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Covering your bases parson

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Covering your bases parson

  1. 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. 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Part 34 (Appraisal Regulation) 2) OCC 2010-42: Interagency Appraisal and Evaluation Guidelines – December 10, 2010 1) Rescinded: 1) OCC 94-55: Interagency Appraisal and Evaluation Guidelines 2) AL 2003-09: Independent Appraisal and Evaluation Functions 3) OCC 2006-27: 2006 Revisions to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. 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. 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. 5. Three “Valuation” Categories Anchored in Not Appraisal Regulation Appraisal Evaluation Other © Copyright 2017 Robert L. Parson. All Rights Reserved 5
  6. 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. 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. 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. 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. 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. 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. 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. 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. 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. 15. Evaluations BC 225 © Copyright 2017 Robert L. Parson. All Rights Reserved 15
  16. 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. 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. 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. 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. 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. 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. 22. Central Concept Parson’s Maxim #3: Evaluation is a Process, not a Form © Copyright 2017 Robert L. Parson. All Rights Reserved 22
  23. 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. 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. 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. 26. Central Concept Parson’s Maxim #4: Review is a Process, not a Form © Copyright 2017 Robert L. Parson. All Rights Reserved 26
  27. 27. © Copyright 2017 Robert L. Parson. All Rights Reserved 27 10) Concentrations
  28. 28. Questions ? QUESTIONS ? rparson@valmanco.com (571) 420-3240 © Copyright 2017 Robert L. Parson. All Rights Reserved 28

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