CAR Appraisal Reviewer Risk Assessment 2 — Questions and Answers
Question 1: When reviewing an appraisal for loan collateral risk, which factor most directly signals elevated collateral risk?
- A recent comparable sale used is located 10 miles from the subject
- The appraiser's value conclusion exceeds the contract price by 5%
- The loan-to-value ratio based on appraised value is 97% (Correct answer)
- The effective age of the property is less than its actual age
Correct answer: The loan-to-value ratio based on appraised value is 97%
A very high LTV ratio means the lender has minimal equity cushion, making collateral risk significant if the borrower defaults.
Question 2: An appraisal reviewer identifies that an appraiser used only distressed sales as comparables for a non-distressed property. This most likely indicates:
- A geographic competency issue
- A market conditions adjustment error
- An unsupported value conclusion that understates market value (Correct answer)
- A violation of USPAP's confidentiality rule
Correct answer: An unsupported value conclusion that understates market value
Using only distressed sales for a non-distressed subject likely produces an artificially low value and is not a credible appraisal approach.
Question 3: Which of the following best describes 'scope creep' risk in an appraisal review assignment?
- The reviewer expanding the review beyond the originally defined scope without client authorization (Correct answer)
- An appraiser including too many comparable sales in the report
- The subject property increasing in value during the review period
- A client requesting a second opinion after the review is complete
Correct answer: The reviewer expanding the review beyond the originally defined scope without client authorization
Scope creep occurs when the reviewer performs work beyond the agreed engagement terms, creating liability and ethical concerns.
Question 4: Under USPAP's Standards Rule 3-2, a reviewer must identify the work under review. What is the primary risk if this step is inadequately performed?
- The review may not meet appraisal institute reporting standards
- The reviewer may inadvertently render an opinion on a different appraisal than intended (Correct answer)
- The client may reject the review fee
- The comparable database may be incomplete
Correct answer: The reviewer may inadvertently render an opinion on a different appraisal than intended
Failing to properly identify the appraisal being reviewed can cause the reviewer to critique or rely on the wrong report, undermining the review's validity.
Question 5: A desk review reveals that the appraiser made no market conditions adjustment despite a rapidly appreciating market. The primary risk this poses to the lender is:
- Regulatory non-compliance with FIRREA
- An understated value that leads to loan denial
- An overstated value relative to current market conditions (Correct answer)
- Failure to meet USPAP competency requirements
Correct answer: An overstated value relative to current market conditions
Omitting a positive market conditions adjustment in a rising market can inflate the time-adjusted value, overstating collateral and increasing lender risk.
Question 6: Which risk category is most directly addressed when a reviewer evaluates whether the appraiser's effective date of value is appropriate for the intended use?
- Operational risk
- Temporal risk (Correct answer)
- Fraud risk
- Concentration risk
Correct answer: Temporal risk
Temporal risk arises when the value date does not align with the transaction date, making the appraisal unreliable for its intended purpose.
Question 7: When assessing an appraisal for appraisal bias risk, a reviewer should be most alert to:
- Comparable sales drawn from a radius wider than one mile
- Systematic adjustment patterns that disadvantage properties in certain neighborhoods (Correct answer)
- The use of an income approach on a single-family residence
- An appraiser's use of a cost approach for a newer property
Correct answer: Systematic adjustment patterns that disadvantage properties in certain neighborhoods
Appraisal bias risk is evidenced by adjustment patterns that consistently produce lower values in protected-class or minority neighborhoods without market support.
CAR Appraisal Reviewer Risk Assessment 2
When reviewing an appraisal for loan collateral risk, which factor most directly signals elevated collateral risk?