Interim Final Rule on Appraisal Independence

Transcription

1 November 1, 2010 Interim Final Rule on Appraisal Independence Executive Summary The Federal Reserve Board (Fed) has issued an interim final rule that will amend Regulation Z, the Truth in Lending Act, 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 transaction. The rule is also intended to ensure that appraisers receive customary and reasonable payments for their services. This rule is required under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Many of the provisions of this rule are similar to those of the Home Valuation Code of Conduct that applied to loans sold to Freddie Mac and Fannie Mae and which was repealed by the Dodd- Frank Act. This rule is also consistent with current appraisal rules and guidance that apply to credit unions. Among other provisions the interim final rule will: o Prohibit coercion or other similar actions designed to cause appraisers to base the value of properties on factors other than independent judgment. o Prohibit appraisers and appraisal management companies (AMCs) hired by lenders from having financial or other interests in the properties or credit transactions. o Prohibit 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 property values are not materially misstated. o Require that creditors or settlement service providers that have information about appraiser misconduct file reports with the appropriate state licensing authorities. o Require the payment of reasonable and customary compensation to appraisers who are not employees of the creditors or of the AMCs hired by the creditors.

2 Compliance with the interim rule will be mandatory as of April 1, 2011 and will apply to applications received on or after that date. Comments are due by December 27, Please submit comments to CUNA by December 17, If commenting directly to the Fed, you must refer to Docket No. R Please feel free to fax your responses to CUNA at ; them to Senior Vice President and Deputy General Counsel Mary Dunn at and to Senior Assistant General Counsel Jeff Bloch at or mail them to Mary and Jeff c/o CUNA s Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, Suite 600, Washington, DC You may also contact us at , ext. 6732, if you would like a copy of the interim final rule, and you may access it on the Internet at the following address: BACKGROUND The Dodd-Frank Act establishes new requirements for appraisal independence and requires the Fed to issue a rule under Regulation Z, the Truth in Lending Act, to implement them within 90 days after enactment. This rule will apply to any consumer credit transaction that is secured by the consumer s principal home and will apply to creditors, AMCs, appraisers, mortgage brokers, realtors, title insurers, and other settlement service providers. Since these Dodd-Frank provisions essentially codify in many respects the Home Ownership and Equity Protection Act rules that the Fed issued in 2008, this interim final rule incorporates those HOEPA rules and expands them to all loans secured by the consumer s principal home, including home equity lines of credit. As a result, those HOEPA rules applicable to appraisal independence will be removed as of April 1, 2011, although compliance with those rules will be required for applications received before that date even if credit is extended after April 1 st. However, credit unions may comply with this interim final rule before April 1 st, in which case this will constitute compliance with those HOEPA rules. In addition, other existing appraisal rules and guidance will still apply. DESCRIPTION OF THE INTERIM FINAL RULE AND CHANGES TO THE OFFICIAL STAFF COMMENTARY General Information The interim final rule will apply to all property valuations, in addition to formal appraisals. This includes estimates of the value of the consumer s primary home, in either electronic or written form, other than one produced solely by an automated model or system, although this will include valuations that are based 2

3 in part on the use of an automated model or system. As for appraisers, unless otherwise noted, this will apply to anyone who performs valuation functions for the consumer s primary home, not just those who are licensed or certified appraisers or who otherwise perform formal appraisals. Restrictions on Property Valuations Those covered under the interim final rule are prohibited from engaging in coercion, bribery, collusion, inducement, intimidation, and other similar actions designed to cause anyone who prepares a property valuation to base the value on factors other than the person s independent judgment. This would apply to actions intended to result in a valuation that would be above or below a certain amount. However, this provision would not prevent a person from requesting the appraiser to consider additional, appropriate property information or providing incentives to the appraiser, as long as this does not affect his or her independent judgment. Here are examples of actions that would violate this provision: Withholding, or threatening to withhold, timely payment under the terms of a contract, although this provision would not apply if compensation is withheld for breach of contract or substandard performance of services. Implying that current or future retention of the appraiser depends on his or her valuation. Conditioning the compensation paid to the appraiser on the consummation of the loan. The interim final rule prohibits an appraiser from materially misrepresenting the value of the consumer s home. However, a bona fide error will not violate this provision. Others may not materially alter the valuation, other than the appraiser, although this will not include alterations that do not significantly affect the value assigned to the home. Also, no one may induce another person to violate either of these prohibitions. However, this will not prevent creditors and others from requesting that the appraiser correct errors in the valuation. The interim final rule does not prohibit the obtaining of multiple valuations of a single property in order to select the most reliable valuation. The interim final rule also does not otherwise prohibit an action that is permitted or required under applicable federal or state law, regulation, or agency guidance. Those covered under the rule are also prohibited from extending credit based on a valuation if the creditor knows at or before loan consummation that: 1) coercion or similar misconduct has occurred; or 2) the person who prepares or performs a property valuation function has a prohibited interest in the property or transaction, unless the creditor uses reasonable diligence to determine that the valuation does not materially misstate the property value. 3

4 Prohibition on Conflicts of Interest In general, the interim final rule prohibits a person who provides a property valuation service from having any interest, financial or otherwise, in the property or transaction. However, having an employment relationship, such as with the creditor, or other affiliation does not, by itself, violate this prohibition. In addition, these provisions are not violated solely by the fact that the person providing the service also provides an additional settlement service. The following are examples of conduct that would be prohibited under these provisions: The person performing the valuation service has an ownership interest or a reasonably foreseeable interest, which would include when the person seeks a mortgage on the property being valued. The person providing the valuation service, or an affiliate of that entity, also serves as a loan officer of the creditor, mortgage broker, or other settlement service provider, unless the safe harbor for settlement providers applies, as described below. The person providing this service is compensated based on whether the loan is consummated. However, the rule provides safe harbors and specific criteria for establishing firewalls between the appraisal function and the loan production function in order to prevent conflicts of interest for appraisers who are employees or affiliates of the creditor. Different safe harbors apply for creditors with assets of more than $250 million as of December 31 st for both of the past two calendar years and for creditors with assets of $250 million or less as of December 31 st for either of the past two calendar years. If the conditions of these safe harbors are satisfied, then the creditor may rely on valuations prepared by in-house staff or affiliates. If these conditions are not met, then violations are determined based on all of the facts and circumstances. These safe harbors also apply for those who perform valuation functions in addition to other settlement services. Here are the conditions for the safe harbor for those creditors with more than $250 million in assets: The compensation of the person performing the valuation function is not based on the value arrived at in any valuation, although this does not prohibit the basing of compensation on whether the loan closes; The person performing the valuation function reports to a person who is not part of the creditor s loan production function and whose compensation is not based on whether the loan closes; and No employee, officer, or director in the creditor s loan production function is involved in any way in selecting, retaining, recommending, or influencing the selection of the one performing the valuation service, which includes deciding who should or should not be on a list of those approved to perform this function. 4

5 Here are the conditions for the safe harbor for those creditors with $250 million in assets or less: The compensation of the person performing the valuation function is not based on the value arrived at in any valuation, although this does not prohibit the basing of compensation on whether the loan closes; and The creditor requires any employee, officer, or director of the creditor who orders, performs, or reviews a valuation to abstain from participating in any decision to approve, deny, or set the terms of the transaction. Prohibited Extensions of Credit If a creditor knows at or before loan consummation of a violation of the interim final rule provisions on both misrepresentations and conflicts of interests, then it must not extend credit based on the property valuation, unless the creditor documents that it has acted with reasonable diligence to determine that the valuation does not materially misstate or misrepresent the value of the home. The interim final rule does not mandate the due diligence procedures that need to be followed. However, the creditor does not have to obtain a second valuation to document that the creditor has acted with reasonable diligence in these situations. Also, if a creditor knows there is a violation and still extends credit, this violation itself does not void the loan agreement. Whether the loan agreement is valid is determined by state or other applicable law. Customary and Reasonable Compensation The interim final rule will require a creditor or its agent to pay a fee appraiser a rate that is reasonable and customary in the geographic market where the property is located. This geographic area may be a state, metropolitan statistical area, metropolitan division, county, or other type of area. Also, this provision only covers state-licensed or certified appraisers and does not include employees of the creditor or of AMCs. However, the rule is not intended to prohibit a creditor and appraiser from negotiating a rate in good faith, prohibit a creditor from communicating to an appraiser the rates that had been submitted by other appraisers solicited for an assignment, or prohibit the negotiation of volume-based discounts for multiple assignments to one appraiser. The rule provides the following two presumptions of compliance: 1) The fee is reasonably related to recent rates paid for comparable appraisal services in the geographic market in which the property is located and in setting that fee the creditor or its agent has: Made adjustments, as necessary, after taking into account specific factors to ensure reasonable compensation, which include factoring in the type of property, scope of work, the timeframe that the appraisal is required to be 5

6 performed, the appraiser s qualifications, the appraiser s experience and professional record, and the appraiser s work quality; and Not engaged in any anticompetitive actions, in violation of state or federal law, that affect the appraisal fee, such as price-fixing, other actions that restrain trade, restricting others from entering the market, causing appraisers to leave the market, or other forms of monopolization. The following are additional clarifications with regard to the certain of the adjustments outlined above that should be made to the recent rates, although the rule does not specify amounts or percentages that should be made for each adjustment: Type of property Adjustments may be made depending on whether the property is a detached or an attached single-family property, a condominium or cooperative unit, or a manufactured home. Scope of work This may require adjustments depending on whether the inspection is exterior only or both exterior and interior, the number of comparable properties that are required to be used, the extent of the inspection, the type and extent that the data is researched, and the analysis required to reach conclusions regarding the property value. Appraiser qualifications This may include the extent the appraiser has completed continuing education courses on effective appraisal methods and related topics. Experience and professional record This may include years of service as a state-licensed or certified appraiser, as well as years of service within a geographic area or pertaining to certain property types. This may also include considering whether the appraiser has a past record of suspensions; disqualifications; or judgments for waste, fraud, abuse, or breach of legal or professional standards, in which case creditors should use caution and scrutinize the work in addition to decreasing the fee. Work quality Higher fees may be paid to appraisers with excellent performance histories. 2) The fee is established by relying on recent rates of a representative sample in the geographic area where the property is located that is determined by objective third party information. This could include appraisal fee schedules issued by the Veteran s Administration, and/or fee surveys, studies, and reports prepared by an independent third party, which may include government agencies, academic institutions, and private research firms. However, this information must not include fees paid by AMCs. The above two presumptions may be rebutted with other evidence that the fee was not customary or reasonable. Also, if these presumptions are not met, compliance with whether the fee is customary or reasonable will be determined based on all the facts and circumstances. For both presumptions, whether a rate is recent will depend on the facts and circumstances, although a rate will be 6

7 considered recent if it was charged within a year of the creditor relying on this information. A document signed by the appraiser and creditor indicating that the fee is customary and reasonable will not be sufficient to demonstrate compliance with these provisions, although they can agree to compensation based on transaction volume if the compensation still qualifies as customary and reasonable. However, these provisions do not prohibit a creditor or its agent from withholding compensation from the appraiser for failing to meet a contractual obligation or violating appraisal laws. Mandatory Reporting Requirements Under the interim final rule, a creditor or settlement service provider involved in the transaction that has a reasonable basis to believe that an appraiser has not complied with ethical, professional, or other requirements for appraisers under applicable federal or state law or regulation, or the Uniform Standards of Professional Appraisal Practice, must report this to the appropriate state licensing agency. However, this will be limited to material incidents to the extent they are likely to affect the value assigned to the property and only applies to state-licensed/certified appraisers or those otherwise subject to a state agency s jurisdiction. A reasonable basis to believe there has been a failure to comply will be based on whether the creditor or service provider has actual knowledge or information that would lead a reasonable person to believe the appraiser has materially failed to comply with these requirements. Examples of material noncompliance include mischaracterizing the value of the home, performing the appraisal in a grossly negligent manner, and accepting an appraisal assignment on condition that the value assigned will be at least as high as the purchase price. Examples of noncompliance that would not be material include the appraiser disclosing confidential information in violation of applicable law or the appraiser s failure to maintain the required errors and omissions insurance. The creditor or service provider must report these incidents within a reasonable time after it determines that noncompliance may have occurred. These incidents are to be reported to the agency for the state in which the home is located. 7

8 QUESTIONS TO CONSIDER REGARDING THE INTERIM FINAL RULE (The Fed has specifically requested comments on these issues) Should settlement service providers be exempt from some or all of these provisions as they may not have significant influence or knowledge of appraiser activities, although this may also mean that their compliance burdens should be low? Automated valuation models will be excluded from coverage under these rules. Do you agree with this approach? Have creditors or others exercised or attempted to exercise improper influence over those who develop such an automated system? The rule prohibits the material alteration of a home valuation. Are there specific types of alterations that are not material and should therefore not be prohibited? The Fed uses a $250 million threshold for the different safe harbors outlined under this rule. Should a different threshold be used or are there other factors that should be used for applying these safe harbors? Do you agree with the substance of these safe harbors, including as they apply to those who perform valuation services in addition to settlement services? 8

9 The interim final rule will not prohibit the withholding of compensation for breach of contract or for violations of applicable laws and regulations. Should the Fed specify the types of contract breaches that would not violate this rule? The interim final rule will permit volume-based discounts. Should the Fed provide more guidance regarding the permissibility of such discounts? To what extent should the Fed provide more guidance for determining whether comparable rates are recent for purposes of determining reasonable and customary compensation? Should the Fed expressly prohibit basing compensation on an appraiser s membership or lack of membership in a particular organization? The interim final rule outlines specific factors for adjusting what is considered customary and reasonable compensation that is based on recent rates in the relevant geographic area. Do you agree with these and what other factors should be considered? Is additional guidance needed regarding the anticompetitive acts that would disqualify creditors from the first presumption outlined in this rule? 9

10 For the presumption regarding third-party information, should studies and surveys be treated any differently? Should the Fed provide which third-party information would qualify for this presumption? What other guidance is needed for this presumption? For the mandatory reporting requirements, should the Fed only require this reporting if the compliance failure caused the appraised value to differ by a certain amount from the value that would have been assigned without the failure, such as 10% or more? Also, a creditor will be required to report a violation within a reasonable time after it determines that noncompliance may have occurred. What would constitute a reasonable time? Other comments? 10