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Regulatory requirements for appraisals.

Title XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) requires federal banking regulatory authorities and their regulated institutions to make use of appraisals that meet certain standards and are performed by state licensed or certified appraisers. To accomplish this goal, the Appraisal Subcommittee of the Federal Financial Institutions Regulatory Council was established to administer state licensing and certification programs, and states and federalfinancial regulators were charged with establishing various guidelines and rules pertaining to appraisals. These requirements as well as key issues such as the deminimis threshold are discussed in this article.

In a single, comprehensive measure on August 9, 1989, Congress instituted new legislation to protect federal financial and public policy interests in certain federally related real estate transactions. Specifically, Title XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) requires that all real property appraisals used in transactions conducted by the financial institutions and their regulatory agencies, including the Federal Deposit Insurance Corporation (FDIC), be performed in writing, in accordance with uniform standards, and by individuals whose competency has been demonstrated and whose professional conduct is subject to effective supervision.[1]

Among other functions, the FDIC insures deposits of insured depository institutions, supervises state nonmember banks, and liquidates the assets of failed depository institutions, subject to the benefits and protections of Title XI. The requirements and standards of Title XI are also extended to real estate-related transactions of the Resolution Trust Corporation (RTC). Created under a separate title of FIRREA, the RTC has been assigned the monumental task of resolving failing thrift institutions and disposing of their assets. In doing so the RTC is specifically directed to make use of appraisals that meet the criteria and standards established under Title XI.

Failed bank assets are liquidated primarily by the FDIC's Division of Liquidation (FDIC/DOL). The Washington office of the FDIC/DOL is the division's headquarters and establishes national policies and procedures for managing and liquidating failed bank assets. Liquidation operations are managed by four regional offices that implement the central office's policies and establish consistent regional policies and procedures. Most FDIC day-to-day operations that involve the resolution of failed financial institutions and the liquidation of their assets are conducted at the field office level.

The goal of the FDIC/DOL is to liquidate and sell failed bank assets, including owned real estate and personal property acquired by the FDIC from its failed banks as well as properties that secure loans purchased or acquired by the FDIC when appointed as receiver or liquidator of the failed banks. Funds recovered from the liquidation activities of the FDIC/DOL are used to pay the creditors and shareholders of the failed banks and to reimburse the Bank Insurance Fund (BIF) administered by the FDIC as necessary for any outlay or advances from the BIF on account of insured deposits.

The value of an FDIC-owned property, or a property serving as collateral, is a key factor in the FDIC's strategy for managing and liquidating an asset. Value considerations affect almost every transaction or credit-related decision made by the FDIC/DOL.

When conducting liquidation activities, the FDIC/DOL seeks to achieve the greatest return on its assets; however, it must also seek to minimize the impact of asset disposition on local real estate markets. Similarly, the RTC must be sensitive to the impact that its liquidation activities may have on already depressed real estate markets.

Appraisals of poor quality can cause improper marketing of an FDIC/DOL property. If appraised too low, for example, a disposition at less than fair market value will lessen the FDIC's recovery as well as exacerbating an already depressed market. If appraised too high, a property may remain in the FDIC/DOL's asset pool too long, causing substantial carrying costs as well as lost investment opportunity. Title XI's protections are designed to maximize liquidation values while avoiding undue depression of real estate markets.

As liquidator or receiver of failed banks, the FDIC/DOL is a frequent creditor in bankruptcy proceedings pending throughout the United States. The Dallas region of the FDIC/DOL, for example, which includes Texas and Oklahoma, is involved in over 1,993 active bankruptcy cases. Twenty-five in-house bankruptcy attorneys are employed in the region's six regional and filed offices. The Houston Consolidated Office of the FDIC/DOL, with one of the largest portfolios of assets by value in the Dallas region, is responsible for 448 active bankruptcy cases, which are handled by 5 in-house attorneys.

In over 75% of the FDIC/DOL's bankruptcy cases, at least one asset on which a claim is asserted is a secured claim. Valuation thus plays an important role in the FDIC's strategy.


The purpose of this article is to provide a brief overview of Title XI of FIRREA, including its scheme for regulating and supervising, through state-administered appraiser licensing and certification programs, the quality of the appraisal process as it relates to real estate-related transactions of regulated institutions and their regulatory agencies, including the FDIC/DOL. The requirements of Title XI, including the system of state law licensing and certification of appraisers as well as the role of the Appraisal Subcommittee of the Federal Financial Institutions Examination Council (FFIEC) in the implementation of Title XI, are explained. Next, the article illustrates the regulation of a financial institution through Title XI by describing the appraisal regulations of the FDIC. The status of Title XI's state licensing and certification programs as well as issues that have arisen in implementation of state programs are discussed.

The function of both real estate and personal property appraisals in the day-to-day activities of the FDIC/DOL as well as the policies and guidelines followed by the FDIC in its appraisal-related activities are explained here. The important role of review appraisers in the appraisal procedures of the FDIC/DOL is then discussed, and a short explanation of the FDIC/DOL's uniform instructions to appraisers concludes the article.


Brief history of Title XI

As mandated by Title XI of FIRREA, the federal financial and public policy interests of regulatory agencies and the RTC in real estate-related transactions are protected by requiring that real estate appraisals used in such transactions are 1) performed in writing; 2) in accordance with uniform standards; and 3) performed by individuals with demonstrated competency and whose professional conduct is subject to effective supervision.[2]

Title XI was passed in response to concerns expressed during a series of Congressional hearings conducted in the mid-1980s on the failing savings and loan industry. Witnesses identified poor quality and fraudulent appraisals as one of several factors contributing to the thrift crisis. These findings were set forth in a 1986 Report of the House Government Operations Committee's Subcommittee on Commerce, Consumer & Monetary Affairs (House Subcommittee on Commerce). The report noted that overstated collateral values resulting from inaccurate appraisals had contributed to the insolvency of financial institutions and caused substantial losses to federal agencies, mortgage lenders, private mortgage insurers, and investors in mortgage -backed securities. Blame for the savings and loan crisis was also assigned to the lenders and financial institutions who were found to have pressured appraisers into overvaluing collateral. In addition, the federal government was blamed for having tolerated among its supervised institutions uneven and ineffective appraisal policies and practices.

Responding to these concerns, in 1987 the federal banking regulators, including the FDIC, thoroughly reviewed their policies concerning the supervision of real estate lending procedures. From this examination emerged a new set of guidelines on real estate policies and review procedures for regulated financial institutions. While the guidelines were addressed primarily to open regulated institutions, they were also adopted by the FDIC/DOL for use in its liquidation activities.

As did federal banking regulators, the appraisal industry took measures to upgrade its real estate practices. In early 1988, several major appraisal societies formed a nonprofit entity known as The Appraisal Foundation to establish commonly accepted standards for real estate appraials and uniform standards of professional appraisal practice.

Federal regulation of the appraisal process gained momentum when in 1987 the House Subcommittee on Commerce drafted legislation to address appraisal standards. Proposed HR 3675 would have required the creation of a new federal agency to draft and administer appraisal standards. In an industry then basically unregulated, proposed HR 3675 would have established objective state standards to ensure appraisal quality and to supplement the self-policing efforts of the appraisal industry.[3]

In March 1988, representatives of the financial industry opposed HR 3675 on the grounds that the creation of a new federal agency would increase costs and that the drafting of appraisal standards was better left to the private sector. Thus, while generally agreeing with the goals of the proposed legislation, the financial industry opposed the specific means HR 3675 provided for achieving those goals and suggested an alternative. The alternative was that an existing agency, the FFIEC, be used to achieve the desired uniformity in appropriate regulations. Further, it was suggested that the responsibility for establishing appraisal standards be given to the appraisal industry and that The Appraisal Foundation be designated to fulfill such purpose.

In time, The Appraisal Foundation moved forward with its own agenda, and completed the Uniform Standards of Professional Appraisal Practice (USPAP). In addition, The Appraisal Foundation developed requirements for appraisal certification and licensing as well as a proposed legislative model for state-administered appraiser certification programs.

It is worth noting that a considerable portion of HR 3675's provisions, with modifications substantially responsive to the concerns of its critics, was eventually incorporated into the FIRREA legislation and adopted as Title XI.

Overview of Title XI provisions

Title XI established the Appraisal Subcommittee of the FFIEC, empowering it to administer state licensing and certification programs for real estate appraisals nationwide. States are held responsible for developing certification criteria for their real estate appraisers, while financial institution regulatory agencies are to adopt rules and regulations that identify which real estate-related transactions require review by an appraiser, to set minimum standards for appraisals, and to distinguish those appraisals to be conducted by state certified appraisers from those that can be conducted by state licensed appraisers.


The scope of Title XI is described in a series of defined terms. Thus, for example, a "federally related transaction" is defined as any real estate-related financial transaction that 1) involves a federal financial institutions regulatory agency or the RTC; and 2) requires the services of an appraiser.[4] The term "federal financial institutions regulatory agency" refers to the five primary financial institutions' regulatory agencies, including the FDIC, the Board of Governors of the Federal Reserve System (Feb), the Office of the

Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS), and the National Credit Union (NCU).[5]

A "real estate--related financial transaction" is broadly defined to include any transaction involving 1) the sale, lease, purchase, investment in, or exchange of real property, including interests in property, or any financing involved; 2) the refinancing of real property or interests in real property; and 3) the use of real property or interests in property as security for a loan or investment, including mortgage-backed securities.[6] As applied to the FDIC/DOL, the term real estate-related financial transaction the FDIC/DOL may undertake that involves an owned property or a property backing a loan. For assets in bankruptcy, such transactions include those involving a debtor's proposed treatment of an FDIC/DOL-secured claim in the case.

Regulatory agencies' and the RTC's appraisal regulations

Title XI mandates all regulatory agencies and the RTC to identify which real estate-related financial transactions will require an appraisal to meet the standards of Title XI. The regulations must also specify which transactions that require an appraisal must use the services of a state certified appraiser and which may be performed by a state licensed appraiser. Certified appraisers must meet qualifications of a higher standard than licensed appraisers.[7]

The regulations of regulatory agencies and the RTC require, at a minimum, that all real estate appraisals be in written form. A "written appraisal" is defined as a written statement independently and impartially prepared by a licensed or certified appraiser that contains a value opinion of an adequately described property as of a specified date, which is supported by relevant market information.[8]

Appraisal regulations must include standards for appraisals that are no less stringent than the generally accepted appraisal standards (GAAS) established by the Appraisal Standards Board of The Appraisal Foundation. Each regulatory agency may set standards at more stringent levels an GAAS if higher standards are determined to be consistent with its statutory responsibilities.[9]

As previously noted, regulatory agencies and the RTC must differentiate between the types of federally related transactions that require the services of state certified appraisers and those that require state licensed appraisers. Regulatory agencies must consider whether their transactions are, individually or collectively, of sufficient financial or public policy importance that a state certified appraiser will be required.[10]

Regulatory agencies are guided by certain statutory limitations. For example, all regulatory agencies must require an appraiser to be state certified if a federally related transaction has a value of $1,000,000 or more. On the other hand, a state licensed appraiser may be employed if a transaction involves a one- to four-family residential property, unless the size or complexity of the property dictates otherwise.[11]

Generally, regulatory agencies and the RTC may accept, as indications of an appraiser's qualifications, the certification and license status granted by the appropriate state agency. However, regulatory agencies and the RTC may impose additional certification criteria as they consider necessary or appropriate to carry out their statutory responsibilities.[12]

The appraisal subcommittee

To implement the Title XI appraisal regulations, Congress provided for the designation of an appraisal subcommittee (Appraisal Subcommittee) to be formed from the FFIEC. Composed of individuals who represent the regulatory agencies belonging to the FFIEC, the Appraisal Subcommittee is empowered to

* Monitor state certification and licensing requirements for appraisers;

* Review the appraisal regulations established by regulatory agencies used in their federally related transactions; and

* Review the practices, procedures, and activities of the Appraisal Foundation.[13]

The Appraisal Subcommittee is required to maintain a national registry of state certified and licensed appraisers who are eligible to perform appraisals in federally related transactions. In conjunction with its activities generally, the Appraisal Subcommittee is to report to Congress the results of its implementation of Title XI on an annual basis.

During its initial phase of operations, the Appraisal Subcommittee was financed through a single $5 million statutory appropriation. Continuing activities of The Appraisal Foundation are to be financed through assessments of annual registration fees (up to $25 per person) from state certified and licensed appraisers.

State certification and licensing programs

To assure an adequate supply of state certified and licensed appraisers as well as the effective supervision of appraisers, Title XI authorizes each state to establish programs for certifying and licensing appraisers.[14]

The qualification of appraisers under state-administered licensing and certification schemes replaces the prior practice by which appraisers were selected based substantially on their professional designations or appraisal society affiliations. While designations and affiliations likely will continue to reflect professional achievement in the appraiser community and be by many as an enchancement of professional stature, Title XI specifically prohibits a regulatory agency from establishing criteria requiring the regulated financial institutions to exclude an appraiser from consideration based solely on whether an appraiser is a member of a particular appraisal organization.[15]

Title XI originally imposed a deadline of July 1, 1991, which was subsequently extended to December 31, 1992, after which all appraisals performed in connection with federally related transactions are to be performed only by state certified or licensed appraisers. State certification and licensing programs should be in place sufficiently in advance of the deadline to assure compliance with Title XI's appraiser qualification standards.

State programs must meet certain minimum criteria, which are established by the Appraiser Qualifications Board of The Appraisal Foundation. Among other requirements, each candidate for certification or licensing must demonstrate proficiency via a state-administered examination substantially equivalent in content to the Uniform State Certification Examination approved by the Appraiser Certification Board.[16]

The Appraisal Subcommittee may refuse to approve a state certification and licensing program that fails to adopt and enforce the standards and procedures prescribed under Title XI. Similarly, the Appraisal Subcommittee may not approve a state licensing agency designated to administer a program if the agency lacks adequate authority to carry out its responsibilities or fails to act decisively regarding the implementation of appraisal standards, appraiser qualifications, or appraiser supervision.[17] Notwithstanding its other authority, the Appraisal Subcommittee cannot set qualifications or experience requirements for the states in licensing real estate appraisers. Further, the recommendations of the Appraisal Subcommittee are not binding on the states.[18]

When notifying a state agency of its determination not to recognize a proposed certification and licensing program, the Appraisal Subcommittee must allow the agency an opportunity to present information that contests this decision and to correct the conditions that prompted the denial. Actions by the Appraisal Subcommittee that deny recognition of a state licensing program or agency are subject to judicial review.[19]

Penalties for noncompliance with Title XI

A financial institution is prohibited under Title XI from knowingly employing an appraiser who is not certified or licensed. Violations of Title XI may result in civil monetary penalties of up to $25,000 for the initial violation and $50,000 for each subsequent violation.

Sanctions for a violation of Title XI may be awarded only after an administrative hearing has been conducted by the appropriate regulatory agency, and a determination to award civil penalties is subject to judicial review.[20]


Regulatory agencies and the RTC have promulgated regulations to implement the requirements of Title XI.[21]

The appraisal regulations of the FDIC/DOL

In accordance with the provisions of Title XI, the FDIC's appraisal regulations 1) identify real estate-related financial transactions that require the services of an appraiser; 2) specify which categories of federally related transactions require appraisals performed by state certified appraisers and which categories of transactions may be conducted using appraisals performed by state licensed appraisers; and 3) prescribe minimum standards for real estate appraisals performed in connection with federally related transactions.

For purposes of the FDIC's appraisal regulations, market value is

The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under the following conditions.

* Buyer and seller are typically motivated;

* Both parties are well-informed or well-advised, and acting in what they consider their own best interests;

* A reasonable time is allowed for exposure in the open market;

* Payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; or

* The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.[22]

* The value of the transaction is $50,000 or less (the "de minimis" level);

* The transaction involves the taking of a lien solely in an abundance of caution in which the terms of the transaction are not made more favorable by the lien;

* The transaction is a lease (unless the lease is the economic equivalent of a purchase or sale of the property); or

* The transaction results from the maturity of an extension of credit in which the borrower is current, no new monies are advanced, the credit standing of the borrower has not deteriorated, and there is no obvious material deterioration in the value of the property.[23]

The state certified/licensed appraiser distinction

A state certified appraiser is required for all federally related transactions of $1,000,000 or more. In addition, state certified appraisers are required for appraisals that involve nonresidential properties with a value of $250,000 or more, other than those that involve one-to four-family residential properties.

All appraisals of "complex" one-to four-family residential properties require the services of a state certified appraiser if the transaction value is $250,000 or more. A complex one- to four-family residential property appraisal is an appraisal in which the property to be appraised, its form of ownership, or its market conditions are atypical.

Specific regulatory appraisal standards

Appraisals conducted for the FDIC and its regulated financial institutions must meet the following 14 minimum standards.

1. They must conform to the Uniform Standards of Professional Appraisal Practice (USPAP) adopted by the Appraisal Standards Board of The Appraisal Foundation (excluding the "Departure Provision" of the USPAP);

2. They must specify the steps taken to comply with the Competency Provision of the USPAP;

3. They must be based upon the definition of market value set forth in Section 323.2(f) of the Appraisal Regulations;

4. (i) Be written and presented in a narrative format or on forms that-- (ii) are sufficiently descriptive to enable the reader to ascertain the estimated market value and the rationale for the estimate; and (iii) provide detail and depth of analysis that reflect the complexity of the real estate appraised;

5. Analyze and report in reasonable detail any prior sales of the property being appraised that occurred within the following time periods: (i) for a one- to four-family residential property, one year preceding the date when the appraisal was prepared; and (ii) for all other properties, three years preceding the date when the appraisal was prepared;

6. Analyze and report data on current revenues, expenses, and vacancies for the property if it is and will continue to be income producing;

7. Analyze and report a reasonable marketing period for the property;

8. Analyze and report on current market conditions and trends that will affect projected income or the absorption period to the extent they affect the value of the property;

9. Analyze and report appropriate deductions and discounts for any proposed construction, or any completed properties that are partially leased or leased at other than market rents as of the date of the appraisal, or any tract developments with unsold units;

10. Certify that the appraisal assignment was not based on a requested minimum valuation, a specific valuation, or the approval of a loan;

11. Include documentation supporting the appraiser's logic, reasoning, judgment, and analysis in arriving at his opinion on value;

12. Include a legal description of the appraised property;

13. Identify and separately value any personal property, fixtures, or intangible items that are not real property but are included in the appraisal, and their impact on value;

14. Follow a valuation method that addresses and reconciles the approaches of direct sales comparison, income, and cost, and explain why any given method has not been used.[24]


Since its enactment nearly three years ago, the Title XI program has prompted various concerns, including whether to extend the July 1, 1991, deadline for requiring appraisals by state licensed and certified appraisers; whether the provisions of Title XI should be extended to appraisal of personal property; the appropriate de minimis standard; the appropriate categories of state certified or licensed appraisers; and how the experience qualification will be established. The more commonly debated issues are identified in the following section, and their recent status is reviewed.

The extension of the July 1, 1991, state certification and licensing deadline

As first enacted, Title XI required that after July 1, 1991, all appraisals for a federally related transaction be performed by state certified or state licensed appraisers.[25] Thus, after July 1, 1991, at the latest, state agencies were not only to have completed their certification and licensing programs, they were to have licensed and certified a sufficient number of appraisers to comply with the statutory deadline.

The initial Appraisal Subcommittee guidelines were issued in January 1990. Their thrust was to require states to establish schemes that 1) promote appraiser independence from industry influence; 2) reduce conflicts of interest; and 3) address concerns regarding grand-fathering and dual licensing requirements.

After the release of state licensing guidelines, the states began to establish their programs. Certain states found it necessary first to enact appropriate enabling legislation to provide for the creation of the necessary state agencies and programs. Others amended existing legislation to permit compliance with the Appraisal Subcommittee's guidelines.

The Appraisal Subcommittee guidelines require that agency board members be generally representative of the broad public interest, and that an individual be selected to direct the agency who is not engaged in the appraisal business or any related industry. In addition, appraisal agencies must answer to a governor or other official of the state who does not have regulatory responsibility for realty-related activities.

For many states, these guidelines were out of sync with state law. Some states, for example, required that members of their appraisal regulatory bodies be composed entirely of appraisers, as opposed to persons representative of the broad public interest. Other states required that a state certified appraiser be a licensed real estate broker or salesperson contrary to the prohibition against restricting certification to those holding brokers licenses.

The Appraisal Subcommittee guidelines also require that appraisers be qualified through appropriate testing and experience requirements, with no exemptions to the criteria. These provisions were also problematical because many states had no appraiser licensing criteria in 1990.

As a result of these and other compliance problems, by August 1990 only a handful of states had completed the measures necessary to implement their programs.

In late 1990, the American Bankers Association (ABA), joined by groups from the mortgage banking and mortgage insurance industries, petitioned the Appraisal Subcommittee for an extension in the statutory deadline for state certification and licensing of appraisers. The request was based on the ABA's determination that states would probably not complete their programs in time to permit the certification and licensing of a sufficient number of appraisers to meet the anticipated demand for appraisals under the new guidelines.

Acting on authority specifically provided in Title XI, the Appraisal Subcommittee thus announced a six-month extension in the state certification deadline in April 1991, delaying the effective date for requiring the use of licensed and certified appraisers to December 31, 1991.

Even the extended implementation date of December 31, 1991, proved unworkable. As the deadline drew near, the Appraisal Institute reported that 17 states had not completed final rules and regulations and 23 states had not implemented their programs for certifying and licensing appraisers. Congress was advised that states likely would need breathing room to license and certify adequate numbers of appraisers to meet the Title XI mandate.

In time it became apparent that the year-end deadline would result in a shortage of duly licensed and certified appraisers. This so-called "appraisal crunch" would, in turn, give rise to higher appraisal fees and delays in completing transactions. Accordingly, in late 1991, Congress amended the effective date for one additional year, until January 1, 1993, when states must comply with the real estate appraisal standards. Amendments to Title XI were passed as part of two separate bills--the Federal Deposit Insurance Corporation Improvement Act of 1991 and the Resolution Trust Corporation's funding legislation. It is anticipated that the extended deadline will allow states to implement Title XI in a responsible manner.

Extending Title XI to personal property appraisals

As initially enacted, Title XI's appraisal requirements applied only to real estate transactions. However, the Appraisal Subcommittee was also directed to study and report on the feasibility and desirability of extending the real estate appraisal requirements to personal property appraising.

The term "personal property" is defined in Title XI as all identifiable portable and tangible objects considered by the general public as personal, including furnishings, art, antiques, gems and jewelry, collectibles, machinery, equipment, and all other property not classified as real estate. An extension of Title XI's requirements to personal property appraisals would cover the personal property acquired by the FDIC/DOL in conjunction with the closing of banks and the personal property, including business inventory and other items, which collateralizes its commerical loan assets.

In early 1991, the Appraisal Subcommittee completed its mandated study of the feasibility and desirability of regulating personal property appraising. In its report "Personal Property Appraisal Study," the Appraisal Subcommittee concluded that the appraisal requirements of Title XI should not be extended to personal property appraising.[26] The Subcommittee found no evidence that significant or systemic losses had been sustained by insured financial institutions or the RTC as a result of faulty valuations of personal property. The Appraisal Subcommittee therefore concluded that existing informal standards intrinsic to the loan underwriting process were sufficient and likely would continue to be sufficient to protect the federal interest in personal property appraisals.

The appropriate de minimis threshold

To implement Title XI, the RTC and regulatory agencies with the sole exception of the Fed adopted a threshold standard or de minimis level of $50,000 in their regulations. Thus, a Title XI appraisal is not required in a real estate-related financial transaction for which the transaction value is less than $50,000. The Fed, however, which was the first regulatory agency to adopt its standard, set a de minimis level of $100,000.

Before Title XI was adopted, an early decision to require appraisals on all real estate transactions of $15,000 or more was soundly rejected as being too low. On the other hand, appraisers and Congressional sponsors of Title XI also opposed a proposed threshold of $100,000, on the grounds that this amount would be too high to protect important transactions. In late 1990, the Appraisal Subcommittee issued a report in which it questioned whether a de minimis standard of $50,000 also would be too high, noting that the Federal Housing Authority and the secondary market enterprises, including the Federal National Mortgage Association (Fannie Mae), require professional appraisers for mortgage transactions of any amount.

During 1991, amendments to Title XI were proposed that require the regulatory agencies to exempt from the requirement for an appraisal by a state certified or licensed appraiser any one- to four-single-family residential transaction having a value of $100,000 or less and any other transaction having a value of $200,000 or less except as unique economic conditions, geographic considerations, or other factors make such action appropriate. Appraisal and realtor groups strenuously opposed these amendments. In late 1991, a compromise was reached by which the specific de minimis limits were scrapped in favor of an amendment directing the Office of Management and Budget to conduct a six-month study on an appropriate de minimis threshold for appraisals. This provision became part of the FDIC Improvement Act and the RTC's funding legislation.

In late 1991, following the lead of other regulatory agencies, the OTS proposed to raise to $100,000 its de minimis transaction value for which licensed or certified appraisers must perform appraisals. The increased threshold would significantly lower the number of real estate transactions requiring certified or licensed appraisals, thereby responding to criticism that the current $50,000 threshold is too costly to financial institutions and results in burdensome costs to borrowers. Like the OTS, the FDIC, the OCC, and the RTC all have proposed raising their de minimis levels. Ironically, the Fed, which initially set the higher $100,000 threshold, has proposed lowering its de minimis level to $50,000. Proposals to raise the threshold are supported by the determination that there is no cost-benefit justification for doing appraisals on properties costing less than $100,000.

Additional certified appraiser classifications

According to Title XI, a state certified appraiser must satisfy the minimum certification requirements of the Appraiser Qualifications Board of The Appraisal Foundation, which include 1) 2,000 hours of experience (half of which must be in nonresidential appraisal practice); 2) 165 hours of education; and 3) the successful completion of a written examination. State licensed appraisers, by comparison, must complete only 75 hours of education--although they also must have at least 2,000 hours of experience and successfully complete a state-administered examination.

During 1990 a number of states sought to create additional appraiser classifications within their licensing programs. Such classifications were urged on the grounds that the two-class system mandated by Title XI was too rigid. While the Appraisal Subcommittee initially opposed more classifications, after considering the issue they announced in early 1991 that a second classification of state certified residential appraisers would be recognized. Specifically, the Appraisal Subcommittee agreed to recognize a separate classification for state certified residential real estate appraisers if it is determined that additional classification is necessary to meet the demand for such appraisals, and if appropriate qualification criteria for the additional classification are developed. State certified residential appraisers will be permitted to perform appraisals of more expensive properties and complex one- to four-family residential properties.

Appraisal experience criteria

An issue that has arisen recently is the appropriateness of the appraisal experience criteria. Further, if appraisal experience is to be required, what work experience should satisfy this requirement? Those who oppose the requirement contend that 2,000 hours of experience is excessive for an individual to be qualified to appraise a single-family home.

While the experience requirement of 2,000 hours is likely to remain a baseline criteria for both state licensing and state certification, a wider range of appraisal-related experience eventually may be recognized. For example, experience as a bank lending officer or a real estate broker may be considered applicable to the experience requirement of a state license. In the course of its asset liquidation activities, the FDIC/DOL makes extensive use of appraisals. Whether acquired as owned properties of a failed bank, as a result of foreclosure of a lien, or simply as encumbered by an FDIC lien, both personal and real properties are appraised as necessary to ensure their proper management and prompt liquidation and sale.

Although not considered indisputable evidence of value, appraisals provide an important reference point for the FDIC/DOL's evaluation of a property transaction. Appraisals are considered in conjunction with 1) the length of any marketing period for the property; 2) previous offers received for the property; 3) the cost of holding the property; 4) the risk of its vandalism; and 5) local conditions or trends in sales of like property.

Most decisions of the FDIC/DOL that involve the disposition of failed bank assets require the approval of a field office's Credit Review Committee (CRC). When seeking authority from the CRC for a specific transaction involving a property, the account officer assigned to the asset prepares and presents a written case. CRC cases are approved according to a system of authority delegated from the Washington office to the various regional and local offices of the FDIC/DOL. The delegations of authority are addressed to specific levels of management within the FDIC/DOL and the authority delegated to a particular level may vary according to the type and value of the transaction at hand.

When an asset is in bankruptcy, the account officer in whose portfolio the asset is managed works with the attorney assigned to the bankruptcy case in formulating a bankruptcy strategy. Transactions involving properties in bankruptcy may require CRC approval. CRC approval, for example, is required for a favorable vote on a proposed plan of reorganization.

FDIC/DOL appraisal policies and guidelines

When an appraisal is required for a CRC case, the appraisal must comply with the requirements of Title XI, the FDIC's appraisal regulations, and the FDIC's appraisal policies and guidelines. The appraisal policies and guidelines specify when an appraisal is required, the type of appraisal that may be used, whether one or more appraisals are necessary, and how often a new appraisal must be obtained. Generally, these appraisal policies and guidelines apply equally to real property and personal property, and to both FDIC/DOL-owned properties and properties that serve as collateral.

When a loan secured by property is current and performing, an appraisal may not be required. Further, when a loan is less than $25,000 and the estimated value of the property securing the loan is less than $25,000, a broker's indication of property value (BPO) rather than a full appraisal may be sufficient.

While the FDIC's appraisal regulations address the threshold level at which an appraisal is required and the standards applicable to an appraisal, they do not indicate the number of appraisals to be required in connection with a particular transaction or the frequency with which new appraisals must be obtained. These and other gaps in the regulations are filled by the FDIC/DOL's appraisal policies and guidelines--which, for example, require a second appraisal when a proposed transaction involves an owned property or property pledged as collateral that is estimated to exceed $1,000,000.

To process a CRC case for which an appraisal is required, the appraisal must be current (i.e., less than one year old). Occasionally, an appraisal requirement can be satisfied through the use of an appraisal found in the files of a failed bank upon its closing, provided that the appraisal is less than six months old and meets certain standards.

The role of the FDIC/DOL's review appraisers

To implement Title XI, the FDIC's appraisal regulations, and the FDIC/DOL appraiser policies and guidelines, the FDIC/DOL employs a team of appraisal specialists known as review appraisers. The FDIC/DOL's team of review appraisers facilitates the process by which appraisals are acquired for all real property assets, affording a quality review as well as a second-level analysis of the appraisals performed on behalf of the FDIC. The principal functions of the review appraiser team are as follows.

* Maintain a roster of approved appraisers

* Process requests from account officers for appraisers

* Award appraisal assignments to approved fee appraiser on a competitive bid basis

* Review appraisals submitted by the fee appraisers and discuss the deficiencies in the appraisals if any, with them

* Document the quality of the work product as well as the adequacy, timeliness, and compliance with the FDIC/DOL's requirements applicable to the fee appraisers.

The review appraisal section seeks to disburse its appraisal assignments, subject to competitive bidding requirements, among as many different approved appraisers as possible. In addition, a review appraisal log, which tracks the status of the FDIC/DOL's fee appraiser contracts, is maintained.

When an assignment to conduct an FDIC/DOL appraisal is accepted, the appraiser must certify that no conflict of interest exists and that confidentiality in the appraisal report and the information it contains will be maintained. The FDIC is thus protected against appraisals in which the opinion of value has been influenced by a direct or indirect interest, financial or otherwise, in the property. The confidentiality agreement ensures the integrity of the appraisal and the FDIC/DOL's use of the appraisal as the FDIC/DOL seeks to negotiate an arm's-length property transaction. The FDIC/DOL's review appraisers are themselves independent of the collection and liquidation functions of the FDIC/DOL.

When two appraisals are required for a transaction, a review appraiser determines whether the difference, if any, in the values of the two appraisals are reasonable or can be justified. Once determined acceptable to the review appraiser, differences in value between appraisals are explained in a written summary. If a value difference cannot be reasonably reconciled, a third appraisal may be ordered.

When a BPO is used in a transaction that involves a property with an estimated value of less than $25,000, the review appraiser determines whether the broker meets the FDIC/DOL's appraisal policy and guidelines concerning disinterestedness. The review appraiser must be assured that the broker is not a listing broker or representative of a buyer who wishes to bid on the property.

The FDIC/DOL may occasionally receive an offer to sell property or to release a lien to permit a sale of a property that will result in the disposition of a portion but not all of the property. When a transaction involving less than an entire appraised property is proposed, the FDIC/DOL will seek a written statement from the fee appraiser to the effect that the proposed disposition of the property will not adversely affect the value of the remaining property. The review appraiser then must review the fee appraiser's recommendation to ensure that the FDIC/DOL's interests will be protected in the transaction.

Uniform instructions to appraisers

In addition to the FDIC/DOL's appraisal policies and guidelines, the FDIC/DOL issues a standard set of uniform instructions to its fee appraisers. For each applicable real property appraisal assignment, the FDIC/DOL requires adherence to its "Uniform Appraisal Instructions to Appraisers for FDIC/DOL Real Estate Properties" (Uniform Appraisal Instructions/Real Estate). With respect to personal property appraisals, the FDIC requires compliance with its "Uniform Appraisal Instructions to Appraisers for FDIC Personal Properties" (Uniform Appraisal Instructions/Personal Property).

As required by the FDIC's appraisal regulations, appraisals for federal real estate-related transactions must be performed in accordance with the USPAP promulgated by the Appraisal Standards Board of The Appraisal Foundation. The Uniform Appraisal Instructions/Real Estate are intended to supplement the USPAP and to emphasize those USPAP criteria of key importance to the FDIC/DOL.

The scope of the Uniform Appraisal Instructions/Personal Property is broader than that of the Uniform Appraisal Instructions/Real Estate. Standards applicable to personal property appraising are not as formalized as the USPAP that apply to real property. The standards applicable to personal property appraisals for the FDIC/DOL are thus more specifically described in the Uniform Appraisal Instructions/Personal Property. A personal property appraiser is requested to provide additional information including 1) the condition of the items being appraised; 2) whether any repairs are needed; 3) the methods used to research values, including any catalogs consulted in establishing values; and 4) whether transporting the property to a different location may enhance its marketability and sale.

Among other provisions, the Uniform Appraisal Instructions/Real Estate require an appraiser to state the estimated marketing period for the property based on comparable sales or other market evidence in the appraisal report. It is worth noting that the FDIC does not solicit or condone appraisals that incorporate a six-month marketing period discount.


Title XI requires that states establish agencies for the licensing, certification, and discipline of real estate appraisers. It designates an Appraisal Subcommittee of the FFIEC to monitor the state appraisal and certification process although the Appraisal Subcommittee cannot set qualifications or experience requirements for the states in licensing real estate appraisers. The perpose of these measures is to protect the federal interests of the five federal banking agencies, the federally regulated financial institutions, and the RTC. This is accomplished by ensuring that appraisals used in connection with real estate-related transactions meet minimum standards and are performed by duly certified or licensed appraisers.

Currently, states are establishing their licensing and certification systems. While various issues pertaining to the completion of state programs continue to be debated, the Title XI program is expected to go far toward achieving the goals of FIRREA.

[1] 12 U.S.C. Section 3331. et seq.

[2] Ibid.

[3] See "Statement of Congress," 74 Federal Reserve Bulletin 304 (May 1988), statement by Williams Taylor, Staff Director, Division of Banking Supervision and Regulation, Board ofGovernors of the Federal Reserve System.

[4] See 12 U.S.C. Section 3350(4).

[5] See 12 U.S.C. Section 3350(6).

[6] See 12 U.S.C. Section 3350(5).

[7] See 12 U.S.C. Section 3339-41.

[8] See 12 U.S.C. Section 3350(10).

[9] See 12 U.S.C. Section 3339.

[10] See 12 U.S.C. Section 3339, 41.

[11] See 12 U.S.C. Section 3342.

[12] See 12 U.S.C. Section 3345(d).

[13] See 12 U.S.C. Section 3332.

[14] See 12 U.S.C. Section 3346.

[15] See 12 U.S.C. Section 3351(c).

[16] See 12 U.S.C. Section 3347.

[17] Ibid.

[18] Appraisal Amendments, P.L. 102 Section.701(a) (amending Section.1116 of FIRREA, 12 U.S.C. Section 3345), to be codified at 12 U.S.C. Section 3345(e).

[19] See 12 U.S.C. Section. 3347(b).

[20] See 12 U.S.C. Section 3349.

[21] The FDIC's appraisal regulations, which apply to all federally related transactions entered into by the FDIC and the financial institutions regulated by the FDIC, are codified at 12 CFR Section 323 et seq. The RTC's regulations, which are substantially similar to those of the FDIC, are codified at 12 CFR Section 1608 et seq.

[22] See 12 CFR Section 323.2(f) (1990).

[23] See 12 CFR Section 323.3(a).

[24] See 12 CFR Section 323.4.

[25] See 12 U.S.C. Section 3348(a)(1).

[26] "FFIEC Extends Appraiser Deadline, Nixes Personal Property Appraisal System," 56 BNA's Banking Report (May 6, 1991).
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Author:Dennis, Kim A.
Publication:Appraisal Journal
Date:Jul 1, 1992
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