We are pleased that commercial and residential lending are increasing, but with this good news we want to remind lenders to establish and maintain policies on appraisal review that ensure compliance with Dodd Frank, Interagency Appraisal and Evaluation Guidelines, and Fannie Mae/Freddie Mac guidance. Many of these laws and guidance policies were established after concerns were raised that many financial institution losses could have been prevented with sound appraisal policies and processes.
A few key points:
1. The appraisal reviewer must be independent of the loan transaction and insulated from any influence by the loan production staff. Basically, the reviewer cannot be involved in or benefit from the lending transaction. In most cases, to be truly independent requires that an appraisal department, compliance department or a third party, such as an appraisal management company, complete the review. Depending on an organization’s structure, a loan underwriter may not be considered independent of the loan process. Establishing appraisal departments can be very costly and many financial institutions obtain the required independence by outsourcing to a third party. Outsourcing the full appraisal process to an AMC typically results in little or no cost to the financial institution.
2. Commercial and residential reviewers should possess the requisite education, expertise, and competence to perform the review commensurate with the complexity of the transaction, type of real property and market. While the guidance doesn’t require that the review be done by a real estate appraiser, it puts the burden of proof that the reviewer is qualified on the lending institution. Once again, it can be very costly for an institution to employ a qualified appraisal reviewer and many institutions find value in outsourcing to a third party. The third party may be an AMC or it may be an independent review appraiser. Should the institution engage an independent review appraiser or an AMC, guidelines for third party arrangements are applicable. Many institutions may not have considered that engaging an independent review appraiser requires due diligence as with any outsourced or third party arrangement.
3. The depth of review or type of review should be based on a risk-focused approach. Obviously, commercial real estate appraisals require a more in depth review than residential appraisals. The reviewer of commercial or residential appraisals should have the expertise and knowledge to complete a meaningful review. The financial institution should have within its policy specifications for when a more detailed and in depth appraisal review is required, such as transaction amounts that exceed certain thresholds, or loans that are secured by complex or specialized real estate.
4. The appraisal review must be fully documented. The documentation should provide an audit trail that documents the resolution of noted deficiencies. Should an original appraisal not be acceptable, documentation of the reasons for relying on a second opinion of market value should be maintained in the credit file.
5. Appraisal regulations specify that an institution may use an appraisal that was prepared by an appraiser engaged directly by another financial service institution, provided the receiving institution determines the appraisal conforms to all appraisal regulations and is otherwise acceptable. The institution should ensure the appraisal receives, at a minimum, at least the same level of review that the institution performs on appraisals it obtains directly for similar properties, and the credit file should be fully documented. Clearly the lender should be obtaining an independent review of the appraisal. Based on the review, if the appraisal is deemed not acceptable, a new appraisal should be obtained. In order to accept an appraisal from another institution, you must confirm that the appraisal was engaged directly by the other financial services institution, the appraiser had no conflict of interest, and that the borrower did not engage or influence the appraiser. There are times when this proves to be difficult to confirm or get comfortable enough with to certify the information. When in doubt, get a new appraisal.
As a national commercial and residential appraisal management company, Valuation Management Group, LLC (VMG) has licensed and certified real estate appraisers to handle all levels of appraisal review. Our Quality Assurance Reviewers have an average of over 18 years of appraisal experience. Please contact us with any questions you might have on the management of appraisal reviews.
Valuation Management Group is a national, full service appraisal management company that manages the appraisal process for community banks, mortgage bankers and credit unions. We take the process from ordinary to extraordinary.