The Uneven Playing Field in Banking vs Non-Banking Loans

There are rules, guidelines, and regulations within the industry that all valuation professionals must follow – but what happens when someone begins to bend the rules? Non-banking vs banking loans have created an environment where the rules aren’t always enforced. Tony Pistilli with Computershare Property Solutions, helped give us a closer look on where the problems are arising. 

Buzz: Tony, thank you for taking the time to discuss a topic many see as quite confusing for the industry. We wanted to chat with you about the difference between bank and non-bank appraisals. Can you help us understand the difference between the two?

TonyIn terms of the actual appraisals, there really is no difference in how they are supposed to be done.  It’s the same, no matter if a bank places the order or a non-bank mortgage lender. All licensed and certified appraisers are obligated to complete the appraisal assignment in compliance with USPAP. Generally speaking, there’s no difference between how much the appraiser gets paid, either. However, there is a big difference between how bank lenders and non-bank lenders select appraisers. Banks are subject to significantly greater oversight when it comes to appraisals, which has created an unlevel playing field—and many non-bank lenders are taking advantage of it.

Buzz: What regulations apply to banks vs. non-bank lenders?

Tony: Non-bank lenders such as independent mortgage bankers and mortgage brokers must comply with federal and state laws, but many of the banking regulations do not apply to them, only to banks. At the nation’s regulated banks, you may find dozens of OCC (Office of the Comptroller of the Currency), FDIC (Federal Deposit Insurance Corporation), or FRB (Federal Reserve Board) examiners routinely asking questions about whether the bank follows appraisal guidelines, but you’ll hardly ever, or maybe never see this at mortgage companies. The oversight of these entities by the Consumer Financial Protection Bureau (CFPB) is not anything like the banking agencies, and the depth and understanding of the valuation process is not nearly as thorough.

Buzz: Is there any problem with that?

Tony: Absolutely. What we have today is an uneven playing field between bank lenders and non-bank lenders. Most of the rules and guidelines regulated institutions (banks) face involving mortgages and appraisals, in particular, were established after the housing crisis and they are intended to prevent influencing the outcome of residential appraisals. The OCC, FDIC, FRB, and NCUA monitor banks and credit unions constantly for appraisal compliance, but there is little, if any oversight and enforcement with non-bank lenders.

As a result, it’s extremely common that non-bank lenders allow their production people to select appraisers or to use appraisal management companies (AMCs) that allow loan officers to request certain appraisers for assignments. It is not uncommon for those types of lenders to have a person in a sales position, such as a loan officer, communicating to the appraiser the property value they need to hit, and they think it’s perfectly OK to do so. This practice is clearly prohibited in federal law, as well as most states laws.  In addition, it is prohibited by Fannie Mae, Freddie Mac, FHA, USDA & VA Appraisal Independence rules. It bears mentioning that this is not happening with all non-bank lenders, but it is happening with many of them. Seemingly non-bank lenders are able to do this with impunity.

Keep in mind that inflated appraisals are just one of the many factors that contributed to the last mortgage meltdown. We may or may not be facing another housing crisis, but we are starting to see home values decelerating, just like they did before the crisis. In fact, the same states in which values plummeted the most during the crisis years are the states where values are cooling now, such as Florida, Nevada and California. Are biased appraisals going to cause the next meltdown? Probably not. But is it wrong? Yes.

Buzz: So, do appraisers treat non-banking appraisals differently than bank appraisals?

Tony: They’re not supposed to, but the reality is that it leaves an open opportunity, which is the same reason why the appraisal independence rules were established for banks to begin with. If an appraiser receives an order from a non-bank loan officer or broker and believes their next assignment could depend on whether they hit a predetermined value, they could be more inclined to do something they wouldn’t otherwise do because the lender’s sales team is controlling their selection. That lender might call the appraiser and say, “we need an extra $X amount on this value to do the deal,” and the appraiser might be willing to accommodate them because they know it could make the difference between getting more appraisal orders.

This type of influence could be reflected by what the appraiser doesn’t include in an appraisal report. For example, they may leave out the fact that a property is located 100 feet away from a gas station, which is a factor that can negatively impact the property’s value.  Or, they could use  comparables that are in superior condition without making the appropriate adjustments. It is an act of omission, if you will. The fact is that appraisals that are performed for non-bank lenders are subject to the opportunity of more undue influence and bias.   

Buzz: Is there anything being done to level the playing field?

Tony: Not really. Because of this type of flexibility and reduced oversight throughout the lending process for non-bank lenders, it’s like speeding on a highway with no cops in sight. You might get away with it, but it’s still not right. Most non-bank lenders simply outsource appraisals to AMCs and assume they are being performed in a compliant manner. This highlights the importance of using a trusted third-party due diligence provider for valuation quality control reviews. But until there’s a level playing field for appraisal compliance, the problems we are seeing today will probably continue. The rules and laws are in place, there just needs to be enforcement. 

Buzz: Tony, thank you for speaking with us. We appreciate it.

With such an interesting topic, there are so many more questions to ask. Stay tuned as Tony will be joining us again to provide us with the answers we all have been waiting for.

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About Tony Pistilli

Tony Pistilli
Tony Pistilli is the SVP, General Manager of Valuation Services and Chief Appraiser for Computershare Valuation Services, LLC. Tony oversees the valuation business, including Traditional Appraisal, BPO, Inspections, Data and Analytics and Hybrid Appraisal. He is also tasked with introducing innovative and compliant valuation products and industry leading solutions to the marketplace. Tony has over 25 years of real estate appraising and lending experience with national banks, mortgage companies, a federal agency in addition to being self-employed as a fee appraiser. Tony is a member of several appraisal industry organizations and is a subject matter expert for the Appraisal Foundation in the area of declining markets and previously served as vice-chair of the Minnesota Real Estate Appraiser Board. Tony is an AQB certified USPAP instructor and holds a certified residential appraisers license.

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