The appraiser's perspective: How banks are complying with appraisal regulationsCharlie W. Elliott Jr., MAI, SRAappraisal regulations
As I stated in my column in September 2006 ("Regulatory
compliance and the appraisal made clearer," The Mortgage
Press, September 2006), bank regulators are making it clearer
what may and may not be done in complying with appraisal
regulations imposed by the five regulatory agencies that regulate
our banks, credit unions and savings institutions. Regulators are
taking a strong stand against loan originators and others, who have
a financial interest in a transaction, deciding who appraises
property to be used to collateralize a loan.
Recent incidences of loan fraud have precipitated stronger
enforcement of the laws and regulations that serve to monitor the
financial soundness of banks and the loans that they make. Some
argue that past practices encourage lender pressure on appraisers
who consider themselves likely to lose business if they do not
inflate their estimated values. There have been few, if any, new
laws or regulations concerning this issue, just a new approach to
enforcing the laws and regulations that are, and have been, on the
books for a long time.
In the course of their audits in recent months, regulators
started with the larger banks and worked down to the smaller ones,
quietly informing them of changes that they must make in order to
comply with current interpretations of the regulations.
This has caused the risk managers of many banks to scurry around
and develop new plans and systems that are designed to comply with
the current interpretation of the regulations. The primary goal is
to remove the responsibility for selecting appraisers, supervising
appraisers and ordering appraisals from those who have a financial
interest in a transaction. This would include loan officers and
others who report to them in an origination office. It seems that,
while not all banks are approaching this the same way, there are
basically three paths that most seem to be taking. They are listed
as follows:
Staff appraisers
Banks are permitted to use staff appraisers so long as they are not
influenced by loan originators or others with a stake in the
transaction. Typically, one or more staff appraisers are employed
by a bank to cover limited geographic regions. In cases where the
staff appraisers are unable to handle all workflow, contract
appraisers are used to fill in. The contract appraisers must be
selected in a random way so as to eliminate bias. Bank of America
has used staff appraisers to perform many of its nationwide
appraisals, and other banks use staff appraisals to perform some of
their appraisal services.
In-house management companies
Some banks are electing to establish bank-owned and operated
vendor-management companies, not just for appraisals, but also for
other services such as title or mortgage insurance. In these
situations, the bank is required to establish a panel of approved
appraisers capable of covering all of the geographic territory
where it makes loans. Appraisers are then selected at random,
usually by a vendor platform containing all of the approved
appraisers. Many of the larger banks, including Wachovia and Bank
of America, have their own proprietary management companies. Some
banks own their own vendor platforms, while others are contracting
out vendor platform business, which offers a level of compliance
within itself. Examples of such platforms are FNC Inc.'s Appraisal
Port and Ocwens REALTrans systems. In cases where there is no
approved appraiser available, the appraisal order is typically sent
to an independent appraisal management company, which selects an
appraiser who is impartial to the transaction. I like to refer to
this as a cleanup hitter of last resort for a particular
transaction.
Independent management companies
Banks, which are electing to get as far away from the appraisal
selection process as they can, are going with independent
management companies. This was recently the decision of Washington
Mutual, where management selected two appraisal management
companies to handle appraisals and eliminated less-independent
appraisal sources under its control. In such cases, the bank
relieves itself of the overhead and responsibility of acquiring the
appraisal by contracting this service out. This is probably the
purest form of regulatory compliance, in that the bank exercises
little or no control over the appraisal process.
Which of the above systems is best for our industry? Which will
become the most widely used? It would seem that in this instance,
the old adage of "Beauty is in the eye of the beholder" would be a
fair explanation. As in the cases of the above examples, we are
seeing some of our larger banks with virtually unlimited resources
taking different tacks in approaching the compliance issue. Over
the past 25 years in which I have been part of the appraisal
profession, we have seen banks vacillating back and forth with the
economic and regulatory winds of a particular day. Some banks
jumped head first into having their own proprietary appraisal
management company only to find that it was not a very lucrative
profit center and that it often produced conflict. They were
accused of being heavy-handed by charging bank customers much
higher fees than they paid their appraisers, creating animosity
with both the customers and the appraisers.
The last bastion of appraiser-selection independence is through
the mortgage brokers who still, in many cases, select appraisers
for their loans, since they are not regulated in the same way as
banks. While this practice still exists in many brokerage
operations, it will be interesting to see how long the brokerage
community will be able to enjoy this position. Their loans
typically are sold to banks and other regulated institutions, and
there is a new focus on those loans as well. Banks buying loans for
non-regulated institutions are under new scrutiny to ensure that
appraisers involved in the process are not pressured to provide
inflated appraisals.
In summary, we are likely to continue to see a variety of
different types of appraisal management systems going forward, as
banks try to balance customer service, regulatory compliance,
control and profitability. Everything else being said, compliance
is todays operative word and one that we are likely to see drive
the engine of appraisal management policy going forward. Either way
we cut it, if we are to believe the regulatory community and its
recent decisions, banks are going to be required to discontinue the
practice of allowing individuals with a financial interest in a
transaction to select appraisers.
Charlie W. Elliott Jr., MAI, SRA is president of Elliott
& Company Appraisers, a national real estate appraisal company.
He can be reached at (800) 854-5889,
[email protected] or
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 & Company Web site.
