|Article By: Ben Giumarra, Spillane Consulting Associates, Inc.
A recent submission is answered in today’s newsletter.So I received this note the other day:
Hi Ben – I recently met with other members of [ABC Trade Group] and one of the topics discussed was Appraisal Review Independence. I recalled that you had recently written an article about it and pulled it out after. It did not address the particular question and was hoping to run it by you if you do not mind. So my question is this: assuming that the underwriting function is sufficiently segregated from loan production, is there any reason that the underwriter that reviews the appraisal must be a different one than that which underwrites the credit portion of the file?
The confusion surrounding appraisal independence is unfortunate. I doubt today’s newsletter will be able to remove that entirely – but let’s try to chip away just a little bit.
Short Answer: Someone other than the underwriter has to complete the appraisal review. The underwriter who approves the loan cannot also complete the appraisal review.
Note: Phrasing is crucial here, because of course any underwriter is going to use the appraisal, and in that sense will review it. The Appraiser Independence Requirements do not force an underwriter to ignore the appraisal, or any mistakes they happen to see. So you’ll have to distinguish between an underwriter looking at the appraisal as part of the origination process and actually performing an appraisal review to monitor for appraisal strength and compliance. The latter, which I’ll simply call “true appraisal review”, cannot be completed by the same underwriter who approves the loan.
Extra Note: You’re never going to have an underwriter “segregated from loan production” – approving loans is one of the core parts of “loan production.” This is why, more and more, you see appraisal review teams reporting to other departments, such as compliance or risk.
Full Explanation: What we call “AIR” are the appraisal independence requirements that stem from the now-obsolete HVCC. Parts of AIR are found in the TILA regulation. Other parts are found in the 2010 Interagency Guidance signed off on by all federal regulators. (Having them in two different places probably adds to the confusion.)
Mandatory Review The 2010 guidance does require a true appraisal review pre-closing.
“As part of the credit approval process and prior to a final credit decision, an institution should review appraisals and evaluations to ensure that they comply with the Agencies’ appraisal regulations and are consistent with supervisory guidance and its own internal policies.”
What does the review do?
Independence of Review AIR generally requires that persons conducting a true appraisal review “be independent of the transaction and have no direct or indirect interest, financial or otherwise, in the property or transaction, and be independent of and insulated from any influence by loan production staff.”
The specific requirements vary based on asset size:
There are more relaxed standards for institutions under $250 million in assets, but even here the same person who reviews the appraisal cannot participate in the loan decision: The “review may be part of the originating loan officer’s overall credit analysis, as long as the originating loan officer abstains from directly or indirectly approving or voting to approve the loan.”
And of course the more stringent standards for larger institutions do not help matters; this rule requires that:
The person performing the [appraisal review] is not part of the creditor’s loan production function and does not report to a person whose compensation is based on the closing of the transaction for which the valuation is prepared.
More of a visual person? The FDIC has a simple but helpful graphic to help with the independence requirement …
Safe – No Compliance violation
In Other News
On My Mind …
Is there a social aspect to banking? And if so, can we capitalize on it to increase customer retention?
According to The Power of Habit, by Charles Duhigg, YMCA researchers learned a valuable lesson that might apply to our industry. As described in the book, two researchers gathered information from 150,000 YMCA members. At the time, YMCA executives thought the key to customer retention was “fancy” equipment and expensive facilities — and they invested accordingly.
But the researchers found that so-called “social” aspects of the YMCA experience were more important than the physical investments. These included whether employees recognized members’ names and whether they said hello upon entry. Further, research found that customer retention greatly increased when a member made friends with someone at the YMCA.
“In other words, people who join the YMCA have certain social habits. If the YMCA satisfied them, members were happy.” The book quotes researcher Bill Lazarus as saying, “People want to visit places that satisfy their social needs. Getting people to exercise in groups makes it more likely they’ll stick with a workout. You can change the health of the nation this way.”
So what’s the analogy to banking?
For better or worse, many institutions have already heavily invested in branches. Do employees learn customer names and greet them upon entry? How could institutions enable social or group activities? When I grew up, meeting at the hardware store (where I worked) was a social experience – people came in to trade stories and meet friends … especially on weekends. We enabled this with coffee and lounge seating. OK – so another thought for banks is to have refreshments and a place to sit. What else? Maybe encourage financial literacy classes or something else? What are your ideas on this?
“On a playground, peer pressure is dangerous. In adult life, it’s how business gets done….” – Charles Duhigg
Thank you to Ben Giumarra, Spillane Consulting Associates, Inc., a member of our Education Committee, who with the support of other experts at SCA have put together this newsletter.