QUESTION
Our state banking department requested that we update our independent appraisal policy. They want us to update the "Appraisal and Evaluation Program." And they want us to provide information about its independence. We bought the policy from a company that sells mortgage policies, but the examiner says the policy is "defective."
We went back to the mortgage policy company, and they said there was nothing wrong with their policy. Obviously, there's something wrong if an examiner has a problem with it! We told the examiner that the mortgage manuals company is well known, but she didn't care and told us to update the policy.
We don't know what to put into the policy to satisfy the examiner. We need some pointers.
What is an appraisal and evaluation program?
What is independence in relation to an appraisal and evaluation program?
ANSWER
The term "Appraisal and Evaluation Program" is found in variations throughout various regulatory frameworks. An institution's board of directors or its designated committee is responsible for adopting and reviewing policies and procedures that establish an effective real estate appraisal and evaluation program.
We believe there are certain features of an appraisal and evaluation program. The program should:
· 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 agencies' 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 prompt receipt and review of the appraisal or evaluation report 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.
· Establish criteria for obtaining appraisals or evaluations for transactions that are not otherwise covered by the appraisal requirements of the appraisal regulations.
Regarding the independence of the appraisal and evaluation program, for both appraisal and evaluation functions, an institution should maintain standards of independence as part of an effective collateral valuation program for all of its real estate lending activity.
The collateral valuation program is an integral component of the credit underwriting process and, therefore, should be isolated from influence by the institution's loan production staff. We also recommend that an institution establish reporting lines independent of loan production for staff who administers the institution's collateral valuation program, including the ordering, reviewing, and acceptance of appraisals and evaluations.
Appraisers must be independent of the loan production and collection processes and have no direct, indirect, or prospective interest, financial or otherwise, in the property or transaction.[i] These standards of independence also should apply to persons who perform evaluations.
For a small or rural institution or branch, it may not always be possible or practical to separate the collateral valuation program from the loan production process. If absolute lines of independence cannot be achieved, an institution should be able to demonstrate clearly that it has prudent safeguards to isolate its collateral valuation program from influence or interference from the loan production process. In such cases, another loan officer, other officer, or company director may be the only person qualified to analyze the real estate collateral. However, to ensure their independence, such lending officials, officers, or directors must abstain from any vote or approval involving loans on which they ordered, performed, or reviewed the appraisal or evaluation.[ii]
Communication between the institution's collateral valuation staff and an appraiser or person performing an evaluation is essential for exchanging appropriate information relative to the valuation assignment. An institution's policies and procedures should specify communication methods that ensure independence in the collateral valuation function. These policies and procedures should foster timely and appropriate communications regarding the assignment and establish a process for responding to questions from the appraiser or person performing an evaluation.
We are often asked if an institution may exchange information with appraisers and persons who perform evaluations. The short answer is Yes, with restrictions; for example, you may provide a copy of the sales contract[iii] for a purchase transaction. However, an institution should not directly or indirectly coerce, influence, or otherwise encourage an appraiser or a person who performs an evaluation to misstate or misrepresent the property's value.
Consistent with its policies and procedures, an institution also may request the appraiser or person who performs an evaluation to:
· Consider additional information about the subject property or comparable properties.
· Provide additional supporting information about the basis for a valuation.
· Correct factual errors in an appraisal.
Furthermore, an institution's policies and procedures should ensure that it avoids inappropriate independence of the collateral valuation function, including:
· Communicating a predetermined, expected, or qualifying estimate of value, or a loan amount or target loan-to-value ratio to an appraiser or person performing an evaluation;
· Specifying a minimum value requirement for the property that is needed to approve the loan or as a condition of ordering the valuation;
· Conditioning a person's compensation on loan consummation;
· Failing to compensate a person because a property is not valued at a certain amount;[iv]
· Implying that current or future retention of a person's services depends on the amount at which the appraiser or person performing an evaluation values a property; and
· Excluding a person from consideration for future engagement because a property's reported market value does not meet a specified threshold.
After obtaining an appraisal or evaluation, or as part of its business practice, a institution may find it necessary to obtain another appraisal or evaluation of a property. You would be expected to adhere to a policy of selecting the most credible appraisal or evaluation rather than the appraisal or evaluation that states the highest value.
Further, an institution's reporting of a person suspected of non-compliance with the Uniform Standards of Professional Appraisal Practice (USPAP) and applicable federal or state laws or regulations or otherwise engaged in other unethical or unprofessional conduct to the appropriate authorities would not be viewed by governmental agencies as coercion or undue influence. Indeed, an institution should not use the threat of reporting a false allegation to influence or coerce an appraiser or a person who performs an evaluation.
Chairman & Managing Director
[i] The Agencies’ appraisal regulations set
forth specific appraiser independence requirements that exceed those set forth
in the Uniform Standards of Professional Appraisal Practice (USPAP).
Institutions also should be aware of separate requirements on conflicts of
interest under Regulation Z (Truth in Lending Act), see 12 CFR 1026.42(d).
[ii] For instance, the NCUA has recognized
that it may be necessary for credit union loan officers or other officials to
participate in the appraisal or evaluation function although it may be sound
business practice to ensure no single person has the sole authority to make
credit decisions involving loans on which the person ordered or reviewed the
appraisal or evaluation. 55 FR 5614, 5618 (February 16, 1990), 55 FR 30193,
30206 (July 25, 1990).
[iii] Refer to USPAP Standards Rule 1-5(a)
and the Ethics Rule.
[iv] This provision does not preclude an
institution from withholding compensation from an appraiser or person who
provided an evaluation based on a breach of contract or substandard performance
of services under a contractual provision.
