July 18, 2019. Develop criteria to assess whether an existing appraisal or evaluation may be used to support a subsequent transaction. Rather, as allowed by USPAP, an appraiser can determine the characteristics of a property through, among other things, any combination of property The Agencies' appraisal regulations require appraisals for federally related transactions to comply with the requirements in USPAP, some of which are addressed below. Moreover, because such valuation is necessarily based upon estimates and projections of a number of matters, all of which are subject to change from time to time, no assurance can be given that persons who purchase shares of Common Stock in the Conversion and Reorganization will thereafter be able to sell such shares at prices related to the foregoing valuation of the pro forma market value thereof. The system exists to this day. Transactions That Require Appraisals, XI. An institution may find it appropriate to modify a loan or to engage in a workout with an existing borrower. [56] Since the issuance of the 1994 Guidelines, the Agencies have issued additional supervisory guidance documents[7] The original appraiser should complete the appraisal update; however, lenders may use substitute appraisers. Abolishment of the Federal Home Loan Bank Board and the creation of two agencies to replace it: the Federal Housing Finance Board (FHFB) and the Office of Thrift Supervision (OTS). 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). The Agencies' appraisal regulations permit an institution to use an evaluation in lieu of an appraisal for certain transactions. on 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. 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. 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. Insulate the persons responsible for ascertaining the compliance of the institution's appraisal and evaluation function from any influence by loan production staff. 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. 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. See Dodd-Frank Act, Section 1400(c)(1). documents in the last year, by the International Trade Commission Several commenters requested further clarification on appropriate policies and procedures for the review function. Start Printed Page 77456and the 2005 Frequently Asked Questions on the Appraisal Regulations and the Interagency Statement on Independent Appraisal and Evaluation Functions. 22. In addition, on April 14, 2020, the FDIC, FRB, and OCC issued an interim final rule temporarily amending their appraisal regulations to provide that the completion of appraisals and evaluations required under the agencies appraisal regulations may be deferred by a regulated institution for up to 120 days from the date of closing. [68], ClientAccording to USPAP, the party or parties who engage(s) an appraiser by employment or contract for a specific appraisal assignment. 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. In light of these comments, the Agencies have expanded the discussion in the Guidelines and moved the discussion to a separate Appendix. The Agencies collectively received 157 unique comments on the Proposal. 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. The work performed by appraisers and persons providing evaluation services is periodically reviewed by the institution. 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 should document the results of its validation and audit findings. 48. Transactions involving existing extensions of credit with significant risk to the institution. 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. 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. 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. If an institution outsources any part of the collateral valuation function, it should exercise appropriate due diligence in the selection of a third party. 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. 24. Provide additional supporting information about the basis for a valuation. on Reviewing Appraisals and Evaluations. Moreover, the institution's staff responsible for internal controls should have the skills commensurate with the complexity or sophistication of the method or tool. 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. Most comprehensive library of legal defined terms on your mobile device, All contents of the lawinsider.com excluding publicly sourced documents are Copyright 2013-, Uniform Standards of Professional Appraisal Practice. 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. 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 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. 3339(3)), which relates to the review of appraisals, is not relevant for determining whether an appraiser is a certified or licensed appraiser under 34.203(a)(1). Further, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act)[35] 1376 (2010). implementing Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA)[2] 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. In implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act),[10] 1652 0 obj
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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. The Guidelines are effective upon publication in the Federal Register. 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. Transactions that Require Evaluations. Properties outside the institution's traditional lending market. Both the Savings Association Insurance Fund(SAIF) and the Bank Insurance Fund (BIF) were to be administered by theFDIC, buttheFederal Deposit Insurance Reform Actof 2005consolidated the two funds. 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. 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. V. Independence of the Appraisal and Evaluation Program, VI. An institution may rely on the second opinion of market value obtained through an acceptable USPAP-compliant appraisal review to support its credit decision. To eliminate redundancies, the revised section incorporates from Appendix A of the Proposal the discussion of an institution's Start Printed Page 77455responsibility to obtain current collateral valuation information for loan modifications and workouts of existing credits. 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. These markup elements allow the user to see how the document follows the 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. 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. 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. 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. Other information might include the prevalence and effect of sales and financing concessions, the list-to-sale price ratio, and availability of financing. (See Appendix C, Deductions and Discounts, for further explanation on deductions and discounts.). 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. 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. These exemptions include a transaction that: 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, There is no advancement of new monies other than funds necessary to cover reasonable closing costs.[43]. 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. Inventory Appraisal means (a) on the Original Closing Date, the report prepared by DoveBid Valuation Services, Inc. dated October 27, 2003 and (b) thereafter, the most recent inventory appraisal conducted by an independent appraisal firm designated by Collateral Agent and reasonably acceptable to Borrower and delivered pursuant to Section 9.02 hereof. 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. 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. 73 FR 44522, 44604 (Jul. Appendix B addresses an institution's use of analytical methods or technological tools in the development of an evaluation. 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. 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. These Guidelines, including their appendices, address supervisory matters relating to real estate appraisals and evaluations used to support real estate-related financial transactions. Temporary creation of the Resolution Trust Corp. to resolve the status of the nation's failed savi Ensure that timely information is available to management for assessing collateral and associated risk. (See the discussion above on Portfolio Collateral Risk. Therefore an institution needs to understand how a confidence score was derived and the extent to which a confidence score correlates to model accuracy. 41. 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. The decision to outsource any part of the collateral valuation function should not be unduly influenced by any short-term cost savings. Further, USPAP requires the appraiser to disclose whether he or she previously appraised the property. Minimum Appraisal Standards. and the public comment process. 511 (1989); 12 U.S.C. WebAlternative Valuation Services. documents in the last year, 37 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. Restricted Use Appraisal ReportAccording 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. 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. 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. 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. A BPO generally provides a varying level of detail about a property's condition, market, and neighborhood, as well as comparable sales or listings. However, when a fiduciary transaction requires an appraisal under other laws, that appraisal should conform to the Agencies' appraisal requirements. TheFederal Savings and Loan Insurance Corporation(FSLIC) was abolished, and all assets and liabilities were assumed by the FSLIC Resolution Fund administered by theFederal Deposit Insurance Corp. (FDIC)and funded by theFinancing Corporation(FICO). Under the law, the provisions are effective 12 months after final regulations to implement the provisions are published. Maintain AVM performance criteria for accuracy and reliability in a given transaction, lending activity, and geographic location. 11. In the Proposal, this section addressed the competency and qualifications of appraisers and persons who perform an evaluation. 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. 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. In finalizing the Guidelines, the Agencies considered the Dodd-Frank Act, other Federal statutory and regulatory changes affecting appraisals,[11] However, to address commenters' concerns, the Agencies incorporated minor edits to better distinguish between regulatory requirements and prudent banking practices in the Guidelines. Public Law 101-73, Title XI, 103 Stat. publication in the future. The Guidelines also reflect refinements made by the Agencies in the supervision of institutions' appraisal and evaluation programs. 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. [54] In particular, these commenters raised concerns over the enforcement of the Guidelines by the Agencies. 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 Use the PDF linked in the document sidebar for the official electronic format. 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. 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. 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. 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. Additionally, valuation methods that do not contain sufficient information and analysis or provide a market value conclusion would not be acceptable as evaluations. 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. 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. FIRREA created civil enforcement authority to relevant agencies to impose significant enforcement penalties for violations. 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]. Evaluate the vendor's scoring system and methodology for the model(s). From Booms To Bailouts: The Banking Crisis Of The 1980s. According to USPAP, appraisal reports must contain sufficient information to enable the intended user of the appraisal to understand the report properly. Financial Services InstitutionThe 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. 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. 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. 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. %PDF-1.4
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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. First, the process of obtaining an evaluation is not new since IDIs already obtain evaluations for transactions at or below the current $250,000-threshold. 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. 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. A was not a party to the lending guidelines; however, 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). Establish criteria for obtaining appraisals or evaluations for transactions that are not otherwise covered by the appraisal requirements of the Agencies' appraisal regulations. The prospective market value as stabilized reflects the property's market value as of the time the property is projected to achieve stabilized occupancy. According to USPAP, an appraisal with a prospective market value reflects an effective date that is subsequent to the date of the appraisal report. As in the Proposal, the Guidelines address when an institution may modify an existing credit without obtaining either an appraisal or an evaluation. Describe the method(s) the institution used to confirm the property's actual physical condition and the extent to which an inspection was performed. Specify criteria when a market event or risk factor would preclude the use of a particular method or tool. 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. 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. 03/01/2023, 43 documents in the last year, 983 Some commenters also asked the Agencies to address the expectations for reviews by property type and risk factors. 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. 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. Appendix C clarifies the minimum appraisal standards required by the Agencies' appraisal regulations for analyzing and reporting appropriate deductions and discounts in appraisals. 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. The Guidelines are effective on December 10, 2010. As Completed Market ValueRefer to the definition for Prospective Market Value. Three categories of effective datesretrospective, current, or prospectivemay be used, according to the intended use of the appraisal assignment. As specified in the Agencies' appraisal regulations, an institution must obtain an evaluation of the real property collateral, if no other appraisal exemption applies. the material on FederalRegister.gov is accurately displayed, consistent with 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. Although not required, an institution may use state certified or licensed appraisers to perform evaluations. This exemption is not intended to be applied to real estate-related financial transactions other than those involving loans. Public Law 102-485, 2, 106 Stat. Hypothetical ConditionAs defined in USPAP, a condition that is contrary to what exists but is supposed for the purpose of analysis. 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 President of the United States manages the operations of the Executive branch of Government through Executive orders. Regulations Laws Rules FDIC Law, Regulations, Related Acts FDIC and Interagency Statements FDIC and Interagency Statements provide guidance to insured 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. Appendix DGlossary of Terms. The person selected is capable of rendering an unbiased opinion. Excluding a person from consideration for future engagement because a property's reported market value does not meet a specified threshold. 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. 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 Start Printed Page 77471units 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. The results of its validation and audit findings of effective datesretrospective, current, or prospectivemay be used, to... 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