[Federal Register Volume 68, Number 8 (Monday, January 13, 2003)]
[Proposed Rules]
[Pages 1766-1769]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-539]



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Part III





Department of Housing and Urban Development





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24 CFR Parts 25 and 203



FHA Single Family Mortgage Insurance; Lender Accountability for 
Appraisals; Proposed Rule

  Federal Register / Vol. 68, No. 8 / Monday, January 13, 2003 / 
Proposed Rules  

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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Parts 25 and 203

[Docket No. FR-4722-P-01]
RIN 2502-AH78


FHA Single Family Mortgage Insurance; Lender Accountability for 
Appraisals

AGENCY: Office of the Secretary, HUD.

ACTION: Proposed rule.

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SUMMARY: This proposed rule clarifies and strengthens HUD's regulations 
concerning the responsibilities of lenders approved by the Federal 
Housing Administration (FHA) in the selection of appraisers to perform 
appraisals on properties that will be the security for FHA insured 
mortgages. First, the proposed rule provides that lenders are to be 
held strictly accountable for the quality of appraisals on properties 
securing FHA insured mortgages. Further, the proposed rule specifically 
provides that lenders who submit appraisals to HUD that do not meet FHA 
requirements are subject to the imposition of sanctions by the HUD 
Mortgagee Review Board. The proposed rule would apply to both sponsor 
lenders, who underwrite loans, and loan correspondent lenders, who 
originate loans on behalf of their sponsors. HUD believes these 
proposed changes will help protect the FHA Insurance Fund, ensure 
better compliance with appraisal standards, and help to ensure that 
homebuyers receive an accurate statement of appraised value.

DATES: Comments Due Date: March 14, 2003.

ADDRESSES: Interested persons are invited to submit comments regarding 
this proposed rule to the office of the Department's Rules Docket 
Clerk, Office of General Counsel, Room 10276, Department of Housing and 
Urban Development, 451 Seventh Street, SW., Washington, DC 20410-0500. 
Communications should refer to the above docket number and title. 
Facsimile (FAX) comments are not acceptable. A copy of each 
communication submitted will be available for public inspection and 
copying between 7:30 a.m. and 5:30 p.m. weekdays at the above address.

FOR FURTHER INFORMATION CONTACT: Vance T. Morris, Director, Office of 
Single Family Program Development, Office of Insured Single Family 
Housing, Room 9266, U.S. Department of Housing and Urban Development, 
451 Seventh Street, SW., Washington, DC 20410-8000; telephone (202) 
708-2121 (this is not a toll-free number). Hearing-or speech-impaired 
individuals may access this number via TTY by calling the toll-free 
Federal Information Relay Service at (800) 877-8339.

SUPPLEMENTARY INFORMATION:

I. Background

A. FHA Appraisals

    The success of the Federal Housing Administration (FHA) single 
family mortgage insurance program, and HUD's ability to protect the FHA 
Insurance Fund, begins with the quality of appraisals on properties 
that secure FHA mortgages. Section 203(b)(1) of the National Housing 
Act (12 U.S.C. 1709(b)(10)) provides the method for calculating the 
maximum mortgage amount that FHA can insure. The calculations required 
by the statute are based on the appraised value of the property that is 
security for the mortgage. If a mortgagor defaults and the lender \1\ 
conveys property title to HUD in exchange for payment of mortgage 
insurance benefits, FHA then must manage and sell the property in order 
to recoup its insurance loss. If the appraisal was accurate, FHA's loss 
will be minimal. However, if the appraisal was inaccurate or the 
appraiser neglected to report readily observable defects, FHA's losses 
could be increased.
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    \1\ This proposed rule uses the terms ``lender'' and 
``mortgagee'' interchangeably.
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    HUD has implemented several policies to help ensure the accuracy 
and completeness of appraisals on properties securing FHA insured 
mortgages. For example, HUD has established the FHA Appraiser Roster 
(Appraiser Roster), which lists those appraisers who are eligible to 
perform FHA single family appraisals. To be eligible for placement on 
the Appraiser Roster, an appraiser must be state licensed or certified 
and pass a test on FHA appraisal methods. Further, the appraiser must 
not be listed on the General Services Administration's Suspension and 
Debarment List, HUD's Limited Denial of Participation List, or HUD's 
Credit Alert Interactive Voice Response System. HUD maintains the 
Appraiser Roster to provide a means by which HUD can ensure the 
competency of appraisers performing FHA appraisals. Placement on the 
Appraiser Roster means that an appraiser is qualified to perform FHA 
appraisals; it does not mean that the appraiser is approved by FHA, nor 
does it provide a guarantee or warranty that the appraiser's work will 
meet FHA standards. The FHA Appraiser Roster regulations are located at 
24 CFR part 200, subpart G.
    The FHA single family mortgage insurance regulations at 24 CFR 
203.5(e)(1) provide that ``[a] mortgagee shall have the property 
appraised in accordance with such standards as the Secretary may 
prescribe.'' These standards are contained in HUD Handbook 4150.2, 
entitled ``Valuation Analysis for Home Mortgage Insurance,'' which each 
appraiser receives upon applying to be placed on the FHA Appraiser 
Roster. All appraisers on the Appraiser Roster are required to read and 
comply with the handbook in performing appraisals of properties that 
will be security for FHA insured mortgage loans (see Sec.  200.206 of 
the Appraiser Roster regulations). A copy of Handbook 4150.2 may be 
downloaded from HUD's Client Information and Policy System (HUDCLIPS) 
internet homepage at http://www.hudclips.org.

B. Lender Responsibilities Concerning FHA Appraisals

    Almost all FHA insured mortgage loans are originated under the 
Direct Endorsement process. Under this process, a lender selects an 
appraiser from the Appraiser Roster. The appraiser appraises the 
property and then submits an appraisal report and accompanying 
documentation to the lender. The lender's Direct Endorsement 
underwriter (or, in the case of a loan correspondent, its sponsor's 
Direct Endorsement underwriter) reviews the appraisal documentation. 
Under Sec.  203.255(b)(5), when a mortgage is submitted to FHA under 
the Direct Endorsement process, the application must contain, among 
other things, ``[a]n underwriter certification, on a form prescribed by 
the Secretary, stating that the underwriter has personally reviewed the 
appraisal report ... and that the proposed mortgage complies with HUD 
underwriting requirements.'' Consequently, a lender is required, 
through its underwriter, to review the appraisal documentation to 
assure that the documentation meets the FHA requirements contained in 
HUD Handbook 4150.2 and amendatory issuances.
    HUD's regulation at Sec.  203.255(b) explicitly authorizes the 
Secretary to determine if there is any information indicating that any 
required certification (including the appraisal certification) ``is 
false, misleading or constitutes fraud or misrepresentation on the part 
of any party, or that the mortgage fails to meet any statutory or 
regulatory requirement.'' Further, the Mortgagee Review Board 
regulations at 24 CFR 25.9 authorize the imposition of

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administrative sanctions against a lender who submits such a false 
certification in connection with any FHA insured mortgage transaction. 
The responsibilities of a lender in ensuring the quality of FHA 
appraisals are also emphasized in the guidance issued by HUD through 
Mortgagee Letters. For example, Mortgagee Letter 94-54, issued on 
November 7, 1994, provides that ``mortgagees that select their own 
appraisers must accept responsibility, equally with the appraisers, for 
the integrity, accuracy, and thoroughness of the appraisals, and will 
be held accountable by HUD'' (this guidance was reiterated by FHA 
Mortgagee Letter 97-45, issued on November 25, 1997). Further, 
Mortgagee Letter 97-22, issued on May 20, 1997, reminds lenders ``that 
if the appraiser they selected provides a poor or even fraudulent 
appraisal which leads the Department to insure a mortgage at an 
inflated amount, the lender is held equally responsible with the 
appraiser for the violation.'' Copies of these Mortgagee Letters may be 
downloaded from HUD's Client Information and Policy System (HUDCLIPS) 
internet website at http://www.hudclips.org.

II. This Proposed Rule

A. Need for Proposed Rule

    FHA has found that most appraisers perform appraisals in accordance 
with FHA standards. There are some instances, however, in which some 
lenders tacitly require appraisers to make the appraisal computations 
match the sales price to ensure that a home sale and mortgage loan 
closes for the appraiser to obtain additional business. Other instances 
have occurred, including recent episodes of predatory lending activity 
in several areas of the country, whereby lenders, realtors, investors, 
and others have participated in so-called property ``flipping'' schemes 
to inflate home prices and perpetuate sales that generate fees and 
charges to participants in the transaction. There are additional 
examples of fraudulent activity that could have been prevented if the 
underwriters had properly reviewed the appraisal reports.
    This proposed rule would clarify and strengthen HUD's regulations 
concerning the responsibilities of lenders in assuring the quality of 
FHA appraisals. The proposed rule will ensure accountability of lenders 
for poor appraisals and thereby protect the FHA Insurance Fund, ensure 
better compliance with appraisal standards, and help to ensure that 
homebuyers receive an accurate statement of appraised value. The 
proposed changes would apply to both sponsor lenders, who underwrite 
loans, and loan correspondent lenders, who originate loans on behalf of 
their sponsors.
    There are numerous tools that lenders may use to determine whether 
an appraisal satisfies FHA requirements. Reviewing appraisal 
documentation and performing quality assurance reviews are two such 
methods. New technology is available, such as Automated Valuation Model 
(AVM), which can be used to determine whether the value derived by an 
appraiser is within reason. A lender may wish to do business only with 
appraisers who carry errors and omissions (E&O) insurance. Such 
coverage may help in reducing possible schemes that result in fraud. 
There are numerous other steps that lenders can take to ensure that an 
appraisal package satisfies FHA requirements. The purpose of this 
proposed rule is not to mandate that lenders must follow a specific 
course of action to ensure compliance with FHA appraisal requirements. 
Each lender has the discretion to choose the means by which it will 
ensure such compliance. The purpose of the proposed rule is to require 
that a lender act to ensure appraisal quality and to emphasize that the 
lender will bear responsibility if an appraisal does not satisfy FHA 
requirements.

B. Proposed Changes to FHA Regulations

    The proposed rule would make the following changes to the existing 
FHA regulations:
    1. Mortgagee Review Board (Sec.  25.9). The proposed rule would 
clarify that a mortgagee is subject to administrative action by HUD's 
Mortgagee Review Board for submitting to HUD an appraisal that does not 
satisfy FHA appraisal requirements in connection with an insured 
mortgage transaction. Specifically, a new Sec.  25.9(ee) would be added 
to explicitly include the obtaining and submitting of appraisals that 
do not satisfy FHA appraisal requirements among the list of actions 
subject to administrative sanction. As provided in Sec.  25.3, which 
contains the definitions applicable to Mortgagee Review Board 
proceedings, the term ``mortgagee'' includes both underwriting and loan 
correspondent lenders.
    2. Lender accountability for appraisal (Sec.  203.5). The proposed 
rule also would codify HUD's policy that lenders must ensure that the 
appraisals satisfy FHA appraisal requirements and are responsible, 
equally with appraisers, for the quality of appraisals on properties 
that secure FHA insured mortgage loans. The proposed rule would amend 
Sec.  203.5, which describes the Direct Endorsement process, to specify 
that a lender must ensure that appraisals satisfy FHA requirements and 
is responsible for the quality of the appraisals. A Direct Endorsement 
mortgagee, and any of its loan correspondent lenders, that submit, or 
cause to be submitted, an appraisal or related documentation that does 
not satisfy FHA requirements may be sanctioned by the Mortgagee Review 
Board. The proposed rule would also amend Sec.  203.5 to re-emphasize 
that a lender must select an appraiser listed on the FHA Appraiser 
Roster.

III. Issue Highlighted for Public Comment

    While HUD invites public comment on all aspects of this proposed 
rule, it is particularly interested in comments regarding the possible 
consequences of the rule on the majority of FHA lenders and appraisers 
who comply with FHA standards. HUD believes that the proposed 
regulatory changes are necessary to ensure the accountability of 
lenders for poor appraisals and thereby protect the FHA Insurance Fund, 
ensure better compliance with appraisal standards, and help to ensure 
that homebuyers receive an accurate statement of appraised value. 
However, HUD recognizes that the proposed changes may also have 
unintended negative consequences on those lenders and appraisers who 
already comply with applicable FHA regulations and policies. 
Accordingly, HUD invites interested members of the public to submit 
their comments on such possible unintended impacts, as well as to offer 
suggestions on less burdensome methods to accomplish the stated goals 
of the proposed rule.

IV. Small Business Concerns Related to Mortgagee Review Board Actions 
Against Lenders

    As discussed below in this preamble, HUD has determined that this 
rule will not have a significant economic impact on a substantial 
number of small entities. However, the proposed rule may nonetheless 
result in HUD's Mortgagee Review Board imposing an administrative 
sanction on a small lender or appraiser due to a submitted appraisal 
that is inconsistent with FHA requirements, or taking other appropriate 
enforcement action against a small lender or appraiser. With respect to 
such compliance efforts, HUD is cognizant that section 222 of the Small 
Business Regulatory Enforcement Fairness Act of 1996 (Pub. L. 104-121) 
(referred to as ``SBREFA'') requires the

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Small Business and Agriculture Regulatory Enforcement Ombudsman to 
``work with each agency with regulatory authority over small businesses 
to ensure that small business concerns that receive or are subject to 
an audit, on-site inspection, compliance assistance effort or other 
enforcement related communication or contact by agency personnel are 
provided with a means to comment on the enforcement activity conducted 
by this personnel.'' To implement this statutory provision, the Small 
Business Administration has requested that agencies include the 
following language on agency publications and notices that are provided 
to small businesses at the time the enforcement action is undertaken. 
The language is as follows:

Your Comments Are Important

The Small Business and Agriculture Regulatory Enforcement Ombudsman 
and 10 Regional Fairness Boards were established to receive comments 
from small businesses about federal agency enforcement actions. The 
Ombudsman will annually evaluate the enforcement activities and rate 
each agency's responsiveness to small business. If you wish to 
comment on the enforcement actions of [insert agency name], call 1-
888-REG-FAIR (1-888-734-3247).

    As HUD stated in its notice describing HUD's actions on the 
implementation of SBREFA, which was published on May 21, 1998 (63 FR 
28214), HUD intends to work with the Small Business Administration to 
provide small entities with information on the Fairness Boards and 
National Ombudsman program, at the time enforcement actions are taken, 
to ensure that small entities have the full means to comment on the 
enforcement activity conducted by HUD.

V. Findings and Certifications

Regulatory Planning and Review

    The Office of Management and Budget (OMB) reviewed this rule under 
Executive Order 12866, Regulatory Planning and Review. OMB determined 
that this rule is a ``significant regulatory action'' as defined in 
section 3(f) of the Order (although not an economically significant 
regulatory action under the Order). Any changes made to this rule as a 
result of that review are identified in the docket file, which is 
available for public inspection in the office of the Department's Rules 
Docket Clerk, Office of General Counsel, Room 10276, 451 Seventh 
Street, SW., Washington, DC 20410-0500.

Environmental Impact

    This proposed rule would not direct, provide for assistance or loan 
and mortgage insurance for, or otherwise govern or regulate, real 
property acquisition, disposition, leasing, rehabilitation, alteration, 
demolition, or new construction, or establish, revise, or provide for 
standards for construction or construction materials, manufactured 
housing, or occupancy. Accordingly, under 24 CFR 50.19(c), this 
proposed rule is categorically excluded from the requirements of the 
National Environmental Policy Act (42 U.S.C. 4332 et seq.).

Regulatory Flexibility Act

    The Secretary has reviewed this proposed rule before publication, 
and by approving it certifies, in accordance with the Regulatory 
Flexibility Act (5 U.S.C. 605(b)), that this proposed rule would not 
have a significant economic impact on a substantial number of small 
entities. The proposed rule would not establish, or substantively 
modify, HUD policy and procedures regarding lender accountability for 
FHA appraisals. Rather, the regulatory changes will clarify HUD's 
existing policy of holding lenders equally responsible with appraisers 
for the quality of such appraisals. Further, the proposed changes are 
designed to ensure the integrity of appraisals on properties securing 
FHA insured mortgages. To the extent that the regulatory amendments 
have an economic impact, it will be on those lenders and appraisers who 
submit appraisals that are inconsistent with FHA requirements. 
Notwithstanding HUD's determination that this rule will not have a 
significant economic effect on a substantial number of small entities, 
HUD specifically invites comments regarding any less burdensome 
alternatives to this rule that will meet HUD's objectives as described 
in this preamble.

Executive Order 13132, Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either imposes substantial direct compliance costs on state and local 
governments and is not required by statute, or the rule preempts state 
law, unless the agency meets the consultation and funding requirements 
of section 6 of the Executive Order. This proposed rule would not have 
federalism implications and would not impose substantial direct 
compliance costs on state and local governments or preempt state law 
within the meaning of the Executive Order.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 
1531-1538) establishes requirements for federal agencies to assess the 
effects of their regulatory actions on state, local, and tribal 
governments, and on the private sector. This proposed rule would not 
impose any federal mandates on any state, local, or tribal governments, 
or on the private sector, within the meaning of the Unfunded Mandates 
Reform Act of 1995.

Catalog of Federal Domestic Assistance

    The Catalog of Federal Domestic Assistance Numbers for the programs 
affected by this proposed rule are 14.117 and 14.133.

List of Subjects

24 CFR Part 25

    Administrative practice and procedure, Loan programs--housing and 
community development, Organization and functions (government 
agencies).

24 CFR Part 203

    Hawaiian Natives, Home improvement, Indians--lands, Loan programs--
housing and community development, Mortgage insurance, Reporting and 
recordkeeping requirements, Solar energy.
    Accordingly, for the reasons described in the preamble, HUD 
proposes to amend 24 CFR parts 25 and 203 to read as follows:

PART 25--MORTGAGEE REVIEW BOARD

    1. The authority citation for 24 CFR part 25 continues to read as 
follows:

    Authority: 12 U.S.C. 1708(c), 1708(d), 1709(s), 1715b and 
1735(f)-14; 42 U.S.C. 3535(d).

    2. Amend Sec.  25.9 by redesignating paragraph (ee) as paragraph 
(ff) and adding a new paragraph (ee) to read as follows:


Sec.  25.9  Grounds for an administrative action.

* * * * *
    (ee) Submitting, or causing to be submitted, with an application 
for FHA mortgage insurance an appraisal, valuation condition sheet, or 
any other documentation relating to an appraisal that does not satisfy 
FHA requirements.
* * * * *

PART 203--SINGLE FAMILY MORTGAGE INSURANCE

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

    Authority: 12 U.S.C. 1709, 1710, 1715b, and 1715u; 42 U.S.C. 
3535(d).

    4. Amend Sec.  203.5 by adding a sentence at the end of paragraph 
(e)(1)

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and adding a new paragraph (e)(3) to read as follows:


Sec.  203.5  Direct Endorsement process.

* * * * *
    (e) * * *
    (1) * * * A mortgagee must select an appraiser whose name is on the 
FHA Appraiser Roster, in accordance with 24 CFR part 200, subpart G.
* * * * *
    (3) A mortgagee and an appraiser must ensure that an appraisal and 
related documentation satisfy FHA appraisal requirements and shall bear 
equal responsibility for the quality of the appraisal in satisfying 
such requirements. A Direct Endorsement Mortgagee (and any of its loan 
correspondent lenders) that submits, or causes to be submitted, an 
appraisal or related documentation that does not satisfy FHA 
requirements is subject to administrative sanction by the Mortgagee 
Review Board pursuant to Sec.  25.9 of this title.

    Dated: December 3, 2002.
Mel Martinez,
Secretary.
[FR Doc. 03-539 Filed 1-10-03; 8:45 am]
BILLING CODE 4210-27-P