Regulatory Agencies Issue Final Appraisal and Real Estate Evaluation Guidelines
Following an extended period of public comment, federal regulators (The Agencies) have issued final Interagency Appraisal and Evaluation Guidelines for real estate appraisals and evaluations used in financial transactions. The guidelines replace the 1994 version developed under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989 and the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA.) The latter required that each regulated institution adopt and maintain written real estate lending policies that are consistent with safety and soundness.<br /<br /The new guidelines emphasize the importance of institutions maintaining strong internal controls to ensure reliable appraisals and evaluations. Institutions also are responsible for monitoring and periodically updating valuations of collateral for existing real estate loans and forrn transactions, such as modifications and workouts. The following is a summary of the guidelines.<br /<br /1. Supervisory Policy<br /<br /Appraisal policies and procedures will be reviewed by regulators as partrn of a regular examination of real estate-related activities. Examiners will consider the size and nature of each institution's real estate-related activities in assessing the appropriateness of its program and will review the steps taken to ensure that the persons who perform appraisals and evaluations are qualified, competent, and not subject to conflicts of interest. <br /<br /2. Appraisal and Evaluation Program<br /<br /An institution's board of directors (or its delegates) is responsible for developing a program that will provide for the independence of persons involved in the appraisal process, establish criteria and procedures to evaluate and monitor their performance ensure that appraisals and evaluations comply with regulations and contain sufficient information to support the credit decision.<br /<br /The board must establish and maintain criteria for content and use of evaluations including timely receipt and review, assessment, and monitoring collateral values and for obtaining appraisals for transactions not otherwise covered by the Agencies' appraisal regulations.<br /<br /3. Independence of the Appraisal and Evaluation Program<br /<br /An institution should maintain standards of independence for collateral evaluations throughout its real estate lending activity. Collateral evaluations must be isolated from influence by the institutions loan production staff and the institution should establish reporting lines independent of loan production for staff who administer the evaluation program. Appraisers must be independent of loan production and collection and have no direct, indirect or prospective interest in the property or the transaction. Policies devised to insure the independence of collateral valuation must not hinder the communication of appropriate information.<br /<br /For small or rural institutions where is it not always possible or practical to separate collateral valuation from production, the institution should be able to demonstrate clearly that it has prudent safeguards to isolate the valuation process from influence or interference. In cases where only one person is qualified to analyze collateral that person must not participate in loan approval.<br /<br /The appraiser can be provided with a copy of the sales contract and the person who requests the appraisal can request that the appraiser consider additional information about the property, provide supporting information about the basis for a value, and correct factual errors. The institution, however, may not directly or indirectly coerce, influence or otherwise encourage an appraiser or evaluator to misstate or misrepresent the value of a property or communicate a predetermined, expected or qualifying estimate of value, specify a minimum value for the property, or condition the appraisers compensation or future employment on obtaining a certain value or on consummation of the loan.<br /<br /Where a second appraisal or evaluation is necessary, the institution is expected to select the most credible product rather than the one with the highest value.<br /<br /4. Selection of Appraisers or Persons Who Perform Evaluations<br /<br / The institution's criteria for selection evaluating, and monitoring thern performance of appraisers and evaluations should ensure that:</p<ul
The institution must directly select and hire appraisers except wherern Agency regulations allow use of an appraisal prepared for another institution. Independence is compromised when a borrower recommends or loan production staff selects an appraiser. <br / <br /Where an institution establishes an approved appraiser list, it should have appropriate procedures for developing and administering that list including a process of initial qualification, periodic monitoring of performance and accreditations and a periodic internal review of the usern of the list. For residential work, loan production staff can use a revolving, pre-approved appraiser list as long as the development and maintenance of the list is not under their control.<br / <br /5. Minimum Appraisal Standards<br / <br /Appraisals must:</p<ul
6. Appraisal Development
Appraisals must comply with the requirements of USPAP and, consistent with the USPAP “Scope of Work Rule) provide credible assignment results including 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. The institution itself is responsible for obtaining an appraisal that contains sufficient information and analysis to support its credit decision.
7. Appraisal Reports
Each institution can selection the appropriate USPAP report option to supportrn its credit decisions, taking into account the risk, size, and complexity of the transaction and the collateral.
8. Transactions that require Evaluations</p
An institution can obtain an evaluation in lieu of an appraisal for transactions that qualify for certain exemptions including:</p<ul
Although an institution may be allowed, under the regulations, to use an evaluation, the institution should establish policies and procedures opting for an appraisal such as for higher risk transactions like atypical properties or properties outside of the institution’s traditional lending market.
9. Evaluation Development and Content
The institution should establish policies to determining appropriate collateral valuation methods for a transaction regardless of the cost or turnaround time of the evaluation. An evaluation must provide a property’s market value and sufficient information and analysis to support that value, address the property’s actual physical condition and characteristics as well as economic and market conditions. These should include, among other factors:</p<ul
10. Validity of Appraisals and Evaluations
Where an institution uses an existing appraisal or evaluation, it should establish criteria for assessing whether it continues to be valid. A new appraisal or evaluation will be deemed necessary if the market value has changed due to:</p<ul
11. Reviewing Appraisals and Evaluations
Prior to making a credit decision, the institution should review appraisals and evaluations to ensure they comply with the Agencies’ appraisal regulations and the institution’s internal policies. The policies and procedures for reviewing these documents should, at a minimum:</p<ul
12. Third Party Arrangements</p
An institution that engages a third party to perform collateral valuations on its behalf is responsible for understanding and managing the risks associated with the arrangement. The institution should have internal controls for such arrangements and should compare the risks, costs and benefits of the proposed relationship with using another vendor or conducting the activity in-house and should exercise due diligence in selecting the vendor.
13. Program Compliance
In addition to establishing internal controls to promote an effective appraisal and evaluation program the institution should have policies that address the need to understand its collateral position over the life of a credit including criteria for obtaining current valuation information. Such criteria should address deterioration of the credit or changes in market condition. If an institution finds it appropriate to modify a loan or engage in a workout the Agencies expect it to consider current collateral valuation information and obtain a new appraisal or evaluation if necessary.
An institution is expected to file a complaint with the appropriate state regulatory officials when it suspects that a state certified or licensed appraiser has failed to comply with state laws or engaged in unethical or unprofessional conduct. The institution also must file a suspicious activity report with the Department of the Treasury when suspecting fraud or identifying other transactions meeting the filing criteria.
The Dodd-Frank Wall Street Financial Reform and Consumer Protection Act of 2010 underscores the importance of sound real estate lending decisions; future revisions to the appraisal guidelines may be necessary after regulations are adopted to implement the Act.
All Content Copyright © 2003 – 2009 Brown House Media, Inc. All Rights Reserved.nReproduction in any form without permission of MortgageNewsDaily.com is prohibited.
Leave a Comment
By John Gittelsohn August 24, 2020, 4:00 AM PDT Some of the largest real estate investors are walking away from Read More...Late-Stage Delinquencies are Surging
Aug 21 2020, 11:59AM Like the report from Black Knight earlier today, the second quarter National Delinquency Survey from the Read More...Published by the Federal Reserve Bank of San Francisco
It was recently published by the Federal Reserve Bank of San Francisco, which is about as official as you can Read More...