Help! Our external auditors have recently been in and strongly recommended that we make changes to our Real Estate Appraisal Policy, citing the OCC Advisory Letter dated October 2003 on independence in the process. We have always believed that we fell under the exception for small institutions, and have structured our policy to read that loan officers can order and review appraisals, as long as they are not involved in the approval. Our auditors have clamied that we would not qualify as a small institution, and have recommended that we turn this process over to an independent person with real estate experience, which we don't have. We are a $200 million bank. Has anyone else run into this issue, or are we seriously behind the times???

For the record, I would think of you as a small bank. If your reviewing loan officer plays no part in the approval process, then it appears from your post that you are doing the best you can and in keeping with the advisory. In a perfect world, the auditor's recommendations are good ones...they may just be doing a little CYA? Once in awhile, however, common sense must come into play (IMHO)

Common sense...in banking...that must be where the name Joker comes from. Thanks for your reply. That has been my opinion all along. Unfortunatetly the auditors have excited the Board, and now I'm scrambling to support our policy. By the way, any thoughts on in-house evaluations of real estate??

Evaluations tend to be fairly inexpensive. It's likely that you don't have access to the latest comp data if you're a small bank.

You may want to explore going with the flow - at $200 million depending what your R/E volumes are - we picked up an in-house licensed appraiser to do all ordering and appraisal reviews and some in-house evaluations and continued to charge the normal fees and about broke even. They reported up through the CFO to keep them separated from the loan production and underwriting division.

My bank also recently picked up an in-house appraiser to run a newly formed appraisal dept. He essentially acts as chief appraiser and manages all of the appraisal functions (both residential and commercial). While he doesn't do the actual appraisals, he does all of the ordering and reviews the larger commercial deals. It's actually a relief to have someone on staff who we can turn to for valuation advice.

Anon:
Wait until the commercial lending folks start to disagree and start screaming they can't do their job because of this uncontrolable, overly conservative, uncooperative idiot in the appraisal department. The honeymoon is over at that point. The appraiser will be as loved as loan review, audit and compliance.

That's why we hired this nice gentleman that was 6'5" and 280lbs. There wasn't a whole lot of screaming going on by the whimpy CLOs

Don: I never said that the loan officers are happy with the new hire. But those of us in credit risk are finding the position a nice addition to staff. Loan officers only want cheap, fast and "hit the number" appraisals. It's about time that someone's here seeking quality.

Can I assume then that most of you don't recommend branch managers and loan officers doing evaluations for their own loans (no approval authority). We have no one with real estate experience and likely wouldn't hire anyone. We have altered our policy several times, and as much as begged them to order outside appraisals on several occassions, but 'fast' and 'cheap' seems to win-out.

If the "bubble" bursts one of these days, you're going to realize that having inexperienced loan officers evaluating real estate was a costly cost. It's scary enough to think of what could happen if you're basing your lending risk on quality appraisals, not alone if risk is based on unsound evaluation practices. An option to weigh...an appraisal department now, or an reo department later.