Reviewer’s Dilemma: Scope Creep in a Retrospective Review
You are a senior reviewer at a regional bank. A junior review appraiser has completed a review of an appraisal for a 12-unit apartment building. The original appraiser used only the income approach, citing a lack of recent sales of apartment buildings in the market. The junior reviewer’s report concludes that the original appraisal is 'acceptable' but notes that the sales comparison approach was not developed. The junior reviewer did not verify any of the original appraiser’s data, did not inspect the property, and did not comment on the original appraiser’s extraordinary assumption that the property is in average condition despite visible deferred maintenance in the photos. The bank’s policy requires reviews to be completed on a 'desktop' basis unless the property is complex. The loan amount is $1.2 million, and the original appraisal value is $1.5 million. The junior reviewer’s report is due to the loan committee tomorrow.
1. What are the key deficiencies in the junior reviewer’s review, and what standards apply?
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The junior reviewer’s work has several deficiencies:
Failure to verify data: USPAP Standards Rule 3-1 requires reviewers to develop an opinion of the quality of the work under review. While verification is not always mandatory, the reviewer must have a reasonable basis for the opinion. Here, the reviewer accepted the original appraiser’s data without any verification, which may be insufficient given the loan amount and the property type.
Failure to address the omitted sales comparison approach: The original appraiser claimed a lack of sales, but the reviewer should have checked whether that claim was reasonable. If sales exist but were not used, the reviewer must comment on the adequacy of the income approach alone. The reviewer’s report simply notes the omission without analysis.
Failure to comment on the extraordinary assumption: The original appraiser assumed average condition despite visible deferred maintenance. The reviewer should have assessed whether that assumption was reasonable and whether it affected value. The reviewer’s silence is a deficiency.
No inspection: The bank’s policy allows desktop reviews for non-complex properties, but the reviewer must still determine if a desktop review is sufficient. Given the deferred maintenance and the loan-to-value ratio, an exterior inspection might be warranted. The reviewer should document why a desktop review is adequate.
Insufficient analysis: The reviewer’s conclusion of 'acceptable' is not supported by any analysis of the original appraiser’s methodology, data, or assumptions. The review report must provide a rationale.
Standards: USPAP Standards Rule 3-1 (reviewer’s opinion of quality) and 3-2 (reviewer’s opinion of value, if applicable). Also, the bank’s policy and the Interagency Appraisal and Evaluation Guidelines require reviews to be sufficiently rigorous. The reviewer must also comply with the Competency Rule (USPAP) if they lack expertise in apartment properties.
2. How should you, as the senior reviewer, handle the situation given the loan committee deadline?
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As the senior reviewer, you must balance the deadline with the need for a credible review. Options:
Request additional work from the junior reviewer: Ask them to verify at least a few key data points (e.g., comparable rents, vacancy rates) and to comment on the extraordinary assumption and the omitted sales approach. This may be possible within the deadline if the junior reviewer can quickly check online databases or call market participants.
Perform the additional work yourself: If time is short, you could verify data and add the necessary analysis, but you must document your contributions and ensure the review report reflects the combined work.
Communicate with the loan committee: If the review cannot be completed to standards by the deadline, you should inform the committee of the limitations and recommend a conditional approval or an extension. The loan committee should not rely on an inadequate review.
Consider the risk: The loan is $1.2M on a $1.5M value (80% LTV). If the value is overstated due to deferred maintenance or unsupported income assumptions, the bank’s risk is significant. The review must be sufficiently rigorous to support the decision.
Ultimately, you should not sign off on a deficient review. You must ensure the review complies with USPAP and bank policy, even if it means delaying the loan committee’s decision. Document your actions and rationale.