New TILA-RESPA Integrated Disclosure rules took effect Oct. 3, but from an appraisal standpoint, the rule has notable flaws regarding fee disclosures and zero-tolerance requirements.
The rule is a classic example of an agency choosing to walk the fence on an important policy issue — in this case how to treat the disclosure of appraisal management company fees. During the proposed rule phase, the Consumer Financial Protection Bureau worried that consumers might be confused by additional fees (including AMC fees) being disclosed on the new consumer disclosure statement, so it ended up allowing — but not requiring — AMC fee disclosure, even though the Dodd-Frank Act clearly authorized the requirement. While banks can disclose AMC fees to consumers, they also are allowed to continue to lump them in with appraisal fees.
The constraints around new zero-tolerance requirements for any service that consumers cannot shop for — including appraisals — and the “changed circumstances” regime can unnecessarily complicate and compromise the preparation of credible appraisals. The Appraisal Institute finds it unrealistic and unreasonable to require appraisers to predict the exact scope of work for the assignment sight unseen, which some lenders may require in order to avoid complications with the rule. Public records are not perfect, and situations will arise that require additional due diligence in the preparation of a credible report.
AI has encouraged the CFPB to provide additional guidance on appraisal implementation issues, particularly on matters involving changed circumstances. AI is not optimistic that the agency will issue any additional guidance in the short-term, but expects guidance eventually will come.
In related TRID news, AI is part of a coalition of real estate finance and development organizations supporting legislation that would impose a six-month grace period on enforcement of the new rules. The bill, HR 3192, the Homebuyers Assistance Act, passed the House on Oct. 7 by a veto-proof majority.
The Trade Pacific Partnership agreement, signed Oct. 5 by the U.S. and 11 other countries, may result in increased merger and acquisition activity, according to an analysis from the Wharton School of the University of Pennsylvania. M&A activity requires a significant amount of valuation work.
Separately, the TPP is reported by the White House to have sections on sustainable development, capacity building and trade within the services industry, which also may directly or indirectly impact valuation.
In addition to the U.S., the countries that signed the TPP are: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. Ratification of the agreement faces opposition from some quarters in Congress, and is a hot topic in the current presidential campaign.
IN THE AGENCIES
Appraisal Institute President-Elect J. Scott Robinson, MAI, SRA, AI-GRS, testified Aug. 13 in Washington before the U.S. Department of Labor’s Employee Benefits Security Administration regarding its rule proposing a new definition of “fiduciary.”
Robinson said the Appraisal Institute is concerned about the proposed rule because it confuses the role of appraisals in buying and selling decisions and fails to note a distinction between appraisals prepared for investment managers and services referred to as “fairness opinions,” which are two completely different items.
In an Aug. 31 comment letter on the National Credit Union Administration’s proposed rule to expand credit union business lending, the Appraisal Institute asked the NCUA to mirror regulations and guidance issued by federal bank regulatory agencies relative to construction and development loans. AI also asked for meaningful oversight should credit unions expand their lending footprint.
Specifically, AI urged the NCUA to avoid creating competitive advantages or disadvantages with banks relative to examination procedures and protocols in real estate loans, stating, “Our experience is that most credit unions do not have functioning real estate risk management operations, including appraisal departments or operations. This would need to change if credit unions were to expand into this area.”
AI further stated, “It is incumbent upon the NCUA to ensure that such activities are on a par with that of the federal bank regulatory agencies as it relates to risk management examinations, which have been revamped and refocused in recent years. Doing anything short of this increases the potential for credit union failures and puts taxpayers at risk.”
AI also asked the NCUA to look at the work of other federal bank regulatory agencies for regulations relating to construction and development loans. “Relative to this set of loans, we see little value in veering from well-established policies and procedures maintained by the federal bank regulatory agencies,” AI wrote. “We urge the NCUA to refer to, or reference, work already completed and widely available in this area, including the Office of the Comptroller’s Handbook on Commercial Real Estate Lending, which was updated in 2013.”
The Obama administration on Aug. 24 announced its intentions to issue guidance that would preserve the priority status of Federal Housing Administration loans over those created by the Property Assessed Clean Energy program, which allows homeowners to obtain financing to make their homes more energy efficient.
Ahead of the issuance of guidance, AI sent a letter to U.S. Department of Housing and Urban Development Secretary Julian Castro on how FHA should address appraisals of properties with PACE liens, noting, “We believe risk management can, and should be enhanced by loan-to-value requirements enabled through a credible appraisal process, and we encourage FHA to integrate such requirements in any plan involving PACE or loans backing properties with green or energy efficient features.”
The letter further stated, “The existence of PACE loans as liens on properties may impact subsequent appraisal assignments, either as subject properties or comparable properties analyzed by appraisers. The existence of a PACE loan is comparable with situations that involve a special assessment for sewer or water. The special assessment can pass to the new buyer or be paid off by the seller. The sale price paid is negotiated based on who assumes the special assessment. From a valuation perspective, it is important to understand whether a seller paid assessment influenced the sales price. This is best understood by comparing sales with a PACE Loan or Special Assessment to a sale without one, which can quickly reveal if the Assessment affected the price paid.”
The PACE guidance is expected to be released within the next few months.
The U.S. Department of Housing and Urban Development’s Inspector General met with members of the Appraisal Institute’s Washington office on Sept. 14, to discuss recent spikes in fraud surrounding Home Equity Conversion Mortgages, also known as reverse mortgages. HUD OIG’s appraisal concerns revolve around “cherry-picked comps” for properties being refinanced at a higher rate in bad neighborhoods. Active investigations reportedly are underway.
HUD continues to investigate its appraisal concerns and AI will continue to provide support to the agency on this issue.
STANDARDS SETTERS
The Georgia Real Estate Appraiser Board on Sept. 9 adopted new rules for appraisal management companies operating in the state, requiring them to compensate appraisers at a rate that is reasonable and customary.
An AMC is presumed to comply with the new rules if it compensates the appraiser in an amount that is reasonably related to recent rates paid for comparable appraisal services performed for one- to four-family residential units within the geographic market of the property being appraised and the AMC takes into consideration a number of specific factors regarding the appraisal.
As an alternative presumption of compliance, an AMC may utilize third-party information, including fee schedules; studies; and surveys prepared by independent third-parties, including government agencies, academic institutions, and private research firms.
The new Georgia rules also: 1) Require AMCs to satisfy payment obligations for work performed by an appraiser within 30 days from the completion of an appraisal; 2) Require AMCs to preserve the data and format of the appraisal as submitted by the appraiser; and 3) Prohibit AMCs from requiring an appraiser to indemnify it or hold it harmless from liability, damage, losses or claims arising out of the services provided by the AMC.
The Kentucky Real Estate Appraisers Board on May 28 released the results of a study of the state’s residential property appraisal fees. The study was requested by the KREAB in relation to a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
North Carolina Gov. Pat McCrory on Aug. 5 signed into law HB 651, legislation that eliminates the discovery rule for civil action related to real estate appraisals and establishes a five-year statute of limitations that brings the state in line with the Uniform Standards of Professional Appraisal Practice.
The bill also eliminates the need for appraisers to submit a separate background check to each appraisal management company for which they work. Instead, appraisers will be able to cycle a single up-to-date background check to each AMC — a process that should streamline the background check process and reduce costs.
“This bill provides regulatory relief for small businesses,” said Rep. Jon Hardister, R-Guilford, the legislator who introduced the bill. “It is a good, bipartisan bill that makes sensible changes to laws regulating the real estate appraisal industry. This bill will reduce costs on small businesses and independent contractors across the state.”
The bill was supported by the Appraisal Institute’s North Carolina Chapter and the North Carolina Real Estate Appraisers Association.
South Dakota has a similar provision, enacted in 2007, that states, “No action may be brought against a licensed real estate appraiser, or any agent or employee thereof, for malpractice, error, mistake or omission, whether based upon contract or tort, unless it is commenced within three years of the occurrence of the alleged malpractice, error, mistake or omission.” However, the South Dakota law failed to include an appraiser’s employer within its protections, therefore lawsuits may still be brought against an appraisal firm for actions of its employee appraisers outside of the three-year period.
AI chapters encountering similar legislation in their state are requested to contact AI’s Washington office so that legislation language can be drafted to provide maximum protection to appraisers.
Staff from the Appraisal Institute’s Washington office appeared before the Florida Real Estate Appraiser Board on Oct. 5 to advise FREAB on how the state can modernize and update its appraiser regulatory system.
AI recommended that FREAB consider a rulemaking proceeding, which would allow state-certified appraisers to utilize standards of valuation practice other than the Uniform Standards of Professional Appraisal Practice when performing appraisals for non-federal, non-mortgage lending.
These proposed rule changes are consistent with amendments to Florida’s real estate appraisal law regarding standards of professional practice that were adopted by the legislature in 2012 and allow FREAB to adopt rules “establishing standards of professional practice which meet or exceed nationally recognized standards of appraisal practice.”
AI should have an update on Florida’s regulatory modernization efforts in a future edition of the Washington Report.
The Appraisal Institute on Oct. 1 sent correspondence to the Oregon Appraiser Licensing and Certification Board seeking clarification of an issue regarding appraisal report “due dates” that was included in an ALCB email sent to Oregon appraisers.
The ALCB’s Sept. 18 email alleged that a “Due Date is an assignment condition” and that “Failing to adhere to the assignment condition can be an actionable violation of the Uniform Standards of Professional Appraisal Practice and Oregon Statute.” Additionally, the email indicated that appraisers who have missed a “due date” have acted in “bad faith” in violation of Oregon law.
In its letter to the ALCB, AI stated, “There is nothing in USPAP that says that a violation of an assignment condition is a violation of USPAP.” Additionally, AI wrote, “What USPAP says is that accepting an assignment condition that precludes an appraiser’s impartiality, limits the scope of work so that the assignment results aren’t credible, or limits the content of a report so that it’s misleading, is unacceptable.” Finally, AI noted, “Not satisfying an assignment condition itself isn’t the violation of USPAP, it’s the misdeeds it can cause.”
AI currently is awaiting a response from the ALCB.
INSIDE THE INSTITUTE
The Appraisal Institute and the Land Trust Alliance announced Oct. 14 a cooperative effort to identify and promote education, experience and other qualifications necessary for the valuation of conservation easements. Additionally, the organizations will provide professional development on the subject to appraisers and land trust officials.
AI maintains an industry-leading professional development program on the valuation of conservation easements, which has been completed by nearly 1,000 valuation professionals.
The joint agreement also promotes the importance of appraisal review to the conservation easement process, which has become increasingly important in light of increased scrutiny given to non-cash charitable contributions.
The organizations will reinforce the importance of adhering to requirements from both state and federal revenue agencies and other tax issues concerning the donation of land and open space; LTA warned its members in September about a potential tax scheme involving real estate tax syndications that may involve inflated appraisals.
AI professionals are urged to read an LTA
member advisory and
article published in Saving Land magazine and proceed with caution on appraisal assignments engaged by tax consultants and facilitators and where short-term investors may be pursuing tax benefits.
Liability Insurance Administrators, an AI-endorsed E&O insurance carrier, is sounding the alarm on lawsuit-for-profit schemes brought against appraisers, and AI is highlighting the issue here to increase awareness. AI professionals are encouraged to read more about the issue in the third quarter 2015 Valuation magazine and on the LIA blog to familiarize themselves with this growing appraiser litigation crisis.
Real estate finance professionals who use valuation services are invited to attend a stakeholder’s forum Nov. 17 in Chicago to discuss appraisal regulatory modernization, the application of new appraisal concepts in lending transactions and new opportunities and solutions for both users and AI professionals.
The meeting is free to attendees, but space is limited to those working for both commercial and residential real estate finance organizations. Sign up today!