[Federal Register Volume 69, Number 138 (Tuesday, July 20, 2004)]
[Rules and Regulations]
[Pages 43504-43509]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-16391]



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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; Final Rule

  Federal Register / Vol. 69, No. 138 / Tuesday, July 20, 2004 / Rules 
and Regulations  

[[Page 43504]]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Parts 25 and 203

[Docket No. FR-4722-F-02]
RIN 2502-AH78


FHA Single Family Mortgage Insurance; Lender Accountability for 
Appraisals

AGENCY: Office of the Secretary, HUD.

ACTION: Final rule.

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SUMMARY: This final rule clarifies HUD's regulations concerning the 
responsibilities of lenders approved by the Federal Housing 
Administration (FHA) with respect to appraisals on properties that will 
be the security for FHA insured mortgages. The final rule clarifies 
that lenders are accountable for the quality of appraisals on 
properties securing FHA-insured mortgages. The final rule specifically 
provides that lenders that submit appraisals to HUD that do not meet 
FHA requirements are subject to the imposition of sanctions by the HUD 
Mortgagee Review Board. The final rule applies to both sponsor lenders 
that underwrite loans, and loan correspondent lenders that originate 
loans on behalf of their sponsors. The codification of this 
clarification is designed to ensure lenders are aware of their 
responsibilities with respect to appraisals, and homebuyers receive an 
accurate statement of the appraised value of their homes. This final 
rule follows publication of a January 13, 2003, proposed rule, and 
takes into consideration the public comments received on the proposed 
rule. After careful review of the comments, HUD has decided to adopt 
the proposed rule with minor changes to the regulatory text.

DATES: Effective Date: August 19, 2004.

FOR FURTHER INFORMATION CONTACT: Vance T. Morris, Director, Office of 
Single Family Program Development, Office of Insured Single Family 
Housing, Room 9266, 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--The January 13, 2003, Proposed Rule

    HUD published a proposed rule on January 13, 2003 (68 FR 1766), to 
clarify HUD's regulations concerning the responsibilities of lenders 
approved by FHA in the selection of appraisers to perform appraisals on 
properties that will be the security for FHA insured mortgages.
    The success of the FHA single family mortgage insurance program, 
and HUD's ability to protect the FHA Insurance Fund, depends 
significantly on the quality of appraisals on properties that secure 
FHA mortgages. Section 203(b)(2) of the National Housing Act (12 U.S.C. 
1709(b)(2)) 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 an appraisal is deficient, a mortgagor may be 
subsequently confronted with unexpected and costly repairs, which could 
result in default and a mortgage insurance claim. Further, if a 
mortgagor defaults and the lender 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. 
(Please note that this rule uses the terms ``mortgagee'' and ``lender'' 
interchangeably.) HUD's return on any such sale could be significantly 
reduced if the appraisal is deficient.
    The purpose of the January 13, 2003, proposed rule, was to clarify 
HUD's regulations concerning the responsibilities of lenders in 
assuring the quality of FHA appraisals. HUD proposed to codify in 
regulations that lenders will be held accountable, along with 
appraisers, for the quality of appraisals on properties securing FHA 
insured mortgages. HUD also proposed to codify in regulations that 
lenders that submit appraisals to HUD that do not meet FHA requirements 
are subject to the imposition of sanctions by the HUD Mortgagee Review 
Board (MRB).
    The January 13, 2003, rule proposed, to enhance accountability of 
lenders for poor appraisals and thereby protect the FHA Insurance Fund, 
promote better compliance with appraisal standards, and ensure that 
homebuyers receive an accurate statement of appraised value. The 
proposed changes would apply to both sponsor lenders that underwrite 
loans and loan correspondent lenders that originate loans on behalf of 
their sponsors. Interested readers are invited to review the preamble 
of the January 13, 2003, proposed rule, for additional details 
regarding the proposed regulatory changes.

II. This Final Rule

    This final rule follows publication of the January 13, 2003, 
proposed rule, and takes into consideration the public comments 
received on the proposed rule. After careful consideration of the 
public comments, HUD has decided to modify the proposed rule at this 
final rule stage to clarify that the standard of accountability to 
which lenders, sponsor lenders, and loan correspondent lenders will be 
held is the same as the standard used to impose civil money penalties 
for program violations, and that standard is one of knowing (actual 
knowledge) or had reason to know.
    In the ``Summary'' of the preamble to the proposed rule (68 FR 
1766, column one), and only in the Summary, HUD used the term 
``strictly accountable.'' In using this term, HUD did not intend to 
indicate ``strict'' liability in the sense that fault or rather no 
fault would be disregarded when a deficient or inaccurate appraisal was 
submitted on a HUD-insured property. The proposed rule intended to 
clarify and emphasize that where an appraisal is deficient or 
inaccurate, HUD would not look solely to the appraiser as the 
responsible party for the deficiency. HUD would also look to the lender 
for the lender's submission of a deficient appraisal and whether the 
lender knew or had reason to know the appraisal was deficient.
    In addition to the clarification of lender responsibility with 
respect to appraisals codified in this final rule, HUD handbooks and 
mortgagee letters specify certain actions that a mortgagee should take 
to help ensure that appraisals comply with FHA requirements. However, 
the fact that a mortgagee has taken such actions does not automatically 
mitigate the standard imposed by this final rule if despite compliance 
with the requirements, the lender is found to have known or had reason 
to know about the deficient appraisal. HUD will hold both the mortgagee 
and the appraiser as accountable 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 and civil money 
penalties by the MRB pursuant to 24 CFR part 25 and part 30.
    The following section of this preamble presents a summary of the 
significant issues raised by the public commenters on the January 13, 
2003, proposed rule, and HUD's responses to these issues.

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III. Summary of Public Comments on January 13, 2003, Proposed Rule

    The public comment period on the proposed rule closed on March 14, 
2003. HUD received 34 public comments on the proposed rule. Comments 
were received from lenders and mortgage companies; private citizens; 
associations representing realtors, mortgage bankers, home builders, 
mortgage brokers, and other participants in the FHA mortgage insurance 
programs; nonprofits; a housing authority; and the state of Colorado.

A. Comments Supporting the Proposed Rule

    Comment: Support for proposed rule. Several commenters expressed 
unqualified support for the proposed rule. The commenters wrote that 
the proposed rule represents an appropriate step in clarifying and 
reiterating HUD's policies regarding lender accountability for FHA 
appraisals. The commenters wrote that it is appropriate that lenders 
participating in the FHA mortgage insurance programs accept the 
responsibility of establishing partnerships with reputable appraisers. 
The commenters wrote that the proposed rule would not establish an 
undue burden on lenders, since most lenders already exercise care in 
the selection of appraisers.
    HUD response. HUD appreciates the support expressed by the 
commenters. HUD agrees that the regulatory changes will help to better 
protect the FHA Insurance Fund and ensure more accurate appraisals with 
no additional burden imposed on lenders. HUD has modified the proposed 
rule to clarify that the accountability standard that is being codified 
through this rulemaking is the standard to which lenders have been held 
to date.

B. Specific Objections to the Proposed Rule

    Comment: Lenders do not have the necessary expertise to be held 
strictly liable for faulty appraisals. Several commenters wrote that 
lenders are not trained in the intricacies of the appraisal process 
and, therefore, would have difficulty reviewing appraisals and catching 
inaccuracies or readily observable defects. The commenters wrote that 
it is unfair to hold lenders strictly liable for faulty appraisals or 
to ask lenders to substitute their opinions for the judgment of the 
appraiser. The commenters wrote that the obligation of the lender is 
appropriately limited to selecting a duly qualified appraiser from the 
FHA Appraiser Roster and to review, through the lender's underwriter, 
the appraisal documentation to assure it meets FHA requirements.
    HUD response. HUD has revised the rule at the final rule stage to 
clarify that lender accountability does not mean a no fault liability. 
Through this rule, HUD is clarifying and emphasizing that if an 
appraisal is deficient or inaccurate, HUD will not look solely to the 
appraiser as the responsible party. HUD will also look to the lender to 
determine whether the lender acted responsibly in submission of the bad 
appraisal. HUD does not agree that the regulatory changes made final by 
this rule, will impose burdensome new requirements on lenders. Rather, 
the changes made by this final rule clarify, and are consistent with, 
existing HUD policy regarding lenders' responsibility for FHA 
appraisals. For example, under the Direct Endorsement process, the 
lender's Direct Endorsement underwriter (or, in the case of a loan 
correspondent, its sponsor's Direct Endorsement underwriter) is already 
required to review the appraisal documentation. Under 24 CFR 
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 already 
required, through its underwriter, to review the appraisal 
documentation to assure that the documentation meets the FHA appraisal 
requirements contained in HUD Handbook 4150.2 (entitled ``Valuation 
Analysis for Home Mortgage Insurance'') and amendatory issuances. 
Further, in numerous issuances, including Mortgagee Letters 94-54, 97-
22, and 97-45, HUD has stated that mortgagees, in selecting their 
appraisers, must bear responsibility, along with the appraisers for the 
integrity, the accuracy, and the thoroughness of appraisals and will be 
held accountable by HUD. This handbook and these mortgagee letters may 
be downloaded from HUD's Client Information and Policy System 
(HUDCLIPS) Internet home page at http://www.hudclips.org.
    Comment: Rather than imposing new regulations, FHA should more 
strictly enforce existing requirements. Several commenters wrote that 
the proposed rule is unnecessary because there already are several 
existing statutory and regulatory systems in place to safeguard the 
integrity of FHA appraisals. For example, the commenters wrote that the 
licensing of appraisers is currently regulated by the individual states 
in which the appraisers do business. The commenters also wrote that HUD 
has several measures to monitor the quality of FHA appraisals and the 
performance of lenders, such as the FHA Appraiser Roster and the Credit 
Watch Termination Initiative. These commenters wrote that, rather than 
imposing additional regulatory requirements, HUD could address its 
concerns regarding faulty appraisals by more strictly enforcing these 
existing standards. For example, three of the commenters suggested that 
HUD could require that appraisers must maintain errors and omissions 
insurance in order to qualify for placement on the Appraiser Roster.
    HUD response. Through this rule, HUD is not imposing new 
requirements on lenders but is codifying the standards to which lenders 
have been held to date. In response to some of the specific suggestions 
of the commenters, HUD notes that few if any states have programs in 
place that routinely or periodically monitor and review the quality and 
integrity of appraisals performed by licensed/certified appraisers. 
Rather, the licensing authority in the individual states typically 
review or regulate appraisers upon the filing of a complaint against 
the appraiser. The overall goal of this final rule is to achieve full 
compliance with FHA appraisal standards and the Uniform Standards of 
Professional Appraisal Practice. The intent of this rule is to be 
proactive rather than reactive in maintaining quality appraisals of 
properties with loans secured by FHA insurance.
    Although HUD has other measures to monitor the quality of FHA 
appraisals and the performance of lenders, this rule will reinforce FHA 
efforts to ensure accountability in the appraisal process and the 
performance of lenders. Further, although some lenders may determine 
that maintaining errors and omissions insurance is advisable, HUD does 
not believe it would be appropriate to mandate that lenders obtain this 
type of insurance. Such a requirement will not necessarily ensure a 
better quality and more accurate appraisal, and might impose an undue 
financial burden on the FHA appraisers.
    Comment: Proposed rule appears to conflict with the purpose of the 
FHA Appraiser Roster. Several commenters wrote that the proposed rule 
appears to conflict with the purposes of the FHA Appraiser Roster. The 
Appraiser Roster lists those appraisers that have the

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necessary qualifications to perform FHA appraisals. The commenters 
wrote that the Appraiser Roster is the best place for ensuring the 
competency of appraisers. The commenters wrote that placement on the 
Appraiser Roster constitutes tacit approval by HUD of the appraiser 
and, therefore, it is not fair or reasonable for lenders to be held 
liable for faulty appraisals performed by appraisers on the Roster.
    HUD response. HUD has not revised the proposed rule in response to 
these comments. In the past, FHA performed the required appraisals for 
properties securing FHA-insured mortgages. In response to statutory 
changes over the years, responsibility for selecting appraisers was 
transferred from FHA to the mortgagees. To ensure that appraisers 
selected to appraise FHA-insured properties meet minimum standards and 
have experience with FHA-insured mortgages, however, a mortgagee's 
selection is limited to appraisers listed on the FHA Appraiser Roster. 
A mortgagee may select any appraiser on the FHA Appraiser Roster.
    The FHA Appraiser Roster, established in 1994, presents mortgagees 
with a list of appraisers who meet minimum qualification standards. 
These minimum standards include (1) an appropriate state licensure/
certification with credentials based on the minimum licensing/
certification criteria issued by the Appraiser Qualifications Board 
(AQB) of the Appraisal Foundation in the individual state where the 
appraiser practices, and (2) knowledge of and familiarity with FHA 
appraisal requirements, policies, and regulations as evidenced by 
passing the FHA Appraisal Exam. Placement on the FHA Appraiser Roster 
means that an appraiser is eligible 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 lender who selects the appraiser must ensure that the 
appraiser is complying with FHA requirements when conducting appraisals 
for HUD-insured properties. Consequently, the FHA Single Family 
Appraiser Roster is not in conflict with this rule; it provides the 
lender a list that denotes appraisers have met FHA's minimum 
eligibility requirements.
    Comment: HUD lacked the legal authority to issue the proposed rule. 
Several commenters questioned HUD's legal authority for issuing the 
proposed rule. The commenters wrote that the National Housing Act (12 
U.S.C. 1701 et seq.) does not explicitly provide HUD with the authority 
to hold lenders strictly liable for the quality of appraisal reports. 
The commenters also wrote that the proposed rule conflicts with the 
intent of Congress in enacting those provisions of the National Housing 
Act concerning FHA appraisal requirements, such as sections 1708(c) and 
(e), 1709, and 1735f-14. The commenters also questioned HUD's authority 
to issue the proposed rule pursuant to the general rulemaking authority 
granted by section 7(d) of the Department of Housing and Urban 
Development Act (42 U.S.C. 3535(d)). The commenters also wrote that the 
proposed rule conflicts with agency law principles. The commenters 
wrote that, as a general rule, an employer using an independent 
contractor, such as a third-party appraiser, is not liable for the 
wrongdoing of the contractor or the contractor's employees because the 
employer does not have the right to control the contractor's work.
    HUD response. As discussed earlier in this preamble, through this 
rule HUD is clarifying that mortgagees accept the same responsibility 
for the quality of appraisals submitted to HUD to which they have been 
held responsible to date. To the extent there remains disagreement 
among mortgagees with HUD's authority to impose this standard of 
responsibility on mortgagees, HUD advises that its legal authority is 
based on the National Housing Act and the general rulemaking authority 
provided to HUD under section 211 of the National Housing Act and HUD's 
rulemaking authority under section 7(d) of the Department of Housing 
and Urban Development Act. Further, HUD has determined that issuance of 
this rule is consistent with Congressional intent as reflected in the 
provisions of the National Housing Act.
    Section 211 of the National Housing Act grants the Secretary of HUD 
with broad rulemaking authority ``to make such rules and regulations as 
may be necessary to carry out the provisions of this title.'' Section 
211 provides statutory authority for HUD's issuance of rules to 
implement substantive provisions of the National Housing Act (see 
below), which would provide for the imposition of liability upon 
mortgage lenders for faulty appraisals.
    Under section 203(a) of the National Housing Act, the Secretary 
establishes terms and conditions under which a mortgage loan will be 
endorsed for insurance. HUD's regulations at 24 CFR 203.5(e)(1) provide 
that the Direct Endorsement (DE) mortgagee, in originating mortgage 
loans under the DE process, will have the property appraised in 
accordance with ``such standards and requirements as the Secretary may 
prescribe.'' HUD is issuing this rule pursuant to section 211 to ensure 
a mortgagee is aware of its responsibility for the accuracy of the 
appraisals that they are required to submit pursuant to 24 CFR 
203.5(e).
    The amount of FHA mortgage insurance is based upon the value of the 
property that will be the security for a mortgage loan and the 
creditworthiness of the borrower. Sections 203(b)(2)(B)(ii)(I) through 
(IV) of the National Housing Act provide the formulas, based upon the 
appraised value of a property, for calculating the maximum mortgage 
amount that FHA is statutorily authorized to insure. Consequently, it 
is imperative that appraisals be accurate in order to comply with this 
statutory requirement. In addition, the mortgagee, not the appraiser, 
submits an appraisal to FHA as part of a mortgage insurance application 
package. The mortgagee selects an appraiser, and pursuant to 24 CFR 
203.255(b)(5), certifies to HUD that its underwriter has reviewed 
personally \1\ the appraisal report and credit application and that the 
proposed mortgage complies with HUD underwriting requirements.
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    \1\ Section 203.255(b)(5) contains an exception to this 
requirement for an underwriter to review personally a credit 
application when FHA's TOTAL Scorecard has determined that the 
application represents an acceptable risk under FHA terms and 
conditions.
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    Section 202(c)(1) of the National Housing Act provides that the 
mortgage lender may be sanctioned by the MRB for ``engaging in 
activities in violation of Federal Housing Administration 
requirements.'' Nothing in the National Housing Act would prohibit FHA 
from establishing a requirement that mortgage lenders submit only 
appraisals that comport with FHA appraisal requirements. In fact, as 
noted above, section 203(a) provides the Secretary with broad authority 
to insure mortgage loans under such terms and conditions as he may 
provide, and under section 211, to make such rules and regulations as 
may be necessary to carry out the provisions of Title II of the 
National Housing Act.
    FHA can insure only those mortgage loans that are made to, and held 
by, a mortgagee approved by the Secretary as ``responsible'' (see 
section 203(b)(1) of the National Housing Act). FHA believes this final 
rule is consistent with appraisal standards used in the conventional 
marketplace. FHA also believes that responsible mortgage lenders will 
take appropriate steps to ensure that appraisals of properties that 
will be security for FHA-insured mortgage loans conform to FHA 
requirements.

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C. Possible Effects of the Proposed Rule

    Comment: The proposed rule will increase costs to FHA homebuyers. 
Several commenters wrote that the proposed rule would force lenders to 
incur the cost of hiring appraisal experts to review and evaluate all 
FHA appraisals `` a cost that would inevitably be passed on the FHA 
consumers and make FHA products unattractive when compared to other 
loan products on the marketplace.
    HUD response. HUD does not agree with the commenters. As noted 
above in this preamble, Direct Endorsement lenders have had a long-
standing requirement to provide appraisal oversight and review for all 
FHA-insured loans. This final rule does not place any additional burden 
upon FHA lenders who, by FHA policy and guidance, have been performing 
appraisal review functions. It only codifies and reinforces existing 
policy. Consequently, promulgation of this regulation is not expected 
to increase costs to FHA homebuyers.
    Comment: The proposed rule will discourage lenders from 
participating in the FHA loans programs. Several commenters wrote that 
the imposition of strict liability on lenders for faulty appraisals 
would cause lenders to question whether originating FHA mortgages 
presents an unacceptable business risk and lead them to abandon the FHA 
market. The commenters wrote that the burden of the increased risk 
would be particularly difficult for small lenders, who have less 
ability to fully attest to the quality of independent third-party 
contractors and to absorb the additional risk and cost the rule would 
impose on them. The commenters wrote that even if some lenders are able 
to incur the added costs, low-income consumers might not be able to 
afford the increased expenses and thereby lose a valuable source of 
credit.
    HUD response. As discussed in this preamble, this final rule does 
not impose a no fault liability on the lender, but rather emphasizes 
and reinforces that lenders are being held to the standard that HUD has 
held them to date, one of known or had reason to know. With this 
clarification, HUD does not agree that this final rule will reduce 
lender participation in the FHA programs. As noted elsewhere in this 
preamble, this final rule does not impose any additional burdensome 
requirements on lenders. Therefore, HUD does not expect any lender to 
withdraw from the FHA-insured mortgage program as a result of this 
rule.
    Comment: The proposed rule may have the unintended consequence of 
having appraisers be less concerned with the quality of appraisals, 
since the appraiser can rely on the lender to ensure that the appraisal 
meets FHA requirements. Two commenters wrote that the proposed rule 
might create this unintended disincentive for appraisers to meet FHA 
requirements.
    HUD response. The appraisal industry is a regulated profession with 
established education and experience criteria and continuing education 
requirements. HUD expects all FHA Appraisers to abide by the Uniform 
Standards of Professional Appraisal Practice (USPAP) of the Appraisal 
Foundation and FHA requirements. Those FHA appraisers who fail to abide 
by USPAP and do not meet FHA requirements are subject to administrative 
actions by the Department. It is also expected that FHA mortgage 
lenders will not select FHA appraisers that are not knowledgeable in 
the property type appraised or do not adequately perform their trade.

D. Other Comments and Recommendations

    Comment: HUD should establish a single Web site for posting all 
procedures and policies regarding FHA appraisals. Two commenters made 
this suggestion. The commenters wrote that it is currently very 
difficult for lenders and appraisers to locate all of the relevant FHA 
policies since they are scattered throughout several Web sites and 
sources.
    HUD response. HUD's home page http://www.hud.gov contains links to 
Web pages that enable appraisers and lenders to obtain information on 
FHA requirements and to keep abreast of changes. In addition, 
information can be found at Web page http://www.hudclips.org (Client 
Information and Policy System), which enables the user to search for 
all of HUD's official policies, procedures and directives, including 
notices, handbooks, Mortgagee Letters, Federal Register publications, 
the Congressional Record, and the U.S. Code.
    Comment: HUD should establish a system to consider complaints from 
appraisers alleging inappropriate lender pressure to inflate the 
appraised value of a property. Two commenters made this suggestion. The 
commenters wrote that such a procedure should inform the appraiser of 
the information that must be submitted to HUD as part of the complaint, 
and whether HUD will hold the appraiser's identity in confidence during 
the investigation. The commenters also suggested that HUD should 
establish a ``hotline'' or designate a single point of contact for 
these complaints.
    HUD response. HUD currently has a system in place where complaints 
may be channeled. Each HUD Homeownership Center can be contacted 
through a toll-free telephone number, e-mail, or written 
correspondence. Each Homeownership Center has a Technical Support 
Branch to handle complaints and a Customer Service Division, which can 
also receive complaints and make referrals to the Inspector General's 
hotline. Contact information for the Homeownership Centers may be found 
on HUD's Home page at http://www.hud.gov.
    Comment: HUD should require lenders to inform State appraisal 
licensing agencies when problems with a particular appraiser are 
identified. One commenter made this suggestion. The commenter wrote 
that removing an appraiser from the Appraiser Roster without providing 
information to the State-licensing agency protects HUD, but does not 
protect the public.
    HUD response. HUD will not impose an additional burden on lenders 
by mandating that they inform State appraisal licensing agencies when 
problems with a particular appraiser are identified. However, FHA will 
continue to make referrals to State certification and licensing boards.
    Comment: Care must be taken in the use of AVMs to conduct appraisal 
reviews. Two commenters wrote that the use of Automated Valuation 
Models (AVMs) does not constitute an effective appraisal review 
program. The commenters wrote that AVMs are not appraisals, but a form 
of computerized statistical modeling. According to the commenters, AVMs 
fail to consider the unique characteristics of properties, as they rely 
primarily on public records and proprietary databases for information. 
The commenters recommended that if a lender chooses to use AVMs, a 
qualified appraiser employed by the lender should conduct the AVM 
appraisal review.
    HUD response. HUD agrees with the commenters that AVMs do not 
constitute an effective stand-alone check on the quality of appraisals. 
An AVM can be a useful tool, however, when used in conjunction with 
more traditional appraisal review techniques to preliminarily assess 
the credibility and accuracy of an appraisal, as well as assess the 
probability of ancillary concerns such as the probability of property 
``flipping''.
    Comment: Lenders should be held strictly liable only for 
substantive appraisal defects. One commenter

[[Page 43508]]

suggested that the final rule should clarify that lenders will be held 
strictly liable only for substantive defects in an appraisal. The 
commenter wrote that the goal of the rule should be to prevent bad 
appraisals, not to punish lenders for insignificant errors. The 
commenter further suggested that the final rule should specify the 
appraisal elements that would be considered significant enough to 
trigger strict liability.
    HUD response. In this preamble, HUD already has thoroughly 
addressed the issue of strict liability but notes that HUD Handbook 
4000.4 (``Single Family Direct Endorsement Program'') details the 
procedures for an underwriter's appraisal review, which include 
verification that factual information is correctly reported in the 
appraisal; assessment of the plausibility and consistency of 
conclusions based upon data presented in the report; determination of 
consistency of reported conclusions with other data conclusions 
reported in similar cases recently processed; and compliance with HUD 
underwriting instructions. If the underwriter concludes that the 
appraisal report findings are inconsistent, or otherwise unacceptable, 
the appraiser may be contacted or the report returned for 
reconsideration. In addition, HUD Handbook 4060.1 REV-1, dated 
September 30, 1993, and Handbook 4330.1 REV-5, dated September 1994, 
provide guidance on a mortgagee's quality control plan. Given this 
existing policy guidance and the fact that this final rule codifies and 
clarifies HUD's existing policy regarding lender review of appraisals, 
HUD does not consider any additional clarification necessary. Copies of 
the handbooks referenced above may be downloaded through the HUDCLIPS 
Web site:  http://www.hudclips.org.
    Comment: Lenders should not be permitted to select appraisers. Two 
commenters wrote that the proposed rule demonstrates that the system of 
permitting FHA lenders to select their own appraisers has been a 
mistake. The commenters suggested that HUD return to the system of HUD 
selecting the appraisers, on a rotation system, from an approved list 
of independent appraisers.
    HUD response. The change requested by the commenters is outside the 
scope of the January 13, 2003, proposed rule. Lender selection of the 
appraiser is statutorily mandated. There are no plans to recommend 
changes to the existing regulations.
    Comment: Rule should provide greater clarity regarding liability. 
One commenter wrote that the proposed rule was unclear regarding how 
HUD would allocate liability for a faulty appraisal between the lender 
and appraiser. The commenter requested that HUD clarify this matter in 
the final rule.
    HUD response. This final rule states that the lender and appraiser 
shall both bear responsibility for the quality of the appraisal. To 
that end, if an appraisal is determined to be faulty and/or non-
compliant with FHA requirements, HUD may seek administrative sanctions 
against either or both of the parties, depending upon the particular 
circumstances of the case. This final rule clarifies the authority of 
the MRB to sanction lenders for deficient appraisals. HUD Handbook 
4150.2 details administrative and civil sanctions as well as criminal 
penalties available against appraisers who have violated FHA 
regulations and/or the USPAP.

IV. Small Business Concerns Related to MRB 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. The final rule does clarify that HUD's MRB 
may impose administrative sanctions on small lenders for submitting 
appraisals that are inconsistent with FHA requirements, and for which 
the lenders knew were inconsistent or had reason to know were 
inconsistent. With respect to such enforcement 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 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 888-REG-FAIR (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 Regulations 
Division, Office of General Counsel, Room 10276, 451 Seventh Street, 
SW., Washington, DC 20410-0500.

Environmental Impact

    This final rule does 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 final 
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 final rule before publication, and 
by approving it certifies, in accordance with the Regulatory 
Flexibility Act (5 U.S.C. 605(b)), that this final rule will not have a 
significant economic impact on a substantial number of small entities. 
The final rule will 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 responsible along with

[[Page 43509]]

appraisers for the quality of such appraisals. Further, the regulatory 
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.

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 final rule will 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 final rule will 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 final 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.


0
Accordingly, for the reasons described in the preamble, HUD amends 24 
CFR parts 25 and 203 as follows:

PART 25--MORTGAGEE REVIEW BOARD

0
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).

0
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

0
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).

0
4. Amend Sec.  203.5 by adding a sentence at the end of paragraph 
(e)(1) 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 both bear 
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 24 CFR part 25 and part 30.

    Dated: July 12, 2004.
Alphonso Jackson,
Secretary.
[FR Doc. 04-16391 Filed 7-19-04; 8:45 am]
BILLING CODE 4210-27-P