The appraiser's perspective: Regulatory compliance and the appraisal made clearerCharlie W. Elliott Jr., MAI, SRAcompliance, appraisal
We have all heard it said that for all things, there is a
season. There would probably be little disagreement among those in
our industry that this rule is alive and well in our business, as
there always seems to be hot topics at any given point and time.
One of the current issues that seems to be lingering and perhaps
even becoming more intensified is that of regulatory
Not since the government got into the business of regulating
banks after the Great Depression has there been so much focus on
monitoring the policies and actions of the financial industry as
there is today. At least, it seems that way to me. Not that I was
here during the Great Depression, but I have read quite a bit about
it and I can find little evidence that there was much attention
directed to the looking over the shoulder of banks back then. Why
has it become such a hot topic today? Could it be that we did not
have many rules way back when and that the ones we did have were
simpler and more to the point, making it much easier to comply and
to make sure everyone else complied? Be that as it may, we are
confronted with the issue of regulatory compliance and it does not
appear to be going away, at least, until there is more done to
ensure that everyone is following the rules.
While the issue of regulatory compliance covers many banking
activities, one of the more intensive segments of the regulatory
compliance environment is that which pertains to real estate
appraisals. This is due in part to the ever-increasing amount of
fraud occurring within our industry today. In an attempt to convey
to you some of the areas where fraud has occurred or may occur, I
was able to locate a list of questions and answers provided by the
top five regulatory agencies that monitor the mortgage process
through our banks, credit unions and savings institutions. These
regulatory agencies include the Office of the Comptroller of the
Currency, the Federal Reserve Board of Governors, Federal Deposit
Insurance Corporation, Office of Thrift Supervision and the
National Credit Union Administration. Among these agencies,
virtually all mortgage loans made are regulated in one way or
another. Listed below are a few of the questions and answers which
I thought might serve to address some of the most commonly violated
rules that I experience as the operator of an appraisal management
company. These questions represent excerpts from a Financial
Institution Letter dated March 22, 2005. The letter may be viewed
in its entirety on the Internet at www.fdic.gov/news/news/financial/2005/fil2005a.html.
Q: Who should be considered the loan production staff
for purposes of achieving appraiser independence? Could loan
production staff select an appraiser?
A: The loan production staff consists of those
responsible for generating loan volume or approving loans, as well
as their subordinates. This would include any employee whose
compensation is based on loan volume. Employees responsible for the
credit administration function or credit risk management are not
considered loan production staff. Loan production staff should not
select appraisers. However, in a small or rural institution or
branch, the only individual qualified to analyze the real estate
collateral may also be a loan officer, other officer or director of
the institution. To ensure their independence, such lending
officials, officers and directors should abstain from any vote or
approval involving loans for which they engaged the appraiser,
reviewed the appraisal or performed an evaluation.
Q: Can a regulated institution accept an appraisal from
a prospective borrower and determine its acceptability based on a
A: No, a regulated institution cannot accept a
Q: Can a borrower pay the appraiser directly for an
appraisal that is ordered by the lender?
A: Since the regulated institution has engaged the
appraiser for its services, the regulated institution should be the
party to remit payment to the appraiser. The regulated institution
may seek reimbursement from the borrower for the cost of the
appraisal. However, the borrower may not recommend an appraiser to
the institution or select the appraiser.
Q: What qualifications would constitute a "qualified and
adequately trained individual" for the purpose of conducting
A: Individuals who review appraisals as part of a
regulated institution's internal compliance function should be
independent of the transaction and possess the requisite education,
expertise and competence to perform the review commensurate with
the complexity of the transaction.
Q: How can a regulated institution ensure appraiser
independence when accepting an appraisal prepared for a financial
A: Documentation (that is, an engagement letter) should
be available to indicate that the financial services institution
(not the borrower) ordered the appraisal and that the appraiser has
no direct or indirect interest, financial or otherwise, in the
property or the transaction. The original lender's engagement
letter to the appraiser should be made part of the appraisal report
to provide additional information on the identity of the client in
order to ensure independence in the appraisal process.
Q: May an appraisal be re-addressed to a regulated
institution from the borrower or another institution?
A: A regulated institution cannot accept an appraisal
that has been re-addressed or altered by the appraiser with the
intent to conceal that the original client was the borrower.
Re-addressing appraisals to conceal the original client, whether
the client is a borrower or another financial services institution,
is misleading and violates the agencies' regulations and Uniform
Standards Of Professional Appraisal Practice.
Q: What information should the regulated institution
provide to the appraiser upon engagement?
A: The regulated institution should provide the
property's address, its description and any other relevant
information. The regulated institution may also provide a copy of
the sales contract for purchase transactions. However, the
information provided by the regulated institution should not unduly
influence the appraiser or in any way suggest the property's
In summary and conclusion, regulations generally dictate that
the loan production staff shall not select appraisers for loan
transactions. This is a function that must be left to credit
administration staff who do not have a financial interest in the
transaction. Borrowers are not permitted to order appraisals or to
pay appraisers directly for appraisals to be used on their
If you have been confused and/or unaware of the regulatory
compliance policies of the governing bodies that regulate mortgages
(as I was), perhaps this will help. Only recently have regulators
been specific on many of the issues covered above. Kudos is due to
the regulators for finally making the kind of information above
available to those responsible for complying with the
Please note that mortgage brokerage companies are not regulated
institutions within themselves. However, when they produce loans
that are transferred to regulated institutions, it is the
responsibility of the regulated institution to ensure that the
brokerage company is in compliance with the regulations. In my
opinion, this is an area where we may expect much greater scrutiny
in the future.
Charlie W. Elliott Jr., MAI, SRA is president of Elliott and
Company Appraisers, a national real estate appraisal company. He
can be reached at (800) 854-5889, [email protected]
through the company's Web site at www.appraisalsanywhere.com.
Previous columns he has written for The Mortgage Press can
be seen on the Elliott and Company Web site.