MUST READ! Dodd-Frank Client Alert - Customary & Reasonable Fees

The following is a small portion of an excellent Client Alert newsletter from Morrison/Foerster, authored by Joseph Gabai dated Nov. 1, 2010.  Download 101101-Interim-Final-Rule-on-Real-Estate-Appraisals[1]

One of the key issues in the Interim Final Rule (IFR) of Dodd-Frank is the Duty to Pay Customary and Reasonable Compensation to Fee Appraisers (Section 226.42(f) of Regulation Z).  Basically it states that the duty of the creditor and its agents is to pay a customary and reasonable fee in the “geographic market of the property being appraised.”

The following are snipped from the full Client Alert noted above:

The interim final rule provides two separate presumptions of compliance with the customary and reasonable compensation requirement.

• If the creditor and its agents comply with either of the two presumptions, then it is presumed that they are in compliance with the customary and reasonable compensation requirement 
• Both of the two presumptions of compliance are rebuttable. The presumption may be rebutted with evidence that the amount of compensation paid to a fee appraiser was not customary and reasonable for reasons that are unrelated to the conditions for the presumption. How this will be done remains to be seen. If a presumption relied upon is successfully rebutted, this means that the customariness and reasonableness of the compensation is determined based on all of the facts and circumstances (i.e., without a presumption of compliance or violation)
• Comment: While the regulation does not require the creditor and its agent to comply with one of the two presumptions, in practice this is what most creditors ultimately are expected to do
• Comment: Both presumptions contain a fact-intensive determination process, which suggests that there may not be an easy way of being comfortably assured that the customary and reasonable compensation requirement is being met

First Presumption of Compliance. A creditor and its agents are presumed to be in compliance with the customary and reasonable compensation requirement if they conform to the following three-part process:

• First, the creditor or its agents must determine the amount of the fee that is reasonably related to recent rates paid for comparable appraisal services performed in the geographic market of the property being appraised. This requires the identification of “comparable appraisal services” being performed, which overlaps somewhat with the second part of the three-part process, below. Also, it requires an identification of the “geographic market” (see discussion above). “Recent rates” depend on the relevant facts and circumstances, but the Commentary states that rates charged within one year of reliance on the information generally will qualify

The Commentary also states that the creditor/agent may gather the information using a reasonable method, including a fee survey. Unlike the second presumption of compliance discussed below, the first presumption of compliance does not prohibit the inclusion of fees paid by AMCs in any such survey. In fact, the Board’s Supplementary Information expressly confirms that the regulation and Commentary do not prohibit this.

"This borders on the incredible, given the Dodd-Frank Act’s express prohibition on the use of such information in what has become the second presumption of compliance. Keep in mind that the presumptions are rebuttable, and a survey used to support the first presumption that includes AMC-paid fees could be challenged."

If a decision is made to accept this risk, and a survey used to support the first presumption includes AMC-paid fees, it would be advisable to determine that the overall results of the survey fairly represent the fees paid to fee appraisers in the relevant geographic market.

Finally, nothing in the regulation or Commentary prohibits a creditor from delegating the tasks required by the first presumption to an AMC. However, because the AMC is the agent of the creditor, the creditor presumably will have exposure for the acts or omissions of the AMC in this regard, and creditors should take steps to protect themselves accordingly (e.g., by obtaining appropriate representations, warranties, and indemnities in their agreements with AMCs)

• Second, once this amount is determined, it must be adjusted, as applicable, based on certain factors (i.e., type of property, scope of work, turnaround time for performance of the work, appraiser qualifications, appraiser experience and professional record, and appraiser work quality)

The need to consider the appraiser’s qualifications does not override federal or state laws prohibiting the exclusion of an appraiser from consideration for an appraisal assignment solely by virtue of membership or lack of membership in any particular appraisal organization. See, e.g., 12 C.F.R. §34.46(a) (OCC regulation). Note that Section 1473 of the Dodd-Frank Act will allow membership in a nationally recognized appraisal organization to be considered, but lack of membership may not be the sole bar against consideration for a particular appraisal assignment

• Third, the creditor and its agents must not engage in any anticompetitive acts in violation of federal or state law. Examples of prohibited acts include: (i) entering into contracts or engaging in conspiracies to restrain trade through price fixing or market allocation, in violation of federal or state antitrust laws, or (ii) engaging in acts of monopolization, such as restricting entrants into the relevant geographic markets (e.g., if an AMC holds a dominant position in a particular geographic market, through that AMC’s use of exclusivity agreements in its contracts with creditors) or causing persons to leave those markets, in violation of federal or state antitrust laws

Second Presumption of Compliance. A creditor and its agents are presumed to be in compliance with the customary and reasonable compensation requirement if they determine the amount of compensation paid to the fee appraiser by relying on rate information that meets all of the following:

• First, the information must be based on objective third-party information. This includes fee schedules, studies, and surveys prepared by independent third parties, such as government agencies, academic institutions, and private research firms
• Second, the information must be based on recent rates paid to a representative sample of providers of appraisal services in the geographic market of the property being appraised, or the fee schedules of those providers. (See discussion above regarding the “geographic market.”) Thus, the fact that the information is derived from a government agency fee schedule is not, by itself, sufficient to get the benefits of the second presumption of compliance—it also is necessary to confirm that the information is based on recent rates actually paid to a representative sample of providers in the relevant market, or the fee schedules for those providers
• Third, any information based on fee schedules, studies, and surveys must exclude compensation paid to fee appraisers for appraisals ordered by AMCs. For this purpose, an “AMC” is defined as set forth above. As noted above, this definition is the same as the definition of an “AMC” under Section 1124 of FIRREA, except that it does not require the person to oversee a network or panel of a certain minimum size

This is only a SMALL portion of the complete document - Download 101101-Interim-Final-Rule-on-Real-Estate-Appraisals[1]

More information from Morrison/Foerster can be found here: Download Dodd-Frank Residential Mortgage Guide