Lenders Face New Set of Rules for Real Estate Appraisal
Milan, David, American Banker
Negotiating a business loan can be a nerve-racking experience. Lenders want to calculate the value of assets cautiously, to reduce their risk. Borrowers jockey for optimistic numbers, to get the money to make the deal work.
Appraisers have been left with the role of umpire to determine the real value. For years, the middleman method worked well - despite fluctuating markets and nearly a dozen different ways to value property.
Then, in the 1980s, the feeding frenzy of speculation in the real estate market eventually toppled hundreds of the nation's savings and loans.
On the Overhaul Bandwagon
A ripple of reform evolved into a full-scale of the real estate appraisal process. Congress enacted the Financial Institutions Reform, Recovery, and Enforcement Act, calling for minimum standards of conduct on appraisals.
The Appraisal Foundation, comprising eight appraisal organizations, complied by developing the Uniform Standards of Professional Appraisal Practices. These standards now apply to real property, personal property, and business valuations, as well as review of appraisal reports and consulting on the value of property or businesses.
The Office of the Comptroller of the Currency added guidelines that allow individual lenders to involve their own appraisal management policies, in addition to the basic standards set out in the uniform appraisal practices.
Most lenders have adopted stringent guidelines. But their clients -- and, in some cases, their own lown officers - are unaware of the new rules.
Five Key Changes
* Lenders are now the client. Under the new standards, appraisers must be engaged and paid by lending institutions themselves.
Even though the lender collects a retainer from a loan prospect to cover the cost of the appraisal, for all practical purposes the banks is now the customer.
Now, reports must be addressed and sent directly to the lender and, in most cases, directly to the appraisal review division. Neither the loan officer, nor the lender's client, is entitled to see the report until it passes this inspection point.
* Only fully complete reports can be submitted.
Submitting a summary without enclosing the full appraisal report is a violation of the Uniform Standards of Professional Appraisal Practices.
But the law does allow an appraiser to discuss key numbers with a client verbally, as long as the firm has performed the appraisal to professional standards and has documentation on file to back the numbers given verbally.
* Reviewers cannot supply new numbers. Appraisers, like doctors, are often asked to give a second opinion. The scope of these desk-top opinions, however, is now limited to two functions.
The reviewer can concur or disagree with the original report in its entirety, or disagree with specific elements.
But if the reveiwer disagrees with the value given in the original report, he or she can no longer give an opinion of a more accurate value. To get new numbers, a lender has to request a separate's report.
* Appraisers must be licensed. Until now, appraisers have regulated their own industry. Instead of a formal education or uniform certification process, various appraisal organizations have indicated an individual is qualified to conduct appraisals by awarding "designations" - the most prestigious is the Member of the Appraisal Institute. …