Financial Update (Fourth Quarter 2004)


 Appraisal Reviews

 GLBA Spurs
 Banks’ Insurance

 Conference Focuses
 on Remittances

 New Fed
 Brochures About
 Check 21

 Fed Distributes
 Redesigned $50s

 Atlanta Fed Chair,
 Vice Chair

 Will Privacy
 Concerns Prolong
 Cash Use?

 Fed Governor
 Sees Oil Prices
 Staying High

 Greenspan on
 Challenges of
 Aging Population

 Helping Consumers
 Avoid Overdrafts

 Examining Fannie
 Mae and
 Freddie Mac


 Data Bank

 Circular Letters



Appraisal Reviews Are Important to Safe Banking

Financial institutions must have an effective, independent real estate appraisal and evaluation program. This sort of program, which ensures the independence of the collateral valuation process, maintains safe and sound banking practices.

An institution’s appraisal and evaluation review function should be independent from the loan production process. Further, staff conducting the reviews should have the knowledge and expertise to assess compliance with the Federal Reserve’s appraisal regulations and guidelines. Though all appraisals need to be reviewed for compliance with appraisal regulations, guidelines, and professional standards, the stringency of the review of a particular appraisal or evaluation should increase as loan size or the property complexity increases.

Internal reviews crucial
Internal reviews should determine whether the appraisal or evaluation is appropriate for the transaction, the risk of the transaction, and whether the process by which the collateral valuation is obtained ensures independence and quality.

Engagement Letters Provide Appraisal Control
Appraisers Must Be Independent, Qualified
Examiners Look Closely at Appraisal Practices
Interagency appraisal and evaluation guidelines
Independent appraisal and evaluation functions
Risk Management Association on appraisal review
FDIC on assessing commercial real estate portfolio risk

Internal reviews should also indicate whether the appraisal or evaluation report is consistent with the engagement letter, which sets forth the scope of the appraisal assignment. The review process also provides an element of quality control for assessing the work of appraisers and individuals who prepare evaluations. Each individual providing appraisals or evaluations would ideally have a sample of valuations subject to periodic, in-depth monitoring regardless of the transactions’ size or complexity. The institution would use this assessment to determine whether to retain the fee appraiser on its approved appraiser list.

In certain instances, such as for commercial properties that pose greater risk, a more detailed review should be conducted. Some banks supplement routine reviews with post-funding evaluations of appraisal quality for some of their higher-risk or greater-value transactions as a control to assist in detecting valuation problems.

Meeting the requirements
At a minimum, a bank’s appraisal review policies and procedures should specify

  • the reviewer’s qualifications, including experience, education, training, and independence from the loan production function;
  • the timing of reviews so that they are completed before credit decisions are made;
  • the scope of the appraisal review, which will vary according to transaction type, risk, size, and complexity (however, the review must always be adequate to determine whether the appraisal is complete, the reported value reasonable, and the appraiser’s techniques adequate and well supported);
  • standards for documenting the review and communicating its findings, including processes for resolving inaccuracies, appraisal weaknesses, and ambiguities; rejecting appraisals; and referring potential fraudulent activity to the appropriate regulator; and
  • relevant audit and control processes.

By Lynn Woosley in the Atlanta Fed’s Supervision and Regulation Department