You may already have a good idea of the difference between banking and nonbanking loans. However, this article contains some great information that can help you act ethically when dealing with nonbanking loans.
Banking Versus Nonbanking Loans
From the actual appraisal perspective, there isn’t a real difference. Whether a bank or non-bank lender places the order, it’s the same procedure. As a licensed appraiser, you have to complete the assignment according to the USPAP rules. The pay is the same too. The difference is how bank lenders and nonbank lenders choose real estate appraisers. Banks are subject to minute oversight, whereas, nonbank lenders are not — and nonbank lenders are taking advantage of that.
Regulations That Apply to Banks and Nonbanks
The nonbank lenders are independent mortgage bankers and brokers who need to meet federal and state requirements. However, many banking regulations only apply to banks, not nonbank lenders. All major banks have several analysts to ensure these rules are being followed in accordance with the FDIC (Federal Deposit Insurance Corporation), OCC (Office of the Comptroller of the Currency) and FRB (Federal Reserve Board). Examiners routinely ask how the banks are following appraisal guidelines. You hardly ever see this at mortgage companies, which are overseen by the Consumer Financial Protection Bureau (CFPB). The CFPB doesn’t have the same depth or understanding of the valuation process as the banks do.
How Appraisers Treat Each Type of Loan
Real estate appraisers aren’t supposed to treat the two types of loans differently. In reality, there’s an opportunity to do so. One of the reasons the banks have so many regulations is to eliminate independent methods and to preserve the continuity of the appraisal process. With a nonbank loan, a real estate appraiser may be pressured into submitting a higher valuation if they think their next order depends on it. The relationship is unethical and should be avoided.
Here’s an example: An appraisal for a nonbank loan might not include that a property is located right next to a gas station, which would negatively impact its value. Another way to set the valuation dubiously high is to use comparables that are in far better condition without lowering the appraisal value of the subject property. Basically, appraisals provided for non-bank lenders create much more opportunity for influence and bias. That’s not good for the buyer or the industry, and it also taints the reputation of appraisers in general — including those who avoid situations that may influence their findings.
Are Any Changes Pending in the Regulations?
Currently, there aren’t any pending federal regulations that would reduce the potential flexibility of nonbanking appraisals. Most non-bank lenders hire an Appraisal Mortgage Company and assume the contracted appraisals are being done correctly. This doesn’t always make sense. It’s important to use a trusted third-party for valuation quality control. However, it’s currently an uneven playing field regarding appraisal compliance. Even though the rules are in place, there’s no enforcement on the nonbanking side.
That means it’s up to the individual real estate appraiser to follow the rules and respect the duties that come with having a license.