Brave New World of Appraisal Guidelines

1/20/2011

By Daniel R. McDonald

Following two years of deliberations, new interagency guidelines for real estate appraisals and evaluations were unveiled Dec. 2, 2010. The Interagency Appraisal and Evaluation Guidelines (Guidelines), which replace 1994 guidelines, explain the federal banking agencies’ minimum regulatory standards for appraisals and evaluations. The Guidelines, which apply to all real estate lending functions and related financial transactions, promote greater consistency in application and enforcement across the agencies.

While most provisions serve to clarify or update existing requirements, there are several new provisions that will affect real-estate lending practices, costs, and policies at community banks. Among them are new requirements for evaluations, safeguarding independence, and the use of third party appraisals.

Performing evaluations. Although evaluations for low-risk loans under $250,000 are still permitted, the agencies’ have specified that only individuals independent of the loan production process may be permitted to perform evaluations. Loan officers that have typically performed evaluations at smaller banks in the past can no longer do so under the Guidelines. As a result, the cost of evaluations is expected to rise, and some community banks may choose to do away with evaluations entirely. These banks may prefer the relative ease of hiring, and paying for, an experienced appraiser and appraisal to the training and backroom work necessary to continue to use evaluations under the new Guidelines.

Safeguarding Independence. In limited situations where absolute lines of independence cannot be achieved, the Guidelines give institutions the flexibility to use staff to perform valuations and lending functions as long as the institution can demonstrate the use of prudent safeguards that isolate the collateral evaluation process from the influence of the loan production process. With this provision, the agencies recognize that it may not always be possible or practical for a lending institution to separate the loan and collection functions from the appraisal or evaluation process. To ensure the independence of dual-function individuals, lenders, officers, and directors in these situations should abstain from any vote or approval involving loans on which they performed an appraisal or evaluation, and the safeguards used to ensure independence should be clearly written out in the bank’s policies and procedures.

Using third party appraisals. The Guidelines confirm that appraisals obtained from other financial services institutions must comply with the agencies’ appraisal regulations and standards of independence. Prior to the release of the Guidelines, a lender could not accept an appraisal commissioned by a non-federally insured financial institution, such as a mortgage broker. As a result, bankers were required to pay for a second appraisal to ensure compliance when purchasing assets from institutions that were not federally insured. Under the new Guidelines, banks can now accept appraisals from mortgage brokers and other companies as long as those institutions follow the same guidelines for appraisals as federally-insured financial institutions. Banks that accept appraisals under these conditions do, however, have the responsibility to review the appraisals in accordance with their own policies and procedures.

The agencies will determine whether additional revisions to these guidelines are necessary as implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 continues. Until further notice, though, institutions are responsible for adhering to these Guidelines and adjusting policies and procedures to reflect these changes.

The Guidelines are available on the FDIC web site at http://www.fdic.gov/regulations/laws/rules/5000-4800.html.