[Federal Register Volume 59, Number 108 (Tuesday, June 7, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-13312]
[[Page Unknown]]
[Federal Register: June 7, 1994]
_______________________________________________________________________
Part II
Department of the Treasury
Office of the Comptroller of the Currency
12 CFR Part 34
Office 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
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR 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. 94-47]
RIN 1550-AA64
Real Estate Appraisals
AGENCIES: Office of the Comptroller of the Currency, Treasury; Board of
Governors of the Federal Reserve System; Federal Deposit Insurance
Corporation; and Office of Thrift Supervision, Treasury.
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The Office of the Comptroller of the Currency, the Board of
Governors of the Federal Reserve System, the Federal Deposit Insurance
Corporation, and the Office of Thrift Supervision (collectively the
agencies) are amending their regulations regarding appraisals of real
estate. This final rule is adopted pursuant to Title XI of the
Financial Institutions Reform, Recovery, and Enforcement Act of 1989.
The final rule increases to $250,000 the threshold at or below
which appraisals are not required pursuant to Title XI, expands and
clarifies existing exemptions to the Title XI appraisal requirement,
identifies additional circumstances when appraisals are not required
under Title XI, and specifies when exempt transactions nevertheless
require appropriate evaluations. In addition, the final rule amends
existing requirements governing appraisal content and the use of
appraisals prepared by other financial services institutions.
The agencies are adopting this final rule to further federal
financial and public policy interests by reducing regulatory burden,
while requiring Title XI appraisals when necessary to protect the
safety and soundness of financial institutions or otherwise advance
public policy.
EFFECTIVE DATE: This final rule is effective on June 7, 1994.
FOR FURTHER INFORMATION CONTACT:
Office of the Comptroller of the Currency (OCC)
Thomas E. Watson, National Bank Examiner, Office of the Chief National
Bank Examiner, (202) 874-5170; or Horace G. Sneed, Senior Attorney, or
Stephen Freeland, Attorney, (202) 874-4460, Bank Operations and Assets
Division; Office of the Comptroller of the Currency, 250 E Street, SW,
Washington, DC 20219.
Board of Governors of the Federal Reserve System (Board)
Roger T. Cole, Deputy Associate Director, (202) 452-2618, Rhoger H
Pugh, Assistant Director, (202) 728-5883, Stanley B. Rediger,
Supervisory Financial Analyst (202) 452-2629, or Virginia M. Gibbs,
Supervisory Financial Analyst, (202) 452-2521, Division of Banking
Supervision and Regulation; or Gregory A. Baer, Senior Attorney (202)
452-3236, Legal Division; Board of Governors of the Federal Reserve
System, 20th Street and Constitution Avenue, NW., Washington, DC 20551.
Federal Deposit Insurance Corporation (FDIC)
Robert F. Miailovich, Associate Director, (202) 898-6918, James D.
Leitner, Examination Specialist, (202) 898-6790, Division of
Supervision; or Walter P. Doyle, Counsel, (202) 898-3682, Legal
Division; Federal Deposit Insurance Corporation, 550 17th Street NW.,
Washington, DC 20429.
Office of Thrift Supervision (OTS)
Robert Fishman, Senior Program Manager, Credit Risk, Supervision
Policy, (202) 906-5672; Deirdre G. Kvartunas, Policy Analyst,
Supervision Policy, (202) 906-7933; Ellen J. Sazzman, Counsel (Banking
and Finance), Regulations and Legislation Division, Chief Counsel's
Office, (202) 906-7133; Office of Thrift Supervision, 1700 G Street
NW., Washington, DC 20552.
SUPPLEMENTARY INFORMATION:
I. Background
Title XI of the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (FIRREA), 12 U.S.C. 3331 et seq., directs each
Federal banking agency to publish appraisal regulations for federally
related transactions within its jurisdiction. The purpose of the
legislation is to protect federal financial and public policy interests
in real estate related transactions by requiring that real estate
appraisals utilized in connection with federally related transactions
are performed in writing, in accordance with uniform standards, and by
individuals whose competency has been demonstrated and whose
professional conduct will be subject to effective supervision. See 12
U.S.C. 3331.
Section 1121(4) of FIRREA, 12 U.S.C. 3350(4), defines a federally
related transaction as a real estate-related financial transaction that
is regulated or engaged in by a federal financial institutions
regulatory agency and requires the services of an appraiser. A real
estate-related financial transaction is defined as any transaction that
involves:
(i) The sale, lease, purchase, investment in or exchange of real
property, including interests in property, or the financing thereof;
(ii) The refinancing of real property or interests in real
property; and
(iii) The use of real property or interests in real property as
security for a loan or investment, including mortgage-backed
securities. See 12 U.S.C. 3350(5) (FIRREA section 1121(5)).
In their appraisal regulations, the agencies identify categories of
real estate-related financial transactions that do not require the
services of an appraiser in order to protect federal financial and
public policy interests or to satisfy principles of safe and sound
banking. These real estate-related financial transactions are not
federally related transactions under the statutory and regulatory
definitions. Accordingly, they are subject to neither Title XI of
FIRREA nor those provisions of the agencies' regulations governing
appraisals.
In December 1992, Congress confirmed that the agencies may set a
threshold level below which the services of state certified or licensed
appraisers are not required in connection with federally related
transactions if the agencies determine in writing that the threshold
does not represent a threat to the safety and soundness of financial
institutions. See Housing and Community Development Act of 1992, Public
Law 102-550, section 954 (amending 12 U.S.C. 3341).
The agencies jointly published a proposed rule to amend their
appraisal regulations on June 4, 1993. See 58 FR 31878. The agencies
published a notice of the availability of supplemental information
concerning the proposed rule and invited further comments on November
10, 1993. See 58 FR 59688.
The agencies are issuing this joint final rule under their
authority to issue rules to implement Title XI of FIRREA and each
agency's authority to prescribe rules and regulations to carry out its
responsibility to ensure that the institutions under its supervision
conduct their activities in accordance with safe and sound banking
principles. This final rule is intended to protect federal financial
and public policy interests and the safety and soundness of financial
institutions, while reducing duplication, costs and regulatory burden.
II. Comments on the Proposed Rule
A. Overview of Comments
Collectively, the agencies received over 19,000 comment letters on
the proposed rule. In response to the June 4th Notice of Proposed
Rulemaking, the agencies received comment letters from appraisers,
bankers, and others as shown in Table A. Comment letters received in
response to the November 10th Notice of Supplemental Information were
distributed as shown in Table B.
Table A.--Distribution of Comments Received in Response to June 4, 1993 Proposed Rule
----------------------------------------------------------------------------------------------------------------
Letters
Agency from Letters from bankers Letters Total
appraisers from others
----------------------------------------------------------------------------------------------------------------
OCC.......................................... 1660 161....................... 168 1989
Board........................................ 1608 259....................... 276 2143
FDIC......................................... 1574 376....................... 149 2099
OTS.......................................... 1298 40 (14 thrifts)........... 134 1472
----------------------------------------------------------------------------------------------------------------
Table B.--Distribution of Comments Received in Response to November 10, 1993 Notice of Supplemental Information
----------------------------------------------------------------------------------------------------------------
Letters
Agency from Letters from bankers Letters Total
appraisers from others
----------------------------------------------------------------------------------------------------------------
OCC.......................................... 1878 659....................... 242 2779
Board........................................ 1994 519....................... 528 3041
FDIC......................................... 1818 1142...................... 467 3427
OTS.......................................... 1644 57 (22 thrifts)........... 502 2203
----------------------------------------------------------------------------------------------------------------
The agencies have reviewed and considered all comments concerning
the proposed rule. The agencies discuss general comments immediately
below. Responses to the agencies' specific requests for comment and
comments concerning specific amendments to the appraisal regulation are
discussed in the section-by-section analysis.
B. General Comments on the Proposed Rule
Regulated institutions generally endorsed the proposed changes to
the appraisal regulations, though a small number of savings
associations, banks, and other commenters opposed changing the
regulation. Appraisers almost unanimously opposed changing the
threshold, and a large number of appraisers opposed the business loan
exemption. However, appraisers commented favorably on other parts of
the proposed rule.
A large number of appraisers commented that the proposed changes
would lead to abuses that caused savings associations to fail in the
mid-to-late 1980s and that the changes would violate the intent of
Congress. In the experience of the agencies, and in the opinion of
studies conducted on the failures of the 1980s, abuses were related to
real estate acquisition or development projects and larger loans. The
regulations issued today continue to require appraisals for these
transactions. Moreover, the regulations fully comply with the intent of
Congress by continuing to protect federal financial and public policy
interests in real estate-related financial transactions as well as the
safety and soundness of financial institutions.
Regulated institutions and appraisers have over three years
experience with the appraisal regulations and have urged changes in the
regulations to improve credit availability and reduce duplication,
costs, and regulatory burden. Some commenters, focusing on the proposed
threshold, opposed changing the regulations because they believed that
additional time was needed to study the effect of the existing
regulations. Delaying the issuance of the final rule would deny
regulated institutions, appraisers, and borrowers the benefits of these
changes. To the extent that subsequent events demonstrate that
additional changes are needed, the agencies can further amend the
regulations.
One appraisal organization suggested that several of the proposed
exemptions should be replaced with guidelines regarding when to obtain
Title XI appraisals. Because regulated institutions and appraisers can
become liable for substantial penalties for violating the regulation,
the agencies believe that it benefits regulated institutions,
appraisers, and the public for the agencies to identify categories of
exempt transactions in the regulation. However, the agencies intend to
provide supplemental information about the appraisal and evaluation
practices of regulated institutions in guidance.
Some commenters stated that they were denied an opportunity to
comment on the supplemental information identified in the November 10th
notice because the materials were available only in Washington, DC, and
the comment period was 30 days. The agencies believe that the public
procedures on the proposed amendments to the appraisal regulations
fully complied with the requirements of the Administrative Procedure
Act and accorded the public a full opportunity to participate in the
rulemaking.
The November 10th notice explained that the supplemental materials
were available from each of the agencies. In accordance with
established procedures, all agencies mailed copies of those materials
to any person requesting them, as well as having the documents
available for review at each agency.
The agencies also believe the 30-day comment period was appropriate
for the second comment period on the proposed amendments. The notice of
supplemental information requested comment on materials that dealt
almost exclusively with the appraisal threshold. As shown in Table B
above, more than 11,000 comment letters were received in response to
the November 10th notice.
III. Section-by-Section Analysis
Sec. ____.2 Definitions.
(d) Business Loan
The agencies 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. The definition is used in connection with the
exemption for business loans of $1 million or less that are not
dependent on the sale of, or rental income derived from, real estate as
the primary source of repayment.
Commenters suggested that the agencies amend the definition of
business loan to include loans to individuals for business purposes and
to permit use of the exemption when individuals lease real estate to a
related business. Loans to individuals are included in the definition
of business loan as loans to sole proprietorships and other business
entities. This exemption does not apply to loans to individuals that
are consumer or personal loans. Therefore, the agencies do not believe
that it is necessary to amend the definition.
(h) Real Estate or Real Property
The Board is adding a definition of ``real estate'' and ``real
property'' to Sec. 225.62 of its regulation. The Board proposed this
amendment to incorporate the definition of real estate and real
property employed by the other agencies. That definition specifically
excludes mineral rights, timber rights, growing crops, water rights,
and similar interests.
Title XI of FIRREA does not define ``real estate'' or ``real
property'' nor does the context in which these terms are used suggest
that the terms are intended to have different technical meanings. See
55 FR 27762 (July 5, 1990).
The Board used ``real property'' and ``real estate''
interchangeably throughout its appraisal rule to mean interests in an
identified parcel or tract of land and improvements. However, the Board
did not intend these terms to include mineral rights, timber rights, or
growing crops when they are considered separately from the parcel or
tract of land. Valuation of such interests generally requires the
services of a professional other than a real estate appraiser.
To clarify this distinction, the Board has amended its regulation
to define ``real property'' and ``real estate'' for purposes of the
appraisal regulation as an identified parcel or tract of land,
including improvements, easements, rights of way, undivided or future
interests and similar rights in a tract of land, but excluding mineral
rights, timber rights, or growing crops.
Few commenters expressed an opinion on this proposed change. Those
few commenters who opposed the definition stated that timber and
growing crops should not be excluded from the definition of real estate
in that the value of such items is tied to the value of the land.
Comments opposing this definition were generally from appraisers who
perform farm and timber appraisals.
In many states, minerals, timber, and growing crops that have not
been severed from the land are considered interests in real estate or
real property. Consequently, if mineral rights are collateral for a
loan in one of those states, a question arises whether the institution
must obtain a real estate appraisal of the parcel or tract of land to
which the mineral rights are attached but in which the institution has
no interest.
The Board's final rule clarifies that regulated institutions are
not required to obtain appraisals of the parcel of land to which
mineral rights, or similar severable interests in real estate are
attached, if the transaction only involves the severable interest
rather than the parcel or tract of land. Where mineral rights, timber
rights, or growing crops, and the associated parcel or tract of land,
are the subject of a real estate-related financial transaction, the
services of a licensed or certified appraiser would be required unless
the transaction is otherwise exempt.
In addition, the contribution of relevant mineral rights, timber
rights, or growing crops should be included when appraising a parcel of
land which possesses any of these features. However, valuation of these
interests would not be required if they are not part of the transaction
or if they are not relevant to the analyses which the appraiser needs
to perform to arrive at an estimate of value for the parcel or tract of
land.
Sec. ____.3(a) Appraisals required
(1) Threshold
The agencies proposed an increase from $100,000 to $250,000 in the
threshold at or below which a Title XI appraisal is not required, and
specifically asked commenters whether a $250,000 or some other
threshold would be appropriate. In addition, the agencies requested
information on loss experience of depository institutions for loans
greater than $250,000 and loans of $250,000 or less. On November 10,
1993, the agencies made available supplemental information on the
proposed rule and extended the comment period for 30 days in order to
allow commenters to consider and comment on the information. The
supplemental information related primarily to the proposed increase in
the threshold.
A majority of the commenters addressed the threshold issue. Almost
all of the commenters opposed to the increase were appraisers, while
almost all of the commenters in favor of the increase were depository
institutions.
Most of those opposed stated as the basis for their opposition that
an increase in the threshold would cause substantial losses for
depository institutions, and thereby for the deposit insurance funds.
To support this view, commenters generally cited the thrift failures of
the 1980s and asserted that an increase in the threshold would lead to
the same result.
A total of 74 comment letters provided data on loss experience. The
institutions providing the data varied in size, and included large
regional multi-bank holding companies, as well as small banks. This
data is discussed below.
For the reasons set forth below, the agencies have decided to raise
the threshold from $100,000 to $250,000. Such an increase will benefit
consumers and lenders and will not threaten the safety and soundness of
financial institutions, particularly as an evaluation will be required
for all loans exempt under the threshold.
Benefits for Consumers and Lenders of an Increase in the Threshold.
Many commenters stated that an increase in the threshold would benefit
consumers and lenders. Numerous bank and thrift commenters pointed to
the cost and time needed in order to obtain an appraisal as an
impediment to lending. The appraisal was cited by several commenters as
the most important factor causing delay in small business lending, and
the cost of the appraisal was described as high, especially for
commercial borrowers. Commenters reported that appraisal fees for
commercial transactions between $100,000 and $250,000 could cost 5
percent of the loan amount to the borrower. Banks and thrifts also
commented that increasing the threshold would reduce regulatory burden
associated with making loans below $250,000. Many appraisers, however,
commented that appraisal costs have remained relatively steady.
Many appraisers also stated that appraisals by certified or
licensed appraisers are necessary to protect the consumer. The agencies
believe that this assertion mischaracterizes the role of the
institution's determination of collateral value in a typical consumer
transaction. The regulated institution obtains the appraisal or
evaluation as part of its loan underwriting process in order to make
certain that it is adequately secured. Any appraisal ordered by a
financial institution is not designed, and generally comes too late, to
assist the consumer in negotiating a contract price. In a purchase of
real estate, the purchase offer is generally made before financing is
sought and the financial institution orders an appraisal. Therefore,
the appraisal represents an after-the-fact cost. Further, even when a
Title XI appraisal is not required, nothing prevents a consumer from
independently obtaining an appraisal by a licensed or certified
appraiser for the consumer's own use in the negotiating process.
Moreover, the agencies' rules require an institution to obtain an
appropriate evaluation of the real property collateral for transactions
below the threshold, and that evaluation would be available to the
consumer.
The agencies believe that many of the concerns about consumer
protection are addressed under statutory and regulatory programs other
than Title XI of FIRREA, which focuses on bank and thrift safety and
soundness.
The Real Estate Settlement Procedures Act (RESPA) establishes
procedures for lenders to disclose to consumers the charges for a
variety of settlement services, including appraisals and evaluations.
To comply with the letter and intent of the Board's Regulation B
(implementing the Equal Credit Opportunity Act), regulated institutions
must either disclose to the borrower the right to receive a copy of the
documents the lender uses to value the collateral in an application for
a loan secured by a dwelling, regardless of whether the documents
constitute a Title XI appraisal or evaluation, or, as a matter of
course provide the borrower with the appraisal or evaluation. Thus, to
the extent that a borrower benefits from knowing the value the lender
places on the property the borrower has contracted to purchase or
pledged as collateral, the borrower should be able to benefit from that
knowledge whether it is in the form of a Title XI appraisal or an
evaluation.
Furthermore, although such a disclosure is not required by RESPA,
Regulation B, or Title XI, the agencies believe that a regulated
institution should advise consumers whether the institution intends to
have a licensed or certified appraiser prepare the estimate of value.
This should be done early enough in the loan application process to
allow the consumer to make an informed decision that the intended
method of estimating the real estate's value meets his or her needs.
Effects on Safety and Soundness of Financial Institutions. The
agencies have concluded that a $250,000 threshold would not threaten
the safety and soundness of financial institutions.
Benefits to Safety and Soundness. The agencies believe that the
increase in the threshold will have affirmative benefits for safety and
soundness. A decrease in appraisal requirements should relieve
regulatory burden for banks and thrifts and thereby improve their
competitiveness with non-regulated lenders. Appraisal costs represent a
significant expense for certain small loans, making such lending less
attractive to a potential borrower or less profitable for the lender.
Numerous comments from lenders supported this conclusion. The problem
is particularly troubling for lenders in small towns, who must pay a
premium for a licensed or certified appraiser to visit the town. A GAO
survey of bankers in connection with a study of small business lending
revealed that the minimum cost to perform the necessary appraisal on
commercial real estate property used as collateral for small business
loans was approximately $3,000.1 See GAO Report GGD-93-121, Bank
Regulation: Regulatory Impediments to Small Business Lending Should Be
Removed (September 1993).
---------------------------------------------------------------------------
\1\The GAO noted that a survey performed by the American Bankers
Association reflected a lower average cost.
---------------------------------------------------------------------------
Experience with the $100,000 Threshold. The Board has had a
$100,000 threshold in place since August 1990, and the other agencies
have had a $100,000 threshold since March or April 1992. The experience
of the agencies has demonstrated that the $100,000 threshold has posed
no risk to safety and soundness.
A survey by each of the agencies of its senior examination staff
indicates that over a period of many years, with a few possible
exceptions,2 no bank or thrift has failed or suffered significant
losses as a result of appraisal problems with loans under $100,000 or
even up to $250,000. Each of the regional representatives of the Board,
the FDIC, and the OCC supported adoption of the $250,000 threshold as
consistent with safety and soundness. Representatives of the OTS
suggested that the threshold should only apply to healthier thrifts. As
described below, this concern has been addressed by the agencies in the
final regulation.
---------------------------------------------------------------------------
\2\The 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.
---------------------------------------------------------------------------
The $250,000 threshold was also supported by the Conference of
State Bank Supervisors (CSBS), the professional association for state
officials who supervise and regulate state-chartered commercial and
savings banks. The CSBS concluded that the increased threshold would
reduce unnecessary costs and would not represent a threat to the safety
and soundness of financial institutions.
Numerous bank and thrift commenters also reported that their
experience with the $100,000 threshold had been good. Moreover,
commenters opposed to the increased threshold did not identify
institutions that had failed or suffered significant losses because of
the existence of the $100,000 threshold.
The agencies believe that low loss experience with a $100,000
threshold provides justification for an increase in the threshold to
$250,000.
Data Indicate Similarities Between the $100,000 Threshold and
$250,000 Threshold. A substantial body of evidence provides strong
reasons to believe that exempting loans between $100,000 and $250,000
from the Title XI appraisal requirement will not present materially
greater risk than the prior exemption for loans under $100,000.
Data from the commercial bank Consolidated Reports of Condition and
Income (Call Reports) for year-end 1992 show that approximately 53
percent of the dollar volume of all real estate-secured loans of all
sizes in the commercial banking industry are loans secured by 1-to-4
family residential 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 1-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 1-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 will 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 1-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 1-to-4 family loans, the agencies believe that 1-to-4 family loans
will be the largest block of loans exempted by the increase in the
threshold.
The increase in 1-to-4 family residential real estate loans
exempted by the $250,000 threshold will 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 rate3
for all commercial bank loans secured by 1-to-4 family real estate was
0.23 percent; for thrifts, the net charge-off rate for loans secured by
1-to-4 family residential real estate was 0.22 percent. Low loss rates
for 1-to-4 family residential real estate loans predate enactment of
Title XI; for example, in 1991, when the great majority of 1-to-4
family loans had been originated prior to implementation of Title XI in
August 1990, the charge-off rate for 1-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).
---------------------------------------------------------------------------
\3\ The net loan charge-off rate is determined by taking the
dollar amount of gross losses, subtracting the amount recovered, and
dividing the result by the average of outstanding loans.
---------------------------------------------------------------------------
Beginning June 30, 1993, commercial banks and thrifts are required
to report annually the number and dollar amount 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 estate-secured 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 will 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 will be exempted by the
raised threshold.
Although the increase in the threshold will increase the dollar
volume of exempt transactions, the agencies believe that the quality of
loans and lending practices of banks and thrifts will 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 will be low. For 1992, the commercial bank loss
rate for farm loans was .23 percent (approximately the same loss rate
as for 1-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 non-residential 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 will 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 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
---------------------------------------------------------------------------
\4\As noted below, the agencies may require an appraisal for
loans between $100,000 and $250,000 (not otherwise subject to an
exemption) when an institution is in troubled condition, and that
troubled condition is attributable to underwriting problems in the
institution's real estate loan portfolio.
---------------------------------------------------------------------------
Second, even though a bank or thrift will not generally be required
to obtain a Title XI appraisal for real estate-secured 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 will 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 will 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 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
are important to the decision to lend and the failure to obtain such an
appraisal will lead to higher loss rates, then banks and thrifts would
presumably have a strong incentive to use appraisals. As several
commenters noted, institutions will 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 will 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 1-to-4 family mortgages
originated in the United States. In addition to the 63 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 will 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 estate-secured 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.
----------------------------------------------------------------------------------------------------------------
Loss on
Outstanding loans\1\
Number of principal (annual net Loss rate\3\
Real estate-secured loans Size of loans loans amount of charge- (calculated)
loans\1\(12/ offs)\2\(12/ (percent)
31/92) 31/92)
----------------------------------------------------------------------------------------------------------------
Loans secured by 1-to-4 Loans greater than $250,000 7,151 3,169,918 4,129 0.13
family residential real
estate.
Loans of $250,000 or less.. 524,137 22,240,821 23,773 .11
Loans secured by commercial Loans greater than $250,000 25,344 28,315,961 372,706 1.32
real estate.
Loans of $250,000 or less.. 67,469 5,131,866 36,751 0.72
----------------------------------------------------------------------------------------------------------------
\1\Dollars rounded to thousands.
\2\Annual net charge-offs are determined 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 annual 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 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 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.
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 estate-secured
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, while 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 of $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 will 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 will 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.
---------------------------------------------------------------------------
\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.)
---------------------------------------------------------------------------
Reassessment of 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 will 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 will 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 will 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 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 well 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 and
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 the 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 of the real estate. This amendment will 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 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 million 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 estate-secured loan for one project,
in which the lender has taken a security interest, will 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 the 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. Therefore, 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 estate-secured 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 threat 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
full-scope, on-site examination, each agency will 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 will 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 well as information on
the significance, by loan size, of losses on loans secured by 1-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 could present more serious risks for small financial
institutions. Respondents to the survey identified loans above $1
million secured by non-residential 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
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.
----------------------------------------------------------------------------------------------------------------
Loss on
Outstanding loans\2\
Number of principal (annual net Loss rate\4\
Real estate-secured loans\1\ loans (12/ amount of charge- (calculated)
31/92) loans\2\ offs)\3\ (percent)
(12/31/92) (12/31/92)
----------------------------------------------------------------------------------------------------------------
All real estate-secured business loans..................... 90,410 17,488,561 178,237 1.02
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.................. 59,595 8,008,422 32,680 0.41
----------------------------------------------------------------------------------------------------------------
\1\None 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 dividing total annual net charge-offs by the total outstanding principal balance.
Limited to Business Loans of $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 the 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 estate-related 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 will 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 of 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 commenters 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
well recognized in accounting practice. Consistent with the distinction
in accounting for operating and capital leases, the agencies have
concluded that, in general, operating 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
will continue to require regulated institutions to obtain appraisals in
connection with transactions that involve capital leases.
(7) Renewals, Refinancings, and Other Subsequent Transactions
The agencies are adopting a modified version of the proposed
exemption for renewals, refinancings, and other subsequent transactions
at the lending institution to simplify the conditions under which the
exemption applies. Under the final rule, regulated institutions will be
permitted to renew or refinance existing extensions of credit without
first obtaining a Title XI appraisal for two general classes of
transactions.
First, a subsequent transaction is exempt provided there has been
no obvious and material change in market conditions or physical aspects
of the property that threatens the adequacy of the institution's real
estate collateral protection after the transaction, even with the
advancement of new funds. This modification to the proposed rule is
intended to emphasize that an institution must consider the effect of
changes in market conditions and physical aspects of the property on
its collateral protection when it advances funds in excess of
reasonable closing costs as part of a renewal, refinancing, or other
subsequent transaction.
Second, a subsequent transaction is exempt provided that no new
monies are advanced other than funds necessary to cover reasonable
closing costs. The proposed rule did not explicitly address this class
of transactions.
The agencies note that this exemption would not be applicable if a
borrower refinances a mortgage with a new lender.
Prior to the adoption of this amendment, the agencies did not
require a Title XI appraisal for a subsequent transaction that resulted
from a maturing extension of credit if:
(i) The borrower had performed satisfactorily according to the
original terms;
(ii) No new monies were advanced other than as previously agreed;
(iii) The credit standing of the borrower had not deteriorated; and
(iv) There had been no obvious and material deterioration in market
conditions or physical aspects of the property which would threaten the
institution's collateral protection.
In the agencies' experience, the original exemption may not have
provided sufficient flexibility to regulated institutions and borrowers
when a transaction was refinanced before its maturity. This is
particularly true for refinancings to reduce a loan's interest rate.
Further, bankers questioned whether a Title XI appraisal would be
required for a refinancing where the borrower's payment history is
sound and future repayment prospects are good, but the borrower's
collateral has declined in value as a result of a general market
decline. The agencies believe that not requiring a Title XI appraisal
in such refinancings is consistent with safe and sound banking
practices because the amount of the loan (except for the addition of
reasonable closing costs) and the lender's collateral remain the same,
and the lower loan payments may improve the ability of the borrower to
repay the loan without adversely affecting the likelihood that the
lender will be repaid.
If a subsequent transaction that includes the advancement of
additional funds does not result in the level of collateral protection
being threatened, despite a change in the market conditions or physical
aspects of the property, a Title XI appraisal need not be obtained. For
example, a loan originally extended with a low loan-to-value ratio
could be renewed and additional funds advanced above closing costs
without a Title XI appraisal, even though market conditions have
deteriorated, if the regulated institution, after verifying the value
of the collateral, concludes that the new loan-to-value ratio will
provide adequate protection.
Similarly, if a borrower is refinancing a loan where the real
estate collateral is located in a market that has experienced
significant appreciation, the institution should ensure that the
advancement of any new monies is based on substantiated appreciation in
value. An institution can advance funds against an appreciated property
whose future use is consistent with the use described in the original
appraisal. If an institution makes a substantial advance that could
possibly threaten the institution's collateral protection, it should
consider the need to obtain a new Title XI appraisal. This exemption
would not be available if a material change in the use of the property
produces the reported appreciation, such as when property is rezoned
for a different use.
While a Title XI appraisal is not required for transactions that
qualify for this exemption, regulated institutions are required to
obtain an appropriate evaluation of the collateral in accordance with
the agencies' guidelines. The level of analysis and information
included in the evaluation should be more detailed as the institution's
exposure in the transaction increases.
Several commenters raised questions about the applicability of this
exemption to loan restructurings and workouts. In such situations, the
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.
(8) Transactions Involving Real Estate Notes
The agencies are adopting a modified version of the proposed
exemption for transactions involving real estate-secured loans, loan
participations, pooled loans, interests in real property, and mortgage-
backed securities. The amendment clarifies when regulated institutions
may engage in secondary mortgage market transactions involving real
estate loans and other interests in real estate without obtaining a new
Title XI appraisal.
The exemption adopted by the agencies clarifies and allows
regulated institutions to purchase, sell, invest in, exchange, or
extend credit secured by, real estate-secured notes or interests in
real estate without obtaining a new Title XI appraisal if each note or
real estate interest is supported by an appraisal that met the
regulatory appraisal requirements for the institution at the time the
real estate-secured note was originated. The prior exemption referred
to purchases of these interests only. In addition, the agencies have
changed the text of the final rule to more clearly state the appraisal
requirements that the underlying notes must meet.
The exemption serves federal public policy interests by helping to
ensure that the appraisal regulation does not unnecessarily inhibit
secondary mortgage market transactions that involve these real estate-
secured loans and real estate interests. The exemption makes clear that
a regulated institution need not obtain new Title XI appraisals for
loans originated before the effective date of the agencies' regulations
in order to buy or sell them in the secondary mortgage market.
The agencies have concluded that the transactions exempted by this
provision 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 the suitability of
purchasing or investing in existing real estate-secured loans and real
estate interests. Typically, these transactions will have a history of
performance or will 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.
Some commenters stated that this exemption raised safety and
soundness concerns because exempt transactions may have appraisals
performed before Title XI appraisal requirements went into effect.
Because regulated institutions will have other sources of information
about the performance of these seasoned loans, the agencies believe
that new Title XI appraisals are not necessary to ensure the safety and
soundness of these exempt transactions.
Some commenters urged the agencies to expand the proposed
exemption, or adopt new exemptions, to eliminate the Title XI appraisal
requirement for all mortgage-backed securities. In addition, commenters
suggested that the agencies exempt residential mortgage warehousing
loans (loans to residential mortgage lenders who ultimately sell the
mortgages to the secondary mortgage market), transactions with credit
ratings by established rating agencies, or transactions that were not
subject to the agencies' jurisdiction at origination.
The agencies believe that to protect federal financial and public
policy interests, the underlying loans or real estate interests should
have appraisals that meet the requirements that were applicable to
regulated institutions when the underlying transactions were
originated. For this reason, the agencies are not adopting the
suggestions for exempting additional categories of transactions under
this provision.
Commenters also suggested that the agencies should permit a
regulated institution that purchases a pool of loans, invests in
mortgage-backed securities, or secures a mortgage warehousing loan with
real estate notes, to confirm that the loans have appropriate
appraisals without reviewing the appraisal for each underlying loan.
The agencies agree that it should not be necessary to review the
appraisal for each underlying loan in all cases. The agencies believe
that regulated institutions may use sampling 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 investment-grade, 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 Mac
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 will 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
underwriting requirements of the federal insurer or guarantor,
including real estate appraisal requirements, in order to receive the
insurance or guarantee. The agencies believe that the standards of
these loan programs are sufficient to protect the safety and soundness
of regulated financial institutions. Therefore, it is unnecessary to
require that these transactions also meet the overlapping requirements
of the banking and thrift agencies' appraisal regulations.
Some commenters suggested that the agencies should limit the
application of this exemption to federal loan programs with appraisal
requirements that conform to the Uniform Standards of Professional
Appraisal Practice (USPAP) and require the use of licensed or certified
appraisers. In addition, commenters raised concerns that some loan
programs may not have appraisal standards and asked the agencies to
list those loan programs to which this exemption applies.
OMB has directed federal agencies with government guaranteed or
insured loan programs to conduct real estate appraisal programs in a
manner to reduce default risks to the federal government. Specifically,
these federal agencies are required to ensure that all real estate
credit transactions over $100,000 have an appraisal performed by a
state licensed or certified appraiser and that the appraisal be
conducted under appraisal standards that are consistent with the
USPAP.6
---------------------------------------------------------------------------
\6\OMB Circular A-129, ``Policy for Federal Programs and Non-Tax
Receivables,'' revised January 1993.
---------------------------------------------------------------------------
The agencies believe that the authority of OMB to ensure that
federal agencies adopt appropriate real estate appraisal standards
eliminates the need to list specific loan programs for which this
exemption applies. Moreover, OMB is monitoring the implementation of
those appraisal programs and has required any federal agency not having
appraisal standards and practices in place to submit an implementation
plan and schedule to OMB. If the agencies later determine that a
particular federal loan program poses a threat to the safety and
soundness of regulated institutions, the agencies have retained the
authority to require appraisals in such situations.
This exemption also applies to certain other real estate-related
financial transactions involving government agencies or government
sponsored agencies. For example, the U.S. Postal Service typically
contracts with a developer to erect and lease a special purpose
building for the Postal Service's use. Applicable contract procedures
normally require only cost estimates when determining who is awarded
the contract. The Postal Service also enters into a lease with the
developer. The lease payments, which are assigned to the lender, are
sufficient to repay the loan. Because the developer is complying with
applicable contract procedures, which require only cost estimates, it
would be an unnecessary burden for the developer or the lender to also
obtain a Title XI appraisal.
(10) Transactions That Meet the Qualifications for Sale to a United
States Government Agency or Government Sponsored Agency
The agencies are adopting a modified version of the proposed
exemption for transactions that meet the qualifications for sale to any
U.S. government agency or government sponsored agency. By referring to
any U.S. government agency or sponsored agency, the exemption includes
not only loans sold to federal agencies, but also any transaction that
meets the qualifications for sale to agencies established or chartered
by the federal government to serve public purposes specified by the
U.S. Congress. These government sponsored agencies are:
Banks for Cooperatives.
Federal Agricultural Mortgage Corporation (Farmer Mac).
Federal Farm Credit Banks.
Federal Home Loan Banks (FHLBs).
Federal Home Loan Mortgage Corporation (Freddie Mac).
Federal National Mortgage Association (Fannie Mae).
Student Loan Marketing Association (Sallie Mae).
Tennessee Valley Authority (TVA).
This exemption permits regulated institutions to originate, hold,
buy, or sell transactions that meet the qualifications for sale to any
U.S. government agency and the above listed government sponsored
agencies without obtaining a separate appraisal conforming to the
agencies' regulations.
The exemption contains a modification to the original proposal that
permits regulated institutions to accept appraisals performed in
accordance with the appraisal standards of Fannie Mae and Freddie Mac
for any residential real estate transaction, both single family and
multifamily, regardless of whether the loan is eligible to be purchased
by Fannie Mae or Freddie Mac. This modification clarifies that a
regulated institution's ``jumbo'' or other residential real estate
loans that do 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, will qualify for this
exemption.
This exemption expands the prior exception to the regulations of
the OCC, FDIC, and OTS for transactions involving 1-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 1-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 1-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 will 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, will 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 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.
Sec. ____.3(b) Evaluations Required
The agencies are adopting a modified version of the proposed
amendment concerning evaluations.
The final rule requires regulated institutions to obtain
evaluations for real estate-related financial transactions that do not
require Title XI appraisals because they: (i) Are below the threshold
level; (ii) qualify for the exemption for business loans of $1 million
or less where income from real estate is not the primary source of
repayment; or (iii) qualify for the exemption for subsequent
transactions resulting from an existing extension of credit. The
agencies changed the text of this amendment to make clear that
institutions must still obtain evaluations for these exempt
transactions. The regulation does not require the institution to have
an evaluation if the transaction qualifies for an exemption other than
these three exemptions.
An evaluation provides a general estimate of the value of real
estate and need not meet the detailed requirements of a Title XI
appraisal. An evaluation must provide appropriate information to enable
the institution to make a prudent decision regarding the transaction.
Because institutions must tailor evaluations to provide appropriate
information for different types of transactions, the content and form
of evaluations will vary for different transactions.
In their prior regulations, the OCC, Board and OTS required
evaluations for all real estate-related financial transactions that do
not require appraisals. The FDIC's prior regulation stated that
supervisory guidelines, general banking practices or other prudent
standards may require an appropriate valuation of real property
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 estate-related 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
independence of persons performing evaluations. Some commenters stated
that only licensed or certified appraisers were qualified to perform
evaluations.
The agencies believe that safety and soundness principles require
institutions to obtain an understanding of, and document, the value of
the real estate involved in transactions that: (i) Are below the
threshold level; (ii) qualify for the exemption for business loans of
$1 million or less where income from real estate is not the primary
source of repayment; or (iii) involve an existing extension of credit.
In these cases, while a Title XI appraisal is not required to determine
the value of the real estate, the agencies have concluded that
regulated institutions must have an estimate of the real estate's value
as a matter of safe and sound banking practice. For this reason, the
agencies have decided that institutions should not have the discretion
to decide whether they will obtain evaluations for these transactions.
However, institutions will have discretion, within the limits of safe
and sound banking practice as indicated in agency guidance, to
determine the content and form of the evaluation.
While licensed or certified appraisers may be qualified to perform
evaluations, the agencies do not believe these appraisers are the only
persons that can render a competent estimate of the value of real
estate for exempt transactions. Requiring institutions to procure the
services of a licensed or certified appraiser to prepare evaluations or
Title XI appraisals for exempt transactions could impose significant
additional costs on lenders and borrowers without significantly
increasing the safety and soundness of the transactions. However, the
agencies' regulations do not, as 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 the 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.
Sec. ____.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 will have to obtain
appraisals below the threshold will 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, the 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.
Sec. ____.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 III 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 duty 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.
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 will 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.
The 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.
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.
Sec. ____.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.
Sec. ____.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 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.
Sec. ____.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 services 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 commenter 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 non-regulated 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.
IV. Waiver of Delayed Effective Date
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.
V. Paperwork Reduction Act
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 Paperwork Reduction Act (44
U.S.C. 3504(h)) under control number 1557-0190. 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
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 will 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 will
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.
FDIC Paperwork Reduction Act
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 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 will 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
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 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
Mortgages, National banks, Real estate appraisals, Real estate
lending standards, Reporting and recordkeeping requirements.
12 CFR Part 225
Administrative practice and procedure, Banks, banking, Holding
companies, Reporting and recordkeeping requirements, Securities.
12 CFR 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.
COMPTROLLER OF THE CURRENCY
12 CFR Chapter I
Authority and Issuance
For the reasons set out in the joint preamble, part 34 of chapter I
of title 12 of the Code of Federal Regulations is amended as set forth
below:
PART 34--REAL ESTATE LENDING AND APPRAISALS
1. The authority citation for part 34 continues to read as follows:
Authority: 12 U.S.C. 1 et seq., 93a, 371, 1701j-3, 1828(o), and
3331 et seq.
2. In Sec. 34.42, existing paragraphs (d) through (l) are
redesignated as paragraphs (e) through (m), respectively, and a new
paragraph (d) is added to read as follows:
Sec. 34.42 Definitions.
* * * * *
(d) Business loan means a loan or extension of credit to any
corporation, general or limited partnership, business trust, joint
venture, pool, syndicate, sole proprietorship, or other business
entity.
* * * * *
3. In Sec. 34.43, paragraph (a) is revised, paragraphs (b) through
(d) are redesignated as paragraphs (d) through (f), respectively, and
new paragraphs (b) and (c) are added to read as follows:
Sec. 34.43 Appraisals required; transactions requiring a State
certified or licensed appraiser.
(a) Appraisals required. An appraisal performed by a State
certified or licensed appraiser is required for all real estate-related
financial transactions except those in which:
(1) The transaction value is $250,000 or less;
(2) A lien on real estate has been taken as collateral in an
abundance of caution;
(3) The transaction is not secured by real estate;
(4) A lien on real estate has been taken for purposes other than
the real estate's value;
(5) The transaction is a business loan that:
(i) Has a transaction value of $1 million or less; and
(ii) Is not dependent on the sale of, or rental income derived
from, real estate as the primary source of repayment;
(6) A lease of real estate is entered into, unless the lease is the
economic equivalent of a purchase or sale of the leased real estate;
(7) The transaction involves an existing extension of credit at the
lending institution, provided that:
(i) There has been no obvious and material change in market
conditions or physical aspects of the property that threatens the
adequacy of the institution's real estate collateral protection after
the transaction, even with the advancement of new monies; or
(ii) There is no advancement of new monies, other than funds
necessary to cover reasonable closing costs;
(8) The transaction involves the purchase, sale, investment in,
exchange of, or extension of credit secured by, a loan or interest in a
loan, pooled loans, or interests in real property, including mortgaged-
backed securities, and each loan or interest in a loan, pooled loan, or
real property interest met OCC regulatory requirements for appraisals
at the time of origination;
(9) The transaction is wholly or partially insured or guaranteed by
a United States government agency or United States government sponsored
agency;
(10) The transaction either:
(i) Qualifies for sale to a United States government agency or
United States government sponsored agency; or
(ii) Involves a residential real estate transaction in which the
appraisal conforms to the Federal National Mortgage Association or
Federal Home Loan Mortgage Corporation appraisal standards applicable
to that category of real estate;
(11) The regulated institution is acting in a fiduciary capacity
and is not required to obtain an appraisal under other law; or
(12) The OCC determines that the services of an appraiser are not
necessary in order to protect Federal financial and public policy
interests in real estate-related financial transactions or to protect
the safety and soundness of the institution.
(b) Evaluations required. For a transaction that does not require
the services of a State certified or licensed appraiser under paragraph
(a)(1), (a)(5) or (a)(7) of this section, the institution shall obtain
an appropriate evaluation of real property collateral that is
consistent with safe and sound banking practices.
(c) Appraisals to address safety and soundness concerns. The OCC
reserves the right to require an appraisal under this subpart whenever
the agency believes it is necessary to address safety and soundness
concerns.
* * * * *
4. Section 34.44 is revised to read as follows:
Sec. 34.44 Minimum appraisal standards.
For federally related transactions, all appraisals shall, at a
minimum:
(a) Conform to generally accepted appraisal standards as evidenced
by the Uniform Standards of Professional Appraisal Practice (USPAP)
promulgated by the Appraisal Standards Board of the Appraisal
Foundation, 1029 Vermont Ave., NW., Washington, DC 20005, unless
principles of safe and sound banking require compliance with stricter
standards;
(b) Be written and contain sufficient information and analysis to
support the institution's decision to engage in the transaction;
(c) 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;
(d) Be based upon the definition of market value as set forth in
this subpart; and
(e) Be performed by State licensed or certified appraisers in
accordance with requirements set forth in this subpart.
5. In Sec. 34.45, paragraph (b) is revised to read as follows:
Sec. 34.45 Appraiser independence.
* * * * *
(b) Fee appraisers. (1) If an appraisal is prepared by a fee
appraiser, the appraiser shall be engaged directly by the regulated
institution or its agent, and have no direct or indirect interest,
financial or otherwise, in the property or the transaction.
(2) A regulated institution also may accept an appraisal that was
prepared by an appraiser engaged directly by another financial services
institution, if:
(i) The appraiser has no direct or indirect interest, financial or
otherwise, in the property or the transaction; and
(ii) The regulated institution determines that the appraisal
conforms to the requirements of this subpart and is otherwise
acceptable.
Appendix A to Subpart C [Removed]
6. Appendix A to subpart C, part 34, is removed.
Dated: March 31, 1994.
Eugene A. Ludwig,
Comptroller of the Currency.
FEDERAL RESERVE SYSTEM
12 CFR Chapter II
For the reasons set forth in the common preamble, the Board amends
12 CFR part 225 as set forth below:
PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL
(REGULATION Y)
1. The authority citation for part 225 is revised to read as
follows:
Authority: 12 U.S.C. 1817(j)(13), 1818, 1831i, 1843(c)(8),
1844(b), 1972(l), 3106, 3108, 3310, 3331-3351, 3907, and 3909.
2. Section 225.62 is amended by redesignating paragraphs (d)
through (f) and paragraphs (g) through (k) as paragraphs (e) through
(g) and paragraphs (i) through (m), respectively, and adding new
paragraphs (d) and (h) to read as follows:
Sec. 225.62 Definitions.
* * * * *
(d) Business loan means a loan or extension of credit to any
corporation, general or limited partnership, business trust, joint
venture, pool, syndicate, sole proprietorship, or other business
entity.
* * * * *
(h) Real estate or real property means an identified parcel or
tract of land, with improvements, and includes easements, rights of
way, undivided or future interests, or similar rights in a tract of
land, but does not include mineral rights, timber rights, growing
crops, water rights, or similar interests severable from the land when
the transaction does not involve the associated parcel or tract of
land.
* * * * *
3. Section 225.63 is amended by revising the section heading,
revising paragraph (a), redesignating paragraphs (b) and (c) as
paragraphs (d) and (e) and adding new paragraphs (b) and (c) to read as
follows:
Sec. 225.63 Appraisals required; transactions requiring a State
certified or licensed appraiser.
(a) Appraisals required. An appraisal performed by a State
certified or licensed appraiser is required for all real estate-related
financial transactions except those in which:
(1) The transaction value is $250,000 or less;
(2) A lien on real estate has been taken as collateral in an
abundance of caution;
(3) The transaction is not secured by real estate;
(4) A lien on real estate has been taken for purposes other than
the real estate's value;
(5) The transaction is a business loan that:
(i) Has a transaction value of $1 million or less; and
(ii) Is not dependent on the sale of, or rental income derived
from, real estate as the primary source of repayment;
(6) A lease of real estate is entered into, unless the lease is the
economic equivalent of a purchase or sale of the leased real estate;
(7) The transaction involves an existing extension of credit at the
lending institution, provided that:
(i) There has been no obvious and material change in market
conditions or physical aspects of the property that threatens the
adequacy of the institution's real estate collateral protection after
the transaction, even with the advancement of new monies; or
(ii) There is no advancement of new monies, other than funds
necessary to cover reasonable closing costs;
(8) The transaction involves the purchase, sale, investment in,
exchange of, or extension of credit secured by, a loan or interest in a
loan, pooled loans, or interests in real property, including mortgaged-
backed securities, and each loan or interest in a loan, pooled loan, or
real property interest met Board regulatory requirements for appraisals
at the time of origination;
(9) The transaction is wholly or partially insured or guaranteed by
a United States government agency or United States government sponsored
agency;
(10) The transaction either:
(i) Qualifies for sale to a United States government agency or
United States government sponsored agency; or
(ii) Involves a residential real estate transaction in which the
appraisal conforms to the Federal National Mortgage Association or
Federal Home Loan Mortgage Corporation appraisal standards applicable
to that category of real estate;
(11) The regulated institution is acting in a fiduciary capacity
and is not required to obtain an appraisal under other law; or
(12) The Board determines that the services of an appraiser are not
necessary in order to protect Federal financial and public policy
interests in real estate-related financial transactions or to protect
the safety and soundness of the institution.
(b) Evaluations required. For a transaction that does not require
the services of a State certified or licensed appraiser under paragraph
(a)(1), (a)(5) or (a)(7) of this section, the institution shall obtain
an appropriate evaluation of real property collateral that is
consistent with safe and sound banking practices.
(c) Appraisals to address safety and soundness concerns. The Board
reserves the right to require an appraisal under this subpart whenever
the agency believes it is necessary to address safety and soundness
concerns.
* * * * *
4. Section 225.64 is revised to read as follows:
Sec. 225.64 Minimum appraisal standards.
For federally related transactions, all appraisals shall, at a
minimum:
(a) Conform to generally accepted appraisal standards as evidenced
by the Uniform Standards of Professional Appraisal Practice promulgated
by the Appraisal Standards Board of the Appraisal Foundation, 1029
Vermont Ave., NW., Washington, DC 20005, unless principles of safe and
sound banking require compliance with stricter standards;
(b) Be written and contain sufficient information and analysis to
support the institution's decision to engage in the transaction;
(c) 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;
(d) Be based upon the definition of market value as set forth in
this subpart; and
(e) Be performed by State licensed or certified appraisers in
accordance with requirements set forth in this subpart.
5. Section 225.65 is amended by revising paragraph (b) to read as
follows:
Sec. 225.65 Appraiser independence.
* * * * *
(b) Fee appraisers. (1) If an appraisal is prepared by a fee
appraiser, the appraiser shall be engaged directly by the regulated
institution or its agent, and have no direct or indirect interest,
financial or otherwise, in the property or the transaction.
(2) A regulated institution also may accept an appraisal that was
prepared by an appraiser engaged directly by another financial services
institution, if:
(i) The appraiser has no direct or indirect interest, financial or
otherwise, in the property or the transaction; and
(ii) The regulated institution determines that the appraisal
conforms to the requirements of this subpart and is otherwise
acceptable.
Appendix A to Subpart G [Removed]
6. Appendix A to subpart G, part 225, is removed.
Dated: May 25, 1994.
William W. Wiles,
Secretary of the Board.
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Chapter III
Authority and Issuance
For the reasons set out in the joint preamble, part 323 of
subchapter B of chapter III of title 12 of the Code of Federal
Regulations is amended as set forth below:
PART 323-APPRAISALS
1. The authority citation for part 323 is revised to read as
follows:
Authority: 12 U.S.C. 1818, 1819 [``Seventh'' and ``Tenth''], and
3331-3352.
2. Section 323.2 is amended by redesignating paragraphs (d) through
(l) as paragraphs (e) through (m), respectively, and adding a new
paragraph (d) to read as follows:
Sec. 323.2 Definitions.
* * * * *
(d) Business loan means a loan or extension of credit to any
corporation, general or limited partnership, business trust, joint
venture, pool, syndicate, sole proprietorship, or other business
entity.
* * * * *
3. Section 323.3 is amended by revising the section heading and
paragraph (a), revising the phrase in paragraph (d) ``paragraphs (b)
and (c) of this section'' to read ``this section'', redesignating
paragraphs (b) through (d) as paragraphs (d) through (f), respectively,
and adding new paragraphs (b) and (c) to read as follows:
Sec. 323.3 Appraisals required; transactions requiring a State
certified or licensed appraiser.
(a) Appraisals required. An appraisal performed by a State
certified or licensed appraiser is required for all real estate-related
financial transactions except those in which:
(1) The transaction value is $250,000 or less;
(2) A lien on real estate has been taken as collateral in an
abundance of caution;
(3) The transaction is not secured by real estate;
(4) A lien on real estate has been taken for purposes other than
the real estate's value;
(5) The transaction is a business loan that:
(i) Has a transaction value of $1 million or less; and
(ii) Is not dependent on the sale of, or rental income derived
from, real estate as the primary source of repayment;
(6) A lease of real estate is entered into, unless the lease is the
economic equivalent of a purchase or sale of the leased real estate;
(7) The transaction involves an existing extension of credit at the
lending institution, provided that:
(i) There has been no obvious and material change in market
conditions or physical aspects of the property that threatens the
adequacy of the institution's real estate collateral protection after
the transaction, even with the advancement of new monies; or
(ii) There is no advancement of new monies, other than funds
necessary to cover reasonable closing costs;
(8) The transaction involves the purchase, sale, investment in,
exchange of, or extension of credit secured by, a loan or interest in a
loan, pooled loans, or interests in real property, including mortgaged-
backed securities, and each loan or interest in a loan, pooled loan, or
real property interest met FDIC regulatory requirements for appraisals
at the time of origination;
(9) The transaction is wholly or partially insured or guaranteed by
a United States government agency or United States government sponsored
agency;
(10) The transaction either:
(i) Qualifies for sale to a United States government agency or
United States government sponsored agency; or
(ii) Involves a residential real estate transaction in which the
appraisal conforms to the Federal National Mortgage Association or
Federal Home Loan Mortgage Corporation appraisal standards applicable
to that category of real estate;
(11) The regulated institution is acting in a fiduciary capacity
and is not required to obtain an appraisal under other law; or
(12) The FDIC determines that the services of an appraiser are not
necessary in order to protect Federal financial and public policy
interests in real estate-related financial transactions or to protect
the safety and soundness of the institution.
(b) Evaluations required. For a transaction that does not require
the services of a State certified or licensed appraiser under paragraph
(a)(1), (a)(5) or (a)(7) of this section, the institution shall obtain
an appropriate evaluation of real property collateral that is
consistent with safe and sound banking practices.
(c) Appraisals to address safety and soundness concerns. The FDIC
reserves the right to require an appraisal under this part whenever the
agency believes it is necessary to address safety and soundness
concerns.
* * * * *
4. Section 323.4 is revised to read as follows:
Sec. 323.4 Minimum appraisal standards.
For federally related transactions, all appraisals shall, at a
minimum:
(a) Conform to generally accepted appraisal standards as evidenced
by the Uniform Standards of Professional Appraisal Practice (USPAP)
promulgated by the Appraisal Standards Board of the Appraisal
Foundation, 1029 Vermont Ave., NW., Washington, DC 20005, unless
principles of safe and sound banking require compliance with stricter
standards;
(b) Be written and contain sufficient information and analysis to
support the institution's decision to engage in the transaction;
(c) 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;
(d) Be based upon the definition of market value as set forth in
this part; and
(e) Be performed by State licensed or certified appraisers in
accordance with requirements set forth in this part.
5. Section 323.5 is amended by revising paragraph (b) to read as
follows:
Sec. 323.5 Appraiser independence.
* * * * *
(b) Fee appraisers. (1) If an appraisal is prepared by a fee
appraiser, the appraiser shall be engaged directly by the regulated
institution or its agent, and have no direct or indirect interest,
financial or otherwise, in the property or the transaction.
(2) A regulated institution also may accept an appraisal that was
prepared by an appraiser engaged directly by another financial services
institution, if:
(i) The appraiser has no direct or indirect interest, financial or
otherwise, in the property or the transaction; and
(ii) The regulated institution determines that the appraisal
conforms to the requirements of this part and is otherwise acceptable.
Appendix IX [Removed]
6. Appendix A to Part 323 is removed.
By order of the Board of Directors.
Dated at Washington, DC, this 3rd day of May 1994.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Acting Executive Secretary.
OFFICE OF THRIFT SUPERVISION
12 CFR Chapter V
Authority and Issuance
Accordingly, for the reasons set forth in the joint preamble, the
Office of Thrift Supervision hereby amends chapter V, title 12 of the
Code of Federal Regulations, as set forth below:
Subchapter C--Regulations for Federal Savings Associations
PART 545--OPERATIONS
1. The authority citation for part 545 continues to read as
follows:
Authority: 12 U.S.C. 1462a, 1463, 1464, 1828.
2. Section 545.32 is amended by revising the first sentence of
paragraph (b)(2) to read as follows:
Sec. 545.32 Real estate loans.
* * * * *
(b) * * *
(2) Appraisals. A Federal savings association may make a real
estate loan only after an appraiser has submitted a signed appraisal of
the security property consistent with the requirements of part 564 of
this chapter. * * *
* * * * *
3. Section 545.103 is amended by revising the second sentence of
paragraph (b) to read as follows:
Sec. 545.103 Suretyship.
* * * * *
(b) * * * If real estate, the value must be established by a signed
appraisal consistent with the requirements of part 564 of this chapter.
* * *
* * * * *
Subchapter D--Regulations Applicable to All Savings Associations
PART 563--OPERATIONS
4. The authority citation for part 563 continues to read as
follows:
Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467, 1468, 1817,
1818, 3806; 42 U.S.C. 4106; Pub. L. 102-242, sec. 306, 105 Stat.
2236, 2335 (1991).
5. Section 563.170 is amended by revising paragraph (c)(1)(iv) to
read as follows:
Sec. 563.170 Examinations and audits; appraisals; establishment and
maintenance of records.
* * * * *
(c) * * *
(1) * * *
(iv) One or more written appraisal reports, prepared at the request
of the lender or its agent and for the lender's use, and signed prior
to the approval of such application (except in the case of an approval
conditioned upon obtaining an appraisal) that satisfies the
requirements of part 564 of this chapter: Provided, however, That
nothing in this paragraph (c)(1)(iv) shall apply to property
improvement loans, as that term is used in 24 CFR 200.167, insured by
the Federal Housing Administration for which that agency does not
require an appraisal or certification of valuation;
* * * * *
PART 564--APPRAISALS
6. The authority citation for part 564 is revised to read as
follows:
Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1828(m), 3331 et
seq.
7. Section 564.2 is amended by redesignating paragraphs (d) through
(l) as paragraphs (e) through (m), respectively, and by adding a new
paragraph (d) to read as follows:
Sec. 564.2 Definitions.
* * * * *
(d) Business loan means a loan or extension of credit to any
corporation, general or limited partnership, business trust, joint
venture, pool, syndicate, sole proprietorship, or other business
entity.
* * * * *
8. Section 564.3 is amended by revising paragraph (a),
redesignating paragraphs (b) through (d) as paragraphs (d) through (f),
and adding new paragraphs (b) and (c) to read as follows:
Sec. 564.3 Appraisals required; transactions requiring a State
certified or licensed appraiser.
(a) Appraisals required. An appraisal performed by a State
certified or licensed appraiser is required for all real estate-related
financial transactions except those in which:
(1) The transaction value is $250,000 or less;
(2) A lien on real estate has been taken as collateral in an
abundance of caution;
(3) The transaction is not secured by real estate;
(4) A lien on real estate has been taken for purposes other than
the real estate's value;
(5) The transaction is a business loan that:
(i) Has a transaction value of $1 million or less; and
(ii) Is not dependent on the sale of, or rental income derived
from, real estate as the primary source of repayment;
(6) A lease of real estate is entered into, unless the lease is the
economic equivalent of a purchase or sale of the leased real estate;
(7) The transaction involves an existing extension of credit at the
lending institution, provided that:
(i) There has been no obvious and material change in market
conditions or physical aspects of the property that threatens the
adequacy of the institution's real estate collateral protection after
the transaction, even with the advancement of new monies; or
(ii) There is no advancement of new monies, other than funds
necessary to cover reasonable closing costs;
(8) The transaction involves the purchase, sale, investment in,
exchange of, or extension of credit secured by, a loan or interest in a
loan, pooled loans, or interests in real property, including mortgaged-
backed securities, and each loan or interest in a loan, pooled loan, or
real property interest met OTS regulatory requirements for appraisals
at the time of origination;
(9) The transaction is wholly or partially insured or guaranteed by
a United States government agency or United States government sponsored
agency;
(10) The transaction either:
(i) Qualifies for sale to a United States government agency or
United States government sponsored agency; or
(ii) Involves a residential real estate transaction in which the
appraisal conforms to the Federal National Mortgage Association or
Federal Home Loan Mortgage Corporation appraisal standards applicable
to that category of real estate;
(11) The regulated institution is acting in a fiduciary capacity
and is not required to obtain an appraisal under other law; or
(12) The OTS determines that the services of an appraiser are not
necessary in order to protect Federal financial and public policy
interests in real estate-related financial transactions or to protect
the safety and soundness of the institution.
(b) Evaluations required. For a transaction that does not require
the services of a State certified or licensed appraiser under paragraph
(a)(1), (a)(5) or (a)(7) of this section, the institution shall obtain
an appropriate evaluation of real property collateral that is
consistent with safe and sound banking practices.
(c) Appraisals to address safety and soundness concerns. The OTS
reserves the right to require an appraisal under this part whenever the
agency believes it is necessary to address safety and soundness
concerns.
* * * * *
9. Section 564.4 is revised to read as follows:
Sec. 564.4 Minimum appraisal standards.
For federally related transactions, all appraisals shall, at a
minimum:
(a) Conform to generally accepted appraisal standards as evidenced
by the Uniform Standards of Professional Appraisal Practice (USPAP)
promulgated by the Appraisal Standards Board of the Appraisal
Foundation, 1029 Vermont Ave., NW., Washington, DC 20005, unless
principles of safe and sound banking require compliance with stricter
standards;
(b) Be written and contain sufficient information and analysis to
support the institution's decision to engage in the transaction;
(c) 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;
(d) Be based upon the definition of market value as set forth in
this part; and
(e) Be performed by State licensed or certified appraisers in
accordance with requirements set forth in this part.
10. Section 564.5 is amended by revising paragraph (b) to read as
follows:
Sec. 564.5 Appraiser independence.
* * * * *
(b) Fee appraisers. (1) If an appraisal is prepared by a fee
appraiser, the appraiser shall be engaged directly by the regulated
institution or its agent, and have no direct or indirect interest,
financial or otherwise, in the property or the transaction.
(2) A regulated institution also may accept an appraisal that was
prepared by an appraiser engaged directly by another financial services
institution, if:
(i) The appraiser has no direct or indirect interest, financial or
otherwise, in the property or the transaction; and
(ii) The regulated institution determines that the appraisal
conforms to the requirements of this part and is otherwise acceptable.
Sec. 564.8 [Amended]
11. Section 564.8 is amended by removing paragraph (d)(1), by
removing the colon following the introductory text of paragraph (d), by
revising the word ``Appraisals'' to read ``appraisals'' in paragraph
(d)(2), and by removing the paragraph designation (d)(2).
Appendix A [Removed]
12. Appendix A to Part 564 is removed.
Dated: April 6, 1994.
By the Office of Thrift Supervision.
Jonathan L. Fiechter,
Acting Director.
[FR Doc. 94-13312 Filed 6-6-94; 8:45 am]
BILLING CODE 4810-33-P, 6210-01-P, 6714-01-P, 6720-01-P