As demand for loans intensifies, regulatory compliance has become more than a full-time job at financial institutions big and small. To help risk managers ensure that their institution’s appraisal policies are effective, EDR Insight hosted a webinar on March 31, 2015 with appraisal expert Mitch Kreeger, “How to Survive an Appraisal Compliance Audit.” Kreeger has seen first-hand what specific elements examiners are looking for during appraisal compliance audits and shared his best practices in writing appraisal policies. More than 600 appraisers, loan officers, compliance managers and other risk managers nationwide tuned in for the live event. Following his presentation, Kreeger fielded a lively Q&A session. As promised, below are answers to the questions we did not have time to address during the live webinar. A link to the replay and Kreeger’s contact information are posted at the end of this brief.
Question: “What qualifications do auditors require of appraisal reviewers to consider them qualified?”
Mitch Kreeger: “Auditors/examiners generally look at the education and work experience of appraisal reviewers to assess competency. They want to know that a reviewer is competent for each assignment under review, so a residential expert is not necessarily competent to review commercial (income) property appraisals. Likewise, a “four food groups” commercial appraiser may not be competent to review a hotel appraisal. In those cases where competency is in question, it is important to find a reviewer that IS sufficiently competent – internal or outsourced. There are a lot of valuation and compliance issues that come with experience (e.g., fieldwork appraisal production, appraisal review, and peer networking) that can raise the reviewer’s competency and reduce the lender’s risk exposure.”
Q: “When would an Extraordinary Assumption or Limiting Conditions be acceptable when looking at an “as is” value? If leases are signed but tenants are not in occupancy and costs are needed to place the tenants in the property, is an “as is” acceptable assuming all these costs are completed? Or should there be a separate “as is” and when the tenants are in place, an “as complete or stabilized one?”
Kreeger: “”As is” values should not be subject to any conditions. That said, if it is highly likely that a certain condition is true (such as an assumption that a property is environmentally clean with no clear evidence to the contrary that might raise doubt) or will take place in a short time (such as an escrow closing), then it may be acceptable to make Extraordinary Assumptions. An “as is” value should never be subject to a Hypothetical Condition. In the example given, it depends on how long it will take to occupy and/or pay rent – if leases are signed with rent payable within a very short period, “as is” value may be given with EA that leases are signed and initial rent will start soon (any loss between date of value and date of lease commencement or rent payment is likely to be nominal and would not affect the rounded current estimate of value). If leases are signed but the tenants will not occupy for some time (close to 12 or more months), then “as is” and prospective market value upon reaching stabilized occupancy and upon reaching stabilized income may be appropriate. The key take-away here is the timing and impact of future costs on the current value, while weighing the riskiness of the potential for leases to be broken/abandoned/cancelled, in addition to any work-in-progress that needs to be completed. If very short term to reach stabilized occupancy and income, then one can say that these prospective values are equivalent to the “as is” value after considering rounding process.”
Q: “Does the review of an evaluation need to be in written format like a regular appraisal?”
Kreeger: “Yes, but it does not need to be as detailed as an appraisal review. Examiners want to SEE that the Evaluation was reviewed for credibility and compliance, with any errors addressed.”
Q: “How do you go about using an appraisal that was ordered by and addressed to a different bank?”
Kreeger: “I refer you to USPAP Advisory Opinion 26 – Readdressing (Transferring) a Report to Another Party.”
Q: “Is there a significant compliance benefit to having appraisal management handled externally, as opposed to being handled by an independent internal department?”
Kreeger: “This is typically a cost-benefit question for the institution. If there is consistently a lot of volume, the lender may want to control the cost and process by internalizing this function. Otherwise outsourcing some or all of the appraisal function may be practical. FDIC, FRB and OCC all have guidance on using outside vendors. In short, the lender must “know your vendor” as they may be held accountable for using unqualified or underqualified appraisers and reviewers as well as perhaps for egregious legal violations by the vendors (e.g., lack of diversity or evidence of discrimination, breaches in confidentiality, etc.). As I mentioned during the webinar, it is vital to obtain the right person for the right job – internal and/or external to the institution – for appraisal production, review, and process management. The significant compliance benefit to internalizing or using highly qualified SMEs as outsourced vendors is in the institution’s risk management leading to safer and sounder banking practices, which in turn leads to higher stakeholder returns over the long run (fewer and reduced losses).”
Q: “What is the importance of giving a copy of the title report to the appraiser? Our loan officers wait to order the title report after reviewing the appraisal.”
Kreeger: “The title report allows the appraiser to make sure they are appraising the correct property location/address, as well as clue them into possible easements or encroachments or clouds. Often enough, I hear from lenders that the appraisal address does not match the address on title – if the appraiser has the title report then this should not occur. The appraiser should have access to ALL relevant information about a property – the more information, the more reliable will be the appraisal process and report.”
Q: “During the webinar, you advised that if deficiencies are discovered, we should take remedial action in a timely manner. What do you consider timely?”
Kreeger: “Timeliness really depends on the issue. A major concern may require immediate attention. Sometimes examiners want to see something resolved before they leave (e.g., where is the approved appraiser list?). Some items are less time sensitive or lower risk and may be something that requires follow-up over the next week or so after the examiners leave (e.g., additional research or reappraisal which might take more time). Regardless, anything that needs remedial action MUST be given high priority attention to correct and notify examiners, as appropriate per their request.”
Q: “On the topic of vendor management, can you speak to how many qualified appraisers banks typically have on their list of approved vendors? How does this vary for big versus small banks? What’s common practice?”
Kreeger: “There is no one-best answer for that…there are so many variables involved in those decisions. It depends on how many geographic regions and states are covered by a lender’s operations. It also depends on how many specialty property types (other than “four food groups” of basic office, retail, apartments, and industrial properties) are likely to be lent upon. It depends on whether lending focuses on high-end or low-end or a blend of property types (e.g., will there be a mix of complex and basic property appraisals that may require different competency levels of appraisers?). My rule of thumb is to include four to six appraisers who are competent for every region, state, property type, assignment complexity, plus a few “favorites” who are your go-to appraisers in a pinch, a few niche specialists for special purpose properties, and a handful of strong reviewers if reviews are outsourced. The bidding process should only reflect apples-to-apples with respect to competency of the selected vendors for each assignment; for example, a high-rise office property should only be sent to bid among appraisal vendors who are strongly competent in high-rise office valuation and discounted cash flows so you know they are equally competent and will equally understand the complexities of the assignment. In that case, the low bid (within a tight range) will likely be as competent as the high bid; caveat – any bid that is way out of range of other bidders may not fully understand the assignment and merits a phone call and probable re-bid.”
Look for Mitch’s upcoming three-part series on vendor management beginning later this month, which will provide additional guidance on this important topic.
FOR MORE INFORMATION
- Replay of live event, “How to Survive an Appraisal Compliance Audit,” including full Q&A session.
- Mitch Kreeger’s two-part series on surviving compliance audits:
GOT A QUESTION? ASK MITCH!
Mitch Kreeger, MAI SRA MBA, Principal Consultant at Kreeger Consulting is considered a Subject Matter Expert on various valuation, environmental and seismic risk, and regulatory compliance topics by peers nationwide, and volunteers or is sponsored as guest speaker, panelist, author, and network blogger. His firm offers commercial appraisal reviews, outsourced Chief Appraiser duties, and advisory services to lenders on regulatory compliance, efficient appraisal / environmental risk functions, and effective policy updates.
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