The real estate lending guidelines state that an institution's real estate lending program should include an appropriate real estate appraisal and evaluation program. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) has a specific definition for this term in connection with transactions secured by a consumer's principal dwelling or mortgage secondary market transactions. Staff performing the collateral valuation function is responsible for selecting an appraiser. Address standards for the use of multiple methods or tools, if applicable, for valuing the same property or to support a particular lending activity. 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. These reports lack sufficient supporting information and analysis for underwriting purposes. (1994 Guidelines) to provide further guidance to regulated financial institutions on prudent appraisal and evaluation policies, procedures and practices.  documents in the last year, 43 The information from these sources, together with original documentation, should be sufficient to allow an institution to make appropriate credit decisions regarding these transactions. An institution should ensure that the scope of work is appropriate for the assignment. 225; and NCUA: NCUA Letter to Credit Unions 05-CU-12. December 2, 2010: The Interagency Appraisal and Evaluation Guidelines (IAG) The agencies involved are the Federal Reserve Board, OCC, FDIC, OTS, and NCUA. 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. 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. 10(ii)—To qualify for this exemption, transactions that do not conform to all of Fannie Mae or Freddie Mac underwriting standards, such as jumbo or other residential real estate loans, must be supported by an appraisal that meets these government-sponsored agencies' appraisal standards for the applicable property type and is documented in the credit file or reproducible. The Agencies believe that the Proposal adequately addressed an institution's responsibility to maintain a risk-focused process for elevating its collateral valuation methods consistent with safe and sound banking practices. Commenters requested further clarification on the process for institutions to obtain approval to use automated tools and sampling methods in the review process. electronic version on GPOâs govinfo.gov. Appendix C—Deductions and Discounts. For transactions with a transaction value equal to or less than $250,000, the Agencies' appraisal regulations, at a minimum, require an evaluation consistent with safe and sound banking practices. Reducing Burden Associated With Appraisals B. Incorporation of the Rural Residential Appraisal Exemption Under Sectioâ¦ (See “market value” above and USPAP Standards Rule 1-2(c).). 22. Finally, minor edits were made to this section to reaffirm that small institutions should ensure that reviewers are independent and appropriately qualified, and may need to employ additional personnel or engage a third party to perform the review function. that agencies use to create their documents. 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. Replacing evaluations prior to the credit decision that do not provide credible results or lack sufficient information to support the final credit decision. An institution may engage in these transactions without obtaining a separate appraisal conforming to 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 while still providing sufficient information to enable the client and intended user(s) to understand the rationale for the opinions and conclusions in the report. An institution should take into account all aspects of the long-term effect of the relationship, including the managerial expertise and associated costs for effectively monitoring the arrangement on an ongoing basis. Interagency Appraisal and Evaluation Guidelines, 75 Fed.  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. We clearly understand the magnitude of this project, which is why we are committing the resources of our organization to improve bank regulation as it relates to real estate appraisal and evaluation. (See the discussion above on Portfolio Collateral Risk. 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. Renewals, Refinancings, and Other Subsequent Transactions, 8. Although not required, an institution may use state certified or licensed appraisers to perform evaluations. (See Appendix C, Deductions and Discounts, for further explanation on deductions and discounts.). For example, an institution should consider obtaining an appraisal as an institution's portfolio risk increases or for higher risk real estate-related financial transactions, such as those involving: An evaluation must be consistent with safe and sound banking practices and should support the institution's decision to engage in the transaction. 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. The majority of financial institution and industry group commenters supported the Proposal and the Agencies' efforts to update existing guidance in this area. For example, to be consistent with the standards for an evaluation, the results of an AVM would need to address a property's actual physical condition, and therefore, could not be based on an unsupported assumption, such as a property is in “average” condition. The Agencies' appraisal regulations require appraisals for federally related transactions to comply with the requirements in USPAP, some of which are addressed below. Some commenters did not agree that institutions should be permitted to use AVMs to develop an evaluation. In response, the Agencies have revised the Guidelines to reflect a principles-based approach to ensure that an institution's collateral valuation program complies with the Agencies' appraisal regulations and is consistent with supervisory guidance and an institution's internal policies. The Agencies' appraisal regulations include minimum standards for the preparation of an appraisal. documents in the last year, 233 These policies and procedures should address the process for selecting the appropriate valuation method for a transaction rather than using the method that renders the highest value, lowest cost, or fastest turnaround time. Prudent portfolio monitoring practices include criteria for determining when to obtain a new appraisal or evaluation. 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. Unsold Units—An unsold unit is a unit that does not meet the conditions listed in the definition of Presold Units. The Agencies expect an institution to consider current collateral valuation information to assess its collateral risk and facilitate an informed decision on whether to engage in a modification or workout of an existing real estate credit. This threshold increase means that transactions at or below this level do not require appraisals that conform to Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 and the interagency appraisal rules. This interagency statement outlines existing flexibilities in industry appraisal standards and in the appraisal regulations issued by the OCC, FRB, FDIC, and NCUA (agencies) and describes temporary changes to Fannie Mae and Freddie Mac appraisal standards that can assist lenders during this challenging time. Dodd-Frank Act, Section 1473(r). These risks include, but are not limited to, transaction size and purpose, credit quality, and leverage tolerance (loan-to-value). When an appraisal of raw land includes entitlements, the appraisal should disclose when such entitlements will expire if improvements are not completed within a specified time period and the potential effect on the value conclusion. The Agencies' appraisal regulations permit an institution to obtain an appropriate evaluation of real property collateral in lieu of an appraisal for transactions that qualify for certain exemptions. an appraisal rather than an evaluation when the institutionâs portfolio risk increases or for higher- risk real estate-related financial transactions. Monitoring Collateral Value. include documents scheduled for later issues, at the request Moreover, an AVM or TAV is not, in and of itself, an alternative to an evaluation. In response to commenters, the Agencies expanded this section in the Guidelines to further detail their expectations for appropriate communication and information sharing with persons performing collateral valuation assignments. Appraisals for these properties must reflect deductions and discounts for holding costs, marketing costs, and entrepreneurial profit supported by market data. 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. Therefore, an institution should establish criteria for determining the level and extent of research or inspection necessary to ascertain the property's actual physical condition, and the economic and market factors that should be considered in developing an evaluation. Renewing the line of credit at its original amount would not be considered an advancement of new monies. A BPO is not by itself an appraisal or evaluation, but could be used for monitoring the collateral value of an existing loan, when deemed appropriate. An institution should establish policies and procedures for determining an appropriate collateral valuation method for a given transaction considering associated risks. The Public Inspection page may also 12/21/2020, 202 Further, the institution should obtain sufficient documentation that the buyer has entered into a legally binding sales contract and has obtained a written prequalification or commitment for permanent financing. Establish procedures to test the quality of the appraisal and evaluation review process. Provide a description of the property and its current and projected use. The Agencies' real estate lending regulations and guidelines, 21. 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. The agencies issued the Guidelines to clarify the existing real estate appraisal regulations and to provide institutions and examiners with supervisory guidance for a prudent appraisal and evaluation program. The OFR/GPO partnership is committed to presenting accurate and reliable This exemption applies to transactions that either (i) qualify for sale to a U.S. government agency or U.S. government-sponsored agency, Test and document how closely TAVs correlate to market value based on contemporaneous sales at the time of assessment and revalidate whether the correlation remains stable as of the effective date of the evaluation. 30. Appropriate deductions and discounts should reflect holding costs, marketing costs, and entrepreneurial profit during the sales absorption period of the completed units. 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. documents in the last year, 637 The Agencies also reserve the right to require an appraisal under their appraisal regulations to address safety and soundness concerns in a transaction. on  Further, the Agencies revised the Guidelines to confirm that the result of an automated valuation model (AVM), in and of itself, does not meet the Agencies' minimum appraisal standards, regardless of whether the results are signed by an appraiser. Evaluation Development and Evaluation Content. In response, the Agencies note that these commenters' suggestions address statutes and regulations that are generally beyond the scope of the Guidelines, such as the Real Estate Settlement Procedures Act (RESPA) and the FRB's Regulation B (implementing the Equal Credit Opportunity Act). An institution should establish policies and procedures for resolving any inaccuracies or weaknesses in an appraisal or evaluation identified through the review process, including procedures for: An institution should establish policies for documenting the review of appraisals and evaluations in the credit file. 1. 42.  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. These revisions incorporate and clarify certain supervisory expectations from the Evaluation Content section of the Proposal, and emphasize an institution's responsibility to establish criteria addressing the appropriate level of analysis and information necessary to support the estimate of market value in an evaluation. If an institution uses more than one AVM, each AVM should be validated. ○ When a property is non-homogeneous, such as atypical lot sizes or property types. Register, and does not replace the official print version or the official As specified in the Agencies' appraisal regulations, an institution must obtain an evaluation of the real property collateral, if no other appraisal exemption applies.