Compliance Bulletin

Appraisers Code of Conduct Effective May 1, 2009
February 23, 2009

The Home Valuation Code of Conduct (“Code”), established as part of a settlement among Fannie Mae, Freddie Mac, and the New York Attorney General’s Office, becomes effective as to mortgage loans “originated” after May 1 this year (defined as the application date) and sold to Fannie Mae. As most mortgage loans are sold to these entities, the Code will have application nationwide. This is a summary of the Code. Links to the entire Code, together Fannie Mae’s Questions and Answers, are provided at the end of this Bulletin.

The Code applies to conventional, 1- to 4-unit single-family loans sold to Fannie Mae by originators, and will not apply to Fannie Mae’s investments in mortgage-related securities. The key provisions of the Code include the following:

Prohibited influence. Lenders are prohibited from influencing an appraisal through a number of specified ways [1]. Members of the lender’s loan production staff may not be involved in the process of securing appraisers and appraisals or in communicating with an appraiser or appraisal management company. The loan production staff consists of those responsible for generating loan volume or approving loans, as well as their subordinates, but does not include the credit administration or credit risk management functions.

Copy of appraisal. The borrower must be provided with a copy of the appraisal not less than three days prior to the closing of the loan.

Lender selection and compensation of appraiser. The lender or its authorized third party (such as an appraisal management company) is responsible for selecting and compensating the appraiser. Mortgage brokers, real estate agents, and other third parties are not permitted to select or be involved with compensating appraisers.

Qualification and training. Employees of the lender or the appraisal company responsible for selecting appraisers or reviewing appraisals must be “appropriately trained and qualified in the area of real estate appraisals.” [2] The lender’s employee must be independent of the loan production staff and process.

Use of in-house or affiliated appraiser. The lender may use an in-house appraiser or an appraiser employed by an affiliated entity, including by an affiliated appraisal company, only if the following conditions are met: the appraiser or the affiliate must report to a function of the lender that is independent of sales or loan production; the sales or loan production staff may not be involved in the appraisal functions; the appraiser is not furnished with an estimated value of the property or loan amount (except that a copy of the sales contract may be provided); the appraiser’s compensation does not depend on the outcome of an appraisal or closing of the loan; the lender and any appraisal company must adopt policies and procedures implementing the Code; and the lender’s appraisal functions are subject to annual audit or regulatory examination, with Fannie Mae or Freddie Mac being given the results of negative findings.

Appraisal of another service provider. A lender may not use an appraisal of an entity that is affiliated with another settlement service provider in the same transaction unless the entity has adopted policies and procedures implementing the Code.

Appraisal related activities. A lender may use in-house staff appraisers to order appraisals, review appraisals, develop and use internal automated valuation models, and prepare appraisals in connection with transactions other than mortgage originations such as loan workouts, as long as the lender complies with the Code.

Small bank exception. An exception from the in-house appraiser restrictions is available for banks with $250 million in assets or less and which Freddie Mae or Fannie Mae determines would suffer hardship due to adherence to this provision of the Code.

Referral of misconduct. A lender that believes an appraiser or appraisal company is acting illegally or unethically must refer the matter to the appraiser certifying agency (in this state the California Office of Real Estate Appraisers) or other relevant regulatory bodies.

Quality control testing. A lender is required to a portion of its appraisals for quality control and report any negative or irregular findings to Fannie Mae or Freddie Mac, including findings of non-compliance with the Code with respect to loans sold to them. The Enterprise’s [3] rights and remedies for violation include requiring the lender to repurchase mortgages or the Enterprise’s participation interest in mortgages.

Other clarifications. The Code is not intended to create new appraisal requirements, dictate any particular method of appraisals, affect appraisers’ scope of work, or require any lender or its agents to take any action prohibited by law or regulation.

Creation of institute. The Code calls for the creation of the Independent Valuation Protection Institute. The Institute will make a hotline and email address available to receive complaints from appraisers and others concerning improper influence and will report to Fannie Mae and Freddie Mac. It will also publish and promote best practices for independent valuation. A lender is prohibited from retaliating against anyone that makes a complaint to the Institute.

The Code is available from Fannie Mae has published a list of questions and answers about the Code, which is available at

  1. Prohibited influence include: (1) withholding or threatening to withhold payment for an appraisal; (2) withholding or threatening to withhold future business or demoting or terminating or threatening to demote or terminate an appraiser; (3) promising future business, promotions, or increased compensation; (4) conditioning the ordering of or payment for an appraisal or to an appraiser on a desired valuation or on a preliminary estimate; (5) requesting an estimate prior to the completion of the appraisal; (6) providing to an appraiser an estimated or desired value for a property or a proposed amount to be loaned, except that a copy of the sales contract for purchase transactions may be provided; (7) providing stock or other benefits; (8) allowing the removal of an appraiser from an approved list or addition to an exclusionary list without giving prompt written notice to the appraiser, which must include written evidence of the appraiser’s illegal conduct, a violation of the Uniform Standards of Professional Appraisal Practice (USPAP) or state licensing standards, substandard performance, improper or unprofessional behavior or other substantive reason for removal (except that this prohibition does not preclude the management of appraiser lists for bona fide administrative reasons based on written, management-approved policies).
  2. Neither the Code nor Fannie Mae’s Questions and Answers clarifies whether these personnel must themselves be licensed appraisers.
  3. This term is not defined in the Code, but the context suggests it refers to Fannie Mae and Freddie Mac perhaps collectively.

The information contained in this CBA Regulatory Compliance Bulletin is not intended to constitute, and should not be received as, legal advice. Please consult with your counsel for more detailed information applicable to your institution.

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