NOTE TO READERS: In January and February, expert Mitch Kreeger wrote a two-part series on the steps banks can take to survive appraisal compliance audits. Building on that topic, EDR Insight is fortunate to have him back for this brief on the critical components that financial institutions, especially community banks, should have in their appraisal policies. Is your policy strong enough? Would it stand up to the scrutiny of a bank examiner? Are you doing enough to screen the appraisers you use? To monitor their performance? What are the best resources out there? To help you answer these questions, Kreeger shares his thoughts and advice below.
Newer entrants to the U.S. institutional lending industry need to create, update and monitor loan policies and procedures. As smaller institutions grow, appraisal policies become more relevant and scrutinized. What are regulators looking for? What are appropriate preparations and best practices when developing an Appraisal Compliance Policy Manual?
In this article, I briefly explore key issues addressed by appraisal policies, provide regulator “red flags” and offer Best Practice tips based on my discussions with national and regional policy regulators and industry peers. I also draw on my extensive industry experience (see About the Author section below this brief).
An institution’s Appraisal Policy, at its most basic premise, is a footprint of minimum standards for the lending institution’s appraisal function. It is the premise for how the appraisal process shall perform and be judged. The aim is primarily to create a safety and soundness framework that blends these components:
- Collateral valuation and review;
- Regulatory compliance;
- Risk management;
- Vendor management;
- Competitive lending operations support; and
- Prudent credit and risk underwriting support.
Over time, it is also important to remember that as an institution grows its lending volume, the Appraisal Policy should expand to add elements like: additional types of property valuation tools (e.g., evaluations, appraiser-assisted automated valuation models, etc.), property-specific appraisal requirements, staffing and job management operations, peripheral functions (e.g., environmental risk, seismic risk, etc.) and other responsibilities and regulatory updates as they arise.
A Board-approved Appraisal Policy is the formal written blueprint of the appraisal function. It needs to outline in general terms how the institution will provide an appraisal function that results in regulatory-compliant collateral valuation services that reflect safe and sound real estate lending practices.
Less formal Appraisal Procedures may be written, verbal, or merely standing operating procedures that more specifically define the institution’s practices or limitations for day-to-day operation of the appraisal function. Procedures can be easily modified on a localized level to fit the institution or department’s changing needs.
It is prudent to develop policies that offer both: (1) generalized standards for operations that will rarely be waived (a “Policy Exception”), and (2) procedures that are more specific “how to” or “do not” instructions that focus on the lender’s hot buttons, processes and risk aversion issues.
How do these elements tie in with various agency guidance/policy documents related to appraisals?
An institution’s Appraisal Policy should generally mirror regulatory guidance. Source documents to consider include appraisal and vendor management guidance contained in:
FIRREA Title XI and USPAP (1989),
Interagency Appraisal & Evaluation Guidelines (1994, 2010),
OCC CRE Lending Handbook (2013),
FRB Managing Outsourcing Risks (2013),
Additional resources to consider are Financial Information Letters (FILs) and supervisory guidance. Other interpretive guidance can be found from industry groups (e.g., Appraisal Institute) and non-interagency regulators (e.g., CFPB, SBA, GSEs, et al). Guidance should be considered in the context of the institution’s own risk tolerances.
“It is important to know: ‘Who is driving the train?’”
~Bob Parson, OCC Appraisal Policy Specialist, Southern California Chief Appraiser Meeting, February 19, 2015
Parson’s comment suggests that appraisal policies should identify functional governance (regulatory sources), authority (who’s in charge?), independence issues, personnel running the function, qualifications, and competency.
An examiner will look for gaps between practices and procedure: what IS done versus what is SUPPOSED to be done. It is prudent to train lending, credit, risk, and compliance personnel on Appraisal Policies at regular intervals and whenever updated or modified.
Parson also emphasized that Appraisal, Evaluation and Review functions are processes; they are not forms, ratings, or scores. The institution should define each of these processes when developing and managing “cohesive, complete, credible valuation process and report” policies and procedures (Parson, 2015).
Thus, it is good practice to write (and adhere to) an Appraisal Policy that addresses key elements of regulatory compliance, yet not corral the institution into a rigid box that lacks flexibility or may impair the institution’s ability to be competitive.
What advice is appropriate for community banks that lack appraisal expertise in writing their first policies?
“Where do I even begin? There are so many regulations and no one here knows much about appraisals.”
Find and engage a competent subject matter expert (SME) who has sufficient experience to serve as a project leader, or an outsourced consultant ‘guru’ to help develop and manage practical appraisal policies and procedures that meet the institution’s goals, risk tolerance levels, and ability to manage the appraisal process. Networking referrals are often a good starting point.
It is generally prudent when an institution starts to see steady, stable volume of collateral valuation tasks (perhaps 10-20 jobs per month), or upon reaching $1B+ in asset size with a real estate lending focus, that the appraisal function may be ready for formalized in-house and/or outsourced representation by a competent appraisal or collateral risk manager. (This is a topic for a future article, but also a strategic concept to be considered early on).
ABOUT THE AUTHOR
Since 1980, Mitch Kreeger provides real estate appraisal and review services on residential and commercial valuation assignments, environmental and seismic risk management services for lenders, plus consulting services related to policies and procedures, regulatory compliance, and appraisal / environmental risk in-house or outsource function design. Professional services also have included apartment acquisition investment DCFs, budget analysis, construction lending inspections and analysis, and real estate market trend analysis. Mitch’s client base ranges from very small to very large lending institutions, corporate and individual property owners, investors and syndicates, municipalities and redevelopment agencies, and legal services; however, most of his career has been as internal appraisal management or staff with various institutional lenders. Mitch is considered a Subject Matter Expert (SME) on various valuation, environmental and seismic risk, and regulatory compliance topics by peers nationwide, and volunteers or is sponsored as guest speaker, panelist, author, and network blogger. Mitch is currently Chief Appraiser and Principal Consultant at Kreeger Consulting, a private appraisal / environmental / seismic risk consulting services firm that offers commercial appraisal reviews, outsourced Chief Appraiser duties, and advisory services to lenders on regulatory compliance, efficient appraisal / environmental risk functions, and effective policy updates.
Mitch Kreeger, MAl SRA MBA
Principal Consultant, Kreeger Consulting: Appraisal Review, Environmental & Seismic Risk Policy Manager
Mitch’s LinkedIn Profile
“Appraisal Leader for Tomorrow’s Environment”