[Federal Register Volume 75, Number 208 (Thursday, October 28, 2010)]
[Rules and Regulations]
[Pages 66554-66587]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-26671]



[[Page 66553]]

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Part IV





Federal Reserve System





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12 CFR Part 226



Truth in Lending; Interim Final Rule

  Federal Register / Vol. 75 , No. 208 / Thursday, October 28, 2010 / 
Rules and Regulations  

[[Page 66554]]


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FEDERAL RESERVE SYSTEM

12 CFR Part 226

Regulation Z; Docket No. R-1394
RIN AD-7100-56


Truth in Lending

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Interim final rule; request for public comment.

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SUMMARY: The Board is publishing for public comment an interim final 
rule amending Regulation Z (Truth in Lending). The interim rule 
implements Section 129E of the Truth in Lending Act (TILA), which was 
enacted on July 21, 2010, as Section 1472 of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act. TILA Section 129E establishes new 
requirements for appraisal independence for consumer credit 
transactions secured by the consumer's principal dwelling. The 
amendments are designed to ensure that real estate appraisals used to 
support creditors' underwriting decisions are based on the appraiser's 
independent professional judgment, free of any influence or pressure 
that may be exerted by parties that have an interest in the 
transaction. The amendments also seek to ensure that creditors and 
their agents pay customary and reasonable fees to appraisers. The Board 
seeks comment on all aspects of the interim final rule.

DATES: This interim final rule is effective December 27, 2010, except 
that the removal of Sec.  226.36(b) is effective April 1, 2011.
    Compliance Date: To allow time for any necessary operational 
changes, compliance with this interim final rule is optional until 
April 1, 2011.
    Comments: Comments must be received on or before December 27, 2010.

ADDRESSES: You may submit comments, identified by Docket No. R-1394 and 
RIN No. AD-7100-56, by any of the following methods:
     Agency Web Site: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     E-mail: [email protected]. Include the 
docket number in the subject line of the message.
     Fax: (202) 452-3819 or (202) 452-3102.
     Mail: Address to Jennifer J. Johnson, Secretary, Board of 
Governors of the Federal Reserve System, 20th Street and Constitution 
Avenue, NW., Washington, DC 20551.
    All public comments will be made available on the Board's Web site 
at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons. Accordingly, comments 
will not be edited to remove any identifying or contact information. 
Public comments may also be viewed electronically or in paper in Room 
MP-500 of the Board's Martin Building (20th and C Streets, NW.) between 
9 a.m. and 5 p.m. on weekdays.

FOR FURTHER INFORMATION CONTACT: Jamie Z. Goodson, Attorney, or Lorna 
M. Neill, Senior Attorney; Division of Consumer and Community Affairs, 
Board of Governors of the Federal Reserve System, Washington, DC 20551, 
at (202) 452-2412 or (202) 452-3667. For users of Telecommunications 
Device for the Deaf (TDD) only, contact (202) 263-4869.

SUPPLEMENTARY INFORMATION:

I. Background

    The Truth in Lending Act (TILA), 15 U.S.C. 1601 et seq., seeks to 
promote the informed use of consumer credit by requiring disclosures 
about its costs and terms. TILA requires additional disclosures for 
loans secured by consumers' homes and permits consumers to rescind 
certain transactions that involve their principal dwelling. TILA 
directs the Board to prescribe regulations to carry out the purposes of 
the law and specifically authorizes the Board, among other things, to 
issue regulations that contain such classifications, differentiations, 
or other provisions, or that provide for such adjustments and 
exceptions for any class of transactions, that in the Board's judgment 
are necessary or proper to effectuate the purposes of TILA, facilitate 
compliance with TILA, or prevent circumvention or evasion of TILA. 15 
U.S.C. 1604(a). TILA is implemented by the Board's Regulation Z, 12 CFR 
part 226. An Official Staff Commentary interprets the requirements of 
the regulation and provides guidance to creditors in applying the rules 
to specific transactions. See 12 CFR part 226, Supp. I.
    On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (the ``Dodd-Frank Act'') was signed into law.\1\ Section 
1472 of the Dodd-Frank Act amended TILA to establish new requirements 
for appraisal independence. Specifically, the appraisal independence 
provisions in the Dodd-Frank Act:
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    \1\ Public Law 111-203, 124 Stat. 1376.
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     Prohibit coercion, bribery and other similar actions 
designed to cause an appraiser to base the appraised value of the 
property on factors other than the appraiser's independent judgment;
     Prohibit appraisers and appraisal management companies 
from having a financial or other interest in the property or the 
credit transaction;
     Prohibit a creditor from extending credit if it knows, 
before consummation, of a violation of the prohibition on coercion 
or of a conflict of interest;
     Mandate that the parties involved in the transaction 
report appraiser misconduct to state appraiser licensing 
authorities;
     Mandate the payment of reasonable and customary 
compensation to a ``fee appraiser'' (e.g., an appraiser who is not 
the salaried employee of the creditor or the appraisal management 
company hired by the creditor); and
     Provides that when the Board promulgates the interim 
final rule, the Home Valuation Code of Conduct, the current standard 
for appraisal independence for loans purchased by Fannie Mae and 
Freddie Mac, will have no further force or effect.\2\
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    \2\ ``Home Valuation Code of Conduct'' (HVCC), available at 
http://www.fhfa.gov/webfiles/2302/HVCCFinalCODE122308.pdf.
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    These provisions are contained in TILA Section 129E, which applies 
to any consumer credit transaction that is secured by the consumer's 
principal dwelling. TILA Section 129E(g)(1) authorizes the Board, the 
Comptroller of the Currency, the Federal Deposit Insurance Corporation, 
the National Credit Union Administration, the Federal Housing Finance 
Authority (``FHFA''), and the Consumer Financial Protection Bureau to 
issue rules and guidelines. TILA Section 129E(g)(2), however, requires 
the Board to issue interim final regulations to implement the appraisal 
independence requirements within 90 days of enactment of the Dodd-Frank 
Act. As discussed below, the Board finds there is good cause for 
issuing an interim final rule without opportunity for advance notice 
and comment.
    Appraisal independence. Over the years concerns have been raised 
about the need to ensure that appraisals are provided free of any 
coercion or improper influence. The Board and the other federal banking 
agencies have jointly issued regulations and supervisory guidance on 
appraisal independence.\3\ However, the guidance

[[Page 66555]]

is limited to federally supervised institutions. Based on concerns 
about consumers obtaining home-secured loans based on misstated 
appraisals, in 2008, the Board used its authority under the Home 
Ownership and Equity Protection Act (HOEPA) to prohibit a creditor or 
mortgage broker from coercing or influencing an appraiser to misstate 
the value of a consumer's principal dwelling (2008 Appraisal 
Independence Rules). 12 CFR 226.36(b); 15 U.S.C. 1639(l)(2). The 2008 
Appraisal Independence Rules took effect on October 1, 2009. Section 
1472 of the Dodd-Frank Act essentially codifies the 2008 Appraisal 
Independence Rules, and expands on the protections in those rules. This 
interim final rule incorporates the provisions in the 2008 Appraisal 
Independence Rules. Thus, the Board is removing the 2008 Appraisal 
Independence Rules effective on April 1, 2010.
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    \3\ See, e.g., the Board's regulation at 12 CFR 225.65, and its 
guidance, available at http://www.federalreserve.gov/boarddocs/srletters/1994/sr9455.htm. Title XI of the Financial Institutions 
Reform, Recovery, and Enforcement Act of 1989 (FIRREA) was enacted 
to protect federal financial and public policy interests in real 
estate transactions. 12 U.S.C. 3339. It requires the Board, the 
Comptroller of the Currency, the Office of Thrift Supervision, the 
Federal Deposit Insurance Corporation, and the National Credit Union 
Administration (the federal banking agencies) to adopt regulations 
on the preparation and use of appraisals by federally regulated 
financial institutions. 12 U.S.C. 3331.
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    In December 2008, Fannie Mae and Freddie Mac (``the GSEs'') 
announced the Home Valuation Code of Conduct (HVCC), which established 
appraisal independence standards for loans the GSEs would purchase. The 
HVCC is based on an agreement between the GSEs, New York State Attorney 
General Andrew Cuomo, and the FHFA. The HVCC provides that, among other 
things, only a creditor or its agent may select, engage, and compensate 
an appraiser and that a creditor must ensure that its loan production 
staff do not influence the appraisal process or outcome. As noted, 
however, the Dodd-Frank Act mandates that the HVCC shall have no 
effect, once the Board issues this interim final rule.\4\
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    \4\ TILA Section 129E(j), 15 U.S.C. 1639e(j).
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II. Summary of the Interim Final Rule

    The interim final rule applies to a person who extends credit or 
provides services in connection with a consumer credit transaction 
secured by a consumer's principal dwelling. Although TILA and 
Regulation Z generally apply only to persons to whom the obligation is 
initially made payable and that regularly engage in extending consumer 
credit, TILA Section 129E and the interim final rule apply to persons 
that provide services without regard to whether they also extend 
consumer credit by originating mortgage loans.\5\ Thus, the interim 
final rule applies to creditors, appraisal management companies, 
appraisers, mortgage brokers, realtors, title insurers and other firms 
that provide settlement services.
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    \5\ Under the interim final rule, a person provides a service if 
he provides a ``settlement service'' as defined in the Real Estate 
Settlement Procedures Act, 12 U.S.C. 2602(3). See Sec.  
226.42(b)(1).
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    Other scope issues. The interim final rule applies to appraisals 
for any consumer credit transaction secured by the consumer's principal 
dwelling. Covering consumer credit transactions is consistent with the 
scope of TILA generally, which only applies to credit extended for 
personal, family or household purposes. However, the scope of the 
interim final rule is broader than the 2008 Appraisal Independence 
Rules; those rules apply to closed-end loans but not to home-equity 
lines of credit (HELOCs). The broader scope is required by Section 1472 
of the Dodd-Frank Act, which does not limit coverage to closed-end 
loans and also covers HELOCs.
    In addition, with a few exceptions, the interim final rule applies 
to any person who performs valuation services, performs valuation 
management functions, and to any valuation of the consumer's principal 
dwelling, not just to a licensed or certified ``appraiser,'' an 
``appraisal management company,'' or to a formal ``appraisal.'' This 
approach implements the statutory provisions and is consistent with the 
2008 Appraisal Independence Rules, and is designed to ensure that 
consumers are protected regardless of the valuation method chosen by 
the creditor, and to prevent circumvention of the appraisal 
independence rules. These provisions are discussed in more detail in 
the section-by-section analysis below.
    Coercion and prohibited extensions of credit. Consistent with the 
Dodd-Frank Act, the interim final rule prohibits certain practices that 
the Board's 2008 HOEPA rules also prohibit. First, the interim final 
rule prohibits covered persons from engaging in coercion, bribery, and 
other similar actions designed to cause anyone who prepares a valuation 
to base the value of the property on factors other than the person's 
independent judgment. The interim final rule adds examples from the 
Dodd-Frank Act and the Board's 2008 HOEPA rules of actions that do and 
do not constitute unlawful coercion. Second, the interim final rule 
prohibits a creditor from extending credit based on a valuation if the 
creditor knows, at or before consummation, that (a) coercion or other 
similar conduct has occurred, or (b) that the person who prepares a 
valuation or who performs valuation management services has a 
prohibited interest in the property or the transaction as discussed 
below, unless the creditor uses reasonable diligence to determine that 
the valuation does not materially misstate the value of the property.
    Conflicts of interest. The interim final rule provides that a 
person who prepares a valuation or who performs valuation management 
services may not have an interest, financial or otherwise, in the 
property or the transaction. The Dodd-Frank Act does not expressly ban 
the use of in-house appraisers or affiliates. However, because the Act 
prohibits appraisers from having an ``indirect financial interest'' in 
the transaction, it is possible to interpret the Act to prohibit 
creditors from using in-house staff appraisers and affiliated appraisal 
management companies (AMCs). The interim final rule clarifies that an 
employment relationship or affiliation does not, by itself, violate the 
prohibition. The interim final rule also contains establishes a safe 
harbor and specific criteria for establishing firewalls between the 
appraisal function and the loan production function, to prevent 
conflicts of interest. Special guidance on firewalls is provided for 
small institutions, because they likely cannot completely separate 
appraisal and loan production staff. Small institutions are those with 
assets of $250 million or less.
    Mandatory reporting of appraiser misconduct. The interim final rule 
provides that a creditor or settlement service provider involved in the 
transaction who has a reasonable basis to believe that an appraiser has 
not complied with ethical or professional requirements for appraisers 
under applicable federal or state law, or the Uniform Standards of 
Appraisal Practice (USPAP) must report the failure to comply to the 
appropriate state licensing agency. The interim final rule limits the 
duty to report compliance failures to those that are likely to affect 
the value assigned to the property. The interim final rule also 
provides that a person has a ``reasonable basis'' to believe an 
appraiser has not complied with the law or applicable standards, only 
if the person has knowledge or evidence that would lead a reasonable 
person under the circumstances to believe that a material failure to 
comply has occurred.
    Customary and reasonable rate of compensation for fee appraisers. 
Under the interim final rule, a creditor and its agent must pay a fee 
appraiser at a rate

[[Page 66556]]

that is reasonable and customary in the geographic market where the 
property is located. The rule provides two presumptions of compliance. 
Under the first, a creditor and its agent is presumed to have paid a 
customary and reasonable fee if the fee is reasonably related to recent 
rates paid for appraisal services in the relevant geographic market, 
and, in setting the fee, the creditor or its agent has:
     Taken into account specific factors, which include, for 
example, the type of property and the scope of work; and
     Not engaged in any anticompetitive actions, in 
violation of state or federal law, that affect the appraisal fee, 
such as price-fixing or restricting others from entering the market.
    Second, a creditor or its agent would also be presumed to comply if 
it establishes a fee by relying on rates established by third party 
information, such as the appraisal fee schedule issued by the Veteran's 
Administration, and/or fee surveys and reports that are performed by an 
independent third party (the Act provides that these surveys and 
reports must not include fees paid by AMCs).

III. Legal Authority

Rulemaking Authority

    As noted above, TILA Section 105(a) directs the Board to prescribe 
regulations to carry out the act's purposes. 15 U.S.C. 1604(a). In 
addition, TILA Section 129E, added by the Dodd-Frank Act, includes 
several grants of rulemaking authority to implement the provisions of 
that section. Specifically, Section 129E(g)(1) authorizes the Board, 
the other federal banking agencies, the Federal Housing Finance Agency, 
and the Consumer Financial Protection Bureau to jointly issue rules, 
guidelines, and policy statements ``with respect to acts or practices 
that violate appraisal independence in the provision of mortgage 
lending services * * * within the meaning of subsections (a), (b), (c), 
(d), (e), (f), (h), and (i).'' 15 U.S.C. 1639e(g)(1). Second, Section 
129E(g)(2) directs the Board to prescribe interim final regulations no 
later than 90 days after the law's enactment date, ``defining with 
specificity acts or practices that violate appraisal independence in 
the provision of mortgage lending services'' and ``defining any terms 
in this section or such regulations.'' 15 U.S.C. 1639e(g)(2). The 
Board's interim final regulations under Section 129E(g)(2) are deemed 
to be rules prescribed by the agencies jointly. Third, Section 129E(h), 
authorizes the Board, the banking agencies, the FHFA and the Consumer 
Financial Protection Bureau to jointly issue rules regarding appraisal 
report portability. 15 U.S.C. 1639e(h).
    The Board is issuing this interim final rule pursuant to its 
general authority in Section 105(a) and the specific authority 
conferred by Section 129E(g)(2) to implement the appraisal independence 
provisions in Section 129E. Some industry representatives have asserted 
that the appraiser compensation provisions in Section 129E(i) do not 
relate to appraisal independence and, therefore, should not be 
addressed by the Board's interim final rules issued under Section 
129E(g)(2). The Board concludes, however, that the legislative 
directive to issue interim final rules includes the appraiser 
compensation provisions in Section 129E(i). In particular, the Board 
believes that its authority under Section 129E(g)(2) should be read 
consistently with the authority granted in Section 129E(g)(1), which 
expressly identifies the compensation provision in Section 129E(i) as 
an ``appraisal independence'' provision.

Authority To Issue Interim Final Rule Without Notice and Comment

    The Administrative Procedures Act (APA), 5 U.S.C. 551 et seq., 
generally requires public notice before promulgation of regulations. 
See 5 U.S.C. 553(b). The APA also provides an exception, however, when 
there is good cause because notice and public procedure is 
impracticable. 5 U.S.C. 553(b)(B). The Board finds that for this 
interim rule there is ``good cause'' to conclude that providing notice 
and an opportunity to comment would be impracticable and, therefore, is 
not required. The Board's finding of good cause is based on the 
following considerations. Congress imposed a 90 day deadline for 
issuing the interim final rule. Providing notice and an opportunity to 
comment is impracticable, because 90 days does not provide sufficient 
time for the Board to prepare and publish proposed regulations, provide 
a period for comment, and publish in the Federal Register before the 
statutory deadline. Even if the Board were able to publish proposed 
rules for public comment, the comment period would have been too short 
to afford interested parties sufficient time to prepare well-researched 
comments or to afford time for the Board to conduct a meaningful review 
and analysis of those comments. Consequently, the Board finds that the 
use of notice-and-comment procedures before issuing these rules would 
be impracticable. Interested parties will still have an opportunity to 
submit comments in response to this interim final rule before permanent 
final rules are issued.
    Moreover, the Board believes that the Dodd-Frank Act's mandate that 
the Board issue interim final rules that will be effective before the 
issuance of permanent rules also supports the Board's determination 
that notice and comment are impracticable. If the legislation had 
contemplated a notice and comment period, the rules issued by the Board 
could have been referred to as ``final rules'' rather than ``interim 
final rules.'' The term ``interim final regulations'' or ``interim 
final rules'' has long been recognized to mean rules that an agency 
issues without first giving notice of a proposed rule and having a 
public comment period.\6\
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    \6\ See, e.g., Office of the Federal Register, ``A Guide to the 
Rulemaking Process, http://www.federalregister.gov/learn/the_rulemaking_process.pdf; Administrative Conference of the U.S., 
Recommendation 95-4 (1995); U.S. Government Accountability Office, 
Federal Rulemaking: Agencies Often Published Final Actions Without 
Proposed Rules, GAO/GGD-98-126, 7 (1998); American Bar Ass'n, A 
Guide to Federal Agency Rulemaking, 3rd Ed., 83-Y4 (2006).
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IV. Section-by-Section Analysis

Section 226.5b Requirements for Home-Equity Plans

    Section 1472 of the Dodd-Frank Act adds to TILA a new Section 129E 
that establishes appraiser independence requirements for a consumer 
credit transaction secured by the consumer's principal dwelling. 15 
U.S.C. 1639e. TILA Section 129E applies to both open- and closed-end 
consumer credit transactions secured by the consumer's principal 
dwelling, as discussed in detail below in the section-by-section 
analysis of Sec.  226.42. Accordingly, new comment 5b-7 is being 
adopted to clarify that home-equity plans subject to Sec.  226.5b that 
are secured by the consumer's principal dwelling also are subject to 
the requirements of new TILA Section 129E and Sec.  226.42.

Section 226.42 Valuation Independence

Overview
    This part discusses the implementation of the appraisal 
independence provisions added to TILA by the Dodd-Frank Act by this 
interim final rule. TILA Section 129E(a) prohibits persons that extend 
credit or provide any service for a consumer credit transaction secured 
by the consumer's principal dwelling (covered transaction) from 
engaging in ``any acts or practices that violate appraisal independence 
as described in or pursuant to regulations prescribed under [TILA 
Section 129E].'' 15 U.S.C.

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1639e(a). This provision applies to both closed- and open-end 
extensions of credit. TILA Section 129E(b) describes certain acts and 
practices that violate appraisal independence. 15 U.S.C. 1639e(b). TILA 
Section 129E(c) also specifies certain acts and practices that are 
deemed to be permissible. 15 U.S.C. 1639e(c). Under TILA Section 
129E(f), a creditor that knows about a violation of the appraiser 
independence standards or a prohibited conflict of interest at or 
before consummation of the transaction is prohibited from extending 
credit based on the appraisal unless the creditor documents that it has 
acted with reasonable diligence to determine that the appraisal does 
not materially misstate or misrepresent the value of such dwelling. 15 
U.S.C. 1639e(f).
    TILA Section 129E(b) and (c) are substantially similar to the 
appraisal regulations that the Board issued in 2008, which became 
effective on October 1, 2009. 15 U.S.C. 1639e(b), (c). See Sec.  
226.36(b); 73 FR 44522, 44604 (Jul. 30, 2008) (2008 Appraisal 
Independence Rules). The Board's 2008 Appraisal Independence Rules 
prohibit creditors and mortgage brokers and their affiliates from 
directly or indirectly coercing, influencing, or otherwise encouraging 
an appraiser to misstate or misrepresent the value of the consumer's 
principal dwelling. See Sec.  226.36(b)(1). However, the 2008 rules 
apply only to closed-end mortgage loans. The prohibition on certain 
extensions of credit in TILA Section 129E(f) also is substantially 
similar to Sec.  226.36(b)(2) of the Board's 2008 Appraisal 
Independence Rules. 15 U.S.C. 1639e(f).
    The Board is removing Sec.  226.36(b), effective April 1, 2011, the 
mandatory compliance date for this interim final rule. The Board is 
removing Sec.  226.36(b) because the provision is substantially similar 
to TILA Section 129E(b), (c), and (f), implemented in Sec.  226.42 by 
this interim final rule. Through March 31, 2011, creditors, mortgage 
brokers, and their affiliates may comply with either Sec.  226.36(b) or 
new Sec.  226.42. If such persons comply with Sec.  226.42, they are 
deemed to comply with Sec.  226.36(b).
    TILA Section 129E also adds provisions not covered by the Board's 
2008 Appraisal Independence Rules. For a covered transaction, TILA 
Section 129E(d) prohibits an appraiser that conducts and an appraisal 
management company that procures or facilitates an appraisal of the 
consumer's principal dwelling from having a direct or indirect interest 
in the dwelling or the covered transaction, as discussed in detail 
below in the section-by-section analysis of Sec.  226.42(d). Under TILA 
Section 129E(f), a creditor that knows about a violation of the 
conflicts of interest provisions under TILA Section 129E(d) is 
prohibited from extending credit based on the appraisal, unless the 
creditor documents that it has acted with reasonable diligence to 
determine that the appraisal does not materially misstate or 
misrepresent the value of such dwelling. 15 U.S.C. 1639e(f). TILA 
Section 129E(e) imposes a requirement for reporting certain compliance 
failures by appraisers to state appraiser certifying and licensing 
agencies. 15 U.S.C. 1539e(e). TILA Section 129E(i) provides that 
lenders and their agents must compensate fee appraisers at a rate that 
is ``customary and reasonable for appraisal services performed in the 
market area of the property being appraised.'' \7\ 15 U.S.C. 1639e(i).
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    \7\ This interim final rule does not implement TILA Section 
129E(h), which authorizes the Board and other specified Federal 
agencies to jointly issue regulations concerning appraisal report 
portability. Public Law 111-203, 124 Stat. 2187 (to be codified at 
15 U.S.C. 1639e(h)).
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42(a) Scope

    TILA Section 129E(a) generally prohibits acts or practices that 
violate appraisal independence ``in extending credit or in providing 
any services'' for a consumer credit transaction secured by the 
consumer's principal dwelling. 15 U.S.C. 1639e(a). Thus, the coverage 
of the prohibition in Section 129E is not limited to creditors, 
mortgage brokers, and their affiliates, as is the case with the Board's 
2008 Appraisal Independence Rules contained in Sec.  226.36(b). Section 
129E also covers open-end credit plans secured by the consumer's 
principal dwelling, which are not covered by the Board's 2008 rules. 
See comment 42(a)-1. Consistent with the statute, this interim final 
rule applies only to transactions secured by the principal dwelling of 
the consumer who obtains credit. See comment 42(a)-2.

42(b) Definitions

42(b)(1) ``Covered Person''

    This interim final rule uses the term ``covered person'' in 
defining the persons that are subject to the prohibition on coercion 
and similar practices in TILA Section 129E(b) and the mandatory 
reporting requirement in TILA Section 129E(e). 15 U.S.C. 1639e(b), (e). 
TILA Section 129E(a) prohibits an act or practice that violates 
appraisal independence ``in extending credit or in providing any 
services'' for a covered transaction. Consistent with the statutory 
language, the Board is defining ``covered persons'' to include a 
creditor with respect to a covered transaction or a person that 
provides ``settlement services,'' as defined under the Real Estate 
Settlement Procedures Act (RESPA), in connection with a covered 
transaction. See Sec.  226.42(b)(1).
    The Board notes that ``settlement services'' under RESPA is a broad 
class of activities, covering any service provided in connection with 
settlement, including rendering of credit reports, providing legal 
services, preparing documents, surveying real estate, and pest 
inspections. Some providers of settlement services may, as a practical 
matter, have little opportunity or incentive to coerce or influence an 
appraiser, or to have a reasonable basis to believe that an appraiser 
has not complied with USPAP or other applicable authorities. In such 
cases, the benefits of the rule may not justify applying it to these 
parties, however, by the same token, these entities may have little or 
no compliance burden under the circumstances. The Board solicits 
comment on whether some settlement service providers should be exempt 
from some or all of the interim final rule's requirements.
    Examples of ``covered persons'' include creditors, mortgage 
brokers, appraisers, appraisal management companies, real estate 
agents, title insurance companies, and other persons that provide 
``settlement services'' as defined under RESPA. See comment 42(b)(1)-1. 
The Board notes that persons that perform ``settlement services'' 
include persons that conduct appraisals. See 12 U.S.C. 2602(3). Comment 
42(b)(1)-2 clarifies that the following persons are not ``covered 
persons'': (1) The consumer who obtains credit through a covered 
transaction; (2) a person secondarily liable for a covered transaction, 
such as a guarantor; and (3) a person that resides in or will reside in 
the consumer's principal dwelling but will not be liable on the covered 
transaction, such as a non-obligor spouse.
42(b)(2) ``Covered Transaction''
    TILA Section 129E applies to ``a consumer credit transaction 
secured by the principal dwelling of the consumer.'' 15 U.S.C. 1639e. 
This interim rule refers to such a transaction as a ``covered 
transaction,'' for simplicity. For purposes of Sec.  226.42, the 
existing provisions of Regulation Z and accompanying commentary apply 
in determining what constitutes a principal dwelling. See comment 
42(b)(1)-1. Regulation Z provides that, for the purposes of the 
consumer's right to rescind certain loans secured by the consumer's 
principal dwelling, a consumer may have only one principal dwelling at 
a time. See, e.g.,

[[Page 66558]]

Sec.  226.2(a)(19), 226.2(a)(24), comment 2(a)(24)-3.

42(b)(3) ``Valuation''

    TILA Section 129E uses the terms ``appraisal'' and ``appraiser'' 
without defining the terms. In some cases, a creditor might engage a 
person not certified or licensed under state law to estimate a 
dwelling's value in connection with a covered transaction, such as when 
a creditor engages a real estate agent to provide an estimate of market 
value.\8\ The Board believes that TILA Section 129E applies to acts or 
practices that compromise the independent estimation of the value of 
the consumer's principal dwelling, without regard to whether the 
creditor uses a licensed or certified appraiser or another person to 
produce a valuation. Therefore, this interim final rule uses the 
broader term ``valuation'' and refers to a person that prepares a 
``valuation'' rather than use the terms ``appraisal'' and 
``appraiser,'' for purposes of the following provisions: (1) The 
prohibition on causing or attempting to cause the value assigned to the 
consumer's principal dwelling to be based on a factor other than the 
independent judgment of a person that prepares valuations, through 
coercion or certain other similar acts or practices, under Sec.  
226.42(c); (2) the prohibition on having an interest in the consumer's 
principal dwelling or the transaction, under Sec.  226.42(d); and (3) 
the prohibition on extending credit where a creditor knows of a 
violation of Sec.  226.42(c) or (d) unless certain conditions are met 
under Sec.  226.42(e). This is consistent with the 2008 Appraisal 
Independence Rules, which define ``appraiser'' broadly to mean a person 
who engages in the business of providing assessments of the value of 
dwellings.\9\
---------------------------------------------------------------------------

    \8\ Section 1473(r) of the Dodd-Frank Act adds new Section 1126 
to FIRREA, which prohibits the use of a real estate broker's opinion 
of value ``as the primary basis'' of determining the value of the 
consumer's principal dwelling in certain types of transactions. 
Public Law 111-203, 124 Stat. 2198 (to be codified at 12 U.S.C. 
3355).
    \9\ For purposes of the provisions requiring payment of a 
customary and reasonable rate to appraisers and reporting of 
appraisers' failure to comply with USPAP or ethical or professional 
requirements to the appropriate state appraiser certifying and 
licensing agencies, this interim final rule limits persons 
considered ``appraisers'' to persons subject to the state agencies' 
jurisdiction. Sec.  226.36(f), (g).
---------------------------------------------------------------------------

    Section 226.42(b)(5) uses the term ``valuation'' to mean an 
estimate of the value of the consumer's principal dwelling in written 
or electronic form, other than one produced solely by an automated 
model or system. This definition is consistent with the definition of 
``appraisal'' in the Uniform Standards of Professional Appraisal 
Practice (USPAP) as ``an opinion of value.''\10\ As used in Sec.  
226.42(b)(5), the term ``valuation'' applies to an estimate of the 
value of the consumer's principal dwelling whether or not a person 
applies USPAP in preparing such estimate. Comment 42(b)(3)-1 clarifies 
that a ``valuation'' is an estimate of value prepared by a natural 
person, such as an appraisal report prepared by an appraiser or an 
estimate of market value prepared by a real estate agent. Comment 
42(b)(3)-1 also clarifies that the term includes photographic or other 
information included with an estimate of value. Comment 42(b)(3)-1 
clarifies further that a ``valuation'' includes an estimate provided or 
viewed electronically, such as an estimate transmitted via electronic 
mail or viewed using a computer.
---------------------------------------------------------------------------

    \10\ See Appraisal Standards Bd., Appraisal Fdn., USPAP (2010) 
at U-1; see also Appraisal Standards Bd., Appraisal Fdn., Advisory 
Op. 18 (stating that ``the output of an [automated valuation model] 
is not, by itself, an appraisal'' but may become the basis of an 
appraisal if credible).
---------------------------------------------------------------------------

    Comment 42(b)(3)-2 clarifies that, although a ``valuation'' does 
not include an estimate of value produced exclusively using an 
automated model or system, a ``valuation'' includes an estimate of 
value developed by a natural person based in part on an estimate 
produced using an automated model or system. The Board solicits comment 
on the exclusion of automated valuation models from the definition of 
``valuation'' below, in the section-by-section analysis of Sec.  
226.42(c). Comment 42(b)(3)-3 clarifies that an estimate of the value 
of the consumer's principal dwelling includes an estimate of a range of 
values for the consumer's principal dwelling.

42(b)(4) ``Valuation Management Functions''

    This interim final rule uses the term ``valuation management 
functions'' to refer to a variety of administrative activities 
undertaken in connection with the preparation of a valuation. The term 
``valuation management functions'' is used in implementing TILA Section 
129E(b)(1), which prohibits causing or attempting to cause the value 
assigned to the consumer's principal dwelling to be based on a factor 
other than the independent judgment of a person that prepares 
valuations, through coercion or certain other similar acts or 
practices. 15 U.S.C. 1639e(b)(1). The term ``valuation management 
functions'' also is used in implementing TILA Section 129E(d), which 
provides that an appraisal management company may not have an interest 
in a covered transaction or the consumer's principal dwelling. 15 
U.S.C. 1639e(d). This interim final rule applies that prohibition on 
conflicts of interest to a person that performs administrative 
functions in connection with valuations of the consumer's principal 
dwelling, even if the person is not an ``appraisal management company'' 
(for example, a company that employs appraisers or an appraisal 
reviewer employed by a creditor), as discussed below in the section-by-
section analysis of Sec.  226.42(b)(d). This interim final rule 
therefore uses the term ``valuation management functions'' rather than 
``appraisal management'' for purposes of Sec.  226.42(d).
    Section 226.42(b)(4) defines ``valuation management functions'' to 
mean (1) recruiting, selecting, or retaining a person to prepare a 
valuation; (2) contracting with or employing a person to prepare a 
valuation; (3) managing or overseeing the process of preparing a 
valuation (including by providing administrative services such as 
receiving orders for and receiving a valuation, submitting a completed 
valuation to creditors and underwriters, collecting fees from creditors 
and underwriters for services provided in connection with a valuation, 
and compensating a person that prepare valuations); or (4) reviewing or 
verifying the work of a person that prepares valuations. The term is 
used in Sec.  226.42(c) and (d), which are discussed in detail below.

42(c) Valuation of Consumer's Principal Dwelling

    TILA Section 129E(b) provides that, for purposes of TILA Section 
129E(a), acts or practices that violate appraisal independence include: 
(1) Causing or attempting to cause the value assigned to the property 
to be based on a factor other than the independent judgment of an 
appraiser, by compensating, coercing, extorting, colluding with, 
instructing, inducing, bribing, or intimidating a person conducting or 
involved in an appraisal; (2) mischaracterizing, or suborning any 
mischaracterization of, the appraised value of the property securing 
the extension of credit; (3) seeking to influence an appraiser or 
otherwise to encourage a targeted value in order to facilitate the 
making or pricing of the transaction; and (4) withholding or 
threatening to withhold timely payment for an appraisal report or for 
appraisal services rendered when the appraisal report or services are 
provided for in accordance with the contract between the parties. 15 
U.S.C. 1639e(b).

[[Page 66559]]

    TILA Section 129E(c) provides that TILA Section 129E(b) shall not 
be construed as prohibiting a mortgage lender, mortgage broker, 
mortgage banker, real estate broker, appraisal management company, 
employee of an appraisal management company, consumer, or any other 
person with an interest in a real estate transaction from asking an 
appraiser to: (1) Consider additional, appropriate property 
information, including information regarding additional comparable 
properties to make or support an appraisal; (2) provide further detail, 
substantiation, or explanation for the appraiser's value conclusion; or 
(3) correct errors in the appraisal report. 15 U.S.C. 1639e(c).
    TILA Section 129E(b) and (c) are substantially similar to the 2008 
Appraisal Independence Rules. 15 U.S.C. 1639e(b), (c); Sec.  226.36(b). 
The Board is implementing TILA Section 129E(b) and (c) in Sec.  
226.42(c), pursuant to its authority under TILA Section 129E(g)(2) to 
prescribe interim final regulations defining with specificity acts or 
practices that violate appraisal independence in the provision of 
mortgage lending services or mortgage brokerage services for a covered 
transaction and any terms under TILA Section 129E or such regulations. 
15 U.S.C. 1639e(g)(2). The prohibitions of certain acts and practices 
under TILA Section 129E(b) that are substantially similar to the 
Board's 2008 Appraisal Independence Rules are implemented in Sec.  
226.42(c)(1). The prohibition on ``mischaracterizing or suborning any 
mischaracterization of the appraised value of property securing the 
extension of credit'' under TILA Section 129E(b)(2), which has no 
direct corollary in the 2008 Appraisal Independence Rules, is 
implemented in Sec.  226.42(c)(2). 15 U.S.C. 1639e(b)(2). TILA Section 
129E(c), regarding acts and practices that are permissible under TILA 
Section 129E, is implemented in Sec.  226.42(c)(3).

42(c)(1) Coercion

    TILA Section 129E(b)(1) prohibits a person with an interest in the 
underlying transaction to compensate, coerce, extort, collude, 
instruct, induce, bribe, or intimidate a person, appraisal management 
company, firm, or other entity conducting or involved in an appraisal, 
or attempting to do so, for the purpose of causing the value assigned 
to the consumer's principal dwelling to be based on a factor other than 
the independent judgment of the appraiser. 15 U.S.C. 1639e(b)(1). 
Section 226.42(c)(1) implements and is substantially similar to TILA 
Section 129E(b)(1). Section 226.42(c)(1) uses the terms ``covered 
person'' and ``covered transaction'' and refers to persons that prepare 
``valuations'' or perform ``valuation management functions,'' for 
clarity and comprehensiveness, as discussed above in the section-by-
section analysis of Sec.  226.42(b). Also, Sec.  226.42(c)(1) uses the 
term ``person'' to implement the reference in TILA Section 129E(b)(1) 
to certain acts or practices directed towards a ``person, appraisal 
management company, firm, or other entity,'' for simplicity. 15 U.S.C. 
1639e(b)(1). TILA Section 103(d) provides that ``person'' means a 
natural person or an organization, and Sec.  226.2(a)(22) clarifies 
that an organization includes a corporation, partnership, 
proprietorship, association, cooperative, estate, trust, or government 
unit. 15 U.S.C. 1602(d).
    Prohibited acts and practices. Consistent with TILA Section 
129E(b)(1), Sec.  226.42(c)(1) provides that no person shall attempt to 
or cause the value assigned to the consumer's principal dwelling to be 
based on a factor other than the independent judgment of a person that 
prepares valuations, through coercion, extortion, inducement, bribery 
or intimidation of, compensation or instruction to, or collusion with a 
person that prepares a valuation or a person that performs valuation 
management functions. Comment 42(c)(1)-1 provides that the terms used 
for those prohibited actions have the meaning given them by applicable 
state law or contract. See Sec.  226.2(b)(3). In some cases, state law 
may define one of the terms in a context that is not applicable to a 
covered transaction, for example, where state law defines ``bribery'' 
to mean the offering, giving, soliciting, or receiving of something of 
value to influence the action of an official in the discharge of his or 
her public duties. The Board believes, however, that the terms used in 
TILA Section 129E(b)(1) and Sec.  226.42(c)(1) cover a range of acts 
and practices sufficiently broad to address a wide variety of actions 
that compromise the independent estimation of the value of the 
consumer's principal dwelling. Further, Sec.  226.42(c)(1)(i) provides 
examples of actions that violate Sec.  226.42(c)(1), as discussed 
below. 15 U.S.C. 1639e(b)(1).
    Comment 42(c)(1)-2 clarifies that a covered person does not violate 
Sec.  226.42(c)(1) if the person does not engage in an act or practice 
set forth in Sec.  226.42(c)(1) for the purpose of causing the value 
assigned to the consumer's principal dwelling to be based on a factor 
other than the independent judgment of a person that prepares 
valuations. For example, comment 42(c)(1)-2 states that requesting that 
a person that prepares a valuation take certain actions, such as 
considering additional, appropriate property information, does not 
violate Sec.  226.42(c), because such request does not supplant the 
independent judgment of the person that prepares a valuation. See Sec.  
226.42(c)(3)(i). Also, comment 42(c)(1)-2 clarifies that a covered 
person may provide incentives, such as additional compensation, to a 
person that prepares valuations or performs valuation management 
functions, as long as the covered person does not cause or attempt to 
cause the value assigned to the consumer's principal dwelling to be 
based on a factor other than the independent judgment of a person that 
prepares valuations. The Board notes, however, that provisions of 
federal law other than Sec.  226.42(c)(1) or state law may apply in 
determining whether or not a covered person may engage in certain acts 
or practices in connection with valuations of the consumer's principal 
dwelling.
    Person that prepares valuations. Comment 42(c)(1)-3 clarifies that 
Sec.  226.42(c)(1) is violated if a covered person attempts to or 
causes the value assigned by a person that prepares valuations to be 
based on a factor other than the independent judgment of the person 
that prepares valuations through coercion or certain other acts or 
practices, whether or not the person that prepares valuations is a 
state-licensed or state-certified appraiser. For example, comment 
42(c)(1)(1)-3 clarifies that a covered person violates Sec.  
226.42(c)(1) by seeking to coerce a real estate agent to assign a 
market value to the consumer's principal dwelling based on a factor 
other than the real estate agent's independent judgment, in connection 
with a covered transaction. Although Sec.  226.42(c)(1) broadly 
prohibits certain acts and practices directed toward any person who 
prepares valuations, the Board notes that in some cases applicable law 
or guidance may call for a creditor to obtain an appraisal prepared by 
a state-licensed or state-certified appraiser for a covered 
transaction. For example, the federal financial institution regulatory 
agencies require the creditors they supervise to obtain an appraisal by 
a state-certified appraiser for certain federally-related mortgage 
transactions.\11\
---------------------------------------------------------------------------

    \11\ See, Board: 12 CFR 225.63(a); OCC: 12 CFR 34.43(a); FDIC: 
12 CFR 323.3(a); OTS: 12 CFR 564.3(a); NCUA: 12 CFR 722.3(a).
---------------------------------------------------------------------------

    Indirect acts or practices. Comment 42(c)(1)-4 clarifies that Sec.  
226.42(c)(1) may be violated indirectly, for example,

[[Page 66560]]

where a creditor attempts to cause the value an appraiser engaged by an 
appraisal management company assigns to the consumer's principal 
dwelling to be based on a factor other than the appraiser's independent 
judgment. Thus, the commentary provides that it is a violation to 
threaten to withhold future business from a title company affiliated 
with an appraisal management company unless the valuation ordered 
through the appraisal management company assigns a value to the 
consumer's principal dwelling that meets or exceed a minimum threshold.
    Automated valuation systems. Under this interim final rule, Sec.  
226.42(c)(1) does not apply in connection with the development or use 
of an automated model or system that estimates value. (The definition 
of ``valuation'' does not include an estimate of value produced 
exclusively using such an automated system. See Sec.  226.42(b)(3).) 
The Board requests comment, however, on whether creditors or other 
persons exercise or attempt to exercise improper influence over persons 
that develop an automated model or system for estimating the value of 
the consumer's principal dwelling.

42(c)(1)(i)

    TILA Sections 129E(b)(3) and (4) provide that the following actions 
violate appraisal independence: (1) Seeking to influence an appraiser 
to assign a targeted value to facilitate the making or pricing of a 
covered transaction; and (2) withholding or threatening to withhold 
timely payment for an appraisal report provided or for appraisal 
services rendered in accordance with the parties' contract. 15 U.S.C. 
1639e(b)(3), (4). The Board believes that the prohibition on causing or 
attempting to cause the value assigned to the consumer's principal 
dwelling to be based on a factor other than the independent judgment of 
the person that prepares a valuation, through coercion, inducement, 
intimidation, and certain other acts and practices, encompass the acts 
and practices prohibited by TILA Section 129E(b)(3) and (4). This 
interim rule therefore uses the acts and practices prohibited by TILA 
Section 129E(b)(3) and (4) as examples of acts and practices prohibited 
by TILA Section 129E(b)(1). (This interim final rule implements the 
prohibition under TILA Section 129E(b)(2) of ``mischaracterizing'' the 
value of the consumer's principal dwelling separately from the other 
provisions of TILA Section 129E(b), because that provision may be 
violated without outside pressure, as discussed below in the section-
by-section analysis of Sec.  226.42(c)(2). 15 U.S.C. 1639e(b).)
    Section 226.42(c)(1)(i)(A) and (B) implement TILA Section 
129E(b)(3) and (4) and are substantially similar to existing Sec.  
226.36(b)(1)(C) and (D). In addition, Sec.  226.42(c)(1)(i)(D) through 
(E) mirror current Sec.  226.36(b)(1)(i)(A), (B), and (E). The examples 
provided in Sec.  226.42(c)(1)(i) illustrate cases where prohibited 
action is taken towards a person that prepares valuations. The Board 
notes that Sec.  226.42(c)(1) nevertheless applies to prohibited acts 
and practices directed towards a person that performs valuation 
management functions or such person's affiliate. See comment 
42(c)(1)(i)-1. As used in the examples of prohibited actions, the terms 
``specific value'' and ``predetermined threshold'' includes a 
predetermined minimum, maximum, or range of values. See comment 
42(c)(1)(i)-2. Further, although the examples assume a covered person's 
actions are designed to cause the value assigned to the consumer's 
principal dwelling to equal or exceed a certain amount, the rule also 
applies to cases where a covered person's prohibited actions are 
designed to cause the value assigned to the dwelling to be below a 
certain amount. See id.

42(c)(1)(i)(A)

    TILA Section 129E(b)(3) prohibits a covered person from seeking to 
influence a person that prepares valuations, or otherwise encouraging 
the reporting of a targeted value for the consumer's principal 
dwelling, to facilitate the making or pricing of a covered transaction. 
15 U.S.C. 1639e(b)(3). This provision is substantially similar to 
current Sec.  226.36(b)(1)(ii)(C), which prohibits ``telling an 
appraiser a minimum reported value of the consumer's principal dwelling 
that is needed to approve the loan.'' Section 226.42(c)(1)(i)(A) 
implements TILA Section 129E(b)(3), with minor revisions for clarity.

42(c)(1)(i)(B)

    TILA Section 129E(b)(4) provides that appraisal independence is 
violated if a person withholds or threatens to withhold timely payment 
for a valuation or for services rendered to provide a valuation, when 
the valuation or the services are provided in accordance with the 
contract between the parties. 15 U.S.C. 1639e(b)(4). This provision is 
substantially similar to current Sec.  226.36(b)(1)(ii)(D), which 
prohibits ``failing to compensate an appraiser because the appraiser 
does not value the consumer's principal dwelling at or above a certain 
amount.'' Section 226.42(c)(2)(i)(B) implements TILA Section 
129E(b)(4), with minor revisions for clarity. The Board notes that 
withholding compensation for breach of contract or substandard 
performance of services does not violate Sec.  226.42(c)(1). See Sec.  
226.42(c)(3)(v).

42(c)(1)(i)(C), (D), and (E)

    TILA Section 129E(b)(1) prohibits certain acts or practices that 
cause or attempt to cause the value assigned to the consumer's 
principal dwelling to be based on a factor other than the independent 
judgment of a person that prepares valuations. 15 U.S.C. 1639e(b)(1). 
The Board believes that the acts and practices currently prohibited 
under Sec.  226.36(b)(1)(i)(A) through (E) are prohibited by TILA 
Section 129E(b)(1). Therefore, the interim final rule includes the 
examples of prohibited practices provided in current Sec.  
226.36(b)(1)(ii)(A), (B), and (E) in new Sec.  226.42(c)(2)(i)(C), (D), 
and (E).
    Section 226.42(c)(1)(i)(C) provides that an example of an action 
that violates Sec.  226.42(c)(1) is implying to a person that prepares 
valuations that current or future retention of the person depends on 
the amount at which the person estimates the value of the consumer's 
principal dwelling. Section 226.42(c)(1)(i)(D) provides that an example 
of an action that violates Sec.  226.42(c)(1) is excluding a person 
that prepares valuations from consideration for future engagement 
because the person reports a value for the consumer's principal 
dwelling that does not meet or exceed a predetermined threshold. A 
``predetermined threshold'' includes a predetermined minimum, maximum, 
or range of values. See comment 42(c)(1)(i)-2. Section 
226.42(c)(1)(i)(E) provides that an example of an action that violates 
Sec.  226.42(c)(1) is conditioning the compensation paid to a person 
that prepares valuations on consummation of a covered transaction. The 
examples provided under Sec.  226.42(c)(1)(i) are illustrative, not 
exhaustive, and other actions may violate Sec.  226.42(c)(1).

42(c)(2) Mischaracterization of Value

    TILA Section 129E(b)(2) prohibits mischaracterizing or suborning 
any mischaracterization of the appraised value of property securing a 
covered transaction. 15 U.S.C. 1639e(b)(2). The Board implements that 
prohibition separately from the prohibition under Sec.  226.42(c)(1) of 
causing or attempting to cause the value assigned to the consumer's 
principal dwelling to be based on a factor other than the independent 
judgment of a person that prepares valuations, through coercion and 
other similar acts and practices.

[[Page 66561]]

This is because a person may mischaracterize such value without any 
outside pressure. This interim final rule implements TILA Section 
129E(b)(2) in Sec.  226.42(c)(2).

42(c)(2)(i) Misrepresentation

    Section 226.42(c)(2)(i) provides that a person that prepares 
valuations shall not materially misrepresent the value of the 
consumer's principal dwelling in a valuation. Section 226.42(c)(2)(i) 
applies specifically to persons that prepare valuations, because such 
persons represent that the value they assign to the consumer's 
principal dwelling is consistent with their opinion regarding such 
value. Section 226.42(c)(2)(i) provides that a bona fide error is not a 
mischaracterization. The Board believes that Congress intended to 
prohibit the intentional misrepresentation of the value of the 
consumer's principal dwelling, not bona fide errors. Comment 
42(c)(2)(i)-1 clarifies that a person misrepresents the value of the 
consumer's principal dwelling by assigning a value to such dwelling 
that does not reflect the person's opinion of such dwelling's value. 
For example, comment 42(c)(2)(i)-1 clarifies that an appraiser violates 
Sec.  226.42(c)(2)(i) if the appraiser estimates that the value of such 
dwelling is $250,000 applying USPAP but assigns a value of $300,000 to 
such dwelling in a Uniform Residential Appraisal Report.

42(c)(2)(ii) Falsification or Alteration

    TILA Section 129E(b)(2) prohibits ``mischaracterizing or suborning 
any mischaracterization'' of the value of the consumer's principal 
dwelling. 15 U.S.C. 1639e(b)(2). That provision is implemented in Sec.  
226.42(c)(2)(ii). Section 226.42(c)(2)(ii) provides that no covered 
person shall falsify, and no covered person other than a person that 
prepares valuations shall materially alter, a valuation. An alteration 
is material for purposes of Sec.  226.42(c)(2)(ii) if the alteration is 
likely to significantly affect the value assigned to the consumer's 
principal dwelling.
    Alterations to a valuation generally should be made by the person 
that prepares the valuation, because the valuation reflects that 
person's estimate of the value of the consumer's principal dwelling. 
(Covered persons may request that a person that prepares a valuation 
take certain actions, including correct errors in the valuation, 
however. See Sec.  226.42(c)(3).) The Board solicits comment, however, 
on whether there are specific types of alterations that other persons 
may make that do not affect the value assigned to the consumer's 
dwelling and therefore should not be deemed material for purposes of 
Sec.  226.42(c)(2)(ii).

42(c)(2)(iii) Inducement of Mischaracterization

    Section 226.42(c)(2)(iii) provides that no covered person shall 
induce a person to violate the prohibitions under Sec.  226.42(c)(2)(i) 
or (ii). For example, comment 42(c)(2)(iii)-1 clarifies that a loan 
originator may not coerce a loan underwriter to alter an appraisal 
report to increase the value assigned to the consumer's principal 
dwelling.

42(c)(3) Permitted Actions

    TILA Section 129E(c) provides that TILA Section 129E(b) shall not 
be construed to prohibit a mortgage lender, mortgage broker, mortgage 
banker, real estate broker, appraisal management company, employee of 
an appraisal management company, consumer, or any other person with an 
interest in a real estate transaction from asking an appraiser to 
undertake certain actions. 15 U.S.C. 1639e(c). To implement TILA 
Section 129E(c), Sec.  226.42(c)(3) provides examples of actions that 
do not violate Sec.  226.42(c)(1) or (2). The Board notes that the 
examples provided under Sec.  226.42(c)(3) are illustrative, not 
exhaustive, and there are other actions that are permitted under Sec.  
226.42(c)(1) or (2).

42(c)(3)(i), (ii), and (iii)

    TILA Section 129E(c)(1) provides that it is permissible under TILA 
Section 129E(b) to ask an appraiser to consider additional property 
information, including information regarding comparable properties. 15 
U.S.C. 1639e(c)(1). TILA Section 129E(c)(2) provides that it is 
permissible under TILA Section 129E(b) to ask an appraiser to provide 
further detail, substantiation, or explanation for the appraiser's 
value conclusion. 15 U.S.C. 1639e(c)(1). TILA Section 129E(c)(3) 
provides that it is permissible under TILA Section 129E(b) to ask an 
appraiser to correct errors in an appraisal report. 15 U.S.C. 
1639e(c)(3). TILA Section 129E(c)(1) through (3) are substantially 
similar to current Sec.  226.36(b)(1)(ii)(A) through (C). The interim 
final rule implements TILA Section 129E(c)(1) through (3) in Sec.  
226.42(c)(3)(i) through (iii).

42(c)(3)(iv), (v), and (vi)

    The Board believes that the acts and practices allowed under 
current Sec.  226.36(b)(1)(ii)(D) through (F) do not compromise the 
exercise of independent judgment in estimating the value of the 
consumer's principal dwelling. The Board therefore includes the 
examples of permitted practices provided under current Sec.  
226.36(b)(1)(ii)(D) through (F) in new Sec.  226.42(c)(3)(iv) through 
(vi). Section 226.42(c)(3)(iv) provides that an example of an action 
that does not violate Sec.  226.42(c)(1) or (2) is obtaining multiple 
valuations for the consumer's principal dwelling to select the most 
reliable valuation. Section 226.42(c)(3)(iv) is substantially similar 
to current Sec.  226.36(b)(1)(ii)(D) but omits the statement in that 
provision that obtaining multiple appraisals is permitted under Sec.  
226.36(b) ``as long as the creditor adheres to a policy of selecting 
the most reliable appraisal, rather than the appraisal that states the 
highest value.'' That statement is omitted because it may suggest an 
unintended distinction between selecting the valuation that states the 
highest value and selecting the valuation that states the lowest value. 
No substantive change is intended.
    Section 226.42(c)(3)(v) provides that an example of an action that 
does not violate Sec.  226.42(c)(1) or (2) is withholding compensation 
for breach of contract or substandard performance of services. Section 
226.42(c)(3)(vi) provides that example of an action that does not 
violate Sec.  226.42(c)(1) or (2) is taking action permitted or 
required by applicable federal or state statute, regulation, or agency 
guidance. Section 226.42(b)(3)(v) and (vi) are substantially similar to 
current Sec.  226.36(b)(1)(ii)(E) and (F).

42(d) Prohibition on Conflicts of Interest

Background
    Section 226.42(d) implements TILA Section 129E(d), which states 
that ``no certified or licensed appraiser conducting, and no appraisal 
management company procuring or facilitating, an appraisal in 
connection with a consumer credit transaction secured by the principal 
dwelling of a consumer may have a direct or indirect interest, 
financial or otherwise, in the property or transaction involving the 
appraisal.'' This new TILA provision is generally consistent with 
longstanding Federal banking agency appraisal regulations and 
supervisory guidance applicable to federally-regulated depository 
institutions. The federal banking agency regulations require that 
appraisers employed by the institution extending credit (termed ``staff 
appraisers'' in the regulations) be ``independent of the lending, 
investment, and collection functions and not involved, except as an 
appraiser, in the transaction, and have no direct or indirect interest, 
financial

[[Page 66562]]

or otherwise, in the property.'' \12\ The federal banking agency 
regulations also prohibit appraisers who are not employees of the 
institution extending credit, but rather hired on a contract basis 
(termed ``fee appraisers'' in the regulations) from having a ``direct 
or indirect interest, financial or otherwise, in the property or the 
transaction.'' \13\
---------------------------------------------------------------------------

    \12\ Board: 12 CFR 226.65(a); OCC: 12 CFR 34.45(a); FDIC: 12 CFR 
323.5(a); OTS: 12 CFR 564.5(a); NCUA: 12 CFR 722.5(a). The 
regulations define ``appraisal'' to mean ``a written statement 
independently and impartially prepared by a qualified appraiser 
setting forth an opinion as to the market value of an adequately 
described property as of a specific date(s), supported by the 
presentation and analysis of relevant market information.'' Board: 
12 CFR 226.62(a); OCC: 12 CFR 34.42(a); FDIC: 12 CFR 323.2(a); OTS: 
12 CFR 564.2(a); NCUA: 12 CFR 722.2(a). ``State-certified 
appraiser'' and ``state-licensed appraiser'' are defined at, 
respectively, 12 CFR 226.62(j) and (k); OCC: 12 CFR 34.42(j) and 
(k); FDIC: 12 CFR 323.2(j) and (k); OTS: 12 CFR 564.2(j) and (k); 
NCUA: 12 CFR 722.2(j) and (k).
    \13\ Board: 12 CFR 226.65(b); OCC: 12 CFR 34.45(b); FDIC: 12 CFR 
323.5(b); OTS: 12 CFR 564.5(b); NCUA: 12 CFR 722.5(b).
---------------------------------------------------------------------------

Federal Banking Agency Appraisal Guidance

    Reaffirming independence standards in federal banking agency 
appraisal regulations, the federal banking agencies have issued 
Interagency Appraisal and Evaluation Guidelines (Interagency 
Guidelines). The Interagency Guidelines state that the collateral 
valuation process ``should be isolated from the institution's loan 
production process,'' and that a person providing an appraisal or 
evaluation ``should be independent of the loan and collection functions 
of the institution and have no interest, financial or otherwise, in the 
property or the transaction.'' \14\ The Interagency Guidelines 
acknowledge, however, that for some creditors, such as small or rural 
institutions or branches, separating loan production staff from 
collateral valuation staff may not always be possible or practical 
because the only individual qualified to analyze the real estate 
collateral may also be a loan officer, other officer, or director of 
the institution. In these cases, the Interagency Guidelines state that, 
``[t]o ensure their independence, lending officials, officers, or 
directors should abstain from any vote or approval involving loans on 
which they performed an appraisal or evaluation.'' \15\
---------------------------------------------------------------------------

    \14\ Board, OCC, FDIC, OTS, Interagency Appraisal and Evaluation 
Guidelines, SR 94-55 (Oct. 28, 1994) (Interagency Guidelines).
    \15\ Id.
---------------------------------------------------------------------------

    More recently, the federal banking agencies proposed similar 
guidance in the Proposed Interagency Appraisal and Evaluation 
Guidelines (Proposed Interagency Guidelines).\16\ In addition to 
incorporating the existing guidance stated above, the Proposed 
Interagency Guidelines advise institutions to ``establish reporting 
lines independent of loan production for staff that order, accept, and 
review appraisals and evaluations.'' For institutions unable to achieve 
absolute lines of independence between the collateral valuation and 
loan production processes, the Proposed Interagency Guidelines advise 
that an institution should nonetheless ``be able to demonstrate clearly 
that it has prudent safeguards to isolate its collateral valuation 
program from influence or interference from the loan production 
process.''
---------------------------------------------------------------------------

    \16\ Board, OCC, FDIC, OTS, NCUA, Proposed Interagency Appraisal 
and Evaluation Guidelines, 73 FR 69647, Nov. 19, 2008 (Proposed 
Interagency Guidelines).
---------------------------------------------------------------------------

HVCC

    The HVCC, which covers appraisals performed by state-licensed or 
state-certified appraisers for loans sold to Fannie Mae and Freddie 
Mac, also incorporates several provisions to prohibit conflicts of 
interest in the appraisal process.
    First, the HVCC regulates the process of selecting and 
communicating with a person or entity involved in conducting an 
appraisal. Specifically, (1) members of the creditor's loan production 
staff; and (2) any person who (i) is compensated on a commission basis 
based on whether the loan closes, or (ii) reports ultimately to any 
officer of the creditor who is not independent of loan production, may 
not do the following:
     Select, retain, recommend, or influence the selection of 
any appraiser for a particular appraisal assignment or for inclusion on 
a list or panel of approved or disapproved appraisers; or
     Have ``substantive communications'' with an ``appraiser or 
appraisal management company'' involving or impacting valuation, 
including ordering or managing an appraisal assignment.\17\
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    \17\ HVCC, Part III.B.
---------------------------------------------------------------------------

    Second, the HVCC prohibits the creditor from using any appraisal 
prepared by a person or entity that may have a conflict of interest. In 
particular, a creditor may not use any appraisal prepared by an 
appraiser employed by: (1) The creditor; (2) an affiliate of the 
creditor; (3) an entity owned wholly or partly by the creditor; or (4) 
an entity that wholly or partly owns the creditor. A creditor also may 
not use an appraisal prepared by any appraiser employed, engaged as an 
independent contractor, or otherwise retained by ``any appraisal 
company or appraisal management company'' affiliated with, or that 
wholly or partly owns or is owned by the creditor or an affiliate of 
the creditor.\18\ A creditor may use in-house staff appraisers, 
however, to: (1) Order appraisals; (2) review appraisals, both pre- and 
post-loan funding; (3) develop, deploy, or use internal AVMs; and (4) 
prepare appraisals for transactions other than mortgage origination 
transactions, such as ``loan workouts,'' if the appraiser complies with 
the terms of the HVCC.\19\
---------------------------------------------------------------------------

    \18\ Id. Part IV.A.
    \19\ Id. Part IV.C.
---------------------------------------------------------------------------

    Third, the HVCC permits the creditor to use appraisals otherwise 
prohibited above, as long as the creditor adheres to a list of 
requirements designed to ensure the independence of any person involved 
in conducting or managing the appraisal, such as that, among other 
requirements:
     The appraiser must report to a function independent of the 
creditor's sales or loan production function;
     The creditor's loan production staff may have no role in 
selecting, retaining, recommending, or influencing the selection of an 
appraiser; and
     The appraiser must not be compensated based on the 
appraiser's conclusion of value or whether the loan closes.\20\
---------------------------------------------------------------------------

    \20\ Id. Part IV.B.
---------------------------------------------------------------------------

    Fourth, the HVCC prohibits a creditor from using an appraisal 
prepared by an entity affiliated with, or that wholly or partly owns or 
is owned by, another entity performing settlement services for the same 
transaction, unless the entity performing the appraisal has adopted 
policies and procedures to implement the HVCC, including training and 
disciplinary rules on appraiser independence.\21\
---------------------------------------------------------------------------

    \21\ Id. Part IV.C.
---------------------------------------------------------------------------

    The HVCC exempts from compliance with the second, third, and fourth 
provisions described above, ``institutions (including non-banking 
institutions) that meet the definition of a `small bank' as set forth 
in the Community Reinvestment Act,\22\ and which Freddie Mac or Fannie 
Mae determines would suffer hardship due to the provisions, and which 
otherwise adhere with [the HVCC].'' \23\
---------------------------------------------------------------------------

    \22\ ``Small bank'' is defined in the Community Reinvestment Act 
(CRA) as ``any regulated financial institution with aggregate assets 
of not more than $250,000,000.'' 12 U.S.C. 2908. However, adjusting 
asset threshold amounts for inflation, regulations implementing the 
CRA define ``small bank'' as ``a bank that, as of December 31 of 
either of the prior two calendar years, had assets of less than 
$1.098 billion.'' 12 CFR 228.12(u). These regulations also define 
the term ``intermediate small bank,'' meaning ``a small bank with 
assets of at least $274 million as of December 31 of both of the 
prior two calendar years and less than $1.098 billion as of December 
31 of either of the prior two calendar years.'' Id.
    \23\ HVCC, Part IV.D.

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[[Page 66563]]

The Interim Final Rule

    The Board recognizes that the literal language of the statutory 
prohibition on having a ``direct or indirect interest, financial or 
otherwise'' in the property or transaction can be interpreted to mean 
that a person or entity preparing a valuation or performing valuation 
management functions should be deemed to have a prohibited interest 
merely by token of being employed or owned by the creditor. An employee 
of the creditor could be deemed to have an ``indirect'' interest in the 
transaction, for example, because he or she might receive financial 
benefits, such as higher bonuses or more valuable stock options, as a 
result of the creditor's loan volume rising. Similarly, under this 
interpretation, an AMC providing both valuation management functions 
and title services, including title insurance, for the same transaction 
could be deemed to have an ``indirect'' interest in the transaction if 
the entity profits when title insurance is purchased at closing.
    The Board believes, however, that interpreting the statute in this 
way would be impractical and thus would not be the most effective way 
to further the purpose of the conflicts of interest prohibition in TILA 
Section 129E(d)-promoting a healthy mortgage market by ensuring 
independent valuations. A broad prohibition could interfere with the 
functioning of many creditors and providers of valuations and valuation 
management functions, potentially disrupting the mortgage market at a 
vulnerable time. The Board also notes that, according to the 
legislative history of TILA Section 129E(d), the conflicts of interest 
provision ``should not be construed as to prohibit work by staff 
appraisers within a financial institution or other organization, if 
such an entity has established firewalls, consistent with those 
outlined in the [HVCC], between the origination group and the appraisal 
unit designed to ensure the independence of appraisal results and 
reviews.'' \24\
---------------------------------------------------------------------------

    \24\ U.S. House of Reps., Comm. on Fin. Services, Report on H.R. 
1728, Mortgage Reform and Anti-Predatory Lending Act, No. 111-94, 95 
(May 4, 2009) (House Report). The conflict of interest provision 
adopted in TILA Section 129E(d) appears in Title VI, Sec.  602, of 
H.R. 1728.
---------------------------------------------------------------------------

    The Board understands that many AMCs are wholly or partly owned by 
creditors, or share a common corporate parent with a creditor, and 
manage appraisals for a sizable share of the dwelling-secured consumer 
credit market. The Board is also aware that a few larger creditors 
still have a segregated in-house collateral valuation function. Some 
creditor representatives have informally reported to the Board that, 
based on their experience and quality control testing, appraisals 
performed by an in-house collateral valuation function are of higher 
quality than appraisals performed by third parties, including those 
ordered through third-party AMCs. These creditors might reasonably 
prefer using in-house appraisals, or appraisals performed through an 
appraisal company wholly owned by the creditor, to protect both 
consumers and their own safety and soundness.
    In addition, the Board is concerned that small creditors with few 
staff members, such as institutions or branches in rural areas, could 
not comply with an overly broad prohibition on conflicts of interest. 
These entities, particularly in rural areas, may not have the option of 
choosing a third party to perform or manage collateral valuations. They 
may need to rely on a single in-house staff member to perform multiple 
functions, such as, for example, serving as both a loan officer and an 
appraiser.
    For these reasons, the Board's interim final rule:
     Generally prohibits conflicts of interest in the valuation 
process, as prescribed by TILA Section 129E(d);
     Provides a safe harbor to ensure compliance with the 
conflicts of interest prohibition by a creditor's in-house valuation 
staff or affiliated AMC or appraisal company if firewalls and other 
specified safeguards are in place; and
     Provides a safe harbor to ensure compliance with the 
conflicts of interest prohibition by a person who prepares valuations 
or performs valuation management functions in a particular transaction 
in addition to performing another settlement service, or whose 
affiliate performs another settlement service, if firewalls and other 
specified safeguards are in place.
    The interim final rule establishes alternative safe harbor 
safeguards for smaller creditors that are unable to establish firewalls 
due to practical problems, such as having a limited number of 
employees.
    These provisions are discussed in turn below.
42(d)(1)(i) In General
    Section 226.42(d)(1)(i) prohibits a person preparing a valuation or 
performing valuation management functions for a consumer credit 
transaction secured by the consumer's principal dwelling from having a 
direct or indirect interest, financial or otherwise, in the property or 
transaction for which the valuation is or will be performed. This 
provision implements TILA Section 129E(d), but uses different 
terminology (for reasons explained in the section-by-section analysis 
to Sec.  226.42(b)). Specifically, the term ``person preparing 
valuations'' replaces the term ``licensed or certified appraiser''; the 
term ``person performing valuation management functions'' replaces the 
term ``appraisal management company''; and the term ``valuation'' 
replaces the term ``appraisal.'' By using these terms, the interim 
final rule's conflict of interest provision applies to any form of 
valuing a property on which a creditor relies to extend consumer credit 
secured by the consumer's principal dwelling.

Prohibited Interest in the Property

    Comment 42(d)(1)(i)-1 clarifies that a person preparing a valuation 
or performing valuation management functions for a covered transaction 
has a prohibited interest in the property if the person has any 
ownership or reasonably foreseeable ownership interest in the property. 
The comment further clarifies that a person who seeks a mortgage to 
purchase a home has a reasonably foreseeable ownership interest in the 
property securing the mortgage, and therefore is not permitted to 
prepare the valuation or perform valuation management functions for 
that mortgage transaction under Sec.  226.42(d)(1)(i). This example is 
illustrative, and is not intended to be exhaustive; other prohibited 
interests in the covered property may arise, depending on the facts of 
a particular transaction.

Prohibited Interest in the Transaction

    Comment 42(d)(1)(i)-2 clarifies that a person preparing a valuation 
or performing valuation management functions has a prohibited interest 
in the transaction under Sec.  226.42(d)(1)(i) if that person or an 
affiliate of that person also serves as a loan officer of the creditor, 
mortgage broker, real estate broker, or other settlement service 
provider for the transaction, and the safe harbor conditions for 
settlement service providers under Sec.  226.42(d)(4) (discussed below 
in the section-by-section analysis of that provision) are not 
satisfied. The comment further clarifies that a person also has a 
prohibited interest in the transaction if the person is compensated or 
otherwise receives financial or other benefits based on whether the 
transaction is consummated. Under these circumstances, the comment 
explains, the person is not permitted to prepare the valuation or 
perform valuation management functions for the transaction under Sec.  
226.42(d)(1)(i). The

[[Page 66564]]

Board notes that these examples of prohibited interests are generally 
consistent with conflicts of interest provisions in the HVCC.\25\ 
Again, these examples are not intended to be an exhaustive list of 
prohibited conflicts of interest in covered transactions; others may 
arise, depending on the circumstances surrounding a particular 
transaction.
---------------------------------------------------------------------------

    \25\ HVCC, Part IV.A and IV.C.
---------------------------------------------------------------------------

42(d)(1)(ii) Employees and Affiliates of Creditors; Providers of 
Multiple Settlement Services

Employees and Affiliates of Creditors
    Section 226.42(d)(1)(ii)(A) provides that, in any covered 
transaction, no person violates paragraph (d)(1)(i) of this section 
based solely on the fact that the person is an employee or affiliate of 
the creditor. Comment 226.42(d)(1)(ii)-1 explains that, in general, a 
creditor may use employees or affiliates to prepare a valuation or 
perform valuation management functions without violating Sec.  
226.42(d)(1)(i). The comment clarifies, however, that whether an 
employee or affiliate has a direct or indirect interest in the property 
or transaction that creates a prohibited conflict of interest under 
Sec.  226.42(d)(1)(i) depends on the facts and circumstances of a 
particular case, including the structure of the employment or affiliate 
relationship.
Providers of Multiple Settlement Services
    Section 226.42(d)(1)(ii)(B) provides that, in any covered 
transaction, no person violates paragraph (d)(1)(i) of this section 
based solely on the fact that the person provides a settlement service 
in addition to preparing valuations or performing valuation management 
functions, or based solely on the fact that the person's affiliate 
performs another settlement service. Comment 42(d)(1)(ii)-2 explains 
that, in general, a person who prepares a valuation or perform 
valuation management functions for a covered transaction may perform 
another settlement service for the same transaction without violating 
Sec.  226.42(d)(1)(i), or the person's affiliate may provide another 
settlement service for the transaction. The comment clarifies, however, 
that whether the person has a direct or indirect interest in the 
property or transaction that creates a prohibited conflict of interest 
under Sec.  226.42(d)(1)(i) depends on the facts and circumstances of a 
particular case.

42(d)(2) Employees and Affiliates of Creditors With Assets of More Than 
$250 Million for Both of the Past Two Calendar Years; 42(d)(3) 
Employees and Affiliates of Creditors With Assets of $250 Million or 
Less for Either of the Past Two Calendar Years

Background
    As discussed above, one interpretation of TILA Section 129E(d) is 
that it prohibits entities related to a creditor by ownership and a 
creditor's in-house appraisal staff from involvement in the collateral 
valuation process for that creditor. For many creditors and providers 
of valuations and valuation management services, complying with the 
statute under this interpretation would be impractical or impossible.
    The Board believes that an interpretation of the statute more 
consistent with Congress's intent is one that recognizes that 
appropriate firewalls and safeguards can ensure the integrity of the 
valuation process in certain situations where conflicts might otherwise 
arise, such as where the person preparing a valuation is the employee 
of the creditor. The Board also notes that federal banking agency 
guidance and the HVCC permit creditors to use appraisals prepared by 
in-house appraisers or affiliated AMCs if they establish firewalls and 
other safeguards to separate the collateral valuation function from the 
loan production functions.\26\ Appraisers, creditors, and others have 
informed the Board that the HVCC requirements for firewalls and 
safeguards, as an alternative to a strict prohibition on direct or 
indirect conflicts of interest, have generally been effective in 
ensuring that appraisers provide objective and independent valuations. 
Again, the legislative history of TILA Section 129E(d) evinces 
Congress's approval of this approach, stating that the conflict of 
interest provision ``should not be construed as to prohibit work by 
staff appraisers within a financial institution or other organization, 
if such an entity has established firewalls, consistent with those 
outlined in the [HVCC], between the origination group and the appraisal 
unit designed to ensure the independence of appraisal results and 
reviews.'' \27\
---------------------------------------------------------------------------

    \26\ See Interagency Guidelines, SR 94-55; HVCC, Part IV.B.
    \27\ House Report at 95.
---------------------------------------------------------------------------

    Thus, the interim final rule creates two safe harbors for 
compliance with the prohibition on conflicts of interest under Sec.  
226.42(d) for persons who prepare valuations or perform valuation 
management functions and are also employees or affiliates of the 
creditor:
    (1) One for transactions in which the creditor had assets of more 
than $250 million as of December 31st for both of the past two calendar 
years (Sec.  226.42(d)(2)); and
    (2) The other for transactions in which the creditor had assets of 
$250 million or less as of December 31st for either of the past two 
calendar years (Sec.  226.42(d)(3)).

These safe harbors incorporate several firewall and safeguard 
requirements from the HVCC as well as, for smaller institutions, the 
federal banking agencies' appraisal regulations and supervisory 
guidance. As discussed below, the safe harbor conditions under Sec.  
226.42(d)(2) and (d)(3) impose obligations on creditors and also 
require that certain additional conditions be met. If the creditor 
meets these obligations and the other safe harbor conditions are 
satisfied, the creditor generally may rely on valuations prepared by 
its in-house staff or for which its affiliate performed valuation 
management functions for any covered transaction without violating the 
regulation.
    The interim final rule differentiates between creditors with assets 
of over $250 million and creditors with assets of $250 million or less 
for at least three reasons. First, without allowances for staff and 
other limitations of smaller creditors, these creditors may decrease 
their consumer lending operations due to an inability to comply with 
the statute and implementing regulation. This reduction in credit 
availability could harm many consumers, undermining the goals of the 
Dodd-Frank Act to protect and benefit consumers. Second, the federal 
banking agencies have long recognized that smaller institutions may be 
unable to achieve strict separation between its collateral valuation 
and loan production functions; therefore, some firewalls and safeguards 
appropriate for larger institutions are not for smaller institutions. 
Third, distinguishing between larger and smaller institutions is 
consistent with the HVCC, which the statute indicates the interim final 
rule is intended to replace. See TILA Section 129E(j). As discussed 
earlier, the HVCC exempts from its conflict of interest and firewall 
rules all institutions (both depositories and nondepositories) meeting 
the asset threshold for defining a ``small bank'' under the Community 
Reinvestment Act. Therefore, this distinction is generally familiar in 
the

[[Page 66565]]

industry and should not cause undue confusion.\28\
---------------------------------------------------------------------------

    \28\ 12 U.S.C. 2908; HVCC, Part IV.E.
---------------------------------------------------------------------------

    The Board requests comment on whether the $250 million asset size 
threshold, some other asset size threshold, or other factors are 
appropriate for applying the different safe harbor conditions to 
different types of institutions.

42(d)(2) Employees and Affiliates of Creditors With Assets of More Than 
$250 Million for Both of the Past Two Calendar Years

    Section 226.42(d)(2) provides that, in a transaction in which the 
creditor had assets of more than $250 million as of December 31st for 
both of the past two calendar years, a person preparing valuations or 
performing valuation management functions who is employed by or 
affiliated with the creditor does not have a conflict of interest in 
violation of Sec.  226.42(d)(1)(i) of this section based on the 
person's employment or affiliate relationship with the creditor if:
    (1) The compensation of the person preparing a valuation or 
performing valuation management functions is not based on the value 
arrived at in any valuation;
    (2) The person preparing a valuation or performing valuation 
management functions reports to a person who is not part of the 
creditor's loan production function (as defined in Sec.  
226.42(d)(5)(i)) and whose compensation is not based on the closing of 
the transaction to which the valuation relates; and
    (3) No employee, officer or director in the creditor's loan 
production function is directly or indirectly involved in selecting, 
retaining, recommending or influencing the selection of the person to 
prepare a valuation or perform valuation management functions, or to be 
included in or excluded from a list of approved persons who prepare 
valuations or perform valuation management functions.
    Comment 42(d)(2)-1 clarifies that Sec.  226.42(d)(2) creates a safe 
harbor for a person who prepares valuation or performs valuation 
management functions for a covered transaction and is an employee or 
affiliate of the creditor. Such a person will not be deemed to have an 
interest prohibited under Sec.  226.42(d)(1)(i) on the basis of the 
employment or affiliate relationship with the creditor if the 
conditions in Sec.  226.42(d)(2) are satisfied. In addition, the 
comment explains that, in general, in any covered transaction with a 
creditor that had assets of more than $250 million for the past two 
years, the creditor may use its own employee or affiliate to prepare a 
valuation or perform valuation management functions for a particular 
transaction if the safe harbor conditions described in Sec.  
226.42(d)(2) are satisfied without violating the regulation. The 
comment also states that, if the safe harbor conditions in Sec.  
226.42(d)(2) are not satisfied, whether a person preparing valuations 
or performing valuation management functions has violated Sec.  
226.42(d)(1)(i) depends on all of the facts and circumstances. The 
three conditions for the safe harbor under Sec.  226.42(d)(2) are 
discussed in turn below.
    Condition one: Compensation. The first condition is that the 
compensation of the person preparing a valuation or performing 
valuation management functions may not be based on the value arrived at 
in any valuation for the transaction. The Board believes that whether 
the loan closes depends on the conclusion of value; therefore the 
interim final rule prohibits, as a condition of this safe harbor, 
basing an appraiser's compensation on the conclusion of value but does 
not expressly prohibit basing the appraiser's compensation on whether 
the transaction closes. If this condition is met, the person will not 
have a stake in stating a certain value, which might color his or her 
judgment as to the value of the home.
    Condition two: Reporting. The second condition requires that the 
person performing valuations or valuation management functions report 
to a person who is not part of the creditor's loan production function, 
or whose compensation is not based on the closing of the transaction to 
which the valuation relates. The Board believes that this condition is 
important to ensuring that persons instrumental in the collateral 
valuation process are not subject to pressure to misrepresent 
collateral value from managers or similar authorities whose primary 
objective is increasing loan volume, not obtaining an independent 
valuation. The Board also notes that this condition is similar to 
requirements in the HVCC, such as that ``the appraiser or, if an 
affiliate, the company for which the appraiser works,'' report to a 
function of the creditor ``independent of sales or loan production.'' 
\29\ It is reflected in the Proposed Interagency Guidance as well, 
which advises institutions to ``establish reporting lines independent 
of loan production for staff that order, accept, and review appraisals 
and evaluations.'' \30\
---------------------------------------------------------------------------

    \29\ HVCC, Part IV.B(1). See also id., Part III.B.
    \30\ Proposed Interagency Guidelines, 73 FR at 69652.
---------------------------------------------------------------------------

    Comment 42(d)(2)(ii)-1 clarifies the prohibition on reporting to a 
person who is part of the creditor's loan production function. To this 
end, the comment provides the following example: if a person preparing 
a valuation is directly supervised or managed by a loan officer or 
other person in the creditor's loan production function (as defined in 
Sec.  226.42(d)(5)(i), or by a person who is directly supervised or 
managed by a loan officer, the condition under Sec.  226.42(d)(2)(ii) 
is not met.
    Comment 42(d)(2)(ii)-2 clarifies the prohibition on reporting to a 
person whose compensation is based on the transaction closing. To this 
end, the comment provides the following example: assume an appraisal 
management company performs valuation management functions for a 
transaction in which the creditor is an affiliate of the appraisal 
management company. If the employee of the appraisal management company 
who is in charge of valuation management for that transaction is 
supervised by a person who earns a commission or bonus based on the 
percentage of closed transactions for which the appraisal management 
company provides valuation management functions, the condition under 
Sec.  226.42(d)(2)(ii) is not met.
    Condition three: Selection. The third condition requires that 
employees, officers, and directors in the creditor's loan production 
function not be directly or indirectly involved in selecting, 
retaining, recommending or influencing the selection of the person to 
perform a particular valuation or to be included in or excluded from a 
list or panel of approved persons who perform valuations. This safe 
harbor condition is intended to curtail coercion of appraisers that 
occurs through giving or withholding assignments, or removing the 
appraiser from, or including the appraiser on, a panel or list of 
persons approved to perform valuations. This condition is also intended 
to prevent loan sales or production staff from interfering with the 
independence of the valuation by choosing appraisers who pay be 
perceived to give especially high or low values.
    Comment 42(d)(2)(ii)-2 clarifies the prohibition on any employee, 
officer or director in the creditor's loan production function (as 
defined in Sec.  226.42(d)(4)(ii)) from direct or indirect involvement 
in selecting, retaining,

[[Page 66566]]

recommending or influencing the selection of the person to perform a 
valuation or valuation management functions for a covered transaction, 
or to be included in or excluded from a list or panel of approved 
persons who prepare valuations or perform valuation management 
functions. To this end, the comment provides the following example: if 
the person who selects the person who will prepare the valuation for a 
covered transaction is supervised by an employee of the creditor who 
also supervises loan officers, the condition in Sec.  226.42(d)(2)(iii) 
is not met.
    The Board requests comment on the appropriateness of the three 
conditions required under Sec.  226.42(d)(2) for inclusion in the final 
rule.

42(d)(3) Employees and Affiliates of Creditors With Assets of $250 
Million or Less for Either of the Past Two Calendar Years

    Section 226.42(d)(3) provides a safe harbor for compliance with the 
prohibition on conflicts of interest under Sec.  226.42(d)(1)(i) for 
employees and affiliates of creditors with assets of $250 million or 
less as of December 31st for either of the past two calendar years. 
Specifically, Sec.  226.42(d)(3) provides that, in a transaction in 
which the creditor had assets of $250 million or less for either of the 
past two calendar years, a person who prepares valuations or performs 
valuation management functions and who is employed by or affiliated 
with the creditor does not have a conflict of interest in violation of 
Sec.  226.42(d)(1)(i) based on the person's employment or affiliate 
relationship with the creditor if:
    (1) The compensation of the person preparing a valuation or 
performing valuation management functions is not based the value 
arrived at in any valuation; and
    (2) The creditor requires that any employee, officer or director of 
the creditor who orders, performs, or reviews a valuation for a covered 
transaction abstain from participating in any decision to approve, not 
approve, or set the terms of that transaction.
    Comment 42(d)(3)-1 states that Sec.  226.42(d)(3) creates a safe 
harbor for compliance with the general prohibition on conflicts of 
interest under Sec.  226.42(d)(1)(i) by persons who prepare valuations 
or perform valuation management functions for a covered transaction and 
are employees or affiliates of the creditor. This comment explains 
that, in any covered transaction with a creditor that had assets of 
$250 million or less for either of the past two years, the creditor 
generally may use its own employee or affiliate to prepare a valuation 
or perform valuation management functions for a particular transaction, 
as long as the safe harbor conditions described in Sec.  226.42(d)(3) 
are satisfied. The comment also explains that, if the safe harbor 
conditions in Sec.  226.42(d)(3) are not satisfied, whether a person 
preparing valuations or performing valuation management functions has 
violated Sec.  226.42(d)(1) depends on all of the facts and 
circumstances. The two conditions for the safe harbor under Sec.  
226.42(d)(3) are discussed in turn below.
    Condition one: Compensation. The first condition is that the 
compensation of the person preparing a valuation or performing 
valuation management functions may not be based on the value arrived at 
in any valuation for the transaction. This condition parallels the 
condition applicable in transactions with larger creditors under Sec.  
226.42(d)(2)(i), discussed above. The Board believes that this 
condition, which in effect prohibits ``direct'' conflicts of interest 
in the transaction, is equally appropriate in transactions with smaller 
creditors as in those with larger creditors.
    Condition two: Safeguards. The second condition is that the 
creditor must require that any employee, officer or director of the 
institution who orders, performs, or reviews the valuation for a 
particular transaction abstain from participation in any decision to 
approve, not approve, or set the terms of that transaction. The Board 
recognizes that smaller institutions may have difficulty complying with 
a condition that requires the person conducting the valuation or 
performing valuation management functions to report to a person 
independent of the creditor's sales or loan production functions (Sec.  
226.42(d)(2)(ii)) or that prohibits employees in the creditor's loan 
production functions from being directly or indirectly involved in 
selecting, retaining, recommending or influencing the selection of a 
person to perform a particular valuation or to be included in or 
excluded from a list or panel of approved persons who perform 
valuations (Sec.  226.42(b)(2)(iii)). As discussed above, smaller 
institutions may have only a few employees, so each employee may have 
to perform multiple functions, including roles involving both 
collateral valuation and loan production tasks.
    For these reasons, the condition in Sec.  226.42(d)(3)(ii) 
replaces, for smaller creditors, the two conditions applicable to 
larger creditors described above, which require bright-line isolation 
of the collateral valuation function from the loan production function 
(Sec.  226.42(d)(2)(ii) and (d)(2)(iii)). This safe harbor condition 
tailored for smaller creditors incorporates provisions included in 
federal banking agency guidance for small or rural institutions 
regarding how to ensure independent valuations and protect against 
conflicts of interest in the collateral valuation process--namely, that 
a creditor should separate its collateral valuation function from its 
loan production function and that, to this end, any employee, officer 
or director of the institution who orders, performs, or reviews the 
valuation for a particular transaction should abstain from any vote or 
approval involving that transaction.\31\
---------------------------------------------------------------------------

    \31\ Interagency Guidelines, SR 94-55.
---------------------------------------------------------------------------

    The Board requests comment on the appropriateness of the two 
conditions of the safe harbor under Sec.  226.42(d)(3) for inclusion in 
the final rule.

42(d)(4) Settlement Service Providers

    The Board recognizes that AMCs and appraisal companies or firms are 
sometimes affiliated with other settlement service providers, such as 
title companies, and that some AMCs and appraisal companies provide 
services related to collateral valuation in addition to other 
settlement services for the same transaction. The Board believes that 
interpreting the statute to prohibit these AMCs and appraisal companies 
from providing valuation services and other settlement services in the 
same transaction in all cases would be contrary to the purposes of the 
statute; it could disrupt the businesses of many appraisal firms, 
appraisal management companies, and the creditors for which they 
provide services, to the detriment of the overall mortgage market. It 
also could reduce efficiencies created by ``one-stop shopping'' for 
settlement services, which can lower overall mortgage costs for 
consumers. The Board believes that providing a safe harbor consisting 
of appropriate firewalls and safeguards will ensure the integrity of 
the valuation process in accordance with the statute; by including this 
safe harbor, the interim final rule gives providers of multiple 
settlement services and the creditors for which they provide services 
an incentive to implement measures to secure valuation independence.
    Section 226.42(d)(4) provides alternative safe harbors for 
compliance with the prohibition on conflicts of interest under Sec.  
226.42(d)(1)(i) by persons who prepare valuations or perform valuation 
management functions for a covered transaction and

[[Page 66567]]

provide other settlement services for the same transaction, or whose 
affiliate provides settlement services. The Board notes that this 
provision is generally consistent with a similar provision in the HVCC, 
which prohibits a creditor from using an appraisal prepared by an 
entity affiliated with another entity that is engaged by the creditor 
to provide other settlement services for the same transaction, unless 
the entity providing the appraisal has adopted written policies and 
procedures implementing the HVCC, including adequate training and 
disciplinary rules on appraiser independence, and has mechanisms in 
place to report and discipline anyone who violates the policies and 
procedures.\32\
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    \32\ HVCC, Part IV.C. More precisely, this provision of the HVCC 
prohibits use of an appraisal report ``by an entity that is 
affiliated with, or that owns or is owned, in whole or in part by, 
another entity that is engaged by the lender to provide other 
settlement services,'' unless certain conditions are met. Id. 
(emphasis added). The Board's Regulation Y defines ``affiliate'' as 
``any company that controls, is controlled by, or is under common 
control with, another company.'' 12 CFR 225.2(a). Therefore, in the 
interim final rule and this SUPPLEMENTARY INFORMATION, the Board 
uses the term ``affiliate'' to include an entity that owns or is 
owned by another entity, as well as entities with a common owner.
---------------------------------------------------------------------------

    As with the safe harbors for employees and affiliates of creditors 
(Sec.  226.42(d)(2) and (d)(3)), the interim final rule's safe harbors 
for multiple settlement service providers differ depending on whether 
the creditor in the transaction had assets of $250 million or more as 
of December 31st for the past two calendar years (Sec.  
226.42(d)(4)(i)) or assets of $250 million or less as of December 31st 
for either of the past two calendar years (Sec.  226.42(d)(4)(ii)).

Paragraph 42(d)(4)(i)

    Under Sec.  226.42(d)(4)(i), in a transaction in which the creditor 
had assets of more than $250 million for both of the past two calendar 
years, a person preparing a valuation or performing valuation 
management functions in addition to performing another settlement 
service, or whose affiliate performs another settlement service, will 
not be deemed to have interest prohibited under Sec.  226.42(d)(1)(i) 
based on the fact that the person or the person's affiliate performs 
another settlement service for the transaction, as long as the 
conditions in Sec.  226.42(d)(2)(i) (iii) are met. As discussed 
earlier, the conditions in Sec.  226.42(d)(2)(i) (iii) are designed to 
ensure the independence of persons involved with valuations for 
transactions with larger creditors. Thus they require that:
    (1) The compensation of the person preparing a valuation or 
performing valuation management functions is not based on the value 
arrived at in any valuation;
    (2) The person preparing a valuation or performing valuation 
management functions reports to a person who is not part of the 
creditor's loan production function, and whose compensation is not 
based on the closing of the transaction to which the valuation relates; 
and
    (3) No employee, officer or director in the creditor's loan 
production function is directly or indirectly involved in selecting, 
retaining, recommending or influencing the selection of the person to 
prepare a valuation or perform valuation management functions, or to be 
included in or excluded from a list of approved persons who prepare 
valuations or perform valuation management functions.
    Comment 42(d)(4)(i)-1 explains that, even if the conditions in 
paragraph (d)(4)(i) are satisfied, however, the person preparing a 
valuation or performing valuation management functions may have a 
prohibited conflict of interest on other grounds, such as if the person 
performs a valuation for a purchase-money mortgage transaction in which 
the person is the buyer or seller of the subject property. The comment 
further explains that, in general, in any covered transaction with a 
creditor that had assets of more than $250 million for the past two 
years, a person preparing a valuation or performing valuation 
management functions, or its affiliate, may provide another settlement 
service for the same transaction, as long as the conditions described 
in paragraph (d)(4)(i) are satisfied. This comment also explains that, 
if the safe harbor conditions in Sec.  226.42(d)(4)(i) are not 
satisfied, whether a person preparing valuations or performing 
valuation management functions has violated Sec.  226.42(d)(1) depends 
on all of the facts and circumstances.
    Comment 42(d)(4)(i) 2 explains that the safe harbor under Sec.  
226.42(d)(4)(i) is available if the condition specified in Sec.  
226.42(d)(2)(ii), among others, is met. Section 226.42(d)(2)(ii) 
prohibits a person preparing a valuation or performing valuation 
management functions from reporting to a person whose compensation is 
based on the closing of the transaction to which the valuation relates. 
This comment provides the following example to clarify the meaning of 
this prohibition: Assume an appraisal management company performs both 
valuation management functions and title services, including providing 
title insurance, for the same covered transaction. If the appraisal 
management company employee in charge of valuation management functions 
for the transaction is supervised by the title insurance agent in the 
transaction, whose compensation depends in whole or in part on whether 
title insurance is sold at the loan closing, the condition in Sec.  
226.42(d)(2)(ii) is not met.

Paragraph 42(d)(4)(ii)

    Under Sec.  226.42(d)(4)(ii), in a transaction in which the 
creditor in a covered transaction had assets of $250 million or less as 
of December 31st for either of the past two calendar years, a person 
performing valuations or valuation management functions in addition to 
performing another settlement service, or whose affiliate performs 
another settlement service, will not be deemed to have an interest 
prohibited under Sec.  226.42(d)(1)(i) based on the fact that the 
person or the person's affiliate performs another settlement service 
for the transaction if the conditions in Sec.  226.42(d)(3)(i)-(ii) are 
met.
    Comment 42(d)(4)(ii)-1 explains that, even if the conditions in 
Sec.  226.42(d)(4)(ii) are satisfied, however, the person may have a 
prohibited conflict of interest on other grounds, such as if the person 
performs a valuation for a purchase-money mortgage transaction in which 
the person is the buyer or seller of the subject property. Thus, this 
comment explains that, in general, in any covered transaction in which 
the creditor had assets of $250 million or less for either of the past 
two years, a person preparing a valuation or performing valuation 
management functions, or its affiliate, may provide another settlement 
service for the same transaction, as long as the conditions described 
in Sec.  226.42(d)(4)(i) are satisfied. The comment further explains 
that, if the conditions in Sec.  226.42(d)(4)(i) are not satisfied, 
whether a person preparing valuations or performing valuation 
management functions has violated Sec.  226.42(d)(1)(i) depends on all 
of the facts and circumstances.
    The Board requests comment on the appropriateness of the conditions 
under which persons preparing valuations or performing valuations 
management functions for a transaction in addition to performing 
another settlement service for the same transaction, or whose affiliate 
performs another settlement service for the same transaction, will be 
deemed in compliance with the prohibition on conflicts of interest 
under Sec.  226.42(d)(1)(i).

[[Page 66568]]

42(d)(5) Definitions

    Section 226.42(d)(5) provides three definitions for purposes of 
Sec.  226.42(d): ``loan production function''; ``settlement service''; 
and ``affiliate.''

42(d)(5)(i) Loan Production Function

    Section 226.42(d)(5)(i) provides that the term ``loan production 
function'' means an employee, officer, director, department, division, 
or other unit of a creditor with responsibility for generating covered 
transactions, approving covered transactions, or both. This definition 
is generally consistent with the Federal banking agencies' use of the 
term ``loan production function'' or ``loan production staff.'' \33\ 
The term appears in Sec.  226.42(d)(2)(ii) and (d)(2)(iii), which 
require that, respectively, (1) a person preparing the valuation or 
performing valuation management functions report to a person 
independent of the creditor's loan production function, and (2) no 
employee in the creditor's loan production function be directly or 
indirectly involved in selecting, retaining, recommending or 
influencing the selection of a person to prepare a particular valuation 
or valuation management functions, or to be included in or excluded 
from a list of approved persons who prepare valuations or perform 
valuation management functions.
---------------------------------------------------------------------------

    \33\ See, e.g., Proposed Interagency Guidelines, 73 FR at 69661.
---------------------------------------------------------------------------

    Comment 42(d)(5)(i)-1 clarifies the meaning of ``loan production 
function.'' This comment states that a creditor's ``loan production 
function'' includes retail sales staff, loan officers, and any other 
employee of the creditor with responsibility for taking a loan 
application, offering or negotiating loan terms or whose compensation 
is based on loan processing volume. This comment clarifies that a 
person is not considered part of a creditor's loan production function 
solely because part of the person's compensation includes a general 
bonus not tied to specific transactions or percentage of closed 
transactions, or a profit sharing plan that benefits all employees. The 
comment further clarifies that a person solely responsible for credit 
administration or risk management is also not considered part of a 
creditor's loan production function. The comment explains that credit 
administration and risk management includes, for example, loan 
underwriting, loan closing functions (e.g., loan documentation), 
disbursing funds, collecting mortgage payments and otherwise servicing 
the loan (e.g., escrow management and payment of taxes), monitoring 
loan performance, and foreclosure processing.

42(d)(5)(ii) Settlement Service

    As discussed above, the interim final rule provides a safe harbor 
for persons who prepare valuations or perform valuation management 
functions that also perform another settlement service for the same 
transaction, or whose affiliate performs another settlement service for 
the same transaction. See Sec.  226.42(d)(4). Section 42(d)(5)(ii) 
defines ``settlement service'' to have the same meaning as in the Real 
Estate Settlement Procedures Act, 12 U.S.C. 2601 et seq. The Board 
notes that this definition is consistent with the definition used in 
the HVCC regarding its analogous provision on providers of multiple 
settlement services.\34\
---------------------------------------------------------------------------

    \34\ HVCC, Part IV.C.
---------------------------------------------------------------------------

42(d)(5)(iii) Affiliate

    Section 226.42(d)(5)(iii) provides that the term ``affiliate'' has 
the same meaning as in the Board's Regulation Y, 12 CFR 225.62(a), 
which defines ``affiliate'' as ``any company that controls, is 
controlled by, or is under common control with, another company.'' This 
term is used in Sec.  226.42(d)(2), (3), and (4), to identify the 
persons covered by the prohibition on conflicts of interest and safe 
harbors for complying with the general prohibition under Sec.  
226.42(d)(1).

42(e) When Extension of Credit Prohibited

    TILA Section 129E(f) provides that, in connection with a covered 
transaction, a creditor who knows at or before loan consummation of a 
violation of the independence standards established in TILA Section 
129E(b) or (d) (regarding misrepresentation of value and conflicts of 
interest, respectively) must not extend credit based on such appraisal, 
unless the creditor documents that it has acted with reasonable 
diligence to determine that the appraisal does not materially misstate 
or misrepresent the value of the consumer's principal dwelling. 15 
U.S.C. 1639e(b), (d), (f). Section 226.42(e) implements TILA Section 
129E(f). Section 226.42(e) uses the term ``valuation'' to ensure that 
the protections in TILA Section 129E(f) apply to a covered transaction 
even if a creditor uses a valuation that is not a formal ``appraisal'' 
performed in accordance with USPAP by a licensed or certified 
appraiser, as discussed above in the section-by-section analysis of 
Sec.  226.42(b)(3). Section 226.42(e) is substantially similar to 
existing Sec.  226.36(b)(2).
    Comment 42(e)-1 clarifies that a creditor will be deemed to have 
acted with reasonable diligence under Sec.  226.42(e) if the creditor 
extends credit based on a valuation other than the valuation subject to 
the restriction in Sec.  226.42(e). This is consistent with current 
comment 36(b)(2)-1. Comment 42(e)(1)-1 clarifies further, however, that 
a creditor need not obtain a second valuation to document that the 
creditor has acted with reasonable diligence to determine that the 
valuation does not materially misstate or misrepresent the value of the 
consumer's principal dwelling. Comment 42(e)-1 provides an example in 
which an appraiser notifies a creditor that a covered person had 
tried--and failed--to get the appraiser to inflate the value assigned 
to the consumer's principal dwelling. Comment 42(e)(1)-1 clarifies that 
if the creditor reasonably determines and documents that the appraisal 
had not misstated the dwelling's value, the creditor could extend 
credit based on the appraisal. This example is based on supplementary 
information provided in connection with proposed Sec.  226.36(b)(2), 
which was adopted substantially as proposed. See 73 FR 1672, 1701 (Jan. 
9, 2008); see also 73 FR 44522, 44568 (Jul. 30, 2008) (discussing the 
adoption of Sec.  226.36(b)). The example is provided for clarity, and 
no substantive change is intended.
    The interim final rule does not mandate specific due diligence 
procedures for creditors to follow when they suspect a violation of 
Sec.  226.42(c) or (d). In addition, under the interim final rule, a 
violation of Sec.  226.42(e) does not establish a basis for voiding 
loan agreements. That is, even if a creditor knows of a violation of 
Sec.  226.42(c) or (d) and nevertheless extends credit in violation of 
Sec.  226.42(e), this violation does not itself void the consumer's 
loan agreement with the creditor. Whether the loan agreement is valid 
is a matter determined by state or other applicable law. The Board 
notes that applicable federal or state regulations may require 
creditors to take certain steps in the event the creditor knows about 
problems with a valuation. The foregoing discussion is consistent with 
the Board's statements regarding due diligence and the impact of any 
violation on a creditor's contract under current Sec.  226.36(b)(2). 
See 73 FR 44522, 44568 (Jul. 30, 2008).

42(f) Customary and Reasonable Compensation

    Section Sec.  226.42(f) implements TILA Section 129E(i), which 
requires

[[Page 66569]]

creditors and their agents to compensate fee appraisers (appraisers who 
are not their employees) at a rate that is ``customary and reasonable 
for appraisal services in the market area of the property being 
appraised.'' TILA Section 129E(i)(1). The statute states that evidence 
for reasonable and customary fees may be established by objective 
third-party information, such as government agency fee schedules, 
academic studies, and independent private sector surveys. ``Such fee 
studies,'' the statute stipulates, ``shall not include assignments 
ordered by known appraisal management companies.'' The statute does not 
define ``appraisal management company.'' In addition, the statute 
provides that if an appraisal involves a ``complex assignment,'' the 
customary and reasonable fee may reflect ``the increased time, 
difficulty, and scope of the work required for such an appraisal and 
include an amount over and above the customary and reasonable fee for 
non-complex assignments.'' TILA Section 129E(i)(3). The statute does 
not define ``complex'' and ``non-complex'' assignments.
    The Board interprets the statutory language of TILA Section 129E(i) 
to signify that the marketplace should be the primary determiner of the 
value of appraisal services, and hence the customary and reasonable 
rate of compensation for fee appraisers. The ``customary and 
reasonable'' compensation provision that Congress adopted as part of 
TILA is identical to a requirement included in a HUD Mortgagee Letter 
obligating FHA lenders to ensure that appraisers are paid ``at a rate 
that is customary and reasonable for appraisal services performed in 
the market area of the property being appraised.'' \35\ HUD's 
statements regarding this provision recognize the role of the 
marketplace in determining rates for appraisal services and the 
importance of accounting for factors that can cause variations in what 
is a customary and reasonable amount of compensation on a transaction-
by-transaction basis.\36\ Similarly, TILA Section 129E(i) focuses on 
the marketplace by permitting use of objective market information to 
determine rates. The statute also makes allowances for factors that the 
marketplace acknowledges add to the complexity of an appraisal and thus 
value of appraisal services in a given transaction, such as ``increased 
time, difficulty, and scope of work.'' TILA Section 129E(i)(1) and (3).
---------------------------------------------------------------------------

    \35\ HUD, ``Appraiser Independence,'' Mortgagee Letter 2009-28 
(Sept. 18, 2009).
    \36\ See, HUD, ``Frequently Asked Questions--Reasonable Fees/
Time,'' available at http://portal.hud.gov/portal/page/portal/HUD/groups/appraisers: ``FHA believes that the marketplace best 
determines what is reasonable and customary in terms of fees. The 
fee is [the] result of a business decision, which may or may not be 
negotiated, between the appraiser and the client. * * * Given that a 
reasonable and customary fee depends on the complexity of the 
assignment and the expertise needed to perform and report a credible 
and accurate appraisal of the property, the fee will vary depending 
on the property type, the purpose of the assignment and the scope of 
work and, therefore, cannot be easily defined as an objective 
number.'' See http://www.hud.gov/offices/hsg/sfh/appr/faqs_fees-time.pdf.
---------------------------------------------------------------------------

    Accordingly, the interim final rule and alternative presumptions of 
compliance are designed to be consistent with this approach. The 
interim final rule is not intended to prohibit a creditor and an 
appraiser from negotiating a rate for an assignment in good faith, nor 
is it intended to prohibit a creditor from communicating to a fee 
appraiser the rates that had been submitted by the other appraisers 
solicited for the assignment as part of this negotiation. In addition, 
the interim final rule is not intended to prevent appraisers and 
creditors from negotiating volume-based discounts for a creditor that 
provides multiple appraisal assignments to a fee appraiser. See comment 
42(f)(1)-5.
    Specifically, the interim final rule provides that fee appraisers 
must be paid a customary and reasonable fee for appraisal services 
performed in the geographic market in which the property being 
appraised is located. See Sec.  226.42(f)(1). In addition, the interim 
final rule provides two alternative ways in which creditors and their 
agents may qualify for a presumption of compliance with this 
requirement.
    First presumption of compliance (Sec.  226.42(f)(2)). A creditor 
and its agent are presumed to compensate a fee appraiser at a customary 
and reasonable rate if:
     The amount of compensation is reasonably related to recent 
rates for appraisal services performed in the geographic market of the 
property. The creditor or its agent must identify recent rates and make 
any adjustments necessary to account for specific factors, such as the 
type of property, the scope of work, and the fee appraiser's 
qualifications; and
     The creditor and its agent do not engage in any 
anticompetitive actions in violation of state or federal law that 
affect the rate of compensation paid to fee appraisers, such as price-
fixing or restricting others from entering the market.
    Second presumption of compliance (Sec.  226.42(f)(3)). A creditor 
and its agent are also presumed to comply if the creditor or its agent 
establishes a fee by relying on rates in the geographic market of the 
property being appraised established by objective third-party 
information, including fee schedules, studies, and surveys prepared by 
independent third parties such as government agencies, academic 
institutions, and private research firms. The interim final rule 
follows the statute in requiring that fee schedules, studies, and 
surveys, or information derived from them, used to qualify for this 
presumption of compliance must exclude compensation paid to fee 
appraisers for appraisals ordered by appraisal management companies 
(defined in Sec.  226.42(f)(4)(iii)).
    The first presumption of compliance described above (Sec.  
226.42(f)(2)) reflects the Board's interpretation of the statutory 
requirement that fees paid to fee appraisers be ``customary'': to be 
``customary,'' the fee must be reasonably related to recent rates for 
appraisal services in the relevant geographic market. This first 
presumption of compliance also reflects the Board's interpretation of 
the statutory requirement that the fee be ``reasonable'': to be 
``reasonable,'' the fee should be adjusted as necessary to account for 
factors in addition to geographic market that affect the level of 
compensation appropriate in a given transaction, such as the type of 
property and the scope of work. The Board recognizes, however, that if 
some creditors or AMCs dominate the market through illegal 
anticompetitive acts, ``recent rates'' may be an inaccurate measure of 
what a ``reasonable'' fee should be. Thus, to qualify for the 
presumption of compliance, a creditor and its agents also must not 
commit anticompetitive acts in violation of state or federal law that 
affect the compensation of fee appraisers.
    The second presumption of compliance (Sec.  226.42(f)(3)) is 
intended to give effect to TILA Section 129E(i)(1) which expressly 
permits creditors and their agents to use third-party information to 
determine customary and reasonable fees. See TILA Section 129E(i)(1). 
The Board believes that the statute supports a presumption of 
compliance if the creditor or agent based the fee paid to a fee 
appraiser on objective, third-party market information regarding recent 
rates for appraisal services that meet the statutory requirements for 
this information. Thus, in keeping with the statute, the interim final 
rule stipulates that any fee schedule, survey, or study relied on to 
qualify for this presumption of compliance may not include fees for

[[Page 66570]]

appraisals ordered by companies that publicly hold themselves out as 
appraisal management companies (defined in Sec.  226.42(f)(4)(ii)).

Public Input

    In adopting this interim final rule, the Board considered written 
comments from representatives of appraisers, AMCs and creditors, as 
well as views expressed by these parties during conference calls with 
Board staff. Appraisers expressed concerns that AMCs may have recently 
gained significant control over the residential appraisal market as a 
result of unintended consequences of the HVCC. Under the HVCC, mortgage 
brokers are not permitted to order appraisals, and a creditor's in-
house appraisers may not perform the appraisal unless strict firewalls 
to safeguard appraisal independence are in place.\37\ The HVCC also 
prohibits the creditor's ``loan production'' and certain other staff 
from having ``substantive communications'' with appraisers and AMCs, 
which include ordering or managing an appraisal assignment.\38\ To 
minimize the risk of violating these and similar restrictions, many 
creditors reportedly have chosen to rely on AMCs as a ``middle-man'' to 
select appraisers and generally manage the creditor's appraisal 
function. According to some, appraisers willing to work for AMCs are 
often inexperienced in general or in the relevant geographic area and 
produce poor quality appraisals, undermining consumers' well-being and 
creditors' safety and soundness.
---------------------------------------------------------------------------

    \37\ See HVCC, Part IV.A and IV.B.
    \38\ See Id. Part III.B.
---------------------------------------------------------------------------

    On the other hand, representatives of AMCs expressed concerns that, 
depending on how the term ``customary and reasonable'' rate is 
interpreted, requiring AMCs to compensate fee appraisers at a rate that 
is customary and reasonable may force them to raise overall costs 
charged to creditors--and ultimately to consumers--for appraisals 
ordered through AMCs. AMC representatives expressed concerns that AMCs 
would have to pay higher fees to appraisers while still performing 
management functions for which they would need to charge creditors as 
well. AMC representatives stated that reputable AMCs have strong 
quality control systems and produce sound appraisals, and that they 
perform functions that individual appraisers would have to perform 
themselves were they not engaged by an AMC. These include marketing 
appraisal services and handling administrative matters such as 
submitting the appraisal to the creditor and billing the creditor.
    AMC representatives also raised concerns that appropriate appraisal 
fee studies do not exist and argued that the costs of performing the 
appraisal itself and the various management functions associated with 
each appraisal can vary by transaction, complicating the process of 
determining a generally applicable customary and reasonable rate. These 
parties argued that an interim final rule implementing TILA Section 
129E's ``customary and reasonable'' rate provision is premature because 
greater study of the issue is required to avoid a rule that will create 
undue compliance challenges and litigation risk.

Coverage--``Appraisals'' and ``Fee Appraisers''

    Unlike other provisions of Sec.  226.42, Sec.  226.42(f) does not 
replace the statutory terms ``appraisal'' and ``appraiser'' with terms 
that cover a broader range of methods for valuing collateral and 
persons who estimate collateral value. However, the statute clearly 
states that the persons who must receive customary and reasonable 
compensation are ``fee appraisers,'' and that the term ``fee 
appraiser'' means: (1) State-licensed or state-certified appraisers 
and, generally, (2) entities that employ state-licensed or state-
certified appraisers to perform appraisals and are compensated for the 
performance of appraisals (as opposed to entities that merely manage 
the appraisal process). See TILA Section 129E(i)(2).

42(f)(1) Requirement To Provide Customary and Reasonable Compensation 
to Fee Appraisers

    Section 226.42(f)(1) requires that, in any covered transaction 
(defined in Sec.  226.42(b)(1)), the creditor and its agents must 
compensate a fee appraiser for performing appraisal services at a rate 
that is customary and reasonable for comparable appraisal services 
performed in the geographic market of the property being appraised. 
This provision states that, for purposes of Sec.  226.42(f), ``agents'' 
of the creditor do not include any fee appraiser defined in Sec.  
226.42(f)(4)(i).
Agents of the Creditor
    The reference to ``agents'' in Sec.  226.42(f)(1) is not intended 
to signify that agents of creditors are not included in other places 
where the term ``creditor'' appears in Regulation Z. To the contrary, 
the term ``creditor'' used throughout Regulation Z includes agents of 
the creditor, as determined by applicable state law. The Board believes 
that Congress was especially concerned that AMCs, serving as creditors' 
agents in managing the appraisal process, be covered by this provision. 
Consequently, the regulatory text follows the statutory language, which 
applies the requirement to pay fee appraisers customary and reasonable 
fees to both ``a lender and its agent.''
    Comment 42(f)(1)-1 clarifies that whether a person is an ``agent'' 
of the creditor is determined by applicable law. This comment also 
confirms the regulatory exclusion of ``fee appraisers'' as defined in 
Sec.  226.42(f)(4)(i) from the meaning of ``agent'' of the creditor for 
purposes of Sec.  226.42(f). The comment explains that, therefore, fee 
appraisers are not required to pay other fee appraisers customary and 
reasonable compensation under Sec.  226.42(f).
    The Board believes that the express exclusion of ``fee appraisers'' 
from the meaning of ``agents'' is consistent with Congress's intention 
regarding the parties that should be required to pay fee appraisers 
customary and reasonable compensation. As discussed in more detail in 
the section-by-section of Sec.  226.42(f)(4)(i) (defining ``fee 
appraiser''), TILA Section 129E(i)(2) defines ``fee appraisers'' to 
which customary and reasonable fees should be paid to mean (1) 
individual state-licensed or state-certified appraisers (natural 
persons), and (2) companies or firms that employ individual state-
licensed or state-certified appraisers and receive compensation for 
performing appraisals. In this way, the statute reflects that natural 
persons as well as appraisal companies or firms may contract with 
creditors and AMCs to perform appraisals. Appraisal companies or firms 
that contract with AMCs to perform appraisals typically have state-
licensed or state-certified appraisers on staff to perform appraisals. 
These staff appraisers meet the definition of ``fee appraiser'' under 
the statute; thus, a strict interpretation of the statute would require 
appraisal companies to pay their staff appraisers at a ``customary and 
reasonable'' rate. The Board understands, however, that these companies 
or firms often pay their appraisers on an hourly basis and provide 
their employees with office services as well as health insurance and 
other employment benefits. Requiring that they pay their staff 
appraisers ``customary and reasonable'' fees for each appraisal 
assignment could be unduly financially burdensome for these entities, 
and ultimately could undermine their viability as an avenue for 
appraisal services. The Board believes that this result would harm 
consumers by reducing competition in the appraisal services industry.

[[Page 66571]]

    The Board requests comment on whether the final rule should define 
``agent'' to exclude fee appraisers or any other parties.
Geographic Market of the Property Being Appraised
    As noted, TILA Section 129E(i) requires payment of customary and 
reasonable compensation to fee appraisers for appraisal services 
performed ``in the market area of the property being appraised.'' 
Section 226.42(f)(1), (f)(2), and (f)(3) (discussed below) substitute 
the term ``geographic market'' for the statutory term ``market area.'' 
Comment 42(f)(1)-2 clarifies that, for purposes of Sec.  226.42(f), the 
``geographic market of the property being appraised'' means the 
geographic market relevant to the appropriate compensation levels for 
appraisal services.\39\ This comment explains that, depending on the 
facts and circumstances, the relevant geographic market may be a state, 
metropolitan statistical area (MSA), metropolitan division, area 
outside of an MSA, county, or other geographic area. The comment 
provides two examples. First, assume that fee appraisers who normally 
work in County A generally accept $400 to appraise an attached single-
family property in County A. Assume also that very few or no fee 
appraisers who normally work only in contiguous County B will accept a 
rate comparable to $400 to appraise an attached single-family property 
in County A. The relevant geographic market for an attached single-
family property in County A may reasonably be defined as County A.
---------------------------------------------------------------------------

    \39\ For further discussion of ``relevant geographic markets,'' 
see, e.g., U.S. Dept. of Justice and Federal Trade Commission, 
``Horizontal Merger Guidelines,'' Sec.  4.2 (Aug. 19, 2010), found 
at http://www.justice.gov/atr/public/guidelines/hmg-2010.html#4f.
---------------------------------------------------------------------------

    Second, assume that fee appraisers who normally work only in County 
A generally accept $400 to appraise an attached single-family property 
located in County A. Assume also that many fee appraisers who normally 
work only in contiguous County B will accept a rate comparable to $400 
to appraise an attached single-family property located in County A. The 
relevant geographic market for an attached single-family property in 
County A may reasonably be defined to include both County A and County 
B.
Failure To Perform Contractual Obligations
    A few creditors and AMC representatives requested that the Board 
clarify whether creditors and their agents could withhold an 
appraiser's fee for failing to meet contractual obligations. Comment 
42(f)(1)-3 clarifies that Sec.  226.42(f)(1) does not prohibit a 
creditor or its agent from withholding compensation from a fee 
appraiser for failing to meet contractual obligations, such as for 
failing to provide the appraisal report or violating state or federal 
appraisal laws in performing the appraisal. The Board requests comment 
on whether the Board should specify particular types of contractual 
obligations that, if breached, would warrant withholding compensation 
without violating Sec.  226.42(f).
Agreement That Fee Is Customary and Reasonable
    Comment 42(f)(1)-4 clarifies that a document signed by a fee 
appraiser indicating that the appraiser agrees that the fee paid to the 
appraiser is ``customary and reasonable'' does not by itself create a 
presumption of compliance with Sec.  226.42(f) or otherwise satisfy the 
requirement to compensate a fee appraiser at a customary and reasonable 
rate. In the Board's view, a fee appraiser's agreement that a fee is 
``customary and reasonable'' is insufficient to establish that the fee 
meets the statutory ``customary and reasonable'' standard. Objective 
factors or information such as that set forth in Sec.  226.42(f)(2) and 
(f)(3) (discussed below) generally should support the creditor's or 
agent's determination of the appropriate amount of compensation to pay 
a fee appraiser for a particular appraisal assignment. In theory, the 
fact that an appraiser is willing to accept a particular fee for an 
appraisal assignment may bear on whether the fee is customary, 
reasonable, or both. However, an appraiser may be willing to accept a 
low fee because the appraiser is new to the industry and wishes to 
establish herself, or simply because the appraiser needs any work he 
can obtain in a slow housing market. In addition, the Board understands 
that some AMCs have begun requiring fee appraisers to agree that the 
fee is ``customary and reasonable'' as a condition of obtaining the 
appraisal assignment. In these situations, the Board believes that an 
appraiser's agreement that a fee is ``customary and reasonable'' is an 
unreliable measure of whether the fee in fact meets the statutory 
standard.
Volume-Based Discounts
    The Board recognizes that competition and efficiencies may both be 
enhanced when market participants negotiate volume-based discounts for 
services. For this reason, comment 42(f)(1)-5 clarifies that Sec.  
226.42(f)(1) does not prohibit a fee appraiser and a creditor (or its 
agent) from agreeing to compensation based on transaction volume, so 
long as the compensation is customary and reasonable. For example, 
assume that a fee appraiser typically receives $300 for appraisals from 
creditors with whom it does business; the fee appraiser, however, 
agrees to reduce the fee to $280 for a particular creditor, in exchange 
for a minimum number of assignments from the creditor. The Board 
requests comment on whether further guidance is needed concerning the 
permissibility of volume-based discounts under Sec.  226.42(f)(1).

42(f)(2) Presumption of Compliance

    Section 226.42(f)(2) provides that a creditor and its agents will 
be presumed to comply with the requirement to compensate a fee 
appraiser at a customary and reasonable rate if the creditor or its 
agent satisfy two conditions.
    First, the creditor or its agents must compensate the fee appraiser 
in an amount that is reasonably related to recent rates paid for 
comparable appraisal services performed in the geographic market of the 
property being appraised. In determining this amount, the creditor or 
its agent must review the factors below and make any adjustments to 
recent rates paid in the relevant geographic market necessary to ensure 
that the amount of compensation is reasonable:
    (1) The type of property;
    (2) The scope of work;
    (3) The time in which the appraisal services are required to be 
performed;
    (4) Fee appraiser qualifications;
    (5) Fee appraiser experience and professional record; and
    (6) Fee appraiser work quality.
    Second, the creditor and its agents must not engage in any 
anticompetitive acts in violation of state or federal law that affect 
the compensation paid to fee appraisers, including--
    (1) Entering into any contracts or engaging in any conspiracies to 
restrain trade through methods such as price fixing or market 
allocation, as prohibited under section 1 of the Sherman Antitrust Act, 
15 U.S.C. 1, or any other relevant antitrust laws; or
    (2) Engaging in any acts of monopolization such as restricting any 
person from entering the relevant geographic market or causing any 
person to leave the relevant geographic market, as prohibited under 
section 2 of the Sherman Antitrust Act, 15 U.S.C. 2, or any other 
relevant antitrust laws.

[[Page 66572]]

    Comment 42(f)(2)-1 explains that creditor and its agent are 
presumed to comply with the requirement to pay a fee appraiser at a 
customary and reasonable rate under Sec.  226.42(f)(1) if the creditor 
or its agent meets the conditions specified in Sec.  226.42(f)(2), 
stated above, in determining the compensation. The comment clarifies 
that these conditions are not requirements for compliance with Sec.  
226.42(f)(1), but that, if met, they create a presumption that the 
creditor or its agent has complied. The comment further clarifies that 
a person may rebut this presumption with evidence that the amount of 
compensation paid to a fee appraiser was not customary and reasonable. 
The creditor would have met the conditions in Sec.  226.42(f)(2), so 
this evidence must be distinguishable from allegations that the 
creditor or its agent failed to satisfy the conditions in Sec.  
226.42(f)(2). Finally, the comment explains that, if a creditor or its 
agent does not meet one of the conditions in Sec.  226.42(f)(2), the 
creditor's and its agent's compliance with the requirement to pay a fee 
appraiser at a customary and reasonable rate is determined based on all 
of the facts and circumstances without a presumption of either 
compliance or violation.

Paragraph 42(f)(2)(i)

Compensation Must Be Reasonably Related to Recent Rates
    As explained in comment 42(f)(2)(i)-1, the first element of the 
presumption of compliance under Sec.  226.42(f)(2) requires creditor or 
its agent to engage in a two-step process to determine the appropriate 
compensation. First, the creditor or its agent must identify recent 
rates paid for comparable appraisal services in the relevant geographic 
market. Second, once recent rates have been identified, the creditor or 
its agent must review the factors listed in Sec.  226.42(f)(2)(i)(A)-
(F) and make any adjustments to recent rates appropriate to ensure that 
the amount of compensation is appropriate for the current transaction.
    Comment 42(f)(2)(i)-2 further explains the first step in this 
process, which requires the creditor or its agents to identify recent 
rates for appraisal services in the geographic market of the property 
being appraised. Specifically, this comment clarifies that whether 
rates may reasonably be considered ``recent'' depends on the facts and 
circumstances, but that generally a rate would be considered ``recent'' 
if it had been charged within one year of the creditor's or its agent's 
reliance on this information to qualify for the presumption of 
compliance under Sec.  226.42(f)(2). This comment also states that, for 
purposes of the presumption of compliance under Sec.  226.42(f)(2), a 
creditor or its agent may gather information about recent rates by 
using a reasonable method that provides information about rates for 
appraisal services in the geographic market of the relevant property. 
The comment further provides that a creditor or its agent may, but is 
not required to, use or perform a fee survey. As indicated by this 
comment, qualifying for this presumption of compliance does not require 
that a creditor use third-party information that excludes appraisals 
ordered by AMCs, for example, as required to qualify for the 
presumption of compliance available under Sec.  226.42(f)(3), discussed 
below. The Board requests comment on whether additional guidance 
regarding how creditors may identify recent rates is needed, and 
solicits views on what guidance in particular may be helpful.
    Comment 42(f)(2)(i)-3 provides guidance on the second step in the 
process, which requires the creditor or its agent to review the factors 
listed in paragraph (f)(2)(i)(A)-(F) to determine appropriate rate for 
the current transaction may be determined. For further clarification, 
this comment provides an example: If the recent rates identified by the 
creditor or its agent were solely for appraisal assignments in which 
the scope of work required consideration of two comparable properties, 
but the current transaction required an appraisal that considered three 
comparable properties, the creditor or its agent might reasonably 
adjust the rate by an amount that reasonably accounts for the increased 
scope of work.
    The factors that must be considered in this second step for 
determining the appropriate rate of fee appraiser compensation are 
listed in Sec.  226.42(f)(i)(A)-(F) and discussed in turn below. 
Appraisal assignments vary and appraisers have different skills and 
experience, and these variations and differences may legitimately 
contribute to determining what level of compensation for a particular 
assignment is reasonable. For example, an appraisal requiring an 
interior inspection may be more expensive to perform and may warrant 
greater compensation than an appraisal requiring only an exterior or 
``drive-by'' inspection. Similarly, an appraisal of a dwelling in a 
rural area with several additional outbuildings and significant acreage 
in real property might be more expensive to perform and may warrant 
higher compensation for the appraiser than an appraisal of a detached 
single-family dwelling in a suburban area. As discussed earlier, the 
statute itself acknowledges these variances, by expressly permitting a 
creditor or its agent to pay an appraiser more for a ``complex'' 
assignment than for a comparatively ``non-complex'' assignment. TILA 
Section 129E(i)(3).
    At the same time, the Board recognizes that each of these factors 
may not in all transactions determine the quality of an appraisal and 
the value of appraisal services. For example, an appraiser with 20 
years of experience appraising properties may not necessarily provide a 
higher quality appraisal than an appraiser with five years of 
experience. Thus, the interim final rule states that the rate must be 
adjusted as ``necessary'' to ensure a reasonable rate, and does not 
specify exact percentages or amounts by which compensation should vary 
based on each factor.
    Type of property. After the creditor or its agent identifies recent 
rates in the relevant geographic market, the first factor that must be 
accounted for is the type of property. See Sec.  226.42(f)(2)(i)(A). 
Comment 42(f)(2)(i)(A)-1 provides several examples of different 
property types that may appropriately bear on the value of appraisal 
services: Detached or attached single-family property, condominium or 
cooperative unit, or manufactured home. The property type may 
contribute to, for example, the difficulty or ease of a particular 
appraisal assignment, and thus can affect the value of appraisal 
services.
    Scope of work. The second factor that must be accounted for is the 
scope of work. See Sec.  226.42(f)(2)(i)(B). Comment 42(f)(2)(i)(B) 
clarifies that relevant elements of the scope of work to consider would 
include the type of inspection (for example, exterior only or both 
interior and exterior) and the number of comparable properties that the 
appraiser is required to review to perform the assignment. To comply 
with USPAP, appraisers must identify the extent of work and analysis 
required to obtain credible results for an appraisal assignment.\40\ 
The scope of work may vary based on a number of factors, such as the 
extent to which the property must be inspected, the type and extent of 
data that must be researched, and the type and extent of analyses 
required to reach credible conclusions. Thus, the compensation of an 
appraiser may reasonably be higher

[[Page 66573]]

where the scope of work required for the appraisal is more extensive 
than the scope of work required for another appraisal performed by the 
same appraiser.
---------------------------------------------------------------------------

    \40\ See The Appraisal Foundation, Uniform Standards of 
Professional Appraisal Practice (USPAP), ed. 2010-2011, ``Scope of 
Work Rule,'' U-13.
---------------------------------------------------------------------------

    The time in which the appraisal services are required to be 
performed. The third factor is the time in which the appraisal services 
are required to be performed or ``turnaround'' time. See Sec.  
226.42(f)(2)(i)(C). Concerns have been expressed to the Board that a 
quick turnaround time is sometimes over-emphasized in determining 
whether to hire an appraiser and how much to pay the appraiser, to the 
detriment of the appraisal's quality. The Board recognizes that 
required turnaround time can be a legitimate factor to consider in 
determining an appraiser's rate, but stresses that appraiser competency 
and accurate appraisals should be a creditor's chief concerns, not how 
quickly the assignment can be performed. As reflected in the remaining 
factors discussed below, and consistent with longstanding federal 
banking agency supervisory guidance, the Board expects creditors and 
their agents to select an appraiser foremost on the basis of whether 
the appraiser has the requisite education, expertise and competence to 
complete the assignment.\41\
---------------------------------------------------------------------------

    \41\ See Interagency Guidelines, SR 94-55; see also Proposed 
Interagency Guidelines, 73 FR at 69652.
---------------------------------------------------------------------------

    Fee appraiser qualifications. The fourth factor is the fee 
appraiser's professional qualifications. See Sec.  226.42(f)(2)(i)(D). 
Comment 42(f)(2)(i)(D)-1 clarifies that professional qualifications 
that appropriately affect the value of appraisal services include 
whether the appraiser is state-licensed or state-certified in 
accordance with the minimum criteria issued by the Appraisal 
Qualifications Board of the Appraisal Foundation.\42\ For example, a 
state-licensed appraiser could legitimately command a higher rate for 
appraisal services than an appraiser-in-training who has not yet 
received a license. Relevant qualifications may also include the 
appraiser's completion of continuing education courses on effective 
appraisal methods and related topics.
---------------------------------------------------------------------------

    \42\ Appraiser Qualifications Board, The Appraisal Foundation, 
``The Real Property Appraiser Qualification Criteria'' (Apr. 2010).
---------------------------------------------------------------------------

    Comment 42(f)(2)(i)(D)-2 clarifies that permitting a creditor to 
consider an appraiser's qualifications does not override state or 
federal laws prohibiting the exclusion of an appraiser from 
consideration for an assignment solely by virtue of membership or lack 
of membership in any particular appraisal organization.\43\ The Board 
and other federal banking agencies recognize that fellow members of a 
particular appraisal organization may favor one another in selecting an 
appraiser for a given assignment, creating an unfair playing field for 
other appraisers. For this reason, federal banking agency regulations 
prohibit excluding a state-licensed or state-certified appraiser from 
consideration for an assignment for a federally related transaction 
solely by virtue of membership or lack of membership in any particular 
appraisal organization. The Board requests comment on whether the final 
rule should expressly prohibit basing an appraiser's compensation on an 
appraiser's membership or lack of membership in particular appraisal 
organization.
---------------------------------------------------------------------------

    \43\ See Board: 12 CFR 225.66(a); OCC: 12 CFR 34.46(a); FDIC: 12 
CFR 323.6(a); OTS: 12 CFR 564.6(a); NCUA: 12 CFR 722.6(a).
---------------------------------------------------------------------------

    Fee appraiser experience and professional record. The fifth factor 
is the professional record and experience of the fee appraiser. See 
Sec.  226.42(f)(2)(i)(E). Comment 42(f)(2)(i)(E)-1 clarifies that the 
fee appraiser's level of experience may include, for example, the fee 
appraiser's years of service as a state-licensed or state-certified 
appraiser, or years of service appraising properties in a particular 
geographical area or of a particular type. In the Board's view, a fee 
for appraisal services may reasonably be higher when the fee appraiser 
has been state-licensed or state-certified for 15 years and has been 
appraising properties in the relevant geographic area during all that 
time than when the fee appraiser is more recently licensed and has 
appraised properties in that area for only six months.
    Comment 42(f)(2)(i)(E)-1 further clarifies that, regarding the 
appraiser's professional record, a creditor or its agent may consider, 
for example, whether an appraiser has a past record of suspensions, 
disqualifications, debarments, or judgments for waste, fraud, abuse or 
breach of legal or professional standards. The Board expects that a 
creditor or its agent would exercise caution in engaging an appraiser 
with a blemished professional record, and would carefully scrutinize 
the appraiser's work. A creditor or its agent might reasonably pay less 
for the appraiser's services than for the services of an appraiser with 
an unblemished record.
    Fee appraiser work quality. The sixth factor is the quality of the 
appraiser's work. See Sec.  226.42(f)(2)(i)(F). Comment 42(f)(2)(i)(F)-
1 clarifies that ``work quality'' in this factor principally comprises 
the soundness of the appraiser's appraisal assignments; the fee 
appraiser's work quality may include, for example, the past quality of 
appraisals performed by the appraiser based on the written performance 
and review criteria of the creditor or agent of the creditor. A 
creditor or its agent might reasonably pay an appraiser with an 
excellent performance history at a higher rate than an appraiser with a 
performance history showing problems with past assignments.
    The Board solicits comment on whether the factors in Sec.  
226.42(f)(2)(i)(A)-(F) are appropriate, and whether other factors 
should be included.

Paragraph 42(f)(2)(ii)

No Anticompetitive Acts
    As noted above, the Board recognizes that if some creditors or AMCs 
dominate the market through illegal anticompetitive acts, ``recent 
rates'' identified under Sec.  226.42(f)(2)(i) may be an inaccurate 
measure of what a ``reasonable'' fee should be. Thus, under Sec.  
226.42(f)(2)(ii), to qualify for the presumption of compliance afforded 
under Sec.  226.42(f)(2), a creditor and its agents must not engage in 
any anticompetitive acts in violation of state or federal law that 
affect the compensation of fee appraisers, including--
    (1) Entering into any contracts or engaging in any conspiracies to 
restrain trade through methods such as price fixing or market 
allocation, as prohibited under section 1 of the Sherman Antitrust Act, 
15 U.S.C. 1, or any other relevant antitrust laws (Sec.  
226.42(f)(2)(ii)(A)); or
    (2) Engaging in any acts of monopolization such as restricting any 
person from entering the relevant geographic market or causing any 
person to leave the relevant geographic market, as prohibited under 
section 2 of the Sherman Antitrust Act, 15 U.S.C. 2, or any other 
relevant antitrust laws (Sec.  226.42(f)(2)(ii)(B)).
    Comment 42(f)(2)(ii)-1 explains that, under Sec.  
226.42(f)(2)(ii)(A), a creditor or its agent would not qualify for 
Sec.  226.42(f)(2)'s presumption of compliance if it engaged in any 
acts to restrain trade such as entering into a price fixing or market 
allocation agreement that affect the compensation of fee appraisers. 
For example, if appraisal management company A and appraisal management 
company B agreed to compensate fee appraisers at no more than a 
specific rate or range of

[[Page 66574]]

rates, neither appraisal management company would qualify for the 
presumption of compliance. Likewise, if appraisal management company A 
and appraisal management company B agreed that appraisal management 
company A would limit its business to a certain portion of the relevant 
geographic market and appraisal management company B would limit its 
business to a different portion of the relevant geographic market, and 
as a result each appraisal management company unilaterally set the fees 
paid to fee appraisers in their respective portions of the market, 
neither appraisal management company would qualify for the presumption 
of compliance under paragraph (f)(2).
    Comment 42(f)(ii)-2 explains that, under Sec.  226.42(f)(2)(ii)(B), 
a creditor or its agent would not qualify for Sec.  226.42(f)(2)'s 
presumption of compliance if it engaged in any act of monopolization 
such as restricting entry into the relevant geographic market or 
causing any person to leave the relevant geographic market, resulting 
in anticompetitive effects that affect the compensation paid to fee 
appraisers. For example, if only one appraisal management company 
exists or is predominant in a particular market area, that appraisal 
management company might not qualify for the presumption of compliance 
if it entered into exclusivity agreements with all creditors in the 
market or all fee appraisers in the market, such that other appraisal 
management companies had to leave or could not enter the market. 
Whether this behavior would be considered an anticompetitive act that 
affects the compensation paid to fee appraisers depends on all of the 
facts and circumstances, including applicable law.
    The Board requests comment on whether additional guidance is needed 
regarding anticompetitive acts that would disqualify a creditor or its 
agent from the presumption of compliance under Sec.  226.42(f)(2).

42(f)(3) Alternative Presumption of Compliance

Rates Based on Objective Third-Party Information
    Section 226.42(f)(3) provides creditors and their agents with an 
alternative means to qualify for a presumption of compliance with the 
requirement to pay fee appraisers at a customary and reasonable rate 
under Sec.  226.42(f)(1). Specifically, a creditor and its agents are 
presumed to comply with the requirement if the creditor or its agents 
determine the amount of compensation paid to the fee appraiser by 
relying on rates in the geographic market of the property being 
appraised that satisfies three conditions. First, the information must 
be established by objective third-party information, including fee 
schedules, studies, and surveys prepared by independent third parties 
such as government agencies, academic institutions, and private 
research firms (Sec.  226.42(f)(3)(i)). Second, it must be based on 
recent rates paid to a representative sample of providers of appraisal 
services in the geographic market of the property being appraised or 
the fee schedules of those providers (Sec.  226.42(f)(3)(ii)). Third, 
in the case of fee schedules, studies, and surveys, such fee schedules, 
studies and surveys or information derived from them must exclude 
compensation paid to fee appraisers for appraisals ordered by an AMC, 
as defined in Sec.  226.42(f)(4)(iii).
    Regarding this third condition, the Board recognizes that the 
express statutory language states, ``Fee studies shall exclude 
assignments ordered by known appraisal management companies.'' TILA 
Section 129E(i)(1)(emphasis added). However, the Board does not see a 
meaningful distinction between, for example, a fee ``study'' and a fee 
``survey,'' both of which require at least some evaluation of gathered 
data. The Board also is not aware of a rationale consistent with the 
statute that would treat fee studies differently than fee surveys or 
fee schedules. The Board requests comment, however, on whether studies 
and surveys should be treated differently for the purposes of this 
rule.
    Comment 42(f)(3)-1 explains that a creditor and its agent are 
presumed to comply with Sec.  226.42(f)(1) if the creditor or its agent 
determine the compensation paid to a fee appraiser based on information 
about rates that satisfies the three conditions discussed above. This 
comment clarifies that reliance on information satisfying these 
conditions is not a requirement for compliance with Sec.  226.42(f)(1), 
but creates a presumption that the creditor or its agent has complied. 
The comment further clarifies that a person may rebut this presumption 
with evidence that the rate of compensation paid to a fee appraiser by 
the creditor or its agent is not customary and reasonable. The creditor 
or its agent would already have satisfied the presumption of compliance 
by relying on information meeting the three conditions; therefore, 
evidence rebutting the presumption would have to be based on facts or 
information other than third-party information satisfying the 
presumption of compliance conditions of Sec.  226.42(f)(3). This 
comment also explains that, if a creditor or its agent does not rely on 
information that meets the conditions in Sec.  226.42(f)(3), the 
creditor's and its agent's compliance with the requirement to 
compensate fee appraisers at a customary and reasonable rate is 
determined based on all of the facts and circumstances without a 
presumption of either compliance or violation.
    Comment 42(f)(3)-2 clarifies that the term ``geographic market'' is 
explained in comment 42(f)(1)-2. See the section-by-section analysis to 
Sec.  226.42(f)(1). Comment 42(f)(3)-3 clarifies that whether rates may 
reasonably be considered ``recent'' under Sec.  226.42(f)(3) depends on 
the facts and circumstances. Generally, however, ``recent'' rates would 
include rates charged within one year of the creditor's or its agent's 
reliance on this information to qualify for the presumption of 
compliance under Sec.  226.42(f)(3).
    In discussions with Board staff, concerned parties argued that 
existing appraisal fee schedules, surveys and studies have various 
flaws and thus may not be reliable indicators of customary and 
reasonable rates for appraisals in all home-secured consumer credit 
transactions. In preparing this interim final rule, the Board did not 
identify appraisal fee schedules, surveys or studies that would be 
appropriate to designate as a ``safe harbor'' for creditors and their 
agents to comply with Sec.  226.42(f)(1). The Board solicits comment on 
whether and on what basis the final rule should give creditors or their 
agents a safe harbor for relying on a fee study or similar source of 
compiled appraisal fee information. The Board also requests comment on 
what additional guidance may be needed regarding third-party rate 
information on which a creditor and its agents may appropriately rely 
to qualify for the presumption of compliance.

42(f)(4) Definitions

    Section 226.24(f)(4) defines three terms for purposes of Sec.  
226.42(f): ``Fee appraiser,'' ``appraisal services,'' and ``appraisal 
management company.''
Fee Appraiser
    First, the term ``fee appraiser'' is defined to mean--
    (1) A natural person who is a state-licensed or state-certified 
appraiser and receives a fee for performing an appraisal, but who is 
not an employee of the person engaging the appraiser (Sec.  
226.42(f)(4)(i)(A)); or
    (2) An organization that, in the ordinary course of business, 
employs state-licensed or state-certified

[[Page 66575]]

appraisers to perform appraisals, receives a fee for performing 
appraisals, and is not subject to the requirements of section 1124 of 
FIRREA, 12 U.S.C. 3331 et seq. (Sec.  226.42(f)(4)(i)(B)).
    The interim final rule's definition of ``fee appraiser'' is 
intended to be consistent with the statute, as well as the Board's 
longstanding use of the term and with the meaning of ``fee appraiser'' 
generally accepted in the appraisal industry.\44\ Thus, the interim 
final rule specifies that a fee appraiser includes a natural person who 
is a state-licensed or state-certified appraiser hired on a contract or 
other non-permanent basis to perform appraisal services.
---------------------------------------------------------------------------

    \44\ See, e.g., 12 CFR 225.65; Interagency Guidelines, SR 94-55 
(Oct. 28, 1994).
---------------------------------------------------------------------------

    Comment 42(f)(4)(i)-1 clarifies that the term ``organization'' in 
Sec.  226.42(f)(4)(i)(B) includes a corporation, partnership, 
proprietorship, association, cooperative, or other business entity and 
does not include a natural person. Section 226.42(f)(4)(i)(B) also 
cross-references section 1124 of FIRREA. The Dodd-Frank Act added 
Section 1124 to FIRREA. Section 1124 requires the federal banking 
agencies and the FHFA to issue rules that require AMCs (as newly 
defined in FIRREA Section 1121) to register with state appraiser 
certifying and licensing agencies according to minimum criteria set by 
these rules.\45\ Thus, only entities that perform appraisals and that 
would not be required to register under the new rules satisfy the 
definition of fee appraiser. Unlike AMCs as defined under FIRREA and 
commonly known in the industry, these entities do not merely perform 
managerial tasks regarding the appraisal process, but oversee 
individual appraisers whom they employ to perform the appraisal. The 
definition of ``appraisal management company'' for purposes of the 
registration requirement under FIRREA is further addressed below in the 
discussion of the interim final rule's definition of ``appraisal 
management company'' under Sec.  226.42(f)(4)(iii).
---------------------------------------------------------------------------

    \45\ See Dodd-Frank Act, Section 1473(f) (amending FIRREA 
Sections 1121 and 1124), Public Law 111-203, 124 Stat. 2191-2192 (to 
be codified at 12 U.S.C. 3332 and 3353, respectively).
---------------------------------------------------------------------------

Appraisal Services
    Section 226.42(f)(4)(ii) states that, for purposes of Sec.  
226.42(f), ``appraisal services'' include only the services required to 
perform the appraisal, such as defining the scope of work, inspecting 
the property, reviewing necessary and appropriate public and private 
data sources (for example, multiple listing services, tax assessment 
records and public land records), developing and rendering an opinion 
of value, and preparing and submitting the appraisal report. The Board 
understands that agents of the creditor such as AMCs split the total 
appraisal fee between the AMC (for appraisal management functions) and 
the appraiser (for the appraisal). The interim final rule is thus 
intended to clarify that the customary and reasonable rate applies to 
compensation for tasks that the fee appraiser performs, not the entire 
cost of the appraisal (including management functions).
Appraisal Management Company
    Section 226.42(f)(4)(iii) defines an ``appraisal management 
company'' in Sec.  226.42(f) as any person authorized to do the 
following actions on behalf of the creditor--(1) recruit, select, and 
retain appraisers; (2) contract with appraisers to perform appraisal 
assignments; (3) manage the process of having an appraisal performed, 
including providing administrative duties such as receiving appraisal 
orders and appraisal reports, submitting completed appraisal reports to 
creditors and underwriters, collecting fees from creditors and 
underwriters for services provided, and compensating appraisers for 
services performed; or (4) review and verify the work of appraisers. 
This definition is based on the new definition of ``appraisal 
management company'' in the Dodd-Frank Act's amendments to FIRREA, for 
purposes of requiring AMCs to register with the appropriate state 
appraiser certifying and licensing agency and related purposes.\46\ The 
sole difference between the definitions is that the definition under 
FIRREA limits the meaning of AMC to entities that oversee a network or 
panel of more than 15 certified or licensed appraisers in a state or 25 
or more nationally within a given year.
---------------------------------------------------------------------------

    \46\ Id.
---------------------------------------------------------------------------

    For purposes of FIRREA's requirement that AMCs register, the Board 
understands that Congress may have sought to relieve smaller entities 
from administrative burdens by excluding them from this requirement. It 
is not clear, however, that FIRREA's more limited definition of AMC is 
appropriate under TILA Section 129E(i); this TILA provision is a 
technical requirement regarding the content of fee studies rather than 
a direct administrative obligation imposed on AMCs. The interim final 
rule therefore does not limit the meaning of ``appraisal management 
company'' to entities with an appraiser panel of a particular size. The 
Board requests comment on whether the interim final rule's definition 
of ``appraisal management company'' is appropriate for the final rule.

42(g) Mandatory Reporting

    TILA Section 129E(e) requires certain persons to report an 
appraiser to the applicable state appraiser certifying and licensing 
agency if the person has a reasonable basis to believe the appraiser is 
failing to comply with USPAP, is violating applicable laws, or is 
otherwise engaging in unethical or unprofessional conduct. 15 U.S.C. 
1639e(e). This provision applies to creditors, mortgage brokers, real 
estate brokers, appraisal management companies, and any other persons 
providing a service for a covered transaction. The interim final rule 
implements this requirement in Sec.  226.42(g). The Act does not 
expressly define the term ``appraiser'' for purposes of TILA Section 
129E(e). TILA Section 129E(e) is intended to enable state certifying 
and licensing agencies to exercise the authority granted to them under 
state law. Therefore, for purposes of Sec.  226.42(g), an ``appraiser'' 
is a natural person who provides opinions of the value of dwellings and 
is required to be licensed or certified under the laws of the state in 
which the consumer's principal dwelling or otherwise is subject to the 
jurisdiction of the state appraiser certifying and licensing agency. 
See comment 42(g)-6.

42(g)(1) Reporting Required

    Section 226.42(g)(1) requires reporting of a failure to comply with 
USPAP or of an ethical or professional requirement under applicable 
state or federal statute or regulation only if the failure to comply is 
material, that is, likely to significantly affect the value assigned to 
the consumer's principal dwelling. Further, Sec.  226.42(g) clarifies 
that reporting of a failure to comply with an ethical or professional 
requirement is required only if the requirement is codified in an 
applicable state or federal statute or regulation (ethical or 
professional requirement). Other statutes or regulations may contain 
broader reporting requirements, however.
    The Board interprets TILA Section 129E(e) to apply only to a 
material failure to comply with USPAP or a codified standard of ethical 
or professional conduct. The Board believes that this interpretation is 
consistent with the Act's purpose of ensuring that values assigned to a 
consumer's principal dwelling are assigned free of any coercion or 
inappropriate influence, so that

[[Page 66576]]

creditors base their underwriting decisions on appraisals that do not 
misstate the value of the dwelling. Thus, the interim final rule 
mandates reporting failures to comply that would affect the value 
assigned to the dwelling. The Board solicits comment on whether 
reporting should be required only if a material failure to comply 
causes the value assigned to the consumer's principal dwelling to 
differ from the value that would have been assigned had the material 
failure to comply not occurred by more than a certain tolerance, for 
example, by 10 percent or more.
    Reasonable basis. TILA Section 129E(e) requires reporting only if a 
covered person has a ``reasonable basis to believe'' that an appraiser 
has not complied with USPAP or ethical or professional requirements. 15 
U.S.C. 1639e(e). Comment 42(g)(1)-1 states that a covered person has a 
reasonable basis to believe that an appraiser has materially failed to 
comply with USPAP or ethical or professional requirements if the person 
has actual knowledge or information that would lead a reasonable person 
to believe that the appraiser has materially failed to comply with 
USPAP or such requirements.
    Examples of material failures to comply. Comment 42(g)(1)-2 
provides the following examples of a material failure to comply: (1) 
Materially mischaracterizing the value of the consumer's principal 
dwelling, in violation of Sec.  226.42(c)(2); (2) performing an 
appraisal in a grossly negligent manner, in violation of a USPAP rule; 
and (3) accepting an appraisal assignment on the condition that the 
appraiser will assign a value equal to or greater than the purchase 
price to the consumer's principal dwelling, in violation of a USPAP 
rule. Comment 42(g)(1)-3 clarifies that Sec.  226.42(g)(1) does not 
require reporting of failure to comply that is not material within the 
meaning of Sec.  226.42(g)(1). For example, an appraiser's disclosure 
of confidential information, in violation of applicable state law, or 
an appraiser's failure to maintain errors and omissions insurance, in 
violation of applicable state law, would not be material for purposes 
of Sec.  226.42(g)(1).
    Coverage of reporting requirement. TILA Section 129E(e) provides 
that any mortgage lender, mortgage broker, mortgage banker, real estate 
broker, appraisal management company, employee of an appraisal 
management company, or any other person ``involved in a real estate 
transaction'' must report failures to comply with USPAP or ethical or 
professional requirements. 15 U.S.C. 1639e(e). Section 226.42(g)(1) 
provides that a ``covered person'' must report a material failure to 
comply. See Sec.  226.42(b)(1). Comment 42(g)(1)-4 clarifies that 
``covered persons'' required to report an appraiser's material failure 
to with USPAP or ethical or professional requirements in connection 
with a covered transaction include creditors, mortgage brokers, 
appraisers, appraisal management companies, real estate agents, and 
other persons that provide ``settlement services'' as defined under 
RESPA and regulations implementing RESPA.
    Comment 42(g)(1)-5 clarifies that the following persons are not 
``covered persons'' required to report an appraiser's material failure 
to comply with USPAP or ethical or professional requirements: (1) The 
consumer who obtains credit through a covered transaction; (2) a person 
secondarily liable for a covered transaction, such as a guarantor; and 
(3) a person that resides in or will reside in the consumer's principal 
dwelling but will not be liable on the covered transaction, such as a 
non-obligor spouse. Comments 42(g)(1)-4 and -5 are consistent with 
commentary on the definition of ``covered person,'' discussed in detail 
above in the section-by-section analysis of Sec.  226.42(b)(2).

42(g)(2) Timing of Reporting

    TILA Section 129E(e) does not establish a time by which a person 
must report a failure to comply with USPAP or ethical or professional 
requirements. Section 226.42(g)(2) provides that a covered person must 
report a material failure to comply within a reasonable period of time 
after the person determines that there is a reasonable basis to believe 
that such a material failure to comply has occurred. The Board requests 
comment on what constitutes a reasonable period of time within which to 
report a material failure to comply under Sec.  226.42(g).

42(g)(3) Definition

    Section 226.42(g) requires covered persons to report a failure to 
comply to the appropriate ``state agency.'' Consistent with the 
statute, Sec.  226.42(g)(3) defines the term ``state agency'' to mean 
the ``state appraiser certifying and licensing agency'' as defined by 
Title XI of FIRREA, codified under 12 U.S.C. 3350(1), and any 
implementing regulations. Section 226.42(g)(3) clarifies that the 
agency for the state in which the consumer's principal dwelling is 
located is the appropriate agency to which to report a material failure 
to comply.

V. Effective Date and Mandatory Compliance Date

    This interim final rule is effective on December 27, 2010 and 
compliance with it is mandatory for all applications received by a 
creditor on or after April 1, 2011. The Dodd-Frank Act does not provide 
effective or mandatory compliance dates for rules implementing TILA 
Section 129E. Appraisers have generally urged the Board to act quickly 
to put the interim rule in place, noting that the Dodd-Frank Act 
effectively sunsets the HVCC when the Board's interim final rule is 
promulgated. Some industry representatives, on the other hand, have 
stated that they will need sufficient lead time to implement the 
interim final rule.
    Under TILA Section 105(d), certain of the Board's disclosure 
requirements are to have an effective date of October 1 that follows 
the issuance by at least six months. 15 U.S.C. 1604(d). However, the 
Board may at its discretion lengthen the implementation period for 
creditors to adjust their forms to accommodate new requirements, or 
shorten the period where the Board finds that such action is necessary 
to prevent unfair or deceptive disclosure practices. There is no 
similar effective date provision for non-disclosure requirements. The 
Riegle Community Development and Regulatory Improvement Act of 1994, 
however, requires that agency regulations which impose additional 
reporting, disclosure and other requirements on insured depository 
institutions take effect on the first day of a calendar quarter 
following publication in final form. 12 U.S.C. 4802(b).
    The Board believes a mandatory compliance date of April 1, 2011 
will provide creditors and others subject to the rule sufficient time 
to take the steps necessary to comply. Although some provisions in the 
interim final rule are similar to existing Sec.  226.36(b), the interim 
final rule contains new requirements, such as the reasonable and 
customary fee requirement. In addition, the rule covers HELOCs, whereas 
existing Sec.  226.36(b) applies only to closed-end loans secured by 
the consumer's principal dwelling. The rule's new requirements will 
likely require creditors and AMCs to change their systems, adjust 
policies, and train staff. The Board believes that five months should 
be sufficient for these purposes. Accordingly, the interim final rule 
is mandatory for consumer credit transactions secured by the consumer's 
principal dwelling in which an application is received by the creditor 
on or after April 1, 2011.

[[Page 66577]]

    As noted, certain provisions of this interim final rule are 
substantially similar to the provisions of current Sec.  226.36(b). The 
Board is therefore removing Sec.  226.36(b) and related staff 
commentary, effective April 1, 2011, for applications received on or 
after that date. Section 226.36(b) remains in effect until compliance 
with this interim final rule becomes mandatory, and it applies to 
credit applications received before April 1, 2011, even if the credit 
is not extended until after that date. Thus, if a creditor receives an 
application for a loan that will be secured by the consumer's principal 
dwelling on March 20, 2011, and the loan is consummated on May 1, 2011, 
Sec.  226.36(b) applies to that transaction. The Board notes, however, 
that covered persons may wish to comply with this interim final rule 
before April 1, 2011, and may do so. Compliance with Sec.  226.42 
constitutes compliance with Sec.  226.36(b). Accordingly, creditors, 
mortgage brokers, and their affiliates subject to Sec.  226.36(b) may 
comply with this interim final rule for applications received by 
creditors before April 1, 2011, in lieu of complying with Sec.  
226.36(b).

VI. Initial Regulatory Flexibility Analysis

    In accordance with section 4 of the Regulatory Flexibility Act 
(RFA), 5 U.S.C. 601 et seq., the Board is publishing an initial 
regulatory flexibility analysis for the interim final rule. The RFA 
generally requires an agency to assess the impact a rule is expected to 
have on small entities.\47\ Based on its analysis and for the reasons 
stated below, the Board believes that this interim final rule will have 
a significant economic impact on a substantial number of small 
entities. The Board invites comments on the effect of the interim final 
rule on small entities.
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    \47\ Under standards the U.S. Small Business Administration sets 
(SBA), an entity is considered ``small'' if it had $175 million or 
less in assets for banks and other depository institutions; and $6.5 
million or less in revenues for non-bank mortgage lenders, mortgage 
brokers, and loan servicers. U.S. Small Business Administration, 
Table of Small Business Size Standards Matched to North American 
Industry Classification System Codes, available at http://www.sba.gov/idc/groups/public/documents/sba_homepage/serv_sstd_tablepdf.pdf.
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A. Reasons for the Interim Final Rule

    As discussed above in the SUPPLEMENTARY INFORMATION, Section 1472 
of the Dodd-Frank Act amended TILA by inserting a new section 129E. 
Section 129E makes it unlawful to engage in any act that violates 
appraisal independence in consumer credit transactions secured by the 
consumer's principal dwelling. The Dodd-Frank Act requires the Board to 
prescribe interim final rules within 90 days of enactment to define 
with specificity the acts or practices that violate appraisal 
independence.

B. Summary of the Dodd-Frank Act

    As discussed above in the SUPPLEMENTARY INFORMATION, the Dodd-Frank 
Act prohibits any person, in extending credit or providing services, 
from violating appraisal independence for consumer credit transactions 
secured by the consumer's principal dwelling. The Dodd-Frank Act 
specifies that practices that violate appraisal independence include: 
(1) Coercing or otherwise influencing any person, appraisal management 
company, firm or other entity conducting or involved in an appraisal 
for the purpose of causing the appraised value to be based on any 
factor other than the appraiser's independent judgment; (2) 
mischaracterizing or suborning any mischaracterization of the appraised 
value; (3) seeking to influence or encourage a target value in order to 
make or price a transaction; and (4) withholding or threatening to 
withhold timely payment for appraisal services or reports.
    The Dodd-Frank Act also prohibits appraisers and appraisal 
management companies from having direct or indirect interest, financial 
or otherwise, in the property or transaction. In addition, the Dodd-
Frank Act prohibits a creditor from extending credit if the creditor 
knows before consummation that a violation of the prohibition on 
appraiser coercion or the conflict of interest provision has occurred, 
unless the creditor performs due diligence. Under the Dodd-Frank Act, a 
creditor or any person providing services in connection with the 
transaction who has a reasonable basis to believe an appraiser is 
failing to comply with the Uniform Standards of Professional Appraisal 
Practice, or is engaging in unethical or unprofessional conduct in 
violation of applicable law, must refer the issue to the state 
appraiser certifying and licensing agency. The Dodd-Frank Act also 
requires that creditors and their agents compensate fee appraisers at a 
customary and reasonable rate for the market area of the property 
appraised.

C. Statement of Objectives and Legal Basis

    The SUPPLEMENTARY INFORMATION sets forth the objectives and the 
legal basis for the interim final rule. In summary the objectives of 
the interim final rule are to ensure that appraisals used to support 
creditors' underwriting decisions for consumer credit transactions 
secured by the consumer's principal dwelling are based on the 
appraiser's independent professional judgment, free of any influence or 
pressure that may be exerted by parties that have an interest in the 
transaction. The amendments also seek to ensure that creditors and 
their agents pay customary and reasonable fees to appraisers.
    The legal basis for the interim final rule is in Sections 105(a) 
and 129E(g) of TILA. A more detailed discussion of the Board's 
rulemaking authority is set forth in part III of the SUPPLEMENTARY 
INFORMATION.

D. Description of Small Entities to Which the Interim Final Rule Would 
Apply

    The interim final rule would apply to any creditor or person who 
provides settlement services in connection with an extension of 
consumer credit secured by the principal dwelling of the consumer. 
Because of this, the requirements of the interim final rule will apply 
to a substantial number of parties, which include banks, credit unions, 
mortgage companies, mortgage brokers, appraisers, appraisal management 
companies, title insurance companies, and realtors. The Board is not 
aware of a reliable source for the total number of small entities 
likely to be affected by the final rule, but provides the following 
information and estimates about certain entities subject to the interim 
final rule.
    Depository institutions and mortgage companies. The Board can 
identify through data from Reports of Condition and Income (call 
reports) the approximate numbers of small depository institutions that 
will be subject to the final rule. Based on March 2010 call report 
data, approximately 8,845 small institutions would be subject to the 
final rule. Approximately 15,658 depository institutions in the United 
States filed call report data, approximately 11,148 of which had total 
domestic assets of $175 million or less and thus were considered small 
entities for purposes of the Regulatory Flexibility Act. Of 3,898 
banks, 523 thrifts and 6,727 credit unions that filed call report data 
and were considered small entities, 3,776 banks, 496 thrifts, and 4,573 
credit unions, totaling 8,845 institutions, extended mortgage credit. 
For purposes of this analysis, thrifts include savings banks, savings 
and loan entities, co-operative banks and industrial banks.

[[Page 66578]]

    Further, 1,507 non-depository institutions (independent mortgage 
companies, subsidiaries of a depository institution, or affiliates of a 
bank holding company) filed HMDA reports in 2009 for 2008 lending 
activities. Based on the small volume of lending activity reported by 
these institutions, most are likely to be small entities.
    Similarly, the Board cannot identify with certainty the number of 
mortgage brokers, appraiser, realtors, appraisal management companies, 
or title insurance companies subject to the rule that also qualify as 
small entities. The Board can, however, attempt to estimate approximate 
total numbers of each group.
    Mortgage brokers. In its 2008 proposed rule under HOEPA, 73 FR 
1672, 1720; Jan. 9, 2008, the Board noted that, according to the 
National Association of Mortgage Brokers (NAMB), there were 53,000 
mortgage brokerage companies in 2004 that employed an estimated 418,700 
people.\48\ On the other hand, the U.S. Census Bureau's 2002 Economic 
Census indicates that there were only 17,041 ``mortgage and nonmortgage 
loan brokers'' in the United States at that time.\49\ The Census 
Bureau's 2007 Economic Census preliminary data indicate that there are 
approximately 24,299 ``mortgage and nonmortgage loan brokers 
establishments'' with approximately 134,507 employees.\50\
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    \48\ http://www.namb.org/namb/IndustryFacts.asp?SnID=719224934. 
This page of the NAMB Web site, however, no longer provides an 
estimate of the number of mortgage brokerage companies.
    \49\ http://www.census.gov/prod/ec02/ec0252a1us.pdf (NAICS code 
522310).
    \50\ http://factfinder.census.gov/servlet/IBQTable?_bm=y&-ds_name=EC0752I1&-ib_type=NAICS2007&-NAICS2007=522310.
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    Appraisers. The Census Bureau's 2007 Economic Census preliminary 
data indicate that there are approximately 16,018 ``offices of real 
estate appraisers'' employing 43,999 employees.\51\ Based on 
information provided by the Appraisal Subcommittee the Board estimates 
that, as of October 2010, there are approximately 93,429 individual, 
licensed appraisers. That number includes some appraisers that do not 
conduct appraisals of 1-4 family residential properties.
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    \51\ http://factfinder.census.gov/servlet/IBQTable?_bm=y&-ds_name=EC0753I1&-ib_type=NAICS2007&-NAICS2007=531320.
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    Realtors. According to the National Association of Realtors' 
September 2010 Monthly membership report, there are at least 1,088,919 
Realtors in the United States that would be subject to the interim 
final rule.\52\ The Census Bureau's 2007 Economic Census preliminary 
data, however, indicate approximately 108,651 ``offices of real estate 
agents and brokers'' with 360,560 total employees.\53\
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    \52\ http://www.realtor.org/wps/wcm/connect/2b353d80442806058dc6ed34cafa6d66/09-2010.pdf?MOD=AJPERES&CACHEID=2b353d80442806058dc6ed34cafa6d66.
    \53\ http://factfinder.census.gov/servlet/IBQTable?_bm=y&-ds_name=EC0753I1&-ib_type=NAICS2007&-NAICS2007=531210.
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    Appraisal management companies. The Board is not aware of any 
source of information about the number of appraisal management 
companies.
    Title insurance companies. While the Census Bureau has not yet 
released data for title insurance companies, according to the Census 
Bureau's 2006 Statistics of U.S. Business, there were approximately 
6,943 ``direct title insurance carriers'' which employ approximately 
105,145 payroll employees.\54\
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    \54\ http://www.census.gov/epcd/susb/latest/us/US524127.HTM.
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    Title, abstract, and settlement services. Preliminary data from the 
Census Bureau's 2007 Economic Census indicate that there were 
approximately 12,160 title, abstract, and settlement offices employing 
18,749,687 employees.\55\
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    \55\ http://factfinder.census.gov/servlet/IBQTable?_bm=y&-ds_name=EC0754I1&-NAICS2007=541191&-ib_type=NAICS2007&-geo_id=&-_industry=541191&-_lang=en&-fds_name=EC0700A1.
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    Surveying and Mapping. Preliminary data from the Census Bureau's 
2007 Economic Census indicate that there were approximately 9,690 
surveying and mapping establishments (excluding establishments that 
provide geophysical services) employing 69,941 employees.\56\
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    \56\ http://factfinder.census.gov/servlet/IBQTable?_bm=y&-ds_name=EC0754I1&-ib_type=NAICS2007 NAICS2007&-NAICS2007=541370.
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    Escrow agents. The Census Bureau's 2007 Economic Census does not 
contain a separate category for escrow agents but rather includes 
escrow agents in the category ``Other activities related to real 
estate.'' (That category excludes lessors of real estate, offices of 
real estate agents and brokers, real estate property managers, and 
offices of real estate appraisers.) Preliminary data from the 2007 
Economic Census indicate that approximately 16,504 establishments, 
employing 72,058 employees, were in that category.\57\ The Board is not 
aware of a comprehensive source of data specifically regarding the 
number of establishments providing escrow services.
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    \57\ http://factfinder.census.gov/servlet/IBQTable?_bm=y&-ds_name=EC0753I1&-ib_type=NAICS2007&-NAICS2007=531390.
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    Extermination and pest control services. Preliminary data from the 
Census Bureau's 2007 Economic Census indicate that approximately 12,523 
establishments, employing 96,140 employees, provided extermination and 
pest control services.\58\
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    \58\ http://factfinder.census.gov/servlet/IBQTable?_bm=y&-ds_name=EC0756I1&-NAICS2007=561710&-ib_type=NAICS2007&-geo_id=&-_industry=561710&-_lang=en&-fds_name=EC0700A1.
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    Legal services providers. Preliminary data from the Census Bureau's 
2007 Economic Census indicate that there were approximately 189, 486 
legal services establishments employing 1,199,306 employees, including 
approximately 174,523 lawyers' offices employing 1,107,394 
employees.\59\
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    \59\ http://factfinder.census.gov/servlet/IBQTable?_bm=y&-ds_name=EC0754I1&-NAICS2007=5411/541110&-ib_type=NAICS2007&-_industry=541110&-_lang=en&-fds_name=EC0700A1.
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    Credit bureaus. Preliminary data from the Census Bureau's 2007 
Economic Census indicate that there were approximately 813 credit 
bureaus employing 19,866 employees.\60\
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    \60\ http://factfinder.census.gov/servlet/IBQTable?_bm=y&-ds_name=EC0756I1&-NAICS2007=561450&-ib_type=NAICS2007&-geo_id=&-_industry=561450&-_lang=en&-fds_name=EC0700A1.
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    It is unclear exactly how many of these parties subject to the rule 
would meet the small business requirements. The Board believes, 
however, that most mortgage brokers, appraisers, realtors, title 
insurance companies, title abstract and settlement service providers, 
surveying and mapping establishments, escrow services providers, 
exterminators and pest control providers, and legal services providers 
are small entities. The Board notes that some of these entities may, as 
a practical matter, have little opportunity or incentive to coerce or 
influence an appraiser, or to have a reasonable basis to believe that 
an appraiser has not complied with USPAP or other applicable 
authorities. In such cases, these entities may have little or no 
compliance burden. As noted in the SUPPLEMENTARY INFORMATION, the Board 
is soliciting comment on whether some settlement service providers 
should be exempt from some or all of the interim final rule's 
requirements.

E. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements

    The compliance requirements of the final rules are described in the 
SUPPLEMENTARY INFORMATION. As indicated above, creditors and mortgage 
brokers currently are subject to the 2008 Appraisal Independence Rules, 
which are essentially codified in section 1472 of the Dodd-Frank Act. 
The interim final rule, consistent with the Dodd-Frank

[[Page 66579]]

Act, expands the parties covered by those provisions to persons who 
provide settlement services in connection with a covered transaction. 
Moreover, as discussed in the SUPPLEMENTARY INFORMATION, the Dodd-Frank 
Act expands the requirements for appraisal independence significantly 
beyond the requirements in the 2008 Appraisal Independence Rules. The 
effect of the interim final rule on small entities is unknown. Some 
small entities would be required, among other things, to modify their 
systems to comply with the interim final rules. The precise costs to 
small entities of updating their systems are difficult to predict.

F. Other Federal Rules

    The Board has not identified any federal rules that conflict with 
the proposed interim final rule. The Board has identified, however, 
several federal rules that overlap to varying degrees with the 
requirements of the interim final rule. Title XI of FIRREA, enacted in 
1989, provides that the Board and the other banking agencies must issue 
regulations for appraisal standards. These regulations include 
provisions on appraisal independence which overlap with the interim 
final rule.\61\ In addition, the Equal Credit Opportunity Act, 15 
U.S.C. 1691 et seq., and the Board's Regulation B, 12 CFR 202.14, 
require creditors to provide a copy of an appraisal report used in 
connection with an application for credit secured by a dwelling.\62\ As 
noted, the 2008 Appraisal Independence Rules addressed appraiser 
independence; those rules, however, are removed effective on April 1, 
2011, the mandatory compliance date for the interim final rule.
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    \61\ Board: 12 CFR 225.65; OCC: 12 CFR 34.45; FDIC: 12 CFR 
323.5; OTS: 12 CFR 564.5; NCUA: 12 CFR 722.5. The agencies have also 
issued supervisory guidance on appraisal independence: See, e.g., 
Interagency Guidelines, SR 94-55.
    \62\ Section 1474 of the Dodd-Frank Act amends the ECOA's 
requirement to provide a copy of the appraisal report to the 
consumer. Public Law 111-203, 124 Stat. 2199 (to be codified at 15 
U.S.C. 1691).
---------------------------------------------------------------------------

    Additionally, both the Veteran's Administration and Federal Housing 
Administration provide guidance related to appraiser fees which overlap 
with the interim final rule. The VA provides a specific appraiser fee 
schedule for VA loans, while FHA Roster appraisers are compensated at a 
rate that is customary and reasonable for the market area of the 
property.\63\
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    \63\ Veterans Administration fee schedule, (as of Apr. 7, 2010), 
available at http://www.benefits.va.gov/homeloans/fee_timeliness.asp; Appraiser Independence HUD Mortgagee Letter 2009-28 
(Sept. 18, 2009).
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G. Significant Alternatives to the Interim Final Rule

    As noted above, the final rule implements the statutory 
requirements of the Dodd-Frank Act. The Board has implemented these 
requirements to minimize burden while retaining benefits and 
protections for consumers. As discussed above in parts of the 
SUPPLEMENTARY INFORMATION the Board has provided small institutions, 
defined as creditors with assets of $250 million or less as of December 
31 of either of the two preceding calendar years, with an alternative 
safe harbor to the prohibition on conflicts of interest that is 
tailored to the circumstances of small creditors. The Board welcomes 
comment on any significant alternatives that would minimize the impact 
of the interim final rule on small entities.
    The Board also welcomes further information and comment on any 
costs, compliance requirements, or changes in operating procedures 
arising from the application of the interim final rule to small 
business.

VII. Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act (PRA) of 1995 (44 
U.S.C. 3506; 5 CFR part 1320 Appendix A.1), the Board reviewed the 
interim final rule under the authority delegated to the Board by the 
Office of Management and Budget (OMB). The collection of information 
that is required by this final rule is found in Subpart E--Special 
Rules for Certain Home Mortgage Transactions--12 CFR 226.42(g). The 
Board may not conduct or sponsor, and an organization is not required 
to respond to, this information collection unless the information 
collection displays a currently valid OMB control number. The OMB 
control number is 7100-0199.
    This information collection is required to provide benefits for 
consumers and is mandatory (15 U.S.C. 1601 et seq.). Since the Board 
does not collect any information, no issue of confidentiality arises. 
The respondents/recordkeepers for this interim final rulemaking are 
creditors, appraisal management companies, appraisers, mortgage 
brokers, realtors, title insurers and other firms that provide 
settlement services (covered person(s)).
    TILA and Regulation Z are intended to ensure effective disclosure 
of the costs and terms of credit to consumers. For closed-end loans, 
such as mortgage and installment loans, cost disclosures are required 
to be provided prior to consummation. Special disclosures are required 
in connection with certain products, such as reverse mortgages, certain 
variable-rate loans, and certain mortgages with rates and fees above 
specified thresholds. To ease the burden and cost of complying with 
Regulation Z (particularly for small entities), the Board provides 
model forms, which are appended to the regulation. TILA and Regulation 
Z also contain rules concerning credit advertising. Creditors are 
required to retain evidence of compliance with Regulation Z for 24 
months (12 CFR 226.25), but Regulation Z does not specify the types of 
records that must be retained.
    Under the PRA, the Board accounts for the paperwork burden 
associated with Regulation Z for the state member banks and other 
entities supervised by the Board that engage in activities covered by 
Regulation Z and, therefore, are respondents under the PRA. Appendix I 
of Regulation Z defines the institutions supervised by the Federal 
Reserve System as: State member banks, branches and agencies of foreign 
banks (other than Federal branches, Federal agencies, and insured state 
branches of foreign banks), commercial lending companies owned or 
controlled by foreign banks, and organizations operating under section 
25 or 25A of the Federal Reserve Act. Other Federal agencies account 
for the paperwork burden imposed on the entities for which they have 
administrative enforcement authority under TILA.
    The current total annual burden to comply with the provisions of 
Regulation Z is estimated to be 1,497,362 hours for the 1,138 
institutions supervised by the Federal Reserve that are deemed to be 
respondents for the purposes of the PRA.
    As discussed in the preamble, the Board is adopting a rule that 
requires reporting of a violation of Uniform Standards of Professional 
Appraisal Practice (USPAP) or of a standard of ethical or professional 
conduct under applicable state or federal statute or regulation only if 
the violation is material, that is, if the violation is likely to 
affect the value assigned to a covered property. The new reporting 
requirement will impose a one-time increase in the total annual burden 
under Regulation Z for respondents supervised by the Federal Reserve 
involved in the extension of consumer credit that is secured by the 
principal dwelling of the consumer. The Board estimates that 567 
respondents \64\

[[Page 66580]]

supervised by the Federal Reserve will take, on average, 40 hours (one 
business week) to update their systems, internal procedure manuals, and 
provide training for relevant staff to comply with the new reporting 
requirements in Sec.  226.42(g)(1).\65\ This revision is estimated to 
result in a one-time increase in burden by 22,680 hours.
---------------------------------------------------------------------------

    \64\ Based on loan transactions reported for 2009 under the Home 
Mortgage Disclosure Act (HMDA), 12 U.S.C. 2801 et seq.; 12 CFR part 
203, the Board estimates that 567 institutions engaged in such 
mortgage transactions are supervised by the Federal Reserve.
    \65\ The Board believes that, on a continuing basis, since 
financial institutions are familiar with the existing provisions 
Title XI of FIRREA (12 U.S.C. 3348) and the Interagency Guidelines 
(SR letter 94-55) which require similar reporting, implementation of 
requirements in Sec.  226.42(g) should not be overly burdensome.
---------------------------------------------------------------------------

    Accordingly, the Board estimates that the new reporting requirement 
will increase the total annual burden on a one-time basis for 
respondents supervised by the Federal Reserve from 1,497,362 to 
1,520,042 hours.\66\ This total estimated burden increase represents 
averages for all respondents supervised by the Federal Reserve. The 
Board expects that the amount of time required to implement each of the 
changes for a given institution may vary based on the size and 
complexity of the respondent.
---------------------------------------------------------------------------

    \66\ The burden estimate for this rulemaking does not include 
the burden addressing changes to implement the following provisions 
announced in separate rulemakings:
     Closed-End Mortgages (Docket No. R-1366) (74 FR 43232) 
(75 FR 58470),
     Home-Equity Lines of Credit (Docket No. R-1367) (74 FR 
43428), or
     Reverse Mortgages (Docket No. R-1390) (75 FR 58539).
---------------------------------------------------------------------------

    The other Federal financial institution supervisory agencies (the 
Office of the Comptroller of the Currency (OCC), the Office of Thrift 
Supervision (OTS), the Federal Deposit Insurance Corporation (FDIC), 
and the National Credit Union Administration (NCUA)) are responsible 
for estimating and reporting to OMB the total paperwork burden for the 
domestically chartered commercial banks, thrifts, and Federal credit 
unions and U.S. branches and agencies of foreign banks for which they 
have primary administrative enforcement jurisdiction under TILA Section 
108(a), 15 U.S.C. 1607(a). These agencies may, but are not required to, 
use the Board's methodology for estimating burden. Using the Board's 
method, the total current estimated annual burden for the approximately 
16,200 domestically chartered commercial banks, thrifts, and federal 
credit unions and U.S. branches and agencies of foreign banks 
supervised by the Board, OCC, OTS, FDIC, and NCUA under TILA would be 
approximately 21,813,445 hours. The final rule will impose a one-time 
increase in the estimated annual burden for the estimated 6,543 
institutions thought to engage in mortgage transactions by 261,720 
hours. The total annual burden is estimated to be 22,075,165 hours. The 
above estimates represent an average across all respondents and reflect 
variations between institutions based on their size, complexity, and 
practices.
    The Board has a continuing interest in the public's opinions of its 
collections of information. At any time, comments regarding the burden 
estimate or any other aspect of this collection of information, 
including suggestions for enhancing the quality of information 
collected and ways for reducing the burden on respondent. Comments on 
the collection of information may be sent to: Secretary, Board of 
Governors of the Federal Reserve System, 20th and C Streets, NW., 
Washington, DC 20551; and to the Office of Management and Budget, 
Paperwork Reduction Project (7100-0199), Washington, DC 20503.

List of Subjects in 12 CFR Part 226

    Consumer protection, Federal Reserve System, Mortgages, Truth in 
lending.

Authority and Issuance

0
For the reasons set forth in the preamble, the Board amends Regulation 
Z, 12 CFR part 226, as set forth below:

PART 226--TRUTH IN LENDING (REGULATION Z)

0
1. The authority citation for part 226 is revised to read as follows:

    Authority: 12 U.S.C. 3806; 15 U.S.C. 1604, 1637(c)(5), 1639(l); 
Pub. L. 111-24 Sec.  2, 123 Stat. 1734; Pub. L. 111-203 Sec.  
1472(a), 124 Stat. 1376, 2188 (to be codified at 15 U.S.C. 1639e).

Subpart E--Special Rules for Certain Home Mortgage Transactions


Sec.  226.36  [Amended]

0
2. Effective April 1, 2011, Sec.  226.36 is amended by removing and 
reserving paragraph (b).

0
3. Effective December 27, 2010, new section 226.42 is added to read as 
follows:


Sec.  226.42  Valuation independence.

    (a) Scope. This section applies to any consumer credit transaction 
secured by the consumer's principal dwelling.
    (b) Definitions. For purposes of this section:
    (1) ``Covered person'' means a creditor with respect to a covered 
transaction or a person that provides ``settlement services,'' as 
defined in 12 U.S.C. 2602(3) and implementing regulations, in 
connection with a covered transaction.
    (2) ``Covered transaction'' means an extension of consumer credit 
that is or will be secured by the consumer's principal dwelling, as 
defined in Sec.  226.2(a)(19).
    (3) ``Valuation'' means an estimate of the value of the consumer's 
principal dwelling in written or electronic form, other than one 
produced solely by an automated model or system.
    (4) ``Valuation management functions'' means:
    (i) Recruiting, selecting, or retaining a person to prepare a 
valuation;
    (ii) Contracting with or employing a person to prepare a valuation;
    (iii) Managing or overseeing the process of preparing a valuation, 
including by providing administrative services such as receiving orders 
for and receiving a valuation, submitting a completed valuation to 
creditors and underwriters, collecting fees from creditors and 
underwriters for services provided in connection with a valuation, and 
compensating a person that prepares valuations; or
    (iv) Reviewing or verifying the work of a person that prepares 
valuations.
    (c) Valuation of consumer's principal dwelling--(1) Coercion. In 
connection with a covered transaction, no covered person shall or shall 
attempt to directly or indirectly cause the value assigned to the 
consumer's principal dwelling to be based on any factor other than the 
independent judgment of a person that prepares valuations, through 
coercion, extortion, inducement, bribery, or intimidation of, 
compensation or instruction to, or collusion with a person that 
prepares valuations or performs valuation management functions.
    (i) Examples of actions that violate paragraph (c)(1) include:
    (A) Seeking to influence a person that prepares a valuation to 
report a minimum or maximum value for the consumer's principal 
dwelling;
    (B) Withholding or threatening to withhold timely payment to a 
person that prepares a valuation or performs valuation management 
functions because the person does not value the consumer's principal 
dwelling at or above a certain amount;
    (C) Implying to a person that prepares valuations that current or 
future retention of the person depends on the amount at which the 
person estimates the value of the consumer's principal dwelling;
    (D) Excluding a person that prepares a valuation from consideration 
for future engagement because the person reports a value for the 
consumer's principal dwelling that does not meet or exceed a 
predetermined threshold; and

[[Page 66581]]

    (E) Conditioning the compensation paid to a person that prepares a 
valuation on consummation of the covered transaction.
    (2) Mischaracterization of value--(i) Misrepresentation. In 
connection with a covered transaction, no person that prepares 
valuations shall materially misrepresent the value of the consumer's 
principal dwelling in a valuation. A misrepresentation is material for 
purposes of this paragraph (c)(2)(i) if it is likely to significantly 
affect the value assigned to the consumer's principal dwelling. A bona 
fide error shall not be a misrepresentation.
    (ii) Falsification or alteration. In connection with a covered 
transaction, no covered person shall falsify and no covered person 
other than a person that prepares valuations shall materially alter a 
valuation. An alteration is material for purposes of this paragraph 
(c)(2)(ii) if it is likely to significantly affect the value assigned 
to the consumer's principal dwelling.
    (iii) Inducement of mischaracterization. In connection with a 
covered transaction, no covered person shall induce a person to violate 
paragraph (c)(2)(i) or (ii) of this section.
    (3) Permitted actions. Examples of actions that do not violate 
paragraph (c)(1) or (c)(2) include:
    (i) Asking a person that prepares a valuation to consider 
additional, appropriate property information, including information 
about comparable properties, to make or support a valuation;
    (ii) Requesting that a person that prepares a valuation provide 
further detail, substantiation, or explanation for the person's 
conclusion about the value of the consumer's principal dwelling;
    (iii) Asking a person that prepares a valuation to correct errors 
in the valuation;
    (iv) Obtaining multiple valuations for the consumer's principal 
dwelling to select the most reliable valuation;
    (v) Withholding compensation due to breach of contract or 
substandard performance of services; and
    (vi) Taking action permitted or required by applicable federal or 
state statute, regulation, or agency guidance.
    (d) Prohibition on conflicts of interest--(1)(i) In general. No 
person preparing a valuation or performing valuation management 
functions for a covered transaction may have a direct or indirect 
interest, financial or otherwise, in the property or transaction for 
which the valuation is or will be performed.
    (ii) Employees and affiliates of creditors; providers of multiple 
settlement services. In any covered transaction, no person violates 
paragraph (d)(1)(i) of this section based solely on the fact that the 
person--
    (A) Is an employee or affiliate of the creditor; or
    (B) Provides a settlement service in addition to preparing 
valuations or performing valuation management functions, or based 
solely on the fact that the person's affiliate performs another 
settlement service.
    (2) Employees and affiliates of creditors with assets of more than 
$250 million for both of the past two calendar years. For any covered 
transaction in which the creditor had assets of more than $250 million 
as of December 31st for both of the past two calendar years, a person 
subject to paragraph (d)(1)(i) of this section who is employed by or 
affiliated with the creditor does not have a conflict of interest in 
violation of paragraph (d)(1)(i) of this section based on the person's 
employment or affiliate relationship with the creditor if:
    (i) The compensation of the person preparing a valuation or 
performing valuation management functions is not based on the value 
arrived at in any valuation;
    (ii) The person preparing a valuation or performing valuation 
management functions reports to a person who is not part of the 
creditor's loan production function, as defined in paragraph (d)(5)(i) 
of this section, and whose compensation is not based on the closing of 
the transaction to which the valuation relates; and
    (iii) No employee, officer or director in the creditor's loan 
production function, as defined in paragraph (d)(5)(i) of this section, 
is directly or indirectly involved in selecting, retaining, 
recommending or influencing the selection of the person to prepare a 
valuation or perform valuation management functions, or to be included 
in or excluded from a list of approved persons who prepare valuations 
or perform valuation management functions.
    (3) Employees and affiliates of creditors with assets of $250 
million or less for either of the past two calendar years. For any 
covered transaction in which the creditor had assets of $250 million or 
less as of December 31st for either of the past two calendar years, a 
person subject to paragraph (d)(1)(i) of this section who is employed 
by or affiliated with the creditor does not have a conflict of interest 
in violation of paragraph (d)(1)(i) of this section based on the 
person's employment or affiliate relationship with the creditor if:
    (i) The compensation of the person preparing a valuation or 
performing valuation management functions is not based the value 
arrived at in any valuation; and
    (ii) The creditor requires that any employee, officer or director 
of the creditor who orders, performs, or reviews a valuation for a 
covered transaction abstain from participating in any decision to 
approve, not approve, or set the terms of that transaction.
    (4) Providers of multiple settlement services. For any covered 
transaction, a person who prepares a valuation or performs valuation 
management functions in addition to performing another settlement 
service for the transaction, or whose affiliate performs another 
settlement service for the transaction, does not have a conflict of 
interest in violation of paragraph (d)(1)(i) of this section as a 
result of the person or the person's affiliate performing another 
settlement service for the transaction if:
    (i) The creditor had assets of more than $250 million as of 
December 31st for both of the past two calendar years and the 
conditions in paragraph (d)(2)(i)-(iii) are met; or
    (ii) The creditor had assets of $250 million or less as of December 
31st for either of the past two calendar years and the conditions in 
paragraph (d)(3)(i)-(ii) are met.
    (5) Definitions. For purposes of this paragraph, the following 
definitions apply:
    (i) Loan production function. The term ``loan production function'' 
means an employee, officer, director, department, division, or other 
unit of a creditor with responsibility for generating covered 
transactions, approving covered transactions, or both.
    (ii) Settlement service. The term ``settlement service'' has the 
same meaning as in the Real Estate Settlement Procedures Act, 12 U.S.C. 
2601 et seq.
    (iii) Affiliate. The term ``affiliate'' has the same meaning as in 
Regulation Y, 12 CFR 225.2(a).
    (e) When extension of credit prohibited. In connection with a 
covered transaction, a creditor that knows, at or before consummation, 
of a violation of paragraph (c) or (d) of this section in connection 
with a valuation shall not extend credit based on the valuation, unless 
the creditor documents that it has acted with reasonable diligence to 
determine that the valuation does not materially misstate or 
misrepresent the value of the consumer's principal dwelling. For 
purposes of this paragraph (e), a valuation materially misstates or 
misrepresents the value of the consumer's principal dwelling if the 
valuation contains a misstatement or misrepresentation that affects the 
credit

[[Page 66582]]

decision or the terms on which credit is extended.
    (f) Customary and reasonable compensation--(1) Requirement to 
provide customary and reasonable compensation to fee appraisers. In any 
covered transaction, the creditor and its agents shall compensate a fee 
appraiser for performing appraisal services at a rate that is customary 
and reasonable for comparable appraisal services performed in the 
geographic market of the property being appraised. For purposes of 
paragraph (f) of this section, ``agents'' of the creditor do not 
include any fee appraiser as defined in paragraph (f)(4)(i) of this 
section.
    (2) Presumption of compliance. A creditor and its agents shall be 
presumed to comply with paragraph (f)(1) if--
    (i) The creditor or its agents compensate the fee appraiser in an 
amount that is reasonably related to recent rates paid for comparable 
appraisal services performed in the geographic market of the property 
being appraised. In determining this amount, a creditor shall review 
the factors below and make any adjustments to recent rates paid in the 
relevant geographic market necessary to ensure that the amount of 
compensation is reasonable:
    (A) The type of property,
    (B) The scope of work,
    (C) The time in which the appraisal services are required to be 
performed,
    (D) Fee appraiser qualifications,
    (E) Fee appraiser experience and professional record, and
    (F) Fee appraiser work quality; and
    (ii) The creditor and its agents do not engage in any 
anticompetitive acts in violation of state or federal law that affect 
the compensation paid to fee appraisers, including--
    (A) Entering into any contracts or engaging in any conspiracies to 
restrain trade through methods such as price fixing or market 
allocation, as prohibited under section 1 of the Sherman Antitrust Act, 
15 U.S.C. 1, or any other relevant antitrust laws; or
    (B) Engaging in any acts of monopolization such as restricting any 
person from entering the relevant geographic market or causing any 
person to leave the relevant geographic market, as prohibited under 
section 2 of the Sherman Antitrust Act, 15 U.S.C. 2, or any other 
relevant antitrust laws.
    (3) Alternative presumption of compliance. A creditor and its 
agents shall be presumed to comply with paragraph (f)(1) if the 
creditor or its agents determine the amount of compensation paid to the 
fee appraiser by relying on information about rates that:
    (i) Is based on objective third-party information, including fee 
schedules, studies, and surveys prepared by independent third parties 
such as government agencies, academic institutions, and private 
research firms;
    (ii) Is based on recent rates paid to a representative sample of 
providers of appraisal services in the geographic market of the 
property being appraised or the fee schedules of those providers; and
    (iii) In the case of information based on fee schedules, studies, 
and surveys, such fee schedules, studies, or surveys, or the 
information derived therefrom, excludes compensation paid to fee 
appraisers for appraisals ordered by appraisal management companies, as 
defined in paragraph (f)(4)(iii) of this section.
    (4) Definitions. For purposes of this paragraph (f), the following 
definitions apply:
    (i) Fee appraiser. The term ``fee appraiser'' means--
    (A) A natural person who is a state-licensed or state-certified 
appraiser and receives a fee for performing an appraisal, but who is 
not an employee of the person engaging the appraiser; or
    (B) An organization that, in the ordinary course of business, 
employs state-licensed or state-certified appraisers to perform 
appraisals, receives a fee for performing appraisals, and is not 
subject to the requirements of section 1124 of the Financial 
Institutions Reform, Recovery, and Enforcement Act of 1989 (12 U.S.C. 
3331 et seq.).
    (ii) Appraisal services. The term ``appraisal services'' means the 
services required to perform an appraisal, including defining the scope 
of work, inspecting the property, reviewing necessary and appropriate 
public and private data sources (for example, multiple listing 
services, tax assessment records and public land records), developing 
and rendering an opinion of value, and preparing and submitting the 
appraisal report.
    (iii) Appraisal management company. The term ``appraisal management 
company'' means any person authorized to perform one or more of the 
following actions on behalf of the creditor--
    (A) Recruit, select, and retain fee appraisers;
    (B) Contract with fee appraisers to perform appraisal services;
    (C) Manage the process of having an appraisal performed, including 
providing administrative services such as receiving appraisal orders 
and appraisal reports, submitting completed appraisal reports to 
creditors and underwriters, collecting fees from creditors and 
underwriters for services provided, and compensating fee appraisers for 
services performed; or
    (D) Review and verify the work of fee appraisers.
    (g) Mandatory reporting--(1) Reporting required. Any covered person 
that reasonably believes an appraiser has not complied with the Uniform 
Standards of Professional Appraisal Practice or ethical or professional 
requirements for appraisers under applicable state or federal statutes 
or regulations shall refer the matter to the appropriate state agency 
if the failure to comply is material. For purposes of this paragraph 
(g)(1), a failure to comply is material if it is likely to 
significantly affect the value assigned to the consumer's principal 
dwelling.
    (2) Timing of reporting. A covered person shall notify the 
appropriate state agency within a reasonable period of time after the 
person determines that there is a reasonable basis to believe that a 
failure to comply required to be reported under paragraph (g)(1) of 
this section has occurred.
    (3) Definition. For purposes of this paragraph (g), ``state 
agency'' means ``state appraiser certifying and licensing agency'' 
under 12 U.S.C. 3350(1) and any implementing regulations. The 
appropriate state agency to which a covered person must refer a matter 
under paragraph (g)(1) of this section is the agency for the state in 
which the consumer's principal dwelling is located.

0
4. In Supplement I to Part 226:
0
A. Under Section 226.1--Authority, Purpose, Coverage, Organization, 
Enforcement and Liability, paragraph 1(d)(5)-1 is revised.
0
B. Under Section 226.5b--Requirements for Home-equity Plans, new 
paragraph 7 is added.
0
C. Effective April 1, 2011, under Section 226.36--Prohibited Acts or 
Practices in Connection with Credit Secured by a Consumer's Principal 
Dwelling, the headings 36(b) Misrepresentation of the value of 
consumer's principal dwelling and 36(b)(2) When extension of credit 
prohibited and paragraphs 36(b)(2)-1 and -2 are removed.
0
D. Effective December 27, 2010, new Section 226.42 Valuation 
Independence is added.

Supplement I to Part 226--Official Staff Interpretations

* * * * *

Section 226.1--Authority, Purpose, Coverage, Organization, 
Enforcement and Liability

* * * * *
    Paragraph 1(d)(5).

[[Page 66583]]

    1. Effective dates.
    i. The Board's revisions published on July 30, 2008 (the ``final 
rules'') apply to covered loans (including refinance loans and 
assumptions considered new transactions under Sec.  226.20) for 
which the creditor receives an application on or after October 1, 
2009, except for the final rules on advertising, escrows, and loan 
servicing. But see comment 1(d)(3)-1. The final rules on escrow in 
Sec.  226.35(b)(3) are effective for covered loans (including 
refinancings and assumptions in Sec.  226.20) for which the creditor 
receives an application on or after April 1, 2010; but for such 
loans secured by manufactured housing on or after October 1, 2010. 
The final rules applicable to servicers in Sec.  226.36(c) apply to 
all covered loans serviced on or after October 1, 2009. The final 
rules on advertising apply to advertisements occurring on or after 
October 1, 2009. For example, a radio ad occurs on the date it is 
first broadcast; a solicitation occurs on the date it is mailed to 
the consumer. The following examples illustrate the application of 
the effective dates for the final rules.
    A. General. A refinancing or assumption as defined in Sec.  
226.20(a) or (b) is a new transaction and is covered by a provision 
of the final rules if the creditor receives an application for the 
transaction on or after that provision's effective date. For 
example, if a creditor receives an application for a refinance loan 
covered by Sec.  226.35(a) on or after October 1, 2009, and the 
refinance loan is consummated on October 15, 2009, the provision 
restricting prepayment penalties in Sec.  226.35(b)(2) applies. 
However, if the transaction were a modification of an existing 
obligation's terms that does not constitute a refinance loan under 
Sec.  226.20(a), the final rules, including for example the 
restriction on prepayment penalties, would not apply.
    B. Escrows. Assume a consumer applies for a refinance loan to be 
secured by a dwelling (that is not a manufactured home) on March 15, 
2010, and the loan is consummated on April 2, 2010. The escrow rule 
in Sec.  226.35(b)(3) does not apply.
    C. Servicing. Assume that a consumer applies for a new loan on 
August 1, 2009. The loan is consummated on September 1, 2009. The 
servicing rules in Sec.  226.36(c) apply to the servicing of that 
loan as of October 1, 2009.
    (ii) The interim final rule on appraisal independence in Sec.  
226.42 published on October 28, 2010 is mandatory on April 1, 2011, 
for open- and closed-end extensions of consumer credit secured by 
the consumer's principal dwelling. Section 226.36(b), which is 
substantially similar to Sec.  226.42(b) and (e), is removed 
effective April 1, 2011. Applications for closed-end extensions of 
credit secured by the consumer's principal dwelling that are 
received by creditors before April 1, 2011, are subject to Sec.  
226.36(b) regardless of the date on which the transaction is 
consummated. However, parties subject to Sec.  226.36(b) may, at 
their option, choose to comply with Sec.  226.42 instead of Sec.  
226.36(b), for applications received before April 1, 2011. Thus, an 
application for a closed-end extension of credit secured by the 
consumer's principal dwelling that is received by a creditor on 
March 20, 2011, and consummated on May 1, 2011, is subject to Sec.  
226.36(b), however, the creditor may choose to comply with Sec.  
226.42 instead. For an application for open- or closed-end credit 
secured by the consumer's principal dwelling that is received on or 
after April 1, 2011, the creditor must comply with Sec.  226.42.
* * * * *

Section 226.5b--Requirements for Home-Equity Plans

* * * * *
    7. Appraisals and other valuations. For consumer credit 
transactions subject to Sec.  226.5b and secured by the consumer's 
principal dwelling, creditors and other persons must comply with the 
requirements for appraisals and other valuations under Sec.  226.42.
* * * * *

Section 226.42--Valuation Independence

    42(a) Scope.
    1. Open- and closed-end credit. Section 226.42 applies to both 
open-end and closed-end transactions secured by the consumer's 
principal dwelling.
    2. Consumer's principal dwelling. Section 226.42 applies only if 
the dwelling that will secure a consumer credit transaction is the 
principal dwelling of the consumer who obtains credit.
    42(b) Definitions.
    Paragraph 42(b)(1).
    1. Examples of covered persons. ``Covered persons'' include 
creditors, mortgage brokers, appraisers, appraisal management 
companies, real estate agents, and other persons that provide 
``settlement services'' as defined under the Real Estate Settlement 
Procedures Act and implementing regulations. See 12 U.S.C. 2602(3).
    2. Examples of persons not covered. The following persons are 
not ``covered persons'' (unless, of course, they are creditors with 
respect to a covered transaction or perform ``settlement services'' 
in connection with a covered transaction):
    i. The consumer who obtains credit through a covered 
transaction.
    ii. A person secondarily liable for a covered transaction, such 
as a guarantor.
    iii. A person that resides in or will reside in the consumer's 
principal dwelling but will not be liable on the covered 
transaction, such as a non-obligor spouse.
    Paragraph 42(b)(2).
    1. Principal dwelling. The term ``principal dwelling'' has the 
same meaning under Sec.  226.42(b) as under Sec. Sec.  226.2(a)(24), 
226.15(a), and 226.23(a). See comments 2(a)(24)-3, 15(a)-5, and 
23(a)-3.
    Paragraph 42(b)(3).
    1. Valuation. A ``valuation'' is an estimate of value prepared 
by a natural person, such as an appraisal report prepared by an 
appraiser or an estimate of market value prepared by a real estate 
agent. The term includes photographic or other information included 
with a written estimate of value. A ``valuation'' includes an 
estimate provided or viewed electronically, such as an estimate 
transmitted via electronic mail or viewed using a computer.
    2. Automated model or system. A ``valuation'' does not include 
an estimate of value produced exclusively using an automated model 
or system. However, a ``valuation'' includes an estimate of value 
developed by a natural person based in part on an estimate of value 
produced using an automated model or system.
    3. Estimate. An estimate of the value of the consumer's 
principal dwelling includes an estimate of a range of values for the 
consumer's principal dwelling.
    42(c) Valuation for consumer's principal dwelling.
    42(c)(1) Coercion.
    1. State law. The terms ``coercion,'' ``extortion,'' 
``inducement,'' ``bribery,'' ``intimidation,'' ``compensation,'' 
``instruction,'' and ``collusion'' have the meanings given to them 
by applicable state law or contract. See Sec.  226.2(b)(3).
    2. Purpose. A covered person does not violate Sec.  226.42(c)(1) 
if the person does not engage in an act or practice set forth in 
Sec.  226.42(c)(1) for the purpose of causing the value assigned to 
the consumer's principal dwelling to be based on a factor other than 
the independent judgment of a person that prepares valuations. For 
example, requesting that a person that prepares a valuation take 
certain actions, such as consider additional, appropriate property 
information, does not violate Sec.  226.42(c), because such request 
does not supplant the independent judgment of the person that 
prepares a valuation. See Sec.  226.42(c)(3)(i). A covered person 
also may provide incentives, such as additional compensation, to a 
person that prepares valuations or performs valuation management 
functions under Sec.  226.42(c)(1), as long as the covered person 
does not cause or attempt to cause the value assigned to the 
consumer's principal dwelling to be based on a factor other than the 
independent judgment of the person that prepares valuations.
    3. Person that prepares valuations. For purposes of Sec.  
226.42, the term ``valuation'' includes an estimate of value 
regardless of whether it is an appraisal prepared by a state-
certified or -licensed appraiser. See comment 42(b)(5)-1. A person 
that prepares valuations may or may not be a state-licensed or 
state-certified appraiser. Thus a person violates Sec.  226.42(c)(1) 
by engaging in prohibited acts or practices directed towards any 
person that prepares or may prepare a valuation of the consumer's 
principal dwelling for a covered transaction. For example, a person 
violates Sec.  226.42(c)(1) by seeking to coerce a real estate agent 
to assign a value to the consumer's principal dwelling based on a 
factor other than the independent judgment of the real estate agent, 
in connection with a covered transaction.
    4. Indirect acts or practices. Section 226.42(c)(1) prohibits 
both direct and indirect attempts to cause the value assigned to the 
consumer's principal dwelling to be based on a factor other than the 
independent judgment of the person that prepares the valuation, 
through coercion and certain other acts and practices. For example, 
a creditor violates Sec.  226.42(c)(1) if the creditor attempts to 
cause the value an appraiser engaged by an appraisal management 
company assigns to the consumer's principal dwelling to be

[[Page 66584]]

based on a factor other than the appraiser's independent judgment, 
by threatening to withhold future business from a title company 
affiliated with the appraisal management company unless the 
appraiser assigns a value to the dwelling that meets or exceed a 
minimum threshold.
    Paragraph 42(c)(1)(i).
    1. Applicability of examples. Section 226.42(c)(1)(i) provides 
examples of coercion of a person that prepares valuations. However, 
Sec.  226.42(c)(1)(i) also applies to coercion of a person that 
performs valuation management functions or its affiliate. See Sec.  
226.42(c)(1); comment 42(c)(1)-4.
    2. Specific value or predetermined threshold. As used in the 
examples of actions prohibited under Sec.  226.42(c)(1), a 
``specific value'' and a ``predetermined threshold'' include a 
predetermined minimum, maximum, or range of values. Further, 
although the examples assume a covered person's prohibited actions 
are designed to cause the value assigned to the consumer's principal 
dwelling to equal or exceed a certain amount, the rule applies 
equally to cases where a covered person's prohibited actions are 
designed to cause the value assigned to the dwelling to be below a 
certain amount.
    42(c)(2) Mischaracterization of value.
    42(c)(2)(i) Misrepresentation.
    1. Opinion of value. Section 226.42(c)(2)(i) prohibits a person 
that performs valuations from misrepresenting the value of the 
consumer's principal dwelling in a valuation. Such person 
misrepresents the value of the consumer's principal dwelling by 
assigning a value to such dwelling that does not reflect the 
person's opinion of the value of such dwelling. For example, an 
appraiser misrepresents the value of the consumer's principal 
dwelling if the appraiser estimates that the value of such dwelling 
is $250,000 applying the standards required by the Uniform Standards 
of Professional Appraisal Standards but assigns a value of $300,000 
to such dwelling in a Uniform Residential Appraisal Report.
    42(c)(2)(iii) Inducement of mischaracterization.
    1. Inducement. A covered person may not induce a person to 
materially misrepresent the value of the consumer's principal 
dwelling in a valuation or to falsify or alter a valuation. For 
example, a loan originator may not coerce a loan underwriter to 
alter an appraisal report to increase the value assigned to the 
consumer's principal dwelling.
    42(d) Prohibition on conflicts of interest.
    42(d)(1)(i) In general.
    1. Prohibited interest in the property. A person preparing a 
valuation or performing valuation management functions for a covered 
transaction has a prohibited interest in the property under 
paragraph (d)(1)(i) if the person has any ownership or reasonably 
foreseeable ownership interest in the property. For example, a 
person who seeks a mortgage to purchase a home has a reasonably 
foreseeable ownership interest in the property securing the 
mortgage, and therefore is not permitted to prepare the valuation or 
perform valuation management functions for that mortgage transaction 
under paragraph (d)(1)(i).
    2. Prohibited interest in the transaction. A person preparing a 
valuation or performing valuation management functions has a 
prohibited interest in the transaction under paragraph (d)(1)(i) if 
that person or an affiliate of that person also serves as a loan 
officer of the creditor, mortgage broker, real estate broker, or 
other settlement service provider for the transaction and the 
conditions under paragraph (d)(4) are not satisfied. A person also 
has a prohibited interest in the transaction if the person is 
compensated or otherwise receives financial or other benefits based 
on whether the transaction is consummated. Under these 
circumstances, the person is not permitted to prepare the valuation 
or perform valuation management functions for that transaction under 
paragraph (d)(1)(i).
    42(d)(1)(ii) Employees and affiliates of creditors; providers of 
multiple settlement services.
    1. Employees and affiliates of creditors. In general, a creditor 
may use employees or affiliates to prepare a valuation or perform 
valuation management functions without violating paragraph 
(d)(1)(i). However, whether an employee or affiliate has a direct or 
indirect interest in the property or transaction that creates a 
prohibited conflict of interest under paragraph (d)(1)(i) depends on 
the facts and circumstances of a particular case, including the 
structure of the employment or affiliate relationship.
    2. Providers of multiple settlement services. In general, a 
person who prepares a valuation or perform valuation management 
functions for a covered transaction may perform another settlement 
service for the same transaction, or the person's affiliate may 
perform another settlement service, without violating paragraph 
(d)(1)(i). However, whether the person has a direct or indirect 
interest in the property or transaction that creates a prohibited 
conflict of interest under paragraph (d)(1)(i) depends on the facts 
and circumstances of a particular case.
    42(d)(2) Employees and affiliates of creditors with assets of 
more than $250 million for both of the past two calendar years.
    1. Safe harbor. A person who a prepares valuation or performs 
valuation management functions for a covered transaction and is an 
employee or affiliate of the creditor will not be deemed to have an 
interest prohibited under paragraph (d)(1)(i) on the basis of the 
employment or affiliate relationship with the creditor if the 
conditions in paragraph (d)(2) are satisfied. Even if the conditions 
in paragraph (d)(2) are satisfied, however, the person may have a 
prohibited conflict of interest on other grounds, such as if the 
person performs a valuation for a purchase-money mortgage 
transaction in which the person is the buyer or seller of the 
subject property. Thus, in general, in any covered transaction in 
which the creditor had assets of more than $250 million for both of 
the past two years, the creditor may use its own employee or 
affiliate to prepare a valuation or perform valuation management 
functions for a particular transaction, as long as the conditions 
described in paragraph (d)(2) are satisfied. If the conditions in 
paragraph (d)(2) are not satisfied, whether a person preparing a 
valuation or performing valuation management functions has violated 
paragraph (d)(1)(i) depends on all of the facts and circumstances.
    Paragraph 42(d)(2)(ii).
    1. Prohibition on reporting to a person who is part of the 
creditor's loan production function. To qualify for the safe harbor 
under paragraph (d)(2), the person preparing a valuation or 
performing valuation management functions may not report to a person 
who is part of the creditor's loan production function (as defined 
in paragraph (d)(4)(ii) and comment 42(d)(4)(ii)-1). For example, if 
a person preparing a valuation is directly supervised or managed by 
a loan officer or other person in the creditor's loan production 
function, or by a person who is directly supervised or managed by a 
loan officer, the condition under paragraph (d)(2)(ii) is not met.
    2. Prohibition on reporting to a person whose compensation is 
based on the transaction closing. To qualify for the safe harbor 
under paragraph (d)(2), the person preparing a valuation or 
performing valuation management functions may not report to a person 
whose compensation is based on the closing of the transaction to 
which the valuation relates. For example, assume an appraisal 
management company performs valuation management functions for a 
transaction in which the creditor is an affiliate of the appraisal 
management company. If the employee of the appraisal management 
company who is in charge of valuation management functions for that 
transaction is supervised by a person who earns a commission or 
bonus based on the percentage of closed transactions for which the 
appraisal management company provides valuation management 
functions, the condition under paragraph (d)(2)(ii) is not met.
    Paragraph 42(d)(2)(iii).
    1. Direct or indirect involvement in selection of person who 
prepares a valuation. In any covered transaction, the safe harbor 
under paragraph (d)(2) is available if, among other things, no 
employee, officer or director in the creditor's loan production 
function (as defined in paragraph (d)(4)(ii) and comment 
42(d)(4)(ii)-1) is directly or indirectly involved in selecting, 
retaining, recommending or influencing the selection of the person 
to prepare a valuation or perform valuation management functions, or 
to be included in or excluded from a list or panel of approved 
persons who prepare valuations or perform valuation management 
functions. For example, if the person who selects the person to 
prepare the valuation for a covered transaction is supervised by an 
employee of the creditor who also supervises loan officers, the 
condition in paragraph (d)(2)(iii) is not met.
    42(d)(3) Employees and affiliates of creditors with assets of 
$250 million or less for either of the past two calendar years.
    1. Safe harbor. A person who prepares a valuation or performs 
valuation management functions for a covered transaction and is an 
employee or affiliate of the creditor will not be deemed to have 
interest prohibited under paragraph (d)(1)(i) on the basis of the 
employment or affiliate relationship with the

[[Page 66585]]

creditor if the conditions in paragraph (d)(2) are satisfied. Even 
if the conditions in paragraph (d)(2) are satisfied, however, the 
person may have a prohibited conflict of interest on other grounds, 
such as if the person performs a valuation for a purchase-money 
mortgage transaction in which the person is the buyer or seller of 
the subject property. Thus, in general, in any covered transaction 
in which the creditor had assets of $250 million or less for either 
of the past two calendar years, the creditor may use its own 
employee or affiliate to prepare a valuation or perform valuation 
management functions for a particular transaction, as long as the 
conditions described in paragraph (d)(3) are satisfied. If the 
conditions in paragraph (d)(3) are not satisfied, whether a person 
preparing valuations or performing valuation management functions 
has violated paragraph (d)(1)(i) depends on all of the facts and 
circumstances.
    42(d)(4) Providers of multiple settlement services.
    Paragraph 42(d)(4)(i).
    1. Safe harbor in transactions in which the creditor had assets 
of more than $250 million for both of the past two calendar years. A 
person preparing a valuation or performing valuation management 
functions in addition to performing another settlement service for 
the same transaction, or whose affiliate performs another settlement 
service for the transaction, will not be deemed to have interest 
prohibited under paragraph (d)(1)(i) as a result of the person or 
the person's affiliate performing another settlement service if the 
conditions in paragraph (d)(4)(i) are satisfied. Even if the 
conditions in paragraph (d)(4)(i) are satisfied, however, the person 
may have a prohibited conflict of interest on other grounds, such as 
if the person performs a valuation for a purchase-money mortgage 
transaction in which the person is the buyer or seller of the 
subject property. Thus, in general, in any covered transaction with 
a creditor that had assets of more than $250 million for the past 
two years, a person preparing a valuation or performing valuation 
management functions, or its affiliate, may provide another 
settlement service for the same transaction, as long as the 
conditions described in paragraph (d)(4)(i) are satisfied. If the 
conditions in paragraph (d)(4)(i) are not satisfied, whether a 
person preparing valuations or performing valuation management 
functions has violated paragraph (d)(1)(i) depends on all of the 
facts and circumstances.
    2. Reporting. The safe harbor under paragraph (d)(4)(i) is 
available if the condition specified in paragraph (d)(2)(ii), among 
others, is met. Paragraph (d)(2)(ii) prohibits a person preparing a 
valuation or performing valuation management functions from 
reporting to a person whose compensation is based on the closing of 
the transaction to which the valuation relates. For example, assume 
an appraisal management company performs both valuation management 
functions and title services, including providing title insurance, 
for the same covered transaction. If the appraisal management 
company employee in charge of valuation management functions for the 
transaction is supervised by the title insurance agent in the 
transaction, whose compensation depends in whole or in part on 
whether title insurance is sold at the loan closing, the condition 
in paragraph (d)(2)(ii) is not met.
    Paragraph 42(d)(4)(ii).
    1. Safe harbor in transactions in which the creditor had assets 
of $250 million or less for either of the past two calendar years. A 
person preparing a valuation or performing valuation management 
functions in addition to performing another settlement service for 
the same transaction, or whose affiliate performs another settlement 
service for the transaction, will not be deemed to have an interest 
prohibited under paragraph (d)(1)(i) as a result of the person or 
the person's affiliate performing another settlement service if the 
conditions in paragraph (d)(4)(ii) are satisfied. Even if the 
conditions in paragraph (d)(4)(ii) are satisfied, however, the 
person may have a prohibited conflict of interest on other grounds, 
such as if the person performs a valuation for a purchase-money 
mortgage transaction in which the person is the buyer or seller of 
the subject property. Thus, in general, in any covered transaction 
in which the creditor had assets of $250 million or less for either 
of the past two years, a person preparing a valuation or performing 
valuation management functions, or its affiliate, may provide other 
settlement services for the same transaction, as long as the 
conditions described in paragraph (d)(4)(i) are satisfied. If the 
conditions in paragraph (d)(4)(i) are not satisfied, whether a 
person preparing valuations or performing valuation management 
functions has violated paragraph (d)(1)(i) depends on all of the 
facts and circumstances.
    42(d)(5) Definitions.
    Paragraph 42(d)(5)(i).
    1. Loan production function. One condition of the safe harbors 
under paragraphs (d)(3) and (d)(4)(ii), involving transactions in 
which the creditor had assets of more than $250 million for both of 
the past two calendar years, is that the person who prepares a 
valuation or performs valuation management functions must report to 
a person who is not part of the creditor's ``loan production 
function.'' A creditor's ``loan production function'' includes 
retail sales staff, loan officers, and any other employee of the 
creditor with responsibility for taking a loan application, offering 
or negotiating loan terms or whose compensation is based on loan 
processing volume. A person is not considered part of a creditor's 
loan production function solely because part of the person's 
compensation includes a general bonus not tied to specific 
transactions or a specific percentage of transactions closing, or a 
profit sharing plan that benefits all employees. A person solely 
responsible for credit administration or risk management is also not 
considered part of a creditor's loan production function. Credit 
administration and risk management includes, for example, loan 
underwriting, loan closing functions (e.g., loan documentation), 
disbursing funds, collecting mortgage payments and otherwise 
servicing the loan (e.g., escrow management and payment of taxes), 
monitoring loan performance, and foreclosure processing.
    42(e) When extension of credit prohibited.
    1. Reasonable diligence. A creditor will be deemed to have acted 
with reasonable diligence under Sec.  226.42(e) if the creditor 
extends credit based on a valuation other than the valuation subject 
to the restriction in Sec.  226.42(e). A creditor need not obtain a 
second valuation to document that the creditor has acted with 
reasonable diligence to determine that the valuation does not 
materially misstate or misrepresent the value of the consumer's 
principal dwelling, however. For example, assume an appraiser 
notifies a creditor before consummation that a loan originator 
attempted to cause the value assigned to the consumer's principal 
dwelling to be based on a factor other than the appraiser's 
independent judgment, through coercion. If the creditor reasonably 
determines and documents that the appraisal does not materially 
misstate or misrepresent the value of the consumer's principal 
dwelling, for purposes of Sec.  226.42(e), the creditor may extend 
credit based on the appraisal.
    42(f) Customary and reasonable compensation.
    42(f)(1) Requirement to provide customary and reasonable 
compensation to fee appraisers.
    1. Agents of the creditor. Whether a person is an agent of the 
creditor is determined by applicable law; however, a ``fee 
appraiser'' as defined in paragraph (f)(4)(i) is not an agent of the 
creditor for purposes of paragraph (f), and therefore is not 
required to pay other fee appraisers customary and reasonable 
compensation under paragraph (f).
    2. Geographic market. For purposes of paragraph (f), the 
``geographic market of the property being appraised'' means the 
geographic market relevant to compensation levels for appraisal 
services. Depending on the facts and circumstances, the relevant 
geographic market may be a state, metropolitan statistical area 
(MSA), metropolitan division, area outside of an MSA, county, or 
other geographic area. For example, assume that fee appraisers who 
normally work only in County A generally accept $400 to appraise an 
attached single-family property in County A. Assume also that very 
few or no fee appraisers who work only in contiguous County B will 
accept a rate comparable to $400 to appraise an attached single-
family property in County A. The relevant geographic market for an 
attached single-family property in County A may reasonably be 
defined as County A. On the other hand, assume that fee appraisers 
who normally work only in County A generally accept $400 to appraise 
an attached single-family property in County A. Assume also that 
many fee appraisers who normally work only in contiguous County B 
will accept a rate comparable to $400 to appraise an attached 
single-family property in County A. The relevant geographic market 
for an attached single-family property in County A may reasonably be 
defined to include both County A and County B.
    3. Failure to perform contractual obligations. Paragraph (f)(1) 
does not prohibit a creditor or its agent from withholding 
compensation from a fee appraiser for failing to meet contractual 
obligations, such as

[[Page 66586]]

failing to provide the appraisal report or violating state or 
federal appraisal laws in performing the appraisal.
    4. Agreement that fee is ``customary and reasonable.'' A 
document signed by a fee appraiser indicating that the appraiser 
agrees that the fee paid to the appraiser is ``customary and 
reasonable'' does not by itself create a presumption of compliance 
with Sec.  226.42(f) or otherwise satisfy the requirement to pay a 
fee appraiser at a customary and reasonable rate.
    5. Volume-based discounts. Section 226.42(f)(1) does not 
prohibit a fee appraiser and a creditor (or its agent) from agreeing 
to compensation based on transaction volume, so long as the 
compensation is customary and reasonable. For example, assume that a 
fee appraiser typically receives $300 for appraisals from creditors 
with whom it does business; the fee appraiser, however, agrees to 
reduce the fee to $280 for a particular creditor, in exchange for a 
minimum number of assignments from the creditor.
    42(f)(2) Presumption of compliance.
    1. In general. A creditor and its agent are presumed to comply 
with paragraph (f)(1) if the creditor or its agent meets the 
conditions specified in paragraph (f)(2) in determining the 
compensation paid to a fee appraiser. These conditions are not 
requirements for compliance but, if met, create a presumption that 
the creditor or its agent has complied with Sec.  226.42(f)(1). A 
person may rebut this presumption with evidence that the amount of 
compensation paid to a fee appraiser was not customary and 
reasonable for reasons unrelated to the conditions in paragraph 
(f)(2)(i) or (f)(2)(ii). If a creditor or its agent does not meet 
one of the non-required conditions set forth in paragraph (f)(2), 
the creditor's and its agent's compliance with paragraph (f)(1) is 
determined based on all of the facts and circumstances without a 
presumption of either compliance or violation.
    42(f)(2)(i) Presumption of compliance.
    1. Two-step process for determining customary and reasonable 
rates. Paragraph (f)(2)(i) sets forth a two-step process for a 
creditor or its agent to determine the amount of compensation that 
is customary and reasonable in a given transaction. First, the 
creditor or its agent must identify recent rates paid for comparable 
appraisal services in the relevant geographic market. Second, once 
recent rates have been identified, the creditor or its agent must 
review the factors listed in paragraph (f)(2)(i)(A)-(F) and make any 
appropriate adjustments to the rates to ensure that the amount of 
compensation is reasonable.
    2. Identifying recent rates. Whether rates may reasonably be 
considered ``recent'' depends on the facts and circumstances. 
Generally, ``recent'' rates would include rates charged within one 
year of the creditor's or its agent's reliance on this information 
to qualify for the presumption of compliance under paragraph (f)(2). 
For purposes of the presumption of compliance under paragraph 
(f)(2), a creditor or its agent may gather information about recent 
rates by using a reasonable method that provides information about 
rates for appraisal services in the geographic market of the 
relevant property; a creditor or its agent may, but is not required 
to, use or perform a fee survey.
    3. Accounting for factors. Once recent rates in the relevant 
geographic market have been identified, the creditor or its agent 
must review the factors listed in paragraph (f)(2)(i)(A)-(F) to 
determine the appropriate rate for the current transaction. For 
example, if the recent rates identified by the creditor or its agent 
were solely for appraisal assignments in which the scope of work 
required consideration of two comparable properties, but the current 
transaction required an appraisal that considered three comparable 
properties, the creditor or its agent might reasonably adjust the 
rate by an amount that accounts for the increased scope of work, in 
addition to making any other appropriate adjustments based on the 
remaining factors.
    Paragraph 42(f)(2)(i)(A).
    1. Type of property. The type of property may include, for 
example, detached or attached single-family property, condominium or 
cooperative unit, or manufactured home.
    Paragraph 42(f)(2)(i)(B).
    1. Scope of work. The scope of work may include, for example, 
the type of inspection (such as exterior only or both interior and 
exterior) or number of comparables required for the appraisal.
    Paragraph 42(f)(2)(i)(D).
    1. Fee appraiser qualifications. The fee appraiser 
qualifications may include, for example, a state license or 
certification in accordance with the minimum criteria issued by the 
Appraisal Qualifications Board of the Appraisal Foundation, or 
completion of continuing education courses on effective appraisal 
methods and related topics.
    2. Membership in professional appraisal organization. Paragraph 
42(f)(2)(i)(D) does not override state or federal laws prohibiting 
the exclusion of an appraiser from consideration for an assignment 
solely by virtue of membership or lack of membership in any 
particular appraisal organization. See, e.g., 12 CFR 225.66(a).
    Paragraph 42(f)(2)(i)(E).
    1. Fee appraiser experience and professional record. The fee 
appraiser's level of experience may include, for example, the fee 
appraiser's years of service as a state-licensed or state-certified 
appraiser, or years of service appraising properties in a particular 
geographical area or of a particular type. The fee appraiser's 
professional record may include, for example, whether the fee 
appraiser has a past record of suspensions, disqualifications, 
debarments, or judgments for waste, fraud, abuse or breach of legal 
or professional standards.
    Paragraph 42(f)(2)(i)(F).
    1. Fee appraiser work quality. The fee appraiser's work quality 
may include, for example, the past quality of appraisals performed 
by the appraiser based on the written performance and review 
criteria of the creditor or agent of the creditor.
    Paragraph 42(f)(2)(ii).
    1. Restraining trade. Under Sec.  226.42(f)(2)(ii)(A), creditor 
or its agent would not qualify for the presumption of compliance 
under paragraph (f)(2) if it engaged in any acts to restrain trade 
such as entering into a price fixing or market allocation agreement 
that affect the compensation of fee appraisers. For example, if 
appraisal management company A and appraisal management company B 
agreed to compensate fee appraisers at no more than a specific rate 
or range of rates, neither appraisal management company would 
qualify for the presumption of compliance. Likewise, if appraisal 
management company A and appraisal management company B agreed that 
appraisal management company A would limit its business to a certain 
portion of the relevant geographic market and appraisal management 
company B would limit its business to a different portion of the 
relevant geographic market, and as a result each appraisal 
management company unilaterally set the fees paid to fee appraisers 
in their respective portions of the market, neither appraisal 
management company would qualify for the presumption of compliance 
under paragraph (f)(2).
    2. Acts of monopolization. Under Sec.  226.42(f)(2)(ii)(B), a 
creditor or its agent would not qualify for the presumption of 
compliance under paragraph (f)(2) if it engaged in any act of 
monopolization such as restricting entry into the relevant 
geographic market or causing any person to leave the relevant 
geographic market, resulting in anticompetitive effects that affect 
the compensation paid to fee appraisers. For example, if only one 
appraisal management company exists or is predominant in a 
particular market area, that appraisal management company might not 
qualify for the presumption of compliance if it entered into 
exclusivity agreements with all creditors in the market or all fee 
appraisers in the market, such that other appraisal management 
companies had to leave or could not enter the market. Whether this 
behavior would be considered an anticompetitive act that affects the 
compensation paid to fee appraisers depends on all of the facts and 
circumstances, including applicable law.
    42(f)(3) Alternative presumption of compliance.
    1. In general. A creditor and its agent are presumed to comply 
with paragraph (f)(1) if the creditor or its agent determine the 
compensation paid to a fee appraiser based on information about 
customary and reasonable rates that satisfies the conditions in 
paragraph (f)(3) for that information. Reliance on information 
satisfying the conditions in paragraph (f)(3) is not a requirement 
for compliance with paragraph (f)(1), but creates a presumption that 
the creditor or its agent has complied. A person may rebut this 
presumption with evidence that the rate of compensation paid to a 
fee appraiser by the creditor or its agent is not customary and 
reasonable based on facts or information other than third-party 
information satisfying the conditions of this paragraph (f)(3). If a 
creditor or its agent does not rely on information that meets the 
conditions in paragraph (f)(3), the creditor's and its agent's 
compliance with paragraph (f)(1) is determined based on all of the 
facts and circumstances without a presumption of either compliance 
or violation.
    2. Geographic market. The meaning of ``geographic market'' for 
purposes of

[[Page 66587]]

paragraph (f) is explained in comment (f)(1)-1.
    3. Recent rates. Whether rates may reasonably be considered 
``recent'' depends on the facts and circumstances. Generally, 
``recent'' rates would include rates charged within one year of the 
creditor's or its agent's reliance on this information to qualify 
for the presumption of compliance under paragraph (f)(3).
    42(f)(4) Definitions.
    42(f)(4)(i) Fee appraiser.
    1. Organization. The term ``organization'' in paragraph 
42(d)(4)(i)(B) includes a corporation, partnership, proprietorship, 
association, cooperative, or other business entity and does not 
include a natural person.
    42(g) Mandatory reporting.
    42(g)(1) Reporting required.
    1. Reasonable basis. A person reasonably believes that an 
appraiser has materially failed to comply with the Uniform Standards 
of Professional Appraisal Practice established by the Appraisal 
Standards Board of the Appraisal Foundation (as defined in 12 U.S.C. 
3350(9) (USPAP) or ethical or professional requirements for 
appraisers under applicable state or federal statutes or regulations 
if the person possesses knowledge or information that would lead a 
reasonable person in the same circumstances to conclude that the 
appraiser has materially failed to comply with USPAP or such 
statutory or regulatory requirements.
    2. Material failure to comply. For purposes of Sec.  
226.42(g)(1), a material failure to comply is one that is likely to 
affect the value assigned to the consumer's principal dwelling. The 
following are examples of a material failure to comply with USPAP or 
ethical or professional requirements:
    i. Mischaracterizing the value of the consumer's principal 
dwelling in violation of Sec.  226.42(c)(2)(i).
    ii. Performing an assignment in a grossly negligent manner, in 
violation of a rule under USPAP.
    iii. Accepting an appraisal assignment on the condition that the 
appraiser will report a value equal to or greater than the purchase 
price for the consumer's principal dwelling, in violation of a rule 
under USPAP.
    3. Other matters. Section 226.42(g)(1) does not require 
reporting of a matter that is not material under Sec.  226.42(g)(1), 
for example:
    i. An appraiser's disclosure of confidential information in 
violation of applicable state law.
    ii. An appraiser's failure to maintain errors and omissions 
insurance in violation of applicable state law.
    4. Examples of covered persons. ``Covered persons'' include 
creditors, mortgage brokers, appraisers, appraisal management 
companies, real estate agents, other persons that provide 
``settlement services'' as defined under the Real Estate Settlement 
Procedures Act and implementing regulations. See 12 U.S.C. 2602(3); 
Sec.  226.42(b)(1).
    5. Examples of persons not covered. The following persons are 
not ``covered persons'' (unless, of course, they are creditors with 
respect to a covered transaction or perform ``settlement services'' 
in connection with a covered transaction):
    i. The consumer who obtains credit through a covered 
transaction.
    ii. A person secondarily liable for a covered transaction, such 
as a guarantor.
    iii. A person that resides in or will reside in the consumer's 
principal dwelling but will not be liable on the covered 
transaction, such as a non-obligor spouse.
    6. Appraiser. For purposes of Sec.  226.42(g)(1), an 
``appraiser'' is a natural person who provides opinions of the value 
of dwellings and is required to be licensed or certified under the 
laws of the state in which the consumer's principal dwelling is 
located or otherwise is subject to the jurisdiction of the appraiser 
certifying and licensing agency for that state. See 12 U.S.C. 
3350(1).

    By order of the Board of Governors of the Federal Reserve 
System, October 18, 2010.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 2010-26671 Filed 10-27-10; 8:45 am]
BILLING CODE 6210-01-P