Q: Why does a financial institution need a program for establishing the market value of real property?
A: Financial institutions should have a program for valuing real property to ensure they are engaging in real estate-related lending in a safe and sound manner and in compliance with Title XI and the agencies’ appraisal regulations.8
Lending secured by real estate is a large part of many financial institutions’ business plans and is important to the communities served by those institutions. Lessons learned from past crises have shown that poorly managed real estate lending programs, including the failure to properly value real estate that secures transactions, can result in higher loan losses, reduced profitability, and bank failures.
In light of these problems, Congress adopted Title XI,9 requiring financial institutions to obtain appraisals prepared by state-certified or state-licensed appraisers for all federally related transactions (FRTs)10 and requiring the agencies to issue regulations relating to such appraisals.11
Congress expanded Title XI and adopted new provisions relating to appraisals in the Dodd-Frank Act after the 2008 financial crisis.
8 Financial institutions should also have a program for establishing the market value of real property to comply with the real estate lending standards, which require financial institutions to determine the value used in loan-to-value calculations based in part on a value set forth in an appraisal or an evaluation. OCC: 12 CFR Part 34, subpart D, Appendix A; Board: 12 CFR 208, subpart E, Appendix C; and FDIC: 12 CFR Part 365, subpart A, Appendix A.
9 12 U.S.C. §§ 3331 et seq.
10 12 U.S.C. § 3349. See 12 U.S.C. § 3350(4) for the Title XI definition of “federally related transaction.”
11 12 U.S.C. § 3339.