Though it may seem elementary, an area that is commonly criticized by bank examiners is the proper understanding and use of appraisals. This is particularly true when refinancing a loan with different purposes. Common criticism stated by regulators to bank management is when to obtain updated values on properties where the purpose has changed. For example, instances where the property type changed from a single-family residence to a rental property, it is common for banks to overlook the need for a new appraisal. The question that needs to be answered is whether the appraisal or evaluation should be commensurate with the property type.
Another area to be aware of when questioning the need for a new valuation concerns the status of a project that is not performing as originally anticipated. Guidance is given to ensure a new appraisal is obtained if a note is renewed and there is significant change in the project. A common example sighted is a development project that has “stalled” and the market conditions have changed significantly, which results in the original appraisal being invalid.
One last suggestion to remember when renewing a real estate secured loan is to conduct a real estate evaluation. Safe and sound banking practices dictate that an evaluation should be conducted if an extension is made, even if no new monies have been advanced.
With the significant real estate market fluctuations taking place and the effect these may have on a bank’s loan portfolio, it is important to remember the three things discussed to aid in reducing potential regulatory criticisms.