Taking a Closer Look at Appraisals now that Dodd Frank is on its Way to the President's Desk

The Senate passed the Dodd Frank bill at about 3:00 P.M.Eastern Standard time this afternoon. The bill is expected to be signed by the President next week, and then the long process of implementing each of the various changes to the financial system which are codified into law will begin.

I read this afternoon that the new law requires that over 550 new regulations be written, so we will not really know what we have on our hands for quite some time.

On that note, I need to correct and amplify a post from last week regarding HVCC and the new law. First, an apology. I always want to be as accurate as possible, and I said in error that the bill does not get rid of HVCC. The section on appraisals starts on page 2205 of the bill, in Subtitle F, and goes on to about page 2251. I started reading further past that, so I missed the paragraph sunseting the bill. On page 2216, paragraph J, the bill reads, "Sunset--Effective on the date the interim final regulations are promulgated pursuant to subsection g, the Home Valuation Code of Conduct announced by the Federal Housing Finance Agency on December 23, 2008 shall have no force or effect." So, technically, HVCC is gone. But many of the provisions of the code are enacted into the new bill. I am quoting here, but I invite everyone to read this section and see if you interpret it as I do.

For instance, on page 2208, section (c) "Free Copy of Appraisal:--A creditor shall provide 1 copy of each appraisal conducted in accordance with this section in connection with a higher-risk mortgage to the applicant without charge, and at least 3 days prior to the transaction closing date." Page 2243 states, under copies furnished to applicants--"In general each creditor shall furnish an applicant a copy of any and all written appraisals and valuations developed in connection with the applicant's applications for a loan that is secured or would have been secured by a first lien dwelling promptly upon completion, but in no case later than 3 days prior to the closing of the loan..." And then on page 2244 it clarifies, "The applicant may waive the 3 day requirement provided for in paragraph (1) except where otherwise required in law."

This language comes directly from the home valuation code of conduct. I certainly have no problem furnishing borrowers with their appraisals--we always did even before HVCC, but this three day requirement with a possibility for a waiver came straight out of Cuomo's rule. We even have a form that borrowers have to sign with this exact language in it. So the three day rule with possibility of waiver is here to stay.

The House bill was supposed to contain strong language to guarantee appraiser independence. Page 2210 Section 129E states, "In General--It shall be unlawful, in extending credit or in providing any services for a consumer credit transaction secured by the principal dwelling of the consumer, to engage in any act or practice that violates appraiser independence as described in or pursuant to regulations prescribed by this section...For purposes of subsection a, acts or practices that violate appraisal independence shall include--any appraisal of a property offered as security for repayment of the consumer credit transaction that is conducted in connection with such transaction in which a person 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; mischaractering, or suborning any mischaracterization of, the appraised value of the property securing the extension of the credit; seeking to influence an appraiser or otherwise to encourage a targeted value in order to facilitate the making or pricing of a transaction; and 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 parties." This section goes on to say, that these requirements shall not be construed to prevent any mortgage lender, mortgage banker, mortgage broker, real estate broker, appraisal management company, employee of an appraisal management company, consumer or any other person with an interest in a real estate transaction from asking an appraiser to: "Consider additional appropriate property information, including the consideration of additional comparable properties to make or support an appraisal; provide further detail, substantiation or explanation for the appraiser's value conclusion,[or] correct errors in the appraisal report." This final sentence is also straight out of the Home Valuation Code of Conduct. These were the three areas in which a lender could request that changes be made to a report.

Nothing in the new law appears to prohibit loan originators from ordering appraisals or having contact with the appraiser. However, the penalties for anything which may be interpreted as collusion are so severe that I believe in practice lenders will have to continue using AMCs. Page 2212 Section E, "Mandatory Reporting--Any mortgage lender, mortgage broker, mortgage banker, real estate broker, appraisal management company, employee of an appraisal management company, or any other person involved in a real estate transaction involving an appraisal in connection with a consumer credit transaction secured by the principal dwelling of a consumer who has a reasonable basis to believe an appraiser is failing to comply with the Uniform Standards of Professional Appraisal Practice is violating applicable laws, or is otherwise engaging in unethical or unprofessional conduct, shall refer the matter to the applicable State appraiser certifying and licensing agency."

On the creditor side, "In connection with a consumer credit transaction secured by a consumer's principal dwelling, a creditor who knows at or before loan consummation, of a violation of the appraisal independence standards established in subsections (b) or (d) shall not extend credit based on such appraisal unless the creditor documents that the creditor has acted with reasonable diligence to determine that the appraisal does not materially misstate or misrepresent the value of such dwelling."

The penalties for violating this statute are severe. Violates "shall forfeit and pay a civil penalty of not more than $10,000 for each day that any such violation continues" for the first violation and $20,000 per day for any subsequent violation (page 2216 and 2217 section K items 1 and 2). OUCH! Those types of penalties are stiff enough to get anyone's attention. Further, the exact activities that constitute violations are unclear because these will be written in regulations developed by the Consumer Financial Protection Bureau along with the Federal Reserve Board and other regulatory agencies. "[They] and the Bureau may jointly issue rules, interpretive guidelines, and general statements of policy with respect to acts or practices that violate appraisal independence in the provision of mortgage lending services." Page 2214 states, "The Board shall, for purposes of this section, prescribe interim final regulations no later than 90 days after the date of enactment of this section defining with specificity acts or practices that violate appraisal independence in the provision of mortgage lending services..." Those rules, whatever they are, will determine the extent of the contact, if any, that the loan originator is allowed to have with the appraiser. But if a lender and I are both facing a $10,000 fine if the government decides that we are influencing the appraiser, both of us are going to err on the side of extreme caution. And if a loan that violates appraiser independence is an illegal loan, which it now is, we are going to be doubly careful. So I believe that ultimately, the use of AMCs will spread to all loans, not just those sold to Fannie Mae and Freddie Mac. Right now, my portfolio savings and loan lender can accept an appraisal that is not HVCC compliant because they don't sell the loan, but when this bill becomes law next week, they will not want to face the fines and consequences of having an appraisal that I ordered in the file. And I believe that the authors of this bill know this too, because they have instructed that the new good faith estimates should contain a breakdown of the AMCs fee and the part that was actually paid to the appraiser.

The bill does correct one big problem with HVCC and that is the low pay of appraisers by AMCs. On page 2215, the bill states that lenders and their agents shall compensate fee 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 ordered by known appraisal managemnt companies." And the bill makes provision for a fee appraiser to charge more for a complex report: "In the case of an appraisal involving a complex assignment, the customary and reasonable fee may reflect the increased time, difficulty and scope of the work required for such an appraisal and include an amount over and above the customary and reasonable fee for non complex assignments."

Finally, one of the most frustrating and expensive aspects of HVCC for the loan officer and the borrower is that appraisals are basically not portable among lenders. Today, for instance, I have a loan that was declined, but the borrower had already paid for and received a perfectly good appraisal and a rent comp schedule. These two products are expensive, but she has no choice but to order new ones. When I was explaining to the agent that we have to move the loan, she said, "Under the new rules they have to transfer the appraisal." I explained that the financial reform bill will not be law until next week, but I looked up this provision especially because of this conversation. Page 2214 states under letter (h) Appraisal Report Portability, "Consistent with the requirements of this section, the Board, [and other federal agencies] may jointly issue regulations that address the issue of appraisal portability, including regulations that ensure the portability of the appraisal report between lenders for a consumer credit transaction secured by a 1-4 single family residence that is a principal dwelling of the consumer." So what does that mean exactly? We have to wait until they write the new rules to find out.

Alexandra Swann is the author of No Regrets: How Homeschooling Earned me a Master's Degree at Age Sixteen and several other books.  For more information, visit her website at http://www.frontier2000.net