On July 26, 2024, regulators published the final Interagency Guidance on Reconsiderations of Value of Residential Real Estate Valuations.
The Guidance applies to all valuations used in credit transactions secured by a single 1-4 residential property. It outlines, in very general terms, the process by which a financial institution may request reconsideration of an appraisal or other valuation in order to identify and resolve potential deficiencies or inaccuracies, although the guidance does focus specifically on the potential for discriminatory bias to affect valuations, a fair lending concern that the agencies have also raised in other areas, such as the recent guidance on the use of automated valuation models.
The Guidance focuses on a few key features that the regulators recommend including in ROV policies and procedures:
Link to the consumer complaint process. When a consumer complaint is received relating to a residential property valuation, banks should consider whether an ROV could resolve the complaint and have procedures set up to obtain the ROV if appropriate.
- Inform consumers. Banks should ensure that consumers are notified of the valuation and the bank’s process for bringing potential deficiencies in the valuation to the bank’s attention in time for them to avail themselves of that process and raise their concerns with the bank. Notices to consumers should be clear and easy to understand, giving them specific information on the steps to take to request an ROV – what information to submit, when and where to submit it, and what to expect next.
- Involve the appropriate stakeholders. Banks should have processes in place to ensure that requests for reconsiderations of value, regardless of how they are received, are routed to the appropriate personnel for review and further action. Additionally, when an ROV is obtained, the bank takes appropriate measures. Of course, this will require ensuring that the bank’s underwriters and others managing the loan application receive the revised valuation, but it may also be worthwhile to involve other departments such as compliance and vendor management, so that issues and trends can be identified and managed.
- Ensure consistency. The process by which a bank evaluates whether an ROV is merited should be as consistent and objective as possible. Staff evaluating appraisals should be thoroughly trained on the criteria the bank considers relevant and ROV decisions should be well-documented.
One difficult question many banks are considering is how to handle the cost for ROVs. The finalized guidance states that banks should “establish guidelines for when a second appraisal could be ordered and who assumes the cost,” but it gives little direction on how banks should be assigning that cost. Particularly where there is an indication of discriminatory bias in an appraisal, however, there may be concerns that requiring borrowers to pay twice to obtain one valid, reliable appraisal could raise both UDAAP and fair lending concerns, so it is not clear that it would be permissible to automatically pass the cost of a second appraisal on to loan applicants. While there is not a clear answer on how the cost can best be assigned, lenders should ensure that the ROV process they put in place to combat discrimination in appraisals does not lead to other fair lending risks. As always, feel free to reach out to Compliance Hub’s Hotline if you have any other questions or concerns.