Lenders that order appraisals to support mortgage loans may be tempted, as a cost control measure or otherwise, to limit the number of approaches to value that an appraiser uses in performing the appraisal. But those lenders, and their AMCs, should proceed with caution. The uniform appraisal standards, known as USPAP, recognize three main approaches to value: the sales-comparison approach, the cost approach, and the income approach.
Most lenders are no doubt familiar with the general concepts. The key point is that it’s the appraiser’s responsibility to determine which approaches are necessary to produce a credible result for the lender’s purposes.
Several years ago, the Appraisal Standards Board (ASB)–the group responsible for drafting and revising USPAP–beefed up what’s known as the "scope-of-work rule" to make the point that it is the appraiser's responsibility to determine how to produce credible results. And, in the last several years, the ASB has also eliminated key concepts known as the “departure rule” and the “limited appraisal” that allowed appraisers to limit their analysis so long as they included appropriate disclaimers.
Regulators are starting to pay attention, too. Within the last month or so, the Executive Director of the Kentucky Real Estate Appraisers Board circulated a memorandum to all licensed and registered Kentucky appraisers and AMCs, in which he asserted that restricting the development and reporting of relevant approaches to value may violate USPAP and state law, and that, at a minimum, appraisers may be subject to discipline for accepting an assignment with that limitation.
And, of course, in the revised Interagency Appraisal and Evaluation Guidelines published in December of 2010, the principal federal regulators make clear that appraisals subject to their regulations “must include any approach to value…that is applicable and necessary to the assignment.”
Of course, it’s worth noting that USPAP permits clients to ask an appraiser to develop and report additional approaches to value, so long as the client does not direct the appraiser as to how to weigh and reconcile that additional approach in determining the final value. The danger comes in limiting the approaches or preventing an appraiser from reporting the results of a relevant approach.
Lenders and AMCs should be proactive in informing the appraiser about their intended use and providing the appraiser the information necessary to make appropriate scope of work decisions. But in the end, lenders and AMCs must defer to the appraiser in determining whether an approach to value is necessary to produce a credible result.
