FIRREA, the Financial Institutions Reform Recovery Enforcement Act of 1989, Title XI, included the requirement for institutions engaging in federally related transactions to obtain an appraisal of the real estate asset to be used as collateral for the transaction. This requirement is found in §1110. Functions of Federal Financial Institutions Regulatory Agencies Relating to Appraisal Standards [12U.S.C. 3339] which states, “Each Federal financial institutions regulatory agency and the Resolution Trust Corporation shall prescribe appropriate standards for the performance of real estate appraisals in connection with federally related transactions under the jurisdiction of each such agency or instrumentality. These rules shall require, at a minimum –
- That real estate appraisals be performed in accordance with generally accepted appraisal standards as evidenced by the appraisal standards promulgated by the Appraisal Standards Board of the Appraisal Foundation; and
- That such appraisals shall be written appraisals. Each such agency or instrumentality may require compliance with additional standards if it makes a determination in writing that such additional standards are required in order to properly carry out its statutory responsibilities.”
In October 2010, with the passage of the Dodd-Frank Act, a third provision was added to Title XI §110.
- And that such appraisals shall be subject to appropriate review for compliance with the Uniform Standards of Professional Appraisal Practice.
Five years later confusion still exists within the industry as to what would constitute “appropriate review”.
In Q1, 2016, I will be conducting a webinar on this topic for Allterra Online and am providing a preview of that webinar for the benefit of the Appraisal Buzz readers.
Also, in 2014, I developed a 7- hour on-line review course that was approved by the AQB and is still available through Allterra Online. Some of the content of that 7- hour course is incorporated into the review webinar and discussed here today as well.
Using the requirements specifically referenced in FIRREA Title XI as the basis for the discussion my webinar includes three questions whose answers should provide clarity relating to the term REVIEW within the context of federally related transactions:
- The first question is What is a Review?
- The second question is Who Completes Them?
- The third question is When Are They Required?
This Buzz article is focused on the answer to the first question – What is a Review?
Within the context of FIRREA Title XI, a Review relates to the determination of compliance with USPAP. Such a validation of compliance would therefore be conducted within the guidelines of USPAP Standard 3, which contains very specific development and communication requirements for reviewers to adhere to and would exclude QC check lists or sole reliance upon an automated rule set such as GAAR utilized in most appraisal form software. Or, if using the GSE Collateral Underwriter software, the results generated by CU.
Also, if the review is conducted in compliance with USPAP Standard 3 – Standard 3 applies to an “appraiser, acting as a reviewer”, which eliminates reviews completed by underwriters, administrative staff of a lender or, a third party vendor, such as an Appraisal Management Company.
If an institution were to develop a review program outside of USPAP Standard 3, the Agencies have been very clear in previous communications that anyone conducting a review must have the same level of experience and knowledge as the appraiser whose report is being reviewed.
The Interagency Appraisal and Evaluation Guidelines, published in 2010, contain specific requirements relating to reviewing appraisals and evaluations.
Within the Guidelines, Title XV- Reviewing Appraisals and Evaluations, states, “As part of the credit approval process and prior to a final credit decision, an institution should review appraisals and evaluations to ensure that they comply with the Agencies appraisal regulations and are consistent with the supervisory guidance and its own internal policies.”
It goes on to state “This review also should ensure that an appraisal or evaluation contains sufficient information and analysis to support the decision to engage in the transaction.“
“Through the review process, the institution should be able to assess the reasonableness of the appraisal or evaluation, including whether the valuation methods, assumptions, and data sources are appropriate and well supported “.
The operative words in those previous statements are bold for emphasis.
As evidenced by the specific language within Title XV, an institution must engage in a review that is sufficient to ensure that the appraisal or evaluation comply with appraisal regulations. They must also ensure the appraisal or evaluation contains sufficient information and analysis to support the credit decision.
The review must also be sufficient in scope to determine the reasonableness of the appraisal or evaluation and whether the valuation methods, assumptions and data sources are appropriate and well supported.
USPAP Compliant Review is referenced within the Guidelines, discussing the inability to resolve deficiencies with the appraiser or person who performed the evaluation when it states:
“Though a reviewer cannot change the value conclusion in the original appraisal, an appraisal review performed by an appropriately qualified and competent state certified or licensed appraiser in accordance with USPAP may result in a second opinion of market value…. And the institution may rely on the second opinion of market value obtained through an acceptable USPAP-compliant appraisal review to support its credit decision”.
So in summary, when we are talking about a review, we are referring to the big R, commonly referred to as a “technical review” in contrast to an “administrative review” or QC checklist. Although many are referred to as QC Reviews, most are not sufficient in context, data and, analysis to meet the interagency requirements contained within the guidelines.
This topic will be covered in greater detail in my upcoming webinar, as well as the answers to questions 2 and 3 – who completes them and when are they required.
See you in 2016.