A group of federal agencies have finalized 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). The guidance will be effective upon publication in the Federal Register. We previously reported on the proposed guidance.

Background

In the preamble to the ROV guidance, the agencies advise that for “purposes of the final guidance, an ROV is a request from the financial institution to the appraiser or other preparer of the valuation report to reassess the report based upon potential deficiencies or other information that may affect the value conclusion.”

The agencies note that they had received questions and comments from financial institutions and other industry stakeholders on ROVs. In particular, stakeholders highlighted the uncertainty in the industry on how ROVs intersect with appraisal independence requirements and compliance with federal consumer protection laws, including those related to nondiscrimination. Nevertheless, the agencies acknowledge that, prior to the efforts to adopt the joint ROV guidance, they had not, collectively, issued guidance specific to ROV processes.

The agencies advise that the guidance is intended to (1) highlight risks associated with deficient residential real estate valuations, (2) describe how financial institutions may incorporate ROV processes and controls into risk management functions, and (3) provide examples of ROV policies and procedures that institutions may choose to implement. The agencies determined that there is no one-size-fits-all approach and that it is important to maintain a high-level, principles-based approach for the guidance to help ensure the guidance will be useful and relevant for a diverse range of institutions and circumstances. Addressing the focus of the guidance, the agencies state that the considerations and principles included in the guidance are targeted towards single 1-to-4 family residential transactions and, thus, are best suited for those types of transactions.

The agencies note that they considered the comments recommending the development of model forms, model policies, checklists, and other standardized documents. The agencies agree such documents may have utility and will consider future development of model forms.

The agencies received comments supporting the use of automated valuation models with ROVs, and also discouraging reliance solely on automatic review tools in an ROV. The agencies decided to neither promote nor discourage the use of a particular method or tool as part of an ROV process.

With regard to complaints received by lenders about appraisal bias, the agencies state that the “final guidance does not state that ROVs are the sole tool to address bias complaints, nor does the final guidance direct institutions to use a specific tool to address bias complaints.” Nevertheless, the agencies made a clarifying edit to the final guidance to provide that, if an ROV request includes allegations of discrimination, an institution may consider, in addition to processing the ROV, referring the allegations through a separate process that the institution may have to respond to discrimination complaints.

With regard to appraiser independence requirements, the agencies state that they considered the comments received on the subject and:

“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. For small institutions or branches, an institution may be able to demonstrate clearly that it has prudent safeguards in place when absolute lines of independence cannot be achieved, due to, for example, limited staff.”

Guidance

Deficiencies in Collateral Valuations. The guidance provides that “[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.” (Footnote omitted.) The guidance addresses the potential for deficiencies in valuations to present various challenges for consumers and financial institutions.

Use of Third Parties. The 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. Whether valuation review activities and the resolution of deficiencies are performed internally or via a third party, (1) financial institutions supervised by the Board, FDIC, NCUA, and OCC are required to operate in a safe and sound manner and in compliance with applicable laws and regulations, including those designed to protect consumers, and (2) the CFPB expects financial institutions to oversee their business relationships with service providers in a manner that ensures compliance with federal consumer protection laws.

ROV Requests. With regard to ROV requests, the guidance provides:

• 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.
• 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.
• Regardless of how the request for an ROV is initiated, a consumer inquiry or complaint could be resolved through a financial institution’s independent valuation review or other processes to ensure credible appraisals and evaluations.
• 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. 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. With regard to the relationship of ROVs to an institution’s complaint resolution process, the guidance provides:

• Financial institutions can capture consumer feedback regarding potential valuation deficiencies through existing complaint resolution processes.
• The complaint resolution process may capture complaints and inquiries about the financial institution’s products and services offered across all lines of business, including those offered by third parties, as well as complaints from various channels (such as letters, phone calls, in person, transmittal from regulators, third-party valuation service providers, emails, and social media).
• 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.
• 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 guidance provides that “[f]inancial 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 . . . .” (Emphasis added.) One has to wonder if the “may” in practice will be interpreted by the agencies as a “must.” A footnote to the quoted sentence provides that risk-based ROV-related policies, procedures, control systems, and complaint processes may necessarily vary according to the size and complexity of the financial institution, and that smaller financial institutions that choose to implement the guidance may have policies and procedures that differ from those at larger and midsize institutions.

The guidance also sets forth the following specific examples for the development of policies, procedures and control systems:

• Consider ROVs as a possible resolution for consumer complaints or inquiries related to residential property valuations. If a complaint or inquiry includes allegations of discrimination, the institution may consider, in addition to processing the ROV, separately initiating the process the institution may have to respond to allegations of discrimination.
• 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 the institution initiate an ROV.
• Establish a process that provides for the identification, management, analysis, escalation, and resolution of valuation-related complaints or inquiries across all relevant lines of business, from various channels and sources (such as letters, phone calls, in person, regulators, third-party service providers, emails, and social media).
• Establish a process to inform consumers how to raise concerns about the valuation early enough in the underwriting process for any errors or issues to be resolved before a final credit decision is made. This may include educating consumers on the type of information they may provide when communicating with the financial institution about potential valuation deficiencies.
• Identify stakeholders and clearly outline each business unit’s roles and responsibilities for processing an ROV request (e.g., loan origination, processing, underwriting, collateral valuation, compliance,
• Establish risk-based ROV systems that route the request to the appropriate business unit (e.g., requests that include concerns or inquiries that allege discrimination could be routed to the appropriate compliance, legal, and appraisal review staff that have the requisite skills and authority to research and resolve the request).
• Establish standardized processes to increase the consistency of consideration of requests for ROVs:
  • Use clear, plain language in notices to consumers of how they may request the ROV;
  • Use clear, plain language in ROV policies that provide a consistent process for the consumer, appraiser, and internal stakeholders;
  • Establish guidelines for the information the financial institution may need to initiate the ROV process;
  • Establish timelines in the complaint or ROV processes for when milestones need to be achieved;
  • Establish guidelines for when a second appraisal could be ordered and who assumes the cost; and
  • Establish protocols for communicating the status of the complaint or ROV and the lender’s determination to consumers.
• Ensure relevant lending and valuation-related staff, inclusive of third parties (e.g., appraisal management companies, fee-appraisers, mortgage brokers, and mortgage servicers) are trained to identify deficiencies (including practices that may result in discrimination) through the valuation review process.

Further Comments Invited

In connection with the Paperwork Reduction Act, the FDIC, Fed, NCUA, and OCC advise they determined that certain aspects of the final guidance constitute a collection of information, as the required policies and procedures create a recordkeeping requirement. The noted agencies continue to invite comments on:

• Whether the collections of information are necessary for the proper performance of the agencies’ functions, including whether the information has practical utility;
• The accuracy of the estimate of the burden of the information collections, including the validity of the methodology and assumptions used;
• Ways to enhance the quality, utility, and clarity of the information to be collected;
• Ways to minimize the burden of the information collections on respondents, including through the use of automated collection techniques or other forms of information technology; and
• Estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information.