The Federal banking agencies (the “Agencies”) recently issued an “Interagency Advisory on Use of Evaluations in Real Estate-Related Financial Transactions.” The advisory was released to clarify expectations for the use of property evaluations by banking institutions in response to questions raised during outreach meetings last year. The Agencies that published the report include the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation.
The advisory describes the Agencies’ current supervisory expectations for using an evaluation instead of an appraisal to estimate a property’s market value for certain real estate-related financial transactions. In particular, financial institutions may use an evaluation for the following transactions: (1) transactions where the transaction value (i.e., the loan amount) is $250,000 or less; (2) certain renewals, refinances, or other transactions involving existing extensions of credit; and (3) real estate-secured business loans with a transaction value of $1M or less and when the sale of, or rental income derived from, real estate is not the primary source of repayment for the loan.
The advisory notes that other regulations may still require an appraisal for transactions with loan amounts under $250,000. For instance, an appraisal may be required for transactions involving higher-priced mortgage loans under Regulation Z.
In contrast to appraisals, evaluations are not required to be completed by a state-licensed or state-certified appraiser and may be performed by a bank employee or by a third party. For example, in smaller communities, bankers and third-party real estate professionals may obtain an evaluation rather than an appraisal for a financial institution.
The advisory also discusses the use of alternative valuation approaches or methodologies that financial institutions may use to develop evaluations in rural areas or other areas that lack recent comparable sales data for the subject property such as the sales comparison approach. However, regardless of the valuation method used, the Agencies state that an evaluation report must, at a minimum, contain sufficient information and analysis to support a value conclusion. To this end, the advisory recommends that financial institutions establish policies and procedures that detail the information that is required for a reliable evaluation.
The advisory is available here: https://www.federalreserve.gov/bankinforeg/srletters/sr1605.pdf.