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Federal Register / Vol. 75, No. 237 / Friday, December 10, 2010 / Notices
FOR FURTHER INFORMATION CONTACT:
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the
Currency
[Docket ID OCC–2010–0012]
FEDERAL RESERVE SYSTEM
[Docket No. OP–1338]
FEDERAL DEPOSIT INSURANCE
CORPORATION
DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
[Docket No. 2010–0018]
NATIONAL CREDIT UNION
ADMINISTRATION
RIN 3133–AD38
Interagency Appraisal and Evaluation
Guidelines
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).
ACTION: Final guidance.
AGENCY:
The Agencies are issuing final
Interagency Appraisal and Evaluation
Guidelines (Guidelines) to provide
further clarification of the Agencies’
appraisal regulations and supervisory
guidance to institutions and examiners
about prudent appraisal and evaluation
programs. 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. The Guidelines
clarify the Agencies’ longstanding
expectations for an institution’s
appraisal and evaluation program to
conduct real estate lending in a safe and
sound manner. Further, the Guidelines
promote consistency in the application
and enforcement of the Agencies’
appraisal regulations and safe and
sound banking practices. The Agencies
recognize that revisions to the
Guidelines may be necessary to address
future regulations implementing the
provisions of the Dodd-Frank Wall
Street Reform and Consumer Protection
Act of 2010.
DATES: The Guidelines are effective on
December 10, 2010.
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SUMMARY:
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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.
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. 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, (202) 898–8886, or Mark
Mellon, Counsel, (202) 898–3884, Legal
Division.
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.
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.
SUPPLEMENTARY INFORMATION:
I. Background
The Agencies’ appraisal regulations 1
implementing Title XI of the Financial
Institutions Reform, Recovery, and
Enforcement Act of 1989 (FIRREA) 2 set
forth, among other requirements,
minimum standards for the performance
of real estate appraisals in connection
with ‘‘federally related transactions,’’ 3
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.4 These regulations also
specify the requirement for evaluations
of real estate collateral in certain
1 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 Public Law 101–73, Title XI, 103 Stat. 511
(1989); 12 U.S.C. 3331, et seq.
3 12 U.S.C. 3339.
4 12 U.S.C. 3350(4).
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transactions that do not require an
appraisal.
In October 1994, the OCC, FRB, FDIC
and OTS jointly issued the Interagency
Appraisal and Evaluation Guidelines 5
(1994 Guidelines) to provide further
guidance to regulated financial
institutions on prudent appraisal and
evaluation policies, procedures and
practices. Further, under the Agencies’
real estate lending regulations,6
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).
The Lending Guidelines state that an
institution is responsible for
establishing a real estate appraisal and
evaluation program, including the type
and frequency of collateral valuations.
Since the issuance of the 1994
Guidelines, the Agencies have issued
additional supervisory guidance
documents 7 to promote sound practices
in regulated institutions’ appraisal and
evaluation programs, including
independence in the collateral valuation
function, the appraisal of residential
tract developments, and compliance
with revisions to the Uniform Standards
of Professional Appraisal Practice
(USPAP). There also have been
significant industry developments, such
as advancements in information
technology that have affected the
5 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).
6 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.
7 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 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. 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.
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development and delivery of appraisals
and evaluations.
In response to these developments,
the Agencies published for comment the
Proposed Interagency Appraisal and
Evaluation Guidelines (Proposal) on
November 19, 2008.8 After considering
the comments on the Proposal, the
Agencies made revisions to the Proposal
and are now issuing the Guidelines. The
Guidelines apply to all real estate
lending functions and real estate-related
financial transactions originated or
purchased by a regulated institution for
its own portfolio or for assets held for
sale. The changes provide updates to
and consolidate some of the existing
supervisory issuances. The Guidelines
track the format and substance of the
1994 Guidelines and existing
interpretations as reflected in
supervisory guidance documents and
the preamble that accompanies and
describes amendments to the Agencies’
appraisal regulations as published in
June 1994.9 The Guidelines also reflect
refinements made by the Agencies in
the supervision of institutions’ appraisal
and evaluation programs. Since the
issuance of the Proposal, changes in
market conditions underscore the
importance of institutions following
sound collateral valuation practices
when originating or modifying real
estate loans and monitoring portfolio
risk.
In implementing the Dodd-Frank Wall
Street Reform and Consumer Protection
Act of 2010 (the Dodd-Frank Act),10 the
Agencies will determine whether future
revisions to the Guidelines may be
necessary. However, the Agencies are
issuing the Guidelines to promote
consistency in the application and
enforcement of the Agencies’ current
appraisal requirements and related
supervisory guidance. In finalizing the
Guidelines, the Agencies considered the
Dodd-Frank Act, other Federal statutory
and regulatory changes affecting
appraisals,11 and the public comment
process. 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
8 73
FR 69647 (Nov. 19, 2008).
FR 29481 (Jun. 7, 1994).
10 Public Law 111–203, 124 Stat. 1376 (2010).
11 See, for example, Title IV of Division A of the
Housing and Economic Recovery Act of 2008,
Public Law 110–289, Title IV, Division A, 122 Stat.
2800 (2008); 12 U.S.C. 1707, et seq., and FRB
Regulation Z, 12 CFR 226.36 and 226.42.
9 59
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practices across insured depository
institutions.
The Guidelines contain four
appendices that clarify current
regulatory requirements and supervisory
guidance. Appendix A provides further
clarification on real estate-related
financial transactions that are exempt
from the Agencies’ appraisal
regulations. Appendix B addresses an
institution’s use of analytical methods
or technological tools in the
development of an evaluation.
Appendix C clarifies the minimum
appraisal standards required by the
Agencies’ appraisal regulations for
analyzing and reporting appropriate
deductions and discounts in appraisals.
Based on comments on the Proposal, the
Agencies added this additional
appendix. Appendix D (previously
Appendix C in the Proposal) provides a
glossary of terms.
II. Comments on the Proposal
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. In
particular, the Agencies requested
comment on whether automated tools or
sampling methods used to review
appraisals and evaluations supporting
lower risk single-family residential
mortgages are 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 an
institution’s appraisal process for those
low risk mortgage transactions.
The Agencies collectively received
157 unique comments on the Proposal.
Comments were received from financial
institutions, appraisers, collateral
valuation service providers, industryrelated trade associations (industry
groups), consumer groups, government
officials, and individuals.
The majority of financial institution
and industry group commenters
supported the Proposal and the
Agencies’ efforts to update existing
guidance in this area. Many commenters
recognized that additional clarification
of existing regulatory and supervisory
expectations strengthen the real estate
collateral valuation and risk
management practices across federally
regulated institutions. These
commenters were in general agreement
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that the Proposal adequately addressed
developments in collateral valuation
practices, but also raised technical
issues and requested that the Agencies
provide further clarification on a variety
of topics.
Some commenters did not support the
Proposal for various reasons, including
the need to study the effect of the recent
market challenges on appraisal practices
or a request to require appraisals on all
real estate lending activity conducted by
federally regulated institutions. Other
commenters recommended revisions to
the Agencies’ appraisal regulations that
cannot be changed with the issuance of
the Guidelines. Some commenters
encouraged the Agencies to incorporate
additional safeguards for consumers in
the Guidelines. 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).
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. 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. 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.
A few commenters questioned the
timing of the Proposal given the stress
in the current real estate market. 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. The
Agencies believe that the timing of the
release of the Guidelines is appropriate
to emphasize existing requirements,
clarify expectations, and ensure
consistency in the application of the
Agencies’ appraisal regulations, thereby
promoting safe and sound collateral
valuation practices across federally
regulated institutions.
Virtually all of the commenters either
offered suggestions for strengthening or
clarifying technical aspects of the
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Proposal. The following discussion
summarizes significant comments on
specific provisions of the Proposal, the
Agencies’ responses, and major changes
to the Proposal as reflected in the
Guidelines.
Discussion on the Comments and
Guidelines
Supervisory Policy. 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. It
also reaffirmed that, when examining an
institution’s real estate lending activity,
supervisory staff will review an
institution’s appraisal and evaluation
program for compliance with the
Agencies’ appraisal regulations and
consistency with related guidance.
Appraisers and appraisal groups
asked for further explanation on the
enforceability of the Guidelines and the
distinction between supervisory
guidance and regulatory requirements.
These commenters expressed the view
that the Proposal gave too much
discretion to regulated institutions in
the development and implementation of
their appraisal and evaluation programs.
In particular, these commenters raised
concerns over the enforcement of the
Guidelines by the Agencies. 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.
The Agencies believe that the
Proposal adequately addressed the issue
of enforceability and their supervisory
process. The Agencies note that their
appraisal regulations and guidance have
been in place since the early 1990s and
that financial institutions are familiar
with the regulatory and supervisory
framework. The Agencies believe that
the Proposal reaffirmed existing
guidance addressing their supervisory
expectations for prudent appraisal and
evaluation policies, procedures, and
practices. Moreover, an institution’s
compliance with the regulatory
requirements and consistency with
supervisory expectations is considered
during an Agency’s on-site review of an
institution’s real estate lending
activities. However, to address
commenters’ concerns, the Agencies
incorporated minor edits to better
distinguish between regulatory
requirements and prudent banking
practices in the Guidelines. In addition,
the Agencies expanded certain sections
to provide further clarification in an
effort to promote consistency in the
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application and enforcement of their
regulatory requirements and supervisory
expectations.
Independence of the Appraisal and
Evaluation Program. The Proposal
reaffirmed that an institution’s collateral
valuation function should be
independent of the loan production
process. The Proposal addressed
longstanding supervisory expectations
that an institution should implement
procedures to affirm its program’s
independence. In response to
commenters, the Agencies expanded
this section in the Guidelines to further
detail their expectations for appropriate
communication and information sharing
with persons performing collateral
valuation assignments. 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. 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
Some commenters did not support the
longstanding flexibility afforded to
small and rural institutions when
absolute lines of independence cannot
be achieved. The Agencies believe that
small and rural institutions can have
acceptable risk management practices to
support their appraisal function and
conduct their real estate lending activity
in a safe and sound manner. Therefore,
the Guidelines, like the Proposal, allow
for some flexibility to exist so long as an
institution can demonstrate the
independence of its collateral valuation
function from the final credit decision.
A few commenters asked the Agencies
to provide further clarification on the
types of employees who would be
considered as loan production staff. The
Agencies note that both the Proposal
and Guidelines include a definition in
Appendix D for loan production staff.
The Agencies believe that the definition
adequately describes loan production
staff for purposes of the Guidelines.
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.
Selection of Appraisers and
Individuals Who Perform Evaluations.
In the Proposal, this section addressed
the competency and qualifications of
appraisers and persons who perform an
12 73 FR 44522, 44604 (Jul. 30, 2008); 75 FR
66554 (Oct. 28, 2010).
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evaluation. Several commenters asked
for clarification on the factors
institutions should consider in assessing
an appraiser’s competency. A few
commenters also noted that certain
factors, such as cost and turnaround
time, should not influence the selection
of appraisers. Other commenters asked
the Agencies to clarify certain aspects of
the process for engaging an appraiser
and when the appraiser/client
relationship is established. To address
these comments, the Agencies
incorporated clarifying edits in the
Guidelines to emphasize the importance
of appraiser competency for a particular
assignment relative to both the property
type and geographic market. Moreover,
the Guidelines stress that an institution
should not select a valuation method or
tool solely because it provides the
highest value, the lowest cost, or the
fastest response or turnaround time.
To eliminate redundancies, the
Guidelines incorporate the discussion in
the Proposal’s section on qualifications
of persons who perform evaluations into
a new section that addresses both the
qualifications and selection of an
appraiser and a person who performs an
evaluation. Further, the Guidelines no
longer refer to ‘‘a nonpreferential and
unbiased process’’ for selecting
appraisers or persons who perform
evaluations, which could be
misconstrued in a way that would not
ensure that a competent person is
selected for a valuation assignment.
A few institution commenters asked
the Agencies to address whether loan
production staff can recommend an
appraiser for a particular assignment or
inclusion on the institution’s list of
approved appraisers. Staff performing
the collateral valuation function is
responsible for selecting an appraiser.
The Guidelines provide further
clarification on an institution’s
procedures for the selection of an
appraiser for an assignment, including
the development, administration, and
maintenance of an approved appraiser
list, if used.
Minimum Appraisal Standards. To
promote the quality of appraisals, the
Proposal and the Guidelines provide
further clarification of the minimum
appraisal standards in the Agencies’
appraisal regulations and contain
guidance on appraisal development and
reporting to reflect revisions to USPAP.
Most commenters found the Proposal’s
additional explanation on these
standards helpful, particularly the
discussion on deductions and discounts
in an appraisal for a residential tract
development. While this section in the
Guidelines generally tracks the
Proposal, the detailed discussion on
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analyzing deductions and discounts has
been moved to a new appendix. Given
the importance of these concepts, the
appendix contains an expanded
discussion of the appraisal standard for
deductions and discounts in a
discounted cash flow analysis.
Further, several commenters
addressed the topic of assessment of an
appraiser’s competency in the context of
ensuring compliance with the minimum
appraisal standards. 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, 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.
Transactions that Require
Evaluations. Financial institutions
appreciated the flexibility contained in
the Proposal that permitted the use of
evaluations for low-risk transactions,
consistent with the Agencies’ appraisal
regulations. These commenters
contended that appropriate risk
management practices provide sufficient
safeguards to elevate their collateral
valuation methods (that is, obtaining an
appraisal instead of an evaluation) when
warranted. Several appraiser and
appraisal organization commenters
expressed their longstanding opposition
to institutions’ use of evaluations in lieu
of appraisals for exempt transactions.
This section in the Guidelines
references Appendix A, Appraisal
Exemptions, which has been revised in
response to comments on the Proposal.
The Agencies note that the Guidelines
do not expand the categories of
appraisal exemptions set forth in the
Agencies’ appraisal regulations.
For further clarity, this section
incorporates certain technical edits to
address specific comments. For
instance, the dollar amount of the
appraisal threshold and of the business
loan threshold from the Agencies’
appraisal regulations were incorporated
in the text of this section. This section
also addresses the factors that an
institution should consider in
determining whether to obtain an
appraisal, even though an evaluation is
permitted. This topic was moved from
the Evaluation Content section in the
Proposal to this section, as it relates to
the regulatory requirement that
evaluations reflect safe and sound
banking practices. In particular,
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comments from appraisers and appraisal
organizations noted that the Agencies
should not permit evaluations, even
detailed ones, to substitute for
appraisals in higher risk real estate
loans. The Agencies believe that the
Guidelines adequately address an
institution’s responsibility to maintain
policies and procedures for obtaining an
appropriate appraisal or evaluation to
support its credit decision.
Evaluation Development and
Evaluation Content. 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. 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.
In response to comments, the
Agencies revised the Guidelines to
stress that an institution should
consider transaction risk when it is
evaluating the appropriate collateral
valuation method and level of
documentation for an evaluation. The
Guidelines also now provide additional
clarification on the Agencies’
supervisory expectations for the
development and content of
evaluations. A new section on
Evaluation Development provides
guidance on the requirement in the
Agencies’ appraisal regulations that
evaluations must be consistent with safe
and sound banking practices. 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.
Clarifying edits also reaffirm that
valuation methods used to develop an
evaluation must be consistent with safe
and sound banking practices. 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,
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and produces a credible market value
conclusion. In response to comments,
the Guidelines clarify how institutions
can use analytical methods or
technological tools to develop an
evaluation. 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.
Further, technical edits were
incorporated in the Evaluation Content
section of the Guidelines to address
commenters’ questions regarding the
appropriate level of documentation in
an evaluation.
The Guidelines also address questions
from several commenters on the
appropriate use of broker price opinions
(BPOs) in the context of the Agencies’
appraisal regulations. The Proposal did
not specifically address the use of BPOs
or similar valuation methods. 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. A BPO or other valuation
method may provide useful information
in developing an appraisal or
evaluation, for monitoring collateral
values for existing loans, or in
modifying loans in certain
circumstances. 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 a loan
origination of a residential mortgage
loan secured by such piece of
property.’’ 13
Reviewing Appraisals and
Evaluations. This section in the
Proposal and the Guidelines provides
the Agencies’ expectations for an
institution to establish an effective, riskfocused process for reviewing appraisals
and evaluations prior to a final credit
decision. In the Proposal, the Agencies
specifically requested comment on the
Agencies’ expectations for reviewing
appraisals and evaluations. In
particular, the Agencies sought
comment in the Proposal on whether
the use of automated tools or sampling
methods for reviewing appraisals or
evaluations supporting lower risk
residential mortgages are appropriate for
other low risk mortgage transactions.
The Agencies also requested comment
on whether appropriate constraints can
be placed on the use of these tools and
13 Dodd-Frank
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methods to ensure the overall integrity
of the institution’s appraisal review
process for other low risk mortgage
transactions. Commenters requested
further clarification on the process for
institutions to obtain approval to use
automated tools and sampling methods
in the review process. The Proposal
noted that each Agency would address
the approval process through
established processes for
communicating with its regulated
institutions.
Several commenters requested further
clarification on appropriate policies and
procedures for the review function.
Some commenters also asked the
Agencies to address the expectations for
reviews by property type and risk
factors. 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. Further, the
Guidelines now discuss the appropriate
depth of review by property type,
including factors to consider in the
review of appraisals and evaluations of
commercial and single-family
residential real estate. The Guidelines
retain the possible use of automated
tools and sampling methods in the
review of appraisals and evaluations
supporting lower risk residential
mortgages. With prior approval from its
primary Federal regulator, an institution
may use such tools or methods for its
review process.
This revised section also incorporates
the section on Accepting Appraisals
from Other Financial Services
Institutions in the Proposal. 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. Some commenters contend that
regulated institutions should not be
allowed to accept appraisals from
mortgage brokers so as to ensure
compliance with applicable appraisal
independence standards. 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. Moreover,
the Guidelines remind institutions that
they generally should not rely on
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evaluations prepared by another
financial services institution.
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. When
compliance cannot be confirmed,
institutions are reminded that they must
obtain an appraisal(s) prior to engaging
in the transaction. Finally, minor edits
were made to this section to reaffirm
that small institutions should ensure
that reviewers are independent and
appropriately qualified, and may need
to employ additional personnel or
engage a third party to perform the
review function.
Third Party Arrangements. This
section in the Guidelines addresses the
risk management practices that an
institution should consider if it uses a
third party to manage or conduct all or
part of its collateral valuation function.
In the Guidelines, this section was
expanded to provide additional
specificity on an institution’s
responsibilities for the selection,
monitoring, and management of
arrangements with third parties.
Revisions to this section reflect requests
from commenters for clarification on the
relationship between regulated
institutions and third parties.
Commenters also asked the Agencies to
reaffirm that an institution cannot
outsource its responsibility to maintain
an effective and independent collateral
valuation function. The Proposal and
Guidelines reference each Agency’s
guidance on third party arrangements.
Revisions to this section summarize key
considerations from those issuances and
state that institutions should use
caution in determining whether to
engage a third party. In response to
several comments regarding an
institution’s use of appraisal
management companies, this section
addresses the due diligence procedures
for selecting a third party, including an
effective risk management system and
internal controls.
Program Compliance. A few
commenters suggested that the Agencies
incorporate certain clarifying edits with
regard to the independence of the
collateral valuation process, staff
reporting relationships, and internal
quality control practices. Several
commenters asked the Agencies to
clarify their expectations for
demonstrating compliance and offered
recommendations on sound practices,
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including appropriate staff reporting
relationships and the depth of the
process and procedures for verifying
and testing compliance (such as
sampling procedures). In response, the
Agencies have revised the Guidelines to
reflect a principles-based approach to
ensure that an institution’s collateral
valuation program complies with the
Agencies’ appraisal regulations and is
consistent with supervisory guidance
and an institution’s internal policies.
In the Guidelines, this section also
was reorganized to list the minimum
program compliance standards and to
incorporate clarifying text. Institutions
are reminded that the results of their
review process and other relevant
information should be used as a basis
for considering persons for future
collateral valuation assignments and
that collateral valuation deficiencies
should be reported to appropriate
internal parties, and if applicable, to
external authorities in a timely manner.
The Guidelines should be considered by
an institution in establishing effective
internal controls over its collateral
valuation function, including the
verification and testing of its processes.
Monitoring Collateral Value. The
majority of commenters agreed with the
Proposal and the expectations for
determining when an institution should
obtain a new appraisal or evaluation for
monitoring asset quality of its portfolio
and collateral risk in a particular credit.
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.
In addition to certain clarifying edits,
language was added in the Guidelines to
confirm that an institution may employ
a variety of techniques for monitoring
the effect of collateral valuation trends
on portfolio risk and that such
information should be timely and
sufficient to understand the risk
associated with its lending activity. In
response to commenters, the Guidelines
now provide examples of factors for an
institution to consider in assessing
whether a significant change in market
conditions has occurred. The Guidelines
also emphasize the importance of
monitoring collateral values in the
institution’s lending markets, consistent
with the Agencies’ real estate lending
regulations and guidelines.
To eliminate redundancies, the
revised section incorporates from
Appendix A of the Proposal the
discussion of an institution’s
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responsibility to obtain current
collateral valuation information for loan
modifications and workouts of existing
credits. As in the Proposal, the
Guidelines address when an institution
may modify an existing credit without
obtaining either an appraisal or an
evaluation. 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.
The Agencies also revised the
Guidelines to reaffirm an institution’s
responsibility to maintain policies and
procedures that establish standards for
obtaining current collateral valuation
information to facilitate its decision to
engage in a loan modification or
workout. In response to comments, the
Guidelines address the Agencies’
expectations for institutions to elevate
the collateral valuation method as
appropriate to address safety and
soundness concerns, particularly in
those loan workout situations where
repayment becomes more dependent on
the sale of collateral.
Referrals. The Proposal confirmed
that an institution should make referrals
to state appraiser regulatory authorities
when it suspects that a state licensed or
certified appraiser failed to comply with
USPAP, applicable state laws, or
engaged in unethical or unprofessional
conduct. Some commenters referenced
industry efforts to mitigate fraud in real
estate transactions. In response to these
comments, the Agencies revised the
Guidelines to address an institution’s
responsibility to file a suspicious
activity report (SAR) with the Financial
Crimes Enforcement Network of the
Department of Treasury when it
suspects inappropriate appraisal-related
activity that meets the SAR filing
criteria. 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.
Institutions also should be aware of the
recent amendments to Regulation Z,
which address mandatory reporting
provisions.14
Appendix A—Appraisal Exemptions.
The Guidelines contain a new
introduction to the Appendix in
response to commenters’ questions
regarding the authority of the Agencies
to establish exemptions from their
appraisal regulations. The discussion of
loan modifications in the Proposal was
incorporated in the section on
14 75
FR 66554 (Oct. 28, 2010).
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Monitoring Collateral Value. The
revisions reflect clarifying text in
response to comments from institutions
on the regulatory requirements for
reappraisals of real estate collateral for
existing credits and subsequent
transactions, particularly loan workout
situations.
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. 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.
Appendix B—Evaluations Based on
Analytical Methods or Technological
Tools. In response to commenters, the
Appendix was revised to provide
clarification on the appropriate use of
analytical methods or technological
tools 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.
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.
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.
The Appendix also has been revised
to respond to comments regarding the
appropriate use of an AVM or tax
assessment value (TAV) to develop an
evaluation. Some commenters did not
agree that institutions should be
permitted to use AVMs to develop an
evaluation. Some small institutions
noted that they could be placed at a
competitive disadvantage with larger
institutions that use AVMs. The
Guidelines make it clear that an
institution is responsible for meeting
supervisory expectations regarding the
selection, use, and validation of an
AVM and maintaining an effective
system of internal controls. Moreover,
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an AVM or TAV is not, in and of itself,
an alternative to an evaluation.
Therefore, when using an AVM or TAV,
the resulting evaluation should be
consistent with the supervisory
expectations in the Evaluation
Development and Evaluation Content
sections in the Guidelines. The
Appendix also addresses the expertise
necessary to manage the use of a method
or tool, which may require an
institution to employ additional
personnel or engage a third party.
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.
Appendix C—Deductions and
Discounts. This is a new Appendix in
the Guidelines that is based on the
discussion in the Proposal on the
Agencies’ minimum appraisal
standards. Most commenters
appreciated the additional explanation
in the Proposal on the appraisal
standard to analyze deductions and
discounts for residential tract
developments. However, these
commenters provided technical
comments on appraisal practices that
might assist one in understanding this
appraisal concept. In light of these
comments, the Agencies have expanded
the discussion in the Guidelines and
moved the discussion to a separate
Appendix.
Appendix D—Glossary of Terms. In
response to commenters’ suggestions,
additional terms were incorporated in
the Guidelines, including appraisal
management company, broker price
opinion, credit file, going concern value,
presold unit, and unsold units.
Other Comments on the Proposal
Other Interagency Appraisal-Related
Guidance Documents. Several
commenters asked whether other
guidance documents issued by the
Agencies on appraisal-related issues
would be rescinded with the issuance of
the Guidelines. The following guidance
documents have been incorporated in
the Guidelines and are now being
rescinded: (1) The 1994 Interagency
Appraisal and Evaluation Guidelines;
(2) the 2003 Interagency Statement on
Independent Appraisal and Evaluation
Functions; (3) and the Interagency
Statement on the 2006 Revisions to the
Uniform Standards of Professional
Appraisal Practice. The following
guidance documents continue to be in
effect: The 2005 Interagency FAQs on
Residential Tract Development Lending
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and the 2005 Frequently Asked
Questions on the Appraisal Regulations
and the Interagency Statement on
Independent Appraisal and Evaluation
Functions.
Agencies’ Appraisal Regulations. In
the notice for comment on the Proposal,
the Agencies requested comment on the
appraisal regulatory exemption for
residential real estate transactions
involving U.S. government sponsored
enterprises (GSEs). In the Guidelines,
the Agencies clarified their expectations
that while a loan qualifying for sale to
a GSE is exempted from the appraisal
regulations, an institution is expected to
have appropriate policies to confirm
their compliance with the GSEs’
underwriting and appraisal standards.
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.
Any amendment to the Agencies’
appraisal regulations is beyond the
scope of the Guidelines. The
information provided by commenters
will be considered in assessing the need
to revise these regulations.
III. Final Interagency Guidelines
The Guidelines are effective upon
publication in the Federal Register.
However, on a case-by-case basis, an
institution needing to improve its
appraisal and evaluation program may
be granted some flexibility from its
primary Federal regulator on the
timeframe for revising its procedures to
be consistent with the Guidelines. This
timeframe should be commensurate
with the level and nature of the
institution’s real estate lending activity.
The final Interagency Appraisal and
Evaluation Guidelines appear below.
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Interagency Appraisal and Evaluation
Guidelines
Table of Contents
I. Purpose
II. Background
III. Supervisory Policy
IV. Appraisal and Evaluation Program
V. Independence of the Appraisal and
Evaluation Program
VI. Selection of Appraisers or Persons Who
Perform Evaluations
A. Approved Appraiser List
B. Engagement Letters
VII. Transactions That Require Appraisals
VIII. Minimum Appraisal Standards
IX. Appraisal Development
X. Appraisal Reports
XI. Transactions That Require Evaluations
XII. Evaluation Development
XIII. Evaluation Content
XIV. Validity of Appraisals and Evaluations
XV. Reviewing Appraisals and Evaluations
A. Reviewer Qualifications
B. Depth of Review
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C. Resolution of Deficiencies
D. Documentation of the Review
XVI. Third Party Arrangements
XVII. Program Compliance
A. Monitoring Collateral Values
B. Portfolio Collateral Risk
C. Modifications and Workouts of Existing
Credits
XVIII. Referrals
Appendix A, Appraisal Exemptions
Appendix B, Evaluations Based on Analytical
Methods and Technological Tools
Appendix C, Deductions and Discounts
Appendix D, Glossary of Terms
I. 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, including
their appendices, address supervisory
matters relating to real estate appraisals
and evaluations used to support real
estate-related financial transactions.15
Further, these Guidelines provide
federally regulated institutions and
examiners clarification on the Agencies’
expectations for prudent appraisal and
evaluation policies, procedures, and
practices.
II. Background
Title XI of the Financial Institutions
Reform, Recovery, and Enforcement Act
of 1989 (FIRREA) 16 requires each
Agency to prescribe appropriate
standards for the performance of real
estate appraisals in connection with
‘‘federally related transactions,’’ 17 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.18 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
15 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.
16 Public Law 101–73, Title XI, 103 Stat. 511
(1989); 12 U.S.C. 3331, et seq.
17 12 U.S.C. 3339.
18 12 U.S.C. 3350(4).
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writing.19 An Agency may require
compliance with additional appraisal
standards if it makes a determination
that such additional standards are
required to properly carry out its
statutory responsibilities.20 Each of the
Agencies has adopted additional
appraisal standards.21
The Agencies’ real estate lending
regulations and guidelines,22 issued
pursuant to section 304 of the Federal
Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA),23
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.24 The real
estate lending guidelines state that an
institution’s real estate lending program
should include an appropriate real
estate appraisal and evaluation program.
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. Examiners
will consider the size and the nature of
an institution’s real estate-related
activities when assessing the
appropriateness of its program.
While borrowers’ ability to repay their
real estate loans according to reasonable
terms remains the primary
consideration in the lending decision,
an institution also must consider the
value of the underlying real estate
collateral in accordance with the
Agencies’ appraisal regulations.
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
19 Supra
Note 3.
20 Id.
21 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.
22 OCC: 12 CFR part 34, subpart C; FRB: 12 CFR
part 208, subpart E; FDIC: 12 CFR part 365; and
OTS: 12 CFR 560.100 and 560.101.
23 Public Law 102–242, § 304, 105 Stat. 2354; 12
U.S.C. 1828(o).
24 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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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.
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IV. 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 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.
• Develop criteria to assess whether
an existing appraisal or evaluation may
be used to support a subsequent
transaction.
• Implement internal controls that
promote compliance with these program
standards, including those related to
monitoring third party arrangements.
• Establish criteria for monitoring
collateral values.
• Establish criteria for obtaining
appraisals or evaluations for
transactions that are not otherwise
covered by the appraisal requirements
of the Agencies’ appraisal regulations.
V. Independence of the Appraisal and
Evaluation Program
For both appraisal and evaluation
functions, an institution should
maintain standards of independence as
part of an effective collateral valuation
program for all of its real estate lending
activity. The collateral valuation
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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 who administer
the institution’s collateral valuation
program, including the ordering,
reviewing, and acceptance of appraisals
and evaluations. 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.25 These standards of
independence also should apply to
persons who perform evaluations.
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 must abstain from
any vote or approval involving loans on
which they ordered, performed, or
reviewed the appraisal or evaluation.26
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. An
institution’s policies and procedures
should specify methods for
communication that ensure
independence in the collateral valuation
function. These policies and procedures
should foster timely and appropriate
communications regarding the
assignment and establish a process for
responding to questions from the
25 The Agencies’ appraisal regulations set forth
specific appraiser independence requirements that
exceed those set forth in the Uniform Standards of
Professional Appraisal Practice (USPAP).
Institutions also should be aware of separate
requirements on conflicts of interest under
Regulation Z (Truth in Lending), 12 CFR 226.42(d).
26 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).
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appraiser or person performing an
evaluation.
An institution may exchange
information with appraisers and persons
who perform evaluations, which may
include providing a copy of the sales
contract 27 for a purchase transaction.
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.28 Consistent with its policies
and procedures, an institution also may
request the appraiser or person who
performs an evaluation to:
• Consider additional information
about the subject property or about
comparable properties.
• Provide additional supporting
information about the basis for a
valuation.
• Correct factual errors in an
appraisal.
An institution’s policies and
procedures should ensure that it avoids
inappropriate actions that would
compromise the independence of the
collateral valuation function,29
including:
• Communicating a predetermined,
expected, or qualifying estimate of
value, or a loan amount or target loanto-value ratio to an appraiser or person
performing an evaluation.
• Specifying a minimum value
requirement for the property that is
needed to approve the loan or as a
condition of ordering the valuation.
• Conditioning a person’s
compensation on loan consummation.
• Failing to compensate a person
because a property is not valued at a
certain amount.30
• Implying that current or future
retention of a person’s services depends
on the amount at which the appraiser or
person performing an evaluation values
a property.
• Excluding a person from
consideration for future engagement
because a property’s reported market
value does not meet a specified
threshold.
27 Refer to USPAP Standards Rule 1–5(a) and the
Ethics Rule.
28 For mortgage transactions secured by a
consumer’s principal dwelling, refer to 12 CFR
226.36(b) under Regulation Z (Truth in Lending)
through March 31, 2011. Also refer to 12 CFR
226.42, which is mandatory beginning on April 1,
2011. 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.
29 See 12 CFR 226.42(c).
30 This provision does not preclude an institution
from withholding compensation from an appraiser
or person who provided an evaluation based on a
breach of contract or substandard performance of
services under a contractual provision.
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After obtaining an appraisal or
evaluation, or as part of its business
practice, an institution may find it
necessary to obtain another appraisal or
evaluation of a property and would be
expected to adhere to a policy of
selecting the most credible appraisal or
evaluation, rather than the appraisal or
evaluation that states the highest value.
(Refer to the Reviewing Appraisals and
Evaluations section in these Guidelines
for additional information on
determining and documenting the
credibility of an appraisal or
evaluation.) Further, an institution’s
reporting of a person suspected of noncompliance 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. However, an
institution should not use the threat of
reporting a false allegation in order to
influence or coerce an appraiser or a
person who performs an evaluation.
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VI. Selection of Appraisers or Persons
Who Perform Evaluations
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 person selected possesses the
requisite education, expertise, and
experience to competently complete the
assignment.
• The work performed by appraisers
and persons providing 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.
• The appraiser selected to perform
an appraisal holds the appropriate state
certification or license at the time of the
assignment. Persons who perform
evaluations should possess the
appropriate appraisal or collateral
valuation education, expertise, and
experience relevant to the type of
property being valued. Such persons
may include appraisers, real estate
lending professionals, agricultural
extension agents, or foresters.31
31 Although not required, an institution may use
state certified or licensed appraisers to perform
evaluations. Institutions should refer to USPAP
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An institution or its agent must
directly select and engage appraisers.
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. An
institution or its agents also should
directly select and engage persons who
perform evaluations. Independence is
compromised when a borrower
recommends an appraiser or a person to
perform an evaluation. Independence is
also compromised when loan
production staff selects a person to
perform an appraisal or evaluation for a
specific transaction. For certain
transactions, an institution also must
comply with the provisions addressing
valuation independence in Regulation Z
(Truth in Lending).32
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 who selects or oversees the
selection of appraisers or persons
providing evaluation services should be
independent from the loan production
area. An institution’s use of a borrowerordered or borrower-provided appraisal
violates the Agencies’ appraisal
regulations. However, a borrower can
inform an institution that a current
appraisal exists, and the institution may
request it directly from the other
financial services institution.
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. Further, there should be periodic
internal review of the use of the
approved appraiser list to confirm that
appropriate procedures and controls
exist to ensure independence in the
Advisory Opinion 13 for guidance on appraisers
performing evaluations of real property collateral.
32 See 12 CFR 226.42.
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development, administration, and
maintenance of the list. For residential
transactions, loan production staff can
use a revolving, pre-approved appraiser
list, provided the development and
maintenance of the list is not under
their control.
B. Engagement Letters
An institution 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. In addition to the
other information, the engagement letter
will identify the intended use and
user(s), as defined in USPAP. An
engagement letter also may specify
whether there are any legal or
contractual restrictions on the sharing of
the appraisal with other parties. An
institution should include the
engagement letter in its credit file. To
avoid the appearance of any conflict of
interest, appraisal or evaluation
development work should not
commence until the institution has
selected and engaged a person for the
assignment.
VII. Transactions That Require
Appraisals
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.33 The Agencies also
reserve the right to require an appraisal
under their appraisal regulations to
address safety and soundness concerns
in a transaction. (See Appendix A,
Appraisal Exemptions.) 34
33 In order to facilitate recovery in designated
major disaster areas, subject to safety and
soundness considerations, the Depository
Institutions Disaster Relief Act of 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. Public
Law 102–485, § 2, 106 Stat. 2771 (October 23, 1992);
12 U.S.C. 3352.
34 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 an existing extension of credit where there
is either an advancement of new monies or a
material change in the condition of the property. 12
CFR 722.3(d).
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VIII. Minimum Appraisal Standards
The Agencies’ appraisal regulations
include minimum standards for the
preparation of an appraisal. (See
Appendix D, Glossary of Terms, for
terminology used in these Guidelines.)
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.
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.
Further, the appraisal must contain an
opinion of market value as defined in
the Agencies’ appraisal regulations. (See
discussion on the definition of market
value below.) Under USPAP, the
appraisal must contain a certification
that the appraiser has complied with
USPAP. An institution may refer to the
appraiser’s USPAP certification in its
assessment of the appraiser’s
independence concerning the
transaction and the property. 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. Further,
the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010 (DoddFrank Act) 35 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
• 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 for the institution 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
35 Public
Law 111–203, 124 Stat. 1376 (2010).
Act, Section 1473(r).
36 Dodd-Frank
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for establishing the scope of work to be
performed in rendering an opinion of
the property’s market value. 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
extent of the research and analyses
employed for similar property types,
market conditions, and transactions.
Therefore, an institution should be
cautious in limiting the scope of the
appraiser’s inspection, research, or other
information used to determine the
property’s condition and relevant
market factors, which could affect the
credibility of the appraisal.
According to USPAP, appraisal
reports must contain sufficient
information to enable the intended user
of the appraisal to understand the report
properly. An institution should specify
the use of an appraisal report option
that is commensurate with the risk and
complexity of the transaction. The
appraisal report should contain
sufficient disclosure of the nature and
extent of inspection and research
performed by the appraiser to verify the
property’s condition and support the
appraiser’s opinion of market value.
(See Appendix D, Glossary of Terms, for
the definition of appraisal report
options.)
Institutions should be aware that
provisions in the Dodd-Frank Act
address appraisal requirements for a
higher-risk mortgage to a consumer.37
To implement these provisions, the
Agencies recognize that future
regulations will address the requirement
that the appraiser conduct a physical
property visit of the interior of the
mortgaged property.38
• 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.
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. This standard
is designed to avoid having appraisals
prepared using unrealistic assumptions
and inappropriate methods in arriving
at the property’s market value. (See
Appendix C, Deductions and Discounts,
for further explanation on deductions
and discounts.)
37 Under the law, the provisions are effective 12
months after final regulations to implement the
provisions are published. See Dodd-Frank Act,
Section 1400(c)(1).
38 Section 1471 of the Dodd-Frank Act added a
new section 129H to the Truth-in-Lending Act (15
U.S.C. 1631 et seq.).
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• 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
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. Value opinions such as
‘‘going concern value,’’ ‘‘value in use,’’ or
a special value to a specific property
user may not be used as market value
for federally related transactions. An
appraisal may contain separate opinions
of such values so long as they are clearly
identified and disclosed.
The estimate of market value should
consider the real property’s actual
physical condition, use, and zoning as
of the effective date of the appraiser’s
opinion of value. For a transaction
financing construction or renovation of
a building, an institution would
generally request an appraiser to
provide the property’s current market
value in its ‘‘as is’’ condition, and, as
applicable, its prospective market value
upon completion and/or prospective
market value upon stabilization.39
Prospective market value opinions
should be based upon current and
reasonably expected market conditions.
When an appraisal includes prospective
market value opinions, there should be
a point of reference to the market
conditions and time frame on which the
appraiser based the analysis.40 An
institution should understand the real
property’s ‘‘as is’’ market value and
should consider the prospective market
value that corresponds to the credit
decision and the phase of the project
being funded, if applicable.
• 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, an
institution must consider an appraiser’s
education and experience. While an
institution must confirm that the
appraiser holds a valid credential from
the appropriate state appraiser
regulatory authority, a state certification
or license is a minimum credentialing
39 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).
40 See USPAP, Statement 4 on Prospective Value
Opinions, for further explanation.
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requirement. 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. 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. In
communicating an appraisal
assignment, an institution should
convey to the appraiser that the
Agencies’ minimum appraisal standards
must be followed.
IX. Appraisal Development
The Agencies’ appraisal regulations
require appraisals for federally related
transactions to comply with the
requirements in USPAP, some of which
are addressed below. Consistent with
the USPAP Scope of Work Rule,41 the
appraisal must reflect an appropriate
scope of work that provides for
‘‘credible’’ assignment results. 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. Further, USPAP requires
the appraiser to disclose whether he or
she previously appraised the property.
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.
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. These communications
should adhere to the institution’s
policies and procedures on
independence of the appraiser and not
unduly influence the appraiser. An
institution should not allow lower cost
or the speed of delivery time to
inappropriately influence its appraisal
ordering procedures or the appraiser’s
determination of the scope of work for
an appraisal supporting a federally
related transaction.
As required by USPAP, the appraisal
must include any approach to value
(that is, the cost, income, and sales
comparison approaches) that is
applicable and necessary to the
41 See USPAP, Scope of Work Rule, Advisory
Opinions 28 and 29.
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assignment. Further, the appraiser
should disclose the rationale for the
omission of a valuation approach. The
appraiser must analyze and reconcile
the information from the approaches to
arrive at the estimated market value.
The appraisal also should include a
discussion on market conditions,
including relevant information on
property value trends, demand and
supply factors, and exposure time.
Other information might include the
prevalence and effect of sales and
financing concessions, the list-to-sale
price ratio, and availability of financing.
In addition, an appraisal should reflect
an analysis of the property’s sales
history and an opinion as to the highest
and best use of the property. 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.
X. Appraisal Reports
An institution is responsible for
identifying the appropriate appraisal
report 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 the
appraisal report format to be specified
in its appraisal engagement instructions
to an appraiser.
USPAP provides various appraisal
report options that an appraiser may use
to present the results of appraisal
assignments. The major difference
among these report options is the level
of detail presented in the report. A
report 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.
Generally, a report option that is
restricted to a single client and intended
user will not be appropriate to support
most federally related transactions.
These reports lack sufficient supporting
information and analysis for
underwriting purposes. These less
detailed reports may be appropriate for
real estate portfolio monitoring
purposes. (See Appendix D, Glossary of
Terms, for the definition of appraisal
report options.)
Regardless of the report 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
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analysis typically warranted for the type
of appraisal, but omitted, along with the
rationale for its omission.
XI. Transactions That Require
Evaluations
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. These exemptions include
a transaction that:
• Has a transaction value equal to or
less than the appraisal threshold of
$250,000.
• 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.42
• Involves an existing extension of
credit at the lending institution,
provided that:
Æ 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
Æ There is no advancement of new
monies other than funds necessary to
cover reasonable closing costs.43
For more information on real estaterelated financial transactions that are
exempt from the appraisal requirement,
see Appendix A, Appraisal Exemptions.
For a discussion on changes in market
conditions, see the section on Validity
of Appraisals and Evaluations in these
Guidelines.
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. For example, an institution
should consider obtaining an appraisal
as an institution’s portfolio risk
increases or for higher risk real estaterelated financial 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.
42 NCUA regulations do not contain an exemption
from the appraisal requirements specific to member
business loans.
43 NCUA’s appraisal regulation requires credit
unions to meet both conditions to avoid the need
for an appraisal as set forth in 12 CFR 722.3(d).
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• Transactions involving existing
extensions of credit with significant risk
to the institution.
• Borrowers with high risk
characteristics.
XII. Evaluation Development
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 be able to
demonstrate that an evaluation, whether
prepared by an individual or supported
by an analytical method or a
technological tool, 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.
(Refer to Appendix B, Evaluations
Based on Analytical Methods or
Technological Tools.)
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. For
example, a valuation method that
provides a sales or list price, such as a
broker price opinion, cannot be used as
an evaluation because, among other
things, it does not provide a property’s
market value. 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.’’ 44 Likewise, information on
local housing conditions and trends,
such as a competitive market analysis,
does not contain sufficient information
on a specific property that is needed,
and therefore, would not be acceptable
as an evaluation. The information
obtained from such sources, while
insufficient as an evaluation, may be
useful to develop an evaluation or
appraisal.
An institution should establish
policies and procedures for determining
an appropriate collateral valuation
method for a given transaction
considering associated risks. These
policies and procedures should address
the process for selecting the appropriate
valuation method for a transaction
rather than using the method that
renders the highest value, lowest cost,
or fastest turnaround time.
A valuation method should address
the property’s actual physical condition
and characteristics as well as the
economic and market conditions that
44 Dodd-Frank
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affect the estimate of the collateral’s
market value. It would not be acceptable
for an institution to base an evaluation
on unsupported assumptions, such as a
property is in ‘‘average’’ condition, the
zoning will change, or the property is
not affected by adverse market
conditions. Therefore, an institution
should establish criteria for determining
the level and extent of research or
inspection necessary to ascertain the
property’s actual physical condition,
and the economic and market factors
that should be considered in developing
an evaluation. An institution should
consider performing an inspection to
ascertain the actual physical condition
of the property and market factors that
affect its market value. When an
inspection is not performed, an
institution should be able to
demonstrate how these property and
market factors were determined.
XIII. Evaluation Content
An evaluation should contain
sufficient information detailing the
analysis, assumptions, and conclusions
to support the credit decision. An
evaluation’s content should be
documented in the credit file or
reproducible. 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:
Æ External data sources (such as
market sales databases and public tax
and land records);
Æ Property-specific data (such as
previous sales data for the subject
property, tax assessment data, and
comparable sales information);
Æ Evidence of a property inspection;
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Æ Photos of the property;
Æ Description of the neighborhood; or
Æ 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.
(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.)
XIV. Validity of Appraisals and
Evaluations
The Agencies allow an institution to
use an existing appraisal or evaluation
to support a subsequent transaction in
certain circumstances. Therefore, an
institution should establish criteria for
assessing whether an existing appraisal
or evaluation continues to reflect the
market value of the property (that is,
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 may be
used in the subsequent transaction. A
new appraisal or evaluation is necessary
if the originally reported market value
has changed due to factors such as:
• Passage of time.
• Volatility of the local market.
• Changes in terms and availability of
financing.
• Natural disasters.
• Limited or over supply of
competing properties.
• Improvements to the subject
property or competing properties.
• Lack of maintenance of the subject
or competing properties.
• Changes in underlying economic
and market assumptions, such as
capitalization rates and lease terms.
• Changes in zoning, building
materials, or technology.
• Environmental contamination.
XV. Reviewing Appraisals and
Evaluations
The Agencies’ appraisal regulations
specify that appraisals for federally
related transactions must contain
sufficient information and analysis to
support an institution’s decision to
engage in the credit transaction. For
certain transactions that do not require
an appraisal, the Agencies’ regulations
require an institution to obtain an
appropriate evaluation of real property
collateral that is consistent with safe
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and sound banking practices. 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. 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. An
institution may use the review findings
to monitor and evaluate the competency
and ongoing performance of appraisers
and persons who perform evaluations.
(See the discussion in these Guidelines
on Selection of Appraisers or Persons
Who Perform Evaluations.)
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. 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. An institution may rely
on the second opinion of market value
obtained through an acceptable USPAPcompliant appraisal review to support
its credit decision.
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.
• Reflect a risk-focused approach for
determining the depth of the review.
• 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 have
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no direct or indirect interest, financial
or otherwise, in the property or
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.
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. Under these circumstances,
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.
An institution should assess the level
of in-house expertise available to review
appraisals for complex projects, highrisk 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. When using a third
party, an institution remains responsible
for the quality and adequacy of the
review process, including the
qualification standards for reviewers.
(See the discussion in these Guidelines
on Third Party Arrangements.)
B. Depth of Review
An institution should implement a
risk-focused approach for determining
the depth of the review needed to
ensure that appraisals and evaluations
contain sufficient information and
analysis to support the institution’s
decision to engage in the transaction.
This process should differentiate
between high- and low-risk transactions
so that the review is commensurate with
the risk. The depth of the review should
be sufficient to ensure that the methods,
assumptions, data sources, and
conclusions are reasonable, wellsupported, and appropriate for the
transaction, property, and market. The
review also should consider the process
through which the appraisal or
evaluation is obtained, either directly by
the institution or from another financial
services institution. The review process
should be commensurate with the type
of transaction as discussed below:
• Commercial Real Estate. An
institution should ensure that appraisals
or evaluations for commercial real estate
transactions are subject to an
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appropriate level of review.
Transactions involving complex
properties or high-risk commercial loans
should be reviewed more
comprehensively to assess the technical
quality of the appraiser’s analysis. For
example, an institution should perform
a more comprehensive review of
transactions involving large-dollar
credits, loans secured by complex or
specialized properties, and properties
outside the institution’s traditional
lending market. Persons performing
such reviews should have the
appropriate expertise and knowledge
relative to the type of property and its
market.
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. In addition, an institution
should establish criteria for when to
expand the depth of the review.
• 1-to-4 Family Residential Real
Estate. The reviews for residential real
estate transactions should reflect a riskfocused approach that is commensurate
with the size, type, and complexity of
the underlying credit transaction, as
well as loan and portfolio risk
characteristics. These risk factors could
include debt-to-income ratios, loan-tovalue ratios, level of documentation,
transaction dollar amount, or other
relevant factors. With prior approval
from its primary Federal regulator, an
institution may employ various
techniques, such as automated tools or
sampling methods, for performing prefunding reviews of appraisals or
evaluations supporting lower risk
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. In
addition, an institution should establish
criteria for when to expand the depth of
the review.
An institution may use sampling and
audit procedures to verify the seller’s
representations and warranties that the
appraisals for the underlying loans in a
pool of residential loans satisfy the
Agencies’ appraisal regulations and are
consistent with supervisory guidance
and an institution’s internal policies. If
an institution is unable to confirm that
the appraisal meets the Agencies’
appraisal requirements, then the
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institution must obtain an appraisal
prior to engaging in the transaction.
• Appraisals From Other Financial
Services Institutions.45 The Agencies’
appraisal regulations specify that an
institution may use an appraisal that
was prepared by an appraiser engaged
directly by another financial services
institution, provided the institution
determines that the appraisal conforms
to the Agencies’ appraisal regulations
and is otherwise acceptable. An
institution should assess whether to use
the appraisal prior to making a credit
decision. An institution should subject
such appraisals to at least the same level
of review that the institution performs
on appraisals it obtains directly for
similar properties and document its
review in the credit file. The
documentation of the review should
support the institution’s reliance on the
appraisal. Among other considerations,
an institution should confirm that:
Æ The appraiser was engaged directly
by the other financial services
institution.
Æ The appraiser had no direct,
indirect, or prospective interest,
financial or otherwise, in the property
or transaction.
Æ The financial services institution
(not the borrower) ordered the appraisal.
For example, an engagement letter
should show that the financial services
institution, not the borrower, engaged
the appraiser.
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,
does not conform to USPAP, and
violates the Agencies’ appraisal
regulations.
C. Resolution of Deficiencies
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:
• Communicating the noted
deficiencies to and requesting correction
of such deficiencies by the appraiser or
person who prepared the evaluation. An
institution should implement adequate
internal controls to ensure that such
communications do not result in any
coercion or undue influence on the
45 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.
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appraiser or person who performed the
evaluation.
• Addressing significant deficiencies
in the appraisal that could not be
resolved with the original appraiser by
obtaining a second appraisal or relying
on a review that complies with
Standards Rule 3 of USPAP and is
performed by an appropriately qualified
and competent state certified or licensed
appraiser prior to the final credit
decision.
• Replacing evaluations prior to the
credit decision that do not provide
credible results or lack sufficient
information to support the final credit
decision.
D. Documentation of the Review
An institution should establish
policies for documenting the review of
appraisals and evaluations in the credit
file. Such policies should address the
level of documentation needed for the
review, given the type, risk and
complexity of the transaction. The
documentation should describe the
resolution of any appraisal or evaluation
deficiencies, including reasons for
obtaining and relying on a second
appraisal or evaluation. 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.
XVI. Third Party Arrangements
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. An institution should use
caution if it engages a third party to
administer any part of its appraisal and
evaluation function, including the
ordering or reviewing of appraisals and
evaluations, selecting an appraiser or
person to perform evaluations, or
providing access to analytical methods
or technological tools. An institution is
accountable for ensuring that any
services performed by a third party,
both affiliated and unaffiliated entities,
comply with applicable laws and
regulations and are consistent with
supervisory guidance.46 Therefore, an
46 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. Refer to the institution’s
primary Federal regulator for additional guidance
on third party arrangements: 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
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77463
institution should have the resources
and expertise necessary for performing
ongoing oversight of third party
arrangements.
An institution should have internal
controls for identifying, monitoring, and
managing the risks associated with
using a third party arrangement for
valuation services, including
compliance, legal, reputational, and
operational risks. While the
arrangement may allow an institution to
achieve specific business objectives,
such as gaining access to expertise that
is not available internally, the reduced
operational control over outsourced
activities poses additional risk.
Consistent with safe and sound
practices, an institution should have a
written contract that clearly defines the
expectations and obligations of both the
financial institution and the third party,
including that the third party will
perform its services in compliance with
the Agencies’ appraisal regulations and
consistent with supervisory guidance.
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. The decision to
outsource any part of the collateral
valuation function should not be unduly
influenced by any short-term cost
savings. 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.
If an institution outsources any part of
the collateral valuation function, it
should exercise appropriate due
diligence in the selection of a third
party. This process should include
sufficient analysis by the institution to
assess whether the third party provider
can perform the services consistent with
the institution’s performance standards
and regulatory requirements. 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.
An institution also is responsible for
ensuring that a third party selects an
appraiser or a person to perform an
evaluation who is competent and
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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independent, has the requisite
experience and training for the
assignment, and thorough knowledge of
the subject property’s market.
Appraisers must be appropriately
certified or licensed, but this minimum
credentialing requirement, although
necessary, is not sufficient to determine
that an appraiser is competent to
perform an assignment for a particular
property or geographic market.
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 facilitates the
communication of this information.
An institution’s risk management
system should reflect the complexity of
the outsourced activities and associated
risk. An institution should document
the results of ongoing monitoring efforts
and periodic assessments of the
arrangement(s) with a third party for
compliance with applicable regulations
and consistency with supervisory
guidance and its performance standards.
If deficiencies are discovered, an
institution should take remedial action
in a timely manner.
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. An
institution’s appraisal and evaluation
policies should establish internal
controls to promote an effective
appraisal and evaluation program. The
compliance process should:
• Maintain a system of adequate
controls, verification, and testing to
ensure that appraisals and evaluations
provide credible market values.
• 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
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.
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• Report appraisal and evaluation
deficiencies to appropriate internal
parties and, if applicable, to external
authorities in a timely manner.
A. Monitoring Collateral Values
Consistent with the Agencies’ real
estate lending regulations and
guidelines,47 an institution should
monitor collateral risk on a portfolio
and on an individual credit basis.
Therefore, an institution should have
policies and procedures that address the
need for obtaining current collateral
valuation information to understand its
collateral position over the life of a
credit and effectively manage the risk in
its real estate credit portfolios. The
policies and procedures also should
address the need to obtain current
valuation information for collateral
supporting an existing credit that may
be modified or considered for a loan
workout.
Under their appraisal regulations, the
Agencies reserve 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, an
institution should be able to
demonstrate that sufficient information
is available to support the current
market value of the collateral and the
classification of a problem real estate
credit. When such information is not
available, an examiner may direct an
institution to obtain a new appraisal or
evaluation in order to have sufficient
information to understand the current
market value of the collateral.
Examiners would be expected to
provide an institution with a reasonable
amount of time to obtain a new
appraisal or evaluation.
B. Portfolio Collateral Risk
Prudent portfolio monitoring
practices include criteria for
determining when to obtain a new
appraisal or evaluation. Among other
considerations, the criteria should
address deterioration in the credit since
origination or changes in market
conditions. Changes in market
conditions could include material
changes in current and projected
vacancy, absorption rates, lease terms,
rental rates, and sale prices, including
concessions and overruns and delays in
construction costs. Fluctuations in
discount or direct capitalization rates
also are indicators of changing market
conditions.
47 OCC: 12 CFR part 34, subpart D; FRB: 12 CFR
part 208, subpart E; FDIC: 12 CFR part 365; OTS:
12 CFR 560.100 and 560.101; and NCUA: 12 CFR
701.21.
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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. Moreover,
as an institution’s reliance on collateral
becomes more important, its policies
and procedures should:
• Ensure that timely information is
available to management for assessing
collateral and associated risk.
• Specify when new or updated
collateral valuations are appropriate or
desirable to understand collateral risk in
the transaction(s).
• Delineate the valuation method to
be employed after considering the
property type, current market
conditions, current use of the property,
and the relevance of the most recent
appraisal or evaluation in the credit file.
Consistent with sound collateral
valuation monitoring practices, an
institution can use a variety of
techniques for monitoring the effect of
collateral valuation trends on portfolio
risk. Sources of relevant information
may include external market data,
internal data, or reviews of recently
obtained appraisals and evaluations. An
institution should be able to
demonstrate that it has sufficient,
reliable, and timely information on
market trends to understand the risk
associated with its lending activity.
C. Modifications and Workouts of
Existing Credits
An institution may find it appropriate
to modify a loan or to engage in a
workout with an existing borrower. The
Agencies expect an institution to
consider current collateral valuation
information to assess its collateral risk
and facilitate an informed decision on
whether to engage in a modification or
workout of an existing real estate credit.
(See the discussion above on Portfolio
Collateral Risk.)
• Loan Modifications. A loan
modification to an existing credit that
involves a limited change(s) 48 in the
terms of the note or loan agreement and
that does not adversely affect the
institution’s real estate collateral
protection after the modification does
not rise to the level of a new real estate48 A loan modification that entails a decrease in
the interest rate or a single extension of a limited
or short-term nature would not be viewed as a
subsequent transaction. For example, an extension
arising from a short-term delay in the full
repayment of the loan when there is documented
evidence that payment from the borrower is
forthcoming, or a brief delay in the scheduled
closing on the sale of a property when there is
evidence that the closing will be completed in the
near term.
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related financial transaction for
purposes of the Agencies’ appraisal
regulations. As a result, an institution
would not be required to obtain either
a new appraisal or evaluation to comply
with the Agencies’ appraisal
regulations, but should have an
understanding of its collateral risk. For
example, institutions can use automated
valuation models or other valuation
techniques when considering a
modification to a residential mortgage
loan. An institution should have
procedures for ensuring an alternative
collateral valuation method provides
reliable information. In addition, an
institution should be able to
demonstrate that a modification reflects
prudent underwriting standards and is
consistent with safe and sound lending
practices. Examiners will assess the
adequacy of valuation information an
institution uses for loan modifications.
• Loan Workouts. As noted under
‘‘Monitoring Collateral Values,’’ an
institution’s policies and procedures
should address the need for current
information on the value of real estate
collateral supporting a loan workout. A
loan workout can take many forms,
including a modification that adversely
affects the institution’s real estate
collateral protection after the
modification, a renewal or extension of
loan terms, the advancement of new
monies, or a restructuring with or
without concessions. These types of
loan workouts are new real estaterelated financial transactions.
If the loan workout does not include
the advancement of new monies other
than reasonable closing costs, the
institution may obtain an evaluation in
lieu of an appraisal. For loan workouts
that involve the advancement of new
monies, an institution may obtain an
evaluation in lieu of an appraisal
provided there has been no obvious and
material change in market conditions
and no change in the physical aspects
of the property that threatens the
adequacy of the institution’s real estate
collateral protection after the workout.49
In these cases, an institution should
support and document its rationale for
using this exemption. An institution
must obtain an appraisal when a loan
workout involves the advancement of
new monies and there is an obvious and
material change in either market
49 Under the NCUA’s appraisal regulation, a
credit union must meet both conditions to avoid the
need for an appraisal. 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. 12 CFR 722.3(d).
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conditions or physical aspects of the
property, or both, that threatens the
adequacy of the institution’s real estate
collateral protection after the workout
(unless another exemption applies).50
(See also Appendix A, Appraisal
Exemptions, for transactions where an
evaluation would be allowed in lieu of
an appraisal.)
• Collateral Valuation Policies for
Modifications and Workouts. An
institution’s policies should address the
need for obtaining current collateral
valuation information for a loan
modification or workout. The policies
should specify the valuation method to
be used and address the need to monitor
collateral risk on an ongoing basis
taking into consideration changing
market conditions and the borrower’s
repayment performance. An institution
also should be able to demonstrate that
the collateral valuation method used is
reliable for a given credit or loan type.
Further, for loan workouts, an
institution’s policies should specify
conditions under which an appraisal or
evaluation will be obtained. 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.
XVIII. Referrals
An institution should file a complaint
with the appropriate state appraiser
regulatory officials when it suspects that
a state certified or licensed appraiser
failed to comply with USPAP,
applicable state laws, or engaged in
other unethical or unprofessional
conduct. In addition, effective April 1,
2011, an institution must file a
complaint with the appropriate state
appraiser certifying and licensing
agency under certain circumstances.51
An institution also must file a
suspicious activity report (SAR) with
the Financial Crimes Enforcement
Network of the Department of the
Treasury (FinCEN) when suspecting
fraud or identifying other transactions
meeting the SAR filing criteria.52
50 For example, if the transaction value is below
the appraisal threshold of $250,000.
51 See 12 CFR 226.42(g).
52 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. Refer also to the Federal Financial
Institutions Examination Council Bank Secrecy Act/
Anti-Money Laundering Examination Manual
(Revised April 29, 2010) to review the general
criteria, but note that instructions on filing a SAR
through the Financial Crime Enforcement Network
(FinCEN) of the Department of the Treasury are
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Examiners finding evidence of unethical
or unprofessional conduct by appraisers
should instruct the institution to file a
complaint with state appraiser
regulatory officials and, when required,
to file a SAR with FinCEN. If there is a
concern regarding the institution’s
ability or willingness to file a complaint
or make a referral, examiners should
forward their findings and
recommendations to their supervisory
office for appropriate disposition and
referral to state appraiser regulatory
officials and FinCEN, as necessary.
Appendix A—Appraisal Exemptions
Under Title XI of FIRREA, the
Agencies were granted the authority to
identify categories of real estate-related
financial transactions that do not
require the services of an appraiser to
protect Federal financial and public
policy interests or to satisfy principles
of safe and sound lending. Therefore, in
their appraisal regulations, the Agencies
identified certain real estate-related
financial transactions that do not
require the services of an appraiser and
that are exempt from the appraisal
requirement. 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. If an
institution has a question as to whether
a particular transaction qualifies for an
exemption, the institution should seek
guidance from its primary Federal
regulator. For those transactions
qualifying for the appraisal threshold,
existing extensions of credit, or the
business loan exemptions, an institution
is exempted from the appraisal
requirement, but still must, at a
minimum, obtain an evaluation
consistent with these Guidelines.53
1. Appraisal Threshold
For transactions with a transaction
value equal to or less than $250,000, the
Agencies’ appraisal regulations, at a
minimum, require an evaluation
consistent with safe and sound banking
practices.54 If an institution enters into
a transaction that is secured by several
individual properties that are not part of
a tract development, the estimate of
value of each individual property
should determine whether an appraisal
attached to the SAR form. The SAR form is
available on FinCEN’s Web site.
53 NCUA’s regulations do not provide an
exemption from the appraisal requirements specific
to member business loans.
54 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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or evaluation would be required for that
property. For example, an institution
makes a loan secured by seven
commercial properties in different
markets with two properties valued in
excess of the appraisal threshold and
five properties valued less than the
appraisal threshold. An institution
would need to obtain an appraisal on
the two properties valued in excess of
the appraisal threshold and evaluations
on the five properties below the
appraisal threshold, even though the
aggregate loan commitment exceeds the
appraisal threshold.
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 and document
the adequacy and reliability of these
repayment sources and conclude that
knowledge of the market value of the
real estate on which the lien will be
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 and other repayment
sources. Similarly, the exemption
should not be applied to a loan or loan
program unless the institution verifies
and documents the primary and
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
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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,
unless another exemption applies.
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.55 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 an institution
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. 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. 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.
5. Real Estate-Secured Business Loans
This exemption applies to business
loans with a transaction value of $1
million or less when the sale of, or
rental income derived from, real estate
is not the primary source of
repayment.56 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 real
estate. For this type of exempted loan,
under the Agencies’ appraisal
55 NCUA’s regulations do not provide an
exemption from the appraisal requirements specific
to loans not secured by real estate.
56 NCUA’s appraisal regulation, 12 CFR 722, does
not define ‘‘business loan.’’ A ‘‘member business
loan’’ is regulated under 12 CFR 723.
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regulations, an institution may obtain an
evaluation in lieu of an appraisal.
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
transaction in which a loan is secured
by real estate for one project, in which
the lender has taken a security interest,
but 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, would not qualify for the
exemption. (See Appendix D, Glossary
of Terms, for a definition of business
loan.)
6. Leases
An institution is 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, Refinancings, and Other
Subsequent Transactions
Under certain circumstances,
renewals, refinancings, and other
subsequent transactions may be
supported by evaluations rather than
appraisals. The Agencies’ appraisal
regulations permit an evaluation for a
renewal or refinancing of an existing
extension of credit at the institution
when either:
(i) There has been no obvious and
material change in market conditions or
physical aspects of the property that
threatens the adequacy of the
institution’s real estate collateral
protection after the transaction, even
with the advancement of new monies;
or
(ii) There is no advancement of new
monies, other than funds necessary to
cover reasonable closing costs.57
A subsequent transaction is exempt
from the appraisal requirement if no
new monies are advanced (other than
57 Under the NCUA’s appraisal regulation, a
credit union must meet both conditions to avoid the
need for an appraisal. 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. 12 CFR 722.3(d).
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funds necessary to cover reasonable
closing costs) even when there has been
an obvious and material change in
market conditions or the physical
aspects of the property that threatens
the adequacy of the institution’s real
estate collateral protection. 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.
For the purposes of these Guidelines,
an institution is considered to have
advanced new monies (excluding
reasonable closing costs) when there is
an increase in the principal amount of
the loan over the amount of principal
outstanding before the renewal or
refinancing. For example, an institution
originated a 15-year term loan for $3
million and, in year 14, the outstanding
principal is $2.5 million. In year 14, the
borrower seeks to refinance the loan at
a lower interest rate and requests a loan
of $2.8 million. The $300,000 would be
considered new monies. On the other
hand, an institution has provided a $5
million revolving line of credit to a
borrower for two years and, at the end
of year two, renews the $5 million line
for another two years. At the time of
renewal, the borrower has drawn down
$1 million. In this example, the amount
of the line remains unchanged even
though the amount available on the line
is less than the line commitment.
Renewing the line of credit at its
original amount would not be
considered an advancement of new
monies. 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.
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. 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.
If an evaluation is permitted under
this exemption, an institution may use
an existing appraisal or evaluation as
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long as the institution verifies and
documents that the appraisal or
evaluation continues to be valid. (See
the discussion in the Validity of
Appraisals and Evaluations section of
these Guidelines.) Even if a subsequent
transaction qualifies for this exemption,
an institution should consider the risk
posed by the transaction and may wish
to consider obtaining a new appraisal.
Loan Workouts or Restructurings.
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. Use
of this exemption depends on meeting
the conditions listed in (i) and (ii) at the
beginning of the discussion on
Renewals, Refinancings, and Other
Subsequent Transactions. An institution
also should consider such factors as the
quality of the underlying collateral and
the validity of the existing appraisal or
evaluation. 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.
8. Transactions Involving Real Estate
Notes
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 to determine that the conditions of
the exemption have been satisfied.
Principles of safe and sound banking
practices require an institution to
determine the suitability of purchasing
or investing in existing real estatesecured 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 an institution to make appropriate
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credit decisions regarding these
transactions.
An institution may presume that the
underlying loans in a marketable,
mortgage-backed security satisfy the
requirements of the Agencies’ appraisal
regulations whenever an issuer makes a
public statement, such as in a
prospectus, that the appraisals comply
with the Agencies’ appraisal
regulations. 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
experiences more than a minimal rate of
loans being put back by an investor.
9. Transactions Insured or Guaranteed
by a U.S. Government Agency or U.S.
Government-Sponsored Agency
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,58 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. Given the risk to the
institution that it may have to
repurchase a loan that does not comply
with the appraisal standards of the U.S.
58 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.
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government agency or U.S. governmentsponsored agency, the institution
should have appropriate policies to
confirm its compliance with the
underwriting and appraisal standards of
the U.S. government agency or U.S.
government-sponsored agency.
10(i)—An institution that relies 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)—To qualify for this exemption,
transactions that do not conform to all
of Fannie Mae or Freddie Mac
underwriting standards, such as jumbo
or other residential real estate loans,
must be supported by an appraisal that
meets these government-sponsored
agencies’ appraisal standards for the
applicable property type and is
documented in the credit file or
reproducible.
11. Transactions by Regulated
Institutions as Fiduciaries
An 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 with a
transaction.59 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.
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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 on a case-bycase basis rather than broad categories
of transactions that would otherwise be
addressed by an appraisal exemption.
59 Generally, credit unions have limited fiduciary
authority and NCUA’s appraisal regulation does not
specifically exempt transactions by fiduciaries.
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An institution would need to seek a
waiver from its supervisory Federal
agency before entering into the
transaction.
Appendix B—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).60 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 inhouse expertise relative to a particular
method or tool, then an institution
should employ additional personnel or
engage a third party. (See the Third
Party Arrangements section in these
Guidelines.)
• Address the selection, use, and
validation of the valuation method or
tool.
• Establish criteria for determining
whether a particular valuation method
or tool is appropriate for a given
transaction or lending activity,
considering associated risks. These risks
include, but are not limited to,
transaction size and purpose, credit
quality, and leverage tolerance (loan-tovalue).
• Specify criteria when a market
event or risk factor would preclude the
use of a particular method or tool.
• Address standards for the use of
multiple methods or tools, if applicable,
for valuing the same property or to
support a particular lending activity.
• Provide criteria for ensuring that
the institution uses a method or tool
that produces a reliable estimate of
60 For example, the sole use of data from the
Internet or other public sources would not be an
evaluation under these Guidelines. Additionally,
valuation methods that do not contain sufficient
information and analysis or provide a market value
conclusion would not be acceptable as evaluations.
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market value that supports the
institution’s decision to engage in a
transaction.
• Address the extent to which:
Æ An inspection or research is
necessary to ascertain the property’s
actual physical condition, and
Æ Supplemental information is
needed to assess the effect of market
conditions or other factors on the
estimate of market value.
An institution should establish an
effective system of controls for verifying
that a valuation method or tool is
employed in a manner consistent with
internal policies and procedures.
Moreover, the institution’s staff
responsible for internal controls should
have the skills commensurate with the
complexity or sophistication of the
method or tool. Examiners will review
an institution’s policies, procedures,
and internal controls to ensure that an
institution’s use of a method or tool is
appropriate and consistent with safe
and sound banking practices.
Automated Valuation Models (AVMs)
AVMs are computer programs that
estimate a property’s market value based
on market, economic, and demographic
factors. Institutions may employ AVMs
for a variety of uses such as loan
underwriting and portfolio monitoring.
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.
Institutions should establish policies
and procedures that govern the use of
AVMs and specify the supplemental
information that is required to develop
an evaluation. When the supplemental
information indicates the AVM is not an
acceptable valuation tool, the
institution’s policies and procedures
should require the use of an alternative
method or tool.
Selecting an AVM(s)
When selecting an AVM or multiple
AVMs, an institution should:
• Perform the necessary level of due
diligence on AVM vendors and their
models, including how model
developers conducted performance
testing as well as the sample size used
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and the geographic level tested (such as,
county level or zip code).
• Establish acceptable minimum
performance criteria for a model prior to
and independent of the validation
process.
• Perform a detailed validation of the
model(s) considered during the
selection process and document the
validation process.
• Evaluate underlying data used in
the model(s), including the data sources
and types, frequency of updates, quality
control performed on the data, and the
sources of the data in states where
public real estate sales data are not
disclosed.
• 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).
• Evaluate the vendor’s scoring
system and methodology for the
model(s). Determine whether the
scoring system provides an appropriate
indicator of model reliability by
property types and geographic locations.
Following the selection of an AVM(s),
an institution should develop policies
and procedures to address the
appropriate use of an AVM(s) and its
monitoring and ongoing validation
processes.
Determining AVM Use
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An institution should establish
policies and procedures for determining
whether an AVM can be used for a
particular transaction. The institution
should:
• Maintain AVM performance criteria
for accuracy and reliability in a given
transaction, lending activity, and
geographic location.61
• Establish internal confidence
score 62 minimums, or similar criteria,
for when each model can be used.
• Implement controls to preclude
‘‘value shopping’’ when more than one
AVM is used for the same property.
• Establish procedures for obtaining
an appraisal or using a different
61 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’’).
62 A ‘‘confidence score’’ generally refers to a
vendor’s own method of quantifying how reliable
a model value is by using a rank ordering process.
The scale and components of a confidence score are
not standardized. Therefore an institution needs to
understand how a confidence score was derived
and the extent to which a confidence score
correlates to model accuracy. If multiple AVMs are
used, an institution should understand how the
combination of models affects overall accuracy.
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valuation method to develop an
evaluation when an AVM’s resulting
value is not reliable to support the
credit decision. For example, in areas
that have experienced a high incidence
of fraud, the institution should consider
whether the AVM may be relied upon
for the transaction or another valuation
method should be used.
• Identify circumstances under which
an AVM may not be used, including:
Æ When market conditions warrant,
such as during the aftermath of a natural
disaster or a major economic event;
Æ When a model’s performance is
outside of specified tolerances for a
particular geographic market or property
price-tier range; or
Æ When a property is nonhomogeneous, such as atypical lot sizes
or property types.
Validating AVM Results
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.63 An institution
should be able to demonstrate that the
depth and extent of its validation
processes are consistent with the
materiality of the risk and the
complexity of the transaction.
Validation can be performed internally
or with the assistance of a third party,
as long as the validation is conducted by
qualified individuals that are
independent of the model development
or sales functions. An institution should
not rely solely on validation
representations provided by an AVM
vendor. An institution should perform
appropriate model validation regardless
of whether it relies on AVMs that are
supported by value insurance or
guarantees. 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.
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. In the AVM
validation procedures, an institution
should specify, at a minimum:
• Expectations for an appropriate
sample size.
• Level of geographic analysis.
• Testing frequency and criteria for
re-testing.
63 See, for example, OCC Bulletin 2000–16, Risk
Modeling—Model Validation (May 30, 2000).
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• Standards of performance measures
to be used.
• Range of acceptable performance
results.
To ensure unbiased test results, an
institution should compare the results
of an AVM to actual sales data in a
specified trade area or market prior to
the information being available to the
model. If an institution uses more than
one AVM, each AVM 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
relative to similar loans that used a
different valuation process. An
institution should document the results
of its validation and audit findings. An
institution should use these findings to
analyze and periodically update its
policies and procedures for an AVM(s)
when warranted.
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.
An institution may use a TAV in
developing an evaluation when it can
demonstrate that a valid correlation
exists between the tax assessment data
and the market value. In using a TAV
to develop an evaluation, an institution
should:
• Determine and document how the
tax jurisdiction calculates the TAV and
how frequently property revaluations
occur.
• Perform an analysis to determine
the relationship between the TAV and
the property market values for
properties within a tax jurisdiction.
• Test and document how closely
TAVs correlate to market value based on
contemporaneous sales at the time of
assessment and revalidate whether the
correlation remains stable as of the
effective date of the evaluation.
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Appendix C—Deductions and Discounts
The Agencies’ appraisal regulations
require an appraiser to 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. For
such transactions, an appraisal must
include the market value of the
property, which should reflect the
property’s actual physical condition,
use, and zoning designation (referred to
as the ‘‘as is’’ value of the property), as
of the effective date of the appraisal.
Therefore, if the highest and best use of
the property is for development to a
different use, the cost of demolition and
site preparation should be considered in
the analysis.
Proposed Construction or Renovation
For properties where improvements
are to be constructed or rehabilitated, an
institution may request a prospective
market value upon completion and a
prospective market value upon
stabilization. While an institution may
request the appraiser to provide the sum
of retail sales for a proposed
development, the result of such
calculation is not the market value of
the property for purposes of the
Agencies’ appraisal regulations.
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Partially Leased Buildings
For proposed and partially leased
rental developments, the appraiser must
make appropriate deductions and
discounts to reflect that the property has
not achieved stabilized occupancy. The
appraisal analysis also should include
consideration of the absorption of the
unleased space. 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.
Non-Market Lease Terms
For properties subject to leases with
terms that do not reflect current market
conditions, the appraisal must clearly
state the ownership interest being
appraised and provide a discussion of
the leases that are in place. If the leased
fee interest is being appraised and
contract rent is less than market rent on
one or more long term lease(s) to a
highly rated tenant, the market value of
the leased fee interest would be less
than the market value of the
unencumbered fee simple interest in the
property.64 In these situations, the
64 Fee simple interest refers to the most complete
ownership unencumbered by any leases or other
interests. It is subject only to the limitations
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market value of the leased fee interest
should be used.
Tract Developments with Unsold Units
A tract development is defined in the
Agencies’ appraisal regulations as a
project of five units or more that is
constructed or is to be constructed as a
single development. Appraisals for
these properties must reflect deductions
and discounts for holding costs,
marketing costs, and entrepreneurial
profit supported by market data. In
some cases entrepreneurial profit may
be included in the discount rate. The
applicable discount rate is developed
based on investor requirements and the
risk associated with the physical and
financial characteristics of the property.
In some markets, entrepreneurial profit
is treated as a line item deduction while
in other markets it is reflected as a
component of the discount rate.
Regardless of how entrepreneurial profit
is handled in the appraisal analysis, an
appropriate explanation and discussion
should be provided in the appraisal
report. The projected sales prices and
absorption rate of units should be
supported by anticipated demand at the
time the units are expected to be
exposed for sale. Anticipated demand
for the units should be supported and
presented in the appraisal. A reader of
the appraisal report should be able to
understand the risk characteristics
associated with the subject property and
the market, including the anticipated
supply of competing properties.
• Raw Land
The appraiser must provide an
opinion of value for raw land based on
its current condition and existing
zoning. If an appraiser employs a
developmental approach to value the
land that is based on projected land
sales or development and sale of lots,
the appraisal must reflect appropriate
deductions and discounts for costs
associated with developing and selling
lots in the future. These costs may be
incurred during the permitting,
construction or selling stages of
development. Appropriate deductions
and discounts should include items
such as feasibility studies, permitting,
engineering, holding costs, marketing
costs, and entrepreneurial profit and
other costs specific to the property. If
sufficient market data exists to perform
both the sales comparison and
developmental approaches to value, the
appraisal report should detail a
imposed by the governmental powers of taxation,
eminent domain, police power and escheat. Leased
fee interest, on the other hand, refers to a landlord’s
ownership that is encumbered by one or more
leases.
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reconciliation of these two approaches
in arriving at a market value conclusion
for the raw land.
• Developed Lots
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.
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 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. The
absorption period should be based on
market demand for lots in light of
current and expected competition for
similar lots in the market area.
• 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
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units 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.
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Appendix D—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 business or to
manage business affairs for another.
According to the Agencies’ appraisal
regulations, fee appraisers must be
engaged directly by the federally
regulated institution or its agent,65 and
have no direct or indirect interest,
financial or otherwise, in the property
or the transactions. The Agencies do not
limit the arrangements that federally
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
federally regulated institution.
Appraisal—As defined in the
Agencies’ appraisal regulations, a
written statement independently and
impartially prepared by a qualified
appraiser (state licensed or certified)
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 Management Company—
The Agencies’ appraisal regulations do
not define the term appraisal
management company. For purposes of
these Guidelines, an ‘‘appraisal
management company’’ includes, but is
not limited to, a third-party entity that
provides real property valuation-related
services, such as selecting and engaging
an appraiser to perform an appraisal
based upon requests originating from a
regulated institution. The Dodd-Frank
Wall Street Reform and Consumer
Protection Act of 2010 (Dodd-Frank Act)
has a specific definition for this term in
connection with transactions secured by
a consumer’s principal dwelling or
mortgage secondary market transactions.
See the Third Party Arrangements
section in these Guidelines.
65 Except that the regulated institution also may
accept an appraisal that was prepared by an
appraiser engaged directly by another financial
services institution in certain circumstances as set
forth in the Agencies’ appraisal regulations.
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Appraisal Report Options—Refer to
the definitions for Restricted Use
Appraisal Report, Self-Contained
Appraisal Report, and Summary
Appraisal Report.
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, an institution must obtain
an evaluation of the real property
collateral, if no other appraisal
exemption applies.
Approved Appraiser List—A 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.
‘‘As Completed’’ Market Value—Refer
to the definition for 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’s effective
date.
‘‘As Stabilized’’ Market Value—Refer
to the definition for Prospective Market
Value.
Automated Valuation Model—A
computer program that estimates a
property’s market value based on
market, economic, and demographic
factors. Hedonic models generally use
property characteristics (such as square
footage and room count) and
methodologies to process information,
often based on statistical regression.
Index models generally use geographic
repeat sales data over time rather than
property characteristic data. Blended or
hybrid models use elements of both
hedonic and index models.
Broker Price Opinion (BPO)—An
estimate of the probable sales or listing
price of the subject property provided
by a real estate broker, sales agent, or
sales person. A BPO generally provides
a varying level of detail about a
property’s condition, market, and
neighborhood, as well as comparable
sales or listings. A BPO is not by itself
an appraisal or evaluation, but could be
used for monitoring the collateral value
of an existing loan, when deemed
appropriate. 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
66 Dodd-Frank
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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.67 A business
loan includes extensions to entities
engaged in agricultural operations,
which is consistent with the Agencies’
real estate lending guidelines definition
of an improved property loan that
include loans secured by farmland,
timberland, and ranchland committed to
ongoing management and agricultural
production.
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, real
estate. As specified in the Agencies’
appraisal regulations, an institution
must obtain an evaluation of the real
property collateral.68
Client—According to USPAP, the
party or parties who engage(s) an
appraiser by employment or contract for
a specific appraisal assignment. For the
purposes of these Guidelines, the
appraiser should be aware that the
client is the regulated institution. (Refer
to the section on Third Party
Arrangements in these Guidelines.)
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.
Credit File—A hardcopy or electronic
record that documents all information
necessary to (1) analyze the credit before
it is granted and (2) monitor the credit
during its life. An institution may use a
computerized or manual system to
manage the information in its credit
files.
Date of the Appraisal Report—
According to USPAP, the date of the
appraisal report indicates when the
appraisal analysis was completed.
Effective Date of the Appraisal—
USPAP requires that each appraisal
report specifies the effective date of the
appraisal and the date of the report. The
67 NCUA’s appraisal regulation, 12 CFR 722, does
not define ‘‘business loan.’’ A ‘‘member business
loan’’ is regulated under 12 CFR 723.
68 NCUA’s appraisal regulation, 12 CFR 722, does
not provide a higher appraisal threshold for loans
defined as ‘‘member business loans’’ under 12 CFR
723.
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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.
Effective Date of the Evaluation—For
the purposes of the Agencies’ appraisal
regulations and these Guidelines, the
effective date of an evaluation is the
date that the analysis is completed.
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: (i) The
property’s location and legal
description; (ii) intended use and users
of the appraisal; (iii) the requirement to
provide an opinion of the property’s
market value; (iv) the expectation that
the appraiser will comply with
applicable laws and regulations, and be
consistent with supervisory guidance;
(v) appraisal report format; (vi) expected
delivery date; and (vii) appraisal fee.
Evaluation—A valuation permitted 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, the estimated length of time the
property interest being appraised would
have been offered on the market prior to
the hypothetical consummation of a sale
at market value on the effective date of
the appraisal. Exposure time is always
presumed to precede the effective date
of the appraisal. Exposure time is a
function of price, time, and use—not an
isolated opinion of time alone. (See
USPAP Standard 1–2(c) and Statement
6.)
Extraordinary Assumption—As
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.
An example of an extraordinary
assumption is when an appraiser
assumes that an application for a zoning
change will be approved and there is no
evidence to suggest otherwise.
Federally Regulated Institution—For
purposes of the Agencies’ appraisal
regulations and these Guidelines, an
institution that is supervised by a
Federal financial institution’s regulatory
agency. This includes a national or a
state-chartered bank and its
subsidiaries, a bank holding company
and its non-bank subsidiaries, a Federal
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savings association and its subsidiaries,
a Federal savings and loan holding
company and its subsidiaries, and a
credit union.
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.
Going Concern Value—The value of a
business entity rather than the value of
the real property. 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.
Hypothetical Condition—As defined
in USPAP, a condition that is contrary
to what exists but is supposed for the
purpose of analysis. An example of a
hypothetical condition is when an
appraiser assumes a particular
property’s zoning is different from what
the zoning actually is.
Loan Production Staff—Generally, all
personnel responsible for generating
loan volume or approving loans, as well
as their subordinates and supervisors.
These individuals would include any
employee whose compensation is based
on loan volume (such as processing or
approving of loans). 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.
Employees responsible solely 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
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
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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.
Presold Unit—A unit may be
considered presold if a buyer has
entered into a binding contract to
purchase the unit and has made a
substantial and non-refundable earnest
money deposit. 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.
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. (See USPAP
Statement 4 and Advisory Opinion 17.)
Put Back—Represents the ability of an
investor to reject mortgage loans from a
mortgage originator if the mortgage
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loans do not comply with the warranties
and representations in their mortgage
purchasing agreement.
Raw Land—A parcel or tract of land
with no improvements, for example,
infrastructure or vertical construction.
When an appraisal of raw land includes
entitlements, the appraisal should
disclose when such entitlements will
expire if improvements are not
completed within a specified time
period and the potential effect on the
value conclusion.
Real Estate-Related Financial
Transaction—As defined in the
Agencies’ appraisal regulations, any
transaction involving:
• 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—Refer to the
definition of Federally Regulated
Institution.
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 other purposes.
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 effect of any sales
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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
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 is
the most complete and detailed
appraisal report option.
Sum of Retail Sales—A mathematical
calculation of the sum of the expected
sales prices of several individual
properties in the same development 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
while still providing sufficient
information to enable the client and
intended user(s) to understand the
rationale for the opinions and
conclusions in the report.
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 or commercial building lot, a
detached single-family home, an
attached single-family home, and a
residence in a condominium,
cooperative, or timeshare 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,
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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 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.
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.
Unsold Units—An unsold unit is a
unit that does not meet the conditions
listed in the definition of Presold Units.
Value of Collateral (for Use in
Determining Loan-to-Value Ratio)—
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.
Dated: November 1, 2010.
John Walsh,
Acting Comptroller of the Currency.
By order of the Board of Governors of the
Federal Reserve System, December 1, 2010.
Jennifer J. Johnson,
Secretary of the Board.
Dated at Washington, DC, the 1st day of
December, 2010.
By order of the Federal Deposit Insurance
Corporation.
Robert E. Feldman,
Executive Secretary.
Dated: December 1, 2010.
By the Office of Thrift Supervision.
John E. Bowman,
Acting Director.
Dated: November 9, 2010.
By the National Credit Union
Administration Board.
Mary F. Rupp,
Secretary of the Board.
[FR Doc. 2010–30913 Filed 12–9–10; 8:45 am]
BILLING CODE P
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| File Modified | 2023-05-01 |
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