Provide for the receipt and review of the appraisal or evaluation report in a timely manner to facilitate the credit decision. This site displays a prototype of a Web 2.0 version of the daily 49. The documentation should describe the resolution of any appraisal or evaluation deficiencies, including reasons for obtaining and relying on a second appraisal or evaluation. This policy applies regardless of whether the property was appraised as proposed or existing construction. An institution should use written engagement letters when ordering appraisals, particularly for large, complex, or out-of-area commercial real estate properties. Required Appraisal Loan As defined in Section 3.19(a). 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. Other commenters asked the Agencies to clarify certain aspects of the process for engaging an appraiser and when the appraiser/client relationship is established. 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. 3352. The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ( FIRREA ), is a United States federal law enacted in the wake of the savings and loan crisis of the 1980s. 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. on Address standards for the use of multiple methods or tools, if applicable, for valuing the same property or to support a particular lending activity. 15. endstream endobj 1653 0 obj <>/Metadata 143 0 R/OCProperties<>/PageLabels 1643 0 R/PageLayout/OneColumn/Pages 1645 0 R/PieceInfo<>>>/StructTreeRoot 298 0 R/Type/Catalog>> endobj 1654 0 obj <>/Font<>/ProcSet[/PDF/Text]/Properties<>>>/Rotate 0/StructParents 0/Type/Page>> endobj 1655 0 obj <>stream Establish criteria for obtaining appraisals or evaluations for transactions that are not otherwise covered by the appraisal requirements of the Agencies' appraisal regulations. The Agencies' real estate lending regulations and guidelines,[22] An institution's appraisal and evaluation policies should establish internal controls to promote an effective appraisal and evaluation program. Transactions by Regulated Institutions as Fiduciaries, 12. [40] 43. 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. 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. 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. 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 Start Printed Page 77464independent, has the requisite experience and training for the assignment, and thorough knowledge of the subject property's market. 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. When an inspection is not performed, an institution should be able to demonstrate how these property and market factors were determined. An institution should establish policies and procedures for determining whether an AVM can be used for a particular transaction. While this section in the Guidelines generally tracks the Proposal, the detailed discussion on Start Printed Page 77453analyzing deductions and discounts has been moved to a new appendix. the material on FederalRegister.gov is accurately displayed, consistent with For transactions with a transaction value equal to or less than $250,000, the Agencies' appraisal regulations, at a minimum, require an evaluation consistent with safe and sound banking practices. hb```,'x9 X:d&Z=mVH63Sn14^X=*%TXZku+S8gO;MPS%UejE4E[#A5]MMB"Da D0$gNE;A$X`c#i`h`b d`` 2"AA zV! 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. 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. Under the law, the provisions are effective 12 months after final regulations to implement the provisions are published. The agencies Title XI appraisal regulations require an appraisal performed by a state-certified or state-licensed appraiser for all FRTs. 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 appraiser selected to perform an appraisal holds the appropriate state certification or license at the time of the assignment. documents in the last year, by the Rural Utilities Service This table of contents is a navigational tool, processed from the 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. 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. 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. 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. These communications should adhere to the institution's policies and procedures on independence of the appraiser and not unduly influence the appraiser. [28] 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. Unlike the big multi-service banks, savings and loans, or "thrifts" as they are sometimes called, were community-based businesses that concentrated on passbook savings and mortgages. 57. The changes can only be related with a blizzard of acronyms attached to federal agencies created or abolished: FIRREA gaveFreddie MacandFannie Maeadditional responsibility and funding for making homeownership more accessible for low- and moderate-income families. 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. Additional filters are available in search. 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. 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. 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. daily Federal Register on FederalRegister.gov will remain an unofficial In addition to the other information, the engagement letter will identify the intended use and user(s), as defined in USPAP. These markup elements allow the user to see how the document follows the 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. 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. 26. 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. These include white papers, government data, original reporting, and interviews with industry experts. 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. 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. An institution should specify the use of an appraisal report option that is commensurate with the risk and complexity of the transaction. Rather, as allowed by USPAP, an appraiser can determine the characteristics of a property through, among other things, any combination of property 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. 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. When compliance cannot be confirmed, institutions are reminded that they must obtain an appraisal(s) prior to engaging in the transaction. Sales concessions do not include fees that a seller is customarily required to pay under state or local laws. 2800 (2008); 12 U.S.C. 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. See USPAP, Statement 4 on Prospective Value Opinions, for further explanation. documents in the last year, 1479 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. We also reference original research from other reputable publishers where appropriate. What Agencies Oversee U.S. Financial Institutions? Referrals. 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. An institution or its agents also should directly select and engage persons who perform evaluations. See Dodd-Frank Act, Section 1400(c)(1). Further, the Guidelines promote consistency in the application and enforcement of the Agencies' appraisal regulations and safe and sound banking practices. 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. WebProposed Rule In July 2017, the agencies invited comment on a notice of proposed rulemaking (proposal or proposed rule) 1 that would amend the agencies appraisal regulations promulgated pursuant to Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (Title XI).2 Specifically, the proposal would have 12 CFR 722.3(d). Appraiser An Independent nationally recognized professional commercial real estate appraiser who (i) is a member in good standing of the Appraisal Institute, (ii) if the state in which the related Mortgaged Property is located certifies or licenses appraisers, is certified or licensed in such state, and (iii) has a minimum of five years experience in the related property type and market. (See market value above and USPAP Standards Rule 1-2(c).). Savings & Loan Companies vs. Commercial Banks: What's the Difference? 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. Acceptable Appraisal means, with respect to an appraisal of Inventory, the most recent appraisal of such property received by Agent (a) from an appraisal company satisfactory to Agent, (b) the scope and methodology (including, to the extent relevant, any sampling procedure employed by such appraisal company) of which are satisfactory to Agent, and (c) the results of which are satisfactory to Agent, in each case, in Agents Permitted Discretion. [9] 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]. The $300,000 would be considered new monies. Business LoanAs 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. However, when a fiduciary transaction requires an appraisal under other laws, that appraisal should conform to the Agencies' appraisal requirements. 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. For complete information about, and access to, our official publications What Is the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA)? 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. Consistent with its policies and procedures, an institution also may request the appraiser or person who performs an evaluation to: An institution's policies and procedures should ensure that it avoids inappropriate actions that would compromise the independence of the collateral valuation function,[29] A was not a party to the lending guidelines; however, 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. It is not an official legal edition of the Federal This revised section also incorporates the section on Accepting Appraisals from Other Financial Services Institutions in the Proposal. 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. 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. documents in the last year, 24 Register (ACFR) issues a regulation granting it official legal status. 16. 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. 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. For users of Telecommunications Device for the Deaf (TDD) only, contact (202) 263-4869. Appraisal Management CompanyThe Agencies' appraisal regulations do not define the term appraisal management company. Should any such developments or changes, in our opinion, be material to the estimated pro forma market value of the Bank, appropriate adjustments to the estimated pro forma market value will be made. 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. 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. Deficiencies will require appropriate corrective action. 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] In finalizing the Guidelines, the Agencies considered the Dodd-Frank Act, other Federal statutory and regulatory changes affecting appraisals,[11] Maintain criteria for the content and appropriate use of evaluations consistent with safe and sound banking practices. implementing Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA)[2] 7. Among other considerations, the criteria should address deterioration in the credit since origination or changes in market conditions. (Refer to the section on Third Party Arrangements in these Guidelines.). [55] Register documents. 28. Program Compliance. 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. Election to Delay Foreclosure: Any election by the Purchaser to delay the Commencement of Foreclosure, made in accordance with Section 2.02(b). Approved Third-Party Appraiser means any Independent nationally recognized third-party appraisal firm (a) designated by the Borrower in writing to the Administrative Agent (which designation shall be accompanied by a copy of a resolution of the Board of Directors of the Borrower that such firm has been approved by the Borrower for purposes of assisting the Board of Directors of the Borrower in making valuations of portfolio assets to determine the Borrowers compliance with the applicable provisions of the Investment Company Act) and (b) acceptable to the Administrative Agent. Establish acceptable minimum performance criteria for a model prior to and independent of the validation process. Dodd-Frank Act, Section 1473(r). Supervisory Policy. A new appraisal or evaluation is necessary if the originally reported market value has changed due to factors such as: 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. Credible (Appraisal) Assignment ResultsAccording to USPAP, credible means worthy of belief used in the context of the Scope of Work Rule. An institution's risk management system should reflect the complexity of the outsourced activities and associated risk. The Guidelines are effective upon publication in the Federal Register. ), Institutions should be aware that provisions in the Dodd-Frank Act address appraisal requirements for a higher-risk mortgage to a consumer. ?-z#U-&3FK3_kkQ9YV\YB4f~y-rmVK9?ojQ6K|W6-7Fq7[Ct14%74/i_U{}qnAG{13Ry88Y&`[(. 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. 35. Federally Related TransactionAs 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. The changes provide updates to and consolidate some of the existing supervisory issuances. 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. Sales ConcessionsA 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. Testing frequency and criteria for re-testing. Under certain circumstances, renewals, refinancings, and other subsequent transactions may be supported by evaluations rather than appraisals. 225; and NCUA: NCUA Letter to Credit Unions 05-CU-12. An institution should consider performing an inspection to ascertain the actual physical condition of the property and market factors that affect its market value. 1. (See the discussion in the Validity of Appraisals and Evaluations section of these Guidelines.) Date of the Appraisal ReportAccording to USPAP, the date of the appraisal report indicates when the appraisal analysis was completed. 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. TheFederal Home Loan Bank Board(FHLBB) was abolished. 1376 (2010). For example, this exemption should not be applied to a transaction such as an institution's investment in real estate for its own use. 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 final Interagency Appraisal and Evaluation Guidelines appear below. See the Third Party Arrangements section in these Guidelines. 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. Qualified Appraiser An appraiser, duly appointed by the Seller, who had no interest, direct or indirect, in the Mortgaged Property or in any loan made on the security thereof, and whose compensation was not affected by the approval or disapproval of the Mortgage Loan, and such appraiser and the appraisal made by such appraiser both satisfied the requirements of Title XI of FIRREA and the regulations promulgated thereunder, all as in effect on the date the Mortgage Loan was originated. Describe the method(s) the institution used to confirm the property's actual physical condition and the extent to which an inspection was performed. As a result of FIRREA, the differences between S&Ls and banks have decreased significantly. [20] electronic version on GPOs govinfo.gov. 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. 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. 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. 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. 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. [Sen e Footnote 2] Footnote 1-- OCC : 12 CFR 34 , C and D ; FRB 208 E appendix 225 G FDIC 323 365; and OTS: 12 CFR 564, and 12 CFR 560.100, and 12 CFR 560.101 NCU. 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. There also have been significant industry developments, such as advancements in information technology that have affected the Start Printed Page 77451development and delivery of appraisals and evaluations. 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. legal research should verify their results against an official edition of The appraisal must: 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. The appraiser had no direct, indirect, or prospective interest, financial or otherwise, in the property or transaction. (See USPAP Statement 4 and Advisory Opinion 17.). 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. 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. An institution should obtain an appraisal that is appropriate for the particular federally related transaction, considering the risk and complexity of the transaction. Minimum Appraisal Standards. Specify criteria when a market event or risk factor would preclude the use of a particular method or tool. Fluctuations in discount or direct capitalization rates also are indicators of changing market conditions. 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. Appraisal review means the act or process of developing and communicating an opinion about the quality of another appraiser's work that was performed as part of an appraisal assignment related to the appraiser's data collection, analysis, opinions, conclusions, estimate of value, or compliance with the uniform standards of professional appraisal practice. 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. 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.