QUESTION
We are a small lender in the southeast. We originate only conventional loans. We are currently licensed in three states.
Last fall, we had a state banking examination which didn’t go well. The examiner found several problems but the biggest involved how we deal with appraisers.
The banking department sent us their report, which showed a few instances of “appraiser coercion.” I have to say, this really caught us off guard because we thought that our procedures prevented that from happening. However, now we are facing the potential for serious administrative actions.
What guidance can you provide on how we could avoid a charge that we coerce appraisers?
ANSWER
Many companies do not tend to have a comprehensive understanding of appraiser independence. They think of it as a compliance issue, meaning a regulatory matter. But it is much more. There is a view that adopting policies and procedures is a sufficient resolution, but there is hardly much implementation monitoring.
Appraiser independence, when done correctly, can prevent appraiser coercion.
You should be monitoring appraiser independence – whether appraisers are staffed, individually retained, or in an Appraisal Management Company (AMC). If you were to have been doing such monitoring, you might have caught the appraiser coercion issues and corrected them. You could have conducted the review internally or used our firm to provide the Appraiser Tune-up. Either way, the decision not to monitor was irresponsible.
Keep this in mind: appraiser independence covers a broad range of appraisal rules, such as the ECOA appraisal rule. There are many dimensions to ensuring that appraiser coercion is avoided. I will provide a brief list that should help you prepare appropriate procedures. But, remember, without monitoring, your procedures are no more than useless pontifications.
Notwithstanding the prohibitions that I will outline, a lender 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. And, a lender may withhold compensation for breach of contract or substandard performance as provided by contract.
Here are some prohibitions that I have compiled. The list is certainly not meant to be comprehensive.
A lender must not imply to an appraiser that the current or future retention of the appraiser depends on the amount at which the appraiser values a dwelling. Indeed, you must not exclude an appraiser from consideration for future engagement because the appraiser reports a value that does not meet or exceed a minimum threshold.
Along the same lines, you must not 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; and you must not condition an appraiser’s compensation on loan consummation.
Trying to influence the appraiser leads into the appraiser coercion ditch quickly. Thus, you shouldn’t 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. Moreover, a lender must not attempt to influence an appraiser by expressly or impliedly promising future business, promotions, or increased compensation for an appraiser. Avoid the quid pro quo debacle, where a lender attempts 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.
One violation we encounter much too often is where a lender attempts 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. Furthermore, you must not 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.
Any form of bribing the appraiser lead straight to administrative action. Put bluntly, a lender must not 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.
Another coercive tactic is where a lender allows 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 Uniform Standards of Professional Appraisal Practice (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.
An adverse finding that comes up in our monitoring reviews occurs where a lender orders, obtains, uses, or pays for a second or subsequent appraisal or automated valuation model in connection with a mortgage loan, unless, of course, the lender has a reasonable basis to believe that the initial appraisal was flawed or tainted. With respect to a reasonable basis in believing an appraisal to be flawed or tainted, that view should be clearly and appropriately noted in the loan file. The appraisal or automated valuation model may be done pursuant to written, pre-established, bona fide, pre-funding or post-closing appraisal review or quality control process (or underwriting guidelines), in which case the lender should adhere to a policy of selecting the most reliable appraisal rather than the appraisal that states the highest value.
A lender must not ask an appraiser to remove details about the material condition of the property to avoid problems in qualifying certain types of mortgage loans.
Finally, do not threaten to place an appraiser on a “blacklist” (i.e., an exclusionary list), which is sometimes used to blackball appraisers for refusing to hit a predetermined value.
Jonathan Foxx, Ph.D., MBAChairman & Managing Director
