Banking and Finance Law Daily Wrap Up, MORTGAGES—Agencies finalize 'reconsideration of value' guidance for residential real estate transactions, (Jul 19, 2024)

By Joe Cox, J.D.

The guidance will allow lenders and borrowers to request and provide additional information to supplement appraisals in assessing real estate values.

Five federal agencies announced final guidance for reconsideration of value (ROV) procedures for residential real estate transactions. The procedures will allow for additional information which may not have been considered during appraisal or to address deficiencies within an original appraisal. The joint announcement from the Office of the Comptroller of the Currency, Federal Reserve Board, Consumer Financial Protection Bureau, Federal Deposit Insurance Corporation, and National Credit Union Administration comes nearly a year after proposed guidance was released for comment. The adopted final guidance highlights the risks of deficient residential real estate valuations, outlines applicable statutes, regulations, and existing guidance that govern ROVs, explains how ROVs can be incorporated into existing risk management functions, and provides examples of policies and procedures banks may choose to adopt.

History of the Guidance. In June 2023, the agencies issues proposed guidance on these issues. In explaining the reason for action, an FDIC letter noted, “Valuations are important to the integrity of the residential real estate lending process. Deficient valuations, including those that contain evidence of discrimination, can keep individuals, families, and neighborhoods from building wealth through homeownership, and may pose risks to an institution’s financial condition and operations.” The guidance is related to other measures by the Biden Administration to address racial bias in home lending (See Banking and Finance Law Daily, June 9, 2023).

The proposed guidance was published for public comment on July 21, 2023. While the public comments did result in the addition of some clarifying edits, the agencies largely finalized the guidance as it was initially proposed. In the final guidance, a mixture of reaction within the proposed comments was noted, with reactions ranging from emphasizing that the suggestions of the guidance should become mandatory to opposition of the guidance as unduly burdensome to lenders.

Features. The guidance ultimately recommends that financial institutions should develop ROV policies that identify, address, and mitigate deficient values. More specifically, the guidance recommends policies that:

• Consider ROVs as a possible resolution for consumer complaints or inquiries 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 the institution initiate 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.

• 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.

• Identify stakeholders and clearly outline each business unit’s roles and responsibilities for processing an ROV request.

• Establish risk-based ROV systems that route the request to the appropriate business unit.

• Establish standardized processes to increase the consistency of consideration of requests for ROVs.

• 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 (including practices that may result in discrimination) through the valuation review process.

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