Proposed Interagency Appraisal and Evaluation Guidelines, 69647-69662 [E8-27401]
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Federal Register / Vol. 73, No. 224 / Wednesday, November 19, 2008 / Notices
69647
TABLE 1.—REREGISTRATION ELIGIBILITY DECISION DOCKETS OPENING
Registration Case Name and
Number
Chemical Review Manager, Telephone Number, and E-mail
Address
Docket ID Number
EPA–HQ–OPP–2003–0250
Lance Wormell, (703) 603–0523,
wormell.lance@epa.gov
Pentachlorophenol, 2505
EPA–HQ–OPP –2004–0402
Diane Isbell, (703) 308–8154,
isbell.diane@epa.gov
Creosote, 0139
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Chromated arsenicals, 0132
EPA–HQ–OPP–2003–0248
Jacqueline Campbell-McFarlane, (703) 308–6416,
campbell-mcfarlane.jacqueline@epa.gov
Although the chromated arsenicals,
pentachlorophenol, and creosote REDs
were signed on September 25, 2008,
certain components of the document,
which did not affect the final regulatory
decision, were undergoing final editing
at that time. These components,
including the list of additional generic
and product-specific data requirements,
appendices, minor typographical edits,
and other relevant information, have
been added to the chromated arsenicals,
pentachlorophenol, and creosote RED
documents.
EPA is applying the principles of
public participation to all pesticides
undergoing reregistration and tolerance
reassessment. The Agency’s Pesticide
Tolerance Reassessment and
Reregistration; Public Participation
Process, published in the Federal
Register on May 14, 2004, (69 FR 26819)
(FRL–7357–9) explains that in
conducting these programs, EPA is
tailoring its public participation process
to be commensurate with the level of
risk, extent of use, complexity of issues,
and degree of public concern associated
with each pesticide. Due to its uses,
risks, and other factors, chromated
arsenicals, pentachlorophenol, and
creosote were reviewed through the full
6–Phase process. Through this process,
EPA worked extensively with
stakeholders and the public to reach the
regulatory decisions for chromated
arsenicals, pentachlorophenol, and
creosote.
The reregistration program is being
conducted under congressionally
mandated time frames, and EPA
recognizes the need both to make timely
decisions and to involve the public. The
Agency is not issuing the chromated
arsenicals, pentachlorophenol, and
creosote REDs for public comment
because they were reviewed through the
full 6-phase process which included
two 60–day comment periods.
B. What is the Agency’s Authority for
Taking this Action?
Section 4(g)(2) of FIFRA, as amended,
directs that, after submission of all data
concerning a pesticide active ingredient,
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the Administrator shall determine
whether pesticides containing such
active ingredient are eligible for
reregistration, before calling in product
specific data on individual end-use
products and either reregistering
products or taking other ‘‘appropriate
regulatory action.’’
List of Subjects
Environmental protection, Pesticides
and pests, antimicrobials, heavy duty
wood preservatives.
Dated: November 12, 2008.
Joan Harrigan Farrelly,
Director, Antimicrobials Division, Office of
Pesticide Programs.
FR Doc. E8–27307 Filed 11–18–08; 8:45 am
BILLING CODE 6560–50–S
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the
Currency
[Docket ID OCC–2008–0021]
FEDERAL RESERVE SYSTEM
[Docket No. OP–1338]
FEDERAL DEPOSIT INSURANCE
CORPORATION
DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
[Docket ID OTS–2008–0012]
NATIONAL CREDIT UNION
ADMINISTRATION
RIN 3133–AD38
Proposed Interagency Appraisal and
Evaluation Guidelines
AGENCIES: Office of the Comptroller of
the Currency, Treasury (OCC); Board of
Governors of the Federal Reserve
System (FRB); Federal Deposit
Insurance Corporation (FDIC); Office of
Thrift Supervision, Treasury (OTS); and
National Credit Union Administration
(NCUA).
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Notice with request for
comment.
ACTION:
SUMMARY: The OCC, FRB, FDIC, OTS,
and NCUA (the Agencies), request
comment on the proposed Interagency
Appraisal and Evaluation Guidelines
(proposed Guidelines). The proposed
Guidelines, which would supersede the
1994 Interagency Appraisal and
Evaluation Guidelines (1994
Guidelines), reflect revisions to the
Uniform Standards of Professional
Appraisal Practice (USPAP) and the
evolution of collateral valuation
practices, such as the use of automated
valuation models (AVMs). The proposed
Guidelines also incorporate refinements
made by the Agencies to the supervision
of regulated institutions’ appraisal and
evaluation programs since 1994 and
reflect the participation of the NCUA,
which was not a party to the 1994
Guidelines. The proposed Guidelines
are intended to clarify the Agencies’ real
estate appraisal regulations and promote
a safe and sound real estate collateral
valuation program.
DATES: Comments must be submitted on
or before January 20, 2009.
ADDRESSES: Comments should be
directed to:
OCC: You may submit comments by
any of the following methods:
• E-mail:
regs.comments@occ.treas.gov.
• Fax: (202) 874–4448.
• Mail: Office of the Comptroller of
the Currency, 250 E Street, SW., Mail
Stop 1–5, Washington, DC 20219.
• Hand Delivery/Courier: 250 E
Street, SW., Attn: Public Information
Room, Mail Stop 1–5, Washington, DC
20219.
Instructions: You must include
‘‘OCC’’ as the agency name and ‘‘Docket
ID OCC–2008–0021’’ in your comment.
In general, OCC will enter all comments
received into the docket without
change, including any business or
personal information that you provide
such as name and address information,
e-mail addresses, or phone numbers.
Comments, including attachments and
other supporting materials, received are
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part of the public record and subject to
public disclosure. Do not enclose any
information in your comment or
supporting materials that you consider
confidential or inappropriate for public
disclosure.
You may review comments and other
related materials by any of the following
methods:
• Viewing Comments Personally: You
may personally inspect and photocopy
comments at the OCC’s Public
Information Room, 250 E Street, SW.,
Washington, DC. For security reasons,
the OCC requires that visitors make an
appointment to inspect comments. You
may do so by calling (202) 874–5043.
Upon arrival, visitors will be required to
present valid government-issued photo
identification and submit to security
screening in order to inspect and
photocopy comments.
• Docket: You may also view or
request available background
documents and project summaries using
the methods described above.
FRB: You may submit comments,
identified by Docket No. OP–1338, by
any of the following methods:
• Agency Web Site: https://
www.federalreserve.gov. Follow the
instructions for submitting comments at
https://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm.
• Federal eRulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments.
• E-mail:
regs.comments@federalreserve.gov.
Include the docket number in the
subject line of the message.
• Fax: 202/452–3819 or 202/452–
3102.
• Mail: Jennifer J. Johnson, Secretary,
Board of Governors of the Federal
Reserve System, 20th Street and
Constitution Avenue, NW., Washington,
DC 20551.
All public comments are available
from the FRB’s Web site at https://
www.federalreserve.gov/generalinfo/
foia/ProposedRegs.cfm as submitted,
unless modified for technical reasons.
Accordingly, your comments will not be
edited to remove any identifying or
contact information. Public comments
may also be viewed in electronic or
paper form in Room MP–500 of the
FRB’s Martin Building (20th and C
Streets, NW.) between 9 a.m. and 5 p.m.
on weekdays.
FDIC: You may submit comments by
any of the following methods:
• Agency Web Site: https://
www.fdic.gov/regulations/laws/federal.
Follow instructions for submitting
comments on the Agency Web Site.
• E-mail: Comments@FDIC.gov.
Include ‘‘Proposed Interagency
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Appraisal and Evaluation Guidelines’’
in the subject line of the message.
• Mail: Robert E. Feldman, Executive
Secretary, Attention: Comments, Federal
Deposit Insurance Corporation, 550 17th
Street, NW., Washington, DC 20429.
• Hand Delivery/Courier: Guard
station at the rear of the 550 17th Street
Building (located on F Street) on
business days between 7 a.m. and 5 p.m.
(EST).
• Federal eRulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments.
Public Inspection: All comments
received will be posted without change
to https://www.fdic.gov/regulations/laws/
federal including any personal
information provided. Comments may
be inspected and photocopied in the
FDIC Public Information Center, 3501
North Fairfax Drive, Room E–1002,
Arlington, VA 22226, between 9 a.m.
and 5 p.m. (EST) on business days.
Paper copies of public comments may
be ordered from the Public Information
Center by telephone at (877) 275–3342
or (703) 562–2200.
OTS: You may submit comments,
identified by docket number ID OTS–
2008–0012, by any of the following
methods:
• E-mail:
regs.comments@ots.treas.gov. Please
include ID OTS–2008–0012 in the
subject line of the message and include
your name and telephone number in the
message.
• Fax: (202) 906–6518.
• Mail: Regulation Comments, Chief
Counsel’s Office, Office of Thrift
Supervision, 1700 G Street, NW.,
Washington, DC 20552, Attention: ID
OTS–2008–0012.
• Hand Delivery/Courier: Guard’s
Desk, East Lobby Entrance, 1700 G
Street, NW., from 9 a.m. to 4 p.m. on
business days, Attention: Regulation
Comments, Chief Counsel’s Office,
Attention: ID OTS–2008–0012.
Instructions: All submissions received
must include the agency name and
docket number for this notice. All
comments received will be posted
without change, including any personal
information provided. Comments
including attachments and other
supporting materials received are part of
the public record and subject to public
disclosure. Do not enclose any
information in your comments or
supporting materials that you consider
confidential or inappropriate for public
disclosure.
• Viewing Comments On-Site: You
may inspect comments at the Public
Reading Room, 1700 G Street, NW., by
appointment. To make an appointment
for access, call (202) 906–5922, send an
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e-mail to public.info@ots.treas.gov, or
send a facsimile transmission to (202)
906–6518. (Prior notice identifying the
materials you will be requesting will
assist us in serving you.) We schedule
appointments on business days between
10 a.m. and 4 p.m. In most cases,
appointments will be available the next
business day following the date we
receive a request.
NCUA: You may submit comments by
any of the following methods (Please
send comments by one method only):
• Federal eRulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments.
• NCUA Web Site: https://
www.ncua.gov/
RegulationsOpinionsLaws/
proposedregs/proposedregs.html Follow
the instructions for submitting
comments.
• E-mail: Address to
regcomments@ncua.gov. Include ‘‘[Your
name] Comments on Proposed
Interagency Appraisal and Evaluation
Guidelines,’’ in the e-mail subject line.
• Fax: (703) 518–6319. Use the
subject line described above for e-mail.
• Mail: Address to Mary F. Rupp,
Secretary of the Board, National Credit
Union Administration, 1775 Duke
Street, Alexandria, Virginia 22314–
3428.
• Hand Delivery/Courier: Same as
mail address.
Public inspection: All public
comments are available on the agency’s
website at https://www.ncua.gov/
RegulationsOpinionsLaws/
proposed_regs/comments.html as
submitted, except as may not be
possible for technical reasons. Public
comments will not be edited to remove
any identifying or contact information.
Paper copies of comments may be
inspected in NCUA’s law library, at
1775 Duke Street, Alexandria, Virginia
22314, by appointment weekdays
between 9 a.m. and 3 p.m. To make an
appointment, call (703) 518–6546 or
send an e-mail to _OGCMail @ncua.gov
.
FOR FURTHER INFORMATION CONTACT:
OCC: Doreen Ledbetter, Credit Risk
Specialist, or Vance S. Price, Director,
Credit and Market Risk Division, (202)
874–5170; Christopher Manthey,
Counsel, Bank Activities and Structure,
or Mitchell Plave, Counsel, Legislative
and Regulatory Activities, (202) 874–
5300.
FRB: Virginia M. Gibbs, Senior
Supervisory Financial Analyst, (202)
452–2521; or Sabeth I. Siddique,
Assistant Director, (202) 452–3861,
Division of Banking Supervision and
Regulation; or Walter McEwen, Senior
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Counsel, (202) 452–3321, or Benjamin
W. McDonough, Senior Attorney, (202)
452–2036, Legal Division. For users of
Telecommunications Device for the Deaf
(‘‘TDD’’) only, contact (202) 263–4869.
FDIC: Beverlea S. Gardner, Senior
Examination Specialist, Division of
Supervision and Consumer Protection,
(202) 898–6790, or Janet V. Norcom,
Counsel, Legal Division, (202) 898–
8886.
OTS: Debbie Merkle, Project Manager,
Credit Risk, Risk Management, (202)
906–5688, or Marvin Shaw, Senior
Attorney, Regulations and Legislation
Division (202) 906–6639.
NCUA: Moisette Green, Staff
Attorney, (703) 518–6540 or Robert C.
Leonard, Program Officer, (703) 518–
6396.
SUPPLEMENTARY INFORMATION:
I. Background
Title XI of the Financial Institutions
Reform, Recovery, and Enforcement Act
of 1989 (FIRREA) 1 requires each
Agency to prescribe appropriate
standards for the performance of real
estate appraisals in connection with
‘‘federally related transactions,’’ 2 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.3 These rules must require, at
a minimum, that real estate appraisals
be performed in accordance with
generally accepted uniform appraisal
standards as evidenced by the appraisal
standards promulgated by the Appraisal
Standards Board of The Appraisal
Foundation (Appraisal Standards
Board), and that such appraisals be in
writing.4 Such appraisals are to be
performed by an individual whose
competency has been demonstrated and
whose professional conduct is subject to
effective state supervision. An Agency
may require compliance with additional
appraisal standards if it makes a
determination that such additional
standards are required in order to
properly carry out its statutory
responsibilities.5 Each of the Agencies
has adopted additional appraisal
standards.6
The OCC, FRB, FDIC, and OTS jointly
issued the 1994 Guidelines to provide
further guidance to regulated financial
institutions on prudent appraisal and
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1 Public
Law 101–73, 103 Stat. 183 (1989).
U.S.C. 3339.
3 12 U.S.C. 3350(4).
4 12 U.S.C. 3339.
5 Id.
6 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.
2 12
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evaluation policies, procedures,
practices, and standards.7 The 1994
Guidelines address supervisory matters
relating to real estate appraisals and
evaluations used to support real estaterelated financial transactions and
provide guidance to both examiners and
regulated institutions about prudent
appraisal and evaluation programs. In
particular, the 1994 Guidelines provide
clarification of expectations for written
evaluations of real estate collateral in
certain transactions that do not require
the services of an appraiser under the
Agencies’ regulations.
Over the years, the Agencies have
issued several additional supervisory
guidance documents to promote sound
practices in regulated institutions’
appraisal and evaluation programs,
including independence in the appraisal
and evaluation functions, the appraisal
of residential tract development, and
compliance with revisions to USPAP.8
Since the issuance of the 1994
Guidelines, there have been some
significant developments concerning
appraisals and advancements in
regulated institutions’ collateral
valuation practices. Advances in
technology, for example, have prompted
increased use of AVMs to derive values
for residential transactions that do not
require the services of an appraiser
under the appraisal regulations. Further,
in 2006, the Appraisal Standards Board
issued significant revisions to USPAP,
adopting the USPAP Scope of Work
Rule and deleting the USPAP Departure
Rule. For these reasons, the Agencies
are issuing the proposed Guidelines to
provide further clarification of
supervisory expectations for regulated
7 See OCC: Comptroller’s Handbook, Commercial
Real Estate and Construction Lending (1998)
(Appendix E); FRB: 1994 Interagency Appraisal and
Evaluation Guidelines (SR letter 94–55); FDIC: FIL–
74–94; and OTS: 1994 Interagency Appraisal and
Evaluation Guidelines (Thrift Bulletin 55a).
8 This includes: The 2003 Interagency Statement
on Independent Appraisal and Evaluation
Functions, OCC: Advisory Letter 2003–9; FRB: SR
letter 03–18; FDIC: FIL–84–2003; OTS: CEO
Memorandum No.184; and NCUA: NCUA Letter to
Credit Unions 03–CU–17; 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. 213: and
NCUA: NCUA Letter to Credit Unions 05–CU–06;
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. 225: and NCUA: NCUA
Letter to Credit Unions 05–CU–12; and 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. 240: and NCUA: Regulatory Alert
06–RA–04. Each of these guidance documents
continues to be in effect.
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institutions’ appraisal and evaluation
programs.
Independent and reliable collateral
valuations are core to a regulated
institution’s real estate credit decisions.
Therefore, the proposed Guidelines are
intended to re-enforce the importance of
sound collateral valuation practices that
the Agencies’ appraisal regulations
mandate. The Agencies believe that the
proposed Guidelines further clarify their
long standing expectations for an
institution’s appraisal and evaluation
program, which are necessary to
promote safe and sound real estate
lending activity.
II. Principal Elements of the Guidelines
The proposed Guidelines provide
guidance on elements of a safe and
sound appraisal and evaluation
program, including the Agencies’
supervisory expectations concerning the
independence of an institution’s
appraisal and evaluation program from
influence by the borrower or the loan
production staff, the competence of
individuals who perform appraisals and
evaluations, standards for the
development and reporting of appraisals
and evaluations, and an institution’s
collateral review function. The
proposed Guidelines also provide
guidance and expectations for risk
management principles and control
measures for institutions’ appraisal and
evaluation programs.
The proposed Guidelines would
supersede the 1994 Guidelines and
reflect guidance issued by the Agencies
over the past several years on
independence of the appraisal and
evaluation program, appraisals for
residential tract developments, and the
USPAP Scope of Work Rule. The core
principles of the 1994 Guidelines have
been retained. Further, the format of the
1994 Guidelines has been retained in
the proposed Guidelines to make it
easier for regulated institutions and
examiners to find the material that has
not been revised.
The following discussion summarizes
the proposed major revisions to the
1994 Guidelines.
Independence of the Appraisal and
Evaluation Program. The proposed
Guidelines emphasize the importance of
the independence of an institution’s
appraisal and evaluation program from
influence by the loan production
process or borrower. For small and rural
institutions, where complete separation
of the collateral valuation function and
the loan production process may not be
possible, the proposed Guidelines
discuss prudent minimal safeguards and
clarify that lending staff should abstain
from the approval of the loan on which
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they perform, order, or review an
appraisal or evaluation.
Minimum Appraisal Standards. The
proposed Guidelines provide further
clarification of the five appraisal
standards in the Agencies’ appraisal
regulations, as follows. First, the
Agencies’ appraisal regulations provide
that USPAP sets the minimum appraisal
standards for federally related
transactions. The proposed Guidelines
provide clarification of those appraisal
standards above and beyond USPAP
that are required by the Agencies’
appraisal regulations. Second, the
Agencies’ appraisal regulations require
that appraisals for federally related
transactions be written and contain
sufficient information to support the
institution’s credit decision. The
proposed Guidelines reflect an
expanded discussion of the Agencies’
expectations for the content of
appraisals that will satisfy this
requirement. Third, the Agencies’
appraisal regulations require that
appraisals analyze and report
deductions and discounts for a loan to
finance proposed construction or
renovation, partially leased buildings,
non-market lease terms, and tract
developments with unsold units. The
proposed Guidelines provide more
detail on the application of this
standard by property type, both
commercial and residential. Fourth, the
Agencies’ appraisal regulations require
that appraisals be based upon the
regulatory definition of market value.
The discussion of market value in the
1994 Guidelines has been expanded in
the proposed Guidelines to link the
appraisal regulatory definition of market
value with the definition of value in the
Agencies’ real estate lending standards
guidelines.9 The proposed Guidelines
also address the definition of ‘‘market
value’’ in an appraisal for a loan to
finance a development and construction
real estate project. Fifth, the Agencies’
appraisal regulations require that an
institution use the services of a statecertified or licensed appraiser. The
proposed Guidelines remind
institutions that an appraiser’s
credential is not the sole determination
of competency and that institutions
should consider the appraiser’s
education and experience to assess his
or her competency for a given appraisal
assignment. Further, the proposed
Guidelines remind institutions to
9 OCC 12 CFR part 34, subpart D; FRB: 12 CFR
part 208, Appendix C; FDIC 12 CFR part 365; and
OTS 12 CFR 560.100 and 560.101. 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. 12 CFR 701.21; 12 CFR part 723.
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convey to an appraiser that the
requirements of the Agencies’ minimum
appraisal standards are considered
assignment conditions for an appraiser
under USPAP.
Appraisal Development and
Appraisal Reports. These sections were
revised to reflect revisions to USPAP
that the Appraisal Standards Board
implemented in July 2006 to eliminate
the USPAP Departure Rule and to adopt
the USPAP Scope of Work Rule. The
proposed Guidelines incorporate the
guidance provided by the Agencies in
the June 2006 Interagency Statement on
the 2006 Revisions to USPAP.10 The
proposed Guidelines remind
institutions that while the appraiser is
responsible for complying with USPAP
and its Scope of Work Rule, the
institution is responsible for complying
with the Agencies’ appraisal regulations
and should discuss its needs and
expectations for the appraisal with the
appraiser. Further, the discussion on
appraisal reports no longer refers to
specific USPAP reporting formats (that
is, self-contained, summary, and
restricted appraisal reports). Rather, the
discussion addresses the level and
adequacy of information and analysis in
the report that is necessary to comply
with both USPAP and the regulatory
appraisal requirement to provide
sufficient information to support the
institution’s credit decision. Reference
to the revised USPAP terminology has
been included in a new proposed
Appendix C, which provides a glossary
of terms. The Agencies understand that
the Appraisal Standards Board may
consider revisions to the USPAP
reporting formats so this discussion was
worded broadly to allow for possible
USPAP changes.
Evaluation Content. Under the
Agencies’ appraisal regulations, an
institution may obtain or perform an
evaluation of real property collateral in
lieu of an appraisal for transactions that
qualify for certain appraisal exemptions.
This section describes the Agencies’
expectations on the information and
analysis that should be included in an
evaluation. An institution should obtain
more detailed evaluations for higher risk
real estate-related financial transactions
or as its portfolio risk increases. Further,
this section was revised to reflect the
inclusion of a new appendix (Appendix
B) in the proposed Guidelines on
evaluation alternatives. This new
appendix provides a discussion of
appropriate practices and controls
regarding an institution’s use of AVMs
and tax assessment valuations as
evaluation alternatives. This section
10 See
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also addresses the Agencies’
expectations for institutions to establish
a process and procedures for
determining the appropriate use of
evaluation alternatives for a given
transaction or lending activity,
considering associated risk.
Reviewing Appraisals and
Evaluations. This is a new section in the
proposed Guidelines and is based on
material in the Program Compliance
section in the 1994 Guidelines, the 2003
Interagency Statement on Independent
Appraisal and Evaluation Functions,
and a related statement issued by the
Agencies in 2005 addressing frequently
asked questions.11 While the proposed
Guidelines retain a Program Compliance
section concerning effective internal
controls, the new section emphasizes
the importance of an institution’s
review function to promote quality
appraisals and evaluations. The
Agencies expect institutions to maintain
a robust review process for ensuring that
appraisals and evaluations support their
credit decisions. The program should
provide for an increasingly
comprehensive review of appraisals
supporting transactions that pose higher
credit risk to the institution. This
expectation for a risk-based program
recognizes the importance of the
collateral valuation process to
promoting sound credit underwriting
decisions. As explained in the proposed
Guidelines, the scope of the review will
depend upon the type and risk of the
transaction and the process through
which the appraisal or evaluation is
obtained. The proposed Guidelines
provide guidance on the review process,
including documentation,
independence, review procedures, and
reviewers’ qualifications. The proposed
Guidelines also indicate that an
institution with prior approval from its
primary regulator may employ various
techniques, such as automated tools or
sampling methods, for performing prefunding reviews of appraisals or
evaluations supporting lower risk
single-family residential mortgages.
Finally, the proposed Guidelines outline
expectations for a compliance program
to establish effective internal controls
that promote compliance with the
Agencies’ appraisal regulations,
supervisory guidelines and institutions’
internal policies.
Portfolio Monitoring and Updating
Collateral Valuations. This section was
revised to emphasize the importance of
sound portfolio monitoring principles
that set forth criteria for when an
institution should replace or update
collateral valuations for existing real
11 See
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estate loans. In establishing criteria, an
institution should consider the
appropriateness of the valuation tool or
methodology, the age of the original
appraisal or evaluation, property type,
current market conditions, and current
use of the property. Further, the
proposed Guidelines remind
institutions that as the reliance on real
estate becomes more important on an
existing credit, there is a need for timely
information to assess the value of the
real estate collateral and the associated
risk to the institution. This section also
explains that examiners have the right
to require an institution to obtain an
appraisal or evaluation when there are
safety and soundness concerns on an
existing real estate secured credit.
Appraisal Exemptions (Appendix A).
This new appendix provides further
clarification on real estate-related
financial transactions exempted from
the Agencies’ appraisal regulations. This
discussion is based on the preamble to
the Agencies’ 1994 regulations and
responds to the questions the Agencies
have received over the years concerning
exemptions to their appraisal
requirements.
Evaluation Alternatives (Appendix B).
This new appendix reflects the
discussion on the use of AVMs and tax
assessment valuations as evaluation
alternatives in the Interagency Credit
Risk Management Guidance for Home
Equity Lending.12 Appendix B provides
guidance on the process for selecting
and validating a model. The appendix
also provides a framework, in the form
of a set of questions, that institutions
may consider for determining when an
AVM may be an acceptable evaluation
alternative for a given transaction.
Glossary of Terms (Appendix C). The
proposed Guidelines contain a new
glossary of various terms used in the
Guidelines and appraisal practice to aid
institutions in understanding the
Guidelines. Many of these terms are
already defined in the Agencies’
appraisal regulations and in USPAP.
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III. Request for Comment
The Agencies are requesting public
comment on all aspects of the proposed
Guidelines. In particular, the Agencies
request comment on the clarity of the
proposed Guidelines regarding the
interpretations of the thirteen appraisal
exemptions discussed in Appendix A.13
12 OCC: 2005–22; FRB: SR letter 05–11; FDIC: FIL
45–2005; OTS: CEO Memorandum No. 222; and
NCUA: NCUA Letter to Credit Unions 05–CU–07.
13 In light of recent events in the residential
mortgage market, the Agencies are interested in
comments on the exemption from the regulatory
appraisal requirements for residential real estate
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The Agencies further request comment
on the appropriateness of risk
management expectations and controls
in the evaluation process including
those discussed in Appendix B of the
proposed Guidelines. The Agencies also
seek comment on the expectations in
the proposed Guidelines on reviewing
appraisals and evaluations. In
particular, the Agencies seek specific
comment on whether the use of
automated tools or sampling methods
that the proposed Guidelines allow for
reviews of appraisals or evaluations
supporting lower risk single-family
residential mortgages is 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 the institution’s appraisal process for
those low risk mortgage transactions.
The text of the proposed Guidelines,
entitled proposed 2008 Interagency
Appraisal and Evaluation Guidelines, is
as follows:
Purpose
The Office of the Comptroller of the
Currency (OCC), the Board of Governors
of the Federal Reserve System (FRB), the
Federal Deposit Insurance Corporation
(FDIC), the Office of Thrift Supervision
(OTS), and the National Credit Union
Administration (NCUA) (the Agencies)
are jointly issuing these Interagency
Appraisal and Evaluation Guidelines
(Guidelines), which supersede the 1994
Interagency Appraisal and Evaluation
Guidelines. These Guidelines address
supervisory matters relating to real
estate appraisals and evaluations used
to support real estate-related financial
transactions.14 Further, these Guidelines
provide federally regulated institutions
and examiners clarification on the
Agencies’ expectations for prudent
appraisal and evaluation policies,
procedures, and practices.
Background
Title XI of the Financial Institutions
Reform, Recovery, and Enforcement Act
of 1989 (FIRREA) 15 requires each
Agency to prescribe appropriate
standards for the performance of real
estate appraisals in connection with
‘‘federally related transactions,’’ 16
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which are defined as those real estaterelated financial transactions that an
Agency engages in, contracts for, or
regulates and that require the services of
an appraiser.17 The Agencies’ appraisal
regulations must require, at a minimum,
that real estate appraisals be performed
in accordance with generally accepted
uniform appraisal standards as
evidenced by the appraisal standards
promulgated by the Appraisal Standards
Board, and that such appraisals be in
writing.18 An Agency may require
compliance with additional appraisal
standards if it makes a determination
that such additional standards are
required in order to properly carry out
its statutory responsibilities.19 Each of
the Agencies has adopted additional
appraisal standards.20
The Agencies’ real estate lending
regulations and guidelines,21 issued
pursuant to section 304 of the Federal
Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA),
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.22 The real
estate lending guidelines state that an
institution’s real estate lending program
should include an appropriate real
estate appraisal and evaluation program.
Supervisory Policy
An institution’s real estate appraisal
and evaluation policies and procedures
will be reviewed as part of the
examination of the institution’s overall
real estate-related activities. Examiners
will consider the institution’s size and
nature of its real estate-related activities
when assessing the appropriateness of
its program.
When analyzing individual
transactions, examiners will review an
appraisal or evaluation to determine
whether the methods, assumptions, and
value conclusions are reasonable.
Examiners also determine whether the
appraisal or evaluation complies with
the Agencies’ appraisal regulations and
17 12
U.S.C. 3350(4).
to Note 3.
18 Supra
19 Id.
transactions involving U.S. government sponsored
agencies.
14 These Guidelines pertain to all real estaterelated financial transactions originated or
purchased by a regulated institution or its operating
subsidiary for its own portfolio or as assets held for
sale, including activities of commercial and
residential real estate mortgage operations, capital
markets groups, and asset securitization and sales
units.
15 Public Law 101–73, 103 Stat. 183 (1989).
16 12 U.S.C. 3339.
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20 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.
21 OCC: 12 CFR part 34, subpart D; FRB: 12 CFR
part 208, subpart E; FDIC: 12 CFR part 365; and
OTS: 12 CFR 560.100 and 560.101.
22 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. 12 CFR
701.21; 12 CFR part 723.
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supervisory guidelines as well as the
institution’s policies. Examiners will
review the steps taken by an institution
to ensure that the persons who perform
the institution’s appraisals and
evaluations are qualified and are not
subject to conflicts of interest.
Institutions that fail to maintain a sound
appraisal and evaluation program or to
comply with the Agencies’ appraisal
regulations and supervisory guidelines
will be cited in supervisory letters or
examination reports and may be
criticized for unsafe and unsound
banking practices. Deficiencies will
require appropriate corrective action.
Appraisal and Evaluation Program
An institution’s board of directors or
its designated committee is responsible
for adopting and reviewing policies and
procedures that establish an effective
real estate appraisal and evaluation
program. The program should:
• Provide for the independence of the
persons ordering, performing, and
reviewing appraisals or evaluations;
• Establish selection criteria and
procedures to evaluate and monitor the
ongoing performance of persons who
perform appraisals or evaluations;
• Ensure that appraisals contain
sufficient information to support the
credit decision;
• Maintain criteria for content and
appropriate use of evaluations;
• Provide for the receipt and review
of the appraisal or evaluation report in
a timely manner to facilitate the credit
decision;
• Develop criteria to assess the
validity of existing appraisals or
evaluations to support subsequent
transactions;
• Implement internal controls that
promote compliance with these program
standards; and
• Establish criteria for obtaining
appraisals or evaluations for
transactions that are not otherwise
covered by the appraisal requirements
of the Agencies’ appraisal regulations.
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Independence of the Appraisal and
Evaluation Program
An institution should maintain
standards of independence as part of an
effective collateral valuation program
(both appraisal and evaluation
functions) for all of its real estate
lending activity. The collateral
valuation program is an integral
component of the credit underwriting
process and, therefore, should be
isolated from influence by the
institution’s loan production staff. An
institution should establish reporting
lines independent of loan production
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for staff that order, accept, and review
appraisals and evaluations.
Persons who perform appraisals must
be independent of the loan production
and collection processes and have no
direct or indirect interest, financial or
otherwise, in the property or
transaction. These standards of
independence also should apply to
persons who perform evaluations. While
the information provided to the
appraiser by the institution should not
unduly influence the appraiser, the
institution may provide a copy of the
sales contract for purchase transactions.
Further, an institution’s policies and
controls should ensure that the
institution does not communicate a
predetermined, expected, qualifying, or
owner’s estimate of value, or a loan
amount or target loan-to-value ratio to a
person performing an appraisal or
evaluation.
For a small or rural institution or
branch, it may not always be possible or
practical to separate the collateral
valuation program from the loan
production process. 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. In such cases, another loan
officer, other officer, or director of the
institution may be the only person
qualified to analyze the real estate
collateral. To ensure their
independence, such lending officials,
officers, or directors should abstain from
any vote or approval involving loans on
which they performed, ordered, or
reviewed the appraisal or evaluation.23
Selection of Persons Who May Perform
Appraisals and Evaluations
services is periodically reviewed by the
institution;
• The person selected is capable of
rendering an unbiased opinion;
• The person selected is independent
and has no direct, indirect, or
prospective interest, financial or
otherwise, in the property or the
transaction; and
• The person selected to perform an
appraisal holds the appropriate state
certification or license.
Under the Agencies’ appraisal
regulations, an institution or its agent
must directly select and engage
appraisers. There also should be
independence in the selection of
persons who perform evaluations.
Further, the person who selects or
oversees the selection of appraisers or
persons providing evaluation services
should be independent from the loan
production area. Independence is
compromised when a borrower or loan
production personnel recommends or
selects a person to perform an appraisal
or evaluation. An institution’s use of a
borrower-ordered appraisal violates the
Agencies’ appraisal regulations.
Institutions should use written
engagement letters when ordering
appraisals, particularly for large,
complex, or out-of-area commercial real
estate properties. An engagement letter
facilitates communication with the
appraiser and documents the
expectations of each party to the
appraisal assignment. An institution
should include the engagement letter in
its permanent credit file. To avoid the
appearance of any conflict of interest,
appraisal or evaluation development
work should not commence until the
institution has selected a person for the
assignment.
Transactions That Require Appraisals
An institution’s collateral valuation
program should establish criteria to
select, evaluate, and monitor the
performance of persons who perform an
appraisal or evaluation. The criteria
should ensure that:
• The institution’s selection process
is nonpreferential and unbiased;
• The person selected possesses the
requisite education, expertise, and
competence to complete the assignment;
• The work performed by persons
providing appraisal and evaluation
Although the Agencies’ appraisal
regulations exempt certain real estaterelated financial transactions from the
appraisal requirement, most real estaterelated financial transactions over the
appraisal threshold are considered
federally related transactions and, thus,
require appraisals.24 The Agencies
reserve the right to require an
appropriate appraisal under their
appraisal regulations to address safety
and soundness concerns in a
23 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. 55 FR 5614, 5618 (February 16, 1990),
55 FR 30193, 30206 (July 25, 1990).
24 In order to facilitate recovery in designated
major disaster areas, subject to safety and
soundness considerations, Section 2 of the
Depository Institutions Disaster Relief Act of 1992,
Public Law 102–485, 106 Stat. 2771 (October 23,
1992) provides the Agencies with the authority to
waive certain appraisal requirements for up to three
years after a Presidential declaration of a natural
disaster.
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transaction. (See Appendix A—
Appraisal Exemptions.) 25
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Minimum Appraisal Standards
The Agencies’ appraisal regulations
include the following five minimum
standards for the preparation of an
appraisal. (See Appendix C—Glossary
for terminology used in these
guidelines.)
The appraisal must:
• Conform to generally accepted
appraisal standards as evidenced by the
Uniform Standards of Professional
Appraisal Practice (USPAP)
promulgated by the Appraisal
Standards Board of the Appraisal
Foundation unless principles of safe
and sound banking require compliance
with stricter standards.
Although allowed by USPAP, the
Agencies’ appraisal regulations do not
permit an appraiser to appraise any
property in which the appraiser has an
interest, direct or indirect, financial or
otherwise. Further, the appraisal must
contain an opinion of market value as
defined in the Agencies’ appraisal
regulations. Under USPAP, the
appraisal must contain a certification
that the appraiser has complied with
USPAP. An institution may refer to the
USPAP certification to confirm whether
the appraiser is independent of the
property and the transaction, as
required by the Agencies’ appraisal
regulations. Under the Agencies’
appraisal regulations, the result of an
Automated Valuation Model (AVM), by
itself, 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.
• Be written and contain sufficient
information and analysis to support the
institution’s decision to engage in the
transaction.
An institution should obtain an
appraisal that is appropriate for the
particular federally related transaction,
considering the risk and complexity of
the transaction. The level of detail
should be sufficient to understand the
appraiser’s analysis and opinion of the
property’s market value. As provided by
the USPAP Scope of Work Rule,
appraisers are responsible for
25 As a matter of policy, OTS uses its supervisory
authority to require problem associations and
associations in troubled condition to obtain
appraisals for all real estate-related transactions
over $100,000 (unless the transaction is otherwise
exempt). NCUA requires a written estimate of
market value for all real estate-related transactions
valued at the appraisal threshold or less, or that
involve existing credit where there is no advance
of monies and material change in the condition of
the property. 12 CFR 722.3(d).
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establishing the scope of work to be
performed in rendering an opinion of
the property’s market value and have
three different reporting options
available. (See Appendix C—Glossary of
Terms describing reporting options.)
However, an institution should ensure
that the scope of work is appropriate for
the assignment. The appraiser’s scope of
work should be consistent with the
valuation methodology employed for
similar property types, market
conditions, and transactions. The
content and format of the appraisal
report must contain sufficient
information and analysis to support the
institution’s decision to engage in the
transaction. The appraisal report should
contain sufficient disclosure of the
nature and extent of inspection and
research performed to verify the
property’s condition and support the
appraiser’s opinion of market value. The
result of an AVM certified by an
appraiser does not, by itself, meet this
standard.
• Analyze and report appropriate
deductions and discounts for proposed
construction or renovation, partially
leased buildings, non-market lease
terms, and tract developments with
unsold units.
This standard is designed to avoid
having appraisals prepared using
unrealistic assumptions and
inappropriate methods. An appraisal
must include the market value of the
property and should reflect the
property’s condition in its actual
physical condition, use, and zoning
designation, as of the effective date of
the appraisal.
Æ Proposed Construction or
Renovation. For properties where
improvements are to be constructed or
rehabilitated, an institution may request
a prospective market value as completed
and as stabilized. While an institution
may request the appraiser to provide the
sum of retail sales for a proposed
development, this value is not the
market value of the property for the
purpose of the Agencies’ appraisal
regulations.
Æ Partially Leased Buildings. For
proposed and partially leased rental
developments, the appraiser must make
appropriate deductions and discounts.
Appropriate deductions and discounts
should include items such as leasing
commission, rent losses, tenant
improvements, and entrepreneurial
profit.
Æ Non-market Lease Terms. For
properties subject to leases with terms
that do not reflect current market
conditions, the appraiser must make
appropriate deductions and discounts,
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which should be based on stabilized
occupancy at prevailing market terms.
Tract Developments With Unsold Units
• Raw Land. The appraiser must
provide an opinion of value for raw land
based on its current condition and
existing zoning that includes
appropriate deductions and discounts.
Appropriate deductions and discounts
should include items such as holding
costs, marketing costs, and
entrepreneurial profit.
• Developed Lots. For proposed
developments of five or more residential
lots, the appraiser must analyze and
report appropriate deductions and
discounts. 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. The
estimated sales absorption period
should reflect the expected holding
period before development commences
as well as the time frame for the actual
development and sale of the lots.
• Attached or Detached Single-family
Homes. For proposed construction and
sale of five or more attached or detached
single-family homes in the same
development, the appraiser must
analyze and report appropriate
deductions and discounts. Appropriate
deductions and discounts should reflect
holding costs, marketing costs, and
entrepreneurial profit during the sales
absorption period of the completed
units. If an institution finances
construction on an individual unit
basis, an appraisal of the individual
units may be used if the institution can
demonstrate through an independently
obtained feasibility study or market
analysis that all units collateralizing the
loan can be constructed and sold within
12 months. 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.
• Condominiums. For proposed
construction and sale of a condominium
building with five or more units, the
appraisal must reflect appropriate
deductions and discounts. Appropriate
deductions and discounts should
include holding costs, marketing costs,
and entrepreneurial profit during the
sales absorption period of the completed
units. If an institution finances
construction of a single condominium
building with less than five units or a
condominium project with multiple
buildings with less than five units per
building, the institution may rely on
appraisals of the individual units if the
institution can demonstrate through an
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independently obtained feasibility study
or market analysis that all units
collateralizing the loan can be
constructed and sold within 12 months.
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.
• Be based upon the definition of
market value set forth in the appraisal
regulation.
Each appraisal must contain an
estimate of market value, as defined by
the Agencies’ appraisal regulations. The
Agencies’ 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. Further, the market
value should not include a going
concern value or a special value to a
specific property user. An appraisal may
contain separate opinions of value for
such items so long as they are clearly
identified and disclosed.
The estimate of market value should
consider the real property’s current
physical condition, use, and zoning as
of the appraisal date. For a transaction
financing construction or renovation of
a building, an institution would
generally request an appraiser to
provide the property’s market value in
its ‘‘as is’’ condition as of the appraisal’s
effective date and the property’s
‘‘prospective’’ market values at the time
development is expected to be
completed and at the time stabilized
occupancy is projected to be achieved.26
Prospective market value opinions
should be based upon current and
reasonably expected market conditions.
When an appraisal includes prospective
value opinions, there should be a point
of reference to the market conditions
and time frame on which the appraiser
based the analysis.27
• Be performed by state-certified or
licensed appraisers in accordance with
requirements set forth in the appraisal
regulation.
In determining competency for a
given appraisal assignment, institutions
should consider an appraiser’s
education and experience. An
institution should confirm that the
26 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).
27 See USPAP, Statement 4 on Prospective Value
Opinions, for further explanation.
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appraiser holds a valid credential from
the appropriate state appraiser
regulatory authority. An institution
should not base competency solely on
the appraiser’s credentialing. When
ordering appraisals, an institution
should convey to an appraiser that the
Agencies’ minimum appraisal standards
must be followed. From the appraiser’s
perspective, these minimum appraisal
standards are considered assignment
conditions under USPAP.
Appraisal Development
The Agencies’ appraisal regulations
require appraisals for federally related
transactions to comply with USPAP.
Consistent with the USPAP Scope of
Work Rule,28 the appraisal must reflect
an appropriate scope of work that
provides for ‘‘credible’’ assignment
results. The appraisal’s scope of work
should reflect the extent to which the
property is identified and inspected, the
type and extent of data researched, and
the analyses applied to arrive at
opinions or conclusions.
While an appraiser must comply with
USPAP and establish the scope of work
in an appraisal assignment, an
institution is responsible for complying
with the Agencies’ appraisal regulations
and obtaining an appraisal that provides
sufficient information to support its
decision to engage in the transaction.
Therefore, to ensure that an appraisal is
appropriate for the intended use, an
institution should discuss its needs and
expectations for the appraisal with the
appraiser. Such discussions should
assist the appraiser in establishing the
scope of work and form the basis of the
institution’s engagement letter, as
appropriate. An institution should not
allow lower cost or the speed of delivery
time to influence the appraiser’s
determination of an appropriate scope
of work for an appraisal supporting a
federally related transaction.
If applicable, the appraisal should
include three approaches (cost, income,
and sales comparison) to analyze the
value of a property, and should
reconcile the results of each approach to
estimate market value. An appraisal also
should reflect an analysis of the
property’s sales history and an opinion
as to the highest and best use of the
property. Further, 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.
28 See
USPAP Scope of Work Rule, Advisory
Opinions 28 and 29.
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Appraisal Reports
An institution is responsible for
identifying the appropriate appraisal
reporting option to support its credit
decisions. The institution should
consider the risk, size, and complexity
of the transaction and the real estate
collateral when determining its
appraisal engagement instructions to an
appraiser.
USPAP provides various reporting
options that an appraiser may use to
present the results of appraisals. The
major difference among these reporting
options is the level of detail presented
in the report. A reporting 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. Therefore,
the Agencies believe that such reports
will not be appropriate to support most
federally related transactions. However,
these less detailed reports may be
appropriate for real estate collateral
monitoring or in circumstances when an
institution’s collateral valuation
program requires an evaluation. (See
Appendix C—Glossary of Terms
describing reporting options.)
Regardless of the reporting option, the
appraisal report should contain
sufficient detail to allow the institution
to understand the scope of work
performed. Sufficient information
should include the disclosure of
research and analysis performed, as well
as disclosure of the research and
analysis not performed together with the
rationale for its omission.
Transactions That Require Evaluations
An institution may obtain or perform
an evaluation of real property collateral
in lieu of an appraisal for transactions
that qualify for certain exemptions
under the Agencies’ appraisal
regulations. These exemptions include a
transaction that:
• Has a transaction value equal to or
less than the appraisal threshold.
• Is a business loan with a transaction
value equal to or less than the business
loan threshold, and is not dependent on
the sale of, or rental income derived
from, real estate as the primary source
of repayment.29
• Involves an existing extension of
credit at the lending institution,
provided that:
Æ There has been no obvious and
material change in the market
conditions or physical aspects of the
29 NCUA regulations do not contain an exemption
from the appraisal requirements specific to member
business loans.
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property that threaten the adequacy of
the institution’s real estate collateral
protection after the transaction, even
with the advancement of new monies;
or
Æ There is no advancement of new
monies other than funds necessary to
cover reasonable closing costs.
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Qualifications of Persons Who Perform
Evaluations
An institution should select persons
who are independent of the loan
production process and the transaction,
and have real estate-related training and
experience to perform evaluations.
These persons should have knowledge
of the market and property type relevant
to the subject property. Examples
include persons with appraisal
experience, real estate lending or sales
professionals, agricultural extension
agents, or foresters.
An institution should document the
qualifications and relevant experience
of persons selected to perform
evaluations. An institution should have
adequate controls to confirm that the
person performing the evaluation is
qualified and independent of the
property, the transaction, and the loan
production function. If an institution
relies on an external, third party to
perform an evaluation, the institution
should communicate its evaluation
criteria to the third party and have
adequate controls to confirm
compliance with its internal policies
and these Guidelines. Although not
required, an institution may use statecertified or licensed appraisers to
perform evaluations. Institutions should
refer to USPAP Advisory Opinion 13 for
guidance on appraisers performing
evaluations of real property collateral.
Evaluation Content
An evaluation should provide an
estimate of the market value of the
collateral to support the institution’s
credit decision or portfolio
management. An institution should
establish policies and procedures for
determining an appropriate collateral
valuation methodology for a given
transaction considering associated risks.
Further, these policies and procedures
should address the process for selecting
the most reliable evaluation method or
tool for a transaction rather than using
the method or tool that renders the
highest value.
An evaluation should support the
institution’s decision to engage in the
transaction. While evaluation
methodologies and tools may vary, all
evaluations, at a minimum, should:
• Identify the location of the
property;
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• Provide a description of the
property and its current and projected
use;
• Indicate the source(s) of
information used to value the property,
including, but not limited to:
Æ External data sources;
Æ Previous sales data;
Æ Photos of the property;
Æ Property tax assessment data;
Æ Comparable sales information;
Æ Description of the neighborhood;
and
Æ Local market conditions;
• Disclose the analysis that was
performed and the supporting
information used to value the property;
• Provide an estimate of the
property’s market value in its actual
physical condition, use and zoning
designation as of an effective date, with
any limiting conditions, if applicable;
• Indicate the preparer’s name and
contact information; and
• Be documented in the credit file.
Documentation content should be
appropriate for the valuation
methodology and tool used for the
transaction.
The institution also should establish
criteria for determining the extent to
which an inspection of the collateral is
necessary to determine that the property
is in acceptable condition for its current
or projected use. Further, an institution
should obtain more detailed evaluations
for higher risk real estate-related
financial transactions, or as its portfolio
risk increases. A more detailed
evaluation may be necessary for certain
transactions such as those involving:
• Loans with combined loan-to-value
ratios in excess of the supervisory loanto-value limits;
• Atypical properties;
• Properties outside the institution’s
traditional lending market;
• Properties in a transitional market
or location;
• Subsequent transactions with
significant risk to the institution; or
• Borrowers with high risk
characteristics.
See Appendix B—Evaluation
Alternatives for further guidance on
evaluation alternatives such as AVMs
and tax assessment values.
Accepting an Appraisal from Another
Institution
An institution may use an appraisal
that was prepared by an appraiser
engaged directly by another regulated or
financial services institution, provided
the institution determines that the
appraisal is valid, conforms to the
Agencies’ appraisal regulations, and is
otherwise acceptable. Such
determinations should be completed by
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69655
the acquiring institution prior to
accepting the appraisal and documented
in the credit file.
Appraisals that support federally
related transactions must meet the
standards of independence within the
Agencies’ appraisal regulations. Among
other considerations, when accepting an
appraisal from another institution, the
acquiring institution should obtain
documentation that the appraiser was
engaged directly by the institution
transferring the appraisal and had no
direct, indirect, or prospective interest,
financial or otherwise, in the property
or transaction. If an institution relies on
a third party originator or its agent for
the appraisal, the standard of
independence still applies. For
example, an engagement letter should
confirm that the institution transferring
the appraisal, not the borrower, was the
original client that selected the
appraiser and ordered the appraisal.
An institution must not accept an
appraisal that has been readdressed or
altered by the appraiser with the intent
to conceal the original client. Altering
an appraisal report in a manner that
conceals the original client or intended
users of the appraisal is misleading and
violates the Agencies’ appraisal
regulations and USPAP.
Validity of Appraisals and Evaluations
The Agencies allow an institution to
use an existing appraisal or evaluation
to support a subsequent transaction.
Therefore, an institution should
establish criteria for assessing whether
an existing appraisal or evaluation
remains valid. Such criteria will vary
depending upon the condition of the
property and the marketplace, and the
nature of the transaction. The
documentation in the credit file should
provide the facts and analysis to support
the institution’s conclusion that the
existing appraisal or evaluation remains
valid. Factors that could cause changes
to originally reported values include:
• Passage of time;
• Volatility of the local market;
• Availability of financing;
• Inventory of competing properties;
• Improvements to the subject
property or competing properties;
• Lack of maintenance of the subject
or competing properties;
• Changes in zoning; or
• Environmental contamination.
Third Party Arrangements
Effective program oversight should
address any arrangements with a third
party, acting as agent for the institution,
providing appraisal and evaluation
services. An institution should monitor
and periodically assess these
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arrangements for compliance with
program standards and the Agencies’
guidance on third party arrangements.30
If deficiencies are discovered, the
institution should take remedial action
in a timely manner.
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Reviewing Appraisals and Evaluations
The Agencies’ appraisal regulations
specify that appraisals must contain
sufficient information and analysis to
support an institution’s decision to
engage in a credit transaction. As part of
the credit approval process, an
institution should assess the
acceptability of the appraisal or
evaluation as well as compliance with
the Agencies’ appraisal regulations and
Guidelines and its own internal
policies. This review should be
performed prior to the final credit
decision and ensure that the appraisal
or evaluation adequately supports
approval of the credit. An institution’s
appraisal and evaluation review
procedures should address the role,
independence, and qualifications of the
reviewer; the techniques, timing and
level of review; documentation
requirements; and the appropriate
resolution of deficiencies. Review
procedures also should address the
reviewer’s responsibility to verify that
the methods, assumptions, data sources,
and conclusions are reasonable and
appropriate for the particular
transaction and property.
Persons who review appraisals and
evaluations should be independent of
the transaction and possess the requisite
education, expertise, and competence to
perform the review commensurate with
the complexity of the transaction. Small
or rural institutions or branches with
limited staff should implement prudent
safeguards for accepting appraisals and
evaluations when absolute lines of
independence cannot be achieved. In
these situations, the review may be part
of the originating loan officer’s overall
credit analysis, as long as the originating
loan officer abstains from directly or
indirectly approving or voting to
approve the loan.
Institutions should implement a riskfocused approach to determine the
depth of the review needed to ensure
that appraisals and evaluations are
30 See OCC Bulletin 2001–47, Third-Party
Relationships (November 1, 2001); OTS Thrift
Bulletin 82a, Third Party Arrangements (September
1, 2004); NCUA Letter to Credit Unions: 01–CU–20,
Due Diligence Over Third Party Service
Arrangements (November 2001), 07–CU–13,
Supervisory Letter-Evaluation Third Party
Relationships (December 2007), 08–CU–09,
Evaluating Third Party Relationships Questionnaire
(April 2008); and FDIC Financial Institution Letter
44–2008, Guidance for Managing Third-Party Risk
(June 2008).
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acceptable. The scope of review will
depend upon the type and risk of the
transaction and the process through
which the appraisal and evaluation is
obtained (whether directly or from
another regulated or financial services
institution). Appraisals and evaluations
supporting complex properties or highrisk transactions should be reviewed
more comprehensively to assess the
technical quality of the appraiser’s
analysis prior to making a final credit
decision. For example, a risk-focused
approach for commercial mortgages
should provide for a comprehensive
review of those appraisals supporting
transactions that pose higher credit risk
to the institution. These transactions
may include large-dollar credits, loans
secured by complex or specialized
properties, and properties outside the
institution’s traditional lending market.
The depth to which reviews are
completed for lower risk transactions
should be commensurate with the size,
type and complexity of the underlying
credit transaction supported by the
appraisal or evaluation.
With prior approval from its primary
regulator, an institution may employ
various techniques, such as automated
tools or sampling methods, for
performing pre-funding reviews of
appraisals or evaluations supporting
lower risk single-family residential
mortgages. When using such techniques,
an institution should maintain sufficient
data and employ appropriate screening
parameters to provide adequate quality
assurance and should ensure that the
work of all appraisers and persons
performing evaluations is periodically
reviewed.
The institution should document the
content of the review in the credit file.
This documentation may be presented
in a checklist or narrative format as
appropriate. If deficiencies are noted by
the reviewer, they should be addressed
by the person who prepared the
appraisal or evaluation or another
qualified, independent person. An
institution should not accept appraisals
or evaluations that do not adequately
support the opinion of market value and
should replace unreliable appraisals or
evaluations prior to the final credit
decision.
An appraisal review performed by a
state-certified or licensed appraiser
must comply with USPAP. Any changes
to an appraisal’s estimate of value are
permitted only as a result of a review
conducted by an appropriately qualified
state-certified or licensed appraiser in
accordance with USPAP.
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Program Compliance
An institution’s appraisal and
evaluation policies should establish
effective internal controls that promote
compliance with the Agencies’ appraisal
regulations and supervisory guidelines.
The compliance process should include
a system of adequate controls,
verification and testing that ensures the
reliability of an institution’s appraisals
and evaluations. These controls should
be commensurate with the risk of the
institution’s overall real estate lending
activities. Further, the persons
responsible for the compliance function
should be insulated from any influence
by loan production staff.
The compliance process should
ensure that all appraisers and persons
performing evaluations are subject to
periodic evaluation of the quality of
their work. This information should
provide a basis for evaluating whether
the institution should continue to retain
the services of the appraiser or the
person performing the evaluation.
Portfolio Monitoring and Updating
Collateral Valuations
A prudent portfolio monitoring
program should include criteria for
determining when to obtain a new
appraisal or evaluation in accordance
with the Agencies’ real estate lending
standards. Among other considerations,
these criteria may be based on changes
in market conditions or deterioration in
the credit since origination. Moreover,
as an institution’s reliance on collateral
becomes more important, an
institution’s policies and procedures
should ensure that timely information is
available to management for assessing
collateral and associated risk. The
policy should delineate the valuation
tool or methodology and consider the
property type, current market
conditions, current use of the property,
and the age of the original appraisal or
evaluation. For transactions that are
otherwise exempt from the Agencies’
appraisal requirements, institutions
should establish policies for obtaining
appraisals or evaluations to meet risk
management objectives.
Under the Agencies’ appraisal
regulations, examiners have the right to
require an institution to obtain an
appraisal or evaluation when there are
safety and soundness concerns on an
existing real estate secured credit.
Therefore, in determining the
classification of a problem real estate
credit, an examiner may direct an
institution to obtain a new appraisal or
evaluation in order to have sufficient
information to understand the nature of
the problems. Examiners would be
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expected to provide an institution with
a reasonable amount of time to obtain a
new appraisal or evaluation.
Referrals
An institution should make referrals
directly to state appraiser regulatory
authorities when it suspects that a statecertified or licensed appraiser failed to
comply with USPAP, applicable state
laws, or engaged in other unethical or
unprofessional conduct. Examiners
finding evidence of unethical or
unprofessional conduct by appraisers
should forward their findings and
recommendations to their supervisory
office for appropriate disposition and
referral to the state, as necessary.
Appendix A—Appraisal Exemptions
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1. Appraisal Threshold
For transactions with a transaction
value equal to or less than the appraisal
threshold, the Agencies require an
evaluation consistent with safe and
sound banking practices in lieu of an
appraisal.31
2. Abundance of Caution
An institution may take a lien on real
estate and be exempt from obtaining an
appraisal if the lien on real estate is
taken by the lender in an abundance of
caution. This exemption is intended to
have limited application, especially for
real estate loans secured by residential
properties in which the real estate is the
only form of collateral. In order for a
business loan to qualify for the
abundance-of-caution exemption, the
Agencies expect the extension of credit
to be well supported by the borrower’s
cash flow or collateral other than real
property. The institution’s credit
analysis should verify the reliability of
these repayment sources and conclude
that knowledge of the market value of
the real estate on which the lien has
been taken as an abundance of caution
is unnecessary in making the credit
decision.
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. Similarly, the exemption
should not be applied to a loan or loan
program unless the institution verifies
and documents the primary and
31 NCUA’s appraisal regulation requires a written
estimate of market value, performed by a qualified
and experienced person who has no interest in the
property, for transactions equal to or less than the
appraisal threshold and transactions involving an
existing extension of credit. 12 CFR 722.3(d).
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secondary repayment sources. In the
absence of verification of the repayment
sources, this exemption should not be
used merely to reduce the cost
associated with obtaining an appraisal,
to minimize transaction processing
time, or to offer slightly better terms to
a borrower than would be otherwise
offered.
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. If the operating performance or
financial condition of the company
subsequently deteriorates and the lender
determines that the real estate will be
relied upon as a repayment source, an
appraisal should then be obtained.
3. Loans Not Secured by Real Estate
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.32 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. This
exemption is not intended to be applied
to real estate-related financial
transactions other than those involving
loans. For example, this exemption
should not be applied to a transaction
such as an institution’s investment in
real estate for its own use.
4. Liens for Purposes Other Than the
Real Estate’s Value
This exemption allows institutions to
take liens against real estate without
obtaining an appraisal to protect legal
rights to, or control over, other
collateral. Institutions frequently take
real estate liens to protect legal rights to
other collateral rather than because of
the contributory value of the real estate
as an individual asset. In order to apply
the exemption, the institution should
determine that the market value of the
real estate as an individual asset is not
necessary to support its decision to
extend credit. For example, an
institution making a loan to a logging
operation may take a lien against the
real estate upon which the timber stands
to ensure its access to the timber in the
event of default.
69657
million or less when the sale of, or
rental income derived from, real estate
is not the primary source of repayment.
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 the property. For this
type of exempted loan, the Agencies
require an evaluation consistent with
safe and sound banking practices in lieu
of an appraisal.33
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. For example, a real
estate developer cannot qualify for the
exemption by showing that a real estate
secured loan for one project, in which
the lender has taken a security interest,
will be repaid with the cash flow from
real estate sales or rental income from
other real estate projects, in which the
lender does not have a security interest.
(See Appendix C—Glossary of Terms for
a definition of business loan.)
6. Leases
Institutions are required to obtain
appraisals of leases that are the
economic equivalent of a purchase or
sale of the leased real estate. For
example, an institution must obtain an
appraisal on a transaction involving a
capital lease, as the real estate interest
is of sufficient magnitude to be
recognized as an asset of the lessee for
accounting purposes. Operating leases
that are not the economic equivalent of
the purchase or sale of the leased
property do not require appraisals.
7. Renewals, Refinancing, and Other
Subsequent Transactions
5. Real Estate-Secured Business Loans
This exemption applies to business
loans with a transaction value of $1
In general, renewals, refinancing, and
other subsequent transactions may be
supported by evaluations rather than
appraisals. An evaluation is permitted
for renewals of existing extensions of
credit when either:
(1) No new funds are advanced (other
than for reasonable closing costs); or
(2) No obvious and material changes
in market conditions or the physical
aspects of the property threaten the
institution’s real estate protection after
the transaction.
An institution may engage in a
subsequent transaction based on
documented equity from a valid existing
appraisal or evaluation if the above
32 NCUA’s regulations do not provide an
exemption from the appraisal requirements specific
to loans not secured by real estate.
33 NCUA’s regulations do not provide an
exemption from the appraisal requirements specific
to member business loans.
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conditions are met. For example, to
satisfy the condition for no material
change in market conditions or the
physical aspects of the property, the
planned future use of the property
should be consistent with the use
identified in the appraisal or evaluation.
If a property, however, has reportedly
appreciated because of a planned
change in use of the property such as
rezoning, an appraisal should be
performed for a federally related
transaction unless another exemption
applies.
Loan Workouts or Modifications: Loan
workouts, debt restructures, loan
assumptions, and similar transactions
involving the addition or substitution of
borrowers may qualify for the
exemption for renewals, refinancing and
other subsequent transactions. Use of
this exemption depends on meeting the
conditions described above. An
institution also should take into
consideration such factors as the quality
of the underlying collateral and the
validity of the existing appraisal or
evaluation.
As noted above, an institution may
advance new monies beyond closing
costs when there are no material
changes in the physical aspects of the
property that threaten the adequacy of
the collateral. The Agencies interpret
this provision to not require a new
appraisal or evaluation when an
institution advances funds to protect its
interest in a property, such as to repair
damaged property, because these funds
would be used to restore the damaged
property to its original condition. If a
loan workout involves modification of
terms and conditions of an existing
credit, including acceptance of new real
estate collateral that facilitates the
orderly collection of the credit, or
reduces the institution’s risk of loss, an
appraisal or evaluation of the existing
and new collateral may be prudent,
even if it is obtained after the
modification occurs.
Other Changes to Loan Terms: An
institution may modify the terms of an
existing credit without obtaining a new
appraisal or evaluation. Such
modifications should not involve any
advancement of new funds, any material
change in the borrower’s
creditworthiness, any change to the
borrower’s or guarantor’s obligation on
the credit, or any changes to the
collateral pool or deterioration in
collateral protection. For example, an
institution may modify the rate on an
existing credit, provide a short-term
extension, or modify the repayment
terms by increasing or reducing monthly
payments without obtaining a new
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appraisal or evaluation, as long as the
above conditions are met.
experiences more than a minimal loan
put-back rate.
8. Transactions Involving Real Estate
Notes
9. Transactions Insured or Guaranteed
by a U.S. Government Agency or U.S.
Government-sponsored Agency
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. If each note or real estate
interest meets the Agencies’ regulatory
requirements for appraisals at the time
the real estate note was originated, the
institution need not obtain a new
appraisal to support its interest in the
transaction. The institution should
employ audit procedures and review a
representative sample of appraisals
supporting pooled loans or real estate
notes in order to determine that the
conditions of the exemption have been
satisfied.
Principles of safe and sound banking
practice require institutions to
determine the suitability of purchasing
or investing in existing real estate
secured loans and real estate interests.
These transactions should have been
originated according to secondary
market standards and have a history of
performance. The information from
these sources, together with original
documentation, should be sufficient to
allow institutions to make appropriate
credit decisions regarding these
transactions.
An institution may presume that the
underlying loans in an investment
grade, marketable, mortgage-backed
security satisfy the requirements of the
appraisal regulation whenever an issuer
makes a public statement, such as in a
prospectus, that the appraisals comply
with the Agencies’ appraisal
regulations. To be considered
investment grade, a security must be
rated in one of the top four rating
classifications of at least one nationally
recognized statistical rating service. A
marketable security is one that may be
sold with reasonable promptness at a
price that corresponds to its fair value.
If the mortgages that secure the
mortgage warehouse loan are sold to
Fannie Mae or Freddie Mac, the sale
itself may be used to demonstrate that
the underlying loans complied with the
Agencies’ appraisal regulations. 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
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This exemption applies to
transactions that are wholly or partially
insured or guaranteed by a U.S.
government agency or U.S. governmentsponsored agency. 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.
10. Transactions that Qualify for Sale
to, or Meet the Appraisal Standards of,
a U.S. Government Agency or U.S.
Government-sponsored Agency
This exemption applies to
transactions that either (i) qualify for
sale to a U.S. government agency or U.S.
government-sponsored agency,34 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. An institution
may engage in these transactions
without obtaining a separate appraisal
conforming to the Agencies’ appraisal
regulations.
10(i) Institutions that rely on
exemption 10(i) should maintain
adequate documentation that confirms
that the transaction qualifies for sale to
a U.S. government agency or U.S.
government-sponsored agency. If the
qualification for sale is not adequately
documented, the transaction should be
supported by an appraisal that conforms
to the Agencies’ appraisal regulations,
unless another exemption applies.
10(ii) Transactions, such as jumbo or
other residential real estate loans, that
do not conform to all of Fannie Mae or
Freddie Mac underwriting standards
qualify for exemption 10(ii) provided
they are supported by an appraisal that
meets these government-sponsored
agencies’ appraisal standards.
11. Transactions by Regulated
Institutions as Fiduciaries
A regulated 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
34 These government-sponsored agencies would
include Banks for Cooperatives; Federal Agriculture
Mortgage Corporation; Federal Farm Credit Banks;
Federal Home Loan Banks; Freddie Mac; Fannie
Mae; Student Loan Marketing Association; and
Tennessee Valley Authority.
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with a transaction.35 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.
However, when a fiduciary transaction
requires an appraisal under other laws,
that appraisal should conform to the
Agencies’ appraisal requirements.
12. Appraisals Not Necessary To Protect
Federal Financial and Public Policy
Interests or the Safety and Soundness of
Financial Institutions
The Agencies retain the authority to
determine when the services of an
appraiser are not required in order to
protect federal financial and public
policy interests or the safety and
soundness of financial institutions. This
exemption is intended to apply to
individual transactions rather than
broad categories of transactions that
would otherwise be addressed by an
appraisal exemption. An institution
would need to seek a waiver from its
supervisory federal agency before
entering into the transaction.
13. Transactions Involving Underwriting
or Dealing in Mortgage-backed
Securities
The FRB adopted this exemption in
November 1998 to permit bank holding
companies and their nonbank
subsidiaries that engaged in
underwriting and dealing in securities
to underwrite and deal in mortgagebacked securities without having to
demonstrate that the loans underlying
the securities are supported by
appraisals that meet the FRB’s appraisal
requirements.
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Appendix B—Evaluation Alternatives
The Agencies recognize that
evaluation alternatives are available to
institutions for developing an estimate
of market value. Therefore, institutions
should maintain policies and
procedures for determining whether an
evaluation alternative is appropriate for
a given transaction or lending activity,
considering associated risk. Such
procedures should address risk criteria
such as transaction size and purpose,
borrower creditworthiness, and leverage
tolerance (loan-to-value).
An institution should demonstrate
that an evaluation alternative, such as
an automated valuation model or tax
assessment valuation, provides a
reliable estimate of the collateral’s
35 Generally, credit unions have limited fiduciary
authority and NCUA’s appraisal regulation does not
specifically exempt transactions by fiduciaries.
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market value as of a stated effective date
prior to the decision to enter into a
transaction. Further, the institution
should establish criteria for determining
the extent to which an inspection of the
collateral is necessary to determine that
the property is in acceptable condition
for its current or projected use.
An institution’s policies and
procedures also should address the use
of multiple tools or methods for valuing
the same property or to support a
particular lending activity. These
procedures should specify criteria for
ensuring that the institution uses the
most credible method or tool. An
institution should not select a method
or tool solely on the basis that it
provides the highest value. Examiners
will review an institution’s policies,
procedures, and internal controls to
ensure that evaluation alternatives are
appropriate and consistent with safe
and sound lending practices.
Automated Valuation Model (AVM)
An institution may use an AVM as a
valuation method for a transaction in
which an evaluation is permitted by the
Agencies’ appraisal regulations.36 An
AVM may be used alone or in
conjunction with other supplemental
information. An institution should
demonstrate, through testing, that the
AVM’s resulting value and any related
information is credible and sufficient to
support a credit decision, otherwise
another valuation method or tool should
be used. In selecting an AVM, an
institution should perform appropriate
due diligence to:
• Obtain relevant information about
the data the model provider uses.
Among other information, the
institution should know the sources and
types of data used in a model, frequency
of updates, quality control performed on
the data, and how data is obtained in
states where public real estate sales data
are not disclosed;
• Demonstrate an understanding of
the modeling techniques of its external
AVM providers. An institution should
understand the inherent strengths and
weaknesses of different model types
(hedonic, index, and blended) as well as
how a particular model or multiple
AVMs perform for different properties;
• Evaluate the model provider’s
confidence score and determine its
usefulness in assessing the model’s
reliability in determining market values
for different properties; and
36 Credit unions may use an AVM to meet the
requirement for a written estimate of value in
conjunction with a review by a loan officer or a
person with knowledge, training and experience in
the real estate market where the loan is being made.
See 12 CFR 722.3(d).
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• Ascertain which model(s) provide
the most credible values for an
institution’s lending activities.
An institution’s policies should
establish appropriate practices regarding
the use of AVMs and indicate its AVM
performance criteria. In establishing
AVM practices, an institution should:
• Address the qualifications and
responsibilities of persons designated to
select, validate, and administer models;
• Establish standards and procedures
for model validation testing and
monitoring; 37
• Maintain AVM performance criteria
for reliability and suitability in a given
transaction or lending activity based on
the institution’s risk tolerance;
• Establish procedures for selecting a
different collateral valuation method if
an institution’s AVM performance
criteria are not met; and
• Adopt criteria that includes
establishing standards and procedures
for validation testing, for the use of
multiple AVMs (sometimes referred to
as a cascade or waterfall) to ensure that
results are credible.
Determining AVM Use In addition to
evaluating the results of its model
validation testing as noted below, an
institution should establish specific
criteria for determining whether an
AVM is an appropriate evaluation
alternative for a particular transaction.
An institution may consider the
following questions, among others, in
determining whether an AVM may be
appropriate for a given trans
• Property Type
Æ Is the property homogeneous such
as a detached 1-to-4 family residential
dwelling in a typical neighborhood for
its market?
Æ Can the property’s address be
recognized by the model to ensure that
the valuation will reflect the subject
property?
• Property Location
Æ Is the property located in a market
with strong sales activity?
Æ Are aspects about the property’s
location typical or average for its market
(such as the view of the surrounding
area or proximity to public or private
facilities or services)?
• Property Condition
Æ Is sufficient information available
to assess whether the property is in
average or above-average condition
consistent with its intended use?
Æ Is the area or neighborhood free of
known adverse conditions that could
affect the property’s value (such as
disrepair from a natural disaster or other
events, defective building materials, or
environmental concerns)?
37 See OCC Bulletin 2000–16, Risk Modeling—
Model Validation (May 30, 2000).
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• Property Price Range
Æ Is the property’s initial estimated
value within the average price range for
its market?
• Nature of the Transaction
Æ Is the property in an area that is
known to have minimal cases of fraud?
Æ Does the frequency of sales of the
subject property preclude concern that
the property may have been subject to
flipping or fraud?
Æ Is the property owner-occupied?
Validating AVM Results Institutions
should establish standards and
procedures for independently validating
an AVM’s results on a periodic basis.
The depth and extent of an institution’s
validation processes should be
consistent with the materiality and
complexity of the risk being managed.
Institutions should not rely solely on
validation testing representations
provided by external AVM providers.
Regardless of whether an institution
relies on AVMs that are supported by
value insurance or guarantees, an
institution should still perform
appropriate due diligence and model
validation testing.
An institution should establish an
independent model validation process.
This process should specify, at a
minimum:
• Expectations for an appropriate
sample size;
• Level of geographic analysis;
• Testing frequency and criteria for
re-testing;
• Standards of performance measures
to be used; and
• Range of acceptable performance
results.
To ensure unbiased test results, AVM
values should be compared to data
gathered from sales transactions prior to
being recorded in public records. If an
institution uses more than one AVM,
the cascade also should be validated.
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.
An institution should document the
results of its validation testing and audit
findings and use these findings to
analyze and periodically update its
practices regarding AVM use.
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Tax Assessment Valuation (TAV)
An institution may use data provided
by local tax authorities as a basis for
establishing an estimate of market value
for the collateral for a transaction in
which an evaluation is permitted by the
Agencies’ appraisal regulations. TAVs
differ among jurisdictions. Therefore, an
institution should determine and
document how the jurisdiction
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calculates the TAV and how frequently
property revaluations occur.
An institution should perform an
analysis to determine the relationship
between the TAV and the market value
within a tax jurisdiction. This analysis
should be performed for each property
type and price tier in a jurisdiction in
which the institution considers the use
of a TAV to meet or support evaluation
requirements. As part of this process, an
institution should test and document
how closely TAVs correlate to market
value. If a reliable correlation between
the TAV and the market value can be
established, the institution may use
TAVs as a basis for an evaluation.
Appendix C—Glossary of Terms
Agent—The Agencies’ appraisal
regulations do not specifically define
the term ‘‘agent.’’ However, the term is
generally intended to refer to one who
undertakes to transact some business or
to manage some affairs for another.
According to the Agencies’ appraisal
regulations, fee appraisers must be
engaged directly by the regulated
institution or its agent, and have no
direct or indirect interest, financial or
otherwise, in the property or the
transactions. The Agencies do not limit
the arrangements that regulated
institutions have with their agents,
provided those arrangements do not
place the agent in a conflict of interest
that prevents the agent from
representing the interests of the
regulated institution.
Appraisal—As defined in the
Agencies’ appraisal regulations, a
written statement independently and
impartially prepared by a qualified
appraiser setting forth an opinion as to
the market value of an adequately
described property as of a specific
date(s), supported by the presentation
and analysis of relevant market
information.
Appraisal Threshold—An appraisal is
not required on transactions with a
transaction value of $250,000 or less. As
specified in the Agencies’ appraisal
regulations, institutions must obtain an
evaluation of the real property
collateral, if no other appraisal
exemption applies.
Approved Appraiser List—A listing of
appraisers that an institution has
determined to be qualified and
competent to perform appraisals in a
particular market and on various
property types.
‘‘As Completed’’ Market Value—See
Prospective Market Value.
‘‘As Is’’ Market Value—The estimate
of the market value of real property in
its current physical condition, use, and
zoning as of the appraisal date.
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‘‘As Stabilized’’ Market Value—See
Prospective Market Value.
Automated Valuation Models—A
computer program that analyzes data to
determine a property’s market value.
Hedonic models use property
characteristics (such as square footage,
room count) on the subject and
comparable properties to determine a
value. Index models determine value
based on repeat sales in the marketplace
rather than property characteristic data.
Blended or hybrid models use elements
of both hedonic and index models.
Business Loan—As defined in the
Agencies’ appraisal regulations, a loan
or extension of credit to any
corporation, general or limited
partnership, business trust, joint
venture, syndicate, sole proprietorship,
or other business entity.38
Business Loan Threshold—A 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, the
real estate. As specified in the Agencies’
appraisal regulations, institutions must
obtain an evaluation of the real property
collateral, if no other exemption
applies.39
Cascade—A model with specific
performance rules that prioritizes an
institution’s multiple, independent
AVMs in a defined sequence to provide
an estimate of the collateral’s market
value.
Credible (Appraisal) Assignment
Results—According to USPAP, credible
means ‘‘worthy of belief’’ used in the
context of the Scope of Work Rule.
Under this rule, credible assignment
results depend on meeting or exceeding
both (1) the expectations of parties who
are regularly intended users for similar
assignments, and (2) what an appraiser’s
peers’ actions would be in performing
the same or a similar assignment.
Effective Date—USPAP requires that
each appraisal report specifies the
effective date of the appraisal and the
date of the report. The date of the report
indicates the perspective from which
the appraiser is examining the market.
The effective date of the appraisal
establishes the context for the value
opinion. Three categories of effective
dates—retrospective, current, or
prospective—may be used, according to
the intended use of the appraisal
assignment.
38 NCUA’s appraisal regulation, 12 CFR part 722,
does not define ‘‘business loan.’’ A ‘‘member
business loan’’ is regulated under 12 CFR part 723.
39 NCUA’s appraisal regulation, 12 CFR part 722,
does not provide a higher appraisal threshold for
loans defined as ‘‘member business loans’’ under 12
CFR part 723.
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Engagement Letter—An engagement
letter between an institution and an
appraiser documents the expectations of
each party to the appraisal assignment.
For example, an engagement letter may
specify, among other items, the
property’s location and legal
description; intended use of the
appraisal; the expectation that the
appraiser will comply with applicable
laws, regulations, guidelines and
standards; reporting format; expected
delivery date; and appraisal fee.
Evaluation—A valuation required by
the Agencies’ appraisal regulations for
transactions that qualify for the
appraisal threshold exemption, business
loan exemption or subsequent
transaction exemption.
Exposure Time—As defined in
USPAP, a reasonable length of time that
the property would have been offered
on the market prior to the hypothetical
consummation of sale on the appraisal’s
effective date. Exposure time is always
presumed to precede the effective date
of the appraisal. See USPAP Standard
1–2(c), Statements 6 and 10, and
Advisory Opinion 7.
Federally Related Transaction—As
defined in the Agencies’ appraisal
regulations, any real estate-related
financial transaction in which the
Agencies or any regulated institution
engages or contracts for, and that
requires the services of an appraiser.
Financial Services Institution—The
Agencies’ appraisal regulations do not
contain a specific definition of the term
‘‘financial services institution.’’ The
term is intended to describe entities that
provide services in connection with real
estate lending transactions on an
ongoing basis, including loan brokers.
Loan Production Staff—Generally, all
personnel responsible for generating
loan volume or approving loans, as well
as their subordinates and supervisors.
This would include any employee
whose compensation is based on loan
volume. Employees responsible for
credit administration or credit risk
management are not considered loan
production staff.
Marketing Time—According 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. An institution may
request an appraiser to separately
provide an estimate of marketing time in
an appraisal. However, this is not a
requirement of the Agencies’ appraisal
regulations.
Market Value—As defined in the
Agencies’ appraisal regulations, the
most probable price which a property
should bring in a competitive and open
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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. 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:
• Buyer and seller are typically
motivated;
• Both parties are well informed or
well advised, and acting in what they
consider their own best interests;
• A reasonable time is allowed for
exposure in the open market;
• Payment is made in terms of cash
in U.S. dollars or in terms of financial
arrangements comparable thereto; and
• The price represents the normal
consideration for the property sold
unaffected by special or creative
financing or sales concessions granted
by anyone associated with the sale.
Prospective Market Value ‘‘as
Completed’’ and ‘‘as Stabilized’’—A
prospective market value may be
appropriate for the valuation of a
property interest related to a credit
decision for a proposed development or
renovation project. According to
USPAP, an appraisal with a prospective
market value reflects an effective date
that is subsequent to the date of the
appraisal report. Prospective value
opinions are intended to reflect the
current expectations and perceptions of
market participants, based on available
data. Two prospective value opinions
may be required to reflect the time
frame during which development,
construction, and occupancy will occur.
The prospective market value ‘‘as
completed’’ reflects the property’s
market value as of the time that
development is expected to be
completed. The prospective market
value ‘‘as stabilized’’ reflects the
property’s market value as of the time
the property is projected to achieve
stabilized occupancy. For an incomeproducing 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.
Put Back—Represents the ability of an
investor to reject mortgage loans from a
mortgage originator if the mortgage
loans do not comply with the warranties
and representations in their mortgage
purchasing agreement.
Real Estate-Related Financial
Transaction—As defined in the
Agencies’ appraisal regulations, any
transaction involving:
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• The sale, lease, purchase,
investment in or exchange of real
property, including interests in
property, or the financing thereof;
• The refinancing of real property or
interests in real property; or
• The use of real property or interests
in property as security for a loan or
investment, including mortgage-backed
securities.
Regulated Institution—For purposes
of the Agencies’ appraisal regulations
and these Guidelines, an institution
supervised by the federal financial
institutions regulatory Agencies. 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.
Restricted Use Appraisal Report—
According to USPAP Standards Rule 2–
2(c), a restricted use appraisal report
briefly ‘‘states’’ information significant
to solve the appraisal problem as well
as a reference to the existence of specific
work-file information in support of the
appraiser’s opinions and conclusions.
The Agencies believe that the restricted
use appraisal report will not be
appropriate to underwrite a significant
number of federally related transactions
due to the lack of supporting
information and analysis in the
appraisal report. However, it may be
appropriate to use this type of appraisal
report for ongoing collateral monitoring
of an institution’s real estate
transactions and under other
circumstances when an institution’s
program requires an evaluation.
Sales Concessions—A 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. A sales
concession may include, but is not
limited to, the seller paying all or some
portion of the purchaser’s closing costs
(such as prepaid expenses or discount
points) or the seller conveying to the
purchaser personal property which is
typically not conveyed with the real
property. Sales concessions do not
include fees that a seller is customarily
required to pay under state or local
laws. In developing an opinion of
market value, an appraiser must take
into consideration the affect of any sales
concessions on the market value of the
real property. See ‘‘market value’’ above
and USPAP Standards Rule 1–2(c).
Sales History and Pending Sales—
According to USPAP Standards Rule 1–
5, when the value opinion to be
developed is market value, an appraiser
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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.
Scope of Work—According to USPAP
Scope of Work Rule, the type and extent
of research and analyses in an appraisal
assignment. (See the Scope of Work
Rule in USPAP.)
Self-Contained Appraisal Report—
According to USPAP Standards Rule 2–
2(a), a self-contained appraisal report
‘‘describes’’ all information significant
to the solution of an appraisal problem
and should include all significant data
reported in comprehensive detail.
Sum of Retail Sales—A collateral
valuation method for estimating a value
of several properties based on the sum
of the sales price of each property to an
individual purchaser. The sum of retail
sales is not the market value for
purposes of meeting the minimum
appraisal standards in 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 and should include
all significant data reported in a tabular
or abbreviated format.
Tract Development—As defined in
the Agencies’ appraisal regulations, a
project of five units or more that is
constructed or is to be constructed as a
single development. For purposes of
these Guidelines, ‘‘unit’’ refers to: A
residential building lot, a detached
single-family home, an attached singlefamily home, and a residence in a
condominium building.
Transaction Value—As defined in the
Agencies’ appraisal regulations:
• For loans or other extensions of
credit, the amount of the loan or
extension of credit;
• For sales, leases, purchases, and
investments in or exchanges of real
property, the market value of the real
property interest involved; and
• 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.
For loans that permit negative
amortization, the transaction value
should be the institution’s total
committed amount, including any
potential negative amortization.
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If an institution enters into a
transaction that is secured by several
individual properties that are not part of
a tract development and that have a
value equal to or less than the appraisal
threshold, the estimate of value of each
individual property should determine
whether an appraisal or evaluation
would be required on each property in
the collateral pool.
Uniform Standards of Professional
Appraisal Practice (USPAP)—USPAP
identifies the minimum set of standards
that apply in all appraisal, appraisal
review, and appraisal consulting
assignments. These standards are
promulgated by the Appraisal Standards
Board of the Appraisal Foundation and
are incorporated as a minimum
appraisal standard in the Agencies’
appraisal regulations.
Value (of Collateral for Use in
Determining Loan-to-Value)—According
to the Agencies’ real estate lending
standards guidelines, the term ‘‘value’’
means an opinion or estimate set forth
in an appraisal or evaluation, whichever
may be appropriate, of the market value
of real property, prepared in accordance
with the Agencies’ appraisal regulations
and these Guidelines. For loans to
purchase an existing property, ‘‘value’’
means the lesser of the actual
acquisition cost or the estimate of value.
DATE & TIME: Thursday, November 20,
2008 at 10 a.m.
PLACE: 999 E Street, NW., Washington,
DC (Ninth Floor).
STATUS: This Meeting Will Be Open To
The Public.
ITEMS TO BE DISCUSSED: Correction and
Approval of Minutes.
Draft Advisory Opinion 2008–16:
Libertarian Party of Colorado, by Leah
Kelley, Treasurer.
Management and Administrative
Matters.
PERSON TO CONTACT FOR INFORMATION:
Robert Biersack, Press Officer,
Telephone: (202) 694–1220.
Individuals who plan to attend and
require special assistance, such as sign
language interpretation or other
reasonable accommodations, should
contact Mary Dove, Commission
Secretary, at (202)694–1040, at least 72
hours prior to the hearing date.
Dated: October 10, 2008.
John C. Dugan,
Comptroller of the Currency.
The Commission hereby gives notice
of the filing of the following agreement
under the Shipping Act of 1984.
Interested parties may submit comments
on agreements to the Secretary, Federal
Maritime Commission, Washington, DC
20573, within ten days of the date this
notice appears in the Federal Register.
Copies of agreements are available
through the Commission’s Web site
(https://www.fmc.gov) or contacting the
Office of Agreements at (202) 523–5793
or tradeanalysis@fmc.gov.
Agreement No.: 011117–047.
Title: United States/Australasia
Discussion Agreement.
Parties: A.P. Moller-Maersk A/S; ANL
Singapore Pte Ltd.; CMA–CGM;
Compagnie Maritime Marfret S.A.;
¨
Hamburg-Sud; and Hapag-Lloyd AG.
Filing Party: Wayne R. Rohde, Esq.;
Sher & Blackwell LLP; 1850 M Street,
NW; Suite 900; Washington, DC 20036.
Synopsis: The amendment deletes
Wallenius Wilhemsen Logistics AS as a
party to the agreement effective
November 22, 2008.
By order of the Board of Governors of the
Federal Reserve System, November 12, 2008.
Robert deV. Frierson,
Deputy Secretary of the Board.
Dated at Washington, DC, the 13th day of
November, 2008.
By order of the Federal Deposit Insurance
Corporation.
Robert E. Feldman,
Executive Secretary.
Dated: October 29, 2008.
By the Office of Thrift Supervision.
John M. Reich,
Director.
Dated: November 7, 2008.
By the National Credit Union
Administration Board.
Hattie M. Ulan,
Acting Secretary of the Board.
[FR Doc. E8–27401 Filed 11–18–08; 8:45 am]
BILLING CODE 4810–33–P; 6210–01–P; 6714–01–P;
6720–01–P; 7535–01–P
FEDERAL ELECTION COMMISSION
Sunshine Act Notices
AGENCY:
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Frm 00064
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Mary W. Dove,
Secretary of the Commission.
[FR Doc. E8–27380 Filed 11–18–08; 8:45 am]
BILLING CODE 6715–01–M
FEDERAL MARITIME COMMISSION
Notice of Agreement Filed
By the Commission.
Dated: November 14, 2008.
Karen V. Gregory,
Secretary.
[FR Doc. E8–27498 Filed 11–18–08; 8:45 am]
BILLING CODE 6730–01–P
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Agencies
[Federal Register Volume 73, Number 224 (Wednesday, November 19, 2008)]
[Notices]
[Pages 69647-69662]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-27401]
=======================================================================
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
[Docket ID OCC-2008-0021]
FEDERAL RESERVE SYSTEM
[Docket No. OP-1338]
FEDERAL DEPOSIT INSURANCE CORPORATION
DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
[Docket ID OTS-2008-0012]
NATIONAL CREDIT UNION ADMINISTRATION
RIN 3133-AD38
Proposed Interagency Appraisal and Evaluation Guidelines
AGENCIES: Office of the Comptroller of the Currency, Treasury (OCC);
Board of Governors of the Federal Reserve System (FRB); Federal Deposit
Insurance Corporation (FDIC); Office of Thrift Supervision, Treasury
(OTS); and National Credit Union Administration (NCUA).
ACTION: Notice with request for comment.
-----------------------------------------------------------------------
SUMMARY: The OCC, FRB, FDIC, OTS, and NCUA (the Agencies), request
comment on the proposed Interagency Appraisal and Evaluation Guidelines
(proposed Guidelines). The proposed Guidelines, which would supersede
the 1994 Interagency Appraisal and Evaluation Guidelines (1994
Guidelines), reflect revisions to the Uniform Standards of Professional
Appraisal Practice (USPAP) and the evolution of collateral valuation
practices, such as the use of automated valuation models (AVMs). The
proposed Guidelines also incorporate refinements made by the Agencies
to the supervision of regulated institutions' appraisal and evaluation
programs since 1994 and reflect the participation of the NCUA, which
was not a party to the 1994 Guidelines. The proposed Guidelines are
intended to clarify the Agencies' real estate appraisal regulations and
promote a safe and sound real estate collateral valuation program.
DATES: Comments must be submitted on or before January 20, 2009.
ADDRESSES: Comments should be directed to:
OCC: You may submit comments by any of the following methods:
E-mail: regs.comments@occ.treas.gov.
Fax: (202) 874-4448.
Mail: Office of the Comptroller of the Currency, 250 E
Street, SW., Mail Stop 1-5, Washington, DC 20219.
Hand Delivery/Courier: 250 E Street, SW., Attn: Public
Information Room, Mail Stop 1-5, Washington, DC 20219.
Instructions: You must include ``OCC'' as the agency name and
``Docket ID OCC-2008-0021'' in your comment. In general, OCC will enter
all comments received into the docket without change, including any
business or personal information that you provide such as name and
address information, e-mail addresses, or phone numbers. Comments,
including attachments and other supporting materials, received are
[[Page 69648]]
part of the public record and subject to public disclosure. Do not
enclose any information in your comment or supporting materials that
you consider confidential or inappropriate for public disclosure.
You may review comments and other related materials by any of the
following methods:
Viewing Comments Personally: You may personally inspect
and photocopy comments at the OCC's Public Information Room, 250 E
Street, SW., Washington, DC. For security reasons, the OCC requires
that visitors make an appointment to inspect comments. You may do so by
calling (202) 874-5043. Upon arrival, visitors will be required to
present valid government-issued photo identification and submit to
security screening in order to inspect and photocopy comments.
Docket: You may also view or request available background
documents and project summaries using the methods described above.
FRB: You may submit comments, identified by Docket No. OP-1338, by
any of the following methods:
Agency Web Site: https://www.federalreserve.gov. Follow the
instructions for submitting comments at https://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments.
E-mail: regs.comments@federalreserve.gov. Include the
docket number in the subject line of the message.
Fax: 202/452-3819 or 202/452-3102.
Mail: Jennifer J. Johnson, Secretary, Board of Governors
of the Federal Reserve System, 20th Street and Constitution Avenue,
NW., Washington, DC 20551.
All public comments are available from the FRB's Web site at http:/
/www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as submitted,
unless modified for technical reasons. Accordingly, your comments will
not be edited to remove any identifying or contact information. Public
comments may also be viewed in electronic or paper form in Room MP-500
of the FRB's Martin Building (20th and C Streets, NW.) between 9 a.m.
and 5 p.m. on weekdays.
FDIC: You may submit comments by any of the following methods:
Agency Web Site: https://www.fdic.gov/regulations/laws/
federal. Follow instructions for submitting comments on the Agency Web
Site.
E-mail: Comments@FDIC.gov. Include ``Proposed Interagency
Appraisal and Evaluation Guidelines'' in the subject line of the
message.
Mail: Robert E. Feldman, Executive Secretary, Attention:
Comments, Federal Deposit Insurance Corporation, 550 17th Street, NW.,
Washington, DC 20429.
Hand Delivery/Courier: Guard station at the rear of the
550 17th Street Building (located on F Street) on business days between
7 a.m. and 5 p.m. (EST).
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments.
Public Inspection: All comments received will be posted without
change to https://www.fdic.gov/regulations/laws/federal including any
personal information provided. Comments may be inspected and
photocopied in the FDIC Public Information Center, 3501 North Fairfax
Drive, Room E-1002, Arlington, VA 22226, between 9 a.m. and 5 p.m.
(EST) on business days. Paper copies of public comments may be ordered
from the Public Information Center by telephone at (877) 275-3342 or
(703) 562-2200.
OTS: You may submit comments, identified by docket number ID OTS-
2008-0012, by any of the following methods:
E-mail: regs.comments@ots.treas.gov. Please include ID
OTS-2008-0012 in the subject line of the message and include your name
and telephone number in the message.
Fax: (202) 906-6518.
Mail: Regulation Comments, Chief Counsel's Office, Office
of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552,
Attention: ID OTS-2008-0012.
Hand Delivery/Courier: Guard's Desk, East Lobby Entrance,
1700 G Street, NW., from 9 a.m. to 4 p.m. on business days, Attention:
Regulation Comments, Chief Counsel's Office, Attention: ID OTS-2008-
0012.
Instructions: All submissions received must include the agency name
and docket number for this notice. All comments received will be posted
without change, including any personal information provided. Comments
including attachments and other supporting materials received are part
of the public record and subject to public disclosure. Do not enclose
any information in your comments or supporting materials that you
consider confidential or inappropriate for public disclosure.
Viewing Comments On-Site: You may inspect comments at the
Public Reading Room, 1700 G Street, NW., by appointment. To make an
appointment for access, call (202) 906-5922, send an e-mail to
public.info@ots.treas.gov, or send a facsimile transmission to (202)
906-6518. (Prior notice identifying the materials you will be
requesting will assist us in serving you.) We schedule appointments on
business days between 10 a.m. and 4 p.m. In most cases, appointments
will be available the next business day following the date we receive a
request.
NCUA: You may submit comments by any of the following methods
(Please send comments by one method only):
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments.
NCUA Web Site: https://www.ncua.gov/
RegulationsOpinionsLaws/proposedregs/proposedregs.html Follow the
instructions for submitting comments.
E-mail: Address to regcomments@ncua.gov. Include ``[Your
name] Comments on Proposed Interagency Appraisal and Evaluation
Guidelines,'' in the e-mail subject line.
Fax: (703) 518-6319. Use the subject line described above
for e-mail.
Mail: Address to Mary F. Rupp, Secretary of the Board,
National Credit Union Administration, 1775 Duke Street, Alexandria,
Virginia 22314-3428.
Hand Delivery/Courier: Same as mail address.
Public inspection: All public comments are available on the
agency's website at https://www.ncua.gov/RegulationsOpinionsLaws/
proposed_regs/comments.html as submitted, except as may not be
possible for technical reasons. Public comments will not be edited to
remove any identifying or contact information. Paper copies of comments
may be inspected in NCUA's law library, at 1775 Duke Street,
Alexandria, Virginia 22314, by appointment weekdays between 9 a.m. and
3 p.m. To make an appointment, call (703) 518-6546 or send an e-mail to
--OGCMail @ncua.gov .
FOR FURTHER INFORMATION CONTACT:
OCC: Doreen Ledbetter, Credit Risk Specialist, or Vance S. Price,
Director, Credit and Market Risk Division, (202) 874-5170; Christopher
Manthey, Counsel, Bank Activities and Structure, or Mitchell Plave,
Counsel, Legislative and Regulatory Activities, (202) 874-5300.
FRB: Virginia M. Gibbs, Senior Supervisory Financial Analyst, (202)
452-2521; or Sabeth I. Siddique, Assistant Director, (202) 452-3861,
Division of Banking Supervision and Regulation; or Walter McEwen,
Senior
[[Page 69649]]
Counsel, (202) 452-3321, or Benjamin W. McDonough, Senior Attorney,
(202) 452-2036, Legal Division. For users of Telecommunications Device
for the Deaf (``TDD'') only, contact (202) 263-4869.
FDIC: Beverlea S. Gardner, Senior Examination Specialist, Division
of Supervision and Consumer Protection, (202) 898-6790, or Janet V.
Norcom, Counsel, Legal Division, (202) 898-8886.
OTS: Debbie Merkle, Project Manager, Credit Risk, Risk Management,
(202) 906-5688, or Marvin Shaw, Senior Attorney, Regulations and
Legislation Division (202) 906-6639.
NCUA: Moisette Green, Staff Attorney, (703) 518-6540 or Robert C.
Leonard, Program Officer, (703) 518-6396.
SUPPLEMENTARY INFORMATION:
I. Background
Title XI of the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (FIRREA) \1\ requires each Agency to prescribe
appropriate standards for the performance of real estate appraisals in
connection with ``federally related transactions,'' \2\ 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.\3\ These rules must require, at a minimum,
that real estate appraisals be performed in accordance with generally
accepted uniform appraisal standards as evidenced by the appraisal
standards promulgated by the Appraisal Standards Board of The Appraisal
Foundation (Appraisal Standards Board), and that such appraisals be in
writing.\4\ Such appraisals are to be performed by an individual whose
competency has been demonstrated and whose professional conduct is
subject to effective state supervision. An Agency may require
compliance with additional appraisal standards if it makes a
determination that such additional standards are required in order to
properly carry out its statutory responsibilities.\5\ Each of the
Agencies has adopted additional appraisal standards.\6\
---------------------------------------------------------------------------
\1\ Public Law 101-73, 103 Stat. 183 (1989).
\2\ 12 U.S.C. 3339.
\3\ 12 U.S.C. 3350(4).
\4\ 12 U.S.C. 3339.
\5\ Id.
\6\ 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.
---------------------------------------------------------------------------
The OCC, FRB, FDIC, and OTS jointly issued the 1994 Guidelines to
provide further guidance to regulated financial institutions on prudent
appraisal and evaluation policies, procedures, practices, and
standards.\7\ The 1994 Guidelines address supervisory matters relating
to real estate appraisals and evaluations used to support real estate-
related financial transactions and provide guidance to both examiners
and regulated institutions about prudent appraisal and evaluation
programs. In particular, the 1994 Guidelines provide clarification of
expectations for written evaluations of real estate collateral in
certain transactions that do not require the services of an appraiser
under the Agencies' regulations.
---------------------------------------------------------------------------
\7\ See OCC: Comptroller's Handbook, Commercial Real Estate and
Construction Lending (1998) (Appendix E); FRB: 1994 Interagency
Appraisal and Evaluation Guidelines (SR letter 94-55); FDIC: FIL-74-
94; and OTS: 1994 Interagency Appraisal and Evaluation Guidelines
(Thrift Bulletin 55a).
---------------------------------------------------------------------------
Over the years, the Agencies have issued several additional
supervisory guidance documents to promote sound practices in regulated
institutions' appraisal and evaluation programs, including independence
in the appraisal and evaluation functions, the appraisal of residential
tract development, and compliance with revisions to USPAP.\8\
---------------------------------------------------------------------------
\8\ This includes: The 2003 Interagency Statement on Independent
Appraisal and Evaluation Functions, OCC: Advisory Letter 2003-9;
FRB: SR letter 03-18; FDIC: FIL-84-2003; OTS: CEO Memorandum No.184;
and NCUA: NCUA Letter to Credit Unions 03-CU-17; 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. 213: and NCUA: NCUA Letter to Credit Unions 05-
CU-06; 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. 225: and NCUA: NCUA Letter to
Credit Unions 05-CU-12; and 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. 240: and NCUA: Regulatory Alert 06-
RA-04. Each of these guidance documents continues to be in effect.
---------------------------------------------------------------------------
Since the issuance of the 1994 Guidelines, there have been some
significant developments concerning appraisals and advancements in
regulated institutions' collateral valuation practices. Advances in
technology, for example, have prompted increased use of AVMs to derive
values for residential transactions that do not require the services of
an appraiser under the appraisal regulations. Further, in 2006, the
Appraisal Standards Board issued significant revisions to USPAP,
adopting the USPAP Scope of Work Rule and deleting the USPAP Departure
Rule. For these reasons, the Agencies are issuing the proposed
Guidelines to provide further clarification of supervisory expectations
for regulated institutions' appraisal and evaluation programs.
Independent and reliable collateral valuations are core to a
regulated institution's real estate credit decisions. Therefore, the
proposed Guidelines are intended to re-enforce the importance of sound
collateral valuation practices that the Agencies' appraisal regulations
mandate. The Agencies believe that the proposed Guidelines further
clarify their long standing expectations for an institution's appraisal
and evaluation program, which are necessary to promote safe and sound
real estate lending activity.
II. Principal Elements of the Guidelines
The proposed Guidelines provide guidance on elements of a safe and
sound appraisal and evaluation program, including the Agencies'
supervisory expectations concerning the independence of an
institution's appraisal and evaluation program from influence by the
borrower or the loan production staff, the competence of individuals
who perform appraisals and evaluations, standards for the development
and reporting of appraisals and evaluations, and an institution's
collateral review function. The proposed Guidelines also provide
guidance and expectations for risk management principles and control
measures for institutions' appraisal and evaluation programs.
The proposed Guidelines would supersede the 1994 Guidelines and
reflect guidance issued by the Agencies over the past several years on
independence of the appraisal and evaluation program, appraisals for
residential tract developments, and the USPAP Scope of Work Rule. The
core principles of the 1994 Guidelines have been retained. Further, the
format of the 1994 Guidelines has been retained in the proposed
Guidelines to make it easier for regulated institutions and examiners
to find the material that has not been revised.
The following discussion summarizes the proposed major revisions to
the 1994 Guidelines.
Independence of the Appraisal and Evaluation Program. The proposed
Guidelines emphasize the importance of the independence of an
institution's appraisal and evaluation program from influence by the
loan production process or borrower. For small and rural institutions,
where complete separation of the collateral valuation function and the
loan production process may not be possible, the proposed Guidelines
discuss prudent minimal safeguards and clarify that lending staff
should abstain from the approval of the loan on which
[[Page 69650]]
they perform, order, or review an appraisal or evaluation.
Minimum Appraisal Standards. The proposed Guidelines provide
further clarification of the five appraisal standards in the Agencies'
appraisal regulations, as follows. First, the Agencies' appraisal
regulations provide that USPAP sets the minimum appraisal standards for
federally related transactions. The proposed Guidelines provide
clarification of those appraisal standards above and beyond USPAP that
are required by the Agencies' appraisal regulations. Second, the
Agencies' appraisal regulations require that appraisals for federally
related transactions be written and contain sufficient information to
support the institution's credit decision. The proposed Guidelines
reflect an expanded discussion of the Agencies' expectations for the
content of appraisals that will satisfy this requirement. Third, the
Agencies' appraisal regulations require that appraisals analyze and
report deductions and discounts for a loan to finance proposed
construction or renovation, partially leased buildings, non-market
lease terms, and tract developments with unsold units. The proposed
Guidelines provide more detail on the application of this standard by
property type, both commercial and residential. Fourth, the Agencies'
appraisal regulations require that appraisals be based upon the
regulatory definition of market value. The discussion of market value
in the 1994 Guidelines has been expanded in the proposed Guidelines to
link the appraisal regulatory definition of market value with the
definition of value in the Agencies' real estate lending standards
guidelines.\9\ The proposed Guidelines also address the definition of
``market value'' in an appraisal for a loan to finance a development
and construction real estate project. Fifth, the Agencies' appraisal
regulations require that an institution use the services of a state-
certified or licensed appraiser. The proposed Guidelines remind
institutions that an appraiser's credential is not the sole
determination of competency and that institutions should consider the
appraiser's education and experience to assess his or her competency
for a given appraisal assignment. Further, the proposed Guidelines
remind institutions to convey to an appraiser that the requirements of
the Agencies' minimum appraisal standards are considered assignment
conditions for an appraiser under USPAP.
---------------------------------------------------------------------------
\9\ OCC 12 CFR part 34, subpart D; FRB: 12 CFR part 208,
Appendix C; FDIC 12 CFR part 365; and OTS 12 CFR 560.100 and
560.101. 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.
12 CFR 701.21; 12 CFR part 723.
---------------------------------------------------------------------------
Appraisal Development and Appraisal Reports. These sections were
revised to reflect revisions to USPAP that the Appraisal Standards
Board implemented in July 2006 to eliminate the USPAP Departure Rule
and to adopt the USPAP Scope of Work Rule. The proposed Guidelines
incorporate the guidance provided by the Agencies in the June 2006
Interagency Statement on the 2006 Revisions to USPAP.\10\ The proposed
Guidelines remind institutions that while the appraiser is responsible
for complying with USPAP and its Scope of Work Rule, the institution is
responsible for complying with the Agencies' appraisal regulations and
should discuss its needs and expectations for the appraisal with the
appraiser. Further, the discussion on appraisal reports no longer
refers to specific USPAP reporting formats (that is, self-contained,
summary, and restricted appraisal reports). Rather, the discussion
addresses the level and adequacy of information and analysis in the
report that is necessary to comply with both USPAP and the regulatory
appraisal requirement to provide sufficient information to support the
institution's credit decision. Reference to the revised USPAP
terminology has been included in a new proposed Appendix C, which
provides a glossary of terms. The Agencies understand that the
Appraisal Standards Board may consider revisions to the USPAP reporting
formats so this discussion was worded broadly to allow for possible
USPAP changes.
---------------------------------------------------------------------------
\10\ See supra, note 8.
---------------------------------------------------------------------------
Evaluation Content. Under the Agencies' appraisal regulations, an
institution may obtain or perform an evaluation of real property
collateral in lieu of an appraisal for transactions that qualify for
certain appraisal exemptions. This section describes the Agencies'
expectations on the information and analysis that should be included in
an evaluation. An institution should obtain more detailed evaluations
for higher risk real estate-related financial transactions or as its
portfolio risk increases. Further, this section was revised to reflect
the inclusion of a new appendix (Appendix B) in the proposed Guidelines
on evaluation alternatives. This new appendix provides a discussion of
appropriate practices and controls regarding an institution's use of
AVMs and tax assessment valuations as evaluation alternatives. This
section also addresses the Agencies' expectations for institutions to
establish a process and procedures for determining the appropriate use
of evaluation alternatives for a given transaction or lending activity,
considering associated risk.
Reviewing Appraisals and Evaluations. This is a new section in the
proposed Guidelines and is based on material in the Program Compliance
section in the 1994 Guidelines, the 2003 Interagency Statement on
Independent Appraisal and Evaluation Functions, and a related statement
issued by the Agencies in 2005 addressing frequently asked
questions.\11\ While the proposed Guidelines retain a Program
Compliance section concerning effective internal controls, the new
section emphasizes the importance of an institution's review function
to promote quality appraisals and evaluations. The Agencies expect
institutions to maintain a robust review process for ensuring that
appraisals and evaluations support their credit decisions. The program
should provide for an increasingly comprehensive review of appraisals
supporting transactions that pose higher credit risk to the
institution. This expectation for a risk-based program recognizes the
importance of the collateral valuation process to promoting sound
credit underwriting decisions. As explained in the proposed Guidelines,
the scope of the review will depend upon the type and risk of the
transaction and the process through which the appraisal or evaluation
is obtained. The proposed Guidelines provide guidance on the review
process, including documentation, independence, review procedures, and
reviewers' qualifications. The proposed Guidelines also indicate that
an institution with prior approval from its primary regulator may
employ various techniques, such as automated tools or sampling methods,
for performing pre-funding reviews of appraisals or evaluations
supporting lower risk single-family residential mortgages. Finally, the
proposed Guidelines outline expectations for a compliance program to
establish effective internal controls that promote compliance with the
Agencies' appraisal regulations, supervisory guidelines and
institutions' internal policies.
---------------------------------------------------------------------------
\11\ See supra, note 8.
---------------------------------------------------------------------------
Portfolio Monitoring and Updating Collateral Valuations. This
section was revised to emphasize the importance of sound portfolio
monitoring principles that set forth criteria for when an institution
should replace or update collateral valuations for existing real
[[Page 69651]]
estate loans. In establishing criteria, an institution should consider
the appropriateness of the valuation tool or methodology, the age of
the original appraisal or evaluation, property type, current market
conditions, and current use of the property. Further, the proposed
Guidelines remind institutions that as the reliance on real estate
becomes more important on an existing credit, there is a need for
timely information to assess the value of the real estate collateral
and the associated risk to the institution. This section also explains
that examiners have the right to require an institution to obtain an
appraisal or evaluation when there are safety and soundness concerns on
an existing real estate secured credit.
Appraisal Exemptions (Appendix A). This new appendix provides
further clarification on real estate-related financial transactions
exempted from the Agencies' appraisal regulations. This discussion is
based on the preamble to the Agencies' 1994 regulations and responds to
the questions the Agencies have received over the years concerning
exemptions to their appraisal requirements.
Evaluation Alternatives (Appendix B). This new appendix reflects
the discussion on the use of AVMs and tax assessment valuations as
evaluation alternatives in the Interagency Credit Risk Management
Guidance for Home Equity Lending.\12\ Appendix B provides guidance on
the process for selecting and validating a model. The appendix also
provides a framework, in the form of a set of questions, that
institutions may consider for determining when an AVM may be an
acceptable evaluation alternative for a given transaction.
---------------------------------------------------------------------------
\12\ OCC: 2005-22; FRB: SR letter 05-11; FDIC: FIL 45-2005; OTS:
CEO Memorandum No. 222; and NCUA: NCUA Letter to Credit Unions 05-
CU-07.
---------------------------------------------------------------------------
Glossary of Terms (Appendix C). The proposed Guidelines contain a
new glossary of various terms used in the Guidelines and appraisal
practice to aid institutions in understanding the Guidelines. Many of
these terms are already defined in the Agencies' appraisal regulations
and in USPAP.
III. Request for Comment
The Agencies are requesting public comment on all aspects of the
proposed Guidelines. In particular, the Agencies request comment on the
clarity of the proposed Guidelines regarding the interpretations of the
thirteen appraisal exemptions discussed in Appendix A.\13\ The Agencies
further request comment on the appropriateness of risk management
expectations and controls in the evaluation process including those
discussed in Appendix B of the proposed Guidelines. The Agencies also
seek comment on the expectations in the proposed Guidelines on
reviewing appraisals and evaluations. In particular, the Agencies seek
specific comment on whether the use of automated tools or sampling
methods that the proposed Guidelines allow for reviews of appraisals or
evaluations supporting lower risk single-family residential mortgages
is 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 the institution's appraisal
process for those low risk mortgage transactions.
---------------------------------------------------------------------------
\13\ In light of recent events in the residential mortgage
market, the Agencies are interested in comments on the exemption
from the regulatory appraisal requirements for residential real
estate transactions involving U.S. government sponsored agencies.
---------------------------------------------------------------------------
The text of the proposed Guidelines, entitled proposed 2008
Interagency Appraisal and Evaluation Guidelines, is as follows:
Purpose
The Office of the Comptroller of the Currency (OCC), the Board of
Governors of the Federal Reserve System (FRB), the Federal Deposit
Insurance Corporation (FDIC), the Office of Thrift Supervision (OTS),
and the National Credit Union Administration (NCUA) (the Agencies) are
jointly issuing these Interagency Appraisal and Evaluation Guidelines
(Guidelines), which supersede the 1994 Interagency Appraisal and
Evaluation Guidelines. These Guidelines address supervisory matters
relating to real estate appraisals and evaluations used to support real
estate-related financial transactions.\14\ Further, these Guidelines
provide federally regulated institutions and examiners clarification on
the Agencies' expectations for prudent appraisal and evaluation
policies, procedures, and practices.
---------------------------------------------------------------------------
\14\ These Guidelines pertain to all real estate-related
financial transactions originated or purchased by a regulated
institution or its operating subsidiary for its own portfolio or as
assets held for sale, including activities of commercial and
residential real estate mortgage operations, capital markets groups,
and asset securitization and sales units.
---------------------------------------------------------------------------
Background
Title XI of the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (FIRREA) \15\ requires each Agency to prescribe
appropriate standards for the performance of real estate appraisals in
connection with ``federally related transactions,'' \16\ 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.\17\ The Agencies' appraisal regulations must
require, at a minimum, that real estate appraisals be performed in
accordance with generally accepted uniform appraisal standards as
evidenced by the appraisal standards promulgated by the Appraisal
Standards Board, and that such appraisals be in writing.\18\ An Agency
may require compliance with additional appraisal standards if it makes
a determination that such additional standards are required in order to
properly carry out its statutory responsibilities.\19\ Each of the
Agencies has adopted additional appraisal standards.\20\
---------------------------------------------------------------------------
\15\ Public Law 101-73, 103 Stat. 183 (1989).
\16\ 12 U.S.C. 3339.
\17\ 12 U.S.C. 3350(4).
\18\ Supra to Note 3.
\19\ Id.
\20\ 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.
---------------------------------------------------------------------------
The Agencies' real estate lending regulations and guidelines,\21\
issued pursuant to section 304 of the Federal Deposit Insurance
Corporation Improvement Act of 1991 (FDICIA), 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.\22\ The real estate lending guidelines
state that an institution's real estate lending program should include
an appropriate real estate appraisal and evaluation program.
---------------------------------------------------------------------------
\21\ OCC: 12 CFR part 34, subpart D; FRB: 12 CFR part 208,
subpart E; FDIC: 12 CFR part 365; and OTS: 12 CFR 560.100 and
560.101.
\22\ 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.
12 CFR 701.21; 12 CFR part 723.
---------------------------------------------------------------------------
Supervisory Policy
An institution's real estate appraisal and evaluation policies and
procedures will be reviewed as part of the examination of the
institution's overall real estate-related activities. Examiners will
consider the institution's size and nature of its real estate-related
activities when assessing the appropriateness of its program.
When analyzing individual transactions, examiners will review an
appraisal or evaluation to determine whether the methods, assumptions,
and value conclusions are reasonable. Examiners also determine whether
the appraisal or evaluation complies with the Agencies' appraisal
regulations and
[[Page 69652]]
supervisory guidelines as well as the institution's policies. Examiners
will review the steps taken by an institution to ensure that the
persons who perform the institution's appraisals and evaluations are
qualified and are not subject to conflicts of interest. Institutions
that fail to maintain a sound appraisal and evaluation program or to
comply with the Agencies' appraisal regulations and supervisory
guidelines will be cited in supervisory letters or examination reports
and may be criticized for unsafe and unsound banking practices.
Deficiencies will require appropriate corrective action.
Appraisal and Evaluation Program
An institution's board of directors or its designated committee is
responsible for adopting and reviewing policies and procedures that
establish an effective real estate appraisal and evaluation program.
The program should:
Provide for the independence of the persons ordering,
performing, and reviewing appraisals or evaluations;
Establish selection criteria and procedures to evaluate
and monitor the ongoing performance of persons who perform appraisals
or evaluations;
Ensure that appraisals contain sufficient information to
support the credit decision;
Maintain criteria for content and appropriate use of
evaluations;
Provide for the receipt and review of the appraisal or
evaluation report in a timely manner to facilitate the credit decision;
Develop criteria to assess the validity of existing
appraisals or evaluations to support subsequent transactions;
Implement internal controls that promote compliance with
these program standards; and
Establish criteria for obtaining appraisals or evaluations
for transactions that are not otherwise covered by the appraisal
requirements of the Agencies' appraisal regulations.
Independence of the Appraisal and Evaluation Program
An institution should maintain standards of independence as part of
an effective collateral valuation program (both appraisal and
evaluation functions) for all of its real estate lending activity. The
collateral valuation program is an integral component of the credit
underwriting process and, therefore, should be isolated from influence
by the institution's loan production staff. An institution should
establish reporting lines independent of loan production for staff that
order, accept, and review appraisals and evaluations.
Persons who perform appraisals must be independent of the loan
production and collection processes and have no direct or indirect
interest, financial or otherwise, in the property or transaction. These
standards of independence also should apply to persons who perform
evaluations. While the information provided to the appraiser by the
institution should not unduly influence the appraiser, the institution
may provide a copy of the sales contract for purchase transactions.
Further, an institution's policies and controls should ensure that the
institution does not communicate a predetermined, expected, qualifying,
or owner's estimate of value, or a loan amount or target loan-to-value
ratio to a person performing an appraisal or evaluation.
For a small or rural institution or branch, it may not always be
possible or practical to separate the collateral valuation program from
the loan production process. 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. In
such cases, another loan officer, other officer, or director of the
institution may be the only person qualified to analyze the real estate
collateral. To ensure their independence, such lending officials,
officers, or directors should abstain from any vote or approval
involving loans on which they performed, ordered, or reviewed the
appraisal or evaluation.\23\
---------------------------------------------------------------------------
\23\ 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. 55 FR 5614, 5618 (February 16,
1990), 55 FR 30193, 30206 (July 25, 1990).
---------------------------------------------------------------------------
Selection of Persons Who May Perform Appraisals and Evaluations
An institution's collateral valuation program should establish
criteria to select, evaluate, and monitor the performance of persons
who perform an appraisal or evaluation. The criteria should ensure
that:
The institution's selection process is nonpreferential and
unbiased;
The person selected possesses the requisite education,
expertise, and competence to complete the assignment;
The work performed by persons providing appraisal and
evaluation services is periodically reviewed by the institution;
The person selected is capable of rendering an unbiased
opinion;
The person selected is independent and has no direct,
indirect, or prospective interest, financial or otherwise, in the
property or the transaction; and
The person selected to perform an appraisal holds the
appropriate state certification or license.
Under the Agencies' appraisal regulations, an institution or its
agent must directly select and engage appraisers. There also should be
independence in the selection of persons who perform evaluations.
Further, the person who selects or oversees the selection of appraisers
or persons providing evaluation services should be independent from the
loan production area. Independence is compromised when a borrower or
loan production personnel recommends or selects a person to perform an
appraisal or evaluation. An institution's use of a borrower-ordered
appraisal violates the Agencies' appraisal regulations.
Institutions should use written engagement letters when ordering
appraisals, particularly for large, complex, or out-of-area commercial
real estate properties. An engagement letter facilitates communication
with the appraiser and documents the expectations of each party to the
appraisal assignment. An institution should include the engagement
letter in its permanent credit file. To avoid the appearance of any
conflict of interest, appraisal or evaluation development work should
not commence until the institution has selected a person for the
assignment.
Transactions That Require Appraisals
Although the Agencies' appraisal regulations exempt certain real
estate-related financial transactions from the appraisal requirement,
most real estate-related financial transactions over the appraisal
threshold are considered federally related transactions and, thus,
require appraisals.\24\ The Agencies reserve the right to require an
appropriate appraisal under their appraisal regulations to address
safety and soundness concerns in a
[[Page 69653]]
transaction. (See Appendix A--Appraisal Exemptions.) \25\
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\24\ In order to facilitate recovery in designated major
disaster areas, subject to safety and soundness considerations,
Section 2 of the Depository Institutions Disaster Relief Act of
1992, Public Law 102-485, 106 Stat. 2771 (October 23, 1992) provides
the Agencies with the authority to waive certain appraisal
requirements for up to three years after a Presidential declaration
of a natural disaster.
\25\ As a matter of policy, OTS uses its supervisory authority
to require problem associations and associations in troubled
condition to obtain appraisals for all real estate-related
transactions over $100,000 (unless the transaction is otherwise
exempt). NCUA requires a written estimate of market value for all
real estate-related transactions valued at the appraisal threshold
or less, or that involve existing credit where there is no advance
of monies and material change in the condition of the property. 12
CFR 722.3(d).
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Minimum Appraisal Standards
The Agencies' appraisal regulations include the following five
minimum standards for the preparation of an appraisal. (See Appendix
C--Glossary for terminology used in these guidelines.)
The appraisal must:
Conform to generally accepted appraisal standards as
evidenced by the Uniform Standards of Professional Appraisal Practice
(USPAP) promulgated by the Appraisal Standards Board of the Appraisal
Foundation unless principles of safe and sound banking require
compliance with stricter standards.
Although allowed by USPAP, the Agencies' appraisal regulations do
not permit an appraiser to appraise any property in which the appraiser
has an interest, direct or indirect, financial or otherwise. Further,
the appraisal must contain an opinion of market value as defined in the
Agencies' appraisal regulations. Under USPAP, the appraisal must
contain a certification that the appraiser has complied with USPAP. An
institution may refer to the USPAP certification to confirm whether the
appraiser is independent of the property and the transaction, as
required by the Agencies' appraisal regulations. Under the Agencies'
appraisal regulations, the result of an Automated Valuation Model
(AVM), by itself, 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.
Be written and contain sufficient information and analysis
to support the institution's decision to engage in the transaction.
An institution should obtain an appraisal that is appropriate for
the particular federally related transaction, considering the risk and
complexity of the transaction. The level of detail should be sufficient
to understand the appraiser's analysis and opinion of the property's
market value. As provided by the USPAP Scope of Work Rule, appraisers
are responsible for establishing the scope of work to be performed in
rendering an opinion of the property's market value and have three
different reporting options available. (See Appendix C--Glossary of
Terms describing reporting options.) However, an institution should
ensure that the scope of work is appropriate for the assignment. The
appraiser's scope of work should be consistent with the valuation
methodology employed for similar property types, market conditions, and
transactions. The content and format of the appraisal report must
contain sufficient information and analysis to support the
institution's decision to engage in the transaction. The appraisal
report should contain sufficient disclosure of the nature and extent of
inspection and research performed to verify the property's condition
and support the appraiser's opinion of market value. The result of an
AVM certified by an appraiser does not, by itself, meet this standard.
Analyze and report appropriate deductions and discounts
for proposed construction or renovation, partially leased buildings,
non-market lease terms, and tract developments with unsold units.
This standard is designed to avoid having appraisals prepared using
unrealistic assumptions and inappropriate methods. An appraisal must
include the market value of the property and should reflect the
property's condition in its actual physical condition, use, and zoning
designation, as of the effective date of the appraisal.
[cir] Proposed Construction or Renovation. For properties where
improvements are to be constructed or rehabilitated, an institution may
request a prospective market value as completed and as stabilized.
While an institution may request the appraiser to provide the sum of
retail sales for a proposed development, this value is not the market
value of the property for the purpose of the Agencies' appraisal
regulations.
[cir] Partially Leased Buildings. For proposed and partially leased
rental developments, the appraiser must make appropriate deductions and
discounts. Appropriate deductions and discounts should include items
such as leasing commission, rent losses, tenant improvements, and
entrepreneurial profit.
[cir] Non-market Lease Terms. For properties subject to leases with
terms that do not reflect current market conditions, the appraiser must
make appropriate deductions and discounts, which should be based on
stabilized occupancy at prevailing market terms.
Tract Developments With Unsold Units
Raw Land. The appraiser must provide an opinion of value
for raw land based on its current condition and existing zoning that
includes appropriate deductions and discounts. Appropriate deductions
and discounts should include items such as holding costs, marketing
costs, and entrepreneurial profit.
Developed Lots. For proposed developments of five or more
residential lots, the appraiser must analyze and report appropriate
deductions and discounts. 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.
The estimated sales absorption period should reflect the expected
holding period before development commences as well as the time frame
for the actual development and sale of the lots.
Attached or Detached Single-family Homes. For proposed
construction and sale of five or more attached or detached single-
family homes in the same development, the appraiser must analyze and
report appropriate deductions and discounts. Appropriate deductions and
discounts should reflect holding costs, marketing costs, and
entrepreneurial profit during the sales absorption period of the
completed units. If an institution finances construction on an
individual unit basis, an appraisal of the individual units may be used
if the institution can demonstrate through an independently obtained
feasibility study or market analysis that all units collateralizing the
loan can be constructed and sold within 12 months. 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.
Condominiums. For proposed construction and sale of a
condominium building with five or more units, the appraisal must
reflect appropriate deductions and discounts. Appropriate deductions
and discounts should include holding costs, marketing costs, and
entrepreneurial profit during the sales absorption period of the
completed units. If an institution finances construction of a single
condominium building with less than five units or a condominium project
with multiple buildings with less than five units per building, the
institution may rely on appraisals of the individual units if the
institution can demonstrate through an
[[Page 69654]]
independently obtained feasibility study or market analysis that all
units collateralizing the loan can be constructed and sold within 12
months. 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.
Be based upon the definition of market value set forth in
the appraisal regulation.
Each appraisal must contain an estimate of market value, as defined
by the Agencies' appraisal regulations. The Agencies' 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. Further, the market value
should not include a going concern value or a special value to a
specific property user. An appraisal may contain separate opinions of
value for such items so long as they are clearly identified and
disclosed.
The estimate of market value should consider the real property's
current physical condition, use, and zoning as of the appraisal date.
For a transaction financing construction or renovation of a building,
an institution would generally request an appraiser to provide the
property's market value in its ``as is'' condition as of the
appraisal's effective date and the property's ``prospective'' market
values at the time development is expected to be completed and at the
time stabilized occupancy is projected to be achieved.\26\ Prospective
market value opinions should be based upon current and reasonably
expected market conditions. When an appraisal includes prospective
value opinions, there should be a point of reference to the market
conditions and time frame on which the appraiser based the
analysis.\27\
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\26\ 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).
\27\ See USPAP, Statement 4 on Prospective Value Opinions, for
further explanation.
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Be performed by state-certified or licensed appraisers in
accordance with requirements set forth in the appraisal regulation.
In determining competency for a given appraisal assignment,
institutions should consider an appraiser's education and experience.
An institution should confirm that the appraiser holds a valid
credential from the appropriate state appraiser regulatory authority.
An institution should not base competency solely on the appraiser's
credentialing. When ordering appraisals, an institution should convey
to an appraiser that the Agencies' minimum appraisal standards must be
followed. From the appraiser's perspective, these minimum appraisal
standards are considered assignment conditions under USPAP.
Appraisal Development
The Agencies' appraisal regulations require appraisals for
federally related transactions to comply with USPAP. Consistent with
the USPAP Scope of Work Rule,\28\ the appraisal must reflect an
appropriate scope of work that provides for ``credible'' assignment
results. The appraisal's scope of work should reflect the extent to
which the property is identified and inspected, the type and extent of
data researched, and the analyses applied to arrive at opinions or
conclusions.
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\28\ See USPAP Scope of Work Rule, Advisory Opinions 28 and 29.
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While an appraiser must comply with USPAP and establish the scope
of work in an appraisal assignment, an institution is responsible for
complying with the Agencies' appraisal regulations and obtaining an
appraisal that provides sufficient information to support its decision
to engage in the transaction. Therefore, to ensure that an appraisal is
appropriate for the intended use, an institution should discuss its
needs and expectations for the appraisal with the appraiser. Such
discussions should assist the appraiser in establishing the scope of
work and form the basis of the institution's engagement letter, as
appropriate. An institution should not allow lower cost or the speed of
delivery time to influence the appraiser's determination of an
appropriate scope of work for an appraisal supporting a federally
related transaction.
If applicable, the appraisal should include three approaches (cost,
income, and sales comparison) to analyze the value of a property, and
should reconcile the results of each approach to estimate market value.
An appraisal also should reflect an analysis of the property's sales
history and an opinion as to the highest and best use of the property.
Further, 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.
Appraisal Reports
An institution is responsible for identifying the appropriate
appraisal reporting option to support its credit decisions. The
institution should consider the risk, size, and complexity of the
transaction and the real estate collateral when determining its
appraisal engagement instructions to an appraiser.
USPAP provides various reporting options that an appraiser may use
to present the results of appraisals. The major difference among these
reporting options is the level of detail presented in the report. A
reporting 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. Therefore, the Agencies believe
that such reports will not be appropriate to support most federally
related transactions. However, these less detailed reports may be
appropriate for real estate collateral monitoring or in circumstances
when an institution's collateral valuation program requires an
evaluation. (See Appendix C--Glossary of Terms describing reporting
options.)
Regardless of the reporting option, the appraisal report should
contain sufficient detail to allow the institution to understand the
scope of work performed. Sufficient information should include the
disclosure of research and analysis performed, as well as disclosure of
the research and analysis not performed together with the rationale for
its omission.
Transactions That Require Evaluations
An institution may obtain or perform an evaluation of real property
collateral in lieu of an appraisal for transactions that qualify for
certain exemptions under the Agencies' appraisal regulations. These
exemptions include a transaction that:
Has a transaction value equal to or less than the
appraisal threshold.
Is a business loan with a transaction value equal to or
less than the business loan threshold, and is not dependent on the sale
of, or rental income derived from, real estate as the primary source of
repayment.\29\
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\29\ NCUA regulations do not contain an exemption from the
appraisal requirements specific to member business loans.
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Involves an existing extension of credit at the lending
institution, provided that:
[cir] There has been no obvious and material change in the market
conditions or physical aspects of the
[[Page 69655]]
property that threaten the adequacy of the institution's real estate
collateral protection after the transaction, even with the advancement
of new monies; or
[cir] There is no advancement of new monies other than funds
necessary to cover reasonable closing costs.
Qualifications of Persons Who Perform Evaluations
An institution should select persons who are independent of the
loan production process and the transaction, and have real estate-
related training and experience to perform evaluations. These persons
should have knowledge of the market and property type relevant to the
subject property. Examples include persons with appraisal experience,
real estate lending or sales professionals, agricultural extension
agents, or foresters.
An institution should document the qualifications and relevant
experience of persons selected to perform evaluations. An institution
should have adequate controls to confirm that the person performing the
evaluation is qualified and independent of the property, the
transaction, and the loan production function. If an institution relies
on an external, third party to perform an evaluation, the institution
should communicate its evaluation criteria to the third party and have
adequate controls to confirm compliance with its internal policies and
these Guidelines. Although not required, an institution may use state-
certified or licensed appraisers to perform evaluations. Institutions
should refer to USPAP Advisory Opinion 13 for guidance on appraisers
performing evaluations of real property collateral.
Evaluation Content
An evaluation should provide an estimate of the market value of the
collateral to support the institution's credit decision or portfolio
management. An institution should establish policies and procedures for
determining an appropriate collateral valuation methodology for a given
transaction considering associated risks. Further, these policies and
procedures should address the process for selecting the most reliable
evaluation method or tool for a transaction rather than using the
method or tool that renders the highest value.
An evaluation should support the institution's decision to engage
in the transaction. While evaluation methodologies and tools may vary,
all evaluations, at a minimum, should:
Identify the location of the property;
Provide a description of the property and its current and
projected use;
Indicate the source(s) of information used to value the
property, including, but not limited to:
[cir] External data sources;
[cir] Previous sales data;
[cir] Photos of the property;
[cir] Property tax assessment data;
[cir] Comparable sales information;
[cir] Description of the neighborhood; and
[cir] Local market conditions;
Disclose the analysis that was performed and the
supporting information used to value the property;
Provide an estimate of the property's market value in its
actual physical condition, use and zoning designation as of an
effective date, with any limiting conditions, if applicable;
Indicate the preparer's name and contact information; and
Be documented in the credit file. Documentation content
should be appropriate for the valuation methodology and tool used for
the transaction.
The institution also should establish criteria for determining the
extent to which an inspection of the collateral is necessary to
determine that the property is in acceptable condition for its current
or projected use. Further, an institution should obtain more detailed
evaluations for higher risk real estate-related financial transactions,
or as its portfolio risk increases. A more detailed evaluation may be
necessary for certain transactions such as those involving:
Loans with combined loan-to-value ratios in excess of the
supervisory loan-to-value limits;
Atypical properties;
Properties outside the institution's traditional lending
market;
Properties in a transitional market or location;
Subsequent transactions with significant risk to the
institution; or
Borrowers with high risk characteristics.
See Appendix B--Evaluation Alternatives for further guidance on
evaluation alternatives such as AVMs and tax assessment values.
Accepting an Appraisal from Another Institution
An institution may use an appraisal that was prepared by an
appraiser engaged directly by another regulated or financial services
institution, provided the institution determines that the appraisal is
valid, conforms to the Agencies' appraisal regulations, and is
otherwise acceptable. Such determinations should be completed by the
acquiring institution prior to accepting the appraisal and documented
in the credit file.
Appraisals that support federally related transactions must meet
the standards of independence within the Agencies' appraisal
regulations. Among other considerations, when accepting an appraisal
from another institution, the acquiring institution should obtain
documentation that the appraiser was engaged directly by the
institution transferring the appraisal and had no direct, indirect, or
prospective interest, financial or otherwise, in the property or
transaction. If an institution relies on a third party originator or
its agent for the appraisal, the standard of independence still
applies. For example, an engagement letter should confirm that the
institution transferring the appraisal, not the borrower, was the
original client that selected the appraiser and ordered the appraisal.
An institution must not accept an appraisal that has been