Academic journal article Federal Reserve Bulletin , Vol. 78, No. 11
Statement by John P. LaWare, Member, Board of Governors of the Federal Reserve System, before the Subcommittee on General Oversight and Investigations of the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, September 16, 1992
I am pleased to appear before you this morning to discuss the implementation and effectiveness of the real estate appraisal requirements contained in Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). Title XI contemplates a dual state and federal role in fulfilling its goal, which, as indicated in its statement of purpose, is to provide "that federal financial and public policy interests in real estate-related transactions will be protected by requiring that real estate appraisals utilized in connection with federally related transactions are performed in writing, in accordance with uniform standards, by individuals whose competency has been demonstrated and whose professional conduct will be subject to effective supervision."
At the federal level, Title XI required that the federal financial institutions regulatory agencies issue regulations that prescribe appropriate appraisal standards for those real estate-related transactions that would require the services of a licensed or certified appraiser under the statute and, therefore, are federally related. The agencies were also required to distinguish between those transactions that require the services of a state-certified appraiser (the senior designation) and those that require the services of a state-licensed appraiser (the junior designation).
The states also play a vital role under the statute. Title XI contemplates that the states will establish appraiser certification and licensing agencies, as well as set minimum requirements for individuals who are qualified to perform appraisals in connection with federally related transactions. After December 31, 1992, state-certified or licensed appraisers must be used for all federally related transactions, unless a temporary waiver is granted in accordance with the provisions contained in Title XI.
At the outset I should make clear that the Federal Reserve Board shares the desire of the Congress to ensure that banks establish sound loan underwriting and administrative procedures. An integral part of such procedures is, of course, a prudent and effective appraisal program. Indeed, the loss experience of depository institutions in recent years has demonstrated the critical importance of sound underwriting standards in promoting the safety of financial institutions and in protecting the interests of depositors.
The committee's letter of invitation provides that this hearing will generally examine the implementation and effectiveness of Title XI and requests, as well, that the Federal Reserve Board address several specific questions. The individual questions are addressed in an attachment to this testimony.(1) However, because of the interest that has been expressed on the topic, I will, later in my statement, address the issue of a threshold above which appraisals are required.
Since the enactment of FIRREA on August 9, 1989, the Federal Reserve Board has been working extensively with the other federal financial institutions regulatory agencies to implement the requirements of Title XI. These efforts fall into several categories, as required by Title XI. One set of initiatives is the establishment of the appraisal subcommittee of the Federal Financial Institutions Examination Council and our continued representation on that subcommittee. Regarding the activities of the Appraisal Subcommittee, I will defer to the statement of the Appraisal Subcommittee Chairman, Fred Finke.
A second area in which each of the agencies has expended considerable effort is that of prescribing appropriate standards for the performance of real estate appraisals. In developing the regulation, the Board has attempted to comply with both the letter and the spirit of Title XI, while at the same time remaining sensitive to the potential costs and burdens that the regulation could impose, particularly on consumers and small businesses seeking real estate loans. …