[Federal Register: June 7, 1994]

_______________________________________________________________________

Part II

Department of the Treasury
Office of the Comptroller of the Currency

12 CFR Part 34

Office of Thrift Supervision

12 CFR Parts 545, 563, and 564

Federal Reserve System

12 CFR Part 225

Federal Deposit Insurance Corporation

12 CFR Part 323

_______________________________________________________________________

Real Estate Appraisals; Rule
DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 34

[Docket No. 94-10]
RIN 1557-AB34

FEDERAL RESERVE SYSTEM

12 CFR Part 225

[Regulation Y; Docket No. R-0803]
RIN 7100-AB20

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 323

RIN 3064-ABO5

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Parts 545, 563, 564

[Docket No. 94-47]
RIN 1550-AA64

 
Real Estate Appraisals

AGENCIES: Office of the Comptroller of the Currency, Treasury; Board of 
Governors of the Federal Reserve System; Federal Deposit Insurance 
Corporation; and Office of Thrift Supervision, Treasury.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Office of the Comptroller of the Currency, the Board of 
Governors of the Federal Reserve System, the Federal Deposit Insurance 
Corporation, and the Office of Thrift Supervision (collectively the 
agencies) are amending their regulations regarding appraisals of real 
estate. This final rule is adopted pursuant to Title XI of the 
Financial Institutions Reform, Recovery, and Enforcement Act of 1989.
    The final rule increases to $250,000 the threshold at or below 
which appraisals are not required pursuant to Title XI, expands and 
clarifies existing exemptions to the Title XI appraisal requirement, 
identifies additional circumstances when appraisals are not required 
under Title XI, and specifies when exempt transactions nevertheless 
require appropriate evaluations. In addition, the final rule amends 
existing requirements governing appraisal content and the use of 
appraisals prepared by other financial services institutions.
    The agencies are adopting this final rule to further federal 
financial and public policy interests by reducing regulatory burden, 
while requiring Title XI appraisals when necessary to protect the 
safety and soundness of financial institutions or otherwise advance 
public policy.

EFFECTIVE DATE: This final rule is effective on June 7, 1994.

FOR FURTHER INFORMATION CONTACT:

Office of the Comptroller of the Currency (OCC)

Thomas E. Watson, National Bank Examiner, Office of the Chief National 
Bank Examiner, (202) 874-5170; or Horace G. Sneed, Senior Attorney, or 
Stephen Freeland, Attorney, (202) 874-4460, Bank Operations and Assets 
Division; Office of the Comptroller of the Currency, 250 E Street, SW, 
Washington, DC 20219.

Board of Governors of the Federal Reserve System (Board)

Roger T. Cole, Deputy Associate Director, (202) 452-2618, Rhoger H 
Pugh, Assistant Director, (202) 728-5883, Stanley B. Rediger, 
Supervisory Financial Analyst (202) 452-2629, or Virginia M. Gibbs, 
Supervisory Financial Analyst, (202) 452-2521, Division of Banking 
Supervision and Regulation; or Gregory A. Baer, Senior Attorney (202) 
452-3236, Legal Division; Board of Governors of the Federal Reserve 
System, 20th Street and Constitution Avenue, NW., Washington, DC 20551.

Federal Deposit Insurance Corporation (FDIC)

Robert F. Miailovich, Associate Director, (202) 898-6918, James D. 
Leitner, Examination Specialist, (202) 898-6790, Division of 
Supervision; or Walter P. Doyle, Counsel, (202) 898-3682, Legal 
Division; Federal Deposit Insurance Corporation, 550 17th Street NW., 
Washington, DC 20429.

Office of Thrift Supervision (OTS)

Robert Fishman, Senior Program Manager, Credit Risk, Supervision 
Policy, (202) 906-5672; Deirdre G. Kvartunas, Policy Analyst, 
Supervision Policy, (202) 906-7933; Ellen J. Sazzman, Counsel (Banking 
and Finance), Regulations and Legislation Division, Chief Counsel's 
Office, (202) 906-7133; Office of Thrift Supervision, 1700 G Street 
NW., Washington, DC 20552.

SUPPLEMENTARY INFORMATION:

I. Background

    Title XI of the Financial Institutions Reform, Recovery, and 
Enforcement Act of 1989 (FIRREA), 12 U.S.C. 3331 et seq., directs each 
Federal banking agency to publish appraisal regulations for federally 
related transactions within its jurisdiction. The purpose of the 
legislation is to protect federal financial and public policy interests 
in real estate related transactions by requiring that real estate 
appraisals utilized in connection with federally related transactions 
are performed in writing, in accordance with uniform standards, and by 
individuals whose competency has been demonstrated and whose 
professional conduct will be subject to effective supervision. See 12 
U.S.C. 3331.
    Section 1121(4) of FIRREA, 12 U.S.C. 3350(4), defines a federally 
related transaction as a real estate-related financial transaction that 
is regulated or engaged in by a federal financial institutions 
regulatory agency and requires the services of an appraiser. A real 
estate-related financial transaction is defined as any transaction that 
involves:
    (i) The sale, lease, purchase, investment in or exchange of real 
property, including interests in property, or the financing thereof;
    (ii) The refinancing of real property or interests in real 
property; and
    (iii) The use of real property or interests in real property as 
security for a loan or investment, including mortgage-backed 
securities. See 12 U.S.C. 3350(5) (FIRREA section 1121(5)).
    In their appraisal regulations, the agencies identify categories of 
real estate-related financial transactions that do not require the 
services of an appraiser in order to protect federal financial and 
public policy interests or to satisfy principles of safe and sound 
banking. These real estate-related financial transactions are not 
federally related transactions under the statutory and regulatory 
definitions. Accordingly, they are subject to neither Title XI of 
FIRREA nor those provisions of the agencies' regulations governing 
appraisals.
    In December 1992, Congress confirmed that the agencies may set a 
threshold level below which the services of state certified or licensed 
appraisers are not required in connection with federally related 
transactions if the agencies determine in writing that the threshold 
does not represent a threat to the safety and soundness of financial 
institutions. See Housing and Community Development Act of 1992, Public 
Law 102-550, section 954 (amending 12 U.S.C. 3341).
    The agencies jointly published a proposed rule to amend their 
appraisal regulations on June 4, 1993. See 58 FR 31878. The agencies 
published a notice of the availability of supplemental information 
concerning the proposed rule and invited further comments on November 
10, 1993. See 58 FR 59688.
    The agencies are issuing this joint final rule under their 
authority to issue rules to implement Title XI of FIRREA and each 
agency's authority to prescribe rules and regulations to carry out its 
responsibility to ensure that the institutions under its supervision 
conduct their activities in accordance with safe and sound banking 
principles. This final rule is intended to protect federal financial 
and public policy interests and the safety and soundness of financial 
institutions, while reducing duplication, costs and regulatory burden.

II. Comments on the Proposed Rule

A. Overview of Comments

    Collectively, the agencies received over 19,000 comment letters on 
the proposed rule. In response to the June 4th Notice of Proposed 
Rulemaking, the agencies received comment letters from appraisers, 
bankers, and others as shown in Table A. Comment letters received in 
response to the November 10th Notice of Supplemental Information were 
distributed as shown in Table B. 

             Table A.--Distribution of Comments Received in Response to June 4, 1993 Proposed Rule              
----------------------------------------------------------------------------------------------------------------
                                                 Letters                                                        
                    Agency                         from        Letters from bankers       Letters       Total   
                                                appraisers                              from others             
----------------------------------------------------------------------------------------------------------------
OCC..........................................         1660  161.......................          168         1989
Board........................................         1608  259.......................          276         2143
FDIC.........................................         1574  376.......................          149         2099
OTS..........................................         1298  40 (14 thrifts)...........          134         1472
----------------------------------------------------------------------------------------------------------------

Table B.--Distribution of Comments Received in Response to November 10, 1993 Notice of Supplemental Information 
----------------------------------------------------------------------------------------------------------------
                                                 Letters                                                        
                    Agency                         from        Letters from bankers       Letters       Total   
                                                appraisers                              from others             
----------------------------------------------------------------------------------------------------------------
OCC..........................................         1878  659.......................          242         2779
Board........................................         1994  519.......................          528         3041
FDIC.........................................         1818  1142......................          467         3427
OTS..........................................         1644  57 (22 thrifts)...........          502        2203 
----------------------------------------------------------------------------------------------------------------

    The agencies have reviewed and considered all comments concerning 
the proposed rule. The agencies discuss general comments immediately 
below. Responses to the agencies' specific requests for comment and 
comments concerning specific amendments to the appraisal regulation are 
discussed in the section-by-section analysis.

B. General Comments on the Proposed Rule

    Regulated institutions generally endorsed the proposed changes to 
the appraisal regulations, though a small number of savings 
associations, banks, and other commenters opposed changing the 
regulation. Appraisers almost unanimously opposed changing the 
threshold, and a large number of appraisers opposed the business loan 
exemption. However, appraisers commented favorably on other parts of 
the proposed rule.
    A large number of appraisers commented that the proposed changes 
would lead to abuses that caused savings associations to fail in the 
mid-to-late 1980s and that the changes would violate the intent of 
Congress. In the experience of the agencies, and in the opinion of 
studies conducted on the failures of the 1980s, abuses were related to 
real estate acquisition or development projects and larger loans. The 
regulations issued today continue to require appraisals for these 
transactions. Moreover, the regulations fully comply with the intent of 
Congress by continuing to protect federal financial and public policy 
interests in real estate-related financial transactions as well as the 
safety and soundness of financial institutions.
    Regulated institutions and appraisers have over three years 
experience with the appraisal regulations and have urged changes in the 
regulations to improve credit availability and reduce duplication, 
costs, and regulatory burden. Some commenters, focusing on the proposed 
threshold, opposed changing the regulations because they believed that 
additional time was needed to study the effect of the existing 
regulations. Delaying the issuance of the final rule would deny 
regulated institutions, appraisers, and borrowers the benefits of these 
changes. To the extent that subsequent events demonstrate that 
additional changes are needed, the agencies can further amend the 
regulations.
    One appraisal organization suggested that several of the proposed 
exemptions should be replaced with guidelines regarding when to obtain 
Title XI appraisals. Because regulated institutions and appraisers can 
become liable for substantial penalties for violating the regulation, 
the agencies believe that it benefits regulated institutions, 
appraisers, and the public for the agencies to identify categories of 
exempt transactions in the regulation. However, the agencies intend to 
provide supplemental information about the appraisal and evaluation 
practices of regulated institutions in guidance.
    Some commenters stated that they were denied an opportunity to 
comment on the supplemental information identified in the November 10th 
notice because the materials were available only in Washington, DC, and 
the comment period was 30 days. The agencies believe that the public 
procedures on the proposed amendments to the appraisal regulations 
fully complied with the requirements of the Administrative Procedure 
Act and accorded the public a full opportunity to participate in the 
rulemaking.
    The November 10th notice explained that the supplemental materials 
were available from each of the agencies. In accordance with 
established procedures, all agencies mailed copies of those materials 
to any person requesting them, as well as having the documents 
available for review at each agency.
    The agencies also believe the 30-day comment period was appropriate 
for the second comment period on the proposed amendments. The notice of 
supplemental information requested comment on materials that dealt 
almost exclusively with the appraisal threshold. As shown in Table B 
above, more than 11,000 comment letters were received in response to 
the November 10th notice.

III. Section-by-Section Analysis

Sec. ____.2  Definitions.

(d) Business Loan
    The agencies are adopting the proposed definition of ``business 
loan'' as a loan or extension of credit to any corporation, general or 
limited partnership, business trust, joint venture, pool, syndicate, 
sole proprietorship (including an individual engaged in farming), or 
other business entity. The definition is used in connection with the 
exemption for business loans of $1 million or less that are not 
dependent on the sale of, or rental income derived from, real estate as 
the primary source of repayment.
    Commenters suggested that the agencies amend the definition of 
business loan to include loans to individuals for business purposes and 
to permit use of the exemption when individuals lease real estate to a 
related business. Loans to individuals are included in the definition 
of business loan as loans to sole proprietorships and other business 
entities. This exemption does not apply to loans to individuals that 
are consumer or personal loans. Therefore, the agencies do not believe 
that it is necessary to amend the definition.
(h) Real Estate or Real Property
    The Board is adding a definition of ``real estate'' and ``real 
property'' to Sec. 225.62 of its regulation. The Board proposed this 
amendment to incorporate the definition of real estate and real 
property employed by the other agencies. That definition specifically 
excludes mineral rights, timber rights, growing crops, water rights, 
and similar interests.
    Title XI of FIRREA does not define ``real estate'' or ``real 
property'' nor does the context in which these terms are used suggest 
that the terms are intended to have different technical meanings. See 
55 FR 27762 (July 5, 1990).
    The Board used ``real property'' and ``real estate'' 
interchangeably throughout its appraisal rule to mean interests in an 
identified parcel or tract of land and improvements. However, the Board 
did not intend these terms to include mineral rights, timber rights, or 
growing crops when they are considered separately from the parcel or 
tract of land. Valuation of such interests generally requires the 
services of a professional other than a real estate appraiser.
    To clarify this distinction, the Board has amended its regulation 
to define ``real property'' and ``real estate'' for purposes of the 
appraisal regulation as an identified parcel or tract of land, 
including improvements, easements, rights of way, undivided or future 
interests and similar rights in a tract of land, but excluding mineral 
rights, timber rights, or growing crops.
    Few commenters expressed an opinion on this proposed change. Those 
few commenters who opposed the definition stated that timber and 
growing crops should not be excluded from the definition of real estate 
in that the value of such items is tied to the value of the land. 
Comments opposing this definition were generally from appraisers who 
perform farm and timber appraisals.
    In many states, minerals, timber, and growing crops that have not 
been severed from the land are considered interests in real estate or 
real property. Consequently, if mineral rights are collateral for a 
loan in one of those states, a question arises whether the institution 
must obtain a real estate appraisal of the parcel or tract of land to 
which the mineral rights are attached but in which the institution has 
no interest.
    The Board's final rule clarifies that regulated institutions are 
not required to obtain appraisals of the parcel of land to which 
mineral rights, or similar severable interests in real estate are 
attached, if the transaction only involves the severable interest 
rather than the parcel or tract of land. Where mineral rights, timber 
rights, or growing crops, and the associated parcel or tract of land, 
are the subject of a real estate-related financial transaction, the 
services of a licensed or certified appraiser would be required unless 
the transaction is otherwise exempt.
    In addition, the contribution of relevant mineral rights, timber 
rights, or growing crops should be included when appraising a parcel of 
land which possesses any of these features. However, valuation of these 
interests would not be required if they are not part of the transaction 
or if they are not relevant to the analyses which the appraiser needs 
to perform to arrive at an estimate of value for the parcel or tract of 
land.

Sec. ____.3(a)  Appraisals required

(1) Threshold
    The agencies proposed an increase from $100,000 to $250,000 in the 
threshold at or below which a Title XI appraisal is not required, and 
specifically asked commenters whether a $250,000 or some other 
threshold would be appropriate. In addition, the agencies requested 
information on loss experience of depository institutions for loans 
greater than $250,000 and loans of $250,000 or less. On November 10, 
1993, the agencies made available supplemental information on the 
proposed rule and extended the comment period for 30 days in order to 
allow commenters to consider and comment on the information. The 
supplemental information related primarily to the proposed increase in 
the threshold.
    A majority of the commenters addressed the threshold issue. Almost 
all of the commenters opposed to the increase were appraisers, while 
almost all of the commenters in favor of the increase were depository 
institutions.
    Most of those opposed stated as the basis for their opposition that 
an increase in the threshold would cause substantial losses for 
depository institutions, and thereby for the deposit insurance funds. 
To support this view, commenters generally cited the thrift failures of 
the 1980s and asserted that an increase in the threshold would lead to 
the same result.
    A total of 74 comment letters provided data on loss experience. The 
institutions providing the data varied in size, and included large 
regional multi-bank holding companies, as well as small banks. This 
data is discussed below.
    For the reasons set forth below, the agencies have decided to raise 
the threshold from $100,000 to $250,000. Such an increase will benefit 
consumers and lenders and will not threaten the safety and soundness of 
financial institutions, particularly as an evaluation will be required 
for all loans exempt under the threshold.
    Benefits for Consumers and Lenders of an Increase in the Threshold. 
Many commenters stated that an increase in the threshold would benefit 
consumers and lenders. Numerous bank and thrift commenters pointed to 
the cost and time needed in order to obtain an appraisal as an 
impediment to lending. The appraisal was cited by several commenters as 
the most important factor causing delay in small business lending, and 
the cost of the appraisal was described as high, especially for 
commercial borrowers. Commenters reported that appraisal fees for 
commercial transactions between $100,000 and $250,000 could cost 5 
percent of the loan amount to the borrower. Banks and thrifts also 
commented that increasing the threshold would reduce regulatory burden 
associated with making loans below $250,000. Many appraisers, however, 
commented that appraisal costs have remained relatively steady.
    Many appraisers also stated that appraisals by certified or 
licensed appraisers are necessary to protect the consumer. The agencies 
believe that this assertion mischaracterizes the role of the 
institution's determination of collateral value in a typical consumer 
transaction. The regulated institution obtains the appraisal or 
evaluation as part of its loan underwriting process in order to make 
certain that it is adequately secured. Any appraisal ordered by a 
financial institution is not designed, and generally comes too late, to 
assist the consumer in negotiating a contract price. In a purchase of 
real estate, the purchase offer is generally made before financing is 
sought and the financial institution orders an appraisal. Therefore, 
the appraisal represents an after-the-fact cost. Further, even when a 
Title XI appraisal is not required, nothing prevents a consumer from 
independently obtaining an appraisal by a licensed or certified 
appraiser for the consumer's own use in the negotiating process. 
Moreover, the agencies' rules require an institution to obtain an 
appropriate evaluation of the real property collateral for transactions 
below the threshold, and that evaluation would be available to the 
consumer.
    The agencies believe that many of the concerns about consumer 
protection are addressed under statutory and regulatory programs other 
than Title XI of FIRREA, which focuses on bank and thrift safety and 
soundness.
    The Real Estate Settlement Procedures Act (RESPA) establishes 
procedures for lenders to disclose to consumers the charges for a 
variety of settlement services, including appraisals and evaluations. 
To comply with the letter and intent of the Board's Regulation B 
(implementing the Equal Credit Opportunity Act), regulated institutions 
must either disclose to the borrower the right to receive a copy of the 
documents the lender uses to value the collateral in an application for 
a loan secured by a dwelling, regardless of whether the documents 
constitute a Title XI appraisal or evaluation, or, as a matter of 
course provide the borrower with the appraisal or evaluation. Thus, to 
the extent that a borrower benefits from knowing the value the lender 
places on the property the borrower has contracted to purchase or 
pledged as collateral, the borrower should be able to benefit from that 
knowledge whether it is in the form of a Title XI appraisal or an 
evaluation.
    Furthermore, although such a disclosure is not required by RESPA, 
Regulation B, or Title XI, the agencies believe that a regulated 
institution should advise consumers whether the institution intends to 
have a licensed or certified appraiser prepare the estimate of value. 
This should be done early enough in the loan application process to 
allow the consumer to make an informed decision that the intended 
method of estimating the real estate's value meets his or her needs.
    Effects on Safety and Soundness of Financial Institutions. The 
agencies have concluded that a $250,000 threshold would not threaten 
the safety and soundness of financial institutions.
    Benefits to Safety and Soundness. The agencies believe that the 
increase in the threshold will have affirmative benefits for safety and 
soundness. A decrease in appraisal requirements should relieve 
regulatory burden for banks and thrifts and thereby improve their 
competitiveness with non-regulated lenders. Appraisal costs represent a 
significant expense for certain small loans, making such lending less 
attractive to a potential borrower or less profitable for the lender. 
Numerous comments from lenders supported this conclusion. The problem 
is particularly troubling for lenders in small towns, who must pay a 
premium for a licensed or certified appraiser to visit the town. A GAO 
survey of bankers in connection with a study of small business lending 
revealed that the minimum cost to perform the necessary appraisal on 
commercial real estate property used as collateral for small business 
loans was approximately $3,000.<SUP>1 See GAO Report GGD-93-121, Bank 
Regulation: Regulatory Impediments to Small Business Lending Should Be 
Removed (September 1993).
---------------------------------------------------------------------------

    \1\The GAO noted that a survey performed by the American Bankers 
Association reflected a lower average cost.
---------------------------------------------------------------------------

    Experience with the $100,000 Threshold. The Board has had a 
$100,000 threshold in place since August 1990, and the other agencies 
have had a $100,000 threshold since March or April 1992. The experience 
of the agencies has demonstrated that the $100,000 threshold has posed 
no risk to safety and soundness.
    A survey by each of the agencies of its senior examination staff 
indicates that over a period of many years, with a few possible 
exceptions,<SUP>2 no bank or thrift has failed or suffered significant 
losses as a result of appraisal problems with loans under $100,000 or 
even up to $250,000. Each of the regional representatives of the Board, 
the FDIC, and the OCC supported adoption of the $250,000 threshold as 
consistent with safety and soundness. Representatives of the OTS 
suggested that the threshold should only apply to healthier thrifts. As 
described below, this concern has been addressed by the agencies in the 
final regulation.
---------------------------------------------------------------------------

    \2\The Central Region of the OTS was the only OTS respondent to 
identify failures attributable to inadequate appraisal practices. 
The Central Region identified fewer than six failures over the 
previous twelve years where appraisal issues for loans under 
$250,000 were a major contributing factor to a thrift's failure. The 
Central Region noted that in those failures where inadequate 
appraisal practices were a problem, other areas of loan underwriting 
were usually found to be equally deficient.
    One OCC survey respondent reported that one institution had 
failed because of residential and commercial loans between $100,000 
and $500,000. The respondent noted that the problems occurred before 
1987, when the OCC issued guidelines that would have prevented the 
institution's real estate valuation problems.
---------------------------------------------------------------------------

    The $250,000 threshold was also supported by the Conference of 
State Bank Supervisors (CSBS), the professional association for state 
officials who supervise and regulate state-chartered commercial and 
savings banks. The CSBS concluded that the increased threshold would 
reduce unnecessary costs and would not represent a threat to the safety 
and soundness of financial institutions.
    Numerous bank and thrift commenters also reported that their 
experience with the $100,000 threshold had been good. Moreover, 
commenters opposed to the increased threshold did not identify 
institutions that had failed or suffered significant losses because of 
the existence of the $100,000 threshold.
    The agencies believe that low loss experience with a $100,000 
threshold provides justification for an increase in the threshold to 
$250,000.
    Data Indicate Similarities Between the $100,000 Threshold and 
$250,000 Threshold. A substantial body of evidence provides strong 
reasons to believe that exempting loans between $100,000 and $250,000 
from the Title XI appraisal requirement will not present materially 
greater risk than the prior exemption for loans under $100,000.
    Data from the commercial bank Consolidated Reports of Condition and 
Income (Call Reports) for year-end 1992 show that approximately 53 
percent of the dollar volume of all real estate-secured loans of all 
sizes in the commercial banking industry are loans secured by 1-to-4 
family residential properties. Data from the Thrift Financial Reports 
(TFR) for year-end 1992 show that the number is 77 percent in the 
thrift industry.
    Data on loan size are not reported for residential loans on the 
Call Report or TFR. However, information from the National Association 
of Realtors, the Census Bureau, and the Department of Housing and Urban 
Development (HUD) indicate that approximately 29 percent of the dollar 
volume of 1-to-4 family real estate loans to purchase new homes, and 33 
percent of the dollar volume of loans to finance the purchase of 
existing homes, fell below the prior $100,000 threshold. Approximately 
56 percent of the dollar volume for new 1-to-4 family homes and 49 
percent of the dollar volume for existing homes fell between $100,000 
and $250,000. In sum, 85 percent of the dollar volume of mortgages 
financing new homes and 82 percent of the volume of mortgages financing 
purchases of existing homes will fall below the $250,000 threshold.
    Thus, increasing the threshold from $100,000 to $250,000 is likely 
to more than double the amount of lending for 1-to-4 family residential 
real estate loans exempt from the Title XI appraisal requirement. 
Inasmuch as a solid majority of total real estate lending is composed 
of 1-to-4 family loans, the agencies believe that 1-to-4 family loans 
will be the largest block of loans exempted by the increase in the 
threshold.
    The increase in 1-to-4 family residential real estate loans 
exempted by the $250,000 threshold will not affect safety and 
soundness, as these loans are traditionally the safest in a lending 
institution's portfolio. In 1992, the net loan charge-off rate<SUP>3 
for all commercial bank loans secured by 1-to-4 family real estate was 
0.23 percent; for thrifts, the net charge-off rate for loans secured by 
1-to-4 family residential real estate was 0.22 percent. Low loss rates 
for 1-to-4 family residential real estate loans predate enactment of 
Title XI; for example, in 1991, when the great majority of 1-to-4 
family loans had been originated prior to implementation of Title XI in 
August 1990, the charge-off rate for 1-to-4 family loans was 0.20 
percent for commercial banks and 0.11 percent for thrifts. See FDIC 
Quarterly Banking Profile (4th Quarter 1991) and Thrift Financial 
Reports (1991).
---------------------------------------------------------------------------

    \3\ The net loan charge-off rate is determined by taking the 
dollar amount of gross losses, subtracting the amount recovered, and 
dividing the result by the average of outstanding loans.
---------------------------------------------------------------------------

    Beginning June 30, 1993, commercial banks and thrifts are required 
to report annually the number and dollar amount of non-farm non-
residential real estate loans, which basically constitute business 
loans secured by real estate. They are also required to report the 
number and dollar amount of all agricultural loans.
    The data from the June 1993 Call Reports show that 12 percent of 
the dollar volume of real estate-secured business loans was below the 
$100,000 threshold. Also by dollar volume, only 11 percent of 
outstanding real estate-secured business loans fell between $100,000 
and $250,000. For thrifts, the TFRs show that 10 percent of the dollar 
volume of all real-estate secured business loans was below $100,000, 
and 9 percent between $100,000 and $250,000.
    These findings are consistent with data compiled in the 1989 
National Survey of Small Business Finances, which surveyed firms with 
fewer than 500 employees. See National Survey of Small Business 
Finances (1989) (cosponsored by the Federal Reserve Board and Small 
Business Administration). According to that survey, of the commercial 
mortgages to small businesses by depository institutions, 6 percent of 
the dollar volume of these loans was in loans of less than $100,000, 
and 12 percent was in loans between $100,000 and $250,000.
    As noted in the regional examiner surveys, the $100,000 threshold 
has not resulted in significant losses, even though that threshold 
captures 12 percent of the dollar volume of small business loans. The 
agencies do not believe that an increase in the threshold that exempts 
another 11 percent of business loans will significantly increase such 
losses.
    Call Report data also show that 63 percent of the dollar volume of 
agricultural real estate loans fell below the $100,000 threshold, and 
that 15 percent fell between $100,000 and $250,000. For thrifts, TFR 
data show that 46 percent of farm loans fell below $100,000, and 36 
percent between $100,000 and $250,000. Farm loans represented 
approximately one-half of one percent (.58%) of non-residential 
mortgages held by thrifts. Thus, in the area of farm loans, only a 
relatively small amount of additional loans will be exempted by the 
raised threshold.
    Although the increase in the threshold will increase the dollar 
volume of exempt transactions, the agencies believe that the quality of 
loans and lending practices of banks and thrifts will not change for 
these transactions. Moreover, an institution must obtain evaluations 
for these exempt transactions when it does not obtain appraisals.
    In addition, there is evidence that the loss rates on loans below 
the $250,000 threshold will be low. For 1992, the commercial bank loss 
rate for farm loans was .23 percent (approximately the same loss rate 
as for 1-to-4 family loans). These loss rates on residential and farm 
loans are significantly lower than the loss rates for the types of real 
estate loans that are much less likely to fall below the $250,000 
threshold--construction loans (3.54% loss rate for commercial banks) 
and multifamily loans (1.68% loss rate for commercial banks). Loss 
rates for non-farm non-residential real estate loans at commercial 
banks were 1.55 percent, higher than residential or farm loans, but 
still below the loss rates experienced for loans for construction or 
multifamily housing.
    Finally, in addition to the relatively lower risk of the portfolio 
of real estate related loans between $100,000 and $250,000, the fact 
remains that the dollar amount of each credit is relatively small. In 
the experience of the agencies, banks and thrifts generally do not fail 
because of real estate-related financial transactions under $250,000. 
It is generally large construction and development loans that have 
created safety and soundness problems. For example, much of the thrift 
losses of the 1980s were caused by losses in large, speculative real 
estate development projects, such as construction of offices, 
condominiums, and apartments. See, e.g., GAO Report AFMD 89-62, Thrift 
Failures: Costly Failures Resulted from Regulatory Violations and 
Unsafe Practices. Such projects generally involve loans in much greater 
amounts than $250,000. The experience of the agencies continues to be 
that larger development and construction loans are most likely to cause 
significant losses.
    Although many commenters suggested that raising the threshold would 
result in losses similar to those of the thrift failures of the 1980s, 
they did not offer analysis to support those statements. The agencies 
do not believe that inadequate appraisals on loans under $250,000 were 
a significant cause of those failures.
    Additional Protections. Significant protections exist so that loans 
under $250,000 will not create a safety and soundness problem once the 
$250,000 threshold is in place.
    First, each agency will, during each required full-scope, on-site 
examination, analyze the prudence of each institution's credit 
underwriting practices, including appraisal and evaluation practices, 
as appropriate to the institution's size and nature of its real estate-
related activities. If an institution is doing a poor job of evaluating 
real estate for transactions under $250,000, then the appropriate 
agency may order the institution to obtain appraisals for certain loans 
or for all loans above a certain amount that are not subject to another 
exemption.<SUP>4
---------------------------------------------------------------------------

    \4\As noted below, the agencies may require an appraisal for 
loans between $100,000 and $250,000 (not otherwise subject to an 
exemption) when an institution is in troubled condition, and that 
troubled condition is attributable to underwriting problems in the 
institution's real estate loan portfolio.
---------------------------------------------------------------------------

    Second, even though a bank or thrift will not generally be required 
to obtain a Title XI appraisal for real estate-secured loans under 
$250,000, the institution must determine the value of the real estate 
before making the loan. Under the appraisal regulations, banks and 
thrifts must support any transaction below the threshold with an 
evaluation that is consistent with the agencies' guidelines. 
Evaluations will be performed by persons who are capable of rendering 
an appropriate estimate of value of real estate as a result of their 
real estate-related experience or training.
    As several commenters noted, a $250,000 threshold will have its 
greatest effect in smaller communities where property values are lower. 
However, as many community bank commenters pointed out, local lenders 
in small communities tend to be extremely knowledgeable of property 
values. Also, collateral for loans of this size do not typically 
represent complex problems of analysis or valuation.
    Third, a $250,000 threshold does not prevent the use of appraisals 
when needed. Banks and thrifts may obtain appraisals prepared by 
licensed or certified appraisers whenever the institutions believe it 
is prudent, and customer may independently obtain such appraisals. If, 
as some commenters contend, history demonstrates that such appraisals 
are important to the decision to lend and the failure to obtain such an 
appraisal will lead to higher loss rates, then banks and thrifts would 
presumably have a strong incentive to use appraisals. As several 
commenters noted, institutions will obtain appraisals when their 
underwriting criteria warrant one, regardless of whether regulations 
require it.
    Fourth, in many cases involving residential real estate, banks and 
thrifts will be required to obtain the equivalent of a Title XI 
appraisal in order to make the loan eligible for sale in the secondary 
market. According to HUD data, in 1992, secondary mortgage market 
purchasers, such as the Federal National Mortgage Association (Fannie 
Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), 
purchased approximately 63 percent of all 1-to-4 family mortgages 
originated in the United States. In addition to the 63 percent that 
were purchased by major secondary mortgage market entities, other loans 
were originated so as to be eligible for sale to such entities. The 
agencies have concluded that the appraisal requirements of these 
government sponsored agencies should protect federal financial and 
public policy interests in the loans that are eligible to be purchased 
by them. The agencies also believe that compliance with these appraisal 
requirements will protect the safety and soundness of regulated 
financial institutions.
    Data Submitted by Commenters. The notice of proposed rulemaking 
asked commenters to submit loan loss data for different categories of 
real estate-secured loans above and below $250,000. Many depository 
institution commenters noted that they do not maintain loss data by 
loan size and that this information is not reasonably accessible. Only 
a small number of depository institutions submitted such data. The 
agencies do not believe that this response is sufficiently large to 
base any conclusions about industry-wide conditions. Nonetheless, the 
agencies note that the information provided by commenters is consistent 
with the low loss rates for real estate lending indicated by other 
sources. The responses that the agencies received are summarized in the 
following table.

----------------------------------------------------------------------------------------------------------------
                                                                                         Loss on                
                                                                         Outstanding    loans\1\                
                                                            Number of     principal    (annual net  Loss rate\3\
  Real estate-secured loans          Size of loans            loans       amount of      charge-    (calculated)
                                                                        loans\1\(12/  offs)\2\(12/    (percent) 
                                                                           31/92)        31/92)                 
----------------------------------------------------------------------------------------------------------------
Loans secured by 1-to-4       Loans greater than $250,000        7,151     3,169,918         4,129          0.13
 family residential real                                                                                        
 estate.                                                                                                        
                              Loans of $250,000 or less..      524,137    22,240,821        23,773           .11
Loans secured by commercial   Loans greater than $250,000       25,344    28,315,961       372,706          1.32
 real estate.                                                                                                   
                              Loans of $250,000 or less..       67,469     5,131,866        36,751          0.72
----------------------------------------------------------------------------------------------------------------
\1\Dollars rounded to thousands.                                                                                
\2\Annual net charge-offs are determined by taking the dollar amount of gross losses and subtracting the amount 
  recovered.                                                                                                    
\3\The agencies have calculated the loss rate for each of the categories of real estate-secured loans about     
  which the agencies requested data by dividing total annual net charge-offs by the total outstanding principal 
  balance.                                                                                                      

    Additional Comments on the $250,000 Threshold--OMB Study. Several 
commenters opposing an increase in the threshold pointed to an August 
1992 study by the Office of Management and Budget (OMB) entitled Report 
to Congress: De Minimis Levels for Commercial Real Estate Appraisals. 
The OMB study did not oppose an increase in the threshold level but 
instead stated, ``OMB does not recommend--at this time--a de minimis 
level higher than $100,000. . . .'' OMB study at i.
    The agencies believe that the major concerns identified by the OMB 
in urging delay have been addressed with the passage of time. Most 
importantly, each of the agencies now has an additional year's 
experience with the $100,000 threshold. Furthermore, OMB noted that 
FIRREA's appraisal requirements had not been implemented in all states, 
but such implementation has now occurred.
    Rulemaking Process. Several commenters stated that the agencies had 
failed to justify increasing the threshold from $100,000 to $250,000 
because the agencies had not produced a definitive study showing that 
doing so would not increase loss rates.
    Congress granted the agencies explicit authority to establish a 
threshold consistent with safety and soundness. The delegation of 
authority was broad, and no requirement for quantitative analysis was 
included. Nor is it reasonably feasible for the agencies to conduct a 
definitive quantitative analysis that isolates the effect of obtaining 
Title XI appraisals on institutions' losses on real estate-secured 
loans given the many variables, including changing market conditions 
and varying loan underwriting practices, that may affect institutions' 
ultimate loss experience. For the same reason, the agencies did not 
conduct a random sampling of the experience of financial institutions, 
as suggested by one commenter. This does not mean, however, that the 
final rule fails to rely on objective data. Moreover, that data was 
analyzed in light of the agencies' experience and expertise.
    As part of this rulemaking, the agencies reviewed the data the 
agencies currently collect from financial institutions and sought out 
data that would enable the agencies to analyze the effect of the 
threshold on regulated institutions. Consistent with statutory 
requirements, the agencies have carefully considered the effect of 
raising the threshold and determined that a $250,000 threshold level 
does not represent a threat to the safety and soundness of financial 
institutions based on the agencies' judgment, expertise, and 
experience. In making this determination, the agencies have, as 
described above, analyzed the available data, the comments received 
during the rulemaking, and relevant work of other governmental 
agencies.
    Appraiser Employment. Many commenters from the appraisal industry 
objected to the proposed increase in the threshold on the grounds that 
it would decrease their business and employment in the appraisal 
industry.
    In the event that an appraisal is not required because the 
transaction falls below $250,000, the appraisal regulation nonetheless 
requires that an evaluation of the property be conducted. The agencies' 
appraisal rules do not impede licensed and certified appraisers from 
performing these evaluations.
    GAO Study. Several commenters suggested that the agencies delay 
action on any rulemaking pending completion of General Accounting 
Office (GAO) studies of the threshold scheduled for completion in April 
1994 and October 1995. Congress delegated authority to the agencies to 
establish a threshold in the same legislation that directed the GAO to 
conduct two studies of the appraisal threshold. Congress clearly did 
not require the agencies to withhold action on the threshold pending 
completion of the GAO studies; nor did it make agency action contingent 
on the outcome of the GAO studies or any other studies. Also, in the 
Interagency Policy Statement on Credit Availability issued March 10, 
1993, the agencies identified a need to reexamine their existing 
appraisal rules to make certain that thresholds below which formal 
appraisals are not needed are reasonable. Therefore, the agencies 
believe that it is appropriate to proceed with the rulemaking. The 
agencies are cooperating with the GAO by providing information that it 
may use in preparing its studies.
    Private Mortgage Insurance Industry Experience. A trade association 
representing the private mortgage insurance industry opposed increasing 
the threshold level to $250,000, citing substantial losses on loans 
under $100,000. However, it also noted that for loans originated in 
1984, loans above $250,000 had a relative claim rate more than 50 
percent higher than the claim rate for loans originated under $100,000. 
Information provided by this commenter also showed that the relative 
claim rates on loans below $100,000 and loans between $100,000 and 
$250,000 were close for most years, while the relative claim rate for 
loans above $250,000 exceeded the claim rates for loans below $250,000 
in all years except one. The commenter did not provide actual claim 
rates nor dollar amounts of claims. Nor did the commenter disclose the 
average loan-to-value ratios for those mortgages, a factor that could 
affect the loss experience.
    Although the trade association stated its belief that a significant 
amount of the claims experienced by its members were related to 
inadequate appraisals, bank and thrift commenters stated that losses on 
foreclosed properties were more directly related to deterioration in 
the local real estate market, damage to the property, or actions or 
inaction by the borrower.
    Application of $100,000 Threshold to Certain Troubled Institutions. 
As described in more detail below, the agencies are adopting 
substantially as proposed a separate amendment stating that each agency 
continues to reserve the right to require a regulated institution to 
obtain a Title XI appraisal whenever the agency believes that an 
appraisal is necessary to address safety and soundness concerns. This 
authority may involve the agency requiring an institution to obtain an 
appraisal for a particular extension of credit or an entire group of 
credits.
    Whether an institution will be required, pursuant to this provision 
or existing safety and soundness authority, to obtain an individual 
appraisal or group of appraisals may depend on the condition of that 
institution. If an institution's troubled condition is attributable to 
real estate loan underwriting problems, then the appropriate agency may 
require appraisals for all new real estate-related transactions of more 
than $100,000 that are not subject to an exemption.
    Since thrift industry assets are concentrated in real estate loans, 
OTS believes that problem thrifts or thrifts in troubled 
condition<SUP>5 generally will have real estate-related asset quality 
problems. As a matter of policy, OTS intends to require thrifts in 
troubled condition to adhere to a $100,000 threshold.
---------------------------------------------------------------------------

    \5\A ``problem'' association is defined as an association that: 
(1) Has a composite MACRO rating of 4 or 5; (2) is undercapitalized 
under prompt corrective action standards; (3) is subject to a 
capital directive or a cease and desist order, a consent order, or a 
formal written agreement, relating to the safety and soundness or 
financial viability of the savings association, unless otherwise 
informed in writing by the OTS; or (4) has been notified in writing 
by the OTS that is has been designated a problem association or an 
association in troubled condition. (See Regulatory Bulletin 27a, 
Executive Compensation.)
---------------------------------------------------------------------------

    Reassessment of Threshold. Finally, just as the agencies have 
reviewed their experience with the $100,000 threshold in determining 
whether a higher (or lower) threshold was appropriate, so too will the 
agencies review their experience with the $250,000 threshold. If the 
agencies should determine that the increased threshold is causing 
safety and soundness problems, then the agencies will reassess that 
threshold.
(2) The ``Abundance of Caution'' Exemption
    The agencies are amending their regulations to clarify and expand 
the scope of the exemption for real estate liens taken in an 
``abundance of caution.'' Under the amended rule, regulated 
institutions will be able to apply the abundance of caution exemption 
to a broader range of transactions in which real estate is taken as 
additional collateral for an extension of credit that is well supported 
by income or other collateral of the borrower.
    Prior to adoption of this amendment, the abundance of caution 
exemption was available only for transactions in which a lien on real 
estate had been taken as collateral solely through an abundance of 
caution and where the terms of the transaction as a consequence had not 
been made more favorable than they would have been in the absence of a 
lien. In the agencies' experience, however, this standard was being 
interpreted too narrowly. As a result, regulated institutions obtained 
appraisals even though they were unnecessary to protect federal 
financial and public policy interests in the transaction or bank and 
thrift safety and soundness. Further, a transaction would not qualify 
for the exemption if the regulated institution made the terms more 
favorable to the borrower because of the real estate collateral. 
Therefore, bankers believed they were unable to use this exemption when 
common business practices would call for a lower interest rate on a 
secured loan than an unsecured loan.
    To qualify for the amended exemption, the regulated institution's 
decision to enter into the transaction must be well supported by the 
borrower's income or collateral other than real estate. The following 
examples from the proposed rule help to explain how this standard is 
applied.

    Example 1: A business with an established cash flow seeks a loan 
from a regulated institution to purchase an adjacent property for 
expansion. As a common business practice, the institution takes a 
lien against real estate whenever available for greater comfort. 
However, the institution's analysis determines that the current 
income from the business and personal property available as 
collateral support the decision to extend credit without knowing the 
real estate's market value. During loan negotiations, the 
institution offers to make the loan on slightly better terms for the 
borrower if it receives a lien on real estate. The borrower accepts 
the offer and provides the real estate as additional collateral.
    The regulated institution may reasonably conclude that the lien 
on the real estate was taken in an abundance of caution because the 
current income from the business and personal property taken as 
collateral support the decision to extend credit. Therefore, no 
appraisal would be required.
    Example 2: The owner of a shop seeks a term loan from a 
regulated institution for modernization of its facilities. The 
institution determines that other sources of repayment and 
collateral do not sufficiently support the decision to extend credit 
without taking a lien on the real estate and knowing the real 
estate's market value. Therefore, in order to extend credit to the 
borrower prudently, the institution needs an appraisal.
    The regulated institution should conclude that the real estate 
lien has not been taken in an abundance of caution because the other 
sources of repayment and collateral do not support the decision to 
extend credit without knowing the real estate's market value. This 
transaction would not qualify for the abundance of caution 
exemption.
    Regulated institutions generally supported the proposed 
amendment. Some commenters representing appraisers agreed that the 
abundance of caution exemption had been too narrowly interpreted and 
supported the proposal to extend the scope of the exemption.
    Other appraisers commented that the agencies should require an 
appraisal, limited scope appraisal, or evaluation any time a 
regulated institution takes real estate as collateral. Some 
regulated institutions noted that the prior rule caused them to 
forgo liens on real estate collateral in order to avoid the expense 
of an appraisal, thus potentially increasing their exposure 
unnecessarily.
    The agencies are not requiring appraisals for these transactions 
because an estimate of the real estate collateral's value generally 
would not assist the regulated institution to make its lending 
decision. Therefore, an appraisal generally would not further the 
purposes of Title XI of FIRREA nor significantly improve the safety 
and soundness of financial institutions.
(3) Loans Not Secured by Real Estate
    The agencies are adopting a uniform exemption for transactions that 
are not secured by real estate. The exemption makes clear that a 
regulated institution is not required to obtain a Title XI real estate 
appraisal in connection with a loan used to acquire or invest in real 
estate if the institution does not take a security interest in real 
estate.
    The prior appraisal regulations of the OCC, FDIC and OTS exempted 
these transactions, and the amendment does not result in any 
substantive change in regulatory requirements for these agencies. The 
amendment eliminates minor differences between the text of the rules 
adopted by the OCC and OTS and the text of the FDIC's rule. Prior to 
adoption of the amendment, the Board's appraisal regulation did not 
specifically exempt these transactions.
    Although a few appraisers stated that Title XI appraisals should be 
obtained for these transactions, other commenters, including 
appraisers, supported this exemption. Several commenters stated that 
Title XI was never intended to reach transactions that were not secured 
by real estate.
    In transactions covered by this exemption, the value of the real 
estate has no direct effect on the regulated institution's decision to 
extend credit because the institution has no security interest in the 
real estate. The agencies conclude that federal financial and public 
policy interests would not be served by requiring lenders and borrowers 
to incur the cost of obtaining Title XI appraisals in connection with 
these transactions.
(4) Liens for Purposes Other Than the Real Estate's Value
    The agencies are adopting a new exemption for transactions in which 
a regulated institution takes a lien on real estate for a purpose other 
than the value of the real estate. This amendment will permit regulated 
institutions to take liens against real estate to protect rights to, or 
control over, collateral other than the real estate without obtaining 
an appraisal.
    Regulated institutions frequently take real estate liens to protect 
legal rights to other collateral and not because of the value of the 
real estate as an individual asset. For example, in lending associated 
with logging operations, a regulated institution typically takes a lien 
against the real estate upon which the timber stands to ensure its 
access to the timber in the event of default. Similarly, where the 
collateral for a loan is a business or manufacturing facility, a 
regulated institution may take a lien against the land and improvements 
in order to be able to sell the entire business or facility as a going 
concern if the borrower defaults.
    A Title XI appraisal contains an opinion of the market value of 
real estate. When the market value of the real estate as an individual 
asset is not needed to support the regulated institution's decision to 
lend, no purpose is served by requiring the institution to obtain a 
Title XI appraisal.
    Commenters generally favored adopting an exemption addressing these 
circumstances, agreeing that Title XI appraisals did not enhance the 
safety and soundness of these transactions because the lenders were 
basing their decision to extend credit on the value of collateral other 
than real estate.
    Some commenters suggested that this exemption could be combined 
with the abundance of caution exemption. Although there are situations 
in which the two exemptions overlap, the agencies believe that both 
exemptions are necessary because there will be transactions that 
qualify for one exemption, but not the other.
(5) Real Estate-Secured Business Loans of $1 Million or Less
    The agencies are adopting a new exemption for business loans with a 
value of $1 million or less where the sale of, or rental income derived 
from, real estate is not the primary source of repayment. The agencies 
also are adopting the proposed definition of ``business loan'' as a 
loan or extension of credit to any corporation, general or limited 
partnership, business trust, joint venture, pool, syndicate, sole 
proprietorship (including an individual engaged in farming), or other 
business entity. This provision allows a regulated institution to take 
real estate as security in connection with a loan to a small- or 
medium-sized business when the primary source of repayment for the loan 
does not depend on sale of, or rental income derived from, real estate.
    The final rule differs in two respects from the proposed rule. 
First, the exemption is available for business loans of $1 million or 
less. The proposed rule would have exempted business loans less than $1 
million. The change was adopted to reduce confusion by making this 
provision consistent with the way other limits are treated in the rule. 
The change affects the scope of the exemption very slightly.
    Second, under the final rule, the exemption is available for 
business loans that do not depend on real estate sales and rental 
income as the primary source of repayment for the loan. The proposed 
rule would have exempted business loans that were not dependent on sale 
of, or rental income derived from, the real estate taken as collateral 
as the primary source of repayment. The change narrows the scope of the 
exemption by preventing a borrower from qualifying for the exemption by 
showing that the primary source of repayment for the loan is income 
from real estate sales and rentals involving real estate other than the 
real estate in which the lender has a security interest. This means, 
for example, that a real estate developer cannot qualify for the 
exemption by showing that a real estate-secured loan for one project, 
in which the lender has taken a security interest, will be repaid with 
income from real estate sales or rentals from other real estate 
projects, in which the lender does not have a security interest.
    The following examples illustrate the application of this 
exemption.

    Example 1: The owner of a shop seeks a term loan for $1 million 
or less from a regulated institution. The loan will be repaid with 
income derived from operations. The regulated institution would not 
extend credit to the borrower without a lien against the real 
estate.
    However, because the loan is for $1 million or less and the sale 
of, or rental income derived from, real estate is not the primary 
source of repayment, a Title XI appraisal would not be required for 
this transaction under this exemption.
    Example 2: A company acquires an adjacent parcel of land to 
construct an office building. The company seeks a loan of $1 million 
or less from a regulated institution to provide construction 
financing and a permanent mortgage for the office building. The 
company intends to lease part of the building and will use the 
rental income to help repay the loan. The lender estimates that 
operations of the business would contribute approximately 45 percent 
of the funds necessary to repay the loan and rental income 
approximately 55 percent.
    The regulated institution should conclude that rental income 
derived from real estate serves as the primary source of repayment 
for the loan. Therefore, assuming no other exemption is applicable 
to the transaction, a Title XI appraisal would be required.

    Increased Lending to Small- and Medium-Sized Businesses. In the 
experience of the agencies, the appraisal requirement may have 
adversely affected the ability of small- and medium-sized businesses to 
obtain credit. In particular, there are indications that the cost of an 
appraisal may impede small- and medium-sized businesses from receiving 
working capital, operating loans, and other business-related credits 
that otherwise would be consistent with prudent banking practice.
    The majority of financial institutions and financial institution 
trade associations that responded to the agencies' request for comment 
on the effect of the business loan exemption on credit availability 
stated that the proposed exemption would increase credit availability 
by reducing the cost and time to make real estate-secured business 
loans. These commenters generally stated that the changes would have 
the most significant effect on credit availability for small- and 
medium-sized businesses. Some appraisers also stated that the proposed 
changes would increase credit availability.
    A large number of commenters responding to the specific request for 
comment thought that the changes would have no effect on credit 
availability. These commenters included appraisers and appraiser trade 
associations, a small number of financial institutions, and other 
commenters. Some of these commenters stated that the ability of 
financial institutions to earn a reasonable return by making relatively 
risk-free investments in U.S. government securities was the cause of 
credit availability problems.
    The agencies believe that the final rule may reduce the cost of 
real estate-secured loans to small- and medium-sized businesses and 
increase the availability of loans to these borrowers.
    Effect on Safety and Soundness. Some commenters stated that this 
exemption would eliminate the requirement to obtain Title XI appraisals 
for a large portion of the real estate-secured business loans in their 
communities. Others stated that this exemption raised safety and 
soundness concerns because the only tangible collateral for many 
businesses is real estate. Though real estate may be an important asset 
of many small- and medium-sized businesses, the agencies have concluded 
that this exemption for certain business loans that do not rely on real 
estate as the primary source of repayment will not threaten the safety 
and soundness of regulated institutions nor pose a threat to federal 
financial and public policy interests.
    Although the agencies are not requiring Title XI appraisals in 
connection with these business loans, the agencies are requiring 
regulated institutions to obtain appropriate evaluations of the real 
estate collateral. The evaluation should provide the institution with 
sufficient information on the value of the real estate to satisfy 
principles of safe and sound banking. In addition, during each required 
full-scope, on-site examination, each agency will analyze the prudence 
of each institution's credit underwriting practices, including 
appraisal and evaluation practices, as appropriate to the institution's 
size and nature of its real estate-related activities.
    Shortly after the agencies issued the proposed rule, the GAO 
completed its report entitled Regulatory Impediments to Small Business 
Lending Should Be Removed (September 1993). In the report's summary, 
the GAO stated: ``Specifically, we believe that real estate appraisal 
requirements can be safely modified when applied to collateral taken as 
supplementary support for traditional small business loans. Therefore, 
we agree with those aspects of the rule changes recently proposed by 
the banking regulators to expand the exemptions from mandatory 
appraisals as they pertain to such loans.'' The GAO noted that the 
report and its comment on the proposed appraisal regulations were 
limited ``to situations in which real estate collateral is used to 
support loans to small businesses for such purposes as working capital 
and equipment purchases.'' This exemption is intended to reach these 
loans, as well as loans for other business purposes where sale of, or 
rental income derived from, real estate is not the primary source of 
repayment.
    The conclusion that exempting these transactions will not threaten 
the safety and soundness of financial institutions is supported by 
responses to a 1993 OCC survey of its senior examining staff. The 
survey asked for information on the effect of the proposed business 
loan exemption on bank safety and soundness, as well as information on 
the significance, by loan size, of losses on loans secured by 1-to-4 
family residential real estate and other categories of real estate.
    Eighteen of the 20 respondents to the OCC survey stated that the 
proposed exemption for business loans would not threaten the safety and 
soundness of financial institutions, although some respondents noted 
that the exemption could present more serious risks for small financial 
institutions. Respondents to the survey identified loans above $1 
million secured by non-residential real estate as the category of 
transactions that had the most significant losses attributable to 
inadequate appraisals, followed by loans secured by non-residential 
real estate in the ranges $750,000 to $1 million and $500,000 to 
$750,000.
    In general, respondents noted that where real estate serves as only 
a secondary source of repayment for a business loan, an evaluation of 
the collateral would be sufficient to address safety and soundness 
issues. Although the other bank regulatory agencies' surveys did not 
include the specific questions posed in the OCC survey, the results of 
the other bank regulatory agencies' surveys also generally support the 
business loan exemption.
    In addition to the survey responses, the data from the 1992 
commercial bank Call Reports and savings associations' TFR indicate 
that the exposure to the banking system from these transactions is 
limited. All commercial loans secured by non-farm non-residential real 
estate in the range between $250,000 and $1 million (this includes both 
non-exempt and exempt transactions) represent less than 4 percent of 
all loans for commercial banks and less than 3 percent of all loans for 
savings associations. Furthermore, these loans represent less than 27 
percent of commercial loans secured by non-farm non-residential real 
estate at commercial banks and less than 36 percent of commercial loans 
secured by such real estate at savings associations. This generally 
agrees with the National Survey of Small Business Finances (1989), 
cosponsored by the Federal Reserve Board and Small Business 
Administration. The results of the survey (adjusted to 1992 dollars) 
show that 22 percent of all commercial mortgages were for amounts 
between $250,000 and $1 million.
    The agencies requested specific comment on loss experience for real 
estate-secured business loans. Only a small number of banks and no 
thrifts submitted the requested data. Although the agencies do not 
believe the response is large enough to reach conclusions about 
industry-wide loss experience, the data submitted is consistent with 
the conclusion that regulated institutions are not suffering high 
levels of losses in connection with real estate-secured business loans 
of $1 million or less that do not depend on real estate sales or rental 
income as the primary source of repayment. The responses that the 
agencies received are summarized in the following table. 

----------------------------------------------------------------------------------------------------------------
                                                                                         Loss on                
                                                                          Outstanding    loans\2\               
                                                              Number of    principal   (annual net  Loss rate\4\
                Real estate-secured loans\1\                  loans (12/   amount of     charge-    (calculated)
                                                                31/92)      loans\2\     offs)\3\     (percent) 
                                                                          (12/31/92)    (12/31/92)              
----------------------------------------------------------------------------------------------------------------
All real estate-secured business loans.....................       90,410   17,488,561      178,237          1.02
Real estate-secured business loans less than $1 million                                                         
 that are not dependent on the sale of, or rental income                                                        
 derived from, the real estate taken as collateral as the                                                       
 primary source of repayment for the loan..................       59,595    8,008,422       32,680          0.41
----------------------------------------------------------------------------------------------------------------
\1\None of the comment letters received by OTS included data on these loans.                                    
\2\Dollars rounded to thousands.                                                                                
\3\Annual net-charges are determined by taking the dollar amount of gross losses and subtracting the amount     
  recovered.                                                                                                    
\4\The agencies have calculated the loss rate for both categories of real estate-secured loans about which the  
  agencies required data by dividing total annual net charge-offs by the total outstanding principal balance.   

    Limited to Business Loans of $1 Million or Less. The exemption 
applies only to transactions involving business loans with a value of 
$1 million or less. Capping the exemption at $1 million serves two 
purposes. It helps to ensure that the transactions involve small- and 
medium-sized businesses. It also limits the overall exposure of the 
banking system to transactions exempt under this provision.
    Some commenters stated that a $1 million limit may be too high for 
small institutions and suggested that the limit be set at a percentage 
of the institution's capital. Others stated that the exemption should 
cover business loans of any size.
    Regulated institutions typically are subject to capital-based 
lending limits that restrict the amount of credit they can extend to 
any one borrower. While a $1 million business loan may be much more 
significant to a smaller institution, the agencies believe that a 
second capital-based limit in the appraisal regulation is inappropriate 
because it can place smaller institutions at a competitive disadvantage 
to larger institutions. In addition, the agencies regularly examine the 
lending practices of all regulated institutions and can address 
problems with individual institutions if they arise. The agencies 
believe it is appropriate, however, to place a limit on the size of 
loan that can qualify for this exemption. Many commenters agreed that a 
$1 million dollar limit was appropriate.
    Primary Source of Repayment. Some commenters suggested that the 
exemption should be available only if the borrower could repay the loan 
entirely from sources other than sale of, or rental income derived 
from, real estate. Commenters also suggested specific percentage limits 
on the contribution of real estate to repayment of the loan ranging 
from 10 to 50 percent. Other commenters stated that the exemption 
should allow a regulated institution to determine whether a business 
loan requires an appraisal, regardless of the contribution of real 
estate sales or rental income to the borrower's repayment of the loan.
    The exemption is intended to improve the ability of small- and 
medium-sized businesses to obtain real estate-secured loans for 
business purposes. As the contribution of real estate sales and rentals 
to the borrower's sources for repaying the loan increases, repayment 
becomes more dependent on the performance of the real estate market. 
Therefore, in deciding whether a transaction qualifies for this 
exemption, regulated institutions should be guided by the importance of 
the real estate-related sources of income to the borrower's repayment 
of the loan, rather than applying a universal numerical cap. In no 
case, however, may a business loan qualify for this exemption if real 
estate-related sources of income contribute more toward repayment of 
the loan than non-real estate sources of income.
    Exempting these business loans will reduce the adverse effects on 
small- and medium-sized business lending associated with the 
requirement to obtain a Title XI appraisal. Moreover, since repayment 
of these loans generally will not depend primarily on the performance 
of the real estate markets, allowing lenders to make these business 
loans on the basis of evaluations of the real estate collateral does 
not threaten the safety and soundness of financial institutions.
    Agricultural Lending. The agencies received comment letters from 
appraisers in rural areas who stated that the exemption should not 
apply to agricultural production loans because use of the real estate 
generates the income for repayment of the loan. For any transaction 
exempt under this provision, the regulated institution is responsible 
for documenting that the borrower's sources of income are not primarily 
dependent upon the sale of, or rental income derived from, real estate. 
The agencies do not view the sale of growing crops as the sale of real 
estate, nor as providing rental income derived from real estate. The 
agencies have concluded that transactions involving agricultural 
operations present no greater risk than other types of business 
operations, provided the primary source of repayment for the loan is 
not sale of, or rental income derived from, real estate.
(6) Leases
    The agencies did not propose changes to the existing exemption for 
leases. Under this exemption, regulated institutions are not required 
to obtain appraisals of leases that are not the economic equivalent of 
the purchase or sale of real estate.
    Even though the agencies did not propose changes to this exemption, 
some commenters suggested that Title XI appraisals should be required 
if a regulated institution takes any security interest in a real estate 
lease. The distinction between operating leases and capital leases is 
well recognized in accounting practice. Consistent with the distinction 
in accounting for operating and capital leases, the agencies have 
concluded that, in general, operating leases, which are not equivalent 
to the purchase or sale of the leased property, should not require 
Title XI appraisals given the limited real estate interest such leases 
represent.
    In transactions that involve capital leases (leases that are the 
economic equivalent of purchasing or selling real estate), the given 
real estate interest is of sufficient magnitude to be counted as an 
asset of the lessee under accounting practices. Generally, the agencies 
will continue to require regulated institutions to obtain appraisals in 
connection with transactions that involve capital leases.
(7) Renewals, Refinancings, and Other Subsequent Transactions
    The agencies are adopting a modified version of the proposed 
exemption for renewals, refinancings, and other subsequent transactions 
at the lending institution to simplify the conditions under which the 
exemption applies. Under the final rule, regulated institutions will be 
permitted to renew or refinance existing extensions of credit without 
first obtaining a Title XI appraisal for two general classes of 
transactions.
    First, a subsequent transaction is exempt provided there has been 
no obvious and material change in market conditions or physical aspects 
of the property that threatens the adequacy of the institution's real 
estate collateral protection after the transaction, even with the 
advancement of new funds. This modification to the proposed rule is 
intended to emphasize that an institution must consider the effect of 
changes in market conditions and physical aspects of the property on 
its collateral protection when it advances funds in excess of 
reasonable closing costs as part of a renewal, refinancing, or other 
subsequent transaction.
    Second, a subsequent transaction is exempt provided that no new 
monies are advanced other than funds necessary to cover reasonable 
closing costs. The proposed rule did not explicitly address this class 
of transactions.
    The agencies note that this exemption would not be applicable if a 
borrower refinances a mortgage with a new lender.
    Prior to the adoption of this amendment, the agencies did not 
require a Title XI appraisal for a subsequent transaction that resulted 
from a maturing extension of credit if:
    (i) The borrower had performed satisfactorily according to the 
original terms;
    (ii) No new monies were advanced other than as previously agreed;
    (iii) The credit standing of the borrower had not deteriorated; and
    (iv) There had been no obvious and material deterioration in market 
conditions or physical aspects of the property which would threaten the 
institution's collateral protection.
    In the agencies' experience, the original exemption may not have 
provided sufficient flexibility to regulated institutions and borrowers 
when a transaction was refinanced before its maturity. This is 
particularly true for refinancings to reduce a loan's interest rate. 
Further, bankers questioned whether a Title XI appraisal would be 
required for a refinancing where the borrower's payment history is 
sound and future repayment prospects are good, but the borrower's 
collateral has declined in value as a result of a general market 
decline. The agencies believe that not requiring a Title XI appraisal 
in such refinancings is consistent with safe and sound banking 
practices because the amount of the loan (except for the addition of 
reasonable closing costs) and the lender's collateral remain the same, 
and the lower loan payments may improve the ability of the borrower to 
repay the loan without adversely affecting the likelihood that the 
lender will be repaid.
    If a subsequent transaction that includes the advancement of 
additional funds does not result in the level of collateral protection 
being threatened, despite a change in the market conditions or physical 
aspects of the property, a Title XI appraisal need not be obtained. For 
example, a loan originally extended with a low loan-to-value ratio 
could be renewed and additional funds advanced above closing costs 
without a Title XI appraisal, even though market conditions have 
deteriorated, if the regulated institution, after verifying the value 
of the collateral, concludes that the new loan-to-value ratio will 
provide adequate protection.
    Similarly, if a borrower is refinancing a loan where the real 
estate collateral is located in a market that has experienced 
significant appreciation, the institution should ensure that the 
advancement of any new monies is based on substantiated appreciation in 
value. An institution can advance funds against an appreciated property 
whose future use is consistent with the use described in the original 
appraisal. If an institution makes a substantial advance that could 
possibly threaten the institution's collateral protection, it should 
consider the need to obtain a new Title XI appraisal. This exemption 
would not be available if a material change in the use of the property 
produces the reported appreciation, such as when property is rezoned 
for a different use.
    While a Title XI appraisal is not required for transactions that 
qualify for this exemption, regulated institutions are required to 
obtain an appropriate evaluation of the collateral in accordance with 
the agencies' guidelines. The level of analysis and information 
included in the evaluation should be more detailed as the institution's 
exposure in the transaction increases.
    Several commenters raised questions about the applicability of this 
exemption to loan restructurings and workouts. In such situations, the 
commenters contended that requiring a Title XI appraisal may impede an 
institution's ability to obtain additional real estate collateral to 
shore-up its position or to advance new funds to protect its existing 
collateral position. The agencies acknowledge that the time and cost of 
obtaining a Title XI appraisal may present barriers to institutions in 
their negotiations with borrowers in a loan restructuring or workout. 
The agencies believe that this situation has been addressed in the 
regulation and the agencies' guidance, such as the November 7, 1991 
Interagency Policy Statement on the Review and Classification of 
Commercial Real Estate Loans. It is the agencies' policy to encourage 
lenders to work constructively with their borrowers when restructuring 
existing loans that have credible support for repayment.
(8) Transactions Involving Real Estate Notes
    The agencies are adopting a modified version of the proposed 
exemption for transactions involving real estate-secured loans, loan 
participations, pooled loans, interests in real property, and mortgage-
backed securities. The amendment clarifies when regulated institutions 
may engage in secondary mortgage market transactions involving real 
estate loans and other interests in real estate without obtaining a new 
Title XI appraisal.
    The exemption adopted by the agencies clarifies and allows 
regulated institutions to purchase, sell, invest in, exchange, or 
extend credit secured by, real estate-secured notes or interests in 
real estate without obtaining a new Title XI appraisal if each note or 
real estate interest is supported by an appraisal that met the 
regulatory appraisal requirements for the institution at the time the 
real estate-secured note was originated. The prior exemption referred 
to purchases of these interests only. In addition, the agencies have 
changed the text of the final rule to more clearly state the appraisal 
requirements that the underlying notes must meet.
    The exemption serves federal public policy interests by helping to 
ensure that the appraisal regulation does not unnecessarily inhibit 
secondary mortgage market transactions that involve these real estate-
secured loans and real estate interests. The exemption makes clear that 
a regulated institution need not obtain new Title XI appraisals for 
loans originated before the effective date of the agencies' regulations 
in order to buy or sell them in the secondary mortgage market.
    The agencies have concluded that the transactions exempted by this 
provision do not require new Title XI appraisals to protect federal 
financial and public policy interests or the safety and soundness of 
financial institutions. Principles of safe and sound banking practice 
require regulated institutions to determine the suitability of 
purchasing or investing in existing real estate-secured loans and real 
estate interests. Typically, these transactions will have a history of 
performance or will have been originated according to secondary 
mortgage market standards. The additional information from these 
sources, when coupled with the original documentation, permits 
regulated institutions to make appropriate decisions regarding these 
transactions.
    Some commenters stated that this exemption raised safety and 
soundness concerns because exempt transactions may have appraisals 
performed before Title XI appraisal requirements went into effect. 
Because regulated institutions will have other sources of information 
about the performance of these seasoned loans, the agencies believe 
that new Title XI appraisals are not necessary to ensure the safety and 
soundness of these exempt transactions.
    Some commenters urged the agencies to expand the proposed 
exemption, or adopt new exemptions, to eliminate the Title XI appraisal 
requirement for all mortgage-backed securities. In addition, commenters 
suggested that the agencies exempt residential mortgage warehousing 
loans (loans to residential mortgage lenders who ultimately sell the 
mortgages to the secondary mortgage market), transactions with credit 
ratings by established rating agencies, or transactions that were not 
subject to the agencies' jurisdiction at origination.
    The agencies believe that to protect federal financial and public 
policy interests, the underlying loans or real estate interests should 
have appraisals that meet the requirements that were applicable to 
regulated institutions when the underlying transactions were 
originated. For this reason, the agencies are not adopting the 
suggestions for exempting additional categories of transactions under 
this provision.
    Commenters also suggested that the agencies should permit a 
regulated institution that purchases a pool of loans, invests in 
mortgage-backed securities, or secures a mortgage warehousing loan with 
real estate notes, to confirm that the loans have appropriate 
appraisals without reviewing the appraisal for each underlying loan. 
The agencies agree that it should not be necessary to review the 
appraisal for each underlying loan in all cases. The agencies believe 
that regulated institutions may use sampling and audit procedures to 
determine whether appraisals for the underlying loans in a loan pool 
satisfy the regulation's requirements and to verify the seller's 
representations and warranties.
    The agencies also believe that a regulated institution may presume 
that the underlying loans in an investment-grade, marketable, mortgage-
backed security satisfy the requirements of the appraisal regulation 
whenever an issuer makes a public statement, such as in a prospectus, 
that the appraisals comply with the agencies' regulations. To be 
considered investment grade, a security must be rated in one of the top 
four rating classifications of at least one nationally recognized 
statistical rating service. A marketable security is one that may be 
sold with reasonable promptness at a price that corresponds to its fair 
value.
    For mortgage warehousing loans, sale to Fannie Mae or Freddie Mac 
of the mortgages that secure the mortgage warehouse loan may be used to 
demonstrate that the underlying loans complied with the appraisal 
requirements of the agencies' regulations. The institution, however, 
must continue to monitor its borrower's performance in selling loans to 
the secondary market and take appropriate steps, such as increased 
sampling and auditing of the loans and their documentation, if the 
borrower experiences more than a minimal rejection rate.
(9) Transactions Insured or Guaranteed by a U.S. Government Agency or 
U.S. Government Sponsored Agency
    The agencies are adopting a uniform exemption for transactions that 
are wholly or partially insured or guaranteed by a United States 
government agency or government sponsored agency because these loans 
pose little risk to insured institutions. This exemption will eliminate 
the confusion among regulated institutions who may believe that two 
separate appraisals are required--one meeting the banking agencies' 
regulations and another meeting the federal loan programs' standards.
    The prior regulations of the OCC, FDIC, and OTS exempted many of 
these transactions. However, they previously required that these 
transactions be supported by an appraisal that conformed to the 
requirements of the insuring or guaranteeing agency. Prior to adoption 
of this amendment, the Board's appraisal regulation did not 
specifically exempt these transactions.
    Federally insured or guaranteed transactions must meet all the 
underwriting requirements of the federal insurer or guarantor, 
including real estate appraisal requirements, in order to receive the 
insurance or guarantee. The agencies believe that the standards of 
these loan programs are sufficient to protect the safety and soundness 
of regulated financial institutions. Therefore, it is unnecessary to 
require that these transactions also meet the overlapping requirements 
of the banking and thrift agencies' appraisal regulations.
    Some commenters suggested that the agencies should limit the 
application of this exemption to federal loan programs with appraisal 
requirements that conform to the Uniform Standards of Professional 
Appraisal Practice (USPAP) and require the use of licensed or certified 
appraisers. In addition, commenters raised concerns that some loan 
programs may not have appraisal standards and asked the agencies to 
list those loan programs to which this exemption applies.
    OMB has directed federal agencies with government guaranteed or 
insured loan programs to conduct real estate appraisal programs in a 
manner to reduce default risks to the federal government. Specifically, 
these federal agencies are required to ensure that all real estate 
credit transactions over $100,000 have an appraisal performed by a 
state licensed or certified appraiser and that the appraisal be 
conducted under appraisal standards that are consistent with the 
USPAP.<SUP>6
---------------------------------------------------------------------------

    \6\OMB Circular A-129, ``Policy for Federal Programs and Non-Tax 
Receivables,'' revised January 1993.
---------------------------------------------------------------------------

    The agencies believe that the authority of OMB to ensure that 
federal agencies adopt appropriate real estate appraisal standards 
eliminates the need to list specific loan programs for which this 
exemption applies. Moreover, OMB is monitoring the implementation of 
those appraisal programs and has required any federal agency not having 
appraisal standards and practices in place to submit an implementation 
plan and schedule to OMB. If the agencies later determine that a 
particular federal loan program poses a threat to the safety and 
soundness of regulated institutions, the agencies have retained the 
authority to require appraisals in such situations.
    This exemption also applies to certain other real estate-related 
financial transactions involving government agencies or government 
sponsored agencies. For example, the U.S. Postal Service typically 
contracts with a developer to erect and lease a special purpose 
building for the Postal Service's use. Applicable contract procedures 
normally require only cost estimates when determining who is awarded 
the contract. The Postal Service also enters into a lease with the 
developer. The lease payments, which are assigned to the lender, are 
sufficient to repay the loan. Because the developer is complying with 
applicable contract procedures, which require only cost estimates, it 
would be an unnecessary burden for the developer or the lender to also 
obtain a Title XI appraisal.
(10) Transactions That Meet the Qualifications for Sale to a United 
States Government Agency or Government Sponsored Agency
    The agencies are adopting a modified version of the proposed 
exemption for transactions that meet the qualifications for sale to any 
U.S. government agency or government sponsored agency. By referring to 
any U.S. government agency or sponsored agency, the exemption includes 
not only loans sold to federal agencies, but also any transaction that 
meets the qualifications for sale to agencies established or chartered 
by the federal government to serve public purposes specified by the 
U.S. Congress. These government sponsored agencies are:
    <bullet> Banks for Cooperatives.
    <bullet> Federal Agricultural Mortgage Corporation (Farmer Mac).
    <bullet> Federal Farm Credit Banks.
    <bullet> Federal Home Loan Banks (FHLBs).
    <bullet> Federal Home Loan Mortgage Corporation (Freddie Mac).
    <bullet> Federal National Mortgage Association (Fannie Mae).
    <bullet> Student Loan Marketing Association (Sallie Mae).
    <bullet> Tennessee Valley Authority (TVA).
    This exemption permits regulated institutions to originate, hold, 
buy, or sell transactions that meet the qualifications for sale to any 
U.S. government agency and the above listed government sponsored 
agencies without obtaining a separate appraisal conforming to the 
agencies' regulations.
    The exemption contains a modification to the original proposal that 
permits regulated institutions to accept appraisals performed in 
accordance with the appraisal standards of Fannie Mae and Freddie Mac 
for any residential real estate transaction, both single family and 
multifamily, regardless of whether the loan is eligible to be purchased 
by Fannie Mae or Freddie Mac. This modification clarifies that a 
regulated institution's ``jumbo'' or other residential real estate 
loans that do not conform to all the underwriting standards of Fannie 
Mae or Freddie Mac, but that are supported by an appraisal that meets 
the appraisal standards of these agencies, will qualify for this 
exemption.
    This exemption expands the prior exception to the regulations of 
the OCC, FDIC, and OTS for transactions involving 1-to-4 family 
residential properties that had appraisals conforming to the appraisal 
standards of Fannie Mae and Freddie Mac. In addition, the OTS exception 
applied to existing multifamily properties. These transactions were not 
required to comply with the additional supervisory standards set forth 
in the prior regulations. The Board did not have a similar exception in 
its prior regulation.
    Some commenters requested that the agencies continue the prior 
exception allowing the use of Fannie Mae or Freddie Mac standards for 
any loans involving 1-to-4 family residential real estate. Other 
commenters stated that the proposed exemption should not be adopted 
because the agencies would not be meeting their statutory obligation to 
set appraisal standards for transactions within their jurisdiction.
    The agencies believe the appraisal standards of the U.S. government 
agencies or sponsored agencies established to maintain a secondary 
market in various types of loans are appropriate for these exempt 
transactions. Recently, Fannie Mae and Freddie Mac revised their 1-to-4 
family residential appraisal standards and report forms to incorporate 
the USPAP as the minimum appraisal standards. Further, the appraisal 
standards and forms of Fannie Mae and Freddie Mac are recognized as the 
appraisal industry's standard for residential real estate appraisals. 
The agencies have concluded that those appraisal standards should 
protect federal financial and public policy interests in the loans that 
are eligible for purchase by U.S. government agencies or sponsored 
agencies. The agencies also believe that compliance with these 
standards will protect the safety and soundness of regulated financial 
institutions.
    The agencies believe that permitting regulated institutions to 
follow these standardized appraisal requirements, without the necessity 
of obtaining a separate appraisal or an appraisal supplement for 
conformance with the banking agencies' regulations, will reduce 
regulatory burden and increase an institution's ability to buy and sell 
these types of loans, improving the institution's liquidity.
(11) Transactions by Regulated Institutions as Fiduciaries
    The agencies are adopting a new exemption for transactions in which 
a regulated institution is acting in a fiduciary capacity and is not 
required to obtain an appraisal under other law. The amendment 
clarifies that regulated institutions acting as fiduciaries are not 
required to obtain appraisals under the agencies' appraisal regulations 
if no appraisal is required under other law governing their fiduciary 
responsibilities in connection with those transactions.
    Prior to adoption of this amendment, it was unclear whether the 
agencies' appraisal regulations required appraisals for all real 
estate-related financial transactions in which regulated institutions 
participated as fiduciaries. For example, other law may not require an 
appraisal in connection with the sale of a parcel of real estate to a 
beneficiary of a trust on terms specified in the trust instrument.
    While financial institutions were in general agreement with the 
proposed exemption, some of these commenters stated that a fiduciary 
should be exempt from meeting Title XI appraisal requirements 
regardless of whether other laws require an appraisal. Commenters 
opposing this exemption believe that fiduciaries should be required to 
obtain a Title XI appraisal for all their real estate-related 
transactions.
    The agencies have concluded that a Title XI appraisal should not be 
required when regulated institutions engage in real estate-related 
financial transactions as fiduciaries and no other law (including state 
common law establishing the responsibilities of fiduciaries) requires 
appraisals for those transactions. Losses as a result of these 
transactions would not, absent some negligence by the institution, be 
incurred by the institution. Therefore, exempting these transactions 
from the Title XI appraisal requirement should not adversely affect the 
safety and soundness of financial institutions.
    When a fiduciary transaction requires an appraisal under other law, 
that appraisal should conform to the requirements of the agencies' 
regulations.
(12) Appraisals Not Necessary To Protect Federal Financial and Public 
Policy Interests or the Safety and Soundness of Financial Institutions
    This provision was added to the rule to make clear that the 
agencies retain the authority to determine in a given case when the 
services of an appraiser are not required.
    Only a few commenters addressed this issue. One commenter expressed 
the concern that the agencies are granting themselves the authority to 
create new exemptions without the benefit of public comment.
    The agencies have the authority to implement and interpret 
regulations under their jurisdiction. The specific exemptions of the 
regulation describe the major categories of transactions that would not 
require appraisals. As a result of their experience in implementing 
their regulations, however, the agencies recognized that it is 
impossible to identify all types of transactions for which the services 
of an appraiser should not be required under Title XI of FIRREA and 
proposed this exemption to confirm their authority to determine that 
individual transactions do not require the services of an appraiser. 
The agencies will adopt any new exemptions covering broad categories of 
transactions in accordance with notice and comment rulemaking 
procedures.

Sec. ____.3(b)  Evaluations Required

    The agencies are adopting a modified version of the proposed 
amendment concerning evaluations.
    The final rule requires regulated institutions to obtain 
evaluations for real estate-related financial transactions that do not 
require Title XI appraisals because they: (i) Are below the threshold 
level; (ii) qualify for the exemption for business loans of $1 million 
or less where income from real estate is not the primary source of 
repayment; or (iii) qualify for the exemption for subsequent 
transactions resulting from an existing extension of credit. The 
agencies changed the text of this amendment to make clear that 
institutions must still obtain evaluations for these exempt 
transactions. The regulation does not require the institution to have 
an evaluation if the transaction qualifies for an exemption other than 
these three exemptions.
    An evaluation provides a general estimate of the value of real 
estate and need not meet the detailed requirements of a Title XI 
appraisal. An evaluation must provide appropriate information to enable 
the institution to make a prudent decision regarding the transaction. 
Because institutions must tailor evaluations to provide appropriate 
information for different types of transactions, the content and form 
of evaluations will vary for different transactions.
    In their prior regulations, the OCC, Board and OTS required 
evaluations for all real estate-related financial transactions that do 
not require appraisals. The FDIC's prior regulation stated that 
supervisory guidelines, general banking practices or other prudent 
standards may require an appropriate valuation of real property 
collateral when a Title XI appraisal is not required. For some 
institutions, the effect of these provisions may have been to require 
evaluations in cases where they did not assist in protecting the 
institutions' safety and soundness. The agencies are amending their 
regulations to require regulated institutions to have evaluations only 
for those real estate-related financial transactions where an 
understanding of the real estate's value is generally needed to assist 
the institution in deciding whether to enter into the transaction.
    Some commenters stated that evaluations should not be required for 
any exempt transactions and that the decision to obtain an evaluation 
should be left to the institution. Commenters suggested that the 
agencies should require appraisals for any transaction that requires an 
evaluation and raised questions about the qualifications and 
independence of persons performing evaluations. Some commenters stated 
that only licensed or certified appraisers were qualified to perform 
evaluations.
    The agencies believe that safety and soundness principles require 
institutions to obtain an understanding of, and document, the value of 
the real estate involved in transactions that: (i) Are below the 
threshold level; (ii) qualify for the exemption for business loans of 
$1 million or less where income from real estate is not the primary 
source of repayment; or (iii) involve an existing extension of credit. 
In these cases, while a Title XI appraisal is not required to determine 
the value of the real estate, the agencies have concluded that 
regulated institutions must have an estimate of the real estate's value 
as a matter of safe and sound banking practice. For this reason, the 
agencies have decided that institutions should not have the discretion 
to decide whether they will obtain evaluations for these transactions. 
However, institutions will have discretion, within the limits of safe 
and sound banking practice as indicated in agency guidance, to 
determine the content and form of the evaluation.
    While licensed or certified appraisers may be qualified to perform 
evaluations, the agencies do not believe these appraisers are the only 
persons that can render a competent estimate of the value of real 
estate for exempt transactions. Requiring institutions to procure the 
services of a licensed or certified appraiser to prepare evaluations or 
Title XI appraisals for exempt transactions could impose significant 
additional costs on lenders and borrowers without significantly 
increasing the safety and soundness of the transactions. However, the 
agencies' regulations do not, as suggested by some commenters, prohibit 
regulated institutions from using licensed or certified appraisers to 
prepare evaluations. Nor do the regulations prevent regulated 
institutions from obtaining Title XI appraisals for exempt 
transactions.
    The agencies also believe that regulated institutions can take 
steps to ensure that the individuals performing evaluations are capable 
of providing an unbiased estimate of value. Institutions would 
generally be expected to check that persons who prepare evaluations are 
subject to adequate safeguards and controls to assure the integrity of 
the evaluation they perform. The agencies intend that regulated 
institutions have some flexibility in the safeguards they erect to 
ensure the independence of the person performing the evaluation.
    The agencies' experience with transactions exempt under their prior 
appraisal requirements indicates that employees of a regulated 
institution generally can provide an unbiased and competent evaluation 
of real estate collateral for exempt transactions.
    If there are deficiencies in an individual institution's evaluation 
procedures, including its procedures for determining whether to order 
Title XI appraisals for exempt transactions, the agencies can take 
appropriate steps to have the institution correct the problem. This can 
include requiring the institution to obtain appraisals for exempt 
transactions to address safety and soundness problems.
    Several commenters requested that the agencies provide additional 
information on what is required in evaluations and who may perform 
them. The agencies intend to revise their existing guidance on real 
estate appraisal and evaluation programs for regulated institutions to 
further address these issues.

Sec. ____.3(c)  Appraisals To Address Safety and Soundness Concerns

    The agencies are adopting substantially as proposed an amendment 
stating that each agency continues to reserve the right to require a 
regulated institution to obtain a Title XI appraisal whenever the 
agency believes that an appraisal is necessary to address safety and 
soundness concerns. This authority may involve the agency requiring an 
institution to obtain an appraisal for a particular extension of credit 
or an entire group of credits.
    Some commenters raised the concern that the agencies' authority to 
require a Title XI appraisal for safety and soundness purposes should 
be exercised only on a prospective basis. Further, several commenters 
noted that the agencies' authority to determine on a case-by-case basis 
whether an appraisal is required may lead to inconsistencies among the 
agencies.
    Whether an institution will be required, pursuant to this provision 
or existing safety and soundness authority, to obtain an appraisal for 
a particular extension of credit, or an entire group of credits, may 
depend on the condition of that institution. If an institution is in 
troubled condition, and that troubled condition is attributable to 
underwriting problems in the institution's real estate loan portfolio, 
then the agencies may require such an institution to obtain an 
appraisal for all new real estate-related financial transactions below 
the threshold that are not subject to another exemption. Thus, for 
example, a troubled institution whose problems are attributable to 
trading losses, investment losses, or a defalcation might be allowed to 
continue to operate under the $250,000 threshold, whereas an 
institution whose problems are attributable to poor underwriting of 
real estate loans may be subjected to a lower threshold.
    However, regardless of an institution's condition, an examiner may 
determine that a particular real estate-related financial transaction 
requires a Title XI appraisal. This provision confirms that the 
agencies have the authority to require appraisals for a particular 
transaction to address safety and soundness concerns.
    A determination that a particular institution will have to obtain 
appraisals below the threshold will be made by the appropriate agency's 
supervisory office. Although this provision is intended to be applied 
on a case-by-case basis to address the problems of a particular 
institution, the agencies will work to maintain consistency.
    As previously stated in the discussion of the appraisal threshold, 
as a matter of policy, OTS intends to require problem institutions or 
institutions in troubled condition to continue to obtain Title XI 
appraisals for loans over $100,000. Given the overall concentration of 
real estate-related transactions in the thrift industry, OTS believes 
that a problem thrift or a thrift in troubled condition will, in 
general, have real estate-related asset quality problems.

Sec. ____.4(a)  Minimum Appraisal Standards

    The agencies are adopting five minimum appraisal standards in place 
of the 14 standards in the prior rule. The final rule includes four 
modifications to the proposed rule concerning minimum appraisal 
standards. The final rule requires all appraisals for federally related 
transactions to:
    (i) Conform to generally accepted appraisal standards as evidenced 
by the USPAP unless principles of safe and sound banking require 
compliance with stricter standards;
    (ii) Be written and contain sufficient information and analysis to 
support the institution's decision to engage in the transaction;
    (iii) Analyze and report appropriate deductions and discounts for 
proposed construction or renovation, partially leased buildings, non-
market lease terms, and tract developments with unsold units;
    (iv) Be based upon the definition of market value as set forth in 
the regulation; and
    (v) Be performed by State licensed or certified appraisers.
    Adoption of these standards will simplify compliance with the 
appraisal regulation without affecting the usefulness of the Title XI 
appraisals prepared for federally related transactions. The amendment 
allows institutions to make use of the USPAP Departure Provision and 
eliminates several regulatory standards that parallel existing USPAP 
standards.
    The agencies proposed three alternatives for meeting the statutory 
requirement to use the USPAP in setting minimum appraisal standards for 
federally related transactions. Under the first two alternatives, the 
agencies would have published the USPAP as part of their regulations 
(either as an appendix to their rules or through incorporation by 
reference). The agencies have chosen to adopt the third alternative 
that generally references USPAP, but does not make USPAP a part of the 
agencies' regulations. The agencies agree with many commenters who 
believed that Alternative III was the most workable approach because 
the agencies would not have to republish changes to the USPAP adopted 
by the Appraisal Standards Board, and references to USPAP in the 
regulation could be assumed to always refer to the most current USPAP 
edition. The agencies believe that Alternative III minimizes potential 
conflicts between an institution's duty to follow the agencies' 
appraisal requirements and an appraiser's professional obligation to 
follow the latest USPAP version.
    Since the agencies are adopting Alternative III, USPAP provisions 
applicable to federally related transactions will no longer be 
published as Appendix A to the agencies' appraisal regulations. 
Therefore, each agency has deleted Appendix A from its appraisal 
regulation.
    Because application of present or future USPAP standards to 
federally related transactions may be inconsistent with maintaining the 
safety and soundness of financial institutions, the agencies have 
modified the standard on compliance with the USPAP. This modification 
makes clear that principles of safe and sound banking may require 
institutions to comply with stricter standards than the USPAP. Although 
the institution has the primary responsibility for obtaining a Title XI 
appraisal that meets its needs, the agencies may by regulation or 
guidance identify USPAP standards that are inappropriate for federally 
related transactions. For example, the USPAP allows an appraiser to 
appraise property even though the appraiser may have a direct or 
indirect interest in the property, if the appraiser discloses this fact 
in the appraisal report. The agencies believe, however, that federal 
financial and public policy interests are better served by requiring 
that an appraiser for a federally related transaction not have any 
direct or indirect interest, financial or otherwise, in the transaction 
or the property. The agencies have included this requirement in the 
section of the regulation that deals with appraiser independence.
    The minimum standards also permit regulated institutions to use 
appraisals prepared in accordance with the USPAP Departure Provision 
for federally related transactions. The Departure Provision permits 
limited exceptions to specific guidelines in the USPAP. Appraisers 
preparing appraisals using the Departure Provision still must comply 
with all binding requirements of the USPAP and must be sure that the 
resulting appraisal will not be misleading.
    The agencies believe that regulated institutions should be allowed 
to determine, with the assistance of the appraiser, whether an 
appraisal to be prepared in accordance with the Departure Provision is 
appropriate for a particular transaction and consistent with principles 
of safe and sound banking practice.
    The agencies are adopting a modified version of the proposed 
standard that requires appraisals for federally related transactions to 
be written. The modification makes clear that the written appraisal 
must contain sufficient information and analysis to support the 
institution's decision to engage in the transaction. The modification 
puts regulated institutions on notice of their responsibility to have 
appraisals that are appropriate for the particular federally related 
transaction. The agencies are aware that the Appraisal Standards Board 
of the Appraisal Foundation has proposed changing the USPAP to expand 
the types of appraisal reports that appraisers may prepare. The 
agencies believe that the standard on written appraisals permits 
regulated institutions to take advantage of additional flexibility that 
may be available if the USPAP is amended, as long as the appraisal 
report contains information and analysis to support the institution's 
decision.
    The agencies are retaining from the prior rule the standard 
regarding deductions and discounts. The USPAP provision on this subject 
requires the appraiser to include a discussion of deductions and 
discounts only when it is necessary to prevent an appraisal from being 
misleading. Although commenters were divided over the need to retain 
this regulatory standard, the agencies have decided that it is 
appropriate to emphasize the need to include an appropriate discussion 
of deductions and discounts applicable to the estimate of value in 
Title XI appraisals for federally related transactions.
    For example, in order to properly underwrite a loan, a regulated 
institution may need to know a prospective value of a property, in 
addition to the market value as of the date of the appraisal. A 
prospective value of a property is based upon events yet to occur, such 
as completion of construction or renovation, reaching a stabilized 
occupancy level, or some other event to be determined. Thus, more than 
one value may be reported in an appraisal, as long as all values are 
clearly described and reflect the projected dates when future events 
could occur.
    The standard on deductions and discounts is intended to make clear 
that appraisers must analyze, apply, and report appropriate discounts 
and deductions when providing values based on future events. In 
financing the purchase of an existing home, there typically would be no 
need to apply any discounts or deductions to arrive at the market value 
of the property since the institution's financing of the project does 
not depend on events such as further development of the property or the 
sale of units in a tract development.
    In place of the proposed standard on market value, the agencies are 
retaining the prior standard that required the appraisal to be based on 
the definition of market value contained in the agencies' rules. Use of 
the standard from the prior rule is intended to emphasize that the 
agencies are not changing the definition of market value or the manner 
in which that definition is applied.
    The agencies are eliminating regulatory standards that parallel or 
duplicate requirements of the USPAP. The regulatory standards 
originally were put in place because of uncertainty about the content 
of the USPAP and its interpretation. Based on their experience with the 
USPAP, the agencies believe that the additional standards may be 
eliminated. Commenters generally agreed. The majority of commenters 
responded to three specific questions on the need for additional 
regulatory standards by indicating that it was unnecessary to adopt 
separate standards on: (i) Analysis of revenues, expenses and 
vacancies; (ii) valuation of personal property; and (iii) 
reconciliation of the three approaches to value. The elimination of 
regulatory standards that parallel USPAP standards should simplify the 
preparation of appraisals for federally related transactions and reduce 
regulatory burden.
    As proposed, the agencies are adding a new provision to make clear 
that all appraisals for federally related transactions must be prepared 
by licensed or certified appraisers. This requirement is mandated by 
Title XI of FIRREA and repeated in other parts of the appraisal 
regulation.

Sec. ____.4(b/c)  Unavailability of Information [Removed]

    The agencies are removing the provision that required appraisers to 
disclose and explain when information necessary to the completion of an 
appraisal is unavailable. The USPAP currently requires appraisers to 
disclose and explain the absence of information necessary to completion 
of an appraisal that is not misleading. See USPAP Standard Rule 2-2(k). 
Moreover, when information that may materially affect the estimate of 
value is unavailable, the agencies believe that generally accepted 
appraisal standards require appraisers to explain the absence of that 
information and its effect on the reliability of the appraisal. 
Therefore, eliminating this provision does not result in a substantive 
change in the requirements applicable to appraisals for federally 
related transactions.

Sec. ____.4(c/d)  Additional Standards [Removed]

    The agencies are removing a provision that merely confirmed the 
authority of regulated institutions to require appraisers they use to 
comply with additional standards. The regulation's minimum appraisal 
standards for federally related transactions do not prevent a regulated 
institution from requiring an appraiser to follow additional standards 
or provide additional information to satisfy the institution's business 
needs and it is unnecessary to restate this fact in the appraisal 
regulation.

Sec. ____.5(b)  Appraiser Independence

    The agencies are adopting the proposed amendment concerning the use 
of appraisals prepared for financial services institutions other than 
institutions subject to Title XI of FIRREA. The agencies' prior 
appraisal regulations provided that fee appraisers must be engaged by 
the regulated institution or its agent. An exception to this 
requirement was permitted if the appraiser was directly engaged by 
another institution that is subject to Title XI of FIRREA.
    The agencies concluded that the prior provision on the use of 
appraisals prepared for other institutions was too restrictive. It 
required a regulated institution to obtain a new appraisal if the 
borrower originally sought a loan from an institution that was not 
subject to Title XI of FIRREA and was not an agent of that regulated 
institution. There also was uncertainty about the meaning of agent in 
these cases.
    The amended provision permits a regulated institution to use an 
appraisal that was prepared for any financial services institution, 
including mortgage bankers, if certain conditions are met. The 
appraiser must be engaged directly by the financial services 
institution and must not have a direct interest, financial or 
otherwise, in the property or the transaction. In addition, the 
regulated institution must ensure that the appraisal conforms to the 
requirements of the regulation and is otherwise acceptable. The 
prohibition on the institution using an appraisal prepared for the 
borrower remains in effect.
    The majority of comments concerning this provision favored the 
proposed change. One commenter requested that the agencies define 
financial services institutions and include mortgage brokers within 
that definition. Other commenters requested clarification of the 
circumstances under which a non-regulated institution can be an agent 
of a regulated institution and whether agents are prohibited from 
receiving a commission on each transaction.
    The agencies have decided not to adopt a specific definition of 
financial services institution. This term is intended to describe 
entities that provide services in connection with real estate lending 
transactions on an ongoing basis.
    The agencies do not intend to limit the arrangements that regulated 
institutions have with their agents, provided those arrangements do not 
place the agent in a conflict of interest that prevents the agent from 
representing the interests of the regulated institution. For example, 
the agencies do not require that there be a written agreement between 
the regulated institution and the agent, and the agent may represent 
the regulated institution solely with respect to ordering appraisals. 
In addition, the agencies' regulations do not prohibit agents from 
receiving a commission for transactions on which they order appraisals.
    Some commenters opposed the amendment because of their concern that 
it would increase the pressure on appraisers to render an estimate of 
value that favors the interests of the borrower. However, regulated 
institutions are not required to accept appraisals that are prepared 
for other financial services institutions. Therefore, the institution 
always retains complete control over the process of ordering real 
estate appraisals. In addition, institutions must determine that the 
appraisal ordered by the financial services institution complies with 
the requirements of the agencies' regulations and is otherwise 
acceptable. This should include obtaining assurance that the financial 
services institution has an independent appraisal.
    Other suggested changes to reduce the burden on secondary market 
transactions involving real estate notes, particularly for mortgage 
warehousing loans, are addressed in the exemption for transactions in 
real estate notes.

IV. Waiver of Delayed Effective Date

    This final rule is effective on June 7, 1994. The 30-day delayed 
effective date required under the Administrative Procedure Act (APA) is 
waived pursuant to 5 U.S.C. 553(d)(1), which provides for waiver when a 
substantive rule grants or recognizes an exemption or relieves a 
restriction. The amendments adopted in this final rule exempt 
additional transactions from the appraisal regulation, reduce appraisal 
standards, and provide other modifications that have the effect of 
relieving perceived restrictions. Consequently, all amendments in this 
final rule meet the requirements for waiver set forth in the APA.

V. Paperwork Reduction Act

OCC Paperwork Reduction Act

    The collection of information contained in this final regulation 
has been reviewed and approved by the Office of Management and Budget 
in accordance with the requirements of the Paperwork Reduction Act (44 
U.S.C. 3504(h)) under control number 1557-0190. The estimated annual 
burden per recordkeeper ranges from 0 hours to in excess of 100 hours, 
depending on individual circumstances, with an estimated average of 
34.5 hours.
    Comments concerning the accuracy of this burden estimate and 
suggestions for reducing this burden should be directed to the 
Comptroller of the Currency, Legislative, Regulatory, and International 
Activities, Attention: 1557-0190, 250 E Street SW., Washington, DC 
20219, and to the Office of Management and Budget, Paperwork Reduction 
Project (1557-0190), Washington, DC 20503.

Board Paperwork Reduction Act

    The Board is adopting revisions to Regulation Y in this rulemaking 
that relate to recordkeeping requirements under authority delegated to 
it by the Office of Management and Budget, in accordance with section 
3507 of the Paperwork Reduction Act of 1980, 44 U.S.C. chapter 35, and 
part 1320 of title 5, Code of Federal Regulations, 5 CFR part 1320. In 
developing these revisions, the Board has consulted with the OCC, the 
FDIC, and the OTS.
    The collection of information in this regulation is in 12 CFR part 
225. This information is required by the Federal Reserve System to 
protect federal financial and public policy interests in real estate-
related financial transactions requiring the services of an appraiser. 
State member banks will use this information in determining whether and 
on what terms to enter into federally related transactions, such as 
making loans secured by real estate. The Federal Reserve System will 
use this information in its examination of State member banks and bank 
holding companies to ensure that they undertake real estate-related 
financial transactions in accordance with safe and sound banking 
principles.
    The likely recordkeepers are for-profit institutions.
    The estimated annual burden per recordkeeper varies from 0 hours to 
in excess of 100 hours, depending on individual circumstances, with an 
estimated average of 25.1 hours. Estimated number of recordkeepers: 
1573.

FDIC Paperwork Reduction Act

    The collection of information contained in this final rule has been 
submitted to the Office of Management and Budget for review in 
accordance with the Paperwork Reduction Act of 1980 (44 U.S.C. 
3504(h)). Comments on the collection of information should be sent to 
the Assistant Executive Secretary (Administration), room F-400, 550 
17th Street, NW., Washington, DC 20429, with a copy to the Office of 
Management and Budget, Paperwork Reduction Project 3064-0103, 
Washington, DC 20503.
    The collection of information in this final rule is in 12 CFR part 
323. This information is required by the FDIC to protect federal 
financial and public policy interests in real estate-related financial 
transactions requiring the services of an appraiser. State nonmember 
banks will use this information in determining whether and on what 
terms to enter into federally related transactions, such as making 
loans secured by real estate. The FDIC will use this information in its 
examination of State nonmember banks to ensure that they undertake real 
estate-related financial transactions in accordance with safe and sound 
banking principles.
    The likely recordkeepers are for-profit institutions.
    The estimated annual burden per recordkeeper varies from 0 hours to 
in excess of 100 hours, depending on individual circumstances, with an 
estimated average of 20.0 hours. Estimated number of recordkeepers: 
7,310.

OTS Paperwork Reduction Act

    The collection of information contained in this final regulation 
has been reviewed and approved by the Office of Management and Budget 
in accordance with the requirements of the Paperwork Reduction Act (44 
U.S.C. 3504(h)) under control number 1550. The estimated annual burden 
per recordkeeper ranges from 0 hours to in excess of 100 hours, 
depending on individual circumstances, with an estimated average of 59 
hours.
    Comments concerning the accuracy of this burden estimate and 
suggestions for reducing this burden should be directed to the Office 
of Management and Budget, Paperwork Reduction Project (1550), 
Washington, DC 20503, with copies to the Office of Thrift Supervision, 
1700 G Street, NW., Washington, DC 20552.

VI. OCC and OTS Executive Order 12866 Determination

    It has been determined that this final rule is not a ``Significant 
Regulatory Action'' under Executive Order 12866.

List of Subjects

12 CFR Part 34

    Mortgages, National banks, Real estate appraisals, Real estate 
lending standards, Reporting and recordkeeping requirements.

12 CFR Part 225

    Administrative practice and procedure, Banks, banking, Holding 
companies, Reporting and recordkeeping requirements, Securities.

12 CFR Part 323

    Banks, banking, Mortgages, Real estate appraisals, Reporting and 
recordkeeping requirements, State nonmember insured banks.

12 CFR Part 545

    Accounting, Consumer protection, Credit, Electronic funds 
transfers, Investments, Manufactured homes, Mortgages, Reporting and 
recordkeeping requirements, Savings associations.

12 CFR Part 563

    Accounting, Advertising, Crime, Currency, Flood insurance, 
Investments, Reporting and recordkeeping requirements, Savings 
associations, Securities, Surety bonds.

12 CFR Part 564

    Appraisals, Real estate appraisals, Reporting and recordkeeping 
requirements, Savings associations.

COMPTROLLER OF THE CURRENCY

12 CFR Chapter I

Authority and Issuance

    For the reasons set out in the joint preamble, part 34 of chapter I 
of title 12 of the Code of Federal Regulations is amended as set forth 
below:

PART 34--REAL ESTATE LENDING AND APPRAISALS

    1. The authority citation for part 34 continues to read as follows:

    Authority: 12 U.S.C. 1 et seq., 93a, 371, 1701j-3, 1828(o), and 
3331 et seq.

    2. In Sec. 34.42, existing paragraphs (d) through (l) are 
redesignated as paragraphs (e) through (m), respectively, and a new 
paragraph (d) is added to read as follows:

Sec. 34.42  Definitions.

* * * * *
    (d) Business loan means a loan or extension of credit to any 
corporation, general or limited partnership, business trust, joint 
venture, pool, syndicate, sole proprietorship, or other business 
entity.
* * * * *
    3. In Sec. 34.43, paragraph (a) is revised, paragraphs (b) through 
(d) are redesignated as paragraphs (d) through (f), respectively, and 
new paragraphs (b) and (c) are added to read as follows:

Sec. 34.43  Appraisals required; transactions requiring a State 
certified or licensed appraiser.

    (a) Appraisals required. An appraisal performed by a State 
certified or licensed appraiser is required for all real estate-related 
financial transactions except those in which:
    (1) The transaction value is $250,000 or less;
    (2) A lien on real estate has been taken as collateral in an 
abundance of caution;
    (3) The transaction is not secured by real estate;
    (4) A lien on real estate has been taken for purposes other than 
the real estate's value;
    (5) The transaction is a business loan that:
    (i) Has a transaction value of $1 million or less; and
    (ii) Is not dependent on the sale of, or rental income derived 
from, real estate as the primary source of repayment;
    (6) A lease of real estate is entered into, unless the lease is the 
economic equivalent of a purchase or sale of the leased real estate;
    (7) The transaction involves an existing extension of credit at the 
lending institution, provided that:
    (i) There has been no obvious and material change in market 
conditions or physical aspects of the property that threatens the 
adequacy of the institution's real estate collateral protection after 
the transaction, even with the advancement of new monies; or
    (ii) There is no advancement of new monies, other than funds 
necessary to cover reasonable closing costs;
    (8) The transaction involves the purchase, sale, investment in, 
exchange of, or extension of credit secured by, a loan or interest in a 
loan, pooled loans, or interests in real property, including mortgaged-
backed securities, and each loan or interest in a loan, pooled loan, or 
real property interest met OCC regulatory requirements for appraisals 
at the time of origination;
    (9) The transaction is wholly or partially insured or guaranteed by 
a United States government agency or United States government sponsored 
agency;
    (10) The transaction either:
    (i) Qualifies for sale to a United States government agency or 
United States government sponsored agency; or
    (ii) Involves a residential real estate transaction in which the 
appraisal conforms to the Federal National Mortgage Association or 
Federal Home Loan Mortgage Corporation appraisal standards applicable 
to that category of real estate;
    (11) The regulated institution is acting in a fiduciary capacity 
and is not required to obtain an appraisal under other law; or
    (12) The OCC determines that the services of an appraiser are not 
necessary in order to protect Federal financial and public policy 
interests in real estate-related financial transactions or to protect 
the safety and soundness of the institution.
    (b) Evaluations required. For a transaction that does not require 
the services of a State certified or licensed appraiser under paragraph 
(a)(1), (a)(5) or (a)(7) of this section, the institution shall obtain 
an appropriate evaluation of real property collateral that is 
consistent with safe and sound banking practices.
    (c) Appraisals to address safety and soundness concerns. The OCC 
reserves the right to require an appraisal under this subpart whenever 
the agency believes it is necessary to address safety and soundness 
concerns.
* * * * *
    4. Section 34.44 is revised to read as follows:

Sec. 34.44  Minimum appraisal standards.

    For federally related transactions, all appraisals shall, at a 
minimum:
    (a) Conform to generally accepted appraisal standards as evidenced 
by the Uniform Standards of Professional Appraisal Practice (USPAP) 
promulgated by the Appraisal Standards Board of the Appraisal 
Foundation, 1029 Vermont Ave., NW., Washington, DC 20005, unless 
principles of safe and sound banking require compliance with stricter 
standards;
    (b) Be written and contain sufficient information and analysis to 
support the institution's decision to engage in the transaction;
    (c) Analyze and report appropriate deductions and discounts for 
proposed construction or renovation, partially leased buildings, non-
market lease terms, and tract developments with unsold units;
    (d) Be based upon the definition of market value as set forth in 
this subpart; and
    (e) Be performed by State licensed or certified appraisers in 
accordance with requirements set forth in this subpart.
    5. In Sec. 34.45, paragraph (b) is revised to read as follows:

Sec. 34.45  Appraiser independence.

* * * * *
    (b) Fee appraisers. (1) If an appraisal is prepared by a fee 
appraiser, the appraiser shall be engaged directly by the regulated 
institution or its agent, and have no direct or indirect interest, 
financial or otherwise, in the property or the transaction.
    (2) A regulated institution also may accept an appraisal that was 
prepared by an appraiser engaged directly by another financial services 
institution, if:
    (i) The appraiser has no direct or indirect interest, financial or 
otherwise, in the property or the transaction; and
    (ii) The regulated institution determines that the appraisal 
conforms to the requirements of this subpart and is otherwise 
acceptable.

Appendix A to Subpart C  [Removed]

    6. Appendix A to subpart C, part 34, is removed.

    Dated: March 31, 1994.
Eugene A. Ludwig,
Comptroller of the Currency.

FEDERAL RESERVE SYSTEM

12 CFR Chapter II

    For the reasons set forth in the common preamble, the Board amends 
12 CFR part 225 as set forth below:

PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL 
(REGULATION Y)

    1. The authority citation for part 225 is revised to read as 
follows:

    Authority: 12 U.S.C. 1817(j)(13), 1818, 1831i, 1843(c)(8), 
1844(b), 1972(l), 3106, 3108, 3310, 3331-3351, 3907, and 3909.

    2. Section 225.62 is amended by redesignating paragraphs (d) 
through (f) and paragraphs (g) through (k) as paragraphs (e) through 
(g) and paragraphs (i) through (m), respectively, and adding new 
paragraphs (d) and (h) to read as follows:

Sec. 225.62  Definitions.

* * * * *
    (d) Business loan means a loan or extension of credit to any 
corporation, general or limited partnership, business trust, joint 
venture, pool, syndicate, sole proprietorship, or other business 
entity.
* * * * *
    (h) Real estate or real property means an identified parcel or 
tract of land, with improvements, and includes easements, rights of 
way, undivided or future interests, or similar rights in a tract of 
land, but does not include mineral rights, timber rights, growing 
crops, water rights, or similar interests severable from the land when 
the transaction does not involve the associated parcel or tract of 
land.
* * * * *
    3. Section 225.63 is amended by revising the section heading, 
revising paragraph (a), redesignating paragraphs (b) and (c) as 
paragraphs (d) and (e) and adding new paragraphs (b) and (c) to read as 
follows:

Sec. 225.63  Appraisals required; transactions requiring a State 
certified or licensed appraiser.

    (a) Appraisals required. An appraisal performed by a State 
certified or licensed appraiser is required for all real estate-related 
financial transactions except those in which:
    (1) The transaction value is $250,000 or less;
    (2) A lien on real estate has been taken as collateral in an 
abundance of caution;
    (3) The transaction is not secured by real estate;
    (4) A lien on real estate has been taken for purposes other than 
the real estate's value;
    (5) The transaction is a business loan that:
    (i) Has a transaction value of $1 million or less; and
    (ii) Is not dependent on the sale of, or rental income derived 
from, real estate as the primary source of repayment;
    (6) A lease of real estate is entered into, unless the lease is the 
economic equivalent of a purchase or sale of the leased real estate;
    (7) The transaction involves an existing extension of credit at the 
lending institution, provided that:
    (i) There has been no obvious and material change in market 
conditions or physical aspects of the property that threatens the 
adequacy of the institution's real estate collateral protection after 
the transaction, even with the advancement of new monies; or
    (ii) There is no advancement of new monies, other than funds 
necessary to cover reasonable closing costs;
    (8) The transaction involves the purchase, sale, investment in, 
exchange of, or extension of credit secured by, a loan or interest in a 
loan, pooled loans, or interests in real property, including mortgaged-
backed securities, and each loan or interest in a loan, pooled loan, or 
real property interest met Board regulatory requirements for appraisals 
at the time of origination;
    (9) The transaction is wholly or partially insured or guaranteed by 
a United States government agency or United States government sponsored 
agency;
    (10) The transaction either:
    (i) Qualifies for sale to a United States government agency or 
United States government sponsored agency; or
    (ii) Involves a residential real estate transaction in which the 
appraisal conforms to the Federal National Mortgage Association or 
Federal Home Loan Mortgage Corporation appraisal standards applicable 
to that category of real estate;
    (11) The regulated institution is acting in a fiduciary capacity 
and is not required to obtain an appraisal under other law; or
    (12) The Board determines that the services of an appraiser are not 
necessary in order to protect Federal financial and public policy 
interests in real estate-related financial transactions or to protect 
the safety and soundness of the institution.
    (b) Evaluations required. For a transaction that does not require 
the services of a State certified or licensed appraiser under paragraph 
(a)(1), (a)(5) or (a)(7) of this section, the institution shall obtain 
an appropriate evaluation of real property collateral that is 
consistent with safe and sound banking practices.
    (c) Appraisals to address safety and soundness concerns. The Board 
reserves the right to require an appraisal under this subpart whenever 
the agency believes it is necessary to address safety and soundness 
concerns.
* * * * *
    4. Section 225.64 is revised to read as follows:

Sec. 225.64  Minimum appraisal standards.

    For federally related transactions, all appraisals shall, at a 
minimum:
    (a) Conform to generally accepted appraisal standards as evidenced 
by the Uniform Standards of Professional Appraisal Practice promulgated 
by the Appraisal Standards Board of the Appraisal Foundation, 1029 
Vermont Ave., NW., Washington, DC 20005, unless principles of safe and 
sound banking require compliance with stricter standards;
    (b) Be written and contain sufficient information and analysis to 
support the institution's decision to engage in the transaction;
    (c) Analyze and report appropriate deductions and discounts for 
proposed construction or renovation, partially leased buildings, non-
market lease terms, and tract developments with unsold units;
    (d) Be based upon the definition of market value as set forth in 
this subpart; and
    (e) Be performed by State licensed or certified appraisers in 
accordance with requirements set forth in this subpart.
    5. Section 225.65 is amended by revising paragraph (b) to read as 
follows:

Sec. 225.65  Appraiser independence.

* * * * *
    (b) Fee appraisers. (1) If an appraisal is prepared by a fee 
appraiser, the appraiser shall be engaged directly by the regulated 
institution or its agent, and have no direct or indirect interest, 
financial or otherwise, in the property or the transaction.
    (2) A regulated institution also may accept an appraisal that was 
prepared by an appraiser engaged directly by another financial services 
institution, if:
    (i) The appraiser has no direct or indirect interest, financial or 
otherwise, in the property or the transaction; and
    (ii) The regulated institution determines that the appraisal 
conforms to the requirements of this subpart and is otherwise 
acceptable.

Appendix A to Subpart G  [Removed]

    6. Appendix A to subpart G, part 225, is removed.

    Dated: May 25, 1994.
William W. Wiles,
Secretary of the Board.

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Chapter III

Authority and Issuance

    For the reasons set out in the joint preamble, part 323 of 
subchapter B of chapter III of title 12 of the Code of Federal 
Regulations is amended as set forth below:

PART 323-APPRAISALS

    1. The authority citation for part 323 is revised to read as 
follows:

    Authority: 12 U.S.C. 1818, 1819 [``Seventh'' and ``Tenth''], and 
3331-3352.

    2. Section 323.2 is amended by redesignating paragraphs (d) through 
(l) as paragraphs (e) through (m), respectively, and adding a new 
paragraph (d) to read as follows:

Sec. 323.2  Definitions.

* * * * *
    (d) Business loan means a loan or extension of credit to any 
corporation, general or limited partnership, business trust, joint 
venture, pool, syndicate, sole proprietorship, or other business 
entity.
* * * * *
    3. Section 323.3 is amended by revising the section heading and 
paragraph (a), revising the phrase in paragraph (d) ``paragraphs (b) 
and (c) of this section'' to read ``this section'', redesignating 
paragraphs (b) through (d) as paragraphs (d) through (f), respectively, 
and adding new paragraphs (b) and (c) to read as follows:

Sec. 323.3  Appraisals required; transactions requiring a State 
certified or licensed appraiser.

    (a) Appraisals required. An appraisal performed by a State 
certified or licensed appraiser is required for all real estate-related 
financial transactions except those in which:
    (1) The transaction value is $250,000 or less;
    (2) A lien on real estate has been taken as collateral in an 
abundance of caution;
    (3) The transaction is not secured by real estate;
    (4) A lien on real estate has been taken for purposes other than 
the real estate's value;
    (5) The transaction is a business loan that:
    (i) Has a transaction value of $1 million or less; and
    (ii) Is not dependent on the sale of, or rental income derived 
from, real estate as the primary source of repayment;
    (6) A lease of real estate is entered into, unless the lease is the 
economic equivalent of a purchase or sale of the leased real estate;
    (7) The transaction involves an existing extension of credit at the 
lending institution, provided that:
    (i) There has been no obvious and material change in market 
conditions or physical aspects of the property that threatens the 
adequacy of the institution's real estate collateral protection after 
the transaction, even with the advancement of new monies; or
    (ii) There is no advancement of new monies, other than funds 
necessary to cover reasonable closing costs;
    (8) The transaction involves the purchase, sale, investment in, 
exchange of, or extension of credit secured by, a loan or interest in a 
loan, pooled loans, or interests in real property, including mortgaged-
backed securities, and each loan or interest in a loan, pooled loan, or 
real property interest met FDIC regulatory requirements for appraisals 
at the time of origination;
    (9) The transaction is wholly or partially insured or guaranteed by 
a United States government agency or United States government sponsored 
agency;
    (10) The transaction either:
    (i) Qualifies for sale to a United States government agency or 
United States government sponsored agency; or
    (ii) Involves a residential real estate transaction in which the 
appraisal conforms to the Federal National Mortgage Association or 
Federal Home Loan Mortgage Corporation appraisal standards applicable 
to that category of real estate;
    (11) The regulated institution is acting in a fiduciary capacity 
and is not required to obtain an appraisal under other law; or
    (12) The FDIC determines that the services of an appraiser are not 
necessary in order to protect Federal financial and public policy 
interests in real estate-related financial transactions or to protect 
the safety and soundness of the institution.
    (b) Evaluations required. For a transaction that does not require 
the services of a State certified or licensed appraiser under paragraph 
(a)(1), (a)(5) or (a)(7) of this section, the institution shall obtain 
an appropriate evaluation of real property collateral that is 
consistent with safe and sound banking practices.
    (c) Appraisals to address safety and soundness concerns. The FDIC 
reserves the right to require an appraisal under this part whenever the 
agency believes it is necessary to address safety and soundness 
concerns.
* * * * *
    4. Section 323.4 is revised to read as follows:

Sec. 323.4  Minimum appraisal standards.

    For federally related transactions, all appraisals shall, at a 
minimum:
    (a) Conform to generally accepted appraisal standards as evidenced 
by the Uniform Standards of Professional Appraisal Practice (USPAP) 
promulgated by the Appraisal Standards Board of the Appraisal 
Foundation, 1029 Vermont Ave., NW., Washington, DC 20005, unless 
principles of safe and sound banking require compliance with stricter 
standards;
    (b) Be written and contain sufficient information and analysis to 
support the institution's decision to engage in the transaction;
    (c) Analyze and report appropriate deductions and discounts for 
proposed construction or renovation, partially leased buildings, non-
market lease terms, and tract developments with unsold units;
    (d) Be based upon the definition of market value as set forth in 
this part; and
    (e) Be performed by State licensed or certified appraisers in 
accordance with requirements set forth in this part.
    5. Section 323.5 is amended by revising paragraph (b) to read as 
follows:

Sec. 323.5  Appraiser independence.

* * * * *
    (b) Fee appraisers. (1) If an appraisal is prepared by a fee 
appraiser, the appraiser shall be engaged directly by the regulated 
institution or its agent, and have no direct or indirect interest, 
financial or otherwise, in the property or the transaction.
    (2) A regulated institution also may accept an appraisal that was 
prepared by an appraiser engaged directly by another financial services 
institution, if:
    (i) The appraiser has no direct or indirect interest, financial or 
otherwise, in the property or the transaction; and
    (ii) The regulated institution determines that the appraisal 
conforms to the requirements of this part and is otherwise acceptable.

Appendix IX  [Removed]

    6. Appendix A to Part 323 is removed.

    By order of the Board of Directors.

    Dated at Washington, DC, this 3rd day of May 1994.

    Federal Deposit Insurance Corporation.
Robert E. Feldman,
Acting Executive Secretary.

OFFICE OF THRIFT SUPERVISION

12 CFR Chapter V

Authority and Issuance

    Accordingly, for the reasons set forth in the joint preamble, the 
Office of Thrift Supervision hereby amends chapter V, title 12 of the 
Code of Federal Regulations, as set forth below:

Subchapter C--Regulations for Federal Savings Associations

PART 545--OPERATIONS

    1. The authority citation for part 545 continues to read as 
follows:

    Authority: 12 U.S.C. 1462a, 1463, 1464, 1828.

    2. Section 545.32 is amended by revising the first sentence of 
paragraph (b)(2) to read as follows:

Sec. 545.32  Real estate loans.

* * * * *
    (b) * * *
    (2) Appraisals. A Federal savings association may make a real 
estate loan only after an appraiser has submitted a signed appraisal of 
the security property consistent with the requirements of part 564 of 
this chapter. * * *
* * * * *
    3. Section 545.103 is amended by revising the second sentence of 
paragraph (b) to read as follows:

Sec. 545.103  Suretyship.

* * * * *
    (b) * * * If real estate, the value must be established by a signed 
appraisal consistent with the requirements of part 564 of this chapter. 
* * *
* * * * *
Subchapter D--Regulations Applicable to All Savings Associations

PART 563--OPERATIONS

    4. The authority citation for part 563 continues to read as 
follows:

    Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467, 1468, 1817, 
1818, 3806; 42 U.S.C. 4106; Pub. L. 102-242, sec. 306, 105 Stat. 
2236, 2335 (1991).

    5. Section 563.170 is amended by revising paragraph (c)(1)(iv) to 
read as follows:

Sec. 563.170  Examinations and audits; appraisals; establishment and 
maintenance of records.

* * * * *
    (c) * * *
    (1) * * *
    (iv) One or more written appraisal reports, prepared at the request 
of the lender or its agent and for the lender's use, and signed prior 
to the approval of such application (except in the case of an approval 
conditioned upon obtaining an appraisal) that satisfies the 
requirements of part 564 of this chapter: Provided, however, That 
nothing in this paragraph (c)(1)(iv) shall apply to property 
improvement loans, as that term is used in 24 CFR 200.167, insured by 
the Federal Housing Administration for which that agency does not 
require an appraisal or certification of valuation;
* * * * *

PART 564--APPRAISALS

    6. The authority citation for part 564 is revised to read as 
follows:

    Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1828(m), 3331 et 
seq.

    7. Section 564.2 is amended by redesignating paragraphs (d) through 
(l) as paragraphs (e) through (m), respectively, and by adding a new 
paragraph (d) to read as follows:

Sec. 564.2  Definitions.

* * * * *
    (d) Business loan means a loan or extension of credit to any 
corporation, general or limited partnership, business trust, joint 
venture, pool, syndicate, sole proprietorship, or other business 
entity.
* * * * *
    8. Section 564.3 is amended by revising paragraph (a), 
redesignating paragraphs (b) through (d) as paragraphs (d) through (f), 
and adding new paragraphs (b) and (c) to read as follows:

Sec. 564.3  Appraisals required; transactions requiring a State 
certified or licensed appraiser.

    (a) Appraisals required. An appraisal performed by a State 
certified or licensed appraiser is required for all real estate-related 
financial transactions except those in which:
    (1) The transaction value is $250,000 or less;
    (2) A lien on real estate has been taken as collateral in an 
abundance of caution;
    (3) The transaction is not secured by real estate;
    (4) A lien on real estate has been taken for purposes other than 
the real estate's value;
    (5) The transaction is a business loan that:
    (i) Has a transaction value of $1 million or less; and
    (ii) Is not dependent on the sale of, or rental income derived 
from, real estate as the primary source of repayment;
    (6) A lease of real estate is entered into, unless the lease is the 
economic equivalent of a purchase or sale of the leased real estate;
    (7) The transaction involves an existing extension of credit at the 
lending institution, provided that:
    (i) There has been no obvious and material change in market 
conditions or physical aspects of the property that threatens the 
adequacy of the institution's real estate collateral protection after 
the transaction, even with the advancement of new monies; or
    (ii) There is no advancement of new monies, other than funds 
necessary to cover reasonable closing costs;
    (8) The transaction involves the purchase, sale, investment in, 
exchange of, or extension of credit secured by, a loan or interest in a 
loan, pooled loans, or interests in real property, including mortgaged-
backed securities, and each loan or interest in a loan, pooled loan, or 
real property interest met OTS regulatory requirements for appraisals 
at the time of origination;
    (9) The transaction is wholly or partially insured or guaranteed by 
a United States government agency or United States government sponsored 
agency;
    (10) The transaction either:
    (i) Qualifies for sale to a United States government agency or 
United States government sponsored agency; or
    (ii) Involves a residential real estate transaction in which the 
appraisal conforms to the Federal National Mortgage Association or 
Federal Home Loan Mortgage Corporation appraisal standards applicable 
to that category of real estate;
    (11) The regulated institution is acting in a fiduciary capacity 
and is not required to obtain an appraisal under other law; or
    (12) The OTS determines that the services of an appraiser are not 
necessary in order to protect Federal financial and public policy 
interests in real estate-related financial transactions or to protect 
the safety and soundness of the institution.
    (b) Evaluations required. For a transaction that does not require 
the services of a State certified or licensed appraiser under paragraph 
(a)(1), (a)(5) or (a)(7) of this section, the institution shall obtain 
an appropriate evaluation of real property collateral that is 
consistent with safe and sound banking practices.
    (c) Appraisals to address safety and soundness concerns. The OTS 
reserves the right to require an appraisal under this part whenever the 
agency believes it is necessary to address safety and soundness 
concerns.
* * * * *
    9. Section 564.4 is revised to read as follows:

Sec. 564.4  Minimum appraisal standards.

    For federally related transactions, all appraisals shall, at a 
minimum:
    (a) Conform to generally accepted appraisal standards as evidenced 
by the Uniform Standards of Professional Appraisal Practice (USPAP) 
promulgated by the Appraisal Standards Board of the Appraisal 
Foundation, 1029 Vermont Ave., NW., Washington, DC 20005, unless 
principles of safe and sound banking require compliance with stricter 
standards;
    (b) Be written and contain sufficient information and analysis to 
support the institution's decision to engage in the transaction;
    (c) Analyze and report appropriate deductions and discounts for 
proposed construction or renovation, partially leased buildings, non-
market lease terms, and tract developments with unsold units;
    (d) Be based upon the definition of market value as set forth in 
this part; and
    (e) Be performed by State licensed or certified appraisers in 
accordance with requirements set forth in this part.
    10. Section 564.5 is amended by revising paragraph (b) to read as 
follows:

Sec. 564.5  Appraiser independence.

* * * * *
    (b) Fee appraisers. (1) If an appraisal is prepared by a fee 
appraiser, the appraiser shall be engaged directly by the regulated 
institution or its agent, and have no direct or indirect interest, 
financial or otherwise, in the property or the transaction.
    (2) A regulated institution also may accept an appraisal that was 
prepared by an appraiser engaged directly by another financial services 
institution, if:
    (i) The appraiser has no direct or indirect interest, financial or 
otherwise, in the property or the transaction; and
    (ii) The regulated institution determines that the appraisal 
conforms to the requirements of this part and is otherwise acceptable.

Sec. 564.8  [Amended]

    11. Section 564.8 is amended by removing paragraph (d)(1), by 
removing the colon following the introductory text of paragraph (d), by 
revising the word ``Appraisals'' to read ``appraisals'' in paragraph 
(d)(2), and by removing the paragraph designation (d)(2).

Appendix A  [Removed]

    12. Appendix A to Part 564 is removed.

    Dated: April 6, 1994.

    By the Office of Thrift Supervision.
Jonathan L. Fiechter,
Acting Director.
[FR Doc. 94-13312 Filed 6-6-94; 8:45 am]
BILLING CODE 4810-33-P, 6210-01-P, 6714-01-P, 6720-01-P