The Juggling Act: Tracking Regulatory Trends in Real Estate Appraisal and Valuation
“As we pick ourselves up from the crisis, we see that one source of these mortgage problems has been the validity of the home appraisal.” Leonard Nakamura of the Federal Reserve Bank of Philadelphia.
The world record for most balls juggled is 11 for two complete cycles. Imagine taking 60 objects and attempting to juggle them. Only the objects can change in midair and each object is controlled by a different person. Now imagine being that juggler, responsible for keeping all the objects aerial and in a manageable pattern. This is the challenge faced by mortgage compliance professionals in the rapidly changing appraisal and valuation industry. And it is not just the industry participants who need to juggle; regulators require strong third-party oversight controls. Even the compliance “ringmaster” has to keep his or her eye on the ball.
Federal and state regulators have been active in regulating the industry. Although much of the regulation is in response to the financial crisis and is driven by the Dodd-Frank Act (“Dodd-Frank”), some regulators have taken the opportunity to go even further. The appraisal and valuation industry is regulated by federal and state regulators. Within the federal level, there are multiple agencies and quasi-government regulators, such as Fannie Mae and Freddie Mac (collectively, the “GSEs”). Appraisal professionals must also abide by the Uniform Standards of Professional Appraisal Practices (“USPAP”) issued by the Appraisal Foundation, an organization overseen by the FFIEC’s Appraisal Subcommittee (“ASC”). This piece sets out to summarize the recent regulatory developments from the numerous regulators overseeing the appraisal and valuation industry.
Federal Regulation
ECOA Appraisal Rule
Dodd-Frank amended the Equal Credit Opportunity Act (“ECOA”) to require creditors to: (1) notify consumers that they are entitled to receive a copy of any appraisals or written valuations completed in connection with a first lien mortgage application; and (2) provide a free copy of any such appraisals or written valuations to the consumer promptly after completion. Generally, the rule applies to any application for closed-end or open-end credit secured by a first lien on a dwelling (including business purpose loans and reverse mortgages). Note the rule does not cover any subordinate loans or loans not secured by a dwelling, such as loans secured solely by land. The rule defines a “dwelling” as a residential structure that contains one to four units including individual condo units, mobile homes, and manufactured homes. A “valuation” means any estimate of the value of a dwelling developed in connection with an application for credit.
These expansive definitions have created implementation challenges for mortgage compliance professionals. First, because many homeowners are participating in loss mitigation programs, such as the federally sponsored Home Affordable Modification Program (“HAMP”), it has been difficult for servicers to determine whether a consumer is entitled to copies of valuations completed in connection with a loss mitigation application. The question is whether the homeowner has applied for credit in submitting the loss mitigation application. The Consumer Financial Protection Bureau (“CFPB”) has not given conclusive guidance on this issue. However, the CFPB noted in the preamble to the ECOA Valuations Rule that a HAMP trial or permanent modification is an application for credit that requires the servicer to share any completed appraisals with the consumer. Other loss mitigation programs may not trigger the ECOA requirements, and in most cases, the determination must be made on a case-by-case basis.
Second, mortgage compliance professionals are finding it difficult to decide what qualifies as a written valuation. For example, GSE desktop underwriting software will allow lenders to enter an estimated home value as part of a refinance application. The software returns a determination of whether an appraisal is needed or if the stated value is acceptable. Lenders are struggling to determine whether this determination is a written valuation. The CFPB has stated that certain GSE reports are considered valuations; however, it is not clear whether the simple determination of whether an appraisal is needed would be considered a GSE report that must be shared with the consumer.
Third, the scope of the rule is still being defined. There is a question whether an appraisal on a consumer’s current property (not the property subject to an application) must be shared with the consumer. This question arises in situations where consumers own a property and wish to either rent or sell it before purchasing a new property. Lenders will often complete an appraisal or valuation on the current property to determine fair market value for rental income or expected down-payment funds to be used for the new property. The question is whether such appraisals of the consumer’s current residence must be shared with the consumer despite the property not being subject to the application. These questions, and many others, are lingering in the appraisal industry and will need to be answered to ensure compliance with the rule.
AMC Proposed Rule
On March 24, 2014, federal regulators issued a joint proposed rule regarding minimum standards and registration requirements for appraisal management companies (“AMC Proposed Rule”) as required by Dodd-Frank. Under the AMC Proposed Rule, states would need to require that an AMC: (1) register with or obtain a license from the state and be subject to regulatory supervision; (2) contract with or employ only state-certified or licensed appraisers for federally related transactions; (3) require that appraisals comply with the USPAP; and (4) establish policies and procedures to ensure compliance with the appraisal independence standards established under the Truth in Lending Act (“TILA”). Further, the applicable state regulator for AMCs would need the power to: (1) approve or deny AMC registration applications; (2) examine AMC books and records; (3) verify that AMC appraisers hold valid state certifications or licenses; and (4) conduct investigations, discipline AMCs for noncompliance with related laws, and report violations to the ASC.
There are potential issues with the AMC Proposed Rule. First, states are not required to implement a regulatory structure to license AMCs. Therefore, if a state chooses not to create a licensing structure, AMCs not considered “federally regulated AMCs” would be unable to provide services for federally related transactions in that state, and lenders would have fewer options to obtain compliant appraisals. A “federally related transaction” is a real estate-related financial transaction that involves an institution regulated by the federal banking regulators and that requires an appraiser’s services under the interagency appraisal rules.
Another concern with the AMC Proposed Rule is the scope of certain key definitions. The rule notes that appraisal firms, those entities made up of individual appraisers that perform residential property appraisals, should not be included in the definition of an AMC. However, these firms do not receive an explicit exemption. They could be included in the definition of an AMC if they are considered “hybrid” entities that use both employees and independent contractors to perform appraisals. Further, the definition of an “appraiser network or panel” (a key component to being considered an AMC) leaves open the possibility that AMCs could hire part-time employees to avoid being considered an AMC. The preamble to the AMC Proposed Rule states, however, that the federal agencies will work with state regulators to monitor for such industry activities.
GSE and Agency Guidance
The following chart contains a summary of the recent guidance issued by Fannie Mae, Freddie Mac, and the Department of Housing and Urban Development (“HUD”).
Agency or GSE
Provision
Freddie Mac
Updated HAMP valuation and appraisal guidance instructing lenders and servicers to use the GSE automated property valuation model
Issued guidance regarding foreclosure and short sale valuation procedures
Clarified that appraisers do not need to be selected through an AMC but must comply with the appraisal independence requirements
Announced that the GSE would implement an automated review of appraisals submitted through its Uniform Collateral Data Portal
Fannie Mae
Issued guidance regarding appraisal disclosure requirements and appraisal procedures in connection with loan modification applications
Created a “blacklist” and placed certain appraisers on the list who will have all their appraisals reviewed by Fannie Mae staff
Amended provisions regarding acceptable appraisal practices for determining property value
Clarified that appraisers do not need to be selected through an AMC but must comply with the appraisal independence requirements
HUD
Issued guidance regarding ordering appraisals for REO properties and what can be considered market value for an REO property
Announced that the agency will move toward an electronic appraisal submission system for FHA-insured mortgages
State Regulation
Licensing and Substantive Law Changes
State regulators have been changing the licensing requirements for individual appraisers to require additional education and other qualification requirements. States are increasing the number of hours of training an individual must complete before he or she can become a state licensed appraiser. Some states – Washington, for example – are requiring college level course completion or a bachelor’s degree. Other states are implementing financial or criminal (or both) background checks as a barrier to obtaining a state real estate appraiser license. Moreover, the ASC is requiring states to implement policies to ensure that any reciprocal licenses issued by states to appraisers licensed in other states are issued based on the minimum requirements in the issuing state.
Substantively, states are changing the processes that individual appraisers must follow in completing residential real estate appraiser reports. A few states, notably Massachusetts, Missouri and New Mexico, are tinkering with key definitions into what qualifies as a valuation and what information can be relied upon when completing an appraisal. Mississippi is even proposing to regulate the method used to calculate the square footage in a residential property. Further, states have started to amend provisions regarding disclosures. Generally, most states have attempted to align new laws with federal requirements found in the ECOA Valuation Rule (see discussion above).
AMC Regulation
A majority of states (36 at time of publication) chose to pass legislation to begin licensing AMCs in response to Dodd-Frank despite not being required to do so until three years after federal regulators issue a final rule. As noted above, the AMC Proposed Rule was issued in March and a final rule will not be out until late 2014, at the earliest. Most state laws were based on the Appraisal Management Company Registration and Regulation Model Act. Because many state legislatures will either need to amend their AMC laws or pass them initially, it is expected that states will take the opportunity to further regulate the appraisal industry. Moreover, some states are creating new regulatory agencies to monitor and license AMCs. These factors signal the potential for major state regulatory movement over the next three to four years.
State AMC licensing requirements pose additional cost concerns for AMCs. Generally, states have created a licensing scheme that requires AMCs to submit: (1) a designated Controlling Person (typically a licensed appraiser); (2) biographical statements, criminal background investigation authorizations, and fingerprint cards for owners, partners, and officers; (3) organization and ownership structure charts; and (4) surety bonds ranging from $10,000 to $100,000. Further, state initial AMC licensing fees range from $125 to $5,000 and $250 to $2,500 to renew the license annually. These costs do not include AMC National Registry fees that will likely be imposed by the ASC once the registry is established.
Changes to the USPAP
A number of clarifications and amendments to the USPAP went into effect January 1, 2014. First the definition of “assignment results” was amended to clarify that the term includes an appraiser’s opinions or conclusions regarding a specific assignment and are not limited to an appraiser’s final opinion of value. Next, the USPAP changed requirements regarding reporting provisions for different types of reports. The Ethics Rule was modified to explain that an appraiser is not required to include a certification of prior services or current or prospective interest in the property in assignment reports that are not otherwise required to include such a certification. The rule states that such certification is only required in an appraisal report or appraisal review report. Finally, although not specifically a new requirement, the USPAP now states that appraisers must perform their duties competently. This was an implied requirement that is now explicitly stated.
Over the next few years, state and federal regulators will likely continue to be active in regulating the appraisal industry. Remember that compliance, like juggling, is a skill that requires concentration and an astute attention to detail. Most importantly, it requires commitment.
The post The Juggling Act: Tracking Regulatory Trends in Real Estate Appraisal and Valuation appeared first on Mortgage Compliance Magazine.