In December, federal financial regulators adopted the appraisal and evaluation guidelines that were originally issued for public comment in 2008. These new guidelines were issued in response to heightened concerns that arose regarding collateral appraisals and credit quality in the aftermath of the financial crisis.
The Interagency Appraisal and Evaluation Guidelines (FIL-82-2010) reaffirm supervisory expectations for sound real estate appraisal and evaluation practices. Specifically, they help clarify the risk management principles and internal controls necessary to ensure that banks’ appraisals are accurate and reliable from a regulatory standpoint.
The new guidance replaces previous guidelines from 1994 by incorporating recent supervisory issuances and reflecting changes since then in industry practices, uniform appraisal standards and new technologies. They apply to all of a bank’s real estate lending functions, both commercial and residential. Specifically, the guidelines:
- Recognize that sound collateral valuation practices are an integral part of the loan underwriting process.
- Offer an expanded discussion of portfolio management techniques and circumstances under which an institution should update real estate collateral valuations.
- Provide more detail on the regulators’ expectations for an independent appraisal and evaluation function.
- Include a more detailed explanation of the regulators’ minimum appraisal standards and revisions to the Uni-form Standards of Professional Appraisal Practice (USPAP).
- Clarify that collateral valuation methods using an analytical method or technological tool (like an automated valuation model) cannot be substituted for an appraisal if a transaction requires an appraisal.
- Specify that valuation methods that don’t provide a property’s market value (like a broker price opinion) are not acceptable as an evaluation.
- Expand guidance on who can provide evaluations and their required content.
In response, banks should create a structured process and policy ensuring segregation in the ordering of appraisals. In other words, an individual who is independent of the lending decision must order and evaluate the appraisal. This person must be knowledgeable about appraisals, maintain a list of approved appraisers, and select from this list an appraiser with appropriate expertise (e.g., by type of property and market area) and knowledge.
To download a PDF of the complete guidelines, visit http://fdic.gov/news/news/financial/2010/fil10082a.pdf.