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Lenders (and AMCs) Responsible for Appraisal Quality?
By Jim Wells, President at Validox
Many appraisers may not be fully aware that with lenders, whether using appraisal management companies or deploying inhouse procurement solutions, any method of engagement comes with a responsibility for appraisal quality and USPAP compliance. Fannie Mae Selling Guide B4-1.1- 03 and B4-1.3-12 both specify the lender’s responsibility to hire appraisers with the proper competencies, qualifications, experience, and geographic knowledge when ordering an appraisal.
But more than just hiring the right appraiser with the right credentials and experience, lenders are ultimately responsible for the “quality of work” of the appraiser it selects for each assignment. Even if using an AMC or other third party service provider, the lender is “accountable for the quality of the work performed as if it was performed by an employee of the lender.”
At Validox, our focus on providing compliance products for AMCs and lenders gives us a rather unique view of overall appraisal quality on a large scale and the common mistakes that degrade the quality of valuations. With the large volume of USPAP Standard 3 compliance reviews performed by our staff of certified appraisers across the country, we have been able to identify seven areas of non-compliance that represent the greatest reasons for ongoing USPAP failure and its impact on appraisal quality. The most common deficiencies noted by our team are the following:
1. Highest and Best Use
2. Contradictory Statements
3. Exposure Time
4. Prior Disclosure of Services
5. Supporting Opinions and Conclusions
6. Reconciliation
7. Three Approaches to Value
Compliance and review are an often neglected, yet nonetheless very critical responsibility for lenders (or their third party vendors), because ultimately the buck stops with them. Fannie’s Selling Guide indicates that the lender must have a Quality Control (QC) plan that continually monitors and assesses the overall quality of work performed by an appraiser, and Fannie “holds the lender fully accountable for the quality of the QC appraisal reviews regardless of whether the work is performed by the lender itself or by an outsourced QC service provider” (FNMA D1-3-04).
This highlights the importance of both selecting competent appraisers, and also reviewing the work of the appraisers that a lender engages, whether directly or through an AMC. Suffice it to say that appraisers who understand USPAP well and produce high quality appraisal reports are great assets to any entity in the mortgage loan industry, both on front-end origination or on back-end quality control and monitoring.
Reporting
In addition to being responsible for the quality of its appraisals and selecting competent appraisers, lenders are also, in many cases, responsible for reporting deficiencies in appraisal reports. Depending on the severity and type of USPAP failure, these failures have the potential of creating quality issues and reporting challenges for lenders and AMCs, not to mention serious trouble for the offending appraiser. For example, some individual state appraisal board rules require that all USPAP failures must be submitted for review to the board, even those that may not be deemed as ‘material deficiencies.’
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USPAP failures that are ‘material deficiencies’ require more serious reporting by lenders and AMCs and corresponding potential consequences for appraisers. HUD defines material deficiencies on appraisals as those that have a direct impact on value marketability (see HUD 4000.1). The regulations requiring action by lenders and AMCs include mandates from the CFPB, OCC, FDIC, NCUA, Fannie Mae, Freddie Mac, HUD, and the state appraisal boards. The requirement that affects the greatest number of institutions providing mortgage loan services is found on page 23 Section XVII of the Interagency Appraisal and Evaluation Guidelines.
XVIII Referrals
An institution should file a complaint with the appropriate state appraiser regulatory officials when it suspects that a state Certified or licensed appraiser failed to comply with USPAP, applicable state laws, or engaged in other unethical or unprofessional conduct.
In addition, effective April 1, 2011, an institution must file a complaint with the appropriate state certifying and licensing agency under certain circumstances. (12 CFR 226.42 g).
As of 2013, Fannie Mae also specifically requires all lenders to have a procedure to refer appraisers to the applicable state licensing and regulatory board and a procedure for suspending or terminating business with individual appraisers (FNMA D1-3-04).
If you are an AMC or lender, it is critical to have written policies and procedures for USPAP compliance that include ongoing reviews and testing as well as adherence to all federal and state requirements. It’s important to note that typical desk reviews used for loan origination purposes do not test properly for USPAP compliance. Only a review with the proper scope of work and methodology will satisfy the USPAP compliance mandate. The policies and procedures must also contain the necessary steps to follow when USPAP failure occurs, including the reporting to state appraisal boards.
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Statistically speaking, since most USPAP failures are not material deficiencies, when a USPAP failure occurs, this becomes an opportunity for training and education for the appraiser, and a pathway to creating higher quality appraisals for lenders and AMCs. A USPAP compliance review and remediation program is not only a regulatory burden; when managed correctly, it sets the tone for a true win-win for lenders and AMCs, while giving appraisers the tools to continue receiving assignment opportunities.
In conclusion, when it comes to achieving higher appraisal quality, USPAP competency reigns as king. For appraisers, that means staying up-todate on USPAP and continually pursuing professional development opportunities to hone their skills and competencies. For lenders, this means ongoing monitoring of appraiser performance, which is accomplished by USPAP compliance reviews. These reviews of each appraiser’s work must be performed on a consistent basis. Whether this is a mandated number of Standard 3 USPAP reviews per appraiser per year in states with AMC laws such as Texas, Colorado, North Carolina, Montana, Kansas, New Mexico and others, or complying with lender requirements to test and monitor the performance of each appraiser performing services, the need to continuously test the USPAP competency of every appraiser on a panel is a requirement of both lenders and AMCs. Appraisers will do well to remember this and continue to maintain USPAP competency.
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About the Author
Jim Wells is President of Validox. Validox provides compliance services for lenders and AMCs and dramatically reduces the hassle and cost of state regulatory USPAP compliance reviews. Validox employs certified and general licensure appraisers providing coverage in all 50 states. Validox’s product suite covers compliance needs for Lenders, AMCs and appraisers, and has new products that assist in FNMA-FHLMC-HUD post-closing QC compliance and new review products for resell by AMCs and Lender compliance companies to assist pre-funding Collateral Underwriter issues.
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by Jeremy Hall Appraisals - Colorado
Meanwhile many persons in charge of distributing the orders to individual appraisers have inadequate experience to make such quality based decisions. Or they rely on statistical performance data, fastest and cheapest will get better grades in that category. Persons in charge of making quality decisions for selecting and distributing to appraisers should be licensed themselves. Turnover in these positions is very high and it seems to be a popular position for people whom have lost their licenses or did not attain more sought after employment positions. Persons distributing orders and managing or effecting the status of appraiser approval panels should be required to have active appraisal licenses in good standing themselves.
-by Don M.
Just a quick comment. I think the articles is right on target. Another concern of mine is the fact that AVM’s can provide values to banks and other types of lenders without fulfiling the same USPAP requirements as licensed and certified appraisers. The Institute in my opinion as done nothing in regard to this that I can see.
-by Tim In Fla
Mr. Bassi is correct on all counts. The AMC goal is to find the cheapest and fastest as long as there is a valid license and E&O they are good. BTW, I don’t submit work samples to anyone. By the time I redact all the info that would be required under the The Confidentiality Requirement they would be useless. When the system backs up on a poor report and sent back to the lender the lender kicks it to the AMC and the AMC kicks it to the appraiser with the stated issues found. Likely selection of comparable properties is also on the list as the author notes. So now its on the appraiser who was just following the Assignment Conditions and Requirements of the AMC in the first place. Provide two sales within a mile, sold within 90 days, one sale within a mile can be over 90 days and one comparable listing that a Realtor priced that is way over the opinion of value. Low fee, quick turn. This makes it through the AMC check and the appraiser doesn’t have to fight for days trying to make this stupid requirement work. Even if there is a model match either over 90 days or over 1 mile, same builder, same model same type lot, verified sale. Somehow this doesn’t make it into the report but is caught in QC somewhere. Field appraisers should remember its there responsibility to provide sufficient data to solve the problem. Know this, the AMC will throw you under the bus. They will claim their set of criteria is not “hard and fast” and they rely on the appraiser. So if your churning out round peg in the round hole, low fee, quick turn, check box appraisals you do so at your peril. No one will come to your aid. Post closing QC reviews are a very real thing even months or years past closing. I have done that type of work and the fee’s and turn times are more than gracious. Way above the original appraisers fee and typical double or even triple time for completion. Buy backs happen all the time. The AMC will simply remove you from their list and find the next cheap and fast appraiser to fill the void. Apparently there remain plenty out there.
-by Billy Bach
Wow, this appraisal compliance thing seems like a really critical deal. Which begs the question: When an appraiser who produces a quality work product is discovered why are those in charge of procurement, like AMCs, beating those appraisers to death over the fee???
-by M Alley
As usual, the appraiser is burdened with the responsibility of upholding the entire lending industry. I guess the rules that apply to appraiser competence do not apply to underwriting or the AMC “technical” reviews. I find that a VERY high percentage of my appraisal work is returned for inane reasons: reasons that, when boiled down, reveal that the reviewer or underwriter just doesn’t like the way a statement is worded. As a result of these subjective reviews and appraisal conditions, the “uniform” part of USPAP has become MEANINGLESS.
-by Brad Bassi
Mr. Wells, well written article. However, it does bring a smile to my face. Are you aware that most appraisers receive multiple requests to join AMC panels, especially when they land a new client in an area that they currently don’t have coverage. All of those request that come through to me, ask me for my license, W9 and of course the all important E & O insurance declaration page. Notice that I did not mention one thing about work sample or my resume/CV, which is why I had to smile at your article. For all the yaking about quality, I find it mildly interesting that no one cares about the quality of a report prior to assigning someone just get me you E & O and tell me how little you will charge me and can I have it back in 3 days. When the industry as a whole stops the insanity of driving appraisal fees below $400 ro $450 ( I know Washington and Oregon appraises are in the $800, I really should consider moving up there) and stop with the 3 to 4 day turn time including the weekend, then maybe just maybe you might see a drop in the issues your firm is finding. The good news at my end is that I managed to avoid the AMC fray, mainly because the AMC’s don’t like me fee structure, so we typically don’t cross paths. Every now and then I do get one or two, mainly because they couldn’t find anyone to do a rural complex property. Course when they do hire me they loose money, because I am sure the lender tells them to pound sand on the fee increase so the AMC is left to swallow hard and take the beating. I guess I must be missing something in this whole process. It seems to be me, to be more focused on volume/production than quality just in the shear craziness of the AMC structure and what the 8,000 lb gorillas like B of A, Citbank and the world famous Chase think of the whole appraisal process and AMC’s in general. Pretty sad in my opinion, but hey I am just one beat up old cowboy, whose opinion really doesn’t matter. Good luck with your work and I hope you can figure out how to handle all the requests from the 8,000 lb gorillas that will be squawking to get appraisers to go out to properties in Texas and tell them the damage from a drive-by and pontoon boat. Personal Regards.
-by EJ Brown
Why is it that if an AMC is to select the most competent appraiser for an assignment I keep receiving blast for orders hundreds of miles out of my coverage area ?
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