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Covering Your Bases - Parson
1.
EDR PRISM Conference Covering
your Bases – Examiner’s Viewpoint May 2, 2017 Robert L. Parson Valuation Management Compliance LLC © Copyright 2017 Robert L. Parson. All Rights Reserved 1
2.
Foundation Documents (OCC): 1)
12 CFR Part 34 (Appraisal Regulation) 2) OCC 2010-42: Interagency Appraisal and Evaluation Guidelines – December 10, 2010 1) Rescinded: 1) OCC 94-55: Interagency Appraisal and Evaluation Guidelines 2) AL 2003-09: Independent Appraisal and Evaluation Functions 3) OCC 2006-27: 2006 Revisions to USPAP 3) OCC 2011-12: Risk Modeling-Model Validation – April 4, 2011 4) OCC 2013-29: Third-Party Relationships – October 30, 2013 5) OCC 2005-6: Frequently Asked Questions on the Appraisal Regulations and the Interagency Statement on Independent Appraisal and Evaluation Function – March 22, 2005 6) OCC 2005-22: Credit Risk Management Guidance for Home Equity Lending – May 16, 2005 7) OCC 2005-32: Frequently Asked Questions on Residential Tract Development Lending – September 8, 2005 © Copyright 2017 Robert L. Parson. All Rights Reserved 2
3.
Overarching Principle: Competency Title
XI: FIRREA State credential does not connote competency • State licensure or certification is a necessary prerequisite, but not sufficient. • 34.46 (b) … a State certified or licensed appraiser may not be considered competent solely by virtue of being certified or licensed.Any determination of competency shall be based upon the individual’s experience and educational background as they relate to the particular appraisal assignment for which he or she is being considered. © Copyright 2017 Robert L. Parson. All Rights Reserved 3
4.
Parson’s Maxim #1: In
a bank appraisal and evaluation program: Nothing is more important than the selection and engagement process Overarching Principle:Appraisal Program © Copyright 2017 Robert L. Parson. All Rights Reserved 4
5.
Three “Valuation” Categories Anchored
in Not Appraisal Regulation Appraisal Evaluation Other © Copyright 2017 Robert L. Parson. All Rights Reserved 5
6.
1990: Each Regulatory
Agency published a Real Estate Appraisal Rule 1994: Interagency (FFIEC process) joint Real Estate Appraisal Rule (current Rule) Appraisals and Evaluations © Copyright 2017 Robert L. Parson. All Rights Reserved 6
7.
Start with request
Letter • Policy (Policies) • Single Policy • Policy Cascade • Often out of date • Procedures • Practices (onsite) ValuationTarget Exams © Copyright 2017 Robert L. Parson. All Rights Reserved 7
8.
Target Exam Areas
of Concern 1) Selection and Engagement Process 2) Competency 3) Independence 4) When is a valuation “stale”? 5) SubsequentTransactions 6) Business Loan Exemption © Copyright 2017 Robert L. Parson. All Rights Reserved 8
9.
Target Exam Areas
of Concern (cont’d) 7) Managing the appraisal threshold 8) Evaluations 9) Appraisal and Evaluation Reviews • Not “one size fits all” • “sufficient information and analysis” • Who? 10) Concentrations (how to Close a Bank) 11) Operational Risk: people/systems --technology 12) Find the “Holes” – active risk management 13) Documentation, documentation, documentation © Copyright 2017 Robert L. Parson. All Rights Reserved 9
10.
1) Selection and
Engagement Process 2) Competency 3) Independence 4)When is a valuation “stale”? Who is Driving theTrain? •Governance •Authority •Independence •Personnel •Qualifications •Competence © Copyright 2017 Robert L. Parson. All Rights Reserved 10
11.
5) SubsequentTransactions (Simplified
DecisionTree): New Funds? •NO: Evaluation Allowable •YES: Need to ask 2 more questions: •Change in General Market Conditions? • YES: Appraisal Required • NO: GoTo NextQuestion •Change in Physical Aspects of the Property? • YES: Appraisal Required • NO: See Bottom Line •Bottom Line: If A Change in Either Physical Aspects or General Market Conditions, or Both: Appraisal Required •If No Change in Either: Evaluation Allowable •BE SURE to document the file re: decision © Copyright 2017 Robert L. Parson. All Rights Reserved 11
12.
6) Business Loan
Exemption •The transaction is a business loan that: •(i) Has a transaction value of $1 million or less; and •(ii) Is not dependent on the sale of, or rental income derived from,real estate as the primary source of repayment; Notice the comma (in red) Notice that it is a comma, not the word “the” •“real estate” as an asset class, not “the” collateral © Copyright 2017 Robert L. Parson. All Rights Reserved 12
13.
7) Managing the
AppraisalThreshold •EGRPRA Report to Congress: (FFIEC Docket No. FFIEC- 2017-0001, Federal Register/Vol. 82,No. 60/Thursday, March 30, 2017) •Proposing raising commercial loan threshold from $250,000 to $400,000 Who decides when an evaluation is performed? What is an Evaluation? © Copyright 2017 Robert L. Parson. All Rights Reserved 13
14.
8) Evaluations 1990 OCC
Appraisal Regulation – Any transaction for which a State certified or licensed appraiser is not required, nevertheless must have an appropriate evaluation of real property collateral consistent with the OCCs Guidelines for Real Estate Appraisal Policies and Review Procedures (Banking Circular 225). OCC Appraisal Regulation was published on August 24, 1990 Banking Circular 225 was published on 12/21/1987 © Copyright 2017 Robert L. Parson. All Rights Reserved 14
15.
Evaluations BC 225 © Copyright
2017 Robert L. Parson. All Rights Reserved 15
16.
Evaluations BC 225 (REV)
9/28/1992 – As with an appraisal, an evaluation is an integral part of the decision-making process. – An evaluation need not meet all of the detailed requirements of an appraisal…however file documentation should support the estimate of value and include sufficient information to allow an individual to fully understand the evaluator’s analysis – The evaluation should include the evaluator's calculations, supporting assumptions for the estimate of value, and, if utilized, a discussion of comparable property values. © Copyright 2017 Robert L. Parson. All Rights Reserved 16
17.
2010-42: Evaluation Development A
valuation method that does not provide a property’s market value or sufficient information and analysis to support the value conclusion is not acceptable as an evaluation. © Copyright 2017 Robert L. Parson. All Rights Reserved 17
18.
Evaluation concepts a) Start
at the beginning: i. Competency requirements for the preparer (who) ii. Evaluation analysis – (no shortcuts): • Can’t “assume” normative property condition • Can’t ignore neighborhood and other factors that affect value iii. must consider (elements that impact market value): • Actual physical condition of property • Market and other factors that affect value (on and off-site) • Inspection? If no inspection, how are these property and market conditions known and considered © Copyright 2017 Robert L. Parson. All Rights Reserved 18
19.
Evaluation Scenario: Market
Value 1) FIRST and FOREMOST driven by WHO: a) Experience relevant to type of property being valued b) Education/Background (appraisal or collateral valuation) c) Competency d) Independence e) Capability of rendering an unbiased opinion © Copyright 2017 Robert L. Parson. All Rights Reserved 19
20.
Next Concept SO what
is an acceptable form for an evaluation? Is this form OK? © Copyright 2017 Robert L. Parson. All Rights Reserved 20
21.
Credible Evaluations Focus on
a FORM is inappropriate: • A form isn’t competent • A form doesn’t have any experience • A form does not have any background in subject matter • A form doesn’t have market knowledge • A form cannot apply judgment • Beware of any vendor who makes claims to you that a federal banking regulatory agency endorses or approves “our form” © Copyright 2017 Robert L. Parson. All Rights Reserved 21
22.
Central Concept Parson’s Maxim
#3: Evaluation is a Process, not a Form © Copyright 2017 Robert L. Parson. All Rights Reserved 22
23.
Credible Evaluations • A
recipe is only successful when the ingredients are gathered and combined in a logical manner, by someone who has the knowledge, background and skills to understand food chemistry. • An evaluation is only successful when the data are gathered and combined in a logical manner by someone who has the knowledge, background and skills to understand valuation theory and practice. © Copyright 2017 Robert L. Parson. All Rights Reserved 23
24.
Evaluations May 18, 2017:
Appraisal Foundation Webinar: Using Restricted Appraisal Reports in your practice. 1:00 to 2:00 Eastern. Maggie Hambleton, Chair, ASB and John Brenan, Director of Appraisal Issues (no fee)(www.appraisalfoundation.org) June 28, 2017: Follow up webinar: Deep Dive into “Evaluations” Planned Webinar: Robert Parson and John Brennan (small fee) © Copyright 2017 Robert L. Parson. All Rights Reserved 24
25.
9) Reviewing Appraisals
and Evaluations: “An institution should establish qualification criteria for persons who are eligible to review appraisals and evaluations.” “Reviewers also should possess the requisite education, expertise, and competence to perform the review commensurate with the complexity of the transaction, type of real property, and market. Further, reviewers should be capable of assessing whether the appraisal or evaluation contains sufficient information and analysis to support the institution’s decision to engage in the transaction.” (Federal Register Vol. 75, No. 60/Friday, December 10, 2010 p. 77462) © Copyright 2017 Robert L. Parson. All Rights Reserved 25
26.
Central Concept Parson’s Maxim
#4: Review is a Process, not a Form © Copyright 2017 Robert L. Parson. All Rights Reserved 26
27.
© Copyright 2017
Robert L. Parson. All Rights Reserved 27 10) Concentrations
28.
Questions ? QUESTIONS ? rparson@valmanco.com (571)
420-3240 © Copyright 2017 Robert L. Parson. All Rights Reserved 28
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