Bracing for a Crackdown on Appraisals

Article excerpt

Bank and thrift regulators have put lenders on notice that examiners will scrutinize how they obtain appraisals for real estate used as collateral.

To ensure honest appraisal, free from the influence of people with incentives to get a loan approved, banks should insulate the process from underwriting, regulators say. They issued guidelines saying as much a decade ago but reissued them in October after examiners noticed a rise in dubious practices.

"We are trying to refocus people on what the appraisal is supposed to be used for," said Virginia Gibbs, the senior supervisory financial analyst at the Federal Reserve Board. "An important element ... is that it is independent. We don't want it to paper the file; we want it to support the credit decision."

Barbara Grunkemeyer, the deputy comptroller for credit risk in the Office of the Comptroller of the Currency, said there must be "separation between loan production, appraisal ordering, and the appraisal review function." Small banks have approached the new scrutiny with a combination of wariness and resignation. Most are concerned that adding staff or hiring outside experts to review appraisals could become too expensive.

"The regulatory burden is unbelievable right now," said W. Everett Crawford, the chairman and chief executive of the $334 million-asset First National Bank in Artesia, N.M. "We don't have the resources the big money-center banks do."

But small banks also recognize the necessity of reliable appraisals and seem prepared to work with regulators, within limits, to ensure that they are getting them.

"We want good values on our loans," said Anna M. Rentschler, vice president and the compliance officer at the $113 million-asset First National Bank of Audrain County in Mexico, Mo. "We don't want the undue risk of inflated values."

Last year examiners at the bank and thrift regulators were directed to ask about appraisal procedures, and what they found was internal systems that had atrophied somewhat in recent years.

"We were seeing a certain amount of laxity," Ms. Grunkemeyer said. "We were also getting a lot of questions about our appraisal requirements, and that led us to believe that there was misunderstanding."

National banks were not alone in loosening appraisal standards, she said. "What we were finding pretty much mirrored what our sister agencies were finding.

"In the last several years, banks have done a great job improving their efficiency ratio," Ms. Grunkemeyer said. But one of the ways they have accomplished that is by cutting out "some of the safeguards built into their appraisal systems."

Among other things, she said, institutions were often skimping on appraisal reviews. Part of what regulators expect to see is a process for evaluating the quality of appraisals once they have been completed, and many organizations had let that function lapse during the lending boom of the past several years.

"We're not seeing the kind of abuses that led to the regulation in the first place," Ms Grunkemeyer said. "But banks were not as sharp as we expected, so we wanted to get a reminder out there."

Regulators themselves had also been taking less interest in appraisal procedures, she said. The matter was at the forefront of examinations when the guidance was first released in 1994, after the savings and loan crisis. But as the real estate market stabilized and then revived in the late 1990s, regulators began changing their focus.

First National Bank of Audrain (a subsidiary of Central Bancompany Inc. in Jefferson, Mo.) recently reviewed its appraisal processes, working closely with the OCC to make sure that it met the standards examiners expected, Ms. Rentschler said. In cooperation with them, she said, the bank was able to implement a system of checks and balances that prevented any one loan officer or other employee from having too much influence on appraisals. …