NEWS: The NCUA and other federal regulators have issued final guidance on “reconsiderations of value” (ROVs) in residential real estate lending.
When credit unions identify deficiencies in appraisal and valuation reports – either through their own review process or through information that a consumer has provided – it can call into question the report’s credibility. ROVs are requests from a lender to an appraiser (or other preparer of a valuation report) to reassess residential real estate’s value.
The new guidance:
- Offers examples of ROV policies and procedures that a credit union can implement to help identify, address, and mitigate discrimination risk;
- Describes the risks of deficient residential real estate valuations; and
- Explains how credit unions and other financial institutions may incorporate ROV processes into risk management functions.
The League will add a summary of this guidance to its ii Release No. B008 – “Appraisals and Evaluations.”
The guidance
The regulators begin their guidance by stressing that “credible collateral valuations, including appraisals, are essential to the integrity” of real estate lending. They go on to explain that 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 can harm consumers, but they also pose risks to credit unions’ financial conditions and operations, including loan losses, violations of law, fines, civil money penalties, payment of damages, and civil litigation.
Use of third parties
Whether credit unions internally review valuations and resolve deficiencies, or whether that is handled by a third party, the credit unions still bear responsibility for operating in a safe and sound way and for complying with applicable laws and regulations. Credit unions must oversee their business relationships with service providers in a way that ensures compliance with federal consumer protection laws.
ROV requests
A credit union can request an ROV because of its own valuation review or after considering information received from a consumer through a complaint or a request to the loan officer or other credit union representative. Regardless how the ROV request is started, a consumer inquiry or complaint could be resolved through a credit union’s independent valuation review or other process 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, credit unions can communicate relevant information to the original preparer of the valuation and, when appropriate, request an ROV.
Complaint resolution process
A credit union can capture consumer feedback about potential valuation deficiencies through an existing complaint resolution process. That process may capture complaints and inquiries about the credit union’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 credit union should ask for an ROV.
Examples of policies, procedures, and control systems
The regulators wrote 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 ….” Those policies, procedures, control systems, and complaint processes may necessarily vary according to the credit union’s size and complexity. Smaller credit unions that choose to implement the guidance may have policies and procedures that differ from those at larger credit unions.
The guidance gives these 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 credit union may consider, in addition to processing the ROV, separately starting the process that the credit union may have to respond to allegations of discrimination.
- Consider whether any information or other process requirements related to a consumer’s request for an ROV creates unreasonable barriers or discourages consumers from requesting 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 credit union 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, etc.)
- Establish risk-based ROV systems that route the request to the appropriate business unit. For example, requests that include concerns or inquiries that allege discrimination could be routed to compliance, legal, and appraisal review staff who have the skills and authority to research and resolve the requests.
- Establish standardized processes to increase consistency for considering ROV requests:
- 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 credit union may need to start the ROV process;
- Set timelines in the complaint or ROV processes for when milestones need to be achieved;
- Set 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, including 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.