U.S. Bank Gives Risk Officer the Reins in Home Appraisal Revamp

U.S. Bancorp has moved all its home appraisals to an in-house unit overseen by a senior risk officer, breaking from the way most banks handle valuations of residential properties.

The Minneapolis bank made the move to streamline its operations and improve compliance with the Dodd-Frank Act, according to executives.

"This is part of an effort to establish a higher standard of compliance," says Todd Loudenslager, a senior vice president and senior risk officer for U.S. Bank’s consumer banking division, who is overseeing the new unit.

Real estate appraisals determine the value of a property at a specific point in time, typically by looking at sales of comparable properties in the surrounding market. As banks have found themselves with more soured mortgages, their need for frequent property valuations has skyrocketed.

A few years ago, U.S. Bank had seven separate processes for assessing the value of the homes of its mortgage borrowers. But those separate appraisal processes, one for each business line, became redundant, according to Loudenslager.

In 2010, the company created its separate in-house appraisal unit, USB Lending Support Services LLC. The unit handled a small volume of appraisals last year, but now it is responsible for all appraisals of residential properties.

Loudenslager is chief executive of the unit and ultimately reports to Richard C. Hartnack, the bank's vice chairman of consumer banking.

U.S. Bank's focus on appraisal compliance has been accelerated by the 2010 Dodd-Frank Act, which emphasizes appraisal independence and mandates that banks pay appraisers "customary and reasonable" fees. Banks now have compliance responsibilities for all aspects of the appraisal process, including those outsourced to third-party appraisal management companies.

Loudenslager says his bank's appraisal overhaul is part of an overall effort to improve "our ability to analyze, understand and measure the risk associated with appraisals."

"We look at the credit worthiness of the customer and the value of the collateral, which is an important part, and that's why we're giving it the attention," he says.

U.S. Bank's new policy marks a dramatic change from how banks handled appraisals before the financial crisis.

Cliff Rossi, a former chief risk officer at Citigroup Inc. and an executive-in-residence at the University of Maryland's Center for Financial Policy, says banks got into trouble during the bubble years because the chief appraiser would typically report to the head of mortgage loan production. That model created potential conflicts, because loan officers and brokers often would tell the appraisers to match the property's valuation with the amount they wanted to fund on mortgage loans.

That standard changed with the 2009 Home Valuation Code of Conduct, a regulatory agreement that prevented banks' staff and mortgage brokers from directly overseeing the appraisal process. That code resulted from a deal struck between then-New York Attorney General Andrew Cuomo and the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac. It has since been codified under Dodd-Frank.

But that deal also upended the traditional fee structure of the appraisal industry, as banks increasingly outsourced oversight to appraisal management companies, or AMCs. Those third parties generally took a cut of the appraisal fees, meaning that the people actually doing appraisals got paid less. Some have said this trend led to lower-quality appraisals.

"It's a prudent business practice to put that unit under a risk officer," says Rossi. "It says a lot about the whole issue of appraisal independence."

Loudenslager, who calls himself a "professional worrier," says U.S. Bank will still do some business through appraisal management companies, but adds that Dodd-Frank requires lenders to have a better grasp of how such third parties are paid.

"That's a sensitive point for AMCs," he says. "It requires greater transparency from AMCs in compensating the appraisers they are contracting with. So any AMC we work with, we expect much greater transparency in terms of what they're paying, and this gives us the ability to audit that as well. I don't want to get into dictating prices."

He adds that the Dodd-Frank law "requires lenders to know what is going on in pricing, and we take these changes very seriously."

U.S. Bank executives went on a road show of sorts in December to explain its new business model and to meet directly with appraisers. The bank launched a pilot program with Alterra Group LLC, a Salisbury, Md., appraisal education company, and held appraisal events this winter in Seattle and Cincinnati. The group will attend events in six cities this year, including Kansas City, Mo., Denver and San Diego.

Joan Trice, the founder of Alterra, which arranges the events, says there is plenty of data to suggest that banks get higher-quality valuations when they closely monitor and train appraisers. While mortgage loan officers are prohibited from talking to appraisers, "the quality control department of a bank not only should, but must, have a direct relationship with appraisers," Trice said.

Other banks, including Capital One Financial Corp. and UnionBanCal Corp. of San Francisco, are considering holding similar events, she says. Representatives for Capital One and Union Bank did not immediately respond to requests for comment.

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