[Federal Register Volume 60, Number 192 (Wednesday, October 4, 1995)]
[Rules and Regulations]
[Pages 51889-51895]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-24690]



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NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 722


Appraisals

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final amendments.

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SUMMARY: The NCUA Board is issuing final amendments to its regulation 
regarding the appraisal of real estate, adopted pursuant to Title XI of 
the Financial Institutions Reform, Recovery and Enforcement Act of 
1989. The final amendments simplify compliance with regulatory 
requirements for credit unions by changing provisions of the appraisal 
regulation that govern: the publication of the Uniform Standards of 
Professional Appraisal Practice (USPAP); minimum appraisal standards; 
appraisals to address safety and soundness concerns; unavailable 
information; additional appraisal standards developed by credit unions; 
and appraiser independence. The final amendments should reduce costs 
without affecting the reliability of appraisals used in connection with 
federally related transactions.

EFFECTIVE DATE: October 1, 1995.

FOR FURTHER INFORMATION CONTACT: Herbert Yolles, Director, Department 
of Risk Management, Office of Examination and Insurance, (703) 518-6360 
or Michael McKenna, Staff 

[[Page 51890]]
Attorney, Office of General Counsel, (703) 518-6540.

SUPPLEMENTARY INFORMATION:

A. Background

    Title XI of the Financial Institutions Reform, Recovery and 
Enforcement Act of 1989 (FIRREA) directed NCUA and the other financial 
institution regulatory agencies to publish appraisal rules for 
federally related real estate transactions within the jurisdiction of 
each agency. In accordance with statutory requirements, NCUA's final 
rule sets minimum standards for appraisals used in connection with 
federally related real estate transactions and identified those 
transactions that require a state certified appraiser and those that 
require either a state certified or licensed appraiser.
    While in most cases an appraisal is an essential part of a sound 
underwriting decision, the Board believes that NCUA should not require 
Title XI appraisals where they impose costs without significantly 
promoting the safety and soundness of credit unions or furthering the 
purpose of Title XI of FIRREA. Furthermore, it has been the Board's 
experience that some requirements are no longer necessary. Accordingly, 
on March 1, 1995, the Board issued proposed amendments to part 722, the 
appraisal regulation. See 60 FR 13388 (March 13, 1995). The proposed 
amendments were intended to simplify compliance for credit unions by 
changing provisions in the appraisal regulation that govern: (i) The 
publication of the USPAP; (ii) minimum appraisal standards; (iii) 
appraisals to address safety and soundness concerns; (iv) unavailable 
information; (v) additional appraisal standards developed by credit 
unions; and (vi) appraiser independence.

B. Comments

    Twenty-nine comments were received. Two commenters fully supported 
the amendments. The remaining twenty-seven comments were generally 
positive and consistently supported most of the proposed amendments. 
The issues that generated the most comments were the de minimus amount 
and appraiser independence.

Dollar Threshold for Obtaining an Appraisal (the De Minimus Amount)

    The current appraisal regulation requires a credit union to obtain 
an appraisal by a certified and licensed appraiser if the transaction 
value is in excess of $100,000 for residential real estate and $50,000 
for commercial property. See 12 CFR 722.3(a). The other federal 
financial institution regulatory agencies \1\ have increased the 
threshold to $250,000. See 59 FR 29482, June 7, 1994. The Board 
considered whether the de minimus level should be increased for 
federally-insured credit unions. Although credit unions are well 
capitalized, they are generally much smaller than other financial 
institutions. As a result, the relative size of an average real estate 
loan in comparison to capital is generally much higher for a credit 
union, which translates to much greater relative risk. A major portion 
of the losses to the National Credit Union Share Insurance Fund in the 
past ten years were associated with real estate lending. Consequently, 
the Board did not propose to increase either threshold.

    \1\ The Board of Governors of the Federal Reserve System, the 
Federal Deposit Insurance Corporation, the Office of the Comptroller 
of the Currency and the Office of Thrift Supervision.
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    Twelve commenters supported the Board's position. One commenter 
specifically concurred with NCUA's rationale for not increasing the de 
minimus level. Two commenters believed that increasing the dollar 
threshold may cause safety and soundness problems. Eight commenters 
recommended increasing the de minimus level to $250,000 for residential 
real estate. Most of these commenters believed that retaining the 
current threshold will make credit union loans more expensive and place 
credit unions at a competitive disadvantage. Two commenters recommended 
increasing the de minimus level to $150,000. One commenter suggested 
increasing the de minimus level to $250,000 for business loans. The 
Board does not believe the minimal effects on competition outweigh 
safety and soundness concerns. For credit unions that engage in real 
estate lending, their greatest single risk protection is to obtain a 
licensed or certified appraisal to support the loan-to-value ratio. The 
current thresholds of $100,000 for residential real estate and $50,000 
for commercial property are sufficiently high to preclude most home 
equity or second trust lending from the appraisal requirement, but are 
low enough to ensure that appraisals are obtained for higher dollar 
value real estate lending.

Valuation Requirement

    The Board did not propose any change to the requirement that any 
real estate transaction under the de minimus level, and not otherwise 
exempt, receive a valuation. Three commenters recommended eliminating 
the valuation requirement if the value of the loan was below a certain 
dollar threshold. Two commenters would set the dollar threshold for a 
valuation at $20,000 and one commenter would set the dollar threshold 
at $50,000.
    The Board continues to believe that there should be no de minimus 
level on the valuation requirement. Loans which are secured by real 
estate are often made at substantially lower interest rates than 
noncollateralized loans. The value of the real estate secured as 
collateral reduces the potential risk of the loan, thereby enabling the 
credit union to lend at a lower interest rate or smaller spread. Unless 
a valuation is performed that meets the requirements of part 722, the 
credit union has no assurance that the real estate offered as 
collateral is of sufficient value to provide the necessary risk 
protection to justify the reduced interest rate. However, the Board is 
exempting from the valuation requirement those real estate loans that 
are insured by a third party. In this case, there is virtually no risk 
to the credit union and the valuation requirement serves no practical 
purpose.
    One commenter recommended that the agency define the term 
``valuation'' in the preamble of the final regulation. The term was 
defined in the preamble to the original final rule. See 55 FR 30199 
(July 25, 1990). The term was broadly defined to allow credit unions 
the flexibility to use various methods to measure market value. Any 
further refinement of the definition would reduce that flexibility. The 
Board does not believe that would be in the best interests of credit 
unions.
    Some credit unions have established programs in which minimal 
valuation procedures are used for real estate loans which are below 
certain dollar thresholds and/or are below certain loan-to-value 
ratios. These minimal procedures do not involve a physical inspection 
of the property or ``drive by'', but instead may rely on other written 
evidence such as a recent tax assessment. The Board has no objection to 
such alternative valuation procedures, as long as the credit union has 
fully documented how the alternate procedures will work and 
demonstrated that the procedures do not impose an unacceptable risk by 
not performing a physical inspection. The credit union must also 
demonstrate how the other written evidence correlates to the value of 
the collateral. What constitutes an unacceptable level of risk will 
vary for each credit union and each loan based on such factors as the 
credit union's size, capital level and experience with real estate 
lending, and the borrower's debt level and credit history. For this 
reason, the Board believes that it would be inappropriate for it to 
attempt to set 

[[Page 51891]]
specific parameters on the valuation procedures that credit unions may 
employ.

1. Exemptions

    The Board proposed amendments to clarify and expand the 
circumstances in which a Title XI appraisal is not required. The Board 
addressed the following areas: (1) The ``abundance of caution'' 
provision; (2) liens for purposes other than the real estate's value; 
(3) requirements for renewals, refinancings and other subsequent 
transactions; (4) transactions involving real estate notes; (5) 
transactions insured or guaranteed by a United States Government Agency 
or United States Government Sponsored Agency; and (6) transactions that 
meet the qualification for sale to a United States Government Agency or 
United States Government Sponsored Agency.

The ``Abundance of Caution'' Provision

    NCUA's appraisal regulation currently provides that an appraisal is 
not required when a lien on real estate has been taken as collateral 
``solely'' through an abundance of caution and where the terms of the 
transaction as a consequence have not been made more favorable than 
they would have been in the absence of a lien. See 12 CFR 722.3(a)(2). 
To emphasize the broader scope of the abundance of caution exemption, 
the Board proposed to delete the word ``solely'' from the current 
exemption. Seven commenters supported and one opposed this amendment. 
The supporters believed it would add flexibility to credit union's 
lending policies. One of these commenters suggested that the final 
regulation also eliminate the requirement that ``the terms of the 
transaction have not been made more favorable than they would have been 
in the absence of the lien.'' This commenter stated that if this 
requirement is not eliminated credit unions would be at a competitive 
disadvantage with banks and thrifts.
    The Board is unwilling to further expand the abundance of caution 
provision. When the terms of a loan are more favorable than they would 
have been in the absence of a lien, the more favorable terms are 
warranted because of the value of the collateral. Without a certified 
or licensed appraisal (or a valuation if the transaction is below the 
de minimus level) the credit union has no assurance that the collateral 
is of sufficient value to provide the necessary risk protection.
    The opposing commenter believes this amendment may lead to 
unwarranted risk. However, this amendment will only affect a small 
number of transactions and cannot be used when the terms of the 
transaction have been made more favorable than they would have been in 
the absence of the lien. A loan falling into this category will not 
carry any additional risk. Therefore, the Board is adopting this 
amendment as proposed.

Liens for Purposes Other Than the Real Estate's Value

    The Board proposed a new exemption for transactions in which a 
credit union takes a lien on real estate for purposes other than the 
value of the real estate, such as when it takes a lien on real estate 
to protect the legal rights to other collateral. In such cases an 
appraisal would not be required. Seven commenters supported this 
amendment. One of these commenters stated that this new exemption would 
benefit credit unions since it would allow them to take additional 
security without adding the burden of obtaining an appraisal. 
Accordingly, the Board is adopting the amendment as proposed.

Requirements for Renewals, Refinancing and Other Subsequent 
Transactions

    The Board proposed exempting from the appraisal requirement 
subsequent transactions provided no new monies were advanced other than 
funds necessary to cover reasonable closing costs and where there has 
been no obvious and material change in the market conditions or 
physical aspects of the property which would threaten the credit 
union's collateral protection. Fifteen commenters supported this 
proposal. One of these commenters stated that this amendment would be 
beneficial to credit unions and members who wish to refinance an 
existing mortgage with the same credit union, in order to take 
advantage of a lower interest rate, but not incur the added expenses of 
another appraisal.
    One commenter recommended even greater flexibility to situations in 
which an appraisal is not required for renewals, refinancings, and 
other subsequent transactions. This commenter would exempt a 
transaction which involves an existing extension of credit provided it 
meets one of two criteria: (i) There is no advancement of new money 
except to cover reasonable closing costs or (ii) there has been no 
obvious and material change in market conditions or physical aspects of 
the property that threatens the adequacy of the credit union's real 
estate collateral protection after the transaction, even with the 
advancement of new monies. This commenter stated that banks and thrifts 
have this exemption and credit unions would be at a competitive 
disadvantage without it. The Board believes that an appraisal is 
necessary if new funds are advanced. The Board believes that safety and 
soundness concerns outweigh the possible minimal affects on 
competition.
    One commenter supports the proposal but would also require a drive-
by appraisal to confirm there had been no material change in the 
collateral. The Board believes that credit unions should retain the 
flexibility on how best to determine whether there has been any 
material change in the collateral. Three commenters objected to this 
amendment believing an appraisal is necessary because market conditions 
may have changed since the loan was originally granted. The Board 
disagrees. If the credit union has made the loan being refinanced and 
no additional funds are advanced, the risk is only associated with the 
extension of the repayment period. The Board believes that in most 
cases this risk will be minimal. In addition, the Board believes that 
the credit unions will be aware of the deteriorating market trends and 
will seek a new appraisal if they believe it is necessary. The Board is 
adopting in final the amendment as proposed. This exemption is not 
applicable if a member refinances a mortgage with a new lender.

Transactions Involving Real Estate Notes

    The Board proposed to allow credit unions to purchase, sell, invest 
in, exchange, or extend credit secured by real estate notes or 
interests in real estate notes or interests in real estate without 
obtaining a new Title XI appraisal if each note or real estate interest 
is supported by an appraisal that meets the regulatory appraisal 
requirements for the institution at the time the real estate-secured 
note was originated. (The transaction would, of course, have to meet 
other statutory and regulatory requirements applicable to federally-
insured credit unions.) The Board believes that this amendment will 
serve federal public policy interests by helping to ensure that the 
appraisal regulation does not unnecessarily inhibit secondary mortgage 
market transactions that involve real estate-secured loans and real 
estate interests. Six commenters supported this proposal. Most of these 
commenters believe that this change would permit credit unions to buy 
or sell loans more easily on the secondary market. Consequently, the 
Board is adopting this amendment as proposed.

[[Page 51892]]


Transactions Insured or Guaranteed by a United States Government Agency 
or United States Government Sponsored Agency

    NCUA's appraisal regulation currently provides that loans insured 
or guaranteed by an agency of the United States government are exempt 
from NCUA's appraisal requirements. The Board proposed to delete the 
requirement that the transaction be supported by an appraisal that 
conforms to the requirements of the insuring or guaranteeing agency. 
Five commenters supported this amendment. One commenter objected to it 
on safety and soundness grounds. The Board believes that loan program 
standards sufficiently protect credit unions since in order to receive 
the insurance or guarantee, the transaction must meet all underwriting 
requirements of the insurer or guarantor, including real estate 
appraisal or valuation requirements. It is unnecessary to require these 
transactions to also meet the overlapping requirements of NCUA. 
Moreover, this exemption will eliminate the confusion among credit 
unions that two separate appraisals are required; one meeting NCUA's 
Regulations and another meeting the federal loan program standards. 
Accordingly, the Board is adopting the proposed amendment in final.

Transactions That Meet the Qualifications for Sale to a United States 
Government Agency or Government Sponsored Agency

    NCUA proposed to permit credit unions to originate, hold, buy or 
sell transactions that meet the qualifications for sale to any U.S. 
government agency and certain government sponsored agencies without 
obtaining a separate appraisal conforming to NCUA's Regulations. The 
Board believes that permitting credit unions to follow these 
standardized appraisal requirements, without the necessity of obtaining 
an appraisal or appraisal supplement will increase a credit union's 
ability to buy and sell these loans. Also, it may help a credit union 
with liquidity problems. Four commenters supported this amendment. One 
commenter suggested that the list of the government sponsored agencies 
that was in the proposed rule's preamble be included in the preamble of 
the final regulation so that credit unions would be able to identify 
those agencies more easily. The Board agrees. These government 
sponsored agencies are:
    * Banks for Cooperatives.
    * Federal Agricultural Mortgage Corporation (Farmer Mac).
    * Federal Farm Credit Banks.
    * Federal Home Loan Banks (FHLBs).
    * Federal Home Loan Mortgage Corporation (Freddie Mac).
    * Federal National Mortgage Association (Fannie Mae).
    * Student Loan Marketing Association (Sallie Mae).
    * Tennessee Valley Authority (TVA).
    The Board believes the appraisal standards of the U.S. government 
agencies established to maintain a secondary market in various types of 
loans are appropriate for these exempt transactions. Furthermore, the 
Board believes that compliance with these standards will protect the 
safety and soundness of regulated financial institutions. Accordingly, 
the Board is adopting the proposed amendments in final.

2. Appraisals to Address Safety and Soundness Concerns

    The Board proposed to clarify that NCUA may require Title XI 
appraisals to address safety and soundness concerns where real estate-
related financial transactions present greater-than-normal risk to 
individual credit unions. For example, NCUA may require a troubled 
credit union to obtain an appraisal for transactions below the 
threshold level. Two commenters supported this amendment. One commenter 
objected stating that USPAP standards already provide sufficient 
safeguards. In general, the Board believes that the USPAP standards are 
sufficient but as the above example demonstrates there may be occasions 
where additional standards are necessary. Accordingly, the Board is 
adopting this amendment as proposed.

3. Minimum Appraisal Standards

    The Board proposed to reduce the number of minimum appraisal 
standards applicable to Title XI appraisals for federally-related 
transactions from the thirteen standards found in Sec. 722.4(a) of 
NCUA's Regulations (12 CFR 722.4(a)) to five and eliminate the current 
prohibition on the use of the USPAP Departure Provision in connection 
with federally-related transactions. The Board proposed to require all 
appraisals for federally-related transactions to: (i) Conform to 
generally accepted appraisal standards as evidenced by the USPAP; (ii) 
be written and contain sufficient information and analysis to support 
the credit union's decision to engage in the transaction; (iii) analyze 
and report appropriate deductions and discounts for proposed 
construction or renovation, partially leased buildings, no-market lease 
terms and tract developments with unsold units (iv) be based upon the 
definition of market value as set forth in the regulation; and (v) be 
performed by State licensed or certified appraisers.
    The Board also proposed deleting Appendix A from the regulation 
since USPAP would be referenced in the regulation.
    Nine commenters supported the modification and believe that 
eliminating the parallel USPAP standards will ease regulatory burden. 
Most of these commenters believed that this amendment will eliminate 
any confusion on what standards to follow. One commenter specifically 
stated that the elimination of Appendix A will make it clear to credit 
unions that any reference to USPAP is the current edition. Ten 
commenters did not believe this change will ease regulatory burden but 
they did not object to the change. One of these commenters stated that 
all the proposed changes are the responsibility of the appraiser and 
not the credit union. One commenter objected to the amendment because 
he does not believe the current standards impose any sort of regulatory 
burden. Two commenters believe the proposed amendments will affect the 
usefulness of an appraisal. The Board does not believe an appraisal 
will be less useful by eliminating these standards since an appraiser 
must still follow the parallel USPAP standards. By eliminating the 
regulatory standards that parallel USPAP standards the Board is simply 
reducing the confusion on what standards need to be followed in the 
preparation of appraisals for federally related transactions.

Departure Provision

    The Board proposed to permit credit unions to use appraisals 
prepared in accordance with the USPAP Departure Provision for 
federally-related transactions. The Departure Provision permits limited 
exceptions to specific guidelines in the USPAP. The Board believes that 
credit unions should be allowed to determine, with the assistance of 
the appraiser, whether an appraisal to be prepared in accordance with 
the Departure Provision is appropriate for a particular transaction and 
consistent with principles of safe and sound lending. Thirteen 
commenters supported the ability of a credit union to use USPAP's 
Departure Provision. Most of these commenters do not believe this 
change would affect the reliability of an appraisal report. They 
believe this change would provide credit unions with added flexibility 
which will result in decreased appraisal costs. Five commenters believe 
the use of the Departure Provision may affect an appraisal's 
reliability and two of these 

[[Page 51893]]
commenters stated that the interpretation of the data given by the 
appraiser may be misleading and not acceptable. The Board believes that 
appraisal data is always subject to some interpretation. A credit union 
can minimize this risk by carefully selecting an appraiser. 
Furthermore, appraisers preparing appraisals using the Departure 
Provision must still comply with all binding requirements of the USPAP 
and must be sure that the resulting appraisal is not misleading. The 
amendment also makes clear that the written appraisal must contain 
sufficient information and analysis to support the credit union's 
decision to engage in the transaction. This puts the credit union on 
notice of their responsibility to have appraisals that are appropriate 
for the particular federally related transaction.

Deductions and Discounts

    The Board proposed to retain the current standard in the appraisal 
regulation regarding deductions and discounts. See 12 CFR 722.4(a)(8). 
The USPAP provision on this subject requires the appraiser to include a 
discussion of deductions and discounts when it is necessary to prevent 
an appraisal from being misleading. The Board believes it is 
appropriate to emphasize the need to include an appropriate discussion 
of deductions and discounts applicable to the estimate of value in 
Title XI appraisals for federally related transactions. For example, in 
order to properly underwrite a loan, a credit union may need to know a 
prospective value of a property, in addition to the market value as the 
date of the appraisal. A prospective value of a property is based upon 
events yet to occur, such as completion of construction or renovation, 
reaching a stabilized occupancy level, or some other event to be 
determined. Thus, more than one value may be reported in an appraisal 
as long as all values are clearly described and reflect the projected 
dates when future events could occur.
    The standard on deductions and discounts emphasize the need for 
appraisers to analyze, apply and report appropriate discounts and 
deductions when providing values based on future events. In financing 
the purchase of an existing home in a long-standing community, there 
typically would be no need to apply any discounts or deductions to 
arrive at the market value of the property since the credit union's 
financing of the project does not depend on events such as further 
development of the property or the sale of units in a tract 
development. Therefore, the Board is adopting in final the amendment as 
proposed.

Remaining Standards

    The Board also proposed to retain the current market value standard 
in the appraisal regulation which requires the appraisal to be based on 
the definition of market value in NCUA's Regulations. See 12 CFR 
722.4(a)(2). Finally, the Board proposed a new standard that all 
appraisals for federally related transactions must be prepared by 
licensed or certified appraisers. This requirement is mandated by Title 
XI of FIRREA and is repeated in other parts of the appraisal 
regulation.
    The Board is adopting the minimum appraisal standards as proposed. 
The Board believes these five standards will simplify compliance with 
the appraisal regulation without diminishing the usefulness of Title XI 
appraisals prepared for federally related transactions. Under these 
standards, the USPAP is referenced but is no longer part of NCUA's 
Regulations. This approach no longer requires NCUA to republish changes 
to the USPAP adopted by the Appraisal Standards Board in Appendix A of 
this rule. The appendix is deleted from NCUA's appraisal regulation.

4. Elimination of the Provision on Unavailable Information

    The Board proposed to delete the current provision that requires 
appraisers to disclose and explain when information necessary to the 
completion of an appraisal is unavailable. See 12 CFR 722.4(b). The 
USPAP currently requires appraisers to disclose and explain the absence 
of information necessary to complete an appraisal that is not 
misleading. See USPAP Standard Rule 2-2(k). Moreover, when information 
that may materially affect the estimate of the value is unavailable, 
the Board believes that generally accepted appraisal standards require 
appraisers to explain the absence of that information and its effect on 
the reliability of the appraisal. Therefore, to streamline the 
regulation the Board is adopting the amendment as proposed.

5. Elimination of the Provision on Additional Appraisal Standards

    The Board proposed to delete the current provision that merely 
confirms the authority of credit unions to require appraisers to comply 
with additional standards. See 12 CFR 722.4(c). As the regulation's 
minimum appraisal standards for federally related transactions do not 
prevent a credit union from requiring additional appraisal standards or 
information to meet the credit union's business needs. It is 
unnecessary to keep this provision in the appraisal regulation. 
Consequently, the Board is adopting the proposed amendment in final.

6. Appraiser Independence

    The Board proposed to permit a credit union to use an appraisal 
that was prepared for any financial service institution including 
mortgage bankers. Twenty commenters supported this amendment. One of 
these commenters added a caveat that it should be permissible only if 
the appraisal is ordered by a lending establishment and the appraiser 
is one that has been approved by the lender. Three of these commenters 
believed the appraiser should be certified or licensed. Two commenters 
say the appraisal should be recent. Three commenters objected to this 
provision. One of these commenters stated that relying on an appraisal 
commissioned by another financial institution may lead to a faulty 
credit decision. A credit union need not rely on an appraisal if it 
does not have confidence in the report or the appraiser. The Board 
believes that these are all business decisions that should be made by 
the credit union and need not be regulated. However, it is incumbent on 
the credit union to ensure that the appraisal conforms to the 
requirements of the regulation and is otherwise acceptable. 
Furthermore, the appraiser would not be allowed to have a direct or 
indirect interest, financial or otherwise, in the property or the 
transaction, and must have been directly engaged by the non-regulated 
institution.

Age of Appraisal

    In the preamble to the proposed amendments, the Board addressed the 
maximum age for an acceptable appraisal. The Board believed that there 
should be a maximum age (time from date of the appraisal to date of the 
application of the loan) for an appraisal, but that the age should not 
be so short as to unnecessarily require a new appraisal in the unlikely 
event that a mortgage is refinanced within a reasonably short time or a 
credit union is using an appraisal prepared for another financial 
service institution. The Board realized that setting a specific time 
period would not be appropriate in all situations. The Board proposed 
allowing credit unions to determine the period for an appraisal but 
recommending that any appraisal over six months not be used. Ten 
commenters supported the six month recommendation and nine commenters 
objected. Most of these commenters 

[[Page 51894]]
would prefer that NCUA allow the determination to be made on a case by 
case basis or continue with the current one year recommendation. They 
also believed that in many locations an appraisal that is one year old 
is still an accurate reflection of market value.
    The Board does not have any empirical evidence to demonstrate that 
an appraisal older than six months is inherently unreliable. The Board 
believes that while any specific time period will not be appropriate in 
all situations, appraisals generally can be relied upon for up to one 
year. During periods of stable real estate market conditions, 
appraisals that are one year old may be fairly accurate. However, 
because of the uncertain nature of real estate market conditions, older 
appraisals may be unreliable. It is the responsibility of the credit 
union to be aware of market conditions. The ultimate judgment on 
whether to use an appraisal rests with the credit union. This approach 
provides guidance while permitting credit unions the flexibility to use 
their best judgment in this matter.

Regulatory Procedures

Regulatory Flexibility Act

    The Regulatory Flexibility Act requires NCUA to prepare an analysis 
to describe any significant economic impact a proposed regulation may 
have on a substantial number of small credit unions (primarily those 
under $1 million in assets). The final amendments reduce regulatory 
burden and are less restrictive than current requirements. Overall, the 
Board expects the changes to benefit members and federally-insured 
credit unions regardless of size by reducing costs without 
substantially increasing the risk of loss. In addition, most small 
credit unions do not offer real estate loans. Accordingly, the Board 
determines and certifies that the final rule is not expected to have a 
significant economic impact on a substantial number of small credit 
unions and that a Regulatory Flexibility Analysis is not required.

Executive Order 12612

    Executive Order 12612 requires NCUA to consider the effect of its 
actions on state interests. The final rule will apply to all federally-
insured credit unions and reduce regulatory requirements. The Board has 
determined that the final amendments would not have a substantial 
direct effect on the states, on the relationship between the national 
government and the states, or on the distribution of power and 
responsibilities among the various levels of government.

Paperwork Reduction Act

    The final rule decreases paperwork requirements for a credit union. 
The paperwork requirements were submitted to the Office of Management 
and Budget (OMB) for approval under the Paperwork Reduction Act. A 
notice will be published in the Federal Register once approval is 
received from OMB.

List of Subjects in 12 CFR Part 722

     Appraisals, Credit unions, State-certified and State-licensed 
appraisers

    By the National Credit Union Administration Board on September 
28, 1995.
Becky Baker, --
Secretary to the Board.

    Accordingly, NCUA amends 12 CFR part 722 as follows:

PART 722--APPRAISALS

    1. The authority citation for part 722 continues to read as 
follows:

    Authority: 12 U.S.C. 1766, 1789 and Pub. L. No. 101-73.

    2. Section 722.3 is amended by revising the section headings, 
revising paragraphs (a) and (d) and adding a new paragraph (e) to read 
as follows:


Sec. 722.3  Appraisals required; transactions requiring a State 
certified or licensed appraiser.

    (a) Appraisals required. An appraisal performed by a State 
certified or licensed appraiser is required for all real estate-related 
financial transactions except those in which:
    (1) The transaction value is $100,000 or less except if it is a 
business loan and then the transaction value is $50,000 or less;
    (2) A lien on real property has been taken as collateral through an 
abundance of caution and where the terms of the transaction as a 
consequence have not been made more favorable than they would have been 
in the absence of a lien;
    (3) A lien on real estate has been taken for purposes other than 
the real estate's value;
    (4) A lease of real estate is entered into, unless the lease is the 
economic equivalent of a purchase or sale of the leased real estate;
    (5) The transaction involves an existing extension of credit at the 
credit union, provided that:
    (i) There is no advancement of new monies, other than funds 
necessary to cover reasonable closing costs; and
    (ii) There has been no obvious and material change in market 
conditions or physical aspects of the property that threatens the 
adequacy of the credit union's real estate collateral protection after 
the transaction;
    (6) The transaction involves the purchase, sale, investment in, 
exchange of, or extension of credit secured by, a loan or interest in a 
loan, pooled loans, or interests in real property, including mortgage-
backed securities, and each loan or interest in a loan, pooled loan, or 
real property interest met the requirements of this regulation, if 
applicable, at the time of origination;
    (7) The transaction is wholly or partially insured or guaranteed by 
a United States government agency or United States government sponsored 
agency; or
    (8) The transaction either:
    (i) Qualifies for sale to a United States government agency or 
United States government sponsored agency; or
    (ii) Involves a residential real estate transaction in which the 
appraisal conforms to the Federal National Mortgage Association or 
Federal Home Loan Mortgage Corporation appraisal standards applicable 
to that category of real estate.
* * * * *
    (d) Valuation requirement. Secured transactions exempted from 
appraisal requirements pursuant to paragraphs (a)(1) of this section 
and not otherwise exempted from this regulation or fully insured shall 
be supported by a written estimate of market value, as defined in this 
regulation, performed by an individual having no direct or indirect 
interest in the property, and qualified and experienced to perform such 
estimates of value for the type and amount of credit being considered.
    (e) Appraisals to address safety and soundness concerns. NCUA 
reserves the right to require an appraisal under this subpart whenever 
the agency believes it is necessary to address safety and soundness 
concerns.
    3. Section 722.4 is revised to read as follows:


Sec. 722.4  Minimum appraisal standards.

    For federally related transactions, all appraisals shall, at a 
minimum:
    (a) Conform to generally accepted appraisal standards as evidenced 
by the Uniform Standards of Professional Appraisal Practice (USPAP) 
promulgated by the Appraisal Standards Board of the Appraisal 
Foundation, 1029 Vermont Ave., NW., Washington, DC 20005;
    (b) Be written and contain sufficient information and analysis to 
support the institution's decision to engage in the transaction;
    (c) Analyze and report appropriate deductions and discounts for 
proposed construction or renovation, partially 

[[Page 51895]]
leased buildings, non-market lease terms, and tract developments with 
unsold units;
    (d) Be based upon the definition of market value as set forth in 
Sec. 722.2(f); and
    (e) Be performed by State licensed or certified appraisers in 
accordance with requirements set forth in this subpart.
    4. Section 722.5 is amended by revising paragraph (b) to read as 
follows:


Sec. 722.5  Appraiser independence.

* * * * *
    (b) Fee Appraisers. (1) If an appraisal is prepared by a fee 
appraiser, the appraiser shall be engaged directly by the credit union 
or its agent and have no direct or indirect interest, financial or 
otherwise, in the property or the transaction.
    (2) A credit union also may accept an appraisal that was prepared 
by an appraiser engaged directly by another financial services 
institution; if:
    (i) the appraiser has no direct or indirect interest, financial or 
otherwise, in the property or transaction; and
    (ii) the credit union determines that the appraisal conforms to the 
requirement of this regulation and is otherwise acceptable.

Appendix A--[Removed]

    5. Appendix A to Part 722 is removed.

[FR Doc. 95-24690 Filed 10-3-95; 8:45 am]
BILLING CODE 7535-01-U