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Interagency Rules of Banks & Credit Unions Course No. 011 Instructor: Diana Jacob [email protected] com 210. 363. 5950 cell or 254. 582. 3940 home
Course Learning Objectives On completion, you will have gained comprehension of the requirements and be able to implement those Rules in your day-to-day appraisal practice. Today’s course you will gain knowledge on: • Appraiser selection and engagement • The requirements for an appraisal report • Comparison of an appraisal and evaluation; and when either is used • Special considerations in varying situations • Special considerations in varying types of property • Special terminology used by federally regulated institutions
Federal Financial Institutions Regulatory Agencies (FFIRA) Pg 1 • FFIEC (Federal Financial Institution Examination Council- is the coordinating council of FFIRA which meets once a month • Federally regulated financial institutions are Nationally Charted Banks and Credit Unions; they are both • State-Chartered and • Regulated by the OCC • Some banks are state-chartered but opt to join the Federal Reserve System • Credit Unions are typically chartered and regulated by the National Credit Union Administration (NCUA)
Pg 1 FFIRA Regulations • Of the Big Five the regulations are essentially the same • Exception is the NCUA having a slightly different mission as a credit union OCC OTS FRB FDIC NCUA
Interagency Appraisal & Evaluation Guidelines • 2010 Interagency Appraisal Guidelines supersede the preceding Interagency Statements issued since the 1989 Title XI FIRREA • Purpose is to provide federally regulated institutions and examiners clarification on the Agencies’ s for prudent appraisal and evaluation • Policies, • Procedures, and • Practices 1
Background Interagency Guidelines • What does FIRREA mean? • F Finally or • I I’m or • R Rich or • R Real or • E Estate or • A Appraiser or Financial Institution Reform Recovery Enforcement Act Pg 1
Background Interagency Guidelines • The Agencies’ appraisal regulations MUST require AT A MINIMUM that real estate appraisals be performed in accordance with the Uniform Standards of Professional Appraisal Practice (USPAP) • Each institution is to adopt and maintain written real estate lending policies that are consistent with principles of safety and soundness reflecting consideration of the real estate lending as an appendix to the regulations of the Agencies’ • Each real estate lending institution must have guidelines that state their appraisal and evaluation program 1
Appraisal and Evaluation Program Each institution’s BOD or designated committee is responsible for adopting and reviewing policies and procedures that establish and effective Real Estate Appraisal and Evaluation Program. That program should: • Provide for 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 appraisals comply with the Agencies’ appraisal regulations and are consistent with supervisory guidance • Ensure 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 2
Appraisal and Evaluation Program (continued) That program should: • Provide for the receipt and review of the appraisal or evaluation report in a timely manner • 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 3
Independence of the Appraisal and Evaluation Program 3 • Institutions should maintain standards of independence for all of its real estate lending activity • Should be isolated from influence by the institution’s loan production staff • Establish reporting lines independent of loan production • 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
Independence of the Appraisal and Evaluation Program • Rural or small institutions may not have the ability to have the staff that affords that type of separation • In those instances the person who is wearing more than one hat can do so as long as that person DOES NOT VOTE or have any say in the loan approval 3
What an Institution Can Do! 4 • Communication between 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. • Institutions may exchange information with appraisers and persons who perform evaluations which may include providing a copy of the sales contract for a purchase WHAT THEY CANNOT DO! – They cannot directly or indirectly coerce, influence, or otherwise encourage an appraiser to misstate or otherwise encourage an appraiser to misrepresent the value of the property.
What and Institution Can Do! • Appraisers’ can be asked 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 4
What an Institution CANNOT DO! • The institution cannot communicate a predetermined, expected, or qualifying estimate of value, or a loan amount or target loan-to-value ratio to an appraiser • Specify a minimum value requirement for the property that is needed to approve the loan or as a condition or ordering the valuation • Conditioning a person’s compensation on loan consummation • Imply that current or future retention of a person’s services depends on the amount at which the appraiser or person performs an evaluation values a property • Exclude a person from consideration for future engagement because a property’s reported market value does not meet a specified threshold 4
What an Institution Must and Must Not Do! • When an institution becomes aware that an appraiser may be violating USPAP or Federal Regulations they must report to the regulatory authorities that unethical conduct • They may not use their obligation to report as a means of threatening to procure an outcome favorable to the cause of the client that promotes a violation 4
Class Discussion Exercise 5 • The subject of the appraisal is a “subject to” proposed renovation which will have a cost of $50, 000 on a property that has a current market value of $200, 000. • The appraisal under a hypothetical condition being “subject to” came in at $225, 000 • There were limited sales with only one that was within ¼ mile in the same subdivision. All other sales of similar quality construction but not on the golf-course like the subject were 5 miles out. • There were two sales of tract homes in the same subdivision just not on the golf course. Because they were in the same subdivision they were used in the appraisal. The quality of construction was not similar to the subject or the sales 5 miles out.
Class Discussion Exercise • The lender has asked for a reconsideration of value • The lender has asked the appraiser to go further out to find similar location of golf course sales and similar quality of construction QUESTION – Is that question out of line or beyond the rights of the lender? 5
Selection of Appraisers or Persons performing Evaluations 5 • Possess requisite education, expertise, and experience to competently complete the assignment • Subject to periodic reviews • Capable of rendering an unbiased opinions • Independent with no direct, indirect, or prospective interest, financial or otherwise, in the property or the transaction • Holds appropriate state certification or license at time of assignment NOTE: Persons performing evaluations may include appraisers, real estate lending professionals, agricultural extension agents, or foresters
6 Interagency Guidelines Part VI • Institutions or their agent must directly select and engage the appraisers (not the borrower) • Appraisal reports have portability and can be transferred between lenders as long as the reports are prepared with the same quality control of the institution accepting the transfer • Independence is compromised with borrowers recommend an appraiser • Institutions should maintain documentation of their quality control and qualifications of the selected appraisers
Approved Appraiser List • Institutions should have appropriate procedures for the development and administration of the approved appraiser list • Procedures should include a process for qualifying the appraiser for initial placement and, • Procedures for monitoring the appraiser’s performance and credentials to assess whether to retain the appraiser on the list 6
Approved Appraiser List • Institutions should have appropriate procedures for the There should be periodic internal review of the use of the approved appraiser list to confirm appropriate procedures and controls exist to ensure independence in the 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 6
Engagement Letters Pg 6 • Institutions should use written engagement letters when ordering appraisals • Engagement letters should include whethere any legal or contractual restrictions on the sharing of the appraisal with other parties • To avoid appearance of any conflict of interest, the work should not commence until the institution has selected and engage a person for the assignment • Engagement letters facilitates communication with the appraiser and documents the expectations of each party to the appraisal assignment
Class Discussion 6 • Communication between client’s and AMCs are generally electronically communicated-AMCs then place the notice out to the region of available competent appraisers • Look at the typical order: • Street Address and City • Borrower Name • Client and address of client • Type of Loan (Conventional-FHA-VA) • Transaction – Purchase or Refinance How can the appraiser begin their Scope of Work to: 1. Determine if they are competent and 2. Develop a plan for solving the problem competently?
Are you competent? • The subject is located in Houston, TX is the assignment in a geographic location you’re familiar with? • Did you pull up a picture of the neighborhood and the subject to make sure the property type was one you’d had experience in appraising? • When the appraiser went inside they found the interior staircase had been sealed off at the top of the stairs to the upstairs area. The upstairs had been converted to an accessory unit making this property a 2 -Bedroom and now being the only 2 -bedroom in the market. Not in Bk. Discussion Q Access to the bathroom had been altered and now the only access is through the main bedroom. The second bedroom can only be accessed by going into the main bedroom, into the bathroom and then exiting into the 2 nd bedroom.
Minimum Appraisal Standards Pg 7 • Conform to generally accepted appraisal standards as evidenced by the USPAP promulgated by the ASB of The Appraisal Foundation unless principles of safe and sound banking require compliance with stricter standards. • What are the ramifications of this first federal appraisal standard? • - Agencies do not allow an appraiser to value any property in which they have an interest direct or indirect • - The appraisal report must contain an opinion of market value as defined in the Agencies’ appraisal regulations at Regulations (FIRREA Title XI, 12 CFR Part 34. 42) • - USPAP requires a statement of certification be part of the appraisal report (a certification statement is a signed statement of ethical obligation) • -Under Agencies’ regulations, results of AVMs are not by itself an appraisal because it doesn’t meet the minimum development under Standard 1 • -Broker Price Opinions are not allowed to be used as primary basis to determine value for purposes of loan origination of a residential mortgage secured by real estate
Minimum Appraisal Standards Pg 8 • Be written and contain sufficient information and analysis to support the institution’s decision to engage in the transaction. • This is in close agreement with Standard 2 that also directs the appraiser to communicate sufficiently. • QUESTION(s) • 1. Do you think that means all written appraisal reports should contain the same level of information? • 2. What drives the amount of information in the report? • Institutions should be aware provisions in Dodd-Frank address appraisal requirements for a higher-risk mortgage to a consumer.
Minimum Appraisal Standards Pg 8 • Analyze and report appropriate deductions and discounts for proposed construction or renovation, partially leased buildings, nonmarket lease terms, and tract developments with unsold units. • Although this appears to be for commercial properties as it requires analysis of deductions and discounts when providing a market value opinion based on demand for real estate in the future it can also be applicable in some residential assignments as well.
Examples of Deductions • A dwelling is partially complete and the builder has died. The property was being built as a “custom built” dwelling. The buyers had their loan fall through. The builder’s company decided to let the loan go back to the lender. • The appraiser is asked to appraise the property “subject to completion” inclusive of the costs of time to complete the subject. This type of assignment would involved not only determining an estimate of cost to cure there would also be a deduction for: • Time to complete • Entrepreneurial profit for the second builder who would have to secure a set of plans to complete and be sure it was worth the builder’s time to finish the project so additional deductions would be made for the percentage of profit the second builder would be willing to accept-that may also mean tearing down anything that may not be according to code as the second builder will now assume full liability for the project
Go to Appendix C –Deductions and Pg 36 Discounts • Other Examples of appraisal assignments that may require deductions are: • Proposed Construction or Renovation • Partially Leased Buildings • Non-market Lease Terms • Tract Developments with Unsold Units • Raw Land • Developed Lots • Attached or Detached Single-family Homes • Condominiums
Pg. 9 Minimum Appraisal Standards • Be based on the definition of market value set forth in the appraisal regulation • Assumes price is not affected by undue stimulus • Value opinions such as “going concern value” or “value in use” may not be used as market value for federally related transactions-it may contain separate opinions of such values as long as they are clearly identified and disclosed • The value needs to consider the real property’s actual physical condition, use, and zoning as of the effective date of the appraiser’s opinion of value,
Minimum Appraisal Standards Pg. 9 • Be based on the definition of market value set forth in the appraisal regulation (continued) • Transactions that involve financing construction or renovation will most often request an appraiser to provide the property’s current market value in “as is” condition, and, as applicable, • Prospective market value upon completion • Prospective market value should be based on current and reasonably expected market conditions
Minimum Appraisal Standards Pg. 9 • Be based on the definition of market value set forth in the appraisal regulation (continued) • Be performed by a state certified or licensed appraisers in accordance with the requirements set forth n the appraisal regulation • Determining competency for a given appraisal assignment institutions must consider an appraiser’s education and experience • Appraisers are expected to be selected for individual assignments based on their competency to perform the appraisal, including knowledge of property type and specific property market
IX. Appraisal Development Pg 10 • Agencies appraisal regulations require appraisals for federally related transactions (FRT)to comply with the requirements in USPAP. • What is an FRT? The term "federally related transaction" is defined to mean any real estate-related financial transaction which: 1) a federal financial institutions regulatory agency or the Resolution Trust Corporation engages in, contracts for, or regulates; and 2) requires the services of an appraiser. Refer to 12 U. S. C. 3350 • Federally related transactions: A credential is required to perform appraisals involving "federally related transactions". Refer to 12 U. S. C. 3342, which provides that a State certified appraiser shall be required for all federally related transactions having a value of one million dollars or more and that 1 -to-4 unit, single family residential appraisals may be performed by State licensed appraisers unless the size and complexity requires a State certified appraiser.
IX. Appraisal Development Pg 10 • …. . an institution is responsible for obtaining an appraisal that contains sufficient information and analysis to support its decision to engage in the transaction. • …. an institution should discuss its needs and expectations for the appraisal with the appraiser • These communications should adhere to the institution’s policies and procedures on independence of the appraiser • Lower cost or speed of delivery time should not drive the appraisal ordering procedures or the appraiser’s determination of the scope of work for supporting a federally related transaction appraisal
Pg 10 IX. Appraisal Development • What must the appraiser do? • Include any approach to value that’s applicable and necessary to the assignment • Disclose rationale for omission of a valuation • Analyze and reconcile information from the approaches to arrive at the market value • Include a discussion on marketing conditions, relevant information on property value trends, demand supply factors • State (with support) the exposure time
IX. Appraisal Development Pg 10 • What must the appraiser do? • Other information might include: • Prevalence and effect of sales and financing concisions • List-to-sale price ratio • Availability of financing • Analysis of property’s sales history • Opinion of the highest and best use (supported with reasoning and rationale) • Disclosure if the property was inspected and if anyone provided significant assistance to the appraiser signing the appraisal report
X. Appraisal Reports Pg. ’s 10 -11 • Standard 2 has a comment that best states what the text is communicating • …. “The form, format, and style of a report are functions of the needs of intended users and appraisers. The substantive content of a report determines its compliance. ” 2012 -2013 Edition of USPAP • Sufficient information should include the disclosure of research and analysis performed, as well as disclosure of the research and analysis typically warranted for the type of appraisal, but omitted, along with rationale for its omission
XI. Transactions that Require Evaluations Pg. 11 In lieu of an appraisal the Agencies’ appraisal regulations permit evaluations on transactions that qualify for the exemptions. Exemptions Include: • Transaction value equal to or less than the appraisal threshold of $250, 000 • 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
Pg. 12 XII. Evaluation Development 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. An appraisal should be ordered in spite of the exemption allowance when: • Loans with combined loan-to-value ratios are in excess of supervisory loan-to-value limits • Atypical properties • Properties outside the institution’s traditional lending market • Transactions involving existing extensions of credit with significant risk to the institution • Borrowers with high risk characteristics
Class Discussion Exercise • Look at the photographs and identify Yes or No if you think an evaluation would be sufficient given its exterior based on where you live
XII. Evaluation Development Pg. 12 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! Broker Price Opinions may not be used as the primary basis to determined the value of a piece of property for loan origination of residential mortgages Institutions should establish policies and procedures for determining appropriate collateral valuation methods for a given transaction which are not based on : i. What renders the highest value, lowest cost, or ii. Fastest turn-around-time
XIII. Evaluation Content Pg. 13 At a minimum the content of an evaluation should contain: • Identify the location of the property • Provide a description of the property – its current and projected use • An opinion of the market value in its actual physical condition, use and zoning designation as of the effective date of the evaluation (date analysis was completed) with any limiting conditions • Description of methods used to confirm the property’s actual physical condition and extent to which an inspection was performed
XIII. Evaluation Content (continued) Pg. 13 At a minimum the content of an evaluation should contain: • Describe the analysis that was performed and supporting information used in valuing property • Describe supplemental information considered when using an analytical method or technological tool • Indicate all source(s) of information used in the analysis to value the property, including: • External data sources Don’t forget to • Property –specific data include information • Evidence of a property inspection about preparer’ • Photos of the property; name, contact • Description of the neighborhood; or information and • Local market conditions signature
XIV. Validity of Appraisals and Evaluations Pg 14 Existing appraisals or evaluations supporting subsequent transactions are allowed in certain circumstances. However, change would prompt a new valuation service. For example: • Length/passage of time • Volatility of the 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 – subject or competing properties • Changes in zoning, building materials, or technology • Environmental contamination
Pg. 15 XV. Reviewing Appraisals and Evaluations • Financial Institutions are required to have in place appropriate policies for reviewing appraisals and evaluations • When it has been determined that the appraisal or evaluation are not well supported they must question and ask the appraiser to address those deficiencies-if they cannot be resolved the institution must obtain an appraisal or evaluation that meets the regulatory requirements for making a credit decision and; • Under the Dodd-Frank Act the institution or its agent (the AMC) must turn the findings of unresolved valuation deficiencies into the state appraisal board to pursue investigation
Pg. 15 XV. Reviewing Appraisals and Evaluations • 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 Pg. 16 Institutions should assess the level of in-house expertise available to review appraisals for; • Complex projects • High-risk transactions, and • Out of market properties It may be necessary to employ additional personnel or engage a third-party to perform the reviews. • Hiring third-party doesn’t negate the obligation of the institution to be responsible for the quality and adequacy of the review process-including qualification standards for reviewers
Third Party Arrangements (section XVI) Pg 18 When an institution hires a third-party to perform certain collateral valuation functions on their behalf they are responsible for understanding and managing the risks associated with the arrangement. Such functions include: • Appraisal and evaluations inclusive of ordering or reviewing appraisals and evaluations • Selecting an Appraiser to perform the appraisal or • Providing Analytical methods or • Providing Technological tools
Depth of Review Pg 16 • Implementation of a risk-focused approach (differentiate between high-and low-risk transactions )to determine depth of the review is needed to ensure appraisals/evaluations contain sufficient information and analysis to support the institution’s decision to engage in the transaction • 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
Depth of Review Pg 16 • The risk approach should consider the process through which the appraisals/evaluation is obtained either directly by the institution or through another financial service institution • The review process should be commensurate with the type of transaction • Commercial Real Estate • 1 -4 Family • Appraisals from Other Financial Services
Pg 16 Depth of Review-Commercial • Commercial real estate involve complexities that doesn’t exist for residential properties such as: • Often designed to house specific business needs that may not be easily adapted by other types of business. For example a Distribution Center with several loading bays has closed its business-the town never housed a distribution center prior to its locating in that area and there is a nearby town that houses several distribution centers nearer the hub of the interstate. What is the Highest and Best Use of a building on that site out of the small town? Where will sales come from? How will adjustments be made? What type of income can be associated with a one-tenant occupancy such as a distribution center? How will the demand factors be identified?
Depth of Review-1 to 4 Family Residential Risk factors for lenders of 1 -4 Family units are: • Debt to Income Ratio • Loan to Value Ratio • Transaction Amount • Demand of Rental Units in the Area • Quantity, Quality and Durability of the Income Pg 17
Depth of Review – Appraisals from other Financial Institutions may use an appraisal prepared by an appraiser engaged directly by another financial services institution, provided the institution determines that: • The appraiser was engaged directly by the other financial services institution • The appraiser had no direct, indirect, or prospective interest, financial or otherwise, in the property or transaction • The financial services institution (not the borrower) ordered the appraisal. Example, an engagement letter should show that the financial services institution, not the borrower, engaged the appraiser. Institutions MUST NOT accept an appraisal that has been readdressed or altered by the appraiser with the intent to conceal the original client. Pg 17
Resolution of Deficiencies Pg 18 Policies need to be established 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 – adequate controls to ensure communications do not result in any coercion or undue influence on the appraiser or person who performed the valuation • 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, prepared by a competent qualified appraiser that complies with SR 3 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 final credit decision
Documentation Pg 18 Policies for documentation for the review of appraisals/evaluations in the credit file. Documentation should include: • Description of the resolution of any appraisal/deficiency • Include reasons for obtaining and relying on a second appraisal/evaluation is required • Ensure an audit trail exists that documents the resolution of noted deficiencies
XVI. Third Party Arrangements Pg 19 • 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 out source any art of the collateral valuation function should not be unduly influenced by any short-term cost savings. • 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.
XVII. Program Compliance Pg 20 • An Institution’s appraisal policies should establish internal controls to promote an effective appraisal program. The compliance process should: • Maintain a system of adequate controls, verification, and testing to ensure that appraisals provide credible market values • Insulate the persons responsible for ascertaining the compliance of the institution’s appraisal function from an influence by loan production staff • Ensure the institution’s practices result in the selection of appraiser’s who perform valuation services with appropriate qualifications and demonstrated competency for the assignment
Pg 20 XVII. Program Compliance (continued) • An Institution’s appraisal policies should establish internal controls to promote an effective appraisal program. The compliance process should: • Establish procedures to test the quality of the appraisal 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 • Report appraisal deficiencies to appropriate internal parties and, if applicable, to external authorities in a timely manner
Pg 21 XVII. Program Compliance (Monitoring Collateral Values) • Under the Agencies appraisal regulations the Agencies reserve the right to require an institution to obtain an appraisal when there are safety and soundness concerns on an existing real estate secured credit • If an institution is not able to demonstrate to examiners information that supports current market value of the collateral and classification of a problem real estate credit the examiner may direct the institution to obtain a new appraisal in order to have sufficient information to understand current market value