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5000 - Statements of Policy
{{8-31-98 p.5463}}
Interagency Appraisal and Evaluation Guidelines
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), and the Office of Thrift Supervision
(OTS) (the agencies) are jointly issuing these guidelines, which
supersede each of the agencies' appraisal and evaluation guidelines
issued in 1992. 1
These guidelines address supervisory matters relating to real estate
appraisals and evaluations used to support real estate-related
financial transactions and provide guidance to examining personnel and
federally regulated institutions about prudent appraisal and evaluation
policies, procedures, practices, and standards.
Background
Title XI of the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (FIRREA) requires the agencies to adopt
regulations on the preparation and use of appraisals by federally
regulated financial institutions. 2
Such real estate appraisals are to be in writing and performed in
accordance with uniform standards by an individual whose competency has
been demonstrated and whose professional conduct is subject to
effective State supervision.
Common agency regulations 3
issued pursuant to Section 304 of the Federal Deposit Insurance
Corporation Improvement Act of 1991 (FDICIA) also require each
regulated institution to adopt and maintain written real estate lending
policies that are consistent with safe and sound banking practices and
that reflect consideration of the real estate lending guidelines
attached to the regulation. The real estate lending guidelines state
that a real estate lending program should include an appropriate real
estate appraisal and evaluation program.
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. An
institution's policies and procedures should be incorporated into an
effective appraisal and evaluation program. Examiners will consider the
institution's size and the nature of its real estate-related
activities when assessing the appropriateness of its program.
When analyzing individual transactions, examiners will review an
appraisal or evaluation to determine whether the methods, assumptions,
and findings are reasonable and in compliance with the agencies'
appraisal regulations, policies, 4
supervisory guidelines, and the institution's policies. Examiners also
will review the steps taken by an institution to ensure that the
individuals who perform its appraisals and evaluations are qualified
and are not subject to conflicts of interest. Institutions that fail to
maintain a sound appraisal or evaluation program or to comply with the
agencies' appraisal regulations, policies, or these supervisory
guidelines will be cited in examination reports and may be criticized
for unsafe and unsound banking practices. Deficiencies will require
corrective action.
{{8-31-98 p.5464}}
Appraisal and Evaluation Program
An institution's board of directors is responsible for reviewing
and adopting policies and procedures that establish an effective real
estate appraisal and evaluation program. The program should:
Establish selection criteria and procedures to evaluate
and monitor the ongoing performance of individuals who perform
appraisals or evaluations;
Provide for the independence of the person performing
appraisals or evaluations;
Identify the appropriate appraisal for various lending
transactions;
Establish criteria for contents of an evaluation;
Provide for the receipt of the appraisal or evaluation
report in a timely manner to facilitate the underwriting decision;
Assess the validity of existing appraisals or
evaluations to support subsequent transactions;
Establish criteria for obtaining appraisals or
evaluations for transactions that are otherwise exempt from the
agencies' appraisal regulations; and
Establish internal controls that promote compliance
with these program standards.
Selection of Individuals Who May Perform Appraisals and
Evaluations
An institution's program should establish criteria to select,
evaluate, and monitor the performance of the individual(s) who performs
a real estate appraisal or evaluation. The criteria should ensure that:
The institution's selection process is
non-preferential and unbiased;
The individual selected possesses the requisite
education, expertise and competence to complete the assignment;
The individual selected is capable of rendering an
unbiased opinion; and
The individual selected is independent and has no
direct or indirect interest, financial or otherwise, in the property or
the transaction.
Under the agencies' appraisal regulations, the appraiser must be
selected and engaged directly by the institution or its agent. The
appraiser's client is the institution, not the borrower. An
institution may use an appraisal that was prepared by an appraiser
engaged directly by another financial services institution, as long as
the institution determines that the appraisal conforms to the
agencies' appraisal regulations and is otherwise acceptable.
Independence of the Appraisal And Evaluation Function
Because the appraisal and evaluation process is an integral
component of the credit underwriting process, it should be isolated
from influence by the institution's loan production process. An
appraiser and an individual providing evaluation services should be
independent of the loan and collection functions of the institution and
have no interest, financial or otherwise, in the property or the
transaction. If absolute lines of independence cannot be achieved, an
institution must be able to clearly demonstrate that it has prudent
safeguards to isolate its collateral evaluation process from influence
or interference from the loan production process.
The agencies recognize, however, that it is not always possible or
practical to separate the loan and collection functions from the
appraisal or evaluation process. In some cases, such as in a small or
rural institution or branch, the only individual qualified to analyze
the real estate collateral may also be a loan officer, other officer,
or director of the institution. To ensure their independence, such
lending officials, officers, or directors should abstain from any vote
or approval involving loans on which they performed an appraisal or
evaluation.
{{8-31-98 p.5465}}
Transactions That Require Appraisals
Although the agencies' appraisal regulations exempt certain
categories of real estate-related financial transactions from the
appraisal requirements, most real estate transactions over $250,000 are
considered federally related transactions and thus require
appraisals. 5
A "federally related transaction" means any real estate-related
financial transaction in which the agencies engage, contract for, or
regulate, and that requires the services of an appraiser. An agency
also may impose more stringent appraisal requirements than the
appraisal regulations require, such as when an institution's troubled
condition is attributable to real estate loan underwriting
problems. 6
Minimum Appraisal Standards
The agencies' appraisal regulations include five minimum standards
for the preparation of an appraisal. The appraisal must:
Conform to generally accepted appraisal standards as
evidenced by the Uniform Standards of Professional Appraisal Practice
(USPAP) promulgated by the Appraisal Standards Board (ASB) 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.
Be written and contain sufficient information and
analysis to support the institution's decision to engage in the
transaction; As discussed below, appraisers have
available various appraisal development and report options; however,
not all options may be appropriate for all transactions. A report
option is acceptable under the agencies' appraisal regulations only if
the appraisal report contains sufficient information and analysis to
support an institution's decision to engage in the transaction.
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; This standard is designed to avoid having
appraisals prepared using unrealistic assumptions and inappropriate
methods. For federally related transactions, an appraisal is to include
the current market value of the property in its actual physical
condition and subject to the zoning in effect as of the date of the
appraisal. For properties where improvements are to be constructed or
rehabilitated, the regulated institution may also request a prospective
market value based on stabilized occupancy or a value based on the sum
of retail sales. However, the sum of retail sales for a proposed
development is not the market value of the development for the purpose
of the agencies' appraisal regulations. For proposed developments that
involve the sale of individual houses, units, or lots, the appraiser
must analyze and report appropriate deductions and discounts for
holding costs, marketing costs and entrepreneurial profit. For proposed
and rehabilitated rental developments, the appraiser must make
appropriate deductions and discounts for items such as leasing
commission, rent losses, and tenant improvements from an estimate based
on stabilized occupancy.
Be based upon the definition of market value set forth
in the regulation; and Each appraisal must contain an
estimate of market value, as defined by the agencies' appraisal
regulations.
{{8-31-98 p.5466}}
Be performed by State-licensed or certified appraisers
in accordance with requirements set forth in the regulation.
Appraisal Options
An appraiser typically uses three market value approaches to analyze
the value of a property--cost, income, and comparable sales--and
reconciles the results of each to estimate market value. An appraisal
will discuss the property's recent sales history and contain an
opinion as to the highest and best use of the property. An appraiser
must certify that he/she has complied with USPAP and is independent.
Also, the appraiser must disclose whether the subject property was
inspected and whether anyone provided significant assistance to the
person signing the appraisal report.
An institution may engage an appraiser to perform either a Complete
or Limited Appraisal. 7
When performing a Complete Appraisal assignment, an appraiser must
comply with all USPAP standards without departing from any binding
requirements and specific guidelines when estimating market value. When
performing a Limited Appraisal, the appraiser elects to invoke the
Departure Provision which allows the appraiser to depart, under limited
conditions, from standards identified as specific guidelines. For
example, in a Limited Appraisal, the appraiser might not utilize all
three approaches to value. Departure from standards designated as
binding requirements is not permitted.
An institution and appraiser must concur that use of the Departure
Provision is appropriate for the transaction before the appraiser
commences the appraisal assignment. The appraiser must ensure that the
resulting appraisal report will not mislead the institution or other
intended users of the appraisal report. The agencies do not prohibit
the use of a Limited Appraisal for a federally related transaction, but
the agencies believe that institutions should be cautious in their use
of a Limited Appraisal because it will be less thorough than a Complete
Appraisal.
Complete and Limited Appraisal assignments may be reported in three
different report formats: a Self-Contained Report, a Summary Report, or
a Restricted Report. The major difference among these three reports
relates to the degree of detail presented in the report by the
appraiser. The Self-Contained Appraisal Report provides the most
detail, while the Summary Appraisal Report presents the information in
a condensed manner. The Restricted Report provides a capsulized report
with the supporting details maintained in the appraiser's files.
The agencies believe that the Restricted Report format will not be
appropriate to underwrite a significant number of federally related
transactions due to the lack of sufficient supporting information and
analysis in the appraisal report. However, it might be appropriate to
use this type of appraisal report for ongoing collateral monitoring of
an institution's real estate transactions and under other
circumstances when an institution's program requires an evaluation.
Moreover, since the institution is responsible for selecting the
appropriate appraisal report to support its underwriting decisions, its
program should identify the type of appraisal report that will be
appropriate for various lending transactions. The institution's
program should consider the risk, size, and complexity of the
individual loan and the supporting collateral when determining the
level of appraisal development and the type of report format that will
be ordered. When ordering an appraisal report, institutions may want to
consider the benefits of a written engagement letter that outlines the
institution's expectations and delineates each party's
responsibilities, especially for large, complex, or out-of-area
properties.
Transactions That Require Evaluations
A formal opinion of market value prepared by a State licensed or
certified appraiser is not always necessary. Instead, less formal
evaluations of the real estate may suffice for transactions that are
exempt from the agencies' appraisal requirements. The
agencies'
{{8-31-98 p.5467}}appraisal regulations allow an
institution to use an appropriate evaluation of the real estate rather
than an appraisal when the transaction:
Has a value of $250,000 or less;
Is a business loan of $1,000,000 or less, and the
transaction is not dependent on the sale of, or rental income derived
from, real estate as the primary source of repayment; or
Involves an existing extension of credit at the lending
institution, provided that: (i) there has been no obvious and material
change in the 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 (ii) there is no advancement of new monies other than funds
necessary to cover reasonable closing costs.
Institutions should also establish criteria for obtaining appraisals
or evaluations for safety and soundness reasons for transactions that
are otherwise exempt from the agencies' appraisal regulations.
Evaluation Content
An institution should establish prudent standards for the
preparation of evaluations. At a minimum, an evaluation should:
Be written;
Include the preparer's name, address, and signature,
and the effective date of the evaluation;
Describe the real estate collateral, its condition, its
current and projected use;
Describe the source(s) of information used in the
analysis;
Describe the analysis and supporting information,
and;
Provide an estimate of the real estate's market value,
with any limiting conditions.
An evaluation report should include calculations, supporting
assumptions, and, if utilized, a discussion of comparable sales.
Documentation should be sufficient to allow an institution to
understand the analysis, assumptions, and conclusions. An
institution's own real estate loan portfolio experience and value
estimates prepared for recent loans on comparable properties might
provide a basis for evaluations.
An evaluation should provide an estimate of value to assist the
institution in assessing the soundness of the transaction. Prudent
practices also require that as an institution engages in more complex
real estate-related financial transactions, or as it overall exposure
increases, a more detailed evaluation should be performed. For example,
an evaluation for a home equity loan might be based primarily on
information derived from a sales data services organization or current
tax assessment information, while an evaluation for an income-producing
real estate property should fully describe the current and expected use
of the property and include an analysis of the property's rental
income and expenses.
Qualifications of Individuals Who Perform Evaluations
Individuals who prepare evaluations should have real estate-related
training or experience and knowledge of the market relevant to the
subject property. Based upon their experience and training,
professionals from several fields may be qualified to prepare
evaluations of certain types of real estate collateral. Examples
include individuals with appraisal experience, real estate lenders,
consultants or sales persons, agricultural extension agents, or
foresters. Institutions should document the qualifications and
experience level of individuals whom the institution deems acceptable
to perform evaluations. An institution might also augment its in-house
expertise and hire an outside party familiar with a certain market or a
particular type of property. Although not required, an institution may
use State licensed or certified appraisers to prepare evaluations. As
such, Limited Appraisals reported in a Summary or Restricted format may
be appropriate for evaluations of real estate-related financial
transactions exempt from the agencies' appraisal
requirements.
{{8-31-98 p.5468}}
Valid Appraisals and Evaluations
The agencies allow an institution to use an existing appraisal or
evaluation to support a subsequent transaction, if the institution
documents that the existing estimate of value remains valid. Therefore,
a prudent appraisal and evaluation program should include criteria to
determine whether an existing appraisal or evaluation remains valid to
support a subsequent transaction. Criteria for determining whether an
existing appraisal or evaluation remains valid will vary depending upon
the condition of the property and the marketplace, and the nature of
any subsequent transaction. Factors that could cause changes to
originally reported values include: the passage of time; the volatility
of the local market; the availability of financing; the inventory of
competing properties; improvements to, or lack of maintenance of, the
subject property or competing surrounding properties; changes in
zoning; or environmental contamination. The institution must document
the information sources and analyses used to conclude that an existing
appraisal or evaluation remains valid for subsequent transactions.
Renewals, Refinancings, and Other Subsequent Transactions
While the agencies' appraisal regulations generally allow
appropriate evaluations of real estate collateral in lieu of an
appraisal for loan renewals and refinancings, in certain situations an
appraisal is required. If new funds are advanced over reasonable
closing costs, an institution would be expected to obtain a new
appraisal for the renewal of an existing transaction when there is a
material change in market conditions or the physical aspects of the
property that threatens the institution's real estate collateral
protection.
The decision to reappraise or reevaluate the real estate collateral
should be guided by the exemption for renewals, refinancings, and other
subsequent transactions. 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 the condition and quality of the loan, the soundness of the
underlying collateral and the validity of the existing appraisal or
evaluation.
A reappraisal would not be required when an institution advances
funds to protect its interest in a property, such as to repair damaged
property, because these funds should be used to restore the damaged
property to its original condition. If a loan workout involves
modification of the terms and conditions of an existing credit,
including acceptance of new or additional real estate collateral, which
facilitates the orderly collection of the credit or reduces the
institution's risk of loss, a reappraisal or reevaluation may be
prudent, even if it is obtained after the modification occurs.
An institution may engage in a subsequent transaction based on
documented equity from a valid appraisal or evaluation, if the planned
future use of the property is consistent with the use identified in the
appraisal or evaluation. If a property, however, has reportedly
appreciated because of a planned change in use of the property, such as
rezoning, an appraisal would be required for a federally related
transaction, unless another exemption applied.
Program Compliance
An institution's appraisal and evaluation program should establish
effective internal controls that promote compliance with the program's
standards. An individual familiar with the appropriate agency's
appraisal regulation should ensure that the institution's appraisals
and evaluations comply with the agencies' appraisal regulations, these
guidelines, and the institution's program. Loan administration files
should document this compliance review, although a detailed analysis or
comprehensive analytical procedures are not required for every
appraisal or evaluation. For some loans, the compliance review may be
part of the loan officer's overall credit analysis and may take the
form of either a narrative or a checklist. Corrective action should be
undertaken for noted deficiencies by the individual who prepared the
appraisal or evaluation.
{{8-31-98 p.5469}}
An institution's appraisal and evaluation program should also have
comprehensive analytical procedures that focus on certain types of
loans, such as large-dollar credits, loans secured by complex or
specialized properties, non-residential real estate construction loans,
or out-of-area real estate. These comprehensive analytical procedures
should be designed to verify that the methods, assumptions, and
conclusions are reasonable and appropriate for the transaction and the
property. These procedures should provide for a more detailed review of
selected appraisals and evaluations prior to the final credit decision.
The individual(s) performing these reviews should have the appropriate
training or experience, and be independent of the transaction.
Appraisers and persons performing evaluations should be responsible
for any deficiencies in their reports. Deficient reports should be
returned to them for correction. Unreliable appraisals or evaluations
should be replaced prior to the final credit decision. Changes to an
appraisal's estimate of value are permitted only as a result of a
review conducted by an appropriately qualified State licensed or
certified appraiser in accordance with Standard III of USPAP.
Portfolio Monitoring
The institution should also develop criteria for obtaining
reappraisals or reevaluations as part of a program of prudent portfolio
review and monitoring techniques--even when additional financing is not
being contemplated. Examples of such types of situations include large
credit exposures and out-of-area loans.
Referrals
Financial institutions are encouraged to make referrals directly to
state appraiser regulatory authorities when a State licensed or
certified appraiser violates USPAP, applicable state law, or engages in
other unethical or unprofessional conduct. Examiners finding evidence
of unethical or unprofessional conduct by appraisers will forward their
findings and recommendations to their supervisory office for
appropriate disposition and referral to the state, as necessary.
[Source: FDIC Financial Institution Letter
(FIL--74--94), dated November 11, 1994]
1FRB: "Guidelines for Real Estate Appraisal and Evaluation
Programs," September 28, 1992; OCC: BC--225, "Real Estate
Appraisal and Evaluation Guidelines," September 28, 1992; FDIC:
FIL--69--92, "Guidelines for Real Estate Appraisal and Evaluation
Programs," September 30, 1992; OTS: Thrift Bulletin 55, "Real
Estate Appraisal and Evaluation Guidelines," October 13, 1992. Go Back to Text
2OCC: 12 CFR Part 34, subpart C; FRB: 12 CFR 208.18 and
12 CFR 225, subpart G;
FDIC: 12 CFR 323; and OTS: 12
CFR Part 564. Go Back to Text
3OCC: 12 CFR 34, subpart D; FRB: 12 CFR Part 208, subpart C;
FDIC: 12 CFR Part 365; and
OTS: 12 CFR Parts 545 and 563. Go Back to Text
4The appraisal guidance contained in the "Interagency Policy
Statement on the Review and Classification of Commercial Real Estate
Loans," November 7, 1991, generally applies to all transactions. Go Back to Text
5In order to facilitate recovery in designated major disaster
areas, subject to safety and soundness considerations, Section 2 of the
Depository Institutions Disaster Relief Act of 1992 authorized the
agencies to waive certain appraisal requirements for up to three years
after a Presidential declaration of a natural disaster. Go Back to Text
6As a matter of policy, OTS requires 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). Go Back to Text
7USPAP Statement on Appraisal Standards No. 7
(SMT--7)--Permitted Departure from Specific Guidelines for Real
Property Appraisal, issued March 30, 1994, effective July 1,
1994. Go Back to Text
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