I. INTRODUCTION
The federal banking agencies have issued frequently asked questions regarding the agencies’ appraisal regulations and guidance. The FAQs do not introduce new policy or guidance but assemble previously communicated policy and interpretations. The FAQ’s focus on, and should be reviewed in conjunction with, the agencies’ appraisal regulations issued under Title IX of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, the real estate lending standards, the December 2010 Interagency Appraisal and Evaluation Guidelines, and the March 2016 Interagency Advisory on the Use of Evaluations in Real Estate-Related Financial Transactions.
II. FREQUENTLY ASKED QUESTIONS
A. Appraisal and Evaluation Program
Question 1. Why does a financial institution need a program for establishing the market value of real property?
Answer 1: Financial institutions should have a program for valuing real property to ensure they are engaging in real estate-related lending in a safe and sound manner and in compliance with Title XI and the agencies’ appraisal regulations. Lending secured by real estate is a large part of many financial institutions’ business plans and is important to the communities served by those institutions. Lessons learned from past crises have shown that poorly managed real estate lending programs, including the failure to properly value real estate that secures transactions, can result in higher loan losses, reduced profitability, and bank failures. In light of these problems, Congress adopted Title XI, requiring financial institutions to obtain appraisals prepared by state-certified or state-licensed appraisers for all federally related transactions (FRTs) and requiring the agencies to issue regulations relating to such appraisals.
Congress expanded Title XI and adopted new provisions relating to appraisals in the Dodd-Frank Act after the 2008 financial crisis.
Question 2. What regulations are applicable to appraisal and evaluation programs?
Answer 2: The agencies have issued appraisal regulations as required by Title XI for the performance of real estate appraisals in connection with FRTs. These regulations prescribe which real estate-related financial transactions require the services of an appraiser, identify which categories of FRTs must be appraised by a state-certified appraiser and which by a state-licensed appraiser, and prescribe minimum standards for the performance of real estate appraisals in connection with FRTs.
Financial institutions should also be aware of and comply with two additional rules that apply specifically to residential mortgage loans secured by a consumer’s principal dwelling – the HPML Appraisal Rule and the IFR on Valuation Independence. In addition, the agencies adopted regulations regarding real estate lending standards pursuant to section 304 of the Federal Deposit Improvement Act of 1991, which requires banks and federal savings associations to adopt and maintain written policies that establish appropriate limits and standards for extensions of credit that are secured by real estate.
The Interagency Guidelines for Real Estate Lending Policies, which were promulgated as an appendix to the real estate lending standards, were issued to assist financial institutions in formulating and maintaining appropriate real estate lending policies in accordance with the regulations. The agencies’ real estate lending standards provide that each financial institution’s written policies must be consistent with safe and sound lending practices, and must ensure that the financial institution operates within limits and according to standards that are reviewed and approved by the financial institution’s board of directors.
Question 3. What types of transactions require an appraisal?
Answer 3: The agencies’ Title XI appraisal regulations require an appraisal performed by a state-certified or state-licensed appraiser for all FRTs. All real estate-related financial transactions engaged in by financial institutions are FRTs unless the transactions are exempt from the appraisal requirements of the appraisal regulations.
The agencies’ Title XI appraisal regulations require an evaluation that is consistent with safe and sound banking practices for certain exempt transactions. The Title XI appraisal regulations apply to both commercial and residential transactions; however, for financial institutions the threshold above which an appraisal is required is different for residential transactions, commercial real estate transactions, and qualifying business loans. As discussed in the Valuation Guidelines, a financial institution’s appraisal policy and practices may differ by transaction type. The financial institution should consider the type and complexity of the transaction when ordering appraisals, selecting appraisers, and reviewing appraisals. Moreover, for all lending activity, a financial institution should ensure that independence is maintained when ordering appraisals, selecting appraisers, and reviewing appraisals.
Question 4. What is the purpose of the Valuation Guidelines, and do all financial institutions’ valuation programs have to meet every aspect of the Valuation Guidelines?
Answer 4: The Valuation Guidelines are not regulations and do not prescribe a set of requirements that financial institutions must meet, nor do they represent a checklist or a “one size fits all” approach to supervising financial institutions. Instead, the Valuation Guidelines describe a framework to assist financial institutions in complying with the agencies’ appraisal regulations and real estate lending standards.
A financial institution’s valuation program should be commensurate with the complexity and nature of its real estate lending activities, risk profile, and business model, and must comply with applicable laws and regulations. For example, a financial institution that engages primarily in owner-occupied real estate lending in its local market area should tailor its valuation program to reflect the size and nature of the loans and collateral. In contrast, a financial institution that engages in significant commercial real estate lending or large acquisition, development, and construction (ADC) projects should tailor its valuation program for these types of higher risk transactions.
Question 5. Should a financial institution review all appraisals and evaluations?
Answer 5: As part of the credit approval process and prior to making a final credit decision, a financial institution should review appraisals and evaluations to confirm that they comply with the agencies’ appraisal regulations and the financial institution’s internal policies.
Reviewers should be independent of the transaction and have no direct or indirect interest in the property or transaction, and be independent of and insulated from any influence by loan production staff. Additionally, as reflected in supervisory guidance, the reviews should confirm that an appraisal or evaluation contains sufficient information and analysis to support the market value conclusion and the decision to engage in the transaction.
The depth of the review should be commensurate with the risk of the transaction. Valuations supporting lower risk transactions may warrant a less robust review, while valuations supporting higher risk transactions with complex or specialized collateral, such as large ADC projects, may warrant a more robust review.
Question 6. What cost-effective actions can a smaller financial institution take to implement an appraisal and evaluation review program that meets the standards for independence in the agencies’ appraisal regulations?
Answer 6: A small financial institution with limited staff should implement practical safeguards for reviewing appraisals and evaluations when absolute lines of separation between the collateral valuation program and loan production process cannot be achieved. Small financial institutions could have loan officers, other employees, or directors review an appraisal or evaluation, but those individuals should be appropriately qualified, independent of the transaction, and should abstain from any vote or approval related to such loans.
To the extent that a financial institution is involved in real estate transactions that are complex, out of market, or otherwise exhibit elevated risk, management should assess the level of in-house expertise available to review appraisals or evaluations associated with these types of transactions. If the expertise is not available in-house, the financial institution may find it appropriate to evaluate alternatives, such as outsourcing of the review process, for ensuring that effective and independent reviews are performed.
For transactions subject to the IFR on Valuation Independence, institutions must comply with the provisions of that rule.
B. Appraisal Exemptions
Question 7. When is it appropriate for financial institutions to use the “abundance of caution” exemption?
Answer 7: The abundance of caution exemption may only be used in those transactions where a borrower qualifies for an extension of credit based on the strength of the associated cash flow or non-real estate collateral, and knowledge of the market value of the real estate collateral taken as security for the transaction is unnecessary in making the credit decision. The financial institution’s credit analysis should clearly document and verify that the credit decision was well supported by repayment sources other than real estate collateral. For transactions that meet the abundance of caution exemption, neither an appraisal nor an evaluation is required. Refer to the following examples.
Example 1: Commercial and Industrial Cash Flow Loan. A financial institution extends a commercial business line of credit to a heating and cooling repair business. The financial institution holds the owner’s personal guaranty and has taken a security interest in an investment property owned by the guarantor. The financial institution’s credit analysis determines that cash flow from business operations has generated sufficient debt service coverage. The guarantor’s global cash flow also reflects sufficient debt service coverage, and the guarantor maintains a strong liquid asset position. All of the borrower’s other credit attributes are satisfactory. The financial institution’s credit analysis has verified and documented that the financial institution would have made the loan without knowledge of the market value of the real estate. Based on the borrower’s overall creditworthiness and the sufficiency of cash flow generated by the business to cover the debt service on the loan, the security interest in the real estate can be considered an abundance of caution.
Example 2: Loan Secured by Other Collateral. A financial institution extends a term loan to a construction company to purchase equipment used in the construction business and secures the loan with a lien on the equipment and the borrower’s headquarters building. The real estate lien can be considered an abundance of caution if, for example, the value of the equipment adequately secures the outstanding balance of the loan and the borrower’s global cash flow provides for repayment of the loan. In such a case, the cash flow from the operation of the business is the primary source of repayment for the loan and the equipment is the secondary source of repayment. All of the borrower’s other credit attributes are satisfactory. The financial institution’s credit analysis verified and documented that the financial institution would have made the loan without knowledge of the market value of the real estate.
Prior to making a final commitment to the borrower, the financial institution should document and retain in the credit file the analysis performed to verify that the abundance of caution exemption has been appropriately applied. If the operating performance or financial condition of the borrower subsequently deteriorates and the financial institution determines that the real estate will be relied upon as a repayment source, an appraisal should then be obtained, unless another exemption applies.
Question 8. Does a financial institution always need to obtain a new appraisal or evaluation for a renewal of an existing loan at the financial institution, particularly where the property is located in a market that has not changed materially?
Answer 8: No. A financial institution may use an existing appraisal or evaluation to support the renewal of an existing loan at the financial institution when the market value conclusion within the appraisal or evaluation remains valid.
Validating the market value conclusion of the real property is a fact-specific determination, based on market conditions, property condition, and nature of the transaction. As described in the Valuation Guidelines, a financial institution should establish criteria for validating an existing appraisal or evaluation in its written valuation policies. The criteria should consider factors that could impact the market value conclusion in the existing appraisal or evaluation, such as: the volatility of the local market; changes in terms and availability of financing; natural disasters; supply of competing properties; improvements to the subject or competing properties; lack of maintenance on 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; and the passage of time. Regarding this last factor, there is no provision in the agencies’ appraisal regulations specifying the useful life of an appraisal or evaluation.
The financial institution must also consider whether an appraisal or an evaluation is required for the transaction. The agencies’ appraisal regulations require an evaluation for transactions involving an existing extension of credit at the financial institution when either (1) there has been no obvious and material change in market conditions or physical aspects of the property that threatens the adequacy of the real estate collateral protection after the transaction, even with the advancement of new money, or (2) there is no advancement of new money, other than funds necessary to cover reasonable closing costs. Alternatively, a financial institution could choose to obtain an appraisal, although only an evaluation is required. For example, an institution may choose to obtain an appraisal to achieve a higher level of risk management or to conform to internal policies.
In the context of renewal transactions, whether there has been a material change in market conditions may affect both whether an appraisal or evaluation is required and whether an existing appraisal or evaluation remains valid. A financial institution can assess whether there has been a “material change” in market conditions by considering the factors detailed above for validating an existing appraisal or evaluation. When there has been an obvious and material change in market conditions or physical aspects of the property that threatens the adequacy of the real estate collateral protection, the existing appraisal or evaluation is no longer valid. In such situations, if no new money is advanced, a financial institution must obtain a new evaluation, or may choose to satisfy the agencies’ appraisal regulations by obtaining a new appraisal.
However, if new money is advanced, a financial institution must obtain a new appraisal unless another exemption from the appraisal requirement applies. Refer to the following examples.
Example 1. A financial institution originated a revolving line of credit for a specified term, and at the end of the term, renews the line for another specified term with no new money advanced. The financial institution’s credit analysis concluded that there had been a material change in market conditions or the physical aspects of the property that threatened the adequacy of the real estate collateral protection. Based on this conclusion, the financial institution could not validate an existing appraisal or evaluation to support the transaction. The agencies’ appraisal regulations would require an evaluation, rather than an appraisal, because no new money was advanced, even though the financial institution concluded there is a threat to the adequacy of the collateral protection. Alternatively, the financial institution could choose to obtain a new appraisal, although only an evaluation would be required.
Example 2. A financial institution originated an ADC loan and, at maturity, renewed the loan and advanced new money that exceeded the original credit commitment. The financial institution’s credit analysis concluded that a material change in market conditions or the physical aspects of the property threatened the adequacy of the real estate collateral protection. Based on this conclusion, the financial institution could not validate an existing appraisal or evaluation to support the transaction. The agencies’ appraisal regulations would require an appraisal to support the transaction, because the financial institution advanced new money and concluded there is a threat to the adequacy of the real estate collateral protection.
Example 3. Consider the same scenario in Example 2 above; however, the financial institution’s credit analysis concluded that there had not been a material change in market conditions or physical aspects of the property that threatened the adequacy of the real estate collateral protection. Based on this conclusion, the agencies’ appraisal regulations would require an appropriate evaluation to support the transaction. The financial institution could use a valid existing evaluation or appraisal, or could choose to obtain a new evaluation to support the transaction. Alternatively, a financial institution could choose to obtain a new appraisal, but a new appraisal would not be required.
Example 4. A financial institution originated a balloon mortgage secured by a single family residential property. At the end of the term, the financial institution renews the balance of the mortgage for another term, with no new money advanced. The financial institution’s credit analysis concluded that there had not been a material change in market conditions or the physical aspects of the property that threatened the adequacy of the real estate collateral protection. Based on this conclusion, the agencies’ appraisal regulations would require the financial institution to obtain an appropriate evaluation to support the transaction. The financial institution could use a valid existing evaluation or appraisal, or could choose to obtain a new evaluation to support the transaction. Alternatively, the financial institution could choose to obtain a new appraisal, although a new appraisal would not be required.
Financial institutions should consider the risk posed by transactions that do not require new appraisals or evaluations and may consider obtaining a new appraisal or evaluation based on the financial institution’s risk assessment. In addition, financial institutions making HPMLs must ensure compliance with the HPML Appraisal Rule.
Question 9. When engaging in a renewal transaction, how can a financial institution document the validity of an existing appraisal or evaluation?
Answer 9: A financial institution should document the assessment of the validity of an existing appraisal or evaluation in the credit file. The documentation should detail the facts and analysis to support the financial institution’s determination that the market value conclusion of the collateral can be used to support the subsequent transaction. The level of detail for the assessment of the validity of appraisals or evaluations in the credit file could vary in accordance with the transaction type. For example, documentation for a renewal of a residential mortgage loan may be less detailed than for a residential tract development loan or commercial property.
Question 10. Are real estate transactions secured by farmland eligible for the $1 million exemption for certain business loans?
Answer 10: Yes, real estate transactions secured by farmland are eligible for the $1 million exemption if they meet the regulatory requirements. The agencies appraisal regulations establish a $1 million threshold above which appraisals are required for business loans that are not dependent on the sale of, or rental income derived from, real estate as the primary source of repayment (qualifying business loans). A loan secured by farmland could be treated as a qualifying business loan and be eligible for the corresponding $1 million threshold if repayment is primarily from the proceeds from the farm business (for example, sale of crops and related payments).
However, a loan secured by farmland whose repayment is primarily from rental income from renting or leasing the farmland to a non-affiliated entity would not be eligible for the qualifying business loan threshold. Transactions secured by multiple farmland properties that are owned by one or more affiliated limited liability companies could meet the qualifying business loan exemption, if they meet the source of repayment requirements provided in the appraisal regulations.
C. Appraisals and Evaluations
Question 11. What information should be contained in an evaluation?
Answer 11: The agencies’ appraisal regulations require evaluations to be appropriate for the transaction and consistent with safe and sound banking practices, but do not specifically define the content to support the evaluation. As explained in the Valuation Guidelines, an evaluation should contain sufficient information detailing the analysis, assumptions, and conclusions to support the credit decision. An evaluation’s content should be documented in the credit file or reproducible. An evaluation should include sufficient information to identify the property, address the property’s actual physical condition, and detail the analysis, assumptions, and conclusions that support the market value conclusion. The level of detail documented in the evaluation should reflect the risk in the transaction. For example, in general, an evaluation for most residential properties could be less detailed than evaluations for commercial properties.
When developing policies and procedures regarding supplemental information that a financial institution will require to develop an evaluation, the financial institution should be aware that some valuation assignments, such as for properties in rural areas or non-disclosure states or properties that are not sufficiently similar to other properties in the local market, may be more challenging to value due to a lack of comparable sales data. Although the sales comparison approach is the most used valuation method, in areas where there have been few, if any, recent comparable sales of similar properties in reasonable proximity to the subject property, the person who performs an evaluation may consider alternative valuation methods and other information for developing an evaluation and supporting a market value conclusion.
For example, the cost approach to valuing real property might be an appropriate valuation approach, particularly if the property is newer construction. Similarly, for an income producing or rental property, the income approach could be appropriate to support a market value conclusion in an evaluation.
Question 12. When would a financial institution be able to use a tax assessment valuation (TAV) in the development of an evaluation?
Answer 12: A financial institution could use a TAV as a component in the development of an evaluation when it demonstrates a valid correlation between the TAV and the market value of the property by:
A TAV with a valid correlation analysis could be used, along with other supporting information appropriate to the type of transaction, to prepare an evaluation and develop a market value conclusion. A TAV is not, in and of itself, an alternative to an evaluation. As with all evaluations, transactions that rely heavily on a TAV as part of the evaluation process should describe and document the method(s) the financial institution used to confirm the property's actual physical condition and the extent to which an inspection was performed.
Financial institutions should establish policies and procedures that specify the supplemental information that is required to develop an evaluation supported by a TAV. A financial institution should be able to demonstrate that such an evaluation provides a credible market value conclusion and supports the financial institution’s decision to enter into a transaction.
Question 13. If a financial institution engages in a FRT with an intermediate lender, such as a warehouse lender, in which the financial institution extends credit to the intermediate lender collateralized by the intermediate lender’s real estate-related transactions with third parties, can the financial institution accept appraisals ordered by the intermediate lender to support the value of the underlying real estate collateral?
Answer 13: Yes, the financial institution may accept the appraisals from the intermediate lender, provided the intermediate lender is a financial services institution, the appraiser has no direct or indirect interest in the property or the transaction, and the other requirements of the appraisal regulations are fulfilled.
Question 14. Can a financial institution approve a residential or commercial real estate loan subject to receipt and review of an appraisal or evaluation, or must the appraisal or evaluation be obtained and reviewed prior to making the final decision?
Answer 14: A financial institution may grant conditional approvals to prospective borrowers before obtaining an appraisal or evaluation. However, a final credit decision or action should only occur after the financial institution receives, reviews, and accepts the appraisal or evaluation.
Question 15. The work-out plan on a problem loan calls for a financial institution to receive an assignment of a note secured by a deed of trust on a different property. Is this transaction considered a real-estate-related financial transaction and is an appraisal required on the collateral property?
Answer 15: Yes, this transaction is considered a real-estate-related financial transaction. The agencies’ appraisal regulations require an evaluation in certain loan workout situations. In such situations, although only an evaluation would be required, the financial institution could choose to obtain a new appraisal.
D. Independence
Question 16. A financial institution plans to make a construction loan to a tract developer to build multiple homes. Is it permissible for the developer to order appraisals on the properties to support the construction loan request? Could the developer select an appraiser from the lender’s approved appraiser list and in turn submit the appraiser’s name to potential permanent lenders?
Answer 16: No, the financial institution may not accept a borrower-ordered appraisal and may not allow the borrower to select an appraiser from its approved appraiser list.
Question 17. Are appraisers required to disclose whether they have been engaged to appraise a given property in the past?
Answer 17: The agencies’ appraisal regulations do not specifically require that the financial institution obtain information from appraisers as to whether an appraiser has previously appraised a given property. However, the regulations do require that all appraisals conform to Uniform Standards of Professional Appraisal Practice (USPAP), and USPAP requires that an appraiser disclose any services regarding a given property performed by the appraiser within the three-year period immediately preceding acceptance of an assignment, as an appraiser or in any other capacity. The agencies’ appraisal regulations also require a financial institution, when engaging a fee appraiser, to confirm that the appraiser has no direct or indirect interest, financial or otherwise, in the property or the transaction. The financial institution should ask relevant questions of an appraiser to confirm that the appraiser is independent of the transaction and capable of rendering an unbiased opinion.
Question 18. Can a staff appraiser or an appraisal company affiliated with the financial institution be considered independent, since the financial institution compensates them?
Answer 18: Yes, if a staff appraiser prepares an appraisal, that appraiser must be independent of the loan production function and not involved in the approval of the transaction. Staff appraisers must not have any direct or indirect interest in the property or transaction. Likewise, when fee appraisers from an affiliated appraisal company prepare appraisals, such fee appraisers must not have any direct or indirect interest in the property or transaction. For transactions subject to the IFR on Valuation Independence, institutions must refer to that rule for the circumstances under which a staff appraiser or appraisal company affiliated with the creditor would not be considered to have a conflict of interest based on the person’s employment or affiliate relationship with the creditor.
Question 19. May a financial institution accept an appraisal prepared by an appraiser who was engaged by the loan broker for the transaction?
Answer 19: The agencies’ appraisal regulations allow a financial institution to accept an appraisal prepared by an appraiser engaged by another financial services institution, including a loan broker, as long as the appraiser has no direct or indirect interest, financial or otherwise, in the property or transaction and the appraisal conforms to the requirements of the regulations and is otherwise acceptable. Financial institutions should review broker-ordered appraisals thoroughly to confirm that the appraisal complies with the regulations and meets the quality standards required by the financial institution’s appraisal policies. For transactions subject to the IFR on Valuation Independence, institutions must refer to that rule for the circumstances under which the loan broker ordering the appraisal would not be considered to have a conflict of interest as a result of performing multiple settlement services for the transaction.
Question 20. May an appraisal be routed from one financial institution to another financial institution via the borrower?
Answer 20: A financial institution should not accept an appraisal from the borrower. However, the borrower can inform the financial institution that there is an existing appraisal. Prior to accepting an appraisal from another financial institution, the institution should confirm that the appraiser is independent of the transaction, the appraiser was engaged directly by the other financial institution, and the appraisal conforms to the agencies’ appraisal regulations and is otherwise acceptable.
Question 21. May an appraiser deliver an appraisal report to more than one lender assuming the appraisal has been ordered by one of the lenders?
Answer 21: The agencies’ appraisal regulations do not address whether an appraiser can deliver an appraisal report to more than one lender. The case may depend upon the provisions of the engagement letter. For example, the lender may specify in the engagement letter that the appraisal may be provided to another financial institution if the lender decides not to go forward on the loan. In the case of a syndicated loan, a lead lender is usually responsible for engaging the appraiser and providing copies of the appraisal to the other participating financial institutions. With regard to standards of confidentiality, USPAP directs an appraiser to be aware of, and comply with, all confidentiality and privacy laws and regulations applicable in an assignment.
Question 22. May a financial institution accept a transferred appraisal prepared by an appraiser who had an affiliated business relationship with the financial services institution that originally ordered the appraisal?
Answer 22: The affiliated business relationship between the financial services institution and the fee appraiser does not violate the independence requirement of the agencies’ appraisal regulations, provided the fee appraiser has no direct or indirect interest, financial or otherwise, in the property or the transaction. The financial institution receiving the appraisal should confirm that the appraiser is independent of the transaction and that the appraisal conforms to the agencies’ appraisal regulations and is otherwise acceptable. For transactions subject to the IFR on Valuation Independence or the HPML Appraisal Rule, institutions should confirm that the appraisal complies with those rules.
Question 23. How can a financial institution confirm appraiser independence when accepting an appraisal prepared for another financial services institution?
Answer 23: Documentation (such as an engagement letter) should be available to indicate that the financial services institution (not the borrower) ordered the appraisal and that the appraiser has no direct or indirect interest, financial or otherwise, in the property or the transaction. The original lender’s engagement letter to the appraiser should be included in the credit file. For transactions subject to the IFR on Valuation Independence, an institution’s documentation should be available to indicate that the requirements of that rule are met.