Tag Archives: evaluations

NEW INTERAGENCY GUIDANCE ISSUED

October 16, 2018 – The Federal Agencies have issued an updated guidance titled ‘Frequently Asked Questions on the Appraisal Regulations and the Interagency Appraisal and Evaluation Guidelines.’  This rescinds a similar document issued in 2005.

You can download this 14-page document at the following URL:

https://www.fdic.gov/news/news/financial/2018/fil18062a.pdf

Please pass this document along to your in-house appraisal staff and other bankers.

Reportedly, there are no significant changes.  Simply, an update of a 13-year old document with some needed clarification.

THE ‘ERROR’ IN THE 2010 INTERAGENCY APPRAISAL GUIDELINES

July 30, 2018 – The following wording from the December 2010 IAEG suggests that property value be used to determine if an appraisal or evaluation is needed.  Obviously, this is not possible since property value is not known at the time a decision is made.

The text appears next followed by a reply from G. Kevin Lawton with the OCC.  Mr. Lawton was kind enough to provide the response and allow it to be credited to him.

Text from Item 1 in Appendix A:

1. Appraisal Threshold
For transactions with a transaction value equal to or less than $250,000, the Agencies’ appraisal regulations, at a minimum, require an evaluation consistent with safe and sound banking practices.54 If an institution enters into a transaction that is secured by several individual properties that are not part of a tract development, the estimate of value of each individual property should determine whether an appraisal or evaluation would be required for that property. For example, an institution makes a loan secured by seven commercial properties in different markets with two properties valued in excess of the appraisal threshold and five properties valued less than the appraisal threshold. An institution would need to obtain an appraisal on the two properties valued in excess of the appraisal threshold and evaluations on the five properties below the appraisal threshold, even though the aggregate loan commitment exceeds the appraisal threshold.

Mr. Lawton’s response:

This is one of those areas in the Guidelines where the wording, which mixes the concept of “value” and “transaction value,” can create a problem that is confusing and not consistent with the regulation, and I have had banks and examiners complain about the inconsistency.

The solution is to have banks allocate “transaction value” among the individual properties rather than “property value.”  The bank should allocate the entire aggregate commitment among properties.  Doing this allocation of “transaction value” rather than expected “property value,” sticks to the spirit of the regulation itself.  There is another, bigger advantage of using transaction value as the driver: it avoids the Catch‐22 problem that some banks have brought up: “what if I allocate property value to one property of $200,000, obtain an evaluation, and the evaluation result shows a market value (property value) of $260,000, do I then need to go get an appraisal?”  In other words, “I estimated the property value to be $200,000 and I was wrong. The property value is $260,000 and since, using the “property value” as the driver for what is needed, I now need an appraisal because the property value is above the threshold. This, in itself, is an area where the Guidelines are not consistent with the regulation, since the Guidelines talk about property values “less than the appraisal threshold” (Appendix A, Section 1). That sentence, and the following sentence in the Guidelines mix the concept of “property value” and “transaction value” (last two sentences in Section 1).

The “appraisal threshold” deals with transaction value, not property value.  So, back to the example above, if the banker estimates (allocates) $200,000 of the transaction value to the property (rather than “guessing” a $200,000 property value) then an evaluation is allowable and if the evaluation result shows a property value of $260,000 there is no Catch‐22.  It does not matter what the property value result is because property value does not drive what is needed.  So when a bank addresses “property value” as the driver of what product (appraisal or evaluation) is the minimum product required under the regulation they may need an evaluation (based on a guess of property value of $200,000) followed by an appraisal (because the evaluation shows a property value of $260,000). This is not what the Guidelines intended.

One could probably argue this several ways, but the “allocation of transaction value” among the individual properties, accomplishes the following:  1) it is consistent with the intent of the regulation, 2) doesn’t jumble the concepts of property value and transaction value, 3) avoids the “what if’s” when property value is the driver, 4) is understandable, and, 5) is a practical solution for our bankers.

Hope this provides some clarity to this issue.

REVISIONS MADE TO TITLE XI OF FIRREA

April 2, 2018 (UPDATED) – The Agencies have finally released ‘The Final Rule’ for updates to FIRREA.  A copy of the document can be found at:

https://www.fdic.gov/news/board/2018/2018-03-20-notice-sum-c-fr.pdf

The main change is increasing the de minimus level for commercial real estate transactions from $250,000 to $500,000.  Although this might seem significant, it is basically an adjustment for inflation from the last change to $250,000 in 1994.

Also, the definition of ‘commercial real estate transaction’ has been updated.

The changes are not in effect until published in the Federal Register,  I will update this post when this occurs.  UPDATE – This document is now live as it is in the Federal Register.

Financial institutions should update their appraisal/evaluation policies accordingly.

 

AGENCIES PROPOSE TO INCREASE ONLY ONE THRESHOLD A SMALL AMOUNT

July 24, 2017 – The Federal Agencies published the following on July 19th:

The FDIC, the Board of Governors of the Federal Reserve System, and the Office of the Comptroller of the Currency (the Agencies) are jointly issuing a notice of proposed rulemaking titled Real Estate Appraisals (Appraisal NPR) that will be published in the Federal Register for a 60-day comment period. The Appraisal NPR proposes to increase the current appraisal threshold for commercial real estate (CRE) transactions from $250,000 to $400,000. The Appraisal NPR addresses comments received during the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) review process, which requires that, not less than once every ten years, the Agencies, along with the Federal Financial Institutions Examination Council, conduct a review of the Agencies’ regulations to identify outdated or otherwise unnecessary or burdensome regulatory requirements.

You can get their full 60-page report at:

https://www.fdic.gov/news/board/2017/2017-07-18-notice-dis-a-fr.pdf

The one thing I found amusing was their statement that it takes about 40 minutes to review an appraisal.  Who did they survey?

I have reviewed over 4,000 commercial appraisal reports for the past 25 years.  I consider myself extremely fast.  Plus, many times I am reviewing reports of the same appraisers I have seen 10 or 20 or 50 times before.  That helps to speed up reviews as we know where everything is in a report.

In all of the time studies I have been part of or heard about for the past 25 years, the average time to perform a Compliance Checklist is 2 hours and to perform a Technical Review is 4-8 hours.

But, that is not an important issue.  The only suggestion being made is to increase the $250,000 threshold for all commercial loans up to $400,000.  The business loan exemption will stay at $1,000,000 and the residential (1-4 units) loan exemption will stay at $250,000.

These are minor changes and quite surprising to me.  Based on inflation alone (which they present in their report), I would increase the $250,000 to $500,000 and the $1,000,000 to $2,000,000.  Based on the stats they present, this would keep appraisal volume at 1994 levels (appraisal volume has increased steadily over the past 23 years).

If I really had my way, I would eliminate appraisals for all business loans and residential loans.  Appraisers know that the value when a new loan is made is meaningless.  These type of loans are based on credit not real estate.  The banks only need to know the real estate value years in the future when a foreclosure might occur.

Which, of course, always brings us back to my call for America to adopt Mortgage Lending Value/Long-Term Sustainable Value…..but, I digress.

Remember, you have the opportunity to send in your opinion to the Agencies.  This is probably the first time in 23 years that your opinion has been asked for in regard to FIRREA.  And, it will be the last time for another 10 years.  Speak up…this is the time to do such.

UP TO 6 STATES NOW, WELCOME TO THE CLUB FLORIDA

May 25, 2017 – Six states now permit licensed appraisers to perform non-USPAP Evaluations.  In those six states, licensed appraisers are finally on a level playing field.  44 states to go.  We might already have another state in the group, but some legal confirmation is needed.  And Virginia is actually delayed a year as they need to change the definition of Evaluation.  But, we are headed in the right direction.  The following is from the Appraisal Institute (but, it omits Indiana which does have this law):

Florida Makes Significant Changes to Appraiser Licensing Law

Florida Gov. Rick Scott on May 23 signed HB 927, legislation that makes significant changes to the state’s appraiser licensing law and requires appraisal management companies to comply with federal minimum requirements for registration and oversight. The law takes effect Oct. 1.

The Appraisal Institute and the Region X Government Relations Committee advocated for two key improvements to the state’s appraiser licensing law, and those provisions were incorporated into the bill.

The first provision defines an “evaluation” as a “valuation permitted by any federal financial institutions regulatory agency for transactions that do not require an appraisal” and clarifies that a state-licensed appraiser may perform an evaluation. Currently, appraisers in Florida are prevented from providing evaluations that are not in full compliance with the Uniform Standards of Professional Appraisal Practice even though federal requirements only call for compliance with the Interagency Appraisal and Evaluation Guidelines.

Evaluation services in the state have been provided by non-appraisers, such as brokers and salespersons, accountants, architects, financial analysts and data providers, all of whom do not have to meet the same licensing and standards compliance requirements as appraisers. State-licensed appraisers will now be able to perform services on these same terms in compliance with federal requirements. Florida joins Georgia, Illinois, Tennessee and Virginia in allowing appraisers to perform evaluations.

The second provision clarifies that the Florida Real Estate Appraiser Board has the authority to adopt rules allowing for the use of standards of professional practice other than USPAP for “nonfederally related transactions.” Such transactions include appraisal assignments for portfolio monitoring, financial reporting, litigation, tax and consulting, among other areas. The law requires appraisers using development and reporting standards other than those contained in USPAP to comply with USPAP Ethics and Competency Rules and other requirements adopted by the Board by rule. The law clarifies that any valuation work performed per standards other than USPAP cannot be used to satisfy the experience requirements for any Florida appraiser credential.

In 2015 and 2016, the FREAB undertook a rulemaking proceeding that would have allowed the use of standards other than USPAP if additional standards “meet or exceed” USPAP. The provisions in HB 927 remove that arbitrary threshold and grant much broader authority to FREAB to consider standards other than USPAP. Further rulemaking proceedings will need to be undertaken by FREAB to fully implement this new provision.

The Region X Government Relations Committee, under the leadership of Chair Wesley Sanders, MAI, advocated for this legislation, meeting with the state’s Department of Business and Professional Regulation about these two provisions. Additionally, AI professionals in Florida participated in Region X’s ValuEvent on Feb. 14 in Tallahassee, meeting with many legislators to urge support for the provisions.

View a copy of HB 927.

5 STATES DOWN, 45 TO GO

May 19, 2017 – I was notified this week that Illinois has had a law on their books that allows licensed appraisers to perform non-USPAP Evaluations.  I have no clue how long it has been there.  Maybe someone from Illinois knows and can tell me.  So, we are actually at 5 states now, albeit Virginia has a technical glitch that will delay the law for a year.  Following is an excerpt from the law (I will add emphasis to the key words) and additional explanation I have received from my ‘sources.’  (oh geez I sound like the Fake News Media!)

225 ILCS 458/5-5a – “It is unlawful for a person to …. (ii) develop a
real estate appraisal, (iii) practice as a real estate appraiser… without a license issued under this Act.”
225 ILCS 458/5-5g – “This act does not apply to”….
[1] an employee, officer, director, or member of a credit or loan
committee of a financial institution or any other person engaged by a financial institution when performing an evaluation of real property for the sole use of the financial institution in a transaction for which the financial institution would not be required to use the services of a State licensed or State certified appraiser pursuant to federal regulations adopted under Title XI of the federal Financial Institutions Reform, Recovery, and Enforcement Act of 1989… (emphasis added)
The state board has confirmed to several people that state-certified appraisers are permitted to perform non-USPAP compliant evaluations when engaged by an institution.  The only caveat is that the appraiser cannot sign as an appraiser, reference their state credential or any appraisal related designations.

CORRECTING THE APPRAISAL FOUNDATION’S FAKE NEWS

May 18, 2017 – Today The Appraisal Foundation (TAF) gave a webinar on using Restricted Appraisal Reports (RARs) to meet the need of Evaluations.  As TAF is no longer an unbiased entity, I will correct the Fake News they put out today.  My perspective is based on 23+ years of writing true Evaluations (i.e. non-USPAP) and 23 years of ordering RARs.  I have seen both type of reports all across the nation.  So, here goes…

  1.  FAKE NEWS – Evaluation requirements are more than Appraisal requirements.  Misleading.  TAF listed the 5 appraisal requirements listed in FIRREA.  Then compared that to the 14 bullet points for Evaluations listed in the IAEG.  Of course, one of the 5 appraisal requirements is mandatory compliance with USPAP – which has 12 bullet points in SR 2-2.  A few of those requirements require multiple items.  FACT – As I will explain below, A RESTRICTED APPRAISAL REPORT MUST ALWAYS CONTAIN MORE INFO THAN AN EVALUATION!

2.  Remember USPAP has NOTHING to do with Evaluations.  Only the December 2010 IAEG applies to Evaluations.  Thus, this webinar and the next webinar about writing an USPAP Evaluation (an oxymoron – USPAP has an A for Appraisal in it, not an E for Evaluation! Evaluation requirements are in the IAEG) are not relevant.

3.  IMPORTANT EXPLANATION FROM GEORGE MANN:

A.  Evaluations CAN omit many items that are required and/or reported in the typical appraisal report (I will list many below).

B.  RARs CANNOT omit any items required by the IAEG for Evaluations.

C.  Therefore, RARs MUST ALWAYS CONTAIN MORE INFO THAN AN EVALUATION!

4.  FAKE NEWS – It was insinuated in the webinar that a RAR could have less content than an Evaluation.  A single statement near the end said RARs do need to be beefed up and that will be explained in the next webinar.  That should have been emphasized more.  The sample RAR presented would NOT meet Evaluation requirements.  The IAEG says ‘sufficient information’ is needed.  Simply stating a value is not sufficient information.

5.  Here is a list of items that are typically included in a RAR, but are NOT included in an Evaluation:

2 very important items are Evaluations do NOT require the SR 2-3 Certification, nor do you have a work file requirement.  Those are yuge and bigly!

Reporting-wise Evaluations typically will NOT contain an executive summary, limiting conditions, extraordinary assumptions and hypothetical conditions, intended use, intended user, zoning, tax assessment info, flood zone, detailed property descriptions, prominent use restriction statement (RARs), or listing and sales history.  That is not to say every RAR needs all of those items (many are mandatory though) nor that every Evaluation will omit all of those items (most of them will be omitted though).  Therefore, it is FAKE NEWS for anyone to ever say or insinuate that a RAR contains less or equal detail to an Evaluation.

Remember, Mann’s Law of Evaluations – A RESTRICTED APPRAISAL REPORT MUST ALWAYS CONTAIN MORE INFO THAN AN EVALUATION!

Lastly, not that TAF suggested a bank would use an Evaluation on a $34 Million property, the IAEG makes it clear that as the loan and/or property become more complex, banks need to move towards appraisals.  Nearly all Evaluations will be on properties valued around $1 Million or less.  Some exceptions will exist, especially for the largest banks.  But, not too often will a bank use an Evaluation on properties over $1 Million.  Yes, technically, they make their decision based on loan amount.  But, us appraisers deal with property value.

TAF made a great point that an RAR can be done on any size property.  The amount of work doesn’t change between a RAR and an Appraisal Report.  But, the amount of reporting is less (in a RAR) and that saves a little bit of writing time.

CONGRATS VIRGINIA! 4 DOWN, 46 TO GO

March 27, 2017 – I’ve been campaigning since 1994 to get states to pass laws that allow licensed appraisers to perform non-USPAP compliant Evaluations.  After 23 years, we now have the 4th state to invoke such a law.  Congrats to Virginia and all of its appraisers that can now complete on a level playing field.

We have a long way to go.  But, hopefully, this is gaining steam and appraisers in every state will get to work on getting similar laws passed sooner than later.   Florida and North Carolina have similar laws up for consideration right now.

Just fyi, I think the Tennessee law is the best, but the Indiana wording is very good, too.

My alter ego, Johnny Evaluationseed, is proud to see such progress:)

If you are trying to get this law passed in your state, please feel free to contact me.  I would be glad to help in any way I can.  In a few days I will be posting a list of Q&As that address the typical opposition to these laws.  I hope you find it useful.  Feel free to use it, albeit I would appreciate knowing where it is being passed around.  Just curious which states are considering the law is all:)

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ADDED April 27, 2017 – There has been some confusion among appraisers.  I received the following explanation which I think clarifies the law.  I hope it helps.

The new law very clearly says that “The provisions of this chapter DO NOT APPLY” to an appraiser performing an evaluation.   So once you make the determination that: 1) you are an appraiser; and 2) that you are performing an evaluation as permitted in the law, then the rest of the law in the chapter does not apply, including anything related to USPAP compliance.   At that point (appraiser performing an evaluation), you are 100% outside of the appraiser licensing law and the VREAB would have absolutely ZERO jurisdiction over you as it relates to ANYTHING.

 

TRANSACTION VALUE

February 17, 2017 – I received the following question:

QUESTION:  I had an appraisal/FDIC interpretation question in regards to the $250,000 transaction value from fil10082a and thought I’d reach out and see if you could provide any input.

Example:  An individual identified a situation where there’s an existing $1,300,000 loan and a borrower is requesting another $200,000 for improvements.  Is the “transaction value” (as defined in FDIC fil10082a) $200,000, which is the new subsequent request OR is it equal to the new exposure of $1,500,000?  All else equal (market values have held, no material property deterioration, etc.), no new appraisal would be required if the transaction value is under $250,000.

Any input you could provide would be appreciated.

ANSWER:  The transaction amount is the total $1.5 Million.

Assuming no change in market conditions or collateral protection, an evaluation is permitted and an appraisal is not required.

However, you should consider getting an appraisal if there were potential credit risk management concerns.

Also, regulators want banks to have a policy on when to obtain appraisals even though an evaluation is permitted.

ADDITIONAL NOTE – There is no dollar threshold for loan renewals, refinancings, or subsequent transactions.  The $250,000 and $1,000,000 thresholds only apply to New Loans.

 

THERE ARE NO MANDATORY STATES

August 23, 2016 – Per the Appraisal Subcommittee’s (ASC) website, ‘State statutes governing appraiser certification and licensing can be characterized in three ways:

Mandatory (Man) – Certified/licensed appraisers required for any service for which an opinion of value (evaluation or appraisal) for real property is developed;

Mandatory for Federally Related Transactions (M/FRT) – Certified/licensed appraisers required to perform appraisals in any federally related transactions and real estate related financial transactions when Federal law requires the services of such appraisers; and

Voluntary (Vol) – Certified/licensed appraisers not required for any appraisal/evaluation assignments. If appraisers wish to perform appraisals in such federally related transactions and real estate related transactions, appraisers can choose to become certified/licensed and submit to the State’s regulatory jurisdiction.’

I contend that there are no Mandatory States because it conflicts with Federal law to require someone be certified/licensed to perform an evaluation.  The States argue they can ‘add to’ the requirements of Federal law (in this case FIRREA).  Myself, and many others, argue they are not ‘adding to,’ but are in conflict with Federal law – Federal law trumping State law.

Per the ASC website, I count 4 Voluntary States, 13 Mandatory for FRT States, and 38 Mandatory States.  The total includes DC and territories.  Everyone can agree that 17 States clearly are not Mandatory.  It is the 38 States that claim to be Mandatory that I contend cannot be mandatory.

The debate comes down to Federal Preemption – the displacement of U.S. State law by  U.S. Federal law.  FIRREA does not require an evaluator be a State certified/licensed appraiser.  The question becomes, can a State require you to be a certified/licensed appraiser in order to prepare an evaluation?

One item that is clear and not up for debate is that FIRREA requires an evaluation provide an opinion of Market Value ‘As Is’ of Real Estate Only.  The key point being an evaluation does provide market value – just like an appraisal.

As to who can perform evaluations, pertinent quotes from the December, 2010 Interagency Appraisal and Evaluation Guidelines follow:

Persons who perform evaluations should possess the appropriate appraisal or collateral valuation education, expertise, and experience relevant to the type of property being valued. Such persons may include appraisers, real estate lending professionals, agricultural extension agents, or foresters.31

31 Although not required, an institution may use state certified or licensed appraisers to perform evaluations.  (Emphasis added)

From here, we are back to Federal Preemption.  Does it apply or not?  I am aware of one case that has decided this question.  I will provide its reference and the Judge’s quotes below.  As with any case ruling, it can be argued that it only applies to this specific set of circumstances, only in this jurisdiction, etc.  However, it is a Federal Judge and it decides if the State of Pennsylvania can require appraisal licensing for people performing evaluations.  And it decides if Federal Preemption applies.  There is a good chance other Judges around the country would refer to his case.

Let’s start with the exact reference from the copy that was provided to me:

2004 WL 764834

Only the Westlaw citation is currently available.

United States District Court,

E.D. Pennsylvania.

FIDELITY NATIONAL INFORMATION SOLUTIONS, INC., Market Intelligence, Inc., and Pennsylvania Bankers Association, Plaintiffs,

v.

George D. SINCLAIR, et al., Defendants.

No. Civ.A. 02-6928. | March 31, 2004.

Yes, this case is 12 years old.  I am surprised it hasn’t been brought up more often in this debate as to who can perform evaluations in each State.   I will let you read the entire document as it is too long to cut and paste it here.  It ebbs and flows and the Judge does a great job of addressing many arguments from both sides.  In the end, Federal Preemption is the main issue and the Judge says this:

‘...The federal financial regulatory agencies, pursuant to the Congressional authority granted under 12 U.S.C. § 3341(b), have exempted federally related real estate transactions under $250,000 from the state certified real estate appraiser requirement. Insofar as these federally related, but expressly exempt transactions are concerned, REACA is preempted by FIRREA. For all other transactions that are non-federally related either because they do not involve a federal financial institution regulatory agency or the Resolution Trust Corporation, or because they have been designated by the federal financial institution regulatory agencies as not requiring “the services of an appraiser” as set forth in 12 U.S.C. § 3350(4), such non-federally related transactions are outside the scope of FIRREA and are subject to state regulation. …’

REACA stands for the Pennsylvania Real Estate Appraisers Certification Act.

So, there you have it.  Federal Preemption DOES apply and States (at least Pennsylvania for sure) cannot require appraiser certification/licensure to perform evaluations.  Therefore, NO State can be Mandatory.  They can require appraiser certification/licensure for most, but not all, products that provide opinions of value.

Although I am not sure where the money is in such a case, I would hope someone would file a suit against all of the so-called Mandatory States and force them to change their laws to note the exception for evaluations.  Maybe organizations like ABA would do it to assist their members.

Lastly, I have heard of some State Attorney Generals trying to strong arm financial institutions into only using certified/licensed appraisers to perform evaluations.  This is laughable and hopefully there can be push back in one way or another.  Legal Counsel at the Federally-Regulated banks I worked at made it clear that no State was going to get into our files anyway since we were regulated by the Federal Agencies.  But, States will be States and try to throw their weight around.

I recall one State who attempted this with me.  They didn’t like us doing evaluations in their State without being licensed appraisers.  It wasn’t Illinois, but let’s just say it was and the property was in that State.  I replied I am located in Ohio.  I am licensed in Kentucky.  The client got the evaluation report off of the internet from a server located in California.  Please let me know when Illinois has any jurisdiction over anything going on in those States:)  I never heard back:)

As always, I appreciate your thoughts.  I would be very interested in any other settled cases that exist and address the issue of Federal Preemption in regard to evaluations.  Email me if you want a copy of the case I have referred to in this post.