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Oct 1, 2014 BryanR-BioBy BRYAN ROBERTSON The power of big data is about understanding patterns of consumer behavior and profiles, particularly information around “life events” such as marriage, divorce, job change and births. Having this data enables you to advertise to prospective clients when these events happen. While you could pay to get this information, some of it you can get on your own without paying a dime. All you have to do is look at your own neighborhood and what’s happening with people and homes there. Big data image via Shutterstock. Big data image via Shutterstock. Big data No. 1 — Buyer profiles This might seem a bit invasive, but it’s powerful in a good way. To improve the response rate on your marketing campaigns, figure out who is buying homes in your market. Demographic data is useless for this, as it’s too general and way out of date. To create buyer profiles in a neighborhood, make a list of all the buyers for homes in your neighborhood. Once you have that list, use these free online resources to get details on those buyers: •Intelius.com — full name, age, past employers, education, relatives (gives you insight into who they are more than most sites). •Radaris.com — age and relatives. •Addresses.com — valid phone numbers (not blocked). •Everyone411.com — full address and phone. •Advanced background checks — verify relationships and other addresses. •Whitepages.com — full address and phone numbers. •Bizapedia.com — Get info on LLC and other business owners. •Google.com — Enter {full name + city + “email address”} and look in cached results. Two of the most valuable big data elements you’ll get are profiles of the industries buyers are coming from (tech, finance, etc.) and family composition. What you can do with the industry profile knowledge is target your advertising to people who work in those industries in the surrounding area (via print ads) or online. Facebook, Twitter and others all have user profile information related to the industry they work in. That will make your buyer ads more effective because you’re targeting people who buy in your neighborhood. You can use the family composition data to extrapolate potential candidates for major life events. For example, a single person who bought a condo at a particular age could wed and upgrade their home. You’ll have to gather enough data on buyers in the area to figure out what ages are most commonly associated with certain events (marriage, birth, etc.). You can then target appropriate marketing campaigns to each group. Big Data No. 2 — Average length of ownership You can determine the average length of ownership, even broken down by age of home, by looking at past sales in the MLS. To do this, just look at all sales in the past year or so in your neighborhood. Make note of the transaction history and calculate the age in months between the last two transactions. Add up all the months and divide by the number of sales to get the average length in months. Then divide by 12 to get the length in years. Now you can look at any homes NOT sold in the area where the last sale was near that average and you’ve got potential sellers! If you have the age of the houses being sold, you can organize (simple sort is fine) to see if there is a trend on homes of a certain age. You can also sort by address to see if certain streets or neighborhoods tend to have shorter or longer ownership periods. The value of this information is in knowing which homeowners are more likely to sell when they’re within six to 12 months of the average. It’s not a guaranteed listing, but it certainly increases your chances. Big Data No. 3 — Recent births Take a look at your local paper for recent birth announcements. You can also find this information online at some hospital websites. Gathering a list of recent births gives you parent names, which can be used to find out who they are and where they live. •Find new births. •Verify family composition. •Check on house type/size. •Small house + big family = candidate to move. Once you know where they live, look at the type of home they live in. Using the same sites used to create the buyer profiles, you can find out more about who they are and get a family profile. If they currently rent, they may be candidates to become first-time homebuyers. If they live in a condo or townhouse, they may be a candidate to upgrade (which means a listing and a purchase). There may be other combinations you’ll need to consider based on your market. What do you do with all this? That’s easy — big data is all about refining your marketing. It helps create more opportunities at less cost with faster results. It helps you understand your prospective clients better. It helps you understand the market better. Investing time in this research will pay off in a lot of ways that will make you a better agent overall. Bryan is the co-founder and managing broker of Catarra Real Estate, a real estate services company that provides highly personalized services to each client. Copyright © Inman News

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First Exposure Draft of Changes for the 2016-17 USPAP 1


TO: All Interested Parties


FROM: Barry J. Shea, Chair


Appraisal Standards Board


RE: First Exposure Draft of proposed changes for the 2016-17 edition of the


Uniform Standards of Professional Appraisal Practice


DATE: January 7, 2014


The goal of the Uniform Standards of Professional Appraisal Practice (USPAP) is to promote


and maintain a high level of public trust in appraisal practice by establishing requirements for


appraisers. With this goal in mind, the Appraisal Standards Board (ASB) regularly solicits and


receives comments and suggestions for improving USPAP. Proposed changes are intended to


improve USPAP understanding and enforcement, and thereby achieve the goal of promoting and


maintaining public trust in appraisal practice.


The ASB is currently considering changes for the 2016-17 edition of USPAP. All interested


parties are encouraged to comment in writing to the ASB before the deadline of February


17, 2014.

Respondents should be assured that each member of the ASB will thoroughly read and


consider all comments. Comments are also invited at the ASB public meeting on February 21,


2014, in Orlando, Florida.


Written comments on this exposure draft can be submitted by mail, email and facsimile.


Mail: Appraisal Standards Board


The Appraisal Foundation


1155 15th Street, NW, Suite 1111


Washington, DC 20005


Email: asbcomments@appraisalfoundation.org


Facsimile: (202) 347-7727


First Exposure Draft of Changes for the 2016-17 USPAP 2


IMPORTANT NOTE: All written comments will be posted for public viewing, exactly as


submitted, on the website of The Appraisal Foundation. Names may be redacted upon


request.


The Appraisal Foundation reserves the right not to post written comments that contain


offensive or inappropriate statements.


If you have any questions regarding the attached exposure draft, please contact Emily Mann,


Standards Administrator at The Appraisal Foundation, via e-mail at


emily@appraisalfoundation.org

or by calling (202) 624-3058.


Background


The ASB’s plan for the 2016-17 edition of USPAP includes reviewing and revising as needed


the following areas of USPAP:


?

Definition of report


?

Edits to eliminate confusion regarding report drafts


?

Revisions to STANDARD 3 to enhance consistency with other Standards


?

Other edits to improve clarity and enforceability of USPAP


The ASB believes it is fulfilling its work plan and addressing the needs of appraisers and users of


appraisal services by proposing the revisions contained in this First Exposure Draft of proposed


changes for the 2016-17 edition of USPAP.


Of paramount importance to the Board when considering any potential revisions to USPAP is the


issue of public trust. This umbrella of public trust, therefore, remains the primary consideration


of the ASB in putting forth the concepts contained in this document.


Each member of the Board will review each and every comment submitted in response to this


exposure draft. Based on the feedback received, the Board will likely issue a Second Exposure


Draft sometime after its public meeting in Orlando in February. If that occurs, the Board will


again solicit comments leading up to its second public meeting of the year which will be held in


in June 2014 in Sacramento, California. And if necessary, the Board may elect to issue a Third


Exposure Draft after that meeting, again soliciting feedback.


The Board currently intends to adopt any revisions for the 2016-17 edition of USPAP at its


public meeting in early 2015. Any such revisions to USPAP would become effective on January


1, 2016, and any updates related to USPAP course material should be available by fall 2015.


First Exposure Draft of Changes for the 2016-17 USPAP 3


First Exposure Draft of


Proposed Changes for the


2016-17 edition of the Uniform Standards of Professional Appraisal Practice


Issued: January 7, 2014


Comment Deadline: February 17, 2014


Each section of this exposure draft begins with a rationale for the proposed changes to USPAP.


The rationale is identified as such and does not have line numbering. Where proposed changes


to USPAP are noted, the exposure draft contains line numbers. This difference is intended to


distinguish for the reader those parts that explain the changes to USPAP from the proposed


changes themselves.


When commenting on various aspects of the exposure draft, it is very helpful to reference the


line numbers, fully explain the reasons for concern or support, provide examples or illustrations,


and suggest any alternatives or additional issues that the ASB should consider.


Unless otherwise noted, where text is proposed to be deleted from USPAP, that text is shown as


strikeout. For example: This is strikeout text proposed for deletion. Text that is proposed to be


added to USPAP is underlined. For example: This is text proposed for insertion.


For ease in identifying the various issues being addressed, the exposure draft is presented in


sections.


TABLE OF CONTENTS


Section Issue Page


1 Proposed Revision to the Definition of Report 4


2 Proposed Revision Related to the Communication of Assignment Results 6


3 Proposed Revisions to STANDARD 3 13


4 Consideration of Retirement of all STATEMENTS ON APPRAISAL


STANDARDS


18


5 Possible Topics for Subsequent 2016-17 Exposure Drafts 20


First Exposure Draft of Changes for the 2016-17 USPAP 4


Section 1:

Proposed Revision to the Definition of Report


RATIONALE


The ASB has heard concerns expressed regarding the definition of report for some time. These


concerns have come from enforcement officials and others concerned about appraisers having


issued multiple reports in an assignment and attempting to disavow responsibility for early


iterations of the report because they were not transmitted "upon completion of the assignment"


as specified in the current definition. This claim is reported to have been made even in cases


where an earlier iteration was submitted as a final report and later revised.


There has also been a great deal of discussion regarding the communication of assignment results


prior to the completion of an assignment. This may be in the form of a report draft, preliminary


report, or merely an excerpt for a report that is being prepared. Some have expressed a concern


regarding the record keeping requirements for such communications. USPAP does not currently


directly address this and interpretations regarding the requirements appear to vary greatly.


The ASB proposes revising the current definition of report in the DEFINITIONS section in


USPAP. In addition, the ASB is considering alternative solutions to the issues regarding


corrected reports and preliminary communications (See Section 2 of this Exposure Draft).


The proposed revised definition of report removes the linking of a report to the completion of an


assignment. There have been many requests for the ASB to provide guidance on when an


assignment is complete. The ASB has received comments from appraisers that an assignment is


complete when they sign or transmit a report to the client. Clients have provided comments that


an assignment is not complete until they review and approve or accept a report. Whether an


assignment is complete or not depends on the facts and matters at hand and also the perspective


of a given party. As the ASB studied the overall concept of reporting, it appeared more


important to address all communication of assignment results regardless of where an appraiser is


in the process. The ASB is proposing linking the definition of report to when the certification is


signed by the appraiser and the report is transmitted to the client.


The ASB is also proposing to add "or any other intended user," in addition to the client, as part


of the definition of a report. There are situations where reports might be transmitted to an


intended user other than the client (such as the client’s attorney), and with such cases in mind,


the ASB believes that this edit may be prudent.


With the proposed definition, communication of a portion of an appraiser’s opinions or analyses


performed as part of an appraisal or appraisal review assignment is not a report, thus not subject


to reporting Standards, unless it includes a signed certification. The ASB received many


comments that emphasized the importance of such communications in complex assignments.


These comments came from appraisers of all disciplines. When communicating portions of their


opinions or analyses performed as part of an assignment, the appraiser must still comply with the


ETHICS RULE, the COMPETENCY RULE and the JURISDICTIONAL EXCEPTION RULE.


First Exposure Draft of Changes for the 2016-17 USPAP 5


Each of the alternative solutions in Section 2 of this exposure draft assumes the adoption of the


following revisions to the definition of report:


1 REPORT: any written communication, written or oral, of an appraisal or appraisal review that is


2 transmitted with a signed certification to the client or other intended user, or any oral


3 communication of an appraisal or appraisal review that is transmitted to the client or other


4 intended user in lieu of a written report upon completion of an assignment.


5 Comment: Most reports are written and most clients mandate require written reports.


6 Oral report requirements (see the RECORD KEEPING RULE) are included to cover


7 court testimony and other oral communications of an appraisal or appraisal review.


First Exposure Draft of Changes for the 2016-17 USPAP 6


Section 2:

Proposed Revision Related to the Communication of Assignment Results


GENERAL RATIONALE


Over the last two USPAP revision cycles, the ASB has considered addressing the topics of


preliminary or draft reports, as well as revised reports. There have been different perceptions as


to what is currently required in cases where these types of communications are made in an


assignment. There have also been very different opinions as to what the USPAP requirements


should be.


Much of the confusion and disagreement has centered on record keeping requirements, but there


has also been some discussion regarding how preliminary communications or draft reports


should be labeled.


The ASB recognizes that the different interpretations of the current USPAP requirements can


lead to problems. It is the intent of the ASB to eliminate the confusion and provide clear,


enforceable requirements that will not restrict common practice.


The ASB is considering two similar, but different proposals as possible solutions to the problem.


Each of the two proposals discussed in this section assume that the definition of report will be


revised as discussed in Section 1 of this exposure draft. The ASB is also considering changing


the definition of report and making no other changes related to the communication of assignment


results.


Proposal 1


RATIONALE


The ASB proposes revising the current definition of report in the DEFINITIONS section in


USPAP along with new definitions for report draft and interim communication and revisions to


the RECORD KEEPING RULE.


Some stakeholders believe that the use of report drafts, also known as drafts or draft reports, is


not allowed by USPAP and that any communication of assignment results constitutes a report.


Further, they believe all assignment results transmitted to the client or intended user(s) in any


format must be a report as defined in USPAP.


Others believe that the use of drafts or other interim communication of opinions and/or


conclusions in an assignment is allowed, and because it is allowed as something other than a


report, they have no USPAP requirements. Given the current definition of report, a draft or other


such interim communications is not a report under the current definition because it is not


delivered "upon completion of an assignment." As a result, report drafts are not subject to


review, enforcement, or the requirements of the RECORD KEEPING RULE.


First Exposure Draft of Changes for the 2016-17 USPAP 7


Some segments of the appraisal profession are strongly opposed to the use of drafts, while others


frequently use them, particularly in complex appraisal assignments and some litigation matters.


Some fear that recognizing drafts in USPAP might encourage some clients to shop for the


appraiser who provides the most favorable results, while others fear prohibition of their use will


inappropriately restrict client input into complex valuation issues until after a signed report is


delivered, resulting in revisions of reports after they have been signed and delivered.


The Appraisal Standards Board has been reviewing this matter for several years and believes that


report drafts and other interim communications of assignment opinions and conclusions may


need to be dealt with in USPAP, especially since state appraisal boards appear to be interpreting


USPAP differently regarding what an appraiser’s responsibilities are when issuing such


communications.


Some appraisers, when issuing a draft, clearly and conspicuously identify the report as a draft or


similar name. Others simply send a signed or unsigned report, or portions thereof, without any


such notation. Must these drafts be retained in the file, or may they be disposed of? USPAP does


not currently specifically address these types of communications. For enhancement of public


trust, should USPAP include requirements for these types of communications which are


currently being used by appraisers?


The Appraisal Standards Board is exposing a solution in which USPAP would define report draft


and other interim communication and detail how they may be utilized, transmitted to the client or


intended users, and clarify requirements for file retention. To do so, this would require the


proposed change to the definition of report, new definitions for report draft and interim


communication, and revisions to the RECORD KEEPING RULE.


The following DEFINITION has been proposed as the new definition for Report Draft:


8 REPORT DRAFT: a communication of preliminary assignment results, including, but not


9 limited to, a value opinion in an appraisal assignment or an opinion about another appraiser’s


10 work in an appraisal review assignment, made to the client or other intended user.


11 Comment: A report draft must not be used by the appraiser for any purpose which would


12 place the appraiser in violation of the ETHICS RULE.


The following DEFINITION has been proposed as the new definition for Other Interim


Communication:


13 OTHER INTERIM COMMUNICATION: any written or oral interim communication of


14 assignment results that includes all or part of the opinions and conclusions of an appraisal or


15 appraisal review assignment.


The following edits to the RECORD KEEPING RULE are proposed as part of this solution:


First Exposure Draft of Changes for the 2016-17 USPAP 8


16 RECORD KEEPING RULE


17 An appraiser must prepare a workfile for each appraisal or appraisal review assignment. A


18 workfile must be in existence prior to the issuance of any report. A written summary of an oral


19 report must be added to the workfile within a reasonable time after the issuance of the oral


20 report.


21 The workfile must include:


22 ?the name of the client and the identity, by name or type, of any other intended users;


23 ?true copies of any all written reports, documented on any type of media. (A true copy is


24 a replica of the report transmitted to the client. A photocopy or an electronic copy of the


25 entire report transmitted to the client satisfies the requirement of a true copy.);


26 ?true copies of all written communications of assignment results transmitted to clients or


27 other intended users, documented on any type of media, unless and until such


28 communication is superseded by a report or other subsequent communication;


29 ?true copies of all written report drafts or other interim communications of assignment


30 results transmitted to clients or other intended users, documented on any type of media,


31 unless and until such report draft is superseded by a subsequent report draft or report;


32 Comment: Any report draft or other interim communication of assignment results


33 transmitted to a client must be prominently labeled as such and must include a


34 conspicuous warning that the results are not final and are subject to change.


35 ?summaries of all oral reports or testimony, or a transcript of testimony, including the


36 appraiser’s signed and dated certification;


37 ?summaries of all oral communications of assignment results transmitted to clients or


38 other intended users, unless and until such communication is superseded by a report


39 (written or oral) or other subsequent communication;


40 ?all other data, information, and documentation necessary to support the appraiser’s


41 opinions and conclusions and to show compliance with USPAP, or references to the


42 location(s) of such other data, information, or documentation; and


43 ?a workfile in support of a Restricted Appraisal Report must be sufficient for the appraiser


44 to produce an Appraisal Report.


45 An appraiser must retain the workfile for a period of at least five years after preparation or at


46 least two years after final disposition of any judicial proceeding in which the appraiser provided


47 testimony related to the assignment, whichever period expires last.


48 An appraiser must have custody of the workfile, or make appropriate workfile retention, access,


49 and retrieval arrangements with the party having custody of the workfile. This includes ensuring


First Exposure Draft of Changes for the 2016-17 USPAP 9


50 that a workfile is stored in a medium that is retrievable by the appraiser throughout the


51 prescribed record retention period.


52 An appraiser having custody of a workfile must allow other appraisers with workfile obligations


53 related to an assignment appropriate access and retrieval for the purpose of:


54 ?submission to state appraiser regulatory agencies;


55 ?compliance with due process of law;


56 ?submission to a duly authorized professional peer review committee; or


57 ?compliance with retrieval arrangements.


58 Comment: A workfile must be made available by the appraiser when required by a state


59 appraiser regulatory agency or due process of law.


60 An appraiser who willfully or knowingly fails to comply with the obligations of this RECORD


61 KEEPING RULE is in violation of the ETHICS RULE.


Proposal 2


RATIONALE


Concern from stakeholders was apparent from the many comments received both prior to and


after exposure drafts issued in advance of the 2014-2015 edition of USPAP. The major


comments included the need to provide a more definitive means of determining when an


assignment is complete (and from whose standpoint), and the ongoing concern in the areas of


appraisal practice where interim communications (aka, preliminary reports, draft reports, report


drafts, etc.) are issued to the client. In response to the concerns raised, the ASB is proposing the


revised definition of report, as well as a new definition of draft.


The following is the proposed DEFINITION of Draft:


62 DRAFT: a communication of preliminary assignment results, including, but not limited to, a


63 value opinion in an appraisal assignment or an opinion about another appraiser’s work in an


64 appraisal review assignment, made to the client or other intended user.


65 Comment: A draft must not be used by the appraiser for any purpose which would


66 place the appraiser in violation of the ETHICS RULE.


The RECORD KEEPING RULE presently requires true copies of any written reports,


documented on any type of media. (A true copy is a replica of the report transmitted to the client.


A photocopy or an electronic copy of the entire report transmitted to the client satisfies the


requirement of a true copy.) Since the RECORD KEEPING RULE is linked closely to the


First Exposure Draft of Changes for the 2016-17 USPAP 10


report, corresponding revisions are proposed to the Rule to address both the revisions to the


definition of report and the addition of draft.


The RECORD KEEPING RULE lacks specificity with regard to revisions to assignment results


communicated to intended users. For example, there have been instances where there were two


appraisal reports on the same property completed by the same appraiser and submitted to the


client, with the same effective and report dates, but different value conclusions. It is not unusual


for the appraiser to claim that one of the reports did not represent the end of the assignment, and


was not the final report, although it included a signed and dated certification. This type of


communication has been referred to as a draft, an interim report, etc. This type of scenario has


raised, for example, issues from an enforcement standpoint, as well as questions as to the validity


of such products


In other instances, a portion of an appraiser’s work (an opinion which may or may not include a


value indication) has been submitted to a client in ongoing assignment for confirmation of


information, preliminary analysis to help the client/intended user in decision making, etc.


Depending upon the intended use and intended users, there has been support for requiring


appraisers to retain copies of all such communications. In other instances, such as litigation,


retention of such communication has proven problematic.


Appraiser independence is of the utmost importance in an assignment. The ASB feels that


independence will be enhanced by putting workfile retention requirements on all written


communications of assignment results transmitted to the clients or other intended users, as well


as all written drafts transmitted to clients or other intended users, unless and until such


communication or draft is superseded by a report or other subsequent communication, or a draft


or report.


The retention requirement, as proposed in this exposure draft, does not prohibit the appraiser


from retaining all copies of reports and subsequent communication, or drafts. While there are


advantages of short-term retention of earlier communications that are superseded by subsequent


reports, drafts, or communications, there are also some potential problems. These problems,


again, are dependent upon the intended use and intended users of the assignment. The ASB is


further proposing appropriate disclosure of any draft that is transmitted to a client. Any such


draft must be prominently labeled as such and must include a conspicuous warning that the


results are not final and are subject to change.


The following RECORD KEEPING RULE shows the changes the ASB is proposing to the


current Rule:


67 RECORD KEEPING RULE


68 An appraiser must prepare a workfile for each appraisal or appraisal review assignment. A


69 workfile must be in existence prior to the issuance of any report. A written summary of an oral


First Exposure Draft of Changes for the 2016-17 USPAP 11


70 report must be added to the workfile within a reasonable time after the issuance of the oral


71 report.


72 The workfile must include:


73 ?the name of the client and the identity, by name or type, of any other intended users;


74 ?true copies of any all written reports, documented on any type of media. (A true copy is


75 a replica of the report transmitted to the client. A photocopy or an electronic copy of the


76 entire report transmitted to the client satisfies the requirement of a true copy.);


77 ?true copies of all written communications of assignment results transmitted to clients or


78 other intended users, documented on any type of media, unless and until such


79 communication is superseded by a report or other subsequent communication;


80 ?true copies of all written drafts transmitted to clients or other intended users, documented


81 on any type of media, unless and until such draft is superseded by a subsequent draft or


82 report;


83 Comment: Any draft transmitted to a client must be prominently labeled as such


84 and must include a conspicuous warning that the results are not final and are


85 subject to change.


86 ?summaries of all oral reports or testimony, or a transcript of testimony, including the


87 appraiser’s signed and dated certification;


88 ?summaries of all oral communications of assignment results transmitted to clients or


89 other intended users, unless and until such communication is superseded by a report


90 (written or oral) or other subsequent communication;


91 ?all other data, information, and documentation necessary to support the appraiser’s


92 opinions and conclusions and to show compliance with USPAP, or references to the


93 location(s) of such other data, information, or documentation; and


94 ?a workfile in support of a Restricted Appraisal Report must be sufficient for the appraiser


95 to produce an Appraisal Report.


96 An appraiser must retain the workfile for a period of at least five years after preparation or at


97 least two years after final disposition of any judicial proceeding in which the appraiser provided


98 testimony related to the assignment, whichever period expires last.


99 An appraiser must have custody of the workfile, or make appropriate workfile retention, access,


100 and retrieval arrangements with the party having custody of the workfile. This includes ensuring


101 that a workfile is stored in a medium that is retrievable by the appraiser throughout the


102 prescribed record retention period.


103 An appraiser having custody of a workfile must allow other appraisers with workfile obligations


104 related to an assignment appropriate access and retrieval for the purpose of:


First Exposure Draft of Changes for the 2016-17 USPAP 12


105 ?submission to state appraiser regulatory agencies;


106 ?compliance with due process of law;


107 ?submission to a duly authorized professional peer review committee; or


108 ?compliance with retrieval arrangements.


109 Comment: A workfile must be made available by the appraiser when required by a state


110 appraiser regulatory agency or due process of law.


111 An appraiser who willfully or knowingly fails to comply with the obligations of this RECORD


112 KEEPING RULE is in violation of the ETHICS RULE.


First Exposure Draft of Changes for the 2016-17 USPAP 13


Section 3: Proposed Revisions to STANDARD 3


RATIONALE


It has been brought to the attention of the ASB that several items are addressed differently in


STANDARD 3 than they are in other Standards. One of these is the requirement for a


certification in an oral Appraisal Review Report.


Standards Rules 2-4, 8-4 and 10-4 require that oral appraisal reports address the substantive


matters set forth in Standards Rules 2-2(a), 8-2(a), and 10-2(a) respectively. Similarly,


Standards Rule 3-7 states that an oral Appraisal Review Report must address the substantive


matters set forth in Standards Rule 3-5. However, Standards Rules 2-2 (a)(xii), 8-2(a)(xii), and


10-2(a)(xi) require that the Appraisal Report include a signed certification in accordance with


Standards Rules 2-3, 8-3, and 10-3 respectively. There is no corresponding certification


requirement in Standards Rule 3-5.


So, although the RECORD KEEPING RULE requires a signed and dated certification for any


oral report, there is concern that the requirement is addressed differently in appraisal review


assignments than in appraisal assignments. The ASB is proposing the addition of Standards Rule


3-5(j) to make STANDARD 3 consistent with the other Standards:


113 Standards Rule 3-5


114 The Content of an Appraisal Review Report must be consistent with the intended use of the


115 appraisal review and, at a minimum:


116 (a) state the identity of the client and any intended users, by name or type;


117 (b) state the intended use of the appraisal review;


118 (c) state the purpose of the appraisal review;


119 (d) state information sufficient to identify:


120 (i) the work under review, including any ownership interest in the property that


121 is the subject of the work under review;


122 (ii) the date of the work under review;


123 (iii) the effective date of the opinions or conclusions in the work under review;


124 and


125 (iv) the appraiser(s) who completed the work under review, unless the identity is


126 withheld by the client.


First Exposure Draft of Changes for the 2016-17 USPAP 14


127 Comment: If the identity of the appraiser(s) in the work under review is withheld


128 by the client, that fact must be stated in the appraisal review report.


129 (e) state the effective date of the appraisal review and the date of the appraisal review


130 report;


131 (f) clearly and conspicuously:


132 • state all extraordinary assumptions and hypothetical conditions; and


133 • state that their use might have affected the assignment results.


134 (g) state the scope of work used to develop the appraisal review;


135 Comment: Because intended users’ reliance on an appraisal review may be affected by


136 the scope of work, the appraisal review report must enable them to be properly informed


137 and not misled. Sufficient information includes disclosure of research and analyses


138 performed and might also include disclosure of research and analyses not performed.


139 When any portion of the work involves significant appraisal or appraisal review


140 assistance, the reviewer must state the extent of that assistance. The name(s) of those


141 providing the significant assistance must be stated in the certification, in accordance with


142 Standards Rule 3-6.


143 (h) state the reviewer’s opinions and conclusions about the work under review,


144 including the reasons for any disagreement;


145 Comment: The report must provide sufficient information to enable the client and


146 intended users to understand the rationale for the reviewer’s opinions and conclusions.


147 (i) when the scope of work includes the reviewer’s development of an opinion of value


148 or review opinion related to the work under review, the reviewer must:


149 (i) state which information, analyses, opinions, and conclusions in the work


150 under review that the reviewer accepted as credible and used in developing


151 the reviewer’s opinion and conclusions;


152 (ii) at a minimum, summarize any additional information relied on and the


153 reasoning for the reviewer’s opinion of value or review opinion related to the


154 work under review;


155 (iii) clearly and conspicuously:


156 • state all extraordinary assumptions and hypothetical conditions


157 connected with the reviewer’s opinion of value or review opinion related


158 to the work under review; and


First Exposure Draft of Changes for the 2016-17 USPAP 15


159 • state that their use might have affected the assignment results.


160 Comment: The reviewer may include his or her own opinion of value or


161 review opinion related to the work under review within the appraisal review


162 report itself without preparing separate report. However, data and analyses


163 provided by the reviewer to support a different opinion or conclusion must


164 match, at a minimum, except for the certification requirements, the reporting


165 requirements for an:


166 Appraisal Report for a real property appraisal (Standards Rule 2-2(a));


167 Appraisal Report for a personal property appraisal (Standards Rule 8-2(a));


168 Appraisal Review Report for an appraisal review (Standards Rule 3-5);


169 • Mass Appraisal Report for mass appraisal (Standards Rule 6-8); and


170 • Appraisal Report for business appraisal (Standards Rule 10-2(a)).


171 (j) include a signed certification in accordance with Standards Rule 3-6


Standards Rule 3-2(d) is parallel to Standards Rule 1-2(e) in that it addresses the identification of


the characteristics of the subject of the work. Standards Rule 3-2(d)(i) requires that the review


appraiser identify the relevant characteristics of the work under review including "any ownership


interest in the property that is the subject of the review; …" While this may appear to be asking


the reviewer to identify whether he or she has an ownership interest in the work under review,


that is not the case. When looked at in context and when considered the parallel requirements in


STANDARD 1 (or STANDARDS 7 or 9), it is clear that the identification that is required is the


property rights appraised (if any) in the work under review.


The resolve this confusion, the ASB is proposing the following rewording of Standards Rule 3-


2(d):


172 Standards Rule 3-2


173 In developing an appraisal review, the reviewer must:


174 (a) identify the client and other intended users;


175 (b) identify the intended use of the reviewer’s opinions and conclusions;


176 Comment: A reviewer must not allow the intended use of an assignment or a client’s


177 objectives to cause the assignment results to be biased. A reviewer must not advocate for


178 a client’s objectives.


179 The intended use refers to the use of the reviewer’s opinions and conclusions by the


180 client and other intended users; examples include, without limitation, quality control,


181 audit, qualification, or confirmation.


First Exposure Draft of Changes for the 2016-17 USPAP 16


182 (c) identify the purpose of the appraisal review, including whether the assignment


183 includes the development of the reviewer’s own opinion of value or review opinion


184 related to the work under review;


185 Comment: The purpose of an appraisal review assignment relates to the reviewer’s


186 objective; examples include, without limitation, to determine if the results of the work


187 under review are credible for the intended user’s intended use, or to evaluate compliance


188 with relevant USPAP requirements, client requirements, or applicable regulations.


189 In the review of an appraisal assignment, the reviewer may provide an opinion of value


190 for the property that is the subject of the work under review.


191 In the review of an appraisal review assignment, the reviewer may provide an opinion of


192 quality of the work that is the subject of the appraisal review assignment.


193 (d) identify the work under review and the characteristics of that work which are


194 relevant to the intended use and purpose of the appraisal review, including:


195 (i) the any ownership interest appraised, if any, in the property that is the


196 subject of the work under review;


197 (ii) the date of the work under review and the effective date of the opinions or


198 conclusions in the work under review;


199 (iii) the appraiser(s) who completed the work under review, unless the identity is


200 withheld by the client; and


201 (iv) the physical, legal, and economic characteristics of the property, properties,


202 property type(s), or market area in the work under review.


203 Comment: The subject of an appraisal review assignment may be all or part of a report, a


204 workfile, or a combination of these, and may be related to an appraisal or appraisal


205 review assignment.


206 (e) identify the effective date of the reviewer’s opinions and conclusions;


207 (f) identify any extraordinary assumptions necessary in the review assignment;


208 Comment: An extraordinary assumption may be used in a review assignment only if:


209 • it is required to properly develop credible opinions and conclusions;


210 • the reviewer has a reasonable basis for the extraordinary assumption;


211 • use of the extraordinary assumption results in a credible analysis; and


212 • the reviewer complies with the disclosure requirements set forth in USPAP for


213 extraordinary assumptions.


First Exposure Draft of Changes for the 2016-17 USPAP 17


214 (g) identify any hypothetical conditions necessary in the review assignment; and


215 Comment: A hypothetical condition may be used in a review assignment only if:


216 • use of the hypothetical condition is clearly required for legal purposes, for purposes


217 of reasonable analysis, or for purposes of comparison;


218 • use of the hypothetical condition results in a credible analysis; and


219 • the reviewer complies with the disclosure requirements set forth in USPAP for


220 hypothetical conditions.


221 (h) determine the scope of work necessary to produce credible assignment results in


222 accordance with the SCOPE OF WORK RULE.


223 Comment: Reviewers have broad flexibility and significant responsibility in determining


224 the appropriate scope of work in an appraisal review assignment.


225 Information that should have been considered by the original appraiser can be used by the


226 reviewer in developing an opinion as to the quality of the work under review.


227 Information that was not available to the original appraiser in the normal course of


228 business may also be used by the reviewer; however, the reviewer must not use such


229 information in the reviewer’s development of an opinion as to the quality of the work


230 under review.


Standard Rules 2-2 and 8-2 both state:


An appraiser must supplement a report form, when necessary, to ensure that any


intended user of the appraisal is not misled and that the report complies with the


applicable content requirements set forth in this Standards Rule.


Although report forms are quite commonly used in appraisal review assignments, there is no


equivalent language in STANDARD 3. Some may wrongly infer from this there is no similar


requirement applicable to appraisal review assignments. Therefore, the ASB is proposing the


following change to the Comment to Standards Rule 3-4:


231 Comment: An Appraisal Review Report communicates the results of an appraisal


232 review, which can have as its subject another appraiser’s work in an appraisal or


233 appraisal review assignment.


234 The report content and level of information in the Appraisal Review Report is


235 specific to the needs of the client, other intended users, the intended use, and


236 requirements applicable to the assignment. The reporting requirements set forth in


237 this Standard are the minimum for an Appraisal Review Report. An appraiser


238 must supplement a report form, when necessary, to ensure that any intended user


239 of the appraisal review is not misled and that the report complies with the


240 applicable content requirements set forth in this Standards Rule.


First Exposure Draft of Changes for the 2016-17 USPAP 18


Section 4: Consideration of the Retirement of all STATEMENTS ON APPRAISAL


STANDARDS


RATIONALE


The ASB has issued ten Statements on Appraisal Standards, of which five have since been


retired. The ASB is considering the retirement of the remaining Statements and the elimination


of Statements from the USPAP document. The five remaining Statements are:


SMT-2: Discounted Cash Flow Analysis


SMT-3: Retrospective Value Opinions


SMT-4: Prospective Value Opinions


SMT-6: Reasonable Exposure Time in Real Property and Personal Property


Opinions of Value


SMT-9: Identification of Intended Use and Intended Users


Some stakeholders believe that the Statements are no longer necessary and that standards related


issues are covered in the Rules and Standards and that issues related to methods and techniques


should not be addressed in USPAP. Others believe that additional guidance beyond what is


stated in the Rules and Standards is necessary for complete understanding of some issues. While


this may be true in some cases, the Statements are not guidance material; it is most appropriate to


use other communications from the ASB, such as Advisory Opinions and Frequently Asked


Questions, to convey guidance material.


In addition, there have been comments that topics addressed in SMTs 2, 3, and 4 would be more


appropriately handled as Valuation Advisories issued by the Appraisal Practices Board (APB).


First, it seems prudent to review the some terms taken from the USPAP publication:


Statements on Appraisal Standards

clarify, interpret, explain, or elaborate on a Rule or


Standards Rule.


Advisory Opinions

are communications that do not establish new Standards or interpret


existing Standards and are not part of USPAP. They illustrate the applicability of


Standards in specific situations and offer advice from the ASB for the resolution of


specific appraisal issues and problems.


It is important to note that the Statements are an integral part of USPAP and appraisers must


comply with any applicable requirements that are included in the Statements. Advisory Opinions


are intended only to provide guidance and do not include any requirements.


The question: Are the Statements necessary, or can any requirements found in the Statements be


incorporated into Rules and Standards Rules, and relevant guidance put into Advisory Opinions?


First Exposure Draft of Changes for the 2016-17 USPAP 19


ALTERNATIVES:


The ASB has identified some potential alternatives to retiring the remaining Statements. These


alternatives include:


1. Leave the Statements in place, but make revisions as necessary


2. Incorporate any requirements that appear in the Statements but not the appropriate Rule


or Standards Rule and eliminate the Statements


3. Retire the Statements, but develop new Advisory Opinions addressing guidance issues


for each Statement


4. Address whether a need exists for any Q&As relating to each appropriate topic (can


potential questions be added to an Advisory Opinion or should they be in more than one


place?)


5. Work in conjunction with the APB if it elects to address any of the topics in SMTs 2, 3,


and 4 to coordinate retirement from USPAP with adoption of Valuation Advisories.


Potential Unintended Consequences:


The ASB recognizes that there could be unintended consequences as a result as retiring all or


some of the remaining Statements. Therefore, the Board is looking for feedback and poses the


following questions:


1. If we eliminate the Statement, does it negatively impact understandability of Standards


Rules?


2. If we eliminate these Statements and develop Advisory Opinions in their place, have we


hindered enforceability?


3. Are there additional adverse consequences in retiring the Statements?


Before the ASB proceeds with the elimination of the Statements, it is critical to evaluate any


impact that this might have on the various stakeholders. We are, therefore, asking for feedback


on the concept.


First Exposure Draft of Changes for the 2016-17 USPAP 20


Section 5: Possible Topics for Subsequent 2016-17 Exposure Drafts


In addition to the changes detailed in this exposure draft, the ASB is considering changes to


several definitions. The ASB is also considering additional guidance in the form of new and/or


expanded Advisory Opinions.


The ASB has received a significant amount of correspondence regarding the application of the


Confidentiality section of the ETHICS RULE. Given the concerns raised in this correspondence,


the ASB is considering revisions in that area as well.


Of course, there is always the possibility that additional changes could be proposed based on


input from our various constituencies.


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Fannie and Freddie announce new appraisal rules

A replacement for the Home Valuation Code of Conduct (HVCC) was announced today by Fannie Mae and Freddie Mac in accordance with mandates from the Dodd–Frank Wall Street Reform and Consumer Protection Act. The new standards for appraiser independence will replace what was covered under the HVCC since May 2009. Fannie Mae stated: “The revised requirements will maintain the spirit and intent of HVCC and continue to provide important protections for mortgage investors, homebuyers, and the housing market.”

Key provisions include:

  • An appraiser must be at minimum, licensed or certified by the state in which the property to be apprised is located
  • No employee, director, officer, or agent of the Seller, or any other third party acting as a joint venture partner, independent contractor, appraisal company, or partner on behalf of the Seller, shall influence or attempt to influence the development, reporting result, or review of an appraisal through coercion, extortion, collusion, compensation, inducement, intimidation, bribery, or in any other manner including but not limited to:
    • Withholding or threatening to withhold timely payment or partial payment for an appraisal
    • Withholding or threatening to withhold future business for an appraiser, or demoting or terminating or threatening to demote or terminate an appraiser
    • Expressly or implied promising future business, promotions, or increased compensation for an appraiser
    • Conditioning the ordering of an appraisal report or payment of an appraisal fee or salary or bonus on the opinion, conclusion, or valuation reached, or on a preliminary value requested from an appraiser
    • Requesting that an appraiser provide an estimated predetermined or desired valuation in an appraisal report prior to the completion of the appraisal report, or requesting that an appraiser provide estimated values or comparable sales at any time prior to the appraiser completion of the report
    • Providing to an appraiser an anticipated, estimated, encouraged, or desired value for a subject property or a proposed target amount to be loaned to the Borrower, except that a copy of the sale contract for purchase transactions may be provided
    • Providing to an appraiser, appraisal company, appraisal Mgmt. Company, or an entity or person related to the appraiser, appraisal company, or appraisal mgmt. company stock or other financial or non financial benefits
    • Removing an appraiser from a list of qualified appraisers, or adding an appraiser to an exclusionary list of disapproved appraisers, in connection with the influencing or attempting to influence an appraisal
    • Any other act or practice that impairs or attempts to impair an appraiser’s independence, objectivity, or impartiality or violates law or regulation

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December 8th, 2010 7:48 PM

Plunging Home Prices Fuel Property Tax Appeals Swamping U.S. Cities, Towns

A fiscal flood that threatens to swamp local government budgets across the U.S. overflows from file cabinets in the office of Patty Halm, chair of the Michigan Tax Tribunal.

The backlog of cases from taxpayers seeking to lower property-tax bills of more than $100,000 shot up to 14,236 this year from an annual average of about 6,000 during the past decade. The backlog of smaller claims was at 28,558 at the end of September, eight times higher than a decade ago, according to records at the tribunal, a Lansing-based administrative court.

From Los Angeles to Atlantic City, the New Jersey gambling resort whose credit rating Moody’s Investors Service cut by three levels last month, property owners are demanding lower taxes after real-estate values plunged. The disputes over billions in dollars come as municipalities are already slashing services such as police and fire protection and may depress revenue further as communities try to recover from the longest recession since the 1930s. In Michigan, Governor-elect Rick Snyder has warned that hundreds of towns face financial crises.

“We’re just getting swamped,” said Halm, 54, who was appointed in 2003. “We’re constantly buying new file cabinets to hold all the cases. We even have six surplus file cabinets in the courtroom.”

U.S. home prices are 30 percent below their peak of April 2006, according to the seasonally adjusted S&P/Case-Shiller index of property values in 20 cities. They may drop 10 percent more, Greg Lippmann, a founder of New York-based LibreMax Capital LLC, said Dec. 2 at the Hedge Funds New York Conference hosted by Bloomberg Link.

Appeals Upon Appeals

Meanwhile, the Moody’s/REAL Commercial Property Price Index of U.S. commercial property is 43 percent below its October 2007 peak.

“If we look into the future, assessments will have to reflect the market value, and two years out, property-tax receipts will have to be coming down,” Michael Pagano, dean of the College of Urban Planning and Public Affairs at the University of Illinois at Chicago, said in a telephone interview. “If the appeals are largely successful, they will generate a lot more appeals.”

In Michigan, seven judges and 15 hearing officers are clearing the backlog. Five additional staff members are crammed into cubicles in hallways and a library space, said Halm, who is also one of the judges. More than a dozen mismatched file cabinets line the hallway outside the tribunal, among about 50 that have been added for the overflow.

Amid the Cabinets

This week a chief clerk sat surrounded by them on the floor, sorting files to get ready for hearings. Bins held even more folders.

Oakland County, the Detroit suburb with Michigan’s second- highest median income, didn’t previously pay much attention to Tax Tribunal cases because any losses were covered by new construction gains, said Robert Daddow, deputy county executive. Now, about $3.9 billion in taxable value, or 5 percent of the county’s tax base, is under review, he said.

Cities and towns across Michigan had property-tax collections plunge as much as 20 percent in the past year, the steepest drop since a 1994 rewrite of state levies, forcing scores to decide whether to borrow to pay bills or risk default on bonds.

Municipal budgets “tend to lag economic conditions” by 18 months to several years, according to a National League of Cities report in October that Pagano co-wrote.

“The full weight of the decline in housing values has yet to hit the budgets of many cities and property tax revenues will likely decline further in 2011 and 2012,” the report said.

Already Struggling

Douglas Roberts, Michigan’s former treasurer, said in a telephone interview from East Lansing that the impact of property-tax appeals “could be significant” because cities are already struggling with rising pension and health-care costs and declining revenue.

Settlements are likely to increase across the state through 2013 as the backlog is worked through, compounding other revenue shortfalls, Daddow said.

“In some of these instances, probably most of them, local governmental units have not been setting money aside for this,” Daddow said. “That will be huge. That will be another big headache coming down the pike.”

In many states, property-tax appeals are handled primarily at the local level.

Clark County, Nevada, which includes Las Vegas, had 8,300 appeals last year, an increase from 6,000 the year before and 1,900 in 2008, according to Rocky Steele, assistant director of assessment services.

“It was a big year, the biggest we’ve ever had,” Steele said in a telephone interview.

Losing Hand

Clark County’s taxable real-estate value fell to $184 billion for the 2010-11 fiscal year from $263 billion the prior year and the record $320 billion in 2008-09, according to Steele. The one-year reduction will cost the county a projected $514 million in lost taxes. Almost all the hotel casinos and major property owners received reductions, Steele said.

In Atlantic City, where 11 casinos account for 74 percent of the property-tax base, the city has exhausted a reserve for tax appeals that in 2006 held $26 million, according to a Nov. 4 Moody’s report on the rating cut. The company reduced the credit to Baa1, three levels above speculative grade, from A1.

All Atlantic City casinos have pending property-tax appeals, Moody’s said. Since their valuation is based on gambling revenue, which has declined more than 11 percent this year, appeals may continue, the rating company said.

Resort Under Pressure

“The city’s negative fund balance position, outstanding tax casino credits and the significant number of remaining unsettled casino tax appeals will continue to pressure the city’s financial position,” Moody’s said in the report.

New Jersey homeowners filed 18,147 property-tax appeals in Tax Court during the fiscal year ending June 30, up from 10,067 in fiscal 2007, according to a report by the state judiciary.

Moody’s today cited continuing tax appeals when it lowered the rating on about $3.7 million in outstanding debt for the Borough of Roseland, New Jersey, to fourth-highest Aa3 from Aa2.

A reserve fund for tax appeals in the town about 20 miles (32 kilometers) east of New York City may fall to $600,000 this year from $3.5 million in 2007, and the borough may issue bonds to handle future appeals, Moody’s said in the report.

‘Overloaded’ in L.A.

Across the country, the situation is similar.

“We’re just overloaded,” said Khanh Nguyen, chief of assessment appeals in Los Angeles County, whose more than 10 million residents make it the nation’s largest.

The county expects “a few thousand” more than the 42,000 applications last year, Nguyen said. That’s quadruple the 9,353 in 2007, she said. The appeals are rising as the overall tax rolls declined by $18.5 billion, or 1.67 percent, to $1.089 trillion in 2010.

The phenomenon is not universal. In Miami-Dade County, which is Florida’s largest municipal borrower, 2010 tax appeals, due in September, dropped 27 percent from 2009, to about 105,000, said Robert Alfaro, Value Adjustment Board manager.

In Illinois, pleas for relief arrive every week on the desk of Louis Apostol, executive director of the state Property Tax Appeal Board.

‘Heart-Wrenching’

“These letters are heart-wrenching. I’ve got drawers and drawers of them,” Apostol said in a telephone interview from his office in Des Plaines.

Illinois may have 19,350 property appeals this year, 10 percent more than in 2009, he said. The backlog is about 35,000, to be processed by a staff of 21. Fifty-four people handled roughly half the workload in 2003, he said.

More than 80 percent come from homeowners and the board approves an average of 30 percent of them, he said.

Determining the impact could take two years, he said. In the meantime, Apostol will continue receiving letters of complaint forwarded by Governor Pat Quinn.

“I respond directly,” Apostol said. “I also include my phone number and tell them how they can appeal their taxes.”

To contact the reporters on this story: Jeff Green in Southfield, Michigan, at jgreen16@bloomberg.net; Tim Jones in Chicago at tjones58@bloomberg.net.

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net


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October 20th, 2010 2:03 PM
The Federal Reserve Board eagle logo links to home page

Proposals for Comment

FOIA Home Making a
FOIA Request
Electronic Request Form FOIA Exemptions Reading
Rooms
FOIA Service Center
Fees and
Waivers
FOIA
Regulations
FOIA
Annual Reports
Appeals Proposals for
Comment

The Board has requested public comment on the proposals listed below. Comments can be submitted through this web site using the "Submit comment" links. Comments may also be submitted in writing or by electronic mail (see text of each proposal for contact information). Please note the closing date for each comment period.

Public comments on the proposals and, if publicly available, related staff materials can be viewed by following the associated links. Comments can also be viewed in Room MP-500 of the Board’s Martin Building (20th and C Streets, NW, Washington, D.C.) between 9:00 a.m. and 5:00 p.m. (Eastern Time) weekdays or can be obtained by formal request under the FOIA. All comments are reproduced without alteration except when necessary for technical reasons.

The proposals are grouped by subject: (1) regulations ("Rulemaking Proposals"), (2) policies ("Other Proposals"), and (3) reports of financial and other information ("Information Collection Proposals"). Under each heading, the proposals are listed in reverse order of publication in the Federal Register, with the most recently published proposal as the first entry.

The rules and proposed rules that the Board expects to issue during the next six months are summarized in the Unified Agenda (also known as the Semiannual Regulatory Agenda), which is published twice a year in the Federal Register. View the Board's Unified Agenda.

You can find, review, and submit comments on other federal documents that are open for comment and published in the Federal Register at Regulations.gov.

Rulemaking Proposals | Other Proposals | Information Collection Proposals

Rulemaking Proposals
Proposals concerning Board regulations codified in the Code of Federal Regulations

Request for comment regarding proposed rule amending Regulation Z (Truth In Lending) to clarify aspects of the Board's rules protecting consumers who use credit cards. The proposal is intended to enhance protections for consumers and to resolve areas of uncertainty so that card issuers fully understand their compliance obligations. The proposal would also clarify portions of the Federal Reserve's final rules implementing the Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit Card Act).
Closing date for comments: 60 days after the Federal Register Notice
Submit comment on this proposal
View comments on this proposal
Request for comment on all aspects of the interim final rule to ensure that real estate appraisers are free to use their independent professional judgement in assigning home values without influence or pressure from those with interests in the transactions. The rule also seeks to ensure that appraisers receive customary and reasonable payments for their services. The interim final rule is required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Closing date for comments: 60 days after the Federal Register Notice
Submit comment on this proposal
View comments on this proposal
The Board proposes to amend Regulation Z, which implements the Truth in Lending Act (TILA), and the staff commentary to the regulation, as part of a comprehensive review of TILA's rules for home-secured credit. This proposal would revise the rules for the consumer's right to rescind certain open-end and closed-end loans secured by the consumer's principal dwelling.
Request for public comment regarding the interim rule amending Regulation Z, which implements the Truth in Lending Act (TILA). The interim rule implements certain requirements of the Mortgage Disclosure Improvement Act of 2008, which amended TILA. The amendments and this interim rule require creditors extending consumer credit secured by real property or a dwelling to disclose certain summary information about interest rates and payment changes, in a tabular format, as well as a statement that consumers are not guaranteed to be able to refinance their transactions in the future.
The Board is publishing for comment a proposed rule to amend Regulation Z, which implements the Truth in Lending Act (TILA). The proposed rule would implement Section 1461 of the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 1461 amends TILA to provide a separate, higher threshold for determining coverage of the Board's escrow requirement applicable to higher-priced mortgage loans, for loans that exceed the maximum principal balance eligible for sale to Freddie Mac.
Interagency Advance Notice of Proposed Rulemaking regarding Alternatives to the Use of Credit Ratings in the Risk-Based Capital Guidelines of the Federal Banking Agencies.
Interagency notice of proposed rulemaking to Expand the Scope of Community Reinvestment Act Regulations to Encourage Depository Institution Support for HUD Neighborhood Stabilization Program Activities
The Federal Bank and Thrift Regulatory Agencies announced a series of upcoming public hearings on modernizing the regulations that implement the Community Reinvestment Act (CRA).
Request for comment on a proposed rule amending Regulation Z to protect credit card users from unreasonable late payment and other penalty fees and to require credit card issuers to reconsider increases in interest rates.
Proposed amendments to change the timing, content, and format of the disclosures that creditors provide to consumers about HELOCs at application and throughout the life of such accounts. The proposal would also provide protections related to account suspensions and credit-limit reductions, and reinstatement of accounts
Proposed new and revised guidance that address the most frequently asked questions about flood insurance
Proposed interim final rule amending Regulation Z (Truth in Lending) to require creditors to increase the amount of notice consumers receive before the rate on a credit card account is increased or a significant change is made to the account's terms
Interagency Advance Notice of Proposed Rulemaking (ANPR) to identify possible additions to the information that furnishers must provide to consumer reporting agencies, such as the account opening date
The Board has adopted, and is seeking public comment on, an interim final rule to support in a timely manner, the full implementation and acceptance of the capital purchase program of the U.S. Department of Treasury and promote the stability of banking organizations and the financial system.
Interagency proposal to allow a banking organization to assign a 10 percent risk weight to claims on, and portions of claims guaranteed by, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).
Interagency proposal that would permit banks, bank holding companies, and savings associations (collectively, banking organizations) to reduce the amount of goodwill that a banking organization must deduct from tier 1 capital by the amount of any deferred tax liability associated with that goodwill
Interagency proposal of a new risk-based capital framework (standardized framework) based on the standardized approach for credit risk and the basic indicator approach for operational risk described in the capital adequacy framework titled "International Convergence of Capital Measurement and Capital Standards: A Revised Framework" (New Accord) released by the Basel Committee on Banking Supervision. The standardized framework generally would be available, on an optional basis, to banks, bank holding companies, and savings associations (banking organizations) that apply the general risk-based capital rule
Interagency proposed revisions to the market risk capital rule to enhance its risk sensitivity and introduce requirements for public disclosure of certain qualitative and quantitative information about the market risk of a bank or bank holding company
Joint advanced notice of proposed rulemaking requesting comment from the public, including law enforcement and financial institutions, to assess whether the potential benefit to law enforcement of a lower threshold outweighs the potential burden to financial institutions.
Joint request for comment on issues related to the accuracy of consumer credit reports and the reinvestigation of disputes
Proposed framework for Risk-Based Capital Guidelines; Implementation of New Basel Capital Accord

Rulemaking Proposals | Other Proposals | Information Collection Proposals

Other Proposals
Proposals concerning Board policies not codified in the Code of Federal Regulations

Request for comment regarding the discussion topics for its upcoming public hearings on potential revisions to the Board's Regulation C, which implements the Home Mortgage Disclosure Act (HMDA).
Proposed guidance designed to help ensure that incentive compensation policies at banking organizations do not encourage excessive risk-taking and are consistent with the safety and soundness of the organization
Interagency request for comment on proposed guidance on correspondent concentration risks. The Proposed Guidance outlines the Agencies' expectations for financial institutions with respect to identifying, monitoring, and managing correspondent concentration risks between financial institutions, and performing appropriate due diligence on all credit exposures to and funding transactions with other financial institutions.
Interagency proposed guidance on sound practices for the management of funding and liquidity risks, and to strengthen liquidity risk-management practices
Request for comment on proposed changes to the methodology for calculating the imputed costs, collectively known as the private sector adjustment factor, that are considered when setting fees and measuring cost recovery for certain payment services provided to depository institutions
The Federal Reserve Board, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, and Office of Thrift Supervision are proposing for comment one new and two revised questions and answers. The revisions to the two existing questions and answers would allow pro rata consideration in certain circumstances for an activity that provides affordable housing targeted to low- or moderate-income individuals. The proposed new question and answer would provide examples of how an institution can determine that community services it provides are targeted to low- and moderate-income individuals
Request for comment regarding the proposed Interagency Appraisal and Evaluation Guidelines that reaffirm supervisory expectations for sound real estate appraisal and evaluation practices.
Pursuant to the provisions of the Privacy Act of 1974, notice is given that the Board of Governors of the Federal Reserve System (Board) proposes to add two new systems of records, BGFRS-37 (Electronic Applications) and BGFRS-38 (Transportation Subsidy Records)
Request for comment on new and revised interagency questions and answers regarding flood insurance.
Interagency proposed guidance entitled Garnishment of Exempt Federal Benefit Funds
Interagency request for comment on proposed illustrations of consumer information for subprime mortgage lending.
Request for comment on a series of new and revised interagency questions and answers pertaining to the Community Reinvestment Act (CRA).
Interagency proposed Supervisory Guidance for Internal Ratings-Based Systems for Credit Risk, Advanced Measurement Approaches for Operational Risk, and the Supervisory Review Process (Pillar 2) Related to Basel II Implementation
Joint request for comment on proposed classification of commercial credit exposures
Proposal to standardize and expand the examination data collected in support of the Shared National Credit Program
Proposed supervisory guidance on the internal-ratings-based (IRB) approach to determine regulatory capital requirements for retail credit exposures
Proposal to adopt an interpretation of the anti-tying restrictions of section 106 of the Bank Holding Company Act Amendments of 1970, and related supervisory guidance

Rulemaking Proposals | Other Proposals | Information Collection Proposals

Information Collection Proposals
Proposals concerning the reporting of financial and other information under authority delegated to the Board by the Office of Management and Budget

Proposal to approve under OMB delegated authority the extension for three years, without revision, of the following report: The Report of Net Debit Cap (FR 2226)and the Statement of Purpose for an Extension of Credit by a Creditor (FR T-4). Proposal to approve under OMB delegated authority the extension for three years, with clarification, of the following reports: Registration Statement for Persons Who Extend Credit Secured by Margin Stock (Other Than Banks, Brokers, or Dealers), Deregistration Statement for Persons Registered Pursuant to Regulation U, Statement of Purpose for an Extension of Credit Secured by Margin Stock by a person Subject to Registration Under Regulation U; Annual Report, and Statement of Purpose for an Extension of Credit Secured by Margin Stock. (FR G-1, FR G-2, FR G-3, FR G-4, and FR U-1).
Proposal to approve under OMB delegated authority the extension for three years, with revision, of the following report: Domestic Finance Company Report of Consolidated Assets and Liabilities (FR 2248); and the implementation of the following report: Survey of Finance Companies (FR 3033s)
Closing date for comments: 60 days after the Federal Register Notice
Submit comment on this proposal
View comments on this proposal
Proposal to revise the Consolidated Reports of Condition and Income (Call Report) for banks, the Thrift Financial Report (TFR) for savings associations, the Report of Assets and Liabilities of U.S. Branches and Agencies of Foreign Banks (FFIEC 002), and the Report of Assets and Liabilities of a Non-U.S.Branch that is Managed or Controlled by a U.S. Branch or Agency of a Foreign (Non-U.S.) Bank (FFIEC 002S), all of which are currently approved collections of information.
Proposal to approve under OMB delegated authority the extension for three years, without revision, of the following report: Compensation and Salary Surveys (FR 29a and b).
Proposal to approve under OMB delegated authority the extension for three years, without revision, of the following report: Recordkeeping and Disclosure Requirements Associated with Securities Transactions Pursuant to Regulation H (Reg H-3).
Proposal to approve under OMB delegated authority the extension for three years, without revision, of the following reports: Survey of Board Publications (FR 1373 a,b), Interagency Bank Merger Act Application (FR 2070), Interagency Notice of Change in Control, Interagency Notice of Change in Director or Senior Executive Officer, and Interagency Biographical and Financial Report (FR 2081a, FR 2081b, and FR 2081c), Recordkeeping and Disclosure Requirements Associated with Regulation R (FR 4025)

Rulemaking Proposals | Other Proposals | Information Collection Proposals

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Proposals for Comment

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The Board has requested public comment on the proposals listed below. Comments can be submitted through this web site using the "Submit comment" links. Comments may also be submitted in writing or by electronic mail (see text of each proposal for contact information). Please note the closing date for each comment period.

Public comments on the proposals and, if publicly available, related staff materials can be viewed by following the associated links. Comments can also be viewed in Room MP-500 of the Board’s Martin Building (20th and C Streets, NW, Washington, D.C.) between 9:00 a.m. and 5:00 p.m. (Eastern Time) weekdays or can be obtained by formal request under the FOIA. All comments are reproduced without alteration except when necessary for technical reasons.

The proposals are grouped by subject: (1) regulations ("Rulemaking Proposals"), (2) policies ("Other Proposals"), and (3) reports of financial and other information ("Information Collection Proposals"). Under each heading, the proposals are listed in reverse order of publication in the Federal Register, with the most recently published proposal as the first entry.

The rules and proposed rules that the Board expects to issue during the next six months are summarized in the Unified Agenda (also known as the Semiannual Regulatory Agenda), which is published twice a year in the Federal Register. View the Board's Unified Agenda.

You can find, review, and submit comments on other federal documents that are open for comment and published in the Federal Register at Regulations.gov.

Rulemaking Proposals | Other Proposals | Information Collection Proposals

Rulemaking Proposals
Proposals concerning Board regulations codified in the Code of Federal Regulations

Request for comment regarding proposed rule amending Regulation Z (Truth In Lending) to clarify aspects of the Board's rules protecting consumers who use credit cards. The proposal is intended to enhance protections for consumers and to resolve areas of uncertainty so that card issuers fully understand their compliance obligations. The proposal would also clarify portions of the Federal Reserve's final rules implementing the Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit Card Act).
Closing date for comments: 60 days after the Federal Register Notice
Submit comment on this proposal
View comments on this proposal
Request for comment on all aspects of the interim final rule to ensure that real estate appraisers are free to use their independent professional judgement in assigning home values without influence or pressure from those with interests in the transactions. The rule also seeks to ensure that appraisers receive customary and reasonable payments for their services. The interim final rule is required by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Closing date for comments: 60 days after the Federal Register Notice
Submit comment on this proposal
View comments on this proposal
The Board proposes to amend Regulation Z, which implements the Truth in Lending Act (TILA), and the staff commentary to the regulation, as part of a comprehensive review of TILA's rules for home-secured credit. This proposal would revise the rules for the consumer's right to rescind certain open-end and closed-end loans secured by the consumer's principal dwelling.
Request for public comment regarding the interim rule amending Regulation Z, which implements the Truth in Lending Act (TILA). The interim rule implements certain requirements of the Mortgage Disclosure Improvement Act of 2008, which amended TILA. The amendments and this interim rule require creditors extending consumer credit secured by real property or a dwelling to disclose certain summary information about interest rates and payment changes, in a tabular format, as well as a statement that consumers are not guaranteed to be able to refinance their transactions in the future.
The Board is publishing for comment a proposed rule to amend Regulation Z, which implements the Truth in Lending Act (TILA). The proposed rule would implement Section 1461 of the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 1461 amends TILA to provide a separate, higher threshold for determining coverage of the Board's escrow requirement applicable to higher-priced mortgage loans, for loans that exceed the maximum principal balance eligible for sale to Freddie Mac.
Interagency Advance Notice of Proposed Rulemaking regarding Alternatives to the Use of Credit Ratings in the Risk-Based Capital Guidelines of the Federal Banking Agencies.
Interagency notice of proposed rulemaking to Expand the Scope of Community Reinvestment Act Regulations to Encourage Depository Institution Support for HUD Neighborhood Stabilization Program Activities
The Federal Bank and Thrift Regulatory Agencies announced a series of upcoming public hearings on modernizing the regulations that implement the Community Reinvestment Act (CRA).
Request for comment on a proposed rule amending Regulation Z to protect credit card users from unreasonable late payment and other penalty fees and to require credit card issuers to reconsider increases in interest rates.
Proposed amendments to change the timing, content, and format of the disclosures that creditors provide to consumers about HELOCs at application and throughout the life of such accounts. The proposal would also provide protections related to account suspensions and credit-limit reductions, and reinstatement of accounts
Proposed new and revised guidance that address the most frequently asked questions about flood insurance
Proposed interim final rule amending Regulation Z (Truth in Lending) to require creditors to increase the amount of notice consumers receive before the rate on a credit card account is increased or a significant change is made to the account's terms
Interagency Advance Notice of Proposed Rulemaking (ANPR) to identify possible additions to the information that furnishers must provide to consumer reporting agencies, such as the account opening date
The Board has adopted, and is seeking public comment on, an interim final rule to support in a timely manner, the full implementation and acceptance of the capital purchase program of the U.S. Department of Treasury and promote the stability of banking organizations and the financial system.
Interagency proposal to allow a banking organization to assign a 10 percent risk weight to claims on, and portions of claims guaranteed by, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).
Interagency proposal that would permit banks, bank holding companies, and savings associations (collectively, banking organizations) to reduce the amount of goodwill that a banking organization must deduct from tier 1 capital by the amount of any deferred tax liability associated with that goodwill
Interagency proposal of a new risk-based capital framework (standardized framework) based on the standardized approach for credit risk and the basic indicator approach for operational risk described in the capital adequacy framework titled "International Convergence of Capital Measurement and Capital Standards: A Revised Framework" (New Accord) released by the Basel Committee on Banking Supervision. The standardized framework generally would be available, on an optional basis, to banks, bank holding companies, and savings associations (banking organizations) that apply the general risk-based capital rule
Interagency proposed revisions to the market risk capital rule to enhance its risk sensitivity and introduce requirements for public disclosure of certain qualitative and quantitative information about the market risk of a bank or bank holding company
Joint advanced notice of proposed rulemaking requesting comment from the public, including law enforcement and financial institutions, to assess whether the potential benefit to law enforcement of a lower threshold outweighs the potential burden to financial institutions.
Joint request for comment on issues related to the accuracy of consumer credit reports and the reinvestigation of disputes
Proposed framework for Risk-Based Capital Guidelines; Implementation of New Basel Capital Accord

Rulemaking Proposals | Other Proposals | Information Collection Proposals

Other Proposals
Proposals concerning Board policies not codified in the Code of Federal Regulations

Request for comment regarding the discussion topics for its upcoming public hearings on potential revisions to the Board's Regulation C, which implements the Home Mortgage Disclosure Act (HMDA).
Proposed guidance designed to help ensure that incentive compensation policies at banking organizations do not encourage excessive risk-taking and are consistent with the safety and soundness of the organization
Interagency request for comment on proposed guidance on correspondent concentration risks. The Proposed Guidance outlines the Agencies' expectations for financial institutions with respect to identifying, monitoring, and managing correspondent concentration risks between financial institutions, and performing appropriate due diligence on all credit exposures to and funding transactions with other financial institutions.
Interagency proposed guidance on sound practices for the management of funding and liquidity risks, and to strengthen liquidity risk-management practices
Request for comment on proposed changes to the methodology for calculating the imputed costs, collectively known as the private sector adjustment factor, that are considered when setting fees and measuring cost recovery for certain payment services provided to depository institutions
The Federal Reserve Board, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, and Office of Thrift Supervision are proposing for comment one new and two revised questions and answers. The revisions to the two existing questions and answers would allow pro rata consideration in certain circumstances for an activity that provides affordable housing targeted to low- or moderate-income individuals. The proposed new question and answer would provide examples of how an institution can determine that community services it provides are targeted to low- and moderate-income individuals
Request for comment regarding the proposed Interagency Appraisal and Evaluation Guidelines that reaffirm supervisory expectations for sound real estate appraisal and evaluation practices.
Pursuant to the provisions of the Privacy Act of 1974, notice is given that the Board of Governors of the Federal Reserve System (Board) proposes to add two new systems of records, BGFRS-37 (Electronic Applications) and BGFRS-38 (Transportation Subsidy Records)
Request for comment on new and revised interagency questions and answers regarding flood insurance.
Interagency proposed guidance entitled Garnishment of Exempt Federal Benefit Funds
Interagency request for comment on proposed illustrations of consumer information for subprime mortgage lending.
Request for comment on a series of new and revised interagency questions and answers pertaining to the Community Reinvestment Act (CRA).
Interagency proposed Supervisory Guidance for Internal Ratings-Based Systems for Credit Risk, Advanced Measurement Approaches for Operational Risk, and the Supervisory Review Process (Pillar 2) Related to Basel II Implementation
Joint request for comment on proposed classification of commercial credit exposures
Proposal to standardize and expand the examination data collected in support of the Shared National Credit Program
Proposed supervisory guidance on the internal-ratings-based (IRB) approach to determine regulatory capital requirements for retail credit exposures
Proposal to adopt an interpretation of the anti-tying restrictions of section 106 of the Bank Holding Company Act Amendments of 1970, and related supervisory guidance

Rulemaking Proposals | Other Proposals | Information Collection Proposals

Information Collection Proposals
Proposals concerning the reporting of financial and other information under authority delegated to the Board by the Office of Management and Budget

Proposal to approve under OMB delegated authority the extension for three years, without revision, of the following report: The Report of Net Debit Cap (FR 2226)and the Statement of Purpose for an Extension of Credit by a Creditor (FR T-4). Proposal to approve under OMB delegated authority the extension for three years, with clarification, of the following reports: Registration Statement for Persons Who Extend Credit Secured by Margin Stock (Other Than Banks, Brokers, or Dealers), Deregistration Statement for Persons Registered Pursuant to Regulation U, Statement of Purpose for an Extension of Credit Secured by Margin Stock by a person Subject to Registration Under Regulation U; Annual Report, and Statement of Purpose for an Extension of Credit Secured by Margin Stock. (FR G-1, FR G-2, FR G-3, FR G-4, and FR U-1).
Proposal to approve under OMB delegated authority the extension for three years, with revision, of the following report: Domestic Finance Company Report of Consolidated Assets and Liabilities (FR 2248); and the implementation of the following report: Survey of Finance Companies (FR 3033s)
Closing date for comments: 60 days after the Federal Register Notice
Submit comment on this proposal
View comments on this proposal
Proposal to revise the Consolidated Reports of Condition and Income (Call Report) for banks, the Thrift Financial Report (TFR) for savings associations, the Report of Assets and Liabilities of U.S. Branches and Agencies of Foreign Banks (FFIEC 002), and the Report of Assets and Liabilities of a Non-U.S.Branch that is Managed or Controlled by a U.S. Branch or Agency of a Foreign (Non-U.S.) Bank (FFIEC 002S), all of which are currently approved collections of information.
Proposal to approve under OMB delegated authority the extension for three years, without revision, of the following report: Compensation and Salary Surveys (FR 29a and b).
Proposal to approve under OMB delegated authority the extension for three years, without revision, of the following report: Recordkeeping and Disclosure Requirements Associated with Securities Transactions Pursuant to Regulation H (Reg H-3).
Proposal to approve under OMB delegated authority the extension for three years, without revision, of the following reports: Survey of Board Publications (FR 1373 a,b), Interagency Bank Merger Act Application (FR 2070), Interagency Notice of Change in Control, Interagency Notice of Change in Director or Senior Executive Officer, and Interagency Biographical and Financial Report (FR 2081a, FR 2081b, and FR 2081c), Recordkeeping and Disclosure Requirements Associated with Regulation R (FR 4025)

Rulemaking Proposals | Other Proposals | Information Collection Proposals

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Posted in:General
Posted by Bill Bici on October 20th, 2010 2:02 PMView Comments (1)

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October 20th, 2010 1:54 PM

1

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.

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 [insert date that is 60 days after the date of

publication in the Federal Register], except that the removal of § 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.

2

Comments: Comments must be received on or before [insert date that is 60 days after the date

of publication in the Federal Register].

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: regs.comments@federalreserve.gov. 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, N.W., 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, N.W.) between 9:00 a.m. and

5:00 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.

3

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:

? 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;

1 Pub. L. No. 111-203, 124 Stat. 1376.

4

? 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

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 is limited to federally supervised institutions.

2 “Home Valuation Code of Conduct” (HVCC), available

athttp://www.fhfa.gov/webfiles/2302/HVCCFinalCODE122308.pdf.

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

5

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, 2011.

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

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.

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.

4 TILA Section 129E(j), 15 U.S.C. 1639e(j).

6

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.

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.

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 § 226.42(b )(1).

7

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

8

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 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

9

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

10

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 ain 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

11

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

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 § 226.42. Accordingly, new

comment 5b-7 is being adopted to clarify that home-equity plans subject to § 226.5b that are

secured by the consumer’s principal dwelling also are subject to the requirements of new TILA

Section 129E and § 226.42.

Section 226.42 Valuation Independence

Overview

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).

12

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. 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 § 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 § 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 § 226.36(b)(2) of the

Board’s 2008 Appraisal Independence Rules. 15 U.S.C. 1639e(f).

13

The Board is removing § 226.36(b), effective April 1, 2011, the mandatory compliance

date for this interim final rule. The Board is removing § 226.36(b) because the provision is

substantially similar to TILA Section 129E(b), (c), and (f), implemented in § 226.42 by this

interim final rule. Through March 31, 2011, creditors, mortgage brokers, and their affiliates may

comply with either § 226.36(b) or new § 226.42. If such persons comply with § 226.42, they are

deemed to comply with § 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

§ 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).

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. Pub. L. 111-203, 124 Stat. 2187

(to be codified at 15 U.S.C. 1639e(h)).

14

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 § 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

§ 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

15

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 § 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

16

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., § 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

§ 226.42(c); (2) the prohibition on having an interest in the consumer’s principal dwelling or the

transaction, under § 226.42(d); and (3) the prohibition on extending credit where a creditor

knows of a violation of § 226.42(c) or (d) unless certain conditions are met under § 226.42(e).

This is consistent with the 2008 Appraisal Independence Rules, which define “appraiser” broadly

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. Pub. L. 111-203, 124 Stat. 2198 (to be codified at 12 U.S.C. 3355).

17

to mean a person who engages in the business of providing assessments of the value of

dwellings.9

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 § 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.

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

§ 226.42(c). Comment 42(b)(3)-3 clarifies that an estimate of the value of the consumer’s

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. § 226.36(f), (g).

10 SeeAppraisal 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).

18

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 § 226.42(b)(d). This interim final rule therefore uses the term “valuation

management functions” rather than “appraisal management” for purposes of § 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

19

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 § 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).

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,

20

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); § 226.36(b). The Board is implementing TILA

Section 129E(b) and (c) in § 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 § 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 § 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

§ 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).

21

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 § 226.42(b). Also,

§ 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 § 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), § 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

§ 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 § 226.42(c)(1) cover a range of acts and practices

sufficiently broad to address a wide variety of actions that compromise the independent

22

estimation of the value of the consumer’s principal dwelling. Further, § 226.42(c)(1)(i) provides

examples of actions that violate § 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 § 226.42(c)(1) if the

person does not engage in an act or practice set forth in § 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 § 226.42(c), because

such request does not supplant the independent judgment of the person that prepares a valuation.

See § 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 § 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 § 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 § 226.42(c)(1) by seeking to coerce a real

23

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 § 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 federallyrelated

mortgage transactions.11

Indirect acts or practices. Comment 42(c)(1)-4 clarifies that § 226.42(c)(1) may be

violated indirectly, for example, 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, § 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 § 226.42(b)(3).) The Board requests comment, however, on

whether creditors or other persons exercise or attempt to exercise improper influence over

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).

24

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 § 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 § 226.36(b)(1)(C) and (D). In addition, § 226.42(c)(1)(i)(D)

through (E) mirror current § 226.36(b)(1)(i)(A), (B), and (E). The examples provided in

§ 226.42(c)(1)(i) illustrate cases where prohibited action is taken towards a person that prepares

valuations. The Board notes that § 226.42(c)(1) nevertheless applies to prohibited acts and

25

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 § 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 § 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.”

26

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 § 226.42(c)(1). See § 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 § 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 § 226.36(b)(1)(ii)(A), (B), and (E) in new

§ 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

§ 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 § 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 § 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 § 226.42(c)(1)(i) are illustrative, not

exhaustive, and other actions may violate § 226.42(c)(1).

27

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

§ 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. This is because a person may

mischaracterize such value without any outside pressure. This interim final rule implements

TILA Section 129E(b)(2) in § 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

§ 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.

28

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 § 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 § 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 § 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 § 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 § 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

29

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), § 226.42(c)(3) provides

examples of actions that do not violate § 226.42(c)(1) or (2). The Board notes that the examples

provided under § 226.42(c)(3) are illustrative, not exhaustive, and there are other actions that are

permitted under § 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 § 226.36(b)(1)(ii)(A) through (C).

The interim final rule implements TILA Section 129E(c)(1) through (3) in § 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

§ 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 § 226.36(b)(1)(ii)(D) through (F) in new

§ 226.42(c)(3)(iv) through (vi). Section 226.42(c)(3)(iv) provides that an example of an action

30

that does not violate § 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 § 226.36(b)(1)(ii)(D) but omits the statement in that provision that obtaining

multiple appraisals is permitted under § 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

§ 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 § 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 § 226.36(b)(1)(ii)(E) and (F).

42(d) Prohibition on Conflicts of Interest

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

31

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 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

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

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).

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

(Interagency Guidelines).

32

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

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.”

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:

15 Id.

16 Board, OCC, FDIC, OTS, NCUA, Proposed Interagency Appraisal and Evaluation Guidelines, 73 FR 69647, Nov.

19, 2008 (Proposed Interagency Guidelines).

33

? 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

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

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:

17 HVCC, Part III.B.

18 Id. Part IV.A.

19 Id. Part IV.C.

34

? 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

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

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

The Interim Final Rule

20 Id. Part IV.B.

21 Id. Part IV.C.

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.

35

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), th 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

36

[HVCC], between the origination group and the appraisal unit designed to ensure the

independence of appraisal results and reviews.”24

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);

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, § 602, of H.R. 1728.

37

? 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 § 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

38

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 § 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

§ 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 § 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

39

under § 226.42(d)(1)(i). The 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.

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 § 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 § 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 § 226.42(d)(1)(i), or the person’s affiliate may provide

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

40

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 § 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

26 See Interagency Guidelines, SR 94-55; HVCC, Part IV.B.

41

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

Thus, the interim final rule creates two safe harbors for compliance with the prohibition

on conflicts of interest under § 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 (§ 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 (§ 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 § 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

27 House Report at 95.

42

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 industry and should not cause undue confusion.28

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 § 226.42(d)(1)(i) of

this section based on the person’s employment or affiliate relationship with the creditor if:

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

43

(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

§ 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 § 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 § 226.42(d)(1)(i) on the basis of the employment or affiliate relationship with

the creditor if the conditions in § 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 § 226.42(d)(2) are satisfied without violating the regulation. The

comment also states that, if the safe harbor conditions in § 226.42(d)(2) are not satisfied, whether

a person preparing valuations or performing valuation management functions has violated §

44

226.42(d)(1)(i) depends on all of the facts and circumstances. The three conditions for the safe

harbor under § 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.

45

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 § 226.42(d)(5)(i), or by a

person who is directly supervised or managed by a loan officer, the condition under §

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 § 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.

46

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 § 226.42(d)(4)(ii)) from direct or indirect

involvement in selecting, retaining, 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 § 226.42(d)(2)(iii) is not met.

The Board requests comment on the appropriateness of the three conditions required

under § 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 § 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, § 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 § 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

47

(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 § 226.42(d)(3) creates a safe harbor for compliance with

the general prohibition on conflicts of interest under § 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 § 226.42(d)(3) are satisfied. The comment also explains that, if the safe harbor

conditions in § 226.42(d)(3) are not satisfied, whether a person preparing valuations or

performing valuation management functions has violated § 226.42(d)(1) depends on all of the

facts and circumstances. The two conditions for the safe harbor under § 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 § 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.

48

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 (§ 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 (§ 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 § 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 (§ 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

49

orders, performs, or reviews the valuation for a particular transaction should abstain from any

vote or approval involving that transaction.31

The Board requests comment on the appropriateness of the two conditions of the safe

harbor under § 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 § 226.42(d)(1)(i) by persons who prepare valuations or

perform valuation management functions for a covered transaction and provide other settlement

services for the same transaction, or whose affiliate provides settlement services. The Board

31 Interagency Guidelines, SR 94-55.

50

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

As with the safe harbors for employees and affiliates of creditors (§ 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 (§ 226.42(d)(4)(i)) or assets of $250 million or

less as of December 31st for either of the past two calendar years (§ 226.42(d)(4)(ii)).

Paragraph 42(d)(4)(i)

Under § 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 § 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

§ 226.42(d)(2)(i)-(iii) are met. As discussed earlier, the conditions in § 226.42(d)(2)(i)-(iii) are

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.

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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 § 226.42(d)(4)(i) are not satisfied, whether a person preparing valuations or

52

performing valuation management functions has violated § 226.42(d)(1) depends on all of the

facts and circumstances.

Comment 42(d)(4)(i)-2 explains that the safe harbor under § 226.42(d)(4)(i) is available

if the condition specified in § 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 § 226.42(d)(2)(ii) is not met.

Paragraph 42(d)(4)(ii)

Under § 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 § 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

§ 226.42(d)(3)(i)-(ii) are met.

Comment 42(d)(4)(ii)-1 explains that, even if the conditions in § 226.42(d)(4)(ii) are

satisfied, however, the person may have a prohibited conflict of interest on other grounds, such

53

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 services for the same transaction, as

long as the conditions described in § 226.42(d)(4)(i) are satisfied. The comment further explains

that, if the conditions in § 226.42(d)(4)(i) are not satisfied, whether a person preparing valuations

or performing valuation management functions has violated § 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 § 226.42(d)(1)(i).

42(d)(5) Definitions

Section 226.42(d)(5) provides three definitions for purposes of § 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

54

function” or “loan production staff.”33 The term appears in § 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.

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

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

55

service for the same transaction, or whose affiliate performs another settlement service for the

same transaction. See § 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

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 § 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

§ 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-

34 HVCC, Part IV.C.

56

by-section analysis of § 226.42(b)(3). Section 226.42(e) is substantially similar to existing

§ 226.36(b)(2).

Comment 42(e)-1 clarifies that a creditor will be deemed to have acted with reasonable

diligence under § 226.42(e) if the creditor extends credit based on a valuation other than the

valuation subject to the restriction in § 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 § 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 § 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 § 226.42(c) or (d). In addition, under the interim final

rule, a violation of § 226.42(e) does not establish a basis for voiding loan agreements. That is,

even if a creditor knows of a violation of § 226.42(c) or (d) and nevertheless extends credit in

violation of § 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

57

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 § 226.36(b)(2). See 73 FR 44522,

44568 (Jul. 30, 2008).

42(f) Customary and Reasonable Compensation

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

58

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).

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.

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.

59

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 § 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 (§ 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 (§ 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

60

compensation paid to fee appraisers for appraisals ordered by appraisal management companies

(defined in § 226.42(f)(4)(iii)).

The first presumption of compliance described above (§ 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 (§ 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 appraisals

61

ordered by companies that publicly hold themselves out as appraisal management companies

(defined in § 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.

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

37 See HVCC, Part IV.A and IV.B.

38 See Id. Part III.B.

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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 § 226.42, § 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

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Section 226.42(f)(1) requires that, in any covered transaction (defined in § 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

§ 226.42(f), “agents” of the creditor do not include any fee appraiser defined in § 226.42(f)(4)(i).

Agents of the Creditor

The reference to “agents” in § 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 § 226.42(f)(4)(i) from the meaning of “agent” of the creditor for

purposes of § 226.42(f). The comment explains that, therefore, fee appraisers are not required to

pay other fee appraisers customary and reasonable compensation under § 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 § 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)

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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 Boardunderstands, 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.

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 § 226.42(f), the “geographic market of the property being appraised” means

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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.

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 § 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

39 For further discussion of “relevant geographic markets,” see, e.g., U.S. Dept. of Justice and Federal Trade

Commission, “Horizontal Merger Guidelines,” § 4.2 (Aug. 19, 2010), found at

http://www.justice.gov/atr/public/guidelines/hmg-2010.html#4f.

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should specify particular types of contractual obligations that, if breached, would warrant

withholding compensation without violating § 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 § 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 § 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

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42(f)(1)-5 clarifies that § 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 § 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.

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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.

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 § 226.42(f)(1) if the

creditor or its agent meets the conditions specified in § 226.42(f)(2), stated above, in determining

the compensation. The comment clarifies that these conditions are not requirements for

compliance with § 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 § 226.42(f)(2), so this evidence must

be distinguishable from allegations that the creditor or its agent failed to satisfy the conditions in

§ 226.42(f)(2). Finally, the comment explains that, if a creditor or its agent does not meet one of

the conditions in § 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)

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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 § 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 §

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 § 226.42(f)(2). This

comment also states that, for purposes of the presumption of compliance under § 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 § 226.42(f)(3), discussed below. The Board requests comment on whether

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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 § 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).

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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

§ 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 singlefamily

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

§ 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

40 See The Appraisal Foundation, Uniform Standards of Professional Appraisal Practice (USPAP), ed. 2010-2011,

“Scope of Work Rule,” U-13.

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analyses required to reach credible conclusions. Thus, the compensation of an appraiser may

reasonably be higher 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.

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 § 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

Fee appraiser qualifications. The fourth factor is the fee appraiser’s professional

qualifications. See § 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-intraining

who has not yet received a license. Relevant qualifications may also include the

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

42 Appraiser Qualifications Board, The Appraisal Foundation, “The Real Property Appraiser Qualification Criteria”

(Apr. 2010).

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appraiser’s completion of continuing education courses on effective appraisal methods and

related topics.

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.

Fee appraiser experience and professional record. The fifth factor is the professional

record and experience of the fee appraiser. See § 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

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).

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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

§ 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 § 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 § 226.42(f)(2)(i) may

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be an inaccurate measure of what a “reasonable” fee should be. Thus, under § 226.42(f)(2)(ii), to

qualify for the presumption of compliance afforded under § 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 (§ 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 (§ 226.42(f)(2)(ii)(B)).

Comment 42(f)(2)(ii)-1 explains that, under § 226.42(f)(2)(ii)(A), a creditor or its agent

would not qualify for § 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 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

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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 § 226.42(f)(2)(ii)(B), a creditor or its agent

would not qualify for § 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 § 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 § 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

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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 (§ 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 (§ 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 § 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

§ 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 § 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

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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 § 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 § 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 § 226.42(f)(1). Comment 42(f)(3)-3 clarifies

that whether rates may reasonably be considered “recent” under § 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 § 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 § 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

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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 § 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

(§ 226.42(f)(4)(i)(A)); or

(2) 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 FIRREA, 12 U.S.C. 3331 et seq.

(§ 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.

Comment 42(f)(4)(i)-1 clarifies that the term “organization” in § 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

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

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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 § 226.42(f)(4)(iii).

Appraisal Services

Section 226.42(f)(4)(ii) states that, for purposes of § 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

45 See Dodd-Frank Act, Section 1473(f) (amending FIRREA Sections 1121 and 1124), Pub. L. 111-203, 124 Stat.

2191-2192 (to be codified at 12 U.S.C. 3332 and 3353, respectively).

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Section 226.42(f)(4)(iii) defines an “appraisal management company” in § 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.

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.

46 Id.

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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 § 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

§ 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, § 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.

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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 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 § 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

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42(g)(1)-3 clarifies that § 226.42(g)(1) does not require reporting of failure to comply that is not

material within the meaning of § 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 § 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 § 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 sectionby-

section analysis of § 226.42(b)(2).

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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 § 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, § 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 [Insert date that is 60 days after the date of

publication in the Federal Register] 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.

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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 § 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 § 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.

As noted, certain provisions of this interim final rule are substantially similar to the

provisions of current § 226.36(b). The Board is therefore removing § 226.36(b) and related staff

commentary, effective April 1, 2011, for applications received on or after that date.

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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, § 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 § 226.42 constitutes compliance with § 226.36(b).

Accordingly, creditors, mortgage brokers, and their affiliates subject to § 226.36(b) may comply

with this interim final rule for applications received by creditors before April 1, 2011, in lieu of

complying with § 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.

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

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.

88

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

89

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.

90

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.

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

91

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

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.

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

Appraisal management companies. The Board is not aware of any source of information

about the number of appraisal management companies.

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.

51 http://factfinder.census.gov/servlet/IBQTable?_bm=y&-ds_name=EC0753I1&-ib_type=NAICS2007&-

NAICS2007=531320.

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.

92

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

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

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

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.

54 http://www.census.gov/epcd/susb/latest/us/US524127.HTM.

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.

56 http://factfinder.census.gov/servlet/IBQTable?_bm=y&-ds_name=EC0754I1&-ib_type=NAICS2007

NAICS2007&-NAICS2007=541370.

57 http://factfinder.census.gov/servlet/IBQTable?_bm=y&-ds_name=EC0753I1&-ib_type=NAICS2007&-

NAICS2007=531390.

93

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

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

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

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.

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.

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.

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.

94

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 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 USC 1691 et seq., and

the Board’s Regulation B, 12 CFR 202.14, require creditors to provide a copy of an appraisal

61 Board: 12 C.F.R. 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.

95

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.

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

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

62 Section 1474 of the Dodd-Frank Act amends the ECOA’s requirement to provide a copy of the appraisal report to

the consumer. Pub. L. 111-203, 124 Stat. 2199 (to be codified at 15 U.S.C. 1691).

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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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.

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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 respondents64 supervised by the Federal Reserve will take, on average,

40 hours (one business week) to update their systems, internal procedure manuals, and provide

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.

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training for relevant staff to comply with the new reporting requirements in § 226.42(g)(1).65

This revision is estimated to result in a one-time increase in burden by 22,680 hours.

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.

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.

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 § 226.42(g) should not be overly burdensome.

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).

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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

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

Authority and Issuance

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)

1. The authority section 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 § 2,

123 Stat. 1734; Pub. L. 111-203 § 1472(a), 124 Stat. 1376, 2188 (to be codified at 15 U.S.C.

1639e).

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Subpart E—Special Rules for Certain Home Mortgage Transactions

2. Effective April 1, 2011, section 226.36 is amended by removing and reserving

paragraph (b).

3. Effective [Insert date that is 60 days after the date of publication in the Federal

Register], new section 226.42 is added to read as follows:

§ 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 § 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

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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

(E) Conditioning the compensation paid to a person that prepares a valuation on

consummation of the covered transaction.

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(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

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(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

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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)

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of this section as a result of the person or the person’s affiliate performinganother 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 decision or the terms on which credit is extended.

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(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—

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(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—

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(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 reasonable

believes an appraiser has not complied with the Uniform Standards of Professional Appraisal

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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.

4. In Supplement I to Part 226:

A. Under Section 226.1-- Authority, Purpose, Coverage, Organization, Enforcement and

Liability, paragraph 1(d)(5)-1 is revised.

B. Under Section 226.5b—Requirements for Home-equity Plans, new paragraph 7 is

added.

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.

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D. Effective [Insert date that is 60 days after the date of publication in the Federal

Register], 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).

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 §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 §226.35(b)(3) are effective for covered loans (including refinancings and assumptions

in §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 §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 §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

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an application for a refinance loan covered by §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 §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 §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 §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 §226.36(c) apply to the servicing

of that loan as of October 1, 2009.

(ii) The interim final rule on appraisal independence in § 226.42 published on [insert

date of publication in Federal Register] is mandatory on April 1, 2011, for open- and closedend

extensions of consumer credit secured by the consumer’s principal dwelling. Section

226.36(b), which is substantially similar to § 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 § 226.36(b) regardless

of the date on which the transaction is consummated. However, parties subject to § 226.36(b)

may, at their option, choose comply with § 226.42 instead of § 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 § 226.36(b), however, the creditor may choose to

comply with § 226.42 instead. For an application for open- or closed-end credit secured by the

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consumer’s principal dwelling that is received on or after April 1, 2011, the creditor must

comply with § 226.42.

* * * * *

Section 226.5b—Requirements for Home-equity Plans.

* * * * *

7. Appraisals and other valuations. For consumer credit transactions subject to § 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 § 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”

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(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

§ 226.42(b) as under §§ 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.

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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 § 226.2(b)(3).

2. Purpose. A covered person does not violate § 226.42(c)(1) if the person does not

engage in an act or practice set forth in § 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 § 226.42(c), because such request does not supplant the

independent judgment of the person that prepares a valuation. See § 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 § 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 § 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 § 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

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person violates § 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 § 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 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, § 226.42(c)(1)(i) also applies to coercion of a person

that performs valuation management functions or its affiliate. See § 226.42(c)(1); comment

42(c)(1)-4.

2. Specific value or predetermined threshold. As used in the examples of actions

prohibited under § 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

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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

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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

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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 purchasemoney

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

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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

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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 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 purchasemoney

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

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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.

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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

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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 § 226.42(e) if the creditor extends credit based on a valuation other than the

valuation subject to the restriction in § 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 § 226.42(e), the

creditor may extend credit based on the appraisal.

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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.

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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 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 § 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 § 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

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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

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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

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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 § 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 § 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

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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.

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2. Geographic market. The meaning of “geographic market” for purposes of 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 § 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

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professional requirements:

i. Mischaracterizing the value of the consumer’s principal dwelling in violation of

§ 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 § 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); § 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.

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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 § 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 (signed)

Jennifer J. Johnson

Secretary of the Board.


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No tax reassessment planned for Glen Rock
Friday, September 3, 2010
Glen Rock Gazette
STAFF WRITER

Despite a surge in tax appeals throughout Bergen County, there will likely be no tax reassessment of Glen Rock homes for at least two years, according to the borough's tax assessor.

"We don't have a clear-enough indication from recent sales that we need one," said Steve Rubenstein, the borough's tax assessor and a principal with New York-based Realty Appraisal Co. "When we last did one in Glen Rock, I kept the numbers modest enough."

By contrast, 20 towns in Bergen County are looking to perform reassessments or revaluations, and most have voluntarily asked for them, according to James Camisa, tax manager for the Bergen County Board of Taxation. These communities generally performed their last assessments before the markets crashed, and had valued homes on the high end of market prices.

"This year has been hectic," Camisa said. "A lot of it was the market, and a lot of it was that people were just panicking."

As a town's housing market fluctuates or goes out of sync with assessments, communities generally see a spike in tax appeals – as is the case in many of the towns seeking reassessments and revaluations. The county's Tax Board received 8,286 tax appeals this year – up from about 7,000 last year, Camisa said. Last year, Englewood hired an outside firm to assist with an onslaught of appeals.

Glen Rock, however, has not received a large increase in property tax appeals. In 2010, there were 37 appeals; in 2009, the number was 28, not including an appeal by a large condominium development that was later withdrawn. In 2008, there were 34 appeals.

"There's only been a slight uptake," Rubenstein said. "We haven't had any large-scale taxpayer revolt, no big meetings."

Tax appeals are costly and involve extra fees to assessors and attorneys, and successful appeals upset the balance among a community's taxpayers.

Glen Rock's last reassessment, conducted in 2006, cost the borough about $70,000; the last revaluation was conducted in 2002 and cost the borough more than $200,000, Rubenstein said. Revaluations are generally conducted by an outside firm and require an inspection of every single home. Reassessments are usually conducted by a municipal tax assessor and are calculated using a combination of the last revaluation's data and more recent housing sales data.

At the time of Glen Rock's last reassessment, Rubenstein said, he had deliberately assessed homes at 90 or 95 percent of their market value. The year 2006 "was a very hyper type of market, and I left a little margin for the market to fall. So we're not facing the same situation as some of these other towns," he said.

Mayor John van Keuren noted at the Aug. 17 Borough Council work session that residents had inquired about whether a tax assessment was planned in Glen Rock.

After conferring with Rubenstein, he suggested that the town abide by "what the tax assessor advises us."

"Even though it would appear that house sale prices are down in recent experiences, we are not at the point where we need a [revaluation]," van Keuren said.

In general, the best indicator for determining whether assessments are necessary is the assessment ratio, defined as the assessed values of a community's homes divided by their market values, or sale prices; the ratio is calculated by the New Jersey Division of Taxation for every community. If the ratio is below 85 percent, the county orders a reassessment. If the ratio is near or above 100 percent – that is, when a majority of homes sell for less than their assessed value – then towns often voluntarily request reassessments, Rubenstein said.

In 2009, Glen Rock's assessment ratio was calculated at 88.6 percent; in 2008 it was 86 percent.

The ratio will be recalculated in October, and Rubenstein estimated that Glen Rock's could crawl up above 90 percent – though still not high enough to order a reassessment or revaluation.

He acknowledged that some of Glen Rock's homes are now being sold for less than their assessed value, but added that "just as many" are being sold for more than their assessed value.

Another indicator for reassessments is the "coefficient of deviation," a calculation of the degree of variation in assessment ratios among individual homeowners. This indicator in Glen Rock is also moderate, Rubenstein said.

Towns approved for revaluations include Carlstadt, Demarest, Fairview, Garfield, Mahwah, Midland Park, North Arlington, Old Tappan, Tenafly, and Wood-Ridge.

Towns approved for reassessments include Hackensack, Norwood, Wallington, Park Ridge, Franklin Lakes, Ho-Ho-Kus, Englewood, Emerson, Ridgefield Park, and Cliffside Park.

E-mail: ebbels@northjersey.com

Despite a surge in tax appeals throughout Bergen County, there will likely be no tax reassessment of Glen Rock homes for at least two years, according to the borough's tax assessor.

"We don't have a clear-enough indication from recent sales that we need one," said Steve Rubenstein, the borough's tax assessor and a principal with New York-based Realty Appraisal Co. "When we last did one in Glen Rock, I kept the numbers modest enough."

By contrast, 20 towns in Bergen County are looking to perform reassessments or revaluations, and most have voluntarily asked for them, according to James Camisa, tax manager for the Bergen County Board of Taxation. These communities generally performed their last assessments before the markets crashed, and had valued homes on the high end of market prices.

"This year has been hectic," Camisa said. "A lot of it was the market, and a lot of it was that people were just panicking."

As a town's housing market fluctuates or goes out of sync with assessments, communities generally see a spike in tax appeals – as is the case in many of the towns seeking reassessments and revaluations. The county's Tax Board received 8,286 tax appeals this year – up from about 7,000 last year, Camisa said. Last year, Englewood hired an outside firm to assist with an onslaught of appeals.

Glen Rock, however, has not received a large increase in property tax appeals. In 2010, there were 37 appeals; in 2009, the number was 28, not including an appeal by a large condominium development that was later withdrawn. In 2008, there were 34 appeals.

"There's only been a slight uptake," Rubenstein said. "We haven't had any large-scale taxpayer revolt, no big meetings."

Tax appeals are costly and involve extra fees to assessors and attorneys, and successful appeals upset the balance among a community's taxpayers.

Glen Rock's last reassessment, conducted in 2006, cost the borough about $70,000; the last revaluation was conducted in 2002 and cost the borough more than $200,000, Rubenstein said. Revaluations are generally conducted by an outside firm and require an inspection of every single home. Reassessments are usually conducted by a municipal tax assessor and are calculated using a combination of the last revaluation's data and more recent housing sales data.

At the time of Glen Rock's last reassessment, Rubenstein said, he had deliberately assessed homes at 90 or 95 percent of their market value. The year 2006 "was a very hyper type of market, and I left a little margin for the market to fall. So we're not facing the same situation as some of these other towns," he said.

Mayor John van Keuren noted at the Aug. 17 Borough Council work session that residents had inquired about whether a tax assessment was planned in Glen Rock.

After conferring with Rubenstein, he suggested that the town abide by "what the tax assessor advises us."

"Even though it would appear that house sale prices are down in recent experiences, we are not at the point where we need a [revaluation]," van Keuren said.

In general, the best indicator for determining whether assessments are necessary is the assessment ratio, defined as the assessed values of a community's homes divided by their market values, or sale prices; the ratio is calculated by the New Jersey Division of Taxation for every community. If the ratio is below 85 percent, the county orders a reassessment. If the ratio is near or above 100 percent – that is, when a majority of homes sell for less than their assessed value – then towns often voluntarily request reassessments, Rubenstein said.

In 2009, Glen Rock's assessment ratio was calculated at 88.6 percent; in 2008 it was 86 percent.

The ratio will be recalculated in October, and Rubenstein estimated that Glen Rock's could crawl up above 90 percent – though still not high enough to order a reassessment or revaluation.

He acknowledged that some of Glen Rock's homes are now being sold for less than their assessed value, but added that "just as many" are being sold for more than their assessed value.

Another indicator for reassessments is the "coefficient of deviation," a calculation of the degree of variation in assessment ratios among individual homeowners. This indicator in Glen Rock is also moderate, Rubenstein said.

Towns approved for revaluations include Carlstadt, Demarest, Fairview, Garfield, Mahwah, Midland Park, North Arlington, Old Tappan, Tenafly, and Wood-Ridge.

Towns approved for reassessments include Hackensack, Norwood, Wallington, Park Ridge, Franklin Lakes, Ho-Ho-Kus, Englewood, Emerson, Ridgefield Park, and Cliffside Park.


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Posted by Bill Bici on September 14th, 2010 7:51 PMLeave a Comment

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The mortgage-broker and real-estate industries are pushing to have a measure that would kill new home-appraisal rules inserted into pending legislation to overhaul financial-sector regulation.

The Home Valuation Code of Conduct, adopted in May 2009 to ensure appraiser independence, bars mortgage brokers and bank loan officers from selecting appraisers. Mortgage brokers and realtors complain that the rules have produced low-ball appraisals that have blown up deals, while appraisers argue the change has harmed appraisal quality.

Mortgage lenders, on the other hand, are trying to fend off the measure. Several big lenders own or have a stake in companies that have seen a surge in business as a result of the new rules. "We're going to try all we can to keep it out," said John A. Courson, the Mortgage Bankers Association's president and chief executive officer. Inflated appraisals were widely blamed for helping to fuel the sharp run-up in home prices during the past decade. Before adoption of the new standards, appraisals were typically ordered directly by loan officers or mortgage brokers who worked regularly with the same appraisers. Lenders contend that the new standards have ensured that appraisers aren't pressured by loan officers to make the appraisal match the contract price, increasing chances of getting the mortgage loan approved.

The Code of Conduct was adopted last spring by Fannie Mae and Freddie Mac, the government controlled mortgage giants, in settling a New York state attorney general's probe of their appraisal standards.

Realtors and mortgage brokers succeeded in inserting language in the House-passed financial-regulation bill to end the new protocols. The measure would direct federal regulators to come up with an improved set of rules.

The language, however, didn't make it into the most recent draft being used as a basis for House and Senate negotiations. Lawmakers are expected to turn their attention to the appraisal rules and other mortgage provisions next week.

The new system has been a boon to vendors that specialize in farming out appraisal requests to a network of in-house and independent appraisers. Critics say these middlemen companies have pushed appraisers to do more work in less time, forcing a cram-down in fees across the whole industry that is hurting appraisal quality.

Appraisers have seen their fees slashed by 60%, according to Bill Garber, chief federal lobbyist for the Appraisal Institute, the industry's main trade group. Mr. Garber contends that a new mortgage broker licensing law and a myriad of state laws passed in the wake of the housing bust are sufficient to discourage collusion between brokers and appraisers.

"There's now a layer of oversight that didn't exist prior to the Home Valuation Code of Conduct that I think we can build from," he said.

National Association of Mortgage Brokers CEO Roy DeLoach contends that out-of-town appraisers hired by vendors are eating away at homeowner equity through home valuations that aren't credible: "It's basically hollowing out the equity in communities whether you intend to sell or not."

Mr. DeLoach said he believes the measure to scrap the Code of Conduct was left out of the latest draft of the legislation unintentionally.

Many of the largest U.S. mortgage lenders, including J.P. Morgan & Co. and Citigroup, own or have stakes in the middleman companies, known as appraisal-management companies.

Steve O'Connor, senior vice president of government affairs at the Mortgage Bankers Association, argued that it was sound policy to have a fire wall between the appraiser and the loan underwriter. His group supports federal oversight of appraisal-management companies, but is pushing to cap any fees charged to the companies to fund the regulator at $5,000 annually. Mortgage lenders are also fighting language in the financial-overhaul bill that would require disclosure to home buyers of the share of the appraisal cost going to the appraisal-management company.

Write to Jessica Holzer at jessica.holzer@dowjones.com


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Posted by Bill Bici on June 20th, 2010 1:02 AMView Comments (1)

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Two years after New York Attorney General Andrew Cuomo set out to reform home appraisals, that effort is still a work in progress that stirs strong passions among appraisers, lenders and real estate agents.

Government-backed mortgage investors Fannie Mae and Freddie Mac will set up a complaint procedure for people who believe home appraisals have been done improperly, the companies’ regulator, the Federal Housing Finance Agency, said Thursday.

The plan falls short of an agreement reached between the companies and Mr. Cuomo in March 2008. That agreement created a code of conduct for appraisers and required Fannie and Freddie to establish and fund what was to be called the Independent Valuation Protection Institute.

Under the agreement, Fannie and Freddie were to provide $24 million over five years to fund the institute. Aside from handling complaints and coordinating with state and federal regulators, the institute would have had the power to propose amendments to the code.

But the Federal Housing Finance Agency said in a letter to Mr. Cuomo this week that it couldn’t justify having Fannie and Freddie fund such an institute “in light of the billions of dollars in taxpayer funds” the companies have absorbed to cover heavy losses related to mortgage defaults. A spokesman for Mr. Cuomo said: “We understand the FHFA director’s position” on funding.

In early 2008, Mr. Cuomo threatened lawsuits against Fannie and Freddie for allegedly failing to make sure appraisers were protected from pressure to fudge their estimates in a way that would allow dubious loans to be made. He and many others argued that inflated appraisals helped pump up the housing bubble and facilitated fraudulent lending.

To avert litigation, Fannie and Freddie agreed with Mr. Cuomo on the code, which took effect in May 2009. Because Fannie and Freddie buy or guarantee the bulk of all home loans, the code has become the national standard for most home appraisals. The Federal Housing Administration, which insures loans, has adopted similar standards.

Many appraisers say the code has caused a drop in income for appraisers and hurt quality. As we’ve reported, some appraisers have tried to make up for declining fees by doing more assignments, some of them outside of the areas they know best.

But the FHFA said Thursday that the code has improved the quality of appraisals and reduced fraud.

The regulator said Fannie and Freddie will create a standardized complaint form and a way to submit complaints via the Internet within the next few weeks. Fannie and Freddie also are to refer cases of impropriety to state regulatory officials and identify “patterns and practices suggestive of fraud.”

The Appraisal Institute, a trade group for appraisers, said it was disappointed that “a fully funded” valuation institute won’t be created. The appraisal group said Fannie and Freddie should “do more than simply make referrals” to regulators. “We hope Fannie and Freddie will take aggressive action against loan sellers that violate the code and fail to obtain credible appraisals by competent appraisers,” the group said. It added that the code “can and should be improved.”

A spokesman for the National Association of Realtors said setting up a complaint process is “a good beginning” but that doing so without creating the institute falls short of the Realtors’ wishes.

The code bars loan officers, mortgage brokers or real-estate agents from any role in selecting appraisers. Bank employees who aren’t involved in loan production — and thus not dependent on commissions from completed loans — can order appraisals. But many lenders chose to comply with the code by outsourcing the selection of appraisers to appraisal management companies, or AMCs. AMCs take a sizable cut of the appraisal fee, sometimes 30% or more. Appraisers say AMCs pay them as little as $175 to $250 per assignment, compared with the $350 or more that many get when they work directly for a lender.

Mr. Cuomo effectively made an end run around Congress and federal regulators in establishing the code via an agreement with Fannie and Freddie. But Washington has since joined the debate. The Federal Reserve has adopted new rules, effective in October 2009, under the Truth in Lending Act that ban lenders and mortgage brokers from “coercing” appraisers to misstate a home’s value.

In December, the House of Representatives passed financial-regulatory legislation that could undo some of Mr. Cuomo’s work. The House bill would require a new regulator to create rules shielding appraisers from pressure to fudge their estimates. It also would allow mortgage brokers to order appraisals, subject to certain restrictions, and specify that lenders and their agents must “compensate appraisers at a rate this is customary and reasonable.” The Senate now is considering similar proposals as part of legislation to overhaul financial regulation.

Under the agreement between Mr. Cuomo, the FHFA, Fannie and Freddie that created the code, Fannie and Freddie no longer are bound by most of the terms after Nov. 1 of this year. That means Fannie and Freddie will be free to make changes in the appraisal requirements they impose on lenders, but they don’t seem likely to junk the whole code. “The code has been fairly successful,” an FHFA official said recently, but there may be ways to improve it and those will be examined in the months ahead.


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Posted by Bill Bici on June 20th, 2010 12:57 AMView Comments (1)

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April 25th, 2010 12:32 PM

5 tips for first-time homebuyers

So you've decided to go for it. Buying a home can be thrilling and nerve-racking at the same time, especially for a first-time homebuyer. It's difficult to know exactly what to expect. The learning curve can be steep, but most of the issues can be resolved by doing a little financial homework at the outset.

Take these five steps to help make the process go more smoothly.

Find the best mortgage rates
Bankrate can help you find the lowest available mortgage rate.

Check your credit

The credit score of the buyer may be the most important factor when it comes to qualifying for a loan these days.

"In addition, the standards are higher in terms of what score you need and how it affects the cost of the loan," says Mike Winesburg, mortgage planner with McKinley Carter Wealth Services in Wheeling, W.Va.

To get a sense of where your credit stands, go to AnnualCreditReport.com to get your free credit report from each of the three credit bureaus. For an extra fee you can find out what your numerical score is, but just checking the reports should give you an idea of what lenders will see. Scour the reports for mistakes, unpaid accounts or collection accounts.

Just because you pay everything on time every month doesn't mean your credit is stellar, however. The amount of credit you're using relative to your available credit limit, or your credit utilization ratio, can sink a credit score.

"Lenders determine all of the available credit that you have on all of your cards added up and how much your balances are. So if you have $10,000 credit available to you and you have $5,000 on there, you have a 50 percent credit utilization rate," says Winesburg.

The lower the utilization rate, the higher your score will be. Ideally, first-time homebuyers would have a lot of credit available, with less than a third of it used.

Repairing damaged credit takes time -- and money if you owe more than lenders would prefer to see relative to your income. Begin the process at least six months before shopping for a home.

Evaluate assets and liabilities

So you don't owe too much money and your payments are up to date. But how do you spend your money? Do you have piles of money left over every month or are you on a shoestring budget?

A first-time homebuyer should have a good idea of what is owed and what is coming in.

"You should understand a little bit about monthly cash flow," says Winesburg.

"If I were a first-time homebuyer and I wanted to do everything right, I would probably try to track my spending for a couple of months to see where my money was going," he says.

Additionally, buyers should have an idea of how lenders will view their income, and that requires becoming familiar with the basics of mortgage lending.

For instance, some professionals, such as the self-employed or straight-commission sales person, may have a more difficult time getting a loan these days than others. Gone are the days of the no-doc loan, thanks to the abuses of a couple years ago.

A stated income loan was available to non-W-2 wage earners in previous years, but today's standards are much more stringent.

According to Winesburg, the self-employed or independent contractor will need a solid two years' earnings history to show.

In short, how you receive and report income as well as how you write off expenses can make a difference to lenders.

Organize documents

The documents homebuyers must produce to be considered for a home mortgage are those which authenticate their income and taxes.

Typically, mortgage lenders will request two recent paystubs, the previous two years' W-2s, tax returns and the last two months of bank statements -- every page, even the blank ones.

"Why it has to be every single last page, I don't know. But that is what they want to see. I think they look for nonsufficient funds or odd money in or out," says Floyd Walters, owner of BWA Mortgage in La Canada Flintridge, Calif.

Buying a home can take a long time, but knowing what you need and where to find it can save time when you're ready.

Qualify yourself

Ideally, first-time homebuyers would know how much they can afford to spend before the mortgage lender tells them how much they qualify for.

By calculating their debt-to-income ratio and factoring in a down payment, buyers should have a good idea of what they can afford to invest, both upfront and on a monthly basis, when it comes to their home.

Though there's not a fixed debt-to-income ratio that lenders require, the old standard dictates that no more than 28 percent of your gross monthly income be devoted to housing costs, called the front-end ratio.

Including all debts with housing costs is the back-end ratio, and lenders prefer it to be under 41 percent.

"I really ask buyers to qualify themselves because although we can use that 28/41 ratio as a guideline, each of us knows our finances best. If we're used to paying $800 in rent but 28 percent of your income would be $2,000 then maybe 28 percent is too high," says Winesburg.

"Find out what you can afford and then you can back into everything else. We know the money you have available to put down, we know the monthly payment and we can solve for the third variable -- and that is the home price," he says.

Figure out your down payment

Scraping up that initial down payment takes some effort. Though FHA loans require a less substantial down payment than conventional loans, it can still be a huge chunk of money for a young person or couple.

Uncle Sam is here to help, however, with the first-time homebuyer tax credit, at least until the end of April.

Some borrowers working with a state housing finance agency can use the tax credit for a down payment. However, not all state agencies are offering interest-free or low interest loans to be paid back with the tax credit funds.

Other programs can assist buyers with qualifying incomes and situations.

"I've helped arrange assistance loans for $10,000 which are interest and payment free, and forgivable after five years. Although considered a loan, they're more like grants. Other programs can provide up to $40,000 interest free," says Winesburg.

"Each state is different, but most of this money comes from the HOME Investment Partnership Program, which is a federal block grant to create affordable housing," he says.

Finally, speak with mortgage lenders when you're starting the process. Check with friends, co-workers and neighbors to find out which lenders they enjoyed working with and ask them questions about the process and what other steps first-time homebuyers should take.


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Posted by Bill Bici on April 25th, 2010 12:32 PMLeave a Comment

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January 31st, 2010 12:07 PM

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Posted by Bill Bici on January 31st, 2010 12:07 PMLeave a Comment

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Complying with the Gramm-Leach-Bliley (“GLB”) Act

 

What is it?

The Gramm-Leach-Bliley Act, passed in 1999 and fully effective in July, 2001, addressed overall financial industry reforms as well as emerging consumer privacy and security issues.   Officially called the “Financial Modernization Act of 1999”, it affects the technology and information system policies used by anyone engaged in providing financial services either directly or indirectly to consumers.   

Under GLB, both the security and the privacy of a consumer’s non-public personal information (“NPI”) are protected.   Charged with implementing the act, the Federal Trade Commission addressed the security and privacy components separately by issuing two distinct rules, the “Safeguards Rule”, and the “Privacy Rule”. 

Appraisers are subject to the rules.  All appraisers are required to implement at least the following:

  • Under the Safeguards Rule, secure the transmission, receipt, and storage of data relating to any consumer’s NPI at all times, via passwords, encryption, and physical protection, backed by a written information security plan
  • Under the Privacy Rule, provide easily understood privacy statements to any consumers who engage the appraiser directly, disclosing the gathering, sharing, and security of NPI data, as well as the methods the consumer may use to opt-out of sharing of the data with third parties

Compliance is not terribly difficult, but it does require understanding of the rules and the methods available.   This Best Practices document will hopefully provide appraisers with information and ideas useful in implementing GLB compliance as part of their overall regulatory compliance strategy. 

Note:  For a la mode clients, we’ve provided specific details at the end of this document regarding how to be in GLB compliance and protect the NPI you send and receive using our tools.  Clients of other software vendors should contact their own vendors directly.

 

What non-public personal information (“NPI”) am I receiving?

NPI includes loan terms, lender or mortgage broker name, sales concessions, co-borrower, unpublished phone numbers, other contact information, and of course more sensitive information as well.   Even the fact that a particular consumer is engaged with a particular lender, at the time of the appraisal, is considered to be NPI if it has not been recorded in the public record yet or disclosed in some other way. 

Whether or not some of the data might eventually be disclosed post-closing through recording of deeds and mortgages is irrelevant.   At the time it is provided, it must be treated as NPI and accorded all of the security and privacy controls under the law.

Perhaps more importantly, the burden is on the appraiser to determine whether the data provided is public information or not.  The institution – the appraiser – is required to have a “reasonable basis to believe” that the data is publicly available.   In other words, research must have been done to determine its public availability first.   One could not assume that a phone number or an e-mail address is publicly listed without verifying it.

To be safe, anything about a particular borrower or individual, which is not absolutely known to be public at the specific moment the appraiser receives the information, should be strictly treated as NPI, and subjected to the appraiser’s implementation of both the Safeguards and Privacy Rules. 

Best Practices:  It’s safest to simply assume that an appraiser receives NPI on every assignment, and therefore, the Safeguards Rule precautions must be taken on every assignment.   The Privacy Rule also applies at all times, but the actions the appraiser must take vary depending on whether the appraiser was directly engaged by the individual.

It’s also important to note that the appraiser may not fall back on any state regulations which are less protective than the federal regulations.  Only those state laws offering greater protection of the consumer’s NPI, in the eyes of the FTC, are considered to apply.

 

Does it really apply to me?

GLB applies to financial institutions of all sizes.  While appraisers may not think of themselves as a “financial institution”, the Code of Federal Regulations [§ 4(k)(4)(F); 12 C.F.R. § 225.28] specifically defines appraisers as such:  “A personal property or real estate appraiser is a financial institution because real and personal property appraisal is a financial activity listed in 12 CFR 225.28(b)(2)(i) and referenced in section 4(k)(4)(F) of the Bank Holding Company Act.”

Like all laws, opinions differ as to the level of applicability in particular circumstances (lawyers are, after all, paid to argue both sides).  When evaluating whether or not a law applies, it’s valuable to look at the intent of the legislators and regulators implementing it.  In the case of GLB, the rules were submitted for industry comment by the FTC prior to adoption.  The commission noted specifically that lenders requested specific waivers for the hundreds of thousands of appraisers, attorneys, and accountants in the settlement services chain. 

The commission rejected the request, replying that the security of NPI must be maintained at every link in the chain and that lenders could not abdicate the responsibility of the Safeguards Rule at any point.  The FTC considered the case of appraisal transactions specifically, and clarified in the public record that the rules do indeed apply to appraisers.  Throughout the FTC’s official business guides to the two rules, posted on its website, appraisers are specifically listed up front as being covered by each particular rule. 

The FTC guidance is also very clear that size of the company is not an exception.  A one-person appraisal shop is an “institution” under GLB and is bound by the law exactly to the same extent as any other institution.
               
It’s important to note that the GLB rules apply to the institution, not the transaction, since the consumer’s NPI is held by the institution and unrelated to a transaction’s “federally related” status.   A transaction also does not have to be successfully completed for the rules to apply.   The consumer information merely has to be provided to any “financial institution” in the performance of financial services, such as appraising. 

Just as FIRREA resulted in the creation of USPAP, the GLB act resulted in the creation of the Safeguards Rule and the Privacy Rule.  Both are sets of rules created by federal agencies as a direct implementation of federal law, and both are non-optional in any appraisal firm’s overall regulatory compliance obligations. 

The practical application of the two rules in any size appraisal shop can be summarized this way:

The Safeguards Rule always applies to appraisers.  A consumer’s NPI must be securely handled at all times, regardless of where it originated, how it is held, or what type of transaction prompted it.
The Privacy Rule only applies when the appraiser is directly engaged by an individual consumer.

Best Practices:  GLB is just as applicable as USPAP to every appraiser.  Appraisers handle NPI on virtually every appraisal, and should implement GLB compliance using simple, unbending rules.  At the bare minimum, all transmissions with NPI, including the order and the final appraisal, must be via secure methods. 

Realize that USPAP is talked about frequently among appraisers because it guides numerous individual valuation decisions, on a daily basis.  But GLB similarly guides numerous individual data handling decisions, especially as related to e-mails to and from clients, on orders and final reports.   It must become part of the appraiser’s daily regimen.

As an analogy, most appraisers have encountered privacy hurdles attached to medical information under HIPAA.  Medical providers, from dentists to insurance companies, are now required to provide additional disclosures to patients, cannot provide information even to other family members, and must provide checks and balances even in person to ensure only authorized access is granted to information.   It changed everything related to how privacy of medical information is implemented.  It affected virtually every aspect of any medical provider’s daily interaction with the public, from phone calls to e-mails to paper storage. 

GLB is effectively the financial counterpart to HIPAA, and its impact on even the most low-level tasks conducted in the completion of an appraisal should be considered no less sweeping.

 

What’s the risk if I ignore it?

This is an era of substantial litigation with respect to privacy and security of data, in all industries.   There are also increasingly broad state and federal investigations of specific mortgage-related fraud activity, with appraisers being fairly or unfairly caught in the middle of thousands of cases.   The FBI lists mortgage-related fraud as its single fastest growth area of concern. 

Perhaps most worrisome of all, action against an appraiser for violating GLB rules can also come from individuals, and could be used as settlement leverage by plaintiffs filing lawsuits over valuation disputes.   The environment becomes rich for these types of suits as markets slow down, foreclosures go up, and lawyers for both consumers and lenders get involved.  

Best Practices:  GLB-related liability is always present.  Don’t increase legal exposure by ignoring it  any more than ignoring USPAP.  Compliance is much easier than it appears on the surface, much easier than USPAP, and much easier than responding to an investigation or lawsuit after the fact.

It’s by no means necessary to panic, but it would be unwise for appraisers to treat compliance with these rules lightly.  There’s been little discussion to date in the appraisal community, but they do apply and they are clearly an issue. 

As always, appraisers should consult their own legal advisors.  This document is not intended to provide legal advice of any kind.  It is merely our opinion of selected technological best practices for GLB compliance.  Simply put, if we were in an appraiser’s shoes, this is what we would do.

 

Why is this just now coming up?

GLB has been in force since mid-2001, so it isn’t new.  But with the combination of the mortgage boom and the post-9/11 focus on other areas of banking, GLB compliance took a back seat at most institutions, large and small.   Recently however, with identity theft and mortgage fraud both capturing headlines, GLB is now squarely in the spotlight.  As a provider of technology products directly to mortgage lenders and brokers, we were naturally asked by our customers in that market segment to carefully research GLB and ensure that our mortgage products were fully compliant. 

In the process, we were surprised to find the clear references to appraisers and the lack of exceptions to the rules.   Like most in the appraisal industry, we were not aware of the applicability to appraisers, nor the scope of the changes needed to comply.

Since we are now aware that most appraisers are not in compliance, and we are a service provider ourselves to appraisers who operate as financial institutions under the law, we feel we are obligated to notify appraisers of the relevant issues and to help them transition their businesses to practices consistent with the law.

GLB compliance is therefore now an integral part of our overall compliance support for appraisers, and part of our Best Practices series of documents. 

 

How do the two rules affect me?

Safeguards Rule:  Security and custody of consumer data

The Safeguards Rule requires that appraisers and all other financial institutions implement written security procedures to prevent NPI from falling into the wrong hands.  The complexity and scope of the written protocols may be appropriate to the size of the institution, but core security of the NPI may not be abdicated.  NPI must be secured using passwords and encryption during any sort of transmission, as well as during storage (and physically secured even when stored in paper form).  

All institutions are required to respect the sensitivity of the NPI data in all phases of a transaction, and interact with service providers appropriately, according to their written information security plan.  This written information security plan and the relevant protocols in it must be referenced in the privacy policy provided to the consumer (if the consumer directly engages the appraiser).   

In the appraiser’s role in the transaction, NPI data is potentially received electronically under many scenarios:

  • Receiving an appraisal order via e-mail
  • Receiving sales contracts and other financial documents
  • Transmitting final appraisal reports to the client
  • Ad hoc e-mails with other service providers – agent, mortgage broker, loan officer, etc.
In addition to unauthorized access, the data must be secured from loss due to environmental hazards such as floods, as well as from technological hazards such as system failures.  

Obviously, the appraiser must implement secure means of sending and receiving documents containing NPI.  Utilizing regular e-mails with NPI data in the message body or attachments, and even with password protected PDFs, is not sufficient.   (Appraisers of course normally send a final report PDF with a password preventing a client from editing the PDF, to prevent fraud.  But that still does not prevent anyone else from reading the PDF with the NPI in it.  Access to the data is undeterred by preventing the editing of the report.)

Best Practices:  Adopt a “custodial” mindset on all NPI data received, thinking in terms of security as well as preservation.  Develop a written information security plan and have it on file at all times, and review it regularly.  The plan must specify steps used to secure any communications containing NPI.  The easiest method is by using password-protected website delivery over SSL (Secure Sockets Layer). 

Obviously, each appraisal firm will adopt different levels of implementation.  But at its core, NPI data must be secured at all times.

There may be cases of course where the appraiser receives no NPI, and therefore, in hindsight, encryption would not have been necessary.  It would be tempting for an appraiser to decide therefore that security overall is not needed until the presence of NPI is certain.  However, the appraiser would not be aware of the scope of NPI until the data had already been received, which would already be a security breach if NPI was indeed present.  The only safe route is to assume that NPI is present and secure all communications appropriately. 

Note that encrypted e-mail may also be used, but is more difficult to implement, since encryption keys must be exchanged manually with multiple providers.  It’s unlikely that the people dealing with an appraiser on a transaction will have encryption enabled in their e-mail at all.  But all recipients and transmitters of NPI in the transaction are likely to be able to click a link to an SSL-enabled website in an automated e-mail, and to be able to set up password protected accounts on that site.  There are many options available, both tailored to appraisers’ needs and generic “off the shelf” secure delivery sites.

Regardless of the scope and type of encryption methods and processes used, developing a written security plan describing them is not optional.   The law specifically requires that it be written and regularly reviewed.  The appraiser must have it on file, and the privacy statement must refer to its presence.

Privacy Rule:  Policy statements and opt-out provisions

Under the Privacy Rule, individuals fall into two categories: “consumers”, and “customers”.  Consumers are any individuals who engage the institution at least once.  Customers are simply consumers who have an ongoing relationship with the company.   Both must be given privacy statements regarding the use of their NPI, and opt-out notices at specific times and circumstances, by the institution they engaged.  

That last phrase is essential.  When a lender or other business client provides the appraiser with NPI on an individual as part of a transaction, the appraiser is not required to provide another privacy policy disclosure to the individual.  The appraiser’s client must ensure that the suppliers it engages are in compliance with the privacy disclosures and opt-out notices it already provides to the individual.   

Best Practices:  Do not send privacy notices to consumers brought to you by a business client.   The obligation is on the institution whom the consumer directly engages. 

Appraisers who are indeed directly engaged by individuals must do the following: 

  • Provide a conspicuous and understandable initial notice of the privacy policy, covering handling of NPI, opt-out methods, and security safeguards
  • Provide opt-out notices of sharing of NPI, with a "reasonable opportunity" to respond (weeks or months)
  • Provide new revised privacy and opt-out notices if policies change
  • For “customers” only, provide an annual privacy statement reminder for the duration of the relationship

Typically, an appraiser does not share the NPI with any non-affiliated third parties except where required to process the report.   Appraisers don’t usually sell or otherwise distribute their databases for marketing purposes.  Most appraisers should be able to invoke the exceptions to opt-out notification as provided in sections 313.13, 313.14, and 313.15 of the act.

Under section 313.14 in particular, appraisers would not be required to send an opt-out notification nor even provide notice that sharing of the NPI has been undertaken, when the party to whom the data is disclosed is a non-financial service provider used in processing the transaction.   Likewise, in cases where the appraiser was not directly engaged by the consumer, the act of providing the data to the appraiser’s service providers would not be a violation of the original client’s privacy obligations to the consumer under section 313 of the law. 

However, when directly engaged by the consumer and even when claiming exemption under any provision of section 313, the appraiser must provide the privacy policy statement up front in order to be granted the exception.  Unless the consumer is aware of the policy overall, there can be no exceptions granted. 

Also, note that the security provisions still apply.  The appraiser must be sure that the service provider provides security controls, and that they are commensurate with the appraiser’s written security and safeguards policy.

Best Practices:  Do not share NPI data with anyone other than service providers who meet your security standards, and you can generally use the opt-out exceptions in section 313.  Treat all consumers and customer clients the same, by providing the “initial,” “revised,” and “annual” privacy policy disclosures to every individual who has engaged you.  Annual disclosures should be sent within the calendar year (i.e., by December of the year). 

Remember that unless the privacy policy disclosures are provided in all three conditions (initial, revised, and annual), the exceptions under section 313 cannot be invoked.

The privacy statement itself needs to address how the NPI will be handled and disclosed (if at all), how the consumer may opt out, and how the appraiser safeguards the data.   

The latter is why the company’s individual safeguards policy must be in writing.  The privacy statement does not need to include the full text of it, but it does need to state that the procedures are in place and are in writing.



Specific guidance for a la mode clients

Choosing an overall approach

The important thing when evaluating your options is to scale them to your needs, and remember that it’s not “all or nothing”.   Improving security and compliance is a path, not a destination.  It will never be “done” because the risks and methods constantly change.   Don’t feel like you have to have it all done tomorrow.  You don’t.  You do need to start, and be educated, however.  Security and privacy issues are not going away, ever.

If you’re a smaller firm, you can keep it simpler.  If you’re larger, the risk and the expected standards for privacy communications, security, and employee training are probably higher.

Knock out the highest risk elements first.  Generally, in the Safeguards Rule, you’re most likely to get valuable NPI in the original order and in the documents sent to you as follow-ups (contracts and such).  

Any time you receive or handle a document with a credit card number, an electronic bank account number, a loan account number, or an SSN on it, you’re handling the most sensitive data in the consumer’s NPI, and the security and privacy standards go up accordingly.   Since you don’t know when you’ll receive an order that already contains something sensitive, it’s usually a good idea to employ the strictest security all the time, up front, so that it’s not “too late” by the time you see it.

That being said, you can apply different standards of security based on your beliefs of the risk.  If, for example, you don’t believe that digital faxes inside unencrypted e-mails pose a risk, approach that aspect last, or not at all.   (But even eFax recognizes the non-compliance of unsecured faxes in e-mail and has a system designed specifically for GLB requirements:  http://www.efaxcorporate.com/corp/twa/page/glb). 

It’s your decision as to what level of compliance you think is “reasonable”, given your environment.

Don’t forget that some state privacy laws are stricter than GLB’s own Privacy Rule.  The privacy statements and the opt-out provisions of GLB should be implemented no matter what when dealing with consumers.

Finally, remember that top-level privacy and security are good business, and appealing to your clients.    If you decide to “lead the pack”, tell them.   Market yourself as being in full GLB compliance.  Turn your efforts into profit instead of just an expense.

 

Complying with the Safeguards Rule using our products

To comply with the Safeguards Rule, security and safety of the data is necessary – inbound, outbound, and stored on your systems – and you must have a written security plan.   The following are suggestions for using our products and others for compliance.

  • Develop a plan.  Keep it simple at first – anything is better than nothing.  For ideas in a “checklist” format, see http://tinyurl.com/qkwd7 or  http://tinyurl.com/f3wd3

    We will also be distributing template security plans free of charge, appropriate to various sizes of appraisal shops, as part of WinTOTAL’s upcoming Compliance Powerview in the Appraisal Desktop.

  • Receive orders securely.   Avoid orders sent via regular Internet e-mail, as they can be intercepted and read easily (even attachments).

    If you do not have an XSite, use some sort of website which is SSL encrypted, and do not allow orders from it to be forwarded to you via unencrypted e-mail.    Likewise, faxed orders received via an online e-mail fax service are not secure if they are delivered to you as attachments to unprotected e-mail.  Use a fax service with a desktop component which downloads the orders securely without e-mail.   

    If you have an XSite, use WinTOTAL’s Appraisal Desktop to pull down orders placed on your site, and those from plugin-capable clients, as it uses a secure connection.  You can also get faxed orders securely using the DirectFax cover sheets on your XSite.

  • Receive documents securely.  If you have others send you documents which are confidential, such as sales contracts, do not receive them as attachments to e-mails.

    If the document can be received as a secure fax (not as an attachment to an unencrypted e-mail), use that technique.

    If you have an XSite, clients (or you on their behalf) can log into the site, click on an existing order, and either electronically upload documents, or send them via DirectFax.  The documents are placed into WinTOTAL’s Digital Workfile for the specified report automatically the next time you synchronize with your XSite.  You can also print a DirectFax cover sheet from here for use by anyone wanting to send documents securely to your specific Workfile.

    If you do not have an XSite, you can use the DirectFax cover sheets in the WinTOTAL Digital Workfile to securely receive faxes directly to your system.  Print a Digital Workfile cover sheet to a PDF, attach that to an e-mail asking the other person to fax you a file, and tell them to use that cover sheet.  The document will be inserted directly into your Workfile the next time you synchronize with our net.X servers.

  • Store documents and appraisals (even in paper) securely and safely.  Security and safety of files is not just during transmission.  Even on your own system and in paper form, documents must be handled properly.

    Secure your paper files behind locked doors or cabinets, and where they will not be damaged by flood or fire.  If at all possible, move away from vulnerable paper storage altogether.

    If you have the Vault, let it upload your appraisal files every day.   In WinTOTAL, be sure to put any PDFs, etc. into the report’s Digital Workfile.  Use the DirectFax feature in WinTOTAL to simply fax any remaining paper files “into” your appraisal in one step. 

    If you do not have the Vault, you should still use the WinTOTAL Digital Workfile and DirectFax features to eliminate paper.  Then remember to regularly backup the files using CDs, DVDs, tape, or online systems, and store them offsite.  Be certain that offsite systems are secure.

  • Transmit appraisals securely.   Sending the final PDF should also be done securely.  Password protecting a PDF to prevent a client from changing it does not make it secure from viewing.   Others can easily snoop on an unencrypted e-mail in transit.

    If you have an XSite, use it to deliver final reports even if the order came in via phone or fax.  Allow WinTOTAL to synchronize the desktop order with your XSite automatically, and deliver it via the XSite plugin inside WinTOTAL.   When the client receives the delivery notification, they will be logging in and receiving the PDF over a secure connection, and all of the communications between your desktop and the XSite will also have been secure.

    If you do not have an XSite, deliver the final report using the SureReceipts option in WinTOTAL.  It avoids the PDF being attached to the unencrypted e-mail, it notifies you that the client opened the actual PDF, and it is downloaded to the client via an SSL secure connection.  SureReceipts is not as secure as an XSite yet, but it is being upgraded to also support password security.

 

Complying with the Privacy Rule using our products

To comply with the Privacy Rule, you have to deliver and display privacy statements as well as provide opt-out mechanisms to any consumer who engages you directly.   Providing the privacy statements and opt-out methods is not optional.  There are exceptions to the opt-out conditions when sharing that data with third parties, but not to the provision of the privacy statements up front.

Remember, the opt-out clauses only have an impact when sharing data with certain types of third parties.   Most appraisers will be unaffected since no sharing takes place.    (But you still have to provide the opt-out mechanism and the privacy statement.)

Opt-out provisions may be stricter and more mandatory in some states (California, for example) than under GLB alone, so be sure you understand what other opt-out restrictions may be placed on you and try to incorporate those into your site as well.   In any case, it’s good business to have a strong, client-friendly opt-out policy.

  • Develop a privacy policy and opt-out mechanism.  Privacy policy examples are all over the web, on nearly every site you visit.  Check out the GLB policies of your clients, posted on their sites, for examples too.   Like the security plan, keep it simple at first – anything is better than nothing. 

    We will be distributing template policy statements free of charge, appropriate to various sizes of appraisal shops, as part of WinTOTAL’s upcoming Compliance PowerView in the Appraisal Desktop.

    If you have an XSite, there will be sample privacy policies available within it.   You can also easily add an “optout@yourdomain.com” mailbox to CertMail for responses to your opt-out clause.  (We will be adding opt-out flagging in your contacts database as well; if they opt out, it will tag their record in your database.) 

    If you do not have an XSite, you can use the sample policy which will be provided within WinTOTAL, or your own, and add a mailbox for monitoring opt-out requests via your ISP or other mail carrier.  Be sure to keep track of clients who opt out.

  • Post the policy conspicuously on your website.   It should be on the footer of every page, as well as in the main navigation.  It should visually stand out.  The law specifically requires that it be conspicuous.

    If you have an XSite, you can quickly add our template Privacy Policy page to your site’s footer and navigation using the XSite Wizard.   Simply check the boxes to add the page.   

    If you do not have an XSite, use whatever method you currently follow to add pages, or consult your web designer.  You can paste the template page from WinTOTAL’s Compliance PowerView into whatever HTML editor you normally use.

  • Send the policy immediately any time you get a new consumer order.   As soon as you receive an order from a consumer, you must provide the policy.  You do not have to make it a mandatory “click through” before accepting an order.  You only have to provide it quickly enough after the order that the consumer would be able to opt-out before his or her NPI is shared with anyone.  Generally speaking, you should send the notice as soon as the order is received.

    If you have an XSite and XSellerate, the system will be able to trigger an automated privacy policy message to the consumer, whether the order was entered into the site directly or not.  If it was entered into the site, it will be immediate.  If it was received by phone or fax and typed into WinTOTAL, it will be sent automatically the next time your XSite and WinTOTAL synchronize the order.   There will be no need for you to remember to send it.

    If you do not have an XSite with XSellerate, remember to send an e-mail manually each time you are engaged by a consumer.    Place a link to your website policy page (or the full text of the policy) in the e-mail each time.

  • Send your annual privacy policy statements en masse to all consumers you handled, as well as any time you change it.  By sending an annual statement to every consumer, you don’t have to distinguish between “consumers” and the longer-term “customers”.   Also, send changed policies to everyone as soon as the change is made. 

    End of year is a great chance to thank them for their business, and then also remind them of the policy and your high standards in handling their NPI.   Use it as a marketing opportunity – not a sales pitch.  It’s a subtle opportunity to position yourself as a serious professional entity.

    If you have an XSite with XSellerate, use an XSellerate campaign set to trigger in December of each year, with your consumers selected automatically using the “groups” function.   From then on it will be automatic.  If you make a change to your policy at any time, simply trigger the same campaign to be sent immediately.

    If you do not have an XSite with XSellerate, use an e-mail program to manually send your privacy notice every year.   Be sure to set a reminder so that it doesn’t fall off your list of end-of-year tasks.  Likewise, be sure you send the policy again any time it’s changed.



References

Safeguards Rule” on the FTC’s web site:

http://www.ftc.gov/bcp/conline/pubs/buspubs/safeguards.htm
http://www.ftc.gov/bcp/conline/pubs/buspubs/safeguards.pdf
http://www.ftc.gov/privacy/privacyinitiatives/glbact.html

Privacy Rule”, from the same FTC site:

http://www.ftc.gov/privacy/privacyinitiatives/financial_rule.html
http://www.ftc.gov/bcp/conline/pubs/buspubs/glbshort.htm

Code of Federal Regulations, from the Government Printing Office:
http://a257.g.akamaitech.net/7/257/2422/14mar20010800/edocket.access.gpo.gov/cfr_2003/16cfr313.3.htm

Developing an information security program:
http://www.federalreserve.gov/boarddocs/SRLETTERS/2001/sr0115a1.pdf

Document from the Appraisal Foundation, 2001
http://www.appraisalfoundation.org/s_appraisal/bin.asp?CID=5&DID=517&DOC=FILE.PDF

Document from the California OREA, Winter 2002
http://www.orea.ca.gov/forms/CAv13n02.pdf 

 


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Posted by Bill Bici on January 18th, 2010 1:51 PMLeave a Comment

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March 11th, 2009 11:50 PM

Bill:

Its great! Thank you so much for this report. This is exactly the kind of information and skilled perspective we need to get the best value for our mother's house. I cannot think of any questions I have right now but I might come up with one down the road. I want you to know I will recommend you to anybody I know in New Jersey or parts of New York who needs your services. Did you have any further concerns about which you wish to make me aware? I'll be happy to hear from you.

Sincerely,

Helen.


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Posted by Bill Bici on March 11th, 2009 11:50 PMView Comments (6)

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WASHINGTON, 5 de marzo -- Fannie Mae (FNM/NYSE) comenzó hoy dos nuevas iniciativas: Home Affordable Refinance (Refinanciamiento del pago de la vivienda) y Home Affordable Modification (Modificación del pago de la vivienda), que estarán disponibles para sus administradores de préstamos y prestatarios como parte del programa Making Home Affordable (Facilitando el pago de la vivienda) de la Administración Obama. Las dos iniciativas están ideadas para ampliar de manera significativa la cantidad de prestatarios que puedan refinanciar o modificar sus hipotecas para llegar a un pago mensual que sea asequible ahora y en el futuro.

"Making Home Affordable ofrece herramientas clave a los prestadores hipotecarios y propietarios de viviendas que están afrontando dificultades financieras y precios de viviendas en disminución", dijo Herb Allison, presidente y CEO. "Potencialmente, millones de propietarios de viviendas podrían reunir los requisitos y beneficiarse con estas iniciativas. La gente de Fannie Mae hará todo lo que pueda para hacer que el programa sea un éxito para los propietarios de viviendas de todos los Estados Unidos y para avanzar la recuperación inmobiliaria de la nación."

Home Affordable Refinance

Home Affordable Refinance incluye nuevas flexibilidades de refinanciamiento para los propietarios de viviendas cuyos préstamos son propiedad de Fannie Mae. Entre las principales características, se encuentran:

  • Más flexibilidades: La mayoría de los prestatarios que refinancien un préstamo Fannie Mae existente no tendrán que comprar un seguro hipotecario nuevo ni adicional, si el préstamo --al momento del refinanciamiento-- consiste en más del 80 por ciento del valor de la vivienda. Todo seguro hipotecario existente podrá ser transferido a un nuevo préstamo. Además, Fannie Mae puede refinanciar préstamos hasta 105 por ciento del valor de la propiedad con esta nueva flexibilidad, por lo que incluso los prestatarios que están "bajo agua" --que adeudan más de lo que su vivienda vale-- pueden refinanciar. Esto ampliará la cantidad de prestatarios que puedan aprovechar las menores tasas de interés que reducen los pagos mensuales o que puedan refinanciar con una hipoteca más asequible.
  • Procedimiento simplificado: A partir de abril, todos los 1,600 prestadores y 29,000 corredores hipotecarios que usan la plataforma Desktop Underwriter® de Fannie Mae podrán procesar una solicitud para refinanciar cualquier préstamo Fannie Mae existente, lo que posibilita una mayor capacidad de originación de préstamos por parte de los prestadores y un refinanciamiento más fácil para los prestatarios.

Los que los prestatarios necesitan saber:

  • Para reunir las condiciones, su prestamo hipotecario debe ser propiedad Fannie Mae.
  • Debe contar con un sólido historial de pago correspondiente a su hipoteca actual.
  • La flexibilidad de este refinanciamiento termina en junio de 2010.

Home Affordable Modification

A través de la Home Affordable Modification, Fannie Mae trabajará con administradores de préstamos de todo el país con el fin de ayudar a los angustiados prestatarios a modificar su actual préstamo y convertirlo en una hipoteca que sea más asequible y sostenible. Los administradores de préstamos que participan en este programa pueden reducir las tasas de interés, alargar los tiempos de pago o tomar otras medidas, tales como ser indulgentes en cuanto a la devolución del capital (principal forbearance), para reducir los pagos mensuales hasta el 31 por ciento del ingreso bruto (antes de impuestos) del prestatario.

Lo que los prestatarios necesitan saber:

  • La modificación de un préstamo a través del Home Affordable Modification, solo puede ser para su residencia principal.
  • No necesita esperar a retrasarse con sus pagos: puede ponerse en marcha un plan en cuanto usted piense que podría tener problemas en realizar su pago hipotecario.
  • El importe que adeude sobre su hipoteca debe ser menor o igual a US$729,750.
  • El programa es para hipotecas extendidas antes del 1o. de enero de 2009.
  • En algunos casos, pueden exigirse ciertos requisitos de admisión, como el certificar que tiene dificultades financieras.

Con el fin de asegurar que los prestatarios que actualmente corren riesgo de ejecución hipotecaria (foreclosure) tengan la oportunidad de solicitar una Home Affordable Modification, se ha instruido a los administradores de préstamos de Fannie Mae que no procedan a una ejecución hipotecaria hasta que el prestatario haya sido evaluado para el programa.

Cómo saber si un préstamo es propiedad de Fannie Mae

Los prestatarios pueden averiguar si sus préstamos son propiedad de Fannie Mae en una de dos maneras:

  • Llamando a su actual prestador o administrador hipotecario. El número telefónico debería estar en su estado de cuenta mensual o en su talonario de cupones de pago mensual.

Fannie Mae también tiene la intención de poner a disposición una herramienta en línea más adelante en el mes, de manera que los prestatarios puedan buscar sus préstamos y determinar si son propiedad de la compañía.

Fannie Mae tiene como misión ampliar el alojamiento costeable y llevar el capital global a las comunidades locales, con el fin de atender el mercado inmobiliario de los EE. UU. Fannie Mae tiene un estatuto federal (federal charter) y opera en el mercado de segunda hipoteca de los Estados Unidos, con el fin de aumentar la liquidez del mercado hipotecario, ofreciendo fondos a banqueros hipotecarios y a otros prestamistas, de manera que puedan prestar dinero a los compradores de viviendas. Nuestra función es ayudar a quienes tienen sus viviendas en los Estados Unidos.

Fannie Mae Resource Center Telephone 1-800-7FANNIE
(1-800-732-6643)

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Posted by Bill Bici on March 9th, 2009 11:03 PMLeave a Comment

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WASHINGTON DC -- Fannie Mae (FNM/NYSE) today began making two new initiatives -- Home Affordable Refinance and Home Affordable Modification -- available to its servicers and borrowers as part of the Obama Administration's Making Home Affordable program. The two initiatives are designed to significantly expand the numbers of borrowers who can refinance or modify their mortgages to a payment that is affordable now and into the future.

"Making Home Affordable provides crucial tools to mortgage lenders and homeowners coping with financial hardship and declining home prices," said Herb Allison, president and chief executive officer. "Potentially millions of homeowners could qualify for and benefit from these initiatives. The people of Fannie Mae will do all they can to make the program a success for homeowners across America and to advance the nation's housing recovery."

Home Affordable Refinance

Home Affordable Refinance includes new refinancing flexibilities for homeowners whose loans are owned by Fannie Mae. Key features include:

  • Additional Flexibilities: Most borrowers refinancing an existing Fannie Mae loan will not be required to buy new or additional mortgage insurance if the loan at the time of the refinance is more than 80 percent of a home's value. Any existing mortgage insurance may be carried forward to the new loan. In addition, Fannie Mae can refinance loans up to 105 percent of a home's value with this new flexibility, so even borrowers who are "underwater" -- who owe more than their home is worth -- may be able to refinance. This will expand the number of borrowers able to take advantage of lower interest rates that reduce monthly payments, or refinance into a more sustainable mortgage.
  • Streamlined Processing: Beginning in April, all 1,600 lenders and 29,000 mortgage brokers using Fannie Mae's Desktop Underwriter® platform will be able to process an application to refinance any existing Fannie Mae loan, allowing for greater lender origination capacity and easier refinancing for borrowers.

What Borrowers Need to Know:

  • To qualify, your mortgage loan must be owned by Fannie Mae.
  • You must have a solid payment history on your existing mortgage.
  • The expanded refinance flexibility ends in June 2010.

Home Affordable Modification

Through the Home Affordable Modification, Fannie Mae will work with loan servicers across the country to help distressed borrowers modify their current loan into a mortgage that is more affordable and sustainable. Loan servicers participating in the program may reduce interest rates, lengthen the payment time frame or take other steps, such as principal forbearance, to bring the monthly payments down to as low as 31 percent of the borrower's gross (pre-tax) income.

What Borrowers Need to Know:

  • To modify a loan through Home Affordable Modification, it must be for your primary residence.
  • You need not wait to become delinquent with your payments -- a plan can be put in place as soon as you think you may have trouble making your mortgage payment.
  • The amount you owe on your mortgage must be less than or equal to $729,750.
  • The program is for mortgages originated prior to January 1, 2009.
  • Certain eligibility requirements, including attesting to a financial hardship, may apply in some cases.

To ensure borrowers currently at risk of a foreclosure have the opportunity to apply for a Home Affordable Modification, Fannie Mae servicers have been directed not to proceed with a foreclosure until a borrower has been evaluated for the program.

Finding Out if a Loan is Owned by Fannie Mae

Borrowers can find out if their loan is owned by Fannie Mae in one of two ways:

  • Call your current mortgage lender or servicer. The phone number should be on your monthly mortgage statement or monthly coupon book.

Fannie Mae also intends to make an online tool available later this month so borrowers can look up their loan and determine if it is owned by the company.

Fannie Mae exists to expand affordable housing and bring global capital to local communities in order to serve the U.S. housing market. Fannie Mae has a federal charter and operates in America's secondary mortgage market to enhance the liquidity of the mortgage market by providing funds to mortgage bankers and other lenders so that they may lend to home buyers.Our job is to help those who house America.

Fannie Mae Resource Center Telephone 1-800-7FANNIE
(1-800-732-6643)

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Posted by Bill Bici on March 9th, 2009 11:02 PMLeave a Comment

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March 8th, 2009 1:43 AM

HUD Handbooks, Forms and Publications

 Information by State
 Esta página en español
 Print version
 

HUD provides program information to the public in a variety of ways. The most commonly requested information is discussed below.

Housing information for families and individuals

We have basic information on Homebuying and Rental Assistance on our web site. We also have information on resources for senior citizens and people with disabilities.

For help with housing needs, you can find the nearest HUD-approved counseling agency on the web or by calling 1 (800) 569-4287.

Grant applications

Grant applications and funding announcements are available online on the Grants Page. Further information on ordering by telephone is also available there.

Families or individuals seeking housing assistance can find basic information on Homebuying and Rental Assistance on our web site. We also have information on resources for senior citizens and people with disabilities.

For help with housing needs, you can find the nearest HUD-approved counseling agency on the web or by calling 1 (800) 569-4287.

Forms

Official HUD forms used in all programs and other commonly used forms are available online to print and download. Printed forms can be ordered online through the Direct Distribution System or by telephone at 1 (800) 767-7468.

Forms for housing discrimination complaints are available online.

For assistance using forms we provide information on program technical guidance below.

HUD handbooks, notices, mortgagee letters and regulations

HUD Handbooks, Notices and other documents are available to print or view at HUDCLIPS. For the FHA Home Mortgage programs, links to the most commonly used Handbooks and Mortgagee Letters are included in the FHA Mortgagee Starter Kit. Printed handbooks can be ordered online through the Direct Distribution System or by telephone at 1 (800) 767-7468. For assistance with questions on the content of handbooks we provide information on program technical guidance below.

Program technical guidance

For interpretations of program requirements or handbooks and instructions on the use of forms:

Housing Programs - See our Contact List for help.

Public Housing and Section 8 Choice Voucher Programs - Contact the Public Housing Field Office Staff.

Native American Programs - Contact the Office of Native American Programs for your area.

All other program questions - Contact the Local HUD Field Office.

Publications

To find a specific publication, you can search our entire web site.

You can also browse or search the HUDUSER Online Store Catalog.

Many pamphlets, brochures and other program publications can be ordered by telephone at 1 (800) 767-7468.

Materials on lead paint hazards, including the required lead paint pamphlet, are available from our Office of Healthy Homes and Lead Hazard Control. Printed materials can be ordered from the The National Lead Information Center by calling 1 (800) 424-5323.

Research reports, executive summaries, case studies, and guidebooks, and specialized data including the Fair Market Rents and Income Limits are available online at HUDUSER. Most items can be downloaded or ordered in printed copy as well.

Bibliographies

HUDUSER maintains the only bibliographic database exclusively dedicated to housing and community development issues with more than 8,000 full-abstract citations to research reports, articles, books, monographs, and data sources in housing policy, building technology, economic development, urban planning, and a host of other relevant fields.

Informacion en español

1 (800) 483-7342 o 1 (800) 767-7468 son los números para pedir publicaciones de HUD en Español.

 

Comments and Questions

 
Content current as of 28 October 2008

Posted in:General
Posted by Bill Bici on March 8th, 2009 1:43 AMView Comments (1)

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203k Rehabilitation Mortgage Insurance

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HUD Resources
SUBSCRIBE to the Single Family Housing email list. You will get frequent updates to the HOC Reference Guide, training and event announcements, mortgagee letters and notices about your Single Family business.

FHA's Streamline 203(k) Mortgage
The “Streamline (K)” Limited Repair Program permits homebuyers to finance an additional $35,000 into their mortgage to improve or upgrade their home before move-in. With this product, homebuyers can quickly and easily tap into cash to pay for property repairs or improvements, such as those identified by a home inspector or FHA appraiser. More...

FHA's 203(k) Mortgage
The Section 203(k) program is HUD's primary program for the rehabilitation and repair of single family properties. As such, it is an important tool for community and neighborhood revitalization and for expanding homeownership opportunities. To find out how to become a 203k consultant, read HUD mortgagee letter 00-25 and How to Become an Approved 203k Consultant.

 -   203K Rehabilitation Program Description
 -   Rehab a Home with HUD's 203K Rehab Program
 -   Streamline K Mortgage
 -   Approved 203k Consultants Search
 -   Funds for Handyman-Specials and Fixer-Uppers
 -   203k Mortgagee Letters
 -   203k FAQs
 -   HUD Form 92700 203(k) Maximum Mortgage Worksheet (2/06)
 -   203(k) Endorsement Summary Report

Visit the FHA Resource Center for more 203(k) information.

 

 
Content current as of 4 February 2009  

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Posted by Bill Bici on March 8th, 2009 1:39 AMLeave a Comment

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Questions & Answers for Reservists, Guardsmen and Other Military Personnel

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regarding mortgage payment relief and protection from foreclosure provided by the Servicemembers Civil Relief Act (formerly known as The Soldiers' and Sailors' Civil Relief Act of 1940).

Who Is Eligible?

The provisions of the Act apply to active duty military personnel who had a mortgage obligation prior to enlistment or prior to being ordered to active duty. This includes members of the Army, Navy, Marine Corps, Air Force, Coast Guard; commissioned officers of the Public Health Service and the National Oceanic and Atmospheric Administration who are engaged in active service; reservists ordered to report for military service; persons ordered to report for induction under the Military Selective Service Act; and guardsmen called to active service for more than 30 consecutive days. In limited situations, dependents of servicemembers are also entitled to protections.

Am I Entitled To Debt Payment Relief?

The Act limits the interest that may be charged on mortgages incurred by a service member (including debts incurred jointly with a spouse) before he or she entered into active military service. Mortgage lenders must, at your request, reduce the interest rate to no more than six percent per year during the period of active military service and recalculate your payments to reflect the lower rate. This provision applies to both conventional and government-insured mortgages.

Is The Interest Rate Limitation Automatic?

No. To request this temporary interest rate reduction, you must submit a written request to your mortgage lender and include a copy of your military orders. The request may be submitted as soon as the orders are issued but must be provided to a mortgage lender no later than 180 days after the date of your release from active duty military service.

Am I Eligible Even if I Can Afford To Pay My Mortgage At A Higher Interest Rate?

If a mortgage lender believes that military service has not affected your ability to repay your mortgage, they have the right to ask a court to grant relief from the interest rate reduction. This is not very common.

What If I Can't Afford to Pay My Mortgage Even At the Lower Rate?

Your mortgage lender may allow you to stop paying the principal amount due on your loan during the period of active duty service. Lenders are not required to do this but they generally try to work with service members to keep them in their homes. You will still owe this amount but will not have to repay it until after your complete your active duty service.

Additionally, most lenders have other programs to assist borrowers who cannot make their mortgage payments. If you or your spouse find yourself in this position at any time before or after active duty service, contact your lender immediately and ask about loss mitigation options. Borrowers with FHA insured loans who are having difficulty making mortgage payments may also be eligible for special forbearance and other loss mitigation options. More information about help for homeowners who are unable to make payments on a mortgage is available on the HUD website at http://www.hud.gov/offices/hsg/sfh/econ/econ.cfm.

Am I Protected against Foreclosure?

Mortgage lenders may not foreclose, or seize property for a failure to pay a mortgage debt, while a service member is on active duty or within 90 days after the period of military service unless they have the approval of a court. In a court proceeding, the lender would be required to show that the service member's ability to repay the debt was not affected by his or her military service.

What Information Do I Need To Provide To My Lender?

When you or your representative contact your mortgage lender, you should provide the following information:

 -   Notice that you have been called to active duty;
 -   A copy of the orders from the military notifying you of your activation;
 -   Your FHA case number; and
 -   Evidence that the debt precedes your activation date.

HUD has reminded FHA lenders of their obligation to follow the Act. If notified that a borrower is on active military duty, the lender must advise the borrower or representative of the adjusted amount due, provide adjusted coupons or billings, and ensure that the adjusted payments are not returned as insufficient payments.

Will My Payments Change Later? Will I Need To Pay Back The Interest Rate "Subsidy" At A Later Date?

The change in interest rate is not a subsidy. Interest in excess of 6 percent per year that would otherwise have been charged is forgiven. However, the reduction in the interest rate and monthly payment amount only applies during the period of active duty. Once the period of active military service ends, the interest rate will revert back to the original interest rate, and the payment will be recalculated accordingly.

How Long Does The Benefit Last? Does The Period Begin And End With My Tour Of Duty?

Interest rate reductions are only for the period of active military service. Other benefits, such as postponement of monthly principal payments on the loan and restrictions on foreclosure may begin immediately upon assignment to active military service and end on the third month following the term of active duty assignment.

How Can I Learn More About Relief Available To Active Duty Military Personnel?

Read more information about the Servicemembers Civil Relief Act, sponsored by the Legal Assistance Policy Division, Office of The Judge Advocate General, U.S. Army.

Servicemembers who have questions about the SCRA or the protections that they may be entitled to may contact their unit judge advocate or installation legal assistance officer. Dependents of servicemembers can also contact or visit local military legal assistance offices where they reside. A military legal assistance office locator for each branch of the armed forces is available at http://legalassistance.law.af.mil/content/locator.php

 

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Posted by Bill Bici on March 8th, 2009 1:37 AMLeave a Comment

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February 15th, 2009 2:11 AM

 

             Act Now to Prevent Foreclosure

New Program Announced
The Federal Housing Finance Agency, the regulator of Fannie Mae and Freddie Mac, recently announced a new Streamlined Modification Program that is designed to help struggling borrowers avoid foreclosure by having Fannie Mae work with mortgage servicers to modify loans into more affordable terms.

You may qualify if all of the following are true:

  • Your mortgage loan is owned by Fannie Mae or Freddie Mac.
  • Your mortgage loan is 90 or more days past due.
  • You occupy the property as your primary residence.
  • You are not in bankruptcy.

To achieve a more affordable mortgage payment, your loan servicer may:

  • extend the term of your loan to as much as 40 years
  • reduce your mortgage interest rate for a period of time
  • defer payment of part of your principal, or
  • offer a combination of all three.

What You Can Do Today
If you are about to fall behind, or have fallen behind on your mortgage payments, or if your loan has been referred to an attorney, the most important step you can take is to get help early from your mortgage lender, servicer, or housing counselor.

Here are important steps to take immediately:

  • Call your lender or loan servicer to talk about your situation. You can find the contact information on your monthly mortgage statement or coupon book.
  • If you can't reach your lender or servicer or you do not receive help, contact the Homeownership Preservation Foundation at 1-888-995-HOPE. Experienced counselors can help you develop the best plan for your personal financial situation. This counseling is free.
  • Gather the information you will need. You will be asked to provide:
    • letters or communications from your lender,
    • foreclosure notices,
    • recent mortgage statements showing your loan number,
    • homeowner's insurance policy,
    • last two pay stubs and most recent tax return for all borrowers named on the mortgage,
    • proof of other income, such as child support, alimony, Social Security, or pension,
    • bank account statements, and
    • list of major monthly bills, including child care, utilities, credit cards, and cell phone.
  • Understand your options. Depending on your situation, you may have several options to discuss with your servicer or counselor. They could include:
    • Repayment Plan -- You may be able to catch up on missed payments by creating a schedule for repaying the past-due amount.
    • Advance -- If your mortgage is owned by Fannie Mae (your servicer has this information), and your missed payments are due to a temporary financial hardship, you may be eligible for an unsecured personal loan, such as HomeSaver Advance™, that is available from your servicer to help you get current with your payments.
    • Modification -- In some cases, mortgage loan terms can be changed on a temporary or permanent basis to make the payment more affordable.
  • Avoid foreclosure rescue scams. Don't become a victim. Foreclosure scams seek to take advantage of your situation.
  • Your financial situation may have changed significantly since you qualified for your home due to unemployment, divorce, job change/relocation, or medical issues. You may want or need to sell your home as a result of this change. There are options for borrowers who are worried about possible foreclosure:
    • Pre-foreclosure or Short-Sale -- Servicers work with borrowers to sell their home and use the proceeds to pay off the loan even if the proceeds are not enough to settle the entire balance.
    • Deed-in-lieu -- Borrowers sign over title to the property to Fannie Mae without the expense of foreclosure.

You have more options if you act quickly. Now is the time to ask for help!

Originally Published: August 16, 2008
Last Revised: December 16, 2008

Posted in:General
Posted by Bill Bici on February 15th, 2009 2:11 AMLeave a Comment

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Fannie Mae Announces national REO Rental Policy

On January 13th, Fannie Mae announced the establishment of a new National Real Estate Owned (REO) Rental Policy that will allow qualified renters in Fannie Mae-owned foreclosed properties to stay in their homes. Currently, Fannie Mae has an eviction suspension in place through the end of January, which will allow for the new policy to be fully operational prior to that program concluding.

The new policy applies to renters occupying foreclosed properties at the time Fannie Mae acquires the property. Renters occupying any type of single-family property will be eligible including residents of two- to four-unit properties, condos, co-ops, single-family detached homes and manufactured housing. Eligible renters will be offered a new month-to-month lease with Fannie Mae or financial assistance for their transition to new housing should they choose to vacate the property. The properties must meet state laws and local code requirements for a rental property.

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Posted by Bill Bici on January 26th, 2009 12:15 PMLeave a Comment

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Announcement 08-30 November 14, 2008

Amends these Guides: Selling

Appraisal-Related Policy Changes and Clarifications

Introduction

Due to current conditions in the real estate market, it is paramount that appraisers are provided with sufficient guidance to properly appraise and document the appraisal report. Fannie Mae recognizes the Uniform Standards of Professional Appraisal Practice as the minimum appraisal standards for the appraisal profession. In addition, Fannie Mae has established its own separate appraisal requirements to supplement the Uniform Standards. This Announcement addresses several new or updated appraisal-related requirements and clarifies several other existing policies to help underwriters make sound underwriting decisions when reviewing the appraisal report. The following topics are discussed:

New or Updated Policies

Implementation of the Market Conditions Addendum to the Appraisal Report (Form 1004MC)

Use of supervisory appraisers

Requirement to provide the sales contract to the appraiser

Requirement regarding the appraiser’s selection of comparable sales

Clarification of Existing Policies

Repair escrows for existing construction

Research and reporting of the current and prior listings of the subject property

Appraising the entire site of a property

Time adjustments on the appraisal report

Verification of a sales transaction

Neighborhood boundaries and the selection of comparable sales

Effective age of the subject property

Utilizing the cost approach to value for insurance purposes

Announcement 08-30 Page 1

Implementation of the Market Conditions Addendum to the Appraisal Report (Form 1004MC)

Selling Guide, Part XI, Section 403.03: Trend of Property Values, Demand/Supply, and Marketing Time; and Section 203: Appraisal and Property Inspection Report Forms

Fannie Mae purchases or securitizes mortgages in all markets and under all market conditions. The current appraisal report forms require the appraiser to report on the primary indicators of market condition for properties in the subject neighborhood by noting the trend of property values (increasing, stable, or declining), the supply of properties in the subject neighborhood (shortage, in-balance, or over-supply), and the marketing time for properties (under three months, three to six months, or over six months) as of the effective date of the appraisal. Fannie Mae also expects the appraiser to provide their conclusions for the reasons a market is experiencing declining market values, an over-supply of properties, or marketing times over six months.

To further enhance the transparency of the conclusions made by the appraiser related to market trends and conditions, the Form 1004MC will be required for all mortgage loans delivered to Fannie Mae with appraisals of one- to four-unit properties with an effective date on or after April 1, 2009. A sample of the form is attached to this Announcement. In addition, the form is posted on eFannieMae.com.

Guidelines for Using Form 1004MC

The Form 1004MC is intended to provide the lender with a clear and accurate understanding of the market trends and conditions prevalent in the subject neighborhood. The form provides the appraiser with a structured format to report the data and to more easily identify current market trends and conditions. The appraiser’s conclusions are to be reported in the "Neighborhood" section of the appraisal report.

Fannie Mae recognizes that all of the requested data elements for analysis are not equally available in all markets. In some markets it may not be possible to retrieve the total number of comparable active listings from earlier periods. If this is the case, the appraiser must explain the attempt to obtain such information. Also, there may be markets in which the data is available in terms of an "average" as opposed to a "median." In this case, the appraiser needs to note that his or her analysis has been based on an "average" representation of the data. Regardless of whether all requested information is available, the appraiser must provide support for his or her conclusions regarding market trends and conditions.

Inventory Analysis Section

The "Inventory Analysis" section assists the appraiser in analyzing important supply and demand factors in order to reach a conclusion regarding housing trends and market conditions. When completing this section, the appraiser must include the comparable data

Announcement 08-30 Page 2

that reflects the total pool of comparable properties from which a buyer may select a property in order to analyze the sales activity and the local housing supply. One of the tools used to monitor these trends is the absorption rate. The absorption rate is the rate at which properties for sale have been or can be sold (marketed) within a given area. To determine the absorption rate, the appraiser divides the total number of settled sales by the time frame being analyzed. The months of housing supply is based on the total listings for the applicable period divided by the absorption rate.

Example

Step 1: Calculate the absorption rate. If there were 60 sales during a 6 month period (e.g., "Prior 7 – 12 Months" column), the absorption rate is 10 sales per month (60/6).

Step 2: Calculate the months of housing supply. If there are 240 active listings, there is a 24-month supply of homes on the market (240 active sales/10 sales per month). This may support the appraiser’s conclusion that there is an over-supply of homes on the market. Anomalies in the data such as seasonal markets, new construction, or other factors must be addressed in the form.

Median Sale & List Price, DOM, List/Sale Ratio Section

The appraiser must analyze additional trends, including the changes in median prices and days on the market (DOM) for both sales and listings as well as a change in list-to-sales price ratios.

Example

If the median comparable sale prices are $300,000, $295,000, and $305,000 for their respective time periods, the overall trend for the prior 12 months is relatively "stable."

Overall Trend Section

The "Overall Trend" section is designed to reflect potential positive trends, neutral trends, or negative trends in inventory, median sale and list price, days on market, list-to- sale price ratio, and seller concessions.

Example

An increase in the absorption rate is generally viewed as a positive trend, whereas a decrease in the absorption rate may be viewed as a negative trend. Furthermore, a decrease in the number of days on the market, either sales or listings, more than likely represents an overall positive trend.

Seller Concessions

Form 1004MC also provides a section for comments on the prevalence of seller concessions and the trend in seller concessions for the past 12 months. The change in seller concessions within the market provides the lender with additional insight into current market conditions. The appraiser should consider and report on seller-paid (or third-party) costs. Examples of these items include, but are not limited to mortgage

Announcement 08-30 Page 3

payments, points and fees, and in condominium or cooperative projects, items such as homeowners’ association fees and guaranteed rental programs. Seller concessions must be carefully analyzed by the appraiser since excessive concessions often lead to inflated property values.

There are a number of markets across the country where, due to current conditions, there has been an increase in the prevalence of seller concessions. The following excerpt from the Selling Guide, Part XI, Section 406.5 (C) provides guidance for these circumstances:

"The need to make negative dollar adjustments for sales and financing concessions and the amount of the adjustments to the comparable sales are not based on how typical the concessions might be for a segment of the market area—large sales concessions can be relatively typical in a particular segment of the market and still result in sale prices that reflect more than the value of the real estate. Adjustments based on dollar-for-dollar deductions that are equal to the cost of the concessions to the seller (as a strict cash equivalency approach would dictate) are not appropriate. We recognize that the effect of the sales concessions on sales prices can vary with the amount of the concessions and differences in various markets. The adjustments must reflect the difference between what the comparables actually sold for with the sales concessions and what they would have sold for without the concessions so that the dollar amount of the adjustments will approximate the reaction of the market to the concessions."

For further information regarding seller concessions in the appraisal, refer to the Selling Guide, Part XI, Section 205 and Section 406.05(C) (for additional guidance not referenced above).

Foreclosure Sales and Summary/Analysis of Data

The presence and extent of foreclosure/REO sales is worthy of comment when analyzing market data and must be reported on the form. The form also allows for the appraiser to summarize the data and provide other data analysis or additional information, such as analysis of pending sales, which over time can show a market trend.

Use of Supervisory Appraisers

Selling Guide, Part XI, Section 101.03: Use of Supervisory or Review Appraisers

Fannie Mae defines the appraiser as the individual who personally inspected the property being appraised, inspected the exterior of the comparables, performed the analysis, and prepared and signed the appraisal report as the appraiser. Fannie Mae allows an unlicensed or uncertified appraiser who works as an employee or subcontractor of a licensed or certified appraiser to perform a significant amount of the appraisal (or the entire appraisal if he or she is qualified to do so)—as long as the appraisal report is signed by a licensed or certified supervisory or review appraiser and is acceptable under state law. This policy is updated to now require that if a supervisory appraiser signs the

Announcement 08-30 Page 4

appraisal report as the appraiser, the supervisory appraiser must have performed the inspection of the subject property.

Requirement to Provide the Sales Contract to the Appraiser

Selling Guide, Part XI, Chapter 2: Appraisal (or Property Inspection) Documentation

Fannie Mae requires the lender to ensure that it provides the appraiser with all appropriate financing data and sales concessions for the subject property that will be, or have been, granted by anyone associated with the transaction. Typically this information is contained in the sales contract; however, Fannie Mae currently does not require that the lender provide the appraiser with the sales contract. Fannie Mae is adding the requirement that lenders must provide the appraiser with the sales contract and all addenda, therefore ensuring that the appraiser has been given the opportunity to consider the financing and sales concessions in the transaction and their effect on value. If the sales contract is amended during the process, the lender must provide the updated contract to the appraiser.

Requirement Regarding the Appraiser’s Selection of Comparable Sales

Selling Guide, Part XI, Section 406.02: Selection of Comparable Sales

The Selling Guide states that when a property is located in an area in which there is a shortage of truly comparable sales—either because of the nature of the property improvements or the relatively low number of sales transactions in the neighborhood—the appraiser may need to use as comparable sales properties that are not truly comparable to the subject property or properties that are located in competing neighborhoods.

If the appraiser utilizes comparable sales outside of the subject’s neighborhood when closer comparable sales appear to be available, Fannie Mae is adding a requirement that the appraiser provide an explanation as to why he or she used the specific comparable sales in the appraisal report. This will add transparency to the appraiser’s selection of comparable sales and may assist the lender in underwriting the appraisal.

Refer to the "Neighborhood Boundaries and the Selection of Comparable Sales" section of this Announcement for an additional clarification of this section of the Selling Guide.

Repair Escrows for Existing Construction

Selling Guide, Part XI, Section 202: Status of Construction; and Section 405.08: Property Condition

The following clarifications apply to both of the above referenced sections of the Selling Guide as they pertain to postponed improvements. Furthermore, Fannie Mae is explicitly

Announcement 08-30 Page 5

stating that completion or repair escrows are permitted under certain circumstances for existing properties.

If the appraiser reports the existence of minor conditions or deferred maintenance items that do not affect the livability, soundness, or structural integrity of the property, the appraiser may complete the appraisal "as is" and these items must be reflected in the appraiser’s opinion of value. The lender is not required to ensure that the borrower has had this work completed prior to delivery of the loan to Fannie Mae.

If there are minor conditions or deferred maintenance items to be remedied or completed after closing, the lender may escrow for these items at their own discretion and still deliver the loan to Fannie Mae prior to the release of the escrow as long as the lender can ensure that these items do not affect the livability, soundness, or structural integrity of the property. Minor conditions and deferred maintenance items include, but are not limited to, worn floor finishes or carpet, minor plumbing leaks, holes in window screens, or cracked window glass. Minor conditions and deferred maintenance are typically due to normal wear and tear from the aging process and the occupancy of the property.

When there are incomplete items or conditions that do affect the livability, soundness, or structural integrity, the property must be appraised subject to completion of the specific alterations or repairs. These items include, a partially completed addition or renovation, or physical deficiencies that could affect the soundness or structural integrity of the improvements including but not limited to cracks or settlement in the foundation, water seepage, active roof leaks, curled or cupped roof shingles, or inadequate electrical service or plumbing fixtures. In such cases, the lender must obtain a certificate of completion from the appraiser before it delivers the mortgage to Fannie Mae.

Research and Reporting of the Current and Prior Listings of the Subject Property

Selling Guide, Part XI, Section 401: The Subject Property

Fannie Mae’s appraisal report forms require the appraiser to research and comment on whether the subject property is currently for sale or if it has been listed for sale within 12 months prior to the effective date of the appraisal. To clarify, the appraiser must report on each occurrence or listing and provide the data source(s), offering prices, and date(s). For example, if the subject property is currently listed for sale and was previously listed eight months ago, the appraiser must report on both offerings.

Appraising the Entire Site of a Property

Selling Guide, Part XI, Section 404: Site Analysis

The property site should be of a size, shape, and topography that is generally conforming and acceptable in the market area. It also must have comparable utilities, street improvements, adequate vehicular access, and other amenities. Fannie Mae is clarifying

Announcement 08-30 Page 6

that the appraisal must include the actual size of the site and not a hypothetical portion of the site. For example, the appraiser may not appraise only 5 acres of an unsubdivided 40-acre parcel. The appraised value must reflect the entire 40-acre parcel.

Effective Age of the Subject Property

Selling Guide, Part XI, Section 405.02: Actual and Effective Ages

The effective age can be a good indication of the condition of the subject property. Fannie Mae is clarifying that when adjustments are made to the appraisal for the effective age, the appraiser must provide an explanation for the adjustments and the condition of the property.

Verification of a Sales Transaction

Selling Guide, Part XI, Section 406.01: Sources of Comparable Market Data

It is important for the appraiser to ensure that the data he or she is providing in the appraisal report is accurate. When the appraiser is provided with comparable sales data by a party that has a financial interest in either the sale or financing of the subject property, the above section of the Selling Guide requires the appraiser to verify the data with a party that does not have a financial interest in the subject transaction. However, when appraising new construction, the appraiser may need to rely solely on the builder of the property they are appraising to provide comparable sales data, as this data may not yet be available through typical data sources such as public records or multiple listing services. In this scenario, it is acceptable for the appraiser to verify the transaction of the comparable sale by viewing a copy of the HUD-1 Settlement Statement from the builder’s file.

Neighborhood Boundaries and the Selection of Comparable Sales

Selling Guide, Part XI, Section 406.02: Selection of Comparable Sales

The appraiser must perform a neighborhood analysis in order to identify the area that is subject to the same influences as the property being appraised (based on the actions of typical buyers in the market area). The results of a neighborhood analysis enable the appraiser not only to identify the factors that influence the value of properties in the market area, but also to define the area from which to select the market data needed to perform a sales comparison analysis. As a reminder, although it is preferable for the appraiser to provide comparables from the subject’s neighborhood, Fannie Mae does allow for the use of comparable sales that are located in competing neighborhoods, as these may simply be the best comparables available and the most appropriate for the appraiser’s analysis. If this situation arises, the appraiser must not expand the neighborhood boundaries just to encompass the comparables selected. The appraiser must indicate the comparables are from a competing neighborhood and address any differences that exist.

Announcement 08-30 Page 7Announcement 08-30 Page 8

Time Adjustments on the Appraisal Report

Selling Guide, Part XI, Section 406.05D: Date of sale/time adjustment

The following is being added to Section 406.05D of the Selling Guide:

If in the analysis and completion of the sales comparison approach the appraiser determines that time adjustments are required, the adjustments may be either positive or negative. The adjustments, however, must reflect the difference in market conditions between the date of sale of the comparable and the effective date of appraisal for the subject property.

Utilizing the Cost Approach to Value for Insurance Purposes

Selling Guide, Part V, Section 302: Coverage for Home Mortgages; and Part XI, Section 407, Cost Approach to Value

If a lender requires the cost approach to be completed in order to obtain a replacement cost estimate for the purpose of determining the level of hazard insurance coverage required for a one-unit property, the lender may rely on the appraiser’s estimate of the replacement cost of the improvements. This is reported as the "Total Estimate of Cost New" on the appraisal forms. This estimate does not include any form of depreciation or obsolescence for the property. It is not appropriate for the lender simply to subtract the reported site or land value from the appraised value of the property to make the determination because the result is an estimate of the depreciated value of the improvements, not an estimate of their replacement cost.

Effective Date

The new Form 1004MC is required on all appraisals with an effective date on and after April 1, 2009. All other new and updated policies are effective for all appraisals on or after January 1, 2009.

*****

Lenders who have questions about Announcement 08-30 should contact their Customer Account Team for additional information.

Michael A. Quinn

Senior Vice President


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Posted by Bill Bici on December 26th, 2008 12:05 AMLeave a Comment

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October 20th, 2008 10:28 PM

BICI APPRAISALS CAN HELP WITH YOUR APPRAISAL NEEDS FOR THE NEW FHA HOPE PROGRAM FOR HOME OWNERS, CALL 973-949-4768.

FOR RELEASE
Lemar Wooley                                      Wednesday
(202) 708-0685                                October 1, 2008


BUSH ADMINISTRATION LAUNCHES “HOPE FOR HOMEOWNERS” PROGRAM TO HELP MORE STRUGGLING FAMILIES KEEP THEIR HOMES
Detailed Program Eligibility Requirements Announced

WASHINGTON – The Bush Administration today unveiled additional mortgage assistance for homeowners at risk of foreclosure.  The HOPE for Homeowners program will refinance mortgages for borrowers who are having difficulty making their payments, but can afford a new loan insured by HUD’s Federal Housing Administration (FHA).

“For families struggling to keep up with their mortgage payments, this program will be another resource to refinance into a loan they can afford,” said HUD Secretary Steve Preston.  “FHA remains a safe and affordable alternative to the high-priced mortgage loans that threaten homeowners’ ability to retain their homes.  We strongly encourage borrowers to work with their lenders to determine if HOPE for Homeowners is the right program for them.”

The HOPE for Homeowners program was authorized by the Economic and Housing Recovery Act of 2008.  Since the President signed this vital legislation into law on July 30, 2008, the HOPE for Homeowners Board of Directors has worked diligently to develop and implement the program as directed by Congress.  The Board was charged with establishing underwriting standards to ensure borrowers, after any write-down in principal, have a reasonable ability to repay their new FHA-insured mortgage.

The HOPE for Homeowners program begins today and ends September 30, 2011.  The program is available only to owner occupants and will offer 30-year fixed rate mortgages – so the borrower’s last payment will be the same as the first payment.  In many cases, to avoid what would be an even costlier foreclosure, banks will have to write down the existing mortgage to 90 percent of the new appraised value of the home.

Borrower Eligibility

Borrowers are encouraged to contact their lender to determine eligibility, but may be eligible if, among other factors:


• The home is their primary residence, and they have no ownership interest in any other residential property, such as second homes.

• Their existing mortgage was originated on or before January 1, 2008, and they have made at least six payments.

• They are not able to pay their existing mortgage without help.

• As of March 2008, their total monthly mortgage payments due were more than 31 percent of their gross monthly income.

• They certify they have not been convicted of fraud in the past 10 years, intentionally defaulted on debts, and did not knowingly or willingly provide material false information to obtain their existing mortgage(s).

How the HOPE for Homeowners program works

“HOPE for Homeowners will add to HUD’s existing efforts to make FHA refinancing available to homeowners who need it most,” said FHA Commissioner Brian D. Montgomery.  “One year ago, FHA expanded refinancing into its FHASecure program.  Since that time, we have helped more than 360,000 families keep their homes by refinancing with FHA, and we will assist a total of 500,000 families by the end of this year.”

The Board expects that the primary way homeowners will participate in the program is by working with their current lender. HOPE for Homeowners will serve as another loss mitigation tool available to distressed borrowers. 

HOPE for Homeowners also includes the following provisions:

• The loan amount may not exceed a maximum of $550,440.

• The new mortgage will be no more than 90 percent of the new appraised value including any financed Upfront Mortgage Insurance Premium. 

• The Upfront Mortgage Insurance Premium is 3 percent and the Annual Mortgage Insurance Premium is 1.5 percent.

• The holders of existing mortgage liens must waive all prepayment penalties and late payment fees.

• The existing first mortgage must accept the proceeds of the HOPE for Homeowners loan as full settlement of all outstanding indebtedness.

• Existing subordinate lenders must release their outstanding mortgage liens.


• Standard FHA policy regarding closing costs applies, and they may be:


o Financed into the new loan provided the value of the mortgage (including the Upfront Mortgage Insurance Premium) does not exceed 90 percent of the new appraised value of the home.
o Paid from the borrowers’ own assets.
o Paid by the servicing lender or third party (e.g., federal, state, or local program).
o Paid by the originating lender through premium pricing.

 

• The borrower must agree to share with FHA both the equity created at the beginning of this new mortgage and any future appreciation in the value of the home.

• The borrower cannot take out a second mortgage for the first five years of the loan, except under certain circumstances for emergency repairs.

The lender will disclose to the homeowner the benefits of the program including home retention, a new affordable mortgage based on the current appraised value, and 10 percent equity.  The lender will also explain the prohibition against new junior liens against the property unless directly related to property maintenance, and a minimum of 50 percent equity and appreciation sharing with the Federal government. 

The costs to the homeowner include the upfront and annual insurance premiums, as well as a share of the equity created by the write-down associated with the HOPE for Homeowners mortgage and any future appreciation in the value of the home.  At settlement, subordinate lien holders will receive a certificate that evidences their interest as an obligation backed by HUD, with payment conditional on the value of HUD’s appreciation share. 

If the home is sold or refinanced, the homeowner will share the equity with FHA on a sliding scale ranging from a 100 percent FHA share after the first year to a minimum of 50 percent after five years.  The lien holder that previously held the highest priority will receive payment up to a proportion of its original interest, not to exceed the amount of available appreciation.  This type of delayed payoff will take place until all prior lien holders are satisfied or the amount of available appreciation is exhausted.  All remaining appreciation is remitted to FHA.

The HOPE for Homeowners Board of Directors includes HUD Secretary Steve Preston, Treasury Secretary Henry Paulson, Federal Reserve Board Chairman Ben Bernanke, and FDIC Chairman Sheila Bair.  They have named the following people to serve on the board as their designees:  FHA Commissioner and Chairman of the Board Brian Montgomery, Federal Reserve Board Governor Elizabeth Duke, Treasury Assistant Secretary for Economic Policy Phillip Swagel, and Federal Deposit Insurance Corporation Director Tom Curry.

Read more about HOPE for Homeowners at www.fha.gov/hopeforhomeowners.


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