The Agencies requested comment on all aspects of the Proposal, and specifically requested comment on: (1) The clarity of the Proposal regarding interpretations of the appraisal exemptions discussed in Appendix A; (2) the appropriateness of risk management expectations and controls in the evaluation process, including those discussed in Appendix B; and (3) the expectations in the Proposal on reviewing appraisals and evaluations. The Agencies' appraisal regulations set forth specific appraiser independence requirements that exceed those set forth in the Uniform Standards of Professional Appraisal Practice (USPAP). 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. Appraisal review means the act or process of developing and communicating an opinion about the quality of another appraiser's work that was performed as part of an appraisal assignment related to the appraiser's data collection, analysis, opinions, conclusions, estimate of value, or compliance with the uniform standards of professional appraisal practice. 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. 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. An institution should use written engagement letters when ordering appraisals, particularly for large, complex, or out-of-area commercial real estate properties. 11. 03/01/2023, 239 Business Loan ThresholdA business loan with a transaction value of $1,000,000 or less does not require an appraisal if the primary source of repayment is not dependent on the sale of, or rental income derived from, real estate. TheFederal Savings and Loan Insurance Corporation(FSLIC) was abolished, and all assets and liabilities were assumed by the FSLIC Resolution Fund administered by theFederal Deposit Insurance Corp. (FDIC)and funded by theFinancing Corporation(FICO). 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. An institution may use a computerized or manual system to manage the information in its credit files. Fluctuations in discount or direct capitalization rates also are indicators of changing market conditions. Appendix BEvaluations Based on Analytical Methods or Technological Tools. NCUA's regulations do not provide an exemption from the appraisal requirements specific to loans not secured by real estate. This section in the Proposal and the Guidelines provides the Agencies' expectations for an institution to establish an effective, risk-focused process for reviewing appraisals and evaluations prior to a final credit decision. 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. For example, if the transaction value is below the appraisal threshold of $250,000. 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. Therefore, the Guidelines, like the Proposal, allow for some flexibility to exist so long as an institution can demonstrate the independence of its collateral valuation function from the final credit decision. An evaluation should contain sufficient information detailing the analysis, assumptions, and conclusions to support the credit decision. In response to these comments, the Agencies revised the Guidelines to address an institution's responsibility to file a suspicious activity report (SAR) with the Financial Crimes Enforcement Network of the Department of Treasury when it suspects inappropriate appraisal-related activity that meets the SAR filing criteria. Revisions to this section reflect requests from commenters for clarification on the relationship between regulated institutions and third parties. documents in the last year, 474 56. 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. Examiners also will determine whether the appraisal or evaluation complies with the Agencies' appraisal regulations and is consistent with supervisory guidance as well as the institution's policies. Should any such developments or changes, in our opinion, be material to the estimated pro forma market value of the Bank, appropriate adjustments to the estimated pro forma market value will be made. Evaluate underlying data used in the model(s), including the data sources and types, frequency of updates, quality control performed on the data, and the sources of the data in states where public real estate sales data are not disclosed. documents in the last year, 83 At the time of renewal, the borrower has drawn down $1 million. 65. 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. Federally Regulated InstitutionFor purposes of the Agencies' appraisal regulations and these Guidelines, an institution that is supervised by a Federal financial institution's regulatory agency. An institution's risk management system should reflect the complexity of the outsourced activities and associated risk. Appraisal Trigger Event As defined in Section 3.19(a). Sales concessions do not include fees that a seller is customarily required to pay under state or local laws. Broker Price Opinion (BPO)An estimate of the probable sales or listing price of the subject property provided by a real estate broker, sales agent, or sales person. require each institution to adopt and maintain written real estate lending policies that are consistent with principles of safety and soundness and that reflect consideration of the real estate lending guidelines issued as an appendix to the regulations. better and aid in comparing the online edition to the print edition. 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. The Guidelines, for instance, emphasize the importance of considering the property's condition in the development of an evaluation, regardless of the method or tool used. A few commenters suggested that the Agencies incorporate certain clarifying edits with regard to the independence of the collateral valuation process, staff reporting relationships, and internal quality control practices. An institution is responsible for identifying the appropriate appraisal report option to support its credit decisions. An appraisal may contain separate opinions of such values so long as they are clearly identified and disclosed. Ensure that timely information is available to management for assessing collateral and associated risk. What Agencies Oversee U.S. Financial Institutions? 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. This term does not include: Control Appraisal Period shall exist with respect to the Mortgage Loan, if and for so long as: MAI Appraiser With respect to any real property, a member of the American Institute of Real Estate Appraisers with a minimum of 5 years of experience appraising real property of a type similar to the real property being appraised and located in the same geographical area as the real property being appraised. the appraisal must reflect an appropriate scope of work that provides for credible assignment results. 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. Each document posted on the site includes a link to the While some commenters cautioned that the Agencies' examiners should not be overly aggressive in requiring institutions to obtain new appraisals on existing loans, a few commenters asked for clarification on what would constitute a change in market condition and when an institution should re-value collateral. The use of FIRREA as an enforcement tool has grown since 2015 and is expected to increase under the Biden Administration. [64] The change became effective on April 10, 2018 (the day after it was published in the Federal Register). 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. In response to these comments, the Guidelines confirm that appraisals obtained from other financial services institutions must comply with the Agencies' appraisal regulations and be consistent with supervisory guidance, including the standards of independence. 16. Selection of Appraisers and Individuals Who Perform Evaluations. The applicable discount rate is developed based on investor requirements and the risk associated with the physical and financial characteristics of the property. To ensure their independence, such lending officials, officers, or directors must abstain from any vote or approval involving loans on which they ordered, performed, or reviewed the appraisal or evaluation.[26]. Dated at Washington, DC, the 1st day of December, 2010. Further, for loan workouts, an institution's policies should specify conditions under which an appraisal or evaluation will be obtained. In some cases entrepreneurial profit may be included in the discount rate. 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. After considering the comments on the Proposal, the Agencies made revisions to the Proposal and are now issuing the Guidelines. 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. [52] 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. This process should differentiate between high- and low-risk transactions so that the review is commensurate with the risk. Has a transaction value equal to or less than the appraisal threshold of $250,000. Perform a detailed validation of the model(s) considered during the selection process and document the validation process. In response to several comments regarding an institution's use of appraisal management companies, this section addresses the due diligence procedures for selecting a third party, including an effective risk management system and internal controls. 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. Going Concern ValueThe value of a business entity rather than the value of the real property. A marketable security is one that may be sold with reasonable promptness at a price that corresponds to its fair value. In addition, an institution should establish criteria for when to expand the depth of the review. Set forth documentation standards for the review and the resolution of noted deficiencies. In implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act),[10] The Guidelines also emphasize the importance of monitoring collateral values in the institution's lending markets, consistent with the Agencies' real estate lending regulations and guidelines. Some commenters encouraged the Agencies to incorporate additional safeguards for consumers in the Guidelines. legal research should verify their results against an official edition of 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. Testing frequency and criteria for re-testing. Second, The Agencies' appraisal regulations require appraisals for federally related transactions to comply with the requirements in USPAP, some of which are addressed below. Resolution Funding Corporation (REFCORP) was created by Congress to fund the Resolution Trust Corporation during the Savings and Loan Crisis. 7. Insulate the persons responsible for ascertaining the compliance of the institution's appraisal and evaluation function from any influence by loan production staff. 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. Public Law 111-203, 124 Stat. Valuation means the determination, to be made initially by the Board of Directors of the Company, of the fair market value per share of Common Stock pursuant to clause (v) above. It also created the Bank Insurance Fund (BIF). 24. 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. An institution should perform appropriate model validation regardless of whether it relies on AVMs that are supported by value insurance or guarantees. [68], ClientAccording to USPAP, the party or parties who engage(s) an appraiser by employment or contract for a specific appraisal assignment. 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. The appraisal update must occur within four months prior to the date of the note and mortgage. The Proposal confirmed that an institution should make referrals to state appraiser regulatory authorities when it suspects that a state licensed or certified appraiser failed to comply with USPAP, applicable state laws, or engaged in unethical or unprofessional conduct. To assess the effectiveness of its AVM practices, an institution should verify whether loans in which an AVM was used to establish value met the institution's performance expectations relative to similar loans that used a different valuation process. These communications should adhere to the institution's policies and procedures on independence of the appraiser and not unduly influence the appraiser. 23. For example, an engagement letter should show that the financial services institution, not the borrower, engaged the appraiser. Xxxxxx Shipbrokers, Norway, or Fearnley AS, Norway. Changes in terms and availability of financing. 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. It established the Appraisal Subcommittee (ASC) within the Examination Council of theFederal Financial Institutions Examination Council. To implement these provisions, the Agencies recognize that future regulations will address the requirement that the appraiser conduct a physical property visit of the interior of the mortgaged property. FIRREA Appraisal (Y/N)Appraisal Report"Yes", if the Appraisal Report was prepared according to FIRREA. Ensure that appraisals and evaluations contain sufficient information to support the credit decision. For the pooling of loans or interests in real property for resale or purchase, the amount of the loan or market value of the real property calculated with respect to each such loan or interest in real property. 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. Independence is compromised when a borrower recommends an appraiser or a person to perform an evaluation. for better understanding how a document is structured but 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. Based on comments on the Proposal, the Agencies added this additional appendix. In some markets, entrepreneurial profit is treated as a line item deduction while in other markets it is reflected as a component of the discount rate. Moreover, the institution's staff responsible for internal controls should have the skills commensurate with the complexity or sophistication of the method or tool. Validity of Appraisals and Evaluations, C. Modifications and Workouts of Existing Credits, Appendix B, Evaluations Based on Analytical Methods and Technological Tools. Summary Appraisal ReportAccording 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. The compliance process should: Consistent with the Agencies' real estate lending regulations and guidelines,[47] A new section on Evaluation Development provides guidance on the requirement in the Agencies' appraisal regulations that evaluations must be consistent with safe and sound banking practices. The documentation should describe the resolution of any appraisal or evaluation deficiencies, including reasons for obtaining and relying on a second appraisal or evaluation. 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