QUESTION
We had a problem recently with one of our appraisers. Long story short, he had a criminal background that we did not know about. We found out about it when he got caught falsifying his evaluations by getting bribed by a loan officer.
Both the appraiser and the loan officer were fired. As the one and only compliance manager in our company, it is up to me to revise our appraiser independence policy. I need to know how to select appraisers and how to manage our appraiser list.
What criteria should I use to select appraisers?
How do I manage the appraiser list?
ANSWER
Don't be too hard on yourself. You might have a decent appraiser independence policy; however, people who are set on committing crimes will tend to ignore your standards and do whatever they can to defeat your protective systems.
This is why it is not sufficient just to have a good appraiser independence policy. You must monitor it and conduct risk assessments. We offer the AIR Tune-up to give you the feedback you need about Appraiser Independence Requirements. Contact us and we'll send you information about it.
An institution's collateral valuation program should establish criteria to select, evaluate, and monitor the performance of appraisers and persons who perform evaluations.
The criteria should ensure that:
· The person selected possesses the requisite education, expertise, and experience to complete the assignment competently;
· The institution periodically reviews the work performed by appraisers and persons providing evaluation services;
· The person selected is capable of rendering an unbiased opinion; and
· The person selected is independent and has no direct, indirect, or prospective interest, financial or otherwise, in the property or the transaction.
The appraiser selected to perform an appraisal must hold the appropriate state certification or license at the time of the assignment.
Importantly, persons who perform evaluations should possess the appropriate appraisal or collateral valuation education, expertise, and experience relevant to the type of property being valued. Such persons may include appraisers, real estate lending professionals, agricultural extension agents, or foresters.[i]
An institution or its agent must directly select and engage appraisers. The only exception to this requirement is that the Agencies' appraisal regulations allow an institution to use an appraisal prepared for another financial services institution, provided certain conditions are met.
An institution or its agents also should directly select and engage persons who perform evaluations. Independence is compromised when a borrower recommends an appraiser or a person to perform an evaluation.
Independence is also compromised when loan production staff selects a person to perform an appraisal or evaluation for a specific transaction. For certain transactions, an institution also must comply with the provisions addressing valuation independence in Regulation Z (Truth in Lending Act).[ii]
An institution's selection process should also ensure that a qualified, competent, and independent person is selected for a valuation assignment. An institution should maintain documentation to demonstrate that the appraiser or person performing an evaluation is competent, independent, and has the relevant experience and knowledge for the market, location, and type of real property being valued.
Furthermore, the person who selects or oversees the selection of appraisers or persons providing evaluation services should be independent from the loan production area.
Your institution should prohibit the use of borrower-ordered or borrower-provided appraisals, as this would violate the Agencies' appraisal regulations. However, a borrower can inform an institution that a current appraisal exists, and the institution may request it directly from the other financial services institution.
With respect to managing the approved appraiser list, if an institution establishes an approved appraiser list for selecting an appraiser for a particular assignment, it should have appropriate procedures for the development and administration of the list.
These procedures should include a process for qualifying an appraiser for initial placement on the list and periodic monitoring of the appraiser's performance and credentials to assess whether to retain the appraiser on the list.
There should be periodic internal reviews of the approved appraiser list to confirm that appropriate procedures and controls exist to ensure independence in the list's development, administration, and maintenance.
For residential transactions, loan production staff can use a revolving, pre-approved appraiser list, provided the development and maintenance of the list are not under their control.
Jonathan Foxx, Ph.D., MBAChairman & Managing Director
[i] Although not required, an institution
may use state certified or licensed appraisers to perform evaluations.
Institutions should refer to USPAP Advisory Opinion 13 for guidance on
appraisers performing evaluations of real property collateral
[ii] See 12 CFR § 1026.42
