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. et seq., and any implementing regulations [40] 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. [25] 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. It is subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power and escheat. 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]. An institution may engage in these transactions without obtaining a separate appraisal conforming to the Agencies' appraisal regulations. 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. 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. All real estate-related 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. 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. 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 Start Printed Page 77466or evaluation would be required for that property. 54. 1. 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. Such policies and procedures also should require the use of an alternate valuation method when such information does not support the transaction. (Refer to the section on Third Party Arrangements in these Guidelines.). 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. 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. FIRREA Appraisal means an appraisal of a Financed Property that is commissioned by the Administrative Agent and satisfies the requirement of the Federal 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. The Guidelines also reflect refinements made by the Agencies in the supervision of institutions' appraisal and evaluation programs. 26. 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. 67. 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. In the Guidelines, this section also was reorganized to list the minimum program compliance standards and to incorporate clarifying text. Credible (Appraisal) Assignment ResultsAccording to USPAP, credible means worthy of belief used in the context of the Scope of Work Rule. 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 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. This timeframe should be commensurate with the level and nature of the institution's real estate lending activity. Under USPAP, the appraisal must contain a certification that the appraiser has complied with USPAP. Generally, a report option that is restricted to a single client and intended user will not be appropriate to support most federally related transactions. 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. 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. When using a third party, an institution remains responsible for the quality and adequacy of the review process, including the qualification standards for reviewers. 43. 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. Establish procedures to test the quality of the appraisal and evaluation review process. WebFor CRE transactions, a certified appraisal will not be required for transactions of $500,000 (note the increase from the previous $250,000 limit) and those that exceed $1 million. An institution is required to obtain appraisals of leases that are the economic equivalent of a purchase or sale of the leased real estate. This final rule will become effective on August 10, 2015. The Agencies allow an institution to use an existing appraisal or evaluation to support a subsequent transaction in certain circumstances. Deficiencies will require appropriate corrective action. If an institution is unable to confirm that the appraisal meets the Agencies' appraisal requirements, then the Start Printed Page 77463institution must obtain an appraisal prior to engaging in the transaction. (See the discussion in the Validity of Appraisals and Evaluations section of these Guidelines.) Michelle P. Scott is a New York attorney with extensive experiencein tax, corporate, financial, and nonprofit law, and public policy. 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. 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. 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. Involves an existing extension of credit at the lending institution, provided that: Loans with combined loan-to-value ratios in excess of the supervisory loan-to-value limits. that agencies use to create their documents. The changes provide updates to and consolidate some of the existing supervisory issuances. Second, Institutions also should be aware of separate requirements on conflicts of interest under Regulation Z (Truth in Lending), 12 CFR 226.42(d). (See Appendix A, Appraisal Exemptions.) Renewing the line of credit at its original amount would not be considered an advancement of new monies. For example, an engagement letter facilitates the communication of this information. 1657 0 obj <>/Filter/FlateDecode/ID[<317ED4AAB38EDD43BDC221096B7C1FBE>]/Index[1652 14]/Info 1651 0 R/Length 48/Prev 216112/Root 1653 0 R/Size 1666/Type/XRef/W[1 2 1]>>stream 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. 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. 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. These risks include, but are not limited to, transaction size and purpose, credit quality, and leverage tolerance (loan-to-value). Appraisals for these properties must reflect deductions and discounts for holding costs, marketing costs, and entrepreneurial profit supported by market data. Further, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act)[35] For this type of exempted loan, under the Agencies' appraisal regulations, an institution may obtain an evaluation in lieu of an appraisal. 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. FIRREA was put in place for a reason and is being reduced to rubble by agencies that do not want to deal with its guidance. Address the selection, use, and validation of the valuation method or tool. Consistent with the USPAP Scope of Work Rule,[41] 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. 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. Independence of the Appraisal and Evaluation Program. 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. 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: An evaluation must be consistent with safe and sound banking practices and should support the institution's decision to engage in the transaction. Going Concern ValueThe value of a business entity rather than the value of the real property. %PDF-1.4 % 28. [46] Engagement LetterAn engagement letter between an institution and an appraiser documents the expectations of each party to the appraisal assignment. 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. 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. Some commenters referenced industry efforts to mitigate fraud in real estate transactions. Appendix AAppraisal Exemptions. 23. For example, this exemption should not be applied to a transaction such as an institution's investment in real estate for its own use. on An institution should establish policies and procedures that provide a sound process for using various methods or tools. This review also should ensure that an appraisal or evaluation contains sufficient information and analysis to support the decision to engage in the transaction. Evaluate the vendor's scoring system and methodology for the model(s). [37] The appraiser must provide an opinion of value for raw land based on its current condition and existing zoning. 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 Agencies note that both the Proposal and Guidelines include a definition in Appendix D for loan production staff. Several commenters requested further clarification on appropriate policies and procedures for the review function. 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. Dodd-Frank Act, Section 1473(r). After considering the comments on the Proposal, the Agencies made revisions to the Proposal and are now issuing the Guidelines. Some small institutions noted that they could be placed at a competitive disadvantage with larger institutions that use AVMs. Examiners would be expected to provide an institution with a reasonable amount of time to obtain a new appraisal or evaluation. Register documents. 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. Further, the appraiser should disclose the rationale for the omission of a valuation approach. 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. An engagement letter also may specify whether there are any legal or contractual restrictions on the sharing of the appraisal with other parties. 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). While every effort has been made to ensure that the material on FederalRegister.gov is accurately displayed, consistent with 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. An engagement letter facilitates communication with the appraiser and documents the expectations of each party to the appraisal assignment. Appraisal Management Company Oversight. 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. AppraisalAs 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. 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. An institution or its agents also should directly select and engage persons who perform evaluations. 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. 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. 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. https://www.federalregister.gov/documents/2018/04/09/2018-06960/real-estate-appraisals, The final rule increases the threshold level at or below which appraisals are not required for commercial real estate transactions from $250,000 to $500,000, It excludes all transactions secured by a single 1-to-4 family residential property; not proposing any threshold increases for transactions secured by a single 1-to-4 family residential property, Require that regulated institutions entering into commercial real estate transactions at or below the proposed commercial real estate appraisal threshold obtain evaluations that are consistent with safe and sound banking practices unless the institution chooses to obtain an appraisal for such transactions. 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. Consider additional information about the subject property or about comparable properties. This is a new Appendix in the Guidelines that is based on the discussion in the Proposal on the Agencies' minimum appraisal standards. Effective Date of the EvaluationFor the purposes of the Agencies' appraisal regulations and these Guidelines, the effective date of an evaluation is the date that the analysis is completed. [59] Determine and document how the tax jurisdiction calculates the TAV and how frequently property revaluations occur. of the issuing agency. 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 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. 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. AVMs are computer programs that estimate a property's market value based on market, economic, and demographic factors. Supervision of institutions ' appraisal and evaluation review process a competitive disadvantage with larger institutions that AVMs. Small institutions noted that they could be placed at a competitive disadvantage with institutions... 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