The ASB could consider moving forward with a discussion draft or an exposure draft by late 2019.
TAF once a draw a bright line between appraisals and evaluations.
“Federal Deposit Insurance Corporation, the Board of the Federal Reserve System, and the Office of the Comptroller of the Currency issued an advisory to clarify supervisory expectations for using an evaluation for certain real estate-related transactions in response to questions raised during outreach meetings held pursuant to the Economic Growth and Regulatory Paperwork Reduction Act. Many of the questions pertained to when an evaluation is permitted for a real estate-related transaction and how an evaluation can support a market value conclusion when there are few or no recent comparable sales of similar properties.
Part 323 of the FDIC Rules and Regulations permits institutions to use an evaluation in lieu of an appraisal to value real property pledged as collateral for certain real estate-related transactions that are not subject to the appraisal requirements in Part 323. For example, institutions may use evaluations rather than appraisals to estimate the market value of residential or commercial properties securing real estate-related transactions of $250,000 or less except for certain higher-priced mortgage loans under Regulation Z.
The Inter-agency Appraisal and Evaluation Guidelines do not require evaluations to be based on comparable sales.
In areas with few, if any, recent comparable sales of similar properties in reasonable proximity to the subject property, persons who perform evaluations may consider alternative valuation methods and other supporting information when developing a market value conclusion.
Institutions that demonstrate that a valid correlation exists between tax assessment values and market values may use such information to develop the market value conclusion in an evaluation.”
According to the federal banking regulators’ Inter-agency Appraisal and Evaluation Guidelines (the “Guidelines”), evaluations are permitted for:
- Transactions where the “transaction value” (generally the loan amount) is $250,000 or less;
- 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.
Even though the regulations allow evaluations for these types of transactions, the Guidelines state that banks should establish policies and procedures for determining when to obtain appraisals for higher-risk transactions, such as those with combined loan-to-value ratios that exceed supervisory limits, atypical properties, properties outside the bank’s traditional lending market, or high-risk borrowers.
While an appraisal requires a state-certified or licensed appraiser, the Guidelines state that those who perform evaluations should have “the appropriate appraisal or collateral valuation education, expertise and experience relevant to the type of property being valued.” Examples include appraisers, real estate lending professionals, agricultural extension agents or foresters.
You can even use internal staff to perform evaluations, provided they possess the necessary training and qualifications and you take steps to maintain the independence of your real estate valuation program. Generally, that means a complete separation of the collateral valuation program from the loan production process. Maintaining such a separation may be difficult for smaller banks. According to the Guidelines, if the only person qualified to evaluate real estate collateral is another loan officer, director or bank official, the bank should ensure that person’s independence by requiring him or her to abstain from any vote or approval involving loans for which they ordered, performed, or reviewed an appraisal or evaluation.
For banks lacking the resources to hire and train their own personnel to perform evaluations, the most cost-effective way to address independence issues may be to use a third party for evaluations.
(Washington, DC) August 1, 2019 – The Appraisal Standards Board (ASB), an independent board of The Appraisal Foundation, announced today that it intends to examine the concept of creating standards for evaluations, which are alternatives to appraisals used by financial institutions.
Currently, there are no uniform standards for appraisers to follow when conducting an evaluation, which leads to greater risk to the safety and soundness of the real estate transaction and diminished protection for consumers. The ASB intends to issue a concept paper around Labor Day and will follow up with a public hearing with panels of constituents on October 18, 2019, in Washington, DC. As with all public meetings of the ASB, the public hearing will be broadcast via Livestream.
“This important development by the ASB shows how the Board has their ear to the ground, listening to the concerns of working appraisers in a rapidly evolving marketplace where there is an increasing demand for different valuation products,” said David Bunton, president of the Foundation. “They are balancing that with their responsibility to protect the public trust in valuation by creating uniform standards that are subject to oversight.”
Currently, the Inter-agency Appraisal and Evaluation Guidelines for federally regulated financial institutions provide guidance on evaluations, but that guidance is directed at lenders, not appraisers. Furthermore, the courts have found such guidance to be unenforceable. “This puts appraisers in a difficult, untenable position,” said John Brenan, vice president of appraisal issues at the Appraisal Foundation. “Appraisers often struggle when asked to perform evaluations, since most are mandated to comply with the Uniform Standards of Professional Appraisal Practice (USPAP). It’s almost a Catch-22 situation.”
Under federal regulations, evaluations may be performed by non-appraisers who have not demonstrated a level of expertise through education, training, and examination. If appraisers are not completing an evaluation, there is no recourse for a lender or consumer to appeal a bad evaluation. With the increased use of evaluations in the marketplace lenders and consumers are being exposed to an unnecessary level of risk not seen since the 1980s when national appraiser qualifications and appraisal standards had not yet been created.
“Appraisers are valuation experts. When hiring a licensed or certified real property appraiser to develop and report market value, the client should expect the work to be performed in accordance with USPAP,” said Wayne Miller, chair of the Appraisal Standards Board. “The Board is eager to receive stakeholder feedback from the planned concept paper and public hearing on the impediments, if any, to appraisers completing evaluations in accordance with USPAP. As always, the Board’s goal is to allow USPAP to evolve in an ever-changing real estate valuation environment while continuing to promote and maintain a high level of public trust in the valuation profession.”
For these reasons, the ASB is considering creating standards for developing and reporting evaluations, which would apply to those appraisers who want to perform evaluations while complying with state laws. The concept is to draw a bright line between evaluations and appraisals in USPAP.
Based on feedback from the concept paper and the public hearing, the ASB could consider moving forward with a discussion draft or an exposure draft by late 2019. The question of when evaluation standards would go into effect is likely to be part of the discussion in the concept paper and at the public meeting.