HUD Having Second Thoughts about Appraisal Rule

The Department of Housing and Urban Development has backed away from holding Federal Housing Administration lenders and appraisers equally responsible for the quality of appraisals.

Instead of holding lenders strictly accountable for bad appraisals, HUD said it will only sanction lenders if they knew or should have known that an appraisal was inaccurate or deficient.

The Mortgage Bankers Association said they support the final rule because it does not hold lenders and appraisers equally responsible for the appraiser's work.

"The final rule draws the correct line," said MBA senior vice president Kurt Pfotenhauer. "An FHA lender is primarily responsible for the quality of the loan, while the appraiser is primarily accountable for the quality of the appraisal."

HUD has always maintained that lenders are responsible for the quality of appraisers. But when it ran into a series of property flipping scandals in the late 1990s, it tried and failed to get FHA lenders to restructure loans where the appraisals were double the value of the properties.

Lenders and their attorneys claimed HUD lacked the authority to compel relief for the borrowers, although many lenders entered into legal settlements with consumer attorneys.

As an insurer of the loans, HUD felt it needed to clarify its rules to make sure lenders are responsible for the quality of appraisals. After all, lenders select the appraisers and they use the appraisal in underwriting the loan.

At first, lenders thought HUD wanted to create a "no fault" system where lenders are automatically liable if a loan goes bad and the appraisal is off the mark. Lenders argued that HUD does not have the statutory or regulatory authority to enforce such a no-fault system and it would force lenders to exit the FHA program.

In the final rule, HUD says it never intended to impose such a "strict" liability requirement on lenders.

"HUD has revised the rule at the final stage to clarify that lender accountability does not mean a no-fault liability. Through this rule, HUD is clarifying and emphasizing that if an appraisal is deficient or inaccurate, HUD will not look solely to the appraiser as the responsible party. HUD will also look to the lender to determine whether the lender acted responsibly in submission of the bad appraisal," the final rule said.

Mortgage banking attorney Phillip Schulman said the standard established by HUD is reasonable. "HUD recognizes that lenders shouldn't be held responsible for appraisals conducted by independent contractors unless they are culpable."

In a press release, HUD makes the final rule sound much tougher. "Holding lenders accountable when appraisers they select engage in fraudulent activities is another step this administration is taking to protect homebuyers, particularly minorities, from unscrupulous predatory lending practices," HUD assistant secretary John Weicher said.

Mr. Schulman pointed out that the standard stated in the preface of the final rule says that lenders who knew or should have known about fraudulent activities will be held accountable.

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