Undue influence on property value

During the housing boom, real estate valuations exceeded the historical trendline by more than double the true market value of the properties. The industry has since discovered appraisers were unduly influenced by interested parties to arrive at specific values. This was one of the causes of the depressed market conditions during the Great Recession.

The following rules were enacted to curb the industry’s abusive influence over appraisal valuation.

These rules apply to appraisals of principal dwellings securing open- or closed-end personal-use loans, called covered transactions, and to individuals who provide settlement services, called covered persons, including:

  • lenders;
  • appraisal management companies;
  • real estate agents and brokers;
  • loan originators;
  • attorneys;
  • title representatives; and
  • escrow representatives. [12 Code of Federal Regulations §1026.42(a)-(b); 12 United States Code §2602(3)]

The borrower, guarantors and any individuals who live with the borrower but are not on the loan are not subject to these prohibitions. [Official Interpretation of 12 CFR §1026.42(b)(1)-2]

It is unlawful for a covered person to violate appraisal independence. Violations include:

  • directly or indirectly coercing, extorting, colluding with, instructing, bribing or intimidating any person who provides valuations into valuing a property based on any factor other than independent judgment; or
  •  materially misrepresenting the appraised value of a property to secure a loan. [12 CFR §1026.42(c)(1)-(2)]

Note that the prohibition against coercion is not only in relation to appraisers, but to any person providing values of a borrower’s principal dwelling. For instance, a covered person is prohibited from coercing a real estate agent to assign a value to a borrower’s principal dwelling based on anything other than the real estate agent’s independent judgment. [Official Interpretation of 12 CFR §1026.42(c)(1)-3]

Other examples of improper influence include:

  • seeking to influence an appraiser to provide a minimum or maximum value on the dwelling;
  • withholding or threatening to withhold timely payment unless the appraiser values a property above a certain amount;
  • withholding or threatening to withhold future business from an appraiser unless the appraiser values a property above a certain amount;
  • demoting, terminating or threatening to demote or terminate an appraiser due to the appraiser’s failure to value a property above a certain amount;
  • conditioning the ordering of an appraisal report or the payment of an appraisal fee, salary or bonus on the opinion, conclusion, valuation or preliminary value estimate requested from an appraiser; and
  • inducing an appraiser or another person connected with the loan to falsify the appraised value. [12 CFR §1026.42(c)(1)-(2)]

However, anyone with an interest in a real estate transaction may:

  • ask an appraiser to consider additional relevant property information, including information regarding comparable properties;
  • ask an appraiser to provide further explanation for the valuation;
  • ask an appraiser to correct errors in the appraisal report;
  • obtain multiple valuations in order to assure reliability in value assessment;
  • withhold compensation due to a breach of contract or inferior service; or
  • take action permitted or required by federal, state or agency regulations. [12 CFR §1026.42(c)(3)]

Prohibitions against conflict of interest

An appraiser or appraisal company is prohibited from having a direct or indirect interest, financial or otherwise, in the property being appraised. For instance, the appraiser cannot also be the borrower obtaining the loan to purchase the home. [12 CFR §1026.42(d)(1)]

An appraiser who appraises a property has a prohibited interest in the property if the appraiser or an affiliate of the appraiser serves as a covered person (loan officer, mortgage broker, lender, etc.) on the same transaction without meeting the safe harbor rules, or receives compensation dependent on the loan closing. [Official Interpretation of 12 CFR §1026.42(d)(1)(i)-2]

An appraiser is not in violation of the undue influence prohibition simply by being an employee or affiliate of the lender. The regulatory commentary on this issue is careful to state that the prohibition on undue influence is highly dependent on the facts of a specific situation. [12 CFR §1026.42(d)(1)(ii); Official Interpretation of 12 CFR §1026.42(d)(1)(ii)-1]

Prohibition against extending credit and reporting requirements

If a lender is aware of a violation of appraisal independence, they are prohibited from using that appraisal report to make a loan, unless the lender has confirmed that the appraisal does not misrepresent the value of the property. [12 CFR §1026.42(e)]

Additionally, a lender who becomes aware of any appraiser materially violating the USPAP or other federal or state rules controlling appraiser ethics must report the appraiser to the state agency regulating appraisers within a reasonable time of discovering the violation. A material violation is defined as any valuation which significantly affects the value of the borrower’s principal dwelling. [12 CFR §1026.42(g)]

Examples of material violations include:

  • mischaracterizing the value of a principal dwelling;
  • performing an assignment in a grossly negligent manner; or
  • accepting an appraisal assignment on a condition of arriving at a particular value. [Official Interpretation of §1026.42(g)(1)-2]

Examples of nonmaterial violations which do not require reporting under this prohibition include:

  •  an appraiser’s disclosure of confidential information; or
  •  an appraiser’s failure to carry errors and omissions insurance. [Official Interpretation of §1026.42(g)(1)-3]