Banking Regulators Release Guidance on Reconsideration of Appraisals

Agencies say inaccurate valuations may pose financial risks to banks and credit unions.

Five federal banking regulatory agencies, including the NCUA and the CFPB, on Thursday issued proposed guidance on how financial institutions should handle complaints about property appraisals—including how and when a Reconsideration of Value (ROV) is appropriate.

“Deficient collateral valuations can keep individuals, families, and neighborhoods from building wealth through homeownership by potentially preventing homeowners from accessing accumulated equity, preventing prospective buyers from purchasing homes, making it harder for homeowners to sell or refinance their homes, and increasing the risk of default,” the banking regulators stated.

Further, the agencies said valuations that are not credible may pose risks to the financial condition of banks and credit unions, adding that, “such risks may include loan losses, violations of law, fines, civil money penalties, payment of damages, and civil litigation.”

Backstory and Context

The regulators recently issued a proposed rule to ensure that mortgage originators using Automated Valuation Models adopt policies to ensure the credibility and integrity of those models.

The proposed rule and guidance are part of an administration effort to improve the appraisal industry. There have been widespread complaints about racial bias in the appraisal process, as well as reports that homeowners do not know how to ask for reconsideration of appraisals.

Inside the Guidance

In the latest guidance, the agency said that appraisals “can contain inaccuracies due to errors, omissions, or discrimination that affect the value conclusion and can result in either overvaluing or undervaluing real estate collateral.”

The regulators reported that they have received comments from industry stakeholders expressing uncertainty over how ROVs intersect with appraisal independence requirements as well as compliance with consumer protection laws.

The agencies also said that following an appraisal, additional review might be warranted if the consumer provides information that could affect the value conclusion or if deficiencies are noted in the original appraisal.

“If a financial institution determines through the appraisal review process, or after consideration of information later provided by the consumer, that the appraisal does not meet the minimum standards outlined in the agencies’ appraisal regulations and if the deficiencies remain uncorrected, the appraisal cannot be used as part of the credit decision,” the agencies stated.

Addressing the Issues

The solutions range from resolving the issues with the original appraiser to requesting a new appraisal.

“An ROV request may include consideration of comparable properties not previously identified, property characteristics, or other information about the property that may have been incorrectly reported or not previously considered, which may affect the value conclusion,” the guidance reads. “To resolve deficiencies, including those related to potential discrimination, financial institutions can communicate relevant information to the original preparer of the valuation and, when appropriate, request an ROV.”

Financial institutions may establish a process to inform consumers about how to raise concerns over a valuation early enough in the underwriting process for any errors or issues to be resolved.

They also may train lending and valuation staff members to identify deficiencies in an appraisal.

Pushback From Conservatives

Some Republicans have questioned whether there is widespread racial bias in the appraisal industry and have said much of the evidence is anecdotal.

One think tank sees a more sinister motive behind the administration’s moves.

“The Biden Administration and Members of Congress are laying the groundwork for a federal takeover of the home appraisal industry in the name of equity,” the America First Policy Institute, a think tank that supports the policy positions of the Trump Administration, contends.

And in a statement on its website, the institute concludes, “The left’s interest in overhauling America’s appraisal process is especially dangerous because it relies on the false assumption that racism is the cause of disparities in home values for minority groups.”