Appraisal Scoop

GAO Recommendation: Appraisal Subcommittee Needs to Improve Monitoring Procedures

Why GAO Did This Study

Real estate appraisals have come under increased scrutiny in the wake of the recent mortgage crisis. Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 created an oversight structure for appraisals and appraisers that involves state, federal, and private entities. This structure includes ASC, a federal agency responsible for monitoring these entities’ Title XI-related activities. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) expanded ASC’s Title XI role and required GAO to examine ASC’s activities and exemptions to federal appraisal requirements. This report discusses (1) how ASC is carrying out its original Title XI responsibilities, (2) ASC’s actions and plans to implement Dodd-Frank Act provisions, and (3) regulatory dollar thresholds for determining when an appraisal is required. To do this work, GAO reviewed ASC records and reports, surveyed state appraiser regulatory agencies, analyzed government mortgage data, and interviewed industry stakeholders.

Full Report:  GAO-12-147 Click Here

What GAO Found

The Appraisal Subcommittee (ASC) has been performing its monitoring role under Title XI, but several weaknesses have potentially limited its effectiveness. For example, Title XI did not originally provide ASC rulemaking and enforcement tools that could be useful in promoting state compliance. In addition, ASC has not reported or clearly defined the criteria it uses to assess states’ overall compliance levels. Title XI charges ASC with monitoring the appraisal requirements of the federal financial institutions regulators, but ASC has not defined the scope of this function—for example, by developing policies and procedures—and its monitoring activities have been limited. ASC also lacks specific policies for determining whether activities of the Appraisal Foundation (a private nonprofit organization that sets criteria for appraisals and appraisers) that are funded by ASC grants are Title XI-related. Not having appropriate policies and procedures is inconsistent with federal internal control standards designed to promote effectiveness and efficiency and limits the accountability and transparency of ASC’s activities.

ASC faces potential resource and planning challenges in implementing some Dodd-Frank Act provisions. ASC has only 10 staff and is funded by appraiser registration fees that totaled $2.8 million in fiscal year 2010. The Dodd-Frank Act expands ASC’s responsibilities and authorities.

For example, the act requires ASC to establish a national appraiser complaint hotline and provide grants to state appraiser regulatory agencies, and it gives ASC limited rulemaking and enhanced enforcement authorities to help address prior weaknesses.

As of October 2011, ASC had completed several implementation tasks that required no rulemaking or creation of new programs and was in various stages of progress on the others. The potentially resource-intensive nature of some remaining tasks will require careful planning. For example, operating a complaint hotline may require investments in information technology and the creation of screening and follow-up procedures. Also, implementing a grant program will require ASC to set aside funds, develop funding criteria, and oversee grantees. ASC is in the process of developing a strategic plan to help carry out these efforts with available resources.

GAO found that more than 70 percent of residential mortgages made from 2006 through 2009 were $250,000 or less—the regulatory threshold at or below which appraisals are not required for transactions involving federally regulated lenders. In recent years, however, the threshold has had a limited impact on the proportion of mortgages with appraisals because mortgage investors and insurers such as Fannie Mae, Freddie Mac, and the Federal Housing Administration have generally required appraisals for mortgages both above and below the threshold.

While these entities currently dominate the mortgage market, federal plans to scale them back could lead to a more privatized market, and whether this market would impose similar requirements is not known. None of the appraisal industry stakeholders GAO spoke with argued for increasing the threshold. Some stakeholders said the threshold should be lowered or eliminated, citing potential benefits to risk management and consumer protection.

Others noted potential downsides to lowering the threshold, such as requiring more borrowers to pay appraisal fees and requiring appraisals on more transactions for which cheaper and quicker valuation methods may be sufficient.

What GAO Recommends

To help ensure effective implementation of ASC’s original Title XI and additional Dodd-Frank Act responsibilities, ASC should clarify and report the criteria it uses to assess states’ overall compliance with Title XI and develop specific policies and procedures for its other monitoring functions. GAO provided a draft of this report to ASC and seven other agencies. ASC and two other agencies agreed with the report’s recommendations. One agency did not comment on the recommendations, and the others did not provide written comments

SOURCE: GAO-12-147 - January 18, 2012

GAO Report: Residential Appraisals - Opportunities to Enhance Oversight of an Evolving Industry

Thanks to Dave Towne of Towne Appraisals for sending this document:

Per the Dodd-Frank law, the General Accounting Office (GAO) was required to produce a report concerning appraisals. It has been released. You can access a copy at this link: http://www.gao.gov/new.items/d11653.pdf  

What GAO Found

Data GAO obtained from the enterprises and five of the largest mortgage lenders indicate that appraisals—which provide an estimate of market value at a point in time—are the most commonly used valuation method for first-lien residential mortgage originations, reflecting their perceived advantages relative to other methods. Other methods, such as broker price opinions and automated valuation models, are quicker and less costly but are viewed as less reliable and therefore generally are not used for most purchase and refinance mortgage originations. Although the enterprises and lenders GAO spoke with do not capture data on the prevalence of approaches used to perform appraisals, the sales comparison approach—in which the value is based on recent sales of similar properties—is required by the enterprises and the Federal Housing Administration and is reportedly used in nearly all appraisals.

Recent policy changes may affect consumer costs for appraisals, while other policy changes have enhanced disclosures to consumers. Consumer costs for appraisals vary by geographic location, appraisal type, and complexity. However, the impact of recent policy changes on these costs is uncertain. Some appraisers are concerned that the fees they receive from AMCs—firms that manage the appraisal process on behalf of lenders—are too low.

A new requirement to pay appraisers a customary and reasonable fee could affect consumer costs and appraisal quality, depending on how new rules are implemented. Other recent policy changes aim to provide lenders with a greater incentive to estimate costs accurately and require lenders to provide consumers with a copy of the valuation report prior to closing.

Conflict-of-interest policies, including HVCC, have changed appraiser selection processes and the appraisal industry more broadly, which has raised concerns among some industry participants about the oversight of AMCs. Recently issued policies that reinforce prior requirements and guidance restrict who can select appraisers and prohibit coercing appraisers. In response to market changes and these requirements, some lenders turned to AMCs to select appraisers.

Greater use of AMCs has raised questions about oversight of these firms and their impact on appraisal quality. Federal regulators and the enterprises said they hold lenders responsible for ensuring that AMCs’ policies and practices meet their requirements for appraiser selection, appraisal review, and reviewer qualifications but that they generally do not directly examine AMCs’ operations. Some industry participants said they are concerned that some AMCs may prioritize low costs and speed over quality and competence.

The Act places the supervision of AMCs with state appraiser licensing boards and requires the federal banking regulators, the Federal Housing Finance Agency, and the Bureau of Consumer Financial Protection to establish minimum standards for states to apply in registering AMCs. A number of states began regulating AMCs in 2009, but the regulatory requirements vary. Setting minimum standards that address key functions AMCs perform on behalf of lenders would enhance oversight of appraisal services and provide greater assurance to lenders, the enterprises, and others of the credibility and quality of the appraisals provided by AMCs.

Conclusions

Because appraisals provide an estimate of market value at a particular point in time, they are affected by changes in the housing and mortgage markets. In recent years, turmoil in these markets has heightened attention on residential property valuations, and appraisals in particular. The prominent role of appraisals in the mortgage market underscores the importance of efforts to better ensure appraisal quality. HVCC, the Act, and federal banking regulator guidance have sought to address some of the factors that can affect appraisal quality, including appraiser independence and compensation. In addition, the enterprises are undertaking an initiative to collect detailed and standardized appraisal data that could provide them with greater insight into appraisal practices for the mortgages they purchase.

Partly in reaction to appraiser independence requirements, lenders have increasingly relied upon AMCs to perform certain functions. Despite the increased use of AMCs, direct federal oversight of AMCs is limited because the focus of regulators is primarily on lenders, and state-level requirements for AMCs are uneven, ranging from no laws to laws with specific standards for registering with the state. Some appraisal industry participants have raised concerns that the management practices of some AMCs may be negatively affecting appraisal quality.

Among the areas of concern are AMCs’ practices for key functions, including selecting appraisers for assignments, reviewing completed appraisal reports, and establishing qualifications for appraisal reviewers.

The federal banking regulators have emphasized the importance of these functions in guidelines that apply to lenders’ appraisal functions. The Act requires the federal banking regulators and other federal agencies to set minimum state standards for registering AMCs, which provides an opportunity for the regulators to address these areas of concern and promote more consistent oversight of these functions, whether performed by lenders or AMCs. Doing so could help to provide greater assurance to lenders, the enterprises, and federal agencies of the quality of the appraisals provided by AMCs.

 Recomendation for Executive Action

To help ensure more consistent and effective oversight of the appraisal industry, we recommend that the heads of FDIC, the Federal Reserve, FHFA, NCUA, OCC, and the Bureau of Consumer Financial Protection— as part of their joint rulemaking required under the Act—consider including the following areas when developing minimum standards for state registration of AMCs: criteria for selecting appraisers for appraisal orders, review of completed appraisals, and qualifications for appraisal reviewers.

   Click HERE for the complete GAO Report

Webcast: “Mortgage Origination: The Impact of Recent Changes on Homeowners and Businesses”

Wednesday, July 13, 2011 2:00 PM in 2128 Rayburn HOB
Insurance, Housing and Community Opportunity

Click herefor the Archived Webcast of this hearing. Mark Savitt's testimony beings at approximately 1 hour and 35 minutes into the hearing.

Of particular interest to appraisers are the testimonies of:

Mr. Marc Savitt, President, The Mortgage Center, on behalf of the National Association of Independent Housing Professionals

Ms. Sara Stephens, President Elect, Appraisal Institute

Mr. Don Kelly, Executive Director, Real Estate Valuation Advocacy Association (REVAA), on behalf of REVAA and the Coalition to Facilitate Appraisal Integrity Reform

You can click on the Author Links above to read their official "prepared" testimony.

Excerpt From Marc Savitt:

 

"Unfortunately, like its predecessor HVCC, appraiser independence has already proven to be a failure. Appraisers are still being pressured and blacklisted with no mechanism in place to report offenses. Moreover, Appraisal Management Companies (AMC’s), have found a "workaround" enabling them to set factious "Customary and Reasonable fees," that are anything but customary and reasonable. In fact, appraisers are now being paid less than under HVCC."

Excerpt From Sara Stephens:

Real estate agents have reported that consumers are paying higher appraisal fees in recent years,yet according to our members, appraiser fees have declined by as much as 40 percent

How can this be the case? The answer is simple – lenders have passed through appraisal administration expenses onto the backs of consumers through the Appraisal line of the HUD-1.

Current RESPA interpretations allow for, and even promote, "bundled" fees to consumers, whereby appraisal management fees are lumped together with actual appraisal fees. When a lender utilizes an AMC, HUD’s current interpretation of RESPA dictates the fee paid to the AMC – not the actual appraiser – be disclosed to the consumer on Truth and Lending disclosures and listed on the HUD-1 settlement statement As a result, a perverse incentive exists for AMCs to seek reductions in appraisal fees to carve out larger profit margins.

Don Kelly formerly represented the Appraisal Institute but now represents REVAA.  His testimony has an entirely different tone NOW!  Here's who he presently speaks for . . . AMAZING!!

 
 

 

Help Regulators Take Proper Aim, Appraisal Institute Tells Congress

CHICAGO (July 14, 2011) – Testifying before a Congressional subcommittee, the Appraisal Institute’s president-elect on Wednesday told lawmakers their intent was “right on target” and asked them to “guide the regulators’ aim” in implementing consumer-friendly real estate appraisal guidelines.

Sara W. Stephens, MAI, told members of the House Financial Services’ Subcommittee on Insurance, Housing and Community Opportunity that the Dodd-Frank Act passed by Congress last year is not being properly implemented by federal regulators.

Among other highlights, the Act calls on appraisal management companies (AMCs) to pay “customary and reasonable” fees to residential appraisers. While lenders can manage appraisal operations with internal staff, some choose to outsource these functions to third-party management companies called AMCs. These firms act as “middlemen” between lenders and appraisers

“Unfortunately, the Federal Reserve’s Interim Final Rule is not faithful to Congressional intent,” Stephens told lawmakers. “The Appraisal Institute thinks Congress’ intent was right on target. We urge Congress to guide the regulators’ aim, directing them to correct the Interim Final Rule to promote credibility over speed and cost.”

She added: “Many lenders have chosen to outsource the appraisal management function to third-party management companies who pass only a small percentage on to the appraiser actually performing the appraisal service. Current policy leaves consumers completely in the dark. Here, we need transparency between appraisal and appraisal management fees, especially since it is the consumer who pays these fees in nearly all transactions.”

Due to the low fees many AMCs pay appraisers, consumers often have to rely on valuation services from some of the least qualified and least competent appraisers hired by some AMCs. Congress intended to protect consumers by requiring AMCs to pay “customary and reasonable” fees to appraisers.

“Last year, Congress passed the most significant legislative update of the appraisal regulatory structure in two decades. In our view, this was only a beginning,” Stephens told the House subcommittee. “Moving forward, Congress must maintain an active role in oversight of appraisal regulators and build on these reforms to address ongoing weaknesses. We can ill afford to allow another 20 years to pass without a thorough audit of appraisal regulations. Consumers, lenders and taxpayers deserve much better than they have been given to date.”

Stephens also told lawmakers that the Appraisal Subcommittee, the federal oversight agency of the real estate valuation profession, “may have exceeded its Congressional authorization” by allowing The Appraisal Foundation to create a new board “with no clear purpose or boundaries.” She noted that Congress authorized the Appraisal Subcommittee “to monitor and review the activities and structure of The Appraisal Foundation, but not to direct or overrule its activities and structure.”

She added: “At a minimum, the recent actions of the Appraisal Subcommittee and Appraisal Foundation should be examined by Congress, and we urge this Committee to bring clarity and accountability to the relationship between the Appraisal Subcommittee and Appraisal Foundation where it does not exist today.”

To read the Appraisal Institute’s full written testimony, go to http://financialservices.house.gov/UploadedFiles/071311stephens.pdf.

Subscribe to the Appraisal Institute News Releases RSS feed and stay connected with the latest news from the Appraisal Institute: http://www.appraisalinstitute.org/RSS/NewsRelease/Default.aspx
 
The Appraisal Institute is a global membership association of professional real estate appraisers, with more than 24,000 members and 91 chapters throughout the world. Its mission is to advance professionalism and ethics, global standards, methodologies, and practices through the professional development of property economics worldwide. Organized in 1932, the Appraisal Institute advocates equal opportunity and nondiscrimination in the appraisal profession and conducts its activities in accordance with applicable federal, state and local laws. Members of the Appraisal Institute benefit from an array of professional education and advocacy programs, and may hold the prestigious MAI, SRPA and SRA designations. Learn more at www.appraisalinstitute.org.

Are Appraisers Too Independent For Their Own Good?

GUEST POST: Lisa Alvarez,  The American Guild of Appraisers 800-660-1835 ext 2.  The American Guild of Appraisers Weekly Conference Call When: Every Tuesdays 2pm – 2:30pm Eastern Time Where: 559-546-1000, Password 382795.  

As a result of the Home Valuation Code of Conduct (HVCC), and the current Financial Reform Act of 2010 (aka Dodd-Frank), appraisers have had to work under difficult circumstances. According to recent statistics, upwards of 80% of lending appraisal assignments are being funneled through Appraisal Management Companies (AMCs). These AMC’s are enforcing unreasonable working conditions on appraisers by unrealistically reducing the completion time for appraisal assignments, adding exhaustive addenda requirements, while reducing in half the typical fee paid to the appraiser.

Appraisers are now faced with big banks (aided by misguided government interpretation of Dodd-Frank) determining what should be a reasonable and customary fee. Since April 1, 2011, AMCs have been telling appraisers to expect yet lower fees for their services. AMC’s continue to rack up huge profits on the backs of consumers and appraisers. To add insult to injury, the transparency of appraisal service fees to the consumer has become a joke.

From my experience over the past few years as the legislative liaison for two appraisal organizations, I have come to realize: “The very thing we value, our independence, has been detrimental to our profession.” During the past few weeks I’ve had the opportunity to speak with a multitude of appraisal organizations, state coalitions, AI chapters, as well as individual appraisers. The one constant I hear from leaders of these organizations is that they have a difficult time getting appraisers involved. To quote myself “We are too independent for our own good.” 

National appraisal organizations have been working on the behalf of appraisers for many years. With members spread out between a collective of different organizations, the appraisal industry has had minimal success protecting our profession. We lack the necessary funding to influence legislature at both the state and federal levels. Up to now, other lobbying organizations (lenders and AMCs) have been the Goliath to our David.

So what can we do? “With so many small organizations representing appraisers, we don’t have a strong and collective voice,” said Coleen Morrison, Standing President of the MD Chapter of AGA. “We needed a voice that we haven’t had for the past 25 years. A voice that allows us to come together so we can be more powerful and better able to represent the interests of appraisers.”

The American Guild of Appraiser (AGA) /Guild 44 of the Office and Professional Employees International Union (OPEIU)/AFL-CIO, based in Maryland, near Washington, DC, could be our answer.

The AGA is a non-traditional union that represents independent professionals. The AGA does not engage in collective bargaining, strikes, and does not enforce closed shops. The AGA does not negotiate contracts, does not have shop stewards, and does not have any oversight regarding its member’s work products. What we have is the backing of over 10 million members within the AFL-CIO and 110,000 within the OPEIU. With these numbers, we have a collective voice. AGA will encourage professionalism and communication between all professional appraisal organizations. With the backing of the AFL-CIO we continue to play a vital role in fighting legislation and regulation that supplants and marginalizes the professional appraiser. We are practicing real estate appraisers who are giving up our time and talents for the appraising profession, for you.

The American Guild of Appraisers is working to further legislation at the state and federal level to better regulate AMC activities and to secure the independent role and compensation of the professional appraiser. 

“We have to fight for the integrity of the appraisal process, as well as to preserve our industry, to stop it from being swallowed up and lost,” said Colleen Johansen, AGA vice president. “We are not going to let that happen, we will fight for our members.”

Peter Vidi, Guild 44 president states “It’s our mission is to ensure that professionals have a collective voice, whether it’s negotiating a contract or representation on the legislative front. That’s what AGA is all about, and that’s the kind of strong collective voice that the appraisers have as part of Guild 44. The credo of the American Guild of Appraisers is, ‘We Value America’s Future.’

Appraisers take the first step and join us on our weekly conference call. Let’s start working together with one strong collective voice. If you don’t get involved now, than yes, “we are too independent for our own good.”

The American Guild of Appraisers Weekly Conference Call is every Tuesday from 2:00pm – 2:30pm Eastern Time. Call 559-546-1000. The password is 382795  - For more information email: [email protected] , or call 800-660-1835.

Appraisers launch online petition against use of AMC fees as "Customary and Reasonable"

Appraisal Scoop is seeking feedback from its readers to help inform the Federal Reserve Board, U.S. Congress, Federal Financial Institutions Examination Council, and the Federal Trade Commission of issues and concerns arising from the potential violations of the prohibitions in TILA against the use of AMC fees as the basis for determining reasonable and customary appraisal fees.

PETITION

On October 18, 2010, the Federal Reserve Board announced an interim final rule to Regulation Z of Title 12, also known as the Truth in Lending Act (TILA). One of the elements to Regulation Z is a binding requirement upon creditors and appraisal management companies to ensure that appraisers who are not employees of creditors or of the appraisal management companies receive customary and reasonable payments for their services.

In preparing this interim final rule, the Federal Reserve Board did not specifically identify which appraisal fee schedules, surveys or studies that would be appropriate to designate as a ‘‘safe harbor’’ for creditors and their agents to comply with the reasonable and customary fee requirements of TILA. In lieu of identifying these schedules, surveys or studies, the Board basically offered two alternatives to creditors and appraisal management companies; either conduct their own surveys of fees for a locale and operate off the presumption that those surveys are reasonably accurate (Presumption 1), or rely on other fee surveys or studies conducted by objective third parties such as government agencies, academic institutions, and private research firms and rely on the presumption that they are accurate (Presumption 2).

The specific language of both (TILA) and the FRB’s interim final rule specifically exclude the use of AMC fees as the basis for identifying the thresholds for reasonable and customary appraisal fees. In fact, the final interim rule specifically refers to this prohibition several times. (Read More - Appraisal Scoop)

It is our assertion that there is no language in the "Presumption 1" paragraphs that indicate that either Congress or the Board intended to allow the AMCs to include their own fees or those of other AMCs as the basis for reasonable or customary appraisal fees. We believe it is obvious that the term:

"...recent rates paid for comparable appraisal services..."

as stated in Presumption 1 *is not* synonymous with, nor should it be interpreted as:

"...recent rates paid by AMCs for comparable appraisal services..."

We also assert that ample evidence exists in the market in virtually all locales as to what local appraisers charge their non-AMC clients for such appraisal work. No AMC is compelled to actually wonder what fees the appraisers charge their non-AMC clients - all they have to do is pick up the phone and start asking.

As of the implementation date of the final interim rule, many appraisal management companies have made a good faith effort to comply with the requirements in TILA to ensure that the appraisers they engage are paid fees that are reasonable and customary for those markets. Some of these AMCs have accomplished this by employing Presumption 1 (conducting their own market surveys), while others have accomplished this by employing Presumption 2 (relying on other published fee schedules and surveys developed by objective third parties). Some AMCs have gone so far as to employ both methods as a means of ensuring their compliance. As appraisers, we applaud and support the good faith efforts of those AMCs that have chosen to adhere to the law as written.

Sadly, as of the implementation date of 04/2011, some AMCs have chosen to flaunt both the letter and specific intent of the law (TILA) as well as that of the interim final rule. Despite the specific prohibition against including AMC fees as part of those surveys, a few of the high profile AMCs have even gone so far as to erroneously assert that the final interim rule specifically allows them to reference their own fees and/or those of other AMCs in their surveys. This, despite the repeated references in TILA and the interim final rule to the contrary.

To the extent such violations are occurring in the market the results serve to undermine both the letter and intent of the law (TILA) as written. The “violator” AMCs have undermined the level playing field on which they compete in the market with other AMCs that are in compliance, not to mention seriously degrading the economic viability of the appraisers who actually perform the appraisals being used in these transactions. The damages to the professional appraiser community extend across all levels of experience and competency, and serve to induce some appraisers who work for the AMCs to attempt to compensate for these grossly substandard fees by sacrificing quality and due diligence for increased assignment volume. Obviously this has also had a negative impact on the utility of those appraisals as used by the creditors, not to mention the negative impacts on consumer interests and the federal banking regulatory interests.

Simply put, if a violator AMC is billing a consumer $500 or more for a comprehensive residential appraisal, that consumer’s interests cannot be well served on a consistent basis when that AMC makes their primary choice of appraiser based on a unilaterally imposed fee structure that is, in some cases, less than half of the prevailing rate being charged in the market to any other type of user. That some of the biggest AMCs are wholly-owned subsidiaries of the lending institutions they represent essentially amounts to an additional hidden fee being paid - by the consumers - to those lenders in those loan transactions.

We, the undersigned, represent a large number of licensed and certified real estate appraisers in the United States.

We respectfully request that the Board take action to publicly reiterate the prohibitions contained in both TILA and the Board’s interim final rule against the reliance on any survey, conducted by any party, that unlawfully includes AMC fees and purports to use them as the basis, in part or in whole, for establishing the thresholds for reasonable and customary appraisal fees as referenced.

In addition to public guidance, we also request that the Board act promptly and effectively to investigate complaints involving allegations of the blatant violations of these prohibitions as stated.

We thank you for your cooperation and assistance.

Sincerely, The Undersigned

Join the Petition "Event" on Facebook!!

The New Threat to Appraiser Independence

Guest Post: Charles R. (Chuck) Dettling is a Certified Residential Real Property Appraiser licensed in Alabama and Florida. Chuck and his son, Seth, also a Certified Residential Real Property Appraiser, operate a small firm, Dettling & Associates, covering seven counties in Southwest Alabama and the Florida panhandle. Their practice includes single family, small commercial, condo, and land, with a specialization in REO assignments. Email: [email protected]  

As most appraisers and mortgage market participants are aware, the Board of Governors of the Federal Reserve published an Interim Final Rule in the Federal Register on October 28 2010, Volume 75, Number 208, Pages 66554 through 66587, that implements Section 129E of the Truth in Lending Act (TILA) U.S.C. 1601, which was enacted on July 21, 2010 as Section 1472 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Rule is to take full effect on April 1, 2011, and among other things, intends to establish new requirements for appraiser independence, and better consumer protection in all finance transactions that involve their principal residence.

As appraisers, we generally applaud the efforts of Congress and the Federal Reserve to implement rules and procedures that enhance appraiser independence, help to protect the integrity of our profession and increase public trust in the appraisal process. From the appraisers’ point of view, some of the more popular provisions of the Rule include the elimination of the HVCC, and mandated payment of “reasonable and customary compensation” to the appraiser. Other provisions attempt to strengthen already existing ethics rules and regulations. As with many extremely complex federal regulations, there are often unintended consequences. In this appraiser’s view, the mandate that “… parties involved in the transaction report appraiser misconduct to state appraiser licensing authorities” could lead to a new breed of pressure on appraisers, i.e., the threat of a board complaint. Most of us would agree there are unethical and poorly trained appraisers out there competing with the rest of us, and those should be reported when warranted. But, what unintended consequences could result from enactment this provision?

Over the course of the past several years, I have found the relationships between appraisers and real estate brokers, agents and sales staff to be increasingly strained. One need only recall the visceral reaction by the real estate sales profession after the implementation of HVCC. The national news media was filled with so-called ‘horror stories” of appraisers “low-balling” appraisals in order to avoid liability in what was (and is) clearly a tragically devastated real estate market. Agents complained bitterly that they could not get their deals done because those naughty appraisers were intentionally valuing their pending sales too low. One of the more obnoxious examples was a report on Fox Business News wherein David Asman interviewed Dolly Lentz, the Real Estate Vice Chairman of Prudential Douglas Elliman. Asman asked Lenz what needed to be done to “fix the problem” and incredibly she replied, “…I think for one, they should have to provide comparable sales.” Earth to Dolly!!

Section 226.42 42(g) Mandatory Reporting “TILA Section 129E(e) requires certain persons to report an appraiser to the applicable state appraiser certifying and licensing agency if the person has a reasonable basis to believe the appraiser is failing to comply with USPAP, is violating applicable laws, or is otherwise engaging in unethical or unprofessional conduct. 15 U.S.C. 1639e(e). This provision applies to creditors, mortgage brokers, real estate brokers, appraisal management companies, and any other persons providing a service for a covered transaction.”

By the way, notice how the new law is strangely silent on the responsibilities and professional conduct of real estate sales professionals. Could it be that the massive National Association of Realtors lobby was able to convince congress that everything was just hunky-dory on their end. Just fix the appraisers and everything will be just fine.

So, now we have several million people described in the above code section who are required by law to report appraisers when they “have a reasonable basis to believe that an appraiser has not complied with USPAP or ethical or professional requirements…” Unfortunately, the Fed forgot to define “reasonable.” Question. With (hopefully) the exception of licensed or certified appraisers, who in this group knows squat about USPAP, really? When is the last time you heard Jane Q. Public espouse the many virtues and complexities of USPAP? I had a dream the other night. I was talking to a homeowner about the appraisal process and that rascal looked over his bifocals, leaned toward me, smiled (exposing all six of his teeth), and said: “So, doesn’t the Scope of Work Rule in USPAP require you to include the research and analyses that are necessary to develop credible assignment results?” 

A couple of years ago I had a property owner file a complaint against me. The complaint letter stated rather adamantly that I had refused to consider “comparable sales” that she had provided. Those “comparables” were in another state and were so superior that it was ridiculous. I expected the case to be dismissed immediately. But according to the Board they are required by the Appraisal Standards Board to conduct a full investigation into every aspect of the appraisal assignment. Six months later and with ten years of my life eliminated, I was completely exonerated, with not even a private warning.

Armed with this new “weapon” it is easy to imagine a huge surge in complaints by irate real estate agents, unhappy property owners, and others to the state boards. What is going to happen to E&O insurance rates when over-zealous state boards launch World War III against the appraisers to protect the public (oh, yes, and raise some much-needed revenue)? Will appraisers quickly discover that simply “tweaking” the numbers to accommodate real estate sales contracts or consumers’ wishes will minimize or eliminate the risk of complaints? Will too many appraisers end up with frivolous complaints that result in fines and reprimands, tainting the valuable reputations of our colleagues, and driving the best of our lot from this profession? In short, will this codified mandate to report appraisers become the new threat to appraiser independence?

About The Author: Charles R. (Chuck) Dettling is a Certified Residential Real Property Appraiser licensed in Alabama and Florida. Chuck and his son, Seth, also a Certified Residential Real Property Appraiser, operate a small firm, Dettling & Associates, covering seven counties in Southwest Alabama and the Florida panhandle. Their practice includes single family, small commercial, condo, and land, with a specialization in REO assignments. Email: [email protected]  

Appraisal Independence Interim Final Rule - Effective 4/1/2011

On October 18, 2010, the Federal Reserve Board of Governors (the "Board") announced a new rule setting standards for appraisals of residences offered as security for consumer credit transactions - 12 C.F.R. § 226.42 (the "Rule" or "Section 42").

The Rule amends the Board's Regulation Z, which implements the Truth in Lending Act ("TILA"). The Rule prohibits (i) undue influence on appraisers, (ii) mischaracterization of value in appraisals, and (iii) certain appraiser conflicts of interest. Section 42 also sets forth requirements for (i) compensation for licensed/certified appraisers and (ii) reporting of appraiser misconduct. Notably, the Rule places stringent requirements on creditors that employ in-house appraisers, so as to avoid conflicts of interest. (source: Mondaq)

Background: The new rules regarding appraisal independence adds a new section under Part 226 (Regulation Z), Subpart E (Special Rules for Certain Home Transactions), as Section 226.42 (titled as – Valuation Independence). These provisions were issued as an interim final rule with comment period due to the limited time frame the Act provided for issuance of this rule under the statutory deadline. 

This rule eliminates the current appraiser independence rules in Reg Z at 226.36(b) that were added last year, but those rules will stay in effective until April 1, 2011, at which time compliance with this rule will be mandatory. Through March 31, 2011, you may comply with either 12 CFR 226.36(b) or new 12 CFR 226.42.  (federal register)

"The Federal Reserve Board on Monday [October 18, 2010] announced an interim final rule to ensure that real estate appraisers are free to use their independent professional judgment in assigning home values without influence or pressure from those with interests in the transactions. The rule also seeks to ensure that appraisers receive customary and reasonable payments for their services."

The interim final rule includes several provisions that protect the integrity of the appraisal process when a consumer's home is securing the loan. The interim final rule:

• Prohibits coercion and other similar actions designed to cause appraisers to base the appraised value of properties on factors other than their independent judgment;
• Prohibits appraisers and appraisal management companies hired by lenders from having financial or other interests in the properties or the credit transactions;
• Prohibits creditors from extending credit based on appraisals if they know beforehand of violations involving appraiser coercion or conflicts of interest, unless the creditors determine that the values of the properties are not materially misstated;
• Requires that creditors or settlement service providers that have information about appraiser misconduct file reports with the appropriate state licensing authorities; and
• Requires the payment of reasonable and customary compensation to appraisers who are not employees of the creditors or of the appraisal management companies hired by the creditors.

The interim final rule is required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. Compliance will be mandatory on April 1, 2011.

Source: Federal Reserve Press Release

Federal Register notice: HTML | 271 KB PDF

Federal Register notice, technical correction: HTML | 53 KB PDF

2010 Banking and Consumer Regulatory Policy

 

Appraisal Institute-ASA-ASFMRA-NAIFA reply regarding the pending Interim Final Rule on TILA

Here is the official comment letter of the Appraisal Institute-ASA-ASFMRA-NAIFA on the pending Interim Final Rule on TILA and customary and reasonable fees.

Download JointLetterToFederalReserveTILAAppraisalProvisions

This letter is divided into two parts: 

Part I provides brief, general observations regarding the impact of the HVCC and HOEPA’s anti-coercion provisions. 

Part II contains specific positions and recommendations regarding the contents of the interim final rule. 

You will note that in Part II they address the issue of “customary and reasonable” residential appraiser fees in great detail given this provision’s central importance to the new law’s appraisal independence requirements. 

"While implementation of the other aspects of the appraisal independence section are discussed in somewhat less detail, our organizations regard them as being of comparable public policy and consumer protection importance. We hope you find our comments helpful and responsive to the specific questions the Fed asked in connection with the conference call."

Here are several  excerpts from the letter:

 Customary And Reasonable Appraiser Fees: As we discussed during the September 8 conference call, the Dodd-Frank Act contains a provision requiring “customary and reasonable” fees be paid to appraisers to reflect what an appraiser would typically earn for an assignment absent the involvement of an appraisal management company (AMC). Under the Act, evidence for such fees may be established by objective third-party information, such as government agency fee schedules, academic studies, and independent private sector surveys. This issue is extremely important given evidence that indicates wide divergence between fees paid to appraisers through appraisal management companies and those retained directly by financial institutions. While some AMCs pay full fees and charge for their services on a “cost-plus” basis, many do not. Many of our members report having to accept reduce fees by as much as 50 percent since the inception of the Home Valuation Code of Conduct.

 Prohibitions on Conflicts of Interest: The Fed asks whether “small banks” should be exempt from the appraisal independence and anti-conflict of interest provisions of the Dodd-Frank Act. In a word, our answer is an emphatic “no”. Because many of our members operate small valuation firms, we appreciate the difficulty that small businesses sometimes experience in meeting federal and state requirements. Nevertheless, we believe that consumers whose collateralized loans are made by small banks would be ill-served by exempting those banks from the appraiser independence requirements. Clearly, mid-size and large financial institutions with in-house appraisal departments have the resources to establish “fire walls” between those departments and their mortgage production departments. If small financial institutions lack such resources, they can readily go outside the bank and hire independent appraisers. We do not believe that this represents an unreasonable requirement.

Mandatory Reporting of USPAP Violations: The Fed asks whether clarification is required in connection with new TILA section 129E(e), which requires individuals involved in a collateralized consumer credit transaction to report an appraiser’s violation of USPAP, federal and state appraisal laws or who is otherwise engaging in “unethical or unprofessional conduct” to his or her state appraiser licensing agency. We strongly believe that clarification is essential if frivolous complaints against appraisers and wasted investigative efforts by state appraiser licensing agencies are to be avoided.

 Our organizations support appraiser accountability. If an appraiser violates USPAP or otherwise engages in unprofessional conduct, we want these violations examined and the appraiser sanctioned if the alleged misbehavior is confirmed. However, because the language of the mandatory reporting provision is general in nature, we urge the Fed to establish specific ground rules that would govern and circumscribe the reporting of alleged appraiser misconduct. We believe that those ground rules should describe, as concretely as possible, and provide examples of, the acts of appraisers which might constitute a possible violation of the behavior addressed in the statute’s mandatory reporting language. Without such guidelines, a torrent of unfounded complaints to state appraiser licensing agencies could be unleashed – based, for example, on nothing more than an appraiser’s refusal to provide a desired opinion of value. Indeed, an unscrupulous user of appraisal services or even a disappointed borrower could use an unfocused and generalized mandatory reporting requirement, as a means to undermine the independence and objectivity of the appraiser.

HUD-1 Line Charges:  We urge the Fed, in its interim final regulations, to require that when an appraisal is procured through an AMC or through any other third party, that consumers are provided with clear and timely information on how the appraisal fee is to be split between the appraiser and the AMC or other third party. The consumer is entitled to such transparency. While we continue to seek clarification from HUD/FHA that under RESPA, the portion of appraisal fees collected by AMCs are, in reality, loan origination costs and should not be reported on the Appraisal line of the HUD-1 form, we strongly urge that the interim final rule require creditors to provide clear and timely information to consumer-borrowers showing appraisal costs broken-out between the fee actually paid to the appraiser and the administrative fee paid to the AMC.

Finally, we strongly oppose the recommendation of one interest group that the Federal Reserve delay promulgating interim final rules to implement the “customary and reasonable fee” provisions of the statute

.

We believe that delaying implementation would violate the clear words of the statute which state that “for purposes of this section,” the Fed shall prescribe interim final regulations no later than 90 days after the date of enactment of this section…” (emphasis added). The “customary and reasonable fee” provision (129E(i)) is a part of “this section” (i.e., section 1472).

  Click here for the full TILA Appraisal Provisions Letter

Appraiser Urges the Fed to Implement the Dodd-Frank Act NOW! - Customary and Reasonable Fees

Guest Post by Joseph Lorinc, a State Certified General Residential Real Estate Appraiser, licensed by and working in the State of Florida. Joseph works for Neapolitan Appraisal, Inc. in Southwest Florida providing residential real estate appraisals. He has 13 years of residential and non-residential appraisal experience.

I am writing this letter to urge the Federal Reserve Board to move forward with the implementation of the appraisal independence and appraisal fee provisions in Title XIV of the Dodd-Frank Act.

 Download Customary Fee Letter

Title XIV (Section 1400 et seq) of the Dodd-Frank Act contains the “Mortgage Reform and Anti-Predatory Lending Act,” which includes Subtitle F – Appraisal Activities. Section 1472 of the “Mortgage Reform and Anti-Predatory Lending Act” adds Section 129 E to the Truth in Lending Act which will establish minimum federal appraisal independence requirements and customary and reasonable fee requirements.

Effective Date of Appraisal Requirements

The enacting language of the Dodd-Frank Act states that the appraisal requirements should be adopted in the Interim Final Regulations. As an appraiser, I believe it is vitally important that there should be no delay in implementation of the appraisal independence requirements under Title XIV of the Dodd-Frank Act. As part of the Dodd-Frank Act, Section 4312 (b) (2) also requires that lenders and their agents compensate appraisers at a rate that is customary and reasonable for appraisal services performed in the market area of the property being appraised.

 As defined in the Uniform Standards of Professional Appraisal Practice, 2010-2011 Edition by the Appraisal Standards Board of The Appraisal Foundation, valuation services are “services pertaining to aspects of property value,” an appraiser is “one who is expected to perform valuation services competently and in a manner that is independent, impartial and objective,” an assignment is “an agreement between an appraiser and a client to provide a valuation service or the valuation service that is provided as a consequence of such an agreement,” an appraisal is “the act or process of developing an opinion of value” and appraisal practice is defined as “valuation services performed by an individual acting as an appraiser, including but not limited to appraisal, appraisal review or appraisal consulting.” Appraisal services are valuation services provided by an appraiser as the result of an assignment. Under Section 4312 (b) (2), customary and reasonable fees must be paid to for appraisal services for residential loan purposes. There is no mention of specific appraisal products, rather the Dodd-Frank Act specifies appraisal services for residential loan purposes, covering any valuation services provided by an appraiser.

Customary and Reasonable Fees and Appraisal Management Companies

Customary and reasonable fees for appraisal services are available from a number of sources. Several companies have existing fee data surveys available, such as the Appraisal Fee Reference published by a la mode, inc. Over the past month since the passage of the Dodd-Frank Act, I have received invitations to participate in several other fee surveys from a variety of companies in the appraisal, appraisal management and banking fields. 

 
As Section 4312 of the Dodd-Frank bill is intended to promulgate appraisal independence requirements for residential loan purposes, I believe the most obvious source of customary and reasonable fees is being overlooked. In every residential mortgage transaction, a HUD-1 Form detailing fees (including appraisal fees) associated with the origination of a residential mortgage loan is required. The data on the HUD-1 Form could be used to determine the customary and reasonable fees that consumers have been charged for appraisal services. The HUD-1 data would provide an accurate and unbiased basis for determining the customary and reasonable fees that consumers are paying for appraisal services for residential loan purposes.

In its AMCs/Reasonable and Customary Fees/Turnaround Time FAQs HUD clarified what it believes to constitute a customary and reasonable fee:

 “FHA believes that the marketplace best determines what is reasonable and customary in terms of fees. The fee is the result of a business decision, which may or may not be negotiated, between the appraiser and the client. FHA does not set fees or determine whether a fee is reasonable or customary. Lenders are expected to know what is reasonable and customary in the areas in which they lend and are expected to ensure that the fees paid by consumers for both the appraisal and the management of the appraisal process are reasonable and customary.”

This statement appears to indicated HUD’s reliance on the free market system in determining fees.

 
Since the introduction of the Home Valuation Code of Conduct in March of 2008, appraisal management companies participation in the market has grown from 15% of appraisals ordered to an estimated 80% today. While HUD’s stance on the importance of the free market system is not in question, the current situation in the appraisal industry has little resemblance to a free market. Appraisal fees are no longer negotiated between the client and the appraiser, they are dictated to the appraiser by the appraisal management company. The Dodd-Frank Act seems to recognize this fact in Title XIV, Section 129 E (i) (1)

“In General – Lenders and their agents shall compensate appraisers at a rate that is customary and reasonable for appraisal services performed in the market area of the property being appraised. Evidence for such fees may be established by objective third-party information, such as government agency fee schedules, academic studies and independent private sector surveys. Fee studies shall exclude assignments offered by known appraisal management companies.”

By specifically excluding fees offered by appraisal management companies, the writers of these regulations seem to be acknowledging the undue influence that the appraisal management companies have had on the appraisal industry.

In March of 2008, the Home Valuation Code of Conduct was introduced to curb the banking industries pressure on independent appraisers to produce appraisal reports that met their lending needs instead of reflecting the true market value of the properties being appraised. This practice by the banking industry resulted in many inaccurate appraisal reports being produced and then used as justification to finance residential mortgage loans. The unethical behavior of the banking industry and the appraisers who wrote appraisal reports they knew to be inaccurate contributed in a significant way to the collapse of the housing market in which we currently find ourselves.

Unfortunately, the Home Valuation Code of Conduct had the unintended consequence of producing a business climate where appraisal management companies have come to dominate the appraisal services market for residential lending. Under the appraisal management company business model, appraisal assignments are shopped to the appraiser that will accept the lowest fee and promise the shortest completion time. Little to no regard to the complexity of the assignment or the competency of the appraiser to complete the appraisal assignment is given.

To receive orders from an appraisal management company, appraisers are forced to complete appraisal assignments requiring an ever increasing amount of information gathering, analysis and reporting mandated by Government-Sponsored Enterprises (Federal National Mortgage Association [Fannie Mae], Federal Home Loan Mortgage Corporation [Freddie Mac]), the appraisal management companies and finally the client, in an unrealistically short timeframe for substantially reduced fees. Though it was written to improve the quality of appraisal services, the unintended results of the Home Valuation Code of Conduct have been the same, an increasing number of inaccurate reports are being produced by unqualified appraisers. In time, this may lead to yet another collapse of the housing market.

Section 4312 of the Dodd-Frank Act was intended to re-establish a business environment where appraiser independence can be maintained. In the midst of the current housing crisis, delaying the implementation of this vital legislation could have a devastating and far reaching impact on not only the housing market but the overall economy of the United States.