Appraiser Misconduct: Prevention Caveats

QUESTION
One of the appraisers we use is involved in an appraisal misconduct investigation. The investigation is being conducted by one of our investors.

They requested a list of all the appraisals he has done for the last three years and may want to expand the period further back in time. They also asked for a list of all our appraisers. We’re worried now about where this will lead.

We thought our appraiser independence policies were good. They had always passed banking examinations.

We decided to bring our problem to your attention, hoping that you would shed some light on how we can avoid this mess in the future.

What can we do to prevent appraiser misconduct?

ANSWER
High on the examination and enforcement agenda for state banking departments, the Consumer Financial Protection Bureau (CFPB), and the federal prudential agencies is appraisal fraud. FinCEN reports such mortgage fraud statistics regularly. The bedrock of residential mortgage banking is the underlying real property collateral.

Title XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) required the federal banking agencies to institute appraisal standards that, at a minimum, meet the generally accepted appraisal standards established by the Appraisal Foundation. These standards have become known as Appraisal Standards.

In general, FIRREA requires all real estate appraisals performed in connection with real estate-related financial transactions to be conducted by state-certified or licensed appraisers. It should be a hallmark of your policy to comply with these standards, whichever regulator supervises your institution. The foregoing departments and agencies have adopted the Appraisal Standards in a substantially similar construct.

Although you should not necessarily exclude any appraiser from consideration for an assignment solely by membership or lack of membership in any particular appraisal organization, you would want your Appraisal Standards to meet certain interagency appraisal and evaluation guidelines.

Here’s a checklist of some caveats that should be included in your compliance reviews. 

·     Provide for the independence of the persons ordering, performing, and reviewing appraisals or evaluations. 

·     Establish selection criteria and procedures to evaluate and monitor the ongoing performance of appraisers and persons who perform evaluations. 

·     Ensure that appraisals comply with the appraisal regulations and are consistent with supervisory guidance. 

·     Ensure that appraisals and evaluations contain sufficient information to support the credit decision. 

·     Maintain criteria for the content and appropriate use of evaluations consistent with safe and sound banking practices. 

·     Provide for the receipt and review of the appraisal or evaluation report in a timely manner to facilitate the credit decision. 

·     Develop criteria to assess whether an existing appraisal or evaluation may be used to support a subsequent transaction. 

·     Implement internal controls that promote compliance with these program standards, including those related to monitoring third-party arrangements. 

·     Establish criteria for monitoring collateral values. 

·     Review mortgage quality control reports for appraisal statistics, report them to management, and provide written management responses for any appraisal defects or process concerns. 

·     Establish criteria for obtaining appraisals or evaluations for transactions that are not otherwise covered by the appraisal requirements of the appraisal regulations.

Regulation Z, the implementing regulation of the Truth-in-Lending Act (TILA), prohibits a financial institution from directly or indirectly coercing, influencing, or otherwise encouraging an appraiser to misstate or misrepresent the value of the consumer’s dwelling. 

Indeed, a creditor may not extend credit when it knows, at or before loan consummation, of a violation of this requirement unless the creditor documents that it has acted with reasonable diligence to determine that the appraisal does not materially misstate or misrepresent the value of the dwelling.

For example, a creditor or mortgage broker may not: 

·     Imply to an appraiser that current or future retention of the appraiser depends on the amount at which the appraiser values a consumer’s principal dwelling. 

·     Exclude an appraiser from consideration for future engagement because the appraiser reports a value of a consumer’s principal dwelling that does not meet or exceed a minimum threshold. 

·     Tell an appraiser a minimum reported value of a consumer’s principal dwelling needed to approve the loan. 

·     Fail to compensate an appraiser because the appraiser does not value a consumer’s principal dwelling at or above a certain amount. 

·     Condition an appraiser’s compensation on loan consummation.

Certain actions are not prohibited, including: 

·     Asking an appraiser to consider additional information about a consumer’s principal dwelling or comparable properties. 

·     Requesting that an appraiser provide additional information about the basis for a valuation. 

·     Requesting that an appraiser correct factual errors in a valuation. 

·     Obtaining multiple appraisals of a consumer’s principal dwelling, so long as the creditor adheres to a policy of selecting the most reliable appraisal, rather than the appraisal that states the highest value. 

·     Withholding compensation from an appraiser for breach of contract or substandard performance of services as provided by contract. 

·     Taking action permitted or required by applicable federal or state statute, regulation, or agency guidance.

I would add a few Regulation Z caveats that coincide with the appraiser independence rule, with respect to any loan secured by a consumer’s principal dwelling, such as:

·     Not to engage in coercion, bribery, and other similar actions designed to cause an appraiser to base the appraised value of a property on factors other than the appraiser’s independent judgment. 

·     Not to permit appraisers or appraisal management companies to materially misrepresent the value of a consumer’s principal dwelling in a valuation. 

·     Not to allow the falsification of a valuation or material alteration of a valuation. 

·     Not to allow appraisers or appraisal management companies to have a financial or other interest in the property or the credit transaction. 

·     Not to extend credit if you know, at or before consummation, of a violation of the prohibition on coercion or of a conflict of interest, unless you document that you have acted with reasonable diligence to determine that the valuation does not materially misstate or misrepresent the value of the dwelling. 

·     To report appraiser misconduct to state appraiser licensing authorities. 

·     To pay reasonable and customary compensation to any “fee appraiser” (i.e., an appraiser who is not your salaried employee and is not an employee of an appraisal management company you hire).

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group