As published in Scotsman Guide's Residential Edition, August 2011.
For the past two years, mortgage originators and real estate lenders have faced one major compliance change after another. Originators have had to adjust their processes to account for revisions to the Real Estate Settlement Procedures Act, loan-originator-compensation laws, good-faith estimates and much more.
In addition to obeying regulations that govern disclosure requirements and borrower protection and communication, originators also must ensure that the property used as collateral in a transaction is evaluated with an accurate, independent appraisal to support the underwriting decision.
The expanded Interagency Appraisal and Evaluation Guidelines (IAEG), released this past December, outline when and how lenders and originators can use licensed appraisers, automated valuation models (AVMs) and nonappraisal valuations. Furthermore, additional requirements were introduced to validate the actual condition of a property and local market, increasing the amount of diligence and expense involved in reviewing collateral before making an underwriting decision.
With proper planning and strategy, originators can adapt their processes and procedures to work within the new guidelines in a way that ensures safe and sound collateral review in a cost-effective manner. The key is to use the appropriate data and analytical tools to drive consistent and compliant selection and quality control of collateral-valuation products.
Originally issued in 1994, the IAEG serves as the overarching standard and guideline regulating the appraisal process for originations, modifications and refinances. Five federal banking agencies oversee the IAEG:
Office of the Comptroller of the Currency
Federal Reserve Bank
Federal Deposit Insurance Corp.
Office of Thrift Supervision
National Credit Union Association
These agencies recently expanded the guidelines to clarify the role of AVMs and appraisal-management companies (AMCs), especially in identifying which scenarios require full appraisals and which can be supported with a nonappraisal evaluation. The basic intent of this aspect of the guidelines remains the same: to ensure appraiser independence and promote accuracy and soundness in the underwriting process.
For originators, the first step in managing the process is deciding when an appraisal is needed or when an alternate evaluation can be used. The standards for when an appraisal is needed have not changed, nor have the exemptions established in the original 1994 guidelines.
The new commentary, however, outlines specific definitions for market value, appraiser independence, AVMs and broker price opinions (BPOs). The guidelines are clear that AVMs and BPOs are not appraisals and may not be used as the primary method to determine valuations for originations, unless specific exemptions are met.
A nonappraisal evaluation is acceptable in place of an appraisal when a loan meets certain conditions. The loan must:
Have a value equal to or less than the appraisal threshold of $250,000;
Be a narrow type of commercial loan of less than $1 million;
Involve an existing line of credit where no new money is being advanced;
Involve no material change in market condition or physical aspects of the property if new money is being advanced; and
Qualify for sale to a government or government-sponsored agency in which the loan conforms to established standards.
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