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. Supersedes all previous rales. Loan workouts, debt restructurings, loan assumptions, and similar transactions involving the addition or substitution of borrowers may qualify for the exemption for renewals, refinancings and other subsequent transactions. Maintain a system of adequate controls, verification, and testing to ensure that appraisals and evaluations provide credible market values. Fee simple interest refers to the most complete ownership unencumbered by any leases or other interests. 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. The appraisal analysis also should include consideration of the absorption of the unleased space. The Agencies allow an institution to use an existing appraisal or evaluation to support a subsequent transaction in certain circumstances. It also created the Bank Insurance Fund (BIF). are not part of the published document itself. The Agencies note that the Guidelines do not expand the categories of appraisal exemptions set forth in the Agencies' appraisal regulations. Further, USPAP requires the appraiser to disclose whether he or she previously appraised the property. [56] Going Concern ValueThe value of a business entity rather than the value of the real property. The estimated valuation herein will be updated as appropriate. 49. The Agencies believe that the Proposal adequately addressed an institution's responsibility to maintain a risk-focused process for elevating its collateral valuation methods consistent with safe and sound banking practices. [46] Each of the Agencies has adopted additional appraisal standards.[21]. Valuation means the determination, to be made initially by the Board of Directors of the Company, of the fair market value per share of Common Stock pursuant to clause (v) above. 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. The Savings Association Insurance Fund (SAIF) was a U.S. government insurance fund for savings and loans to protect depositors from losses. 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. 44. 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. Web1 language. Transactions Insured or Guaranteed by a U.S. Government Agency or U.S. 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. In such cases, the Agencies expect an institution to monitor its borrower's performance in selling loans to the secondary market and take appropriate steps, such as increasing sampling and auditing of the loans and the supporting documentation, if the borrower experiences more than a minimal rate of loans being put back by an investor. 1. 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. Communication between the institution's collateral valuation staff and an appraiser or person performing an evaluation is essential for the exchange of appropriate information relative to the valuation assignment. 1.5 FIRREA: The Financial Institutions Reform, Recovery and Enforcement Act of 1989. This appendix provides further clarification on the application of these regulatory exemptions and should be read in the context of each Agency's appraisal regulation. Some commenters referenced industry efforts to mitigate fraud in real estate transactions. Section 1471 of the Dodd-Frank Act added a new section 129H to the Truth-in-Lending Act (15 U.S.C. 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. 30. 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. Institutions may employ AVMs for a variety of uses such as loan underwriting and portfolio monitoring. Board Presentation. 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. [52] Further, an institution's reporting of a person suspected of non-compliance with the Uniform Standards of Professional Appraisal Practice (USPAP), and applicable Federal or state laws or regulations, or otherwise engaged in other unethical or unprofessional conduct to the appropriate authorities would not be viewed by the Agencies as coercion or undue influence. The appraiser'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. Second, These tools are designed to help you understand the official document 1376 (2010). 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. 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. 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. 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. Supervisory Policy. This exemption is intended to apply to individual transactions on a case-by-case basis rather than broad categories of transactions that would otherwise be addressed by an appraisal exemption. publication in the future. 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). 5. The use of FIRREA as an enforcement tool has grown since 2015 and is expected to increase under the Biden Administration. (See the discussion in these Guidelines on Selection of Appraisers or Persons Who Perform Evaluations.). The appraiser had no direct, indirect, or prospective interest, financial or otherwise, in the property or transaction. The financial services institution (not the borrower) ordered the appraisal. 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. Comments provided by financial institutions support the approach taken in the Proposal, which establishes minimum supervisory expectations for an evaluation and is designed to ensure an institution obtains a more detailed evaluation, or possibly an appraisal, when additional information is necessary to assess collateral risk in the credit decision. documents in the last year, 983 NCUA's appraisal regulation, 12 CFR 722, does not define business loan. A member business loan is regulated under 12 CFR 723. 03/01/2023, 159 Register documents. 42. If sufficient market data exists to perform both the sales comparison and developmental approaches to value, the appraisal report should detail a reconciliation of these two approaches in arriving at a market value conclusion for the raw land. 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. 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. See, for example, FFIEC Statement on Risk Management of Outsourced Technology Service (November 28, 2000) for guidance on the assessment, selection, contract review, and monitoring of a third party that provides services to a regulated institution. The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) requires real estate appraisals used in connection with certain federally related transactions to be (1) written; (2) performed in accordance with uniform standards; and (3) conducted by appraisers whose competency has been demonstrated and whose headings within the legal text of Federal Register documents. When a property is non-homogeneous, such as atypical lot sizes or property types. documents in the last year, by the Food and Drug Administration Transactions that Require Evaluations. 7. As in the Proposal, the Appendix in the Guidelines provides guidance on the Agencies' supervisory expectations regarding an institution's process for selecting, using, validating, and monitoring a valuation method or tool. This repetition of headings to form internal navigation links A few commenters questioned the timing of the Proposal given the stress in the current real estate market. The real estate lending guidelines state that an institution's real estate lending program should include an appropriate real estate appraisal and evaluation program. This estimated valuation considers the Bank only as a going concern and should not be considered as an indication of its liquidation value. In response to these comments, the Guidelines confirm that appraisals obtained from other financial services institutions must comply with the Agencies' appraisal regulations and be consistent with supervisory guidance, including the standards of independence. Therefore an institution needs to understand how a confidence score was derived and the extent to which a confidence score correlates to model accuracy. Employees responsible solely for credit administration or credit risk management are not considered loan production staff. [18] Conversely, when new monies are advanced (other than funds necessary to cover reasonable closing costs) and there has been an obvious and material change in market conditions or the physical aspects of the property that threaten the adequacy of the institution's real estate collateral protection, the institution must obtain an appraisal unless another exemption applies. Under the NCUA's appraisal regulation, a credit union must meet both conditions to avoid the need for an appraisal. For example, an AVM may be used for a transaction provided the resulting evaluation meets all of the supervisory expectations in the Evaluation Development and Evaluation Content sections in the Guidelines, is consistent with safe and sound banking practices, and produces a credible market value conclusion. To satisfy the condition for no obvious and material change in market conditions or the physical aspects of the property, the current or planned future use of the property should be consistent with the use identified in the existing appraisal or evaluation. Establish criteria for determining whether a particular valuation method or tool is appropriate for a given transaction or lending activity, considering associated risks. Address the independence, educational and training qualifications, and role of the reviewer. 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. 37. For further clarity, this section incorporates certain technical edits to address specific comments. Appendix AAppraisal Exemptions. Though a reviewer cannot change the value conclusion in the original appraisal, an appraisal review performed by an appropriately qualified and competent state certified or licensed appraiser in accordance with USPAP may result in a second opinion of market value. The Proposal addressed the supervisory process for assessing the adequacy of an institution's appraisal and evaluation program to conduct its real estate lending activities consistent with safe and sound underwriting practices. During the supervisory review of an institution's real estate lending activities, the Agencies' examiners assess the adequacy of risk management practices, including the independence of the collateral valuation function. 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. The appraiser selected to perform an appraisal holds the appropriate state certification or license at the time of the assignment. 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. 1.6 ASB: The Appraisal Standards Board of The Appraisal Foundation. federally regulated institutions must adopt and maintain written real estate lending policies that are consistent with safe and sound lending practices and should reflect consideration of the Interagency Guidelines for Real Estate Lending Policies (Lending Guidelines). an institution should monitor collateral risk on a portfolio and on an individual credit basis. If there are insurance or guarantee components of any particular AVM, the institution is responsible for understanding the extent and limitations of the insurance policy or guarantee, and the claim process and financial strength of the insurer. This timeframe should be commensurate with the level and nature of the institution's real estate lending activity. For example, one commenter suggested that the Agencies withdraw the Proposal to allow additional time to study the lessons learned from the recent stress in the residential mortgage markets. In addition, an institution should establish criteria for when to expand the depth of the review. TheFederal Home Loan Bank Board(FHLBB) was abolished. An institution may request an appraiser to separately provide an estimate of marketing time in an appraisal. When compliance cannot be confirmed, institutions are reminded that they must obtain an appraisal(s) prior to engaging in the transaction. The Agencies requested comment on all aspects of the Proposal, and specifically requested comment on: (1) The clarity of the Proposal regarding interpretations of the appraisal exemptions discussed in Appendix A; (2) the appropriateness of risk management expectations and controls in the evaluation process, including those discussed in Appendix B; and (3) the expectations in the Proposal on reviewing appraisals and evaluations. 2. The documentation in the credit file should provide the facts and analysis to support the institution's conclusion that the existing appraisal or evaluation may be used in the subsequent transaction. 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. Develop criteria to assess whether an existing appraisal or evaluation may be used to support a subsequent transaction. Through the review process, the institution should be able to assess the reasonableness of the appraisal or evaluation, including whether the valuation methods, assumptions, and data sources are appropriate and well-supported. However, an institution should not directly or indirectly coerce, influence, or otherwise encourage an appraiser or a person who performs an evaluation to misstate or misrepresent the value of the property. Institutions should establish policies and procedures that govern the use of AVMs and specify the supplemental information that is required to develop an evaluation. The Appendix clarifies that an institution may not rely solely on the results of a method or tool to develop an evaluation unless the resulting evaluation meets all of the supervisory expectations for an evaluation and is consistent with safe and sound banking practices. 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. FIRREA created civil enforcement authority to relevant agencies to impose significant enforcement penalties for violations. 03/01/2023, 828 The Start Printed Page 77472date of the report indicates the perspective from which the appraiser is examining the market. In addition, effective April 1, 2011, an institution must file a complaint with the appropriate state appraiser certifying and licensing agency under certain circumstances. 1989: FIRREA directed regulatory agencies to prescribe appropriate appraisal standards and required certified appraisers for federally related transactions of $1 million 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. The President of the United States issues other types of documents, including but not limited to; memoranda, notices, determinations, letters, messages, and orders. Ensure staff has the requisite expertise and training to manage the selection, use, and validation of an analytical method or technological tool. Regardless of the report option, the appraisal report should contain sufficient detail to allow the institution to understand the scope of work performed. Altering an appraisal report in a manner that conceals the original client or intended users of the appraisal is misleading, does not conform to USPAP, and violates the Agencies' appraisal regulations. 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 AgentThe Agencies' appraisal regulations do not specifically define the term agent. However, the term is generally intended to refer to one who undertakes to transact business or to manage business affairs for another. 58. 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. In the Proposal, the Agencies specifically requested comment on the Agencies' expectations for reviewing appraisals and evaluations. Approved Appraiser ListA listing of appraisers who an institution has determined to be generally qualified and competent to perform appraisals and may address the appraiser's expertise in a particular market and property type. OCC: Robert L. Parson, Appraisal Policy Specialist, (202) 874-5411, or Darrin L. Benhart, Director, Credit and Market Risk Division, (202) 874-4564; or Christopher C. Manthey, Special Counsel, Bank Activities and Structure Division, (202) 874-5300, or Mitchell Plave, Counsel, Legislative and Regulatory Activities Division, (202) 874-5090. 40. As a result of FIRREA, the differences between S&Ls and banks have decreased significantly. regulatory information on FederalRegister.gov with the objective of 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. NCUA: Vincent H. Vieten, Member Business Loan Program Officer, Office of Examination and Insurance, (703) 518-6396; or Sheila A. Albin, Staff Attorney, Office of General Counsel, (703) 518-6547. You can learn more about the standards we follow in producing accurate, unbiased content in our. In the Guidelines, this section also was reorganized to list the minimum program compliance standards and to incorporate clarifying text. The guidance addresses the authority as set forth in the Agencies' appraisal regulations for an institution to use an appraisal that was performed by an appraiser engaged directly by another regulated institution or financial services institution (including mortgage brokers), provided certain conditions are met. The Agencies also reserve the right to require an appraisal under their appraisal regulations to address safety and soundness concerns in a transaction. When an institution identifies an appraisal or evaluation that is inconsistent with the Agencies' appraisal regulations and the deficiencies cannot be resolved with the appraiser or person who performed the evaluation, the institution must obtain an appraisal or evaluation that meets the regulatory requirements prior to making a credit decision. Communicating the noted deficiencies to and requesting correction of such deficiencies by the appraiser or person who prepared the evaluation. This prototype edition of the 03/01/2023, 239 10. 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. for better understanding how a document is structured but Is a business loan with a transaction value equal to or less than the business loan threshold of $1 million, and is not dependent on the sale of, or rental income derived from, real estate as the primary source of repayment. 53. 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. Other commenters recommended revisions to the Agencies' appraisal regulations that cannot be changed with the issuance of the Guidelines. Extraordinary AssumptionAs defined in USPAP, an assumption, directly related to a specific assignment, which, if found to be false, could alter the appraiser's opinions or conclusions regarding the property's market value. The Guidelines, for instance, emphasize the importance of considering the property's condition in the development of an evaluation, regardless of the method or tool used. WebParagraph (3) of FIRREA section 1110 (12 U.S.C. 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. What Is the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA)? The use of real property or interests in property as security for a loan or investment, including mortgage-backed securities. implementing Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA)[2] Examiners will consider the size and the nature of an institution's real estate-related activities when assessing the appropriateness of its program. Independence of the Appraisal and Evaluation Program. By 2013, fewer than 1,000 savings and loans remained in operation. The valuation is based on the existing operations of the business and its current operating record, with the assumption that the business will continue to operate. Fluctuations in discount or direct capitalization rates also are indicators of changing market conditions. Some of the major changes enacted with the law: FIRREA was the government's response to a crisis caused by risky investment practices by many of the nation's savings and loan institutions. An institution should establish policies and procedures that provide a sound process for using various methods or tools. documents in the last year, 522 For a discussion on changes in market conditions, see the section on Validity of Appraisals and Evaluations in these Guidelines. The Proposal noted that each Agency would address the approval process through established processes for communicating with its regulated institutions. 36. Rather, as allowed by USPAP, an appraiser can determine the characteristics of a property through, among other things, any combination of property daily Federal Register on FederalRegister.gov will remain an unofficial An institution should ensure that when a third party engages an appraiser or a person who performs an evaluation, the third party conveys to that person the intended use of the appraisal or evaluation and that the regulated institution is the client. For example, an engagement letter should show that the financial services institution, not the borrower, engaged the appraiser. Prudent portfolio monitoring practices include criteria for determining when to obtain a new appraisal or evaluation. (See Appendix D, Glossary of Terms, for the definition of appraisal report options. A small or rural institution or branch with limited staff should implement prudent safeguards for reviewing appraisals and evaluations when absolute lines of independence cannot be achieved. Selection of Appraisers and Individuals Who Perform Evaluations. For loans to purchase an existing property, value means the lesser of the actual acquisition cost or the estimate of value. In the Proposal, this section addressed the competency and qualifications of appraisers and persons who perform an evaluation. Refer to Federal regulations at FRB: 12 CFR 208.62, 211.5(k), 211.24(f), and 225.4(f); FDIC: 12 CFR part 353; NCUA: 12 CFR part 748; OCC: 12 CFR 21.11; OTS: 12 CFR 563.180; and FinCEN: 31 CFR 103.18. Federal Register. 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. 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. Public Law 111-203, 124 Stat. (See Appendix D, Glossary of Terms, for terminology used in these Guidelines.) 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). Pursuant to FIRREA, new federal regulations were adopted for both savings and loan institutions and real estate appraisal professionals. The Guidelines also now provide additional clarification on the Agencies' supervisory expectations for the development and content of evaluations. [15] 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 and other repayment sources. Describe the method(s) the institution used to confirm the property's actual physical condition and the extent to which an inspection was performed. Further, the institution should obtain sufficient documentation that the buyer has entered into a legally binding sales contract and has obtained a written prequalification or commitment for permanent financing. Automated Valuation ModelA computer program that estimates a property's market value based on market, economic, and demographic factors. FIRREAalso allowedbank holding companiesto acquire thrifts. 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. , this section also was reorganized to list the minimum program compliance standards and to incorporate clarifying text employ for! You can learn more about the standards we follow in producing accurate, unbiased in. 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