> **\[OCC-4810-33-P 20%\]**

**\[FRB-6210-01-P 20%\]**

**\[FDIC-6714-01-P 20%\]**

**\[OTS-6720-01-P 20%\]**

**\[NCUA-7535-01 P 20%\]**

**DEPARTMENT OF THE TREASURY**

**Office of the Comptroller of the Currency**

**Docket ID \[OCC-2008-0021\]**

**FEDERAL RESERVE SYSTEM**

**Docket No. \[OP-1338\]**

**FEDERAL DEPOSIT INSURANCE CORPORATION**

**DEPARTMENT OF THE TREASURY**

**Office of Thrift Supervision**

**Docket ID \[OTS-2008-0012\]**

**NATIONAL CREDIT UNION ADMINISTRATION**

**RIN 3133-AD38**

**Proposed Interagency Appraisal and Evaluation Guidelines**

**AGENCIES:** Office of the Comptroller of the Currency, Treasury (OCC);
Board of Governors of the Federal Reserve System (FRB); Federal Deposit
Insurance Corporation (FDIC); Office of Thrift Supervision, Treasury
(OTS); and National Credit Union Administration (NCUA).

**ACTION:** Notice with request for comment.

**SUMMARY:** The OCC, FRB, FDIC, OTS, and NCUA (the Agencies), request
comment on the proposed Interagency Appraisal and Evaluation Guidelines
(proposed Guidelines). The proposed Guidelines, which would supersede
the 1994 Interagency Appraisal and Evaluation Guidelines (1994
Guidelines), reflect revisions to the Uniform Standards of Professional
Appraisal Practice (USPAP) and the evolution of collateral valuation
practices, such as the use of automated valuation models (AVMs). The
proposed Guidelines also incorporate refinements made by the Agencies to
the supervision of regulated institutions' appraisal and evaluation
programs since 1994 and reflect the participation of the NCUA, which was
not a party to the 1994 Guidelines. The proposed Guidelines are intended
to clarify the Agencies' real estate appraisal regulations and promote a
safe and sound real estate collateral valuation program.

**DATES:** Comments must be submitted on or before \[INSERT DATE 60 DAYS
AFTER PUBLICATION IN THE FEDERAL REGISTER\].

**ADDRESSES:** Comments should be directed to:

**[OCC]{.underline}:** You may submit comments by any of the following
methods:

-   **E-mail:** regs.comments@occ.treas.gov.

-   **Fax:** (202) 874-4448.

-   **Mail:** Office of the Comptroller of the Currency, 250 E Street,
    S.W., Mail Stop 1-5, Washington, DC 20219.

-   **Hand Delivery/Courier:** 250 E Street, SW., Attn: Public
    Information Room, Mail Stop 1-5, Washington, DC 20219.

*Instructions*: You must include "OCC" as the agency name and "Docket ID
OCC-2008-0021" in your comment. In general, OCC will enter all comments
received into the docket without change, including any business or
personal information that you provide such as name and address
information, e-mail addresses, or phone numbers. Comments, including
attachments and other supporting materials, received are part of the
public record and subject to public disclosure. Do not enclose any
information in your comment or supporting materials that you consider
confidential or inappropriate for public disclosure.

> You may review comments and other related materials by any of the
> following methods:

-   **Viewing Comments Personally:** You may personally inspect and
    photocopy comments at the OCC\'s Public Information Room, 250 E
    Street, SW., Washington, DC. For security reasons, the OCC requires
    that visitors make an appointment to inspect comments. You may do so
    by calling (202) 874-5043.  Upon arrival, visitors will be
    required to present valid government-issued photo identification and
    submit to security screening in order to inspect and photocopy
    comments.

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-   **Docket:** You may also view or request available background
    documents and project summaries using the methods described above.

**[FRB]{.underline}:** You may submit comments, identified by Docket No.
OP-1338, by any of the following methods:

-   Agency Web Site: http://www.federalreserve.gov. Follow the
    instructions for submitting comments at
    http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.

-   Federal eRulemaking Portal: http://www.regulations.gov. Follow the
    instructions for submitting comments.

-   E-mail: regs.comments@federalreserve.gov. Include the docket number
    in the subject line of the message.

-   FAX: 202/452-3819 or 202/452-3102.

-   Mail: Jennifer J. Johnson, Secretary, Board of Governors of the
    Federal Reserve System, 20^th ^Street and Constitution Avenue, NW.,
    Washington, DC 20551.

All public comments are available from the FRB's Web site at
www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as submitted,
unless modified for technical reasons. Accordingly, your comments will
not be edited to remove any identifying or contact information. Public
comments may also be viewed in electronic or paper form in Room MP-500
of the FRB's Martin Building (20th and C Streets, NW) between 9 a.m. and
5 p.m. on weekdays.

[**FDIC**:]{.underline}  You may submit comments by any of the following
methods:

        Agency Web Site: 
<http://www.fdic.gov/regulations/laws/federal>.  Follow instructions for
submitting comments on the Agency Web Site. 

        E-mail:  <Comments@FDIC.gov>.  Include "Proposed Interagency
Appraisal and Evaluation Guidelines\" in the subject line of the
message.

        Mail:  Robert E. Feldman, Executive Secretary, Attention:
Comments, Federal Deposit Insurance Corporation, 550 17th Street, NW.,
Washington, DC 20429.

        Hand Delivery/Courier: Guard station at the rear of the 550 17th
Street Building (located on F Street) on business days between 7 a.m.
and 5 p.m. (EST).

        Federal eRulemaking Portal:
[http://www.regulations.gov](http://www.regulations.gov/).  Follow the
instructions for submitting comments.

Public Inspection: All comments received will be posted without change
to <http://www.fdic.gov/regulations/laws/federal> including any personal
information provided.  Comments may be inspected and photocopied in the
FDIC Public Information Center, 3501 North Fairfax Drive, Room E-1002,
Arlington, VA 22226, between 9 a.m. and 5 p.m. (EST) on business days. 
Paper copies of public comments may be ordered from the Public
Information Center by telephone at (877) 275-3342 or (703) 562-2200.

**[OTS]{.underline}:** You may submit comments, identified by docket
number ID OTS-2008-0012, by any of the following methods:

-   E-mail: regs.comments@ots.treas.gov. Please include ID OTS-2008-0012
    in the subject line of the message and include your name and
    telephone number in the message.

-   Fax: (202) 906-6518.

-   Mail: Regulation Comments, Chief Counsel's Office, Office of Thrift
    Supervision, 1700 G Street, NW., Washington, DC 20552, Attention: ID
    OTS-2008-0012.

-   Hand Delivery/Courier: Guard's Desk, East Lobby Entrance, 1700 G
    Street, NW., from 9 a.m. to 4 p.m. on business days, Attention:
    Regulation Comments, Chief Counsel's Office, Attention: ID
    OTS-2008-0012.

*Instructions*: All submissions received must include the agency name
and docket number for this notice. All comments received will be posted
without change, including any personal information provided. Comments
including attachments and other supporting materials received are part
of the public record and subject to public disclosure. Do not enclose
any information in your comments or supporting materials that you
consider confidential or inappropriate for public disclosure.

-   Viewing Comments On-Site: You may inspect comments at the Public
    Reading Room, 1700 G Street, NW., by appointment. To make an
    appointment for access, call (202) 906-5922, send an e-mail to
    <public.info@ots.treas.gov>, or send a facsimile transmission
    to (202) 906-6518. (Prior notice identifying the materials you will
    be requesting will assist us in serving you.) We schedule
    appointments on business days between 10:00 a.m. and 4:00 p.m. In
    most cases, appointments will be available the next business day
    following the date we receive a request.

**[NCUA]{.underline}**: You may submit comments by any of the following
methods (**Please send comments by one method only**):

-   **Federal eRulemaking Portal:**
    [http://www.regulations.gov]{.underline}. Follow the instructions
    for submitting comments.

-   **NCUA Web Site:**
    <http://www.ncua.gov/RegulationsOpinionsLaws/proposedregs/proposedregs.html>
    Follow the instructions for submitting comments.

-   **E-mail:** Address to <regcomments@ncua.gov>. Include \"\[Your
    name\] Comments on Proposed Interagency Appraisal and Evaluation
    Guidelines,\" in the e-mail subject line.

-   **Fax:** (703) 518-6319. Use the subject line described above for
    e-mail.

-   **Mail:** Address to Mary F. Rupp, Secretary of the Board, National
    Credit Union Administration, 1775 Duke Street, Alexandria, Virginia
    22314-3428.

-   **Hand Delivery/Courier:** Same as mail address. 

Public inspection: All public comments are available on the agency's
website at
<http://www.ncua.gov/RegulationsOpinionsLaws/proposed_regs/comments.html>
as submitted, except as may not be possible for technical reasons.
Public comments will not be edited to remove any identifying or contact
information. Paper copies of comments may be inspected in NCUA's law
library, at 1775 Duke Street, Alexandria, Virginia 22314, by appointment
weekdays between 9:00 a.m. and 3:00 p.m. To make an appointment, call
(703) 518-6546 or send an e-mail to \_OGC Mail \@ncua.gov.

**FOR FURTHER INFORMATION CONTACT:**

**OCC**: Doreen Ledbetter, Credit Risk Specialist, or Vance S. Price,
Director, Credit and Market Risk Division, (202) 874-5170; Christopher
Manthey, Counsel, Bank Activities and Structure, or Mitchell Plave,
Counsel, Legislative and Regulatory Activities, (202) 874-5300.

**FRB**: Virginia M. Gibbs, Senior Supervisory Financial Analyst, (202)
452-2521; or Sabeth I. Siddique, Assistant Director, (202) 452-3861,
Division of Banking Supervision and Regulation; or Walter McEwen, Senior
Counsel, (202) 452-3321, or Benjamin W. McDonough, Senior Attorney,
(202) 452-2036, Legal Division. For users of Telecommunications Device
for the Deaf ("TDD") only, contact (202) 263-4869.

**FDIC**: Beverlea S. Gardner, Senior Examination Specialist, Division
of Supervision and Consumer Protection, (202) 898-6790, or Janet V.
Norcom, Counsel, Legal Division, (202) 898-8886.

**OTS**: Debbie Merkle, Project Manager, Credit Risk, Risk Management,
(202) 906-5688, or Marvin Shaw, Senior Attorney, Regulations and
Legislation Division (202) 906-6639.

**NCUA**: Moisette Green, Staff Attorney, (703) 518-6540 or Robert C.
Leonard, Program Officer, (703) 518-6396.

**SUPPLEMENTARY INFORMATION:**

I.  **Background**

Title XI of the Financial Institutions Reform, Recovery, and Enforcement
Act of 1989 (FIRREA)[^1] requires each Agency to prescribe appropriate
standards for the performance of real estate appraisals in connection
with "federally related transactions,"[^2] which are defined as those
real estate-related financial transactions that an Agency engages in,
contracts for, or regulates and that require the services of an
appraiser.[^3] These rules must require, at a minimum, that real estate
appraisals be performed in accordance with generally accepted uniform
appraisal standards as evidenced by the appraisal standards promulgated
by the Appraisal Standards Board of The Appraisal Foundation (Appraisal
Standards Board), and that such appraisals be in writing.[^4] Such
appraisals are to be performed by an individual whose competency has
been demonstrated and whose professional conduct is subject to effective
state supervision. An Agency may require compliance with additional
appraisal standards if it makes a determination that such additional
standards are required in order to properly carry out its statutory
responsibilities.[^5] Each of the Agencies has adopted additional
appraisal standards.[^6]

The OCC, FRB, FDIC, and OTS jointly issued the 1994 Guidelines to
provide further guidance to regulated financial institutions on prudent
appraisal and evaluation policies, procedures, practices, and
standards.[^7] The 1994 Guidelines address supervisory matters relating
to real estate appraisals and evaluations used to support real
estate-related financial transactions and provide guidance to both
examiners and regulated institutions about prudent appraisal and
evaluation programs. In particular, the 1994 Guidelines provide
clarification of expectations for written evaluations of real estate
collateral in certain transactions that do not require the services of
an appraiser under the Agencies\' regulations.  

Over the years, the Agencies have issued several additional supervisory
guidance documents to promote sound practices in regulated institutions'
appraisal and evaluation programs, including independence in the
appraisal and evaluation functions, the appraisal of residential tract
development, and compliance with revisions to USPAP.[^8]

Since the issuance of the 1994 Guidelines, there have been some
significant developments concerning appraisals and advancements in
regulated institutions' collateral valuation practices. Advances in
technology, for example, have prompted increased use of AVMs to derive
values for residential transactions that do not require the services of
an appraiser under the appraisal regulations. Further, in 2006, the
Appraisal Standards Board issued significant revisions to USPAP,
adopting the USPAP Scope of Work Rule and deleting the USPAP Departure
Rule. For these reasons, the Agencies are issuing the proposed
Guidelines to provide further clarification of supervisory expectations
for regulated institutions' appraisal and evaluation programs.

Independent and reliable collateral valuations are core to a regulated
institution\'s real estate credit decisions. Therefore, the proposed
Guidelines are intended to re-enforce the importance of sound collateral
valuation practices that the Agencies\' appraisal regulations mandate.
The Agencies believe that the proposed Guidelines further clarify their
long standing expectations for an institution\'s appraisal and
evaluation program, which are necessary to promote safe and sound real
estate lending activity.

**II. Principal Elements of the Guidelines**

The proposed Guidelines provide guidance on elements of a safe and sound
appraisal and evaluation program, including the Agencies' supervisory
expectations concerning the independence of an institution's appraisal
and evaluation program from influence by the borrower or the loan
production staff, the competence of individuals who perform appraisals
and evaluations, standards for the development and reporting of
appraisals and evaluations, and an institution's collateral review
function. The proposed Guidelines also provide guidance and expectations
for risk management principles and control measures for institutions'
appraisal and evaluation programs.

The proposed Guidelines would supersede the 1994 Guidelines and reflect
guidance issued by the Agencies over the past several years on
independence of the appraisal and evaluation program, appraisals for
residential tract developments, and the USPAP Scope of Work Rule. The
core principles of the 1994 Guidelines have been retained. Further, the
format of the 1994 Guidelines has been retained in the proposed
Guidelines to make it easier for regulated institutions and examiners to
find the material that has not been revised.

The following discussion summarizes the proposed major revisions to the
1994 Guidelines.

**Independence of the Appraisal and Evaluation Program.** The proposed
Guidelines emphasize the importance of the independence of an
institution's appraisal and evaluation program from influence by the
loan production process or borrower. For small and rural institutions,
where complete separation of the collateral valuation function and the
loan production process may not be possible, the proposed Guidelines
discuss prudent minimal safeguards and clarify that lending staff should
abstain from the approval of the loan on which they perform, order, or
review an appraisal or evaluation.

**Minimum Appraisal Standards.** The proposed Guidelines provide further
clarification of the five appraisal standards in the Agencies' appraisal
regulations, as follows. First, the Agencies' appraisal regulations
provide that USPAP sets the minimum appraisal standards for federally
related transactions. The proposed Guidelines provide clarification of
those appraisal standards above and beyond USPAP that are required by
the Agencies' appraisal regulations. Second, the Agencies' appraisal
regulations require that appraisals for federally related transactions
be written and contain sufficient information to support the
institution's credit decision. The proposed Guidelines reflect an
expanded discussion of the Agencies' expectations for the content of
appraisals that will satisfy this requirement. Third, the Agencies'
appraisal regulations require that appraisals analyze and report
deductions and discounts for a loan to finance proposed construction or
renovation, partially leased buildings, non-market lease terms, and
tract developments with unsold units. The proposed Guidelines provide
more detail on the application of this standard by property type, both
commercial and residential. Fourth, the Agencies' appraisal regulations
require that appraisals be based upon the regulatory definition of
market value. The discussion of market value in the 1994 Guidelines has
been expanded in the proposed Guidelines to link the appraisal
regulatory definition of market value with the definition of value in
the Agencies' real estate lending standards guidelines.[^9] The proposed
Guidelines also address the definition of "market value" in an appraisal
for a loan to finance a development and construction real estate
project. Fifth, the Agencies' appraisal regulations require that an
institution use the services of a state-certified or licensed appraiser.
The proposed Guidelines remind institutions that an appraiser's
credential is not the sole determination of competency and that
institutions should consider the appraiser's education and experience to
assess his or her competency for a given appraisal assignment. Further,
the proposed Guidelines remind institutions to convey to an appraiser
that the requirements of the Agencies' minimum appraisal standards are
considered assignment conditions for an appraiser under USPAP.

**Appraisal Development and Appraisal Reports.** These sections were
revised to reflect revisions to USPAP that the Appraisal Standards Board
implemented in July 2006 to eliminate the USPAP Departure Rule and to
adopt the USPAP Scope of Work Rule. The proposed Guidelines incorporate
the guidance provided by the Agencies in the June 2006 Interagency
Statement on the 2006 Revisions to USPAP.[^10] The proposed Guidelines
remind institutions that while the appraiser is responsible for
complying with USPAP and its Scope of Work Rule, the institution is
responsible for complying with the Agencies' appraisal regulations and
should discuss its needs and expectations for the appraisal with the
appraiser. Further, the discussion on appraisal reports no longer refers
to specific USPAP reporting formats (that is, self-contained, summary,
and restricted appraisal reports). Rather, the discussion addresses the
level and adequacy of information and analysis in the report that is
necessary to comply with both USPAP and the regulatory appraisal
requirement to provide sufficient information to support the
institution's credit decision. Reference to the revised USPAP
terminology has been included in a new proposed Appendix C, which
provides a glossary of terms. The Agencies understand that the Appraisal
Standards Board may consider revisions to the USPAP reporting formats so
this discussion was worded broadly to allow for possible USPAP changes.

**Evaluation Content**. Under the Agencies' appraisal regulations, an
institution may obtain or perform an evaluation of real property
collateral in lieu of an appraisal for transactions that qualify for
certain appraisal exemptions. This section describes the Agencies'
expectations on the information and analysis that should be included in
an evaluation. An institution should obtain more detailed evaluations
for higher risk real estate-related financial transactions or as its
portfolio risk increases. Further, this section was revised to reflect
the inclusion of a new appendix (Appendix B) in the proposed Guidelines
on evaluation alternatives. This new appendix provides a discussion of
appropriate practices and controls regarding an institution's use of
AVMs and tax assessment valuations as evaluation alternatives. This
section also addresses the Agencies' expectations for institutions to
establish a process and procedures for determining the appropriate use
of evaluation alternatives for a given transaction or lending activity,
considering associated risk.

**Reviewing Appraisals and Evaluations**. This is a new section in the
proposed Guidelines and is based on material in the Program Compliance
section in the 1994 Guidelines, the 2003 Interagency Statement on
Independent Appraisal and Evaluation Functions, and a related statement
issued by the Agencies in 2005 addressing frequently asked
questions.[^11] While the proposed Guidelines retain a Program
Compliance section concerning effective internal controls, the new
section emphasizes the importance of an institution's review function to
promote quality appraisals and evaluations. The Agencies expect
institutions to maintain a robust review process for ensuring that
appraisals and evaluations support their credit decisions. The program
should provide for an increasingly comprehensive review of appraisals
supporting transactions that pose higher credit risk to the institution.
This expectation for a risk-based program recognizes the importance of
the collateral valuation process to promoting sound credit underwriting
decisions. As explained in the proposed Guidelines, the scope of the
review will depend upon the type and risk of the transaction and the
process through which the appraisal or evaluation is obtained. The
proposed Guidelines provide guidance on the review process, including
documentation, independence, review procedures, and reviewers'
qualifications. The proposed Guidelines also indicate that an
institution with prior approval from its primary regulator may employ
various techniques, such as automated tools or sampling methods, for
performing pre-funding reviews of appraisals or evaluations supporting
lower risk single-family residential mortgages. Finally, the proposed
Guidelines outline expectations for a compliance program to establish
effective internal controls that promote compliance with the Agencies'
appraisal regulations, supervisory guidelines and institutions' internal
policies.

**Portfolio Monitoring and Updating Collateral Valuations.** This
section was revised to emphasize the importance of sound portfolio
monitoring principles that set forth criteria for when an institution
should replace or update collateral valuations for existing real estate
loans. In establishing criteria, an institution should consider the
appropriateness of the valuation tool or methodology, the age of the
original appraisal or evaluation, property type, current market
conditions, and current use of the property. Further, the proposed
Guidelines remind institutions that as the reliance on real estate
becomes more important on an existing credit, there is a need for timely
information to assess the value of the real estate collateral and the
associated risk to the institution. This section also explains that
examiners have the right to require an institution to obtain an
appraisal or evaluation when there are safety and soundness concerns on
an existing real estate secured credit.

**Appraisal Exemptions (Appendix A)**. This new appendix provides
further clarification on real estate-related financial transactions
exempted from the Agencies' appraisal regulations. This discussion is
based on the preamble to the Agencies' 1994 regulations and responds to
the questions the Agencies have received over the years concerning
exemptions to their appraisal requirements.

**Evaluation Alternatives (Appendix B)**. This new appendix reflects the
discussion on the use of AVMs and tax assessment valuations as
evaluation alternatives in the Interagency Credit Risk Management
Guidance for Home Equity Lending.[^12] Appendix B provides guidance on
the process for selecting and validating a model. The appendix also
provides a framework, in the form of a set of questions, that
institutions may consider for determining when an AVM may be an
acceptable evaluation alternative for a given transaction.

**Glossary of Terms (Appendix C)**. The proposed Guidelines contain a
new glossary of various terms used in the Guidelines and appraisal
practice to aid institutions in understanding the Guidelines. Many of
these terms are already defined in the Agencies' appraisal regulations
and in USPAP.

**III. Request for Comment**

The Agencies are requesting public comment on all aspects of the
proposed Guidelines. In particular, the Agencies request comment on the
clarity of the proposed Guidelines regarding the interpretations of the
thirteen appraisal exemptions discussed in Appendix A.[^13] The Agencies
further request comment on the appropriateness of risk management
expectations and controls in the evaluation process including those
discussed in Appendix B of the proposed Guidelines. The Agencies also
seek comment on the expectations in the proposed Guidelines on reviewing
appraisals and evaluations. In particular, the Agencies seek specific
comment on whether the use of automated tools or sampling methods that
the proposed Guidelines allow for reviews of appraisals or evaluations
supporting lower risk single-family residential mortgages is appropriate
for other low risk mortgage transactions and whether appropriate
constraints can be placed on the use of these tools and methods to
ensure the overall integrity of the institution's appraisal process for
those low risk mortgage transactions.

The text of the proposed Guidelines, entitled proposed 2008 Interagency
Appraisal and

Evaluation Guidelines, is as follows:

Purpose

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 these Interagency Appraisal and Evaluation Guidelines
(Guidelines), which supersede the 1994 Interagency Appraisal and
Evaluation Guidelines. These Guidelines address supervisory matters
relating to real estate appraisals and evaluations used to support real
estate-related financial transactions.[^14] Further, these Guidelines
provide federally regulated institutions and examiners clarification on
the Agencies' expectations for prudent appraisal and evaluation
policies, procedures, and practices.

Background

Title XI of the Financial Institutions Reform, Recovery, and Enforcement
Act of 1989 (FIRREA)[^15] requires each Agency to prescribe appropriate
standards for the performance of real estate appraisals in connection
with "federally related transactions,"[^16] which are defined as those
real estate-related financial transactions that an Agency engages in,
contracts for, or regulates and that require the services of an
appraiser.[^17] The Agencies' appraisal regulations must require, at a
minimum, that real estate appraisals be performed in accordance with
generally accepted uniform appraisal standards as evidenced by the
appraisal standards promulgated by the Appraisal Standards Board, and
that such appraisals be in writing.[^18] An Agency may require
compliance with additional appraisal standards if it makes a
determination that such additional standards are required in order to
properly carry out its statutory responsibilities.[^19] Each of the
Agencies has adopted additional appraisal standards.[^20]

The Agencies' real estate lending regulations and guidelines,[^21]
issued pursuant to section 304 of the Federal Deposit Insurance
Corporation Improvement Act of 1991 (FDICIA), require each institution
to adopt and maintain written real estate lending policies that are
consistent with principles of safety and soundness and that reflect
consideration of the real estate lending guidelines issued as an
appendix to the regulations.[^22] The real estate lending guidelines
state that an institution's real estate lending program should include
an appropriate real estate appraisal and evaluation program.

Supervisory Policy

An institution's real estate appraisal and evaluation policies and
procedures will be reviewed as part of the examination of the
institution's overall real estate-related activities. Examiners will
consider the institution's size and nature of its real estate-related
activities when assessing the appropriateness of its program.

When analyzing individual transactions, examiners will review an
appraisal or evaluation to determine whether the methods, assumptions,
and value conclusions are reasonable. Examiners also determine whether
the appraisal or evaluation complies with the Agencies' appraisal
regulations and supervisory guidelines as well as the institution's
policies. Examiners will review the steps taken by an institution to
ensure that the persons who perform the institution's appraisals and
evaluations are qualified and are not subject to conflicts of interest.
Institutions that fail to maintain a sound appraisal and evaluation
program or to comply with the Agencies' appraisal regulations and
supervisory guidelines will be cited in supervisory letters or
examination reports and may be criticized for unsafe and unsound banking
practices. Deficiencies will require appropriate corrective action.

Appraisal and Evaluation Program

An institution's board of directors or its designated committee is
responsible for adopting and reviewing policies and procedures that
establish an effective real estate appraisal and evaluation program. The
program should:

-   Provide for the independence of the persons ordering, performing,
    and reviewing appraisals or evaluations;

-   Establish selection criteria and procedures to evaluate and monitor
    the ongoing performance of persons who perform appraisals or
    evaluations;

-   Ensure that appraisals contain sufficient information to support the
    credit decision;

-   Maintain criteria for content and appropriate use of evaluations;

-   Provide for the receipt and review of the appraisal or evaluation
    report in a timely manner to facilitate the credit decision;

-   Develop criteria to assess the validity of existing appraisals or
    evaluations to support subsequent transactions;

-   Implement internal controls that promote compliance with these
    program standards; and

-   Establish criteria for obtaining appraisals or evaluations for
    transactions that are not otherwise covered by the appraisal
    requirements of the Agencies' appraisal regulations.

    Independence of the Appraisal and Evaluation Program

An institution should maintain standards of independence as part of an
effective collateral valuation program (both appraisal and evaluation
functions) for all of its real estate lending activity. The collateral
valuation program is an integral component of the credit underwriting
process and, therefore, should be isolated from influence by the
institution's loan production staff.  An institution should establish
reporting lines independent of loan production for staff that order,
accept, and review appraisals and evaluations.

Persons who perform appraisals must be independent of the loan
production and collection processes and have no direct or indirect
interest, financial or otherwise, in the property or transaction. These
standards of independence also should apply to persons who perform
evaluations. While the information provided to the appraiser by the
institution should not unduly influence the appraiser, the institution
may provide a copy of the sales contract for purchase transactions.
Further, an institution's policies and controls should ensure that the
institution does not communicate a predetermined, expected, qualifying,
or owner's estimate of value, or a loan amount or target loan-to-value
ratio to a person performing an appraisal or evaluation.

For a small or rural institution or branch, it may not always be
possible or practical to separate the collateral valuation program from
the loan production process.  If absolute lines of independence cannot
be achieved, an institution should be able to demonstrate clearly that
it has prudent safeguards to isolate its collateral valuation program
from influence or interference from the loan production process. In such
cases, another loan officer, other officer, or director of the
institution may be the only person qualified to analyze the real estate
collateral.  To ensure their independence, such lending officials,
officers, or directors should abstain from any vote or approval
involving loans on which they performed, ordered, or reviewed the
appraisal or evaluation.[^23]

Selection of Persons Who May Perform Appraisals and Evaluations

An institution's collateral valuation program should establish criteria
to select, evaluate, and monitor the performance of persons who perform
an appraisal or evaluation.  The criteria should ensure that:

-   The institution's selection process is nonpreferential and unbiased;

-   The person selected possesses the requisite education, expertise,
    and competence to complete the assignment;

-   The work performed by persons providing appraisal and evaluation
    services is periodically reviewed by the institution;

-   The person selected is capable of rendering an unbiased opinion;

-   The person selected is independent and has no direct, indirect, or
    prospective interest, financial or otherwise, in the property or the
    transaction; and

-   The person selected to perform an appraisal holds the appropriate
    state certification or license.

Under the Agencies' appraisal regulations, an institution or its agent
must directly select and engage appraisers. There also should be
independence in the selection of persons who perform evaluations.
Further, the person who selects or oversees the selection of appraisers
or persons providing evaluation services should be independent from the
loan production area. Independence is compromised when a borrower or
loan production personnel recommends or selects a person to perform an
appraisal or evaluation. An institution's use of a borrower-ordered
appraisal violates the Agencies' appraisal regulations.

Institutions should use written engagement letters when ordering
appraisals, particularly for large, complex, or out-of-area commercial
real estate properties. An engagement letter facilitates communication
with the appraiser and documents the expectations of each party to the
appraisal assignment. An institution should include the engagement
letter in its permanent credit file. To avoid the appearance of any
conflict of interest, appraisal or evaluation development work should
not commence until the institution has selected a person for the
assignment.

Transactions That Require Appraisals

Although the Agencies' appraisal regulations exempt certain real
estate-related financial transactions from the appraisal requirement,
most real estate-related financial transactions over the appraisal
threshold are considered federally related transactions and, thus,
require appraisals.[^24] The Agencies reserve the right to require an
appropriate appraisal under their appraisal regulations to address
safety and soundness concerns in a transaction. (See Appendix A --
Appraisal Exemptions.)[^25]

**Minimum Appraisal Standards**

The Agencies' appraisal regulations include the following five minimum
standards for the preparation of an appraisal. (See Appendix C --
Glossary for terminology used in these guidelines.)

The appraisal must:

-   [Conform to generally accepted appraisal standards as evidenced by
    the Uniform Standards of Professional Appraisal Practice (USPAP)
    promulgated by the Appraisal Standards Board of the Appraisal
    Foundation unless principles of safe and sound banking require
    compliance with stricter standards.]{.underline}

> Although allowed by USPAP, the Agencies' appraisal regulations do not
> permit an appraiser to appraise any property in which the appraiser
> has an interest, direct or indirect, financial or otherwise. Further,
> the appraisal must contain an opinion of market value as defined in
> the Agencies' appraisal regulations. Under USPAP, the appraisal must
> contain a certification that the appraiser has complied with USPAP. An
> institution may refer to the USPAP certification to confirm whether
> the appraiser is independent of the property and the transaction, as
> required by the Agencies' appraisal regulations. Under the Agencies'
> appraisal regulations, the result of an Automated Valuation Model
> (AVM), by itself, is not an appraisal, because a state-certified or
> licensed appraiser must perform an appraisal in conformance with USPAP
> and the Agencies' minimum appraisal standards.

-   [Be written and contain sufficient information and analysis to
    support the institution\'s decision to engage in the
    transaction.]{.underline}

> An institution should obtain an appraisal that is appropriate for the
> particular federally related transaction, considering the risk and
> complexity of the transaction. The level of detail should be
> sufficient to understand the appraiser's analysis and opinion of the
> property's market value. As provided by the USPAP Scope of Work Rule,
> appraisers are responsible for establishing the scope of work to be
> performed in rendering an opinion of the property's market value and
> have three different reporting options available. (See Appendix C --
> Glossary of Terms describing reporting options.) However, an
> institution should ensure that the scope of work is appropriate for
> the assignment. The appraiser's scope of work should be consistent
> with the valuation methodology employed for similar property types,
> market conditions, and transactions. The content and format of the
> appraisal report must contain sufficient information and analysis to
> support the institution's decision to engage in the transaction. The
> appraisal report should contain sufficient disclosure of the nature
> and extent of inspection and research performed to verify the
> property's condition and support the appraiser's opinion of market
> value. The result of an AVM certified by an appraiser does not, by
> itself, meet this standard.

-   [Analyze and report appropriate deductions and discounts for
    proposed construction or renovation, partially leased buildings,
    non-market lease terms, and tract developments with unsold
    units.]{.underline}

> This standard is designed to avoid having appraisals prepared using
> unrealistic assumptions and inappropriate methods. An appraisal must
> include the market value of the property and should reflect the
> property's condition in its actual physical condition, use, and zoning
> designation, as of the effective date of the appraisal.

-   **Proposed Construction or Renovation**. For properties where
    improvements are to be constructed or rehabilitated, an institution
    may request a prospective market value as completed and as
    stabilized. While an institution may request the appraiser to
    provide the sum of retail sales for a proposed development, this
    value is not the market value of the property for the purpose of the
    Agencies' appraisal regulations.

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-   **Partially Leased Buildings**. For proposed and partially leased
    rental developments, the appraiser must make appropriate deductions
    and discounts. Appropriate deductions and discounts should include
    items such as leasing commission, rent losses, tenant improvements,
    and entrepreneurial profit.

-   **Non-market Lease Terms**. For properties subject to leases with
    terms that do not reflect current market conditions, the appraiser
    must make appropriate deductions and discounts, which should be
    based on stabilized occupancy at prevailing market terms.

**Tract Developments with Unsold Units**

-   **Raw Land**. The appraiser must provide an opinion of value for raw
    land based on its current condition and existing zoning that
    includes appropriate deductions and discounts. Appropriate
    deductions and discounts should include items such as holding costs,
    marketing costs, and entrepreneurial profit.

-   **Developed Lots**. For proposed developments of five or more
    residential lots, the appraiser must analyze and report appropriate
    deductions and discounts. Appropriate deductions and discounts
    should reflect holding costs, marketing costs, and entrepreneurial
    profit during the sales absorption period for the sale of the
    developed lots. The estimated sales absorption period should reflect
    the expected holding period before development commences as well as
    the time frame for the actual development and sale of the lots.

-   **Attached or Detached Single-family Homes**. For proposed
    construction and sale of five or more attached or detached
    single-family homes in the same development, the appraiser must
    analyze and report appropriate deductions and discounts. Appropriate
    deductions and discounts should reflect holding costs, marketing
    costs, and entrepreneurial profit during the sales absorption period
    of the completed units. If an institution finances construction on
    an individual unit basis, an appraisal of the individual units may
    be used if the institution can demonstrate through an independently
    obtained feasibility study or market analysis that all units
    collateralizing the loan can be constructed and sold within 12
    months. However, the transaction should be supported by an appraisal
    that analyzes and reports appropriate deductions and discounts if
    any of the individual units are not completed and sold within the
    12-month time frame.

-   **Condominiums**. For proposed construction and sale of a
    condominium building with five or more units, the appraisal must
    reflect appropriate deductions and discounts. Appropriate deductions
    and discounts should include holding costs, marketing costs, and
    entrepreneurial profit during the sales absorption period of the
    completed units. If an institution finances construction of a single
    condominium building with less than five units or a condominium
    project with multiple buildings with less than five units per
    building, the institution may rely on appraisals of the individual
    units if the institution can demonstrate through an independently
    obtained feasibility study or market analysis that all units
    collateralizing the loan can be constructed and sold within 12
    months. However, the transaction should be supported by an appraisal
    that analyzes and reports appropriate deductions and discounts if
    any of the individual units are not completed and sold within the
    12-month time frame.

-   [Be based upon the definition of market value set forth in the
    appraisal regulation.]{.underline}

> Each appraisal must contain an estimate of market value, as defined by
> the Agencies' appraisal regulations. The Agencies' definition of
> market value assumes that the price is not affected by undue stimulus,
> which would allow the value of the real property to be increased by
> favorable financing or seller concessions. Further, the market value
> should not include a going concern value or a special value to a
> specific property user. An appraisal may contain separate opinions of
> value for such items so long as they are clearly identified and
> disclosed.
>
> The estimate of market value should consider the real property's
> current physical condition, use, and zoning as of the appraisal date.
> For a transaction financing construction or renovation of a building,
> an institution would generally request an appraiser to provide the
> property's market value in its "as is" condition as of the appraisal's
> effective date and the property's "prospective" market values at the
> time development is expected to be completed and at the time
> stabilized occupancy is projected to be achieved.[^26] Prospective
> market value opinions should be based upon current and reasonably
> expected market conditions. When an appraisal includes prospective
> value opinions, there should be a point of reference to the market
> conditions and time frame on which the appraiser based the
> analysis.[^27]

-   [Be performed by state-certified or licensed appraisers in
    accordance with requirements set forth in the appraisal
    regulation.]{.underline}

> In determining competency for a given appraisal assignment,
> institutions should consider an appraiser's education and experience.
> An institution should confirm that the appraiser holds a valid
> credential from the appropriate state appraiser regulatory authority.
> An institution should not base competency solely on the appraiser's
> credentialing. When ordering appraisals, an institution should convey
> to an appraiser that the Agencies' minimum appraisal standards must be
> followed. From the appraiser's perspective, these minimum appraisal
> standards are considered assignment conditions under USPAP.

Appraisal Development

The Agencies' appraisal regulations require appraisals for federally
related transactions to comply with USPAP. Consistent with the USPAP
Scope of Work Rule,[^28] the appraisal must reflect an appropriate scope
of work that provides for "credible" assignment results. The appraisal's
scope of work should reflect the extent to which the property is
identified and inspected, the type and extent of data researched, and
the analyses applied to arrive at opinions or conclusions.

While an appraiser must comply with USPAP and establish the scope of
work in an appraisal assignment, an institution is responsible for
complying with the Agencies' appraisal regulations and obtaining an
appraisal that provides sufficient information to support its decision
to engage in the transaction. Therefore, to ensure that an appraisal is
appropriate for the intended use, an institution should discuss its
needs and expectations for the appraisal with the appraiser. Such
discussions should assist the appraiser in establishing the scope of
work and form the basis of the institution's engagement letter, as
appropriate. An institution should not allow lower cost or the speed of
delivery time to influence the appraiser's determination of an
appropriate scope of work for an appraisal supporting a federally
related transaction.

If applicable, the appraisal should include three approaches (cost,
income, and sales comparison) to analyze the value of a property, and
should reconcile the results of each approach to estimate market
value.  An appraisal also should reflect an analysis of the property's
sales history and an opinion as to the highest and best use of the
property.  Further, USPAP requires the appraiser to disclose whether or
not the subject property was inspected and whether anyone provided
significant assistance to the appraiser signing the appraisal report.

Appraisal Reports

An institution is responsible for identifying the appropriate appraisal
reporting option to support its credit decisions. The institution should
consider the risk, size, and complexity of the transaction and the real
estate collateral when determining its appraisal engagement instructions
to an appraiser.

USPAP provides various reporting options that an appraiser may use to
present the results of appraisals.  The major difference among these
reporting options is the level of detail presented in the report. A
reporting option that merely states, rather than summarizes or describes
the content and information required in an appraisal report, may lack
sufficient supporting information and analysis to explain the
appraiser's opinions and conclusions. Therefore, the Agencies believe
that such reports will not be appropriate to support most federally
related transactions. However, these less detailed reports may be
appropriate for real estate collateral monitoring or in circumstances
when an institution's collateral valuation program requires an
evaluation. (See Appendix C -- Glossary of Terms describing reporting
options.)

Regardless of the reporting option, the appraisal report should contain
sufficient detail to allow the institution to understand the scope of
work performed. Sufficient information should include the disclosure of
research and analysis performed, as well as disclosure of the research
and analysis not performed together with the rationale for its omission.

Transactions That Require Evaluations

An institution may obtain or perform an evaluation of real property
collateral in lieu of an appraisal for transactions that qualify for
certain exemptions under the Agencies' appraisal regulations. These
exemptions include a transaction that:

-   Has a transaction value equal to or less than the appraisal
    threshold.

-   Is a business loan with a transaction value equal to or less than
    the business loan threshold, and is not dependent on the sale of, or
    rental income derived from, real estate as the primary source of
    repayment.[^29]

-   Involves an existing extension of credit at the lending institution,
    provided that:

    -   There has been no obvious and material change in the market
        conditions or physical aspects of the property that threaten the
        adequacy of the institution's real estate collateral protection
        after the transaction, even with the advancement of new monies;
        or

    -   There is no advancement of new monies other than funds necessary
        to cover reasonable closing costs.

Qualifications of Persons Who Perform Evaluations

An institution should select persons who are independent of the loan
production process and the transaction, and have real estate-related
training and experience to perform evaluations.  These persons should
have knowledge of the market and property type relevant to the subject
property. Examples include persons with appraisal experience, real
estate lending or sales professionals, agricultural extension agents, or
foresters. 

An institution should document the qualifications and relevant
experience of persons selected to perform evaluations.  An institution
should have adequate controls to confirm that the person performing the
evaluation is qualified and independent of the property, the
transaction, and the loan production function. If an institution relies
on an external, third party to perform an evaluation, the institution
should communicate its evaluation criteria to the third party and have
adequate controls to confirm compliance with its internal policies and
these Guidelines. 

Although not required, an institution may use state-certified or
licensed appraisers to perform evaluations. Institutions should refer to
USPAP Advisory Opinion 13 for guidance on appraisers performing
evaluations of real property collateral.

Evaluation Content

An evaluation should provide an estimate of the market value of the
collateral to support the institution's credit decision or portfolio
management. An institution should establish policies and procedures for
determining an appropriate collateral valuation methodology for a given
transaction considering associated risks. Further, these policies and
procedures should address the process for selecting the most reliable
evaluation method or tool for a transaction rather than using the method
or tool that renders the highest value.

An evaluation should support the institution's decision to engage in the
transaction. While evaluation methodologies and tools may vary, all
evaluations, at a minimum, should:

-   Identify the location of the property;

-   Provide a description of the property and its current and projected
    use;

-   Indicate the source(s) of information used to value the property,
    including, but not limited to:

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-   External data sources;

-   Previous sales data;

-   Photos of the property;

-   Property tax assessment data;

-   Comparable sales information;

-   Description of the neighborhood; and

-   Local market conditions;

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-   Disclose the analysis that was performed and the supporting
    information used to value the property;

-   Provide an estimate of the property's market value in its actual
    physical condition, use and zoning designation as of an effective
    date, with any limiting conditions, if applicable;

-   Indicate the preparer's name and contact information; and

-   Be documented in the credit file. Documentation content should be
    appropriate for the valuation methodology and tool used for the
    transaction.

The institution also should establish criteria for determining the
extent to which an inspection of the collateral is necessary to
determine that the property is in acceptable condition for its current
or projected use. Further, an institution should obtain more detailed
evaluations for higher risk real estate-related financial transactions,
or as its portfolio risk increases. A more detailed evaluation may be
necessary for certain transactions such as those involving:

-   Loans with combined loan-to-value ratios in excess of the
    supervisory loan-to-value limits;

-   Atypical properties;

-   Properties outside the institution's traditional lending market;

-   Properties in a transitional market or location;

-   Subsequent transactions with significant risk to the institution; or

-   Borrowers with high risk characteristics.

See Appendix B -- Evaluation Alternatives for further guidance on
evaluation alternatives such as AVMs and tax assessment values.

Accepting an Appraisal from Another Institution

An institution may use an appraisal that was prepared by an appraiser
engaged directly by another regulated or financial services institution,
provided the institution determines that the appraisal is valid,
conforms to the Agencies' appraisal regulations, and is otherwise
acceptable. Such determinations should be completed by the acquiring
institution prior to accepting the appraisal and documented in the
credit file.

Appraisals that support federally related transactions must meet the
standards of independence within the Agencies' appraisal regulations.
Among other considerations, when accepting an appraisal from another
institution, the acquiring institution should obtain documentation that
the appraiser was engaged directly by the institution transferring the
appraisal and had no direct, indirect, or prospective interest,
financial or otherwise, in the property or transaction. If an
institution relies on a third party originator or its agent for the
appraisal, the standard of independence still applies. For example, an
engagement letter should confirm that the institution transferring the
appraisal, not the borrower, was the original client that selected the
appraiser and ordered the appraisal.

An institution must not accept an appraisal that has been readdressed or
altered by the appraiser with the intent to conceal the original client.
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 USPAP.

**Validity of Appraisals and Evaluations**

The Agencies allow an institution to use an existing appraisal or
evaluation to support a subsequent transaction. Therefore, an
institution should establish criteria for assessing whether an existing
appraisal or evaluation remains valid.  Such criteria will vary
depending upon the condition of the property and the marketplace, and
the nature of the transaction. The documentation in the credit file
should provide the facts and analysis to support the institution's
conclusion that the existing appraisal or evaluation remains
valid.  Factors that could cause changes to originally reported values
include:  

-   Passage of time;

-   Volatility of the local market;

-   Availability of financing;

-   Inventory of competing properties;

-   Improvements to the subject property or competing properties;

-   Lack of maintenance of the subject or competing properties;

-   Changes in zoning; or

-   Environmental contamination.

    Third Party Arrangements

Effective program oversight should address any arrangements with a third
party, acting as agent for the institution, providing appraisal and
evaluation services. An institution should monitor and periodically
assess these arrangements for compliance with program standards and the
Agencies' guidance on third party arrangements.[^30] If deficiencies are
discovered, the institution should take remedial action in a timely
manner.

Reviewing Appraisals and Evaluations

The Agencies' appraisal regulations specify that appraisals must contain
sufficient information and analysis to support an institution's decision
to engage in a credit transaction. As part of the credit approval
process, an institution should assess the acceptability of the appraisal
or evaluation as well as compliance with the Agencies' appraisal
regulations and Guidelines and its own internal policies. This review
should be performed prior to the final credit decision and ensure that
the appraisal or evaluation adequately supports approval of the credit.
An institution's appraisal and evaluation review procedures should
address the role, independence, and qualifications of the reviewer; the
techniques, timing and level of review; documentation requirements; and
the appropriate resolution of deficiencies. Review procedures also
should address the reviewer's responsibility to verify that the methods,
assumptions, data sources, and conclusions are reasonable and
appropriate for the particular transaction and property.

Persons who review appraisals and evaluations should be independent of
the transaction and possess the requisite education, expertise, and
competence to perform the review commensurate with the complexity of the
transaction. Small or rural institutions or branches with limited staff
should implement prudent safeguards for accepting appraisals and
evaluations when absolute lines of independence cannot be achieved. In
these situations, the review may be part of the originating loan
officer's overall credit analysis, as long as the originating loan
officer abstains from directly or indirectly approving or voting to
approve the loan.

Institutions should implement a risk-focused approach to determine the
depth of the review needed to ensure that appraisals and evaluations are
acceptable. The scope of review will depend upon the type and risk of
the transaction and the process through which the appraisal and
evaluation is obtained (whether directly or from another regulated or
financial services institution). Appraisals and evaluations supporting
complex properties or high-risk transactions should be reviewed more
comprehensively to assess the technical quality of the appraiser's
analysis prior to making a final credit decision. For example, a
risk-focused approach for commercial mortgages should provide for a
comprehensive review of those appraisals supporting transactions that
pose higher credit risk to the institution. These transactions may
include large-dollar credits, loans secured by complex or specialized
properties, and properties outside the institution's traditional lending
market. The depth to which reviews are completed for lower risk
transactions should be commensurate with the size, type and complexity
of the underlying credit transaction supported by the appraisal or
evaluation.

With prior approval from its primary regulator, an institution may
employ various techniques, such as automated tools or sampling methods,
for performing pre-funding reviews of appraisals or evaluations
supporting lower risk single-family residential mortgages. When using
such techniques, an institution should maintain sufficient data and
employ appropriate screening parameters to provide adequate quality
assurance and should ensure that the work of all appraisers and persons
performing evaluations is periodically reviewed.

The institution should document the content of the review in the credit
file. This documentation may be presented in a checklist or narrative
format as appropriate. If deficiencies are noted by the reviewer, they
should be addressed by the person who prepared the appraisal or
evaluation or another qualified, independent person. An institution
should not accept appraisals or evaluations that do not adequately
support the opinion of market value and should replace unreliable
appraisals or evaluations prior to the final credit decision. 

An appraisal review performed by a state-certified or licensed appraiser
must comply with USPAP. Any changes to an appraisal's estimate of value
are permitted only as a result of a review conducted by an appropriately
qualified state-certified or licensed appraiser in accordance with
USPAP.

Program Compliance

An institution's appraisal and evaluation policies should establish
effective internal controls that promote compliance with the Agencies'
appraisal regulations and supervisory guidelines.  The compliance
process should include a system of adequate controls, verification and
testing that ensures the reliability of an institution's appraisals and
evaluations. These controls should be commensurate with the risk of the
institution's overall real estate lending activities. Further, the
persons responsible for the compliance function should be insulated from
any influence by loan production staff.

The compliance process should ensure that all appraisers and persons
performing evaluations are subject to periodic evaluation of the quality
of their work. This information should provide a basis for evaluating
whether the institution should continue to retain the services of the
appraiser or the person performing the evaluation.

**Portfolio Monitoring and Updating Collateral Valuations**

A prudent portfolio monitoring program should include criteria for
determining when to obtain a new appraisal or evaluation in accordance
with the Agencies' real estate lending standards. Among other
considerations, these criteria may be based on changes in market
conditions or deterioration in the credit since origination. Moreover,
as an institution's reliance on collateral becomes more important, an
institution's policies and procedures should ensure that timely
information is available to management for assessing collateral and
associated risk. The policy should delineate the valuation tool or
methodology and consider the property type, current market conditions,
current use of the property, and the age of the original appraisal or
evaluation. For transactions that are otherwise exempt from the
Agencies' appraisal requirements, institutions should establish policies
for obtaining appraisals or evaluations to meet risk management
objectives.

Under the Agencies' appraisal regulations, examiners have the right to
require an institution to obtain an appraisal or evaluation when there
are safety and soundness concerns on an existing real estate secured
credit. Therefore, in determining the classification of a problem real
estate credit, an examiner may direct an institution to obtain a new
appraisal or evaluation in order to have sufficient information to
understand the nature of the problems. Examiners would be expected to
provide an institution with a reasonable amount of time to obtain a new
appraisal or evaluation.

Referrals

An institution should make referrals directly to state appraiser
regulatory authorities when it suspects that a state-certified or
licensed appraiser failed to comply with USPAP, applicable state laws,
or engaged in other unethical or unprofessional conduct. Examiners
finding evidence of unethical or unprofessional conduct by appraisers
should forward their findings and recommendations to their supervisory
office for appropriate disposition and referral to the state, as
necessary.

**Appendix A**

Appraisal Exemptions

1.  **[Appraisal Threshold]{.underline}**

> For transactions with a transaction value equal to or less than the
> appraisal threshold, the Agencies require an evaluation consistent
> with safe and sound banking practices in lieu of an appraisal.[^31]

**2. [Abundance of Caution]{.underline}**

> An institution may take a lien on real estate and be exempt from
> obtaining an appraisal if the lien on real estate is taken by the
> lender in an abundance of caution. This exemption is intended to have
> limited application, especially for real estate loans secured by
> residential properties in which the real estate is the only form of
> collateral. In order for a business loan to qualify for the
> abundance-of-caution exemption, the Agencies expect the extension of
> credit to be well supported by the borrower's cash flow or collateral
> other than real property. The institution's credit analysis should
> verify the reliability of these repayment sources and conclude that
> knowledge of the market value of the real estate on which the lien has
> been taken as an abundance of caution is unnecessary in making the
> credit decision.
>
> An institution should not invoke the abundance-of-caution exemption if
> its credit analysis reveals that the transaction would not be
> adequately secured by sources of repayment other than the real estate,
> even if the contributory value of the real estate collateral is low
> relative to the entire collateral pool. Similarly, the exemption
> should not be applied to a loan or loan program unless the institution
> verifies and documents the primary and secondary repayment sources. In
> the absence of verification of the repayment sources, this exemption
> should not be used merely to reduce the cost associated with obtaining
> an appraisal, to minimize transaction processing time, or to offer
> slightly better terms to a borrower than would be otherwise offered.
>
> In addition, prior to making a final commitment to the borrower, the
> institution should document and retain in the credit file the analysis
> performed to verify that the abundance-of-caution exemption has been
> appropriately applied. If the operating performance or financial
> condition of the company subsequently deteriorates and the lender
> determines that the real estate will be relied upon as a repayment
> source, an appraisal should then be obtained.

**3. [Loans Not Secured by Real Estate]{.underline}**

> An institution is not required to obtain an appraisal on a loan that
> is not secured by real estate, even if the proceeds of the loan are
> used to acquire or improve real property.[^32] For loans covered by
> this exemption, the real estate has no direct effect on the
> institution's decision to extend credit because the institution has no
> legal security interest in the real estate.  This exemption is not
> intended to be applied to real estate-related financial transactions
> other than those involving loans.  For example, this exemption should
> not be applied to a transaction such as an institution\'s investment
> in real estate for its own use.

**4. [Liens for Purposes Other Than the Real Estate's
Value]{.underline}**

> This exemption allows institutions to take liens against real estate
> without obtaining an appraisal to protect legal rights to, or control
> over, other collateral. Institutions frequently take real estate liens
> to protect legal rights to other collateral rather than because of the
> contributory value of the real estate as an individual asset. In order
> to apply the exemption, the institution should determine that the
> market value of the real estate as an individual asset is not
> necessary to support its decision to extend credit. For example, an
> institution making a loan to a logging operation may take a lien
> against the real estate upon which the timber stands to ensure its
> access to the timber in the event of default.

**5. [Real Estate-Secured Business Loans]{.underline}**

> This exemption applies to business loans with a transaction value of
> \$1 million or less when the sale of, or rental income derived from,
> real estate is not the primary source of repayment. To apply this
> exemption, the Agencies expect the institution to determine that the
> primary source of repayment for the business loan is operating cash
> flow from the business rather than rental income or sale of the
> property. For this type of exempted loan, the Agencies require an
> evaluation consistent with safe and sound banking practices in lieu of
> an appraisal.[^33]
>
> This exemption will not apply to transactions in which the lender has
> taken a security interest in real estate, but the primary source of
> repayment is provided by cash flow or sale of real estate in which the
> lender has no security interest. For example, a real estate developer
> cannot qualify for the exemption by showing that a real estate secured
> loan for one project, in which the lender has taken a security
> interest, will be repaid with the cash flow from real estate sales or
> rental income from other real estate projects, in which the lender
> does not have a security interest. (See Appendix C -- Glossary of
> Terms for a definition of business loan.)

**6. [Leases]{.underline}**

> Institutions are required to obtain appraisals of leases that are the
> economic equivalent of a purchase or sale of the leased real estate.
> For example, an institution must obtain an appraisal on a transaction
> involving a capital lease, as the real estate interest is of
> sufficient magnitude to be recognized as an asset of the lessee for
> accounting purposes. Operating leases that are not the economic
> equivalent of the purchase or sale of the leased property do not
> require appraisals.

**7. [Renewals, Refinancing, and Other Subsequent
Transactions]{.underline}**

> In general, renewals, refinancing, and other subsequent transactions
> may be supported by evaluations rather than appraisals. An evaluation
> is permitted for renewals of existing extensions of credit when
> either:
>
> \(1\) No new funds are advanced (other than for reasonable closing
> costs); or
>
> \(2\) No obvious and material changes in market conditions or the
> physical aspects of the property threaten the institution's real
> estate protection after the transaction.
>
> An institution may engage in a subsequent transaction based on
> documented equity from a valid existing appraisal or evaluation if the
> above conditions are met. For example, to satisfy the condition for no
> material change in market conditions or the physical aspects of the
> property, the planned future use of the property should be consistent
> with the use identified in the appraisal or evaluation. If a property,
> however, has reportedly appreciated because of a planned change in use
> of the property such as rezoning, an appraisal should be performed for
> a federally related transaction unless another exemption applies.
>
> **[Loan Workouts or Modifications]{.underline}**: Loan workouts, debt
> restructures, loan assumptions, and similar transactions involving the
> addition or substitution of borrowers may qualify for the exemption
> for renewals, refinancing and other subsequent transactions. Use of
> this exemption depends on meeting the conditions described above. An
> institution also should take into consideration such factors as the
> quality of the underlying collateral and the validity of the existing
> appraisal or evaluation.
>
> As noted above, an institution may advance new monies beyond closing
> costs when there are no material changes in the physical aspects of
> the property that threaten the adequacy of the collateral. The
> Agencies interpret this provision to not require a new appraisal or
> evaluation when an institution advances funds to protect its interest
> in a property, such as to repair damaged property, because these funds
> would be used to restore the damaged property to its original
> condition. If a loan workout involves modification of terms and
> conditions of an existing credit, including acceptance of new real
> estate collateral that facilitates the orderly collection of the
> credit, or reduces the institution's risk of loss, an appraisal or
> evaluation of the existing and new collateral may be prudent, even if
> it is obtained after the modification occurs.
>
> **[Other Changes to Loan Terms]{.underline}**: An institution may
> modify the terms of an existing credit without obtaining a new
> appraisal or evaluation. Such modifications should not involve any
> advancement of new funds, any material change in the borrower's
> creditworthiness, any change to the borrower's or guarantor's
> obligation on the credit, or any changes to the collateral pool or
> deterioration in collateral protection. For example, an institution
> may modify the rate on an existing credit, provide a short-term
> extension, or modify the repayment terms by increasing or reducing
> monthly payments without obtaining a new appraisal or evaluation, as
> long as the above conditions are met.

**8. [Transactions Involving Real Estate Notes]{.underline}**

> This exemption applies to appraisal requirements for transactions
> involving the purchase, sale, investment in, exchange of, or extension
> of credit secured by a loan or interest in a loan, pooled loans, or
> interests in real property, including mortgage-backed securities. If
> each note or real estate interest meets the Agencies' regulatory
> requirements for appraisals at the time the real estate note was
> originated, the institution need not obtain a new appraisal to support
> its interest in the transaction. The institution should employ audit
> procedures and review a representative sample of appraisals supporting
> pooled loans or real estate notes in order to determine that the
> conditions of the exemption have been satisfied.
>
> Principles of safe and sound banking practice require institutions to
> determine the suitability of purchasing or investing in existing real
> estate secured loans and real estate interests. These transactions
> should have been originated according to secondary market standards
> and have a history of performance. The information from these sources,
> together with original documentation, should be sufficient to allow
> institutions to make appropriate credit decisions regarding these
> transactions.
>
> An institution may presume that the underlying loans in an investment
> grade, marketable, mortgage-backed security satisfy the requirements
> of the appraisal regulation whenever an issuer makes a public
> statement, such as in a prospectus, that the appraisals comply with
> the Agencies' appraisal regulations. To be considered investment
> grade, a security must be rated in one of the top four rating
> classifications of at least one nationally recognized statistical
> rating service. A marketable security is one that may be sold with
> reasonable promptness at a price that corresponds to its fair value.
>
> If the mortgages that secure the mortgage warehouse loan are sold to
> Fannie Mae or Freddie Mac, the sale itself may be used to demonstrate
> that the underlying loans complied with the Agencies' appraisal
> regulations. In such cases, the Agencies expect an institution to
> monitor its borrower's performance in selling loans to the secondary
> market and take appropriate steps, such as increasing sampling and
> auditing of the loans and the supporting documentation, if the
> borrower experiences more than a minimal loan put-back rate.

**9. [Transactions Insured or Guaranteed by a U.S. Government Agency or
U.S. Government-sponsored Agency]{.underline}**

> This exemption applies to transactions that are wholly or partially
> insured or guaranteed by a U.S. government agency or U.S.
> government-sponsored agency. The Agencies expect these transactions to
> meet all the underwriting requirements of the federal insurer or
> guarantor, including its appraisal requirements, in order to receive
> the insurance or guarantee.

**10. [Transactions that Qualify for Sale to, or Meet the Appraisal
Standards of, a U.S. Government Agency or U.S. Government-sponsored
Agency]{.underline}**

> This exemption applies to transactions that either (i) qualify for
> sale to a U.S. government agency or U.S. government-sponsored
> agency,[^34] or (ii) involve a residential real estate transaction in
> which the appraisal conforms to Fannie Mae or Freddie Mac appraisal
> standards applicable to that category of real estate. An institution
> may engage in these transactions without obtaining a separate
> appraisal conforming to the Agencies' appraisal regulations.
>
> **[10(i)]{.underline}** ­ Institutions that rely on exemption 10(i)
> should maintain adequate documentation that confirms that the
> transaction qualifies for sale to a U.S. government agency or U.S.
> government-sponsored agency. If the qualification for sale is not
> adequately documented, the transaction should be supported by an
> appraisal that conforms to the Agencies' appraisal regulations, unless
> another exemption applies.
>
> **[10(ii)]{.underline}** Transactions, such as jumbo or other
> residential real estate loans, that do not conform to all of Fannie
> Mae or Freddie Mac underwriting standards qualify for exemption 10(ii)
> provided they are supported by an appraisal that meets these
> government-sponsored agencies' appraisal standards.

**11. [Transactions by Regulated Institutions as
Fiduciaries]{.underline}**

> A regulated institution acting as a fiduciary is not required to
> obtain appraisals under the Agencies' appraisal regulations if an
> appraisal is not required under other laws governing fiduciary
> responsibilities in connection with a transaction.[^35] For example,
> if no other law requires an appraisal in connection with the sale of a
> parcel of real estate to a beneficiary of a trust on terms specified
> in a trust instrument, an appraisal is not required under the
> Agencies' appraisal regulations. However, when a fiduciary transaction
> requires an appraisal under other laws, that appraisal should conform
> to the Agencies' appraisal requirements.

**12. [Appraisals Not Necessary to Protect Federal Financial and Public
Policy Interests or the Safety and Soundness of Financial
Institutions]{.underline}**

> The Agencies retain the authority to determine when the services of an
> appraiser are not required in order to protect federal financial and
> public policy interests or the safety and soundness of financial
> institutions. This exemption is intended to apply to individual
> transactions rather than broad categories of transactions that would
> otherwise be addressed by an appraisal exemption. An institution would
> need to seek a waiver from its supervisory federal agency before
> entering into the transaction.

**13. [Transactions Involving Underwriting or Dealing in Mortgage-backed
Securities]{.underline}**

> The FRB adopted this exemption in November 1998 to permit bank holding
> companies and their nonbank subsidiaries that engaged in underwriting
> and dealing in securities to underwrite and deal in mortgage-backed
> securities without having to demonstrate that the loans underlying the
> securities are supported by appraisals that meet the FRB's appraisal
> requirements.
>
> **Appendix B**

Evaluation Alternatives

The Agencies recognize that evaluation alternatives are available to
institutions for developing an estimate of market value. Therefore,
institutions should maintain policies and procedures for determining
whether an evaluation alternative is appropriate for a given transaction
or lending activity, considering associated risk. Such procedures should
address risk criteria such as transaction size and purpose, borrower
creditworthiness, and leverage tolerance (loan-to-value).

An institution should demonstrate that an evaluation alternative, such
as an automated valuation model or tax assessment valuation, provides a
reliable estimate of the collateral's market value as of a stated
effective date prior to the decision to enter into a transaction.
Further, the institution should establish criteria for determining the
extent to which an inspection of the collateral is necessary to
determine that the property is in acceptable condition for its current
or projected use.

An institution's policies and procedures also should address the use of
multiple tools or methods for valuing the same property or to support a
particular lending activity. These procedures should specify criteria
for ensuring that the institution uses the most credible method or tool.
An institution should not select a method or tool solely on the basis
that it provides the highest value. Examiners will review an
institution's policies, procedures, and internal controls to ensure that
evaluation alternatives are appropriate and consistent with safe and
sound lending practices.

**Automated Valuation Model (AVM)**

An institution may use an AVM as a valuation method for a transaction in
which an evaluation is permitted by the Agencies' appraisal
regulations.[^36] An AVM may be used alone or in conjunction with other
supplemental information. An institution should demonstrate, through
testing, that the AVM's resulting value and any related information is
credible and sufficient to support a credit decision, otherwise another
valuation method or tool should be used. In selecting an AVM, an
institution should perform appropriate due diligence to:

-   Obtain relevant information about the data the model provider uses.
    Among other information, the institution should know the sources and
    types of data used in a model, frequency of updates, quality control
    performed on the data, and how data is obtained in states where
    public real estate sales data are not disclosed;

-   Demonstrate an understanding of the modeling techniques of its
    external AVM providers. An institution should understand the
    inherent strengths and weaknesses of different model types (hedonic,
    index, and blended) as well as how a particular model or multiple
    AVMs perform for different properties;

-   Evaluate the model provider's confidence score and determine its
    usefulness in assessing the model's reliability in determining
    market values for different properties; and

-   Ascertain which model(s) provide the most credible values for an
    institution's lending activities.

An institution's policies should establish appropriate practices
regarding the use of AVMs and indicate its AVM performance criteria. In
establishing AVM practices, an institution should:

-   Address the qualifications and responsibilities of persons
    designated to select, validate, and administer models;

-   Establish standards and procedures for model validation testing and
    monitoring;[^37]

-   Maintain AVM performance criteria for reliability and suitability in
    a given transaction or lending activity based on the institution's
    risk tolerance;

-   Establish procedures for selecting a different collateral valuation
    method if an institution's AVM performance criteria are not met; and

-   Adopt criteria that includes establishing standards and procedures
    for validation testing, for the use of multiple AVMs (sometimes
    referred to as a cascade or waterfall) to ensure that results are
    credible.

**[Determining AVM Use]{.underline}** In addition to evaluating the
results of its model validation testing as noted below, an institution
should establish specific criteria for determining whether an AVM is an
appropriate evaluation alternative for a particular transaction. An
institution may consider the following questions, among others, in
determining whether an AVM may be appropriate for a given transaction:

-   [Property Type]{.underline}

    -   Is the property homogeneous such as a detached 1-to-4 family
        residential dwelling in a typical neighborhood for its market?

    -   Can the property's address be recognized by the model to ensure
        that the valuation will reflect the subject property?

-   [Property Location]{.underline}

    -   Is the property located in a market with strong sales activity?

    -   Are aspects about the property's location typical or average for
        its market (such as the view of the surrounding area or
        proximity to public or private facilities or services)?

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-   [Property Condition]{.underline}

    -   Is sufficient information available to assess whether the
        property is in average or above-average condition consistent
        with its intended use?

    -   Is the area or neighborhood free of known adverse conditions
        that could affect the property's value (such as disrepair from a
        natural disaster or other events, defective building materials,
        or environmental concerns)?

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-   [Property Price Range]{.underline}

    -   Is the property's initial estimated value within the average
        price range for its market?

-   [Nature of the Transaction]{.underline}

    -   Is the property in an area that is known to have minimal cases
        of fraud?

    -   Does the frequency of sales of the subject property preclude
        concern that the property may have been subject to flipping or
        fraud?

    -   Is the property owner-occupied?

**[Validating AVM Results]{.underline}** Institutions should establish
standards and procedures for independently validating an AVM's results
on a periodic basis. The depth and extent of an institution's validation
processes should be consistent with the materiality and complexity of
the risk being managed. Institutions should not rely solely on
validation testing representations provided by external AVM providers.
Regardless of whether an institution relies on AVMs that are supported
by value insurance or guarantees, an institution should still perform
appropriate due diligence and model validation testing.

An institution should establish an independent model validation process.
This process should specify, at a minimum:

-   Expectations for an appropriate sample size;

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-   Level of geographic analysis;

-   Testing frequency and criteria for re-testing;

-   Standards of performance measures to be used; and

-   Range of acceptable performance results.

To ensure unbiased test results, AVM values should be compared to data
gathered from sales transactions prior to being recorded in public
records. If an institution uses more than one AVM, the cascade also
should be validated.

To assess the effectiveness of its AVM practices, an institution should
verify whether loans in which an AVM was used to establish value met the
institution's performance expectations. An institution should document
the results of its validation testing and audit findings and use these
findings to analyze and periodically update its practices regarding AVM
use.

**Tax Assessment Valuation (TAV)**

An institution may use data provided by local tax authorities as a basis
for establishing an estimate of market value for the collateral for a
transaction in which an evaluation is permitted by the Agencies'
appraisal regulations. TAVs differ among jurisdictions. Therefore, an
institution should determine and document how the jurisdiction
calculates the TAV and how frequently property revaluations occur.

An institution should perform an analysis to determine the relationship
between the TAV and the market value within a tax jurisdiction. This
analysis should be performed for each property type and price tier in a
jurisdiction in which the institution considers the use of a TAV to meet
or support evaluation requirements. As part of this process, an
institution should test and document how closely TAVs correlate to
market value. If a reliable correlation between the TAV and the market
value can be established, the institution may use TAVs as a basis for an
evaluation.

**Appendix C**

Glossary of Terms

**[Agent]{.underline}** -- The Agencies' appraisal regulations do not
specifically define the term "agent." However, the term is generally
intended to refer to one who undertakes to transact some business or to
manage some affairs for another. According to the Agencies' appraisal
regulations, fee appraisers must be engaged directly by the regulated
institution or its agent, and have no direct or indirect interest,
financial or otherwise, in the property or the transactions. The
Agencies do not limit the arrangements that regulated institutions have
with their agents, provided those arrangements do not place the agent in
a conflict of interest that prevents the agent from representing the
interests of the regulated institution.

**[Appraisal]{.underline}** -- As defined in the Agencies' appraisal
regulations, a written statement independently and impartially prepared
by a qualified appraiser setting forth an opinion as to the market value
of an adequately described property as of a specific date(s), supported
by the presentation and analysis of relevant market information.

**[Appraisal Threshold]{.underline}** -- An appraisal is not required on
transactions with a transaction value of \$250,000 or less. As specified
in the Agencies' appraisal regulations, institutions must obtain an
evaluation of the real property collateral, if no other appraisal
exemption applies.

**[Approved Appraiser List]{.underline}** -- A listing of appraisers
that an institution has determined to be qualified and competent to
perform appraisals in a particular market and on various property types.

**["As Completed" Market Value]{.underline}** -- See Prospective Market
Value.

**["As Is" Market Value]{.underline}** -- The estimate of the market
value of real property in its current physical condition, use, and
zoning as of the appraisal date.

["**As Stabilized" Market Value**]{.underline} -- See Prospective Market
Value.

**[Automated Valuation Models]{.underline} --** A computer program that
analyzes data to determine a property's market value.
[Hedonic]{.underline} models use property characteristics (such as
square footage, room count) on the subject and comparable properties to
determine a value. [Index]{.underline} models determine value based on
repeat sales in the marketplace rather than property characteristic
data. [Blended or hybrid]{.underline} models use elements of both
hedonic and index models.

**[Business Loan]{.underline}** **--** As defined in the Agencies'
appraisal regulations, a loan or extension of credit to any corporation,
general or limited partnership, business trust, joint venture,
syndicate, sole proprietorship, or other business entity.[^38]

**[Business Loan Threshold]{.underline} --** A business loan with a
transaction value of \$1,000,000 or less does not require an appraisal
if the primary source of repayment is not dependent on the sale of, or
rental income derived from, the real estate. As specified in the
Agencies' appraisal regulations, institutions must obtain an evaluation
of the real property collateral, if no other exemption applies.[^39]

**[Cascade]{.underline}** **--** A model with specific performance rules
that prioritizes an institution's multiple, independent AVMs in a
defined sequence to provide an estimate of the collateral's market
value.

**[Credible (Appraisal) Assignment Results]{.underline}** **--**
According to USPAP, credible means "worthy of belief" used in the
context of the Scope of Work Rule. Under this rule, credible assignment
results depend on meeting or exceeding both (1) the expectations of
parties who are regularly intended users for similar assignments, and
(2) what an appraiser's peers' actions would be in performing the same
or a similar assignment.

**[Effective Date]{.underline} --** USPAP requires that each appraisal
report specifies the effective date of the appraisal and the date of the
report. The date of the report indicates the perspective from which the
appraiser is examining the market. The effective date of the appraisal
establishes the context for the value opinion. Three categories of
effective dates---retrospective, current, or prospective---may be used,
according to the intended use of the appraisal assignment.

**[Engagement Letter]{.underline}** **--** An engagement letter between
an institution and an appraiser documents the expectations of each party
to the appraisal assignment. For example, an engagement letter may
specify, among other items, the property's location and legal
description; intended use of the appraisal; the expectation that the
appraiser will comply with applicable laws, regulations, guidelines and
standards; reporting format; expected delivery date; and appraisal fee.

**[Evaluation]{.underline}** -- A valuation required by the Agencies'
appraisal regulations for transactions that qualify for the appraisal
threshold exemption, business loan exemption or subsequent transaction
exemption.

**[Exposure Time]{.underline}** -- As defined in USPAP, a reasonable
length of time that the property would have been offered on the market
prior to the hypothetical consummation of sale on the appraisal's
effective date. Exposure time is always presumed to precede the
effective date of the appraisal. See USPAP Standard 1-2(c), Statements 6
and 10, and Advisory Opinion 7.

**[Federally Related Transaction]{.underline}** -- As defined in the
Agencies' appraisal regulations, any real estate-related financial
transaction in which the Agencies or any regulated institution engages
or contracts for, and that requires the services of an appraiser.

**[Financial Services Institution]{.underline}** -- The Agencies'
appraisal regulations do not contain a specific definition of the term
"financial services institution." The term is intended to describe
entities that provide services in connection with real estate lending
transactions on an ongoing basis, including loan brokers.

**[Loan Production Staff]{.underline}** -- Generally, all personnel
responsible for generating loan volume or approving loans, as well as
their subordinates and supervisors. This would include any employee
whose compensation is based on loan volume. Employees responsible for
credit administration or credit risk management are not considered loan
production staff.

**[Marketing Time]{.underline}** -- According to USPAP Advisory Opinion
7, the time it might take to sell the property interest at the appraised
market value during the period immediately after the effective date of
the appraisal. An institution may request an appraiser to separately
provide an estimate of marketing time in an appraisal. However, this is
not a requirement of the Agencies' appraisal regulations.

**[Market Value]{.underline}** *--* As defined in the Agencies'
appraisal regulations, the most probable price which a property should
bring in a competitive and open market under all conditions requisite to
a fair sale, the buyer and seller each acting prudently and
knowledgeably, and assuming the price is not affected by undue stimulus.
Implicit in this definition are the consummation of a sale as of a
specified date and the passing of title from seller to buyer under
conditions whereby:

-   Buyer and seller are typically motivated;

-   Both parties are well informed or well advised, and acting in what
    they consider their own best interests;

-   A reasonable time is allowed for exposure in the open market;

-   Payment is made in terms of cash in U.S. dollars or in terms of
    financial arrangements comparable thereto; and

-   The price represents the normal consideration for the property sold
    unaffected by special or creative financing or sales concessions
    granted by anyone associated with the sale.

**[Prospective Market Value "as Completed" and "as
Stabilized"]{.underline}** -- A prospective market value may be
appropriate for the valuation of a property interest related to a credit
decision for a proposed development or renovation project. According to
USPAP, an appraisal with a prospective market value reflects an
effective date that is subsequent to the date of the appraisal report.
Prospective value opinions are intended to reflect the current
expectations and perceptions of market participants, based on available
data. Two prospective value opinions may be required to reflect the time
frame during which development, construction, and occupancy will occur.
The prospective market value "as completed" reflects the property's
market value as of the time that development is expected to be
completed. The prospective market value "as stabilized" reflects the
property's market value as of the time the property is projected to
achieve stabilized occupancy. For an income-producing property,
stabilized occupancy is the occupancy level that a property is expected
to achieve after the property is exposed to the market for lease over a
reasonable period of time and at comparable terms and conditions to
other similar properties.

**[Put Back]{.underline}** -- Represents the ability of an investor to
reject mortgage loans from a mortgage originator if the mortgage loans
do not comply with the warranties and representations in their mortgage
purchasing agreement.

**[Real Estate-Related Financial Transaction]{.underline}** -- As
defined in the Agencies' appraisal regulations, any transaction
involving:

-   The sale, lease, purchase, investment in or exchange of real
    property, including interests in property, or the financing thereof;

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-   The refinancing of real property or interests in real property; or

-   The use of real property or interests in property as security for a
    loan or investment, including mortgage-backed securities.

**[Regulated Institution]{.underline}** -- For purposes of the Agencies'
appraisal regulations and these Guidelines, an institution supervised by
the federal financial institutions regulatory Agencies. This includes a
national or a state-chartered bank and its subsidiaries, a bank holding
company and its non-bank subsidiaries, a federal savings association and
its subsidiaries, a federal savings and loan holding company and its
subsidiaries, and a credit union.

**[Restricted Use Appraisal Report]{.underline}** -- According to USPAP
Standards Rule 2-2(c), a restricted use appraisal report briefly
"states" information significant to solve the appraisal problem as well
as a reference to the existence of specific work-file information in
support of the appraiser's opinions and conclusions. The Agencies
believe that the restricted use appraisal report will not be appropriate
to underwrite a significant number of federally related transactions due
to the lack of supporting information and analysis in the appraisal
report. However, it may be appropriate to use this type of appraisal
report for ongoing collateral monitoring of an institution's real estate
transactions and under other circumstances when an institution's program
requires an evaluation.

**[Sales Concessions]{.underline}** -- A cash or noncash contribution
that is provided by the seller or other party to the transaction and
reduces the purchaser's cost to acquire the real property. A sales
concession may include, but is not limited to, the seller paying all or
some portion of the purchaser\'s closing costs (such as prepaid expenses
or discount points) or the seller conveying to the purchaser personal
property which is typically not conveyed with the real property. Sales
concessions do not include fees that a seller is customarily required to
pay under state or local laws. In developing an opinion of market value,
an appraiser must take into consideration the affect of any sales
concessions on the market value of the real property. See \"market
value\" above and USPAP Standards Rule 1-2(c).

**[Sales History and Pending Sales]{.underline}** -- According to USPAP
Standards Rule 1-5, when the value opinion to be developed is market
value, an appraiser must, if such information is available to the
appraiser in the normal course of business, analyze: (1) all current
agreements of sale, options, and listings of the subject property as of
the effective date of the appraisal, and (2) all sales of the subject
property that occurred within three years prior to the effective date of
the appraisal.

**[Scope of Work]{.underline}** -- According to USPAP Scope of Work
Rule, the type and extent of research and analyses in an appraisal
assignment. (See the Scope of Work Rule in USPAP.)

**[Self-Contained Appraisal Report]{.underline}** -- According to USPAP
Standards Rule 2-2(a), a self-contained appraisal report "describes" all
information significant to the solution of an appraisal problem and
should include all significant data reported in comprehensive detail.

**[Sum of Retail Sales]{.underline}** -- A collateral valuation method
for estimating a value of several properties based on the sum of the
sales price of each property to an individual purchaser. The sum of
retail sales is not the market value for purposes of meeting the minimum
appraisal standards in the Agencies' appraisal regulations.

**[Summary Appraisal Report]{.underline}** -- According to USPAP
Standards Rule 2-2(b), the summary appraisal report "summarizes" all
information significant to the solution of an appraisal problem and
should include all significant data reported in a tabular or abbreviated
format.  

**[Tract Development]{.underline}** -- As defined in the Agencies'
appraisal regulations, a project of five units or more that is
constructed or is to be constructed as a single development. For
purposes of these Guidelines, "unit" refers to: a residential building
lot, a detached single-family home, an attached single-family home, and
a residence in a condominium building.

**[Transaction Value]{.underline}** -- As defined in the Agencies'
appraisal regulations:

-   For loans or other extensions of credit, the amount of the loan or
    extension of credit;

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-   For sales, leases, purchases, and investments in or exchanges of
    real property, the market value of the real property interest
    involved; and

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-   For the pooling of loans or interests in real property for resale or
    purchase, the amount of the loan or market value of the real
    property calculated with respect to each such loan or interest in
    real property.

For loans that permit negative amortization, the transaction value
should be the institution's total committed amount, including any
potential negative amortization.

If an institution enters into a transaction that is secured by several
individual properties that are not part of a tract development and that
have a value equal to or less than the appraisal threshold, the estimate
of value of each individual property should determine whether an
appraisal or evaluation would be required on each property in the
collateral pool.

**[Uniform Standards of Professional Appraisal Practice
(USPAP)]{.underline}** -- USPAP identifies the minimum set of standards
that apply in all appraisal, appraisal review, and appraisal consulting
assignments. These standards are promulgated by the Appraisal Standards
Board of the Appraisal Foundation and are incorporated as a minimum
appraisal standard in the Agencies' appraisal regulations.

**[Value (of Collateral for Use in Determining
Loan-to-Value)]{.underline}** -- According to the Agencies' real estate
lending standards guidelines, the term "value" means an opinion or
estimate set forth in an appraisal or evaluation, whichever may be
appropriate, of the market value of real property, prepared in
accordance with the Agencies' appraisal regulations and these
Guidelines. For loans to purchase an existing property, "value" means
the lesser of the actual acquisition cost or the estimate of value.

\[THIS SIGNATURE PAGE PERTAINS TO THE NOTICE AND REQUEST FOR COMMENT
TITLED, "PROPOSED INTERAGENCY APPRAISAL AND EVALUATION GUIDELINES."\]

Dated: \_\_\_\_\_\_\_\_\_ , 2008.

John C. Dugan,

Comptroller of the Currency.

\[THIS SIGNATURE PAGE PERTAINS TO THE NOTICE AND REQUEST FOR COMMENT
TITLED, "PROPOSED INTERAGENCY APPRAISAL AND EVALUATION GUIDELINES."\]

By order of the Board of Governors of the Federal Reserve System,
\_\_\_\_\_\_\_\_ , 2008.

Robert deV. Frierson,

Deputy Secretary of the Board.

\[THIS SIGNATURE PAGE PERTAINS TO THE NOTICE AND REQUEST FOR COMMENT
TITLED, "PROPOSED INTERAGENCY APPRAISAL AND EVALUATION GUIDELINES."\]

Dated at Washington, D.C., the th day of , 2008.

By order of the Federal Deposit Insurance Corporation.

Robert E. Feldman,

Executive Secretary.

\[THIS SIGNATURE PAGE PERTAINS TO THE NOTICE AND REQUEST FOR COMMENT
TITLED, "PROPOSED INTERAGENCY APPRAISAL AND EVALUATION GUIDELINES."\]

Dated: \_\_\_\_\_\_\_\_\_ , 2008.

By the Office of Thrift Supervision.

John M. Reich,

Director

\[THIS SIGNATURE PAGE PERTAINS TO THE NOTICE AND REQUEST FOR COMMENT
TITLED, "PROPOSED INTERAGENCY APPRAISAL AND EVALUATION GUIDELINES."\]

Dated: November 7, 2008

By the National Credit Union Administration Board.

Hattie M. Ulan

Acting Secretary of the Board

[^1]: Pub. L. 101-73, 103 Stat. 183 (1989).

[^2]: 12 U.S.C. 3339.

[^3]: 12 U.S.C. 3350(4).

[^4]: 12 U.S.C. 3339.

[^5]: [Id.]{.underline}

[^6]: OCC: 12 CFR 34, subpart C; FRB: 12 CFR 208, subpart E and 12 CFR
    part 225, subpart G; FDIC: 12 CFR part 323; OTS: 12 CFR part 564;
    and NCUA: 12 CFR part 722.

[^7]: [See]{.underline} OCC: Comptroller's Handbook, Commercial Real
    Estate and Construction Lending (1998) (Appendix E); FRB: 1994
    Interagency Appraisal and Evaluation Guidelines (SR letter 94-55);
    FDIC: FIL-74-94; and OTS: 1994 Interagency Appraisal and Evaluation
    Guidelines (Thrift Bulletin 55a).

[^8]: This includes: the 2003 Interagency Statement on Independent
    Appraisal and Evaluation Functions, OCC: Advisory Letter 2003-9;
    FRB: SR letter 03-18; FDIC: FIL-84-2003; OTS: CEO Memorandum No.184;
    and NCUA: NCUA Letter to Credit Unions 03-CU-17; the 2005 Frequently
    Asked Questions on the Appraisal Regulations and the Interagency
    Statement on Independent Appraisal and Evaluation Functions, OCC:
    OCC Bulletin 2005-6; FRB: SR letter 05-5; FDIC: FIL-20-2005; OTS:
    CEO Memorandum No. 213: and NCUA: NCUA Letter to Credit Unions
    05-CU-06; the 2005 Interagency FAQs on Residential Tract Development
    Lending, OCC: OCC Bulletin 2005-32; FRB: SR letter 05-14; FDIC:
    FIL-90-2005; OTS: CEO Memorandum No. 225: and NCUA: NCUA Letter to
    Credit Unions 05-CU-12; and the 2006 Interagency Statement on the
    2006 Revisions to the Uniform Standards of Professional Appraisal
    Practice, OCC: OCC Bulletin 2006-27; FRB: SR letter 06-9; FDIC:
    FIL-53-2006; OTS: CEO Memorandum No. 240: and NCUA: Regulatory Alert
    06-RA-04. Each of these guidance documents continues to be in
    effect.

[^9]: OCC 12 CFR part 34, subpart D; FRB: 12 CFR part 208, Appendix C;
    FDIC 12 CFR part 365; and OTS 12 CFR 560.100 and 560.101. NCUA's
    general lending regulation addresses residential real estate lending
    by federal credit unions, and its member business loan regulation
    addresses commercial real estate lending. 12 CFR 701.21; 12 CFR part
    723.

[^10]: [See supra]{.underline}, note 8.

[^11]: [See supra,]{.underline} note 8.

[^12]: OCC: 2005-22; FRB: SR letter 05-11; FDIC: FIL 45-2005; OTS: CEO
    Memorandum No. 222; and NCUA: NCUA Letter to Credit Unions 05-CU-07.

[^13]: In light of recent events in the residential mortgage market, the
    Agencies are interested in comments on the exemption from the
    regulatory appraisal requirements for residential real estate
    transactions involving U.S. government sponsored agencies.

[^14]: These Guidelines pertain to all real estate-related financial
    transactions originated or purchased by a regulated institution or
    its operating subsidiary for its own portfolio or as assets held for
    sale, including activities of commercial and residential real estate
    mortgage operations, capital markets groups, and asset
    securitization and sales units.

[^15]: Pub. L. 101-73, 103 Stat. 183 (1989).

[^16]: 12 U.S.C. 3339.

[^17]: 12 U.S.C. 3350(4).

[^18]: [Supra]{.underline} to Note 3.

[^19]: [Id]{.underline}.

[^20]: OCC: 12 CFR part 34, subpart C; FRB: 12 CFR part 208, subpart E,
    and 12 CFR part 225, subpart G; FDIC: 12 CFR part 323; OTS: 12 CFR
    part 564; and NCUA: 12 CFR part 722.

[^21]: OCC: 12 CFR part 34, subpart D; FRB: 12 CFR part 208, subpart E;
    FDIC: 12 CFR part 365; and OTS: 12 CFR 560.100 and 560.101.

[^22]: NCUA's general lending regulation addresses residential real
    estate lending by federal credit unions, and its member business
    loan regulation addresses commercial real estate lending. 12 CFR
    701.21; 12 CFR part 723.

[^23]: NCUA has recognized that it may be necessary for credit union
    loan officers or other officials to participate in the appraisal or
    evaluation function although it may be sound business practice to
    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. 55 FR 5614, 5618 (February 16, 1990),
    55 FR 30193, 30206 (July 25, 1990).

[^24]: In order to facilitate recovery in designated major disaster
    areas, subject to safety and soundness considerations, Section 2 of
    the Depository Institutions Disaster Relief Act of 1992, Pub. L.
    102-485, 106 Stat. 2771 (October 23, 1992) provides the Agencies
    with the authority to waive certain appraisal requirements for up to
    three years after a Presidential declaration of a natural disaster.

[^25]: As a matter of policy, OTS uses its supervisory authority to
    require problem associations and associations in troubled condition
    to obtain appraisals for all real estate-related transactions over
    \$100,000 (unless the transaction is otherwise exempt). NCUA
    requires a written estimate of market value for all real
    estate-related transactions valued at the appraisal threshold or
    less, or that involve existing credit where there is no advance of
    monies and material change in the condition of the property. 12 CFR
    722.3(d).

[^26]: Under NCUA regulations, "market value" of a construction and
    development project is the value at the time a commercial real
    estate loan is made, which includes "the appraised value of land
    owned by the borrower on which the project is to be built, less any
    liens, plus the cost to build the project." 68 FR 56537, 56540
    (October 1, 2003) (referring to Office of General Counsel Opinion
    01-0422 (June 7, 2001)); 12 CFR 723.3(b).

[^27]: [See]{.underline} USPAP, Statement 4 on Prospective Value
    Opinions, for further explanation.

[^28]: [See]{.underline} USPAP Scope of Work Rule, Advisory Opinions 28
    and 29.

[^29]: NCUA regulations do not contain an exemption from the appraisal
    requirements specific to member business loans.

[^30]: [See]{.underline} OCC Bulletin 2001-47, Third-Party Relationships
    (November 1, 2001); OTS Thrift Bulletin 82a, Third Party
    Arrangements (September 1, 2004); NCUA Letter to Credit Unions:
    01-CU-20, Due Diligence Over Third Party Service Arrangements
    (November 2001), 07-CU-13, Supervisory Letter-Evaluation Third Party
    Relationships (December 2007), 08-CU-09, Evaluating Third Party
    Relationships Questionnaire (April 2008); and FDIC Financial
    Institution Letter 44-2008, Guidance for Managing Third-Party Risk
    (June 2008).

[^31]: NCUA's appraisal regulation requires a written estimate of market
    value, performed by a qualified and experienced person who has no
    interest in the property, for transactions equal to or less than the
    appraisal threshold and transactions involving an existing extension
    of credit. 12 CFR 722.3(d).

[^32]: NCUA's regulations do not provide an exemption from the appraisal
    requirements specific to loans not secured by real estate.

[^33]: NCUA's regulations do not provide an exemption from the appraisal
    requirements specific to member business loans.

[^34]: These government-sponsored agencies would include Banks for
    Cooperatives; Federal Agriculture Mortgage Corporation; Federal Farm
    Credit Banks; Federal Home Loan Banks; Freddie Mac; Fannie Mae;
    Student Loan Marketing Association; and Tennessee Valley Authority.

[^35]: Generally, credit unions have limited fiduciary authority and
    NCUA's appraisal regulation does not specifically exempt
    transactions by fiduciaries.

[^36]: Credit unions may use an AVM to meet the requirement for a
    written estimate of value in conjunction with a review by a loan
    officer or a person with knowledge, training and experience in the
    real estate market where the loan is being made. [See]{.underline}
    12 CFR 722.3(d).

[^37]: [See]{.underline} OCC Bulletin 2000-16, Risk Modeling -- Model
    Validation (May 30, 2000).

[^38]: NCUA's appraisal regulation, 12 CFR 722, does not define
    "business loan." A "member business loan" is regulated under 12 CFR
    723.

[^39]: NCUA's appraisal regulation, 12 CFR 722, does not provide a
    higher appraisal threshold for loans defined as "member business
    loans" under 12 CFR 723.