Internal Control Questionnaires and Verification Procedures

Appraisals and Evaluations

  1. Has the bank’s policy or procedures for appraisals and evaluations been approved by the board of directors?

  2. Does the bank’s policy or procedures provide for the monitoring of real estate collateral values for:

    1. Other real estate owned?

    2. Troubled real estate loans?

    3. Portfolio loans?

  3. Does the bank’s policy or procedures address the real estate lending engaged in by the bank and provide guidance for each category, including, for example, residential, income-producing, and construction projects?

  4. Does the bank provide written instructions to the appraiser?

  5. Are appraisals and evaluations required to be in writing, dated, and signed?

  6. Does the bank have an internal review procedure to determine whether appraisal policies/procedures are being followed consistently and that appraisal documentation supports the appraiser’s conclusions?

  7. If staff appraisers are used, is their independence ensured by precluding them from the lending and collection functions?

  8. If staff appraisers are used, does the bank occasionally have appraisals prepared by such staff reviewed by fee appraisers?

  9. If fee appraisers are used, does the bank maintain a list of approved appraisers?

    1. Does the bank investigate the qualifications and reputations of fee appraisers before placing them on the list of approved appraisers?

    2. Does the bank periodically test appraisals to ensure that unsatisfactory fee appraisers are not being used and are removed from the list?

  10. Are appraisal fees:

    1. Paid directly by the bank?

    2. The same amount regardless of whether or not the loan is granted?

  11. Does the bank have procedures in place to ensure that appraisers do not have a financial or other interest in the property being appraised?

  12. Are procedures in place to determine if there is a relationship between the appraiser and the borrower, or between the appraiser and an insider of the bank?

  13. Is the appraiser not informed of the amount of the loan being requested?

  14. Are the appraiser’s underlying assumptions, including capitalization rates, future net income streams, recent sales activities, and omission of certain valuation methods required to be documented?

  15. determination that the sale was an arms-length transaction required to be documented?

  16. Are procedures in place to review appraisals for reasonableness before funds are advanced?

  17. For construction loans, if there is to be a take-out commitment, are appraisals also approved in writing by the permanent lender?

    Note: Questions 22 through 65 focus on real estate construction lending. Additional questions concerning other, generally applicable internal controls for real estate lending resume with question 66.

Previous: Policies Next: Construction Loan Applications