Paper sheds light on lenders’ appraisal requirements

An outfit called the Center for Responsible Appraisals and Valuations released an "Appraisal Compliance Paper" this month with the purpose of informing lenders about their responsibilities for overseeing their appraisal and valuation systems. It's sometimes not as "plain English" as it could be but is a good summary of what responsible lenders are being instructed to do by FIRREA and federal banking authority guidance.

The bank must have a compliant initial selection process for appraisers, staff or fee, and an ongoing monitoring process. It is generally not enough to choose approved appraisers based only on state license or certification: "Any determination of competency shall be based upon the individual's experience and educational background as they relate to the particular appraisal assignment for which he or she is being considered."

As we've been discussing in recent editions of the newsletter, banks must also ensure the independence of its staff or fee appraisers. The CRAV notes, "this is one area where many banks are not complying with the regulation." It quotes 2003 federal interagency guidance: "Individuals independent from the loan production area should oversee the selection of appraisers and individuals providing evaluation services."

The paper suggests three ways to comply. One is to set up a section of or designated person in the bank's credit risk or credit policy area responsible for qualifying appraisers, maintaining the appraiser panel, selecting appraisers for assignments and reviewing their reports. Another is similar, but involves setting up a separate appraisal review department. While separate, it is suggested the department be under the supervision of the credit risk or credit policy department. "Financial institutions exceeding $5 billion should consider the need for an in-house appraisal review department," the paper states. A third option is contracting with an appraisal management company (AMC).

There is a lot to recommend one of the first two options, specifically that in-house operations are not apt to put turn time or fee pressure on their fee appraisers. Because AMCs' business models involve maximizing production and minimizing cost, that possibility exists in that scenario. But because there is no serious money to be made via the first two options, only the third is being touted as a definitive solution to complying with interagency guidance. Be careful of pronouncements that "federal regulations require lenders to use AMCs."

Mortgage brokers, the paper says, are forbidden from ordering, managing, influencing, reviewing or controlling the appraisal.

The paper considers, but does not definitively answer, the question whether collecting money from the borrower on site violates FIRREA or federal regulatory guidance.

You can download the CRAV paper in PDF format at this link: http://www.cravonline.com/crav_bc.pdf