October 31, 2006

Kenneth E. Williams, President/CEO

Infinity Federal Credit Union

202 Larrabee Road

Westbrook, ME 04092

Re: Use of Automated Valuation Methods.

Dear Mr. Williams:

You have asked if it is permissible for credit unions to use automated
valuation methods (AVMs) to determine the value of real property for
"junior mortgages." NCUA's appraisal rule requires an appraisal by a
state-certified or licensed appraiser for [all]{.underline} real
estate-related financial transactions, with nine, specific exceptions.
The appraisal rule does not except loans from its requirements based on
the seniority of the mortgage. Two transactions, while excepted from the
formal appraisal requirement, nevertheless require "a written estimate
of market value." While an AVM cannot be used in place of an appraisal
by a state-certified or licensed appraiser, we think, subject to the
cautions noted below, an AVM may be useful in meeting the requirement
for a "written estimate of value."

Infinity Federal Credit Union (Infinity) offers mortgage loan products
that permit it to take a second lien on the property offered as
collateral, require no closing costs, and are processed within 24 hours.
Infinity uses an AVM combined with ValueGuard Insurance (ValueGuard)
instead of an appraisal to determine the value of the real property for
these loans. An AVM is a computerized property value system using
comparable or repeat sales indexes to determine property value and,
generally, does not include an onsite examination of the property. Our
understanding is ValueGuard insures automated values up to \$250,000,
covering a lender for losses up to \$100,000 for any difference between
the AVM report and the actual appraised value of a property. Integrated
Loan Services, available at [http://www.ils.com](http://www.ils.com/)
(as of September 26, 2006). One exception to the requirement in the
appraisal rule for a formal appraisal is for transactions of \$250,000
or less but we understand Infinity does not limit its second-lien
mortgages to \$250,000 or less.

The Financial Institutions Reform, Recovery, and Enforcement Act of 1989
requires a real estate appraisal in any federally related transaction,
subject to the rules of federal financial institution regulators. Pub.
L. 101-73, §1110, 103 Stat. 514 (1989); 12 U.S.C. §3339. A federally
related transaction is any real estate-related financial transaction
entered into by any federally insured credit union that requires an
appraiser's services. 12 C.F.R. §722.2(e). When an appraisal is
required, a state certified or licensed appraiser must perform it. 12
C.F.R. §722.3(a).

Under NCUA regulations, certain real estate-related financial
transactions do not require an appraisal performed by a state certified
or licensed appraiser. The exception most likely to apply to second
mortgages is the exception for transactions with a value of \$250,000 or
less. 12 C.F.R. §722.3(a)(1). Although a formal appraisal is not
required, transactions with a value of \$250,000 or less must still be
supported by a "written estimate of market value." 12 C.F.R. §722.3(d).
The other exception requiring a written estimate of value is essentially
one for re-financings with no additional credit extension. 12 C.F.R.
§722.3(a)(5). The appraisal rule requires that an individual who has no
interest in the property and is qualified and experienced for the type
and amount of the credit being considered must perform the written
estimate of market value. 12 C.F.R. §722.3(d).

While AVM technology can augment the appraisal process, it is not a
substitute for an appraisal or independent valuation. An AVM obviously
does not meet the requirement for an appraisal by a state-certified or
licensed appraiser, and our opinion is a credit union cannot rely solely
on the value an AVM provides to meet the requirement of a written
estimate of value. The appraisal rule contemplates the involvement of an
experienced, disinterested individual who prepares the written estimate
of value.

AVMs can be useful to qualified professionals who understand the
limitations of an AVM and can verify its consistency with the
professionals' own knowledge of the market where a particular property
is located. AVMs, for example, those based only on tax records or
comparable sales, may not reflect recent changes or events affecting a
particular market and, of course, do not reflect the physical condition
of a particular property.

Insurance, such as that provided by ValueGuard, may be helpful and
provide protection against inaccurate AVMs but, as with any insurance
product, credit unions need to understand the terms and limitations of
coverage. Further, credit unions must still meet the appraisal rule's
requirements regardless of whether they have purchased insurance such as
ValueGuard.

Sincerely,

/S/

Sheila A. Albin

Associate General Counsel

OGC/MIG/SAA:bhs/06-0824

cc: Mark A. Treichel, Region I Director