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.
