Analysis of Dodd-Frank Act: Appraisers
September 12, 2010
Subtitle F of Title XIV of the Dodd-Frank Act, titled “Appraisal Activities” addresses a number of concerns over the perceived role that residential real estate appraisals have had in exacerbating the housing crisis. Subtitle F (hereafter, the “Act”) makes a number of amendments to FIERRA, TILA, RESPA, and ECOA affecting appraisals. It puts into law existing regulations and guidance on appraiser independence, and establishes specific standards for appraisals related to “higher-risk mortgages.” Appraisal management companies (AMCs), whose prominence was elevated with the adoption of the Home Valuation Code of Conduct (HVCC), will be subject to heightened supervision.
The legislation was partly prompted by dissatisfaction with the HVCC, particularly by independent appraisers, who saw their profession (and fee arrangements) suddenly dominated by the activities of corporate AMCs. The HVCC itself, after a required Government Accountability Office (GAO) study and the issuance of interim regulations this October, is set to be withdrawn.
As with many other provisions of the Dodd-Frank Act, broad authority is given to various agencies to develop regulations. Thus, detailed compliance guidance will not be available until after the applicable regulations are finalized. This Bulletin is a summary of the statutory provisions.
The Act puts into federal law—new section 129E of the Truth in Lending Act (15 U.S.C. 1631 et seq.)—certain appraisal independence standards that are currently found in the HVCC, regulations, and agency guidelines. It makes it unlawful to engage in conduct that violates appraisal independence in the context of extending credit or providing services related to a consumer credit transaction secured by the consumer’s principal dwelling. Acts or practices that violate appraisal independence include:
- (1) any appraisal of a property offered as security for re-payment of the consumer credit transaction that is conducted in connection with such transaction in which a person with an interest in the underlying transaction compensates, coerces, extorts, colludes, instructs, induces, bribes, or intimidates a person, appraisal management company, firm, or other entity conducting or involved in an appraisal, or attempts, to compensate, coerce, extort, collude, instruct, induce, bribe, or intimidate such a person, for the purpose of causing the appraised value assigned, under the appraisal, to the property to be based on any factor other than the independent judgment of the appraiser;
- (2) mischaracterizing, or suborning any mischaracterization of, the appraised value of the property securing the extension of the credit;
- (3) seeking to influence an appraiser or otherwise to encourage a targeted value in order to facilitate the making or pricing of the transaction; and
- ‘‘(4) withholding or threatening to withhold timely payment for an appraisal report or for appraisal services rendered when the appraisal report or services are provided for in accordance with the contract between the parties.
The Act also requires appraisers to be free of any conflicts of interest, to be further defined.
Exceptions. It would not be a violation of the independence standards for a person with an interest in the transaction to request an appraiser to consider additional information, provide further information, or correct errors. Both the long definition above and these exceptions are consistent with existing standards.
Mandatory reporting. The Act makes it mandatory to report to the applicable state agency (in California, the Office of Real Estate Appraisers) any illegal, unethical, or unprofessional conduct by any appraiser. This obligation applies broadly to a number of enumerated persons, including broadly any person “involved” in a covered transaction. Moreover, if a creditor knows at or before consummation of the loan of a violation of the independence or conflict of interest standards, it may not extend the credit unless it first documents that the appraisal does not materially misstate or misrepresent the value of the secured dwelling.
Appraiser independence regulations. The Federal Reserve Board (“Board”), OCC, FDIC, NCUA, Federal Housing Finance Agency, and the new Bureau of Consumer Financial Protection (“Agencies”) may issue a joint regulation setting forth the acts and practices that violate appraiser independence in the context of the provisions discussed above. On the other hand, the Board is required to issue an interim final regulation within 90 days after enactment (that is, by October 19, 2010) “defining with specificity” the same. Further, this regulation “shall be deemed to be rules prescribed by the agencies jointly.” Presumably, this means that the Board’s interim regulation will have the same force and effect as if it were issued together with the other agencies. When the interim final regulations are issued, the HVCC will no longer be effective. It remains to be seen when the Board will make the interim rule effective.
Portability. The Agencies also have the authority to issue a joint regulation to address the portability of appraisals. This provision includes no further details but a regulation could be expected to make it appropriate or necessary for a creditor to accept an appraisal prepared on the same property for another creditor under certain conditions.
After the HVCC became effective, many appraisers immediately saw their fees reduced as the role of AMCs grew in prominence due to concerns about appraiser independence. Many also lost direct contact with lenders and other mortgage originators and were forced to take appraisal orders from AMCs. The appraisers community and others have challenged the HVCC ever since. With this legislation, the appraisers community has successfully secured a requirement for lenders and their agents to compensate “fee appraisers” at a rate that is “customary and reasonable for appraisal services performed in the market area of the property being appraised.” Adjustments to the fee are permissible for more complex appraisals.
A “fee appraiser” is defined as a licensed or certified appraiser who is not an employee of the originator or AMC and either receives a fee for appraisal services or is a company that uses the services of a licensed or certified appraiser and receives a fee for performing appraisals.
It is unclear why the provision for reasonable compensation specifically refers to lenders and their agents, but not AMCs or, more generally, any person or entity that orders the appraisal.
Enhanced Supervision of AMCs
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA” 12 U.S.C. 3331 et seq) currently sets forth the duties of the Appraisal Subcommittee of the Federal Financial Institutions Examination Council (FFIEC). Those duties include monitoring state certification and licensing of appraisers, monitoring federal banking agency appraiser requirements, and maintaining a national registry of appraisers who are eligible to perform appraisals in federally related transactions. It also monitors the Appraisal Foundation, which helps regulate the appraisal profession.
The Act increases the focus on AMCs  by authorizing the Appraisal Subcommittee to monitor state supervision of AMCs. The Subcommittee will also maintain a national registry of AMCs, including those that are operating subsidiaries of financial institutions.
The Act specifically requires the Agencies to establish, by regulation, minimum requirements for state regulation of AMCs. These requirements pertain to state registration, mandatory use of licensed or certified appraisers, compliance with Uniform Standards of Professional Appraisal Practice (USPAP), and compliance with the aforementioned independence standards. States may establish additional requirements. AMCs that are operating subsidiaries of financial institutions are subject to these minimum requirements, but not to state registration.
In addition, the Act prohibits ownership of AMCs by any appraiser whose license or certificate has been denied or revoked, and requires owners to be of good moral character and to submit to background checks. It also substantially enhances the Appraisal Subcommittee’s supervisory duties over state appraiser agencies. The Subcommittee has the authority remove appraisers and AMCs from a national registry pending state agency action, and to impose sanctions against state agencies, to include de-recognition. Finally, the Act adds registration and supervision of AMCs to the responsibilities of state appraisal agencies through an amendment of FIRREA at 12 U.S.C. Section 3346. This is the statute that originally led to the establishment of such agencies.
The effective date of the AMC provisions is 36 months after issuance of the final regulations on AMC minimum requirements, unless it is extended by 12 months subject to the approval of the FFIEC.
Other Subcommittee duties. Its new duties with respect to AMCs are just part of the Appraisal Subcommittee’s enhanced obligations. It is also granted new authority to prescribe regulations on limited issues, including the national registry and enforcement. In furtherance of this authority, the Subcommittee will establish an advisory committee of industry participants, including appraisers, lenders, consumer advocates, real estate agents, and government agencies, and hold meetings as necessary to support the development of regulations.
The Subcommittee also has new reporting requirements to Congress on oversight of state appraiser regulatory activities. State agencies, in turn, will have enhanced reporting requirements to the national registry on licensing and disciplinary activities, as well as to the Appraisal Subcommittee on supervision of AMCs and related service providers.
Reciprocity. The Act requires state appraisal agencies, as a condition of any appraiser being involved in a federally-related transaction, to have policies in place to issue reciprocal certification of appraisers who are validly licensed or certified in another state, as long as the other agency complies with the standards in the Act, and its licensing standards meet or exceed the reciprocating agency’s standards.
Hotline. The Appraisal Subcommittee has the authority to establish a national hotline to receive appraisal-related complaints. These may be complaints by consumers or by appraisers who believe they are undergoing undue influence.
Special rule on “higher-risk” mortgages. New section 129H is added to TILA that establishes requirements specific to appraisals in connection with “higher-risk mortgages.” The principal characteristic of a “higher-risk mortgage” is that it features an annual percentage rate that exceeds the average prime offer rate for a comparable transaction by at least 1.5% on a first lien conforming mortgage, by at least 2.5% for a loan exceeding the conforming amount, or by at least 3.5% for a subordinate lien mortgage loan.
The following standards apply to appraisals in connection with higher-risk mortgages:
- A certified or licensed appraiser must conduct a physical property visit of the interior of the mortgaged property.
- In the special circumstance in which the borrower is seeking to obtain a loan to purchase a property from a person who, within 180 days prior, had acquired the property at a lower price, the creditor is required to obtain a second appraisal (at no cost to the applicant) from a different appraiser, and that appraisal must include an analysis of the difference.
- The creditor must furnish a free copy of each appraisal at least three days prior to closing (there is no indication that the creditor is prohibited from charging for the cost of obtaining the first appraisal).
- At the time of the initial application, the creditor must notify the applicant that any appraisal prepared for the mortgage is for the sole use of the creditor, and that the applicant may choose to have a separate appraisal conducted at the applicant’s expense.
The Agencies must issue joint regulations to implement this provision, which may include an exemption for defined classes of loans as long as any exemption is consistent with the public interest and lenders’ safety and soundness.
Automated valuation models. The Act brings automated valuation models  into the ambit of FIERRA regulation. These models must adhere to quality control standards designed, among other things, to ensure reliable estimates, protect against manipulation, and avoid conflicts of interest. Testing and reviews are required. The Agencies, in consultation with the Appraisal Subcommittee and the Appraisal Standards Board of the Appraisal Foundation, will issue regulations to implement these standards.
Broker price opinions. Broker price opinions  may not be used as the primary basis to determine the value of property in conjunction with originating a loan to purchase a consumer’s principal dwelling.
Availability of appraisal report. The Equal Credit Opportunity Act is amended to require creditors to provide applicants for loans secured by a first lien on a dwelling with a copy of any written valuations no later than 3 days before closing, regardless of whether the creditor grants or denies the application. The applicant may be charged a reasonable fee for the cost of procuring the appraisal, except that the creditor is required to provide a copy of the appraisal at no additional cost. Creditors must notify applicants in writing of this right at the time of application.
Disclosure of AMC fees. RESPA (new 12 U.S.C. Section 2603(c)) is amended to give HUD the authority to amend the settlement statement to disclose separately, where an appraisal is coordinated by an AMC, the fee paid to the appraiser and the administration fee charged by the AMC.
Registry fee. The annual registry fee paid by appraisers is raised from $25 to $40. New fees are assessed on AMCs, which vary depending on how long they have been in operation and the number of appraisers that work for, or contract with, the AMC. These fees may be adjusted periodically by the Appraisal Subcommittee.
GAO study. The Government Accountability Office is required to conduct a study on the effectiveness and impact of appraisal methods, valuation models, appraisal distribution channels (including AMCs), the HVCC (even though it will have been eliminated), and the Appraisal Subcommittee’s own functions, and submit reports to Congress. The subjects of the reports are varied, and suggest Congress’s active interest in possible further legislation.
The text of the Dodd-Frank Act is available here.
- AMC means: “in connection with valuing properties collateralizing mortgage loans or mortgages incorporated into a securitization, any external third party authorized either by a creditor of a consumer credit transaction secured by a consumer’s principal dwelling or by an underwriter of or other principal in the secondary mortgage markets, that oversees a network or panel of more than 15 certified or licensed appraisers in a State or 25 or more nationally within a given year—
- ‘‘(A) to recruit, select, and retain appraisers;
- ‘‘(B) to contract with licensed and certified appraisers to perform appraisal assignments;
- ‘‘© to manage the process of having an appraisal performed, including providing administrative duties such as receiving appraisal orders and appraisal reports, submitting completed appraisal reports to creditors and underwriters, collecting fees from creditors and underwriters for services provided, and reimbursing appraisers for services performed; or
- ‘‘(D) to review and verify the work of appraisers.’
- The term is defined as ”any computerized model used by mortgage originators and secondary market issuers to determine the collateral worth of a mortgage secured by a consumer’s principal dwelling.”
- The term is defined as “an estimate prepared by a real estate broker, agent, or sales person that details the probable selling price of a particular piece of real estate property and provides a varying level of detail about the property’s condition, market, and neighborhood, and information on comparable sales, but does not include an automated valuation model, as defined in section 1125(c).”
The information contained in this CBA Regulatory Compliance Bulletin is not intended to constitute, and should not be received as, legal advice. Please consult with your counsel for more detailed information applicable to your institution.
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