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FEDERAL RESERVE BANK OF NEW YORK [ Circular No. 10644 ~| June 17, 1993 REAL ESTATE APPRAISAL REQUIREMENTS Proposed Amendments to Regulations H and Y C o m m e n t s R e q u e s t e d b y J u ly 1 9 To All State Member Banks, Bank Holding Companies, and Branches and Agencies of Foreign Banks, in the Second Federal Reserve District: The Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, and the Board of Governors of the Federal Reserve System have issued joint proposals to amend their regulations on real estate appraisals, in order to reduce the regulatory burden by requiring appraisals only when they enhance the safety and soundness of financial institutions or otherwise further public policy. Following is the text of the statement by the Board of Governors announcing the proposal: The Federal Reserve Board is requesting public comment on an interagency proposed rule to amend real estate appraisals which are contained in the Board’s Regulations H and Y. Comments should be received by July 19, 1993. The proposed amendments would increase to $250,000 the threshold level at or below which appraisals are not required, expand and clarify existing exemptions to appraisal requirements, and identify additional circumstances when appraisals are not required. The proposal also would amend existing requirements governing appraisal content and appraiser independence. Enclosed — for member banks, bank holding companies, and branches and agencies o f foreign banks in this District — is an excerpt from the F e d e r a l R e g is te r of June 4, containing the official interagency notice of the proposed rule, together with the text of the proposed amendments to Regulations H and Y of the Board of Governors. Additional, single copies of the enclosure may be obtained at this Bank (33 Liberty Street) from the Issues Division on the first floor or by calling the Circulars Division (Tel. No. 212-720-5215 or 5216). Comments on the proposal should be submitted by July 19, 1993, and may be sent to the Board, as indicated in the notice, or to our Domestic Banking Department. E. G erald C orrigan , P r e s id e n t. Friday June 4, 1993 Part VII Department of the Treasury Office of the Comptroller of the Currency Office of Thrift Supervision Federal Reserve System____________ Federal Deposit Insurance Corporation 12 CFR Part 34 et al. Real Estate Appraisals; Notice of Proposed Rulemaking P R IN T E D IN N E W Y O R K , F R O M c. Cir. No. 10644] FEDERAL REGISTER , V O L . 5 8 , NO . 106 DEPARTMENT O F THE TREASURY Office of the Comptroller of the Currency 12CFR Part 34 [Docket No. 93-10] FEDERAL R ESER VE SYSTEM 12 CFR Part 22S [Regulation Y; D ocket No. R-0803] FEDERAL DEPOSIT INSURANCE CORPORATION 12 CFR Part 323 RIN 3064—A B 0 5 DEPARTMENT O F THE TREASURY Office of Thrift Supervision 12 CFR Parts 545,563, 564 [Docket No. 93-78] RIN 1550-AA64 Real Estate Appraisals O ffice o f th e Com ptroller of the Currency, Treasury; Board o f Governors o f th e F ederal Reserve System ; F ederal D ep o sit Insurance Corporation; an d O ffice o f Thrift S u p ervision , Treasury. ACTION: N o tic e o f p rop osed rulem aking. AGENCIES: T h e O ffice o f the Comptroller o f the Currency, th e Board o f Governors o f the Federal R eserve S ystem , the Federal D ep o sit Insurance Corporation, and th e O ffice o f T hrift S u p ervision (co llectiv ely th e a gen cies) so licit com m en ts on p ro p o sed am en dm en ts to the agen cies’ regu lation s regarding appraisals o f real estate, adopted pursuant to T itle XI o f th e Financial Institutions Reform , R ecovery, and Enforcem ent A ct o f 1989. T h e p rop osed am en d m en ts w o u ld in crease to $ 2 5 0 ,0 0 0 th e th resh old lev el at or b elo w w h ic h appraisals are not required pursuant to T itle XI, expand and clarify ex istin g ex em p tio n s to the T itle XI appraisal requirem ent, and id en tify a d d itio n a l circu m stan ces w h e n appraisals are n o t required und er Title .XL In ad dition , th e p rop osal w o u ld am end ex istin g requirem ents governing appraisal con ten t and appraiser in d ep en d en ce. T he a g en cies are p ro p o sin g these am endm en ts as a resu lt o f experience gained from im p lem en tin g th eir appraisal regulations. T h e am endm ents are an effort to serve federal financial and p u b lic p o lic y in terests b y reducing regulatory burden w h ile requ iring T itle SUMMARY: XI appraisals w h e n su ch appraisals en h a n ce th e safety and so u n d n e ss of fin an cial in stitu tio n s or oth erw ise further p u b lic p o licy . If ad opted , this prop osal w o u ld red u ce the num ber o f real estate-related finan cial transactions that require th e serv ices o f an appraiser and sim p lify th e preparation o f appraisals for federally related transactions. DATES: C om m ents m ust b e received by July 1 9 ,1 9 9 3 . ADDRESSES: C om m ents sh o u ld be* d irected to: D ocket N o. 9 3 -7 8 . T h e se su b m issio n s m ay b e hand d eliv e red to 1 7 0 0 G Street, N W , from 9:00 a.m . to 5:00 p .m . on b u sin ess days; th e y m ay b e se n t by fa csim ile tra n sm ission to F A X num ber (202) 9 0 6 -7 7 5 5 . S u b m issio n s m u st be receiv ed b y 5;00 p .m . o n th e day they are d u e in order to b e co n sid ered by the OTS. Late-filed, m isad d ressed or m isid en tifie d su b m issio n s w ill n ot be co n sid ered b y th e O T S in th is rulem aking. C om m ents w ill b e available for in sp e ctio n at 1 7 76 G Street, NW , L evel 1C. O ffice o f the C om p troller o f th e C urrency FOR FURTHER INFORMATION CONTACT: C om m u nications D iv isio n , C om ptroller o f th e Currency, 9th F lo w , 250 E Street, SW , W ash ington , DC 2 0 219, A ttention: D ocket N o . 9 3 -1 0 . C om m ents w ill b e available for public in sp e ctio n and p h o to co p y in g at the sam e location. . ' B oard o f G overn ors o f the F ederal R eserve S ystem C om m ents, w h ic h sh o u ld refer to D ocket N o. R -0 8 0 3 , m ay b e m ailed to Mr. W illiam W iles, Secretary, Board o f G overnors o f th e Federal R eserve S y stem , 20th Street and C onstitution A v en u e NW ., W ashington, DC 20551. C om m ents ad dressed to Mr. W iles may a lso b e d elivered to th e Board’s m ail room b etw een 8:45 a.m . and 5:15 p.m ., and to the secu rity con trol room ou tsid e o f th ese hours. B oth th e m ail room and con trol room are a ccessib le from the courtyard entrance on 20th Street b etw een C onstitution A v en u e and C Street, NW. C om m ents m ay b e in sp e cted in room B -1 1 2 2 b etw een 9:00 a.m . and 5:00 p .m ., ex cep t as provided in § 261.8 o f the Board’s R ules Regarding A vailab ility o f Information, 12 CFR 261.8. F ed eral D ep osit In su ran ce Corporation S en d com m en ts to H oyle L. Robinson, E x ecu tiv e Secretary, Federal D eposit Insurance Corporation, 550 17th Street, N W ., W ashington, DC 20429. Com m ents m ay b e hand d eliv ered to room F -4 0 2 , 1776 F Street, N W „ W ashington, DC on b u sin e ss d ays b etw een 8:30 a jn . and 5 p.m . [FAX n u m b er (202) 8 9 8 -3 8 3 8 ). C om m ents w ill b e available for in sp ectio n and p h otocop yin g in room 7 118, 550 17th Street, NW ., W ashington DC b etw een 9 a.m . and 4:30 p.m . on b u sin ess days. O ffice o f Thrift S u p erv isio n S en d com m en ts to D irector, Information S erv ices D iv isio n , O ffice of C om m u nications, O ffice o f Thrift S up ervision , 1700 G Street, NW , W ashington, DC 2 0 5 5 2 , A ttention 2 O ffice o f th e C om p troller o f th e C urrency (OCC) T hom as E. W atson, N ation al Bank Exam iner, O ffice o f the C h ief N ational Bank Exam iner, (202) 8 7 4 -5 1 7 0 ; or H orace G. S n eed , S en ior A ttorney, or F. John P od vin , Jr., A ttorney, (202) 8 7 4 44 6 0 , Bank O p erations an d A ssets D iv isio n . B oard o f G overn ors o f th e F ed eral R eserve S ystem (Board) Roger C ole, D ep u ty A sso cia te Director, (202) 4 5 2 -2 6 1 8 , R hoger H. Pugh, A ssistan t D irector, (202) 7 2 8 5883, S tan ley B. R ediger, Supervisory F in ancial A n a ly st (202) 4 5 2 -2 6 2 9 , or V irginia M. Gibbs, S up ervisory F in an cial A n alyst, (202) 4 5 2 -2 5 2 1 , D iv isio n o f Banking S u p erv isio n and R egulation; or Gregory A. Baer, Senior A ttorney (202) 4 5 2 -3 2 3 6 or C hristopher B e llin i, A ttorney (202) 4 5 2 -3 2 6 9 , Legal D ivision . F ed eral D ep osit In su ra n ce C orporation (FDIC) Robert F. M ia ilo v ich , A sso cia te Director, (202) 8 9 8 -6 9 1 8 , James D. Leitner, E xam ination S p ecia list, (202) 8 9 8 -6 7 9 0 , D iv isio n o f S up ervision ; or W alter P. D oyle, C ou n sel, (202) 8 9 8 3 682, Legal D iv isio n . O ffice o f Thrift S u p erv isio n (OTS) Robert F ish m an , Program Manager, Credit Risk, S u p er v isio n P o licy , (202) 9 0 6 -5 6 7 2 ; D eirdre G. Kvartunas, P olicy A n a ly s t S u p erv ision P o lic y , (202) 9 0 6 7933; E llen J. S azzm an, A ttorney, R egulations and L egislation D iv isio n , C hief C o u n sel’s O ffice, (202) 9 0 6 -7 1 3 3 . SUPPLEMENTARY INFORMATION: I. B ackground T itle XI o f th e F in an cial Institutions Reform, R ecovery, and Enforcem ent A ct o f 1989 (FIRREA), 12 U .S.C . 3331 et se q ., directs the a g en cies to p ub lish appraisal ru les for federally related transactions w ith in the jurisd iction of each agency. T h e p urpose o f the T he am en dm en ts also id en tified legislation is to provid e that federal financial and p u b lic p o lic y in terests in ad dition al real estate-related fin an cial real estate related tran saction s w ill b e transactions that do n ot require the services o f an appraiser. S e e 57 FR protected by requiring that real estate 12190 (OCC) (April 9 ,1 9 9 2 ); 57 FR 9 0 4 3 appraisals u tilized in co n n ectio n w ith federally related transactions are (FDIC) (March 1 6 ,1 9 9 2 ); 57 FR 1 2698 perform ed in w riting, in accord ance (OTS) (April 1 3 ,1 9 9 2 ). w ith uniform standards, b y in d iv id u a ls . In D ecem ber 1992, C ongress p rovid ed w h ose co m p eten cy h as b een that the agen cies may set a th resh o ld dem onstrated a n d w h o se p ro fessio n a l le v el b e lo w w h ich th e serv ices o f state con d uct w ill b e subject to effec tiv e certified or lic e n se d appraisers are n o t su pervision. S e e 12 U.S.C. 3331. required in co n n ectio n w ith federally Section 1121(4) o f FIRREA, 1 2 U.S.C. related transactions if th e y determ in e in 3350(4), d efin e s a federally related w riting that the thresh old d o es n ot transaction a s a real estate-related represent a threat to th e safety and financial transaction that is regulated or sou n d n ess o f financial in stitu tion s. S ee engaged in b y a federal fin an cial H ousing and C om m unity D evelop m en t in stitu tio n s regulatory a gen cy an d A ct o f 1992, P ub lic Law 1 0 2 -5 5 0 , sec. requires th e services o f an appraiser. A 9 5 4 ,1 0 6 Stat. 3672, 389 4 (1992) real estate-related fin a n cia l transaction (am ending 12 U.S.C. 3341). is d efin ed as an y transaction that A s part o f the burden red u ction study in volves: (i) T h e sa le, lea se, p u rch ase, m andated by section 221 o f the Federal in vestm en t in or ex ch a n g e o f real ' D ep osit Insurance Corporation property, in clu d in g interests in ' Im provem ent A ct o f 1991, P u b lic Law property, or th e fin an cin g thereof; (ii) 1 0 2 -2 4 2 ,1 0 5 StaL 2 2 3 6 , 2305, th e the refinancing o f real property or agen cies review ed their appraisel interests in real property; an d (iii) th e regulations to determ ine if ad d ition al use o f real property or in terests in real changes cou ld be m ade to reduce property a s secu rity for a loan or regulatory burden co n sisten t w ith in vestm en t, in clu d in g m ortgage-backed federal financial and p u b lic p o licy securities. S e e 12 U.S.C. 3 3 5 0 (5 ) interests and the safety and so u n d n e ss (FIRREA sectio n 1121(5)). o f regulated institu tions. A s part o f th is In July an d A ugu st o f 1990, th e process, the agen cies requested agencies p u b lish ed regulations to m eet com m en ts from the p u b lic on w a y s to the requirem ents o f T itle XI o f FIRREA. reduce burden. S ee 55 FR 3 4 684 (A ugust 2 4 .1 9 9 0 ) II. P rop osed A m endm ents (OCC); 55 FR 27762 (July 5 .1 9 9 0 ) .(Board); 55 FR 3 3 8 7 9 (A u gust 2 0 ,1 9 9 0 ) A s a result o f the com m en ts and their (FDIC); 55 FR 34532 (A ugust 2 3 ,1 9 9 0 ) ow n exp erience, th e agen cies b elie v e (OTS). that the requirem ent o f a T itle XI In their appraisal regulations, the appraisal can im p ose ad d ition al direct agencies id en tify categories o f real and indirect costs on b oth th e lend er estate-related financial tran saction s that and the borrower. O ne result o f th is do n ot require the serv ices o f an increased cost m ay be a restriction on appraiser in order to protect federal the availability o f credit. In so m e cases, financial and p u b lic p o lic y in terests or appraisals m ay prove so ex p en siv e that to satisfy p rin cip les o f safe and sou n d they m ay m ake a sou nd sm all- or banking. T h ese real estate-related m ed iu m -sized b u sin ess loan financial transactions are n o t federally u necon om ical. related transactions u nd er th e statutory W hile in m any cases an appraisal is and regulatory d efin itio n s. A ccord in gly, a necessary part o f a so u n d loanthey are subject to neith er T itle XI o f underw riting d ecision process, the FIRREA nor th o se p ro v isio n s o f th e agencies b eliev e that the statutory ag en cies’ regulations g overn in g flexib ility sh ou ld be u sed and that the appraisals. agen cies sh o u ld not require T itle XI In March an d A pril o f 19 9 2 , th e OCC, appraisals w here they im p o se FDIC and O TS am en d ed th eir appraisal significant costs w ithou t prom oting to a regulations. T h o se am en d m en ts sign ifican t extent the safety and increased from $5 0 ,0 0 0 to $ 1 0 0 ,0 0 0 the threshold at or b elo w w h ic h th e se rv ic es so u n d n ess o f regulated in stitu tio n s or furthering the purposes o f T itle XI o f o f an appraiser w o u ld n ot be re q u ir e d .1 FIRREA. A ccordingly, the agen cies are p roposing to am end their regulations to 1W hen the other agencies initially adopted a clarify and expand the circum stances in threshold level of £ 5 0 ,0 0 0 , the Board, w hich had already adopted a $100,000 threshold, sought w h ich a T itle XI appraisal is not comment on (1) whether it should conform its level required. to those of the other agencies, and (2) the appropriate m inim um standards for State-licensed appraisers. Because the other agendas then raised their levels to $100,000 an d the States have adopted appropriate licensing standards, the Board took no further action on its proposed rulemaking. 3 It is a lso th e a g en cies’ exp erience that th e current m inim u m standards a p p lica b le to federally related tran saction s and requirem ents co n ce rn in g th e in d ep en d en ce of appraisers can be sim p lified w ithout sig n ifica n tly affecting th e reliability of T itle XI appraisals. Therefore, the a g en cies are p roposing to am end their reg u la tio n s to elim in ate regulatory ap p raisal standards that parallel standards in th e U niform Standards o f P ro fessio n a l A ppraisal Practice p rom u lgated by the A ppraisal Standards Board o f th e A ppraisal F oundation. In a d d itio n , th e agen cies are proposing to a m en d their regulations con cerning appraiser in d e p e n d en ce to perm it regulated in stitu tio n s to u se appraisals prepared for other finan cial services in stitu tio n s. T h e a g en cies b elie v e that federal fin a n cia l and p u b lic p o licy interests can b e served b y m aking several ch anges to p ro v isio n s o f their appraisal regulations that id en tify: (i) W hen T itle XI ap p raisals are not required; (ii) w hen an ev a lu a tio n is n eed ed for real estaterelated fin a n cia l transactions that d o not require T itle XI appraisals; and (iii) w h e n an agen cy m ay require a T itle XI ap praisal to address safety and so u n d n e ss con cern s. T h ese changes sh o u ld red u ce regulatory burden, im p ro v e cred it availability and serve federal fin an cial and p u b lic p o licy in terests w ith o u t threatening the safety an d so u n d n e ss o f financial in stitu tions. T h e a g en cies also propose to sim p lify c o m p lia n c e w ith regulatory requ irem en ts for both appraisers and u sers o f the appraisals by changing p r o v isio n s o f their regulations that govern: (i) P ub lication o f the Uniform S tandards o f Professional A ppraisal Practice; (ii) m inim u m appraisal standards; (iii) unavailable information; (iv) in stitu tio n d ev elo p ed ad ditional ap praisal standards; and (v) appraiser in d e p e n d e n c e . The p roposed changes sh o u ld red u ce costs w ith o u t effecting th e relia b ility o f appraisals u sed in c o n n e c tio n w ith federally related tran saction s. A . T ra n sa c tio n s That D o N o t R equire A p p r a is a ls T h e p ro p o sed am endm ents identify n e w categories o f transactions for w h ich T itle XI appraisals w ill n ot b e required an d ex p a n d and clarify ex istin g categories o f transactions that do not require T itle XI appraisals. 1. In crease th e T hreshold from $100,000 to $ 2 5 0 ,0 0 0 T h e a g en cies p ropose to increase to $ 2 5 0 ,0 0 0 th e thresh old le v e l at or b elow w h ic h th e serv ices o f an appraiser o f repaym ent or collateral m ust support the d ecisio n to ex te n d credit. T h e ap p lication o f th e prop osed am endm ent is illustrated b y th e fo llo w in g exam p les. E x a m p le 1: A b u sin ess w ith an estab lish ed cash flo w seek s a loan from a regulated in stitu tion to p urchase an adjacent property for exp an sion . A s a Common b u sin ess practice, the in stitu tion takes a lie n against real estate w h en ev er availab le for greater com fort. H ow ever, th e in stitu tio n ’s an a ly sis determ in es that th e current in co m e from the b u sin ess and p ersonal property available as collateral support the d ecisio n to exten d credit w ith o u t k n ow in g the real estate’s m arket value. During loan n egotiations, the in stitution offers to m ake th e loan on slig h tly better term s for th e borrow er if it receiv es a lie n on real estate. T h e borrow er accepts the offer and p ro v id es the ad dition al real estate collateral. T he regulated in stitu tion m ay reasonably c o n clu d e that th e lie n on the real estate w as taken in an abundance of caution b ecau se th e current in co m e from th e b u sin ess and personal property 2. T h e “A bu nd ance o f C aution ” taken as collateral support th e d ecision P rovision to exten d credit. Therefore, n o appraisal T he agen cies p rop ose to am end their w o u ld be required.' regulations to clarify and exp an d the E x a m p le 2: T h e ow n er o f a sh op seeks sco p e o f the ex em p tio n for real estate a term loan from a regulated in stitution lie n s taken in an “ ab un dan ce of for m odern ization o f its facilities. T he cau tion .” in stitu tion d eterm in es that other sources T he a gen cies’ appraisal regulations o f repaym ent and collateral d o not currently p rovide that an appraisal is su fficien tly support th e d ecisio n to not required w h e n a lie n on real estate exten d credit w ith o u t taking a lie n on h as b een taken as collateral so le ly the real estate and k n ow in g th e real through an ab un dan ce of cau tion and estate’s market v alu e. Therefore, in w here the terms o f th e transaction as a order to p rudently exten d credit to the co n seq u en ce h ave n ot b een m ade m ore borrower, the in stitu tion n eed s an favorable than th ey w o u ld h ave b een in appraisal. the absence o f a lie n . S ee 12 CFR T he regulated in stitu tion sh ou ld 34.43(a)(2)(i) (OCC); 12 CFR 225.63(a)(2) co n clu d e that th e real estate lie n has not (Board); 12 CFR 323.3(a)(2) (FDIC); and been taken in an ab undance o f caution 12 CFR 564.3(a)(2)(i) (OTS). b ecau se the other sou rces o f repaym ent T he a g en cies’ ex p er ie n c e w ith and collateral do n ot support the im p lem en tin g th e appraisal regulations d ecisio n to exten d credit w ith ou t in d icates that the e x istin g abundance o f k n ow in g the real esta te’s market value. caution exem p tion h a s b een interpreted A ssu m in g n o other exem p tion is too narrowly. T h e a d d itio n a l ap p licab le to th is transaction, a T itle XI requirem ent that th e transaction w o u ld appraisal w o u ld b e required. have b een m ade on th e sam e term s 3. Loans N ot S ecured b y Real Estate absent the lien on real estate collateral T he agen cies p ropose to adopt a has sign ifican tly red u ced th e num ber o f uniform exem p tion for transactions that cases in w h ich th e ex em p tio n ap plies. To em p hasize th e broader sco p e o f the are not secured b y real estate. abundance of ca u tio n exem p tion , the Currently, the appraisal regulations of agen cies propose to d elete th e w ord the OCC, FDIC and O TS exem p t these “ s o le ly ” from th e current ex em p tio n . transactions. See 12 CFR 34.43(a)(2)(ii) (OCC); 12 CFR 323.3(a)(7) (FDIC); and T he agen cies a lso p rop ose to d elete th e 2 De M inim is Levels fo r Commercial Feat Estate Appraisals, Report to Congress, Office of 12 CFR 564.3(a)(2)(ii) (OTS). H ow ever, language requiring that the term s o f the Management and Budget (August 1992). there are m inor d ifferen ces b etw een the transaction not be m ore favorable to the 3 The net loan charge-off rate is determined by p rovision s ad opted b y the OCC and OTS borrower than th ey w o u ld h ave b een in taking the dollar am ount of gross losses, subtracting and th e p rovision in the FDIC’s rule. the absence o f th e real estate lien . T o the am ount recovered,' and dividing the result by qualify for this ex e m p tio n , other sou rces Currently, the B oard’s appraisal the average of outstanding loans. w o u ld n o t b e required in con n ection w ith real estate-related financial transactions. T h e current thre sh o ld le v e l is set at $100 ,0 0 0 . S ee 12 CFR 34.43(a)(1) (OCC); 12 CFR 225.63(a)(1) (Board); 12 CFR 323.3(a)(1) (FDIC); an d 12 CFR 564.3(a)(1) (OTS). T h e agen cies d o n ot regularly collect data on rates o f lo s s b y th e siz e o f loans b ecau se o f the e x c e s siv e burden to the in du stry a sso cia ted w ith th e collection o f su ch data. T h e a g en cies n ote, h ow ever, that lo ss in form ation for com m ercial real estate lo a n s based on a sm all sam ple o f le n d in g in stitu tion s w as con sid ered by th e O ffice o f M anagem ent and B udget (OMB) in a 1992 report2 to C ongress prepared pursuant to section 472 o f Federal D ep o sit Insurance Corporation Im provem ent A ct o f 1991. That report, w h ic h th e agen cies w ill in clu d e in th e rulem ak in g record, su ggests it m ay b e appropriate to approach an in crea se in th e threshold above $1 0 0 ,0 0 0 w ith so m e caution due to higher lo ss rates associated w ith larger com m ercial loan s. S in ce the esta b lish m en t o f a $100,000 thresh old le v e l, th e ag en cies have not found an y e v id e n c e to in d ica te that there h as b een a sign ifican t increase in the defaults on real estate-related loans o f $ 1 0 0 ,0 0 0 or le ss. Furtherm ore, the agen cies b e lie v e that faulty estim ates of v alu e o f real estate collateral are not a major ca u se o f lo ss e s in con n ection w ith transactions b e lo w $1 0 0 ,0 0 0 . T he agen cies b e lie v e that the low lo ss exp erien ce w ith th e $ 1 0 0 ,0 0 0 threshold stem s from th e fact that loan s secured b y l-to -4 fam ily resid en tia l real estate com p rise the m ajority o f transactions fallin g b elo w th e $ 1 0 0 ,0 0 0 threshold. T h ese loan s h ave n ot b een the cause of major credit lo ss e s in th e banking system . Data for a ll com m ercial banks as o f D ecem ber 1 992 sh o w that the net loan charge-off rate 3 for l-to -4 fam ily resid en tial real estate lo a n s w as 0.20 percent com pared to 1.26 percent for all loans. T h e n et loan charge-off rate for savin gs a sso c ia tio n s w a s 0.2 2 percent for l-to -4 fam ily resid en tia l real estate loan s com pared to 0.51 percent for all loan s. T he agen cies b e lie v e that an increase in th e thresh old le v e l from $100,000 to $ 2 5 0 ,0 0 0 for bank s and thrifts w ould n ot represent a threat to th e safety and so u n d n e ss o f fin an cial institutions. M oreover, the a g en cies b elie v e that federal finan cial an d p u b lic p o lic y interests w o u ld co n tin u e to b e protected if th e prop osed in crease w ere ad opted. T h e agen cies b e lie v e that th e m ajority o f lo a n s b elo w a $ 2 5 0 ,0 0 0 th resh old le v e l w o u ld co n tin u e to b& loan s secu red by l-to -4 fam ily resid en tial real estate. T hus, th e a g en cies d o n o t b e lie v e that lo a n s o f $ 1 0 0 ,0 0 1 to $ 2 5 0 ,0 0 0 w o u ld p o se sig n ifica n tly greater risks to finan cial in stitu tio n s than sim ilar loan s b e lo w th e ex istin g th resh old . T h e a gen cies b eliev e that in the ev en t su ch lo sse s d o occur, th e $ 2 5 0 ,0 0 0 thresh old w o u ld protect th e d ep o sit in surance funds and the safety an d so u n d n e ss of finan cial in stitu tion s. Separately, th e a g en cies are p roposing an am endm ent stating that each agency reserves the right to require a regulated in stitu tion to obtain a T itle XI appraisal w h en ev er the ag en cy b e lie v e s it is necessary to ad dress safety and so u n d n ess con cern s. A s a matter of p o licy , the OTS in te n d s to require problem in stitu tio n s or in stitu tio n s in a troubled co n d itio n to obtain appraisals for transactions o f m ore than $ 1 00,000. 4 regulation d o es n o t sp ec ifica lly exem pt these transactions. 5. Real Estate-Secured B u sin ess Loans Less Than $1 M illio n T he proposed am en dm en t w o u ld clarify that a regulated in stitu tion d oes n ot n eed a T itle XI appraisal w h en it m akes a loan that is n ot secu red b y real estate even thou gh th e borrow er u se s the loan p roceed s to p urchase or in vest in real estate. For exam p le, th is exem ption w o u ld b e ap p licab le to transactions in w h ic h th e borrower provid es collateral for th e loan other than real estate or q u a lifies for unsecured c r e d it T h e agen cies are p rop osing a n ew exem p tion for b u sin ess loan s w ith a v a lu e o f le ss than $1 m illio n w h ere the sale of, or rental in co m e d erived from, the real estate taken as collateral is not the prim ary sou rce o f repaym ent. In co n n ectio n w ith th is p rop osed exem p tion , th e a g en cies a lso are prop osing to am end their regulations to d efin e “b u sin ess lo a n .” T h e a gen cies b e lie v e that th e co st and d ela y associated w ith ob tain in g an appraisal has h a d an ad verse im pact on the ty p es o f sm all- and m ed iu m -sized b u sin ess len d in g that w o u ld b e exem p ted b y th is p rovision . In th e ex p erien ce o f the agen cies, th e appraisal requirem ent h as a d versely effected the ab ility o f sm all- and m ed iu m -sized b u sin esses to obtain c r e d it In effect, the cost o f an appraisal m ay h a v e im peded sm a ll- and m ed iu m -sized b u sin e sse s from receivin g w ork in g cap ital, operating loan s and other b u sin essrelated cred its that o th erw ise w o u ld be co n sisten t w ith prudent banking practice. T h e a g en cies d o n o t b eliev e that th is w a s the in ten t o f T itle XI o f FIRREA, and d o n o t b e lie v e that federal p u b lic p o licy in terests are served by requiring a T itle XI appraisal in these cases. T h e agen cies are p rop osin g an exem p tion d esig n ed to serve th e public p o licy interest in sm all- and m ed iu m sized b u sin ess len d in g w h ile ensuring that th e safety arid so u n d n e ss o f finan cial in stitu tio n s w o u ld b e protected. T h e p rop osed exem p tion w o u ld ap p ly o n ly to transactions in v o lv in g b u sin ess loan s w ith a value le ss than $1 m illio n . T h is w o u ld h elp en su re that the transactions w o u ld generally in v o lv e sm all- an d m ed iu m siz ed b u sin esses and that an y lo sses associated w ith ex em p tin g th ese transactions from th e T itle XI appraisal requirem ent w o u ld not gen erally p ose a threat to the safety and so u n d n e ss of financial in stitu tion s. In ad dition , th e ex em p tio n w o u ld o n ly ap p ly to tran saction s w here the sale of, or rental in co m e d erived from, the real estate is n ot th e prim ary source o f repaym ent for the loan. For exem p t transactions, lend ers w o u ld n eed to d ocu m en t th e ab ility o f th e b u sin ess to repay the loan from b u sin e ss operations. W here the v a lu e o f the real estate is c lo se ly lin k ed to the a b ility o f the borrower to repay th e b u sin e ss loan, an appraisal w o u ld be required u n le ss another ex em p tio n is ap p licab le to the transaction. In co n n ectio n w ith th is ex em p tio n , the a gen cies a lso p rop ose to am en d their For transactions that w o u ld be covered b y th is p rop o sed exem ption, the real estate h as n o direct effect on the regulated in stitu tion 's d ecisio n to extend credit b eca u se th e in stitu tion has n o legal interest in th e real estate as collateral. T herefore, th e agen cies b eliev e that federal finan cial and p u b lic p o licy interests w o u ld n ot b e served by requiring len d ers an d borrow ers to in cu r the cost o f ob taining T itle XI appraisals in con n ection w ith th ese transactions. 4. L iens for P urposes O ther Than the Real Estate’s V alu e T he agen cies are p rop osing a n ew exem ption for transactions in w h ich a regulated in stitu tion takes a lie n on real estate for a p u rp ose other than the valu e o f the real estate. R egulated in stitu tio n s frequently take real estate lie n s to protect legal rights to other collateral a n a n o t b ecau se o f the valu e o f the real esta te as an in dividu al asset. For in stan ce, in len d in g associated w ith loggin g operations, regulated in stitu tio n s ty p ica lly take a lien against th e real estate u p on w h ich the tim ber stand s to en su re their access to the timber. Sim ilarly, w h ere the collateral for a loan is a b u sin ess or m anufacturing facility, a regulated in stitu tion m ay take a lie n against the land and im provem en ts in order to be able to se ll the en tire b u sin ess or facility as a going con cern if the borrower defaults. A s d efin ed in th e a g en cies’ regulations, an appraisal is a w ritten statem ent in d ep en d en tly an d im partially prepared by a q ualified appraiser settin g forth an o p in io n as to the market va lu e o f real estate. See 12 CFR 34.42(a) (OCC); 12 CFR 225.62(a) (Board); 12 CFR 323.2(a) (FDIC); and 12 CFR 564.2(a) (OTS). W hen the market v alu e o f the real estate as a n in d ivid u al asset is n ot part o f th e regulated in stitu tio n ’s d e c isio n to take a lie n against real estate, n o purpose is served by requiring th e in stitu tio n to obtain an appraisal. 5 regulations to d efin e “b u sin ess lo a n ” as a loan or ex ten sio n o f cred it to any corporation, general or lim ited partnership, b u sin ess trust, joint ven ture, p o o l, syn d icate, so le proprietorship (in clu d in g an in d ivid u al engaged in farming), or other b u sin ess en tity . T h is d efin ition e x c lu d e s in d iv id u a ls, in d iv id u a l trusts, a sso cia tio n s, and unincorporated organizations. T h e ap p lication o f th e p rop osed am en dm en t is illustrated b y th e fo llo w in g exam p les. E xam ple 1: T ne ow n er o f a sh o p seek s a term loan for le ss than $1 m illio n from a regulated in stitu tion . T h e loan w ill be repaid w ith in co m e derived from op erations. T he regulated in stitu tion w o u ld not ex ten d cred it to th e borrower w ith o u t a lien against the real estate. H ow ever, b ecau se the loan is le ss than $1 m illio n and the sale of, or rental in co m e derived from, the real estate is n ot th e primary sou rce o f repaym ent, a T itle XI appraisal w o u ld n ot b e required for th is transaction under th is exem p tion . E xam ple 2; A com p an y acquires an adjacent parcel o f land to construct an o ffice b uildin g. T h e com p any seek s a loan o f le ss than $1 m illio n from a regulated in stitu tion to provid e con stru ction finan cing and a perm anent mortgage for the office b u ild in g. The co m p a n y in ten d s to lease part o f the b u ild in g and w ill u se the rental in com e to h e lp repay th e loan. T h e lender estim ates that operations o f th e b u sin ess w o u ld contribute approxim ately 45 percent o f th e funds n ecessary to repay the loan and rental in co m e approxim ately 55 p e r c e n t.. T h e regulated in stitu tion sh o u ld c o n clu d e that rental in co m e d erived from th e real estate serves as th e prim ary source o f repaym ent for the loan. Therefore, assu m in g n o other ex em p tio n is ap plicab le to the transaction, a T itle XI appraisal w ou ld b e required. 6. L eases T h e agen cies are not prop osing any su bstan tive change to the ex em p tion for operating leases. H ow ever, as a result o f in clu d in g n ew ex em p tio n s in th e regulations, th is ex em p tio n is b eing renum bered. 7. R equirem ents for R en ew als, R efinancings, and Other S ubsequent Transactions T h e agen cies propose to am en d and clarify the exem p tion for renew als, refinan cings, and other transactions resu ltin g from an ex istin g ex te n sio n o f cred it to sim p lify th e c o n d itio n s under w h ic h the exem p tion ap p lies. T h e ag en cies’ appraisal regulations currently p ro v id e that an appraisal is not required for a subsequent transaction that resu lts from a maturing exten sion o f cred it if: (i) The borrower has perform ed satisfactorily according to the original terms; (ii) no n ew m o n ies are advanced other than as previously agreed; (iii) th e cred it standing o f the borrow er h as n o t deteriorated; and (iv) there h as b een n o ob vious and m aterial deterioration in market con d ition s or p h y sica l a sp ects o f th e property w h ich w o u ld threaten th e in stitu tion ’s collateral protection . S ee 12 CFR 34.43(a)(4) (OCC); 12 CFR 225.63(a)(4) (Board); 12 CFR 323.3(a)(4) (FDIC); and 12 CFR 564.3(a)(4) (OTS). U nder.the p roposed am en d m en t, the u se o f this exem p tio n n o lon ger w o u ld be co n d itio n ed o n m eetin g all o f these requirem ents. T he prop osed am endm ent w o u ld perm it regulated in stitu tion s to renew or refinance an y ex istin g exten sion o f credit an d ex ten d additional funds w ith o u t ob tain in g a n e w T itle XI appraisal if th e in stitu tio n ’s collateral protection w o u ld h ot be threatened as a result o f th e transaction. The borrower’s past perform ance and ability for future perform ance are sign ifican t factors to b e con sid ered as a m atter o f prudent banking practice w h e n determ ining w heth er to ren ew or refinance an existin g ex te n sio n o f credit. H ow ever, in the ab sen ce o f a m aterial change in market co n d itio n s or the con d ition o f the property that threaten the in stitu tio n ’s collateral protection, no purpose is served b y obtaining a n ew T itle XI appraisal. For exam ple, a loan originally ex te n d ed w ith a lo w loan-tovalu e ratio c o u ld b e renew ed w ithou t a T itle XI appraisal, even though market co n d itio n s h ave deteriorated, if the regulated in stitu tio n co n clu d es that th e n ew loan -to-valu e ratio w o u ld remain lo w and, therefore, its collateral protection w o u ld n ot be threatened. T he p rop osed am en dm en t also w o u ld perm it a regulated in stitu tion to advance ad d ition al fun ds to the borrow er u p to a le v e l that w o u ld not threaten th e in stitu tio n ’s collateral protection. H ow ever, if the advance o f ad dition al fu n d s a lon e, or in com b ination w ith a deterioration in market co n d itio n s, resu lts in the regulated in stitu tio n ’s collateral protection b ein g threatened, a n ew T itle XI appraisal w o u ld then be required. 8. Transactions Involving Real Estate Notes The agencies are proposing to amend and clarify the currenWext of the regulation that exempts purchases of real estate-secured loans. T h e a g en cies’ appraisal regulations currently a llo w regulated in stitu tion s to p urch ase loan s or interests in p o o ls o f loan s secu red b y real estate p rovided that each loan h as an appraisal that con form s to the appraisal regulation if it w a s ap p lica b le at th e tim e the loan w as originated . S ee 12 CFR 34.43(a)(5) (OCC); 12 CFR 225.63(a)(5) (Board); 12 CFR 323.3(a)(5) (FDIC); and 12 CFR 564.3(a)(5) (OTS). T h e p rop osed am en dm en t w o u ld clarify that a regulated in stitu tion m ay engage in certain transactions in v o lv in g real estate-secu red n o tes w ith ou t ob tain in g a n e w appraisal if the , u n d erlyin g real estate loan w as originated prior to th e effective date o f th e appropriate a g en cy ’s regulation, or th e u n d erlyin g real estate loan w as originated after th e effective date o f the appropriate a g en cy ’s appraisal regulation and is supported by an appraisal that m et the requirem ents o f the appropriate a g en cy ’s appraisal regulation eith er at th e tim e of origination or su bsequ en t sale. T n e a gen cies d o n o t b eliev e that n ew ap praisals are required for these transactions in order to protect federal fin an cial and p u b lic p o licy interests or th e safety and so u n d n e ss o f financial in stitu tio n s. In ad d ition , requiring n ew appraisals m ay restrict the market for p u rch ases, sa les, and in vestm en ts in real estate-secu red lo a n s by increasing co sts for th o se transactions. 9. T ransactions Insured or Guaranteed by a U n ited States G overnm ent A gency or U n ited States G overnm ent Sponsored A gen cy T h e ag en cies are p roposing to am end their appraisal regulations to adopt an ex em p tio n for transactions that are in sured or guaranteed by a U nited States governm ent agen cy or governm ent sp on sored agency. T h e appraisal regulations o f the OCC, FDIC, and OTS currently provide that loan s in sured or guaranteed by an agen cy o f the U n ited States governm ent do n ot require appraisals. See 12 CFR 34.43(a)(6) (OCC); 12 CFR 323.3(a)(6) (FDIC); and 12 CFR 545.32(b) and 5 6 3 .1 7 0 (c )(l)(iv ) (OTS). T h e OCC and th e FDIC are proposing to am en d th is p ro v isio n in their regulations by d eletin g the requirem ent that th e transaction be supported by an appraisal that con form s to the requirem ents o f th e insuring or guaranteeing agen cy. In order to receive th e in su ran ce or guarantee, the transaction m u st m eet a ll underw riting requirem ents o f th e insurer or guarantor, in clu d in g real estate appraisal or evalu ation requirem ents. Therefore, it is u n n ecessary to require regulated 6 institutions to ensure compliance with appraisal requirements of the federal insurer or guarantor. T h e O TS also is p rop osin g to adopt th is p rovision as part o f its appraisal regulation in 12 CFR Part 564 an d, if ad opted , w ill m o d ify its current regulations to b e co n siste n t w ith th is p rovision. The Board is proposing to adopt a new exemption for transactions insured or guaranteed by a United States government agency or government sponsored agency. 10. Transactions That Meet the Qualifications for Sale to a United States Government Agency or Government Sponsored Agency The agencies are proposing to adopt an exemption for transactions that meet the qualifications for sale to a United States government agency or government sponsored agency. Currently, tn e appraisal regulations o f the OCC, FDIC and O TS p ro v id e that appraisals in co n n ectio n w ith transactions in v o lv in g l-to -4 fam ily resid en tial prop erties n eed n o t com p ly w ith certain ap praisal standards if the appraisals con form to th e appraisal standards ap proved b y the F ederal N ational M ortgage A sso cia tio n (Fannie Mae) or Federal H o m e Loan Mortgage Corporation (Fred die M ac). S e e 12 CFR 34.44(b) (OCC); 12 CFR 323.4(b) (FDIC); and 12 CFR 564.8(d )(1) (OTS). The proposed amendment would permit a regulated institution to originate, hold, buy or sell transactions that meet the qualifications for sale to any United States government agency or government sponsored agency without obtaining a Title XI appraisal. The agencies believe that the appraisal standards of U.S. government agencies or government sponsored agencies established to maintain a secondary market in loans are sufficient to protect federal financial and public policy interests in the loans those government or government sponsored agencies purchase. The agencies also believe that compliance with these standards will protect the safety and soundness of financial institutions. By referring to any U.S. government agency or U.S. government sponsored agency, the proposed amendment would include transactions that meet the qualifications for sale to entities such as tne College Construction Loan Insurance, Association and Federal Agricultural Mortgage Corporation, as well as the Federal National Mortgage Association and Federal Home Loan Mortgage " Corporation. • Tne agencies believe that permitting regulated institutions to follow these standardized appraisal requirem ents, w ithout the n ecessity o f obtain in g an additional appraisal or appraisal supplem ent, w ill increase in stitu tio n s’ ability to buy and se ll th ese loan s and their liquidity. If the proposed am en d m en t is adopted, the OCC, FDIC and OTS w o u ld d elete their current p ro v isio n s. T he Board has no sim ilar p rovision . 11. Transactions b y R egulated Institutions as F id u cia ries T he agencies are p rop osin g a n ew exem ption for transaction s in w h ic h a regulated in stitu tion is acting in a fiduciary capacity and is n ot required to obtain an appraisal und er other law . T he agencies d o n o t b e lie v e that a T itle XI appraisal sh o u ld be required w hen a regulated in stitu tio n en gages in a real estate-related fin an cial transaction in a fiduciary cap acity , u n le ss other federal, state or co m m o n la w requires an appraisal for th o se transactions. L osses as a result of th ese tran saction s w o u ld not, absent som e n eg lig e n c e b y the in stitu tion, be incurred by th e institution. T hus, ex e m p tin g th ese transactions from th e T itle XI appraisal requirem ent sh o u ld n o t ad versely affect the safety and so u n d n e ss o f finan cial institutions. W hen an ap praisal is required under other law , it sh o u ld conform to the requirem ents o f the ' agen cies’ regulations. 12. Transactions W here the S ervices o f an A ppraiser Are N o t N ecessary To Protect Federal F in a n cia l and P ub lic P olicy Interests A s a result o f th eir ex p erien ce in im plem enting their regulations, the agencies recognize that it is im p o ssib le to id en tify all transaction s for w h ic h the services o f an appraiser sh o u ld n ot b e required under T itle XI o f FIRREA. T h e sp ecific exem p tion s o f the p rop osed regulation describe th e major categories o f transactions that w o u ld n o t require appraisals. H ow ever, th e a g en cies are proposing to retain th e authority to determ ine in a g iv en case that the services o f an appraiser are n ot required in order to protect federal fin an cial and p ub lic p o licy in terests in real estaterelated financial tran saction s or to protect the safety and so u n d n e ss o f the institution. 13. D efinition o f R eal Estate T he Board is p rop o sin g to incorporate the d efinition o f real estate and real property currently em p lo y ed by the other agencies. T hat d efin itio n sp ecifica lly ex c lu d e s m ineral rights, tim ber rights, grow in g crop s, w ater rights, and sim ilar in terests. in sectio n 553 o f title 5, U n ited States C ode, in c lu d in g th e p u b lication o f T h e agen cies are p roposing m inor n o tic e and receip t o f w ritten com m ents ch an ges to the p ro v isio n s o f their or th e h o ld in g o f p u b lic hearings w ith regulations governing the u se o f resp ect to any standards or requirem ents evaluation s. p rop osed to be esta b lish ed . Currently, the OCC, Board and OTS A s part o f the effort to sim p lify their require evaluation s for all transactions regulations, th e a g en cies are considering that d o not require appraisals. S ee 12 three alternatives for satisfyin g the CFR 34.43(a) (OCC); 12 CFR 225.63(a) (Board); and 12 CFR 564.3(a) (OTS). The statutory requirem ent to p u b lish appraisal standards ap p licab le to FDIC’s regulation p rovid es that su p ervisory g u id e lin es, general banking fed erally related transactions. p ractices or other prudent standards U n d er A lternative I, th e ap plicable m ay require an appropriate va lu ation of p ro v isio n s o f the U SPA P w o u ld be real property collateral. S ee 12 CFR repeated in the a g e n c ie s’ regulations. 323.3(a). The a gen cies b elie v e that the U nd er A lternative II, th e p ro vision s of effect o f these p ro v isio n s for som e th e U SPA P w o u ld be in clu d ed in the regulated in stitu tion s m ay have been to a g e n c ie s’ rules through incorporation by require evalu ation s for certain real reference. U nd er b oth A lternatives I and estate-related finan cial transactions II, a failure to c o m p ly w ith the USPAP w h e n th e evaluation s d id not a ssist in in an y particular transaction w o u ld be p rotecting the safety and so u n d n ess of a v io la tio n o f th e regulation. Therefore, th e in stitu tions. , if an agen cy w a n ted to pursue an T h e agen cies p ropose to am end this en forcem en t or rem ed ial action against p rovision to state that evaluation s a regulated in stitu tio n , th e agencies sh o u ld b e obtained for som e, but not all, w o u ld o n ly h ave to sh o w that the real estate-related financial transactions U SPA P w as n ot fo llo w ed . that do not require T itle XI appraisals. In ad d ition , u n d er A lternatives I and U nder th e proposed am endm ent, II th e a g en cies w o u ld h ave to com p ly regulated in stitu tion s w o u ld be w ith th e n o tice and com m en t ex p ected to obtain an evaluation requirem ents o f th e A dm in istrative w h e n e v er n ecessary to assist the P rocedure A ct, 5 U.S.C . 553, in order to in stitu tio n in its d ecisio n to enter into adopt an y su b stan tive ch an ges to the th e real estate-related financial U SP A P p rom ulgated by the A ppraisal transaction. T h ese in clu d e transactions Standards Board o f th e A ppraisal b e lo w th e threshold le v el, b u sin ess loan s b elo w $1 m illio n w h ere real estate F oun dation . T h is c o u ld m ean that the v ersion o f the U SPA P u sed b y the is not th e primary sou rce o f repaym ent, a g en cies and regulated in stitu tion s and transactions resulting from an c o u ld be outdated. In stitu tions, ex istin g exten sion o f credit. therefore, w o u ld n o t b e able to u se the C. A p p ra isa ls to A d d re ss S a fe ty a n d su b stan tive ch an ges o f the current S o u n d n e ss C oncerns v ersion o f the U SPA P u n til the agencies T he agen cies are prop osing to am end c o u ld am end their regulations in their regulations to clarify that each accord ance w ith n o tic e and com m ent agen cy m ay require T itle XI appraisals rulem aking procedures. to address safety and sou n d n ess U nd er A lternative III, the U SPA P con cern s. U nder th is p rovision, the w o u ld n ot be a part o f the a g en cies’ ag en cies cou ld require appraisals w here regulations. A d o p tin g th is approach real estate-related finan cial transactions w o u ld m ean that a failure to fo llo w the p resent greater-than-normal risk to U SPA P w o u ld n o t co n stitu te a violation in d iv id u a l in stitu tion s. For exam p le, an o f th e regulation. Therefore, if an agency agen cy m ay require a problem w an ted to pursue an en forcem ent or in stitu tion or an in stitu tion in troubled rem ed ial action against a regulated co n d itio n to obtain appraisals for in stitu tio n , it w o u ld h a v e to transactions b elo w th e proposed dem onstrate that th e failure to follow th resh old level. th e U SPA P in th e particular situation D. P u blication o f USPAP v io la ted generally accep ted appraisal standards. The agencies also are seeking B. U se o f E valu ation s comment on alternatives to the current practice of publishing the Uniform Standards of Professional Appraisal Practice (USPAP) as an appendix to each agency's appraisal regulation. S ectio n 1107 o f FIRREA states that appraisal standards sh a ll be prescribed in accordance w ith p rocedures set forth 7 U nd er th is alternative, the agencies w o u ld not h ave to repu b lish ch an ges to th e U SPA P ad op ted b y the A ppraisal Standards Board. R eferences to the U SPA P w o u ld n ot b e to a particular ed itio n . Instead, references w o u ld be a ssu m ed to a lw a y s m ean the m ost current ed itio n . E. Minimum Standards T h e agen cies p rop ose to am end their regulations to red u ce th e num ber o f m in im u m appraisal standards ap p licab le to T itle XI appraisals for federally related transactions from 14 to four and elim in a te th e current p rohibition on th e u se o f the USPAP D eparture P rovision in co n n ectio n w ith federally related transactions. T itle XI o f FIRREA states that each federal finan cial in stitu tio n s regulatory agency sh a ll p rescribe appropriate standards for th e perform ance o f real estate appraisals in co n n ectio n w ith federally related tran saction s under the jurisd iction o f ea ch su ch agency. T h ese rules sh a ll require, at a m in im u m that: (i) real estate ap praisals b e performed in accordance w ith gen erally accepted appraisal standards as ev id en ced by the standards prom ulgated b y the Appraisal Standards Board o f th e A ppraisal F oundation; an d (ii) that su ch appraisals sh all b e w ritten ap praisals. U nd er T itle XI, each agen cy m ay require co m p lia n ce w ith addition al standards if it m akes a determ ination in w ritin g that su c h a d d itio n a l standards are n ecessary in ord er to properly carry out its statutory resp o n sib ilities. A t th e tim e th e a g en cies began drafting th eir ap praisal regulations, the A ppraisal Standards Board w a s in the process o f am en d in g its appraisal standards. B ecau se o f uncertainty about the co n ten t o f th e standards that w o u ld be prom ulgated by th e A ppraisal Standards Board, a n d th e interpretation o f th ose standards, th e a gen cies in clu d ed w ith in th eir appraisal regulations 13 m in im u m standards that paralleled ex istin g or p rop osed USPAP standards. C om p lian ce w ith th ese 13 standards w a s required in ad dition to com p lian ce w ith th e U SPA P. T he agen cies a lso proh ibited the u se o f th e U SPA P D eparture P rovision in co n n ectio n w ith fed erally related transactions. T h e D eparture Provision perm its an appraiser to prepare an appraisal w ith o u t co m p ly in g w ith certain recom m en d ed p ro v isio n s o f th e U SPA P if th e appraisal report is not rendered m islead in g. T h e a gen cies h a v e gain ed con sid erab le ex p er ie n c e w ith the A ppraisal Standards Board and its appraisal standards and b e lie v e that it is n o lon ger n ecessary to in c lu d e all the ad d ition al standards in their appraisal regulations. T h e a g en cies also b eliev e that the Departure P rovision o f the U SPA P m ay appropriately b e u sed in co n n ectio n w ith fed erally related transactions. In addition to the standard involving the USPAP, the agencies are proposing to adopt three minimum standards that would require Title XI appraisals to: (i) be written; (ii) set forth a market value as defined in the regulation; and (iii) be performed by a certified or licensed appraiser in accordance with the regulation. A lth ou gh th e a g en cies are p roposing to stream line th eir appraisal regulations b y elim in a tin g standards in their current regu lation s that parallel U SPA P requirem ents, th e a g en cies are requ estin g sp ec ific com m en t on w heth er other m in im u m standards sh o u ld b e required. F. Elimination of Provision on Unavailable Information T h e a g en cies are p rop osing to d ele te the current p ro v isio n that requires appraisers to d isc lo se and exp lain w h e n inform ation n ecessary to th e co m p letio n o f an appraisal is unavailable. S ee 12 CFR 34.44(c) (OCC); 12 CFR 225.64(b) (Board); 12 CFR 323.4(c) (FDIC); and 12 CFR 564.4(b) (OTS). T h e U SPA P currently requires appraisers to d isc lo se and ex p la in th e a b sen ce o f inform ation n ecessary to co m p letio n o f an appraisal that is not m islead in g. S ee U SPA P Standard R ule 2 -2 (k ). Therefore, th e elim in a tio n o f th is p ro v isio n w o u ld n ot result in a su b stan tive change in th e requirem ents ap p licab le to appraisals for federally related transactions if th e a gen cies co n tin u e to require, a s a m inim u m standard, that appraisals conform to standards con tain ed in th e USPAP, eith er as adopted and p u b lish ed b y th e a gen cies or incorporated by reference in to th e a g en cies’ regulations. E lim ination o f th is p rovision co u ld resu lt in a change in th e enforceab ility o f th is requirem ent if the ag en cies adopt A lternative m , w h ic h w o u ld estab lish a m inim u m appraisal standard that requires appraisals to conform to generally accep ted appraisal standards as ev id e n c ed by th e U SPA P, rather than ad opting A lternatives I and n , w h ich w o u ld estab lish a standard that requires co m p lia n ce w ith th e USPAP. U nder A lternative m , a regulated in stitu tion that a cc ep ted an appraisal in w h ich th e appraiser failed to d isclo se and ex p la in th e ab sen ce o f inform ation n ecessary to co m p letio n o f an appraisal that is n ot m islea d in g w o u ld be in vio la tio n o f the regulation o n ly if generally a ccep ted appraisal standards required th e ab sen ce o f n ecessary inform ation to b e d isc lo se d and ex p la in ed . W h ile th e regulated in stitu tio n ’s failure to co m p ly w ith th e U SPA P w o u ld n o t b e a vio la tio n o f th e regulation, th e a g en cies w o u ld rely on U SPA P Standard R ule 2 -2 (k ) as ev id e n c e o f w hat co n stitu tes generally 8 a ccep ted appraisal standards in d eterm in in g w h eth er th e regulated in stitu tio n m et th e m in im u m standard. G. Elimination of Provision on Additional Appraisal Standards T h e a gen cies p rop ose to d elete the current p ro v isio n con firm in g that the a g e n c ie s’ a d op tion o f m inim u m appraisal standards for federally related tran saction s d o es n o t prevent a regulated in stitu tio n from requiring appraisers to c o m p ly w ith ad dition al standards. S ee 12 CFR 34.44(d) (OCC); 12 CFR 2 2 5 .6 4 (c) (Board); 12 CFR 323.4(d ) (FDIC); an d 12 CFR 564.4(c) (OTS). A regulated in stitu tio n m ay ask the appraisers it h ires t o p rovid e an y a d d itio n a l in form ation the in stitu tion m ay require in co n n ectio n w ith the preparation o f an appraisal. T he a g en cies b e lie v e that regulated in stitu tio n s retain th e authority to require appraisers to p rovid e additional inform ation to sa tisfy the in stitu tion s' b u sin e ss n eed s. H. Appraiser Independence T h e a g en cies are p rop osin g to am end and clarify their appraisal regulations to p erm it u se o f ap p raisals prepared for fin an cial se rv ic es in stitu tio n s other than in stitu tio n s subject to T itle XI o f FIRREA. T h e a g en cies’ current appraisal regu lation s p ro v id e that fee appraisers m u st b e engaged b y the regulated in stitu tio n or its a g e n t A n ex cep tio n to th is requirem ent is perm itted if th e appraiser is d irectly engaged b y another in stitu tio n that is subject to T itle XI o f FIRREA. T h e current p ro v isio n w a s adopted to h e lp en su re that ap praisers w o u ld not b e subject to c o n flic ts o f interest as a resu lt o f h avin g b e e n engaged b y borrow ers. H ow ever, the a gen cies b e lie v e that th e current p rovision is too restrictive. It requires a regulated in stitu tio n to ob tain a n e w appraisal if th e borrow er o rig in ally sou ght th e loan from an in stitu tio n that is n o t subject to T itle XI o f FIRREA a n d is n ot an agent o f th e regulated in stitu tion . T here also h as b een u n certain ty about the m eaning o f agen t in th e se ca ses. T n e a g en cies p ro p o se to perm it a regulated in stitu tio n to u se an appraisal that w a s prepared for any finan cial se rv ic es in stitu tio n , in clu d in g mortgage bankers. T h e appraiser w o u ld n ot be a llo w e d to h ave a d irect or in d irect in terest, fin an cial o r oth erw ise, in the property or th e transaction, an d m ust h a v e b een d irectly engaged b y the nonregulated in stitu tio n . Further, the regulated in stitu tio n w o u ld b e required to en su re that th e appraisal conform s to the requirem ents o f the regulation and is otherw ise acceptable. III. P ub lic C om m ent T he a gen cies are requesting p u b lic com m ent o h a ll a sp ec ts o f their proposed ru les as w e ll as sp ecific com m ent on certain proposals. A ll com m en ts are volu n tary and n o in d iv id u a l or in stitu tio n is required to provide an y o f th e inform ation requested b elo w , nor m ust com m en ts be p rovided in an y particular format. T he a g en cies are requesting com m en t in Q u estion s 1 through 9 con cern in g the threshold le v el, lo ss history for certain transactions, effect o f th e proposed changes on cred it availab ility, effect o f the prop osed thresh old on h ou sin g loans so ld in th e secon dary market, proposed ex em p tio n for b u sin ess loan s, p roposed ex em p tio n for sa les to governm ent a g en cies or governm ent sponsored agen cies, an d th e effect o f th e current regulation on th e cost and tim e n eed ed to co m p lete certain transactions. In ad dition , th e a g en cies request com m en t on w h eth er th e four p rop osed m inim u m standards for appraisals are su fficien t to serve th e p u rposes o f T itle XI. In particular, th e a g en cies request com m en t on w h eth er th e regulations (or other agency gu idan ce) sh ou ld incorporate an y o f th e current standards, the standards d iscu sse d in q u estion s 10 through 13 b elo w , or any other standard. It w o u ld a ssist the a g en cies in review in g the co m m en ts if com m en ters referred to the num bers listed b e lo w w h en resp ond ing to th o se requests for com m ent. Further, com m en ters are asked to clearly id en tify th e exem ption or p rovision th ey are d iscu ssin g. A ll com m enters are a d v ised that, pursuant to th e A dm in istrative Procedure A ct, all inform ation provided to th e agen cies w ill be available for p u b lic in sp ection . A . S p e c ific C o m m en t 1. T hresh old L evel S h o u ld the a g en cies increase the thresh old le v el b elo w w h ich an appraisal is not required from $100,000 to $ 2 5 0 ,0 0 0 , and w h y? W ould a th resh old higher than $ 2 5 0 ,0 0 0 be appropriate, and w hy? 2. L oss E xperience (a) T h resh o ld L evel. Number of . loans Real estate-secured loans and size of loans Outstand ing prin cipal amount of loans (12/ 31/92) Loss on loans (an nual net chargeoffs) (12/ 31/92) Loans secured by 1-to-4 family residential real estate: Loans greater than $250,000 ........ ..................................... ................................................................. Loans of $250,000 or le s s .................. .............................................................. ................................... Loans secured by commercial real estate: Loans greater than $250,000 ...... ......................................................................................................... Loans of $250 000 or le s s .................................................................................................................... (b) B u sin ess L oan s Less th an $1 M illion W here S a le of, o r R en ta l In com e D e rived from , th e R eal E state Taken a s C ollateral is N o t th e P rim ary S o u rce o f R epaym en t. Number of loans (12/ 31/92) Real estate-secured loans Outstand ing prin cipal amount of loans (12/ 31/92) Loss on loans (an nual net chargeoffs) (12/ 31/92) All real estate-secured business lo a n s................................................................ .......................... ............. 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 3. Credit Availability (a) T o w hat exten t, if any, w ill an increase in the thresh old level to $250,000 affect the availab ility o f credit for real estate-secu red loans b elo w $250,000? W here p o ssib le, p lease provide quantitative data on the exp ected effect on lend in g. (b) T o w hat exten t, if any, w o u ld the proposed am en dm en t exem pting real estate-secured b u sin e ss loans (in clu d in g farm loans) o f le ss than $1 m illion that are not d ep en d en t u p o n the sale of, or rental in co m e derived from, the real estate taken as collateral as the primary source o f repaym ent, affect the availab ility o f credit for sm all- and m ed iu m -sized b u sin esses? W here possible, please provide quantitative data on the expected effect on lending to small- and medium-sized businesses. (c) To what extent, if any, would the proposed amendments affect the availability of credit for community development lending? Where possible, please provide quantitative data on the expected effect on community development lending. 4. Effect of the Proposed $250,000 Threshold on Housing Loans Sold in the Secondary Market To what extent, if any, do you sell your housing loans on the secondary market, e.g., to the Federal National Mortgage Association or Federal Home Loan Mortgage Corporation? How often 9 is an appraisal required regardless of the size of the loan in these cases? What effect, if any, would an increase in the threshold to $250,000 have on these types of housing loans? Where possible, please provide quantitative data. 5. Business Loans Less Than $1 Million Secured by Real Estate That are Not Dependent oh the Sale of, or Rental Income Derived From, the Real Estate Taken as Collateral as the Primary Source of Repayment (a) Should the exemption for real estate-secured business loans be based on the extent to which the primary source of repayment of the loan is dependent upon the sale of, or rental income derived from, the real estate collateral? If yes, at what point should reliance on the sale of, or rental income derived from, the real estate taken as collateral be considered the “primary source*’ of repayment, and why? If no, what are alternative criteria that would be consistent with safety and soundness concerns, and why? (b) Is the $1 million limit on this exemption appropriate? If not, should the limit be higher, lower, oreliminated, and why? 6. Transactions that Meet the Qualifications for Sale to a United States Government Agency or Government Sponsored Agency (a) For tran saction s o f $ 2 5 0 ,0 0 0 or less? (b) For b u sin e ss loan s o f $1 m illio n or le ss secu red b y real esta te that are n ot d ep en d en t o n th e sa le o f, or rental in co m e d eriv ed from, th e real estate taken a s collateral as th e prim ary sou rce o f repaym ent? T h e current p roposal in c lu d e s an ex em p tio n for transactions that m eet the q u alificatio n s for sale to a U n ited States governm ent agen cy or governm ent sp on sored agen cy. S h ou ld th is ex em p tio n a p p ly to any U.S. governm en t agen cy or governm ent sp on sored agen cy or sh o u ld it be lim ited to certain a gen cies, and why? 11. A n a ly se an d Report D ed u ctio n s and D isco u n ts 10. Data and Analysis on Revenues, Expenses and Vacancies ; The agencies request comment on whether it would be beneficial to require, by regulation, that appraisals include, where applicable, data and analysis on revenues, expenses and vacancies as well as on current market conditions. in stitu tion s W hich are regulated b y the OCC, th e Board, th e FDIC, or th e O TS, to u se appraisals prepared in accordance w ith gen erally accep ted appraisal standards as e v id e n c ed by the appraisal standards prom ulgated b y the A ppraisal Standards Board o f th e A ppraisal F oun dation. S in c e th e U SPA P standards o n ly co d ify appraisal p ractices that are u su a l and custom ary in th e appraisal in d u stry, ad option o f th is regulation sh o u ld n o t resu lt in a m aterial departure from e x istin g practice b y regulated in stitu tio n s or cau se a sig n ifica n t e c o n o m ic im p act on a substantial n um ber o f sm a ll en tities. OCC and OTS E x e cu tiv e O rder Statem ent T he OCC and th e O T S h a v e in d ep en d en tly d eterm in ed that th is proposed rule d o es n o t con stitu te a T h e ag en cies request com m en t on “ major ru le” w ith in th e m ean in g o f w heth er th e regulations sh o u ld E xecutive Order 12291 and Treasury sp ec ifica lly require an a n a ly sis and Departm ent G u id elin es. A ccord ingly, a report o f appropriate d ed u c tio n s and Regulatory Im pact A n a ly sis is not d isco u n ts for p rop osed con stru ction , required on th e grounds that, i f ad opted, partially lea sed b u ild in g s, subm arket this p rop osed rule, ex c lu siv e o f th ose leases, and tract d ev elo p m en ts w ith 7. Effect o f T itle XI A pp raisals by effects attributable to requirem ents u n so ld u n its. T h e U SPA P d o es not C ertified or L icensed A ppraisers im p osed b y T itle XI o f FIRREA, (i) sp ec ifica lly require that an appraiser w o u ld n ot h ave an an nu al effect o n th e an alyze an d report th is data in th e B ased on h istorical data and the m ost eco n o m y o f $ 1 0 0 m illio n or m ore, (ii) appraisal. recent ex p er ie n c e under the existing w o u ld n ot result in a m ajor in crease in appraisal regulations, d o es the 12. Separate V aluation o f Personal the co st o f fin an cial in stitu tion requirem ent for a T itle XI appraisal by Property operation s or governm ental su p erv isio n , a certified or lic en se d appraiser affect T h e a g en cies request com m en t on and (iii) w o u ld n ot h ave a sign ifican t loan perform ance and u ltim ate lo ss adverse effect o n co m p etitio n (foreign w h eth er it w o u ld b e b en eficia l to exp erience: and d o m estic), em p loym en t, require that personal property, fixtures (a) For real estate-secured loans b elow in vestm en t, p ro d u c tiv ity or in n ovation , and in ta n g ib les in c lu d e d in th e $250,000? w ith in the m ean ing o f th e ex ecu tiv e appraisal be id en tified and separately (b) For b u sin e ss lo a n s o f $1 m illion or valu ed , and th e effect o f th eir valu e on order. le s s secu red b y real esta te that are not For federally related transactions, the overall v a lu e estim ate be d iscu sse d . d ep en d en t on th e sale of, or rental T itle XI requires th e finan cial 13. R econ ciliation o f T hree A pp roaches in co m e derived from, the real estate in stitu tion s su p ervised b y the OCC or taken as collateral as th e prim ary source to V alue the OTS to obtain ap praisals prepared in o f repaym ent? T h e a g en cies request com m en t on accordance w ith g en erally accep ted w h eth er it w o u ld be b en eficia l to appraisal standards as ev id e n c ed by the 8 . Effect o f th e Current R egulation on require that an appraisal in clu d e a appraisal standards prom ulgated by th e th e Cost o f M aking Real Estate-Secured recon ciliation o f th e three approaches to A ppraisal Standards Board o f the Loans market v a lu e (i.e., the direct sales, A ppraisal F oundation. S in ce th ese T o w hat extent, if anv, h a s the current in co m e and c o st approaches) and standards o n ly co d ify appraisal appraisal regulation affected th e cost o f exp lain th e elim in a tio n o f an y m ethod practices and procedures that are u su al real estate lo a n s to th e len d er or n ot u sed b y th e appraiser. and custom ary in th e appraisal industry, b o rro w er they sh o u ld n ot ca u se a sign ifican t Regulatory Flexibility A ct Statement (a) For transactions o f $ 2 5 0 ,0 0 0 or departure from current appraisal less? Pursuant to sectio n 605(b) o f the practices b y regulated in stitu tion s, or a (b) For b u sin ess lo a n s o f $1 m illion or Regulatory F le x ib ility A ct, the OCC, th e substantial effect on th e econom y. Board, the FDIC, an d th e O TS, hereby le s s secured b y real estate that are not OCC P ap erw ork R ed u ction A ct d ep en d en t on th e sale of, or rental in d ep en d en tly certify that the p rop osed in co m e derived from, th e real estate ru le is n ot ex p ec ted to h a v e a sign ifican t T h e co llec tio n o f inform ation taken a s collateral as th e prim ary source ec o n o m ic im pact on a substantial con tain ed in th is n o tic e o f p roposed o f repaym ent? n um ber o f sm a ll en tities. A ccord ingly, a rulem aking h as b een su b m itted to the O ffice o f M anagem ent an d B udget for regulatory flex ib ility a n a ly sis is not 9. Effect o f th e Current R egulation on required. H ow ever, the p rop osed rule, If review in accord an ce w ith th e D elay in M aking Real Estate-Secured ad opted , is e x p e c te d to resu lt in Paperwork R eduction A ct o f 1980 (44 L oans U.S.C. 3504(h)). C om m ents o n th e redu ced burden and c o sts for so m e T o w h a t exten t, i f any, h as th e current sm all en tities. co llectio n o f inform ation sh o u ld be se n t ap praisal regulation affected th e tim e For fed erally related transactions, to the C om ptroller o f th e Currency, n ecessary to co m p lete a real estate loan: T itle XI o f FIRREA requires financial L egislative, R egulatory, an d 10 International A ctivities, A ttention: 1557-4)190, 250 E Street, S W ., W ashington, DC 2 0 2 1 9 , w it h a co p y to the O ffice o f M anagem ent e n d B u dget, P aperw orkR eduction Project 1 5 5 7 0190, W ashington. DC 20503. The co llectio n o f in form ation in th is proposed regulation i s in 12 CFR 3 4 .4 4 . T his inform ation is required h y th e OCC p o licy In terests in real esta te-ren ted financial transactions requiring the services o f a n appraiser. N ational b anks w ill u s e th is in form ation in d eterm in in g w hether an d o n w h a t ter m s t o en ter in to federally related tran saction s, s u c h as m aking loan s secu red b y r e a l esta te. T he OCC w ill u se th is in form ation in Its exam ination o f n ation al banks to en su re that n ation al banks u n d ertak e real estate-related financial tra n sa ctio n s in accordance w ith safe an d so u n d b an k in g principles. T he lik e ly recordk eepers e r e for-profit institutions. The estim ated an nu al b urd en per recordkeeper varies from 0 h ou rs to in ex cess o f 100 h o u r s, d ep en d in g on in d ivid u al circum stan ces, w ith an estim ated average o f 34 .5 h o u r s. Estim ated num ber o f Tecordkeepers: 3,600. Board P ap erw ork R ed u ctio n A ct The co llec tio n o f in form ation con tained in th is n o tic e o f p ro p o sed rulem aking h a s b e e n su b m itte d to th e O ffice o f M anagem ent an d B u dget for review i n accord ance w ith th e Paperwork R ed u ctio n A ct o f 1 9 8 0 (44 U.S.C. 3504(h)). C om m en ts on th e co llectio n o f inform ation sh o u ld b e se n t to the Secretary .B oa rd o f G overnors o f the Federal R eserve S y stem , 2 0 th Street and C onstitution A v e n u e , NW ., W ashington, DC 20 5 5 1 , w it h a co p y to the O ffice o f M anagem ent a n d B udget, Paperwork R eduction Project 7 1 0 0 0250, W ashington, DC 205 0 3 . The co llectio n o f inform ation in th is proposed regulation is in 1 2 CFR part 225. T h is inform ation is required by the Federal R eserve S y stem t o protect federal finan cial a n d p u b lic p o lic y interests in Teal estate-related fin a n cia l transactions requiring th e serv ices o f an appraiser. State m em b er b ank s w ill u se this inform ation in d eter m in in g w h eth er and on w h a tterm s 'to en ter In to federally related tran saction s, sudh as m aking loan s secu re d b y rea l e sta te .T h e Federal R eserve S ystem w ill u se th is inform ation in its exam in ation o f State m em ber h ank s and bank h o ld in g com p anies to ensure that th e y undertake real estate-related fin an cial transactions in accordance w ith s a f e an d so u n d banking p rin cip les. T h e lik e ly T e c o rd k e e p e rs a re f o r - p r o f it in s t it u t io n s . T h e estim a ted annual burden p er recordkeeper varies-from 0 h ou rs t o in e x c ess o f 100 hours, d ep e n d in g on in d iv id u a l circu m sta n ces, w ith an estim ated average Df 25 .1 h ours. Estim ated num ber o f recordkeepers: 1,183. FDIC P a p erw o rk R ed uction A ct T h e c o lle c tio n o f in form ation con tain ed in th is n o tic e o f p ro p o sed ru le m a k in g b a sb e e n su b m itted to th e O ffice o f M anagem ent a n d B u d g et for rev iew in accord ance w ith th e Paperwork R ed u ctio n A ct o f 1980 f 44 U.S.C. 3504(h)). C om m ents on th e co llec tio n o f in form ation s h o u ld b e se n t to th e A ssistan t E x e cu tiv e Secretary (A d m inistration), ro o m F - 4 0 0 , 5 5 0 17th Street, N W ,, W ash ington , D C 204 2 9 , w ith a co p y to th e O ffice trf M an agem ent and B u dget,tP aperw ofk R ed uction ■Project 3064-4)103, W a sh in g to n ,D C 20503. T he co lle c tio n o f inform ation in th is p roposed regulation i s in 12.CFR part 323. T h is in form ation i s required b y Ih e FDIC to protect federal fin an cial and p u b lic p o lic y in terests i n real estaterelated fin an cial tran saction s requiring the se rv ic es o f an appraiser. State n onm em ber b an k s w ill u s e th is inform ation in d eterm ining w h eth er and on w h at term s to enter in to federally related tran saction s, Tsuch a s m akin g loan s secu red by .real esta te. The FDIC w ill u s e th is inform ation in its exam in ation o f State n onm em b erb arik s to en sure that th e y undertake real estaterelated fin an cial transactions in accordance w ith safe and so u n d bank ing p rin cip les. T h e lik e ly recordkeepers are for-profit in stitu tion s. T he estim ated annual burden p er recordkeeper varies from 0 hours to in ex c ess o f 1 0 0 hours, d ep en d in g on in d iv id u a l circum stances, w ith an estim ated average o f 20 .0 hours. Estim ated num ber o f recordkeepers: 7,393. OTS P a p erw o rk R ed u ctio n A ct T he co llec tio n o f inform ation con tained in th is n o tice o f p rop osed rulem aking h a s b een subm itted to th e O ffice o f M anagem ent a n d B u dget for rev iew in accord ance w ith the Paperwork R eduction A c t o f 1 9 8 0 (44 U.S.C. 3504(h)). C om m en ts o n t h e co llec tio n o f inform ation sh o u ld b e s e n t to the O ffice o f M anagem ent and Budget, P a p erw o rk E ed u ctio n P roject (1550), W ashington, DC 2 0 5 0 3 w ith co p ie s t o t h e O ffice oTThrift S u p ervision , 1 7 0 0 C S treet, N W „ W a sh in g to n ,D C 20552. 11 The collection of information in this notice of proposedxulemaking is found at 12 CFR 564.4. Each savings association will use the information in connection with determining whether and upon what terms, to enter into a federally related transaction, such as making a loan on commercial real estate or purchasing property ifar its own operation. The OTS will use the information in its examination of savings associationsto ensurethat extensions of credit by the associations, which are collateralized by real estate, and permissible investments in real estate are undertaken in accordance with safe and sound banking principles. The likely Tecordkeepers are for-profit institutions. T h e estim ated a n n u al b u rd en p er recordkeeper varies from £ to o v er 100 h ours, d ep en d in g on in d iv id u a l circu m stan ces, w ith an estim ated average o f 5 9 h o u r s .T h ls i s a red u ction from th e current average estim ated burden p e r recordkeeper o f 7 8 .7 h o u rs. T he estim ated n u m b er o f recordkeepers is 2 ,2 0 0 . List of Subjects 12 CFR P art 34 Mortgages, National banks. Real estate appraisals, Real estate lending standards, Reporting and recordkeeping requirements. 12 CFR Part 225 Administrative practice and procedure, Banks, Banking, Holding companies, Reporting and recordkeeping requirements, Securities. 12 CFR P art 323 Banks, Banking, Mortgages, Real estate appraisals, Reporting and recordkeeping requirements, State nonmember insured banks. 12 CFR P art 545 Accounting, Consumer protection, Credit, Electronic funds transfers, Investments, Manufactured homes, Mortgages, Reporting and recordkeeping requirements, Savings associations. 12 CFR P art 563 Accounting, Advertising, Crime, Currency, Flood insurance, Investments, Reporting and recordkeeping requirements, Savings associations, Securities, Surety bonds. 12 CFR %art 564 ' Appraisals, Real estate .appraisals, Reporting and recordkeeping requirements, Savings associations. FED ER A L R ESER V E SYSTEM For the reasons outlined in the joint preamble, the Board of Governors proposes to amend 12 CFR part 225 as set forth below: PART 225— BANK HOLDING COMPANIES AND C H A N G E IN BANK CONTROL 1. The authority citation for 12 CFR part 225 continues to read as follows: A u thority: 12 U.S.C. 1817(j)(13), 1818, 1 8 3 1 i, 1 8 4 3 (c)(8), 1844(b ), 1972(1), 3106, 3 1 0 8 , 3 9 0 7 , 3 9 0 9 , 3 3 1 0 , a n d 3 3 3 1 -3 3 5 1 . 2. Section 225.62 is amended by redesignating paragraphs (g) through (k) as paragraphs (i) through fm), redesignating paragraphs (d) through (f) as paragraphs.'(e) through (g), and adding new.paragraphs (d) and (h) to read as follows: (5) T he transaction is a b u sin e ss loan that: (i) Has a transaction v a lu e o f le ss than $1 m illio n ; an d (ii) Is n o t d ep en d en t on th e sa le of, or rental in co m e d erived from , th e re a l estate taken as collateral a s th e primary sou rce o f repaym ent; , (6) A lea se o f real estate i s en tered in to , u n le ss i h e le a s e is t h e ec o n o m ic eq u ivalen t o f a p u rch ase o r s a le o f th e lea sed real e s ta te ;; ■(7) T h e ’trensaction r e su lts from o n ex istin g ex te n sio n o f cred it,-provid ed that there h a s b een n o o b v io u s or m aterial d eteriotation in m arket co n d itio n s o r p h y s ic a l a sp ec ts o f t h e property th a tth re a te o th e in stitu tio n 's real estate co lla tera l p rotection; (8) T he transaction: (i) In v o lv es th e p u rch ase, sale, in vestm en t in , exch an ge o f ,o r ex te n sio n o f credit secu red b y ,a lo a n o r in terest $225.62 D efinition *. in a loan, p o o led lo a n s, or in terests in * * * ‘* • real property, in c lu d in g mortgaged(d) B u sin e s s Joan means a loan or backed secu rities;-en d extension of .credit to any corporation, (ii) Is su pported by an appraisal that general orlimitedpartnership.business m eets the requirem ents o f t h is subpart trust, joint venture, pool, syndicate, sole for each loan or interest .in a lo a n , proprietarship,-or other business entity. p o o led lo a n , or r e a l p ro p erty interest * H it ' * originated a fter .A ugu st 9 ,1 9 9 0 ; (h) Real estate or realproperty means 19) The transaction i s insured o r guaranteed by a U n ited .States an identified parcel oriract of land, with improvements, andincludes governm ent agen cy or U n ited S tates easements, rights of wav,.undivided Dr governm ent sp on sored agency; future interests, or aimilar lights In a (10) T he transaction m e e ts a ll o f the tract of land,“but does not include q u alifications for s a le to a U n ited States mineral rights, tiniber rights, growing governm ent agen cy or U n ite d States crops, water rights, or similar interests governm ent sp onsored agency; f l l ) The regu lated in stitu tio n i s actin g severable from the land when the in a fiduciary c a p a city a n d i s n ot transaction rloesmot involve the required to obtain a n ap praisal under associated parcel ortract of land. * * * ’ ’% •«* it other daw; or (12) T h e B oard d eterm in es that th e 3. Section 225.63 is amended by services o f an appraiser are n o t revising the section heading and paragraph (a),redesignating paragraphs necessary i n order to p ro tect "Federal' (b) and (c) as paragraphs (c) and Id),'and financial and p u b lic p o licy in terests In real estate-related finan cial transactions adding a newparagraph (b) to read as or to p ro tect'th e safety an d -soun dn ess follows: o f the in stitu tion . $225.63 A p p ra isa ls ra q u lra tiitra n se o tio n a (b) E v a lu a tio n s a n d o th e m p p r a is a ls . requ irin g a S ta to c a rtifla d o r Stata-lioanaad Transactions for w h ich th e serv ices o f a a p praiser. State certified or lic e n se d appraiser are (a) Appraisals requirecf^An appraisal not required under paragraphs (a)(1), performed by a State certified or (a)(5) or (a)(7) o f th is se c tio n licensed appraiser is required for all real n everth eless sh ou ld have an appropriate estate-related .financial transactions evaluation o f real p rop erty collateral except those in which: that is co n sisten t w ith a g en cy gu id a n ce. (1) The transaction value is 5250,BD0 T he Board reserv es t h e Tightt o require or less; • an appraisal binder th is subpart (2) A lienon realestatehasbeen w h enever th e agency b elie v es it is taken as collateral in an ebundanoe of necessary .to address safety and caution; sou n d n ess con cern s. (3) The transaction is not secured by real estate; (4) Alien on real estate has been taken for purposes other than the real estate's value; • 41 T* 7* $ 225.64 A p p ra isa l sta n d a rd s. For fed erally related transactions, a ll appraisals s h a ll, at a m in im u m : ALTERNATIVE 1 FOR PARAG RAPH (a) (a) Conform to th e U n iform Standards o f P rofessional A p p raisal P ractice (USPAP) ad op ted by the A p p raisal Standards Board o f the A ppraisal Foundation; ALTERNATIVE II FOR PARAGRAPH (q) <a) Conform to th e U niform Standards o f P rofessional A pp raisal P ractice (USPAP) ad op ted by Ih e A ppraisal Standards B o a r d o f-th e A ppraisal F oundation, 1 9 9 3 (Edition (as ad o p ted D ecem ber 8 ,1 9 9 2 ), w h ich I s s p e c ific a lly in co rp o ra ted b y referen ce in accord an ce w ith 5 U .S.C . 552(a) and lU F R p a r t 51 (the U SPA P i s available from the A ppraisal F oun d ation , 1 0 2 9 Verm ont A v en u e, N W „ S u ite 9 0 0 , W ashington, DC 2 0 0 0 5 -3 5 1 7 ); ALTERNATIVE m FO R PARAGRAPH (a) (a) Conform t o g en era lly accep ted appraisal stan d ard s a s e v id e n c e d b y th e U niform Standards o f 'Professional A ppraisal P racticefU SP A R ) prom ulgated by t h e A p p raisal Standards Board o f t h e A pp raisal F ou n d ation ; (b) Be w ritten; <(c) S e t forth a m arket valu e a s d efin ed in th is subparti a n d (d) Be perform ed b y State lic en se d or certified ap praisers i n accordance w ith requirem ents s e t forth in th is subpart. 5. S ectio n 225.65 is am ended by revising paragraph fb) t o read a s fo llo w s: $225.65 <* * A p p raiaw -in d ep en d en ce. >* , .* (b) Fee a p p ra isers. i l ) If an appraisal is prepared by a f e e appraiser,Ihe appraiser sh all be engaged directly b y th e regulated in stitu tio n or>its agent, and h a v e n o direct<or in direct in terest, finan cial or oth erw ise, in the property or th e transaction. (2) A regulated in stitu tion also m ay accep t an appraisdl th a t w a s prepared by an ap praiser'engaged directly fry another finan cial services institu tion, if: (i) T h e appraiser h as n o direct or in direct interest, finan cial or otherw ise, in th e p r o p e r ty or t h e transaction; a n d (ii) T he regulated in stitu tion d eterm in es m at th e Bppraisalconforms to th e requirem ents-of t h is subpart a n d is o th erw ise acceptable. Dated: May28, 3993, S ection .2 2 5 £ 4 is re v ise d to read a s William W. Wiles, 4. follow s: Secretary of the Board. 12
@FedFRASER