Banking Agencies Issue Advisory Regarding Use of Evaluations in Certain Real Estate Transactions

The Board of Governors of the Federal Reserve System, the FDIC and the Office of the Comptroller of the Currency ("OCC") (collectively, "the agencies") issued an advisory to clarify expectations for the use of property evaluations by banking institutions. The advisory describes the agencies' existing supervisory expectations for using an evaluation instead of an appraisal to estimate the market value of real property securing real estate-related financial transactions. The agencies sent this advisory and the Interagency Appraisal and Evaluation Guidelines in a letter to the Federal Reserve Banks.

The agencies pointed out to the financial institutions that the following transaction types do not require an appraisal, but do require an evaluation:

• transactions where the "transaction value" (generally the loan amount) is $250,000 or less;
• certain renewals, refinances or other transactions involving existing extensions of credit; and
• real estate-secured business loans with a transaction value of $1,000,000 or less and when the sale of, or rental income derived from, real estate is not the primary source of repayment for the loan.

In addition, the advisory reminded financial institutions: (i) that preparers of an evaluation may be internal bank employees or third parties that are knowledgeable, competent and independent of the transaction; (ii) of the three valuation methods commonly used for developing a market value conclusion (the sales comparison approach, the cost approach, and the income approach); and (iii) that regardless of the valuation method used, an evaluation should contain sufficient information to support the value conclusion.