A Complex Appraisal Reg, In a Nutshell

New Reg Z provisions take effect this month.

April 1, 2011

Keeping track of the number of appraisal requirements credit unions must follow can be daunting. For example, consider:

  • NCUA’s Part 722 of its Rules and Regulations on appraisals;
  • Interagency guidelines on appraisals developed by NCUA and the federal banking agencies;
  • NCUA’s Part 701.31 and Regulation B’s (Equal Credit Opportunity) requirement to provide borrowers with a copy
  • of their appraisal;
  • Fannie Mae and Freddie Mac standards for loans sold to the secondary market; and
  • The interim Regulation Z (Truth in Lending) appraisal rule, which is the focus of this article.

What most of these requirements have in common is the emphasis on appraiser independence. This means appraisals and real estate valuations must be based on the person’s independent professional judgment, free of any influence or pressure that may be exerted by anyone with an interest in the transaction.

Reg Z interim rule

The Dodd-Frank Wall Street Reform and Consumer Protection Act amended the Truth in Lending (TIL) Act last year to establish new requirements for appraisal independence for credit transactions secured by a consumer’s principal dwelling.

TIL Section 129E(a) “prohibits persons that extend credit or provide any service for a consumer credit transaction secured by the consumer’s principal dwelling from engaging in any acts or practices that violate appraisal independence” as described in the Federal Reserve Board’s implementing regulations. 

The Fed published an interim final rule amending Reg Z last October implementing these provisions. The mandatory compliance date is April 1, 2011. 


The new Reg Z provisions are similar to amendments issued in 2008 under the Home Ownership and Equity Protection Act (HOEPA), except that the new regulations apply to both closed-end and open-end credit transactions (e.g., home equity lines of credit) secured by a consumer’s principal dwelling. The 2008 regulations only applied to closed-end mortgage loans. 

The regulation applies to any valuation (not just a formal appraisal) of a consumer’s principal dwelling, and to any person who performs valuation services or valuation management functions. A “valuation” is an estimate of the value of a consumer’s principal dwelling in written or electronic form, other than one produced by an automated model or system. And, the term “valuation management functions” refers to a variety of administrative activities undertaken in connection with the preparation of a valuation, for example, managing or overseeing the appraisal preparation process.

Restrictions on property valuations

The interim regulation:

  • Prohibits coercion, bribery, collusion, inducement, intimidation, and similar actions designed to cause appraisers to base the value of properties on factors other than their independent judgment. For example, a creditor is prohibited from implying that current or future retention of an appraiser depends on his or her valuation. (Appraisers also are prohibited from misrepresenting the value of a home. This doesn’t include a bona fide error.)
  • Prohibits appraisers and appraisal management companies from having financial or other interests in the properties or the credit transactions (see the “conflicts of interest prohibition” section).
  • Prohibits creditors from extending credit based on appraisals if they know beforehand of violations involving appraiser coercion or conflicts of interest, unless they document that they have exercised reasonable diligence to determine that the values of the properties are not materially misstated. 
  • Requires creditors and settlement service providers that have information about appraiser misconduct to file reports with the appropriate state licensing authorities.
  • Requires the creditor or its agent to pay fee appraisers (i.e., those not employed by the creditor) a rate that is reasonable and customary in the geographic market where the property is located. This provision only covers state-licensed and certified appraisers.

These new regulations take the place of the Home Valuation Code of Conduct (HVCC), which in 2008 established appraisal independence standards for loans sold to Fannie Mae and Freddie Mac. Readers may recall that the HVCC provided, among other things, that only a creditor (or its agent) could select, engage, and compensate an appraiser or order an appraisal, and that the creditor had to ensure that its loan production staff had no influence on the appraisal process or outcome. The Dodd-Frank Act repealed the HVCC, effective once the Fed issued these interim appraisal independence regulations.  

Conflicts of interest prohibition

The interim rule prohibits a person who provides a property valuation from having a direct or indirect interest, financial or otherwise, in the dwelling or transaction. Some have misinterpreted this as prohibiting in-house staff from preparing appraisals. But an employment relationship by itself doesn’t violate the prohibition. 

The rule provides safe harbors and specific criteria for establishing firewalls between loan production staff and property valuation staff to prevent conflicts of interest based on asset size. The safe harbors also apply to those who perform valuation functions in addition to other settlement services.

Different safe harbors apply for creditors with assets of more than $250 million as of Dec. 31 for both of the past two calendar years and for creditors with assets of $250 million or less as of Dec. 31 for either of the past two calendar years. If the conditions of these safe harbors are satisfied, then the creditor may rely on valuations prepared by in-house staff or affiliates. If they’re not met, violations will be determined based on all of the facts and circumstances.

For credit unions with more than $250 million in assets, the safe harbor will apply when:

  • The compensation of the person performing the valuation function isn’t based on the value arrived at in any valuation, although this doesn’t prohibit the basing of compensation on whether the loan closes;
  • The person performing the valuation function reports to a person who isn’t part of the creditor’s loan production function and whose compensation isn’t based on whether the loan closes; and
  • No employee, officer, or director in the creditor’s loan production function is involved in any way in selecting, retaining, recommending, or influencing the selection of the one performing the valuation service, which includes deciding who should or shouldn’t be on a list of those approved to perform this function.

For credit unions with $250 million in assets or less, the safe harbor will apply when:

The compensation of the person performing the valuation function isn’t based on the value arrived at in any valuation, although this doesn’t prohibit basing compensation on whether the loan closes; and

The creditor requires any employee, officer, or director of the creditor who orders, performs, or reviews a valuation to abstain from participating.

For institutions with $250 million in assets or less, no one with decision-making authority on a particular loan can order or review the appraisal. But that standard is raised for institutions with more than $250 million in assets. In these institutions, no one in the entire real estate department can order or review the appraisal. The different standards recognize that smaller institutions can’t always separate property valuation and loan production staff. 

This is only the “nutshell version” of a very complex regulation. You can read the regulation (12 C.F.R. §226.42: Valuation Independence) and find additional information under “appraisals” in CUNA’s e-Guide to Federal Laws and Regulations (, and select “compliance”).

VALERIE Y. MOSSis CUNA’s director of compliance infor-mation. Send compliance questions to