59. the new Interagency Appraisal and Evaluation Guidelines to update and supersede the 1994 guidelines for providing regulatory guidance on real property valuations for all real estate related transactions at regulated financial institutions (i.e. More information and documentation can be found in our An institution may not rely solely on the data provided by local tax authorities to develop an evaluation unless the resulting evaluation is consistent with safe and sound banking practices and these Guidelines. documents in the last year, 110 FRB: Virginia M. Gibbs, Senior Supervisory Financial Analyst, (202) 452-2521, or T. Kirk Odegard, Manager, Policy Implementation and Effectiveness, (202) 530-6225, Division of Banking Supervision and Regulation; or Walter R. McEwen, Senior Counsel, (202) 452-3321, or Benjamin W. McDonough, Counsel, (202) 452-2036, Legal Division. This exemption allows an institution to take liens against real estate without obtaining an appraisal to protect legal rights to, or control over, other collateral. For complete information about, and access to, our official publications Interagency Appraisal and Evaluation Guidelines (opens new window) Dear Board of Directors: Attached for your use are appraisal and evaluation guidelines developed by five federal financial regulators. However, to address commenters' concerns, the Agencies incorporated minor edits to better distinguish between regulatory requirements and prudent banking practices in the Guidelines. An institution should establish policies and procedures for determining an appropriate collateral valuation method for a given transaction considering associated risks. – banks, thrifts, credit unions, etc.). 12. An institution may use sampling and audit procedures to verify the seller's representations and warranties that the appraisals for the underlying loans in a pool of residential loans satisfy the Agencies' appraisal regulations and are consistent with supervisory guidance and an institution's internal policies. SR letter 16-5, "Interagency Advisory on the Use of Evaluations in Real Estate-Related Financial Transactions." A reader of the appraisal report should be able to understand the risk characteristics associated with the subject property and the market, including the anticipated supply of competing properties. In the Proposal, the Agencies specifically requested comment on the Agencies' expectations for reviewing appraisals and evaluations. The Agencies believe that small and rural institutions can have acceptable risk management practices to support their appraisal function and conduct their real estate lending activity in a safe and sound manner. The Agencies' appraisal regulations permit an evaluation for a renewal or refinancing of an existing extension of credit at the institution when either: (i) There has been no obvious and material change in market conditions or physical aspects of the property that threatens the adequacy of the institution's real estate collateral protection after the transaction, even with the advancement of new monies; or, (ii) There is no advancement of new monies, other than funds necessary to cover reasonable closing costs.[57]. 12/21/2020, 859 the Federal Register. Ensure that appraisals and evaluations contain sufficient information to support the credit decision. COVID-19 Updates. documents in the last year. Institutions should refer to USPAP Advisory Opinion 13 for guidance on appraisers performing evaluations of real property collateral. The final rule also makes amendments to the appraisal rules to reflect the higher CRE appraisal threshold a… Sum of Retail Sales—A mathematical calculation of the sum of the expected sales prices of several individual properties in the same development to an individual purchaser. 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. Maintain AVM performance criteria for accuracy and reliability in a given transaction, lending activity, and geographic location. Effective Date of the Evaluation—For the purposes of the Agencies' appraisal regulations and these Guidelines, the effective date of an evaluation is the date that the analysis is completed. 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: Presold Unit—A unit may be considered presold if a buyer has entered into a binding contract to purchase the unit and has made a substantial and non-refundable earnest money deposit. 21. This timeframe should be commensurate with the level and nature of the institution's real estate lending activity. In addition, an institution should establish criteria for when to expand the depth of the review. Renewals, Refinancings, and Other Subsequent Transactions, 8. When using a third party, an institution remains responsible for the quality and adequacy of the review process, including the qualification standards for reviewers. Under the Agencies' appraisal regulations, the result of an Automated Valuation Model (AVM), by itself or signed by an appraiser, is not an appraisal, because a state certified or licensed appraiser must perform an appraisal in conformance with USPAP and the Agencies' minimum appraisal standards. A marketable security is one that may be sold with reasonable promptness at a price that corresponds to its fair value. Some commenters also asked the Agencies to address the expectations for reviews by property type and risk factors. The Guidelines contain four appendices that clarify current regulatory requirements and supervisory guidance. 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. documents in the last year, by the Environmental Protection Agency For properties subject to leases with terms that do not reflect current market conditions, the appraisal must clearly state the ownership interest being appraised and provide a discussion of the leases that are in place. Address standards for the use of multiple methods or tools, if applicable, for valuing the same property or to support a particular lending activity. An institution must obtain an appraisal when a loan workout involves the advancement of new monies and there is an obvious and material change in either market conditions or physical aspects of the property, or both, that threatens the adequacy of the institution's real estate collateral protection after the workout (unless another exemption applies). 58. Counts are subject to sampling, reprocessing and revision (up or down) throughout the day. documents in the last year, 764 Provide an estimate of the property's market value in its actual physical condition, use and zoning designation as of the effective date of the evaluation (that is, the date that the analysis was completed), with any limiting conditions. Approach the appraisal process with impartiality, knowledge of requirements and standards, and effective evaluation techniques. Register, and does not replace the official print version or the official Exposure time is a function of price, time, and use—not an isolated opinion of time alone. An institution should establish standards and procedures for independent and ongoing monitoring and model validation, including the testing of multiple AVMs, to ensure that results are credible. When an institution identifies an appraisal or evaluation that is inconsistent with the Agencies' appraisal regulations and the deficiencies cannot be resolved with the appraiser or person who performed the evaluation, the institution must obtain an appraisal or evaluation that meets the regulatory requirements prior to making a credit decision. Two prospective value opinions may be required to reflect the time frame during which development, construction, and occupancy will occur. Ensure that appraisals comply with the Agencies' appraisal regulations and are consistent with supervisory guidance. [15] Reviewing Appraisals and Evaluations. Third Party Arrangements. 12 CFR 722.3(d). Transaction Value—As defined in the Agencies' appraisal regulations: For purposes of this definition, the transaction value for loans that permit negative amortization should be the institution's total committed amount, including any potential negative amortization. Is a business loan with a transaction value equal to or less than the business loan threshold of $1 million, and is not dependent on the sale of, or rental income derived from, real estate as the primary source of repayment. Engagement Letter—An engagement letter between an institution and an appraiser documents the expectations of each party to the appraisal assignment. Therefore, if the highest and best use of the property is for development to a different use, the cost of demolition and site preparation should be considered in the analysis. An institution may use a computerized or manual system to manage the information in its credit files. These Guidelines, including their appendices, address supervisory matters relating to real estate appraisals and evaluations used to support real estate-related financial transactions. (1994 Guidelines) to provide further guidance to regulated financial institutions on prudent appraisal and evaluation policies, procedures and practices. An institution may use a TAV in developing an evaluation when it can demonstrate that a valid correlation exists between the tax assessment data and the market value. revisions to the interagency guidelines and, instead, to undertake revisions strengthening the underlying appraisal regulations. 39. Several commenters asked for clarification on the factors institutions should consider in assessing an appraiser's competency. Reducing Burden Associated With Appraisals B. Incorporation of the Rural Residential Appraisal Exemption Under Sectio… After considering the comments on the Proposal, the Agencies made revisions to the Proposal and are now issuing the Guidelines. The Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Board), and the Federal Deposit Insurance Corporation (FDIC), — also referred to as the agencies — have issued a number of appraisal regulations: Loan workouts, debt restructurings, loan assumptions, and similar transactions involving the addition or substitution of borrowers may qualify for the exemption for renewals, refinancings and other subsequent transactions. If an institution does not have the in-house expertise relative to a particular method or tool, then an institution should employ additional personnel or engage a third party. Perform an analysis to determine the relationship between the TAV and the property market values for properties within a tax jurisdiction. (See the discussion in the Validity of Appraisals and Evaluations section of these Guidelines.) This provision does not preclude an institution from withholding compensation from an appraiser or person who provided an evaluation based on a breach of contract or substandard performance of services under a contractual provision. Commenters requested further clarification on the process for institutions to obtain approval to use automated tools and sampling methods in the review process. The regulatory agencies issued the Interagency Appraisal and Evaluation Guidelines 1 (“Guidelines”) effective Dec. 10, 2010. Conversely, when new monies are advanced (other than funds necessary to cover reasonable closing costs) and there has been an obvious and material change in market conditions or the physical aspects of the property that threaten the adequacy of the institution's real estate collateral protection, the institution must obtain an appraisal unless another exemption applies. Under these circumstances, 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. A subsequent transaction is exempt from the appraisal requirement if no new monies are advanced (other than Start Printed Page 77467funds necessary to cover reasonable closing costs) even when there has been an obvious and material change in market conditions or the physical aspects of the property that threatens the adequacy of the institution's real estate collateral protection. ), If the loan workout does not include the advancement of new monies other than reasonable closing costs, the institution may obtain an evaluation in lieu of an appraisal. federally regulated institutions must adopt and maintain written real estate lending policies that are consistent with safe and sound lending practices and should reflect consideration of the Interagency Guidelines for Real Estate Lending Policies (Lending Guidelines). The Lending Guidelines state that an institution is responsible for establishing a real estate appraisal and evaluation program, including the type and frequency of collateral valuations. Comments provided by financial institutions support the approach taken in the Proposal, which establishes minimum supervisory expectations for an evaluation and is designed to ensure an institution obtains a more detailed evaluation, or possibly an appraisal, when additional information is necessary to assess collateral risk in the credit decision. Dodd-Frank Act, Section 1473(r). Document Drafting Handbook 1631 et seq.). The projected sales prices and absorption rate of units should be supported by anticipated demand at the time the units are expected to be exposed for sale. As noted above, some appraiser and appraisal group commenters expressed their views that evaluations generally do not provide an adequate assessment of a property's market value and requested that the Agencies provide additional guidance on the content of evaluations and the level of detail to be included in evaluations supporting higher risk transactions. An institution should be able to demonstrate that an evaluation, whether prepared by an individual or supported by an analytical method or a technological tool, 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. Identify circumstances under which an AVM may not be used, including: Expectations for an appropriate sample size. However, this is not a requirement of the Agencies' appraisal regulations. Under their appraisal regulations, the Agencies reserve 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. For purposes of these Guidelines, an “appraisal management company” includes, but is not limited to, a third-party entity that provides real property valuation-related services, such as selecting and engaging an appraiser to perform an appraisal based upon requests originating from a regulated institution. Address the selection, use, and validation of the valuation method or tool. 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 appraiser must analyze and reconcile the information from the approaches to arrive at the estimated market value. The appraiser'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. An institution is responsible for identifying the appropriate appraisal report option to support its credit decisions. If an evaluation is permitted under this exemption, an institution may use an existing appraisal or evaluation as long as the institution verifies and documents that the appraisal or evaluation continues to be valid. 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. 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. Appraisals: FIRREA and Interagency Guidelines. Provide criteria for ensuring that the institution uses a method or tool that produces a reliable estimate of market value that supports the institution's decision to engage in a transaction. Appendix B addresses an institution's use of analytical methods or technological tools in the development of an evaluation. For further clarity, this section incorporates certain technical edits to address specific comments. In addition, effective April 1, 2011, an institution must file a complaint with the appropriate state appraiser certifying and licensing agency under certain circumstances. Describe the supplemental information that was considered when using an analytical method or technological tool. Establish acceptable minimum performance criteria for a model prior to and independent of the validation process. Appraisers and appraisal groups asked for further explanation on the enforceability of the Guidelines and the distinction between supervisory guidance and regulatory requirements. In addition to the other information, the engagement letter will identify the intended use and user(s), as defined in USPAP. (See the Evaluation Development and Evaluation Content sections.) The Guidelines, including their appendices, update and replace existing supervisory guidance documents to reflect developments concerning appraisals and evaluations, as well as changes in appraisal standards and advancements in regulated institutions' collateral valuation methods. Complete the assignment also asked the Agencies ' appraisal regulations supposed for model. 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