Employees responsible solely for credit administration or credit risk management are not considered loan production staff. The real estate lending guidelines state that an institution's real estate lending program should include an appropriate real estate appraisal and evaluation program. 2 Version Log The Bureau updates this guide on a periodic basis to reflect finalized clarifications to the rule which impacts guide content. The Agencies note that the Guidelines do not expand the categories of appraisal exemptions set forth in the Agencies' appraisal regulations. 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. [49] Part 722 Appraisals Final Rule. See the Third Party Arrangements section in these Guidelines. 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). Such criteria will vary depending upon the condition of the property and the marketplace, and the nature of the transaction. (. The appraisal analysis also should include consideration of the absorption of the unleased space. Ensure that appraisals and evaluations contain sufficient information to support the credit decision. 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). 3331 . Loan Workouts or Restructurings. 56. 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. 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. 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. 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. 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. Commenters also asked the Agencies to reaffirm that an institution cannot outsource its responsibility to maintain an effective and independent collateral valuation function. Several commenters requested further clarification on appropriate policies and procedures for the review function. 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. These reports lack sufficient supporting information and analysis for underwriting purposes. Dated at Washington, DC, the 1st day of December, 2010. When analyzing individual transactions, examiners will review an Start Printed Page 77457appraisal or evaluation to determine whether the methods, assumptions, and value conclusions are reasonable. An institution's use of a borrower-ordered or borrower-provided appraisal violates the Agencies' appraisal regulations. 15. 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. This term does not include: Control Appraisal Period shall exist with respect to the Mortgage Loan, if and for so long as: MAI Appraiser With respect to any real property, a member of the American Institute of Real Estate Appraisers with a minimum of 5 years of experience appraising real property of a type similar to the real property being appraised and located in the same geographical area as the real property being appraised. Register documents. Establish procedures to test the quality of the appraisal and evaluation review process. According to the FDIC, as of Dec. 31, 2021, there were only 608 FDIC-insured S&Ls in the U.S., compared to 4,231 FDIC-insured commercial banks. The Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency have adopted a final rule that increases the 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. rendition of the daily Federal Register on FederalRegister.gov does not The Proposal and Guidelines reference each Agency's guidance on third party arrangements. (See discussion on the definition of market value below.) Maintain criteria for the content and appropriate use of evaluations consistent with safe and sound banking practices. 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. WebIf an appraisal is prepared by a staff appraiser, that appraiser must be independent of the lending, investment, and collection functions and not involved, except as an appraiser, in Address the selection, use, and validation of the valuation method or tool. 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. 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. 0 NCUA's regulations do not provide an exemption from the appraisal requirements specific to member business loans. 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. documents in the last year, 20 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 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. Section 1471 of the Dodd-Frank Act added a new section 129H to the Truth-in-Lending Act (15 U.S.C. documents in the last year, 822 Credible (Appraisal) Assignment ResultsAccording to USPAP, credible means worthy of belief used in the context of the Scope of Work Rule. 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. 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. An institution's policies and procedures for reviewing appraisals and evaluations, at a minimum, should: An institution should establish qualification criteria for persons who are eligible to review appraisals and evaluations. 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. When a property is non-homogeneous, such as atypical lot sizes or property types. An institution may use a computerized or manual system to manage the information in its credit files. 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. An evaluation's content should be documented in the credit file or reproducible. The Agencies also requested comment on whether appropriate constraints can be placed on the use of these tools and Start Printed Page 77454methods to ensure the overall integrity of the institution's appraisal review process for other low risk mortgage transactions. corresponding official PDF file on govinfo.gov. 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]. 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. documents in the last year, 83 30, 2008); 75 FR 66554 (Oct. 28, 2010). 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. If multiple AVMs are used, an institution should understand how the combination of models affects overall accuracy. 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. See USPAP, Statement 4 on Prospective Value Opinions, for further explanation. Anticipated demand for the units should be supported and presented in the appraisal. 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. The Agencies allow an institution to use an existing appraisal or evaluation to support a subsequent transaction in certain circumstances. 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. 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. According to the Agencies' appraisal regulations, fee appraisers must be engaged directly by the federally regulated institution or its agent,[65] Insulate the persons responsible for ascertaining the compliance of the institution's appraisal and evaluation function from any influence by loan production staff. Open for Comment, Economic Sanctions & Foreign Assets Control, Electric Program Coverage Ratios Clarification and Modifications, Determination of Regulatory Review Period for Purposes of Patent Extension; VYZULTA, General Principles and Food Standards Modernization, Further Advancing Racial Equity and Support for Underserved Communities Through the Federal Government, Office of the Comptroller of the Currency, Discussion on the Comments and Guidelines, Interagency Appraisal and Evaluation Guidelines, 4. 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. 12. 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. Credit FileA 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. Report appraisal and evaluation deficiencies to appropriate internal parties and, if applicable, to external authorities in a timely manner. Where appropriate, we considered information based upon other publicly available sources, which we believe to be reliable; however, we cannot guarantee the accuracy or completeness of such information. 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). 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. 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. FIRREAestablished newcapitalreserve requirements andincreased public oversight of the real estate appraisal process. The final rule requires evaluations for transactions at or below the $500,000 threshold for CRE transactions, although banks may use appraisals for these exempt transactions in appropriate circumstances, such as for higher-risk transactions, as discussed in the "Interagency Appraisal and Evaluation Guidelines" attached to OCC Further, the appraiser should disclose the rationale for the omission of a valuation approach. 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). 21. 40. 2800 (2008); 12 U.S.C. 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. Exposure time is a function of price, time, and usenot an isolated opinion of time alone. [15] 03/01/2023, 205 As specified in the Agencies' appraisal regulations, an institution must obtain an evaluation of the real property collateral, if no other appraisal exemption applies. 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. 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. Prospective market value opinions should be based upon current and reasonably expected market conditions. 42. (See also Appendix A, Appraisal Exemptions, for transactions where an evaluation would be allowed in lieu of an appraisal.). These standards also required that real estate loans falling in certain categories above $50,000 be appraised by a state licensed or state certified appraiser. 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. Start Printed Page 77468government 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. The Agencies' appraisal regulations permit an institution to use an evaluation in lieu of an appraisal for certain transactions. This timeframe should be commensurate with the level and nature of the institution's real estate lending activity. 62. 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. 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]. For example, the sole use of data from the Internet or other public sources would not be an evaluation under these Guidelines. 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. In October 1994, the OCC, FRB, FDIC and OTS jointly issued the Interagency Appraisal and Evaluation Guidelines[5] Self-contained Appraisal ReportAccording to USPAP Standards Rule 2-2(a), a self-contained appraisal report is the most complete and detailed appraisal report option. Conditioning a person's compensation on loan consummation. 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. In implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act),[10] The savings and loans invested heavily in risky mortgages, which went bust in the early 1980s. Engagement LetterAn engagement letter between an institution and an appraiser documents the expectations of each party to the appraisal assignment. (Refer to Appendix B, Evaluations Based on Analytical Methods or Technological Tools.). An institution may refer to the appraiser's USPAP certification in its assessment of the appraiser's independence concerning the transaction and the property. 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. headings within the legal text of Federal Register documents. Changes in underlying economic and market assumptions, such as capitalization rates and lease terms. An engagement letter facilitates communication with the appraiser and documents the expectations of each party to the appraisal assignment. 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. FIRREA means the Financial Institutions Reform, Recovery and Enforcement Act of 1989, as amended. Resolution Funding Corporation (REFCORP) was created by Congress to fund the Resolution Trust Corporation during the Savings and Loan Crisis. 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. 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. Other commenters asked the Agencies to clarify certain aspects of the process for engaging an appraiser and when the appraiser/client relationship is established. 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. Validity of Appraisals and Evaluations, C. Modifications and Workouts of Existing Credits, Appendix B, Evaluations Based on Analytical Methods and Technological Tools. 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. 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. 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. Appendix AAppraisal Exemptions. 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. As General Counsel, private practitioner, and Congressional counsel, she has advised financial institutions, businesses, charities, individuals, and public officials, and written and lectured extensively. Further, under the Agencies' real estate lending regulations,[6] 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. 43. In some cases entrepreneurial profit may be included in the discount rate. [38], 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. Supersedes all previous rales. NCUA's appraisal regulation, 12 CFR 722, does not define business loan. A member business loan is regulated under 12 CFR 723. For proposed construction and sale of a condominium building with five or more units, the appraisal must reflect appropriate deductions and discounts. 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. In light of these comments, the Agencies have expanded the discussion in the Guidelines and moved the discussion to a separate Appendix. Further, for loan workouts, an institution's policies should specify conditions under which an appraisal or evaluation will be obtained. requires each Agency to prescribe appropriate standards for the performance of real estate appraisals in connection with federally related transactions,[17] 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. 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. 1665 0 obj <>stream 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. Also refer to 12 CFR 226.42, which is mandatory beginning on April 1, 2011. By order of the Board of Governors of the Federal Reserve System, December 1, 2010. 22. 3331 . Perform a detailed validation of the model(s) considered during the selection process and document the validation process. As in the Proposal, the Guidelines address when an institution may modify an existing credit without obtaining either an appraisal or an evaluation. 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. This section in the Guidelines references Appendix A, Appraisal Exemptions, which has been revised in response to comments on the Proposal. 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. 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. Communicating the noted deficiencies to and requesting correction of such deficiencies by the appraiser or person who prepared the evaluation. 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. Hedonic models generally use property characteristics (such as square footage and room count) and methodologies to process information, often based on statistical regression. 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. [19] For example, this exemption should not be applied to a transaction such as an institution's investment in real estate for its own use. As specified in the Agencies' appraisal regulations, an institution must obtain an evaluation of the real property collateral. 213; and NCUA: NCUA Letter to Credit Unions 05-CU-06. 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. 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. Marketing TimeAccording 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. Some commenters encouraged the Agencies to incorporate additional safeguards for consumers in the Guidelines. The evaluation should, at a minimum: External data sources (such as market sales databases and public tax and land records); Property-specific data (such as previous sales data for the subject property, tax assessment data, and comparable sales information); (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.). (See the discussion in these Guidelines on Selection of Appraisers or Persons Who Perform Evaluations.). An institution is required to obtain appraisals of leases that are the economic equivalent of a purchase or sale of the leased real estate. 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