Dear Board of Directors:
Attached for your use are appraisal and evaluation guidelines developed by five federal financial regulators.1
I urge you to implement the best practices in the attached guidelines.
Your board of directors is responsible for reviewing and adopting policies and procedures that establish and maintain an effective, independent real estate appraisal and evaluation program for all of your credit union’s lending functions.
This guidance will assist you in that process. It applies to all real estate-related financial transactions originated or purchased by your credit union for your own portfolio or as assets held for sale.
Highlights of the guidelines include:
Emphasizing the importance of having a collateral valuation process independent from other parts of the lending process;
Having effective quality controls over the appraisal process by recommending a periodic review of the work completed by the appraisers and for individuals selected to hold appropriate state certification or licenses;
An expanded "Minimum Appraisal Standards" section to clarify appraisals must contain an opinion of market value as defined in the Agencies’ appraisal regulations;
In addition, the Minimum Appraisal Standards section clarifies an Automated Valuation Model,2 by itself, is not an appraisal. This section also contains new guidance about having the appraisal report disclose the nature and extent of research performed to verify a property’s condition and support market value;
Greater detail about how appraisals should have appropriate adjustments to market value for factors such as prospective improvements, lease terms, and market conditions. Furthermore, the guidelines clarify how appraisals should not incorporate factors such as favorable financing or special value to a specific property user into the market value;
Reinforcement of the Agencies’ expectations regarding the management of relationships with third parties as they pertain to real estate lending; and,
The need to develop policies for determining an appropriate collateral valuation methodology for various transactions.
These guidelines are intended to supplement existing regulations and provide a clear overview of the expectations regarding appraisal practices. This revised version supersedes the 1994 issuance and NCUA Letter to Credit Unions 03-CU-17.
1 The interagency group includes the Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of Thrift Supervision, and National Credit Union Administration.
2 An Automated Valuation Model (AVM) is a computerized property valuation system that relies upon comparable or repeat sales indexes to determine property value. AVMs generally do not include an onsite examination of the property. On January 26, 2007, NCUA issued a press release to indicate credit unions can use AVMs for mortgage or home equity transactions with a value of $250,000 or less when an individual with “knowledge, training, and experience in the local real estate market” reviews the AVM. The reviewer can be an employee of the credit union. See also: Office of General Counsel Opinions 06-0824 (October 31, 2006) and 06-1219 (January 19, 2007).