Enhancing Appraisal and Evaluation Reviews

Reviewing real estate appraisals and evaluations can seem a mundane but required task in the commercial lending process.  The commercial appraisal and evaluation (valuation) review process[i] within community-based financial institutions includes internally prepared reviews, third-party prepared reviews, or some combination of the two.  Often, the internally prepared review is completed by less experienced financial institution staff as a part of their training process, while some institutions have a dedicated appraisal and review department.  Loan officers may also perceive the review as a necessary evil rather than a risk management function.  The significance of the appraisal or evaluation review should be considered as a part of the pre-funding due diligence and risk management process, however pedestrian the process may seem.

Valuation reviews are a standard and vital part of a loan file review for commercial real estate lending transactions.  Recently our loan review activities identified two situations where the compliance review completed by the financial institution did not identify material flaws with the information included in the appraisal.   Both circumstances originated with a flawed appraisal engagement letter which did not appropriately identify the subject property.  The reviews of these valuations did not detect the mismatch between the appraised property and the property identified in the credit approval pledged to secure the transaction.  The result of the deficient appraisal review led to lending decisions using market values that did not represent the collateral pledged.

[i] The Uniform Standards of Professional Appraisal Practice (USPAP) 2010-2011 edition defines an appraisal review as the act or process of developing and communicating an opinion about the quality of another appraiser’s work that was performed as part of an appraisal, appraisal review, or appraisal consulting assignment. In addition, Section 1473(e) of the Dodd-Frank Act amended Section 1110 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 to require the federal financial regulatory agencies, Federal Housing Finance Agency (FHFA), and Consumer Financial Protection Bureau (CFPB) to issue appraisal review standards.

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The Not-So-Typical-Repo Man

The Not-So-Typical Repo Man: A Conversation with Jeremy Vang with Recovery Solutions 

Recently, Kevin Graff, President of Integrity Loan Review sat down with Jeremy Vang of Recovery Solutions.   Recovery Solutions is a fully insured and bonded nationwide commercial repossession and remarketing agency specializing in commercial-grade repossessions. Recovery Solutions specializes in ag equipment, yellow iron, trucks and trailers, coach busses, cranes, tow trucks, forestry, mining, industrial machines, medical equipment, luxury RVs, and motor homes.

Thanks for sitting down with me, Jeremy. Would you mind telling me a little bit about how you started Recovery Solutions? 

My wife Jessica and I formed Recovery Solutions together in 2015 and we rebranded, strictly focusing on commercial-grade repossessions after 20 years in the auto repossession side of the recovery industry. We noticed that the auto repossession industry was saturated with repo agencies that specialized in consumer vehicles, and nobody was really specializing in commercial-grade equipment repossessions, so we took the ball and ran with it. Recovery Solutions serves lenders of all sizes, ranging from small community banks and credit unions to small-mid-and large ticket leasing and equipment finance companies, attorneys and law firms, and truck and equipment dealers. Because I was able to form Recovery Solutions together with my wife, we are also classified as a woman-owned business.

If there is one thing that separates Recovery Solutions from our competitors and nationwide commercial forwarding companies, it’s the fact that we care about the overall well-being of our lenders and our lenders’ customers, our understanding of brand awareness and reputational risks, and our ability to repossess assets placed with reduced risk to the lender.

You mentioned that you specialize in commercial-grade equipment, do you have a specialty with a specific asset class? How does pricing work for the different asset classes for your business?

We truly specialize in all facets of commercial-grade recovery. We are most versed in ag and construction equipment, trucks and trailers, coach and shuttle busses, limousines, cranes, tow-trucks, forestry, mining, industrial machines, medical equipment, luxury RVs, and motor homes. We’ve even repossessed nail and tanning salons, restaurant equipment, and arcades, and conducted a full-on business closure of a 5-acre truck stop and restaurant once.

With commercial grade repossessions, pricing is typically broken down into weight classes. For instance, if a lender is dealing with mining or installed industrial machines, we try to quote these out to the best of our ability on a case-by-case basis as there will almost always be breakdown and deinstall costs. The one thing that separates consumer and commercial repossessions is this, no commercial repossession is ever the same and it’s hard to put an exact dollar amount on how much it’s going to cost a lender to repossess, deinstall, and transport a 1.5M Tube Laser for instance. The logistics that come with commercial repossessions can be very overwhelming.

To read this full interview, click here. 

Underwriting with a Debt Yield Metric

Over the last few years, I have observed more frequent use of a debt yield calculation as a part of commercial real estate (CRE) underwriting. The reason is due to the simplicity of the debt yield formula and its higher degree of consistency when compared to alternative underwriting metrics such as loan to value (LTV) and debt service coverage ratio (DSCR). Even so, I have not observed the addition of a debt yield metric to the CRE lending policies of community-based financial institutions (CBFIs).

So, what’s the big deal?  

My curiosity as to how a debt yield metric could add value to CBFI commercial real estate underwriting led me to create the example below. The example identifies and highlights the differences when applying the LTV and DSCR metrics in the underwriting of a credit opportunity as compared to a debt yield metric.

To read this full blog, click here.

Did you know….

Since its inception, Integrity Loan Review has been serving customers throughout the Upper Midwest including Wisconsin, Michigan, Iowa, Minnesota, and Illinois. We work with banks, credit unions, and financial institutions of all sizes from community banks to multi-billion dollar financial institutions to publicly owned institutions. Our customers have a wide variety of loan types and credit structures, including commercial real estate, commercial and industrial, agricultural, leveraged lending, asset-based lending and acquisition, and development and construction loans.

A lot has changed over the last few years – and those advancements and innovation in technology and communication has allowed for Integrity Loan Review to also evolve. Our services remain uniquely tailored to your financial institution while maintaining efficient and timely service directly from our ownership team. We believe our expertise plays an integral role in enhancing our customers’ risk management and credit department effectiveness.

Our advantage above others is a local feel with nationwide capabilities. We hope you continue to grow with us as we continue to broaden our reach!

Loan Review Policy

Loan review has become a mainstay third line of defense for loan portfolio risk management in financial institutions of all sizes.   Loan review has also taken on increased significance  as it is used both to ensure appropriate credit grading and to assist in the determination of loan loss allowance.  Regulators often assess an institution’s loan review program in reviewing the appropriateness of the loan loss allowance.

We believe the key to a successful loan review program starts with a sound loan review policy.  The policy should serve as the roadmap in which management, the board and regulators can point to in support of safe and sound risk management practices.

To read this full blog, please click here.