FDIC Federal Register Citations

RE: Request for Comment on Study of Banking Regulations
Regarding the Online Delivery of Banking Services

Specifically: APPRAISALS

Dear Sirs,

I appreciate the opportunity to present comments based on your request concerning the online delivery of banking services and the impact of current banking regulations. I would like to specifically address the issue of Appraisals.

The application of technology to the appraisal process is much more complicated than just the delivery of appraisals electronically and the controls regarding authenticity. The appraisal process has seen a glut of regulation for more than a decade. Technology and its benefits allow us to reassess current appraisal practices, regulations, guidelines, procedures and policies. Lets review them:

Appraisal Subcommittee and State Regulators

The appraisal subcommittee is charged with ensuring that state regulators provide for the regulation of guidelines produced by the AQB and the ASB. Unfortunately they have little control over the states and the result is chaotic interpretations of what was suppose to be uniform standards. Each state regulatory agency has its own opinion and interpretation of the Uniform Standards of Appraisal Practice (USPAP). These differences extend to the point of not even being able to agree on the definition of an appraisal. Enforcement from state to state has no consistency and there have been cases were states have refused to allow appraisers in their state to perform certain types of appraisal services because of their belief that it violated USPAP and thus disrupting mortgage banking in that state. Many states admit that when they investigate a complaint based on an appraisal submitted to them, they are looking for the appraisals compliance with USPAP and not whether or not the value indication was correct. These two should be one in the same, however, the distance between USPAP compliance and a sound value conclusion has increased over the past decade.

USPAP

The Uniform Standards of Appraisal Practice was intended to create appraisal standards and practices that would eliminate the need for separate guidelines from federal agencies, the secondary market, wall street and individual institutions.

Unfortunately, with each state's own interpretation and the complication of the document itself, appraisers have difficultly meeting the requirements of the document. There is currently an effort to provide extensive training for instructors of USPAP because of all the varying interpretations. Each year there are additions and updates but appraisers do not automatically receive a copy.

Appraisal Practices Today

The cost of an appraisal can easily approach $600-900 in total cost to the institution and subsequently the borrower. An appraisal of a basic single family resident can approach 20 pages in length in order to meet all the guidelines, policies and standards required by all the parties involved. These parties can include of course USPAP, secondary market requirements, institutional guidelines, and investor policies. A review appraisal might then be conducted. Then an underwriting review and finally a review by the QC department could be conducted. This entire process still does not ensure a sound valuation. The fact is that many institutions have guidelines and policies that have not been overhauled or reviewed for years. Appraisers spend too much time on guidelines and policies being fulfilled in their appraisals and not enough time making sure the value is sound and not misleading.

Recent meetings and conferences have been held concerning the pressure put on appraisers to hit numbers. I personally was told recently that if I could not hit the number on a refinance to let them know right away because they would find someone else. It is widely known and accepted that refinance appraisals are on average 10% high. No one wants a good appraisal, just one good enough to get by.

Despite all the regulations and USPAP, appraisals have not improved in the past ten years.

Technology

Simply converting all the appraisal documents to an electronic paperless file is not the answer. Technology allows us to completely overhaul and reassess the appraisal process. Three comparable sales as proof for a value conclusion was a good process when created based on the available technology and footwork needed to generate an appraisal. Today computer programs can analyze hundreds of sales to predict a value in a matter of seconds. Granted, it does not work everywhere, but that is were the appraisers expertise is lifted to a new level.

Automated Valuation Models (AVMs) are starting to get wide spread attention. These models provide the opportunity to create a more efficient, practical, faster process to provide mortgages to the consumer like never before. However, these models raise questions that also expose weaknesses in current practices. These include:

· AVMs can be tested and measured for accuracy in each county that sufficient data is available. However, since no one knows how accurate appraisals have been, they have no idea how accurate an AVM needs to be.

· AVMs do not hit the number. This requires alterations to guidelines, policies and standards that currently insist on an absolute number that is supported by an appraisal.

· The ability to measure the accuracy of AVMs allows for the development of policies before any risk is taken.

AVMs today can be used for a wide variety of applications such as appraisal review, prescreening, quality control, home equity lending and portfolio analysis. Their use in the area of first mortgages has not been seen except within the automated underwriting systems of the secondary market. To date they will not accept AVMs outside of their own. This is puzzling considering they will accept any appraisal from a licensed appraiser acceptable to the lending institution.

Summary

The application of technology to the mortgage banking industry is a difficult task because the same standards, policies and guidelines that have in the past made it efficient are now in many cases anchors being dragged behind the ship.

I have been involved in the development, application and implementation of AVMs into the collateral assessment process for the past ten years. The opportunity is exciting, the FDIC and other federal agencies have the ability to be a catalyst for the use of technology within the banking industry. Providing regulation that will protect the safety and soundness of banking and allow for the rapid evolution of technology is difficult and complex.

Please contact me if you have any questions.

Sincerely,


Lewis J. Allen