In their appraisal regulations, the Agencies identified certain real estate-related financial transactions that do not require the services of an appraiser and that are exempt from the appraisal requirement. One exemption applies to business loans with a transaction value of $1 million or less when the sale of, or rental income derived from, real estate is not the primary source of repayment.
To apply this exemption, the Agencies expect the institution to determine that the primary source of repayment for the business loan is operating cash flow from the business rather than rental income or sale of real estate.
For this type of exempted loan, under the Agencies’ appraisal regulations, an institution may obtain an evaluation in lieu of an appraisal.
As part of the credit approval process and prior to a final credit decision, an institution should review appraisals and evaluations to ensure that:
They comply with the Agencies’ appraisal regulations and are consistent with supervisory guidance and its own internal policies.
An appraisal or evaluation contains sufficient information and analysis to support the decision to engage in the transaction.
Persons who review appraisals and evaluations should:
Be independent of the transaction and have no direct or indirect interest, financial or otherwise, in the property or transaction, and be independent of and insulated from any influence by loan production staff.
Possess the requisite education, expertise, and competence to perform the review commensurate with the complexity of the transaction, type of real property, and market.
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.
An institution should assess the level of in-house expertise available to review appraisals for complex projects, high-risk transactions, and out-of-market properties.
An institution may find it appropriate to employ additional personnel or engage a third party to perform the reviews.
When using a third party, an institution remains responsible for the quality and adequacy of the review process, including the qualification standards for reviewers.
Regulation Z contains detailed rules to assure the independence of the appraisal process, but Regulation Z does not apply to loans made primarily for a business purpose.