Sen. Elizabeth Dole, a North Carolina Republican, plans to offer an amendment to legislation aimed at strengthening regulation of government-sponsored mortgage investors Fannie Mae and Freddie Mac. The amendment, favored by some banks, would direct the companies' regulator to write new rules on appraisal standards for home loans purchased or guaranteed by Fannie and Freddie. Download Dole_draft.pdf
That regulation would supersede an appraisal code of conduct negotiated by Mr. Cuomo, Fannie and Freddie earlier this year. The companies accepted Mr. Cuomo's terms to avoid the threat of a lawsuit over their alleged failure to ensure that appraisers are protected from pressure to inflate appraisals. Because Fannie and Freddie buy or guarantee the bulk of all U.S. mortgages, the code would become in essence a national standard.
The code would bar brokers or bank employees involved in making loans from choosing appraisers, and lenders couldn't make loans on the basis of appraisals from their employees or companies they control.
Sen. Charles Schumer, a New York Democrat, vowed to resist the amendment, calling it a "step backwards."
Talking Points on the Appraisal Amendment
On March 3, 2008, Fannie Mae and Freddie Mac signed agreements with the Attorney General of New York to adopt a Home Valuation Protection Code, which was crafted by the Attorney General’s Office and approved by OFHEO, in consultation with the Enterprises and other market entities. The Code establishes requirements governing appraisal selection, solicitation, compensation, conflicts of interest and corporate independence, among other things.
The Code's concept of appraiser independence and accuracy should be endorsed. These concepts are important to a safe and sound process that is properly structured, regardless of whether lenders use third-party, affiliated, or in-house staff appraisers.
However, the Code leans heavily towards inconsistent and potentially counterproductive regulation of the lending industry. Lenders would essentially be required to be regulated by the New York Attorney General or suffer serious impairment of liquidity. In addition, the role of the New York Attorney General in promulgating the Code is misplaced and an attempted exercise of one state’s regulatory authority over federally and other state regulated lenders.
Bank mortgage lending practices are subject to multiple layers of regulatory oversight and quality control. They receive guidance from regulators and have regular on-site monitoring and examinations. Corporate audit, compliance and credit risk personnel also monitor appraisal processes for safety and soundness. The resulting processes have firewalls to ensure independence of the appraisal process as well as a comprehensive and consistent quality control examination of every appraisal report.
This amendment would require the Director of OFHEO to issue a regulation establishing appraisal standards for mortgages purchased or guaranteed by Fannie Mae and Freddie Mac. It would ensure that mortgages purchased or secured by Fannie Mae and Freddie Mac are collateralized by properties subject to fair and accurate appraisals, which is necessary to maintain the integrity of the mortgage process, improve the safety and soundness of the enterprises, and reduce the potential for mortgage fraud.
This amendment will also ensure the establishment of a common set of appraisal standards governing mortgage lenders that are federally supervised and regulated. This includes requiring the process controls necessary to ensure independence, avoid improper influences, and avoid overvaluation.
Although OFHEO was involved in making substantive changes to the Code, including requiring an informal comment process, the Code is not consistent with the appraisal regulations and guidelines issued by the federal banking agencies (the Office of Thrift Supervision, the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Federal Reserve Board, and the National Credit Union Administration). Further, the agreement violates the Administrative Procedures Act, which requires an agency to publish a notice of proposed rulemaking, solicit and consider public comments, and publish a final regulation that explains the basis and purpose of the regulation, and the agency’s consideration of public comments. The agreement entered into by OFHEO is clearly an agency statement of general applicability and future effect designed to implement, interpret, or prescribe law or policy.
This amendment will ensure consistency with the concepts of the Code, the regulations and guidelines of federal banking agencies, and the requirements of the Administrative Procedures Act.
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