On October 18, 2010, the Federal Reserve Board of Governors (the "Board") announced a new rule setting standards for appraisals of residences offered as security for consumer credit transactions - 12 C.F.R. § 226.42 (the "Rule" or "Section 42").
The Rule amends the Board's Regulation Z, which implements the Truth in Lending Act ("TILA"). The Rule prohibits (i) undue influence on appraisers, (ii) mischaracterization of value in appraisals, and (iii) certain appraiser conflicts of interest. Section 42 also sets forth requirements for (i) compensation for licensed/certified appraisers and (ii) reporting of appraiser misconduct. Notably, the Rule places stringent requirements on creditors that employ in-house appraisers, so as to avoid conflicts of interest. (source: Mondaq)
Background: The new rules regarding appraisal independence adds a new section under Part 226 (Regulation Z), Subpart E (Special Rules for Certain Home Transactions), as Section 226.42 (titled as – Valuation Independence). These provisions were issued as an interim final rule with comment period due to the limited time frame the Act provided for issuance of this rule under the statutory deadline.
This rule eliminates the current appraiser independence rules in Reg Z at 226.36(b) that were added last year, but those rules will stay in effective until April 1, 2011, at which time compliance with this rule will be mandatory. Through March 31, 2011, you may comply with either 12 CFR 226.36(b) or new 12 CFR 226.42. (federal register)
"The Federal Reserve Board on Monday [October 18, 2010] announced an interim final rule to ensure that real estate appraisers are free to use their independent professional judgment in assigning home values without influence or pressure from those with interests in the transactions. The rule also seeks to ensure that appraisers receive customary and reasonable payments for their services."
The interim final rule includes several provisions that protect the integrity of the appraisal process when a consumer's home is securing the loan. The interim final rule:
- Prohibits coercion and other similar actions designed to cause appraisers to base the appraised value of properties on factors other than their independent judgment;
- Prohibits appraisers and appraisal management companies hired by lenders from having financial or other interests in the properties or the credit transactions;
- Prohibits creditors from extending credit based on appraisals if they know beforehand of violations involving appraiser coercion or conflicts of interest, unless the creditors determine that the values of the properties are not materially misstated;
- Requires that creditors or settlement service providers that have information about appraiser misconduct file reports with the appropriate state licensing authorities; and
- Requires the payment of reasonable and customary compensation to appraisers who are not employees of the creditors or of the appraisal management companies hired by the creditors.
The interim final rule is required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. Compliance will be mandatory on April 1, 2011.
Source: Federal Reserve Press Release