As a lender, we use an AMC to order appraisals. If the appraisal that is done comes in at, what is, in our opinion, an extremely low value, can we order and pay for a new appraisal through a different appraiser. We don’t want to dispute the first appraisal due to the time and energy involved. We believe the comparables used were poor and reflected that the appraiser’s unfamiliarity with the local housing market. So, can we order a new appraisal or are we obligated to use the first appraisal? Of course, we will never use this particular appraiser again.
Under the Appraiser Independence Rules, a lender must not order, obtain, use, or pay for a second or subsequent appraisal in connection with a transaction unless:
(i) there is a reasonable basis to believe that the initial appraisal was flawed or tainted and such basis is clearly and appropriately noted in the Mortgage file, or
(ii) such appraisal is done pursuant to written, pre-established bona fide pre- or post-funding appraisal review or quality control processes or underwriting guidelines, and so long as the lender adheres to a policy of selecting the most reliable appraisal, rather than the appraisal that states the highest value, or
(iii) a second appraisal is required by law. So, in your scenario, as the lender, if you can document your reasonable basis of belief that the initial appraisal was defective, you can order a second appraisal.
With respect to an FHA loan, a lender is prohibited from ordering an additional appraisal to achieve an increase in value for the property and/or the elimination or reduction of deficiencies and/or repairs required. As an exception to this general prohibition, the lender may order a second appraisal for Mortgages in accordance with FHA’s requirements on property flipping. A second appraisal may only be ordered if the Direct Endorsement (DE) underwriter determines that the first appraisal is materially deficient and the appraiser is unable or uncooperative in resolving the deficiency. The lender must fully document the deficiency and status of the appraisal in the mortgage file. The lender must pay for the second appraisal. Material deficiencies on appraisals are those deficiencies that have a direct impact on value and marketability. Material deficiencies include, but are not limited to:
- failure to report readily observable defects that impact the health and safety of the occupants and/or structural soundness of the house;
- reliance upon outdated or dissimilar comparable sales when more recent and/or comparable sales were available as of the effective date of the appraisal; and
- fraudulent statements or conclusions when the Appraiser had reason to know or should have known that such statements or conclusions compromise the integrity, accuracy and/or thoroughness of the appraisal submitted to the client. [Handbook 4000.1 II.A.1.a.iii.B.8]
Don’t forget, under ECOA, as the lender, you must provide the borrower with copies of all appraisals and valuations of the property at least 3 days prior to closing. [12 CFR 1002. 14]
Joyce Wilkins Pollison
Director/Legal & Regulatory Compliance
Lenders Compliance Group