WASHINGTON -- Federal banking regulators defended their decision to exempt many home mortgages for appraisal requirements at a House hearing Wednesday.

The officials argued that they need more time to learn how the rule will affect lenders before making additional changes.

"We're just beginning to gather information," said Federal Reserve Governor John P. LaWare. "I'd rather wait and see what experience tells us."

Bankers testifying before the panel said the experience so far was all negative.

Called Costly

"In my market, consumers currently pay $250 for an appraisal that they used to get for $50 and an appraisal that used to take one week now takes four to six weeks," said J. Edward Dawson, president of Peoples National Bank, Martinsburg, W. Va.

"Licensed or certified appraisers are hard to find in my market as well," said Michael Macielag, president of Chesapeake Bank and Trust Co. of Chestertown, Md.

"When we need an outside appraiser, we currently call a firm that is approximately 40 miles away," he added. "I am concerned about the validity of their analysis because they may not know the local market as well as we do."

The exemption of most loans of less than $100,000 has become one of the most controversial elements of the real-estate appraisal reforms mandated by Congress.

Bankers vs. Appraisers

It has ignited a feud between bankers, who say it will reduce costs and regulation without threatening the safety and soundness of the industry, and appraisers, who say appraisals on all loans would protect consumers and banks alike from inaccuracies and abuse.

Congress required federal regulators to establish standards for real estate appraisals for financial institutions in the 1989 thrift bailout law.

"Bad appraisals can lead to bad loans, which in turn produce financial institution failures, deposit insurance fund losses, and taxpayer bailouts," said Rep. Carroll Hubbard, who chairs the House Banking sub-committee that held the hearing.

Rationale for Exemption

But regulators told Rep. Hubbard that the $100,000 threshold will reduce loan costs for consumers, diminish delays in loan processing, and cut regulatory burden on banks without jeopardizing the safety and soundness of the industry.

"For smaller loans, it is probable that any reduction in average loss-per-loan that could be achieved through the appraisal regulation would be less than the cost of requiring an appraisal that met all the regulatory requirements," said Robert F. Miailovich, associate director of the FDIC's Office of Policy.

"It is believed that traditional rules of competence and bank safety and soundness are sufficient for smaller real estate loans."

Regulators said they had received near-record numbers of letters about the appraisal regulations. The Federal Reserve alone has received 2,800 letters, Mr. LaWare said.

The Federal Reserve, The Office of the Comptroller of the Currency, Office of Thrift Supervision, and the FDIC all currently exempt both residential and commercial loans of less than $100,000 from appraisal requirements.

The National Credit Union Administration, however, exempts loans only up to $50,000.

Several of the agencies, including the OCC and the FDIC, had initially set lower de minimus levels, but raised them after a barrage of complaints from the banking industry.

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