The Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System (Federal Reserve Board), the Federal Deposit Insurance Corporation, the Office of Thrift Supervision and the National Credit Union Administration (collectively, the "Agencies") published for comment Proposed Interagency Appraisal and Evaluation Guidelines (the "Proposed Guidelines") in the November 19, 2008 Federal Register, at 73 Fed. Reg. 69647. The Proposed Guidelines include an Appendix A that discusses exemptions to the appraisal requirement, an Appendix B that discusses permissible evaluations in lieu of appraisals, and a Glossary of Terms as Appendix C.
The regulations and guidelines (the "Existing Guidelines") currently in effect require lending institutions subject to the Agencies' regulation to obtain appraisals for real-estate-secured loans of $250,000 or more (or $1,000,000 or more in the case of business loans). For loans below the threshold, the Agencies require an evaluation to estimate market value, in lieu of an appraisal. The Existing Guidelines also prescribe minimum standards for appraisers and for the lending institutions' appraisal policies.
The Proposed Guidelines include the following:
Tract Developments With Unsold Units. The Proposed Guidelines list several questions that need to be asked when a tract development is being appraised, so that unsold units are not necessarily valued for as much as units that have already been sold.
Independence. To ensure that the appraisal and evaluation process is independent from the loan production process, the Proposed Guidelines specify a number of safeguards including that:
- a lending institution should not communicate to the appraiser or evaluator any estimate of dollar value, loan amount, or target loan-to-value ratio. Where, however, the lender is financing a purchase transaction, the lender may provide the appraiser or evaluation with a copy of the sales contract.
- the lending institution cannot use an appraisal ordered by the borrower.
- within the lending institution, the loan production area should not recommend or select the appraiser or evaluator.
Review. The Proposed Guidelines require each lending institution to "maintain a robust review process" for checking the reliability of appraisals and evaluations. The review process will need to cover past work by appraisers and evaluators who are continuing to provide service to the institution. The Agencies' minimum expectations for what the review procedures need to address, including what needs to be placed in the credit file, are set forth in the Proposed Guidelines. The Agencies will also require each lending institution to establish and maintain internal controls for promoting compliance and assuring that appraisals and evaluations are reliable.
Exemptions. The exemptions set forth in Appendix A codify interpretations by the Agencies since the Existing Guidelines were published in 1994. Significant exemptions include:
- If a loan qualifies for sale to Fannie Mae, Freddie Mac or another specified U.S. government agency,1 then the applicable appraisal standards of Fannie Mae, Freddie Mac or the U.S. government agency can be used in place of an appraisal that satisfies the Proposed Guidelines, even if the loan is not actually sold.
- If Fannie Mae, Freddie Mac or another specified U.S. government agency insures or guarantees the mortgage, then the lender does not need an appraisal satisfying the Proposed Guidelines (however, Fannie Mae, Freddie Mac or the applicable U.S. government agency generally will require an appraisal meeting its own guidelines).
The Proposed Guidelines also add an express exemption for underwriting and dealing in mortgage-backed securities, including Collateralized Debt Obligations (CDOs). Since 1998, the Federal Reserve Board has allowed bank holding companies and their nonbank subsidiaries to act as underwriters and dealers in these securities without having to demonstrate that the underlying loans are supported by appraisals in compliance with Existing Guidelines. The Proposed Guidelines will expand this exemption to any Federally-regulated depository institution that is allowed by its charter to be in the business of underwriting and dealing in mortgage-backed securities.
Evaluations in Lieu of Appraisals. For real-estate-secured loans below the dollar thresholds that require an appraisal, the Proposed Guidelines discuss methods for determining the market value of the collateral in Appendix B. Appendix B requires that an institution consider using multiple tools or methods for valuing property and discusses two evaluation alternatives: automated valuation models (AVMs) and tax assessment valuations. In order to use an AVM, the institution needs to ask numerous questions regarding the data and the assumptions used by the AVM, and then test the results. In order to use tax assessment as an evaluation alternative, the institution needs to test how closely tax assessments correlate to market value.
The foregoing discussion covers some of the significant changes in the Proposed Guidelines. The Agencies have requested comments on the Proposed Guidelines from the public on or before January 20, 2009.
Please do not hesitate to contact the attorneys in the Financial Institutions and Lending Practice Area if we can assist you with preparing comments and with any questions.
1The other U.S. government or government-sponsored agencies are Banks for Cooperatives; the Federal Agricultural Mortgage Corporation; Federal Farm Credit Banks; Federal Home Loan Banks; the Student Loan Marketing Association; and the Tennessee Valley Authority.