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FHA Single Family Mortgage Insurance; Lender Accountability for Appraisals
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[Federal Register: January 13, 2003 (Volume 68, Number 8)]
[Proposed Rules]
[Page 1765-1769]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13ja03-34]
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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Parts 25 and 203
[Docket No. FR-4722-P-01]
RIN 2502-AH78
FHA Single Family Mortgage Insurance; Lender Accountability for
Appraisals
AGENCY: Office of the Secretary, HUD.
ACTION: Proposed rule.
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SUMMARY: This proposed rule clarifies and strengthens HUD's regulations
concerning the responsibilities of lenders approved by the Federal
Housing Administration (FHA) in the selection of appraisers to perform
appraisals on properties that will be the security for FHA insured
mortgages. First, the proposed rule provides that lenders are to be
held strictly accountable for the quality of appraisals on properties
securing FHA insured mortgages. Further, the proposed rule specifically
provides that lenders who submit appraisals to HUD that do not meet FHA
requirements are subject to the imposition of sanctions by the HUD
Mortgagee Review Board. The proposed rule would apply to both sponsor
lenders, who underwrite loans, and loan correspondent lenders, who
originate loans on behalf of their sponsors. HUD believes these
proposed changes will help protect the FHA Insurance Fund, ensure
better compliance with appraisal standards, and help to ensure that
homebuyers receive an accurate statement of appraised value.
DATES: Comments Due Date: March 14, 2003.
ADDRESSES: Interested persons are invited to submit comments regarding
this proposed rule to the office of the Department's Rules Docket
Clerk, Office of General Counsel, Room 10276, Department of Housing and
Urban Development, 451 Seventh Street, SW., Washington, DC 20410-0500.
Communications should refer to the above docket number and title.
Facsimile (FAX) comments are not acceptable. A copy of each
communication submitted will be available for public inspection and
copying between 7:30 a.m. and 5:30 p.m. weekdays at the above address.
FOR FURTHER INFORMATION CONTACT: Vance T. Morris, Director, Office of
Single Family Program Development, Office of Insured Single Family
Housing, Room 9266, U.S. Department of Housing and Urban Development,
451 Seventh Street, SW., Washington, DC 20410-8000; telephone (202)
708-2121 (this is not a toll-free number). Hearing-or speech-impaired
individuals may access this number via TTY by calling the toll-free
Federal Information Relay Service at (800) 877-8339.
SUPPLEMENTARY INFORMATION:
I. Background
A. FHA Appraisals
The success of the Federal Housing Administration (FHA) single
family mortgage insurance program, and HUD's ability to protect the FHA
Insurance Fund, begins with the quality of appraisals on properties
that secure FHA mortgages. Section 203(b)(1) of the National Housing
Act (12 U.S.C. 1709(b)(10)) provides the method for calculating the
maximum mortgage amount that FHA can insure. The calculations required
by the statute are based on the appraised value of the property that is
security for the mortgage. If a mortgagor defaults and the lender \1\
conveys property title to HUD in exchange for payment of mortgage
insurance benefits, FHA then must manage and sell the property in order
to recoup its insurance loss. If the appraisal was accurate, FHA's loss
will be minimal. However, if the appraisal was inaccurate or the
appraiser neglected to report readily observable defects, FHA's losses
could be increased.
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\1\ This proposed rule uses the terms ``lender'' and
``mortgagee'' interchangeably.
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HUD has implemented several policies to help ensure the accuracy
and completeness of appraisals on properties securing FHA insured
mortgages. For example, HUD has established the FHA Appraiser Roster
(Appraiser Roster), which lists those appraisers who are eligible to
perform FHA single family appraisals. To be eligible for placement on
the Appraiser Roster, an appraiser must be state licensed or certified
and pass a test on FHA appraisal methods. Further, the appraiser must
not be listed on the General Services Administration's Suspension and
Debarment List, HUD's Limited Denial of Participation List, or HUD's
Credit Alert Interactive Voice Response System. HUD maintains the
Appraiser Roster to provide a means by which HUD can ensure the
competency of appraisers performing FHA appraisals. Placement on the
Appraiser Roster means that an appraiser is qualified to perform FHA
appraisals; it does not mean that the appraiser is approved by FHA, nor
does it provide a guarantee or warranty that the appraiser's work will
meet FHA standards. The FHA Appraiser Roster regulations are located at
24 CFR part 200, subpart G.
The FHA single family mortgage insurance regulations at 24 CFR
203.5(e)(1) provide that ``[a]
mortgagee shall have the property
appraised in accordance with such standards as the Secretary may
prescribe.'' These standards are contained in HUD Handbook 4150.2,
entitled ``Valuation Analysis for Home Mortgage Insurance,'' which each
appraiser receives upon applying to be placed on the FHA Appraiser
Roster. All appraisers on the Appraiser Roster are required to read and
comply with the handbook in performing appraisals of properties that
will be security for FHA insured mortgage loans (see Sec. 200.206 of
the Appraiser Roster regulations). A copy of Handbook 4150.2 may be
downloaded from HUD's Client Information and Policy System (HUDCLIPS)
internet homepage at http://www.hudclips.org. 
B. Lender Responsibilities Concerning FHA Appraisals
Almost all FHA insured mortgage loans are originated under the
Direct Endorsement process. Under this process, a lender selects an
appraiser from the Appraiser Roster. The appraiser appraises the
property and then submits an appraisal report and accompanying
documentation to the lender. The lender's Direct Endorsement
underwriter (or, in the case of a loan correspondent, its sponsor's
Direct Endorsement underwriter) reviews the appraisal documentation.
Under Sec. 203.255(b)(5), when a mortgage is submitted to FHA under
the Direct Endorsement process, the application must contain, among
other things, ``[a]n underwriter certification, on a form prescribed by
the Secretary, stating that the underwriter has personally reviewed the
appraisal report ... and that the proposed mortgage complies with HUD
underwriting requirements.'' Consequently, a lender is required,
through its underwriter, to review the appraisal documentation to
assure that the documentation meets the FHA requirements contained in
HUD Handbook 4150.2 and amendatory issuances.
HUD's regulation at Sec. 203.255(b) explicitly authorizes the
Secretary to determine if there is any information indicating that any
required certification (including the appraisal certification) ``is
false, misleading or constitutes fraud or misrepresentation on the part
of any party, or that the mortgage fails to meet any statutory or
regulatory requirement.'' Further, the Mortgagee Review Board
regulations at 24 CFR 25.9 authorize the imposition of
[[Page 1767]]
administrative sanctions against a lender who submits such a false
certification in connection with any FHA insured mortgage transaction.
The responsibilities of a lender in ensuring the quality of FHA
appraisals are also emphasized in the guidance issued by HUD through
Mortgagee Letters. For example, Mortgagee Letter 94-54, issued on
November 7, 1994, provides that ``mortgagees that select their own
appraisers must accept responsibility, equally with the appraisers, for
the integrity, accuracy, and thoroughness of the appraisals, and will
be held accountable by HUD'' (this guidance was reiterated by FHA
Mortgagee Letter 97-45, issued on November 25, 1997). Further,
Mortgagee Letter 97-22, issued on May 20, 1997, reminds lenders ``that
if the appraiser they selected provides a poor or even fraudulent
appraisal which leads the Department to insure a mortgage at an
inflated amount, the lender is held equally responsible with the
appraiser for the violation.'' Copies of these Mortgagee Letters may be
downloaded from HUD's Client Information and Policy System (HUDCLIPS)
internet website at http://www.hudclips.org.
II. This Proposed Rule
A. Need for Proposed Rule
FHA has found that most appraisers perform appraisals in accordance
with FHA standards. There are some instances, however, in which some
lenders tacitly require appraisers to make the appraisal computations
match the sales price to ensure that a home sale and mortgage loan
closes for the appraiser to obtain additional business. Other instances
have occurred, including recent episodes of predatory lending activity
in several areas of the country, whereby lenders, realtors, investors,
and others have participated in so-called property ``flipping'' schemes
to inflate home prices and perpetuate sales that generate fees and
charges to participants in the transaction. There are additional
examples of fraudulent activity that could have been prevented if the
underwriters had properly reviewed the appraisal reports.
This proposed rule would clarify and strengthen HUD's regulations
concerning the responsibilities of lenders in assuring the quality of
FHA appraisals. The proposed rule will ensure accountability of lenders
for poor appraisals and thereby protect the FHA Insurance Fund, ensure
better compliance with appraisal standards, and help to ensure that
homebuyers receive an accurate statement of appraised value. The
proposed changes would apply to both sponsor lenders, who underwrite
loans, and loan correspondent lenders, who originate loans on behalf of
their sponsors.
There are numerous tools that lenders may use to determine whether
an appraisal satisfies FHA requirements. Reviewing appraisal
documentation and performing quality assurance reviews are two such
methods. New technology is available, such as Automated Valuation Model
(AVM), which can be used to determine whether the value derived by an
appraiser is within reason. A lender may wish to do business only with
appraisers who carry errors and omissions (E&O) insurance. Such
coverage may help in reducing possible schemes that result in fraud.
There are numerous other steps that lenders can take to ensure that an
appraisal package satisfies FHA requirements. The purpose of this
proposed rule is not to mandate that lenders must follow a specific
course of action to ensure compliance with FHA appraisal requirements.
Each lender has the discretion to choose the means by which it will
ensure such compliance. The purpose of the proposed rule is to require
that a lender act to ensure appraisal quality and to emphasize that the
lender will bear responsibility if an appraisal does not satisfy FHA
requirements.
B. Proposed Changes to FHA Regulations
The proposed rule would make the following changes to the existing
FHA regulations:
1. Mortgagee Review Board (Sec. 25.9). The proposed rule would
clarify that a mortgagee is subject to administrative action by HUD's
Mortgagee Review Board for submitting to HUD an appraisal that does not
satisfy FHA appraisal requirements in connection with an insured
mortgage transaction. Specifically, a new Sec. 25.9(ee) would be added
to explicitly include the obtaining and submitting of appraisals that
do not satisfy FHA appraisal requirements among the list of actions
subject to administrative sanction. As provided in Sec. 25.3, which
contains the definitions applicable to Mortgagee Review Board
proceedings, the term ``mortgagee'' includes both underwriting and loan
correspondent lenders.
2. Lender accountability for appraisal (Sec. 203.5). The proposed
rule also would codify HUD's policy that lenders must ensure that the
appraisals satisfy FHA appraisal requirements and are responsible,
equally with appraisers, for the quality of appraisals on properties
that secure FHA insured mortgage loans. The proposed rule would amend
Sec. 203.5, which describes the Direct Endorsement process, to specify
that a lender must ensure that appraisals satisfy FHA requirements and
is responsible for the quality of the appraisals. A Direct Endorsement
mortgagee, and any of its loan correspondent lenders, that submit, or
cause to be submitted, an appraisal or related documentation that does
not satisfy FHA requirements may be sanctioned by the Mortgagee Review
Board. The proposed rule would also amend Sec. 203.5 to re-emphasize
that a lender must select an appraiser listed on the FHA Appraiser
Roster.
III. Issue Highlighted for Public Comment
While HUD invites public comment on all aspects of this proposed
rule, it is particularly interested in comments regarding the possible
consequences of the rule on the majority of FHA lenders and appraisers
who comply with FHA standards. HUD believes that the proposed
regulatory changes are necessary to ensure the accountability of
lenders for poor appraisals and thereby protect the FHA Insurance Fund,
ensure better compliance with appraisal standards, and help to ensure
that homebuyers receive an accurate statement of appraised value.
However, HUD recognizes that the proposed changes may also have
unintended negative consequences on those lenders and appraisers who
already comply with applicable FHA regulations and policies.
Accordingly, HUD invites interested members of the public to submit
their comments on such possible unintended impacts, as well as to offer
suggestions on less burdensome methods to accomplish the stated goals
of the proposed rule.
IV. Small Business Concerns Related to Mortgagee Review Board Actions
Against Lenders
As discussed below in this preamble, HUD has determined that this
rule will not have a significant economic impact on a substantial
number of small entities. However, the proposed rule may nonetheless
result in HUD's Mortgagee Review Board imposing an administrative
sanction on a small lender or appraiser due to a submitted appraisal
that is inconsistent with FHA requirements, or taking other appropriate
enforcement action against a small lender or appraiser. With respect to
such compliance efforts, HUD is cognizant that section 222 of the Small
Business Regulatory Enforcement Fairness Act of 1996 (Pub. L. 104-121)
(referred to as ``SBREFA'') requires the
[[Page 1768]]
Small Business and Agriculture Regulatory Enforcement Ombudsman to
``work with each agency with regulatory authority over small businesses
to ensure that small business concerns that receive or are subject to
an audit, on-site inspection, compliance assistance effort or other
enforcement related communication or contact by agency personnel are
provided with a means to comment on the enforcement activity conducted
by this personnel.'' To implement this statutory provision, the Small
Business Administration has requested that agencies include the
following language on agency publications and notices that are provided
to small businesses at the time the enforcement action is undertaken.
The language is as follows:
Your Comments Are Important
The Small Business and Agriculture Regulatory Enforcement Ombudsman
and 10 Regional Fairness Boards were established to receive comments
from small businesses about federal agency enforcement actions. The
Ombudsman will annually evaluate the enforcement activities and rate
each agency's responsiveness to small business. If you wish to
comment on the enforcement actions of [insert agency name], call 1-
888-REG-FAIR (1-888-734-3247).
As HUD stated in its notice describing HUD's actions on the
implementation of SBREFA, which was published on May 21, 1998 (63 FR
28214), HUD intends to work with the Small Business Administration to
provide small entities with information on the Fairness Boards and
National Ombudsman program, at the time enforcement actions are taken,
to ensure that small entities have the full means to comment on the
enforcement activity conducted by HUD.
V. Findings and Certifications
Regulatory Planning and Review
The Office of Management and Budget (OMB) reviewed this rule under
Executive Order 12866, Regulatory Planning and Review. OMB determined
that this rule is a ``significant regulatory action'' as defined in
section 3(f) of the Order (although not an economically significant
regulatory action under the Order). Any changes made to this rule as a
result of that review are identified in the docket file, which is
available for public inspection in the office of the Department's Rules
Docket Clerk, Office of General Counsel, Room 10276, 451 Seventh
Street, SW., Washington, DC 20410-0500.
Environmental Impact
This proposed rule would not direct, provide for assistance or loan
and mortgage insurance for, or otherwise govern or regulate, real
property acquisition, disposition, leasing, rehabilitation, alteration,
demolition, or new construction, or establish, revise, or provide for
standards for construction or construction materials, manufactured
housing, or occupancy. Accordingly, under 24 CFR 50.19(c), this
proposed rule is categorically excluded from the requirements of the
National Environmental Policy Act (42 U.S.C. 4332 et seq.).
Regulatory Flexibility Act
The Secretary has reviewed this proposed rule before publication,
and by approving it certifies, in accordance with the Regulatory
Flexibility Act (5 U.S.C. 605(b)), that this proposed rule would not
have a significant economic impact on a substantial number of small
entities. The proposed rule would not establish, or substantively
modify, HUD policy and procedures regarding lender accountability for
FHA appraisals. Rather, the regulatory changes will clarify HUD's
existing policy of holding lenders equally responsible with appraisers
for the quality of such appraisals. Further, the proposed changes are
designed to ensure the integrity of appraisals on properties securing
FHA insured mortgages. To the extent that the regulatory amendments
have an economic impact, it will be on those lenders and appraisers who
submit appraisals that are inconsistent with FHA requirements.
Notwithstanding HUD's determination that this rule will not have a
significant economic effect on a substantial number of small entities,
HUD specifically invites comments regarding any less burdensome
alternatives to this rule that will meet HUD's objectives as described
in this preamble.
Executive Order 13132, Federalism
Executive Order 13132 (entitled ``Federalism'') prohibits an agency
from publishing any rule that has federalism implications if the rule
either imposes substantial direct compliance costs on state and local
governments and is not required by statute, or the rule preempts state
law, unless the agency meets the consultation and funding requirements
of section 6 of the Executive Order. This proposed rule would not have
federalism implications and would not impose substantial direct
compliance costs on state and local governments or preempt state law
within the meaning of the Executive Order.
Unfunded Mandates Reform Act
Title II of the Unfunded Mandates Reform Act of 1995 (2 U.S.C.
1531-1538) establishes requirements for federal agencies to assess the
effects of their regulatory actions on state, local, and tribal
governments, and on the private sector. This proposed rule would not
impose any federal mandates on any state, local, or tribal governments,
or on the private sector, within the meaning of the Unfunded Mandates
Reform Act of 1995.
Catalog of Federal Domestic Assistance
The Catalog of Federal Domestic Assistance Numbers for the programs
affected by this proposed rule are 14.117 and 14.133.
List of Subjects
24 CFR Part 25
Administrative practice and procedure, Loan programs--housing and
community development, Organization and functions (government
agencies).
24 CFR Part 203
Hawaiian Natives, Home improvement, Indians--lands, Loan programs--
housing and community development, Mortgage insurance, Reporting and
recordkeeping requirements, Solar energy.
Accordingly, for the reasons described in the preamble, HUD
proposes to amend 24 CFR parts 25 and 203 to read as follows:
PART 25--MORTGAGEE REVIEW BOARD
1. The authority citation for 24 CFR part 25 continues to read as
follows:
Authority: 12 U.S.C. 1708(c), 1708(d), 1709(s), 1715b and
1735(f)-14; 42 U.S.C. 3535(d).
2. Amend Sec. 25.9 by redesignating paragraph (ee) as paragraph
(ff) and adding a new paragraph (ee) to read as follows:
Sec. 25.9 Grounds for an administrative action.
* * * * *
(ee) Submitting, or causing to be submitted, with an application
for FHA mortgage insurance an appraisal, valuation condition sheet, or
any other documentation relating to an appraisal that does not satisfy
FHA requirements.
* * * * *
PART 203--SINGLE FAMILY MORTGAGE INSURANCE
3. The authority citation for 24 CFR part 203 continues to read as
follows:
Authority: 12 U.S.C. 1709, 1710, 1715b, and 1715u; 42 U.S.C.
3535(d).
4. Amend Sec. 203.5 by adding a sentence at the end of paragraph
(e)(1)
[[Page 1769]]
and adding a new paragraph (e)(3) to read as follows:
Sec. 203.5 Direct Endorsement process.
* * * * *
(e) * * *
(1) * * * A mortgagee must select an appraiser whose name is on the
FHA Appraiser Roster, in accordance with 24 CFR part 200, subpart G.
* * * * *
(3) A mortgagee and an appraiser must ensure that an appraisal and
related documentation satisfy FHA appraisal requirements and shall bear
equal responsibility for the quality of the appraisal in satisfying
such requirements. A Direct Endorsement Mortgagee (and any of its loan
correspondent lenders) that submits, or causes to be submitted, an
appraisal or related documentation that does not satisfy FHA
requirements is subject to administrative sanction by the Mortgagee
Review Board pursuant to Sec. 25.9 of this title.
Dated: December 3, 2002.
Mel Martinez,
Secretary.
[FR Doc. 03-539 Filed 1-10-03; 8:45 am]
BILLING CODE 4210-27-P