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FOR RELEASE ON DELIVERY
8:30 A.M. EST
October 27, 1992
Remarks by
John P . LaWare
Member, Board of Governors of the
Federal Reserve System
to the
State Regulators Conference
Sponsored by the
Appraisal Subcommittee of the
Federal Financial Institutions Examination Council
Washington, D.C.
October 27, 1992
I am pleased to be with you this morning to address the
role and responsibilities of the federal financial institutions
regulatory agencies in implementing the provisions of Title XI of
the Financial Institutions Reform, Recovery, and Enforcement Act
of 1989, and to discuss the important part that the states have
in improving and maintaining the quality of real estate
appraisals and the professionalism of appraisers.
To begin with, no discussion of appraisal regulations
or, for that matter, any other regulatory requirement affecting
insured depository institutions, can ignore the special and
extensive regulatory environment in which banks, thrifts, and
credit unions operate.
Society's reliance on the banking system
and the government's deposit insurance guarantee has led to these
depository institutions being treated differently from other
types of financial enterprises.
While I certainly would not
argue that these institutions should not be held to the highest
standards of safety and soundness, the fact remains that many of
the laws passed by the Congress have imposed regulatory
requirements and operating constraints on depository
institutions, that, in general, are not imposed upon other
businesses that carry out the same kinds of transactions and
serve the public in many similar ways.
Even though these statutes and regulations— those
related to safety and soundness and those related to other public
policy goals— address legitimate concerns, they still impose
significant costs on the banking system.
These costs stem not
only from the need for additional personnel and other resources
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to insure compliance, but also from the diversion of management's
attention from serving the everyday needs of the institution's
depositors and borrowers.
Title XI, by requiring the agencies to
issue very detailed real estate appraisal regulations, is yet
another example of how banks and other depository institutions
are treated differently from other businesses such as insurance
companies, mutual funds, and other nondepository financial
institutions which are in direct competition with them.
In issuing their appraisal regulations, the agencies
have, as always, complied with both the letter and the spirit of
the law.
Concerned about the administrative burden that these
regulations would impose upon depository institutions and the
increased costs of compliance that would have to be passed on to
customers— particularly homeowners and small businesses— the
banking agencies adopted a $100,000 appraisal threshold.
Federally related transactions below this threshold amount do not
have to be documented with an appraisal prepared by a licensed or
certified appraiser but must be supported by an appropriate
evaluation of the real estate collateral prepared in conformance
with the supervisory guidance.
And, it must clearly set forth an
estimate of the current market value of the underlying real
estate collateral.
On the other hand, those federally related
transactions above the threshold require appraisals performed by
state licensed or certified appraisers in accordance with the
regulations.
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In the agencies' experience, credit losses arising from
inadequate appraisals of 1- to 4-family residential loans, which
comprise the vast majority of those real estate related
transactions that fall below $100,000, have not been a
significant cause of failures among depository institutions.
Given that the median average sales price for existing single
family homes in 1990 was $95,500 and for new homes $122,900, the
agencies believed that the $100,000 limit was a reasonable
threshold.
I would note that while the agencies' decision to
establish a threshold was controversial at the time, the
authority of the agencies to establish such an appraisal
threshold was recently addressed by the Congress as I will
describe in a little more detail in a moment.
It has been large real estate loans for commercial and
multi-family residential properties which have been the major
cause of losses.
But, we are also concerned about problems
stemming from relatively small- or medium-size loans which result
in some of the losses to individual institutions.
Accordingly,
the agencies have all adopted supervisory guidelines for real
estate appraisals and evaluations for all sizes and types of real
estate loans.
As the agencies proceed with the implementation of
Title XI, we are also evaluating the impact our appraisal
regulations may be having on the availability of credit to
qualified borrowers.
In line with the President's initiative to
reduce regulatory burden to all businesses, the Federal Reserve
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Board, in conjunction with the other agencies, is currently
developing a proposal to amend its appraisal regulation.
We want
to eliminate appraisal standards that are similar to or
duplicative of the Uniform Standards of Professional Appraisal
Practice ("USPAP").
The proposal will simplify the regulations
and make clear to appraisers and insured depository institutions
that the USPAP standards are acceptable for all appraisals of
federally related transactions and fulfill the requirements of
Title XI.
Many individuals, particularly appraisers, have
mistakenly believed that two separate analyses were needed in
every appraisal of a federally related transaction in order to
satisfy both the requirements of the appraisal regulations and
the standards set forth in USPAP.
Such is not the case.
Our
actual experience with appraisals since the USPAP standards were
issued in final form in June of 1990 appears to indicate that the
USPAP standards adequately address our concerns as supervisors
and the purposes of Title XI.
We are also considering permitting appraisers to use
the Departure Provision of USPAP.
This would allow appraisers to
limit the scope of an appraisal assignment when every specific
guideline prescribed in USPAP is not needed to render a reliable
estimate of value.
By allowing appraisers to use the Departure
Provision, an appraiser will be able to modify the appraisal
scope when some USPAP guidelines are not appropriate for a
particular assignment or for a particular type of real estate.
In addition, this proposed change would permit the use of
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appraisal updates which are not presently permitted under the
agencies' regulations.
Both of these changes should serve to
lower the costs of appraisals to the public.
Board staff and staff of the other agencies have just
begun discussing these changes so I cannot give you a timetable
for implementation, but we intend to move as quickly as possible.
Now, I would like to discuss briefly some recent
Congressional actions pertaining to our joint responsibilities in
the area of appraisals.
In the closing days of the last
Congress, several bills were passed that impact Title XI.
are awaiting the President's signature.
They
The first is an
amendment to the Housing Bill which would confirm the agencies'
authority to establish a threshold below which an appraisal
performed by certified or licensed appraisers would not be
required for federally related transactions.
Some of the federal
financial institutions regulatory agencies have been sued by an
appraiser organization challenging the agencies' authority to
establish such thresholds.
This amendment to Title XI confirms
the agencies' authority to establish such a threshold.
This recent Congressional action draws attention to the
fact that some states have incorporated the agencies' $100,000
threshold and the federal agencies' appraisal requirements for
federally related transactions into state laws governing
appraiser licensing and certification.
This is causing a
considerable amount of confusion among federally regulated
institutions in those states where the state requirements differ
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from the federal regulations.
Consistency between federal and
state standards will not only reduce the costs and burden of
compliance, but will insure better appraisals and more informed
credit decisions by lenders.
I believe it would be better for
the states to defer to the federal agencies on these matters.
Rather than pass state laws that attempt to quote federal
appraisal standards in detail— standards which will change over
time creating inconsistency between state and federal
requirements— it would be far more efficient to simply defer to
the federal regulations.
Furthermore, I think it would be better
for all interested parties if states did not attempt to define
federally related transactions in their statutes or regulations.
The determination of what constitutes a federally related
transaction is the province of the federal financial institutions
regulatory agencies as specifically set forth in Title XI.
If a
state chooses to define federally related transactions
differently, it can only lead to unnecessary confusion and
inefficiency in the appraisal process.
The Congress recently also passed the Depository
Institutions Disaster Relief Act which in part deals with the
appraisal requirements for regulated institutions regarding real
property located in federally designated disaster areas.
The Act
amends Title XI to provide the agencies with the ability to waive
appraisal requirements for areas in which the President has
determined a major disaster exists.
While the Disaster Relief
Act was intended to assist those areas struck by Hurricanes
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Andrew and Iniki, the amendment was structured to allow the
agencies to grant, if they so determine, appraisal relief in
future disasters as well.
As I said at the beginning of my remarks, the states
have a very important role in improving and maintaining the
quality of real estate appraisals and professionalism in the
appraisal industry.
In that regard, the agencies will be looking
to the states to establish strong and effective regulatory
programs for the supervision of certified and licensed
appraisers.
This is a critical component of Title XI and one
which is key to strengthening the appraisal process.
Moreover,
regulated institutions depend on the states to ensure that
individuals awarded state appraiser certifications or licenses
have met minimum qualification requirements.
In my view, such qualification requirements depend not
only on minimum standards for testing, education, and experience,
but also on the enforcement of a professional code of conduct.
Appraisers as well as the users of appraisal services should be
able to depend on the states to take appropriate disciplinary
action against disreputable and unethical appraisers.
I also want to touch briefly on another state matter
which affects many federally regulated institutions.
should be able to practice on a multi-state basis.
Appraisers
Many of our
larger regulated institutions lend in more than one state and
have commented on the differences among the states respecting
temporary practice privileges for appraisers.
In this
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connection, it should be recalled that Title XI specifically
included a provision which directed the states to recognize on a
temporary basis an appraiser license or certification from
another state when the appraiser is conducting an appraisal for a
federally related transaction.
I encourage you to consider the
needs of multi-state lenders in establishing reasonable temporary
certification and licensing privileges.
I understand that many
states have entered into reciprocity agreements with other states
and I believe that approach would help to meet the needs of both
lenders and borrowers.
In conclusion, while I believe Title XI has contributed
to strengthening appraisal procedures, I also believe that the
appraisal process is not an exact science and, thus, should not
be the sole basis upon which regulated institutions make real
estate loans.
Work still must be done on refining the appraisal
process to avoid the use of dubious assumptions that contribute
to exaggerated valuations in both the upside and downside phases
of the real estate cycle as well as general business cycles.
For
these reasons, the principal factors in assessing the quality of
a real estate loan include not only the value of the underlying
real estate collateral, but also the borrower's willingness and
capacity to repay the loan.
As we proceed in implementing Title XI, I want to
assure you that the agencies will continue to monitor the
effectiveness and impact of our regulations.
As is true of any
new regulation, we recognize adjustments may have to be made in
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order to accomplish the desired objectives.
We appreciate the
efforts the states have made to implement Title XI, especially
given the budgetary constraints many of you face.
In this
regard, the Federal Reserve, the other agencies, and the
Appraisal Subcommittee look forward to continued cooperation
between the federal and state levels of government to insure the
orderly implementation of Title XI and to further the
professional development of the appraisal industry and the
quality of appraisals.
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