Earlier this year, the CFPB announced it is working on a real estate issue that gets to the core of the agency's purpose: bringing transparency and better disclosures about the obscure and costly fees during the loan process.
In an industry challenged with inadequate communications and disclosures, it can’t be understated how important the relationship is between fees paid to appraisers and the quality of the service—and how this relationship must be communicated clearly in order to support a strong lending portfolio.
This is an important and critical issue that unfortunately does not have the momentum behind it that the market requires. When appraisers are paid a reasonable and customary fee for their services, expect an improvement in appraisal quality, on-time delivery, fewer revisions and reduced turn-time on revisions.
Fees should be based on what appraisers were normally paid on independent appraisals, before any is taken off the top.
However, increasing the fee paid by the borrower does not guarantee higher fees to the appraiser. Frequently, appraisal management companies agree to retain a fee and pay the balance to the appraiser. This balance is inconsistent and can change to the detriment of the appraiser.
For lenders that work with appraisal management companies, oftentimes the fee is negotiated in the beginning of the relationship, while the management company then begins to negotiate with the appraiser.
It is critical to know exactly what portion of the fee is forwarded to the appraiser. Appraisers are brought on to panels with lower fees, but with the guarantee of more work. The potential risk to the lender is ending up with a poor quality appraisal report supporting the loan. This is avoided by clearly understanding the process and negotiations between the appraisal management company and the appraiser.
On every appraisal invoice, the fee charged to the borrower, the fee paid to the appraiser and the fee retained by the management company should be clearly identified. Lenders should know if the report ending up in their loan portfolio is a $350 or $200 report. Quality in, quality out. All references to the appraiser’s actual fee should be included.
Full disclosure would support the regulations set forth in the Dodd-Frank Act to strengthen this aspect of the industry, and should be addressed and clearly identified. Instead of a method shrouded in secrecy, the system needs to be strengthened with reasonable and customary fees paid for quality service and fee transparency throughout the loan process.
Dennis Ashcroft is senior vice president for Appraisal Logistics, a nationwide appraisal management company.