OCC Promises Guidance on Appraisal Program

Poor appraisal quality and appraisal pressure are challenging the lending system and loan reviews according to Comptroller of the Currency John Dugan. In an October 2 address before the Independent Bankers Association of Texas, Dugan said that "the federal banking agencies are working on guidance that updates and clarifies many previous supervisory interpretations on real estate appraisals, including independence of the appraisal program, minimum appraisal standards, and internal review processes."

Dugan said that the OCC has seen greater independence in the process of ordering appraisals and appraisal review – which is positive – but remains concerned with the overall quality of many appraisals. The agencies plan to propose the guidance for comment, but were unsure of a delivery date for that.

Dugan focused a portion of his comments on problems associated with community banks having a high concentration of commercial real estate loans. Dugan pointed to the interagency guidance released last December, which was intended to remind everyone of the increased risk that arises from concentrations in this asset class, and reiterated the OCC’s expectations when evaluating this increased risk.

Dugan said such concentrations still present elevated levels of credit risk for community banks, and that the industry is entering a stage of the credit cycle where losses are likely to increase. The mortgage market disruptions of the last two months, combined with declining house prices across the country, are putting considerably more stress on one category of commercial real estate lending: residential construction, Dugan said. “Other categories will feel similar stress if general economic activity slows materially. As losses mount, banks need to be prepared, especially banks with significant concentrations,” he said.

While overall commercial real estate performance has been sound, Dugan pointed out some weaknesses that are beginning to emerge in C&D loans, primarily related to the slow-down in residential home sales. During the last year national community banks have experienced a significant increase in C&D loans that are 30 days or more past due – more than doubling from 1.2 percent in June 2006 to 2.6 percent in June 2007. “Although starting from an admittedly very low baseline, such an increase – over 100 percent in a single year – is clearly a trend that bears watching,” he said.

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