The Consumer Financial Protection Bureau recently released its proposed rule on integrated mortgage disclosures, providing some direction about where the agency is headed as it creates the new mortgage lending rulebook. That is the good news. The not-so-good news is that the proposed rule, while is meant to simplify and align relevant Truth-in-Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA) requirements, presents potential compliance challenges for appraisers, appraisal management companies (AMCs) and lenders, specifically when it comes to fees.
The biggest change in the appraisal space may be the elimination of what "wiggle room" remained in appraiser and AMC fees following the 2008 revised RESPA rules that became effective in 2010. Those 2008 RESPA rules provided, generally, that the sum of charges for so-called lender-required settlement services, like AMC and appraiser fees, could not increase by more than 10 percent between the initial good faith estimate and the final closing statement. Under limited “changed circumstances” an originator may provide a revised GFE.
The new CFPB proposal—which creates new, simplified disclosure and closing statements—appears to restrict lender-required settlement charges to a 0% tolerance. In other words, appraiser and AMC fees as stated on the closing statement must match exactly the fee quoted on the initial disclosure, again subject to some limited ability to revise the disclosure when circumstances change.
This could be a challenge. USPAP (Uniform Standards for Professional Appraisal Practice) views an appraiser’s scope of work obligations as an ongoing process – one subject to revision during the development of the appraisal. Appraisers will need some flexibility to adjust their pricing accordingly. Appraisers and lenders do have some hope on this front, as buried near the back of the rule—on page 964 of the version of the proposed rule available on the CFPB’s website and blog—is an example explaining at least one circumstance where revisions to scope of work (caused by the borrower providing misleading information about the nature of the property) might actually rise to the level of a “changed circumstance” justifying a revision to the initial disclosure. To compare matters, the supplemental information to the 2008 RESPA rule, as published in the Federal Register, included an example with the opposite result – where an appraiser raised his fee by $50 after the GFE. In that example, it was suggested that the originator would not be able to pass along that increase to the borrower. This issue is one to watch for appraisers, lenders and AMCs as we begin the process of analyzing the massive new rule.
There are other questions, too. To what extent will appraisal and AMC fees count towards the new definition of "finance charge"—or APR—under the CFPB’s new rules? The new rule suggests that all such fees will be lumped in. If that’s the case, more loans may fail the “qualified mortgage” test under ability-to-repay provisions, high-cost loan rules, and even the new rules currently being written on appraisal requirements for high-risk mortgages (we wrote about those in an earlier post here), and more loans may become subject federal and state high-cost loan rules. Based on commentary included in the new proposed rule, the CFPB appears to be aware of the possible ramifications and references potential “fixes.”
Another hot-button issue addressed implicitly in the new rule is the reporting of appraiser and AMC fees on the disclosure and closing statement. The Appraisal Institute and other appraiser trade organizations had issued several comment letters in the months leading up to the proposal arguing that the CFPB should mandate that originators separately report the AMC and appraiser fee (as opposed to lumping them into a single appraisal fee). Dodd-Frank includes a provision that makes separate disclosure optional, and the CFPB’s new rule follows the Dodd-Frank provision. In the last few days, the Appraisal Institute has reported that the CFPB gave them a statement indicating that the CFPB’s intention was to follow Dodd-Frank. Occasionally, over the last few years, statements had appeared in testimony from the Appraisal Institute suggesting that they favored a strict prohibition on lenders passing through AMC fees. However, the new CFPB rule permits lenders to pass AMC fees through to borrowers.
Given the shear mass of the proposed rule (weighing in at some 1,100 pages) it will take weeks, if not months, for analysts and experts to dig through and process exactly how the proposal may affect appraisal and AMC fees. And, of course, the rule is still subject to public comment, and won’t be finalized for months. But lenders, appraisers and AMCs need to pay attention to these issues, digest the proposal, and let their voice be heard.