In the ever-evolving landscape of the lending industry, the appraisal department within a lending institution will often find itself at the crossroads of financial stability and customer satisfaction.
Noelle McDonald, VP, Valuation Services at LCS was invited to speak alongside Cheryl Bella, National Chief Compliance Officer at FICRAS, in a special event held for the Louisiana Banker’s Association.
A recent Appraisal Compliance panel discussion brought to light several concerns and opportunities for appraisal departments within lending institutions. Here’s a deep dive into the most pressing issues and potential strategies to address them:
1. The Hidden Risks of GSE Waivers
The trend of bypassing appraisals due to Government-Sponsored Enterprise (GSE) waivers might seem like a time-saving grace, but it’s fraught with risks associated with the inaccurate representation of property values that only use automated models to determine eligibility. Prior GSE waivers, the use of which began back in 1994 and were acceptable through the years leading up to the housing market crash of 2007-2008, arguably, may have contributed to the GSE’s financial woes and eventual conservatorship. Banks and credit unions must be acutely aware of the implications, especially considering that not every loan finds its way to GSEs due to ineligibility from other limitations outside of the property’s value.
Strategy: Adopt a case-by-case approach. Even if a waiver is available, examine the broader context of the loan and its potential implications. Most loans are considered to be federally-regulated transactions and still require appraisals. Compliance with individual state laws that may also require appraisals should also be considered.
2. The AMC Quality Conundrum
One of the common concerns surrounding appraisal management companies (AMCs) is their lack of rigorous quality control, which can lead to inaccurate property valuations.
Strategy: Regularly audit AMCs, establish strict criteria for partnerships, and invest in training and development initiatives with these entities. Evaluate alternative appraisal software platforms to assist with procurement, file organization and vendor management that allow for more internal quality control.
3. The Imperative of Robust Evaluation Tools
Using inappropriate assessment tools can lead to incomplete property valuation, putting the financial standing of the lending institution at risk.
Strategy: Continually assess and update evaluation tools, staying abreast of technological advancements and industry best practices. Hire external third-party providers who have the experience and knowledge to complete Evaluations with the most up-to-date market data.
4. AVMs: A Double-Edged Sword
Automated valuation models (AVMs) streamline processes but aren’t without flaws. A lack of understanding about underlying models can lead to misleading property values.
Strategy: Ensure that all personnel using AVMs receive comprehensive training. The accuracy of these models should be periodically reviewed and validated using traditional valuation methods.
Impact of Interest Rates, COVID-19, and Markets on Appraisals
5. Navigating the Nuances of Going Concern Values
Not appropriately differentiating the market value of the real estate value and from the total assets of the business. The inclusion of the portions of market value allocated to business assets, namely non-permanent furniture, fixtures, and equipment (FF&E) and intangible/intrinsic business value, can lead to inflated loan values.
Strategy: Implement rigorous guidelines and training programs to ensure that appraisers can accurately differentiate and value assets.
6. The Importance of Portfolio Reviews
Complacency in reviewing the entire commercial portfolio of assets, individually and collectively, can mask valuation errors, which might snowball into larger financial discrepancies.
Strategy: Establish a system for portfolio reviews and ensure they are comprehensive, involving multiple layers of scrutiny. Assets must be considered individually for unique situational characteristics that may impact the value of the collective portfolio overall.
7. Adequate Due Diligence for Participation Loans
Participation loans require meticulous due diligence. Relying on another institution for the appraisal review or even in-house reviews, while valuable, may not capture all intricacies and may not meet regulatory requirements.
Strategy: Engage reputable third-party agencies for participation loan reviews to ensure unbiased and thorough scrutiny.
Banking and Appraisals
8. Staying Ahead of the Compliance Curve
In the maze of regulatory requirements, ensuring accurate exemptions is paramount. Non-compliance isn’t just about penalties and risk, it’s about reputation.
Strategy: Regularly update compliance training and adopt automated compliance management systems to flag potential issues.
9. Championing Reviewer Competency
Inaccurate appraisals often stem from lapses in reviewer competency, leading to potential Uniform Standards of Professional Appraisal Practice (USPAP) violations.
Strategy: Institute regular competency assessments and refresher training sessions.
10. The Living Nature of Appraisal Policies
Policies aren’t static – they evolve with the industry’s pulse. Relying on outdated procedures can be detrimental.
Strategy: Periodically review and update appraisal policies. Engage external consultants if necessary to gain an outsider’s perspective.
11. The Sanctity of the Voting Committee
Maintaining the integrity of property valuations means keeping loan committees insulated from potential influences.
Strategy: Define clear boundaries and roles for various committees. Ensure transparency in all decisions.
12. Identifying and Addressing High-Risk Credits
All loans aren’t created equal. High-risk loans require a different level of scrutiny.
Strategy: Develop a risk matrix and ensure high-risk loans undergo specialized reviews.
13. The Essence of Policy Adherence
Having policies is one thing, following them is another. Non-compliance within the lending institution’s own procedures can pose a significant risk and regulatory scrutiny.
Strategy: Regular internal audits and fostering a culture of adherence can help in the alignment of operations with focused compliance policies.
14. Precision in Property Measurement
Using outdated standards for property measurement can lead to significant discrepancies in valuations.
Strategy: Keep updated with industry standards like the American National Standards Institute (ANSI) and ensure appraisers are trained accordingly.
In summary, while appraisal departments face many challenges in today’s market, they aren’t too great to overcome. With proactive strategies, a commitment to continuous learning, and an emphasis on quality and compliance, lending institutions can successfully navigate these complexities to reduce financial risk.
Additional Resource: Free Appraisal Infographic
We’ve developed this infographic resource, Improving Appraisal Practices for Optimal Lending: Main Points for Financial Institutions, to help you continuously improve your lending operations.
And as always….
LCS listens to your needs to develop products that are right for your lending transaction. Whether that be an individual appraisal, environmental or construction report, or a combination of services; LCS will meet your needs in the most efficient, effective way possible.
To learn more, reach out to Liz Mahoney, Director of Sales & Business Development today.