Since the late 2000s financial crisis, the regulatory pendulum has swung hard toward greater scrutiny and oversight. Nowhere is this more evident than in the property valuation arena. Today, internal bank appraisal departments are frequent and regular targets of the safety and soundness examination.
If your financial institution does any type of residential or commercial property lending, it is critical to stay on top of the latest regulatory guidance and industry best practices for engaging valuation professionals and ensuring the quality and accuracy of those valuations.
The best place to start is with the most recent Interagency Appraisal and Evaluation Guidelines, which were adopted in December 2010 by the alphabet soup of major financial regulatory agencies, including the OCC, FRB, FDIC, and NCUA. These guidelines represented the first major overhaul of appraisal and evaluation regulations since 1994 and reflected a significant tightening of property valuation practice requirements.
It is important to note this guidance was further enhanced in April 2018, when the appraisal threshold for commercial real estate loans was raised from $250,000 to $500,000. CRE loans that fall below the new $500,000 threshold are subject to an evaluation “that is consistent with safe and sound banking practices.” However, CRE loans covered by an SBA guarantee program are still subject to the lower $250,000 appraisal threshold.
Here are 5 keys to maintaining a strong and compliant valuation due diligence program:
Further, as described in the guidelines, although the Agencies’ appraisal regulations allow an institution to use an evaluation for certain transactions, an institution should establish policies and procedures for determining when to obtain an appraisal for such transactions. For example, an institution should consider obtaining an appraisal as an institution’s portfolio risk increases or for higher risk real estate-related financial transactions, such as those involving:
Likewise, internal or external individuals performing non-appraisal evaluations must be properly qualified and experienced. According to the Guidelines, these individuals must have “the requisite experience and training for the assignment, and thorough knowledge of the subject property’s market.” Examples of qualified evaluators include: appraisers (where states allow for appraisers to complete evaluations without complying with USPAP), foresters, ag extension agents, and real estate lending professionals.
If the above steps seem challenging and your institution is unwilling or unable to create and maintain a viable appraisal department, you may want to consider engaging a third-party firm to assist. Particularly for community institutions with less staff, maintaining rigorous oversight and separation of duties within the valuation ordering and review functions can be daunting.