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BOARD OF GOVERNORS

OF THE

FEDERAL RESERVE SYSTEM

WASHINGTON, D.C. 20551 

DIVISION OF BANKING

SUPERVISION AND REGULATION

SR 16-5 

March 4, 2016 

TO THE OFFICER IN CHARGE OF SUPERVISION

AT EACH FEDERAL RESERVE BANK

SUBJECT: Interagency Advisory on the Use of Evaluations in Real Estate-Related 

Financial Transactions

Applicability: This guidance applies to all state member banks, bank holding companies, and 

nonbank subsidiaries of bank holding companies, regardless of the asset size of the supervised 

institution. 

The Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the 

Comptroller of the Currency (agencies) are issuing the attached Interagency Advisory on the Use 

of Evaluations in Real Estate-Related Financial Transactions to describe aspects of the agencies’ 

appraisal regulations1

 and the Interagency Appraisal and Evaluation Guidelines.

2

 In outreach 

meetings conducted by the agencies pursuant to the requirement of the Economic Growth and 

Regulatory Paperwork Reduction Act, representatives from the financial industry raised 

questions regarding supervisory expectations for using an evaluation instead of an appraisal for 

estimating the market value of real property securing real estate-related financial transactions. 

Many of these questions pertained to the circumstances under which evaluations may be used in 

the underwriting of real estate-related financial transactions and how to support a market value 

conclusion when there have been few or no recent comparable sales. Therefore, the agencies are 

issuing this advisory to respond to those questions and to describe existing supervisory 

expectations, guidance, and industry practice. 

In particular, the advisory reminds institutions about the appropriate use of an evaluation 

when determining the market value of real property for certain real estate-related financial 

transactions. It highlights that preparers of an evaluation may be internal bank employees or 

third parties that are knowledgeable, competent, and independent of the transaction. Further, the 

advisory discusses various valuation methods commonly used for developing a market value 

conclusion. The agencies remind institutions that regardless of the valuation method used, an 

evaluation should contain sufficient information to support the value conclusion. Institutions are 

1 See the Board’s appraisal rules: 12 CFR 208 subpart E (state member banks) and 12 CFR 225 subpart G (bank 

holding companies).

2 See SR letter 10-16, “Interagency Appraisal and Evaluation Guidelines.”
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reminded to refer to the Interagency Appraisal and Evaluation Guidelines for further guidance 

concerning evaluations.

Federal Reserve Banks are asked to distribute this letter to supervised institutions in their 

districts, as well as to supervisory and examination staff. For questions related to this advisory, 

please contact Carmen Holly, Senior Supervisory Financial Analyst, at (202) 973-6122. In 

addition, questions may be sent via the Board’s public website.3

Michael S. Gibson

Director

Attachment:

• Interagency Advisory on the Use of Evaluations in Real Estate-Related Financial 

Transactions 

Cross References to:

• SR letter 10-16, “Interagency Appraisal and Evaluation Guidelines”

 3 See http://www.federalreserve.gov/apps/contactus/feedback.aspx. 
Board of Governors of the Federal Reserve System 

Federal Deposit Insurance Corporation 

Office of the Comptroller of the Currency

Interagency Advisory on Use of Evaluations

in Real Estate-Related Financial Transactions

March 4, 2016

In outreach meetings conducted by the federal banking agencies1 (agencies) pursuant to the 

requirement of the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA),2

representatives from the financial industry raised questions regarding supervisory expectations 

for using an evaluation instead of an appraisal for estimating the market value of real property 

securing real estate-related financial transactions. 

Many questions pertained to the circumstances under which evaluations may be used in the 

underwriting of real estate-related financial transactions and how to support a market value 

conclusion when there have been few or no recent comparable sales. The federal banking 

agencies are providing this advisory to respond to those questions by describing existing 

supervisory expectations, guidance, and industry practice. 

Transactions That Permit Evaluations

The agencies’ appraisal regulations3 require financial institutions regulated by the agencies to 

obtain an appraisal completed by a competent and qualified state-licensed or state-certified 

appraiser that complies with the Uniform Standards of Professional Appraisal Practice (USPAP)4

for any real estate-related financial transaction, unless an exception applies. 

 1 The federal banking agencies include the Federal Deposit Insurance Corporation (FDIC), the Board of Governors 

of the Federal Reserve System (Board), and the Office of the Comptroller of the Currency (OCC).

2 The federal banking agencies are currently conducting a review of their respective regulations pursuant to the 

EGRPRA, including their appraisal regulations, in order to evaluate whether they are outdated, unnecessary, or 

unduly burdensome, and to consider how to reduce regulatory burden on insured depository institutions while, at the 

same time, ensuring their safety and soundness and the safety and soundness of the financial system. This guidance 

is responding to specific questions that have been raised about appraisals as part of the agencies’ EGRPRA outreach 

process, but this guidance is not intended to indicate the completion of their EGRPRA review of appraisal 

requirements, which is ongoing. See transcripts at: http://egrpra.ffiec.gov/outreach/outreach-index.html.

3 See FDIC: 12 CFR 323; Board: 12 CFR 208 subpart E and 12 CFR 225 subpart G; and OCC: 12 CFR 34, 

subpart C. The National Credit Union Administration (NCUA) regulations are located at 12 CFR 722, but NCUA is 

not a party to this Advisory as it is being issued in response to comments raised during the EGRPRA process, and 

NCUA is not required to participate in EGRPRA.

4 Appraisal Standards Board of The Appraisal Foundation, Uniform Standards of Professional Appraisal Practice 

(2016-2017), available at:

http://www.appraisalfoundation.org/TAF/Standards/Appraisal_Standards/TAF/USPAP.aspx?hkey=5a640dda-464d4683-b4e1-190201e0eda7.
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Under the appraisal regulations, the following transaction types do not require an appraisal, but 

do require an evaluation:

• Transactions where the “transaction value”5 (generally the loan amount) is $250,000 or less;6

• Certain renewals, refinances, or other transactions involving existing extensions of credit; 

and

• Real estate-secured business loans with a transaction value of $1,000,000 or less and when 

the sale of, or rental income derived from, real estate is not the primary source of repayment 

for the loan. 

There may be instances when a financial institution finds it prudent or necessary to go beyond 

the requirements of the agencies’ appraisal regulations. For example, obtaining an appraisal may 

be prudent for credit risk management purposes or may be a prerequisite to participating in some 

secondary market transactions. Additionally, a financial institution may find it prudent to obtain 

an appraisal rather than an evaluation when the institution’s portfolio risk increases or for higherrisk real estate-related financial transactions. 

Preparation of an Evaluation 

The Interagency Appraisal and Evaluation Guidelines (Guidelines)7 provide guidance on the use 

of and parameters for evaluations. An evaluation is not required to be completed by a statelicensed or state-certified appraiser or to comply with USPAP. The evaluation preparer should, 

however, be knowledgeable, competent, and independent of the transaction and the loan 

production function of the institution. Evaluations may be completed by a bank employee or by 

a third party. In smaller communities, bankers and third-party real estate professionals have 

access to local market information and may be qualified to prepare evaluations for an institution. 

An individual who prepares an evaluation may consider one or more valuation approaches or 

methodologies to estimate the market value of real estate. The valuation profession considers 

three approaches to valuing real estate, namely the sales comparison approach, the cost approach, 

and the income approach. An evaluation should provide a reliable estimate of the market value 

of the property and, therefore, the approach or approaches used in an evaluation should be 

appropriate to the property being valued. For most residential properties and some commercial 

properties, the person preparing an evaluation may obtain data on recent sales of properties 

similar to the property being valued that reflect recent market activity. Such comparable sales 

 5 “Transaction value” is a defined term in the interagency appraisal regulation. See FDIC: 12 CFR 323.2(m); Board: 

12 CFR 225.62(m); and OCC: 12 CFR 34.42(m).

6 Other regulations may require obtaining an appraisal for certain transactions with transaction values under the 

threshold. For example, an appraisal may be required under Regulation Z for any transaction that is considered a 

higher-priced mortgage loan under that regulation due to its interest rate. See Consumer Financial Protection 

Bureau: 12 CFR 1026.35; Board: 12 CFR 226.43; and OCC: 12 CFR 34, subpart G.

7 See Interagency Appraisal and Evaluation Guidelines, Federal Register, Vol. 75, No. 237, December 10, 2010, 

page 77450, at https://www.gpo.gov/fdsys/pkg/FR-2010-12-10/pdf/2010-30913.pdf. While the National Credit 

Union Administration (NCUA) has appraisal regulations and is a party to the Guidelines, the NCUA is not a party to 

this Advisory as it is being issued in response to comments raised during the EGRPRA process, and NCUA is not 

required to participate in EGRPRA.
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present direct market evidence that may be useful to the preparer in estimating the market value 

of the subject property. 

Some valuation assignments, such as for properties in rural areas or non-disclosure states8 or 

properties that are not sufficiently similar to other properties in the local market, may be more 

challenging due to a lack of comparable sales data. Although the sales comparison approach is 

the most used valuation method, in areas where there have been few, if any, recent comparable 

sales of similar properties in reasonable proximity to the subject property, the person who 

performs an evaluation may consider alternative valuation methods and other information for 

developing an evaluation and supporting a market value conclusion. For example, the cost 

approach9 to valuing real property might be appropriate, particularly if the property is newer 

construction. Similarly, for an income producing or rental property, the income approach10

could be appropriate to support a market value conclusion in an evaluation. There are many 

sources of information available to financial institutions that describe the valuation processes 

applicable to income-producing properties. 

The Guidelines discuss the possible use of several analytical methods and technological tools, 

such as automated valuation models and tax assessment values. To use one of these methods, an 

institution should be able to demonstrate that the valuation method is consistent with safe-andsound banking practices and the Guidelines. The Guidelines detail expectations for selecting, 

using, and validating an analytical method or technological tool. Institutions should establish 

policies and procedures that specify the supplemental information that is required to develop an 

evaluation. 

Contents of an Evaluation Report

The Guidelines provide information regarding the minimum content that should be contained in 

an evaluation. Unlike an appraisal report that must be written in conformity with the 

requirements of USPAP, there is no standard format for documenting the information and 

analysis performed to reach a market value conclusion in an evaluation. Regardless of the 

approach or methodology used to estimate the market value of real property, an evaluation 

should contain sufficient information to allow a reader to understand the analysis that was 

performed to support the value conclusion and the institution’s decision to engage in the 

transaction. 

 8 States that do not disclose a property’s actual sales price are referred to as non-disclosure states.

9 See definition for cost approach in The Dictionary of Real Estate Appraisal, sixth edition, Appraisal Institute, 

Chicago 2013, page 54.

10 A discussion of the income approach is included in chapters 23 and 24 of The Appraisal of Real Estate, 14th

edition, Appraisal Institute, Chicago, 2013.