[Federal Register Volume 75, Number 237 (Friday, December 10, 2010)]
[Notices]
[Pages 77450-77473]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-30913]
[[Page 77449]]
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Part VI
Department of the Treasury
Office of the Comptroller of the Currency
Office of Thrift Supervision
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Federal Reserve System
Federal Deposit Insurance Corporation
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National Credit Union Administration
Interagency Appraisal and Evaluation Guidelines; Notice
Federal Register / Vol. 75 , No. 237 / Friday, December 10, 2010 /
Notices
[[Page 77450]]
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
[Docket ID OCC-2010-0012]
FEDERAL RESERVE SYSTEM
[Docket No. OP-1338]
FEDERAL DEPOSIT INSURANCE CORPORATION
DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
[Docket No. 2010-0018]
NATIONAL CREDIT UNION ADMINISTRATION
RIN 3133-AD38
Interagency Appraisal and Evaluation Guidelines
AGENCY: 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) (collectively,
the Agencies).
ACTION: Final guidance.
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SUMMARY: The Agencies are issuing final Interagency Appraisal and
Evaluation Guidelines (Guidelines) to provide further clarification of
the Agencies' appraisal regulations and supervisory guidance to
institutions and examiners about prudent appraisal and evaluation
programs. The Guidelines, including their appendices, update and
replace existing supervisory guidance documents to reflect developments
concerning appraisals and evaluations, as well as changes in appraisal
standards and advancements in regulated institutions' collateral
valuation methods. The Guidelines clarify the Agencies' longstanding
expectations for an institution's appraisal and evaluation program to
conduct real estate lending in a safe and sound manner. Further, the
Guidelines promote consistency in the application and enforcement of
the Agencies' appraisal regulations and safe and sound banking
practices. The Agencies recognize that revisions to the Guidelines may
be necessary to address future regulations implementing the provisions
of the Dodd-Frank Wall Street Reform and Consumer Protection Act of
2010.
DATES: The Guidelines are effective on December 10, 2010.
FOR FURTHER INFORMATION CONTACT: OCC: Robert L. Parson, Appraisal
Policy Specialist, (202) 874-5411, or Darrin L. Benhart, Director,
Credit and Market Risk Division, (202) 874-4564; or Christopher C.
Manthey, Special Counsel, Bank Activities and Structure Division, (202)
874-5300, or Mitchell Plave, Counsel, Legislative and Regulatory
Activities Division, (202) 874-5090.
FRB: Virginia M. Gibbs, Senior Supervisory Financial Analyst, (202)
452-2521, or T. Kirk Odegard, Manager, Policy Implementation and
Effectiveness, (202) 530-6225, Division of Banking Supervision and
Regulation; or Walter R. McEwen, Senior Counsel, (202) 452-3321, or
Benjamin W. McDonough, Counsel, (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, (202) 898-8886, or Mark Mellon, Counsel, (202) 898-
3884, Legal Division.
OTS: Deborah S. Merkle, Senior Project Manager, Credit Risk, Risk
Management, (202) 906-5688; or Marvin L. Shaw, Senior Attorney,
Regulations and Legislation Division (202) 906-6639.
NCUA: Vincent H. Vieten, Member Business Loan Program Officer,
Office of Examination and Insurance, (703) 518-6396; or Sheila A.
Albin, Staff Attorney, Office of General Counsel, (703) 518-6547.
SUPPLEMENTARY INFORMATION:
I. Background
The Agencies' appraisal regulations \1\ implementing Title XI of
the Financial Institutions Reform, Recovery, and Enforcement Act of
1989 (FIRREA) \2\ set forth, among other requirements, minimum
standards for the performance of real estate appraisals in connection
with ``federally related transactions,'' \3\ 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.\4\ These regulations also specify the requirement for
evaluations of real estate collateral in certain transactions that do
not require an appraisal.
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\1\ 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.
\2\ Public Law 101-73, Title XI, 103 Stat. 511 (1989); 12 U.S.C.
3331, et seq.
\3\ 12 U.S.C. 3339.
\4\ 12 U.S.C. 3350(4).
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In October 1994, the OCC, FRB, FDIC and OTS jointly issued the
Interagency Appraisal and Evaluation Guidelines \5\ (1994 Guidelines)
to provide further guidance to regulated financial institutions on
prudent appraisal and evaluation policies, procedures and practices.
Further, under the Agencies' real estate lending regulations,\6\
federally regulated institutions must adopt and maintain written real
estate lending policies that are consistent with safe and sound lending
practices and should reflect consideration of the Interagency
Guidelines for Real Estate Lending Policies (Lending Guidelines). The
Lending Guidelines state that an institution is responsible for
establishing a real estate appraisal and evaluation program, including
the type and frequency of collateral valuations.
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\5\ 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).
\6\ 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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Since the issuance of the 1994 Guidelines, the Agencies have issued
additional supervisory guidance documents \7\ to promote sound
practices in regulated institutions' appraisal and evaluation programs,
including independence in the collateral valuation function, the
appraisal of residential tract developments, and compliance with
revisions to the Uniform Standards of Professional Appraisal Practice
(USPAP). There also have been significant industry developments, such
as advancements in information technology that have affected the
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development and delivery of appraisals and evaluations.
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\7\ 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 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. 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.
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In response to these developments, the Agencies published for
comment the Proposed Interagency Appraisal and Evaluation Guidelines
(Proposal) on November 19, 2008.\8\ After considering the comments on
the Proposal, the Agencies made revisions to the Proposal and are now
issuing the Guidelines. The Guidelines apply to all real estate lending
functions and real estate-related financial transactions originated or
purchased by a regulated institution for its own portfolio or for
assets held for sale. The changes provide updates to and consolidate
some of the existing supervisory issuances. The Guidelines track the
format and substance of the 1994 Guidelines and existing
interpretations as reflected in supervisory guidance documents and the
preamble that accompanies and describes amendments to the Agencies'
appraisal regulations as published in June 1994.\9\ The Guidelines also
reflect refinements made by the Agencies in the supervision of
institutions' appraisal and evaluation programs. Since the issuance of
the Proposal, changes in market conditions underscore the importance of
institutions following sound collateral valuation practices when
originating or modifying real estate loans and monitoring portfolio
risk.
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\8\ 73 FR 69647 (Nov. 19, 2008).
\9\ 59 FR 29481 (Jun. 7, 1994).
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In implementing the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (the Dodd-Frank Act),\10\ the Agencies will
determine whether future revisions to the Guidelines may be necessary.
However, the Agencies are issuing the Guidelines to promote consistency
in the application and enforcement of the Agencies' current appraisal
requirements and related supervisory guidance. In finalizing the
Guidelines, the Agencies considered the Dodd-Frank Act, other Federal
statutory and regulatory changes affecting appraisals,\11\ and the
public comment process. The Guidelines are also responsive to the
majority of comments, which expressed support for the Proposal and
confirmed that additional clarification of existing regulatory and
supervisory standards serve to strengthen the real estate collateral
valuation and risk management practices across insured depository
institutions.
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\10\ Public Law 111-203, 124 Stat. 1376 (2010).
\11\ See, for example, Title IV of Division A of the Housing and
Economic Recovery Act of 2008, Public Law 110-289, Title IV,
Division A, 122 Stat. 2800 (2008); 12 U.S.C. 1707, et seq., and FRB
Regulation Z, 12 CFR 226.36 and 226.42.
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The Guidelines contain four appendices that clarify current
regulatory requirements and supervisory guidance. Appendix A provides
further clarification on real estate-related financial transactions
that are exempt from the Agencies' appraisal regulations. Appendix B
addresses an institution's use of analytical methods or technological
tools in the development of an evaluation. Appendix C clarifies the
minimum appraisal standards required by the Agencies' appraisal
regulations for analyzing and reporting appropriate deductions and
discounts in appraisals. Based on comments on the Proposal, the
Agencies added this additional appendix. Appendix D (previously
Appendix C in the Proposal) provides a glossary of terms.
II. Comments on the Proposal
The Agencies requested comment on all aspects of the Proposal, and
specifically requested comment on: (1) The clarity of the Proposal
regarding interpretations of the appraisal exemptions discussed in
Appendix A; (2) the appropriateness of risk management expectations and
controls in the evaluation process, including those discussed in
Appendix B; and (3) the expectations in the Proposal on reviewing
appraisals and evaluations. In particular, the Agencies requested
comment on whether automated tools or sampling methods used to review
appraisals and evaluations supporting lower risk single-family
residential mortgages are 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 an
institution's appraisal process for those low risk mortgage
transactions.
The Agencies collectively received 157 unique comments on the
Proposal. Comments were received from financial institutions,
appraisers, collateral valuation service providers, industry-related
trade associations (industry groups), consumer groups, government
officials, and individuals.
The majority of financial institution and industry group commenters
supported the Proposal and the Agencies' efforts to update existing
guidance in this area. Many commenters recognized that additional
clarification of existing regulatory and supervisory expectations
strengthen the real estate collateral valuation and risk management
practices across federally regulated institutions. These commenters
were in general agreement that the Proposal adequately addressed
developments in collateral valuation practices, but also raised
technical issues and requested that the Agencies provide further
clarification on a variety of topics.
Some commenters did not support the Proposal for various reasons,
including the need to study the effect of the recent market challenges
on appraisal practices or a request to require appraisals on all real
estate lending activity conducted by federally regulated institutions.
Other commenters recommended revisions to the Agencies' appraisal
regulations that cannot be changed with the issuance of the Guidelines.
Some commenters encouraged the Agencies to incorporate additional
safeguards for consumers in the Guidelines. In response, the Agencies
note that these commenters' suggestions address statutes and
regulations that are generally beyond the scope of the Guidelines, such
as the Real Estate Settlement Procedures Act (RESPA) and the FRB's
Regulation B (implementing the Equal Credit Opportunity Act).
Other commenters urged the Agencies to work with other Federal
agencies and government-sponsored enterprises (such as Freddie Mac and
Fannie Mae) in an effort to harmonize standards for appraisals and
other collateral valuations across all channels of mortgage lending,
not just lending by federally regulated institutions. A few commenters
recommended broad initiatives for the Agencies to undertake in the
context of mitigating mortgage fraud and promoting appraisal quality
through, for example, information sharing in the form of national data
bases. While the Agencies recognize the significance of these issues in
the ongoing public debate on appraisal reform through various
initiatives, such matters are beyond the scope of the Guidelines.
A few commenters questioned the timing of the Proposal given the
stress in the current real estate market. For example, one commenter
suggested that the Agencies withdraw the Proposal to allow additional
time to study the lessons learned from the recent stress in the
residential mortgage markets. The Agencies believe that the timing of
the release of the Guidelines is appropriate to emphasize existing
requirements, clarify expectations, and ensure consistency in the
application of the Agencies' appraisal regulations, thereby promoting
safe and sound collateral valuation practices across federally
regulated institutions.
Virtually all of the commenters either offered suggestions for
strengthening or clarifying technical aspects of the
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Proposal. The following discussion summarizes significant comments on
specific provisions of the Proposal, the Agencies' responses, and major
changes to the Proposal as reflected in the Guidelines.
Discussion on the Comments and Guidelines
Supervisory Policy. The Proposal addressed the supervisory process
for assessing the adequacy of an institution's appraisal and evaluation
program to conduct its real estate lending activities consistent with
safe and sound underwriting practices. It also reaffirmed that, when
examining an institution's real estate lending activity, supervisory
staff will review an institution's appraisal and evaluation program for
compliance with the Agencies' appraisal regulations and consistency
with related guidance.
Appraisers and appraisal groups asked for further explanation on
the enforceability of the Guidelines and the distinction between
supervisory guidance and regulatory requirements. These commenters
expressed the view that the Proposal gave too much discretion to
regulated institutions in the development and implementation of their
appraisal and evaluation programs. In particular, these commenters
raised concerns over the enforcement of the Guidelines by the Agencies.
Conversely, financial institutions found the Proposal to be an
improvement over existing guidance and indicated that it would promote
consistent application of the Agencies' appraisal requirements.
The Agencies believe that the Proposal adequately addressed the
issue of enforceability and their supervisory process. The Agencies
note that their appraisal regulations and guidance have been in place
since the early 1990s and that financial institutions are familiar with
the regulatory and supervisory framework. The Agencies believe that the
Proposal reaffirmed existing guidance addressing their supervisory
expectations for prudent appraisal and evaluation policies, procedures,
and practices. Moreover, an institution's compliance with the
regulatory requirements and consistency with supervisory expectations
is considered during an Agency's on-site review of an institution's
real estate lending activities. However, to address commenters'
concerns, the Agencies incorporated minor edits to better distinguish
between regulatory requirements and prudent banking practices in the
Guidelines. In addition, the Agencies expanded certain sections to
provide further clarification in an effort to promote consistency in
the application and enforcement of their regulatory requirements and
supervisory expectations.
Independence of the Appraisal and Evaluation Program. The Proposal
reaffirmed that an institution's collateral valuation function should
be independent of the loan production process. The Proposal addressed
longstanding supervisory expectations that an institution should
implement procedures to affirm its program's independence. In response
to commenters, the Agencies expanded this section in the Guidelines to
further detail their expectations for appropriate communication and
information sharing with persons performing collateral valuation
assignments. The Guidelines address the types of communications that
would not be construed as coercion or undue influence on appraisers and
persons performing evaluations, as well as examples of actions that
would compromise independence. The Guidelines also reference the FRB's
Regulation Z (implementing the Truth in Lending Act), which was amended
in 2008 and 2010 to include provisions regarding appraiser
independence.\12\
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\12\ 73 FR 44522, 44604 (Jul. 30, 2008); 75 FR 66554 (Oct. 28,
2010).
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Some commenters did not support the longstanding flexibility
afforded to small and rural institutions when absolute lines of
independence cannot be achieved. The Agencies believe that small and
rural institutions can have acceptable risk management practices to
support their appraisal function and conduct their real estate lending
activity in a safe and sound manner. Therefore, the Guidelines, like
the Proposal, allow for some flexibility to exist so long as an
institution can demonstrate the independence of its collateral
valuation function from the final credit decision.
A few commenters asked the Agencies to provide further
clarification on the types of employees who would be considered as loan
production staff. The Agencies note that both the Proposal and
Guidelines include a definition in Appendix D for loan production
staff. The Agencies believe that the definition adequately describes
loan production staff for purposes of the Guidelines. During the
supervisory review of an institution's real estate lending activities,
the Agencies' examiners assess the adequacy of risk management
practices, including the independence of the collateral valuation
function.
Selection of Appraisers and Individuals Who Perform Evaluations. In
the Proposal, this section addressed the competency and qualifications
of appraisers and persons who perform an evaluation. Several commenters
asked for clarification on the factors institutions should consider in
assessing an appraiser's competency. A few commenters also noted that
certain factors, such as cost and turnaround time, should not influence
the selection of appraisers. Other commenters asked the Agencies to
clarify certain aspects of the process for engaging an appraiser and
when the appraiser/client relationship is established. To address these
comments, the Agencies incorporated clarifying edits in the Guidelines
to emphasize the importance of appraiser competency for a particular
assignment relative to both the property type and geographic market.
Moreover, the Guidelines stress that an institution should not select a
valuation method or tool solely because it provides the highest value,
the lowest cost, or the fastest response or turnaround time.
To eliminate redundancies, the Guidelines incorporate the
discussion in the Proposal's section on qualifications of persons who
perform evaluations into a new section that addresses both the
qualifications and selection of an appraiser and a person who performs
an evaluation. Further, the Guidelines no longer refer to ``a
nonpreferential and unbiased process'' for selecting appraisers or
persons who perform evaluations, which could be misconstrued in a way
that would not ensure that a competent person is selected for a
valuation assignment.
A few institution commenters asked the Agencies to address whether
loan production staff can recommend an appraiser for a particular
assignment or inclusion on the institution's list of approved
appraisers. Staff performing the collateral valuation function is
responsible for selecting an appraiser. The Guidelines provide further
clarification on an institution's procedures for the selection of an
appraiser for an assignment, including the development, administration,
and maintenance of an approved appraiser list, if used.
Minimum Appraisal Standards. To promote the quality of appraisals,
the Proposal and the Guidelines provide further clarification of the
minimum appraisal standards in the Agencies' appraisal regulations and
contain guidance on appraisal development and reporting to reflect
revisions to USPAP. Most commenters found the Proposal's additional
explanation on these standards helpful, particularly the discussion on
deductions and discounts in an appraisal for a residential tract
development. While this section in the Guidelines generally tracks the
Proposal, the detailed discussion on
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analyzing deductions and discounts has been moved to a new appendix.
Given the importance of these concepts, the appendix contains an
expanded discussion of the appraisal standard for deductions and
discounts in a discounted cash flow analysis.
Further, several commenters addressed the topic of assessment of an
appraiser's competency in the context of ensuring compliance with the
minimum appraisal standards. The Guidelines reaffirm that a state
certification or license is a minimum credentialing requirement and
that an appraiser must be selected based on his or her competency to
perform a particular assignment, including knowledge of the specific
property type and market. Further, the Agencies revised the Guidelines
to confirm that the result of an automated valuation model (AVM), in
and of itself, does not meet the Agencies' minimum appraisal standards,
regardless of whether the results are signed by an appraiser.
Transactions that Require Evaluations. Financial institutions
appreciated the flexibility contained in the Proposal that permitted
the use of evaluations for low-risk transactions, consistent with the
Agencies' appraisal regulations. These commenters contended that
appropriate risk management practices provide sufficient safeguards to
elevate their collateral valuation methods (that is, obtaining an
appraisal instead of an evaluation) when warranted. Several appraiser
and appraisal organization commenters expressed their longstanding
opposition to institutions' use of evaluations in lieu of appraisals
for exempt transactions. This section in the Guidelines references
Appendix A, Appraisal Exemptions, which has been revised in response to
comments on the Proposal. The Agencies note that the Guidelines do not
expand the categories of appraisal exemptions set forth in the
Agencies' appraisal regulations.
For further clarity, this section incorporates certain technical
edits to address specific comments. For instance, the dollar amount of
the appraisal threshold and of the business loan threshold from the
Agencies' appraisal regulations were incorporated in the text of this
section. This section also addresses the factors that an institution
should consider in determining whether to obtain an appraisal, even
though an evaluation is permitted. This topic was moved from the
Evaluation Content section in the Proposal to this section, as it
relates to the regulatory requirement that evaluations reflect safe and
sound banking practices. In particular, comments from appraisers and
appraisal organizations noted that the Agencies should not permit
evaluations, even detailed ones, to substitute for appraisals in higher
risk real estate loans. The Agencies believe that the Guidelines
adequately address an institution's responsibility to maintain policies
and procedures for obtaining an appropriate appraisal or evaluation to
support its credit decision.
Evaluation Development and Evaluation Content. As noted above, some
appraiser and appraisal group commenters expressed their views that
evaluations generally do not provide an adequate assessment of a
property's market value and requested that the Agencies provide
additional guidance on the content of evaluations and the level of
detail to be included in evaluations supporting higher risk
transactions. Comments provided by financial institutions support the
approach taken in the Proposal, which establishes minimum supervisory
expectations for an evaluation and is designed to ensure an institution
obtains a more detailed evaluation, or possibly an appraisal, when
additional information is necessary to assess collateral risk in the
credit decision.
In response to comments, the Agencies revised the Guidelines to
stress that an institution should consider transaction risk when it is
evaluating the appropriate collateral valuation method and level of
documentation for an evaluation. The Guidelines also now provide
additional clarification on the Agencies' supervisory expectations for
the development and content of evaluations. A new section on Evaluation
Development provides guidance on the requirement in the Agencies'
appraisal regulations that evaluations must be consistent with safe and
sound banking practices. These revisions incorporate and clarify
certain supervisory expectations from the Evaluation Content section of
the Proposal, and emphasize an institution's responsibility to
establish criteria addressing the appropriate level of analysis and
information necessary to support the estimate of market value in an
evaluation.
Clarifying edits also reaffirm that valuation methods used to
develop an evaluation must be consistent with safe and sound banking
practices. For example, an AVM may be used for a transaction provided
the resulting evaluation meets all of the supervisory expectations in
the Evaluation Development and Evaluation Content sections in the
Guidelines, is consistent with safe and sound banking practices, and
produces a credible market value conclusion. In response to comments,
the Guidelines clarify how institutions can use analytical methods or
technological tools to develop an evaluation. The Guidelines, for
instance, emphasize the importance of considering the property's
condition in the development of an evaluation, regardless of the method
or tool used. Further, technical edits were incorporated in the
Evaluation Content section of the Guidelines to address commenters'
questions regarding the appropriate level of documentation in an
evaluation.
The Guidelines also address questions from several commenters on
the appropriate use of broker price opinions (BPOs) in the context of
the Agencies' appraisal regulations. The Proposal did not specifically
address the use of BPOs or similar valuation methods. The Guidelines
confirm that BPOs and other similar valuation methods, in and of
themselves, do not comply with the minimum appraisal standards in the
Agencies' appraisal regulations and are not consistent with the
Agencies' minimum supervisory expectations for evaluations. A BPO or
other valuation method may provide useful information in developing an
appraisal or evaluation, for monitoring collateral values for existing
loans, or in modifying loans in certain circumstances. Further, the
Dodd-Frank Act provides, ``[i]n conjunction with the purchase of a
consumer's principal dwelling, broker price opinions may not be used as
the primary basis to determine the value of a piece of property for the
purpose of a loan origination of a residential mortgage loan secured by
such piece of property.'' \13\
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\13\ Dodd-Frank Act, Section 1473(r).
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Reviewing Appraisals and Evaluations. This section in the Proposal
and the Guidelines provides the Agencies' expectations for an
institution to establish an effective, risk-focused process for
reviewing appraisals and evaluations prior to a final credit decision.
In the Proposal, the Agencies specifically requested comment on the
Agencies' expectations for reviewing appraisals and evaluations. In
particular, the Agencies sought comment in the Proposal on whether the
use of automated tools or sampling methods for reviewing appraisals or
evaluations supporting lower risk residential mortgages are appropriate
for other low risk mortgage transactions. The Agencies also requested
comment on whether appropriate constraints can be placed on the use of
these tools and
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methods to ensure the overall integrity of the institution's appraisal
review process for other low risk mortgage transactions. Commenters
requested further clarification on the process for institutions to
obtain approval to use automated tools and sampling methods in the
review process. The Proposal noted that each Agency would address the
approval process through established processes for communicating with
its regulated institutions.
Several commenters requested further clarification on appropriate
policies and procedures for the review function. Some commenters also
asked the Agencies to address the expectations for reviews by property
type and risk factors. In response to these comments, the Guidelines
were expanded to clarify the Agencies' expectations for an appropriate
depth of review, the educational and training qualifications for
reviewers, the resolution of valuation deficiencies, and related
documentation standards. Further, the Guidelines now discuss the
appropriate depth of review by property type, including factors to
consider in the review of appraisals and evaluations of commercial and
single-family residential real estate. The Guidelines retain the
possible use of automated tools and sampling methods in the review of
appraisals and evaluations supporting lower risk residential mortgages.
With prior approval from its primary Federal regulator, an institution
may use such tools or methods for its review process.
This revised section also incorporates the section on Accepting
Appraisals from Other Financial Services Institutions in the Proposal.
The guidance addresses the authority as set forth in the Agencies'
appraisal regulations for an institution to use an appraisal that was
performed by an appraiser engaged directly by another regulated
institution or financial services institution (including mortgage
brokers), provided certain conditions are met. Some commenters contend
that regulated institutions should not be allowed to accept appraisals
from mortgage brokers so as to ensure compliance with applicable
appraisal independence standards. In response to these comments, the
Guidelines confirm that appraisals obtained from other financial
services institutions must comply with the Agencies' appraisal
regulations and be consistent with supervisory guidance, including the
standards of independence. Moreover, the Guidelines remind institutions
that they generally should not rely on evaluations prepared by another
financial services institution.
With regard to relying on appraisals supporting underlying loans in
a pool of 1-to-4 family mortgage loans, the Guidelines also confirm
that an institution may use sampling and audit procedures to determine
whether the appraisals in a pool of residential loans satisfy the
Agencies' appraisal regulations and are consistent with supervisory
guidance. When compliance cannot be confirmed, institutions are
reminded that they must obtain an appraisal(s) prior to engaging in the
transaction. Finally, minor edits were made to this section to reaffirm
that small institutions should ensure that reviewers are independent
and appropriately qualified, and may need to employ additional
personnel or engage a third party to perform the review function.
Third Party Arrangements. This section in the Guidelines addresses
the risk management practices that an institution should consider if it
uses a third party to manage or conduct all or part of its collateral
valuation function. In the Guidelines, this section was expanded to
provide additional specificity on an institution's responsibilities for
the selection, monitoring, and management of arrangements with third
parties. Revisions to this section reflect requests from commenters for
clarification on the relationship between regulated institutions and
third parties. Commenters also asked the Agencies to reaffirm that an
institution cannot outsource its responsibility to maintain an
effective and independent collateral valuation function. The Proposal
and Guidelines reference each Agency's guidance on third party
arrangements. Revisions to this section summarize key considerations
from those issuances and state that institutions should use caution in
determining whether to engage a third party. In response to several
comments regarding an institution's use of appraisal management
companies, this section addresses the due diligence procedures for
selecting a third party, including an effective risk management system
and internal controls.
Program Compliance. A few commenters suggested that the Agencies
incorporate certain clarifying edits with regard to the independence of
the collateral valuation process, staff reporting relationships, and
internal quality control practices. Several commenters asked the
Agencies to clarify their expectations for demonstrating compliance and
offered recommendations on sound practices, including appropriate staff
reporting relationships and the depth of the process and procedures for
verifying and testing compliance (such as sampling procedures). In
response, the Agencies have revised the Guidelines to reflect a
principles-based approach to ensure that an institution's collateral
valuation program complies with the Agencies' appraisal regulations and
is consistent with supervisory guidance and an institution's internal
policies.
In the Guidelines, this section also was reorganized to list the
minimum program compliance standards and to incorporate clarifying
text. Institutions are reminded that the results of their review
process and other relevant information should be used as a basis for
considering persons for future collateral valuation assignments and
that collateral valuation deficiencies should be reported to
appropriate internal parties, and if applicable, to external
authorities in a timely manner. The Guidelines should be considered by
an institution in establishing effective internal controls over its
collateral valuation function, including the verification and testing
of its processes.
Monitoring Collateral Value. The majority of commenters agreed with
the Proposal and the expectations for determining when an institution
should obtain a new appraisal or evaluation for monitoring asset
quality of its portfolio and collateral risk in a particular credit.
While some commenters cautioned that the Agencies' examiners should not
be overly aggressive in requiring institutions to obtain new appraisals
on existing loans, a few commenters asked for clarification on what
would constitute a change in market condition and when an institution
should re-value collateral.
In addition to certain clarifying edits, language was added in the
Guidelines to confirm that an institution may employ a variety of
techniques for monitoring the effect of collateral valuation trends on
portfolio risk and that such information should be timely and
sufficient to understand the risk associated with its lending activity.
In response to commenters, the Guidelines now provide examples of
factors for an institution to consider in assessing whether a
significant change in market conditions has occurred. The Guidelines
also emphasize the importance of monitoring collateral values in the
institution's lending markets, consistent with the Agencies' real
estate lending regulations and guidelines.
To eliminate redundancies, the revised section incorporates from
Appendix A of the Proposal the discussion of an institution's
[[Page 77455]]
responsibility to obtain current collateral valuation information for
loan modifications and workouts of existing credits. As in the
Proposal, the Guidelines address when an institution may modify an
existing credit without obtaining either an appraisal or an evaluation.
The revisions reflect clarifying text in response to comments from
institutions on the regulatory requirements for reappraisals of real
estate collateral for existing credits, particularly in modification
and workout situations.
The Agencies also revised the Guidelines to reaffirm an
institution's responsibility to maintain policies and procedures that
establish standards for obtaining current collateral valuation
information to facilitate its decision to engage in a loan modification
or workout. In response to comments, the Guidelines address the
Agencies' expectations for institutions to elevate the collateral
valuation method as appropriate to address safety and soundness
concerns, particularly in those loan workout situations where repayment
becomes more dependent on the sale of collateral.
Referrals. The Proposal confirmed that an institution should make
referrals to state appraiser regulatory authorities when it suspects
that a state licensed or certified appraiser failed to comply with
USPAP, applicable state laws, or engaged in unethical or unprofessional
conduct. Some commenters referenced industry efforts to mitigate fraud
in real estate transactions. In response to these comments, the
Agencies revised the Guidelines to address an institution's
responsibility to file a suspicious activity report (SAR) with the
Financial Crimes Enforcement Network of the Department of Treasury when
it suspects inappropriate appraisal-related activity that meets the SAR
filing criteria. The revisions also confirm that examiners will forward
such findings to their supervisory office for appropriate disposition
if there are concerns with an institution's ability or willingness to
make a referral or file a SAR. Institutions also should be aware of the
recent amendments to Regulation Z, which address mandatory reporting
provisions.\14\
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\14\ 75 FR 66554 (Oct. 28, 2010).
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Appendix A--Appraisal Exemptions. The Guidelines contain a new
introduction to the Appendix in response to commenters' questions
regarding the authority of the Agencies to establish exemptions from
their appraisal regulations. The discussion of loan modifications in
the Proposal was incorporated in the section on Monitoring Collateral
Value. The revisions reflect clarifying text in response to comments
from institutions on the regulatory requirements for reappraisals of
real estate collateral for existing credits and subsequent
transactions, particularly loan workout situations.
Notwithstanding the exemption on renewals, refinancings, and
subsequent transactions, some industry groups and appraiser
organizations recommended that the Agencies address the circumstances
under which institutions are to obtain appraisals even though
evaluations are permitted. The Agencies believe that the Proposal
adequately addressed an institution's responsibility to maintain a
risk-focused process for elevating its collateral valuation methods
consistent with safe and sound banking practices.
Appendix B--Evaluations Based on Analytical Methods or
Technological Tools. In response to commenters, the Appendix was
revised to provide clarification on the appropriate use of analytical
methods or technological tools to develop an evaluation. The Appendix
clarifies that an institution may not rely solely on the results of a
method or tool to develop an evaluation unless the resulting evaluation
meets all of the supervisory expectations for an evaluation and is
consistent with safe and sound banking practices.
As in the Proposal, the Appendix in the Guidelines provides
guidance on the Agencies' supervisory expectations regarding an
institution's process for selecting, using, validating, and monitoring
a valuation method or tool. The Appendix also addresses the process
that institutions are expected to establish for determining whether a
method or tool may be used in the preparation of an evaluation and the
supplemental information that may be necessary to comply with the
minimum supervisory expectations for an evaluation, as set forth in the
Guidelines.
The Appendix also has been revised to respond to comments regarding
the appropriate use of an AVM or tax assessment value (TAV) to develop
an evaluation. Some commenters did not agree that institutions should
be permitted to use AVMs to develop an evaluation. Some small
institutions noted that they could be placed at a competitive
disadvantage with larger institutions that use AVMs. The Guidelines
make it clear that an institution is responsible for meeting
supervisory expectations regarding the selection, use, and validation
of an AVM and maintaining an effective system of internal controls.
Moreover, an AVM or TAV is not, in and of itself, an alternative to an
evaluation. Therefore, when using an AVM or TAV, the resulting
evaluation should be consistent with the supervisory expectations in
the Evaluation Development and Evaluation Content sections in the
Guidelines. The Appendix also addresses the expertise necessary to
manage the use of a method or tool, which may require an institution to
employ additional personnel or engage a third party. Recognizing that
technology may change, the Guidelines address an institution's
responsibility for ensuring that an evaluation based on an analytical
method or technological tool is consistent with the Agencies'
supervisory expectations in the Evaluation Content section.
Appendix C--Deductions and Discounts. This is a new Appendix in the
Guidelines that is based on the discussion in the Proposal on the
Agencies' minimum appraisal standards. Most commenters appreciated the
additional explanation in the Proposal on the appraisal standard to
analyze deductions and discounts for residential tract developments.
However, these commenters provided technical comments on appraisal
practices that might assist one in understanding this appraisal
concept. In light of these comments, the Agencies have expanded the
discussion in the Guidelines and moved the discussion to a separate
Appendix.
Appendix D--Glossary of Terms. In response to commenters'
suggestions, additional terms were incorporated in the Guidelines,
including appraisal management company, broker price opinion, credit
file, going concern value, presold unit, and unsold units.
Other Comments on the Proposal
Other Interagency Appraisal-Related Guidance Documents. Several
commenters asked whether other guidance documents issued by the
Agencies on appraisal-related issues would be rescinded with the
issuance of the Guidelines. The following guidance documents have been
incorporated in the Guidelines and are now being rescinded: (1) The
1994 Interagency Appraisal and Evaluation Guidelines; (2) the 2003
Interagency Statement on Independent Appraisal and Evaluation
Functions; (3) and the Interagency Statement on the 2006 Revisions to
the Uniform Standards of Professional Appraisal Practice. The following
guidance documents continue to be in effect: The 2005 Interagency FAQs
on Residential Tract Development Lending
[[Page 77456]]
and the 2005 Frequently Asked Questions on the Appraisal Regulations
and the Interagency Statement on Independent Appraisal and Evaluation
Functions.
Agencies' Appraisal Regulations. In the notice for comment on the
Proposal, the Agencies requested comment on the appraisal regulatory
exemption for residential real estate transactions involving U.S.
government sponsored enterprises (GSEs). In the Guidelines, the
Agencies clarified their expectations that while a loan qualifying for
sale to a GSE is exempted from the appraisal regulations, an
institution is expected to have appropriate policies to confirm their
compliance with the GSEs' underwriting and appraisal standards.
Further, the Agencies recognize that the Dodd-Frank Act directs the
Agencies to address in their safety and soundness regulations the
appraisal requirements for 1-to-4 family residential mortgages. Any
amendment to the Agencies' appraisal regulations is beyond the scope of
the Guidelines. The information provided by commenters will be
considered in assessing the need to revise these regulations.
III. Final Interagency Guidelines
The Guidelines are effective upon publication in the Federal
Register. However, on a case-by-case basis, an institution needing to
improve its appraisal and evaluation program may be granted some
flexibility from its primary Federal regulator on the timeframe for
revising its procedures to be consistent with the Guidelines. This
timeframe should be commensurate with the level and nature of the
institution's real estate lending activity.
The final Interagency Appraisal and Evaluation Guidelines appear
below.
Interagency Appraisal and Evaluation Guidelines
Table of Contents
I. Purpose
II. Background
III. Supervisory Policy
IV. Appraisal and Evaluation Program
V. Independence of the Appraisal and Evaluation Program
VI. Selection of Appraisers or Persons Who Perform Evaluations
A. Approved Appraiser List
B. Engagement Letters
VII. Transactions That Require Appraisals
VIII. Minimum Appraisal Standards
IX. Appraisal Development
X. Appraisal Reports
XI. Transactions That Require Evaluations
XII. Evaluation Development
XIII. Evaluation Content
XIV. Validity of Appraisals and Evaluations
XV. Reviewing Appraisals and Evaluations
A. Reviewer Qualifications
B. Depth of Review
C. Resolution of Deficiencies
D. Documentation of the Review
XVI. Third Party Arrangements
XVII. Program Compliance
A. Monitoring Collateral Values
B. Portfolio Collateral Risk
C. Modifications and Workouts of Existing Credits
XVIII. Referrals
Appendix A, Appraisal Exemptions
Appendix B, Evaluations Based on Analytical Methods and
Technological Tools
Appendix C, Deductions and Discounts
Appendix D, Glossary of Terms
I. 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, including their appendices,
address supervisory matters relating to real estate appraisals and
evaluations used to support real estate-related financial
transactions.\15\ 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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\15\ 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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II. Background
Title XI of the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (FIRREA) \16\ requires each Agency to prescribe
appropriate standards for the performance of real estate appraisals in
connection with ``federally related transactions,'' \17\ 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.\18\ 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.\19\ An Agency
may require compliance with additional appraisal standards if it makes
a determination that such additional standards are required to properly
carry out its statutory responsibilities.\20\ Each of the Agencies has
adopted additional appraisal standards.\21\
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\16\ Public Law 101-73, Title XI, 103 Stat. 511 (1989); 12
U.S.C. 3331, et seq.
\17\ 12 U.S.C. 3339.
\18\ 12 U.S.C. 3350(4).
\19\ Supra Note 3.
\20\ Id.
\21\ 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,\22\
issued pursuant to section 304 of the Federal Deposit Insurance
Corporation Improvement Act of 1991 (FDICIA),\23\ 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.\24\ 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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\22\ OCC: 12 CFR part 34, subpart C; FRB: 12 CFR part 208,
subpart E; FDIC: 12 CFR part 365; and OTS: 12 CFR 560.100 and
560.101.
\23\ Public Law 102-242, Sec. 304, 105 Stat. 2354; 12 U.S.C.
1828(o).
\24\ 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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III. 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 size and the nature of an institution's real estate-
related activities when assessing the appropriateness of its program.
While borrowers' ability to repay their real estate loans according
to reasonable terms remains the primary consideration in the lending
decision, an institution also must consider the value of the underlying
real estate collateral in accordance with the Agencies' appraisal
regulations. Institutions that fail to comply with the Agencies'
appraisal regulations or to maintain a sound appraisal and evaluation
program consistent with supervisory guidance 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.
When analyzing individual transactions, examiners will review an
[[Page 77457]]
appraisal or evaluation to determine whether the methods, assumptions,
and value conclusions are reasonable. Examiners also will determine
whether the appraisal or evaluation complies with the Agencies'
appraisal regulations and is consistent with supervisory guidance 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, competent, and
are not subject to conflicts of interest.
IV. 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 appraisers and persons who
perform evaluations.
Ensure that appraisals comply with the Agencies' appraisal
regulations and are consistent with supervisory guidance.
Ensure that appraisals and evaluations contain sufficient
information to support the credit decision.
Maintain criteria for the content and appropriate use of
evaluations consistent with safe and sound banking practices.
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 whether an existing appraisal
or evaluation may be used to support a subsequent transaction.
Implement internal controls that promote compliance with
these program standards, including those related to monitoring third
party arrangements.
Establish criteria for monitoring collateral values.
Establish criteria for obtaining appraisals or evaluations
for transactions that are not otherwise covered by the appraisal
requirements of the Agencies' appraisal regulations.
V. Independence of the Appraisal and Evaluation Program
For both appraisal and evaluation functions, an institution should
maintain standards of independence as part of an effective collateral
valuation program 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 who
administer the institution's collateral valuation program, including
the ordering, reviewing, and acceptance of appraisals and evaluations.
Appraisers must be independent of the loan production and collection
processes and have no direct, indirect or prospective interest,
financial or otherwise, in the property or transaction.\25\ These
standards of independence also should apply to persons who perform
evaluations.
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\25\ The Agencies' appraisal regulations set forth specific
appraiser independence requirements that exceed those set forth in
the Uniform Standards of Professional Appraisal Practice (USPAP).
Institutions also should be aware of separate requirements on
conflicts of interest under Regulation Z (Truth in Lending), 12 CFR
226.42(d).
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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 must abstain from any vote or approval involving
loans on which they ordered, performed, or reviewed the appraisal or
evaluation.\26\
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\26\ 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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Communication between the institution's collateral valuation staff
and an appraiser or person performing an evaluation is essential for
the exchange of appropriate information relative to the valuation
assignment. An institution's policies and procedures should specify
methods for communication that ensure independence in the collateral
valuation function. These policies and procedures should foster timely
and appropriate communications regarding the assignment and establish a
process for responding to questions from the appraiser or person
performing an evaluation.
An institution may exchange information with appraisers and persons
who perform evaluations, which may include providing a copy of the
sales contract \27\ for a purchase transaction. However, an institution
should not directly or indirectly coerce, influence, or otherwise
encourage an appraiser or a person who performs an evaluation to
misstate or misrepresent the value of the property.\28\ Consistent with
its policies and procedures, an institution also may request the
appraiser or person who performs an evaluation to:
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\27\ Refer to USPAP Standards Rule 1-5(a) and the Ethics Rule.
\28\ For mortgage transactions secured by a consumer's principal
dwelling, refer to 12 CFR 226.36(b) under Regulation Z (Truth in
Lending) through March 31, 2011. Also refer to 12 CFR 226.42, which
is mandatory beginning on April 1, 2011. Regulation Z also prohibits
a creditor from extending credit when it knows that the appraiser
independence standards have been violated, unless the creditor
determines that the value of the property is not materially
misstated.
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Consider additional information about the subject property
or about comparable properties.
Provide additional supporting information about the basis
for a valuation.
Correct factual errors in an appraisal.
An institution's policies and procedures should ensure that it
avoids inappropriate actions that would compromise the independence of
the collateral valuation function,\29\ including:
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\29\ See 12 CFR 226.42(c).
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Communicating a predetermined, expected, or qualifying
estimate of value, or a loan amount or target loan-to-value ratio to an
appraiser or person performing an evaluation.
Specifying a minimum value requirement for the property
that is needed to approve the loan or as a condition of ordering the
valuation.
Conditioning a person's compensation on loan consummation.
Failing to compensate a person because a property is not
valued at a certain amount.\30\
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\30\ This provision does not preclude an institution from
withholding compensation from an appraiser or person who provided an
evaluation based on a breach of contract or substandard performance
of services under a contractual provision.
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Implying that current or future retention of a person's
services depends on the amount at which the appraiser or person
performing an evaluation values a property.
Excluding a person from consideration for future
engagement because a property's reported market value does not meet a
specified threshold.
[[Page 77458]]
After obtaining an appraisal or evaluation, or as part of its
business practice, an institution may find it necessary to obtain
another appraisal or evaluation of a property and would be expected to
adhere to a policy of selecting the most credible appraisal or
evaluation, rather than the appraisal or evaluation that states the
highest value. (Refer to the Reviewing Appraisals and Evaluations
section in these Guidelines for additional information on determining
and documenting the credibility of an appraisal or evaluation.)
Further, an institution's reporting of a person suspected of non-
compliance with the Uniform Standards of Professional Appraisal
Practice (USPAP), and applicable Federal or state laws or regulations,
or otherwise engaged in other unethical or unprofessional conduct to
the appropriate authorities would not be viewed by the Agencies as
coercion or undue influence. However, an institution should not use the
threat of reporting a false allegation in order to influence or coerce
an appraiser or a person who performs an evaluation.
VI. Selection of Appraisers or Persons Who Perform Evaluations
An institution's collateral valuation program should establish
criteria to select, evaluate, and monitor the performance of appraisers
and persons who perform evaluations. The criteria should ensure that:
The person selected possesses the requisite education,
expertise, and experience to competently complete the assignment.
The work performed by appraisers and persons providing
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.
The appraiser selected to perform an appraisal holds the
appropriate state certification or license at the time of the
assignment. Persons who perform evaluations should possess the
appropriate appraisal or collateral valuation education, expertise, and
experience relevant to the type of property being valued. Such persons
may include appraisers, real estate lending professionals, agricultural
extension agents, or foresters.\31\
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\31\ 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.
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An institution or its agent must directly select and engage
appraisers. The only exception to this requirement is that the
Agencies' appraisal regulations allow an institution to use an
appraisal prepared for another financial services institution provided
certain conditions are met. An institution or its agents also should
directly select and engage persons who perform evaluations.
Independence is compromised when a borrower recommends an appraiser or
a person to perform an evaluation. Independence is also compromised
when loan production staff selects a person to perform an appraisal or
evaluation for a specific transaction. For certain transactions, an
institution also must comply with the provisions addressing valuation
independence in Regulation Z (Truth in Lending).\32\
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\32\ See 12 CFR 226.42.
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An institution's selection process should ensure that a qualified,
competent and independent person is selected to perform a valuation
assignment. An institution should maintain documentation to demonstrate
that the appraiser or person performing an evaluation is competent,
independent, and has the relevant experience and knowledge for the
market, location, and type of real property being valued. Further, the
person who selects or oversees the selection of appraisers or persons
providing evaluation services should be independent from the loan
production area. An institution's use of a borrower-ordered or
borrower-provided appraisal violates the Agencies' appraisal
regulations. However, a borrower can inform an institution that a
current appraisal exists, and the institution may request it directly
from the other financial services institution.
A. Approved Appraiser List
If an institution establishes an approved appraiser list for
selecting an appraiser for a particular assignment, the institution
should have appropriate procedures for the development and
administration of the list. These procedures should include a process
for qualifying an appraiser for initial placement on the list, as well
as periodic monitoring of the appraiser's performance and credentials
to assess whether to retain the appraiser on the list. Further, there
should be periodic internal review of the use of the approved appraiser
list to confirm that appropriate procedures and controls exist to
ensure independence in the development, administration, and maintenance
of the list. For residential transactions, loan production staff can
use a revolving, pre-approved appraiser list, provided the development
and maintenance of the list is not under their control.
B. Engagement Letters
An institution 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. In addition to the other information, the
engagement letter will identify the intended use and user(s), as
defined in USPAP. An engagement letter also may specify whether there
are any legal or contractual restrictions on the sharing of the
appraisal with other parties. An institution should include the
engagement letter in its credit file. To avoid the appearance of any
conflict of interest, appraisal or evaluation development work should
not commence until the institution has selected and engaged a person
for the assignment.
VII. 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.\33\ The Agencies also reserve the right to require
an appraisal under their appraisal regulations to address safety and
soundness concerns in a transaction. (See Appendix A, Appraisal
Exemptions.) \34\
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\33\ In order to facilitate recovery in designated major
disaster areas, subject to safety and soundness considerations, the
Depository Institutions Disaster Relief Act of 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. Public Law 102-485, Sec. 2, 106 Stat. 2771 (October 23,
1992); 12 U.S.C. 3352.
\34\ 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 an existing extension of credit where there
is either an advancement of new monies or a material change in the
condition of the property. 12 CFR 722.3(d).
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[[Page 77459]]
VIII. Minimum Appraisal Standards
The Agencies' appraisal regulations include minimum standards for
the preparation of an appraisal. (See Appendix D, Glossary of Terms,
for terminology used in these Guidelines.) The appraisal must:
Conform to generally accepted appraisal standards as
evidenced by the 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 in the
property or transaction. Further, the appraisal must contain an opinion
of market value as defined in the Agencies' appraisal regulations. (See
discussion on the definition of market value below.) Under USPAP, the
appraisal must contain a certification that the appraiser has complied
with USPAP. An institution may refer to the appraiser's USPAP
certification in its assessment of the appraiser's independence
concerning the transaction and the property. Under the Agencies'
appraisal regulations, the result of an Automated Valuation Model
(AVM), by itself or signed by an appraiser, 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. Further, the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (Dodd-Frank Act) \35\ provides ``[i]n
conjunction with the purchase of a consumer's principal dwelling,
broker price opinions may not be used as the primary basis to determine
the value of a piece of property for the purpose of loan origination of
a residential mortgage loan secured by such piece of property.'' \36\
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\35\ Public Law 111-203, 124 Stat. 1376 (2010).
\36\ Dodd-Frank Act, Section 1473(r).
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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
for the institution 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. 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
extent of the research and analyses employed for similar property
types, market conditions, and transactions. Therefore, an institution
should be cautious in limiting the scope of the appraiser's inspection,
research, or other information used to determine the property's
condition and relevant market factors, which could affect the
credibility of the appraisal.
According to USPAP, appraisal reports must contain sufficient
information to enable the intended user of the appraisal to understand
the report properly. An institution should specify the use of an
appraisal report option that is commensurate with the risk and
complexity of the transaction. The appraisal report should contain
sufficient disclosure of the nature and extent of inspection and
research performed by the appraiser to verify the property's condition
and support the appraiser's opinion of market value. (See Appendix D,
Glossary of Terms, for the definition of appraisal report options.)
Institutions should be aware that provisions in the Dodd-Frank Act
address appraisal requirements for a higher-risk mortgage to a
consumer.\37\ To implement these provisions, the Agencies recognize
that future regulations will address the requirement that the appraiser
conduct a physical property visit of the interior of the mortgaged
property.\38\
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\37\ Under the law, the provisions are effective 12 months after
final regulations to implement the provisions are published. See
Dodd-Frank Act, Section 1400(c)(1).
\38\ Section 1471 of the Dodd-Frank Act added a new section 129H
to the Truth-in-Lending Act (15 U.S.C. 1631 et seq.).
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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.
Appraisers must analyze, apply, and report appropriate deductions
and discounts when providing an estimate of market value based on
demand for real estate in the future. This standard is designed to
avoid having appraisals prepared using unrealistic assumptions and
inappropriate methods in arriving at the property's market value. (See
Appendix C, Deductions and Discounts, for further explanation on
deductions and discounts.)
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 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. Value opinions such as ``going concern
value,'' ``value in use,'' or a special value to a specific property
user may not be used as market value for federally related
transactions. An appraisal may contain separate opinions of such values
so long as they are clearly identified and disclosed.
The estimate of market value should consider the real property's
actual physical condition, use, and zoning as of the effective date of
the appraiser's opinion of value. For a transaction financing
construction or renovation of a building, an institution would
generally request an appraiser to provide the property's current market
value in its ``as is'' condition, and, as applicable, its prospective
market value upon completion and/or prospective market value upon
stabilization.\39\ Prospective market value opinions should be based
upon current and reasonably expected market conditions. When an
appraisal includes prospective market value opinions, there should be a
point of reference to the market conditions and time frame on which the
appraiser based the analysis.\40\ An institution should understand the
real property's ``as is'' market value and should consider the
prospective market value that corresponds to the credit decision and
the phase of the project being funded, if applicable.
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\39\ 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).
\40\ 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, an
institution must consider an appraiser's education and experience.
While an institution must confirm that the appraiser holds a valid
credential from the appropriate state appraiser regulatory authority, a
state certification or license is a minimum credentialing
[[Page 77460]]
requirement. Appraisers are expected to be selected for individual
assignments based on their competency to perform the appraisal,
including knowledge of the property type and specific property market.
As stated in the Agencies' appraisal regulations, a state certified or
licensed appraiser may not be considered competent solely by virtue of
being certified or licensed. In communicating an appraisal assignment,
an institution should convey to the appraiser that the Agencies'
minimum appraisal standards must be followed.
IX. Appraisal Development
The Agencies' appraisal regulations require appraisals for
federally related transactions to comply with the requirements in
USPAP, some of which are addressed below. Consistent with the USPAP
Scope of Work Rule,\41\ the appraisal must reflect an appropriate scope
of work that provides for ``credible'' assignment results. The
appraiser'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. Further, USPAP requires the appraiser to disclose whether
he or she previously appraised the property.
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\41\ See USPAP, Scope of Work Rule, Advisory Opinions 28 and 29.
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While an appraiser must comply with USPAP and establish the scope
of work in an appraisal assignment, an institution is responsible for
obtaining an appraisal that contains sufficient information and
analysis 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. These communications
should adhere to the institution's policies and procedures on
independence of the appraiser and not unduly influence the appraiser.
An institution should not allow lower cost or the speed of delivery
time to inappropriately influence its appraisal ordering procedures or
the appraiser's determination of the scope of work for an appraisal
supporting a federally related transaction.
As required by USPAP, the appraisal must include any approach to
value (that is, the cost, income, and sales comparison approaches) that
is applicable and necessary to the assignment. Further, the appraiser
should disclose the rationale for the omission of a valuation approach.
The appraiser must analyze and reconcile the information from the
approaches to arrive at the estimated market value. The appraisal also
should include a discussion on market conditions, including relevant
information on property value trends, demand and supply factors, and
exposure time. Other information might include the prevalence and
effect of sales and financing concessions, the list-to-sale price
ratio, and availability of financing. In addition, an appraisal should
reflect an analysis of the property's sales history and an opinion as
to the highest and best use of the property. 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.
X. Appraisal Reports
An institution is responsible for identifying the appropriate
appraisal report 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 the
appraisal report format to be specified in its appraisal engagement
instructions to an appraiser.
USPAP provides various appraisal report options that an appraiser
may use to present the results of appraisal assignments. The major
difference among these report options is the level of detail presented
in the report. A report 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.
Generally, a report option that is restricted to a single client
and intended user will not be appropriate to support most federally
related transactions. These reports lack sufficient supporting
information and analysis for underwriting purposes. These less detailed
reports may be appropriate for real estate portfolio monitoring
purposes. (See Appendix D, Glossary of Terms, for the definition of
appraisal report options.)
Regardless of the report 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 typically warranted for the type of
appraisal, but omitted, along with the rationale for its omission.
XI. Transactions That Require Evaluations
The Agencies' appraisal regulations permit an institution to obtain
an appropriate evaluation of real property collateral in lieu of an
appraisal for transactions that qualify for certain exemptions. These
exemptions include a transaction that:
Has a transaction value equal to or less than the
appraisal threshold of $250,000.
Is a business loan with a transaction value equal to or
less than the business loan threshold of $1 million, and is not
dependent on the sale of, or rental income derived from, real estate as
the primary source of repayment.\42\
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\42\ 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 market
conditions or physical aspects of the 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.\43\
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\43\ NCUA's appraisal regulation requires credit unions to meet
both conditions to avoid the need for an appraisal as set forth in
12 CFR 722.3(d).
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For more information on real estate-related financial transactions
that are exempt from the appraisal requirement, see Appendix A,
Appraisal Exemptions. For a discussion on changes in market conditions,
see the section on Validity of Appraisals and Evaluations in these
Guidelines.
Although the Agencies' appraisal regulations allow an institution
to use an evaluation for certain transactions, an institution should
establish policies and procedures for determining when to obtain an
appraisal for such transactions. For example, an institution should
consider obtaining an appraisal as an institution's portfolio risk
increases or for higher risk real estate-related financial
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.
[[Page 77461]]
Transactions involving existing extensions of credit with
significant risk to the institution.
Borrowers with high risk characteristics.
XII. Evaluation Development
An evaluation must be consistent with safe and sound banking
practices and should support the institution's decision to engage in
the transaction. An institution should be able to demonstrate that an
evaluation, whether prepared by an individual or supported by an
analytical method or a technological tool, 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. (Refer to Appendix B,
Evaluations Based on Analytical Methods or Technological Tools.)
A valuation method that does not provide a property's market value
or sufficient information and analysis to support the value conclusion
is not acceptable as an evaluation. For example, a valuation method
that provides a sales or list price, such as a broker price opinion,
cannot be used as an evaluation because, among other things, it does
not provide a property's market value. Further, the Dodd-Frank Act
provides ``[i]n conjunction with the purchase of a consumer's principal
dwelling, broker price opinions may not be used as the primary basis to
determine the value of a piece of property for the purpose of loan
origination of a residential mortgage loan secured by such piece of
property.'' \44\ Likewise, information on local housing conditions and
trends, such as a competitive market analysis, does not contain
sufficient information on a specific property that is needed, and
therefore, would not be acceptable as an evaluation. The information
obtained from such sources, while insufficient as an evaluation, may be
useful to develop an evaluation or appraisal.
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\44\ Dodd-Frank Act, Section 1473(r).
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An institution should establish policies and procedures for
determining an appropriate collateral valuation method for a given
transaction considering associated risks. These policies and procedures
should address the process for selecting the appropriate valuation
method for a transaction rather than using the method that renders the
highest value, lowest cost, or fastest turnaround time.
A valuation method should address the property's actual physical
condition and characteristics as well as the economic and market
conditions that affect the estimate of the collateral's market value.
It would not be acceptable for an institution to base an evaluation on
unsupported assumptions, such as a property is in ``average''
condition, the zoning will change, or the property is not affected by
adverse market conditions. Therefore, an institution should establish
criteria for determining the level and extent of research or inspection
necessary to ascertain the property's actual physical condition, and
the economic and market factors that should be considered in developing
an evaluation. An institution should consider performing an inspection
to ascertain the actual physical condition of the property and market
factors that affect its market value. When an inspection is not
performed, an institution should be able to demonstrate how these
property and market factors were determined.
XIII. Evaluation Content
An evaluation should contain sufficient information detailing the
analysis, assumptions, and conclusions to support the credit decision.
An evaluation's content should be documented in the credit file or
reproducible. The evaluation should, at a minimum:
Identify the location of the property.
Provide a description of the property and its current and
projected use.
Provide an estimate of the property's market value in its
actual physical condition, use and zoning designation as of the
effective date of the evaluation (that is, the date that the analysis
was completed), with any limiting conditions.
Describe the method(s) the institution used to confirm the
property's actual physical condition and the extent to which an
inspection was performed.
Describe the analysis that was performed and the
supporting information that was used in valuing the property.
Describe the supplemental information that was considered
when using an analytical method or technological tool.
Indicate all source(s) of information used in the
analysis, as applicable, to value the property, including:
[cir] External data sources (such as market sales databases and
public tax and land records);
[cir] Property-specific data (such as previous sales data for the
subject property, tax assessment data, and comparable sales
information);
[cir] Evidence of a property inspection;
[cir] Photos of the property;
[cir] Description of the neighborhood; or
[cir] Local market conditions.
Include information on the preparer when an evaluation is
performed by a person, such as the name and contact information, and
signature (electronic or other legally permissible signature) of the
preparer.
(See Appendix B, Evaluations Based on Analytical Methods or
Technological Tools, for guidance on the appropriate use of analytical
methods and technological tools for developing an evaluation.)
XIV. Validity of Appraisals and Evaluations
The Agencies allow an institution to use an existing appraisal or
evaluation to support a subsequent transaction in certain
circumstances. Therefore, an institution should establish criteria for
assessing whether an existing appraisal or evaluation continues to
reflect the market value of the property (that is, 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 may
be used in the subsequent transaction. A new appraisal or evaluation is
necessary if the originally reported market value has changed due to
factors such as:
Passage of time.
Volatility of the local market.
Changes in terms and availability of financing.
Natural disasters.
Limited or over supply of competing properties.
Improvements to the subject property or competing
properties.
Lack of maintenance of the subject or competing
properties.
Changes in underlying economic and market assumptions,
such as capitalization rates and lease terms.
Changes in zoning, building materials, or technology.
Environmental contamination.
XV. Reviewing Appraisals and Evaluations
The Agencies' appraisal regulations specify that appraisals for
federally related transactions must contain sufficient information and
analysis to support an institution's decision to engage in the credit
transaction. For certain transactions that do not require an appraisal,
the Agencies' regulations require an institution to obtain an
appropriate evaluation of real property collateral that is consistent
with safe
[[Page 77462]]
and sound banking practices. As part of the credit approval process and
prior to a final credit decision, an institution should review
appraisals and evaluations to ensure that they comply with the
Agencies' appraisal regulations and are consistent with supervisory
guidance and its own internal policies. This review also should ensure
that an appraisal or evaluation contains sufficient information and
analysis to support the decision to engage in the transaction. Through
the review process, the institution should be able to assess the
reasonableness of the appraisal or evaluation, including whether the
valuation methods, assumptions, and data sources are appropriate and
well-supported. An institution may use the review findings to monitor
and evaluate the competency and ongoing performance of appraisers and
persons who perform evaluations. (See the discussion in these
Guidelines on Selection of Appraisers or Persons Who Perform
Evaluations.)
When an institution identifies an appraisal or evaluation that is
inconsistent with the Agencies' appraisal regulations and the
deficiencies cannot be resolved with the appraiser or person who
performed the evaluation, the institution must obtain an appraisal or
evaluation that meets the regulatory requirements prior to making a
credit decision. Though a reviewer cannot change the value conclusion
in the original appraisal, an appraisal review performed by an
appropriately qualified and competent state certified or licensed
appraiser in accordance with USPAP may result in a second opinion of
market value. An institution may rely on the second opinion of market
value obtained through an acceptable USPAP-compliant appraisal review
to support its credit decision.
An institution's policies and procedures for reviewing appraisals
and evaluations, at a minimum, should:
Address the independence, educational and training
qualifications, and role of the reviewer.
Reflect a risk-focused approach for determining the depth
of the review.
Establish a process for resolving any deficiencies in
appraisals or evaluations.
Set forth documentation standards for the review and the
resolution of noted deficiencies.
A. Reviewer Qualifications
An institution should establish qualification criteria for persons
who are eligible to review appraisals and evaluations. Persons who
review appraisals and evaluations should be independent of the
transaction and have no direct or indirect interest, financial or
otherwise, in the property or transaction, and be independent of and
insulated from any influence by loan production staff. Reviewers also
should possess the requisite education, expertise, and competence to
perform the review commensurate with the complexity of the transaction,
type of real property, and market. Further, reviewers should be capable
of assessing whether the appraisal or evaluation contains sufficient
information and analysis to support the institution's decision to
engage in the transaction.
A small or rural institution or branch with limited staff should
implement prudent safeguards for reviewing appraisals and evaluations
when absolute lines of independence cannot be achieved. Under these
circumstances, 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.
An institution should assess the level of in-house expertise
available to review appraisals for complex projects, high-risk
transactions, and out-of-market properties. An institution may find it
appropriate to employ additional personnel or engage a third party to
perform the reviews. When using a third party, an institution remains
responsible for the quality and adequacy of the review process,
including the qualification standards for reviewers. (See the
discussion in these Guidelines on Third Party Arrangements.)
B. Depth of Review
An institution should implement a risk-focused approach for
determining the depth of the review needed to ensure that appraisals
and evaluations contain sufficient information and analysis to support
the institution's decision to engage in the transaction. This process
should differentiate between high- and low-risk transactions so that
the review is commensurate with the risk. The depth of the review
should be sufficient to ensure that the methods, assumptions, data
sources, and conclusions are reasonable, well-supported, and
appropriate for the transaction, property, and market. The review also
should consider the process through which the appraisal or evaluation
is obtained, either directly by the institution or from another
financial services institution. The review process should be
commensurate with the type of transaction as discussed below:
Commercial Real Estate. An institution should ensure that
appraisals or evaluations for commercial real estate transactions are
subject to an appropriate level of review. Transactions involving
complex properties or high-risk commercial loans should be reviewed
more comprehensively to assess the technical quality of the appraiser's
analysis. For example, an institution should perform a more
comprehensive review of transactions involving large-dollar credits,
loans secured by complex or specialized properties, and properties
outside the institution's traditional lending market. Persons
performing such reviews should have the appropriate expertise and
knowledge relative to the type of property and its market.
The depth of the review of appraisals and evaluations completed for
commercial properties securing lower risk transactions may be less
technical in nature, but still should provide meaningful results that
are commensurate with the size, type, and complexity of the underlying
credit transaction. In addition, an institution should establish
criteria for when to expand the depth of the review.
1-to-4 Family Residential Real Estate. The reviews for
residential real estate transactions should reflect a risk-focused
approach that is commensurate with the size, type, and complexity of
the underlying credit transaction, as well as loan and portfolio risk
characteristics. These risk factors could include debt-to-income
ratios, loan-to-value ratios, level of documentation, transaction
dollar amount, or other relevant factors. With prior approval from its
primary Federal 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
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. In addition, an institution should establish
criteria for when to expand the depth of the review.
An institution may use sampling and audit procedures to verify the
seller's representations and warranties that the appraisals for the
underlying loans in a pool of residential loans satisfy the Agencies'
appraisal regulations and are consistent with supervisory guidance and
an institution's internal policies. If an institution is unable to
confirm that the appraisal meets the Agencies' appraisal requirements,
then the
[[Page 77463]]
institution must obtain an appraisal prior to engaging in the
transaction.
Appraisals From Other Financial Services Institutions.\45\
The Agencies' appraisal regulations specify that an institution may use
an appraisal that was prepared by an appraiser engaged directly by
another financial services institution, provided the institution
determines that the appraisal conforms to the Agencies' appraisal
regulations and is otherwise acceptable. An institution should assess
whether to use the appraisal prior to making a credit decision. An
institution should subject such appraisals to at least the same level
of review that the institution performs on appraisals it obtains
directly for similar properties and document its review in the credit
file. The documentation of the review should support the institution's
reliance on the appraisal. Among other considerations, an institution
should confirm that:
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\45\ An institution generally should not rely on an evaluation
prepared by or for another financial services institution because it
will not have sufficient information relative to the other
institution's risk management practices for developing evaluations.
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[cir] The appraiser was engaged directly by the other financial
services institution.
[cir] The appraiser had no direct, indirect, or prospective
interest, financial or otherwise, in the property or transaction.
[cir] The financial services institution (not the borrower) ordered
the appraisal. For example, an engagement letter should show that the
financial services institution, not the borrower, engaged the
appraiser.
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,
does not conform to USPAP, and violates the Agencies' appraisal
regulations.
C. Resolution of Deficiencies
An institution should establish policies and procedures for
resolving any inaccuracies or weaknesses in an appraisal or evaluation
identified through the review process, including procedures for:
Communicating the noted deficiencies to and requesting
correction of such deficiencies by the appraiser or person who prepared
the evaluation. An institution should implement adequate internal
controls to ensure that such communications do not result in any
coercion or undue influence on the appraiser or person who performed
the evaluation.
Addressing significant deficiencies in the appraisal that
could not be resolved with the original appraiser by obtaining a second
appraisal or relying on a review that complies with Standards Rule 3 of
USPAP and is performed by an appropriately qualified and competent
state certified or licensed appraiser prior to the final credit
decision.
Replacing evaluations prior to the credit decision that do
not provide credible results or lack sufficient information to support
the final credit decision.
D. Documentation of the Review
An institution should establish policies for documenting the review
of appraisals and evaluations in the credit file. Such policies should
address the level of documentation needed for the review, given the
type, risk and complexity of the transaction. The documentation should
describe the resolution of any appraisal or evaluation deficiencies,
including reasons for obtaining and relying on a second appraisal or
evaluation. The documentation also should provide an audit trail that
documents the resolution of noted deficiencies or details the reasons
for relying on a second opinion of market value.
XVI. Third Party Arrangements
An institution that engages a third party to perform certain
collateral valuation functions on its behalf is responsible for
understanding and managing the risks associated with the arrangement.
An institution should use caution if it engages a third party to
administer any part of its appraisal and evaluation function, including
the ordering or reviewing of appraisals and evaluations, selecting an
appraiser or person to perform evaluations, or providing access to
analytical methods or technological tools. An institution is
accountable for ensuring that any services performed by a third party,
both affiliated and unaffiliated entities, comply with applicable laws
and regulations and are consistent with supervisory guidance.\46\
Therefore, an institution should have the resources and expertise
necessary for performing ongoing oversight of third party arrangements.
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\46\ See, for example, FFIEC Statement on Risk Management of
Outsourced Technology Service (November 28, 2000) for guidance on
the assessment, selection, contract review, and monitoring of a
third party that provides services to a regulated institution. Refer
to the institution's primary Federal regulator for additional
guidance on third party arrangements: 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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An institution should have internal controls for identifying,
monitoring, and managing the risks associated with using a third party
arrangement for valuation services, including compliance, legal,
reputational, and operational risks. While the arrangement may allow an
institution to achieve specific business objectives, such as gaining
access to expertise that is not available internally, the reduced
operational control over outsourced activities poses additional risk.
Consistent with safe and sound practices, an institution should have a
written contract that clearly defines the expectations and obligations
of both the financial institution and the third party, including that
the third party will perform its services in compliance with the
Agencies' appraisal regulations and consistent with supervisory
guidance.
Prior to entering into any arrangement with a third party for
valuation services, an institution should compare the risks, costs, and
benefits of the proposed relationship to those associated with using
another vendor or conducting the activity in-house. The decision to
outsource any part of the collateral valuation function should not be
unduly influenced by any short-term cost savings. An institution should
take into account all aspects of the long-term effect of the
relationship, including the managerial expertise and associated costs
for effectively monitoring the arrangement on an ongoing basis.
If an institution outsources any part of the collateral valuation
function, it should exercise appropriate due diligence in the selection
of a third party. This process should include sufficient analysis by
the institution to assess whether the third party provider can perform
the services consistent with the institution's performance standards
and regulatory requirements. An institution should be able to
demonstrate that its policies and procedures establish effective
internal controls to monitor and periodically assess the collateral
valuation functions performed by a third party.
An institution also is responsible for ensuring that a third party
selects an appraiser or a person to perform an evaluation who is
competent and
[[Page 77464]]
independent, has the requisite experience and training for the
assignment, and thorough knowledge of the subject property's market.
Appraisers must be appropriately certified or licensed, but this
minimum credentialing requirement, although necessary, is not
sufficient to determine that an appraiser is competent to perform an
assignment for a particular property or geographic market.
An institution should ensure that when a third party engages an
appraiser or a person who performs an evaluation, the third party
conveys to that person the intended use of the appraisal or evaluation
and that the regulated institution is the client. For example, an
engagement letter facilitates the communication of this information.
An institution's risk management system should reflect the
complexity of the outsourced activities and associated risk. An
institution should document the results of ongoing monitoring efforts
and periodic assessments of the arrangement(s) with a third party for
compliance with applicable regulations and consistency with supervisory
guidance and its performance standards. If deficiencies are discovered,
an institution should take remedial action in a timely manner.
XVII. Program Compliance
Deficiencies in an institution's appraisal and evaluation program
that result in violations of the Agencies' appraisal regulations or
contraventions of the Agencies' supervisory guidance reflect negatively
on management. An institution's appraisal and evaluation policies
should establish internal controls to promote an effective appraisal
and evaluation program. The compliance process should:
Maintain a system of adequate controls, verification, and
testing to ensure that appraisals and evaluations provide credible
market values.
Insulate the persons responsible for ascertaining the
compliance of the institution's appraisal and evaluation function from
any influence by loan production staff.
Ensure the institution's practices result in the selection
of appraisers and persons who perform evaluations with the appropriate
qualifications and demonstrated competency for the assignment.
Establish procedures to test the quality of the appraisal
and evaluation review process.
Use, as appropriate, the results of the institution's
review process and other relevant information as a basis for
considering a person for a future appraisal or evaluation assignment.
Report appraisal and evaluation deficiencies to
appropriate internal parties and, if applicable, to external
authorities in a timely manner.
A. Monitoring Collateral Values
Consistent with the Agencies' real estate lending regulations and
guidelines,\47\ an institution should monitor collateral risk on a
portfolio and on an individual credit basis. Therefore, an institution
should have policies and procedures that address the need for obtaining
current collateral valuation information to understand its collateral
position over the life of a credit and effectively manage the risk in
its real estate credit portfolios. The policies and procedures also
should address the need to obtain current valuation information for
collateral supporting an existing credit that may be modified or
considered for a loan workout.
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\47\ OCC: 12 CFR part 34, subpart D; FRB: 12 CFR part 208,
subpart E; FDIC: 12 CFR part 365; OTS: 12 CFR 560.100 and 560.101;
and NCUA: 12 CFR 701.21.
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Under their appraisal regulations, the Agencies reserve 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, an institution should be able to demonstrate
that sufficient information is available to support the current market
value of the collateral and the classification of a problem real estate
credit. When such information is not available, an examiner may direct
an institution to obtain a new appraisal or evaluation in order to have
sufficient information to understand the current market value of the
collateral. Examiners would be expected to provide an institution with
a reasonable amount of time to obtain a new appraisal or evaluation.
B. Portfolio Collateral Risk
Prudent portfolio monitoring practices include criteria for
determining when to obtain a new appraisal or evaluation. Among other
considerations, the criteria should address deterioration in the credit
since origination or changes in market conditions. Changes in market
conditions could include material changes in current and projected
vacancy, absorption rates, lease terms, rental rates, and sale prices,
including concessions and overruns and delays in construction costs.
Fluctuations in discount or direct capitalization rates also are
indicators of changing market conditions.
In assessing whether changes in market conditions are material, an
institution should consider the individual and aggregate effect of
these changes on its collateral protection and the risk in its real
estate lending programs or credit portfolios. Moreover, as an
institution's reliance on collateral becomes more important, its
policies and procedures should:
Ensure that timely information is available to management
for assessing collateral and associated risk.
Specify when new or updated collateral valuations are
appropriate or desirable to understand collateral risk in the
transaction(s).
Delineate the valuation method to be employed after
considering the property type, current market conditions, current use
of the property, and the relevance of the most recent appraisal or
evaluation in the credit file.
Consistent with sound collateral valuation monitoring practices, an
institution can use a variety of techniques for monitoring the effect
of collateral valuation trends on portfolio risk. Sources of relevant
information may include external market data, internal data, or reviews
of recently obtained appraisals and evaluations. An institution should
be able to demonstrate that it has sufficient, reliable, and timely
information on market trends to understand the risk associated with its
lending activity.
C. Modifications and Workouts of Existing Credits
An institution may find it appropriate to modify a loan or to
engage in a workout with an existing borrower. The Agencies expect an
institution to consider current collateral valuation information to
assess its collateral risk and facilitate an informed decision on
whether to engage in a modification or workout of an existing real
estate credit. (See the discussion above on Portfolio Collateral Risk.)
Loan Modifications. A loan modification to an existing
credit that involves a limited change(s) \48\ in the terms of the note
or loan agreement and that does not adversely affect the institution's
real estate collateral protection after the modification does not rise
to the level of a new real estate-
[[Page 77465]]
related financial transaction for purposes of the Agencies' appraisal
regulations. As a result, an institution would not be required to
obtain either a new appraisal or evaluation to comply with the
Agencies' appraisal regulations, but should have an understanding of
its collateral risk. For example, institutions can use automated
valuation models or other valuation techniques when considering a
modification to a residential mortgage loan. An institution should have
procedures for ensuring an alternative collateral valuation method
provides reliable information. In addition, an institution should be
able to demonstrate that a modification reflects prudent underwriting
standards and is consistent with safe and sound lending practices.
Examiners will assess the adequacy of valuation information an
institution uses for loan modifications.
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\48\ A loan modification that entails a decrease in the interest
rate or a single extension of a limited or short-term nature would
not be viewed as a subsequent transaction. For example, an extension
arising from a short-term delay in the full repayment of the loan
when there is documented evidence that payment from the borrower is
forthcoming, or a brief delay in the scheduled closing on the sale
of a property when there is evidence that the closing will be
completed in the near term.
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Loan Workouts. As noted under ``Monitoring Collateral
Values,'' an institution's policies and procedures should address the
need for current information on the value of real estate collateral
supporting a loan workout. A loan workout can take many forms,
including a modification that adversely affects the institution's real
estate collateral protection after the modification, a renewal or
extension of loan terms, the advancement of new monies, or a
restructuring with or without concessions. These types of loan workouts
are new real estate-related financial transactions.
If the loan workout does not include the advancement of new monies
other than reasonable closing costs, the institution may obtain an
evaluation in lieu of an appraisal. For loan workouts that involve the
advancement of new monies, an institution may obtain an evaluation in
lieu of an appraisal provided there has been no obvious and material
change in market conditions and no change in the physical aspects of
the property that threatens the adequacy of the institution's real
estate collateral protection after the workout.\49\ In these cases, an
institution should support and document its rationale for using this
exemption. An institution must obtain an appraisal when a loan workout
involves the advancement of new monies and there is an obvious and
material change in either market conditions or physical aspects of the
property, or both, that threatens the adequacy of the institution's
real estate collateral protection after the workout (unless another
exemption applies).\50\ (See also Appendix A, Appraisal Exemptions, for
transactions where an evaluation would be allowed in lieu of an
appraisal.)
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\49\ Under the NCUA's appraisal regulation, a credit union must
meet both conditions to avoid the need for an appraisal. If a
transaction does not involve an advancement of new monies and there
have been no obvious and material changes in market or property
conditions, a credit union must obtain a written estimate of market
value that is consistent with the standards for evaluations as
discussed in these Guidelines. 12 CFR 722.3(d).
\50\ For example, if the transaction value is below the
appraisal threshold of $250,000.
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Collateral Valuation Policies for Modifications and
Workouts. An institution's policies should address the need for
obtaining current collateral valuation information for a loan
modification or workout. The policies should specify the valuation
method to be used and address the need to monitor collateral risk on an
ongoing basis taking into consideration changing market conditions and
the borrower's repayment performance. An institution also should be
able to demonstrate that the collateral valuation method used is
reliable for a given credit or loan type.
Further, for loan workouts, an institution's policies should
specify conditions under which an appraisal or evaluation will be
obtained. As loan repayment becomes more dependent on the sale of
collateral, an institution's policies should address the need to obtain
an appraisal or evaluation for safety and soundness reasons even though
one is not otherwise required by the Agencies' appraisal regulations.
XVIII. Referrals
An institution should file a complaint with the appropriate state
appraiser regulatory officials 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. In
addition, effective April 1, 2011, an institution must file a complaint
with the appropriate state appraiser certifying and licensing agency
under certain circumstances.\51\ An institution also must file a
suspicious activity report (SAR) with the Financial Crimes Enforcement
Network of the Department of the Treasury (FinCEN) when suspecting
fraud or identifying other transactions meeting the SAR filing
criteria.\52\ Examiners finding evidence of unethical or unprofessional
conduct by appraisers should instruct the institution to file a
complaint with state appraiser regulatory officials and, when required,
to file a SAR with FinCEN. If there is a concern regarding the
institution's ability or willingness to file a complaint or make a
referral, examiners should forward their findings and recommendations
to their supervisory office for appropriate disposition and referral to
state appraiser regulatory officials and FinCEN, as necessary.
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\51\ See 12 CFR 226.42(g).
\52\ Refer to Federal regulations at FRB: 12 CFR 208.62,
211.5(k), 211.24(f), and 225.4(f); FDIC: 12 CFR part 353; NCUA: 12
CFR part 748; OCC: 12 CFR 21.11; OTS: 12 CFR 563.180; and FinCEN: 31
CFR 103.18. Refer also to the Federal Financial Institutions
Examination Council Bank Secrecy Act/Anti-Money Laundering
Examination Manual (Revised April 29, 2010) to review the general
criteria, but note that instructions on filing a SAR through the
Financial Crime Enforcement Network (FinCEN) of the Department of
the Treasury are attached to the SAR form. The SAR form is available
on FinCEN's Web site.
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Appendix A--Appraisal Exemptions
Under Title XI of FIRREA, the Agencies were granted the authority
to identify categories of real estate-related financial transactions
that do not require the services of an appraiser to protect Federal
financial and public policy interests or to satisfy principles of safe
and sound lending. Therefore, in their appraisal regulations, the
Agencies identified certain real estate-related financial transactions
that do not require the services of an appraiser and that are exempt
from the appraisal requirement. This appendix provides further
clarification on the application of these regulatory exemptions and
should be read in the context of each Agency's appraisal regulation. If
an institution has a question as to whether a particular transaction
qualifies for an exemption, the institution should seek guidance from
its primary Federal regulator. For those transactions qualifying for
the appraisal threshold, existing extensions of credit, or the business
loan exemptions, an institution is exempted from the appraisal
requirement, but still must, at a minimum, obtain an evaluation
consistent with these Guidelines.\53\
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\53\ NCUA's regulations do not provide an exemption from the
appraisal requirements specific to member business loans.
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1. Appraisal Threshold
For transactions with a transaction value equal to or less than
$250,000, the Agencies' appraisal regulations, at a minimum, require an
evaluation consistent with safe and sound banking practices.\54\ If an
institution enters into a transaction that is secured by several
individual properties that are not part of a tract development, the
estimate of value of each individual property should determine whether
an appraisal
[[Page 77466]]
or evaluation would be required for that property. For example, an
institution makes a loan secured by seven commercial properties in
different markets with two properties valued in excess of the appraisal
threshold and five properties valued less than the appraisal threshold.
An institution would need to obtain an appraisal on the two properties
valued in excess of the appraisal threshold and evaluations on the five
properties below the appraisal threshold, even though the aggregate
loan commitment exceeds the appraisal threshold.
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\54\ 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 and
document the adequacy and reliability of these repayment sources and
conclude that knowledge of the market value of the real estate on which
the lien will be 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 and other repayment sources.
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, unless another
exemption applies.
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.\55\ 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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\55\ 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 an institution 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. 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. 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.
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.\56\ 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 real
estate. For this type of exempted loan, under the Agencies' appraisal
regulations, an institution may obtain an evaluation in lieu of an
appraisal.
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\56\ NCUA's appraisal regulation, 12 CFR 722, does not define
``business loan.'' A ``member business loan'' is regulated under 12
CFR 723.
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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 transaction in which a
loan is secured by real estate for one project, in which the lender has
taken a security interest, but 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, would not qualify
for the exemption. (See Appendix D, Glossary of Terms, for a definition
of business loan.)
6. Leases
An institution is 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, Refinancings, and Other Subsequent Transactions
Under certain circumstances, renewals, refinancings, and other
subsequent transactions may be supported by evaluations rather than
appraisals. The Agencies' appraisal regulations permit an evaluation
for a renewal or refinancing of an existing extension of credit at the
institution when either:
(i) There has been no obvious and material change in market
conditions or physical aspects of the property that threatens the
adequacy of the institution's real estate collateral protection after
the transaction, even with the advancement of new monies; or
(ii) There is no advancement of new monies, other than funds
necessary to cover reasonable closing costs.\57\
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\57\ Under the NCUA's appraisal regulation, a credit union must
meet both conditions to avoid the need for an appraisal. If a
transaction does not involve an advancement of new monies and there
have been no obvious and material changes in market or property
conditions, a credit union must obtain a written estimate of market
value that is consistent with the standards for evaluations as
discussed in these Guidelines. 12 CFR 722.3(d).
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A subsequent transaction is exempt from the appraisal requirement
if no new monies are advanced (other than
[[Page 77467]]
funds necessary to cover reasonable closing costs) even when there has
been an obvious and material change in market conditions or the
physical aspects of the property that threatens the adequacy of the
institution's real estate collateral protection. Conversely, when new
monies are advanced (other than funds necessary to cover reasonable
closing costs) and there has been an obvious and material change in
market conditions or the physical aspects of the property that threaten
the adequacy of the institution's real estate collateral protection,
the institution must obtain an appraisal unless another exemption
applies.
For the purposes of these Guidelines, an institution is considered
to have advanced new monies (excluding reasonable closing costs) when
there is an increase in the principal amount of the loan over the
amount of principal outstanding before the renewal or refinancing. For
example, an institution originated a 15-year term loan for $3 million
and, in year 14, the outstanding principal is $2.5 million. In year 14,
the borrower seeks to refinance the loan at a lower interest rate and
requests a loan of $2.8 million. The $300,000 would be considered new
monies. On the other hand, an institution has provided a $5 million
revolving line of credit to a borrower for two years and, at the end of
year two, renews the $5 million line for another two years. At the time
of renewal, the borrower has drawn down $1 million. In this example,
the amount of the line remains unchanged even though the amount
available on the line is less than the line commitment. Renewing the
line of credit at its original amount would not be considered an
advancement of new monies. Further, when an institution advances funds
to protect its interest in a property, such as to repair damaged
property, a new appraisal or evaluation would not be required because
these funds would be used to restore the damaged property to its
original condition.
To satisfy the condition for no obvious and material change in
market conditions or the physical aspects of the property, the current
or planned future use of the property should be consistent with the use
identified in the existing appraisal or evaluation. For example, if a
property has reportedly increased in value because of a planned change
in use of the property resulting from rezoning, an appraisal should be
performed unless another exemption applies.
If an evaluation is permitted under this exemption, an institution
may use an existing appraisal or evaluation as long as the institution
verifies and documents that the appraisal or evaluation continues to be
valid. (See the discussion in the Validity of Appraisals and
Evaluations section of these Guidelines.) Even if a subsequent
transaction qualifies for this exemption, an institution should
consider the risk posed by the transaction and may wish to consider
obtaining a new appraisal.
Loan Workouts or Restructurings. Loan workouts, debt
restructurings, loan assumptions, and similar transactions involving
the addition or substitution of borrowers may qualify for the exemption
for renewals, refinancings and other subsequent transactions. Use of
this exemption depends on meeting the conditions listed in (i) and (ii)
at the beginning of the discussion on Renewals, Refinancings, and Other
Subsequent Transactions. An institution also should consider such
factors as the quality of the underlying collateral and the validity of
the existing appraisal or evaluation. If a loan workout involves
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 workout occurs and the
institution perfects its security interest.
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 to determine that the conditions of
the exemption have been satisfied.
Principles of safe and sound banking practices require an
institution 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 an institution to make appropriate credit decisions regarding
these transactions.
An institution may presume that the underlying loans in a
marketable, mortgage-backed security satisfy the requirements of the
Agencies' appraisal regulations whenever an issuer makes a public
statement, such as in a prospectus, that the appraisals comply with the
Agencies' appraisal regulations. 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 rate of loans being put
back by an investor.
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,\58\ 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. Given the risk to
the institution that it may have to repurchase a loan that does not
comply with the appraisal standards of the U.S.
[[Page 77468]]
government agency or U.S. government-sponsored agency, the institution
should have appropriate policies to confirm its compliance with the
underwriting and appraisal standards of the U.S. government agency or
U.S. government-sponsored agency.
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\58\ These government-sponsored agencies include Banks for
Cooperatives; Federal Agriculture Mortgage Corporation; Federal Farm
Credit Banks; Federal Home Loan Banks; Freddie Mac; Fannie Mae; and
Tennessee Valley Authority.
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10(i)--An institution that relies 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)--To qualify for this exemption, transactions that do not
conform to all of Fannie Mae or Freddie Mac underwriting standards,
such as jumbo or other residential real estate loans, must be supported
by an appraisal that meets these government-sponsored agencies'
appraisal standards for the applicable property type and is documented
in the credit file or reproducible.
11. Transactions by Regulated Institutions as Fiduciaries
An 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 with a transaction.\59\ 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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\59\ 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 on a case-by-case basis 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.
Appendix B--Evaluations Based on Analytical Methods or Technological
Tools
The Agencies' appraisal regulations permit an institution to use an
evaluation in lieu of an appraisal for certain transactions. An
institution may use a variety of analytical methods and technological
tools for developing an evaluation, provided the institution can
demonstrate that the valuation method is consistent with safe and sound
banking practices and these Guidelines (see sections on Evaluation
Development and Evaluation Content).\60\ An institution should not
select a method or tool solely because it provides the highest value,
the lowest cost, or the fastest response or turnaround time.
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\60\ For example, the sole use of data from the Internet or
other public sources would not be an evaluation under these
Guidelines. Additionally, valuation methods that do not contain
sufficient information and analysis or provide a market value
conclusion would not be acceptable as evaluations.
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An institution should establish policies and procedures that
provide a sound process for using various methods or tools. Such
policies and procedures should:
Ensure staff has the requisite expertise and training to
manage the selection, use, and validation of an analytical method or
technological tool. If an institution does not have the in-house
expertise relative to a particular method or tool, then an institution
should employ additional personnel or engage a third party. (See the
Third Party Arrangements section in these Guidelines.)
Address the selection, use, and validation of the
valuation method or tool.
Establish criteria for determining whether a particular
valuation method or tool is appropriate for a given transaction or
lending activity, considering associated risks. These risks include,
but are not limited to, transaction size and purpose, credit quality,
and leverage tolerance (loan-to-value).
Specify criteria when a market event or risk factor would
preclude the use of a particular method or tool.
Address standards for the use of multiple methods or
tools, if applicable, for valuing the same property or to support a
particular lending activity.
Provide criteria for ensuring that the institution uses a
method or tool that produces a reliable estimate of market value that
supports the institution's decision to engage in a transaction.
Address the extent to which:
[cir] An inspection or research is necessary to ascertain the
property's actual physical condition, and
[cir] Supplemental information is needed to assess the effect of
market conditions or other factors on the estimate of market value.
An institution should establish an effective system of controls for
verifying that a valuation method or tool is employed in a manner
consistent with internal policies and procedures. Moreover, the
institution's staff responsible for internal controls should have the
skills commensurate with the complexity or sophistication of the method
or tool. Examiners will review an institution's policies, procedures,
and internal controls to ensure that an institution's use of a method
or tool is appropriate and consistent with safe and sound banking
practices.
Automated Valuation Models (AVMs)
AVMs are computer programs that estimate a property's market value
based on market, economic, and demographic factors. Institutions may
employ AVMs for a variety of uses such as loan underwriting and
portfolio monitoring. An institution may not rely solely on the results
of an AVM to develop an evaluation unless the resulting evaluation is
consistent with safe and sound banking practices and these Guidelines.
(See the Evaluation Development and Evaluation Content sections.) For
example, to be consistent with the standards for an evaluation, the
results of an AVM would need to address a property's actual physical
condition, and therefore, could not be based on an unsupported
assumption, such as a property is in ``average'' condition.
Institutions should establish policies and procedures that govern
the use of AVMs and specify the supplemental information that is
required to develop an evaluation. When the supplemental information
indicates the AVM is not an acceptable valuation tool, the
institution's policies and procedures should require the use of an
alternative method or tool.
Selecting an AVM(s)
When selecting an AVM or multiple AVMs, an institution should:
Perform the necessary level of due diligence on AVM
vendors and their models, including how model developers conducted
performance testing as well as the sample size used
[[Page 77469]]
and the geographic level tested (such as, county level or zip code).
Establish acceptable minimum performance criteria for a
model prior to and independent of the validation process.
Perform a detailed validation of the model(s) considered
during the selection process and document the validation process.
Evaluate underlying data used in the model(s), including
the data sources and types, frequency of updates, quality control
performed on the data, and the sources of the data in states where
public real estate sales data are not disclosed.
Assess modeling techniques and the inherent strengths and
weaknesses of different model types (such as hedonic, index, and
blended) as well as how a model(s) performs for different property
types (such as condominiums, planned unit developments, and single
family detached residences).
Evaluate the vendor's scoring system and methodology for
the model(s). Determine whether the scoring system provides an
appropriate indicator of model reliability by property types and
geographic locations.
Following the selection of an AVM(s), an institution should develop
policies and procedures to address the appropriate use of an AVM(s) and
its monitoring and ongoing validation processes.
Determining AVM Use
An institution should establish policies and procedures for
determining whether an AVM can be used for a particular transaction.
The institution should:
Maintain AVM performance criteria for accuracy and
reliability in a given transaction, lending activity, and geographic
location.\61\
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\61\ For example, an institution should establish a level of
acceptable core accuracy and limit exposure to a model's systemic
tendency to over value properties (commonly referred to as ``tail
risk'').
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Establish internal confidence score \62\ minimums, or
similar criteria, for when each model can be used.
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\62\ A ``confidence score'' generally refers to a vendor's own
method of quantifying how reliable a model value is by using a rank
ordering process. The scale and components of a confidence score are
not standardized. Therefore an institution needs to understand how a
confidence score was derived and the extent to which a confidence
score correlates to model accuracy. If multiple AVMs are used, an
institution should understand how the combination of models affects
overall accuracy.
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Implement controls to preclude ``value shopping'' when
more than one AVM is used for the same property.
Establish procedures for obtaining an appraisal or using a
different valuation method to develop an evaluation when an AVM's
resulting value is not reliable to support the credit decision. For
example, in areas that have experienced a high incidence of fraud, the
institution should consider whether the AVM may be relied upon for the
transaction or another valuation method should be used.
Identify circumstances under which an AVM may not be used,
including:
[cir] When market conditions warrant, such as during the aftermath
of a natural disaster or a major economic event;
[cir] When a model's performance is outside of specified tolerances
for a particular geographic market or property price-tier range; or
[cir] When a property is non-homogeneous, such as atypical lot
sizes or property types.
Validating AVM Results
An institution should establish standards and procedures for
independent and ongoing monitoring and model validation, including the
testing of multiple AVMs, to ensure that results are credible.\63\ An
institution should be able to demonstrate that the depth and extent of
its validation processes are consistent with the materiality of the
risk and the complexity of the transaction. Validation can be performed
internally or with the assistance of a third party, as long as the
validation is conducted by qualified individuals that are independent
of the model development or sales functions. An institution should not
rely solely on validation representations provided by an AVM vendor. An
institution should perform appropriate model validation regardless of
whether it relies on AVMs that are supported by value insurance or
guarantees. If there are insurance or guarantee components of any
particular AVM, the institution is responsible for understanding the
extent and limitations of the insurance policy or guarantee, and the
claim process and financial strength of the insurer.
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\63\ See, for example, OCC Bulletin 2000-16, Risk Modeling--
Model Validation (May 30, 2000).
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An institution should ensure that persons who validate an AVM on an
ongoing basis are independent of the loan production and collection
processes and have the requisite expertise and training. In the AVM
validation procedures, an institution 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.
Range of acceptable performance results.
To ensure unbiased test results, an institution should compare the
results of an AVM to actual sales data in a specified trade area or
market prior to the information being available to the model. If an
institution uses more than one AVM, each AVM 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 relative to similar loans
that used a different valuation process. An institution should document
the results of its validation and audit findings. An institution should
use these findings to analyze and periodically update its policies and
procedures for an AVM(s) when warranted.
Tax Assessment Valuations (TAVs)
An institution may not rely solely on the data provided by local
tax authorities to develop an evaluation unless the resulting
evaluation is consistent with safe and sound banking practices and
these Guidelines. (See the Evaluation Development and Evaluation
Content sections.) Since analytical methods such as TAVs generally need
additional support to meet these Guidelines, institutions should
develop policies and procedures that specify the level and extent of
supplemental information that should be obtained to develop an
evaluation. Such policies and procedures also should require the use of
an alternate valuation method when such information does not support
the transaction.
An institution may use a TAV in developing an evaluation when it
can demonstrate that a valid correlation exists between the tax
assessment data and the market value. In using a TAV to develop an
evaluation, an institution should:
Determine and document how the tax jurisdiction calculates
the TAV and how frequently property revaluations occur.
Perform an analysis to determine the relationship between
the TAV and the property market values for properties within a tax
jurisdiction.
Test and document how closely TAVs correlate to market
value based on contemporaneous sales at the time of assessment and
revalidate whether the correlation remains stable as of the effective
date of the evaluation.
[[Page 77470]]
Appendix C--Deductions and Discounts
The Agencies' appraisal regulations require an appraiser to 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. For such
transactions, an appraisal must include the market value of the
property, which should reflect the property's actual physical
condition, use, and zoning designation (referred to as the ``as is''
value of the property), as of the effective date of the appraisal.
Therefore, if the highest and best use of the property is for
development to a different use, the cost of demolition and site
preparation should be considered in the analysis.
Proposed Construction or Renovation
For properties where improvements are to be constructed or
rehabilitated, an institution may request a prospective market value
upon completion and a prospective market value upon stabilization.
While an institution may request the appraiser to provide the sum of
retail sales for a proposed development, the result of such calculation
is not the market value of the property for purposes of the Agencies'
appraisal regulations.
Partially Leased Buildings
For proposed and partially leased rental developments, the
appraiser must make appropriate deductions and discounts to reflect
that the property has not achieved stabilized occupancy. The appraisal
analysis also should include consideration of the absorption of the
unleased space. Appropriate deductions and discounts should include
items such as leasing commission, rent losses, tenant improvements, and
entrepreneurial profit, if such profit is not included in the discount
rate.
Non-Market Lease Terms
For properties subject to leases with terms that do not reflect
current market conditions, the appraisal must clearly state the
ownership interest being appraised and provide a discussion of the
leases that are in place. If the leased fee interest is being appraised
and contract rent is less than market rent on one or more long term
lease(s) to a highly rated tenant, the market value of the leased fee
interest would be less than the market value of the unencumbered fee
simple interest in the property.\64\ In these situations, the market
value of the leased fee interest should be used.
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\64\ Fee simple interest refers to the most complete ownership
unencumbered by any leases or other interests. It is subject only to
the limitations imposed by the governmental powers of taxation,
eminent domain, police power and escheat. Leased fee interest, on
the other hand, refers to a landlord's ownership that is encumbered
by one or more leases.
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Tract Developments with Unsold Units
A tract development is defined in the Agencies' appraisal
regulations as a project of five units or more that is constructed or
is to be constructed as a single development. Appraisals for these
properties must reflect deductions and discounts for holding costs,
marketing costs, and entrepreneurial profit supported by market data.
In some cases entrepreneurial profit may be included in the discount
rate. The applicable discount rate is developed based on investor
requirements and the risk associated with the physical and financial
characteristics of the property. In some markets, entrepreneurial
profit is treated as a line item deduction while in other markets it is
reflected as a component of the discount rate. Regardless of how
entrepreneurial profit is handled in the appraisal analysis, an
appropriate explanation and discussion should be provided in the
appraisal report. The projected sales prices and absorption rate of
units should be supported by anticipated demand at the time the units
are expected to be exposed for sale. Anticipated demand for the units
should be supported and presented in the appraisal. A reader of the
appraisal report should be able to understand the risk characteristics
associated with the subject property and the market, including the
anticipated supply of competing properties.
Raw Land
The appraiser must provide an opinion of value for raw land based
on its current condition and existing zoning. If an appraiser employs a
developmental approach to value the land that is based on projected
land sales or development and sale of lots, the appraisal must reflect
appropriate deductions and discounts for costs associated with
developing and selling lots in the future. These costs may be incurred
during the permitting, construction or selling stages of development.
Appropriate deductions and discounts should include items such as
feasibility studies, permitting, engineering, holding costs, marketing
costs, and entrepreneurial profit and other costs specific to the
property. If sufficient market data exists to perform both the sales
comparison and developmental approaches to value, the appraisal report
should detail a reconciliation of these two approaches in arriving at a
market value conclusion for the raw land.
Developed Lots
For existing or proposed developments of five or more residential
lots in a single 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 for the sale
of the developed lots. The estimated sales absorption period should
reflect the appraiser's estimate of the time frame for the actual
development and sale of the lots, starting on the effective date of
value and ending as of the expected date of the last lot sale. The
absorption period should be based on market demand for lots in light of
current and expected competition for similar lots in the market area.
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
[[Page 77471]]
units 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.
Appendix D--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 business or to manage business
affairs for another. According to the Agencies' appraisal regulations,
fee appraisers must be engaged directly by the federally regulated
institution or its agent,\65\ and have no direct or indirect interest,
financial or otherwise, in the property or the transactions. The
Agencies do not limit the arrangements that federally 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 federally regulated institution.
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\65\ Except that the regulated institution also may accept an
appraisal that was prepared by an appraiser engaged directly by
another financial services institution in certain circumstances as
set forth in the Agencies' appraisal regulations.
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Appraisal--As defined in the Agencies' appraisal regulations, a
written statement independently and impartially prepared by a qualified
appraiser (state licensed or certified) 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 Management Company--The Agencies' appraisal regulations
do not define the term appraisal management company. For purposes of
these Guidelines, an ``appraisal management company'' includes, but is
not limited to, a third-party entity that provides real property
valuation-related services, such as selecting and engaging an appraiser
to perform an appraisal based upon requests originating from a
regulated institution. The Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (Dodd-Frank Act) has a specific definition for
this term in connection with transactions secured by a consumer's
principal dwelling or mortgage secondary market transactions. See the
Third Party Arrangements section in these Guidelines.
Appraisal Report Options--Refer to the definitions for Restricted
Use Appraisal Report, Self-Contained Appraisal Report, and Summary
Appraisal Report.
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, an institution must obtain an
evaluation of the real property collateral, if no other appraisal
exemption applies.
Approved Appraiser List--A listing of appraisers who an institution
has determined to be generally qualified and competent to perform
appraisals and may address the appraiser's expertise in a particular
market and property type.
``As Completed'' Market Value--Refer to the definition for
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's effective date.
``As Stabilized'' Market Value--Refer to the definition for
Prospective Market Value.
Automated Valuation Model--A computer program that estimates a
property's market value based on market, economic, and demographic
factors. Hedonic models generally use property characteristics (such as
square footage and room count) and methodologies to process
information, often based on statistical regression. Index models
generally use geographic repeat sales data over time rather than
property characteristic data. Blended or hybrid models use elements of
both hedonic and index models.
Broker Price Opinion (BPO)--An estimate of the probable sales or
listing price of the subject property provided by a real estate broker,
sales agent, or sales person. A BPO generally provides a varying level
of detail about a property's condition, market, and neighborhood, as
well as comparable sales or listings. A BPO is not by itself an
appraisal or evaluation, but could be used for monitoring the
collateral value of an existing loan, when deemed appropriate. Further,
the Dodd-Frank Act provides ``[i]n conjunction with the purchase of a
consumer's principal dwelling, broker price opinions may not be used as
the primary basis to determine the value of a piece of property for the
purpose of loan origination of a residential mortgage loan secured by
such piece of property.'' \66\
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\66\ Dodd-Frank Act, Section 1473(r).
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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.\67\ A business loan includes
extensions to entities engaged in agricultural operations, which is
consistent with the Agencies' real estate lending guidelines definition
of an improved property loan that include loans secured by farmland,
timberland, and ranchland committed to ongoing management and
agricultural production.
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\67\ NCUA's appraisal regulation, 12 CFR 722, does not define
``business loan.'' A ``member business loan'' is regulated under 12
CFR 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, real estate. As specified in the Agencies' appraisal
regulations, an institution must obtain an evaluation of the real
property collateral.\68\
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\68\ NCUA's appraisal regulation, 12 CFR 722, does not provide a
higher appraisal threshold for loans defined as ``member business
loans'' under 12 CFR 723.
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Client--According to USPAP, the party or parties who engage(s) an
appraiser by employment or contract for a specific appraisal
assignment. For the purposes of these Guidelines, the appraiser should
be aware that the client is the regulated institution. (Refer to the
section on Third Party Arrangements in these Guidelines.)
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.
Credit File--A hardcopy or electronic record that documents all
information necessary to (1) analyze the credit before it is granted
and (2) monitor the credit during its life. An institution may use a
computerized or manual system to manage the information in its credit
files.
Date of the Appraisal Report--According to USPAP, the date of the
appraisal report indicates when the appraisal analysis was completed.
Effective Date of the Appraisal--USPAP requires that each appraisal
report specifies the effective date of the appraisal and the date of
the report. The
[[Page 77472]]
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.
Effective Date of the Evaluation--For the purposes of the Agencies'
appraisal regulations and these Guidelines, the effective date of an
evaluation is the date that the analysis is completed.
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: (i) The property's location and legal description; (ii) intended
use and users of the appraisal; (iii) the requirement to provide an
opinion of the property's market value; (iv) the expectation that the
appraiser will comply with applicable laws and regulations, and be
consistent with supervisory guidance; (v) appraisal report format; (vi)
expected delivery date; and (vii) appraisal fee.
Evaluation--A valuation permitted 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, the estimated length of time
the property interest being appraised would have been offered on the
market prior to the hypothetical consummation of a sale at market value
on the effective date of the appraisal. Exposure time is always
presumed to precede the effective date of the appraisal. Exposure time
is a function of price, time, and use--not an isolated opinion of time
alone. (See USPAP Standard 1-2(c) and Statement 6.)
Extraordinary Assumption--As defined in USPAP, an assumption,
directly related to a specific assignment, which, if found to be false,
could alter the appraiser's opinions or conclusions regarding the
property's market value. An example of an extraordinary assumption is
when an appraiser assumes that an application for a zoning change will
be approved and there is no evidence to suggest otherwise.
Federally Regulated Institution--For purposes of the Agencies'
appraisal regulations and these Guidelines, an institution that is
supervised by a Federal financial institution's regulatory agency. 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.
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.
Going Concern Value--The value of a business entity rather than the
value of the real property. The valuation is based on the existing
operations of the business and its current operating record, with the
assumption that the business will continue to operate.
Hypothetical Condition--As defined in USPAP, a condition that is
contrary to what exists but is supposed for the purpose of analysis. An
example of a hypothetical condition is when an appraiser assumes a
particular property's zoning is different from what the zoning actually
is.
Loan Production Staff--Generally, all personnel responsible for
generating loan volume or approving loans, as well as their
subordinates and supervisors. These individuals would include any
employee whose compensation is based on loan volume (such as processing
or approving of loans). An employee is not considered loan production
staff just because part of their compensation includes a general bonus
or profit sharing plan that benefits all employees. Employees
responsible solely 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.
Presold Unit--A unit may be considered presold if a buyer has
entered into a binding contract to purchase the unit and has made a
substantial and non-refundable earnest money deposit. Further, the
institution should obtain sufficient documentation that the buyer has
entered into a legally binding sales contract and has obtained a
written prequalification or commitment for permanent financing.
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. (See USPAP Statement 4 and Advisory Opinion
17.)
Put Back--Represents the ability of an investor to reject mortgage
loans from a mortgage originator if the mortgage
[[Page 77473]]
loans do not comply with the warranties and representations in their
mortgage purchasing agreement.
Raw Land--A parcel or tract of land with no improvements, for
example, infrastructure or vertical construction. When an appraisal of
raw land includes entitlements, the appraisal should disclose when such
entitlements will expire if improvements are not completed within a
specified time period and the potential effect on the value conclusion.
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--Refer to the definition of Federally
Regulated Institution.
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
other purposes.
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 effect 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 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 is the most complete and
detailed appraisal report option.
Sum of Retail Sales--A mathematical calculation of the sum of the
expected sales prices of several individual properties in the same
development 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 while still providing sufficient
information to enable the client and intended user(s) to understand the
rationale for the opinions and conclusions in the report.
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 or commercial building
lot, a detached single-family home, an attached single-family home, and
a residence in a condominium, cooperative, or timeshare 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 purposes of this definition, the transaction value for loans that
permit negative amortization should be the institution's total
committed amount, including any potential negative amortization.
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.
Unsold Units--An unsold unit is a unit that does not meet the
conditions listed in the definition of Presold Units.
Value of Collateral (for Use in Determining Loan-to-Value Ratio)--
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: November 1, 2010.
John Walsh,
Acting Comptroller of the Currency.
By order of the Board of Governors of the Federal Reserve
System, December 1, 2010.
Jennifer J. Johnson,
Secretary of the Board.
Dated at Washington, DC, the 1st day of December, 2010.
By order of the Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
Dated: December 1, 2010.
By the Office of Thrift Supervision.
John E. Bowman,
Acting Director.
Dated: November 9, 2010.
By the National Credit Union Administration Board.
Mary F. Rupp,
Secretary of the Board.
[FR Doc. 2010-30913 Filed 12-9-10; 8:45 am]
BILLING CODE P