Regulators set final guidance on appraisals
Federal regulatory agencies released final guidance Thursday on how financial institutions will conduct real estate appraisals, the first nationwide update since 1994.
The Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp., the Office of Thrift Supervision and the National Credit Union Administration jointly filed the "Interagency Appraisal and Evaluation Guidelines," with the Federal Register. The guidelines were originally introduced in 1994 and submitted the proposal for industry comment in November 2008. (Download here.)
The guidelines are effective upon filing with the Federal Register.
With the passage of the Dodd-Frank Act this summer, the agencies will determine whether future revisions are needed. Dodd-Frank also cleared a replacement of the Home Valuation Code of Conduct that would govern appraisals for Fannie Mae and Freddie Mac mortgages.
One of the main issues addressed in the guidance is a standard for appraisal independence. Lenders can exchange information with appraisers but they cannot "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."
But banks cannot tell the appraiser of any expected or qualifying estimate of value. Banks cannot specify a minimum value requirement for the property that is needed to approve the loan or as a condition of ordering the valuation. Banks cannot tie an appraiser's compensation on whether or not the loan goes through, nor can they not avoid considering an appraiser for future work if the value of the home does not meet a specified threshold.
The agencies received 157 unique comments when it proposed the rules in 2008. Most, according to the announcement, supported the proposal. While many agreed that the proposal did address issues in the valuation process, they also raised questions over technical issues.
Most suggestions, according to the agencies, "address statutes and regulations that are generally beyond the scope of the Guidelines."
In regard to the use of appraisal management companies, the agencies state that institutions should use caution in using AMCs and included a risk management system and internal controls for the lenders in dealing with these companies.
While many commentators voiced concerns over broker-priced opinions in the proposal, the agencies clarified that BPOs do not comply with the minimum appraisal standards.
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