In looking back over some of the recent history of Federal Regulation and Appraisals, concern had been raised about the need to ensure that appraisals are provided free of any coercion or improper influence. Based on those concerns, in 2008, the Federal Reserve Board used its authority under the Home Ownership and Equity Protection Act (HOEPA) to prohibit a creditor from influencing an appraiser to misstate the value of a consumer's principal dwelling (2008 Appraisal Independence Rules). The Dodd-Frank Act essentially codifies the 2008 Appraisal Independence Rules and EXPANDS on the protections in those rules. The scope is much broader. The 2008 Appraisal Independence Rules applied to closed-end loans. These new regulations also encompass home-equity lines of credit (HELOCs).
On July 21, 2010, the Dodd-Frank Act was signed into law. This bill covers many areas, but the portion relative to appraisals and mortgage financing is Subtitle F - Appraisal Activities, Sec. 1471 through Sec. 1476. Section 1472 amended The Truth in Lending Act (TILA), directing the Federal Reserve Board to establish new requirements for appraisal independence. These provisions are contained in TILA Section 129E, which applies to any consumer credit transaction that is secured by the consumer's principal dwelling. TILA Section 129E authorizes the Federal Reserve Board (the Board), the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), the Federal Housing Finance Authority (FHFA), and the Consumer Financial Protection Bureau (CFPB), to issue rules and guidelines. Those guidelines were announced on December 2, 2010, with a compliance date of December 10, 2010, as The 2010 Interagency Appraisal and Evaluation Guidelines. A discussion of those follows on another page. However, Dodd-Frank also directed the Federal Reserve Board to issue interim final regulations to implement the appraisal independence requirements within 90 days of enactment of the Dodd-Frank Act. This Interim Final Rule was announced on October 18, 2010, with a compliance date of April 1, 2011. Links to the entire Dodd-Frank Act can be found on below, as well as for the entire Federal Reserve Interim Final Rule. Also below there are exceptions from the Federal Reserve Final Rule, this is four pages of reading, but believe me, it's condensed! The exceptions are identified by page number for more extended research, if desired. The last exception is from page 119, so if you want to find out a lot about this ruling, this is the easy way. What is the main message of the Interim Final Rule? A complete separation of the community bank's appraisal management process (selecting the appraiser, ordering the appraisal, and reviewing the appraisal) from anyone involved in the community bank's loan production function.
The Interim Final Rule is specific about the requirement to pay "reasonable and customary" fees to the appraiser. SAMCO already does that for our community bank/credit union clients and their board approved appraiser panel of local appraisers, so we have not included that in the exceptions below. Also, not included below, is the regulatory requirements for Appraisal Management Company licensing, in the interest of remaining brief. If you are interested in your own state's AMC licensing requirements, go to "State Appraiser Licensing and Certification Boards" under the heading "New Regulatory Guidelines". Appraisal Management Companies are licensed by each state's Appraiser Board of Licensing. We have each state's licensing board contact information listed for you. SAMCO Appraisal Management Company is becoming state-licensed as the states legislate this into a reality.
There have been many changes mandated by the Dodd-Frank and the Interim Final Rule but the startling fact is that only 221 out of 400 set of rules have been approved to date, the balance have had their enactment deadline totally missed! This tremendous delay only means one thing to the community lender, uncertainty for now and much more change down the road.
Federal Reserve Interim Rule
Federal Reserve Board
Truth in Lending
Interim Final Rule
Highlights of the Interim Final Rule include the following:
Federal Reserve System
Truth in Lending
AGENCY: Board of Governors of the Federal Reserve System
TILA (REG. Z) established new requirements for appraisal independence for consumer credit transactions secured by the consumer's principal dwelling. To ensure that real estate appraisals are based on the appraiser's independent professional judgment, free of any influence or pressure that may be exerted by parties that have an interest in the transaction. (Page number 1)
Compliance date is April 1, 2011.
Part of the appraisal independence provisions are: Prohibit coercion, bribery and other similar actions designed to cause an appraiser to base the appraised value of the property on factors other than the appraiser's independent judgment. (3)
These provisions are contained in TILA Section 129E, which applies to any consumer credit transaction that is secured by the consumer's principal dwelling. (Commercial is not included.) (4)
TILA Section 129E (g)(1) authorizes the Board (Federal Reserve), the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), the Federal Housing Finance Authority (FHFA), and the Consumer Financial Protection Bureau (CFPB) to issue rules and guidelines. TILA, however, requires the Board to issue interim final regulations to implement the appraisal independence requirements within 90 days of enactment of the Dodd-Frank Act. (4)
The scope of the Interim Final Rule is broader than the 2008 Appraisal Independence Rules; those rules apply to closed-end loans but not to home-equity lines of credit (HELOCs). The Dodd-Frank Act does not limit coverage to closed-end loans and also covers HELOCs. (6)
TILA shall not be construed as prohibiting a person with an interest in a real estate transaction from asking an appraiser to: (1) consider additional, appropriate property information, including information regarding addtional comparable properties to make or support an appraisal; (2) provide further detail, substantiation, or explanation for the appraiser's value conclusions; or (3) correct errors in the appraisal report. (19)
The person performing valuation management functions reports to a person who is not part of the creditor's loan production function, or whose compensation is not based on the closing of the transaction to which the valuation relates. The Board also notes that this condition is similar to requirements in the HVCC, such as that "the appraiser or if an affiliate, the company for which the appraiser works", report to a function of the creditor "independent of sales or loan production for staff that order, accept, and review appraisals and evaluations." (44)
The third condition requires that employees, officers, and directors in the creditor's loan production function not be directly or indirectly involved in selecting, retaining, recommending, or influencing the selection of the person to perform a particular valuation or to be included in or excluded from a list or panel of approved persons who perform valuations. This safe harbor condition is intended to curtail coercion of appraisers that occurs through giving or withholding assignments, or removing the appraiser from, or including the appraiser on, a panel or list of persons approved to perform valuations. This condition is also intended to prevent loan sales or production staff from interfering with the independence of the valuation by choosing appraisers who may be perceived to give especially high or low values. (46)
Comment 42 (d)(2)(ii)-2 clarifies the prohibition on any employee, officer, or director in the creditor's loan production function...from direct or indirect involvement in selecting, retaining, recommending, or influencing the selection of the person to perform a valuation or valuation management functions for a covered transaction, or to be included in or excluded from a list or panel of approved persons who prepare valuations or perform valuation management functions. (46)
"Loan production function" means an employee, officer, director, department, division, or other unit of a creditor with responsibility for generating covered transactions, approving covered transactions, or both. This definition is generally consistent with the federal banking agencies' use of the term "loan production function" or "loan production staff". (53)
B. Summary of the Dodd-Frank Act
As discussed above in the SUPPLEMENTARY INFORMATION, the Dodd-Frank Act prohibits any person, in extending credit or providing services, from violating appraisal independence for consumer credit transactions secured by the consumer's principal dwelling. The Dodd-Frank Act specifies that practices that violate appraisal independence include: (1) coercing or otherwise influencing any person, appraisal management company, firm or other entity conducting or involved in an appraisal for the purpose of causing the appraised value to be based on any factor other than the appraiser's independent judgment; (2) mischaracterizing or suborning any mischaracterization of the appraised value; (3) seeking to influence or encourage a target value in order to make or price a transaction; and (4) withholding or threatening to withhold timely payment for appraisal services or reports. (88)
In summary, the objectives of the Interim Final Rule are to ensure that appraisals used to support creditors' underwriting decisions for consumer credit transactions secured by the consumer's principal dwelling are based on the appraiser's independent professional judgment, free of any influence or pressure that may be exerted by parties that have an interest in the transaction. (89)
...the Dodd-Frank Act expands the requirements for appraisal independence significantly beyond the requirements in the 2008 Appraisal Independence Rules. The effect of the Interim Final Rule on small entities is unknown. Some small entities would be required, among other things, to modify their systems to comply with the Interim Final Rules. (94)
Section 226.42(c)(1) prohibits both direct and indirect attempts to cause the value assigned to the consumer's principal dwelling to be based on a factor other than the independent judgment of the person that prepares the valuation, through coercion and certain other acts and practices.
1. Direct or indirect involvement in selection of person who prepares a valuation. In any covered transaction, the safe harbor under paragraph (d)(2) is available if, among other things, no employee, officer, or director in the creditor's loan production function...is directly or indirectly involved in selecting, retaining, recommending or influencing the selection of the person to prepare a valuation or perform valuation management functions, or to be included in or excluded from a list or panel of approved persons who prepare valuations or perform valuation management functions. (119)