The OCC, FDIC and FRB have issued a joint advisory to address questions regarding using evaluations instead of appraisals in real estate related financial transactions. The advisory does not contain new guidance, but it does provide a succinct explanation of existing regulations and highlights certain prudent evaluation procedures described in the Interagency Appraisal and Evaluation Guidelines (Interagency Guidelines).

Citing the agencies’ regulations, the advisory lists the three situations that permit the use of an evaluation instead of an appraisal:

• Transactions in which the “transaction value” (generally the loan amount) is $250,000 or less, unless it is a higher-priced mortgage loan

• Certain renewals, refinances, or other transactions involving existing extensions of credit

• Real estate-secured business loans with a transaction value of $1,000,000 or less, provided that the sale of, or rental income derived from, real estate is not the primary source of repayment for the loan

The agencies remind financial institutions that there may be instances where it is sensible to obtain an appraisal even when it is not required, such as for higher-risk transactions.

The advisory also highlights certain evaluation parameters that are discussed more thoroughly in the Interagency Guidelines. In particular, the advisory notes that evaluations:

• Are not required to be completed by a state-licensed or state-certified appraiser or to comply with the Uniform Standards of Professional Appraisal Practice (USPAP)

• May be prepared by a bank employee or third party

• Must be prepared by someone who is knowledgeable, competent, and independent of the transaction

• May use one or more valuation methodology, including the comparable sales approach, the income approach, or the cost approach, provided that the method is appropriate to the property being valued

• May utilize other technological tools, such as automated valuation models and tax assessment values, provided that they are consistent with safe and sound banking practices and the Interagency Guidelines

For more information about using evaluations, review the complete Interagency Appraisal and Evaluation Guidelines. The Guidelines further describe supervisory expectations for selecting, using, and validating valuation methodologies and provide additional information about the minimum contents of an evaluation. There is no standard format for evaluations, but they 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.