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Supporting Valuations without Running Afoul of Reg B

MAR 24, 2014 11:44am ET
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The rising tide of regulation has continued in 2014 with the Consumer Financial Protection Bureau’s final rule on the Equal Credit Opportunity Act amendment under Regulation B, which took effect on Jan.18. The act requires creditors to provide all credit applicants with a free copy of any property valuation in connection with an application for credit. his regulation includes traditional appraisals as well as any valuations completed through an automated valuation model.

On the surface, it seems originators, lenders and servicers must make a choice: take on the added cost and workload of explaining these valuation reports to each new applicant (many of whom have never heard of an AVM) or eliminate the use of lower-cost advanced valuation intelligence all together.

However, there may be another option. 

Thanks to advances in today’s valuation technology, mortgage professionals now can access the intelligence needed for lending decisions without producing a property value. Two solutions eliminate the added hassle of providing a valuation to consumers without eliminating the intelligence found in an AVM.

Property research tools are available that provide market statistics that are useful in estimating the value of a property with more information than can be found in a traditional valuation. These solutions can be customized to produce all of the comparable sales data, property profiles, transaction history, loan activity and neighborhood demographic analysis lenders need to assess the property without producing a valuation, thus eliminating the need to send anything to the applicant.

Some property research tools can allow mortgage professionals to search specific properties by address, owner name or parcel number and then compare it to similar properties in the area based on various customizable criteria. Sales comparables can be configured and customized to produce only the information most needed to make lending decisions.  Also, a median sales price for comparable homes can be calculated to give mortgage professionals a general idea of what the value should be without producing an exact valuation for that specific property.

Appraisal review technology is now available to help mortgage professionals go beyond a tradition review of the appraised value to evaluate areas such as appropriateness of sales comps, accuracy of comp adjustments and validation of assumed market conditions. Many of these tools also integrate extensive market data beyond what is provided in a standard appraisal or broker price opinion into the evaluation for added confidence.

Lenders, originators and other mortgage professionals can access this added intelligence in a way that not only reviews the accuracy of an appraisal, but also allows them to evaluate the worth of a property without producing an exact property value—again eliminating the need to provide the valuation to the credit applicant.

Whether it is through tools like these or other technology solutions, mortgage professionals can still access the critical valuation data they need without running afoul of Regulation B.

Comments (1)
Regulation B has a lot of elements, but one is about transparency and disclosure to the applicant. The intent is simple: share with an applicant the key components that drove the lending decision... with one of those components being the collateral valuation.

Mr. Cruse advocates sidestepping that requirement by obtaining a value estimate that is apparently reliable enough to make a lending decision on, but not so precise or specific as to actual state what the value of a property is.

As an appraiser, I obviously have a built-in bias that an appraisal should be as good as or better than the next lower alternative.
I also don't think all lending decisions necessary require an appraisal; given the loan or situation, something less than an appraisal can provide an appropriate level of valuation diligence given the loan amount, the collateral value, the credit score, the net worth of the borrower, etc.

But as a stakeholder in the residential mortgage-finance industry, I find it concerning that a leading industry news organization would openly promote and endorse methods to circumvent the intent of consumer transparency.

Of course, if Mr. Cruse wants to add to his advocacy that in-lieu of the valuation product, the decision maker fill out a certification that states, "I valued this property at $X based on A, B, and C", then transparency is restored, and the consumer is provided with the how/why of the valuation of his/her property.
(BTW, all appraisals are written in a "I valued this property at $X based on A,B and C" format).
Posted by | Tuesday, April 08 2014 at 4:19PM ET
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