Final Interagency Appraisal and Evaluation Guidelines (Part 2)

Evaluation Content

An evaluation should contain sufficient information to support the credit decision. An evaluation's content should be documented in the credit file or reproducible. Minimum requirements for an evaluation include the following: Location of the property. Description of the property and its current and projected use. Estimate of the property's market value in its actual physical condition, use and zoning designation as of the effective date of the evaluation. This means the date that the analysis was completed. Any limiting conditions must be stated. The methods used to confirm the property's actual physical condition and the extent to which an inspection was performed. The analysis that was performed and the supporting information that was used in valuing the property. The supplemental information that was considered when using an analytical method or technological tool. All sources of information used in the analysis, as applicable, to value the property, including: External data sources, such as market sales databases and public tax and land records. Property-specific data, such as previous sales data for the subject property, tax assessment data, and comparable sales information. Evidence of a property inspection. Photos of the property. Description of the neighborhood. Local market conditions. When an evaluation is performed by a person: The name and contact information of the preparer. Other relevant information on the preparer. Signature of the preparer, which may be an electronic or other legally permissible signature. See discussion below for additional guidance on AVMs and other analytical methods and technological tools.

Validity of Appraisals and Evaluations

When an appraisal or evaluation is still valid, it may be used for a subsequent transaction. An institution needs to establish criteria that it can use to determine whether an appraisal or evaluation is still valid. This is not simply a question of the age of the appraisal or evaluation, but rather requires a consideration of the condition of the property, changes in the market, and the nature of the transaction. The decision to re-use an existing appraisal or evaluation is necessarily subjective in nature because it requires consideration of a variety of factors, which may be weighed differently from one transaction to the next. The key to success here is having policies and procedures that provide guidance regarding the decision to re-use. If a decision is made to re-use an appraisal or evaluation, the credit file must document support for that decision. The Guidelines state that a new appraisal or evaluation is required if market value has changed due to various factors, including the following: Passage of time. Volatility of the local market. Changes in terms and availability of financing. Natural disasters. Limited or oversupply of competing properties. Improvements to the subject property or competing properties. Lack of maintenance of the subject or competing properties. Changes in underlying economic and market assumptions, such as capitalization rates and lease terms. Changes in zoning, building materials, or technology. Environmental contamination. Reviewing Appraisals and Evaluations

An appraisal or evaluation must be reviewed before the final credit decision to make sure that it is compliant with the Banking Agencies' regulations and guidance and the institution's own policies and procedures. This does not necessarily mean that a formal review appraisal/evaluation must be performed, but rather that the institution must take steps to satisfy itself that it is appropriate to rely on the appraisal/evaluation. If the review leads to a conclusion that the appraisal or evaluation contains deficiencies, the next step is to determine if the deficiencies can be fixed. If they can, the appraisal or evaluation can be used. If the deficiencies cannot be repaired, the appraisal or evaluation cannot be used, and it will be necessary for the institution to obtain a compliant appraisal or evaluation before making a credit decision. In any event, the file should document the determination made and the support for that determination. A person reviewing an appraisal or evaluation may not change the market value conclusion. However, if a formal appraisal review is performed by a state certified or licensed appraiser in accordance with USPAP, the review may result in a second opinion of market value, and the institution may rely on that second opinion to support a credit decision. The review appraiser must be qualified and competent to review an appraisal for the type of property in the geographic market in question. The Guidelines identify four factors that, at a minimum, an institution should consider when reviewing an appraisal or evaluation. These are discussed below. Reviewer Qualifications An institution needs to establish qualifications for persons who review appraisals and evaluations. For the most part, these individuals must meet criteria that are similar to those that apply to the appraiser or person performing the evaluation – independent from the transaction; no interest in the property or transaction; insulated from the loan production staff; and possessing of the requisite education, expertise, and competence. As in the case of performing an appraisal, the Guidelines provide some flexibility for small or rural institutions or branches with limited staff. If absolute independence cannot be achieved, reviews nonetheless may be performed if appropriate safeguards can be implemented. The Guidelines state that the review may be part of the originating loan officer's overall credit analysis, as long as the originating loan officer abstains from directly or indirectly...