SUPPLEMENTARY INFORMATION:

I. Introduction

The Board, the CFPB, the FDIC, the NCUA, and the OCC are proposing interagency guidance (proposed guidance) on ROVs of residential real estate valuations.^[1] Collateral valuations, ( printed page 47073) including appraisals,^[2] are important to the integrity of the residential real estate lending process. Deficient collateral valuations can contain inaccuracies due to errors, omissions, or discrimination that affect the value conclusion and can result in either overvaluing or undervaluing real estate collateral. The Board, FDIC, NCUA, and the OCC have previously issued guidance that describes actions a financial institution may take to correct deficiencies identified in collateral valuations.^[3] These actions include ordering a second appraisal or evaluation or resolving the deficiency through the original appraiser or preparer of the evaluation.^[4]

The agencies, collectively, do not have existing guidance specific to ROV processes. For purposes of the proposed guidance, an ROV is a request from the financial institution to the appraiser or other preparer of the valuation report to re-assess the report based upon potential deficiencies or other information that may affect the value conclusion.^[5] The agencies have received questions and comments from financial institutions and other industry stakeholders on ROVs, highlighting the uncertainty in the industry on how ROVs intersect with appraisal independence requirements and compliance with Federal consumer protection laws, including those related to nondiscrimination.

II. Description of Proposed Joint ROV Guidance

The proposed guidance describes how financial institutions may create or enhance ROV processes that are consistent with safety and soundness standards, comply with applicable laws and regulations, preserve appraiser independence, and remain responsive to consumers. The proposed guidance (1) describes the risks of deficient collateral valuations, (2) outlines applicable statutes, regulations, and existing guidance that govern ROVs and collateral valuations, (3) explains how ROV processes and controls can be incorporated into existing risk management functions such as appraisal review and complaint management, and (4) provides examples of ROV policies, procedures, and controls that financial institutions may choose to adopt.

III. Request for Comment

The agencies seek comment, from all interested parties, on all aspects of the proposed guidance, and in particular request comment on the following:

(1) To what extent does the proposed guidance describe suitable considerations for a financial institution to take into account in assessing and potentially modifying its current policies and procedures for addressing ROVs?

(a) What, if any, additional examples of policies and procedures related to ROVs should be included in the guidance?

(b) Which, if any, of the policies and procedures described in the proposed guidance could present challenges?

(2) What model forms, or model policies and procedures, if any, related to ROVs would be helpful for the agencies to recommend?

(3) What other guidance may be helpful to financial institutions regarding the development of ROV processes?

(4) To what extent, if any, does the proposed ROV guidance conflict, duplicate, or complement the existing Interagency Appraisal and Evaluation Guidelines or a financial institution's policies and procedures to implement those Guidelines?

IV. Paperwork Reduction Act Analysis

In accordance with the Paperwork Reduction Act (PRA) of 1995,^[6] the OCC, Board, FDIC, and NCUA reviewed the proposed guidance. The agencies may not conduct or sponsor, and an organization is not required to respond to, an information collection unless the information collection displays a currently valid OMB control number. The agencies have determined that certain aspects of the proposed guidance constitute a collection of information and are revising their information collections related to real estate appraisals and evaluations. The OMB control number for each agency is: OCC, 1557-0190; Board, 7100-0250; FDIC, 3064-0103; and NCUA, 3133-0125. These information collections will be extended for three years, with revision. In addition to accounting for the PRA burden incurred as a result of this proposed guidance, the OCC, Board, FDIC, and NCUA are also updating and aligning their information collections with respect to the hourly burden associated with the Interagency Appraisal and Evaluation Guidelines.

Abstract: The proposed guidance encourages financial institutions to implement ROV policies, procedures, and control systems to allow consumers to provide the financial institution with relevant information that may not have been considered during an appraisal or evaluation. Such policies and procedures create a recordkeeping requirement.

Frequency of Response: Annual.

Affected Public: Businesses, other for-profit institutions, and other not-for-profit institutions.

Respondents

OCC: National banks, Federal savings associations.

Board: State member banks (SMBs), bank holding companies (BHCs) and nonbank subsidiaries of BHCs.

FDIC: Insured state nonmember banks and state savings associations, insured state branches of foreign banks.

NCUA: Private Sector: Not-for-profit institutions.

( printed page 47074)

Burden

OCC

Board

FDIC

NCUA

Comments are invited on:

(a) Whether the collections of information are necessary for the proper performance of the agencies' functions, including whether the information has practical utility;

(b) The accuracy of the estimate of the burden of the information collections, including the validity of the methodology and assumptions used;

(c) Ways to enhance the quality, utility, and clarity of the information to be collected;

(d) Ways to minimize the burden of the information collections on respondents, including through the use of automated collection techniques or other forms of information technology; and

(e) Estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information.

All comments will become a matter of public record. Comments on the collections of information should be sent to the address listed for each agency in the ADDRESSES section of this document. A copy of the comments may also be submitted to OMB: by mail, to U.S. Office of Management and Budget, 725 17th Street NW, #10235, Washington, DC 20503; by facsimile, to 202-395-6974; or by email, to oira_submission@omb.eop.gov, Attention: Federal Banking Agency Desk Officer.

V. Text of Proposed Interagency ROV Guidance

Background

Credible collateral valuations, including appraisals, are essential to the integrity of the residential real estate lending process. Deficiencies identified in valuations, either through an institution's valuation review processes or through consumer provided information may be a basis for financial institutions to question the credibility of the appraisal or valuation report. Collateral valuations may be deficient due to prohibited discrimination; ^[7] errors or omissions; or valuation methods, assumptions, data sources, or conclusions that are otherwise unreasonable, unsupported, unrealistic, or inappropriate. Deficient collateral valuations can keep individuals, families, and neighborhoods from building wealth through homeownership by potentially preventing homeowners from accessing accumulated equity, preventing prospective buyers from purchasing homes, making it harder for homeowners to sell or refinance their homes, and increasing the risk of default. Valuations that are not credible may pose risks to the financial condition and operations of a financial institution. Such risks may include loan losses, violations of law, fines, civil money penalties, payment of damages, and civil litigation.

Applicable Statutes, Regulations, and Guidance

The Equal Credit Opportunity Act (ECOA), and its implementing regulation, Regulation B, prohibit discrimination in any aspect of a credit transaction.^[8] The Fair Housing Act (FH Act) and its implementing regulation prohibit discrimination in all aspects of residential real estate-related transactions.^[9] ECOA and the FH Act prohibit discrimination on the basis of race and certain other characteristics in all aspects of residential real estate-related transactions, including in ( printed page 47076) residential real estate valuations. In addition, section 5 of the Federal Trade Commission Act prohibits unfair or deceptive acts or practices ^[10] and the Consumer Financial Protection Act prohibits any covered person or service provider of a covered person from engaging in any unfair, deceptive, or abusive act or practice.^[11]

The Truth in Lending Act (TILA) and its implementing regulation, Regulation Z, establish certain federal appraisal independence requirements.^[12] Specifically, TILA and Regulation Z prohibit compensation, coercion, extortion, bribery, or other efforts that may impede upon the appraiser's independent valuation in connection with any covered transaction.^[13] However, Regulation Z also explicitly clarifies that it is permissible for covered persons ^[14] to, among other things, request the preparer of the valuation to consider additional, appropriate property information, including information about comparable properties, or to correct errors in the valuation.^[15]

The Board's, FDIC's, NCUA's, and OCC's appraisal regulations ^[16] implementing Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ^[17] require all appraisals conducted in connection with federally related transactions to conform with the Uniform Standards of Professional Appraisal Practice (USPAP), which requires compliance with all applicable laws and regulations including nondiscrimination requirements.

The Board's, FDIC's, NCUA's, and OCC's appraisal regulations also require appraisals to be subject to appropriate review for compliance with USPAP.^[18] Financial institutions generally conduct an independent review prior to providing the consumer a copy of the appraisal or evaluation; however, additional review may be warranted if the consumer provides information that could affect the value conclusion or if deficiencies are identified in the original appraisal. An appraisal does not comply with USPAP if it relies on a prohibited basis set forth in either the ECOA or the FH Act or contains material errors including errors ^[19] of omission or commission. If a financial institution determines through the appraisal review process, or after consideration of information later provided by the consumer, that the appraisal does not meet the minimum standards outlined in the agencies' appraisal regulations and if the deficiencies remain uncorrected, the appraisal cannot be used as part of the credit decision.^[20]

The Board, FDIC, NCUA, and OCC have issued interagency guidance describing actions that financial institutions may take to resolve valuation deficiencies.^[21] These actions include resolving the deficiencies with the appraiser or preparer of the valuation report; requesting a review of the valuation by an independent, qualified, and competent state certified or licensed appraiser; or obtaining a second appraisal or evaluation. Deficiencies may be identified through the financial institution's valuation review or through consumer provided information. The regulatory framework permits financial institutions to implement ROV policies, procedures, and control systems that allow consumers to provide, and the financial institution to review, relevant information that may not have been considered during the appraisal or evaluation process.

Use of Third Parties

A financial institution's use of third parties in the valuation review process does not diminish its responsibility to comply with applicable laws and regulations.^[22] Moreover, whether valuation review activities and resolving deficiencies are performed internally or via a third party, financial institutions supervised by the Board, FDIC, NCUA, and the OCC are required to operate in a safe and sound manner and in compliance with applicable laws and regulations, including those designed to protect consumers.^[23] In addition, the CFPB expects financial institutions to oversee their business relationships with service providers in a manner that ensures compliance with Federal consumer protection laws, which are designed to protect the interests of consumers and avoid consumer harm.^[24] A financial institution's risk management practices include managing the risks arising from its third-party valuations and valuation review functions.

Reconsiderations of Value

An ROV request made by the financial institution 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. A financial institution may initiate a request for an ROV because of the financial institution's 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.^[25]

( printed page 47077)

A consumer inquiry or complaint regarding a valuation would generally occur after the financial institution has conducted its initial appraisal or evaluation review and resolved any issues identified. Given this timing, a consumer may provide specific and verifiable information that may not have been available or considered when the initial valuation and review were performed. Regardless of how the request for an ROV is initiated, a request could be resolved through a financial institution's independent valuation review or other processes 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, financial institutions can communicate relevant information to the original preparer of the valuation and, when appropriate, request an ROV.

Complaint Resolution Process

Financial institutions can capture consumer feedback regarding potential valuation deficiencies through existing complaint resolution processes. The complaint resolution process may capture complaints and inquiries about the financial institution'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 financial institution should initiate an ROV.

Examples of Policies, Procedures, and Control Systems

Financial institutions may consider developing risk-based ROV-related policies, procedures, control systems, and complaint processes that identify, address, and mitigate the risk of deficient valuations, including valuations that involve prohibited discrimination, and that:

• Consider ROVs as a possible resolution for consumer complaints related to residential property valuations.
• Consider whether any information or other process requirements related to a consumer's request for a financial institution to initiate an ROV create unreasonable barriers or discourage consumers from requesting an ROV.
• Establish a process that provides for the identification, management, analysis, escalation, and resolution of valuation related complaints 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 sufficiently early enough in the underwriting process for any errors or issues to be resolved before a final credit decision is made. This may include suggesting to consumers the type of information they may provide when communicating with the financial institution 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, customer experience or complaints).
• Establish risk-based ROV systems that route the request to the appropriate business unit (e.g., ROV requests that allege discrimination could be routed to the appropriate compliance, legal, and appraisal review staff that have the requisite skills and authority to research and resolve the request).
• Establish standardized processes to increase the consistency of consideration of requests for ROVs:

○ 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 financial institution may need to initiate the ROV process;

○ Establish timelines in the complaint or ROV process for when milestones need to be achieved;

○ Establish 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 results to consumers.

• Ensure relevant lending and valuation related staff, inclusive of third parties (e.g., appraisal management companies, fee-appraisers, mortgage brokers, and mortgage servicers) are trained to identify deficiencies (inclusive of prohibited discriminatory practices) through the valuation review process.

VI. CFPB Signing Authority

The Director of the Consumer Financial Protection Bureau, Rohit Chopra, having reviewed and approved this document, is delegating the authority to electronically sign this document to Laura Galban, CFPB Federal Register Liaison, for purposes of publication in the Federal Register .

88 FR 47071