Part 722 Appraisals Final Rule. 68. 12 CFR 722.3(d). An institution may rely on the second opinion of market value obtained through an acceptable USPAP-compliant appraisal review to support its credit decision. Supervisory Policy. Provide a description of the property and its current and projected use. 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. Conversely, financial institutions found the Proposal to be an improvement over existing guidance and indicated that it would promote consistent application of the Agencies' appraisal requirements. 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. Prior to entering into any arrangement with a third party for valuation services, an institution should compare the risks, costs, and benefits of the proposed relationship to those associated with using another vendor or conducting the activity in-house. 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. Examiners would be expected to provide an institution with a reasonable amount of time to obtain a new appraisal or evaluation. These government-sponsored agencies include Banks for Cooperatives; Federal Agriculture Mortgage Corporation; Federal Farm Credit Banks; Federal Home Loan Banks; Freddie Mac; Fannie Mae; and Tennessee Valley Authority. 47. Each appraisal must contain an estimate of market value, as defined by the Agencies' appraisal regulations. Sources of relevant information may include external market data, internal data, or reviews of recently obtained appraisals and evaluations. Failing to compensate a person because a property is not valued at a certain amount. Third Appraiser has the meaning set forth in Section 6.04(b) hereof. include documents scheduled for later issues, at the request The HPML Appraisal Rule applies to higher-priced, first-lien or subordinate-lien closed-end loans secured by a consumers principal dwelling, which are not otherwise exempt under the rule. Perform a detailed validation of the model(s) considered during the selection process and document the validation process. 65. Establish a process for resolving any deficiencies in appraisals or evaluations. Establish procedures for obtaining an appraisal or using a different valuation method to develop an evaluation when an AVM's resulting value is not reliable to support the credit decision. (See the discussion in these Guidelines on Third Party Arrangements.). Each of the Agencies has adopted additional appraisal standards.[21]. The Guidelines confirm that BPOs and other similar valuation methods, in and of themselves, do not comply with the minimum appraisal standards in the Agencies' appraisal regulations and are not consistent with the Agencies' minimum supervisory expectations for evaluations. However, to address commenters' concerns, the Agencies incorporated minor edits to better distinguish between regulatory requirements and prudent banking practices in the Guidelines. Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia. 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. 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. An institution should take into account all aspects of the long-term effect of the relationship, including the managerial expertise and associated costs for effectively monitoring the arrangement on an ongoing basis. NCUA's appraisal regulation, 12 CFR 722, does not define business loan. A member business loan is regulated under 12 CFR 723. The OFR/GPO partnership is committed to presenting accurate and reliable Document page views are updated periodically throughout the day and are cumulative counts for this document. Financial Regulations: Glass-Steagall to Dodd-Frank, Financial Regulators: Who They Are and What They Do. It also created the Bank Insurance Fund (BIF). developer tools pages. Effective Date of the EvaluationFor the purposes of the Agencies' appraisal regulations and these Guidelines, the effective date of an evaluation is the date that the analysis is completed. FIRREA Appraisal ReviewsNow that the S&L crisis is long past, the skills of appraisal review are in demand for other purposes, including institutional equity and loan decisions and litigation support. 38. Three categories of effective datesretrospective, current, or prospectivemay be used, according to the intended use of the appraisal assignment. More information and documentation can be found in our An institution generally should not rely on an evaluation prepared by or for another financial services institution because it will not have sufficient information relative to the other institution's risk management practices for developing evaluations. These include white papers, government data, original reporting, and interviews with industry experts. Persons who perform evaluations should possess the appropriate appraisal or collateral valuation education, expertise, and experience relevant to the type of property being valued. Set forth documentation standards for the review and the resolution of noted deficiencies. When providing details of a subject asset under the requirements of 12 CFR 614.4245 (b) (2), an evaluation for business chattel and personal property must explain Revisions to this section reflect requests from commenters for clarification on the relationship between regulated institutions and third parties. Specify when new or updated collateral valuations are appropriate or desirable to understand collateral risk in the transaction(s). An institution should be able to demonstrate that its policies and procedures establish effective internal controls to monitor and periodically assess the collateral valuation functions performed by a third party. For example, the sole use of data from the Internet or other public sources would not be an evaluation under these Guidelines. 3339(3)), which relates to the review of appraisals, is not relevant for determining whether an appraiser is a certified or licensed appraiser under 34.203(a)(1). Employees responsible solely for credit administration or credit risk management are not considered loan production staff. 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. Address the independence, educational and training qualifications, and role of the reviewer. Many thrifts employed weak real estate investment requirements, and federal agency oversight failed to recognize the problem wasn't discovered until it was too late. These regulations also specify the requirement for evaluations of real estate collateral in certain transactions that do not require an appraisal. Independence of the Appraisal and Evaluation Program. This table of contents is a navigational tool, processed from the Public Law 111-203, 124 Stat. the appraisal must reflect an appropriate scope of work that provides for credible assignment results. Counts are subject to sampling, reprocessing and revision (up or down) throughout the day. By the National Credit Union Administration Board. See Dodd-Frank Act, Section 1400(c)(1). 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. Notwithstanding the exemption on renewals, refinancings, and subsequent transactions, some industry groups and appraiser organizations recommended that the Agencies address the circumstances under which institutions are to obtain appraisals even though evaluations are permitted. Register (ACFR) issues a regulation granting it official legal status. The Guidelines reaffirm that a state certification or license is a minimum credentialing requirement and that an appraiser must be selected based on his or her competency to perform a particular assignment, including knowledge of the specific property type and market. Further, several commenters addressed the topic of assessment of an appraiser's competency in the context of ensuring compliance with the minimum appraisal standards. Loan Production StaffGenerally, all personnel responsible for generating loan volume or approving loans, as well as their subordinates and supervisors. The evaluation should, at a minimum: 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); (See Appendix B, Evaluations Based on Analytical Methods or Technological Tools, for guidance on the appropriate use of analytical methods and technological tools for developing an evaluation.). 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. With prior approval from its primary Federal regulator, an institution may use such tools or methods for its review process. The person selected is independent and has no direct, indirect, or prospective interest, financial or otherwise, in the property or the transaction. 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. The revisions also confirm that examiners will forward such findings to their supervisory office for appropriate disposition if there are concerns with an institution's ability or willingness to make a referral or file a SAR. First, the process of obtaining an evaluation is not new since IDIs already obtain evaluations for transactions at or below the current $250,000-threshold. The Guidelines are also responsive to the majority of comments, which expressed support for the Proposal and confirmed that additional clarification of existing regulatory and supervisory standards serve to strengthen the real estate collateral valuation and risk management practices across insured depository institutions. 213; and NCUA: NCUA Letter to Credit Unions 05-CU-06. (See the Scope of Work Rule in USPAP.). The Guidelines, including their appendices, update and replace existing supervisory guidance documents to reflect developments concerning appraisals and evaluations, as well as changes in appraisal standards and advancements in regulated institutions' collateral valuation methods. An evaluation should contain sufficient information detailing the analysis, assumptions, and conclusions to support the credit decision. Evaluate the vendor's scoring system and methodology for the model(s). 56. As loan repayment becomes more dependent on the sale of collateral, an institution's policies should address the need to obtain an appraisal or evaluation for safety and soundness reasons even though one is not otherwise required by the Agencies' appraisal regulations. Under the Agencies' appraisal regulations, the result of an Automated Valuation Model (AVM), by itself or signed by an appraiser, is not an appraisal, because a state certified or licensed appraiser must perform an appraisal in conformance with USPAP and the Agencies' minimum appraisal standards. [38], Appraisers must analyze, apply, and report appropriate deductions and discounts when providing an estimate of market value based on demand for real estate in the future. Some commenters referenced industry efforts to mitigate fraud in real estate transactions. 03/01/2023, 43 Web( 1) Title XI of FIRREA provides protection for federal financial and public policy interests in real estate-related transactions by requiring real estate appraisals used in connection These revisions incorporate and clarify certain supervisory expectations from the Evaluation Content section of the Proposal, and emphasize an institution's responsibility to establish criteria addressing the appropriate level of analysis and information necessary to support the estimate of market value in an evaluation. In response to these comments, the Guidelines were expanded to clarify the Agencies' expectations for an appropriate depth of review, the educational and training qualifications for reviewers, the resolution of valuation deficiencies, and related documentation standards. Market ValueAs defined in the Agencies' appraisal regulations, the most probable price which a property should bring in a competitive and open 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. Further, the Agencies recognize that the Dodd-Frank Act directs the Agencies to address in their safety and soundness regulations the appraisal requirements for 1-to-4 family residential mortgages. Independence is compromised when a borrower recommends an appraiser or a person to perform an evaluation. set forth, among other requirements, minimum standards for the performance of real estate appraisals in connection with federally related transactions,[3] The Guidelines also reference the FRB's Regulation Z (implementing the Truth in Lending Act), which was amended in 2008 and 2010 to include provisions regarding appraiser independence.[12]. For example, an institution should establish a level of acceptable core accuracy and limit exposure to a model's systemic tendency to over value properties (commonly referred to as tail risk). Comments were received from financial institutions, appraisers, collateral valuation service providers, industry-related trade associations (industry groups), consumer groups, government officials, and individuals. Raw LandA parcel or tract of land with no improvements, for example, infrastructure or vertical construction. Acceptable Appraisal means, with respect to an appraisal of Inventory, the most recent appraisal of such property received by Agent (a) from an appraisal company satisfactory to Agent, (b) the scope and methodology (including, to the extent relevant, any sampling procedure employed by such appraisal company) of which are satisfactory to Agent, and (c) the results of which are satisfactory to Agent, in each case, in Agents Permitted Discretion. 40. The Guidelines address the types of communications that would not be construed as coercion or undue influence on appraisers and persons performing evaluations, as well as examples of actions that would compromise independence. As noted above, some appraiser and appraisal group commenters expressed their views that evaluations generally do not provide an adequate assessment of a property's market value and requested that the Agencies provide additional guidance on the content of evaluations and the level of detail to be included in evaluations supporting higher risk transactions. 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. Further, the Agencies revised the Guidelines to confirm that the result of an automated valuation model (AVM), in and of itself, does not meet the Agencies' minimum appraisal standards, regardless of whether the results are signed by an appraiser. In assessing whether changes in market conditions are material, an institution should consider the individual and aggregate effect of these changes on its collateral protection and the risk in its real estate lending programs or credit portfolios. These individuals would include any employee whose compensation is based on loan volume (such as processing or approving of loans). Communicating a predetermined, expected, or qualifying estimate of value, or a loan amount or target loan-to-value ratio to an appraiser or person performing an evaluation. 24. 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. 1652 0 obj
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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. Restricted Use Appraisal ReportAccording 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. This revised section also incorporates the section on Accepting Appraisals from Other Financial Services Institutions in the Proposal. An institution should obtain an appraisal that is appropriate for the particular federally related transaction, considering the risk and complexity of the transaction. Until the ACFR grants it official status, the XML About half of the savings and loans went out of business between 1986 and 1995, when the Resolution Trust Corp. completed its task of disposing of the remaining assets in order to reimburse depositors. A few commenters asked the Agencies to provide further clarification on the types of employees who would be considered as loan production staff. 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). Public Law 102-485, 2, 106 Stat. The Agencies also requested comment on whether appropriate constraints can be placed on the use of these tools and Start Printed Page 77454methods to ensure the overall integrity of the institution's appraisal review process for other low risk mortgage transactions. (Refer to Appendix B, Evaluations Based on Analytical Methods or Technological Tools.). In response, the Agencies note that these commenters' suggestions address statutes and regulations that are generally beyond the scope of the Guidelines, such as the Real Estate Settlement Procedures Act (RESPA) and the FRB's Regulation B (implementing the Equal Credit Opportunity Act). 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. A few commenters recommended broad initiatives for the Agencies to undertake in the context of mitigating mortgage fraud and promoting appraisal quality through, for example, information sharing in the form of national data bases. FIRREAalso allowedbank holding companiesto acquire thrifts. Transactions that Require Evaluations. For existing or proposed developments of five or more residential lots in a single development, the appraiser must analyze and report appropriate deductions and discounts. An institution's appraisal and evaluation policies should establish internal controls to promote an effective appraisal and evaluation program. An institution should establish policies and procedures for resolving any inaccuracies or weaknesses in an appraisal or evaluation identified through the review process, including procedures for: An institution should establish policies for documenting the review of appraisals and evaluations in the credit file. Prospective value opinions are intended to reflect the current expectations and perceptions of market participants, based on available data. The institution should employ audit procedures and review a representative sample of appraisals supporting pooled loans or real estate notes to determine that the conditions of the exemption have been satisfied. [56] 23. [FR Doc. This final rule will become effective on August 10, 2015. This section in the Proposal and the Guidelines provides the Agencies' expectations for an institution to establish an effective, risk-focused process for reviewing appraisals and evaluations prior to a final credit decision. The revisions reflect clarifying text in response to comments from institutions on the regulatory requirements for reappraisals of real estate collateral for existing credits, particularly in modification and workout situations. Appraisers are expected to be selected for individual assignments based on their competency to perform the appraisal, including knowledge of the property type and specific property market. Sum of Retail SalesA mathematical calculation of the sum of the expected sales prices of several individual properties in the same development to an individual purchaser. 57. 2. If an evaluation is permitted under this exemption, an institution may use an existing appraisal or evaluation as long as the institution verifies and documents that the appraisal or evaluation continues to be valid. 22. 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. Recognizing that technology may change, the Guidelines address an institution's responsibility for ensuring that an evaluation based on an analytical method or technological tool is consistent with the Agencies' supervisory expectations in the Evaluation Content section. According to USPAP, appraisal reports must contain sufficient information to enable the intended user of the appraisal to understand the report properly. Prudent portfolio monitoring practices include criteria for determining when to obtain a new appraisal or evaluation. The Appendix also addresses the process that institutions are expected to establish for determining whether a method or tool may be used in the preparation of an evaluation and the supplemental information that may be necessary to comply with the minimum supervisory expectations for an evaluation, as set forth in the Guidelines. While the Agencies recognize the significance of these issues in the ongoing public debate on appraisal reform through various initiatives, such matters are beyond the scope of the Guidelines. Further, the Dodd-Frank Act provides [i]n conjunction with the purchase of a consumer's principal dwelling, broker price opinions may not be used as the primary basis to determine the value of a piece of property for the purpose of loan origination of a residential mortgage loan secured by such piece of property.[66]. Implement internal controls that promote compliance with these program standards, including those related to monitoring third party arrangements. provides [i]n conjunction with the purchase of a consumer's principal dwelling, broker price opinions may not be used as the primary basis to determine the value of a piece of property for the purpose of loan origination of a residential mortgage loan secured by such piece of property.[36]. Appendix D (previously Appendix C in the Proposal) provides a glossary of terms. Institutions also should be aware of separate requirements on conflicts of interest under Regulation Z (Truth in Lending), 12 CFR 226.42(d). An institution should specify the use of an appraisal report option that is commensurate with the risk and complexity of the transaction. 3331, et seq. 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