Appraiser Independence

Following the financial crisis of 2007, the industry recognized the need for stricter controls relegated to appraiser independence. All stakeholders in the mortgage lending sector experienced the result of appraisers being placed under pressure to “hit” specific property values, and the volume of overvalued homes was evident during the real estate bubble.

Most appraisers did not give in to this pressure to meet specific sale or refinance values to receive further appraisal orders. However, it was clear that powers other than market-driven factors were directing appraised values beyond supported Uniform Standards of Professional Appraisal -compliant practices, which placed the entire appraisal industry at risk.

In April of 2015, the Consumer Financial Protection Bureau and five other agencies issued a final rule to implement minimum requirements for state registration and supervision of appraisal management companies, which provide services to lenders, underwriters or other principals in the secondary mortgage markets.

AMCs remain a key partner for many credit unions, and appraisal independence is one of the topics at the forefront of these requirements, which note that AMCs must establish policies and procedures to ensure compliance with appraisal independence standards. AMCs are required in every state to implement formal AIR policy and procedural controls, as they insulate the appraiser from undue influence from those within the real estate profession and loan production, who might influence values for personal gain.

The new rule for AMCs closely follows previous guidelines for appraisal independence.

The Home Valuation Code of Conduct Act of 2006 first addressed the need for greater independence, creating a formal separation between loan production and the assigned appraiser. Congress further recognized the need to keep loan production and the underwriting and appraisal process as two separate functions, beyond any advocated party’s self-interest that might unduly influence the collateral decision process. The Federal Deposit Insurance Corp. included in its interagency guidelines specific rules of appraiser independence to which all loan production staff within the mortgage industry are expected to adhere.

The National Credit Union Administration published a frequently asked questions bulletin in March 2005 directly regarding independent appraisal and evaluation functions. And in December 2010, all federally insured credit unions were issued a best practices in real estate appraisals bulletin.

The NCUA guidelines:

• emphasize the importance of having a collateral valuation process independent from other parts of the lending process;
• have effective quality controls over the appraisal process by recommending a periodic review of the work completed by the appraiser and oversight requiring the appraiser to hold appropriate state certifications or licenses;
• include an expanded “minimum appraisal standards” section that clarifies the appraisal opinion of market value based on appraisal regulations;
• include greater detail about how the appraisal should disclose the nature and extent of research performed to verify a property’s condition, and supported adjustments leading to the market value conclusion.
• include a value dispute process, which helps limit unwarranted and direct correspondence with the appraiser; and
• discuss the need to develop policies for determining an appropriate collateral valuation methodology for various transactions.

It is evident that NCUA, CFPB and other regulatory bodies recognize the profound importance of creating new guidelines as they pertain to the appraisal practice and their impact on their members’ internal collateral policies. If the past 10 years have imparted any lessons, they have shown that all participants in the loan production process work best when working independently, yet focused on the same goal. Time has shown us the importance of making prudent loans based on sound underwriting and appraisal practices and that the appraisal remains a critical element of those efforts.

Brad Froelich is chief appraiser for USRES, Dallas.