Separating the Appraisal and Evaluation Functions - Mary Beth Guard
Separating the Appraisal and Evaluation Functions
Answer by Mary Beth Guard, BOL Guru
Real estate prices have soared over the last few years. A borrower may get a loan for $90,000 to buy a $100,000 house and over the course of just a few years, the collateral ends up being worth substantially more. Are the property values realistic? Will they continue to escalate? Or are there appraisers out there who are appraising property at whatever value the seller sets as the sales price, and perhaps artificially inflating values?
An institution's loan portfolio's worth depends upon the strength of the borrowers and the value of the underlying collateral. If the appraisals are not trustworthy, the examiner is going to be saying, "Houston, we've got a problem." Well, okay, maybe that won't be exactly what the examiner says, but you get the idea.
The regulators are concerned about recent exam findings that indicate some financial institutions are ignoring guidelines dating back to FIRREA that require independence in the appraisal and evaluation functions, and they have recently issued interagency guidance to remind financial institutions about the requirements that relate to independence of the collateral valuation process for all real estate-related financial transactions that are either originated by the financial institution or purchased by it for its own portfolio or as assets held for sale.
Improperly prepared appraisals can undermine the integrity of credit underwriting processes, and a loan officer anxious to book a loan can't be allowed to have undue influence on the appraiser.
Here's a quick checklist to remind you of what the regulators are looking for:
- Has your board of directors reviewed and adopted policies and procedures that establish and maintain an effective, independent real estate appraisal and evaluation program for all your lending functions (which include commercial RE mortgage departments, capital market groups, and asset securitization and sales units)?
- Is the individual who performs the appraisal or evaluation truly independent? [That means the individual has neither a direct nor indirect, interest, financial or otherwise, in the property or transaction.]
- Is the individual performing the appraisal or evaluation competent to perform the assignment?
- Has your institution reviewed the individual's qualifications, experience, and educational background prior to engaging him or her?
- Do you complete the "selection" of the appraiser (according to the regulators, this means the individual accepts the assignment to appraise or evaluate a particular property, based on an oral or written agreement) prior to the commencement of appraisal or evaluation development work?
- Is the appraiser engaged directly by your institution or an agent acting on your behalf? [There is an exception for circumstances where an appraisal that meets the guidelines and regulations was prepared for another financial services institution and you use it.]
- Do you avoid using an appraiser recommended or selected by the borrower (even if the borrower selects from your institution's list of approved appraisers)?
- Do you refrain from using a borrower-ordered appraisal?
- Do you avoid using any "readdressed appraisals" (i.e. appraisal reports altered by an appraiser to replace any references to the original client with your institution's name.)
- Do individuals who are independent from the loan production area oversee the selection of appraisers and individuals providing evaluation services? [If your institution is small, the regulators recognize the difficulty of separating the collateral valuation from the loan production processes. To try to achieve independence in a small institution, loan officials, officers or directors with responsibility for ordering appraisals and evaluations should not have sole approval authority for granting the loan request.]
- Do you identify the assignment and order the appropriate appraisal or evaluation when selecting and engaging appraisers?
- Do you use written engagement letters when ordering appraisals, especially for large, complex, or out-of-area commercial real estate properties?
- Do you include a copy of the written engagement letter in the permanent loan file?
- Does the appraiser incorporate an engagement letter in the appraisal report in order to confirm the assignment was made in a compliant manner?
- Are appraisals and evaluations reviewed?
- Are the individuals who review the appraisals and evaluations qualified and adequately trained and not involved in the loan production processes?
- Do your standards for appraisal review properly reflect the risk of the transaction and the process through which the appraisal or evaluation was obtained?
- Do you have more in-depth review procedures for evaluations of large, complex, or out-of-area commercial real estate credits and for those appraisals and evaluations ordered by agents of the institution, such as loan brokers or by another financial services institution?
- Do you ensure that no single person has sole authority to render credit decisions involving loans on which they ordered or reviewed the appraisal or evaluation?
- Do lending officials, officers, and directors abstain from any vote or approval involving loans for which they performed the appraisal or evaluation?
The original version appeared in the April/May 2004 edition of the Oklahoma Bankers Association Compliance Informer.
First published on BankersOnline.com 09/27/04
First published on 09/27/2004