firrea appraisal rules

Exposure time is a function of price, time, and usenot an isolated opinion of time alone. Appendix DGlossary of Terms. An institution may not rely solely on the results of an AVM to develop an evaluation unless the resulting evaluation is consistent with safe and sound banking practices and these Guidelines. To eliminate redundancies, the Guidelines incorporate the discussion in the Proposal's section on qualifications of persons who perform evaluations into a new section that addresses both the qualifications and selection of an appraiser and a person who performs an evaluation. At the time of renewal, the borrower has drawn down $1 million. For example, one commenter suggested that the Agencies withdraw the Proposal to allow additional time to study the lessons learned from the recent stress in the residential mortgage markets. Conversely, financial institutions found the Proposal to be an improvement over existing guidance and indicated that it would promote consistent application of the Agencies' appraisal requirements. To eliminate redundancies, the revised section incorporates from Appendix A of the Proposal the discussion of an institution's Start Printed Page 77455responsibility to obtain current collateral valuation information for loan modifications and workouts of existing credits. of the issuing agency. As a result of FIRREA, the differences between S&Ls and banks have decreased significantly. establishing the XML-based Federal Register as an ACFR-sanctioned These exemptions include a transaction that: There has been no obvious and material change in market conditions or physical aspects of the property that threaten the adequacy of the institution's real estate collateral protection after the transaction, even with the advancement of new monies; or, There is no advancement of new monies other than funds necessary to cover reasonable closing costs.[43]. As loan repayment becomes more dependent on the sale of collateral, an institution's policies should address the need to obtain an appraisal or evaluation for safety and soundness reasons even though one is not otherwise required by the Agencies' appraisal regulations. The FDIC, the Federal Reserve, and the Office of the Comptroller of the Currency (the Federal Agencies) have adopted a final rule that raises the threshold level at or below which appraisals will not be required for residential real estate transactions from $250,000 to $400,000. The Agencies' appraisal regulations include minimum standards for the preparation of an 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. Validation can be performed internally or with the assistance of a third party, as long as the validation is conducted by qualified individuals that are independent of the model development or sales functions. Some small institutions noted that they could be placed at a competitive disadvantage with larger institutions that use AVMs. Counts are subject to sampling, reprocessing and revision (up or down) throughout the day. AppraisalAs defined in the Agencies' appraisal regulations, a written statement independently and impartially prepared by a qualified appraiser (state licensed or certified) 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. documents in the last year, 287 Independence is also compromised when loan production staff selects a person to perform an appraisal or evaluation for a specific transaction. An institution may use a computerized or manual system to manage the information in its credit files. An institution should implement adequate internal controls to ensure that such communications do not result in any coercion or undue influence on the appraiser or person who performed the evaluation. The SAR form is available on FinCEN's Web site. The person selected is capable of rendering an unbiased opinion. An institution should establish reporting lines independent of loan production for staff who administer the institution's collateral valuation program, including the ordering, reviewing, and acceptance of appraisals and evaluations. In the Proposal, this section addressed the competency and qualifications of appraisers and persons who perform an evaluation. (See Appendix D, Glossary of Terms, for terminology used in these Guidelines.) In response to commenters' suggestions, additional terms were incorporated in the Guidelines, including appraisal management company, broker price opinion, credit file, going concern value, presold unit, and unsold units. Institutions should establish policies and procedures that govern the use of AVMs and specify the supplemental information that is required to develop an evaluation. The evaluation should, at a minimum: External data sources (such as market sales databases and public tax and land records); Property-specific data (such as previous sales data for the subject property, tax assessment data, and comparable sales information); (See Appendix B, Evaluations Based on Analytical Methods or Technological Tools, for guidance on the appropriate use of analytical methods and technological tools for developing an evaluation.). An employee is not considered loan production staff just because part of their compensation includes a general bonus or profit sharing plan that benefits all employees. 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. The level of detail should be sufficient for the institution to understand the appraiser's analysis and opinion of the property's market value. New Documents An institution should use these findings to analyze and periodically update its policies and procedures for an AVM(s) when warranted. Appraisal Report OptionsRefer to the definitions for Restricted Use Appraisal Report, Self-Contained Appraisal Report, and Summary Appraisal Report. An Agency may require compliance with additional appraisal standards if it makes a determination that such additional standards are required to properly carry out its statutory responsibilities. NCUA's appraisal regulation, 12 CFR 722, does not provide a higher appraisal threshold for loans defined as member business loans under 12 CFR 723. If deficiencies are discovered, an institution should take remedial action in a timely manner. This exemption is intended to apply to individual transactions on a case-by-case basis rather than broad categories of transactions that would otherwise be addressed by an appraisal exemption. Virtually all of the commenters either offered suggestions for strengthening or clarifying technical aspects of the Start Printed Page 77452Proposal. Value of Collateral (for Use in Determining Loan-to-Value Ratio)According to the Agencies' real estate lending standards guidelines, the term value means an opinion or estimate set forth in an appraisal or evaluation, whichever may be appropriate, of the market value of real property, prepared in accordance with the Agencies' appraisal regulations and these Guidelines. Conversion Valuation Appraisal Report Page: 3 ================================================================================ In preparing our valuation, we relied upon and assumed the accuracy and completeness of financial and other information provided to us by the Bank and its independent accountants. In the notice for comment on the Proposal, the Agencies requested comment on the appraisal regulatory exemption for residential real estate transactions involving U.S. government sponsored enterprises (GSEs). Updated Appraisal means an Appraisal of the Mortgaged Property or related REO Property, as the case may be, conducted subsequent to any Appraisal performed on or prior to the date of this Agreement by an Appraiser, selected by the applicable Servicer, in accordance with MAI standards, the costs of which shall be paid as a Property Advance by the Lead Securitization Note Holder or applicable Servicer. For example, an institution originated a 15-year term loan for $3 million and, in year 14, the outstanding principal is $2.5 million. To avoid the appearance of any conflict of interest, appraisal or evaluation development work should not commence until the institution has selected and engaged a person for the assignment. 2. While an appraiser must comply with USPAP and establish the scope of work in an appraisal assignment, an institution is responsible for obtaining an appraisal that contains sufficient information and analysis to support its decision to engage in the transaction. Some commenters referenced industry efforts to mitigate fraud in real estate transactions. [33] documents in the last year, 37 This estimated valuation considers the Bank only as a going concern and should not be considered as an indication of its liquidation value. Excluding a person from consideration for future engagement because a property's reported market value does not meet a specified threshold. Appendix A provides further clarification on real estate-related financial transactions that are exempt from the Agencies' appraisal regulations. electronic version on GPOs govinfo.gov. Moreover, the Guidelines stress that an institution should not select a valuation method or tool solely because it provides the highest value, the lowest cost, or the fastest response or turnaround time. The policies and procedures also should address the need to obtain current valuation information for collateral supporting an existing credit that may be modified or considered for a loan workout. For those transactions qualifying for the appraisal threshold, existing extensions of credit, or the business loan exemptions, an institution is exempted from the appraisal requirement, but still must, at a minimum, obtain an evaluation consistent with these Guidelines.[53]. A few commenters asked the Agencies to provide further clarification on the types of employees who would be considered as loan production staff. [40] The Agencies believe that the timing of the release of the Guidelines is appropriate to emphasize existing requirements, clarify expectations, and ensure consistency in the application of the Agencies' appraisal regulations, thereby promoting safe and sound collateral valuation practices across federally regulated institutions. (1) This $50,000 minimum is referred to as the de minimis threshold level Moreover, an institution's compliance with the regulatory requirements and consistency with supervisory expectations is considered during an Agency's on-site review of an institution's real estate lending activities. documents in the last year. The Guidelines also reflect refinements made by the Agencies in the supervision of institutions' appraisal and evaluation programs. Changes in underlying economic and market assumptions, such as capitalization rates and lease terms. Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA)[16] The Guidelines make it clear that an institution is responsible for meeting supervisory expectations regarding the selection, use, and validation of an AVM and maintaining an effective system of internal controls. The Agencies' appraisal regulations require appraisals for federally related transactions to comply with the requirements in USPAP, some of which are addressed below. Examiners will review an institution's policies, procedures, and internal controls to ensure that an institution's use of a method or tool is appropriate and consistent with safe and sound banking practices. and services, go to If a loan workout involves 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 workout occurs and the institution perfects its security interest. A few commenters also noted that certain factors, such as cost and turnaround time, should not influence the selection of appraisers. An institution should establish policies and procedures for determining whether an AVM can be used for a particular transaction. The Guidelines retain the possible use of automated tools and sampling methods in the review of appraisals and evaluations supporting lower risk residential mortgages. When an appraisal includes prospective market value opinions, there should be a point of reference to the market conditions and time frame on which the appraiser based the analysis. An institution should implement a risk-focused approach for determining the depth of the review needed to ensure that appraisals and evaluations contain sufficient information and analysis to support the institution's decision to engage in the transaction. 12 CFR 722.3(d). 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. An institution may engage in these transactions without obtaining a separate appraisal conforming to the Agencies' appraisal regulations. Therefore, an institution should establish criteria for assessing whether an existing appraisal or evaluation continues to reflect the market value of the property (that is, remains valid). An institution should ensure that when a third party engages an appraiser or a person who performs an evaluation, the third party conveys to that person the intended use of the appraisal or evaluation and that the regulated institution is the client. Any amendment to the Agencies' appraisal regulations is beyond the scope of the Guidelines. Two prospective value opinions may be required to reflect the time frame during which development, construction, and occupancy will occur. For the purposes of these Guidelines, the appraiser should be aware that the client is the regulated institution. The Office of Thrift Supervision was responsible for issuing and enforcing regulations governing the nation's savings and loan industry. 1652 0 obj <> endobj Michelle P. Scott is a New York attorney with extensive experiencein tax, corporate, financial, and nonprofit law, and public policy. Some commenters contend that regulated institutions should not be allowed to accept appraisals from mortgage brokers so as to ensure compliance with applicable appraisal independence standards. Given the importance of these concepts, the appendix contains an expanded discussion of the appraisal standard for deductions and discounts in a discounted cash flow analysis. [46] The following discussion summarizes significant comments on specific provisions of the Proposal, the Agencies' responses, and major changes to the Proposal as reflected in the Guidelines. For example, an engagement letter facilitates the communication of this information. The change became effective on April 10, 2018 (the day after it was published in the Federal Register). Describe the requirements for reviewing 2354; 12 U.S.C. Each document posted on the site includes a link to the [38], Appraisers must analyze, apply, and report appropriate deductions and discounts when providing an estimate of market value based on demand for real estate in the future. Additionally, valuation methods that do not contain sufficient information and analysis or provide a market value conclusion would not be acceptable as evaluations. [54] legal research should verify their results against an official edition of The real estate lending guidelines state that an institution's real estate lending program should include an appropriate real estate appraisal and evaluation program. In communicating an appraisal assignment, an institution should convey to the appraiser that the Agencies' minimum appraisal standards must be followed. allow a bank up to 120 days from the closing of a transaction to obtain the appraisal or evaluation required under the appraisal regulations. An institution may exchange information with appraisers and persons who perform evaluations, which may include providing a copy of the sales contract[27] An 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 with a transaction. Acceptable Appraisal means, with respect to an appraisal of Inventory, the most recent appraisal of such property received by Agent (a) from an appraisal company satisfactory to Agent, (b) the scope and methodology (including, to the extent relevant, any sampling procedure employed by such appraisal company) of which are satisfactory to Agent, and (c) the results of which are satisfactory to Agent, in each case, in Agents Permitted Discretion. What Agencies Oversee U.S. Financial Institutions? Such discussions should assist the appraiser in establishing the scope of work and form the basis of the institution's engagement letter, as appropriate. Rather, as allowed by USPAP, an appraiser can determine the characteristics of a property through, among other things, any combination of property Sales concessions do not include fees that a seller is customarily required to pay under state or local laws. publication in the future. The Guidelines are also responsive to the majority of comments, which expressed support for the Proposal and confirmed that additional clarification of existing regulatory and supervisory standards serve to strengthen the real estate collateral valuation and risk management practices across insured depository institutions. As part of the credit approval process and prior to a final credit decision, an institution should review appraisals and evaluations to ensure that they comply with the Agencies' appraisal regulations and are consistent with supervisory guidance and its own internal policies. (Refer to the Reviewing Appraisals and Evaluations section in these Guidelines for additional information on determining and documenting the credibility of an appraisal or evaluation.) Staff performing the collateral valuation function is responsible for selecting an appraiser. 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. The 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. Deficiencies will require appropriate corrective action. Sales History and Pending SalesAccording to USPAP Standards Rule 1-5, when the value opinion to be developed is market value, an appraiser 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. According to the Agencies' appraisal regulations, fee appraisers must be engaged directly by the federally regulated institution or its agent,[65] The Guidelines also now provide additional clarification on the Agencies' supervisory expectations for the development and content of evaluations. Document page views are updated periodically throughout the day and are cumulative counts for this document. An institution should establish policies and procedures for determining an appropriate collateral valuation method for a given transaction considering associated risks. [9] Scope of WorkAccording to USPAP Scope of Work Rule, the type and extent of research and analyses in an appraisal assignment. For example, a valuation method that provides a sales or list price, such as a broker price opinion, cannot be used as an evaluation because, among other things, it does not provide a property's market value. hN0_pQl`H[HwY qaZF$qo;.mv(xPf >Id FPDAQ'`D`?`Y?S|-jyt)B\)#1%_XJ3R'1:zMxrN1.^ j`y%k[(fDDq1EaXrEYX_r2I"p^e1zv{1vK.YY]Wtj; ; For users of Telecommunications Device for the Deaf (TDD) only, contact (202) 263-4869. These risks include, but are not limited to, transaction size and purpose, credit quality, and leverage tolerance (loan-to-value). Refer to USPAP Standards Rule 1-5(a) and the Ethics Rule. and the public comment process. 61. Therefore, an institution should have policies and procedures that address the need for obtaining current collateral valuation information to understand its collateral position over the life of a credit and effectively manage the risk in its real estate credit portfolios. For instance, the dollar amount of the appraisal threshold and of the business loan threshold from the Agencies' appraisal regulations were incorporated in the text of this section. The work performed by appraisers and persons providing evaluation services is periodically reviewed by the institution. The institution should employ audit procedures and review a representative sample of appraisals supporting pooled loans or real estate notes to determine that the conditions of the exemption have been satisfied. 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). The Guidelines also reference the FRB's Regulation Z (implementing the Truth in Lending Act), which was amended in 2008 and 2010 to include provisions regarding appraiser independence.[12]. 28. Further, the person who selects or oversees the selection of appraisers or persons providing evaluation services should be independent from the loan production area. Perform a detailed validation of the model(s) considered during the selection process and document the validation process. When using a third party, an institution remains responsible for the quality and adequacy of the review process, including the qualification standards for reviewers. On the other hand, an institution has provided a $5 million revolving line of credit to a borrower for two years and, at the end of year two, renews the $5 million line for another two years. For example, an AVM may be used for a transaction provided the resulting evaluation meets all of the supervisory expectations in the Evaluation Development and Evaluation Content sections in the Guidelines, is consistent with safe and sound banking practices, and produces a credible market value conclusion. These commenters expressed the view that the Proposal gave too much discretion to regulated institutions in the development and implementation of their appraisal and evaluation programs. Institutions are reminded that the results of their review process and other relevant information should be used as a basis for considering persons for future collateral valuation assignments and that collateral valuation deficiencies should be reported to appropriate internal parties, and if applicable, to external authorities in a timely manner. Employees responsible solely for credit administration or credit risk management are not considered loan production staff. (See the Evaluation Development and Evaluation Content sections.) Additional filters are available in search. The revisions also confirm that examiners will forward such findings to their supervisory office for appropriate disposition if there are concerns with an institution's ability or willingness to make a referral or file a SAR.
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