Alston & Bird Consumer Finance Blog

Appraisal and Valuation

Appraisal Bias Focus Continues in 2024

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What Happened?

Building on the 2021 announcement of the Interagency Task Force on Property Appraisal and Valuation Equity (“PAVE”) and a series of federal agency actions in the intervening months, 2024 brings new efforts at the state and federal levels to address appraisal bias and promote fair valuations.  Notably, a new version of the Uniform Standards of Professional Appraisal Practice (“USPAP”) is in effect, prohibiting discrimination.

Why Is It Important?

USPAP:

As of January 1, the amended USPAP (the operational standards that govern real property appraisal practice) includes updates to the Ethics Rule that expressly prohibit appraisers from engaging in both unethical discrimination and illegal discrimination.  An appraiser cannot engage in illegal discrimination, which includes acting in a manner that violates or contributes to a violation of applicable anti-discrimination laws or regulations, including, but not limited to, the Fair Housing Act (“FHA”), the Equal Credit Opportunity Act (“ECOA”), and the Civil Rights Act of 1866.

The prohibition also encompasses unethical discrimination – developing an opinion of value based or with bias with respect on an actual or perceived protected characteristic of any person, “upon the premise that homogeneity of the inhabitants of a geographic area is relevant for the appraisal,” or using a characteristic to attempt to conceal a bias in the performance of an appraisal assignment.

OCC Hearing on Appraisal Bias:

On February 13, the Office of the Comptroller of the Currency (“OCC”) held the fourth of the Appraisal Subcommittee’s public hearing on appraisal bias.  Representatives of the Federal Financial Institutions Examination Council (“FFIEC”) regulatory agencies (the Federal Reserve Board, Federal Deposit Insurance Corporation, Consumer Financial Protection Bureau, National Credit Union Administration, and OCC), the U.S. Department of Housing and Urban Development, and the Federal Housing Financial Agency took questions from individuals speaking on behalf of the Appraisal Foundation, the Mississippi and Texas state appraiser regulatory boards, and the appraisal profession.

The discussion focused on efforts to combat appraisal bias, including through diversification of the appraisal profession.

FFIEC Statement on Valuation Bias:

On February 14, the FFIEC on behalf of its member entities outlined consumer compliance and safety and soundness examination principles to “promote credible appraisals” and mitigate risk from valuation practices due to potential discrimination. Through this guidance, the FFIEC encourages institutions to establish a formal valuation program “to identify noncompliance with appraisal regulations, USPAP, inaccuracies, or poorly supported valuations.”

The guidance identifies: (a) ECOA, the FHA, the Truth in Lending Act, and the Federal Trade Commission Act as the applicable consumer protection laws; and (b) Title XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 and USPAP as safety and soundness requirements.

Under the guidance, the consumer compliance examination principles focus primarily on compliance with consumer protection requirements and prohibitions on discrimination relating to valuation practices.  The FFIEC designed these principles to ensure that an institution’s board and management oversight, third party risk management and compliance management program (including policies and procedures, training, monitoring and/or audit, and consumer complaint handling) are commensurate with the size of the institution and appropriate to identify potentially discriminatory valuation practices or results.

Similarly, the FFIEC’s safety and soundness examination principles focus on financial condition and operations relating to the review and assessment of an “institution’s practices for identifying, monitoring and controlling the risk of valuation discrimination or bias.” Such assessments are similar to the consumer compliance examination principles, but also include an evaluation of the collateral valuation program and valuation review function, credit risk review function, and consideration of materiality in relation to the institution’s overall lending activities.

New Jersey Anti-Discrimination Initiative: 

Following other states (such as Texas) that have stepped up anti-discrimination efforts, the New Jersey Office of the Attorney General and Division on Civil Rights provided guidance on their enforcement of the state’s Law Against Discrimination (“LAD”) in home appraisals.

The guidance clarifies that LAD applies not only to appraisers, but also to “’any person’ who is involved in the ‘furnishing of facilities or services’ or ‘involved in the making or purchasing of any loan or extension of credit,” and thus encompasses bank and non-bank mortgage lenders, appraisal management companies (“AMCs”), insurance companies, and others.

The guidance also expressly prohibits subject individuals and entities from: (a) engaging in disparate treatment of individuals (e.g., borrowers) based on protected characteristics; (b) maintaining policies or practices that have unlawful disparate impacts; or (c) submitting or relying on an appraisal that is known (or should be known) to be discriminatory.

What Do I Need to Do?

While the above actions will impact lenders, appraisers, and AMCs differently, overall they indicate regulators’ continued (and increased) attention to fair valuations matters.  Lenders and AMCs should ensure that their in-house appraisal processes prohibit engagement in discriminatory valuations, their compliance management programs are well documented and working appropriately, and that they have escalation processes in place to address any alleged issues that may arise.  (We routinely provide compliance management system readiness reviews.)  Appraisers need to keep abreast not only of the new USPAP requirements, but also of changes to state continuing education requirements that implicate fair valuations.

CFPB and Federal Agencies Seek Comment on Proposed Automated Valuation Models Rule

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A&B Abstract:

On June 21, the Consumer Financial Protection Bureau (CFPB), along with five federal regulatory agencies (Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System (Board), Federal Deposit Insurance Corporation (FDIC), National Credit Union Administration (NCUA), and Federal Housing Finance Agency (FHFA) (the “Agencies”), published for public comment a proposed rule to implement the quality control standards mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) for the use of automated valuation models (AVMs) by mortgage originators and secondary market issuers in valuing the collateral worth of a mortgage secured by a consumer’s principal dwelling.

Background

Section 1473(q) of the Dodd-Frank Act amended the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), adding 12 U.S.C. § 3354, to address the use of AVMs to estimate the collateral value of a mortgage for mortgage lending purposes.  The statute sets forth the framework for developing quality control standards to which AVMs must adhere and directs the Agencies to promulgate regulations implementing the standards.

Automated Valuation Models (AVMs) and Covered AVMs

The term “AVMs” refers to computerized models used by mortgage originators and secondary market issuers to determine the value of a consumer’s principal dwelling collateralizing a mortgage.  Under the proposed rule, the quality control standards are applicable only to AVMs used in connection with making credit decisions or covered securitization determinations regarding a mortgage, for example, when determining a new value before originating, modifying, terminating a mortgage, or making other changes to a mortgage including a decision whether to extend new or additional credit or change the credit limit on a line of credit, or placing a loan in a securitization pool.  Other uses, such as monitoring collateral value in mortgage-backed securitizations after they have already been issued over time or validating an already completed valuation of real estate, would not be subject to the proposed rule.

Applicability 0f the Proposed Rule
Mortgage Originators and Brokers

The proposed rule would not apply to mortgage brokers if they do not engage in making covered credit decisions or securitization determinations.  As proposed, the term “mortgage originator” would follow the same definition contained in the Truth in Lending Act (TILA), at 15 U.S.C. § 1602(dd)(2).  The term would generally include creditors, as defined in TILA, such as, any person who originates two or more high-cost mortgages in any 12-month period.  Further, the term is also defined broadly to include mortgage brokers.

Mortgage Servicers

Following the exception in TILA, the proposed rule would also generally not cover mortgage servicers unless they perform any of the stated origination activities for any new extensions of credit, including a refinancing or an assumption.  For example, the proposed rule would apply to a mortgage servicer that both uses covered AVMs to engage in credit decisions and performs any of the stated origination activities.  According to the preamble, once the definition of “mortgage originator” is met, a mortgage servicer would be required to comply with the requirements of the proposed rule any time it uses an AVM to determine the collateral worth of a mortgage, including when such usage does not involve a new extension of credit such as a loan modification or reduction of a home equity line of credit.

Secondary Market Issuers

The proposed rule would apply to certain secondary market participants.  It defines the term “secondary market issuer” to mean “any party that creates, structures, or organizes a mortgage-backed securities transaction,” which includes coverage of entities that are responsible for determining the collateral worth of a mortgage when issuing mortgage-backed securities.  This would encompass secondary market participants in the securitization process that make these types of determinations, as opposed to verifying or monitoring such determinations.

Business Purpose and Commercial Loans

With respect to non-residential loans, the proposed rule would reach further than TILA.  The proposed rule includes a definition of “dwelling” that follows that contained in Regulation Z (which implements TILA), at 12 C.F.R. § 1026.2(a)(19).  However, unlike TILA, the proposed rule would apply when a mortgage is secured by a consumer’s principal dwelling, even if the mortgage is primarily for business, commercial, agricultural, or organizational purposes.

Quality Control Standards Address Valuation Bias and Discrimination

The proposed rule would require institutions that engage in covered credit decisions or securitization determinations themselves or through or in cooperation with a third party affiliate, to adopt policies, practices, procedures, and control systems to ensure that the use of AVMs adhere to quality control standards.

The proposed rule defines “control systems” to mean the functions (such as internal and external audits, risk review, quality control, and quality assurance) and information systems that are used to measure performance, make decisions about risk, and assess and effectiveness of processes and personnel, including with respect to compliance with statutes and regulations.

In keeping with FIRREA, these standards would be designed to:

  • Ensure a high level of confidence in the estimates produced by AVMs;
  • Protect against the manipulation of data;
  • Seek to avoid conflicts of interest; and
  • Require random sample testing and reviews.
Extension to Nondiscrimination Laws

However, in the proposed rule, the Agencies take the standards one step further than the Dodd-Frank Act mandate, by including that AVM quality control standards must comply with applicable nondiscrimination laws.  Exercising their statutory authority to account for other appropriate quality control factors, the Agencies included this fifth factor to address concerns about the potential for AVMs to produce property estimates that reflect discriminatory bias.

As a result, this proposed factor would create an independent requirement for institutions to establish policies and procedures to specifically address nondiscrimination and fair lending laws, such as the Equal Credit Opportunity Act (ECOA) and its implementing Regulation B, and the Fair Housing Act.  To that end, the preamble specifically notes that ECOA and Regulation B prohibit discrimination in any aspect of a credit decision, which “extends to using different standards to evaluate collateral” including “the design or use of an AVM in any aspect of a credit transaction in a way that would treat an applicant differently on a prohibited basis or result in unlawful discrimination against an applicant on a prohibited basis.”  The Agencies’ inclusion of the addition of this fifth factor is consistent with the focus of the Interagency Task Force on Property Appraisal and Valuation Equity (“PAVE”), as we have previously discussed, on addressing issues of bias and discrimination in residential property appraisal.

The proposed rule does not include specific requirements on how institutions are to structure their policies and procedures – an approach intended to provide institutions the flexibility to set quality controls for AVMs as appropriate, based on the size of the institution and the risk and complexity of transactions for which AVMs will be used.

Use of AVMs by Appraisers Not Subject to Proposed Rule

A certified or licensed appraiser using AVMs in the development of an appraisal would not be subject to the proposed rule due to the Agencies’ recognition that appraisers must make valuation conclusions that are supportable independently and do not rely on the results produced by AVMs in accordance with the Uniform Standards of Professional Appraisal Practice and its interpreting opinions.  The Agencies also acknowledge that it may be impractical for mortgage originators and secondary market issuers to adopt policies and procedures relating to AVMs used by multiple independent appraisers with which they work.

However, the proposed rule would cover the use of AVMs in preparing valuations required for certain real estate transactions that are exempt from the existing appraisal requirements under the appraisal regulations issued by the OCC, Board, FDIC, and NCUA (such as transactions that have a value below the exemption thresholds in the appraisal regulations).  Additionally, the Agencies’ existing guidance regarding AVMs would remain applicable separately from the proposed rule; for example, the OCC, Board, FDIC, and NCUA have issued guidance about prudent appraisal and evaluation programs in Appendix B to the Interagency Appraisal and Evaluation Guidelines.

Takeaway

If adopted, the proposed rule would require regulated mortgage originators and secondary market issuers to take appropriate steps and adopt policies, practices, procedures, and control systems to ensure that the use of AVMs in valuing real estate collateral securing mortgage loans adhere to the specified quality control standards, including compliance with nondiscrimination laws to avoid potential valuation bias.  While the proposed rule does not contain specific requirements, it would require institutions to create their own policies and procedures to ensure the credibility and integrity of the valuation determinations produced by AVMs.

Comments must be received by August 21, 2023.

Moving to Address Appraisal Bias, Agencies and the Appraisal Foundation Issue Updates

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A&B ABstract:

 A year and a half after President Biden’s announcement of the Interagency Task Force on Property Appraisal and Valuation Equity (“PAVE”), the past weeks have seen a flurry of activity from federal agencies and the Appraisal Foundation to address issues of bias in residential property appraisal.  What should lenders, servicers, and appraisers know?

Background:

In June 2021, President Biden announced the formation of the PAVE Task Force, comprising 13 federal agencies, including the White House Domestic Policy Council.  He tasked the group with identifying and evaluating “the causes, extent, and consequences of appraisal bias and to establish a transformative set of recommendations to root out racial and ethnic bias in home valuations.”

In March 2022, the member agencies of the PAVE Task Force published an action plan, announcing a series of concrete commitments to address appraisal bias in five broad categories:

  • strengthening guardrails against discrimination in all stages of residential valuation;
  • enhancing fair housing and fair lending enforcement, and driving accountability in the appraisal industry;
  • building a diverse, well-trained, and accessible appraiser workforce;
  • empowering consumers to take action against bias; and
  • giving researchers and enforcement agencies better data to study and monitor valuation bias.

While the Task Force’s activity is ongoing, federal agencies in the past few weeks have announced a series of steps that are in line with the PAVE goal of addressing real property appraisal bias.

FHA: Draft Mortgagee Letter on Reconsiderations of Value and Appraisal Review

On January 3, 2023, the Federal Housing Administration (“FHA”) published for public comment a draft mortgagee letter, Borrower Request for Review of Appraisal Results, that would permit a second appraisal to be ordered if a Direct Endorsement underwriter determines that an original appraisal contains a material deficiency.  The letter would expressly identify as a material deficiency – one that would directly impact value and marketability of the underlying property – either indications of unlawful bias in the appraisal or of a violation of applicable federal, state, or local fair housing and non-discrimination laws.

Further, the draft mortgagee letter would require the underwriter in a transaction involving an FHA-insured loan to “review the appraisal and determine that it is complete, accurate, and provides a credible analysis of the marketability and value of the Property.”  Among other criteria, this would require the underwriter to make a determination of whether the appraisal is materially deficient – that is, whether the appraisal contains indications of unlawful bias or of a violation of applicable fair housing and non-discrimination laws.  Providing a “credible analysis” exceeds the scope of a quality control review.  If included in a finalized mortgagee letter, it would require lenders to determine whether underwriters must be state-licensed or -certified appraisers.

The draft mortgagee letter also sets forth standards for the submission and consideration of a borrower’s request for a review of appraisal results, including the submission of a reconsideration of value request to the appraiser.

VA: Enhanced Oversight Procedures to Combat Appraisal Bias

On January 18, the Department of Veterans Affairs (“VA”) issued Circular 26-23-05, detailing the enhanced oversight procedures that the VA has adopted “to identify discriminatory bias in home loan appraisals and act against participants who illegally discriminate based on race, color, national origin, religion, sex (including gender identity and sexual orientation), age, familial status, or disability.”

In the Circular, the VA indicated that it will review all appraisal reports submitted in connection with VA-guaranteed home loans to identify any potential discriminatory bias.  The VA will: (a) conduct an escalated review of any suspected incidents of bias; and (b) remove from its panel of approved appraisers any individual who is confirmed to have provided a biased appraisal as the result of such a review.

The VA also reminded panel appraisers that in submitting a Fannie Mae Form 1004 (Uniform Residential Appraisal Report), they certify that they have not based the opinion communicated in an appraisal report on discriminatory factors (e.g., the race) of either the property applicants or the residents of the area in which the property is located.

Appraisal Foundation: Proposed Revision of Appraisal Standards

In mid-December, the Appraisal Standards Board (“ASB”) of the Appraisal Foundation released its fourth exposure draft of proposed changes to the Uniform Standards of Professional Appraisal Practice (“USPAP”), the operational standards that govern real property appraisal practice.

In response to comments received in response to the last draft, the ASB proposes to add to the USPAP Ethics Rule a section expressly discussing non-discrimination.  The proposed section would prohibit appraisers from engaging in both unethical discrimination and illegal discrimination, and would provide guidance as to the type of conduct constituting each form.

Unethical Discrimination:

First, the ASB proposes to include an express statement that an appraiser must not engage in unethical discrimination.  First, that prohibition would preclude an appraiser from developing and/or reporting an opinion or value that is based, in whole or in part, on the actual or perceived protected characteristics of any person.

Second, the rule would prohibit an appraiser from performing an assignment with bias with respect to the actual or perceived protected characteristics of any person – meaning that the appraiser may not engage in any discriminatory conduct (regardless of whether it arises in the course of developing and/or reporting an opinion of value). For purposes of this prohibition, the rule would utilize the USPAP definition of bias: “a preference or inclination that precludes an appraiser’s impartiality, independence, or objectivity in an assignment.”

The rule would make a limited exception for activity that qualifies with “limited permissive language,” permitting an appraiser to use or rely upon a protected characteristic in an assignment only where:

  • laws and regulations expressly permit or otherwise allow the consideration of a protected characteristic;
  • use of or reliance on that characteristic is essential to the assignment and necessary for credible assignment results; and
  • consideration of the characteristic is not based upon bias, prejudice, or stereotype.

The exposure draft provides as an example of activity that might qualify for the exception the completion of an appraisal review in order to determine whether the initial appraisal was discriminatory.

The ASB proposal makes clear that because “an appraiser’s ethical duties are broader than the law’s prohibitions,” an appraiser may commit unethical discrimination without violating any applicable law; however, an act that “constitutes illegal discrimination … will also constitute unethical discrimination.”

Illegal Discrimination:

Complementing the prohibitions discussed above, the ASB proposes to include an express statement that an appraiser must not engage in illegal discrimination – conduct that violates the minimum standards of anti-discrimination set forth in the Fair Housing Act (“FHA”), the Equal Credit Opportunity Act (“ECOA”), and Section 1981 of the Civil Rights Act of 1866 (“Section 1981”).  The rule would impose on appraisers a duty to understand and comply with such laws as they apply to the appraiser and the appraiser’s assignments, including the concepts of disparate treatment and disparate impact.  Further, the rule would prohibit an appraiser from using or relying on a non-protected characteristic as a pretext to conceal the use of or reliance upon protected characteristics when performing an assignment.

Further Guidance:

 The exposure draft indicates that the ASB would follow the adoption of the new non-discrimination section of the ethics rule with detailed guidance on the scope of these prohibitions, including:

  • Background on federal, state, and local anti-discrimination laws;
  • Guidance on the application of FHA, ECOA, and Section 1981 to appraisals of residential real property;
  • Explanation of the disparate treatment and disparate impact theories of discrimination, including examples relating to appraisal practice;
  • Guidance on neighborhood discrimination in real property appraisals; and
  • Clarification on acceptable uses of protected characteristics, in connection with the “limited permissive language” exception for the prohibition against unethical discrimination.

OMB: AVM Rule on Regulatory Agenda

 Automated valuation models  (“AVMs”) are considered a useful tool to help mitigate appraisal discrimination.  On January 4, the Office of Management and Budget (“OMB”) released its Fall 2022 Regulatory Agenda.  Among other topics, OMB indicated that an interagency proposed rule addressing quality control standards for AVMs is expected in March 2023. The Dodd-Frank Act’s amendments to the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”) require the federal banking regulatory agencies to undertake this rulemaking.

 ASC: Hearing on Appraisal Bias

 On January 24, the Appraisal Subcommittee (“ASC”) of the Federal Financial Institutions Examination Council held a hearing on appraisal bias.  Of note, Consumer Financial Protection Bureau Director Rohit Chopra ended the hearing by articulating the objective that the “lodestar” of appraisals is an appraisal that neither too high nor too low, but rather is accurate.    Director Chopra then questioned the regulatory structure governing appraisals, calling it “byzantine.”  His remarks focused on the funding mechanism between the Appraisal Institute and the Appraisal Foundation, implying that there may be a conflict of interest.

To understand Director Chopra’s comment requires knowledge of the current regulatory framework, which Title XI of FIRREA established in 1989.   It includes three principal parties: the ASC, the Appraisal Foundation, and the Appraisal Institute:

  • The ASC is a federal agency with oversight responsibility of the state appraisal regulatory structure for real property appraisers as well as to monitor activities of the Appraisal Foundation.
  • The Appraisal Foundation is a private non-profit educational organization. Through the ASB and the Appraiser Qualifications Board (“AQB”), the Appraisal Foundation sets the ethical and performance standards of appraisers in the USPAP.  The AQB establishes the minimum education, experience, and examination requirements for real property appraisers, which are then enforced by state regulatory agencies.  The Appraisal Foundation is funded through sales of publications and services, as well as by its sponsoring organizations.
  • The Appraisal Institute is a private professional organization of appraisal professionals, and is one of the sponsoring organizations of the Appraisal Foundation.

Takeaway

 Viewed through the lens of the overall PAVE Task Force efforts, actions by the FHA and the VA show early and concrete action to address residential appraisal bias.  Because they implicate government insurance and guarantee programs, the focus is particularly important for lenders and appraisers to take heed of – such that documentation submitted to the agencies is accurate.

Appraisers should also take note of the updated USPAP exposure draft as it moves toward final adoption, so that they are aware of their responsibilities with respect to avoiding bias in appraisal reports. Finally, with regulators scrutinizing the appraisal framework – as seen in the OMB and ASC announcements – more significant changes are expected.

PAVE Task Force Issues Action Plan to Address Appraisal Bias

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A&B Abstract: As part of the Biden Administration’s stated focus on narrowing the racial gap in wealth and homeownership, federal agencies launched an Interagency Task Force on Property Appraisal and Valuation Equity (PAVE), with the goal of “addressing the persistent misvaluation and undervaluation of properties experienced by families and communities of color.” On March 23, 2022, the PAVE Task Force released its Action Plan, which contains 21 specific actions to be taken by the 13 member agencies and offices of the Task Force and, in certain cases, Government-Sponsored Enterprises (GSEs), as well as general recommendations for the appraisal industry.

Components of the PAVE Action Plan: The Action Plan delineates 21 specific actions for the appraisal industry, with the goal of:

  • Increasing accountability and oversight of the appraisal industry, primarily by encouraging federal agencies to update their appraisal-specific policies and guidelines, expand regulatory agency examinations of mortgage lenders, and enhance interagency coordination and collaboration.
  • Ensuring that consumers are fully informed regarding the steps they can take after receiving a property valuation that is lower than expected, including the reconsideration of value process.
  • Preventing algorithmic bias by incorporating a “nondiscrimination quality control standard” into proposed federal rulemaking for automated valuation models (AVMs).
  • Promoting diversity in the appraiser profession by “remov[ing] unnecessary educational and experience requirements that make it difficult for underrepresented groups to access the profession,” as well as by bolstering fair lending training of existing appraisers.
  • Developing an aggregated database of federal appraisal data to better study, understand, and address appraisal bias, “complemented by a working group of subject matter experts from stakeholder agencies.”

Scope of the Action Plan: It is worth noting that, apart from these recommendations and the overall push toward federal rulemaking regarding appraisals, the PAVE Action Plan does not itself propose any substantive changes to the existing appraisal process. Unlike recent suggestions by various advocacy groups and public policy organizations, the PAVE Action Plan does not recommend specific revisions to the Uniform Standards of Professional Appraisal Practice (USPAP), such as identifying the homeowner or mortgage loan borrower as the intended user of the appraisal report. Rather, the Action Plan focuses on the existence of appraisal bias in home purchase appraisals (while acknowledging that refinances have not been studied as extensively) and suggests that more work is needed to evaluate alternatives to traditional appraisals, the use of range-of-value estimates in lieu of point estimates, and potential modifications to the sales comparison approach to appraisals. Notably, the Action Plan also acknowledges the federal government’s historical role in increasing valuation bias through the implementation of the Home Owners Loan Corporation.

Federal agency reaction: In response to the Action Plan, certain member agencies have publicly pledged their commitment to eradicating appraisal bias. For one, the Consumer Financial Protection Bureau (CFPB) has announced that it will be “closely scrutinizing the work of The Appraisal Foundation,” “working to implement a dormant authority in federal law to ensure that algorithmic valuations are fair and accurate,” and “developing a proposed rule.” The Federal Housing Finance Agency added that it will be “working with HUD and other interagency partners to share information and resources that strengthen fair lending oversight of the mortgage finance system.”

Takeaways: The various components of the Action Plan demonstrate that collaboration between lenders, federal agencies, advocacy groups, and industry associations will be necessary to craft a successful approach toward eliminating potential appraisal bias. For a more detailed discussion of the lender’s role and limitations in the existing appraisal process, please see Appraisal Values and Lender Liability: Art, Science, or Gamble?

 

Agencies Raise Appraisal Threshold Exemption

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A&B ABstract:

A new rule from the federal banking regulators reduces the number of residential mortgage transactions for which an appraisal is required.  The rule also incorporates changes to federal appraisal requirements made by the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018.

On September 27, 2019, the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System, and the Office of the Comptroller of the Currency (the “Agencies”) issued a much-anticipated Final Rule increasing the threshold below which an appraisal is not required for a residential mortgage transaction from $250,000 to $400,000.  (The announcement parallels a similar increase in the de minimis thresholds for commercial transactions that the Agencies announced in April 2018.)  The rule takes effect October 9, 2019 (the day after publication in the Federal Register), except as otherwise noted below.

Background

The Agencies first promulgated regulations and guidance required by Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act (“FIRREA”) in 1994.  While FIRREA generally requires a regulated lending institution to obtain an appraisal to support any “federally related transaction,” the Agencies have identified more than a dozen categories of appraisals that are exempt.  Until the recent rule adoptions, the $250,000 de minimis threshold had remained unchanged since its creation.

Impact of the Rule

The Final Rule does not impact the requirement that a regulated lending institution obtain an evaluation of the property, consistent with the Agencies’ regulations and the Interagency Appraisal and Evaluation Guidelines, for transactions below the de minimis threshold.  Notably, broker price opinions and automated valuation models (“AVMs”), which FIRREA separately addresses, among the valuation products that do not meet that standard.

In addition, the Final Rule creates a new exemption from the appraisal requirement.  Consistent with the Regulatory Relief Act, effective January 1, 2020, the Agencies will no longer require an appraisal for a rural residential mortgage loan transaction that meet the qualifications set forth in 12 U.S.C. § 3356.

Finally, effective January 1, 2020, the Final Rule requires that appraisals performed in connection with federally related transactions be subject to appropriate review for compliance with the Uniform Standards of Professional Appraisal Practice.

Takeaway:

The increased appraisal exemption thresholds are welcome news for the residential and commercial mortgage markets.  The augmented exemption will be especially helpful to originators of smaller loans (such as second-lien home equity lines of credit) and fix/flip, non-owner-occupied loans that typically have smaller transaction values.  However, lenders should note the requirements for evaluations (still required for exempt transactions) – a topic that is drawing increased attention.