[Federal Register Volume 73, Number 224 (Wednesday, November 19, 2008)]
[Notices]
[Pages 69647-69662]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-27401]


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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

[Docket ID OCC-2008-0021]

FEDERAL RESERVE SYSTEM

[Docket No. OP-1338]

FEDERAL DEPOSIT INSURANCE CORPORATION

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

[Docket ID OTS-2008-0012]

NATIONAL CREDIT UNION ADMINISTRATION

RIN 3133-AD38


Proposed Interagency Appraisal and Evaluation Guidelines

AGENCIES: Office of the Comptroller of the Currency, Treasury (OCC); 
Board of Governors of the Federal Reserve System (FRB); Federal Deposit 
Insurance Corporation (FDIC); Office of Thrift Supervision, Treasury 
(OTS); and National Credit Union Administration (NCUA).

ACTION: Notice with request for comment.

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SUMMARY: The OCC, FRB, FDIC, OTS, and NCUA (the Agencies), request 
comment on the proposed Interagency Appraisal and Evaluation Guidelines 
(proposed Guidelines). The proposed Guidelines, which would supersede 
the 1994 Interagency Appraisal and Evaluation Guidelines (1994 
Guidelines), reflect revisions to the Uniform Standards of Professional 
Appraisal Practice (USPAP) and the evolution of collateral valuation 
practices, such as the use of automated valuation models (AVMs). The 
proposed Guidelines also incorporate refinements made by the Agencies 
to the supervision of regulated institutions' appraisal and evaluation 
programs since 1994 and reflect the participation of the NCUA, which 
was not a party to the 1994 Guidelines. The proposed Guidelines are 
intended to clarify the Agencies' real estate appraisal regulations and 
promote a safe and sound real estate collateral valuation program.

DATES: Comments must be submitted on or before January 20, 2009.

ADDRESSES: Comments should be directed to:
    OCC: You may submit comments by any of the following methods:
     E-mail: [email protected].
     Fax: (202) 874-4448.
     Mail: Office of the Comptroller of the Currency, 250 E 
Street, SW., Mail Stop 1-5, Washington, DC 20219.
     Hand Delivery/Courier: 250 E Street, SW., Attn: Public 
Information Room, Mail Stop 1-5, Washington, DC 20219.
    Instructions: You must include ``OCC'' as the agency name and 
``Docket ID OCC-2008-0021'' in your comment. In general, OCC will enter 
all comments received into the docket without change, including any 
business or personal information that you provide such as name and 
address information, e-mail addresses, or phone numbers. Comments, 
including attachments and other supporting materials, received are

[[Page 69648]]

part of the public record and subject to public disclosure. Do not 
enclose any information in your comment or supporting materials that 
you consider confidential or inappropriate for public disclosure.
    You may review comments and other related materials by any of the 
following methods:
     Viewing Comments Personally: You may personally inspect 
and photocopy comments at the OCC's Public Information Room, 250 E 
Street, SW., Washington, DC. For security reasons, the OCC requires 
that visitors make an appointment to inspect comments. You may do so by 
calling (202) 874-5043. Upon arrival, visitors will be required to 
present valid government-issued photo identification and submit to 
security screening in order to inspect and photocopy comments.
     Docket: You may also view or request available background 
documents and project summaries using the methods described above.
    FRB: You may submit comments, identified by Docket No. OP-1338, by 
any of the following methods:
     Agency Web Site: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     E-mail: [email protected]. Include the 
docket number in the subject line of the message.
     Fax: 202/452-3819 or 202/452-3102.
     Mail: Jennifer J. Johnson, Secretary, Board of Governors 
of the Federal Reserve System, 20th Street and Constitution Avenue, 
NW., Washington, DC 20551.
    All public comments are available from the FRB's Web site at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as submitted, 
unless modified for technical reasons. Accordingly, your comments will 
not be edited to remove any identifying or contact information. Public 
comments may also be viewed in electronic or paper form in Room MP-500 
of the FRB's Martin Building (20th and C Streets, NW.) between 9 a.m. 
and 5 p.m. on weekdays.
    FDIC: You may submit comments by any of the following methods:
     Agency Web Site: http://www.fdic.gov/regulations/laws/federal. Follow instructions for submitting comments on the Agency Web 
Site.
     E-mail: [email protected]. Include ``Proposed Interagency 
Appraisal and Evaluation Guidelines'' in the subject line of the 
message.
     Mail: Robert E. Feldman, Executive Secretary, Attention: 
Comments, Federal Deposit Insurance Corporation, 550 17th Street, NW., 
Washington, DC 20429.
     Hand Delivery/Courier: Guard station at the rear of the 
550 17th Street Building (located on F Street) on business days between 
7 a.m. and 5 p.m. (EST).
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
    Public Inspection: All comments received will be posted without 
change to http://www.fdic.gov/regulations/laws/federal including any 
personal information provided. Comments may be inspected and 
photocopied in the FDIC Public Information Center, 3501 North Fairfax 
Drive, Room E-1002, Arlington, VA 22226, between 9 a.m. and 5 p.m. 
(EST) on business days. Paper copies of public comments may be ordered 
from the Public Information Center by telephone at (877) 275-3342 or 
(703) 562-2200.
    OTS: You may submit comments, identified by docket number ID OTS-
2008-0012, by any of the following methods:
     E-mail: [email protected]. Please include ID 
OTS-2008-0012 in the subject line of the message and include your name 
and telephone number in the message.
     Fax: (202) 906-6518.
     Mail: Regulation Comments, Chief Counsel's Office, Office 
of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552, 
Attention: ID OTS-2008-0012.
     Hand Delivery/Courier: Guard's Desk, East Lobby Entrance, 
1700 G Street, NW., from 9 a.m. to 4 p.m. on business days, Attention: 
Regulation Comments, Chief Counsel's Office, Attention: ID OTS-2008-
0012.
    Instructions: All submissions received must include the agency name 
and docket number for this notice. All comments received will be posted 
without change, including any personal information provided. Comments 
including attachments and other supporting materials received are part 
of the public record and subject to public disclosure. Do not enclose 
any information in your comments or supporting materials that you 
consider confidential or inappropriate for public disclosure.
     Viewing Comments On-Site: You may inspect comments at the 
Public Reading Room, 1700 G Street, NW., by appointment. To make an 
appointment for access, call (202) 906-5922, send an e-mail to 
public.info@ots.treas.gov">public.info@ots.treas.gov, or send a facsimile transmission to (202) 
906-6518. (Prior notice identifying the materials you will be 
requesting will assist us in serving you.) We schedule appointments on 
business days between 10 a.m. and 4 p.m. In most cases, appointments 
will be available the next business day following the date we receive a 
request.
    NCUA: You may submit comments by any of the following methods 
(Please send comments by one method only):
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     NCUA Web Site: http://www.ncua.gov/RegulationsOpinionsLaws/proposedregs/proposedregs.html Follow the 
instructions for submitting comments.
     E-mail: Address to [email protected]. Include ``[Your 
name] Comments on Proposed Interagency Appraisal and Evaluation 
Guidelines,'' in the e-mail subject line.
     Fax: (703) 518-6319. Use the subject line described above 
for e-mail.
     Mail: Address to Mary F. Rupp, Secretary of the Board, 
National Credit Union Administration, 1775 Duke Street, Alexandria, 
Virginia 22314-3428.
     Hand Delivery/Courier: Same as mail address.
    Public inspection: All public comments are available on the 
agency's website at http://www.ncua.gov/RegulationsOpinionsLaws/proposed_regs/comments.html as submitted, except as may not be 
possible for technical reasons. Public comments will not be edited to 
remove any identifying or contact information. Paper copies of comments 
may be inspected in NCUA's law library, at 1775 Duke Street, 
Alexandria, Virginia 22314, by appointment weekdays between 9 a.m. and 
3 p.m. To make an appointment, call (703) 518-6546 or send an e-mail to 
--OGCMail @ncua.gov .

FOR FURTHER INFORMATION CONTACT:
    OCC: Doreen Ledbetter, Credit Risk Specialist, or Vance S. Price, 
Director, Credit and Market Risk Division, (202) 874-5170; Christopher 
Manthey, Counsel, Bank Activities and Structure, or Mitchell Plave, 
Counsel, Legislative and Regulatory Activities, (202) 874-5300.
    FRB: Virginia M. Gibbs, Senior Supervisory Financial Analyst, (202) 
452-2521; or Sabeth I. Siddique, Assistant Director, (202) 452-3861, 
Division of Banking Supervision and Regulation; or Walter McEwen, 
Senior

[[Page 69649]]

Counsel, (202) 452-3321, or Benjamin W. McDonough, Senior Attorney, 
(202) 452-2036, Legal Division. For users of Telecommunications Device 
for the Deaf (``TDD'') only, contact (202) 263-4869.
    FDIC: Beverlea S. Gardner, Senior Examination Specialist, Division 
of Supervision and Consumer Protection, (202) 898-6790, or Janet V. 
Norcom, Counsel, Legal Division, (202) 898-8886.
    OTS: Debbie Merkle, Project Manager, Credit Risk, Risk Management, 
(202) 906-5688, or Marvin Shaw, Senior Attorney, Regulations and 
Legislation Division (202) 906-6639.
    NCUA: Moisette Green, Staff Attorney, (703) 518-6540 or Robert C. 
Leonard, Program Officer, (703) 518-6396.

SUPPLEMENTARY INFORMATION: 

I. Background

    Title XI of the Financial Institutions Reform, Recovery, and 
Enforcement Act of 1989 (FIRREA) \1\ requires each Agency to prescribe 
appropriate standards for the performance of real estate appraisals in 
connection with ``federally related transactions,'' \2\ which are 
defined as those real estate-related financial transactions that an 
Agency engages in, contracts for, or regulates and that require the 
services of an appraiser.\3\ These rules must require, at a minimum, 
that real estate appraisals be performed in accordance with generally 
accepted uniform appraisal standards as evidenced by the appraisal 
standards promulgated by the Appraisal Standards Board of The Appraisal 
Foundation (Appraisal Standards Board), and that such appraisals be in 
writing.\4\ Such appraisals are to be performed by an individual whose 
competency has been demonstrated and whose professional conduct is 
subject to effective state supervision. An Agency may require 
compliance with additional appraisal standards if it makes a 
determination that such additional standards are required in order to 
properly carry out its statutory responsibilities.\5\ Each of the 
Agencies has adopted additional appraisal standards.\6\
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    \1\ Public Law 101-73, 103 Stat. 183 (1989).
    \2\ 12 U.S.C. 3339.
    \3\ 12 U.S.C. 3350(4).
    \4\ 12 U.S.C. 3339.
    \5\ Id.
    \6\ OCC: 12 CFR part 34, subpart C; FRB: 12 CFR part 208, 
subpart E and 12 CFR part 225, subpart G; FDIC: 12 CFR part 323; 
OTS: 12 CFR part 564; and NCUA: 12 CFR part 722.
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    The OCC, FRB, FDIC, and OTS jointly issued the 1994 Guidelines to 
provide further guidance to regulated financial institutions on prudent 
appraisal and evaluation policies, procedures, practices, and 
standards.\7\ The 1994 Guidelines address supervisory matters relating 
to real estate appraisals and evaluations used to support real estate-
related financial transactions and provide guidance to both examiners 
and regulated institutions about prudent appraisal and evaluation 
programs. In particular, the 1994 Guidelines provide clarification of 
expectations for written evaluations of real estate collateral in 
certain transactions that do not require the services of an appraiser 
under the Agencies' regulations.
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    \7\ See OCC: Comptroller's Handbook, Commercial Real Estate and 
Construction Lending (1998) (Appendix E); FRB: 1994 Interagency 
Appraisal and Evaluation Guidelines (SR letter 94-55); FDIC: FIL-74-
94; and OTS: 1994 Interagency Appraisal and Evaluation Guidelines 
(Thrift Bulletin 55a).
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    Over the years, the Agencies have issued several additional 
supervisory guidance documents to promote sound practices in regulated 
institutions' appraisal and evaluation programs, including independence 
in the appraisal and evaluation functions, the appraisal of residential 
tract development, and compliance with revisions to USPAP.\8\
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    \8\ This includes: The 2003 Interagency Statement on Independent 
Appraisal and Evaluation Functions, OCC: Advisory Letter 2003-9; 
FRB: SR letter 03-18; FDIC: FIL-84-2003; OTS: CEO Memorandum No.184; 
and NCUA: NCUA Letter to Credit Unions 03-CU-17; the 2005 Frequently 
Asked Questions on the Appraisal Regulations and the Interagency 
Statement on Independent Appraisal and Evaluation Functions, OCC: 
OCC Bulletin 2005-6; FRB: SR letter 05-5; FDIC: FIL-20-2005; OTS: 
CEO Memorandum No. 213: and NCUA: NCUA Letter to Credit Unions 05-
CU-06; the 2005 Interagency FAQs on Residential Tract Development 
Lending, OCC: OCC Bulletin 2005-32; FRB: SR letter 05-14; FDIC: FIL-
90-2005; OTS: CEO Memorandum No. 225: and NCUA: NCUA Letter to 
Credit Unions 05-CU-12; and the 2006 Interagency Statement on the 
2006 Revisions to the Uniform Standards of Professional Appraisal 
Practice, OCC: OCC Bulletin 2006-27; FRB: SR letter 06-9; FDIC: FIL-
53-2006; OTS: CEO Memorandum No. 240: and NCUA: Regulatory Alert 06-
RA-04. Each of these guidance documents continues to be in effect.
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    Since the issuance of the 1994 Guidelines, there have been some 
significant developments concerning appraisals and advancements in 
regulated institutions' collateral valuation practices. Advances in 
technology, for example, have prompted increased use of AVMs to derive 
values for residential transactions that do not require the services of 
an appraiser under the appraisal regulations. Further, in 2006, the 
Appraisal Standards Board issued significant revisions to USPAP, 
adopting the USPAP Scope of Work Rule and deleting the USPAP Departure 
Rule. For these reasons, the Agencies are issuing the proposed 
Guidelines to provide further clarification of supervisory expectations 
for regulated institutions' appraisal and evaluation programs.
    Independent and reliable collateral valuations are core to a 
regulated institution's real estate credit decisions. Therefore, the 
proposed Guidelines are intended to re-enforce the importance of sound 
collateral valuation practices that the Agencies' appraisal regulations 
mandate. The Agencies believe that the proposed Guidelines further 
clarify their long standing expectations for an institution's appraisal 
and evaluation program, which are necessary to promote safe and sound 
real estate lending activity.

II. Principal Elements of the Guidelines

    The proposed Guidelines provide guidance on elements of a safe and 
sound appraisal and evaluation program, including the Agencies' 
supervisory expectations concerning the independence of an 
institution's appraisal and evaluation program from influence by the 
borrower or the loan production staff, the competence of individuals 
who perform appraisals and evaluations, standards for the development 
and reporting of appraisals and evaluations, and an institution's 
collateral review function. The proposed Guidelines also provide 
guidance and expectations for risk management principles and control 
measures for institutions' appraisal and evaluation programs.
    The proposed Guidelines would supersede the 1994 Guidelines and 
reflect guidance issued by the Agencies over the past several years on 
independence of the appraisal and evaluation program, appraisals for 
residential tract developments, and the USPAP Scope of Work Rule. The 
core principles of the 1994 Guidelines have been retained. Further, the 
format of the 1994 Guidelines has been retained in the proposed 
Guidelines to make it easier for regulated institutions and examiners 
to find the material that has not been revised.
    The following discussion summarizes the proposed major revisions to 
the 1994 Guidelines.
    Independence of the Appraisal and Evaluation Program. The proposed 
Guidelines emphasize the importance of the independence of an 
institution's appraisal and evaluation program from influence by the 
loan production process or borrower. For small and rural institutions, 
where complete separation of the collateral valuation function and the 
loan production process may not be possible, the proposed Guidelines 
discuss prudent minimal safeguards and clarify that lending staff 
should abstain from the approval of the loan on which

[[Page 69650]]

they perform, order, or review an appraisal or evaluation.
    Minimum Appraisal Standards. The proposed Guidelines provide 
further clarification of the five appraisal standards in the Agencies' 
appraisal regulations, as follows. First, the Agencies' appraisal 
regulations provide that USPAP sets the minimum appraisal standards for 
federally related transactions. The proposed Guidelines provide 
clarification of those appraisal standards above and beyond USPAP that 
are required by the Agencies' appraisal regulations. Second, the 
Agencies' appraisal regulations require that appraisals for federally 
related transactions be written and contain sufficient information to 
support the institution's credit decision. The proposed Guidelines 
reflect an expanded discussion of the Agencies' expectations for the 
content of appraisals that will satisfy this requirement. Third, the 
Agencies' appraisal regulations require that appraisals analyze and 
report deductions and discounts for a loan to finance proposed 
construction or renovation, partially leased buildings, non-market 
lease terms, and tract developments with unsold units. The proposed 
Guidelines provide more detail on the application of this standard by 
property type, both commercial and residential. Fourth, the Agencies' 
appraisal regulations require that appraisals be based upon the 
regulatory definition of market value. The discussion of market value 
in the 1994 Guidelines has been expanded in the proposed Guidelines to 
link the appraisal regulatory definition of market value with the 
definition of value in the Agencies' real estate lending standards 
guidelines.\9\ The proposed Guidelines also address the definition of 
``market value'' in an appraisal for a loan to finance a development 
and construction real estate project. Fifth, the Agencies' appraisal 
regulations require that an institution use the services of a state-
certified or licensed appraiser. The proposed Guidelines remind 
institutions that an appraiser's credential is not the sole 
determination of competency and that institutions should consider the 
appraiser's education and experience to assess his or her competency 
for a given appraisal assignment. Further, the proposed Guidelines 
remind institutions to convey to an appraiser that the requirements of 
the Agencies' minimum appraisal standards are considered assignment 
conditions for an appraiser under USPAP.
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    \9\ OCC 12 CFR part 34, subpart D; FRB: 12 CFR part 208, 
Appendix C; FDIC 12 CFR part 365; and OTS 12 CFR 560.100 and 
560.101. NCUA's general lending regulation addresses residential 
real estate lending by federal credit unions, and its member 
business loan regulation addresses commercial real estate lending. 
12 CFR 701.21; 12 CFR part 723.
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    Appraisal Development and Appraisal Reports. These sections were 
revised to reflect revisions to USPAP that the Appraisal Standards 
Board implemented in July 2006 to eliminate the USPAP Departure Rule 
and to adopt the USPAP Scope of Work Rule. The proposed Guidelines 
incorporate the guidance provided by the Agencies in the June 2006 
Interagency Statement on the 2006 Revisions to USPAP.\10\ The proposed 
Guidelines remind institutions that while the appraiser is responsible 
for complying with USPAP and its Scope of Work Rule, the institution is 
responsible for complying with the Agencies' appraisal regulations and 
should discuss its needs and expectations for the appraisal with the 
appraiser. Further, the discussion on appraisal reports no longer 
refers to specific USPAP reporting formats (that is, self-contained, 
summary, and restricted appraisal reports). Rather, the discussion 
addresses the level and adequacy of information and analysis in the 
report that is necessary to comply with both USPAP and the regulatory 
appraisal requirement to provide sufficient information to support the 
institution's credit decision. Reference to the revised USPAP 
terminology has been included in a new proposed Appendix C, which 
provides a glossary of terms. The Agencies understand that the 
Appraisal Standards Board may consider revisions to the USPAP reporting 
formats so this discussion was worded broadly to allow for possible 
USPAP changes.
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    \10\ See supra, note 8.
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    Evaluation Content. Under the Agencies' appraisal regulations, an 
institution may obtain or perform an evaluation of real property 
collateral in lieu of an appraisal for transactions that qualify for 
certain appraisal exemptions. This section describes the Agencies' 
expectations on the information and analysis that should be included in 
an evaluation. An institution should obtain more detailed evaluations 
for higher risk real estate-related financial transactions or as its 
portfolio risk increases. Further, this section was revised to reflect 
the inclusion of a new appendix (Appendix B) in the proposed Guidelines 
on evaluation alternatives. This new appendix provides a discussion of 
appropriate practices and controls regarding an institution's use of 
AVMs and tax assessment valuations as evaluation alternatives. This 
section also addresses the Agencies' expectations for institutions to 
establish a process and procedures for determining the appropriate use 
of evaluation alternatives for a given transaction or lending activity, 
considering associated risk.
    Reviewing Appraisals and Evaluations. This is a new section in the 
proposed Guidelines and is based on material in the Program Compliance 
section in the 1994 Guidelines, the 2003 Interagency Statement on 
Independent Appraisal and Evaluation Functions, and a related statement 
issued by the Agencies in 2005 addressing frequently asked 
questions.\11\ While the proposed Guidelines retain a Program 
Compliance section concerning effective internal controls, the new 
section emphasizes the importance of an institution's review function 
to promote quality appraisals and evaluations. The Agencies expect 
institutions to maintain a robust review process for ensuring that 
appraisals and evaluations support their credit decisions. The program 
should provide for an increasingly comprehensive review of appraisals 
supporting transactions that pose higher credit risk to the 
institution. This expectation for a risk-based program recognizes the 
importance of the collateral valuation process to promoting sound 
credit underwriting decisions. As explained in the proposed Guidelines, 
the scope of the review will depend upon the type and risk of the 
transaction and the process through which the appraisal or evaluation 
is obtained. The proposed Guidelines provide guidance on the review 
process, including documentation, independence, review procedures, and 
reviewers' qualifications. The proposed Guidelines also indicate that 
an institution with prior approval from its primary regulator may 
employ various techniques, such as automated tools or sampling methods, 
for performing pre-funding reviews of appraisals or evaluations 
supporting lower risk single-family residential mortgages. Finally, the 
proposed Guidelines outline expectations for a compliance program to 
establish effective internal controls that promote compliance with the 
Agencies' appraisal regulations, supervisory guidelines and 
institutions' internal policies.
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    \11\ See supra, note 8.
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    Portfolio Monitoring and Updating Collateral Valuations. This 
section was revised to emphasize the importance of sound portfolio 
monitoring principles that set forth criteria for when an institution 
should replace or update collateral valuations for existing real

[[Page 69651]]

estate loans. In establishing criteria, an institution should consider 
the appropriateness of the valuation tool or methodology, the age of 
the original appraisal or evaluation, property type, current market 
conditions, and current use of the property. Further, the proposed 
Guidelines remind institutions that as the reliance on real estate 
becomes more important on an existing credit, there is a need for 
timely information to assess the value of the real estate collateral 
and the associated risk to the institution. This section also explains 
that examiners have the right to require an institution to obtain an 
appraisal or evaluation when there are safety and soundness concerns on 
an existing real estate secured credit.
    Appraisal Exemptions (Appendix A). This new appendix provides 
further clarification on real estate-related financial transactions 
exempted from the Agencies' appraisal regulations. This discussion is 
based on the preamble to the Agencies' 1994 regulations and responds to 
the questions the Agencies have received over the years concerning 
exemptions to their appraisal requirements.
    Evaluation Alternatives (Appendix B). This new appendix reflects 
the discussion on the use of AVMs and tax assessment valuations as 
evaluation alternatives in the Interagency Credit Risk Management 
Guidance for Home Equity Lending.\12\ Appendix B provides guidance on 
the process for selecting and validating a model. The appendix also 
provides a framework, in the form of a set of questions, that 
institutions may consider for determining when an AVM may be an 
acceptable evaluation alternative for a given transaction.
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    \12\ OCC: 2005-22; FRB: SR letter 05-11; FDIC: FIL 45-2005; OTS: 
CEO Memorandum No. 222; and NCUA: NCUA Letter to Credit Unions 05-
CU-07.
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    Glossary of Terms (Appendix C). The proposed Guidelines contain a 
new glossary of various terms used in the Guidelines and appraisal 
practice to aid institutions in understanding the Guidelines. Many of 
these terms are already defined in the Agencies' appraisal regulations 
and in USPAP.

III. Request for Comment

    The Agencies are requesting public comment on all aspects of the 
proposed Guidelines. In particular, the Agencies request comment on the 
clarity of the proposed Guidelines regarding the interpretations of the 
thirteen appraisal exemptions discussed in Appendix A.\13\ The Agencies 
further request comment on the appropriateness of risk management 
expectations and controls in the evaluation process including those 
discussed in Appendix B of the proposed Guidelines. The Agencies also 
seek comment on the expectations in the proposed Guidelines on 
reviewing appraisals and evaluations. In particular, the Agencies seek 
specific comment on whether the use of automated tools or sampling 
methods that the proposed Guidelines allow for reviews of appraisals or 
evaluations supporting lower risk single-family residential mortgages 
is appropriate for other low risk mortgage transactions and whether 
appropriate constraints can be placed on the use of these tools and 
methods to ensure the overall integrity of the institution's appraisal 
process for those low risk mortgage transactions.
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    \13\ In light of recent events in the residential mortgage 
market, the Agencies are interested in comments on the exemption 
from the regulatory appraisal requirements for residential real 
estate transactions involving U.S. government sponsored agencies.
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    The text of the proposed Guidelines, entitled proposed 2008 
Interagency Appraisal and Evaluation Guidelines, is as follows:

Purpose

    The Office of the Comptroller of the Currency (OCC), the Board of 
Governors of the Federal Reserve System (FRB), the Federal Deposit 
Insurance Corporation (FDIC), the Office of Thrift Supervision (OTS), 
and the National Credit Union Administration (NCUA) (the Agencies) are 
jointly issuing these Interagency Appraisal and Evaluation Guidelines 
(Guidelines), which supersede the 1994 Interagency Appraisal and 
Evaluation Guidelines. These Guidelines address supervisory matters 
relating to real estate appraisals and evaluations used to support real 
estate-related financial transactions.\14\ Further, these Guidelines 
provide federally regulated institutions and examiners clarification on 
the Agencies' expectations for prudent appraisal and evaluation 
policies, procedures, and practices.
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    \14\ These Guidelines pertain to all real estate-related 
financial transactions originated or purchased by a regulated 
institution or its operating subsidiary for its own portfolio or as 
assets held for sale, including activities of commercial and 
residential real estate mortgage operations, capital markets groups, 
and asset securitization and sales units.
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Background

    Title XI of the Financial Institutions Reform, Recovery, and 
Enforcement Act of 1989 (FIRREA) \15\ requires each Agency to prescribe 
appropriate standards for the performance of real estate appraisals in 
connection with ``federally related transactions,'' \16\ which are 
defined as those real estate-related financial transactions that an 
Agency engages in, contracts for, or regulates and that require the 
services of an appraiser.\17\ The Agencies' appraisal regulations must 
require, at a minimum, that real estate appraisals be performed in 
accordance with generally accepted uniform appraisal standards as 
evidenced by the appraisal standards promulgated by the Appraisal 
Standards Board, and that such appraisals be in writing.\18\ An Agency 
may require compliance with additional appraisal standards if it makes 
a determination that such additional standards are required in order to 
properly carry out its statutory responsibilities.\19\ Each of the 
Agencies has adopted additional appraisal standards.\20\
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    \15\ Public Law 101-73, 103 Stat. 183 (1989).
    \16\ 12 U.S.C. 3339.
    \17\ 12 U.S.C. 3350(4).
    \18\ Supra to Note 3.
    \19\ Id.
    \20\ OCC: 12 CFR part 34, subpart C; FRB: 12 CFR part 208, 
subpart E, and 12 CFR part 225, subpart G; FDIC: 12 CFR part 323; 
OTS: 12 CFR part 564; and NCUA: 12 CFR part 722.
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    The Agencies' real estate lending regulations and guidelines,\21\ 
issued pursuant to section 304 of the Federal Deposit Insurance 
Corporation Improvement Act of 1991 (FDICIA), require each institution 
to adopt and maintain written real estate lending policies that are 
consistent with principles of safety and soundness and that reflect 
consideration of the real estate lending guidelines issued as an 
appendix to the regulations.\22\ The real estate lending guidelines 
state that an institution's real estate lending program should include 
an appropriate real estate appraisal and evaluation program.
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    \21\ OCC: 12 CFR part 34, subpart D; FRB: 12 CFR part 208, 
subpart E; FDIC: 12 CFR part 365; and OTS: 12 CFR 560.100 and 
560.101.
    \22\ NCUA's general lending regulation addresses residential 
real estate lending by federal credit unions, and its member 
business loan regulation addresses commercial real estate lending. 
12 CFR 701.21; 12 CFR part 723.
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Supervisory Policy

    An institution's real estate appraisal and evaluation policies and 
procedures will be reviewed as part of the examination of the 
institution's overall real estate-related activities. Examiners will 
consider the institution's size and nature of its real estate-related 
activities when assessing the appropriateness of its program.
    When analyzing individual transactions, examiners will review an 
appraisal or evaluation to determine whether the methods, assumptions, 
and value conclusions are reasonable. Examiners also determine whether 
the appraisal or evaluation complies with the Agencies' appraisal 
regulations and

[[Page 69652]]

supervisory guidelines as well as the institution's policies. Examiners 
will review the steps taken by an institution to ensure that the 
persons who perform the institution's appraisals and evaluations are 
qualified and are not subject to conflicts of interest. Institutions 
that fail to maintain a sound appraisal and evaluation program or to 
comply with the Agencies' appraisal regulations and supervisory 
guidelines will be cited in supervisory letters or examination reports 
and may be criticized for unsafe and unsound banking practices. 
Deficiencies will require appropriate corrective action.

Appraisal and Evaluation Program

    An institution's board of directors or its designated committee is 
responsible for adopting and reviewing policies and procedures that 
establish an effective real estate appraisal and evaluation program. 
The program should:
     Provide for the independence of the persons ordering, 
performing, and reviewing appraisals or evaluations;
     Establish selection criteria and procedures to evaluate 
and monitor the ongoing performance of persons who perform appraisals 
or evaluations;
     Ensure that appraisals contain sufficient information to 
support the credit decision;
     Maintain criteria for content and appropriate use of 
evaluations;
     Provide for the receipt and review of the appraisal or 
evaluation report in a timely manner to facilitate the credit decision;
     Develop criteria to assess the validity of existing 
appraisals or evaluations to support subsequent transactions;
     Implement internal controls that promote compliance with 
these program standards; and
     Establish criteria for obtaining appraisals or evaluations 
for transactions that are not otherwise covered by the appraisal 
requirements of the Agencies' appraisal regulations.

Independence of the Appraisal and Evaluation Program

    An institution should maintain standards of independence as part of 
an effective collateral valuation program (both appraisal and 
evaluation functions) for all of its real estate lending activity. The 
collateral valuation program is an integral component of the credit 
underwriting process and, therefore, should be isolated from influence 
by the institution's loan production staff. An institution should 
establish reporting lines independent of loan production for staff that 
order, accept, and review appraisals and evaluations.
    Persons who perform appraisals must be independent of the loan 
production and collection processes and have no direct or indirect 
interest, financial or otherwise, in the property or transaction. These 
standards of independence also should apply to persons who perform 
evaluations. While the information provided to the appraiser by the 
institution should not unduly influence the appraiser, the institution 
may provide a copy of the sales contract for purchase transactions. 
Further, an institution's policies and controls should ensure that the 
institution does not communicate a predetermined, expected, qualifying, 
or owner's estimate of value, or a loan amount or target loan-to-value 
ratio to a person performing an appraisal or evaluation.
    For a small or rural institution or branch, it may not always be 
possible or practical to separate the collateral valuation program from 
the loan production process. If absolute lines of independence cannot 
be achieved, an institution should be able to demonstrate clearly that 
it has prudent safeguards to isolate its collateral valuation program 
from influence or interference from the loan production process. In 
such cases, another loan officer, other officer, or director of the 
institution may be the only person qualified to analyze the real estate 
collateral. To ensure their independence, such lending officials, 
officers, or directors should abstain from any vote or approval 
involving loans on which they performed, ordered, or reviewed the 
appraisal or evaluation.\23\
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    \23\ NCUA has recognized that it may be necessary for credit 
union loan officers or other officials to participate in the 
appraisal or evaluation function although it may be sound business 
practice to ensure no single person has the sole authority to make 
credit decisions involving loans on which the person ordered or 
reviewed the appraisal or evaluation. 55 FR 5614, 5618 (February 16, 
1990), 55 FR 30193, 30206 (July 25, 1990).
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Selection of Persons Who May Perform Appraisals and Evaluations

    An institution's collateral valuation program should establish 
criteria to select, evaluate, and monitor the performance of persons 
who perform an appraisal or evaluation. The criteria should ensure 
that:
     The institution's selection process is nonpreferential and 
unbiased;
     The person selected possesses the requisite education, 
expertise, and competence to complete the assignment;
     The work performed by persons providing appraisal and 
evaluation services is periodically reviewed by the institution;
     The person selected is capable of rendering an unbiased 
opinion;
     The person selected is independent and has no direct, 
indirect, or prospective interest, financial or otherwise, in the 
property or the transaction; and
     The person selected to perform an appraisal holds the 
appropriate state certification or license.
    Under the Agencies' appraisal regulations, an institution or its 
agent must directly select and engage appraisers. There also should be 
independence in the selection of persons who perform evaluations. 
Further, the person who selects or oversees the selection of appraisers 
or persons providing evaluation services should be independent from the 
loan production area. Independence is compromised when a borrower or 
loan production personnel recommends or selects a person to perform an 
appraisal or evaluation. An institution's use of a borrower-ordered 
appraisal violates the Agencies' appraisal regulations.
    Institutions should use written engagement letters when ordering 
appraisals, particularly for large, complex, or out-of-area commercial 
real estate properties. An engagement letter facilitates communication 
with the appraiser and documents the expectations of each party to the 
appraisal assignment. An institution should include the engagement 
letter in its permanent credit file. To avoid the appearance of any 
conflict of interest, appraisal or evaluation development work should 
not commence until the institution has selected a person for the 
assignment.

Transactions That Require Appraisals

    Although the Agencies' appraisal regulations exempt certain real 
estate-related financial transactions from the appraisal requirement, 
most real estate-related financial transactions over the appraisal 
threshold are considered federally related transactions and, thus, 
require appraisals.\24\ The Agencies reserve the right to require an 
appropriate appraisal under their appraisal regulations to address 
safety and soundness concerns in a

[[Page 69653]]

transaction. (See Appendix A--Appraisal Exemptions.) \25\
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    \24\ In order to facilitate recovery in designated major 
disaster areas, subject to safety and soundness considerations, 
Section 2 of the Depository Institutions Disaster Relief Act of 
1992, Public Law 102-485, 106 Stat. 2771 (October 23, 1992) provides 
the Agencies with the authority to waive certain appraisal 
requirements for up to three years after a Presidential declaration 
of a natural disaster.
    \25\ As a matter of policy, OTS uses its supervisory authority 
to require problem associations and associations in troubled 
condition to obtain appraisals for all real estate-related 
transactions over $100,000 (unless the transaction is otherwise 
exempt). NCUA requires a written estimate of market value for all 
real estate-related transactions valued at the appraisal threshold 
or less, or that involve existing credit where there is no advance 
of monies and material change in the condition of the property. 12 
CFR 722.3(d).
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Minimum Appraisal Standards

    The Agencies' appraisal regulations include the following five 
minimum standards for the preparation of an appraisal. (See Appendix 
C--Glossary for terminology used in these guidelines.)
    The appraisal must:
     Conform to generally accepted appraisal standards as 
evidenced by the Uniform Standards of Professional Appraisal Practice 
(USPAP) promulgated by the Appraisal Standards Board of the Appraisal 
Foundation unless principles of safe and sound banking require 
compliance with stricter standards.
    Although allowed by USPAP, the Agencies' appraisal regulations do 
not permit an appraiser to appraise any property in which the appraiser 
has an interest, direct or indirect, financial or otherwise. Further, 
the appraisal must contain an opinion of market value as defined in the 
Agencies' appraisal regulations. Under USPAP, the appraisal must 
contain a certification that the appraiser has complied with USPAP. An 
institution may refer to the USPAP certification to confirm whether the 
appraiser is independent of the property and the transaction, as 
required by the Agencies' appraisal regulations. Under the Agencies' 
appraisal regulations, the result of an Automated Valuation Model 
(AVM), by itself, is not an appraisal, because a state-certified or 
licensed appraiser must perform an appraisal in conformance with USPAP 
and the Agencies' minimum appraisal standards.
     Be written and contain sufficient information and analysis 
to support the institution's decision to engage in the transaction.
    An institution should obtain an appraisal that is appropriate for 
the particular federally related transaction, considering the risk and 
complexity of the transaction. The level of detail should be sufficient 
to understand the appraiser's analysis and opinion of the property's 
market value. As provided by the USPAP Scope of Work Rule, appraisers 
are responsible for establishing the scope of work to be performed in 
rendering an opinion of the property's market value and have three 
different reporting options available. (See Appendix C--Glossary of 
Terms describing reporting options.) However, an institution should 
ensure that the scope of work is appropriate for the assignment. The 
appraiser's scope of work should be consistent with the valuation 
methodology employed for similar property types, market conditions, and 
transactions. The content and format of the appraisal report must 
contain sufficient information and analysis to support the 
institution's decision to engage in the transaction. The appraisal 
report should contain sufficient disclosure of the nature and extent of 
inspection and research performed to verify the property's condition 
and support the appraiser's opinion of market value. The result of an 
AVM certified by an appraiser does not, by itself, meet this standard.
     Analyze and report appropriate deductions and discounts 
for proposed construction or renovation, partially leased buildings, 
non-market lease terms, and tract developments with unsold units.
    This standard is designed to avoid having appraisals prepared using 
unrealistic assumptions and inappropriate methods. An appraisal must 
include the market value of the property and should reflect the 
property's condition in its actual physical condition, use, and zoning 
designation, as of the effective date of the appraisal.
    [cir] Proposed Construction or Renovation. For properties where 
improvements are to be constructed or rehabilitated, an institution may 
request a prospective market value as completed and as stabilized. 
While an institution may request the appraiser to provide the sum of 
retail sales for a proposed development, this value is not the market 
value of the property for the purpose of the Agencies' appraisal 
regulations.
    [cir] Partially Leased Buildings. For proposed and partially leased 
rental developments, the appraiser must make appropriate deductions and 
discounts. Appropriate deductions and discounts should include items 
such as leasing commission, rent losses, tenant improvements, and 
entrepreneurial profit.
    [cir] Non-market Lease Terms. For properties subject to leases with 
terms that do not reflect current market conditions, the appraiser must 
make appropriate deductions and discounts, which should be based on 
stabilized occupancy at prevailing market terms.

Tract Developments With Unsold Units

     Raw Land. The appraiser must provide an opinion of value 
for raw land based on its current condition and existing zoning that 
includes appropriate deductions and discounts. Appropriate deductions 
and discounts should include items such as holding costs, marketing 
costs, and entrepreneurial profit.
     Developed Lots. For proposed developments of five or more 
residential lots, the appraiser must analyze and report appropriate 
deductions and discounts. Appropriate deductions and discounts should 
reflect holding costs, marketing costs, and entrepreneurial profit 
during the sales absorption period for the sale of the developed lots. 
The estimated sales absorption period should reflect the expected 
holding period before development commences as well as the time frame 
for the actual development and sale of the lots.
     Attached or Detached Single-family Homes. For proposed 
construction and sale of five or more attached or detached single-
family homes in the same development, the appraiser must analyze and 
report appropriate deductions and discounts. Appropriate deductions and 
discounts should reflect holding costs, marketing costs, and 
entrepreneurial profit during the sales absorption period of the 
completed units. If an institution finances construction on an 
individual unit basis, an appraisal of the individual units may be used 
if the institution can demonstrate through an independently obtained 
feasibility study or market analysis that all units collateralizing the 
loan can be constructed and sold within 12 months. However, the 
transaction should be supported by an appraisal that analyzes and 
reports appropriate deductions and discounts if any of the individual 
units are not completed and sold within the 12-month time frame.
     Condominiums. For proposed construction and sale of a 
condominium building with five or more units, the appraisal must 
reflect appropriate deductions and discounts. Appropriate deductions 
and discounts should include holding costs, marketing costs, and 
entrepreneurial profit during the sales absorption period of the 
completed units. If an institution finances construction of a single 
condominium building with less than five units or a condominium project 
with multiple buildings with less than five units per building, the 
institution may rely on appraisals of the individual units if the 
institution can demonstrate through an

[[Page 69654]]

independently obtained feasibility study or market analysis that all 
units collateralizing the loan can be constructed and sold within 12 
months. However, the transaction should be supported by an appraisal 
that analyzes and reports appropriate deductions and discounts if any 
of the individual units are not completed and sold within the 12-month 
time frame.
     Be based upon the definition of market value set forth in 
the appraisal regulation.
    Each appraisal must contain an estimate of market value, as defined 
by the Agencies' appraisal regulations. The Agencies' definition of 
market value assumes that the price is not affected by undue stimulus, 
which would allow the value of the real property to be increased by 
favorable financing or seller concessions. Further, the market value 
should not include a going concern value or a special value to a 
specific property user. An appraisal may contain separate opinions of 
value for such items so long as they are clearly identified and 
disclosed.
    The estimate of market value should consider the real property's 
current physical condition, use, and zoning as of the appraisal date. 
For a transaction financing construction or renovation of a building, 
an institution would generally request an appraiser to provide the 
property's market value in its ``as is'' condition as of the 
appraisal's effective date and the property's ``prospective'' market 
values at the time development is expected to be completed and at the 
time stabilized occupancy is projected to be achieved.\26\ Prospective 
market value opinions should be based upon current and reasonably 
expected market conditions. When an appraisal includes prospective 
value opinions, there should be a point of reference to the market 
conditions and time frame on which the appraiser based the 
analysis.\27\
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    \26\ Under NCUA regulations, ``market value'' of a construction 
and development project is the value at the time a commercial real 
estate loan is made, which includes ``the appraised value of land 
owned by the borrower on which the project is to be built, less any 
liens, plus the cost to build the project.'' 68 FR 56537, 56540 
(October 1, 2003) (referring to Office of General Counsel Opinion 
01-0422 (June 7, 2001)); 12 CFR 723.3(b).
    \27\ See USPAP, Statement 4 on Prospective Value Opinions, for 
further explanation.
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     Be performed by state-certified or licensed appraisers in 
accordance with requirements set forth in the appraisal regulation.
    In determining competency for a given appraisal assignment, 
institutions should consider an appraiser's education and experience. 
An institution should confirm that the appraiser holds a valid 
credential from the appropriate state appraiser regulatory authority. 
An institution should not base competency solely on the appraiser's 
credentialing. When ordering appraisals, an institution should convey 
to an appraiser that the Agencies' minimum appraisal standards must be 
followed. From the appraiser's perspective, these minimum appraisal 
standards are considered assignment conditions under USPAP.

Appraisal Development

    The Agencies' appraisal regulations require appraisals for 
federally related transactions to comply with USPAP. Consistent with 
the USPAP Scope of Work Rule,\28\ the appraisal must reflect an 
appropriate scope of work that provides for ``credible'' assignment 
results. The appraisal's scope of work should reflect the extent to 
which the property is identified and inspected, the type and extent of 
data researched, and the analyses applied to arrive at opinions or 
conclusions.
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    \28\ See USPAP Scope of Work Rule, Advisory Opinions 28 and 29.
---------------------------------------------------------------------------

    While an appraiser must comply with USPAP and establish the scope 
of work in an appraisal assignment, an institution is responsible for 
complying with the Agencies' appraisal regulations and obtaining an 
appraisal that provides sufficient information to support its decision 
to engage in the transaction. Therefore, to ensure that an appraisal is 
appropriate for the intended use, an institution should discuss its 
needs and expectations for the appraisal with the appraiser. Such 
discussions should assist the appraiser in establishing the scope of 
work and form the basis of the institution's engagement letter, as 
appropriate. An institution should not allow lower cost or the speed of 
delivery time to influence the appraiser's determination of an 
appropriate scope of work for an appraisal supporting a federally 
related transaction.
    If applicable, the appraisal should include three approaches (cost, 
income, and sales comparison) to analyze the value of a property, and 
should reconcile the results of each approach to estimate market value. 
An appraisal also should reflect an analysis of the property's sales 
history and an opinion as to the highest and best use of the property. 
Further, USPAP requires the appraiser to disclose whether or not the 
subject property was inspected and whether anyone provided significant 
assistance to the appraiser signing the appraisal report.

Appraisal Reports

    An institution is responsible for identifying the appropriate 
appraisal reporting option to support its credit decisions. The 
institution should consider the risk, size, and complexity of the 
transaction and the real estate collateral when determining its 
appraisal engagement instructions to an appraiser.
    USPAP provides various reporting options that an appraiser may use 
to present the results of appraisals. The major difference among these 
reporting options is the level of detail presented in the report. A 
reporting option that merely states, rather than summarizes or 
describes the content and information required in an appraisal report, 
may lack sufficient supporting information and analysis to explain the 
appraiser's opinions and conclusions. Therefore, the Agencies believe 
that such reports will not be appropriate to support most federally 
related transactions. However, these less detailed reports may be 
appropriate for real estate collateral monitoring or in circumstances 
when an institution's collateral valuation program requires an 
evaluation. (See Appendix C--Glossary of Terms describing reporting 
options.)
    Regardless of the reporting option, the appraisal report should 
contain sufficient detail to allow the institution to understand the 
scope of work performed. Sufficient information should include the 
disclosure of research and analysis performed, as well as disclosure of 
the research and analysis not performed together with the rationale for 
its omission.

Transactions That Require Evaluations

    An institution may obtain or perform an evaluation of real property 
collateral in lieu of an appraisal for transactions that qualify for 
certain exemptions under the Agencies' appraisal regulations. These 
exemptions include a transaction that:
     Has a transaction value equal to or less than the 
appraisal threshold.
     Is a business loan with a transaction value equal to or 
less than the business loan threshold, and is not dependent on the sale 
of, or rental income derived from, real estate as the primary source of 
repayment.\29\
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    \29\ NCUA regulations do not contain an exemption from the 
appraisal requirements specific to member business loans.
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     Involves an existing extension of credit at the lending 
institution, provided that:
    [cir] There has been no obvious and material change in the market 
conditions or physical aspects of the

[[Page 69655]]

property that threaten the adequacy of the institution's real estate 
collateral protection after the transaction, even with the advancement 
of new monies; or
    [cir] There is no advancement of new monies other than funds 
necessary to cover reasonable closing costs.

Qualifications of Persons Who Perform Evaluations

    An institution should select persons who are independent of the 
loan production process and the transaction, and have real estate-
related training and experience to perform evaluations. These persons 
should have knowledge of the market and property type relevant to the 
subject property. Examples include persons with appraisal experience, 
real estate lending or sales professionals, agricultural extension 
agents, or foresters.
    An institution should document the qualifications and relevant 
experience of persons selected to perform evaluations. An institution 
should have adequate controls to confirm that the person performing the 
evaluation is qualified and independent of the property, the 
transaction, and the loan production function. If an institution relies 
on an external, third party to perform an evaluation, the institution 
should communicate its evaluation criteria to the third party and have 
adequate controls to confirm compliance with its internal policies and 
these Guidelines. Although not required, an institution may use state-
certified or licensed appraisers to perform evaluations. Institutions 
should refer to USPAP Advisory Opinion 13 for guidance on appraisers 
performing evaluations of real property collateral.

Evaluation Content

    An evaluation should provide an estimate of the market value of the 
collateral to support the institution's credit decision or portfolio 
management. An institution should establish policies and procedures for 
determining an appropriate collateral valuation methodology for a given 
transaction considering associated risks. Further, these policies and 
procedures should address the process for selecting the most reliable 
evaluation method or tool for a transaction rather than using the 
method or tool that renders the highest value.
    An evaluation should support the institution's decision to engage 
in the transaction. While evaluation methodologies and tools may vary, 
all evaluations, at a minimum, should:
     Identify the location of the property;
     Provide a description of the property and its current and 
projected use;
     Indicate the source(s) of information used to value the 
property, including, but not limited to:
    [cir] External data sources;
    [cir] Previous sales data;
    [cir] Photos of the property;
    [cir] Property tax assessment data;
    [cir] Comparable sales information;
    [cir] Description of the neighborhood; and
    [cir] Local market conditions;
     Disclose the analysis that was performed and the 
supporting information used to value the property;
     Provide an estimate of the property's market value in its 
actual physical condition, use and zoning designation as of an 
effective date, with any limiting conditions, if applicable;
     Indicate the preparer's name and contact information; and
     Be documented in the credit file. Documentation content 
should be appropriate for the valuation methodology and tool used for 
the transaction.
    The institution also should establish criteria for determining the 
extent to which an inspection of the collateral is necessary to 
determine that the property is in acceptable condition for its current 
or projected use. Further, an institution should obtain more detailed 
evaluations for higher risk real estate-related financial transactions, 
or as its portfolio risk increases. A more detailed evaluation may be 
necessary for certain transactions such as those involving:
     Loans with combined loan-to-value ratios in excess of the 
supervisory loan-to-value limits;
     Atypical properties;
     Properties outside the institution's traditional lending 
market;
     Properties in a transitional market or location;
     Subsequent transactions with significant risk to the 
institution; or
     Borrowers with high risk characteristics.
    See Appendix B--Evaluation Alternatives for further guidance on 
evaluation alternatives such as AVMs and tax assessment values.

Accepting an Appraisal from Another Institution

    An institution may use an appraisal that was prepared by an 
appraiser engaged directly by another regulated or financial services 
institution, provided the institution determines that the appraisal is 
valid, conforms to the Agencies' appraisal regulations, and is 
otherwise acceptable. Such determinations should be completed by the 
acquiring institution prior to accepting the appraisal and documented 
in the credit file.
    Appraisals that support federally related transactions must meet 
the standards of independence within the Agencies' appraisal 
regulations. Among other considerations, when accepting an appraisal 
from another institution, the acquiring institution should obtain 
documentation that the appraiser was engaged directly by the 
institution transferring the appraisal and had no direct, indirect, or 
prospective interest, financial or otherwise, in the property or 
transaction. If an institution relies on a third party originator or 
its agent for the appraisal, the standard of independence still 
applies. For example, an engagement letter should confirm that the 
institution transferring the appraisal, not the borrower, was the 
original client that selected the appraiser and ordered the appraisal.
    An institution must not accept an appraisal that has been 
readdressed or altered by the appraiser with the intent to conceal the 
original client. Altering an appraisal report in a manner that conceals 
the original client or intended users of the appraisal is misleading 
and violates the Agencies' appraisal regulations and USPAP.

Validity of Appraisals and Evaluations

    The Agencies allow an institution to use an existing appraisal or 
evaluation to support a subsequent transaction. Therefore, an 
institution should establish criteria for assessing whether an existing 
appraisal or evaluation remains valid. Such criteria will vary 
depending upon the condition of the property and the marketplace, and 
the nature of the transaction. The documentation in the credit file 
should provide the facts and analysis to support the institution's 
conclusion that the existing appraisal or evaluation remains valid. 
Factors that could cause changes to originally reported values include:
     Passage of time;
     Volatility of the local market;
     Availability of financing;
     Inventory of competing properties;
     Improvements to the subject property or competing 
properties;
     Lack of maintenance of the subject or competing 
properties;
     Changes in zoning; or
     Environmental contamination.

Third Party Arrangements

    Effective program oversight should address any arrangements with a 
third party, acting as agent for the institution, providing appraisal 
and evaluation services. An institution should monitor and periodically 
assess these

[[Page 69656]]

arrangements for compliance with program standards and the Agencies' 
guidance on third party arrangements.\30\ If deficiencies are 
discovered, the institution should take remedial action in a timely 
manner.
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    \30\ See OCC Bulletin 2001-47, Third-Party Relationships 
(November 1, 2001); OTS Thrift Bulletin 82a, Third Party 
Arrangements (September 1, 2004); NCUA Letter to Credit Unions: 01-
CU-20, Due Diligence Over Third Party Service Arrangements (November 
2001), 07-CU-13, Supervisory Letter-Evaluation Third Party 
Relationships (December 2007), 08-CU-09, Evaluating Third Party 
Relationships Questionnaire (April 2008); and FDIC Financial 
Institution Letter 44-2008, Guidance for Managing Third-Party Risk 
(June 2008).
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Reviewing Appraisals and Evaluations

    The Agencies' appraisal regulations specify that appraisals must 
contain sufficient information and analysis to support an institution's 
decision to engage in a credit transaction. As part of the credit 
approval process, an institution should assess the acceptability of the 
appraisal or evaluation as well as compliance with the Agencies' 
appraisal regulations and Guidelines and its own internal policies. 
This review should be performed prior to the final credit decision and 
ensure that the appraisal or evaluation adequately supports approval of 
the credit. An institution's appraisal and evaluation review procedures 
should address the role, independence, and qualifications of the 
reviewer; the techniques, timing and level of review; documentation 
requirements; and the appropriate resolution of deficiencies. Review 
procedures also should address the reviewer's responsibility to verify 
that the methods, assumptions, data sources, and conclusions are 
reasonable and appropriate for the particular transaction and property.
    Persons who review appraisals and evaluations should be independent 
of the transaction and possess the requisite education, expertise, and 
competence to perform the review commensurate with the complexity of 
the transaction. Small or rural institutions or branches with limited 
staff should implement prudent safeguards for accepting appraisals and 
evaluations when absolute lines of independence cannot be achieved. In 
these situations, the review may be part of the originating loan 
officer's overall credit analysis, as long as the originating loan 
officer abstains from directly or indirectly approving or voting to 
approve the loan.
    Institutions should implement a risk-focused approach to determine 
the depth of the review needed to ensure that appraisals and 
evaluations are acceptable. The scope of review will depend upon the 
type and risk of the transaction and the process through which the 
appraisal and evaluation is obtained (whether directly or from another 
regulated or financial services institution). Appraisals and 
evaluations supporting complex properties or high-risk transactions 
should be reviewed more comprehensively to assess the technical quality 
of the appraiser's analysis prior to making a final credit decision. 
For example, a risk-focused approach for commercial mortgages should 
provide for a comprehensive review of those appraisals supporting 
transactions that pose higher credit risk to the institution. These 
transactions may include large-dollar credits, loans secured by complex 
or specialized properties, and properties outside the institution's 
traditional lending market. The depth to which reviews are completed 
for lower risk transactions should be commensurate with the size, type 
and complexity of the underlying credit transaction supported by the 
appraisal or evaluation.
    With prior approval from its primary regulator, an institution may 
employ various techniques, such as automated tools or sampling methods, 
for performing pre-funding reviews of appraisals or evaluations 
supporting lower risk single-family residential mortgages. When using 
such techniques, an institution should maintain sufficient data and 
employ appropriate screening parameters to provide adequate quality 
assurance and should ensure that the work of all appraisers and persons 
performing evaluations is periodically reviewed.
    The institution should document the content of the review in the 
credit file. This documentation may be presented in a checklist or 
narrative format as appropriate. If deficiencies are noted by the 
reviewer, they should be addressed by the person who prepared the 
appraisal or evaluation or another qualified, independent person. An 
institution should not accept appraisals or evaluations that do not 
adequately support the opinion of market value and should replace 
unreliable appraisals or evaluations prior to the final credit 
decision.
    An appraisal review performed by a state-certified or licensed 
appraiser must comply with USPAP. Any changes to an appraisal's 
estimate of value are permitted only as a result of a review conducted 
by an appropriately qualified state-certified or licensed appraiser in 
accordance with USPAP.

Program Compliance

    An institution's appraisal and evaluation policies should establish 
effective internal controls that promote compliance with the Agencies' 
appraisal regulations and supervisory guidelines. The compliance 
process should include a system of adequate controls, verification and 
testing that ensures the reliability of an institution's appraisals and 
evaluations. These controls should be commensurate with the risk of the 
institution's overall real estate lending activities. Further, the 
persons responsible for the compliance function should be insulated 
from any influence by loan production staff.
    The compliance process should ensure that all appraisers and 
persons performing evaluations are subject to periodic evaluation of 
the quality of their work. This information should provide a basis for 
evaluating whether the institution should continue to retain the 
services of the appraiser or the person performing the evaluation.

Portfolio Monitoring and Updating Collateral Valuations

    A prudent portfolio monitoring program should include criteria for 
determining when to obtain a new appraisal or evaluation in accordance 
with the Agencies' real estate lending standards. Among other 
considerations, these criteria may be based on changes in market 
conditions or deterioration in the credit since origination. Moreover, 
as an institution's reliance on collateral becomes more important, an 
institution's policies and procedures should ensure that timely 
information is available to management for assessing collateral and 
associated risk. The policy should delineate the valuation tool or 
methodology and consider the property type, current market conditions, 
current use of the property, and the age of the original appraisal or 
evaluation. For transactions that are otherwise exempt from the 
Agencies' appraisal requirements, institutions should establish 
policies for obtaining appraisals or evaluations to meet risk 
management objectives.
    Under the Agencies' appraisal regulations, examiners have the right 
to require an institution to obtain an appraisal or evaluation when 
there are safety and soundness concerns on an existing real estate 
secured credit. Therefore, in determining the classification of a 
problem real estate credit, an examiner may direct an institution to 
obtain a new appraisal or evaluation in order to have sufficient 
information to understand the nature of the problems. Examiners would 
be

[[Page 69657]]

expected to provide an institution with a reasonable amount of time to 
obtain a new appraisal or evaluation.

Referrals

    An institution should make referrals directly to state appraiser 
regulatory authorities when it suspects that a state-certified or 
licensed appraiser failed to comply with USPAP, applicable state laws, 
or engaged in other unethical or unprofessional conduct. Examiners 
finding evidence of unethical or unprofessional conduct by appraisers 
should forward their findings and recommendations to their supervisory 
office for appropriate disposition and referral to the state, as 
necessary.

Appendix A--Appraisal Exemptions

1. Appraisal Threshold

    For transactions with a transaction value equal to or less than the 
appraisal threshold, the Agencies require an evaluation consistent with 
safe and sound banking practices in lieu of an appraisal.\31\
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    \31\ NCUA's appraisal regulation requires a written estimate of 
market value, performed by a qualified and experienced person who 
has no interest in the property, for transactions equal to or less 
than the appraisal threshold and transactions involving an existing 
extension of credit. 12 CFR 722.3(d).
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2. Abundance of Caution

    An institution may take a lien on real estate and be exempt from 
obtaining an appraisal if the lien on real estate is taken by the 
lender in an abundance of caution. This exemption is intended to have 
limited application, especially for real estate loans secured by 
residential properties in which the real estate is the only form of 
collateral. In order for a business loan to qualify for the abundance-
of-caution exemption, the Agencies expect the extension of credit to be 
well supported by the borrower's cash flow or collateral other than 
real property. The institution's credit analysis should verify the 
reliability of these repayment sources and conclude that knowledge of 
the market value of the real estate on which the lien has been taken as 
an abundance of caution is unnecessary in making the credit decision.
    An institution should not invoke the abundance-of-caution exemption 
if its credit analysis reveals that the transaction would not be 
adequately secured by sources of repayment other than the real estate, 
even if the contributory value of the real estate collateral is low 
relative to the entire collateral pool. Similarly, the exemption should 
not be applied to a loan or loan program unless the institution 
verifies and documents the primary and secondary repayment sources. In 
the absence of verification of the repayment sources, this exemption 
should not be used merely to reduce the cost associated with obtaining 
an appraisal, to minimize transaction processing time, or to offer 
slightly better terms to a borrower than would be otherwise offered.
    In addition, prior to making a final commitment to the borrower, 
the institution should document and retain in the credit file the 
analysis performed to verify that the abundance-of-caution exemption 
has been appropriately applied. If the operating performance or 
financial condition of the company subsequently deteriorates and the 
lender determines that the real estate will be relied upon as a 
repayment source, an appraisal should then be obtained.

3. Loans Not Secured by Real Estate

    An institution is not required to obtain an appraisal on a loan 
that is not secured by real estate, even if the proceeds of the loan 
are used to acquire or improve real property.\32\ For loans covered by 
this exemption, the real estate has no direct effect on the 
institution's decision to extend credit because the institution has no 
legal security interest in the real estate. This exemption is not 
intended to be applied to real estate-related financial transactions 
other than those involving loans. For example, this exemption should 
not be applied to a transaction such as an institution's investment in 
real estate for its own use.
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    \32\ NCUA's regulations do not provide an exemption from the 
appraisal requirements specific to loans not secured by real estate.
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4. Liens for Purposes Other Than the Real Estate's Value

    This exemption allows institutions to take liens against real 
estate without obtaining an appraisal to protect legal rights to, or 
control over, other collateral. Institutions frequently take real 
estate liens to protect legal rights to other collateral rather than 
because of the contributory value of the real estate as an individual 
asset. In order to apply the exemption, the institution should 
determine that the market value of the real estate as an individual 
asset is not necessary to support its decision to extend credit. For 
example, an institution making a loan to a logging operation may take a 
lien against the real estate upon which the timber stands to ensure its 
access to the timber in the event of default.

5. Real Estate-Secured Business Loans

    This exemption applies to business loans with a transaction value 
of $1 million or less when the sale of, or rental income derived from, 
real estate is not the primary source of repayment. To apply this 
exemption, the Agencies expect the institution to determine that the 
primary source of repayment for the business loan is operating cash 
flow from the business rather than rental income or sale of the 
property. For this type of exempted loan, the Agencies require an 
evaluation consistent with safe and sound banking practices in lieu of 
an appraisal.\33\
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    \33\ NCUA's regulations do not provide an exemption from the 
appraisal requirements specific to member business loans.
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    This exemption will not apply to transactions in which the lender 
has taken a security interest in real estate, but the primary source of 
repayment is provided by cash flow or sale of real estate in which the 
lender has no security interest. For example, a real estate developer 
cannot qualify for the exemption by showing that a real estate secured 
loan for one project, in which the lender has taken a security 
interest, will be repaid with the cash flow from real estate sales or 
rental income from other real estate projects, in which the lender does 
not have a security interest. (See Appendix C--Glossary of Terms for a 
definition of business loan.)

6. Leases

    Institutions are required to obtain appraisals of leases that are 
the economic equivalent of a purchase or sale of the leased real 
estate. For example, an institution must obtain an appraisal on a 
transaction involving a capital lease, as the real estate interest is 
of sufficient magnitude to be recognized as an asset of the lessee for 
accounting purposes. Operating leases that are not the economic 
equivalent of the purchase or sale of the leased property do not 
require appraisals.

7. Renewals, Refinancing, and Other Subsequent Transactions

    In general, renewals, refinancing, and other subsequent 
transactions may be supported by evaluations rather than appraisals. An 
evaluation is permitted for renewals of existing extensions of credit 
when either:
    (1) No new funds are advanced (other than for reasonable closing 
costs); or
    (2) No obvious and material changes in market conditions or the 
physical aspects of the property threaten the institution's real estate 
protection after the transaction.
    An institution may engage in a subsequent transaction based on 
documented equity from a valid existing appraisal or evaluation if the 
above

[[Page 69658]]

conditions are met. For example, to satisfy the condition for no 
material change in market conditions or the physical aspects of the 
property, the planned future use of the property should be consistent 
with the use identified in the appraisal or evaluation. If a property, 
however, has reportedly appreciated because of a planned change in use 
of the property such as rezoning, an appraisal should be performed for 
a federally related transaction unless another exemption applies.
    Loan Workouts or Modifications: Loan workouts, debt restructures, 
loan assumptions, and similar transactions involving the addition or 
substitution of borrowers may qualify for the exemption for renewals, 
refinancing and other subsequent transactions. Use of this exemption 
depends on meeting the conditions described above. An institution also 
should take into consideration such factors as the quality of the 
underlying collateral and the validity of the existing appraisal or 
evaluation.
    As noted above, an institution may advance new monies beyond 
closing costs when there are no material changes in the physical 
aspects of the property that threaten the adequacy of the collateral. 
The Agencies interpret this provision to not require a new appraisal or 
evaluation when an institution advances funds to protect its interest 
in a property, such as to repair damaged property, because these funds 
would be used to restore the damaged property to its original 
condition. If a loan workout involves modification of terms and 
conditions of an existing credit, including acceptance of new real 
estate collateral that facilitates the orderly collection of the 
credit, or reduces the institution's risk of loss, an appraisal or 
evaluation of the existing and new collateral may be prudent, even if 
it is obtained after the modification occurs.
    Other Changes to Loan Terms: An institution may modify the terms of 
an existing credit without obtaining a new appraisal or evaluation. 
Such modifications should not involve any advancement of new funds, any 
material change in the borrower's creditworthiness, any change to the 
borrower's or guarantor's obligation on the credit, or any changes to 
the collateral pool or deterioration in collateral protection. For 
example, an institution may modify the rate on an existing credit, 
provide a short-term extension, or modify the repayment terms by 
increasing or reducing monthly payments without obtaining a new 
appraisal or evaluation, as long as the above conditions are met.

8. Transactions Involving Real Estate Notes

    This exemption applies to appraisal requirements for transactions 
involving the purchase, sale, investment in, exchange of, or extension 
of credit secured by a loan or interest in a loan, pooled loans, or 
interests in real property, including mortgage-backed securities. If 
each note or real estate interest meets the Agencies' regulatory 
requirements for appraisals at the time the real estate note was 
originated, the institution need not obtain a new appraisal to support 
its interest in the transaction. The institution should employ audit 
procedures and review a representative sample of appraisals supporting 
pooled loans or real estate notes in order to determine that the 
conditions of the exemption have been satisfied.
    Principles of safe and sound banking practice require institutions 
to determine the suitability of purchasing or investing in existing 
real estate secured loans and real estate interests. These transactions 
should have been originated according to secondary market standards and 
have a history of performance. The information from these sources, 
together with original documentation, should be sufficient to allow 
institutions to make appropriate credit decisions regarding these 
transactions.
    An institution may presume that the underlying loans in an 
investment grade, marketable, mortgage-backed security satisfy the 
requirements of the appraisal regulation whenever an issuer makes a 
public statement, such as in a prospectus, that the appraisals comply 
with the Agencies' appraisal regulations. To be considered investment 
grade, a security must be rated in one of the top four rating 
classifications of at least one nationally recognized statistical 
rating service. A marketable security is one that may be sold with 
reasonable promptness at a price that corresponds to its fair value.
    If the mortgages that secure the mortgage warehouse loan are sold 
to Fannie Mae or Freddie Mac, the sale itself may be used to 
demonstrate that the underlying loans complied with the Agencies' 
appraisal regulations. In such cases, the Agencies expect an 
institution to monitor its borrower's performance in selling loans to 
the secondary market and take appropriate steps, such as increasing 
sampling and auditing of the loans and the supporting documentation, if 
the borrower experiences more than a minimal loan put-back rate.

9. Transactions Insured or Guaranteed by a U.S. Government Agency or 
U.S. Government-sponsored Agency

    This exemption applies to transactions that are wholly or partially 
insured or guaranteed by a U.S. government agency or U.S. government-
sponsored agency. The Agencies expect these transactions to meet all 
the underwriting requirements of the federal insurer or guarantor, 
including its appraisal requirements, in order to receive the insurance 
or guarantee.

10. Transactions that Qualify for Sale to, or Meet the Appraisal 
Standards of, a U.S. Government Agency or U.S. Government-sponsored 
Agency

    This exemption applies to transactions that either (i) qualify for 
sale to a U.S. government agency or U.S. government-sponsored 
agency,\34\ or (ii) involve a residential real estate transaction in 
which the appraisal conforms to Fannie Mae or Freddie Mac appraisal 
standards applicable to that category of real estate. An institution 
may engage in these transactions without obtaining a separate appraisal 
conforming to the Agencies' appraisal regulations.
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    \34\ These government-sponsored agencies would include Banks for 
Cooperatives; Federal Agriculture Mortgage Corporation; Federal Farm 
Credit Banks; Federal Home Loan Banks; Freddie Mac; Fannie Mae; 
Student Loan Marketing Association; and Tennessee Valley Authority.
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    10(i) Institutions that rely on exemption 10(i) should maintain 
adequate documentation that confirms that the transaction qualifies for 
sale to a U.S. government agency or U.S. government-sponsored agency. 
If the qualification for sale is not adequately documented, the 
transaction should be supported by an appraisal that conforms to the 
Agencies' appraisal regulations, unless another exemption applies.
    10(ii) Transactions, such as jumbo or other residential real estate 
loans, that do not conform to all of Fannie Mae or Freddie Mac 
underwriting standards qualify for exemption 10(ii) provided they are 
supported by an appraisal that meets these government-sponsored 
agencies' appraisal standards.

11. Transactions by Regulated Institutions as Fiduciaries

    A regulated institution acting as a fiduciary is not required to 
obtain appraisals under the Agencies' appraisal regulations if an 
appraisal is not required under other laws governing fiduciary 
responsibilities in connection

[[Page 69659]]

with a transaction.\35\ For example, if no other law requires an 
appraisal in connection with the sale of a parcel of real estate to a 
beneficiary of a trust on terms specified in a trust instrument, an 
appraisal is not required under the Agencies' appraisal regulations. 
However, when a fiduciary transaction requires an appraisal under other 
laws, that appraisal should conform to the Agencies' appraisal 
requirements.
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    \35\ Generally, credit unions have limited fiduciary authority 
and NCUA's appraisal regulation does not specifically exempt 
transactions by fiduciaries.
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12. Appraisals Not Necessary To Protect Federal Financial and Public 
Policy Interests or the Safety and Soundness of Financial Institutions

    The Agencies retain the authority to determine when the services of 
an appraiser are not required in order to protect federal financial and 
public policy interests or the safety and soundness of financial 
institutions. This exemption is intended to apply to individual 
transactions rather than broad categories of transactions that would 
otherwise be addressed by an appraisal exemption. An institution would 
need to seek a waiver from its supervisory federal agency before 
entering into the transaction.

13. Transactions Involving Underwriting or Dealing in Mortgage-backed 
Securities

    The FRB adopted this exemption in November 1998 to permit bank 
holding companies and their nonbank subsidiaries that engaged in 
underwriting and dealing in securities to underwrite and deal in 
mortgage-backed securities without having to demonstrate that the loans 
underlying the securities are supported by appraisals that meet the 
FRB's appraisal requirements.

Appendix B--Evaluation Alternatives

    The Agencies recognize that evaluation alternatives are available 
to institutions for developing an estimate of market value. Therefore, 
institutions should maintain policies and procedures for determining 
whether an evaluation alternative is appropriate for a given 
transaction or lending activity, considering associated risk. Such 
procedures should address risk criteria such as transaction size and 
purpose, borrower creditworthiness, and leverage tolerance (loan-to-
value).
    An institution should demonstrate that an evaluation alternative, 
such as an automated valuation model or tax assessment valuation, 
provides a reliable estimate of the collateral's market value as of a 
stated effective date prior to the decision to enter into a 
transaction. Further, the institution should establish criteria for 
determining the extent to which an inspection of the collateral is 
necessary to determine that the property is in acceptable condition for 
its current or projected use.
    An institution's policies and procedures also should address the 
use of multiple tools or methods for valuing the same property or to 
support a particular lending activity. These procedures should specify 
criteria for ensuring that the institution uses the most credible 
method or tool. An institution should not select a method or tool 
solely on the basis that it provides the highest value. Examiners will 
review an institution's policies, procedures, and internal controls to 
ensure that evaluation alternatives are appropriate and consistent with 
safe and sound lending practices.

Automated Valuation Model (AVM)

    An institution may use an AVM as a valuation method for a 
transaction in which an evaluation is permitted by the Agencies' 
appraisal regulations.\36\ An AVM may be used alone or in conjunction 
with other supplemental information. An institution should demonstrate, 
through testing, that the AVM's resulting value and any related 
information is credible and sufficient to support a credit decision, 
otherwise another valuation method or tool should be used. In selecting 
an AVM, an institution should perform appropriate due diligence to:
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    \36\ Credit unions may use an AVM to meet the requirement for a 
written estimate of value in conjunction with a review by a loan 
officer or a person with knowledge, training and experience in the 
real estate market where the loan is being made. See 12 CFR 
722.3(d).
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     Obtain relevant information about the data the model 
provider uses. Among other information, the institution should know the 
sources and types of data used in a model, frequency of updates, 
quality control performed on the data, and how data is obtained in 
states where public real estate sales data are not disclosed;
     Demonstrate an understanding of the modeling techniques of 
its external AVM providers. An institution should understand the 
inherent strengths and weaknesses of different model types (hedonic, 
index, and blended) as well as how a particular model or multiple AVMs 
perform for different properties;
     Evaluate the model provider's confidence score and 
determine its usefulness in assessing the model's reliability in 
determining market values for different properties; and
     Ascertain which model(s) provide the most credible values 
for an institution's lending activities.
    An institution's policies should establish appropriate practices 
regarding the use of AVMs and indicate its AVM performance criteria. In 
establishing AVM practices, an institution should:
     Address the qualifications and responsibilities of persons 
designated to select, validate, and administer models;
     Establish standards and procedures for model validation 
testing and monitoring; \37\
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    \37\ See OCC Bulletin 2000-16, Risk Modeling--Model Validation 
(May 30, 2000).
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     Maintain AVM performance criteria for reliability and 
suitability in a given transaction or lending activity based on the 
institution's risk tolerance;
     Establish procedures for selecting a different collateral 
valuation method if an institution's AVM performance criteria are not 
met; and
     Adopt criteria that includes establishing standards and 
procedures for validation testing, for the use of multiple AVMs 
(sometimes referred to as a cascade or waterfall) to ensure that 
results are credible.
    Determining AVM Use In addition to evaluating the results of its 
model validation testing as noted below, an institution should 
establish specific criteria for determining whether an AVM is an 
appropriate evaluation alternative for a particular transaction. An 
institution may consider the following questions, among others, in 
determining whether an AVM may be appropriate for a given trans
     Property Type
    [cir] Is the property homogeneous such as a detached 1-to-4 family 
residential dwelling in a typical neighborhood for its market?
    [cir] Can the property's address be recognized by the model to 
ensure that the valuation will reflect the subject property?
     Property Location
    [cir] Is the property located in a market with strong sales 
activity?
    [cir] Are aspects about the property's location typical or average 
for its market (such as the view of the surrounding area or proximity 
to public or private facilities or services)?
     Property Condition
    [cir] Is sufficient information available to assess whether the 
property is in average or above-average condition consistent with its 
intended use?
    [cir] Is the area or neighborhood free of known adverse conditions 
that could affect the property's value (such as disrepair from a 
natural disaster or other events, defective building materials, or 
environmental concerns)?

[[Page 69660]]

     Property Price Range
    [cir] Is the property's initial estimated value within the average 
price range for its market?
     Nature of the Transaction
    [cir] Is the property in an area that is known to have minimal 
cases of fraud?
    [cir] Does the frequency of sales of the subject property preclude 
concern that the property may have been subject to flipping or fraud?
    [cir] Is the property owner-occupied?
    Validating AVM Results Institutions should establish standards and 
procedures for independently validating an AVM's results on a periodic 
basis. The depth and extent of an institution's validation processes 
should be consistent with the materiality and complexity of the risk 
being managed. Institutions should not rely solely on validation 
testing representations provided by external AVM providers. Regardless 
of whether an institution relies on AVMs that are supported by value 
insurance or guarantees, an institution should still perform 
appropriate due diligence and model validation testing.
    An institution should establish an independent model validation 
process. This process should specify, at a minimum:
     Expectations for an appropriate sample size;
     Level of geographic analysis;
     Testing frequency and criteria for re-testing;
     Standards of performance measures to be used; and
     Range of acceptable performance results.
    To ensure unbiased test results, AVM values should be compared to 
data gathered from sales transactions prior to being recorded in public 
records. If an institution uses more than one AVM, the cascade also 
should be validated.
    To assess the effectiveness of its AVM practices, an institution 
should verify whether loans in which an AVM was used to establish value 
met the institution's performance expectations. An institution should 
document the results of its validation testing and audit findings and 
use these findings to analyze and periodically update its practices 
regarding AVM use.

Tax Assessment Valuation (TAV)

    An institution may use data provided by local tax authorities as a 
basis for establishing an estimate of market value for the collateral 
for a transaction in which an evaluation is permitted by the Agencies' 
appraisal regulations. TAVs differ among jurisdictions. Therefore, an 
institution should determine and document how the jurisdiction 
calculates the TAV and how frequently property revaluations occur.
    An institution should perform an analysis to determine the 
relationship between the TAV and the market value within a tax 
jurisdiction. This analysis should be performed for each property type 
and price tier in a jurisdiction in which the institution considers the 
use of a TAV to meet or support evaluation requirements. As part of 
this process, an institution should test and document how closely TAVs 
correlate to market value. If a reliable correlation between the TAV 
and the market value can be established, the institution may use TAVs 
as a basis for an evaluation.

Appendix C--Glossary of Terms

    Agent--The Agencies' appraisal regulations do not specifically 
define the term ``agent.'' However, the term is generally intended to 
refer to one who undertakes to transact some business or to manage some 
affairs for another. According to the Agencies' appraisal regulations, 
fee appraisers must be engaged directly by the regulated institution or 
its agent, and have no direct or indirect interest, financial or 
otherwise, in the property or the transactions. The Agencies do not 
limit the arrangements that regulated institutions have with their 
agents, provided those arrangements do not place the agent in a 
conflict of interest that prevents the agent from representing the 
interests of the regulated institution.
    Appraisal--As defined in the Agencies' appraisal regulations, a 
written statement independently and impartially prepared by a qualified 
appraiser setting forth an opinion as to the market value of an 
adequately described property as of a specific date(s), supported by 
the presentation and analysis of relevant market information.
    Appraisal Threshold--An appraisal is not required on transactions 
with a transaction value of $250,000 or less. As specified in the 
Agencies' appraisal regulations, institutions must obtain an evaluation 
of the real property collateral, if no other appraisal exemption 
applies.
    Approved Appraiser List--A listing of appraisers that an 
institution has determined to be qualified and competent to perform 
appraisals in a particular market and on various property types.
    ``As Completed'' Market Value--See Prospective Market Value.
    ``As Is'' Market Value--The estimate of the market value of real 
property in its current physical condition, use, and zoning as of the 
appraisal date.
    ``As Stabilized'' Market Value--See Prospective Market Value.
    Automated Valuation Models--A computer program that analyzes data 
to determine a property's market value. Hedonic models use property 
characteristics (such as square footage, room count) on the subject and 
comparable properties to determine a value. Index models determine 
value based on repeat sales in the marketplace rather than property 
characteristic data. Blended or hybrid models use elements of both 
hedonic and index models.
    Business Loan--As defined in the Agencies' appraisal regulations, a 
loan or extension of credit to any corporation, general or limited 
partnership, business trust, joint venture, syndicate, sole 
proprietorship, or other business entity.\38\
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    \38\ NCUA's appraisal regulation, 12 CFR part 722, does not 
define ``business loan.'' A ``member business loan'' is regulated 
under 12 CFR part 723.
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    Business Loan Threshold--A business loan with a transaction value 
of $1,000,000 or less does not require an appraisal if the primary 
source of repayment is not dependent on the sale of, or rental income 
derived from, the real estate. As specified in the Agencies' appraisal 
regulations, institutions must obtain an evaluation of the real 
property collateral, if no other exemption applies.\39\
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    \39\ NCUA's appraisal regulation, 12 CFR part 722, does not 
provide a higher appraisal threshold for loans defined as ``member 
business loans'' under 12 CFR part 723.
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    Cascade--A model with specific performance rules that prioritizes 
an institution's multiple, independent AVMs in a defined sequence to 
provide an estimate of the collateral's market value.
    Credible (Appraisal) Assignment Results--According to USPAP, 
credible means ``worthy of belief'' used in the context of the Scope of 
Work Rule. Under this rule, credible assignment results depend on 
meeting or exceeding both (1) the expectations of parties who are 
regularly intended users for similar assignments, and (2) what an 
appraiser's peers' actions would be in performing the same or a similar 
assignment.
    Effective Date--USPAP requires that each appraisal report specifies 
the effective date of the appraisal and the date of the report. The 
date of the report indicates the perspective from which the appraiser 
is examining the market. The effective date of the appraisal 
establishes the context for the value opinion. Three categories of 
effective dates--retrospective, current, or prospective--may be used, 
according to the intended use of the appraisal assignment.

[[Page 69661]]

    Engagement Letter--An engagement letter between an institution and 
an appraiser documents the expectations of each party to the appraisal 
assignment. For example, an engagement letter may specify, among other 
items, the property's location and legal description; intended use of 
the appraisal; the expectation that the appraiser will comply with 
applicable laws, regulations, guidelines and standards; reporting 
format; expected delivery date; and appraisal fee.
    Evaluation--A valuation required by the Agencies' appraisal 
regulations for transactions that qualify for the appraisal threshold 
exemption, business loan exemption or subsequent transaction exemption.
    Exposure Time--As defined in USPAP, a reasonable length of time 
that the property would have been offered on the market prior to the 
hypothetical consummation of sale on the appraisal's effective date. 
Exposure time is always presumed to precede the effective date of the 
appraisal. See USPAP Standard 1-2(c), Statements 6 and 10, and Advisory 
Opinion 7.
    Federally Related Transaction--As defined in the Agencies' 
appraisal regulations, any real estate-related financial transaction in 
which the Agencies or any regulated institution engages or contracts 
for, and that requires the services of an appraiser.
    Financial Services Institution--The Agencies' appraisal regulations 
do not contain a specific definition of the term ``financial services 
institution.'' The term is intended to describe entities that provide 
services in connection with real estate lending transactions on an 
ongoing basis, including loan brokers.
    Loan Production Staff--Generally, all personnel responsible for 
generating loan volume or approving loans, as well as their 
subordinates and supervisors. This would include any employee whose 
compensation is based on loan volume. Employees responsible for credit 
administration or credit risk management are not considered loan 
production staff.
    Marketing Time--According to USPAP Advisory Opinion 7, the time it 
might take to sell the property interest at the appraised market value 
during the period immediately after the effective date of the 
appraisal. An institution may request an appraiser to separately 
provide an estimate of marketing time in an appraisal. However, this is 
not a requirement of the Agencies' appraisal regulations.
    Market Value--As defined in the Agencies' appraisal regulations, 
the most probable price which a property should bring in a competitive 
and open market under all conditions requisite to a fair sale, the 
buyer and seller each acting prudently and knowledgeably, and assuming 
the price is not affected by undue stimulus. Implicit in this 
definition are the consummation of a sale as of a specified date and 
the passing of title from seller to buyer under conditions whereby:
     Buyer and seller are typically motivated;
     Both parties are well informed or well advised, and acting 
in what they consider their own best interests;
     A reasonable time is allowed for exposure in the open 
market;
     Payment is made in terms of cash in U.S. dollars or in 
terms of financial arrangements comparable thereto; and
     The price represents the normal consideration for the 
property sold unaffected by special or creative financing or sales 
concessions granted by anyone associated with the sale.
    Prospective Market Value ``as Completed'' and ``as Stabilized''--A 
prospective market value may be appropriate for the valuation of a 
property interest related to a credit decision for a proposed 
development or renovation project. According to USPAP, an appraisal 
with a prospective market value reflects an effective date that is 
subsequent to the date of the appraisal report. Prospective value 
opinions are intended to reflect the current expectations and 
perceptions of market participants, based on available data. Two 
prospective value opinions may be required to reflect the time frame 
during which development, construction, and occupancy will occur. The 
prospective market value ``as completed'' reflects the property's 
market value as of the time that development is expected to be 
completed. The prospective market value ``as stabilized'' reflects the 
property's market value as of the time the property is projected to 
achieve stabilized occupancy. For an income-producing property, 
stabilized occupancy is the occupancy level that a property is expected 
to achieve after the property is exposed to the market for lease over a 
reasonable period of time and at comparable terms and conditions to 
other similar properties.
    Put Back--Represents the ability of an investor to reject mortgage 
loans from a mortgage originator if the mortgage loans do not comply 
with the warranties and representations in their mortgage purchasing 
agreement.
    Real Estate-Related Financial Transaction--As defined in the 
Agencies' appraisal regulations, any transaction involving:
     The sale, lease, purchase, investment in or exchange of 
real property, including interests in property, or the financing 
thereof;
     The refinancing of real property or interests in real 
property; or
     The use of real property or interests in property as 
security for a loan or investment, including mortgage-backed 
securities.
    Regulated Institution--For purposes of the Agencies' appraisal 
regulations and these Guidelines, an institution supervised by the 
federal financial institutions regulatory Agencies. This includes a 
national or a state-chartered bank and its subsidiaries, a bank holding 
company and its non-bank subsidiaries, a federal savings association 
and its subsidiaries, a federal savings and loan holding company and 
its subsidiaries, and a credit union.
    Restricted Use Appraisal Report--According to USPAP Standards Rule 
2-2(c), a restricted use appraisal report briefly ``states'' 
information significant to solve the appraisal problem as well as a 
reference to the existence of specific work-file information in support 
of the appraiser's opinions and conclusions. The Agencies believe that 
the restricted use appraisal report will not be appropriate to 
underwrite a significant number of federally related transactions due 
to the lack of supporting information and analysis in the appraisal 
report. However, it may be appropriate to use this type of appraisal 
report for ongoing collateral monitoring of an institution's real 
estate transactions and under other circumstances when an institution's 
program requires an evaluation.
    Sales Concessions--A cash or noncash contribution that is provided 
by the seller or other party to the transaction and reduces the 
purchaser's cost to acquire the real property. A sales concession may 
include, but is not limited to, the seller paying all or some portion 
of the purchaser's closing costs (such as prepaid expenses or discount 
points) or the seller conveying to the purchaser personal property 
which is typically not conveyed with the real property. Sales 
concessions do not include fees that a seller is customarily required 
to pay under state or local laws. In developing an opinion of market 
value, an appraiser must take into consideration the affect of any 
sales concessions on the market value of the real property. See 
``market value'' above and USPAP Standards Rule 1-2(c).
    Sales History and Pending Sales--According to USPAP Standards Rule 
1-5, when the value opinion to be developed is market value, an 
appraiser

[[Page 69662]]

must, if such information is available to the appraiser in the normal 
course of business, analyze: (1) All current agreements of sale, 
options, and listings of the subject property as of the effective date 
of the appraisal, and (2) all sales of the subject property that 
occurred within three years prior to the effective date of the 
appraisal.
    Scope of Work--According to USPAP Scope of Work Rule, the type and 
extent of research and analyses in an appraisal assignment. (See the 
Scope of Work Rule in USPAP.)
    Self-Contained Appraisal Report--According to USPAP Standards Rule 
2-2(a), a self-contained appraisal report ``describes'' all information 
significant to the solution of an appraisal problem and should include 
all significant data reported in comprehensive detail.
    Sum of Retail Sales--A collateral valuation method for estimating a 
value of several properties based on the sum of the sales price of each 
property to an individual purchaser. The sum of retail sales is not the 
market value for purposes of meeting the minimum appraisal standards in 
the Agencies' appraisal regulations.
    Summary Appraisal Report--According to USPAP Standards Rule 2-2(b), 
the summary appraisal report ``summarizes'' all information significant 
to the solution of an appraisal problem and should include all 
significant data reported in a tabular or abbreviated format.
    Tract Development--As defined in the Agencies' appraisal 
regulations, a project of five units or more that is constructed or is 
to be constructed as a single development. For purposes of these 
Guidelines, ``unit'' refers to: A residential building lot, a detached 
single-family home, an attached single-family home, and a residence in 
a condominium building.
    Transaction Value--As defined in the Agencies' appraisal 
regulations:
     For loans or other extensions of credit, the amount of the 
loan or extension of credit;
     For sales, leases, purchases, and investments in or 
exchanges of real property, the market value of the real property 
interest involved; and
     For the pooling of loans or interests in real property for 
resale or purchase, the amount of the loan or market value of the real 
property calculated with respect to each such loan or interest in real 
property.
    For loans that permit negative amortization, the transaction value 
should be the institution's total committed amount, including any 
potential negative amortization.
    If an institution enters into a transaction that is secured by 
several individual properties that are not part of a tract development 
and that have a value equal to or less than the appraisal threshold, 
the estimate of value of each individual property should determine 
whether an appraisal or evaluation would be required on each property 
in the collateral pool.
    Uniform Standards of Professional Appraisal Practice (USPAP)--USPAP 
identifies the minimum set of standards that apply in all appraisal, 
appraisal review, and appraisal consulting assignments. These standards 
are promulgated by the Appraisal Standards Board of the Appraisal 
Foundation and are incorporated as a minimum appraisal standard in the 
Agencies' appraisal regulations.
    Value (of Collateral for Use in Determining Loan-to-Value)--
According to the Agencies' real estate lending standards guidelines, 
the term ``value'' means an opinion or estimate set forth in an 
appraisal or evaluation, whichever may be appropriate, of the market 
value of real property, prepared in accordance with the Agencies' 
appraisal regulations and these Guidelines. For loans to purchase an 
existing property, ``value'' means the lesser of the actual acquisition 
cost or the estimate of value.

    Dated: October 10, 2008.
John C. Dugan,
Comptroller of the Currency.

    By order of the Board of Governors of the Federal Reserve 
System, November 12, 2008.
Robert deV. Frierson,
Deputy Secretary of the Board.
    Dated at Washington, DC, the 13th day of November, 2008.
    By order of the Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
    Dated: October 29, 2008.
    By the Office of Thrift Supervision.
John M. Reich,
Director.
    Dated: November 7, 2008.
    By the National Credit Union Administration Board.
Hattie M. Ulan,
Acting Secretary of the Board.
[FR Doc. E8-27401 Filed 11-18-08; 8:45 am]
BILLING CODE 4810-33-P; 6210-01-P; 6714-01-P; 6720-01-P; 7535-01-P