Bothell, Washington
January 3, 2011

Happy New Year! December was a busy month for Appraisal Guidelines. Interagency Guidelines on Appraisal, FannieMae/FreddieMac’s UMDP (Uniform Mortgage Delivery Program) and FannieMae/FreddieMac’s UAD (Uniform Appraisal Dataset) were all published in December 2010. Below is a communication highlighting a few points from the Interagency Guidelines on Appraisal which were distributed on December 2, 2010:

1. Appraisal Independence within an institution

2. Evaluations and the use of Automated Valuation Models (AVMs)

3. Guidelines on Broker Price Opinions

4. Appraisal Management Company responsibilities when utilized for evaluations

ARC has provided the actual document on our website for reference purposes and for your review.

Interagency Appraisal and Evaluation Guidelines -

After almost two years of open dialogue, this 70 page document produced jointly by the OCC, OTS, FRB, FDIC and NCUA is more specific than previous Interagency Guidelines set forth in 2003, 1994 and 1989. Although all aspects of the collateral arena received increased guidance, the appraisal independence, and use of evaluation products appear to have received the most attention.

Although Appraisal Independence has been addressed in previous guidelines the 2010 version has taken a page from the GSEs and their HVCC and AIR guidelines in becoming more specific regarding reporting lines and functions.

“An institution should establish reporting lines independent of loan production for staff who administer the institution’s collateral valuation program, including the ordering, reviewing, and acceptance of appraisals and evaluations.

“Examiners will review the steps taken by an institution to ensure that the persons who perform the institution appraisals and evaluations are qualified, competent and are not subject to conflicts of interest."

Requirements regarding (page 20-29)- engagement letters, approved appraiser/ineligible appraiser lists, selection of appraisers, appraisal development (report requirements), resolution of deficiencies, appraisal reviews and type of appraisal report options - were all expanded with specific guidance for each item. Regulatory compliance appears focused on making institutions document their entire collateral valuation process from ordering, communication, reviewing, report corrections, and resolution of rebuttals.

Evaluations came under increased focus in these guidelines versus the minimal mention provided in 1994. Pages 30 and 31 of the guidelines could bring about some dramatic changes in how AVMs (automated valuation models) and TAVs (tax assessed valuations) are used in the future for lending transactions.

“…a valuation method should address the property’s actual physical condition and characteristics as well as the economic and market conditions that affect the estimate of the collateral’s market value. It would not be acceptable for an institution to base an evaluation on unsupported assumptions such as a property is in “average” condition, the zoning will change, or the property is not affected by adverse market conditions.”

On page 31, the guidelines regarding evaluations continue by providing minimum content for the evaluation product. This content includes evidence of a property inspection, photos of the property, local market conditions and description of the neighborhood. Evaluations typically don’t include this information because it would impact the speed of delivery of the evaluation product. AVMs typically provide answers in a few seconds, whereas the information now indicated could delay the evaluation result by hours or days.

Broker Price Opinions were dealt a blow with these guidelines: ”…broker price opinions may not be used as the primary basis to determine the value of a piece of property for the purpose of loan origination of a residential mortgage loan…”

Even before using evaluation products (AVMs, TAVs etc.) an institution is urged to invest in policies, procedures and testing of evaluation products (AVMs, TAVs, BPOs etc) for appropriate risk and safety and soundness concerns. Page 52-54 of the guidelines require institutions to validate AVMs, TAVs and other evaluation methods - “Validation can be performed internally or with the assistance of a third party, as long as the validation is conducted by qualified individuals that are independent of the model development or sales functions. An institution should not rely solely on validation representations provided by an AVM vendor. An institution should ensure that persons who validate an AVM on an ongoing basis are independent of the loan production and collection processes and have the requisite expertise and training.”

We are also pleased to see the guidelines address Third Party Arrangements as they relate to appraisal and evaluations (Page 36-38). With the tremendous increase in business which Appraisal Management Companies have seen since HVCC, it is important for institutions to assess their relationships or affiliations when it comes to collateral products; “If an institution outsources any part of the collateral valuation function, it should exercise appropriate due diligence in the selection of a third party. This process should include sufficient analysis by the institution to assess whether the third party provider can perform the services consistent with the institution’s performance standards and regulatory requirements. An institution should be able to demonstrate that its policies and procedures establish effective internal controls to monitor and periodically assess the collateral valuation functions performed by a third party.” The guidelines require institutions to understand and clearly identify what aspects of the collateral valuation function a third party provider is responsible; ordering, reviewing, selecting appraisers, or providing access to analytical/technological tools. If a Third Party Provider is contracted as a technology provider (portal/ordering platform) then the institution must provide internal resources for all other aspects of the collateral valuation function. If a Third Party Provider is contracted to provide all the necessary collateral valuation functions, then the institution is required to provide necessary oversight consistent with safety and soundness objectives.

FannieMae/FreddieMac’s AIR which replaced HVCC provided lending guidelines to all depository and non-depository institutions which opted to sell their loans to the GSEs. Interagency Appraisal Guidelines are regulatory guidelines for depository institutions regardless of who those institutions sell to or choose to portfolio. Dodd- Frank and the Consumer Protection Agency in November 2010 indicated they will further clarify in the coming year the issue of the collateral evaluations process – some have indicated that these recent Interagency Guidelines may be adopted by the Consumer Protection Agency which would then cover most lending activity, depository, non-depository, portfolio, correspondent etc.

Regardless of the outcome of Dodd-Frank, the appraisal-collateral-evaluation portion of the lending process is going through a re-engineering similar to when credit scoring was introduced into the lending environment in the 1990’s.

As your partner, it is our responsibility to make sure we provide you the resources and tools to complete your lending transaction. We will continue to update you on changes within the appraisal and credit industry as well as provide solutions for these new guidelines and procedures.
We appreciate your business and would be happy to discuss anything mentioned in this communication with you at your convenience.

About ARC

American Reporting Company specializes is providing settlement services to the mortgage lending communities. Founded in 1986, ARC was traditionally known as a premier credit reporting agency but expanded their product offering to include appraisal services, escrow and mortgage lending education. In 2007, 2008, and 2010 ARC was named to INC’s Fastest Growing Companies List. For more information about HVCC and all of ARC’s products go to

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