In This Issue
Are You in Compliance with FIRREA Appraisal Requirements?
The latest emphasis by regulators on financial institutions is in the area of federally regulated commercial real estate appraisals.
After the savings and loan crisis of the late 1980s, Congress passed the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) to address the abuses that contributed to the crisis. FIRREA defined the appraisal requirements for all federally regulated real estate transactions. But more than a decade later, some of the appraisal abuses from the late ‘80s are starting to resurface again, which has regulators paying special attention to how banks are handling appraisals.
Independence Is Key
Independence in the appraisal and review processes is the biggest issue with bank examiners. Appraisals must be ordered by the bank - which must define the purpose of the appraisal and provide guidance to the appraiser as to the bank requirements - and the bank must engage the appraiser, who cannot be related in any way to the seller or buyer.
Regulators are putting special emphasis on the ordering of the appraisal being separate from the lending decision, especially in banks with assets over $500 million. In other words, the lender shouldn't order the appraisal - an individual independent of the loan process (perhaps someone in credit administration) should.
FIRREA also requires that, once the bank has received an appraisal, a written appraisal review must be performed by a qualified individual independent of the lending decision to test compliance with policy and detect deficiencies in the appraisal. At some banks, the appraisal review process has been reduced to a cursory checklist review by a clerk, rather than a qualified professional making judgment calls on things like whether comprehensives, rent, vacancy, expenses and cap utilization rates are realistic and representative of the local market.
The regulators recognize that smaller banks with limited resources may not have access to this type of qualified individual on staff. In these cases, it is acceptable simply for a bank lender who is separate from this transaction to do the appraisal review. Or, some smaller banks are contracting with third parties to do reviews - outside appraisers, community college professors, retired lenders, etc.
Regulators are also focusing in on whether banks have a separate commercial real estate appraisal policy that:
What does all this mean? Simply put, the increased scrutiny and attention being paid by regulators to commercial real estate appraisals makes now a good time to go back and review the fundamental appraisal requirements of FIRREA to make sure that you're in compliance.
For more details on commercial real estate appraisals, please contact our office.
The articles in this newsletter are general in nature and are not a substitute for accounting, legal, or other professional services. We assume no liability for the reader's reliance on this information. Before implementing any of the ideas contained in this publication, consult a professional advisor to determine whether they apply to your unique circumstances. © 2014