Interagency Appraisal Regulations and Guidance

The Appraisal Regulations permit the use of evaluations in lieu of appraisals for transactions under $250,000, but sometimes such transactions nonetheless require an appraisal for safety and soundness reasons. (We reference the FDIC’s appraisal regulations below, as the FDIC is your bank’s primary federal regulator.) While we cannot predict whether an examiner will expect an appraisal for a particular transaction under $250,000, the federal regulators have provided some helpful guidance.

The Interagency Appraisal and Evaluation Guidelines suggest that financial institutions should obtain appraisals even if a transaction is exempt “as an institution's portfolio risk increases or for higher risk real estate-related financial transactions, such as those involving: Loans with combined loan-to-value ratios in excess of the supervisory loan-to-value limits. Atypical properties. Properties outside the institution’s traditional lending market. Transactions involving existing extensions of credit with significant risk to the institution. Borrowers with high risk characteristics.” The Guidelines also suggest that an appraisal might be required for problem loans as “loan repayment becomes more dependent on the sale of collateral….”

In our view, you also may wish to consider how an internal auditor or examiner would view a loan or loan program in which the underlying collateral has not been appraised, and particularly whether foregoing an appraisal would present an unacceptable risk to your bank.

Other Appraisal Requirements

Outside of the appraisal regulations and guidance, other regulations or third parties may require appraisals in certain cases. For instance, Regulation Z requires an appraisal (and in some cases two appraisals) for “higher-priced mortgage loans” (consumer mortgage loans with interest rates exceeding 1.5%, 2.5% or 3.5% over the average prime offer rate, depending on the lien position and loan amount). You also may need to obtain an appraisal to securitize or sell a loan or a loan participation, or to meet the qualifications for mortgage programs run by HUD/FHA or those involving Fannie Mae, Freddie Mac or the Federal Home Loan Banks.

For resources related to our guidance, please see:

• FDIC Appraisal Regulations, 12 CFR 323.3(a) (“An appraisal performed by a State certified or licensed appraiser is required for all real estate-related financial transactions except those in which: (1) The transaction value is $250,000 or less; . . .”)

• FDIC Appraisal Regulations, 12 CFR 323.3(c) (“The FDIC reserves the right to require an appraisal under this subpart whenever the agency believes it is necessary to address safety and soundness concerns.”)

• Interagency Appraisal and Evaluation Guidelines (“Although the Agencies’ appraisal regulations allow an institution to use an evaluation for certain transactions, an institution should establish policies and procedures for determining when to obtain an appraisal for such transactions. For example, an institution should consider obtaining an appraisal as an institution's portfolio risk increases or for higher risk real estate-related financial transactions, such as those involving:
  • Loans with combined loan-to-value ratios in excess of the supervisory loan-to-value limits.
  • Atypical properties.
  • Properties outside the institution’s traditional lending market.
  • Transactions involving existing extensions of credit with significant risk to the institution.
  • Borrowers with high risk characteristics.”)

• Interagency Appraisal and Evaluation Guidelines (“As loan repayment becomes more dependent on the sale of collateral, an institution's policies should address the need to obtain an appraisal or evaluation for safety and soundness reasons even though one is not otherwise required by the Agencies' appraisal regulations.”)

• Interagency Advisory on Use of Evaluations in Real Estate-Related Financial Transactions, page 2 (“There may be instances when a financial institution finds it prudent or necessary to go beyond the requirements of the agencies’ appraisal regulations. For example, obtaining an appraisal may be prudent for credit risk management purposes or may be a prerequisite to participating in some secondary market transactions. Additionally, a financial institution may find it prudent to obtain an appraisal rather than an evaluation when the institution’s portfolio risk increases or for higher-risk real estate-related financial transactions.”)

• Regulation Z, 12 CFR 1026.35(c)(3) (“Except as provided in paragraph (c)(2) of this section, a creditor shall not extend a higher-priced mortgage loan to a consumer without obtaining, prior to consummation, a written appraisal of the property to be mortgaged. . . .”)