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FEDERAL RESERVE press release
Corrected Copy
For immediate release
February 6, 1990
The Federal Reserve Board today issued for public comment a proposed
regulation that would set standards for appraisals conducted for state member
banks and bank holding companies in federally related transactions.
Comment should be received by the Board by April 10.
Title XI of the Federal Financial Institutions Reform, Recovery and
Enforcement Act of 1989 (FIRREA) requires the Board and other regulators to
issue regulations to protect federal financial and public policy interests in
real estate transactions requiring the services of an appraiser.
The proposed regulation identifies which transactions would require
an appraiser, sets forth minimum standards for performing appraisals, and
distinguishes those appraisals requiring the services of a State certified
appraiser from those requiring a State licensed appraiser.
A copy of the Board's proposed regulation is attached.
FEDERAL RESERVE SYSTEM
12 CFR Parts 208 and 225
[Regulation H, Regulation Y; Docket No. R - 0 6 5 8 ]
Appraisal Standards for
Federally Related Transactions
AGENCY:
Board of Governors of the Federal Reserve System.
ACTION:
Notice of proposed rulemaking.
SUMMARY: Title XI of the Federal Financial Institutions Reform,
Recovery and Enforcement Act of 1989 ("FIRREA") 1 requires the
Board to propose regulations regarding the performance and
utilization of appraisals by state member banks and bank holding
companies. Title XI and these implementing regulations are
intended to protect federal financial and public policy interests
in real estate-related financial transactions requiring the
services of an appraiser.
This proposed regulation, and similar
regulations proposed by the other financial institutions
regulatory agencies 2 and the Resolution Trust Corporation,
provide the affected federal entities with added assurance that
real estate appraisals used in connection with federal
responsibilities and requirements are performed in accordance
with uniform standards by individuals whose competency has been
demonstrated and whose professional conduct will be subject to
effective supervision. Toward this end, the proposed regulation
identifies which transactions require an appraiser, sets forth
minimum standards for performing appraisals, and distinguishes
those appraisals requiring the services of a State certified
appraiser from those requiring a State licensed appraiser.
DATES:
Comments must be submitted on or before April 10, 1990.
ADDRESS:
Comments, which should refer to Docket No. R-0658, may
be mailed to the Board of Governors of the Federal Reserve
System, 20th and Constitution Avenue, N.W. , Washington, D.C.
20551, to the attention of Mr. William W. Wiles, Secretary; or
delivered to room B-2223, Eccles Building, between 8:45 a.m. and
5:15 p.m.
Comments may be inspected in room B-1122 between 9:00
a.m. and 5:00 p.m., except as provided in section 261.8 of the
1
2
Pub. L. No. 101-73, 103 Stat. 183
(1989).
The Federal Deposit Insurance Corporation ("FDIC"), the
Office of the Comptroller of the Currency ("OCC"), the Office of
Thrift Supervision ("OTS"), and the National Credit Union
Administration.
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2
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Board's Rules Regarding Availability of Information, 12 C.F.R.
261.8.
FOR FURTHER INFORMATION CONTACT: Roger Cole, Assistant Director
(202/452-2618), Rhoger H Pugh, Manager (202/728-5883), or Stanley
B. Rediger, Senior Financial Analyst (202/452-2629), Division of
Banking Supervision and Regulation, Board of Governors; or
Michael J. O'Rourke, Senior Attorney (202/452-3288) or Mark J.
Tenhundfeld, Attorney (202/452-3612), Legal Division, Board of
Governors. For the hearing impaired only. Telecommunication
Device for the Deaf (TDD), Earnestine Hill or Dorothea Thompson
(202/452-3544) .
SUPPLEMENTARY INFORMATION:
A. Background. Title XI of FIRREA requires the Board
to establish standards for performing appraisals in connection
with federally related transactions within the Board's
jurisdiction. In addition, Title XI requires the Board to
identify those circumstances that require a State certified
appraiser from those that require a State certified or licensed
appraisers. In response to this legislative mandate, the Board
is proposing this regulation which is designed to address
problems perceived by Congress and the Board.
Section 1121 of FIRREA defines a "federally related
transaction" as a real estate-related financial transaction
which, inter alia, requires the services of an appraiser. The
Board is proposing to require State certified or licensed
appraisers to be used for all real estate-related financial
transactions except those transactions in which (i) a lien is
placed on real property solely through an abundance of caution or
(ii) the transaction value (as defined in the proposed
regulation) is less than or equal to $15,000. The Board, acting
pursuant to section 1112 of FIRREA, also is proposing to require
State certified appraisers to be used for all appraisals except
non-complex l-to-4 family residential property appraisals
rendered in connection with a federally related transaction
having a transaction value below a specified amount.
In addition, the Board is proposing standards, pursuant
to section 1110 of FIRREA, for the performance of appraisals in
connection with federally related transactions within the Board's
jurisdiction. These standards would require that all such
appraisals be written and that they conform to the Uniform
Standards of Professional Appraisal Practice ("USPAP")
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promulgated by the Appraisal Foundation and the additional
standards set forth in this proposal.
This proposed regulation is intended to supplement the
Board's appraisal guidelines 4 currently in effect. These
guidelines will remain in effect, subject to amendment.
The Board proposes this regulation to improve the
safety and soundness of all financial institutions covered by
Title XI within the Board's jurisdiction. The soundness of real
estate loans and investments made by financial institutions
covered by Title XI depends upon the adequacy of the underwriting
or analysis used to support these transactions. A real estate
appraisal is one of several essential components of the lending
process. Accordingly, through the integration of existing
guidance on real estate appraisals with the additional
requirements imposed by Title XI, this proposal is intended to
provide the affected entities with a reasonable degree of
assurance that real estate appraisals used in connection with
federally related transactions will be reliable.
Public comment is solicited on all aspects of the
proposed rule. In addition, public comment is specifically
requested on the following:
(1) the definitions used in this proposal, in
particular the definitions of "complex l-to-4 family residential
property appraisal" and "transaction value;"
(2) the amount and appropriateness of the de minimis
provision below which a State certified or licensed appraiser is
not required;
(3) the criteria that determine when a State certified
appraiser is required and when a State licensed appraiser is
required; and
(4) the additional appraisal standards set forth in
the proposed regulation.
B. Section-bv-section analysis.
Section 225.61—Authority, purpose, and scope. This
section identifies Title XI of FIRREA as the authority under
which this regulation is promulgated. Further, it identifies
those institutions, including the Board and institutions
3
The Appraisal Foundation was established by several
professional appraisal organization as a not-for-profit
corporation under the laws of Illinois in order to enhance the
quality of professional appraisals.
U
See
Guidelines for Real Estate Appraisal Policies and
Review Procedures, distributed by the various divisions of bank
supervision at the FDIC, the OCC, and the Board.
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primarily or exclusively regulated by the Board ("regulated
institutions"), which must comply with the regulation.
State
member banks, bank holding companies, and nonbank subsidiaries of
bank holding companies are specifically covered.
Section 2 2 5 . 6 2 — D e f i n i t i o n s .
Except where noted below,
the definitions set forth in Title XI shall apply to the terms
used in this regulation.
—"Appraisal."
This definition currently is used by
nineteen federal agencies. 5
The Board believes that this
widespread use and acceptance will produce consistent appraisals.
— " C o m p l e x l-to-4 family residential property
appraisal."
Section 1113 of FIRREA allows the use of a State
licensed appraiser for, among other federally related
transactions, l-to-4 family residential property appraisals,
"unless the size and complexity requires a State certified
appraiser." The definition of "complex l-to-4 family residential
property appraisal" provides guidance on factors that will
determine if the services of a State certified or licensed
appraiser are required.
This list is illustrative only.
— " M a r k e t value."
This definition is commonly used in
connection with mortgage lending by a number of government
agencies and others.
The definition contemplates the
consummation of a sale as of a specified date and the passing of
title from seller to buyer under open and competitive market
conditions requisite to a fair sale.
It is designed to provide
an accurate and reliable measure of the economic potential of
property involved in federally related transactions. Moreover,
the Board believes that widespread acceptance and use of this
definition will provide consistency to appraisals.
In applying this definition of market value,
adjustments to the comparables must be made for special or
creative financing or sales concessions.
No adjustments are
necessary for those costs that are normally paid by sellers as a
result of tradition or law in a market area; these costs are
readily identifiable since the seller pays these costs in
virtually all sales transactions.
Special or creative financing
adjustments can be made to the comparable property by comparisons
to financing terms offered by a third party financial institution
that is not already involved in the property or transaction. Any
adjustment should not be calculated on a mechanical dollar-fordollar cost of the financing or concession, but the dollar amount
See 49 C.F.R. Part 24, "Uniform Relocation Assistance and
Real Property Acquisition Regulations for Federal and Federally
Assisted Programs," 54 Federal Register 8,913 (1989).
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of any adjustment should approximate the market's reaction to the
financing or concessions based on the appraiser's judgment.6
—"Real estate-related financial transaction." This
definition is the same as that set forth in section 1121(5) of
FIRREA, except that "and" is replaced with "or" throughout so as
to clarify the intent of Congress that the safeguards of Title XI
apply as broadly as possible.7
—"State certified appraiser." This classification
applies to appraisers who are recognized by the States as being
more knowledgeable of and experienced in appraisals than are
licensed appraisers. Section 1116 of FIRREA contemplates that
each state or territory will adopt standards and procedures,
consistent with the purposes of Title XI, for obtaining the
designation of "State certified appraiser." To be consistent
with Title XI, each state's standards and procedures must require
its certified appraisers to meet, at a minimum, the criteria for
certification issued by the Appraisal Foundation. Moreover, no
state or territory may certify an appraiser under Title XI unless
that individual passes an examination, administered by the state
or territory, that is consistent with and equivalent to the
Uniform State Certification Examination issued or endorsed by the
Appraisal Foundation. The proposed rule does not prevent a state
from establishing additional certification criteria.
Under FIRREA, the Board is authorized to establish
certification criteria in addition to those adopted by a given
state. Additionally, the Appraisal Subcommittee of the Federal
Financial Institutions Examination Council may issue a written
finding that the certification criteria of a state or territory
are inadequate for specified reasons. Thus, an individual may be
a "State certified appraiser" only if (a) the individual complies
with all state-imposed criteria and additional criteria, if any,
imposed by the Board, and (b) the appraiser certifications and
licenses of a state have not been rejected by the Appraisal
Subcommittee. As of July l, 1991, appraisals for federally
related transactions must be performed by State certified or
licensed appraisers, unless this deadline is extended by the
6
This paragraph regarding comparables is taken from the
standard definition of "market value" used by the Federal Home
Loan Mortgage Corporation ("FHLMC"), the Federal National
Mortgage Association ("FNMA"), and OTS, among others. By
including this paragraph in the preamble rather than the
regulation, the Board does not intend to suggest any change in
the interpretation or application of the definition of "market
value" as this term currently is used.
7
See. e.g., Report of the House Banking, Finance and Urban
Affairs, H.R. Rept. 101-54, Part 1, 101st Cong., 1st Sess. (the
"House Banking Committee Report") 480, 481 (1989).
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Appraisal Subcommittee for a given state pursuant to provisions
of Title XI.
— " S t a t e licensed appraiser." Each state may elect to
adopt licensing criteria that are less rigorous than
certification criteria. However, licensing criteria must be
adequate to protect federal financial and public policy
interests. For example, simply "grandfathering" all existing
appraisers generally would not be acceptable. Rather, the states
and territories are to design criteria that will insure that
licensed appraisers will have the experience and training
sufficient to perform l-to-4 family residential property
appraisals that are below the dollar thresholds set forth in this
proposed regulation and that are not "complex l-to-4 family
residential property appraisals" as this term is defined in this
proposal.
As with State certified appraiser criteria, the Board
is authorized to impose additional licensing requirements.
Moreover, the Appraisal Subcommittee is charged with monitoring
state appraiser certifying and licensing agencies, and may reject
state certifications and licenses if a state's appraisal
policies, practices, or procedures are found to be inconsistent
with Title XI or this proposed regulation.
— " T i e r 1 capital." This term is applied in
determining circumstances when a State certified appraiser is
required. The calculation of Tier 1 capital is set forth in
appendices to the Board's Regulation H (for state member banks)
and Regulation Y (for bank holding companies).
— " T r a c t development." A tract development may be
units in a subdivision, condominium project, timeshare project,
or any similar project meant to be sold as individual units over
a period of time.
—"Transaction value." This definition is intended to
clarify certain circumstances under which appraisals must be
performed by a State certified appraiser. For example, a State
certified appraiser is required when, among other instances, a 1to-4 family residential property appraisal is performed in
connection with a federally related transaction having a
transaction value greater than $1,000,000 or 10 percent of a
regulated institution's Tier 1 capital, whichever is less.
Section 225.63—Transactions requiring State certified
or licensed appraiser.
(a) Appraiser not required. Section 1121(4) of FIRREA
defines a federally related transaction as a real estate-related
financial transaction that, among other things, requires the
services of an appraiser. The Board recognizes that not all real
estate-related financial transactions will require an appraiser.
For instance, an appraisal would not be needed where a lien on
real property has been taken as collateral solely through an
abundance of caution and where the terms as a consequence have
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not been made more favorable than they would have been in the
absence of the lien. In addition, the Board proposes not to
require a State certified or licensed appraiser for real estaterelated financial transactions having a transaction value less
than or equal to $15,000. However, the Board does not intend for
the de minimis exception to discourage any regulated institution
from obtaining an appraisal of property even though not otherwise
required by law to do so.
(b) Transactions requiring State certified appraiser.
The legislative history evidences a clear intent that State
certified appraisers be used for most appraisals performed in
connection with federally related transactions. 8 The proposed
regulation accomplishes this goal by requiring State certified
appraisers for all federally related transactions that do not
involve l-to-4 family residential property. Moreover, a State
certified appraiser is to be used even for appraisals of l-to-4
family residential properties in three circumstances: first, for
federally related transactions entered into by the Board, if the
transaction value exceeds $1,000,000; second, for federally
related transactions entered into by regulated institutions, if
the transaction value exceeds $1,000,000 or 10 percent of Tier 1
capital, whichever is less; and third, for federally related
transactions that involve a "complex l-to-4 family residential
property appraisal" as this term is defined.
(c) Transactions requiring either a State certified or
licensed appraiser. Any federally related transaction that does
not require the services of a State certified appraiser must be
performed by, at a minimum, a State licensed appraiser. State
licensed appraisers may perform appraisals rendered in connection
with federally related transactions involving only l-to-4 family
residential properties, and only if the transaction value is
below the threshold set forth above and the transaction does not
involve a "complex l-to-4 family residential property appraisal."
Section 225.64—Appraisal standards.
(a) Minimum standards. Section 1110 of FIRREA
instructs the Board to prescribe appropriate standards for the
performance of appraisals made in connection with federally
related transactions within its jurisdiction. Further, section
1110 mandates that the standards require, at a minimum, that
appraisals be written and that they conform to the generally
accepted appraisal standards promulgated by the Appraisal
Foundation. The Board is empowered to require compliance with
additional appraisal standards if it makes a written
determination that such additional standards are required in
order to properly carry out its statutory responsibilities.
Section 225.63 of the proposed regulation incorporates the
See. e.g., House Banking Committee Report at 481.
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minimum standards set forth in the statute, while listing
additional criteria that shall apply to all appraisals performed
in connection with federally related transactions.
In enacting Title XI of FIRREA, Congress was responding
to perceived problems in the appraisal industry. These problems
were identified by the House Committee on Government Operations
during a series of hearings, 9 and have been cited repeatedly in
the legislative history of Title XI. 10 The Board is proposing to
adopt the following standards to further the legislative intent
in addressing these problems.
These standards are designed to
contribute to safe and sound banking practices by requiring
reliable appraisal reports. Appraisals performed in connection
with federally related transactions are to comply with these
standards by August 9, 1990.
—(1)
Compliance with USPAP; departure provision.
This standard incorporates the current standards in the USPAP,
and clarifies that the Departure Provision 1 1 in the USPAP is
inapplicable to appraisals conducted in connection with federally
related transactions within the Board's jurisdiction. The Board
believes that the Departure Provision allows appraisal services
to be performed which produce something different from an
"appraisal" as contemplated by Title XI of FIRREA.
For instance,
in accordance with the Departure Provision and consistent with
current USPAP requirements, a letter opinion might be produced
that could be silent about trends of rents, vacancies, or
overbuilding.
Explanatory comments in the USPAP regarding the
Departure Provision in the USPAP cite examples of when the
departure provision might apply; 1 2 however, for purposes of the
9
House Comm. on Government Operations, Impact of Appraisal
Problems on Real Estate Lending. Mortgage Insurance, and
Investment in the Secondary Market. H.R. 99-891, 99th Cong., 2d
Sess. (1986).
10
See. e.g., 135 Cong. Rec. S4004 (daily ed. April 17,
1989) (statement of Sen. Dodd); H.R. Rep. No. 100-1001, 100th
Cong. 2d Sess. pt. 1, at 19, 21-26; 133 Cong. Rec. H10709 (daily
ed. Nov. 20, 1987) (statement of Cong. Barnard); 132 Cong. Rec.
H3452 (daily ed. June 6, 1986) (statement of Cong. Barnard).
11
The Departure Provision enables appraisers to "perform
an assignment that calls for something less than or different
from the work that would otherwise be required by the [USPAP]."
USPAP at IV.
12
These examples include introducing into evidence during
a judicial proceeding a one page summary that incorporates by
reference an appraiser's file or preparing a brief update of a
previously prepared appraisal.
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proposed regulation, such services are not appraisals as this
term is used in Title XI. The Board believes that the Departure
Provision in the USPAP allows for the omission of data that
should be included in all appraisals rendered in connection with
federally related transactions and, therefore, has proposed that
the Departure Provision shall not apply to such appraisals.
Changes in the USPAP will apply to federally related
transactions unless the Board has stated in writing that the
change shall not apply to federally related transactions within
its primary or exclusive jurisdiction.
—(2)
Disclosure of competency. An appraiser is
required to have the appropriate knowledge and experience that
will be required to complete an assignment competently. If such
knowledge and experience is initially lacking, the appraiser must
disclose in the appraisal both this fact and the steps taken to
comply with the Competency Provision in the USPAP.
—(3)
Market value. This standard requires an
appraisal to document an appraiser's opinion of a property's
"market value" as this term is defined. The definition of
"market value" was developed by FNMA and FHLMC with the input of
many professional appraisal organizations. Without such a
standard, a lender might select a definition of value that allows
the value of real property to be increased by favorable
financing, going concern value, or special value to a specific
user. This standard proposes to provide to interested parties
the information necessary to determine the value of a property.
—(4)
Written appraisals; forms. This standard sets
forth the legislative mandate that all appraisals be written.
Moreover, it requires an appraisal to be sufficiently descriptive
to enable a reviewer to readily ascertain the estimated value
reported and the rationale for that estimate. The appraisal may
be in a narrative format or on a form chosen by an appraiser, but
the appraisal must comply with all other provisions of the
regulation. A form not initially designed for use in connection
with federally related transactions may be used provided that it
is modified as necessary to comply with the requirements of Title
XI and this proposed regulation. Regardless of the format
selected, the appraisal must be readily understood by a third
party and must reflect the complexity of the property that is
appraised. This will enable the reader of the appraisal to
independently determine its adequacy based upon the
characteristics of the collateral appraised.
—(5)
Sales history. This standard is designed to
enable a reviewer to compare an appraiser's opinion of a
property's market value with recent sales prices. In addition to
giving the reviewer a basis by which to evaluate the accuracy of
the subject property appraisal, it also will assist the reviewer
in identifying recent trends in market prices. For instance, a
sales history may identify a single sale or a series of sales at
artificially inflated prices.
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Sales histories are required for one year for l-to-4
family residential property and for three years for all other
types of property. A more demanding reporting standard for
nonresidential property is appropriate because larger loan
amounts are generally granted, and hence larger risk to the
regulated institution incurred, when the loan security is not a
l-to-4 family dwelling.
— ( 6 ) Rents and vacancies. An appraisal should
disclose current income produced by a property if the property
will continue to be used to generate income after a transaction
is consummated. This information is essential for an accurate
picture of the market value of an income-producing property.
Appraisal values should be predicated upon current rents and
current vacancies for property utilized in such a manner. That
is, appraisals should be based upon income that can realistically
be earned under current market and economic conditions (in light
of rents being earned on comparable properties), rather than upon
estimated or projected income that cannot be supported by current
market conditions. If an appraiser reports a high current
vacancy, this condition may require a lender to impose special
conditions on the loan.
— ( 7 ) Marketing period. This standard requires an
appraiser to employ a marketing period that is reasonable in
light of a given property's characteristics and market
conditions, and to disclose the assumptions used. An appraiser's
opinion of market value will depend in part on the appraiser's
estimate of how long a given piece of property will remain for
sale. For instance, an appraisal using a long marketing period
is likely to produce a higher market value than would an appraisal using a shorter marketing period. This information will
better enable the reader of the appraisal to assess its accuracy.
— ( 8 ) Trend analysis. An appraisal should inform the
reader of any market trends, regardless of whether the trend
reflects rising or declining values. Such trends might include,
for example, increasing vacancy rates, greater use of rent
concessions, or declining sales prices. Identification of
negative trends is particularly important so that a regulated
institution may avoid extending credit on the basis of insufficient collateral. Market trends may be indicated in market
activity on the subject property, such as listings, options, or
sales agreements; accordingly, such activity should be disclosed.
— ( 9 ) Deductions and discounts. This standard is
designed to avoid having appraisals prepared using unrealistic
assumptions. For federally related transactions, the subject
property must always be valued in its "as is" condition as of the
date of valuation. Further, appropriate deductions or discounts
are to be made from an estimated retail or stabilized value to
arrive at the market value as of the date of valuation identified
in the appraisal. Unsold units or unleased space poses a significant risk to an owner, buyer, or lender. For this reason,
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the impact of such risks must be reflected in the market value
estimate.
—(10)
Prohibited influences. All appraisals are to
be performed without pressure from someone who desires a specific
value. Accordingly, every appraisal rendered in connection with
a federally related transaction shall include a statement to the
effect that employment of the appraiser was not conditioned upon
the appraisal producing a specific value or a value within a
given range.
Similarly, future employment prospects should not
be dependent upon an appraisal producing a specified value.
Employment and compensation should not be based on whether a loan
application is approved, as this, too, would exert pressure on an
appraiser to render whatever appraisal is necessary for the loan
to be approved.
—(11)
Self-contained appraisals. This standard
requires an appraisal to contain all information necessary to
enable a reader of an appraisal to understand the appraiser's
opinion. The appraisal should not incorporate by reference a
document that is not readily available to the reader.
Studies
prepared by a third party should be verified to the extent his or
her assumptions or conclusions are used.
In addition, the
appraiser's acceptance or rejection of a third party study and
its impact on value should be fully explained.
The appraisal
itself should enable the reader to understand the conclusion
without having to refer to numerous other documents.
Moreover,
the conclusion must be reasonable in light of the information set
forth in the appraisal.
These requirements will force an appraiser to obtain adequate data before issuing an opinion of
value.
—(12)
Legal description.
A legal description of the
property is to be included in an appraisal so as to avoid confusion that may arise from less precise identification.
This
requirement enables a reader to compare the legal description in
the appraisal to the legal description in the loan documents.
The legal description is to be provided in addition to, and not
in lieu of, the description required in the USPAP.
— (13) Personal property, fixtures, and intangible
items. An appraisal is to include a separate assessment of
personal property, fixtures, or intangible items that are attached to or located on real property if the personal property,
fixture, or intangible item affects the market value of the real
property.
Furniture and fixtures should have separate valuations
because their economic life is shorter than real property improvements and may require special lending or investment considerations.
If the personal property, fixture, or intangible
item is not a part of the transaction, then this fact should be
stated and the impact on market value should be disclosed.
Favorable loan financing or any business interest or other
intangible item should be valued separately within the appraisal.
These requirements will help provide a reader with a more com-
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plete understanding of the market value of the real property as
it will be at the time the transaction is entered into.
—(14)
Use of recognized appraisal approaches. At the
request of clients, some appraisers have not prepared cost
estimates of value, estimates of value based on the capitalization of income, or value estimates based on direct sales comparisons. This standard requires an appraiser to employ each of
these recognized approaches to market value and explain how each
approach was used.
However, if one or more approaches cannot be
used, an appraiser is to explain the elimination of any approach.
This requirement is intended to produce appraisals made only
after the three major approaches to market value have been
considered and reconciled, thereby improving the accuracy of the
appraisal.
Disclosure of the fact that an approach was not used
will assist the reader in evaluating the adequacy of the appraisal.
(b) Unavailability of information.
The Board realizes
that some information required by the USPAP or this regulation to
be in an appraisal may, on occasion, be unavailable.
For example, historic rents will not exist for a building under construction at the time of appraisal.
However, an appraisal should
inform the reader of any material information that is unavailable
and why such information could not be obtained, so as to assist
the reader in reviewing the appraisal.
(c) Additional standards.
The standards required by
this regulation are the minimum standards to be met by every
appraisal made in connection with a federally related transaction. However, the Board and regulated institutions may employ
additional standards if circumstances so warrant.
Section 225.65--Appraiser independence. An appraiser's
goal should be to produce an objective opinion about the market
value of a property. This objectivity may be compromised if the
appraiser is involved in the transaction, such as deciding
whether to extend credit to be secured by such property.
Similarly, a direct or indirect interest in the property appraised may undermine the accuracy of the appraisal. A direct
interest would arise, for example, by owning all or part of
property being appraised. An indirect interest would arise if,
for example, an appraiser owns property adjacent to the parcel
being appraised.
This indirect interest would extend to any
property whose value is likely to be affected by an appraisal, if
the appraisal is the proximate cause for the effect. Moreover,
the interest may be nonpecuniary, such as a desire to help an
associate obtain a loan.
To further the goal of appraiser independence, the
Board proposes to require that fee appraisers (that is,
appraisers not permanently employed by a given regulated institution) be hired by a regulated institution or its agent rather
than the borrower.
In order to avoid potential conflicts of
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interest, staff appraisers (appraisers that are permanently
employed by a regulated institution) should not be supervised,
controlled, or influenced by loan underwriters, loan officers, or
collection officers.
The Board recognizes that in certain cases it may be
necessary for loan officers and directors to perform appraisals.
Such cases would depend on a bank*s particular circumstances; an
example would be a small rural bank where the only qualified
individual to perform appraisals is a loan officer, and separating this person from the loan and collection departments is
impossible. In such situations, the Board recommends that this
individual perform appraisal work on loans in which he or she is
not otherwise involved. In cases where loan officers or directors perform appraisals, regulated institutions are expected to
ensure that the appraisers are qualified and that appraisal
reports are adequate. 13 Directors and officers should abstain
from any vote and/or approval involving assets on which they had
performed an appraisal. In all, sufficient safeguards should be
in place to permit appraisers to exercise independent judgment,
thereby ensuring the validity of the appraisal process.
Section 225.66--Professional association membership;
competency.
(a) Membership in appraisal organizations. The
legislative history of Title XI evidences an intent to prohibit
discrimination against appraisers solely by virtue of membership
or lack of membership in a particular appraisal organization. 14
Accordingly, this regulation prohibits any entity covered by
Title XI from basing decisions regarding the employment of
appraisers solely on membership or lack of membership in an
appraisal organization. An institution should review the
qualifications of appraisers rather than the qualifications of
appraisal organizations to insure that a qualified individual is
being employed. Membership in an organization may be considered;
however, it may not be the sole determining factor in accepting
or rejecting an appraiser.
(b) Competency• Not all appraisers are competent to
perform every type of appraisal that will be needed in connection
with federally related transactions. For instance, an appraiser
who is experienced in appraising shopping centers may not possess
sufficient expertise to appraise a golf course. A financial
It should be noted that directors and officers who
perform appraisals in connection with federally related transactions must be licensed or certified, as appropriate.
16
See. e.g., House Banking Committee Report at 484; see
also H.R. Conf. Rep. No. 101-222, 101st Cong., 1st Sess., at 457
(1989) .
- 14 -
institution should look beyond an individual's title to determine
if he or she has the experience and training needed to perform
the appraisal. This provision is not intended to prohibit, in
every circumstance, an individual from appraising a type of
property with which he or she is not familiar. However, in such
instances, an appraiser may perform the appraisal only in accordance with the Competency Provision in the USPAP. In addition,
an individual who is not a State certified or licensed appraiser
may assist in the preparation of an appraisal if he or she is
directly supervised by a licensed or certified appraiser (as
appropriate), and the appraisal is approved and signed by a
certified or licensed appraiser.
Section 225.67—Enforcement. Section 1120 of FIRREA
vests the Board with the authority to bring an action for civil
money penalties against a regulated institution within the
agency's primary jurisdiction. The proposed regulation makes
clear that additional enforcement remedies available to the Board
under section 8 of the Federal Deposit Insurance Act also apply.
These can include civil money penalties and cease and desist
orders, as well as orders of removal and prohibitions against
institutions and institution-affiliated parties. FIRREA
specifically provides that "Institution-affiliated parties"
includes, but is not limited to, appraisers. 15
Differences Between the Agencies. The federal financial institutions regulatory agencies and the RTC have attempted to develop
uniform regulations regarding the appraisal requirements for
federally related transactions. However, the agencies and the
RTC have proposed different approaches on the following points:
(1) Jge minimis test. The Board proposes not to
require a State certified or licensed appraiser for real estaterelated financial transactions having a transaction value less
than or equal to $15,000.
(2) Tier 1 capital. The Board proposes to adopt the
definition of Tier 1 capital as set forth in appendices to the
Board's Regulation H (for state member banks) and Regulation Y
(for bank holding companies).
(3) Bridge banks operating under 12 U.S.C. 1821(n) and
depository institutions operated by the FDIC or the RTC as
receiver, liquidator, or conservator are not addressed in the
Board's proposal.
Regulatory Flexibility Act Analysis
Title XI of FIRREA requires the Board to establish
standards for performing appraisals in connection with federally
related transactions within the Board's jurisdiction. In
See FIRREA, §§ 204(f)(6) and 901(b)(1).
- 15 -
addition, Title XI requires the Board to distinguish those
transactions that require State certified appraisers from those
that require State certified or licensed appraisers. This
proposed regulation is in response to this legislative mandate.
Title XI specifies certain transactions requiring the
services of an appraiser, but allows the agencies some discretion
in determining which other transactions should also require an
appraiser. In this regard, the Board has attempted to alleviate
the economic impact on small businesses, including small regulated institutions, by not requiring a State certified or
licensed appraiser for transactions in which (i) the transaction
value is below the £le minimis cutoff established in the regulation, or (ii) a lien on real estate is taken as collateral solely
as an abundance of caution.
The Board invites comments on the costs and benefits of
the proposed regulation with regard to the operation of
depository institutions, the provision of real estate credit, the
impact on loan losses, and the cost of appraisals.
The Board anticipates that the proposed regulation may
have a tendency to increase costs, to some degree, for borrowers
and member banks and bank holding companies. The cost increase
may stem from at least two aspects of the rule. First, since
member banks and bank holding companies are required to use
certified or licensed appraisers, the cost of an appraisal may
rise somewhat. Some borrowers may resist the increased appraisal
cost and decide not to take out a loan secured by real estate.
Alternatively, some banking organizations may elect to absorb all
or a portion of any increased appraisal cost. Second, the
proposed regulation includes certain provisions that go beyond
the Federal Reserve's existing appraisal guidelines. Those
provisions could add to appraisal costs.
On the other hand, the proposed regulation should serve
to decrease costs to member banks and bank holding companies of
all sizes. Such banking organizations will have better information about the value of the real estate involved in federally
related transactions and can better ensure that each loan is
collateralized adequately. As a result, the events of default
should be reduced, with a corresponding reduction in loan losses.
In addition, for those organizations that already have strong
appraisal policies or procedures that exceed minimum supervisory
standards, the marginal costs of the proposed regulation should
be limited. On balance, the Board believes that adoption of this
proposal would not have a significant adverse economic impact on
a substantial number of small business entities, in accordance
with the spirit and purposes of the Regulatory Flexibility Act (5
U.S.C. 601 et sea.).
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16
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List of Subjects
12 CFR Part 208
Agricultural loan losses, Applications, Appraisals,
Banks, Banking, Branches, Capital adequacy, Federal
Reserve System, Flood insurance, Publication of reports
of condition, Reporting and recordkeeping requirements,
Securities, State member banks.
12 CFR Part 225
Administrative practice and procedure, Appraisals,
Banks, Banking, Federal Reserve System, Holding companies, Reporting and recordkeeping requirements,
Securities.
For the reasons set forth in this notice, the Board
proposes to amend 12 CFR Parts 208 and 225 as follows:
PART 208 - MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE
FEDERAL RESERVE SYSTEM
1. The authority citation for Part 208 is revised to
read as follows:
Authority: Sections 9, 11(a), 11(c), 19, 21, 25, and 25(a) of
the Federal Reserve Act, as amended (12 U.S.C. 321-338,
248(a), 248(c), 461, 481-486, 601, and 611,
respectively); sections 4 and 13(j) of the Federal
Deposit Insurance Act, as amended (12 U.S.C. 1814 and 1823(j),
respectively); section 7(a) of the International Lending
Supervision Act of 1978 (12 U.S.C. 3105); sections 907-910 of the
International Banking Act of 1983 (12 U.S.C. 3906-3909); sections
2, 12(b), 12(g), 12(i), 15B(c)(5), 17, 17A, and 23 of the Securities Exchange Act of 1934 (15 U.S.C. 78b, 781(b), 781(g), 781(i),
78o-4(c)(5), 78q, 78q-l, and 78w, respectively); section 5155 of
the Revised Statutes (12 U.S.C. 36) as amended by the McFadden
Act of 1927; and sections 1101-1122 of the Financial Institutions
Reform, Recovery and Enforcement Act of 1989 (12 U.S.C. 3310 and
3331-3351).
2. Section 208.18 is added to read as follows:
Section 208.18 Appraisal standards for federally related
transactions.
The standards applicable to appraisals rendered in
connection with federally related transactions entered into by
member banks are set forth in Subpart G of the Board's Regulation
Y, 12 CFR Part 225.
PART 2 25 - BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL
1. The authority citation for Part 225 is revised to
read as follows:
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Authority: 12 U.S.C. 1817(j)(l3), 1818, 1843(c)(8), 1844(b),
3106, 3108, 3907, and 3909; and sections 1101-1122 of the
Financial Institutions Reform, Recovery and Enforcement Act of
1989 (12 U.S.C. 3310 and 3331-3351).
2. Subpart G, consisting of sections 225.61 through
225.67, is added immediately following Subpart F to read as
follows:
Subpart G — Appraisal Standards for Federally Related
Transactions
225.61 Authority, purpose, and scope.
225.62 Definitions.
225.63 Transactions requiring State certified or licensed
appraiser.
225.64 Appraisal standards.
225.65 Appraiser independence.
225.66 Professional association membership; competency.
225.67 Enforcement.
Subpart G — Appraisal Standards for Federally Related
Transactions
§ 225.61 Authority, purpose, and scope.
(a) Authority. This subpart is issued by the Board of
Governors of the Federal Reserve System (the "Board") under Title
XI of the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 ("FIRREA") (Pub. L. No. 101-73, 103 Stat.
183 (1989)).
(b) Purpose and scope.
(l) Title XI provides protection
for federal financial and public policy interests in real estate
related transactions by requiring real estate appraisals used in
connection with federally related transactions to be performed in
writing, in accordance with uniform standards, by appraisers
whose competency has been demonstrated and whose professional
conduct is subject to effective supervision. This subpart
implements the requirements of Title XI, and applies to all
federally related transactions entered into by the Board or by
institutions primarily or exclusively regulated by the Board
("regulated institutions").
(2) This subpart:
(i) identifies which real estate-related financial
transactions require the services of an appraiser;
(ii) prescribes which categories of federally
related transactions shall be appraised by a State certified
appraiser and which by a State licensed appraiser; and
(iii) prescribes minimum standards for the
performance of real estate appraisals in connection with
federally related transactions under the jurisdiction of the
Board.
§ 225.62 Definitions.
(a) "Appraisal" means a written statement independently and
impartially prepared by a qualified appraiser setting forth an
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18
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opinion as to the market value of an adequately described
property as of a specific date(s), supported by the presentation
and analysis of relevant market information.
(b) "Appraisal Foundation" means the Appraisal Foundation
established on November 30, 1987, as a not-for-profit corporation
under the laws of Illinois.
(c) "Appraisal Subcommittee" means the Appraisal
Subcommittee of the Federal Financial Institutions Examination
Council ("FFIEC").
(d) "Complex l-to-4 family residential property appraisal"
means one in which the property to be appraised is atypical of
its market. For example, atypical factors may include:
(1) age of improvements;
(2) architectural style;
(3) size of improvements;
(4) size of lot;
(5) neighborhood land use;
(6) potential environmental hazard liability;
(7) leasehold interests;
(8) limited readily available comparable sales data; or
(9) other unusual factors.
(e) "Federally related transaction" means any real estaterelated financial transaction that:
(1) the Board or any regulated institution engages in
or contracts for; and
(2) requires the services of an appraiser.
(f) "Market value" means the most probable price which a
property should bring in a competitive and open market under all
conditions requisite to a fair sale, the buyer and seller each
acting prudently and knowledgeably, and assuming the price is not
affected by undue stimulus. Implicit in this definition is the
consummation of a sale as of a specified date and the passing of
title from seller to buyer under conditions whereby:
(1) buyer and seller are typically motivated;
(2) both parties are well informed or well advised, and
acting in what they consider their best interests;
(3) a reasonable time is allowed for exposure in the
open market;
(4) payment is made in terms of cash in United States
dollars or in terms of financial arrangements comparable thereto;
and
(5) the price represents the normal consideration for
the property sold unaffected by special or creative financing or
sales concessions granted by anyone associated with the sale.
(g) "Real estate-related financial transaction" means any
transaction involving:
(1) the sale, lease, purchase, investment in or
exchange of real property, including interests in real property,
or the financing thereof; or
- 19 -
(2) the refinancing of real property or interests in
real property; or
(3) the use of real property or interests in real
property as security for a loan or investment, including
mortgage-backed securities.
(h) "State certified appraiser" means any individual who
has satisfied the requirements for State certification in a State
or territory whose criteria for certification as a real estate
appraiser currently meets the minimum criteria for certification
issued by the Appraiser Qualifications Board of the Appraisal
Foundation. No individual shall be a State certified appraiser
unless such individual has achieved a passing grade upon a
suitable examination administered by a State or territory that is
consistent with and equivalent to the Uniform State Certification
Examination issued or endorsed by the Appraiser Qualification
Board of the Appraisal Foundation. In addition, the Appraisal
Subcommittee must not have issued a finding that the State's
policies, practices, or procedures are inconsistent with Title XI
of FIRREA. The Board may, from time to time, impose additional
qualification criteria for certified appraisers performing
appraisals in connection with federally related transactions
within the Board's jurisdiction.
(i) "State licensed appraiser" means any individual who has
satisfied the requirements for State licensing in a State or
territory where the licensing procedures are consistent with
Title XI of FIRREA and where the Appraisal Subcommittee has not
issued a finding that the State's appraisal policies, practices,
or procedures are inconsistent with Title XI. The Board may,
from time to time, impose additional qualification criteria for
licensed appraisers performing appraisals in connection with
federally related transactions within the Board's jurisdiction.
(j) "Tier l capital" means such capital for year-end 1992,
as set forth in Appendix A to Part 2 08 of the Board's Regulation
H for state-chartered banks that are members of the Federal
Reserve System and in Appendix A to Part 225 of the Board's
Regulation Y for bank holding companies. Tier 1 capital shall be
calculated as of the date of the regulated institution's latest
call report.
(k) "Tract development" means a project of five units or
more that is constructed as a single development.
(1) "Transaction value" means:
(1) for loans or other extensions of credit, the amount
of the loan or extension of credit; and
(2) for sales, leases, purchases, and investments in or
exchanges of real property, the market value of the real property
involved.
S 225.63 Transactions requiring State certified or licensed
appraiser.
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20
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(a) Appraiser not required. An appraisal performed by a
State certified or licensed appraiser is not required for:
(1) any real estate-related financial transaction in
which the transaction value is $15,000 or less; or
(2) any real estate-related financial transaction in
which a lien on real property has been taken as collateral solely
through an abundance of caution and where the terms of the
transaction as a consequence have not been made more favorable
than they would have been in the absence of a lien.
(b) Transactions requiring state certified appraiser.
(1) All federally related transactions, other than
those involving appraisals of l-to-4 family residential
properties, shall require an appraisal performed by a State
certified appraiser.
(2) All appraisals of l-to-4 family residential
properties made in connection with federally related transactions
shall require a State certified appraiser if:(i) for federally related transactions entered
into by the Board, the transaction value exceeds $1,000,000; or
(ii) for federally related transactions entered
into by regulated institutions, the transaction value exceeds:
(A) 10 percent of the regulated institution's Tier
1 capital or
(B) $1,000,000, whichever is less.
(3) All complex l-to-4 family residential property
appraisals rendered in connection with federally related transactions shall require a State certified appraiser. The regulated
institution shall determine whether the property is complex and
shall make available, if requested by the Board, appropriate
evidence to support the determination.
(c) Transactions requiring either a State certified or
licensed appraiser. All appraisals for federally related
transactions not requiring the services of a State certified
appraiser shall be performed by either a State certified
appraiser or a State licensed appraiser.
S 22 5.64 Appraisal standards.
(a) Minimum standards. For federally related transactions,
all appraisals as defined in section 225.62(a) of this subpart
shall, at a minimum:
(1) conform to the current Uniform Standards of
Professional Appraisal Practice ("USPAP") as adopted by the
Appraisal Foundation, 16 except that the Departure Provision of
the USPAP shall not apply to federally related transactions;
16
Amendments to the USPAP made after the effective date of
a final rule shall apply to federally related transactions unless
disapproved in writing by the Board.
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(2) if appropriate, disclose any steps taken to comply
with the Competency Provision of the USPAP;
(3) be based upon the conditions specified in the
definition of market value as set forth in section 225.62(f) of
this subpart;
(4) be written and presented in a narrative format, or
on forms, that satisfy all the requirements of this section, be
sufficiently descriptive to enable the reader to ascertain the
estimated market value and the rationale for the estimate, and
provide detail and depth of analysis that reflects the complexity
of the real estate appraised;
(5) analyze and report in reasonable detail any prior
sales of the property being appraised that occurred within the
following time periods:
(i) for l-to-4 family residential property, one
year preceding the date when the appraisal was prepared; and
(ii) for all other property, three years preceding
the date when the appraisal was prepared;
(6) analyze and report data on current rents and
current vacancies for the property if it is and will continue to
be income-producing;
(7) analyze and report a reasonable marketing period
for the subject property;
(8) analyze and report on current market conditions and
trends that will affect projected income or the absorption period
to the extent they affect the value of the subject property;
(9) analyze and report appropriate deductions and
discounts for:
(i) any proposed construction;
(ii) any completed properties that are partially
leased or are leased at other than market rents as of the date of
the appraisal; or
(iii) any tract developments with unsold units;
(10) include in the certification required by the USPAP
an additional statement that the appraisal assignment was not
based on a requested minimum valuation, a specific valuation, or
approval of a loan;
(11) contain sufficient supporting documentation with
all pertinent information reported so that the appraiser's logic,
reasoning, judgment, and analysis in arriving at a final
conclusion indicate to the reader the reasonableness of the
market value reported;
(12) include a legal description of the real estate
being appraised in addition to the description required by the
USPAP;
(13) identify and separately value any personal
property, fixtures, or intangible items that are not real
property but are included in the appraisal, and discuss the
impact of their inclusion or exclusion on the estimate of market
value; and
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22
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(14) follow a reasonable valuation method that
addresses the direct sales comparison, income, and cost
approaches to market value, and reconciles those approaches; if
one or more approach cannot be used, explain the elimination of
each approach not used.
(b) Unavailability of information. If information required
or deemed pertinent to the completion of an appraisal is
unavailable, that fact shall be disclosed and explained in the
appraisal report.
(c) Additional standards. Nothing contained herein shall
prevent a regulated institution from requiring additional
appraisal standards if deemed appropriate.
§ 225.65 Appraiser independence.
(a) Staff appraisers.
If an appraisal is prepared by a
staff appraiser, that appraiser must:
(i) be independent of the lending, investment, or
collection functions and not involved, except as an appraiser, in
the federally related transaction; and
(ii) have no direct or indirect interest, financial or
otherwise, in the property.
If the only qualified persons available to perform an appraisal
are involved in the lending, investment, or collection functions
of the regulated institution, the regulated institution shall
take appropriate steps to insure that the appraisers exercise
independent judgment and that the appraisal is adequate. Such
steps include, but are not limited to, prohibiting an individual
from performing an appraisal in connection with federally related
transactions in which the appraiser is otherwise involved and
prohibiting directors and officers from participating in any vote
or approval involving assets on which they had performed an
appraisal.
(b) Fee appraisers.
If an appraisal is prepared by a fee
appraiser, the appraiser shall be employed directly by the
regulated institution or its agent, and have no direct or
indirect interest, financial or otherwise, in the property or
transaction.
§ 225.66 Professional association membership; competency.
(a) Membership in appraisal organizations.
A State
certified appraiser or a State licensed appraiser may not be
excluded from consideration for an assignment for a federally
related transaction solely by virtue of membership or lack of
membership in any particular appraisal organization.
(b) Competency. All staff and fee appraisers performing
appraisals in connection with federally related transactions must
be State certified or licensed, as appropriate. However, a State
certified or licensed appraiser may not be considered competent
solely by virtue of being certified or licensed. Any
determination of competency shall be based upon the individual's
- 23 -
experience and educational background as they relate to the
particular appraisal assignment for which he or she is being
considered.
S 225.67
Enforcement.
Institutions and institution-affiliated parties,
including staff appraisers and fee appraisers, may be subject to
removal and/or prohibition orders, cease and desist orders, and
the imposition of civil money penalties pursuant to Section 8 of
the Federal Deposit Insurance Act, 12 U.S.C. S 1818, as amended.
Board of Governors of the Federal Reserve System,
February 5, 1990.
(signed) William w. Wiles
William W. Wiles
Secretary of the Board