Compliance Journal August 2024
Special Focus Agencies Issue New Guidance and Rule Regarding Certain Methods of Determining Values of Residential Real Estate Over the past several weeks the Bureau of Consumer Financial Protection (CFPB), Board of Governors of the Federal Reserve System (FRB), Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency (OCC), Federal Housing Finance Agency (FHFA), and National Credit Union Administration (NCUA) (collectively, the agencies) have issued final guidance and a final rule regarding certain methods for determining values of residential real estate. The final guidance (Guidance) addresses reconsiderations of value (ROVs) for residential real estate transactions. An ROV is a request from a bank to an appraiser or other preparer of a valuation report to reassess the report based upon deficiencies or information that may affect the value conclusion. A bank may initiate a request for an ROV because of its 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. The Guidance provides examples of policies and procedures that a bank may choose to implement to help identify, address, and mitigate the risk of discrimination impacting residential real estate valuations. In addition to the Guidance, the agencies also issued a final rule (Rule) designed to help ensure the credibility and integrity of models used in valuations for certain mortgages secured by a consumer’s principal dwelling. In particular, the Rule establishes quality control standards for automated valuation models (AVMs) used by mortgage originators and secondary market issuers. An AVM is a computer program that estimates a property’s value and is used for a variety of purposes, including loan underwriting and portfolio monitoring. The following is a summary of both the Guidance and the Rule. The Guidance is final as of July 26, 2024. The Rule is effective October 1, 2025. Interagency Guidance on Reconsideration of Value of Residential Real Estate Valuations Background The agencies created the Guidance as creditable collateral valuations, including appraisals, are essential to the integrity of the residential real estate lending process. Deficiencies identified in valuations, either through a bank’s valuation review processes or through consumer-provided information, may be a basis for the bank to question the credibility of the appraisal or valuation report. Collateral 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. Deficient valuations may pose risks to the financial condition and operations of the bank. Such risks may include loan losses, violations of law, fines, civil money penalties, payment of damages, and civil litigation. Reconsideration of Value (ROV) The Guidance sets forth that an ROV request made by the bank 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. The bank may initiate a request for an ROV because of its 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.