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This report represents the results of our audit of the FDIC Division of Supervision and
Consumer Protection’s (DSC) assessments of appraisals, property insurance, and flood
insurance performed during risk management and compliance examinations. The
objective of the audit was to determine whether FDIC examiners adequately consider the
reliability of appraisals and sufficiency of insurance coverage for collateral as part of an
evaluation of a financial institution’s lending policies, procedures, and practices related to
real estate loans. This audit focused primarily on institution and examination guidance.
We performed limited testing of examinations performed by DSC’s Dallas Regional
Office (DRO) at 11 financial institutions, including institutions impacted by Hurricane
Katrina,[ 1 ] to gain an understanding of how existing examination guidance was being
applied. Appendix I of this report discusses our objective, scope, and methodology in
detail.
BACKGROUND
As of September 30, 2006, the FDIC insured the deposits of over 8,700 institutions. The
combined assets of these insured institutions totaled $11.8 trillion, including $7.2 trillion
in loans, of which $4.5 trillion was for real estate loans.[ 2 ] Loans in default, including
those with insufficient underlying collateral, traditionally have been the source of most
credit losses incurred by financial institutions. When loans secured by real estate go into
default, the institution may be exposed to loss, such as when security interest on the loan
is not perfected, title insurance is not obtained, the appraised value of the collateral has
declined, uninsured losses have occurred, or environmental factors have impaired
collateral value.
Of the total number of insured institutions, the FDIC is the primary federal regulator for
over 5,200 state-chartered institutions that are not members of the Federal Reserve
System. Under section 10(d) of the Federal Deposit Insurance Act (FDI Act), all FDICinsured
institutions are required to undergo on-site risk management examinations every
12-18 months, depending on asset size and bank performance, to assess the safety and
soundness of the financial institution. Further, DSC performs compliance examinations
every 12-36 months for FDIC-supervised institutions to assess institution compliance
with consumer protection laws and regulations. To promote stability and public
confidence in the nation's financial system, DSC examines FDIC-supervised financial
institutions to ensure they operate in a safe and sound manner, that consumers’ rights are
protected, and that FDIC-supervised institutions invest in their communities.
Real Estate Lending Standards
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) required
each federal banking agency to adopt uniform regulations prescribing standards for
extensions of credit related to real estate, including commercial, residential, and industrial
real property, considering the risk posed to the Deposit Insurance Fund[ 3 ] by the extension
of credit and the need for the safe and sound operation of insured depository institutions
and the availability of credit.
In response to this FDICIA requirement, the FDIC issued Part 365 of the FDIC Rules and
Regulations, Real Estate Lending Standards, which requires each FDIC-supervised
institution to adopt and maintain written real estate lending policies that are consistent
with sound lending principles and are appropriate for the size of the institution and the
nature and scope of its operations. Within these general parameters, the regulation
requires an institution to establish policies that include:
- portfolio diversification standards;
- prudent underwriting standards, including loan-to-value (LTV) limits;
- loan administration procedures;
- documentation, approval, and reporting requirements; and
- procedures for monitoring real estate markets within the institution’s lending area.
In assessing the risks associated with loans secured by liens on real estate, the FDIC’s
Examination Documentation (ED) Modules for commercial/industrial and residential real
estate lending direct examiners to review the loan files for:
- a recorded note and mortgage or deed of trust;
- an attorney’s title opinion or title insurance;
- an appraisal or collateral evaluation; and
- evidence of appropriate insurance, such as property, liability, or flood insurance.
For the purposes of this audit, we focused our review on the reliability of real estate
appraisals and sufficiency of insurance coverage, including property insurance and flood
insurance.
Reliability of Real Estate Appraisals
Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989
(FIRREA) required the FDIC and the other federal banking agencies to establish
regulations on financial institution use of real estate appraisals. Initially, Title XI
required appraisals for all real estate loan transactions of $100,000 or more, but the FDIC
raised this threshold to over $250,000 effective June 7, 1994.
Institution Guidance. As part of its implementation of Title XI of FIRREA, the FDIC
issued institution guidance in FDIC Rules and Regulations, Part 323, Appraisals, on the
reliability of appraisals. Specifically, FDIC Rules and Regulations, Section 323.4,
Minimum appraisal standards, state that appraisals should meet the following minimum
standards:
- conform to generally-accepted appraisal standards as evidenced by the Uniform
Standards of Professional Appraisal Practice (USPAP) promulgated by the
Appraisal Standards Board of the Appraisal Foundation;
- be written and contain sufficient information and analysis to support the
institution's decision to engage in the transaction;
- analyze and report appropriate deductions and discounts for proposed
construction or renovation, partially-leased buildings, non-market lease terms, and
tract developments with unsold units;
- be based on the definition of market value set forth in appraisal regulations; and
- be performed by state-licensed or certified appraisers in accordance with
requirements set forth in the regulations.
Examination Guidance. DSC’s Risk Management Manual of Examination Policies
(Risk Management Manual) and supplemental guidance advocate a risk-focused
examination approach that focuses examination resources on those areas that pose the
greatest risk to an insured institution. The level of analysis performed largely depends on
the examiner’s assessment of bank management’s ability to identify, measure, monitor,
and control risks. A key aspect of that assessment is the adequacy of management
controls that may have an impact on the institution’s real estate appraisal program, such
as audit functions, loan policies, loan grading systems, and other similar controls. If
management controls are properly designed and effectively applied, examiners can place
greater reliance on the control systems and limit the scope of their review. The amount
of transaction testing necessary to evaluate particular activities generally depends on the
quality of the bank’s management processes.
To provide examination coverage of the requirements in Part 323 on appraisals, DSC’s
Risk Management Manual outlines examiner procedures for reviewing real estate loans
during a risk management examination. These examination procedures include
reviewing loan files for inadequate or no collateral and for other loan documentation
related to mortgages, appraisals, legal opinions, title insurance, property insurance, and
loan applications.
Additionally, the FDIC’s ED Modules provide examiners with a tool that focuses on risk
management and helps to establish an appropriate examination scope. With respect to the
reliability of appraisals, the Real Estate Appraisal Programs ED Module includes a step
for examiners to determine if an institution’s real estate appraisal program establishes the
minimum appraisal standards as set forth in FDIC Rules and Regulations, Part 323. The
ED Module, the use of which is discretionary by examiners, also contains steps related to
appraisal reliability, such as:
- Determine that the bank has prepared a list of approved appraisers and that the list
is reviewed and approved by the bank’s board of directors at least annually.
- Determine that the real estate appraisal program provides for the independence of
the appraisers. An appraiser should be independent of the loan and collection
functions of the bank and have no interest, financial or otherwise, in the property
or transaction.
- Verify that appraisal reports are prepared for the lender and by an approved
appraiser.
- Verify that the appraisers’ qualifications are appropriate for the types of
properties being appraised.
- Determine that there is an annual independent evaluation of the real estate
appraisal program and corresponding internal controls.
Sufficiency of Property Insurance Coverage
Although property insurance is not specifically discussed in the FDICIA section related
to real estate lending or the FDIC’s implementing regulations, interagency guidelines, as
discussed below, require each institution to adopt a real estate lending policy with
underwriting standards and loan administration requirements, which could include
property insurance coverage. In addition, the FDIC has included coverage of property
insurance in its examination guidance on residential real estate lending and loan portfolio
management related to FDICIA implementation, as discussed below.
Institution Guidance. In response to FDICIA requirements, the FDIC issued Part 365,
Real Estate Lending Standards, of the FDIC Rules and Regulations. Although Part 365
does not specifically reference property insurance, Appendix A, Interagency Guidelines
for Real Estate Lending Policies, to Part 365 requires each insured depository institution to adopt and maintain a written real estate lending policy that is comprehensive and
consistent with safe and sound lending practices. The interagency guidelines address,
among other areas: loan portfolio management considerations such as loan origination,
approval, and administration procedures; underwriting standards; and supervisory review
of real estate lending policies and procedures. Regarding underwriting standards, the
regulations require consideration of all relevant credit factors and any secondary sources
of repayment, which could include the sufficiency of property insurance. Additionally,
components of loan administration, such as those related to collateral, escrow, loan
documentation (including documentation for mortgage insurance), and claims processing
(including seeking recoveries through government guaranty or insurance programs), can
include property insurance coverage.
Examination Guidance. To provide examination coverage of the requirements in Part
365 of the FDIC Rules and Regulations, DSC’s Loan Portfolio Management and Review
ED Module includes the coverage of insurance protection as part of loan documentation.
The module includes steps for determining if an institution’s real estate mortgage lending
policies, procedures, and practices are adequate and appropriate for the size and nature of
the bank’s real estate lending activities. Another related ED Module, Residential Real
Estate Lending, the use of which is discretionary by examiners, contains a specific step in
the section on documentation for determining if evidence of appropriate insurance,
including property and liability insurance, is in the loan files reviewed.
Sufficiency of Flood Insurance Coverage
The National Flood Insurance Act of 1968 established the National Flood Insurance
Program (NFIP) as a means by which flood insurance would be made available on a
nationwide basis through the cooperative efforts of the Federal Government and the
private insurance industry. The Act enabled interested persons to purchase insurance
against loss resulting from physical damage to or loss of real or personal property related
to any flood occurring in the United States. The Act requires lending institutions -- as a
condition of making, increasing, extending, or renewing any loan secured by improved
real estate or a mobile home that is located in an area determined by the Federal
Emergency Management Agency (FEMA) as having special flood hazards -- to notify the
purchaser and servicer of the loan of such hazards before the purchase agreement is
signed. The Flood Disaster Protection Act of 1973 expanded the NFIP by substantially
increasing the limits of coverage and total amount of insurance authorized to be
outstanding and by requiring known flood-prone communities to participate in the
program. The National Flood Insurance Reform Act of 1994 made various amendments
to the prior statutes and included new provisions such as the requirement that lenders
purchase flood insurance for borrowers under certain circumstances.
Institution Guidance. FDIC Rules and Regulations, Part 339, Loans in Areas Having
Special Flood Hazards, implements the requirements of the National Flood Insurance Act
and Flood Disaster Protection Act, as amended. Part 339 applies to loans secured by
buildings or mobile homes located or to be located in areas determined by FEMA as
having special flood hazards. According to Part 339, generally, a bank shall not make, increase, extend, or renew any designated loan unless the building or mobile home and
any personal property securing the loan are covered by flood insurance for the term of the
loan. Further, Part 339 states that the amount of insurance must be at least equal to the
lesser of the outstanding principal balance of the designated loan or the maximum limit of
coverage available for the particular type of property under the National Flood Insurance
Act. The amount of insurance cannot exceed the overall value of the property securing
the designated loan less the value of the land on which the property is located.
In 2001, the FDIC issued additional guidance to FDIC-supervised institutions in
Financial Institution Letter (FIL) 81-2001, Strengthening Compliance with Federal Flood
Insurance Requirements, which emphasized the principal requirements of the National
Flood Insurance Act and the FDIC’s implementing regulation, Part 339, and contained a
Flood Insurance Compliance Monitoring Checklist and information resources.
Examination Guidance. Key examination coverage of flood insurance requirements is
provided as part of compliance examinations. DSC’s Compliance Examination
Handbook[ 4 ] outlines procedures for reviewing compliance with laws and regulations
related to flood insurance. These procedures include reviewing the completion of the
FEMA Standard Flood Hazard Determination form,[ 5 ] the notice to the borrower that the
property securing the loan is located in a special flood hazard area (SFHA), and the
sufficiency of the flood insurance coverage amount. In addition, DSC issued revised
examination guidance for determining civil money penalties for violations of the National
Flood Insurance Act and Part 339. From a risk management examination perspective,
DSC’s Residential Real Estate Lending ED Module, the use of which is discretionary by
examiners, contains a specific step in the section on documentation for determining if
evidence of appropriate insurance, including flood insurance, is in the loan files
reviewed.
RESULTS OF AUDIT
The FDIC’s guidance to institutions and examiners on the reliability of appraisals and
sufficiency of property and flood insurance for real estate loans was based on the
following regulations and was generally adequate. Specifically:
- Part 323, Appraisals, of the FDIC’s Rules and Regulations provides institution
guidance concerning the reliability of appraisals and, particularly, the minimum
appraisal standards that must be met. Similarly, examination guidance is
provided in the Risk Management Manual and the related Real Estate Appraisal
Programs ED Module on the reliability of appraisals.
- Part 365, Real Estate Lending Standards, of the FDIC’s Rules and Regulations
provides institution guidance on real estate lending but does not explicitly include
institution requirements related to ensuring the sufficiency of property insurance.
However, Appendix A to Part 365 provides interagency guidelines, such as those
related to underwriting standards and loan origination, approval, and
administration procedures, which – given references therein to mortgage
insurance and government insurance programs – can also apply to the sufficiency
of property insurance. Examination guidance in the related ED Modules,
Residential Real Estate Lending and Loan Portfolio Management and Review,
was adequate for purposes of ensuring the appropriateness of property insurance.
- Part 339, Loans in Areas Having Special Flood Hazards, of the FDIC’s Rules and
Regulations provides institution guidance concerning the sufficiency of flood
insurance. However, as discussed below, we noted that institution guidance could
be enhanced by addressing controls to avoid lapses in flood insurance, particularly
in cases where insurance premiums are not escrowed. With respect to
examination guidance, DSC’s Compliance Examination Handbook outlines
comprehensive procedures for reviewing compliance with laws and regulations
related to flood insurance. Also, risk management examination guidance in the
Residential Real Estate Lending ED Module was adequate for purposes of
ensuring the appropriateness of flood insurance.
Concerning the application of existing examination guidance related to the reliability of
appraisals and sufficiency of property and flood insurance on real estate loans, based on a
limited sample of institutions, we found the following:
- Risk management Reports of Examination (ROE) and related examination
documentation showed that examiners had reviewed appraisal information as
part of their assessment of a financial institution’s real estate lending and loan
portfolio management at the program level and, in most cases, at the individual
loan transaction level. However, for 6 of the 11 examinations we reviewed, we
found only limited evidence in the examination documentation that examiners
had specifically considered the reliability of appraisals as part of the
institution’s real estate appraisal program. As a result, there was inadequate
assurance that these institutions were complying with the minimum appraisal
standards in the FDIC’s Rules and Regulations designed to ensure the reliability
of appraisals. In our opinion, appraisal reliability relates to a number of
important areas relevant to risk management, such as determining loan-to-value
ratios and managing to internal loan-to-value limits as part of real estate lending
and loan portfolio management, which collectively ensure that real estate
collateral provides a sufficient, though secondary, source of repayment (see
Reliability of Appraisals).
- Examinations considered the sufficiency of property insurance coverage for
collateral. In some cases, examiners had assessed third-party reviews of the
institutions’ loan portfolios as part of the examination process which provided
added assurance that property insurance coverage was sufficient (see Property
Insurance).
- Examinations adequately considered the sufficiency of flood insurance coverage
for collateral. Examinations included an evaluation of an institution’s
compliance management system, transactional testing of loans for compliance,
and a determination of whether a civil money penalty should be assessed for
violations of the National Flood Insurance Act (see Flood Insurance).
Although the examinations we reviewed had adequately considered the sufficiency of
flood insurance coverage for collateral on real estate loans, we identified one area of
concern. This area relates to ensuring that institutions have adequate controls to avoid
flood insurance lapses in cases where escrowing is not performed. Both the borrowers
and the institutions are exposed to a greater risk of an uninsured loss from flooding
during a period of lapsed insurance (see Lapses in Flood Insurance Coverage).
We also identified a matter for congressional consideration. Differences between the
waiting period under the Flood Disaster Protection Act for the purchase of flood
insurance on a borrower’s behalf and the grace period provided by the NFIP after
insurance expires can lead to a lapse in flood insurance. This lapse can occur because the
required waiting period – after which a financial institution must purchase flood
insurance on behalf of the borrower who allows the flood insurance to expire – is longer
than the grace period during which insurance coverage remains in effect after expiration.
During this lapse, flood insurance coverage is not in place. We are providing this
information to assist the Congress in considering whether legislative action regarding
flood insurance would help to reduce the risk associated with flood insurance policy
lapses (see Matter for Congressional Consideration – Waiting Period for Placement
of Coverage Under the Flood Disaster Protection Act).
RELIABILITY OF APPRAISALS
The FDIC has issued guidance to both institutions and examiners regarding the reliability
of appraisals. Specifically, the institution guidance in Part 323.4 of the FDIC Rules and
Regulations provides the minimum standards for ensuring the reliability of appraisals.
Further, examination guidance in the Real Estate Appraisal Programs ED Module
provides for examination coverage of appraisal programs for ensuring compliance with
appraisal standards and additional steps for ensuring that appraisals are reliable. Other
details on the institution and examination guidance related to the reliability of appraisals
are in the Background section of this report.
Examiner Consideration of the Reliability of Appraisals
For the 11 examinations sampled, we found that examiners had reviewed appraisal
information as part of their assessment of the financial institutions’ real estate lending
and loan portfolio management at the program level and, in most cases, at the individual loan transaction level. However, for 6 of the 11 examinations we reviewed, we found
only limited evidence in the examination documentation that examiners had specifically
considered the reliability of appraisals as part of the institution’s real estate appraisal
program. For example, there was no documentation that the appraisers were independent
and, if applicable, certified or licensed, or that the institution had implemented a real
estate appraisal program established to meet the minimum appraisal standards set forth in
Part 323.4 of the FDIC’s Rules and Regulations. As a result, there was inadequate
assurance that these institutions were complying with the minimum appraisal standards
designed to ensure the reliability of appraisals. In our opinion, appraisal reliability relates
to a number of important areas relevant to risk management, such as determining loan-tovalue
ratios and managing to internal loan-to-value limits as part of residential real estate
lending and loan portfolio management, to ensure that real estate collateral provides a
sufficient, though secondary, source of repayment if a borrower defaults on a real estate
loan.
Examination of Financial Institution Appraisal Programs
Our review of 11 examinations conducted by two DRO field offices indicated that
examiners had reviewed financial institution appraisal programs as part of their
assessment of the institutions’ real estate lending and portfolio management activities.
Specifically, we noted 1 or more of the following elements in the documentation for the
11 examinations we reviewed:
- Completed Officer’s Questionnaires that included a question related to the
extension of credit to appraisers (11 examinations).
- Copies of institution loan and, in some cases, appraisal policies (9 examinations).
- Evidence of third-party reviews of institution loan portfolios (4 examinations).
- Completed Pre-Examination Planning memorandums citing appraisal issues
(3 examinations).
- The financial institution’s list of approved appraisers (2 examinations).
We also noted examiner line sheets or real estate line cards[ 6 ] that contained selected loan
information such as the appraised value of the collateral. As a result, we concluded that
examiners for these institutions had reviewed appraisal information as part of their
assessment of the financial institution’s real estate lending and loan portfolio
management program during risk management examinations. However, as described
below, this examination evidence at the appraisal program level and individual loan level
was not sufficient in some cases to show that the examiners had specifically considered
the reliability of appraisals as part of the institution’s real estate appraisal program.
Examination Documentation for Assessing the Reliability of Appraisals
Although DSC has issued institution and examiner guidance related to assessing the
reliability of appraisals, the examination documentation for 6 of the 11 examinations we
reviewed provided only limited support for an overall conclusion on the reliability of the
real estate appraisals. Specifically, we found that DRO examiners had not used the Real
Estate Appraisal Programs ED Module to conduct examination work related to
appraisals. Although use of the ED module is discretionary, DRO examiners used
Assignment Sheets, which are an alternative form of documentation approved by DRO
and permitted by DSC policy,[ 7 ] but which did not include some steps the ED Module
specified in order to conclude on the reliability of appraisals. The Assignment Sheets
were used for each of the 11 examinations. However, in five cases, the ROEs provided
evidence that examiners had considered the reliability of appraisals.
In assessing the procedures outlined on the Assignment Sheets, we determined that they
did not include procedures that would be required to conclude on the reliability of
appraisals. Specifically, the Assignment Sheets did not include any of the key examiner
procedures, related to the reliability of appraisals, that are specified in the ED Module,
such as:
- Determining if an institution’s real estate appraisal program establishes the
minimum appraisal standards as set forth in the FDIC Rules and Regulations,
Part 323.
- Determining that the bank has prepared a list of approved appraisers and that the
list is reviewed and approved by the bank’s board of directors at least annually.
- Determining that the real estate appraisal program provides for the independence
of appraisers.
- Verifying that appraisal reports are prepared for the lender and by an approved
appraiser.
While DSC policy provides that examiner use of the ED Modules is discretionary, the
underlying requirement to address the reliability of appraisals remains. Further, DSC has
provided examiners with guidance on how to document work when core analysis
procedures are not used. As stated in the Risk Management Manual, Section 1.1, Basic
Examination Concepts and Guidelines, examination findings should be documented
through a combination of brief summaries, bank source documents, report comments, and
other examination documentation that addresses management practices. The manual also
states that examination documentation should:
- demonstrate a clear trail of decisions and supporting logic within a given area,
- provide written support for examination and verification procedures performed
and conclusions reached, and
- support the assertions of fact or opinion in the financial schedules and narrative
comments in the ROE.
However, the work papers for the examinations we reviewed documented only limited
coverage of the reliability of appraisals because the Assignment Sheets the examiners
used lacked key procedures in this area. As a result of the conditions we noted, there was
inadequate assurance that 6 of the 11 institutions in our sample were complying with the
minimum appraisal standards in the FDIC Rules and Regulations designed to ensure the
reliability of appraisals.
Recommendation
We recommend that the Director, DSC:
(1) Enhance guidance to clarify that, in the absence of ED Module usage, examiners
provide adequate documentation of examination coverage to ensure institution
compliance with the provisions in FDIC Rules and Regulations, Part 323, Appraisals,
related to the reliability of appraisals, including the minimum appraisal standards.
PROPERTY INSURANCE
The FDIC has issued guidance to both institutions and examiners regarding the
sufficiency of property insurance. Specifically, the institution guidance contained in Part
365 of the FDIC Rules and Regulations addresses underwriting standards and loan
origination, approval, and administration procedures that can include the sufficiency of
property insurance coverage even though an explicit reference to property insurance is
not made. Further, examination guidance in the ED Modules on Residential Real Estate
Lending and Loan Portfolio Management and Review was adequate for purposes of
ensuring the appropriateness of property insurance. Additional details on the institution
and examination guidance related to the sufficiency of property insurance is in the
Background section of this report.
Examiner Consideration of the Sufficiency of Property Insurance
Regarding the sufficiency of property insurance coverage for collateral on real estate
loans, we focused on risk management examinations for 9 of the 11 financial institutions
in our sample and found evidence in the examination documentation that the examiners
had generally reviewed the sufficiency of property insurance coverage. Although
examination documentation for each institution varied, available documentation enabled
us to conclude that, overall, the examiners had considered the sufficiency of property
insurance on collateral for real estate loans as part of their overall assessment of each
institution’s loan portfolio management. For example, we observed that for most of the institutions in our sample, examiner line sheets or work papers identified property
insurance amounts and expiration dates or instances when insurance had expired or was
cancelled, indicating that a review of the sufficiency of insurance had been performed.
In addition, for three of the institutions in our sample, examiners documented third-party
reviews of the institutions’ loan portfolios for the sufficiency of insurance. For example,
one such third-party review noted significant deficiencies such as no evidence of
insurance in some loan files. In addition, the examination documentation for one
institution contained the institution’s board of directors’ minutes, wherein property
insurance coverage had been addressed. Overall, we determined that the examiners had
documented their work in this area, and the available documentation enabled us to
conclude that the examiners had considered the sufficiency of property insurance for
collateral.
FLOOD INSURANCE
The FDIC has issued guidance to both institutions and examiners regarding the
sufficiency of flood insurance. Specifically, Part 339 of the FDIC Rules and Regulations
provides institution guidance concerning the sufficiency of flood insurance. DSC’s
Compliance Examination Handbook outlines comprehensive procedures for reviewing
compliance with laws and regulations, including those related to flood insurance. These
procedures include reviewing the sufficiency of the flood insurance coverage amount.
Further, risk management examination guidance in the Residential Real Estate Lending
ED Module was adequate for purposes of ensuring the appropriateness of flood
insurance. Additional details on the institution and examination guidance related to the
sufficiency of flood insurance is in the Background section of this report. However, as
discussed below, we noted that institution guidance could be enhanced by addressing
financial institution controls to avoid lapses in flood insurance, particularly in cases
where insurance premiums are not escrowed.
Examiner Consideration of the Sufficiency of Flood Insurance
Compliance examinations are the primary means by which the FDIC determines whether
an FDIC-supervised financial institution is meeting its responsibility to comply with
consumer protection requirements. The Compliance Examination Handbook states that
the purposes of compliance examinations are to:
- assess the quality of an FDIC-supervised institution’s compliance management
system for implementing consumer protection statutes and regulations,
- review compliance with relevant laws and regulations, and
- initiate effective supervisory action when an institution’s compliance management
system is deficient or when significant violations[ 8 ] of law are found.
The compliance examinations we reviewed showed evidence that examiners had
adequately considered the sufficiency of flood insurance coverage for collateral
supporting residential real estate loans. For each of the 11 institutions in our sample, the
examiner’s assessment of the institution’s compliance with flood insurance regulations
included: (1) an evaluation of the institution’s compliance management system;
(2) transactional testing of loans for compliance with the National Flood Insurance Act;
and (3) a determination of when a civil money penalty should be assessed for violations
of the National Flood Insurance Act. Also, for all 11 financial institutions, the examiners
had documented their review of the institutions’ internal or external compliance audit
function. Because adequate examination coverage of the sufficiency of flood insurance
had been provided as part of the compliance examinations, we did not separately assess
risk management examination coverage.
Concerning transactional testing, examiners used either an overall summary or a real
estate loan worksheet to document their reviews. The examiners focused on the accuracy
of the completed Standard Flood Hazard Determination forms, which indicate whether
the collateral property is located within an SFHA and therefore requires flood insurance.
As a result of transactional testing, examiners identified significant flood insurance
violations at 6 of the 11 institutions. The violations included:
- an insufficient amount of flood insurance coverage,
- failure of the financial institution to purchase insurance on behalf of borrowers
when flood insurance policies had lapsed, and
- inaccurate Standard Flood Hazard Determination forms (for example, the form
lacked the bank’s lender identification number).
The FDIC assessed a civil money penalty against one of the six institutions because,
according to the examiner, the institution’s flood insurance violations represented a
pattern in which the institution had identified lapsed coverage, but loan personnel had not
corrected the lapses. This situation bears directly on the sufficiency of flood insurance
coverage. DSC Regional Directors (RD) Memorandum 2005-029, Revised Guidance
About Civil Money Penalties for Flood Insurance Violations, dated July 29, 2005,
provides guidance on the process for determining when and in what amount a civil
money penalty must or should be assessed for violations of the National Flood Insurance
Act and flood insurance regulations. The guidance, consistent with the Flood Disaster
Protection Act, indicates that a civil money penalty must be assessed against an
institution when a pattern or practice of certain violations is discovered.
From January 1, 2005 through August 31, 2006, the DRO conducted compliance
examinations for 660 financial institutions. These DRO examinations identified 175
(26.5 percent) institutions with significant flood insurance violations. As of
December 31, 2006, DSC's Formal and Informal Action Tracking (FIAT) system showed
that DSC had assessed civil money penalties for flood insurance violations against 5
(3 percent) of those 175 institutions, which were deemed by DSC to have a pattern or
practice of violations consistent with the statutory provisions.[ 9 ]
Lapses in Flood Insurance Coverage
Although the compliance examinations we reviewed adequately considered the
sufficiency of flood insurance coverage for collateral in residential real estate loans, we
identified one area of concern with regard to institution guidance. This area relates to
ensuring that institutions have adequate controls to prevent flood insurance lapses in
cases where escrowing by a financial institution is not performed. Compliance
examination documentation indicated that institutions did not always have adequate
controls to ensure required flood insurance did not lapse in cases where escrowing was
not performed. Specifically, ROEs for 3 of the 11 institutions in our sample indicated
that the institutions had allowed one or more flood insurance policies to lapse. As a
result, both the borrowers and the institutions at issue were exposed to a greater risk of an
uninsured loss from flooding during the period of lapsed insurance. As discussed earlier,
one institution had been assessed a civil money penalty for a pattern of inaction on lapsed
flood insurance.
The Flood Disaster Protection Act of 1973, as amended in 1994, requires an institution to
escrow flood insurance premiums for loans secured by residential improved real estate if
the institution requires the escrow of funds to cover other charges associated with the
loan, such as taxes, premiums for hazard or fire insurance, or other fees. However, the
escrow requirement for flood insurance does not apply if the institution does not require
the escrowing of other charges. In these cases, the borrower is responsible for paying the
premiums to renew the policy. According to the Flood Disaster Protection Act, as
amended, if an institution determines that a designated loan is not covered by flood
insurance, the institution is required to notify the borrower that the borrower should
obtain flood insurance. If the borrower fails to obtain flood insurance within 45 days
after notification by the institution, then the institution must purchase insurance on the
borrower’s behalf. Such notification to a borrower that insurance may lapse is an
important control to protect both the borrower and the institution from flood losses.
In the cases where flood insurance policies had lapsed, the ROEs are clear that the
institutions’ controls were not adequate to have prevented the lapses. Specifically, examiners reported instances in which borrowers had not paid required flood insurance
premiums in a timely manner, and institutions did not purchase insurance on behalf of the
borrower, thus allowing flood insurance policies to expire. For example, for the
1 institution that was assessed a civil money penalty, examiners identified 97 loans for
which flood insurance coverage had expired. In this case, the examiners provided three
examples of insurance that had lapsed from 9 to 10 months. Another institution had to
purchase insurance coverage on 14 loans. In this case, the examiners provided three
examples of insurance that had lapsed from 4 to 5 months. The ROEs for these cases
stated that the institutions had allowed flood insurance policies to lapse and that bank
management promised corrective action. The examiners identified the following reasons
for the lapses:
- inadequate procedures at the institution for tracking loans in flood hazard areas,
- lack of timely action by the institution’s loan servicing personnel to address
expired policies, and
- lack of institution board and senior management oversight.
The FDIC has placed increased attention on flood insurance coverage in view of the
substantial damage caused by Hurricane Katrina. However, flood insurance premiums
are required to be escrowed only when an institution escrows for other charges, as
described earlier, and it is common for institutions in some parts of the country not to
escrow for these charges. FDIC guidance does not presently require financial institutions
to establish compensating controls to ensure flood insurance remains in effect in cases
where a financial institution does not escrow for payment of the flood insurance
premiums. Therefore, it would be prudent for the FDIC to provide guidance to
institutions on establishing adequate controls to avoid lapses in flood insurance coverage.
Recommendation
(2) Issue guidance to institutions addressing the need for adequate controls to avoid
lapses in flood insurance coverage.
MATTER FOR CONGRESSIONAL CONSIDERATION – WAITING PERIOD
FOR PLACEMENT OF COVERAGE UNDER THE FLOOD DISASTER
PROTECTION ACT
During the course of this audit, we learned that a lapse in flood insurance coverage can
occur in situations where a financial institution that is not escrowing for flood insurance
premiums must purchase flood insurance because a borrower has failed to maintain
adequate coverage. This lapse can occur because the required waiting period under the
Flood Disaster Protection Act – after which a financial institution must purchase flood insurance on behalf of the borrower who allows the flood insurance to expire – is longer
than the grace period, provided under the NFIP, during which insurance coverage
remains in effect after expiration. During this lapse, flood insurance coverage is not in
place. According to DSC, the federal banking agencies have been aware of the potential
for a lapse in flood insurance coverage in this manner, and the FDIC has previously
raised the issue for congressional attention.
When an institution does not escrow for flood insurance premiums, the circumstances
surrounding a lapse in flood insurance coverage can be explained as follows. When a
borrower fails to pay a policy renewal premium in a timely manner, the guidelines in the
NFIP Flood Insurance Manual allow a 30-day grace period after a policy expires during
which insurance coverage remains in effect. However, under the provisions of the Flood
Disaster Protection Act[ 10 ] a financial institution must provide the borrower with notice of
the expiration; and if the borrower fails to obtain adequate insurance within 45 days of
such notification, the institution must purchase insurance on the borrower’s behalf.
Furthermore, there may be delays between the time that the policy expires and the
institution becomes aware of the expiration. Consequently, even under the best of
circumstances, there is, at a minimum, a 15-day lapse in insurance coverage because the
45-day waiting period exceeds the 30-day grace period allowed under the policy renewal
guidelines. Thus, when a borrower fails to pay flood insurance premiums, the borrower
and the financial institution may have no flood insurance coverage for 15 days or more
until the financial institution is able to purchase flood insurance on behalf of the
borrower.
To address this concern, the FDIC made a legislative proposal, as part of the financial
services regulatory relief proposals in 2003, addressing the issue of lapses in flood
insurance. According to the agency’s submission, lenders that want to ensure that
collateral is protected during this 15-day period currently must seek private insurance,
which is not widely available and is reportedly more expensive than flood insurance
available through the National Flood Insurance Program. The FDIC's proposal would
have allowed “regulated institutions to purchase coverage on behalf of a borrower when
the borrower fails to purchase insurance within 30 days of notification of lack of
coverage.” The FDIC's position was that the amendment would allow a lender to place
insurance at approximately the same time the grace period ends, reducing the risk of
lapsed flood insurance. However, the FDIC withdrew the proposal in 2005, following
Hurricane Katrina, with the understanding that flood insurance reform legislation was in
process that would address this and other concerns. Such legislation, however, has not
yet been enacted.
We are providing this information to assist the Congress in considering whether
legislative action regarding flood insurance would help reduce the risk to financial
institutions and consumers associated with flood insurance policy lapses.
CORPORATION COMMENTS AND OIG EVALUATION
On March 29, 2007, the Director, DSC, provided a written response to the draft of this
report. The DSC response is presented in its entirety in Appendix III. In its response,
DSC concurred with our findings and recommendations. With regard to our
recommendation to enhance guidance to clarify that examiners provide adequate
documentation of examination coverage related to the reliability of appraisals, DSC will
remind its examiners to ensure their evaluations are fully documented. Also, the FDIC
will provide staff a reminder about the need for examiners to adequately notate the
reliability of appraisals. Further, DSC stated that updated Interagency Appraisal and
Evaluation Guidelines are to be released shortly. With regard to our recommendation to
issue guidance to institutions, addressing the need for adequate controls to avoid lapses in
flood insurance coverage, DSC will prepare guidance to FDIC-supervised institutions
addressing the need for adequate internal controls to manage the risks associated with
lapses in flood insurance coverage. DSC expects to complete these actions by
December 31, 2007.
A summary of management’s response to the recommendations is in Appendix IV.
DSC’s planned actions are responsive to our recommendations. Accordingly, the
recommendations are resolved but will remain open until we have determined that the
agreed-to corrective actions have been completed and are effective.
OBJECTIVE, SCOPE, AND METHODOLOGY
Objective
The objective of the audit was to determine whether FDIC examiners adequately consider
the reliability of appraisals and sufficiency of insurance coverage for collateral as part of
an evaluation of a financial institution’s lending policies, procedures, and practices
related to real estate loans. This audit focused primarily on institution and examination
guidance. We performed limited testing of examinations performed by DSC’s DRO at 11
financial institutions, including institutions the FDIC identified as affected by Hurricane
Katrina, to gain an understanding of how existing examination guidance was being
applied. Because we found generally sound controls related to examiners’ review of
appraisals and determinations concerning property and flood insurance, we decided to
curtail further audit tests and procedures related to specific examinations. We performed
our audit from July through December 2006 in accordance with generally accepted
government auditing standards.
Scope and Methodology
We reviewed the ROEs and examination work papers for 11 sampled institutions
examined by the DRO. We selected eight institutions, with appraisal and flood
violations, that were supervised by the Baton Rouge Field Office and three institutions
(two of which had flood violations) that were supervised by the Dallas Field Office.
We selected the 11 institutions from a list of risk management ROEs completed as of
January 1, 2005 through August 31, 2006, and the most recent compliance examinations.
We performed the following steps to address the audit objective:
- Interviewed officials at DSC’s DRO, the Dallas Field Office, and the Baton
Rouge Field Office.
- Identified applicable criteria, including:
- laws and regulations applicable to appraisals, property insurance, and
flood insurance, as specified in the Compliance With Laws and
Regulations section in this report;
- DSC’s Risk Management Manual of Examination Policies;
- DSC’s Compliance Examination Manual;
- Regional Directors memoranda:
- RD Memorandum 2005-029, Revised Guidance about Civil Money
Penalties for Flood Insurance Violations
- RD Memorandum 2006-001, Hurricane Katrina Guidance
- RD Memorandum 2006-016, Updated Standard Flood Hazard
Determination Form
- Financial Institution Letters:
- FIL-13-1998, Loans in Areas with Special Flood Hazards, dated
February 5, 1998
- FIL-94-1999, High Loan-to-Value Residential Real Estate
Lending, dated October 12, 1999
- FIL-81-2001, Loans in Areas Having Special Flood Hazards,
dated September 20, 2001
- FIL-84-2003, Independent Appraisal and Evaluation Functions,
dated October 27, 2003
- FIL-20-2005, Appraisal Regulations Frequently Asked Questions,
dated March 22, 2005
- FIL-101-2005, Regulatory Relief Information for Bankers in
Hurricane Affected Areas, dated October 7, 2005
- FIL-12-2006, Hurricane Katrina Examiner Guidance, dated
February 3, 2006
- FIL-51-2006, Updated Standard Flood Hazard Determination
Form, dated June 21, 2006
- FIL-53-2006, Appraisal Standards Revisions to USPAP, dated
June 23, 2006
- Examiner tools such as the ED Modules and Assignment Sheets.
- Accessed the Virtual Supervisory Information on the Net (ViSION)[ 11 ] system,
used to track ROEs and obtained information on the most recent risk management
and compliance examination information for banks supervised in the Baton Rouge
and Dallas Field Offices.
- Accessed the System of Uniform Reporting of Compliance and Community
Reinvestment Act Examinations (SOURCE)[ 12 ] to obtain information on flood
insurance violations.
- Obtained a schedule of banks supervised by the DRO that had been cited for
significant violations of flood insurance regulations since January 1, 2005.
- Reviewed risk management and compliance ROEs and applicable work papers for
a total of 11 financial institutions examined by the Baton Rouge and Dallas Field
Offices.
- Obtained information on consumer complaints and inquiries from DSC’s
Specialized Tracking and Reporting System (STARS)[ 13 ] and the Consumer
Response Center relating to flood insurance.
- Reviewed prior FDIC OIG reports as well as those from the Board of Governors
of the Federal Reserve System Office of Inspector General and Government
Accountability Office (GAO).
- Reviewed the FDIC 2006 Annual Performance Plan for performance measures
related to safety and soundness and consumer protection.
- Consulted the FDIC’s Counsel to the Inspector General for assistance in verifying
applicable criteria and researching potential legal issues.
Internal Controls
We identified DSC’s internal controls related to the risk management and compliance
examinations, focusing on the examiners’ review of loans for determining the reliability
of appraisals and sufficiency of insurance. Our observations related to those controls are
described in the body of this report. However, we did not assess the ratings assigned by
the risk management and compliance examinations and did not determine whether DSC
should have taken more stringent enforcement actions with respect to reported significant
violations of applicable laws and regulations.
Reliance on Computer-based Data
Our audit objective did not require that we separately assess the reliability of computerprocessed
data. We accessed DSC’s ViSION information system to identify a universe
of risk management examinations performed by the Baton Rouge and Dallas Field
Offices and the related ROEs. From this universe, we selected a non-statistical[ 14 ] sample
of 11 institutions—some having reported appraisal or flood insurance violations and
some having neither type of violation reported. For these institutions, we reviewed the
risk management examinations for the period January 1, 2005 through August 31, 2006
and the most recent compliance examinations.
We accessed DSC’s SOURCE information system for information on flood insurance
violations. For purposes of the audit, we did not rely on computer-processed data to
support our significant findings, conclusions, and recommendations. Our assessment centered on reviews of hardcopy ROEs, examination work papers, and other documents
such as correspondence files.
Compliance With Laws and Regulations
We reviewed the following laws and regulations pertaining to examination coverage of
appraisals and insurance:
- Federal Deposit Insurance Act (FDI Act) - Section 10(d);
- Financial Institutions Reform, Recovery, and Enforcement Act of 1989
(FIRREA)-Title XI;
- Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
- National Flood Insurance Act of 1968;
- Flood Disaster Protection Act of 1973;
- National Flood Insurance Reform Act of 1994;
- FDIC Rules and Regulations, 12 Code of Federal Regulations (C.F.R.) Part 323,
Appraisals;
- FDIC Rules and Regulations, 12 C.F.R. Part 339, Loans in Areas Having Special
Flood Hazards; and
- FDIC Rules and Regulations, 12 C.F.R. Part 365, Appendix A, Interagency
Guidelines for Real Estate Lending Policies.
Government Performance and Results Act
The Government Performance and Results Act of 1993 directs Executive Branch
agencies to develop a strategic plan that sets general goals and objectives for agency
management. In fulfilling its primary supervisory responsibilities, the FDIC pursues two
general (or strategic) goals: (1) FDIC-supervised institutions are safe and sound, and
(2) consumers’ rights are protected and FDIC-supervised institutions invest in their
communities. Moreover, there are two strategic objectives related to our audit:
(1) FDIC-supervised institutions appropriately manage risk and (2) FDIC-supervised
institutions comply with consumer protection, the Community Reinvestment Act, and fair
lending laws.
The FDIC’s strategic goals are implemented through the Corporation’s 2006 Annual
Performance Plan. The plan identifies performance goals, indicators, and targets for
each strategic objective. For example, the plan contained one goal for the Risk Management component of the Supervision Program related to the scope of our audit—
conduct on-site risk management examinations to assess the overall financial condition,
management practices and policies, and compliance with applicable laws and regulations
of FDIC-supervised depository institutions.
Fraud and Illegal Acts
The objective of this audit did not lend itself to testing for fraud and illegal acts.
Accordingly, our survey and audit programs did not include specific audit steps for this
purpose. However, we were alert to situations or transactions that could have been
indicative of fraud or illegal acts and discussed the potential for such acts with the
assigned staff.
Summary of Prior Coverage
The FDIC OIG, Board of Governors of the Federal Reserve System OIG, and GAO and
have performed audits regarding appraisals as follows.
- On March 24, 2004, the GAO presented testimony before the Subcommittee on
Housing and Transportation, Committee on Banking, Housing, and Urban Affairs,
U.S. Senate. GAO’s statements were based on a report GAO issued in May 2003.
In this testimony (GAO-04-580T), Opportunities to Enhance Oversight of the
Real Estate Appraisal Industry, GAO states that the primary role of appraisals is
to provide evidence that the collateral value is sufficient to avoid losses to the
institution. According to the report, the most significant shortcoming of
FIRREA’s Title XI is that it allows each state to establish the criteria for licensed
appraisers. The education and experience requirements differ from state to state.
In 2002, one state passed legislation that eliminated the experience requirement
for its licensed appraisers and, in 2001, another state revised its criteria to comply
with Appraiser Qualifications Board requirements but at the same time,
“grandfathered in” several hundred licensed appraisers. GAO stated that
Title XI’s intent was to ensure a minimum level of competency but to make
licensing at the state level voluntary.
- On January 3, 2003, the FDIC OIG issued Audit Report No. 03-008, Examiner
Assessment of Commercial Real Estate Loans. The report discusses whether the
examiners fully assessed appraised value, cash flow, and lending policies in their
examination of commercial real estate (CRE) loans. The audit found that
examiners had not consistently: used the lesser of the acquisition cost or
appraised value to compute the LTV ratios, used new financial information to
update old appraisal assumptions, and documented the results of their review of
appraisals. As a result, auditors found cases where the LTV ratio appeared to
comply with the recommended supervisory limits, but when recalculated using
the lesser of the acquisition cost or appraised value, the LTV ratios were actually
in excess of the recommended supervisory limits.
- On March 31, 1995, the Federal Reserve’s OIG issued Audit Report No. A9305,
Audit of Federal Reserve Examination Policies and Procedures for Commercial
Real Estate Loans. An audit of three Federal Reserve examination teams found
they had not consistently ensured that bank CRE lending practices complied with
the Federal Reserve Board rules implementing Title XI of FIRREA. Examiners
had detected few of the apparent appraisal-related deficiencies that existed in the
sample of CRE loans reviewed during the audit. The undetected deficiencies
included appraisals that (1) had not been obtained when needed for loan renewal
transactions, (2) had been ordered by the borrower instead of by the commercial
bank, (3) had been received or reviewed after the loan was closed, or (4) did not
meet USPAP standards.
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HURRICANE KATRINA RESPONSE EFFORTS |
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Hurricane Katrina, a massive storm that made landfall on August 29, 2005 and caused
substantial damage in the Gulf Coast region, impacted the eight banks whose
examinations we reviewed at the DSC Baton Rouge Field Office. Although the storm’s
duration was short, the economic effects will be long-lasting, and many FDIC officials,
including the Chairman, have toured the affected area. The FDIC was involved in
extensive outreach efforts to the community and supervises the eight banks. Moreover,
the FDIC has published numerous related articles, including one entitled, Lessons
Learned From Hurricane Katrina: Preparing Your Institution for a Catastrophic Event.
On February 3, 2006, the federal banking, thrift, and credit union regulatory agencies and
the state supervisory authorities in Alabama, Louisiana, and Mississippi jointly issued
examiner guidance outlining the supervisory practices for assessing the financial
condition of institutions affected by Hurricane Katrina. This guidance, Interagency
Supervisory Guidance for Institutions Affected by Hurricane Katrina, describes
examination procedures for institutions adversely affected by the hurricane. The
guidance advises examiners to retain flexibility in their supervisory response, given the
unique and long-term nature of the problems faced by affected institutions and to give
appropriate recognition to the extent to which weaknesses are caused by external
problems related to the hurricane and its aftermath.
Some of this guidance is pertinent to our audit. For example, examiners were advised to
consult with their supervisors to determine what supervisory action, if any, should be
taken, and a 3-year appraisal waiver from federal appraisal regulations was offered to
institutions. These appraisal waivers for institutions affected by Hurricane Katrina are to
end August 29, 2008. To qualify for the waiver, a financial institution needs to document
that (1) the property involved was directly affected by the disaster, (2) there is a binding
commitment to fund the transaction, and (3) the value of the real property supports the
institution’s funding decision to enter into the transaction. At the time of our visit,
according to DSC’s Baton Rouge Field Office Supervisor for Risk Management, the
banks had not elected to take advantage of the appraisal waiver, primarily because there
had not been a high volume of new business.
The FDIC has also worked cooperatively with state and federal banking agencies and
other organizations to determine the status of the financial institutions located in the
affected areas. For example, the FDIC’s DRO developed a watch list to monitor and
track the financial status of 43 FDIC-insured institutions that were impacted by
hurricanes in 2005. According to an Assistant Regional Director for Risk Management,
this was an attempt to capture the banks’ posture—both financially and from an “up-andrunning”
perspective and is not a scientific approach but rather an “artful way of getting
their arms around the situation.” The information has been used to brief FDIC
management and others on the health of the financial institutions and has helped focus the
examination efforts that have taken place since the hurricane. Regional management has
sent specific instructions to field examiners in special written memorandums to the
Regional Director regarding each bank’s condition.
For the eight banks in our sample that were in areas affected by Hurricane Katrina,
according to the Baton Rouge Field Office Supervisor, the examiners had not modified
their required detailed examination procedures. However, some scheduled examinations
were initially delayed, and for some examinations, more loans were reviewed.
|
| DATE: |
March 29, 2007 |
| |
| MEMORANDUM TO: | Russell A. Rau |
|
Assistant Inspector General for Audits |
| |
| FROM: |
Sandra L. Thompson [Electronically produced version; original signed by Sandra L. Thompson] |
|
Director |
| |
| SUBJECT: |
Response to Draft Report Entitled: Examination Assessment of the Reliability of Appraisals and Sufficiency of Insurance Coverage for Real Estate Lending (Assignment No. 2006-024) |
| |
This memorandum represents the Federal Deposit Insurance Corporation, Division of Supervision and Consumer Protection’s (DSC) response to the draft report entitled Examination Assessment of the Reliability of Appraisals and Sufficiency of Insurance Coverage for Real Estate Lending (Assignment No. 2006-024) (Draft Report) prepared by the FDIC’s Office of Inspector General (OIG). The Draft Report states, “The FDIC’s guidance to institutions and examiners on the reliability of appraisals and sufficiency of property and flood insurance for real estate loans … was generally adequate.” DSC concurs with the findings and recommendations in the OIG’s Draft Report. With respect to the OIG’s specific recommendations, DSC’s response follows:
- Enhance guidance to clarify that, in the absence of ED Module usage, examiners provide adequate documentation of examination coverage to ensure institution compliance with the provisions in FDIC Rules and Regulations, Part 323, Appraisals (Part 323), related to the reliability of appraisals, including the minimum appraisal standards.
The Draft Report indicates that auditors found only “limited evidence” in the examination documentation that examiners had specifically considered the reliability of appraisals as part of the institution’s real estate appraisal program in 6 of the 11 examinations reviewed. However, it also notes examiners had reviewed appraisal information as part of their assessment at all of the institutions sampled and did not cite any deficiencies in examiners’ documentation of apparent violations of FDIC Rules and Regulations Part 323-Appraisals1 in Reports of Examination.
Further, the DSC regional offices forward several referrals to state appraisal certification agencies each year. These referrals, describe deficiencies found in certain appraisals through our supervisory processes. Referrals are used by the state certification agencies to support fines and other sanctions against appraisers. These actions are evidence that DSC’s examination staff is considering the reliability of appraisals and ensuring that institutions are in compliance with Part 323.
DSC examiners are appropriately reviewing the reliability of an institution’s appraisals during the examination process; nonetheless, DSC will remind our examiners to ensure their evaluation is fully documented. The FDIC will provide staff with a reminder about the need for examiners to adequately notate the reliability of appraisals. Further, the updated 2007 Interagency Appraisal and Evaluation Guidelines are to be released shortly. DSC expects to complete this recommendation by December 31, 2007.
- Issue guidance to institutions addressing the need for adequate controls to avoid lapses in flood insurance coverage.
DSC will prepare guidance to FDIC-supervised institutions addressing the need for adequate internal controls to manage the risks associated with lapses in flood insurance coverage by December 31, 2007.
1 - PART 323—APPRAISALS -- Section 323.4 -- Minimum appraisal standards, provides that: "For federally related transactions, all appraisals shall, at a minimum: (a) Conform to generally accepted appraisal standards as evidenced by the Uniform Standards of Professional Appraisal Practice (USPAP) promulgated by the Appraisal Standards Board of the Appraisal Foundation, 1029 Vermont Ave., NW., Washington, DC 20005, unless principles of safe and sound banking require compliance with stricter standards; (b) Be written and contain sufficient information and analysis to support the institution's decision to engage in the transaction; (c) Analyze and report appropriate deductions and discounts for proposed construction or renovation, partially leased buildings, non-market lease terms, and tract developments with unsold units; (d) Be based upon the definition of market value as set forth in this part; and (e) Be performed by state licensed or certified appraisers in accordance with requirements set forth in this part.
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MANAGEMENT RESPONSE TO RECOMMENDATIONS |
| This table presents the management response on the recommendations in our report and the status of the recommendations as of the date of report issuance. |
| a Resolved – |
(1) Management concurs with the recommendation, and the planned corrective action is consistent with the recommendation. |
|
(2) Management does not concur with the recommendation, but planned alternative action is acceptable to the OIG. |
|
(3) Management agrees to the OIG monetary benefits, or a different amount, or no ($0) amount. Monetary benefits are considered resolved as long as management provides an amount. |
| b Once the OIG determines that the agreed-upon corrective actions have been completed and are effective, the recommendation can be closed. |
|
