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#2267158 - 03/03/22 04:29 PM
Appraisal Independence
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Platinum Poster
Joined: Jan 2015
Posts: 616
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Good Morning,
We are looking at our process for ordering appraisals and considering having the underwriter order the report. From what I have read, the loan underwriter is not considered part of "loan production" for Reg z as long as he/she does not report directly to anyone involved in the taking of the application, offering or negotiating terms, or whose compensation is based on loan processing volume. Does anyone have any thoughts on this?
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If at first you do succeed....try something harder -fortune cookie
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#2267162 - 03/03/22 06:31 PM
Re: Appraisal Independence
Luv2run
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10K Club
Joined: Jul 2001
Posts: 83,362
Galveston, TX
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I am confused. You are saying that your loan underwriter is not part of your loan production staff?
How do you equate that with this statement in the guidelines?
For a small or rural institution or branch, it may not always be possible or practical to separate the collateral valuation program from the loan production process. If absolute lines of independence cannot be achieved, an institution should be able to demonstrate clearly that it has prudent safeguards to isolate its collateral valuation program from influence or interference from the loan production process. In such cases, another loan officer, other officer, or director of the institution may be the only person qualified to analyze the real estate collateral. To ensure their independence, such lending officials, officers, or directors must abstain from any vote or approval involving loans on which they ordered, performed, or reviewed the appraisal or evaluation.
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The opinions expressed here should not be construed to be those of my employer: PPDocs.com
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#2267163 - 03/03/22 07:35 PM
Re: Appraisal Independence
Luv2run
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Platinum Poster
Joined: Jan 2015
Posts: 616
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Based on the definition of loan production staff showing in the Official interpretation of 42(d)(5)(i) Loan Production Function that states
" A person solely responsible for credit administration or risk management is not considered a part of a creditors loan production function, Credit administration and risk management includes, for example, loan underwriting......."
So, based on that I was feeling pretty sure we would be ok.
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If at first you do succeed....try something harder -fortune cookie
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#2267165 - 03/03/22 08:23 PM
Re: Appraisal Independence
Luv2run
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10K Club
Joined: Jul 2001
Posts: 83,362
Galveston, TX
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The regulation itself reads as follows.
(i) Loan production function. The term “loan production function†means an employee, officer, director, department, division, or other unit of a creditor with responsibility for generating covered transactions, approving covered transactions, or both.
Being responsible for risk management or credit underwriting policies from an administrative perspective is not the same as being an underwriter.
_________________________
The opinions expressed here should not be construed to be those of my employer: PPDocs.com
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#2267595 - 03/14/22 03:31 PM
Re: Appraisal Independence
Luv2run
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Platinum Poster
Joined: Jan 2015
Posts: 616
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After closer examination of the reg, I agree with you 100% . I was reading too much into the term "loan underwriter" and not necessarily keeping that term in context of the industry practices as a whole. I appreciate your feedback.....it caused me to take the necessary second look.
_________________________
If at first you do succeed....try something harder -fortune cookie
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#2271675 - 06/15/22 03:01 PM
Re: Appraisal Independence
Luv2run
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Platinum Poster
Joined: Jun 2014
Posts: 566
Petersburg, VA
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The individuals who engage appraisers and review completed appraisals work in our loan operations department. The loan operations department itself reports to a senior manager. That senior manager sits on the bank's loan committee. The loan committee approves all real estate secured loans. We are over $250 million in assets. We pay no compensation outside of a flat salary to anyone involved in the loan production process.
Reading through of 1026.42(d) had me thinking we have a problem. Could the fact that it's a full committee that approves the loan save us, as opposed to the senior manager being able to approve the loan on their own? ((i) Loan production function. The term “loan production function†means an employee, officer, director, department, division, or other unit of a creditor with responsibility for generating covered transactions, approving covered transactions, or both.)
Just thinking this through further- we could have someone else in a separate department order the appraisals, however there's really no one else in our bank qualified to perform the review. Not to mention, the CEO is also a member of the loan committee and everyone ultimately reports to them. I'm assuming this is why a lot of banks have moved to using a third-party appraisal management company to avoid these issues...
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#2271680 - 06/15/22 03:22 PM
Re: Appraisal Independence
Luv2run
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Platinum Poster
Joined: Jun 2014
Posts: 566
Petersburg, VA
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I think "review" is covered in the valuation management function that can't be performed by a person involved with or reporting to someone involved with the "loan production function."
(4) “Valuation management functions†means: (i) Recruiting, selecting, or retaining a person to prepare a valuation; (ii) Contracting with or employing a person to prepare a valuation; (iii) Managing or overseeing the process of preparing a valuation, including by providing administrative services such as receiving orders for and receiving a valuation, submitting a completed valuation to creditors and underwriters, collecting fees from creditors and underwriters for services provided in connection with a valuation, and compensating a person that prepares valuations; or (iv) Reviewing or verifying the work of a person that prepares valuations.
Last edited by burke116; 06/15/22 03:24 PM. Reason: clarify the "reporting to" piece
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#2271726 - 06/15/22 08:27 PM
Re: Appraisal Independence
Luv2run
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Platinum Poster
Joined: Jun 2014
Posts: 566
Petersburg, VA
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They would be performing a function under the "valuation management function" as defined above to include the selection (item i.) of the appraiser. Because they are part of the valuation management function, for banks over $250 million in assets, they cannot report to someone who is part of the "loan production function" as defined to be someone who generates or approves covered loans.
(2) Employees and affiliates of creditors with assets of more than $250 million for both of the past two calendar years. For any covered transaction in which the creditor had assets of more than $250 million as of December 31st for both of the past two calendar years, a person subject to paragraph (d)(1)(i) of this section who is employed by or affiliated with the creditor does not have a conflict of interest in violation of paragraph (d)(1)(i) of this section based on the person's employment or affiliate relationship with the creditor if:
(i) The compensation of the person preparing a valuation or performing valuation management functions is not based on the value arrived at in any valuation;
(ii) The person preparing a valuation or performing valuation management functions reports to a person who is not part of the creditor's loan production function, as defined in paragraph (d)(5)(i) of this section, and whose compensation is not based on the closing of the transaction to which the valuation relates; and
(iii) No employee, officer or director in the creditor's loan production function, as defined in paragraph (d)(5)(i) of this section, is directly or indirectly involved in selecting, retaining, recommending or influencing the selection of the person to prepare a valuation or perform valuation management functions, or to be included in or excluded from a list of approved persons who prepare valuations or perform valuation management functions.
(4) “Valuation management functions†means: (i) Recruiting, selecting, or retaining a person to prepare a valuation;
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#2271797 - 06/16/22 07:48 PM
Re: Appraisal Independence
Luv2run
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Platinum Poster
Joined: Jun 2014
Posts: 566
Petersburg, VA
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A teller does not have the responsibility outlined above nor do they perform a 'valuation management function.' I never said a teller ordering an appraisal is part of the loan production function. They are merely placing an order. At my bank, that would definitely meet the definition of selecting an appraiser as they would be going to our list of approved appraisers and selecting an appraiser (also possibly reaching out to multiple and making a selection depending on the quote/time frame). (4) “Valuation management functions†means: (i) Recruiting, selecting, or retaining a person to prepare a valuation; I could understand if a teller was ordering from an appraisal management company who actually made the selection, but if you're dealing with appraisers directly, I don't know how "select" isn't "select."
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#2271910 - 06/21/22 06:22 PM
Re: Appraisal Independence
Luv2run
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10K Club
Joined: Aug 2002
Posts: 47,530
Bloomington, IN
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IMHO if the appraisal is assigned to the next appraiser up on a revolving list then the person doing the assigning is not selecting the appraiser, the list is.
We had a similar set-up as TR described and our FDIC examiners were fine with it.
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The opinions expressed are mine and they are not to be taken as legal advice.
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