[Federal Register Volume 59, Number 190 (Monday, October 3, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-24327]


[[Page Unknown]]

[Federal Register: October 3, 1994]


_______________________________________________________________________

Part XI





Department of Housing and Urban Development





_______________________________________________________________________



Office of the Assistant Secretary for Housing--Federal Housing 
Commissioner



_______________________________________________________________________



24 Part 200 et al.




Appraisals and Property Valuation; Final Rule




DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Office of the Assistant Secretary for Housing--Federal Housing 
Commissioner

24 CFR Parts 200, 203, 204, 206 and 267

[Docket No. R-94-1626; FR-3027-F-02]
RIN 2502-AF25

 
Appraisals and Property Valuation

AGENCY: Office of the Assistant Secretary for Housing--Federal Housing 
Commissioner, HUD.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: This final rule establishes minimum standards for real estate 
appraisals made by staff, fee panel and contract appraisers in 
determining the maximum insurable mortgage amount in most HUD/FHA 
single family (one-to-four family) and multifamily transactions; and 
establishes criteria for the selection of appraisers by mortgagees. The 
rule also distinguishes those appraisals that may be performed by state 
licensed appraisers from those that must be performed by state 
certified appraisers.

DATES: Effective Date: December 2, 1994.
    Applicability date: Section 267.10 is applicable to HUD employees 
who qualify as certified general appraisers not later than December 31, 
1996, unless the Assistant Secretary-Commissioner specifies otherwise 
in a specific case.

FOR FURTHER INFORMATION CONTACT: For single family programs: Morris 
Carter, Director of the Single Family Development Division, Room 9270, 
Department of Housing and Urban Development, 451 Seventh Street, SW, 
Washington, DC 20410-8000, telephone, voice: (202) 708-2720; (TDD) 
(202) 708-4594. (These are not toll-free numbers.) For multifamily 
programs: Linda Cheatham, Director, Office of Insured Multifamily 
Development, Room 6134, Department of Housing and Urban Development, 
451 Seventh Street, SW, Washington, DC 20410-8000, telephone, voice: 
(202) 708-3000; (TDD) 708-4594. (These are not toll-free numbers.)

SUPPLEMENTARY INFORMATION:

I. Information Collection

    The information collection requirements contained in this final 
rule have been submitted to the Office of Management and Budget for 
review under the Paperwork Reduction Act of 1980. No person may be 
subjected to a penalty for failure to comply with these information 
collection requirements until they have been approved and assigned an 
OMB control number. The OMB control number, when assigned, will be 
announced by separate notice in the Federal Register. See the ``Other 
Matters'' section of this preamble for further information on the 
information collection requirements.

II. Publication of the Proposed Rule

    On September 16, 1993, the Department published in the above 
Docket, at 58 FR 48556, a proposed rule entitled ``Appraisals and 
Property Valuation''. The proposal, among other things, would 
promulgate a new part 267 to title 24 of the Code of Federal 
Regulations containing minimum standards for HUD real estate appraisals 
and criteria for the selection of appraisers by mortgagees. The 
preamble to the proposed rule describes, in greater detail than below, 
the legislative background for this rulemaking and set the rulemaking 
in the context of certain administrative changes that the Department 
had been considering on its own initiative. The preamble also explains 
the significant provisions of proposed part 267 as well as certain 
conforming amendments to other parts of HUD regulations.
    Interested persons were invited to submit comments in Docket No. 
FR-3027 on or before Nov. 15, 1993.

III. Description of this Final Rule

Background

    This rule implements two statutory provisions. Section 142 of the 
Department of Housing and Urban Development Reform Act of 1989 (Reform 
Act) requires that the appraisal of all property securing an FHA-
insured mortgage be performed in accordance with generally approved 
appraisal standards.1 Section 322 of the Cranston-Gonzalez 
National Affordable Housing Act (Cranston-Gonzalez) provides that 
single family Direct Endorsement (DE) mortgagees may choose the 
appraisers who evaluate properties securing FHA-insured mortgages and 
states that those appraisers may be legal entities as well as natural 
persons.2 Furthermore, as explained in the proposed rule, HUD, on 
its own initiative, has been revising its procedures for qualifying 
appraisers and for requiring their use in various FHA programs. The 
objective is to identify under each program the particular method of 
determining who is qualified to perform the appraisal, consultancy or 
other type of evaluation, based on differences inherent in the broad 
range of insurance programs that comprise Titles I and II of the 
National Housing Act (Act, NHA).
---------------------------------------------------------------------------

    \1\Section 142 of the Reform Act added section 202(e) to the 
National Housing Act (NHA, Act), 12 U.S.C. 1708(e).
    \2\Section 322 of Cranston-Gonzalez amended section 202(e).
---------------------------------------------------------------------------

    As a consequence of the Congressional mandates and its own 
initiatives, the Department published the proposed rule which elicited 
384 written public comments. Some of these comments raised a single 
issue, while others expressed multiple questions or concerns. Many were 
repetitive. In this rule, a number of changes are the direct 
consequence of, or are easily traceable to, public comments, as 
explained below. Also being adopted are changes originated by the 
Department as a result of having further considered its proposal. 
Mainly, these modifications are designed to simplify the rule in its 
final form and to address comments which objected to the burdensomeness 
of several proposed requirements. In addition, there are a number of 
editorial revisions that were needed to correct errors and improve 
readability; they are self-explanatory and are not discussed.

Differences Between the Proposed and Final Rules

    This rule differs from the proposal in two general respects. The 
first difference is in response to a view expressed by several 
commenters that the proposed rule was difficult to follow and should be 
split into separate rules covering single family and multifamily 
programs, respectively. HUD does not believe that such radical 
restructuring is necessary but does recognize that FHA's single and 
multifamily programs differ enough that a division of the proposed 
rule's content along those lines would be helpful. Consequently, the 
final rule has reorganized the new part 267 into three subparts. 
Subpart A includes material common to both single and multifamily 
programs, subpart B relates exclusively to single family programs and 
subpart C relates only to multifamily programs. This revision has 
necessitated a technical, non-substantive redrafting of various 
proposed sections, e.g., the definition of ``appraisal'' has been 
tailored to fit subparts B and C, but these changes do not affect 
meaning.
    Not as obvious is a shift in the final rule toward a less incursive 
regulatory posture that gives greater recognition to accepted industry 
standards and practices. Several HUD standards contained in the 
proposal are being deleted and the Departure Provision of the Uniform 
Standards of Professional Appraisal Practice (USPAP) is being 
acknowledged with respect to single family programs. Regarding this 
latter change, FHA currently requires that all single family appraisals 
be ``complete appraisals'', as that term is defined under Standard 1 of 
USPAP, but instances may arise when the Departure Provision will be 
invoked to authorize ``limited appraisals'' under specific 
circumstances and on a case-by-case basis. In general, we are 
increasingly convinced that, with legislative prompting, the appraisal 
profession is moving in the direction of effective self-regulation and 
that HUD should limit its role to adapting industry requirements and 
practices to particular FHA needs rather than competing with broader 
ongoing efforts to improve the reliability of residential appraisals 
and the overall performance of the appraisal industry.
    Set forth below is a discussion of significant changes from the 
proposed rule contained in each of the three subparts of new part 267.

Subpart A--General

    In Sec. 267.1 (applicability), paragraph (b)(2) has been changed to 
add a reference to Sec. 201.23(b)(3) regarding the ``trade-in'' of a 
borrower's equity in a manufactured home. As a result, part 267 now 
excludes appraisals used in determining the borrower's equity in an 
existing manufactured home traded for a new manufactured home to be 
purchased with a Title I loan. This reference was inadvertently omitted 
from the proposed rule. Also, in paragraph (b)(3) of Sec. 267.1, the 
exception for property improvement loans has been broadened by changing 
the phrase ``one- to-four family dwellings'' to ``property'' since the 
exception should cover Title I commercial and multifamily property 
improvement loans as well as one-to-four family dwellings. The 
paragraph has also been revised to reflect a recent decision by the 
Department to enhance the Title I program.3 Specifically, the 
$15,000 threshold of borrower equity in the property undergoing 
improvement, below which no mortgage is required, has been eliminated.
---------------------------------------------------------------------------

    \3\See News Release issued by the Department on June 28, 1994.
---------------------------------------------------------------------------

    ``FIRREA'' (Title XI of the Financial Institutions Reform, Recovery 
and Enforcement Act 1989) has been included as definition (d) under 
Sec. 267.2 to aid the reader.
    A broad description of ``Single family program'' has been included 
as definition (j) under Sec. 267.2.
    ``USPAP'' has been included as definition (l) under Sec. 267.2 and 
to it has been added the provision of former Sec. 267.4(c)(4). That 
provision states the Department's policy of recognizing any changes or 
additions to USPAP which the Appraisal Standards Board may from time to 
time adopt, unless HUD publishes in the Federal Register its decision 
not to recognize a change or addition.
    In Sec. 267.3, paragraph (b)(1) [formerly Sec. 267.6(b)(1)] 
prohibits certain discriminatory acts. It has been extensively revised 
in response to numerous comments about the burdensomeness for 
mortgagees of reporting on the relative frequency with which they use 
women and minority status appraisers. At the same time, we have been 
careful to ensure the public availability of the data which would have 
been provided by those reports and which for single family programs the 
Department will now obtain elsewhere in accordance with paragraph 
(b)(2) of Sec. 267.3. The Department will be scrutinizing that data 
carefully. We will not countenance discrimination by lenders against 
female and minority status appraisers.
    For single family programs, HUD will compile an annual report 
directly from information which the Department will maintain for each 
appraiser listed on the Roster. Information with respect to gender and 
minority status will be furnished by the appraiser at the time he or 
she applies for listing. This is permitted by the newly-added reference 
to ``such further information as HUD may require'' in Sec. 267.8(d)(2). 
When the mortgagee accesses the Computerized Homes Underwriting 
Management System (CHUMS), giving the appraiser's certification or 
license number, the information on the appraiser will be recorded from 
the Roster data bank. For fee panel appraisers, HUD will record the 
information from the Roster data at the time the panelist is assigned. 
The Department will be able to prepare the annual report directly from 
this information and will make it available to members of the public 
upon request. See Sec. 267.3(c).
    With respect to multifamily programs, there do not exist systems 
analogous to CHUMS and the Roster, and consequently the data must be 
furnished by Delegated Processors, contract appraisers and consultants, 
and each housing finance agency (HFA) participating in the Department's 
HFA Risk-Sharing Program. Since the number of multifamily cases 
processed is considerably less than single family activity during a 
given time span, this burden should not be unreasonable. Details of 
this reporting requirement will be specified in one of the terms of the 
contract/agreements which HUD executes with its Delegated Processors, 
contract appraisers and consultants and HFAs. Because reporting under 
multifamily programs is being implemented by contractural obligation, 
and because that obligation is not set forth under existing contracts, 
the data will not become immediately available when this rule takes 
effect. As of the effective date provided at the beginning of this 
preamble, however, all new contractural agreements and all renewals or 
renegotiations of existing agreements will provide for the data to be 
furnished thereafter. See Sec. 267.3(c)(5).
    Proposed Sec. 267.6(c) relating to competency is now paragraph 
Sec. 267.3(d).
    A new Sec. 267.4, entitled `` waiver'', has been added at the end 
of subpart A. The section authorizes the Assistant Secretary-
Commissioner to waive any requirement in part 267 not mandated by 
statute when enforcement of that requirement would adversely affect the 
purposes of the NHA. It is unlikely that this waiver authority would be 
invoked often under part 267. However, HUD has been including a similar 
waiver provision in many recently adopted rules because it does permit 
administrative flexibility in unusual circumstances when invariable 
application of a rule would be unfair or contrary to program 
objectives.

Subpart B--Single Family Programs

    In Sec. 267.5, entitled ``Definitions applicable to single family 
programs'', paragraph (a), defining ``Appraisal'', no longer includes 
the phrase ``as estimated by HUD staff or an appraiser under contract 
with HUD'' which appeared in proposed Sec. 267.2(b)(2). The effect of 
this change is that the DE lender, not HUD, will be responsible for 
estimating replacement cost under the section 220 single family 
program.
    In customary usage, the term ``single family'' is well established. 
However, there are FHA programs that do not fit the usual concept of 
one-to-four family dwellings, yet are governed by one-to-four family 
appraisal standards and procedures, specifically, Title I multifamily 
and non-residential property improvement loans. The revised definition 
(c) under Sec. 267.5, ``one-to-four family residential property'', 
covers this anomaly. Note that there is no parallel definition of 
multifamily programs, which simply include all other FHA mortgage 
origination transactions.
    Section 267.6 follows proposed Sec. 267.3, but with minor editing 
to improve readability and clarity.
    Section 267.7, Appraisal standards, represents an extensive 
revision of proposed Sec. 267.4 on this subject. Specifically:
    (1) The proposed rule stated that the USPAP Departure Provision 
would not apply to FHA single family appraisals. The preamble to the 
proposed rule stated a concern that the Provision might be used to 
dispense with important information gathering. (See 58 FR 48560). After 
considering the matter more fully, we have decided that this concern is 
unjustified. Each of the appraisal forms permitted by HUD makes clear 
what information is required and any deficiency should be readily 
noticed by the review appraiser or underwriter. Also, the Provision 
will only be invoked under unusual circumstances, subject to mutual 
agreement of the mortgagee and appraiser, after obtaining consent from 
the local HUD office. Should appropriate circumstances arise and a 
complete appraisal not be required, the Provision gives HUD the 
administrative flexibility to save the parties needless expense. The 
Department expects that eventually, as experience is gained, a handbook 
addition or other directive will be issued with respect to Departure 
situations in single family programs. In view of the foregoing, the 
Provision is being given recognition for single family programs and 
reference to it (as being inapplicable) has been dropped from former 
Sec. 267.4(a)(1), now Sec. 267.7(a)(1).
    (2) Section 267.4(a)(3) of the proposed rule is being deleted as 
unnecessary and somewhat redundant since Sec. 267.7(a)(8) of the final 
rule covers the question of property valuation methods in greater 
detail.
    (3) Section 267.4(a)(4)(i) of the proposed rule described the 
appraisal report forms. That section has been revised in Sec. 267.7(a) 
of the final rule to extract the language pertinent to single family 
programs. Two Federal National Mortgage Association forms are also 
being added as acceptable for FHA single family purposes; these are 
somewhat more detailed than the Uniform Residential Appraisal Report 
and offer an alternative means of presenting the data. In addition, 
former Sec. 267.4(a)(4)(iii) required sufficient ``depth of analysis'' 
to reflect the complexity of the property. HUD has concluded that the 
data necessary for an appraisal which satisfies the other FHA standards 
will necessarily reveal whether the property is complex so as to 
require a certified rather than a licensed appraiser. Therefore, the 
need for this separate and rather vague standard is avoided and the 
language of proposed Sec. 267.4(a)(4)(iii) has been dropped from this 
final rule.
    (4) Proposed Sec. 267.4(a)(7) is being deleted as not really 
pertinent for single family programs.
    (5) Proposed Sec. 267.4(a)(11) is being deleted to simplify the 
appraiser's responsibilities. We agree with several commenters that the 
added burden of requiring the appraiser to check the property's legal 
description is not justified by the remote likelihood of a mistake in 
the address.
    (6) Section 267.7(a)(8) still requires the appraiser to certify 
that the racial/ethnic composition of the neighborhood has in no way 
affected the appraisal determination. However, the phrase ``or 
socioeconomic'' has been dropped as part of this certification. The 
term was not susceptible to a clear understanding. It was, in fact, 
misleading, since the economic composition of the surrounding 
neighborhood, e.g., level of property maintenance, is a valid 
consideration in determining value, whereas any consideration of the 
social mix and demographics is precluded by the rule's explicit warning 
that the appraiser must not give weight to racial and ethnic aspects of 
the neighborhood4. A similar change has been made with respect to 
the certification for multifamily programs in Sec. 267.11(a)(9).
---------------------------------------------------------------------------

    \4\In addition to the certification requirement of 
Sec. 267.7(a)(8) it should also be noted that the Uniform 
Residential Appraisal Report Form states in bold type that ``[r]ace 
and the racial composition of the neighborhood are not appraisal 
factors.''
---------------------------------------------------------------------------

    (7) Proposed Sec. 267.4(a)(12), now Sec. 267.7(a)(9), describing 
valuation methods, has been revised to extract the relevant single 
family provisions.
    Section 267.8(a)(1)(i)(A) of the rule contains a parenthetical 
phrase to make clear that a mortgagee selecting an appraisal 
organization may also select a particular employee within that 
organization to perform the appraisal.
    Section 267.8(c)(1) embodies the prohibitions of proposed 
Sec. 267.5(c), but has been simplified in one respect. Proposed 
Sec. 267.5(c)(1) addressed contracts between the mortgagee and the 
appraiser if the two were affiliated. While this relationship is still 
prohibited in multifamily cases, in single family programs, where DE 
mortgagees may employ staff appraisers, it is inconsistent with much of 
the lending industry's practice. The prohibition has therefore been 
dropped from Sec. 267.8(c).
    In Sec. 267.8(d)(1), the list of legal entities which, together 
with natural persons, comprise eligible types of appraisers has been 
expanded from the list in Sec. 267.5(d)(1) of the proposed rule to 
include joint ventures, limited liability companies and other 
organizations. In addition, Sec. 267.8(d)(1) has been redrafted to 
explain the options available to a DE mortgagee in need of an 
appraiser, i.e., an independent contractor, a staff employee or a fee 
panelist. Section 267.5(d)(1) of the proposed rule did not cover these 
options; paragraphs (d)(1)(i), (d)(1)(ii) and (d)(1)(iii) focused 
instead on appraiser qualifications, which made them somewhat redundant 
since appraiser qualifications were also set forth in Sec. 267.5(d)(2), 
now Sec. 267.8(d)(2), describing the Roster.
    Proposed Sec. 267.5(d)(1)(iv) has been incorporated into Sec. 267.8 
(d)(1) of this rule and revised to make it clear that the mortgagee and 
appraiser share not only concurrent but also equal responsibility for 
the accuracy and thoroughness of an appraisal.
    In Sec. 267.8(d)(2), the appraiser, rather than providing evidence 
of compliance with the items listed in proposed Sec. 267.5(d) (2)(i)-
(vi), may now certify that he or she satisfies the requirements of that 
paragraph. Also, two of the proposed requirements have been dropped: 
there is no obligation to obtain errors and omissions insurance unless 
the mortgagee requires it and there is no fee for being listed on the 
Roster.
    Section 267.8(f)(1) [proposed Sec. 267.5(h)] no longer requires as 
a condition to transferring an appraisal that the accepting mortgagee 
have ``adopted appraisal review procedures in accordance with this 
part''. Inclusion of this condition in the proposed rule was an error. 
There is no appraisal review procedure contained in the rule.
    Section 267.5(f) of the proposed rule, regarding the extent to 
which others may assist the appraiser, has been deleted. As explained 
above, the thrust of many changes which distinguish this rule from the 
proposal is to place a greater reliance on USPAP and, wherever 
possible, to achieve compatibility with generally accepted practices of 
the appraisal industry. Consistent with this approach, the Department 
looks to USPAP to set criteria for the ``assistance of others''.
    Finally, mention should be made of the conforming amendment under 
24 CFR part 204, Coinsurance, contained in the proposed rule (58 FR 
48566). On March 30, 1994 (59 FR 14809, Docket No. R-94-1717), the 
Department proposed termination of its single family coinsurance 
program but the proceeding in Docket No. R-94-1717 is still open. Until 
final action is taken, part 204 remains in effect and is being amended 
by this rule.

Subpart C--Multifamily Programs

    Section 267.9, Definitions applicable to multifamily programs, 
extracts from Sec. 267.2 of the proposed rule those definitions 
pertinent to multifamily programs. As with Sec. 267.5, some editorial 
changes have been required to accommodate this separation of the 
definitions from the format in which they were proposed.
    Section 267.10, Qualified appraisers and appraisals, derives from 
Sec. 267.3 of the proposal. It has been redrafted to fit exclusively 
multifamily programs. Note also that paragraph (a) provides for HUD 
employees performing multifamily appraisals to be qualified as 
certified general appraisers not later than December 31, 1996, unless 
the Assistant Secretary-Commissioner specifies otherwise in an 
individual case. It is FHA's goal to qualify its staff appraisers in 
accordance with the standards of a state as soon as possible. However, 
the Department is currently undertaking an extensive reorganization and 
restructuring of its field office functions and jurisdictions. Very 
likely, a number of HUD Multifamily appraisers, including some who have 
already attained certified general status, will be retiring in the near 
future. Time is required to recoup such losses and our current estimate 
is that we will not be able to achieve comprehensive certification of 
multifamily appraisers until the end of 1996. Some currently certified 
employees will remain, of course, and others will become certified 
before that time, but we cannot set a precise schedule because 
available training funds for the 1995 and 1996 fiscal years are not 
known nor is the retirement rate predictable with much accuracy. 
Moreover, the dispatch with which HUD can accomplish conprehensive 
certification of its staff appraisers will be directly proportional to 
the extent of training and experience required by different states so 
progress will undoubtedly vary from one field office to another. We 
have set a date of December 31, 1996 for achieving full staff 
certification in multifamily programs; however, in the event funding 
and attrition rates differ appreciably from our projections, we will 
adjust the effective date to make it earlier if possible, later if 
necessary.
    As is the case with Sec. 267.7, which sets standards for single 
family appraisals, Sec. 267.11 has been extensively revised both to 
reduce requirements and to extract specific--in this case multifamily--
appraisal standards. In most respects, Secs. 267.7 and 267.11 are 
alike, except that in Sec. 267.11: 1) the prescribed appraisal forms 
are different; 2) the review of historical sales prices covers a three-
year (or more), rather than a one-year, time span; 3) proposed rule 
paragraphs 267.4(a)(7) and (a)(8), concerning marketing period and 
factors that affect income and the absorption period, are relevant for 
multifamily sales and are included; and 4) the reference to valuation 
methods focuses on the greater concern with replacement cost in 
multifamily programs.
    For the reasons cited above in the description of Sec. 267.8, the 
provision regarding the assistance of others, Sec. 267.5(f) of the 
proposed rule, has been deleted. However, Sec. 267.12 contains a new 
paragraph (b)(2), inadvertently omitted from the proposed rule, that 
outlines the relationship between an appraiser and a Delegated 
Processor. Paragraph (b)(2) explains that HUD must review and approve 
each appraiser who works for a Delegated Processor, either as an 
employee or as an independent contractor. We also review and approve 
each appraiser employed under a Technical Discipline Contract (TDC).

Discussion of the Comments Received

The Two Main Issues
    Most of the comments addressed one or both of the principal 
objectives of the rule: to require the certification or licensing of 
appraisers for FHA-insured mortgages and to enable DE mortgagees to use 
appraisers of their own choosing for FHA transactions.5
---------------------------------------------------------------------------

    \5\ Several commenters used the rulemaking as an occasion to 
raise matters outside the scope of this proceeding. It would be 
inappropriate to dispose of those matters at this time, but to the 
extent HUD deems appropriate, they may be the subject of subsequent 
administrative action.
---------------------------------------------------------------------------

The Certification/Licensure Issue
    As was pointed out in the proposed rule, the requirement that FHA 
appraisers must be certified or licensed, depending upon the nature of 
the transaction, is based on section 142 of the Reform Act, and 
parallels a similar Congressional mandate in FIRREA that only certified 
general, certified residential or licensed persons may perform 
appraisals involving federally related transactions. Thus, when section 
142 was enacted, a system of state certification and licensing was 
already under development. This was beneficial in two respects. First, 
it obviated the need for HUD to develop its own regulatory structure 
with a resultant drain on staff and budgetary resources. Second, by 
drawing upon the FIRREA system as an established resource, HUD could 
fulfill its regulatory responsibility with a minimum of added expense 
to homebuyers. We believe that most appraisers will soon be certified 
and/or licensed in order to participate in the broad range of federally 
related transactions and also to enhance their own professional 
stature. The cost of added training and membership will then be 
distributed over a wide base of consumers. Moreover, there will 
probably be a dwindling pool of unlicensed and uncertified appraisers 
upon which mortgagees can draw so that, quite apart from the mandate of 
section 142, debate over the need for such accreditation in FHA 
programs will become academic. In any event, HUD retains its control 
over appraisal fees permitted for single family programs to make sure 
that they do not rise disproportionately.
The Appraiser Selection Issue
    With respect to the DE mortgagee's right to choose appraisers, we 
specifically requested comment from the public. It is not possible for 
HUD to preclude that choice by rulemaking, since the mortgagee's right 
to choose has been mandated by Congress and is therefore beyond the 
scope of agency policy. However, we wanted to assess the extent and 
weight of public opinion in order to ascertain if there were a good 
case HUD might present to Congress for repealing the provision. We 
found that public opinion was fairly well balanced between support and 
opposition. Some commenters argued that lender choice would lead to 
abuse and distorted valuation; others that it would do no more than 
serve to simplify and speed the appraisal process. We turned, 
therefore, to an analogy with experience already gained, inferring that 
use of the staff appraisers employed by many major lending firms should 
have the same potential for abuse and the same tendency to encourage 
lender-dictated property values. Yet increasing experience with this 
practice has not indicated that the accuracy or thoroughness of lender 
staff appraisals has been compromised by pressure on the employee. We 
have concluded that serious concern about the integrity of lender-
selected appraisers is not supported by current evidence and we do not 
plan to pursue the matter legislatively at this time.
    Specific comments. Some of the public comments raised specific 
issues that should be addressed.
    Comment on review appraisers: The Department has not adequately 
addressed the need for qualifying review appraisers. Furthermore, there 
is no recognition of the difference between a technical review and an 
administrative review as those terms are understood within the 
appraisal industry.
    Response: HUD has given considerable thought to the general 
question of appraisal reviews and who performs them. For FHA purposes, 
reviews are essentially of two types. First are those incidental to the 
duties of the DE underwriter. In these instances, the appraisal is 
accepted on its face, while certain factors are weighed into the 
decision of whether or not to underwrite, and if so, whether to change 
the loan amount on the basis of an adjustment to value. This is not an 
appraisal action; it is an underwriting judgment as we explained in the 
proposed rule. Along with these judgments, the underwriter exercises 
administrative review responsibilities, checking to see if the 
appraiser has properly completed the form, noting the comparables used, 
etc. We see no element of technical review in this role of the 
underwriter, who is not certified or licensed in most cases.
    The second type of review is technical, as compared to 
administrative. With respect to multifamily transactions, technical 
reviews are conducted by HUD staff or by a contractor and may result in 
a revision of the appraisal report. In the case of single family 
transactions, they are conducted by HUD staff and may provide a basis 
for administrative sanctions, but they do not materially affect the 
appraisal report. Whether a technical review is performed by a 
contractor or by HUD staff, the reviewer must be certified in the case 
of multifamily programs and either certified or licensed, as is 
necessary, for single family programs. In order to make HUD's own 
internal practices consistent with the standard that we apply to 
private sector appraisers, the Department intends that over the next 
several years, every FHA multifamily and single family staff appraiser 
who performs reviews will become either certified or licensed, 
whichever is appropriate for the nature of the reviews that he or she 
performs.
    Comment on loan correspondents choosing appraisers: The proposed 
rule does not clarify whether loan correspondents or their sponsors 
should choose the appraiser.
    Response: The Department expects sponsors to be responsible for 
underwriting single family loans submitted by their loan 
correspondents. Consistent with this approach, the sponsor must select 
the appraiser.
    Comment on limiting market value with replacement cost: It is ill-
advised and inconsistent with USPAP for HUD to stipulate that market 
value shall not exceed replacement cost.
    Response: The Department agrees with several of the commenters that 
there are instances when replacement cost does not keep step with 
market value, and this is precisely why a limitation is needed. We do 
not agree that a property can adequately secure a debt for any sum 
greater than is sufficient to replace the property. For purposes of 
mortgage financing, value must be ascertained prudently. It is not the 
same, for example, as the value assigned to property when setting a 
market price. For FHA purposes, it is fair and sensible to limit market 
value by replacement cost, particularly since it will be supported by 
an actual construction contract.
    We are puzzled by the assertion of one commenter that HUD's policy 
is inconsistent with USPAP. Standards Rule 1-5 of USPAP states that the 
appraiser must consider and reconcile the quality and quantity of data 
available and analyzed within the approaches used and the applicability 
or suitability of those approaches which are set forth in Standards 
Rule 1-4. For FHA, the acceptable approach is market value, although 
replacement cost is recognized as a limit to data acquired from the 
sales of comparable properties. We see no conflict with USPAP in this 
regard.
    Comment on reporting market conditions and trends: Why require the 
appraiser to analyze and report on current market conditions and trends 
if, as stated in the preamble to the proposed rule, such conditions and 
trends should not be factored into the estimate of value?
    Response: In the preamble to the proposed rule, we stated that:

* * * while the appraiser should indicate observed market trends as a 
part of the appraisal report, a trend should not be factored into the 
estimate of value.

This statement failed to make a basic distinction between what is meant 
by ``trend'' in multifamily compared with single family programs, and 
caused several commenters to question the usefulness of trending in 
single family appraisal work.
    A multifamily appraiser must give consideration to long-term 
projections of market changes in order to estimate, for example, 
project income from rents over the life of the mortgage. Trends are 
therefore of twofold significance in multifamily cases: they address 
projected changes in both the intrinsic value of the property and in 
its earning ability. Hence, they are essentially forward-looking.
    By comparison, the existence of rapidly rising or declining prices 
for single family properties can be ascertained by analysis of recent 
sales data. Looking at sale prices within the preceding six months, the 
appraiser can estimate the rate of increase or decrease in an area. 
These rates of change will have an effect on the value of the subject 
property and must be taken into consideration.6
---------------------------------------------------------------------------

    \6\ The URAR provides for the appraiser's perception of ``Market 
conditions in the subject neighborhood (including support for the 
above conclusions [regarding marketability] related to the trend of 
market values * * *)'' (Emphasis added.)
---------------------------------------------------------------------------

    For both single family and multifamily transactions, however, it 
should be borne in mind that conditions and trends are ephemeral 
elements in any economy whether viewed from a local or national 
perspective and they reflect assumptions which may or may not be 
vindicated by subsequent events.
    Comment on reporting the use of minority appraisers: Reporting on 
the use of minority and female appraisers is burdensome, unnecessary 
and if nevertheless adopted, should be HUD's responsibility.
    Response: This is an important initiative. It is intended to 
address two matters of concern. One is the perceived underutilization 
of minority and female appraisers in general. Second is a perceived 
underutilization of minority appraisers in communities where they might 
be more knowledgeable about trends and conditions and more sensitive to 
community problems. However, the Department recognizes the burden this 
reporting requirement places on mortgagees, especially in FHA's high 
volume single family programs. We have therefore revised the 
requirement so that HUD will accept virtually all responsibility for 
compiling and reporting the information for those programs.
    Comment on differing appraiser classifications: Why does the 
proposed rule not distinguish between the different levels of 
certification, such as a Certified General Appraiser compared with a 
Certified Residential Appraiser?
    Response: We do distinguish between certified general and certified 
residential appraisers in those instances where the distinction must be 
made. Thus, when the reference is to multifamily programs, ``certified 
general'' is intended and the rule will usually so state. When we are 
referring to single family programs that require the services of a 
certified appraiser, as described in Sec. 267.5(b), the rule makes no 
distinction because either a certified general or a certified 
residential appraiser would be appropriate for the assignment. Some 
jurisdictions have provided for other variant classifications which 
this rule does not seek to distinguish. We rely instead on the state 
accreditation agencies--prompted by the benefits of reciprocity and 
guided by the Appraiser Qualifications Board--to maintain comparable 
standards within the different classifications for use by FHA, the 
Federal Financial Institutions Examination Council members and other 
interested agencies such as the Department of Veterans Affairs (DVA) 
and the Farmers Home Administration.
    Comment on continuing the use of DVA certificates of reasonable 
value (CRVs) and HUD conditional commitments: According to HUD's Direct 
Endorsement regulations, in particular 24 CFR 203.5(e): ``In lieu of 
appraising the property, the mortgagee may utilize a HUD conditional 
commitment (for proposed construction only), or a Department of 
Veterans Affairs certificate of reasonable value.'' Will this continue 
to be the practice under the Roster system?
    Response: Lenders may continue to rely on conditional commitments 
and CRVs. Part 267 will not affect this interchangeability. For some 
time now, both HUD and DVA, by administrative instructions, have 
required certified or licensed appraisers for single family appraisals. 
Moreover, appraisals for veteran housing programs must comply with 
USPAP. Thus, DVA and FHA requirements are comparable in key respects 
and are mutually acceptable. Of course this interchangeability could 
end if either agency were to lessen its standards for appraisers or 
appraisals. We point out also that HUD requires virtually all 
applications for mortgage insurance to be processed under the DE 
program, so very little use is made of HUD conditional commitments. 
This fact tends to discourage the mutual recognition of CRVs and 
conditional commitments (or at least DVA's recognition of HUD 
commitments) since 38 U.S.C. 1831 requires that CRV appraisers be 
assigned on a rotational basis from a fee panel selected and maintained 
by DVA--a requirement incompatible with the DE lenders' freedom to 
select their appraisers.
    Comment on the integrity of DE staff appraisers: It is naive and 
pointless to require that DE lenders separate the appraisal function 
from their underwriting operations in order to protect the autonomy and 
integrity of staff appraisers. Policy and decisionmaking for every 
corporate component coalesce at the top of the business structure and 
filter downward; a staff appraiser cannot avoid being influenced.
    Response: We are aware of the potential for pressure on staff 
appraisers, but short of prohibiting the practice altogether, there is 
no completely satisfactory solution. We believe that by removing the 
appraiser from the direct supervision of the loan production 
department, two advantages accrue.
    First, the appraiser is at least free from the everyday case-by-
case control of loan officers. An appraiser may sense that too many 
unfavorable appraisals can impede on his or her career track (of 
course, a self-employed appraiser under contract with a lender can feel 
similar pressures), but there will at least not be instances where 
one's immediate supervisor looks for a specific value in every case 
assigned.
    Second, when the nexus of decisionmaking shifts upward, if undue 
influence is manifest, it is usually easier to fix accountability. If 
there is a consistent problem, it will very likely have originated at 
upper corporate levels. Top management of a maleficent lending 
institution will find it more difficult to avoid culpability by 
claiming that fraudulent or misleading appraisals are the result of 
nothing more than faulty supervision or insensitivity to potential 
trouble at the loan officer level. Of course none of our precautions, 
including appraiser independence, can guarantee that a staff (or 
contract) appraiser will escape undue pressure. Ultimately, we look to 
the integrity and long-range business judgment of the mortgagees 
themselves to counter serious abuse and destructive practices. As we 
have observed previously, there has been a very good overall record on 
the part of mortgagees and staff appraisers in this regard.
    Comment on the advisability of the Roster system: The idea of 
establishing a Roster for single family appraisers appears to be an 
offshoot of the fee panel system and is therefore a repudiation of the 
mortgagee's right to select the appraiser.
    Response: The Roster and the fee panel are in fact totally 
different in concept and purpose. The fee panel was initiated as a 
means of controlling the quality of appraisers in terms of training, 
diligence, judgment and professionalism. It functioned mainly at a time 
when there was little other assurance in these respects. It afforded a 
means of training appraisers in FHA requirements and procedures and it 
also served to limit the pool of appraisers so that panelists could be 
kept active in FHA programs and their experience level would benefit 
accordingly.
    Circumstances have now changed completely. First and most 
importantly, FIRREA has raised and standardized the level of appraiser 
competence nationwide so that it is no longer a major concern. Second, 
the law now permits DE mortgagees to select appraisers. This means that 
a system of assigning panelists, unless the mortgagee requests the 
assignment or is not DE approved (and most now are) would be illegal--a 
fact which is overlooked by those commenters who urge HUD to retain the 
strict panel assignment system. In a practical sense, it also means 
that there are far more potential FHA single family appraisers than 
this agency, with its increased budget constraints, could hope to train 
in the manner that it once did. We must now rely on FIRREA and State 
accreditation boards to do much of what HUD has done in the past. The 
fee panel will continue in a diminished role, and only for those 
lenders who wish to continue using it. This does not mean that HUD will 
abdicate its responsibility for guarding against poor appraisal work. 
We are instituting the Roster as a means of monitoring and quickly 
remedying problems. However, unlike the fee panel system, the Roster 
will list any applicant who holds current credentials under state 
certification/licensing law, who has acquainted himself or herself with 
FHA program requirements, and who has a good professional record, 
including competency in performing FHA assignments. The Roster will 
thus provide a rapid means of confirming that the appraiser is in good 
standing at the time the mortgagee requests an FHA case number and 
identifies the appraiser selected. That is its purpose--it is a 
monitoring control, not a system for training and qualifying FHA 
appraisers.
    Comment on the need to list fee panelists on the Roster: The 
proposed rule does not clarify whether fee panelists must be listed on 
the Roster.
    Response: Section 267.8(d)(1) now clarifies that fee panelists must 
be listed on the HUD Appraiser Roster. Otherwise, minority and female 
panelists could not be tracked for the report compiled by HUD pursuant 
to Sec. 267.3(b)(2).
    Comments on the scope of the Roster: Must an appraiser apply for 
listing on the Roster in every state where the appraiser may do 
business? Also, if an institutional appraiser applies, must the 
individual employees of that firm apply for listing as well?
    Response: The appraiser must apply to the HUD Office (or to any one 
of the state's HUD Offices if there are several) in each state where he 
or she intends to perform an appraisal. The reason is that every state 
has its own numbering system and the only practical means of 
correlating the Roster data and the record of state accreditation is to 
maintain a list of all the various certification and/or license numbers 
pertaining to that appraiser. Individual employees as well as the 
employing institution must be listed since the performance of both will 
be monitored.
    Comment on removal from the Roster: If HUD needs to remove an 
appraiser from the Roster for any reason, it should report that fact to 
the state licensing board. Two commenters, in fact, suggested that HUD 
``punish'' a disqualified appraiser.
    Response: It is HUD's intention to report cases of fraudulent or 
incompetent appraisals and other serious violations of appraisal 
professional conduct to state accrediting boards. However, the 
commenters who favor ``punishment'' mistake the purpose of the Roster. 
As we said previously, it is not a device for applying sanctions; it is 
simply a quality control measure to assure that appraisers who have not 
maintained their credentials, or who for some reason have not met FHA 
standards, are removed from the system where they can cause a problem. 
Congress did not make HUD a watchdog or enforcer for the appraisal 
industry when it enacted section 142 of the Reform Act, and it would be 
inappropriate to base a punitive process on the Roster system. When we 
discussed the Roster in the Proposed Rule, we explained that 24 CFR 
part 24 relating to Government debarment and suspension procedures does 
not apply to the removal of an appraiser from the listing, but we also 
cautioned that the Department will invoke part 24 whenever 
circumstances call for remedial action and Sec. 267.8(d)(3) so states.
    Comment on training for special HUD programs: How will HUD train 
non-panelists with regard to special FHA requirements such as lead 
based paint detection and abatement?
    Response: This is a matter that has not been resolved. The 
Department is exploring several means of helping appraisers who have 
not been through fee panel training to become knowledgeable about 
specific program requirements. We are expediting this matter and will 
advise interested members of the public as soon as there is further 
information. In the meantime, appraisers should bear in mind that it 
would be a violation of USPAP's Competency Provision to undertake an 
assignment for which the appraiser has not been adequately trained and 
is not qualified.
    Comment on membership in professional organizations: Even though 
the Department may not wish to predicate an individual appraiser's 
competence solely on the basis of his or her membership in a 
professional organization, such membership should be given weight.
    Response: We disagree. There is simply no correlation in our view 
between an appraiser's competence and which professional organizations, 
or the number of professional organizations, that an appraiser may 
choose to join. Our conclusion in the proposed rule on this point 
remains unchanged.
    Comment on appraising Secretary-held properties: It is short-
sighted and ill-advised for HUD to exempt the sale of Secretary-held 
properties from part 267.
    HUD disposition properties are indeed exempted from the 
requirements of part 267, but they are nonetheless subject to a 
valuation process in determining what would be an acceptable return on 
the disposition sale. Moreover, if FHA mortgage insurance is used to 
finance that sale, the maximum allowable mortgage is based on the bid 
amount capped by the FHA mortgage limit applicable to the area. No 
appraisal is required, and should the mortgagee on its own initiative 
call for one, this part 267 would not apply.

IV. Other Matters

A Rule Recently Adopted by the Federal Financial Agencies

    On June 7, 1994 (59 FR 29482) 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 (the Agencies), after publishing a proposed rule for public 
comment, amended their respective parts of title 12 of the Code of 
Federal Regulations regarding the appraisal of real property pursuant 
to FIRREA. These amendments increase from $100,000 to $250,000 the 
minimum threshold for residential real estate appraisals as provided by 
that statute and also broaden existing exemptions from various other 
appraisal requirements. In addition, the amendments revise existing 
provisions with respect to appraisal content and appraiser 
independence.
    In developing this final rule, HUD took the Agencies' amendments 
into consideration. However, we do not believe it would be appropriate 
for the Department to adopt a threshold mortgage amount that triggers 
the need for an appraisal. HUD is charged with a specific Congressional 
mandate under section 202(e) of the NHA to assure the quality of each 
appraisal used in determining the value of the security for an FHA 
insured mortgage. The Secretary's accountability in this regard is more 
immediate and direct than that of the Agencies in establishing a system 
of state accreditation under FIRREA. Moreover, protection of the FHA 
insurance funds is a duty of the greatest importance to HUD. We do not 
believe that we could fulfill these responsibilities by accepting as 
security for FHA insured mortgages properties that have not been 
thoroughly appraised.
    The Department will therefore require appraisals for single family 
and multifamily programs as set forth in Sec. 267.1, without exception. 
Various considerations that underlie the Agencies' other amendments 
with respect to appraisal standards, appraiser independence and 
miscellaneous related matters are, we believe, comprehensively 
addressed in this rule. Therefore, specific changes to the Agencies' 
regulations need not be discussed or included in this rulemaking which 
alone governs requirements for FHA mortgage insurance transactions.
Executive Order 12866
    This rule was reviewed by the Office of Management and Budget under 
Executive Order 12866, Regulatory Planning and Review. Any changes made 
to the rule as a result of that review are clearly identified in the 
docket file which is available for public inspection in the office of 
the Department's Rules Docket Clerk, Room 10276, 451 Seventh Street, 
SW, Washington, DC 20410.
Regulatory Flexibility Act Analysis
    In accordance with the Regulatory Flexibility Act, 5 U.S.C. 605(b), 
the undersigned hereby certifies that this rule does not have a 
significant economic impact on a substantial number of small entities. 
The eligibility and performance requirements contained in this rule are 
consistent with requirements already established by other government 
agencies for lender eligibility. Accordingly, the economic impact of 
this rule would be minimal, and would affect small and large entities 
equally.
Environmental Impact
    A Finding of No Significant Impact with respect to the environment 
has been made in accordance with HUD regulations in 24 CFR part 50 that 
implement section 102(2)(C) of the National Environmental Policy Act of 
1969 (42 U.S.C. 4332). The Finding of No Significant Impact is 
available for public inspection and copying Monday through Friday, 7:30 
a.m. until 5:30 p.m. in the office of the Rules Docket Clerk, Office of 
General Counsel, Room 10276, Department of Housing and Urban 
Development, 451 Seventh Street, SW, Washington, DC 20410.
    HUD's Semiannual Agenda. This rule was listed under Office of 
Housing as sequence number 1589 in the Department's Semiannual Agenda 
of Regulations published on April 25, 1994 (59 FR 20424, 20448) under 
Executive Order 12866 and the Regulatory Flexibility Act.
    Executive Order 12612, Federalism. The General Counsel, as the 
Designated Official under section 6(a) of Executive Order 12612, 
Federalism, has determined that the policies contained in this rule do 
not have federalism implications and thus are not subject to review 
under the Order. The rule is limited to imposing additional eligibility 
and performance requirements on private lenders. The only point of 
policy contained in part 267 with even an indirect implication for 
federal-state relationships is the decision that a HUD appraiser should 
be subject to the certification requirements of any one state, but not 
necessarily other states in which he or she is assigned to perform 
appraisals. As explained previously, the standards of various 
jurisdictions developed pursuant to FIRREA should result in a 
reasonably uniform level of competence, and qualifying HUD employees in 
every jurisdiction would involve many dollars and staff hours spent on 
a largely duplicative effort. For purposes of section 142 of the Reform 
Act, certification by any one state should therefore be sufficient. In 
reaching this conclusion, HUD parallels OMB's decision with regard to 
FIRREA that:

    Federal employees who choose to become state-licensed or 
certified real estate appraisers need only be licensed or certified 
in one state or territory to perform real estate appraisal duties as 
Federal employees in all states and territories.7
---------------------------------------------------------------------------

    \7\ OMB Bulletin 92-06, March 16, 1992.

    The Department is working toward assuring that its employees who 
perform appraisals or consultations on multifamily projects become 
qualified as certified general appraisers as soon as possible.
    Executive Order 12606, the Family. The General Counsel, as the 
Designated Official under Executive Order 12606, The Family, has 
determined that this rule does not have a potential significant impact 
on family formation, maintenance and general well-being, and, thus is 
not subject to review under the Order. No significant change in 
existing HUD policies or programs, as those policies relate to family 
concerns, will result from promulgation of this rule.
    Paperwork Reduction Act Statement. The information collection 
requirements contained in this rule have been submitted to the Office 
of Management and Budget for approval under the Paperwork Reduction Act 
of 1980 (44 U.S.C. 3501-3520). The form shown in the matrix below has 
been determined by the Department to contain collection of information 
requirements: 

----------------------------------------------------------------------------------------------------------------
                                                                     Number of                                  
                      Form                           Number of     Responses per     Hours per      Total hours 
                                                   Respondents     Respondents     Respondents                  
----------------------------------------------------------------------------------------------------------------
Form HUD 92563..................................          50,000               1              .5         25,000 
                                                 ---------------------------------------------------------------
    Total Annual Burden.........................  ..............  ..............  ..............          25,000
----------------------------------------------------------------------------------------------------------------

List of Subjects

24 CFR Part 200

    Administrative practice and procedure, Claims, Equal employment 
opportunity, Fair housing, Housing standards, Incorporation by 
reference, Lead poisoning, Loan programs--housing and community 
development, Minimum property standards, Mortgage insurance, 
Organization and functions (Government agencies), Penalties, Reporting 
and recordkeeping requirements, Social security, Unemployment 
compensation, Wages.

24 CFR Part 203

    Hawaiian Natives, Home improvement, Indians--lands, Loan programs--
housing and community development, Mortgage insurance, Reporting and 
recordkeeping requirements, Solar energy.

24 CFR Part 204

    Mortgage insurance.

24 CFR Part 206

    Aged, Condominiums, Loan programs--housing and community 
development, Mortgage insurance, Reporting and recordkeeping 
requirements.

24 CFR Part 267

    Appraisals, Mortgage insurance, Property valuation, Reporting and 
recordkeeping requirements.

    Accordingly, the Department amends CFR parts 200, 203, 204, and 
206, and adds a new part 267, consisting of subparts A through C, as 
follows:

PART 200--INTRODUCTION

    1. The authority citation for 24 CFR part 200 is revised to read as 
follows:

    Authority: 12 U.S.C. 1701s, 1701-1715z-18a, 1715z-11; 42 U.S.C. 
3535(d), 3543, and 3544.

    2. Section 200.810 is amended by revising paragraph (b), to read as 
follows:


Sec. 200.810  Single family insurance and coinsurance.

* * * * *
    (b) Appraisal. The appraiser, who shall be listed on the HUD 
Appraiser Roster under Sec. 267.8(d)(2) of this chapter, shall, when 
appraising a dwelling constructed prior to 1978, inspect the dwelling 
for defective paint surfaces.
* * * * *

PART 203--SINGLE FAMILY MORTGAGE INSURANCE

    3. The authority citation for 24 CFR part 203 is revised to read as 
follows:

    Authority: 12 U.S.C. 1709, 1715b; 42 U.S.C. 3535(d).

    4. Section 203.5(e) is revised to read as follows:


Sec. 203.5  Direct endorsement process.

* * * * *
    (e) Appraisal. A mortgagee shall have the property appraised in 
accordance with the requirements of part 267 of this chapter.

PART 204--COINSURANCE

    5. The authority citation for 24 CFR part 204 is revised to read as 
follows:

    Authority: 12 U.S.C. 1715z-9; 42 U.S.C. 3535(d).

    6. Section 204.3(b) is revised to read as follows:


Sec. 204.3  Authority to determine eligibility.

* * * * *
    (b) In making the determination set forth in this section the 
mortgagee shall utilize an appraiser who meets the requirements of part 
267 of this chapter and mortgage credit examiners and inspectors 
approved by the Commissioner.

PART 206--HOME EQUITY CONVERSION MORTGAGE INSURANCE

    7. The authority citation for 24 CFR part 206 is revised to read as 
follows:

    Authority: 12 U.S.C. 1715b, 1715z-20; 42 U.S.C. 3535(d).

    8. Section 206.3 is amended by adding at the end of the definition 
of ``Maximum claim amount'' the following sentence:


Sec. 206.3  Definitions.

* * * * *
    Maximum claim amount * * * Appraised value shall be determined by 
an appraisal performed in accordance with part 267 of this chapter.
* * * * *
    9. A new part 267, consisting of subparts A through C, is added to 
read as follows:

PART 267--APPRAISAL AND PROPERTY VALUATION

Subpart A--General

Sec.
267.1  Applicability.
267.2  Definitions applicable to both single family and multifamily 
programs.
267.3  Professional association membership; nondiscrimination; 
lender reporting and competency.
267.4  Waiver.

Subpart B--Single Family Programs

267.5  Definitions applicable to single family programs.
267.6  Transactions requiring a state certified or state licensed 
appraiser.
267.7  Appraisal standards.
267.8  Selection of appraisers by mortgagees; HUD Appraiser Roster; 
appraiser independence.

Subpart C--Multifamily Programs

267.9  Definitions applicable to multifamily programs.
267.10  Qualified appraisers and appraisals.
267.11  Appraisal standards.
267.12  Selection of appraisers; appraiser independence.

    Authority: 12 U.S.C. 1708(e), 1715b; 42 U.S.C. 3535 (d).

Subpart A--General


Sec. 267.1  Applicability.

    (a) General rule. If the maximum insurable amount for a mortgage 
insured under any National Housing Act program covered by this 
subchapter is based in whole or in part upon the value of security as 
determined by an appraisal, the appraisal must comply with this part 
267.
    (b) Exceptions. This part does not apply:
    (1) If title to the property is held by the Secretary and a 
determination of value is needed for disposition of the property or for 
an insured mortgage to finance the property;
    (2) To appraisals of manufactured homes under Sec. 201.10 (b) or 
(d) of this chapter or Sec. 201.23(b)(3) of this chapter where the 
manufactured home is classified as personal property;
    (3) To appraisals of property for purposes of property improvement 
loans under Title I of the National Housing Act if the principal 
balance of the loan is not required to be based on the borrower's 
equity in the property; or
    (4) If the insured mortgage is secured by a hospital.


Sec. 267.2  Definitions applicable to both single family and 
multifamily programs.

    The following definitions apply to subparts A, B and C of this 
part:
    Appraisal Foundation means the Appraisal Foundation established on 
November 30, 1987, as a not-for-profit corporation under the laws of 
Illinois.
    Appraisal Subcommittee means the Appraisal Subcommittee of the 
Federal Financial Institutions Examination Council.
    FIRREA means Title XI of the Financial Institutions Reform, 
Recovery and Enforcement Act of 1989;
    Market analysis means a study of real estate market conditions for 
a specific type of property.
    Market value means: (1) The most probable price which a property 
should bring in a competitive and open market under all conditions 
requisite to a fair sale, the buyer and seller each acting prudently 
and knowledgeably, provided that the price is not affected by undue 
stimulus. Implicit in this definition is the consummation of a sale as 
of a specified date and the passing of title from seller to buyer under 
conditions whereby:
    (i) Buyer and seller are typically motivated;
    (ii) Both parties are well informed or well advised, and acting in 
what they consider their own best interests;
    (iii) A reasonable time is allowed for sales exposure in the open 
market;
    (iv) Payment is made in terms of cash in U.S. dollars or in terms 
of comparable financial arrangements; and
    (v) The price represents the normal consideration for the property 
sold unaffected by special or creative financing or by a sales 
concession from anyone associated with the sale.
    (2) For purposes of this definition, market value cannot exceed 
replacement cost, i.e., the reasonable estimated cost of replacing the 
property.
    Mortgage means a mortgage as defined in this chapter, or a loan 
authorized for insurance under the National Housing Act.
    Mortgagee means the holder of a mortgage and includes a lender 
holding a Title I contract of insurance and a Title I loan 
correspondent.
    Replacement cost means the Secretary's estimate of the construction 
cost of the property or project when the proposed improvements are 
completed. The replacement cost may include the land, the proposed 
physical improvements, utilities within the boundaries of the land, 
architect's fees, taxes, interest during construction, and other 
miscellaneous charges incident to construction and approved by the 
Secretary. For substantial rehabilitation proposals, the replacement 
cost estimate includes the ``as is'' value of the property before 
rehabilitation, plus the cost of rehabilitation and appropriate 
carrying and financing charges.
    Single family program means a mortgage or loan insurance program 
authorized by the National Housing Act for one-to-four family 
residential property as defined in Sec. 267.5(c).
    State means any state of the United States, any territory of the 
United States, the District of Columbia, Puerto Rico, Guam, American 
Samoa, the Trust Territory of the Pacific Islands, the Virgin Islands, 
and the Northern Mariana Islands.
    USPAP means that edition of the Uniform Standards of Professional 
Appraisal Practice most recently promulgated by the Appraisal Standards 
Board of the Appraisal Foundation at the time the Standards are 
applied. The term also includes such changes and additions to USPAP as 
the Department shall recognize. In general, HUD will recognize a change 
or addition to USPAP. If, after opportunity to consider the 
applicability and consequences of the change for HUD programs, HUD 
should decide that it will no longer recognize the change or addition, 
that decision will be published in the Federal Register.


Sec. 267.3  Professional association membership; nondiscrimination; 
lender reporting and competency.

    (a) Membership in appraisal organizations. A state certified 
general or certified residential appraiser or a state licensed 
appraiser may not be excluded from consideration for an assignment 
solely because of membership or lack of membership in a particular 
appraisal organization.
    (b) Discrimination prohibited. In the selection of an appraiser, 
there shall be no discrimination on the basis of race, color, religion, 
national origin, sex, age or disability.
    (c) Single family report and multifamily information; public 
availability. (1) Based upon data compiled pursuant to paragraphs 
(c)(3) and (c)(4) of this section, HUD will develop gender and minority 
status information and will publish a report summarizing with respect 
to each mortgagee the total number of appraisals performed within the 
applicable reporting period and of that total the number of appraisals 
performed by female appraisers and the number of appraisals performed 
by minority status appraisers as defined in paragraph (c)(3)(iii) of 
this section.
    (2) Based on data compiled pursuant to paragraphs (c)(3) and (c)(5) 
of this section, HUD will develop gender and minority status 
information with respect to each housing finance agency participating 
in the Risk-Sharing Program, each Delegated Processor, and each 
appraisal company and individual appraiser contracting directly with 
the Department. The information will disclose for each of the parties 
described above the total number of appraisals performed within the 
applicable reporting period and of that total the number of appraisals 
performed by female appraisers and the number of appraisals performed 
by minority status appraisers as defined in paragraph (c)(3)(iii) of 
this section.
    (3) Each institution or individual who conducts or contracts for 
appraisals covered by this part will be monitored by HUD with respect 
to the number of appraisals which it has performed or contracted for 
during the reporting year by:
    (i) Staff appraisers;
    (ii) Appraisers assigned from a fee panel;
    (iii) Appraisers whose services it has contracted for; in order to 
determine the number of appraisals conducted for the mortgagee by 
female and minority persons within the reporting period. A minority 
appraiser is one who is: Hispanic, Hispanic black, Non-Hispanic black, 
Asian/Pacific Islander, Asian Indian American, or American Indian/
Alaskan Native.
    (4) With respect to single family programs, the information 
contained in the report will be extracted by HUD from data kept on 
record with respect to each appraiser listed on the HUD Appraiser 
Roster described in Sec. 267.8(d)(2). The data will be maintained so as 
to record the identity of the appraiser when the mortgagee requests an 
appraisal assignment.
    (5) With respect to multifamily programs, information will be 
extracted by HUD from data kept on record for each Review Appraiser and 
Field Appraiser performing appraisals or consulting for housing finance 
agencies (HFAs), Delegated Processors, and the Department on a contract 
basis. The information will be submitted within the following time 
limits:
    (i) HFAs participating in the Risk-Sharing Program will be required 
to submit data early in the process (generally at the time of the 
request for HUD-Retained Reviews);
    (ii) Delegated Processors will be required to submit data within 
three business days from receipt of the Task-Delivery Order;
    (iii) Contract appraisers (Technical Discipline and Purchase 
Orders) will be required to submit data within three days from receipt 
of the Task/Delivery/Purchase Order. Institutions or individuals who 
are currently under contract to HUD will be required to furnish this 
additional information when exercising an option to renew or at any 
other time which involves a change in a negotiated price. HFAs will be 
required to submit the additional data as soon as possible after the 
final rule in the Risk-Sharing Program becomes effective.
    (6) The single family report and the multifamily information will 
be available for public inspection during regular business hours at the 
Office of Insured Single Family Housing, Single Family Development 
Division, U.S. Department of Housing and Urban Development, 451 7th 
St., S.W., Washington, D.C. 20410.
    (d) Competency. Although appraisers performing appraisals covered 
by this part must be either state licensed or certified, as 
appropriate, an appraiser shall not be considered competent or suitable 
solely by reason of having been licensed or certified by a state. Every 
determination of competency shall be based upon the appraiser's 
individual qualifications and character and upon his or her experience 
and educational background as they relate to a particular appraisal 
assignment.


Sec. 267.4  Waiver.

    The Assistant Secretary for Housing-Federal Housing Commissioner, 
or an official designated to act on behalf of the Assistant Secretary-
Commissioner, may waive any requirement of this part not mandated by 
statute upon a finding that application of such requirement would 
adversely affect the purposes of the National Housing Act. Each waiver 
pursuant to this section shall be in writing and shall be supported by 
a statement of the facts and reasons that are the basis for the waiver. 
The authority conferred under this section may not be redelegated.

Subpart B--Single Family Programs


Sec. 267.5  Definitions applicable to single family programs.

    In addition to the definitions in Sec. 267.2, the following 
definitions apply to single family programs:
    Appraisal means a written report independently and impartially 
prepared by a qualified appraiser setting forth an opinion as to the 
market value of an adequately described property as of a specific 
date(s), which statement is supported by the presentation and analysis 
of relevant market information; except that, in the case of a property 
which is not valued on the basis of economic soundness, the appraisal 
shall be based on replacement cost.
    Complex one-to-four family residential property appraisal means an 
appraisal in which the nature of the property, the form of ownership, 
or the market conditions are atypical.
    One-to-four family residential property means a manufactured home 
lot or real property upon which is located a structure containing not 
less than one, nor more than four, dwelling units (or 11 units for a 
mortgage to be insured under subpart A of part 220(h) of this chapter), 
including, for purposes of a mortgage to be insured under Sec. 203.50 
of this chapter, a structure that will contain such units after 
rehabilitation and for purposes of a mortgage to be insured under part 
201 of this chapter, any property regardless of size or nature. The 
term includes a manufactured home and lot classified as real property, 
or a manufactured home lot which meets the requirements of 
Sec. 201.2(v) of this chapter.
    State certified appraiser means any individual who satisfies the 
requirements for certification in a state which has adopted criteria 
that currently meet or exceed the minimum certification criteria issued 
by the Appraiser Qualifications Board of the Appraisal Foundation. The 
state criteria must include a requirement that the individual have 
achieved a satisfactory grade upon a state-administered examination 
that is consistent with and equivalent to the Uniform State 
Certification Examination issued or endorsed by the Appraiser 
Qualifications Board of the Appraisal Foundation. Furthermore, if the 
Appraisal Subcommittee has issued a finding that the policies, 
practices, or procedures of the state are inconsistent with FIRREA, an 
individual must comply with any additional standards for state 
certified appraisers imposed by HUD under Sec. 267.7(c)(2).
    State licensed appraiser means any individual who satisfies the 
requirements for licensing in a state which has adopted criteria that 
currently meet or exceed the minimum licensing criteria issued by the 
Appraiser Qualifications Board of the Appraisal Foundation. The state 
criteria must include a requirement that the individual have achieved a 
satisfactory grade on a state-administered examination that is 
consistent with, and equivalent to, the Uniform State Licensing 
Examination issued or endorsed by the Appraiser Qualifications Board of 
the Appraisal Foundation. Furthermore, if the Appraisal Subcommittee 
has issued a finding that the policies, practices, or procedures of the 
State are inconsistent with Title XI of FIRREA, an individual must 
comply with any additional standards for state licensed appraisers 
imposed by HUD under Sec. 267.7(c)(2).


Sec. 267.6  Transactions requiring a state certified or state licensed 
appraiser.

    (a) Appraisal by either a state certified or state licensed 
appraiser. Every appraisal shall be performed by either a state 
certified appraiser or a state licensed appraiser, except as provided 
in paragraph (b) of this section. With respect to appraisals performed 
by HUD employees, this requirement is satisfied whether or not the 
property is located in the certifying or licensing state.
    (b) Appraisal by a state certified appraiser only. An appraisal 
shall be prepared by a state certified appraiser if it is:
    (1) Required in connection with a mortgage of $1,000,000 or more; 
or
    (2) A complex one-to-four family residential property appraisal.
    (c) Recognition of appraisals not governed by this part. An 
appraisal of a one-to-four family residential property prepared in 
accordance with standards prescribed under FIRREA, and in response to 
the requirements of any Federal Financial Institution Regulatory 
Agency, viz., the Office of the Comptroller of the Currency, the Board 
of Governors of the Federal Reserve System, the Federal Deposit 
Insurance Corporation, the National Credit Union Association or the 
Office of Thrift Supervision, or with standards of the Resolution Trust 
Corporation will comply with this section.


Sec. 267.7  Appraisal standards.

    (a) Minimum standards. Each appraisal shall follow the requirements 
of this Sec. 267.7. The appraisal shall, at a minimum:
    (1) Conform to USPAP, except to the extent that such compliance may 
conflict with the provisions of this part 267.
    (2) Disclose any steps taken that were necessary or appropriate to 
comply with the Competency Provision of USPAP.
    (3) Be written and presented on the Uniform Residential Appraisal 
Report form, the Federal National Mortgage Association (FNMA) Small 
Residential Income Property Appraisal Report form, the FNMA Individual 
Condominium Unit Appraisal Report form or any other format that is 
acceptable to the Secretary.
    (4) Analyze and report in reasonable detail all prior sales of the 
property being appraised that occurred within one year preceding the 
date when the appraisal is prepared.
    (5) Analyze and report data on current revenues, expenses, and 
vacancies for the property if it currently is, and will continue to be, 
income-producing.
    (6) Analyze and report on current market conditions and trends that 
will affect income or the absorption period, to the extent they affect 
the value of the property.
    (7) Contain sufficient supporting documentation with all pertinent 
information reported so that the appraiser's logic, reasoning, 
judgment, and analysis in arriving at a conclusion indicate to the 
reader the reasonableness of the value reported.
    (8) Include in the certification required by USPAP a statement that 
the appraisal is not based on a requested minimum valuation, a specific 
valuation or range of values, or the approval of the loan. The 
certification shall also include a statement that the racial/ethnic 
composition of the neighborhood surrounding the property in no way 
affected the appraisal determination.
    (9) Follow a reasonable valuation method that, except for an 
appraisal with respect to a mortgage to be insured under part 220 of 
this chapter, addresses the direct sales comparison, income, and cost 
approaches to market value required by the Secretary, reconciles or 
explains any differences those approaches yield in determining the 
value of the property in question, and gives the reason(s) for 
rejecting each approach that was not used.
    (b) Unavailable information. If information required by this 
section is not available, that fact shall be disclosed and explained in 
the appraisal report.
    (c) Additional standards. In addition to the minimum standards set 
forth in paragraph (a) of this section:
    (1) A Direct Endorsement mortgagee may adopt generally, or may 
impose in specific cases, such supplementary standards as are 
reasonable, appropriate, and consistent with this part 267.
    (2) HUD may, in instances where the Appraisal Subcommittee has 
determined that the policies, practices, and procedures of a certifying 
or licensing state are inconsistent with FIRREA, impose such 
supplementary requirements as may be appropriate.
    (3) HUD may, in instances where the Appraisal Subcommittee has 
determined that the requirements of FIRREA may be waived in accordance 
with 12 U.S.C. 3348(b), impose such supplementary requirements as may 
be appropriate.


Sec. 267.8  Selection of appraisers by mortgagees; HUD Appraiser 
Roster; appraiser independence.

    (a) Selection method. (1) The method of selecting the appraiser 
depends upon the program involved.
    (i) For a mortgage insured under Title II of the National Housing 
Act, the appraiser may be:
    (A) Employed on the staff of the Direct Endorsement mortgagee or 
selected by the Direct Endorsement mortgagee (which includes being 
selected as an individual from the staff of a selected appraisal 
organization), provided the appraiser is listed on the Appraiser Roster 
provided under this Sec. 267.8; or
    (B) Assigned by HUD from membership on one of its fee panels.
    (ii) Reserved.
    (2) The criteria in paragraph (d) of this section govern the 
selection of the appraiser.
    (3) For the appraisal of a manufactured home which is to be insured 
under Title I of the National Housing Act and is classified as personal 
property, the appraisal shall be carried out under the terms and 
conditions of a contract between HUD and a contractor selected to 
perform such appraisals.
    (b) Direct Endorsement staff appraisers. An appraiser who is a 
staff employee of a Direct Endorsement mortgagee shall be independent 
of the loan officers and the loan production operations of the 
mortgagee.
    (c) Mortgagees, staff and fee appraisers: conflicts of interests. 
(1) A mortgagee must avoid conflicts of interest and other 
relationships which affect, either in reality or in appearance, the 
credibility of the appraisal. Accordingly, a mortgagee may not contract 
with an appraiser or appraisal organization to perform an appraisal of 
a property if the builder or seller of the property owns, is owned by, 
is affiliated with, or has a financial interest in the appraiser or 
appraisal organization.
    (2) An appraiser must avoid conflicts of interest and other 
relationships which affect, either in reality or in appearance, the 
credibility of the appraisal. Accordingly, a fee appraiser may not have 
any interest, direct or indirect, in the property being appraised. A 
staff appraiser of a Direct Endorsement mortgagee may not have any 
direct interest, financial or otherwise, in the property being 
appraised, and is permitted an indirect interest only by reason of his 
or her employment by a mortgagee that has its appraisal operations 
isolated from its other activities in accordance with paragraph (b) of 
this section.
    (d) Eligible fee appraisers. (1) General rule for Direct 
Endorsement cases. If a mortgage is to be processed by Direct 
Endorsement, the mortgagee may:
    (i) Contract with a fee appraiser to perform appraisal services. 
The contract may be with an individual, a corporation, a partnership, a 
sole proprietorship, a joint venture, a limited liability company, or 
any other legal entity recognized for the purpose by the state, which 
the mortgagee has chosen at its sole discretion, provided that the 
individual appraiser selected to perform the appraisal is listed on the 
current HUD Appraiser Roster set forth in paragraph (d)(2) of this 
section. The mortgagee, concurrently and equally with the appraiser 
whom it has chosen, accepts full responsibility for the accuracy, 
integrity and thoroughness of the appraisal.
    (ii) Use an appraiser employed on its staff, provided that the 
appraiser is listed on the current HUD Appraiser Roster.
    (iii) Request HUD to assign an appraiser from one of its fee 
panels. Fee panelists must be listed on the HUD Appraiser Roster.
    (2) HUD Appraiser Roster. (i) HUD will maintain a nationwide 
listing on an Appraiser Roster of appraisers who are permitted to 
perform appraisals in connection with HUD's single family programs. 
Being listed on the Roster does not indicate a warranty or endorsement 
by HUD of any appraiser or appraisal, and Sec. 200.145(c) of this 
chapter applies to each appraisal performed in accordance with this 
part. Each applicant for listing or periodic relisting must certify 
that he or she:
    (A) Holds a current certification or license from a state whose 
qualification standards are in compliance with FIRREA, as determined by 
the Appraisal Subcommittee (and must include his or her current 
certificate or license number);
    (B) Has read HUD Handbook 4150.1 and related Mortgagee Letters;
    (C) Is not listed on HUD's Credit Alert Interactive Voice Response 
System; and
    (D) Is not debarred, suspended or in any way disqualified from 
participating in HUD programs.
    (ii) In addition, the applicant must submit such additional 
information as HUD may require. Application to be listed on the Roster 
must be made at any HUD Office in each state where the applicant will 
perform appraisals.
    (3) Removal from the Roster. HUD may at any time remove the 
appraiser from the Roster for cause. Cause includes, but is not limited 
to, significant deficiencies in appraisals, failure to maintain 
standing as a state certified or state licensed appraiser and 
prosecution for committing or attempting to commit fraud, 
misrepresentation or other offence that may reflect on the appraiser's 
character and integrity. Such removal shall not be governed by the 
procedures of part 24 of this Title. The appraiser shall, however, be 
subject to other sanctions in accordance with part 24 of this title.
    (4) Fee panels. If a mortgage is not processed by the Direct 
Endorsement procedure, the appraiser will be assigned from a fee panel 
or otherwise designated by HUD. A mortgagee using the Direct 
Endorsement procedure may also request HUD to assign an appraiser from 
a fee panel.
    (e) Appraisal fees and charges. The appraisal fee charged to the 
borrower or other party shall be reasonable. The fee may be prescribed 
by rule or other HUD issuance.
    (f) Transfer of appraisals between mortgagees. A Direct Endorsement 
lender may accept an appraisal that was prepared by an appraiser 
engaged directly by another mortgagee, provided that the appraisal was 
performed in accordance with this part and that the mortgagee accepting 
the appraisal has:
    (1) Reviewed the appraisal report under its review procedures; and
    (2) Found the appraisal to be acceptable.

Subpart C--Multifamily Programs


Sec. 267.9  Definitions applicable to multifamily programs.

    In addition to the definitions in Sec. 267.2, the following 
definitions apply to multifamily programs:
    Acceptable risk refers to a program in which the project's net 
operating income covers the mortgage debt service requirement and 
provides an appropriate return to the owner's equity. The term assumes 
that the mortgage does not exceed the appropriate percentage of 
estimated replacement cost and any other supplemental standards 
concerning particular programs contained in handbooks and other 
directives.
    Appraisal means a written report independently and impartially 
prepared by a qualified appraiser setting forth an opinion:
    (1) In the case of a project requiring economic soundness, as to 
the market value of an adequately described property as of a specific 
date(s), which statement is supported by the presentation and analysis 
of relevant market information, and is in accordance with the 
supplemental standards as set forth in HUD's appraisal instructions; or
    (2) In the case of a project which does not require a determination 
of economic soundness, that is based on replacement cost, as estimated 
by HUD staff or by an appraiser who has contracted with HUD to perform 
a real estate consultation pursuant to Sec. 267.12(b).
    Consultant, which refers to an appraiser performing a real property 
consultation for HUD, means the person who provides such information, 
analysis, recommendations or conclusions.
    Consultation or consultancy means the act or process of providing 
information, analysis of real estate data, and recommendations or 
conclusions on diversified problems in real estate, other than 
estimating value.
    Economic soundness refers to a program under which a project has 
had its underwriting risk analyzed on the basis of three approaches to 
value.
    Multifamily project or multifamily property means a project 
containing five or more family units (or in the case of a mortgage to 
be insured under section 220(h) of the National Housing Act, two or 
more rental units), a nursing home, an intermediate care facility, a 
board and care home or a project insured under section 232 of the NHA.
    State certified appraiser means any individual who satisfies the 
requirements for certification as a certified general appraiser in a 
state which has adopted criteria that currently meet or exceed the 
minimum certification criteria issued by the Appraiser Qualifications 
Board of the Appraisal Foundation. The state criteria must include a 
requirement that the individual have achieved a satisfactory grade upon 
a state-administered examination that is consistent with and equivalent 
to the Uniform State Certification Examination issued or endorsed by 
the Appraiser Qualifications Board of the Appraisal Foundation. 
Furthermore, if the Appraisal Foundation has issued a finding that the 
policies, practices, or procedures of the state are inconsistent with 
FIRREA, an individual must comply with any additional standards for 
state certified appraisers imposed by HUD under Sec. 267.11(c)(1).


Sec. 267.10  Qualified appraisers and appraisals.

    (a) Appraisal by a state certified general appraiser. Every 
appraisal shall be performed by a state certified general appraiser. 
With respect to appraisals performed by HUD employees, this requirement 
is satisfied whether or not the property being appraised is located in 
the state which certified the HUD employee. Each HUD employee who 
performs appraisals or consultations or who reviews appraisals or 
consultations will be qualified as a certified general appraiser under 
the laws of one or more states not later than December 31, 1996, 
unless, in an individual case, the Assistant Secretary for Housing-
Federal Housing Commissioner decides that a different date is 
appropriate. All appraisers shall comply with HUD policies and 
procedures as set forth in HUD handbooks and other issuances.
    (b) Only appraisals and consultations complying with this part are 
recognized. Appraisals or consultations performed in accordance with 
the requirements of other agencies will not be recognized for HUD 
multifamily transactions that require appraisals or consultations 
complying with this part 267 unless those appraisals or consultations 
so comply.


Sec. 267.11  Appraisal standards.

    (a) Minimum standards. Each appraisal or real estate consultation 
shall follow the requirements of this Sec. 267.11 as supplemented from 
time to time by HUD processing instructions which comprise supplemental 
standards authorized in accordance with USPAP. The appraisal shall, at 
a minimum:
    (1) Conform to USPAP, except to the extent that such compliance may 
conflict with the provisions of this part 267.
    (2) Disclose any steps taken that were necessary or appropriate to 
comply with the Competency Provision of the USPAP.
    (3) Apply USPAP Standard 2, Real Property Appraisal Reporting; 
except that under the Supplemental Standards Provision of USPAP, 
reports by appraisers or consultants shall be in writing using the 
following forms:
    (i) HUD-92264, HUD-92264(RCF) or HUD-92264B, with attachments as 
required;
    (ii) Trial form HUD-92264A.
    (4) Analyze and report in reasonable detail all prior sales of the 
property being appraised within three years preceding the date when the 
appraisal is prepared, or beyond three years if necessary to include 
the last arms-length transaction.
    (5) Analyze and report data on current revenues, expenses, and 
vacancies for the property if it currently is, and will continue to be, 
income-producing.
    (6) Analyze and report a reasonable marketing period for the 
subject property.
    (7) Analyze and report on current market conditions and trends that 
will affect income or the absorption period, to the extent they affect 
the value of the property.
    (8) Contain sufficient supporting documentation with all pertinent 
information reported so that the appraiser's logic, reasoning, 
judgment, and analysis in arriving at a conclusion indicate to the 
reader the reasonableness of the value reported or of the consulting 
recommendations or conclusions provided.
    (9) Include in the certification required by USPAP a statement that 
the appraisal is not based on a requested minimum valuation, a specific 
valuation or range of values, or the approval of the loan. The 
certification shall also include a statement that the racial/ethnic 
composition of the neighborhood surrounding the property in no way 
affected the appraisal determination.
    (10) Follow a reasonable valuation method that:
    (i) With respect to a program based on market value, addresses the 
direct sales comparison, income, and cost approaches to market value, 
reconciles or explains any differences those approaches yield in 
determining the value of the property in question, and gives the 
reason(s) for rejecting each approach that was not used;
    (ii) With respect to a program based on replacement cost, 
determines the acceptable risk using estimated replacement cost 
together with supplemental standards set forth in HUD handbooks and 
other program directives.
    (b) Unavailable information. If information required by this 
section is not available, that fact shall be disclosed and explained in 
the appraisal report.
    (c) Additional standards. In addition to the minimum standards set 
forth in paragraph (a) of this section:
    (1) HUD may, in instances where the Appraisal Subcommittee has 
determined that the policies, practices, and procedures of a certifying 
or licensing state are inconsistent with FIRREA, impose such 
supplementary requirements as may be appropriate.
    (2) HUD may, in instances where the Appraisal Subcommittee has 
determined that the requirements of FIRREA may be waived in accordance 
with 12 U.S.C. 3348(b), impose such supplementary requirements as may 
be appropriate.


Sec. 267.12  Selection of appraisers; appraiser independence.

    (a) Basis for selection. The appraiser or consultant may be:
    (1) A member of HUD's staff;
    (2) Selected by the Delegated Processor in accordance with terms 
and conditions agreed to in writing by HUD and the Delegated Processor;
    (3) Selected to perform appraisals in accordance with the terms and 
conditions of a formal contract between HUD and an institution or 
individual performing the services, or in accordance with the terms and 
conditions of a Purchase Order; or
    (4) Selected by an HFA which has been approved to participate in 
the Department's Risk-Sharing Program.
    (b) Qualifications. HUD exercises contractual control over the 
qualifications of those individuals and organizations that perform 
appraisal and consultation services in FHA multifamily programs.
    (1) Appraisers and consultants performing services under HUD 
contracts for Delegated Processing and Technical Discipline assignments 
will be selected on the basis of criteria and procedures set forth in 
the solicitation, pursuant to the Federal Acquisition Regulations, 48 
CFR Chapter I.
    (2) Under the Delegated Processing Program HUD contracts with a 
HUD-approved processing company to perform mortgage insurance 
underwriting processing and to make a recommendation to HUD. HUD makes 
the final underwriting determination. The Delegated Processor must 
identify the staff or contract review appraiser(s) and consultant(s) 
and must submit their qualifications, based upon requirements as set 
forth in the contract between HUD and the Delegated Processor, for 
review and approval. The Delegated Processor may subcontract appraiser 
and consulting functions, but must identify, prior to performing the 
appraisal or consultation, the appraiser or consultant selected under 
the subcontract and must provide a resume or qualifications for review 
and approval by the HUD field office concerned.
    (3) Under the Housing Finance Agency Risk-Sharing Program, HUD 
delegates to state and local housing finance agencies the authority to 
originate and service loans that are fully insured by FHA. Under this 
program, participating agencies share in the risk associated with 
monetary losses that may be incurred as a result of loan defaults. An 
HFA may use either in-house or contract appraisers who meet 
certification requirements. The Risk-Sharing Program requires 
compliance with USPAP and therefore requires that appraisals be 
performed by certified general appraisers accredited by the state in 
which the project is located.
    (c) Delegated Processor appraisers: conflicts of interests. A 
Delegated Processor or Consultant must avoid conflicts of interest and 
other relationships which affect, either in reality or in appearance, 
the credibility of the appraisal. The Delegated Processor or Consultant 
may not:
    (1) Contract with an appraiser or appraisal organization to perform 
appraisals, if the Delegated Processor or Consultant owns, is owned by, 
is affiliated with, or has a financial interest in the appraiser or 
appraisal organization; or
    (2) Contract with an appraiser or appraisal organization to perform 
an appraisal of a property if the builder or seller of the property 
owns or is owned by, is affiliated with, or has a financial interest in 
the appraiser or appraisal organization.
    (d) Appraiser independence. An appraiser may not have any interest, 
direct or indirect, in the property being appraised.
    (e) Non-transferability of appraisal. Appraisal materials and 
reports may not be transferred between mortgagees with respect to a 
property involved in a multifamily transaction.

    Dated: September 16, 1994.
Jeanne K. Engel,
General Deputy Assistant Secretary for Housing-Federal Housing 
Commissioner.
[FR Doc. 94-24327 Filed 9-30-94; 8:45 am]
BILLING CODE 4210-27-P