FDIC Publication Focuses on Real Estate Valuation Programs
Issues related to real estate appraisal and valuation programs are of critical interest to bankers and regulators. “Navigating the Real Estate Valuation Process,” which appears in the Winter 2011 issue of Supervisory Insights released on December 14, 2011, highlights certain aspects of the 2010 Interagency Appraisal and Evaluation Guidelines (Guidelines). This article also provides information for bankers regarding sound practices for banks’ real estate valuation processes in the areas of valuation review, independence, content standards, preparer selection, and monitoring.
“Banks have implemented provisions of the Guidelines, but continue to seek feedback from their regulators on appraisal-related concerns,” said Sandra L. Thompson, Director, Division of Risk Management Supervision. “We are providing information on best practices that is intended to help financial institutions successfully navigate the real estate appraisal and valuation process.”
Excerpts of the article “Navigating the Real Estate Valuation Process” found in the Winter 2011 issue of Supervisory Insights:
Selection and Monitoring of Appraisers
Selecting competent appraisers is critical to obtaining reliable collateral valuation information. Best practices for selecting and monitoring appraisers include:
- Verifying an appraiser’s credentials and standing through the National Registry. The Appraisal Subcommittee (ASC) of the Federal Financial Institutions Examination Council maintains the National Registry of state-licensed and -certified appraisers. The National Registry lists the state(s) in which an appraiser is licensed, the license number and type (e.g., Certified Residential or Certified General), whether the license status is active or inactive, whether the license holder meets the qualification criteria (education, experience, and examination) of the Appraiser Qualifications Board, and whether the licensee is subject to active disciplinary actions. The ASC Web site includes a link to all state appraisal regulatory agencies, which can provide more information regarding appraiser disciplinary actions and other matters.
- Using the findings from the appraisal review process to evaluate an appraiser’s performance. The appraisal review process can assist in the evaluation of individual appraisers’ performance and report accuracy. Some banks have found that tracking deficiencies in each reviewer’s valuation reports can be a useful way to strengthen the performance of the bank’s real estate valuation function.
- Conducting random quality reviews of appraisals obtained through appraisal management companies. Such reviews can help ensure third-party valuation services meet regulatory requirements and the institution’s internal standards. Banks should also establish a process for addressing deficiencies found in third-party appraisals.
Dodd-Frank Act Appraisal Independence Requirements
The Dodd-Frank Act required the FRB to prescribe interim final regulations defining specific acts or practices that violate appraisal independence in the context of the Truth in Lending Act. The FRB issued such interim final rules, effective April 1, 2011, by adding Section 226.42 to Regulation Z. While the new rules address several issues, three key appraisal-related matters for real estate credit transactions include:
- Appraiser independence. Section 226.42(c) encourages appraiser independence by prohibiting certain acts that directly or indirectly cause the value assigned to a consumer’s principal dwelling to be based on any factor other than the independent judgment of the person who prepares the valuation. Examples of such prohibited acts include, but are not limited to, seeking to influence the appraiser/evaluator to report a minimum or maximum value, withholding timely payment to the preparer because the property is not valued at or above a certain amount, and conditioning the preparer’s compensation on consummation of the covered transaction. These and other acts that would compromise the collateral valuation function also are noted in the Guidelines.
- Customary and reasonable fees. Section 226.42(f) requires the creditor and its agents to compensate a fee appraiser for performing appraisal services at a rate customary and reasonable for comparable appraisal services performed in the geographic market of the property being appraised. Two safe harbors are provided. The first is based on the creditor or its agents reviewing certain factors and not engaging in anticompetitive acts. The second is based on the creditor or its agents relying on certain external information for determining the amount of compensation. Some financial institutions may have difficulty obtaining sufficient and appropriate data to comply with these requirements. An institution may demonstrate compliance by documenting the information it considered and used in determining what is a customary and reasonable fee for a given appraisal service.
~ Source FDIC
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Nothing short of round robin appraiser panels will quell many of these selection based issues. “either you’re good enough to be on the lenders panel to expect a fair share of the workload, or you’re not.” As many appraisers have varied skills and lenders have varied needs of appraisal services, there is a well rounded match for most appraisers. However, it’s when there is no round robin distribution method that the game of favorites is played and quality valuation is traded for biased and appealing results. Without round robin, the appraiser has incentive to make the lender happy, and may attain more work for that reason, rather than the proper reason of high quality. Truly a round robin system eliminates such imposed bias.