January 19, 2007

Kenneth E. Williams, President/CEO

Infinity Federal Credit Union

202 Larrabee Road

Westbrook, ME 04092

Re: Additional Guidance on Using Automated Valuation Methods.

Dear Mr. Williams:

Our office recently responded to your request regarding the
permissibility of automated valuation methods (AVMs) to determine the
value of real property for "junior mortgages." OGC Op. 06-0824 (October
31, 2006). We stated a credit union cannot rely solely on the value an
AVM provides to meet the requirement of a written estimate of value but
an experienced, disinterested individual's review is required. We have
received several inquiries asking about the requirement and believe the
following additional guidance will be helpful. As a preliminary matter,
we note NCUA's appraisal rule is similar but not identical to the
appraisal rules of other federal financial institution regulators and
financial institutions other than credit unions should consult with
their regulators on appraisal matters.

NCUA's appraisal rule exempts certain transactions from the requirement
of a formal appraisal but requires a "written estimate of market value"
for transactions with a value of \$250,000 or less and transactions
involving an existing extension of credit. 12 C.F.R. §722.3(d). The
appraisal rule requires the written estimate of market value be
"performed by an individual" with no interest "in the property" and who
is "qualified and experienced to perform such estimates of value for the
type and amount of credit being considered." *Id*.

A previous legal opinion addressed the human involvement required in the
valuation process for non-federally related transactions. OGC Op.
94-0909 (October 7, 1994). That opinion stated a tax assessment, coupled
with review by a loan officer, meets the valuation requirement in
§722.3(d); the opinion also noted other steps the credit union included
in its valuation process. Similarly, an AVM can be used to meet the
valuation requirement in conjunction with review by a loan officer or an
individual with knowledge, training, and experience in the real estate
market where the loan is being made. A loan officer's review of a tax
assessment or AVM can ensure the written estimate is sufficiently
accurate to protect the credit union's interest throughout the term of
the loan.

The Office of Examination and Insurance asked us to note in this legal
opinion that the agency has also received inquiries about previous
guidance issued by the Federal Financial Institution Examination
Council. In 2005, NCUA and other federal financial regulators issued
joint guidance for managing credit risks associated with home equity
lending that also contained guidance on collateral valuation. *See*,
NCUA Letter to Credit Unions (LCU) 05-CU-07 (May 2005). Among other
subjects, the joint guidance addressed the due diligence an institution
should undertake in evaluating AVM products.

> When AVMs are used to support evaluations or appraisals, the financial
> institution should validate the models on a periodic basis to mitigate
> the potential valuation uncertainty in the model. . . . The validation
> process includes back-testing a representative sample of the
> valuations against market data on actual sales (where sufficient
> information is available).

*Credit Risk Management Guidance for Home Equity Lending*, May 16, 2005,
p. 5 (enclosure to LCU 05-CU-07). The joint guidance recommends credit
unions validate the AVM product and output for each AVM loan.

In addition, NCUA and the other federal financial regulators issued
joint guidance regarding the independence of the appraisal and
evaluation function. See NCUA Letter to Credit Unions (LCU) 05-CU-06
(March 2005). The March 2005 guidance, recommends appraisals and
evaluations be independent from loan production staff[^1] as a sound
business practice. Specifically, the guidance states, "\[c\]redit unions
should ensure no single person has the sole authority to make credit
decisions involving loans on which \[the person\] ordered or reviewed
the appraisal or evaluation. Further, lending officials, officers, and
directors should abstain from any vote or approval involving loans for
which they performed the appraisal or evaluation." LCU 05-CU-06 (March
2005). However, although this is a sound business practice it is not a
regulatory requirement. NCUA recognized in the preamble discussion in
both the proposed and final appraisal rules that, in certain cases, it
may be necessary for credit union loan officers or other officials to
perform appraisals. 55 Fed. Reg. 5614, 5618 (Feb. 16, 1990), 55 Fed.
Reg. 30193, 30206 (July 25, 1990).

Also, please note NCUA's appraisal rule requires individuals who provide
a written estimate of market value to have no direct or indirect
interest in the property. 12 C.F.R. §722.3(d). A direct interest would
arise, for example, if the individual performing the written estimate
owned all or a part of the property being evaluated. An example of an
indirect interest would be a situation in which the individual owns the
property adjacent to the property being evaluated, and the written
estimate could likely affect the individual's property value. *See*,
55 Fed. Reg. 5614 (February 16, 1990).

Credit unions with questions about their particular processes and use of
AVMs in meeting the requirement for a written estimate of market value
can consult their examiner, regional office or state supervisory
authority.

Sincerely,

/S/

Sheila A. Albin

Associate General Counsel

OGC/MIG:bhs

06-1219

cc: Mark A. Treichel, Region I Director

[^1]: The loan production staff consists of those responsible for
    generating loan volume or approving loans, as well as their
    subordinates. This would include any employee whose compensation is
    based on loan volume. Employees responsible for the credit
    administration function or credit risk management are not considered
    loan production staff.