Several commenters asked whether other guidance documents issued by the Agencies on appraisal-related issues would be rescinded with the issuance of the Guidelines.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 Agencies recognize that revisions to the Guidelines may be necessary to address future regulations implementing the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Prudent portfolio monitoring practices include criteria for determining when to obtain a new appraisal or evaluation. An example of a hypothetical condition is when an appraiser assumes a particular property's zoning is different from what the zoning actually is. An institution that engages a third party to perform certain collateral valuation functions on its behalf is responsible for understanding and managing the risks associated with the arrangement. Updated Appraisal means an Appraisal of the Mortgaged Property or related REO Property, as the case may be, conducted subsequent to any Appraisal performed on or prior to the date of this Agreement by an Appraiser, selected by the applicable Servicer, in accordance with MAI standards, the costs of which shall be paid as a Property Advance by the Lead Securitization Note Holder or applicable Servicer. 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. As stated in the Agencies' appraisal regulations, a state certified or licensed appraiser may not be considered competent solely by virtue of being certified or licensed. 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. Comments were received from financial institutions, appraisers, collateral valuation service providers, industry-related trade associations (industry groups), consumer groups, government officials, and individuals. An institution may not rely solely on the results of an AVM to develop an evaluation unless the resulting evaluation is consistent with safe and sound banking practices and these Guidelines. 35. If an institution uses more than one AVM, each AVM should be validated. In light of these comments, the Agencies have expanded the discussion in the Guidelines and moved the discussion to a separate Appendix. When an appraisal includes prospective market value opinions, there should be a point of reference to the market conditions and time frame on which the appraiser based the analysis. Effective Date of the AppraisalUSPAP requires that each appraisal report specifies the effective date of the appraisal and the date of the report. 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. 13. Delineate the valuation method to be employed after considering the property type, current market conditions, current use of the property, and the relevance of the most recent appraisal or evaluation in the credit file. These individuals would include any employee whose compensation is based on loan volume (such as processing or approving of loans). An institution's real estate appraisal and evaluation policies and procedures will be reviewed as part of the examination of the institution's overall real estate-related activities. that agencies use to create their documents. This timeframe should be commensurate with the level and nature of the institution's real estate lending activity. [28] [54] For example, if no other law requires an appraisal in connection with the sale of a parcel of real estate to a beneficiary of a trust on terms specified in a trust instrument, an appraisal is not required under the Agencies' appraisal regulations. Under NCUA regulations, market value of a construction and development project is the value at the time a commercial real estate loan is made, which includes the appraised value of land owned by the borrower on which the project is to be built, less any liens, plus the cost to build the project. 68 FR 56537, 56540 (October 1, 2003) (referring to Office of General Counsel Opinion 01-0422 (June 7, 2001)); 12 CFR 723.3(b). Further, technical edits were incorporated in the Evaluation Content section of the Guidelines to address commenters' questions regarding the appropriate level of documentation in an evaluation. In response to these developments, the Agencies published for comment the Proposed Interagency Appraisal and Evaluation Guidelines (Proposal) on November 19, 2008. Limited or over supply of competing properties. Referrals. 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. The purpose of the act was to create a more efficient, productive, and effective base on which to build the industry and safeguard future 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. The information obtained from such sources, while insufficient as an evaluation, may be useful to develop an evaluation or appraisal. Part 722 Appraisals Final Rule. In addition, effective April 1, 2011, an institution must file a complaint with the appropriate state appraiser certifying and licensing agency under certain circumstances. As General Counsel, private practitioner, and Congressional counsel, she has advised financial institutions, businesses, charities, individuals, and public officials, and written and lectured extensively. Such policies and procedures should: An inspection or research is necessary to ascertain the property's actual physical condition, and. 1. 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 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. electronic version on GPOs govinfo.gov. Improvements to the subject property or competing properties. An Agency may require compliance with additional appraisal standards if it makes a determination that such additional standards are required to properly carry out its statutory responsibilities. The use of real property or interests in property as security for a loan or investment, including mortgage-backed securities. 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. An institution should not rely solely on validation representations provided by an AVM vendor. The change became effective on April 10, 2018 (the day after it was published in the Federal Register). on FederalRegister.gov It resulted indramaticchanges tothe savings and loan industry and its federalregulation, including deposit insurance. The Agencies also reserve the right to require an appraisal under their appraisal regulations to address safety and soundness concerns in a transaction. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) has a specific definition for this term in connection with transactions secured by a consumer's principal dwelling or mortgage secondary market transactions. Since analytical methods such as TAVs generally need additional support to meet these Guidelines, institutions should develop policies and procedures that specify the level and extent of supplemental information that should be obtained to develop an evaluation. 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. Report appraisal and evaluation deficiencies to appropriate internal parties and, if applicable, to external authorities in a timely manner. For certain transactions that do not require an appraisal, the Agencies' regulations require an institution to obtain an appropriate evaluation of real property collateral that is consistent with safe Start Printed Page 77462and sound banking practices. A loan modification that entails a decrease in the interest rate or a single extension of a limited or short-term nature would not be viewed as a subsequent transaction. [34]. Transaction ValueAs defined in the Agencies' appraisal regulations: For purposes of this definition, the transaction value for loans that permit negative amortization should be the institution's total committed amount, including any potential negative amortization. Board Presentation. Dodd-Frank Act, Section 1473(r). Loan Production StaffGenerally, all personnel responsible for generating loan volume or approving loans, as well as their subordinates and supervisors. Examiners would be expected to provide an institution with a reasonable amount of time to obtain a new appraisal or evaluation. As part of the credit approval process and prior to a final credit decision, an institution should review appraisals and evaluations to ensure that they comply with the Agencies' appraisal regulations and are consistent with supervisory guidance and its own internal policies. For a small or rural institution or branch, it may not always be possible or practical to separate the collateral valuation program from the loan production process. Excluding a person from consideration for future engagement because a property's reported market value does not meet a specified threshold. An institution should document the results of ongoing monitoring efforts and periodic assessments of the arrangement(s) with a third party for compliance with applicable regulations and consistency with supervisory guidance and its performance standards. Counts are subject to sampling, reprocessing and revision (up or down) throughout the day. Transactions Insured or Guaranteed by a U.S. Government Agency or U.S. 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 Savings Association Insurance Fund (SAIF) was a U.S. government insurance fund for savings and loans to protect depositors from losses. Prospective value opinions are intended to reflect the current expectations and perceptions of market participants, based on available data. 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. Anticipated demand for the units should be supported and presented in the appraisal. 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. These standards of independence also should apply to persons who perform evaluations. An institution or its agents also should directly select and engage persons who perform evaluations. 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. The Guidelines should be considered by an institution in establishing effective internal controls over its collateral valuation function, including the verification and testing of its processes. (See the Scope of Work Rule in USPAP.). Reflect a risk-focused approach for determining the depth of the review. 44. endstream endobj startxref 23. An institution may refer to the appraiser's USPAP certification in its assessment of the appraiser's independence concerning the transaction and the property. Moreover, the Guidelines remind institutions that they generally should not rely on evaluations prepared by another financial services institution. See OCC: Comptroller's Handbook, Commercial Real Estate and Construction Lending (1998) (Appendix E); FRB: 1994 Interagency Appraisal and Evaluation Guidelines (SR letter 94-55); FDIC: FIL-74-94; and OTS: 1994 Interagency Appraisal and Evaluation Guidelines (Thrift Bulletin 55a). 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. Sum of Retail SalesA mathematical calculation of the sum of the expected sales prices of several individual properties in the same development to an individual purchaser. 55. [46] Third Party Arrangements. 37. Additionally, valuation methods that do not contain sufficient information and analysis or provide a market value conclusion would not be acceptable as evaluations. Sources of relevant information may include external market data, internal data, or reviews of recently obtained appraisals and evaluations. 54. An institution should not allow lower cost or the speed of delivery time to inappropriately influence its appraisal ordering procedures or the appraiser's determination of the scope of work for an appraisal supporting a federally related transaction. Lack of maintenance of the subject or competing properties. Loan Workouts or Restructurings. (See Appendix D, Glossary of Terms, for a definition of business loan.). As Completed Market ValueRefer to the definition for Prospective Market Value. Independent Appraiser means a nationally recognized or major regional investment banking firm or firm of independent certified public accountants of recognized standing (which may be the firm that regularly examines the financial statements of the Issuer) that is regularly engaged in the business of appraising the Capital Stock or assets of corporations or other entities as going concerns, and which is not affiliated with either the Issuer or the Holder of any Warrant. The Agencies note that both the Proposal and Guidelines include a definition in Appendix D for loan production staff. However, this is not a requirement of the Agencies' appraisal regulations. In the Guidelines, this section also was reorganized to list the minimum program compliance standards and to incorporate clarifying text. The Public Inspection page Determine and document how the tax jurisdiction calculates the TAV and how frequently property revaluations occur. 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. Appraisers must be appropriately certified or licensed, but this minimum credentialing requirement, although necessary, is not sufficient to determine that an appraiser is competent to perform an assignment for a particular property or geographic market. An institution may find it appropriate to modify a loan or to engage in a workout with an existing borrower. In addition, an appraisal should reflect an analysis of the property's sales history and an opinion as to the highest and best use of the property. An institution may find it appropriate to employ additional personnel or engage a third party to perform the reviews. The Guidelines contain a new introduction to the Appendix in response to commenters' questions regarding the authority of the Agencies to establish exemptions from their appraisal regulations. An institution should ensure that the scope of work is appropriate for the assignment. 50. 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. Summary Appraisal ReportAccording to USPAP Standards Rule 2-2(b), the summary appraisal report summarizes all information significant to the solution of an appraisal problem while still providing sufficient information to enable the client and intended user(s) to understand the rationale for the opinions and conclusions in the report. Government-Sponsored Agency, 11. 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. The following guidance documents have been incorporated in the Guidelines and are now being rescinded: (1) The 1994 Interagency Appraisal and Evaluation Guidelines; (2) the 2003 Interagency Statement on Independent Appraisal and Evaluation Functions; (3) and the Interagency Statement on the 2006 Revisions to the Uniform Standards of Professional Appraisal Practice. To apply this exemption, the Agencies expect the institution to determine that the primary source of repayment for the business loan is operating cash flow from the business rather than rental income or sale of real estate. Appendix D (previously Appendix C in the Proposal) provides a glossary of terms. Under the NCUA's appraisal regulation, a credit union must meet both conditions to avoid the need for an appraisal. You can learn more about the standards we follow in producing accurate, unbiased content in our. Insulate the persons responsible for ascertaining the compliance of the institution's appraisal and evaluation function from any influence by loan production staff. by the Housing and Urban Development Department documents in the last year, 1479 1.6 ASB: The Appraisal Standards Board of The Appraisal Foundation. This is a new Appendix in the Guidelines that is based on the discussion in the Proposal on the Agencies' minimum appraisal standards. 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. Several commenters asked for clarification on the factors institutions should consider in assessing an appraiser's competency. documents in the last year, 522 1. Appraisers and appraisal groups asked for further explanation on the enforceability of the Guidelines and the distinction between supervisory guidance and regulatory requirements. This revised section also incorporates the section on Accepting Appraisals from Other Financial Services Institutions in the Proposal. WebIf necessary, modify values in appraisals, when warranted and support the decision to do so according to the Interagency Appraisal & Evaluation Guidelines, USPAP and FIRREA requirements. Transactions That Require Appraisals, XI. 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. For example, an institution originated a 15-year term loan for $3 million and, in year 14, the outstanding principal is $2.5 million. This section in the Guidelines references Appendix A, Appraisal Exemptions, which has been revised in response to comments on the Proposal. 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. Office of the Comptroller of the Currency, Treasury (OCC); Board of Governors of the Federal Reserve System (FRB); Federal Deposit Insurance Corporation (FDIC); Office of Thrift Supervision, Treasury (OTS); and National Credit Union Administration (NCUA) (collectively, the Agencies). 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. The appraiser must analyze and reconcile the information from the approaches to arrive at the estimated market value. A few commenters recommended broad initiatives for the Agencies to undertake in the context of mitigating mortgage fraud and promoting appraisal quality through, for example, information sharing in the form of national data bases. As Is Market ValueThe estimate of the market value of real property in its current physical condition, use, and zoning as of the appraisal's effective date. 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. Also refer to 12 CFR 226.42, which is mandatory beginning on April 1, 2011. (1) This $50,000 minimum is referred to as the de minimis threshold level However, an institution should not use the threat of reporting a false allegation in order to influence or coerce an appraiser or a person who performs an evaluation. Maintain criteria for the content and appropriate use of evaluations consistent with safe and sound banking practices. The Agencies' appraisal regulations[1] We also reference original research from other reputable publishers where appropriate. A BPO generally provides a varying level of detail about a property's condition, market, and neighborhood, as well as comparable sales or listings. The Proposal noted that each Agency would address the approval process through established processes for communicating with its regulated institutions. The Agencies believe that the Proposal reaffirmed existing guidance addressing their supervisory expectations for prudent appraisal and evaluation policies, procedures, and practices. Validation can be performed internally or with the assistance of a third party, as long as the validation is conducted by qualified individuals that are independent of the model development or sales functions. It would not be acceptable for an institution to base an evaluation on unsupported assumptions, such as a property is in average condition, the zoning will change, or the property is not affected by adverse market conditions. Program Compliance. See, for example, FFIEC Statement on Risk Management of Outsourced Technology Service (November 28, 2000) for guidance on the assessment, selection, contract review, and monitoring of a third party that provides services to a regulated institution. hbbd``b`.Z }$~\b`bdc@ The system exists to this day. These commenters expressed the view that the Proposal gave too much discretion to regulated institutions in the development and implementation of their appraisal and evaluation programs. For a transaction financing construction or renovation of a building, an institution would generally request an appraiser to provide the property's current market value in its as is condition, and, as applicable, its prospective market value upon completion and/or prospective market value upon stabilization. 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. Appropriate deductions and discounts should reflect holding costs, marketing costs, and entrepreneurial profit during the sales absorption period for the sale of the developed lots. 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