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The Banking Interagency Guidelines Were Revised in December 2010. Are You Up to Speed?
The Interagency (FDIC / OTS / OCC / FRB / NCUA) Guidelines were revised recently to clarify the agencies’ expectations for an institution’s appraisal and evaluation program. 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. Notable points include:
APPRAISAL GUIDELINES (Transaction values > $250,000)
- Going-Concern Value, Value-in-Use or Value to a Specific Owner may not be used as market value for federally related transactions.
- Generally, a restricted use report is not appropriate for most federally related transactions due to lack of sufficient supporting information for underwriting.
- An 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.
EVALUATION GUIDELINES (Transaction values =/< $250,000)
- An Evaluation should address the property’s actual physical condition…no “average” condition boilerplate.
- An Evaluation should address economic and market conditions that affect the estimate of the collateral’s market value.
- The 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 /market factors that should be considered in developing an Evaluation.
- When an inspection is not performed, an institution should be able to demonstrate how these property and market factors were determined.
A BPO may not be used as an Evaluation.
THIRD PARTY ARRANGEMENTS (AMCs)
More and more institutions are engaging the services of an Appraisal Management Company to effectively separate lending personnel from the appraisal function. While these arrangements have many benefits, the revised guidelines also place significant burden upon the institution to police the AMC.
The guidelines read:
“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…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.”
It appears AMCs are here to stay and will be more and more regulated as time goes by. The Dodd-Frank Act addresses AMC’s although it appears the legislation is primarily aimed at residential AMCs. Currently, Texas does not require AMC’s to register with the state - but it is coming.
This update is provided courtesy of O’Connor & Associates Commercial Appraisal Division. The O’Connor & Associates Appraisal team has remained current and compliant with ever-changing banking regulations since 1983 and is a recognized industry leader for appraisal services. Contact John Fisher, CCRA, LEED AP, Director of Appraisal Services at 713.375.4297 for additional information.
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