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Here is a copy of the Interagency Appraisal and Evaluation Guidelines that
was published by the FDIC on October 27, 1994
(PDF: 98KB/ 7 pages). Our lender clients should note the requirement
for an "as-is" value on any new construction properties or for any
properties that are subject to renovation. Our professional standards,
USPAP, also require the same
(Statement 10 of USPAP).
There has been some confusion in the lending industry with respect to
appraiser independence. Regulations have been in existence since 1994 with
respect to who is responsible for ordering an appraisal. Basically, the
borrower should not be the party ordering an appraisal for a mortgage
transaction. The lender, if regulated by one of the agencies below, is
responsible for making sure that they engage the appraiser's services
directly. If you are a borrower who needs an appraisal for a mortgage
transaction then you should be sure to have the lender contact the
appraiser themselves rather than placing the order yourself. The various
agencies listed below issued the following letter to remind regulated
lenders of their responsibilities under the existing regulations that have
been in effect since 1993. Also, the joint agencies issued a frequently
asked questions document available here
(PDF: 32KB/ 8pages.).
Office of the Comptroller of the Currency
Board of Governors of the Federal Reserve System
Federal Deposit Insurance Corporation
Office of Thrift Supervision
National Credit Union Administration
INDEPENDENT APPRAISAL AND EVALUATION FUNCTIONS
October 27, 2004
The Office of the Comptroller of the Currency (OCC), the Board of
Governors of the Federal Reserve System (FRB), the Federal Deposit
Insurance Corporation (FDIC), the Office of Thrift Supervision (OTS), and
the National Credit Union Administration (NCUA) (the agencies) are jointly
issuing this statement to address concerns identified during examinations
about the independence of the collateral valuation process. This statement
applies to all real estate-related financial transactions originated or
purchased by a regulated institution for its own portfolio or as assets
held for sale. It provides further clarification of, and should be
reviewed in conjunction with, the agencies' appraisal and real estate
lending regulations1 and the Interagency Appraisal and
Evaluation Guidelines (Guidelines).2
An institution's board of directors is responsible for reviewing and
adopting policies and procedures that establish and maintain an effective,
independent real estate appraisal and evaluation program (program) for all
of its lending functions. The real estate lending functions include
commercial real estate mortgage departments, capital market groups, and
asset securitization and sales units. These independence concerns include
the risk that improperly prepared appraisals may undermine the integrity
of credit underwriting processes. More broadly, an institution's lending
functions should not have undue influence that might compromise the
program's independence.
Selecting Individuals to Perform Appraisals or Evaluations
The Guidelines establish minimum
standards for an effective program, including standards for selecting
individuals who may perform appraisals or evaluations. Among other
considerations, the selection criteria must provide for the independence
of the individual performing the appraisal or evaluation. That is, the
individual has neither a direct nor indirect, interest, financial or
otherwise, in the property or transaction. Institutions also need to
ensure that the individual selected is competent to perform the
assignment. Consideration should be given to the individual's
qualifications, experience, and educational background. Selection occurs
when, based on an oral or written agreement, the individual accepts the
assignment to appraise or evaluate a particular property. Moreover,
appraisal or evaluation development work should not commence until the
institution finalizes the selection process.
The agencies'
appraisal regulations address appraiser independence and require that an
institution, or its agent, directly engage the appraiser. The only
exception to this requirement is that an institution may use an appraisal
prepared for another financial services institution, provided that the
institution determines that the appraisal conforms to the agencies'
appraisal regulations and is otherwise acceptable.
Independence is compromised when an institution uses an appraiser who is
recommended by the borrower or allows the borrower to select the appraiser
from the institution's list of approved appraisers.
Institutions may not use an appraisal prepared by an individual who was
selected or engaged by a borrower. An institution's use of a
borrower-ordered appraisal violates the agencies' appraisal regulations.
Likewise, institutions may not use "readdressed appraisals" -- appraisal
reports that are altered by the appraiser to replace any references to the
original client with the institution's name. Altering an appraisal report
in a manner that conceals the original client or intended users of the
appraisal is misleading and violates the agencies' appraisal regulations
and the Uniform Standards of Professional Appraisal Practice (USPAP).
It is also important to ensure that the program is safeguarded from
internal influence and interference from an institution's loan production
staff. Individuals independent from the loan production area should
oversee the selection of appraisers and individuals providing evaluation
services. The agencies recognize that it may not be possible or practical
for small institutions to separate the collateral valuation and loan
production processes. To ensure independence, loan officials, officers or
directors with the responsibility for ordering appraisals and evaluations
should not have sole approval authority for granting the loan request.
When selecting and engaging individuals, an institution needs to identify
the assignment and order the appropriate appraisal or evaluation, as
discussed in the Guidelines. To foster control and accountability, the
agencies encourage an institution to use written engagement letters when
ordering appraisals, especially for large, complex, or out-of-area
commercial real estate properties. An institution should include a copy of
the written engagement letter in the permanent loan file. An appraiser may
also incorporate an engagement letter in the appraisal report. The
engagement letter confirms that the assignment was made in a manner that
complies with the institution's procedures and the agencies' regulations
and Guidelines.
Appraisal and Evaluation Compliance Reviews
An institution's appraisal and evaluation program must maintain effective
internal controls that promote compliance with program standards and the
agencies' appraisal regulations and Guidelines. Internal controls should,
among other criteria, confirm that appraisals and evaluations are reviewed
by qualified and adequately trained individuals who are not involved in
the loan production processes. The institution's standards for and the
depth of such reviews should reflect the risk of the transaction and the
process through which the appraisal or evaluation is obtained. An
institution should establish more in depth review procedures for
appraisals of large, complex or out-of-area commercial real estate credits
and for those appraisals and evaluations that are ordered by agents of the
institution, such as loan brokers or another financial services
institution.
Even in small institutions when absolute lines of independence cannot be
achieved, effective internal controls should be implemented to ensure that
no single person has sole authority to render credit decisions involving
loans on which they ordered or reviewed the appraisal or evaluation.
Further, lending officials, officers, or directors should abstain from any
vote or approval involving loans for which they performed the appraisal or
evaluation.
Supervisory Approach
Examiners will review an institution's standards of
independence, taking into consideration the size of the institution and
the nature and complexity of its real estate-related activities. Examiners
will consider whether policies and procedures are comprehensive and
applied uniformly to all units engaging in federally related transactions.
If an institution suspects that a licensed or certified appraiser is
violating applicable laws or USPAP, or is otherwise engaging in other
unethical or unprofessional conduct, the institution should make referrals
directly to the appropriate state appraiser regulatory authorities.
Examiners finding evidence of unethical or unprofessional conduct,
including improperly prepared appraisals or evaluations and readdressed
appraisals, should forward their findings and their recommendations to
their supervisory office for appropriate disposition and referral to the
state appraiser regulatory authority, as necessary. Institutions and
institution-affiliated parties, including lenders, staff and fee
appraisers, are reminded that they could be subject to enforcement
actions, which include removal/prohibition orders, cease and desist
orders, and civil money penalties, for violations of the agencies'
appraisal and real estate lending regulations.
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1OCC: 12 CFR 34, subparts C and D; FRB: 12 CFR 208 subpart
E and appendix C, and 12 CFR 225 subpart G; FDIC: 12 CFR 323 and 12 CFR
Part 365; OTS: 12 CFR Part 564, and 12 CFR 560.100, and 12 CFR 560.101;
and NCUA: 12 CFR Part 722.5.
2 The interagency guidelines may be found in: Comptroller's Handbook for
Commercial Real Estate and Construction Lending for OCC; SR letter 94-55
for FRB; FIL-74-94 for FDIC; and Thrift Bulletin 55a for OTS. NCUA was not
a party to the Guidelines; however, the NCUA applies the content to credit
unions, when applicable.
Last Updated 10/28/2003
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