CFPB Appraisal Disclosure Rule Takes Its Toll
The Consumer Financial Protection Bureau's new notification requirements for property valuations have rekindled old industry debates over appraisal alternatives and are expected to add costs along with yet another layer of mortgage litigation risk.
Since Jan. 18, the CFPB's amendment to Regulation B hasrequired lenders to send loan applicants free copies of "all written property valuations" created to support a mortgage credit application. That includes appraisals, automated valuation models and broker price opinions.
Full appraisal reports are seen as a must in supporting mortgage loan originations, refinancing, short sale, foreclosure or other life-of-the-loan milestones. However, lenders routinely make property valuations using alternative methods to fill the information gap when a current full appraisal that is more expensive and takes longer processing time is not immediately available.
“Regulation B has created a bit of an administrative nightmare for lenders who must figure out how to deliver AVM reports to the consumer, explain their contents, and prove it was received," says John Walsh, the president of DataQuick, a provider of real estate and mortgage data, analytics and software.
Regulatory pressures and accuracy concerns may tempt lenders "to stop using AVMs altogether to avoid the hassle of providing reports," Walsh says, and risk missing out on the "valuable property valuation intelligence" AVMs provide between appraisals.
An example of such intelligence: Lenders and appraisal management companies may run an AVM just to see "if the deal has legs at all," with no intention of using it as the final valuation, says Molly Dowdy, an executive vice president of marketing at Naples, Fla., appraisal software firm a la mode.
While useful, the alternative tools are no substitute for a full appraisal, Dowdy says. "There’s a long history of inaccuracy with BPOs and AVMs, so when those come through there’s no real accountability for the accuracy."
For years, appraisers have warned as much.
"Appraisals are more robust products than AVMs or BPOs, which aren’t intended to, or capable of, serving the same purpose as an appraisal," says Ken Wilson, the 2014 president of the Appraisal Institute. Consumers are always better served by reliable opinions of value provided by qualified, licensed appraisers, he says.
Tom Goyda, a spokesman for Wells Fargo, says the bank has not "substantially changed" the use of AVMs as a result of recent regulatory changes.
"While most of Wells Fargo’s mortgage originations are made with a full appraisal, we continue to use AVMs for some property valuations and to supplement our use of appraisals."
The bank sends hard copies of all valuations to customers, but "I can't comment on anything related to electronic transmission of AVMs."
Regulation B is expected to bring about additionalunintended consequences.
Lenders and servicers are now looking for alternative tools that help assess property values, "without an actual valuation figure that must be sent to the credit applicant,” according to Walsh.
Hence DataQuick is offering alternative data support to lenders trying to comply with the new CFPB requirement. It has updated its online property intelligence portal, PropertyFinder 2G, so users can customize comparable sales data and analysis to accurately assess the property without generating a valuation estimate subject to the notification requirement.
Dowdy points out another issue that is easy for lenders to miss, because it applies only to electronic notifications.
The E-Sign Act of 2000 says companies may deliver notifications to consumers electronically only if they "have proof that the borrower can access and view" the file. Without such proof, the notification must be sent by regular mail. So to comply with the new CFPB rules, lenders must send a dated and time-stamped electronic notification to the borrower of their intent to deliver a valuation, and they must document the borrower's acknowledgement they can receive electronic files.
"We just started getting a flood of calls and emails" from lenders and others who worry the platforms they use to deliver notifications to borrowers cannot handle the acknowledgment requirement, making them potentially liable, Dowdy says.
Alice Sorenson, the chief investment officer of LRES,a real estate finance software solutions provider based in Orange, Calif., says some of her bank clients "are definitely relying more on appraisals than they are on the other valuation tools" as a result of the new rules. "Bankers are more conservative in their business practices and are more comfortable getting the valuations from licensed appraisers."
The challenge with these different types of property valuation methods, in addition to accuracy, is using the right tool for the right job, she says. "I've always maintained that appraisals are what lenders need, BPOs are what sellers and brokers need, and AVMs and other sources of electronic data are what the secondary market needs," Sorenson says. Each of those products "will find the most traction" in its respective field, maybe not in the short run, but in the long run.
Sorenson disputes the validity of the new notification requirement from both the lender and the customer perspective, especially given the cost that has resulted.
While more reliable and more accurate than AVMs and BPOs, appraisals also are more expensive. Even electronic valuation data transmission costs can be significant because cost depends on scale.
Over the last two years, in anticipation of the rule, most lenders have spent large amounts of money to make internal changes to their processes to comply, Sorenson says. "It has been a huge cost incurred to date."
Whether it is an appraisal or an AVM, "there is a cost to valuation compliance." If delivered electronically, it includes the cost of setting up systems, sending a notification and then documenting the borrower's acknowledgement. Snail mail also costs money.
Sorenson finds that lenders are willing to send these pre-notifications if they can recover associated costs through higher product pricing.