15 Mar Federal Regulatory Update
OCC BULLETIN 2016-8
The Office of the Comptroller of the Currency (“OCC”) issued Bulletin 2016-8 dated March 4, 2016, to provide the interagency advisory on the use of evaluations in real estate-related financial transactions (instead of an appraisal).
In outreach meetings conducted by the federal banking agencies[i], the financial industry raised questions regarding supervisory expectations for using an evaluation instead of an appraisal for estimating the market value of real property securing real estate-related financial transactions. This advisory is to respond to those questions by describing existing supervisory expectations, guidance, and industry practice. A review of appraisal requirements is currently ongoing by the federal banking agencies.
Transactions That Permit Evaluations
Financial institutions regulated by the agencies are required to obtain an appraisal[ii] for any real estate-related financial transaction unless an exception applies. The following transaction types do not require an appraisal, but do require an evaluation:
- Transactions in which the “transaction value” (generally the loan amount) is $250,000 or less;
- Certain renewals, refinances, or other transactions involving existing extensions of credit; and
- Real estate-secured business loans with a transaction value of $1,000,000 or less and when the sale of, or rental income derived from, real estate is not the primary source of repayment for the loan.
There may be other factors that would affect the determination of whether to use an appraisal, such as:
- Other regulatory requirements to use an appraisal for a specific transaction (even if it falls under the transaction value threshold), such as for higher-priced mortgage loans under Regulation Z;
- Prerequisite to participating in some secondary market transactions; or
- Prudent for credit risk management purposes (e.g. when the institution’s portfolio risk increases or for higher-risk real estate-related transactions).
Preparation of an Evaluation
Who can complete/prepare an evaluation:
- Is not required to be a state-licensed or state-certified appraiser;
- Person who is knowledgeable, competent, and independent of the transaction and the loan production function of the institution;
- May be completed by a bank employee or by a third party.
A person who prepares an evaluation may use one or more valuation approaches or methodology to estimate the market value of real estate (appropriate to the property being valued), including:
- The sales comparison approach;
- The cost approach, and
- The income approach.
The sales comparison approach is the most used valuation method; however, in areas where there have been few, if any, recent comparable sales in reasonable proximity to the subject property, the preparer may consider an alternative methodology. For example, the cost approach might be appropriate, particularly for newer construction; the income approach could be appropriate for income-producing or rental property.
The Guidelines[iii] discuss the possible use of various analytical methods and technological tools, such as automated valuation models and tax assessment values. The institution should be able to demonstrate that the valuation method used is consistent with safe-and-sound banking practices and the Guidelines. The Guidelines detail the expectations for selecting, using, and validating a method or tool, and institutions should establish policies and procedures that specify the supplemental information that is required to develop an evaluation.
Contents of Evaluation Report
The Guidelines provide information regarding the minimum content to be contained in an evaluation, but there is no standard format for documenting the information and analysis. An evaluation should contain sufficient information to allow a reader to understand the analysis that was performed to support the value conclusion and the institution’s decision to engage in the transaction.
[i] The federal banking agencies include the Federal Deposit Insurance Corporation (FDIC), the Board of Governors of the Federal Reserve System (FRB) and the Office of the Comptroller of the Currency (OCC); NCUA is party to the Guidelines, but is not a party to this Advisory.
[ii] Appraisal must be completed by a competent and qualified state-licensed or state-certified appraiser that complies with the Uniform Standards of Professional Appraisal Practice.
[iii]Interagency Appraisal and Evaluation Guidelines, Federal Register, Vol. 75, No. 237, December 10, 2010, page 77450, at https://www.gpo.gov/fdsys/pkg/FR-2010-12-10/pdf/2010-30913.pdf.