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Federal Reserve Bank
of
N
ew
Yo r k
N E W Y O R K , N. Y. 1 0 0 4 - 5 - 0 0 0 1
AREA CODE
212
7 20-6375
C hester B .F eldberg
E x e c u t i v e V ic e P r e s i d e n t
October 14, 1992
TO T H E C H I E F E X E C U T I V E O F F I C E R S OF A L L S T ATE
M E M B E R BANKS, B A N K H O L D I N G COMPANIES, A N D
D O M E S T I C O F F I C E S OF F O R E I G N B A NKS IN T H E
SECOND FEDERAL RESERVE DISTRICT
SUBJECT:
G U I D E L I N E S FOR R E A L E S T A T E A P P R A I S A L A N D E V A L U A T I O N
PROGRAMS
T i t l e XI of the F i n a n c i a l I n s t i t u t i o n s Reform,
Recovery, and E n f o r c e m e n t A c t of 1989 m a n d a t e d t h a t t he federal
financial institutions regulatory agencies adopt regulations
r e g a r d i n g t he u t i l i z a t i o n of a p p r a i s a l s by r e g u l a t e d
institutions.
T he B o a r d ' s r e g u l a t i o n , 1 and s i m i l a r r e g u l a t i o n s
a d o p t e d by t h e o t h e r agencies, i d e n t i f y w h i c h real e s t a t e - r e l a t e d
f i n a n c i a l t r a n s a c t i o n s r e q u i r e an evaluation, set f o r t h m i n i m u m
s t a n d a r d s for p e r f o r m i n g an a p p r a i s a l in f e d e r a l l y r e l a t e d
trans a c t i o n s , a nd d i s t i n g u i s h t h o s e a p p r a i s a l s r e q u i r i n g the
se r v i c e s of a s t ate c e r t i f i e d a p p r a i s e r v e r s u s a s t a t e li c e n s e d
appraiser, a m o n g o t her items.
T he F e d e r a l R e s e r v e has issued e x a m i n e r g u i d a n c e tha t
d i s c u s s e s (1) e v a l u a t i o n s for real e s t a t e - r e l a t e d f i n a n c i a l
t r a n s a c t i o n s t h a t do not r e q u i r e th e s e r v i c e s of a s t a t e li c e n s e d
or c e r t i f i e d appraiser, and (2) s u p p l e m e n t a l i n f o r m a t i o n on the
r e q u i r e m e n t s for t he safe and s o und a d m i n i s t r a t i o n of an
i n s t i t u t i o n ' s a p p r a i s a l an d e v a l u a t i o n programs.
T h e Fe d e r a l
D e p o s i t I n s u r a n c e Corporation, the O f f i c e of t h e C o m p t r o l l e r of
the Currency, a nd the O f f i c e of T h r i f t S u p e r v i s i o n a re a d o p t i n g
s e p a r a t e g u i d e l i n e s for real e s t a t e a p p r a i s a l an d e v a l u a t i o n
programs.
A c o p y of the F e d eral R e s e r v e g u i d e l i n e s is enclosed.
R e g a r d i n g evaluations, th e g u i d e l i n e s p r o v i d e
c l a r i f i c a t i o n on the B o a r d ' s e x p e c t a t i o n s for w r i t t e n e v a l u a t i o n s
of real e s t a t e in real e s t a t e - r e l a t e d f i n a n c i a l t r a n s a c t i o n s t hat
do no t r e q u i r e the se r v i c e s of an a p p r a i s e r u n d e r t h e a p p r a i s a l
r egulation.
T h e Bo a r d ' s r e g u l a t i o n r e q u i r e s t h a t an a p p r o p r i a t e
e v a l u a t i o n be p e r f o r m e d on all such tr a n s a c t i o n s .
T he g u i d e l i n e s
1 T h e t e x t of the B o a r d ' s a p p r a i s a l r e g u l a t i o n is set f o rth
in R e g u l a t i o n Y - S u b p a r t G, 12 C F R 225.61-67 an d A p p e n d i x A to
S u b p a r t G of P a r t 225 and i n c o r p o r a t e d by r e f e r e n c e into R e g u l a t i o n
H, 12 C F R 208.18 (referred to h e r e i n as t h e ''regulation'').
4
Federal Reserve Board
Division of Banking Supervision and Regulation
GUIDELINES FOR REAL ESTATE
APPRAISAL AND EVALUATION PROGRAMS
September 28, 1992
INTRODUCTION
The Federal Reserve Board and the other federal financial institutions regulatory
agencies1 developed and adopted appraisal rules as mandated by Title XI of the
Financial Institutions Reform, Recovery, and Enforcement Act o f 1989 ("FIRREA").
The Board’s rule requires that appraisals be conducted by licensed or certified appraisers
for real estate-related financial transactions that "require the services o f an appraiser."
The appraisal regulations2 ("regulation") set forth applicable appraisal standards to be
used by certified and licensed appraisers in conducting appraisals in these transactions.
In addition, the regulation currently identifies certain real-estate related financial
transactions that do not require the services o f an appraiser,
do not need an
appraisal, such as when the loan amount is $100,000 or less. In the context of Title XI
of FIRREA, an appraisal means the kind o f specialized opinion as to the value of real
estate- containing certain formal elements recognized by industry practices and in
standards promulgated by professional appraisers. An appraisal ordinarily estimates the
property’s value under three approaches, the cost, income, and comparable sales
approaches, and reconciles the values under each approach. An appraisal also typically
contains a description of the property, a disclosure of sales history, an opinion as to the
highest and best use of the property, and the certification o f the appraiser as to content,
independence, property inspection, compensation, opinions and assistance. As provided
in the regulation, not all real estate transactions need such a formal opinion as to value.
For these transactions, the appraisal rule and proper lending policies continue to require
an appropriate evaluation of real estate consistent with the Board’s policies and these
supervisory guidelines. Further, the Board recognizes that there may be other real
estate-related financial transactions that do not require the services o f an appraiser and
is continuing to consider the treatment of various categories o f real estate-related
financial transactions.
1 For the purposes of these guidelines, "federal financial institutions regulatory
agencies" means the Board o f Governors of the Federal Reserve System, the Federal
D eposit Insurance Corporation, the National Credit U nion Administration, the Office of
the Comptroller o f the Currency, the Office o f Thrift Supervision, and the Resolution
Trust Corporation.
2 The text of the Board’s appraisal regulation is set forth in Regulation Y - Subpart
G, 12 CFR 225.61-67 and Appendix A to Subpart G o f Part 225 and incorporated by
reference into Regulation H, 12 CFR 208.18.
Purpose. The purpose of this memorandum is: (1) to provide guidance on an
appropriate evaluation of real estate for transactions that do not require the services of
an appraiser; and (2 ) to supplement the substantive requirements of the Board’s
regulation by providing guidance on an institution’s administration of its appraisal and
evaluation programs. These guidelines supersede the interagency appraisal guidelines
originally adopted by the three federal banking regulators entitled "Guidelines for Real
Estate Appraisal Policies and Review Procedures,'" adopted in Decem ber 1987 and
clarified in September 1988.
Background. An appraisal or evaluation is an integral part of the decision-making
process in credit analysis and investment underwriting primarily used to validate real
estate values. If the borrower’s cash flow fails to permit servicing o f the indebtedness in
a satisfactory manner, the value o f real estate collateral should be sufficient to ensure
that there is a reasonable margin o f protection to repay the loan. An appraisal or
evaluation also plays an important role in administering foreclosed properties, both in
determining a carrying value and establishing a probable sales price.
EVALUATION STANDARDS
For real estate-related financial transactions that do not require the services of a licensed
or certified appraiser, an institution should establish prudent standards to conduct an
appropriate evaluation of the real estate for these transactions. The evaluation should
determine an estimate of value to assist the institution in assessing the soundness o f the
transaction.
Safe and sound banking practices require evaluations by competent persons capable of
rendering an unbiased estimate o f value. Prudent practices also require that as the
institution’s exposure in a real estate-related financial transaction increases, a more
detailed evaluation should be performed. The evaluation need not m eet all of the
detailed requirements of an appraisal set forth in the Board’s regulation. Documentation
should support the estimate of value and include sufficient information for an individual
to understand fully the evaluator’s analysis and assumptions. An evaluation must be in
writing, signed, dated and include the preparer’s name and address. A n individual who
conducts an evaluation should have real estate-related training or experience relevant to
the type o f property, but does not have to be a state licensed or certified appraiser.
An evaluation for a transaction that needs a more detailed analysis should fully describe
the property and discuss its use, especially for a non-residential property. The evaluation
should include the evaluator’s calculations, supporting assumptions for the estimate of
value, and, if utilized, a discussion o f comparable property sales.
An evaluation for a transaction that requires a less detailed analysis may be based upon
information such as comparable property sales information from sales data services such
2
as the multiple listing service or current tax assessed value in appropriate situations.3
Further, the institution’s own real estate loan portfolio experience and value estimates
prepared for recent loans on comparable properties where appraisals meeting the
requirements of the regulation were obtained may be used. Regardless of the method,
the institution must document its analysis and findings in the loan file.
These supervisory guidelines do not preclude an institution from obtaining an appraisal
that conforms to the Board’s appraisal regulation for any real estate-related financial
transaction.
ADMINISTRATION OF APPRAISAL AND EVALUATION PROGRAMS
A n institution’s board of directors is responsible for adopting and reviewing policies and
procedures that establish and verify adherence to effective real estate appraisal and
evaluation programs (hereinafter called "programs").
Generally, an institution’s programs should establish prudent standards and procedures
for obtaining appraisals and evaluations that are tailored to the institution’s size,
location, and the nature of its real estate-related activities. Moreover, the programs
should establish the manner in which an institution selects, evaluates and monitors
individuals that perform or critique real estate appraisals and evaluations. Selection of
individuals should be based on competency, independence,4 expertise in relation to the
type o f property being appraised or evaluated, and the ability to render a high quality,
written product.
3 Because assessed values for tax purposes may be a specified fraction of market
value as determined by the tax assessor, tax assessed values should be adjusted to a
market value equivalent In cases where the assessed value does not have a reliable
correlation to current market value, the use o f assessed value would be inappropriate as
the basis for an evaluation.
4 The staff o f the institution performing appraisals or evaluations should be
independent o f the lending and the collection functions and have no interest financial or
otherwise, in the property. In som e cases it may be appropriate for loan officers and
directors to perform appraisals or evaluations. An example would be a community bank
where the only qualified individual is a loan officer or a member o f the board of
directors, and separating this individual from the lending and collection functions is
neither practical nor possible. In such situations, it is recommended that individuals
perform appraisals or evaluations only on loans in which they are not otherwise involved.
Directors or officers should abstain from any vote involving assets they appraised or
evaluated.
3
Timing of Appraisals and Evaluations. An appraisal or evaluation should be received in
sufficient time to be analyzed before an institution arrives at its final credit or other
decision. Prior to using an appraisal or evaluation in its decision-making process, an
institution should assess the completeness of an appraisal or evaluation through internal
compliance procedures that are discussed in the following section.
In certain unique circumstances, when an institution acts to prudently protect its interest
by modifying the terms and conditions o f an existing extension o f credit in order to
facilitate orderly collection and thereby reduce its risk o f loss, an appraisal or evaluation
may be obtained subsequent to the institution’s decision concerning the real property.
Compliance Procedures. An institution’s programs should ensure that an appraisal or
evaluation complies with the requirements o f the Board’s regulation, policies, and these
guidelines as appropriate. The compliance procedures undertaken should be
appropriately documented in the files. Checklists to determine completeness and
consistency may be used for this purpose.
If an institution’s compliance procedures for a new transaction reveal deficiencies that
render an appraisal’s or evaluation’s estimate of value unreliable, an institution should
obtain an appraisal or evaluation that conforms to the Board’s regulation, policies and
these guidelines before making its final credit or other decision. Deficiencies that do not
affect the estimate of value should be corrected by the individual who conducted the
appraisal or evaluation before the transaction is completed.
In addition, an institution’s programs should require a written critique o f the appraisal or
evaluation for select transactions. The critique should assess the adequacy,
reasonableness, and appropriateness o f the methods, assumptions, and techniques that
were used in conducting the appraisal or evaluation. The criteria for identifying these
select transactions should be consistent with prudent audit sampling or testing practices
and have a bias toward out-of-area properties, specialized property types, and large
credit or investment exposures.
A n individual performing critiques, either an employee o f the institution or an outside
consultant, should have real estate-related training or experience and be independent of
the transaction. The individual may not change the appraisal’s or evaluation’s estimate
o f value as u result of a critique.
Useful life o f appraisals or evaluations. The programs should establish criteria for
determining whether a prior appraisal or evaluation that an institution may intend to use
in making a subsequent loan or investment continues to be valid. The useful life o f an
appraisal or evaluation will vary depending upon the circumstances o f the property and
the marketplace. An institution should determine if there have been material changes to
the underlying assumptions in the appraisal or evaluation which affect the original
estimate of value.
4
Examples of factors that could cause material changes to reported values include: the
passage of time; the volatility of the local market; the availability of financing; the
inventory of competing properties; new improvements to, or lack o f maintenance of, the
subject property or competing, surrounding properties; change in zoning; or
environmental contamination. The institution should document its information sources
and analyses used to determine that an existing appraisal or evaluation remains valid and
that the institution will use that appraisal or evaluation in a subsequent transaction.
Reappraisals and Reevaluations o f the Collateral. An institution’s programs should
establish criteria consistent with prudent practices that designate those prior transactions
that require a reappraisal or reevaluation of the collateral. In these situations, the
original appraisal or evaluation will have becom e unreliable,
the appraisal’s or
evaluation’s useful life has ended, and further circumstances dictate that the collateral be
reappraised or reevaluated. The individual who makes this determination should have
real estate-related training or experience.
The decision to obtain a reappraisal or reevaluation will depend upon the condition and
quality of a credit or investment as well as the soundness o f the underlying collateral.
The volatility of the local real estate market should be considered in determining the
need for a reappraisal or reevaluation. In certain situations such as loan workouts, loan
renewals, loan restructurings, or problem credits or investments, the need for a
reappraisal or reevaluation should receive particularly close attention. In all cases, the
information sources and analyses relied upon must sufficiently support an institution’s
determination o f whether a reappraisal or reevaluation is required. Reappraisals should
be in conformance with the Board’s appraisal regulation and policies, and reevaluations
should be in conformance with these guidelines.
Updated Appraisal. An updated appraisal is currently not acceptable as an appraisal
under the appraisal regulation. However, an institution may use an updated appraisal
(1 ) to evaluate real estate when a federally related transaction has not occurred;
and (2 ) to assess the useful life of an appraisal. In this connection, the Board and the
other agencies are investigating the broader application o f the Departure Provision of
the Uniform Standards of Professional Appraisal Practice in their regulations, which
broader application if adopted may expand the use of updated appraisals.
SUPERVISORY POLICY
A n institution’s real estate appraisal or evaluation policies, programs and procedures will
be reviewed as part of the examination of the institution’s overall real estate-related
activities. Examiners will take into consideration the institution’s size and nature o f its
real estate-related activities when assessing the appropriateness o f its programs.
5
W hen analyzing individual transactions, examiners will analyze an appraisal or evaluation
to determine that the methods, assumptions, and findings are reasonable and in
compliance with the Board’s appraisal rule, policies, and these supervisory guidelines.
Moreover,'examiners will review the steps taken by an institution to ensure that the
individuals who conduct its appraisals or evaluations are qualified, and are not subject to
any conflicts of interest. Failure to maintain sound programs or to comply with the
Board’s appraisal rule, policies, or supervisory guidelines will be cited or criticized as
unsafe and unsound practices. Corrective action will be required
6
@FedFRASER