A prospective loan customer has agreed to purchase a group of properties, and we obtained an appraisal for the properties that is 15% below the purchase price. The seller will not lower the price, and the prospective loan customer would like us to obtain a different appraisal. Can we order a new appraisal through a different company, or would that violate a regulation? We have been advised that we will need to terminate our relationship with the current appraiser if we proceed with obtaining a second appraisal.

If the first appraisal passed your bank’s appraisal review process, we do not believe it would be appropriate to obtain a second appraisal simply because your customer requested it.

The federal banking agencies’ Interagency Appraisal and Evaluation Guidelines require financial institutions to establish policies for documenting the review of appraisal and evaluations. If you decide to obtain a second appraisal, you must provide “an audit trail” that “details the reasons for relying on a second opinion of market value.” After obtaining a second appraisal, you are “expected to adhere to a policy of selecting the most credible appraisal or evaluation, rather than the appraisal or evaluation that states the highest value.” Additionally, a lender may not allow the borrower to select an appraiser, as allowing the borrower to select an appraiser would threaten the independence of the appraisal.

As a result, we do not believe it would be appropriate to obtain a second appraisal on a customer’s request, unless your review of the first appraisal revealed certain deficiencies that could not be resolved by the current appraiser and necessitated obtaining a second opinion. And even if you did obtain a second appraisal, you would be prohibited from relying on that appraisal merely because it stated a higher value than the first appraisal.

As to terminating your relationship with the current appraiser, the Interagency Appraisal and Evaluation Guidelines identify “inappropriate actions that would compromise the independence of the collateral valuation function” as including an implication that your retention of an appraiser depends on the appraisal amount for this property and “excluding a person from consideration for future engagement because a property’s reported market value does not meet a specified threshold.” If the only reason for terminating your relationship with this appraiser is because their appraisal did not meet the property’s sales price, we believe that would be an inappropriate basis for terminating the relationship.

Of course, there may be valid reasons for reconsidering an appraisal, ordering a second appraisal, or terminating your relationship with a particular appraiser. For example, you may ask an appraiser to consider additional information about a property or correct factual errors in an appraisal. If the appraiser is unable to correct those deficiencies, you may order a second appraisal, and you are encouraged to monitor and evaluate the competence and ongoing performance of appraisers. However, none of these actions may be taken merely to obtain a borrower’s desired appraisal value.

For resources related to our guidance, please see:

FRB Appraisal Regulations, 12 CFR 225.65(b) (“(1) If an appraisal is prepared by a fee appraiser, the appraiser shall be engaged directly by the regulated institution or its agent, and have no direct or indirect interest, financial or otherwise, in the property or the transaction.”)

Interagency Appraisal and Evaluation Guidelines, XV. Reviewing Appraisals and Evaluations, D. Documentation of the Review, 75 Fed. Reg. 77449, 77463 (December 10, 2010) (“An institution should establish policies for documenting the review of appraisals and evaluations in the credit file. Such policies should address the level of documentation needed for the review, given the type, risk and complexity of the transaction. The documentation should describe the resolution of any appraisal or evaluation deficiencies, including reasons for obtaining and relying on a second appraisal or evaluation. The documentation also should provide an audit trail that documents the resolution of noted deficiencies or details the reasons for relying on a second opinion of market value.”)

Interagency Appraisal and Evaluation Guidelines, V. Independence of the Appraisal and Evaluation Program, 75 Fed. Reg. 77449, 77458 (December 10, 2010) (“After obtaining an appraisal or evaluation, or as part of its business practice, an institution may find it necessary to obtain another appraisal or evaluation of a property and would be expected to adhere to a policy of selecting the most credible appraisal or evaluation, rather than the appraisal or evaluation that states the highest value. (Refer to the Reviewing Appraisals and Evaluations section in these Guidelines for additional information on determining and documenting the credibility of an appraisal or evaluation. . . .”)

FAQs on the Appraisal Regulations and the Interagency Appraisal and Evaluation Guidelines, #16 (October 16, 2018) (“[A] financial institution may not accept a borrower-ordered appraisal and may not allow the borrower to select an appraiser from its approved appraiser list.”)

Interagency Appraisal and Evaluation Guidelines, V. Independence of the Appraisal and Evaluation Program, 75 Fed. Reg. 77449, 77457 (December 10, 2010) (“An institution’s policies and procedures should ensure that it avoids inappropriate actions that would compromise the independence of the collateral valuation function, including: . . .

Implying that current or future retention of a person’s services depends on the amount at which the appraiser or person performing an evaluation values a property.

Excluding a person from consideration for future engagement because a property’s reported market value does not meet a specified threshold.”)

Interagency Appraisal and Evaluation Guidelines, V. Independence of Appraisal and Evaluation Program, 75 Fed. Reg. 77449, 77457 (December 10, 2010) (“An institution may exchange information with appraisers and persons who perform evaluations, which may include providing a copy of the sales contract for a purchase transaction. However, an institution should not directly or indirectly coerce, influence, or otherwise encourage an appraiser or a person who performs an evaluation to misstate or misrepresent the value of the property. Consistent with its policies and procedures, an institution also may request the appraiser or person who performs an evaluation to:

Consider additional information about the subject property or about comparable properties.

Provide additional supporting information about the basis for a valuation.

Correct factual errors in an appraisal.”)

Interagency Appraisal and Evaluation Guidelines, XV. Reviewing Appraisals and Evaluations, D. Documentation of the Review, 75 Fed. Reg. 77449, 77462 (December 10, 2010) (“As part of the credit approval process and prior to a final credit decision, an institution should review appraisals and evaluations to ensure that they comply with the Agencies' appraisal regulations and are consistent with supervisory guidance and its own internal policies. This review also should ensure that an appraisal or evaluation contains sufficient information and analysis to support the decision to engage in the transaction. Through the review process, the institution should be able to assess the reasonableness of the appraisal or evaluation, including whether the valuation methods, assumptions, and data sources are appropriate and well-supported. An institution may use the review findings to monitor and evaluate the competency and ongoing performance of appraisers and persons who perform evaluations.”)