Let’s focus on the three exemptions in which you will be ordering an evaluation.
First, the appraisal threshold exemption applies if the transaction (generally meaning the loan amount for loans and the value of the property for sales) value is equal to or less than $250,000. This is the most broadly used exemption of the three because it is very easy to understand.
The real estate-secured business loan exemption has a dollar threshold of $1 million, but you can’t stop there. You have to show that the loan is not dependent on the sale or rental of the real estate, rather that you are depending on cash flow from the operation of the business.
The subsequent transaction exemption potentially is the one where you can have the highest dollar amount or the most complex properties come across your desk (if you’re someone who is preparing the evaluations) as a result of the technical operation because it has no specific dollar threshold. It means that if you have an existing extension of credit at the bank and you are considering doing something else to the loan, there are two ways to be able to prepare an evaluation rather than an appraisal:
- If there is no advancement of new money other than reasonable closing costs, you may qualify for the subsequent transaction exemption.
- There has been no obvious and material change to either the market conditions or physical aspects of the property that would result in an adverse affect to collateral.
Confusion around subsequent transaction is very common, so take care when dealing with this exemption.
There are 12 exemptions to the appraisal requirements. Appraisal regulations require that when a real estate-related transaction happens, the bank must order an appraisal by a licensed appraiser.
In the 12 exempted situations, you do not have to order an appraisal. However, there is another step for three of those (listed in bold below), which is in that an evaluation must be ordered.
Here is a basic list of the 12 exemptions:
- Appraisal threshold
- Abundance of caution
- Loans not secured by real estate
- Liens for purposes other than the real estate’s value
- Real estate-secured business loans
- Leases
- Renewals, refinancings and other subsequent transactions
- Transactions involving real estate notes
- Transactions insured or guaranteed by a U.S. Government agency or U.S. Government-sponsored agency
- Transactions that qualify for sale to, or meet the appraisal standards of, a U.S. Government agency or U.S. Government-sponsored agency
- Transactions by regulated institutions as fiduciaries
- Appraisals not necessary to protect federal financial and public policy interests or the safety and soundness of financial institutions
It’s important that you engage any external person in the evaluation process first with a written engagement letter before you start talking to them about what they think the value of a property is.
Because of the flexibility inherent in evaluations, if you’re going to brokers, it’s likely you will be calling around and asking what they think the property is worth before they start offering you evaluations or broker price opinions.
Be careful not to shop around BPOs until you find one who says he or she thinks it is worth a lot of money. That type of procedure is not going to be viewed well at the regulator.
This blog is provided for your information only and does not constitute legal advice. It may not reflect new or recent changes in regulation. No representation or warranty is made as to the accuracy or completeness of the content.
At MountainSeed, we work with lenders to help them understand the ever-changing regulatory environment and anticipate legislative changes. We are also committed to developing sustainable, long-term solutions that are mutually beneficial to our bank clients and to the appraisal community. If you have any questions about our services or anything in this blog, please contact MountainSeed Appraisal Management at (855) 640-0905 or visit mountainseed.com.
Welcome to our first episode of our friday compliance minute series. We plan to take 2-3 minutes each friday to show you something we believe your regulator cares about.
This week we are discussing structural separation of your loan production staff from your appraisal management staff.
We hope you find this valuable!
If you have a topic or question you would like us to cover next week. Just drop it in the comments and we'll see what we can do!
Keep in mind that it’s important to be careful in the review of an evaluation that you are not creating multiple valuation opinions.
There is a tendency to allow for conflicting market value opinions, but given the complexity level of evaluations, it makes sense not to be creating multiple valuation opinions within your bank or from third parties.
This blog is provided for your information only and does not constitute legal advice. It may not reflect new or recent changes in regulation. No representation or warranty is made as to the accuracy or completeness of the content.
At MountainSeed, we work with lenders to help them understand the ever-changing regulatory environment and anticipate legislative changes. We are also committed to developing sustainable, long-term solutions that are mutually beneficial to our bank clients and to the appraisal community. If you have any questions about our services or anything in this blog, please contact MountainSeed Appraisal Management at (855) 640-0905 or visit mountainseed.com.
The issue that comes up is that a big part of the review function in the appraisal world is compliance with Uniform Standards of Professional Appraisal Practice (USPAP). Although you can give an evaluation assignment to an appraiser, it is not required.
It also is not required that evaluations comply with USPAP. So, during a review of an evaluation, if you subject it to a USPAP review, it will probably fail because it was not designed to comply. That’s part of the flexibility built into the evaluation program.
So, what do you review an evaluation for? You can do a review for the Section 13 content standards that are in the Interagency Guidelines. (We at MountainSeed provide to our evaluators guidelines based on those standards.) By nature, evaluations are intended for your bank, and you should not be asking another bank for its evaluation and relying on it.
The regulators are specifically focused on the fact that evaluations now should be done only from low-risk transactions. In the subsequent transaction exemption you could end up in a situation where a very large dollar amount credit for a very complex commercial property falls into the subsequent transaction exemption because it has no dollar threshold. As the regulators see it, risk is specific to your bank, your lending limit and your typical transaction.
You should have something in your policies that acts as a kick-out that says even though a transaction may technically qualify for the exemption, policy has a limiter for a specific dollar amount or complexity level with regard to evaluations.
Some positive news is that you have the ability to go to your regulator and ask for permission not to review every single appraisal or evaluation, but to review only a sample of those or use an automated technology to do the reviews. But you have to get prior written approval from your regulator for this method.
There is a mandate that all evaluations and appraisals be reviewed prior to the final credit decision. Worth noting is an expectation on the part of the regulator that the person who does the evaluation has the appropriate education, experience and competence, specifically with respect to the property type, the risk and the complexity involved in the transaction.
The new standard is not just that you look internally, but that you hire someone internally or outsource to a third party to get the review done. If you are having an external third party prepare an evaluation and you are having an external third party review the evaluation, think about vendor management, because you are ultimately responsible for compliance in the activities of the third parties.
Dodd-Frank made a substantive change to add at the Congressional statutory level a requirement that all appraisals be reviewed.
If you’re trying to answer questions from people internally at your bank regarding things like ordering evaluations, loan officer activities, etc., it’s important to try to keep in mind which rules apply.
As a broad general point, if it’s a commercial transaction, you are more than likely looking at the FIRREA-based December 2010 guidelines.
Generally, if it is a residential transaction, you have more to worry about, including the December 2010 guidelines and the consumer protection laws.
Remember that if you are selling the loan to Fannie Mae and Freddie Mac, you have to worry about their requirements.
This blog is provided for your information only and does not constitute legal advice. It may not reflect new or recent changes in regulation. No representation or warranty is made as to the accuracy or completeness of the content.
At MountainSeed, we work with lenders to help them understand the ever-changing regulatory environment and anticipate legislative changes. We are also committed to developing sustainable, long-term solutions that are mutually beneficial to our bank clients and to the appraisal community. If you have any questions about our services or anything in this blog, please contact MountainSeed Appraisal Management at (855) 640-0905 or visit mountainseed.com.
Banks under $10 billion in assets aren’t subject to direct examination by the CFPB, so how does this impact you? It impacts you because the CFPB has “tagalong rights”, meaning a representative from the CFPB could tag along with your primary federal regulator in an exam. But probably more precisely, it impacts you because your federal regulator has the power and will try to enforce this.
So even though it’s not the CFPB who will be in your office enforcing these TILA independence requirements, your primary regulator, the FDIC, Fed or OCC, will try to enforce them.
There is a history of the primary federal regulators approach to these consumer protection requirements being stricter than the agency itself. For example, HUD had some FAQs on lender credits on HUD closing statements, and the FDIC came in and penalized banks for doing what HUD spelled out in the FAQs, saying HUD got things wrong.
The FDIC has a history of being overprotective on the consumer front, and as it results in Dodd-Frank, there will be an increased emphasis on consumer protection being enforced by your regulator.
This blog is provided for your information only and does not constitute legal advice. It may not reflect new or recent changes in regulation. No representation or warranty is made as to the accuracy or completeness of the content.
At MountainSeed, we work with lenders to help them understand the ever-changing regulatory environment and anticipate legislative changes. We are also committed to developing sustainable, long-term solutions that are mutually beneficial to our bank clients and to the appraisal community. If you have any questions about our services or anything in this blog, please contact MountainSeed Appraisal Management at (855) 640-0905 or visit mountainseed.com.