What must an institution be able to demonstrate about an evaluation, whether prepared by an individual or supported by a technological tool?
Correct Answer
D) That it reliably estimates market value as of a stated effective date
An institution should be able to demonstrate that an evaluation provides a reliable estimate of the collateral’s market value as of a stated effective date prior to the decision to enter into the transaction.
Why This Is the Correct Answer
Option D is correct because the Interagency Guidelines state that an institution should be able to demonstrate that an evaluation, whether prepared by an individual or supported by an analytical method or technological tool, provides a reliable estimate of the collateral's market value as of a stated effective date. That date should be prior to the decision to enter into the transaction.
Why the Other Options Are Wrong
Option A: That it was prepared by a state-certified or state-licensed appraiser
Option A requires that the evaluation be prepared by a state-certified or state-licensed appraiser. Evaluations do not have to be prepared by a licensed or certified appraiser, which is one way they differ from appraisals.
Option B: That it matches the price stated in the borrower’s purchase contract
Option B requires that the evaluation match the price in the borrower's purchase contract. An evaluation estimates market value as of a stated date; requiring it to match the contract price is not the standard and would turn the contract price into a target, which undermines independence.
Option C: That it develops the cost, sales comparison and income approaches
Option C requires that the evaluation develop the cost, sales comparison and income approaches. The guidelines ask for a reliable market value estimate, not a mandatory use of all three approaches.
Reliable value, stated date
Evaluation questions come back to two things: a reliable market value estimate and a stated effective date.
How to use: Use this pair to test which option matches the evaluation standard.
Exam Tip
Requirements that belong to appraisals, such as a licensed preparer, do not automatically carry over to evaluations.
Common Mistakes to Avoid
- -Assuming evaluations must be prepared by licensed appraisers
- -Expecting an evaluation to match the contract price
- -Requiring all three approaches in an evaluation
Concept Deep Dive
Analysis
This question tests the core standard for evaluations under the Interagency Guidelines. Whether a person prepares the evaluation or a technological tool supports it, the institution should be able to demonstrate that it provides a reliable estimate of the collateral's market value as of a stated effective date. Reject options that import appraisal-only requirements or tie value to the contract price.
Background Knowledge
Evaluations are valuation products used for certain transactions exempt from the appraisal requirement. They must still be reliable and adequately supported. Institutions may use tools such as AVMs to support evaluations, but must be able to show the result reliably estimates market value as of a stated date.
Real-World Application
A bank uses an AVM-supported evaluation for a small home equity line. Its file shows the model's suitability for the area, the estimate, and the effective date, demonstrating reliability before the credit decision.
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