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Home Valuation Code of Conduct
By Ronette Schlatter, CRCM
Senior Compliance Coordinator, Iowa Bankers Association
In late December Freddie Mac and Fannie Mae released their much anticipated (and highly debated) revised Home Valuation Code of Conduct (the Code). The Code was the result of an agreement between Fannie Mae, Freddie Mac, its regulator, the Federal Housing Finance Agency (formerly the Office of Federal Housing Enterprise Oversight) and the New York Attorney General’s office to adopt policies to enhance the integrity of the home appraisal process and quality of appraisals for loans purchased by Freddie Mac and Fannie Mae. The Code was originally released in early 2008 and opened for comment. Following the comment period, the Code was modified. This final version is effective for single-family mortgage loans (except government-issued loans) that are originated on or after May 1, 2009 and delivered (sold) to Fannie Mae or Freddie Mac. The Code is not applicable to loans a lender retains within its own loan portfolio or appraisals done on properties other than single-family dwellings.
Regardless of the loan application date, beginning May 1, 2009, lenders/sellers who deliver loans to Fannie Mae or Freddie Mac must represent and warrant that appraisals conducted in connection with single-family mortgage loans (other than government-issued loans) conform to the Code.
The Code addresses eight general areas:
- Appraiser Independence Safeguards;
- Borrower’s Receipt of Appraisals;
- Appraisal Engagement;
- Prevention of Improper Influence on Appraisers;
- Independent Valuation Protection Institute;
- Appraisal Quality Control Testing;
- Referrals of Appraisal Misconduct Reports; and
- Representations and Warranties.
Appraiser Independence
The first section of the Code focuses on appraiser independence. It requires an appraiser to, at a minimum, be licensed or certified by the state in which the property to be appraised is located. It also contains prohibitions on attempts to influence the development, reporting, result or review of an appraisal.
The provisions of this part prohibit coercion, extortion, collusion, inducement, intimidation or any other action including bribery by an employee, director, officer, agent or anyone acting behalf the lender/seller to influence the outcome of an appraisal. This section of the Code outlines a number of actions that would be considered attempting to influence the appraisal process including, but not limited to:
- Withholding or threatening to withhold timely payment or partial payment for an appraisal report or future business;
- Expressly or implicitly promising future business, promotions or increased compensation for an appraiser;
- Conditioning the ordering of an appraisal report or the payment of an appraisal fee or salary or bonus on the opinion, conclusion or valuation to be reached, or on a preliminary value estimate requested from an appraiser;
- Requesting that an appraiser provide an estimated, predetermined or desired valuation in an appraisal report prior to the completion of the appraisal report, or requesting that an appraiser provide estimated values or comparable sales at any time prior to the appraiser’s completion of an appraisal report.
It is important to note, however, the Code does not prohibit a lender/seller from contacting the appraiser to request additional information, to request an explanation about the basis for valuation or to correct objective factual errors in an appraisal report.
Appraisal Engagement
The Code specifically prohibits lenders/sellers from accepting appraisal reports completed by an appraiser selected, retained or compensated in any manner by the borrower, mortgage brokers and real estate agents. The lender/seller or a third party specifically authorized by the lender/seller must be responsible for selecting, retaining and providing payment to the appraiser. Original lenders/sellers can transfer the borrower’s original appraisal to a new lender/seller as long as the requirements of Appraisal Engagement section of the Code are met.
Lenders/sellers may, but are not required to, use appraisal management companies to obtain appraisals. As long as a lender/seller complies with the requirements of Section III (Appraiser Engagement) a member of the lender/seller’s staff may order appraisals directly from the appraiser. However, the staff member ordering the appraisal cannot be a member of the “loan production staff.” The term “loan production staff” is not defined in the Code. However, the FAQs prepared by federal agencies on the agencies’ appraisal regulations define it as follows: “The loan production staff consists of those responsible for generating loan volume or approving loans, as well as their subordinates. This would include an employee whose compensation is based on loan volume or the closing of a loan transaction.
Employees responsible for the credit administration function or credit risk management are not considered loan production staff.” If a lender/seller’s staff member orders the appraisal, the lender/seller must be able to demonstrate that it has prudent safeguards to isolate its collateral evaluation process from influence from the loan production staff.
In-House Appraisers
The original Code contained a provision prohibiting an in-house appraiser from doing an appraisal on a loan sold to Fannie Mae or Freddie Mac. Under the revised Code, lenders/sellers are permitted to use in-house appraisers to obtain and prepare appraisal reports if the lender/seller is in compliance with Section IV.B. of the Code — the rules that address prevention of improper influence.
In addition, a lender/seller’s in-house appraiser may adjust the value on an appraisal during an appraisal review as part of a pre-funding or post-funding quality control process. The Code does not prohibit the underwriting of an appraisal by a lender/seller’s qualified underwriting staff or prohibit a lender/seller’s due diligence verifying collateral value in originating a loan.
Borrower’s Copy of the Appraisal
Section II of the Code requires the lender/seller to provide, free of charge, a “copy” of any appraisal report completed in association with a specific loan. The lender/seller may require the borrower to reimburse the lender/seller for the cost of the appraisal. The lender/seller can provide the copy promptly upon completion of the appraisal, but no less than three business days prior to closing. The lender/seller may use any means to provide the copy, including but not limited to via mail, e-mail (electronic message), overnight delivery, etc., as long as the borrower receives the copy no less than three business days prior to closing.
Quality Control Requirement
The Code also requires lenders/sellers to randomly select 10 percent (or other bona fide statistically significant percentage) of the appraisals or valuations that are used by the lender/seller (including the results of automated valuation models, broker’s price opinions, or “desktop” evaluations) for a quality control review. The lender/seller must provide to Fannie Mae or Freddie Mac a report of any adverse, negative or irregular findings indicating non-compliance with any provision of the Code. Fannie Mae has indicated its current quality control requirements, (as noted in the Selling Guide, Part I, Section 301.01, Quality Assurance System,) satisfies this requirement.Independent Valuation Protection InstituteThe Code requires the creation of an “Independent Valuation Protection Institute.” The Institute has not yet been created but its services are expected to include:
- A telephone hotline and e-mail address to receive any complaints of Code non-compliance, including complaints from appraisers, individuals or other entities concerning the improper influencing or attempted improper influencing of appraisers or the appraisal process; and
- The publication and promotion of best practices for independent valuation.
Non-Compliance with the Code
It is the lender/seller’s responsibility to ensure that all loans it originates with the intent to deliver to Fannie Mae or Freddie Mac are in full compliance with the Code. As stated earlier, effective May 1, 2009, Freddie Mac and Fannie Mae will no longer purchase mortgages from lenders/sellers that do not adopt and abide by the Code. Freddie Mac and Fannie Mae will treat breaches of the Code the same as any other breach of a lender/seller’s representations and warranties. This could include suspension or termination of the lender/seller’s eligibility to sell loans to Fannie Mae and Freddie Mac if the lender/seller fails to remediate violations.
The revised Code can be found in its entirety online at http://www.freddiemac.com/singlefamily/pdf/122308_valuationcodeofconduct.pdf.
Freddie Mac has posted a series of questions and answers on its web site related to the Code. They can be found at http://www.freddiemac.com/singlefamily/hvcc_faq.html. Fannie Mae has also posted additional guidance on its web site located at https://www.efanniemae.com/sf/guides/ssg/relatedsellinginfo/appcode/pdf/hvccfaqs.pd.
Editor's note: This article was originally published in the February 2009 issue of the Iowa Bankers Association's "Disclosure" magazine. Ronette Schlatter, CRCM, is senior compliance coordinator with the Iowa Bankers Association.
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