Appraisal Views of the Federal Financial Institution Regulatory Agencies Presenters: Carmen Holly,...

Appraisal Views of the Federal Financial Institution Regulatory Agencies

Presenters:Carmen Holly, Board of Governors of the Federal Reserve System (FRB)Bob Parson, Office of the Comptroller of the Currency (OCC) Suzy Gardner, Federal Deposit Insurance Corporation (FDIC)

Evaluations

Appraisal Report Review & Examination Findings

Update on Dodd-Frank Act & High Volatility Commercial Real Estate (HVCRE)

Agenda

Evaluations

Carmen Holly

Evaluations

Must be consistent with safe and sound banking practices – that means that it must provide a Credible Value

Prepared by a competent individual who:• Possesses RE-related training or experience

and knowledge of the market• Provides a supported and credible

determination of market value • Is independent of the transaction

Evaluations

Federally Related Transactions that Require

at a Minimum an Evaluation •A transaction value equal to

or less than the appraisal threshold of $250,000

•A business loan equal to or less than $1 million

•Transaction involves an existing extension of credit

•Note: An institution should consider obtaining an appraisal as an institution’s portfolio risk increases or for higher-risk real estate-related financial transactions

Evaluation Development

•An evaluation must be consistent with safe and sound banking practices and support the institution’s decision to engage in the transaction

•A valuation method should address the property’s actual physical condition and characteristics as well as the economic and market conditions that affect the estimate of the collateral’s market value

•An evaluation should not be based on unsupported assumptions

•An institution should establish criteria for determining the level and extent of research or inspection necessary to ascertain the property’s actual physical condition, and economic and market factors

Evaluation Content

•Contain sufficient information detailing the analysis, assumptions, and conclusions to support the credit decision

•Be documented in the credit file or reproducible

•Appendix B of the Interagency Appraisal and Evaluation Guidelines provides guidance on the use of analytical methods and technological tools in developing an evaluation

Evaluations

What is NOT an Evaluation:• Any product that does not meet the

minimum content for an Evaluation (refer to the Interagency Guidelines).

• BPOs and AVMs are tools that can be used in the process of developing an Evaluation.

• BPOs and AVMs should never be used as a substitute for an appraisal or an Evaluation if one is required by the appraisal regulation.

Evaluations

When an Evaluation may not be enough:• When loan-to-value exceeds the

supervisory loan-to-value limits• Atypical properties• Collateral consists of properties located

outside of the bank’s market • High risk borrowers• Other criteria specific to the institution

Reviewing Evaluations

Do all evaluations need to be reviewed? • Yes, to ensure Evaluation complies with regulations,

interagency guidance, and bank policies and contains sufficient information to support credit decision.

What about sampling?• For 1-4 family residential real estate• With prior approval from primary federal regulator

What type of review is needed?• Risk-focused approach• Ensure methods, assumptions, and conclusions are

well supported and reasonable for property type


Reviewing the reviewer?• Yes, if the review results in a new value

opinion

Can the reviewer change the value?• The reviewer does not change the original

opinion of value• A reviewer develops their own value

opinion


What else should a bank’s policy address?• Establish qualification criteria for reviewers• Establish independence for reviewers• Set standards for the depth of review

consistent with a risk-focused approach• Establish a process for handling

deficiencies• Establish standards for documenting

reviews and deficiency actions.

Appraisal Report Review

Exam Findings in play

Robert L. Parson

Comptroller of the Currency

“Review” – an interesting word w/ many meanings

What is a review, and what is not a review?

What is NOT an Appraisal Review?

Automated risk management tools are not reviews A loan underwriter checklist is fast becoming a non-

review A post-closing “QC review” is not a review

Shifting Sands: Appraisal Review

• Shift FROM: function follows form (“rules-based” review)

• TO: Application of Qualitative Judgment

• Result: Calling the balls and strikes is different

• Bridging Review Approach (e.g. GSE requirements and those of the federal banking agencies)

• CHANGES:• WHAT: Objective of the review• WHO: What skill set is necessary as a result of the

objective• HOW: Documentation

Objective (Residential property example)

• Objective of the review, that is:• What to look at when looking at an appraisal report

Measurement

QUANTITATIVE

Date of Sale (was comp sale within the “rules”?)

Distance between S and Comparable

Percent Net and Gross Adjustments (eliminated 12/14/2014)

Judgment

QUALITATIVE

Given data constraints, were comparables appropriate?

Does report anticipate reviewer questions and adequately address them?

Credibility,Believability,Sufficient content,Confidence

Objective drives the necessary skill set

Measurement

QUANTITATIVE

1) Did the comparables “fit the rules” (distance, percent adjustments)

2) Math skills (e.g. use of a calculator to check calculations)

Judgment

QUALITATIVE

1) Given data constraints, were comparables appropriate?

2) Do the adjustments to comparables seem reasonable?

Objectives are changing

Shift from Quantitative observations to Qualitative Judgment

Resulting skillset changes:

Ability to do math, read, use a calculator

vs

Ability to understand factual data shortcomings and base decision regarding quality of analysis

presented on how the appraisal problem was addressed.

Result of changing objective

Changing objective drives the need for different:

• Qualifications

• Background

• Training

• Competencies

Documentation

• Check boxes• Questions• Freeform comments and

observations

If this form is used is the appraisal “good”?

S A L E S C

O M P A R I S O N A P P

There are comparable properties currently offered for sale in the subject neighborhood ranging in price from $ to $ . There are comparable sales in the subject neighborhood within the past twelve months ranging in sale price from $ to $ .

FEATURE SUBJECT COMPARABLE SALE # 1 COMPARABLE SALE # 2 COMPARABLE SALE # 3 Address

Proximity to Subject Sale Price $ $ $ $ Sale Price/Gross Liv. Area $ sq. ft. $ sq. ft. $ sq. ft. $ sq. ft. Data Source(s) Verification Source(s) VALUE ADJUSTMENTS DESCRIPTION DESCRIPTION +(-) $ Adjustment DESCRIPTION +(-) $ Adjustment DESCRIPTION +(-) $ Adjustment Sale or Financing Concessions

Date of Sale/Time Location Leasehold/Fee Simple Site View Design (Style) Quality of Construction Actual Age Condition Above Grade Room Count Gross Living Area

Total Bdrms. Baths Total Bdrms. Baths Total Bdrms. Baths Total Bdrms. Baths

sq. ft. sq. ft. sq. ft. sq. ft. Basement & Finished Rooms Below Grade

Functional Utility Heating/Cooling Energy Efficient Items Garage/Carport Porch/Patio/Deck Net Adjustment (Total) + - $ + - $ + - $ Adjusted Sale Price of Comparables

Net Adj. % Gross Adj. %

$


$


$

As a regulator I am asked:

1) Is this a good review form?

2) Can you provide us with a good form?

3) What do you want to see in a review form?

4) Should we use a third-party review form?

5) Can we use this checklist?

These are the wrong questions

Axiom

Appraisal Review is Process, not a Form

The Genesis of a Review

An appropriate review requires the reviewer to exercise qualitative judgment regarding the quality of the appraisal report being reviewed

The regulatory terminology: contains sufficient information and analysis on which to base a credit decision

The reviewer will take into account:a) The availability of data

b) The analyses performed in light of the availability of data

c) The explanation presented in the report of any shortcomings

d) Whether the report leads a reader to the same conclusions presented in the report

e) An understanding of the confidence in the report conclusions

Continuing issues from NTI

OCC Appraisal Program findings/what’s next

OCC National Training Initiative – Across the spectrum of National Banks and Federal Thrifts

1. Some “hot button” issues for exams:

a) Valuation and Process issues

2. Structure of an Appraisal and Evaluation Program

3. A Look Forward

OCC Horizontal Research Findings

Continuing “Hot Button” Issues Include

1) Placement/Independence/Reporting Lines.

2) Inadequate appraisal/evaluation policies.

3) Shortcomings in evaluation development and reporting.

4) Inadequate oversight of third party appraisal management companies (AMCs)(if used as a part of the appraisal function).

5) Deficiencies in appraisal and/or evaluation review process.

Policies

Policies were out of date; not Board approved or lacked sufficient detail (ie. did not address evaluations, AMCs, vendor management).

Policies inconsistent with actual practice and did not distinguish between policy and procedure.

Policies were not accessible to all staff who needed access. Fractured Processes: Policies did not consider enterprise wide

scope (ie. Mortgage banking division, retail or consumer division, private banking).

Regulatory Groundwork – the Basics interrelated

OBJECTIVE: Credible appraisal to support each federally related transaction

Start at the Beginning: Nothing trumps the Selection and Engagement process – Basic criteria:

Competency (product type and geographic) Knowledge, education, training Independence Ability to express thoughts (Dr. James Arnold Graaskamp)

All of the above hinges on the individual responsible for Selection and Engagement process

Bonus: An effective review process provides an enormously beneficial lift to the Selection & Engagement process

Update on the Dodd-Frank Act & High Volatility Commercial Real Estate

(HVCRE)

Suzy Gardner

Dodd-Frank Act - Completed

October 2010 - Interim Final Rule January 2013 - Appraisals for Higher

Priced Mortgage Loans December 2013 - Supplemental Rule:

Appraisals for Higher Priced Mortgage Loans

Appraisal Management Companies (AMCs)

• Finalized April 2015• Effective August 10, 2015

AMC Rule

AMC Rule requires State appraiser certifying and licensing agencies to have the authority to –• Register AMCs and renew their registrations;• Examine AMCs and require AMCs to submit

relevant information to the State;• Verify that the appraisers on AMC appraiser

networks or panels hold valid State certifications or licenses;

AMC Rule

• Conduct investigations of AMCs to assess for potential violations of appraisal-related laws;

• Discipline AMCs that violate appraisal-related laws; • Report violations by AMCs of appraisal-related laws,

as well as disciplinary and enforcement actions, and other pertinent information about an AMC’s operations to the Appraisal Subcommittee

State Prosecutorial Discretion• While AMC Rule requires States to have these legal

authorities to supervise and discipline AMCs, States retain control over the exercise of these authorities

AMC Rule

Participating States must require that AMCs:• Register with the State and be subject to its

supervision;• Use only State-certified or licensed appraisers for

federally related transactions;• Require that appraisals comply with the USPAP;• Establish and comply with processes and controls

reasonably designed to ensure the selection of an appraiser who is independent of the transaction and has the requisite education, expertise, and experience necessary to complete the appraisal assignment; and

AMC Rule

• Establish and comply with processes and controls reasonably designed to ensure that appraisals comply with the appraisal independence standards under the Truth in Lending Act

Subsidiaries of Financial Institutions • An AMC that is a subsidiary of a federally-

regulated depository institution (a federally-regulated AMC) is not required to register with a State, but must meet the same minimum requirements as State-regulated AMCs

AMC Rule

AMC Rule does not compel a State to establish an AMC registration and supervision program and there is no penalty imposed on a State that does not establish a regulatory structure for AMCs• However, States that have not established a

regulatory structure for AMCs within 36 months from the effective date of the final rule, non-federally regulated AMCs will be barred by section 1124 of Title XI from providing appraisal management services for federally related transactions in those States

AMC Rule

• A State may elect to adopt a regulatory structure for AMCs after this 36-month period, which would lift this restriction

State Discretion to Adopt Additional Requirements for AMCs • The final rule sets out minimum standards for

registration and supervision of AMCs• Per section 1124, states may adopt requirements

for registration and supervision of AMCs that are in addition to those in the final rule

AMC Rule

The compliance date for federally-regulated AMCs is 12 months from the effective date of the final rule

In any participating State, the State will specify the compliance deadline for State-regulated AMCs operating in the State

Appraisal Subcommittee will issue a notice regarding the AMC National Registry

Dodd-Frank Act – In Process

Automated Valuation Models (AVMs)

Appraisal Portability

Appraisal Reviews

Broker Price Opinions

Interim/Final Appraisal Independence

High Volatility Commercial Real Estate

HVCRE

HVCRE - subset of acquisition, development, or construction (ADC) loans and provide short-term financing to developers to purchase and develop commercial properties

• Risk and performance of an ADC loan is dependent on the initial estimate of the property’s valuation upon completion and on the amount of capital contributed by the borrower

• HVCRE exposures are assigned a 150% risk weight rather than a 100% risk weight

However, Permanent loans are not HVCRE

HVCRE Definition

Total ADC LoansHVCRE

150%Risk Weight

1-4 Family Residential

Projects

Less=

ADC Loans Meeting Certain Criteria

Secured by Properties for Agricultural

Purposes

Community Development Loans

ADC Loans Must Meet Certain Criteria

Excluded if the facility finances the following

What is included in HVCRE?

HVCRE Exemption Criteria

Not HVCRE

LTV is less than supervisory or equal to supervisory maximum.

Borrower has contributed at least 15% of “as completed” appraised value in cash or

unencumbered readily marketable assets.

Borrower contributed capital is contractually

required to remain throughout the project

life.

Not HVCRE HVCRE

One- to four-family residential properties

(Excludes condo projects of +5 units)

ADC loan on shopping center with LTV above supervisory maximum

Loan to finance farmland and valued as such

ADC loan to construct office building where borrower has not contributed

qualifying capital

Most types of Community development ADC projects

ADC loan to construct hotel where borrower-contributed capital is not

held for life of project

Mixed-Use Properties

1-4 Family portion of a mixed-use property is exempt from the HVCRE criteria

Commercial portion of the property could be subject to the HVCRE requirements if it does not meet any exemption

15% Cash Contribution

Appraisal reports need to provide “as completed” market value as well as “as is” or “as stabilized” market value

Borrower must contribute 15% of “as completed” market value in:

• Cash or unencumbered marketable assets.• Soft costs (development expenses) that contribute to

project’s completion/value.

Contributions must be done before any funds are advanced

Cash or marketable securities

Cash paid for land as part of the project

Development expenses (hard and/or

some soft costs)

Customer deposits (such as for condos)

Cash received from a loan or grant

Guarantees

Pledged Assets

Assets That Qualify Assets That Do Not Qualify

No HVCRE Grandfather Clause

No Grandfathering

Loans made prior to the

implementation date of the

regulation must be

classified as HVCRE if they

meet the criteria.

Can a loan be grandfathered from HVCRE requirements?

HVCRE Designation

HVCRE loans are credit facilities used for ADC purposes.

Once a loan has converted to permanent financing, it is no longer HVCRE.

When is HVCRE no longer HVCRE?

Questions?

Questions?

Appraisal Views of the Federal Financial Institution Regulatory Agencies Presenters: Carmen Holly,...

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