The Guidelines confirm that BPOs and other similar valuation methods, in and of themselves, do not comply with the minimum appraisal standards in the Agencies' appraisal regulations and are not consistent with the Agencies' minimum supervisory expectations for evaluations. Register (ACFR) issues a regulation granting it official legal status. These standards of independence also should apply to persons who perform evaluations. The Agencies also revised the Guidelines to reaffirm an institution's responsibility to maintain policies and procedures that establish standards for obtaining current collateral valuation information to facilitate its decision to engage in a loan modification or workout. However, it may be appropriate to use this type of appraisal report for ongoing collateral monitoring of an institution's real estate transactions and other purposes. 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. Further, the Guidelines promote consistency in the application and enforcement of the Agencies' appraisal regulations and safe and sound banking practices. [55] Specify when new or updated collateral valuations are appropriate or desirable to understand collateral risk in the transaction(s). 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. Therefore, when using an AVM or TAV, the resulting evaluation should be consistent with the supervisory expectations in the Evaluation Development and Evaluation Content sections in the Guidelines. 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. 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. The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA)is a law that revised the federal government agency structure and rules governing the U.S. savings and loan banking system and the real estate appraisal industry, passed in 1989 in response to the savings and loan crisis of the late 1980s. Appraisal Trigger Event As defined in Section 3.19(a). The Agencies believe that the Proposal adequately addressed the issue of enforceability and their supervisory process. [20] documents in the last year, 1479 An institution should perform appropriate model validation regardless of whether it relies on AVMs that are supported by value insurance or guarantees. Among other considerations, the criteria should address deterioration in the credit since origination or changes in market conditions. As Completed Market ValueRefer to the definition for Prospective Market Value. 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. A marketable security is one that may be sold with reasonable promptness at a price that corresponds to its fair value. An institution's risk management system should reflect the complexity of the outsourced activities and associated risk. A report 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. The criteria should ensure that: An institution or its agent must directly select and engage appraisers. However, these commenters provided technical comments on appraisal practices that might assist one in understanding this appraisal concept. An engagement letter also may specify whether there are any legal or contractual restrictions on the sharing of the appraisal with other parties. See, for example, Title IV of Division A of the Housing and Economic Recovery Act of 2008, Public Law 110-289, Title IV, Division A, 122 Stat. While an institution must confirm that the appraiser holds a valid credential from the appropriate state appraiser regulatory authority, a state certification or license is a minimum credentialing Start Printed Page 77460requirement. FIRREA allows an exemption from a state licensed or state certified appraisal for business loans of $1M or less that are not dependent upon the sale of, or rental income generated from the collateral real estate as the primary source of repayment. A "business loan" is defined as an extension of credit to "any" corporation or other business entity. A few commenters questioned the timing of the Proposal given the stress in the current real estate market. A BPO generally provides a varying level of detail about a property's condition, market, and neighborhood, as well as comparable sales or listings. The Agencies' appraisal regulations permit an institution to use an evaluation in lieu of an appraisal for certain transactions. Date of the Appraisal ReportAccording to USPAP, the date of the appraisal report indicates when the appraisal analysis was completed. 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]. on rendition of the daily Federal Register on FederalRegister.gov does not The purpose of the act was to create a more efficient, productive, and effective base on which to build the industry and safeguard future transactions. The appraisal update must occur within four months prior to the date of the note and mortgage. provides [i]n conjunction with the purchase of a consumer's principal dwelling, broker price opinions may not be used as the primary basis to determine the value of a piece of property for the purpose of loan origination of a residential mortgage loan secured by such piece of property.[36]. Under USPAP, the appraisal must contain a certification that the appraiser has complied with USPAP. Commenters requested further clarification on the process for institutions to obtain approval to use automated tools and sampling methods in the review process. While an institution may request the appraiser to provide the sum of retail sales for a proposed development, the result of such calculation is not the market value of the property for purposes of the Agencies' appraisal regulations. Institutions also should be aware of the recent amendments to Regulation Z, which address mandatory reporting provisions.[14]. 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. Several commenters asked whether other guidance documents issued by the Agencies on appraisal-related issues would be rescinded with the issuance of the Guidelines. Sales ConcessionsA 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. The Public Inspection page The applicable discount rate is developed based on investor requirements and the risk associated with the physical and financial characteristics of the property. Sources of relevant information may include external market data, internal data, or reviews of recently obtained appraisals and evaluations. 2. Further, the appraiser should disclose the rationale for the omission of a valuation approach. These can be useful 39. FIRREA was put in place for a reason and is being reduced to rubble by agencies that do not want to deal with its guidance. The reasons for any such adjustments will be explained at that time. documents in the last year, 861 An institution may use the review findings to monitor and evaluate the competency and ongoing performance of appraisers and persons who perform evaluations. The revisions reflect clarifying text in response to comments from institutions on the regulatory requirements for reappraisals of real estate collateral for existing credits, particularly in modification and workout situations. Further, the Guidelines now discuss the appropriate depth of review by property type, including factors to consider in the review of appraisals and evaluations of commercial and single-family residential real estate. In response to commenters, the Guidelines now provide examples of factors for an institution to consider in assessing whether a significant change in market conditions has occurred. An institution may request an appraiser to separately provide an estimate of marketing time in an appraisal. documents in the last year, 822 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. [56] 53. 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. Election to Delay Foreclosure: Any election by the Purchaser to delay the Commencement of Foreclosure, made in accordance with Section 2.02(b). This process should include sufficient analysis by the institution to assess whether the third party provider can perform the services consistent with the institution's performance standards and regulatory requirements. the appraisal must reflect an appropriate scope of work that provides for credible assignment results. Exposure time is a function of price, time, and usenot an isolated opinion of time alone. We also reviewed the competitive environment in which the Bank operates and its relative strengths and weaknesses. If an institution has a question as to whether a particular transaction qualifies for an exemption, the institution should seek guidance from its primary Federal regulator. The appraisal analysis also should include consideration of the absorption of the unleased space. Consistent with safe and sound practices, an institution should have a written contract that clearly defines the expectations and obligations of both the financial institution and the third party, including that the third party will perform its services in compliance with the Agencies' appraisal regulations and consistent with supervisory guidance. An institution should establish policies and procedures that provide a sound process for using various methods or tools. Therefore, an institution should be cautious in limiting the scope of the appraiser's inspection, research, or other information used to determine the property's condition and relevant market factors, which could affect the credibility of the appraisal. Credit FileA hardcopy or electronic record that documents all information necessary to (1) analyze the credit before it is granted and (2) monitor the credit during its life. As Is Market ValueThe estimate of the market value of real property in its current physical condition, use, and zoning as of the appraisal's effective date. Selection of Appraisers or Persons Who Perform Evaluations, VII. For a discussion on changes in market conditions, see the section on Validity of Appraisals and Evaluations in these Guidelines. The Public Inspection page may also 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. (See market value above and USPAP Standards Rule 1-2(c).). Independence of the Appraisal and Evaluation Program. Specifying a minimum value requirement for the property that is needed to approve the loan or as a condition of ordering the valuation. [60] An institution may presume that the underlying loans in a marketable, mortgage-backed security satisfy the requirements of the Agencies' appraisal regulations whenever an issuer makes a public statement, such as in a prospectus, that the appraisals comply with the Agencies' appraisal regulations. As used in Section 5.12 hereof, an Approved Third-Party Appraiser selected by the Administrative Agent shall mean any of the firms identified in the preceding sentence and any other Independent nationally recognized third-party appraisal firm identified by the Administrative Agent and consented to by the Borrower (such consent not to be unreasonably withheld or delayed). Examiners finding evidence of unethical or unprofessional conduct by appraisers should instruct the institution to file a complaint with state appraiser regulatory officials and, when required, to file a SAR with FinCEN. These include white papers, government data, original reporting, and interviews with industry experts. 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. Provide additional supporting information about the basis for a valuation. (Refer to the section on Third Party Arrangements in these Guidelines.). As stated in the Agencies' appraisal regulations, a state certified or licensed appraiser may not be considered competent solely by virtue of being certified or licensed. The information provided by commenters will be considered in assessing the need to revise these regulations. (See Appendix C, Deductions and Discounts, for further explanation on deductions and discounts.). The Guidelines reaffirm that a state certification or license is a minimum credentialing requirement and that an appraiser must be selected based on his or her competency to perform a particular assignment, including knowledge of the specific property type and market. 1707, et seq., and FRB Regulation Z, 12 CFR 226.36 and 226.42. Virtually all of the commenters either offered suggestions for strengthening or clarifying technical aspects of the Start Printed Page 77452Proposal. Ensure staff has the requisite expertise and training to manage the selection, use, and validation of an analytical method or technological tool. Consistent with the USPAP Scope of Work Rule,[41] Validity of Appraisals and Evaluations, C. Modifications and Workouts of Existing Credits, Appendix B, Evaluations Based on Analytical Methods and Technological Tools. As in the Proposal, the Appendix in the Guidelines provides guidance on the Agencies' supervisory expectations regarding an institution's process for selecting, using, validating, and monitoring a valuation method or tool. The changes can only be related with a blizzard of acronyms attached to federal agencies created or abolished: FIRREA gaveFreddie MacandFannie Maeadditional responsibility and funding for making homeownership more accessible for low- and moderate-income families. Abolishment of the Federal Savings and Loan Insurance Corporation and the creation of the Federal Deposit Insurance Corporation's funds: the Savings Association Insurance Fund (SAIF) to cover S&Ls and the Bank Insurance Fund (BIF) to cover banks. Market ValueAs 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. (See the Scope of Work Rule in USPAP.). that agencies use to create their documents. 40. Table A1: Collateral Interest Underlying Property Characteristic Provided ValueCommuter Portfolio 161 North Arlington Avenue USPAP Appraisal (Y/N) FIRREA Appraisal (Y/N) Y YNew Horizon Apartments NAP Ground Lease Maturity 3/28/2040Exhibit 2 to Attachment A Page 8 of 14Notes: (continued)3. 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. Exposure TimeAs defined in USPAP, the estimated length of time the property interest being appraised would have been offered on the market prior to the hypothetical consummation of a sale at market value on the effective date of the appraisal. An institution should not select a method or tool solely because it provides the highest value, the lowest cost, or the fastest response or turnaround time. 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. 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. 12 CFR 722.3(d). Communication between the institution's collateral valuation staff and an appraiser or person performing an evaluation is essential for the exchange of appropriate information relative to the valuation assignment. 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. 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. 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. As in the Proposal, the Guidelines address when an institution may modify an existing credit without obtaining either an appraisal or an evaluation. %PDF-1.4 % It is subject only to the limitations imposed by the governmental powers of taxation, eminent domain, police power and escheat. 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 program should: For both appraisal and evaluation functions, an institution should maintain standards of independence as part of an effective collateral valuation program for all of its real estate lending activity. As specified in the Agencies' appraisal regulations, an institution must obtain an evaluation of the real property collateral. In the Guidelines, the Agencies clarified their expectations that while a loan qualifying for sale to a GSE is exempted from the appraisal regulations, an institution is expected to have appropriate policies to confirm their compliance with the GSEs' underwriting and appraisal standards. Hedonic models generally use property characteristics (such as square footage and room count) and methodologies to process information, often based on statistical regression. 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. Further, there should be periodic internal review of the use of the approved appraiser list to confirm that appropriate procedures and controls exist to ensure independence in the development, administration, and maintenance of the list. Some commenters did not support the longstanding flexibility afforded to small and rural institutions when absolute lines of independence cannot be achieved. Employees responsible solely for credit administration or credit risk management are not considered loan production staff. 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. Effective Date of the AppraisalUSPAP requires that each appraisal report specifies the effective date of the appraisal and the date of the report. If an institution establishes an approved appraiser list for selecting an appraiser for a particular assignment, the institution should have appropriate procedures for the development and administration of the list. An institution should ensure that persons who validate an AVM on an ongoing basis are independent of the loan production and collection processes and have the requisite expertise and training. Establish procedures to test the quality of the appraisal and evaluation review process. Limited or over supply of competing properties. Value opinions such as going concern value, value in use, or a special value to a specific property user may not be used as market value for federally related transactions. This section also addresses the factors that an institution should consider in determining whether to obtain an appraisal, even though an evaluation is permitted. If there is a concern regarding the institution's ability or willingness to file a complaint or make a referral, examiners should forward their findings and recommendations to their supervisory office for appropriate disposition and referral to state appraiser regulatory officials and FinCEN, as necessary. For example, this exemption should not be applied to a transaction such as an institution's investment in real estate for its own use. 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. Describe the analysis that was performed and the supporting information that was used in valuing the property. This standard is designed to avoid having appraisals prepared using unrealistic assumptions and inappropriate methods in arriving at the property's market value. Appendix DGlossary of Terms. implementing Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA)[2] 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. [63] While borrowers' ability to repay their real estate loans according to reasonable terms remains the primary consideration in the lending decision, an institution also must consider the value of the underlying real estate collateral in accordance with the Agencies' appraisal regulations. Public Law 101-73, Title XI, 103 Stat. 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 change became effective on April 10, 2018 (the day after it was published in the Federal Register). NCUA's regulations do not provide an exemption from the appraisal requirements specific to loans not secured by real estate. FIRREA allows an exemption from a state licensed or state certified appraisal for business loans of $1M or less that are not dependent upon the sale of, or rental Each of the Agencies has adopted additional appraisal standards.[21]. FIRREAalso allowedbank holding companiesto acquire thrifts. 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. The Appendix also has been revised to respond to comments regarding the appropriate use of an AVM or tax assessment value (TAV) to develop an evaluation. 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