We have a loan processor who gets paid a flat fee amount for each loan application she processes, compiles, and submits to underwriting. She receives this fee regardless of whether the loan ultimately is approved or denied and has no role in deciding whether to approve or deny the loan. Can she order appraisals online through an appraisal management company (AMC)? The employee would have no input in selecting the appraiser and no direct contact with the appraiser. Our bank has less than $250 million in assets.

Yes, we believe this loan processor may order appraisals through an appraisal management company.

The federal Interagency Appraisal and Evaluation Guidelines generally require that an institution’s collateral valuation program be isolated from the influence of its loan production staff (including employees who are compensated based on volume alone, such as your loan processor). However, the Guidelines note that in small or rural institutions, total isolation between valuation and loan production may not be possible. In such cases, the institution “should be able to demonstrate clearly that it has prudent safeguards to isolate its collateral valuation program from influence or interference from the loan production process.” One way to demonstrate independence is to ensure that the loan production employee who participates the collateral valuation (e.g., by ordering an appraisal) abstains from any vote or approval for such loans. In this case, your loan processor never participates in the loan approval decision making. Consequently, we believe that she can order appraisals without violating the Guidelines’ “isolation” requirements.

In addition to the Guidelines, Regulation Z imposes a separate conflict of interest rule that applies to consumer credit transactions secured by the consumer’s principal dwelling. In essence, Regulation Z prohibits employees who perform valuation management functions (including ordering appraisals) from having an interest in the transaction. For institutions with less than $250 million in assets, however, a loan production employee who orders an appraisal is not “interested” in the transaction if the employee’s compensation is not based on the value arrived at in the appraisal and the employee abstains from any role in the lending decision. Based on the facts you have provided, both requirements are met in this case. As a result, we do not believe allowing this loan processor to order appraisals would violate Regulation Z’s conflict of interest rule.

Also, we reached out to an attorney with the FDIC, and he concurred with our conclusion that a loan processor may order appraisals through an AMC provided that the safeguards and requirements discussed above are met.

For resources related to our guidance, please see:

Interagency Appraisal and Evaluation Guidelines, 75 Fed. Reg. 77449, 77457 (December 10, 2010) (“The collateral valuation program is an integral component of the credit underwriting process and, therefore, should be isolated from influence by the institution’s loan production staff.”)
Interagency Appraisal and Evaluation Guidelines, 75 Fed. Reg. 77449, 77457 (“For a small or rural institution or branch, it may not always be possible or practical to separate the collateral valuation program from the loan production process. If absolute lines of independence cannot be achieved, an institution should be able to demonstrate clearly that it has prudent safeguards to isolate its collateral valuation program from influence or interference from the loan production process. In such cases, another loan officer, other officer, or director of the institution may be the only person . To ensure their independence, such lending officials, officers, or directors must abstain from any vote or approval involving loans on which they ordered, performed, or reviewed the appraisal or evaluation.”)
Regulation Z, 12 CFR 1026.42(d)(1)(i) (“No person preparing a valuation or performing valuation management functions for a covered transaction may have a direct or indirect interest, financial or otherwise, in the property or transaction for which the valuation is or will be performed.”)
Regulation Z, 12 CFR 1026.42(b)(4) (Defines “valuation management function” to include selecting or contracting with a person to prepare a valuation.)
Regulation Z, 12 CFR 1026.42(d)(3) (“For any covered transaction in which the creditor had assets of $250 million or less as of December 31st for either of the past two calendar years, a person subject to paragraph (d)(1)(i) of this section who is employed by . . . the creditor does not have a conflict of interest . . . if . . .
- The compensation of the person preparing a valuation or performing valuation management functions is not based on the value arrived at in any valuation; and
- The creditor requires that any employee, officer or director of the creditor who orders, performs, or reviews a valuation for a covered transaction abstain from participating in any decision to approve, not approve, or set the terms of that transaction.”)