OCC Identifies Increased Risk in Appraisals, Home-Equity Loans

PHOENIX — The Office of the Comptroller of the Currency is urging banks to strengthen their oversight of the home appraisal process and warning them to keep an eye out for a sudden spike in delinquencies on home-equity loans.

Darrin Benhart, the OCC's deputy comptroller for credit and market risk, told 650 risk managers at a conference here Wednesday that reviews of banks of all sizes has found weak governance of all aspects of the appraisal process. The weaknesses range from little to no oversight of appraisal management companies to hiring poorly qualified appraisers to a lack of processes to evaluate the underlying collateral of a property.

"In some cases bankers didn't understand how appraisers were selected or engaged on behalf of a bank," Benhart said. "This is a critical function where effective oversight was missing especially when the function was outsourced."

Many banks lack an audit, quality control or internal control function to even be able to evaluate the performance of their appraisal programs, he said.

Some appraisal products claim to comply with OCC guidelines but actually lack even the basics, giving no opinion of market value, having unsigned and undated reports, and even making generic assumptions about the actual physical condition of a property, issues the agency addressed in guidelines two years ago, he said.

Benhart described one example of seeing a loan file with an automated valuation model stapled to a third-party appraisal report but that contained no evaluation or analysis. An AVM can be obtained in seconds to get an estimate from public record data of the value of property but typically requires validation of the actual model itself.

"We found deficiencies in the review process for both appraisals and evaluations," that required more attention from banks, he said. Risk managers need to focus on "the basic blocking and tackling items," Benhart said, adding that they may have taken their focus off appraisals because they are dealing with many new regulatory requirements.

Banks need to ensure that the "risk management function is multi-dimensional and looks at all risk across the entire bank," he said.

Junior liens also are becoming a sore spot. Though delinquency rates for home-equity lines of credit have remained relatively stable, Benhart believes they may rise sharply in the next few months because a large number of HELOCs are reaching the end of their draw period. At that time, borrowers may no longer have access to the credit lines and their monthly payments will rise sharply because of amortization.

"Banks offering HELOC products should establish processes to quantify and address the risk of increased delinquencies and losses," he said "Taking action now will provide greater flexibility for borrowers and will allow banks to manage this portion of their risks more effectively."

The risk associated with HELOCs has been on the OCC's radar since early last year. Benhart said banks are in varying stages of "preparing to respond to this risk," but he didn't elaborate, adding only that more works needs to be done.