By Carl Pry, CRCM, CRP
It’s not been news to anyone over the past few years that scrutiny around appraisal bias has only increased. There has been litigation around lenders making credit decisions based on biased appraisals, as well as regulatory pronouncements and guidance. Anecdotal reports and statistical analyses from various organizations make a compelling case that appraisal bias is a substantial problem that must be addressed. The Property Appraisal and Valuation Equity (PAVE) Task Force, an interagency grouping of thirteen federal agencies, issued its action plan in March 2022, with a number of recommendations for both the appraisal and lending industries to strengthen “guardrails against unlawful discrimination in all stages of residential valuation.”[i]
This article is from the May-June issue of ABA Risk and Compliance magazine. Subscribe here.
FFIEC statement on fair and credible valuations
In February of 2024, the Federal Financial Institutions Examination Council (FFIEC) issued a statement on bank examination principles related to ensuring fair and credible residential property valuation practices among supervised institutions.[ii] The statement discussed the necessity to comply with anti-discrimination laws and regulations (such as the Equal Credit Opportunity Act, or ECOA, the CFPB’s Regulation B, and the Fair Housing Act, or FHA) while also adhering to safety and soundness regulations outlined in statutes like the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). The statement emphasized that effective valuation review programs are essential for identifying and addressing deficiencies, ensuring compliance with appraisal regulations, as well as promoting fair lending practices.
This means banks should have internal processes to ascertain whether the valuations they receive are reasonable. They should not simply wait for a customer to complain. These processes could take various forms. For example, a bank could analyze discrepancies between values listed on an appraisal versus that from an automated valuation model (AVM). It might also consider whether the appraiser’s selection of comparable properties (“comps”) is appropriate. The easiest way to investigate an appraisal is to simply read the language in the narrative portion of the report for possible indicators of bias or other flawed methodology.
Failure to have internal controls to identify and address discrimination or bias can result in poor credit decisions and resulting consumer harm. There are also safety and soundness risks, such as excessive loan-to-value ratios, which in turn impacts risk-weighted assets and potentially the capital adequacy of the bank.
An important control to mitigate the risk of relying on a biased or inaccurate appraisal is the Reconsideration of Value, or ROV. An ROV is a request from a lender to an appraiser or other preparer of a valuation report to reassess the value of residential real estate. ROVs offer a safeguard, allowing for challenges to inaccurate valuations and ensure compliance with regulatory expectations.
CFPB blog post on ROVs
As far back as October 2022, a CFPB blog post[iii] set the table for expectations regarding banks’ need for a specific ROV process. The CFPB stated, “[a] lender’s reconsideration of value process must ensure that all borrowers have an opportunity to explain why they believe that a valuation is inaccurate and the benefit of a reconsideration to determine whether an adjustment is appropriate.” The bureau was of the opinion that lenders that do not have a clear and consistent method to ensure that borrowers can seek a ROV may risk violating federal law.
This position parallels one the DOJ also took, emphasizing that failing to act on biased appraisals constitutes a fair lending violation, which in turn highlights the need for strong internal review programs. ROVs are but one part of that program.
Interagency ROV guidance
A few months after the FFIEC statement, the OCC, Federal Reserve, Federal Deposit Insurance Corporation (FDIC), National Credit Union Association (NCUA), and CFPB issued final guidance on ROVs for residential real estate transactions.[iv] The guidance advises on policies and procedures that institutions may implement to allow consumers to provide institutions with information that may not have been considered during a valuation or if deficiencies are identified in the original valuation report. Notice the words “may implement” in the regulators’ pronouncement; even though the guidance is not binding law or regulation, it is fairly clear when reading the interagency guidance in tandem with the FFIEC statement that an ROV process is a regulatory expectation.
A few important points about the FFIEC statement and the interagency guidance:
- The FFIEC’s statement speaks of the responsibility of banks to identify valuation deficiencies, either through an institution’s valuation review processes or through consumer-provided information. These identified issues may lead banks to question the credibility of the appraisal or valuation report. But note that deficiencies may be identified either by the consumer or “through the institution’s valuation review processes.” This points out that the bank’s program must contain processes to internally identify whether an appraisal may be deficient. To rely solely on the customer to allege a problem (by submitting an ROV request) is not enough.
- An ROV request may not only be about bias or discrimination. The interagency guidance says, “[c]ollateral 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.” This means a bank’s ROV process must address issues broader than just appraisal bias.
- The ROV request may not necessarily deal only with a formal appraisal performed by a person; the title of the guidance is “Interagency Guidance on Reconsiderations of Value of Residential Real Estate Valuations.” The word “appraisal” is not in the title. The term “valuation” is broader and includes less-formal estimates of value, including those produced by machines, such as automated valuation models, or AVMs. This means the bank’s ROV process should cover all valuation methods it utilizes to evaluate applications, not just those performed by human beings.
- There are many questions around the precise scope of the interagency guidance. According to the agencies, the principles in the guidance are targeted towards single one-to-four family residential transactions, such as consumer-purpose mortgage loans. Does this mean that a bank should limit its ROV process to only transactions that fall into that category? Think about it this way: could there be a violation of ECOA or FHA if the bank relied on a biased appraisal when it makes a credit decision on a commercial loan secured by a multi-unit apartment building? Consider the spirit of the regulators’ intentions here: relying on a biased appraisal could be a fair lending problem regardless of the type of loan being made or the character of the collateral. It may be a best practice to extend the bank’s ROV process beyond just standard consumer-purpose mortgage loans.
- ROVs are requests made by the institution to the appraiser (or other preparer of the valuation report), encompassing a request to reassess the valuation based upon deficiencies or information that may affect the value conclusion. The relevant wording in that definition is “made by the institution.” ROVs are not direct communications between the consumer (applicant/borrower) and the appraiser; they are communications to the appraiser by the bank, even though the issue may have originally been brought to the bank’s attention from the consumer. This is a central point in a bank’s ROV process. The bank must be the intermediary to communicate with the appraiser, not the consumer. To allow otherwise would be a violation of provisions requiring independence between the borrower and the appraiser.
This last point illustrates a challenge banks face: for decades, lenders have been advised to keep appraisers separate from the lending process to avoid conflicts, but now lenders are being told they can be held responsible for not addressing valuation bias and inaccuracies. If lenders reject an appraisal due to perceived or real bias, does that violate appraiser independence standards? But if they do nothing, are they risking violations of fair lending laws?
This point has been the subject of litigation. It will be interesting to see how the courts handle this thorny question. But in the meantime, regulators are making it clear: lenders must act on deficient valuations while simultaneously maintaining compliance with independence regulations. The interagency guidance states the agencies “reiterate that institutions are responsible for maintaining standards of independence for all real estate lending activity, including ROVs, as required by the agencies’ appraisal regulations and, as applicable, USPAP.” (Note: USPAP stands for the Uniform Standards of Professional Appraisal Practice. These are the rules appraisers must follow; they are not banking laws or regulations, although when a bank is required by regulation to obtain an appraisal, it must conform with USPAP.)
In the end, banks must demonstrate they maintain a structured, well-documented process that aligns with examiner expectations regarding ROVs. The agencies emphasize that this process is not one-size-fits-all. It should be a risk-based process that is appropriate to the bank and its business practices. It should be a high-level, principles-based approach.
This means there are no templates or uniform policies, disclosures, or other forms to fulfill these requirements. Fortunately, the interagency guidance has a wealth of information to help banks formulate their processes, including examples of policies, procedures, and controls a bank may implement to help identify, address, and mitigate risk, and explains how banks may incorporate ROV processes into their existing risk management functions.
Banks that sell loans to Fannie Mae or Freddie Mac, or who are FHA lenders, have additional requirements to follow. Each of these agencies has released guidance requiring their lending partners to establish appropriate processes for consumers to request ROVs.[v] These requirements closely follow those of the banking agencies, so even banks that do not sell to Fannie or Freddie, or are not FHA lenders, would benefit to read their information. The more recommendations on how to formulate an effective process, the better.
Putting together the bank’s ROV process
What elements should be in place to constitute an effective ROV process that will both withstand regulatory scrutiny as well as best serve the bank in making appropriate and non-biased credit decisions? The interagency guidance states, “Financial institutions may consider developing risk-based ROV-related policies, procedures, control systems, and complaint resolution processes that identify, address, and mitigate the risk of deficient valuations, including valuations that involve prohibited discrimination.” Together these policies, procedures, and controls constitute an ROV prcess.
The interagency guidance speaks of involvement of appropriate business units to handle such requests, and also stresses consistency as a key element in ensuring the process is effective. This means, when possible, use of standardized disclosures and forms, implementation of timeframes, and development of communication standards that apply to both the bank as well as any third parties that may be involved, such as third-party (fee) appraisers, appraisal management companies (AMCs), brokers and servicers. Handling ROV requests on an ad-hoc basis is not efficient or recommended.
In all stages of the process, extensive documentation and records should be maintained for later examination and analysis. As well, the bank’s process should be subjected to review by the bank’s auditors, to evaluate its comprehensiveness and effectiveness.
The following are suggestions to include in the bank’s process.
Define the ROV. The interagency guidance describes an ROV as a request of the appraiser (or other preparer of the valuation report) to reassess the report based upon deficiencies or information that may affect the value conclusion. As discussed above, this request must go to the appraiser from the bank (not the consumer), and can address issues regarding bias, but also other perceived deficiencies, such as in adequate or inappropriate comps, a conflict of interest, methodology concern, or other factor(s).
Inform consumers of their rights. It is important, as stated by the agencies as well as in earlier CFPB guidance, that consumers understand their rights and how to invoke them. There are various ways to do this, of course, but this could involve adding language to initial disclosures (such as the Loan Estimate) and/or the appraisal delivery package (which would be provided when the copy of the appraisal is given to the applicant), or developing a standalone disclosure to be provided to the applicant early in the loan process. Written disclosures are preferable to verbal statements. The point is to provide the information early in the process so consumers can carefully examine the valuation report knowing they can lodge concerns if they wish.
Develop a form for ROV requests. Consider developing such a form for this purpose, which would provide instructions to the consumer to submit their issue and relevant documentation. This ensures that ROV requests are initiated properly and can be tracked and reported. There is no set list of elements on an ROV request form, but information including the applicant’s name, property address, effective date of the valuation, preparer’s name, date of the request, and a description of unsupported, inaccurate, or deficient areas in the report is a good start. The request should include adequate information to be able to tell what precisely is being contested and why, and should avoid technical language. The bank should make it easy for the consumer to submit an ROV request.
Ensure proper receipt of ROV requests. Receipt of a standard form certainly puts the bank on notice that the customer has requested an ROV, but that should not be the only way a request can be received. Any bank staff that are in a position to communicate with a customer about a problem with the valuation should be appropriately trained to recognize an ROV request. The bank’s complaints management system should be especially attuned to consumers communicating dissatisfaction with their valuations. In fact, it is unlikely consumers will use the phrase “I want a reconsideration of value” in their communications. This means bankers must be trained to understand when the consumer’s communication includes, or itself constitutes, an ROV request. It might not even be in the context of a formal request or complaint; it could be part of a normal conversation. The key is to understand when the consumer is questioning the value statement, triggering the bank’s ROV process, which includes logging the exchange.
Vet the ROV request. The next step is for the bank to thoroughly analyze the request to determine whether there is a reasonable basis to request anything from the valuation preparer. This helps protect the independence of the valuation process. The bank need not always contact the preparer simply because the customer is requesting an ROV. For example, if the consumer’s application was not approved due to insufficient property value, the applicant may submit an ROV request just to see if the value might be bumped up a bit to enable an approval. There is nothing wrong with the appraiser’s methodology per se, and there may be no allegation of bias. To communicate with the appraiser in this instance could be construed as violating the independence provisions, since this looks like “value shopping.”
It may well be that the information in the consumer’s ROV request does not warrant being presented to the appraiser. Perhaps the concerns can be addressed by the bank’s staff. Think of this as a customer service opportunity if nothing else. But in any case, document the conclusion thoroughly so there are no questions later as to why it appears as though the bank ignored the request.
But if there are legitimate concerns, whether around bias or otherwise, it’s time for the bank to communicate with the appraiser and attempt to resolve any deficiencies. Just remember that the bank is an intermediary in this process; the consumer’s ROV request form should not just be forwarded on to the appraiser.
Work with the valuation preparer. It is important that the appraiser understand that this is a valid ROV request. It should not seem like it’s only about getting a higher value. The appraiser needs substantive information from the bank to properly address the concerns raised in the ROV request. The focus should be on how the valuation was developed, including, for example, accuracy of the data, how comps were selected, adjustments made, costs and income (if appropriate) analyzed, or even potential bias.
In return, the preparer should provide substantive analysis and commentary that explains the rationale for the conclusions and statement of value in the report, as well as addressing the concerns raised in the ROV request. Recognize that just because an ROV request is considered by the appraiser, it does not guarantee a change in the appraiser’s original statement of value. Regardless of whether the response supports a change in value or not, the valuation report should be updated to contain sufficient information to help the lender (and ultimately the consumer) understand why the value did or did not change.
Occasionally the bank may encounter a situation where the appraiser is unresponsive or even refuses to consider the request. To counter this possibility, consider adding language into the appraiser’s engagement letter, or the bank’s contract with an external appraisal firm or AMC, to set expectations and require appraisers to respond to requests. Inclusion of service level agreements (SLAs) to set expectations around forms of communication and timing, are advisable here.
Resolve the ROV request. Once the preparer responds to the bank regarding the ROV request, the bank must then determine whether the response is credible, and whether it appropriately addresses the issues raised. This part of the process should also include an escalation mechanism, so that issues can be appropriately resolved by experienced and knowledgeable personnel (or a third party) if necessary.
Here is where the bank again acts as an intermediary, as it can communicate further with the preparer to obtain clarifications or if additional information or explanation is required. The bank can then address confusing terminology so the ultimate response to the consumer makes sense.
The bank should track ROV trends and outcomes. In this way the bank can understand where and why issues are occurring, and even whether problems can be narrowed to particular geographies or even individual appraisers. This allows the bank to take remedial action, if necessary, to reduce its risk.
Communicate the results of the ROV request with the consumer. The bank then shares the response with the consumer. Creating a formal ROV response protocol and form that is formatted for customer communication, highlighting outcomes in non-technical language, is beneficial. Simply passing on the appraiser’s responses to the consumer is not a sufficient resolution and risks independence.
If the appraiser’s response is credible (after any back-and-forth), the bank can then proceed with underwriting the application utilizing the new valuation. But if the bank determines the response is not credible, what should it do then?
Address appraiser responses that are not credible. Applicants deserve valuations that are credible and provide a reliable estimate of the property’s market value. Anything short of that is not acceptable and could be a violation of various appraisal standards and regulations. Lenders are required to resolve deficiencies they have identified in appraisals they receive.
If the bank determines that the preparer’s response is not credible for whatever reason (the valuation is still affected by bias or other inappropriate valuation methodology, for example), it has few (limited) options, since utilizing the appraisal in its present form is not acceptable:
- It can obtain a detailed review of the appraisal, called a “technical review.” (Note: contrast this with an “administrative review,” which is performed by the bank in its usual due diligence responsibilities when considering the appraisal in its underwriting.) These technical reviews come in various forms. One such review is known as an “enhanced field review,” where a reviewer examines the appraisal but also conducts an on-site inspection of the property and comparable sales, and conducts additional research and analysis to verify the accuracy of the original valuation. Another type is what is sometimes called a “Standards Rule 3” review, which is an objective and independent evaluation of an appraiser’s work performed by a “review appraiser” to assess its quality, accuracy, and compliance with industry standards. It focuses on evaluating the credibility of the original report by analyzing whether its conclusions are reasonable and adequately supported. Either of these may help the bank in making a final determination as to whether the original valuation can and should be used.
- If, after conducting any internal and/or external reviews, the valuation is still deemed to be not credible, the bank could order another appraisal.
Obtain a second appraisal when necessary. In these situations, the original appraisal’s deficiencies cannot be resolved and is therefore unusable. These cases should be extensively documented so it is clear to any outside observer (such as an examiner) that the bank did all it could to salvage the appraisal, and was not just shopping for a higher valuation.
This is part of the bank’s “resolution of deficiencies” responsibilities, as the agencies require banks to have policies and procedures for resolving any inaccuracies or deficiencies by “addressing significant deficiencies in the appraisal that could not be resolved with the original appraiser by obtaining a second appraisal.”
Note that is it not always necessary (or required) to go to the original appraiser to inquire about issues before deciding a second appraisal is necessary, even if the bank receives an ROV request. In some cases, the defects may be so significant or egregious that the appraiser’s credibility is in question and a second appraisal is the most reasonable course of action. This may happen, for example, in situations where evidence of bias is so strong, it would not be reasonable to hope the appraiser could “fix” the problem.
In these cases, Fannie Mae and Freddie Mac require the lender to report the appraiser to the applicable state licensing board. Whether the bank is required to do this or chooses to, it is a good idea to have clear written procedures to address how this will take place. It may also be advisable to have the bank’s counsel review such procedures to ensure they are appropriate.
In any case, if the bank obtains a second appraisal, it should think long and hard before charging the applicant twice. Especially in cases where the original appraisal is discarded due to bias, there is significant fair lending risk since the result would be to more frequently assess two appraisal fees to minority applicants, creating a disparate treatment risk.
Set clear expectations on timing. Although there are no mandates in the interagency guidance about how long this process should take, banks should be realistic in their representations to consumers. Adequate time must be planned for considering the ROV request from the consumer, communications with the appraiser, and evaluation by the bank of responses. At the same time, the bank should protect against undue delays to the consumer and be on the lookout for any adverse impacts on the application (such as expiration of rate lock agreements or purchase contract commitments, for example) due to delays caused by consumers exercising their rights. This means at the very least that the ROV process, from start to finish, should be completed prior to loan closing. This is another area that can be addressed in engagement letters between the bank and individual appraisers, or in contractual agreements with appraisal firms or AMCs.
A well-structured ROV process, as a part of efforts to ensure fairness and integrity in the property valuations the bank obtains, is essential to ensure fairness, compliance and transparency. By implementing regulatory recommendations and best practices, banks can mitigate risks while upholding the integrity of the valuation process.
CARL PRY, CRCM, CRP, is a senior advisor for Asurity Advisors in Washington, D.C., where he advises clients on a wide variety of compliance, fair lending, corporate treasury and risk management issues. Over the last 30-plus years, Pry has held senior leadership positions including senior vice president and compliance manager for Compliance and Control Department at KeyBank in Cleveland; vice president of regulatory services at Kirchman Corp. in Orlando; and manager in the finance and performance management service line at Accenture in Chicago. Most recently, he served as managing director at Treliant LLC. He also serves as chair of the editorial advisory board for ABA Risk and Compliance magazine. Reach him via email at [email protected] or at (440) 320-4662.
[i] Interagency Task Force on Property Appraisal and Valuation Equity (PAVE) Action Plan (March 23, 2022); at https://pave.hud.gov/sites/pave.hud.gov/files/documents/PAVEActionPlan.pdf
[ii] Statement on Examination Principles Related to Valuation Discrimination and Bias in Residential Lending (Feb. 12, 2024), at https://www.ffiec.gov/press/PDF/FFIEC_Statement_on_Exam_Principles_Related_to_Valuation_Bias.pdf
[iii] CFPB blog post (Oct. 6, 2022); at https://www.consumerfinance.gov/about-us/blog/mortgage-borrowers-can-challenge-inaccurate-appraisals-through-the-reconsideration-of-value-process/.
[iv] Interagency Guidance on Reconsiderations of Value of Residential Real Estate Valuations (July 26, 2024); at https://www.govinfo.gov/content/pkg/FR-2024-07-26/pdf/2024-16200.pdf.
[v] Fannie Mae guidance (May 1, 2024) at https://singlefamily.fanniemae.com/media/39071/display; Freddie Mac guidance (May 1, 2024) at https://guide.freddiemac.com/app/guide/bulletin/2024-6; FHA guidance (May 1, 2024) at https://www.hud.gov/sites/dfiles/OCHCO/documents/2024-07hsgml.pdf.
