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Federal Reserve Bank of Dallas
2200 N. PEARL ST.
DALLAS, TX 75201-2272

November 20, 2003

Notice 03-65
TO: The Chief Executive Officer of each state
member bank and bank holding company
in the Eleventh Federal Reserve District
SUBJECT
Independent Appraisal and Evaluation Functions
DETAILS
The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance
Corporation, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the
National Credit Union Administration have jointly issued a statement on the independence of the
collateral valuation process.
The statement serves as a reminder to regulated institutions that there needs to be an
effective, independent real estate appraisal and evaluation program for all of their lending functions.
This includes all real estate-related financial transactions originated or purchased by a regulated
institution for its own portfolio or as assets held for sale. The statement should be reviewed in
conjunction with each agency’s appraisal and real estate lending regulations and the Interagency
Appraisal and Evaluation Guidelines.
ATTACHMENTS
A copy of the Board’s SR letter and the joint agency statement are attached.
MORE INFORMATION
For more information, please contact Marion White, Banking Supervision Department, at
(214) 922-6155. Paper copies of this notice or previous Federal Reserve Bank notices can be printed
from our web site at www.dallasfed.org/banking/notices/index.html.

For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal
Reserve Bank of Dallas: Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012;
Houston Branch Intrastate (800) 392-4162, Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810.

BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C. 20551
DIVISION OF BANKING
SUPERVISION AND REGULATION

SR 03-18
October 28, 2003
TO THE OFFICER IN CHARGE OF SUPERVISION AND APPROPRIATE SUPERVISORY AND EXAMINATION STAFF AT
EACH FEDERAL RESERVE BANK AND TO EACH DOMESTIC BANKING ORGANIZATION SUPERVISED BY THE
FEDERAL RESERVE
SUBJECT: Independent Appraisal and Evaluation Functions
The Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of
the Comptroller of the Currency, Office of Thrift Supervision, and National Credit Union Administration (the agencies)
are jointly issuing the attached statement on the independence of the collateral valuation process. The purpose of
the statement is to serve as a reminder to regulated institutions that there needs to be an effective, independent real
estate appraisal and evaluation program for all of their lending functions. This includes all real estate-related
financial transactions originated or purchased by a regulated institution for its own portfolio or as assets held for
sale. The statement should be reviewed in conjunction with each agency's appraisal and real estate lending
regulations and the Interagency Appraisal and Evaluation Guidelines.1
The agencies' appraisal regulations address appraiser independence and require that an institution, or its
agent, directly engage the appraiser. The only exception to this requirement is that an institution may use an
appraisal prepared for another financial services institution, provided that the regulated institution determines that the
appraisal conforms to the agencies' appraisal regulations and is otherwise acceptable. It is also important to ensure
that the program is safeguarded from internal influence and interference from an institution's loan production staff.
Individuals independent from the loan production area should oversee the selection of appraisers and individuals
providing evaluation services.
To foster control and accountability, the agencies encourage a banking institution to use written
engagement letters when ordering appraisals, especially for large, complex, or out-of-area commercial real estate
properties. Even in small institutions when absolute lines of independence cannot be achieved, effective internal
controls should be implemented to ensure that no single person has sole authority to render credit decisions
involving loans on which they ordered or reviewed the appraisal or evaluation.
Reserve Banks are asked to distribute this SR letter and the attached statement to state member banks
and bank holding companies in their districts and to appropriate supervisory staff. Questions concerning the
statement and the Board's appraisal regulation may be directed to Virginia Gibbs, Senior Supervisory Financial
Analyst, at 202/452-2521.
Richard Spillenkothen
Director
Attachment
Cross Reference: SR letter 94-55

Notes:
1. For the real estate lending regulation, refer to 12 CFR 208 subpart E and Appendix C on the Federal Reserve
website at http://www.federalreserve.gov/regulations/title12/sec208/12cfr208_01.htm
For the appraisal regulation, refer to 12 CFR 225 subpart G at
http://www.federalreserve.gov/regulations/title12/sec225/12cfr225_01.htm
For the guidelines, refer to SR letter 94-55 at
http://www.federalreserve.gov/boarddocs/SRLETTERS/1994/SR9455.HTM.

Office of the Comptroller of the Currency
Board of Governors of the Federal Reserve System
Federal Deposit Insurance Corporation
Office of Thrift Supervision
National Credit Union Administration
INDEPENDENT APPRAISAL AND EVALUATION FUNCTIONS
October 27, 2003
The Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal
Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), the Office of Thrift
Supervision (OTS), and the National Credit Union Administration (NCUA) (the agencies) are
jointly issuing this statement to address concerns identified during examinations about the
independence of the collateral valuation process. This statement applies to all real estate-related
financial transactions originated or purchased by a regulated institution for its own portfolio or as
assets held for sale. It provides further clarification of, and should be reviewed in conjunction
with, the agencies’ appraisal and real estate lending regulations1 and the Interagency Appraisal
and Evaluation Guidelines (Guidelines).2
An institution’s board of directors is responsible for reviewing and adopting policies and
procedures that establish and maintain an effective, independent real estate appraisal and
evaluation program (program) for all of its lending functions. The real estate lending functions
include commercial real estate mortgage departments, capital market groups, and asset
securitization and sales units. These independence concerns include the risk that improperly
prepared appraisals may undermine the integrity of credit underwriting processes. More broadly,
an institution’s lending functions should not have undue influence that might compromise the
program’s independence.

Selecting Individuals to Perform Appraisals or Evaluations
The Guidelines establish minimum standards for an effective program, including standards for
selecting individuals who may perform appraisals or evaluations. Among other considerations,
the selection criteria must provide for the independence of the individual performing the
appraisal or evaluation. That is, the individual has neither a direct nor indirect, interest, financial
or otherwise, in the property or transaction. Institutions also need to ensure that the individual
selected is competent to perform the assignment. Consideration should be given to the
1

OCC: 12 CFR 34, subparts C and D; FRB: 12 CFR 208 subpart E and appendix C, and 12 CFR 225 subpart G;
FDIC: 12 CFR 323 and 12 CFR Part 365; OTS: 12 CFR Part 564, and 12 CFR 560.100, and 12 CFR 560.101; and
NCUA: 12 CFR Part 722.5.
2

The interagency guidelines may be found in: Comptroller’s Handbook for Commercial Real Estate and
Construction Lending for OCC; SR letter 94-55 for FRB; FIL-74-94 for FDIC; and Thrift Bulletin 55a for OTS.
NCUA was not a party to the Guidelines; however, the NCUA applies the content to credit unions, when applicable.

individual’s qualifications, experience, and educational background. Selection occurs when,
based on an oral or written agreement, the individual accepts the assignment to appraise or
evaluate a particular property. Moreover, appraisal or evaluation development work should not
commence until the institution finalizes the selection process.
The agencies’ appraisal regulations address appraiser independence and require that an
institution, or its agent, directly engage the appraiser. The only exception to this requirement is
that an institution may use an appraisal prepared for another financial services institution,
provided that the institution determines that the appraisal conforms to the agencies’ appraisal
regulations and is otherwise acceptable. Independence is compromised when an institution uses
an appraiser who is recommended by the borrower or allows the borrower to select the appraiser
from the institution’s list of approved appraisers.
Institutions may not use an appraisal prepared by an individual who was selected or engaged by a
borrower. An institution’s use of a borrower-ordered appraisal violates the agencies’ appraisal
regulations. Likewise, institutions may not use “readdressed appraisals” -- appraisal reports that
are altered by the appraiser to replace any references to the original client with the institution’s
name. Altering an appraisal report in a manner that conceals the original client or intended users
of the appraisal is misleading and violates the agencies’ appraisal regulations and the Uniform
Standards of Professional Appraisal Practice (USPAP).
It is also important to ensure that the program is safeguarded from internal influence and
interference from an institution’s loan production staff. Individuals independent from the loan
production area should oversee the selection of appraisers and individuals providing evaluation
services. The agencies recognize that it may not be possible or practical for small institutions to
separate the collateral valuation and loan production processes. To ensure independence, loan
officials, officers or directors with the responsibility for ordering appraisals and evaluations
should not have sole approval authority for granting the loan request.
When selecting and engaging individuals, an institution needs to identify the assignment and
order the appropriate appraisal or evaluation, as discussed in the Guidelines. To foster control
and accountability, the agencies encourage an institution to use written engagement letters when
ordering appraisals, especially for large, complex, or out-of-area commercial real estate
properties. An institution should include a copy of the written engagement letter in the
permanent loan file. An appraiser may also incorporate an engagement letter in the appraisal
report. The engagement letter confirms that the assignment was made in a manner that complies
with the institution’s procedures and the agencies’ regulations and Guidelines.

Appraisal and Evaluation Compliance Reviews
An institution’s appraisal and evaluation program must maintain effective internal controls that
promote compliance with program standards and the agencies’ appraisal regulations and
Guidelines. Internal controls should, among other criteria, confirm that appraisals and
evaluations are reviewed by qualified and adequately trained individuals who are not involved in
the loan production processes. The institution’s standards for and the depth of such reviews
should reflect the risk of the transaction and the process through which the appraisal or

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evaluation is obtained. An institution should establish more in depth review procedures for
appraisals of large, complex or out-of-area commercial real estate credits and for those appraisals
and evaluations that are ordered by agents of the institution, such as loan brokers or another
financial services institution.
Even in small institutions when absolute lines of independence cannot be achieved, effective
internal controls should be implemented to ensure that no single person has sole authority to
render credit decisions involving loans on which they ordered or reviewed the appraisal or
evaluation. Further, lending officials, officers, or directors should abstain from any vote or
approval involving loans for which they performed the appraisal or evaluation.

Supervisory Approach
Examiners will review an institution’s standards of independence, taking into consideration the
size of the institution and the nature and complexity of its real estate-related activities.
Examiners will consider whether policies and procedures are comprehensive and applied
uniformly to all units engaging in federally related transactions.
If an institution suspects that a licensed or certified appraiser is violating applicable laws or
USPAP, or is otherwise engaging in other unethical or unprofessional conduct, the institution
should make referrals directly to the appropriate state appraiser regulatory authorities.
Examiners finding evidence of unethical or unprofessional conduct, including improperly
prepared appraisals or evaluations and readdressed appraisals, should forward their findings and
their recommendations to their supervisory office for appropriate disposition and referral to the
state appraiser regulatory authority, as necessary. Institutions and institution-affiliated parties,
including lenders, staff and fee appraisers, are reminded that they could be subject to
enforcement actions, which include removal/prohibition orders, cease and desist orders, and civil
money penalties, for violations of the agencies’ appraisal and real estate lending regulations.

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Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102