73 FR 44522, 44604 (Jul. For example, an engagement letter may specify, among other items: (i) The property's location and legal description; (ii) intended use and users of the appraisal; (iii) the requirement to provide an opinion of the property's market value; (iv) the expectation that the appraiser will comply with applicable laws and regulations, and be consistent with supervisory guidance; (v) appraisal report format; (vi) expected delivery date; and (vii) appraisal fee. documents in the last year, 110 49. The agencies’ appraisal regulations and the IAEGprovide guidance for determining market values, creating an effective real estate valuation program, and establishing the usage and content of evaluations. 2800 (2008); 12 U.S.C. In the Proposal, this section addressed the competency and qualifications of appraisers and persons who perform an evaluation. The statement references the Interagency Appraisal and Evaluation Guidelines (Guidelines) which were implemented several years ago by the other agencies. This repetition of headings to form internal navigation links Public Law 111-203, 124 Stat. The federal financial regulatory agencies are issuing the attached Interagency Appraisal and Evaluation Guidelines (Guidelines) to update and replace existing supervisory guidance to reflect changes in appraisal and evaluation practices. [64] Date of the Appraisal Report—According to USPAP, the date of the appraisal report indicates when the appraisal analysis was completed. For users of Telecommunications Device for the Deaf (“TDD”) only, contact (202) 263-4869. (1994 Guidelines) to provide further guidance to regulated financial institutions on prudent appraisal and evaluation policies, procedures and practices. Dodd-Frank Act, Section 1473(r). documents in the last year, 65 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. For certain transactions that do not require an appraisal, the Agencies' regulations require an institution to obtain an appropriate evaluation of real property collateral that is consistent with safe Start Printed Page 77462and sound banking practices. A new appraisal or evaluation is necessary if the originally reported market value has changed due to factors such as: The Agencies' appraisal regulations specify that appraisals for federally related transactions must contain sufficient information and analysis to support an institution's decision to engage in the credit transaction. The regulatory agencies issued the Interagency Appraisal and Evaluation Guidelines 1 (“Guidelines”) effective Dec. 10, 2010. Appendix B—Evaluations Based on Analytical Methods or Technological Tools. Appropriate deductions and discounts should include items such as leasing commission, rent losses, tenant improvements, and entrepreneurial profit, if such profit is not included in the discount rate. For mortgage transactions secured by a consumer's principal dwelling, refer to 12 CFR 226.36(b) under Regulation Z (Truth in Lending) through March 31, 2011. These individuals would include any employee whose compensation is based on loan volume (such as processing or approving of loans). Interagency Appraisal and Evaluation Guidelines Surnmry: The federal banking and thrift regulatory agencies have issued interagency guidelines on appraisals and evaluations. 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. 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. 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 and other repayment sources. ○ The appraiser was engaged directly by the other financial services institution. Standards of performance measures to be used. Describe the analysis that was performed and the supporting information that was used in valuing the property. In year 14, the borrower seeks to refinance the loan at a lower interest rate and requests a loan of $2.8 million. For example, in areas that have experienced a high incidence of fraud, the institution should consider whether the AVM may be relied upon for the transaction or another valuation method should be used. An institution must not accept an appraisal that has been readdressed or altered by the appraiser with the intent to conceal the original client. In particular, these commenters raised concerns over the enforcement of the Guidelines by the Agencies. Refer also to the Federal Financial Institutions Examination Council Bank Secrecy Act/Anti-Money Laundering Examination Manual (Revised April 29, 2010) to review the general criteria, but note that instructions on filing a SAR through the Financial Crime Enforcement Network (FinCEN) of the Department of the Treasury are attached to the SAR form. the appraisal must reflect an appropriate scope of work that provides for “credible” assignment results. Involves an existing extension of credit at the lending institution, provided that: Loans with combined loan-to-value ratios in excess of the supervisory loan-to-value limits. (Refer to the section on Third Party Arrangements in these Guidelines.). 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. ○ The financial services institution (not the borrower) ordered the appraisal. Prior to entering into any arrangement with a third party for valuation services, an institution should compare the risks, costs, and benefits of the proposed relationship to those associated with using another vendor or conducting the activity in-house. an appraisal rather than an evaluation when the institution’s portfolio risk increases or for higher-risk real estate-related financial transactions. The Agencies note that their appraisal regulations and guidance have been in place since the early 1990s and that financial institutions are familiar with the regulatory and supervisory framework. 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. documents in the last year, 28 For example, an engagement letter facilitates the communication of this information. The information provided by commenters will be considered in assessing the need to revise these regulations. Interagency Appraisal and Evaluation Guidelines provide information regarding for policies, procedures, and practices relating to appraisals and evaluations Other Resources Supplemental information related to safe-and-sound banking operations. 50. 1657 0 obj <>/Filter/FlateDecode/ID[<317ED4AAB38EDD43BDC221096B7C1FBE>]/Index[1652 14]/Info 1651 0 R/Length 48/Prev 216112/Root 1653 0 R/Size 1666/Type/XRef/W[1 2 1]>>stream 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. and the public comment process. ensure the evaluation contains sufficient information and analysis to support the decision to engage in the transaction.6 What are the Development Requirements for Evaluations? (See the Evaluation Development and Evaluation Content sections.) documents in the last year, 233 According to USPAP, appraisal reports must contain sufficient information to enable the intended user of the appraisal to understand the report properly. Specify when new or updated collateral valuations are appropriate or desirable to understand collateral risk in the transaction(s). ○ The appraiser had no direct, indirect, or prospective interest, financial or otherwise, in the property or transaction. implementing Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) [2] 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. Independence is also compromised when loan production staff selects a person to perform an appraisal or evaluation for a specific transaction. Among other considerations, the criteria should address deterioration in the credit since origination or changes in market conditions. 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. 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. Document Drafting Handbook An institution's policies and procedures for reviewing appraisals and evaluations, at a minimum, should: An institution should establish qualification criteria for persons who are eligible to review appraisals and evaluations. The institution should consider the risk, size, and complexity of the transaction and the real estate collateral when determining the appraisal report format to be specified in its appraisal engagement instructions to an appraiser. (Refer to Appendix B, Evaluations Based on Analytical Methods or Technological Tools.). An institution may use the review findings to monitor and evaluate the competency and ongoing performance of appraisers and persons who perform evaluations. Prospective value opinions are intended to reflect the current expectations and perceptions of market participants, based on available data. For this type of exempted loan, under the Agencies' appraisal regulations, an institution may obtain an evaluation in lieu of an appraisal. Blended or hybrid models use elements of both hedonic and index models. These policies and procedures should foster timely and appropriate communications regarding the assignment and establish a process for responding to questions from the appraiser or person performing an evaluation. Therefore an institution needs to understand how a confidence score was derived and the extent to which a confidence score correlates to model accuracy. Put Back—Represents the ability of an investor to reject mortgage loans from a mortgage originator if the mortgage Start Printed Page 77473loans do not comply with the warranties and representations in their mortgage purchasing agreement. Federal Register. 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. OTS: Deborah S. Merkle, Senior Project Manager, Credit Risk, Risk Management, (202) 906-5688; or Marvin L. Shaw, Senior Attorney, Regulations and Legislation Division (202) 906-6639. To address these comments, the Agencies incorporated clarifying edits in the Guidelines to emphasize the importance of appraiser competency for a particular assignment relative to both the property type and geographic market. NCUA's regulations do not provide an exemption from the appraisal requirements specific to member business loans. Raw Land—A parcel or tract of land with no improvements, for example, infrastructure or vertical construction. 58. 59. 2771 (October 23, 1992); 12 U.S.C. [4] In response to comments, the Guidelines clarify how institutions can use analytical methods or technological tools to develop an evaluation. NCUA regulations do not contain an exemption from the appraisal requirements specific to member business loans. Counts are subject to sampling, reprocessing and revision (up or down) throughout the day. issued pursuant to section 304 of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA),[23] Preparation of an Evaluation The Interagency Appraisal and Evaluation Guidelines (Guidelines) 7 The documentation should describe the resolution of any appraisal or evaluation deficiencies, including reasons for obtaining and relying on a second appraisal or evaluation. In addition, the Agencies expanded certain sections to provide further clarification in an effort to promote consistency in the application and enforcement of their regulatory requirements and supervisory expectations. The estimate of market value should consider the real property's actual physical condition, use, and zoning as of the effective date of the appraiser's opinion of value. 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. This revised section also incorporates the section on Accepting Appraisals from Other Financial Services Institutions in the Proposal. An institution should document the results of its validation and audit findings. documents in the last year, 1469 22. Further, technical edits were incorporated in the Evaluation Content section of the Guidelines to address commenters' questions regarding the appropriate level of documentation in an evaluation. Institutions should establish policies and procedures that govern the use of AVMs and specify the supplemental information that is required to develop an evaluation. An engagement letter facilitates communication with the appraiser and documents the expectations of each party to the appraisal assignment. 56. of the issuing agency. headings within the legal text of Federal Register documents. Describe the supplemental information that was considered when using an analytical method or technological tool. 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. Ensure that timely information is available to management for assessing collateral and associated risk. In the Proposal, the Agencies specifically requested comment on the Agencies' expectations for reviewing appraisals and evaluations. 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. Monitoring Collateral Value. It would not be acceptable for an institution to base an evaluation on unsupported assumptions, such as a property is in “average” condition, the zoning will change, or the property is not affected by adverse market conditions. Appendix B addresses an institution's use of analytical methods or technological tools in the development of an evaluation. Refer to USPAP Standards Rule 1-5(a) and the Ethics Rule. For complete information about, and access to, our official publications Further, reviewers should be capable of assessing whether the appraisal or evaluation contains sufficient information and analysis to support the institution's decision to engage in the transaction. The Agencies' appraisal regulations include minimum standards for the preparation of an appraisal. 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. Consumer Protection Considerations 5. Federal Interagency Appraisal and Evaluation Guidelines (December 2010) have changed lending procedures as they relate to appraisals and appraisal reviews. In assessing whether changes in market conditions are material, an institution should consider the individual and aggregate effect of these changes on its collateral protection and the risk in its real estate lending programs or credit portfolios. An institution's collateral valuation program should establish criteria to select, evaluate, and monitor the performance of appraisers and persons who perform evaluations. 1376 (2010). 55 FR 5614, 5618 (February 16, 1990), 55 FR 30193, 30206 (July 25, 1990). 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