The Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, Office of Thrift Supervision, and National Credit Union Administration (the agencies) are jointly issuing the attached statement on the independence of the collateral valuation process. The purpose of the statement is to serve as a reminder to regulated institutions that there needs to be an effective, independent real estate appraisal and evaluation program for all of their lending functions. This includes all real estate-related financial transactions originated or purchased by a regulated institution for its own portfolio or as assets held for sale. The statement should be reviewed in conjunction with each agency's appraisal and real estate lending regulations and the Interagency Appraisal and Evaluation Guidelines.1
The agencies' appraisal regulations address appraiser independence and require that an institution, or its agent, directly engage the appraiser. The only exception to this requirement is that an institution may use an appraisal prepared for another financial services institution, provided that the regulated institution determines that the appraisal conforms to the agencies' appraisal regulations and is otherwise acceptable. It is also important to ensure that the program is safeguarded from internal influence and interference from an institution's loan production staff. Individuals independent from the loan production area should oversee the selection of appraisers and individuals providing evaluation services.
To foster control and accountability, the agencies encourage a banking institution to use written engagement letters when ordering appraisals, especially for large, complex, or out-of-area commercial real estate properties. Even in small institutions when absolute lines of independence cannot be achieved, effective internal controls should be implemented to ensure that no single person has sole authority to render credit decisions involving loans on which they ordered or reviewed the appraisal or evaluation.
Reserve Banks are asked to distribute this SR letter and the attached statement to state member banks and bank holding companies in their districts and to appropriate supervisory staff. Questions concerning the statement and the Board's appraisal regulation may be directed to Virginia Gibbs, Senior Supervisory Financial Analyst, at 202/452-2521.