HMDA: Procedures & Internal Controls

QUESTION 

I am a compliance analyst in our compliance department. We are getting ready to file our HMDA-LAR. Yesterday, our internal auditor requested an outline of the steps we take to evaluate our HMDA policies and procedures. 

Our compliance manager has put together a few bullet points. However, we need some procedures and internal controls that tell the internal auditors adequate measures are in place to ensure compliance. 

Mostly, our procedures are informal. We follow the HMDA guide and use HMDA reporting software. 

I am reaching out to you for guidance in putting together a list of HMDA procedures. 

What are some procedures and internal controls needed to comply with filing HMDA data? 

ANSWER 

Compliance Solution: HMDA, CRA, Fair Lending

The Home Mortgage Disclosure Act (HMDA) requires certain financial institutions to collect, report, and disclose information about their mortgage lending activity. HMDA was enacted by Congress in 1975 and implemented by Regulation C.[i] Over the years, there have been numerous amendments, updates, and linkages to other Acts. HMDA is a disclosure law that relies upon public scrutiny for its effectiveness. 

Contrary to what some people think, HMDA does not prohibit any specific activity of lenders, nor does it establish a quota system for mortgage loans to be made in any geographic area. The federal supervisory agencies use HMDA data to support a variety of activities.[ii] For instance, some federal supervisory agencies use HMDA data as part of their fair lending examination process,[iii] and other agencies use HMDA data in conducting Community Reinvestment Act (CRA) performance evaluations.[iv] 

HMDA disclosures provide the public with information on the home mortgage lending activities of particular reporting entities and activity in their communities. These disclosures are used by local, state, and federal officials to evaluate housing trends and issues and by community organizations to monitor financial institutions' lending patterns. Because HMDA data serve numerous important purposes, validating the accuracy of HMDA data is a key element of the federal supervisory agencies' examination activities. 

For the purpose of this article, I will use the term "institution" to refer to an institution that is either a depository financial institution or a non-depository financial institution that is subject to Regulation C. An institution is required to comply with Regulation C only if it is a financial institution as that term is defined in Regulation C. The definition of financial institution includes depository and non-depository financial institutions, as those terms are separately defined in Regulation C.[v] It is beyond the scope of this response to delve into the method to identify whether an institution meets the definition. An institution utilizes certain coverage tests and thresholds to determine whether a financial institution is required to comply with Regulation C.[vi] 

If your internal auditor plans to review your procedures and internal controls, I suggest you let them know that Regulation C requires an institution to record the data about a covered loan or application on a Loan Application Register (LAR), hereinafter "HMDA-LAR," within 30 calendar days after the end of the calendar quarter in which the financial institution takes final action on the covered loan or application.[vii] An institution is not required to record all its HMDA data for a quarter on a single HMDA-LAR. Rather, it may record data on a single HMDA-LAR or may record data on one or more HMDA-LARs for different branches or different loan types (such as home purchase loans, home improvement loans, or loans on multifamily dwellings). State or federal regulations may require an institution to record its data on a HMDA-LAR more frequently. 

Depending on various criteria, under Regulation C, an institution must submit its annual HMDA-LAR in electronic format to its appropriate federal supervisory agency by March 1 of the year following the calendar year for which the data are collected.[viii] Certain institutions must file their HMDA-LAR quarterly and annually,[ix] where the institution reported at least 60,000 originated covered loans and applications (combined) for the preceding calendar year. 

Guidelines for Procedures and Internal Controls 

for HMDA Recording and Reporting 

I will provide a list of some procedures and internal controls to ensure compliance with HMDA and Regulation C. The list is not meant to be comprehensive. 

·       Whether the individual assigned responsibility for the institution's compliance with HMDA and Regulation C possesses an adequate level of knowledge and has established a method for staying abreast of changes to laws and regulations. 

·       If the institution ensures that individuals assigned compliance responsibilities receive adequate training to ensure compliance with the requirements of the regulation. 

·       Whether the individuals assigned responsibility for the institution's compliance with HMDA and Regulation C know whom to contact, at the financial institution or their supervisory agency, if they have questions not answered by the written materials. 

·       If the institution has established and implemented adequate controls to ensure separation of duties exists (i.e., data entry, review, oversight, and approval). 

·       Any internal reports or records documenting policy and procedure revisions and any informal self-assessment of the institution's compliance with the regulation. 

·       If the institution offers preapprovals, whether the institution's preapproval program meets the specifications detailed in the HMDA regulation. If so, whether the institution's policies and procedures provide adequate guidance for reporting preapproval requests that are approved or denied in accordance with the regulation. 

·       Whether the institution's policies and procedures address the reporting of (1) non-dwelling secured loans that are originated in whole or in part for home improvement and classified as such by the institution, and (2) dwelling-secured loans that are originated in whole or in part for home improvement, whether or not classified as such. 

·       Whether the institution established a method for determining and reporting the lien status for all originated loans and applications. 

·       Whether the institution's policies and procedures contain guidance for collecting ethnicity, race, and sex for all loan applications, including applications made by telephone, mail, and Internet. 

·       Whether the institution's policies and procedures address the collection of the rate spread (the difference between the APR and the average prime offer rate for a comparable transaction as of the date the interest rate is set) and whether the institution has established a system for tracking rate lock dates and calculating the rate spread. 

·       Whether the institution's policies and procedures address determining if a loan is subject to the Home Ownership and Equity Protection Act and the reporting of applications involving manufactured home loans. 

·       Whether the HMDA-LAR is updated within 30 days after the end of each calendar quarter. 

·       Whether data are collected at all branches, and if so, whether the appropriate personnel are sufficiently trained to ensure that all branches are reporting data under the same guidelines. 

·       Whether the institution's loan officers, including loan officers in the commercial loan department who may handle loan applications reportable under HMDA (including loans and applications for multifamily or mixed-use properties and small business refinances secured by residential real estate), are informed of the reporting requirements necessary to assemble the information. 

·       Whether the Board of Directors has established an independent review of the policies, procedures, and HMDA data to ensure compliance and accuracy and is advised each year of the accuracy and timeliness of the financial institution's data submissions. 

·       What procedures the institution has put in place to comply with the requirement to submit data in machine-readable form, and whether the institution has some mechanism in place to ensure the accuracy of the data that are submitted in machine-readable form. 

·       Whether the institution's loan officers are familiar with the disclosure, reporting, and retention requirements associated with the loan application registers and the FFIEC public disclosure statements. 

·       Whether the institution's loan officers are familiar with the disclosure statements that will be produced from the data. 

·       Whether the institution's loan officers and affected staff know that civil money penalties may be imposed when an institution has submitted erroneous data and has not established adequate procedures to ensure the accuracy of the data. 

·       Whether the institution's loan officers and affected staff know that correction and resubmission of erroneous data may be required when data are incorrectly reported for at least 5 percent of the loan application records. 

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

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[i] 12 CFR Part 1003

[ii] Home Mortgage Disclosure Act (HMDA), Consumer Financial Protection Bureau, September 2021. Also see 12 USC 2801–2810.

[iii] 15 USC 1691–1691f, 42 USC 3605, a nd 12 CFR 1002

[iv] 12 USC 2901–2908, and 12 CFR 25, 195, 228, and 345

[v] 12 CFR 1003.2(g)

[vi] HMDA Data Collection and Reporting: Keys to an Effective Program, Consumer Compliance Outlook, Fourth Issue 2020, published by the Philadelphia FRB, provides a good overview of coverage tests and thresholds, among other things.

[vii] 12 CFR 1003.4(f)

[viii] 12 CFR 1003.5(a)(1)(i)

[ix] Effective January 1, 2020.

Appraisal and Evaluation Program

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.

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

Lenders Compliance Group

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[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.

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.

Appraiser Misconduct: Prevention Caveats

QUESTION
One of the appraisers we use is involved in an appraisal misconduct investigation. The investigation is being conducted by one of our investors.

They requested a list of all the appraisals he has done for the last three years and may want to expand the period further back in time. They also asked for a list of all our appraisers. We’re worried now about where this will lead.

We thought our appraiser independence policies were good. They had always passed banking examinations.

We decided to bring our problem to your attention, hoping that you would shed some light on how we can avoid this mess in the future.

What can we do to prevent appraiser misconduct?

ANSWER
High on the examination and enforcement agenda for state banking departments, the Consumer Financial Protection Bureau (CFPB), and the federal prudential agencies is appraisal fraud. FinCEN reports such mortgage fraud statistics regularly. The bedrock of residential mortgage banking is the underlying real property collateral.

Title XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) required the federal banking agencies to institute appraisal standards that, at a minimum, meet the generally accepted appraisal standards established by the Appraisal Foundation. These standards have become known as Appraisal Standards.

In general, FIRREA requires all real estate appraisals performed in connection with real estate-related financial transactions to be conducted by state-certified or licensed appraisers. It should be a hallmark of your policy to comply with these standards, whichever regulator supervises your institution. The foregoing departments and agencies have adopted the Appraisal Standards in a substantially similar construct.

Although you should not necessarily exclude any appraiser from consideration for an assignment solely by membership or lack of membership in any particular appraisal organization, you would want your Appraisal Standards to meet certain interagency appraisal and evaluation guidelines.

Here’s a checklist of some caveats that should be included in your compliance reviews. 

·     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 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 the receipt and review of the appraisal or evaluation report in a timely manner 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. 

·     Review mortgage quality control reports for appraisal statistics, report them to management, and provide written management responses for any appraisal defects or process concerns. 

·     Establish criteria for obtaining appraisals or evaluations for transactions that are not otherwise covered by the appraisal requirements of the appraisal regulations.

Regulation Z, the implementing regulation of the Truth-in-Lending Act (TILA), prohibits a financial institution from directly or indirectly coercing, influencing, or otherwise encouraging an appraiser to misstate or misrepresent the value of the consumer’s dwelling. 

Indeed, a creditor may not extend credit when it knows, at or before loan consummation, of a violation of this requirement unless the creditor documents that it has acted with reasonable diligence to determine that the appraisal does not materially misstate or misrepresent the value of the dwelling.

For example, a creditor or mortgage broker may not: 

·     Imply to an appraiser that current or future retention of the appraiser depends on the amount at which the appraiser values a consumer’s principal dwelling. 

·     Exclude an appraiser from consideration for future engagement because the appraiser reports a value of a consumer’s principal dwelling that does not meet or exceed a minimum threshold. 

·     Tell an appraiser a minimum reported value of a consumer’s principal dwelling needed to approve the loan. 

·     Fail to compensate an appraiser because the appraiser does not value a consumer’s principal dwelling at or above a certain amount. 

·     Condition an appraiser’s compensation on loan consummation.

Certain actions are not prohibited, including: 

·     Asking an appraiser to consider additional information about a consumer’s principal dwelling or comparable properties. 

·     Requesting that an appraiser provide additional information about the basis for a valuation. 

·     Requesting that an appraiser correct factual errors in a valuation. 

·     Obtaining multiple appraisals of a consumer’s principal dwelling, so long as the creditor adheres to a policy of selecting the most reliable appraisal, rather than the appraisal that states the highest value. 

·     Withholding compensation from an appraiser for breach of contract or substandard performance of services as provided by contract. 

·     Taking action permitted or required by applicable federal or state statute, regulation, or agency guidance.

I would add a few Regulation Z caveats that coincide with the appraiser independence rule, with respect to any loan secured by a consumer’s principal dwelling, such as:

·     Not to engage in coercion, bribery, and other similar actions designed to cause an appraiser to base the appraised value of a property on factors other than the appraiser’s independent judgment. 

·     Not to permit appraisers or appraisal management companies to materially misrepresent the value of a consumer’s principal dwelling in a valuation. 

·     Not to allow the falsification of a valuation or material alteration of a valuation. 

·     Not to allow appraisers or appraisal management companies to have a financial or other interest in the property or the credit transaction. 

·     Not to extend credit if you know, at or before consummation, of a violation of the prohibition on coercion or of a conflict of interest, unless you document that you have acted with reasonable diligence to determine that the valuation does not materially misstate or misrepresent the value of the dwelling. 

·     To report appraiser misconduct to state appraiser licensing authorities. 

·     To pay reasonable and customary compensation to any “fee appraiser” (i.e., an appraiser who is not your salaried employee and is not an employee of an appraisal management company you hire).

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