If you’re trying to answer questions from people internally at your bank regarding things like ordering evaluations, loan officer activities, etc., it’s important to try to keep in mind which rules apply.
As a broad general point, if it’s a commercial transaction, you are more than likely looking at the FIRREA-based December 2010 guidelines.
Generally, if it is a residential transaction, you have more to worry about, including the December 2010 guidelines and the consumer protection laws.
Remember that if you are selling the loan to Fannie Mae and Freddie Mac, you have to worry about their requirements.
This blog is provided for your information only and does not constitute legal advice. It may not reflect new or recent changes in regulation. No representation or warranty is made as to the accuracy or completeness of the content.
At MountainSeed, we work with lenders to help them understand the ever-changing regulatory environment and anticipate legislative changes. We are also committed to developing sustainable, long-term solutions that are mutually beneficial to our bank clients and to the appraisal community. If you have any questions about our services or anything in this blog, please contact MountainSeed Appraisal Management at (855) 640-0905 or visit mountainseed.com.
Conflicts of Interest
The Federal Truth in Lending Act (TILA) starts with a prohibition that no person preparing a valuation or performing valuation management functions for a covered transaction may have a direct or indirect interest, financial or otherwise, in the property or transaction for which the valuation is or will be performed.
What about a creditor’s employees, staff appraisers or affiliates implementing the collateral valuation function? TILA clarifies that just by virtue of being an employee you don’t have an interest, so long as you build an appropriate firewall based on compensation, reporting and selection.
Small banks with assets of $250 million or less for either of the past two calendar years can do a stripped-down firewall, looking to the compensation of the people on the collateral valuation team, making sure they aren’t compensated based on loan production volume, and have safeguards that are documented to show that appropriate steps have been taken.
This blog is provided for your information only and does not constitute legal advice. It may not reflect new or recent changes in regulation. No representation or warranty is made as to the accuracy or completeness of the content.
At MountainSeed, we work with lenders to help them understand the ever-changing regulatory environment and anticipate legislative changes. We are also committed to developing sustainable, long-term solutions that are mutually beneficial to our bank clients and to the appraisal community. If you have any questions about our services or anything in this blog, please contact MountainSeed Appraisal Management at (855) 640-0905 or visit mountainseed.com.
Appraiser Blacklisting and Defamation
This oversight of who is going to be taken off an approved appraiser list or placed on an exclusionary list comes from a whole host of lawsuits that have occurred regarding “blacklisting” appraisers because there was some determination made that they weren’t returning appropriate values.
Defamation actions refer to taking an appraiser off a list for a reason that is not substantiated as a violation. This comes from allegations that some banks broadcasted to the community that an appraiser on an exclusionary list had done something wrong and the appraiser sued for defamation, in some cases successfully.
See our “Best Practices for Working With Appraisers” blog post for our suggested best practices.
This blog is provided for your information only and does not constitute legal advice. It may not reflect new or recent changes in regulation. No representation or warranty is made as to the accuracy or completeness of the content.
At MountainSeed, we work with lenders to help them understand the ever-changing regulatory environment and anticipate legislative changes. We are also committed to developing sustainable, long-term solutions that are mutually beneficial to our bank clients and to the appraisal community. If you have any questions about our services or anything in this blog, please contact MountainSeed Appraisal Management at (855) 640-0905 or visit mountainseed.com.
Three Predictions for Your Next Regulatory Exam
By: Nathan C. Brown, Chief Legal Officer, MountainSeed Appraisal Management, LLC
Copyright © 2013, MountainSeed Appraisal Management, LLC. All Rights Reserved.
In December of 2010, bank regulators finalized updated guidance on regulated institutions’ appraisal and evaluation programs. Almost two-and-a-half years later, banks still find themselves tackling key compliance and business challenges related to when and how they value the real estate they own and that secures the residential and commercial real-estate loans they make. Often, finding solutions to those issues requires analysis beyond the December 2010 guidance into the dark corners of a host of federal statutes, implementing regulations and the interaction between state and federal regulators. But, ultimately, it’s how and to what extent the regulators enforce those requirements that will drive compliance challenges and force change.
In January of 2013, the Office of Inspector General inside the FDIC issued a report to Congress examining issues related to the failure of financial institutions. In that report, the FDIC devoted an entire section to appraisal. While a detailed analysis is beyond the scope of this piece, for those of us that try to stare into the crystal ball, the report provides some helpful context as banks prepare for safety and soundness exams over the next 12 months. Three predictions for regulatory exams this year:
Focus on Quality
First, regulators will pay more attention to the quality of the appraisal or evaluation itself. In the OIG Report, the FDIC OIG claims that in reviewing the results of full-scope examinations from all three primary regulators, it found evidence that examiners pulled key pieces of information from appraisals and evaluations, presumably for purposes of running ALLL models, LTV calculations and classifying loans, but less evidence that regulators challenged the assumptions and methods used by the appraiser or evaluator in reaching a value conclusion. This trend may be especially impactful in the context of evaluations -- valuations for which the federal regulations do not require a licensed appraiser because they fall into one of three exemptions – and particularly with respect to the methods and techniques used by the evaluator in reaching their value conclusion, and the experience, education and competency of the person performing the evaluation.
Enter ECOA/Regulation B
As a side note, banks will also find increasing pressure on the quality of evaluations and the competency of their evaluators, not only from their regulators, but from their borrowers. The CFPB’s new final rule under ECOA/Regulation B, published in January of this year, will require banks to provide copies of internally-prepared evaluations to borrowers on first-lien mortgage loans secured by most 1-4 family properties. That rule will apply regardless of whether it’s a business or consumer loan and regardless of whether the collateral is the borrower's principal dwelling or a rental or vacation home. And, banks will have to provide a copy of the evaluation regardless of whether the loan closes. The rule takes effect in January of 2014.
Appraiser on Board
Second, more banks will see appraisers on their regulator’s exam teams. Several different approaches surfaced from interviews with examiners summarized in the report, but at least a few examiners made reference to their teams including or being provided with an appraiser for purposes of assisting with the review of an institution’s policy and procedure, a trend that may gather some steam. At least anecdotally, the author is aware of other recent appraisal exams where the exam team included one (or more) appraisers.
Appraisal Stands Alone
Third, regulators will begin to treat the appraisal and evaluation process as a more-prominent, separate are of inquiry, rather than a less-important subset of credit administration. In its written response to the report, the OCC acknowledged that it was currently drafting new, separate appraisal sections of key mortgage and CRE handbooks, evidencing what may be a larger trend.
DISCLAIMER: The author, Nathan C. Brown, is Chief Legal Officer at MountainSeed Appraisal Management, LLC. MountainSeed, and its affiliates, offer valuation-related products and services to banks. The article is not legal advice. It’s for your information only. Neither the author nor MountainSeed makes any representation or warranty as to the accuracy or completeness of the content. You should always consult your regulator or a licensed attorney in your jurisdiction with questions relating to compliance with any law, guidance, rule, or regulation. Please don’t hesitate to send any questions, comments or corrections to the author at nathan@mountainseed.com.
Approved Appraiser Lists
In most cases we see banks maintaining an approved appraiser list, and there is specific language in the Interagency Appraisal and Evaluation Guidelines that governs how this can be done in compliance with regulations.
First, you need appropriate procedures for development and administration of the list, including:
- Qualify each appraiser
- Monitor appraiser performance and credentials for retention, and
- Review use of appraiser list to ensure independence.
The loan production staff cannot have control over the development and maintenance of the list; it must fall under the collateral valuation team.
There is one specific exception: If it is a residential transaction, where the loan production staff is dealing with a pre-approved list developed independently by the collateral valuation team, and the list is used on a revolving basis, in which appraisers automatically rotate.
This blog is provided for your information only and does not constitute legal advice. It may not reflect new or recent changes in regulation. No representation or warranty is made as to the accuracy or completeness of the content.
At MountainSeed, we work with lenders to help them understand the ever-changing regulatory environment and anticipate legislative changes. We are also committed to developing sustainable, long-term solutions that are mutually beneficial to our bank clients and to the appraisal community. If you have any questions about our services or anything in this blog, please contact MountainSeed Appraisal Management at (855) 640-0905 or visit mountainseed.com.
By: Nathan C. Brown, Chief Legal Officer, MountainSeed Appraisal Management, LLC
Copyright © 2012, MountainSeed Appraisal Management, LLC. All Rights Reserved.
In our last appraisal management tip, our appraisal coordinators asked you to be aware of different options when it comes to the interest that you ask the appraiser to value.
If you read that list, you might have noticed that in some cases it was relatively easy to differentiate between them. If your bank is lending to a commercial real-estate developer or landlord, you probably -- although not always -- would know right up front whether that borrower owns the property outright or merely rents the land under a long-term ground lease.
By the way, if the long-term ground lease doesn't strike a chord with you, you may not live in a part of the country where that's as common as other areas. As an example, it's not uncommon in New York City for a large office building to be built by a real estate development company that has rented the land for 99 years under a long-term ground lease. And in some big cities, real estate companies can own portions of buildings under structures where their actual interest is more akin to "air rights" than traditional interests in the "dirt" -- but we'll have to leave that for another day.
On to the topic at hand. What about this distinction between "fee simple" and "leased fee"? What's that about and why does it matter?
What did you say?
Don't get distracted by the term "fee simple". It sounds strange because it's a vestige of middle-age, English common law -- you know, with knights and fiefs and something called feudal landholding. But, with apologies to my property law professor, let's forget about all that history for now. This is not a class on legal interests in real property. For purposes of illustrating the point, let's (over)simplify. Assume, for the sake of this conversation only, that fee simple is a rough translation for "ownership".
Example
Here's an example. Your borrower owns an office building. So, in other words, your borrower is the "landlord" to several office tenants under standard office leases. The tenants occupy the building. The landlord, in general, does not.
It might be common in real estate circles to say that your borrower owns the "fee", and that the handful of tenants that occupy the building own a "leasehold" interest -- a fancy way of saying they rent space.
Now assume that your bank is considering making a loan to this borrower. The loan will be secured by the borrower's interest in the office building. You are ordering the appraisal. What interest should you ask the appraiser to value?
What does it mean to appraise the "Fee Simple"?
It's a natural reaction to say "fee simple" -- after all, your borrower is not renting the property from someone else. They own it.
But here's what will happen if you do that. In valuing the property under the income approach, the appraiser will perform market research and use accepted methods and techniques to determine the appraiser's opinion of market rent. In other words, the appraiser will come up with an opinion as to the rent that your borrower could get if they leased space in the building today -- or, more precisely, as of the effective date of the appraiser's opinion of value. Then, the appraiser will use that opinion of market rent to value the building, more or less ignoring the current leases.
Below-market rents highlight the distinction
But what if some or all of the tenants in the building signed long-term leases 10 years ago, and still have 10 years left on their leases? What if those tenants are "credit" tenants (e.g., big, successful public companies with low risk of default) and as a result have sweetheart deals, even in light of today's real estate environment? Well, in that case, the appraiser's opinions about the "market rent" don't bear a resemblance to the cash flow that's actually coming in the door based on the specific terms of those leases. If you want the appraiser to dig through the terms of those leases, the rent roll, and other information and use the actual numbers in the income approach, then you need to order "leased fee".
What if I order it the "wrong" way?
In most cases, if this gets mixed up, it's just a misunderstanding. But getting this wrong can cost time and money. If you order a fee simple appraisal, the appraiser may not think to ask you about leases and rent rolls. He may assume there isn't a lease in place. Then, if you suddenly ask him why he didn't consider the lease, or if the appraiser runs into a tenant on his site visit, you could have an issue. The appraiser may have to go back and review leases and rework his income analysis. It pays to get this right up front.
(Aside from the regulatory issues discussed below, it's not "wrong" to order a fee simple appraisal for a building with tenants. There may be very legitimate reasons for wanting to know the market value of the building using the prevailing market rents and ignoring the specific leases in place. For example, it may be that the leases in place have above-market rent. In that case, a fee-simple appraisal may serve as a means of stress-testing value in the event those tenants were to default and the landlord was forced to re-rent the space. But you should understand what you're ordering. And the appraiser should take care to clearly explain in the report which interest he or she is valuing.)
Does my regulator care?
When you're dealing with a property with below-market rents, it might be tempting to view this distinction as an opportunity to influence value. You may be confident that your borrower's "good for it" and looking for a way to get the property to "appraise out". If you order a "fee simple" appraisal, you could take advantage of the market rents, even though your borrower's locked into below-market rents. But don't do it. Your regulator is paying attention.
Each of the prudential regulators requires that appraisers report appropriate deductions and discounts, and that includes, specifically, for properties with below-market rents. Refer to Appendix C in the December 2010 Interagency Appraisal and Evaluation Guidelines. There you'll read:
"For properties subject to leases with terms that do not reflect current market conditions, the appraisal must clearly state the ownership interest being appraised and provide a discussion of the leases that are in place. If the leased fee interest is being appraised and contract rent is less than market rent on one or more long term lease(s) to a highly rated tenant, the market value of the leased fee interest would be less than the market value of the unencumbered fee simple interest in the property. In these situations, the market value of the leased fee interest should be used."
DISCLAIMER: The author, Nathan C. Brown, is Chief Legal Officer at MountainSeed Appraisal Management, LLC. MountainSeed, and its affiliates, offer valuation-related products and services to banks. The article is not legal advice. It’s for your information only. Neither the author nor MountainSeed makes any representation or warranty as to the accuracy or completeness of the content. You should always consult your regulator or a licensed attorney in your jurisdiction with questions relating to compliance with any law, guidance, rule, or regulation. Please don’t hesitate to send any questions, comments or corrections to the author at nathan@mountainseed.com.
In a blog post last week, we alerted you that the agencies had released a new, 211-page proposal to implement Dodd-Frank Section 1471, which added Section 129H to the Truth in Lending Act. That section imposes tougher appraisal requirements on higher-risk mortgage loans. The next day, we circulated our preliminary analysis of the proposal.
Click here to download the whitepaper.
Are Banks Bound by USPAP?
By: Nathan C. Brown, Chief Legal Officer, MountainSeed Advisors, LLC
Copyright © 2012, MountainSeed Advisors, LLC. All Rights Reserved.
We’ve heard from bankers, even chief credit officers, who have woken up in a cold sweat over their appraisal and evaluation program – particularly with respect to USPAP. So, what is USPAP and why does it matter? This post seeks to shed some light on the issue.
The Uniform Standards of Professional Appraisal Practice (USPAP) are drafted and maintained by the Appraisal Standards Board (ASB). They establish, in part, uniform guidelines for the development and reporting of real estate appraisals. The ASB is a board sponsored by the Appraisal Foundation. Although it receives some grant money from the federal Appraisal Subcommittee (ASC) – the ASC is a subcommittee of the FFIEC – the Appraisal Foundation is a private, non-profit corporation. Neither the ASB nor the Appraisal Foundation is a regulatory body. Neither has any authority to examine your bank, to penalize you, or to take any enforcement action whatsoever. For that matter, neither the ASB nor the Appraisal Foundation has any authority to force any appraiser to use or comply with USPAP.
So why should you care about USPAP? Because Congress did, and so your regulator does.
To unpack that claim, let’s start with a brief overview of the relationship between Congress and the primary bank regulatory agencies (OCC, FDIC, Fed, NCUA) when it comes to appraisal regulation. Remember, there are other statutes (TILA, ECOA, etc.) that include appraisal-related regulation, but those are not our chief concern here. For now, we’re focused on FIRREA Title XI.
As most readers will know, FIRREA arose in the wake of the S&L crisis in the late 1980s. Title XI includes FIRREA’s provisions on real estate appraisal reform.
There are several prominent features of Title XI, but for our purposes here, I draw your attention to one of them – the mandate in Section 1110 that the regulatory agencies “prescribe appropriate standards for the performance of real estate appraisals in connection with the federally-related transactions under the jurisdiction of each such agency.”
FIRREA is a statute, which means it was drafted and approved by Congress, and signed into law by the President. As with most areas of financial regulation, the authority of your regulator (and, actually, their existence) is directly derived from a statute. Here, in Section 1110, we have Congress telling the regulators to promulgate regulations to govern the appraisal process. Section 1110 is the primary authority underlying your regulator’s appraisal regulations and guidance.
As with most statutory pronouncements, Section 1110 is brief, and cedes responsibility for most of the details to the regulatory agencies. It does, however, in just over 100 words – at least in its pre-Dodd-Frank form – set forth Congress’ expectations as to the minimum requirements for those standards. To be clear, Congress specifically permitted the agencies to go further – and go further they did – but in implementing appraisal reform, Congress deemed at least two elements sufficiently important that they needed codification in the statute itself. What are those? Well, one is that the appraisal be written. That seems obvious. But the other (and actually the first as the statute reads) is that it “be performed in accordance with generally accepted appraisal standards as evidenced by the appraisal standards promulgated by the Appraisal Standards Board of the Appraisal Foundation” – in other words, the appraisal must comply with USPAP.
It should be no surprise then, when each agency promulgated regulations in response to FIRREA’s mandate, that the first requirement in the minimum appraisal standards was that the appraisal comply with USPAP. (See, for example, the OCC’s appraisal regulations at 12 CFR § 34.44(a).) And, you shouldn’t be shocked to discover that the interagency guidance issued, in part, to clarify the regulations, lists as the very first requirement in the minimum appraisal standards, that the appraisal conform to USPAP. (See Section VIII of the Interagency Appraisal and Evaluation Guidelines, 75 Fed. Reg. 77450, 77459 [December 10, 2010].)
Bottom line – appraisals that fail to comply with USPAP don’t meet the basic minimum appraisal requirements set forth in FIRREA, and won’t satisfy your regulator. In the next post, we will examine the new Dodd-Frank requirement that appraisals be reviewed for USPAP compliance, and issues surrounding its implementation. For now, suffice it to say that USPAP compliance isn’t just an issue for appraisers. Banks need to understand it, and ensure appraisals comply with it.
DISCLAIMER: The author, Nathan C. Brown, is Chief Legal Officer at MountainSeed Advisors, LLC. MountainSeed, and its affiliates, offer valuation-related products and services to banks. The article is not legal advice. It’s for your information only. Neither the author nor MountainSeed makes any representation or warranty as to the accuracy or completeness of the content. You should always consult your regulator or a licensed attorney in your jurisdiction with questions relating to compliance with any law, guidance, rule, or regulation. Please don’t hesitate to send any questions, comments or corrections to the author at nathan@mountainseed.com.
Ignoring state appraisal laws may subject bank employees or third-party service providers to fines or even criminal penalties. National banks relying on federal preemption for appraisal laws should take another look at that assumption in light of Dodd-Frank.
The primary federal regulatory agencies recognize that financial institutions appreciate the flexibility in the revised Interagency Appraisal and Evaluation Guidelines permitting the use of less-formal real-estate evaluations in lieu of more-costly appraisals in certain low-risk transactions. Those guidelines do not require that an evaluation be prepared by a licensed or certified appraiser. But the appraisal acts in many states — passed in the wake of the savings and loan crisis in response to a mandate in the Financial Institutions Reform, Recovery and Enforcement Act — do not provide that flexibility...
Continue reading this article that we wrote for American Banker:
http://www.americanbanker.com/bankthink/federal-preemption-on-appraisal-laws-not-a-sure-thing-1049923-1.html
New Dodd-Frank Requirements for AVMs
By: Nathan C. Brown, Chief Legal Officer, MountainSeed Advisors, LLC
Copyright © 2012, MountainSeed Advisors, LLC. All Rights Reserved.
If your head is spinning after our quick trip through the AVM regulations and validation requirements in the revised Interagency Appraisal and Evaluation Guidelines, you may be surprised to learn that there are more AVM-related regulations coming, and they will apply more broadly to residential mortgage loans not otherwise covered by the interagency guidelines.
What regulations?
Section 1473(q) of Dodd-Frank amends FIRREA Title XI to add new section 1125. FIRREA Section 1125 requires the FHFA, the CFPB, the OCC, the FDIC, and the NCUA, in consultation with the federal Appraisal Subcommittee (ASC) – the ASC is a subcommittee of the FFIEC – and the Appraisal Standards Board (ASB) – the ASB is best known for its role in drafting and revising USPAP – to write regulations implementing quality control standards for AVMs.
What will the regulations say?
While we don’t know exactly what those regulations will say when they’re published, Dodd-Frank does give some general guidelines for what those rules need to address, including ensuring high levels of confidence in the results, protecting against data manipulation, avoiding conflicts of interest, requiring random sampling and reviews, and accounting for other factors as determined by the agency. It’s a good bet that they will include validation requirements and otherwise borrow concepts from the interagency guidelines.
When will those regulations be effective?
Dodd-Frank sets a deadline for publishing the regulations -- January of 2013 -- and the regulations will have to be effective within a year after that. So we expect the regulations to take effect some time in 2013.
Who and what transactions will be subject to these AVM regulations?
Dodd-Frank defines an AVM, for purposes of the new FIRREA Section 1125-based regulations as “[A]ny computerized model used by mortgage originators and secondary market issuers to determine the collateral worth of a mortgage secured by a consumer’s principal dwelling.”
While the details of which AVMs will be subject to these requirements will be fleshed out in the regulations themselves, the key point is that these regulations will apply primarily to AVMs used by originators and secondary market issuers in connection with mortgages secured by a consumer’s principal dwelling. (You’ll recognize that language from certain TILA standards.)
Who will enforce these AVM regulations?
For banks and other regulated financial institutions and subsidiaries of regulated financial institutions, these new AVM regulations will be enforced by their primary federal regulator. With respect to other non-bank participants in the market, the regulations will be enforced by the FTC, the CFPB and state attorneys general.
The next post will highlight new ECOA rules being drafted in response to mandates in Dodd-Frank that beef up requirements to share valuation reports, specifically including AVMs, with consumer borrowers.
DISCLAIMER: The author, Nathan C. Brown, is Chief Legal Officer at MountainSeed Advisors, LLC. MountainSeed, and its affiliates, offer valuation-related products and services to banks. The article is not legal advice. It’s for your information only. Neither the author nor MountainSeed makes any representation or warranty as to the accuracy or completeness of the content. You should always consult your regulator or a licensed attorney in your jurisdiction with questions relating to compliance with any law, guidance, rule, or regulation. Please don’t hesitate to send any questions, comments or corrections to the author at nathan@mountainseed.com.