Options for Appraisal Review Independence?
Starting to make some sense of overlapping appraiser independence requirements.
In addition to some state laws and uniform appraisal practices, we must comply with what's known as AIR requirements. Let's explore their origin and one specific issue that arises.
Truth in Lending vs. Federal Regulatory Guidelines
What confuses most people, at least at first, is that what many refer to as "Appraisal Independence Requirements" (AIR) are actually a combination of two completely distinct rules.
First, you have Federal interagency guidelines implemented in 2010 post-Dodd Frank. This applies to "real estate lending" in general. This guidance provides minimum appraisal requirements, appraisal review requirements, and also a set of appraiser independence requirements.
Secondly, you also have a set of appraiser independence rules in the Truth in Lending Act. These apply only to consumer loans secured by a consumer's principal dwelling (lien position is irrelevant, and this applies to both open- and closed-end credit, but this does exclude investment and commercial loans).
What's the significance of there being a different, more limited, scope in TILA? You're not going to modify appraisal practices on a loan-by-loan basis. But the significance of this is that your commercial lenders can adhere to a more lenient policy.
Note: These rules have replaced the Home Valuation Code of Conduct. So if you still have references to the "HVCC" in your loan policy, time for a refresher!
Zoom In -- Conflicts of Interest and Appraisal Review
One particular item that's interesting is with the rules against conflicts of interest and how they apply to appraisal review.
TILA Conflicts Rule:
TILA states that no person reviewing an appraisal may have a "direct or indirect interest, financial or otherwise," in the loan transaction. This is not a clear cut rule, which itself says the compliance "depends on the facts and circumstances of a particular case." For example, does this affect employees who receive some annual bonus, or report to a manager who does?
Now, I don't think this is terribly hard to meet. But, of course, then the Federal Interagency Guidelines add another layer of complexity:
Interagency Conflicts Rule:
The Federal Interagency Guidelines require an effective appraisal review process with qualified reviewers who similarly must be "isolated from influence by the institution's loan production staff."
Safe Harbor?
Due to the ambiguity, it would be nice to have a way to guarantee compliance. Well you're in luck! The TILA rule provides a safe harbor from the conflict of interest rule if you meet the following requirements:
Compensation of the person reviewing appraisals is not based on the appraisal's valuation (This is easy to meet - just don't let the loan officer review the appraisal).
Person reviewing appraisal reports to a manager outside of loan production area (meaning employee, officer, director, department, related to mortgage lending)
No person in the loan production area can select the person reviewing appraisals.
While this is nice, it's no guarantee that you're in compliance with the Federal Interagency Guidelines.
Solutions
So the challenge is to have qualified appraisal reviewers who are capable of truly vetting appraisals who are able to meet the independence requirements of the rules stated above.
Option A. Keep In-House.
Your first option is to keep things as-is, but try to take advantage of the safe harbor as best as possible. This will require careful practices and auditing to avoid missteps.
Option B. Create New Department
Another option is to set up appraisal management/review as its own independent function. This may work better for larger volume lenders.
Option C. Outsourcing
Of course, finding a qualified vendor to perform appraisal review functions will satisfy the independence requirements. Alert - Sales pitch: You should know that SCA offers appraisal review services that has become very popular.
Option D. Add to Existing Department
If you have one or two employees who are very good at appraisal reviews, it might be a good idea to have them report to a department outside of mortgage lending, such as compliance/risk, credit administration, or another department. This would serve to "isolate" them from the loan production functions.
In Other News
Hello President Trump. Goodbye FHA MIP reduction ...
In related news, the MBA had the foresight to issue recommendations on what steps to take should the MIP refund be retracted ... find that list here for free.
Interested to see who JD Power ranks as the top retail banks in different regions of the country? Check out the results here. See Bangor Savings, Rockland Trust, Eastern Bank, and others score well in New England.
Even the happiest lives are filled with numerous tragedies, which leads me to ask, does happiness depend more on what happens to you, or how you respond to it? I mean, take Uncle Willy (from Saturday Night Live) for example. Around the office and otherwise in your professional life, universal approachability is a good trait to have. Your always-negative "everything always happens to me" colleague isn't going to very easily be easy to approach and talk to, at least not with intentions for a respectful intelligent conversation (i.e., maybe someone people approach with gossip, but not when something serious is on the line). So take a look at the positive side of things and be a better colleague, salesman, consultant, whatever.
"Start out with an ideal and end up with a deal."
- Karl Albrecht
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