66554 Federal Register / Vol. 75, No. 208 / Thursday, October 28, 2010 / Rules and Regulations 

1Public Law 111–203, 124 Stat. 1376. 

2 ‘‘Home Valuation Code of Conduct’’ (HVCC), 

available at http://www.fhfa.gov/webfiles/2302/ 

HVCCFinalCODE122308.pdf. 

3See, e.g., the Board’s regulation at 12 CFR 

225.65, and its guidance, available at http:// 

www.federalreserve.gov/boarddocs/srletters/1994/ 

sr9455.htm. Title XI of the Financial Institutions 

Reform, Recovery, and Enforcement Act of 1989 

(FIRREA) was enacted to protect federal financial 

FEDERAL RESERVE SYSTEM 

12 CFR Part 226 

Regulation Z; Docket No. R–1394 

RIN AD–7100–56 

Truth in Lending 

AGENCY: Board of Governors of the 

Federal Reserve System. 

ACTION: Interim final rule; request for 

public comment. 

SUMMARY: The Board is publishing for 

public comment an interim final rule 

amending Regulation Z (Truth in 

Lending). The interim rule implements 

Section 129E of the Truth in Lending 

Act (TILA), which was enacted on July 

21, 2010, as Section 1472 of the DoddFrank Wall Street Reform and Consumer 

Protection Act. TILA Section 129E 

establishes new requirements for 

appraisal independence for consumer 

credit transactions secured by the 

consumer’s principal dwelling. The 

amendments are designed to ensure that 

real estate appraisals used to support 

creditors’ underwriting decisions are 

based on the appraiser’s independent 

professional judgment, free of any 

influence or pressure that may be 

exerted by parties that have an interest 

in the transaction. The amendments also 

seek to ensure that creditors and their 

agents pay customary and reasonable 

fees to appraisers. The Board seeks 

comment on all aspects of the interim 

final rule. 

DATES: This interim final rule is 

effective December 27, 2010, except that 

the removal of § 226.36(b) is effective 

April 1, 2011. 

Compliance Date: To allow time for 

any necessary operational changes, 

compliance with this interim final rule 

is optional until April 1, 2011. 

Comments: Comments must be 

received on or before December 27, 

2010. 

ADDRESSES: You may submit comments, 

identified by Docket No. R–1394 and 

RIN No. AD–7100–56, by any of the 

following methods: 

• Agency Web Site: http:// 

www.federalreserve.gov. Follow the 

instructions for submitting comments at 

http://www.federalreserve.gov/ 

generalinfo/foia/ProposedRegs.cfm. 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

• E-mail: 

regs.comments@federalreserve.gov. 

Include the docket number in the 

subject line of the message. 

• Fax: (202) 452–3819 or (202) 452– 

3102. 

• Mail: Address to Jennifer J. Johnson, 

Secretary, Board of Governors of the 

Federal Reserve System, 20th Street and 

Constitution Avenue, NW., Washington, 

DC 20551. 

All public comments will be made 

available on the Board’s Web site at 

http://www.federalreserve.gov/ 

generalinfo/foia/ProposedRegs.cfm as 

submitted, unless modified for technical 

reasons. Accordingly, comments will 

not be edited to remove any identifying 

or contact information. Public 

comments may also be viewed 

electronically or in paper in Room MP– 

500 of the Board’s Martin Building (20th 

and C Streets, NW.) between 9 a.m. and 

5 p.m. on weekdays. 

FOR FURTHER INFORMATION CONTACT: 

Jamie Z. Goodson, Attorney, or Lorna M. 

Neill, Senior Attorney; Division of 

Consumer and Community Affairs, 

Board of Governors of the Federal 

Reserve System, Washington, DC 20551, 

at (202) 452–2412 or (202) 452–3667. 

For users of Telecommunications 

Device for the Deaf (TDD) only, contact 

(202) 263–4869. 

SUPPLEMENTARY INFORMATION: 

I. Background 

The Truth in Lending Act (TILA), 15 

U.S.C. 1601 et seq., seeks to promote the 

informed use of consumer credit by 

requiring disclosures about its costs and 

terms. TILA requires additional 

disclosures for loans secured by 

consumers’ homes and permits 

consumers to rescind certain 

transactions that involve their principal 

dwelling. TILA directs the Board to 

prescribe regulations to carry out the 

purposes of the law and specifically 

authorizes the Board, among other 

things, to issue regulations that contain 

such classifications, differentiations, or 

other provisions, or that provide for 

such adjustments and exceptions for 

any class of transactions, that in the 

Board’s judgment are necessary or 

proper to effectuate the purposes of 

TILA, facilitate compliance with TILA, 

or prevent circumvention or evasion of 

TILA. 15 U.S.C. 1604(a). TILA is 

implemented by the Board’s Regulation 

Z, 12 CFR part 226. An Official Staff 

Commentary interprets the requirements 

of the regulation and provides guidance 

to creditors in applying the rules to 

specific transactions. See 12 CFR part 

226, Supp. I. 

On July 21, 2010, the Dodd-Frank 

Wall Street Reform and Consumer 

Protection Act (the ‘‘Dodd-Frank Act’’) 

was signed into law.1 Section 1472 of 

the Dodd-Frank Act amended TILA to 

establish new requirements for appraisal 

independence. Specifically, the 

appraisal independence provisions in 

the Dodd-Frank Act: 

• Prohibit coercion, bribery and other 

similar actions designed to cause an 

appraiser to base the appraised value of the 

property on factors other than the appraiser’s 

independent judgment; 

• Prohibit appraisers and appraisal 

management companies from having a 

financial or other interest in the property or 

the credit transaction; 

• Prohibit a creditor from extending credit 

if it knows, before consummation, of a 

violation of the prohibition on coercion or of 

a conflict of interest; 

• Mandate that the parties involved in the 

transaction report appraiser misconduct to 

state appraiser licensing authorities; 

• Mandate the payment of reasonable and 

customary compensation to a ‘‘fee appraiser’’ 

(e.g., an appraiser who is not the salaried 

employee of the creditor or the appraisal 

management company hired by the creditor); 

and 

• Provides that when the Board 

promulgates the interim final rule, the Home 

Valuation Code of Conduct, the current 

standard for appraisal independence for 

loans purchased by Fannie Mae and Freddie 

Mac, will have no further force or effect.2

These provisions are contained in 

TILA Section 129E, which applies to 

any consumer credit transaction that is 

secured by the consumer’s principal 

dwelling. TILA Section 129E(g)(1) 

authorizes the Board, the Comptroller of 

the Currency, the Federal Deposit 

Insurance Corporation, the National 

Credit Union Administration, the 

Federal Housing Finance Authority 

(‘‘FHFA’’), and the Consumer Financial 

Protection Bureau to issue rules and 

guidelines. TILA Section 129E(g)(2), 

however, requires the Board to issue 

interim final regulations to implement 

the appraisal independence 

requirements within 90 days of 

enactment of the Dodd-Frank Act. As 

discussed below, the Board finds there 

is good cause for issuing an interim final 

rule without opportunity for advance 

notice and comment. 

Appraisal independence. Over the 

years concerns have been raised about 

the need to ensure that appraisals are 

provided free of any coercion or 

improper influence. The Board and the 

other federal banking agencies have 

jointly issued regulations and 

supervisory guidance on appraisal 

independence.3 However, the guidance 

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Federal Register / Vol. 75, No. 208 / Thursday, October 28, 2010 / Rules and Regulations 66555 

and public policy interests in real estate 

transactions. 12 U.S.C. 3339. It requires the Board, 

the Comptroller of the Currency, the Office of Thrift 

Supervision, the Federal Deposit Insurance 

Corporation, and the National Credit Union 

Administration (the federal banking agencies) to 

adopt regulations on the preparation and use of 

appraisals by federally regulated financial 

institutions. 12 U.S.C. 3331. 

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

5Under the interim final rule, a person provides 

a service if he provides a ‘‘settlement service’’ as 

defined in the Real Estate Settlement Procedures 

Act, 12 U.S.C. 2602(3). See § 226.42(b)(1). 

is limited to federally supervised 

institutions. Based on concerns about 

consumers obtaining home-secured 

loans based on misstated appraisals, in 

2008, the Board used its authority under 

the Home Ownership and Equity 

Protection Act (HOEPA) to prohibit a 

creditor or mortgage broker from 

coercing or influencing an appraiser to 

misstate the value of a consumer’s 

principal dwelling (2008 Appraisal 

Independence Rules). 12 CFR 226.36(b); 

15 U.S.C. 1639(l)(2). The 2008 Appraisal 

Independence Rules took effect on 

October 1, 2009. Section 1472 of the 

Dodd-Frank Act essentially codifies the 

2008 Appraisal Independence Rules, 

and expands on the protections in those 

rules. This interim final rule 

incorporates the provisions in the 2008 

Appraisal Independence Rules. Thus, 

the Board is removing the 2008 

Appraisal Independence Rules effective 

on April 1, 2010. 

In December 2008, Fannie Mae and 

Freddie Mac (‘‘the GSEs’’) announced 

the Home Valuation Code of Conduct 

(HVCC), which established appraisal 

independence standards for loans the 

GSEs would purchase. The HVCC is 

based on an agreement between the 

GSEs, New York State Attorney General 

Andrew Cuomo, and the FHFA. The 

HVCC provides that, among other 

things, only a creditor or its agent may 

select, engage, and compensate an 

appraiser and that a creditor must 

ensure that its loan production staff do 

not influence the appraisal process or 

outcome. As noted, however, the DoddFrank Act mandates that the HVCC shall 

have no effect, once the Board issues 

this interim final rule.4

II. Summary of the Interim Final Rule 

The interim final rule applies to a 

person who extends credit or provides 

services in connection with a consumer 

credit transaction secured by a 

consumer’s principal dwelling. 

Although TILA and Regulation Z 

generally apply only to persons to 

whom the obligation is initially made 

payable and that regularly engage in 

extending consumer credit, TILA 

Section 129E and the interim final rule 

apply to persons that provide services 

without regard to whether they also 

extend consumer credit by originating 

mortgage loans.5 Thus, the interim final 

rule applies to creditors, appraisal 

management companies, appraisers, 

mortgage brokers, realtors, title insurers 

and other firms that provide settlement 

services. 

Other scope issues. The interim final 

rule applies to appraisals for any 

consumer credit transaction secured by 

the consumer’s principal dwelling. 

Covering consumer credit transactions 

is consistent with the scope of TILA 

generally, which only applies to credit 

extended for personal, family or 

household purposes. However, the 

scope of the interim final rule is broader 

than the 2008 Appraisal Independence 

Rules; those rules apply to closed-end 

loans but not to home-equity lines of 

credit (HELOCs). The broader scope is 

required by Section 1472 of the DoddFrank Act, which does not limit 

coverage to closed-end loans and also 

covers HELOCs. 

In addition, with a few exceptions, 

the interim final rule applies to any 

person who performs valuation services, 

performs valuation management 

functions, and to any valuation of the 

consumer’s principal dwelling, not just 

to a licensed or certified ‘‘appraiser,’’ an 

‘‘appraisal management company,’’ or to 

a formal ‘‘appraisal.’’ This approach 

implements the statutory provisions and 

is consistent with the 2008 Appraisal 

Independence Rules, and is designed to 

ensure that consumers are protected 

regardless of the valuation method 

chosen by the creditor, and to prevent 

circumvention of the appraisal 

independence rules. These provisions 

are discussed in more detail in the 

section-by-section analysis below. 

Coercion and prohibited extensions of 

credit. Consistent with the Dodd-Frank 

Act, the interim final rule prohibits 

certain practices that the Board’s 2008 

HOEPA rules also prohibit. First, the 

interim final rule prohibits covered 

persons from engaging in coercion, 

bribery, and other similar actions 

designed to cause anyone who prepares 

a valuation to base the value of the 

property on factors other than the 

person’s independent judgment. The 

interim final rule adds examples from 

the Dodd-Frank Act and the Board’s 

2008 HOEPA rules of actions that do 

and do not constitute unlawful 

coercion. Second, the interim final rule 

prohibits a creditor from extending 

credit based on a valuation if the 

creditor knows, at or before 

consummation, that (a) coercion or 

other similar conduct has occurred, or 

(b) that the person who prepares a 

valuation or who performs valuation 

management services has a prohibited 

interest in the property or the 

transaction as discussed below, unless 

the creditor uses reasonable diligence to 

determine that the valuation does not 

materially misstate the value of the 

property. 

Conflicts of interest. The interim final 

rule provides that a person who 

prepares a valuation or who performs 

valuation management services may not 

have an interest, financial or otherwise, 

in the property or the transaction. The 

Dodd-Frank Act does not expressly ban 

the use of in-house appraisers or 

affiliates. However, because the Act 

prohibits appraisers from having an 

‘‘indirect financial interest’’ in the 

transaction, it is possible to interpret the 

Act to prohibit creditors from using inhouse staff appraisers and affiliated 

appraisal management companies 

(AMCs). The interim final rule clarifies 

that an employment relationship or 

affiliation does not, by itself, violate the 

prohibition. The interim final rule also 

contains establishes a safe harbor and 

specific criteria for establishing 

firewalls between the appraisal function 

and the loan production function, to 

prevent conflicts of interest. Special 

guidance on firewalls is provided for 

small institutions, because they likely 

cannot completely separate appraisal 

and loan production staff. Small 

institutions are those with assets of $250 

million or less. 

Mandatory reporting of appraiser 

misconduct. The interim final rule 

provides that a creditor or settlement 

service provider involved in the 

transaction who has a reasonable basis 

to believe that an appraiser has not 

complied with ethical or professional 

requirements for appraisers under 

applicable federal or state law, or the 

Uniform Standards of Appraisal Practice 

(USPAP) must report the failure to 

comply to the appropriate state 

licensing agency. The interim final rule 

limits the duty to report compliance 

failures to those that are likely to affect 

the value assigned to the property. The 

interim final rule also provides that a 

person has a ‘‘reasonable basis’’ to 

believe an appraiser has not complied 

with the law or applicable standards, 

only if the person has knowledge or 

evidence that would lead a reasonable 

person under the circumstances to 

believe that a material failure to comply 

has occurred. 

Customary and reasonable rate of 

compensation for fee appraisers. Under 

the interim final rule, a creditor and its 

agent must pay a fee appraiser at a rate 

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66556 Federal Register / Vol. 75, No. 208 / Thursday, October 28, 2010 / Rules and Regulations 

6See, e.g., Office of the Federal Register, ‘‘A Guide 

to the Rulemaking Process, http:// 

www.federalregister.gov/learn/ 

the_rulemaking_process.pdf; Administrative 

Conference of the U.S., Recommendation 95–4 

(1995); U.S. Government Accountability Office, 

Federal Rulemaking: Agencies Often Published 

Final Actions Without Proposed Rules, GAO/GGD– 

98–126, 7 (1998); American Bar Ass’n, A Guide to 

Federal Agency Rulemaking, 3rd Ed., 83–Y4 (2006). 

that is reasonable and customary in the 

geographic market where the property is 

located. The rule provides two 

presumptions of compliance. Under the 

first, a creditor and its agent is 

presumed to have paid a customary and 

reasonable fee if the fee is reasonably 

related to recent rates paid for appraisal 

services in the relevant geographic 

market, and, in setting the fee, the 

creditor or its agent has: 

• Taken into account specific factors, 

which include, for example, the type of 

property and the scope of work; and 

• Not engaged in any anticompetitive 

actions, in violation of state or federal law, 

that affect the appraisal fee, such as pricefixing or restricting others from entering the 

market. 

Second, a creditor or its agent would 

also be presumed to comply if it 

establishes a fee by relying on rates 

established by third party information, 

such as the appraisal fee schedule 

issued by the Veteran’s Administration, 

and/or fee surveys and reports that are 

performed by an independent third 

party (the Act provides that these 

surveys and reports must not include 

fees paid by AMCs). 

III. Legal Authority 

Rulemaking Authority 

As noted above, TILA Section 105(a) 

directs the Board to prescribe 

regulations to carry out the act’s 

purposes. 15 U.S.C. 1604(a). In addition, 

TILA Section 129E, added by the DoddFrank Act, includes several grants of 

rulemaking authority to implement the 

provisions of that section. Specifically, 

Section 129E(g)(1) authorizes the Board, 

the other federal banking agencies, the 

Federal Housing Finance Agency, and 

the Consumer Financial Protection 

Bureau to jointly issue rules, guidelines, 

and policy statements ‘‘with respect to 

acts or practices that violate appraisal 

independence in the provision of 

mortgage lending services * * * within 

the meaning of subsections (a), (b), (c), 

(d), (e), (f), (h), and (i).’’ 15 U.S.C. 

1639e(g)(1). Second, Section 129E(g)(2) 

directs the Board to prescribe interim 

final regulations no later than 90 days 

after the law’s enactment date, ‘‘defining 

with specificity acts or practices that 

violate appraisal independence in the 

provision of mortgage lending services’’ 

and ‘‘defining any terms in this section 

or such regulations.’’ 15 U.S.C. 

1639e(g)(2). The Board’s interim final 

regulations under Section 129E(g)(2) are 

deemed to be rules prescribed by the 

agencies jointly. Third, Section 129E(h), 

authorizes the Board, the banking 

agencies, the FHFA and the Consumer 

Financial Protection Bureau to jointly 

issue rules regarding appraisal report 

portability. 15 U.S.C. 1639e(h). 

The Board is issuing this interim final 

rule pursuant to its general authority in 

Section 105(a) and the specific authority 

conferred by Section 129E(g)(2) to 

implement the appraisal independence 

provisions in Section 129E. Some 

industry representatives have asserted 

that the appraiser compensation 

provisions in Section 129E(i) do not 

relate to appraisal independence and, 

therefore, should not be addressed by 

the Board’s interim final rules issued 

under Section 129E(g)(2). The Board 

concludes, however, that the legislative 

directive to issue interim final rules 

includes the appraiser compensation 

provisions in Section 129E(i). In 

particular, the Board believes that its 

authority under Section 129E(g)(2) 

should be read consistently with the 

authority granted in Section 129E(g)(1), 

which expressly identifies the 

compensation provision in Section 

129E(i) as an ‘‘appraisal independence’’ 

provision. 

Authority To Issue Interim Final Rule 

Without Notice and Comment 

The Administrative Procedures Act 

(APA), 5 U.S.C. 551 et seq., generally 

requires public notice before 

promulgation of regulations. See 5 

U.S.C. 553(b). The APA also provides an 

exception, however, when there is good 

cause because notice and public 

procedure is impracticable. 5 U.S.C. 

553(b)(B). The Board finds that for this 

interim rule there is ‘‘good cause’’ to 

conclude that providing notice and an 

opportunity to comment would be 

impracticable and, therefore, is not 

required. The Board’s finding of good 

cause is based on the following 

considerations. Congress imposed a 90 

day deadline for issuing the interim 

final rule. Providing notice and an 

opportunity to comment is 

impracticable, because 90 days does not 

provide sufficient time for the Board to 

prepare and publish proposed 

regulations, provide a period for 

comment, and publish in the Federal 

Register before the statutory deadline. 

Even if the Board were able to publish 

proposed rules for public comment, the 

comment period would have been too 

short to afford interested parties 

sufficient time to prepare wellresearched comments or to afford time 

for the Board to conduct a meaningful 

review and analysis of those comments. 

Consequently, the Board finds that the 

use of notice-and-comment procedures 

before issuing these rules would be 

impracticable. Interested parties will 

still have an opportunity to submit 

comments in response to this interim 

final rule before permanent final rules 

are issued. 

Moreover, the Board believes that the 

Dodd-Frank Act’s mandate that the 

Board issue interim final rules that will 

be effective before the issuance of 

permanent rules also supports the 

Board’s determination that notice and 

comment are impracticable. If the 

legislation had contemplated a notice 

and comment period, the rules issued 

by the Board could have been referred 

to as ‘‘final rules’’ rather than ‘‘interim 

final rules.’’ The term ‘‘interim final 

regulations’’ or ‘‘interim final rules’’ has 

long been recognized to mean rules that 

an agency issues without first giving 

notice of a proposed rule and having a 

public comment period.6

IV. Section-by-Section Analysis 

Section 226.5b Requirements for 

Home-Equity Plans 

Section 1472 of the Dodd-Frank Act 

adds to TILA a new Section 129E that 

establishes appraiser independence 

requirements for a consumer credit 

transaction secured by the consumer’s 

principal dwelling. 15 U.S.C. 1639e. 

TILA Section 129E applies to both openand closed-end consumer credit 

transactions secured by the consumer’s 

principal dwelling, as discussed in 

detail below in the section-by-section 

analysis of § 226.42. Accordingly, new 

comment 5b–7 is being adopted to 

clarify that home-equity plans subject to 

§ 226.5b that are secured by the 

consumer’s principal dwelling also are 

subject to the requirements of new TILA 

Section 129E and § 226.42. 

Section 226.42 Valuation 

Independence 

Overview 

This part discusses the 

implementation of the appraisal 

independence provisions added to TILA 

by the Dodd-Frank Act by this interim 

final rule. TILA Section 129E(a) 

prohibits persons that extend credit or 

provide any service for a consumer 

credit transaction secured by the 

consumer’s principal dwelling (covered 

transaction) from engaging in ‘‘any acts 

or practices that violate appraisal 

independence as described in or 

pursuant to regulations prescribed 

under [TILA Section 129E].’’ 15 U.S.C. 

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Federal Register / Vol. 75, No. 208 / Thursday, October 28, 2010 / Rules and Regulations 66557 

7This interim final rule does not implement TILA 

Section 129E(h), which authorizes the Board and 

other specified Federal agencies to jointly issue 

regulations concerning appraisal report portability. 

Public Law 111–203, 124 Stat. 2187 (to be codified 

at 15 U.S.C. 1639e(h)). 

1639e(a). This provision applies to both 

closed- and open-end extensions of 

credit. TILA Section 129E(b) describes 

certain acts and practices that violate 

appraisal independence. 15 U.S.C. 

1639e(b). TILA Section 129E(c) also 

specifies certain acts and practices that 

are deemed to be permissible. 15 U.S.C. 

1639e(c). Under TILA Section 129E(f), a 

creditor that knows about a violation of 

the appraiser independence standards 

or a prohibited conflict of interest at or 

before consummation of the transaction 

is prohibited from extending credit 

based on the appraisal unless the 

creditor documents that it has acted 

with reasonable diligence to determine 

that the appraisal does not materially 

misstate or misrepresent the value of 

such dwelling. 15 U.S.C. 1639e(f). 

TILA Section 129E(b) and (c) are 

substantially similar to the appraisal 

regulations that the Board issued in 

2008, which became effective on 

October 1, 2009. 15 U.S.C. 1639e(b), (c). 

See § 226.36(b); 73 FR 44522, 44604 (Jul. 

30, 2008) (2008 Appraisal Independence 

Rules). The Board’s 2008 Appraisal 

Independence Rules prohibit creditors 

and mortgage brokers and their affiliates 

from directly or indirectly coercing, 

influencing, or otherwise encouraging 

an appraiser to misstate or misrepresent 

the value of the consumer’s principal 

dwelling. See § 226.36(b)(1). However, 

the 2008 rules apply only to closed-end 

mortgage loans. The prohibition on 

certain extensions of credit in TILA 

Section 129E(f) also is substantially 

similar to § 226.36(b)(2) of the Board’s 

2008 Appraisal Independence Rules. 15 

U.S.C. 1639e(f). 

The Board is removing § 226.36(b), 

effective April 1, 2011, the mandatory 

compliance date for this interim final 

rule. The Board is removing § 226.36(b) 

because the provision is substantially 

similar to TILA Section 129E(b), (c), and 

(f), implemented in § 226.42 by this 

interim final rule. Through March 31, 

2011, creditors, mortgage brokers, and 

their affiliates may comply with either 

§ 226.36(b) or new § 226.42. If such 

persons comply with § 226.42, they are 

deemed to comply with § 226.36(b). 

TILA Section 129E also adds 

provisions not covered by the Board’s 

2008 Appraisal Independence Rules. 

For a covered transaction, TILA Section 

129E(d) prohibits an appraiser that 

conducts and an appraisal management 

company that procures or facilitates an 

appraisal of the consumer’s principal 

dwelling from having a direct or 

indirect interest in the dwelling or the 

covered transaction, as discussed in 

detail below in the section-by-section 

analysis of § 226.42(d). Under TILA 

Section 129E(f), a creditor that knows 

about a violation of the conflicts of 

interest provisions under TILA Section 

129E(d) is prohibited from extending 

credit based on the appraisal, unless the 

creditor documents that it has acted 

with reasonable diligence to determine 

that the appraisal does not materially 

misstate or misrepresent the value of 

such dwelling. 15 U.S.C. 1639e(f). TILA 

Section 129E(e) imposes a requirement 

for reporting certain compliance failures 

by appraisers to state appraiser 

certifying and licensing agencies. 15 

U.S.C. 1539e(e). TILA Section 129E(i) 

provides that lenders and their agents 

must compensate fee appraisers at a rate 

that is ‘‘customary and reasonable for 

appraisal services performed in the 

market area of the property being 

appraised.’’ 7 15 U.S.C. 1639e(i). 

42(a) Scope 

TILA Section 129E(a) generally 

prohibits acts or practices that violate 

appraisal independence ‘‘in extending 

credit or in providing any services’’ for 

a consumer credit transaction secured 

by the consumer’s principal dwelling. 

15 U.S.C. 1639e(a). Thus, the coverage 

of the prohibition in Section 129E is not 

limited to creditors, mortgage brokers, 

and their affiliates, as is the case with 

the Board’s 2008 Appraisal 

Independence Rules contained in 

§ 226.36(b). Section 129E also covers 

open-end credit plans secured by the 

consumer’s principal dwelling, which 

are not covered by the Board’s 2008 

rules. See comment 42(a)-1. Consistent 

with the statute, this interim final rule 

applies only to transactions secured by 

the principal dwelling of the consumer 

who obtains credit. See comment 

42(a)–2. 

42(b) Definitions 

42(b)(1) ‘‘Covered Person’’ 

This interim final rule uses the term 

‘‘covered person’’ in defining the 

persons that are subject to the 

prohibition on coercion and similar 

practices in TILA Section 129E(b) and 

the mandatory reporting requirement in 

TILA Section 129E(e). 15 U.S.C. 

1639e(b), (e). TILA Section 129E(a) 

prohibits an act or practice that violates 

appraisal independence ‘‘in extending 

credit or in providing any services’’ for 

a covered transaction. Consistent with 

the statutory language, the Board is 

defining ‘‘covered persons’’ to include a 

creditor with respect to a covered 

transaction or a person that provides 

‘‘settlement services,’’ as defined under 

the Real Estate Settlement Procedures 

Act (RESPA), in connection with a 

covered transaction. See § 226.42(b)(1). 

The Board notes that ‘‘settlement 

services’’ under RESPA is a broad class 

of activities, covering any service 

provided in connection with settlement, 

including rendering of credit reports, 

providing legal services, preparing 

documents, surveying real estate, and 

pest inspections. Some providers of 

settlement services may, as a practical 

matter, have little opportunity or 

incentive to coerce or influence an 

appraiser, or to have a reasonable basis 

to believe that an appraiser has not 

complied with USPAP or other 

applicable authorities. In such cases, the 

benefits of the rule may not justify 

applying it to these parties, however, by 

the same token, these entities may have 

little or no compliance burden under 

the circumstances. The Board solicits 

comment on whether some settlement 

service providers should be exempt 

from some or all of the interim final 

rule’s requirements. 

Examples of ‘‘covered persons’’ 

include creditors, mortgage brokers, 

appraisers, appraisal management 

companies, real estate agents, title 

insurance companies, and other persons 

that provide ‘‘settlement services’’ as 

defined under RESPA. See comment 

42(b)(1)–1. The Board notes that persons 

that perform ‘‘settlement services’’ 

include persons that conduct appraisals. 

See 12 U.S.C. 2602(3). Comment 

42(b)(1)–2 clarifies that the following 

persons are not ‘‘covered persons’’: 

(1) The consumer who obtains credit 

through a covered transaction; (2) a 

person secondarily liable for a covered 

transaction, such as a guarantor; and 

(3) a person that resides in or will reside 

in the consumer’s principal dwelling 

but will not be liable on the covered 

transaction, such as a non-obligor 

spouse. 

42(b)(2) ‘‘Covered Transaction’’ 

TILA Section 129E applies to ‘‘a 

consumer credit transaction secured by 

the principal dwelling of the consumer.’’ 

15 U.S.C. 1639e. This interim rule refers 

to such a transaction as a ‘‘covered 

transaction,’’ for simplicity. For 

purposes of § 226.42, the existing 

provisions of Regulation Z and 

accompanying commentary apply in 

determining what constitutes a 

principal dwelling. See comment 

42(b)(1)–1. Regulation Z provides that, 

for the purposes of the consumer’s right 

to rescind certain loans secured by the 

consumer’s principal dwelling, a 

consumer may have only one principal 

dwelling at a time. See, e.g., 

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8Section 1473(r) of the Dodd-Frank Act adds new 

Section 1126 to FIRREA, which prohibits the use 

of a real estate broker’s opinion of value ‘‘as the 

primary basis’’ of determining the value of the 

consumer’s principal dwelling in certain types of 

transactions. Public Law 111–203, 124 Stat. 2198 (to 

be codified at 12 U.S.C. 3355). 

9For purposes of the provisions requiring 

payment of a customary and reasonable rate to 

appraisers and reporting of appraisers’ failure to 

comply with USPAP or ethical or professional 

requirements to the appropriate state appraiser 

certifying and licensing agencies, this interim final 

rule limits persons considered ‘‘appraisers’’ to 

persons subject to the state agencies’ jurisdiction. 

§ 226.36(f), (g). 

10See Appraisal Standards Bd., Appraisal Fdn., 

USPAP (2010) at U–1; see also Appraisal Standards 

Bd., Appraisal Fdn., Advisory Op. 18 (stating that 

‘‘the output of an [automated valuation model] is 

not, by itself, an appraisal’’ but may become the 

basis of an appraisal if credible). 

§ 226.2(a)(19), 226.2(a)(24), comment 

2(a)(24)–3. 

42(b)(3) ‘‘Valuation’’ 

TILA Section 129E uses the terms 

‘‘appraisal’’ and ‘‘appraiser’’ without 

defining the terms. In some cases, a 

creditor might engage a person not 

certified or licensed under state law to 

estimate a dwelling’s value in 

connection with a covered transaction, 

such as when a creditor engages a real 

estate agent to provide an estimate of 

market value.8 The Board believes that 

TILA Section 129E applies to acts or 

practices that compromise the 

independent estimation of the value of 

the consumer’s principal dwelling, 

without regard to whether the creditor 

uses a licensed or certified appraiser or 

another person to produce a valuation. 

Therefore, this interim final rule uses 

the broader term ‘‘valuation’’ and refers 

to a person that prepares a ‘‘valuation’’ 

rather than use the terms ‘‘appraisal’’ 

and ‘‘appraiser,’’ for purposes of the 

following provisions: (1) The 

prohibition on causing or attempting to 

cause the value assigned to the 

consumer’s principal dwelling to be 

based on a factor other than the 

independent judgment of a person that 

prepares valuations, through coercion or 

certain other similar acts or practices, 

under § 226.42(c); (2) the prohibition on 

having an interest in the consumer’s 

principal dwelling or the transaction, 

under § 226.42(d); and (3) the 

prohibition on extending credit where a 

creditor knows of a violation of 

§ 226.42(c) or (d) unless certain 

conditions are met under § 226.42(e). 

This is consistent with the 2008 

Appraisal Independence Rules, which 

define ‘‘appraiser’’ broadly to mean a 

person who engages in the business of 

providing assessments of the value of 

dwellings.9

Section 226.42(b)(5) uses the term 

‘‘valuation’’ to mean an estimate of the 

value of the consumer’s principal 

dwelling in written or electronic form, 

other than one produced solely by an 

automated model or system. This 

definition is consistent with the 

definition of ‘‘appraisal’’ in the Uniform 

Standards of Professional Appraisal 

Practice (USPAP) as ‘‘an opinion of 

value.’’10 As used in § 226.42(b)(5), the 

term ‘‘valuation’’ applies to an estimate 

of the value of the consumer’s principal 

dwelling whether or not a person 

applies USPAP in preparing such 

estimate. Comment 42(b)(3)–1 clarifies 

that a ‘‘valuation’’ is an estimate of value 

prepared by a natural person, such as an 

appraisal report prepared by an 

appraiser or an estimate of market value 

prepared by a real estate agent. 

Comment 42(b)(3)–1 also clarifies that 

the term includes photographic or other 

information included with an estimate 

of value. Comment 42(b)(3)–1 clarifies 

further that a ‘‘valuation’’ includes an 

estimate provided or viewed 

electronically, such as an estimate 

transmitted via electronic mail or 

viewed using a computer. 

Comment 42(b)(3)–2 clarifies that, 

although a ‘‘valuation’’ does not include 

an estimate of value produced 

exclusively using an automated model 

or system, a ‘‘valuation’’ includes an 

estimate of value developed by a natural 

person based in part on an estimate 

produced using an automated model or 

system. The Board solicits comment on 

the exclusion of automated valuation 

models from the definition of 

‘‘valuation’’ below, in the section-bysection analysis of § 226.42(c). Comment 

42(b)(3)–3 clarifies that an estimate of 

the value of the consumer’s principal 

dwelling includes an estimate of a range 

of values for the consumer’s principal 

dwelling. 

42(b)(4) ‘‘Valuation Management 

Functions’’ 

This interim final rule uses the term 

‘‘valuation management functions’’ to 

refer to a variety of administrative 

activities undertaken in connection with 

the preparation of a valuation. The term 

‘‘valuation management functions’’ is 

used in implementing TILA Section 

129E(b)(1), which prohibits causing or 

attempting to cause the value assigned 

to the consumer’s principal dwelling to 

be based on a factor other than the 

independent judgment of a person that 

prepares valuations, through coercion or 

certain other similar acts or practices. 15 

U.S.C. 1639e(b)(1). The term ‘‘valuation 

management functions’’ also is used in 

implementing TILA Section 129E(d), 

which provides that an appraisal 

management company may not have an 

interest in a covered transaction or the 

consumer’s principal dwelling. 15 

U.S.C. 1639e(d). This interim final rule 

applies that prohibition on conflicts of 

interest to a person that performs 

administrative functions in connection 

with valuations of the consumer’s 

principal dwelling, even if the person is 

not an ‘‘appraisal management 

company’’ (for example, a company that 

employs appraisers or an appraisal 

reviewer employed by a creditor), as 

discussed below in the section-bysection analysis of § 226.42(b)(d). This 

interim final rule therefore uses the term 

‘‘valuation management functions’’ 

rather than ‘‘appraisal management’’ for 

purposes of § 226.42(d). 

Section 226.42(b)(4) defines 

‘‘valuation management functions’’ to 

mean (1) recruiting, selecting, or 

retaining a person to prepare a 

valuation; (2) contracting with or 

employing a person to prepare a 

valuation; (3) managing or overseeing 

the process of preparing a valuation 

(including by providing administrative 

services such as receiving orders for and 

receiving a valuation, submitting a 

completed valuation to creditors and 

underwriters, collecting fees from 

creditors and underwriters for services 

provided in connection with a 

valuation, and compensating a person 

that prepare valuations); or (4) 

reviewing or verifying the work of a 

person that prepares valuations. The 

term is used in § 226.42(c) and (d), 

which are discussed in detail below. 

42(c) Valuation of Consumer’s Principal 

Dwelling 

TILA Section 129E(b) provides that, 

for purposes of TILA Section 129E(a), 

acts or practices that violate appraisal 

independence include: (1) Causing or 

attempting to cause the value assigned 

to the property to be based on a factor 

other than the independent judgment of 

an appraiser, by compensating, 

coercing, extorting, colluding with, 

instructing, inducing, bribing, or 

intimidating a person conducting or 

involved in an appraisal; (2) 

mischaracterizing, or suborning any 

mischaracterization of, the appraised 

value of the property securing the 

extension of credit; (3) seeking to 

influence an appraiser or otherwise to 

encourage a targeted value in order to 

facilitate the making or pricing of the 

transaction; and (4) withholding or 

threatening to withhold timely payment 

for an appraisal report or for appraisal 

services rendered when the appraisal 

report or services are provided for in 

accordance with the contract between 

the parties. 15 U.S.C. 1639e(b). 

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11See, Board: 12 CFR 225.63(a); OCC: 12 CFR 

34.43(a); FDIC: 12 CFR 323.3(a); OTS: 12 CFR 

564.3(a); NCUA: 12 CFR 722.3(a). 

TILA Section 129E(c) provides that 

TILA Section 129E(b) shall not be 

construed as prohibiting a mortgage 

lender, mortgage broker, mortgage 

banker, real estate broker, appraisal 

management company, employee of an 

appraisal management company, 

consumer, or any other person with an 

interest in a real estate transaction from 

asking an appraiser to: (1) Consider 

additional, appropriate property 

information, including information 

regarding additional comparable 

properties to make or support an 

appraisal; (2) provide further detail, 

substantiation, or explanation for the 

appraiser’s value conclusion; or (3) 

correct errors in the appraisal report. 15 

U.S.C. 1639e(c). 

TILA Section 129E(b) and (c) are 

substantially similar to the 2008 

Appraisal Independence Rules. 15 

U.S.C. 1639e(b), (c); § 226.36(b). The 

Board is implementing TILA Section 

129E(b) and (c) in § 226.42(c), pursuant 

to its authority under TILA Section 

129E(g)(2) to prescribe interim final 

regulations defining with specificity 

acts or practices that violate appraisal 

independence in the provision of 

mortgage lending services or mortgage 

brokerage services for a covered 

transaction and any terms under TILA 

Section 129E or such regulations. 15 

U.S.C. 1639e(g)(2). The prohibitions of 

certain acts and practices under TILA 

Section 129E(b) that are substantially 

similar to the Board’s 2008 Appraisal 

Independence Rules are implemented in 

§ 226.42(c)(1). The prohibition on 

‘‘mischaracterizing or suborning any 

mischaracterization of the appraised 

value of property securing the extension 

of credit’’ under TILA Section 

129E(b)(2), which has no direct 

corollary in the 2008 Appraisal 

Independence Rules, is implemented in 

§ 226.42(c)(2). 15 U.S.C. 1639e(b)(2). 

TILA Section 129E(c), regarding acts 

and practices that are permissible under 

TILA Section 129E, is implemented in 

§ 226.42(c)(3). 

42(c)(1) Coercion 

TILA Section 129E(b)(1) prohibits a 

person with an interest in the 

underlying transaction to compensate, 

coerce, extort, collude, instruct, induce, 

bribe, or intimidate a person, appraisal 

management company, firm, or other 

entity conducting or involved in an 

appraisal, or attempting to do so, for the 

purpose of causing the value assigned to 

the consumer’s principal dwelling to be 

based on a factor other than the 

independent judgment of the appraiser. 

15 U.S.C. 1639e(b)(1). Section 

226.42(c)(1) implements and is 

substantially similar to TILA Section 

129E(b)(1). Section 226.42(c)(1) uses the 

terms ‘‘covered person’’ and ‘‘covered 

transaction’’ and refers to persons that 

prepare ‘‘valuations’’ or perform 

‘‘valuation management functions,’’ for 

clarity and comprehensiveness, as 

discussed above in the section-bysection analysis of § 226.42(b). Also, 

§ 226.42(c)(1) uses the term ‘‘person’’ to 

implement the reference in TILA 

Section 129E(b)(1) to certain acts or 

practices directed towards a ‘‘person, 

appraisal management company, firm, 

or other entity,’’ for simplicity. 15 U.S.C. 

1639e(b)(1). TILA Section 103(d) 

provides that ‘‘person’’ means a natural 

person or an organization, and 

§ 226.2(a)(22) clarifies that an 

organization includes a corporation, 

partnership, proprietorship, association, 

cooperative, estate, trust, or government 

unit. 15 U.S.C. 1602(d). 

Prohibited acts and practices. 

Consistent with TILA Section 

129E(b)(1), § 226.42(c)(1) provides that 

no person shall attempt to or cause the 

value assigned to the consumer’s 

principal dwelling to be based on a 

factor other than the independent 

judgment of a person that prepares 

valuations, through coercion, extortion, 

inducement, bribery or intimidation of, 

compensation or instruction to, or 

collusion with a person that prepares a 

valuation or a person that performs 

valuation management functions. 

Comment 42(c)(1)–1 provides that the 

terms used for those prohibited actions 

have the meaning given them by 

applicable state law or contract. See 

§ 226.2(b)(3). In some cases, state law 

may define one of the terms in a context 

that is not applicable to a covered 

transaction, for example, where state 

law defines ‘‘bribery’’ to mean the 

offering, giving, soliciting, or receiving 

of something of value to influence the 

action of an official in the discharge of 

his or her public duties. The Board 

believes, however, that the terms used 

in TILA Section 129E(b)(1) and 

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

practices sufficiently broad to address a 

wide variety of actions that compromise 

the independent estimation of the value 

of the consumer’s principal dwelling. 

Further, § 226.42(c)(1)(i) provides 

examples of actions that violate 

§ 226.42(c)(1), as discussed below. 15 

U.S.C. 1639e(b)(1). 

Comment 42(c)(1)–2 clarifies that a 

covered person does not violate 

§ 226.42(c)(1) if the person does not 

engage in an act or practice set forth in 

§ 226.42(c)(1) for the purpose of causing 

the value assigned to the consumer’s 

principal dwelling to be based on a 

factor other than the independent 

judgment of a person that prepares 

valuations. For example, comment 

42(c)(1)–2 states that requesting that a 

person that prepares a valuation take 

certain actions, such as considering 

additional, appropriate property 

information, does not violate 

§ 226.42(c), because such request does 

not supplant the independent judgment 

of the person that prepares a valuation. 

See § 226.42(c)(3)(i). Also, comment 

42(c)(1)–2 clarifies that a covered person 

may provide incentives, such as 

additional compensation, to a person 

that prepares valuations or performs 

valuation management functions, as 

long as the covered person does not 

cause or attempt to cause the value 

assigned to the consumer’s principal 

dwelling to be based on a factor other 

than the independent judgment of a 

person that prepares valuations. The 

Board notes, however, that provisions of 

federal law other than § 226.42(c)(1) or 

state law may apply in determining 

whether or not a covered person may 

engage in certain acts or practices in 

connection with valuations of the 

consumer’s principal dwelling. 

Person that prepares valuations. 

Comment 42(c)(1)–3 clarifies that 

§ 226.42(c)(1) is violated if a covered 

person attempts to or causes the value 

assigned by a person that prepares 

valuations to be based on a factor other 

than the independent judgment of the 

person that prepares valuations through 

coercion or certain other acts or 

practices, whether or not the person that 

prepares valuations is a state-licensed or 

state-certified appraiser. For example, 

comment 42(c)(1)(1)–3 clarifies that a 

covered person violates § 226.42(c)(1) by 

seeking to coerce a real estate agent to 

assign a market value to the consumer’s 

principal dwelling based on a factor 

other than the real estate agent’s 

independent judgment, in connection 

with a covered transaction. Although 

§ 226.42(c)(1) broadly prohibits certain 

acts and practices directed toward any 

person who prepares valuations, the 

Board notes that in some cases 

applicable law or guidance may call for 

a creditor to obtain an appraisal 

prepared by a state-licensed or statecertified appraiser for a covered 

transaction. For example, the federal 

financial institution regulatory agencies 

require the creditors they supervise to 

obtain an appraisal by a state-certified 

appraiser for certain federally-related 

mortgage transactions.11

Indirect acts or practices. Comment 

42(c)(1)–4 clarifies that § 226.42(c)(1) 

may be violated indirectly, for example, 

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66560 Federal Register / Vol. 75, No. 208 / Thursday, October 28, 2010 / Rules and Regulations 

where a creditor attempts to cause the 

value an appraiser engaged by an 

appraisal management company assigns 

to the consumer’s principal dwelling to 

be based on a factor other than the 

appraiser’s independent judgment. 

Thus, the commentary provides that it 

is a violation to threaten to withhold 

future business from a title company 

affiliated with an appraisal management 

company unless the valuation ordered 

through the appraisal management 

company assigns a value to the 

consumer’s principal dwelling that 

meets or exceed a minimum threshold. 

Automated valuation systems. Under 

this interim final rule, § 226.42(c)(1) 

does not apply in connection with the 

development or use of an automated 

model or system that estimates value. 

(The definition of ‘‘valuation’’ does not 

include an estimate of value produced 

exclusively using such an automated 

system. See § 226.42(b)(3).) The Board 

requests comment, however, on whether 

creditors or other persons exercise or 

attempt to exercise improper influence 

over persons that develop an automated 

model or system for estimating the value 

of the consumer’s principal dwelling. 

42(c)(1)(i) 

TILA Sections 129E(b)(3) and (4) 

provide that the following actions 

violate appraisal independence: (1) 

Seeking to influence an appraiser to 

assign a targeted value to facilitate the 

making or pricing of a covered 

transaction; and (2) withholding or 

threatening to withhold timely payment 

for an appraisal report provided or for 

appraisal services rendered in 

accordance with the parties’ contract. 15 

U.S.C. 1639e(b)(3), (4). The Board 

believes that the prohibition on causing 

or attempting to cause the value 

assigned to the consumer’s principal 

dwelling to be based on a factor other 

than the independent judgment of the 

person that prepares a valuation, 

through coercion, inducement, 

intimidation, and certain other acts and 

practices, encompass the acts and 

practices prohibited by TILA Section 

129E(b)(3) and (4). This interim rule 

therefore uses the acts and practices 

prohibited by TILA Section 129E(b)(3) 

and (4) as examples of acts and practices 

prohibited by TILA Section 129E(b)(1). 

(This interim final rule implements the 

prohibition under TILA Section 

129E(b)(2) of ‘‘mischaracterizing’’ the 

value of the consumer’s principal 

dwelling separately from the other 

provisions of TILA Section 129E(b), 

because that provision may be violated 

without outside pressure, as discussed 

below in the section-by-section analysis 

of § 226.42(c)(2). 15 U.S.C. 1639e(b).) 

Section 226.42(c)(1)(i)(A) and (B) 

implement TILA Section 129E(b)(3) and 

(4) and are substantially similar to 

existing § 226.36(b)(1)(C) and (D). In 

addition, § 226.42(c)(1)(i)(D) through (E) 

mirror current § 226.36(b)(1)(i)(A), (B), 

and (E). The examples provided in 

§ 226.42(c)(1)(i) illustrate cases where 

prohibited action is taken towards a 

person that prepares valuations. The 

Board notes that § 226.42(c)(1) 

nevertheless applies to prohibited acts 

and practices directed towards a person 

that performs valuation management 

functions or such person’s affiliate. See 

comment 42(c)(1)(i)–1. As used in the 

examples of prohibited actions, the 

terms ‘‘specific value’’ and 

‘‘predetermined threshold’’ includes a 

predetermined minimum, maximum, or 

range of values. See comment 

42(c)(1)(i)–2. Further, although the 

examples assume a covered person’s 

actions are designed to cause the value 

assigned to the consumer’s principal 

dwelling to equal or exceed a certain 

amount, the rule also applies to cases 

where a covered person’s prohibited 

actions are designed to cause the value 

assigned to the dwelling to be below a 

certain amount. See id. 

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

TILA Section 129E(b)(3) prohibits a 

covered person from seeking to 

influence a person that prepares 

valuations, or otherwise encouraging the 

reporting of a targeted value for the 

consumer’s principal dwelling, to 

facilitate the making or pricing of a 

covered transaction. 15 U.S.C. 

1639e(b)(3). This provision is 

substantially similar to current 

§ 226.36(b)(1)(ii)(C), which prohibits 

‘‘telling an appraiser a minimum 

reported value of the consumer’s 

principal dwelling that is needed to 

approve the loan.’’ Section 

226.42(c)(1)(i)(A) implements TILA 

Section 129E(b)(3), with minor revisions 

for clarity. 

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

TILA Section 129E(b)(4) provides that 

appraisal independence is violated if a 

person withholds or threatens to 

withhold timely payment for a valuation 

or for services rendered to provide a 

valuation, when the valuation or the 

services are provided in accordance 

with the contract between the parties. 

15 U.S.C. 1639e(b)(4). This provision is 

substantially similar to current 

§ 226.36(b)(1)(ii)(D), which prohibits 

‘‘failing to compensate an appraiser 

because the appraiser does not value the 

consumer’s principal dwelling at or 

above a certain amount.’’ Section 

226.42(c)(2)(i)(B) implements TILA 

Section 129E(b)(4), with minor revisions 

for clarity. The Board notes that 

withholding compensation for breach of 

contract or substandard performance of 

services does not violate § 226.42(c)(1). 

See § 226.42(c)(3)(v). 

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

TILA Section 129E(b)(1) prohibits 

certain acts or practices that cause or 

attempt to cause the value assigned to 

the consumer’s principal dwelling to be 

based on a factor other than the 

independent judgment of a person that 

prepares valuations. 15 U.S.C. 

1639e(b)(1). The Board believes that the 

acts and practices currently prohibited 

under § 226.36(b)(1)(i)(A) through (E) 

are prohibited by TILA Section 

129E(b)(1). Therefore, the interim final 

rule includes the examples of prohibited 

practices provided in current 

§ 226.36(b)(1)(ii)(A), (B), and (E) in new 

§ 226.42(c)(2)(i)(C), (D), and (E). 

Section 226.42(c)(1)(i)(C) provides 

that an example of an action that 

violates § 226.42(c)(1) is implying to a 

person that prepares valuations that 

current or future retention of the person 

depends on the amount at which the 

person estimates the value of the 

consumer’s principal dwelling. Section 

226.42(c)(1)(i)(D) provides that an 

example of an action that violates 

§ 226.42(c)(1) is excluding a person that 

prepares valuations from consideration 

for future engagement because the 

person reports a value for the 

consumer’s principal dwelling that does 

not meet or exceed a predetermined 

threshold. A ‘‘predetermined threshold’’ 

includes a predetermined minimum, 

maximum, or range of values. See 

comment 42(c)(1)(i)–2. Section 

226.42(c)(1)(i)(E) provides that an 

example of an action that violates 

§ 226.42(c)(1) is conditioning the 

compensation paid to a person that 

prepares valuations on consummation 

of a covered transaction. The examples 

provided under § 226.42(c)(1)(i) are 

illustrative, not exhaustive, and other 

actions may violate § 226.42(c)(1). 

42(c)(2) Mischaracterization of Value 

TILA Section 129E(b)(2) prohibits 

mischaracterizing or suborning any 

mischaracterization of the appraised 

value of property securing a covered 

transaction. 15 U.S.C. 1639e(b)(2). The 

Board implements that prohibition 

separately from the prohibition under 

§ 226.42(c)(1) of causing or attempting 

to cause the value assigned to the 

consumer’s principal dwelling to be 

based on a factor other than the 

independent judgment of a person that 

prepares valuations, through coercion 

and other similar acts and practices. 

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This is because a person may 

mischaracterize such value without any 

outside pressure. This interim final rule 

implements TILA Section 129E(b)(2) in 

§ 226.42(c)(2). 

42(c)(2)(i) Misrepresentation 

Section 226.42(c)(2)(i) provides that a 

person that prepares valuations shall 

not materially misrepresent the value of 

the consumer’s principal dwelling in a 

valuation. Section 226.42(c)(2)(i) applies 

specifically to persons that prepare 

valuations, because such persons 

represent that the value they assign to 

the consumer’s principal dwelling is 

consistent with their opinion regarding 

such value. Section 226.42(c)(2)(i) 

provides that a bona fide error is not a 

mischaracterization. The Board believes 

that Congress intended to prohibit the 

intentional misrepresentation of the 

value of the consumer’s principal 

dwelling, not bona fide errors. Comment 

42(c)(2)(i)–1 clarifies that a person 

misrepresents the value of the 

consumer’s principal dwelling by 

assigning a value to such dwelling that 

does not reflect the person’s opinion of 

such dwelling’s value. For example, 

comment 42(c)(2)(i)–1 clarifies that an 

appraiser violates § 226.42(c)(2)(i) if the 

appraiser estimates that the value of 

such dwelling is $250,000 applying 

USPAP but assigns a value of $300,000 

to such dwelling in a Uniform 

Residential Appraisal Report. 

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

TILA Section 129E(b)(2) prohibits 

‘‘mischaracterizing or suborning any 

mischaracterization’’ of the value of the 

consumer’s principal dwelling. 15 

U.S.C. 1639e(b)(2). That provision is 

implemented in § 226.42(c)(2)(ii). 

Section 226.42(c)(2)(ii) provides that no 

covered person shall falsify, and no 

covered person other than a person that 

prepares valuations shall materially 

alter, a valuation. An alteration is 

material for purposes of 

§ 226.42(c)(2)(ii) if the alteration is 

likely to significantly affect the value 

assigned to the consumer’s principal 

dwelling. 

Alterations to a valuation generally 

should be made by the person that 

prepares the valuation, because the 

valuation reflects that person’s estimate 

of the value of the consumer’s principal 

dwelling. (Covered persons may request 

that a person that prepares a valuation 

take certain actions, including correct 

errors in the valuation, however. See 

§ 226.42(c)(3).) The Board solicits 

comment, however, on whether there 

are specific types of alterations that 

other persons may make that do not 

affect the value assigned to the 

consumer’s dwelling and therefore 

should not be deemed material for 

purposes of § 226.42(c)(2)(ii). 

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

Mischaracterization 

Section 226.42(c)(2)(iii) provides that 

no covered person shall induce a person 

to violate the prohibitions under 

§ 226.42(c)(2)(i) or (ii). For example, 

comment 42(c)(2)(iii)–1 clarifies that a 

loan originator may not coerce a loan 

underwriter to alter an appraisal report 

to increase the value assigned to the 

consumer’s principal dwelling. 

42(c)(3) Permitted Actions 

TILA Section 129E(c) provides that 

TILA Section 129E(b) shall not be 

construed to prohibit a mortgage lender, 

mortgage broker, mortgage banker, real 

estate broker, appraisal management 

company, employee of an appraisal 

management company, consumer, or 

any other person with an interest in a 

real estate transaction from asking an 

appraiser to undertake certain actions. 

15 U.S.C. 1639e(c). To implement TILA 

Section 129E(c), § 226.42(c)(3) provides 

examples of actions that do not violate 

§ 226.42(c)(1) or (2). The Board notes 

that the examples provided under 

§ 226.42(c)(3) are illustrative, not 

exhaustive, and there are other actions 

that are permitted under § 226.42(c)(1) 

or (2). 

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

TILA Section 129E(c)(1) provides that 

it is permissible under TILA Section 

129E(b) to ask an appraiser to consider 

additional property information, 

including information regarding 

comparable properties. 15 U.S.C. 

1639e(c)(1). TILA Section 129E(c)(2) 

provides that it is permissible under 

TILA Section 129E(b) to ask an 

appraiser to provide further detail, 

substantiation, or explanation for the 

appraiser’s value conclusion. 15 U.S.C. 

1639e(c)(1). TILA Section 129E(c)(3) 

provides that it is permissible under 

TILA Section 129E(b) to ask an 

appraiser to correct errors in an 

appraisal report. 15 U.S.C. 1639e(c)(3). 

TILA Section 129E(c)(1) through (3) are 

substantially similar to current 

§ 226.36(b)(1)(ii)(A) through (C). The 

interim final rule implements TILA 

Section 129E(c)(1) through (3) in 

§ 226.42(c)(3)(i) through (iii). 

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

The Board believes that the acts and 

practices allowed under current 

§ 226.36(b)(1)(ii)(D) through (F) do not 

compromise the exercise of independent 

judgment in estimating the value of the 

consumer’s principal dwelling. The 

Board therefore includes the examples 

of permitted practices provided under 

current § 226.36(b)(1)(ii)(D) through (F) 

in new § 226.42(c)(3)(iv) through (vi). 

Section 226.42(c)(3)(iv) provides that an 

example of an action that does not 

violate § 226.42(c)(1) or (2) is obtaining 

multiple valuations for the consumer’s 

principal dwelling to select the most 

reliable valuation. Section 

226.42(c)(3)(iv) is substantially similar 

to current § 226.36(b)(1)(ii)(D) but omits 

the statement in that provision that 

obtaining multiple appraisals is 

permitted under § 226.36(b) ‘‘as long as 

the creditor adheres to a policy of 

selecting the most reliable appraisal, 

rather than the appraisal that states the 

highest value.’’ That statement is 

omitted because it may suggest an 

unintended distinction between 

selecting the valuation that states the 

highest value and selecting the 

valuation that states the lowest value. 

No substantive change is intended. 

Section 226.42(c)(3)(v) provides that 

an example of an action that does not 

violate § 226.42(c)(1) or (2) is 

withholding compensation for breach of 

contract or substandard performance of 

services. Section 226.42(c)(3)(vi) 

provides that example of an action that 

does not violate § 226.42(c)(1) or (2) is 

taking action permitted or required by 

applicable federal or state statute, 

regulation, or agency guidance. Section 

226.42(b)(3)(v) and (vi) are substantially 

similar to current § 226.36(b)(1)(ii)(E) 

and (F). 

42(d) Prohibition on Conflicts of Interest 

Background 

Section 226.42(d) implements TILA 

Section 129E(d), which states that ‘‘no 

certified or licensed appraiser 

conducting, and no appraisal 

management company procuring or 

facilitating, an appraisal in connection 

with a consumer credit transaction 

secured by the principal dwelling of a 

consumer may have a direct or indirect 

interest, financial or otherwise, in the 

property or transaction involving the 

appraisal.’’ This new TILA provision is 

generally consistent with longstanding 

Federal banking agency appraisal 

regulations and supervisory guidance 

applicable to federally-regulated 

depository institutions. The federal 

banking agency regulations require that 

appraisers employed by the institution 

extending credit (termed ‘‘staff 

appraisers’’ in the regulations) be 

‘‘independent of the lending, 

investment, and collection functions 

and not involved, except as an 

appraiser, in the transaction, and have 

no direct or indirect interest, financial 

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66562 Federal Register / Vol. 75, No. 208 / Thursday, October 28, 2010 / Rules and Regulations 

12Board: 12 CFR 226.65(a); OCC: 12 CFR 34.45(a); 

FDIC: 12 CFR 323.5(a); OTS: 12 CFR 564.5(a); 

NCUA: 12 CFR 722.5(a). The regulations define 

‘‘appraisal’’ to mean ‘‘a written statement 

independently and impartially prepared by a 

qualified appraiser setting forth an opinion as to the 

market value of an adequately described property 

as of a specific date(s), supported by the 

presentation and analysis of relevant market 

information.’’ Board: 12 CFR 226.62(a); OCC: 12 

CFR 34.42(a); FDIC: 12 CFR 323.2(a); OTS: 12 CFR 

564.2(a); NCUA: 12 CFR 722.2(a). ‘‘State-certified 

appraiser’’ and ‘‘state-licensed appraiser’’ are 

defined at, respectively, 12 CFR 226.62(j) and (k); 

OCC: 12 CFR 34.42(j) and (k); FDIC: 12 CFR 323.2(j) 

and (k); OTS: 12 CFR 564.2(j) and (k); NCUA: 12 

CFR 722.2(j) and (k). 

13Board: 12 CFR 226.65(b); OCC: 12 CFR 

34.45(b); FDIC: 12 CFR 323.5(b); OTS: 12 CFR 

564.5(b); NCUA: 12 CFR 722.5(b). 

14Board, OCC, FDIC, OTS, Interagency Appraisal 

and Evaluation Guidelines, SR 94–55 (Oct. 28, 

1994) (Interagency Guidelines). 

15 Id. 

16Board, OCC, FDIC, OTS, NCUA, Proposed 

Interagency Appraisal and Evaluation Guidelines, 

73 FR 69647, Nov. 19, 2008 (Proposed Interagency 

Guidelines). 

17HVCC, Part III.B. 

18 Id. Part IV.A. 

19 Id. Part IV.C. 

20 Id. Part IV.B. 

21 Id. Part IV.C. 

22 ‘‘Small bank’’ is defined in the Community 

Reinvestment Act (CRA) as ‘‘any regulated financial 

institution with aggregate assets of not more than 

$250,000,000.’’ 12 U.S.C. 2908. However, adjusting 

asset threshold amounts for inflation, regulations 

implementing the CRA define ‘‘small bank’’ as ‘‘a 

bank that, as of December 31 of either of the prior 

two calendar years, had assets of less than $1.098 

billion.’’ 12 CFR 228.12(u). These regulations also 

define the term ‘‘intermediate small bank,’’ meaning 

‘‘a small bank with assets of at least $274 million 

as of December 31 of both of the prior two calendar 

years and less than $1.098 billion as of December 

31 of either of the prior two calendar years.’’ Id. 

23HVCC, Part IV.D. 

or otherwise, in the property.’’ 12 The 

federal banking agency regulations also 

prohibit appraisers who are not 

employees of the institution extending 

credit, but rather hired on a contract 

basis (termed ‘‘fee appraisers’’ in the 

regulations) from having a ‘‘direct or 

indirect interest, financial or otherwise, 

in the property or the transaction.’’ 13

Federal Banking Agency Appraisal 

Guidance 

Reaffirming independence standards 

in federal banking agency appraisal 

regulations, the federal banking agencies 

have issued Interagency Appraisal and 

Evaluation Guidelines (Interagency 

Guidelines). The Interagency Guidelines 

state that the collateral valuation 

process ‘‘should be isolated from the 

institution’s loan production process,’’ 

and that a person providing an appraisal 

or evaluation ‘‘should be independent of 

the loan and collection functions of the 

institution and have no interest, 

financial or otherwise, in the property 

or the transaction.’’ 14 The Interagency 

Guidelines acknowledge, however, that 

for some creditors, such as small or 

rural institutions or branches, separating 

loan production staff from collateral 

valuation staff may not always be 

possible or practical because the only 

individual qualified to analyze the real 

estate collateral may also be a loan 

officer, other officer, or director of the 

institution. In these cases, the 

Interagency Guidelines state that, ‘‘[t]o 

ensure their independence, lending 

officials, officers, or directors should 

abstain from any vote or approval 

involving loans on which they 

performed an appraisal or 

evaluation.’’ 15

More recently, the federal banking 

agencies proposed similar guidance in 

the Proposed Interagency Appraisal and 

Evaluation Guidelines (Proposed 

Interagency Guidelines).16 In addition to 

incorporating the existing guidance 

stated above, the Proposed Interagency 

Guidelines advise institutions to 

‘‘establish reporting lines independent 

of loan production for staff that order, 

accept, and review appraisals and 

evaluations.’’ For institutions unable to 

achieve absolute lines of independence 

between the collateral valuation and 

loan production processes, the Proposed 

Interagency Guidelines advise that an 

institution should nonetheless ‘‘be able 

to demonstrate clearly that it has 

prudent safeguards to isolate its 

collateral valuation program from 

influence or interference from the loan 

production process.’’ 

HVCC 

The HVCC, which covers appraisals 

performed by state-licensed or statecertified appraisers for loans sold to 

Fannie Mae and Freddie Mac, also 

incorporates several provisions to 

prohibit conflicts of interest in the 

appraisal process. 

First, the HVCC regulates the process 

of selecting and communicating with a 

person or entity involved in conducting 

an appraisal. Specifically, (1) members 

of the creditor’s loan production staff; 

and (2) any person who (i) is 

compensated on a commission basis 

based on whether the loan closes, or (ii) 

reports ultimately to any officer of the 

creditor who is not independent of loan 

production, may not do the following: 

• Select, retain, recommend, or 

influence the selection of any appraiser 

for a particular appraisal assignment or 

for inclusion on a list or panel of 

approved or disapproved appraisers; or 

• Have ‘‘substantive communications’’ 

with an ‘‘appraiser or appraisal 

management company’’ involving or 

impacting valuation, including ordering 

or managing an appraisal assignment.17

Second, the HVCC prohibits the 

creditor from using any appraisal 

prepared by a person or entity that may 

have a conflict of interest. In particular, 

a creditor may not use any appraisal 

prepared by an appraiser employed by: 

(1) The creditor; (2) an affiliate of the 

creditor; (3) an entity owned wholly or 

partly by the creditor; or (4) an entity 

that wholly or partly owns the creditor. 

A creditor also may not use an appraisal 

prepared by any appraiser employed, 

engaged as an independent contractor, 

or otherwise retained by ‘‘any appraisal 

company or appraisal management 

company’’ affiliated with, or that wholly 

or partly owns or is owned by the 

creditor or an affiliate of the creditor.18

A creditor may use in-house staff 

appraisers, however, to: (1) Order 

appraisals; (2) review appraisals, both 

pre- and post-loan funding; (3) develop, 

deploy, or use internal AVMs; and (4) 

prepare appraisals for transactions other 

than mortgage origination transactions, 

such as ‘‘loan workouts,’’ if the appraiser 

complies with the terms of the HVCC.19

Third, the HVCC permits the creditor 

to use appraisals otherwise prohibited 

above, as long as the creditor adheres to 

a list of requirements designed to ensure 

the independence of any person 

involved in conducting or managing the 

appraisal, such as that, among other 

requirements: 

• The appraiser must report to a 

function independent of the creditor’s 

sales or loan production function; 

• The creditor’s loan production staff 

may have no role in selecting, retaining, 

recommending, or influencing the 

selection of an appraiser; and 

• The appraiser must not be 

compensated based on the appraiser’s 

conclusion of value or whether the loan 

closes.20

Fourth, the HVCC prohibits a creditor 

from using an appraisal prepared by an 

entity affiliated with, or that wholly or 

partly owns or is owned by, another 

entity performing settlement services for 

the same transaction, unless the entity 

performing the appraisal has adopted 

policies and procedures to implement 

the HVCC, including training and 

disciplinary rules on appraiser 

independence.21

The HVCC exempts from compliance 

with the second, third, and fourth 

provisions described above, 

‘‘institutions (including non-banking 

institutions) that meet the definition of 

a ‘small bank’ as set forth in the 

Community Reinvestment Act,22 and 

which Freddie Mac or Fannie Mae 

determines would suffer hardship due 

to the provisions, and which otherwise 

adhere with [the HVCC].’’ 23

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Federal Register / Vol. 75, No. 208 / Thursday, October 28, 2010 / Rules and Regulations 66563 

24U.S. House of Reps., Comm. on Fin. Services, 

Report on H.R. 1728, Mortgage Reform and AntiPredatory Lending Act, No. 111–94, 95 (May 4, 

2009) (House Report). The conflict of interest 

provision adopted in TILA Section 129E(d) appears 

in Title VI, § 602, of H.R. 1728. 

The Interim Final Rule 

The Board recognizes that the literal 

language of the statutory prohibition on 

having a ‘‘direct or indirect interest, 

financial or otherwise’’ in the property 

or transaction can be interpreted to 

mean that a person or entity preparing 

a valuation or performing valuation 

management functions should be 

deemed to have a prohibited interest 

merely by token of being employed or 

owned by the creditor. An employee of 

the creditor could be deemed to have an 

‘‘indirect’’ interest in the transaction, for 

example, because he or she might 

receive financial benefits, such as higher 

bonuses or more valuable stock options, 

as a result of the creditor’s loan volume 

rising. Similarly, under this 

interpretation, an AMC providing both 

valuation management functions and 

title services, including title insurance, 

for the same transaction could be 

deemed to have an ‘‘indirect’’ interest in 

the transaction if the entity profits when 

title insurance is purchased at closing. 

The Board believes, however, that 

interpreting the statute in this way 

would be impractical and thus would 

not be the most effective way to further 

the purpose of the conflicts of interest 

prohibition in TILA Section 129E(d)– 

promoting a healthy mortgage market by 

ensuring independent valuations. A 

broad prohibition could interfere with 

the functioning of many creditors and 

providers of valuations and valuation 

management functions, potentially 

disrupting the mortgage market at a 

vulnerable time. The Board also notes 

that, according to the legislative history 

of TILA Section 129E(d), the conflicts of 

interest provision ‘‘should not be 

construed as to prohibit work by staff 

appraisers within a financial institution 

or other organization, if such an entity 

has established firewalls, consistent 

with those outlined in the [HVCC], 

between the origination group and the 

appraisal unit designed to ensure the 

independence of appraisal results and 

reviews.’’ 24

The Board understands that many 

AMCs are wholly or partly owned by 

creditors, or share a common corporate 

parent with a creditor, and manage 

appraisals for a sizable share of the 

dwelling-secured consumer credit 

market. The Board is also aware that a 

few larger creditors still have a 

segregated in-house collateral valuation 

function. Some creditor representatives 

have informally reported to the Board 

that, based on their experience and 

quality control testing, appraisals 

performed by an in-house collateral 

valuation function are of higher quality 

than appraisals performed by third 

parties, including those ordered through 

third-party AMCs. These creditors might 

reasonably prefer using in-house 

appraisals, or appraisals performed 

through an appraisal company wholly 

owned by the creditor, to protect both 

consumers and their own safety and 

soundness. 

In addition, the Board is concerned 

that small creditors with few staff 

members, such as institutions or 

branches in rural areas, could not 

comply with an overly broad 

prohibition on conflicts of interest. 

These entities, particularly in rural 

areas, may not have the option of 

choosing a third party to perform or 

manage collateral valuations. They may 

need to rely on a single in-house staff 

member to perform multiple functions, 

such as, for example, serving as both a 

loan officer and an appraiser. 

For these reasons, the Board’s interim 

final rule: 

• Generally prohibits conflicts of 

interest in the valuation process, as 

prescribed by TILA Section 129E(d); 

• Provides a safe harbor to ensure 

compliance with the conflicts of interest 

prohibition by a creditor’s in-house 

valuation staff or affiliated AMC or 

appraisal company if firewalls and other 

specified safeguards are in place; and 

• Provides a safe harbor to ensure 

compliance with the conflicts of interest 

prohibition by a person who prepares 

valuations or performs valuation 

management functions in a particular 

transaction in addition to performing 

another settlement service, or whose 

affiliate performs another settlement 

service, if firewalls and other specified 

safeguards are in place. 

The interim final rule establishes 

alternative safe harbor safeguards for 

smaller creditors that are unable to 

establish firewalls due to practical 

problems, such as having a limited 

number of employees. 

These provisions are discussed in 

turn below. 

42(d)(1)(i) In General 

Section 226.42(d)(1)(i) prohibits a 

person preparing a valuation or 

performing valuation management 

functions for a consumer credit 

transaction secured by the consumer’s 

principal dwelling from having a direct 

or indirect interest, financial or 

otherwise, in the property or transaction 

for which the valuation is or will be 

performed. This provision implements 

TILA Section 129E(d), but uses different 

terminology (for reasons explained in 

the section-by-section analysis to 

§ 226.42(b)). Specifically, the term 

‘‘person preparing valuations’’ replaces 

the term ‘‘licensed or certified 

appraiser’’; the term ‘‘person performing 

valuation management functions’’ 

replaces the term ‘‘appraisal 

management company’’; and the term 

‘‘valuation’’ replaces the term 

‘‘appraisal.’’ By using these terms, the 

interim final rule’s conflict of interest 

provision applies to any form of valuing 

a property on which a creditor relies to 

extend consumer credit secured by the 

consumer’s principal dwelling. 

Prohibited Interest in the Property 

Comment 42(d)(1)(i)–1 clarifies that a 

person preparing a valuation or 

performing valuation management 

functions for a covered transaction has 

a prohibited interest in the property if 

the person has any ownership or 

reasonably foreseeable ownership 

interest in the property. The comment 

further clarifies that a person who seeks 

a mortgage to purchase a home has a 

reasonably foreseeable ownership 

interest in the property securing the 

mortgage, and therefore is not permitted 

to prepare the valuation or perform 

valuation management functions for that 

mortgage transaction under 

§ 226.42(d)(1)(i). This example is 

illustrative, and is not intended to be 

exhaustive; other prohibited interests in 

the covered property may arise, 

depending on the facts of a particular 

transaction. 

Prohibited Interest in the Transaction 

Comment 42(d)(1)(i)–2 clarifies that a 

person preparing a valuation or 

performing valuation management 

functions has a prohibited interest in 

the transaction under § 226.42(d)(1)(i) if 

that person or an affiliate of that person 

also serves as a loan officer of the 

creditor, mortgage broker, real estate 

broker, or other settlement service 

provider for the transaction, and the safe 

harbor conditions for settlement service 

providers under § 226.42(d)(4) 

(discussed below in the section-bysection analysis of that provision) are 

not satisfied. The comment further 

clarifies that a person also has a 

prohibited interest in the transaction if 

the person is compensated or otherwise 

receives financial or other benefits 

based on whether the transaction is 

consummated. Under these 

circumstances, the comment explains, 

the person is not permitted to prepare 

the valuation or perform valuation 

management functions for the 

transaction under § 226.42(d)(1)(i). The 

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66564 Federal Register / Vol. 75, No. 208 / Thursday, October 28, 2010 / Rules and Regulations 

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

26See Interagency Guidelines, SR 94–55; HVCC, 

Part IV.B. 

27House Report at 95. 

Board notes that these examples of 

prohibited interests are generally 

consistent with conflicts of interest 

provisions in the HVCC.25 Again, these 

examples are not intended to be an 

exhaustive list of prohibited conflicts of 

interest in covered transactions; others 

may arise, depending on the 

circumstances surrounding a particular 

transaction. 

42(d)(1)(ii) Employees and Affiliates of 

Creditors; Providers of Multiple 

Settlement Services 

Employees and Affiliates of Creditors 

Section 226.42(d)(1)(ii)(A) provides 

that, in any covered transaction, no 

person violates paragraph (d)(1)(i) of 

this section based solely on the fact that 

the person is an employee or affiliate of 

the creditor. Comment 226.42(d)(1)(ii)– 

1 explains that, in general, a creditor 

may use employees or affiliates to 

prepare a valuation or perform valuation 

management functions without violating 

§ 226.42(d)(1)(i). The comment clarifies, 

however, that whether an employee or 

affiliate has a direct or indirect interest 

in the property or transaction that 

creates a prohibited conflict of interest 

under § 226.42(d)(1)(i) depends on the 

facts and circumstances of a particular 

case, including the structure of the 

employment or affiliate relationship. 

Providers of Multiple Settlement 

Services 

Section 226.42(d)(1)(ii)(B) provides 

that, in any covered transaction, no 

person violates paragraph (d)(1)(i) of 

this section based solely on the fact that 

the person provides a settlement service 

in addition to preparing valuations or 

performing valuation management 

functions, or based solely on the fact 

that the person’s affiliate performs 

another settlement service. Comment 

42(d)(1)(ii)–2 explains that, in general, a 

person who prepares a valuation or 

perform valuation management 

functions for a covered transaction may 

perform another settlement service for 

the same transaction without violating 

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

may provide another settlement service 

for the transaction. The comment 

clarifies, however, that whether the 

person has a direct or indirect interest 

in the property or transaction that 

creates a prohibited conflict of interest 

under § 226.42(d)(1)(i) depends on the 

facts and circumstances of a particular 

case. 

42(d)(2) Employees and Affiliates of 

Creditors With Assets of More Than 

$250 Million for Both of the Past Two 

Calendar Years; 42(d)(3) Employees and 

Affiliates of Creditors With Assets of 

$250 Million or Less for Either of the 

Past Two Calendar Years 

Background 

As discussed above, one 

interpretation of TILA Section 129E(d) 

is that it prohibits entities related to a 

creditor by ownership and a creditor’s 

in-house appraisal staff from 

involvement in the collateral valuation 

process for that creditor. For many 

creditors and providers of valuations 

and valuation management services, 

complying with the statute under this 

interpretation would be impractical or 

impossible. 

The Board believes that an 

interpretation of the statute more 

consistent with Congress’s intent is one 

that recognizes that appropriate 

firewalls and safeguards can ensure the 

integrity of the valuation process in 

certain situations where conflicts might 

otherwise arise, such as where the 

person preparing a valuation is the 

employee of the creditor. The Board also 

notes that federal banking agency 

guidance and the HVCC permit creditors 

to use appraisals prepared by in-house 

appraisers or affiliated AMCs if they 

establish firewalls and other safeguards 

to separate the collateral valuation 

function from the loan production 

functions.26 Appraisers, creditors, and 

others have informed the Board that the 

HVCC requirements for firewalls and 

safeguards, as an alternative to a strict 

prohibition on direct or indirect 

conflicts of interest, have generally been 

effective in ensuring that appraisers 

provide objective and independent 

valuations. Again, the legislative history 

of TILA Section 129E(d) evinces 

Congress’s approval of this approach, 

stating that the conflict of interest 

provision ‘‘should not be construed as to 

prohibit work by staff appraisers within 

a financial institution or other 

organization, if such an entity has 

established firewalls, consistent with 

those outlined in the [HVCC], between 

the origination group and the appraisal 

unit designed to ensure the 

independence of appraisal results and 

reviews.’’ 27

Thus, the interim final rule creates 

two safe harbors for compliance with 

the prohibition on conflicts of interest 

under § 226.42(d) for persons who 

prepare valuations or perform valuation 

management functions and are also 

employees or affiliates of the creditor: 

(1) One for transactions in which the 

creditor had assets of more than $250 

million as of December 31st for both of 

the past two calendar years 

(§ 226.42(d)(2)); and 

(2) The other for transactions in 

which the creditor had assets of $250 

million or less as of December 31st for 

either of the past two calendar years 

(§ 226.42(d)(3)). 

These safe harbors incorporate several 

firewall and safeguard requirements 

from the HVCC as well as, for smaller 

institutions, the federal banking 

agencies’ appraisal regulations and 

supervisory guidance. As discussed 

below, the safe harbor conditions under 

§ 226.42(d)(2) and (d)(3) impose 

obligations on creditors and also require 

that certain additional conditions be 

met. If the creditor meets these 

obligations and the other safe harbor 

conditions are satisfied, the creditor 

generally may rely on valuations 

prepared by its in-house staff or for 

which its affiliate performed valuation 

management functions for any covered 

transaction without violating the 

regulation. 

The interim final rule differentiates 

between creditors with assets of over 

$250 million and creditors with assets 

of $250 million or less for at least three 

reasons. First, without allowances for 

staff and other limitations of smaller 

creditors, these creditors may decrease 

their consumer lending operations due 

to an inability to comply with the 

statute and implementing regulation. 

This reduction in credit availability 

could harm many consumers, 

undermining the goals of the DoddFrank Act to protect and benefit 

consumers. Second, the federal banking 

agencies have long recognized that 

smaller institutions may be unable to 

achieve strict separation between its 

collateral valuation and loan production 

functions; therefore, some firewalls and 

safeguards appropriate for larger 

institutions are not for smaller 

institutions. Third, distinguishing 

between larger and smaller institutions 

is consistent with the HVCC, which the 

statute indicates the interim final rule is 

intended to replace. See TILA Section 

129E(j). As discussed earlier, the HVCC 

exempts from its conflict of interest and 

firewall rules all institutions (both 

depositories and nondepositories) 

meeting the asset threshold for defining 

a ‘‘small bank’’ under the Community 

Reinvestment Act. Therefore, this 

distinction is generally familiar in the 

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28 12 U.S.C. 2908; HVCC, Part IV.E. 29HVCC, Part IV.B(1). See also id., Part III.B. 

30Proposed Interagency Guidelines, 73 FR at 

69652. 

industry and should not cause undue 

confusion.28

The Board requests comment on 

whether the $250 million asset size 

threshold, some other asset size 

threshold, or other factors are 

appropriate for applying the different 

safe harbor conditions to different types 

of institutions. 

42(d)(2) Employees and Affiliates of 

Creditors With Assets of More Than 

$250 Million for Both of the Past Two 

Calendar Years 

Section 226.42(d)(2) provides that, in 

a transaction in which the creditor had 

assets of more than $250 million as of 

December 31st for both of the past two 

calendar years, a person preparing 

valuations or performing valuation 

management functions who is employed 

by or affiliated with the creditor does 

not have a conflict of interest in 

violation of § 226.42(d)(1)(i) of this 

section based on the person’s 

employment or affiliate relationship 

with the creditor if: 

(1) The compensation of the person 

preparing a valuation or performing 

valuation management functions is not 

based on the value arrived at in any 

valuation; 

(2) The person preparing a valuation 

or performing valuation management 

functions reports to a person who is not 

part of the creditor’s loan production 

function (as defined in § 226.42(d)(5)(i)) 

and whose compensation is not based 

on the closing of the transaction to 

which the valuation relates; and 

(3) No employee, officer or director in 

the creditor’s loan production function 

is directly or indirectly involved in 

selecting, retaining, recommending or 

influencing the selection of the person 

to prepare a valuation or perform 

valuation management functions, or to 

be included in or excluded from a list 

of approved persons who prepare 

valuations or perform valuation 

management functions. 

Comment 42(d)(2)–1 clarifies that 

§ 226.42(d)(2) creates a safe harbor for a 

person who prepares valuation or 

performs valuation management 

functions for a covered transaction and 

is an employee or affiliate of the 

creditor. Such a person will not be 

deemed to have an interest prohibited 

under § 226.42(d)(1)(i) on the basis of 

the employment or affiliate relationship 

with the creditor if the conditions in 

§ 226.42(d)(2) are satisfied. In addition, 

the comment explains that, in general, 

in any covered transaction with a 

creditor that had assets of more than 

$250 million for the past two years, the 

creditor may use its own employee or 

affiliate to prepare a valuation or 

perform valuation management 

functions for a particular transaction if 

the safe harbor conditions described in 

§ 226.42(d)(2) are satisfied without 

violating the regulation. The comment 

also states that, if the safe harbor 

conditions in § 226.42(d)(2) are not 

satisfied, whether a person preparing 

valuations or performing valuation 

management functions has violated 

§ 226.42(d)(1)(i) depends on all of the 

facts and circumstances. The three 

conditions for the safe harbor under 

§ 226.42(d)(2) are discussed in turn 

below. 

Condition one: Compensation. The 

first condition is that the compensation 

of the person preparing a valuation or 

performing valuation management 

functions may not be based on the value 

arrived at in any valuation for the 

transaction. The Board believes that 

whether the loan closes depends on the 

conclusion of value; therefore the 

interim final rule prohibits, as a 

condition of this safe harbor, basing an 

appraiser’s compensation on the 

conclusion of value but does not 

expressly prohibit basing the appraiser’s 

compensation on whether the 

transaction closes. If this condition is 

met, the person will not have a stake in 

stating a certain value, which might 

color his or her judgment as to the value 

of the home. 

Condition two: Reporting. The second 

condition requires that the person 

performing valuations or valuation 

management functions report to a 

person who is not part of the creditor’s 

loan production function, or whose 

compensation is not based on the 

closing of the transaction to which the 

valuation relates. The Board believes 

that this condition is important to 

ensuring that persons instrumental in 

the collateral valuation process are not 

subject to pressure to misrepresent 

collateral value from managers or 

similar authorities whose primary 

objective is increasing loan volume, not 

obtaining an independent valuation. 

The Board also notes that this condition 

is similar to requirements in the HVCC, 

such as that ‘‘the appraiser or, if an 

affiliate, the company for which the 

appraiser works,’’ report to a function of 

the creditor ‘‘independent of sales or 

loan production.’’ 29 It is reflected in the 

Proposed Interagency Guidance as well, 

which advises institutions to ‘‘establish 

reporting lines independent of loan 

production for staff that order, accept, 

and review appraisals and 

evaluations.’’ 30

Comment 42(d)(2)(ii)–1 clarifies the 

prohibition on reporting to a person 

who is part of the creditor’s loan 

production function. To this end, the 

comment provides the following 

example: if a person preparing a 

valuation is directly supervised or 

managed by a loan officer or other 

person in the creditor’s loan production 

function (as defined in § 226.42(d)(5)(i), 

or by a person who is directly 

supervised or managed by a loan officer, 

the condition under § 226.42(d)(2)(ii) is 

not met. 

Comment 42(d)(2)(ii)–2 clarifies the 

prohibition on reporting to a person 

whose compensation is based on the 

transaction closing. To this end, the 

comment provides the following 

example: assume an appraisal 

management company performs 

valuation management functions for a 

transaction in which the creditor is an 

affiliate of the appraisal management 

company. If the employee of the 

appraisal management company who is 

in charge of valuation management for 

that transaction is supervised by a 

person who earns a commission or 

bonus based on the percentage of closed 

transactions for which the appraisal 

management company provides 

valuation management functions, the 

condition under § 226.42(d)(2)(ii) is not 

met. 

Condition three: Selection. The third 

condition requires that employees, 

officers, and directors in the creditor’s 

loan production function not be directly 

or indirectly involved in selecting, 

retaining, recommending or influencing 

the selection of the person to perform a 

particular valuation or to be included in 

or excluded from a list or panel of 

approved persons who perform 

valuations. This safe harbor condition is 

intended to curtail coercion of 

appraisers that occurs through giving or 

withholding assignments, or removing 

the appraiser from, or including the 

appraiser on, a panel or list of persons 

approved to perform valuations. This 

condition is also intended to prevent 

loan sales or production staff from 

interfering with the independence of the 

valuation by choosing appraisers who 

pay be perceived to give especially high 

or low values. 

Comment 42(d)(2)(ii)–2 clarifies the 

prohibition on any employee, officer or 

director in the creditor’s loan 

production function (as defined in 

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

involvement in selecting, retaining, 

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31 Interagency Guidelines, SR 94–55. 

recommending or influencing the 

selection of the person to perform a 

valuation or valuation management 

functions for a covered transaction, or to 

be included in or excluded from a list 

or panel of approved persons who 

prepare valuations or perform valuation 

management functions. To this end, the 

comment provides the following 

example: if the person who selects the 

person who will prepare the valuation 

for a covered transaction is supervised 

by an employee of the creditor who also 

supervises loan officers, the condition 

in § 226.42(d)(2)(iii) is not met. 

The Board requests comment on the 

appropriateness of the three conditions 

required under § 226.42(d)(2) for 

inclusion in the final rule. 

42(d)(3) Employees and Affiliates of 

Creditors With Assets of $250 Million or 

Less for Either of the Past Two Calendar 

Years 

Section 226.42(d)(3) provides a safe 

harbor for compliance with the 

prohibition on conflicts of interest 

under § 226.42(d)(1)(i) for employees 

and affiliates of creditors with assets of 

$250 million or less as of December 31st 

for either of the past two calendar years. 

Specifically, § 226.42(d)(3) provides 

that, in a transaction in which the 

creditor had assets of $250 million or 

less for either of the past two calendar 

years, a person who prepares valuations 

or performs valuation management 

functions and who is employed by or 

affiliated with the creditor does not 

have a conflict of interest in violation of 

§ 226.42(d)(1)(i) based on the person’s 

employment or affiliate relationship 

with the creditor if: 

(1) The compensation of the person 

preparing a valuation or performing 

valuation management functions is not 

based the value arrived at in any 

valuation; and 

(2) The creditor requires that any 

employee, officer or director of the 

creditor who orders, performs, or 

reviews a valuation for a covered 

transaction abstain from participating in 

any decision to approve, not approve, or 

set the terms of that transaction. 

Comment 42(d)(3)–1 states that 

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

compliance with the general prohibition 

on conflicts of interest under 

§ 226.42(d)(1)(i) by persons who prepare 

valuations or perform valuation 

management functions for a covered 

transaction and are employees or 

affiliates of the creditor. This comment 

explains that, in any covered transaction 

with a creditor that had assets of $250 

million or less for either of the past two 

years, the creditor generally may use its 

own employee or affiliate to prepare a 

valuation or perform valuation 

management functions for a particular 

transaction, as long as the safe harbor 

conditions described in § 226.42(d)(3) 

are satisfied. The comment also explains 

that, if the safe harbor conditions in 

§ 226.42(d)(3) are not satisfied, whether 

a person preparing valuations or 

performing valuation management 

functions has violated § 226.42(d)(1) 

depends on all of the facts and 

circumstances. The two conditions for 

the safe harbor under § 226.42(d)(3) are 

discussed in turn below. 

Condition one: Compensation. The 

first condition is that the compensation 

of the person preparing a valuation or 

performing valuation management 

functions may not be based on the value 

arrived at in any valuation for the 

transaction. This condition parallels the 

condition applicable in transactions 

with larger creditors under 

§ 226.42(d)(2)(i), discussed above. The 

Board believes that this condition, 

which in effect prohibits ‘‘direct’’ 

conflicts of interest in the transaction, is 

equally appropriate in transactions with 

smaller creditors as in those with larger 

creditors. 

Condition two: Safeguards. The 

second condition is that the creditor 

must require that any employee, officer 

or director of the institution who orders, 

performs, or reviews the valuation for a 

particular transaction abstain from 

participation in any decision to 

approve, not approve, or set the terms 

of that transaction. The Board 

recognizes that smaller institutions may 

have difficulty complying with a 

condition that requires the person 

conducting the valuation or performing 

valuation management functions to 

report to a person independent of the 

creditor’s sales or loan production 

functions (§ 226.42(d)(2)(ii)) or that 

prohibits employees in the creditor’s 

loan production functions from being 

directly or indirectly involved in 

selecting, retaining, recommending or 

influencing the selection of a person to 

perform a particular valuation or to be 

included in or excluded from a list or 

panel of approved persons who perform 

valuations (§ 226.42(b)(2)(iii)). As 

discussed above, smaller institutions 

may have only a few employees, so each 

employee may have to perform multiple 

functions, including roles involving 

both collateral valuation and loan 

production tasks. 

For these reasons, the condition in 

§ 226.42(d)(3)(ii) replaces, for smaller 

creditors, the two conditions applicable 

to larger creditors described above, 

which require bright-line isolation of 

the collateral valuation function from 

the loan production function 

(§ 226.42(d)(2)(ii) and (d)(2)(iii)). This 

safe harbor condition tailored for 

smaller creditors incorporates 

provisions included in federal banking 

agency guidance for small or rural 

institutions regarding how to ensure 

independent valuations and protect 

against conflicts of interest in the 

collateral valuation process—namely, 

that a creditor should separate its 

collateral valuation function from its 

loan production function and that, to 

this end, any employee, officer or 

director of the institution who orders, 

performs, or reviews the valuation for a 

particular transaction should abstain 

from any vote or approval involving that 

transaction.31

The Board requests comment on the 

appropriateness of the two conditions of 

the safe harbor under § 226.42(d)(3) for 

inclusion in the final rule. 

42(d)(4) Settlement Service Providers 

The Board recognizes that AMCs and 

appraisal companies or firms are 

sometimes affiliated with other 

settlement service providers, such as 

title companies, and that some AMCs 

and appraisal companies provide 

services related to collateral valuation in 

addition to other settlement services for 

the same transaction. The Board 

believes that interpreting the statute to 

prohibit these AMCs and appraisal 

companies from providing valuation 

services and other settlement services in 

the same transaction in all cases would 

be contrary to the purposes of the 

statute; it could disrupt the businesses 

of many appraisal firms, appraisal 

management companies, and the 

creditors for which they provide 

services, to the detriment of the overall 

mortgage market. It also could reduce 

efficiencies created by ‘‘one-stop 

shopping’’ for settlement services, which 

can lower overall mortgage costs for 

consumers. The Board believes that 

providing a safe harbor consisting of 

appropriate firewalls and safeguards 

will ensure the integrity of the valuation 

process in accordance with the statute; 

by including this safe harbor, the 

interim final rule gives providers of 

multiple settlement services and the 

creditors for which they provide 

services an incentive to implement 

measures to secure valuation 

independence. 

Section 226.42(d)(4) provides 

alternative safe harbors for compliance 

with the prohibition on conflicts of 

interest under § 226.42(d)(1)(i) by 

persons who prepare valuations or 

perform valuation management 

functions for a covered transaction and 

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32HVCC, Part IV.C. More precisely, this provision 

of the HVCC prohibits use of an appraisal report ‘‘by 

an entity that is affiliated with, or that owns or is 

owned, in whole or in part by, another entity that 

is engaged by the lender to provide other settlement 

services,’’ unless certain conditions are met. Id. 

(emphasis added). The Board’s Regulation Y defines 

‘‘affiliate’’ as ‘‘any company that controls, is 

controlled by, or is under common control with, 

another company.’’ 12 CFR 225.2(a). Therefore, in 

the interim final rule and this SUPPLEMENTARY

INFORMATION, the Board uses the term ‘‘affiliate’’ to 

include an entity that owns or is owned by another 

entity, as well as entities with a common owner. 

provide other settlement services for the 

same transaction, or whose affiliate 

provides settlement services. The Board 

notes that this provision is generally 

consistent with a similar provision in 

the HVCC, which prohibits a creditor 

from using an appraisal prepared by an 

entity affiliated with another entity that 

is engaged by the creditor to provide 

other settlement services for the same 

transaction, unless the entity providing 

the appraisal has adopted written 

policies and procedures implementing 

the HVCC, including adequate training 

and disciplinary rules on appraiser 

independence, and has mechanisms in 

place to report and discipline anyone 

who violates the policies and 

procedures.32

As with the safe harbors for 

employees and affiliates of creditors 

(§ 226.42(d)(2) and (d)(3)), the interim 

final rule’s safe harbors for multiple 

settlement service providers differ 

depending on whether the creditor in 

the transaction had assets of $250 

million or more as of December 31st for 

the past two calendar years 

(§ 226.42(d)(4)(i)) or assets of $250 

million or less as of December 31st for 

either of the past two calendar years 

(§ 226.42(d)(4)(ii)). 

Paragraph 42(d)(4)(i) 

Under § 226.42(d)(4)(i), in a 

transaction in which the creditor had 

assets of more than $250 million for 

both of the past two calendar years, a 

person preparing a valuation or 

performing valuation management 

functions in addition to performing 

another settlement service, or whose 

affiliate performs another settlement 

service, will not be deemed to have 

interest prohibited under 

§ 226.42(d)(1)(i) based on the fact that 

the person or the person’s affiliate 

performs another settlement service for 

the transaction, as long as the 

conditions in § 226.42(d)(2)(i) (iii) are 

met. As discussed earlier, the conditions 

in § 226.42(d)(2)(i) (iii) are designed to 

ensure the independence of persons 

involved with valuations for 

transactions with larger creditors. Thus 

they require that: 

(1) The compensation of the person 

preparing a valuation or performing 

valuation management functions is not 

based on the value arrived at in any 

valuation; 

(2) The person preparing a valuation 

or performing valuation management 

functions reports to a person who is not 

part of the creditor’s loan production 

function, and whose compensation is 

not based on the closing of the 

transaction to which the valuation 

relates; and 

(3) No employee, officer or director in 

the creditor’s loan production function 

is directly or indirectly involved in 

selecting, retaining, recommending or 

influencing the selection of the person 

to prepare a valuation or perform 

valuation management functions, or to 

be included in or excluded from a list 

of approved persons who prepare 

valuations or perform valuation 

management functions. 

Comment 42(d)(4)(i)–1 explains that, 

even if the conditions in paragraph 

(d)(4)(i) are satisfied, however, the 

person preparing a valuation or 

performing valuation management 

functions may have a prohibited conflict 

of interest on other grounds, such as if 

the person performs a valuation for a 

purchase-money mortgage transaction in 

which the person is the buyer or seller 

of the subject property. The comment 

further explains that, in general, in any 

covered transaction with a creditor that 

had assets of more than $250 million for 

the past two years, a person preparing 

a valuation or performing valuation 

management functions, or its affiliate, 

may provide another settlement service 

for the same transaction, as long as the 

conditions described in paragraph 

(d)(4)(i) are satisfied. This comment also 

explains that, if the safe harbor 

conditions in § 226.42(d)(4)(i) are not 

satisfied, whether a person preparing 

valuations or performing valuation 

management functions has violated 

§ 226.42(d)(1) depends on all of the facts 

and circumstances. 

Comment 42(d)(4)(i) 2 explains that 

the safe harbor under § 226.42(d)(4)(i) is 

available if the condition specified in 

§ 226.42(d)(2)(ii), among others, is met. 

Section 226.42(d)(2)(ii) prohibits a 

person preparing a valuation or 

performing valuation management 

functions from reporting to a person 

whose compensation is based on the 

closing of the transaction to which the 

valuation relates. This comment 

provides the following example to 

clarify the meaning of this prohibition: 

Assume an appraisal management 

company performs both valuation 

management functions and title 

services, including providing title 

insurance, for the same covered 

transaction. If the appraisal management 

company employee in charge of 

valuation management functions for the 

transaction is supervised by the title 

insurance agent in the transaction, 

whose compensation depends in whole 

or in part on whether title insurance is 

sold at the loan closing, the condition in 

§ 226.42(d)(2)(ii) is not met. 

Paragraph 42(d)(4)(ii) 

Under § 226.42(d)(4)(ii), in a 

transaction in which the creditor in a 

covered transaction had assets of $250 

million or less as of December 31st for 

either of the past two calendar years, a 

person performing valuations or 

valuation management functions in 

addition to performing another 

settlement service, or whose affiliate 

performs another settlement service, 

will not be deemed to have an interest 

prohibited under § 226.42(d)(1)(i) based 

on the fact that the person or the 

person’s affiliate performs another 

settlement service for the transaction if 

the conditions in § 226.42(d)(3)(i)–(ii) 

are met. 

Comment 42(d)(4)(ii)–1 explains that, 

even if the conditions in 

§ 226.42(d)(4)(ii) are satisfied, however, 

the person may have a prohibited 

conflict of interest on other grounds, 

such as if the person performs a 

valuation for a purchase-money 

mortgage transaction in which the 

person is the buyer or seller of the 

subject property. Thus, this comment 

explains that, in general, in any covered 

transaction in which the creditor had 

assets of $250 million or less for either 

of the past two years, a person preparing 

a valuation or performing valuation 

management functions, or its affiliate, 

may provide another settlement service 

for the same transaction, as long as the 

conditions described in § 226.42(d)(4)(i) 

are satisfied. The comment further 

explains that, if the conditions in 

§ 226.42(d)(4)(i) are not satisfied, 

whether a person preparing valuations 

or performing valuation management 

functions has violated § 226.42(d)(1)(i) 

depends on all of the facts and 

circumstances. 

The Board requests comment on the 

appropriateness of the conditions under 

which persons preparing valuations or 

performing valuations management 

functions for a transaction in addition to 

performing another settlement service 

for the same transaction, or whose 

affiliate performs another settlement 

service for the same transaction, will be 

deemed in compliance with the 

prohibition on conflicts of interest 

under § 226.42(d)(1)(i). 

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66568 Federal Register / Vol. 75, No. 208 / Thursday, October 28, 2010 / Rules and Regulations 

33See, e.g., Proposed Interagency Guidelines, 73 

FR at 69661. 34HVCC, Part IV.C. 

42(d)(5) Definitions 

Section 226.42(d)(5) provides three 

definitions for purposes of § 226.42(d): 

‘‘loan production function’’; ‘‘settlement 

service’’; and ‘‘affiliate.’’ 

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

Section 226.42(d)(5)(i) provides that 

the term ‘‘loan production function’’ 

means an employee, officer, director, 

department, division, or other unit of a 

creditor with responsibility for 

generating covered transactions, 

approving covered transactions, or both. 

This definition is generally consistent 

with the Federal banking agencies’ use 

of the term ‘‘loan production function’’ 

or ‘‘loan production staff.’’ 33 The term 

appears in § 226.42(d)(2)(ii) and 

(d)(2)(iii), which require that, 

respectively, (1) a person preparing the 

valuation or performing valuation 

management functions report to a 

person independent of the creditor’s 

loan production function, and (2) no 

employee in the creditor’s loan 

production function be directly or 

indirectly involved in selecting, 

retaining, recommending or influencing 

the selection of a person to prepare a 

particular valuation or valuation 

management functions, or to be 

included in or excluded from a list of 

approved persons who prepare 

valuations or perform valuation 

management functions. 

Comment 42(d)(5)(i)–1 clarifies the 

meaning of ‘‘loan production function.’’ 

This comment states that a creditor’s 

‘‘loan production function’’ includes 

retail sales staff, loan officers, and any 

other employee of the creditor with 

responsibility for taking a loan 

application, offering or negotiating loan 

terms or whose compensation is based 

on loan processing volume. This 

comment clarifies that a person is not 

considered part of a creditor’s loan 

production function solely because part 

of the person’s compensation includes a 

general bonus not tied to specific 

transactions or percentage of closed 

transactions, or a profit sharing plan 

that benefits all employees. The 

comment further clarifies that a person 

solely responsible for credit 

administration or risk management is 

also not considered part of a creditor’s 

loan production function. The comment 

explains that credit administration and 

risk management includes, for example, 

loan underwriting, loan closing 

functions (e.g., loan documentation), 

disbursing funds, collecting mortgage 

payments and otherwise servicing the 

loan (e.g., escrow management and 

payment of taxes), monitoring loan 

performance, and foreclosure 

processing. 

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

As discussed above, the interim final 

rule provides a safe harbor for persons 

who prepare valuations or perform 

valuation management functions that 

also perform another settlement service 

for the same transaction, or whose 

affiliate performs another settlement 

service for the same transaction. See 

§ 226.42(d)(4). Section 42(d)(5)(ii) 

defines ‘‘settlement service’’ to have the 

same meaning as in the Real Estate 

Settlement Procedures Act, 12 U.S.C. 

2601 et seq. The Board notes that this 

definition is consistent with the 

definition used in the HVCC regarding 

its analogous provision on providers of 

multiple settlement services.34

42(d)(5)(iii) Affiliate 

Section 226.42(d)(5)(iii) provides that 

the term ‘‘affiliate’’ has the same 

meaning as in the Board’s Regulation Y, 

12 CFR 225.62(a), which defines 

‘‘affiliate’’ as ‘‘any company that 

controls, is controlled by, or is under 

common control with, another 

company.’’ This term is used in 

§ 226.42(d)(2), (3), and (4), to identify 

the persons covered by the prohibition 

on conflicts of interest and safe harbors 

for complying with the general 

prohibition under § 226.42(d)(1). 

42(e) When Extension of Credit 

Prohibited 

TILA Section 129E(f) provides that, in 

connection with a covered transaction, 

a creditor who knows at or before loan 

consummation of a violation of the 

independence standards established in 

TILA Section 129E(b) or (d) (regarding 

misrepresentation of value and conflicts 

of interest, respectively) must not 

extend credit based on such appraisal, 

unless the creditor documents that it 

has acted with reasonable diligence to 

determine that the appraisal does not 

materially misstate or misrepresent the 

value of the consumer’s principal 

dwelling. 15 U.S.C. 1639e(b), (d), (f). 

Section 226.42(e) implements TILA 

Section 129E(f). Section 226.42(e) uses 

the term ‘‘valuation’’ to ensure that the 

protections in TILA Section 129E(f) 

apply to a covered transaction even if a 

creditor uses a valuation that is not a 

formal ‘‘appraisal’’ performed in 

accordance with USPAP by a licensed 

or certified appraiser, as discussed 

above in the section-by-section analysis 

of § 226.42(b)(3). Section 226.42(e) is 

substantially similar to existing 

§ 226.36(b)(2). 

Comment 42(e)–1 clarifies that a 

creditor will be deemed to have acted 

with reasonable diligence under 

§ 226.42(e) if the creditor extends credit 

based on a valuation other than the 

valuation subject to the restriction in 

§ 226.42(e). This is consistent with 

current comment 36(b)(2)–1. Comment 

42(e)(1)–1 clarifies further, however, 

that a creditor need not obtain a second 

valuation to document that the creditor 

has acted with reasonable diligence to 

determine that the valuation does not 

materially misstate or misrepresent the 

value of the consumer’s principal 

dwelling. Comment 42(e)–1 provides an 

example in which an appraiser notifies 

a creditor that a covered person had 

tried—and failed—to get the appraiser 

to inflate the value assigned to the 

consumer’s principal dwelling. 

Comment 42(e)(1)–1 clarifies that if the 

creditor reasonably determines and 

documents that the appraisal had not 

misstated the dwelling’s value, the 

creditor could extend credit based on 

the appraisal. This example is based on 

supplementary information provided in 

connection with proposed 

§ 226.36(b)(2), which was adopted 

substantially as proposed. See 73 FR 

1672, 1701 (Jan. 9, 2008); see also 73 FR 

44522, 44568 (Jul. 30, 2008) (discussing 

the adoption of § 226.36(b)). The 

example is provided for clarity, and no 

substantive change is intended. 

The interim final rule does not 

mandate specific due diligence 

procedures for creditors to follow when 

they suspect a violation of § 226.42(c) or 

(d). In addition, under the interim final 

rule, a violation of § 226.42(e) does not 

establish a basis for voiding loan 

agreements. That is, even if a creditor 

knows of a violation of § 226.42(c) or (d) 

and nevertheless extends credit in 

violation of § 226.42(e), this violation 

does not itself void the consumer’s loan 

agreement with the creditor. Whether 

the loan agreement is valid is a matter 

determined by state or other applicable 

law. The Board notes that applicable 

federal or state regulations may require 

creditors to take certain steps in the 

event the creditor knows about 

problems with a valuation. The 

foregoing discussion is consistent with 

the Board’s statements regarding due 

diligence and the impact of any 

violation on a creditor’s contract under 

current § 226.36(b)(2). See 73 FR 44522, 

44568 (Jul. 30, 2008). 

42(f) Customary and Reasonable 

Compensation 

Section § 226.42(f) implements TILA 

Section 129E(i), which requires 

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35HUD, ‘‘Appraiser Independence,’’ Mortgagee 

Letter 2009–28 (Sept. 18, 2009). 

36See, HUD, ‘‘Frequently Asked Questions— 

Reasonable Fees/Time,’’ available at http:// 

portal.hud.gov/portal/page/portal/HUD/groups/ 

appraisers: ‘‘FHA believes that the marketplace best 

determines what is reasonable and customary in 

terms of fees. The fee is [the] result of a business 

decision, which may or may not be negotiated, 

between the appraiser and the client. * * * Given 

that a reasonable and customary fee depends on the 

complexity of the assignment and the expertise 

needed to perform and report a credible and 

accurate appraisal of the property, the fee will vary 

depending on the property type, the purpose of the 

assignment and the scope of work and, therefore, 

cannot be easily defined as an objective number.’’ 

See http://www.hud.gov/offices/hsg/sfh/appr/ 

faqs_fees-time.pdf. 

creditors and their agents to compensate 

fee appraisers (appraisers who are not 

their employees) at a rate that is 

‘‘customary and reasonable for appraisal 

services in the market area of the 

property being appraised.’’ TILA Section 

129E(i)(1). The statute states that 

evidence for reasonable and customary 

fees may be established by objective 

third-party information, such as 

government agency fee schedules, 

academic studies, and independent 

private sector surveys. ‘‘Such fee 

studies,’’ the statute stipulates, ‘‘shall 

not include assignments ordered by 

known appraisal management 

companies.’’ The statute does not define 

‘‘appraisal management company.’’ In 

addition, the statute provides that if an 

appraisal involves a ‘‘complex 

assignment,’’ the customary and 

reasonable fee may reflect ‘‘the increased 

time, difficulty, and scope of the work 

required for such an appraisal and 

include an amount over and above the 

customary and reasonable fee for noncomplex assignments.’’ TILA Section 

129E(i)(3). The statute does not define 

‘‘complex’’ and ‘‘non-complex’’ 

assignments. 

The Board interprets the statutory 

language of TILA Section 129E(i) to 

signify that the marketplace should be 

the primary determiner of the value of 

appraisal services, and hence the 

customary and reasonable rate of 

compensation for fee appraisers. The 

‘‘customary and reasonable’’ 

compensation provision that Congress 

adopted as part of TILA is identical to 

a requirement included in a HUD 

Mortgagee Letter obligating FHA lenders 

to ensure that appraisers are paid ‘‘at a 

rate that is customary and reasonable for 

appraisal services performed in the 

market area of the property being 

appraised.’’ 35 HUD’s statements 

regarding this provision recognize the 

role of the marketplace in determining 

rates for appraisal services and the 

importance of accounting for factors that 

can cause variations in what is a 

customary and reasonable amount of 

compensation on a transaction-bytransaction basis.36 Similarly, TILA 

Section 129E(i) focuses on the 

marketplace by permitting use of 

objective market information to 

determine rates. The statute also makes 

allowances for factors that the 

marketplace acknowledges add to the 

complexity of an appraisal and thus 

value of appraisal services in a given 

transaction, such as ‘‘increased time, 

difficulty, and scope of work.’’ TILA 

Section 129E(i)(1) and (3). 

Accordingly, the interim final rule 

and alternative presumptions of 

compliance are designed to be 

consistent with this approach. The 

interim final rule is not intended to 

prohibit a creditor and an appraiser 

from negotiating a rate for an 

assignment in good faith, nor is it 

intended to prohibit a creditor from 

communicating to a fee appraiser the 

rates that had been submitted by the 

other appraisers solicited for the 

assignment as part of this negotiation. In 

addition, the interim final rule is not 

intended to prevent appraisers and 

creditors from negotiating volume-based 

discounts for a creditor that provides 

multiple appraisal assignments to a fee 

appraiser. See comment 42(f)(1)–5. 

Specifically, the interim final rule 

provides that fee appraisers must be 

paid a customary and reasonable fee for 

appraisal services performed in the 

geographic market in which the 

property being appraised is located. See 

§ 226.42(f)(1). In addition, the interim 

final rule provides two alternative ways 

in which creditors and their agents may 

qualify for a presumption of compliance 

with this requirement. 

First presumption of compliance 

(§ 226.42(f)(2)). A creditor and its agent 

are presumed to compensate a fee 

appraiser at a customary and reasonable 

rate if: 

• The amount of compensation is 

reasonably related to recent rates for 

appraisal services performed in the 

geographic market of the property. The 

creditor or its agent must identify recent 

rates and make any adjustments 

necessary to account for specific factors, 

such as the type of property, the scope 

of work, and the fee appraiser’s 

qualifications; and 

• The creditor and its agent do not 

engage in any anticompetitive actions in 

violation of state or federal law that 

affect the rate of compensation paid to 

fee appraisers, such as price-fixing or 

restricting others from entering the 

market. 

Second presumption of compliance 

(§ 226.42(f)(3)). A creditor and its agent 

are also presumed to comply if the 

creditor or its agent establishes a fee by 

relying on rates in the geographic 

market of the property being appraised 

established by objective third-party 

information, including fee schedules, 

studies, and surveys prepared by 

independent third parties such as 

government agencies, academic 

institutions, and private research firms. 

The interim final rule follows the statute 

in requiring that fee schedules, studies, 

and surveys, or information derived 

from them, used to qualify for this 

presumption of compliance must 

exclude compensation paid to fee 

appraisers for appraisals ordered by 

appraisal management companies 

(defined in § 226.42(f)(4)(iii)). 

The first presumption of compliance 

described above (§ 226.42(f)(2)) reflects 

the Board’s interpretation of the 

statutory requirement that fees paid to 

fee appraisers be ‘‘customary’’: to be 

‘‘customary,’’ the fee must be reasonably 

related to recent rates for appraisal 

services in the relevant geographic 

market. This first presumption of 

compliance also reflects the Board’s 

interpretation of the statutory 

requirement that the fee be ‘‘reasonable’’: 

to be ‘‘reasonable,’’ the fee should be 

adjusted as necessary to account for 

factors in addition to geographic market 

that affect the level of compensation 

appropriate in a given transaction, such 

as the type of property and the scope of 

work. The Board recognizes, however, 

that if some creditors or AMCs dominate 

the market through illegal 

anticompetitive acts, ‘‘recent rates’’ may 

be an inaccurate measure of what a 

‘‘reasonable’’ fee should be. Thus, to 

qualify for the presumption of 

compliance, a creditor and its agents 

also must not commit anticompetitive 

acts in violation of state or federal law 

that affect the compensation of fee 

appraisers. 

The second presumption of 

compliance (§ 226.42(f)(3)) is intended 

to give effect to TILA Section 129E(i)(1) 

which expressly permits creditors and 

their agents to use third-party 

information to determine customary and 

reasonable fees. See TILA Section 

129E(i)(1). The Board believes that the 

statute supports a presumption of 

compliance if the creditor or agent 

based the fee paid to a fee appraiser on 

objective, third-party market 

information regarding recent rates for 

appraisal services that meet the 

statutory requirements for this 

information. Thus, in keeping with the 

statute, the interim final rule stipulates 

that any fee schedule, survey, or study 

relied on to qualify for this presumption 

of compliance may not include fees for 

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66570 Federal Register / Vol. 75, No. 208 / Thursday, October 28, 2010 / Rules and Regulations 

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

38See Id. Part III.B. 

appraisals ordered by companies that 

publicly hold themselves out as 

appraisal management companies 

(defined in § 226.42(f)(4)(ii)). 

Public Input 

In adopting this interim final rule, the 

Board considered written comments 

from representatives of appraisers, 

AMCs and creditors, as well as views 

expressed by these parties during 

conference calls with Board staff. 

Appraisers expressed concerns that 

AMCs may have recently gained 

significant control over the residential 

appraisal market as a result of 

unintended consequences of the HVCC. 

Under the HVCC, mortgage brokers are 

not permitted to order appraisals, and a 

creditor’s in-house appraisers may not 

perform the appraisal unless strict 

firewalls to safeguard appraisal 

independence are in place.37 The HVCC 

also prohibits the creditor’s ‘‘loan 

production’’ and certain other staff from 

having ‘‘substantive communications’’ 

with appraisers and AMCs, which 

include ordering or managing an 

appraisal assignment.38 To minimize 

the risk of violating these and similar 

restrictions, many creditors reportedly 

have chosen to rely on AMCs as a 

‘‘middle-man’’ to select appraisers and 

generally manage the creditor’s 

appraisal function. According to some, 

appraisers willing to work for AMCs are 

often inexperienced in general or in the 

relevant geographic area and produce 

poor quality appraisals, undermining 

consumers’ well-being and creditors’ 

safety and soundness. 

On the other hand, representatives of 

AMCs expressed concerns that, 

depending on how the term ‘‘customary 

and reasonable’’ rate is interpreted, 

requiring AMCs to compensate fee 

appraisers at a rate that is customary 

and reasonable may force them to raise 

overall costs charged to creditors—and 

ultimately to consumers—for appraisals 

ordered through AMCs. AMC 

representatives expressed concerns that 

AMCs would have to pay higher fees to 

appraisers while still performing 

management functions for which they 

would need to charge creditors as well. 

AMC representatives stated that 

reputable AMCs have strong quality 

control systems and produce sound 

appraisals, and that they perform 

functions that individual appraisers 

would have to perform themselves were 

they not engaged by an AMC. These 

include marketing appraisal services 

and handling administrative matters 

such as submitting the appraisal to the 

creditor and billing the creditor. 

AMC representatives also raised 

concerns that appropriate appraisal fee 

studies do not exist and argued that the 

costs of performing the appraisal itself 

and the various management functions 

associated with each appraisal can vary 

by transaction, complicating the process 

of determining a generally applicable 

customary and reasonable rate. These 

parties argued that an interim final rule 

implementing TILA Section 129E’s 

‘‘customary and reasonable’’ rate 

provision is premature because greater 

study of the issue is required to avoid 

a rule that will create undue compliance 

challenges and litigation risk. 

Coverage—‘‘Appraisals’’ and ‘‘Fee 

Appraisers’’ 

Unlike other provisions of § 226.42, 

§ 226.42(f) does not replace the statutory 

terms ‘‘appraisal’’ and ‘‘appraiser’’ with 

terms that cover a broader range of 

methods for valuing collateral and 

persons who estimate collateral value. 

However, the statute clearly states that 

the persons who must receive 

customary and reasonable compensation 

are ‘‘fee appraisers,’’ and that the term 

‘‘fee appraiser’’ means: (1) State-licensed 

or state-certified appraisers and, 

generally, (2) entities that employ statelicensed or state-certified appraisers to 

perform appraisals and are compensated 

for the performance of appraisals (as 

opposed to entities that merely manage 

the appraisal process). See TILA Section 

129E(i)(2). 

42(f)(1) Requirement To Provide 

Customary and Reasonable 

Compensation to Fee Appraisers 

Section 226.42(f)(1) requires that, in 

any covered transaction (defined in 

§ 226.42(b)(1)), the creditor and its 

agents must compensate a fee appraiser 

for performing appraisal services at a 

rate that is customary and reasonable for 

comparable appraisal services 

performed in the geographic market of 

the property being appraised. This 

provision states that, for purposes of 

§ 226.42(f), ‘‘agents’’ of the creditor do 

not include any fee appraiser defined in 

§ 226.42(f)(4)(i). 

Agents of the Creditor 

The reference to ‘‘agents’’ in 

§ 226.42(f)(1) is not intended to signify 

that agents of creditors are not included 

in other places where the term ‘‘creditor’’ 

appears in Regulation Z. To the 

contrary, the term ‘‘creditor’’ used 

throughout Regulation Z includes agents 

of the creditor, as determined by 

applicable state law. The Board believes 

that Congress was especially concerned 

that AMCs, serving as creditors’ agents 

in managing the appraisal process, be 

covered by this provision. 

Consequently, the regulatory text 

follows the statutory language, which 

applies the requirement to pay fee 

appraisers customary and reasonable 

fees to both ‘‘a lender and its agent.’’ 

Comment 42(f)(1)–1 clarifies that 

whether a person is an ‘‘agent’’ of the 

creditor is determined by applicable 

law. This comment also confirms the 

regulatory exclusion of ‘‘fee appraisers’’ 

as defined in § 226.42(f)(4)(i) from the 

meaning of ‘‘agent’’ of the creditor for 

purposes of § 226.42(f). The comment 

explains that, therefore, fee appraisers 

are not required to pay other fee 

appraisers customary and reasonable 

compensation under § 226.42(f). 

The Board believes that the express 

exclusion of ‘‘fee appraisers’’ from the 

meaning of ‘‘agents’’ is consistent with 

Congress’s intention regarding the 

parties that should be required to pay 

fee appraisers customary and reasonable 

compensation. As discussed in more 

detail in the section-by-section of 

§ 226.42(f)(4)(i) (defining ‘‘fee 

appraiser’’), TILA Section 129E(i)(2) 

defines ‘‘fee appraisers’’ to which 

customary and reasonable fees should 

be paid to mean (1) individual statelicensed or state-certified appraisers 

(natural persons), and (2) companies or 

firms that employ individual statelicensed or state-certified appraisers and 

receive compensation for performing 

appraisals. In this way, the statute 

reflects that natural persons as well as 

appraisal companies or firms may 

contract with creditors and AMCs to 

perform appraisals. Appraisal 

companies or firms that contract with 

AMCs to perform appraisals typically 

have state-licensed or state-certified 

appraisers on staff to perform 

appraisals. These staff appraisers meet 

the definition of ‘‘fee appraiser’’ under 

the statute; thus, a strict interpretation 

of the statute would require appraisal 

companies to pay their staff appraisers 

at a ‘‘customary and reasonable’’ rate. 

The Board understands, however, that 

these companies or firms often pay their 

appraisers on an hourly basis and 

provide their employees with office 

services as well as health insurance and 

other employment benefits. Requiring 

that they pay their staff appraisers 

‘‘customary and reasonable’’ fees for 

each appraisal assignment could be 

unduly financially burdensome for 

these entities, and ultimately could 

undermine their viability as an avenue 

for appraisal services. The Board 

believes that this result would harm 

consumers by reducing competition in 

the appraisal services industry. 

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Federal Register / Vol. 75, No. 208 / Thursday, October 28, 2010 / Rules and Regulations 66571 

39For further discussion of ‘‘relevant geographic 

markets,’’ see, e.g., U.S. Dept. of Justice and Federal 

Trade Commission, ‘‘Horizontal Merger Guidelines,’’ 

§ 4.2 (Aug. 19, 2010), found at 

http://www.justice.gov/atr/public/guidelines/hmg2010.html#4f. 

The Board requests comment on 

whether the final rule should define 

‘‘agent’’ to exclude fee appraisers or any 

other parties. 

Geographic Market of the Property 

Being Appraised 

As noted, TILA Section 129E(i) 

requires payment of customary and 

reasonable compensation to fee 

appraisers for appraisal services 

performed ‘‘in the market area of the 

property being appraised.’’ Section 

226.42(f)(1), (f)(2), and (f)(3) (discussed 

below) substitute the term ‘‘geographic 

market’’ for the statutory term ‘‘market 

area.’’ Comment 42(f)(1)–2 clarifies that, 

for purposes of § 226.42(f), the 

‘‘geographic market of the property 

being appraised’’ means the geographic 

market relevant to the appropriate 

compensation levels for appraisal 

services.39 This comment explains that, 

depending on the facts and 

circumstances, the relevant geographic 

market may be a state, metropolitan 

statistical area (MSA), metropolitan 

division, area outside of an MSA, 

county, or other geographic area. The 

comment provides two examples. First, 

assume that fee appraisers who 

normally work in County A generally 

accept $400 to appraise an attached 

single-family property in County A. 

Assume also that very few or no fee 

appraisers who normally work only in 

contiguous County B will accept a rate 

comparable to $400 to appraise an 

attached single-family property in 

County A. The relevant geographic 

market for an attached single-family 

property in County A may reasonably be 

defined as County A. 

Second, assume that fee appraisers 

who normally work only in County A 

generally accept $400 to appraise an 

attached single-family property located 

in County A. Assume also that many fee 

appraisers who normally work only in 

contiguous County B will accept a rate 

comparable to $400 to appraise an 

attached single-family property located 

in County A. The relevant geographic 

market for an attached single-family 

property in County A may reasonably be 

defined to include both County A and 

County B. 

Failure To Perform Contractual 

Obligations 

A few creditors and AMC 

representatives requested that the Board 

clarify whether creditors and their 

agents could withhold an appraiser’s fee 

for failing to meet contractual 

obligations. Comment 42(f)(1)–3 

clarifies that § 226.42(f)(1) does not 

prohibit a creditor or its agent from 

withholding compensation from a fee 

appraiser for failing to meet contractual 

obligations, such as for failing to 

provide the appraisal report or violating 

state or federal appraisal laws in 

performing the appraisal. The Board 

requests comment on whether the Board 

should specify particular types of 

contractual obligations that, if breached, 

would warrant withholding 

compensation without violating 

§ 226.42(f). 

Agreement That Fee Is Customary and 

Reasonable 

Comment 42(f)(1)–4 clarifies that a 

document signed by a fee appraiser 

indicating that the appraiser agrees that 

the fee paid to the appraiser is 

‘‘customary and reasonable’’ does not by 

itself create a presumption of 

compliance with § 226.42(f) or 

otherwise satisfy the requirement to 

compensate a fee appraiser at a 

customary and reasonable rate. In the 

Board’s view, a fee appraiser’s 

agreement that a fee is ‘‘customary and 

reasonable’’ is insufficient to establish 

that the fee meets the statutory 

‘‘customary and reasonable’’ standard. 

Objective factors or information such as 

that set forth in § 226.42(f)(2) and (f)(3) 

(discussed below) generally should 

support the creditor’s or agent’s 

determination of the appropriate 

amount of compensation to pay a fee 

appraiser for a particular appraisal 

assignment. In theory, the fact that an 

appraiser is willing to accept a 

particular fee for an appraisal 

assignment may bear on whether the fee 

is customary, reasonable, or both. 

However, an appraiser may be willing to 

accept a low fee because the appraiser 

is new to the industry and wishes to 

establish herself, or simply because the 

appraiser needs any work he can obtain 

in a slow housing market. In addition, 

the Board understands that some AMCs 

have begun requiring fee appraisers to 

agree that the fee is ‘‘customary and 

reasonable’’ as a condition of obtaining 

the appraisal assignment. In these 

situations, the Board believes that an 

appraiser’s agreement that a fee is 

‘‘customary and reasonable’’ is an 

unreliable measure of whether the fee in 

fact meets the statutory standard. 

Volume-Based Discounts 

The Board recognizes that 

competition and efficiencies may both 

be enhanced when market participants 

negotiate volume-based discounts for 

services. For this reason, comment 

42(f)(1)–5 clarifies that § 226.42(f)(1) 

does not prohibit a fee appraiser and a 

creditor (or its agent) from agreeing to 

compensation based on transaction 

volume, so long as the compensation is 

customary and reasonable. For example, 

assume that a fee appraiser typically 

receives $300 for appraisals from 

creditors with whom it does business; 

the fee appraiser, however, agrees to 

reduce the fee to $280 for a particular 

creditor, in exchange for a minimum 

number of assignments from the 

creditor. The Board requests comment 

on whether further guidance is needed 

concerning the permissibility of 

volume-based discounts under 

§ 226.42(f)(1). 

42(f)(2) Presumption of Compliance 

Section 226.42(f)(2) provides that a 

creditor and its agents will be presumed 

to comply with the requirement to 

compensate a fee appraiser at a 

customary and reasonable rate if the 

creditor or its agent satisfy two 

conditions. 

First, the creditor or its agents must 

compensate the fee appraiser in an 

amount that is reasonably related to 

recent rates paid for comparable 

appraisal services performed in the 

geographic market of the property being 

appraised. In determining this amount, 

the creditor or its agent must review the 

factors below and make any adjustments 

to recent rates paid in the relevant 

geographic market necessary to ensure 

that the amount of compensation is 

reasonable: 

(1) The type of property; 

(2) The scope of work; 

(3) The time in which the appraisal 

services are required to be performed; 

(4) Fee appraiser qualifications; 

(5) Fee appraiser experience and 

professional record; and 

(6) Fee appraiser work quality. 

Second, the creditor and its agents 

must not engage in any anticompetitive 

acts in violation of state or federal law 

that affect the compensation paid to fee 

appraisers, including— 

(1) Entering into any contracts or 

engaging in any conspiracies to restrain 

trade through methods such as price 

fixing or market allocation, as 

prohibited under section 1 of the 

Sherman Antitrust Act, 15 U.S.C. 1, or 

any other relevant antitrust laws; or 

(2) Engaging in any acts of 

monopolization such as restricting any 

person from entering the relevant 

geographic market or causing any 

person to leave the relevant geographic 

market, as prohibited under section 2 of 

the Sherman Antitrust Act, 15 U.S.C. 2, 

or any other relevant antitrust laws. 

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66572 Federal Register / Vol. 75, No. 208 / Thursday, October 28, 2010 / Rules and Regulations 

40See The Appraisal Foundation, Uniform 

Standards of Professional Appraisal Practice 

(USPAP), ed. 2010–2011, ‘‘Scope of Work Rule,’’ 

U–13. 

Comment 42(f)(2)–1 explains that 

creditor and its agent are presumed to 

comply with the requirement to pay a 

fee appraiser at a customary and 

reasonable rate under § 226.42(f)(1) if 

the creditor or its agent meets the 

conditions specified in § 226.42(f)(2), 

stated above, in determining the 

compensation. The comment clarifies 

that these conditions are not 

requirements for compliance with 

§ 226.42(f)(1), but that, if met, they 

create a presumption that the creditor or 

its agent has complied. The comment 

further clarifies that a person may rebut 

this presumption with evidence that the 

amount of compensation paid to a fee 

appraiser was not customary and 

reasonable. The creditor would have 

met the conditions in § 226.42(f)(2), so 

this evidence must be distinguishable 

from allegations that the creditor or its 

agent failed to satisfy the conditions in 

§ 226.42(f)(2). Finally, the comment 

explains that, if a creditor or its agent 

does not meet one of the conditions in 

§ 226.42(f)(2), the creditor’s and its 

agent’s compliance with the 

requirement to pay a fee appraiser at a 

customary and reasonable rate is 

determined based on all of the facts and 

circumstances without a presumption of 

either compliance or violation. 

Paragraph 42(f)(2)(i) 

Compensation Must Be Reasonably 

Related to Recent Rates 

As explained in comment 42(f)(2)(i)– 

1, the first element of the presumption 

of compliance under § 226.42(f)(2) 

requires creditor or its agent to engage 

in a two-step process to determine the 

appropriate compensation. First, the 

creditor or its agent must identify recent 

rates paid for comparable appraisal 

services in the relevant geographic 

market. Second, once recent rates have 

been identified, the creditor or its agent 

must review the factors listed in 

§ 226.42(f)(2)(i)(A)–(F) and make any 

adjustments to recent rates appropriate 

to ensure that the amount of 

compensation is appropriate for the 

current transaction. 

Comment 42(f)(2)(i)–2 further 

explains the first step in this process, 

which requires the creditor or its agents 

to identify recent rates for appraisal 

services in the geographic market of the 

property being appraised. Specifically, 

this comment clarifies that whether 

rates may reasonably be considered 

‘‘recent’’ depends on the facts and 

circumstances, but that generally a rate 

would be considered ‘‘recent’’ if it had 

been charged within one year of the 

creditor’s or its agent’s reliance on this 

information to qualify for the 

presumption of compliance under 

§ 226.42(f)(2). This comment also states 

that, for purposes of the presumption of 

compliance under § 226.42(f)(2), a 

creditor or its agent may gather 

information about recent rates by using 

a reasonable method that provides 

information about rates for appraisal 

services in the geographic market of the 

relevant property. The comment further 

provides that a creditor or its agent may, 

but is not required to, use or perform a 

fee survey. As indicated by this 

comment, qualifying for this 

presumption of compliance does not 

require that a creditor use third-party 

information that excludes appraisals 

ordered by AMCs, for example, as 

required to qualify for the presumption 

of compliance available under 

§ 226.42(f)(3), discussed below. The 

Board requests comment on whether 

additional guidance regarding how 

creditors may identify recent rates is 

needed, and solicits views on what 

guidance in particular may be helpful. 

Comment 42(f)(2)(i)–3 provides 

guidance on the second step in the 

process, which requires the creditor or 

its agent to review the factors listed in 

paragraph (f)(2)(i)(A)–(F) to determine 

appropriate rate for the current 

transaction may be determined. For 

further clarification, this comment 

provides an example: If the recent rates 

identified by the creditor or its agent 

were solely for appraisal assignments in 

which the scope of work required 

consideration of two comparable 

properties, but the current transaction 

required an appraisal that considered 

three comparable properties, the 

creditor or its agent might reasonably 

adjust the rate by an amount that 

reasonably accounts for the increased 

scope of work. 

The factors that must be considered in 

this second step for determining the 

appropriate rate of fee appraiser 

compensation are listed in 

§ 226.42(f)(i)(A)–(F) and discussed in 

turn below. Appraisal assignments vary 

and appraisers have different skills and 

experience, and these variations and 

differences may legitimately contribute 

to determining what level of 

compensation for a particular 

assignment is reasonable. For example, 

an appraisal requiring an interior 

inspection may be more expensive to 

perform and may warrant greater 

compensation than an appraisal 

requiring only an exterior or ‘‘drive-by’’ 

inspection. Similarly, an appraisal of a 

dwelling in a rural area with several 

additional outbuildings and significant 

acreage in real property might be more 

expensive to perform and may warrant 

higher compensation for the appraiser 

than an appraisal of a detached singlefamily dwelling in a suburban area. As 

discussed earlier, the statute itself 

acknowledges these variances, by 

expressly permitting a creditor or its 

agent to pay an appraiser more for a 

‘‘complex’’ assignment than for a 

comparatively ‘‘non-complex’’ 

assignment. TILA Section 129E(i)(3). 

At the same time, the Board 

recognizes that each of these factors may 

not in all transactions determine the 

quality of an appraisal and the value of 

appraisal services. For example, an 

appraiser with 20 years of experience 

appraising properties may not 

necessarily provide a higher quality 

appraisal than an appraiser with five 

years of experience. Thus, the interim 

final rule states that the rate must be 

adjusted as ‘‘necessary’’ to ensure a 

reasonable rate, and does not specify 

exact percentages or amounts by which 

compensation should vary based on 

each factor. 

Type of property. After the creditor or 

its agent identifies recent rates in the 

relevant geographic market, the first 

factor that must be accounted for is the 

type of property. See § 226.42(f)(2)(i)(A). 

Comment 42(f)(2)(i)(A)–1 provides 

several examples of different property 

types that may appropriately bear on the 

value of appraisal services: Detached or 

attached single-family property, 

condominium or cooperative unit, or 

manufactured home. The property type 

may contribute to, for example, the 

difficulty or ease of a particular 

appraisal assignment, and thus can 

affect the value of appraisal services. 

Scope of work. The second factor that 

must be accounted for is the scope of 

work. See § 226.42(f)(2)(i)(B). Comment 

42(f)(2)(i)(B) clarifies that relevant 

elements of the scope of work to 

consider would include the type of 

inspection (for example, exterior only or 

both interior and exterior) and the 

number of comparable properties that 

the appraiser is required to review to 

perform the assignment. To comply 

with USPAP, appraisers must identify 

the extent of work and analysis required 

to obtain credible results for an 

appraisal assignment.40 The scope of 

work may vary based on a number of 

factors, such as the extent to which the 

property must be inspected, the type 

and extent of data that must be 

researched, and the type and extent of 

analyses required to reach credible 

conclusions. Thus, the compensation of 

an appraiser may reasonably be higher 

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Federal Register / Vol. 75, No. 208 / Thursday, October 28, 2010 / Rules and Regulations 66573 

41See Interagency Guidelines, SR 94–55; see also 

Proposed Interagency Guidelines, 73 FR at 69652. 

42Appraiser Qualifications Board, The Appraisal 

Foundation, ‘‘The Real Property Appraiser 

Qualification Criteria’’ (Apr. 2010). 

43See Board: 12 CFR 225.66(a); OCC: 12 CFR 

34.46(a); FDIC: 12 CFR 323.6(a); OTS: 12 CFR 

564.6(a); NCUA: 12 CFR 722.6(a). 

where the scope of work required for the 

appraisal is more extensive than the 

scope of work required for another 

appraisal performed by the same 

appraiser. 

The time in which the appraisal 

services are required to be performed. 

The third factor is the time in which the 

appraisal services are required to be 

performed or ‘‘turnaround’’ time. See 

§ 226.42(f)(2)(i)(C). Concerns have been 

expressed to the Board that a quick 

turnaround time is sometimes overemphasized in determining whether to 

hire an appraiser and how much to pay 

the appraiser, to the detriment of the 

appraisal’s quality. The Board 

recognizes that required turnaround 

time can be a legitimate factor to 

consider in determining an appraiser’s 

rate, but stresses that appraiser 

competency and accurate appraisals 

should be a creditor’s chief concerns, 

not how quickly the assignment can be 

performed. As reflected in the 

remaining factors discussed below, and 

consistent with longstanding federal 

banking agency supervisory guidance, 

the Board expects creditors and their 

agents to select an appraiser foremost on 

the basis of whether the appraiser has 

the requisite education, expertise and 

competence to complete the 

assignment.41

Fee appraiser qualifications. The 

fourth factor is the fee appraiser’s 

professional qualifications. See 

§ 226.42(f)(2)(i)(D). Comment 

42(f)(2)(i)(D)–1 clarifies that 

professional qualifications that 

appropriately affect the value of 

appraisal services include whether the 

appraiser is state-licensed or statecertified in accordance with the 

minimum criteria issued by the 

Appraisal Qualifications Board of the 

Appraisal Foundation.42 For example, a 

state-licensed appraiser could 

legitimately command a higher rate for 

appraisal services than an appraiser-intraining who has not yet received a 

license. Relevant qualifications may also 

include the appraiser’s completion of 

continuing education courses on 

effective appraisal methods and related 

topics. 

Comment 42(f)(2)(i)(D)–2 clarifies that 

permitting a creditor to consider an 

appraiser’s qualifications does not 

override state or federal laws 

prohibiting the exclusion of an 

appraiser from consideration for an 

assignment solely by virtue of 

membership or lack of membership in 

any particular appraisal organization.43

The Board and other federal banking 

agencies recognize that fellow members 

of a particular appraisal organization 

may favor one another in selecting an 

appraiser for a given assignment, 

creating an unfair playing field for other 

appraisers. For this reason, federal 

banking agency regulations prohibit 

excluding a state-licensed or statecertified appraiser from consideration 

for an assignment for a federally related 

transaction solely by virtue of 

membership or lack of membership in 

any particular appraisal organization. 

The Board requests comment on 

whether the final rule should expressly 

prohibit basing an appraiser’s 

compensation on an appraiser’s 

membership or lack of membership in 

particular appraisal organization. 

Fee appraiser experience and 

professional record. The fifth factor is 

the professional record and experience 

of the fee appraiser. See 

§ 226.42(f)(2)(i)(E). Comment 

42(f)(2)(i)(E)–1 clarifies that the fee 

appraiser’s level of experience may 

include, for example, the fee appraiser’s 

years of service as a state-licensed or 

state-certified appraiser, or years of 

service appraising properties in a 

particular geographical area or of a 

particular type. In the Board’s view, a 

fee for appraisal services may 

reasonably be higher when the fee 

appraiser has been state-licensed or 

state-certified for 15 years and has been 

appraising properties in the relevant 

geographic area during all that time than 

when the fee appraiser is more recently 

licensed and has appraised properties in 

that area for only six months. 

Comment 42(f)(2)(i)(E)–1 further 

clarifies that, regarding the appraiser’s 

professional record, a creditor or its 

agent may consider, for example, 

whether an appraiser has a past record 

of suspensions, disqualifications, 

debarments, or judgments for waste, 

fraud, abuse or breach of legal or 

professional standards. The Board 

expects that a creditor or its agent 

would exercise caution in engaging an 

appraiser with a blemished professional 

record, and would carefully scrutinize 

the appraiser’s work. A creditor or its 

agent might reasonably pay less for the 

appraiser’s services than for the services 

of an appraiser with an unblemished 

record. 

Fee appraiser work quality. The sixth 

factor is the quality of the appraiser’s 

work. See § 226.42(f)(2)(i)(F). Comment 

42(f)(2)(i)(F)–1 clarifies that ‘‘work 

quality’’ in this factor principally 

comprises the soundness of the 

appraiser’s appraisal assignments; the 

fee appraiser’s work quality may 

include, for example, the past quality of 

appraisals performed by the appraiser 

based on the written performance and 

review criteria of the creditor or agent 

of the creditor. A creditor or its agent 

might reasonably pay an appraiser with 

an excellent performance history at a 

higher rate than an appraiser with a 

performance history showing problems 

with past assignments. 

The Board solicits comment on 

whether the factors in 

§ 226.42(f)(2)(i)(A)–(F) are appropriate, 

and whether other factors should be 

included. 

Paragraph 42(f)(2)(ii) 

No Anticompetitive Acts 

As noted above, the Board recognizes 

that if some creditors or AMCs dominate 

the market through illegal 

anticompetitive acts, ‘‘recent rates’’ 

identified under § 226.42(f)(2)(i) may be 

an inaccurate measure of what a 

‘‘reasonable’’ fee should be. Thus, under 

§ 226.42(f)(2)(ii), to qualify for the 

presumption of compliance afforded 

under § 226.42(f)(2), a creditor and its 

agents must not engage in any 

anticompetitive acts in violation of state 

or federal law that affect the 

compensation of fee appraisers, 

including— 

(1) Entering into any contracts or 

engaging in any conspiracies to restrain 

trade through methods such as price 

fixing or market allocation, as 

prohibited under section 1 of the 

Sherman Antitrust Act, 15 U.S.C. 1, or 

any other relevant antitrust laws 

(§ 226.42(f)(2)(ii)(A)); or 

(2) Engaging in any acts of 

monopolization such as restricting any 

person from entering the relevant 

geographic market or causing any 

person to leave the relevant geographic 

market, as prohibited under section 2 of 

the Sherman Antitrust Act, 15 U.S.C. 2, 

or any other relevant antitrust laws 

(§ 226.42(f)(2)(ii)(B)). 

Comment 42(f)(2)(ii)–1 explains that, 

under § 226.42(f)(2)(ii)(A), a creditor or 

its agent would not qualify for 

§ 226.42(f)(2)’s presumption of 

compliance if it engaged in any acts to 

restrain trade such as entering into a 

price fixing or market allocation 

agreement that affect the compensation 

of fee appraisers. For example, if 

appraisal management company A and 

appraisal management company B 

agreed to compensate fee appraisers at 

no more than a specific rate or range of 

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rates, neither appraisal management 

company would qualify for the 

presumption of compliance. Likewise, if 

appraisal management company A and 

appraisal management company B 

agreed that appraisal management 

company A would limit its business to 

a certain portion of the relevant 

geographic market and appraisal 

management company B would limit its 

business to a different portion of the 

relevant geographic market, and as a 

result each appraisal management 

company unilaterally set the fees paid to 

fee appraisers in their respective 

portions of the market, neither appraisal 

management company would qualify for 

the presumption of compliance under 

paragraph (f)(2). 

Comment 42(f)(ii)–2 explains that, 

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

its agent would not qualify for 

§ 226.42(f)(2)’s presumption of 

compliance if it engaged in any act of 

monopolization such as restricting entry 

into the relevant geographic market or 

causing any person to leave the relevant 

geographic market, resulting in 

anticompetitive effects that affect the 

compensation paid to fee appraisers. For 

example, if only one appraisal 

management company exists or is 

predominant in a particular market area, 

that appraisal management company 

might not qualify for the presumption of 

compliance if it entered into exclusivity 

agreements with all creditors in the 

market or all fee appraisers in the 

market, such that other appraisal 

management companies had to leave or 

could not enter the market. Whether this 

behavior would be considered an 

anticompetitive act that affects the 

compensation paid to fee appraisers 

depends on all of the facts and 

circumstances, including applicable 

law. 

The Board requests comment on 

whether additional guidance is needed 

regarding anticompetitive acts that 

would disqualify a creditor or its agent 

from the presumption of compliance 

under § 226.42(f)(2). 

42(f)(3) Alternative Presumption of 

Compliance 

Rates Based on Objective Third-Party 

Information 

Section 226.42(f)(3) provides creditors 

and their agents with an alternative 

means to qualify for a presumption of 

compliance with the requirement to pay 

fee appraisers at a customary and 

reasonable rate under § 226.42(f)(1). 

Specifically, a creditor and its agents are 

presumed to comply with the 

requirement if the creditor or its agents 

determine the amount of compensation 

paid to the fee appraiser by relying on 

rates in the geographic market of the 

property being appraised that satisfies 

three conditions. First, the information 

must be established by objective thirdparty information, including fee 

schedules, studies, and surveys 

prepared by independent third parties 

such as government agencies, academic 

institutions, and private research firms 

(§ 226.42(f)(3)(i)). Second, it must be 

based on recent rates paid to a 

representative sample of providers of 

appraisal services in the geographic 

market of the property being appraised 

or the fee schedules of those providers 

(§ 226.42(f)(3)(ii)). Third, in the case of 

fee schedules, studies, and surveys, 

such fee schedules, studies and surveys 

or information derived from them must 

exclude compensation paid to fee 

appraisers for appraisals ordered by an 

AMC, as defined in § 226.42(f)(4)(iii). 

Regarding this third condition, the 

Board recognizes that the express 

statutory language states, ‘‘Fee studies 

shall exclude assignments ordered by 

known appraisal management 

companies.’’ TILA Section 

129E(i)(1)(emphasis added). However, 

the Board does not see a meaningful 

distinction between, for example, a fee 

‘‘study’’ and a fee ‘‘survey,’’ both of 

which require at least some evaluation 

of gathered data. The Board also is not 

aware of a rationale consistent with the 

statute that would treat fee studies 

differently than fee surveys or fee 

schedules. The Board requests 

comment, however, on whether studies 

and surveys should be treated 

differently for the purposes of this rule. 

Comment 42(f)(3)–1 explains that a 

creditor and its agent are presumed to 

comply with § 226.42(f)(1) if the creditor 

or its agent determine the compensation 

paid to a fee appraiser based on 

information about rates that satisfies the 

three conditions discussed above. This 

comment clarifies that reliance on 

information satisfying these conditions 

is not a requirement for compliance 

with § 226.42(f)(1), but creates a 

presumption that the creditor or its 

agent has complied. The comment 

further clarifies that a person may rebut 

this presumption with evidence that the 

rate of compensation paid to a fee 

appraiser by the creditor or its agent is 

not customary and reasonable. The 

creditor or its agent would already have 

satisfied the presumption of compliance 

by relying on information meeting the 

three conditions; therefore, evidence 

rebutting the presumption would have 

to be based on facts or information other 

than third-party information satisfying 

the presumption of compliance 

conditions of § 226.42(f)(3). This 

comment also explains that, if a creditor 

or its agent does not rely on information 

that meets the conditions in 

§ 226.42(f)(3), the creditor’s and its 

agent’s compliance with the 

requirement to compensate fee 

appraisers at a customary and 

reasonable rate is determined based on 

all of the facts and circumstances 

without a presumption of either 

compliance or violation. 

Comment 42(f)(3)–2 clarifies that the 

term ‘‘geographic market’’ is explained 

in comment 42(f)(1)–2. See the sectionby-section analysis to § 226.42(f)(1). 

Comment 42(f)(3)–3 clarifies that 

whether rates may reasonably be 

considered ‘‘recent’’ under § 226.42(f)(3) 

depends on the facts and circumstances. 

Generally, however, ‘‘recent’’ rates 

would include rates charged within one 

year of the creditor’s or its agent’s 

reliance on this information to qualify 

for the presumption of compliance 

under § 226.42(f)(3). 

In discussions with Board staff, 

concerned parties argued that existing 

appraisal fee schedules, surveys and 

studies have various flaws and thus may 

not be reliable indicators of customary 

and reasonable rates for appraisals in all 

home-secured consumer credit 

transactions. In preparing this interim 

final rule, the Board did not identify 

appraisal fee schedules, surveys or 

studies that would be appropriate to 

designate as a ‘‘safe harbor’’ for creditors 

and their agents to comply with 

§ 226.42(f)(1). The Board solicits 

comment on whether and on what basis 

the final rule should give creditors or 

their agents a safe harbor for relying on 

a fee study or similar source of 

compiled appraisal fee information. The 

Board also requests comment on what 

additional guidance may be needed 

regarding third-party rate information 

on which a creditor and its agents may 

appropriately rely to qualify for the 

presumption of compliance. 

42(f)(4) Definitions 

Section 226.24(f)(4) defines three 

terms for purposes of § 226.42(f): ‘‘Fee 

appraiser,’’ ‘‘appraisal services,’’ and 

‘‘appraisal management company.’’ 

Fee Appraiser 

First, the term ‘‘fee appraiser’’ is 

defined to mean— 

(1) A natural person who is a statelicensed or state-certified appraiser and 

receives a fee for performing an 

appraisal, but who is not an employee 

of the person engaging the appraiser 

(§ 226.42(f)(4)(i)(A)); or 

(2) An organization that, in the 

ordinary course of business, employs 

state-licensed or state-certified 

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44See, e.g., 12 CFR 225.65; Interagency 

Guidelines, SR 94–55 (Oct. 28, 1994). 

45See Dodd-Frank Act, Section 1473(f) (amending 

FIRREA Sections 1121 and 1124), Public Law 111– 

203, 124 Stat. 2191–2192 (to be codified at 12 

U.S.C. 3332 and 3353, respectively). 46 Id. 

appraisers to perform appraisals, 

receives a fee for performing appraisals, 

and is not subject to the requirements of 

section 1124 of FIRREA, 12 U.S.C. 3331 

et seq. (§ 226.42(f)(4)(i)(B)). 

The interim final rule’s definition of 

‘‘fee appraiser’’ is intended to be 

consistent with the statute, as well as 

the Board’s longstanding use of the term 

and with the meaning of ‘‘fee appraiser’’ 

generally accepted in the appraisal 

industry.44 Thus, the interim final rule 

specifies that a fee appraiser includes a 

natural person who is a state-licensed or 

state-certified appraiser hired on a 

contract or other non-permanent basis to 

perform appraisal services. 

Comment 42(f)(4)(i)–1 clarifies that 

the term ‘‘organization’’ in 

§ 226.42(f)(4)(i)(B) includes a 

corporation, partnership, 

proprietorship, association, cooperative, 

or other business entity and does not 

include a natural person. Section 

226.42(f)(4)(i)(B) also cross-references 

section 1124 of FIRREA. The DoddFrank Act added Section 1124 to 

FIRREA. Section 1124 requires the 

federal banking agencies and the FHFA 

to issue rules that require AMCs (as 

newly defined in FIRREA Section 1121) 

to register with state appraiser certifying 

and licensing agencies according to 

minimum criteria set by these rules.45

Thus, only entities that perform 

appraisals and that would not be 

required to register under the new rules 

satisfy the definition of fee appraiser. 

Unlike AMCs as defined under FIRREA 

and commonly known in the industry, 

these entities do not merely perform 

managerial tasks regarding the appraisal 

process, but oversee individual 

appraisers whom they employ to 

perform the appraisal. The definition of 

‘‘appraisal management company’’ for 

purposes of the registration requirement 

under FIRREA is further addressed 

below in the discussion of the interim 

final rule’s definition of ‘‘appraisal 

management company’’ under 

§ 226.42(f)(4)(iii). 

Appraisal Services 

Section 226.42(f)(4)(ii) states that, for 

purposes of § 226.42(f), ‘‘appraisal 

services’’ include only the services 

required to perform the appraisal, such 

as defining the scope of work, 

inspecting the property, reviewing 

necessary and appropriate public and 

private data sources (for example, 

multiple listing services, tax assessment 

records and public land records), 

developing and rendering an opinion of 

value, and preparing and submitting the 

appraisal report. The Board understands 

that agents of the creditor such as AMCs 

split the total appraisal fee between the 

AMC (for appraisal management 

functions) and the appraiser (for the 

appraisal). The interim final rule is thus 

intended to clarify that the customary 

and reasonable rate applies to 

compensation for tasks that the fee 

appraiser performs, not the entire cost of 

the appraisal (including management 

functions). 

Appraisal Management Company 

Section 226.42(f)(4)(iii) defines an 

‘‘appraisal management company’’ in 

§ 226.42(f) as any person authorized to 

do the following actions on behalf of the 

creditor—(1) recruit, select, and retain 

appraisers; (2) contract with appraisers 

to perform appraisal assignments; (3) 

manage the process of having an 

appraisal performed, including 

providing administrative duties such as 

receiving appraisal orders and appraisal 

reports, submitting completed appraisal 

reports to creditors and underwriters, 

collecting fees from creditors and 

underwriters for services provided, and 

compensating appraisers for services 

performed; or (4) review and verify the 

work of appraisers. This definition is 

based on the new definition of 

‘‘appraisal management company’’ in the 

Dodd-Frank Act’s amendments to 

FIRREA, for purposes of requiring 

AMCs to register with the appropriate 

state appraiser certifying and licensing 

agency and related purposes.46 The sole 

difference between the definitions is 

that the definition under FIRREA limits 

the meaning of AMC to entities that 

oversee a network or panel of more than 

15 certified or licensed appraisers in a 

state or 25 or more nationally within a 

given year. 

For purposes of FIRREA’s 

requirement that AMCs register, the 

Board understands that Congress may 

have sought to relieve smaller entities 

from administrative burdens by 

excluding them from this requirement. 

It is not clear, however, that FIRREA’s 

more limited definition of AMC is 

appropriate under TILA Section 129E(i); 

this TILA provision is a technical 

requirement regarding the content of fee 

studies rather than a direct 

administrative obligation imposed on 

AMCs. The interim final rule therefore 

does not limit the meaning of ‘‘appraisal 

management company’’ to entities with 

an appraiser panel of a particular size. 

The Board requests comment on 

whether the interim final rule’s 

definition of ‘‘appraisal management 

company’’ is appropriate for the final 

rule. 

42(g) Mandatory Reporting 

TILA Section 129E(e) requires certain 

persons to report an appraiser to the 

applicable state appraiser certifying and 

licensing agency if the person has a 

reasonable basis to believe the appraiser 

is failing to comply with USPAP, is 

violating applicable laws, or is 

otherwise engaging in unethical or 

unprofessional conduct. 15 U.S.C. 

1639e(e). This provision applies to 

creditors, mortgage brokers, real estate 

brokers, appraisal management 

companies, and any other persons 

providing a service for a covered 

transaction. The interim final rule 

implements this requirement in 

§ 226.42(g). The Act does not expressly 

define the term ‘‘appraiser’’ for purposes 

of TILA Section 129E(e). TILA Section 

129E(e) is intended to enable state 

certifying and licensing agencies to 

exercise the authority granted to them 

under state law. Therefore, for purposes 

of § 226.42(g), an ‘‘appraiser’’ is a natural 

person who provides opinions of the 

value of dwellings and is required to be 

licensed or certified under the laws of 

the state in which the consumer’s 

principal dwelling or otherwise is 

subject to the jurisdiction of the state 

appraiser certifying and licensing 

agency. See comment 42(g)–6. 

42(g)(1) Reporting Required 

Section 226.42(g)(1) requires reporting 

of a failure to comply with USPAP or of 

an ethical or professional requirement 

under applicable state or federal statute 

or regulation only if the failure to 

comply is material, that is, likely to 

significantly affect the value assigned to 

the consumer’s principal dwelling. 

Further, § 226.42(g) clarifies that 

reporting of a failure to comply with an 

ethical or professional requirement is 

required only if the requirement is 

codified in an applicable state or federal 

statute or regulation (ethical or 

professional requirement). Other 

statutes or regulations may contain 

broader reporting requirements, 

however. 

The Board interprets TILA Section 

129E(e) to apply only to a material 

failure to comply with USPAP or a 

codified standard of ethical or 

professional conduct. The Board 

believes that this interpretation is 

consistent with the Act’s purpose of 

ensuring that values assigned to a 

consumer’s principal dwelling are 

assigned free of any coercion or 

inappropriate influence, so that 

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66576 Federal Register / Vol. 75, No. 208 / Thursday, October 28, 2010 / Rules and Regulations 

creditors base their underwriting 

decisions on appraisals that do not 

misstate the value of the dwelling. Thus, 

the interim final rule mandates 

reporting failures to comply that would 

affect the value assigned to the 

dwelling. The Board solicits comment 

on whether reporting should be required 

only if a material failure to comply 

causes the value assigned to the 

consumer’s principal dwelling to differ 

from the value that would have been 

assigned had the material failure to 

comply not occurred by more than a 

certain tolerance, for example, by 10 

percent or more. 

Reasonable basis. TILA Section 

129E(e) requires reporting only if a 

covered person has a ‘‘reasonable basis 

to believe’’ that an appraiser has not 

complied with USPAP or ethical or 

professional requirements. 15 U.S.C. 

1639e(e). Comment 42(g)(1)–1 states that 

a covered person has a reasonable basis 

to believe that an appraiser has 

materially failed to comply with USPAP 

or ethical or professional requirements 

if the person has actual knowledge or 

information that would lead a 

reasonable person to believe that the 

appraiser has materially failed to 

comply with USPAP or such 

requirements. 

Examples of material failures to 

comply. Comment 42(g)(1)–2 provides 

the following examples of a material 

failure to comply: (1) Materially 

mischaracterizing the value of the 

consumer’s principal dwelling, in 

violation of § 226.42(c)(2); (2) 

performing an appraisal in a grossly 

negligent manner, in violation of a 

USPAP rule; and (3) accepting an 

appraisal assignment on the condition 

that the appraiser will assign a value 

equal to or greater than the purchase 

price to the consumer’s principal 

dwelling, in violation of a USPAP rule. 

Comment 42(g)(1)–3 clarifies that 

§ 226.42(g)(1) does not require reporting 

of failure to comply that is not material 

within the meaning of § 226.42(g)(1). 

For example, an appraiser’s disclosure 

of confidential information, in violation 

of applicable state law, or an appraiser’s 

failure to maintain errors and omissions 

insurance, in violation of applicable 

state law, would not be material for 

purposes of § 226.42(g)(1). 

Coverage of reporting requirement. 

TILA Section 129E(e) provides that any 

mortgage lender, mortgage broker, 

mortgage banker, real estate broker, 

appraisal management company, 

employee of an appraisal management 

company, or any other person ‘‘involved 

in a real estate transaction’’ must report 

failures to comply with USPAP or 

ethical or professional requirements. 15 

U.S.C. 1639e(e). Section 226.42(g)(1) 

provides that a ‘‘covered person’’ must 

report a material failure to comply. See 

§ 226.42(b)(1). Comment 42(g)(1)–4 

clarifies that ‘‘covered persons’’ required 

to report an appraiser’s material failure 

to with USPAP or ethical or professional 

requirements in connection with a 

covered transaction include creditors, 

mortgage brokers, appraisers, appraisal 

management companies, real estate 

agents, and other persons that provide 

‘‘settlement services’’ as defined under 

RESPA and regulations implementing 

RESPA. 

Comment 42(g)(1)–5 clarifies that the 

following persons are not ‘‘covered 

persons’’ required to report an 

appraiser’s material failure to comply 

with USPAP or ethical or professional 

requirements: (1) The consumer who 

obtains credit through a covered 

transaction; (2) a person secondarily 

liable for a covered transaction, such as 

a guarantor; and (3) a person that resides 

in or will reside in the consumer’s 

principal dwelling but will not be liable 

on the covered transaction, such as a 

non-obligor spouse. Comments 42(g)(1)– 

4 and –5 are consistent with 

commentary on the definition of 

‘‘covered person,’’ discussed in detail 

above in the section-by-section analysis 

of § 226.42(b)(2). 

42(g)(2) Timing of Reporting 

TILA Section 129E(e) does not 

establish a time by which a person must 

report a failure to comply with USPAP 

or ethical or professional requirements. 

Section 226.42(g)(2) provides that a 

covered person must report a material 

failure to comply within a reasonable 

period of time after the person 

determines that there is a reasonable 

basis to believe that such a material 

failure to comply has occurred. The 

Board requests comment on what 

constitutes a reasonable period of time 

within which to report a material failure 

to comply under § 226.42(g). 

42(g)(3) Definition 

Section 226.42(g) requires covered 

persons to report a failure to comply to 

the appropriate ‘‘state agency.’’ 

Consistent with the statute, 

§ 226.42(g)(3) defines the term ‘‘state 

agency’’ to mean the ‘‘state appraiser 

certifying and licensing agency’’ as 

defined by Title XI of FIRREA, codified 

under 12 U.S.C. 3350(1), and any 

implementing regulations. Section 

226.42(g)(3) clarifies that the agency for 

the state in which the consumer’s 

principal dwelling is located is the 

appropriate agency to which to report a 

material failure to comply. 

V. Effective Date and Mandatory 

Compliance Date 

This interim final rule is effective on 

December 27, 2010 and compliance 

with it is mandatory for all applications 

received by a creditor on or after April 

1, 2011. The Dodd-Frank Act does not 

provide effective or mandatory 

compliance dates for rules 

implementing TILA Section 129E. 

Appraisers have generally urged the 

Board to act quickly to put the interim 

rule in place, noting that the DoddFrank Act effectively sunsets the HVCC 

when the Board’s interim final rule is 

promulgated. Some industry 

representatives, on the other hand, have 

stated that they will need sufficient lead 

time to implement the interim final rule. 

Under TILA Section 105(d), certain of 

the Board’s disclosure requirements are 

to have an effective date of October 1 

that follows the issuance by at least six 

months. 15 U.S.C. 1604(d). However, 

the Board may at its discretion lengthen 

the implementation period for creditors 

to adjust their forms to accommodate 

new requirements, or shorten the period 

where the Board finds that such action 

is necessary to prevent unfair or 

deceptive disclosure practices. There is 

no similar effective date provision for 

non-disclosure requirements. The Riegle 

Community Development and 

Regulatory Improvement Act of 1994, 

however, requires that agency 

regulations which impose additional 

reporting, disclosure and other 

requirements on insured depository 

institutions take effect on the first day 

of a calendar quarter following 

publication in final form. 12 U.S.C. 

4802(b). 

The Board believes a mandatory 

compliance date of April 1, 2011 will 

provide creditors and others subject to 

the rule sufficient time to take the steps 

necessary to comply. Although some 

provisions in the interim final rule are 

similar to existing § 226.36(b), the 

interim final rule contains new 

requirements, such as the reasonable 

and customary fee requirement. In 

addition, the rule covers HELOCs, 

whereas existing § 226.36(b) applies 

only to closed-end loans secured by the 

consumer’s principal dwelling. The 

rule’s new requirements will likely 

require creditors and AMCs to change 

their systems, adjust policies, and train 

staff. The Board believes that five 

months should be sufficient for these 

purposes. Accordingly, the interim final 

rule is mandatory for consumer credit 

transactions secured by the consumer’s 

principal dwelling in which an 

application is received by the creditor 

on or after April 1, 2011. 

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47Under standards the U.S. Small Business 

Administration sets (SBA), an entity is considered 

‘‘small’’ if it had $175 million or less in assets for 

banks and other depository institutions; and 

$6.5 million or less in revenues for non-bank 

mortgage lenders, mortgage brokers, and loan 

servicers. U.S. Small Business Administration, 

Table of Small Business Size Standards Matched to 

North American Industry Classification System 

Codes, available at http://www.sba.gov/idc/groups/ 

public/documents/sba_homepage/ 

serv_sstd_tablepdf.pdf. 

As noted, certain provisions of this 

interim final rule are substantially 

similar to the provisions of current 

§ 226.36(b). The Board is therefore 

removing § 226.36(b) and related staff 

commentary, effective April 1, 2011, for 

applications received on or after that 

date. Section 226.36(b) remains in effect 

until compliance with this interim final 

rule becomes mandatory, and it applies 

to credit applications received before 

April 1, 2011, even if the credit is not 

extended until after that date. Thus, if 

a creditor receives an application for a 

loan that will be secured by the 

consumer’s principal dwelling on 

March 20, 2011, and the loan is 

consummated on May 1, 2011, 

§ 226.36(b) applies to that transaction. 

The Board notes, however, that covered 

persons may wish to comply with this 

interim final rule before April 1, 2011, 

and may do so. Compliance with 

§ 226.42 constitutes compliance with 

§ 226.36(b). Accordingly, creditors, 

mortgage brokers, and their affiliates 

subject to § 226.36(b) may comply with 

this interim final rule for applications 

received by creditors before April 1, 

2011, in lieu of complying with 

§ 226.36(b). 

VI. Initial Regulatory Flexibility 

Analysis 

In accordance with section 4 of the 

Regulatory Flexibility Act (RFA), 5 

U.S.C. 601 et seq., the Board is 

publishing an initial regulatory 

flexibility analysis for the interim final 

rule. The RFA generally requires an 

agency to assess the impact a rule is 

expected to have on small entities.47

Based on its analysis and for the reasons 

stated below, the Board believes that 

this interim final rule will have a 

significant economic impact on a 

substantial number of small entities. 

The Board invites comments on the 

effect of the interim final rule on small 

entities. 

A. Reasons for the Interim Final Rule 

As discussed above in the 

SUPPLEMENTARY INFORMATION, Section 

1472 of the Dodd-Frank Act amended 

TILA by inserting a new section 129E. 

Section 129E makes it unlawful to 

engage in any act that violates appraisal 

independence in consumer credit 

transactions secured by the consumer’s 

principal dwelling. The Dodd-Frank Act 

requires the Board to prescribe interim 

final rules within 90 days of enactment 

to define with specificity the acts or 

practices that violate appraisal 

independence. 

B. Summary of the Dodd-Frank Act 

As discussed above in the 

SUPPLEMENTARY INFORMATION, the DoddFrank Act prohibits any person, in 

extending credit or providing services, 

from violating appraisal independence 

for consumer credit transactions secured 

by the consumer’s principal dwelling. 

The Dodd-Frank Act specifies that 

practices that violate appraisal 

independence include: (1) Coercing or 

otherwise influencing any person, 

appraisal management company, firm or 

other entity conducting or involved in 

an appraisal for the purpose of causing 

the appraised value to be based on any 

factor other than the appraiser’s 

independent judgment; 

(2) mischaracterizing or suborning any 

mischaracterization of the appraised 

value; (3) seeking to influence or 

encourage a target value in order to 

make or price a transaction; and 

(4) withholding or threatening to 

withhold timely payment for appraisal 

services or reports. 

The Dodd-Frank Act also prohibits 

appraisers and appraisal management 

companies from having direct or 

indirect interest, financial or otherwise, 

in the property or transaction. In 

addition, the Dodd-Frank Act prohibits 

a creditor from extending credit if the 

creditor knows before consummation 

that a violation of the prohibition on 

appraiser coercion or the conflict of 

interest provision has occurred, unless 

the creditor performs due diligence. 

Under the Dodd-Frank Act, a creditor or 

any person providing services in 

connection with the transaction who 

has a reasonable basis to believe an 

appraiser is failing to comply with the 

Uniform Standards of Professional 

Appraisal Practice, or is engaging in 

unethical or unprofessional conduct in 

violation of applicable law, must refer 

the issue to the state appraiser certifying 

and licensing agency. The Dodd-Frank 

Act also requires that creditors and their 

agents compensate fee appraisers at a 

customary and reasonable rate for the 

market area of the property appraised. 

C. Statement of Objectives and Legal 

Basis 

The SUPPLEMENTARY INFORMATION sets 

forth the objectives and the legal basis 

for the interim final rule. In summary 

the objectives of the interim final rule 

are to ensure that appraisals used to 

support creditors’ underwriting 

decisions for consumer credit 

transactions secured by the consumer’s 

principal dwelling are based on the 

appraiser’s independent professional 

judgment, free of any influence or 

pressure that may be exerted by parties 

that have an interest in the transaction. 

The amendments also seek to ensure 

that creditors and their agents pay 

customary and reasonable fees to 

appraisers. 

The legal basis for the interim final 

rule is in Sections 105(a) and 129E(g) of 

TILA. A more detailed discussion of the 

Board’s rulemaking authority is set forth 

in part III of the SUPPLEMENTARY

INFORMATION. 

D. Description of Small Entities to 

Which the Interim Final Rule Would 

Apply 

The interim final rule would apply to 

any creditor or person who provides 

settlement services in connection with 

an extension of consumer credit secured 

by the principal dwelling of the 

consumer. Because of this, the 

requirements of the interim final rule 

will apply to a substantial number of 

parties, which include banks, credit 

unions, mortgage companies, mortgage 

brokers, appraisers, appraisal 

management companies, title insurance 

companies, and realtors. The Board is 

not aware of a reliable source for the 

total number of small entities likely to 

be affected by the final rule, but 

provides the following information and 

estimates about certain entities subject 

to the interim final rule. 

Depository institutions and mortgage 

companies. The Board can identify 

through data from Reports of Condition 

and Income (call reports) the 

approximate numbers of small 

depository institutions that will be 

subject to the final rule. Based on March 

2010 call report data, approximately 

8,845 small institutions would be 

subject to the final rule. Approximately 

15,658 depository institutions in the 

United States filed call report data, 

approximately 11,148 of which had total 

domestic assets of $175 million or less 

and thus were considered small entities 

for purposes of the Regulatory 

Flexibility Act. Of 3,898 banks, 523 

thrifts and 6,727 credit unions that filed 

call report data and were considered 

small entities, 3,776 banks, 496 thrifts, 

and 4,573 credit unions, totaling 8,845 

institutions, extended mortgage credit. 

For purposes of this analysis, thrifts 

include savings banks, savings and loan 

entities, co-operative banks and 

industrial banks. 

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66578 Federal Register / Vol. 75, No. 208 / Thursday, October 28, 2010 / Rules and Regulations 

48http://www.namb.org/namb/Industry

Facts.asp?SnID=719224934. This page of the NAMB 

Web site, however, no longer provides an estimate 

of the number of mortgage brokerage companies. 

49http://www.census.gov/prod/ec02/

ec0252a1us.pdf (NAICS code 522310). 

50http://factfinder.census.gov/servlet/ 

IBQTable?_bm=y&-ds_name=EC0752I1&-ib_type=

NAICS2007&-NAICS2007=522310. 

51http://factfinder.census.gov/servlet/ 

IBQTable?_bm=y&-ds_name=EC0753I1&-ib_type=

NAICS2007&-NAICS2007=531320. 

52http://www.realtor.org/wps/wcm/connect/

2b353d80442806058dc6ed34cafa6d66/09- 

2010.pdf?MOD=AJPERES&CACHEID=

2b353d80442806058dc6ed34cafa6d66. 

53http://factfinder.census.gov/servlet/ 

IBQTable?_bm=y&-ds_name=EC0753I1&-ib_type=

NAICS2007&-NAICS2007=531210. 

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

US524127.HTM. 

55http://factfinder.census.gov/servlet/ 

IBQTable?_bm=y&-ds_name=EC0754I1&- 

NAICS2007=541191&-ib_type=NAICS2007&- 

geo_id=&-_industry=541191&-_lang=en&- 

fds_name=EC0700A1. 

56http://factfinder.census.gov/servlet/ 

IBQTable?_bm=y&-ds_name=EC0754I1&-ib_type=

NAICS2007 NAICS2007&-NAICS2007=541370. 

57http://factfinder.census.gov/servlet/ 

IBQTable?_bm=y&-ds_name=EC0753I1&-ib_type=

NAICS2007&-NAICS2007=531390. 

58http://factfinder.census.gov/servlet/ 

IBQTable?_bm=y&-ds_name=EC0756I1&- 

NAICS2007=561710&-ib_type=NAICS2007&- 

geo_id=&-_industry=561710&-_lang=en&- 

fds_name=EC0700A1. 

59http://factfinder.census.gov/servlet/

IBQTable?_bm=y&-ds_name=EC0754I1&- 

NAICS2007=5411/541110&-ib_type=NAICS2007&- 

_industry=541110&-_lang=en&-fds_name=

EC0700A1. 

60http://factfinder.census.gov/servlet/ 

IBQTable?_bm=y&-ds_name=EC0756I1&- 

NAICS2007=561450&-ib_type=NAICS2007&- 

geo_id=&-_industry=561450&-_lang=en&- 

fds_name=EC0700A1. 

Further, 1,507 non-depository 

institutions (independent mortgage 

companies, subsidiaries of a depository 

institution, or affiliates of a bank 

holding company) filed HMDA reports 

in 2009 for 2008 lending activities. 

Based on the small volume of lending 

activity reported by these institutions, 

most are likely to be small entities. 

Similarly, the Board cannot identify 

with certainty the number of mortgage 

brokers, appraiser, realtors, appraisal 

management companies, or title 

insurance companies subject to the rule 

that also qualify as small entities. The 

Board can, however, attempt to estimate 

approximate total numbers of each 

group. 

Mortgage brokers. In its 2008 

proposed rule under HOEPA, 73 FR 

1672, 1720; Jan. 9, 2008, the Board 

noted that, according to the National 

Association of Mortgage Brokers 

(NAMB), there were 53,000 mortgage 

brokerage companies in 2004 that 

employed an estimated 418,700 

people.48 On the other hand, the U.S. 

Census Bureau’s 2002 Economic Census 

indicates that there were only 17,041 

‘‘mortgage and nonmortgage loan 

brokers’’ in the United States at that 

time.49 The Census Bureau’s 2007 

Economic Census preliminary data 

indicate that there are approximately 

24,299 ‘‘mortgage and nonmortgage loan 

brokers establishments’’ with 

approximately 134,507 employees.50

Appraisers. The Census Bureau’s 2007 

Economic Census preliminary data 

indicate that there are approximately 

16,018 ‘‘offices of real estate appraisers’’ 

employing 43,999 employees.51 Based 

on information provided by the 

Appraisal Subcommittee the Board 

estimates that, as of October 2010, there 

are approximately 93,429 individual, 

licensed appraisers. That number 

includes some appraisers that do not 

conduct appraisals of 1–4 family 

residential properties. 

Realtors. According to the National 

Association of Realtors’ September 2010 

Monthly membership report, there are at 

least 1,088,919 Realtors in the United 

States that would be subject to the 

interim final rule.52 The Census 

Bureau’s 2007 Economic Census 

preliminary data, however, indicate 

approximately 108,651 ‘‘offices of real 

estate agents and brokers’’ with 360,560 

total employees.53

Appraisal management companies. 

The Board is not aware of any source of 

information about the number of 

appraisal management companies. 

Title insurance companies. While the 

Census Bureau has not yet released data 

for title insurance companies, according 

to the Census Bureau’s 2006 Statistics of 

U.S. Business, there were approximately 

6,943 ‘‘direct title insurance carriers’’ 

which employ approximately 105,145 

payroll employees.54

Title, abstract, and settlement 

services. Preliminary data from the 

Census Bureau’s 2007 Economic Census 

indicate that there were approximately 

12,160 title, abstract, and settlement 

offices employing 18,749,687 

employees.55

Surveying and Mapping. Preliminary 

data from the Census Bureau’s 2007 

Economic Census indicate that there 

were approximately 9,690 surveying 

and mapping establishments (excluding 

establishments that provide geophysical 

services) employing 69,941 

employees.56

Escrow agents. The Census Bureau’s 

2007 Economic Census does not contain 

a separate category for escrow agents but 

rather includes escrow agents in the 

category ‘‘Other activities related to real 

estate.’’ (That category excludes lessors 

of real estate, offices of real estate agents 

and brokers, real estate property 

managers, and offices of real estate 

appraisers.) Preliminary data from the 

2007 Economic Census indicate that 

approximately 16,504 establishments, 

employing 72,058 employees, were in 

that category.57 The Board is not aware 

of a comprehensive source of data 

specifically regarding the number of 

establishments providing escrow 

services. 

Extermination and pest control 

services. Preliminary data from the 

Census Bureau’s 2007 Economic Census 

indicate that approximately 12,523 

establishments, employing 96,140 

employees, provided extermination and 

pest control services.58

Legal services providers. Preliminary 

data from the Census Bureau’s 2007 

Economic Census indicate that there 

were approximately 189, 486 legal 

services establishments employing 

1,199,306 employees, including 

approximately 174,523 lawyers’ offices 

employing 1,107,394 employees.59

Credit bureaus. Preliminary data from 

the Census Bureau’s 2007 Economic 

Census indicate that there were 

approximately 813 credit bureaus 

employing 19,866 employees.60

It is unclear exactly how many of 

these parties subject to the rule would 

meet the small business requirements. 

The Board believes, however, that most 

mortgage brokers, appraisers, realtors, 

title insurance companies, title abstract 

and settlement service providers, 

surveying and mapping establishments, 

escrow services providers, 

exterminators and pest control 

providers, and legal services providers 

are small entities. The Board notes that 

some of these entities may, as a practical 

matter, have little opportunity or 

incentive to coerce or influence an 

appraiser, or to have a reasonable basis 

to believe that an appraiser has not 

complied with USPAP or other 

applicable authorities. In such cases, 

these entities may have little or no 

compliance burden. As noted in the 

SUPPLEMENTARY INFORMATION, the Board 

is soliciting comment on whether some 

settlement service providers should be 

exempt from some or all of the interim 

final rule’s requirements. 

E. Projected Reporting, Recordkeeping, 

and Other Compliance Requirements 

The compliance requirements of the 

final rules are described in the 

SUPPLEMENTARY INFORMATION. As 

indicated above, creditors and mortgage 

brokers currently are subject to the 2008 

Appraisal Independence Rules, which 

are essentially codified in section 1472 

of the Dodd-Frank Act. The interim final 

rule, consistent with the Dodd-Frank 

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Federal Register / Vol. 75, No. 208 / Thursday, October 28, 2010 / Rules and Regulations 66579 

61Board: 12 CFR 225.65; OCC: 12 CFR 34.45; 

FDIC: 12 CFR 323.5; OTS: 12 CFR 564.5; NCUA: 12 

CFR 722.5. The agencies have also issued 

supervisory guidance on appraisal independence: 

See, e.g., Interagency Guidelines, SR 94–55. 

62Section 1474 of the Dodd-Frank Act amends 

the ECOA’s requirement to provide a copy of the 

appraisal report to the consumer. Public Law 111– 

203, 124 Stat. 2199 (to be codified at 15 U.S.C. 

1691). 

63 Veterans Administration fee schedule, (as of 

Apr. 7, 2010), available at http:// 

www.benefits.va.gov/homeloans/fee_timeliness.asp; 

Appraiser Independence HUD Mortgagee Letter 

2009–28 (Sept. 18, 2009). 

64Based on loan transactions reported for 2009 

under the Home Mortgage Disclosure Act (HMDA), 

12 U.S.C. 2801 et seq.; 12 CFR part 203, the Board 

estimates that 567 institutions engaged in such 

Continued 

Act, expands the parties covered by 

those provisions to persons who provide 

settlement services in connection with a 

covered transaction. Moreover, as 

discussed in the SUPPLEMENTARY

INFORMATION, the Dodd-Frank Act 

expands the requirements for appraisal 

independence significantly beyond the 

requirements in the 2008 Appraisal 

Independence Rules. The effect of the 

interim final rule on small entities is 

unknown. Some small entities would be 

required, among other things, to modify 

their systems to comply with the 

interim final rules. The precise costs to 

small entities of updating their systems 

are difficult to predict. 

F. Other Federal Rules 

The Board has not identified any 

federal rules that conflict with the 

proposed interim final rule. The Board 

has identified, however, several federal 

rules that overlap to varying degrees 

with the requirements of the interim 

final rule. Title XI of FIRREA, enacted 

in 1989, provides that the Board and the 

other banking agencies must issue 

regulations for appraisal standards. 

These regulations include provisions on 

appraisal independence which overlap 

with the interim final rule.61 In 

addition, the Equal Credit Opportunity 

Act, 15 U.S.C. 1691 et seq., and the 

Board’s Regulation B, 12 CFR 202.14, 

require creditors to provide a copy of an 

appraisal report used in connection 

with an application for credit secured 

by a dwelling.62 As noted, the 2008 

Appraisal Independence Rules 

addressed appraiser independence; 

those rules, however, are removed 

effective on April 1, 2011, the 

mandatory compliance date for the 

interim final rule. 

Additionally, both the Veteran’s 

Administration and Federal Housing 

Administration provide guidance 

related to appraiser fees which overlap 

with the interim final rule. The VA 

provides a specific appraiser fee 

schedule for VA loans, while FHA 

Roster appraisers are compensated at a 

rate that is customary and reasonable for 

the market area of the property.63

G. Significant Alternatives to the Interim 

Final Rule 

As noted above, the final rule 

implements the statutory requirements 

of the Dodd-Frank Act. The Board has 

implemented these requirements to 

minimize burden while retaining 

benefits and protections for consumers. 

As discussed above in parts of the 

SUPPLEMENTARY INFORMATION the Board 

has provided small institutions, defined 

as creditors with assets of $250 million 

or less as of December 31 of either of the 

two preceding calendar years, with an 

alternative safe harbor to the prohibition 

on conflicts of interest that is tailored to 

the circumstances of small creditors. 

The Board welcomes comment on any 

significant alternatives that would 

minimize the impact of the interim final 

rule on small entities. 

The Board also welcomes further 

information and comment on any costs, 

compliance requirements, or changes in 

operating procedures arising from the 

application of the interim final rule to 

small business. 

VII. Paperwork Reduction Act 

In accordance with the Paperwork 

Reduction Act (PRA) of 1995 (44 U.S.C. 

3506; 5 CFR part 1320 Appendix A.1), 

the Board reviewed the interim final 

rule under the authority delegated to the 

Board by the Office of Management and 

Budget (OMB). The collection of 

information that is required by this final 

rule is found in Subpart E—Special 

Rules for Certain Home Mortgage 

Transactions—12 CFR 226.42(g). The 

Board may not conduct or sponsor, and 

an organization is not required to 

respond to, this information collection 

unless the information collection 

displays a currently valid OMB control 

number. The OMB control number is 

7100–0199. 

This information collection is 

required to provide benefits for 

consumers and is mandatory (15 U.S.C. 

1601 et seq.). Since the Board does not 

collect any information, no issue of 

confidentiality arises. The respondents/ 

recordkeepers for this interim final 

rulemaking are creditors, appraisal 

management companies, appraisers, 

mortgage brokers, realtors, title insurers 

and other firms that provide settlement 

services (covered person(s)). 

TILA and Regulation Z are intended 

to ensure effective disclosure of the 

costs and terms of credit to consumers. 

For closed-end loans, such as mortgage 

and installment loans, cost disclosures 

are required to be provided prior to 

consummation. Special disclosures are 

required in connection with certain 

products, such as reverse mortgages, 

certain variable-rate loans, and certain 

mortgages with rates and fees above 

specified thresholds. To ease the burden 

and cost of complying with Regulation 

Z (particularly for small entities), the 

Board provides model forms, which are 

appended to the regulation. TILA and 

Regulation Z also contain rules 

concerning credit advertising. Creditors 

are required to retain evidence of 

compliance with Regulation Z for 24 

months (12 CFR 226.25), but Regulation 

Z does not specify the types of records 

that must be retained. 

Under the PRA, the Board accounts 

for the paperwork burden associated 

with Regulation Z for the state member 

banks and other entities supervised by 

the Board that engage in activities 

covered by Regulation Z and, therefore, 

are respondents under the PRA. 

Appendix I of Regulation Z defines the 

institutions supervised by the Federal 

Reserve System as: State member banks, 

branches and agencies of foreign banks 

(other than Federal branches, Federal 

agencies, and insured state branches of 

foreign banks), commercial lending 

companies owned or controlled by 

foreign banks, and organizations 

operating under section 25 or 25A of the 

Federal Reserve Act. Other Federal 

agencies account for the paperwork 

burden imposed on the entities for 

which they have administrative 

enforcement authority under TILA. 

The current total annual burden to 

comply with the provisions of 

Regulation Z is estimated to be 

1,497,362 hours for the 1,138 

institutions supervised by the Federal 

Reserve that are deemed to be 

respondents for the purposes of the 

PRA. 

As discussed in the preamble, the 

Board is adopting a rule that requires 

reporting of a violation of Uniform 

Standards of Professional Appraisal 

Practice (USPAP) or of a standard of 

ethical or professional conduct under 

applicable state or federal statute or 

regulation only if the violation is 

material, that is, if the violation is likely 

to affect the value assigned to a covered 

property. The new reporting 

requirement will impose a one-time 

increase in the total annual burden 

under Regulation Z for respondents 

supervised by the Federal Reserve 

involved in the extension of consumer 

credit that is secured by the principal 

dwelling of the consumer. The Board 

estimates that 567 respondents 64

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66580 Federal Register / Vol. 75, No. 208 / Thursday, October 28, 2010 / Rules and Regulations 

mortgage transactions are supervised by the Federal 

Reserve. 

65The Board believes that, on a continuing basis, 

since financial institutions are familiar with the 

existing provisions Title XI of FIRREA (12 U.S.C. 

3348) and the Interagency Guidelines (SR letter 94– 

55) which require similar reporting, 

implementation of requirements in § 226.42(g) 

should not be overly burdensome. 

66The burden estimate for this rulemaking does 

not include the burden addressing changes to 

implement the following provisions announced in 

separate rulemakings: 

• Closed-End Mortgages (Docket No. R–1366) (74 

FR 43232) (75 FR 58470), 

• Home-Equity Lines of Credit (Docket No. R– 

1367) (74 FR 43428), or 

• Reverse Mortgages (Docket No. R–1390) (75 FR 

58539). 

supervised by the Federal Reserve will 

take, on average, 40 hours (one business 

week) to update their systems, internal 

procedure manuals, and provide 

training for relevant staff to comply with 

the new reporting requirements in 

§ 226.42(g)(1).65 This revision is 

estimated to result in a one-time 

increase in burden by 22,680 hours. 

Accordingly, the Board estimates that 

the new reporting requirement will 

increase the total annual burden on a 

one-time basis for respondents 

supervised by the Federal Reserve from 

1,497,362 to 1,520,042 hours.66 This 

total estimated burden increase 

represents averages for all respondents 

supervised by the Federal Reserve. The 

Board expects that the amount of time 

required to implement each of the 

changes for a given institution may vary 

based on the size and complexity of the 

respondent. 

The other Federal financial institution 

supervisory agencies (the Office of the 

Comptroller of the Currency (OCC), the 

Office of Thrift Supervision (OTS), the 

Federal Deposit Insurance Corporation 

(FDIC), and the National Credit Union 

Administration (NCUA)) are responsible 

for estimating and reporting to OMB the 

total paperwork burden for the 

domestically chartered commercial 

banks, thrifts, and Federal credit unions 

and U.S. branches and agencies of 

foreign banks for which they have 

primary administrative enforcement 

jurisdiction under TILA Section 108(a), 

15 U.S.C. 1607(a). These agencies may, 

but are not required to, use the Board’s 

methodology for estimating burden. 

Using the Board’s method, the total 

current estimated annual burden for the 

approximately 16,200 domestically 

chartered commercial banks, thrifts, and 

federal credit unions and U.S. branches 

and agencies of foreign banks 

supervised by the Board, OCC, OTS, 

FDIC, and NCUA under TILA would be 

approximately 21,813,445 hours. The 

final rule will impose a one-time 

increase in the estimated annual burden 

for the estimated 6,543 institutions 

thought to engage in mortgage 

transactions by 261,720 hours. The total 

annual burden is estimated to be 

22,075,165 hours. The above estimates 

represent an average across all 

respondents and reflect variations 

between institutions based on their size, 

complexity, and practices. 

The Board has a continuing interest in 

the public’s opinions of its collections 

of information. At any time, comments 

regarding the burden estimate or any 

other aspect of this collection of 

information, including suggestions for 

enhancing the quality of information 

collected and ways for reducing the 

burden on respondent. Comments on 

the collection of information may be 

sent to: Secretary, Board of Governors of 

the Federal Reserve System, 20th and C 

Streets, NW., Washington, DC 20551; 

and to the Office of Management and 

Budget, Paperwork Reduction Project 

(7100–0199), Washington, DC 20503. 

List of Subjects in 12 CFR Part 226 

Consumer protection, Federal Reserve 

System, Mortgages, Truth in lending. 

Authority and Issuance 

■ For the reasons set forth in the 

preamble, the Board amends Regulation 

Z, 12 CFR part 226, as set forth below: 

PART 226—TRUTH IN LENDING 

(REGULATION Z) 

■ 1. The authority citation for part 226 

is revised to read as follows: 

Authority: 12 U.S.C. 3806; 15 U.S.C. 1604, 

1637(c)(5), 1639(l); Pub. L. 111–24 § 2, 123 

Stat. 1734; Pub. L. 111–203 § 1472(a), 124 

Stat. 1376, 2188 (to be codified at 15 U.S.C. 

1639e). 

Subpart E—Special Rules for Certain 

Home Mortgage Transactions 

§ 226.36 [Amended] 

■ 2. Effective April 1, 2011, § 226.36 is 

amended by removing and reserving 

paragraph (b). 

■ 3. Effective December 27, 2010, new 

section 226.42 is added to read as 

follows: 

§ 226.42 Valuation independence. 

(a) Scope. This section applies to any 

consumer credit transaction secured by 

the consumer’s principal dwelling. 

(b) Definitions. For purposes of this 

section: 

(1) ‘‘Covered person’’ means a creditor 

with respect to a covered transaction or 

a person that provides ‘‘settlement 

services,’’ as defined in 12 U.S.C. 

2602(3) and implementing regulations, 

in connection with a covered 

transaction. 

(2) ‘‘Covered transaction’’ means an 

extension of consumer credit that is or 

will be secured by the consumer’s 

principal dwelling, as defined in 

§ 226.2(a)(19). 

(3) ‘‘Valuation’’ means an estimate of 

the value of the consumer’s principal 

dwelling in written or electronic form, 

other than one produced solely by an 

automated model or system. 

(4) ‘‘Valuation management functions’’ 

means: 

(i) Recruiting, selecting, or retaining a 

person to prepare a valuation; 

(ii) Contracting with or employing a 

person to prepare a valuation; 

(iii) Managing or overseeing the 

process of preparing a valuation, 

including by providing administrative 

services such as receiving orders for and 

receiving a valuation, submitting a 

completed valuation to creditors and 

underwriters, collecting fees from 

creditors and underwriters for services 

provided in connection with a 

valuation, and compensating a person 

that prepares valuations; or 

(iv) Reviewing or verifying the work 

of a person that prepares valuations. 

(c) Valuation of consumer’s principal 

dwelling—(1) Coercion. In connection 

with a covered transaction, no covered 

person shall or shall attempt to directly 

or indirectly cause the value assigned to 

the consumer’s principal dwelling to be 

based on any factor other than the 

independent judgment of a person that 

prepares valuations, through coercion, 

extortion, inducement, bribery, or 

intimidation of, compensation or 

instruction to, or collusion with a 

person that prepares valuations or 

performs valuation management 

functions. 

(i) Examples of actions that violate 

paragraph (c)(1) include: 

(A) Seeking to influence a person that 

prepares a valuation to report a 

minimum or maximum value for the 

consumer’s principal dwelling; 

(B) Withholding or threatening to 

withhold timely payment to a person 

that prepares a valuation or performs 

valuation management functions 

because the person does not value the 

consumer’s principal dwelling at or 

above a certain amount; 

(C) Implying to a person that prepares 

valuations that current or future 

retention of the person depends on the 

amount at which the person estimates 

the value of the consumer’s principal 

dwelling; 

(D) Excluding a person that prepares 

a valuation from consideration for 

future engagement because the person 

reports a value for the consumer’s 

principal dwelling that does not meet or 

exceed a predetermined threshold; and 

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Federal Register / Vol. 75, No. 208 / Thursday, October 28, 2010 / Rules and Regulations 66581 

(E) Conditioning the compensation 

paid to a person that prepares a 

valuation on consummation of the 

covered transaction. 

(2) Mischaracterization of value—(i) 

Misrepresentation. In connection with a 

covered transaction, no person that 

prepares valuations shall materially 

misrepresent the value of the 

consumer’s principal dwelling in a 

valuation. A misrepresentation is 

material for purposes of this paragraph 

(c)(2)(i) if it is likely to significantly 

affect the value assigned to the 

consumer’s principal dwelling. A bona 

fide error shall not be a 

misrepresentation. 

(ii) Falsification or alteration. In 

connection with a covered transaction, 

no covered person shall falsify and no 

covered person other than a person that 

prepares valuations shall materially 

alter a valuation. An alteration is 

material for purposes of this paragraph 

(c)(2)(ii) if it is likely to significantly 

affect the value assigned to the 

consumer’s principal dwelling. 

(iii) Inducement of 

mischaracterization. In connection with 

a covered transaction, no covered 

person shall induce a person to violate 

paragraph (c)(2)(i) or (ii) of this section. 

(3) Permitted actions. Examples of 

actions that do not violate paragraph 

(c)(1) or (c)(2) include: 

(i) Asking a person that prepares a 

valuation to consider additional, 

appropriate property information, 

including information about comparable 

properties, to make or support a 

valuation; 

(ii) Requesting that a person that 

prepares a valuation provide further 

detail, substantiation, or explanation for 

the person’s conclusion about the value 

of the consumer’s principal dwelling; 

(iii) Asking a person that prepares a 

valuation to correct errors in the 

valuation; 

(iv) Obtaining multiple valuations for 

the consumer’s principal dwelling to 

select the most reliable valuation; 

(v) Withholding compensation due to 

breach of contract or substandard 

performance of services; and 

(vi) Taking action permitted or 

required by applicable federal or state 

statute, regulation, or agency guidance. 

(d) Prohibition on conflicts of 

interest—(1)(i) In general. No person 

preparing a valuation or performing 

valuation management functions for a 

covered transaction may have a direct or 

indirect interest, financial or otherwise, 

in the property or transaction for which 

the valuation is or will be performed. 

(ii) Employees and affiliates of 

creditors; providers of multiple 

settlement services. In any covered 

transaction, no person violates 

paragraph (d)(1)(i) of this section based 

solely on the fact that the person— 

(A) Is an employee or affiliate of the 

creditor; or 

(B) Provides a settlement service in 

addition to preparing valuations or 

performing valuation management 

functions, or based solely on the fact 

that the person’s affiliate performs 

another settlement service. 

(2) Employees and affiliates of 

creditors with assets of more than $250 

million for both of the past two calendar 

years. For any covered transaction in 

which the creditor had assets of more 

than $250 million as of December 31st 

for both of the past two calendar years, 

a person subject to paragraph (d)(1)(i) of 

this section who is employed by or 

affiliated with the creditor does not 

have a conflict of interest in violation of 

paragraph (d)(1)(i) of this section based 

on the person’s employment or affiliate 

relationship with the creditor if: 

(i) The compensation of the person 

preparing a valuation or performing 

valuation management functions is not 

based on the value arrived at in any 

valuation; 

(ii) The person preparing a valuation 

or performing valuation management 

functions reports to a person who is not 

part of the creditor’s loan production 

function, as defined in paragraph 

(d)(5)(i) of this section, and whose 

compensation is not based on the 

closing of the transaction to which the 

valuation relates; and 

(iii) No employee, officer or director 

in the creditor’s loan production 

function, as defined in paragraph 

(d)(5)(i) of this section, is directly or 

indirectly involved in selecting, 

retaining, recommending or influencing 

the selection of the person to prepare a 

valuation or perform valuation 

management functions, or to be 

included in or excluded from a list of 

approved persons who prepare 

valuations or perform valuation 

management functions. 

(3) Employees and affiliates of 

creditors with assets of $250 million or 

less for either of the past two calendar 

years. For any covered transaction in 

which the creditor had assets of $250 

million or less as of December 31st for 

either of the past two calendar years, a 

person subject to paragraph (d)(1)(i) of 

this section who is employed by or 

affiliated with the creditor does not 

have a conflict of interest in violation of 

paragraph (d)(1)(i) of this section based 

on the person’s employment or affiliate 

relationship with the creditor if: 

(i) The compensation of the person 

preparing a valuation or performing 

valuation management functions is not 

based the value arrived at in any 

valuation; and 

(ii) The creditor requires that any 

employee, officer or director of the 

creditor who orders, performs, or 

reviews a valuation for a covered 

transaction abstain from participating in 

any decision to approve, not approve, or 

set the terms of that transaction. 

(4) Providers of multiple settlement 

services. For any covered transaction, a 

person who prepares a valuation or 

performs valuation management 

functions in addition to performing 

another settlement service for the 

transaction, or whose affiliate performs 

another settlement service for the 

transaction, does not have a conflict of 

interest in violation of paragraph 

(d)(1)(i) of this section as a result of the 

person or the person’s affiliate 

performing another settlement service 

for the transaction if: 

(i) The creditor had assets of more 

than $250 million as of December 31st 

for both of the past two calendar years 

and the conditions in paragraph 

(d)(2)(i)–(iii) are met; or 

(ii) The creditor had assets of $250 

million or less as of December 31st for 

either of the past two calendar years and 

the conditions in paragraph (d)(3)(i)–(ii) 

are met. 

(5) Definitions. For purposes of this 

paragraph, the following definitions 

apply: 

(i) Loan production function. The 

term ‘‘loan production function’’ means 

an employee, officer, director, 

department, division, or other unit of a 

creditor with responsibility for 

generating covered transactions, 

approving covered transactions, or both. 

(ii) Settlement service. The term 

‘‘settlement service’’ has the same 

meaning as in the Real Estate Settlement 

Procedures Act, 12 U.S.C. 2601 et seq. 

(iii) Affiliate. The term ‘‘affiliate’’ has 

the same meaning as in Regulation Y, 12 

CFR 225.2(a). 

(e) When extension of credit 

prohibited. In connection with a 

covered transaction, a creditor that 

knows, at or before consummation, of a 

violation of paragraph (c) or (d) of this 

section in connection with a valuation 

shall not extend credit based on the 

valuation, unless the creditor 

documents that it has acted with 

reasonable diligence to determine that 

the valuation does not materially 

misstate or misrepresent the value of the 

consumer’s principal dwelling. For 

purposes of this paragraph (e), a 

valuation materially misstates or 

misrepresents the value of the 

consumer’s principal dwelling if the 

valuation contains a misstatement or 

misrepresentation that affects the credit 

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66582 Federal Register / Vol. 75, No. 208 / Thursday, October 28, 2010 / Rules and Regulations 

decision or the terms on which credit is 

extended. 

(f) Customary and reasonable 

compensation—(1) Requirement to 

provide customary and reasonable 

compensation to fee appraisers. In any 

covered transaction, the creditor and its 

agents shall compensate a fee appraiser 

for performing appraisal services at a 

rate that is customary and reasonable for 

comparable appraisal services 

performed in the geographic market of 

the property being appraised. For 

purposes of paragraph (f) of this section, 

‘‘agents’’ of the creditor do not include 

any fee appraiser as defined in 

paragraph (f)(4)(i) of this section. 

(2) Presumption of compliance. A 

creditor and its agents shall be 

presumed to comply with paragraph 

(f)(1) if— 

(i) The creditor or its agents 

compensate the fee appraiser in an 

amount that is reasonably related to 

recent rates paid for comparable 

appraisal services performed in the 

geographic market of the property being 

appraised. In determining this amount, 

a creditor shall review the factors below 

and make any adjustments to recent 

rates paid in the relevant geographic 

market necessary to ensure that the 

amount of compensation is reasonable: 

(A) The type of property, 

(B) The scope of work, 

(C) The time in which the appraisal 

services are required to be performed, 

(D) Fee appraiser qualifications, 

(E) Fee appraiser experience and 

professional record, and 

(F) Fee appraiser work quality; and 

(ii) The creditor and its agents do not 

engage in any anticompetitive acts in 

violation of state or federal law that 

affect the compensation paid to fee 

appraisers, including— 

(A) Entering into any contracts or 

engaging in any conspiracies to restrain 

trade through methods such as price 

fixing or market allocation, as 

prohibited under section 1 of the 

Sherman Antitrust Act, 15 U.S.C. 1, or 

any other relevant antitrust laws; or 

(B) Engaging in any acts of 

monopolization such as restricting any 

person from entering the relevant 

geographic market or causing any 

person to leave the relevant geographic 

market, as prohibited under section 2 of 

the Sherman Antitrust Act, 15 U.S.C. 2, 

or any other relevant antitrust laws. 

(3) Alternative presumption of 

compliance. A creditor and its agents 

shall be presumed to comply with 

paragraph (f)(1) if the creditor or its 

agents determine the amount of 

compensation paid to the fee appraiser 

by relying on information about rates 

that: 

(i) Is based on objective third-party 

information, including fee schedules, 

studies, and surveys prepared by 

independent third parties such as 

government agencies, academic 

institutions, and private research firms; 

(ii) Is based on recent rates paid to a 

representative sample of providers of 

appraisal services in the geographic 

market of the property being appraised 

or the fee schedules of those providers; 

and 

(iii) In the case of information based 

on fee schedules, studies, and surveys, 

such fee schedules, studies, or surveys, 

or the information derived therefrom, 

excludes compensation paid to fee 

appraisers for appraisals ordered by 

appraisal management companies, as 

defined in paragraph (f)(4)(iii) of this 

section. 

(4) Definitions. For purposes of this 

paragraph (f), the following definitions 

apply: 

(i) Fee appraiser. The term ‘‘fee 

appraiser’’ means— 

(A) A natural person who is a statelicensed or state-certified appraiser and 

receives a fee for performing an 

appraisal, but who is not an employee 

of the person engaging the appraiser; or 

(B) An organization that, in the 

ordinary course of business, employs 

state-licensed or state-certified 

appraisers to perform appraisals, 

receives a fee for performing appraisals, 

and is not subject to the requirements of 

section 1124 of the Financial 

Institutions Reform, Recovery, and 

Enforcement Act of 1989 (12 U.S.C. 

3331 et seq.). 

(ii) Appraisal services. The term 

‘‘appraisal services’’ means the services 

required to perform an appraisal, 

including defining the scope of work, 

inspecting the property, reviewing 

necessary and appropriate public and 

private data sources (for example, 

multiple listing services, tax assessment 

records and public land records), 

developing and rendering an opinion of 

value, and preparing and submitting the 

appraisal report. 

(iii) Appraisal management company. 

The term ‘‘appraisal management 

company’’ means any person authorized 

to perform one or more of the following 

actions on behalf of the creditor— 

(A) Recruit, select, and retain fee 

appraisers; 

(B) Contract with fee appraisers to 

perform appraisal services; 

(C) Manage the process of having an 

appraisal performed, including 

providing administrative services such 

as receiving appraisal orders and 

appraisal reports, submitting completed 

appraisal reports to creditors and 

underwriters, collecting fees from 

creditors and underwriters for services 

provided, and compensating fee 

appraisers for services performed; or 

(D) Review and verify the work of fee 

appraisers. 

(g) Mandatory reporting—(1) 

Reporting required. Any covered person 

that reasonably believes an appraiser 

has not complied with the Uniform 

Standards of Professional Appraisal 

Practice or ethical or professional 

requirements for appraisers under 

applicable state or federal statutes or 

regulations shall refer the matter to the 

appropriate state agency if the failure to 

comply is material. For purposes of this 

paragraph (g)(1), a failure to comply is 

material if it is likely to significantly 

affect the value assigned to the 

consumer’s principal dwelling. 

(2) Timing of reporting. A covered 

person shall notify the appropriate state 

agency within a reasonable period of 

time after the person determines that 

there is a reasonable basis to believe that 

a failure to comply required to be 

reported under paragraph (g)(1) of this 

section has occurred. 

(3) Definition. For purposes of this 

paragraph (g), ‘‘state agency’’ means 

‘‘state appraiser certifying and licensing 

agency’’ under 12 U.S.C. 3350(1) and 

any implementing regulations. The 

appropriate state agency to which a 

covered person must refer a matter 

under paragraph (g)(1) of this section is 

the agency for the state in which the 

consumer’s principal dwelling is 

located. 

■ 4. In Supplement I to Part 226: 

■ A. Under Section 226.1—Authority, 

Purpose, Coverage, Organization, 

Enforcement and Liability, paragraph 

1(d)(5)–1 is revised. 

■ B. Under Section 226.5b— 

Requirements for Home-equity Plans, 

new paragraph 7 is added. 

■ C. Effective April 1, 2011, under 

Section 226.36—Prohibited Acts or 

Practices in Connection with Credit 

Secured by a Consumer’s Principal 

Dwelling, the headings 36(b) 

Misrepresentation of the value of 

consumer’s principal dwelling and 

36(b)(2) When extension of credit 

prohibited and paragraphs 36(b)(2)–1 

and –2 are removed. 

■ D. Effective December 27, 2010, new 

Section 226.42 Valuation Independence 

is added. 

Supplement I to Part 226—Official Staff 

Interpretations 

* * * * * 

Section 226.1—Authority, Purpose, Coverage, 

Organization, Enforcement and Liability 

* * * * * 

Paragraph 1(d)(5). 

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Federal Register / Vol. 75, No. 208 / Thursday, October 28, 2010 / Rules and Regulations 66583 

1. Effective dates. 

i. The Board’s revisions published on July 

30, 2008 (the ‘‘final rules’’) apply to covered 

loans (including refinance loans and 

assumptions considered new transactions 

under § 226.20) for which the creditor 

receives an application on or after October 1, 

2009, except for the final rules on 

advertising, escrows, and loan servicing. But 

see comment 1(d)(3)–1. The final rules on 

escrow in § 226.35(b)(3) are effective for 

covered loans (including refinancings and 

assumptions in § 226.20) for which the 

creditor receives an application on or after 

April 1, 2010; but for such loans secured by 

manufactured housing on or after October 1, 

2010. The final rules applicable to servicers 

in § 226.36(c) apply to all covered loans 

serviced on or after October 1, 2009. The 

final rules on advertising apply to 

advertisements occurring on or after October 

1, 2009. For example, a radio ad occurs on 

the date it is first broadcast; a solicitation 

occurs on the date it is mailed to the 

consumer. The following examples illustrate 

the application of the effective dates for the 

final rules. 

A. General. A refinancing or assumption as 

defined in § 226.20(a) or (b) is a new 

transaction and is covered by a provision of 

the final rules if the creditor receives an 

application for the transaction on or after that 

provision’s effective date. For example, if a 

creditor receives an application for a 

refinance loan covered by § 226.35(a) on or 

after October 1, 2009, and the refinance loan 

is consummated on October 15, 2009, the 

provision restricting prepayment penalties in 

§ 226.35(b)(2) applies. However, if the 

transaction were a modification of an existing 

obligation’s terms that does not constitute a 

refinance loan under § 226.20(a), the final 

rules, including for example the restriction 

on prepayment penalties, would not apply. 

B. Escrows. Assume a consumer applies for 

a refinance loan to be secured by a dwelling 

(that is not a manufactured home) on March 

15, 2010, and the loan is consummated on 

April 2, 2010. The escrow rule in 

§ 226.35(b)(3) does not apply. 

C. Servicing. Assume that a consumer 

applies for a new loan on August 1, 2009. 

The loan is consummated on September 1, 

2009. The servicing rules in § 226.36(c) apply 

to the servicing of that loan as of October 1, 

2009. 

(ii) The interim final rule on appraisal 

independence in § 226.42 published on 

October 28, 2010 is mandatory on April 1, 

2011, for open- and closed-end extensions of 

consumer credit secured by the consumer’s 

principal dwelling. Section 226.36(b), which 

is substantially similar to § 226.42(b) and (e), 

is removed effective April 1, 2011. 

Applications for closed-end extensions of 

credit secured by the consumer’s principal 

dwelling that are received by creditors before 

April 1, 2011, are subject to § 226.36(b) 

regardless of the date on which the 

transaction is consummated. However, 

parties subject to § 226.36(b) may, at their 

option, choose to comply with § 226.42 

instead of § 226.36(b), for applications 

received before April 1, 2011. Thus, an 

application for a closed-end extension of 

credit secured by the consumer’s principal 

dwelling that is received by a creditor on 

March 20, 2011, and consummated on May 

1, 2011, is subject to § 226.36(b), however, 

the creditor may choose to comply with 

§ 226.42 instead. For an application for openor closed-end credit secured by the 

consumer’s principal dwelling that is 

received on or after April 1, 2011, the 

creditor must comply with § 226.42. 

* * * * * 

Section 226.5b—Requirements for HomeEquity Plans 

* * * * * 

7. Appraisals and other valuations. For 

consumer credit transactions subject to 

§ 226.5b and secured by the consumer’s 

principal dwelling, creditors and other 

persons must comply with the requirements 

for appraisals and other valuations under 

§ 226.42. 

* * * * * 

Section 226.42—Valuation Independence 

42(a) Scope. 

1. Open- and closed-end credit. Section 

226.42 applies to both open-end and closedend transactions secured by the consumer’s 

principal dwelling. 

2. Consumer’s principal dwelling. Section 

226.42 applies only if the dwelling that will 

secure a consumer credit transaction is the 

principal dwelling of the consumer who 

obtains credit. 

42(b) Definitions. 

Paragraph 42(b)(1). 

1. Examples of covered persons. ‘‘Covered 

persons’’ include creditors, mortgage brokers, 

appraisers, appraisal management 

companies, real estate agents, and other 

persons that provide ‘‘settlement services’’ as 

defined under the Real Estate Settlement 

Procedures Act and implementing 

regulations. See 12 U.S.C. 2602(3). 

2. Examples of persons not covered. The 

following persons are not ‘‘covered persons’’ 

(unless, of course, they are creditors with 

respect to a covered transaction or perform 

‘‘settlement services’’ in connection with a 

covered transaction): 

i. The consumer who obtains credit 

through a covered transaction. 

ii. A person secondarily liable for a 

covered transaction, such as a guarantor. 

iii. A person that resides in or will reside 

in the consumer’s principal dwelling but will 

not be liable on the covered transaction, such 

as a non-obligor spouse. 

Paragraph 42(b)(2). 

1. Principal dwelling. The term ‘‘principal 

dwelling’’ has the same meaning under 

§ 226.42(b) as under §§ 226.2(a)(24), 

226.15(a), and 226.23(a). See comments 

2(a)(24)–3, 15(a)–5, and 23(a)–3. 

Paragraph 42(b)(3). 

1. Valuation. A ‘‘valuation’’ is an estimate 

of value prepared by a natural person, such 

as an appraisal report prepared by an 

appraiser or an estimate of market value 

prepared by a real estate agent. The term 

includes photographic or other information 

included with a written estimate of value. A 

‘‘valuation’’ includes an estimate provided or 

viewed electronically, such as an estimate 

transmitted via electronic mail or viewed 

using a computer. 

2. Automated model or system. A 

‘‘valuation’’ does not include an estimate of 

value produced exclusively using an 

automated model or system. However, a 

‘‘valuation’’ includes an estimate of value 

developed by a natural person based in part 

on an estimate of value produced using an 

automated model or system. 

3. Estimate. An estimate of the value of the 

consumer’s principal dwelling includes an 

estimate of a range of values for the 

consumer’s principal dwelling. 

42(c) Valuation for consumer’s principal 

dwelling. 

42(c)(1) Coercion. 

1. State law. The terms ‘‘coercion,’’ 

‘‘extortion,’’ ‘‘inducement,’’ ‘‘bribery,’’ 

‘‘intimidation,’’ ‘‘compensation,’’ 

‘‘instruction,’’ and ‘‘collusion’’ have the 

meanings given to them by applicable state 

law or contract. See § 226.2(b)(3). 

2. Purpose. A covered person does not 

violate § 226.42(c)(1) if the person does not 

engage in an act or practice set forth in 

§ 226.42(c)(1) for the purpose of causing the 

value assigned to the consumer’s principal 

dwelling to be based on a factor other than 

the independent judgment of a person that 

prepares valuations. For example, requesting 

that a person that prepares a valuation take 

certain actions, such as consider additional, 

appropriate property information, does not 

violate § 226.42(c), because such request does 

not supplant the independent judgment of 

the person that prepares a valuation. See 

§ 226.42(c)(3)(i). A covered person also may 

provide incentives, such as additional 

compensation, to a person that prepares 

valuations or performs valuation 

management functions under § 226.42(c)(1), 

as long as the covered person does not cause 

or attempt to cause the value assigned to the 

consumer’s principal dwelling to be based on 

a factor other than the independent judgment 

of the person that prepares valuations. 

3. Person that prepares valuations. For 

purposes of § 226.42, the term ‘‘valuation’’ 

includes an estimate of value regardless of 

whether it is an appraisal prepared by a statecertified or -licensed appraiser. See comment 

42(b)(5)–1. A person that prepares valuations 

may or may not be a state-licensed or statecertified appraiser. Thus a person violates 

§ 226.42(c)(1) by engaging in prohibited acts 

or practices directed towards any person that 

prepares or may prepare a valuation of the 

consumer’s principal dwelling for a covered 

transaction. For example, a person violates 

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

estate agent to assign a value to the 

consumer’s principal dwelling based on a 

factor other than the independent judgment 

of the real estate agent, in connection with 

a covered transaction. 

4. Indirect acts or practices. Section 

226.42(c)(1) prohibits both direct and 

indirect attempts to cause the value assigned 

to the consumer’s principal dwelling to be 

based on a factor other than the independent 

judgment of the person that prepares the 

valuation, through coercion and certain other 

acts and practices. For example, a creditor 

violates § 226.42(c)(1) if the creditor attempts 

to cause the value an appraiser engaged by 

an appraisal management company assigns to 

the consumer’s principal dwelling to be 

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based on a factor other than the appraiser’s 

independent judgment, by threatening to 

withhold future business from a title 

company affiliated with the appraisal 

management company unless the appraiser 

assigns a value to the dwelling that meets or 

exceed a minimum threshold. 

Paragraph 42(c)(1)(i). 

1. Applicability of examples. Section 

226.42(c)(1)(i) provides examples of coercion 

of a person that prepares valuations. 

However, § 226.42(c)(1)(i) also applies to 

coercion of a person that performs valuation 

management functions or its affiliate. See 

§ 226.42(c)(1); comment 42(c)(1)–4. 

2. Specific value or predetermined 

threshold. As used in the examples of actions 

prohibited under § 226.42(c)(1), a ‘‘specific 

value’’ and a ‘‘predetermined threshold’’ 

include a predetermined minimum, 

maximum, or range of values. Further, 

although the examples assume a covered 

person’s prohibited actions are designed to 

cause the value assigned to the consumer’s 

principal dwelling to equal or exceed a 

certain amount, the rule applies equally to 

cases where a covered person’s prohibited 

actions are designed to cause the value 

assigned to the dwelling to be below a certain 

amount. 

42(c)(2) Mischaracterization of value. 

42(c)(2)(i) Misrepresentation. 

1. Opinion of value. Section 226.42(c)(2)(i) 

prohibits a person that performs valuations 

from misrepresenting the value of the 

consumer’s principal dwelling in a valuation. 

Such person misrepresents the value of the 

consumer’s principal dwelling by assigning a 

value to such dwelling that does not reflect 

the person’s opinion of the value of such 

dwelling. For example, an appraiser 

misrepresents the value of the consumer’s 

principal dwelling if the appraiser estimates 

that the value of such dwelling is $250,000 

applying the standards required by the 

Uniform Standards of Professional Appraisal 

Standards but assigns a value of $300,000 to 

such dwelling in a Uniform Residential 

Appraisal Report. 

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

mischaracterization. 

1. Inducement. A covered person may not 

induce a person to materially misrepresent 

the value of the consumer’s principal 

dwelling in a valuation or to falsify or alter 

a valuation. For example, a loan originator 

may not coerce a loan underwriter to alter an 

appraisal report to increase the value 

assigned to the consumer’s principal 

dwelling. 

42(d) Prohibition on conflicts of interest. 

42(d)(1)(i) In general. 

1. Prohibited interest in the property. A 

person preparing a valuation or performing 

valuation management functions for a 

covered transaction has a prohibited interest 

in the property under paragraph (d)(1)(i) if 

the person has any ownership or reasonably 

foreseeable ownership interest in the 

property. For example, a person who seeks a 

mortgage to purchase a home has a 

reasonably foreseeable ownership interest in 

the property securing the mortgage, and 

therefore is not permitted to prepare the 

valuation or perform valuation management 

functions for that mortgage transaction under 

paragraph (d)(1)(i). 

2. Prohibited interest in the transaction. A 

person preparing a valuation or performing 

valuation management functions has a 

prohibited interest in the transaction under 

paragraph (d)(1)(i) if that person or an 

affiliate of that person also serves as a loan 

officer of the creditor, mortgage broker, real 

estate broker, or other settlement service 

provider for the transaction and the 

conditions under paragraph (d)(4) are not 

satisfied. A person also has a prohibited 

interest in the transaction if the person is 

compensated or otherwise receives financial 

or other benefits based on whether the 

transaction is consummated. Under these 

circumstances, the person is not permitted to 

prepare the valuation or perform valuation 

management functions for that transaction 

under paragraph (d)(1)(i). 

42(d)(1)(ii) Employees and affiliates of 

creditors; providers of multiple settlement 

services. 

1. Employees and affiliates of creditors. In 

general, a creditor may use employees or 

affiliates to prepare a valuation or perform 

valuation management functions without 

violating paragraph (d)(1)(i). However, 

whether an employee or affiliate has a direct 

or indirect interest in the property or 

transaction that creates a prohibited conflict 

of interest under paragraph (d)(1)(i) depends 

on the facts and circumstances of a particular 

case, including the structure of the 

employment or affiliate relationship. 

2. Providers of multiple settlement services. 

In general, a person who prepares a valuation 

or perform valuation management functions 

for a covered transaction may perform 

another settlement service for the same 

transaction, or the person’s affiliate may 

perform another settlement service, without 

violating paragraph (d)(1)(i). However, 

whether the person has a direct or indirect 

interest in the property or transaction that 

creates a prohibited conflict of interest under 

paragraph (d)(1)(i) depends on the facts and 

circumstances of a particular case. 

42(d)(2) Employees and affiliates of 

creditors with assets of more than $250 

million for both of the past two calendar 

years. 

1. Safe harbor. A person who a prepares 

valuation or performs valuation management 

functions for a covered transaction and is an 

employee or affiliate of the creditor will not 

be deemed to have an interest prohibited 

under paragraph (d)(1)(i) on the basis of the 

employment or affiliate relationship with the 

creditor if the conditions in paragraph (d)(2) 

are satisfied. Even if the conditions in 

paragraph (d)(2) are satisfied, however, the 

person may have a prohibited conflict of 

interest on other grounds, such as if the 

person performs a valuation for a purchasemoney mortgage transaction in which the 

person is the buyer or seller of the subject 

property. Thus, in general, in any covered 

transaction in which the creditor had assets 

of more than $250 million for both of the past 

two years, the creditor may use its own 

employee or affiliate to prepare a valuation 

or perform valuation management functions 

for a particular transaction, as long as the 

conditions described in paragraph (d)(2) are 

satisfied. If the conditions in paragraph (d)(2) 

are not satisfied, whether a person preparing 

a valuation or performing valuation 

management functions has violated 

paragraph (d)(1)(i) depends on all of the facts 

and circumstances. 

Paragraph 42(d)(2)(ii). 

1. Prohibition on reporting to a person who 

is part of the creditor’s loan production 

function. To qualify for the safe harbor under 

paragraph (d)(2), the person preparing a 

valuation or performing valuation 

management functions may not report to a 

person who is part of the creditor’s loan 

production function (as defined in paragraph 

(d)(4)(ii) and comment 42(d)(4)(ii)–1). For 

example, if a person preparing a valuation is 

directly supervised or managed by a loan 

officer or other person in the creditor’s loan 

production function, or by a person who is 

directly supervised or managed by a loan 

officer, the condition under paragraph 

(d)(2)(ii) is not met. 

2. Prohibition on reporting to a person 

whose compensation is based on the 

transaction closing. To qualify for the safe 

harbor under paragraph (d)(2), the person 

preparing a valuation or performing 

valuation management functions may not 

report to a person whose compensation is 

based on the closing of the transaction to 

which the valuation relates. For example, 

assume an appraisal management company 

performs valuation management functions for 

a transaction in which the creditor is an 

affiliate of the appraisal management 

company. If the employee of the appraisal 

management company who is in charge of 

valuation management functions for that 

transaction is supervised by a person who 

earns a commission or bonus based on the 

percentage of closed transactions for which 

the appraisal management company provides 

valuation management functions, the 

condition under paragraph (d)(2)(ii) is not 

met. 

Paragraph 42(d)(2)(iii). 

1. Direct or indirect involvement in 

selection of person who prepares a valuation. 

In any covered transaction, the safe harbor 

under paragraph (d)(2) is available if, among 

other things, no employee, officer or director 

in the creditor’s loan production function (as 

defined in paragraph (d)(4)(ii) and comment 

42(d)(4)(ii)–1) is directly or indirectly 

involved in selecting, retaining, 

recommending or influencing the selection of 

the person to prepare a valuation or perform 

valuation management functions, or to be 

included in or excluded from a list or panel 

of approved persons who prepare valuations 

or perform valuation management functions. 

For example, if the person who selects the 

person to prepare the valuation for a covered 

transaction is supervised by an employee of 

the creditor who also supervises loan 

officers, the condition in paragraph (d)(2)(iii) 

is not met. 

42(d)(3) Employees and affiliates of 

creditors with assets of $250 million or less 

for either of the past two calendar years. 

1. Safe harbor. A person who prepares a 

valuation or performs valuation management 

functions for a covered transaction and is an 

employee or affiliate of the creditor will not 

be deemed to have interest prohibited under 

paragraph (d)(1)(i) on the basis of the 

employment or affiliate relationship with the 

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creditor if the conditions in paragraph (d)(2) 

are satisfied. Even if the conditions in 

paragraph (d)(2) are satisfied, however, the 

person may have a prohibited conflict of 

interest on other grounds, such as if the 

person performs a valuation for a purchasemoney mortgage transaction in which the 

person is the buyer or seller of the subject 

property. Thus, in general, in any covered 

transaction in which the creditor had assets 

of $250 million or less for either of the past 

two calendar years, the creditor may use its 

own employee or affiliate to prepare a 

valuation or perform valuation management 

functions for a particular transaction, as long 

as the conditions described in paragraph 

(d)(3) are satisfied. If the conditions in 

paragraph (d)(3) are not satisfied, whether a 

person preparing valuations or performing 

valuation management functions has violated 

paragraph (d)(1)(i) depends on all of the facts 

and circumstances. 

42(d)(4) Providers of multiple settlement 

services. 

Paragraph 42(d)(4)(i). 

1. Safe harbor in transactions in which the 

creditor had assets of more than $250 million 

for both of the past two calendar years. A 

person preparing a valuation or performing 

valuation management functions in addition 

to performing another settlement service for 

the same transaction, or whose affiliate 

performs another settlement service for the 

transaction, will not be deemed to have 

interest prohibited under paragraph (d)(1)(i) 

as a result of the person or the person’s 

affiliate performing another settlement 

service if the conditions in paragraph (d)(4)(i) 

are satisfied. Even if the conditions in 

paragraph (d)(4)(i) are satisfied, however, the 

person may have a prohibited conflict of 

interest on other grounds, such as if the 

person performs a valuation for a purchasemoney mortgage transaction in which the 

person is the buyer or seller of the subject 

property. Thus, in general, in any covered 

transaction with a creditor that had assets of 

more than $250 million for the past two 

years, a person preparing a valuation or 

performing valuation management functions, 

or its affiliate, may provide another 

settlement service for the same transaction, 

as long as the conditions described in 

paragraph (d)(4)(i) are satisfied. If the 

conditions in paragraph (d)(4)(i) are not 

satisfied, whether a person preparing 

valuations or performing valuation 

management functions has violated 

paragraph (d)(1)(i) depends on all of the facts 

and circumstances. 

2. Reporting. The safe harbor under 

paragraph (d)(4)(i) is available if the 

condition specified in paragraph (d)(2)(ii), 

among others, is met. Paragraph (d)(2)(ii) 

prohibits a person preparing a valuation or 

performing valuation management functions 

from reporting to a person whose 

compensation is based on the closing of the 

transaction to which the valuation relates. 

For example, assume an appraisal 

management company performs both 

valuation management functions and title 

services, including providing title insurance, 

for the same covered transaction. If the 

appraisal management company employee in 

charge of valuation management functions 

for the transaction is supervised by the title 

insurance agent in the transaction, whose 

compensation depends in whole or in part on 

whether title insurance is sold at the loan 

closing, the condition in paragraph (d)(2)(ii) 

is not met. 

Paragraph 42(d)(4)(ii). 

1. Safe harbor in transactions in which the 

creditor had assets of $250 million or less for 

either of the past two calendar years. A 

person preparing a valuation or performing 

valuation management functions in addition 

to performing another settlement service for 

the same transaction, or whose affiliate 

performs another settlement service for the 

transaction, will not be deemed to have an 

interest prohibited under paragraph (d)(1)(i) 

as a result of the person or the person’s 

affiliate performing another settlement 

service if the conditions in paragraph 

(d)(4)(ii) are satisfied. Even if the conditions 

in paragraph (d)(4)(ii) are satisfied, however, 

the person may have a prohibited conflict of 

interest on other grounds, such as if the 

person performs a valuation for a purchasemoney mortgage transaction in which the 

person is the buyer or seller of the subject 

property. Thus, in general, in any covered 

transaction in which the creditor had assets 

of $250 million or less for either of the past 

two years, a person preparing a valuation or 

performing valuation management functions, 

or its affiliate, may provide other settlement 

services for the same transaction, as long as 

the conditions described in paragraph 

(d)(4)(i) are satisfied. If the conditions in 

paragraph (d)(4)(i) are not satisfied, whether 

a person preparing valuations or performing 

valuation management functions has violated 

paragraph (d)(1)(i) depends on all of the facts 

and circumstances. 

42(d)(5) Definitions. 

Paragraph 42(d)(5)(i). 

1. Loan production function. One 

condition of the safe harbors under 

paragraphs (d)(3) and (d)(4)(ii), involving 

transactions in which the creditor had assets 

of more than $250 million for both of the past 

two calendar years, is that the person who 

prepares a valuation or performs valuation 

management functions must report to a 

person who is not part of the creditor’s ‘‘loan 

production function.’’ A creditor’s ‘‘loan 

production function’’ includes retail sales 

staff, loan officers, and any other employee 

of the creditor with responsibility for taking 

a loan application, offering or negotiating 

loan terms or whose compensation is based 

on loan processing volume. A person is not 

considered part of a creditor’s loan 

production function solely because part of 

the person’s compensation includes a general 

bonus not tied to specific transactions or a 

specific percentage of transactions closing, or 

a profit sharing plan that benefits all 

employees. A person solely responsible for 

credit administration or risk management is 

also not considered part of a creditor’s loan 

production function. Credit administration 

and risk management includes, for example, 

loan underwriting, loan closing functions 

(e.g., loan documentation), disbursing funds, 

collecting mortgage payments and otherwise 

servicing the loan (e.g., escrow management 

and payment of taxes), monitoring loan 

performance, and foreclosure processing. 

42(e) When extension of credit prohibited. 

1. Reasonable diligence. A creditor will be 

deemed to have acted with reasonable 

diligence under § 226.42(e) if the creditor 

extends credit based on a valuation other 

than the valuation subject to the restriction 

in § 226.42(e). A creditor need not obtain a 

second valuation to document that the 

creditor has acted with reasonable diligence 

to determine that the valuation does not 

materially misstate or misrepresent the value 

of the consumer’s principal dwelling, 

however. For example, assume an appraiser 

notifies a creditor before consummation that 

a loan originator attempted to cause the value 

assigned to the consumer’s principal 

dwelling to be based on a factor other than 

the appraiser’s independent judgment, 

through coercion. If the creditor reasonably 

determines and documents that the appraisal 

does not materially misstate or misrepresent 

the value of the consumer’s principal 

dwelling, for purposes of § 226.42(e), the 

creditor may extend credit based on the 

appraisal. 

42(f) Customary and reasonable 

compensation. 

42(f)(1) Requirement to provide 

customary and reasonable compensation to 

fee appraisers. 

1. Agents of the creditor. Whether a person 

is an agent of the creditor is determined by 

applicable law; however, a ‘‘fee appraiser’’ as 

defined in paragraph (f)(4)(i) is not an agent 

of the creditor for purposes of paragraph (f), 

and therefore is not required to pay other fee 

appraisers customary and reasonable 

compensation under paragraph (f). 

2. Geographic market. For purposes of 

paragraph (f), the ‘‘geographic market of the 

property being appraised’’ means the 

geographic market relevant to compensation 

levels for appraisal services. Depending on 

the facts and circumstances, the relevant 

geographic market may be a state, 

metropolitan statistical area (MSA), 

metropolitan division, area outside of an 

MSA, county, or other geographic area. For 

example, assume that fee appraisers who 

normally work only in County A generally 

accept $400 to appraise an attached singlefamily property in County A. Assume also 

that very few or no fee appraisers who work 

only in contiguous County B will accept a 

rate comparable to $400 to appraise an 

attached single-family property in County A. 

The relevant geographic market for an 

attached single-family property in County A 

may reasonably be defined as County A. On 

the other hand, assume that fee appraisers 

who normally work only in County A 

generally accept $400 to appraise an attached 

single-family property in County A. Assume 

also that many fee appraisers who normally 

work only in contiguous County B will 

accept a rate comparable to $400 to appraise 

an attached single-family property in County 

A. The relevant geographic market for an 

attached single-family property in County A 

may reasonably be defined to include both 

County A and County B. 

3. Failure to perform contractual 

obligations. Paragraph (f)(1) does not prohibit 

a creditor or its agent from withholding 

compensation from a fee appraiser for failing 

to meet contractual obligations, such as 

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failing to provide the appraisal report or 

violating state or federal appraisal laws in 

performing the appraisal. 

4. Agreement that fee is ‘‘customary and 

reasonable.’’ A document signed by a fee 

appraiser indicating that the appraiser agrees 

that the fee paid to the appraiser is 

‘‘customary and reasonable’’ does not by itself 

create a presumption of compliance with 

§ 226.42(f) or otherwise satisfy the 

requirement to pay a fee appraiser at a 

customary and reasonable rate. 

5. Volume-based discounts. Section 

226.42(f)(1) does not prohibit a fee appraiser 

and a creditor (or its agent) from agreeing to 

compensation based on transaction volume, 

so long as the compensation is customary 

and reasonable. For example, assume that a 

fee appraiser typically receives $300 for 

appraisals from creditors with whom it does 

business; the fee appraiser, however, agrees 

to reduce the fee to $280 for a particular 

creditor, in exchange for a minimum number 

of assignments from the creditor. 

42(f)(2) Presumption of compliance. 

1. In general. A creditor and its agent are 

presumed to comply with paragraph (f)(1) if 

the creditor or its agent meets the conditions 

specified in paragraph (f)(2) in determining 

the compensation paid to a fee appraiser. 

These conditions are not requirements for 

compliance but, if met, create a presumption 

that the creditor or its agent has complied 

with § 226.42(f)(1). A person may rebut this 

presumption with evidence that the amount 

of compensation paid to a fee appraiser was 

not customary and reasonable for reasons 

unrelated to the conditions in paragraph 

(f)(2)(i) or (f)(2)(ii). If a creditor or its agent 

does not meet one of the non-required 

conditions set forth in paragraph (f)(2), the 

creditor’s and its agent’s compliance with 

paragraph (f)(1) is determined based on all of 

the facts and circumstances without a 

presumption of either compliance or 

violation. 

42(f)(2)(i) Presumption of compliance. 

1. Two-step process for determining 

customary and reasonable rates. Paragraph 

(f)(2)(i) sets forth a two-step process for a 

creditor or its agent to determine the amount 

of compensation that is customary and 

reasonable in a given transaction. First, the 

creditor or its agent must identify recent rates 

paid for comparable appraisal services in the 

relevant geographic market. Second, once 

recent rates have been identified, the creditor 

or its agent must review the factors listed in 

paragraph (f)(2)(i)(A)–(F) and make any 

appropriate adjustments to the rates to ensure 

that the amount of compensation is 

reasonable. 

2. Identifying recent rates. Whether rates 

may reasonably be considered ‘‘recent’’ 

depends on the facts and circumstances. 

Generally, ‘‘recent’’ rates would include rates 

charged within one year of the creditor’s or 

its agent’s reliance on this information to 

qualify for the presumption of compliance 

under paragraph (f)(2). For purposes of the 

presumption of compliance under paragraph 

(f)(2), a creditor or its agent may gather 

information about recent rates by using a 

reasonable method that provides information 

about rates for appraisal services in the 

geographic market of the relevant property; a 

creditor or its agent may, but is not required 

to, use or perform a fee survey. 

3. Accounting for factors. Once recent rates 

in the relevant geographic market have been 

identified, the creditor or its agent must 

review the factors listed in paragraph 

(f)(2)(i)(A)–(F) to determine the appropriate 

rate for the current transaction. For example, 

if the recent rates identified by the creditor 

or its agent were solely for appraisal 

assignments in which the scope of work 

required consideration of two comparable 

properties, but the current transaction 

required an appraisal that considered three 

comparable properties, the creditor or its 

agent might reasonably adjust the rate by an 

amount that accounts for the increased scope 

of work, in addition to making any other 

appropriate adjustments based on the 

remaining factors. 

Paragraph 42(f)(2)(i)(A). 

1. Type of property. The type of property 

may include, for example, detached or 

attached single-family property, 

condominium or cooperative unit, or 

manufactured home. 

Paragraph 42(f)(2)(i)(B). 

1. Scope of work. The scope of work may 

include, for example, the type of inspection 

(such as exterior only or both interior and 

exterior) or number of comparables required 

for the appraisal. 

Paragraph 42(f)(2)(i)(D). 

1. Fee appraiser qualifications. The fee 

appraiser qualifications may include, for 

example, a state license or certification in 

accordance with the minimum criteria issued 

by the Appraisal Qualifications Board of the 

Appraisal Foundation, or completion of 

continuing education courses on effective 

appraisal methods and related topics. 

2. Membership in professional appraisal 

organization. Paragraph 42(f)(2)(i)(D) does 

not override state or federal laws prohibiting 

the exclusion of an appraiser from 

consideration for an assignment solely by 

virtue of membership or lack of membership 

in any particular appraisal organization. See, 

e.g., 12 CFR 225.66(a). 

Paragraph 42(f)(2)(i)(E). 

1. Fee appraiser experience and 

professional record. The fee appraiser’s level 

of experience may include, for example, the 

fee appraiser’s years of service as a statelicensed or state-certified appraiser, or years 

of service appraising properties in a 

particular geographical area or of a particular 

type. The fee appraiser’s professional record 

may include, for example, whether the fee 

appraiser has a past record of suspensions, 

disqualifications, debarments, or judgments 

for waste, fraud, abuse or breach of legal or 

professional standards. 

Paragraph 42(f)(2)(i)(F). 

1. Fee appraiser work quality. The fee 

appraiser’s work quality may include, for 

example, the past quality of appraisals 

performed by the appraiser based on the 

written performance and review criteria of 

the creditor or agent of the creditor. 

Paragraph 42(f)(2)(ii). 

1. Restraining trade. Under 

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

would not qualify for the presumption of 

compliance under paragraph (f)(2) if it 

engaged in any acts to restrain trade such as 

entering into a price fixing or market 

allocation agreement that affect the 

compensation of fee appraisers. For example, 

if appraisal management company A and 

appraisal management company B agreed to 

compensate fee appraisers at no more than a 

specific rate or range of rates, neither 

appraisal management company would 

qualify for the presumption of compliance. 

Likewise, if appraisal management company 

A and appraisal management company B 

agreed that appraisal management company 

A would limit its business to a certain 

portion of the relevant geographic market and 

appraisal management company B would 

limit its business to a different portion of the 

relevant geographic market, and as a result 

each appraisal management company 

unilaterally set the fees paid to fee appraisers 

in their respective portions of the market, 

neither appraisal management company 

would qualify for the presumption of 

compliance under paragraph (f)(2). 

2. Acts of monopolization. Under 

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

would not qualify for the presumption of 

compliance under paragraph (f)(2) if it 

engaged in any act of monopolization such as 

restricting entry into the relevant geographic 

market or causing any person to leave the 

relevant geographic market, resulting in 

anticompetitive effects that affect the 

compensation paid to fee appraisers. For 

example, if only one appraisal management 

company exists or is predominant in a 

particular market area, that appraisal 

management company might not qualify for 

the presumption of compliance if it entered 

into exclusivity agreements with all creditors 

in the market or all fee appraisers in the 

market, such that other appraisal 

management companies had to leave or could 

not enter the market. Whether this behavior 

would be considered an anticompetitive act 

that affects the compensation paid to fee 

appraisers depends on all of the facts and 

circumstances, including applicable law. 

42(f)(3) Alternative presumption of 

compliance. 

1. In general. A creditor and its agent are 

presumed to comply with paragraph (f)(1) if 

the creditor or its agent determine the 

compensation paid to a fee appraiser based 

on information about customary and 

reasonable rates that satisfies the conditions 

in paragraph (f)(3) for that information. 

Reliance on information satisfying the 

conditions in paragraph (f)(3) is not a 

requirement for compliance with paragraph 

(f)(1), but creates a presumption that the 

creditor or its agent has complied. A person 

may rebut this presumption with evidence 

that the rate of compensation paid to a fee 

appraiser by the creditor or its agent is not 

customary and reasonable based on facts or 

information other than third-party 

information satisfying the conditions of this 

paragraph (f)(3). If a creditor or its agent does 

not rely on information that meets the 

conditions in paragraph (f)(3), the creditor’s 

and its agent’s compliance with paragraph 

(f)(1) is determined based on all of the facts 

and circumstances without a presumption of 

either compliance or violation. 

2. Geographic market. The meaning of 

‘‘geographic market’’ for purposes of 

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paragraph (f) is explained in comment (f)(1)– 

1. 

3. Recent rates. Whether rates may 

reasonably be considered ‘‘recent’’ depends 

on the facts and circumstances. Generally, 

‘‘recent’’ rates would include rates charged 

within one year of the creditor’s or its agent’s 

reliance on this information to qualify for the 

presumption of compliance under paragraph 

(f)(3). 

42(f)(4) Definitions. 

42(f)(4)(i) Fee appraiser. 

1. Organization. The term ‘‘organization’’ in 

paragraph 42(d)(4)(i)(B) includes a 

corporation, partnership, proprietorship, 

association, cooperative, or other business 

entity and does not include a natural person. 

42(g) Mandatory reporting. 

42(g)(1) Reporting required. 

1. Reasonable basis. A person reasonably 

believes that an appraiser has materially 

failed to comply with the Uniform Standards 

of Professional Appraisal Practice established 

by the Appraisal Standards Board of the 

Appraisal Foundation (as defined in 12 

U.S.C. 3350(9) (USPAP) or ethical or 

professional requirements for appraisers 

under applicable state or federal statutes or 

regulations if the person possesses 

knowledge or information that would lead a 

reasonable person in the same circumstances 

to conclude that the appraiser has materially 

failed to comply with USPAP or such 

statutory or regulatory requirements. 

2. Material failure to comply. For purposes 

of § 226.42(g)(1), a material failure to comply 

is one that is likely to affect the value 

assigned to the consumer’s principal 

dwelling. The following are examples of a 

material failure to comply with USPAP or 

ethical or professional requirements: 

i. Mischaracterizing the value of the 

consumer’s principal dwelling in violation of 

§ 226.42(c)(2)(i). 

ii. Performing an assignment in a grossly 

negligent manner, in violation of a rule under 

USPAP. 

iii. Accepting an appraisal assignment on 

the condition that the appraiser will report a 

value equal to or greater than the purchase 

price for the consumer’s principal dwelling, 

in violation of a rule under USPAP. 

3. Other matters. Section 226.42(g)(1) does 

not require reporting of a matter that is not 

material under § 226.42(g)(1), for example: 

i. An appraiser’s disclosure of confidential 

information in violation of applicable state 

law. 

ii. An appraiser’s failure to maintain errors 

and omissions insurance in violation of 

applicable state law. 

4. Examples of covered persons. ‘‘Covered 

persons’’ include creditors, mortgage brokers, 

appraisers, appraisal management 

companies, real estate agents, other persons 

that provide ‘‘settlement services’’ as defined 

under the Real Estate Settlement Procedures 

Act and implementing regulations. See 12 

U.S.C. 2602(3); § 226.42(b)(1). 

5. Examples of persons not covered. The 

following persons are not ‘‘covered persons’’ 

(unless, of course, they are creditors with 

respect to a covered transaction or perform 

‘‘settlement services’’ in connection with a 

covered transaction): 

i. The consumer who obtains credit 

through a covered transaction. 

ii. A person secondarily liable for a 

covered transaction, such as a guarantor. 

iii. A person that resides in or will reside 

in the consumer’s principal dwelling but will 

not be liable on the covered transaction, such 

as a non-obligor spouse. 

6. Appraiser. For purposes of 

§ 226.42(g)(1), an ‘‘appraiser’’ is a natural 

person who provides opinions of the value of 

dwellings and is required to be licensed or 

certified under the laws of the state in which 

the consumer’s principal dwelling is located 

or otherwise is subject to the jurisdiction of 

the appraiser certifying and licensing agency 

for that state. See 12 U.S.C. 3350(1). 

By order of the Board of Governors of the 

Federal Reserve System, October 18, 2010. 

Jennifer J. Johnson, 

Secretary of the Board. 

[FR Doc. 2010–26671 Filed 10–27–10; 8:45 am] 

BILLING CODE 6210–01–P 

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