Mandated by the Dodd-Frank Act, lenders and appraisal management companies (known as AMCs) are awaiting a series of joint rules addressing appraisal issues. While rules addressing pre-funding reviews of appraisals or evaluations is not a topic specifically required by the January 21, 2013 deadline, the FDIC’s Winter 2011 issue of Supervisory Insights hints that it may be addressed in the joint rule establishing minimum requirements for AMCs’ state registration. This may be a welcome development for regulated banking institutions subject to the revised Interagency Appraisal and Evaluation Guidelines (“Guidelines”). Those Guidelines, issued jointly by the federal banking agencies on December 2, 2010 (and effective on that date), update and replace existing guidance in response to changes in the real estate valuation industry and those mandated by the Dodd-Frank Act.
The Guidelines contain some new twists. In the area of valuation reviews, the Guidelines require institutions to establish a process for reviewing appraisals and evaluations, including the qualifications for persons performing such reviews. Among others, institutions should note that:
- The use of BPOs and AVMs does not meet minimum appraisal or evaluation standards, in and of itself;
- An evaluation must address the property’s actual physical condition as well as the economic and market conditions that affect the estimate of the collateral’s market value; and
- If an institution outsources any part of the collateral valuation program (such as through AMCs), it must execute appropriate due diligence in the selection of the third party.
Notwithstanding these Guidelines, unanswered questions remain. For example, what should be included in the process of reviewing appraisals or evaluations? What is a satisfactory inspection of the property’s actual physical condition? What is “appropriate due diligence”?
FDIC Best Practices
While not answering all of the questions, the FDIC provides a glimpse of what the regulators are thinking and offers some practical suggestions that are lacking in the Guidelines. Best practices suggested by the FDIC include:
- With regard to reviewer qualification, the FDIC recommends that institutions:
- establish reviewer qualification criteria to ensure that internal or external (if outsourced) reviewers have the appropriate education, experience and competence to perform the appropriate level of review for the transaction;
- ensure that the reviewer is independent and thus the reviewer should not be in the competitive pool of appraisers who bid for the valuation assignment under review; and
- have a qualified reviewer conduct a (second) review of each reviewer’s work product to ensure the consistency and quality of the reviews.
The FDIC also recommends a more robust review for complex or higher risk properties. Checklist-type reviews may be sufficient for low-risk type transactions but, according to the FDIC, reviews of complex or higher risk properties should be supplemented with a narrative explanation or other information supporting the assumptions and conclusions.
- In the area of selection and monitoring of appraisals, institutions should:
- verify an appraiser’s credentials and standing through the National Registry;
- use the findings from the appraisal review process to evaluate an appraiser’s performance; and
- conduct random quality reviews of appraisers obtained through AMCs.
- With regard to ongoing collateral and other real estate portfolio monitoring, when valuing foreclosed properties, institutions should select an appraiser or person performing the evaluation who was not involved in the previous valuation of that property.
- In the area of overseeing third party arrangements, exercising “appropriate due diligence” in the selection of the AMC includes performing due diligence before engaging an AMC as well as ongoing oversight of the arrangement, and providing the AMC with the institution’s criteria for reviewing and selecting appraisers and appraisal reviewers.
While these practical suggestions are not binding on FDIC regulated entities (or other federal banking institutions), they may provide insight into what the regulators are thinking and possibly signify what may be contained in upcoming appraisal rules.