A group of federal agencies have proposed reconsideration of value (ROV) guidance for residential real estate valuations. The agencies are the Comptroller of the Currency (OCC), Consumer Financial Protection Bureau (CFPB), Federal Deposit Insurance Corporation (FDIC), Federal Reserve Board (Board) and National Credit Union Administration (NCUA). Comments on the proposed guidance will be due 60 days after publication in the Federal Register.

As previously reported, the CFPB has warned mortgage lenders that the failure to have ROV policies can violate federal law, and the U.S. Department of Housing and Urban Development issued draft guidance on ROV policies, seeking input from stakeholders. Regulators view clear and robust ROV policies as an important tool in addressing appraisal bias. We also have addressed regulator concerns regarding appraisal bias here, here, here, and here, as well as appraisal bias complaints and a related report by the National Community Reinvestment Coalition.

Background.  The proposed joint agency guidance provides that collateral valuations may be deficient due to prohibited discrimination, errors or omissions, or valuation methods, assumptions, data sources, or conclusions that are otherwise unreasonable, unsupported, unrealistic, or inappropriate. The proposed guidance also provides that deficient valuations can present various challenges for consumers and financial institutions. The proposed guidance notes that the appraisal regulations of the OCC, FDIC, Board and NCUA require that appraisals be subject to appropriate review for compliance with the Uniform Standards of Professional Appraisal Practice (USPAP), and that an appraisal does not comply with USPAP if it relies on a prohibited basis set forth in the Equal Credit Opportunity Act or Fair Housing Act, or includes material errors, including errors of omission or commission.

Third Parties.  The proposed guidance provides that a financial institution’s use of third parties in the valuation review process does not diminish its responsibility to comply with applicable laws and regulations, and that a financial institution’s risk management practices include managing the risks arising from its third-party valuations and valuation review functions.

ROV Requests.  For purposes of the proposed guidance, an “ROV request made by the financial institution to the appraiser or other preparer of the valuation report encompasses a request to reassess the report based upon deficiencies or information that may affect the value conclusion.” The proposed guidance provides that a “financial institution may initiate a request for an ROV because of the financial institution’s valuation review activities or after consideration of information received from a consumer through a complaint, or request to the loan officer or other lender representative” and that, regardless of how the request for an ROV is initiated, a request could be resolved through a financial institution’s independent valuation review or other processes to ensure credible appraisals and evaluations.

The proposed guidance also provides that 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 proposed guidance adds that 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.

Complaint Resolution Process.  The proposed guidance provides that financial institutions can capture consumer feedback regarding potential valuation deficiencies through existing complaint resolution processes. Additionally, the proposed guidance provides that depending on the nature and volume, appraisal and other valuation-based complaints and inquiries can be an important indicator of potential risks and risk management weaknesses, and that appropriate policies, procedures, and control systems can adequately address the monitoring, escalating, and resolving of complaints, including a determination of the merits of the complaint and whether a financial institution should initiate an ROV.

Examples of Policies, Procedures and Control Systems. The proposed guidance provides that financial institutions may consider developing risk-based ROV-related policies, procedures, control systems, and complaint processes that identify, address, and mitigate the risk of deficient valuations, including valuations that involve prohibited discrimination. The proposed guidance sets forth various specific examples of policies, procedures and control systems, including the following:

  • Consider ROVs as a possible resolution for consumer complaints related to residential property valuations.
  • Consider whether any information or other process requirements related to a consumer’s request for a financial institution to initiate an ROV create unreasonable barriers or discourage consumers from requesting an ROV.
  • Establish a process that provides for the identification, management, analysis, escalation, and resolution of valuation related complaints across all relevant lines of business, from various channels and sources.
  • Establish a process to inform consumers how to raise concerns about the valuation sufficiently early enough in the underwriting process for any errors or issues to be resolved before a final credit decision is made.
  • Establish risk-based ROV systems that route the request to the appropriate business unit.
  • Establish standardized processes to increase the consistency of consideration of requests for ROVs that, among other processes, could include guidelines for the information the financial institution may need to initiate the ROV process, and for when a second appraisal could be ordered and who assumes the cost.
  • Ensure relevant lending and valuation related staff, including third parties, are trained to identify deficiencies, including prohibited discriminatory practices, through the valuation review process.

Specific Comment Requests.  The agencies specifically request comment on the following:

  • To what extent does the proposed guidance describe suitable considerations for a financial institution to take into account in assessing and potentially modifying its current policies and procedures for addressing ROVs?
    • What, if any, additional examples of policies and procedures related to ROVs should be included in the guidance?
    • Which, if any, of the policies and procedures described in the proposed guidance could present challenges?
  • What model forms, or model policies and procedures, if any, related to ROVs would be helpful for the agencies to recommend?
  • What other guidance may be helpful to financial institutions regarding the development of ROV processes?
  • To what extent, if any, does the proposed ROV guidance conflict, duplicate, or complement the existing Interagency Appraisal and Evaluation Guidelines or a financial institution’s policies and procedures to implement those Guidelines?