Even the most well-intentioned lenders sometimes fall short in terms of compliance with certain aspects of the Final Interagency Appraisal and Evaluation Guidelines, most notably when it comes to having policies and procedures in place to evaluate and monitor the ongoing performance of appraisers and having the required supporting documentation to show that the lender is evaluating and monitoring the appraisers.
This deficiency on the part of the majority of lenders either to understand and/or comply with Interagency Appraisal and Evaluation Guidelines was recently underscored during the performance of five regulatory reviews for five unique lenders. Coincidently, when the requested documentation for the regulatory reviews arrived from the lenders, it was apparent that the requested documentation relating to appraisal policy and evaluation procedures was completely absent from two of the lenders and only partially provided by three of the lenders. When auditors again requested documentation from the two lenders who had completely failed to send any documentation regarding their appraisal processes and procedures, both lenders responded by stating “this was a regulatory review, they had regulatory reviews previously, no one asked about appraisal procedures; furthermore, appraisal policy and procedures are not part of regulatory reviews.”
While the lender's response was true at one time, the rules of the game changed after April 1, 2011, when compliance with the Interagency Appraisal and Evaluation Guidelines became mandatory (i.e. no longer optional), thus expanding the scope of a meaningful regulatory review to include a review of a lender's procedures not only for the development, administration, and monitoring of their appraiser panel but also of the review processes for their appraisals.
The first paragraph in Section 3 Supervisory Policy on page 2 of The Interagency Appraisal and Evaluation Guidelines states, “An institution's real estate appraisal and evaluation policies and procedures will be reviewed as part of the examination of the institution's overall real estate-related activities.” More importantly, on the same page, there is clear warning to lenders, “Institutions that fail to comply with the Agencies' appraisal regulations or to maintain a sound appraisal and evaluation program consistent with supervisory guidance will be cited in supervisory letters or examination reports and may be criticized for unsafe and unsound banking practices. Deficiencies will require appropriate corrective action.”
The GAO in its July 2011 Residential Appraisal Report to Congressional Committees stated, “As required by Title XI, federal banking regulators have established appraisal and evaluation requirements through regulations and have also jointly issued Interagency Appraisal and Evaluation Guidelines. These regulations and guidelines address the minimum appraisal and evaluation standards lenders must follow…The federal banking regulators have procedures for examining the real estate lending activities of regulated institutions that include steps for assessing the completeness, adequacy, and appropriateness of these institutions' appraisal and evaluation policies and procedures.”
Patrick Parkerson, director, Division of Banking Supervision and Regulation, Board of Governors of the Federal Reserve System stated in his response letter to the GAO (he received an early draft of their July report on Appraisals) “These guidelines (Interagency Appraisal and Evaluation Guidelines, December 10, 2010) address the federal banking regulators expectations for a regulated institution's appraisal process…” Clearly there are now regulatory requirements, which are enumerated in the Interagency Appraisal and Evaluation Guidelines, for lenders to be engaging in ongoing monitoring and evaluation of both appraisals and appraisers thus meriting their inclusion in a meaningful regulatory review.
So what about the three lenders who supplied partial information? Lenders 3 and 4 provided the QMS review team documentation showing that their Board of Directors reviewed appraisers' résumés, licenses, and sample appraisals prior to approving them for their appraisal panel. Lender 3 even required appraiser panel candidates to submit reference letters from other lenders who had previously made use of their services. Regrettably, the Board of Directors for both Lenders 3 and 4 harbored the mistaken belief that once they approved an appraiser to their panel, it was a lifetime appointment deeming any further monitoring of their credentials or performance unnecessary. Unfortunately, this falls short of what the Interagency Appraisal and Evaluation Guidelines ergo federal regulators require. For lenders with appraiser panels, the Interagency Guidelines mandate:
- A process for qualifying an appraiser for initial placement on the list.
- Policies and procedures for ongoing monitoring of the appraiser's performance to assess whether to retain the appraiser on the list.
- Documentation of periodic monitoring of the appraiser's credentials to assess whether to retain the appraiser on the list.
- Documentation of periodic internal review of the use of the approved appraiser list to confirm that appropriate procedures and controls exist to ensure independence in the development, administration, and maintenance of the list.
For every appraisal performed, the lender must maintain documentation that the person performing each appraisal is competent, independent and has the relevant experience and knowledge for the market, location, and type of property being valued.
This brings us to Lender 5. After a second request for documentation regarding Lender 5's selection criteria and procedures to evaluate and monitor the ongoing performance of their appraisers, the lender's operations manager faxed a copy of their contract with a large AMC along with a note stating that their institution had turned their entire appraisal management process over to an AMC and, therefore, they (the lender), were not required to monitor appraiser qualifications and performance because those functions were handled by the AMC. Unfortunately, the Interagency Appraisal and Evaluation Guidelines require lenders to “have the resources and expertise necessary for performing ongoing oversight of third party arrangements.” Not only are lenders required to maintain ongoing monitoring of their AMC, they are required to maintain documentation of those monitoring efforts and assessments. The Interagency Appraisal and Evaluation Guidelines state:
“An institution should document the results of ongoing monitoring efforts and periodic assessments of the arrangement(s) with a third party for compliance with applicable regulations and consistency with supervisory guidance and its performance standards. If deficiencies are discovered, an institution should take remedial action in a timely manner.” (Page 20)
In conclusion, these 5 lenders are generally, for lack of a better term, “responsible”. These five lenders have always focused their efforts on compliance and quality control, which is why they had ordered a regulatory review. Indeed, these five lenders were truly and deeply surprised that the QMS regulatory review uncovered any deficiencies. Nonetheless, having a regulatory review proved to be a good thing for these lenders even though it uncovered serious deficiencies in terms of their appraiser and appraisal processes and procedures because they will now have an opportunity to correct these deficiencies prior to any review performed by federal regulators.
