A bank develops an evaluation for an exempt home-equity loan using an AVM whose estimate assumes the house is in average condition. No inspection was performed and nothing else documents the property's condition. Under the Interagency Guidelines, is this evaluation acceptable?
Correct Answer
C) No; it rests on an unsupported assumption about the property's condition
The guidelines state that an evaluation may not rest on unsupported assumptions such as a property being in average condition, and an AVM result used as an evaluation must address the property's actual physical condition. When no inspection is performed, the bank must be able to show how condition was determined, which it cannot do here. A confidence score does not supply condition information, and evaluations need not be prepared by appraisers.
Why This Is the Correct Answer
Option C is correct because the guidelines say an evaluation may not be based on unsupported assumptions, giving average condition as an example. Appendix B adds that an AVM result used for an evaluation must address the property's actual physical condition. Without an inspection or other documentation, the bank cannot demonstrate how condition was determined.
Why the Other Options Are Wrong
Option A: Yes; an evaluation is not subject to USPAP development requirements
Option A says the evaluation is acceptable because evaluations are not subject to USPAP development requirements. That premise does not cure the problem, because the guidelines set their own evaluation standards, including addressing actual physical condition.
Option B: Yes, if the AVM's confidence score meets the bank's internal minimum
Option B makes acceptability depend on the AVM's confidence score meeting the bank's minimum. A confidence score speaks to the model's estimate, not to whether the property's actual condition was established, so it does not fix the unsupported assumption.
Option D: No; an evaluation must be prepared and signed by a certified appraiser
Option D says an evaluation must be prepared and signed by a certified appraiser. The guidelines allow evaluations by qualified persons who are not appraisers and allow evaluations supported by technological tools, so this is not the reason the evaluation fails.
Average is an assumption
Average condition is a guess, not a finding. An evaluation needs condition that was actually determined, by inspection or another documented method.
How to use: Use this phrase when an evaluation scenario relies on a model's default or assumed condition.
Exam Tip
When an evaluation question mentions no inspection, look for whether the institution can show how condition and market factors were determined.
Common Mistakes to Avoid
- -Treating a high confidence score as evidence of condition
- -Believing evaluations must be prepared by certified appraisers
Concept Deep Dive
Analysis
The question requires two judgments: whether an AVM-based evaluation can rest on an assumed condition, and whether the absence of an inspection can be cured some other way. The guidelines bar unsupported condition assumptions and require the bank to show how condition was determined when there is no inspection. Since nothing documents condition, the evaluation fails.
Background Knowledge
An evaluation must provide a reliable estimate of market value reflecting the property's actual physical condition, use and zoning. Institutions should set criteria for the research or inspection needed to determine condition, and an AVM may be used for an evaluation only with supplemental information that meets the guidelines.
Real-World Application
A lender's home-equity program pairs each AVM result with a borrower-provided photo set and a short property condition questionnaire reviewed by staff. When the photos show deferred maintenance, the lender switches to an appraisal or another valuation method.
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