On June 8, the Consumer Financial Protection Bureau (CFPB), Board of Governors of the Federal Reserve System (Board), Federal Deposit Insurance Corporation (FDIC), National Credit Union Administration (NCUA), and Office of the Comptroller of the Currency (OCC) (collectively, the agencies) issued proposed guidance to financial institutions on how to incorporate reconsiderations of value (ROV) for deficient residential real estate valuations into established risk management processes. The guidance is intended to help financial institutions to identify, address, and mitigate the risk of discrimination in residential real estate valuations.
An ROV is a request from a financial institution to an appraiser, usually at the behest of the institution’s customer, to re-assess a value estimate based on potential deficiencies or other information that may affect the appraised value of residential real property. A 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. According to the agencies, an ROV may be warranted if a consumer provides information that may affect the estimated value.
The proposed guidance provides considerations for ROV policies, procedures, and controls that a financial institution could incorporate into its established risk management procedures, including:
- Using ROVs as a possible resolution to a consumer complaint related to residential property valuations.
- Considering whether any information or process requirements related to an ROV request create “unreasonable barriers” or discourage consumers from requesting an ROV.
- Establishing a process that provides for the identification, management, analysis, escalation, and resolution of valuation related complaints across all lines of business and from various channels and sources.
- Establishing a process to inform consumers on how to raise valuation concerns sufficiently early in the underwriting process for any errors or issues to be resolved before a final credit decision is made.
- Identifying stakeholders and clearly outlining each business unit’s roles and responsibilities for processing an ROV request.
- Establishing risk-based ROV systems that route the request to the appropriate business unit.
- Establishing a standardized process to increase the consistency of requests for ROVs.
- Ensuring relevant lending and valuation staff, including third parties, are trained to identify deficiencies throughout the valuation review process.
The agencies also seek public comments on four specific issues. Once the proposed guidance is published in the Federal Register, interested parties will have 60 days to comment.
The issue of bias in residential real estate appraisals and other valuations has been a hot topic for the federal agencies. This proposed guidance follows a mere week after the agencies published a proposed rule with request for public comment that would implement quality control standards for automated valuation models (AVMs). As discussed here, that proposed rule would require mortgage originators and secondary market insurers that use AVMs to adhere to quality control standards designed to: 1) ensure a high level of confidence in the estimates, 2) protect against the manipulation of data, 3) seek to avoid conflicts of interest, 4) require random sample testing and reviews, and 5) comply with applicable nondiscrimination laws.