1

Regulation Z (Truth in Lending). The interim rule implements Section 129E of the Truth in

Lending Act (TILA), which was enacted on July 21, 2010, as Section 1472 of the Dodd-Frank

Wall Street Reform and Consumer Protection Act. TILA Section 129E establishes new

requirements for appraisal independence for consumer credit transactions secured by the

consumer’s principal dwelling. The amendments are designed to ensure that real estate

appraisals used to support creditors’ underwriting decisions are based on the appraiser’s

independent professional judgment, free of any influence or pressure that may be exerted by

parties that have an interest in the transaction. The amendments also seek to ensure that creditors

and their agents pay customary and reasonable fees to appraisers. The Board seeks comment on

all aspects of the interim final rule.

1, 2011.

interim final rule is optional until April 1, 2011.

2

AD-7100-56, by any of the following methods:

submitting comments.

line of the message.

All public comments will be made available on the Board’s web site at

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

5:00 p.m. on weekdays.

Neill, Senior Attorney; Division of Consumer and Community Affairs, Board of Governors of

the Federal Reserve System, Washington, DC 20551, at (202) 452-2412 or (202) 452-3667. For

users of Telecommunications Device for the Deaf (TDD) only, contact (202) 263-4869.

3

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

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the

to establish new requirements for appraisal independence. Specifically, the appraisal

independence provisions in the Dodd-Frank Act:

the appraised value of the property on factors other than the appraiser’s independent

judgment;

interest in the property or the credit transaction;

4

of the prohibition on coercion or of a conflict of interest;

appraiser licensing authorities;

(e.g., an appraiser who is not the salaried employee of the creditor or the appraisal

management company hired by the creditor); and

Code of Conduct, the current standard for appraisal independence for loans purchased by

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.

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

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Based on concerns about consumers obtaining home-secured loans based on misstated

appraisals, in 2008, the Board used its authority under the Home Ownership and Equity

Protection Act (HOEPA) to prohibit a creditor or mortgage broker from coercing or influencing

an appraiser to misstate the value of a consumer’s principal dwelling (2008 Appraisal

Independence Rules). 12 CFR 226.36(b); 15 U.S.C. 1639(l)(2). The 2008 Appraisal

Independence Rules took effect on October 1, 2009. Section 1472 of the Dodd-Frank Act

essentially codifies the 2008 Appraisal Independence Rules, and expands on the protections in

those rules. This interim final rule incorporates the provisions in the 2008 Appraisal

Independence Rules. Thus, the Board is removing the 2008 Appraisal Independence Rules

effective on April 1, 2011.

In December 2008, Fannie Mae and Freddie Mac (“the GSEs”) announced the Home

Valuation Code of Conduct (HVCC), which established appraisal independence standards for

loans the GSEs would purchase. The HVCC is based on an agreement between the GSEs, New

York State Attorney General Andrew Cuomo, and the FHFA. The HVCC provides that, among

other things, only a creditor or its agent may select, engage, and compensate an appraiser and

that a creditor must ensure that its loan production staff do not influence the appraisal process or

outcome. As noted, however, the Dodd-Frank Act mandates that the HVCC shall have no

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.

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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

applies to creditors, appraisal management companies, appraisers, mortgage brokers, realtors,

title insurers and other firms that provide settlement services.

transaction secured by the consumer’s principal dwelling. Covering consumer credit transactions

is consistent with the scope of TILA generally, which only applies to credit extended for

personal, family or household purposes. However, the scope of the interim final rule is broader

than the 2008 Appraisal Independence Rules; those rules apply to closed-end loans but not to

home-equity lines of credit (HELOCs). The broader scope is required by Section 1472 of the

Dodd-Frank Act, which does not limit coverage to closed-end loans and also covers HELOCs.

In addition, with a few exceptions, the interim final rule applies to any person who

performs valuation services, performs valuation management functions, and to any valuation of

the consumer’s principal dwelling, not just to a licensed or certified “appraiser,” an “appraisal

management company,” or to a formal “appraisal.” This approach implements the statutory

provisions and is consistent with the 2008 Appraisal Independence Rules, and is designed to

ensure that consumers are protected regardless of the valuation method chosen by the creditor,

and to prevent circumvention of the appraisal independence rules. These provisions are

discussed in more detail in the section-by-section analysis below.

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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

valuation does not materially misstate the value of the property.

valuation or who performs valuation management services may not have an interest, financial or

otherwise, in the property or the transaction. The Dodd-Frank Act does not expressly ban the use

of in-house appraisers or affiliates. However, because the Act prohibits appraisers from having

an “indirect financial interest” in the transaction, it is possible to interpret the Act to prohibit

creditors from using in-house staff appraisers and affiliated appraisal management companies

(AMCs). The interim final rule clarifies that an employment relationship or affiliation does not,

by itself, violate the prohibition. The interim final rule also contains establishes a safe harbor

and specific criteria for establishing firewalls between the appraisal function and the loan

production function, to prevent conflicts of interest. Special guidance on firewalls is provided

8

for small institutions, because they likely cannot completely separate appraisal and loan

production staff. Small institutions are those with assets of $250 million or less.

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.

final rule, a creditor and its agent must pay a fee appraiser at a rate that is reasonable and

customary in the geographic market where the property is located. The rule provides two

presumptions of compliance. Under the first, a creditor and its agent is presumed to have paid a

customary and reasonable fee if the fee is reasonably related to recent rates paid for appraisal

services in the relevant geographic market, and, in setting the fee, the creditor or its agent has:

scope of work; and

appraisal fee, such as price-fixing or restricting others from entering the market.

Second, a creditor or its agent would also be presumed to comply if it establishes a fee by relying

on rates established by third party information, such as the appraisal fee schedule issued by the

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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).

Rulemaking Authority

As noted above, TILA Section 105(a) directs the Board to prescribe regulations to carry

out the act’s purposes. 15 U.S.C. 1604(a). In addition, TILA Section 129E, added by the Dodd-

Frank Act, includes several grants of rulemaking authority to implement the provisions of that

section. Specifically, Section 129E(g)(1) authorizes the Board, the other federal banking

agencies, the Federal Housing Finance Agency, and the Consumer Financial Protection Bureau

to jointly issue rules, guidelines, and policy statements “with respect to acts or practices that

violate appraisal independence in the provision of mortgage lending services. . . within the

meaning of subsections (a), (b), (c), (d), (e), (f), (h), and (i).” 15 U.S.C. 1639e(g)(1). Second,

Section 129E(g)(2) directs the Board to prescribe interim final regulations no later than 90 days

after the law's enactment date, "defining with specificity acts or practices that violate appraisal

independence in the provision of mortgage lending services" and "defining any terms in this

section or such regulations." 15 U.S.C. 1639e(g)(2). The Board's interim final regulations under

Section 129E(g)(2) are deemed to be rules prescribed by the agencies jointly. Third, Section

129E(h), authorizes the Board, the banking agencies, the FHFA and the Consumer Financial

Protection Bureau to jointly issue rules regarding appraisal report portability. 15 U.S.C.

1639e(h).

The Board is issuing this interim final rule pursuant to its general authority in Section

105(a) and the specific authority conferred by Section 129E(g)(2) to implement the appraisal

independence provisions in Section 129E. Some industry representatives have asserted that the

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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

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

were able to publish proposed rules for public comment, the comment period would have been

too short to afford interested parties sufficient time to prepare well-researched comments or to

afford time for the Board to conduct a meaningful review and analysis of those comments.

Consequently, the Board finds that the use of notice-and-comment procedures before issuing

11

these rules would be impracticable. Interested parties will still have an opportunity to submit

comments in response to this interim final rule before permanent final rules are issued.

Moreover, the Board believes that the Dodd-Frank Act’s mandate that the Board issue

interim final rules that will be effective before the issuance of permanent rules also supports the

Board’s determination that notice and comment are impracticable. If the legislation had

contemplated a notice and comment period, the rules issued by the Board could have been

referred to as “final rules” rather than “interim final rules.” The term “interim final regulations”

or “interim final rules” has long been recognized to mean rules that an agency issues without first

Section 1472 of the Dodd-Frank Act adds to TILA a new Section 129E that establishes

appraiser independence requirements for a consumer credit transaction secured by the

consumer’s principal dwelling. 15 U.S.C. 1639e. TILA Section 129E applies to both open- and

closed-end consumer credit transactions secured by the consumer’s principal dwelling, as

discussed in detail below in the section-by-section analysis of § 226.42. Accordingly, new

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

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

Section 129E and § 226.42.

Overview

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This part discusses the implementation of the appraisal independence provisions added to

TILA by the Dodd-Frank Act by this interim final rule. TILA Section 129E(a) prohibits persons

that extend credit or provide any service for a consumer credit transaction secured by the

consumer’s principal dwelling (covered transaction) from engaging in “any acts or practices that

violate appraisal independence as described in or pursuant to regulations prescribed under [TILA

Section 129E].” 15 U.S.C. 1639e(a). This provision applies to both closed- and open-end

extensions of credit. TILA Section 129E(b) describes certain acts and practices that violate

appraisal independence. 15 U.S.C. 1639e(b). TILA Section 129E(c) also specifies certain acts

and practices that are deemed to be permissible. 15 U.S.C. 1639e(c). Under TILA Section

129E(f), a creditor that knows about a violation of the appraiser independence standards or a

prohibited conflict of interest at or before consummation of the transaction is prohibited from

extending credit based on the appraisal unless the creditor documents that it has acted with

reasonable diligence to determine that the appraisal does not materially misstate or misrepresent

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

TILA Section 129E(b) and (c) are substantially similar to the appraisal regulations that

the Board issued in 2008, which became effective on October 1, 2009. 15 U.S.C. 1639e(b), (c).

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

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).

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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

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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

interim final rule applies only to transactions secured by the principal dwelling of the consumer

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

§ 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

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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

notes that persons that perform “settlement services” include persons that conduct appraisals.

“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.

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

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consumer’s right to rescind certain loans secured by the consumer’s principal dwelling, a

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

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

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

17

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

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

As used in § 226.42(b)(5), the term “valuation” applies to an estimate of the value of the

consumer’s principal dwelling whether or not a person applies USPAP in preparing such

estimate. Comment 42(b)(3)-1 clarifies that a “valuation” is an estimate of value prepared by a

natural person, such as an appraisal report prepared by an appraiser or an estimate of market

value prepared by a real estate agent. Comment 42(b)(3)-1 also clarifies that the term includes

photographic or other information included with an estimate of value. Comment 42(b)(3)-1

clarifies further that a “valuation” includes an estimate provided or viewed electronically, such as

an estimate transmitted via electronic mail or viewed using a computer.

Comment 42(b)(3)-2 clarifies that, although a “valuation” does not include an estimate of

value produced exclusively using an automated model or system, a “valuation” includes an

estimate of value developed by a natural person based in part on an estimate produced using an

automated model or system. The Board solicits comment on the exclusion of automated

valuation models from the definition of “valuation” below, in the section-by-section analysis of

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

18

principal dwelling includes an estimate of a range of values for the consumer’s principal

dwelling.

This interim final rule uses the term “valuation management functions” to refer to a

variety of administrative activities undertaken in connection with the preparation of a valuation.

The term “valuation management functions” is used in implementing TILA Section 129E(b)(1),

which prohibits causing or attempting to cause the value assigned to the consumer’s principal

dwelling to be based on a factor other than the independent judgment of a person that prepares

valuations, through coercion or certain other similar acts or practices. 15 U.S.C. 1639e(b)(1).

The term “valuation management functions” also is used in implementing TILA Section

129E(d), which provides that an appraisal management company may not have an interest in a

covered transaction or the consumer’s principal dwelling. 15 U.S.C. 1639e(d). This interim

final rule applies that prohibition on conflicts of interest to a person that performs administrative

functions in connection with valuations of the consumer’s principal dwelling, even if the person

is not an “appraisal management company” (for example, a company that employs appraisers or

an appraisal reviewer employed by a creditor), as discussed below in the section-by-section

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

management functions” rather than “appraisal management” for purposes of § 226.42(d).

Section 226.42(b)(4) defines “valuation management functions” to mean (1) recruiting,

selecting, or retaining a person to prepare a valuation; (2) contracting with or employing a person

to prepare a valuation; (3) managing or overseeing the process of preparing a valuation

(including by providing administrative services such as receiving orders for and receiving a

valuation, submitting a completed valuation to creditors and underwriters, collecting fees from

19

creditors and underwriters for services provided in connection with a valuation, and

compensating a person that prepare valuations); or (4) reviewing or verifying the work of a

person that prepares valuations. The term is used in § 226.42(c) and (d), which are discussed in

detail below.

TILA Section 129E(b) provides that, for purposes of TILA Section 129E(a), acts or

practices that violate appraisal independence include: (1) causing or attempting to cause the

value assigned to the property to be based on a factor other than the independent judgment of an

appraiser, by compensating, coercing, extorting, colluding with, instructing, inducing, bribing, or

intimidating a person conducting or involved in an appraisal; (2) mischaracterizing, or suborning

any mischaracterization of, the appraised value of the property securing the extension of credit;

(3) seeking to influence an appraiser or otherwise to encourage a targeted value in order to

facilitate the making or pricing of the transaction; and (4) withholding or threatening to withhold

timely payment for an appraisal report or for appraisal services rendered when the appraisal

report or services are provided for in accordance with the contract between the parties. 15

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

TILA Section 129E(c) provides that TILA Section 129E(b) shall not be construed as

prohibiting a mortgage lender, mortgage broker, mortgage banker, real estate broker, appraisal

management company, employee of an appraisal management company, consumer, or any other

person with an interest in a real estate transaction from asking an appraiser to: (1) consider

additional, appropriate property information, including information regarding additional

comparable properties to make or support an appraisal; (2) provide further detail, substantiation,

20

or explanation for the appraiser’s value conclusion; or (3) correct errors in the appraisal report.

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

TILA Section 129E(b) and (c) are substantially similar to the 2008 Appraisal

Independence Rules. 15 U.S.C. 1639e(b), (c); § 226.36(b). The Board is implementing TILA

Section 129E(b) and (c) in § 226.42(c), pursuant to its authority under TILA Section 129E(g)(2)

to prescribe interim final regulations defining with specificity acts or practices that violate

appraisal independence in the provision of mortgage lending services or mortgage brokerage

services for a covered transaction and any terms under TILA Section 129E or such regulations.

15 U.S.C. 1639e(g)(2). The prohibitions of certain acts and practices under TILA Section

129E(b) that are substantially similar to the Board’s 2008 Appraisal Independence Rules are

implemented in § 226.42(c)(1). The prohibition on “mischaracterizing or suborning any

mischaracterization of the appraised value of property securing the extension of credit” under

TILA Section 129E(b)(2), which has no direct corollary in the 2008 Appraisal Independence

Rules, is implemented in § 226.42(c)(2). 15 U.S.C. 1639e(b)(2). TILA Section 129E(c),

regarding acts and practices that are permissible under TILA Section 129E, is implemented in

§ 226.42(c)(3).

TILA Section 129E(b)(1) prohibits a person with an interest in the underlying transaction

to compensate, coerce, extort, collude, instruct, induce, bribe, or intimidate a person, appraisal

management company, firm, or other entity conducting or involved in an appraisal, or attempting

to do so, for the purpose of causing the value assigned to the consumer’s principal dwelling to be

based on a factor other than the independent judgment of the appraiser. 15 U.S.C. 1639e(b)(1).

Section 226.42(c)(1) implements and is substantially similar to TILA Section 129E(b)(1).

21

Section 226.42(c)(1) uses the terms “covered person” and “covered transaction” and refers to

persons that prepare “valuations” or perform “valuation management functions,” for clarity and

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

§ 226.42(c)(1) uses the term “person” to implement the reference in TILA Section 129E(b)(1) to

certain acts or practices directed towards a “person, appraisal management company, firm, or

other entity,” for simplicity. 15 U.S.C. 1639e(b)(1). TILA Section 103(d) provides that

“person” means a natural person or an organization, and § 226.2(a)(22) clarifies that an

organization includes a corporation, partnership, proprietorship, association, cooperative, estate,

trust, or government unit. 15 U.S.C. 1602(d).

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

§ 226.2(b)(3). In some cases, state law may define one of the terms in a context that is not

applicable to a covered transaction, for example, where state law defines “bribery” to mean the

offering, giving, soliciting, or receiving of something of value to influence the action of an

official in the discharge of his or her public duties. The Board believes, however, that the terms

used in TILA Section 129E(b)(1) and § 226.42(c)(1) cover a range of acts and practices

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

22

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

examples of actions that violate § 226.42(c)(1), as discussed below. 15 U.S.C. 1639e(b)(1).

Comment 42(c)(1)-2 clarifies that a covered person does not violate § 226.42(c)(1) if the

person does not engage in an act or practice set forth in § 226.42(c)(1) for the purpose of causing

the value assigned to the consumer’s principal dwelling to be based on a factor other than the

independent judgment of a person that prepares valuations. For example, comment 42(c)(1)-2

states that requesting that a person that prepares a valuation take certain actions, such as

considering additional, appropriate property information, does not violate § 226.42(c), because

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

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.

violated if a covered person attempts to or causes the value assigned by a person that prepares

valuations to be based on a factor other than the independent judgment of the person that

prepares valuations through coercion or certain other acts or practices, whether or not the person

that prepares valuations is a state-licensed or state-certified appraiser. For example, comment

42(c)(1)(1)-3 clarifies that a covered person violates § 226.42(c)(1) by seeking to coerce a real

23

estate agent to assign a market value to the consumer’s principal dwelling based on a factor other

than the real estate agent’s independent judgment, in connection with a covered transaction.

Although § 226.42(c)(1) broadly prohibits certain acts and practices directed toward any person

who prepares valuations, the Board notes that in some cases applicable law or guidance may call

for a creditor to obtain an appraisal prepared by a state-licensed or state-certified appraiser for a

covered transaction. For example, the federal financial institution regulatory agencies require the

creditors they supervise to obtain an appraisal by a state-certified appraiser for certain federallyrelated

violated indirectly, for example, where a creditor attempts to cause the value an appraiser

engaged by an appraisal management company assigns to the consumer’s principal dwelling to

be based on a factor other than the appraiser’s independent judgment. Thus, the commentary

provides that it is a violation to threaten to withhold future business from a title company

affiliated with an appraisal management company unless the valuation ordered through the

appraisal management company assigns a value to the consumer’s principal dwelling that meets

or exceed a minimum threshold.

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

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

24

persons that develop an automated model or system for estimating the value of the consumer’s

principal dwelling.

TILA Sections 129E(b)(3) and (4) provide that the following actions violate appraisal

independence: (1) seeking to influence an appraiser to assign a targeted value to facilitate the

making or pricing of a covered transaction; and (2) withholding or threatening to withhold timely

payment for an appraisal report provided or for appraisal services rendered in accordance with

the parties’ contract. 15 U.S.C. 1639e(b)(3), (4). The Board believes that the prohibition on

causing or attempting to cause the value assigned to the consumer’s principal dwelling to be

based on a factor other than the independent judgment of the person that prepares a valuation,

through coercion, inducement, intimidation, and certain other acts and practices, encompass the

acts and practices prohibited by TILA Section 129E(b)(3) and (4). This interim rule therefore

uses the acts and practices prohibited by TILA Section 129E(b)(3) and (4) as examples of acts

and practices prohibited by TILA Section 129E(b)(1). (This interim final rule implements the

prohibition under TILA Section 129E(b)(2) of “mischaracterizing” the value of the consumer’s

principal dwelling separately from the other provisions of TILA Section 129E(b), because that

provision may be violated without outside pressure, as discussed below in the section-by-section

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

Section 226.42(c)(1)(i)(A) and (B) implement TILA Section 129E(b)(3) and (4) and are

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

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

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

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

25

practices directed towards a person that performs valuation management functions or such

terms “specific value” and “predetermined threshold” includes a predetermined minimum,

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

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.

TILA Section 129E(b)(4) provides that appraisal independence is violated if a person

withholds or threatens to withhold timely payment for a valuation or for services rendered to

provide a valuation, when the valuation or the services are provided in accordance with the

contract between the parties. 15 U.S.C. 1639e(b)(4). This provision is substantially similar to

current § 226.36(b)(1)(ii)(D), which prohibits “failing to compensate an appraiser because the

appraiser does not value the consumer’s principal dwelling at or above a certain amount.”

26

Section 226.42(c)(2)(i)(B) implements TILA Section 129E(b)(4), with minor revisions for

clarity. The Board notes that withholding compensation for breach of contract or substandard

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

226.42(c)(1)(i)(E) provides that an example of an action that violates § 226.42(c)(1) is

conditioning the compensation paid to a person that prepares valuations on consummation of a

covered transaction. The examples provided under § 226.42(c)(1)(i) are illustrative, not

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

27

TILA Section 129E(b)(2) prohibits mischaracterizing or suborning any

mischaracterization of the appraised value of property securing a covered transaction. 15 U.S.C.

1639e(b)(2). The Board implements that prohibition separately from the prohibition under

§ 226.42(c)(1) of causing or attempting to cause the value assigned to the consumer’s principal

dwelling to be based on a factor other than the independent judgment of a person that prepares

valuations, through coercion and other similar acts and practices. This is because a person may

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

TILA Section 129E(b)(2) in § 226.42(c)(2).

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

not a mischaracterization. The Board believes that Congress intended to prohibit the intentional

Comment 42(c)(2)(i)-1 clarifies that a person misrepresents the value of the consumer’s principal

dwelling by assigning a value to such dwelling that does not reflect the person’s opinion of such

dwelling’s value. For example, comment 42(c)(2)(i)-1 clarifies that an appraiser violates

§ 226.42(c)(2)(i) if the appraiser estimates that the value of such dwelling is $250,000 applying

USPAP but assigns a value of $300,000 to such dwelling in a Uniform Residential Appraisal

Report.

28

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

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).

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.

TILA Section 129E(c) provides that TILA Section 129E(b) shall not be construed to

prohibit a mortgage lender, mortgage broker, mortgage banker, real estate broker, appraisal

29

management company, employee of an appraisal management company, consumer, or any other

person with an interest in a real estate transaction from asking an appraiser to undertake certain

actions. 15 U.S.C. 1639e(c). To implement TILA Section 129E(c), § 226.42(c)(3) provides

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

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

permitted under § 226.42(c)(1) or (2).

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).

The Board believes that the acts and practices allowed under current

§ 226.36(b)(1)(ii)(D) through (F) do not compromise the exercise of independent judgment in

estimating the value of the consumer’s principal dwelling. The Board therefore includes the

examples of permitted practices provided under current § 226.36(b)(1)(ii)(D) through (F) in new

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

30

that does not violate § 226.42(c)(1) or (2) is obtaining multiple valuations for the consumer’s

principal dwelling to select the most reliable valuation. Section 226.42(c)(3)(iv) is substantially

similar to current § 226.36(b)(1)(ii)(D) but omits the statement in that provision that obtaining

multiple appraisals is permitted under § 226.36(b) “as long as the creditor adheres to a policy of

selecting the most reliable appraisal, rather than the appraisal that states the highest value.” That

statement is omitted because it may suggest an unintended distinction between selecting the

valuation that states the highest value and selecting the valuation that states the lowest value. No

substantive change is intended.

Section 226.42(c)(3)(v) provides that an example of an action that does not violate

§ 226.42(c)(1) or (2) is withholding compensation for breach of contract or substandard

performance of services. Section 226.42(c)(3)(vi) provides that example of an action that does

not violate § 226.42(c)(1) or (2) is taking action permitted or required by applicable federal or

state statute, regulation, or agency guidance. Section 226.42(b)(3)(v) and (vi) are substantially

similar to current § 226.36(b)(1)(ii)(E) and (F).

Section 226.42(d) implements TILA Section 129E(d), which states that “no certified or

licensed appraiser conducting, and no appraisal management company procuring or facilitating,

an appraisal in connection with a consumer credit transaction secured by the principal dwelling

of a consumer may have a direct or indirect interest, financial or otherwise, in the property or

transaction involving the appraisal.” This new TILA provision is generally consistent with

longstanding federal banking agency appraisal regulations and supervisory guidance applicable

31

to federally-regulated depository institutions. The federal banking agency regulations require

that appraisers employed by the institution extending credit (termed “staff appraisers” in the

regulations) be “independent of the lending, investment, and collection functions and not

involved, except as an appraiser, in the transaction, and have no direct or indirect interest,

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

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

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

32

collateral may also be a loan officer, other officer, or director of the institution. In these cases,

the Interagency Guidelines state that, “[t]o ensure their independence, lending officials, officers,

or directors should abstain from any vote or approval involving loans on which they performed

More recently, the federal banking agencies proposed similar guidance in the Proposed

addition to incorporating the existing guidance stated above, the Proposed Interagency

Guidelines advise institutions to “establish reporting lines independent of loan production for

staff that order, accept, and review appraisals and evaluations.” For institutions unable to

achieve absolute lines of independence between the collateral valuation and loan production

processes, the Proposed Interagency Guidelines advise that an institution should nonetheless “be

able to demonstrate clearly that it has prudent safeguards to isolate its collateral valuation

program from influence or interference from the loan production process.”

HVCC

The HVCC, which covers appraisals performed by state-licensed or state-certified

appraisers for loans sold to Fannie Mae and Freddie Mac, also incorporates several provisions to

prohibit conflicts of interest in the appraisal process.

First, the HVCC regulates the process of selecting and communicating with a person or

entity involved in conducting an appraisal. Specifically, (1) members of the creditor’s loan

production staff; and (2) any person who (i) is compensated on a commission basis based on

whether the loan closes, or (ii) reports ultimately to any officer of the creditor who is not

independent of loan production, may not do the following:

33

appraisal assignment or for inclusion on a list or panel of approved or disapproved

appraisers; or

company” involving or impacting valuation, including ordering or managing an appraisal

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

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

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:

34

production function;

recommending, or influencing the selection of an appraiser; and

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

adopted policies and procedures to implement the HVCC, including training and disciplinary

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

Fannie Mae determines would suffer hardship due to the provisions, and which otherwise adhere

35

The Board recognizes that the literal language of the statutory prohibition on having a

“direct or indirect interest, financial or otherwise” in the property or transaction can be

interpreted to mean that a person or entity preparing a valuation or performing valuation

management functions should be deemed to have a prohibited interest merely by token of being

employed or owned by the creditor. An employee of the creditor could be deemed to have an

“indirect” interest in the transaction, for example, because he or she might receive financial

benefits, such as higher bonuses or more valuable stock options, as a result of the creditor’s loan

volume rising. Similarly, under this interpretation, an AMC providing both valuation

management functions and title services, including title insurance, for the same transaction could

be deemed to have an “indirect” interest in the transaction if the entity profits when title

insurance is purchased at closing.

The Board believes, however, that interpreting the statute in this way would be

impractical and thus would not be the most effective way to further the purpose of the conflicts

of interest prohibition in TILA Section 129E(d)–promoting a healthy mortgage market by

ensuring independent valuations. A broad prohibition could interfere with the functioning of

many creditors and providers of valuations and valuation management functions, potentially

disrupting the mortgage market at a vulnerable time. The Board also notes that, according to the

legislative history of TILA Section 129E(d), th conflicts of interest provision “should not be

construed as to prohibit work by staff appraisers within a financial institution or other

organization, if such an entity has established firewalls, consistent with those outlined in the

36

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

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:

Section 129E(d);

37

creditor’s in-house valuation staff or affiliated AMC or appraisal company if firewalls

and other specified safeguards are in place; and

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.

Section 226.42(d)(1)(i) prohibits a person preparing a valuation or performing valuation

management functions for a consumer credit transaction secured by the consumer’s principal

dwelling from having a direct or indirect interest, financial or otherwise, in the property or

transaction for which the valuation is or will be performed. This provision implements TILA

Section 129E(d), but uses different terminology (for reasons explained in the section-by-section

analysis to § 226.42(b)). Specifically, the term “person preparing valuations” replaces the term

“licensed or certified appraiser”; the term “person performing valuation management functions”

replaces the term “appraisal management company”; and the term “valuation” replaces the term

“appraisal.” By using these terms, the interim final rule’s conflict of interest provision applies to

38

any form of valuing a property on which a creditor relies to extend consumer credit secured by

the consumer’s principal dwelling.

Prohibited Interest in the Property

Comment 42(d)(1)(i)-1 clarifies that a person preparing a valuation or performing

valuation management functions for a covered transaction has a prohibited interest in the

property if the person has any ownership or reasonably foreseeable ownership interest in the

property. The comment further clarifies that a person who seeks a mortgage to purchase a home

has a reasonably foreseeable ownership interest in the property securing the mortgage, and

therefore is not permitted to prepare the valuation or perform valuation management functions

for that mortgage transaction under § 226.42(d)(1)(i). This example is illustrative, and is not

intended to be exhaustive; other prohibited interests in the covered property may arise,

depending on the facts of a particular transaction.

Prohibited Interest in the Transaction

Comment 42(d)(1)(i)-2 clarifies that a person preparing a valuation or performing

valuation management functions has a prohibited interest in the transaction under

§ 226.42(d)(1)(i) if that person or an affiliate of that person also serves as a loan officer of the

creditor, mortgage broker, real estate broker, or other settlement service provider for the

transaction, and the safe harbor conditions for settlement service providers under § 226.42(d)(4)

(discussed below in the section-by-section analysis of that provision) are not satisfied. The

comment further clarifies that a person also has a prohibited interest in the transaction if the

person is compensated or otherwise receives financial or other benefits based on whether the

transaction is consummated. Under these circumstances, the comment explains, the person is not

permitted to prepare the valuation or perform valuation management functions for the transaction

39

under § 226.42(d)(1)(i). The Board notes that these examples of prohibited interests are

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.

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

40

another settlement service for the transaction. The comment clarifies, however, that whether the

person has a direct or indirect interest in the property or transaction that creates a prohibited

conflict of interest under § 226.42(d)(1)(i) depends on the facts and circumstances of a particular

case.

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

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

41

of this approach, stating that the conflict of interest provision “should not be construed as to

prohibit work by staff appraisers within a financial institution or other organization, if such an

entity has established firewalls, consistent with those outlined in the [HVCC], between the

origination group and the appraisal unit designed to ensure the independence of appraisal results

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

(2) the other for transactions in which the creditor had assets of $250 million or less as of

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

42

consumer lending operations due to an inability to comply with the statute and implementing

regulation. This reduction in credit availability could harm many consumers, undermining the

goals of the Dodd-Frank Act to protect and benefit consumers. Second, the federal banking

agencies have long recognized that smaller institutions may be unable to achieve strict separation

between its collateral valuation and loan production functions; therefore, some firewalls and

safeguards appropriate for larger institutions are not for smaller institutions. Third,

distinguishing between larger and smaller institutions is consistent with the HVCC, which the

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

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

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:

43

(1) The compensation of the person preparing a valuation or performing valuation

management functions is not based on the value arrived at in any valuation;

(2) The person preparing a valuation or performing valuation management functions

reports to a person who is not part of the creditor’s loan production function (as defined in

§ 226.42(d)(5)(i)) and whose compensation is not based on the closing of the transaction to

which the valuation relates; and

(3) No employee, officer or director in the creditor’s loan production function is directly

or indirectly involved in selecting, retaining, recommending or influencing the selection of the

person to prepare a valuation or perform valuation management functions, or to be included in or

excluded from a list of approved persons who prepare valuations or perform valuation

management functions.

Comment 42(d)(2)-1 clarifies that § 226.42(d)(2) creates a safe harbor for a person who

prepares valuation or performs valuation management functions for a covered transaction and is

an employee or affiliate of the creditor. Such a person will not be deemed to have an interest

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

the creditor if the conditions in § 226.42(d)(2) are satisfied. In addition, the comment explains

that, in general, in any covered transaction with a creditor that had assets of more than $250

million for the past two years, the creditor may use its own employee or affiliate to prepare a

valuation or perform valuation management functions for a particular transaction if the safe

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

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

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

44

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

harbor under § 226.42(d)(2) are discussed in turn below.

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.

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

advises institutions to “establish reporting lines independent of loan production for staff that

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Comment 42(d)(2)(ii)-1 clarifies the prohibition on reporting to a person who is part of

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.

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.

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Comment 42(d)(2)(ii)-2 clarifies the prohibition on any employee, officer or director in

the creditor’s loan production function (as defined in § 226.42(d)(4)(ii)) from direct or indirect

involvement in selecting, retaining, recommending or influencing the selection of the person to

perform a valuation or valuation management functions for a covered transaction, or to be

included in or excluded from a list or panel of approved persons who prepare valuations or

perform valuation management functions. To this end, the comment provides the following

example: if the person who selects the person who will prepare the valuation for a covered

transaction is supervised by an employee of the creditor who also supervises loan officers, the

condition in § 226.42(d)(2)(iii) is not met.

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

under § 226.42(d)(2) for inclusion in the final rule.

42(d)(3) Employees and Affiliates of Creditors with Assets of $250 Million or Less for Either of

the Past Two Calendar Years

Section 226.42(d)(3) provides a safe harbor for compliance with the prohibition on

conflicts of interest under § 226.42(d)(1)(i) for employees and affiliates of creditors with assets

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

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(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.

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.

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any employee, officer or director of the institution who orders, performs, or reviews the

valuation for a particular transaction abstain from participation in any decision to approve, not

approve, or set the terms of that transaction. The Board recognizes that smaller institutions may

have difficulty complying with a condition that requires the person conducting the valuation or

performing valuation management functions to report to a person independent of the creditor’s

sales or loan production functions (§ 226.42(d)(2)(ii)) or that prohibits employees in the

creditor’s loan production functions from being directly or indirectly involved in selecting,

retaining, recommending or influencing the selection of a person to perform a particular

valuation or to be included in or excluded from a list or panel of approved persons who perform

valuations (§ 226.42(b)(2)(iii)). As discussed above, smaller institutions may have only a few

employees, so each employee may have to perform multiple functions, including roles involving

both collateral valuation and loan production tasks.

For these reasons, the condition in § 226.42(d)(3)(ii) replaces, for smaller creditors, the

two conditions applicable to larger creditors described above, which require bright-line isolation

of the collateral valuation function from the loan production function (§ 226.42(d)(2)(ii) and

(d)(2)(iii)). This safe harbor condition tailored for smaller creditors incorporates provisions

included in federal banking agency guidance for small or rural institutions regarding how to

ensure independent valuations and protect against conflicts of interest in the collateral valuation

process – namely, that a creditor should separate its collateral valuation function from its loan

production function and that, to this end, any employee, officer or director of the institution who

49

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

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.

The Board recognizes that AMCs and appraisal companies or firms are sometimes

affiliated with other settlement service providers, such as title companies, and that some AMCs

and appraisal companies provide services related to collateral valuation in addition to other

settlement services for the same transaction. The Board believes that interpreting the statute to

prohibit these AMCs and appraisal companies from providing valuation services and other

settlement services in the same transaction in all cases would be contrary to the purposes of the

statute; it could disrupt the businesses of many appraisal firms, appraisal management

companies, and the creditors for which they provide services, to the detriment of the overall

mortgage market. It also could reduce efficiencies created by “one-stop shopping” for settlement

services, which can lower overall mortgage costs for consumers. The Board believes that

providing a safe harbor consisting of appropriate firewalls and safeguards will ensure the

integrity of the valuation process in accordance with the statute; by including this safe harbor, the

interim final rule gives providers of multiple settlement services and the creditors for which they

provide services an incentive to implement measures to secure valuation independence.

Section 226.42(d)(4) provides alternative safe harbors for compliance with the

prohibition on conflicts of interest under § 226.42(d)(1)(i) by persons who prepare valuations or

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

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

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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

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

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

51

designed to ensure the independence of persons involved with valuations for transactions with

larger creditors. Thus they require that:

(1) The compensation of the person preparing a valuation or performing valuation

management functions is not based on the value arrived at in any valuation;

(2) The person preparing a valuation or performing valuation management functions

reports to a person who is not part of the creditor’s loan production function, and whose

compensation is not based on the closing of the transaction to which the valuation relates; and

(3) No employee, officer or director in the creditor’s loan production function is directly

or indirectly involved in selecting, retaining, recommending or influencing the selection of the

person to prepare a valuation or perform valuation management functions, or to be included in or

excluded from a list of approved persons who prepare valuations or perform valuation

management functions.

Comment 42(d)(4)(i)-1 explains that, even if the conditions in paragraph (d)(4)(i) are

satisfied, however, the person preparing a valuation or performing valuation management

functions may have a prohibited conflict of interest on other grounds, such as if the person

performs a valuation for a purchase-money mortgage transaction in which the person is the buyer

or seller of the subject property. The comment further explains that, in general, in any covered

transaction with a creditor that had assets of more than $250 million for the past two years, a

person preparing a valuation or performing valuation management functions, or its affiliate, may

provide another settlement service for the same transaction, as long as the conditions described

in paragraph (d)(4)(i) are satisfied. This comment also explains that, if the safe harbor

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

52

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

facts and circumstances.

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

if the condition specified in § 226.42(d)(2)(ii), among others, is met. Section 226.42(d)(2)(ii)

prohibits a person preparing a valuation or performing valuation management functions from

reporting to a person whose compensation is based on the closing of the transaction to which the

valuation relates. This comment provides the following example to clarify the meaning of this

prohibition: assume an appraisal management company performs both valuation management

functions and title services, including providing title insurance, for the same covered transaction.

If the appraisal management company employee in charge of valuation management functions

for the transaction is supervised by the title insurance agent in the transaction, whose

compensation depends in whole or in part on whether title insurance is sold at the loan closing,

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

Paragraph 42(d)(4)(ii)

Under § 226.42(d)(4)(ii), in a transaction in which the creditor in a covered transaction

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

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as if the person performs a valuation for a purchase-money mortgage transaction in which the

person is the buyer or seller of the subject property. Thus, this comment explains that, in

general, in any covered transaction in which the creditor had assets of $250 million or less for

either of the past two years, a person preparing a valuation or performing valuation management

functions, or its affiliate, may provide another settlement services for the same transaction, as

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

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

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

the facts and circumstances.

The Board requests comment on the appropriateness of the conditions under which

persons preparing valuations or performing valuations management functions for a transaction in

addition to performing another settlement service for the same transaction, or whose affiliate

performs another settlement service for the same transaction, will be deemed in compliance with

the prohibition on conflicts of interest under § 226.42(d)(1)(i).

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

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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

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

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

Board notes that this definition is consistent with the definition used in the HVCC regarding its

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).

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-

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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

(Jul. 30, 2008) (discussing the adoption of § 226.36(b)). The example is provided for clarity, and

no substantive change is intended.

The interim final rule does not mandate specific due diligence procedures for creditors to

follow when they suspect a violation of § 226.42(c) or (d). In addition, under the interim final

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

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

violation of § 226.42(e), this violation does not itself void the consumer’s loan agreement with

the creditor. Whether the loan agreement is valid is a matter determined by state or other

57

applicable law. The Board notes that applicable federal or state regulations may require creditors

to take certain steps in the event the creditor knows about problems with a valuation. The

foregoing discussion is consistent with the Board’s statements regarding due diligence and the

44568 (Jul. 30, 2008).

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

agents to compensate fee appraisers (appraisers who are not their employees) at a rate that is

“customary and reasonable for appraisal services in the market area of the property being

appraised.” TILA Section 129E(i)(1). The statute states that evidence for reasonable and

customary fees may be established by objective third-party information, such as government

agency fee schedules, academic studies, and independent private sector surveys. “Such fee

studies,” the statute stipulates, “shall not include assignments ordered by known appraisal

management companies.” The statute does not define “appraisal management company.” In

addition, the statute provides that if an appraisal involves a “complex assignment,” the

customary and reasonable fee may reflect “the increased time, difficulty, and scope of the work

required for such an appraisal and include an amount over and above the customary and

reasonable fee for non-complex assignments.” TILA Section 129E(i)(3). The statute does not

define “complex” and “non-complex” assignments.

The Board interprets the statutory language of TILA Section 129E(i) to signify that the

marketplace should be the primary determiner of the value of appraisal services, and hence the

customary and reasonable rate of compensation for fee appraisers. The “customary and

reasonable” compensation provision that Congress adopted as part of TILA is identical to a

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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

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

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

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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

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:

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

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

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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

Board believes that the statute supports a presumption of compliance if the creditor or agent

based the fee paid to a fee appraiser on objective, third-party market information regarding

recent rates for appraisal services that meet the statutory requirements for this information.

Thus, in keeping with the statute, the interim final rule stipulates that any fee schedule, survey, or

study relied on to qualify for this presumption of compliance may not include fees for appraisals

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

(defined in § 226.42(f)(4)(ii)).

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

creditor’s “loan production” and certain other staff from having “substantive communications”

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

62

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.

Unlike other provisions of § 226.42, § 226.42(f) does not replace the statutory terms

“appraisal” and “appraiser” with terms that cover a broader range of methods for valuing

collateral and persons who estimate collateral value. However, the statute clearly states that the

persons who must receive customary and reasonable compensation are “fee appraisers,” and that

the term “fee appraiser” means: (1) state-licensed or state-certified appraisers and, generally, (2)

entities that employ state-licensed or state-certified appraisers to perform appraisals and are

compensated for the performance of appraisals (as opposed to entities that merely manage the

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

the creditor and its agents must compensate a fee appraiser for performing appraisal services at a

rate that is customary and reasonable for comparable appraisal services performed in the

geographic market of the property being appraised. This provision states that, for purposes of

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

Agents of the Creditor

The reference to “agents” in § 226.42(f)(1) is not intended to signify that agents of

creditors are not included in other places where the term “creditor” appears in Regulation Z. To

the contrary, the term “creditor” used throughout Regulation Z includes agents of the creditor, as

determined by applicable state law. The Board believes that Congress was especially concerned

that AMCs, serving as creditors’ agents in managing the appraisal process, be covered by this

provision. Consequently, the regulatory text follows the statutory language, which applies the

requirement to pay fee appraisers customary and reasonable fees to both “a lender and its agent.”

Comment 42(f)(1)-1 clarifies that whether a person is an “agent” of the creditor is

determined by applicable law. This comment also confirms the regulatory exclusion of “fee

appraisers” as defined in § 226.42(f)(4)(i) from the meaning of “agent” of the creditor for

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

pay other fee appraisers customary and reasonable compensation under § 226.42(f).

The Board believes that the express exclusion of “fee appraisers” from the meaning of

“agents” is consistent with Congress’s intention regarding the parties that should be required to

pay fee appraisers customary and reasonable compensation. As discussed in more detail in the

section-by-section of § 226.42(f)(4)(i) (defining “fee appraiser”), TILA Section 129E(i)(2)

defines “fee appraisers” to which customary and reasonable fees should be paid to mean (1)

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individual state-licensed or state-certified appraisers (natural persons), and (2) companies or

firms that employ individual state-licensed or state-certified appraisers and receive compensation

for performing appraisals. In this way, the statute reflects that natural persons as well as

appraisal companies or firms may contract with creditors and AMCs to perform appraisals.

Appraisal companies or firms that contract with AMCs to perform appraisals typically have

state-licensed or state-certified appraisers on staff to perform appraisals. These staff appraisers

meet the definition of “fee appraiser” under the statute; thus, a strict interpretation of the statute

would require appraisal companies to pay their staff appraisers at a “customary and reasonable”

rate. The Boardunderstands, however, that these companies or firms often pay their appraisers

on an hourly basis and provide their employees with office services as well as health insurance

and other employment benefits. Requiring that they pay their staff appraisers “customary and

reasonable” fees for each appraisal assignment could be unduly financially burdensome for these

entities, and ultimately could undermine their viability as an avenue for appraisal services. The

Board believes that this result would harm consumers by reducing competition in the appraisal

services industry.

The Board requests comment on whether the final rule should define “agent” to exclude

fee appraisers or any other parties.

Geographic Market of the Property Being Appraised

As noted, TILA Section 129E(i) requires payment of customary and reasonable

compensation to fee appraisers for appraisal services performed “in the market area of the

property being appraised.” Section 226.42(f)(1), (f)(2), and (f)(3) (discussed below) substitute

the term “geographic market” for the statutory term “market area.” Comment 42(f)(1)-2 clarifies

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

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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

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

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

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

withholding compensation without violating § 226.42(f).

Agreement that Fee is Customary and Reasonable

Comment 42(f)(1)-4 clarifies that a document signed by a fee appraiser indicating that the

appraiser agrees that the fee paid to the appraiser is “customary and reasonable” does not by

itself create a presumption of compliance with § 226.42(f) or otherwise satisfy the requirement to

compensate a fee appraiser at a customary and reasonable rate. In the Board’s view, a fee

appraiser’s agreement that a fee is “customary and reasonable” is insufficient to establish that the

fee meets the statutory “customary and reasonable” standard. Objective factors or information

such as that set forth in § 226.42(f)(2) and (f)(3) (discussed below) generally should support the

creditor’s or agent’s determination of the appropriate amount of compensation to pay a fee

appraiser for a particular appraisal assignment. In theory, the fact that an appraiser is willing to

accept a particular fee for an appraisal assignment may bear on whether the fee is customary,

reasonable, or both. However, an appraiser may be willing to accept a low fee because the

appraiser is new to the industry and wishes to establish herself, or simply because the appraiser

needs any work he can obtain in a slow housing market. In addition, the Board understands that

some AMCs have begun requiring fee appraisers to agree that the fee is “customary and

reasonable” as a condition of obtaining the appraisal assignment. In these situations, the Board

believes that an appraiser’s agreement that a fee is “customary and reasonable” is an unreliable

measure of whether the fee in fact meets the statutory standard.

Volume-Based Discounts

The Board recognizes that competition and efficiencies may both be enhanced when

market participants negotiate volume-based discounts for services. For this reason, comment

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42(f)(1)-5 clarifies that § 226.42(f)(1) does not prohibit a fee appraiser and a creditor (or its

agent) from agreeing to compensation based on transaction volume, so long as the compensation

is customary and reasonable. For example, assume that a fee appraiser typically receives $300

for appraisals from creditors with whom it does business; the fee appraiser, however, agrees to

reduce the fee to $280 for a particular creditor, in exchange for a minimum number of

assignments from the creditor. The Board requests comment on whether further guidance is

needed concerning the permissibility of volume-based discounts under § 226.42(f)(1).

Section 226.42(f)(2) provides that a creditor and its agents will be presumed to comply

with the requirement to compensate a fee appraiser at a customary and reasonable rate if the

creditor or its agent satisfy two conditions.

First, the creditor or its agents must compensate the fee appraiser in an amount that is

reasonably related to recent rates paid for comparable appraisal services performed in the

geographic market of the property being appraised. In determining this amount, the creditor or

its agent must review the factors below and make any adjustments to recent rates paid in the

relevant geographic market necessary to ensure that the amount of compensation is reasonable:

(1) The type of property;

(2) The scope of work;

(3) The time in which the appraisal services are required to be performed;

(4) Fee appraiser qualifications;

(5) Fee appraiser experience and professional record; and

(6) Fee appraiser work quality.

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Second, the creditor and its agents must not engage in any anticompetitive acts in

violation of state or federal law that affect the compensation paid to fee appraisers, including—

(1) Entering into any contracts or engaging in any conspiracies to restrain trade through

methods such as price fixing or market allocation, as prohibited under section 1 of the Sherman

Antitrust Act, 15 U.S.C. 1, or any other relevant antitrust laws; or

(2) Engaging in any acts of monopolization such as restricting any person from entering

the relevant geographic market or causing any person to leave the relevant geographic market, as

prohibited under section 2 of the Sherman Antitrust Act, 15 U.S.C. 2, or any other relevant

antitrust laws.

Comment 42(f)(2)-1 explains that creditor and its agent are presumed to comply with the

requirement to pay a fee appraiser at a customary and reasonable rate under § 226.42(f)(1) if the

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

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

compliance with § 226.42(f)(1), but that, if met, they create a presumption that the creditor or its

agent has complied. The comment further clarifies that a person may rebut this presumption

with evidence that the amount of compensation paid to a fee appraiser was not customary and

reasonable. The creditor would have met the conditions in § 226.42(f)(2), so this evidence must

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

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

the conditions in § 226.42(f)(2), the creditor’s and its agent’s compliance with the requirement to

pay a fee appraiser at a customary and reasonable rate is determined based on all of the facts and

circumstances without a presumption of either compliance or violation.

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Compensation Must be Reasonably Related to Recent Rates

As explained in comment 42(f)(2)(i)-1, the first element of the presumption of

compliance under § 226.42(f)(2) requires creditor or its agent to engage in a two-step process to

determine the appropriate compensation. First, the creditor or its agent must identify recent rates

paid for comparable appraisal services in the relevant geographic market. Second, once recent

rates have been identified, the creditor or its agent must review the factors listed in §

226.42(f)(2)(i)(A)-(F) and make any adjustments to recent rates appropriate to ensure that the

amount of compensation is appropriate for the current transaction.

Comment 42(f)(2)(i)-2 further explains the first step in this process, which requires the

creditor or its agents to identify recent rates for appraisal services in the geographic market of the

property being appraised. Specifically, this comment clarifies that whether rates may reasonably

be considered “recent” depends on the facts and circumstances, but that generally a rate would be

considered “recent” if it had been charged within one year of the creditor’s or its agent’s reliance

on this information to qualify for the presumption of compliance under § 226.42(f)(2). This

comment also states that, for purposes of the presumption of compliance under § 226.42(f)(2), a

creditor or its agent may gather information about recent rates by using a reasonable method that

provides information about rates for appraisal services in the geographic market of the relevant

property. The comment further provides that a creditor or its agent may, but is not required to,

use or perform a fee survey. As indicated by this comment, qualifying for this presumption of

compliance does not require that a creditor use third-party information that excludes appraisals

ordered by AMCs, for example, as required to qualify for the presumption of compliance

available under § 226.42(f)(3), discussed below. The Board requests comment on whether

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additional guidance regarding how creditors may identify recent rates is needed, and solicits

views on what guidance in particular may be helpful.

Comment 42(f)(2)(i)-3 provides guidance on the second step in the process, which

requires the creditor or its agent to review the factors listed in paragraph (f)(2)(i)(A)-(F) to

determine appropriate rate for the current transaction may be determined. For further

clarification, this comment provides an example: if the recent rates identified by the creditor or

its agent were solely for appraisal assignments in which the scope of work required consideration

of two comparable properties, but the current transaction required an appraisal that considered

three comparable properties, the creditor or its agent might reasonably adjust the rate by an

amount that reasonably accounts for the increased scope of work.

The factors that must be considered in this second step for determining the appropriate

rate of fee appraiser compensation are listed in § 226.42(f)(i)(A)-(F) and discussed in turn below.

Appraisal assignments vary and appraisers have different skills and experience, and these

variations and differences may legitimately contribute to determining what level of

compensation for a particular assignment is reasonable. For example, an appraisal requiring an

interior inspection may be more expensive to perform and may warrant greater compensation

than an appraisal requiring only an exterior or “drive-by” inspection. Similarly, an appraisal of a

dwelling in a rural area with several additional outbuildings and significant acreage in real

property might be more expensive to perform and may warrant higher compensation for the

appraiser than an appraisal of a detached single-family dwelling in a suburban area. As

discussed earlier, the statute itself acknowledges these variances, by expressly permitting a

creditor or its agent to pay an appraiser more for a “complex” assignment than for a

comparatively “non-complex” assignment. TILA Section 129E(i)(3).

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At the same time, the Board recognizes that each of these factors may not in all

transactions determine the quality of an appraisal and the value of appraisal services. For

example, an appraiser with 20 years of experience appraising properties may not necessarily

provide a higher quality appraisal than an appraiser with five years of experience. Thus, the

interim final rule states that the rate must be adjusted as “necessary” to ensure a reasonable rate,

and does not specify exact percentages or amounts by which compensation should vary based on

each factor.

§ 226.42(f)(2)(i)(A). Comment 42(f)(2)(i)(A)-1 provides several examples of different property

types that may appropriately bear on the value of appraisal services: detached or attached singlefamily

property, condominium or cooperative unit, or manufactured home. The property type

may contribute to, for example, the difficulty or ease of a particular appraisal assignment, and

thus can affect the value of appraisal services.

§ 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

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

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

reasonably be higher where the scope of work required for the appraisal is more extensive than

the scope of work required for another appraisal performed by the same appraiser.

is the time in which the appraisal services are required to be performed or “turnaround” time.

time is sometimes over-emphasized in determining whether to hire an appraiser and how much to

pay the appraiser, to the detriment of the appraisal’s quality. The Board recognizes that required

turnaround time can be a legitimate factor to consider in determining an appraiser’s rate, but

stresses that appraiser competency and accurate appraisals should be a creditor’s chief concerns,

not how quickly the assignment can be performed. As reflected in the remaining factors

discussed below, and consistent with longstanding federal banking agency supervisory guidance,

the Board expects creditors and their agents to select an appraiser foremost on the basis of

whether the appraiser has the requisite education, expertise and competence to complete the

qualifications that appropriately affect the value of appraisal services include whether the

appraiser is state-licensed or state-certified in accordance with the minimum criteria issued by

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

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

related topics.

Comment 42(f)(2)(i)(D)-2 clarifies that permitting a creditor to consider an appraiser’s

qualifications does not override state or federal laws prohibiting the exclusion of an appraiser

from consideration for an assignment solely by virtue of membership or lack of membership in

that fellow members of a particular appraisal organization may favor one another in selecting an

appraiser for a given assignment, creating an unfair playing field for other appraisers. For this

reason, federal banking agency regulations prohibit excluding a state-licensed or state-certified

appraiser from consideration for an assignment for a federally related transaction solely by virtue

of membership or lack of membership in any particular appraisal organization. The Board

requests comment on whether the final rule should expressly prohibit basing an appraiser’s

organization.

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

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during all that time than when the fee appraiser is more recently licensed and has appraised

properties in that area for only six months.

Comment 42(f)(2)(i)(E)-1 further clarifies that, regarding the appraiser’s professional

record, a creditor or its agent may consider, for example, whether an appraiser has a past record

of suspensions, disqualifications, debarments, or judgments for waste, fraud, abuse or breach of

legal or professional standards. The Board expects that a creditor or its agent would exercise

caution in engaging an appraiser with a blemished professional record, and would carefully

scrutinize the appraiser’s work. A creditor or its agent might reasonably pay less for the

appraiser’s services than for the services of an appraiser with an unblemished record.

§ 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.

No Anticompetitive Acts

As noted above, the Board recognizes that if some creditors or AMCs dominate the

market through illegal anticompetitive acts, “recent rates” identified under § 226.42(f)(2)(i) may

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

qualify for the presumption of compliance afforded under § 226.42(f)(2), a creditor and its agents

must not engage in any anticompetitive acts in violation of state or federal law that affect the

compensation of fee appraisers, including—

(1) Entering into any contracts or engaging in any conspiracies to restrain trade through

methods such as price fixing or market allocation, as prohibited under section 1 of the Sherman

Antitrust Act, 15 U.S.C. 1, or any other relevant antitrust laws (§ 226.42(f)(2)(ii)(A)); or

(2) Engaging in any acts of monopolization such as restricting any person from entering

the relevant geographic market or causing any person to leave the relevant geographic market, as

prohibited under section 2 of the Sherman Antitrust Act, 15 U.S.C. 2, or any other relevant

antitrust laws (§ 226.42(f)(2)(ii)(B)).

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

would not qualify for § 226.42(f)(2)’s presumption of compliance if it engaged in any acts to

restrain trade such as entering into a price fixing or market allocation agreement that affect the

compensation of fee appraisers. For example, if appraisal management company A and appraisal

management company B agreed to compensate fee appraisers at no more than a specific rate or

range of rates, neither appraisal management company would qualify for the presumption of

compliance. Likewise, if appraisal management company A and appraisal management

company B agreed that appraisal management company A would limit its business to a certain

portion of the relevant geographic market and appraisal management company B would limit its

business to a different portion of the relevant geographic market, and as a result each appraisal

management company unilaterally set the fees paid to fee appraisers in their respective portions

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of the market, neither appraisal management company would qualify for the presumption of

compliance under paragraph (f)(2).

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

would not qualify for § 226.42(f)(2)’s presumption of compliance if it engaged in any act of

monopolization such as restricting entry into the relevant geographic market or causing any

person to leave the relevant geographic market, resulting in anticompetitive effects that affect the

compensation paid to fee appraisers. For example, if only one appraisal management company

exists or is predominant in a particular market area, that appraisal management company might

not qualify for the presumption of compliance if it entered into exclusivity agreements with all

creditors in the market or all fee appraisers in the market, such that other appraisal management

companies had to leave or could not enter the market. Whether this behavior would be

considered an anticompetitive act that affects the compensation paid to fee appraisers depends on

all of the facts and circumstances, including applicable law.

The Board requests comment on whether additional guidance is needed regarding

anticompetitive acts that would disqualify a creditor or its agent from the presumption of

compliance under § 226.42(f)(2).

Rates Based on Objective Third-Party Information

Section 226.42(f)(3) provides creditors and their agents with an alternative means to

qualify for a presumption of compliance with the requirement to pay fee appraisers at a

customary and reasonable rate under § 226.42(f)(1). Specifically, a creditor and its agents are

presumed to comply with the requirement if the creditor or its agents determine the amount of

compensation paid to the fee appraiser by relying on rates in the geographic market of the

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property being appraised that satisfies three conditions. First, the information must be

established by objective third-party information, including fee schedules, studies, and surveys

prepared by independent third parties such as government agencies, academic institutions, and

private research firms (§ 226.42(f)(3)(i)). Second, it must be based on recent rates paid to a

representative sample of providers of appraisal services in the geographic market of the property

being appraised or the fee schedules of those providers (§ 226.42(f)(3)(ii)). Third, in the case of

fee schedules, studies, and surveys, such fee schedules, studies and surveys or information

derived from them must exclude compensation paid to fee appraisers for appraisals ordered by an

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

Regarding this third condition, the Board recognizes that the express statutory language

companies.” TILA Section 129E(i)(1)(emphasis added). However, the Board does not see a

meaningful distinction between, for example, a fee “study” and a fee “survey,” both of which

require at least some evaluation of gathered data. The Board also is not aware of a rationale

consistent with the statute that would treat fee studies differently than fee surveys or fee

schedules. The Board requests comment, however, on whether studies and surveys should be

treated differently for the purposes of this rule.

Comment 42(f)(3)-1 explains that a creditor and its agent are presumed to comply with

§ 226.42(f)(1) if the creditor or its agent determine the compensation paid to a fee appraiser

based on information about rates that satisfies the three conditions discussed above. This

comment clarifies that reliance on information satisfying these conditions is not a requirement

for compliance with § 226.42(f)(1), but creates a presumption that the creditor or its agent has

complied. The comment further clarifies that a person may rebut this presumption with evidence

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that the rate of compensation paid to a fee appraiser by the creditor or its agent is not customary

and reasonable. The creditor or its agent would already have satisfied the presumption of

compliance by relying on information meeting the three conditions; therefore, evidence rebutting

the presumption would have to be based on facts or information other than third-party

information satisfying the presumption of compliance conditions of § 226.42(f)(3). This

comment also explains that, if a creditor or its agent does not rely on information that meets the

conditions in § 226.42(f)(3), the creditor’s and its agent’s compliance with the requirement to

compensate fee appraisers at a customary and reasonable rate is determined based on all of the

facts and circumstances without a presumption of either compliance or violation.

Comment 42(f)(3)-2 clarifies that the term “geographic market” is explained in comment

that whether rates may reasonably be considered “recent” under § 226.42(f)(3) depends on the

facts and circumstances. Generally, however, “recent” rates would include rates charged within

one year of the creditor’s or its agent’s reliance on this information to qualify for the

presumption of compliance under § 226.42(f)(3).

In discussions with Board staff, concerned parties argued that existing appraisal fee

schedules, surveys and studies have various flaws and thus may not be reliable indicators of

customary and reasonable rates for appraisals in all home-secured consumer credit transactions.

In preparing this interim final rule, the Board did not identify appraisal fee schedules, surveys or

studies that would be appropriate to designate as a “safe harbor” for creditors and their agents to

comply with § 226.42(f)(1). The Board solicits comment on whether and on what basis the final

rule should give creditors or their agents a safe harbor for relying on a fee study or similar source

of compiled appraisal fee information. The Board also requests comment on what additional

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guidance may be needed regarding third-party rate information on which a creditor and its agents

may appropriately rely to qualify for the presumption of compliance.

Section 226.24(f)(4) defines three terms for purposes of § 226.42(f): “fee appraiser,”

“appraisal services,” and “appraisal management company.”

Fee Appraiser

First, the term “fee appraiser” is defined to mean—

(1) a natural person who is a state-licensed or state-certified appraiser and receives a fee

for performing an appraisal, but who is not an employee of the person engaging the appraiser

(§ 226.42(f)(4)(i)(A)); or

(2) an organization that, in the ordinary course of business, employs state-licensed or

state-certified appraisers to perform appraisals, receives a fee for performing appraisals, and is

(§ 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

that a fee appraiser includes a natural person who is a state-licensed or state-certified appraiser

hired on a contract or other non-permanent basis to perform appraisal services.

Comment 42(f)(4)(i)-1 clarifies that the term “organization” in § 226.42(f)(4)(i)(B)

includes a corporation, partnership, proprietorship, association, cooperative, or other business

entity and does not include a natural person. Section 226.42(f)(4)(i)(B) also cross-references

section 1124 of FIRREA. The Dodd-Frank Act added Section 1124 to FIRREA. Section 1124

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requires the federal banking agencies and the FHFA to issue rules that require AMCs (as newly

defined in FIRREA Section 1121) to register with state appraiser certifying and licensing

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

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

any person authorized to do the following actions on behalf of the creditor—(1) recruit, select,

and retain appraisers; (2) contract with appraisers to perform appraisal assignments; (3) manage

the process of having an appraisal performed, including providing administrative duties such as

receiving appraisal orders and appraisal reports, submitting completed appraisal reports to

creditors and underwriters, collecting fees from creditors and underwriters for services provided,

and compensating appraisers for services performed; or (4) review and verify the work of

appraisers. This definition is based on the new definition of “appraisal management company”

in the Dodd-Frank Act’s amendments to FIRREA, for purposes of requiring AMCs to register

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.

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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

Section 226.42(g)(1) requires reporting of a failure to comply with USPAP or of an

ethical or professional requirement under applicable state or federal statute or regulation only if

the failure to comply is material, that is, likely to significantly affect the value assigned to the

consumer’s principal dwelling. Further, § 226.42(g) clarifies that reporting of a failure to

comply with an ethical or professional requirement is required only if the requirement is codified

in an applicable state or federal statute or regulation (ethical or professional requirement). Other

statutes or regulations may contain broader reporting requirements, however.

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The Board interprets TILA Section 129E(e) to apply only to a material failure to comply

with USPAP or a codified standard of ethical or professional conduct. The Board believes that

this interpretation is consistent with the Act’s purpose of ensuring that values assigned to a

consumer’s principal dwelling are assigned free of any coercion or inappropriate influence, so

that creditors base their underwriting decisions on appraisals that do not misstate the value of the

dwelling. Thus, the interim final rule mandates reporting failures to comply that would affect the

value assigned to the dwelling. The Board solicits comment on whether reporting should be

required only if a material failure to comply causes the value assigned to the consumer’s

principal dwelling to differ from the value that would have been assigned had the material failure

to comply not occurred by more than a certain tolerance, for example, by 10 percent or more.

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 a material failure to comply: (1) materially mischaracterizing the value of the

consumer’s principal dwelling, in violation of § 226.42(c)(2); (2) performing an appraisal in a

grossly negligent manner, in violation of a USPAP rule; and (3) accepting an appraisal

assignment on the condition that the appraiser will assign a value equal to or greater than the

purchase price to the consumer’s principal dwelling, in violation of a USPAP rule. Comment

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

material within the meaning of § 226.42(g)(1). For example, an appraiser’s disclosure of

confidential information, in violation of applicable state law, or an appraiser’s failure to maintain

errors and omissions insurance, in violation of applicable state law, would not be material for

purposes of § 226.42(g)(1).

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

persons” required to report an appraiser’s material failure to with USPAP or ethical or

professional requirements in connection with a covered transaction include creditors, mortgage

brokers, appraisers, appraisal management companies, real estate agents, and other persons that

provide “settlement services” as defined under RESPA and regulations implementing RESPA.

Comment 42(g)(1)-5 clarifies that the following persons are not “covered persons”

required to report an appraiser’s material failure to comply with USPAP or ethical or

professional requirements: (1) the consumer who obtains credit through a covered transaction;

(2) a person secondarily liable for a covered transaction, such as a guarantor; and (3) a person

that resides in or will reside in the consumer’s principal dwelling but will not be liable on the

covered transaction, such as a non-obligor spouse. Comments 42(g)(1)-4 and -5 are consistent

with commentary on the definition of “covered person,” discussed in detail above in the sectionby-

section analysis of § 226.42(b)(2).

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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).

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.

This interim final rule is effective on [Insert date that is 60 days after the date of

publication in the Federal Register] and compliance with it is mandatory for all applications

received by a creditor on or after April 1, 2011. The Dodd-Frank Act does not provide effective

or mandatory compliance dates for rules implementing TILA Section 129E. Appraisers have

generally urged the Board to act quickly to put the interim rule in place, noting that the Dodd-

Frank Act effectively sunsets the HVCC when the Board’s interim final rule is promulgated.

Some industry representatives, on the other hand, have stated that they will need sufficient lead

time to implement the interim final rule.

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Under TILA Section 105(d), certain of the Board’s disclosure requirements are to have an

effective date of October 1 that follows the issuance by at least six months. 15 U.S.C. 1604(d).

However, the Board may at its discretion lengthen the implementation period for creditors to

adjust their forms to accommodate new requirements, or shorten the period where the Board

finds that such action is necessary to prevent unfair or deceptive disclosure practices. There is

no similar effective date provision for non-disclosure requirements. The Riegle Community

Development and Regulatory Improvement Act of 1994, however, requires that agency

regulations which impose additional reporting, disclosure and other requirements on insured

depository institutions take effect on the first day of a calendar quarter following publication in

final form. 12 U.S.C. 4802(b).

The Board believes a mandatory compliance date of April 1, 2011 will provide creditors

and others subject to the rule sufficient time to take the steps necessary to comply. Although

some provisions in the interim final rule are similar to existing § 226.36(b), the interim final rule

contains new requirements, such as the reasonable and customary fee requirement. In addition,

the rule covers HELOCs, whereas existing § 226.36(b) applies only to closed-end loans secured

by the consumer’s principal dwelling. The rule’s new requirements will likely require creditors

and AMCs to change their systems, adjust policies, and train staff. The Board believes that five

months should be sufficient for these purposes. Accordingly, the interim final rule is mandatory

for consumer credit transactions secured by the consumer’s principal dwelling in which an

application is received by the creditor on or after April 1, 2011.

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

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

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

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Section 226.36(b) remains in effect until compliance with this interim final rule becomes

mandatory, and it applies to credit applications received before April 1, 2011, even if the credit is

not extended until after that date. Thus, if a creditor receives an application for a loan that will

be secured by the consumer’s principal dwelling on March 20, 2011, and the loan is

consummated on May 1, 2011, § 226.36(b) applies to that transaction. The Board notes,

however, that covered persons may wish to comply with this interim final rule before April 1,

2011, and may do so. Compliance with § 226.42 constitutes compliance with § 226.36(b).

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

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

complying with § 226.36(b).

The RFA generally requires an agency to assess the impact a rule is expected to have on small

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.

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

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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.

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

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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.

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

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.

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from Reports of Condition and Income (call reports) the approximate numbers of small

depository institutions that will be subject to the final rule. Based on March 2010 call report

data, approximately 8,845 small institutions would be subject to the final rule. Approximately

15,658 depository institutions in the United States filed call report data, approximately 11,148 of

which had total domestic assets of $175 million or less and thus were considered small entities

for purposes of the Regulatory Flexibility Act. Of 3,898 banks, 523 thrifts and 6,727 credit

unions that filed call report data and were considered small entities, 3,776 banks, 496 thrifts, and

4,573 credit unions, totaling 8,845 institutions, extended mortgage credit. For purposes of this

analysis, thrifts include savings banks, savings and loan entities, co-operative banks and

industrial banks.

Further, 1,507 non-depository institutions (independent mortgage companies, subsidiaries

of a depository institution, or affiliates of a bank holding company) filed HMDA reports in 2009

for 2008 lending activities. Based on the small volume of lending activity reported by these

institutions, most are likely to be small entities.

Similarly, the Board cannot identify with certainty the number of mortgage brokers,

appraiser, realtors, appraisal management companies, or title insurance companies subject to the

rule that also qualify as small entities. The Board can, however, attempt to estimate approximate

total numbers of each group.

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

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indicates that there were only 17,041 ‘‘mortgage and nonmortgage loan brokers’’ in the United

there are approximately 24,299 “mortgage and nonmortgage loan brokers establishments” with

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.

membership report, there are at least 1,088,919 Realtors in the United States that would be

data, however, indicate approximately 108,651 “offices of real estate agents and brokers” with

about the number of appraisal management companies.

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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

Economic Census indicate that there were approximately 12,160 title, abstract, and settlement

Census indicate that there were approximately 9,690 surveying and mapping establishments

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,

comprehensive source of data specifically regarding the number of establishments providing

escrow services.

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2007 Economic Census indicate that approximately 12,523 establishments, employing 96,140

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

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

whether some settlement service providers should be exempt from some or all of the interim

final rule’s requirements.

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the 2008 Appraisal Independence Rules, which are essentially codified in section 1472 of the

Dodd-Frank Act. The interim final rule, consistent with the Dodd-Frank Act, expands the parties

covered by those provisions to persons who provide settlement services in connection with a

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.

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

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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

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

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.

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In accordance with the Paperwork Reduction Act (PRA) of 1995 (44 U.S.C. 3506; 5 CFR

Part 1320 Appendix A.1), the Board reviewed the interim final rule under the authority delegated

to the Board by the Office of Management and Budget (OMB). The collection of information

that is required by this final rule is found in Subpart E—Special Rules for Certain Home

Mortgage Transactions - 12 CFR 226.42(g). The Board may not conduct or sponsor, and an

organization is not required to respond to, this information collection unless the information

collection displays a currently valid OMB control number. The OMB control number is 7100-

0199.

This information collection is required to provide benefits for consumers and is

of confidentiality arises. The respondents/recordkeepers for this interim final rulemaking are

creditors, appraisal management companies, appraisers, mortgage brokers, realtors, title insurers

and other firms that provide settlement services (covered person(s)).

TILA and Regulation Z are intended to ensure effective disclosure of the costs and terms

of credit to consumers. For closed-end loans, such as mortgage and installment loans, cost

disclosures are required to be provided prior to consummation. Special disclosures are required

in connection with certain products, such as reverse mortgages, certain variable-rate loans, and

certain mortgages with rates and fees above specified thresholds. To ease the burden and cost of

complying with Regulation Z (particularly for small entities), the Board provides model forms,

which are appended to the regulation. TILA and Regulation Z also contain rules concerning

credit advertising. Creditors are required to retain evidence of compliance with Regulation Z for

24 months (12 CFR 226.25), but Regulation Z does not specify the types of records that must be

retained.

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Under the PRA, the Board accounts for the paperwork burden associated with Regulation

Z for the state member banks and other entities supervised by the Board that engage in activities

covered by Regulation Z and, therefore, are respondents under the PRA. Appendix I of

Regulation Z defines the institutions supervised by the Federal Reserve System as: state member

banks, branches and agencies of foreign banks (other than federal branches, federal agencies, and

insured state branches of foreign banks), commercial lending companies owned or controlled by

foreign banks, and organizations operating under section 25 or 25A of the Federal Reserve Act.

Other federal agencies account for the paperwork burden imposed on the entities for which they

have administrative enforcement authority under TILA.

The current total annual burden to comply with the provisions of Regulation Z is

estimated to be 1,497,362 hours for the 1,138 institutions supervised by the Federal Reserve that

are deemed to be respondents for the purposes of the PRA.

As discussed in the preamble, the Board is adopting a rule that requires reporting of a

violation of Uniform Standards of Professional Appraisal Practice (USPAP) or of a standard of

ethical or professional conduct under applicable state or federal statute or regulation only if the

violation is material, that is, if the violation is likely to affect the value assigned to a covered

property. The new reporting requirement will impose a one-time increase in the total annual

burden under Regulation Z for respondents supervised by the Federal Reserve involved in the

extension of consumer credit that is secured by the principal dwelling of the consumer. The

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

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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

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.

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The final rule will impose a one-time increase in the estimated annual burden for the estimated

6,543 institutions thought to engage in mortgage transactions by 261,720 hours. The total annual

burden is estimated to be 22,075,165 hours. The above estimates represent an average across all

respondents and reflect variations between institutions based on their size, complexity, and

practices.

The Board has a continuing interest in the public’s opinions of its collections of

information. At any time, comments regarding the burden estimate or any other aspect of this

collection of information, including suggestions for enhancing the quality of information

collected and ways for reducing the burden on respondent. Comments on the collection of

information may be sent to: Secretary, Board of Governors of the Federal Reserve System, 20th

and C Streets, NW, Washington, DC 20551; and to the Office of Management and Budget,

Paperwork Reduction Project (7100-0199), Washington, DC 20503.

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

For the reasons set forth in the preamble, the Board amends Regulation Z, 12 CFR part

226, as set forth below:

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

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

1639e).

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

paragraph (b).

consumer’s principal dwelling.

(1) “Covered person” means a creditor with respect to a covered transaction or a person

that provides “settlement services,” as defined in 12 U.S.C. 2602(3) and implementing

regulations, in connection with a covered transaction.

(2) “Covered transaction” means an extension of consumer credit that is or will be

secured by the consumer’s principal dwelling, as defined in § 226.2(a)(19).

(3) “Valuation” means an estimate of the value of the consumer’s principal dwelling in

written or electronic form, other than one produced solely by an automated model or system.

(4) “Valuation management functions” means:

(i) Recruiting, selecting, or retaining a person to prepare a valuation;

(ii) Contracting with or employing a person to prepare a valuation;

(iii) Managing or overseeing the process of preparing a valuation, including by providing

administrative services such as receiving orders for and receiving a valuation, submitting a

completed valuation to creditors and underwriters, collecting fees from creditors and

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underwriters for services provided in connection with a valuation, and compensating a person

that prepares valuations; or

(iv) Reviewing or verifying the work of a person that prepares valuations.

covered transaction, no covered person shall or shall attempt to directly or indirectly cause the

value assigned to the consumer’s principal dwelling to be based on any factor other than the

independent judgment of a person that prepares valuations, through coercion, extortion,

inducement, bribery, or intimidation of, compensation or instruction to, or collusion with a

person that prepares valuations or performs valuation management functions.

(i) Examples of actions that violate paragraph (c)(1) include:

(A) Seeking to influence a person that prepares a valuation to report a minimum or

maximum value for the consumer’s principal dwelling;

(B) Withholding or threatening to withhold timely payment to a person that prepares a

valuation or performs valuation management functions because the person does not value the

consumer’s principal dwelling at or above a certain amount;

(C) Implying to a person that prepares valuations that current or future retention of the

person depends on the amount at which the person estimates the value of the consumer’s

principal dwelling;

(D) Excluding a person that prepares a valuation from consideration for future

engagement because the person reports a value for the consumer’s principal dwelling that does

not meet or exceed a predetermined threshold; and

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

consummation of the covered transaction.

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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

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.

covered person shall induce a person to violate paragraph (c)(2)(i) or (ii) of this section.

include:

(i) Asking a person that prepares a valuation to consider additional, appropriate property

information, including information about comparable properties, to make or support a valuation;

(ii) Requesting that a person that prepares a valuation provide further detail,

substantiation, or explanation for the person’s conclusion about the value of the consumer’s

principal dwelling;

(iii) Asking a person that prepares a valuation to correct errors in the valuation;

(iv) Obtaining multiple valuations for the consumer’s principal dwelling to select the

most reliable valuation;

(v) Withholding compensation due to breach of contract or substandard performance of

services; and

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(vi) Taking action permitted or required by applicable federal or state statute, regulation,

or agency guidance.

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.

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.

subject to paragraph (d)(1)(i) of this section who is employed by or affiliated with the creditor

does not have a conflict of interest in violation of paragraph (d)(1)(i) of this section based on the

person’s employment or affiliate relationship with the creditor if:

(i) The compensation of the person preparing a valuation or performing valuation

management functions is not based on the value arrived at in any valuation;

(ii) The person preparing a valuation or performing valuation management functions

reports to a person who is not part of the creditor’s loan production function, as defined in

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paragraph (d)(5)(i) of this section, and whose compensation is not based on the closing of the

transaction to which the valuation relates; and

(iii) No employee, officer or director in the creditor’s loan production function, as

defined in paragraph (d)(5)(i) of this section, is directly or indirectly involved in selecting,

retaining, recommending or influencing the selection of the person to prepare a valuation or

perform valuation management functions, or to be included in or excluded from a list of

approved persons who prepare valuations or perform valuation management functions.

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.

prepares a valuation or performs valuation management functions in addition to performing

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

service for the transaction, does not have a conflict of interest in violation of paragraph (d)(1)(i)

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of this section as a result of the person or the person’s affiliate performinganother settlement

service for the transaction if:

past two calendar years and the conditions in paragraph (d)(2)(i)-(iii) are met; or

past two calendar years and the conditions in paragraph (d)(3)(i)-(ii) are met.

officer, director, department, division, or other unit of a creditor with responsibility for

generating covered transactions, approving covered transactions, or both.

225.2(a).

creditor that knows, at or before consummation, of a violation of paragraph (c) or (d) of this

section in connection with a valuation shall not extend credit based on the valuation, unless the

creditor documents that it has acted with reasonable diligence to determine that the valuation

does not materially misstate or misrepresent the value of the consumer’s principal dwelling. For

purposes of this paragraph (e), a valuation materially misstates or misrepresents the value of the

consumer’s principal dwelling if the valuation contains a misstatement or misrepresentation that

affects the credit decision or the terms on which credit is extended.

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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.

with paragraph (f)(1) if—

(i) The creditor or its agents compensate the fee appraiser in an amount that is reasonably

related to recent rates paid for comparable appraisal services performed in the geographic market

of the property being appraised. In determining this amount, a creditor shall review the factors

below and make any adjustments to recent rates paid in the relevant geographic market necessary

to ensure that the amount of compensation is reasonable:

(A) The type of property,

(B) The scope of work,

(C) The time in which the appraisal services are required to be performed,

(D) Fee appraiser qualifications,

(E) Fee appraiser experience and professional record, and

(F) Fee appraiser work quality; and

(ii) The creditor and its agents do not engage in any anticompetitive acts in violation of

state or federal law that affect the compensation paid to fee appraisers, including—

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(A) Entering into any contracts or engaging in any conspiracies to restrain trade through

methods such as price fixing or market allocation, as prohibited under section 1 of the Sherman

Antitrust Act, 15 U.S.C. 1, or any other relevant antitrust laws; or

(B) Engaging in any acts of monopolization such as restricting any person from entering

the relevant geographic market or causing any person to leave the relevant geographic market, as

prohibited under section 2 of the Sherman Antitrust Act, 15 U.S.C. 2, or any other relevant

antitrust laws.

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.

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(A) a natural person who is a state-licensed or state-certified appraiser and receives a fee

for performing an appraisal, but who is not an employee of the person engaging the appraiser; or

(B) an organization that, in the ordinary course of business, employs state-licensed or

state-certified appraisers to perform appraisals, receives a fee for performing appraisals, and is

not subject to the requirements of section 1124 of the Financial Institutions Reform, Recovery,

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.

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.

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

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Practice or ethical or professional requirements for appraisers under applicable state or federal

statutes or regulations shall refer the matter to the appropriate state agency if the failure to

comply is material. For purposes of this paragraph (g)(1), a failure to comply is material if it is

likely to significantly affect the value assigned to the consumer’s principal dwelling.

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.

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:

added.