2018 Appraisal FAQ 8 – Does a financial institution always need to obtain a new appraisal or evaluation for a renewal of an existing loan at the financial institution …?

Compliance > Lending > Appraisal Regulations & Interagency Stmt.
Q:  Does a financial institution always need to obtain a new appraisal or evaluation for a renewal of an existing loan at the financial institution, particularly where the property is located in a market that has not changed materially? 
 
A:   No.  A financial institution may use an existing appraisal or evaluation to support the renewal of an existing loan at the financial institution when the market value conclusion within the appraisal or evaluation remains valid.  
 
Validating the market value conclusion of the real property is a fact-specific determination, based on market conditions, property condition, and nature of the transaction.  As described in the Valuation Guidelines,28 a financial institution should establish criteria for validating an existing appraisal or evaluation in its written valuation policies.  The criteria should consider factors that could impact the market value conclusion in the existing appraisal or evaluation, such as: the volatility of the local market; changes in terms and availability of financing; natural disasters; supply of competing properties; improvements to the subject or competing properties; lack of maintenance on the subject or competing properties; changes in underlying economic and market assumptions, such as capitalization rates and lease terms; changes in zoning, building materials, or technology; environmental contamination; and the passage of time.29  Regarding this last factor, there is no provision in the agencies’ appraisal regulations specifying the useful life of an appraisal or evaluation.  
 
The financial institution must also consider whether an appraisal or an evaluation is required for the transaction.  The agencies’ appraisal regulations require an evaluation for transactions involving an existing extension of credit at the financial institution when either (1) there has been no obvious and material change in market conditions or physical aspects of the property that threatens the adequacy of the real estate collateral protection after the transaction, even with the advancement of new money, or (2) there is no advancement of new money, other than funds necessary to cover reasonable closing costs.30  Alternatively, a financial institution could choose to obtain an appraisal, although only an evaluation is required.  For example, an institution may choose to obtain an appraisal to achieve a higher level of risk management or to conform to internal policies.  
 
In the context of renewal transactions, whether there has been a material change in market conditions may affect both whether an appraisal or evaluation is required and whether an existing appraisal or evaluation remains valid.  A financial institution can assess whether there has been a “material change” in market conditions by considering the factors detailed above for validating an existing appraisal or evaluation.  When there has been an obvious and material change in market conditions or physical aspects of the property that threatens the adequacy of the real estate collateral protection, the existing appraisal or evaluation is no longer valid.  In such situations, if no new money is advanced, a financial institution must obtain a new evaluation, or may choose to satisfy the agencies’ appraisal regulations by obtaining a new appraisal.
 
However, if new money is advanced, a financial institution must obtain a new appraisal unless another exemption from the appraisal requirement applies.  Refer to the following examples.31
 
Example 1.  A financial institution originated a revolving line of credit for a specified term, and at the end of the term, renews the line for another specified term with no new money advanced.  The financial institution’s credit analysis concluded that there had been a material change in market conditions or the physical aspects of the property that threatened the adequacy of the real estate collateral protection.  Based on this conclusion, the financial institution could not validate an existing appraisal or evaluation to support the transaction.  The agencies’ appraisal regulations would require an evaluation, rather than an appraisal, because no new money was advanced, even though the financial institution concluded there is a threat to the adequacy of the collateral protection.  Alternatively, the financial institution could choose to obtain a new appraisal, although only an evaluation would be required.
 
Example 2.  A financial institution originated an ADC loan and, at maturity, renewed the loan and advanced new money that exceeded the original credit commitment.  The financial institution’s credit analysis concluded that a material change in market conditions or the physical aspects of the property threatened the adequacy of the real estate collateral protection.  Based on this conclusion, the financial institution could not validate an existing appraisal or evaluation to support the transaction.  The agencies’ appraisal regulations would require an appraisal to support the transaction, because the financial institution advanced new money and concluded there is a threat to the adequacy of the real estate collateral protection.
 
Example 3.  Consider the same scenario in Example 2 above; however, the financial institution’s credit analysis concluded that there had not been a material change in market conditions or physical aspects of the property that threatened the adequacy of the real estate collateral protection.  Based on this conclusion, the agencies’ appraisal regulations would require an appropriate evaluation to support the transaction.  The financial institution could use a valid existing evaluation or appraisal, or could choose to obtain a new evaluation to support the transaction.  Alternatively, a financial institution could choose to obtain a new appraisal, but a new appraisal would not be required.
 
Example 4.  A financial institution originated a balloon mortgage secured by a single family residential property.  At the end of the term, the financial institution renews the balance of the mortgage for another term, with no new money advanced.  The financial institution’s credit analysis concluded that there had not been a material change in market conditions or the physical aspects of the property that threatened the adequacy of the real estate collateral protection.  Based on this conclusion, the agencies’ appraisal regulations would require the financial institution to obtain an appropriate evaluation to support the transaction.  The financial institution could use a valid existing evaluation or appraisal, or could choose to obtain a new evaluation to support the transaction.  Alternatively, the financial institution could choose to obtain a new appraisal, although a new appraisal would not be required.
 
Financial institutions should consider the risk posed by transactions that do not require new appraisals or evaluations and may consider obtaining a new appraisal or evaluation based on the financial institution’s risk assessment.32  In addition, financial institutions making HPMLs must ensure compliance with the HPML Appraisal Rule.33
 
28 See Valuation Guidelines, section XIV.
29 Valuation Guidelines, section XIV.
30 See OCC: 12 CFR 34.43(a)(7) and (b); Board: 12 CFR 225.63(a)(7) and (b); and FDIC: 12 CFR 323.3(a)(7) and (b).
31 These examples assume no other exemption from the appraisal requirement applies.
32 See Valuation Guidelines, Appendix A, exemption 7. 
33 See OCC: 12 CFR 34.203(b)(7); Board, 12 CFR 226.43(b)(7); and BCFP: 12 CFR 1026.35(c)(2)(vii).  See also FHFA: 12 CFR 1222, subpart A.
 
ADDITIONAL INFORMATION:
This can be found in the 2018 “Frequently Asked Questions on Appraisal Regulations and the Interagency Appraisal and Evaluation Guidelines,” which may be found here:
https://www2.occ.gov/news-issuances/bulletins/2018/bulletin-2018-39a.pdf

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