VIDEO: Appraisal Independence for Commercial Appraisals
In this Compliance Clip (video), Adam answers the question of whether commercial lenders can select the appraiser for commercial loans. In other words, do the appraisal independence rules apply to commercial appraisals and commercial lenders? In addition, Adam explains how the independence rules apply to smaller financial institutions.
Video Transcript
The following is a transcript of this video.
This Compliance Clip is going to talk about appraisal independence for commercial appraisals and commercial loan officers. So the question I received is this, “Can commercial lenders and/or the commercial lending staff select the appraiser for commercial loans?” In other words, I think the question is asking this: do the appraisal independence rules apply to commercial appraisals and commercial lenders?
Now, the answer to this, of course, comes from the 2010 Interagency Appraisal and Evaluation Guidelines, because these are the guidelines that give us the independence requirements for appraisals. So let's take a look at these guidelines and see what they say specifically.
First off, the guidelines say thi, “These guidelines, including their appendices, address supervisory matters relating to real estate appraisals and evaluations used to support real estate-related financial transactions.” So this statement here is telling us who and what the appraisal guidelines apply to. So specifically, they apply to real estate-related appraisals and evaluations used to support real estate-related financial transactions. Now, does that really apply to us? Well, if we take a look at Footnote 1, which is actually attached to this sentence in the guidelines, Footnote 1 says this specifically, “These guidelines pertain to all real estate related financial transactions, originated or purchased by a regulated institution or its operating subsidiary for its own portfolio or assets held for sale, including activities of commercial and real estate-related mortgage originations, capital market groups, and asset securitizations and sales units.” So the key piece in there is it does relate to commercial and residential real estate mortgage operations. So it does relate to commercial loans, commercial lenders, and commercial departments.
So the answer to our question is, yes, the independence rules do apply to commercial loans and commercial lenders. Therefore, to answer the question of should commercial lenders be ordering their own appraisals, the answer is no. Your commercial lenders and commercial loan departments should not be ordering their own appraisals. There should be independence.
Now, in some situations, some financial institutions are smaller and don't have the ability to have independence, and these are pretty rare cases. This would be where you only have a couple of lenders in the entire organization. If you have a commercial department that is completely separate from your real estate consumer department, then you could have the consumer department order for the real estate department, and so on and so forth. This would be pretty rare. But the guidelines do give us this information. They say, “For a small or rural institution or branch, it may not always be possible or practical to separate the collateral valuation program from the loan production process. If absolute lines of independence cannot be achieved, an institution should be able to demonstrate clearly that it has prudent safeguards to isolate its collateral valuation program from influence or interference from the loan production process. In such cases, another loan officer, other officer or director of the institution may be the only person qualified to analyze real estate collateral. To ensure their independence, such lending officials, officers, or directors must abstain from any vote or approval involving loans on which they ordered, performed, or reviewed the appraisal or evaluation.”
In other words, if the only option you have is another loan officer, then you can do that, but it should not be the same loan officer. It could be another loan officer, it could be a director. So they're talking about looking at all options. And again, in these cases here, it would be very rare that you would not have somebody else qualified to order and review the appraisal. Now, even ordering, I like to argue that you could have a receptionist order it and you just do it on a very simple rotating basis, whoever's up, whoever's qualified, and you give somebody some very clear instructions on how to go through the process of appraiser 1, appraiser 2, appraiser 3, and do a rotating basis. And to keep it very simple and pretty much anybody in your organization should be able to do that, thus keeping with the independence piece of the appraisal ordering process.
Again, the 2010 appraisal guidelines are what drives the independence rules. So if you have further questions on this, take a look at those guidelines, those guidelines do absolutely apply to your commercial lenders, your commercial appraisals, and your commercial loan department.
That's all I have for this Compliance Clip.