New Appraisal Requirements Practical Advice on Compliance Presented by: Rich Hogan, Legislative and Regulatory Counsel CATIC North Shore Consumer Credit Association September 28, 2011 1
USPAP Changes for 2010-2011 Ethics Changes Required disclosure if appraiser has provided a previous service with regard to the subject property prior to acceptance or upon discovery; If asked can t disclose prior appraised value; Examples: I have performed a prior appraisal of the subject property within the 3-year period immediately preceding acceptance of this appraisal assignment. I previously appraised the property that is the subject of this assignment, within the 3-year period immediately preceding acceptance of this appraisal assignment. I have performed a prior service (note type of service) concerning the subject property within the 3-year period immediately preceding acceptance of this appraisal assignment. 2
Four FAQs Concerning USPAP Changes: Question: Does this new requirement prohibit appraisers from accepting a new assignment to appraise a property that was previously appraised in the last 3 years? Answer: No Question: Can an appraiser disclose the prior appraised value: Answer: No Question: Does the initial disclosure have to be in writing? Answer: The initial disclosure does not have to be written, however, if the assignment is ultimately completed it would be a good idea to have documentation (such as an e-mail) of this initial disclosure for the work file. Question: Must an appraiser make a disclosure statement whether or not any services were provided in the last 3 years? Answer: A strict reading of the ethics rule and related material indicates that the appraiser must make a disclosure only if services were provided, however, an appraiser may decide to make (or clients may request) a statement indicating whether or not any services were provided in the prior 3 years. 3
Why are Federal Regulators so Concerned about Appraisals and what has been done Historically? Accurately valuing collateral is of vital importance; Appraisals must be performed by qualified appraisers; Appraisals must be performed free of coercion or improper influence; HVCC NY Atty. General and FHFA. 4
Final Supervisory Guidance on Sound Practices by Financial Institutions for Appraisers and Evaluations Guidance issued by FRB, OCC, FDIC, OTS, FHFA, CFPB and NCUA; Apply to all lenders regulated by the federal regulators; Single-family and multi-family residential; Commercial and industrial; HELOC s. 5
Appraisal and Evaluation Written Plan Lenders needs to establish written processes by which its appraisal policies are established, applied, adhered to, monitored, reviewed and adapted; Bd. of Directors or designated committee must adopt written plan which must contain the following: Independence of persons performing, ordering and reviewing appraisals - $10,000 to $20,000 fines per day; Appraiser selection procedures; Appraiser monitoring procedures; Appraiser reviewing procedures. 6
Appraisal and Evaluation Written Plan Special rules for lenders who establish an approved appraiser list: Process for qualifying an appraiser for inclusion on list; Periodic monitoring of performance; and Process for determining whether appraiser remains on the list. 7
Appraisal and Evaluation Written Plan Written plan must mandate that appraisers hold appropriate state certification or license; Written plan must ensure that appraisals comply with the federal banking regulators appraisal regulations; At a minimum conforms to USPAP. 8
Appraisal and Evaluation Guidelines Requirements for Independence Lenders need to maintain standards of independence; Lenders need to establish independent reporting lines for staff who administer the institution s collateral valuation program, including the ordering, reviewing, and acceptance of appraisals and evaluations. Loan production staff should not be involved with appraisals. These staff are: Responsible for generating loan volume or approving loans; Includes subordinates and supervisors; Any employee compensated based on loan volume. 9
Appraisal and Evaluation Guidelines Permissible Communications with Appraisers Lenders may request the appraiser to: Consider additional information about the subject property or about comparable properties; Provide additional supporting information about the basis for a valuation; and Correct factual errors in an appraisal. 10
Appraisal and Evaluation Guidelines Inappropriate Communications with Appraisers Lenders policies and procedures should ensure that it avoids inappropriate actions that would compromise the independence of the appraisal, including: Communicating a predetermined, expected, or qualifying estimate of value, or a loan amount or target loan-to-value ratio to an appraiser or person performing an evaluation; Specifying a minimum value requirement for the property that is needed to approve the loan or as a condition of ordering the valuation; and Conditioning a person's compensation on loan consummation. 11
Appraisal and Evaluation Guidelines Requirements for Independence Lenders policies and procedures should ensure that it avoids inappropriate actions that would compromise the independence of the appraisal, including: Failing to compensate a person because a property is not valued at a certain amount; Implying that current or future retention of a person's services depends on the amount at which the appraiser or person performing an evaluation values a property; Excluding a person from consideration for future engagement because a property's reported market value does not meet a specified threshold. 12
Appraisal and Evaluation Guidelines Engagement Letter Engagement letters should be used; Examples of Different institutions engagement letters. 13
Appraisal and Evaluation Guidelines Use of Prior Appraisal An institution should establish criteria for assessing whether an existing appraisal or evaluation continues to reflect the market value of the property (that is, remains valid) ; The documentation in the credit file should provide the facts and analysis to support the institution s conclusion that the existing appraisal or evaluation may be used in the subsequent transaction. 14
Appraisal and Evaluation Guidelines Review of Appraisals by Lender Personnel who review appraisals should be independent of the transaction; Have no direct or indirect financial interest in the transaction and be insulated from loan production staff; Have the requisite education, expertise and competence to review appraisal; Review should be risk based and differentiate between high and low risks; An institution may use an appraisal that was prepared by an appraiser engaged directly by another financial services institution, provided the institution determines that the appraisal conforms to the Agencies appraisal regulations and is otherwise acceptable ; Document, Document, Document. 15
Appraisal and Evaluation Guidelines Filing of Reports An institution should file a complaint with the appropriate state appraiser regulatory officials when it suspects that a state certified or licensed appraiser failed to comply with USPAP and/or applicable state laws or engaged in other unethical or unprofessional conduct; An institution also must file a suspicious activity report (SAR) when suspecting fraud or identifying other transactions meeting the SAR filing criteria. 16
Federal Reserve Board Final Rule on Dodd-Frank Appraiser Independence Effective April 1, 2011; Applies to lenders and any other settlement service providers (e.g., brokers, real estate agents, appraisers, AMC s and others); Prohibits coercion and bribery designed to cause anyone who prepares a valuation to base the valuation on anything other than independent judgment; Persons who perform valuations can t have any type of interest in the property or transaction; 17
Federal Reserve Board Final Rule on Dodd-Frank Appraiser Independence Prohibits creditors from extending credit when it knows there have been an improper valuation; Mandatory reporting of appraiser misconduct; Customary and reasonable rate of compensation fee for appraisers; Fee must be reasonably related to recent rates paid in a geographical market; and Fee must be commensurate with property type and scope of work. 18