|New appraisal guidelines demand close look (January 2011)|
ABA Community Banking | REAL ESTATE CHALLENGE
By George R. Mann and Robert S. Ely
How up to date are you on the federal appraisal rules? As a check, consider the following fairly common practice: A borrower brings one of your lenders an appraisal that was performed for another bank. You accept it and add it to the loan file.
If you’re OK with that, that’s just one reason your bank had better get up to speed, because you’d be wrong.
Getting on the right pages
In December 2010 the five federal banking regulators issued a statement titled “Interagency Appraisal and Evaluation Guidelines.” These guidelines supplement existing guidance and rescind the 1994 “Interagency Appraisal and Evaluation Guidelines” (FIL-74-94); “Statement on Appraisal Standards” (FIL-20-2001); “Interagency Statement on Independent Appraisal and Evaluation Functions” (FIL-84-2003); and the 2006 “Revisions to Uniform Standards of Professional Appraisal Practice” (FIL-53-2006).
The new document is full of things anyone who relies on appraisals should be clear about, from the board to the newest loan officer.
The scenario we opened with is covered in Section VI, “Selection of Appraisers or Persons Who Perform Evaluations.” This section emphasizes the importance of appraiser competency for a particular assignment relative to both the property type and geographic market and stresses that an institution should not select a valuation method or tool solely because it provides the highest value, the lowest cost, or the fastest turnaround time.
New subsections have been added to address the development, administration, and maintenance of an approved appraiser list and the banking agencies’ recommendation that institutions use engagement letters. Ongoing monitoring of the work performed by fee appraisers and persons performing evaluations is once again emphasized.
But within this section lies a new and very important quote relating to the scenario:
“…An institution’s use of a borrower-ordered 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.”
This statement brings to an end the fairly common practice of Bank B receiving a copy of Bank A’s appraisal from the borrower. Going forward this is not permitted and Bank B will have to contact Bank A directly to get a copy. Also note this: The appraiser who performed the appraisal for Bank A cannot provide a copy of the report to anyone (e.g. Bank B) without Bank A’s permission.
There’s much more to be discovered, and this example illustrates the importance of a bank’s staff taking the time to read and digest the new document. The guidelines contain 18 sections and 4 appendices. This article, and its online companion at www.ababj.com, review some key points banks should be sure to check, but don’t cover everything in the statement.
Here are some new items that have not appeared in prior statements plus some existing items regulators are reemphasizing.
Focus on some basics
An institution’s board is responsible for reviewing and adopting policies and procedures that establish and maintain an effective, independent real estate appraisal and evaluation program for all its lending functions. Section IV, “Appraisal and Evaluation Program” lists ten bullet points that should be included in the program. Regarding program independence, the new guidelines not only pertain to those persons performing appraisals and evaluations, but also to persons who order and review appraisals and evaluations. Three more points from the ten are of special current interest:
• 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. (Third-party issues come up again, as we’ll explore.)
• Establish criteria for monitoring collateral values.
This section states that appraisals must comply with the regulators’ appraisal regulations, which may differ from or exceed the Uniform Standard of Professional Appraisal Practice requirements.
In a related vein, Section V, “Independence of the Appraisal and Evaluation Program,” has been expanded substantially to clarify some points and to address communication process between an institution and its fee appraisers. The standards of independence apply to both appraisals and evaluations.
The guidelines continue to state that “An institution should establish reporting lines independent of loan production for staff who administer the institution’s collateral valuation program…” Appendix D further defines “loan production staff” as “Generally, all personnel responsible for generating loan volume or approving loans, as well as their subordinates and supervisors.” As such, this would not only include line lenders but also credit officers who approve loans, regardless of dollar amount.
This section also addresses 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. Importantly, this provision does not prevent a bank 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.
Section VIII “Minimum Appraisal Standards” is one of the most important sections in the guidelines as it lists the five mandatory items for an appraisal to comply with agency appraisal regulations. This section has been greatly enhanced to clarify each of the five standards. Noteworthy are clarifications that Automated Valuation Models (AVMs) do not meet the requirements of an appraisal, and that market value applies to “real property” only.
Note that in Section IX, “Appraisal Development,” and Section X, “Appraisal Reports,” the guidelines emphasize the need to obtain a report that contains “sufficient information and analysis.” Regulators indicate that a Restricted Use Appraisal Report will probably not be appropriate for most federally related transactions, but may be useful for collateral monitoring.
A look at evaluations versus appraisals
Section XI, “Transactions That Require Evaluations,” outlines the three exemptions where an evaluation in lieu of appraisals is acceptable. While these haven’t changed, the agencies have added guidance as to when an institution should consider getting an appraisal although an evaluation is permitted.
Section XII, “Evaluation Development,” is a new section that works in conjunction with Section XIII, “Evaluation Content.” The agencies added verbiage to emphasize that evaluations must be consistent with safe and sound banking practices and contain an appropriate level of analysis and information necessary to support the estimate of market value.
The content requirements for evaluations have been increased, however. The agencies put an emphasis on physical inspection of collateral and listing of all sources of information used to value the property. Also, these sections specify that valuation methods that do not produce market-value conclusions are not acceptable as evaluations. Hence, Automated Valuation Models (AVMs) and Competitive Market Analysis (CMAs) do not constitute an evaluation on their own, but may be used as support for an evaluation. Not so Broker Price Opinions (BPOs); they do not produce a market value, but a potential selling price.
Section XV, “Reviewing Appraisals and Evaluations,” is now its own section and contains an abundance of new information. Subsections address reviewer qualifications and depth of review by property type and for appraisals received from other institutions, resolution of deficiencies, and review documentation. An appraisal or evaluation review must still be completed prior to a final credit decision.
Third-party risks introduced
New Section XVI, “Third Party Arrangements,” addresses 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. Regulators make it clear that an institution cannot outsource responsibilities—only work. •
George Mann is Managing Director and Chief Appraiser, Collateral Evaluation Services, LLC. Robert Ely is the firm’s Chief Business Development Officer and Chief Appraiser. www.ces-wm.com
The electronic version of this article available at: http://www.nxtbook.com/nxtbooks/sb/ababj0111/index.php?startid=38
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