Bank and Thrift Regulation:

Better Guidance Is Needed for Real Estate Evaluations

GGD-94-144: Published: May 24, 1994. Publicly Released: May 24, 1994.

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Pursuant to a legislative requirement, GAO reviewed the de minimis appraisal threshold set by federal financial regulators and the regulatory guidance provided to financial institutions on real estate evaluation practices and examination procedures.

GAO found that: (1) financial regulators do not provide adequate guidance to financial institutions for establishing minimum evaluation standards or specific procedures for their examiners; (2) although the guidance provided to financial institutions is deliberately intended to be broad to allow institutions latitude in evaluation practices, it does not address regulatory goals; (3) regulatory guidance does not provide minimum standards on the qualifications and independence of people conducting evaluations or the content of evaluations; (4) the qualifications and independence of people performing evaluations, as well as the content of the evaluations, vary widely, and could result in evaluations that are too extensive or that fail to meet regulatory expectations; (5) most financial regulators have not established examination procedures for their examiners to use in reviewing financial institutions' evaluation practices; (6) the lack of specific examination procedures creates the potential for inconsistencies in examination coverage; and (7) regulators believe that consumer complaints about questionable evaluation practices filed at a financial institution or sent to a regulator would receive prompt and serious investigation by examiners.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: Regulators issued the final rule raising the real appraisal threshold to $250,000 on June 7, 1994. The four regulators issued revised interagency appraisal and evaluation guidelines on October 27, 1994. The interagency guidelines address the qualification of individuals who perform evaluations and require institutions to establish criteria regarding the selection, evaluation, and monitoring of the performance of individuals who perform real estate evaluations. In addition, the interagency guidelines provide minimum requirements for the content of the evaluation as well as the documentation requirement for the supporting calculations and assumptions.

    Recommendation: To provide greater assurance that proposed changes in appraisal requirements reduce uncertainties and do not adversely affect the safety and soundness of financial institutions, the Acting Chairman, Federal Deposit Insurance Corporation (FDIC), the Chairman of the Board of Governors of the Federal Reserve System, the Comptroller of the Currency, and the Acting Director, Office of Thrift Supervision, should ensure that regulatory guidance to financial institutions establish minimum standards on key aspects of evaluations. The revised guidance should provide minimum standards regarding the qualifications and independence of individuals performing evaluations and the contents, including the analytical basis, of the evaluations.

    Agency Affected: Department of the Treasury: Office of Thrift Supervision

  2. Status: Closed - Implemented

    Comments: Regulators issued the final rule raising the real appraisal threshold to $250,000 on June 7, 1994. The four regulators issued revised interagency appraisal and evaluation guidelines on October 27, 1994. The interagency guidelines address the qualification of individuals who perform evaluations and require institutions to establish criteria regarding the selection, evaluation, and monitoring of the performance of individuals who perform real estate evaluations. In addition, the interagency guidelines provide minimum requirements for the content of the evaluation as well as the documentation requirement for the supporting calculations and assumptions.

    Recommendation: To provide greater assurance that proposed changes in appraisal requirements reduce uncertainties and do not adversely affect the safety and soundness of financial institutions, the Acting Chairman, Federal Deposit Insurance Corporation (FDIC), the Chairman of the Board of Governors of the Federal Reserve System, the Comptroller of the Currency, and the Acting Director, Office of Thrift Supervision, should ensure that regulatory guidance to financial institutions establish minimum standards on key aspects of evaluations. The revised guidance should provide minimum standards regarding the qualifications and independence of individuals performing evaluations and the contents, including the analytical basis, of the evaluations.

    Agency Affected: Department of the Treasury: Office of the Comptroller of the Currency

  3. Status: Closed - Implemented

    Comments: Regulators issued the final rule raising the real appraisal threshold to $250,000 on June 7, 1994. The four regulators issued revised interagency appraisal and evaluation guidelines on October 27, 1994. The interagency guidelines address the qualification of individuals who perform evaluations and require institutions to establish criteria regarding the selection, evaluation, and monitoring of the performance of individuals who perform real estate evaluations. In addition, the interagency guidelines provide minimum requirements for the content of the evaluation as well as the documentation requirement for the supporting calculations and assumptions.

    Recommendation: To provide greater assurance that proposed changes in appraisal requirements reduce uncertainties and do not adversely affect the safety and soundness of financial institutions, the Acting Chairman, Federal Deposit Insurance Corporation (FDIC), the Chairman of the Board of Governors of the Federal Reserve System, the Comptroller of the Currency, and the Acting Director, Office of Thrift Supervision, should ensure that regulatory guidance to financial institutions establish minimum standards on key aspects of evaluations. The revised guidance should provide minimum standards regarding the qualifications and independence of individuals performing evaluations and the contents, including the analytical basis, of the evaluations.

    Agency Affected: Federal Deposit Insurance Corporation

  4. Status: Closed - Implemented

    Comments: Regulators issued the final rule raising the real appraisal threshold to $250,000 on June 7, 1994. The four regulators issued revised interagency appraisal and evaluation guidelines on October 27, 1994. The interagency guidelines address the qualification of individuals who perform evaluations and require institutions to establish criteria regarding the selection, evaluation, and monitoring of the performance of individuals who perform real estate evaluations. In addition, the interagency guidelines provide minimum requirements for the content of the evaluation as well as the documentation requirement for the supporting calculations and assumptions.

    Recommendation: To provide greater assurance that proposed changes in appraisal requirements reduce uncertainties and do not adversely affect the safety and soundness of financial institutions, the Acting Chairman, Federal Deposit Insurance Corporation (FDIC), the Chairman of the Board of Governors of the Federal Reserve System, the Comptroller of the Currency, and the Acting Director, Office of Thrift Supervision, should ensure that regulatory guidance to financial institutions establish minimum standards on key aspects of evaluations. The revised guidance should provide minimum standards regarding the qualifications and independence of individuals performing evaluations and the contents, including the analytical basis, of the evaluations.

    Agency Affected: Federal Reserve System: Board of Governors

  5. Status: Closed - Implemented

    Comments: OTS has provided its examiners with updated guidance and standardized worksheets/checklists to use in assessing the sufficiency of an institution's real estate evaluation and appraisal practices.

    Recommendation: To provide greater assurance that proposed changes in appraisal requirements reduce uncertainties and do not adversely affect the safety and soundness of financial institutions, the Acting Chairman, FDIC, the Chairman of the Board of Governors of the Federal Reserve System, the Comptroller of the Currency, and the Acting Director, Office of Thrift Supervision (OTS), should ensure that federal examination procedures incorporate specific requirements that provide greater assurance that examiners consistently: (1) assess financial institutions' evaluation practices; and (2) consider evaluation practices in making safety and soundness determinations.

    Agency Affected: Department of the Treasury: Office of Thrift Supervision

  6. Status: Closed - Implemented

    Comments: The Office of Comptroller of the Currency updated its examination handbook and guidance before the real estate appraisal threshold was to $250,000. According to OCC officials, the revised examination handbook and guidance do not contain specific requirements regarding financial institutions' evaluation practices. However, they do provide OCC examiners with the current regulations and guidance governing real estate appraisal and evaluation requirements.

    Recommendation: To provide greater assurance that proposed changes in appraisal requirements reduce uncertainties and do not adversely affect the safety and soundness of financial institutions, the Acting Chairman, FDIC, the Chairman of the Board of Governors of the Federal Reserve System, the Comptroller of the Currency, and the Acting Director, Office of Thrift Supervision (OTS), should ensure that federal examination procedures incorporate specific requirements that provide greater assurance that examiners consistently: (1) assess financial institutions' evaluation practices; and (2) consider evaluation practices in making safety and soundness determinations.

    Agency Affected: Department of the Treasury: Office of the Comptroller of the Currency

  7. Status: Closed - Not Implemented

    Comments: In its July 28, 1994, letter to Congress that was in response to GAO's report recommendations, FDIC stated that it believed its current guidance and manuals provide sufficient specificity. As such, FDIC does not plan to take any specific action in response to the report recommendation. However, FDIC does provide its examiners with the revised interagency appraisal and evaluation guidelines issued on October 27, 1994. The interagency guidelines address the qualifications of individuals who perform evaluations and requires institutions to establish criteria regarding the selection, evaluation, and monitoring of the performance of individuals who perform real estate evaluations. In addition, the interagency guidelines provide minimum requirements for the content of the evaluation as well as the documentation requirement for the supporting calculations and assumptions.

    Recommendation: To provide greater assurance that proposed changes in appraisal requirements reduce uncertainties and do not adversely affect the safety and soundness of financial institutions, the Acting Chairman, FDIC, the Chairman of the Board of Governors of the Federal Reserve System, the Comptroller of the Currency, and the Acting Director, Office of Thrift Supervision (OTS), should ensure that federal examination procedures incorporate specific requirements that provide greater assurance that examiners consistently: (1) assess financial institutions' evaluation practices; and (2) consider evaluation practices in making safety and soundness determinations.

    Agency Affected: Federal Deposit Insurance Corporation

  8. Status: Closed - Implemented

    Comments: As noted in the report, the Federal Reserve System already had specific examination procedures and guidelines for its examiners on the review of real estate evaluation practices. As such, it simply needed to update its examination procedures and guidelines on evaluations to reflect the increase in the appraisal threshold and the revised interagency guidelines on real estate appraisals and evaluation issued on October 27, 1994. According to Federal Reserve System officials, this was accomplished by providing its examiners with copies of the current regulations and guidelines governing real estate appraisals and evaluations.

    Recommendation: To provide greater assurance that proposed changes in appraisal requirements reduce uncertainties and do not adversely affect the safety and soundness of financial institutions, the Acting Chairman, FDIC, the Chairman of the Board of Governors of the Federal Reserve System, the Comptroller of the Currency, and the Acting Director, Office of Thrift Supervision (OTS), should ensure that federal examination procedures incorporate specific requirements that provide greater assurance that examiners consistently: (1) assess financial institutions' evaluation practices; and (2) consider evaluation practices in making safety and soundness determinations.

    Agency Affected: Federal Reserve System: Board of Governors

 

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