Reconsideration of Value and Appraisal Independence

QUESTION 

We are a large wholesale lender. I am a senior underwriter. Every week, we get requests from our broker partners to have properties reappraised. When the appraisal comes back below what they need, they complain to the Account Executives, who then request that we ask for an appraisal re-evaluation.   

Whether we use an AMC or a staff appraiser, we go through a set of procedures to request a second appraisal review to get a valuation closer to the broker’s expectations. It doesn’t always work out, but sometimes we find deficiencies in the original appraisal report, which, if adjusted for, can change the valuation. 

We have a Reconsideration of Value policy and procedure for this process. Our problem is that the new compliance officer is taking the position that this process interferes with appraisal independence. I would like to know if appraisal independence is compromised by requesting a re-evaluation. 

Does Reconsideration of Value compromise appraisal independence? 

Are there procedures we can implement to avoid compromising appraisal independence? 

ANSWER 

There are risks associated with deficient residential real estate valuations. However, financial institutions may incorporate Reconsideration of Value (“ROV”) processes and controls into established risk management functions.[i] The risk occurs not only in collateral valuation models but also in the risk of discrimination impacting residential real estate valuations. 

One problem in providing guidance to you is that no existing requirements are specific to ROV processes. For purposes of this article, I will define an ROV as a request from the financial institution to the appraiser or other preparer of the valuation report to re-assess the report based upon potential deficiencies or other information that may affect the value conclusion. There is some uncertainty in the industry on how ROVs intersect with appraisal independence requirements and compliance with Federal consumer protection laws, including those related to nondiscrimination. 

Collateral valuations may be deficient due to prohibited discrimination; errors or omissions; or valuation methods, assumptions, data sources, or conclusions that are otherwise unreasonable, unsupported, unrealistic, or inappropriate. The concern is that deficient collateral valuations can keep individuals, families, and neighborhoods from building wealth through homeownership by potentially preventing homeowners from accessing accumulated equity, preventing prospective buyers from purchasing homes, thereby making it harder for homeowners to sell or refinance their homes, and increasing the risk of default. 

Up front, it should be understood that valuations that are not credible may pose risks to a financial institution's financial condition and operations. Such risks may include loan losses, violations of law, fines, civil monetary penalties, payment of damages, and civil litigation. 

Regulatory Framework

There are several regulatory frameworks that, taken together, form the basis for ROV activities. For instance, the Equal Credit Opportunity Act (ECOA), and its implementing regulation, Regulation B, prohibit discrimination in any aspect of a credit transaction. The Fair Housing Act (FH Act) and its implementing regulation prohibit discrimination in all aspects of residential real estate-related transactions. ECOA and the FH Act prohibit discrimination based on race and certain other characteristics in residential real estate-related transactions, including in real estate valuations. 

In addition, section 5 of the Federal Trade Commission Act prohibits unfair or deceptive acts or practices, and the Consumer Financial Protection Act prohibits any covered person or service provider of a covered person from engaging in any unfair, deceptive, or abusive act or practice. 

The Truth in Lending Act (TILA) and its implementing regulation, Regulation Z, establish certain federal appraisal independence requirements. Specifically, TILA and Regulation Z prohibit compensation, coercion, extortion, bribery, or other efforts that may impede the appraiser’s independent valuation in connection with any covered transaction. However, Regulation Z also explicitly clarifies that it is permissible for covered persons to, among other things, request the valuation preparer to consider additional, appropriate property information, including information about comparable properties, or to correct errors in the valuation. 

The appraisal regulations implementing Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 require all appraisals conducted in connection with federally related transactions to conform with the Uniform Standards of Professional Appraisal Practice (USPAP), which requires compliance with all applicable laws and regulations including nondiscrimination requirements. 

Applicable appraisal regulations also require appraisals to be subject to appropriate review for compliance with USPAP. Financial institutions generally conduct an independent review prior to providing the consumer a copy of the appraisal or evaluation; however, an additional review may be warranted if the consumer provides information that could affect the value conclusion or if deficiencies are identified in the original appraisal. 

An appraisal does not comply with USPAP if it relies on a prohibited basis set forth in either the ECOA or the FH Act or contains material errors, including errors of omission or commission. If a financial institution determines through the appraisal review process, or after consideration of information later provided by the consumer, that the appraisal does not meet the minimum standards outlined in the appraisal regulations and if the deficiencies remain uncorrected, the appraisal cannot be used as part of the credit decision. 

Interagency Guidance

The Federal Reserve Board, FDIC, NCUA, and OCC have issued interagency guidance describing actions that financial institutions may take to resolve valuation deficiencies. These actions include the following:

• resolving the deficiencies with the appraiser or preparer of the valuation report; 
• requesting a valuation review by an independent, qualified, and competent state-certified or licensed appraiser; or
• obtaining a second appraisal or evaluation. 

Deficiencies may be identified through the financial institution’s valuation review or consumer-provided information. The regulatory framework does permit financial institutions to implement ROV policies, procedures, and control systems that allow consumers to provide and the financial institution to review relevant information that may not have been considered during the appraisal or evaluation process.

Appraisers and Third Parties 

You mentioned the use of AMCs. You must know that a financial institution’s use of third parties in the valuation review process does not diminish its responsibility to comply with applicable laws and regulations. Moreover, whether valuation review activities and resolving deficiencies are performed internally or via a third party, financial institutions supervised by the Board, FDIC, NCUA, and the OCC are required to operate safely and soundly and in compliance with applicable laws and regulations, including those designed to protect consumers. 

In addition, the CFPB expects financial institutions to oversee their business relationships with service providers in a manner that ensures compliance with Federal consumer protection laws, which are designed to protect the interests of consumers and avoid consumer harm. A financial institution’s risk management practices include managing the risks arising from its third-party valuations and valuation review functions. 

Now to turn to Reconsideration of Value itself in the loan flow process. 

Reconsideration of Value

An ROV request by the financial institution to the appraiser or other preparer of the valuation report encompasses a request to reassess the appraisal report based on deficiencies or information that may affect the value conclusion. A financial institution may initiate a request for an ROV because of the financial institution’s valuation review activities or after consideration of information received from a consumer through a complaint or appeal to the loan officer or other lender representative. 

A consumer inquiry or complaint regarding a valuation would generally occur after the financial institution has conducted its initial appraisal or evaluation review and resolved any issues identified. Given this timing, a consumer may provide specific and verifiable information that may not have been available or considered when the initial valuation and review were performed. Regardless of how the request for an ROV is initiated, a request could be resolved through a financial institution’s independent valuation review or other processes to ensure credible appraisals and evaluations. 

An ROV request may include consideration of comparable properties not previously identified, property characteristics, or other information about the property that may have been incorrectly reported or not previously considered, which may affect the value conclusion. To resolve deficiencies, including those related to potential discrimination, financial institutions can communicate relevant information to the original valuation preparer and, when appropriate, request an ROV. 

Complaint Resolution

At the core of the complaint that triggers the ROV request is the complaint resolution process. Financial institutions can capture consumer feedback regarding potential valuation deficiencies through existing complaint resolution processes. The complaint resolution process may capture complaints and inquiries about the financial institution’s products and services offered across all lines of business, including those provided by third parties, as well as complaints from various channels (such as letters, phone calls, in-person, transmittal from regulators, third-party valuation service providers, emails, and social media). 

Depending on the nature and volume, appraisal and other valuation-based complaints and inquiries can be important indicators of potential risks and risk management weaknesses. Appropriate policies, procedures, and control systems can adequately address the monitoring, escalating, and resolving of complaints, including determining the merits of the complaint and whether a financial institution should initiate an ROV.

Policies and Procedures

With respect to procedures you can implement to avoid compromising appraisal independence, there are several policies, procedures, and control systems that should be considered. I will offer a brief outline of such systemic activities that should be installed in the loan flow process.

Financial institutions may consider developing risk-based ROV-related policies, procedures, control systems, and complaint processes that identify, address, and mitigate the risk of deficient valuations, including valuations that involve prohibited discrimination, and that: 

·    Consider ROVs as a possible resolution for consumer complaints related to residential property valuations. 

·    Consider whether any information or other process requirements related to a consumer’s request for a financial institution to initiate an ROV create unreasonable barriers or discourage consumers from requesting an ROV. 

·    Establish a process that provides for the identification, management, analysis, escalation, and resolution of valuation-related complaints across all relevant lines of business from various channels and sources (such as letters, phone calls, in-person, regulators, third-party service providers, emails, and social media). 

·     Establish a process to inform consumers how to raise concerns about the valuation sufficiently early enough in the underwriting process for any errors or issues to be resolved before a final credit decision is made. This may include suggesting to consumers the type of information they may provide when communicating with the financial institution about potential valuation deficiencies. 

·    Identify stakeholders and clearly outline each business unit’s roles and responsibilities for processing an ROV request (i.e., loan origination, processing, underwriting, collateral valuation, compliance, customer experience, or complaints). 

·    Establish risk-based ROV systems that route the request to the appropriate business unit (i.e., ROV requests alleging discrimination could be routed to the appropriate compliance, legal, and appraisal review staff with the requisite skills and authority to research and resolve the request). 

·    Ensure relevant lending and valuation-related staff, including third parties (i.e., appraisal management companies, fee-appraisers, mortgage brokers, and mortgage servicers), are trained to identify deficiencies (inclusive of prohibited discriminatory practices) through the valuation review process. 

·    Establish standardized processes to increase the consistency of consideration of requests for ROVs: 

o   Use clear, plain language in notices to consumers of how they may request the ROV; 

o   Use clear, plain language in ROV policies that provide a consistent process for the consumer, appraiser, and internal stakeholders; 

o   Establish guidelines for the information the financial institution may need to initiate the ROV process; 

o   Establish timelines in the complaint or ROV process for when milestones need to be achieved; 

o   Establish guidelines for when a second appraisal could be ordered and who assumes the cost; and 

o   Establish protocols for communicating the complaint status or ROV and results to consumers. 

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director 

Lenders Compliance Group

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[i] On July 21, 2023, the CFPB, FRB, FDIC, NCUA, and OCC issued for comment their proposed Interagency Guidance on Reconsiderations of Value in Residential Real Estate Valuations. See 88 Federal Register 47071, July 21, 2023.