New Rules

By Grochala, Ann | Independent Banker, February 2009 | Go to article overview
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New Rules

Grochala, Ann, Independent Banker

Agencies Issue New Appraisal and Evaluation Guidelines

Community bankers around the country are facing the challenge of gauging property values as real estate prices decline and accurate "market values" are difficult to determine. Examiners are scrutinizing all banks about how they obtain and use appraisals and other property valuation tools during underwriting and ongoing portfolio monitoring.

In light of the increased importance of accurate appraisals, the FDIC, Federal Reserve Board, National Credit Union Administration, Office of the Comptroller of the Currency and Office of Thrift Supervision have proposed Interagency Appraisal and Evaluation Guidelines.

The proposed guidelines are intended to re-enforce the importance of sound collateral valuation practices mandated by the banking agencies' appraisal regulations. They are also designed to further clarify the agencies' longstanding expectations for institutions' appraisal and evaluation programs, which are necessary to promote safe and sound real estate lending activity.

The new guidelines would supersede the 1994 Interagency Appraisal and Evaluation Guidelines (1994 Guidelines) and reflect revisions to the Uniform Standards of Professional Appraisal Practice and the evolution of collateral valuation practices, such as the use of automated valuation models. While the regulators propose to keep much of the 1994 Guidelines, they are also proposing some major revisions.

Revised Guidance

The proposed guidelines detail the banking agencies' expectations regarding independence in the appraisal and evaluation function; further explain minimum appraisal standards, including a clarification of requirements for appraisals of residential tract developments; and address risk-focused appraisal and evaluations separate and apart from an institution's compliance function. New appendices provide additional clarification on transactions exempt from appraisal regulations and acceptable evaluation alternatives as well as a new glossary of terms.

What constitutes "market value" is a point of debate, and the banking agencies propose to expand the discussion of market value in the 1994 Guidelines. Their proposal would link the appraisal regulatory definition of market value with the definition of value in their real estate lending standards guidelines.

Banks are permitted to obtain or perform an evaluation of real property collateral in lieu of an appraisal for transactions that qualify for certain appraisal exemptions, and the guidelines provide more guidance on the information and analysis that should be included in an evaluation.

Updating Valuations

The proposed guidelines also emphasize the importance of sound portfolio-monitoring principles that set forth criteria for when an institution should replace or update collateral valuations for existing real estate loans.

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