Other commenters asked the Agencies to clarify certain aspects of the process for engaging an appraiser and when the appraiser/client relationship is established. If an institution outsources any part of the collateral valuation function, it should exercise appropriate due diligence in the selection of a third party. Required Appraisal shall have the meaning provided in Section 8.11(g). Inventory Appraisal means (a) on the Original Closing Date, the report prepared by DoveBid Valuation Services, Inc. dated October 27, 2003 and (b) thereafter, the most recent inventory appraisal conducted by an independent appraisal firm designated by Collateral Agent and reasonably acceptable to Borrower and delivered pursuant to Section 9.02 hereof. The review process should be commensurate with the type of transaction as discussed below: The depth of the review of appraisals and evaluations completed for commercial properties securing lower risk transactions may be less technical in nature, but still should provide meaningful results that are commensurate with the size, type, and complexity of the underlying credit transaction. Address standards for the use of multiple methods or tools, if applicable, for valuing the same property or to support a particular lending activity. Appropriate deductions and discounts should include items such as leasing commission, rent losses, tenant improvements, and entrepreneurial profit, if such profit is not included in the discount rate. WebAlternative Valuation Services. 16. An institution should establish standards and procedures for independent and ongoing monitoring and model validation, including the testing of multiple AVMs, to ensure that results are credible. If a transaction does not involve an advancement of new monies and there have been no obvious and material changes in market or property conditions, a credit union must obtain a written estimate of market value that is consistent with the standards for evaluations as discussed in these Guidelines. It resulted indramaticchanges tothe savings and loan industry and its federalregulation, including deposit insurance. With regard to relying on appraisals supporting underlying loans in a pool of 1-to-4 family mortgage loans, the Guidelines also confirm that an institution may use sampling and audit procedures to determine whether the appraisals in a pool of residential loans satisfy the Agencies' appraisal regulations and are consistent with supervisory guidance. While some commenters cautioned that the Agencies' examiners should not be overly aggressive in requiring institutions to obtain new appraisals on existing loans, a few commenters asked for clarification on what would constitute a change in market condition and when an institution should re-value collateral. 35. documents in the last year, by the Rural Utilities Service An institution may exchange information with appraisers and persons who perform evaluations, which may include providing a copy of the sales contract[27] Assess modeling techniques and the inherent strengths and weaknesses of different model types (such as hedonic, index, and blended) as well as how a model(s) performs for different property types (such as condominiums, planned unit developments, and single family detached residences). Although the Agencies' appraisal regulations allow an institution to use an evaluation for certain transactions, an institution should establish policies and procedures for determining when to obtain an appraisal for such transactions. better and aid in comparing the online edition to the print edition. The Guidelines are effective upon publication in the Federal Register. The following guidance documents continue to be in effect: The 2005 Interagency FAQs on Residential Tract Development Lending A marketable security is one that may be sold with reasonable promptness at a price that corresponds to its fair value. As specified in the Agencies' appraisal regulations, an institution must obtain an evaluation of the real property collateral. Put BackRepresents the ability of an investor to reject mortgage loans from a mortgage originator if the mortgage Start Printed Page 77473loans do not comply with the warranties and representations in their mortgage purchasing agreement. documents in the last year, 822 [33] FRB: Virginia M. Gibbs, Senior Supervisory Financial Analyst, (202) 452-2521, or T. Kirk Odegard, Manager, Policy Implementation and Effectiveness, (202) 530-6225, Division of Banking Supervision and Regulation; or Walter R. McEwen, Senior Counsel, (202) 452-3321, or Benjamin W. McDonough, Counsel, (202) 452-2036, Legal Division. Further, when an institution advances funds to protect its interest in a property, such as to repair damaged property, a new appraisal or evaluation would not be required because these funds would be used to restore the damaged property to its original condition. For example, if a property has reportedly increased in value because of a planned change in use of the property resulting from rezoning, an appraisal should be performed unless another exemption applies. OTS: Deborah S. Merkle, Senior Project Manager, Credit Risk, Risk Management, (202) 906-5688; or Marvin L. Shaw, Senior Attorney, Regulations and Legislation Division (202) 906-6639. An institution should document the results of its validation and audit findings. 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) (collectively, the Agencies). For example, an institution should consider obtaining an appraisal as an institution's portfolio risk increases or for higher risk real estate-related financial transactions, such as those involving: An evaluation must be consistent with safe and sound banking practices and should support the institution's decision to engage in the transaction. documents in the last year, by the Environmental Protection Agency Ensure that timely information is available to management for assessing collateral and associated risk. Further, under the Agencies' real estate lending regulations,[6] 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. Regulation Z also prohibits a creditor from extending credit when it knows that the appraiser independence standards have been violated, unless the creditor determines that the value of the property is not materially misstated. About the Federal Register As in the Proposal, the Guidelines address when an institution may modify an existing credit without obtaining either an appraisal or an evaluation. An institution also should consider such factors as the quality of the underlying collateral and the validity of the existing appraisal or evaluation. [9] These exemptions include a transaction that: There has been no obvious and material change in market conditions or physical aspects of the property that threaten the adequacy of the institution's real estate collateral protection after the transaction, even with the advancement of new monies; or, There is no advancement of new monies other than funds necessary to cover reasonable closing costs.[43]. If a loan workout involves 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 workout occurs and the institution perfects its security interest. The Agencies' appraisal regulations permit an institution to obtain an appropriate evaluation of real property collateral in lieu of an appraisal for transactions that qualify for certain exemptions. An employee is not considered loan production staff just because part of their compensation includes a general bonus or profit sharing plan that benefits all employees. An institution should ensure that persons who validate an AVM on an ongoing basis are independent of the loan production and collection processes and have the requisite expertise and training. (See Appendix D, Glossary of Terms, for terminology used in these Guidelines.) Implement controls to preclude value shopping when more than one AVM is used for the same property. 2354; 12 U.S.C. NCUA's regulations do not provide an exemption from the appraisal requirements specific to member business loans. Borrowers with high risk characteristics. TheFederal Housing Finance Board(FHFB) was created as an independent agency to take the place of the FHLBB as overseer of the 12Federal Home Loan Banks. An institution that engages a third party to perform certain collateral valuation functions on its behalf is responsible for understanding and managing the risks associated with the arrangement. Appraisers must be independent of the loan production and collection processes and have no direct, indirect or prospective interest, financial or otherwise, in the property or transaction. FIRREA Appraisal (Y/N)Appraisal Report1 For each Mortgage Asset indicated on the Data File as secured by more than one mortgaged property, the value of such Characteristic for each related mortgaged property is set equal to the value of such Characteristic recomputed for such Mortgage Asset. (See the Evaluation Development and Evaluation Content sections.) 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. Regardless of how entrepreneurial profit is handled in the appraisal analysis, an appropriate explanation and discussion should be provided in the appraisal report. Develop criteria to assess whether an existing appraisal or evaluation may be used to support a subsequent transaction. TheOffice of Thrift Supervision(OTS), a bureau of theU.S. Treasury Department, was created to charter, regulate, examine, and supervise savings institutions. The institution should: When market conditions warrant, such as during the aftermath of a natural disaster or a major economic event; When a model's performance is outside of specified tolerances for a particular geographic market or property price-tier range; or. Transaction ValueAs defined in the Agencies' appraisal regulations: For purposes of this definition, the transaction value for loans that permit negative amortization should be the institution's total committed amount, including any potential negative amortization. In year 14, the borrower seeks to refinance the loan at a lower interest rate and requests a loan of $2.8 million. The reasons for any such adjustments will be explained at that time. Reviewing Appraisals and Evaluations. and have no direct or indirect interest, financial or otherwise, in the property or the transactions. Appendix D (previously Appendix C in the Proposal) provides a glossary of terms. The appraisal must: 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 in the property or transaction. In these situations, the market value of the leased fee interest should be used. Regardless of the report option, the appraisal report should contain sufficient detail to allow the institution to understand the scope of work performed. As stated in the Agencies' appraisal regulations, a state certified or licensed appraiser may not be considered competent solely by virtue of being certified or licensed. [25] The majority of financial institution and industry group commenters supported the Proposal and the Agencies' efforts to update existing guidance in this area. Each of the Agencies has adopted additional appraisal standards.[21]. To ensure their independence, such lending officials, officers, or directors must abstain from any vote or approval involving loans on which they ordered, performed, or reviewed the appraisal or evaluation.[26]. The real estate lending guidelines state that an institution's real estate lending program should include an appropriate real estate appraisal and evaluation program. Independence is also compromised when loan production staff selects a person to perform an appraisal or evaluation for a specific transaction. Other commenters urged the Agencies to work with other Federal agencies and government-sponsored enterprises (such as Freddie Mac and Fannie Mae) in an effort to harmonize standards for appraisals and other collateral valuations across all channels of mortgage lending, not just lending by federally regulated institutions. on For example, the sole use of data from the Internet or other public sources would not be an evaluation under these Guidelines. Register documents. [8] The only exception to this requirement is that the Agencies' appraisal regulations allow an institution to use an appraisal prepared for another financial services institution provided certain conditions are met. Perform a detailed validation of the model(s) considered during the selection process and document the validation process. During April 2018, banking federal banking Regulators issued changes for appraisal, FIRREA, requirements. hbbd``b`.Z }$~\b`bdc@ The estimated sales absorption period should reflect the appraiser's estimate of the time frame for the actual development and sale of the lots, starting on the effective date of value and ending as of the expected date of the last lot sale. 16. 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. See USPAP, Statement 4 on Prospective Value Opinions, for further explanation. 1707, et seq., and FRB Regulation Z, 12 CFR 226.36 and 226.42. on The Guidelines also now provide additional clarification on the Agencies' supervisory expectations for the development and content of evaluations. 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. If an institution is unable to confirm that the appraisal meets the Agencies' appraisal requirements, then the Start Printed Page 77463institution must obtain an appraisal prior to engaging in the transaction. Real Estate-Related Financial TransactionAs defined in the Agencies' appraisal regulations, any transaction involving: Regulated InstitutionRefer to the definition of Federally Regulated Institution. 58. 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