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1
EDR’s PRISM Conference
Thursday, May 9, 2019
Nashville, TN
Richard G. Rawson, MAI
Principal Owner
VRC Advisors, LLC
Valu...
This presentation represents the personal
experiences, opinions, and understandings of
the presenter and is not considered...
 Note: This presentation cites FDIC’s laws,
regulations, and guidance. The OCC, FRB,
and NCUA generally have correspondin...
 Discuss Hot Topics and Red Flags
◦ EGRPRA (The Economic Growth and
Regulatory Paperwork Reduction Act of
1996)
◦ Recent ...
 9/17/2018 Interagency Statement (FDIC FIL-49-
2018)
 Differences clarified between supervisory guidance and
laws or reg...
 10/16/2018 Interagency FAQ release
 See FDIC’s FIL-62-2018 “Frequently Asked
Question on the Appraisal Regulations and ...
 Provide Management and Board with
Information to Assess CRE Lending Strategy
 Important When Considering New Markets
 ...
 DSCR
 LTV and Cap Rates
 Property NOI
 Collateral value depreciation (regional or local)
 CRE sector performance
 I...
Fall of 2018 real estate loan reviews have
found market derived cap rates as low as
1.03%
Mixed-use properties, apartmen...
Example: Property NOI: $100,000.00
@ 4.0% cap rate = $2.5 million vs.
@ 4.5% cap rate = $2.22 million
or 11.1% value decli...
Debt Coverage Formula:
R(o) = DSCR x R(m) x M
where
R(o) = Overall Cap Rate
DSCR = Debt service coverage ratio
R(m) = inte...
Example:
For a property with an NOI of $50,000 and
annual debt service of $44,525, the DSCR is:
DSCR = $50,000/44,525
= 1....
In the previous example, a concluded cap
rate of 5.47% would not support sale
extracted rates of 1% to 4%. Therefore, the
...
Neighborhood or area atypical demand
not reflected in regional surveys (if
present)
A higher level of verified sale comp...
 What is “Credible” in terms of an
analysis or results?
 Answer: The Scope of Work Rule
states: “Credible assignment res...
Definitions:
Assignment Results:
• Opinions or conclusions developed in
an appraisal assignment, not limited to
value;
-US...
 The appraised value is not all that is
needed. Does the report tell the
background story including valuation risk
factor...
 The identified intended use of the
appraisal requires the appraiser to
understand the type of the loan
transaction. As a...
 Extremely low cap rates may be an observed
fact in the market. Appraisers don’t create
them, they report them.
 However...
 Examiners will determine if the program
provides for completion of appraisals,
evaluations and reviews by those who are
...
21
©2019 VRC Advisors, LLC Valuation Regulatory Compliance
22
X Appraisal Policy Review (compliance with
regulations and policies.)
X Procedures Review (including forms and standard...
1. Reporting Structure / description of staff and #
of employees? Physical location in relation to loan
staff? Adequate re...
5. Ordering of Appraisals/ Evaluations Process?
Computer Tracking System for Valuation Requests?
Involvement by loan offic...
11. AVM usage, selection and validation.
12. Résumé / qualifications of those involved in
appraisals, evaluations, reviews...
18. Technical Quality vs. Administrative Reviews. Does
the bank regularly test the validity and
appropriateness of the dat...
©2019 VRC Advisors, LLC Valuation Regulatory Compliance
27
 Can a residential mortgage lending
department have its own policies and
procedures separate from those applicable
to com...
29
©2019 VRC Advisors, LLC Valuation Regulatory Compliance
30
©2019 VRC Advisors, LLC Valuation Regulatory Compliance
31
©2019 VRC Advisors, LLC Valuation Regulatory Compliance
32
©2019 VRC Advisors, LLC Valuation Regulatory Compliance
If the intended use is for financing or loan
impairment calculations, can an extraordinary
assumption be utilized for the ...
Points of consideration for establishing an in-
house resource:
• Size, program growth, complexity
• Audit/exam assistance...
Q = May a licensed appraiser perform a review on a
non-appraiser’s evaluation report?
A = Yes, but do not opine on aspects...
Q = Section XIV of the Interagency Appraisal and
Evaluation Guidelines refers to a bank validating an
appraisal. Must a li...
Q = May a bank create two separate loans
involving a single residential tract
development of four lots each and avoid
requ...
Q = Is a new evaluation required for
renewals, refinancings, and other
subsequent transactions?
A = Under some conditions—...
Q = What is a review of a review and
when is it required?
A = Lenders should test the quality of
the reviews they receive ...
 FIL-49-2018- Interagency Statement Clarifying the Role of
Supervisory Guidance
 FIL-62-2018, Appraisal Regulations: Fre...
 FIL-19-2015 – Minimum Requirements for Appraisal
Management Companies
 FIL-16-2016 – Supervisory Expectations for Evalu...
 Banks have Valuation Program responsibility
and oversight
 There are many risks to identify in CRE
concentrations—appra...
43
©2019 VRC Advisors, LLC Valuation Regulatory Compliance
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2019 prism bank examiner rawson pp

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PRISM Presentation 2019

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2019 prism bank examiner rawson pp

  1. 1. 1 EDR’s PRISM Conference Thursday, May 9, 2019 Nashville, TN Richard G. Rawson, MAI Principal Owner VRC Advisors, LLC Valuation Regulatory Compliance richard@vrca.us Cell (480)740-5090 © 2019 VRC Advisors, LLC
  2. 2. This presentation represents the personal experiences, opinions, and understandings of the presenter and is not considered to be endorsed by the FDIC, nor is it FDIC official directive, guidance, or policy. No reproduction or distribution is permitted without written permission by its author. Thank you ©2019 VRC Advisors, LLC Valuation Regulatory Compliance2
  3. 3.  Note: This presentation cites FDIC’s laws, regulations, and guidance. The OCC, FRB, and NCUA generally have corresponding sections of law found in the Code of Federal Regulations respectively. ©2019 VRC Advisors, LLC Valuation Regulatory Compliance 3
  4. 4.  Discuss Hot Topics and Red Flags ◦ EGRPRA (The Economic Growth and Regulatory Paperwork Reduction Act of 1996) ◦ Recent Exam Issues ◦ Valuation Program Exam Content ◦ Regulatory Resources ◦ Questions Answered ©2019 VRC Advisors, LLC Valuation Regulatory Compliance 4
  5. 5.  9/17/2018 Interagency Statement (FDIC FIL-49- 2018)  Differences clarified between supervisory guidance and laws or regulation  Examiners will no longer cite non-compliance with supervisory guidance.  Supervisory guidance will be used in ROE’s only when clarifying violations of laws or regulations. ©2019 VRC Advisors, LLC Valuation Regulatory Compliance 5
  6. 6.  10/16/2018 Interagency FAQ release  See FDIC’s FIL-62-2018 “Frequently Asked Question on the Appraisal Regulations and the Interagency Appraisal and Evaluation Guidelines”  23 Q&A’s- Topics include: Appraisal and Evaluation Programs, Appraisal Exemptions, Appraisals and Evaluations, and Independence ©2019 VRC Advisors, LLC Valuation Regulatory Compliance 6
  7. 7.  Provide Management and Board with Information to Assess CRE Lending Strategy  Important When Considering New Markets  Useful for Sensitivity Analysis and Stress Tests  Sources Include: ◦ Published Research Data ◦ Real Estate Appraisers ◦ Property Tax Assessors ◦ Local Contractors, Builders, and Investors ◦ Community Development Groups ©2019 VRC Advisors, LLC Valuation Regulatory Compliance 7
  8. 8.  DSCR  LTV and Cap Rates  Property NOI  Collateral value depreciation (regional or local)  CRE sector performance  Interest Rates (variable rate loans)  Refinancing and Repayment risk  Occupancy Status  Lease Rates  Absorption Rates (real estate developments)  Economic Factors ©2019 VRC Advisors, LLC Valuation Regulatory Compliance 8
  9. 9. Fall of 2018 real estate loan reviews have found market derived cap rates as low as 1.03% Mixed-use properties, apartments New York City, Los Angeles, San Francisco Actual sale-extracted rates often do not reflect regional surveys or band-of-investment techniques ©2019 VRC Advisors, LLC Valuation Regulatory Compliance 9
  10. 10. Example: Property NOI: $100,000.00 @ 4.0% cap rate = $2.5 million vs. @ 4.5% cap rate = $2.22 million or 11.1% value decline @ 2.0% cap rate = $5.0 million vs. @ 2.5% cap rate = $4.0 million or 20.0 % value decline @ 1.0% cap rate = $10.0 million vs. @ 1.5% cap rate = $6.67 million Or 33.3% value decline 1.5% versus 4.5% = 66.7% value decline ©2019 VRC Advisors, LLC Valuation Regulatory Compliance10
  11. 11. Debt Coverage Formula: R(o) = DSCR x R(m) x M where R(o) = Overall Cap Rate DSCR = Debt service coverage ratio R(m) = interest rate M = mortgage ratio (LTV) Note: Generally applicable to stabilized property ©2019 VRC Advisors, LLC Valuation Regulatory Compliance 11
  12. 12. Example: For a property with an NOI of $50,000 and annual debt service of $44,525, the DSCR is: DSCR = $50,000/44,525 = 1.123 If R(m) equals 0.065 and M is 0.75, R(o) is estimated as: R(o) = 1.123 x 0.065 x 0.75 = 0.0547 or 5.47% ©2019 VRC Advisors, LLC Valuation Regulatory Compliance 12
  13. 13. In the previous example, a concluded cap rate of 5.47% would not support sale extracted rates of 1% to 4%. Therefore, the appraiser should provide more detailed explanation which could include: Analysis and reporting of buyer motivation Property specifics justifying variance ©2019 VRC Advisors, LLC Valuation Regulatory Compliance 13
  14. 14. Neighborhood or area atypical demand not reflected in regional surveys (if present) A higher level of verified sale comp income and expenses Based on typical length of loans, a 5, 7, or 10-year cap rate historical trend analysis. Speed of rate increases and declines. Analysis of factors affecting rates. ©2019 VRC Advisors, LLC Valuation Regulatory Compliance 14
  15. 15.  What is “Credible” in terms of an analysis or results?  Answer: The Scope of Work Rule states: “Credible assignment results require support by relevant evidence and logic. The credibility of assignment results is always measured in the context of the intended use.” ©2019 VRC Advisors, LLC Valuation Regulatory Compliance 15
  16. 16. Definitions: Assignment Results: • Opinions or conclusions developed in an appraisal assignment, not limited to value; -USPAP 2018-2019 Edition © The Appraisal Foundation ©2019 VRC Advisors, LLC Valuation Regulatory Compliance 16
  17. 17.  The appraised value is not all that is needed. Does the report tell the background story including valuation risk factors?  If appraisers don’t understand loan underwriting concepts, how can they provide credible results with intended use for loan underwriting purposes? (Appraisers don’t need to know loan amount, but do need the loan term.) ©2019 VRC Advisors, LLC Valuation Regulatory Compliance 17
  18. 18.  The identified intended use of the appraisal requires the appraiser to understand the type of the loan transaction. As an example, the appraiser could provide a historical analysis of the concluded cap rate in an informative risk discussion applicable to the type and duration of the loan. ©2019 VRC Advisors, LLC Valuation Regulatory Compliance 18
  19. 19.  Extremely low cap rates may be an observed fact in the market. Appraisers don’t create them, they report them.  However, the appraiser must not only report them but analyze them.  What is credible analysis? The depth and detail of analyses depends on the significance. Credible results are measured in terms of their intended use. (USPAP) ©2019 VRC Advisors, LLC Valuation Regulatory Compliance 19
  20. 20.  Examiners will determine if the program provides for completion of appraisals, evaluations and reviews by those who are familiar with the appraisal regulations, and guidance and have appropriate training, experience, and are independent of the transaction.  Do non-appraiser (administrative) reviewers have USPAP training? Can they recognize a USPAP violation? ©2019 VRC Advisors, LLC Valuation Regulatory Compliance 20
  21. 21. 21 ©2019 VRC Advisors, LLC Valuation Regulatory Compliance
  22. 22. 22 X Appraisal Policy Review (compliance with regulations and policies.) X Procedures Review (including forms and standard engagement letters) X Determination of Independency of Valuation Function X Chief Appraiser/Valuation Department Interview X Staff Credentials/Qualifications Review X Approved Appraisers List Competency and Licensing Review X Valuation product sampling X Complaint referrals process, written policy and procedure, historical occurrences X HPML involvement and bank policy ©2019 VRC Advisors, LLC Valuation Regulatory Compliance
  23. 23. 1. Reporting Structure / description of staff and # of employees? Physical location in relation to loan staff? Adequate resources? Pressure to reach values? 2. What job responsibilities come with your position? Periodic credit monitoring, real estate sector analysis and reporting, environmental risk assessment? Special Assets and OREO? 3. Any other banks under the corporate banner and how they interact with valuation needs and policy? 4. Focus of real estate lending and concentrations? ©2019 VRC Advisors, LLC Valuation Regulatory Compliance 23
  24. 24. 5. Ordering of Appraisals/ Evaluations Process? Computer Tracking System for Valuation Requests? Involvement by loan officers? 6. Review process for Appraisals and Evaluations? Use of brokers opinion of value? 7. Third Party reports handling? 8. AMC usage and management? Written audits? 9. Who makes policy changes and recommendations? Are they qualified? 10. Number of residential and commercial appraisal and evaluation assignments per year and required associated reviews? ©2019 VRC Advisors, LLC Valuation Regulatory Compliance 24
  25. 25. 11. AVM usage, selection and validation. 12. Résumé / qualifications of those involved in appraisals, evaluations, reviews, ordering. 13. Complaint Referrals Made? Referral process in policy or procedure document? 14. Placement / removal / monitoring of “Approved Appraisers” list. 15. Participation Loans? Do they follow review guidelines? 16. Is borrower information and property information safeguarded, locked up after hours? 17. HPML involvement with written policy support? 25 ©2019 VRC Advisors, LLC Valuation Regulatory Compliance
  26. 26. 18. Technical Quality vs. Administrative Reviews. Does the bank regularly test the validity and appropriateness of the data used by the appraisers and evaluators? 19. Is there a policy for a reasonable level of site inspections as a part of the reviewer’s scope of work? Evidence of bumping up a “checklist review” to a higher quality review. 20. Is there an appraisal review and evaluation review audit program? Are the results in writing and available for inspection? ©2019 VRC Advisors, LLC Valuation Regulatory Compliance 26
  27. 27. ©2019 VRC Advisors, LLC Valuation Regulatory Compliance 27
  28. 28.  Can a residential mortgage lending department have its own policies and procedures separate from those applicable to commercial real estate lending? Generally yes, but it must be consistent with all applicable regulatory laws and guidance as well as the bank’s general appraisal policy. No contradictions. ©2019 VRC Advisors, LLC Valuation Regulatory Compliance 28
  29. 29. 29 ©2019 VRC Advisors, LLC Valuation Regulatory Compliance
  30. 30. 30 ©2019 VRC Advisors, LLC Valuation Regulatory Compliance
  31. 31. 31 ©2019 VRC Advisors, LLC Valuation Regulatory Compliance
  32. 32. 32 ©2019 VRC Advisors, LLC Valuation Regulatory Compliance
  33. 33. If the intended use is for financing or loan impairment calculations, can an extraordinary assumption be utilized for the OREO appraisal? Answer: Rarely. Be extremely careful in not misleading the bank with the true level of risk! 33 ©2019 VRC Advisors, LLC Valuation Regulatory Compliance
  34. 34. Points of consideration for establishing an in- house resource: • Size, program growth, complexity • Audit/exam assistance • Depth of review decisions • Policy and procedure changes • Report validity period determinations • Complaint Referrals • AMC oversight, property risk analysis • Costs 34 ©2019 VRC Advisors, LLC Valuation Regulatory Compliance
  35. 35. Q = May a licensed appraiser perform a review on a non-appraiser’s evaluation report? A = Yes, but do not opine on aspects of value and no USPAP certification statement needed. Otherwise compliance with USPAP Standard 1 and 2 may be required. However, some individual state laws preclude this allowance. Please verify with state. Q = What specific controls, oversight, actions, and resources are expected of the bank in monitoring AMC’s or third parties? A = Periodic assessment of valuation functions of the third party. File notes & call logs, email. 35 ©2019 VRC Advisors, LLC Valuation Regulatory Compliance
  36. 36. Q = Section XIV of the Interagency Appraisal and Evaluation Guidelines refers to a bank validating an appraisal. Must a licensed appraiser perform a validation for bank purposes? A = No. The question, as phrased, reflects a misunderstanding of this concept. A bank’s continued use of an appraisal does not require an appraiser’s validation. It requires an assessment by the bank as to whether the existing appraisal remains valid for its use given the nature of the transaction. This is a risk assessment not a new value determination. 36 ©2019 VRC Advisors, LLC Valuation Regulatory Compliance
  37. 37. Q = May a bank create two separate loans involving a single residential tract development of four lots each and avoid required discounting under the five or more lot provision? A = Generally no. However, the loan commitment’s four-lot lien encumbrance, may avoid discounting requirements. However, Part 364 (Safety and Soundness) and Part 365 (RE lending) should be carefully reviewed for compliance. Don’t push this. 37 ©2019 VRC Advisors, LLC Valuation Regulatory Compliance
  38. 38. Q = Is a new evaluation required for renewals, refinancings, and other subsequent transactions? A = Under some conditions—no. An existing evaluation or appraisal may be utilized as long as the institution verifies and documents that the appraisal or evaluation continues to be valid. (See the discussion in the Validity of Appraisals and Evaluations, Section XIV of the IAEGs.) 38 ©2019 VRC Advisors, LLC Valuation Regulatory Compliance
  39. 39. Q = What is a review of a review and when is it required? A = Lenders should test the quality of the reviews they receive through a random audit sampling of review reports. The lender’s appraisal policy could address an established written procedure for testing the quality of the appraisal and evaluation review process. (See IAEG Section XVII, Program Compliance, bullet point four.) 39 ©2019 VRC Advisors, LLC Valuation Regulatory Compliance
  40. 40.  FIL-49-2018- Interagency Statement Clarifying the Role of Supervisory Guidance  FIL-62-2018, Appraisal Regulations: Frequently Asked Questions  12 C.F.R. Part 323 (Appraisals)  FIL-82-2010 – Interagency Appraisal and Evaluation Guidelines  FIL-20-2005 – Frequently Asked Questions on Appraisal Regulations  FIL-90-2005 – Frequently Asked Questions on Residential Tract Development Lending  FIL-44-2008 – Guidance for Managing Third Party Risk  FIL-9-2014 – Higher-Priced Mortgage Loan Appraisal Rules 40 ©2019 VRC Advisors, LLC Valuation Regulatory Compliance
  41. 41.  FIL-19-2015 – Minimum Requirements for Appraisal Management Companies  FIL-16-2016 – Supervisory Expectations for Evaluations  USPAP – Uniform Standards of Professional Appraisal Practice (historical and current editions)  Regulation Z (Truth in Lending)  Sections 1471 and 1473(r) of the Dodd-Frank Wall Street Reform and Consumer Protection Act  Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA—12 U.S.C. § 3331)  Note: Not an all-inclusive list. 41 ©2019 VRC Advisors, LLC Valuation Regulatory Compliance
  42. 42.  Banks have Valuation Program responsibility and oversight  There are many risks to identify in CRE concentrations—appraisers can be helpful  Examiners will conduct an in-depth valuation program examination 42 ©2019 VRC Advisors, LLC Valuation Regulatory Compliance
  43. 43. 43 ©2019 VRC Advisors, LLC Valuation Regulatory Compliance

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