Covering your bases parson

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

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1) Rescinded: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

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.

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

Three “Valuation” Categories
Anchored in Not
Appraisal Regulation
Appraisal
Evaluation
Other

1990: Each Regulatory Agency
published a Real Estate Appraisal
Rule
1994: Interagency (FFIEC process)
joint Real Estate Appraisal Rule
(current Rule)
Appraisals and Evaluations

Start with request Letter
• Policy (Policies)
• Single Policy
• Policy Cascade
• Often out of date
• Procedures
• Practices (onsite)
ValuationTarget Exams

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

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

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

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

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

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?

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

Evaluations
BC 225

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.

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.

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

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

Next Concept
SO what is an acceptable form for an
evaluation?
Is this form OK?

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”

Central Concept
Evaluation is a Process, not a Form

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.

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)

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)

Central Concept
Review is a Process, not a Form

10) Concentrations

Questions ?
QUESTIONS ?
rparson@valmanco.com
(571) 420-3240

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