Appraisal Reviews

Real Estate Appraisal Reviews Are Important to Safe Banking

Financial institutions must have an effective, independent real estate
appraisal and evaluation program.  This sort of program, which ensures
the independence of the collateral valuation process, maintains safe
and sound banking practices.

An institution’s appraisal and evaluation review function should be
independent from the loan production process.  Further staff
conducting the reviews should have the knowledge and expertise to
assess compliance with the Federal Reserve’s appraisal regulations and
guidelines.  Though all appraisals need to be reviewed for compliance
with appraisal regulations, guidelines and professional standards, the
stringency of the review of a particular appraisal or evaluation
should increase as loan size or the property complexity increases.

Internal Reviews Crucial

Internal review should determine whether the appraisal or evaluation
is appropriate for the transaction, the risk of the transaction, and
whether the process by which the collateral valuation is obtained
ensures independence and quality.

Internal reviews should also indicate whether the appraisal or
evaluation report is consistent with the engagement letter, which sets
forth the scope of the appraisal assignment.  The review process also
provides an element of quality control for assessing the work of
appraisers and individuals who prepare evaluations.  Each individual
providing appraisals or evaluations would ideally have a sample of
valuations subject to periodic, in-depth monitoring regardless of the
transaction’s size or complexity.  The institution would use this
assessment to determine whether to retain the fee appraiser on its
approved appraiser list.

In certain instances, such as for commercial properties that pose
greater risk, a more detailed review should be conducted.  Some banks
supplement routine reviews with post-funding evaluations of appraisal
quality for some of their higher-risk or greater-value transactions as
a control to assist in detecting valuation problems.

Meeting The Requirements

At a minimum, a bank’s appraisal review policies and procedures should specify:

• The reviewer’s qualifications, including experience, education, training, and independence from the loan production function.
• The timing of reviews so that they are completed before credit decisions are made.
• The scope of the appraisal review, which will vary according to transaction type, risk, size, and complexity (however, the review must always be adequate to determine whether the appraisal is complete, the reported value reasonable, the appraiser’s techniques adequate and well supported).
• Standards for documenting the review and communicating findings, including processes for resolving inaccuracies, appraisal weaknesses, and ambiguities; rejecting appraisals; and referring potential fraudulent activity to the appropriate regulator.
• Relevant audit and control processes.