This video discusses the importance of appraisal independence. Enroll in firsttuesday’s 8-Hour NMLS CE course to renew your California MLO license and learn more about preventing conflicts of interest in your practice.
Identifying appraiser conflicts of interest
An appraiser must not have a direct or indirect interest, financial, personal or otherwise, in the property they have been retained to prepare their opinion of value – called an appraisal.
For example, the appraiser of a home may not also be the buyer seeking a mortgage to fund the purchase of the home, nor be anyone else with a financial interest in closing the transaction. Likewise, and for the same reason, an appraisal management company (AMC) owned by a mortgage lender may not manage the appraisal of a property owned and resold by the owner-lender. [12 Code of Federal Regulations §1026.42(d)(1)]
Further, an appraiser may not evaluate a property when anyone with whom the appraiser is affiliated serves as a loan officer, MLO, lender or real estate agent – collectively called covered persons – on the same transaction requiring the appraisal, unless the appraiser’s employment meets the safe harbor rules for sparsely populated areas. Also, the appraiser may never agree to compensation dependent on the mortgage closing. [Official Interpretation of 12 CFR §1026.42(d)(1)(i)-2]
Covered persons
“Covered persons” include creditors, mortgage brokers (MLOs), appraisers, appraisal management companies, real estate agents, escrow officers and other persons that provide “settlement services” under the Real Estate Settlement Procedures Act (RESPA).
“Covered transaction” means an extension of consumer credit – a mortgage – that will be secured by the consumer’s principal dwelling. Business purpose mortgages are not covered transactions.
An appraiser does not violate the undue influence prohibitions simply by being an employee or affiliate of the lender funding the mortgage. However, the prohibition on undue influence is highly dependent on the facts of each transaction. [12 CFR §1026.42(d)(1)(ii); Official Interpretation of 12 CFR §1026.42(d)(1)(ii)-1]
A mortgage lender needs valuation independence to assure appraiser independence. However, for small lenders in less-populous areas of the country, the independent appraiser requirement may make it difficult or impossible to locate quality independent appraisal firms and AMCs with which to work on a regular basis.
The inability of remotely located small mortgage lenders to entirely avoid use of on-staff or affiliated appraisers, unless exempt, will decrease the flow of mortgage money to these areas — a result contrary to the best interests of consumers, the objective of the Consumer Protection Act (Dodd-Frank Act).
Therefore, two separate safe harbor tests exist under Reg Z to exempt an appraiser or other covered person relationship from undue influence prohibitions.
Related article:
Safe harbor tests
The safe harbor tests reflect the difference between staffing at larger lenders, which for smaller mortgage lenders is impractical. Smaller lenders, in general, are less likely to have full separation of appraisers from mortgage marketing and processing staff. Thus, small lenders are allowed to safeguard appraiser independence with a less formal, though no less stringent, firewall. [75 Federal Register 66554]
For a covered person employed or affiliated with a mortgage lender whose assets were greater than $250 million during the past two calendar years, the appraiser does not have a conflict of interest when:
- the appraiser’s compensation is not based on the appraised value of the subject property or the closing of the mortgage transaction;
- the appraiser reports to the mortgage lender’s staff other than staff responsible for generating or approving mortgage originations, called the loan production staff; and
- the loan production staff is not responsible in any way for selecting, retaining, recommending or influencing the appraisal staff. [12 CFR §1026.42(d)(2)]
For a covered person employed or affiliated with a mortgage lender whose assets do not exceed $250 million during the past two calendar years, the appraiser is deemed not to have a conflict of interest when:
- the compensation of the appraiser is based on factors other than the appraised value of a property or the closing of the covered transaction; and
- the lender requires that any person who orders, performs or reviews an appraisal for a covered transaction is unconnected with the decision to approve or disapprove the same transaction, a separation referred to as a firewall. [12 CFR §1026.42(d)(3)]
Related article:
Appraisal discrimination made easier to spot with California’s new law
