Wow! What a ride! If you have followed the explanations of the new regulations and laws on this website, you may be worn out! The most important regulation to the community banker/credit union, though, has just arrived. On December 2, 2010, the 2010 Interagency Appraisal and Evaluation Guidelines were announced. These guidelines, which replaced the 1994 guidelines, explain the agencies' MINIMUM regulatory standards for appraisals and evaluations. All financial institutions were advised to review their appraisal program and procedures to ensure they are consistent with the guidelines. The agencies involved are the Federal Reserve Board, Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC), Office of Thrift Supervision (OTS), and the National Credit Union Administration (NCUA).
The Agencies made very clear that as part of any examination, they will review an appraisal to determine whether the methods, assumptions, and value conclusions are reasonable. They will also determine whether the appraisal complies with regulatory appraisal regulations and is consistent with supervisory guidance as well as the community bank/credit union’s policies. The examiners will also review the steps taken by the bank to ensure that the persons who perform the appraisals are qualified, competent, and not subject to conflicts of interest. There has been a focus on "reviewing" the appraisal and there is a reason. Field examiners are concerned, from a safety and soundness examination view, about the deterioration of asset quality, especially in regions as the Midwest and the South, where high unemployment rates and rapid devaluation of real estate have taken place. Individuals within the FDIC have publicly stated that FDIC is closely monitoring asset quality during examinations. For all of these reasons, the examiners will be reviewing the appraisal to ensure that USPAP and Appraisal Standards have been met.
The Interagency Appraisal and Evaluation Guidelines establish minimum supervisory expectations for an evaluation. These are designed to ensure a community bank obtains a more detailed evaluation. A valuation method that does not provide a property’s market value or sufficient information and analysis to support the value conclusion is not acceptable for an evaluation. That is why a simple Brokers Price Opinion (BPO) is not acceptable, nor an Automated Valuation Model (AVM) or Tax Assessment Value (TAV) from the county auditor. SAMCO has a residential evaluation format that DOES comply with the new regulations. The 2010 Interagency Guidelines have 14 points specified for evaluation content. Examiners have been instructed to review evaluations to ensure they comply with the new requirements.
Appraisals and Evaluations
The examiners will also be requiring banks to establish reporting lines independent of loan production areas for staff that administer the bank's collateral valuation program. This includes ordering, reviewing, and acceptance of appraisals and evaluations. It is clear that examiners will require appraisers to be completely independent from the loan production staff. Community banks will need to commit to placing ALL consumer residential loan origination procedures in writing and instituting a formal pre-closing review to assure compliance. This complete separation of the order management and the new review process is for all real estate loans; HELOCs, residential, commercial, and agricultural.
SAMCO works only for community banks and credit unions. When SAMCO enters into a relationship with a lender, we only use the appraisers that are board-approved by that bank. That is a federal requirement that many AMCs do not even know about. Within the first 60 days of assigning appraisals for a new community bank/credit union client to their local board-approved appraisers, 80% OF THE APPRAISALS ORDERED FAIL THE USPAP AND APPRAISAL STANDARDS audit and are sent back to the appraiser for correction. As SAMCO works with your local appraisers, appraisal quality by being USPAP and Appraisal Standard compliant gradually improves. Most appraisers are eager to meet USPAP and Appraisal Standards. However, even after a full year of instruction, typically 20-30% of the appraisals completed for our community bank/credit union clients fail the initial appraisal audit and are sent back to the appraiser. This isn't a challenge that can be "fixed" once. Each appraisal is unique, and each appraiser's abilities are different. SAMCO is experienced and knowledgeable on USPAP and Appraisal Standards. We are experienced working with appraisers in rural areas of the country, helping them produce the best report possible. With the 2010 Interagency Appraisal and Evaluation Guidelines, the community bank/credit union is responsible for the quality of the appraisal report, whether it has met USPAP and Appraisal Standards. If the examiners discover issues, they have been instructed to cite the community bank in supervisory letters or examination reports, and the bank/credit union may be criticized for unsafe and unsound lending practices.
SAMCO's professional staff ensures that each appraisal and evaluation meets these requirements. This takes experience knowing appraisal standards and USPAP and the ability to work closely with appraisers. Appraisal management is now much more than the appraisal ordering process.
Highlights of the 2010 Interagency Appraisal Guidelines
include the following:
III. 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.
Institutions that fail to comply with the Agencies' appraisal regulations or to maintain a sound appraisal and evaluation program consistent with supervisory guidance 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.
When analyzing individual transactions, examiners will review an appraisal or evaluation to determine whether the methods, assumptions, and value conclusions are reasonable. Examiners also will determine whether the appraisal or evaluation complies with the Agencies' appraisal regulations and is consistent with supervisory guidance as well as the institution's policies. Examiners will review the steps taken by an institution to ensure that the persons who perform the institution’s appraisals and evaluations are qualified, competent, and are not subject to conflicts of interest.
IV. Appraisal and Evaluation Program
(Pages 2 & 3)
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 appraisers and persons who perform evaluations.
- Ensure that appraisals comply with the Agencies' appraisal regulations and are consistent with supervisory guidance.
- Ensure that appraisals and evaluations contain sufficient information to support the credit decision.
- Maintain criteria for the content and appropriate use of evaluations consistent with safe and sound banking practices.
- Provide for the receipt and review of the appraisal or evaluation report in a timely manner to facilitate the credit decision.
V. Independence of the Appraisal and Evaluation Program
For both appraisal and evaluation functions, an institution should maintain standards of independence...for all of its real estate lending activity. The collateral valuation program...should be isolated from influence by the institution's loan production staff. An institution should establish reporting lines independent of loan production for staff who administer the institution's collateral valuation program, including the ordering, reviewing, and acceptance of appraisals and evaluations.
VI. Selection of Appraisers or Persons Who Perform Evaluations
(Pages 5 & 6)
An institution's collateral valuation program should establish criteria to select, evaluate, and monitor the performance of appraisers and persons who perform evaluations. The criteria should ensure that:
- The work performed by appraisers and persons providing evaluation services is periodically reviewed by the institution.
An institution's selection process should ensure that a qualified, competent and independent person is selected to perform a valuation assignment. An institution should maintain documentation to demonstrate that the appraiser or person performing an evaluation is competent, independent, and has the relevant experience and knowledge for the market, location, and type of real property being valued. Further, the person selects or oversees the selection of appraisers or persons providing evaluation services should be independent from the loan production area.
A. Approved Appraiser List
If an institution establishes an approved appraiser list for selecting an appraiser for a particular assignment, the institution should have appropriate procedures for the development and administration of the list. These procedures should include a process for qualifying an appraiser for initial placement on the list, as well as periodic monitoring of the appraiser's performance and credentials to assess whether to retain the appraiser on the list.
VIII. Minimum Appraisal Standards
(Pages 7 & 8)
The Agencies' appraisal regulations include minimum standards for the preparation of an appraisal....The appraisal must:
- Conform to generally accepted appraisal standards as evidenced by the USPAP promulgated by the Appraisal Standards Board of the Appraisal Foundation unless principles of safe and sound banking require compliance with stricter standards....Further, the appraisal must contain an opinion of market value as defined in the Agencies’ appraisal regulations.
- Be written and contain sufficient information and analysis to support the institution's decision to engage in the transaction.
IX. Appraisal Development
The Agencies’ appraisal regulations require appraisals for federally related transactions to comply with the requirements in USPAP...
While an appraiser must comply with USPAP and establish the scope of work in an appraisal assignment, an institution is responsible for obtaining an appraisal that contains sufficient information and analysis to support its decision to engage in the transaction.
XII. Evaluation Development
(Pages 12 & 13)
An institution should be able to demonstrate that an evaluation...provides a reliable estimate of the collateral’s market value as of a stated effective date prior to the decision to enter into a transaction.
A valuation method that does not provide a property’s market value or sufficient information and analysis to support the value conclusion is not acceptable as an evaluation.
A valuation method should address the property’s actual physical condition and characteristics as well as the economic and market conditions that affect the estimate of the collateral’s market value.
XIII. Evaluation Content
(Pages 13 & 14)
An evaluation should contain sufficient information detailing the analysis, assumptions, and conclusions to support the credit decision....The evaluation should, at a minimum:
- Identify the location of the property.
- Provide a description of the property and its current and projected use.
- Provide an estimate of the property’s market value in its actual physical condition, use and zoning designation as of the effective date of the evaluation (that is, the date that the analysis was completed), with any limiting conditions.
- Describe the method(s) the institution used to confirm the property’s actual physical condition and the extent to which an inspection was performed.
- Describe the analysis that was performed and the supporting information that was used in valuing the property.
- Describe the supplemental information that was considered when using an analytical method or technological tool.
- Indicate all source(s) of information used in the analysis, as applicable, to value the property, including:
- External data sources (such as market sales databases and public tax and land records);
- Property-specific data (such as previous sales data for the subject property, tax assessment data, and comparable sales information);
- Evidence of a property inspection;
- Photos of the property;
- Description of the neighborhood; or
- Local market conditions.
- Include information on the preparer when an evaluation is performed by a person, such as the name and contact information, and signature (electronic or other legally permissible signature) of the preparer.
XV. Reviewing Appraisals and Evaluations
(Pages 15, 16, & 18)
As part of the credit approval process and prior to a final credit decision, an institution should review appraisals and evaluations to ensure that they comply with the Agencies’ appraisal regulations and are consistent with supervisory guidance and its own internal policies. This review also should ensure that an appraisal or evaluation contains sufficient information and analysis to support the decision to engage in the transaction.
An institution may use the review findings to monitor and evaluate the competency and ongoing performance of appraisers and persons who perform evaluations.
An institution's policies and procedures for reviewing appraisals and evaluations, at a minimum, should:
- Address the independence, educational and training qualifications, and role of the reviewer.
- Establish a process for resolving any deficiencies in appraisals or evaluations.
- Set forth documentation standards for the review and the resolution of noted deficiencies.
A. Reviewer Qualifications
An institution should establish qualification criteria for persons who are eligible to review appraisals and evaluations. Persons who review appraisals and evaluations should be independent of the transaction...and be independent of and insulated from any influence by loan production staff. Reviewers also should possess the requisite education, expertise, and competence to perform the review commensurate with the complexity of the transaction, type of real property, and market. Further, reviewers should be capable of assessing whether the appraisal or evaluation contains sufficient information and analysis to support the institution’s decision to engage in the transaction.
An institution should assess the level of in-house expertise available to review appraisals for complex projects, high-risk transactions, and out-of-market properties. An institution may find it appropriate to employ additional personnel or engage a third party to perform the reviews.
D. Documentation of the Review
An institution should establish policies for documenting the review of appraisal and evaluations in the credit file...The documentation should describe the resolution of any appraisal or evaluation deficiencies...The documentation also should provide an audit trail that documents the resolution of noted deficiencies or details the reasons for relying on a second opinion of market value.
XVII. Program Compliance
Deficiencies in an institution's appraisal and evaluation program that result in violations of the Agencies' appraisal regulations or contraventions of the Agencies' supervisory guidance reflect negatively on management...The compliance process should:
- Insulate the persons responsible for ascertaining the compliance of the institution's appraisal and evaluation function from any influence by loan production staff.
- Ensure the institution's practices will result in the selection of appraisers and persons who perform evaluations with the appropriate qualifications and demonstrated competency for the assignment.
- Establish procedures to test the quality of the appraisal and evaluation review process.
- Use, as appropriate, the results of the institution's review process and other relevant information as a basis for considering a person for a future appraisal or evaluation assignment.
Evaluations Based on Analytical Methods or Technological Tools
The Agencies’ appraisal regulations permit an institution to use an evaluation in lieu of an appraisal for certain transactions. An institution may use a variety of analytical methods and technological tools for developing an evaluation, provided the institution can demonstrate that the valuation method is consistent with safe and sound banking practices and these Guidelines (see sections on Evaluation Development and Evaluation Content). An institution should not select a method or tool solely because it provides the highest value, the lowest cost, or the fastest response or turnaround time.
An institution should establish policies and procedures that provide a sound process for using various methods or tools. Such policies and procedures should:
- Ensure staff has the requisite expertise and training to manage the selection, use, and validation of an analytical method or technological tool. If an institution does not have the in-house expertise relative to a particular method or tool, then an institution should employ additional personnel or engage a third party.
Automated Valuation Models (AVMs)
AVMs are computer programs that estimate a property’s market value based on market, economic, and demographic factors...An institution may not rely solely on the results of an AVM to develop an evaluation unless the resulting evaluation is consistent with safe and sound banking practices and these Guidelines. (See the Evaluation Development and Evaluation Content sections.) For example, to be consistent with the standards for an evaluation, the results of an AVM would need to address a property’s actual physical condition, and therefore, could not be based on an unsupported assumption, such as a property is in “average” condition.
Tax Assessment Valuations (TAVs)
An institution may not rely solely on the data provided by local tax authorities to develop an evaluation unless the resulting evaluation is consistent with safe and sound banking practices and these Guidelines. (See the Evaluation Development and Evaluation Content sections.) Since analytical methods such as TAVs generally need additional support to meet these Guidelines, institutions should develop policies and procedures that specify the level and extent of supplemental information that should be obtained to develop an evaluation. Such policies and procedures also should require the use of an alternate valuation method when such information does not support the transaction.
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