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Appraisal Problems Noted
by Mary Beth Guard
FDIC has taken the lead in informing banks of concerns that some appraisers are not following Uniform Standards of Professional Appraisal Practice (USPAP) for federally related transactions. Areas of concern include appraisals for commercial real estate properties and residential tract development projects, appraisal reviews, and appraiser independence.
Bankers are urged to review the recently released Appraisal Standards Statement No.10, "Assignments for Use by a Federally Insured Depository Institution in a Federally Related Transaction."
Unreliable appraisals, which were widely blamed for many real estate loan losses during the 1980s, led to the laws requiring the use of certified or licensed appraisers for federally related transactions.
What is your bank's role?
- Your internal controls must promote compliance with your federal regulator's appraisal regulations and guidelines and industry appraisal standards;
- Your internal controls should ensure that you engage only competent and ethical appraisers;
- If you find that a state-licensed or state-certified appraiser violates USPAP or applicable laws, or engages in unethical or unprofessional conduct, you should make a referral to the appropriate state appraiser regulatory authority.
Appraisals are to be reviewed and relied upon in connection with federally related transactions. Do not simply view obtaining an appraisal as a checklist requirement that ends when you receive the document. The appraisal should play an integral role in your underwriting decision. To ensure the appraisals you receive are reliable and comply with the guidelines, they should be periodically reviewed by a compliance professional. Special attention should be given to the following appraisal compliance issues highlighted by Appraisal Standards No. 10:
Appraiser independence issues
- Relationships with borrowers
- Altering reports to mislead the reader
Departure issues-misusing the departure rule
- Insufficiently supporting an opinion of value
- Failing to clearly identify and explain reasons for departure
- Omitting an approach to value that typical practice and peers would require
- Failing to obtain client's concurrence in the use of departure
Using hypothetical conditions
- Failing to disclose known facts concerning the property being appraised
- Failing to indicate the "as is" value of the property as of the date of the report and how the "as is" value differs from the value conclusion under a hypothetical condition
Analysis issues
- Failing to adequately address real estate market risk (trends)
- Using comparable sales transactions that are not arm's length
- Reporting the sum of retail values of units in a tract development project as market value
- Using non-market-based time constraints when applying deductions and discounts
- Providing an undiscounted value conclusion to an institution; and failing to report appropriate deductions and discounts for a tract development appraisal
- Failing to analyze a current agreement of sale, option, or listing of the property being appraised; and failing to identify and analyze all prior sales of the subject property (within required time frames), which may facilitate "land flip" deals
Appraisal review issues
- Changing the market value opinion in the appraisal report without adequate support
- Failing to meet minimum USPAP reporting requirements in an appraisal review report
First published on BankersOnline.com 7/23/01
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