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[Federal Register: November 19, 2008 (Volume 73, Number 224)]
[Notices]
[Page 69647-69662]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr19no08-85]
=======================================================================
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
[Docket ID OCC-2008-0021]
FEDERAL RESERVE SYSTEM
[Docket No. OP-1338]
FEDERAL DEPOSIT INSURANCE CORPORATION
DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
[Docket ID OTS-2008-0012]
NATIONAL CREDIT UNION ADMINISTRATION
RIN 3133-AD38
Proposed Interagency Appraisal and Evaluation Guidelines
AGENCIES: 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).
ACTION: Notice with request for comment.
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SUMMARY: The OCC, FRB, FDIC, OTS, and NCUA (the Agencies), request
comment on the proposed Interagency Appraisal and Evaluation Guidelines
(proposed Guidelines). The proposed Guidelines, which would supersede
the 1994 Interagency Appraisal and Evaluation Guidelines (1994
Guidelines), reflect revisions to the Uniform Standards of Professional
Appraisal Practice (USPAP) and the evolution of collateral valuation
practices, such as the use of automated valuation models (AVMs). The
proposed Guidelines also incorporate refinements made by the Agencies
to the supervision of regulated institutions' appraisal and evaluation
programs since 1994 and reflect the participation of the NCUA, which
was not a party to the 1994 Guidelines. The proposed Guidelines are
intended to clarify the Agencies' real estate appraisal regulations and
promote a safe and sound real estate collateral valuation program.
DATES: Comments must be submitted on or before January 20, 2009.
ADDRESSES: Comments should be directed to:
OCC: You may submit comments by any of the following methods:
E-mail: regs.comments@occ.treas.gov.
Fax: (202) 874-4448.
Mail: Office of the Comptroller of the Currency, 250 E
Street, SW., Mail Stop 1-5, Washington, DC 20219.
Hand Delivery/Courier: 250 E Street, SW., Attn: Public
Information Room, Mail Stop 1-5, Washington, DC 20219.
Instructions: You must include ``OCC'' as the agency name and
``Docket ID OCC-2008-0021'' in your comment. In general, OCC will enter
all comments received into the docket without change, including any
business or personal information that you provide such as name and
address information, e-mail addresses, or phone numbers. Comments,
including attachments and other supporting materials, received are
[[Page 69648]]
part of the public record and subject to public disclosure. Do not
enclose any information in your comment or supporting materials that
you consider confidential or inappropriate for public disclosure.
You may review comments and other related materials by any of the
following methods:
Viewing Comments Personally: You may personally inspect
and photocopy comments at the OCC's Public Information Room, 250 E
Street, SW., Washington, DC. For security reasons, the OCC requires
that visitors make an appointment to inspect comments. You may do so by
calling (202) 874-5043. Upon arrival, visitors will be required to
present valid government-issued photo identification and submit to
security screening in order to inspect and photocopy comments.
Docket: You may also view or request available background
documents and project summaries using the methods described above.
FRB: You may submit comments, identified by Docket No. OP-1338, by
any of the following methods:
Agency Web Site: http://www.federalreserve.gov. Follow the
instructions for submitting comments at http://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
E-mail: regs.comments@federalreserve.gov. Include the
docket number in the subject line of the message.
Fax: 202/452-3819 or 202/452-3102.
Mail: Jennifer J. Johnson, Secretary, Board of Governors
of the Federal Reserve System, 20th Street and Constitution Avenue,
NW., Washington, DC 20551.
All public comments are available from the FRB's Web site at http:/
/www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as submitted,
unless modified for technical reasons. Accordingly, your comments will
not be edited to remove any identifying or contact information. Public
comments may also be viewed in electronic or paper form in Room MP-500
of the FRB's Martin Building (20th and C Streets, NW.) between 9 a.m.
and 5 p.m. on weekdays.
FDIC: You may submit comments by any of the following methods:
Agency Web Site: http://www.fdic.gov/regulations/laws/
federal. Follow instructions for submitting comments on the Agency Web
Site.
E-mail: Comments@FDIC.gov. Include ``Proposed Interagency
Appraisal and Evaluation Guidelines'' in the subject line of the
message.
Mail: Robert E. Feldman, Executive Secretary, Attention:
Comments, Federal Deposit Insurance Corporation, 550 17th Street, NW.,
Washington, DC 20429.
Hand Delivery/Courier: Guard station at the rear of the
550 17th Street Building (located on F Street) on business days between
7 a.m. and 5 p.m. (EST).
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Public Inspection: All comments received will be posted without
change to http://www.fdic.gov/regulations/laws/federal including any
personal information provided. Comments may be inspected and
photocopied in the FDIC Public Information Center, 3501 North Fairfax
Drive, Room E-1002, Arlington, VA 22226, between 9 a.m. and 5 p.m.
(EST) on business days. Paper copies of public comments may be ordered
from the Public Information Center by telephone at (877) 275-3342 or
(703) 562-2200.
OTS: You may submit comments, identified by docket number ID OTS-
2008-0012, by any of the following methods:
E-mail: regs.comments@ots.treas.gov. Please include ID
OTS-2008-0012 in the subject line of the message and include your name
and telephone number in the message.
Fax: (202) 906-6518.
Mail: Regulation Comments, Chief Counsel's Office, Office
of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552,
Attention: ID OTS-2008-0012.
Hand Delivery/Courier: Guard's Desk, East Lobby Entrance,
1700 G Street, NW., from 9 a.m. to 4 p.m. on business days, Attention:
Regulation Comments, Chief Counsel's Office, Attention: ID OTS-2008-
0012.
Instructions: All submissions received must include the agency name
and docket number for this notice. All comments received will be posted
without change, including any personal information provided. Comments
including attachments and other supporting materials received are part
of the public record and subject to public disclosure. Do not enclose
any information in your comments or supporting materials that you
consider confidential or inappropriate for public disclosure.
Viewing Comments On-Site: You may inspect comments at the
Public Reading Room, 1700 G Street, NW., by appointment. To make an
appointment for access, call (202) 906-5922, send an e-mail to
public.info@ots.treas.gov, or send a facsimile transmission to (202)
906-6518. (Prior notice identifying the materials you will be
requesting will assist us in serving you.) We schedule appointments on
business days between 10 a.m. and 4 p.m. In most cases, appointments
will be available the next business day following the date we receive a
request.
NCUA: You may submit comments by any of the following methods
(Please send comments by one method only):
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
NCUA Web Site: http://www.ncua.gov/
RegulationsOpinionsLaws/proposedregs/proposedregs.html Follow the
instructions for submitting comments.
E-mail: Address to regcomments@ncua.gov. Include ``[Your
name] Comments on Proposed Interagency Appraisal and Evaluation
Guidelines,'' in the e-mail subject line.
Fax: (703) 518-6319. Use the subject line described above
for e-mail.
Mail: Address to Mary F. Rupp, Secretary of the Board,
National Credit Union Administration, 1775 Duke Street, Alexandria,
Virginia 22314-3428.
Hand Delivery/Courier: Same as mail address.
Public inspection: All public comments are available on the
agency's website at http://www.ncua.gov/RegulationsOpinionsLaws/
proposed_regs/comments.html as submitted, except as may not be
possible for technical reasons. Public comments will not be edited to
remove any identifying or contact information. Paper copies of comments
may be inspected in NCUA's law library, at 1775 Duke Street,
Alexandria, Virginia 22314, by appointment weekdays between 9 a.m. and
3 p.m. To make an appointment, call (703) 518-6546 or send an e-mail to
--OGCMail @ncua.gov .
FOR FURTHER INFORMATION CONTACT:
OCC: Doreen Ledbetter, Credit Risk Specialist, or Vance S. Price,
Director, Credit and Market Risk Division, (202) 874-5170; Christopher
Manthey, Counsel, Bank Activities and Structure, or Mitchell Plave,
Counsel, Legislative and Regulatory Activities, (202) 874-5300.
FRB: Virginia M. Gibbs, Senior Supervisory Financial Analyst, (202)
452-2521; or Sabeth I. Siddique, Assistant Director, (202) 452-3861,
Division of Banking Supervision and Regulation; or Walter McEwen,
Senior
[[Page 69649]]
Counsel, (202) 452-3321, or Benjamin W. McDonough, Senior Attorney,
(202) 452-2036, Legal Division. For users of Telecommunications Device
for the Deaf (``TDD'') only, contact (202) 263-4869.
FDIC: Beverlea S. Gardner, Senior Examination Specialist, Division
of Supervision and Consumer Protection, (202) 898-6790, or Janet V.
Norcom, Counsel, Legal Division, (202) 898-8886.
OTS: Debbie Merkle, Project Manager, Credit Risk, Risk Management,
(202) 906-5688, or Marvin Shaw, Senior Attorney, Regulations and
Legislation Division (202) 906-6639.
NCUA: Moisette Green, Staff Attorney, (703) 518-6540 or Robert C.
Leonard, Program Officer, (703) 518-6396.
SUPPLEMENTARY INFORMATION:
I. Background
Title XI of the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (FIRREA) \1\ requires each Agency to prescribe
appropriate standards for the performance of real estate appraisals in
connection with ``federally related transactions,'' \2\ 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.\3\ These rules 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 of The Appraisal
Foundation (Appraisal Standards Board), and that such appraisals be in
writing.\4\ Such appraisals are to be performed by an individual whose
competency has been demonstrated and whose professional conduct is
subject to effective state supervision. An Agency may require
compliance with additional appraisal standards if it makes a
determination that such additional standards are required in order to
properly carry out its statutory responsibilities.\5\ Each of the
Agencies has adopted additional appraisal standards.\6\
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\1\ Public Law 101-73, 103 Stat. 183 (1989).
\2\ 12 U.S.C. 3339.
\3\ 12 U.S.C. 3350(4).
\4\ 12 U.S.C. 3339.
\5\ Id.
\6\ OCC: 12 CFR part 34, subpart C; FRB: 12 CFR part 208,
subpart E and 12 CFR part 225, subpart G; FDIC: 12 CFR part 323;
OTS: 12 CFR part 564; and NCUA: 12 CFR part 722.
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The OCC, FRB, FDIC, and OTS jointly issued the 1994 Guidelines to
provide further guidance to regulated financial institutions on prudent
appraisal and evaluation policies, procedures, practices, and
standards.\7\ The 1994 Guidelines address supervisory matters relating
to real estate appraisals and evaluations used to support real estate-
related financial transactions and provide guidance to both examiners
and regulated institutions about prudent appraisal and evaluation
programs. In particular, the 1994 Guidelines provide clarification of
expectations for written evaluations of real estate collateral in
certain transactions that do not require the services of an appraiser
under the Agencies' regulations.
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\7\ 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).
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Over the years, the Agencies have issued several additional
supervisory guidance documents to promote sound practices in regulated
institutions' appraisal and evaluation programs, including independence
in the appraisal and evaluation functions, the appraisal of residential
tract development, and compliance with revisions to USPAP.\8\
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\8\ This includes: 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; 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. 213: and NCUA: NCUA Letter to Credit Unions 05-
CU-06; the 2005 Interagency FAQs on Residential Tract Development
Lending, OCC: OCC Bulletin 2005-32; FRB: SR letter 05-14; FDIC: FIL-
90-2005; OTS: CEO Memorandum No. 225: and NCUA: NCUA Letter to
Credit Unions 05-CU-12; and the 2006 Interagency Statement on the
2006 Revisions to the Uniform Standards of Professional Appraisal
Practice, OCC: OCC Bulletin 2006-27; FRB: SR letter 06-9; FDIC: FIL-
53-2006; OTS: CEO Memorandum No. 240: and NCUA: Regulatory Alert 06-
RA-04. Each of these guidance documents continues to be in effect.
---------------------------------------------------------------------------
Since the issuance of the 1994 Guidelines, there have been some
significant developments concerning appraisals and advancements in
regulated institutions' collateral valuation practices. Advances in
technology, for example, have prompted increased use of AVMs to derive
values for residential transactions that do not require the services of
an appraiser under the appraisal regulations. Further, in 2006, the
Appraisal Standards Board issued significant revisions to USPAP,
adopting the USPAP Scope of Work Rule and deleting the USPAP Departure
Rule. For these reasons, the Agencies are issuing the proposed
Guidelines to provide further clarification of supervisory expectations
for regulated institutions' appraisal and evaluation programs.
Independent and reliable collateral valuations are core to a
regulated institution's real estate credit decisions. Therefore, the
proposed Guidelines are intended to re-enforce the importance of sound
collateral valuation practices that the Agencies' appraisal regulations
mandate. The Agencies believe that the proposed Guidelines further
clarify their long standing expectations for an institution's appraisal
and evaluation program, which are necessary to promote safe and sound
real estate lending activity.
II. Principal Elements of the Guidelines
The proposed Guidelines provide guidance on elements of a safe and
sound appraisal and evaluation program, including the Agencies'
supervisory expectations concerning the independence of an
institution's appraisal and evaluation program from influence by the
borrower or the loan production staff, the competence of individuals
who perform appraisals and evaluations, standards for the development
and reporting of appraisals and evaluations, and an institution's
collateral review function. The proposed Guidelines also provide
guidance and expectations for risk management principles and control
measures for institutions' appraisal and evaluation programs.
The proposed Guidelines would supersede the 1994 Guidelines and
reflect guidance issued by the Agencies over the past several years on
independence of the appraisal and evaluation program, appraisals for
residential tract developments, and the USPAP Scope of Work Rule. The
core principles of the 1994 Guidelines have been retained. Further, the
format of the 1994 Guidelines has been retained in the proposed
Guidelines to make it easier for regulated institutions and examiners
to find the material that has not been revised.
The following discussion summarizes the proposed major revisions to
the 1994 Guidelines.
Independence of the Appraisal and Evaluation Program. The proposed
Guidelines emphasize the importance of the independence of an
institution's appraisal and evaluation program from influence by the
loan production process or borrower. For small and rural institutions,
where complete separation of the collateral valuation function and the
loan production process may not be possible, the proposed Guidelines
discuss prudent minimal safeguards and clarify that lending staff
should abstain from the approval of the loan on which
[[Page 69650]]
they perform, order, or review an appraisal or evaluation.
Minimum Appraisal Standards. The proposed Guidelines provide
further clarification of the five appraisal standards in the Agencies'
appraisal regulations, as follows. First, the Agencies' appraisal
regulations provide that USPAP sets the minimum appraisal standards for
federally related transactions. The proposed Guidelines provide
clarification of those appraisal standards above and beyond USPAP that
are required by the Agencies' appraisal regulations. Second, the
Agencies' appraisal regulations require that appraisals for federally
related transactions be written and contain sufficient information to
support the institution's credit decision. The proposed Guidelines
reflect an expanded discussion of the Agencies' expectations for the
content of appraisals that will satisfy this requirement. Third, the
Agencies' appraisal regulations require that appraisals analyze and
report deductions and discounts for a loan to finance proposed
construction or renovation, partially leased buildings, non-market
lease terms, and tract developments with unsold units. The proposed
Guidelines provide more detail on the application of this standard by
property type, both commercial and residential. Fourth, the Agencies'
appraisal regulations require that appraisals be based upon the
regulatory definition of market value. The discussion of market value
in the 1994 Guidelines has been expanded in the proposed Guidelines to
link the appraisal regulatory definition of market value with the
definition of value in the Agencies' real estate lending standards
guidelines.\9\ The proposed Guidelines also address the definition of
``market value'' in an appraisal for a loan to finance a development
and construction real estate project. Fifth, the Agencies' appraisal
regulations require that an institution use the services of a state-
certified or licensed appraiser. The proposed Guidelines remind
institutions that an appraiser's credential is not the sole
determination of competency and that institutions should consider the
appraiser's education and experience to assess his or her competency
for a given appraisal assignment. Further, the proposed Guidelines
remind institutions to convey to an appraiser that the requirements of
the Agencies' minimum appraisal standards are considered assignment
conditions for an appraiser under USPAP.
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\9\ OCC 12 CFR part 34, subpart D; FRB: 12 CFR part 208,
Appendix C; FDIC 12 CFR part 365; and OTS 12 CFR 560.100 and
560.101. 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.
12 CFR 701.21; 12 CFR part 723.
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Appraisal Development and Appraisal Reports. These sections were
revised to reflect revisions to USPAP that the Appraisal Standards
Board implemented in July 2006 to eliminate the USPAP Departure Rule
and to adopt the USPAP Scope of Work Rule. The proposed Guidelines
incorporate the guidance provided by the Agencies in the June 2006
Interagency Statement on the 2006 Revisions to USPAP.\10\ The proposed
Guidelines remind institutions that while the appraiser is responsible
for complying with USPAP and its Scope of Work Rule, the institution is
responsible for complying with the Agencies' appraisal regulations and
should discuss its needs and expectations for the appraisal with the
appraiser. Further, the discussion on appraisal reports no longer
refers to specific USPAP reporting formats (that is, self-contained,
summary, and restricted appraisal reports). Rather, the discussion
addresses the level and adequacy of information and analysis in the
report that is necessary to comply with both USPAP and the regulatory
appraisal requirement to provide sufficient information to support the
institution's credit decision. Reference to the revised USPAP
terminology has been included in a new proposed Appendix C, which
provides a glossary of terms. The Agencies understand that the
Appraisal Standards Board may consider revisions to the USPAP reporting
formats so this discussion was worded broadly to allow for possible
USPAP changes.
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\10\ See supra, note 8.
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Evaluation Content. Under the Agencies' appraisal regulations, an
institution may obtain or perform an evaluation of real property
collateral in lieu of an appraisal for transactions that qualify for
certain appraisal exemptions. This section describes the Agencies'
expectations on the information and analysis that should be included in
an evaluation. An institution should obtain more detailed evaluations
for higher risk real estate-related financial transactions or as its
portfolio risk increases. Further, this section was revised to reflect
the inclusion of a new appendix (Appendix B) in the proposed Guidelines
on evaluation alternatives. This new appendix provides a discussion of
appropriate practices and controls regarding an institution's use of
AVMs and tax assessment valuations as evaluation alternatives. This
section also addresses the Agencies' expectations for institutions to
establish a process and procedures for determining the appropriate use
of evaluation alternatives for a given transaction or lending activity,
considering associated risk.
Reviewing Appraisals and Evaluations. This is a new section in the
proposed Guidelines and is based on material in the Program Compliance
section in the 1994 Guidelines, the 2003 Interagency Statement on
Independent Appraisal and Evaluation Functions, and a related statement
issued by the Agencies in 2005 addressing frequently asked
questions.\11\ While the proposed Guidelines retain a Program
Compliance section concerning effective internal controls, the new
section emphasizes the importance of an institution's review function
to promote quality appraisals and evaluations. The Agencies expect
institutions to maintain a robust review process for ensuring that
appraisals and evaluations support their credit decisions. The program
should provide for an increasingly comprehensive review of appraisals
supporting transactions that pose higher credit risk to the
institution. This expectation for a risk-based program recognizes the
importance of the collateral valuation process to promoting sound
credit underwriting decisions. As explained in the proposed Guidelines,
the scope of the review will depend upon the type and risk of the
transaction and the process through which the appraisal or evaluation
is obtained. The proposed Guidelines provide guidance on the review
process, including documentation, independence, review procedures, and
reviewers' qualifications. The proposed Guidelines also indicate that
an institution with prior approval from its primary regulator may
employ various techniques, such as automated tools or sampling methods,
for performing pre-funding reviews of appraisals or evaluations
supporting lower risk single-family residential mortgages. Finally, the
proposed Guidelines outline expectations for a compliance program to
establish effective internal controls that promote compliance with the
Agencies' appraisal regulations, supervisory guidelines and
institutions' internal policies.
---------------------------------------------------------------------------
\11\ See supra, note 8.
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Portfolio Monitoring and Updating Collateral Valuations. This
section was revised to emphasize the importance of sound portfolio
monitoring principles that set forth criteria for when an institution
should replace or update collateral valuations for existing real
[[Page 69651]]
estate loans. In establishing criteria, an institution should consider
the appropriateness of the valuation tool or methodology, the age of
the original appraisal or evaluation, property type, current market
conditions, and current use of the property. Further, the proposed
Guidelines remind institutions that as the reliance on real estate
becomes more important on an existing credit, there is a need for
timely information to assess the value of the real estate collateral
and the associated risk to the institution. This section also explains
that examiners have the right to require an institution to obtain an
appraisal or evaluation when there are safety and soundness concerns on
an existing real estate secured credit.
Appraisal Exemptions (Appendix A). This new appendix provides
further clarification on real estate-related financial transactions
exempted from the Agencies' appraisal regulations. This discussion is
based on the preamble to the Agencies' 1994 regulations and responds to
the questions the Agencies have received over the years concerning
exemptions to their appraisal requirements.
Evaluation Alternatives (Appendix B). This new appendix reflects
the discussion on the use of AVMs and tax assessment valuations as
evaluation alternatives in the Interagency Credit Risk Management
Guidance for Home Equity Lending.\12\ Appendix B provides guidance on
the process for selecting and validating a model. The appendix also
provides a framework, in the form of a set of questions, that
institutions may consider for determining when an AVM may be an
acceptable evaluation alternative for a given transaction.
---------------------------------------------------------------------------
\12\ OCC: 2005-22; FRB: SR letter 05-11; FDIC: FIL 45-2005; OTS:
CEO Memorandum No. 222; and NCUA: NCUA Letter to Credit Unions 05-
CU-07.
---------------------------------------------------------------------------
Glossary of Terms (Appendix C). The proposed Guidelines contain a
new glossary of various terms used in the Guidelines and appraisal
practice to aid institutions in understanding the Guidelines. Many of
these terms are already defined in the Agencies' appraisal regulations
and in USPAP.
III. Request for Comment
The Agencies are requesting public comment on all aspects of the
proposed Guidelines. In particular, the Agencies request comment on the
clarity of the proposed Guidelines regarding the interpretations of the
thirteen appraisal exemptions discussed in Appendix A.\13\ The Agencies
further request comment on the appropriateness of risk management
expectations and controls in the evaluation process including those
discussed in Appendix B of the proposed Guidelines. The Agencies also
seek comment on the expectations in the proposed Guidelines on
reviewing appraisals and evaluations. In particular, the Agencies seek
specific comment on whether the use of automated tools or sampling
methods that the proposed Guidelines allow for reviews of appraisals or
evaluations supporting lower risk single-family residential mortgages
is 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 the institution's appraisal
process for those low risk mortgage transactions.
---------------------------------------------------------------------------
\13\ In light of recent events in the residential mortgage
market, the Agencies are interested in comments on the exemption
from the regulatory appraisal requirements for residential real
estate transactions involving U.S. government sponsored agencies.
---------------------------------------------------------------------------
The text of the proposed Guidelines, entitled proposed 2008
Interagency Appraisal and Evaluation Guidelines, is as follows:
Purpose
The Office of the Comptroller of the Currency (OCC), the Board of
Governors of the Federal Reserve System (FRB), the Federal Deposit
Insurance Corporation (FDIC), the Office of Thrift Supervision (OTS),
and the National Credit Union Administration (NCUA) (the Agencies) are
jointly issuing these Interagency Appraisal and Evaluation Guidelines
(Guidelines), which supersede the 1994 Interagency Appraisal and
Evaluation Guidelines. These Guidelines address supervisory matters
relating to real estate appraisals and evaluations used to support real
estate-related financial transactions.\14\ Further, these Guidelines
provide federally regulated institutions and examiners clarification on
the Agencies' expectations for prudent appraisal and evaluation
policies, procedures, and practices.
---------------------------------------------------------------------------
\14\ These Guidelines pertain to all real estate-related
financial transactions originated or purchased by a regulated
institution or its operating subsidiary for its own portfolio or as
assets held for sale, including activities of commercial and
residential real estate mortgage operations, capital markets groups,
and asset securitization and sales units.
---------------------------------------------------------------------------
Background
Title XI of the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (FIRREA) \15\ requires each Agency to prescribe
appropriate standards for the performance of real estate appraisals in
connection with ``federally related transactions,'' \16\ 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.\17\ 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.\18\ An Agency
may require compliance with additional appraisal standards if it makes
a determination that such additional standards are required in order to
properly carry out its statutory responsibilities.\19\ Each of the
Agencies has adopted additional appraisal standards.\20\
---------------------------------------------------------------------------
\15\ Public Law 101-73, 103 Stat. 183 (1989).
\16\ 12 U.S.C. 3339.
\17\ 12 U.S.C. 3350(4).
\18\ Supra to Note 3.
\19\ Id.
\20\ OCC: 12 CFR part 34, subpart C; FRB: 12 CFR part 208,
subpart E, and 12 CFR part 225, subpart G; FDIC: 12 CFR part 323;
OTS: 12 CFR part 564; and NCUA: 12 CFR part 722.
---------------------------------------------------------------------------
The Agencies' real estate lending regulations and guidelines,\21\
issued pursuant to section 304 of the Federal Deposit Insurance
Corporation Improvement Act of 1991 (FDICIA), 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.\22\ The real estate lending guidelines
state that an institution's real estate lending program should include
an appropriate real estate appraisal and evaluation program.
---------------------------------------------------------------------------
\21\ OCC: 12 CFR part 34, subpart D; FRB: 12 CFR part 208,
subpart E; FDIC: 12 CFR part 365; and OTS: 12 CFR 560.100 and
560.101.
\22\ 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.
12 CFR 701.21; 12 CFR part 723.
---------------------------------------------------------------------------
Supervisory Policy
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. Examiners will
consider the institution's size and nature of its real estate-related
activities when assessing the appropriateness of its program.
When analyzing individual transactions, examiners will review an
appraisal or evaluation to determine whether the methods, assumptions,
and value conclusions are reasonable. Examiners also determine whether
the appraisal or evaluation complies with the Agencies' appraisal
regulations and
[[Page 69652]]
supervisory guidelines as well as the institution's policies. Examiners
will review the steps taken by an institution to ensure that the
persons who perform the institution's appraisals and evaluations are
qualified and are not subject to conflicts of interest. Institutions
that fail to maintain a sound appraisal and evaluation program or to
comply with the Agencies' appraisal regulations and supervisory
guidelines will be cited in supervisory letters or examination reports
and may be criticized for unsafe and unsound banking practices.
Deficiencies will require appropriate corrective action.
Appraisal and Evaluation Program
An institution's board of directors or its designated committee is
responsible for adopting and reviewing policies and procedures that
establish an effective real estate appraisal and evaluation program.
The program should:
Provide for the independence of the persons ordering,
performing, and reviewing appraisals or evaluations;
Establish selection criteria and procedures to evaluate
and monitor the ongoing performance of persons who perform appraisals
or evaluations;
Ensure that appraisals contain sufficient information to
support the credit decision;
Maintain criteria for content and appropriate use of
evaluations;
Provide for the receipt and review of the appraisal or
evaluation report in a timely manner to facilitate the credit decision;
Develop criteria to assess the validity of existing
appraisals or evaluations to support subsequent transactions;
Implement internal controls that promote compliance with
these program standards; and
Establish criteria for obtaining appraisals or evaluations
for transactions that are not otherwise covered by the appraisal
requirements of the Agencies' appraisal regulations.
Independence of the Appraisal and Evaluation Program
An institution should maintain standards of independence as part of
an effective collateral valuation program (both appraisal and
evaluation functions) for all of its real estate lending activity. The
collateral valuation program is an integral component of the credit
underwriting process and, therefore, should be isolated from influence
by the institution's loan production staff. An institution should
establish reporting lines independent of loan production for staff that
order, accept, and review appraisals and evaluations.
Persons who perform appraisals must be independent of the loan
production and collection processes and have no direct or indirect
interest, financial or otherwise, in the property or transaction. These
standards of independence also should apply to persons who perform
evaluations. While the information provided to the appraiser by the
institution should not unduly influence the appraiser, the institution
may provide a copy of the sales contract for purchase transactions.
Further, an institution's policies and controls should ensure that the
institution does not communicate a predetermined, expected, qualifying,
or owner's estimate of value, or a loan amount or target loan-to-value
ratio to a person performing an appraisal or evaluation.
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. 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. In
such cases, another loan officer, other officer, or director of the
institution may be the only person qualified to analyze the real estate
collateral. To ensure their independence, such lending officials,
officers, or directors should abstain from any vote or approval
involving loans on which they performed, ordered, or reviewed the
appraisal or evaluation.\23\
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\23\ NCUA has recognized that it may be necessary for credit
union loan officers or other officials to participate in the
appraisal or evaluation function although it may be sound business
practice to ensure no single person has the sole authority to make
credit decisions involving loans on which the person ordered or
reviewed the appraisal or evaluation. 55 FR 5614, 5618 (February 16,
1990), 55 FR 30193, 30206 (July 25, 1990).
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Selection of Persons Who May Perform Appraisals and Evaluations
An institution's collateral valuation program should establish
criteria to select, evaluate, and monitor the performance of persons
who perform an appraisal or evaluation. The criteria should ensure
that:
The institution's selection process is nonpreferential and
unbiased;
The person selected possesses the requisite education,
expertise, and competence to complete the assignment;
The work performed by persons providing appraisal and
evaluation services is periodically reviewed by the institution;
The person selected is capable of rendering an unbiased
opinion;
The person selected is independent and has no direct,
indirect, or prospective interest, financial or otherwise, in the
property or the transaction; and
The person selected to perform an appraisal holds the
appropriate state certification or license.
Under the Agencies' appraisal regulations, an institution or its
agent must directly select and engage appraisers. There also should be
independence in the selection of persons who perform evaluations.
Further, the person who selects or oversees the selection of appraisers
or persons providing evaluation services should be independent from the
loan production area. Independence is compromised when a borrower or
loan production personnel recommends or selects a person to perform an
appraisal or evaluation. An institution's use of a borrower-ordered
appraisal violates the Agencies' appraisal regulations.
Institutions should use written engagement letters when ordering
appraisals, particularly for large, complex, or out-of-area commercial
real estate properties. An engagement letter facilitates communication
with the appraiser and documents the expectations of each party to the
appraisal assignment. An institution should include the engagement
letter in its permanent credit file. To avoid the appearance of any
conflict of interest, appraisal or evaluation development work should
not commence until the institution has selected a person for the
assignment.
Transactions That Require Appraisals
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.\24\ The Agencies reserve the right to require an
appropriate appraisal under their appraisal regulations to address
safety and soundness concerns in a
[[Page 69653]]
transaction. (See Appendix A--Appraisal Exemptions.) \25\
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\24\ In order to facilitate recovery in designated major
disaster areas, subject to safety and soundness considerations,
Section 2 of the Depository Institutions Disaster Relief Act of
1992, Public Law 102-485, 106 Stat. 2771 (October 23, 1992) provides
the Agencies with the authority to waive certain appraisal
requirements for up to three years after a Presidential declaration
of a natural disaster.
\25\ 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). NCUA requires a written estimate of market value for all
real estate-related transactions valued at the appraisal threshold
or less, or that involve existing credit where there is no advance
of monies and material change in the condition of the property. 12
CFR 722.3(d).
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Minimum Appraisal Standards
The Agencies' appraisal regulations include the following five
minimum standards for the preparation of an appraisal. (See Appendix
C--Glossary for terminology used in these guidelines.)
The appraisal must:
Conform to generally accepted appraisal standards as
evidenced by the Uniform Standards of Professional Appraisal Practice
(USPAP) promulgated by the Appraisal Standards Board of the Appraisal
Foundation unless principles of safe and sound banking require
compliance with stricter standards.
Although allowed by USPAP, the Agencies' appraisal regulations do
not permit an appraiser to appraise any property in which the appraiser
has an interest, direct or indirect, financial or otherwise. Further,
the appraisal must contain an opinion of market value as defined in the
Agencies' appraisal regulations. Under USPAP, the appraisal must
contain a certification that the appraiser has complied with USPAP. An
institution may refer to the USPAP certification to confirm whether the
appraiser is independent of the property and the transaction, as
required by the Agencies' appraisal regulations. Under the Agencies'
appraisal regulations, the result of an Automated Valuation Model
(AVM), by itself, 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.
Be written and contain sufficient information and analysis
to support the institution's decision to engage in the transaction.
An institution should obtain an appraisal that is appropriate for
the particular federally related transaction, considering the risk and
complexity of the transaction. The level of detail should be sufficient
to understand the appraiser's analysis and opinion of the property's
market value. 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 and have three
different reporting options available. (See Appendix C--Glossary of
Terms describing reporting options.) However, an institution should
ensure that the scope of work is appropriate for the assignment. The
appraiser's scope of work should be consistent with the valuation
methodology employed for similar property types, market conditions, and
transactions. The content and format of the appraisal report must
contain sufficient information and analysis to support the
institution's decision to engage in the transaction. The appraisal
report should contain sufficient disclosure of the nature and extent of
inspection and research performed to verify the property's condition
and support the appraiser's opinion of market value. The result of an
AVM certified by an appraiser does not, by itself, meet this standard.
Analyze and report appropriate deductions and discounts
for proposed construction or renovation, partially leased buildings,
non-market lease terms, and tract developments with unsold units.
This standard is designed to avoid having appraisals prepared using
unrealistic assumptions and inappropriate methods. An appraisal must
include the market value of the property and should reflect the
property's condition in its actual physical condition, use, and zoning
designation, as of the effective date of the appraisal.
[cir] Proposed Construction or Renovation. For properties where
improvements are to be constructed or rehabilitated, an institution may
request a prospective market value as completed and as stabilized.
While an institution may request the appraiser to provide the sum of
retail sales for a proposed development, this value is not the market
value of the property for the purpose of the Agencies' appraisal
regulations.
[cir] Partially Leased Buildings. For proposed and partially leased
rental developments, the appraiser must make appropriate deductions and
discounts. Appropriate deductions and discounts should include items
such as leasing commission, rent losses, tenant improvements, and
entrepreneurial profit.
[cir] Non-market Lease Terms. For properties subject to leases with
terms that do not reflect current market conditions, the appraiser must
make appropriate deductions and discounts, which should be based on
stabilized occupancy at prevailing market terms.
Tract Developments With Unsold Units
Raw Land. The appraiser must provide an opinion of value
for raw land based on its current condition and existing zoning that
includes appropriate deductions and discounts. Appropriate deductions
and discounts should include items such as holding costs, marketing
costs, and entrepreneurial profit.
Developed Lots. For proposed developments of five or more
residential lots, the appraiser must analyze and report appropriate
deductions and discounts. 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.
The estimated sales absorption period should reflect the expected
holding period before development commences as well as the time frame
for the actual development and sale of the lots.
Attached or Detached Single-family Homes. For proposed
construction and sale of five or more attached or detached single-
family homes in the same development, the appraiser must analyze and
report appropriate deductions and discounts. Appropriate deductions and
discounts should reflect holding costs, marketing costs, and
entrepreneurial profit during the sales absorption period of the
completed units. 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. However, the
transaction should be supported by an appraisal that analyzes and
reports appropriate deductions and discounts if any of the individual
units are not completed and sold within the 12-month time frame.
Condominiums. For proposed construction and sale of a
condominium building with five or more units, the appraisal must
reflect appropriate deductions and discounts. Appropriate deductions
and discounts should include holding costs, marketing costs, and
entrepreneurial profit during the sales absorption period of the
completed units. 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 units if the
institution can demonstrate through an
[[Page 69654]]
independently obtained feasibility study or market analysis that all
units collateralizing the loan can be constructed and sold within 12
months. However, the transaction should be supported by an appraisal
that analyzes and reports appropriate deductions and discounts if any
of the individual units are not completed and sold within the 12-month
time frame.
Be based upon the definition of market value set forth in
the appraisal regulation.
Each appraisal must contain an estimate of market value, as defined
by the Agencies' appraisal regulations. The Agencies' definition of
market value assumes that the price is not affected by undue stimulus,
which would allow the value of the real property to be increased by
favorable financing or seller concessions. Further, the market value
should not include a going concern value or a special value to a
specific property user. An appraisal may contain separate opinions of
value for such items so long as they are clearly identified and
disclosed.
The estimate of market value should consider the real property's
current physical condition, use, and zoning as of the appraisal date.
For a transaction financing construction or renovation of a building,
an institution would generally request an appraiser to provide the
property's market value in its ``as is'' condition as of the
appraisal's effective date and the property's ``prospective'' market
values at the time development is expected to be completed and at the
time stabilized occupancy is projected to be achieved.\26\ Prospective
market value opinions should be based upon current and reasonably
expected market conditions. When an appraisal includes prospective
value opinions, there should be a point of reference to the market
conditions and time frame on which the appraiser based the
analysis.\27\
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\26\ 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).
\27\ See USPAP, Statement 4 on Prospective Value Opinions, for
further explanation.
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Be performed by state-certified or licensed appraisers in
accordance with requirements set forth in the appraisal regulation.
In determining competency for a given appraisal assignment,
institutions should consider an appraiser's education and experience.
An institution should confirm that the appraiser holds a valid
credential from the appropriate state appraiser regulatory authority.
An institution should not base competency solely on the appraiser's
credentialing. When ordering appraisals, an institution should convey
to an appraiser that the Agencies' minimum appraisal standards must be
followed. From the appraiser's perspective, these minimum appraisal
standards are considered assignment conditions under USPAP.
Appraisal Development
The Agencies' appraisal regulations require appraisals for
federally related transactions to comply with USPAP. Consistent with
the USPAP Scope of Work Rule,\28\ the appraisal must reflect an
appropriate scope of work that provides for ``credible'' assignment
results. The appraisal's scope of work should reflect 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.
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\28\ See USPAP Scope of Work Rule, Advisory Opinions 28 and 29.
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While an appraiser must comply with USPAP and establish the scope
of work in an appraisal assignment, an institution is responsible for
complying with the Agencies' appraisal regulations and obtaining an
appraisal that provides sufficient information to support its decision
to engage in the transaction. 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. Such
discussions should assist the appraiser in establishing the scope of
work and form the basis of the institution's engagement letter, as
appropriate. An institution should not allow lower cost or the speed of
delivery time to influence the appraiser's determination of an
appropriate scope of work for an appraisal supporting a federally
related transaction.
If applicable, the appraisal should include three approaches (cost,
income, and sales comparison) to analyze the value of a property, and
should reconcile the results of each approach to estimate market value.
An appraisal also should reflect an analysis of the property's sales
history and an opinion as to the highest and best use of the property.
Further, USPAP requires the appraiser to disclose whether or not the
subject property was inspected and whether anyone provided significant
assistance to the appraiser signing the appraisal report.
Appraisal Reports
An institution is responsible for identifying the appropriate
appraisal reporting option to support its credit decisions. The
institution should consider the risk, size, and complexity of the
transaction and the real estate collateral when determining its
appraisal engagement instructions to an appraiser.
USPAP provides various reporting options that an appraiser may use
to present the results of appraisals. The major difference among these
reporting options is the level of detail presented in the report. A
reporting 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. Therefore, the Agencies believe
that such reports will not be appropriate to support most federally
related transactions. However, these less detailed reports may be
appropriate for real estate collateral monitoring or in circumstances
when an institution's collateral valuation program requires an
evaluation. (See Appendix C--Glossary of Terms describing reporting
options.)
Regardless of the reporting option, the appraisal report should
contain sufficient detail to allow the institution to understand the
scope of work performed. Sufficient information should include the
disclosure of research and analysis performed, as well as disclosure of
the research and analysis not performed together with the rationale for
its omission.
Transactions That Require Evaluations
An institution may obtain or perform an evaluation of real property
collateral in lieu of an appraisal for transactions that qualify for
certain exemptions under the Agencies' appraisal regulations. These
exemptions include a transaction that:
Has a transaction value equal to or less than the
appraisal threshold.
Is a business loan with a transaction value equal to or
less than the business loan threshold, and is not dependent on the sale
of, or rental income derived from, real estate as the primary source of
repayment.\29\
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\29\ NCUA regulations do not contain an exemption from the
appraisal requirements specific to member business loans.
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Involves an existing extension of credit at the lending
institution, provided that:
[cir] There has been no obvious and material change in the market
conditions or physical aspects of the
[[Page 69655]]
property that threaten the adequacy of the institution's real estate
collateral protection after the transaction, even with the advancement
of new monies; or
[cir] There is no advancement of new monies other than funds
necessary to cover reasonable closing costs.
Qualifications of Persons Who Perform Evaluations
An institution should select persons who are independent of the
loan production process and the transaction, and have real estate-
related training and experience to perform evaluations. These persons
should have knowledge of the market and property type relevant to the
subject property. Examples include persons with appraisal experience,
real estate lending or sales professionals, agricultural extension
agents, or foresters.
An institution should document the qualifications and relevant
experience of persons selected to perform evaluations. An institution
should have adequate controls to confirm that the person performing the
evaluation is qualified and independent of the property, the
transaction, and the loan production function. If an institution relies
on an external, third party to perform an evaluation, the institution
should communicate its evaluation criteria to the third party and have
adequate controls to confirm compliance with its internal policies and
these Guidelines. Although not required, an institution may use state-
certified or licensed appraisers to perform evaluations. Institutions
should refer to USPAP Advisory Opinion 13 for guidance on appraisers
performing evaluations of real property collateral.
Evaluation Content
An evaluation should provide an estimate of the market value of the
collateral to support the institution's credit decision or portfolio
management. An institution should establish policies and procedures for
determining an appropriate collateral valuation methodology for a given
transaction considering associated risks. Further, these policies and
procedures should address the process for selecting the most reliable
evaluation method or tool for a transaction rather than using the
method or tool that renders the highest value.
An evaluation should support the institution's decision to engage
in the transaction. While evaluation methodologies and tools may vary,
all evaluations, at a minimum, should:
Identify the location of the property;
Provide a description of the property and its current and
projected use;
Indicate the source(s) of information used to value the
property, including, but not limited to:
[cir] External data sources;
[cir] Previous sales data;
[cir] Photos of the property;
[cir] Property tax assessment data;
[cir] Comparable sales information;
[cir] Description of the neighborhood; and
[cir] Local market conditions;
Disclose the analysis that was performed and the
supporting information used to value the property;
Provide an estimate of the property's market value in its
actual physical condition, use and zoning designation as of an
effective date, with any limiting conditions, if applicable;
Indicate the preparer's name and contact information; and
Be documented in the credit file. Documentation content
should be appropriate for the valuation methodology and tool used for
the transaction.
The institution also should establish criteria for determining the
extent to which an inspection of the collateral is necessary to
determine that the property is in acceptable condition for its current
or projected use. Further, an institution should obtain more detailed
evaluations for higher risk real estate-related financial transactions,
or as its portfolio risk increases. A more detailed evaluation may be
necessary for certain transactions such as those involving:
Loans with combined loan-to-value ratios in excess of the
supervisory loan-to-value limits;
Atypical properties;
Properties outside the institution's traditional lending
market;
Properties in a transitional market or location;
Subsequent transactions with significant risk to the
institution; or
Borrowers with high risk characteristics.
See Appendix B--Evaluation Alternatives for further guidance on
evaluation alternatives such as AVMs and tax assessment values.
Accepting an Appraisal from Another Institution
An institution may use an appraisal that was prepared by an
appraiser engaged directly by another regulated or financial services
institution, provided the institution determines that the appraisal is
valid, conforms to the Agencies' appraisal regulations, and is
otherwise acceptable. Such determinations should be completed by the
acquiring institution prior to accepting the appraisal and documented
in the credit file.
Appraisals that support federally related transactions must meet
the standards of independence within the Agencies' appraisal
regulations. Among other considerations, when accepting an appraisal
from another institution, the acquiring institution should obtain
documentation that the appraiser was engaged directly by the
institution transferring the appraisal and had no direct, indirect, or
prospective interest, financial or otherwise, in the property or
transaction. If an institution relies on a third party originator or
its agent for the appraisal, the standard of independence still
applies. For example, an engagement letter should confirm that the
institution transferring the appraisal, not the borrower, was the
original client that selected the appraiser and ordered the appraisal.
An institution must not accept an appraisal that has been
readdressed or altered by the appraiser with the intent to conceal the
original client. Altering an appraisal report in a manner that conceals
the original client or intended users of the appraisal is misleading
and violates the Agencies' appraisal regulations and USPAP.
Validity of Appraisals and Evaluations
The Agencies allow an institution to use an existing appraisal or
evaluation to support a subsequent transaction. Therefore, an
institution should establish criteria for assessing whether an existing
appraisal or evaluation remains valid. Such criteria will vary
depending upon the condition of the property and the marketplace, and
the nature of the transaction. The documentation in the credit file
should provide the facts and analysis to support the institution's
conclusion that the existing appraisal or evaluation remains valid.
Factors that could cause changes to originally reported values include:
Passage of time;
Volatility of the local market;
Availability of financing;
Inventory of competing properties;
Improvements to the subject property or competing
properties;
Lack of maintenance of the subject or competing
properties;
Changes in zoning; or
Environmental contamination.
Third Party Arrangements
Effective program oversight should address any arrangements with a
third party, acting as agent for the institution, providing appraisal
and evaluation services. An institution should monitor and periodically
assess these
[[Page 69656]]
arrangements for compliance with program standards and the Agencies'
guidance on third party arrangements.\30\ If deficiencies are
discovered, the institution should take remedial action in a timely
manner.
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\30\ See OCC Bulletin 2001-47, Third-Party Relationships
(November 1, 2001); OTS Thrift Bulletin 82a, Third Party
Arrangements (September 1, 2004); NCUA Letter to Credit Unions: 01-
CU-20, Due Diligence Over Third Party Service Arrangements (November
2001), 07-CU-13, Supervisory Letter-Evaluation Third Party
Relationships (December 2007), 08-CU-09, Evaluating Third Party
Relationships Questionnaire (April 2008); and FDIC Financial
Institution Letter 44-2008, Guidance for Managing Third-Party Risk
(June 2008).
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Reviewing Appraisals and Evaluations
The Agencies' appraisal regulations specify that appraisals must
contain sufficient information and analysis to support an institution's
decision to engage in a credit transaction. As part of the credit
approval process, an institution should assess the acceptability of the
appraisal or evaluation as well as compliance with the Agencies'
appraisal regulations and Guidelines and its own internal policies.
This review should be performed prior to the final credit decision and
ensure that the appraisal or evaluation adequately supports approval of
the credit. An institution's appraisal and evaluation review procedures
should address the role, independence, and qualifications of the
reviewer; the techniques, timing and level of review; documentation
requirements; and the appropriate resolution of deficiencies. Review
procedures also should address the reviewer's responsibility to verify
that the methods, assumptions, data sources, and conclusions are
reasonable and appropriate for the particular transaction and property.
Persons who review appraisals and evaluations should be independent
of the transaction and possess the requisite education, expertise, and
competence to perform the review commensurate with the complexity of
the transaction. Small or rural institutions or branches with limited
staff should implement prudent safeguards for accepting appraisals and
evaluations when absolute lines of independence cannot be achieved. In
these situations, the review may be part of the originating loan
officer's overall credit analysis, as long as the originating loan
officer abstains from directly or indirectly approving or voting to
approve the loan.
Institutions should implement a risk-focused approach to determine
the depth of the review needed to ensure that appraisals and
evaluations are acceptable. The scope of review will depend upon the
type and risk of the transaction and the process through which the
appraisal and evaluation is obtained (whether directly or from another
regulated or financial services institution). Appraisals and
evaluations supporting complex properties or high-risk transactions
should be reviewed more comprehensively to assess the technical quality
of the appraiser's analysis prior to making a final credit decision.
For example, a risk-focused approach for commercial mortgages should
provide for a comprehensive review of those appraisals supporting
transactions that pose higher credit risk to the institution. These
transactions may include large-dollar credits, loans secured by complex
or specialized properties, and properties outside the institution's
traditional lending market. The depth to which reviews are completed
for lower risk transactions should be commensurate with the size, type
and complexity of the underlying credit transaction supported by the
appraisal or evaluation.
With prior approval from its primary regulator, an institution may
employ various techniques, such as automated tools or sampling methods,
for performing pre-funding reviews of appraisals or evaluations
supporting lower risk single-family residential mortgages. When using
such techniques, an institution should maintain sufficient data and
employ appropriate screening parameters to provide adequate quality
assurance and should ensure that the work of all appraisers and persons
performing evaluations is periodically reviewed.
The institution should document the content of the review in the
credit file. This documentation may be presented in a checklist or
narrative format as appropriate. If deficiencies are noted by the
reviewer, they should be addressed by the person who prepared the
appraisal or evaluation or another qualified, independent person. An
institution should not accept appraisals or evaluations that do not
adequately support the opinion of market value and should replace
unreliable appraisals or evaluations prior to the final credit
decision.
An appraisal review performed by a state-certified or licensed
appraiser must comply with USPAP. Any changes to an appraisal's
estimate of value are permitted only as a result of a review conducted
by an appropriately qualified state-certified or licensed appraiser in
accordance with USPAP.
Program Compliance
An institution's appraisal and evaluation policies should establish
effective internal controls that promote compliance with the Agencies'
appraisal regulations and supervisory guidelines. The compliance
process should include a system of adequate controls, verification and
testing that ensures the reliability of an institution's appraisals and
evaluations. These controls should be commensurate with the risk of the
institution's overall real estate lending activities. Further, the
persons responsible for the compliance function should be insulated
from any influence by loan production staff.
The compliance process should ensure that all appraisers and
persons performing evaluations are subject to periodic evaluation of
the quality of their work. This information should provide a basis for
evaluating whether the institution should continue to retain the
services of the appraiser or the person performing the evaluation.
Portfolio Monitoring and Updating Collateral Valuations
A prudent portfolio monitoring program should include criteria for
determining when to obtain a new appraisal or evaluation in accordance
with the Agencies' real estate lending standards. Among other
considerations, these criteria may be based on changes in market
conditions or deterioration in the credit since origination. Moreover,
as an institution's reliance on collateral becomes more important, an
institution's policies and procedures should ensure that timely
information is available to management for assessing collateral and
associated risk. The policy should delineate the valuation tool or
methodology and consider the property type, current market conditions,
current use of the property, and the age of the original appraisal or
evaluation. For transactions that are otherwise exempt from the
Agencies' appraisal requirements, institutions should establish
policies for obtaining appraisals or evaluations to meet risk
management objectives.
Under the Agencies' appraisal regulations, examiners have the right
to require an institution to obtain an appraisal or evaluation when
there are safety and soundness concerns on an existing real estate
secured credit. Therefore, in determining the classification of a
problem real estate credit, an examiner may direct an institution to
obtain a new appraisal or evaluation in order to have sufficient
information to understand the nature of the problems. Examiners would
be
[[Page 69657]]
expected to provide an institution with a reasonable amount of time to
obtain a new appraisal or evaluation.
Referrals
An institution should make referrals directly to state appraiser
regulatory authorities when it suspects that a state-certified or
licensed appraiser failed to comply with USPAP, applicable state laws,
or engaged in other unethical or unprofessional conduct. Examiners
finding evidence of unethical or unprofessional conduct by appraisers
should forward their findings and recommendations to their supervisory
office for appropriate disposition and referral to the state, as
necessary.
Appendix A--Appraisal Exemptions
1. Appraisal Threshold
For transactions with a transaction value equal to or less than the
appraisal threshold, the Agencies require an evaluation consistent with
safe and sound banking practices in lieu of an appraisal.\31\
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\31\ NCUA's appraisal regulation requires a written estimate of
market value, performed by a qualified and experienced person who
has no interest in the property, for transactions equal to or less
than the appraisal threshold and transactions involving an existing
extension of credit. 12 CFR 722.3(d).
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2. Abundance of Caution
An institution may take a lien on real estate and be exempt from
obtaining an appraisal if the lien on real estate is taken by the
lender in an abundance of caution. This exemption is intended to have
limited application, especially for real estate loans secured by
residential properties in which the real estate is the only form of
collateral. 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 institution's credit analysis should verify the
reliability of these repayment sources and conclude that knowledge of
the market value of the real estate on which the lien has been taken as
an abundance of caution is unnecessary in making the credit decision.
An institution should not invoke the abundance-of-caution exemption
if its credit analysis reveals that the transaction would not be
adequately secured by sources of repayment other than the real estate,
even if the contributory value of the real estate collateral is low
relative to the entire collateral pool. Similarly, the exemption should
not be applied to a loan or loan program unless the institution
verifies and documents the primary and secondary repayment sources. In
the absence of verification of the repayment sources, this exemption
should not be used merely to reduce the cost associated with obtaining
an appraisal, to minimize transaction processing time, or to offer
slightly better terms to a borrower than would be otherwise offered.
In addition, prior to making a final commitment to the borrower,
the institution should document and retain in the credit file the
analysis performed to verify that the abundance-of-caution exemption
has been appropriately applied. If the operating performance or
financial condition of the company subsequently deteriorates and the
lender determines that the real estate will be relied upon as a
repayment source, an appraisal should then be obtained.
3. Loans Not Secured by Real Estate
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.\32\ 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. This exemption is not
intended to be applied to real estate-related financial transactions
other than those involving loans. For example, this exemption should
not be applied to a transaction such as an institution's investment in
real estate for its own use.
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\32\ NCUA's regulations do not provide an exemption from the
appraisal requirements specific to loans not secured by real estate.
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4. Liens for Purposes Other Than the Real Estate's Value
This exemption allows institutions to take liens against real
estate without obtaining an appraisal to protect legal rights to, or
control over, other collateral. 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. In order 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. For
example, an institution making a loan to a logging operation may take a
lien against the real estate upon which the timber stands to ensure its
access to the timber in the event of default.
5. Real Estate-Secured Business Loans
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. 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 the
property. For this type of exempted loan, the Agencies require an
evaluation consistent with safe and sound banking practices in lieu of
an appraisal.\33\
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\33\ NCUA's regulations do not provide an exemption from the
appraisal requirements specific to member business loans.
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This exemption will not apply to transactions in which the lender
has taken a security interest in real estate, but the primary source of
repayment is provided by cash flow or sale of real estate in which the
lender has no security interest. For example, a real estate developer
cannot qualify for the exemption by showing that a real estate secured
loan for one project, in which the lender has taken a security
interest, 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. (See Appendix C--Glossary of Terms for a
definition of business loan.)
6. Leases
Institutions are required to obtain appraisals of leases that are
the economic equivalent of a purchase or sale of the leased real
estate. For example, an institution must obtain an appraisal on a
transaction involving a capital lease, as the real estate interest is
of sufficient magnitude to be recognized as an asset of the lessee for
accounting purposes. Operating leases that are not the economic
equivalent of the purchase or sale of the leased property do not
require appraisals.
7. Renewals, Refinancing, and Other Subsequent Transactions
In general, renewals, refinancing, and other subsequent
transactions may be supported by evaluations rather than appraisals. An
evaluation is permitted for renewals of existing extensions of credit
when either:
(1) No new funds are advanced (other than for reasonable closing
costs); or
(2) No obvious and material changes in market conditions or the
physical aspects of the property threaten the institution's real estate
protection after the transaction.
An institution may engage in a subsequent transaction based on
documented equity from a valid existing appraisal or evaluation if the
above
[[Page 69658]]
conditions are met. For example, to satisfy the condition for no
material change in market conditions or the physical aspects of the
property, the planned future use of the property should be consistent
with the use identified in the appraisal or evaluation. If a property,
however, has reportedly appreciated because of a planned change in use
of the property such as rezoning, an appraisal should be performed for
a federally related transaction unless another exemption applies.
Loan Workouts or Modifications: Loan workouts, debt restructures,
loan assumptions, and similar transactions involving the addition or
substitution of borrowers may qualify for the exemption for renewals,
refinancing and other subsequent transactions. Use of this exemption
depends on meeting the conditions described above. An institution also
should take into consideration such factors as the quality of the
underlying collateral and the validity of the existing appraisal or
evaluation.
As noted above, an institution may advance new monies beyond
closing costs when there are no material changes in the physical
aspects of the property that threaten the adequacy of the collateral.
The Agencies interpret this provision to not require a new appraisal or
evaluation when an institution advances funds to protect its interest
in a property, such as to repair damaged property, because these funds
would be used to restore the damaged property to its original
condition. If a loan workout involves modification of terms and
conditions of an existing credit, including acceptance of new real
estate collateral that facilitates the orderly collection of the
credit, or reduces the institution's risk of loss, an appraisal or
evaluation of the existing and new collateral may be prudent, even if
it is obtained after the modification occurs.
Other Changes to Loan Terms: An institution may modify the terms of
an existing credit without obtaining a new appraisal or evaluation.
Such modifications should not involve any advancement of new funds, any
material change in the borrower's creditworthiness, any change to the
borrower's or guarantor's obligation on the credit, or any changes to
the collateral pool or deterioration in collateral protection. For
example, an institution may modify the rate on an existing credit,
provide a short-term extension, or modify the repayment terms by
increasing or reducing monthly payments without obtaining a new
appraisal or evaluation, as long as the above conditions are met.
8. Transactions Involving Real Estate Notes
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. If
each note or real estate interest meets the Agencies' regulatory
requirements for appraisals at the time the real estate note was
originated, the institution need not obtain a new appraisal to support
its interest in the transaction. The institution should employ audit
procedures and review a representative sample of appraisals supporting
pooled loans or real estate notes in order to determine that the
conditions of the exemption have been satisfied.
Principles of safe and sound banking practice require institutions
to determine the suitability of purchasing or investing in existing
real estate secured loans and real estate interests. These transactions
should have been originated according to secondary market standards and
have a history of performance. The information from these sources,
together with original documentation, should be sufficient to allow
institutions to make appropriate credit decisions regarding these
transactions.
An institution may presume that the underlying loans in an
investment grade, marketable, mortgage-backed security satisfy the
requirements of the appraisal regulation whenever an issuer makes a
public statement, such as in a prospectus, that the appraisals comply
with the Agencies' appraisal regulations. To be considered investment
grade, a security must be rated in one of the top four rating
classifications of at least one nationally recognized statistical
rating service. A marketable security is one that may be sold with
reasonable promptness at a price that corresponds to its fair value.
If the mortgages that secure the mortgage warehouse loan are sold
to Fannie Mae or Freddie Mac, the sale itself may be used to
demonstrate that the underlying loans complied with the Agencies'
appraisal regulations. In such cases, the Agencies expect an
institution to monitor its borrower's performance in selling loans to
the secondary market and take appropriate steps, such as increasing
sampling and auditing of the loans and the supporting documentation, if
the borrower experiences more than a minimal loan put-back rate.
9. Transactions Insured or Guaranteed by a U.S. Government Agency or
U.S. Government-sponsored Agency
This exemption applies to transactions that are wholly or partially
insured or guaranteed by a U.S. government agency or U.S. government-
sponsored agency. 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.
10. Transactions that Qualify for Sale to, or Meet the Appraisal
Standards of, a U.S. Government Agency or U.S. Government-sponsored
Agency
This exemption applies to transactions that either (i) qualify for
sale to a U.S. government agency or U.S. government-sponsored
agency,\34\ or (ii) involve a residential real estate transaction in
which the appraisal conforms to Fannie Mae or Freddie Mac appraisal
standards applicable to that category of real estate. An institution
may engage in these transactions without obtaining a separate appraisal
conforming to the Agencies' appraisal regulations.
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\34\ These government-sponsored agencies would include Banks for
Cooperatives; Federal Agriculture Mortgage Corporation; Federal Farm
Credit Banks; Federal Home Loan Banks; Freddie Mac; Fannie Mae;
Student Loan Marketing Association; and Tennessee Valley Authority.
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10(i) Institutions that rely on exemption 10(i) should maintain
adequate documentation that confirms that the transaction qualifies for
sale to a U.S. government agency or U.S. government-sponsored agency.
If the qualification for sale is not adequately documented, the
transaction should be supported by an appraisal that conforms to the
Agencies' appraisal regulations, unless another exemption applies.
10(ii) Transactions, such as jumbo or other residential real estate
loans, that do not conform to all of Fannie Mae or Freddie Mac
underwriting standards qualify for exemption 10(ii) provided they are
supported by an appraisal that meets these government-sponsored
agencies' appraisal standards.
11. Transactions by Regulated Institutions as Fiduciaries
A regulated institution acting as a fiduciary is not required to
obtain appraisals under the Agencies' appraisal regulations if an
appraisal is not required under other laws governing fiduciary
responsibilities in connection
[[Page 69659]]
with a transaction.\35\ 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.
However, when a fiduciary transaction requires an appraisal under other
laws, that appraisal should conform to the Agencies' appraisal
requirements.
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\35\ Generally, credit unions have limited fiduciary authority
and NCUA's appraisal regulation does not specifically exempt
transactions by fiduciaries.
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12. Appraisals Not Necessary To Protect Federal Financial and Public
Policy Interests or the Safety and Soundness of Financial Institutions
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. This exemption is intended to apply to individual
transactions rather than broad categories of transactions that would
otherwise be addressed by an appraisal exemption. An institution would
need to seek a waiver from its supervisory federal agency before
entering into the transaction.
13. Transactions Involving Underwriting or Dealing in Mortgage-backed
Securities
The FRB adopted this exemption in November 1998 to permit bank
holding companies and their nonbank subsidiaries that engaged in
underwriting and dealing in securities to underwrite and deal in
mortgage-backed securities without having to demonstrate that the loans
underlying the securities are supported by appraisals that meet the
FRB's appraisal requirements.
Appendix B--Evaluation Alternatives
The Agencies recognize that evaluation alternatives are available
to institutions for developing an estimate of market value. Therefore,
institutions should maintain policies and procedures for determining
whether an evaluation alternative is appropriate for a given
transaction or lending activity, considering associated risk. Such
procedures should address risk criteria such as transaction size and
purpose, borrower creditworthiness, and leverage tolerance (loan-to-
value).
An institution should demonstrate that an evaluation alternative,
such as an automated valuation model or tax assessment valuation,
provides a reliable estimate of the collateral's market value as of a
stated effective date prior to the decision to enter into a
transaction. Further, the institution should establish criteria for
determining the extent to which an inspection of the collateral is
necessary to determine that the property is in acceptable condition for
its current or projected use.
An institution's policies and procedures also should address the
use of multiple tools or methods for valuing the same property or to
support a particular lending activity. These procedures should specify
criteria for ensuring that the institution uses the most credible
method or tool. An institution should not select a method or tool
solely on the basis that it provides the highest value. Examiners will
review an institution's policies, procedures, and internal controls to
ensure that evaluation alternatives are appropriate and consistent with
safe and sound lending practices.
Automated Valuation Model (AVM)
An institution may use an AVM as a valuation method for a
transaction in which an evaluation is permitted by the Agencies'
appraisal regulations.\36\ An AVM may be used alone or in conjunction
with other supplemental information. An institution should demonstrate,
through testing, that the AVM's resulting value and any related
information is credible and sufficient to support a credit decision,
otherwise another valuation method or tool should be used. In selecting
an AVM, an institution should perform appropriate due diligence to:
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\36\ Credit unions may use an AVM to meet the requirement for a
written estimate of value in conjunction with a review by a loan
officer or a person with knowledge, training and experience in the
real estate market where the loan is being made. See 12 CFR
722.3(d).
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Obtain relevant information about the data the model
provider uses. Among other information, the institution should know the
sources and types of data used in a model, frequency of updates,
quality control performed on the data, and how data is obtained in
states where public real estate sales data are not disclosed;
Demonstrate an understanding of the modeling techniques of
its external AVM providers. An institution should understand the
inherent strengths and weaknesses of different model types (hedonic,
index, and blended) as well as how a particular model or multiple AVMs
perform for different properties;
Evaluate the model provider's confidence score and
determine its usefulness in assessing the model's reliability in
determining market values for different properties; and
Ascertain which model(s) provide the most credible values
for an institution's lending activities.
An institution's policies should establish appropriate practices
regarding the use of AVMs and indicate its AVM performance criteria. In
establishing AVM practices, an institution should:
Address the qualifications and responsibilities of persons
designated to select, validate, and administer models;
Establish standards and procedures for model validation
testing and monitoring; \37\
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\37\ See OCC Bulletin 2000-16, Risk Modeling--Model Validation
(May 30, 2000).
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Maintain AVM performance criteria for reliability and
suitability in a given transaction or lending activity based on the
institution's risk tolerance;
Establish procedures for selecting a different collateral
valuation method if an institution's AVM performance criteria are not
met; and
Adopt criteria that includes establishing standards and
procedures for validation testing, for the use of multiple AVMs
(sometimes referred to as a cascade or waterfall) to ensure that
results are credible.
Determining AVM Use In addition to evaluating the results of its
model validation testing as noted below, an institution should
establish specific criteria for determining whether an AVM is an
appropriate evaluation alternative for a particular transaction. An
institution may consider the following questions, among others, in
determining whether an AVM may be appropriate for a given trans
Property Type
[cir] Is the property homogeneous such as a detached 1-to-4 family
residential dwelling in a typical neighborhood for its market?
[cir] Can the property's address be recognized by the model to
ensure that the valuation will reflect the subject property?
Property Location
[cir] Is the property located in a market with strong sales
activity?
[cir] Are aspects about the property's location typical or average
for its market (such as the view of the surrounding area or proximity
to public or private facilities or services)?
Property Condition
[cir] Is sufficient information available to assess whether the
property is in average or above-average condition consistent with its
intended use?
[cir] Is the area or neighborhood free of known adverse conditions
that could affect the property's value (such as disrepair from a
natural disaster or other events, defective building materials, or
environmental concerns)?
[[Page 69660]]
Property Price Range
[cir] Is the property's initial estimated value within the average
price range for its market?
Nature of the Transaction
[cir] Is the property in an area that is known to have minimal
cases of fraud?
[cir] Does the frequency of sales of the subject property preclude
concern that the property may have been subject to flipping or fraud?
[cir] Is the property owner-occupied?
Validating AVM Results Institutions should establish standards and
procedures for independently validating an AVM's results on a periodic
basis. The depth and extent of an institution's validation processes
should be consistent with the materiality and complexity of the risk
being managed. Institutions should not rely solely on validation
testing representations provided by external AVM providers. Regardless
of whether an institution relies on AVMs that are supported by value
insurance or guarantees, an institution should still perform
appropriate due diligence and model validation testing.
An institution should establish an independent model validation
process. This process should specify, at a minimum:
Expectations for an appropriate sample size;
Level of geographic analysis;
Testing frequency and criteria for re-testing;
Standards of performance measures to be used; and
Range of acceptable performance results.
To ensure unbiased test results, AVM values should be compared to
data gathered from sales transactions prior to being recorded in public
records. If an institution uses more than one AVM, the cascade also
should be validated.
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. An institution should
document the results of its validation testing and audit findings and
use these findings to analyze and periodically update its practices
regarding AVM use.
Tax Assessment Valuation (TAV)
An institution may use data provided by local tax authorities as a
basis for establishing an estimate of market value for the collateral
for a transaction in which an evaluation is permitted by the Agencies'
appraisal regulations. TAVs differ among jurisdictions. Therefore, an
institution should determine and document how the jurisdiction
calculates the TAV and how frequently property revaluations occur.
An institution should perform an analysis to determine the
relationship between the TAV and the market value within a tax
jurisdiction. This analysis should be performed for each property type
and price tier in a jurisdiction in which the institution considers the
use of a TAV to meet or support evaluation requirements. As part of
this process, an institution should test and document how closely TAVs
correlate to market value. If a reliable correlation between the TAV
and the market value can be established, the institution may use TAVs
as a basis for an evaluation.
Appendix C--Glossary of Terms
Agent--The Agencies' appraisal regulations do not specifically
define the term ``agent.'' However, the term is generally intended to
refer to one who undertakes to transact some business or to manage some
affairs for another. According to the Agencies' appraisal regulations,
fee appraisers must be engaged directly by the regulated institution or
its agent, and have no direct or indirect interest, financial or
otherwise, in the property or the transactions. The Agencies do not
limit the arrangements that regulated institutions have with their
agents, provided those arrangements do not place the agent in a
conflict of interest that prevents the agent from representing the
interests of the regulated institution.
Appraisal--As defined in the Agencies' appraisal regulations, a
written statement independently and impartially prepared by a qualified
appraiser 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.
Appraisal Threshold--An appraisal is not required on transactions
with a transaction value of $250,000 or less. As specified in the
Agencies' appraisal regulations, institutions must obtain an evaluation
of the real property collateral, if no other appraisal exemption
applies.
Approved Appraiser List--A listing of appraisers that an
institution has determined to be qualified and competent to perform
appraisals in a particular market and on various property types.
``As Completed'' Market Value--See Prospective Market Value.
``As Is'' Market Value--The estimate of the market value of real
property in its current physical condition, use, and zoning as of the
appraisal date.
``As Stabilized'' Market Value--See Prospective Market Value.
Automated Valuation Models--A computer program that analyzes data
to determine a property's market value. Hedonic models use property
characteristics (such as square footage, room count) on the subject and
comparable properties to determine a value. Index models determine
value based on repeat sales in the marketplace rather than property
characteristic data. Blended or hybrid models use elements of both
hedonic and index models.
Business Loan--As defined in the Agencies' appraisal regulations, a
loan or extension of credit to any corporation, general or limited
partnership, business trust, joint venture, syndicate, sole
proprietorship, or other business entity.\38\
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\38\ NCUA's appraisal regulation, 12 CFR part 722, does not
define ``business loan.'' A ``member business loan'' is regulated
under 12 CFR part 723.
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Business Loan Threshold--A business loan with a transaction value
of $1,000,000 or less does not require an appraisal if the primary
source of repayment is not dependent on the sale of, or rental income
derived from, the real estate. As specified in the Agencies' appraisal
regulations, institutions must obtain an evaluation of the real
property collateral, if no other exemption applies.\39\
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\39\ NCUA's appraisal regulation, 12 CFR part 722, does not
provide a higher appraisal threshold for loans defined as ``member
business loans'' under 12 CFR part 723.
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Cascade--A model with specific performance rules that prioritizes
an institution's multiple, independent AVMs in a defined sequence to
provide an estimate of the collateral's market value.
Credible (Appraisal) Assignment Results--According to USPAP,
credible means ``worthy of belief'' used in the context of the Scope of
Work Rule. Under this rule, credible assignment results depend on
meeting or exceeding both (1) the expectations of parties who are
regularly intended users for similar assignments, and (2) what an
appraiser's peers' actions would be in performing the same or a similar
assignment.
Effective Date--USPAP requires that each appraisal report specifies
the effective date of the appraisal and the date of the report. The
date of the report indicates the perspective from which the appraiser
is examining the market. The effective date of the appraisal
establishes the context for the value opinion. Three categories of
effective dates--retrospective, current, or prospective--may be used,
according to the intended use of the appraisal assignment.
[[Page 69661]]
Engagement Letter--An engagement letter between an institution and
an appraiser documents the expectations of each party to the appraisal
assignment. For example, an engagement letter may specify, among other
items, the property's location and legal description; intended use of
the appraisal; the expectation that the appraiser will comply with
applicable laws, regulations, guidelines and standards; reporting
format; expected delivery date; and appraisal fee.
Evaluation--A valuation required by the Agencies' appraisal
regulations for transactions that qualify for the appraisal threshold
exemption, business loan exemption or subsequent transaction exemption.
Exposure Time--As defined in USPAP, a reasonable length of time
that the property would have been offered on the market prior to the
hypothetical consummation of sale on the appraisal's effective date.
Exposure time is always presumed to precede the effective date of the
appraisal. See USPAP Standard 1-2(c), Statements 6 and 10, and Advisory
Opinion 7.
Federally Related Transaction--As defined in the Agencies'
appraisal regulations, any real estate-related financial transaction in
which the Agencies or any regulated institution engages or contracts
for, and that requires the services of an appraiser.
Financial Services Institution--The 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.
Loan Production Staff--Generally, all personnel responsible for
generating loan volume or approving loans, as well as their
subordinates and supervisors. This would include any employee whose
compensation is based on loan volume. Employees responsible for credit
administration or credit risk management are not considered loan
production staff.
Marketing Time--According to USPAP Advisory Opinion 7, the time it
might take to sell the property interest at the appraised market value
during the period immediately after the effective date of the
appraisal. An institution may request an appraiser to separately
provide an estimate of marketing time in an appraisal. However, this is
not a requirement of the Agencies' appraisal regulations.
Market Value--As defined in the Agencies' appraisal regulations,
the most probable price which a property should bring in a competitive
and open market under all conditions requisite to a fair sale, the
buyer and seller each acting prudently and knowledgeably, and assuming
the price is not affected by undue stimulus. Implicit in this
definition are the consummation of a sale as of a specified date and
the passing of title from seller to buyer under conditions whereby:
Buyer and seller are typically motivated;
Both parties are well informed or well advised, and acting
in what they consider their own best interests;
A reasonable time is allowed for exposure in the open
market;
Payment is made in terms of cash in U.S. dollars or in
terms of financial arrangements comparable thereto; and
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.
Prospective Market Value ``as Completed'' and ``as Stabilized''--A
prospective market value may be appropriate for the valuation of a
property interest related to a credit decision for a proposed
development or renovation project. According to USPAP, an appraisal
with a prospective market value reflects an effective date that is
subsequent to the date of the appraisal report. Prospective value
opinions are intended to reflect the current expectations and
perceptions of market participants, based on available data. Two
prospective value opinions may be required to reflect the time frame
during which development, construction, and occupancy will occur. The
prospective market value ``as completed'' reflects the property's
market value as of the time that development is expected to be
completed. The prospective market value ``as stabilized'' reflects the
property's market value as of the time the property is projected to
achieve stabilized occupancy. For an income-producing property,
stabilized occupancy is the occupancy level that a property is expected
to achieve after the property is exposed to the market for lease over a
reasonable period of time and at comparable terms and conditions to
other similar properties.
Put Back--Represents the ability of an investor to reject mortgage
loans from a mortgage originator if the mortgage loans do not comply
with the warranties and representations in their mortgage purchasing
agreement.
Real Estate-Related Financial Transaction--As defined in the
Agencies' appraisal regulations, any transaction involving:
The sale, lease, purchase, investment in or exchange of
real property, including interests in property, or the financing
thereof;
The refinancing of real property or interests in real
property; or
The use of real property or interests in property as
security for a loan or investment, including mortgage-backed
securities.
Regulated Institution--For purposes of the Agencies' appraisal
regulations and these Guidelines, an institution supervised by the
federal financial institutions regulatory Agencies. This includes a
national or a state-chartered bank and its subsidiaries, a bank holding
company and its non-bank subsidiaries, a federal savings association
and its subsidiaries, a federal savings and loan holding company and
its subsidiaries, and a credit union.
Restricted Use Appraisal Report--According 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. The Agencies believe that
the restricted use appraisal report will not be appropriate to
underwrite a significant number of federally related transactions due
to the lack of supporting information and analysis in the appraisal
report. However, it may be appropriate to use this type of appraisal
report for ongoing collateral monitoring of an institution's real
estate transactions and under other circumstances when an institution's
program requires an evaluation.
Sales Concessions--A 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. 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. Sales
concessions do not include fees that a seller is customarily required
to pay under state or local laws. In developing an opinion of market
value, an appraiser must take into consideration the affect of any
sales concessions on the market value of the real property. See
``market value'' above and USPAP Standards Rule 1-2(c).
Sales History and Pending Sales--According to USPAP Standards Rule
1-5, when the value opinion to be developed is market value, an
appraiser
[[Page 69662]]
must, if such information is available to the appraiser in the normal
course of business, analyze: (1) All current agreements of sale,
options, and listings of the subject property as of the effective date
of the appraisal, and (2) all sales of the subject property that
occurred within three years prior to the effective date of the
appraisal.
Scope of Work--According to USPAP Scope of Work Rule, the type and
extent of research and analyses in an appraisal assignment. (See the
Scope of Work Rule in USPAP.)
Self-Contained Appraisal Report--According to USPAP Standards Rule
2-2(a), a self-contained appraisal report ``describes'' all information
significant to the solution of an appraisal problem and should include
all significant data reported in comprehensive detail.
Sum of Retail Sales--A collateral valuation method for estimating a
value of several properties based on the sum of the sales price of each
property to an individual purchaser. The sum of retail sales is not the
market value for purposes of meeting the minimum appraisal standards in
the Agencies' appraisal regulations.
Summary Appraisal Report--According to USPAP Standards Rule 2-2(b),
the summary appraisal report ``summarizes'' all information significant
to the solution of an appraisal problem and should include all
significant data reported in a tabular or abbreviated format.
Tract Development--As defined in the Agencies' appraisal
regulations, a project of five units or more that is constructed or is
to be constructed as a single development. For purposes of these
Guidelines, ``unit'' refers to: A residential building lot, a detached
single-family home, an attached single-family home, and a residence in
a condominium building.
Transaction Value--As defined in the Agencies' appraisal
regulations:
For loans or other extensions of credit, the amount of the
loan or extension of credit;
For sales, leases, purchases, and investments in or
exchanges of real property, the market value of the real property
interest involved; and
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.
For loans that permit negative amortization, the transaction value
should be the institution's total committed amount, including any
potential negative amortization.
If an institution enters into a transaction that is secured by
several individual properties that are not part of a tract development
and that have a value equal to or less than the appraisal threshold,
the estimate of value of each individual property should determine
whether an appraisal or evaluation would be required on each property
in the collateral pool.
Uniform Standards of Professional Appraisal Practice (USPAP)--USPAP
identifies the minimum set of standards that apply in all appraisal,
appraisal review, and appraisal consulting assignments. 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.
Value (of Collateral for Use in Determining Loan-to-Value)--
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. For loans to purchase an
existing property, ``value'' means the lesser of the actual acquisition
cost or the estimate of value.
Dated: October 10, 2008.
John C. Dugan,
Comptroller of the Currency.
By order of the Board of Governors of the Federal Reserve
System, November 12, 2008.
Robert deV. Frierson,
Deputy Secretary of the Board.
Dated at Washington, DC, the 13th day of November, 2008.
By order of the Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
Dated: October 29, 2008.
By the Office of Thrift Supervision.
John M. Reich,
Director.
Dated: November 7, 2008.
By the National Credit Union Administration Board.
Hattie M. Ulan,
Acting Secretary of the Board.
[FR Doc. E8-27401 Filed 11-18-08; 8:45 am]
BILLING CODE 4810-33-P