A Look at Appraisal Independence Legislation

Appraisal independence is not new, but we have seen considerable regulatory activity about it recently. Appraisal independence (on a practical level) is making sure that there is no undue influence on an appraiser that might hinder the appraiser’s independent judgment. I think most appraisers will agree that this is a good thing. The difficulty for many appraisers came with the way some of these regulations completely changed the playing field while trying to enforce new independence rules.

One of the most notable changes was the prohibition of direct relationships with mortgage brokers. Several regulatory initiatives focus on the independence issue, but from different directions. This has been one of the core concerns with legislators, so at least one of the regulatory initiatives will apply in every case (and possibly as many as three may apply, depending on the type of loan in question).

The biggest change came from the Home Valuation Code of Conduct (HVCC) in 2009 as it addressed appraiser independence. The HVCC applied to all loans that were intended to be delivered to Fannie Mae or Freddie Mac. It stated that: “No employee, director, officer, or agent of the Seller, or any other third party acting as joint venture partner, independent contractor, appraisal company, appraisal management company, or partner on behalf of the Seller, shall influence or attempt to influence the development, reporting, result, or review of an appraisal through coercion, extortion, collusion, compensation, inducement, intimidation, bribery, or in any other manner including but not limited to:…” (This is followed by a list of nine different and fairly well-known actions that could influence the appraiser.)

While this addressed many of the issues affecting appraisers, the HVCC also specifically prohibited many of the direct relationships that appraisers had sometimes enjoyed with other real estate professionals, especially mortgage brokers. Until then, brokers had been a direct source of work (up to 50% of national loan volume). The HVCC has ended, but the rules around independence were adopted into the Fannie Mae and Freddie Mac loan purchase guidelines and thus still exist in almost the same form today.

The next chapter of the appraisal independence story came with the passage of the Dodd-Frank Act. As part of that act, the Interim Final Regulations were drafted. This is part of Truth in Lending/Regulation Z and applies to all consumer credit transactions (“extension of consumer credit that is or will be secured by the consumer’s principal dwelling”).

Specifically the Interim Final Regulations state: “Valuation of consumer’s principal dwelling—(1) Coercion. In connection with a covered transaction, no covered person shall or shall attempt to directly or indirectly cause the value assigned to the consumer’s principal dwelling to be based on any factor other than the independent judgment of a person that prepares valuations, through coercion, extortion, inducement, bribery, or intimidation of, compensation or instruction to, or collusion with a person that prepares valuations or performs valuation management functions.”

Finally, an update to the Interagency Appraisal and Evaluation Guidelines was issued by the federal financial institution regulatory agencies and applies to all federally related transactions. These guidelines speak directly to the lenders versus the appraisers, but they will have a huge influence on lenders’ appraisal policy and directly affect how lenders handle the appraisal process and lay out their specific requirements for appraisers. It states: “An institution may exchange information with appraisers and persons who perform evaluations, which may include providing a copy of the sales contract for a purchase transaction. However, an institution should not directly or indirectly coerce, influence, or otherwise encourage an appraiser or a person who performs an evaluation to misstate or misrepresent the value of the Property.”

The Interagency Guidelines further describe how an institution should maintain independent lines of reporting. The Guidelines state: “For both appraisal and evaluation functions, an institution should maintain standards of independence as part of an effective collateral valuation program for all of its real estate lending activity. The collateral valuation program is an integral component of the credit underwriting process and, therefore, should be isolated from influence by the institution’s loan production staff. An institution should establish reporting lines independent of loan production for staff who administer the institution’s collateral valuation program, including the ordering, reviewing, and acceptance of appraisals and evaluations. Appraisers must be independent of the loan production and collection processes and have no direct, indirect or prospective interest, financial or otherwise, in the property or transaction. These standards of independence also should apply to persons who perform evaluations.”

In addition to the above comments on the independent lines of reporting, the Interagency Guidelines address the parameters an institution should use if they develop an approved list of appraisers. If an institution establishes an approved appraiser list for selecting an appraiser for a particular assignment, the institution should have appropriate procedures for the development and administration of the list. For residential transactions, loan production staff can use a revolving, pre-approved appraiser list, provided the development and maintenance of the list is not under their control.

This last section on independence is where FNC’s AppraisalPort® helps by directly linking appraisers with lenders. Under all of the rules I have discussed, any institution is still allowed to maintain its own list of approved appraisers and order appraisals directly from the appraiser as long as the guidelines covering independence are followed. AppraisalPort and its accompanying Collateral Management System® (CMS®) are designed to allow lenders and AMCs to select approved appraisers for any institution based on pre-selected criteria, removing the selection process from human hands. Many of our lender clients use AppraisalPort to continue to have direct control over the appraisal process working with both individual appraisers and AMCs, and still meet all the independence guidelines.

That brief overview explains how all three of the main governing regulations weigh in on the subject of appraisal independence. These provisions were created to help the appraiser maintain total independence and avoid pressure to hit values or otherwise massage an appraisal, leading ultimately to a better quality loan. Unfortunately these same provisions have created additional impacts and consequences by changing the status quo significantly—even completely reorganizing how appraisers do business in some cases.