[Federal Register Volume 75, Number 208 (Thursday, October 28, 2010)]
[Rules and Regulations]
[Pages 66554-66587]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-26671]
[[Page 66553]]
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Part IV
Federal Reserve System
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12 CFR Part 226
Truth in Lending; Interim Final Rule
Federal Register / Vol. 75 , No. 208 / Thursday, October 28, 2010 /
Rules and Regulations
[[Page 66554]]
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FEDERAL RESERVE SYSTEM
12 CFR Part 226
Regulation Z; Docket No. R-1394
RIN AD-7100-56
Truth in Lending
AGENCY: Board of Governors of the Federal Reserve System.
ACTION: Interim final rule; request for public comment.
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SUMMARY: The Board is publishing for public comment an interim final
rule amending Regulation Z (Truth in Lending). The interim rule
implements Section 129E of the Truth in Lending Act (TILA), which was
enacted on July 21, 2010, as Section 1472 of the Dodd-Frank Wall Street
Reform and Consumer Protection Act. TILA Section 129E establishes new
requirements for appraisal independence for consumer credit
transactions secured by the consumer's principal dwelling. The
amendments are designed to ensure that real estate appraisals used to
support creditors' underwriting decisions are based on the appraiser's
independent professional judgment, free of any influence or pressure
that may be exerted by parties that have an interest in the
transaction. The amendments also seek to ensure that creditors and
their agents pay customary and reasonable fees to appraisers. The Board
seeks comment on all aspects of the interim final rule.
DATES: This interim final rule is effective December 27, 2010, except
that the removal of Sec. 226.36(b) is effective April 1, 2011.
Compliance Date: To allow time for any necessary operational
changes, compliance with this interim final rule is optional until
April 1, 2011.
Comments: Comments must be received on or before December 27, 2010.
ADDRESSES: You may submit comments, identified by Docket No. R-1394 and
RIN No. AD-7100-56, by any of the following methods:
Agency Web Site: http://www.federalreserve.gov. Follow the
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
E-mail: [email protected]. Include the
docket number in the subject line of the message.
Fax: (202) 452-3819 or (202) 452-3102.
Mail: Address to Jennifer J. Johnson, Secretary, Board of
Governors of the Federal Reserve System, 20th Street and Constitution
Avenue, NW., Washington, DC 20551.
All public comments will be made available on the Board's Web site
at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical reasons. Accordingly, comments
will not be edited to remove any identifying or contact information.
Public comments may also be viewed electronically or in paper in Room
MP-500 of the Board's Martin Building (20th and C Streets, NW.) between
9 a.m. and 5 p.m. on weekdays.
FOR FURTHER INFORMATION CONTACT: Jamie Z. Goodson, Attorney, or Lorna
M. Neill, Senior Attorney; Division of Consumer and Community Affairs,
Board of Governors of the Federal Reserve System, Washington, DC 20551,
at (202) 452-2412 or (202) 452-3667. For users of Telecommunications
Device for the Deaf (TDD) only, contact (202) 263-4869.
SUPPLEMENTARY INFORMATION:
I. Background
The Truth in Lending Act (TILA), 15 U.S.C. 1601 et seq., seeks to
promote the informed use of consumer credit by requiring disclosures
about its costs and terms. TILA requires additional disclosures for
loans secured by consumers' homes and permits consumers to rescind
certain transactions that involve their principal dwelling. TILA
directs the Board to prescribe regulations to carry out the purposes of
the law and specifically authorizes the Board, among other things, to
issue regulations that contain such classifications, differentiations,
or other provisions, or that provide for such adjustments and
exceptions for any class of transactions, that in the Board's judgment
are necessary or proper to effectuate the purposes of TILA, facilitate
compliance with TILA, or prevent circumvention or evasion of TILA. 15
U.S.C. 1604(a). TILA is implemented by the Board's Regulation Z, 12 CFR
part 226. An Official Staff Commentary interprets the requirements of
the regulation and provides guidance to creditors in applying the rules
to specific transactions. See 12 CFR part 226, Supp. I.
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the ``Dodd-Frank Act'') was signed into law.\1\ Section
1472 of the Dodd-Frank Act amended TILA to establish new requirements
for appraisal independence. Specifically, the appraisal independence
provisions in the Dodd-Frank Act:
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\1\ Public Law 111-203, 124 Stat. 1376.
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Prohibit coercion, bribery and other similar actions
designed to cause an appraiser to base the appraised value of the
property on factors other than the appraiser's independent judgment;
Prohibit appraisers and appraisal management companies
from having a financial or other interest in the property or the
credit transaction;
Prohibit a creditor from extending credit if it knows,
before consummation, of a violation of the prohibition on coercion
or of a conflict of interest;
Mandate that the parties involved in the transaction
report appraiser misconduct to state appraiser licensing
authorities;
Mandate the payment of reasonable and customary
compensation to a ``fee appraiser'' (e.g., an appraiser who is not
the salaried employee of the creditor or the appraisal management
company hired by the creditor); and
Provides that when the Board promulgates the interim
final rule, the Home Valuation Code of Conduct, the current standard
for appraisal independence for loans purchased by Fannie Mae and
Freddie Mac, will have no further force or effect.\2\
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\2\ ``Home Valuation Code of Conduct'' (HVCC), available at
http://www.fhfa.gov/webfiles/2302/HVCCFinalCODE122308.pdf.
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These provisions are contained in TILA Section 129E, which applies
to any consumer credit transaction that is secured by the consumer's
principal dwelling. TILA Section 129E(g)(1) authorizes the Board, the
Comptroller of the Currency, the Federal Deposit Insurance Corporation,
the National Credit Union Administration, the Federal Housing Finance
Authority (``FHFA''), and the Consumer Financial Protection Bureau to
issue rules and guidelines. TILA Section 129E(g)(2), however, requires
the Board to issue interim final regulations to implement the appraisal
independence requirements within 90 days of enactment of the Dodd-Frank
Act. As discussed below, the Board finds there is good cause for
issuing an interim final rule without opportunity for advance notice
and comment.
Appraisal independence. Over the years concerns have been raised
about the need to ensure that appraisals are provided free of any
coercion or improper influence. The Board and the other federal banking
agencies have jointly issued regulations and supervisory guidance on
appraisal independence.\3\ However, the guidance
[[Page 66555]]
is limited to federally supervised institutions. Based on concerns
about consumers obtaining home-secured loans based on misstated
appraisals, in 2008, the Board used its authority under the Home
Ownership and Equity Protection Act (HOEPA) to prohibit a creditor or
mortgage broker from coercing or influencing an appraiser to misstate
the value of a consumer's principal dwelling (2008 Appraisal
Independence Rules). 12 CFR 226.36(b); 15 U.S.C. 1639(l)(2). The 2008
Appraisal Independence Rules took effect on October 1, 2009. Section
1472 of the Dodd-Frank Act essentially codifies the 2008 Appraisal
Independence Rules, and expands on the protections in those rules. This
interim final rule incorporates the provisions in the 2008 Appraisal
Independence Rules. Thus, the Board is removing the 2008 Appraisal
Independence Rules effective on April 1, 2010.
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\3\ See, e.g., the Board's regulation at 12 CFR 225.65, and its
guidance, available at http://www.federalreserve.gov/boarddocs/srletters/1994/sr9455.htm. Title XI of the Financial Institutions
Reform, Recovery, and Enforcement Act of 1989 (FIRREA) was enacted
to protect federal financial and public policy interests in real
estate transactions. 12 U.S.C. 3339. It requires the Board, the
Comptroller of the Currency, the Office of Thrift Supervision, the
Federal Deposit Insurance Corporation, and the National Credit Union
Administration (the federal banking agencies) to adopt regulations
on the preparation and use of appraisals by federally regulated
financial institutions. 12 U.S.C. 3331.
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In December 2008, Fannie Mae and Freddie Mac (``the GSEs'')
announced the Home Valuation Code of Conduct (HVCC), which established
appraisal independence standards for loans the GSEs would purchase. The
HVCC is based on an agreement between the GSEs, New York State Attorney
General Andrew Cuomo, and the FHFA. The HVCC provides that, among other
things, only a creditor or its agent may select, engage, and compensate
an appraiser and that a creditor must ensure that its loan production
staff do not influence the appraisal process or outcome. As noted,
however, the Dodd-Frank Act mandates that the HVCC shall have no
effect, once the Board issues this interim final rule.\4\
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\4\ TILA Section 129E(j), 15 U.S.C. 1639e(j).
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II. Summary of the Interim Final Rule
The interim final rule applies to a person who extends credit or
provides services in connection with a consumer credit transaction
secured by a consumer's principal dwelling. Although TILA and
Regulation Z generally apply only to persons to whom the obligation is
initially made payable and that regularly engage in extending consumer
credit, TILA Section 129E and the interim final rule apply to persons
that provide services without regard to whether they also extend
consumer credit by originating mortgage loans.\5\ Thus, the interim
final rule applies to creditors, appraisal management companies,
appraisers, mortgage brokers, realtors, title insurers and other firms
that provide settlement services.
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\5\ Under the interim final rule, a person provides a service if
he provides a ``settlement service'' as defined in the Real Estate
Settlement Procedures Act, 12 U.S.C. 2602(3). See Sec.
226.42(b)(1).
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Other scope issues. The interim final rule applies to appraisals
for any consumer credit transaction secured by the consumer's principal
dwelling. Covering consumer credit transactions is consistent with the
scope of TILA generally, which only applies to credit extended for
personal, family or household purposes. However, the scope of the
interim final rule is broader than the 2008 Appraisal Independence
Rules; those rules apply to closed-end loans but not to home-equity
lines of credit (HELOCs). The broader scope is required by Section 1472
of the Dodd-Frank Act, which does not limit coverage to closed-end
loans and also covers HELOCs.
In addition, with a few exceptions, the interim final rule applies
to any person who performs valuation services, performs valuation
management functions, and to any valuation of the consumer's principal
dwelling, not just to a licensed or certified ``appraiser,'' an
``appraisal management company,'' or to a formal ``appraisal.'' This
approach implements the statutory provisions and is consistent with the
2008 Appraisal Independence Rules, and is designed to ensure that
consumers are protected regardless of the valuation method chosen by
the creditor, and to prevent circumvention of the appraisal
independence rules. These provisions are discussed in more detail in
the section-by-section analysis below.
Coercion and prohibited extensions of credit. Consistent with the
Dodd-Frank Act, the interim final rule prohibits certain practices that
the Board's 2008 HOEPA rules also prohibit. First, the interim final
rule prohibits covered persons from engaging in coercion, bribery, and
other similar actions designed to cause anyone who prepares a valuation
to base the value of the property on factors other than the person's
independent judgment. The interim final rule adds examples from the
Dodd-Frank Act and the Board's 2008 HOEPA rules of actions that do and
do not constitute unlawful coercion. Second, the interim final rule
prohibits a creditor from extending credit based on a valuation if the
creditor knows, at or before consummation, that (a) coercion or other
similar conduct has occurred, or (b) that the person who prepares a
valuation or who performs valuation management services has a
prohibited interest in the property or the transaction as discussed
below, unless the creditor uses reasonable diligence to determine that
the valuation does not materially misstate the value of the property.
Conflicts of interest. The interim final rule provides that a
person who prepares a valuation or who performs valuation management
services may not have an interest, financial or otherwise, in the
property or the transaction. The Dodd-Frank Act does not expressly ban
the use of in-house appraisers or affiliates. However, because the Act
prohibits appraisers from having an ``indirect financial interest'' in
the transaction, it is possible to interpret the Act to prohibit
creditors from using in-house staff appraisers and affiliated appraisal
management companies (AMCs). The interim final rule clarifies that an
employment relationship or affiliation does not, by itself, violate the
prohibition. The interim final rule also contains establishes a safe
harbor and specific criteria for establishing firewalls between the
appraisal function and the loan production function, to prevent
conflicts of interest. Special guidance on firewalls is provided for
small institutions, because they likely cannot completely separate
appraisal and loan production staff. Small institutions are those with
assets of $250 million or less.
Mandatory reporting of appraiser misconduct. The interim final rule
provides that a creditor or settlement service provider involved in the
transaction who has a reasonable basis to believe that an appraiser has
not complied with ethical or professional requirements for appraisers
under applicable federal or state law, or the Uniform Standards of
Appraisal Practice (USPAP) must report the failure to comply to the
appropriate state licensing agency. The interim final rule limits the
duty to report compliance failures to those that are likely to affect
the value assigned to the property. The interim final rule also
provides that a person has a ``reasonable basis'' to believe an
appraiser has not complied with the law or applicable standards, only
if the person has knowledge or evidence that would lead a reasonable
person under the circumstances to believe that a material failure to
comply has occurred.
Customary and reasonable rate of compensation for fee appraisers.
Under the interim final rule, a creditor and its agent must pay a fee
appraiser at a rate
[[Page 66556]]
that is reasonable and customary in the geographic market where the
property is located. The rule provides two presumptions of compliance.
Under the first, a creditor and its agent is presumed to have paid a
customary and reasonable fee if the fee is reasonably related to recent
rates paid for appraisal services in the relevant geographic market,
and, in setting the fee, the creditor or its agent has:
Taken into account specific factors, which include, for
example, the type of property and the scope of work; and
Not engaged in any anticompetitive actions, in
violation of state or federal law, that affect the appraisal fee,
such as price-fixing or restricting others from entering the market.
Second, a creditor or its agent would also be presumed to comply if
it establishes a fee by relying on rates established by third party
information, such as the appraisal fee schedule issued by the Veteran's
Administration, and/or fee surveys and reports that are performed by an
independent third party (the Act provides that these surveys and
reports must not include fees paid by AMCs).
III. Legal Authority
Rulemaking Authority
As noted above, TILA Section 105(a) directs the Board to prescribe
regulations to carry out the act's purposes. 15 U.S.C. 1604(a). In
addition, TILA Section 129E, added by the Dodd-Frank Act, includes
several grants of rulemaking authority to implement the provisions of
that section. Specifically, Section 129E(g)(1) authorizes the Board,
the other federal banking agencies, the Federal Housing Finance Agency,
and the Consumer Financial Protection Bureau to jointly issue rules,
guidelines, and policy statements ``with respect to acts or practices
that violate appraisal independence in the provision of mortgage
lending services * * * within the meaning of subsections (a), (b), (c),
(d), (e), (f), (h), and (i).'' 15 U.S.C. 1639e(g)(1). Second, Section
129E(g)(2) directs the Board to prescribe interim final regulations no
later than 90 days after the law's enactment date, ``defining with
specificity acts or practices that violate appraisal independence in
the provision of mortgage lending services'' and ``defining any terms
in this section or such regulations.'' 15 U.S.C. 1639e(g)(2). The
Board's interim final regulations under Section 129E(g)(2) are deemed
to be rules prescribed by the agencies jointly. Third, Section 129E(h),
authorizes the Board, the banking agencies, the FHFA and the Consumer
Financial Protection Bureau to jointly issue rules regarding appraisal
report portability. 15 U.S.C. 1639e(h).
The Board is issuing this interim final rule pursuant to its
general authority in Section 105(a) and the specific authority
conferred by Section 129E(g)(2) to implement the appraisal independence
provisions in Section 129E. Some industry representatives have asserted
that the appraiser compensation provisions in Section 129E(i) do not
relate to appraisal independence and, therefore, should not be
addressed by the Board's interim final rules issued under Section
129E(g)(2). The Board concludes, however, that the legislative
directive to issue interim final rules includes the appraiser
compensation provisions in Section 129E(i). In particular, the Board
believes that its authority under Section 129E(g)(2) should be read
consistently with the authority granted in Section 129E(g)(1), which
expressly identifies the compensation provision in Section 129E(i) as
an ``appraisal independence'' provision.
Authority To Issue Interim Final Rule Without Notice and Comment
The Administrative Procedures Act (APA), 5 U.S.C. 551 et seq.,
generally requires public notice before promulgation of regulations.
See 5 U.S.C. 553(b). The APA also provides an exception, however, when
there is good cause because notice and public procedure is
impracticable. 5 U.S.C. 553(b)(B). The Board finds that for this
interim rule there is ``good cause'' to conclude that providing notice
and an opportunity to comment would be impracticable and, therefore, is
not required. The Board's finding of good cause is based on the
following considerations. Congress imposed a 90 day deadline for
issuing the interim final rule. Providing notice and an opportunity to
comment is impracticable, because 90 days does not provide sufficient
time for the Board to prepare and publish proposed regulations, provide
a period for comment, and publish in the Federal Register before the
statutory deadline. Even if the Board were able to publish proposed
rules for public comment, the comment period would have been too short
to afford interested parties sufficient time to prepare well-researched
comments or to afford time for the Board to conduct a meaningful review
and analysis of those comments. Consequently, the Board finds that the
use of notice-and-comment procedures before issuing these rules would
be impracticable. Interested parties will still have an opportunity to
submit comments in response to this interim final rule before permanent
final rules are issued.
Moreover, the Board believes that the Dodd-Frank Act's mandate that
the Board issue interim final rules that will be effective before the
issuance of permanent rules also supports the Board's determination
that notice and comment are impracticable. If the legislation had
contemplated a notice and comment period, the rules issued by the Board
could have been referred to as ``final rules'' rather than ``interim
final rules.'' The term ``interim final regulations'' or ``interim
final rules'' has long been recognized to mean rules that an agency
issues without first giving notice of a proposed rule and having a
public comment period.\6\
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\6\ See, e.g., Office of the Federal Register, ``A Guide to the
Rulemaking Process, http://www.federalregister.gov/learn/the_rulemaking_process.pdf; Administrative Conference of the U.S.,
Recommendation 95-4 (1995); U.S. Government Accountability Office,
Federal Rulemaking: Agencies Often Published Final Actions Without
Proposed Rules, GAO/GGD-98-126, 7 (1998); American Bar Ass'n, A
Guide to Federal Agency Rulemaking, 3rd Ed., 83-Y4 (2006).
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IV. Section-by-Section Analysis
Section 226.5b Requirements for Home-Equity Plans
Section 1472 of the Dodd-Frank Act adds to TILA a new Section 129E
that establishes appraiser independence requirements for a consumer
credit transaction secured by the consumer's principal dwelling. 15
U.S.C. 1639e. TILA Section 129E applies to both open- and closed-end
consumer credit transactions secured by the consumer's principal
dwelling, as discussed in detail below in the section-by-section
analysis of Sec. 226.42. Accordingly, new comment 5b-7 is being
adopted to clarify that home-equity plans subject to Sec. 226.5b that
are secured by the consumer's principal dwelling also are subject to
the requirements of new TILA Section 129E and Sec. 226.42.
Section 226.42 Valuation Independence
Overview
This part discusses the implementation of the appraisal
independence provisions added to TILA by the Dodd-Frank Act by this
interim final rule. TILA Section 129E(a) prohibits persons that extend
credit or provide any service for a consumer credit transaction secured
by the consumer's principal dwelling (covered transaction) from
engaging in ``any acts or practices that violate appraisal independence
as described in or pursuant to regulations prescribed under [TILA
Section 129E].'' 15 U.S.C.
[[Page 66557]]
1639e(a). This provision applies to both closed- and open-end
extensions of credit. TILA Section 129E(b) describes certain acts and
practices that violate appraisal independence. 15 U.S.C. 1639e(b). TILA
Section 129E(c) also specifies certain acts and practices that are
deemed to be permissible. 15 U.S.C. 1639e(c). Under TILA Section
129E(f), a creditor that knows about a violation of the appraiser
independence standards or a prohibited conflict of interest at or
before consummation of the transaction is prohibited from extending
credit based on the appraisal unless the creditor documents that it has
acted with reasonable diligence to determine that the appraisal does
not materially misstate or misrepresent the value of such dwelling. 15
U.S.C. 1639e(f).
TILA Section 129E(b) and (c) are substantially similar to the
appraisal regulations that the Board issued in 2008, which became
effective on October 1, 2009. 15 U.S.C. 1639e(b), (c). See Sec.
226.36(b); 73 FR 44522, 44604 (Jul. 30, 2008) (2008 Appraisal
Independence Rules). The Board's 2008 Appraisal Independence Rules
prohibit creditors and mortgage brokers and their affiliates from
directly or indirectly coercing, influencing, or otherwise encouraging
an appraiser to misstate or misrepresent the value of the consumer's
principal dwelling. See Sec. 226.36(b)(1). However, the 2008 rules
apply only to closed-end mortgage loans. The prohibition on certain
extensions of credit in TILA Section 129E(f) also is substantially
similar to Sec. 226.36(b)(2) of the Board's 2008 Appraisal
Independence Rules. 15 U.S.C. 1639e(f).
The Board is removing Sec. 226.36(b), effective April 1, 2011, the
mandatory compliance date for this interim final rule. The Board is
removing Sec. 226.36(b) because the provision is substantially similar
to TILA Section 129E(b), (c), and (f), implemented in Sec. 226.42 by
this interim final rule. Through March 31, 2011, creditors, mortgage
brokers, and their affiliates may comply with either Sec. 226.36(b) or
new Sec. 226.42. If such persons comply with Sec. 226.42, they are
deemed to comply with Sec. 226.36(b).
TILA Section 129E also adds provisions not covered by the Board's
2008 Appraisal Independence Rules. For a covered transaction, TILA
Section 129E(d) prohibits an appraiser that conducts and an appraisal
management company that procures or facilitates an appraisal of the
consumer's principal dwelling from having a direct or indirect interest
in the dwelling or the covered transaction, as discussed in detail
below in the section-by-section analysis of Sec. 226.42(d). Under TILA
Section 129E(f), a creditor that knows about a violation of the
conflicts of interest provisions under TILA Section 129E(d) is
prohibited from extending credit based on the appraisal, unless the
creditor documents that it has acted with reasonable diligence to
determine that the appraisal does not materially misstate or
misrepresent the value of such dwelling. 15 U.S.C. 1639e(f). TILA
Section 129E(e) imposes a requirement for reporting certain compliance
failures by appraisers to state appraiser certifying and licensing
agencies. 15 U.S.C. 1539e(e). TILA Section 129E(i) provides that
lenders and their agents must compensate fee appraisers at a rate that
is ``customary and reasonable for appraisal services performed in the
market area of the property being appraised.'' \7\ 15 U.S.C. 1639e(i).
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\7\ This interim final rule does not implement TILA Section
129E(h), which authorizes the Board and other specified Federal
agencies to jointly issue regulations concerning appraisal report
portability. Public Law 111-203, 124 Stat. 2187 (to be codified at
15 U.S.C. 1639e(h)).
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42(a) Scope
TILA Section 129E(a) generally prohibits acts or practices that
violate appraisal independence ``in extending credit or in providing
any services'' for a consumer credit transaction secured by the
consumer's principal dwelling. 15 U.S.C. 1639e(a). Thus, the coverage
of the prohibition in Section 129E is not limited to creditors,
mortgage brokers, and their affiliates, as is the case with the Board's
2008 Appraisal Independence Rules contained in Sec. 226.36(b). Section
129E also covers open-end credit plans secured by the consumer's
principal dwelling, which are not covered by the Board's 2008 rules.
See comment 42(a)-1. Consistent with the statute, this interim final
rule applies only to transactions secured by the principal dwelling of
the consumer who obtains credit. See comment 42(a)-2.
42(b) Definitions
42(b)(1) ``Covered Person''
This interim final rule uses the term ``covered person'' in
defining the persons that are subject to the prohibition on coercion
and similar practices in TILA Section 129E(b) and the mandatory
reporting requirement in TILA Section 129E(e). 15 U.S.C. 1639e(b), (e).
TILA Section 129E(a) prohibits an act or practice that violates
appraisal independence ``in extending credit or in providing any
services'' for a covered transaction. Consistent with the statutory
language, the Board is defining ``covered persons'' to include a
creditor with respect to a covered transaction or a person that
provides ``settlement services,'' as defined under the Real Estate
Settlement Procedures Act (RESPA), in connection with a covered
transaction. See Sec. 226.42(b)(1).
The Board notes that ``settlement services'' under RESPA is a broad
class of activities, covering any service provided in connection with
settlement, including rendering of credit reports, providing legal
services, preparing documents, surveying real estate, and pest
inspections. Some providers of settlement services may, as a practical
matter, have little opportunity or incentive to coerce or influence an
appraiser, or to have a reasonable basis to believe that an appraiser
has not complied with USPAP or other applicable authorities. In such
cases, the benefits of the rule may not justify applying it to these
parties, however, by the same token, these entities may have little or
no compliance burden under the circumstances. The Board solicits
comment on whether some settlement service providers should be exempt
from some or all of the interim final rule's requirements.
Examples of ``covered persons'' include creditors, mortgage
brokers, appraisers, appraisal management companies, real estate
agents, title insurance companies, and other persons that provide
``settlement services'' as defined under RESPA. See comment 42(b)(1)-1.
The Board notes that persons that perform ``settlement services''
include persons that conduct appraisals. See 12 U.S.C. 2602(3). Comment
42(b)(1)-2 clarifies that the following persons are not ``covered
persons'': (1) The consumer who obtains credit through a covered
transaction; (2) a person secondarily liable for a covered transaction,
such as a guarantor; and (3) a person that resides in or will reside in
the consumer's principal dwelling but will not be liable on the covered
transaction, such as a non-obligor spouse.
42(b)(2) ``Covered Transaction''
TILA Section 129E applies to ``a consumer credit transaction
secured by the principal dwelling of the consumer.'' 15 U.S.C. 1639e.
This interim rule refers to such a transaction as a ``covered
transaction,'' for simplicity. For purposes of Sec. 226.42, the
existing provisions of Regulation Z and accompanying commentary apply
in determining what constitutes a principal dwelling. See comment
42(b)(1)-1. Regulation Z provides that, for the purposes of the
consumer's right to rescind certain loans secured by the consumer's
principal dwelling, a consumer may have only one principal dwelling at
a time. See, e.g.,
[[Page 66558]]
Sec. 226.2(a)(19), 226.2(a)(24), comment 2(a)(24)-3.
42(b)(3) ``Valuation''
TILA Section 129E uses the terms ``appraisal'' and ``appraiser''
without defining the terms. In some cases, a creditor might engage a
person not certified or licensed under state law to estimate a
dwelling's value in connection with a covered transaction, such as when
a creditor engages a real estate agent to provide an estimate of market
value.\8\ The Board believes that TILA Section 129E applies to acts or
practices that compromise the independent estimation of the value of
the consumer's principal dwelling, without regard to whether the
creditor uses a licensed or certified appraiser or another person to
produce a valuation. Therefore, this interim final rule uses the
broader term ``valuation'' and refers to a person that prepares a
``valuation'' rather than use the terms ``appraisal'' and
``appraiser,'' for purposes of the following provisions: (1) The
prohibition on causing or attempting to cause the value assigned to the
consumer's principal dwelling to be based on a factor other than the
independent judgment of a person that prepares valuations, through
coercion or certain other similar acts or practices, under Sec.
226.42(c); (2) the prohibition on having an interest in the consumer's
principal dwelling or the transaction, under Sec. 226.42(d); and (3)
the prohibition on extending credit where a creditor knows of a
violation of Sec. 226.42(c) or (d) unless certain conditions are met
under Sec. 226.42(e). This is consistent with the 2008 Appraisal
Independence Rules, which define ``appraiser'' broadly to mean a person
who engages in the business of providing assessments of the value of
dwellings.\9\
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\8\ Section 1473(r) of the Dodd-Frank Act adds new Section 1126
to FIRREA, which prohibits the use of a real estate broker's opinion
of value ``as the primary basis'' of determining the value of the
consumer's principal dwelling in certain types of transactions.
Public Law 111-203, 124 Stat. 2198 (to be codified at 12 U.S.C.
3355).
\9\ For purposes of the provisions requiring payment of a
customary and reasonable rate to appraisers and reporting of
appraisers' failure to comply with USPAP or ethical or professional
requirements to the appropriate state appraiser certifying and
licensing agencies, this interim final rule limits persons
considered ``appraisers'' to persons subject to the state agencies'
jurisdiction. Sec. 226.36(f), (g).
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Section 226.42(b)(5) uses the term ``valuation'' to mean an
estimate of the value of the consumer's principal dwelling in written
or electronic form, other than one produced solely by an automated
model or system. This definition is consistent with the definition of
``appraisal'' in the Uniform Standards of Professional Appraisal
Practice (USPAP) as ``an opinion of value.''\10\ As used in Sec.
226.42(b)(5), the term ``valuation'' applies to an estimate of the
value of the consumer's principal dwelling whether or not a person
applies USPAP in preparing such estimate. Comment 42(b)(3)-1 clarifies
that a ``valuation'' is an estimate of value prepared by a natural
person, such as an appraisal report prepared by an appraiser or an
estimate of market value prepared by a real estate agent. Comment
42(b)(3)-1 also clarifies that the term includes photographic or other
information included with an estimate of value. Comment 42(b)(3)-1
clarifies further that a ``valuation'' includes an estimate provided or
viewed electronically, such as an estimate transmitted via electronic
mail or viewed using a computer.
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\10\ See Appraisal Standards Bd., Appraisal Fdn., USPAP (2010)
at U-1; see also Appraisal Standards Bd., Appraisal Fdn., Advisory
Op. 18 (stating that ``the output of an [automated valuation model]
is not, by itself, an appraisal'' but may become the basis of an
appraisal if credible).
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Comment 42(b)(3)-2 clarifies that, although a ``valuation'' does
not include an estimate of value produced exclusively using an
automated model or system, a ``valuation'' includes an estimate of
value developed by a natural person based in part on an estimate
produced using an automated model or system. The Board solicits comment
on the exclusion of automated valuation models from the definition of
``valuation'' below, in the section-by-section analysis of Sec.
226.42(c). Comment 42(b)(3)-3 clarifies that an estimate of the value
of the consumer's principal dwelling includes an estimate of a range of
values for the consumer's principal dwelling.
42(b)(4) ``Valuation Management Functions''
This interim final rule uses the term ``valuation management
functions'' to refer to a variety of administrative activities
undertaken in connection with the preparation of a valuation. The term
``valuation management functions'' is used in implementing TILA Section
129E(b)(1), which prohibits causing or attempting to cause the value
assigned to the consumer's principal dwelling to be based on a factor
other than the independent judgment of a person that prepares
valuations, through coercion or certain other similar acts or
practices. 15 U.S.C. 1639e(b)(1). The term ``valuation management
functions'' also is used in implementing TILA Section 129E(d), which
provides that an appraisal management company may not have an interest
in a covered transaction or the consumer's principal dwelling. 15
U.S.C. 1639e(d). This interim final rule applies that prohibition on
conflicts of interest to a person that performs administrative
functions in connection with valuations of the consumer's principal
dwelling, even if the person is not an ``appraisal management company''
(for example, a company that employs appraisers or an appraisal
reviewer employed by a creditor), as discussed below in the section-by-
section analysis of Sec. 226.42(b)(d). This interim final rule
therefore uses the term ``valuation management functions'' rather than
``appraisal management'' for purposes of Sec. 226.42(d).
Section 226.42(b)(4) defines ``valuation management functions'' to
mean (1) recruiting, selecting, or retaining a person to prepare a
valuation; (2) contracting with or employing a person to prepare a
valuation; (3) managing or overseeing the process of preparing a
valuation (including by providing administrative services such as
receiving orders for and receiving a valuation, submitting a completed
valuation to creditors and underwriters, collecting fees from creditors
and underwriters for services provided in connection with a valuation,
and compensating a person that prepare valuations); or (4) reviewing or
verifying the work of a person that prepares valuations. The term is
used in Sec. 226.42(c) and (d), which are discussed in detail below.
42(c) Valuation of Consumer's Principal Dwelling
TILA Section 129E(b) provides that, for purposes of TILA Section
129E(a), acts or practices that violate appraisal independence include:
(1) Causing or attempting to cause the value assigned to the property
to be based on a factor other than the independent judgment of an
appraiser, by compensating, coercing, extorting, colluding with,
instructing, inducing, bribing, or intimidating a person conducting or
involved in an appraisal; (2) mischaracterizing, or suborning any
mischaracterization of, the appraised value of the property securing
the extension of credit; (3) seeking to influence an appraiser or
otherwise to encourage a targeted value in order to facilitate the
making or pricing of the transaction; and (4) withholding or
threatening to withhold timely payment for an appraisal report or for
appraisal services rendered when the appraisal report or services are
provided for in accordance with the contract between the parties. 15
U.S.C. 1639e(b).
[[Page 66559]]
TILA Section 129E(c) provides that TILA Section 129E(b) shall not
be construed as prohibiting a mortgage lender, mortgage broker,
mortgage banker, real estate broker, appraisal management company,
employee of an appraisal management company, consumer, or any other
person with an interest in a real estate transaction from asking an
appraiser to: (1) Consider additional, appropriate property
information, including information regarding additional comparable
properties to make or support an appraisal; (2) provide further detail,
substantiation, or explanation for the appraiser's value conclusion; or
(3) correct errors in the appraisal report. 15 U.S.C. 1639e(c).
TILA Section 129E(b) and (c) are substantially similar to the 2008
Appraisal Independence Rules. 15 U.S.C. 1639e(b), (c); Sec. 226.36(b).
The Board is implementing TILA Section 129E(b) and (c) in Sec.
226.42(c), pursuant to its authority under TILA Section 129E(g)(2) to
prescribe interim final regulations defining with specificity acts or
practices that violate appraisal independence in the provision of
mortgage lending services or mortgage brokerage services for a covered
transaction and any terms under TILA Section 129E or such regulations.
15 U.S.C. 1639e(g)(2). The prohibitions of certain acts and practices
under TILA Section 129E(b) that are substantially similar to the
Board's 2008 Appraisal Independence Rules are implemented in Sec.
226.42(c)(1). The prohibition on ``mischaracterizing or suborning any
mischaracterization of the appraised value of property securing the
extension of credit'' under TILA Section 129E(b)(2), which has no
direct corollary in the 2008 Appraisal Independence Rules, is
implemented in Sec. 226.42(c)(2). 15 U.S.C. 1639e(b)(2). TILA Section
129E(c), regarding acts and practices that are permissible under TILA
Section 129E, is implemented in Sec. 226.42(c)(3).
42(c)(1) Coercion
TILA Section 129E(b)(1) prohibits a person with an interest in the
underlying transaction to compensate, coerce, extort, collude,
instruct, induce, bribe, or intimidate a person, appraisal management
company, firm, or other entity conducting or involved in an appraisal,
or attempting to do so, for the purpose of causing the value assigned
to the consumer's principal dwelling to be based on a factor other than
the independent judgment of the appraiser. 15 U.S.C. 1639e(b)(1).
Section 226.42(c)(1) implements and is substantially similar to TILA
Section 129E(b)(1). Section 226.42(c)(1) uses the terms ``covered
person'' and ``covered transaction'' and refers to persons that prepare
``valuations'' or perform ``valuation management functions,'' for
clarity and comprehensiveness, as discussed above in the section-by-
section analysis of Sec. 226.42(b). Also, Sec. 226.42(c)(1) uses the
term ``person'' to implement the reference in TILA Section 129E(b)(1)
to certain acts or practices directed towards a ``person, appraisal
management company, firm, or other entity,'' for simplicity. 15 U.S.C.
1639e(b)(1). TILA Section 103(d) provides that ``person'' means a
natural person or an organization, and Sec. 226.2(a)(22) clarifies
that an organization includes a corporation, partnership,
proprietorship, association, cooperative, estate, trust, or government
unit. 15 U.S.C. 1602(d).
Prohibited acts and practices. Consistent with TILA Section
129E(b)(1), Sec. 226.42(c)(1) provides that no person shall attempt to
or cause the value assigned to the consumer's principal dwelling to be
based on a factor other than the independent judgment of a person that
prepares valuations, through coercion, extortion, inducement, bribery
or intimidation of, compensation or instruction to, or collusion with a
person that prepares a valuation or a person that performs valuation
management functions. Comment 42(c)(1)-1 provides that the terms used
for those prohibited actions have the meaning given them by applicable
state law or contract. See Sec. 226.2(b)(3). In some cases, state law
may define one of the terms in a context that is not applicable to a
covered transaction, for example, where state law defines ``bribery''
to mean the offering, giving, soliciting, or receiving of something of
value to influence the action of an official in the discharge of his or
her public duties. The Board believes, however, that the terms used in
TILA Section 129E(b)(1) and Sec. 226.42(c)(1) cover a range of acts
and practices sufficiently broad to address a wide variety of actions
that compromise the independent estimation of the value of the
consumer's principal dwelling. Further, Sec. 226.42(c)(1)(i) provides
examples of actions that violate Sec. 226.42(c)(1), as discussed
below. 15 U.S.C. 1639e(b)(1).
Comment 42(c)(1)-2 clarifies that a covered person does not violate
Sec. 226.42(c)(1) if the person does not engage in an act or practice
set forth in Sec. 226.42(c)(1) for the purpose of causing the value
assigned to the consumer's principal dwelling to be based on a factor
other than the independent judgment of a person that prepares
valuations. For example, comment 42(c)(1)-2 states that requesting that
a person that prepares a valuation take certain actions, such as
considering additional, appropriate property information, does not
violate Sec. 226.42(c), because such request does not supplant the
independent judgment of the person that prepares a valuation. See Sec.
226.42(c)(3)(i). Also, comment 42(c)(1)-2 clarifies that a covered
person may provide incentives, such as additional compensation, to a
person that prepares valuations or performs valuation management
functions, as long as the covered person does not cause or attempt to
cause the value assigned to the consumer's principal dwelling to be
based on a factor other than the independent judgment of a person that
prepares valuations. The Board notes, however, that provisions of
federal law other than Sec. 226.42(c)(1) or state law may apply in
determining whether or not a covered person may engage in certain acts
or practices in connection with valuations of the consumer's principal
dwelling.
Person that prepares valuations. Comment 42(c)(1)-3 clarifies that
Sec. 226.42(c)(1) is violated if a covered person attempts to or
causes the value assigned by a person that prepares valuations to be
based on a factor other than the independent judgment of the person
that prepares valuations through coercion or certain other acts or
practices, whether or not the person that prepares valuations is a
state-licensed or state-certified appraiser. For example, comment
42(c)(1)(1)-3 clarifies that a covered person violates Sec.
226.42(c)(1) by seeking to coerce a real estate agent to assign a
market value to the consumer's principal dwelling based on a factor
other than the real estate agent's independent judgment, in connection
with a covered transaction. Although Sec. 226.42(c)(1) broadly
prohibits certain acts and practices directed toward any person who
prepares valuations, the Board notes that in some cases applicable law
or guidance may call for a creditor to obtain an appraisal prepared by
a state-licensed or state-certified appraiser for a covered
transaction. For example, the federal financial institution regulatory
agencies require the creditors they supervise to obtain an appraisal by
a state-certified appraiser for certain federally-related mortgage
transactions.\11\
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\11\ See, Board: 12 CFR 225.63(a); OCC: 12 CFR 34.43(a); FDIC:
12 CFR 323.3(a); OTS: 12 CFR 564.3(a); NCUA: 12 CFR 722.3(a).
---------------------------------------------------------------------------
Indirect acts or practices. Comment 42(c)(1)-4 clarifies that Sec.
226.42(c)(1) may be violated indirectly, for example,
[[Page 66560]]
where a creditor attempts to cause the value an appraiser engaged by an
appraisal management company assigns to the consumer's principal
dwelling to be based on a factor other than the appraiser's independent
judgment. Thus, the commentary provides that it is a violation to
threaten to withhold future business from a title company affiliated
with an appraisal management company unless the valuation ordered
through the appraisal management company assigns a value to the
consumer's principal dwelling that meets or exceed a minimum threshold.
Automated valuation systems. Under this interim final rule, Sec.
226.42(c)(1) does not apply in connection with the development or use
of an automated model or system that estimates value. (The definition
of ``valuation'' does not include an estimate of value produced
exclusively using such an automated system. See Sec. 226.42(b)(3).)
The Board requests comment, however, on whether creditors or other
persons exercise or attempt to exercise improper influence over persons
that develop an automated model or system for estimating the value of
the consumer's principal dwelling.
42(c)(1)(i)
TILA Sections 129E(b)(3) and (4) provide that the following actions
violate appraisal independence: (1) Seeking to influence an appraiser
to assign a targeted value to facilitate the making or pricing of a
covered transaction; and (2) withholding or threatening to withhold
timely payment for an appraisal report provided or for appraisal
services rendered in accordance with the parties' contract. 15 U.S.C.
1639e(b)(3), (4). The Board believes that the prohibition on causing or
attempting to cause the value assigned to the consumer's principal
dwelling to be based on a factor other than the independent judgment of
the person that prepares a valuation, through coercion, inducement,
intimidation, and certain other acts and practices, encompass the acts
and practices prohibited by TILA Section 129E(b)(3) and (4). This
interim rule therefore uses the acts and practices prohibited by TILA
Section 129E(b)(3) and (4) as examples of acts and practices prohibited
by TILA Section 129E(b)(1). (This interim final rule implements the
prohibition under TILA Section 129E(b)(2) of ``mischaracterizing'' the
value of the consumer's principal dwelling separately from the other
provisions of TILA Section 129E(b), because that provision may be
violated without outside pressure, as discussed below in the section-
by-section analysis of Sec. 226.42(c)(2). 15 U.S.C. 1639e(b).)
Section 226.42(c)(1)(i)(A) and (B) implement TILA Section
129E(b)(3) and (4) and are substantially similar to existing Sec.
226.36(b)(1)(C) and (D). In addition, Sec. 226.42(c)(1)(i)(D) through
(E) mirror current Sec. 226.36(b)(1)(i)(A), (B), and (E). The examples
provided in Sec. 226.42(c)(1)(i) illustrate cases where prohibited
action is taken towards a person that prepares valuations. The Board
notes that Sec. 226.42(c)(1) nevertheless applies to prohibited acts
and practices directed towards a person that performs valuation
management functions or such person's affiliate. See comment
42(c)(1)(i)-1. As used in the examples of prohibited actions, the terms
``specific value'' and ``predetermined threshold'' includes a
predetermined minimum, maximum, or range of values. See comment
42(c)(1)(i)-2. Further, although the examples assume a covered person's
actions are designed to cause the value assigned to the consumer's
principal dwelling to equal or exceed a certain amount, the rule also
applies to cases where a covered person's prohibited actions are
designed to cause the value assigned to the dwelling to be below a
certain amount. See id.
42(c)(1)(i)(A)
TILA Section 129E(b)(3) prohibits a covered person from seeking to
influence a person that prepares valuations, or otherwise encouraging
the reporting of a targeted value for the consumer's principal
dwelling, to facilitate the making or pricing of a covered transaction.
15 U.S.C. 1639e(b)(3). This provision is substantially similar to
current Sec. 226.36(b)(1)(ii)(C), which prohibits ``telling an
appraiser a minimum reported value of the consumer's principal dwelling
that is needed to approve the loan.'' Section 226.42(c)(1)(i)(A)
implements TILA Section 129E(b)(3), with minor revisions for clarity.
42(c)(1)(i)(B)
TILA Section 129E(b)(4) provides that appraisal independence is
violated if a person withholds or threatens to withhold timely payment
for a valuation or for services rendered to provide a valuation, when
the valuation or the services are provided in accordance with the
contract between the parties. 15 U.S.C. 1639e(b)(4). This provision is
substantially similar to current Sec. 226.36(b)(1)(ii)(D), which
prohibits ``failing to compensate an appraiser because the appraiser
does not value the consumer's principal dwelling at or above a certain
amount.'' Section 226.42(c)(2)(i)(B) implements TILA Section
129E(b)(4), with minor revisions for clarity. The Board notes that
withholding compensation for breach of contract or substandard
performance of services does not violate Sec. 226.42(c)(1). See Sec.
226.42(c)(3)(v).
42(c)(1)(i)(C), (D), and (E)
TILA Section 129E(b)(1) prohibits certain acts or practices that
cause or attempt to cause the value assigned to the consumer's
principal dwelling to be based on a factor other than the independent
judgment of a person that prepares valuations. 15 U.S.C. 1639e(b)(1).
The Board believes that the acts and practices currently prohibited
under Sec. 226.36(b)(1)(i)(A) through (E) are prohibited by TILA
Section 129E(b)(1). Therefore, the interim final rule includes the
examples of prohibited practices provided in current Sec.
226.36(b)(1)(ii)(A), (B), and (E) in new Sec. 226.42(c)(2)(i)(C), (D),
and (E).
Section 226.42(c)(1)(i)(C) provides that an example of an action
that violates Sec. 226.42(c)(1) is implying to a person that prepares
valuations that current or future retention of the person depends on
the amount at which the person estimates the value of the consumer's
principal dwelling. Section 226.42(c)(1)(i)(D) provides that an example
of an action that violates Sec. 226.42(c)(1) is excluding a person
that prepares valuations from consideration for future engagement
because the person reports a value for the consumer's principal
dwelling that does not meet or exceed a predetermined threshold. A
``predetermined threshold'' includes a predetermined minimum, maximum,
or range of values. See comment 42(c)(1)(i)-2. Section
226.42(c)(1)(i)(E) provides that an example of an action that violates
Sec. 226.42(c)(1) is conditioning the compensation paid to a person
that prepares valuations on consummation of a covered transaction. The
examples provided under Sec. 226.42(c)(1)(i) are illustrative, not
exhaustive, and other actions may violate Sec. 226.42(c)(1).
42(c)(2) Mischaracterization of Value
TILA Section 129E(b)(2) prohibits mischaracterizing or suborning
any mischaracterization of the appraised value of property securing a
covered transaction. 15 U.S.C. 1639e(b)(2). The Board implements that
prohibition separately from the prohibition under Sec. 226.42(c)(1) of
causing or attempting to cause the value assigned to the consumer's
principal dwelling to be based on a factor other than the independent
judgment of a person that prepares valuations, through coercion and
other similar acts and practices.
[[Page 66561]]
This is because a person may mischaracterize such value without any
outside pressure. This interim final rule implements TILA Section
129E(b)(2) in Sec. 226.42(c)(2).
42(c)(2)(i) Misrepresentation
Section 226.42(c)(2)(i) provides that a person that prepares
valuations shall not materially misrepresent the value of the
consumer's principal dwelling in a valuation. Section 226.42(c)(2)(i)
applies specifically to persons that prepare valuations, because such
persons represent that the value they assign to the consumer's
principal dwelling is consistent with their opinion regarding such
value. Section 226.42(c)(2)(i) provides that a bona fide error is not a
mischaracterization. The Board believes that Congress intended to
prohibit the intentional misrepresentation of the value of the
consumer's principal dwelling, not bona fide errors. Comment
42(c)(2)(i)-1 clarifies that a person misrepresents the value of the
consumer's principal dwelling by assigning a value to such dwelling
that does not reflect the person's opinion of such dwelling's value.
For example, comment 42(c)(2)(i)-1 clarifies that an appraiser violates
Sec. 226.42(c)(2)(i) if the appraiser estimates that the value of such
dwelling is $250,000 applying USPAP but assigns a value of $300,000 to
such dwelling in a Uniform Residential Appraisal Report.
42(c)(2)(ii) Falsification or Alteration
TILA Section 129E(b)(2) prohibits ``mischaracterizing or suborning
any mischaracterization'' of the value of the consumer's principal
dwelling. 15 U.S.C. 1639e(b)(2). That provision is implemented in Sec.
226.42(c)(2)(ii). Section 226.42(c)(2)(ii) provides that no covered
person shall falsify, and no covered person other than a person that
prepares valuations shall materially alter, a valuation. An alteration
is material for purposes of Sec. 226.42(c)(2)(ii) if the alteration is
likely to significantly affect the value assigned to the consumer's
principal dwelling.
Alterations to a valuation generally should be made by the person
that prepares the valuation, because the valuation reflects that
person's estimate of the value of the consumer's principal dwelling.
(Covered persons may request that a person that prepares a valuation
take certain actions, including correct errors in the valuation,
however. See Sec. 226.42(c)(3).) The Board solicits comment, however,
on whether there are specific types of alterations that other persons
may make that do not affect the value assigned to the consumer's
dwelling and therefore should not be deemed material for purposes of
Sec. 226.42(c)(2)(ii).
42(c)(2)(iii) Inducement of Mischaracterization
Section 226.42(c)(2)(iii) provides that no covered person shall
induce a person to violate the prohibitions under Sec. 226.42(c)(2)(i)
or (ii). For example, comment 42(c)(2)(iii)-1 clarifies that a loan
originator may not coerce a loan underwriter to alter an appraisal
report to increase the value assigned to the consumer's principal
dwelling.
42(c)(3) Permitted Actions
TILA Section 129E(c) provides that TILA Section 129E(b) shall not
be construed to prohibit a mortgage lender, mortgage broker, mortgage
banker, real estate broker, appraisal management company, employee of
an appraisal management company, consumer, or any other person with an
interest in a real estate transaction from asking an appraiser to
undertake certain actions. 15 U.S.C. 1639e(c). To implement TILA
Section 129E(c), Sec. 226.42(c)(3) provides examples of actions that
do not violate Sec. 226.42(c)(1) or (2). The Board notes that the
examples provided under Sec. 226.42(c)(3) are illustrative, not
exhaustive, and there are other actions that are permitted under Sec.
226.42(c)(1) or (2).
42(c)(3)(i), (ii), and (iii)
TILA Section 129E(c)(1) provides that it is permissible under TILA
Section 129E(b) to ask an appraiser to consider additional property
information, including information regarding comparable properties. 15
U.S.C. 1639e(c)(1). TILA Section 129E(c)(2) provides that it is
permissible under TILA Section 129E(b) to ask an appraiser to provide
further detail, substantiation, or explanation for the appraiser's
value conclusion. 15 U.S.C. 1639e(c)(1). TILA Section 129E(c)(3)
provides that it is permissible under TILA Section 129E(b) to ask an
appraiser to correct errors in an appraisal report. 15 U.S.C.
1639e(c)(3). TILA Section 129E(c)(1) through (3) are substantially
similar to current Sec. 226.36(b)(1)(ii)(A) through (C). The interim
final rule implements TILA Section 129E(c)(1) through (3) in Sec.
226.42(c)(3)(i) through (iii).
42(c)(3)(iv), (v), and (vi)
The Board believes that the acts and practices allowed under
current Sec. 226.36(b)(1)(ii)(D) through (F) do not compromise the
exercise of independent judgment in estimating the value of the
consumer's principal dwelling. The Board therefore includes the
examples of permitted practices provided under current Sec.
226.36(b)(1)(ii)(D) through (F) in new Sec. 226.42(c)(3)(iv) through
(vi). Section 226.42(c)(3)(iv) provides that an example of an action
that does not violate Sec. 226.42(c)(1) or (2) is obtaining multiple
valuations for the consumer's principal dwelling to select the most
reliable valuation. Section 226.42(c)(3)(iv) is substantially similar
to current Sec. 226.36(b)(1)(ii)(D) but omits the statement in that
provision that obtaining multiple appraisals is permitted under Sec.
226.36(b) ``as long as the creditor adheres to a policy of selecting
the most reliable appraisal, rather than the appraisal that states the
highest value.'' That statement is omitted because it may suggest an
unintended distinction between selecting the valuation that states the
highest value and selecting the valuation that states the lowest value.
No substantive change is intended.
Section 226.42(c)(3)(v) provides that an example of an action that
does not violate Sec. 226.42(c)(1) or (2) is withholding compensation
for breach of contract or substandard performance of services. Section
226.42(c)(3)(vi) provides that example of an action that does not
violate Sec. 226.42(c)(1) or (2) is taking action permitted or
required by applicable federal or state statute, regulation, or agency
guidance. Section 226.42(b)(3)(v) and (vi) are substantially similar to
current Sec. 226.36(b)(1)(ii)(E) and (F).
42(d) Prohibition on Conflicts of Interest
Background
Section 226.42(d) implements TILA Section 129E(d), which states
that ``no certified or licensed appraiser conducting, and no appraisal
management company procuring or facilitating, an appraisal in
connection with a consumer credit transaction secured by the principal
dwelling of a consumer may have a direct or indirect interest,
financial or otherwise, in the property or transaction involving the
appraisal.'' This new TILA provision is generally consistent with
longstanding Federal banking agency appraisal regulations and
supervisory guidance applicable to federally-regulated depository
institutions. The federal banking agency regulations require that
appraisers employed by the institution extending credit (termed ``staff
appraisers'' in the regulations) be ``independent of the lending,
investment, and collection functions and not involved, except as an
appraiser, in the transaction, and have no direct or indirect interest,
financial
[[Page 66562]]
or otherwise, in the property.'' \12\ The federal banking agency
regulations also prohibit appraisers who are not employees of the
institution extending credit, but rather hired on a contract basis
(termed ``fee appraisers'' in the regulations) from having a ``direct
or indirect interest, financial or otherwise, in the property or the
transaction.'' \13\
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\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).
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Federal Banking Agency Appraisal Guidance
Reaffirming independence standards in federal banking agency
appraisal regulations, the federal banking agencies have issued
Interagency Appraisal and Evaluation Guidelines (Interagency
Guidelines). The Interagency Guidelines state that the collateral
valuation process ``should be isolated from the institution's loan
production process,'' and that a person providing an appraisal or
evaluation ``should be independent of the loan and collection functions
of the institution and have no interest, financial or otherwise, in the
property or the transaction.'' \14\ The Interagency Guidelines
acknowledge, however, that for some creditors, such as small or rural
institutions or branches, separating loan production staff from
collateral valuation staff may not always be possible or practical
because the only individual qualified to analyze the real estate
collateral may also be a loan officer, other officer, or director of
the institution. In these cases, the Interagency Guidelines state that,
``[t]o ensure their independence, lending officials, officers, or
directors should abstain from any vote or approval involving loans on
which they performed an appraisal or evaluation.'' \15\
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\14\ Board, OCC, FDIC, OTS, Interagency Appraisal and Evaluation
Guidelines, SR 94-55 (Oct. 28, 1994) (Interagency Guidelines).
\15\ Id.
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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.''
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\16\ Board, OCC, FDIC, OTS, NCUA, Proposed Interagency Appraisal
and Evaluation Guidelines, 73 FR 69647, Nov. 19, 2008 (Proposed
Interagency Guidelines).
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HVCC
The HVCC, which covers appraisals performed by state-licensed or
state-certified appraisers for loans sold to Fannie Mae and Freddie
Mac, also incorporates several provisions to prohibit conflicts of
interest in the appraisal process.
First, the HVCC regulates the process of selecting and
communicating with a person or entity involved in conducting an
appraisal. Specifically, (1) members of the creditor's loan production
staff; and (2) any person who (i) is compensated on a commission basis
based on whether the loan closes, or (ii) reports ultimately to any
officer of the creditor who is not independent of loan production, may
not do the following:
Select, retain, recommend, or influence the selection of
any appraiser for a particular appraisal assignment or for inclusion on
a list or panel of approved or disapproved appraisers; or
Have ``substantive communications'' with an ``appraiser or
appraisal management company'' involving or impacting valuation,
including ordering or managing an appraisal assignment.\17\
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\17\ HVCC, Part III.B.
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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\
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\18\ Id. Part IV.A.
\19\ Id. Part IV.C.
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Third, the HVCC permits the creditor to use appraisals otherwise
prohibited above, as long as the creditor adheres to a list of
requirements designed to ensure the independence of any person involved
in conducting or managing the appraisal, such as that, among other
requirements:
The appraiser must report to a function independent of the
creditor's sales or loan production function;
The creditor's loan production staff may have no role in
selecting, retaining, recommending, or influencing the selection of an
appraiser; and
The appraiser must not be compensated based on the
appraiser's conclusion of value or whether the loan closes.\20\
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\20\ Id. Part IV.B.
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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\
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\21\ Id. Part IV.C.
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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\
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\22\ ``Small bank'' is defined in the Community Reinvestment Act
(CRA) as ``any regulated financial institution with aggregate assets
of not more than $250,000,000.'' 12 U.S.C. 2908. However, adjusting
asset threshold amounts for inflation, regulations implementing the
CRA define ``small bank'' as ``a bank that, as of December 31 of
either of the prior two calendar years, had assets of less than
$1.098 billion.'' 12 CFR 228.12(u). These regulations also define
the term ``intermediate small bank,'' meaning ``a small bank with
assets of at least $274 million as of December 31 of both of the
prior two calendar years and less than $1.098 billion as of December
31 of either of the prior two calendar years.'' Id.
\23\ HVCC, Part IV.D.
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[[Page 66563]]
The Interim Final Rule
The Board recognizes that the literal language of the statutory
prohibition on having a ``direct or indirect interest, financial or
otherwise'' in the property or transaction can be interpreted to mean
that a person or entity preparing a valuation or performing valuation
management functions should be deemed to have a prohibited interest
merely by token of being employed or owned by the creditor. An employee
of the creditor could be deemed to have an ``indirect'' interest in the
transaction, for example, because he or she might receive financial
benefits, such as higher bonuses or more valuable stock options, as a
result of the creditor's loan volume rising. Similarly, under this
interpretation, an AMC providing both valuation management functions
and title services, including title insurance, for the same transaction
could be deemed to have an ``indirect'' interest in the transaction if
the entity profits when title insurance is purchased at closing.
The Board believes, however, that interpreting the statute in this
way would be impractical and thus would not be the most effective way
to further the purpose of the conflicts of interest prohibition in TILA
Section 129E(d)-promoting a healthy mortgage market by ensuring
independent valuations. A broad prohibition could interfere with the
functioning of many creditors and providers of valuations and valuation
management functions, potentially disrupting the mortgage market at a
vulnerable time. The Board also notes that, according to the
legislative history of TILA Section 129E(d), the conflicts of interest
provision ``should not be construed as to prohibit work by staff
appraisers within a financial institution or other organization, if
such an entity has established firewalls, consistent with those
outlined in the [HVCC], between the origination group and the appraisal
unit designed to ensure the independence of appraisal results and
reviews.'' \24\
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\24\ U.S. House of Reps., Comm. on Fin. Services, Report on H.R.
1728, Mortgage Reform and Anti-Predatory Lending Act, No. 111-94, 95
(May 4, 2009) (House Report). The conflict of interest provision
adopted in TILA Section 129E(d) appears in Title VI, Sec. 602, of
H.R. 1728.
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The Board understands that many AMCs are wholly or partly owned by
creditors, or share a common corporate parent with a creditor, and
manage appraisals for a sizable share of the dwelling-secured consumer
credit market. The Board is also aware that a few larger creditors
still have a segregated in-house collateral valuation function. Some
creditor representatives have informally reported to the Board that,
based on their experience and quality control testing, appraisals
performed by an in-house collateral valuation function are of higher
quality than appraisals performed by third parties, including those
ordered through third-party AMCs. These creditors might reasonably
prefer using in-house appraisals, or appraisals performed through an
appraisal company wholly owned by the creditor, to protect both
consumers and their own safety and soundness.
In addition, the Board is concerned that small creditors with few
staff members, such as institutions or branches in rural areas, could
not comply with an overly broad prohibition on conflicts of interest.
These entities, particularly in rural areas, may not have the option of
choosing a third party to perform or manage collateral valuations. They
may need to rely on a single in-house staff member to perform multiple
functions, such as, for example, serving as both a loan officer and an
appraiser.
For these reasons, the Board's interim final rule:
Generally prohibits conflicts of interest in the valuation
process, as prescribed by TILA Section 129E(d);
Provides a safe harbor to ensure compliance with the
conflicts of interest prohibition by a creditor's in-house valuation
staff or affiliated AMC or appraisal company if firewalls and other
specified safeguards are in place; and
Provides a safe harbor to ensure compliance with the
conflicts of interest prohibition by a person who prepares valuations
or performs valuation management functions in a particular transaction
in addition to performing another settlement service, or whose
affiliate performs another settlement service, if firewalls and other
specified safeguards are in place.
The interim final rule establishes alternative safe harbor
safeguards for smaller creditors that are unable to establish firewalls
due to practical problems, such as having a limited number of
employees.
These provisions are discussed in turn below.
42(d)(1)(i) In General
Section 226.42(d)(1)(i) prohibits a person preparing a valuation or
performing valuation management functions for a consumer credit
transaction secured by the consumer's principal dwelling from having a
direct or indirect interest, financial or otherwise, in the property or
transaction for which the valuation is or will be performed. This
provision implements TILA Section 129E(d), but uses different
terminology (for reasons explained in the section-by-section analysis
to Sec. 226.42(b)). Specifically, the term ``person preparing
valuations'' replaces the term ``licensed or certified appraiser''; the
term ``person performing valuation management functions'' replaces the
term ``appraisal management company''; and the term ``valuation''
replaces the term ``appraisal.'' By using these terms, the interim
final rule's conflict of interest provision applies to any form of
valuing a property on which a creditor relies to extend consumer credit
secured by the consumer's principal dwelling.
Prohibited Interest in the Property
Comment 42(d)(1)(i)-1 clarifies that a person preparing a valuation
or performing valuation management functions for a covered transaction
has a prohibited interest in the property if the person has any
ownership or reasonably foreseeable ownership interest in the property.
The comment further clarifies that a person who seeks a mortgage to
purchase a home has a reasonably foreseeable ownership interest in the
property securing the mortgage, and therefore is not permitted to
prepare the valuation or perform valuation management functions for
that mortgage transaction under Sec. 226.42(d)(1)(i). This example is
illustrative, and is not intended to be exhaustive; other prohibited
interests in the covered property may arise, depending on the facts of
a particular transaction.
Prohibited Interest in the Transaction
Comment 42(d)(1)(i)-2 clarifies that a person preparing a valuation
or performing valuation management functions has a prohibited interest
in the transaction under Sec. 226.42(d)(1)(i) if that person or an
affiliate of that person also serves as a loan officer of the creditor,
mortgage broker, real estate broker, or other settlement service
provider for the transaction, and the safe harbor conditions for
settlement service providers under Sec. 226.42(d)(4) (discussed below
in the section-by-section analysis of that provision) are not
satisfied. The comment further clarifies that a person also has a
prohibited interest in the transaction if the person is compensated or
otherwise receives financial or other benefits based on whether the
transaction is consummated. Under these circumstances, the comment
explains, the person is not permitted to prepare the valuation or
perform valuation management functions for the transaction under Sec.
226.42(d)(1)(i). The
[[Page 66564]]
Board notes that these examples of prohibited interests are generally
consistent with conflicts of interest provisions in the HVCC.\25\
Again, these examples are not intended to be an exhaustive list of
prohibited conflicts of interest in covered transactions; others may
arise, depending on the circumstances surrounding a particular
transaction.
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\25\ HVCC, Part IV.A and IV.C.
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42(d)(1)(ii) Employees and Affiliates of Creditors; Providers of
Multiple Settlement Services
Employees and Affiliates of Creditors
Section 226.42(d)(1)(ii)(A) provides that, in any covered
transaction, no person violates paragraph (d)(1)(i) of this section
based solely on the fact that the person is an employee or affiliate of
the creditor. Comment 226.42(d)(1)(ii)-1 explains that, in general, a
creditor may use employees or affiliates to prepare a valuation or
perform valuation management functions without violating Sec.
226.42(d)(1)(i). The comment clarifies, however, that whether an
employee or affiliate has a direct or indirect interest in the property
or transaction that creates a prohibited conflict of interest under
Sec. 226.42(d)(1)(i) depends on the facts and circumstances of a
particular case, including the structure of the employment or affiliate
relationship.
Providers of Multiple Settlement Services
Section 226.42(d)(1)(ii)(B) provides that, in any covered
transaction, no person violates paragraph (d)(1)(i) of this section
based solely on the fact that the person provides a settlement service
in addition to preparing valuations or performing valuation management
functions, or based solely on the fact that the person's affiliate
performs another settlement service. Comment 42(d)(1)(ii)-2 explains
that, in general, a person who prepares a valuation or perform
valuation management functions for a covered transaction may perform
another settlement service for the same transaction without violating
Sec. 226.42(d)(1)(i), or the person's affiliate may provide another
settlement service for the transaction. The comment clarifies, however,
that whether the person has a direct or indirect interest in the
property or transaction that creates a prohibited conflict of interest
under Sec. 226.42(d)(1)(i) depends on the facts and circumstances of a
particular case.
42(d)(2) Employees and Affiliates of Creditors With Assets of More Than
$250 Million for Both of the Past Two Calendar Years; 42(d)(3)
Employees and Affiliates of Creditors With Assets of $250 Million or
Less for Either of the Past Two Calendar Years
Background
As discussed above, one interpretation of TILA Section 129E(d) is
that it prohibits entities related to a creditor by ownership and a
creditor's in-house appraisal staff from involvement in the collateral
valuation process for that creditor. For many creditors and providers
of valuations and valuation management services, complying with the
statute under this interpretation would be impractical or impossible.
The Board believes that an interpretation of the statute more
consistent with Congress's intent is one that recognizes that
appropriate firewalls and safeguards can ensure the integrity of the
valuation process in certain situations where conflicts might otherwise
arise, such as where the person preparing a valuation is the employee
of the creditor. The Board also notes that federal banking agency
guidance and the HVCC permit creditors to use appraisals prepared by
in-house appraisers or affiliated AMCs if they establish firewalls and
other safeguards to separate the collateral valuation function from the
loan production functions.\26\ Appraisers, creditors, and others have
informed the Board that the HVCC requirements for firewalls and
safeguards, as an alternative to a strict prohibition on direct or
indirect conflicts of interest, have generally been effective in
ensuring that appraisers provide objective and independent valuations.
Again, the legislative history of TILA Section 129E(d) evinces
Congress's approval of this approach, stating that the conflict of
interest provision ``should not be construed as to prohibit work by
staff appraisers within a financial institution or other organization,
if such an entity has established firewalls, consistent with those
outlined in the [HVCC], between the origination group and the appraisal
unit designed to ensure the independence of appraisal results and
reviews.'' \27\
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\26\ See Interagency Guidelines, SR 94-55; HVCC, Part IV.B.
\27\ House Report at 95.
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Thus, the interim final rule creates two safe harbors for
compliance with the prohibition on conflicts of interest under Sec.
226.42(d) for persons who prepare valuations or perform valuation
management functions and are also employees or affiliates of the
creditor:
(1) One for transactions in which the creditor had assets of more
than $250 million as of December 31st for both of the past two calendar
years (Sec. 226.42(d)(2)); and
(2) The other for transactions in which the creditor had assets of
$250 million or less as of December 31st for either of the past two
calendar years (Sec. 226.42(d)(3)).
These safe harbors incorporate several firewall and safeguard
requirements from the HVCC as well as, for smaller institutions, the
federal banking agencies' appraisal regulations and supervisory
guidance. As discussed below, the safe harbor conditions under Sec.
226.42(d)(2) and (d)(3) impose obligations on creditors and also
require that certain additional conditions be met. If the creditor
meets these obligations and the other safe harbor conditions are
satisfied, the creditor generally may rely on valuations prepared by
its in-house staff or for which its affiliate performed valuation
management functions for any covered transaction without violating the
regulation.
The interim final rule differentiates between creditors with assets
of over $250 million and creditors with assets of $250 million or less
for at least three reasons. First, without allowances for staff and
other limitations of smaller creditors, these creditors may decrease
their consumer lending operations due to an inability to comply with
the statute and implementing regulation. This reduction in credit
availability could harm many consumers, undermining the goals of the
Dodd-Frank Act to protect and benefit consumers. Second, the federal
banking agencies have long recognized that smaller institutions may be
unable to achieve strict separation between its collateral valuation
and loan production functions; therefore, some firewalls and safeguards
appropriate for larger institutions are not for smaller institutions.
Third, distinguishing between larger and smaller institutions is
consistent with the HVCC, which the statute indicates the interim final
rule is intended to replace. See TILA Section 129E(j). As discussed
earlier, the HVCC exempts from its conflict of interest and firewall
rules all institutions (both depositories and nondepositories) meeting
the asset threshold for defining a ``small bank'' under the Community
Reinvestment Act. Therefore, this distinction is generally familiar in
the
[[Page 66565]]
industry and should not cause undue confusion.\28\
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\28\ 12 U.S.C. 2908; HVCC, Part IV.E.
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The Board requests comment on whether the $250 million asset size
threshold, some other asset size threshold, or other factors are
appropriate for applying the different safe harbor conditions to
different types of institutions.
42(d)(2) Employees and Affiliates of Creditors With Assets of More Than
$250 Million for Both of the Past Two Calendar Years
Section 226.42(d)(2) provides that, in a transaction in which the
creditor had assets of more than $250 million as of December 31st for
both of the past two calendar years, a person preparing valuations or
performing valuation management functions who is employed by or
affiliated with the creditor does not have a conflict of interest in
violation of Sec. 226.42(d)(1)(i) of this section based on the
person's employment or affiliate relationship with the creditor if:
(1) The compensation of the person preparing a valuation or
performing valuation management functions is not based on the value
arrived at in any valuation;
(2) The person preparing a valuation or performing valuation
management functions reports to a person who is not part of the
creditor's loan production function (as defined in Sec.
226.42(d)(5)(i)) and whose compensation is not based on the closing of
the transaction to which the valuation relates; and
(3) No employee, officer or director in the creditor's loan
production function is directly or indirectly involved in selecting,
retaining, recommending or influencing the selection of the person to
prepare a valuation or perform valuation management functions, or to be
included in or excluded from a list of approved persons who prepare
valuations or perform valuation management functions.
Comment 42(d)(2)-1 clarifies that Sec. 226.42(d)(2) creates a safe
harbor for a person who prepares valuation or performs valuation
management functions for a covered transaction and is an employee or
affiliate of the creditor. Such a person will not be deemed to have an
interest prohibited under Sec. 226.42(d)(1)(i) on the basis of the
employment or affiliate relationship with the creditor if the
conditions in Sec. 226.42(d)(2) are satisfied. In addition, the
comment explains that, in general, in any covered transaction with a
creditor that had assets of more than $250 million for the past two
years, the creditor may use its own employee or affiliate to prepare a
valuation or perform valuation management functions for a particular
transaction if the safe harbor conditions described in Sec.
226.42(d)(2) are satisfied without violating the regulation. The
comment also states that, if the safe harbor conditions in Sec.
226.42(d)(2) are not satisfied, whether a person preparing valuations
or performing valuation management functions has violated Sec.
226.42(d)(1)(i) depends on all of the facts and circumstances. The
three conditions for the safe harbor under Sec. 226.42(d)(2) are
discussed in turn below.
Condition one: Compensation. The first condition is that the
compensation of the person preparing a valuation or performing
valuation management functions may not be based on the value arrived at
in any valuation for the transaction. The Board believes that whether
the loan closes depends on the conclusion of value; therefore the
interim final rule prohibits, as a condition of this safe harbor,
basing an appraiser's compensation on the conclusion of value but does
not expressly prohibit basing the appraiser's compensation on whether
the transaction closes. If this condition is met, the person will not
have a stake in stating a certain value, which might color his or her
judgment as to the value of the home.
Condition two: Reporting. The second condition requires that the
person performing valuations or valuation management functions report
to a person who is not part of the creditor's loan production function,
or whose compensation is not based on the closing of the transaction to
which the valuation relates. The Board believes that this condition is
important to ensuring that persons instrumental in the collateral
valuation process are not subject to pressure to misrepresent
collateral value from managers or similar authorities whose primary
objective is increasing loan volume, not obtaining an independent
valuation. The Board also notes that this condition is similar to
requirements in the HVCC, such as that ``the appraiser or, if an
affiliate, the company for which the appraiser works,'' report to a
function of the creditor ``independent of sales or loan production.''
\29\ It is reflected in the Proposed Interagency Guidance as well,
which advises institutions to ``establish reporting lines independent
of loan production for staff that order, accept, and review appraisals
and evaluations.'' \30\
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\29\ HVCC, Part IV.B(1). See also id., Part III.B.
\30\ Proposed Interagency Guidelines, 73 FR at 69652.
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Comment 42(d)(2)(ii)-1 clarifies the prohibition on reporting to a
person who is part of the creditor's loan production function. To this
end, the comment provides the following example: if a person preparing
a valuation is directly supervised or managed by a loan officer or
other person in the creditor's loan production function (as defined in
Sec. 226.42(d)(5)(i), or by a person who is directly supervised or
managed by a loan officer, the condition under Sec. 226.42(d)(2)(ii)
is not met.
Comment 42(d)(2)(ii)-2 clarifies the prohibition on reporting to a
person whose compensation is based on the transaction closing. To this
end, the comment provides the following example: assume an appraisal
management company performs valuation management functions for a
transaction in which the creditor is an affiliate of the appraisal
management company. If the employee of the appraisal management company
who is in charge of valuation management for that transaction is
supervised by a person who earns a commission or bonus based on the
percentage of closed transactions for which the appraisal management
company provides valuation management functions, the condition under
Sec. 226.42(d)(2)(ii) is not met.
Condition three: Selection. The third condition requires that
employees, officers, and directors in the creditor's loan production
function not be directly or indirectly involved in selecting,
retaining, recommending or influencing the selection of the person to
perform a particular valuation or to be included in or excluded from a
list or panel of approved persons who perform valuations. This safe
harbor condition is intended to curtail coercion of appraisers that
occurs through giving or withholding assignments, or removing the
appraiser from, or including the appraiser on, a panel or list of
persons approved to perform valuations. This condition is also intended
to prevent loan sales or production staff from interfering with the
independence of the valuation by choosing appraisers who pay be
perceived to give especially high or low values.
Comment 42(d)(2)(ii)-2 clarifies the prohibition on any employee,
officer or director in the creditor's loan production function (as
defined in Sec. 226.42(d)(4)(ii)) from direct or indirect involvement
in selecting, retaining,
[[Page 66566]]
recommending or influencing the selection of the person to perform a
valuation or valuation management functions for a covered transaction,
or to be included in or excluded from a list or panel of approved
persons who prepare valuations or perform valuation management
functions. To this end, the comment provides the following example: if
the person who selects the person who will prepare the valuation for a
covered transaction is supervised by an employee of the creditor who
also supervises loan officers, the condition in Sec. 226.42(d)(2)(iii)
is not met.
The Board requests comment on the appropriateness of the three
conditions required under Sec. 226.42(d)(2) for inclusion in the final
rule.
42(d)(3) Employees and Affiliates of Creditors With Assets of $250
Million or Less for Either of the Past Two Calendar Years
Section 226.42(d)(3) provides a safe harbor for compliance with the
prohibition on conflicts of interest under Sec. 226.42(d)(1)(i) for
employees and affiliates of creditors with assets of $250 million or
less as of December 31st for either of the past two calendar years.
Specifically, Sec. 226.42(d)(3) provides that, in a transaction in
which the creditor had assets of $250 million or less for either of the
past two calendar years, a person who prepares valuations or performs
valuation management functions and who is employed by or affiliated
with the creditor does not have a conflict of interest in violation of
Sec. 226.42(d)(1)(i) based on the person's employment or affiliate
relationship with the creditor if:
(1) The compensation of the person preparing a valuation or
performing valuation management functions is not based the value
arrived at in any valuation; and
(2) The creditor requires that any employee, officer or director of
the creditor who orders, performs, or reviews a valuation for a covered
transaction abstain from participating in any decision to approve, not
approve, or set the terms of that transaction.
Comment 42(d)(3)-1 states that Sec. 226.42(d)(3) creates a safe
harbor for compliance with the general prohibition on conflicts of
interest under Sec. 226.42(d)(1)(i) by persons who prepare valuations
or perform valuation management functions for a covered transaction and
are employees or affiliates of the creditor. This comment explains
that, in any covered transaction with a creditor that had assets of
$250 million or less for either of the past two years, the creditor
generally may use its own employee or affiliate to prepare a valuation
or perform valuation management functions for a particular transaction,
as long as the safe harbor conditions described in Sec. 226.42(d)(3)
are satisfied. The comment also explains that, if the safe harbor
conditions in Sec. 226.42(d)(3) are not satisfied, whether a person
preparing valuations or performing valuation management functions has
violated Sec. 226.42(d)(1) depends on all of the facts and
circumstances. The two conditions for the safe harbor under Sec.
226.42(d)(3) are discussed in turn below.
Condition one: Compensation. The first condition is that the
compensation of the person preparing a valuation or performing
valuation management functions may not be based on the value arrived at
in any valuation for the transaction. This condition parallels the
condition applicable in transactions with larger creditors under Sec.
226.42(d)(2)(i), discussed above. The Board believes that this
condition, which in effect prohibits ``direct'' conflicts of interest
in the transaction, is equally appropriate in transactions with smaller
creditors as in those with larger creditors.
Condition two: Safeguards. The second condition is that the
creditor must require that any employee, officer or director of the
institution who orders, performs, or reviews the valuation for a
particular transaction abstain from participation in any decision to
approve, not approve, or set the terms of that transaction. The Board
recognizes that smaller institutions may have difficulty complying with
a condition that requires the person conducting the valuation or
performing valuation management functions to report to a person
independent of the creditor's sales or loan production functions (Sec.
226.42(d)(2)(ii)) or that prohibits employees in the creditor's loan
production functions from being directly or indirectly involved in
selecting, retaining, recommending or influencing the selection of a
person to perform a particular valuation or to be included in or
excluded from a list or panel of approved persons who perform
valuations (Sec. 226.42(b)(2)(iii)). As discussed above, smaller
institutions may have only a few employees, so each employee may have
to perform multiple functions, including roles involving both
collateral valuation and loan production tasks.
For these reasons, the condition in Sec. 226.42(d)(3)(ii)
replaces, for smaller creditors, the two conditions applicable to
larger creditors described above, which require bright-line isolation
of the collateral valuation function from the loan production function
(Sec. 226.42(d)(2)(ii) and (d)(2)(iii)). This safe harbor condition
tailored for smaller creditors incorporates provisions included in
federal banking agency guidance for small or rural institutions
regarding how to ensure independent valuations and protect against
conflicts of interest in the collateral valuation process--namely, that
a creditor should separate its collateral valuation function from its
loan production function and that, to this end, any employee, officer
or director of the institution who orders, performs, or reviews the
valuation for a particular transaction should abstain from any vote or
approval involving that transaction.\31\
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\31\ Interagency Guidelines, SR 94-55.
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The Board requests comment on the appropriateness of the two
conditions of the safe harbor under Sec. 226.42(d)(3) for inclusion in
the final rule.
42(d)(4) Settlement Service Providers
The Board recognizes that AMCs and appraisal companies or firms are
sometimes affiliated with other settlement service providers, such as
title companies, and that some AMCs and appraisal companies provide
services related to collateral valuation in addition to other
settlement services for the same transaction. The Board believes that
interpreting the statute to prohibit these AMCs and appraisal companies
from providing valuation services and other settlement services in the
same transaction in all cases would be contrary to the purposes of the
statute; it could disrupt the businesses of many appraisal firms,
appraisal management companies, and the creditors for which they
provide services, to the detriment of the overall mortgage market. It
also could reduce efficiencies created by ``one-stop shopping'' for
settlement services, which can lower overall mortgage costs for
consumers. The Board believes that providing a safe harbor consisting
of appropriate firewalls and safeguards will ensure the integrity of
the valuation process in accordance with the statute; by including this
safe harbor, the interim final rule gives providers of multiple
settlement services and the creditors for which they provide services
an incentive to implement measures to secure valuation independence.
Section 226.42(d)(4) provides alternative safe harbors for
compliance with the prohibition on conflicts of interest under Sec.
226.42(d)(1)(i) by persons who prepare valuations or perform valuation
management functions for a covered transaction and
[[Page 66567]]
provide other settlement services for the same transaction, or whose
affiliate provides settlement services. The Board notes that this
provision is generally consistent with a similar provision in the HVCC,
which prohibits a creditor from using an appraisal prepared by an
entity affiliated with another entity that is engaged by the creditor
to provide other settlement services for the same transaction, unless
the entity providing the appraisal has adopted written policies and
procedures implementing the HVCC, including adequate training and
disciplinary rules on appraiser independence, and has mechanisms in
place to report and discipline anyone who violates the policies and
procedures.\32\
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\32\ HVCC, Part IV.C. More precisely, this provision of the HVCC
prohibits use of an appraisal report ``by an entity that is
affiliated with, or that owns or is owned, in whole or in part by,
another entity that is engaged by the lender to provide other
settlement services,'' unless certain conditions are met. Id.
(emphasis added). The Board's Regulation Y defines ``affiliate'' as
``any company that controls, is controlled by, or is under common
control with, another company.'' 12 CFR 225.2(a). Therefore, in the
interim final rule and this SUPPLEMENTARY INFORMATION, the Board
uses the term ``affiliate'' to include an entity that owns or is
owned by another entity, as well as entities with a common owner.
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As with the safe harbors for employees and affiliates of creditors
(Sec. 226.42(d)(2) and (d)(3)), the interim final rule's safe harbors
for multiple settlement service providers differ depending on whether
the creditor in the transaction had assets of $250 million or more as
of December 31st for the past two calendar years (Sec.
226.42(d)(4)(i)) or assets of $250 million or less as of December 31st
for either of the past two calendar years (Sec. 226.42(d)(4)(ii)).
Paragraph 42(d)(4)(i)
Under Sec. 226.42(d)(4)(i), in a transaction in which the creditor
had assets of more than $250 million for both of the past two calendar
years, a person preparing a valuation or performing valuation
management functions in addition to performing another settlement
service, or whose affiliate performs another settlement service, will
not be deemed to have interest prohibited under Sec. 226.42(d)(1)(i)
based on the fact that the person or the person's affiliate performs
another settlement service for the transaction, as long as the
conditions in Sec. 226.42(d)(2)(i) (iii) are met. As discussed
earlier, the conditions in Sec. 226.42(d)(2)(i) (iii) are designed to
ensure the independence of persons involved with valuations for
transactions with larger creditors. Thus they require that:
(1) The compensation of the person preparing a valuation or
performing valuation management functions is not based on the value
arrived at in any valuation;
(2) The person preparing a valuation or performing valuation
management functions reports to a person who is not part of the
creditor's loan production function, and whose compensation is not
based on the closing of the transaction to which the valuation relates;
and
(3) No employee, officer or director in the creditor's loan
production function is directly or indirectly involved in selecting,
retaining, recommending or influencing the selection of the person to
prepare a valuation or perform valuation management functions, or to be
included in or excluded from a list of approved persons who prepare
valuations or perform valuation management functions.
Comment 42(d)(4)(i)-1 explains that, even if the conditions in
paragraph (d)(4)(i) are satisfied, however, the person preparing a
valuation or performing valuation management functions may have a
prohibited conflict of interest on other grounds, such as if the person
performs a valuation for a purchase-money mortgage transaction in which
the person is the buyer or seller of the subject property. The comment
further explains that, in general, in any covered transaction with a
creditor that had assets of more than $250 million for the past two
years, a person preparing a valuation or performing valuation
management functions, or its affiliate, may provide another settlement
service for the same transaction, as long as the conditions described
in paragraph (d)(4)(i) are satisfied. This comment also explains that,
if the safe harbor conditions in Sec. 226.42(d)(4)(i) are not
satisfied, whether a person preparing valuations or performing
valuation management functions has violated Sec. 226.42(d)(1) depends
on all of the facts and circumstances.
Comment 42(d)(4)(i) 2 explains that the safe harbor under Sec.
226.42(d)(4)(i) is available if the condition specified in Sec.
226.42(d)(2)(ii), among others, is met. Section 226.42(d)(2)(ii)
prohibits a person preparing a valuation or performing valuation
management functions from reporting to a person whose compensation is
based on the closing of the transaction to which the valuation relates.
This comment provides the following example to clarify the meaning of
this prohibition: Assume an appraisal management company performs both
valuation management functions and title services, including providing
title insurance, for the same covered transaction. If the appraisal
management company employee in charge of valuation management functions
for the transaction is supervised by the title insurance agent in the
transaction, whose compensation depends in whole or in part on whether
title insurance is sold at the loan closing, the condition in Sec.
226.42(d)(2)(ii) is not met.
Paragraph 42(d)(4)(ii)
Under Sec. 226.42(d)(4)(ii), in a transaction in which the
creditor in a covered transaction had assets of $250 million or less as
of December 31st for either of the past two calendar years, a person
performing valuations or valuation management functions in addition to
performing another settlement service, or whose affiliate performs
another settlement service, will not be deemed to have an interest
prohibited under Sec. 226.42(d)(1)(i) based on the fact that the
person or the person's affiliate performs another settlement service
for the transaction if the conditions in Sec. 226.42(d)(3)(i)-(ii) are
met.
Comment 42(d)(4)(ii)-1 explains that, even if the conditions in
Sec. 226.42(d)(4)(ii) are satisfied, however, the person may have a
prohibited conflict of interest on other grounds, such as if the person
performs a valuation for a purchase-money mortgage transaction in which
the person is the buyer or seller of the subject property. Thus, this
comment explains that, in general, in any covered transaction in which
the creditor had assets of $250 million or less for either of the past
two years, a person preparing a valuation or performing valuation
management functions, or its affiliate, may provide another settlement
service for the same transaction, as long as the conditions described
in Sec. 226.42(d)(4)(i) are satisfied. The comment further explains
that, if the conditions in Sec. 226.42(d)(4)(i) are not satisfied,
whether a person preparing valuations or performing valuation
management functions has violated Sec. 226.42(d)(1)(i) depends on all
of the facts and circumstances.
The Board requests comment on the appropriateness of the conditions
under which persons preparing valuations or performing valuations
management functions for a transaction in addition to performing
another settlement service for the same transaction, or whose affiliate
performs another settlement service for the same transaction, will be
deemed in compliance with the prohibition on conflicts of interest
under Sec. 226.42(d)(1)(i).
[[Page 66568]]
42(d)(5) Definitions
Section 226.42(d)(5) provides three definitions for purposes of
Sec. 226.42(d): ``loan production function''; ``settlement service'';
and ``affiliate.''
42(d)(5)(i) Loan Production Function
Section 226.42(d)(5)(i) provides that the term ``loan production
function'' means an employee, officer, director, department, division,
or other unit of a creditor with responsibility for generating covered
transactions, approving covered transactions, or both. This definition
is generally consistent with the Federal banking agencies' use of the
term ``loan production function'' or ``loan production staff.'' \33\
The term appears in Sec. 226.42(d)(2)(ii) and (d)(2)(iii), which
require that, respectively, (1) a person preparing the valuation or
performing valuation management functions report to a person
independent of the creditor's loan production function, and (2) no
employee in the creditor's loan production function be directly or
indirectly involved in selecting, retaining, recommending or
influencing the selection of a person to prepare a particular valuation
or valuation management functions, or to be included in or excluded
from a list of approved persons who prepare valuations or perform
valuation management functions.
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\33\ See, e.g., Proposed Interagency Guidelines, 73 FR at 69661.
---------------------------------------------------------------------------
Comment 42(d)(5)(i)-1 clarifies the meaning of ``loan production
function.'' This comment states that a creditor's ``loan production
function'' includes retail sales staff, loan officers, and any other
employee of the creditor with responsibility for taking a loan
application, offering or negotiating loan terms or whose compensation
is based on loan processing volume. This comment clarifies that a
person is not considered part of a creditor's loan production function
solely because part of the person's compensation includes a general
bonus not tied to specific transactions or percentage of closed
transactions, or a profit sharing plan that benefits all employees. The
comment further clarifies that a person solely responsible for credit
administration or risk management is also not considered part of a
creditor's loan production function. The comment explains that credit
administration and risk management includes, for example, loan
underwriting, loan closing functions (e.g., loan documentation),
disbursing funds, collecting mortgage payments and otherwise servicing
the loan (e.g., escrow management and payment of taxes), monitoring
loan performance, and foreclosure processing.
42(d)(5)(ii) Settlement Service
As discussed above, the interim final rule provides a safe harbor
for persons who prepare valuations or perform valuation management
functions that also perform another settlement service for the same
transaction, or whose affiliate performs another settlement service for
the same transaction. See Sec. 226.42(d)(4). Section 42(d)(5)(ii)
defines ``settlement service'' to have the same meaning as in the Real
Estate Settlement Procedures Act, 12 U.S.C. 2601 et seq. The Board
notes that this definition is consistent with the definition used in
the HVCC regarding its analogous provision on providers of multiple
settlement services.\34\
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\34\ HVCC, Part IV.C.
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42(d)(5)(iii) Affiliate
Section 226.42(d)(5)(iii) provides that the term ``affiliate'' has
the same meaning as in the Board's Regulation Y, 12 CFR 225.62(a),
which defines ``affiliate'' as ``any company that controls, is
controlled by, or is under common control with, another company.'' This
term is used in Sec. 226.42(d)(2), (3), and (4), to identify the
persons covered by the prohibition on conflicts of interest and safe
harbors for complying with the general prohibition under Sec.
226.42(d)(1).
42(e) When Extension of Credit Prohibited
TILA Section 129E(f) provides that, in connection with a covered
transaction, a creditor who knows at or before loan consummation of a
violation of the independence standards established in TILA Section
129E(b) or (d) (regarding misrepresentation of value and conflicts of
interest, respectively) must not extend credit based on such appraisal,
unless the creditor documents that it has acted with reasonable
diligence to determine that the appraisal does not materially misstate
or misrepresent the value of the consumer's principal dwelling. 15
U.S.C. 1639e(b), (d), (f). Section 226.42(e) implements TILA Section
129E(f). Section 226.42(e) uses the term ``valuation'' to ensure that
the protections in TILA Section 129E(f) apply to a covered transaction
even if a creditor uses a valuation that is not a formal ``appraisal''
performed in accordance with USPAP by a licensed or certified
appraiser, as discussed above in the section-by-section analysis of
Sec. 226.42(b)(3). Section 226.42(e) is substantially similar to
existing Sec. 226.36(b)(2).
Comment 42(e)-1 clarifies that a creditor will be deemed to have
acted with reasonable diligence under Sec. 226.42(e) if the creditor
extends credit based on a valuation other than the valuation subject to
the restriction in Sec. 226.42(e). This is consistent with current
comment 36(b)(2)-1. Comment 42(e)(1)-1 clarifies further, however, that
a creditor need not obtain a second valuation to document that the
creditor has acted with reasonable diligence to determine that the
valuation does not materially misstate or misrepresent the value of the
consumer's principal dwelling. Comment 42(e)-1 provides an example in
which an appraiser notifies a creditor that a covered person had
tried--and failed--to get the appraiser to inflate the value assigned
to the consumer's principal dwelling. Comment 42(e)(1)-1 clarifies that
if the creditor reasonably determines and documents that the appraisal
had not misstated the dwelling's value, the creditor could extend
credit based on the appraisal. This example is based on supplementary
information provided in connection with proposed Sec. 226.36(b)(2),
which was adopted substantially as proposed. See 73 FR 1672, 1701 (Jan.
9, 2008); see also 73 FR 44522, 44568 (Jul. 30, 2008) (discussing the
adoption of Sec. 226.36(b)). The example is provided for clarity, and
no substantive change is intended.
The interim final rule does not mandate specific due diligence
procedures for creditors to follow when they suspect a violation of
Sec. 226.42(c) or (d). In addition, under the interim final rule, a
violation of Sec. 226.42(e) does not establish a basis for voiding
loan agreements. That is, even if a creditor knows of a violation of
Sec. 226.42(c) or (d) and nevertheless extends credit in violation of
Sec. 226.42(e), this violation does not itself void the consumer's
loan agreement with the creditor. Whether the loan agreement is valid
is a matter determined by state or other applicable law. The Board
notes that applicable federal or state regulations may require
creditors to take certain steps in the event the creditor knows about
problems with a valuation. The foregoing discussion is consistent with
the Board's statements regarding due diligence and the impact of any
violation on a creditor's contract under current Sec. 226.36(b)(2).
See 73 FR 44522, 44568 (Jul. 30, 2008).
42(f) Customary and Reasonable Compensation
Section Sec. 226.42(f) implements TILA Section 129E(i), which
requires
[[Page 66569]]
creditors and their agents to compensate fee appraisers (appraisers who
are not their employees) at a rate that is ``customary and reasonable
for appraisal services in the market area of the property being
appraised.'' TILA Section 129E(i)(1). The statute states that evidence
for reasonable and customary fees may be established by objective
third-party information, such as government agency fee schedules,
academic studies, and independent private sector surveys. ``Such fee
studies,'' the statute stipulates, ``shall not include assignments
ordered by known appraisal management companies.'' The statute does not
define ``appraisal management company.'' In addition, the statute
provides that if an appraisal involves a ``complex assignment,'' the
customary and reasonable fee may reflect ``the increased time,
difficulty, and scope of the work required for such an appraisal and
include an amount over and above the customary and reasonable fee for
non-complex assignments.'' TILA Section 129E(i)(3). The statute does
not define ``complex'' and ``non-complex'' assignments.
The Board interprets the statutory language of TILA Section 129E(i)
to signify that the marketplace should be the primary determiner of the
value of appraisal services, and hence the customary and reasonable
rate of compensation for fee appraisers. The ``customary and
reasonable'' compensation provision that Congress adopted as part of
TILA is identical to a requirement included in a HUD Mortgagee Letter
obligating FHA lenders to ensure that appraisers are paid ``at a rate
that is customary and reasonable for appraisal services performed in
the market area of the property being appraised.'' \35\ HUD's
statements regarding this provision recognize the role of the
marketplace in determining rates for appraisal services and the
importance of accounting for factors that can cause variations in what
is a customary and reasonable amount of compensation on a transaction-
by-transaction basis.\36\ Similarly, TILA Section 129E(i) focuses on
the marketplace by permitting use of objective market information to
determine rates. The statute also makes allowances for factors that the
marketplace acknowledges add to the complexity of an appraisal and thus
value of appraisal services in a given transaction, such as ``increased
time, difficulty, and scope of work.'' TILA Section 129E(i)(1) and (3).
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\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.
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Accordingly, the interim final rule and alternative presumptions of
compliance are designed to be consistent with this approach. The
interim final rule is not intended to prohibit a creditor and an
appraiser from negotiating a rate for an assignment in good faith, nor
is it intended to prohibit a creditor from communicating to a fee
appraiser the rates that had been submitted by the other appraisers
solicited for the assignment as part of this negotiation. In addition,
the interim final rule is not intended to prevent appraisers and
creditors from negotiating volume-based discounts for a creditor that
provides multiple appraisal assignments to a fee appraiser. See comment
42(f)(1)-5.
Specifically, the interim final rule provides that fee appraisers
must be paid a customary and reasonable fee for appraisal services
performed in the geographic market in which the property being
appraised is located. See Sec. 226.42(f)(1). In addition, the interim
final rule provides two alternative ways in which creditors and their
agents may qualify for a presumption of compliance with this
requirement.
First presumption of compliance (Sec. 226.42(f)(2)). A creditor
and its agent are presumed to compensate a fee appraiser at a customary
and reasonable rate if:
The amount of compensation is reasonably related to recent
rates for appraisal services performed in the geographic market of the
property. The creditor or its agent must identify recent rates and make
any adjustments necessary to account for specific factors, such as the
type of property, the scope of work, and the fee appraiser's
qualifications; and
The creditor and its agent do not engage in any
anticompetitive actions in violation of state or federal law that
affect the rate of compensation paid to fee appraisers, such as price-
fixing or restricting others from entering the market.
Second presumption of compliance (Sec. 226.42(f)(3)). A creditor
and its agent are also presumed to comply if the creditor or its agent
establishes a fee by relying on rates in the geographic market of the
property being appraised established by objective third-party
information, including fee schedules, studies, and surveys prepared by
independent third parties such as government agencies, academic
institutions, and private research firms. The interim final rule
follows the statute in requiring that fee schedules, studies, and
surveys, or information derived from them, used to qualify for this
presumption of compliance must exclude compensation paid to fee
appraisers for appraisals ordered by appraisal management companies
(defined in Sec. 226.42(f)(4)(iii)).
The first presumption of compliance described above (Sec.
226.42(f)(2)) reflects the Board's interpretation of the statutory
requirement that fees paid to fee appraisers be ``customary'': to be
``customary,'' the fee must be reasonably related to recent rates for
appraisal services in the relevant geographic market. This first
presumption of compliance also reflects the Board's interpretation of
the statutory requirement that the fee be ``reasonable'': to be
``reasonable,'' the fee should be adjusted as necessary to account for
factors in addition to geographic market that affect the level of
compensation appropriate in a given transaction, such as the type of
property and the scope of work. The Board recognizes, however, that if
some creditors or AMCs dominate the market through illegal
anticompetitive acts, ``recent rates'' may be an inaccurate measure of
what a ``reasonable'' fee should be. Thus, to qualify for the
presumption of compliance, a creditor and its agents also must not
commit anticompetitive acts in violation of state or federal law that
affect the compensation of fee appraisers.
The second presumption of compliance (Sec. 226.42(f)(3)) is
intended to give effect to TILA Section 129E(i)(1) which expressly
permits creditors and their agents to use third-party information to
determine customary and reasonable fees. See TILA Section 129E(i)(1).
The Board believes that the statute supports a presumption of
compliance if the creditor or agent based the fee paid to a fee
appraiser on objective, third-party market information regarding recent
rates for appraisal services that meet the statutory requirements for
this information. Thus, in keeping with the statute, the interim final
rule stipulates that any fee schedule, survey, or study relied on to
qualify for this presumption of compliance may not include fees for
[[Page 66570]]
appraisals ordered by companies that publicly hold themselves out as
appraisal management companies (defined in Sec. 226.42(f)(4)(ii)).
Public Input
In adopting this interim final rule, the Board considered written
comments from representatives of appraisers, AMCs and creditors, as
well as views expressed by these parties during conference calls with
Board staff. Appraisers expressed concerns that AMCs may have recently
gained significant control over the residential appraisal market as a
result of unintended consequences of the HVCC. Under the HVCC, mortgage
brokers are not permitted to order appraisals, and a creditor's in-
house appraisers may not perform the appraisal unless strict firewalls
to safeguard appraisal independence are in place.\37\ The HVCC also
prohibits the creditor's ``loan production'' and certain other staff
from having ``substantive communications'' with appraisers and AMCs,
which include ordering or managing an appraisal assignment.\38\ To
minimize the risk of violating these and similar restrictions, many
creditors reportedly have chosen to rely on AMCs as a ``middle-man'' to
select appraisers and generally manage the creditor's appraisal
function. According to some, appraisers willing to work for AMCs are
often inexperienced in general or in the relevant geographic area and
produce poor quality appraisals, undermining consumers' well-being and
creditors' safety and soundness.
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\37\ See HVCC, Part IV.A and IV.B.
\38\ See Id. Part III.B.
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On the other hand, representatives of AMCs expressed concerns that,
depending on how the term ``customary and reasonable'' rate is
interpreted, requiring AMCs to compensate fee appraisers at a rate that
is customary and reasonable may force them to raise overall costs
charged to creditors--and ultimately to consumers--for appraisals
ordered through AMCs. AMC representatives expressed concerns that AMCs
would have to pay higher fees to appraisers while still performing
management functions for which they would need to charge creditors as
well. AMC representatives stated that reputable AMCs have strong
quality control systems and produce sound appraisals, and that they
perform functions that individual appraisers would have to perform
themselves were they not engaged by an AMC. These include marketing
appraisal services and handling administrative matters such as
submitting the appraisal to the creditor and billing the creditor.
AMC representatives also raised concerns that appropriate appraisal
fee studies do not exist and argued that the costs of performing the
appraisal itself and the various management functions associated with
each appraisal can vary by transaction, complicating the process of
determining a generally applicable customary and reasonable rate. These
parties argued that an interim final rule implementing TILA Section
129E's ``customary and reasonable'' rate provision is premature because
greater study of the issue is required to avoid a rule that will create
undue compliance challenges and litigation risk.
Coverage--``Appraisals'' and ``Fee Appraisers''
Unlike other provisions of Sec. 226.42, Sec. 226.42(f) does not
replace the statutory terms ``appraisal'' and ``appraiser'' with terms
that cover a broader range of methods for valuing collateral and
persons who estimate collateral value. However, the statute clearly
states that the persons who must receive customary and reasonable
compensation are ``fee appraisers,'' and that the term ``fee
appraiser'' means: (1) State-licensed or state-certified appraisers
and, generally, (2) entities that employ state-licensed or state-
certified appraisers to perform appraisals and are compensated for the
performance of appraisals (as opposed to entities that merely manage
the appraisal process). See TILA Section 129E(i)(2).
42(f)(1) Requirement To Provide Customary and Reasonable Compensation
to Fee Appraisers
Section 226.42(f)(1) requires that, in any covered transaction
(defined in Sec. 226.42(b)(1)), the creditor and its agents must
compensate a fee appraiser for performing appraisal services at a rate
that is customary and reasonable for comparable appraisal services
performed in the geographic market of the property being appraised.
This provision states that, for purposes of Sec. 226.42(f), ``agents''
of the creditor do not include any fee appraiser defined in Sec.
226.42(f)(4)(i).
Agents of the Creditor
The reference to ``agents'' in Sec. 226.42(f)(1) is not intended
to signify that agents of creditors are not included in other places
where the term ``creditor'' appears in Regulation Z. To the contrary,
the term ``creditor'' used throughout Regulation Z includes agents of
the creditor, as determined by applicable state law. The Board believes
that Congress was especially concerned that AMCs, serving as creditors'
agents in managing the appraisal process, be covered by this provision.
Consequently, the regulatory text follows the statutory language, which
applies the requirement to pay fee appraisers customary and reasonable
fees to both ``a lender and its agent.''
Comment 42(f)(1)-1 clarifies that whether a person is an ``agent''
of the creditor is determined by applicable law. This comment also
confirms the regulatory exclusion of ``fee appraisers'' as defined in
Sec. 226.42(f)(4)(i) from the meaning of ``agent'' of the creditor for
purposes of Sec. 226.42(f). The comment explains that, therefore, fee
appraisers are not required to pay other fee appraisers customary and
reasonable compensation under Sec. 226.42(f).
The Board believes that the express exclusion of ``fee appraisers''
from the meaning of ``agents'' is consistent with Congress's intention
regarding the parties that should be required to pay fee appraisers
customary and reasonable compensation. As discussed in more detail in
the section-by-section of Sec. 226.42(f)(4)(i) (defining ``fee
appraiser''), TILA Section 129E(i)(2) defines ``fee appraisers'' to
which customary and reasonable fees should be paid to mean (1)
individual state-licensed or state-certified appraisers (natural
persons), and (2) companies or firms that employ individual state-
licensed or state-certified appraisers and receive compensation for
performing appraisals. In this way, the statute reflects that natural
persons as well as appraisal companies or firms may contract with
creditors and AMCs to perform appraisals. Appraisal companies or firms
that contract with AMCs to perform appraisals typically have state-
licensed or state-certified appraisers on staff to perform appraisals.
These staff appraisers meet the definition of ``fee appraiser'' under
the statute; thus, a strict interpretation of the statute would require
appraisal companies to pay their staff appraisers at a ``customary and
reasonable'' rate. The Board understands, however, that these companies
or firms often pay their appraisers on an hourly basis and provide
their employees with office services as well as health insurance and
other employment benefits. Requiring that they pay their staff
appraisers ``customary and reasonable'' fees for each appraisal
assignment could be unduly financially burdensome for these entities,
and ultimately could undermine their viability as an avenue for
appraisal services. The Board believes that this result would harm
consumers by reducing competition in the appraisal services industry.
[[Page 66571]]
The Board requests comment on whether the final rule should define
``agent'' to exclude fee appraisers or any other parties.
Geographic Market of the Property Being Appraised
As noted, TILA Section 129E(i) requires payment of customary and
reasonable compensation to fee appraisers for appraisal services
performed ``in the market area of the property being appraised.''
Section 226.42(f)(1), (f)(2), and (f)(3) (discussed below) substitute
the term ``geographic market'' for the statutory term ``market area.''
Comment 42(f)(1)-2 clarifies that, for purposes of Sec. 226.42(f), the
``geographic market of the property being appraised'' means the
geographic market relevant to the appropriate compensation levels for
appraisal services.\39\ This comment explains that, depending on the
facts and circumstances, the relevant geographic market may be a state,
metropolitan statistical area (MSA), metropolitan division, area
outside of an MSA, county, or other geographic area. The comment
provides two examples. First, assume that fee appraisers who normally
work in County A generally accept $400 to appraise an attached single-
family property in County A. Assume also that very few or no fee
appraisers who normally work only in contiguous County B will accept a
rate comparable to $400 to appraise an attached single-family property
in County A. The relevant geographic market for an attached single-
family property in County A may reasonably be defined as County A.
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\39\ For further discussion of ``relevant geographic markets,''
see, e.g., U.S. Dept. of Justice and Federal Trade Commission,
``Horizontal Merger Guidelines,'' Sec. 4.2 (Aug. 19, 2010), found
at http://www.justice.gov/atr/public/guidelines/hmg-2010.html#4f.
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Second, assume that fee appraisers who normally work only in County
A generally accept $400 to appraise an attached single-family property
located in County A. Assume also that many fee appraisers who normally
work only in contiguous County B will accept a rate comparable to $400
to appraise an attached single-family property located in County A. The
relevant geographic market for an attached single-family property in
County A may reasonably be defined to include both County A and County
B.
Failure To Perform Contractual Obligations
A few creditors and AMC representatives requested that the Board
clarify whether creditors and their agents could withhold an
appraiser's fee for failing to meet contractual obligations. Comment
42(f)(1)-3 clarifies that Sec. 226.42(f)(1) does not prohibit a
creditor or its agent from withholding compensation from a fee
appraiser for failing to meet contractual obligations, such as for
failing to provide the appraisal report or violating state or federal
appraisal laws in performing the appraisal. The Board requests comment
on whether the Board should specify particular types of contractual
obligations that, if breached, would warrant withholding compensation
without violating Sec. 226.42(f).
Agreement That Fee Is Customary and Reasonable
Comment 42(f)(1)-4 clarifies that a document signed by a fee
appraiser indicating that the appraiser agrees that the fee paid to the
appraiser is ``customary and reasonable'' does not by itself create a
presumption of compliance with Sec. 226.42(f) or otherwise satisfy the
requirement to compensate a fee appraiser at a customary and reasonable
rate. In the Board's view, a fee appraiser's agreement that a fee is
``customary and reasonable'' is insufficient to establish that the fee
meets the statutory ``customary and reasonable'' standard. Objective
factors or information such as that set forth in Sec. 226.42(f)(2) and
(f)(3) (discussed below) generally should support the creditor's or
agent's determination of the appropriate amount of compensation to pay
a fee appraiser for a particular appraisal assignment. In theory, the
fact that an appraiser is willing to accept a particular fee for an
appraisal assignment may bear on whether the fee is customary,
reasonable, or both. However, an appraiser may be willing to accept a
low fee because the appraiser is new to the industry and wishes to
establish herself, or simply because the appraiser needs any work he
can obtain in a slow housing market. In addition, the Board understands
that some AMCs have begun requiring fee appraisers to agree that the
fee is ``customary and reasonable'' as a condition of obtaining the
appraisal assignment. In these situations, the Board believes that an
appraiser's agreement that a fee is ``customary and reasonable'' is an
unreliable measure of whether the fee in fact meets the statutory
standard.
Volume-Based Discounts
The Board recognizes that competition and efficiencies may both be
enhanced when market participants negotiate volume-based discounts for
services. For this reason, comment 42(f)(1)-5 clarifies that Sec.
226.42(f)(1) does not prohibit a fee appraiser and a creditor (or its
agent) from agreeing to compensation based on transaction volume, so
long as the compensation is customary and reasonable. For example,
assume that a fee appraiser typically receives $300 for appraisals from
creditors with whom it does business; the fee appraiser, however,
agrees to reduce the fee to $280 for a particular creditor, in exchange
for a minimum number of assignments from the creditor. The Board
requests comment on whether further guidance is needed concerning the
permissibility of volume-based discounts under Sec. 226.42(f)(1).
42(f)(2) Presumption of Compliance
Section 226.42(f)(2) provides that a creditor and its agents will
be presumed to comply with the requirement to compensate a fee
appraiser at a customary and reasonable rate if the creditor or its
agent satisfy two conditions.
First, the creditor or its agents must compensate the fee appraiser
in an amount that is reasonably related to recent rates paid for
comparable appraisal services performed in the geographic market of the
property being appraised. In determining this amount, the creditor or
its agent must review the factors below and make any adjustments to
recent rates paid in the relevant geographic market necessary to ensure
that the amount of compensation is reasonable:
(1) The type of property;
(2) The scope of work;
(3) The time in which the appraisal services are required to be
performed;
(4) Fee appraiser qualifications;
(5) Fee appraiser experience and professional record; and
(6) Fee appraiser work quality.
Second, the creditor and its agents must not engage in any
anticompetitive acts in violation of state or federal law that affect
the compensation paid to fee appraisers, including--
(1) Entering into any contracts or engaging in any conspiracies to
restrain trade through methods such as price fixing or market
allocation, as prohibited under section 1 of the Sherman Antitrust Act,
15 U.S.C. 1, or any other relevant antitrust laws; or
(2) Engaging in any acts of monopolization such as restricting any
person from entering the relevant geographic market or causing any
person to leave the relevant geographic market, as prohibited under
section 2 of the Sherman Antitrust Act, 15 U.S.C. 2, or any other
relevant antitrust laws.
[[Page 66572]]
Comment 42(f)(2)-1 explains that creditor and its agent are
presumed to comply with the requirement to pay a fee appraiser at a
customary and reasonable rate under Sec. 226.42(f)(1) if the creditor
or its agent meets the conditions specified in Sec. 226.42(f)(2),
stated above, in determining the compensation. The comment clarifies
that these conditions are not requirements for compliance with Sec.
226.42(f)(1), but that, if met, they create a presumption that the
creditor or its agent has complied. The comment further clarifies that
a person may rebut this presumption with evidence that the amount of
compensation paid to a fee appraiser was not customary and reasonable.
The creditor would have met the conditions in Sec. 226.42(f)(2), so
this evidence must be distinguishable from allegations that the
creditor or its agent failed to satisfy the conditions in Sec.
226.42(f)(2). Finally, the comment explains that, if a creditor or its
agent does not meet one of the conditions in Sec. 226.42(f)(2), the
creditor's and its agent's compliance with the requirement to pay a fee
appraiser at a customary and reasonable rate is determined based on all
of the facts and circumstances without a presumption of either
compliance or violation.
Paragraph 42(f)(2)(i)
Compensation Must Be Reasonably Related to Recent Rates
As explained in comment 42(f)(2)(i)-1, the first element of the
presumption of compliance under Sec. 226.42(f)(2) requires creditor or
its agent to engage in a two-step process to determine the appropriate
compensation. First, the creditor or its agent must identify recent
rates paid for comparable appraisal services in the relevant geographic
market. Second, once recent rates have been identified, the creditor or
its agent must review the factors listed in Sec. 226.42(f)(2)(i)(A)-
(F) and make any adjustments to recent rates appropriate to ensure that
the amount of compensation is appropriate for the current transaction.
Comment 42(f)(2)(i)-2 further explains the first step in this
process, which requires the creditor or its agents to identify recent
rates for appraisal services in the geographic market of the property
being appraised. Specifically, this comment clarifies that whether
rates may reasonably be considered ``recent'' depends on the facts and
circumstances, but that generally a rate would be considered ``recent''
if it had been charged within one year of the creditor's or its agent's
reliance on this information to qualify for the presumption of
compliance under Sec. 226.42(f)(2). This comment also states that, for
purposes of the presumption of compliance under Sec. 226.42(f)(2), a
creditor or its agent may gather information about recent rates by
using a reasonable method that provides information about rates for
appraisal services in the geographic market of the relevant property.
The comment further provides that a creditor or its agent may, but is
not required to, use or perform a fee survey. As indicated by this
comment, qualifying for this presumption of compliance does not require
that a creditor use third-party information that excludes appraisals
ordered by AMCs, for example, as required to qualify for the
presumption of compliance available under Sec. 226.42(f)(3), discussed
below. The Board requests comment on whether additional guidance
regarding how creditors may identify recent rates is needed, and
solicits views on what guidance in particular may be helpful.
Comment 42(f)(2)(i)-3 provides guidance on the second step in the
process, which requires the creditor or its agent to review the factors
listed in paragraph (f)(2)(i)(A)-(F) to determine appropriate rate for
the current transaction may be determined. For further clarification,
this comment provides an example: If the recent rates identified by the
creditor or its agent were solely for appraisal assignments in which
the scope of work required consideration of two comparable properties,
but the current transaction required an appraisal that considered three
comparable properties, the creditor or its agent might reasonably
adjust the rate by an amount that reasonably accounts for the increased
scope of work.
The factors that must be considered in this second step for
determining the appropriate rate of fee appraiser compensation are
listed in Sec. 226.42(f)(i)(A)-(F) and discussed in turn below.
Appraisal assignments vary and appraisers have different skills and
experience, and these variations and differences may legitimately
contribute to determining what level of compensation for a particular
assignment is reasonable. For example, an appraisal requiring an
interior inspection may be more expensive to perform and may warrant
greater compensation than an appraisal requiring only an exterior or
``drive-by'' inspection. Similarly, an appraisal of a dwelling in a
rural area with several additional outbuildings and significant acreage
in real property might be more expensive to perform and may warrant
higher compensation for the appraiser than an appraisal of a detached
single-family dwelling in a suburban area. As discussed earlier, the
statute itself acknowledges these variances, by expressly permitting a
creditor or its agent to pay an appraiser more for a ``complex''
assignment than for a comparatively ``non-complex'' assignment. TILA
Section 129E(i)(3).
At the same time, the Board recognizes that each of these factors
may not in all transactions determine the quality of an appraisal and
the value of appraisal services. For example, an appraiser with 20
years of experience appraising properties may not necessarily provide a
higher quality appraisal than an appraiser with five years of
experience. Thus, the interim final rule states that the rate must be
adjusted as ``necessary'' to ensure a reasonable rate, and does not
specify exact percentages or amounts by which compensation should vary
based on each factor.
Type of property. After the creditor or its agent identifies recent
rates in the relevant geographic market, the first factor that must be
accounted for is the type of property. See Sec. 226.42(f)(2)(i)(A).
Comment 42(f)(2)(i)(A)-1 provides several examples of different
property types that may appropriately bear on the value of appraisal
services: Detached or attached single-family property, condominium or
cooperative unit, or manufactured home. The property type may
contribute to, for example, the difficulty or ease of a particular
appraisal assignment, and thus can affect the value of appraisal
services.
Scope of work. The second factor that must be accounted for is the
scope of work. See Sec. 226.42(f)(2)(i)(B). Comment 42(f)(2)(i)(B)
clarifies that relevant elements of the scope of work to consider would
include the type of inspection (for example, exterior only or both
interior and exterior) and the number of comparable properties that the
appraiser is required to review to perform the assignment. To comply
with USPAP, appraisers must identify the extent of work and analysis
required to obtain credible results for an appraisal assignment.\40\
The scope of work may vary based on a number of factors, such as the
extent to which the property must be inspected, the type and extent of
data that must be researched, and the type and extent of analyses
required to reach credible conclusions. Thus, the compensation of an
appraiser may reasonably be higher
[[Page 66573]]
where the scope of work required for the appraisal is more extensive
than the scope of work required for another appraisal performed by the
same appraiser.
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\40\ See The Appraisal Foundation, Uniform Standards of
Professional Appraisal Practice (USPAP), ed. 2010-2011, ``Scope of
Work Rule,'' U-13.
---------------------------------------------------------------------------
The time in which the appraisal services are required to be
performed. The third factor is the time in which the appraisal services
are required to be performed or ``turnaround'' time. See Sec.
226.42(f)(2)(i)(C). Concerns have been expressed to the Board that a
quick turnaround time is sometimes over-emphasized in determining
whether to hire an appraiser and how much to pay the appraiser, to the
detriment of the appraisal's quality. The Board recognizes that
required turnaround time can be a legitimate factor to consider in
determining an appraiser's rate, but stresses that appraiser competency
and accurate appraisals should be a creditor's chief concerns, not how
quickly the assignment can be performed. As reflected in the remaining
factors discussed below, and consistent with longstanding federal
banking agency supervisory guidance, the Board expects creditors and
their agents to select an appraiser foremost on the basis of whether
the appraiser has the requisite education, expertise and competence to
complete the assignment.\41\
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\41\ See Interagency Guidelines, SR 94-55; see also Proposed
Interagency Guidelines, 73 FR at 69652.
---------------------------------------------------------------------------
Fee appraiser qualifications. The fourth factor is the fee
appraiser's professional qualifications. See Sec. 226.42(f)(2)(i)(D).
Comment 42(f)(2)(i)(D)-1 clarifies that professional qualifications
that appropriately affect the value of appraisal services include
whether the appraiser is state-licensed or state-certified in
accordance with the minimum criteria issued by the Appraisal
Qualifications Board of the Appraisal Foundation.\42\ For example, a
state-licensed appraiser could legitimately command a higher rate for
appraisal services than an appraiser-in-training who has not yet
received a license. Relevant qualifications may also include the
appraiser's completion of continuing education courses on effective
appraisal methods and related topics.
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\42\ Appraiser Qualifications Board, The Appraisal Foundation,
``The Real Property Appraiser Qualification Criteria'' (Apr. 2010).
---------------------------------------------------------------------------
Comment 42(f)(2)(i)(D)-2 clarifies that permitting a creditor to
consider an appraiser's qualifications does not override state or
federal laws prohibiting the exclusion of an appraiser from
consideration for an assignment solely by virtue of membership or lack
of membership in any particular appraisal organization.\43\ The Board
and other federal banking agencies recognize that fellow members of a
particular appraisal organization may favor one another in selecting an
appraiser for a given assignment, creating an unfair playing field for
other appraisers. For this reason, federal banking agency regulations
prohibit excluding a state-licensed or state-certified appraiser from
consideration for an assignment for a federally related transaction
solely by virtue of membership or lack of membership in any particular
appraisal organization. The Board requests comment on whether the final
rule should expressly prohibit basing an appraiser's compensation on an
appraiser's membership or lack of membership in particular appraisal
organization.
---------------------------------------------------------------------------
\43\ See Board: 12 CFR 225.66(a); OCC: 12 CFR 34.46(a); FDIC: 12
CFR 323.6(a); OTS: 12 CFR 564.6(a); NCUA: 12 CFR 722.6(a).
---------------------------------------------------------------------------
Fee appraiser experience and professional record. The fifth factor
is the professional record and experience of the fee appraiser. See
Sec. 226.42(f)(2)(i)(E). Comment 42(f)(2)(i)(E)-1 clarifies that the
fee appraiser's level of experience may include, for example, the fee
appraiser's years of service as a state-licensed or state-certified
appraiser, or years of service appraising properties in a particular
geographical area or of a particular type. In the Board's view, a fee
for appraisal services may reasonably be higher when the fee appraiser
has been state-licensed or state-certified for 15 years and has been
appraising properties in the relevant geographic area during all that
time than when the fee appraiser is more recently licensed and has
appraised properties in that area for only six months.
Comment 42(f)(2)(i)(E)-1 further clarifies that, regarding the
appraiser's professional record, a creditor or its agent may consider,
for example, whether an appraiser has a past record of suspensions,
disqualifications, debarments, or judgments for waste, fraud, abuse or
breach of legal or professional standards. The Board expects that a
creditor or its agent would exercise caution in engaging an appraiser
with a blemished professional record, and would carefully scrutinize
the appraiser's work. A creditor or its agent might reasonably pay less
for the appraiser's services than for the services of an appraiser with
an unblemished record.
Fee appraiser work quality. The sixth factor is the quality of the
appraiser's work. See Sec. 226.42(f)(2)(i)(F). Comment 42(f)(2)(i)(F)-
1 clarifies that ``work quality'' in this factor principally comprises
the soundness of the appraiser's appraisal assignments; the fee
appraiser's work quality may include, for example, the past quality of
appraisals performed by the appraiser based on the written performance
and review criteria of the creditor or agent of the creditor. A
creditor or its agent might reasonably pay an appraiser with an
excellent performance history at a higher rate than an appraiser with a
performance history showing problems with past assignments.
The Board solicits comment on whether the factors in Sec.
226.42(f)(2)(i)(A)-(F) are appropriate, and whether other factors
should be included.
Paragraph 42(f)(2)(ii)
No Anticompetitive Acts
As noted above, the Board recognizes that if some creditors or AMCs
dominate the market through illegal anticompetitive acts, ``recent
rates'' identified under Sec. 226.42(f)(2)(i) may be an inaccurate
measure of what a ``reasonable'' fee should be. Thus, under Sec.
226.42(f)(2)(ii), to qualify for the presumption of compliance afforded
under Sec. 226.42(f)(2), a creditor and its agents must not engage in
any anticompetitive acts in violation of state or federal law that
affect the compensation of fee appraisers, including--
(1) Entering into any contracts or engaging in any conspiracies to
restrain trade through methods such as price fixing or market
allocation, as prohibited under section 1 of the Sherman Antitrust Act,
15 U.S.C. 1, or any other relevant antitrust laws (Sec.
226.42(f)(2)(ii)(A)); or
(2) Engaging in any acts of monopolization such as restricting any
person from entering the relevant geographic market or causing any
person to leave the relevant geographic market, as prohibited under
section 2 of the Sherman Antitrust Act, 15 U.S.C. 2, or any other
relevant antitrust laws (Sec. 226.42(f)(2)(ii)(B)).
Comment 42(f)(2)(ii)-1 explains that, under Sec.
226.42(f)(2)(ii)(A), a creditor or its agent would not qualify for
Sec. 226.42(f)(2)'s presumption of compliance if it engaged in any
acts to restrain trade such as entering into a price fixing or market
allocation agreement that affect the compensation of fee appraisers.
For example, if appraisal management company A and appraisal management
company B agreed to compensate fee appraisers at no more than a
specific rate or range of
[[Page 66574]]
rates, neither appraisal management company would qualify for the
presumption of compliance. Likewise, if appraisal management company A
and appraisal management company B agreed that appraisal management
company A would limit its business to a certain portion of the relevant
geographic market and appraisal management company B would limit its
business to a different portion of the relevant geographic market, and
as a result each appraisal management company unilaterally set the fees
paid to fee appraisers in their respective portions of the market,
neither appraisal management company would qualify for the presumption
of compliance under paragraph (f)(2).
Comment 42(f)(ii)-2 explains that, under Sec. 226.42(f)(2)(ii)(B),
a creditor or its agent would not qualify for Sec. 226.42(f)(2)'s
presumption of compliance if it engaged in any act of monopolization
such as restricting entry into the relevant geographic market or
causing any person to leave the relevant geographic market, resulting
in anticompetitive effects that affect the compensation paid to fee
appraisers. For example, if only one appraisal management company
exists or is predominant in a particular market area, that appraisal
management company might not qualify for the presumption of compliance
if it entered into exclusivity agreements with all creditors in the
market or all fee appraisers in the market, such that other appraisal
management companies had to leave or could not enter the market.
Whether this behavior would be considered an anticompetitive act that
affects the compensation paid to fee appraisers depends on all of the
facts and circumstances, including applicable law.
The Board requests comment on whether additional guidance is needed
regarding anticompetitive acts that would disqualify a creditor or its
agent from the presumption of compliance under Sec. 226.42(f)(2).
42(f)(3) Alternative Presumption of Compliance
Rates Based on Objective Third-Party Information
Section 226.42(f)(3) provides creditors and their agents with an
alternative means to qualify for a presumption of compliance with the
requirement to pay fee appraisers at a customary and reasonable rate
under Sec. 226.42(f)(1). Specifically, a creditor and its agents are
presumed to comply with the requirement if the creditor or its agents
determine the amount of compensation paid to the fee appraiser by
relying on rates in the geographic market of the property being
appraised that satisfies three conditions. First, the information must
be established by objective third-party information, including fee
schedules, studies, and surveys prepared by independent third parties
such as government agencies, academic institutions, and private
research firms (Sec. 226.42(f)(3)(i)). Second, it must be based on
recent rates paid to a representative sample of providers of appraisal
services in the geographic market of the property being appraised or
the fee schedules of those providers (Sec. 226.42(f)(3)(ii)). Third,
in the case of fee schedules, studies, and surveys, such fee schedules,
studies and surveys or information derived from them must exclude
compensation paid to fee appraisers for appraisals ordered by an AMC,
as defined in Sec. 226.42(f)(4)(iii).
Regarding this third condition, the Board recognizes that the
express statutory language states, ``Fee studies shall exclude
assignments ordered by known appraisal management companies.'' TILA
Section 129E(i)(1)(emphasis added). However, the Board does not see a
meaningful distinction between, for example, a fee ``study'' and a fee
``survey,'' both of which require at least some evaluation of gathered
data. The Board also is not aware of a rationale consistent with the
statute that would treat fee studies differently than fee surveys or
fee schedules. The Board requests comment, however, on whether studies
and surveys should be treated differently for the purposes of this
rule.
Comment 42(f)(3)-1 explains that a creditor and its agent are
presumed to comply with Sec. 226.42(f)(1) if the creditor or its agent
determine the compensation paid to a fee appraiser based on information
about rates that satisfies the three conditions discussed above. This
comment clarifies that reliance on information satisfying these
conditions is not a requirement for compliance with Sec. 226.42(f)(1),
but creates a presumption that the creditor or its agent has complied.
The comment further clarifies that a person may rebut this presumption
with evidence that the rate of compensation paid to a fee appraiser by
the creditor or its agent is not customary and reasonable. The creditor
or its agent would already have satisfied the presumption of compliance
by relying on information meeting the three conditions; therefore,
evidence rebutting the presumption would have to be based on facts or
information other than third-party information satisfying the
presumption of compliance conditions of Sec. 226.42(f)(3). This
comment also explains that, if a creditor or its agent does not rely on
information that meets the conditions in Sec. 226.42(f)(3), the
creditor's and its agent's compliance with the requirement to
compensate fee appraisers at a customary and reasonable rate is
determined based on all of the facts and circumstances without a
presumption of either compliance or violation.
Comment 42(f)(3)-2 clarifies that the term ``geographic market'' is
explained in comment 42(f)(1)-2. See the section-by-section analysis to
Sec. 226.42(f)(1). Comment 42(f)(3)-3 clarifies that whether rates may
reasonably be considered ``recent'' under Sec. 226.42(f)(3) depends on
the facts and circumstances. Generally, however, ``recent'' rates would
include rates charged within one year of the creditor's or its agent's
reliance on this information to qualify for the presumption of
compliance under Sec. 226.42(f)(3).
In discussions with Board staff, concerned parties argued that
existing appraisal fee schedules, surveys and studies have various
flaws and thus may not be reliable indicators of customary and
reasonable rates for appraisals in all home-secured consumer credit
transactions. In preparing this interim final rule, the Board did not
identify appraisal fee schedules, surveys or studies that would be
appropriate to designate as a ``safe harbor'' for creditors and their
agents to comply with Sec. 226.42(f)(1). The Board solicits comment on
whether and on what basis the final rule should give creditors or their
agents a safe harbor for relying on a fee study or similar source of
compiled appraisal fee information. The Board also requests comment on
what additional guidance may be needed regarding third-party rate
information on which a creditor and its agents may appropriately rely
to qualify for the presumption of compliance.
42(f)(4) Definitions
Section 226.24(f)(4) defines three terms for purposes of Sec.
226.42(f): ``Fee appraiser,'' ``appraisal services,'' and ``appraisal
management company.''
Fee Appraiser
First, the term ``fee appraiser'' is defined to mean--
(1) A natural person who is a state-licensed or state-certified
appraiser and receives a fee for performing an appraisal, but who is
not an employee of the person engaging the appraiser (Sec.
226.42(f)(4)(i)(A)); or
(2) An organization that, in the ordinary course of business,
employs state-licensed or state-certified
[[Page 66575]]
appraisers to perform appraisals, receives a fee for performing
appraisals, and is not subject to the requirements of section 1124 of
FIRREA, 12 U.S.C. 3331 et seq. (Sec. 226.42(f)(4)(i)(B)).
The interim final rule's definition of ``fee appraiser'' is
intended to be consistent with the statute, as well as the Board's
longstanding use of the term and with the meaning of ``fee appraiser''
generally accepted in the appraisal industry.\44\ Thus, the interim
final rule specifies that a fee appraiser includes a natural person who
is a state-licensed or state-certified appraiser hired on a contract or
other non-permanent basis to perform appraisal services.
---------------------------------------------------------------------------
\44\ See, e.g., 12 CFR 225.65; Interagency Guidelines, SR 94-55
(Oct. 28, 1994).
---------------------------------------------------------------------------
Comment 42(f)(4)(i)-1 clarifies that the term ``organization'' in
Sec. 226.42(f)(4)(i)(B) includes a corporation, partnership,
proprietorship, association, cooperative, or other business entity and
does not include a natural person. Section 226.42(f)(4)(i)(B) also
cross-references section 1124 of FIRREA. The Dodd-Frank Act added
Section 1124 to FIRREA. Section 1124 requires the federal banking
agencies and the FHFA to issue rules that require AMCs (as newly
defined in FIRREA Section 1121) to register with state appraiser
certifying and licensing agencies according to minimum criteria set by
these rules.\45\ Thus, only entities that perform appraisals and that
would not be required to register under the new rules satisfy the
definition of fee appraiser. Unlike AMCs as defined under FIRREA and
commonly known in the industry, these entities do not merely perform
managerial tasks regarding the appraisal process, but oversee
individual appraisers whom they employ to perform the appraisal. The
definition of ``appraisal management company'' for purposes of the
registration requirement under FIRREA is further addressed below in the
discussion of the interim final rule's definition of ``appraisal
management company'' under Sec. 226.42(f)(4)(iii).
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\45\ See Dodd-Frank Act, Section 1473(f) (amending FIRREA
Sections 1121 and 1124), Public Law 111-203, 124 Stat. 2191-2192 (to
be codified at 12 U.S.C. 3332 and 3353, respectively).
---------------------------------------------------------------------------
Appraisal Services
Section 226.42(f)(4)(ii) states that, for purposes of Sec.
226.42(f), ``appraisal services'' include only the services required to
perform the appraisal, such as defining the scope of work, inspecting
the property, reviewing necessary and appropriate public and private
data sources (for example, multiple listing services, tax assessment
records and public land records), developing and rendering an opinion
of value, and preparing and submitting the appraisal report. The Board
understands that agents of the creditor such as AMCs split the total
appraisal fee between the AMC (for appraisal management functions) and
the appraiser (for the appraisal). The interim final rule is thus
intended to clarify that the customary and reasonable rate applies to
compensation for tasks that the fee appraiser performs, not the entire
cost of the appraisal (including management functions).
Appraisal Management Company
Section 226.42(f)(4)(iii) defines an ``appraisal management
company'' in Sec. 226.42(f) as any person authorized to do the
following actions on behalf of the creditor--(1) recruit, select, and
retain appraisers; (2) contract with appraisers to perform appraisal
assignments; (3) manage the process of having an appraisal performed,
including providing administrative duties such as receiving appraisal
orders and appraisal reports, submitting completed appraisal reports to
creditors and underwriters, collecting fees from creditors and
underwriters for services provided, and compensating appraisers for
services performed; or (4) review and verify the work of appraisers.
This definition is based on the new definition of ``appraisal
management company'' in the Dodd-Frank Act's amendments to FIRREA, for
purposes of requiring AMCs to register with the appropriate state
appraiser certifying and licensing agency and related purposes.\46\ The
sole difference between the definitions is that the definition under
FIRREA limits the meaning of AMC to entities that oversee a network or
panel of more than 15 certified or licensed appraisers in a state or 25
or more nationally within a given year.
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\46\ Id.
---------------------------------------------------------------------------
For purposes of FIRREA's requirement that AMCs register, the Board
understands that Congress may have sought to relieve smaller entities
from administrative burdens by excluding them from this requirement. It
is not clear, however, that FIRREA's more limited definition of AMC is
appropriate under TILA Section 129E(i); this TILA provision is a
technical requirement regarding the content of fee studies rather than
a direct administrative obligation imposed on AMCs. The interim final
rule therefore does not limit the meaning of ``appraisal management
company'' to entities with an appraiser panel of a particular size. The
Board requests comment on whether the interim final rule's definition
of ``appraisal management company'' is appropriate for the final rule.
42(g) Mandatory Reporting
TILA Section 129E(e) requires certain persons to report an
appraiser to the applicable state appraiser certifying and licensing
agency if the person has a reasonable basis to believe the appraiser is
failing to comply with USPAP, is violating applicable laws, or is
otherwise engaging in unethical or unprofessional conduct. 15 U.S.C.
1639e(e). This provision applies to creditors, mortgage brokers, real
estate brokers, appraisal management companies, and any other persons
providing a service for a covered transaction. The interim final rule
implements this requirement in Sec. 226.42(g). The Act does not
expressly define the term ``appraiser'' for purposes of TILA Section
129E(e). TILA Section 129E(e) is intended to enable state certifying
and licensing agencies to exercise the authority granted to them under
state law. Therefore, for purposes of Sec. 226.42(g), an ``appraiser''
is a natural person who provides opinions of the value of dwellings and
is required to be licensed or certified under the laws of the state in
which the consumer's principal dwelling or otherwise is subject to the
jurisdiction of the state appraiser certifying and licensing agency.
See comment 42(g)-6.
42(g)(1) Reporting Required
Section 226.42(g)(1) requires reporting of a failure to comply with
USPAP or of an ethical or professional requirement under applicable
state or federal statute or regulation only if the failure to comply is
material, that is, likely to significantly affect the value assigned to
the consumer's principal dwelling. Further, Sec. 226.42(g) clarifies
that reporting of a failure to comply with an ethical or professional
requirement is required only if the requirement is codified in an
applicable state or federal statute or regulation (ethical or
professional requirement). Other statutes or regulations may contain
broader reporting requirements, however.
The Board interprets TILA Section 129E(e) to apply only to a
material failure to comply with USPAP or a codified standard of ethical
or professional conduct. The Board believes that this interpretation is
consistent with the Act's purpose of ensuring that values assigned to a
consumer's principal dwelling are assigned free of any coercion or
inappropriate influence, so that
[[Page 66576]]
creditors base their underwriting decisions on appraisals that do not
misstate the value of the dwelling. Thus, the interim final rule
mandates reporting failures to comply that would affect the value
assigned to the dwelling. The Board solicits comment on whether
reporting should be required only if a material failure to comply
causes the value assigned to the consumer's principal dwelling to
differ from the value that would have been assigned had the material
failure to comply not occurred by more than a certain tolerance, for
example, by 10 percent or more.
Reasonable basis. TILA Section 129E(e) requires reporting only if a
covered person has a ``reasonable basis to believe'' that an appraiser
has not complied with USPAP or ethical or professional requirements. 15
U.S.C. 1639e(e). Comment 42(g)(1)-1 states that a covered person has a
reasonable basis to believe that an appraiser has materially failed to
comply with USPAP or ethical or professional requirements if the person
has actual knowledge or information that would lead a reasonable person
to believe that the appraiser has materially failed to comply with
USPAP or such requirements.
Examples of material failures to comply. Comment 42(g)(1)-2
provides the following examples of a material failure to comply: (1)
Materially mischaracterizing the value of the consumer's principal
dwelling, in violation of Sec. 226.42(c)(2); (2) performing an
appraisal in a grossly negligent manner, in violation of a USPAP rule;
and (3) accepting an appraisal assignment on the condition that the
appraiser will assign a value equal to or greater than the purchase
price to the consumer's principal dwelling, in violation of a USPAP
rule. Comment 42(g)(1)-3 clarifies that Sec. 226.42(g)(1) does not
require reporting of failure to comply that is not material within the
meaning of Sec. 226.42(g)(1). For example, an appraiser's disclosure
of confidential information, in violation of applicable state law, or
an appraiser's failure to maintain errors and omissions insurance, in
violation of applicable state law, would not be material for purposes
of Sec. 226.42(g)(1).
Coverage of reporting requirement. TILA Section 129E(e) provides
that any mortgage lender, mortgage broker, mortgage banker, real estate
broker, appraisal management company, employee of an appraisal
management company, or any other person ``involved in a real estate
transaction'' must report failures to comply with USPAP or ethical or
professional requirements. 15 U.S.C. 1639e(e). Section 226.42(g)(1)
provides that a ``covered person'' must report a material failure to
comply. See Sec. 226.42(b)(1). Comment 42(g)(1)-4 clarifies that
``covered persons'' required to report an appraiser's material failure
to with USPAP or ethical or professional requirements in connection
with a covered transaction include creditors, mortgage brokers,
appraisers, appraisal management companies, real estate agents, and
other persons that provide ``settlement services'' as defined under
RESPA and regulations implementing RESPA.
Comment 42(g)(1)-5 clarifies that the following persons are not
``covered persons'' required to report an appraiser's material failure
to comply with USPAP or ethical or professional requirements: (1) The
consumer who obtains credit through a covered transaction; (2) a person
secondarily liable for a covered transaction, such as a guarantor; and
(3) a person that resides in or will reside in the consumer's principal
dwelling but will not be liable on the covered transaction, such as a
non-obligor spouse. Comments 42(g)(1)-4 and -5 are consistent with
commentary on the definition of ``covered person,'' discussed in detail
above in the section-by-section analysis of Sec. 226.42(b)(2).
42(g)(2) Timing of Reporting
TILA Section 129E(e) does not establish a time by which a person
must report a failure to comply with USPAP or ethical or professional
requirements. Section 226.42(g)(2) provides that a covered person must
report a material failure to comply within a reasonable period of time
after the person determines that there is a reasonable basis to believe
that such a material failure to comply has occurred. The Board requests
comment on what constitutes a reasonable period of time within which to
report a material failure to comply under Sec. 226.42(g).
42(g)(3) Definition
Section 226.42(g) requires covered persons to report a failure to
comply to the appropriate ``state agency.'' Consistent with the
statute, Sec. 226.42(g)(3) defines the term ``state agency'' to mean
the ``state appraiser certifying and licensing agency'' as defined by
Title XI of FIRREA, codified under 12 U.S.C. 3350(1), and any
implementing regulations. Section 226.42(g)(3) clarifies that the
agency for the state in which the consumer's principal dwelling is
located is the appropriate agency to which to report a material failure
to comply.
V. Effective Date and Mandatory Compliance Date
This interim final rule is effective on December 27, 2010 and
compliance with it is mandatory for all applications received by a
creditor on or after April 1, 2011. The Dodd-Frank Act does not provide
effective or mandatory compliance dates for rules implementing TILA
Section 129E. Appraisers have generally urged the Board to act quickly
to put the interim rule in place, noting that the Dodd-Frank Act
effectively sunsets the HVCC when the Board's interim final rule is
promulgated. Some industry representatives, on the other hand, have
stated that they will need sufficient lead time to implement the
interim final rule.
Under TILA Section 105(d), certain of the Board's disclosure
requirements are to have an effective date of October 1 that follows
the issuance by at least six months. 15 U.S.C. 1604(d). However, the
Board may at its discretion lengthen the implementation period for
creditors to adjust their forms to accommodate new requirements, or
shorten the period where the Board finds that such action is necessary
to prevent unfair or deceptive disclosure practices. There is no
similar effective date provision for non-disclosure requirements. The
Riegle Community Development and Regulatory Improvement Act of 1994,
however, requires that agency regulations which impose additional
reporting, disclosure and other requirements on insured depository
institutions take effect on the first day of a calendar quarter
following publication in final form. 12 U.S.C. 4802(b).
The Board believes a mandatory compliance date of April 1, 2011
will provide creditors and others subject to the rule sufficient time
to take the steps necessary to comply. Although some provisions in the
interim final rule are similar to existing Sec. 226.36(b), the interim
final rule contains new requirements, such as the reasonable and
customary fee requirement. In addition, the rule covers HELOCs, whereas
existing Sec. 226.36(b) applies only to closed-end loans secured by
the consumer's principal dwelling. The rule's new requirements will
likely require creditors and AMCs to change their systems, adjust
policies, and train staff. The Board believes that five months should
be sufficient for these purposes. Accordingly, the interim final rule
is mandatory for consumer credit transactions secured by the consumer's
principal dwelling in which an application is received by the creditor
on or after April 1, 2011.
[[Page 66577]]
As noted, certain provisions of this interim final rule are
substantially similar to the provisions of current Sec. 226.36(b). The
Board is therefore removing Sec. 226.36(b) and related staff
commentary, effective April 1, 2011, for applications received on or
after that date. Section 226.36(b) remains in effect until compliance
with this interim final rule becomes mandatory, and it applies to
credit applications received before April 1, 2011, even if the credit
is not extended until after that date. Thus, if a creditor receives an
application for a loan that will be secured by the consumer's principal
dwelling on March 20, 2011, and the loan is consummated on May 1, 2011,
Sec. 226.36(b) applies to that transaction. The Board notes, however,
that covered persons may wish to comply with this interim final rule
before April 1, 2011, and may do so. Compliance with Sec. 226.42
constitutes compliance with Sec. 226.36(b). Accordingly, creditors,
mortgage brokers, and their affiliates subject to Sec. 226.36(b) may
comply with this interim final rule for applications received by
creditors before April 1, 2011, in lieu of complying with Sec.
226.36(b).
VI. Initial Regulatory Flexibility Analysis
In accordance with section 4 of the Regulatory Flexibility Act
(RFA), 5 U.S.C. 601 et seq., the Board is publishing an initial
regulatory flexibility analysis for the interim final rule. The RFA
generally requires an agency to assess the impact a rule is expected to
have on small entities.\47\ Based on its analysis and for the reasons
stated below, the Board believes that this interim final rule will have
a significant economic impact on a substantial number of small
entities. The Board invites comments on the effect of the interim final
rule on small entities.
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\47\ Under standards the U.S. Small Business Administration sets
(SBA), an entity is considered ``small'' if it had $175 million or
less in assets for banks and other depository institutions; and $6.5
million or less in revenues for non-bank mortgage lenders, mortgage
brokers, and loan servicers. U.S. Small Business Administration,
Table of Small Business Size Standards Matched to North American
Industry Classification System Codes, available at http://www.sba.gov/idc/groups/public/documents/sba_homepage/serv_sstd_tablepdf.pdf.
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A. Reasons for the Interim Final Rule
As discussed above in the SUPPLEMENTARY INFORMATION, Section 1472
of the Dodd-Frank Act amended TILA by inserting a new section 129E.
Section 129E makes it unlawful to engage in any act that violates
appraisal independence in consumer credit transactions secured by the
consumer's principal dwelling. The Dodd-Frank Act requires the Board to
prescribe interim final rules within 90 days of enactment to define
with specificity the acts or practices that violate appraisal
independence.
B. Summary of the Dodd-Frank Act
As discussed above in the SUPPLEMENTARY INFORMATION, the Dodd-Frank
Act prohibits any person, in extending credit or providing services,
from violating appraisal independence for consumer credit transactions
secured by the consumer's principal dwelling. The Dodd-Frank Act
specifies that practices that violate appraisal independence include:
(1) Coercing or otherwise influencing any person, appraisal management
company, firm or other entity conducting or involved in an appraisal
for the purpose of causing the appraised value to be based on any
factor other than the appraiser's independent judgment; (2)
mischaracterizing or suborning any mischaracterization of the appraised
value; (3) seeking to influence or encourage a target value in order to
make or price a transaction; and (4) withholding or threatening to
withhold timely payment for appraisal services or reports.
The Dodd-Frank Act also prohibits appraisers and appraisal
management companies from having direct or indirect interest, financial
or otherwise, in the property or transaction. In addition, the Dodd-
Frank Act prohibits a creditor from extending credit if the creditor
knows before consummation that a violation of the prohibition on
appraiser coercion or the conflict of interest provision has occurred,
unless the creditor performs due diligence. Under the Dodd-Frank Act, a
creditor or any person providing services in connection with the
transaction who has a reasonable basis to believe an appraiser is
failing to comply with the Uniform Standards of Professional Appraisal
Practice, or is engaging in unethical or unprofessional conduct in
violation of applicable law, must refer the issue to the state
appraiser certifying and licensing agency. The Dodd-Frank Act also
requires that creditors and their agents compensate fee appraisers at a
customary and reasonable rate for the market area of the property
appraised.
C. Statement of Objectives and Legal Basis
The SUPPLEMENTARY INFORMATION sets forth the objectives and the
legal basis for the interim final rule. In summary the objectives of
the interim final rule are to ensure that appraisals used to support
creditors' underwriting decisions for consumer credit transactions
secured by the consumer's principal dwelling are based on the
appraiser's independent professional judgment, free of any influence or
pressure that may be exerted by parties that have an interest in the
transaction. The amendments also seek to ensure that creditors and
their agents pay customary and reasonable fees to appraisers.
The legal basis for the interim final rule is in Sections 105(a)
and 129E(g) of TILA. A more detailed discussion of the Board's
rulemaking authority is set forth in part III of the SUPPLEMENTARY
INFORMATION.
D. Description of Small Entities to Which the Interim Final Rule Would
Apply
The interim final rule would apply to any creditor or person who
provides settlement services in connection with an extension of
consumer credit secured by the principal dwelling of the consumer.
Because of this, the requirements of the interim final rule will apply
to a substantial number of parties, which include banks, credit unions,
mortgage companies, mortgage brokers, appraisers, appraisal management
companies, title insurance companies, and realtors. The Board is not
aware of a reliable source for the total number of small entities
likely to be affected by the final rule, but provides the following
information and estimates about certain entities subject to the interim
final rule.
Depository institutions and mortgage companies. The Board can
identify through data from Reports of Condition and Income (call
reports) the approximate numbers of small depository institutions that
will be subject to the final rule. Based on March 2010 call report
data, approximately 8,845 small institutions would be subject to the
final rule. Approximately 15,658 depository institutions in the United
States filed call report data, approximately 11,148 of which had total
domestic assets of $175 million or less and thus were considered small
entities for purposes of the Regulatory Flexibility Act. Of 3,898
banks, 523 thrifts and 6,727 credit unions that filed call report data
and were considered small entities, 3,776 banks, 496 thrifts, and 4,573
credit unions, totaling 8,845 institutions, extended mortgage credit.
For purposes of this analysis, thrifts include savings banks, savings
and loan entities, co-operative banks and industrial banks.
[[Page 66578]]
Further, 1,507 non-depository institutions (independent mortgage
companies, subsidiaries of a depository institution, or affiliates of a
bank holding company) filed HMDA reports in 2009 for 2008 lending
activities. Based on the small volume of lending activity reported by
these institutions, most are likely to be small entities.
Similarly, the Board cannot identify with certainty the number of
mortgage brokers, appraiser, realtors, appraisal management companies,
or title insurance companies subject to the rule that also qualify as
small entities. The Board can, however, attempt to estimate approximate
total numbers of each group.
Mortgage brokers. In its 2008 proposed rule under HOEPA, 73 FR
1672, 1720; Jan. 9, 2008, the Board noted that, according to the
National Association of Mortgage Brokers (NAMB), there were 53,000
mortgage brokerage companies in 2004 that employed an estimated 418,700
people.\48\ On the other hand, the U.S. Census Bureau's 2002 Economic
Census indicates that there were only 17,041 ``mortgage and nonmortgage
loan brokers'' in the United States at that time.\49\ The Census
Bureau's 2007 Economic Census preliminary data indicate that there are
approximately 24,299 ``mortgage and nonmortgage loan brokers
establishments'' with approximately 134,507 employees.\50\
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\48\ http://www.namb.org/namb/IndustryFacts.asp?SnID=719224934.
This page of the NAMB Web site, however, no longer provides an
estimate of the number of mortgage brokerage companies.
\49\ http://www.census.gov/prod/ec02/ec0252a1us.pdf (NAICS code
522310).
\50\ http://factfinder.census.gov/servlet/IBQTable?_bm=y&-ds_name=EC0752I1&-ib_type=NAICS2007&-NAICS2007=522310.
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Appraisers. The Census Bureau's 2007 Economic Census preliminary
data indicate that there are approximately 16,018 ``offices of real
estate appraisers'' employing 43,999 employees.\51\ Based on
information provided by the Appraisal Subcommittee the Board estimates
that, as of October 2010, there are approximately 93,429 individual,
licensed appraisers. That number includes some appraisers that do not
conduct appraisals of 1-4 family residential properties.
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\51\ http://factfinder.census.gov/servlet/IBQTable?_bm=y&-ds_name=EC0753I1&-ib_type=NAICS2007&-NAICS2007=531320.
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Realtors. According to the National Association of Realtors'
September 2010 Monthly membership report, there are at least 1,088,919
Realtors in the United States that would be subject to the interim
final rule.\52\ The Census Bureau's 2007 Economic Census preliminary
data, however, indicate approximately 108,651 ``offices of real estate
agents and brokers'' with 360,560 total employees.\53\
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\52\ http://www.realtor.org/wps/wcm/connect/2b353d80442806058dc6ed34cafa6d66/09-2010.pdf?MOD=AJPERES&CACHEID=2b353d80442806058dc6ed34cafa6d66.
\53\ http://factfinder.census.gov/servlet/IBQTable?_bm=y&-ds_name=EC0753I1&-ib_type=NAICS2007&-NAICS2007=531210.
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Appraisal management companies. The Board is not aware of any
source of information about the number of appraisal management
companies.
Title insurance companies. While the Census Bureau has not yet
released data for title insurance companies, according to the Census
Bureau's 2006 Statistics of U.S. Business, there were approximately
6,943 ``direct title insurance carriers'' which employ approximately
105,145 payroll employees.\54\
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\54\ http://www.census.gov/epcd/susb/latest/us/US524127.HTM.
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Title, abstract, and settlement services. Preliminary data from the
Census Bureau's 2007 Economic Census indicate that there were
approximately 12,160 title, abstract, and settlement offices employing
18,749,687 employees.\55\
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\55\ http://factfinder.census.gov/servlet/IBQTable?_bm=y&-ds_name=EC0754I1&-NAICS2007=541191&-ib_type=NAICS2007&-geo_id=&-_industry=541191&-_lang=en&-fds_name=EC0700A1.
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Surveying and Mapping. Preliminary data from the Census Bureau's
2007 Economic Census indicate that there were approximately 9,690
surveying and mapping establishments (excluding establishments that
provide geophysical services) employing 69,941 employees.\56\
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\56\ http://factfinder.census.gov/servlet/IBQTable?_bm=y&-ds_name=EC0754I1&-ib_type=NAICS2007 NAICS2007&-NAICS2007=541370.
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Escrow agents. The Census Bureau's 2007 Economic Census does not
contain a separate category for escrow agents but rather includes
escrow agents in the category ``Other activities related to real
estate.'' (That category excludes lessors of real estate, offices of
real estate agents and brokers, real estate property managers, and
offices of real estate appraisers.) Preliminary data from the 2007
Economic Census indicate that approximately 16,504 establishments,
employing 72,058 employees, were in that category.\57\ The Board is not
aware of a comprehensive source of data specifically regarding the
number of establishments providing escrow services.
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\57\ http://factfinder.census.gov/servlet/IBQTable?_bm=y&-ds_name=EC0753I1&-ib_type=NAICS2007&-NAICS2007=531390.
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Extermination and pest control services. Preliminary data from the
Census Bureau's 2007 Economic Census indicate that approximately 12,523
establishments, employing 96,140 employees, provided extermination and
pest control services.\58\
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\58\ http://factfinder.census.gov/servlet/IBQTable?_bm=y&-ds_name=EC0756I1&-NAICS2007=561710&-ib_type=NAICS2007&-geo_id=&-_industry=561710&-_lang=en&-fds_name=EC0700A1.
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Legal services providers. Preliminary data from the Census Bureau's
2007 Economic Census indicate that there were approximately 189, 486
legal services establishments employing 1,199,306 employees, including
approximately 174,523 lawyers' offices employing 1,107,394
employees.\59\
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\59\ http://factfinder.census.gov/servlet/IBQTable?_bm=y&-ds_name=EC0754I1&-NAICS2007=5411/541110&-ib_type=NAICS2007&-_industry=541110&-_lang=en&-fds_name=EC0700A1.
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Credit bureaus. Preliminary data from the Census Bureau's 2007
Economic Census indicate that there were approximately 813 credit
bureaus employing 19,866 employees.\60\
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\60\ http://factfinder.census.gov/servlet/IBQTable?_bm=y&-ds_name=EC0756I1&-NAICS2007=561450&-ib_type=NAICS2007&-geo_id=&-_industry=561450&-_lang=en&-fds_name=EC0700A1.
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It is unclear exactly how many of these parties subject to the rule
would meet the small business requirements. The Board believes,
however, that most mortgage brokers, appraisers, realtors, title
insurance companies, title abstract and settlement service providers,
surveying and mapping establishments, escrow services providers,
exterminators and pest control providers, and legal services providers
are small entities. The Board notes that some of these entities may, as
a practical matter, have little opportunity or incentive to coerce or
influence an appraiser, or to have a reasonable basis to believe that
an appraiser has not complied with USPAP or other applicable
authorities. In such cases, these entities may have little or no
compliance burden. As noted in the SUPPLEMENTARY INFORMATION, the Board
is soliciting comment on whether some settlement service providers
should be exempt from some or all of the interim final rule's
requirements.
E. Projected Reporting, Recordkeeping, and Other Compliance
Requirements
The compliance requirements of the final rules are described in the
SUPPLEMENTARY INFORMATION. As indicated above, creditors and mortgage
brokers currently are subject to the 2008 Appraisal Independence Rules,
which are essentially codified in section 1472 of the Dodd-Frank Act.
The interim final rule, consistent with the Dodd-Frank
[[Page 66579]]
Act, expands the parties covered by those provisions to persons who
provide settlement services in connection with a covered transaction.
Moreover, as discussed in the SUPPLEMENTARY INFORMATION, the Dodd-Frank
Act expands the requirements for appraisal independence significantly
beyond the requirements in the 2008 Appraisal Independence Rules. The
effect of the interim final rule on small entities is unknown. Some
small entities would be required, among other things, to modify their
systems to comply with the interim final rules. The precise costs to
small entities of updating their systems are difficult to predict.
F. Other Federal Rules
The Board has not identified any federal rules that conflict with
the proposed interim final rule. The Board has identified, however,
several federal rules that overlap to varying degrees with the
requirements of the interim final rule. Title XI of FIRREA, enacted in
1989, provides that the Board and the other banking agencies must issue
regulations for appraisal standards. These regulations include
provisions on appraisal independence which overlap with the interim
final rule.\61\ In addition, the Equal Credit Opportunity Act, 15
U.S.C. 1691 et seq., and the Board's Regulation B, 12 CFR 202.14,
require creditors to provide a copy of an appraisal report used in
connection with an application for credit secured by a dwelling.\62\ As
noted, the 2008 Appraisal Independence Rules addressed appraiser
independence; those rules, however, are removed effective on April 1,
2011, the mandatory compliance date for the interim final rule.
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\61\ Board: 12 CFR 225.65; OCC: 12 CFR 34.45; FDIC: 12 CFR
323.5; OTS: 12 CFR 564.5; NCUA: 12 CFR 722.5. The agencies have also
issued supervisory guidance on appraisal independence: See, e.g.,
Interagency Guidelines, SR 94-55.
\62\ Section 1474 of the Dodd-Frank Act amends the ECOA's
requirement to provide a copy of the appraisal report to the
consumer. Public Law 111-203, 124 Stat. 2199 (to be codified at 15
U.S.C. 1691).
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Additionally, both the Veteran's Administration and Federal Housing
Administration provide guidance related to appraiser fees which overlap
with the interim final rule. The VA provides a specific appraiser fee
schedule for VA loans, while FHA Roster appraisers are compensated at a
rate that is customary and reasonable for the market area of the
property.\63\
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\63\ Veterans Administration fee schedule, (as of Apr. 7, 2010),
available at http://www.benefits.va.gov/homeloans/fee_timeliness.asp; Appraiser Independence HUD Mortgagee Letter 2009-28
(Sept. 18, 2009).
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G. Significant Alternatives to the Interim Final Rule
As noted above, the final rule implements the statutory
requirements of the Dodd-Frank Act. The Board has implemented these
requirements to minimize burden while retaining benefits and
protections for consumers. As discussed above in parts of the
SUPPLEMENTARY INFORMATION the Board has provided small institutions,
defined as creditors with assets of $250 million or less as of December
31 of either of the two preceding calendar years, with an alternative
safe harbor to the prohibition on conflicts of interest that is
tailored to the circumstances of small creditors. The Board welcomes
comment on any significant alternatives that would minimize the impact
of the interim final rule on small entities.
The Board also welcomes further information and comment on any
costs, compliance requirements, or changes in operating procedures
arising from the application of the interim final rule to small
business.
VII. Paperwork Reduction Act
In accordance with the Paperwork Reduction Act (PRA) of 1995 (44
U.S.C. 3506; 5 CFR part 1320 Appendix A.1), the Board reviewed the
interim final rule under the authority delegated to the Board by the
Office of Management and Budget (OMB). The collection of information
that is required by this final rule is found in Subpart E--Special
Rules for Certain Home Mortgage Transactions--12 CFR 226.42(g). The
Board may not conduct or sponsor, and an organization is not required
to respond to, this information collection unless the information
collection displays a currently valid OMB control number. The OMB
control number is 7100-0199.
This information collection is required to provide benefits for
consumers and is mandatory (15 U.S.C. 1601 et seq.). Since the Board
does not collect any information, no issue of confidentiality arises.
The respondents/recordkeepers for this interim final rulemaking are
creditors, appraisal management companies, appraisers, mortgage
brokers, realtors, title insurers and other firms that provide
settlement services (covered person(s)).
TILA and Regulation Z are intended to ensure effective disclosure
of the costs and terms of credit to consumers. For closed-end loans,
such as mortgage and installment loans, cost disclosures are required
to be provided prior to consummation. Special disclosures are required
in connection with certain products, such as reverse mortgages, certain
variable-rate loans, and certain mortgages with rates and fees above
specified thresholds. To ease the burden and cost of complying with
Regulation Z (particularly for small entities), the Board provides
model forms, which are appended to the regulation. TILA and Regulation
Z also contain rules concerning credit advertising. Creditors are
required to retain evidence of compliance with Regulation Z for 24
months (12 CFR 226.25), but Regulation Z does not specify the types of
records that must be retained.
Under the PRA, the Board accounts for the paperwork burden
associated with Regulation Z for the state member banks and other
entities supervised by the Board that engage in activities covered by
Regulation Z and, therefore, are respondents under the PRA. Appendix I
of Regulation Z defines the institutions supervised by the Federal
Reserve System as: State member banks, branches and agencies of foreign
banks (other than Federal branches, Federal agencies, and insured state
branches of foreign banks), commercial lending companies owned or
controlled by foreign banks, and organizations operating under section
25 or 25A of the Federal Reserve Act. Other Federal agencies account
for the paperwork burden imposed on the entities for which they have
administrative enforcement authority under TILA.
The current total annual burden to comply with the provisions of
Regulation Z is estimated to be 1,497,362 hours for the 1,138
institutions supervised by the Federal Reserve that are deemed to be
respondents for the purposes of the PRA.
As discussed in the preamble, the Board is adopting a rule that
requires reporting of a violation of Uniform Standards of Professional
Appraisal Practice (USPAP) or of a standard of ethical or professional
conduct under applicable state or federal statute or regulation only if
the violation is material, that is, if the violation is likely to
affect the value assigned to a covered property. The new reporting
requirement will impose a one-time increase in the total annual burden
under Regulation Z for respondents supervised by the Federal Reserve
involved in the extension of consumer credit that is secured by the
principal dwelling of the consumer. The Board estimates that 567
respondents \64\
[[Page 66580]]
supervised by the Federal Reserve will take, on average, 40 hours (one
business week) to update their systems, internal procedure manuals, and
provide training for relevant staff to comply with the new reporting
requirements in Sec. 226.42(g)(1).\65\ This revision is estimated to
result in a one-time increase in burden by 22,680 hours.
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\64\ Based on loan transactions reported for 2009 under the Home
Mortgage Disclosure Act (HMDA), 12 U.S.C. 2801 et seq.; 12 CFR part
203, the Board estimates that 567 institutions engaged in such
mortgage transactions are supervised by the Federal Reserve.
\65\ The Board believes that, on a continuing basis, since
financial institutions are familiar with the existing provisions
Title XI of FIRREA (12 U.S.C. 3348) and the Interagency Guidelines
(SR letter 94-55) which require similar reporting, implementation of
requirements in Sec. 226.42(g) should not be overly burdensome.
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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.
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\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 other Federal financial institution supervisory agencies (the
Office of the Comptroller of the Currency (OCC), the Office of Thrift
Supervision (OTS), the Federal Deposit Insurance Corporation (FDIC),
and the National Credit Union Administration (NCUA)) are responsible
for estimating and reporting to OMB the total paperwork burden for the
domestically chartered commercial banks, thrifts, and Federal credit
unions and U.S. branches and agencies of foreign banks for which they
have primary administrative enforcement jurisdiction under TILA Section
108(a), 15 U.S.C. 1607(a). These agencies may, but are not required to,
use the Board's methodology for estimating burden. Using the Board's
method, the total current estimated annual burden for the approximately
16,200 domestically chartered commercial banks, thrifts, and federal
credit unions and U.S. branches and agencies of foreign banks
supervised by the Board, OCC, OTS, FDIC, and NCUA under TILA would be
approximately 21,813,445 hours. The final rule will impose a one-time
increase in the estimated annual burden for the estimated 6,543
institutions thought to engage in mortgage transactions by 261,720
hours. The total annual burden is estimated to be 22,075,165 hours. The
above estimates represent an average across all respondents and reflect
variations between institutions based on their size, complexity, and
practices.
The Board has a continuing interest in the public's opinions of its
collections of information. At any time, comments regarding the burden
estimate or any other aspect of this collection of information,
including suggestions for enhancing the quality of information
collected and ways for reducing the burden on respondent. Comments on
the collection of information may be sent to: Secretary, Board of
Governors of the Federal Reserve System, 20th and C Streets, NW.,
Washington, DC 20551; and to the Office of Management and Budget,
Paperwork Reduction Project (7100-0199), Washington, DC 20503.
List of Subjects in 12 CFR Part 226
Consumer protection, Federal Reserve System, Mortgages, Truth in
lending.
Authority and Issuance
0
For the reasons set forth in the preamble, the Board amends Regulation
Z, 12 CFR part 226, as set forth below:
PART 226--TRUTH IN LENDING (REGULATION Z)
0
1. The authority citation for part 226 is revised to read as follows:
Authority: 12 U.S.C. 3806; 15 U.S.C. 1604, 1637(c)(5), 1639(l);
Pub. L. 111-24 Sec. 2, 123 Stat. 1734; Pub. L. 111-203 Sec.
1472(a), 124 Stat. 1376, 2188 (to be codified at 15 U.S.C. 1639e).
Subpart E--Special Rules for Certain Home Mortgage Transactions
Sec. 226.36 [Amended]
0
2. Effective April 1, 2011, Sec. 226.36 is amended by removing and
reserving paragraph (b).
0
3. Effective December 27, 2010, new section 226.42 is added to read as
follows:
Sec. 226.42 Valuation independence.
(a) Scope. This section applies to any consumer credit transaction
secured by the consumer's principal dwelling.
(b) Definitions. For purposes of this section:
(1) ``Covered person'' means a creditor with respect to a covered
transaction or a person that provides ``settlement services,'' as
defined in 12 U.S.C. 2602(3) and implementing regulations, in
connection with a covered transaction.
(2) ``Covered transaction'' means an extension of consumer credit
that is or will be secured by the consumer's principal dwelling, as
defined in Sec. 226.2(a)(19).
(3) ``Valuation'' means an estimate of the value of the consumer's
principal dwelling in written or electronic form, other than one
produced solely by an automated model or system.
(4) ``Valuation management functions'' means:
(i) Recruiting, selecting, or retaining a person to prepare a
valuation;
(ii) Contracting with or employing a person to prepare a valuation;
(iii) Managing or overseeing the process of preparing a valuation,
including by providing administrative services such as receiving orders
for and receiving a valuation, submitting a completed valuation to
creditors and underwriters, collecting fees from creditors and
underwriters for services provided in connection with a valuation, and
compensating a person that prepares valuations; or
(iv) Reviewing or verifying the work of a person that prepares
valuations.
(c) Valuation of consumer's principal dwelling--(1) Coercion. In
connection with a covered transaction, no covered person shall or shall
attempt to directly or indirectly cause the value assigned to the
consumer's principal dwelling to be based on any factor other than the
independent judgment of a person that prepares valuations, through
coercion, extortion, inducement, bribery, or intimidation of,
compensation or instruction to, or collusion with a person that
prepares valuations or performs valuation management functions.
(i) Examples of actions that violate paragraph (c)(1) include:
(A) Seeking to influence a person that prepares a valuation to
report a minimum or maximum value for the consumer's principal
dwelling;
(B) Withholding or threatening to withhold timely payment to a
person that prepares a valuation or performs valuation management
functions because the person does not value the consumer's principal
dwelling at or above a certain amount;
(C) Implying to a person that prepares valuations that current or
future retention of the person depends on the amount at which the
person estimates the value of the consumer's principal dwelling;
(D) Excluding a person that prepares a valuation from consideration
for future engagement because the person reports a value for the
consumer's principal dwelling that does not meet or exceed a
predetermined threshold; and
[[Page 66581]]
(E) Conditioning the compensation paid to a person that prepares a
valuation on consummation of the covered transaction.
(2) Mischaracterization of value--(i) Misrepresentation. In
connection with a covered transaction, no person that prepares
valuations shall materially misrepresent the value of the consumer's
principal dwelling in a valuation. A misrepresentation is material for
purposes of this paragraph (c)(2)(i) if it is likely to significantly
affect the value assigned to the consumer's principal dwelling. A bona
fide error shall not be a misrepresentation.
(ii) Falsification or alteration. In connection with a covered
transaction, no covered person shall falsify and no covered person
other than a person that prepares valuations shall materially alter a
valuation. An alteration is material for purposes of this paragraph
(c)(2)(ii) if it is likely to significantly affect the value assigned
to the consumer's principal dwelling.
(iii) Inducement of mischaracterization. In connection with a
covered transaction, no covered person shall induce a person to violate
paragraph (c)(2)(i) or (ii) of this section.
(3) Permitted actions. Examples of actions that do not violate
paragraph (c)(1) or (c)(2) include:
(i) Asking a person that prepares a valuation to consider
additional, appropriate property information, including information
about comparable properties, to make or support a valuation;
(ii) Requesting that a person that prepares a valuation provide
further detail, substantiation, or explanation for the person's
conclusion about the value of the consumer's principal dwelling;
(iii) Asking a person that prepares a valuation to correct errors
in the valuation;
(iv) Obtaining multiple valuations for the consumer's principal
dwelling to select the most reliable valuation;
(v) Withholding compensation due to breach of contract or
substandard performance of services; and
(vi) Taking action permitted or required by applicable federal or
state statute, regulation, or agency guidance.
(d) Prohibition on conflicts of interest--(1)(i) In general. No
person preparing a valuation or performing valuation management
functions for a covered transaction may have a direct or indirect
interest, financial or otherwise, in the property or transaction for
which the valuation is or will be performed.
(ii) Employees and affiliates of creditors; providers of multiple
settlement services. In any covered transaction, no person violates
paragraph (d)(1)(i) of this section based solely on the fact that the
person--
(A) Is an employee or affiliate of the creditor; or
(B) Provides a settlement service in addition to preparing
valuations or performing valuation management functions, or based
solely on the fact that the person's affiliate performs another
settlement service.
(2) Employees and affiliates of creditors with assets of more than
$250 million for both of the past two calendar years. For any covered
transaction in which the creditor had assets of more than $250 million
as of December 31st for both of the past two calendar years, a person
subject to paragraph (d)(1)(i) of this section who is employed by or
affiliated with the creditor does not have a conflict of interest in
violation of paragraph (d)(1)(i) of this section based on the person's
employment or affiliate relationship with the creditor if:
(i) The compensation of the person preparing a valuation or
performing valuation management functions is not based on the value
arrived at in any valuation;
(ii) The person preparing a valuation or performing valuation
management functions reports to a person who is not part of the
creditor's loan production function, as defined in paragraph (d)(5)(i)
of this section, and whose compensation is not based on the closing of
the transaction to which the valuation relates; and
(iii) No employee, officer or director in the creditor's loan
production function, as defined in paragraph (d)(5)(i) of this section,
is directly or indirectly involved in selecting, retaining,
recommending or influencing the selection of the person to prepare a
valuation or perform valuation management functions, or to be included
in or excluded from a list of approved persons who prepare valuations
or perform valuation management functions.
(3) Employees and affiliates of creditors with assets of $250
million or less for either of the past two calendar years. For any
covered transaction in which the creditor had assets of $250 million or
less as of December 31st for either of the past two calendar years, a
person subject to paragraph (d)(1)(i) of this section who is employed
by or affiliated with the creditor does not have a conflict of interest
in violation of paragraph (d)(1)(i) of this section based on the
person's employment or affiliate relationship with the creditor if:
(i) The compensation of the person preparing a valuation or
performing valuation management functions is not based the value
arrived at in any valuation; and
(ii) The creditor requires that any employee, officer or director
of the creditor who orders, performs, or reviews a valuation for a
covered transaction abstain from participating in any decision to
approve, not approve, or set the terms of that transaction.
(4) Providers of multiple settlement services. For any covered
transaction, a person who prepares a valuation or performs valuation
management functions in addition to performing another settlement
service for the transaction, or whose affiliate performs another
settlement service for the transaction, does not have a conflict of
interest in violation of paragraph (d)(1)(i) of this section as a
result of the person or the person's affiliate performing another
settlement service for the transaction if:
(i) The creditor had assets of more than $250 million as of
December 31st for both of the past two calendar years and the
conditions in paragraph (d)(2)(i)-(iii) are met; or
(ii) The creditor had assets of $250 million or less as of December
31st for either of the past two calendar years and the conditions in
paragraph (d)(3)(i)-(ii) are met.
(5) Definitions. For purposes of this paragraph, the following
definitions apply:
(i) Loan production function. The term ``loan production function''
means an employee, officer, director, department, division, or other
unit of a creditor with responsibility for generating covered
transactions, approving covered transactions, or both.
(ii) Settlement service. The term ``settlement service'' has the
same meaning as in the Real Estate Settlement Procedures Act, 12 U.S.C.
2601 et seq.
(iii) Affiliate. The term ``affiliate'' has the same meaning as in
Regulation Y, 12 CFR 225.2(a).
(e) When extension of credit prohibited. In connection with a
covered transaction, a creditor that knows, at or before consummation,
of a violation of paragraph (c) or (d) of this section in connection
with a valuation shall not extend credit based on the valuation, unless
the creditor documents that it has acted with reasonable diligence to
determine that the valuation does not materially misstate or
misrepresent the value of the consumer's principal dwelling. For
purposes of this paragraph (e), a valuation materially misstates or
misrepresents the value of the consumer's principal dwelling if the
valuation contains a misstatement or misrepresentation that affects the
credit
[[Page 66582]]
decision or the terms on which credit is extended.
(f) Customary and reasonable compensation--(1) Requirement to
provide customary and reasonable compensation to fee appraisers. In any
covered transaction, the creditor and its agents shall compensate a fee
appraiser for performing appraisal services at a rate that is customary
and reasonable for comparable appraisal services performed in the
geographic market of the property being appraised. For purposes of
paragraph (f) of this section, ``agents'' of the creditor do not
include any fee appraiser as defined in paragraph (f)(4)(i) of this
section.
(2) Presumption of compliance. A creditor and its agents shall be
presumed to comply with paragraph (f)(1) if--
(i) The creditor or its agents compensate the fee appraiser in an
amount that is reasonably related to recent rates paid for comparable
appraisal services performed in the geographic market of the property
being appraised. In determining this amount, a creditor shall review
the factors below and make any adjustments to recent rates paid in the
relevant geographic market necessary to ensure that the amount of
compensation is reasonable:
(A) The type of property,
(B) The scope of work,
(C) The time in which the appraisal services are required to be
performed,
(D) Fee appraiser qualifications,
(E) Fee appraiser experience and professional record, and
(F) Fee appraiser work quality; and
(ii) The creditor and its agents do not engage in any
anticompetitive acts in violation of state or federal law that affect
the compensation paid to fee appraisers, including--
(A) Entering into any contracts or engaging in any conspiracies to
restrain trade through methods such as price fixing or market
allocation, as prohibited under section 1 of the Sherman Antitrust Act,
15 U.S.C. 1, or any other relevant antitrust laws; or
(B) Engaging in any acts of monopolization such as restricting any
person from entering the relevant geographic market or causing any
person to leave the relevant geographic market, as prohibited under
section 2 of the Sherman Antitrust Act, 15 U.S.C. 2, or any other
relevant antitrust laws.
(3) Alternative presumption of compliance. A creditor and its
agents shall be presumed to comply with paragraph (f)(1) if the
creditor or its agents determine the amount of compensation paid to the
fee appraiser by relying on information about rates that:
(i) Is based on objective third-party information, including fee
schedules, studies, and surveys prepared by independent third parties
such as government agencies, academic institutions, and private
research firms;
(ii) Is based on recent rates paid to a representative sample of
providers of appraisal services in the geographic market of the
property being appraised or the fee schedules of those providers; and
(iii) In the case of information based on fee schedules, studies,
and surveys, such fee schedules, studies, or surveys, or the
information derived therefrom, excludes compensation paid to fee
appraisers for appraisals ordered by appraisal management companies, as
defined in paragraph (f)(4)(iii) of this section.
(4) Definitions. For purposes of this paragraph (f), the following
definitions apply:
(i) Fee appraiser. The term ``fee appraiser'' means--
(A) A natural person who is a state-licensed or state-certified
appraiser and receives a fee for performing an appraisal, but who is
not an employee of the person engaging the appraiser; or
(B) An organization that, in the ordinary course of business,
employs state-licensed or state-certified appraisers to perform
appraisals, receives a fee for performing appraisals, and is not
subject to the requirements of section 1124 of the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 (12 U.S.C.
3331 et seq.).
(ii) Appraisal services. The term ``appraisal services'' means the
services required to perform an appraisal, including defining the scope
of work, inspecting the property, reviewing necessary and appropriate
public and private data sources (for example, multiple listing
services, tax assessment records and public land records), developing
and rendering an opinion of value, and preparing and submitting the
appraisal report.
(iii) Appraisal management company. The term ``appraisal management
company'' means any person authorized to perform one or more of the
following actions on behalf of the creditor--
(A) Recruit, select, and retain fee appraisers;
(B) Contract with fee appraisers to perform appraisal services;
(C) Manage the process of having an appraisal performed, including
providing administrative services such as receiving appraisal orders
and appraisal reports, submitting completed appraisal reports to
creditors and underwriters, collecting fees from creditors and
underwriters for services provided, and compensating fee appraisers for
services performed; or
(D) Review and verify the work of fee appraisers.
(g) Mandatory reporting--(1) Reporting required. Any covered person
that reasonably believes an appraiser has not complied with the Uniform
Standards of Professional Appraisal Practice or ethical or professional
requirements for appraisers under applicable state or federal statutes
or regulations shall refer the matter to the appropriate state agency
if the failure to comply is material. For purposes of this paragraph
(g)(1), a failure to comply is material if it is likely to
significantly affect the value assigned to the consumer's principal
dwelling.
(2) Timing of reporting. A covered person shall notify the
appropriate state agency within a reasonable period of time after the
person determines that there is a reasonable basis to believe that a
failure to comply required to be reported under paragraph (g)(1) of
this section has occurred.
(3) Definition. For purposes of this paragraph (g), ``state
agency'' means ``state appraiser certifying and licensing agency''
under 12 U.S.C. 3350(1) and any implementing regulations. The
appropriate state agency to which a covered person must refer a matter
under paragraph (g)(1) of this section is the agency for the state in
which the consumer's principal dwelling is located.
0
4. In Supplement I to Part 226:
0
A. Under Section 226.1--Authority, Purpose, Coverage, Organization,
Enforcement and Liability, paragraph 1(d)(5)-1 is revised.
0
B. Under Section 226.5b--Requirements for Home-equity Plans, new
paragraph 7 is added.
0
C. Effective April 1, 2011, under Section 226.36--Prohibited Acts or
Practices in Connection with Credit Secured by a Consumer's Principal
Dwelling, the headings 36(b) Misrepresentation of the value of
consumer's principal dwelling and 36(b)(2) When extension of credit
prohibited and paragraphs 36(b)(2)-1 and -2 are removed.
0
D. Effective December 27, 2010, new Section 226.42 Valuation
Independence is added.
Supplement I to Part 226--Official Staff Interpretations
* * * * *
Section 226.1--Authority, Purpose, Coverage, Organization,
Enforcement and Liability
* * * * *
Paragraph 1(d)(5).
[[Page 66583]]
1. Effective dates.
i. The Board's revisions published on July 30, 2008 (the ``final
rules'') apply to covered loans (including refinance loans and
assumptions considered new transactions under Sec. 226.20) for
which the creditor receives an application on or after October 1,
2009, except for the final rules on advertising, escrows, and loan
servicing. But see comment 1(d)(3)-1. The final rules on escrow in
Sec. 226.35(b)(3) are effective for covered loans (including
refinancings and assumptions in Sec. 226.20) for which the creditor
receives an application on or after April 1, 2010; but for such
loans secured by manufactured housing on or after October 1, 2010.
The final rules applicable to servicers in Sec. 226.36(c) apply to
all covered loans serviced on or after October 1, 2009. The final
rules on advertising apply to advertisements occurring on or after
October 1, 2009. For example, a radio ad occurs on the date it is
first broadcast; a solicitation occurs on the date it is mailed to
the consumer. The following examples illustrate the application of
the effective dates for the final rules.
A. General. A refinancing or assumption as defined in Sec.
226.20(a) or (b) is a new transaction and is covered by a provision
of the final rules if the creditor receives an application for the
transaction on or after that provision's effective date. For
example, if a creditor receives an application for a refinance loan
covered by Sec. 226.35(a) on or after October 1, 2009, and the
refinance loan is consummated on October 15, 2009, the provision
restricting prepayment penalties in Sec. 226.35(b)(2) applies.
However, if the transaction were a modification of an existing
obligation's terms that does not constitute a refinance loan under
Sec. 226.20(a), the final rules, including for example the
restriction on prepayment penalties, would not apply.
B. Escrows. Assume a consumer applies for a refinance loan to be
secured by a dwelling (that is not a manufactured home) on March 15,
2010, and the loan is consummated on April 2, 2010. The escrow rule
in Sec. 226.35(b)(3) does not apply.
C. Servicing. Assume that a consumer applies for a new loan on
August 1, 2009. The loan is consummated on September 1, 2009. The
servicing rules in Sec. 226.36(c) apply to the servicing of that
loan as of October 1, 2009.
(ii) The interim final rule on appraisal independence in Sec.
226.42 published on October 28, 2010 is mandatory on April 1, 2011,
for open- and closed-end extensions of consumer credit secured by
the consumer's principal dwelling. Section 226.36(b), which is
substantially similar to Sec. 226.42(b) and (e), is removed
effective April 1, 2011. Applications for closed-end extensions of
credit secured by the consumer's principal dwelling that are
received by creditors before April 1, 2011, are subject to Sec.
226.36(b) regardless of the date on which the transaction is
consummated. However, parties subject to Sec. 226.36(b) may, at
their option, choose to comply with Sec. 226.42 instead of Sec.
226.36(b), for applications received before April 1, 2011. Thus, an
application for a closed-end extension of credit secured by the
consumer's principal dwelling that is received by a creditor on
March 20, 2011, and consummated on May 1, 2011, is subject to Sec.
226.36(b), however, the creditor may choose to comply with Sec.
226.42 instead. For an application for open- or closed-end credit
secured by the consumer's principal dwelling that is received on or
after April 1, 2011, the creditor must comply with Sec. 226.42.
* * * * *
Section 226.5b--Requirements for Home-Equity Plans
* * * * *
7. Appraisals and other valuations. For consumer credit
transactions subject to Sec. 226.5b and secured by the consumer's
principal dwelling, creditors and other persons must comply with the
requirements for appraisals and other valuations under Sec. 226.42.
* * * * *
Section 226.42--Valuation Independence
42(a) Scope.
1. Open- and closed-end credit. Section 226.42 applies to both
open-end and closed-end transactions secured by the consumer's
principal dwelling.
2. Consumer's principal dwelling. Section 226.42 applies only if
the dwelling that will secure a consumer credit transaction is the
principal dwelling of the consumer who obtains credit.
42(b) Definitions.
Paragraph 42(b)(1).
1. Examples of covered persons. ``Covered persons'' include
creditors, mortgage brokers, appraisers, appraisal management
companies, real estate agents, and other persons that provide
``settlement services'' as defined under the Real Estate Settlement
Procedures Act and implementing regulations. See 12 U.S.C. 2602(3).
2. Examples of persons not covered. The following persons are
not ``covered persons'' (unless, of course, they are creditors with
respect to a covered transaction or perform ``settlement services''
in connection with a covered transaction):
i. The consumer who obtains credit through a covered
transaction.
ii. A person secondarily liable for a covered transaction, such
as a guarantor.
iii. A person that resides in or will reside in the consumer's
principal dwelling but will not be liable on the covered
transaction, such as a non-obligor spouse.
Paragraph 42(b)(2).
1. Principal dwelling. The term ``principal dwelling'' has the
same meaning under Sec. 226.42(b) as under Sec. Sec. 226.2(a)(24),
226.15(a), and 226.23(a). See comments 2(a)(24)-3, 15(a)-5, and
23(a)-3.
Paragraph 42(b)(3).
1. Valuation. A ``valuation'' is an estimate of value prepared
by a natural person, such as an appraisal report prepared by an
appraiser or an estimate of market value prepared by a real estate
agent. The term includes photographic or other information included
with a written estimate of value. A ``valuation'' includes an
estimate provided or viewed electronically, such as an estimate
transmitted via electronic mail or viewed using a computer.
2. Automated model or system. A ``valuation'' does not include
an estimate of value produced exclusively using an automated model
or system. However, a ``valuation'' includes an estimate of value
developed by a natural person based in part on an estimate of value
produced using an automated model or system.
3. Estimate. An estimate of the value of the consumer's
principal dwelling includes an estimate of a range of values for the
consumer's principal dwelling.
42(c) Valuation for consumer's principal dwelling.
42(c)(1) Coercion.
1. State law. The terms ``coercion,'' ``extortion,''
``inducement,'' ``bribery,'' ``intimidation,'' ``compensation,''
``instruction,'' and ``collusion'' have the meanings given to them
by applicable state law or contract. See Sec. 226.2(b)(3).
2. Purpose. A covered person does not violate Sec. 226.42(c)(1)
if the person does not engage in an act or practice set forth in
Sec. 226.42(c)(1) for the purpose of causing the value assigned to
the consumer's principal dwelling to be based on a factor other than
the independent judgment of a person that prepares valuations. For
example, requesting that a person that prepares a valuation take
certain actions, such as consider additional, appropriate property
information, does not violate Sec. 226.42(c), because such request
does not supplant the independent judgment of the person that
prepares a valuation. See Sec. 226.42(c)(3)(i). A covered person
also may provide incentives, such as additional compensation, to a
person that prepares valuations or performs valuation management
functions under Sec. 226.42(c)(1), as long as the covered person
does not cause or attempt to cause the value assigned to the
consumer's principal dwelling to be based on a factor other than the
independent judgment of the person that prepares valuations.
3. Person that prepares valuations. For purposes of Sec.
226.42, the term ``valuation'' includes an estimate of value
regardless of whether it is an appraisal prepared by a state-
certified or -licensed appraiser. See comment 42(b)(5)-1. A person
that prepares valuations may or may not be a state-licensed or
state-certified appraiser. Thus a person violates Sec. 226.42(c)(1)
by engaging in prohibited acts or practices directed towards any
person that prepares or may prepare a valuation of the consumer's
principal dwelling for a covered transaction. For example, a person
violates Sec. 226.42(c)(1) by seeking to coerce a real estate agent
to assign a value to the consumer's principal dwelling based on a
factor other than the independent judgment of the real estate agent,
in connection with a covered transaction.
4. Indirect acts or practices. Section 226.42(c)(1) prohibits
both direct and indirect attempts to cause the value assigned to the
consumer's principal dwelling to be based on a factor other than the
independent judgment of the person that prepares the valuation,
through coercion and certain other acts and practices. For example,
a creditor violates Sec. 226.42(c)(1) if the creditor attempts to
cause the value an appraiser engaged by an appraisal management
company assigns to the consumer's principal dwelling to be
[[Page 66584]]
based on a factor other than the appraiser's independent judgment,
by threatening to withhold future business from a title company
affiliated with the appraisal management company unless the
appraiser assigns a value to the dwelling that meets or exceed a
minimum threshold.
Paragraph 42(c)(1)(i).
1. Applicability of examples. Section 226.42(c)(1)(i) provides
examples of coercion of a person that prepares valuations. However,
Sec. 226.42(c)(1)(i) also applies to coercion of a person that
performs valuation management functions or its affiliate. See Sec.
226.42(c)(1); comment 42(c)(1)-4.
2. Specific value or predetermined threshold. As used in the
examples of actions prohibited under Sec. 226.42(c)(1), a
``specific value'' and a ``predetermined threshold'' include a
predetermined minimum, maximum, or range of values. Further,
although the examples assume a covered person's prohibited actions
are designed to cause the value assigned to the consumer's principal
dwelling to equal or exceed a certain amount, the rule applies
equally to cases where a covered person's prohibited actions are
designed to cause the value assigned to the dwelling to be below a
certain amount.
42(c)(2) Mischaracterization of value.
42(c)(2)(i) Misrepresentation.
1. Opinion of value. Section 226.42(c)(2)(i) prohibits a person
that performs valuations from misrepresenting the value of the
consumer's principal dwelling in a valuation. Such person
misrepresents the value of the consumer's principal dwelling by
assigning a value to such dwelling that does not reflect the
person's opinion of the value of such dwelling. For example, an
appraiser misrepresents the value of the consumer's principal
dwelling if the appraiser estimates that the value of such dwelling
is $250,000 applying the standards required by the Uniform Standards
of Professional Appraisal Standards but assigns a value of $300,000
to such dwelling in a Uniform Residential Appraisal Report.
42(c)(2)(iii) Inducement of mischaracterization.
1. Inducement. A covered person may not induce a person to
materially misrepresent the value of the consumer's principal
dwelling in a valuation or to falsify or alter a valuation. For
example, a loan originator may not coerce a loan underwriter to
alter an appraisal report to increase the value assigned to the
consumer's principal dwelling.
42(d) Prohibition on conflicts of interest.
42(d)(1)(i) In general.
1. Prohibited interest in the property. A person preparing a
valuation or performing valuation management functions for a covered
transaction has a prohibited interest in the property under
paragraph (d)(1)(i) if the person has any ownership or reasonably
foreseeable ownership interest in the property. For example, a
person who seeks a mortgage to purchase a home has a reasonably
foreseeable ownership interest in the property securing the
mortgage, and therefore is not permitted to prepare the valuation or
perform valuation management functions for that mortgage transaction
under paragraph (d)(1)(i).
2. Prohibited interest in the transaction. A person preparing a
valuation or performing valuation management functions has a
prohibited interest in the transaction under paragraph (d)(1)(i) if
that person or an affiliate of that person also serves as a loan
officer of the creditor, mortgage broker, real estate broker, or
other settlement service provider for the transaction and the
conditions under paragraph (d)(4) are not satisfied. A person also
has a prohibited interest in the transaction if the person is
compensated or otherwise receives financial or other benefits based
on whether the transaction is consummated. Under these
circumstances, the person is not permitted to prepare the valuation
or perform valuation management functions for that transaction under
paragraph (d)(1)(i).
42(d)(1)(ii) Employees and affiliates of creditors; providers of
multiple settlement services.
1. Employees and affiliates of creditors. In general, a creditor
may use employees or affiliates to prepare a valuation or perform
valuation management functions without violating paragraph
(d)(1)(i). However, whether an employee or affiliate has a direct or
indirect interest in the property or transaction that creates a
prohibited conflict of interest under paragraph (d)(1)(i) depends on
the facts and circumstances of a particular case, including the
structure of the employment or affiliate relationship.
2. Providers of multiple settlement services. In general, a
person who prepares a valuation or perform valuation management
functions for a covered transaction may perform another settlement
service for the same transaction, or the person's affiliate may
perform another settlement service, without violating paragraph
(d)(1)(i). However, whether the person has a direct or indirect
interest in the property or transaction that creates a prohibited
conflict of interest under paragraph (d)(1)(i) depends on the facts
and circumstances of a particular case.
42(d)(2) Employees and affiliates of creditors with assets of
more than $250 million for both of the past two calendar years.
1. Safe harbor. A person who a prepares valuation or performs
valuation management functions for a covered transaction and is an
employee or affiliate of the creditor will not be deemed to have an
interest prohibited under paragraph (d)(1)(i) on the basis of the
employment or affiliate relationship with the creditor if the
conditions in paragraph (d)(2) are satisfied. Even if the conditions
in paragraph (d)(2) are satisfied, however, the person may have a
prohibited conflict of interest on other grounds, such as if the
person performs a valuation for a purchase-money mortgage
transaction in which the person is the buyer or seller of the
subject property. Thus, in general, in any covered transaction in
which the creditor had assets of more than $250 million for both of
the past two years, the creditor may use its own employee or
affiliate to prepare a valuation or perform valuation management
functions for a particular transaction, as long as the conditions
described in paragraph (d)(2) are satisfied. If the conditions in
paragraph (d)(2) are not satisfied, whether a person preparing a
valuation or performing valuation management functions has violated
paragraph (d)(1)(i) depends on all of the facts and circumstances.
Paragraph 42(d)(2)(ii).
1. Prohibition on reporting to a person who is part of the
creditor's loan production function. To qualify for the safe harbor
under paragraph (d)(2), the person preparing a valuation or
performing valuation management functions may not report to a person
who is part of the creditor's loan production function (as defined
in paragraph (d)(4)(ii) and comment 42(d)(4)(ii)-1). For example, if
a person preparing a valuation is directly supervised or managed by
a loan officer or other person in the creditor's loan production
function, or by a person who is directly supervised or managed by a
loan officer, the condition under paragraph (d)(2)(ii) is not met.
2. Prohibition on reporting to a person whose compensation is
based on the transaction closing. To qualify for the safe harbor
under paragraph (d)(2), the person preparing a valuation or
performing valuation management functions may not report to a person
whose compensation is based on the closing of the transaction to
which the valuation relates. For example, assume an appraisal
management company performs valuation management functions for a
transaction in which the creditor is an affiliate of the appraisal
management company. If the employee of the appraisal management
company who is in charge of valuation management functions for that
transaction is supervised by a person who earns a commission or
bonus based on the percentage of closed transactions for which the
appraisal management company provides valuation management
functions, the condition under paragraph (d)(2)(ii) is not met.
Paragraph 42(d)(2)(iii).
1. Direct or indirect involvement in selection of person who
prepares a valuation. In any covered transaction, the safe harbor
under paragraph (d)(2) is available if, among other things, no
employee, officer or director in the creditor's loan production
function (as defined in paragraph (d)(4)(ii) and comment
42(d)(4)(ii)-1) is directly or indirectly involved in selecting,
retaining, recommending or influencing the selection of the person
to prepare a valuation or perform valuation management functions, or
to be included in or excluded from a list or panel of approved
persons who prepare valuations or perform valuation management
functions. For example, if the person who selects the person to
prepare the valuation for a covered transaction is supervised by an
employee of the creditor who also supervises loan officers, the
condition in paragraph (d)(2)(iii) is not met.
42(d)(3) Employees and affiliates of creditors with assets of
$250 million or less for either of the past two calendar years.
1. Safe harbor. A person who prepares a valuation or performs
valuation management functions for a covered transaction and is an
employee or affiliate of the creditor will not be deemed to have
interest prohibited under paragraph (d)(1)(i) on the basis of the
employment or affiliate relationship with the
[[Page 66585]]
creditor if the conditions in paragraph (d)(2) are satisfied. Even
if the conditions in paragraph (d)(2) are satisfied, however, the
person may have a prohibited conflict of interest on other grounds,
such as if the person performs a valuation for a purchase-money
mortgage transaction in which the person is the buyer or seller of
the subject property. Thus, in general, in any covered transaction
in which the creditor had assets of $250 million or less for either
of the past two calendar years, the creditor may use its own
employee or affiliate to prepare a valuation or perform valuation
management functions for a particular transaction, as long as the
conditions described in paragraph (d)(3) are satisfied. If the
conditions in paragraph (d)(3) are not satisfied, whether a person
preparing valuations or performing valuation management functions
has violated paragraph (d)(1)(i) depends on all of the facts and
circumstances.
42(d)(4) Providers of multiple settlement services.
Paragraph 42(d)(4)(i).
1. Safe harbor in transactions in which the creditor had assets
of more than $250 million for both of the past two calendar years. A
person preparing a valuation or performing valuation management
functions in addition to performing another settlement service for
the same transaction, or whose affiliate performs another settlement
service for the transaction, will not be deemed to have interest
prohibited under paragraph (d)(1)(i) as a result of the person or
the person's affiliate performing another settlement service if the
conditions in paragraph (d)(4)(i) are satisfied. Even if the
conditions in paragraph (d)(4)(i) are satisfied, however, the person
may have a prohibited conflict of interest on other grounds, such as
if the person performs a valuation for a purchase-money mortgage
transaction in which the person is the buyer or seller of the
subject property. Thus, in general, in any covered transaction with
a creditor that had assets of more than $250 million for the past
two years, a person preparing a valuation or performing valuation
management functions, or its affiliate, may provide another
settlement service for the same transaction, as long as the
conditions described in paragraph (d)(4)(i) are satisfied. If the
conditions in paragraph (d)(4)(i) are not satisfied, whether a
person preparing valuations or performing valuation management
functions has violated paragraph (d)(1)(i) depends on all of the
facts and circumstances.
2. Reporting. The safe harbor under paragraph (d)(4)(i) is
available if the condition specified in paragraph (d)(2)(ii), among
others, is met. Paragraph (d)(2)(ii) prohibits a person preparing a
valuation or performing valuation management functions from
reporting to a person whose compensation is based on the closing of
the transaction to which the valuation relates. For example, assume
an appraisal management company performs both valuation management
functions and title services, including providing title insurance,
for the same covered transaction. If the appraisal management
company employee in charge of valuation management functions for the
transaction is supervised by the title insurance agent in the
transaction, whose compensation depends in whole or in part on
whether title insurance is sold at the loan closing, the condition
in paragraph (d)(2)(ii) is not met.
Paragraph 42(d)(4)(ii).
1. Safe harbor in transactions in which the creditor had assets
of $250 million or less for either of the past two calendar years. A
person preparing a valuation or performing valuation management
functions in addition to performing another settlement service for
the same transaction, or whose affiliate performs another settlement
service for the transaction, will not be deemed to have an interest
prohibited under paragraph (d)(1)(i) as a result of the person or
the person's affiliate performing another settlement service if the
conditions in paragraph (d)(4)(ii) are satisfied. Even if the
conditions in paragraph (d)(4)(ii) are satisfied, however, the
person may have a prohibited conflict of interest on other grounds,
such as if the person performs a valuation for a purchase-money
mortgage transaction in which the person is the buyer or seller of
the subject property. Thus, in general, in any covered transaction
in which the creditor had assets of $250 million or less for either
of the past two years, a person preparing a valuation or performing
valuation management functions, or its affiliate, may provide other
settlement services for the same transaction, as long as the
conditions described in paragraph (d)(4)(i) are satisfied. If the
conditions in paragraph (d)(4)(i) are not satisfied, whether a
person preparing valuations or performing valuation management
functions has violated paragraph (d)(1)(i) depends on all of the
facts and circumstances.
42(d)(5) Definitions.
Paragraph 42(d)(5)(i).
1. Loan production function. One condition of the safe harbors
under paragraphs (d)(3) and (d)(4)(ii), involving transactions in
which the creditor had assets of more than $250 million for both of
the past two calendar years, is that the person who prepares a
valuation or performs valuation management functions must report to
a person who is not part of the creditor's ``loan production
function.'' A creditor's ``loan production function'' includes
retail sales staff, loan officers, and any other employee of the
creditor with responsibility for taking a loan application, offering
or negotiating loan terms or whose compensation is based on loan
processing volume. A person is not considered part of a creditor's
loan production function solely because part of the person's
compensation includes a general bonus not tied to specific
transactions or a specific percentage of transactions closing, or a
profit sharing plan that benefits all employees. A person solely
responsible for credit administration or risk management is also not
considered part of a creditor's loan production function. Credit
administration and risk management includes, for example, loan
underwriting, loan closing functions (e.g., loan documentation),
disbursing funds, collecting mortgage payments and otherwise
servicing the loan (e.g., escrow management and payment of taxes),
monitoring loan performance, and foreclosure processing.
42(e) When extension of credit prohibited.
1. Reasonable diligence. A creditor will be deemed to have acted
with reasonable diligence under Sec. 226.42(e) if the creditor
extends credit based on a valuation other than the valuation subject
to the restriction in Sec. 226.42(e). A creditor need not obtain a
second valuation to document that the creditor has acted with
reasonable diligence to determine that the valuation does not
materially misstate or misrepresent the value of the consumer's
principal dwelling, however. For example, assume an appraiser
notifies a creditor before consummation that a loan originator
attempted to cause the value assigned to the consumer's principal
dwelling to be based on a factor other than the appraiser's
independent judgment, through coercion. If the creditor reasonably
determines and documents that the appraisal does not materially
misstate or misrepresent the value of the consumer's principal
dwelling, for purposes of Sec. 226.42(e), the creditor may extend
credit based on the appraisal.
42(f) Customary and reasonable compensation.
42(f)(1) Requirement to provide customary and reasonable
compensation to fee appraisers.
1. Agents of the creditor. Whether a person is an agent of the
creditor is determined by applicable law; however, a ``fee
appraiser'' as defined in paragraph (f)(4)(i) is not an agent of the
creditor for purposes of paragraph (f), and therefore is not
required to pay other fee appraisers customary and reasonable
compensation under paragraph (f).
2. Geographic market. For purposes of paragraph (f), the
``geographic market of the property being appraised'' means the
geographic market relevant to compensation levels for appraisal
services. Depending on the facts and circumstances, the relevant
geographic market may be a state, metropolitan statistical area
(MSA), metropolitan division, area outside of an MSA, county, or
other geographic area. For example, assume that fee appraisers who
normally work only in County A generally accept $400 to appraise an
attached single-family property in County A. Assume also that very
few or no fee appraisers who work only in contiguous County B will
accept a rate comparable to $400 to appraise an attached single-
family property in County A. The relevant geographic market for an
attached single-family property in County A may reasonably be
defined as County A. On the other hand, assume that fee appraisers
who normally work only in County A generally accept $400 to appraise
an attached single-family property in County A. Assume also that
many fee appraisers who normally work only in contiguous County B
will accept a rate comparable to $400 to appraise an attached
single-family property in County A. The relevant geographic market
for an attached single-family property in County A may reasonably be
defined to include both County A and County B.
3. Failure to perform contractual obligations. Paragraph (f)(1)
does not prohibit a creditor or its agent from withholding
compensation from a fee appraiser for failing to meet contractual
obligations, such as
[[Page 66586]]
failing to provide the appraisal report or violating state or
federal appraisal laws in performing the appraisal.
4. Agreement that fee is ``customary and reasonable.'' A
document signed by a fee appraiser indicating that the appraiser
agrees that the fee paid to the appraiser is ``customary and
reasonable'' does not by itself create a presumption of compliance
with Sec. 226.42(f) or otherwise satisfy the requirement to pay a
fee appraiser at a customary and reasonable rate.
5. Volume-based discounts. Section 226.42(f)(1) does not
prohibit a fee appraiser and a creditor (or its agent) from agreeing
to compensation based on transaction volume, so long as the
compensation is customary and reasonable. For example, assume that a
fee appraiser typically receives $300 for appraisals from creditors
with whom it does business; the fee appraiser, however, agrees to
reduce the fee to $280 for a particular creditor, in exchange for a
minimum number of assignments from the creditor.
42(f)(2) Presumption of compliance.
1. In general. A creditor and its agent are presumed to comply
with paragraph (f)(1) if the creditor or its agent meets the
conditions specified in paragraph (f)(2) in determining the
compensation paid to a fee appraiser. These conditions are not
requirements for compliance but, if met, create a presumption that
the creditor or its agent has complied with Sec. 226.42(f)(1). A
person may rebut this presumption with evidence that the amount of
compensation paid to a fee appraiser was not customary and
reasonable for reasons unrelated to the conditions in paragraph
(f)(2)(i) or (f)(2)(ii). If a creditor or its agent does not meet
one of the non-required conditions set forth in paragraph (f)(2),
the creditor's and its agent's compliance with paragraph (f)(1) is
determined based on all of the facts and circumstances without a
presumption of either compliance or violation.
42(f)(2)(i) Presumption of compliance.
1. Two-step process for determining customary and reasonable
rates. Paragraph (f)(2)(i) sets forth a two-step process for a
creditor or its agent to determine the amount of compensation that
is customary and reasonable in a given transaction. First, the
creditor or its agent must identify recent rates paid for comparable
appraisal services in the relevant geographic market. Second, once
recent rates have been identified, the creditor or its agent must
review the factors listed in paragraph (f)(2)(i)(A)-(F) and make any
appropriate adjustments to the rates to ensure that the amount of
compensation is reasonable.
2. Identifying recent rates. Whether rates may reasonably be
considered ``recent'' depends on the facts and circumstances.
Generally, ``recent'' rates would include rates charged within one
year of the creditor's or its agent's reliance on this information
to qualify for the presumption of compliance under paragraph (f)(2).
For purposes of the presumption of compliance under paragraph
(f)(2), a creditor or its agent may gather information about recent
rates by using a reasonable method that provides information about
rates for appraisal services in the geographic market of the
relevant property; a creditor or its agent may, but is not required
to, use or perform a fee survey.
3. Accounting for factors. Once recent rates in the relevant
geographic market have been identified, the creditor or its agent
must review the factors listed in paragraph (f)(2)(i)(A)-(F) to
determine the appropriate rate for the current transaction. For
example, if the recent rates identified by the creditor or its agent
were solely for appraisal assignments in which the scope of work
required consideration of two comparable properties, but the current
transaction required an appraisal that considered three comparable
properties, the creditor or its agent might reasonably adjust the
rate by an amount that accounts for the increased scope of work, in
addition to making any other appropriate adjustments based on the
remaining factors.
Paragraph 42(f)(2)(i)(A).
1. Type of property. The type of property may include, for
example, detached or attached single-family property, condominium or
cooperative unit, or manufactured home.
Paragraph 42(f)(2)(i)(B).
1. Scope of work. The scope of work may include, for example,
the type of inspection (such as exterior only or both interior and
exterior) or number of comparables required for the appraisal.
Paragraph 42(f)(2)(i)(D).
1. Fee appraiser qualifications. The fee appraiser
qualifications may include, for example, a state license or
certification in accordance with the minimum criteria issued by the
Appraisal Qualifications Board of the Appraisal Foundation, or
completion of continuing education courses on effective appraisal
methods and related topics.
2. Membership in professional appraisal organization. Paragraph
42(f)(2)(i)(D) does not override state or federal laws prohibiting
the exclusion of an appraiser from consideration for an assignment
solely by virtue of membership or lack of membership in any
particular appraisal organization. See, e.g., 12 CFR 225.66(a).
Paragraph 42(f)(2)(i)(E).
1. Fee appraiser experience and professional record. The fee
appraiser's level of experience may include, for example, the fee
appraiser's years of service as a state-licensed or state-certified
appraiser, or years of service appraising properties in a particular
geographical area or of a particular type. The fee appraiser's
professional record may include, for example, whether the fee
appraiser has a past record of suspensions, disqualifications,
debarments, or judgments for waste, fraud, abuse or breach of legal
or professional standards.
Paragraph 42(f)(2)(i)(F).
1. Fee appraiser work quality. The fee appraiser's work quality
may include, for example, the past quality of appraisals performed
by the appraiser based on the written performance and review
criteria of the creditor or agent of the creditor.
Paragraph 42(f)(2)(ii).
1. Restraining trade. Under Sec. 226.42(f)(2)(ii)(A), creditor
or its agent would not qualify for the presumption of compliance
under paragraph (f)(2) if it engaged in any acts to restrain trade
such as entering into a price fixing or market allocation agreement
that affect the compensation of fee appraisers. For example, if
appraisal management company A and appraisal management company B
agreed to compensate fee appraisers at no more than a specific rate
or range of rates, neither appraisal management company would
qualify for the presumption of compliance. Likewise, if appraisal
management company A and appraisal management company B agreed that
appraisal management company A would limit its business to a certain
portion of the relevant geographic market and appraisal management
company B would limit its business to a different portion of the
relevant geographic market, and as a result each appraisal
management company unilaterally set the fees paid to fee appraisers
in their respective portions of the market, neither appraisal
management company would qualify for the presumption of compliance
under paragraph (f)(2).
2. Acts of monopolization. Under Sec. 226.42(f)(2)(ii)(B), a
creditor or its agent would not qualify for the presumption of
compliance under paragraph (f)(2) if it engaged in any act of
monopolization such as restricting entry into the relevant
geographic market or causing any person to leave the relevant
geographic market, resulting in anticompetitive effects that affect
the compensation paid to fee appraisers. For example, if only one
appraisal management company exists or is predominant in a
particular market area, that appraisal management company might not
qualify for the presumption of compliance if it entered into
exclusivity agreements with all creditors in the market or all fee
appraisers in the market, such that other appraisal management
companies had to leave or could not enter the market. Whether this
behavior would be considered an anticompetitive act that affects the
compensation paid to fee appraisers depends on all of the facts and
circumstances, including applicable law.
42(f)(3) Alternative presumption of compliance.
1. In general. A creditor and its agent are presumed to comply
with paragraph (f)(1) if the creditor or its agent determine the
compensation paid to a fee appraiser based on information about
customary and reasonable rates that satisfies the conditions in
paragraph (f)(3) for that information. Reliance on information
satisfying the conditions in paragraph (f)(3) is not a requirement
for compliance with paragraph (f)(1), but creates a presumption that
the creditor or its agent has complied. A person may rebut this
presumption with evidence that the rate of compensation paid to a
fee appraiser by the creditor or its agent is not customary and
reasonable based on facts or information other than third-party
information satisfying the conditions of this paragraph (f)(3). If a
creditor or its agent does not rely on information that meets the
conditions in paragraph (f)(3), the creditor's and its agent's
compliance with paragraph (f)(1) is determined based on all of the
facts and circumstances without a presumption of either compliance
or violation.
2. Geographic market. The meaning of ``geographic market'' for
purposes of
[[Page 66587]]
paragraph (f) is explained in comment (f)(1)-1.
3. Recent rates. Whether rates may reasonably be considered
``recent'' depends on the facts and circumstances. Generally,
``recent'' rates would include rates charged within one year of the
creditor's or its agent's reliance on this information to qualify
for the presumption of compliance under paragraph (f)(3).
42(f)(4) Definitions.
42(f)(4)(i) Fee appraiser.
1. Organization. The term ``organization'' in paragraph
42(d)(4)(i)(B) includes a corporation, partnership, proprietorship,
association, cooperative, or other business entity and does not
include a natural person.
42(g) Mandatory reporting.
42(g)(1) Reporting required.
1. Reasonable basis. A person reasonably believes that an
appraiser has materially failed to comply with the Uniform Standards
of Professional Appraisal Practice established by the Appraisal
Standards Board of the Appraisal Foundation (as defined in 12 U.S.C.
3350(9) (USPAP) or ethical or professional requirements for
appraisers under applicable state or federal statutes or regulations
if the person possesses knowledge or information that would lead a
reasonable person in the same circumstances to conclude that the
appraiser has materially failed to comply with USPAP or such
statutory or regulatory requirements.
2. Material failure to comply. For purposes of Sec.
226.42(g)(1), a material failure to comply is one that is likely to
affect the value assigned to the consumer's principal dwelling. The
following are examples of a material failure to comply with USPAP or
ethical or professional requirements:
i. Mischaracterizing the value of the consumer's principal
dwelling in violation of Sec. 226.42(c)(2)(i).
ii. Performing an assignment in a grossly negligent manner, in
violation of a rule under USPAP.
iii. Accepting an appraisal assignment on the condition that the
appraiser will report a value equal to or greater than the purchase
price for the consumer's principal dwelling, in violation of a rule
under USPAP.
3. Other matters. Section 226.42(g)(1) does not require
reporting of a matter that is not material under Sec. 226.42(g)(1),
for example:
i. An appraiser's disclosure of confidential information in
violation of applicable state law.
ii. An appraiser's failure to maintain errors and omissions
insurance in violation of applicable state law.
4. Examples of covered persons. ``Covered persons'' include
creditors, mortgage brokers, appraisers, appraisal management
companies, real estate agents, other persons that provide
``settlement services'' as defined under the Real Estate Settlement
Procedures Act and implementing regulations. See 12 U.S.C. 2602(3);
Sec. 226.42(b)(1).
5. Examples of persons not covered. The following persons are
not ``covered persons'' (unless, of course, they are creditors with
respect to a covered transaction or perform ``settlement services''
in connection with a covered transaction):
i. The consumer who obtains credit through a covered
transaction.
ii. A person secondarily liable for a covered transaction, such
as a guarantor.
iii. A person that resides in or will reside in the consumer's
principal dwelling but will not be liable on the covered
transaction, such as a non-obligor spouse.
6. Appraiser. For purposes of Sec. 226.42(g)(1), an
``appraiser'' is a natural person who provides opinions of the value
of dwellings and is required to be licensed or certified under the
laws of the state in which the consumer's principal dwelling is
located or otherwise is subject to the jurisdiction of the appraiser
certifying and licensing agency for that state. See 12 U.S.C.
3350(1).
By order of the Board of Governors of the Federal Reserve
System, October 18, 2010.
Jennifer J. Johnson,
Secretary of the Board.
[FR Doc. 2010-26671 Filed 10-27-10; 8:45 am]
BILLING CODE 6210-01-P