Author: Jennifer Sides is Executive VP and Chief Counsel at a la mode and works in their Washington, DC office. Sides’ background in intellectual property law has made her an industry leading expert on copyrighting appraisal reports and protecting ones’ creative rights.
As a la mode's in-house Chief Counsel, it is my task to translate the issues a la mode sees in the Home Valuation Code of Conduct (HVCC) as it currently stands into proposed changes to the language of the HVCC. If you have not already read Dave Bigger's, Chairman a la mode, article, click here to do so now to better understand the "why" behind the "what" in our proposed HVCC.
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Before we get into the meat of the changes, it is important to note the process regarding the revision which will best serve the industry. Our proposed changes here are by no means carved in stone, but we do all need to be mindful of the old adage about picking our battles wisely.
We tried to stay within the overall framework of the HVCC, and stuck to the five general issues Dave outlined, click here so that the general document still feels familiar to the parties involved in its first draft.
One could start with a clean sheet approach, but in our nation's capital (where I live), issues are typically negotiated from a starting position already staked out.
The commentary period to the OFHEO comes to a close at the end of April. It is our intention to submit what we have here, while also incorporating the best suggestions from readers and customers such as you.
Again, we have to limit what we change to increase our chances of influencing the outcome, and we also have to show compromise and unity as an industry.
We will be circulating this draft now for suggestions (via e-mail and this publication). The more appraisers we unite behind one document, the more likely we are to effect change.
To see the a la mode proposed revised language to the actual agreement, click Download Proposed_HVCC_Changes_alamode.pdf
Click Here For A Section-By-Section Analysis of the HVCC Proposal
I. The focus of work in this section was on changing the terminology to account for any sort of collateral valuation done, not just the strictly defined appraisal done by an appraiser from the original. The reason, as Dave points out, is that the restrictions in the current HVCC apply very narrowly to appraisers, encouraging the lender to instead utilize alternatives such as AVMs and BPOs, which are expressly exempted in other sections. In effect, the lender sees an appraiser under HVCC as having a higher "liability price tag". This terminology change, to encompass all valuations from all parties, levels the playing field and makes it less likely that a lender will choose a BPO or AVM just to skirt the regulations.
II. The changes here ensure that any and all valuations are provided to the borrower, which under the current HVCC includes only appraisals. If a lender ran multiple AVMs or ordered multiple BPOs until the number was "hit", the current HVCC would enable the lender to never disclose that information at all to the borrower. Also, this complements our language in Section I, item 9, closing the loophole by which repeated valuations were permitted if the first valuation was not an appraisal. Now, secondary valuations are restricted after any sort of primary valuation, whether it was an appraisal or not. Any type of primary or permissible secondary valuation (allowed only in case of errors or a tainted primary valuation) must be provided to the borrower along with the original.
III. In this section, we removed the focus on payment, since Section I, in items 1, 4, and somewhat in 5, already deals well with the common compensation leverage techniques that lenders have used.
The original language also barred appraisers from working with any sort of mortgage broker, which unfairly restricts the appraiser's ability to choose his or her own clients, and which served as a precursor to sections IV and V, moving virtually all appraisal orders to outsourced appraisal management companies.
So long as the coercion language in Section I remains intact, and as long as there is an audit trail protecting the appraiser and proving that the lender or other third party (even a mortgage broker) hasn't influenced the valuation, then the original intent of Section III (isolation of influence via compensation source) is still met by the new language without robbing the appraiser of the ability to interact with clients.
IV. In this section, we eliminated all the specific restrictions which virtually mandated the use of an AMC, and simply modified and broadened the original section's last "catch all" provision for smaller originators. The original section's last sentence was really all that was needed to address the problem: The lender must show that prudent safeguards were in place to prevent the loan production side of the business from influencing value.
Together with the audit trail provision of our new Section III, and the original coercion provisions in Section I, the problem is addressed elegantly and simply, without pushing lenders to utilize outside AMCs.
It's already been established that AMCs were not a shield protecting appraisers from coercion, since the original lawsuit prompting the HVCC's creation was filed against an AMC alleging that it engaged in practices of pressuring and blacklisting appraisers on behalf of a lender.
V. Section V was modified to remove the original clause numbered (2), which was redundant since the requirement for prudent safeguards against the production staff influencing the valuation process was already clearly established in section IV. Also, the education and training burden which was originally applied only to staff interacting with appraisers was extended to apply to any staff interacting with any type of valuation product. Conceivably under the original language, a lender could have the choice of untrained, inexpensive staff dealing with alternative valuations or expensive, trained staff dealing with appraisers, and would be incented therefore to either outsource the work to AMCs, or to utilize alternative valuations with no training cost.
VI. We again extended the concepts embodied in Section VI to all collateral valuation providers and methods. We also corrected an apparent mistake in parts 5 and 6, since even a single-person appraisal shop is defined as a settlement services provider under the RESPA code as referenced. The apparent intent was to avoid having multi-discipline settlement providers (those offering title, credit, flood, and so on) doing appraisal management work, since the sales function in the other components of the settlement provider's company could influence the appraisal where "bundled services" are provided.
Perhaps most importantly, we removed the exceptions allowing a lender to own portions of an appraisal management company, regardless of percentage. Any percentage of ownership would reduce the independence of the valuations provided by a management company.
We also removed the ability for a lender to own and operate, in whole or in part, an internal AVM. It is impossible to imagine a scenario where a lender's own internal AVM could possibly be considered an independent valuation of a property.
If a lender can't utilize an appraiser or other valuation provider unless they are independent, the same should apply to AVMs. A lender would still be able to operate an AVM for quality control and portfolio analysis purposes, since that would be separate from providing the collateral valuation used in a specific mortgage origination transaction.
VII. We removed the provisions allowing the lender to serve as its own investigator, and shifted the hotline ownership to the IVPI (which can independently choose to refer cases to law enforcement authorities or any other regulatory bodies).
We also strengthened the hotline notification language to apply to all parties to the transaction, and to all valuation products, instead of unfairly singling out only appraisals and appraisers for implications of potential impropriety. If the lender receives a complaint directly, the lender has 72 hours to provide the information to the IVPI.
VIII. This section was cleaned up to avoid the use of a target percentage of valuations to be statistically tested. Valid sample sizes and testing methodology are more properly determined by portfolio risk analysts.
IX. The reporting mandate in Section IX was extended to include reporting of unethical or improper conduct on the part of the lender as well.
X. The language was simply expanded to ensure that any valuation was done consistently with the HVCC, not just appraisals.
XI. In the original HVCC, this section underscored the exclusions given to alternative valuation methods and provided a subtle hint to lenders to utilize them instead of appraisals. We modified it to expand on its second half regarding the scope of work, and to reverse the implication of equality of an appraisal and alternative methods.
This new language makes it clear that including an appraiser in the realm of a "valuation provider" under our modified HVCC does not cause USPAP to be applied to non-appraisers, nor does it amalgamate appraisals with alternative valuation products. The distinctions and higher standards associated with an actual appraisal prepared by a licensed or certified appraiser still remain.
The Settlement Agreement is not an altogether bad agreement; as Dave Biggers asserts, its heart is in the right place. It is our collective duty as an industry however to ensure that the Agreement serves the interest of appraisers while achieving its stated goals.
We believe the key is to focus our proposed HVCC changes in these five targeted areas that blatantly harm the appraisal industry. We look forward to hearing from our readers and customers as we develop our final proposal.
As stated previously, the more appraisers we unite behind one document, the more likely we are to effect change.
To see the a la mode proposed revised language to the actual agreement, click Download Proposed_HVCC_Changes_alamode.pdf
Article Source: Appraisal Press - Proposed Changes to the HVCC
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