[Federal Register Volume 75, Number 237 (Friday, December 10, 2010)]
[Notices]
[Pages 77450-77473]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-30913]



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Part VI

Department of the Treasury



Office of the Comptroller of the Currency



Office of Thrift Supervision



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Federal Reserve System
Federal Deposit Insurance Corporation
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National Credit Union Administration



Interagency Appraisal and Evaluation Guidelines; Notice

Federal Register / Vol. 75 , No. 237 / Friday, December 10, 2010 / 
Notices

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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

[Docket ID OCC-2010-0012]

FEDERAL RESERVE SYSTEM

[Docket No. OP-1338]

FEDERAL DEPOSIT INSURANCE CORPORATION

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

[Docket No. 2010-0018]

NATIONAL CREDIT UNION ADMINISTRATION

RIN 3133-AD38


Interagency Appraisal and Evaluation Guidelines

AGENCY: 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) (collectively, 
the Agencies).

ACTION: Final guidance.

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SUMMARY: The Agencies are issuing final Interagency Appraisal and 
Evaluation Guidelines (Guidelines) to provide further clarification of 
the Agencies' appraisal regulations and supervisory guidance to 
institutions and examiners about prudent appraisal and evaluation 
programs. The Guidelines, including their appendices, update and 
replace existing supervisory guidance documents to reflect developments 
concerning appraisals and evaluations, as well as changes in appraisal 
standards and advancements in regulated institutions' collateral 
valuation methods. The Guidelines clarify the Agencies' longstanding 
expectations for an institution's appraisal and evaluation program to 
conduct real estate lending in a safe and sound manner. Further, the 
Guidelines promote consistency in the application and enforcement of 
the Agencies' appraisal regulations and safe and sound banking 
practices. The Agencies recognize that revisions to the Guidelines may 
be necessary to address future regulations implementing the provisions 
of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 
2010.

DATES: The Guidelines are effective on December 10, 2010.

FOR FURTHER INFORMATION CONTACT: OCC: Robert L. Parson, Appraisal 
Policy Specialist, (202) 874-5411, or Darrin L. Benhart, Director, 
Credit and Market Risk Division, (202) 874-4564; or Christopher C. 
Manthey, Special Counsel, Bank Activities and Structure Division, (202) 
874-5300, or Mitchell Plave, Counsel, Legislative and Regulatory 
Activities Division, (202) 874-5090.
    FRB: Virginia M. Gibbs, Senior Supervisory Financial Analyst, (202) 
452-2521, or T. Kirk Odegard, Manager, Policy Implementation and 
Effectiveness, (202) 530-6225, Division of Banking Supervision and 
Regulation; or Walter R. McEwen, Senior Counsel, (202) 452-3321, or 
Benjamin W. McDonough, Counsel, (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, (202) 898-8886, or Mark Mellon, Counsel, (202) 898-
3884, Legal Division.
    OTS: Deborah S. Merkle, Senior Project Manager, Credit Risk, Risk 
Management, (202) 906-5688; or Marvin L. Shaw, Senior Attorney, 
Regulations and Legislation Division (202) 906-6639.
    NCUA: Vincent H. Vieten, Member Business Loan Program Officer, 
Office of Examination and Insurance, (703) 518-6396; or Sheila A. 
Albin, Staff Attorney, Office of General Counsel, (703) 518-6547.

SUPPLEMENTARY INFORMATION:

I. Background

    The Agencies' appraisal regulations \1\ implementing Title XI of 
the Financial Institutions Reform, Recovery, and Enforcement Act of 
1989 (FIRREA) \2\ set forth, among other requirements, minimum 
standards for the performance of real estate appraisals in connection 
with ``federally related transactions,'' \3\ 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.\4\ These regulations also specify the requirement for 
evaluations of real estate collateral in certain transactions that do 
not require an appraisal.
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    \1\ 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.
    \2\ Public Law 101-73, Title XI, 103 Stat. 511 (1989); 12 U.S.C. 
3331, et seq.
    \3\ 12 U.S.C. 3339.
    \4\ 12 U.S.C. 3350(4).
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    In October 1994, the OCC, FRB, FDIC and OTS jointly issued the 
Interagency Appraisal and Evaluation Guidelines \5\ (1994 Guidelines) 
to provide further guidance to regulated financial institutions on 
prudent appraisal and evaluation policies, procedures and practices. 
Further, under the Agencies' real estate lending regulations,\6\ 
federally regulated institutions must adopt and maintain written real 
estate lending policies that are consistent with safe and sound lending 
practices and should reflect consideration of the Interagency 
Guidelines for Real Estate Lending Policies (Lending Guidelines). The 
Lending Guidelines state that an institution is responsible for 
establishing a real estate appraisal and evaluation program, including 
the type and frequency of collateral valuations.
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    \5\ See 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).
    \6\ 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.
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    Since the issuance of the 1994 Guidelines, the Agencies have issued 
additional supervisory guidance documents \7\ to promote sound 
practices in regulated institutions' appraisal and evaluation programs, 
including independence in the collateral valuation function, the 
appraisal of residential tract developments, and compliance with 
revisions to the Uniform Standards of Professional Appraisal Practice 
(USPAP). There also have been significant industry developments, such 
as advancements in information technology that have affected the

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development and delivery of appraisals and evaluations.
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    \7\ 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 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. 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.
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    In response to these developments, the Agencies published for 
comment the Proposed Interagency Appraisal and Evaluation Guidelines 
(Proposal) on November 19, 2008.\8\ After considering the comments on 
the Proposal, the Agencies made revisions to the Proposal and are now 
issuing the Guidelines. The Guidelines apply to all real estate lending 
functions and real estate-related financial transactions originated or 
purchased by a regulated institution for its own portfolio or for 
assets held for sale. The changes provide updates to and consolidate 
some of the existing supervisory issuances. The Guidelines track the 
format and substance of the 1994 Guidelines and existing 
interpretations as reflected in supervisory guidance documents and the 
preamble that accompanies and describes amendments to the Agencies' 
appraisal regulations as published in June 1994.\9\ The Guidelines also 
reflect refinements made by the Agencies in the supervision of 
institutions' appraisal and evaluation programs. Since the issuance of 
the Proposal, changes in market conditions underscore the importance of 
institutions following sound collateral valuation practices when 
originating or modifying real estate loans and monitoring portfolio 
risk.
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    \8\ 73 FR 69647 (Nov. 19, 2008).
    \9\ 59 FR 29481 (Jun. 7, 1994).
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    In implementing the Dodd-Frank Wall Street Reform and Consumer 
Protection Act of 2010 (the Dodd-Frank Act),\10\ the Agencies will 
determine whether future revisions to the Guidelines may be necessary. 
However, the Agencies are issuing the Guidelines to promote consistency 
in the application and enforcement of the Agencies' current appraisal 
requirements and related supervisory guidance. In finalizing the 
Guidelines, the Agencies considered the Dodd-Frank Act, other Federal 
statutory and regulatory changes affecting appraisals,\11\ and the 
public comment process. The Guidelines are also responsive to the 
majority of comments, which expressed support for the Proposal and 
confirmed that additional clarification of existing regulatory and 
supervisory standards serve to strengthen the real estate collateral 
valuation and risk management practices across insured depository 
institutions.
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    \10\ Public Law 111-203, 124 Stat. 1376 (2010).
    \11\ See, for example, Title IV of Division A of the Housing and 
Economic Recovery Act of 2008, Public Law 110-289, Title IV, 
Division A, 122 Stat. 2800 (2008); 12 U.S.C. 1707, et seq., and FRB 
Regulation Z, 12 CFR 226.36 and 226.42.
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    The Guidelines contain four appendices that clarify current 
regulatory requirements and supervisory guidance. Appendix A provides 
further clarification on real estate-related financial transactions 
that are exempt from the Agencies' appraisal regulations. Appendix B 
addresses an institution's use of analytical methods or technological 
tools in the development of an evaluation. Appendix C clarifies the 
minimum appraisal standards required by the Agencies' appraisal 
regulations for analyzing and reporting appropriate deductions and 
discounts in appraisals. Based on comments on the Proposal, the 
Agencies added this additional appendix. Appendix D (previously 
Appendix C in the Proposal) provides a glossary of terms.

II. Comments on the Proposal

    The Agencies requested comment on all aspects of the Proposal, and 
specifically requested comment on: (1) The clarity of the Proposal 
regarding interpretations of the appraisal exemptions discussed in 
Appendix A; (2) the appropriateness of risk management expectations and 
controls in the evaluation process, including those discussed in 
Appendix B; and (3) the expectations in the Proposal on reviewing 
appraisals and evaluations. In particular, the Agencies requested 
comment on whether automated tools or sampling methods used to review 
appraisals and evaluations supporting lower risk single-family 
residential mortgages are 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 an 
institution's appraisal process for those low risk mortgage 
transactions.
    The Agencies collectively received 157 unique comments on the 
Proposal. Comments were received from financial institutions, 
appraisers, collateral valuation service providers, industry-related 
trade associations (industry groups), consumer groups, government 
officials, and individuals.
    The majority of financial institution and industry group commenters 
supported the Proposal and the Agencies' efforts to update existing 
guidance in this area. Many commenters recognized that additional 
clarification of existing regulatory and supervisory expectations 
strengthen the real estate collateral valuation and risk management 
practices across federally regulated institutions. These commenters 
were in general agreement that the Proposal adequately addressed 
developments in collateral valuation practices, but also raised 
technical issues and requested that the Agencies provide further 
clarification on a variety of topics.
    Some commenters did not support the Proposal for various reasons, 
including the need to study the effect of the recent market challenges 
on appraisal practices or a request to require appraisals on all real 
estate lending activity conducted by federally regulated institutions. 
Other commenters recommended revisions to the Agencies' appraisal 
regulations that cannot be changed with the issuance of the Guidelines. 
Some commenters encouraged the Agencies to incorporate additional 
safeguards for consumers in the Guidelines. In response, the Agencies 
note that these commenters' suggestions address statutes and 
regulations that are generally beyond the scope of the Guidelines, such 
as the Real Estate Settlement Procedures Act (RESPA) and the FRB's 
Regulation B (implementing the Equal Credit Opportunity Act).
    Other commenters urged the Agencies to work with other Federal 
agencies and government-sponsored enterprises (such as Freddie Mac and 
Fannie Mae) in an effort to harmonize standards for appraisals and 
other collateral valuations across all channels of mortgage lending, 
not just lending by federally regulated institutions. A few commenters 
recommended broad initiatives for the Agencies to undertake in the 
context of mitigating mortgage fraud and promoting appraisal quality 
through, for example, information sharing in the form of national data 
bases. While the Agencies recognize the significance of these issues in 
the ongoing public debate on appraisal reform through various 
initiatives, such matters are beyond the scope of the Guidelines.
    A few commenters questioned the timing of the Proposal given the 
stress in the current real estate market. For example, one commenter 
suggested that the Agencies withdraw the Proposal to allow additional 
time to study the lessons learned from the recent stress in the 
residential mortgage markets. The Agencies believe that the timing of 
the release of the Guidelines is appropriate to emphasize existing 
requirements, clarify expectations, and ensure consistency in the 
application of the Agencies' appraisal regulations, thereby promoting 
safe and sound collateral valuation practices across federally 
regulated institutions.
    Virtually all of the commenters either offered suggestions for 
strengthening or clarifying technical aspects of the

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Proposal. The following discussion summarizes significant comments on 
specific provisions of the Proposal, the Agencies' responses, and major 
changes to the Proposal as reflected in the Guidelines.

Discussion on the Comments and Guidelines

    Supervisory Policy. The Proposal addressed the supervisory process 
for assessing the adequacy of an institution's appraisal and evaluation 
program to conduct its real estate lending activities consistent with 
safe and sound underwriting practices. It also reaffirmed that, when 
examining an institution's real estate lending activity, supervisory 
staff will review an institution's appraisal and evaluation program for 
compliance with the Agencies' appraisal regulations and consistency 
with related guidance.
    Appraisers and appraisal groups asked for further explanation on 
the enforceability of the Guidelines and the distinction between 
supervisory guidance and regulatory requirements. These commenters 
expressed the view that the Proposal gave too much discretion to 
regulated institutions in the development and implementation of their 
appraisal and evaluation programs. In particular, these commenters 
raised concerns over the enforcement of the Guidelines by the Agencies. 
Conversely, financial institutions found the Proposal to be an 
improvement over existing guidance and indicated that it would promote 
consistent application of the Agencies' appraisal requirements.
    The Agencies believe that the Proposal adequately addressed the 
issue of enforceability and their supervisory process. The Agencies 
note that their appraisal regulations and guidance have been in place 
since the early 1990s and that financial institutions are familiar with 
the regulatory and supervisory framework. The Agencies believe that the 
Proposal reaffirmed existing guidance addressing their supervisory 
expectations for prudent appraisal and evaluation policies, procedures, 
and practices. Moreover, an institution's compliance with the 
regulatory requirements and consistency with supervisory expectations 
is considered during an Agency's on-site review of an institution's 
real estate lending activities. However, to address commenters' 
concerns, the Agencies incorporated minor edits to better distinguish 
between regulatory requirements and prudent banking practices in the 
Guidelines. In addition, the Agencies expanded certain sections to 
provide further clarification in an effort to promote consistency in 
the application and enforcement of their regulatory requirements and 
supervisory expectations.
    Independence of the Appraisal and Evaluation Program. The Proposal 
reaffirmed that an institution's collateral valuation function should 
be independent of the loan production process. The Proposal addressed 
longstanding supervisory expectations that an institution should 
implement procedures to affirm its program's independence. In response 
to commenters, the Agencies expanded this section in the Guidelines to 
further detail their expectations for appropriate communication and 
information sharing with persons performing collateral valuation 
assignments. The Guidelines address the types of communications that 
would not be construed as coercion or undue influence on appraisers and 
persons performing evaluations, as well as examples of actions that 
would compromise independence. The Guidelines also reference the FRB's 
Regulation Z (implementing the Truth in Lending Act), which was amended 
in 2008 and 2010 to include provisions regarding appraiser 
independence.\12\
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    \12\ 73 FR 44522, 44604 (Jul. 30, 2008); 75 FR 66554 (Oct. 28, 
2010).
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    Some commenters did not support the longstanding flexibility 
afforded to small and rural institutions when absolute lines of 
independence cannot be achieved. The Agencies believe that small and 
rural institutions can have acceptable risk management practices to 
support their appraisal function and conduct their real estate lending 
activity in a safe and sound manner. Therefore, the Guidelines, like 
the Proposal, allow for some flexibility to exist so long as an 
institution can demonstrate the independence of its collateral 
valuation function from the final credit decision.
    A few commenters asked the Agencies to provide further 
clarification on the types of employees who would be considered as loan 
production staff. The Agencies note that both the Proposal and 
Guidelines include a definition in Appendix D for loan production 
staff. The Agencies believe that the definition adequately describes 
loan production staff for purposes of the Guidelines. During the 
supervisory review of an institution's real estate lending activities, 
the Agencies' examiners assess the adequacy of risk management 
practices, including the independence of the collateral valuation 
function.
    Selection of Appraisers and Individuals Who Perform Evaluations. In 
the Proposal, this section addressed the competency and qualifications 
of appraisers and persons who perform an evaluation. Several commenters 
asked for clarification on the factors institutions should consider in 
assessing an appraiser's competency. A few commenters also noted that 
certain factors, such as cost and turnaround time, should not influence 
the selection of appraisers. Other commenters asked the Agencies to 
clarify certain aspects of the process for engaging an appraiser and 
when the appraiser/client relationship is established. To address these 
comments, the Agencies incorporated clarifying edits in the Guidelines 
to emphasize the importance of appraiser competency for a particular 
assignment relative to both the property type and geographic market. 
Moreover, the Guidelines stress that an institution should not select a 
valuation method or tool solely because it provides the highest value, 
the lowest cost, or the fastest response or turnaround time.
    To eliminate redundancies, the Guidelines incorporate the 
discussion in the Proposal's section on qualifications of persons who 
perform evaluations into a new section that addresses both the 
qualifications and selection of an appraiser and a person who performs 
an evaluation. Further, the Guidelines no longer refer to ``a 
nonpreferential and unbiased process'' for selecting appraisers or 
persons who perform evaluations, which could be misconstrued in a way 
that would not ensure that a competent person is selected for a 
valuation assignment.
    A few institution commenters asked the Agencies to address whether 
loan production staff can recommend an appraiser for a particular 
assignment or inclusion on the institution's list of approved 
appraisers. Staff performing the collateral valuation function is 
responsible for selecting an appraiser. The Guidelines provide further 
clarification on an institution's procedures for the selection of an 
appraiser for an assignment, including the development, administration, 
and maintenance of an approved appraiser list, if used.
    Minimum Appraisal Standards. To promote the quality of appraisals, 
the Proposal and the Guidelines provide further clarification of the 
minimum appraisal standards in the Agencies' appraisal regulations and 
contain guidance on appraisal development and reporting to reflect 
revisions to USPAP. Most commenters found the Proposal's additional 
explanation on these standards helpful, particularly the discussion on 
deductions and discounts in an appraisal for a residential tract 
development. While this section in the Guidelines generally tracks the 
Proposal, the detailed discussion on

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analyzing deductions and discounts has been moved to a new appendix. 
Given the importance of these concepts, the appendix contains an 
expanded discussion of the appraisal standard for deductions and 
discounts in a discounted cash flow analysis.
    Further, several commenters addressed the topic of assessment of an 
appraiser's competency in the context of ensuring compliance with the 
minimum appraisal standards. The Guidelines reaffirm that a state 
certification or license is a minimum credentialing requirement and 
that an appraiser must be selected based on his or her competency to 
perform a particular assignment, including knowledge of the specific 
property type and market. Further, the Agencies revised the Guidelines 
to confirm that the result of an automated valuation model (AVM), in 
and of itself, does not meet the Agencies' minimum appraisal standards, 
regardless of whether the results are signed by an appraiser.
    Transactions that Require Evaluations. Financial institutions 
appreciated the flexibility contained in the Proposal that permitted 
the use of evaluations for low-risk transactions, consistent with the 
Agencies' appraisal regulations. These commenters contended that 
appropriate risk management practices provide sufficient safeguards to 
elevate their collateral valuation methods (that is, obtaining an 
appraisal instead of an evaluation) when warranted. Several appraiser 
and appraisal organization commenters expressed their longstanding 
opposition to institutions' use of evaluations in lieu of appraisals 
for exempt transactions. This section in the Guidelines references 
Appendix A, Appraisal Exemptions, which has been revised in response to 
comments on the Proposal. The Agencies note that the Guidelines do not 
expand the categories of appraisal exemptions set forth in the 
Agencies' appraisal regulations.
    For further clarity, this section incorporates certain technical 
edits to address specific comments. For instance, the dollar amount of 
the appraisal threshold and of the business loan threshold from the 
Agencies' appraisal regulations were incorporated in the text of this 
section. This section also addresses the factors that an institution 
should consider in determining whether to obtain an appraisal, even 
though an evaluation is permitted. This topic was moved from the 
Evaluation Content section in the Proposal to this section, as it 
relates to the regulatory requirement that evaluations reflect safe and 
sound banking practices. In particular, comments from appraisers and 
appraisal organizations noted that the Agencies should not permit 
evaluations, even detailed ones, to substitute for appraisals in higher 
risk real estate loans. The Agencies believe that the Guidelines 
adequately address an institution's responsibility to maintain policies 
and procedures for obtaining an appropriate appraisal or evaluation to 
support its credit decision.
    Evaluation Development and Evaluation Content. As noted above, some 
appraiser and appraisal group commenters expressed their views that 
evaluations generally do not provide an adequate assessment of a 
property's market value and requested that the Agencies provide 
additional guidance on the content of evaluations and the level of 
detail to be included in evaluations supporting higher risk 
transactions. Comments provided by financial institutions support the 
approach taken in the Proposal, which establishes minimum supervisory 
expectations for an evaluation and is designed to ensure an institution 
obtains a more detailed evaluation, or possibly an appraisal, when 
additional information is necessary to assess collateral risk in the 
credit decision.
    In response to comments, the Agencies revised the Guidelines to 
stress that an institution should consider transaction risk when it is 
evaluating the appropriate collateral valuation method and level of 
documentation for an evaluation. The Guidelines also now provide 
additional clarification on the Agencies' supervisory expectations for 
the development and content of evaluations. A new section on Evaluation 
Development provides guidance on the requirement in the Agencies' 
appraisal regulations that evaluations must be consistent with safe and 
sound banking practices. These revisions incorporate and clarify 
certain supervisory expectations from the Evaluation Content section of 
the Proposal, and emphasize an institution's responsibility to 
establish criteria addressing the appropriate level of analysis and 
information necessary to support the estimate of market value in an 
evaluation.
    Clarifying edits also reaffirm that valuation methods used to 
develop an evaluation must be consistent with safe and sound banking 
practices. For example, an AVM may be used for a transaction provided 
the resulting evaluation meets all of the supervisory expectations in 
the Evaluation Development and Evaluation Content sections in the 
Guidelines, is consistent with safe and sound banking practices, and 
produces a credible market value conclusion. In response to comments, 
the Guidelines clarify how institutions can use analytical methods or 
technological tools to develop an evaluation. The Guidelines, for 
instance, emphasize the importance of considering the property's 
condition in the development of an evaluation, regardless of the method 
or tool used. Further, technical edits were incorporated in the 
Evaluation Content section of the Guidelines to address commenters' 
questions regarding the appropriate level of documentation in an 
evaluation.
    The Guidelines also address questions from several commenters on 
the appropriate use of broker price opinions (BPOs) in the context of 
the Agencies' appraisal regulations. The Proposal did not specifically 
address the use of BPOs or similar valuation methods. The Guidelines 
confirm that BPOs and other similar valuation methods, in and of 
themselves, do not comply with the minimum appraisal standards in the 
Agencies' appraisal regulations and are not consistent with the 
Agencies' minimum supervisory expectations for evaluations. A BPO or 
other valuation method may provide useful information in developing an 
appraisal or evaluation, for monitoring collateral values for existing 
loans, or in modifying loans in certain circumstances. Further, the 
Dodd-Frank Act provides, ``[i]n conjunction with the purchase of a 
consumer's principal dwelling, broker price opinions may not be used as 
the primary basis to determine the value of a piece of property for the 
purpose of a loan origination of a residential mortgage loan secured by 
such piece of property.'' \13\
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    \13\ Dodd-Frank Act, Section 1473(r).
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    Reviewing Appraisals and Evaluations. This section in the Proposal 
and the Guidelines provides the Agencies' expectations for an 
institution to establish an effective, risk-focused process for 
reviewing appraisals and evaluations prior to a final credit decision. 
In the Proposal, the Agencies specifically requested comment on the 
Agencies' expectations for reviewing appraisals and evaluations. In 
particular, the Agencies sought comment in the Proposal on whether the 
use of automated tools or sampling methods for reviewing appraisals or 
evaluations supporting lower risk residential mortgages are appropriate 
for other low risk mortgage transactions. The Agencies also requested 
comment on whether appropriate constraints can be placed on the use of 
these tools and

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methods to ensure the overall integrity of the institution's appraisal 
review process for other low risk mortgage transactions. Commenters 
requested further clarification on the process for institutions to 
obtain approval to use automated tools and sampling methods in the 
review process. The Proposal noted that each Agency would address the 
approval process through established processes for communicating with 
its regulated institutions.
    Several commenters requested further clarification on appropriate 
policies and procedures for the review function. Some commenters also 
asked the Agencies to address the expectations for reviews by property 
type and risk factors. In response to these comments, the Guidelines 
were expanded to clarify the Agencies' expectations for an appropriate 
depth of review, the educational and training qualifications for 
reviewers, the resolution of valuation deficiencies, and related 
documentation standards. Further, the Guidelines now discuss the 
appropriate depth of review by property type, including factors to 
consider in the review of appraisals and evaluations of commercial and 
single-family residential real estate. The Guidelines retain the 
possible use of automated tools and sampling methods in the review of 
appraisals and evaluations supporting lower risk residential mortgages. 
With prior approval from its primary Federal regulator, an institution 
may use such tools or methods for its review process.
    This revised section also incorporates the section on Accepting 
Appraisals from Other Financial Services Institutions in the Proposal. 
The guidance addresses the authority as set forth in the Agencies' 
appraisal regulations for an institution to use an appraisal that was 
performed by an appraiser engaged directly by another regulated 
institution or financial services institution (including mortgage 
brokers), provided certain conditions are met. Some commenters contend 
that regulated institutions should not be allowed to accept appraisals 
from mortgage brokers so as to ensure compliance with applicable 
appraisal independence standards. In response to these comments, the 
Guidelines confirm that appraisals obtained from other financial 
services institutions must comply with the Agencies' appraisal 
regulations and be consistent with supervisory guidance, including the 
standards of independence. Moreover, the Guidelines remind institutions 
that they generally should not rely on evaluations prepared by another 
financial services institution.
    With regard to relying on appraisals supporting underlying loans in 
a pool of 1-to-4 family mortgage loans, the Guidelines also confirm 
that an institution may use sampling and audit procedures to determine 
whether the appraisals in a pool of residential loans satisfy the 
Agencies' appraisal regulations and are consistent with supervisory 
guidance. When compliance cannot be confirmed, institutions are 
reminded that they must obtain an appraisal(s) prior to engaging in the 
transaction. Finally, minor edits were made to this section to reaffirm 
that small institutions should ensure that reviewers are independent 
and appropriately qualified, and may need to employ additional 
personnel or engage a third party to perform the review function.
    Third Party Arrangements. This section in the Guidelines addresses 
the risk management practices that an institution should consider if it 
uses a third party to manage or conduct all or part of its collateral 
valuation function. In the Guidelines, this section was expanded to 
provide additional specificity on an institution's responsibilities for 
the selection, monitoring, and management of arrangements with third 
parties. Revisions to this section reflect requests from commenters for 
clarification on the relationship between regulated institutions and 
third parties. Commenters also asked the Agencies to reaffirm that an 
institution cannot outsource its responsibility to maintain an 
effective and independent collateral valuation function. The Proposal 
and Guidelines reference each Agency's guidance on third party 
arrangements. Revisions to this section summarize key considerations 
from those issuances and state that institutions should use caution in 
determining whether to engage a third party. In response to several 
comments regarding an institution's use of appraisal management 
companies, this section addresses the due diligence procedures for 
selecting a third party, including an effective risk management system 
and internal controls.
    Program Compliance. A few commenters suggested that the Agencies 
incorporate certain clarifying edits with regard to the independence of 
the collateral valuation process, staff reporting relationships, and 
internal quality control practices. Several commenters asked the 
Agencies to clarify their expectations for demonstrating compliance and 
offered recommendations on sound practices, including appropriate staff 
reporting relationships and the depth of the process and procedures for 
verifying and testing compliance (such as sampling procedures). In 
response, the Agencies have revised the Guidelines to reflect a 
principles-based approach to ensure that an institution's collateral 
valuation program complies with the Agencies' appraisal regulations and 
is consistent with supervisory guidance and an institution's internal 
policies.
    In the Guidelines, this section also was reorganized to list the 
minimum program compliance standards and to incorporate clarifying 
text. Institutions are reminded that the results of their review 
process and other relevant information should be used as a basis for 
considering persons for future collateral valuation assignments and 
that collateral valuation deficiencies should be reported to 
appropriate internal parties, and if applicable, to external 
authorities in a timely manner. The Guidelines should be considered by 
an institution in establishing effective internal controls over its 
collateral valuation function, including the verification and testing 
of its processes.
    Monitoring Collateral Value. The majority of commenters agreed with 
the Proposal and the expectations for determining when an institution 
should obtain a new appraisal or evaluation for monitoring asset 
quality of its portfolio and collateral risk in a particular credit. 
While some commenters cautioned that the Agencies' examiners should not 
be overly aggressive in requiring institutions to obtain new appraisals 
on existing loans, a few commenters asked for clarification on what 
would constitute a change in market condition and when an institution 
should re-value collateral.
    In addition to certain clarifying edits, language was added in the 
Guidelines to confirm that an institution may employ a variety of 
techniques for monitoring the effect of collateral valuation trends on 
portfolio risk and that such information should be timely and 
sufficient to understand the risk associated with its lending activity. 
In response to commenters, the Guidelines now provide examples of 
factors for an institution to consider in assessing whether a 
significant change in market conditions has occurred. The Guidelines 
also emphasize the importance of monitoring collateral values in the 
institution's lending markets, consistent with the Agencies' real 
estate lending regulations and guidelines.
    To eliminate redundancies, the revised section incorporates from 
Appendix A of the Proposal the discussion of an institution's

[[Page 77455]]

responsibility to obtain current collateral valuation information for 
loan modifications and workouts of existing credits. As in the 
Proposal, the Guidelines address when an institution may modify an 
existing credit without obtaining either an appraisal or an evaluation. 
The revisions reflect clarifying text in response to comments from 
institutions on the regulatory requirements for reappraisals of real 
estate collateral for existing credits, particularly in modification 
and workout situations.
    The Agencies also revised the Guidelines to reaffirm an 
institution's responsibility to maintain policies and procedures that 
establish standards for obtaining current collateral valuation 
information to facilitate its decision to engage in a loan modification 
or workout. In response to comments, the Guidelines address the 
Agencies' expectations for institutions to elevate the collateral 
valuation method as appropriate to address safety and soundness 
concerns, particularly in those loan workout situations where repayment 
becomes more dependent on the sale of collateral.
    Referrals. The Proposal confirmed that an institution should make 
referrals to state appraiser regulatory authorities when it suspects 
that a state licensed or certified appraiser failed to comply with 
USPAP, applicable state laws, or engaged in unethical or unprofessional 
conduct. Some commenters referenced industry efforts to mitigate fraud 
in real estate transactions. In response to these comments, the 
Agencies revised the Guidelines to address an institution's 
responsibility to file a suspicious activity report (SAR) with the 
Financial Crimes Enforcement Network of the Department of Treasury when 
it suspects inappropriate appraisal-related activity that meets the SAR 
filing criteria. The revisions also confirm that examiners will forward 
such findings to their supervisory office for appropriate disposition 
if there are concerns with an institution's ability or willingness to 
make a referral or file a SAR. Institutions also should be aware of the 
recent amendments to Regulation Z, which address mandatory reporting 
provisions.\14\
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    \14\ 75 FR 66554 (Oct. 28, 2010).
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    Appendix A--Appraisal Exemptions. The Guidelines contain a new 
introduction to the Appendix in response to commenters' questions 
regarding the authority of the Agencies to establish exemptions from 
their appraisal regulations. The discussion of loan modifications in 
the Proposal was incorporated in the section on Monitoring Collateral 
Value. The revisions reflect clarifying text in response to comments 
from institutions on the regulatory requirements for reappraisals of 
real estate collateral for existing credits and subsequent 
transactions, particularly loan workout situations.
    Notwithstanding the exemption on renewals, refinancings, and 
subsequent transactions, some industry groups and appraiser 
organizations recommended that the Agencies address the circumstances 
under which institutions are to obtain appraisals even though 
evaluations are permitted. The Agencies believe that the Proposal 
adequately addressed an institution's responsibility to maintain a 
risk-focused process for elevating its collateral valuation methods 
consistent with safe and sound banking practices.
    Appendix B--Evaluations Based on Analytical Methods or 
Technological Tools. In response to commenters, the Appendix was 
revised to provide clarification on the appropriate use of analytical 
methods or technological tools to develop an evaluation. The Appendix 
clarifies that an institution may not rely solely on the results of a 
method or tool to develop an evaluation unless the resulting evaluation 
meets all of the supervisory expectations for an evaluation and is 
consistent with safe and sound banking practices.
    As in the Proposal, the Appendix in the Guidelines provides 
guidance on the Agencies' supervisory expectations regarding an 
institution's process for selecting, using, validating, and monitoring 
a valuation method or tool. The Appendix also addresses the process 
that institutions are expected to establish for determining whether a 
method or tool may be used in the preparation of an evaluation and the 
supplemental information that may be necessary to comply with the 
minimum supervisory expectations for an evaluation, as set forth in the 
Guidelines.
    The Appendix also has been revised to respond to comments regarding 
the appropriate use of an AVM or tax assessment value (TAV) to develop 
an evaluation. Some commenters did not agree that institutions should 
be permitted to use AVMs to develop an evaluation. Some small 
institutions noted that they could be placed at a competitive 
disadvantage with larger institutions that use AVMs. The Guidelines 
make it clear that an institution is responsible for meeting 
supervisory expectations regarding the selection, use, and validation 
of an AVM and maintaining an effective system of internal controls. 
Moreover, an AVM or TAV is not, in and of itself, an alternative to an 
evaluation. Therefore, when using an AVM or TAV, the resulting 
evaluation should be consistent with the supervisory expectations in 
the Evaluation Development and Evaluation Content sections in the 
Guidelines. The Appendix also addresses the expertise necessary to 
manage the use of a method or tool, which may require an institution to 
employ additional personnel or engage a third party. Recognizing that 
technology may change, the Guidelines address an institution's 
responsibility for ensuring that an evaluation based on an analytical 
method or technological tool is consistent with the Agencies' 
supervisory expectations in the Evaluation Content section.
    Appendix C--Deductions and Discounts. This is a new Appendix in the 
Guidelines that is based on the discussion in the Proposal on the 
Agencies' minimum appraisal standards. Most commenters appreciated the 
additional explanation in the Proposal on the appraisal standard to 
analyze deductions and discounts for residential tract developments. 
However, these commenters provided technical comments on appraisal 
practices that might assist one in understanding this appraisal 
concept. In light of these comments, the Agencies have expanded the 
discussion in the Guidelines and moved the discussion to a separate 
Appendix.
    Appendix D--Glossary of Terms. In response to commenters' 
suggestions, additional terms were incorporated in the Guidelines, 
including appraisal management company, broker price opinion, credit 
file, going concern value, presold unit, and unsold units.

Other Comments on the Proposal

    Other Interagency Appraisal-Related Guidance Documents. Several 
commenters asked whether other guidance documents issued by the 
Agencies on appraisal-related issues would be rescinded with the 
issuance of the Guidelines. The following guidance documents have been 
incorporated in the Guidelines and are now being rescinded: (1) The 
1994 Interagency Appraisal and Evaluation Guidelines; (2) the 2003 
Interagency Statement on Independent Appraisal and Evaluation 
Functions; (3) and the Interagency Statement on the 2006 Revisions to 
the Uniform Standards of Professional Appraisal Practice. The following 
guidance documents continue to be in effect: The 2005 Interagency FAQs 
on Residential Tract Development Lending

[[Page 77456]]

and the 2005 Frequently Asked Questions on the Appraisal Regulations 
and the Interagency Statement on Independent Appraisal and Evaluation 
Functions.
    Agencies' Appraisal Regulations. In the notice for comment on the 
Proposal, the Agencies requested comment on the appraisal regulatory 
exemption for residential real estate transactions involving U.S. 
government sponsored enterprises (GSEs). In the Guidelines, the 
Agencies clarified their expectations that while a loan qualifying for 
sale to a GSE is exempted from the appraisal regulations, an 
institution is expected to have appropriate policies to confirm their 
compliance with the GSEs' underwriting and appraisal standards. 
Further, the Agencies recognize that the Dodd-Frank Act directs the 
Agencies to address in their safety and soundness regulations the 
appraisal requirements for 1-to-4 family residential mortgages. Any 
amendment to the Agencies' appraisal regulations is beyond the scope of 
the Guidelines. The information provided by commenters will be 
considered in assessing the need to revise these regulations.

III. Final Interagency Guidelines

    The Guidelines are effective upon publication in the Federal 
Register. However, on a case-by-case basis, an institution needing to 
improve its appraisal and evaluation program may be granted some 
flexibility from its primary Federal regulator on the timeframe for 
revising its procedures to be consistent with the Guidelines. This 
timeframe should be commensurate with the level and nature of the 
institution's real estate lending activity.
    The final Interagency Appraisal and Evaluation Guidelines appear 
below.

Interagency Appraisal and Evaluation Guidelines

Table of Contents

I. Purpose
II. Background
III. Supervisory Policy
IV. Appraisal and Evaluation Program
V. Independence of the Appraisal and Evaluation Program
VI. Selection of Appraisers or Persons Who Perform Evaluations
    A. Approved Appraiser List
    B. Engagement Letters
VII. Transactions That Require Appraisals
VIII. Minimum Appraisal Standards
IX. Appraisal Development
X. Appraisal Reports
XI. Transactions That Require Evaluations
XII. Evaluation Development
XIII. Evaluation Content
XIV. Validity of Appraisals and Evaluations
XV. Reviewing Appraisals and Evaluations
    A. Reviewer Qualifications
    B. Depth of Review
    C. Resolution of Deficiencies
    D. Documentation of the Review
XVI. Third Party Arrangements
XVII. Program Compliance
    A. Monitoring Collateral Values
    B. Portfolio Collateral Risk
    C. Modifications and Workouts of Existing Credits
XVIII. Referrals
Appendix A, Appraisal Exemptions
Appendix B, Evaluations Based on Analytical Methods and 
Technological Tools
Appendix C, Deductions and Discounts
Appendix D, Glossary of Terms

I. 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, including their appendices, 
address supervisory matters relating to real estate appraisals and 
evaluations used to support real estate-related financial 
transactions.\15\ Further, these Guidelines provide federally regulated 
institutions and examiners clarification on the Agencies' expectations 
for prudent appraisal and evaluation policies, procedures, and 
practices.
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    \15\ 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.
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II. Background

    Title XI of the Financial Institutions Reform, Recovery, and 
Enforcement Act of 1989 (FIRREA) \16\ requires each Agency to prescribe 
appropriate standards for the performance of real estate appraisals in 
connection with ``federally related transactions,'' \17\ 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.\18\ 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.\19\ An Agency 
may require compliance with additional appraisal standards if it makes 
a determination that such additional standards are required to properly 
carry out its statutory responsibilities.\20\ Each of the Agencies has 
adopted additional appraisal standards.\21\
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    \16\ Public Law 101-73, Title XI, 103 Stat. 511 (1989); 12 
U.S.C. 3331, et seq.
    \17\ 12 U.S.C. 3339.
    \18\ 12 U.S.C. 3350(4).
    \19\ Supra Note 3.
    \20\ Id.
    \21\ 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.
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    The Agencies' real estate lending regulations and guidelines,\22\ 
issued pursuant to section 304 of the Federal Deposit Insurance 
Corporation Improvement Act of 1991 (FDICIA),\23\ 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.\24\ The real estate lending guidelines 
state that an institution's real estate lending program should include 
an appropriate real estate appraisal and evaluation program.
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    \22\ OCC: 12 CFR part 34, subpart C; FRB: 12 CFR part 208, 
subpart E; FDIC: 12 CFR part 365; and OTS: 12 CFR 560.100 and 
560.101.
    \23\ Public Law 102-242, Sec.  304, 105 Stat. 2354; 12 U.S.C. 
1828(o).
    \24\ 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.
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III. 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 size and the nature of an institution's real estate-
related activities when assessing the appropriateness of its program.
    While borrowers' ability to repay their real estate loans according 
to reasonable terms remains the primary consideration in the lending 
decision, an institution also must consider the value of the underlying 
real estate collateral in accordance with the Agencies' appraisal 
regulations. Institutions that fail to comply with the Agencies' 
appraisal regulations or to maintain a sound appraisal and evaluation 
program consistent with supervisory guidance 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.
    When analyzing individual transactions, examiners will review an

[[Page 77457]]

appraisal or evaluation to determine whether the methods, assumptions, 
and value conclusions are reasonable. Examiners also will determine 
whether the appraisal or evaluation complies with the Agencies' 
appraisal regulations and is consistent with supervisory guidance 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, competent, and 
are not subject to conflicts of interest.

IV. 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:
    <bullet> Provide for the independence of the persons ordering, 
performing, and reviewing appraisals or evaluations.
    <bullet> Establish selection criteria and procedures to evaluate 
and monitor the ongoing performance of appraisers and persons who 
perform evaluations.
    <bullet> Ensure that appraisals comply with the Agencies' appraisal 
regulations and are consistent with supervisory guidance.
    <bullet> Ensure that appraisals and evaluations contain sufficient 
information to support the credit decision.
    <bullet> Maintain criteria for the content and appropriate use of 
evaluations consistent with safe and sound banking practices.
    <bullet> Provide for the receipt and review of the appraisal or 
evaluation report in a timely manner to facilitate the credit decision.
    <bullet> Develop criteria to assess whether an existing appraisal 
or evaluation may be used to support a subsequent transaction.
    <bullet> Implement internal controls that promote compliance with 
these program standards, including those related to monitoring third 
party arrangements.
    <bullet> Establish criteria for monitoring collateral values.
    <bullet> Establish criteria for obtaining appraisals or evaluations 
for transactions that are not otherwise covered by the appraisal 
requirements of the Agencies' appraisal regulations.

V. Independence of the Appraisal and Evaluation Program

    For both appraisal and evaluation functions, an institution should 
maintain standards of independence as part of an effective collateral 
valuation program 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 who 
administer the institution's collateral valuation program, including 
the ordering, reviewing, and acceptance of appraisals and evaluations. 
Appraisers must be independent of the loan production and collection 
processes and have no direct, indirect or prospective interest, 
financial or otherwise, in the property or transaction.\25\ These 
standards of independence also should apply to persons who perform 
evaluations.
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    \25\ The Agencies' appraisal regulations set forth specific 
appraiser independence requirements that exceed those set forth in 
the Uniform Standards of Professional Appraisal Practice (USPAP). 
Institutions also should be aware of separate requirements on 
conflicts of interest under Regulation Z (Truth in Lending), 12 CFR 
226.42(d).
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    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 must abstain from any vote or approval involving 
loans on which they ordered, performed, or reviewed the appraisal or 
evaluation.\26\
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    \26\ 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).
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    Communication between the institution's collateral valuation staff 
and an appraiser or person performing an evaluation is essential for 
the exchange of appropriate information relative to the valuation 
assignment. An institution's policies and procedures should specify 
methods for communication that ensure independence in the collateral 
valuation function. These policies and procedures should foster timely 
and appropriate communications regarding the assignment and establish a 
process for responding to questions from the appraiser or person 
performing an evaluation.
    An institution may exchange information with appraisers and persons 
who perform evaluations, which may include providing a copy of the 
sales contract \27\ for a purchase transaction. However, an institution 
should not directly or indirectly coerce, influence, or otherwise 
encourage an appraiser or a person who performs an evaluation to 
misstate or misrepresent the value of the property.\28\ Consistent with 
its policies and procedures, an institution also may request the 
appraiser or person who performs an evaluation to:
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    \27\ Refer to USPAP Standards Rule 1-5(a) and the Ethics Rule.
    \28\ For mortgage transactions secured by a consumer's principal 
dwelling, refer to 12 CFR 226.36(b) under Regulation Z (Truth in 
Lending) through March 31, 2011. Also refer to 12 CFR 226.42, which 
is mandatory beginning on April 1, 2011. Regulation Z also prohibits 
a creditor from extending credit when it knows that the appraiser 
independence standards have been violated, unless the creditor 
determines that the value of the property is not materially 
misstated.
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    <bullet> Consider additional information about the subject property 
or about comparable properties.
    <bullet> Provide additional supporting information about the basis 
for a valuation.
    <bullet> Correct factual errors in an appraisal.
    An institution's policies and procedures should ensure that it 
avoids inappropriate actions that would compromise the independence of 
the collateral valuation function,\29\ including:
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    \29\ See 12 CFR 226.42(c).
---------------------------------------------------------------------------

    <bullet> Communicating a predetermined, expected, or qualifying 
estimate of value, or a loan amount or target loan-to-value ratio to an 
appraiser or person performing an evaluation.
    <bullet> Specifying a minimum value requirement for the property 
that is needed to approve the loan or as a condition of ordering the 
valuation.
    <bullet> Conditioning a person's compensation on loan consummation.
    <bullet> Failing to compensate a person because a property is not 
valued at a certain amount.\30\
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    \30\ This provision does not preclude an institution from 
withholding compensation from an appraiser or person who provided an 
evaluation based on a breach of contract or substandard performance 
of services under a contractual provision.
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    <bullet> Implying that current or future retention of a person's 
services depends on the amount at which the appraiser or person 
performing an evaluation values a property.
    <bullet> Excluding a person from consideration for future 
engagement because a property's reported market value does not meet a 
specified threshold.

[[Page 77458]]

    After obtaining an appraisal or evaluation, or as part of its 
business practice, an institution may find it necessary to obtain 
another appraisal or evaluation of a property and would be expected to 
adhere to a policy of selecting the most credible appraisal or 
evaluation, rather than the appraisal or evaluation that states the 
highest value. (Refer to the Reviewing Appraisals and Evaluations 
section in these Guidelines for additional information on determining 
and documenting the credibility of an appraisal or evaluation.) 
Further, an institution's reporting of a person suspected of non-
compliance with the Uniform Standards of Professional Appraisal 
Practice (USPAP), and applicable Federal or state laws or regulations, 
or otherwise engaged in other unethical or unprofessional conduct to 
the appropriate authorities would not be viewed by the Agencies as 
coercion or undue influence. However, an institution should not use the 
threat of reporting a false allegation in order to influence or coerce 
an appraiser or a person who performs an evaluation.

VI. Selection of Appraisers or Persons Who Perform Evaluations

    An institution's collateral valuation program should establish 
criteria to select, evaluate, and monitor the performance of appraisers 
and persons who perform evaluations. The criteria should ensure that:
    <bullet> The person selected possesses the requisite education, 
expertise, and experience to competently complete the assignment.
    <bullet> The work performed by appraisers and persons providing 
evaluation services is periodically reviewed by the institution.
    <bullet> The person selected is capable of rendering an unbiased 
opinion.
    <bullet> The person selected is independent and has no direct, 
indirect, or prospective interest, financial or otherwise, in the 
property or the transaction.
    <bullet> The appraiser selected to perform an appraisal holds the 
appropriate state certification or license at the time of the 
assignment. Persons who perform evaluations should possess the 
appropriate appraisal or collateral valuation education, expertise, and 
experience relevant to the type of property being valued. Such persons 
may include appraisers, real estate lending professionals, agricultural 
extension agents, or foresters.\31\
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    \31\ 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.
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    An institution or its agent must directly select and engage 
appraisers. The only exception to this requirement is that the 
Agencies' appraisal regulations allow an institution to use an 
appraisal prepared for another financial services institution provided 
certain conditions are met. An institution or its agents also should 
directly select and engage persons who perform evaluations. 
Independence is compromised when a borrower recommends an appraiser or 
a person to perform an evaluation. Independence is also compromised 
when loan production staff selects a person to perform an appraisal or 
evaluation for a specific transaction. For certain transactions, an 
institution also must comply with the provisions addressing valuation 
independence in Regulation Z (Truth in Lending).\32\
---------------------------------------------------------------------------

    \32\ See 12 CFR 226.42.
---------------------------------------------------------------------------

    An institution's selection process should ensure that a qualified, 
competent and independent person is selected to perform a valuation 
assignment. An institution should maintain documentation to demonstrate 
that the appraiser or person performing an evaluation is competent, 
independent, and has the relevant experience and knowledge for the 
market, location, and type of real property being valued. Further, the 
person who selects or oversees the selection of appraisers or persons 
providing evaluation services should be independent from the loan 
production area. An institution's use of a borrower-ordered or 
borrower-provided appraisal violates the Agencies' appraisal 
regulations. However, a borrower can inform an institution that a 
current appraisal exists, and the institution may request it directly 
from the other financial services institution.

A. Approved Appraiser List

    If an institution establishes an approved appraiser list for 
selecting an appraiser for a particular assignment, the institution 
should have appropriate procedures for the development and 
administration of the list. These procedures should include a process 
for qualifying an appraiser for initial placement on the list, as well 
as periodic monitoring of the appraiser's performance and credentials 
to assess whether to retain the appraiser on the list. Further, there 
should be periodic internal review of the use of the approved appraiser 
list to confirm that appropriate procedures and controls exist to 
ensure independence in the development, administration, and maintenance 
of the list. For residential transactions, loan production staff can 
use a revolving, pre-approved appraiser list, provided the development 
and maintenance of the list is not under their control.

B. Engagement Letters

    An institution 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. In addition to the other information, the 
engagement letter will identify the intended use and user(s), as 
defined in USPAP. An engagement letter also may specify whether there 
are any legal or contractual restrictions on the sharing of the 
appraisal with other parties. An institution should include the 
engagement letter in its credit file. To avoid the appearance of any 
conflict of interest, appraisal or evaluation development work should 
not commence until the institution has selected and engaged a person 
for the assignment.

VII. 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.\33\ The Agencies also reserve the right to require 
an appraisal under their appraisal regulations to address safety and 
soundness concerns in a transaction. (See Appendix A, Appraisal 
Exemptions.) \34\
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    \33\ In order to facilitate recovery in designated major 
disaster areas, subject to safety and soundness considerations, the 
Depository Institutions Disaster Relief Act of 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. Public Law 102-485, Sec.  2, 106 Stat. 2771 (October 23, 
1992); 12 U.S.C. 3352.
    \34\ 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 an existing extension of credit where there 
is either an advancement of new monies or a material change in the 
condition of the property. 12 CFR 722.3(d).

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[[Page 77459]]

VIII. Minimum Appraisal Standards

    The Agencies' appraisal regulations include minimum standards for 
the preparation of an appraisal. (See Appendix D, Glossary of Terms, 
for terminology used in these Guidelines.) The appraisal must:
    <bullet> Conform to generally accepted appraisal standards as 
evidenced by the USPAP promulgated by the Appraisal Standards Board of 
the Appraisal Foundation unless principles of safe and sound banking 
require compliance with stricter standards.
    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 in the 
property or transaction. Further, the appraisal must contain an opinion 
of market value as defined in the Agencies' appraisal regulations. (See 
discussion on the definition of market value below.) Under USPAP, the 
appraisal must contain a certification that the appraiser has complied 
with USPAP. An institution may refer to the appraiser's USPAP 
certification in its assessment of the appraiser's independence 
concerning the transaction and the property. Under the Agencies' 
appraisal regulations, the result of an Automated Valuation Model 
(AVM), by itself or signed by an appraiser, 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. Further, the Dodd-Frank Wall Street Reform and Consumer 
Protection Act of 2010 (Dodd-Frank Act) \35\ provides ``[i]n 
conjunction with the purchase of a consumer's principal dwelling, 
broker price opinions may not be used as the primary basis to determine 
the value of a piece of property for the purpose of loan origination of 
a residential mortgage loan secured by such piece of property.'' \36\
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    \35\ Public Law 111-203, 124 Stat. 1376 (2010).
    \36\ Dodd-Frank Act, Section 1473(r).
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    <bullet> Be written and contain sufficient information and analysis 
to support the institution's decision to engage in the transaction.
    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 
for the institution 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. 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 
extent of the research and analyses employed for similar property 
types, market conditions, and transactions. Therefore, an institution 
should be cautious in limiting the scope of the appraiser's inspection, 
research, or other information used to determine the property's 
condition and relevant market factors, which could affect the 
credibility of the appraisal.
    According to USPAP, appraisal reports must contain sufficient 
information to enable the intended user of the appraisal to understand 
the report properly. An institution should specify the use of an 
appraisal report option that is commensurate with the risk and 
complexity of the transaction. The appraisal report should contain 
sufficient disclosure of the nature and extent of inspection and 
research performed by the appraiser to verify the property's condition 
and support the appraiser's opinion of market value. (See Appendix D, 
Glossary of Terms, for the definition of appraisal report options.)
    Institutions should be aware that provisions in the Dodd-Frank Act 
address appraisal requirements for a higher-risk mortgage to a 
consumer.\37\ To implement these provisions, the Agencies recognize 
that future regulations will address the requirement that the appraiser 
conduct a physical property visit of the interior of the mortgaged 
property.\38\
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    \37\ Under the law, the provisions are effective 12 months after 
final regulations to implement the provisions are published. See 
Dodd-Frank Act, Section 1400(c)(1).
    \38\ Section 1471 of the Dodd-Frank Act added a new section 129H 
to the Truth-in-Lending Act (15 U.S.C. 1631 et seq.).
---------------------------------------------------------------------------

    <bullet> 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.
    Appraisers must analyze, apply, and report appropriate deductions 
and discounts when providing an estimate of market value based on 
demand for real estate in the future. This standard is designed to 
avoid having appraisals prepared using unrealistic assumptions and 
inappropriate methods in arriving at the property's market value. (See 
Appendix C, Deductions and Discounts, for further explanation on 
deductions and discounts.)
    <bullet> Be based upon the definition of market value set forth in 
the appraisal regulation.
    Each appraisal must contain an estimate of market value, as defined 
by the Agencies' appraisal regulations. The 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. Value opinions such as ``going concern 
value,'' ``value in use,'' or a special value to a specific property 
user may not be used as market value for federally related 
transactions. An appraisal may contain separate opinions of such values 
so long as they are clearly identified and disclosed.
    The estimate of market value should consider the real property's 
actual physical condition, use, and zoning as of the effective date of 
the appraiser's opinion of value. For a transaction financing 
construction or renovation of a building, an institution would 
generally request an appraiser to provide the property's current market 
value in its ``as is'' condition, and, as applicable, its prospective 
market value upon completion and/or prospective market value upon 
stabilization.\39\ Prospective market value opinions should be based 
upon current and reasonably expected market conditions. When an 
appraisal includes prospective market value opinions, there should be a 
point of reference to the market conditions and time frame on which the 
appraiser based the analysis.\40\ An institution should understand the 
real property's ``as is'' market value and should consider the 
prospective market value that corresponds to the credit decision and 
the phase of the project being funded, if applicable.
---------------------------------------------------------------------------

    \39\ 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).
    \40\ See USPAP, Statement 4 on Prospective Value Opinions, for 
further explanation.
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    <bullet> Be performed by state certified or licensed appraisers in 
accordance with requirements set forth in the appraisal regulation.
    In determining competency for a given appraisal assignment, an 
institution must consider an appraiser's education and experience. 
While an institution must confirm that the appraiser holds a valid 
credential from the appropriate state appraiser regulatory authority, a 
state certification or license is a minimum credentialing

[[Page 77460]]

requirement. Appraisers are expected to be selected for individual 
assignments based on their competency to perform the appraisal, 
including knowledge of the property type and specific property market. 
As stated in the Agencies' appraisal regulations, a state certified or 
licensed appraiser may not be considered competent solely by virtue of 
being certified or licensed. In communicating an appraisal assignment, 
an institution should convey to the appraiser that the Agencies' 
minimum appraisal standards must be followed.

IX. Appraisal Development

    The Agencies' appraisal regulations require appraisals for 
federally related transactions to comply with the requirements in 
USPAP, some of which are addressed below. Consistent with the USPAP 
Scope of Work Rule,\41\ the appraisal must reflect an appropriate scope 
of work that provides for ``credible'' assignment results. The 
appraiser'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. Further, USPAP requires the appraiser to disclose whether 
he or she previously appraised the property.
---------------------------------------------------------------------------

    \41\ See USPAP, Scope of Work Rule, Advisory Opinions 28 and 29.
---------------------------------------------------------------------------

    While an appraiser must comply with USPAP and establish the scope 
of work in an appraisal assignment, an institution is responsible for 
obtaining an appraisal that contains sufficient information and 
analysis 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. These communications 
should adhere to the institution's policies and procedures on 
independence of the appraiser and not unduly influence the appraiser. 
An institution should not allow lower cost or the speed of delivery 
time to inappropriately influence its appraisal ordering procedures or 
the appraiser's determination of the scope of work for an appraisal 
supporting a federally related transaction.
    As required by USPAP, the appraisal must include any approach to 
value (that is, the cost, income, and sales comparison approaches) that 
is applicable and necessary to the assignment. Further, the appraiser 
should disclose the rationale for the omission of a valuation approach. 
The appraiser must analyze and reconcile the information from the 
approaches to arrive at the estimated market value. The appraisal also 
should include a discussion on market conditions, including relevant 
information on property value trends, demand and supply factors, and 
exposure time. Other information might include the prevalence and 
effect of sales and financing concessions, the list-to-sale price 
ratio, and availability of financing. In addition, an appraisal should 
reflect an analysis of the property's sales history and an opinion as 
to the highest and best use of the property. 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.

X. Appraisal Reports

    An institution is responsible for identifying the appropriate 
appraisal report 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 the 
appraisal report format to be specified in its appraisal engagement 
instructions to an appraiser.
    USPAP provides various appraisal report options that an appraiser 
may use to present the results of appraisal assignments. The major 
difference among these report options is the level of detail presented 
in the report. A report 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.
    Generally, a report option that is restricted to a single client 
and intended user will not be appropriate to support most federally 
related transactions. These reports lack sufficient supporting 
information and analysis for underwriting purposes. These less detailed 
reports may be appropriate for real estate portfolio monitoring 
purposes. (See Appendix D, Glossary of Terms, for the definition of 
appraisal report options.)
    Regardless of the report 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 typically warranted for the type of 
appraisal, but omitted, along with the rationale for its omission.

XI. Transactions That Require Evaluations

    The Agencies' appraisal regulations permit an institution to obtain 
an appropriate evaluation of real property collateral in lieu of an 
appraisal for transactions that qualify for certain exemptions. These 
exemptions include a transaction that:
    <bullet> Has a transaction value equal to or less than the 
appraisal threshold of $250,000.
    <bullet> Is a business loan with a transaction value equal to or 
less than the business loan threshold of $1 million, and is not 
dependent on the sale of, or rental income derived from, real estate as 
the primary source of repayment.\42\
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    \42\ NCUA regulations do not contain an exemption from the 
appraisal requirements specific to member business loans.
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    <bullet> Involves an existing extension of credit at the lending 
institution, provided that:
    [cir] There has been no obvious and material change in 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
    [cir] There is no advancement of new monies other than funds 
necessary to cover reasonable closing costs.\43\
---------------------------------------------------------------------------

    \43\ NCUA's appraisal regulation requires credit unions to meet 
both conditions to avoid the need for an appraisal as set forth in 
12 CFR 722.3(d).
---------------------------------------------------------------------------

    For more information on real estate-related financial transactions 
that are exempt from the appraisal requirement, see Appendix A, 
Appraisal Exemptions. For a discussion on changes in market conditions, 
see the section on Validity of Appraisals and Evaluations in these 
Guidelines.
    Although the Agencies' appraisal regulations allow an institution 
to use an evaluation for certain transactions, an institution should 
establish policies and procedures for determining when to obtain an 
appraisal for such transactions. For example, an institution should 
consider obtaining an appraisal as an institution's portfolio risk 
increases or for higher risk real estate-related financial 
transactions, such as those involving:
    <bullet> Loans with combined loan-to-value ratios in excess of the 
supervisory loan-to-value limits.
    <bullet> Atypical properties.
    <bullet> Properties outside the institution's traditional lending 
market.

[[Page 77461]]

    <bullet> Transactions involving existing extensions of credit with 
significant risk to the institution.
    <bullet> Borrowers with high risk characteristics.

XII. Evaluation Development

    An evaluation must be consistent with safe and sound banking 
practices and should support the institution's decision to engage in 
the transaction. An institution should be able to demonstrate that an 
evaluation, whether prepared by an individual or supported by an 
analytical method or a technological tool, 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. (Refer to Appendix B, 
Evaluations Based on Analytical Methods or Technological Tools.)
    A valuation method that does not provide a property's market value 
or sufficient information and analysis to support the value conclusion 
is not acceptable as an evaluation. For example, a valuation method 
that provides a sales or list price, such as a broker price opinion, 
cannot be used as an evaluation because, among other things, it does 
not provide a property's market value. Further, the Dodd-Frank Act 
provides ``[i]n conjunction with the purchase of a consumer's principal 
dwelling, broker price opinions may not be used as the primary basis to 
determine the value of a piece of property for the purpose of loan 
origination of a residential mortgage loan secured by such piece of 
property.'' \44\ Likewise, information on local housing conditions and 
trends, such as a competitive market analysis, does not contain 
sufficient information on a specific property that is needed, and 
therefore, would not be acceptable as an evaluation. The information 
obtained from such sources, while insufficient as an evaluation, may be 
useful to develop an evaluation or appraisal.
---------------------------------------------------------------------------

    \44\ Dodd-Frank Act, Section 1473(r).
---------------------------------------------------------------------------

    An institution should establish policies and procedures for 
determining an appropriate collateral valuation method for a given 
transaction considering associated risks. These policies and procedures 
should address the process for selecting the appropriate valuation 
method for a transaction rather than using the method that renders the 
highest value, lowest cost, or fastest turnaround time.
    A valuation method should address the property's actual physical 
condition and characteristics as well as the economic and market 
conditions that affect the estimate of the collateral's market value. 
It would not be acceptable for an institution to base an evaluation on 
unsupported assumptions, such as a property is in ``average'' 
condition, the zoning will change, or the property is not affected by 
adverse market conditions. Therefore, an institution should establish 
criteria for determining the level and extent of research or inspection 
necessary to ascertain the property's actual physical condition, and 
the economic and market factors that should be considered in developing 
an evaluation. An institution should consider performing an inspection 
to ascertain the actual physical condition of the property and market 
factors that affect its market value. When an inspection is not 
performed, an institution should be able to demonstrate how these 
property and market factors were determined.

XIII. Evaluation Content

    An evaluation should contain sufficient information detailing the 
analysis, assumptions, and conclusions to support the credit decision. 
An evaluation's content should be documented in the credit file or 
reproducible. The evaluation should, at a minimum:
    <bullet> Identify the location of the property.
    <bullet> Provide a description of the property and its current and 
projected use.
    <bullet> Provide an estimate of the property's market value in its 
actual physical condition, use and zoning designation as of the 
effective date of the evaluation (that is, the date that the analysis 
was completed), with any limiting conditions.
    <bullet> Describe the method(s) the institution used to confirm the 
property's actual physical condition and the extent to which an 
inspection was performed.
    <bullet> Describe the analysis that was performed and the 
supporting information that was used in valuing the property.
    <bullet> Describe the supplemental information that was considered 
when using an analytical method or technological tool.
    <bullet> Indicate all source(s) of information used in the 
analysis, as applicable, to value the property, including:
    [cir] External data sources (such as market sales databases and 
public tax and land records);
    [cir] Property-specific data (such as previous sales data for the 
subject property, tax assessment data, and comparable sales 
information);
    [cir] Evidence of a property inspection;
    [cir] Photos of the property;
    [cir] Description of the neighborhood; or
    [cir] Local market conditions.
    <bullet> Include information on the preparer when an evaluation is 
performed by a person, such as the name and contact information, and 
signature (electronic or other legally permissible signature) of the 
preparer.
    (See Appendix B, Evaluations Based on Analytical Methods or 
Technological Tools, for guidance on the appropriate use of analytical 
methods and technological tools for developing an evaluation.)

XIV. Validity of Appraisals and Evaluations

    The Agencies allow an institution to use an existing appraisal or 
evaluation to support a subsequent transaction in certain 
circumstances. Therefore, an institution should establish criteria for 
assessing whether an existing appraisal or evaluation continues to 
reflect the market value of the property (that is, 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 may 
be used in the subsequent transaction. A new appraisal or evaluation is 
necessary if the originally reported market value has changed due to 
factors such as:
    <bullet> Passage of time.
    <bullet> Volatility of the local market.
    <bullet> Changes in terms and availability of financing.
    <bullet> Natural disasters.
    <bullet> Limited or over supply of competing properties.
    <bullet> Improvements to the subject property or competing 
properties.
    <bullet> Lack of maintenance of the subject or competing 
properties.
    <bullet> Changes in underlying economic and market assumptions, 
such as capitalization rates and lease terms.
    <bullet> Changes in zoning, building materials, or technology.
    <bullet> Environmental contamination.

XV. Reviewing Appraisals and Evaluations

    The Agencies' appraisal regulations specify that appraisals for 
federally related transactions must contain sufficient information and 
analysis to support an institution's decision to engage in the credit 
transaction. For certain transactions that do not require an appraisal, 
the Agencies' regulations require an institution to obtain an 
appropriate evaluation of real property collateral that is consistent 
with safe

[[Page 77462]]

and sound banking practices. As part of the credit approval process and 
prior to a final credit decision, an institution should review 
appraisals and evaluations to ensure that they comply with the 
Agencies' appraisal regulations and are consistent with supervisory 
guidance and its own internal policies. This review also should ensure 
that an appraisal or evaluation contains sufficient information and 
analysis to support the decision to engage in the transaction. Through 
the review process, the institution should be able to assess the 
reasonableness of the appraisal or evaluation, including whether the 
valuation methods, assumptions, and data sources are appropriate and 
well-supported. An institution may use the review findings to monitor 
and evaluate the competency and ongoing performance of appraisers and 
persons who perform evaluations. (See the discussion in these 
Guidelines on Selection of Appraisers or Persons Who Perform 
Evaluations.)
    When an institution identifies an appraisal or evaluation that is 
inconsistent with the Agencies' appraisal regulations and the 
deficiencies cannot be resolved with the appraiser or person who 
performed the evaluation, the institution must obtain an appraisal or 
evaluation that meets the regulatory requirements prior to making a 
credit decision. Though a reviewer cannot change the value conclusion 
in the original appraisal, an appraisal review performed by an 
appropriately qualified and competent state certified or licensed 
appraiser in accordance with USPAP may result in a second opinion of 
market value. An institution may rely on the second opinion of market 
value obtained through an acceptable USPAP-compliant appraisal review 
to support its credit decision.
    An institution's policies and procedures for reviewing appraisals 
and evaluations, at a minimum, should:
    <bullet> Address the independence, educational and training 
qualifications, and role of the reviewer.
    <bullet> Reflect a risk-focused approach for determining the depth 
of the review.
    <bullet> Establish a process for resolving any deficiencies in 
appraisals or evaluations.
    <bullet> Set forth documentation standards for the review and the 
resolution of noted deficiencies.

A. Reviewer Qualifications

    An institution should establish qualification criteria for persons 
who are eligible to review appraisals and evaluations. Persons who 
review appraisals and evaluations should be independent of the 
transaction and have no direct or indirect interest, financial or 
otherwise, in the property or transaction, and be independent of and 
insulated from any influence by loan production staff. Reviewers also 
should possess the requisite education, expertise, and competence to 
perform the review commensurate with the complexity of the transaction, 
type of real property, and market. Further, reviewers should be capable 
of assessing whether the appraisal or evaluation contains sufficient 
information and analysis to support the institution's decision to 
engage in the transaction.
    A small or rural institution or branch with limited staff should 
implement prudent safeguards for reviewing appraisals and evaluations 
when absolute lines of independence cannot be achieved. Under these 
circumstances, 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.
    An institution should assess the level of in-house expertise 
available to review appraisals for complex projects, high-risk 
transactions, and out-of-market properties. An institution may find it 
appropriate to employ additional personnel or engage a third party to 
perform the reviews. When using a third party, an institution remains 
responsible for the quality and adequacy of the review process, 
including the qualification standards for reviewers. (See the 
discussion in these Guidelines on Third Party Arrangements.)

B. Depth of Review

    An institution should implement a risk-focused approach for 
determining the depth of the review needed to ensure that appraisals 
and evaluations contain sufficient information and analysis to support 
the institution's decision to engage in the transaction. This process 
should differentiate between high- and low-risk transactions so that 
the review is commensurate with the risk. The depth of the review 
should be sufficient to ensure that the methods, assumptions, data 
sources, and conclusions are reasonable, well-supported, and 
appropriate for the transaction, property, and market. The review also 
should consider the process through which the appraisal or evaluation 
is obtained, either directly by the institution or from another 
financial services institution. The review process should be 
commensurate with the type of transaction as discussed below:
    <bullet> Commercial Real Estate. An institution should ensure that 
appraisals or evaluations for commercial real estate transactions are 
subject to an appropriate level of review. Transactions involving 
complex properties or high-risk commercial loans should be reviewed 
more comprehensively to assess the technical quality of the appraiser's 
analysis. For example, an institution should perform a more 
comprehensive review of transactions involving large-dollar credits, 
loans secured by complex or specialized properties, and properties 
outside the institution's traditional lending market. Persons 
performing such reviews should have the appropriate expertise and 
knowledge relative to the type of property and its market.
    The depth of the review of appraisals and evaluations completed for 
commercial properties securing lower risk transactions may be less 
technical in nature, but still should provide meaningful results that 
are commensurate with the size, type, and complexity of the underlying 
credit transaction. In addition, an institution should establish 
criteria for when to expand the depth of the review.
    <bullet> 1-to-4 Family Residential Real Estate. The reviews for 
residential real estate transactions should reflect a risk-focused 
approach that is commensurate with the size, type, and complexity of 
the underlying credit transaction, as well as loan and portfolio risk 
characteristics. These risk factors could include debt-to-income 
ratios, loan-to-value ratios, level of documentation, transaction 
dollar amount, or other relevant factors. With prior approval from its 
primary Federal 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 
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. In addition, an institution should establish 
criteria for when to expand the depth of the review.
    An institution may use sampling and audit procedures to verify the 
seller's representations and warranties that the appraisals for the 
underlying loans in a pool of residential loans satisfy the Agencies' 
appraisal regulations and are consistent with supervisory guidance and 
an institution's internal policies. If an institution is unable to 
confirm that the appraisal meets the Agencies' appraisal requirements, 
then the

[[Page 77463]]

institution must obtain an appraisal prior to engaging in the 
transaction.
    <bullet> Appraisals From Other Financial Services Institutions.\45\ 
The Agencies' appraisal regulations specify that an institution may use 
an appraisal that was prepared by an appraiser engaged directly by 
another financial services institution, provided the institution 
determines that the appraisal conforms to the Agencies' appraisal 
regulations and is otherwise acceptable. An institution should assess 
whether to use the appraisal prior to making a credit decision. An 
institution should subject such appraisals to at least the same level 
of review that the institution performs on appraisals it obtains 
directly for similar properties and document its review in the credit 
file. The documentation of the review should support the institution's 
reliance on the appraisal. Among other considerations, an institution 
should confirm that:
---------------------------------------------------------------------------

    \45\ An institution generally should not rely on an evaluation 
prepared by or for another financial services institution because it 
will not have sufficient information relative to the other 
institution's risk management practices for developing evaluations.
---------------------------------------------------------------------------

    [cir] The appraiser was engaged directly by the other financial 
services institution.
    [cir] The appraiser had no direct, indirect, or prospective 
interest, financial or otherwise, in the property or transaction.
    [cir] The financial services institution (not the borrower) ordered 
the appraisal. For example, an engagement letter should show that the 
financial services institution, not the borrower, engaged the 
appraiser.
    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, 
does not conform to USPAP, and violates the Agencies' appraisal 
regulations.

C. Resolution of Deficiencies

    An institution should establish policies and procedures for 
resolving any inaccuracies or weaknesses in an appraisal or evaluation 
identified through the review process, including procedures for:
    <bullet> Communicating the noted deficiencies to and requesting 
correction of such deficiencies by the appraiser or person who prepared 
the evaluation. An institution should implement adequate internal 
controls to ensure that such communications do not result in any 
coercion or undue influence on the appraiser or person who performed 
the evaluation.
    <bullet> Addressing significant deficiencies in the appraisal that 
could not be resolved with the original appraiser by obtaining a second 
appraisal or relying on a review that complies with Standards Rule 3 of 
USPAP and is performed by an appropriately qualified and competent 
state certified or licensed appraiser prior to the final credit 
decision.
    <bullet> Replacing evaluations prior to the credit decision that do 
not provide credible results or lack sufficient information to support 
the final credit decision.

D. Documentation of the Review

    An institution should establish policies for documenting the review 
of appraisals and evaluations in the credit file. Such policies should 
address the level of documentation needed for the review, given the 
type, risk and complexity of the transaction. The documentation should 
describe the resolution of any appraisal or evaluation deficiencies, 
including reasons for obtaining and relying on a second appraisal or 
evaluation. The documentation also should provide an audit trail that 
documents the resolution of noted deficiencies or details the reasons 
for relying on a second opinion of market value.

XVI. Third Party Arrangements

    An institution that engages a third party to perform certain 
collateral valuation functions on its behalf is responsible for 
understanding and managing the risks associated with the arrangement. 
An institution should use caution if it engages a third party to 
administer any part of its appraisal and evaluation function, including 
the ordering or reviewing of appraisals and evaluations, selecting an 
appraiser or person to perform evaluations, or providing access to 
analytical methods or technological tools. An institution is 
accountable for ensuring that any services performed by a third party, 
both affiliated and unaffiliated entities, comply with applicable laws 
and regulations and are consistent with supervisory guidance.\46\ 
Therefore, an institution should have the resources and expertise 
necessary for performing ongoing oversight of third party arrangements.
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    \46\ See, for example, FFIEC Statement on Risk Management of 
Outsourced Technology Service (November 28, 2000) for guidance on 
the assessment, selection, contract review, and monitoring of a 
third party that provides services to a regulated institution. Refer 
to the institution's primary Federal regulator for additional 
guidance on third party arrangements: 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).
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    An institution should have internal controls for identifying, 
monitoring, and managing the risks associated with using a third party 
arrangement for valuation services, including compliance, legal, 
reputational, and operational risks. While the arrangement may allow an 
institution to achieve specific business objectives, such as gaining 
access to expertise that is not available internally, the reduced 
operational control over outsourced activities poses additional risk. 
Consistent with safe and sound practices, an institution should have a 
written contract that clearly defines the expectations and obligations 
of both the financial institution and the third party, including that 
the third party will perform its services in compliance with the 
Agencies' appraisal regulations and consistent with supervisory 
guidance.
    Prior to entering into any arrangement with a third party for 
valuation services, an institution should compare the risks, costs, and 
benefits of the proposed relationship to those associated with using 
another vendor or conducting the activity in-house. The decision to 
outsource any part of the collateral valuation function should not be 
unduly influenced by any short-term cost savings. An institution should 
take into account all aspects of the long-term effect of the 
relationship, including the managerial expertise and associated costs 
for effectively monitoring the arrangement on an ongoing basis.
    If an institution outsources any part of the collateral valuation 
function, it should exercise appropriate due diligence in the selection 
of a third party. This process should include sufficient analysis by 
the institution to assess whether the third party provider can perform 
the services consistent with the institution's performance standards 
and regulatory requirements. An institution should be able to 
demonstrate that its policies and procedures establish effective 
internal controls to monitor and periodically assess the collateral 
valuation functions performed by a third party.
    An institution also is responsible for ensuring that a third party 
selects an appraiser or a person to perform an evaluation who is 
competent and

[[Page 77464]]

independent, has the requisite experience and training for the 
assignment, and thorough knowledge of the subject property's market. 
Appraisers must be appropriately certified or licensed, but this 
minimum credentialing requirement, although necessary, is not 
sufficient to determine that an appraiser is competent to perform an 
assignment for a particular property or geographic market.
    An institution should ensure that when a third party engages an 
appraiser or a person who performs an evaluation, the third party 
conveys to that person the intended use of the appraisal or evaluation 
and that the regulated institution is the client. For example, an 
engagement letter facilitates the communication of this information.
    An institution's risk management system should reflect the 
complexity of the outsourced activities and associated risk. An 
institution should document the results of ongoing monitoring efforts 
and periodic assessments of the arrangement(s) with a third party for 
compliance with applicable regulations and consistency with supervisory 
guidance and its performance standards. If deficiencies are discovered, 
an institution should take remedial action in a timely manner.

XVII. Program Compliance

    Deficiencies in an institution's appraisal and evaluation program 
that result in violations of the Agencies' appraisal regulations or 
contraventions of the Agencies' supervisory guidance reflect negatively 
on management. An institution's appraisal and evaluation policies 
should establish internal controls to promote an effective appraisal 
and evaluation program. The compliance process should:
    <bullet> Maintain a system of adequate controls, verification, and 
testing to ensure that appraisals and evaluations provide credible 
market values.
    <bullet> Insulate the persons responsible for ascertaining the 
compliance of the institution's appraisal and evaluation function from 
any influence by loan production staff.
    <bullet> Ensure the institution's practices result in the selection 
of appraisers and persons who perform evaluations with the appropriate 
qualifications and demonstrated competency for the assignment.
    <bullet> Establish procedures to test the quality of the appraisal 
and evaluation review process.
    <bullet> Use, as appropriate, the results of the institution's 
review process and other relevant information as a basis for 
considering a person for a future appraisal or evaluation assignment.
    <bullet> Report appraisal and evaluation deficiencies to 
appropriate internal parties and, if applicable, to external 
authorities in a timely manner.

A. Monitoring Collateral Values

    Consistent with the Agencies' real estate lending regulations and 
guidelines,\47\ an institution should monitor collateral risk on a 
portfolio and on an individual credit basis. Therefore, an institution 
should have policies and procedures that address the need for obtaining 
current collateral valuation information to understand its collateral 
position over the life of a credit and effectively manage the risk in 
its real estate credit portfolios. The policies and procedures also 
should address the need to obtain current valuation information for 
collateral supporting an existing credit that may be modified or 
considered for a loan workout.
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    \47\ OCC: 12 CFR part 34, subpart D; FRB: 12 CFR part 208, 
subpart E; FDIC: 12 CFR part 365; OTS: 12 CFR 560.100 and 560.101; 
and NCUA: 12 CFR 701.21.
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    Under their appraisal regulations, the Agencies reserve 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, an institution should be able to demonstrate 
that sufficient information is available to support the current market 
value of the collateral and the classification of a problem real estate 
credit. When such information is not available, an examiner may direct 
an institution to obtain a new appraisal or evaluation in order to have 
sufficient information to understand the current market value of the 
collateral. Examiners would be expected to provide an institution with 
a reasonable amount of time to obtain a new appraisal or evaluation.

B. Portfolio Collateral Risk

    Prudent portfolio monitoring practices include criteria for 
determining when to obtain a new appraisal or evaluation. Among other 
considerations, the criteria should address deterioration in the credit 
since origination or changes in market conditions. Changes in market 
conditions could include material changes in current and projected 
vacancy, absorption rates, lease terms, rental rates, and sale prices, 
including concessions and overruns and delays in construction costs. 
Fluctuations in discount or direct capitalization rates also are 
indicators of changing market conditions.
    In assessing whether changes in market conditions are material, an 
institution should consider the individual and aggregate effect of 
these changes on its collateral protection and the risk in its real 
estate lending programs or credit portfolios. Moreover, as an 
institution's reliance on collateral becomes more important, its 
policies and procedures should:
    <bullet> Ensure that timely information is available to management 
for assessing collateral and associated risk.
    <bullet> Specify when new or updated collateral valuations are 
appropriate or desirable to understand collateral risk in the 
transaction(s).
    <bullet> Delineate the valuation method to be employed after 
considering the property type, current market conditions, current use 
of the property, and the relevance of the most recent appraisal or 
evaluation in the credit file.
    Consistent with sound collateral valuation monitoring practices, an 
institution can use a variety of techniques for monitoring the effect 
of collateral valuation trends on portfolio risk. Sources of relevant 
information may include external market data, internal data, or reviews 
of recently obtained appraisals and evaluations. An institution should 
be able to demonstrate that it has sufficient, reliable, and timely 
information on market trends to understand the risk associated with its 
lending activity.

C. Modifications and Workouts of Existing Credits

    An institution may find it appropriate to modify a loan or to 
engage in a workout with an existing borrower. The Agencies expect an 
institution to consider current collateral valuation information to 
assess its collateral risk and facilitate an informed decision on 
whether to engage in a modification or workout of an existing real 
estate credit. (See the discussion above on Portfolio Collateral Risk.)
    <bullet> Loan Modifications. A loan modification to an existing 
credit that involves a limited change(s) \48\ in the terms of the note 
or loan agreement and that does not adversely affect the institution's 
real estate collateral protection after the modification does not rise 
to the level of a new real estate-

[[Page 77465]]

related financial transaction for purposes of the Agencies' appraisal 
regulations. As a result, an institution would not be required to 
obtain either a new appraisal or evaluation to comply with the 
Agencies' appraisal regulations, but should have an understanding of 
its collateral risk. For example, institutions can use automated 
valuation models or other valuation techniques when considering a 
modification to a residential mortgage loan. An institution should have 
procedures for ensuring an alternative collateral valuation method 
provides reliable information. In addition, an institution should be 
able to demonstrate that a modification reflects prudent underwriting 
standards and is consistent with safe and sound lending practices. 
Examiners will assess the adequacy of valuation information an 
institution uses for loan modifications.
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    \48\ A loan modification that entails a decrease in the interest 
rate or a single extension of a limited or short-term nature would 
not be viewed as a subsequent transaction. For example, an extension 
arising from a short-term delay in the full repayment of the loan 
when there is documented evidence that payment from the borrower is 
forthcoming, or a brief delay in the scheduled closing on the sale 
of a property when there is evidence that the closing will be 
completed in the near term.
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    <bullet> Loan Workouts. As noted under ``Monitoring Collateral 
Values,'' an institution's policies and procedures should address the 
need for current information on the value of real estate collateral 
supporting a loan workout. A loan workout can take many forms, 
including a modification that adversely affects the institution's real 
estate collateral protection after the modification, a renewal or 
extension of loan terms, the advancement of new monies, or a 
restructuring with or without concessions. These types of loan workouts 
are new real estate-related financial transactions.
    If the loan workout does not include the advancement of new monies 
other than reasonable closing costs, the institution may obtain an 
evaluation in lieu of an appraisal. For loan workouts that involve the 
advancement of new monies, an institution may obtain an evaluation in 
lieu of an appraisal provided there has been no obvious and material 
change in market conditions and no change in the physical aspects of 
the property that threatens the adequacy of the institution's real 
estate collateral protection after the workout.\49\ In these cases, an 
institution should support and document its rationale for using this 
exemption. An institution must obtain an appraisal when a loan workout 
involves the advancement of new monies and there is an obvious and 
material change in either market conditions or physical aspects of the 
property, or both, that threatens the adequacy of the institution's 
real estate collateral protection after the workout (unless another 
exemption applies).\50\ (See also Appendix A, Appraisal Exemptions, for 
transactions where an evaluation would be allowed in lieu of an 
appraisal.)
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    \49\ Under the NCUA's appraisal regulation, a credit union must 
meet both conditions to avoid the need for an appraisal. If a 
transaction does not involve an advancement of new monies and there 
have been no obvious and material changes in market or property 
conditions, a credit union must obtain a written estimate of market 
value that is consistent with the standards for evaluations as 
discussed in these Guidelines. 12 CFR 722.3(d).
    \50\ For example, if the transaction value is below the 
appraisal threshold of $250,000.
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    <bullet> Collateral Valuation Policies for Modifications and 
Workouts. An institution's policies should address the need for 
obtaining current collateral valuation information for a loan 
modification or workout. The policies should specify the valuation 
method to be used and address the need to monitor collateral risk on an 
ongoing basis taking into consideration changing market conditions and 
the borrower's repayment performance. An institution also should be 
able to demonstrate that the collateral valuation method used is 
reliable for a given credit or loan type.
    Further, for loan workouts, an institution's policies should 
specify conditions under which an appraisal or evaluation will be 
obtained. As loan repayment becomes more dependent on the sale of 
collateral, an institution's policies should address the need to obtain 
an appraisal or evaluation for safety and soundness reasons even though 
one is not otherwise required by the Agencies' appraisal regulations.

XVIII. Referrals

    An institution should file a complaint with the appropriate state 
appraiser regulatory officials 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. In 
addition, effective April 1, 2011, an institution must file a complaint 
with the appropriate state appraiser certifying and licensing agency 
under certain circumstances.\51\ An institution also must file a 
suspicious activity report (SAR) with the Financial Crimes Enforcement 
Network of the Department of the Treasury (FinCEN) when suspecting 
fraud or identifying other transactions meeting the SAR filing 
criteria.\52\ Examiners finding evidence of unethical or unprofessional 
conduct by appraisers should instruct the institution to file a 
complaint with state appraiser regulatory officials and, when required, 
to file a SAR with FinCEN. If there is a concern regarding the 
institution's ability or willingness to file a complaint or make a 
referral, examiners should forward their findings and recommendations 
to their supervisory office for appropriate disposition and referral to 
state appraiser regulatory officials and FinCEN, as necessary.
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    \51\ See 12 CFR 226.42(g).
    \52\ Refer to Federal regulations at FRB: 12 CFR 208.62, 
211.5(k), 211.24(f), and 225.4(f); FDIC: 12 CFR part 353; NCUA: 12 
CFR part 748; OCC: 12 CFR 21.11; OTS: 12 CFR 563.180; and FinCEN: 31 
CFR 103.18. Refer also to the Federal Financial Institutions 
Examination Council Bank Secrecy Act/Anti-Money Laundering 
Examination Manual (Revised April 29, 2010) to review the general 
criteria, but note that instructions on filing a SAR through the 
Financial Crime Enforcement Network (FinCEN) of the Department of 
the Treasury are attached to the SAR form. The SAR form is available 
on FinCEN's Web site.
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Appendix A--Appraisal Exemptions

    Under Title XI of FIRREA, the Agencies were granted the authority 
to identify categories of real estate-related financial transactions 
that do not require the services of an appraiser to protect Federal 
financial and public policy interests or to satisfy principles of safe 
and sound lending. Therefore, in their appraisal regulations, the 
Agencies identified certain real estate-related financial transactions 
that do not require the services of an appraiser and that are exempt 
from the appraisal requirement. This appendix provides further 
clarification on the application of these regulatory exemptions and 
should be read in the context of each Agency's appraisal regulation. If 
an institution has a question as to whether a particular transaction 
qualifies for an exemption, the institution should seek guidance from 
its primary Federal regulator. For those transactions qualifying for 
the appraisal threshold, existing extensions of credit, or the business 
loan exemptions, an institution is exempted from the appraisal 
requirement, but still must, at a minimum, obtain an evaluation 
consistent with these Guidelines.\53\
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    \53\ NCUA's regulations do not provide an exemption from the 
appraisal requirements specific to member business loans.
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1. Appraisal Threshold

    For transactions with a transaction value equal to or less than 
$250,000, the Agencies' appraisal regulations, at a minimum, require an 
evaluation consistent with safe and sound banking practices.\54\ If an 
institution enters into a transaction that is secured by several 
individual properties that are not part of a tract development, the 
estimate of value of each individual property should determine whether 
an appraisal

[[Page 77466]]

or evaluation would be required for that property. For example, an 
institution makes a loan secured by seven commercial properties in 
different markets with two properties valued in excess of the appraisal 
threshold and five properties valued less than the appraisal threshold. 
An institution would need to obtain an appraisal on the two properties 
valued in excess of the appraisal threshold and evaluations on the five 
properties below the appraisal threshold, even though the aggregate 
loan commitment exceeds the appraisal threshold.
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    \54\ 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).
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2. Abundance of Caution

    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 and 
document the adequacy and reliability of these repayment sources and 
conclude that knowledge of the market value of the real estate on which 
the lien will be 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 and other repayment sources. 
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, unless another 
exemption applies.

3. Loans Not Secured by Real Estate

    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.\55\ 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.
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    \55\ NCUA's regulations do not provide an exemption from the 
appraisal requirements specific to loans not secured by real estate.
---------------------------------------------------------------------------

4. Liens for Purposes Other Than the Real Estate's Value

    This exemption allows an institution 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. 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. 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.

5. Real Estate-Secured Business Loans

    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.\56\ 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 real 
estate. For this type of exempted loan, under the Agencies' appraisal 
regulations, an institution may obtain an evaluation in lieu of an 
appraisal.
---------------------------------------------------------------------------

    \56\ NCUA's appraisal regulation, 12 CFR 722, does not define 
``business loan.'' A ``member business loan'' is regulated under 12 
CFR 723.
---------------------------------------------------------------------------

    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 transaction in which a 
loan is secured by real estate for one project, in which the lender has 
taken a security interest, but 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, would not qualify 
for the exemption. (See Appendix D, Glossary of Terms, for a definition 
of business loan.)

6. Leases

    An institution is 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, Refinancings, and Other Subsequent Transactions

    Under certain circumstances, renewals, refinancings, and other 
subsequent transactions may be supported by evaluations rather than 
appraisals. The Agencies' appraisal regulations permit an evaluation 
for a renewal or refinancing of an existing extension of credit at the 
institution when either:
    (i) There has been no obvious and material change in market 
conditions or physical aspects of the property that threatens the 
adequacy of the institution's real estate collateral protection after 
the transaction, even with the advancement of new monies; or
    (ii) There is no advancement of new monies, other than funds 
necessary to cover reasonable closing costs.\57\
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    \57\ Under the NCUA's appraisal regulation, a credit union must 
meet both conditions to avoid the need for an appraisal. If a 
transaction does not involve an advancement of new monies and there 
have been no obvious and material changes in market or property 
conditions, a credit union must obtain a written estimate of market 
value that is consistent with the standards for evaluations as 
discussed in these Guidelines. 12 CFR 722.3(d).
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    A subsequent transaction is exempt from the appraisal requirement 
if no new monies are advanced (other than

[[Page 77467]]

funds necessary to cover reasonable closing costs) even when there has 
been an obvious and material change in market conditions or the 
physical aspects of the property that threatens the adequacy of the 
institution's real estate collateral protection. Conversely, when new 
monies are advanced (other than funds necessary to cover reasonable 
closing costs) and there has been an obvious and material change in 
market conditions or the physical aspects of the property that threaten 
the adequacy of the institution's real estate collateral protection, 
the institution must obtain an appraisal unless another exemption 
applies.
    For the purposes of these Guidelines, an institution is considered 
to have advanced new monies (excluding reasonable closing costs) when 
there is an increase in the principal amount of the loan over the 
amount of principal outstanding before the renewal or refinancing. For 
example, an institution originated a 15-year term loan for $3 million 
and, in year 14, the outstanding principal is $2.5 million. In year 14, 
the borrower seeks to refinance the loan at a lower interest rate and 
requests a loan of $2.8 million. The $300,000 would be considered new 
monies. On the other hand, an institution has provided a $5 million 
revolving line of credit to a borrower for two years and, at the end of 
year two, renews the $5 million line for another two years. At the time 
of renewal, the borrower has drawn down $1 million. In this example, 
the amount of the line remains unchanged even though the amount 
available on the line is less than the line commitment. Renewing the 
line of credit at its original amount would not be considered an 
advancement of new monies. Further, when an institution advances funds 
to protect its interest in a property, such as to repair damaged 
property, a new appraisal or evaluation would not be required because 
these funds would be used to restore the damaged property to its 
original condition.
    To satisfy the condition for no obvious and material change in 
market conditions or the physical aspects of the property, the current 
or planned future use of the property should be consistent with the use 
identified in the existing appraisal or evaluation. For example, if a 
property has reportedly increased in value because of a planned change 
in use of the property resulting from rezoning, an appraisal should be 
performed unless another exemption applies.
    If an evaluation is permitted under this exemption, an institution 
may use an existing appraisal or evaluation as long as the institution 
verifies and documents that the appraisal or evaluation continues to be 
valid. (See the discussion in the Validity of Appraisals and 
Evaluations section of these Guidelines.) Even if a subsequent 
transaction qualifies for this exemption, an institution should 
consider the risk posed by the transaction and may wish to consider 
obtaining a new appraisal.
    Loan Workouts or Restructurings. Loan workouts, debt 
restructurings, loan assumptions, and similar transactions involving 
the addition or substitution of borrowers may qualify for the exemption 
for renewals, refinancings and other subsequent transactions. Use of 
this exemption depends on meeting the conditions listed in (i) and (ii) 
at the beginning of the discussion on Renewals, Refinancings, and Other 
Subsequent Transactions. An institution also should consider such 
factors as the quality of the underlying collateral and the validity of 
the existing appraisal or evaluation. If a loan workout involves 
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 workout occurs and the 
institution perfects its security interest.

8. Transactions Involving Real Estate Notes

    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 to determine that the conditions of 
the exemption have been satisfied.
    Principles of safe and sound banking practices require an 
institution 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 an institution to make appropriate credit decisions regarding 
these transactions.
    An institution may presume that the underlying loans in a 
marketable, mortgage-backed security satisfy the requirements of the 
Agencies' appraisal regulations whenever an issuer makes a public 
statement, such as in a prospectus, that the appraisals comply with the 
Agencies' appraisal regulations. 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 rate of loans being put 
back by an investor.

9. Transactions Insured or Guaranteed by a U.S. Government Agency or 
U.S. Government-Sponsored Agency

    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

    This exemption applies to transactions that either (i) qualify for 
sale to a U.S. government agency or U.S. government-sponsored 
agency,\58\ 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. Given the risk to 
the institution that it may have to repurchase a loan that does not 
comply with the appraisal standards of the U.S.

[[Page 77468]]

government agency or U.S. government-sponsored agency, the institution 
should have appropriate policies to confirm its compliance with the 
underwriting and appraisal standards of the U.S. government agency or 
U.S. government-sponsored agency.
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    \58\ These government-sponsored agencies include Banks for 
Cooperatives; Federal Agriculture Mortgage Corporation; Federal Farm 
Credit Banks; Federal Home Loan Banks; Freddie Mac; Fannie Mae; and 
Tennessee Valley Authority.
---------------------------------------------------------------------------

    10(i)--An institution that relies 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)--To qualify for this exemption, transactions that do not 
conform to all of Fannie Mae or Freddie Mac underwriting standards, 
such as jumbo or other residential real estate loans, must be supported 
by an appraisal that meets these government-sponsored agencies' 
appraisal standards for the applicable property type and is documented 
in the credit file or reproducible.

11. Transactions by Regulated Institutions as Fiduciaries

    An 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.\59\ 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.
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    \59\ Generally, credit unions have limited fiduciary authority 
and NCUA's appraisal regulation does not specifically exempt 
transactions by fiduciaries.
---------------------------------------------------------------------------

12. Appraisals Not Necessary To Protect Federal Financial and Public 
Policy Interests or the Safety and Soundness of Financial Institutions

    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 on a case-by-case basis 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.

Appendix B--Evaluations Based on Analytical Methods or Technological 
Tools

    The Agencies' appraisal regulations permit an institution to use an 
evaluation in lieu of an appraisal for certain transactions. An 
institution may use a variety of analytical methods and technological 
tools for developing an evaluation, provided the institution can 
demonstrate that the valuation method is consistent with safe and sound 
banking practices and these Guidelines (see sections on Evaluation 
Development and Evaluation Content).\60\ An institution should not 
select a method or tool solely because it provides the highest value, 
the lowest cost, or the fastest response or turnaround time.
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    \60\ For example, the sole use of data from the Internet or 
other public sources would not be an evaluation under these 
Guidelines. Additionally, valuation methods that do not contain 
sufficient information and analysis or provide a market value 
conclusion would not be acceptable as evaluations.
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    An institution should establish policies and procedures that 
provide a sound process for using various methods or tools. Such 
policies and procedures should:
    <bullet> Ensure staff has the requisite expertise and training to 
manage the selection, use, and validation of an analytical method or 
technological tool. If an institution does not have the in-house 
expertise relative to a particular method or tool, then an institution 
should employ additional personnel or engage a third party. (See the 
Third Party Arrangements section in these Guidelines.)
    <bullet> Address the selection, use, and validation of the 
valuation method or tool.
    <bullet> Establish criteria for determining whether a particular 
valuation method or tool is appropriate for a given transaction or 
lending activity, considering associated risks. These risks include, 
but are not limited to, transaction size and purpose, credit quality, 
and leverage tolerance (loan-to-value).
    <bullet> Specify criteria when a market event or risk factor would 
preclude the use of a particular method or tool.
    <bullet> Address standards for the use of multiple methods or 
tools, if applicable, for valuing the same property or to support a 
particular lending activity.
    <bullet> Provide criteria for ensuring that the institution uses a 
method or tool that produces a reliable estimate of market value that 
supports the institution's decision to engage in a transaction.
    <bullet> Address the extent to which:
    [cir] An inspection or research is necessary to ascertain the 
property's actual physical condition, and
    [cir] Supplemental information is needed to assess the effect of 
market conditions or other factors on the estimate of market value.
    An institution should establish an effective system of controls for 
verifying that a valuation method or tool is employed in a manner 
consistent with internal policies and procedures. Moreover, the 
institution's staff responsible for internal controls should have the 
skills commensurate with the complexity or sophistication of the method 
or tool. Examiners will review an institution's policies, procedures, 
and internal controls to ensure that an institution's use of a method 
or tool is appropriate and consistent with safe and sound banking 
practices.

Automated Valuation Models (AVMs)

    AVMs are computer programs that estimate a property's market value 
based on market, economic, and demographic factors. Institutions may 
employ AVMs for a variety of uses such as loan underwriting and 
portfolio monitoring. An institution may not rely solely on the results 
of an AVM to develop an evaluation unless the resulting evaluation is 
consistent with safe and sound banking practices and these Guidelines. 
(See the Evaluation Development and Evaluation Content sections.) For 
example, to be consistent with the standards for an evaluation, the 
results of an AVM would need to address a property's actual physical 
condition, and therefore, could not be based on an unsupported 
assumption, such as a property is in ``average'' condition.
    Institutions should establish policies and procedures that govern 
the use of AVMs and specify the supplemental information that is 
required to develop an evaluation. When the supplemental information 
indicates the AVM is not an acceptable valuation tool, the 
institution's policies and procedures should require the use of an 
alternative method or tool.

Selecting an AVM(s)

    When selecting an AVM or multiple AVMs, an institution should:
    <bullet> Perform the necessary level of due diligence on AVM 
vendors and their models, including how model developers conducted 
performance testing as well as the sample size used

[[Page 77469]]

and the geographic level tested (such as, county level or zip code).
    <bullet> Establish acceptable minimum performance criteria for a 
model prior to and independent of the validation process.
    <bullet> Perform a detailed validation of the model(s) considered 
during the selection process and document the validation process.
    <bullet> Evaluate underlying data used in the model(s), including 
the data sources and types, frequency of updates, quality control 
performed on the data, and the sources of the data in states where 
public real estate sales data are not disclosed.
    <bullet> Assess modeling techniques and the inherent strengths and 
weaknesses of different model types (such as hedonic, index, and 
blended) as well as how a model(s) performs for different property 
types (such as condominiums, planned unit developments, and single 
family detached residences).
    <bullet> Evaluate the vendor's scoring system and methodology for 
the model(s). Determine whether the scoring system provides an 
appropriate indicator of model reliability by property types and 
geographic locations.
    Following the selection of an AVM(s), an institution should develop 
policies and procedures to address the appropriate use of an AVM(s) and 
its monitoring and ongoing validation processes.

Determining AVM Use

    An institution should establish policies and procedures for 
determining whether an AVM can be used for a particular transaction. 
The institution should:
    <bullet> Maintain AVM performance criteria for accuracy and 
reliability in a given transaction, lending activity, and geographic 
location.\61\
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    \61\ For example, an institution should establish a level of 
acceptable core accuracy and limit exposure to a model's systemic 
tendency to over value properties (commonly referred to as ``tail 
risk'').
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    <bullet> Establish internal confidence score \62\ minimums, or 
similar criteria, for when each model can be used.
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    \62\ A ``confidence score'' generally refers to a vendor's own 
method of quantifying how reliable a model value is by using a rank 
ordering process. The scale and components of a confidence score are 
not standardized. Therefore an institution needs to understand how a 
confidence score was derived and the extent to which a confidence 
score correlates to model accuracy. If multiple AVMs are used, an 
institution should understand how the combination of models affects 
overall accuracy.
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    <bullet> Implement controls to preclude ``value shopping'' when 
more than one AVM is used for the same property.
    <bullet> Establish procedures for obtaining an appraisal or using a 
different valuation method to develop an evaluation when an AVM's 
resulting value is not reliable to support the credit decision. For 
example, in areas that have experienced a high incidence of fraud, the 
institution should consider whether the AVM may be relied upon for the 
transaction or another valuation method should be used.
    <bullet> Identify circumstances under which an AVM may not be used, 
including:
    [cir] When market conditions warrant, such as during the aftermath 
of a natural disaster or a major economic event;
    [cir] When a model's performance is outside of specified tolerances 
for a particular geographic market or property price-tier range; or
    [cir] When a property is non-homogeneous, such as atypical lot 
sizes or property types.

Validating AVM Results

    An institution should establish standards and procedures for 
independent and ongoing monitoring and model validation, including the 
testing of multiple AVMs, to ensure that results are credible.\63\ An 
institution should be able to demonstrate that the depth and extent of 
its validation processes are consistent with the materiality of the 
risk and the complexity of the transaction. Validation can be performed 
internally or with the assistance of a third party, as long as the 
validation is conducted by qualified individuals that are independent 
of the model development or sales functions. An institution should not 
rely solely on validation representations provided by an AVM vendor. An 
institution should perform appropriate model validation regardless of 
whether it relies on AVMs that are supported by value insurance or 
guarantees. If there are insurance or guarantee components of any 
particular AVM, the institution is responsible for understanding the 
extent and limitations of the insurance policy or guarantee, and the 
claim process and financial strength of the insurer.
---------------------------------------------------------------------------

    \63\ See, for example, OCC Bulletin 2000-16, Risk Modeling--
Model Validation (May 30, 2000).
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    An institution should ensure that persons who validate an AVM on an 
ongoing basis are independent of the loan production and collection 
processes and have the requisite expertise and training. In the AVM 
validation procedures, an institution should specify, at a minimum:
    <bullet> Expectations for an appropriate sample size.
    <bullet> Level of geographic analysis.
    <bullet> Testing frequency and criteria for re-testing.
    <bullet> Standards of performance measures to be used.
    <bullet> Range of acceptable performance results.
    To ensure unbiased test results, an institution should compare the 
results of an AVM to actual sales data in a specified trade area or 
market prior to the information being available to the model. If an 
institution uses more than one AVM, each AVM 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 relative to similar loans 
that used a different valuation process. An institution should document 
the results of its validation and audit findings. An institution should 
use these findings to analyze and periodically update its policies and 
procedures for an AVM(s) when warranted.

Tax Assessment Valuations (TAVs)

    An institution may not rely solely on the data provided by local 
tax authorities to develop an evaluation unless the resulting 
evaluation is consistent with safe and sound banking practices and 
these Guidelines. (See the Evaluation Development and Evaluation 
Content sections.) Since analytical methods such as TAVs generally need 
additional support to meet these Guidelines, institutions should 
develop policies and procedures that specify the level and extent of 
supplemental information that should be obtained to develop an 
evaluation. Such policies and procedures also should require the use of 
an alternate valuation method when such information does not support 
the transaction.
    An institution may use a TAV in developing an evaluation when it 
can demonstrate that a valid correlation exists between the tax 
assessment data and the market value. In using a TAV to develop an 
evaluation, an institution should:
    <bullet> Determine and document how the tax jurisdiction calculates 
the TAV and how frequently property revaluations occur.
    <bullet> Perform an analysis to determine the relationship between 
the TAV and the property market values for properties within a tax 
jurisdiction.
    <bullet> Test and document how closely TAVs correlate to market 
value based on contemporaneous sales at the time of assessment and 
revalidate whether the correlation remains stable as of the effective 
date of the evaluation.

[[Page 77470]]

Appendix C--Deductions and Discounts

    The Agencies' appraisal regulations require an appraiser to 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. For such 
transactions, an appraisal must include the market value of the 
property, which should reflect the property's actual physical 
condition, use, and zoning designation (referred to as the ``as is'' 
value of the property), as of the effective date of the appraisal. 
Therefore, if the highest and best use of the property is for 
development to a different use, the cost of demolition and site 
preparation should be considered in the analysis.

Proposed Construction or Renovation

    For properties where improvements are to be constructed or 
rehabilitated, an institution may request a prospective market value 
upon completion and a prospective market value upon stabilization. 
While an institution may request the appraiser to provide the sum of 
retail sales for a proposed development, the result of such calculation 
is not the market value of the property for purposes of the Agencies' 
appraisal regulations.

Partially Leased Buildings

    For proposed and partially leased rental developments, the 
appraiser must make appropriate deductions and discounts to reflect 
that the property has not achieved stabilized occupancy. The appraisal 
analysis also should include consideration of the absorption of the 
unleased space. Appropriate deductions and discounts should include 
items such as leasing commission, rent losses, tenant improvements, and 
entrepreneurial profit, if such profit is not included in the discount 
rate.

Non-Market Lease Terms

    For properties subject to leases with terms that do not reflect 
current market conditions, the appraisal must clearly state the 
ownership interest being appraised and provide a discussion of the 
leases that are in place. If the leased fee interest is being appraised 
and contract rent is less than market rent on one or more long term 
lease(s) to a highly rated tenant, the market value of the leased fee 
interest would be less than the market value of the unencumbered fee 
simple interest in the property.\64\ In these situations, the market 
value of the leased fee interest should be used.
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    \64\ Fee simple interest refers to the most complete ownership 
unencumbered by any leases or other interests. It is subject only to 
the limitations imposed by the governmental powers of taxation, 
eminent domain, police power and escheat. Leased fee interest, on 
the other hand, refers to a landlord's ownership that is encumbered 
by one or more leases.
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Tract Developments with Unsold Units

    A tract development is defined in the Agencies' appraisal 
regulations as a project of five units or more that is constructed or 
is to be constructed as a single development. Appraisals for these 
properties must reflect deductions and discounts for holding costs, 
marketing costs, and entrepreneurial profit supported by market data. 
In some cases entrepreneurial profit may be included in the discount 
rate. The applicable discount rate is developed based on investor 
requirements and the risk associated with the physical and financial 
characteristics of the property. In some markets, entrepreneurial 
profit is treated as a line item deduction while in other markets it is 
reflected as a component of the discount rate. Regardless of how 
entrepreneurial profit is handled in the appraisal analysis, an 
appropriate explanation and discussion should be provided in the 
appraisal report. The projected sales prices and absorption rate of 
units should be supported by anticipated demand at the time the units 
are expected to be exposed for sale. Anticipated demand for the units 
should be supported and presented in the appraisal. A reader of the 
appraisal report should be able to understand the risk characteristics 
associated with the subject property and the market, including the 
anticipated supply of competing properties.

<bullet> Raw Land

    The appraiser must provide an opinion of value for raw land based 
on its current condition and existing zoning. If an appraiser employs a 
developmental approach to value the land that is based on projected 
land sales or development and sale of lots, the appraisal must reflect 
appropriate deductions and discounts for costs associated with 
developing and selling lots in the future. These costs may be incurred 
during the permitting, construction or selling stages of development. 
Appropriate deductions and discounts should include items such as 
feasibility studies, permitting, engineering, holding costs, marketing 
costs, and entrepreneurial profit and other costs specific to the 
property. If sufficient market data exists to perform both the sales 
comparison and developmental approaches to value, the appraisal report 
should detail a reconciliation of these two approaches in arriving at a 
market value conclusion for the raw land.

<bullet> Developed Lots

    For existing or proposed developments of five or more residential 
lots in a single 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 for the sale 
of the developed lots. The estimated sales absorption period should 
reflect the appraiser's estimate of the time frame for the actual 
development and sale of the lots, starting on the effective date of 
value and ending as of the expected date of the last lot sale. The 
absorption period should be based on market demand for lots in light of 
current and expected competition for similar lots in the market area.

<bullet> 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.

<bullet> 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

[[Page 77471]]

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.

Appendix D--Glossary of Terms

    Agent--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 business or to manage business 
affairs for another. According to the Agencies' appraisal regulations, 
fee appraisers must be engaged directly by the federally regulated 
institution or its agent,\65\ and have no direct or indirect interest, 
financial or otherwise, in the property or the transactions. The 
Agencies do not limit the arrangements that federally 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 federally regulated institution.
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    \65\ Except that the regulated institution also may accept an 
appraisal that was prepared by an appraiser engaged directly by 
another financial services institution in certain circumstances as 
set forth in the Agencies' appraisal regulations.
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    Appraisal--As defined in the Agencies' appraisal regulations, a 
written statement independently and impartially prepared by a qualified 
appraiser (state licensed or certified) 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 Management Company--The Agencies' appraisal regulations 
do not define the term appraisal management company. For purposes of 
these Guidelines, an ``appraisal management company'' includes, but is 
not limited to, a third-party entity that provides real property 
valuation-related services, such as selecting and engaging an appraiser 
to perform an appraisal based upon requests originating from a 
regulated institution. The Dodd-Frank Wall Street Reform and Consumer 
Protection Act of 2010 (Dodd-Frank Act) has a specific definition for 
this term in connection with transactions secured by a consumer's 
principal dwelling or mortgage secondary market transactions. See the 
Third Party Arrangements section in these Guidelines.
    Appraisal Report Options--Refer to the definitions for Restricted 
Use Appraisal Report, Self-Contained Appraisal Report, and Summary 
Appraisal Report.
    Appraisal Threshold--An appraisal is not required on transactions 
with a transaction value of $250,000 or less. As specified in the 
Agencies' appraisal regulations, an institution must obtain an 
evaluation of the real property collateral, if no other appraisal 
exemption applies.
    Approved Appraiser List--A listing of appraisers who an institution 
has determined to be generally qualified and competent to perform 
appraisals and may address the appraiser's expertise in a particular 
market and property type.
    ``As Completed'' Market Value--Refer to the definition for 
Prospective Market Value.
    ``As Is'' Market Value--The estimate of the market value of real 
property in its current physical condition, use, and zoning as of the 
appraisal's effective date.
    ``As Stabilized'' Market Value--Refer to the definition for 
Prospective Market Value.
    Automated Valuation Model--A computer program that estimates a 
property's market value based on market, economic, and demographic 
factors. Hedonic models generally use property characteristics (such as 
square footage and room count) and methodologies to process 
information, often based on statistical regression. Index models 
generally use geographic repeat sales data over time rather than 
property characteristic data. Blended or hybrid models use elements of 
both hedonic and index models.
    Broker Price Opinion (BPO)--An estimate of the probable sales or 
listing price of the subject property provided by a real estate broker, 
sales agent, or sales person. A BPO generally provides a varying level 
of detail about a property's condition, market, and neighborhood, as 
well as comparable sales or listings. A BPO is not by itself an 
appraisal or evaluation, but could be used for monitoring the 
collateral value of an existing loan, when deemed appropriate. Further, 
the Dodd-Frank Act provides ``[i]n conjunction with the purchase of a 
consumer's principal dwelling, broker price opinions may not be used as 
the primary basis to determine the value of a piece of property for the 
purpose of loan origination of a residential mortgage loan secured by 
such piece of property.'' \66\
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    \66\ Dodd-Frank Act, Section 1473(r).
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    Business Loan--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.\67\ A business loan includes 
extensions to entities engaged in agricultural operations, which is 
consistent with the Agencies' real estate lending guidelines definition 
of an improved property loan that include loans secured by farmland, 
timberland, and ranchland committed to ongoing management and 
agricultural production.
---------------------------------------------------------------------------

    \67\ NCUA's appraisal regulation, 12 CFR 722, does not define 
``business loan.'' A ``member business loan'' is regulated under 12 
CFR 723.
---------------------------------------------------------------------------

    Business Loan Threshold--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, real estate. As specified in the Agencies' appraisal 
regulations, an institution must obtain an evaluation of the real 
property collateral.\68\
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    \68\ 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.
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    Client--According to USPAP, the party or parties who engage(s) an 
appraiser by employment or contract for a specific appraisal 
assignment. For the purposes of these Guidelines, the appraiser should 
be aware that the client is the regulated institution. (Refer to the 
section on Third Party Arrangements in these Guidelines.)
    Credible (Appraisal) Assignment Results--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.
    Credit File--A hardcopy or electronic record that documents all 
information necessary to (1) analyze the credit before it is granted 
and (2) monitor the credit during its life. An institution may use a 
computerized or manual system to manage the information in its credit 
files.
    Date of the Appraisal Report--According to USPAP, the date of the 
appraisal report indicates when the appraisal analysis was completed.
    Effective Date of the Appraisal--USPAP requires that each appraisal 
report specifies the effective date of the appraisal and the date of 
the report. The

[[Page 77472]]

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.
    Effective Date of the Evaluation--For the purposes of the Agencies' 
appraisal regulations and these Guidelines, the effective date of an 
evaluation is the date that the analysis is completed.
    Engagement Letter--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: (i) The property's location and legal description; (ii) intended 
use and users of the appraisal; (iii) the requirement to provide an 
opinion of the property's market value; (iv) the expectation that the 
appraiser will comply with applicable laws and regulations, and be 
consistent with supervisory guidance; (v) appraisal report format; (vi) 
expected delivery date; and (vii) appraisal fee.
    Evaluation--A valuation permitted by the Agencies' appraisal 
regulations for transactions that qualify for the appraisal threshold 
exemption, business loan exemption, or subsequent transaction 
exemption.
    Exposure Time--As defined in USPAP, the estimated length of time 
the property interest being appraised would have been offered on the 
market prior to the hypothetical consummation of a sale at market value 
on the effective date of the appraisal. Exposure time is always 
presumed to precede the effective date of the appraisal. Exposure time 
is a function of price, time, and use--not an isolated opinion of time 
alone. (See USPAP Standard 1-2(c) and Statement 6.)
    Extraordinary Assumption--As defined in USPAP, an assumption, 
directly related to a specific assignment, which, if found to be false, 
could alter the appraiser's opinions or conclusions regarding the 
property's market value. An example of an extraordinary assumption is 
when an appraiser assumes that an application for a zoning change will 
be approved and there is no evidence to suggest otherwise.
    Federally Regulated Institution--For purposes of the Agencies' 
appraisal regulations and these Guidelines, an institution that is 
supervised by a Federal financial institution's regulatory agency. 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.
    Federally Related Transaction--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--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.
    Going Concern Value--The value of a business entity rather than the 
value of the real property. The valuation is based on the existing 
operations of the business and its current operating record, with the 
assumption that the business will continue to operate.
    Hypothetical Condition--As defined in USPAP, a condition that is 
contrary to what exists but is supposed for the purpose of analysis. An 
example of a hypothetical condition is when an appraiser assumes a 
particular property's zoning is different from what the zoning actually 
is.
    Loan Production Staff--Generally, all personnel responsible for 
generating loan volume or approving loans, as well as their 
subordinates and supervisors. These individuals would include any 
employee whose compensation is based on loan volume (such as processing 
or approving of loans). An employee is not considered loan production 
staff just because part of their compensation includes a general bonus 
or profit sharing plan that benefits all employees. Employees 
responsible solely for credit administration or credit risk management 
are not considered loan production staff.
    Marketing Time--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--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:
    <bullet> Buyer and seller are typically motivated;
    <bullet> Both parties are well informed or well advised, and acting 
in what they consider their own best interests;
    <bullet> A reasonable time is allowed for exposure in the open 
market;
    <bullet> Payment is made in terms of cash in U.S. dollars or in 
terms of financial arrangements comparable thereto; and
    <bullet> 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.
    Presold Unit--A unit may be considered presold if a buyer has 
entered into a binding contract to purchase the unit and has made a 
substantial and non-refundable earnest money deposit. Further, the 
institution should obtain sufficient documentation that the buyer has 
entered into a legally binding sales contract and has obtained a 
written prequalification or commitment for permanent financing.
    Prospective Market Value ``as Completed'' and ``as Stabilized''--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. (See USPAP Statement 4 and Advisory Opinion 
17.)
    Put Back--Represents the ability of an investor to reject mortgage 
loans from a mortgage originator if the mortgage

[[Page 77473]]

loans do not comply with the warranties and representations in their 
mortgage purchasing agreement.
    Raw Land--A parcel or tract of land with no improvements, for 
example, infrastructure or vertical construction. When an appraisal of 
raw land includes entitlements, the appraisal should disclose when such 
entitlements will expire if improvements are not completed within a 
specified time period and the potential effect on the value conclusion.
    Real Estate-Related Financial Transaction--As defined in the 
Agencies' appraisal regulations, any transaction involving:
    <bullet> The sale, lease, purchase, investment in or exchange of 
real property, including interests in property, or the financing 
thereof;
    <bullet> The refinancing of real property or interests in real 
property; or
    <bullet> The use of real property or interests in property as 
security for a loan or investment, including mortgage-backed 
securities.
    Regulated Institution--Refer to the definition of Federally 
Regulated Institution.
    Restricted Use Appraisal Report--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 
other purposes.
    Sales Concessions--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 effect 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--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--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--According to USPAP Standards Rule 
2-2(a), a self-contained appraisal report is the most complete and 
detailed appraisal report option.
    Sum of Retail Sales--A mathematical calculation of the sum of the 
expected sales prices of several individual properties in the same 
development 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--According to USPAP Standards Rule 2-2(b), 
the summary appraisal report summarizes all information significant to 
the solution of an appraisal problem while still providing sufficient 
information to enable the client and intended user(s) to understand the 
rationale for the opinions and conclusions in the report.
    Tract Development--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 or commercial building 
lot, a detached single-family home, an attached single-family home, and 
a residence in a condominium, cooperative, or timeshare building.
    Transaction Value--As defined in the Agencies' appraisal 
regulations:
    <bullet> For loans or other extensions of credit, the amount of the 
loan or extension of credit;
    <bullet> For sales, leases, purchases, and investments in or 
exchanges of real property, the market value of the real property 
interest involved; and
    <bullet> 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 purposes of this definition, the transaction value for loans that 
permit negative amortization should be the institution's total 
committed amount, including any potential negative amortization.
    Uniform Standards of Professional Appraisal Practice (USPAP)--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.
    Unsold Units--An unsold unit is a unit that does not meet the 
conditions listed in the definition of Presold Units.
    Value of Collateral (for Use in Determining Loan-to-Value Ratio)--
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.

    Dated: November 1, 2010.
John Walsh,
Acting Comptroller of the Currency.

    By order of the Board of Governors of the Federal Reserve 
System, December 1, 2010.
Jennifer J. Johnson,
Secretary of the Board.

    Dated at Washington, DC, the 1st day of December, 2010.

    By order of the Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.

    Dated: December 1, 2010.

    By the Office of Thrift Supervision.
John E. Bowman,
Acting Director.

    Dated: November 9, 2010.

    By the National Credit Union Administration Board.
Mary F. Rupp,
Secretary of the Board.
[FR Doc. 2010-30913 Filed 12-9-10; 8:45 am]
BILLING CODE P