When it comes to appraisal regulations in 2018, we know you probably have questions. Whether you’re new to appraisals or just need a refresher on the finer points outlined by common requirements, there’s a lot to keep up with when it comes to appraisal regulation and guidance.
To help you make sense of the details, we’ve compiled a list of frequently asked questions with help from the OCC to help you review appraisal regulations like:
- Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989
- Real estate lending standards
- December 2010 Interagency Appraisal and Evaluation Guidelines
- March 2016 Interagency Advisory on the Use of Evaluations in Real Estate-Related Financial Transactions
Get the latest on appraisal regulations in 2018 — we’ll dive into appraisal and evaluation programs specifically, to give you insight into the details that matter.
Why do banks and credit unions need to establish the market value of real properties at all?
Financial institutions MUST rely on programs for valuing property to ensure one thing: that they’re engaging in practices that build a secure environment that is compliant with agency appraisal regulations.
Any financial institution’s business plan should involve a large part of lending secured by real estate, and with a poorly managed real estate lending program, financial institutions could find themselves in trouble quickly. From higher loan losses and reduced profitability all the way to bank failures, past deficiencies on a large scale have caused Congress to adopt measures — such as the Title XI and its subsequent provisions like Dodd-Frank in the post-2008 financial crisis world — to prevent future problems.
Which regulations apply to appraisal and evaluation programs?
The Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Board), and the Federal Deposit Insurance Corporation (FDIC), — also referred to as the agencies — have issued a number of appraisal regulations: Title XI for the performance of real estate appraisals in connection with FRTs, the HPML Appraisal Rule and the IFR on Valuation Independence as it applies specifically to residential mortgage loans secured by a consumer’s principal dwelling, and the real estate lending standards that relate to section 304 of the Federal Deposit Improvement Act of 1991, which establish appropriate limits and standards for extensions of credit that are secured by real estate.
Do all types of transactions require an appraisal?
Under Title XI, all Federally Related Transactions (FRTs) are required to have a state-certified or state-licensed appraisal that is consistent with safe banking practices (with few exceptions) and apply to both commercial and residential transactions. The only difference: what is required for an appraisal for residential transactions, commercial real estate transactions, and qualifying business loans can be very different.
What is the purpose of the Valuation Guidelines, and do all financial institutions’ valuation programs have to meet every aspect of the Valuation Guidelines?
The Valuation Guidelines were designed to provide a framework to assist financial institutions as they seek to comply with the agencies’ appraisal regulations and real estate lending standards, and are not regulations or requirements of any kind.
To that end, financial institutions should form a valuation that meets their needs based on their risk profile, real estate lending activities, and business model, while still complying with the appropriate laws.
Do all appraisals and evaluations need to be reviewed?
Confirming that all appraisals and evaluations comply with federal regulations and internal policies is a best practice prior to all final credit decisions for any financial institution. Another thing banks and credit unions should keep in mind is that all reviewers for a property or transaction must be and have no interest in the outcome of a property or transaction. The scope of work and level of due diligence in reviewing appraisals should be commensurate with the risk of the transaction. For instance, valuations supporting low-risk transactions can be less lengthy than higher risk transaction like a large acquisition, development, and construction (ADC) project.
Regulations and requirements mean more time, money, and resources. Are there any cost-effective options smaller financial institution can explore to meet the required standards for independence?
Smaller financial institutions are not exempt from meeting the standards for independence in appraisal regulations. However, they can practice practical safeguards that allow them to achieve compliance, such as having loan offers or other staff review transactions, as long as they are certified to do so.
Smaller financial institutions should also consider outsourcing their appraisal duties to an AMC to better manage their available resources and still maintain compliance. Not sure what to look for in an AMC? This buyer’s guide can help.
While this list is in no way exhaustive, we hope it helped answer a few of your most important questions regarding appraisal and evaluation programs. Have more in-depth questions about how this relates specifically to your financial institution? We’d be happy to help. And don’t forget — check back soon for Part 2 or sign up for our newsletter to get news delivered directly to your inbox.