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Thursday, August 12, 2021

Unduly Influencing an Appraiser

QUESTION
We have been assessed with an administrative action for unduly influencing our appraisers. Our state regulator is meeting with our lawyer to work out a plan to remediate this situation.

Recently, we also received a letter from another state banking department requesting documents and procedures relating to our appraiser independence. We are licensed in many states and, needless to say, we’re concerned that many other states will be examining us on appraiser independence. 

We have an appraiser independence policy and procedures, but that is not satisfying the regulator. They believe it is “boilerplate,” and we are not following our own plan, which, they also say, is deficient. On top of that, they picked out several areas that show we are unduly influencing our appraisers. 

We would like to get some guidance on how to prevent this from happening to us again. 

What are some of the pitfalls to watch for to avoid unduly influencing our appraisers?

ANSWER
Policies and procedures don’t mean much if you’re not implementing them. You’re just waste
fully pontificating if you do not take them seriously. And what do I mean by that? 

First of all, you must have comprehensive policies that meet regulatory scrutiny. Don’t try to hand a “boilerplate” policy to a regulator with the hope that it is sufficient. Stay away from “manual mills” and cheap policies offered by firms in return for getting you on a long-term retainer for legal or regulatory compliance support. Some of these manual mills pump out policies that are “customizable.” But, often, the purchaser does not know how to customize a policy based on current regulatory rules and laws. So, what’s the point? 

And, many regulators see the same policies from company to company, and these regulators know when you’re trying to snow them with the exact same policy they’ve seen elsewhere. Stay away from one-size-fits-all policies. Make sure the document fully reflects the way you do business. 

Secondly, practice what you preach! Monitor and periodically test your policies and procedures. How do you know they are being implemented if you are not monitoring and testing? Don’t assume anything. Over time, procedures often get bent out of shape. Your monitoring should include defects, remedies, and re-testing plans. An untested appraiser independence policy leads to why the policy doesn’t cut it with regulators.

We offer the Appraiser Tune-up if you need an objective review! 

Management should be hands-on with appraisal independence. Accurate and unbiased evaluation of the collateral is foundational to the mortgage banking edifice. Ultimately, it is management’s responsibility to select, evaluate, and monitor the individuals performing appraisals, pursuant to the selection process set forth in the subject policy. 

In accordance with the policy guidelines, for staff and fee appraisers given an assignment, the basis for choosing them should ensure that the appraiser is independent of the transaction, possesses the requisite expertise, and holds the proper state certification or license, if applicable. 

In promulgating the policy, management should set forth important process issues. It is critical that management certify the procedures for when to obtain appraisals and when to obtain a re-appraisal, including frequency and scope. It is critical that appraisal and evaluation compliance procedures determine that appraisals comply with appraisal regulations and supervisory guidelines, where appropriate. For instance, there must be written (and monitored) appraisal review procedures to ensure that, where appropriate, a lender’s appraisals are consistent with the standards of Uniform Standards of Professional Appraisal Practice (USPAP), appraisal regulations, and supervisory guidelines. 

And, importantly, management has the responsibility, at least on an annual basis, to review the company’s appraiser independence policy and procedures to ensure that they meet the needs of the lender’s mortgage lending activity. 

You ask, what are some of the pitfalls to watch for in compromising appraiser independence? 

There are so many such pitfalls, I would be remiss to endeavor to offer a full slate of them. However, surely, the following list will get you started. You should check the Home Valuation Code of Conduct and Regulation Z for further details. However, the following suggestions are usually in the regulators’ purview to ferret an undue influence on an appraiser. 

Unduly Influencing an Appraiser – Some Pitfalls 

A residential mortgage lender or originator must not: 

- Imply to an appraiser that current or future retention of the appraiser depends on the amount at which the appraiser values a dwelling. 

- Exclude an appraiser from consideration for future engagement because the appraiser reports a value that does not meet or exceed a minimum threshold. 

- Withhold or threaten to withhold payment or partial payment for an appraisal report because the appraiser does not value a dwelling at or above a certain amount. 

- Condition an appraiser’s compensation on loan consummation. 

- Attempt to influence an appraiser by withholding or threatening to withhold future business for an appraiser, or demoting or terminating or threatening to demote or terminate an appraiser. 

- Attempt to influence an appraiser by expressly or impliedly promising future business, promotions, or increased compensation for an appraiser. 

- Attempt to influence an appraiser by conditioning the ordering of an appraisal report or the payment of an appraisal fee or salary or bonus on the opinion, conclusion or valuation to be reached, or on a preliminary estimate requested from an appraiser. 

- Attempt to influence an appraiser by asking the appraiser to provide an estimated, predetermined or desired valuation in an appraisal report before completion of the appraisal report, or requesting the appraiser to provide estimated values or comparable values or comparable sales at any time prior to the appraiser’s completion of an appraisal report. 

- Attempt to influence an appraiser by providing a minimum reported, anticipated, estimated, encouraged, or desired value for a subject property or a proposed or target amount to be loaned to the borrower, other than a copy of the sales contract for a purchase transaction. 

- Attempt to influence an appraiser by providing stock or other financial or non-financial benefits to an appraiser, appraisal company, appraisal management company, or any entity or person related to the appraiser, appraisal company, or appraisal management company. 

- Allow the removal of an appraiser from a list of qualified appraisers without prior notice to the appraiser, including written evidence of the appraiser’s illegal conduct, a violation of the USPAP or state licensing standards, substandard performance, improper or unprofessional behavior, or other substantive reason for removal. This prohibition does not preclude the management of appraiser lists for bona fide administrative reasons based on written management-approved policies. 

- Order, obtain, use or pay for a second or subsequent appraisal or automated valuation model in connection with a mortgage loan unless the lender has a reasonable basis to believe that the initial appraisal was flawed or tainted and that basis is clearly and appropriately noted in the loan file or unless the appraisal or automated valuation model is done pursuant to written, pre-established bona fide pre- or post-funding appraisal review or quality control process or underwriting guidelines, and the lender adheres to a policy of selecting the most reliable appraisal rather than the appraisal that states the highest value. 

Concerning the Home Valuation Code of Conduct, be advised that it is not a complete list of prohibited activities. Other practices are not specifically listed but are also considered an attempt to compromise appraiser independence. For instance, these should also be prohibited:

- Asking an appraiser to remove details about the material condition of the property, to avoid problems in qualifying certain types of mortgage loans, or

- Threatening to place an appraiser on a “blacklist” (i.e., an exclusionary list), sometimes used to blackball appraisers, for refusal to hit a predetermined value. 

Notwithstanding the above prohibitions, you may ask an appraiser to consider additional information about a dwelling or comparable properties. A lender may ask an appraiser to provide additional information about the basis for a valuation or correct factual errors in a valuation. On a case-by-case basis, a lender may also withhold compensation for breach of contract or substandard performance as provided by contract.

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