Agencies propose interagency guidance on reconsiderations of value for residential real estate valuations

The Board of Governors of the Federal Reserve System, FED, has published a press statement to announce an upcoming consultation on new Interagency Guidance on Reconsiderations of Value (ROV) of Residential Real Estate. The guidance will be issued by five (banking) regulators, including the Consumer Financial Protection Bureau, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, and the FED itself and would primarily outline – among others –
– the key risks of wrong real estate valuations,
– the rules and regulations applicable to the valuation of residential real estate,
– the obligations of financial institutions when engaging third parties to perform the review of the valuation process,
– requesting a reconsideration of value, and
– policies and strategies that financial institutions may implement to be compliant with corresponding rules and regulations (e.g. non-discrimination) and to mitigate the risks of wrong valuations.
##### The key content of the proposed guidance is briefly outlined below:
Risks of deficient residential real estate valuations: Generally speaking, credible collateral valuations, which include appraisals, are crucial in the residential real estate lending process to maintain integrity and credibility, and financial soundness of a financial institutions. Appraisal deficiencies can arise from many situations, including from prohibited discrimination, errors or omissions, or the use of unreasonable, unsupported, unrealistic, or inappropriate valuation methods, assumptions, data sources, or conclusions. Such deficiencies can potentially hinder homeowners from accessing adequate loans, make it harder for prospective buyers to purchase homes, create difficulties for homeowners in selling or refinancing their homes, and increase the risk of default. For institutions, such deficiencies can primarily result in increased credit risk (e.g. the values are overestimated) and increased loan losses or even violations of laws and subsequent litigation.
Applicable rules and regulations pertaining to real estate appraisals: The Equal Credit Opportunity Act (ECOA) and the Fair Housing Act (FH Act) prohibit discrimination in credit transactions and residential real estate-related transactions respectively. They prohibit discrimination based on race and other characteristics, including in residential real estate valuations. The Federal Trade Commission Act and the Consumer Financial Protection Act also prohibit unfair or deceptive practices in financial transactions. The Truth in Lending Act (TILA) and Regulation Z establish appraisal independence requirements, prohibiting actions that hinder an appraiser’s independent valuation. However, covered persons are allowed to request additional property information or corrections to the valuation. Appraisals conducted in federally related transactions must comply with the Uniform Standards of Professional Appraisal Practice (USPAP), including nondiscrimination requirements. Financial institutions must conduct an independent review of appraisals before providing them to consumers, and if deficiencies are found or consumer-provided information affects the value, the appraisal may not meet minimum standards and cannot be used for credit decisions. Financial institutions have options to resolve appraisal deficiencies, such as resolving issues with the appraiser, obtaining a review by an independent appraiser, or obtaining a second appraisal or evaluation.
Use of third party in the review of the valuation process: A financial institution’s use of third parties for the valuation review process does not relieve it of its responsibility to comply with relevant laws and regulations. Additionally, regardless of whether the valuation review activities are conducted internally or through a third party, financial institutions must operate in a safe and secure manner and adhere to applicable laws and regulations. This includes laws and regulations aimed at safeguarding consumer interests and preventing harm. Finally, financial institutions are expected to oversee their relationships with service providers to ensure compliance with federal consumer protection laws. Managing the risks associated with third-party valuations and valuation review functions must be an integral part of a financial institution’s risk management practices.
Reconsideration of value: An ROV request is made by a financial institution to an appraiser or preparer of a valuation report. The purpose of the request is to reassess the valuation based on deficiencies or new information that could impact the value conclusion. The request may be triggered by the financial institution’s own valuation review activities or in response to a consumer complaint or inquiry. Consumers may provide specific and verifiable information that was not available during the initial appraisal, which could affect the valuation. Regardless of how the ROV request is initiated, the financial institution can address the deficiencies by conducting an independent valuation review or other processes to ensure reliable appraisals. This may involve considering additional comparable properties, property characteristics, or correcting previously incorrect or overlooked information that may influence the value conclusion.
Policies, proedures, and control systems institutions may implement: In an effort to mitigate the risk of deficient valuations and discrimination, institutions should consider the following:
– Establish a comprehensive process to manage and resolve valuation-related complaints across all lines of business and channels.
– Inform consumers about raising valuation concerns early in the underwriting process, allowing for timely resolution of errors or issues before final credit decisions.
– Identify and define the roles and responsibilities of each business unit involved in processing valuation review requests.
– Implement a system to route valuation review requests to the appropriate business unit based on the nature of the request.
– Use clear language in consumer notices and policies, establish guidelines for initiating the review process, define timelines, and communicate the status and results to consumers.
– Ensure that relevant staff, including third parties, are trained to identify deficiencies, including prohibited discriminatory practices, during the valuation review process.