be able to
be readily understood by a third party
and must reflect the complexity of the
property that is appraised. This will
enable the reader of the appraisal to
independently determine its adequacy
based upon the characteristics of the
collateral appraised.
(5) Sales history. This standard is
designed to enable a reader of an
appraisal to compare an appraiser’s
opinion of a property’s market value
with recent sales prices. In addition to
giving the reader a basis by which to
evaluate the accuracy of the subject
property appraisal, it also will assist the
reader in identifying recent trends in
market prices. For instance, a sales
history may identify a single sale or a
series of sales at artificially inflated
prices.
Sales histories are required for onr
year for l-to-4 family residential
property and for three years for all other
types of property. A more demanding
reporting standard for nonresidential
property is appropriate in view of (i) the
typically lower frequency of turnover of
such properties and (ii) the fact that
larger loan amounts are generally
granted (and hence larger risk to the
regulated institution incurred) when the
loan security is not a l-to-4 family
dwelling.
(6) Revenues, expenses, and
vacancies. An appraisal should disclose
current income produced by a property
if the property will continue to be used
to generate income after a transaction i9
consummated. This information is
essential for an accurate picture of the
market value of an income-producing
property. Appraisal values should be
predicated upon current revenues,
expenses, and vacancies for properties
utilized in such a manner. That is,
appraisals should be based upon income
that can realistically be earned under
current market and economic conditions
(in light of revenues being earned on
comparable properties), rather than
upon estimated or projected income the!
cannot be supported by current market
conditions. If an appraiser reports a high
current vacancy, this condition may
require a lender to impose special
conditions on the loan.
(") M arketing period. This standard
requires an appraiser to employ a
marketing period that is reasonable in
light of a giver, property’s characteristics
and market conditions, and to disclose
the assumptions used. An appraiser's
opinion of market value will depend in
part on the appraiser’s estimate of hew
long a given piece of property wall
remain for sale. For instance, an
appraisal using a long marketing period
is ukely to produce a higher market
value than would an appraisal using a
shorter marketing period. This
information will better enable the reader
of the appraisal to assess its accuracy.
(8) Trend analysis. An appraisal
should inform the reader of any market
trends, regardless of whether the trend
reflects rising or declining values. Such
trends might include, for example,
increasing vacancy rates, greater use of
rent concessions, or declining sales
prices. Identification of negative trends
is particularly important so that a
regulated institution may avoid
extending credit on the basis of
.nsufficient c o lla te r a l. Market trends
may be indicated in market activity on
the subject property, such as listings,
options, or sales agreements;
accordingly, such activity should be
disclosed.
(9) Deductions and discounts. This
standard is designed to avoid having
appraisals prepared using unrealistic
assumptions. For federally related
transactions, an appraisal is to include,
among other values, an "as is” value;
this is the value of the property in its
current physical condition and subject
to the zoning in effect as of the date of
the appraisal. For properties where
improvements are to be constructed or
rehabilitated, the regulated institution
may also request a value based on
stabilized occupancy or a value based
on the sum of retail sales. However, the
sum of retail sales for a proposed
development is not the market value of
the development. For proposed
developments that involve the sale of
individual houses, units, or lots, the
9
appraiser must analyze and report
appropriate deductions and discounts
fer holding costs, marketing costs and
entrepreneurial profit. For proposed and
rehabilitated rental developments, the
appraiser must make appropriate
deductions and discounts for items such
as leasing commissions, ren* losses, and
tenant improvements from an estima’e
based on stabilized occupancy.
(10) Prohibited influences. All
appraisals are to be performed without
pressure from someone who desires a
specific value Accordingly, every
appraisal rendered in connection with a
federally related transaction shall
include a statement to the effect that
employment of the appraiser was not
conditioned upon the appraisal
producing a specific value cr a value
within a given range. Similarly, future
employment prospects should not be
dependent upon an appraisal producing
a specified value. Employment and
compensation should not be based on
whether a loan application is approved,
as this, too, would exert pressure on an
appraiser to render whatever appraisal
is necessary for the loan to be approved
(11) Self-contained appraisals. This
standard requires an appraisal to
contain all information necessary to
enable a reader of an appraisal to
understand the appraiser’s opinion. The
appraisal should not incorporate by
reference a document that is not readily
available to the reader. Studies prepared
by a third party should be verified to the
extent his or her assumptions or
conclusions are used. In addition, the
appraiser’s acceptance or rejection of a
third party study and its impact on value
should be fully explained. The appraisal
itself should enable the reader to
understand the conclusion without
having to refer to numerous other
documents. Moreover, the conclusion
must be reasonable in light of the
information set forth in the appraisal.
These requirements will force an
appraiser to obtain adequate data
before issuing an opinion of value.
(12) Legal description. A legal
description of the property is to be
included in an appraisal 90 as to avoid
confusion that may arise from less
precise identification. The description of
real property contained m a deed will
satisfy this requirement. This
requirement enables a reader to
compare the legal description in the
appraisal to the legal description in the
loan documents. The legal description is
to be provided in addition to, and not in
lieu of, the description required in the
USPAP.
(13) Personal property, fixtures, and
intangible items. An appraisal is to
include a separate assessment of
personal property, fixtures, or intangible
items that are attached to or located on
real property if the personal property,
fixture, or intangible item affects the
market valqe of the real property.
Furniture and fixtures should have
separate valuations because their
economic life may be shorter than real
property improvements and may require
special lending or investment
considerations. If the personal property,
fixture, or intangible item is not a part of
the transaction, then this fact should be
stated and the impact on market value
should be disclosed. Favorable loan
financing or any business interest or
other intangible item should be valued
separately within the appraisal. These
requirements will help provide a reader
with a more complete understanding of
the market value of the real property as
it will be at the time the transaction is
entered into.
(14)
Use of recognized appraisal
approaches. At the request of clients,
some appraisers have not prepared cost
estimates of value, estimates of value
based on the capitalization of income, or
value estimates based on direct sales
comparisons. This standard requires an
appraiser to address each of these
recognized approaches to market value.
If in the judgment of the appraiser one
or more approaches is not appropriate,
then the appraiser is to explain the
decision to use a particular approach.
This requirement is intended to produce
a p p r a i s a ls made only after the three
major approaches to market value have
been considered and (where
appropriate) reconciled, thereby
improving the accuracy of the appraisal.
Disclosure of the fact that an approach
was not used will assist the reader in
evaluating the adequacy of the
appraisal.
(b) Unavailability of information. The
Board realizes that some information
required by the USPA or this regulation
to be in an appraisal may, on occasion,
be unavailable. For example, historic
rents will not exist for a building under
construction at the time of appraisal.
However, an appraisal should inform
the reader of any material information
that is unavailable and why such
information could not be obtained, so as
to assist the reader in reviewing the
appraisal.
(c) Additional standards. The
standards required by this regulation are
the minimum standards to be met by
every appraisal made in connection with
a federally related transaction.
However, regulated institutions may
employ additional standards if
circumstances so warrant.
Section 225.65 Appraiser
Independence
An appraiser’s goal should be to
produce an objective opinion about the
market value of a property. This
objectivity may be compromised if the
appraiser is involved in the transaction,
such as deciding whether to extend
credit to be secured by such property.
Similarly, a direct or indirect interest in
the property appraised may undermine
the accuracy of the appraisal A direct
interest would arise, for example, by
owning all or part of property being
appraised. An indirect interest would
arise if, for example, an appraiser owns
property adjacent to the parcel being
appraised. This indirect interest would
extend to any property whose value is
likely to be affected by an appraisal, if
the appraisal is the proximate cause for
the effect. Moreover, the interest may be
nonpecuniary, such as a desire to help
an associate obtain a loan.
To further the goal of appraiser
independence, the Board requires that
fee appraisers (that is, appraisers hired
by a regulated institution for a particular
appraisal assignment) be hired by a
regulated institution or its agent rather
than the borrower. An appraisal
performed at the request of one
regulated institution may be used by
another if the latter institution has
adequately reviewed the appraisal,
documented such review, and found the
appraisal to have complied with this
regulation. In order to avoid potential
conflicts of interest, staff appraisers
(appraisers that are employees of a
regulated institution) should not be
supervised, controlled, or influenced by
loan underwriters, loan officers, or
collection officers within the institution.
The Board recognizes that in certain
cases it may be necessary for loan
officers and directors to perform
appraisals. Such cases would depend on
a bank’s particular circumstances; an
example would be a small rural bank
where the only qualified individual to
perform appraisals is a loan officer, and
separating this person from the loan and
collection departments is impossible. In
such situations, this individual should
perform appraisals only of real property
serving as collateral for loans with
which he or she is not otherwise
involved. In cases where loan officers or
directors perform appraisals, regulated
institutions are expected to ensure that
the appraisers are qualified and that
appraisal reports are adequate.*11
*1 It should be noted that directors and officers
who perform appraisals in connection with
federally related transactions must be licensed or
certified as appropriate.
10
Directors and officers should abstain
from any vote and/or approval involving
assets on which they had performed an
appraisal. In all. sufficient safeguards
should be in place to permit appraisers
to exercise independent judgment,
thereby ensuring the validity of the
appraisal process.
Section 225.66 Professional
Association Membership; Competency
(a) Membership in appraisal
organizations. The legislative history of
title XI evidences an intent to prohibit
discrimination against appraisers solely
by virtue of membership or lack of
membership in a particular appraisal
organization.12 Accordingly, this
regulation prohibits any entity covered
by title XI from basing decisions
regarding the employment of appraisers
solely on membership or lack of
membership in an appraisal
organization. An institution should
review the qualifications of appraisers
rather than the qualifications of
appraisal organizations to insure that a
qualified individual is being employed.
Membership in an organization may be
considered; however, it may not be the
sole determining factor in accepting or
rejecting an appraiser.
(b) Competency. Not all appraisers
are competent to perform every type of
appraisal that will be needed in
connection with federally related
transactions. For instance, an appraiser
who is experienced in appraising
shopping centers may not possess
sufficient expertise to appraise a golf
course. A financial institution should
look beyond an individual’s designation
or affiliation to determine if he or she
has the experience and training needed
to perform the appraisal. This provision
is not intended to prohibit, in every
circumstance, an individual from
appraising a type of property with which
he or she is not familiar. However, in
such instances, an appraiser may
perform the appraisal only in
accordance with the Competency
Provision in the USPAP. In addition, an
individual who is not a State certified or
licensed appraiser may assist in the
preparation of an appraisal if he or she
is directly supervised by a licensed or
certified appraiser (as appropriate), and
the appraisal is approved and signed by
a certified or licensed appraiser.
Section 225.67 Enforcement
Section 1120 of FIRREA vests the
Board with the authority to bring an
11 See. e.g.. House Banking Committee Report at
464: see also H.R. Conf. Rep. No. 101-222,101st
Cong., 1st Sess., at 457 (1989).
action for civil money penalties against
a regulated institution within the
agency’s primary jurisdiction. The
regulation makes clear that additional
enforcement remedies also are available
to the Board under the Federal Deposit
Insurance Act and other applicable
statutes. These can include civil money
penalties and cease and desist orders,
as well as orders of removal and
prohibitions against institutions and
institution-affiliated parties. FIRREA
specifically provides that the phrase
“institution-affiliated parties” includes,
but is not limited to, appraisers.13
Differences Between the Agencies
The federal financial institutions
regulatory agencies and the RTC have
attempted to develop uniform
regulations regarding the appraisal
requirements for federally related
transactions. However, as of the date of
publication of this regulation, the
agencies and the RTC have the
following principal differences.
1. De minimis test. The Board does
not require a State certified or licensed
appraiser for real estate-related
financial transactions having a
transaction value less than or equal to
$100,000. The OTS provides for no de
minimis test.
2. Use of licensed appraisers. The
Board allows State licensed appraisers
to perform appraisals of property not
involving l-to-4 family residential
property (“nonresidential property”) if
the transaction value is less than
$250,000. The NCUA requires any
appraisal of nonresidential property to
be performed by a State certified
appraiser.
Regulatory Flexibility Act Analysis
Title XI of FIRREA requires the Board
to establish standards for performing
appraisals in connection with federally
related transactions and to distinguish
those transactions that require State
certified appraisers from those that
require State certified or licensed
appraisers. This regulation is in
response to this statutory requirement.
The Board anticipates that the
proposed regulatory changes will
increase the cost of federally related
»s See FIRREA, §5 204(f)(6i and 901(b)(1).
value be below the lesser of $1,000,000
or 10 percent of Tier 1 capital.
4. The revised regulation clarifies that
most appraisals of l-to-4 family
residential property will be presumed to
be non-complex, and therefore
appropriate for State licensed appraisers
to perform, provided that the transaction
value is less than $1,000,000.
5. Finally, the revised regulation
exempts from appraisal requirements
under this regulation certain additional
types cl transactions, including
transactions resulting from a maturing
extension of credit under certain
circumstances, leases that are not the
economic equivalent of a purchase, and
purchases of pooled loans or interests in
real property if conforming appraisals
have been performed.
transactions for regulated institutions, to
the extent that the institutions are
required to perform appraisals that they
otherwise would not undertake or are
required to perform appraisals in a
different manner. Since FIRREA
contains no exception for small
institutions, the Board expects that their
costs will rise somewhat under these
circumstances if the costs are not
passed on to their customers. Weighed
against these increased costs should be
savings to the regulated institutions that
might arise from better loan
documentation generated under the
regulation, which may enable the
institution to improve its risk evaluation
and avoid potential loan losses.
After considering the comments
received, the Board ha3 made a number
of significant changes to the initial draft
that should help to reduce costs,
particularly for smaller institutions, and
to focus the regulation on those
transactions where appraisal standards
are most important. The principal
changes are as follows:
1. The de minimis cutoff has been
raised to $100,000, thus eliminating
smaller loans from the requirements of
this regulation and focusing the
regulation on those large transactions
where the possibility of loss is large.
Because many of these latter
transactions would normally involve an
appraisal under current practices, the
marginal cost of mandatory appraisals is
likely to be relatively insignificant, at
least after a period of adjustment to the
new requirements.
2. The revised regulation permits
competent State licensed appraisers,
rather than only State certified
appraisers, to perform any type of
appraisal in transactions involving
amounts up to $250,000. This should help
minimize the costs to smaller
institutions that concentrate on these
smaller loans.
3. The revised regulation also expands
the number of instances when licensed
appraisers may be used, first, by
allowing licensed appraisers to be used
for all non-complex appraisals of l-to-4
family residential property with
transaction values up to $1,000,000 and,
second, by eliminating the proposed
additional criterion that the transaction
Paperwork Reduction Analysis
The revisions to Regulation H and
Regulation Y in this rulemaking that
relate to recordkeeping requirements
were approved by the Board 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, the OTS, the NCUA, and the RTQ
under title XI, those agencies must adopt
substantially similar regulations. These
revisions to Regulations H and Y
implement the provisions of title XI of
FIRREA and affect state member banks
("SMBs”), bank holding companies, and
the nonbank subsidiaries of bank
holding companies (“BHC subs”), which
must review and evaluate the required
appraisals for federally related
transactions.
The Federal Reserve System estimates
that 1,183 institutions will be affected by
these recordkeeping requirements. Each
federally related transaction is expected
to require, on average, 15 minutes for
review and recordkeeping. The total
reporting burden is estimated to be
31,930 hours, as calculated below, which
represents less than one percent of total
annual System reporting burden.
Number of
respondents
S M B s ............ .................. „ .................... ............................. .
BHC subs.................... ................... ......................................
T o t a l ..............................._ ............ _ ...............
....................
........................... .......
................. ............
11
1,073
t,t8 3
A nnual
*
frequency
*
86
322 ___
Estimated
average
number of
hour* per
responee
25
25
Total annual
“
burden hours
23,070
8,855
31,925
List of Subjects
12 CFR Part 208
Accounting, Agricultural loan losses,
Applications, Appraisals, Banks,
Banking, Branches, Capital adequacy.
Confidential business information.
Dividend payments. Federal Reserve
System, Flood insurance, Publication of
reports of condition. Reporting and
recordkeeping requirements, Securities,
State member banks.
12 CFR Part 225
Administrative practice and
procedure, Appraisals, Banks, Banking,
Capital adequacy, Federal Reserve
System, Holding companies. Reporting
and recordkeeping requirements,
Securities, State member banks.
For the reasons set forth in this
document, the Board amends 12 CFR
parts 208 and 225 as follows:
PART 208— MEMBERSHIP OF S T A TE
BANKING INSTITUTIONS IN TH E
FEDERAL RESERVE SYSTEM
1. The authority citation for part 208 is
revised to read as follows:
Authority: Sections 8 , 11(a), 11(c), 19, 21, 25,
and 25(a) of the Federal R eserve A c t as
am ended (12 U.S.C. 321-338, 248(a), 248(c),
461, 401-486, 001, and 011, respectively):
sections 4 and 13(j) of the Federal Deposit
Insuranoe Act, as am ended (12 U .S.G 1814
and 1823(f), respectively); section 7(a) o f the
International Banking Act of 1978 (12 U.S.G
3105k sections 907-010 of tha International
Lending Supervision Act of 1983 (12 U.S.G
3906-3909): sections 2 ,12(b), 12(g), 12(i),
15B(c)(5), 1 7 ,17A, and 23 of the Securities
Exchange Act of 1934 (15 U.S.G 78b, 781(b),
781(g), 781fi), 78o-4(c)(5), 78q, 78 q -l, and 78w,
respectively); section 5155 of the R evised
Statutes (12 U.S.C. 36) as am ended by the
M cFadden Ant of 1927; and sections 11011122 of the Financial Institutions Reform,
Recovery, and Enforcem ent Act of 1989 (12
U.S.C. 3310 and 3331-3351).
2. Section 208.18 is added to read as
follows:
§ 208.18 Appraisal standards for federally
related transactions.
The standards applicable to
appraisals rendered in connection with
federally related transactions entered
into by state member banks are set forth
in subpart G of the Board’s Regulation
Y, 12 CFR part 225.
PART 225— BANK HOLDING
COMPANIES AND CHANGE IN BANK
CONTROL
The authority citation for part 225 is
revised to read as follows:
Authority: 12 U.S.G 1817(j)(13), 1818,1831i,
1843(c)(8), 1844(b), 3106, 3108, 3907, and 3909:
and sections 1101-1122 of the Financial
Institutions Reform, Recovery, and
Enforcem ent Act of 1989 (12 U.S.C. 3310 and
3331-3351).
(ii) Prescribes which categories of
federally related transactions shall be
appraised by a State certified appraiser
and which by a State licensed appraiser:
and
(iii) Prescribes minimum standards for
the performance of real estate
appraisals in connection with federally
related transactions under the
jurisdiction of the Board.
§225.62 Definitions.
2.
Subpart G, consisting of § 5 225.61
(a) Appraisal means a written
through 225.61, is added immediately
statement independently and impartially
following subpart F to read as follows:
prepared by a qualified appraiser setting
forth an opinion as to the market value
Subpart G—Appraisals
of an adequately described property as
Sec.
of a specific date(s), supported by the
225.61 Authority, purpose, and scope.
presentation and analysis of relevant
225.62 Definitions.
market information.
225.63 A ppraisals not required; transactions
(b) Appraisal Foundation means the
requiring a S tate certified or licensed
Appraisal Foundation established on
appraiser.
225.64 A ppraisal standards.
November 30,1987, as a not-for-profit
225.65 A ppraiser independence.
corporation under the laws of Illinois.
225.66 Professional association m em bership:
(c) Appraisal Subcommittee means
com petency.
the Appraisal Subcommittee of the
225.67 E nforcem ent
Federal Financial Institutions
Subpart G— Appraisals
Examination Council.
(d) Complex l-to-4 family residential
§225.61 Authority, purpose, and scope.
property appraisal means one in which
(a) Authority. This subpart is issued
the property to be appraised, the form of
by the Board of Governors of the
ownership, or market conditions are
Federal Reserve System (the '‘Board")
atypical.
under title XI of the Financial
(e) Federally related transaction
Institutions Reform, Recovery, and
means any real estate-related financial
Enforcement Act of 1989 (“FiRREA")
transaction entered into on or after
(Pub. L No. 101-73,103 StaL 183 (1989)),
August 9,1990, that:
12 U.S.C. 3310, 3331-3351, and section
(1) The Board or any regulated
5(b) of the Bank Holding Company Act,
institution engages in or contracts for;
12 U.S.C. 1844(b).
and
(b) Purpose and scope. (1) Title XI
(2) Requires the services of an
provides protection for federal financial
appraiser.
and public policy interests in real estate
(f) Market value means the most
related transactions by requiring real
probable price which a property should
estate appraisals used in connection
bring in a competitive and open market
with federally related transactions to be
performed in writing, in accordance with under all conditions requisite to a fair
sale, the buyer and seller each acting
uniform standards, by appraisers whose
prudently and knowledgeably, and
competency has been demonstrated and
assuming the price is not affected by
whose professional conduct will be
undue stimulus. Implicit in this
subject to effective supervision. This
definition is the consummation of a sale
subpart implements the requirements of
as of a specified date and the passing of
title XI, and applies to all federally
title from seller to buyer under
related transactions entered into by the
Board or by institutions regulated by the conditions whereby:
(1) Buyer and seller are typically
Board (“regulated institutions'’).
motivated:
(2) This subpart:
(i)
Identifies which real estate-related (2) Both parties are well informed or
well advised, and acting in what they
Financial transactions require the
consider their own best interests;
services of an appraiser,
12
(3) A reasonable time is allowed for
exposure in the open market;
(4) Payment is made in terms of cash
in U.S. dollars or in terms of financial
arrangements comparable thereto; and
(5) The price represents the normal
consideration for the property sold
unaffected by special or creative
financing or sales concessions granted
by anyone associated with the sale.
(g) Real estate-related financial
transaction means any transaction
involving:
(1) The sale, lease, purchase,
investment in or exchange of real
property, including interests in property,
or the financing thereof; or
(2) The refinancing of real property or
interests in real property; or
(3) The use of real property or
interests in property as security for a
loan or investment, including mortgagebacked securities.
(h) State certified appraiser means
any individual who has satisfied the
requirements for certification in a State
or territory whose criteria for
certification as a real estate appraiser
currently meet or exceed the minimum
criteria for certification issued by the
Appraiser Qualifications Board of the
Appraisal Foundation. No individual
shall be a State certified appraiser
unless such individual has achieved a
passing grade upon a suitable
examination administered by a State or
territory that is consistent with and
equivalent to the Uniform State
Certification Examination issued or
endorsed by the Appraiser
Qualifications Board of the Appraisal
Foundation. In addition, the Appraisal
Subcommittee must not have issued a
finding that the policies, practices, or
procedures of the State or territory are
inconsistent with title XI of FIRREA.
The Board may, from time to time,
impose additional qualification criteria
for certified appraisers performing
appraisals in connection with federally
related transactions within its
jurisdiction.
(i) State licensed appraiser means any
individual who has satisfied the
requirements for licensing in a State or
territory where the licensing procedures
comply with title XI of FIRREA and
where the Appraisal Subcommittee has
not issued a finding that the policies,
practices, or procedures of the State or
territory are inconsistent with title XI.
The Board may, from time to time,
impose additional qualification criteria
for licensed appraisers performing
appraisals in connection with federally
related transactions within the Board’s
jurisdiction.
(j) Tract development means a project
of five units or more that is constructed
or is to be constructed as a single
development
(k) Transaction value means:
(l) For loans or other extensions of
credit, the amount of the loan or
extension of credit;
(2) For sales, leases, purchases, and
investments in or exchanges of real
property, the market value of the real
property interest involved; and
(3) For the pooling of loans or
interests in real property for resale or
purchase, the amount of the loan or the
market value of the real property
calculated with respect to each such
loan or interest in real property.
§ 225.63 Appraisals not required;
transactions requiring a State certified or
licensed appraiser.
(a) Appraisals not required. An
appraisal performed by a State certified
or licensed appraiser is not required for
any real estate-related financial
transaction in which:
(1) The transaction value is $100,000
or less;
(2) A lien on real property has been
taken as collateral solely through an
abundance of caution and where the
terms of the transaction as a
consequence have not been made more
favorable than they would have been in
the absence of a lien;
(3) 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;
(4) There is a subsequent transaction
resulting from a maturing extension of
credit, provided that:
(i) The borrower has performed
satisfactorily according to the original
terms;
(ii) No new monies have been
advanced other than as previously
agreed;
(iii) The credit standing of the
borrower has not deteriorated; and
(iv) There has been no obvious and
material deterioration in market
conditions or physical aspects of the
property which would threaten the
institution’s collateral protection; or
(5) A regulated institution purchases a
loan or interest in a loan, pooled loans,
or interests in real property, including
mortgage-backed securities, provided
that the appraisal prepared for each
pooled loan or real property interest met
the requirements of this regulation, if
applicable.
Any transaction for which a State
certified or licensed appraiser is not
required nevertheless must have an
appropriate evaluation of real property
collateral that is consistent with the
Board's Guidelines for Real Estate
13
Appraisal Policies and Review
Procedures.
(b) Transactions requiring a State
certified appraiser.—
(1) All transactions of $1,000,000 or
more. All federally related transactions
having a transaction value of $1,000,000
or more shall require an appraisal
prepared by a State certified appraiser.
(2) Nonresidential transactions of
$250,000 or more. All federally related
transactions having a transaction value
of $250,000 or more, other than those
involving appraisals of l-to-4 family
residential properties, shall require an
appraisal prepared by a State certified
appraiser.
(3 ) Complex residential transactions
of $250,000 or more. All complex l-to-4
family residential property appraisals
rendered in connection with federally
related transactions shall require a State
certified appraiser if the transaction
value is $250,000 or more. A regulated
institution may presume that appraisals
of l-to-4 family residential properties
are not complex, unless the institution
has readily available information that a
given appraisal will be complex. The
regulated institution shall be responsible
for making the final determination of
whether the appraisal is complex. If
during the course of the appraisal a
licensed appraiser identifies factors that
would result in the property, form of
ownership, or market conditions being
considered atypical, then either
(i) The regulated institution may ask
the licensed appraiser to complete the
appraisal and have a certified appraiser
approve and co-sign the appraisal; or
(ii) The institution may engage a
certified appraiser to complete the
appraisal.
(c) Transactions requiring either a
State certified or licensed appraiser. All
appraisals for federally related
transactions not requiring the services of
a State certified appraiser shall be
prepared by either a State certified
appraiser or a State licensed appraiser.
§ 225.64
Appraisal standards.
(a) Minimum standards. For federally
related transactions, all appraisals shall,
at a minimum:
(1) Conform to the Uniform Standards
of Professional Appraisal Practice
(“USPAP") adopted by the Appraisal
Standards Board of the Appraisal
Foundation, except that the Departure
Provision of the USPAP shall not apply
to federally related transactions;
(2) Disclose any steps taken that were
necessary or appropriate to comply with
the Competency Provision of the
USPAP;
(3) Be based upon the definition of
market value a3 set forth in § 225.62(f):
(4)
(i) Be w r itte n a n d p r e s e n te d in
a
n a r r a tiv e fo rm a t o r o n fo rm s th a t s a tis fy
a ll th e re q u ir e m e n ts o f thi3 se c tio n :
(ii) Be sufficiently descriptive to
enable the reader to ascertain the
estimated market value and the
rationale for the estimate; and
(iii) Provide detail and depth of
analysis that reflect the complexity of
the real estate appraised;
(5) Analyze and report in reasonable
detail any prior sales of the property
being appraised that occurred within the
following time periods:
(i) For l-to-4 family residential
property, one year preceding the date
when the appraisal was prepared; and
(ii) For all other property, three years
preceding the date when the appraisal
was prepared;
(6) Analyze and report data on current
revenues, expenses, and vacancies for
the property if it is and will continue to
be income-producing;
(7) Analyze and report a reasonable
marketing period for the subject
property;
(8) Analyze and report on current
market conditions and trends that will
affect projected income or the
absorption period, to the extent they
affect the value of the subject property;
(9) Analyze and report appropriate
deductions and discounts for any
proposed construction, or any completed
properties that are partially leased or
leased at other than market rents as of
the date of the appraisal, or any tract
developments with unsold units;
(10) Include in the certification
required by the USPAP an additional
statement that the appraisal assignment
was not based on a requested minimum
valuation, a specific valuation, or the
approval of a loan;
(11) Contain sufficient supporting
documentation with all pertinent
information reported so that the
appraiser’s logic, reasoning, judgment,
and analysis in arriving at a conclusion
indicate to the reader the
reasonableness of the market value
reported;
(12) Include a legal description of the
real estate being appraised, in addition
to the description required by the
USPAP;
(13) Identify and separately value any
personal property, fixtures, or intangible
items that are not real property but are
included in the appraisal, and discuss
the impact of their inclusion or
exclusion on the estimate of market
value; and
(14) Follow a reasonable valuation
method that addresses the direct sales
comparison, income, and cost
approaches to market value, reconciles
those approaches, and explains the
elimination of each approach not used.
(b) Unavailability of information. If
information required or deemed
pertinent to the completion of an
appraisal is unavailable, that fact shall
be disclosed and explained in the
appraisal.
(c) Additional standards. Nothing
contained herein shall prevent a
regulated institution from requiring
additional appraisal standards if
deemed appropriate.
§ 225.65
Appraiser Independence.
(a) Staff appraisers. If an appraisal is
prepared by a staff appraiser, that
appraiser must be independent of the
lending, investment, and collection
functions and not involved, except as an
appraiser, in the federally related
transaction, and have no direct or
indirect interest, financial or otherwise,
in the property. If the only qualified
persons available to perform an
appraisal are involved in the lending,
investment, or collection functions of the
regulated institution, the regulated
institution shall take appropriate steps
to ensure that the appraisers exercise
independent judgment and that the
appraisal is adequate. Such steps
include, but are not limited to,
prohibiting an individual from
performing appraisals in connection
with federally related transactions in
which the appraiser is otherwise
involved and prohibiting directors and
officers from participating in any vote or
approval involving assets on which they
performed an appraisal.
(b) Fee appraisers. If an appraisal is
prepared by a fee appraiser, the
appraiser shall be engaged directly by
the regulated institution or its agent, and
14
have no direct or indirect interest,
financial or otherwise, in the property or
transaction. A regulated institution may
accept an appraisal that was prepared
by an appraiser engaged directly by
another institution subject to title XI of
FIRREA, if the regulated institution that
accepts the appraisal has:
(1) Established procedures for review
of real estate appraisals:
(2) Reviewed the appraisal under the
established review procedures, finding
the appraisal acceptable; and
(3) Documented the review in writing.
§ 225.66 Professional association
membership; competency.
(a) Membership in appraisal
organizations. A State certified
appraiser or a State licensed appraiser
may not be excluded from consideration
for an assignment for a federally related
transaction solely by virtue of
membership or lack of membership in
any particular appraisal organization.
(b) Competency. All staff and fee
appraisers performing appraisals in
connection with federally related
transactions must be State certified or
licensed, as appropriate. However, a
State certified or licensed appraiser may
not be considered competent solely by
virtue of being certified or licensed. Any
determination of competency shall be
based upon the individual’s experience
and educational background as they
relate to the particular appraisal
assignment for which he or she is being
considered.
§ 225.67
Enforcement
Institutions and institution-affiliated
parties, including staff appraisers and
fee appraisers, may be subject to
removal and/or prohibition orders,
cease and desist orders, and the
imposition of civil money penalties
pursuant to the Federal Deposit
Insurance Act, 12 U.S.C 1811 etseq., 83
amended, or other applicable law.
Board of Governors of the Federal Reserve
System, June 27,1990.
William W. Wiles,
Secretary of the Board.
(FR Doc. 90-15401 Filed 7-3-00; 8:45 amj
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