Full text of Federal Reserve Bank of New York Circulars : 10719. Real Estate Appraisal Requirements

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

FEDERAL RESERVE BANK
OF NEW YORK

[

Circular No. 10719 1
June 29, 1994

REAL ESTATE APPRAISAL REQUIREMENTS
Amendments to Regulation Y
To All State Member Banks, Bank Holding
Companies, and Branches and Agencies of
Foreign Banks, in the Second Federal Reserve District:

T h e O f f ic e o f th e C o m p tr o lle r o f th e C u r r e n c y , th e F e d e r a l D e p o s it I n s u r a n c e C o r p o r a t i o n , th e
O f f ic e o f T h r i f t S u p e r v is io n , a n d th e B o a r d o f G o v e r n o r s o f th e F e d e r a l R e s e r v e S y s te m h a v e j o i n t l y
a m e n d e d t h e i r r e g u la tio n s o n r e a l e s ta te a p p r a is a ls . F o llo w in g is t h e te x t o f a s ta te m e n t i s s u e d b y
th e B o a r d o f G o v e r n o r s a n n o u n c in g th a t a c tio n :

The Federal Reserve Board and other financial institutions regulatory agencies have issued final
amendments to real estate appraisal requirements.
The amendments are effective June 7, 1994.
The amendments will:
• increase to $250,000 the threshold level at or below which appraisals are not required;
• expand and clarify the type of transactions that are exempt from the appraisal requirement;
• narrow the type of exempt transactions for which evaluations are required; and
• revise the requirements governing appraisal content and the use of appraisals prepared by other
financial services institutions.
E n c l o s e d — f o r m e m b e r b a n k s , b a n k h o ld in g c o m p a n ie s , a n d b r a n c h e s a n d a g e n c ie s o f f o r e ig n
b a n k s in t h is D i s t r i c t a n d o th e r s w h o m a in ta in s e ts o f th e B o a r d ’s r e g u la tio n s — is a n e x c e r p t f r o m
th e

Federal Register,

c o n ta in in g th e o f f ic ia l in te r a g e n c y n o tic e , t o g e t h e r w ith a c o p y o f th e te x t o f

th e a m e n d m e n ts to th e B o a r d ’s R e g u la tio n Y, “ B a n k H o ld in g C o m p a n ie s a n d C h a n g e in B a n k
C o n t r o l ,” e f f e c t i v e J u n e 7 , 1 9 9 4 . C o p ie s o f th e e n c lo s u r e s m a y a ls o b e o b ta in e d a t t h is B a n k
(3 3 L i b e r t y S tr e e t) f r o m th e I s s u e s D iv is io n o n th e f i r s t f lo o r o f t h is b u ild in g o r b y c a llin g th e
C ir c u l a r s D iv is io n (T e l. N o. 2 1 2 - 7 2 0 - 5 2 1 5 o r 5 2 1 6 ).
Q u e s tio n s c o n c e r n i n g th is m a tte r m a y b e d i r e c te d to o u r D o m e s tic B a n k in g D e p a r t m e n t
(T e l. N o . 2 1 2 - 7 2 0 - 2 1 9 8 ) .




W illiam J . M cD onough ,
President.

/ 0 7 / cf

Board of Governors of the Federal Reserve System

AMENDMENTS TO REGULATION Y
(Effective June 7, 1994)

FEDERAL RESERVE SYSTEM
12 CFR Chapter II
F o r th e r e a s o n s se t fo rth in th e
c o m m o n p re a m b le , th e B o a rd a m e n d s
12 CFR p a r t 225 a s s e t fo rth b elo w :

PART 225— BANK HOLDING
COMPANIES AND CHANGE IN BANK
CONTROL (REGULATION Y)
1. T h e a u th o rity c ita tio n fo r p a r t 225
is re v is e d to re a d as fo llo w s:
A uthority: 12 U.S.C. 1817(j)(13), 1818,
1831i, 1843(c)(8), 1844(b), 1972(1), 3106,
3108, 3310, 3331-3351, 3907, and 3909.
2. S e c tio n 2 2 5 .6 2 is a m e n d e d b y
re d e s ig n a tin g p a r a g ra p h s (d) th ro u g h (f)
a n d p a ra g ra p h s (g) th r o u g h (k) a s
p a ra g ra p h s (e) th ro u g h (g) a n d
p a ra g ra p h s (i) th ro u g h (m ), re sp e c tiv e ly ,
a n d a d d in g n e w p a ra g ra p h s (d) a n d (h)
to re a d as fo llo w s:
§225.62
*

it

Definitions.
it

it

it

(d)
B u sin ess lo a n m e a n s a lo a n o r
e x te n s io n o f c r e d it to a n y c o rp o ra tio n ,
g e n e ra l o r lim ite d p a r tn e rs h ip , b u s in e s s
tru s t, jo in t v e n tu re , p o o l, sy n d ic a te , so le
p r o p rie to rs h ip , o r o th e r b u s in e s s e n tity .
*
*
*
*
*
(h) R ea l e sta te o r re a l p r o p e r ty m e a n s
a n id e n tifie d p a rc e l o r tra c t o f la n d ,
w ith im p ro v e m e n ts , a n d in c lu d e s
e a se m e n ts , rig h ts o f w a y , u n d iv id e d o r
fu tu re in te re s ts , o r s im ila r rig h ts in a
tra c t o f la n d , b u t d o e s n o t in c lu d e
m in e ra l rig h ts , tim b e r rig h ts, g ro w in g
c ro p s , w a te r rig h ts , o r s im ila r in te re s ts
se v e ra b le fro m th e la n d w h e n th e
tra n s a c tio n d o e s n o t in v o lv e th e
a s so c ia te d p a rc e l o r tra c t o f la n d .
*
*
*
*
*
3. S e c tio n 225.63 is a m e n d e d b y
re v isin g th e se c tio n h e a d in g , re v isin g
p a ra g ra p h (a), r e d e s ig n a tin g p a ra g ra p h s

(b) a n d (c) a s p a ra g ra p h s (d) a n d (e) a n d p u rc h a s e , sa le , in v e s tm e n t in , e x c h an g e
a d d in g n e w p a r a ^ a p h s (b) a n d (c) to
of, o r e x te n s io n o f c r e d it s e c u re d by, a
r e a d a s fo llo w s:
lo a n o r in te r e s t in a lo a n , p o o le d lo a n s,
o r in te r e s ts in re a l p ro p e rty , in c lu d in g
§225.63 Appraisals required; transactions
m o rtg a g e d -b a c k e d s e c u ritie s , a n d e a c h
requiring a State certified o r licensed
lo a n o r in te r e s t in a lo a n , p o o le d lo a n ,
appraiser.
o r re a l p ro p e rty in te r e s t m e t B oard
(а) A p p r a is a ls re q u ire d . A n a p p ra isa l
re g u la to ry r e q u ire m e n ts fo r a p p ra is a ls at
p e rfo rm e d b y a S ta te c e rtifie d or
th e tim e o f o rig in a tio n ;
lic e n s e d a p p r a is e r is re q u ir e d for a ll re a l
(9) T h e tr a n s a c tio n is w h o lly or
e s ta te -re la te d fin a n c ia l tra n s a c tio n s
p a r tia lly in s u r e d o r g u a ra n te e d b y a
e x c e p t th o s e in w h ic h :
U n ite d S ta te s g o v e rn m e n t a g e n c y o r
(1) T h e tr a n s a c tio n v a lu e is $2 5 0 ,0 0 0
U n ite d S ta te s g o v e rn m e n t s p o n s o re d
o r le ss;
a g e n cy ;
(2) A lie n o n re a l e s ta te h a s b e e n
(10) T h e tr a n s a c tio n e ith e r:
ta k e n a s c o lla te ra l in a n a b u n d a n c e o f
(i) Q u a lifie s fo r sa le to a U n ite d S tate s
c a u tio n ;
g o v e rn m e n t a g e n c y o r U n ite d S tates
(3) T h e tra n s a c tio n is n o t se c u re d by
g o v e rn m e n t s p o n s o re d a g e n cy ; o r
re a l e sta te ;
(11) In v o lv e s a r e s id e n tia l rea l e s ta te
(4) A lie n o n re a l e s ta te h a s b e e n
tr a n s a c tio n in w h ic h th e a p p ra is a l
ta k e n fo r p u r p o s e s o th e r th a n th e rea l
c o n fo rm s to th e F e d e ra l N a tio n a l
e s ta te ’s v a lu e ;
M o rtg ag e A sso c ia tio n o r F e d e ra l H o m e
(51 T h e tr a n s a c tio n is a b u s in e s s lo a n
L o a n M o rtg ag e C o rp o ra tio n a p p r a is a l
th a t:
s ta n d a r d s a p p lic a b le to th a t c a te g o ry o f
(i) H a s a tr a n s a c tio n v a lu e o f $1
re a l esta te ;
m illio n o r le ss; a n d
(11) T h e re g u la te d in s titu tio n is a c tin g
(ii) Is n o t d e p e n d e n t o n th e sa le of, o r
in a fid u c ia ry c a p a c ity a n d is n o t
r e n ta l in c o m e d e riv e d fro m , rea l e state
re q u ir e d to o b ta in a n a p p ra is a l u n d e r
as th e p rim a ry so u rc e o f re p a y m e n t;
o th e r la w ; o r
(б) A le a s e o f re a l e s ta te is e n te re d
(12) T h e B o a rd d e te rm in e s th a t th e
in to , u n le s s th e le a se is th e e c o n o m ic
se rv ic e s o f a n a p p r a is e r are n o t
e q u iv a le n t o f a p u r c h a s e o r sa le o f th e
n e c e s s a ry in o r d e r to p ro te c t F e d e ra l
le a s e d re a l esta te ;
fin a n c ia l a n d p u b lic p o lic y in te re s ts in
(7) T h e tra n s a c tio n in v o lv e s an
re a l e s ta te -re la te d fin a n c ia l tra n s a c tio n s
e x is tin g e x te n s io n o f c r e d it at th e
o r to p ro te c t th e sa fe ty a n d s o u n d n e s s
le n d in g in s titu tio n , p r o v id e d th a t:
o f th e in s titu tio n .
(i) T h e re h a s b e e n n o o b v io u s a n d
(b) E va lu a tio n s req u ired . F o r a
m a te ria l c h a n g e in m a rk e t c o n d itio n s o r
tra
n s a c tio n th a t d o e s n o t re q u ire th e
p h y s ic a l a s p e c ts o f th e p ro p e rty th a t
se rv ic e s o f a S ta te c e rtifie d o r lic e n s e d
th r e a te n s th e a d e q u a c y o f th e
a p p r a is e r u n d e r p a ra g ra p h (a)(1), (a)(5)
i n s t itu ti o n ’s r e a l e s ta te c o lla te ra l
o r (a)(7) o f th is s e c tio n , th e in s titu tio n
p ro te c tio n a fte r th e tra n s a c tio n , ev e n
s h a ll o b ta in a n a p p ro p ria te e v a lu a tio n o f
w ith th e a d v a n c e m e n t o f n e w m o n ie s;
re a l p ro p e rty c o lla te ra l th a t is c o n s is te n t
or
w ith sa fe a n d s o u n d b a n k in g p ra c tic e s.
(ii) T h e re is n o a d v a n c e m e n t o f n e w
(c) A p p r a is a ls to a d d re s s s a fe ty a n d
m o n ie s , o th e r th a n fu n d s n e c e ssa ry to
so u n d n e s s co n cern s. T h e B o a rd re se rv e s
c o v e r re a s o n a b le c lo s in g co sts;
th e rig h t to re q u ire a n a p p ra is a l u n d e r
(8) T h e tra n s a c tio n in v o lv e s th e

(OVER)

P R IN T E D IN N E W Y O R K , F R O M F E D E R A L R E G IS T E R , V O L . 5 9 , N O . 10 8 , pp . 2 9 5 0 0 -2 9 5 0 1

[Enc. Cir. No. 10719]



/o 7 /9
tra n s a c tio n ;
fin a n c ia l o r o th e rw is e , in th e p ro p e rty
(c) A n a ly z e a n d re p o rt a p p ro p ria te
o r th e tra n s a c tio n .
d e d u c tio n s a n d d is c o u n ts fo r p ro p o s e d
(2) A re g u la te d in s t itu ti o n a ls o m ay
c o n s tru c tio n o r re n o v a tio n , p a rtia lly
a c c e p t a n a p p r a is a l th a t w a s p r e p a re d
4.
S e c tio n 2 2 5 .6 4 is re v ise d to re a d asle a s e d b u ild in g s , n o n -m a rk e t le a se
b y a n a p p ra is e r e n g a g e d d ir e c tly b y
te rm s , a n d tra c t d e v e lo p m e n ts w ith
fo llo w s:
a n o th e r fin a n c ia l se rv ic e s in s titu tio n , if:
u n s o ld u n its ;
(i) T h e a p p r a is e r h a s n o d ir e c t o r
§ 225.64 Minimum appraisal standards.
(d) B e b a s e d u p o n th e d e fin itio n o f
F o r fe d e ra lly r e la te d tra n s a c tio n s , all m a rk e t v a lu e as se t fo rth in th is s u b p a rt; in d ir e c t in te re s t, fin a n c ia l o r o th e rw is e ,
in th e p ro p e rty o r th e tra n s a c tio n ; a n d
a p p ra is a ls s h a ll, a t a m in im u m :
and
(a) C o n fo rm to g e n e ra lly a c c e p te d
(e) Be p e rfo rm e d b y S tate lic e n s e d o r
(ii) T h e re g u la te d in s titu tio n
a p p r a is a l s ta n d a r d s a s e v id e n c e d b y th e c e rtifie d a p p ra is e rs in a c c o rd a n c e w ith
d e te rm in e s th a t th e a p p r a is a l c o n fo rm s
U n ifo rm S ta n d a rd s o f P ro fe ss io n a l
r e q u ire m e n ts se t fo rth in th is s u b p a rt.
to th e r e q u ire m e n ts o f th is s u b p a rt a n d
A p p ra is a l P ra c tic e p ro m u lg a te d b y th e
5.
S e c tio n 2 2 5 .6 5 is a m e n d e d b y
is o th e rw is e a c c e p ta b le .
A p p ra is a l S ta n d a rd s B o a rd o f th e
re v isin g p a ra g ra p h (b) to re a d as fo llo w s:
Appendix A to Subpart G [Removed]
A p p ra is a l F o u n d a tio n , 1029 V e rm o n t
§ 225.65 Appraiser independence.
A v e., N W ., W a s h in g to n , DC 2 0 0 0 5 ,
6.
A p p e n d ix A to s u b p a rt G, p a r t 225,
*
*
*
*
*
u n le s s p r in c ip le s o f safe a n d s o u n d
is re m o v e d .
(b)
F ee a p p ra ise rs. (1) If a n a p p ra is a l
b a n k in g r e q u ire c o m p lia n c e w ith
Dated: May 25,1994.
is p r e p a re d b y a fee a p p ra is e r, th e
stric te r s ta n d a rd s ;
a p p r a is e r s h a ll b e e n g a g e d d ire c tly b y
(b) Be w ritte n a n d c o n ta in su ffic ie n t
William W. Wiles,
in fo rm a tio n a n d a n a ly s is to s u p p o r t th e th e re g u la te d in s titu tio n o r its a g e n t,
Secretary o f the Board.
in s titu tio n ’s d e c is io n to en g ag e in th e
a n d h a v e n o d ire c t o r in d ir e c t in te re s t.
th is s u b p a rt w h e n e v e r th e ag e n cy
b e lie v e s it is n e c e s s a ry to a d d re s s safety
a n d s o u n d n e s s c o n c e rn s.
* .
* * * *




)O h < j

Tuesday
June 7, 1994

Federal Reserve Abridged Version:
Duplicative material pertaining to other agencies’
rules have been deleted from this reprint. However, it
is noted that those rules are uniform.

Part II
Department of the Treasury
O ffice of the Com ptroller of the Currency
12 CFR Part 34
O ffice of Thrift Supervision
12 CFR Parts 545, 563, and 564

Federal Reserve System
12 CFR Part 225

Federal Deposit Insurance
Corporation
12 CFR Part 323
Real Estate Appraisals; Rule

[Enc. Cir. 10719]




2 9482

Federal Register / Vol. 59, No. 108 / Tuesday, June 7, 1994 / Rules and Regulations

DEPARTMENT OF THE TREASURY
Office of the Comptroller of the
Currency
12CFR Part 34
[Docket No. 94-10]
RIN 1557-AB34

FEDERAL RESERVE SYSTEM
12 CFR Part 225
[Regulation Y; Docket No. R-0803]
RIN 7100-AB20

FEDERAL DEPOSIT INSURANCE
CORPORATION
12 CFR Part 323
RIN 3064-ABO5

DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Parts 545, 563, 564
[Docket No. 94-17]
RIN 1550-AA64

Real Estate Appraisals
AGENCIES: O ffice o f th e C o m p tro lle r o f

th e C u rre n c y , T re a su ry ; B o a rd o f
G o v e rn o rs o f th e F e d e ra l R e serv e
S y stem ; F e d e ra l D e p o sit In s u ra n c e
C o rp o ra tio n ; a n d O ffice o f T h rift
S u p e rv is io n , T re a su ry .
ACTION: F in a l ru le .
SUMMARY: T h e O ffice o f th e C o m p tro lle r

o f th e C u rre n c y , th e B o a rd o f G o v e rn o rs
o f th e F e d e ra l R e serv e S y stem , th e
F e d e ra l D e p o sit In s u ra n c e C o rp o ra tio n ,
a n d th e O ffic e o f T h rift S u p e rv is io n
(c o lle c tiv e ly th e ag e n cies) are a m e n d in g
th e ir re g u la tio n s re g a rd in g a p p ra is a ls o f
re a l estate. T h is fin a l ru le is a d o p te d
p u r s u a n t to T itle XI o f th e F in a n c ia l
I n s titu tio n s R eform , R eco v ery , a n d
E n fo rc e m e n t A c t o f 1989.
T h e fin a l ru le in c re a se s to $ 2 5 0 ,0 0 0
th e th r e s h o ld a t o r b e lo w w h ic h
a p p ra is a ls a re n o t re q u ire d p u r s u a n t to
T itle XI, e x p a n d s a n d c la rifie s e x istin g
e x e m p tio n s to th e T itle XI a p p ra is a l
r e q u ire m e n t, id e n tifie s a d d itio n a l
c irc u m s ta n c e s w h e n a p p ra is a ls are n o t
r e q u ir e d u n d e r T itle XI, a n d s p e c ifie s
w h e n e x e m p t tr a n s a c tio n s n e v e rth e le s s
r e q u ir e a p p r o p r ia te e v a lu a tio n s. In
a d d itio n , th e fin a l r u le a m e n d s e x istin g
r e q u ire m e n ts g o v e rn in g a p p ra isa l
c o n te n t a n d th e u se o f a p p ra is a ls
p r e p a re d b y o th e r fin a n c ia l se rv ic e s
in s titu tio n s .
T h e a g e n c ie s are a d o p tin g th is fin a l
r u le to fu rth e r fe d e ra l fin a n c ia l a n d




p u b lic p o lic y in te re s ts b y r e d u c in g
re g u la to ry b u rd e n , w h ile re q u irin g T itle
XI a p p ra is a ls w h e n n e c e s sa ry to p ro te c t
th e sa fe ty a n d s o u n d n e s s o f fin a n c ia l
in s titu tio n s o r o th e rw ise a d v a n c e p u b lic
p o lic y .
EFFECTIVE DATE: T h is fin a l r u le is
effec tiv e o n Ju n e 7 ,1 9 9 4 .
FOR FURTHER INFORMATION CONTACT:

Office of the Comptroller of the
Currency (OCC)
T h o m a s E. W a tso n , N a tio n a l B a n k
E x a m in e r, O ffice o f th e C h ie f N a tio n a l
B an k E x a m in e r, (202) 8 7 4 -5 1 7 0 ; o r
H o ra c e G. S n e e d , S e n io r A tto rn e y , or
S te p h e n F re e la n d , A tto rn e y , (202)
8 7 4 -4 4 6 0 , B an k O p e ra tio n s a n d
A sse ts D iv isio n ; O ffice o f th e
C o m p tro lle r o f th e C u rre n c y , 2 5 0 E
S tre et, SW , W a sh in g to n , DC 20219.

Board of Governors of the Federal
Reserve System (Board)
R oger T. C ole, D e p u ty A sso c ia te
D ire c to r, (202) 4 5 2 -2 6 1 8 , R h o g e r H
P u g h , A s s is ta n t D irec to r, (202) 7 2 8 5 883, S ta n le y B. R ed ig er, S u p e rv is o ry
F in a n c ia l A n a ly s t (202) 4 5 2 -2 6 2 9 , or
V irg in ia M. G ibbs, S u p e rv is o ry
F in a n c ia l A n a ly s t, (202) 4 5 2 -2 5 2 1 ,
D iv isio n o f B a n k in g S u p e rv is io n a n d
R e g u la tio n ; o r G regory A. B aer, S e n io r
A tto rn e y (202) 4 5 2 -3 2 3 6 , L egal
D iv isio n ; B o ard o f G o v e rn o rs o f th e
F e d e ra l R e serv e S y stem , 2 0 th S tre e t
a n d C o n s titu tio n A v e n u e , N W .,
W a sh in g to n , DC 20551.

Federal Deposit Insurance Corporation
(FDIC)
R o b ert F. M ia ilo v ic h , A sso c ia te D irec to r,
(202) 8 9 8 -6 9 1 8 , Jam es D. L e itn e r,
E x a m in a tio n S p e c ia list, (202) 8 9 8 6790, D iv isio n o f S u p e rv is io n ; o r
W a lte r P. D o y le, C o u n se l, (202) 8 9 8 3682, L egal D iv isio n ; F e d e ra l D e p o sit
In s u ra n c e C o rp o ra tio n , 550 1 7 th
S tre e t N W ., W a sh in g to n , DC 204 2 9 .

Office of Thrift Supervision (OTS)
R o b ert F is h m a n , S e n io r P ro g ra m
M a n ag e r, C re d it R isk, S u p e rv is io n
P o lic y . (202) 9 0 6 -5 6 7 2 ; D e ird re G.
K v a rtu n a s, P o lic y A n a ly st,
S u p e rv is io n P o lic y , (202) 9 0 6 -7 9 3 3 ;
E lle n J. S a z z m a n , C o u n se l (B an k in g
a n d F in a n c e ), R e g u la tio n s a n d
L eg isla tio n D iv isio n , C h ie f C o u n s e l’s
O ffice, (202) 9 0 6 -7 1 3 3 ; O ffice o f
T h rift S u p e rv is io n , 1700 G S tre e t
N W ., W a sh in g to n , DC 2 0 5 5 2 .
SUPPLEMENTARY INFORMATION:

I. B a c k g ro u n d
T itle XI o f th e F in a n c ia l In s titu tio n s
R eform , R eco v ery , a n d E n fo rc e m e n t A ct
o f 1989 (FIRREA), 12 U .S.C . 3331 et

seq., d ire c ts e a c h F e d e ra l b a n k in g
a g e n c y to p u b lis h a p p ra is a l re g u la tio n s
fo r fe d e ra lly r e la te d tra n s a c tio n s w ith in
its ju ris d ic tio n . T h e p u rp o s e o f th e
le g is la tio n is to p ro te c t fe d e ra l fin a n c ia l
a n d p u b lic p o lic y in te re s ts in re a l e sta te
r e la te d tra n s a c tio n s b y re q u irin g th a t
re a l e s ta te a p p ra is a ls u tiliz e d in
c o n n e c tio n w ith fe d e ra lly re la te d
tr a n s a c tio n s a re p e rfo rm e d in w ritin g , in
a c c o rd a n c e w ith u n ifo rm s ta n d a rd s , a n d
b y in d iv id u a ls w h o se c o m p e te n c y h a s
b e e n d e m o n s tra te d a n d w h o se
p ro fe s s io n a l c o n d u c t w ill b e su b je c t to
e ffe c tiv e s u p e rv is io n . S ee 12 U .S.C.
33 3 1 .
S e c tio n 1121(4) o f FIRREA, 12 U.S.C.
3 3 50(4), d e fin e s a fe d e ra lly re la te d
tra n s a c tio n a s a re a l e sta te -re la te d
fin a n c ia l tra n s a c tio n th a t is re g u la te d or
e n g a g e d in b y a fe d e ra l fin a n c ia l
in s titu tio n s re g u la to ry ag e n cy a n d
r e q u ire s th e se rv ic e s o f a n a p p ra ise r. A
re a l e s ta te -re la te d fin a n c ia l tra n s a c tio n
is d e fin e d as a n y tra n s a c tio n th a t
in v o lv e s:
(i) T h e sa le , le a se , p u rc h a s e ,
in v e s tm e n t in o r e x c h a n g e o f rea l
p ro p e rty , in c lu d in g in te re s ts in
p ro p e rty , o r th e fin a n c in g th e re o f;
(ii) T h e re fin a n c in g o f re a l p ro p e rty or
in te re s ts in re a l p ro p e rty ; a n d
(iii) T h e u s e o f re a l p ro p e rty or
in te re s ts in re a l p ro p e rty as s e c u rity for
a lo a n o r in v e s tm e n t, in c lu d in g
m o rtg a g e -b a c k e d se c u ritie s. S ee 12
U .S.C . 3350(5) (FIRREA se c tio n
1121(5)).
In th e ir a p p r a is a l re g u la tio n s, th e
a g e n c ie s id e n tify ca te g o rie s o f rea l
e s ta te -re la te d fin a n c ia l tra n s a c tio n s th a t
d o n o t r e q u ire th e se rv ic e s o f an
a p p r a is e r in o rd e r to p ro te c t fed e ra l
fin a n c ia l a n d p u b lic p o lic y in te re s ts or
to sa tisfy p r in c ip le s o f safe a n d s o u n d
b a n k in g . T h e s e re a l e sta te -re la te d
fin a n c ia l tra n s a c tio n s are n o t fe d e ra lly
r e la te d tr a n s a c tio n s u n d e r th e s ta tu to ry
a n d re g u la to ry d e fin itio n s . A c c o rd in g ly ,
th e y a re su b je c t to n e ith e r T itle XI o f
FIRREA n o r th o s e p ro v is io n s o f th e
a g e n c ie s ’ re g u la tio n s g o v ern in g
a p p ra is a ls .
In D e c e m b e r 1992, C ongress
c o n firm e d th a t th e a g e n cies m a y set a
th r e s h o ld le v e l b e lo w w h ic h th e
se rv ic e s o f sta te c e rtifie d o r lic e n s e d
a p p ra is e rs a re n o t r e q u ire d in
c o n n e c tio n w ith fe d e ra lly re la te d
tr a n s a c tio n s if th e a g e n c ie s d e te rm in e in
w ritin g th a t th e th re s h o ld d o e s n o t
re p r e s e n t a th r e a t to th e safety a n d
s o u n d n e s s o f fin a n c ia l in s titu tio n s . See
H o u sin g a n d C o m m u n ity D ev e lo p m e n t
A c t o f 1992, P u b lic L aw 1 0 2 -5 5 0 ,
s e c tio n 9 5 4 (a m e n d in g 12 U .S.C . 3341).
T h e a g e n c ie s jo in tly p u b lis h e d a
p ro p o s e d ru le to a m e n d th e ir a p p ra is a l
re g u la tio n s o n Ju n e 4 ,1 9 9 3 . See 58 FR

Federal Register / Vol. 59, No. 108 / Tuesday, June 7, 1994 / Rules and Regulations
31 8 7 8 . T h e a g e n c ie s p u b lis h e d a n o tic e
o f th e a v a ila b ility o f s u p p le m e n ta l
in fo rm a tio n c o n c e rn in g th e p ro p o s e d
r u le a n d in v ite d fu rth e r c o m m e n ts o n
N o v e m b e r 1 0 ,1 9 9 3 . S ee 58 F R 5 9 6 8 8 .
T h e ag e n cies a re is s u in g th is jo in t
fin a l r u le u n d e r th e ir a u th o rity to is s u e
ru le s to im p le m e n t T itle XI o f FIRREA
a n d e a c h a g e n c y ’s a u th o rity to p re s c rib e
ru le s a n d re g u la tio n s to c a rry o u t its
re s p o n s ib ility to e n s u re th a t th e
in s titu tio n s u n d e r its s u p e rv is io n
c o n d u c t th e ir a c tiv itie s in a c c o rd a n c e

T able A.— Distribution

of

w ith safe a n d s o u n d b a n k in g p rin c ip le s .
T h is fin a l r u le is in te n d e d to p ro te c t
fe d e ra l fin a n c ia l a n d p u b lic p o lic y
in te re s ts a n d t h e sa fe ty a n d s o u n d n e s s
o f fin a n c ia l in s titu tio n s , w h ile r e d u c in g
d u p lic a tio n , c o s ts a n d re g u la to ry
b u rd e n .
II. C o m m e n ts o n th e P ro p o s e d R u le

C o lle c tiv e ly , th e a g e n c ie s re c e iv e d
o v e r 19,0 0 0 c o m m e n t le tte rs o n th e

C omments R eceived

in

OCC ....................................................................................
Board ...................................................................................
FDIC....................................................................................
OTS............................ .........................................................
of

R espo n se

to

J une 4 ,1 9 9 3 P roposed R ule

Letters from
appraisers

Letters frombankers

Letters from
others

1660
1608
1574
1298

161 .....................
259 .....................
376 .....................
40 (14 thrifts) .........

168
276
149
134

C omments R eceived in R espo n se to November 1 0 ,1 9 9 3 Notice
Information

Agency
OCC ....................................................................................
Board ...................................................................................
FDIC....................................................................................
OTS.....................................................................................
T h e a g e n c ie s h a v e r e v ie w e d a n d
c o n s id e re d a ll c o m m e n ts c o n c e rn in g th e
p ro p o s e d ru le . T h e a g e n c ie s d is c u s s
g e n e ra l c o m m e n ts im m e d ia te ly b e lo w .
R e sp o n se s to th e a g e n c ie s ’ s p e c ific
re q u e s ts for c o m m e n t a n d c o m m e n ts
c o n c e rn in g s p e c ific a m e n d m e n ts to th e
a p p r a is a l re g u la tio n a re d is c u s s e d in th e
se c tio n -b y -se c tio n a n a ly sis.
B. G en eral C o m m e n ts on th e P ro p o se d
R u le
R e g u la te d in s titu tio n s g e n e ra lly
e n d o rs e d th e p ro p o s e d c h a n g e s to th e
a p p r a is a l re g u la tio n s , th o u g h a s m a ll •
n u m b e r o f sa v in g s a s s o c ia tio n s , b a n k s ,
a n d o th e r c o m m e n te rs o p p o s e d
c h a n g in g th e re g u la tio n . A p p ra is e rs
a lm o s t u n a n im o u s ly o p p o s e d c h a n g in g
th e th r e s h o ld , a n d a la rg e n u m b e r o f
a p p ra is e rs o p p o s e d th e b u s in e s s lo a n
e x e m p tio n . H o w e v e r, a p p r a is e r s
c o m m e n te d fa v o ra b ly o n o th e r p a rts o f
th e p ro p o s e d ru le .
A la rg e n u m b e r o f a p p r a is e r s
c o m m e n te d th a t th e p r o p o s e d c h a n g e s
w o u ld le a d to a b u s e s th a t c a u s e d
sa v in g s a s s o c ia tio n s to fail in th e m id to -la te 198 0 s a n d th a t th e c h a n g e s
w o u ld v io la te th e in te n t o f C o n g ress. In
th e e x p e rie n c e o f th e a g e n c ie s, a n d in
th e o p in io n o f s tu d ie s c o n d u c te d o n th e
fa ilu re s o f th e 1 9 8 0 s, a b u s e s w e re
re la te d to re a l e s ta te a c q u is itio n o r




p r o p o s e d ru le . In r e s p o n s e to th e Ju n e
4 th N o tic e o f P ro p o s e d R u lem a k in g , th e
a g e n c ie s re c e iv e d c o m m e n t le tte rs from
a p p ra is e rs , b a n k e rs , a n d o th e rs as
s h o w n in T a b le A . C o m m e n t le tte rs
re c e iv e d in re s p o n s e to th e N o v em b e r
1 0 th N o tic e o f S u p p le m e n ta l
In fo rm a tio n w e re d is trib u te d as sh o w n
in T a b le B.

A . O v e rv ie w o f C o m m e n ts

Agency

Table B — Distribution

29483

of

1989
2143
2099
1472

S upplemental

Letters from
appraisers

Letters frombankers

Letters f om
others

1878
1994
1818
1644

659 .....................
519.....................
1142....................
57 (22 thrifts) .........

242
528
467
502

d e v e lo p m e n t p ro je c ts a n d la rg e r lo a n s.
T h e re g u la tio n s is s u e d to d a y c o n tin u e
to re q u ire a p p ra is a ls fo r th e s e
tra n s a c tio n s . M o re o v e r, th e re g u la tio n s
fu lly c o m p ly w ith th e in te n t o f C o n g ress
b y c o n tin u in g to p ro te c t fe d e ra l
fin a n c ia l a n d p u b l i c p o lic y in te re s ts in
re a l e s ta te -re la te d fin a n c ia l tra n s a c tio n s
as w e ll as th e sa fe ty a n d s o u n d n e s s o f
fin a n c ia l in s titu tio n s .
R e g u la te d in s titu tio n s a n d a p p ra is e rs
h a v e o v e r th re e y e a rs e x p e rie n c e w ith
th e a p p ra is a l re g u la tio n s a n d h a v e u rg e d
c h a n g e s in th e re g u la tio n s to im p ro v e
c r e d it a v a ila b ility a n d r e d u c e
d u p lic a tio n , c o s ts, a n d re g u la to ry
b u r d e n . S o m e c o m m e n te rs , fo c u sin g o n
th e p ro p o s e d th r e s h o ld , o p p o s e d
c h a n g in g th e re g u la tio n s b e c a u s e th e y
b e lie v e d th a t a d d itio n a l tim e w a s
n e e d e d to s tu d y th e effect o f th e e x istin g
re g u la tio n s. D ela y in g th e is s u a n c e o f th e
fin a l r u le w o u ld d e n y re g u la te d
in s titu tio n s , a p p ra is e rs , a n d b o rro w e rs
th e b e n e fits o f th e s e c h a n g e s. T o th e
e x te n t th a t s u b s e q u e n t e v e n ts
d e m o n s tra te th a t a d d itio n a l c h a n g e s a re
n e e d e d , th e a g e n c ie s c a n f u rth e r a m e n d
th e re g u la tio n s.
O n e a p p ra is a l o rg a n iz a tio n su g g e ste d
th a t se v e ra l o f th e p ro p o s e d e x e m p tio n s
s h o u ld b e re p la c e d w ith g u id e lin e s
re g a rd in g w h e n to o b ta in T itle XI
a p p ra is a ls . B e c a u se re g u la te d

Total

Total
2779
3041
3427
2203

in s titu tio n s a n d a p p ra is e rs c a n b e c o m e
lia b le fo r s u b s ta n tia l p e n a ltie s for
v io la tin g th e re g u la tio n , th e ag e n cies
b e lie v e th a t it b e n e fits re g u la te d
in s titu tio n s , a p p ra is e rs , a n d th e p u b lic
for th e a g e n c ie s to id e n tify ca te g o rie s o f
e x e m p t tra n s a c tio n s in th e re g u la tio n .
H o w e v e r, th e a g e n c ie s in te n d to p ro v id e
s u p p le m e n ta l in fo rm a tio n a b o u t th e
a p p r a is a l a n d e v a lu a tio n p ra c tic e s of
re g u la te d in s titu tio n s in g u id a n c e .
S o m e c o m m e n te rs s ta te d th a t th e y
w e re d e n ie d a n o p p o r tu n ity to co m m en t
o n th e s u p p le m e n ta l in fo rm a tio n
id e n tif ie d in th e N o v e m b e r 1 0 th n o tic e
b e c a u s e th e m a te ria ls w e re av a ila b le
o n ly in W a sh in g to n , DC, a n d th e
c o m m e n t p e rio d w a s 30 d ay s. T h e
a g e n c ie s b e lie v e th a t th e p u b lic
p r o c e d u re s o n th e p ro p o s e d
a m e n d m e n ts to th e a p p ra is a l re g u la tio n s
fu lly c o m p lie d w ith th e re q u ire m e n ts of
th e A d m in is tra tiv e P ro c e d u re A ct a n d
a c c o rd e d th e p u b lic a fu ll o p p o rtu n ity
to p a r tic ip a te in th e ru le m a k in g .
T h e N o v e m b e r 1 0 th n o tic e e x p la in e d
th a t th e s u p p le m e n ta l m a te ria ls w ere
a v a ila b le fro m e a c h o f th e ag en cies. In
a c c o rd a n c e w ith e s ta b lis h e d p ro c e d u re s,
a ll a g e n c ie s m a ile d c o p ie s o f th o se
m a te ria ls to a n y p e rs o n re q u e stin g th e m ,
as w e ll as h a v in g th e d o c u m e n ts
a v a ila b le for re v ie w at e a c h ag en cy

29434

Federal Register / Vol. 59, No. 108 / Tuesday, June 7, 1994 / Rules and Regulations

T h e a g e n c ie s a ls o b e lie v e th e 3 0 -d a y
c o m m e n t p e r io d w a s a p p r o p r ia te fo r th e
s e c o n d c o m m e n t p e r io d o n th e
p ro p o s e d a m e n d m e n ts . T h e n o tic e o f
s u p p le m e n ta l in fo rm a tio n re q u e s te d
c o m m e n t n n m a te ria ls th a t d e a lt a lm o st
e x c lu s iv e ly w ith th e a p p r a is a l
th re s h o ld . A s s h o w n in T a b le B ab o v e,
m o re th a n 1 1,0 0 0 c o m m e n t le tte rs w e re
re c e iv e d in re s p o n s e to th e N o v e m b e r
1 0 th n o tic e .
III. S e c tio n -b y -S e c tio n A n a ly s is
§ ____ .2

D efin itio n s.

(d) B u s in e ss L o an
T h e a g e n c ie s a re a d o p tin g th e
p ro p o s e d d e fin itio n o f “b u s in e s s lo a n ”
a s a lo a n o r e x te n s io n o f c r e d it to an y
c o rp o ra tio n , g e n e ra l o r lim ite d
p a r tn e rs h ip , b u s in e s s tr u s t, jo in t
v e n tu re , p o o l, s y n d ic a te , so le
p ro p rie to r s h ip ( in c lu d in g a n in d iv id u a l
e n g a g ed in farm in g ), o r o th e r b u s in e s s
e n tity . T h e d e f in itio n is u s e d in
c o n n e c tio n w ith th e e x e m p tio n for
b u s in e s s lo a n s o f $1 m illio n o r le ss th a t
a re n o t d e p e n d e n t o n th e sa le of, o r
re n ta l in c o m e d e riv e d fro m , re a l e s ta te
as th e p rim a ry so u rc e o f re p a y m e n t.
C o m m e n te rs su g g e ste d th a t th e
a g e n c ie s a m e n d th e d e f in itio n o f
b u s in e s s lo a n to in c lu d e lo a n s to
in d iv id u a ls fo r b u s in e s s p u r p o s e s a n d to
p e rm it u s e o f th e e x e m p tio n w h e n
in d iv id u a ls le a se re a l e s ta te to a re la te d
b u s in e s s . L o a n s to in d iv id u a ls a re
in c lu d e d i n th e d e f in itio n o f b u s in e s s
lo a n as lo a n s to so le p ro p rie to r s h ip s a n d
o th e r b u s in e s s e n titie s . T h is e x e m p tio n
d o e s n o t a p p ly to lo a n s to in d iv id u a ls
th a t a re c o n s u m e r o r p e rs o n a l lo a n s.
T h e re fo re , th e a g e n c ie s d o n o t b e lie v e
th a t it is n e c e s s a ry to a m e n d th e
d e fin itio n .
(h) R eal E sta te o r R eal P ro p e rty
T h e B o a rd is a d d in g a d e f in itio n o f
“ re a l e s ta t e ” a n d “ re a l p r o p e r ty ” to
§ 22 5 .6 2 o f its re g u la tio n . T h e B o a rd
p ro p o s e d th is a m e n d m e n t to
in c o rp o ra te th e d e fin itio n o f re a l e sta te
a n d re a l p ro p e rty e m p lo y e d b y th e o th e r
ag e n cies. T h a t d e fin itio n s p e c ific a lly
e x c lu d e s m in e ra l rig h ts, tim b e r rig h ts,
g ro w in g c ro p s, w a te r rig h ts, a n d s im ila r
in te re sts .
T itle XI o f FIRREA d o e s n o t d e fin e
“ re a l e s ta te " o r “ re a l p r o p e r ty ” n o r d o e s
th e c o n te x t in w h ic h th e s e te rm s are
u s e d su g g e st th a t th e te rm s a re in te n d e d
to h a v e d iffe re n t te c h n ic a l m e a n in g s .
S ee 55 F R 2 7 7 6 2 (July 5, 1990).
T h e B o a rd u s e d “ re a l p r o p e r ty ” a n d
“ re a l e s ta te ” in te rc h a n g e a b ly
th ro u g h o u t its a p p ra is a l r u le to m e a n
in te re s ts in a n id e n tif ie d p a rc e l o r tra c t
o f la n d a n d im p ro v e m e n ts . H o w e v e r,
th e B o ard d id n o t in te n d th e s e te rm s to




in c lu d e m in e ra l rig h ts, tim b e r rig h ts, o r
g ro w in g c ro p s w h e n th e y a re c o n s id e re d
s e p a ra te ly fro m th e p a r c e l o r tra c t o f
la n d . V a lu a tio n o f s u c h in te r e s ts
g e n e ra lly re q u ire s th e se rv ic e s o f a
p ro fe ssio n a l o th e r th a n a re a l e s ta te
a p p ra ise r.
T o cla rify th is d is tin c tio n , th e B o a rd
h as a m e n d e d its re g u la tio n to d e fin e
“ re a l p r o p e r ty ” a n d “ r e a l e s ta te ” fo r
p u rp o s e s o f th e a p p r a is a l r e g u la tio n as
a n id e n tif ie d p a rc e l o r tra c t o f land.,
in c lu d in g im p ro v e m e n ts , e a s e m e n ts ,
rig h ts o f w a y , u n d iv id e d o r f u tu re
in te re s ts a n d s im ila r rig h ts i n a tr a c t o f
la n d , b u t e x c lu d in g m in e ra l rig h ts ,
tim b e r rig h ts, o r g ro w in g c ro p s.
F ew c o m m e n te rs e x p re s s e d a n
o p in io n o n th is p r o p o s e d c h a n g e . T h o se
few c o m m e n te rs w h o o p p o s e d th e
d e fin itio n s ta te d th a t tim b e r a n d
g ro w in g c ro p s s h o u ld n o t b e e x c lu d e d
fro m th e d e fin itio n o f re a l e s ta te in th a t
th e v a lu e o f s u c h ite m s is t ie d to th e
v a lu e o f th e la n d . C o m m e n ts o p p o s in g
th is d e fin itio n w e re g e n e ra lly fro m
a p p ra is e rs w h o p e rfo rm farm a n d tim b e r
a p p ra is a ls .
In m a n y sta te s, m in e ra ls , tim b e r, a n d
g ro w in g c ro p s th a t h a v e n o t b e e n
se v e re d fro m th e la n d a re c o n s id e r e d
in te re s ts in re a l e s ta te o r re a l p ro p e rty .
C o n s e q u e n tly , if m in e ra l rig h ts are
c o lla te ra l for a lo a n in o n e o f th o s e
sta te s, a q u e s tio n a r is e s w h e th e r th e
in s titu tio n m u s t o b ta in a re a l e s ta te
a p p ra is a l o f th e p a rc e l o r tr a c t o f la n d
to w h ic h th e m in e r a l rig h ts a re a tta c h e d
b u t in w h ic h th e in s titu tio n h a s n o
in te re st.
T h e B o a rd ’s fin a l ru le c la rifie s th a t
re g u la te d in s titu tio n s a re n o t r e q u ir e d to
o b ta in a p p ra is a ls o f th e p a rc e l o f la n d to
w h ic h m in e ra l rig h ts, o r s im ila r
se v e ra b le in te re s ts in re a l e s ta te are
a tta c h e d , if th e tr a n s a c tio n o n ly
in v o lv e s th e s e v e ra b le in te r e s t ra th e r
th a n th e p a rc e l o r tra c t o f la n d . W h e re
m in e ra l rig h ts, tim b e r rig h ts, o r g ro w in g
c ro p s, a n d t h e a s s o c ia te d p a r c e l o r tra c t
o f la n d , are th e su b je c t o f a re a l esta te re la te d fin a n c ia l tra n s a c tio n , th e
se rv ic e s o f a lic e n s e d o r c e rtifie d
a p p ra is e r w o u ld b e r e q u ir e d u n le s s th e
tra n s a c tio n is o th e rw is e e x e m p t.
In a d d itio n , th e c o n trib u tio n o f
re le v a n t m in e ra l rig h ts, tim b e r rig h ts, or
g ro w in g c ro p s s h o u ld b e in c lu d e d w h e n
a p p ra is in g a p a rc e l o f la n d w h ic h
p o sse sse s a n y o f th e s e fe a tu re s.
H o w ev er, v a lu a tio n o f th e s e in te re s ts
w o u ld n o t b e re q u ire d if th e y a re n o t
p a rt o f th e tra n s a c tio n o r if th e y a re n o t
re le v a n t to th e a n a ly s e s w h ic h th e
a p p r a is e r n e e d s to p e rfo rm to a rriv e at
a n e s tim a te o f v a lu e fo r th e p a rc e l o r
tra c t o f la n d .

§ ____ .3(a)

A p p r a is a ls re q u ire d

(1) T h re s h o ld
T h e a g e n c ie s p ro p o s e d a n in c re a s e
fro m $ 1 0 0 ,0 0 0 to $ 2 5 0 ,0 0 0 in th e
th r e s h o ld a t o r b e lo w w h ic h a T itle XI
a p p ra is a l is n o t r e q u ire d , a n d
sp e c ific a lly a s k e d c o m m e n te rs w h e th e r
a $ 2 5 0 ,0 0 0 o r so m e o th e r th r e s h o ld
w o u ld b e a p p ro p ria te . In a d d itio n , th e
a g e n c ie s re q u e s te d in fo rm a tio n o n lo ss
e x p e rie n c e o f d e p o s ito ry in s titu tio n s for
lo a n s g re a te r th a n $ 2 5 0 ,0 0 0 a n d lo a n s o f
$ 2 5 0 ,0 0 0 o r le ss. O n N o v e m b e r 10,
19 9 3 , th e a g e n c ie s m a d e a v a ila b le
s u p p le m e n ta l in fo rm a tio n o n th e
p ro p o s e d r u le a n d e x te n d e d th e
c o m m e n t p e r io d fo r 30 d a y s in o rd e r to
a llo w c o m m e n te rs to c o n s id e r a n d
c o m m e n t o n th e in fo rm a tio n . T h e
s u p p le m e n ta l in fo rm a tio n re la te d
p rim a rily to th e p r o p o s e d in c re a s e in
th e th re s h o ld .
A m a jo rity o f th e c o m m e n te rs
a d d re s s e d th e th r e s h o ld is s u e . A lm o st
a ll o f th e c o m m e n te rs o p p o s e d to th e
in c re a s e w e re a p p ra is e rs , w h ile a lm o st
a ll o f th e c o m m e n te rs in fav o r o f th e
in c re a s e w e re d e p o s ito ry in s titu tio n s .
M o st o f th o s e o p p o s e d s ta te d a s th e
b a s is fo r th e ir o p p o s itio n th a t a n
in c re a s e in th e th r e s h o ld w o u ld c a u se
s u b s ta n tia l lo ss e s for d e p o s ito ry
in s titu tio n s , a n d th e re b y fo r th e d e p o s it
in s u r a n c e fu n d s . T o s u p p o r t th is v ie w ,
c o m m e n te rs g e n e ra lly c ite d th e th r if t
fa ilu re s o f th e 1 9 8 0 s a n d a s s e rte d th a t
a n in c re a s e in th e th r e s h o ld w o u ld le a d
to th e sa m e re su lt.
A to ta l o f 74 c o m m e n t le tte rs
p r o v id e d d a ta o n lo s s e x p e rie n c e . T h e
in s titu tio n s p ro v id in g th e d a ta v a rie d in
siz e , a n d in c lu d e d la rg e re g io n a l m u lti­
b a n k h o ld in g c o m p a n ie s , a s w e ll a s
sm a ll b a n k s . T h is d a ta is d is c u s s e d
b e lo w .
F o r th e re a s o n s se t fo rth b e lo w , th e
a g e n c ie s h a v e d e c id e d to ra is e th e
th r e s h o ld fro m $ 1 0 0 ,0 0 0 to $ 2 5 0 ,0 0 0 .
S u c h a n in c re a s e w ill b e n e fit c o n s u m e rs
a n d le n d e rs a n d w ill n o t th r e a te n th e
sa fe ty a n d s o u n d n e s s o f fin a n c ia l
in s titu tio n s , p a r tic u la rly as an
e v a lu a tio n w ill b e r e q u ire d fo r a ll lo a n s
e x e m p t u n d e r th e th re s h o ld .
B en efits f o r C o n su m ers a n d L en ders
o f an In crea se in th e T h resh old. M a n y
c o m m e n te rs s ta te d th a t a n in c re a s e in
th e th r e s h o ld w o u ld b e n e fit c o n s u m e rs
a n d le n d e rs . N u m e ro u s b a n k a n d th rift
c o m m e n te rs p o in te d to th e c o s t a n d
tim e n e e d e d in o rd e r to o b ta in a n
a p p r a is a l a s a n im p e d im e n t to le n d in g .
T h e a p p r a is a l w a s c ite d b y se v e ra l
c o m m e n te rs a s th e m o st im p o r ta n t
fa c to r c a u s in g d e la y in s m a ll b u s in e s s
le n d in g , a n d th e c o s t o f th e a p p r a is a l
w a s d e s c rib e d a s h ig h , e s p e c ia lly for
c o m m e rc ia l b o rro w e rs. C o m m e n te rs

Federal Register / Vol. 59, No. 108 / Tuesday, June 7, 1994 / Rules and Regulations
r e p o r te d th a t a p p r a is a l fee s fo r
c o m m e rc ia l tra n s a c tio n s b e tw e e n
$ 1 0 0 ,0 0 0 a n d $ 2 5 0 ,0 0 0 c o u ld c o st 5
e r c e n t o f th e lo a n a m o u n t to th e
o rro w c r. B a n k s a n d th rifts a lso
c o m m e n te d th a t in c re a s in g th e
th r e s h o ld w o u ld r e d u c e re g u la to ry
b u r d e n a s s o c ia te d w ith m a k in g lo a n s
b e lo w $ 2 5 0 ,0 0 0 . M a n y a p p ra is e rs ,
h o w e v e r, c o m m e n te d th a t a p p ra is a l
c o s ts h a v e r e m a in e d re la tiv e ly ste a d y .
M a n y a p p ra is e rs a lso s ta te d th a t
a p p r a is a ls b y c e rtifie d o r lic e n s e d
a p p ra is e rs a re n e c e s sa ry to p ro te c t th e
c o n s u m e r. T h e a g e n c ie s b e lie v e th a t th is
a s s e rtio n m is c h a ra c te riz e s th e ro le o f
th e in s titu tio n ’s d e te rm in a tio n o f
c o lla te ra l v a lu e in a ty p ic a l c o n s u m e r
tra n s a c tio n . T h e re g u la te d in s titu tio n
o b ta in s th e a p p r a is a l o r e v a lu a tio n as
p a r t o f its lo a n u n d e r w ritin g p ro c e s s in
o rd e r to m a k e c e rta in th a t it is
a d e q u a te ly s e e m e d . A n y a p p ra is a l
o r d e r e d b y a fin a n c ia l in s titu tio n is n o t
d e s ig n e d , a n d g e n e ra lly c o m e s to o late,
to a s s is t th e c o n s u m e r in n e g o tia tin g a
c o n tra c t p ric e . In a p u r c h a s e o f re a l
e s ta te , th e p u rc h a s e o ffe r is g e n e ra lly
m a d e b efo re fin a n c in g is s o u g h t a n d th e
fin a n c ia l in s titu tio n o rd e rs a n a p p ra is a l.
T h e re fo re , th e a p p ra is a l r e p re s e n ts a n
afte r-th e -fac t co st. F u rth e r, e v e n w h e n a
T itle XI a p p ra is a l is n o t r e q u ire d ,
n o th in g p re v e n ts a c o n s u m e r fro m
in d e p e n d e n tly o b ta in in g a n a p p r a is a l by
a lic e n s e d o r c e rtifie d a p p r a is e r for th e
c o n s u m e r ’s o w n u s e in th e n e g o tia tin g
p ro c e ss. M o reo v e r, th e a g e n c ie s ’ ru le s
re q u ire a n in s titu tio n to o b ta in a n
a p p r o p r ia te e v a lu a tio n o f th e re a l
p ro p e rty c o lla te ra l fo r tra n s a c tio n s
b e lo w th e th re s h o ld , a n d tlia t e v a lu a tio n
w o u ld b e a v a ila b le to th e c o n s u m e r.
T h e a g e n c ie s b e lie v e th a t m a n y o f th e
c o n c e rn s a b o u t c o n s u m e r p ro te c tio n are
a d d r e s s e d u n d e r s ta tu to ry a n d
re g u la to ry p ro g ra m s o th e r th a n T itle XI
o f FIR REA , w h ic h fo c u se s o n b a n k a n d
th rift sa fe ty a n d s o u n d n e s s .
T h e R eal E sta te S e ttle m e n t P ro c e d u re s
A ct (RESPA ) e s ta b lis h e s p ro c e d u re s for
le n d e rs to d is c lo s e to c o n s u m e rs th e
ch a rg e s for a v a rie ty o f s e ttle m e n t
se rv ic e s , in c lu d in g a p p r a is a ls a n d
e v a lu a tio n s . T o c o m p ly w ith th e le tte r
a n d in te n t o f th e B o a rd ’s R e g u la tio n B
(im p le m e n tin g th e E q u a l C re d it
O p p o rtu n ity A ct), re g u la te d in s titu tio n s
m u s t e ith e r d is c lo s e to th e b o rro w e r th e
rig h t to re c e iv e a c o p y o f th e d o c u m e n ts
th e le n d e r u s e s to v a lu e th e c o lla te ra l in
a n a p p lic a tio n for a lo a n s e e m e d b y a
d w e llin g , re g a rd le ss o f w h e th e r th e
d o c u m e n ts c o n s titu te a T itle XI
a p p r a is a l o r e v a lu a tio n , o r, a s a m a tte r
o f c o u rs e p ro v id e th e b o rro w e r w ith th e
a p p r a is a l o r e v a lu a tio n . T h u s , to th e
e x te n t th a t a b o rro w e r b e n e fits from
k n o w in g th e v a lu e th e le n d e r p la c e s o n




th e p ro p e rty t h e b o rro w e r h a s
c o n tra c te d to p u r c h a s e o r p le d g e d a s
c o lla te ra l, th e b o rro w e r s h o u ld b e ab le
to b e n e fit fro m th a t k n o w le d g e w h e th e r
it is in th e fo rm o f a T itle XI a p p ra is a l
o r a n e v a lu a tio n .
F u rth e rm o re , a lth o u g h s u c h a
d is c lo s u r e is n o t re q u ir e d b y R ESPA ,
R e g u la tio n B, o r T itle X I, th e a g e n c ie s
b e lie v e th a t a r e g u la te d in s titu tio n
s h o u ld a d v ise c o n s u m e rs w h e th e r th e
in s titu tio n in te n d s to h a v e a lic e n s e d o r
c e rtifie d a p p r a is e r p r e p a re th e e s tim a te
o f v a lu e . T h is s h o u ld b e d o n e e a rly
e n o u g h in th e lo a n a p p lic a tio n p ro c e ss
to a llo w th e c o n s u m e r to m a k e a n
in fo rm e d d e c is io n th a t th e in te n d e d
m e th o d o f e s tim a tin g th e r e a l e s ta te ’s
v a lu e m e e ts h is o r h e r n e e d s .
E ffects on S a fe ty a n d S o u n d n e ss o f
F in a n c ia l In stitu tio n s. T h e a g e n c ie s
h a v e c o n c lu d e d th a t a $ 2 5 0 ,0 0 0
th r e s h o ld w o u ld n o t th r e a te n th e sa fe ty
a n d s o u n d n e s s o f fin a n c ia l in s titu tio n s .
B e n e fits to S afety a n d S o u n d n e s s . T h e
a g e n c ie s b e lie v e th a t th e in c re a s e in th e
th r e s h o ld w ill h a v e a ffirm a tiv e b e n e fits
fo r sa fe ty a n d s o u n d n e s s . A d e c re a s e in
a p p r a is a l re q u ire m e n ts s h o u ld re lie v e
re g u la to ry b u r d e n fo r b a n k s a n d th rifts
a n d th e re b y im p ro v e th e ir
c o m p e titiv e n e s s w ith n o n -re g u la te d
le n d e rs . A p p ra is a l c o s ts re p r e s e n t a
sig n ific a n t e x p e n s e fo r c e rta in sm a ll
lo a n s , m a k in g s u c h le n d in g le ss
a ttra c tiv e to a p o te n tia l b o rro w e r o r le ss
p ro fita b le for th e le n d e r. N u m e ro u s
c o m m e n ts fro m le n d e r s s u p p o r te d th is
c o n c lu s io n . T h e p ro b le m is p a r tic u la rly
tro u b lin g fo r le n d e rs in s m a ll to w n s ,
w h o m u s t p a y a p r e m iu m for a lic e n s e d
o r c e rtifie d a p p r a is e r to v is it th e to w n .
A G A O su rv e y o f b a n k e rs in c o n n e c tio n
w ith a s tu d y o f s m a ll b u s in e s s le n d in g
re v e a le d th a t th e m in im u m c o s t to
p e rfo rm th e n e c e s s a ry a p p r a is a l o n
c o m m e rc ia l re a l e s ta te p ro p e rty u s e d as
c o lla te ra l fo r s m a ll b u s in e s s lo a n s w a s
a p p ro x im a te ly $ 3 ,0 0 0 .' S ee G A O R e p o rt
G G D -9 3 —121, B a n k R e g u la tio n :
R e g u la to ry Im p e d im e n ts to S m a ll
B u s in e s s L e n d in g S h o u ld Be R e m o v e d
(S e p te m b e r 1993).
E x p e rie n c e w ith th e $ 1 0 0 ,0 0 0
T h re s h o ld . T h e B o a rd h a s h a d a
$ 1 0 0 ,0 0 0 th r e s h o ld in p la c e sin c e
A u g u s t 1 990, a n d th e o th e r a g e n c ie s
h a v e h a d a $ 1 0 0 ,0 0 0 th r e s h o ld sin c e
M a rc h o r A p ril 1992. T h e e x p e rie n c e o f
th e a g e n c ie s h a s d e m o n s tra te d th a t th e
$ 1 0 0 ,0 0 0 th r e s h o ld h a s p o s e d n o ris k to
sa fe ty a n d s o u n d n e s s .
A su rv e y b y e a c h o f th e a g e n c ie s o f its
s e n io r e x a m in a tio n sta ff in d ic a te s th a t
o v e r a p e rio d o f m a n y y e a rs, w ith a few

1The GAO noted that a survey performed by the
American Bankers Association reflected a lower
average cost.

29485

p o s s ib le e x c e p tio n s ,12 n o b a n k o r th r if t
h a s fa ile d o r su ffe re d sig n ific a n t lo ss e s
a s a r e s u lt o f a p p ra is a l p ro b le m s w ith
lo a n s u n d e r $ 1 0 0 ,0 0 0 o r e v e n u p to
$ 2 5 0 ,0 0 0 . E a c h o f th e re g io n a l
re p r e s e n ta tiv e s o f th e B o ard , th e FDIC,
a n d th e O C C s u p p o rte d a d o p tio n o f th e
$ 2 5 0 ,0 0 0 th r e s h o ld a s c o n s is te n t w ith
s a fe ty a n d so u n d n e s s . R e p re se n ta tiv e s
o f t h e O T S su g g e ste d th a t th e th r e s h o ld
s h o u ld o n ly a p p ly to h e a lth ie r th rifts.
A s d e s c r ib e d b e lo w , th is c o n c e rn h a s
b e e n a d d r e s s e d b y th e a g e n cies in th e
fin a l re g u la tio n .
T h e $ 2 5 0 ,0 0 0 th re s h o ld w a s also
s u p p o r te d b y th e C o n fe re n ce o f S tate
B a n k S u p e rv is o rs (CSBS), th e
p ro fe s s io n a l a s so c ia tio n for sta te
o ffic ia ls w h o s u p e rv is e a n d reg u la te
s ta te -c h a rte re d c o m m e rc ia l a n d sa v in g s
b a n k s . T h e CSBS c o n c lu d e d th a t th e
in c re a s e d th r e s h o ld w o u ld re d u c e
u n n e c e s s a r y c o s ts a n d w o u ld n o t
r e p r e s e n t a th re a t to th e safety a n d
s o u n d n e s s o f fin a n c ia l in stitu tio n s.
N u m e ro u s b a n k a n d th rift
c o m m e n te rs a lso re p o rte d th a t th e ir
e x p e r ie n c e w ith th e $ 1 0 0 ,000 th re s h o ld
h a d b e e n g o o d . M o reo v e r, c o m m e n te rs
o p p o s e d to th e in c re a se d th re s h o ld d id
n o t id e n tify in s titu tio n s th a t h a d failed
o r s u ffe re d sig n ific a n t lo sses b e c a u s e o f
th e e x is te n c e o f th e $ 1 0 0 ,0 0 0 th re s h o ld .
T h e a g e n c ie s b e lie v e th a t lo w lo ss
e x p e r ie n c e w ith a $ 1 0 0 ,0 0 0 th re s h o ld
p r o v id e s Ju stific a tio n fo r a n in c re a se in
th e th r e s h o ld to $25 0 ,0 0 0 .
D a ta In d ic a te S im ila ritie s B etw een th e
$ 1 0 0 ,0 0 0 T h re s h o ld a n d $ 2 50,000
T h re s h o ld . A s u b s ta n tia l b o d y o f
e v id e n c e p ro v id e s stro n g re a so n s to
b e lie v e th a t e x e m p tin g lo a n s b e tw e e n
$ 1 0 0 ,0 0 0 a n d $ 2 5 0 ,0 0 0 from th e T itle XI
a p p r a is a l r e q u ire m e n t w ill n o t p re s e n t
m a te r ia lly g re a te r ris k th a n th e p rio r
e x e m p tio n fo r lo a n s u n d e r $100,000.
D a ta fro m th e c o m m e rc ia l b a n k
C o n s o lid a te d R e p o rts o f C o n d itio n a n d
In c o m e (C all R e p o rts) for y e a r-e n d 1992
s h o w th a t a p p ro x im a te ly 53 p e rc e n t o f
t h e d o lla r v o lu m e o f a ll re a l estates e e m e d lo a n s o f a ll siz e s in th e
c o m m e rc ia l b a n k in g in d u s try a re lo a n s
s e c u r e d b y l-to -4 fam ily re s id e n tia l

2The Central Region of the OTS was the only
OTS respondent to identify failures attributable to
inadequate appraisal practices. The Central Region
identified fewer than six failures over the previous
twelve years where appraisal issues for loans under
$250,000 were a major contributing factor to a
thrift’s failure. The Central Region noted that in
those failures where inadequate appraisal practices
were a problem, other areas of loan underwriting
were usually found to be equally deficient.
One OCC survey respondent reported that one
institution had failed because of residential and
commercial loans between $100,000 and $500,000.
The respondent noted that the problems occurred
before 1987, when the OCC issued guidelines that
would have prevented the institution’s real estate
valuation problems.

/ b H 9

29486

Federal Register / Vol. 59, No. 108 / Tuesday, June 7/1994 7 Rules and Regulations

properties. Data from the Thrift
Financial Reports (TFR) for year-end
1992 show that the number is 77
percent in the thrift industry.
Data on loan size are not reported for
residential loans on the Call Report or
TFR. However, information from the
National Association of Realtors, the
Census Bureau, and the Department of
Housing and Urban Development (HUD)
indicate that approximately 29 percent
of the dollar volume of l-to-4 family real
estate loans to purchase new homes,
and 33 percent of the dollar volume of
loans to finance the purchase of existing
homes, fell below the prior $100,000
threshold. Approximately 56 percent of
the dollar volume for new l-to-4 family
homes and 49 percent of the dollar
volume for existing homes fell between
$100,000 and $250,000. In sum, 85
percent of the dollar volume of
mortgages financing new homes and 82
percent of the volume of mortgages
financing purchases of existing homes
w ill fall below the $250,000 threshold.
Thus, increasing the threshold from
$100,000 to $250,000 is likely to more
than double the amount of lending for
l-to-4 family residential real estate loans
exempt from the Title XI appraisal
requirement. Inasmuch as a solid
majority of total real estate lending is
composed of l-to-4 family loans, the
agencies believe that l-to-4 family loans
w ill be the largest block of loans
exempted by the increase in the
threshold.
The increase in l-to-4 family
residential real estate lo'ans exempted by
the $250,000 threshold w ill not affect
safety and soundness, as these loans are
traditionally the safest in a lending
institution’s portfolio. In 1992, the net
loan charge-off rate 3 for all commercial
bank loans secured by l-to-4 family real
estate was 0.23 percent; for thrifts, the
net charge-off rate for loans secured by
l-to-4 family residential real estate was
0.22 percent. Low loss rates for l-to-4
family residential real estate loans
predate enactment of Title XI; for
example, in 1991, when the great
majority of l-to-4 family loans had been
originated prior to implementation of
Title XI in August 1990, the charge-off
rate for l-to-4 family loans was 0.20
percent for commercial banks and 0.11
percent for thrifts. See FDIC Quarterly
Banking Profile (4th Quarter 1991) and
Thrift Financial Reports (1991).
Beginning June 30,1993, commercial
banks and thrifts are required to report
annually the number and dollar amount1
1 The net loan charge-off rate is determined by
the dollar amount of gross losses, subtracting
t h e amount recovered, and dividing the result by
ta k in g

th e a v e ra g e o f o u t s t a n d in g lo a n s .




of non-farm non-residential real estate
loans, which basically constitute
business loans secured by real estate.
They are also required to report the
number and dollar amount of all
agricultural loans.
The data from the June 1993 Call
Reports show that 12 percent of the
dollar volume of real estate-secured
business loans was below the $100,000
threshold. Also by dollar volume, only
11 percent of outstanding real estatesecured business loans fell between
$100,000 and $250,000. For thrifts, the
TFRs show that 10 percent of the dollar
volume of all real-estate secured
business loans was below $100,000, and
9 percent between $100,000 and
$250,000.
These findings are consistent with
data compiled in the 1989 National
Survey of Small Business Finances,
which surveyed firms with fewer than
500 employees. See National Survey of
Small Business Finances (1989)
(cosponsored by the Federal Reserve
Board and Small Business
Administration). According to that
survey, of the commercial mortgages to
small businesses by depository
institutions, 6 percent of the dollar
volume of these loans was in loans of
less than $100,000, and 12 percent was
in loans between $100,000 and
$250,000.
As noted in the regional examiner
surveys, the $100,000 threshold has not
resulted in significant losses, even
though that threshold captures 12
percent of the dollar volume of small
business loans. The agencies do not
believe that an increase in the threshold
that exempts another 11 percent of
business loans w ill significantly
increase such losses.
Call Report data also show that 63
percent of the dollar volume of
agricultural real estate loans fell below
the $100,000 threshold, and that 15
percent fell between $100,000 and
$250,000. For thrifts, TFR data show
that 46 percent of farm loans fell below
$100,000, and 36 percent between
$100,000 and $250,000. Farm loans
represented approximately one-half of
one percent (.58%) of non-residential
mortgages held by thrifts. Thus, in the
area of farm loans, only a relatively
small amount of additional loans w ill be
exempted by the raised threshold.
Although the increase in the
threshold w ill increase the dollar
volume of exempt transactions, the
agencies believe that the quality of loans
and lending practices of banks and
thrifts w ill not change for these
transactions. Moreover, an institution
must obtain evaluations for these

exempt transactions when it does not
obtain appraisals.
In addition, there is evidence that the
loss rates on loans below the $250,000
threshold w ill be low. For 1992, the
commercial bank loss rate for farm loans
was .23 percent (approximately the
same loss rate as for l-to-4 family loans).
These loss rates on residential and farm
loans are significantly lower than the
loss rates for the types of real estate
loans that are much less likely to fall
below the $250,000 threshold—
construction loans (3.54% loss rate for
commercial banks) and multifamily
loans (1.68% loss rate for commercial
banks). Loss rates for non-farm nonresidential real estate loans at
commercial banks were 1.55 percent,
higher than residential or farm loans,
but still below the loss rates
experienced for loans for construction
or multifamily housing.
Finally, in addition to the relatively '
lower risk of the portfolio of real estate
related loans between $100,000 and
$250,000, the fact remains that the
dollar amount of each credit is relatively
small. In the experience of the agencies,
banks and thrifts generally do not fail
because of real estate-related financial
transactions under $250,000. It is
generally large construction and
development loans that have created
safety and soundness problems. For
example, much of the thrift losses of the
1980s were caused by losses in large,
speculative real estate development
projects, such as construction of offices,
condominiums, and apartments. See,
e.'g., GAO Report AFMD 89-62, Thrift
Failures: Costly Failures Resulted from
Regulatory Violations and Unsafe
Practices. Such projects generally
involve loans in much greater amounts
than $250,000. The experience of the
agencies continues to be that larger
development and construction loans are
most likely to cause significant losses.
Although many commenters
suggested that raising the threshold
would result in losses similar to those
of the thrift failures of the 1980s, they
did not offer analysis to support those
statements. The agencies do not believe
that inadequate appraisals on loans
under $250,000 were a significant cause
of those failures.
Additional Protections. Significant
protections exist so that loans under
$250,000 w ill not create a safety and
soundness problem once the $250,000
threshold is in place.
First, each agency will, during each
required full-scope, on-site examination,
analyze the prudence of each
institution’s credit underwriting
practices, including appraisal and
evaluation practices, as appropriate to

Federal Register / Vol. 59, No. 108 / Tuesday, June 7, 1994 / Rules and Regulations
the institution’s size and nature of its
real estate-related activities. If an
institution is doing a poor job of
evaluating real estate for transactions
under $250,000, then the appropriate
agency may order the institution to
obtain appraisals for certain loans or for
all loans above a certain amount that are
not subject to another exemption.4
Second, even though a bank or thrift
w ill not generally be required to obtain
a Title XI appraisal for real estatesecured loans under $250,000, the
institution must determine the value of
the real estate before making the loan.
Under the appraisal regulations, banks
and thrifts must support any transaction
below the threshold with an evaluation
that is consistent with the agencies’
guidelines. Evaluations w ill be
performed by persons who are capable
of rendering an appropriate estimate of
value of real estate as a result of their
real estate-related experience or
training.
As several commenters noted, a
$250,000 threshold w ill have its greatest
effect in smaller communities where
property values are lower. However, as
many community bank commenters
pointed out, local lenders in small
communities tend to be extremely
knowledgeable of property values. Also,
collateral for loans of this size do not

29487

percent that were purchased by major
secondary mortgage market entities,
other loans were originated so as to be
eligible for sale to such entities. The
agencies have concluded that the
appraisal requirements of these
government sponsored agencies should
protect federal financial and public
policy interests in the loans that are
eligible to be purchased by them. The
agencies also believe that compliance
with these appraisal requirements w ill
protect the safety and soundness of
regulated financial institutions.
Data Submitted by Commenters. The
notice of proposed rulemaking asked
commenters to submit loan loss data for
different categories of real estatesecured loans above and below
$250,000. Many depository institution
commenters noted that they do not
maintain loss data by loan size and that
this information is not reasonably
accessible. Only a small number of
depository institutions submitted such
data. The agencies do not believe that
this response is sufficiently large to base
any conclusions about industry-wide
conditions. Nonetheless, the agencies
note that the information provided by
commenters is consistent with the low
loss rates for real estate lending
indicated by other sources. The
responses that the agencies received are
summarized in the following table.

typically represent complex problems of
analysis or valuation.
Third, a $250,000 threshold does not
prevent the use of appraisals when
needed. Banks and thrifts may obtain
appraisals prepared by licensed or
certified appraisers whenever the
institutions believe it is prudent, and
customer may independently obtain
such appraisals. If, as some commenters
contend, history demonstrates that such
appraisals axe important to the decision
to lend and the failure to obtain such an
appraisal w ill lead to higher loss rates,
then banks and thrifts would
presumably have a strong incentive to
use appraisals. As several commenters
noted, institutions w ill obtain appraisals
when their underwriting criteria
warrant one, regardless of whether
regulations require it.
Fourth, in many cases involving
residential real estate, banks and thrifts
w ill be required to obtain the equivalent
of a Title XI appraisal in order to make
the loan eligible for sale in the
secondary market. According to HUD
data, in 1992, secondary mortgage
market purchasers, such as the Federal
National Mortgage Association (Fannie
Mae) and the Federal Home Loan
Mortgage Corporation (Freddie Mac),
purchased approximately 63 percent of
all l-to-4 family mortgages originated in
the United States. In addition to the 63

Outstanding
principal
amount of
loans1
(12/31/92)

Number of
loans

Loss on
loan s1 (an­
nual net
chargeo ffs)2
(12/31/92)

Loss ra te 3
(calculated)
(percent)

Real estate-secured loans

Size of loans

Loans secured by 1-to-4 family reside rv
tial real estate.

Loans greater than $250,000 .— .............

7,151

3,169,918

4,129

0.13

Loans of $250,000 or le s s ................... .
Loans greater than $250,000 ...................

524,137
25,344

22,240,821
28,315,961

23,773
372,706

.11
1.32

Loans of $250,000 or le s s .........................

67,469

5,131,866

36,751

0.72

Loans secured by commercial real estate.

1 Dollars rounded to thousands.
2 Annual net charge-offs are determ ined by taking the dollar amount of gross losses and subtracting the amount recovered.
3 The agencies have calculated the loss rate for each of the categories of real estate-secured loans about which the agencies requested data
by dividing total annua? net charge-offs by the total outstanding principal balance.

Additional Comments on the
$250,000 Threshold —OMB Study.
Several commenters opposing an
increase in the threshold pointed to an
August 1992 study by the Office of
Management and Budget (OMB) entitled
Report to Congress: De Minimis Levels
for Commercial Real Estate Appraisals.
The OMB study did not oppose an
increase in the threshold level but
instead stated, “OMB does not
4 As noted below, the agencies may require an
appraisal for loans between $1004)00 and $250,000
(not otherwise subject to an exemption) when an
institution is in troubled condition, and that




recommend—at this time—a de minimis
level higher than $100,000. . . .’’ OMB
study at i.
The agencies believe that the major
concerns identified by the OMB in
urging delay have been addressed with
the passage of time. Most importantly,
each of the agencies now has an
additional year’s experience with the
$100,000 threshold. Furthermore, OMB
noted that FIRREA’s appraisal
troubled condition is attributable to underwriting
problems in the institution’s real estate loan
portfolio.

requirements had not been implemented
in all states, but such implementation
has now occurred.
Rulemaking Process. Several
commenters stated that the agencies had
failed to justify increasing the threshold
from $100,000 to $250,000 because the
agencies had not produced a definitive
study showing that doing so would not
increase loss rates

m

29488

Federal Register / Vol. 59, No. 108 / Tuesday, June 7, 1994 / Rules and Regulations

Congress granted the agencies explicit
authority to establish a threshold
consistent with safety and soundness.
The delegation of authority was broad,
and no requirement for quantitative
analysis was included. Nor is it
reasonably feasible for the agencies to
conduct a definitive quantitative
analysis that isolates the effect of
obtaining Title XI appraisals on
institutions’ losses on real estatesecured loans given the many variables,
including changing market conditions
and varying loan underwriting
practices, that may affect institutions’
ultimate loss experience. For the same
reason, the agencies did not conduct a
random sampling of the experience of
financial institutions, as suggested by
one commenter. This does not mean,
however, that the final rule fails to rely
on objective data. Moreover, that data
was analyzed in light of the agencies’
experience and expertise.
As part of this rulemaking, the
agencies reviewed the data the agencies
currently collect from financial
institutions and sought out data that
would enable the agencies to analyze
the effect of the threshold on regulated
institutions. Consistent with statutory
requirements, the agencies have
carefully considered the effect of raising
the threshold and determined that a
$250,000 threshold level does not
represent a threat to the safety and
soundness of financial institutions
based on the agencies’ judgment,
expertise, and experience. In making
this determination, the agencies have, as
described above, analyzed the available
data, the comments received during the
rulemaking, and relevant work of other
governmental agencies.
Appraiser Employment. Many
commenters from the appraisal industry
objected to the proposed increase in the
threshold on the grounds that it would
decrease their business and employment
in the appraisal industry.
In the event that an appraisal is not
required because the transaction falls
below $250,000, the appraisal regulation
nonetheless requires that an evaluation
of the property be conducted. The
agencies’ appraisal rules do not impede
licensed and certified appraisers from
performing these evaluations.
GAO Study. Several commenters
suggested that the agencies delay action
on any rulemaking pending completion
of General Accounting Office (GAO)
studies of the threshold scheduled for
completion in April 1994 and October
1995. Congress delegated authority to
the agencies to establish a threshold in
the same legislation that directed the
GAO to conduct two studies of the
appraisal threshold. Congress clearly




did not require the agencies to withhold
action on the threshold pending
completion of the GAO studies; nor did
it make agency action contingent on the
outcome of the GAO studies or any
other studies. Also, in the Interagency
Policy Statement on Credit Availability
issued March 10,1993, the agencies
identified a need to reexamine their
existing appraisal rules to make certain
that thresholds below which formal
appraisals are not needed are
reasonable. Therefore, the agencies
believe that it is appropriate to proceed
with the rulemaking. The agencies are
cooperating with the GAO by providing
information that it may use in preparing
its studies.
Private Mortgage Insurance Industry
Experience. A trade association
representing the private mortgage
insurance industry opposed increasing
the threshold level to $250,000, citing
substantial losses on loans under
$100,000. However, it also noted that for
loans originated in 1984, loans above
$250,000 had a relative claim rate more
than 50 percent higher than the claim
rate for loans originated under $100,000.
Information provided by this
commenter also showed that the relative
claim rates on loans below $100,000 and
loans between $100,000 and $250,000
were close for most years, w hile the
relative claim rate for loans above
$250,000 exceeded the claim rates for
loans below $250,000 in all years except
one. The commenter did not provide
actual claim rates nor dollar amounts of
claims. Nor did the commenter disclose
the average loan-to-value ratios for those
mortgages, a factor that could affect the
loss experience.
Although the trade association stated
its belief that a significant amount of the
claims experienced by its members were
related to inadequate appraisals, bank
and thrift commenters stated that losses
on foreclosed properties were more
directly related to deterioration in the
local real estate market, damage to the
property, or actions or inaction by the
borrower.

Application o f $100,000 Threshold to
Certain Troubled Institutions. As
described in more detail below, the
agencies are adopting substantially as
proposed a separate amendment stating
that each agency continues to reserve
the right to require a regulated
institution to obtain a Title XI appraisal
whenever the agency believes that an
appraisal is necessary to address safety
and soundness concerns. This authority
may involve the agency requiring an
institution to obtain an appraisal for a
particular extension of credit or an
entire group of credits.

Whether an institution w ill be
required, pursuant to this provision or
existing safety and soundness authority,
to obtain an individual appraisal or
group of appraisals may depend on the
condition of that institution. If an
institution’s troubled condition is
attributable to real estate loan
underwriting problems, then the
appropriate agency may require
appraisals for all new real estate-related
transactions of more than $100,000 that
are not subject to an exemption.
Since thrift industry assets are
concentrated in real estate loans, OTS
believes that problem thrifts or thrifts in
troubled condition5 generally w ill have
real estate-related asset quality
problems. As a matter of policy, OTS
intends to require thrifts in troubled
condition to adhere to a $100,000
threshold.
Reassessment o f Threshold. Finally,
just as the agencies have reviewed their
experience with the $100,000 threshold
in determining whether a higher (or
lower) threshold was appropriate, so too
w ill the agencies review their
experience with the $250,000 threshold.
If the agencies should determine that
the increased threshold is causing safety
and soundness problems, then the
agencies w ill reassess that threshold.
(2) The “Abundance of Caution”
Exemption
The agencies are amending their
regulations to clarify and expand the
scope of the exemption for real estate
liens taken in an “abundance of
caution.” Under the amended rule,
regulated institutions w ill be able to
apply the abundance of caution
exemption to a broader range of
transactions in which real estate is taken
as additional collateral for an extension
of credit that is well supported by
income or other collateral of the
borrower.
Prior to adoption of this amendment,
the abundance of caution exemption
was available only for transactions in
which a lien on real estate had been
taken as collateral solely through an
abundance of caution and where the
terms of the transaction as a
consequence had not been made more
5 A "problem” association is defined as an
association that: (1) Has a composite MACRO rating
of 4 or 5; (2) is undercapitalized under prompt
corrective action standards; (3) is subject to a
capital directive or a cease and desist order, a
consent order, or a formal written agreement,
relating to the safety and soundness or financial
viability of the savings association, unless
otherwise informed in writing by the OTS; or (4)
has been notified in writing by the OTS that is has
been designated a problem association or an
association in troubled condition. (See Regulatory
Bulletin 27a, Executive Compensation.)

Federal Register / Vol. 59, No, 108 / Tuesday, June 7, 1994 / Rules and Regulations
favorable than they would have been in
the absence of a lien. In the agencies’
experience, however, this standard was
being interpreted too narrowly. As a
result, regulated institutions obtained
appraisals even though they were
unnecessary to protect federal financial
and public policy interests in the
transaction or bank and thrift safety and
soundness. Further, a transaction would
not qualify for the exemption if the
regulated institution made the terms
more favorable to the borrower because
of the real estate collateral. Therefore,
bankers believed they were unable to
use this exemption when common
business practices would call for a
lower interest rate on a secured loan
than an unsecured loan. To qualify for the amended
exemption, the regulated institution’s
decision to enter into the transaction
must be w ell supported by the
borrower’s income or collateral other
than real estate. The following examples
from the proposed rule help to explain
how this standard is applied.
Example 1: A business with an established
cash flow seeks a loan from a regulated
institution to purchase an adjacent property
for expansion. As a common business
practice, the institution takes a lien against
real estate whenever available for greater
comfort. However, the institution’s analysis
determines that the current income from the
business and personal property available as
collateral support the decision to extend
credit without knowing the real estate’s
market value. During loan negotiations, the
institution offers to make the loan on slightly
better terms for the borrower if it receives a
lien on real estate. The borrower accepts the
offer and provides the real estate as
additional collateral.
The regulated institution may reasonably
conclude that the lien on the real estate was
taken in an abundance of caution because the
current income from the business and
personal property taken as collateral support
the decision to extend credit. Therefore, no
appraisal would be required.
Example 2: The owner of a shop seeks a
term loan from a regulated institution for
modernization of its facilities. The institution
determines that other sources of repayment
and collateral do not sufficiently support the
decision to extend credit without taking a
lien on the real estate and knowing the real
estate’s market value. Therefore, in order to
extend credit to the borrower prudently, the
institution needs an appraisal
The regulated institution should conclude
that the real estate lien has not been taken
in an abundance of caution because the other
sources of repayment and collateral do not
support the decision to extend credit without
knowing the real estate’s market value. This
transaction would not qualify for the
abundance of caution exemption.
Regulated institutions generally supported
the proposed amendment. Some commenters
representing appraisers agreed that the
abundance of caution exemption had been




too narrowly interpreted nnd supported the
proposal to extend the scope of the
exemption.
Other appraisers commented that the
agencies should require an appraisal, limited
scope appraisal, or evaluation any time a
regulated institution takes real estate as
collateral. Some regulated institutions noted
that the prior rule caused them to forgo liens
on real estate collateral in order to avoid the
expense of an appraisal, thus potentially
increasing their exposure unnecessarily.
The agencies are not requiring appraisals
for these transactions because an estimate of
the real estate collateral’s value generally
would not assist the regulated institution to
make its lending decision. Therefore, an
appraisal generally would not further the
purposes of Title XI of FIRREA nor
significantly improve the safety and
soundness of financial institutions.
(3) Loans Not Secured by Real Estate
The agencies are adopting a uniform
exemption for transactions that are not
secured by real estate. The exemption
makes clear that a regulated institution
is not required to obtain a Title XI real
estate appraisal in connection with a
loan used to acquire or invest in real
estate if the institution does not take a
security interest in real estate.
The prior appraisal regulations of the
OCC, FDIC and OTS exempted these
transactions, and the amendment does
not result in any substantive change in
regulatory requirements for these
agencies. The amendment eliminates
minor differences between the text of
the rules adopted by the OCC and OTS
and the text of the FDIC’s rule. Prior to
adoption of the amendment, the Board’s
appraisal regulation did not specifically
exempt these transactions.
Although a few appraisers stated that
Title XI appraisals should be obtained
for these transactions, other
commenters, including appraisers,
supported this exemption. Several
commenters stated that Title XI was
never intended to reach transactions
that were not secured by real estate.
In transactions covered by this
exemption, the value of the real estate
has no direct effect on th9 regulated
institution’s decision to extend credit
because the institution has no security
interest in the real estate. The agencies
conclude that federal financial and
public policy interests would not be
served by requiring lenders and
borrowers to incur the cost of obtaining
Title XI appraisals in connection with
these transactions.
(4) Liens for Purposes Other Than the
Real Estate’s Value
The agencies are adopting a new
exemption for transactions in which a
regulated institution takes a lien on real
estate for a purpose other than the value

29489

of the real estate. This amendment w ill
permit regulated institutions to take
liens against real estate to protect rights
to, or control over, collateral other than
the real estate without obtaining an
appraisal.
Regulated institutions frequently take
real estate liens to protect legal rights to
other collateral and not because of the
value of the real estate as an individual
asset. For example, in lending
associated with logging operations, a
regulated institution typically takes a
lien against the real estate upon which
the timber stands to ensure its access to
the timber in the event of default.
Similarly, where the collateral for a loan
is a business or manufacturing facility,
a regulated institution may take a lien
against the land and improvements in
order to be able to sell the entire
business or facility as a going concern
if the borrower defaults.
A Title XI appraisal contains an
opinion of the market value of real
estate. When the market value of the
real estate as an individual asset is not
needed to support the regulated
institution’s decision to lend, no
purpose is served by requiring the
institution to obtain a Title XI appraisal.
Commenters generally favored
adopting an exemption addressing these
circumstances, agreeing that Title XI
appraisals did not enhance the safety
and soundness of these transactions
because the lenders were basing their
decision to extend credit on the value of
collateral other than real estate.
Some commenters suggested that this
exemption could be combined with the
abundance of caution exemption.
Although there are situations in which
the two exemptions overlap, the
agencies believe that both exemptions
are necessary because there will be
transactions that qualify for one
exemption, but not the other.
(5) Real Estate-Secured Business Loans
of $1 Million or Less
The agencies are adopting a new
exemption for business loans with a
value of $1 million or less where the
sale of, or rental income derived from,
real estate is not the primary source of
repayment. The agencies also are
adopting the proposed definition of
“business loan” as a loan or extension
of credit to any corporation, general or
limited partnership, business trust, joint
venture, pool, syndicate, sole
proprietorship (including an individual
engaged in farming), or other business
entity. This provision allows a regulated
institution to take real estate as security
in connection with a loan to a small- or
medium-sized business when the
primary source of repayment for the

23490

Federal Register / Vol. 59, No. 108 / Tuesday, June 7, 1994 / Rules and Regulations

loan does not depend on sale of, or
rental income derived from, real estate.
The final rule differs in two respects
from the proposed rule. First, the
exemption is available for business
loans of $1 m illion or less. The
proposed rule would have exempted
business loans less than $1 million. The
change was adopted to reduce confusion
by making this provision consistent
with the way other limits are treated in
the rule. The change affects the scope of
the exemption very slightly.
Second, under the final rule, the
exemption is available for business
loans that do not depend on real estate
sales and rental income as the primary
source of repayment for the loan. The
proposed rule would have exempted
business loans that were not dependent
on sale of, or rental income derived
from, the real estate taken as collateral
as the primary source of repayment. The
change narrows the scope of the
exemption by preventing a borrower
from qualifying for the exemption by
showing that the primary source of
repayment for the loan is income from
real estate sales and rentals involving
real estate other than the real estate in
which the lender has a security interest.
This means, for example, that a real
estate developer cannot qualify for the
exemption by showing that a real estatesecured loan for one project, in which
the lender has taken a security interest,
w ill be repaid with income from real
estate sales or rentals from other real
estate projects, in which the lender does
not have a security interest.
The following examples illustrate the
application of this exemption.
Example 1: The owner of a shop seeks a
term loan for $1 million or less from a
regulated institution. The loan will be repaid
with income derived from operations. The
regulated institution would not extend credit
to the borrower without a lien against the real
estate.
However, because the loan is for $1 million
or less and the sale of, or rental income
derived from, real estate is not the primary
source of repayment, a Title XI appraisal
would not be required for this transaction
under this exemption.
Example 2: A company acquires an
adjacent parcel of land to construct an office
building. The company seeks a loan of $1
million or less from a regulated institution to
provide construction financing and a
permanent mortgage for the office building.
The company intends to lease part of the
building and will use the rental income to
help repay die loan. The lender estimates
that operations of the business would
contribute approximately 45 percent of the
funds necessary to repay the loan and rental
income approximately 55 percent.
The regulated institution should conclude
that rental income derived from real estate
serves as the primary source of repayment for




the loan. There fore, assuming no other
exemption is applicable to the transaction, a
Title XI appraisal would be required.

Increased Lending to Small- and
Medium-Sized Businesses. In the
experience of the agencies, the appraisal
requirement may have adversely
affected the ability of small- and
medium-sized businesses to obtain
credit. In particular, there are
indications that the cost of an appraisal
may impede small- and medium-sized
businesses from receiving working
capital, operating loans, and other
business-related credits that otherwise
would be consistent with prudent
banking practice.
The majority of financial institutions
and financial institution trade
associations that responded to the
agencies’ request for comment on the
effect of the business loan exemption on
credit availability stated that the
proposed exemption would increase
credit availability by reducing the cost
and time to make real estate-secured
business loans. These commenters
generally stated that the changes would
have the most significant effect on credit
availability for small- and medium-sized
businesses. Some appraisers also stated
that the proposed changes would
increase credit availability.
A large number of commenters
responding to the specific request for
comment thought that the changes
would have no effect on credit
availability. These commenters
included appraisers and appraiser trade
associations, a small number of
financial institutions, and other
commenters. Some of these commenters
stated that the ability of financial
institutions to earn a reasonable return
by making relatively risk-free
investments in U.S. government
securities was the cause of credit
availability problems.
The agencies believe that the final
rule may reduce the cost of real estatesecured loans to small- and medium­
sized businesses and increase the
availability of loans to these borrowers.
Effect on Safety and Soundness. Some
commenters stated that this exemption
would eliminate the requirement to
obtain Title XI appraisals for a large
portion of the real estate-secured
business loans in their communities.
Others stated that this exemption raised
safety and soundness concerns because
the only tangible collateral for many
businesses is real estate. Though real
estate may be an important asset of
many small- and medium-sized
businesses, the agencies have concluded
that this exemption for certain business
loans that do not rely on real estate as
the primary source of repayment will

not threaten the safety and soundness of
regulated institutions nor pose a threait
to federal financial and public policy
interests.
Although the agencies are not
requiring Title XI appraisals in
connection with these business loans,
the agencies are requiring regulated
institutions to obtain appropriate
evaluations of the real estate collateral.
The evaluation should provide the
institution with sufficient information
on the value of the real estate to satisfy
principles of safe and sound banking. In
addition, during each required fullscope, on-site examination, each agency
w ill analyze the prudence of each
institution’s credit underwriting
practices, including appraisal and
evaluation practices, as appropriate to
the institution’s size and nature of its
real estate-related activities.
Shortly after the agencies issued the
proposed rule, the GAO completed its
report entitled Regulatory Impediments

to Small Business Lending Should Be
Removed (September 1993). In the
report’s summary, the GAO stated:
“Specifically, we believe that real estate
appraisal requirements can be safely
modified when applied to collateral
taken as supplementary support for
traditional small business loans.
Therefore, we agree with those aspects
of the rule changes recently proposed by
the banking regulators to expand the
exemptions from mandatory appraisals
as they pertain to such loans.” The GAO
noted that the report and its comment
on the proposed appraisal regulations
were limited "to situations in which
real estate collateral is used to support
loans to small businesses for such
purposes as working capital and
equipment purchases.” This exemption
is intended to reach these loans, as well
as loans for other business purposes
where sale of, or rental income derived
from, real estate is not the primary
source of repayment.
The conclusion that exempting these
transactions w ill not threaten the safety
and soundness of financial institutions
is supported by responses to a 1993
OCC survey of its senior examining
staff. The survey asked for information
on the effect of the proposed business
loan exemption on bank safety and
soundness, as w ell as information on
the significance, by loan size, of losses
on loans secured by l-to-4 family
residential real estate and other
categories of real estate.
Eighteen of the 20 respondents to the
OCC survey stated that the proposed
exemption for business loans would not
threaten the safety and soundness of
financial institutions, although some
respondents noted that the exemption

Federal Register / Vol. 59, No. 108 / Tuesday, June 7, 1994 / Rules and Regulations
could present more serious risks for
small financial institutions.
Respondents to the survey identified
loans above $1 million secured by nonresidential real estate as the category of
transactions that had the most
significant losses attributable to
inadequate appraisals, followed by
loans secured by non-residential real
estate in the ranges $750,000 to $1
million and $500,000 to $750,000.
In general, respondents noted that
where real estate serves as only a
secondary source of repayment for a
business loan, an evaluation of the
collateral would be sufficient to address
safety and soundness issues. Although
the other bank regulatory agencies’
surveys did not include the specific
questions posed in the OCC survey, the
results of the other bank regulatory
agencies’ surveys also generally support
the business loan exemption.

In addition to the survey responses,
the data from the 1992 commercial bank
Call Reports and savings associations’
TFR indicate that the exposure to the
banking system from these transactions
is limited! All commercial loans secured
by non-farm non-residential real estate
in the range between $250,000 and $1
million (this includes both non-exempt
and exempt transactions) represent less
than 4 percent of all loans for
commercial banks and less than 3
percent of all loans for savings
associations. Furthermore, these loans
represent less than 27 percent of
commercial loans secured by non-farm
non-residential real estate at commercial
banks and less than 36 percent of
commercial loans secured by such real
estate at savings associations. This
generally agrees with the National
Survey of Small Business Finances
(1989), cosponsored by the Federal
Reserve Board and Small Business

Real estate-secured loans1

All real estate-secured business loans.........................................................................
Real estate-secured business loans less than $1 million that are not dependent on
the sale of, or rental income derived from, the real estate taken as collateral as the
primary source of repayment for the loan ................................................................

29491

Administration. The results of the
survey (adjusted to 1992 dollars) show
that 22 percent of all commercial
mortgages were for amounts between
$250,000 and $1 million.
The agencies requested specific
comment on loss experience for real
estate-secured business loans. Only a
small number of banks and no thrifts
submitted the requested data. Although
the agencies do not believe the response
is large enough to reach conclusions
about industry-wide loss experience, the
data submitted is consistent with the
conclusion that regulated institutions
are not suffering high levels of losses in
connection with real estate-secured
business loans of $1 million or less that
do not depend on real estate sales or
rental income as the primary source of
repayment. The responses that the
agencies received are summarized in the
following table.

Number ot
loans
(12/31/92)

Outstanding
principal
amount of
loans1
2
(12/31/92)

Loss on
loans2 (an­
nual net
chargeoffs)3
(12/31/92)

Loss rate 4
(calculated)
(percent)

90,410

17,488,561

178,237

1.02

59,595

8,008,422

32.680

0.41

1None of the comment letters received by OTS included data on these loans.
2 Dollars rounded to thousands.
3 Annual net-charges are determined by taking the dollar amount of gross losses and subtracting the amount recovered.
4 The agencies have calculated the loss rate for both categories of real estate-secured loans about which the agencies required data by divid­
ing total annual net charge-offs by the total outstanding principal balance.

Limited to Business Loans o f $1
Million or Less. The exemption applies
only to transactions involving business
loans with a value of $1 million or less.
Capping the exemption at $1 million
serves two purposes. It helps to ensure
that the transactions involve small- and
medium-sized businesses. It also limits
the overall exposure of the banking
system to transactions exempt under
this provision.
Some commenters stated that a $1
million limit may be too high for small
institutions and suggested that the limit
be set at a percentage of the institution’s
capital. Others stated that the exemption
should cover business loans of any size.
Regulated institutions typically are
subject to capital-based lending limits
that restrict file amount of credit they
can extend to any one borrower. While
a $1 million business loan may be much
more significant to a smaller institution,
the agencies believe that a second
capital-based limit in the appraisal
regulation is inappropriate because it
can place smaller institutions at a
competitive disadvantage to larger




institutions. In addition, the agencies
regularly examine the lending practices
of all regulated institutions and can
address problems with individual
institutions if they arise. The agencies
believe it is appropriate, however, to
place a limit on the size of loan that can
qualify for this exemption. Many
commenters agreed that a $1 million
dollar limit was appropriate.
Primary Source of Repayment. Some
commenters suggested that the
exemption should be available only if
the borrower could repay the loan
entirely from sources other than sale of,
or rental income derived from, real
estate. Commenters also suggested
specific percentage limits on the
contribution of real estate to repayment
of the loan ranging from 10 to 50
percent. Other commenters stated that
the exemption should allow a regulated
institution to determine whether a
business loan requires an appraisal,
regardless of the contribution of real
estate sales or rental income to the
borrower’s repayment of the loan.

The exemption is intended to improve
the ability of small- and medium-sized
businesses to obtain real estate-secured
loans for business purposes. As the
contribution of real estate sales and
rentals to the borrower’s sources for
repaying the loan increases, repayment
becomes more dependent on the
performance of the real estate market.
Therefore, in deciding whether a
transaction qualifies for this exemption,
regulated institutions should be guided
by the importance of the real estaterelated sources of income to the
borrower’s repayment of the loan, rather
than applying a universal numerical
cap. In no case, however, may a
business loan qualify for this exemption
if real estate-related sources of income
contribute more toward repayment of
the loan than non-real estate sources of
income.
Exempting these business loans will
reduce the adverse effects on small- and
medium-sized business lending
associated with the requirement to
obtain a Title XI appraisal. Moreover,
since repayment of these loans generally

101/Cf
23492

Federal Register / Vol. 59, No. 108 / Tuesday, June 7, 1994 / Rules and Regulations

w ill not depend primarily on the
performance of the real estate markets,
allowing lenders to make these business
loans on the basis of evaluations of the
real estate collateral does not threaten
the safety and soundness of financial
institutions.
Agricultural Lending. The agencies
received comment letters from
appraisers in rural areas who stated that
the exemption should not apply to
agricultural production loans because
use of the real estate generates the
income for repayment of the loan. For
any transaction exempt under this
provision, the regulated institution is
responsible for documenting that the
borrower’s sources o f income are not
primarily dependent upon the sale of, or
rental income derived from, real estate.
The agencies do not view the sale of
growing crops as the sale of real estate,
nor as providing rental income derived
from real estate. The agencies have
concluded that transactions involving
agricultural operations present no
greater risk than other types of business
operations, provided the primary source
of repayment for the loan is not sale of,
or rental income derived from, real
estate.
(6) Leases
The agencies did not propose changes
to the existing exemption for leases.
Under this exemption, regulated
institutions are not required to obtain
appraisals of leases that are not the
economic equivalent of the purchase or
sale of real estate.
Even though the agencies did not
propose changes to this exemption,
some oommenters suggested that Title
XI appraisals should be required if a
regulated institution takes any security
interest in a real estate lease. The
distinction between operating leases
and capital leases is w ell recognized in
accounting practice. Consistent with the
distinction in accounting for operating
and capital leases, the agencies have
concluded that, in general, operatipg
leases, which are not equivalent to the
purchase or sale of the leased property,
should not require Title XI appraisals
given the limited real estate interest
such leases represent.
In transactions that involve capital
leases (leases that are the economic
equivalent of purchasing or selling real
estate), the given real estate interest is
of sufficient magnitude to be counted as
an asset of the lessee under accounting
practices. Generally, the agencies w ill
continue to require regulated
institutions to obtain appraisals in
connection with transactions that
involve capital leases.




(7) Renewals, Refinancings, and Other
Subsequent Transactions

where the borrower’s payment history is
sound and future repayment prospects
are
good, but the borrower’s collateral
The agencies are adopting a modified
has declined in value as a result of a
version of the proposed exemption for
general market decline. The agencies
renewals, refinancings, and other
believe that not requiring a Title XI
subsequent transactions at the lending
appraisal in such refinancings is
institution to simplify the conditions
consistent
with safe and sound banking
under which the exemption applies.
practices because the amount of the loan
Under the final rule, regulated
(except for the addition o f reasonable
institutions w ill be permitted to renew
closing costs) and the lender’s collateral
or refinance existing extensions of credit
remain the same, and the lower loan
without first obtaining a Title XI
payments may improve the ability of the
appraisal for two general classes of
borrower to repay the loan without
transactions.
adversely affecting the likelihood that
First, a subsequent transaction is
the lender w ill be repaid.
exempt provided there has been no
If a subsequent transaction that
obvious and material change in market
includes the advancement of additional
conditions or physical aspects of the
funds does not result in the level of
property that threatens the adequacy of
collateral protection being threatened,
the institution’s real estate collateral
despite a change in the market
protection after the transaction, even
conditions or physical aspects of the
with the advancement of new funds.
property, a Title XI appraisal need not
This modification to the proposed rule
be obtained. For example, a loan
is intended to emphasize that an
originally extended with a low loan-toinstitution must consider the effect of
value ratio could be renewed and
changes in market conditions and
additional funds advanced above
physical aspects of the property on ift
closing costs without a Title XI
collateral protection when it advances
appraisal, even though market
funds in excess of reasonable closing
conditions have deteriorated, if the
costs as part of a renewal, refinancing,
regulated institution, after verifying the
or other subsequent transaction.
value of the collateral, concludes that Second, a subsequent transaction is
the new loan-to-value ratio wiH provide
exempt provided that no new monies
adequate protection.
are advanced other than funds necessary
Similarly, if a borrower is refinancing
to cover reasonable closing costs. The
a loan where the real estate collateral is
proposed rule did not explicitly address located in a market that has experienced
this class of transactions.
significant appreciation, the institution
The agencies note that this exemption should ensure that the advancement of
would not be applicable if a borrower
any new monies is based on
refinances a mortgage with a new
substantiated appreciation in value. An
lender.
institution can advance funds against an
Prior to the adoption of this
appreciated property whose future use
amendment, the agencies did not
is consistent with the use described in
require a Title XI appraisal for a
the original appraisal. If an institution
subsequent transaction that resulted
makes a substantial advance that could
from a maturing extension of credit if:
possibly threaten the institution’s
(i) The borrower had performed
collateral protection, it should consider
satisfactorily according to the original
the need to obtain a new Title XI
terms;
appraisal. This exemption would not be
(ii) No new monies were advanced
available if a material change in the use
other than as previously agreed;
of the property produces the reported
(iii) The credit standing of the
appreciation, such as when property is
borrower had not deteriorated; and
rezoned for a different use.
(iv) There had been no obvious and
While a Title XI appraisal is not
material deterioration in market
required for transactions that qualify for
conditions or physical aspects of the
this exemption, regulated institutions
property which would threaten the
are required to obtain an appropriate
institution’s collateral protection.
evaluation of the collateral in
In the agencies’ experience, the
accordance with the agencies’
original exemption may not have
guidelines. The level of analysis and
provided sufficient flexibility to
information included in the evaluation
regulated institutions and borrowers
should be more detailed as the
when a transaction was refinanced
institution’s exposure in the transaction
before its maturity. This is particularly
increases.
true for refinancings to reduce a loan’s
Several commenters raised questions
about the applicability of this
interest rate. Further, bankers
exemption to loan restructurings and
questioned whether a Title XI appraisal
workouts. In such situations, the
would be required for a refinancing

/ot/9
Federal Register / Vol. 59, No. 108 / Tuesday, June-7,. 1994 / Rules and Regulations
do not require new Title XI appraisals
to protect federal financial and public,
policy interests or the safety and
soundness of financial institutions.
Principles of safe and sound banking
practice require regulated institutions to
determine die suitability of purchasing
or investing in existing real estatesecured loans and real estate interests.
Typically, these transactions w ill have a
history of performance or w ill have been
originated according to secondary
mortgage market standards. The
additional information from these
sources, when coupled with the original
documentation, permits regulated
institutions to make appropriate
decisions regarding these transactions.
Uome commenters stated that this
exemption raised safety and soundness
concerns because exempt transactions
may have appraisals performed before
Title XI appraisal requirements went
(8) Transactions Involving Real Estate
into effect. Because regulated
Notes
institutions w ill have other sources of
The agencies are adopting a modified
information about the performance of
version of the proposed exemption for
these seasoned loans, the agencies
transactions involving real estatebelieve that new Title XI appraisals are
secured loans, loan participations,
not necessary to ensure the safety and
pooled loans, interests in real property,
soundness of these exempt transactions.
and mortgage-backed securities. The
Some commenters urged the agencies
amendment clarifies when regulated
to expand the proposed exemption, or
institutions may engage in secondary
adopt new exemptions, to eliminate the
mortgage market transactions involving
Title XI appraisal requirement for all
real estate loans and other interests in
mortgage-backed securities. In addition,
real estate without obtaining a new Title commenters suggested that the agencies
XIappraisal.
exempt residential mortgage
Tne exemption adopted by the
warehousing loans (loans to residential
agencies clarifies and allows regulated
mortgage lenders who ultimately sell
institutions to purchase, sell, invest in,
the mortgages to the secondary mortgage
exchange, or extend credit secured by,
market), transactions with credit ratings
real estate-secured notes or interests in
by established rating agencies, or
real estate without obtaining a new Title transactions that were not subject to the
XI appraisal if each note or real estate
agencies’ jurisdiction at origination.
The agencies believe that to protect
interest is supported by an appraisal
federal financial and public, policy
that met the regulatory appraisal
interests, the underlying loans or real
requirements for the institution at the
estate interests should have appraisals
time the real estate-secured note was
originated. The prior exemption referred that meet the requirements that were
applicable to regulated institutions
to purchases of these interests only. In
addition, the agencies have changed the when the underlying transactions were
text of the final rule to more clearly state originated. For this reason, the agencies
are not adopting the suggestions for
the appraisal requirements that the
exempting additional categories of
underlying notes must meet.
transactions under this provision.
The exemption serves federal public
Commenters also suggested that the
policy interests by helping to ensure
agencies should permit a regulated
that the appraisal regulation does not
institution that purchases a pool of
unnecessarily inhibit secondary
loans, invests in mortgage-backed
mortgage market transactions that
securities, or secures a mortgage
involve these real estate-secured loans
and real estate interests. The exemption warehousing loan with real estate notes,
to confirm that the loans have
makes clear that a regulated institution
appropriate appraisals without
need not obtain new Title XI appraisals
reviewing the appraisal for each
for loans originated before the effective
date of the agencies’ regulations in order underlying loan. The agencies agree that
it should not be necessary to review the
to buy or sell them in the secondary
appraisal for each underlying loan in all
mortgage market.
The agencies have concluded that the cases. The agencies believe that
transactions exempted by this provision regulated institutions may use sampling
commenters contended that requiring a
Title XI appraisal may impede an
institution’s ability to obtain additional
real estate collateral to shore-up its
position or to advance new funds to
protect its existing collateral position.
The agencies acknowledge that the time
and cost of obtaining a Title XI appraisal
may present barriers to institutions in
their negotiations with borrowers in a
loan restructuring or workout. The
agencies believe that this situation has
been addressed in the regulation and the
agencies’ guidance, such as the
November 7,1991 Interagency Policy
Statement on the Review and
Classification of Commercial Real Estate
Loans. It is the agencies’ policy to
encourage lenders to work
constructively with their borrowers
when restructuring existing loans that
have credible support for repayment.




29493

and audit procedures to determine
whether appraisals for the underlying
loans in a loan pool satisfy the
regulation’s requirements and to verify
the seller’s representations and
warranties.
The agencies also believe that a
regulated institution may presume that
the underlying loans in an investmentgrade, marketable, mortgage-backed
security satisfy the requirements of the
appraisal regulation whenever an issuer
makes a public statement, such as in a
prospectus, that the appraisals comply
with the agencies’ regulations. To be
considered investment grade, a security
must be rated in one of the top four
rating classifications of at least one
nationally recognized statistical rating
service. A marketable security is one
that may be sold with reasonable
promptness at a price that corresponds
to its fair value.
For mortgage warehousing loans, sale
to Fannie Mae or Freddie Mdc of the
mortgages that secure the mortgage
warehouse loan may be used to.
demonstrate that the underlying loans
complied with the appraisal
requirements of the agencies’
regulations. The institution, however,
must continue to monitor its borrower's
performance in selling loans to the
secondary market and take appropriate
steps, such as increased sampling and
auditing of the loans and their
documentation, if the borrower
experiences more than a minimal
rejection rate.
(9) Transactions Insured or Guaranteed
by a U.S. Government Agency or U.S.
Government Sponsored Agency
The agencies are adopting a uniform
exemption for transactions that are
wholly or partially insured or
guaranteed by a United States
government agency or government
sponsored agency because these loans
pose little risk to insured institutions.
This exemption w ill eliminate the
confusion among regulated institutions
who may believe that two separate
appraisals are required—one meeting
the banking agencies’ regulations and
another meeting the federal loan
programs’standards.
The prior regulations of the OCC,
FDIC, and OTS exempted many of these
transactions. However, they previously
required that these transactions be
supported by an appraisal that
conformed to the requirements of the
insuring or guaranteeing agency. Prior to
adoption of this amendment, the
Board’s appraisal regulation did not
specifically exempt these transactions.
Federally insured or guaranteed
transactions must meet all the

29494

Federal Register / Vol. 59, No. 108 / Tuesday, June 7, 1994 / Rules and Regulations

underwriting requirements of the
normally require only cost estimates
federal insurer or guarantor, including
when determining who is awarded the
real estate appraisal requirements, in
contract. The Postal Service also enters
order to receive the insurance or
into a lease with the developer. The
guarantee. The agencies believe that the
lease payments, which are assigned to
standards of these loan programs are
the lender, are sufficient to repay the
sufficient to protect the safety and
loan. Because the developer is
soundness of regulated financial
complying with applicable contract
institutions. Therefore, it is unnecessary procedures, which require only cost
to require that these transactions also
estimates, it would be an unnecessary
meet the overlapping requirements of
burden for the developer or the lender
the banking and thrift agencies’
to also obtain a Title XI appraisal.
appraisal regulations.
(10) Transactions That Meet the
Some commenters suggested that the
Qualifications
for Sale to a United States
agencies should limit the application of
this exemption to federal loan programs Government Agency or Government
Sponsored Agency
with appraisal requirements that
The agencies are adopting a modified
conform to the Uniform Standards of
Professional Appraisal Practice (USPAP) version of the proposed exemption for
transactions that meet the qualifications
and require the use of licensed or
for sale to any U.S. government agency
certified appraisers. In addition,
or government sponsored agency. By
commenters raised concerns that some
referring to any U.S. government agency
loan programs may not have appraisal
or sponsored agency, the exemption
standards and asked the agencies to list
includes not only loans sold to federal
those loan programs to which this
agencies, but also any transaction that
exemption applies.
OMB has airected federal agencies
meets the qualifications for sale to
with government guaranteed or insured
agencies established or chartered by the
loan programs to conduct real estate
federal government to serve public
appraisal programs in a manner to
purposes specified by the U.S. Congress.
reduce default risks to the federal
These government sponsored agencies
government. Specifically, these federal
are:
• Banks for Cooperatives.
agencies are required to ensure that all
• Federal Agricultural Mortgage
real estate credit transactions over
Corporation (Farmer Mac).
$100,000 have an appraisal performed
• Federal Farm Credit Banks.
by a state licensed or certified appraiser
• Federal Home Loan Banks (FHLBs).
and that the appraisal be conducted
• Federal Home Loan Mortgage
under appraisal standards that are
Corporation (Freddie Mac).
consistent with the USPAP.6
• Federal National Mortgage
The agencies believe that the
Association (Fannie Mae).
authority of OMB to ensure that federal
• Student Loan Marketing
agencies adopt appropriate real estate
Association (Sallie Mae).
appraisal standards eliminates the need
• Tennessee Valley Authority (TVA).
to list specific loan programs for which
This
exemption permits regulated
this exemption applies. Moreover, OMB
institutions to originate, hold, buy, or
is monitoring the implementation of
sell transactions that meet the
those appraisal programs and has
qualifications
for sale to any U.S.
required any federal agency not having
government agency and the above listed
appraisal standards and practices in
government sponsored agencies without
place to submit an implementation plan
obtaining a separate appraisal
and schedule to OMB. If the agencies
conforming
to the agencies’ regulations.
later determine that a particular federal
The exemption contains a
loan program poses a threat to the safety
modification to the original proposal
and soundness of regulated institutions,
that permits regulated institutions to
the agencies have retained the authority
accept appraisals performed in
to require appraisals in such situations.
accordance with the appraisal standards
This exemption also applies to certain
of Fannie Mae and Freddie Mac for any
other real estate-related financial
residential
real estate transaction, both
transactions involving government
single
family
and multifamily,
agencies or government sponsored
regardless
of
whether
the loan is eligible
agencies. For example, the U.S. Postal
to be purchased by Fannie Mae or
Service typically contracts with a
Freddie Mac. This modification clarifies
developer to erect and lease a special
that
a regulated institution’s “jumbo” or
purpose building for the Postal Service’s
other
residential real estate loans that do
use. Applicable contract procedures
6 OMB Circular A -129, “Policy for Federal
Programs and Non-Tax Receivables,” revised
j,,nuarv 1993.




not conform to all the underwriting
standards of Fannie Mae or Freddie
Mac, but that are supported by an
appraisal that meets the appraisal

standards of these agencies, w ill qualify
for this exemption.
This exemption expands the prior
exception to the regulations of the OCC.
FDIC, and OTS for transactions
involving l-to-4 family residential
properties that had appraisals
conforming to the appraisal standards of
Fannie Mae and Freddie Mac. In
addition, the OTS exception applied to
existing multifamily properties. These
transactions were not required to
comply with the additional supervisory
standards set forth in the prior
regulations. The Board did not have a
similar exception in its prior regulation.
Some commenters requested that the
agencies continue the prior exception
allowing the use of Fannie Mae or
Freddie Mac standards for any loans
involving l-to-4 family residential real
estate. Other commenters stated that the
proposed exemption should not be
adopted because the agencies would not
be meeting their statutory obligation to
set appraisal standards for transactions
within their jurisdiction.
The agencies believe the appraisal
standards of the U.S. government
agencies or sponsored agencies
established to maintain a secondary’
market in various types of loans are
appropriate for these exempt
transactions. Recently, Fannie Mae and
Freddie Mac revised their l-to-4 family
residential appraisal standards and
report forms to incorporate the USPAP
as the minimum appraisal standards.
Further, the appraisal standards and
forms of Fannie Mae and Freddie Mac
are recognized as the appraisal
industry’s standard for residential real
estate appraisals. The agencies have
concluded that those appraisal
standards should protect federal
financial and public policy interests in
the loans that are eligible for purchase
by U.S. government agencies or
sponsored agencies. The agencies also
believe that compliance with these
standards w ill protect the safety and
soundness of regulated financial
institutions.
The agencies believe that permitting
regulated institutions to follow these
standardized appraisal requirements,
without the necessity of obtaining a
separate appraisal or an appraisal
supplement for conformance with the
banking agencies’ regulations, w ill
reduce regulatory burden and increase
an institution’s ability to buy and sell
these types of loans, improving the
institution’s liquidity.

(11) Transactions by Regulated
Institutions as Fiduciaries
The agencies are adopting a new
exemption for transactions in which a

Federal Register / Vol. 59, No. 108 / Tuesday, June 7, 1994 / Rules and Regulations
regulated institution is acting in a
fiduciary capacity and is not required to
obtain an appraisal under other law.
The amendment clarifies that regulated
institutions acting as fiduciaries are not
required to obtain appraisals under the
agencies’ appraisal regulations if no
appraisal is required under other law
governing their fiduciary
responsibilities in connection with
those transactions:
Prior to adoption of this amendment,
it was unclear whether the agencies’
appraisal regulations required
appraisals for all real estate-related
financial transactions in which
regulated institutions participated as
fiduciaries. For example, other law may
not require an appraisal in connection
with the sale of a parcel of real estate
to a beneficiary of a trust on terms
specified in the trust instrument.
While financial institutions were in
general agreement with the proposed
exemption, some of these commenters
stated that a fiduciary should be exempt
from meeting Title XI appraisal
requirements regardless of whether
other laws require an appraisal.
Commenters opposing this exemption
believe that fiduciaries should be
required to obtain a Title XI appraisal
for all their real estate-related
transactions.
The agencies have concluded that a
Title XI appraisal should not be
required when regulated institutions
engage in real estate-related financial
transactions as fiduciaries and no other
law (including state common law
establishing the responsibilities of
fiduciaries) requires appraisals for those
transactions. Losses as a result of these
transactions would not, absent some
negligence by the institution, be
incurred by the institution. Therefore,
exempting these transactions from the
Title XI appraisal requirement should
not adversely affect the safety and
soundness of financial institutions.
When a fiduciary transaction requires
an appraisal under other law, that
appraisal should conform to the
requirements of the agencies’
regulations.
(12) Appraisals Not Necessary To
Protect Federal Financial and Public
Policy Interests or the Safety and
Soundness of Financial Institutions
This provision was added to the rule
to make clear that the agencies retain
the authority to determine in a given
case when the services of an appraiser
are not required.
Only a few commenters addressed
this issue. One commenter expressed
the concern that the agencies are
granting themselves the authority to




create new exemptions without the
benefit of public comment.
The agencies have the authority to
implement and interpret regulations
under their jurisdiction. The specific
exemptions of the regulation describe
the major categories of transactions that
would not require appraisals. As a result
of their experience in implementing
their regulations, however, the agencies
recognized that it is impossible to
identify all types of transactions for
which the services of an appraiser
should not be required under Title XI of
FIRREA and proposed this exemption to
confirm their authority to determine
that individual transactions do not
require the services of an appraiser. The
agencies will adopt any new exemptions
covering broad categories of transactions
in accordance with notice and comment
rulemaking procedures.

29495

collateral when a Title XI appraisal is
not required. For some institutions, the
effect of these provisions may have been
to require evaluations in cases where
they did not assist in protecting the
institutions’ safety and soundness. The
agencies are amending their regulations
to require regulated institutions to have
evaluations only for those real estaterelated financial transactions where an
understanding of the real estate’s value
is generally needed to assist the
institution in deciding whether to enter
into the transaction.
Some commenters stated that
evaluations should not be required for
any exempt transactions and that the
decision to obtain an evaluation should
be left to the institution. Commenters
suggested that the agencies should
require appraisals for any transaction
that requires an evaluation and raised
questions about the qualifications and
§ ____.3(b) Evaluations Required
independence of persons performing
The agencies are adopting a modified evaluations. Some commenters stated
version of the proposed amendment
that only licensed or certified appraisers
concerning evaluations.
were qualified to perform evaluations.
The final rule requires regulated
The agencies believe that safety and
institutions to obtain evaluations for
soundness principles require
real estate-related financial transactions institutions to obtain an understanding
that do not require Title XI appraisals
of, and document, the value of the real
because they: (i) Are below the
estate involved in transactions that: (i)
threshold level; (ii) qualify for the
Are below the threshold level; (ii)
exemption for business loans of $1
qualify for the exemption for business
million or less where income from real
loans of $1 million or less where income
estate is not the primary source of
from real estate is not the primary
repayment; or (iii) qualify for the
source of repayment; or (iii) involve an
exemption for subsequent transactions
existing extension of credit. In these
resulting from an existing extension of
cases, while a Title XI appraisal is not
credit. The agencies changed the text of required to determine the value of the
this amendment to make clear that
real estate, the agencies have concluded
institutions must still obtain evaluations that regulated institutions must have an
for these exempt transactions. The
estimate of the real estate’s value as a
regulation does not require the
matter of safe and sound banking
institution to have an evaluation if the
practice. For this reason, the agencies
transaction qualifies for an exemption
have decided that institutions should
other than these three exemptions.
not have the discretion to decide
An evaluation provides a general
whether they will obtain evaluations for
estimate of the value of real estate and
these transactions. However,
need not meet the detailed requirements institutions will have discretion, within
of a Title XI appraisal. An evaluation
the limits of safe and sound banking
must provide appropriate information to practice as indicated in agency
enable the institution to make a prudent guidance, to determine the content and
decision regarding the transaction.
form of the evaluation.
Because institutions must tailor
While licensed or certified appraisers
evaluations to provide appropriate
may be qualified to perform evaluations,
the agencies do not believe these
information for different types of
transactions, the content and form of
appraisers are the only persons that can
render a competent estimate of the value
evaluations will vary for different
of real estate for exempt transactions.
transactions.
In their prior regulations, the OCC,
Requiring institutions to procure the
Board and OTS required evaluations for services of a licensed or certified
all real estate-related financial
appraiser to prepare evaluations or Title
transactions that do not require
XI appraisals for exempt transactions
appraisals. The FDIC’s prior regulation
could impose significant additional
stated that supervisory guidelines,
costs on lenders and borrowers without
general banking practices or other
significantly increasing the safety and
prudent standards may require an
soundness of the transactions. However,
appropriate valuation of real property
the agencies’ regulations do not, as

29496

Federal Register / Vol. 59, No. 108 / Tuesday, June 7, 1994 / Rules and Regulations

suggested by some commenters, prohibit
regulated institutions from using
licensed or certified appraisers to
prepare evaluations. Nor do the
regulations prevent regulated
institutions from obtaining Title XI
appraisals for exempt transactions.
The agencies also believe that
regulated institutions can take steps to
ensure that the individuals performing
evaluations are capable of providing an
unbiased estimate of value. Institutions
would generally be expected to check
that persons who prepare evaluations
are subject to adequate safeguards and
controls to assure the integrity of the
evaluation they perform. The agencies
intend that regulated institutions have
some flexibility in the safeguards they
erect to ensure the independence of the
person performing the evaluation.
The agencies’ experience with
transactions exempt under their prior
appraisal requirements indicates that
employees of a regulated institution
generally can provide an unbiased and
competent evaluation of real estate
collateral for exempt transactions.
If there are deficiencies in an
individual institution’s evaluation
procedures, including its procedures for
determining whether to order Title XI
appraisals for exempt transactions, the
agencies can take appropriate steps to
have the institution correct the problem.
This can include requiring fhe
institution to obtain appraisals for
exempt transactions to address safety
and soundness problems.
Several commenters requested that
the agencies provide additional
information on what is required in
evaluations and who may perform them.
The agencies intend to revise their
existing guidance on real estate
appraisal and evaluation programs for
regulated institutions to further address
these issues.
§ ____.3(c) Appraisals To Address
Safety and Soundness Concerns
The agencies are adopting
substantially as proposed an
amendment stating that each agency
continues to reserve the right to require
a regulated institution to obtain a Title
XI appraisal whenever the agency
believes that an appraisal is necessary to
address safety and soundness concerns.
This authority may involve the agency
requiring an institution to obtain an
appraisal for a particular extension of
credit or an entire group of credits.
Some commenters raised the concern
that the agencies’ authority to require a
Title XI appraisal for safety and
soundness purposes should be exercised
only on a prospective basis. Further,
several commenters noted that the




agencies’ authority to determine on a
case-by-case basis whether an appraisal
is required may lead to inconsistencies
among the agencies.
Whether an institution will be
required, pursuant to this provision or
existing safety and soundness authority,
to obtain an appraisal for a particular
extension of credit, or an entire group of
credits, may depend on the condition of
that institution. If an institution is in
troubled condition, and that troubled
condition is attributable to underwriting
problems in the institution’s real estate
loan portfolio, then the agencies may
require such an institution to obtain an
appraisal for all new real estate-related
financial transactions below the
threshold that are not subject to another
exemption. Thus, for example, a
troubled institution whose problems are
attributable to trading losses, investment
losses, or a defalcation might be allowed
to continue to operate under the
$250,000 threshold, whereas an
institution whose problems are
attributable to poor underwriting of real
estate loans may be subjected to a lower
threshold.
However, regardless of an institution’s
condition, an examiner may determine
that a particular real estate-related
financial transaction requires a Title XI
appraisal. This provision confirms that
the agencies have the authority to
require appraisals for a particular
transaction to address safety and
soundness concerns.
A determination that a particular
institution w ill have to obtain appraisals
below the threshold w ill be made by the
appropriate agency’s supervisory office.
Although this provision is intended to
be applied on a case-by-case basis to
address the problems of a particular
institution, die agencies will work to
maintain consistency.
As previously stated in the discussion
of the appraisal threshold, as a matter of
policy, OTS intends to require problem
institutions or institutions in troubled
condition to continue to obtain Title XI
appraisals for loans over $100,000.
Given the overall concentration of real
estate-related transactions in the thrift
industry, OTS believes that a problem
thrift or a thrift in troubled condition
will, in general, have real estate-related
asset quality problems.

§ ___ .4(a) Minimum Appraisal
Standards
The agencies are adopting five
minimum appraisal standards in place
of the 14 standards in the prior rule. The
final rule includes four modifications to
the proposed rule concerning minimum
appraisal standards. The final rule

requires all appraisals for federally
related transactions to:
(i) Conform to generally accepted
appraisal standards as evidenced by the
USPAP unless principles of safe and
sound banking require compliance with
stricter standards;
(ii) Be written and contain sufficient
information and analysis to support the
institution’s decision to engage in the
transaction;
(iii) Analyze and report appropriate
deductions and discounts for proposed
construction or renovation, partially
leased buildings, non-market lease
terms, and tract developments with
unsold units;
(iv) Be based upon the definition of
market value as set forth in the
regulation; and
(v) Be performed by State licensed or
certified appraisers.
Adoption of these standards will
simplify compliance with the appraisal
regulation without affecting the
usefulness of the Title XI appraisals
prepared for federally related
transactions. The amendment allows
institutions to make use of the USPAP
Departure Provision and eliminates
several regulatory standards that
parallel existing USPAP standards.
The agencies proposed three
alternatives for meeting the statutory
requirement to use the USPAP in setting
minimum appraisal standards for
federally related transactions. Under the
first two alternatives, the agencies
would have published the USPAP as
part of their regulations (either as an
appendix to their rules or through
incorporation by reference). The
agencies have chosen to adopt the third '
alternative that generally references
USPAP, but does not make USPAP a
part of the agencies’ regulations. The
agencies agree with many commenters
who believed that Alternative in was
the most workable approach because the
agencies would not have to republish
changes to the USPAP adopted by the
Appraisal Standards Board, and
references to USPAP in the regulation
could be assumed to always refer to the
most current USPAP edition. The
agencies believe that Alternative III
minimizes potential conflicts between
an institution’s diity to follow the
agencies’ appraisal requirements and an
appraiser’s professional obligation to
follow the latest USPAP version.
Since .the agencies are adopting
Alternative III, USPAP provisions
applicable to federally related
transactions will no longer be published
as Appendix A to the agencies’
appraisal regulations. Therefore, each
agency has deleted Appendix A from its
appraisal regulation.

Federal Register / Vol. 59,. No. 108 / Tuesday, June 7, 1994 / Rules and Regulations
Because application of present or
future USPAP standards to federally
related transactions may be inconsistent
with maintaining the safety and
soundness of financial institutions, the
agencies have modified the standard on
compliance with the USPAP. This
modification makes clear that principles
of safe and sound banking may require
institutions to comply with stricter
standards than the USPAP. Although
the institution has the primary
responsibility for obtaining a Title XI
appraisal that meets its needs, the
agencies may by regulation or guidance
identify USPAP standards that are
inappropriate for federally related
transactions. For example, the USPAP
allows an appraiser to appraise property
even though the appraiser may have a
direct or indirect interest in the
property, if the appraiser discloses this
fact in the appraisal report. The agencies
believe, however, that federal financial
and public policy interests are better
served by requiring that an appraiser for
a federally related transaction not have
any direct or indirect interest, financial
or otherwise, in the transaction or the
property. The agencies have included
this requirement in the section of the
regulation that deals with appraiser
independence.
The minimum standards also permit
regulated institutions to use appraisals
prepared in accordance with the USPAP
Departure Provision for federally related
transactions. The Departure Provision
permits limited exceptions to specific
guidelines in the USPAP. Appraisers
preparing appraisals using the
Departure Provision still must comply
with all binding requirements of the
USPAP and must be sure that the
resulting appraisal w ill not be
misleading.
The agencies believe that regulated
institutions should be allowed to
determine, with the assistance of the
appraiser, whether an appraisal to be
prepared in accordance with the
Departure Provision is appropriate for a
particular transaction and consistent
with principles of safe and sound
banking practice.
The agencies are adopting a modified
version of the proposed standard that
requires appraisals for federally related
transactions to be written. The
modification makes clear that the
written appraisal must contain
sufficient information and analysis to
support the institution’s decision to
engage in the transaction. The
modification puts regulated institutions
on notice of their responsibility to have
appraisals that are appropriate for the
particular federally related transaction.
The agencies are aware that the




Appraisal Standards Board of the
Appraisal Foundation has proposed
changing the USPAP to expand the
types of appraisal reports that appraisers
may prepare. The agencies believe that
the standard on written appraisals
permits regulated institutions to take
advantage of additional flexibility that
may be available if the USPAP is
amended, as long as the appraisal report
contains information and analysis to
support the institution’s decision.
Tne agencies are retaining from the
prior rule the standard regarding
deductions and discounts. The USPAP
provision on this subject requires the
appraiser to include a discussion of
deductions and discounts only when it
is necessary to prevent an appraisal
from being misleading. Although
commenters were divided over the need
to retain this regulatory standard, the
agencies have decided that it is
appropriate to emphasize the need to
include an appropriate discussion of
deductions and discounts applicable to
the estimate of value in Title XI
appraisals for federally related
transactions.
For example, in order to properly
underwrite a loan, a regulated
institution may need to know a
prospective value of a property, in
addition to the market value as of the
date of the appraisal. A prospective
value of a property is based upon events
yet to occur, such as completion of
construction or renovation, reaching a
stabilized occupancy level, or some
other event to be determined. Thus,
more than one value may be reported in
an appraisal, as long as all values are
clearly described and reflect the
projected dates when future events
could occur.
The standard on deductions and
discounts is intended to make clear that
appraisers must analyze, apply, and
report appropriate discounts and
deductions when providing values
based on future events. In financing the
purchase of an existing home, there
typically would be no need to apply any
discounts or deductions to arrive at the
market value of the property since the
institution’s financing of the project
does not depend on events such as
further development of the property or
the sale of units in a tract development.
In place of the proposed standard on
market value, the agencies are retaining
the prior standard that required the
appraisal to be based on the definition
of market value contained in the
agencies’ rules. Use of the standard from
the prior rule is intended to emphasize
that the agencies are not changing the
definition of market value or the manner
in which that definition is applied.

29497

The agencies are eliminating
regulatory standards that parallel or
duplicate requirements of the USPAP.
The regulatory standards originally were
put in place because of uncertainty
about the content of the USPAP and its
interpretation. Based on their
experience with the USPAP, the
agencies believe that the additional
standards may be eliminated.
Commenters generally agreed. The
majority of commenters responded to
three specific questions on the need for
additional regulatory standards by
indicating that it was unnecessary to
adopt separate standards on: (i) Analysis
of revenues, expenses and vacancies; (ii)
valuation of personal property; and (iii)
reconciliation of the three approaches to
value. The elimination of regulatory
standards that parallel USPAP standards
should simplify the preparation of
appraisals for federally related
transactions and reduce regulatory
burden.
As proposed, the agencies are adding
a new provision to make clear that all
appraisals for federally related
transactions must be prepared by
licensed or certified appraisers. This
requirement is mandated by Title XI of
FIRREA and repeated in other parts of
the appraisal regulation.

§ ___ .4(b/c) Unavailability of
Information [Removed]
The agencies are removing the
provision that required appraisers to
disclose and explain when information
necessary to the completion of an
appraisal is unavailable. The USPAP
currently requires appraisers to disclose
and explain the absence of information
necessary to completion of an appraisal
that is not misleading. See USPAP
Standard Rule 2—2(k). Moreover, when
information that may materially affect
the estimate of value is unavailable, the
agencies believe that generally accepted
appraisal standards require appraisers to
explain the absence of that information
and its effect on the reliability of the
appraisal. Therefore, eliminating this
provision does not result in a
substantive change in the requirements
applicable to appraisals for federally
related transactions.

§ ____.4(c/d) Additional Standards
[Removed]
The agencies are removing a provision
that merely confirmed the authority of
regulated institutions to require
appraisers they use to comply with
additional standards. The regulation’s
minimum appraisal standards for
federally related transactions do not
prevent a regulated institution from
requiring an appraiser to follow

29498

Federal Register / Vol. 59, No. 108 / Tuesday, June 7, 1994 / Rules and Regulations

additional standards or provide
additional information to satisfy the
institution’s business needs and it is
unnecessary to restate this fact in the
appraisal regulation.

§ ____.5(b) Appraiser Independence
The agencies are adopting the
proposed amendment concerning the
use of appraisals prepared for financial
services institutions other than
institutions subject to Title XI of
FIRREA. The agencies’ prior appraisal
regulations provided that fee appraisers
must be engaged by the regulated
institution or its agent. An exception to
this requirement was permitted if the
appraiser was directly engaged by
another institution that is subject to
Title XI of FIRREA.
The agencies concluded that the prior
provision on the use of appraisals
prepared for other institutions was too
restrictive. It required a regulated
institution to obtain a new appraisal if
the borrower originally sought a loan
from an institution that was not subject
to Title XI of FIRREA and was not an
agent of that regulated institution. There
also was uncertainty about the meaning
of agent in these cases.
The amended provision permits a
regulated institution to use an appraisal
that was prepared for any financial
sendees institution, including mortgage
bankers, if certain conditions are met.
The appraiser must be engaged directly
by the financial services institution and
must not have a direct interest, financial
or otherwise, in the property or the
transaction. In addition, the regulated
institution must ensure that the
appraisal conforms to the requirements
of the regulation and is otherwise
acceptable. The prohibition on the
institution using an appraisal prepared
for the borrower remains in effect.
The majority of comments concerning
this provision favored the proposed
change. One comm enter requested that
the agencies define financial services
institutions and include mortgage
brokers within that definition. Other
commenters requested clarification of
the circumstances under which a nonregulated institution can be an agent of
a regulated institution and whether
agents are prohibited from receiving a
commission on each transaction.
The agencies have decided not to
adopt a specific definition of financial
services institution. This term is
intended to describe entities that
provide services in connection with real
estate lending transactions on an
ongoing basis.
The agencies do not intend to limit
the arrangements that regulated
institutions have with their agents.




provided those arrangements do not
place the agent in a conflict of interest
that prevents the agent from
representing the interests of the
regulated institution. For example, the
agencies do not require that there be a
written agreement between the
regulated institution and the agent, and
the agent may represent the regulated
institution solely with respect to
ordering appraisals. In addition, the
agencies’ regulations do not prohibit
agents from receiving a commission for
transactions on which they order
appraisals.
Some commenters opposed the
amendment because of their concern
that it would increase the pressure on
appraisers to render an estimate of value
that favors the interests of the borrower.
However, regulated institutions are not
required to accept appraisals that are
prepared for other financial services
institutions. Therefore, the institution
always retains complete control over the
process of ordering real estate
appraisals. In addition, institutions
must determine that the appraisal
ordered by the financial services
institution complies with the
requirements of the agencies’
regulations and is otherwise acceptable.
This should include obtaining assurance
that the financial services institution
has an independent appraisal.
Other suggested changes to reduce the
burden on secondary market
transactions involving real estate notes,
particularly for mortgage warehousing
loans, are addressed in the exemption
for transactions in real estate notes.

Paperwork Reduction Act (44 U.S.C
3504(h)) under control number 15570190. The estimated annual burden per
recordkeeper ranges from 0 hours to in
excess of 100 hours, depending on
individual circumstances, with an
estimated average of 34.5 hours.
Comments concerning the accuracy of
this burden estimate and suggestions for
reducing this burden should be directed
to the Comptroller of the Currency,
Legislative, Regulatory, and
International Activities, Attention:
1557-0190, 250 E Street SW.,
Washington, DC 20219, and to the
Office of Management and Budget,
Paperwork Reduction Project (1557—
0190), Washington, DC 20503.

Board Paperwork Reduction Act

This final rule is effective on June 7,
1994. The 30-day delayed effective date
required under the Administrative
Procedure Act (APA) is waived
pursuant to 5 U.S.C. 553(d)(1), which
provides for waiver when a substantive
rule grants or recognizes an exemption
or relieves a restriction. The
amendments adopted in this final rule
exempt additional transactions from the
appraisal regulation, reduce appraisal
standards, and provide other
modifications that have the effect of
relieving perceived restrictions.
Consequently, all amendments in this
final rule meet the requirements for
waiver set forth in the APA.

The Board is adopting revisions to
Regulation Y in this rulemaking that
relate to recordkeeping requirements
under authority delegated to it by the
Office of Management and Budget, in
accordance with section 3507 of the
Paperwork Reduction Act of 1980, 44
U.S.C. chapter 35, and part 1320 of title
5, Code of Federal Regulations, 5 CFR
part 1320. In developing these revisions,
the Board has consulted with the OCC,
the FDIC, and the OTS.
The collection of information in this
regulation is in 12 CFR part 225. This
information is required by the Federal
Reserve System to protect federal
financial and public policy interests in
real estate-related financial transactions
requiring the services of an appraiser.
State member banks w ill use this
information in determining whether and
on what terms to enter into federally
related transactions, such as making
loans secured by real estate. The Federal
Reserve System w ill use this
information in its examination of State
member banks and bank holding
companies to ensure that they undertake
real estate-related financial transactions
in accordance with safe and sound
banking principles.
The likely recordkeepers are for-profit
institutions.
The estimated annual burden per
recordkeeper varies from 0 hours to in
excess of 100 hours, depending on
individual circumstances, with an
estimated average of 25.1 hours.
Estimated number of recordkeepers:
1573.

V. Paperwork Reduction Act

FDIC Paperwork Reduction Act

IV. W aiver o f D elayed Effective Date

OCC Paperwork Reduction Act
The collection of information
contained in this final regulation has
been reviewed and approved by the
Office of Management and Budget in
accordance with the requirements of the

The collection of information
contained in this final rule has been
submitted to the Office of Management
and Budget for review in accordance
with the Paperwork Reduction Act of
1980 (44 U.S.C. 3504(h)). Comments on
the collection of information should be

/07i 9
Federal Register / Vol. 59, No. 108 / Tuesday, June 7, 1994 / Rules and Regulations
sent to the Assistant Executive Secretary
(Administration), room F-400, 550 17th
Street, NW., Washington, DC 20429,
with a copy to the Office of Management
and Budget, Paperwork Reduction
Project 3064-0103, Washington, DC
20503.
The collection of information in this
final rule is in 12 CFR part 323. This
information is required by the FDIC to
protect federal financial and public
policy interests in real estate-related
financial transactions requiring the
services of an appraiser. State
nonmember banks w ill use this
information in determining whether and
on what terms to enter into federally
related transactions, such as making
loans secured by real estate. The FDIC
will use this information in its
examination of State nonmember banks
to ensure that they undertake real estaterelated financial transactions in
accordance with safe and sound banking
principles.
The likely recordkeepers are for-profit
institutions.
The estimated annual burden per
recordkeeper varies from 0 hours to in
excess of 10C hours, depending on
individual circumstances, with an
estimated average of 20.0 hours.
Estimated number of recordkeepers:
7,310.

OTS Paperwork Reduction Act
The collection of information
contained in this final regulation has
been reviewed and approved by the
Office of Management and Budget in
accordance with the requirements of the
Paperwork Reduction Act (44 U.S.C.
3504(h)) under control number 1550.
The estimated annual burden per
recordkeeper ranges from 0 hours to in
excess of 100 hours, depending on
individual circumstances, with an
estimated average of 59 hours.
Comments concerning the accuracy of
this burden estimate and suggestions for
reducing this burden should be directed
to the Office of Management and
Budget, Paperwork Reduction Project
(1550), Washington, DC 20503, with
copies to the Office of Thrift
Supervision, 1700 G Street, NW.,
Washington, DC 20552.

VI. OCC and OTS Executive Order
12866 Determination
It has been determined that this final
rule is not a “Significant Regulatory
Action” under Executive Order 12866.

List of Subjects
12 CFR Part 34
M o r tg a g e s , N a t i o n a l b a n k s , R e a l e s t a t e
a p p r a is a ls , R e a l e s t a t e l e n d i n g




standards, Reporting and recordkeeping
requirements.

12 CFR Part 225
Administrative practice and
procedure, Banks, banking, Holding
companies, Reporting and
recordkeeping requirements, Securities.

12 CFR Part 323
Banks, banking, Mortgages, Real estate
appraisals, Reporting and recordkeeping
requirements, State nonmember insured
banks.

12 CFR Part 545
Accounting, Consumer protection,
Credit, Electronic funds transfers,
Investments, Manufactured homes,
Mortgages, Reporting and recordkeeping
requirements, Savings associations.

12 CFR Part 563
Accounting, Advertising, Crime,
Currency, Flood insurance, Investments,
Reporting and recordkeeping
requirements, Savings associations,
Securities, Surety bonds.

12 CFR Part 564
Appraisals, Real estate appraisals,
Reporting and recordkeeping
requirements, Savings associations.

211499