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1707, et seq., and FRB Regulation Z, 12 CFR 226.36 and 226.42. documents in the last year, by the Rural Utilities Service Index models generally use geographic repeat sales data over time rather than property characteristic data. Raw LandA parcel or tract of land with no improvements, for example, infrastructure or vertical construction. 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. 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. In particular, these commenters raised concerns over the enforcement of the Guidelines by the Agencies. 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 criteria should ensure that: An institution or its agent must directly select and engage appraisers. 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. 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. What Is the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA)? 5. As Stabilized Market ValueRefer to the definition for Prospective Market Value. 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. for better understanding how a document is structured but Savings & Loan Companies vs. Commercial Banks: What's the Difference? Supervisory Policy. 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. the material on FederalRegister.gov is accurately displayed, consistent with 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. Appraisal Review Licensing Requirements. et seq., and any implementing regulations A valuation method should address the property's actual physical condition and characteristics as well as the economic and market conditions that affect the estimate of the collateral's market value. In finalizing the Guidelines, the Agencies considered the Dodd-Frank Act, other Federal statutory and regulatory changes affecting appraisals,[11] 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. 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). Program Compliance. In particular, 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. 1631 et seq.). [33] Other information might include the prevalence and effect of sales and financing concessions, the list-to-sale price ratio, and availability of financing. You can learn more about the standards we follow in producing accurate, unbiased content in our. 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. The original appraiser should complete the appraisal update; however, lenders may use substitute appraisers. 49. 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. Insulate the persons responsible for ascertaining the compliance of the institution's appraisal and evaluation function from any influence by loan production staff. NCUA's regulations do not provide an exemption from the appraisal requirements specific to member business loans. Moreover, the institution's staff responsible for internal controls should have the skills commensurate with the complexity or sophistication of the method or tool. For example, this exemption should not be applied to a transaction such as an institution's investment in real estate for its own use. The Agencies' appraisal regulations include minimum standards for the preparation of an appraisal. Final Rule: Part 722 - Appraisals. 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. and services, go to These Guidelines, including their appendices, address supervisory matters relating to real estate appraisals and evaluations used to support real estate-related financial transactions. The program should: 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. 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. Sum of Retail SalesA mathematical calculation of the sum of the expected sales prices of several individual properties in the same development to an individual purchaser. The depth of the review should be sufficient to ensure that the methods, assumptions, data sources, and conclusions are reasonable, well-supported, and appropriate for the transaction, property, and market. Such policies should address the level of documentation needed for the review, given the type, risk and complexity of the transaction. We also reviewed the competitive environment in which the Bank operates and its relative strengths and weaknesses. Web( 1) Title XI of FIRREA provides protection for federal financial and public policy interests in real estate-related transactions by requiring real estate appraisals used in connection This document has been published in the Federal Register. 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. Some commenters did not support the longstanding flexibility afforded to small and rural institutions when absolute lines of independence cannot be achieved. Dodd-Frank Act, Section 1473(r). This section also addresses the factors that an institution should consider in determining whether to obtain an appraisal, even though an evaluation is permitted. For example, an institution originated a 15-year term loan for $3 million and, in year 14, the outstanding principal is $2.5 million. An institution should establish policies and procedures for determining whether an AVM can be used for a particular transaction. the appraisal must reflect an appropriate scope of work that provides for credible assignment results. (See also Appendix A, Appraisal Exemptions, for transactions where an evaluation would be allowed in lieu of an appraisal.). As specified in the Agencies' appraisal regulations, an institution must obtain an evaluation of the real property collateral. In the Proposal, this section addressed the competency and qualifications of appraisers and persons who perform an evaluation. Several commenters asked whether other guidance documents issued by the Agencies on appraisal-related issues would be rescinded with the issuance of the Guidelines. Appropriate deductions and discounts should include holding costs, marketing costs, and entrepreneurial profit during the sales absorption period of the completed units. According to USPAP, appraisal reports must contain sufficient information to enable the intended user of the appraisal to understand the report properly. 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. This standard is designed to avoid having appraisals prepared using unrealistic assumptions and inappropriate methods in arriving at the property's market value. 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. 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. First, the process of obtaining an evaluation is not new since IDIs already obtain evaluations for transactions at or below the current $250,000-threshold. Examiners would be expected to provide an institution with a reasonable amount of time to obtain a new appraisal or evaluation. As Completed Market ValueRefer to the definition for Prospective Market Value. 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. This revised section also incorporates the section on Accepting Appraisals from Other Financial Services Institutions in the Proposal. 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 Start Printed Page 77464independent, has the requisite experience and training for the assignment, and thorough knowledge of the subject property's market. An institution or its agents also should directly select and engage persons who perform evaluations. Evaluate the vendor's scoring system and methodology for the model(s). Set forth documentation standards for the review and the resolution of noted deficiencies. 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. 34. 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. 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. 0 An institution's policies and procedures for reviewing appraisals and evaluations, at a minimum, should: An institution should establish qualification criteria for persons who are eligible to review appraisals and evaluations. 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. 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. 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. 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. Appraisal Control Appraisal Event shall be deemed to have occurred with respect to each Note B, if and so long as (a) (1) the Initial Note B Principal Balance, minus (2) the sum of (x) any payments of principal (whether as Prepayments or otherwise) allocated to, and received on, any Note B, (y) any Appraisal Reduction Amounts allocated to any Note B in accordance with the terms of this Agreement, and (z) any Realized Losses with respect to the Mortgage Loan to the extent allocated to Note B, is less than (b) twenty-five percent (25%) of the Initial Note B Principal Balance. 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. 3331, et seq. 48. This exemption is intended to apply to individual transactions on a case-by-case basis rather than broad categories of transactions that would otherwise be addressed by an appraisal exemption. documents in the last year, 822 Transactions involving existing extensions of credit with significant risk to the institution. In addition, effective April 1, 2011, an institution must file a complaint with the appropriate state appraiser certifying and licensing agency under certain circumstances. Under the law, the provisions are effective 12 months after final regulations to implement the provisions are published. Regardless of how entrepreneurial profit is handled in the appraisal analysis, an appropriate explanation and discussion should be provided in the appraisal report. The Agencies believe that the Proposal reaffirmed existing guidance addressing their supervisory expectations for prudent appraisal and evaluation policies, procedures, and practices. Maintain AVM performance criteria for accuracy and reliability in a given transaction, lending activity, and geographic location. 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 development, administration, and maintenance of the list. 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. 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