Several commenters asked for clarification on the factors institutions should consider in assessing an appraiser's competency. Public Law 111-203, 124 Stat. Consistent with the USPAP Scope of Work Rule,[41] [67] WebProposed Rule In July 2017, the agencies invited comment on a notice of proposed rulemaking (proposal or proposed rule) 1 that would amend the agencies appraisal regulations promulgated pursuant to Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (Title XI).2 Specifically, the proposal would have 03/01/2023, 267 Appendix BEvaluations Based on Analytical Methods or Technological Tools. As required by USPAP, the appraisal must include any approach to value (that is, the cost, income, and sales comparison approaches) that is applicable and necessary to the assignment. These costs may be incurred during the permitting, construction or selling stages of development. Notwithstanding the exemption on renewals, refinancings, and subsequent transactions, some industry groups and appraiser organizations recommended that the Agencies address the circumstances under which institutions are to obtain appraisals even though evaluations are permitted. These standards are promulgated by the Appraisal Standards Board of the Appraisal Foundation and are incorporated as a minimum appraisal standard in the Agencies' appraisal regulations. ?-z#U-&3FK3_kkQ9YV\YB4f~y-rmVK9?ojQ6K|W6-7Fq7[Ct14%74/i_U{}qnAG{13Ry88Y&`[(. The appraiser must analyze and reconcile the information from the approaches to arrive at the estimated market value. The Guidelines retain the possible use of automated tools and sampling methods in the review of appraisals and evaluations supporting lower risk residential mortgages. This section in the Guidelines references Appendix A, Appraisal Exemptions, which has been revised in response to comments on the Proposal. In response to several comments regarding an institution's use of appraisal management companies, this section addresses the due diligence procedures for selecting a third party, including an effective risk management system and internal controls. 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. The Proposal reaffirmed that an institution's collateral valuation function should be independent of the loan production process. 1. 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. Several commenters asked the Agencies to clarify their expectations for demonstrating compliance and offered recommendations on sound practices, including appropriate staff reporting relationships and the depth of the process and procedures for verifying and testing compliance (such as sampling procedures). 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. As Completed Market ValueRefer to the definition for Prospective 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. 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. Address the selection, use, and validation of the valuation method or tool. 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. 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. the official SGML-based PDF version on govinfo.gov, those relying on it for While this section in the Guidelines generally tracks the Proposal, the detailed discussion on Start Printed Page 77453analyzing deductions and discounts has been moved to a new appendix. 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. The appraiser was engaged directly by the other financial services institution. 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. [60] Therefore, the $250,000 threshold applies and an evaluation is required if the loan amount is $250,000 or lower. 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). An institution should not rely solely on validation representations provided by an AVM vendor. 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. (See Appendix D, Glossary of Terms, for terminology used in these Guidelines.) During April 2018, banking federal banking Regulators issued changes for appraisal, FIRREA, requirements. has no substantive legal effect. The Agencies' appraisal regulations [ 1] implementing Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) [ 2] set forth, [55] These markup elements allow the user to see how the document follows the An institution's use of a borrower-ordered or borrower-provided appraisal violates the Agencies' appraisal regulations. In addition, effective April 1, 2011, an institution must file a complaint with the appropriate state appraiser certifying and licensing agency under certain circumstances. 1631 et seq.). An engagement letter facilitates communication with the appraiser and documents the expectations of each party to the appraisal assignment. The information obtained from such sources, while insufficient as an evaluation, may be useful to develop an evaluation or appraisal. In response to commenters, the Appendix was revised to provide clarification on the appropriate use of analytical methods or technological tools to develop an evaluation. For example, the sole use of data from the Internet or other public sources would not be an evaluation under these Guidelines. As used in Section 5.12 hereof, an Approved Third-Party Appraiser selected by the Administrative Agent shall mean any of the firms identified in the preceding sentence and any other Independent nationally recognized third-party appraisal firm identified by the Administrative Agent and consented to by the Borrower (such consent not to be unreasonably withheld or delayed). 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 establish an effective system of controls for verifying that a valuation method or tool is employed in a manner consistent with internal policies and procedures. 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. 50. Two prospective value opinions may be required to reflect the time frame during which development, construction, and occupancy will occur. Federal Register issue. However, to address commenters' concerns, the Agencies incorporated minor edits to better distinguish between regulatory requirements and prudent banking practices in the Guidelines. Insulate the persons responsible for ascertaining the compliance of the institution's appraisal and evaluation function from any influence by loan production staff. Sales ConcessionsA cash or noncash contribution that is provided by the seller or other party to the transaction and reduces the purchaser's cost to acquire the real property. An institution's appraisal and evaluation policies should establish internal controls to promote an effective appraisal and evaluation program. In order for a business loan to qualify for the abundance of caution exemption, the Agencies expect the extension of credit to be well supported by the borrower's cash flow or collateral other than real property. 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. 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. 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. 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. Develop criteria to assess whether an existing appraisal or evaluation may be used to support a subsequent transaction. [34]. 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. developer tools pages. Pursuant to FIRREA, new federal regulations were adopted for both savings and loan institutions and real estate appraisal professionals. Further, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act)[35] In developing an opinion of market value, an appraiser must take into consideration the effect of any sales concessions on the market value of the real property. Table A1: Collateral Interest Underlying Property Characteristic Provided ValueCommuter Portfolio 161 North Arlington Avenue USPAP Appraisal (Y/N) FIRREA Appraisal (Y/N) Y YNew Horizon Apartments NAP Ground Lease Maturity 3/28/2040Exhibit 2 to Attachment A Page 8 of 14Notes: (continued)3. If an institution finances construction on an individual unit basis, an appraisal of the individual units may be used 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. This process should include sufficient analysis by the institution to assess whether the third party provider can perform the services consistent with the institution's performance standards and regulatory requirements. 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. and the public comment process. Provide for the independence of the persons ordering, performing, and reviewing appraisals or evaluations. 12 CFR 722.3(d). These risks include, but are not limited to, transaction size and purpose, credit quality, and leverage tolerance (loan-to-value). 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. An evaluation's content should be documented in the credit file or reproducible. 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. Use the PDF linked in the document sidebar for the official electronic format. 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 37. An institution may use a computerized or manual system to manage the information in its credit files. 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. Therefore, an institution should establish criteria for determining the level and extent of research or inspection necessary to ascertain the property's actual physical condition, and the economic and market factors that should be considered in developing an evaluation. Dodd-Frank Act, Section 1473(r). Section 1471 of the Dodd-Frank Act added a new section 129H to the Truth-in-Lending Act (15 U.S.C. Moreover, as an institution's reliance on collateral becomes more important, its policies and procedures should: Consistent with sound collateral valuation monitoring practices, an institution can use a variety of techniques for monitoring the effect of collateral valuation trends on portfolio risk. Loan Production StaffGenerally, all personnel responsible for generating loan volume or approving loans, as well as their subordinates and supervisors. Savings & Loan Companies vs. Commercial Banks: What's the Difference? This exemption applies to appraisal requirements for transactions involving the purchase, sale, investment in, exchange of, or extension of credit secured by a loan or interest in a loan, pooled loans, or interests in real property, including mortgage-backed securities. In these situations, the market value of the leased fee interest should be used. 1665 0 obj <>stream 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. A report option that merely states, rather than summarizes or describes the content and information required in an appraisal report, may lack sufficient supporting information and analysis to explain the appraiser's opinions and conclusions. 55 FR 5614, 5618 (February 16, 1990), 55 FR 30193, 30206 (July 25, 1990). Sales concessions do not include fees that a seller is customarily required to pay under state or local laws. 28. The Guidelines provide further clarification on an institution's procedures for the selection of an appraiser for an assignment, including the development, administration, and maintenance of an approved appraiser list, if used. See the Third Party Arrangements section in these Guidelines. [24] 03/01/2023, 828 44. In particular, the Agencies requested comment on whether automated tools or sampling methods used to review appraisals and evaluations supporting lower risk single-family residential mortgages are appropriate for other low risk mortgage transactions, and whether appropriate constraints can be placed on the use of these tools and methods to ensure the overall integrity of an institution's appraisal process for those low risk mortgage transactions. The appraisal analysis also should include consideration of the absorption of the unleased space. Counts are subject to sampling, reprocessing and revision (up or down) throughout the day. [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. Communication between the institution's collateral valuation staff and an appraiser or person performing an evaluation is essential for the exchange of appropriate information relative to the valuation assignment. A Notice by the Comptroller of the Currency, the Federal Reserve System, the Federal Deposit Insurance Corporation, the Thrift Supervision Office, and the National Credit Union Administration on 12/10/2010. Transactions That Qualify for Sale to, or Meet the Appraisal Standards of, a U.S. Government Agency or U.S. 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 6. issued pursuant to section 304 of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA),[23] Under the Agencies' appraisal regulations, the result of an Automated Valuation Model (AVM), by itself or signed by an appraiser, is not an appraisal, because a state certified or licensed appraiser must perform an appraisal in conformance with USPAP and the Agencies' minimum appraisal standards. When an inspection is not performed, an institution should be able to demonstrate how these property and market factors were determined. [56] This table of contents is a navigational tool, processed from the Second, 38. 56. 1. Third Party Arrangements. A new appraisal or evaluation is necessary if the originally reported market value has changed due to factors such as: The Agencies' appraisal regulations specify that appraisals for federally related transactions must contain sufficient information and analysis to support an institution's decision to engage in the credit transaction. 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. Pursuant to FIRREA, new federal regulations were adopted for both savings and loan institutions and real estate appraisal professionals. FIRREA created civil enforcement authority to relevant agencies to impose significant enforcement penalties for violations. A marketable security is one that may be sold with reasonable promptness at a price that corresponds to its fair value. 43. The Agencies expect an institution to consider current collateral valuation information to assess its collateral risk and facilitate an informed decision on whether to engage in a modification or workout of an existing real estate credit. documents in the last year, by the Food and Drug Administration Moreover, an AVM or TAV is not, in and of itself, an alternative to an evaluation. 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. The program should: For both appraisal and evaluation functions, an institution should maintain standards of independence as part of an effective collateral valuation program for all of its real estate lending activity. documents in the last year, 1479 Independence of the Appraisal and Evaluation Program. Maintain AVM performance criteria for accuracy and reliability in a given transaction, lending activity, and geographic location. 03/01/2023, 239 hN0_pQl`H[HwY qaZF$qo;.mv(xPf >Id FPDAQ'`D`?`Y?S|-jyt)B\)#1%_XJ3R'1:zMxrN1.^ j`y%k[(fDDq1EaXrEYX_r2I"p^e1zv{1vK.YY]Wtj; ; Use of this exemption depends on meeting the conditions listed in (i) and (ii) at the beginning of the discussion on Renewals, Refinancings, and Other Subsequent Transactions. Maintain criteria for the content and appropriate use of evaluations consistent with safe and sound banking practices. 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. Savings Association Insurance Fund (SAIF), Savings and Loan Crisis (S&L): What Happened and Aftermath. Some commenters did not support the longstanding flexibility afforded to small and rural institutions when absolute lines of independence cannot be achieved. ), Institutions should be aware that provisions in the Dodd-Frank Act address appraisal requirements for a higher-risk mortgage to a consumer. Unsold UnitsAn unsold unit is a unit that does not meet the conditions listed in the definition of Presold Units. 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. From Booms To Bailouts: The Banking Crisis Of The 1980s. The revisions reflect clarifying text in response to comments from institutions on the regulatory requirements for reappraisals of real estate collateral for existing credits and subsequent transactions, particularly loan workout situations. The Public Inspection page An institution should document the results of its validation and audit findings. When an appraisal of raw land includes entitlements, the appraisal should disclose when such entitlements will expire if improvements are not completed within a specified time period and the potential effect on the value conclusion. The 2003 Interagency Statement on Independent Appraisal and Evaluation Functions, OCC: Advisory Letter 2003-9; FRB: SR letter 03-18; FDIC: FIL-84-2003; OTS: CEO Memorandum No.184; and NCUA: NCUA Letter to Credit Unions 03-CU-17. Regulations to ensure that real estate appraisals are performed adequately. 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