We have all heard it said that for all things there is a season. There would probably be little disagreement among those in our industry that this rule is alive and well in our business, as there always seems to be hot topics at any given point and time. One of the current issues that seems to be lingering and perhaps even becoming more intensified is that of regulatory compliance (RC).

Not since the government got into the business of regulating banks after the depression has there been so much focus on monitoring the policies and actions of the financial industry as there is today. At least, it seems that way to me. Not that I was here during the depression, but I have read quite a bit about it and I can find little evidence that there was much attention directed to the looking over the shoulder of banks back then. Why has it become such a hot topic today? Could it be that we did not have many rules way back when and that the ones we did have were simpler and more to the point, making it much easier to comply and to make sure everyone else complied? Be that as it may, we are confronted with the issue of RC and it does not appear to be going away, at least until there is more done to ensure that everyone is following the rules.

While the issue of RC covers many banking activities, one of the more intensive segments of the RC environment is that which pertains to real estate appraisals. This is due in part to the ever-increasing amount of fraud occurring within our industry today.

In an attempt to convey to you some of the areas where fraud has occurred or may occur, I was able to locate a list of questions and answers provided by the top five regulatory agencies that monitor the mortgage process through our banks, credit unions and savings institutions. These regulatory agencies include the Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve, Federal Deposit Insurance Corporation, Office of Thrift Supervision and the National Credit Union Administration. Among these agencies, virtually all mortgage loans made are regulated in one way or another. Listed below are a few of the questions and answers which I thought might serve to address some of the most commonly violated rules which I experience as the operator of an appraisal management company. These questions represent excerpts from a Financial Institution Letter dated March 22, 2006 and may be viewed in their entirety on the Internet at www.fdic.gov/news/news/financial/2005/fil2005a.html.

1. Who should be considered the loan production staff for purposes of achieving appraiser independence? Could loan production staff select an appraiser?
   
   Answer: The loan production staff consists of those responsible for generating loan volume or approving loans, as well as their subordinates. This would include any employee whose compensation is based on loan volume. Employees responsible for the credit administration function or credit risk management are not considered loan production staff. Loan production staff should not select appraisers. However, in a small or rural institution or branch, the only individual qualified to analyze the real estate collateral may also be a loan officer, other officer, or director of the institution. To ensure their independence, such lending officials, officers, and directors should abstain from any vote or approval involving loans for which they engaged the appraiser, reviewed the appraisal, or performed an evaluation.
    

2. Can a regulated institution accept an appraisal from a prospective borrower and determine its acceptability based on a review?
   
   Answer: No, a regulated institution cannot accept a borrower-ordered appraisal.
    

3. Can a borrower pay the appraiser directly for an appraisal that is ordered by the lender?
   
   Answer: Since the regulated institution has engaged the appraiser for its services, the regulated institution should be the party to remit payment to the appraiser. The regulated institution may seek reimbursement from the borrower for the cost of the appraisal. However, the borrower may not recommend an appraiser to the institution or select the appraiser.
    

4. What qualifications would constitute a "qualified and adequately trained individual" for the purpose of conducting appraisal reviews?
   
   Answer: Individuals who review appraisals as part of a regulated institution's internal compliance function should be independent of the transaction and possess the requisite education, expertise, and competence to perform the review commensurate with the complexity of the transaction.
    

5. How can a regulated institution ensure appraiser independence when accepting an appraisal prepared for a financial services institution?
   
   Answer: Documentation (that is, an engagement letter) should be available to indicate that the financial services institution (not the borrower) ordered the appraisal and that the appraiser has no direct or indirect interest, financial or otherwise, in the property or the transaction. The original lender's engagement letter to the appraiser should be made part of the appraisal report to provide additional information on the identity of the client in order to ensure independence in the appraisal process.
    

6. May an appraisal be readdressed to a regulated institution from the borrower or another institution?
   
   Answer: A regulated institution cannot accept an appraisal that has been readdressed or altered by the appraiser with the intent to conceal that the original client was the borrower. Readdressing appraisals to conceal the original client, whether the client is a borrower or another financial services institution, is misleading and violates the agencies' regulations and USPAP.
    

7. What information should the regulated institution provide to the appraiser upon engagement?
   
   Answer: The regulated institution should provide the property's address, its description, and any other relevant information. The regulated institution may also provide a copy of the sales contract for purchase transactions. However, the information provided by the regulated institution should not unduly influence the appraiser or in any way suggest the property's value.