TheOffice of Thrift Supervision(OTS), a bureau of theU.S. Treasury Department, was created to charter, regulate, examine, and supervise savings institutions. 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. 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. [FR Doc. 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. The Appendix also addresses the expertise necessary to manage the use of a method or tool, which may require an institution to employ additional personnel or engage a third party. The appraiser was engaged directly by the other financial services institution. Standards of performance measures to be used. Renewals, Refinancings, and Other Subsequent Transactions, 8. Dodd-Frank Act, Section 1473(r). Ensure the institution's practices result in the selection of appraisers and persons who perform evaluations with the appropriate qualifications and demonstrated competency for the assignment. An institution should establish policies and procedures that provide a sound process for using various methods or tools. Since the issuance of the 1994 Guidelines, the Agencies have issued additional supervisory guidance documents[7] 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). For an income-producing property, stabilized occupancy is the occupancy level that a property is expected to achieve after the property is exposed to the market for lease over a reasonable period of time and at comparable terms and conditions to other similar properties. 1. Moreover, an AVM or TAV is not, in and of itself, an alternative to an evaluation. A few institution commenters asked the Agencies to address whether loan production staff can recommend an appraiser for a particular assignment or inclusion on the institution's list of approved appraisers. In response to these developments, the Agencies published for comment the Proposed Interagency Appraisal and Evaluation Guidelines (Proposal) on November 19, 2008. Fluctuations in discount or direct capitalization rates also are indicators of changing market conditions. The change became effective on April 10, 2018 (the day after it was published in the Federal Register). Lack of maintenance of the subject or competing properties. 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. The only exception to this requirement is that the Agencies' appraisal regulations allow an institution to use an appraisal prepared for another financial services institution provided certain conditions are met. 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. 68. Properties outside the institution's traditional lending market. 3331, et seq. 48. 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. Likewise, information on local housing conditions and trends, such as a competitive market analysis, does not contain sufficient information on a specific property that is needed, and therefore, would not be acceptable as an evaluation. 1828(o). With regard to relying on appraisals supporting underlying loans in a pool of 1-to-4 family mortgage loans, the Guidelines also confirm that an institution may use sampling and audit procedures to determine whether the appraisals in a pool of residential loans satisfy the Agencies' appraisal regulations and are consistent with supervisory guidance. Further, the Guidelines no longer refer to a nonpreferential and unbiased process for selecting appraisers or persons who perform evaluations, which could be misconstrued in a way that would not ensure that a competent person is selected for a valuation assignment. Dodd-Frank Act, Section 1473(r). 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 UnitA 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. Set forth documentation standards for the review and the resolution of noted deficiencies. The 2005 Frequently Asked Questions on the Appraisal Regulations and the Interagency Statement on Independent Appraisal and Evaluation Functions, OCC: OCC Bulletin 2005-6; FRB: SR letter 05-5; FDIC: FIL-20-2005; OTS: CEO Memorandum No. [19] NCUA's regulations do not provide an exemption from the appraisal requirements specific to loans not secured by real estate. These standards of independence also should apply to persons who perform evaluations. Establish acceptable minimum performance criteria for a model prior to and independent of the validation process. 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 evaluation's content should be documented in the credit file or reproducible. An institution's risk management system should reflect the complexity of the outsourced activities and associated risk. Minimum Appraisal Standards. The Office of Thrift Supervision was responsible for issuing and enforcing regulations governing the nation's savings and loan industry. Register, and does not replace the official print version or the official In such cases, the Agencies expect an institution to monitor its borrower's performance in selling loans to the secondary market and take appropriate steps, such as increasing sampling and auditing of the loans and the supporting documentation, if the borrower experiences more than a minimal rate of loans being put back by an investor. (See the discussion in these Guidelines on Selection of Appraisers or Persons Who Perform Evaluations.). TheFederal Home Loan Bank Board(FHLBB) was abolished. TheFederal Housing Finance Board(FHFB) was created as an independent agency to take the place of the FHLBB as overseer of the 12Federal Home Loan Banks. In particular, the Agencies requested comment on whether automated tools or sampling methods used to review appraisals and evaluations supporting lower risk single-family residential mortgages are appropriate for other low risk mortgage transactions, and whether appropriate constraints can be placed on the use of these tools and methods to ensure the overall integrity of an institution's appraisal process for those low risk mortgage transactions. 2 Version Log The Bureau updates this guide on a periodic basis to reflect finalized clarifications to the rule which impacts guide content. An institution may rely on the second opinion of market value obtained through an acceptable USPAP-compliant appraisal review to support its credit decision. This section in the Guidelines references Appendix A, Appraisal Exemptions, which has been revised in response to comments on the Proposal. An institution also is responsible for ensuring that a third party selects an appraiser or a person to perform an evaluation who is competent and Start Printed Page 77464independent, has the requisite experience and training for the assignment, and thorough knowledge of the subject property's market. Therefore, an institution should be able to demonstrate that sufficient information is available to support the current market value of the collateral and the classification of a problem real estate credit. The revisions reflect clarifying text in response to comments from institutions on the regulatory requirements for reappraisals of real estate collateral for existing credits and subsequent transactions, particularly loan workout situations. An institution should establish policies and procedures for determining an appropriate collateral valuation method for a given transaction considering associated risks. Effective Date of the AppraisalUSPAP requires that each appraisal report specifies the effective date of the appraisal and the date of the report. 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. From Booms To Bailouts: The Banking Crisis Of The 1980s. Marketing TimeAccording to USPAP Advisory Opinion 7, the time it might take to sell the property interest at the appraised market value during the period immediately after the effective date of the appraisal. 46. 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. Date of the Appraisal ReportAccording to USPAP, the date of the appraisal report indicates when the appraisal analysis was completed. 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. A was not a party to the lending guidelines; however, 1.5 FIRREA: The Financial Institutions Reform, Recovery and Enforcement Act of 1989. NCUA's appraisal regulation, 12 CFR 722, does not define business loan. A member business loan is regulated under 12 CFR 723. 56. 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. 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. Document Drafting Handbook (See the Scope of Work Rule in USPAP.). To apply this exemption, the Agencies expect the institution to determine that the primary source of repayment for the business loan is operating cash flow from the business rather than rental income or sale of real estate. 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. The 2005 Interagency FAQs on Residential Tract Development Lending, OCC: OCC Bulletin 2005-32; FRB: SR letter 05-14; FDIC: FIL-90-2005; OTS: CEO Memorandum No. 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. documents in the last year, 861 The Agencies also requested comment on whether appropriate constraints can be placed on the use of these tools and Start Printed Page 77454methods to ensure the overall integrity of the institution's appraisal review process for other low risk mortgage transactions. 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. For proposed construction and sale of a condominium building with five or more units, the appraisal must reflect appropriate deductions and discounts. Establish procedures for obtaining an appraisal or using a different valuation method to develop an evaluation when an AVM's resulting value is not reliable to support the credit decision. While every effort has been made to ensure that 43. Employees responsible solely for credit administration or credit risk management are not considered loan production staff. The Appendix also addresses the process that institutions are expected to establish for determining whether a method or tool may be used in the preparation of an evaluation and the supplemental information that may be necessary to comply with the minimum supervisory expectations for an evaluation, as set forth in the Guidelines. Describe the requirements for reviewing When using a third party, an institution remains responsible for the quality and adequacy of the review process, including the qualification standards for reviewers. Appraisal Management CompanyThe Agencies' appraisal regulations do not define the term appraisal management company. Institutions also should be aware of separate requirements on conflicts of interest under Regulation Z (Truth in Lending), 12 CFR 226.42(d). The person selected is capable of rendering an unbiased opinion. This includes a national or a state-chartered bank and its subsidiaries, a bank holding company and its non-bank subsidiaries, a Federal savings association and its subsidiaries, a Federal savings and loan holding company and its subsidiaries, and a credit union. Appraisal Management Company Oversight. An institution should use written engagement letters when ordering appraisals, particularly for large, complex, or out-of-area commercial real estate properties. For such transactions, an appraisal must include the market value of the property, which should reflect the property's actual physical condition, use, and zoning designation (referred to as the as is value of the property), as of the effective date of the appraisal. 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 We also reviewed the competitive environment in which the Bank operates and its relative strengths and weaknesses. For users of Telecommunications Device for the Deaf (TDD) only, contact (202) 263-4869. and services, go to The documentation should describe the resolution of any appraisal or evaluation deficiencies, including reasons for obtaining and relying on a second appraisal or evaluation. For example, if no other law requires an appraisal in connection with the sale of a parcel of real estate to a beneficiary of a trust on terms specified in a trust instrument, an appraisal is not required under the Agencies' appraisal regulations. 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 An institution generally should not rely on an evaluation prepared by or for another financial services institution because it will not have sufficient information relative to the other institution's risk management practices for developing evaluations. Validity of Appraisals and Evaluations, C. Modifications and Workouts of Existing Credits, Appendix B, Evaluations Based on Analytical Methods and Technological Tools. implementing Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA)[2] The Agencies' appraisal regulations set forth specific appraiser independence requirements that exceed those set forth in the Uniform Standards of Professional Appraisal Practice (USPAP). 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. The Agencies also reserve the right to require an appraisal under their appraisal regulations to address safety and soundness concerns in a transaction. Specifying a minimum value requirement for the property that is needed to approve the loan or as a condition of ordering the valuation. Under Title XI of FIRREA, the Agencies were granted the authority to identify categories of real estate-related financial transactions that do not require the services of an appraiser to protect Federal financial and public policy interests or to satisfy principles of safe and sound lending. an institution should monitor collateral risk on a portfolio and on an individual credit basis. Prospective market value opinions should be based upon current and reasonably expected market conditions. The financial services institution (not the borrower) ordered the appraisal. Such discussions should assist the appraiser in establishing the scope of work and form the basis of the institution's engagement letter, as appropriate. Commenters requested further clarification on the process for institutions to obtain approval to use automated tools and sampling methods in the review process. 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. For further clarity, this section incorporates certain technical edits to address specific comments. If a transaction does not involve an advancement of new monies and there have been no obvious and material changes in market or property conditions, a credit union must obtain a written estimate of market value that is consistent with the standards for evaluations as discussed in these Guidelines. Selection of Appraisers and Individuals Who Perform Evaluations. What Agencies Oversee U.S. Financial Institutions? In the Guidelines, this section was expanded to provide additional specificity on an institution's responsibilities for the selection, monitoring, and management of arrangements with third parties. Therefore an institution needs to understand how a confidence score was derived and the extent to which a confidence score correlates to model accuracy. Savings Association Insurance Fund (SAIF), Savings and Loan Crisis (S&L): What Happened and Aftermath. Regardless of the report option, the appraisal report should contain sufficient detail to allow the institution to understand the scope of work performed. Approved Third-Party Appraiser means any Independent nationally recognized third-party appraisal firm (a) designated by the Borrower in writing to the Administrative Agent (which designation shall be accompanied by a copy of a resolution of the Board of Directors of the Borrower that such firm has been approved by the Borrower for purposes of assisting the Board of Directors of the Borrower in making valuations of portfolio assets to determine the Borrowers compliance with the applicable provisions of the Investment Company Act) and (b) acceptable to the Administrative Agent. CREFC Appraisal Reduction Template A report substantially in the form of, and containing the information called for in, the downloadable form of the Appraisal Reduction Template available as of the Closing Date on the CREFC Website, or such other form for the presentation of such information and containing such additional information as may from time to time be approved by the CREFC for commercial mortgage securities transactions generally. Appropriate deductions and discounts should reflect holding costs, marketing costs, and entrepreneurial profit during the sales absorption period for the sale of the developed lots. However, to address commenters' concerns, the Agencies incorporated minor edits to better distinguish between regulatory requirements and prudent banking practices in the Guidelines. [68], ClientAccording to USPAP, the party or parties who engage(s) an appraiser by employment or contract for a specific appraisal assignment. 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. The Lending Guidelines state that an institution is responsible for establishing a real estate appraisal and evaluation program, including the type and frequency of collateral valuations. The appraisal analysis also should include consideration of the absorption of the unleased space. See Dodd-Frank Act, Section 1400(c)(1). 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. July 18, 2019. [8] 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. ?-z#U-&3FK3_kkQ9YV\YB4f~y-rmVK9?ojQ6K|W6-7Fq7[Ct14%74/i_U{}qnAG{13Ry88Y&`[(. If deficiencies are discovered, an institution should take remedial action in a timely manner. An institution should be able to demonstrate that its policies and procedures establish effective internal controls to monitor and periodically assess the collateral valuation functions performed by a third party. 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. Communicating the noted deficiencies to and requesting correction of such deficiencies by the appraiser or person who prepared the evaluation. Appraisal Regulatory System Modernization. the official SGML-based PDF version on govinfo.gov, those relying on it for The final rule requires evaluations for transactions at or below the $500,000 threshold for CRE transactions, although banks may use appraisals for these exempt transactions in appropriate circumstances, such as for higher-risk transactions, as discussed in the "Interagency Appraisal and Evaluation Guidelines" attached to OCC 57. The use of real property or interests in property as security for a loan or investment, including mortgage-backed securities. electronic version on GPOs govinfo.gov. which are defined as those real estate-related financial transactions that an Agency engages in, contracts for, or regulates and that require the services of an appraiser. Refer to Federal regulations at FRB: 12 CFR 208.62, 211.5(k), 211.24(f), and 225.4(f); FDIC: 12 CFR part 353; NCUA: 12 CFR part 748; OCC: 12 CFR 21.11; OTS: 12 CFR 563.180; and FinCEN: 31 CFR 103.18. [59] The Guidelines are effective upon publication in the Federal Register. Prudent portfolio monitoring practices include criteria for determining when to obtain a new appraisal or evaluation. Institutions should refer to USPAP Advisory Opinion 13 for guidance on appraisers performing evaluations of real property collateral. 37. The Federal Financial Regulators are changing FIRREA through rules and bypassing Congress in doing so. Regardless of how entrepreneurial profit is handled in the appraisal analysis, an appropriate explanation and discussion should be provided in the appraisal report. appraisal education and real estate appraisal examination requirements More information and documentation can be found in our [4] However, this is not a requirement of the Agencies' appraisal regulations. 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. In addition, effective April 1, 2011, an institution must file a complaint with the appropriate state appraiser certifying and licensing agency under certain circumstances. This review also should ensure that an appraisal or evaluation contains sufficient information and analysis to support the decision to engage in the transaction. An institution may use sampling and audit procedures to verify the seller's representations and warranties that the appraisals for the underlying loans in a pool of residential loans satisfy the Agencies' appraisal regulations and are consistent with supervisory guidance and an institution's internal policies. Sample 1 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. 511 (1989); 12 U.S.C. Self-contained Appraisal ReportAccording to USPAP Standards Rule 2-2(a), a self-contained appraisal report is the most complete and detailed appraisal report option. Appraiser An Independent nationally recognized professional commercial real estate appraiser who (i) is a member in good standing of the Appraisal Institute, (ii) if the state in which the related Mortgaged Property is located certifies or licenses appraisers, is certified or licensed in such state, and (iii) has a minimum of five years experience in the related property type and market. Each appraisal must contain an estimate of market value, as defined by the Agencies' appraisal regulations. Appraised Value With respect to any Mortgage Loan originated in connection with a refinancing, the appraised value of the Mortgaged Property based upon the appraisal made at the time of such refinancing or, with respect to any other Mortgage Loan, the lesser of (x) the appraised value of the Mortgaged Property based upon the appraisal made by a fee appraiser at the time of the origination of the related Mortgage Loan, and (y) the sales price of the Mortgaged Property at the time of such origination. the Agencies will determine whether future revisions to the Guidelines may be necessary. The valuation is based on the existing operations of the business and its current operating record, with the assumption that the business will continue to operate. Is regulated under 12 CFR 723 secured by real estate properties establish acceptable performance! 'S content should be provided in the appraisal monitor collateral risk on a periodic basis reflect... 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