Bank is considering participating in a loan from another bank. Does the exemption from the appraisal requirements in the Interagency Appraisal and Evaluation Guidelines for "Transactions Involving Real Estate Notes" apply to participations?

The short answer IMO is yes. That section of the guidelines speak more to MBSs and mortgages originated according to secondary market standards - however, it still applies to participations in individual loans.

The important thing is that when you purchase a participation, you must verify that the loan met the appraisal requirements at the time it was made - but you do not need to obtain another appraisal. Unless of course you feel that it would be prudent for underwriting purposes to have the lead bank conduct another appraisal before you participate. Note that you have to underwrite participations in the same way you would underwrite them if you were making the loan at your bank. See Appendix E of the Loan Portfolio Management handbook if you are an OCC bank. If you are an FDIC bank, see the lending section of the FDIC Examination Manual.

We have a participation in a non-consumer collateral dependent loan we bought from another bank. The lead bank has asked us to renew the loan as an accruing TDR. They want to do this using a Fair Market Value DCF analysis that the lead bank says has been reviewed by their Accountants and by the FDIC who recently completed their exam of the Bank. The FDIC hasn’t had the exit meeting yet but the lead bank tells us FDIC and and the accountants have signed off on this loan without a new appraisal and it’s considered a collateral dependent loan. Our examiners said previously we would have to have an appraisal done when we “touch “ this loan. The lead bank is adamant about not getting a new appraisal and told us not to contact the customer.

We'd like someone to opine on our ability to accept the lead Banks methodology for valuing the credit and thus not obtaining an new appraisal? Anyone have a response, or know a good resource for the answer? Hard to find TDR and loan participation in same guidance... Thanks.

In my opinion the fact that the loan is a participation doesn't matter. Your bank should still go into/continue with the loan the same as any other. The 2010 Guidance should be able to help you. If you look at the Guidance it appears to me that you would need to determine if the Fair Market Value DCF analysis conforms to the requirements below:

C. Modifications and Workouts of Existing Credits

An institution may find it appropriate to modify a loan or to engage in a workout with an existing borrower. The Agencies expect an institution to consider current collateral valuation information to assess its collateral risk and facilitate an informed decision on whether to engage in a modification or workout of an existing real estate credit. (See the discussion above on Portfolio Collateral Risk.)

• Loan Modifications. A loan modification to an existing credit that involves a limited change(s)34 in the terms of the note or loan agreement and that does not adversely affect the institution’s real estate collateral protection after the modification does not rise to the level of a new real estate-related financial transaction for purposes of the Agencies’ appraisal regulations. As a result, an institution would not be required to obtain either a new appraisal or evaluation to comply with the Agencies’ appraisal regulations, but should have an understanding of its collateral risk. For example, institutions can use automated valuation models or other valuation techniques when considering a modification to a residential mortgage loan. An institution should have procedures for ensuring an alternative collateral valuation method provides reliable information. In addition, an institution should be able to demonstrate that a modification reflects prudent underwriting standards and is consistent with safe and sound lending practices. Examiners will assess the adequacy of valuation information an institution uses for loan modifications.

• Loan Workouts. As noted under “Monitoring Collateral Values,” an institution’s policies and procedures should address the need for current information on the value of real estate collateral supporting a loan workout. A loan workout can take many forms, including a modification that adversely affects the institution’s real estate collateral protection after the modification, a renewal or extension of loan terms, the advancement of new monies, or a restructuring with or without concessions. These types of loan workouts are new real estate-related financial transactions.

If the loan workout does not include the advancement of new monies other than reasonable closing costs, the institution may obtain an evaluation in lieu of an appraisal. For loan workouts that involve the advancement of new monies, an institution may obtain an evaluation in lieu of an appraisal provided there has been no obvious and material change in market conditions and no change in the physical aspects of the property that threatens the adequacy of the institution’s real estate collateral protection after the workout. In these cases, an institution should support and document its rationale for using this exemption. An institution must obtain an appraisal when a loan workout involves the advancement of new monies and there is an obvious and material change in either market conditions or physical aspects of the property, or both, that threatens the adequacy of the institution’s real estate collateral protection after the workout (unless another exemption applies)36. (See also Appendix A, Appraisal Exemptions, for transactions where an evaluation would be allowed in lieu of an appraisal.)

• Collateral Valuation Policies for Modifications and Workouts. An institution’s policies should address the need for obtaining current collateral valuation information for a loan modification or workout. The policies should specify the valuation method to be used and address the need to monitor collateral risk on an ongoing basis taking into consideration changing market conditions and the borrower’s repayment performance. An institution also should be able to demonstrate that the collateral valuation method used is reliable for a given credit or loan type.

Further, for loan workouts, an institution’s policies should specify conditions under which an appraisal or evaluation will be obtained. As loan repayment becomes more dependent on the sale of collateral, an institution’s policies should address the need to obtain an appraisal or evaluation for safety and soundness reasons even though one is not otherwise required by the Agencies' appraisal regulations.