A replacement for the Home Valuation Code of Conduct is coming soon and the Federal Reserve Board is also working on new rules for ensuring lenders and others don’t exert undue influence on the appraisal process.
Fannie Mae and Freddie Mac said they are working with their regulator to adopt new appraiser independence standards as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The new standards will replace the HVCC that went into effect in May 2009 as part of a controversial settlement between the New York attorney general and the two government-sponsored enterprises.
The HVCC banned the GSEs from purchasing loans if a mortgage broker or loan officer was involved in the selection or compensation of the appraisers. The GSEs and Federal Housing Finance Agency are expected to retain that basic tenet when they issue the new appraisal standards “on or about” Oct. 21.
“The revised requirements will maintain the spirit and intent of HVCC and continue to provide important protections for mortgage investors, homebuyers and the housing market,” Fannie said in a notice to lenders.
Bill Garber, director of government relations for the Appraisal Institute, noted that the Dodd-Frank bill gives the GSEs the leeway to keep or end the ban on loan officers and brokers selecting appraisers.
The Appraisal Institute would welcome such a result. But he doubts it will happen. “I would be shocked if Fannie and Freddie altered their policies,” Garber said.
Donald Blanchard, a senior vice president for Lender Processing Services, noted that the GSEs have indicated they are seeing favorable results from the HVCC in terms of appraisal quality and controlling improper pressure on appraisers.
But he didn’t venture to guess what Fannie, Freddie and their regulator will decide. Blanchard is more concerned about the Federal Reserve, which is working on a tight Oct. 19 deadline to issue an interim final rule on appraiser independence.
The Dodd-Frank Act directs the Fed to expand its existing Truth in Lending Act rules to prevent coercion and undo influence during the appraisal process. Violations of those rules can result in penalties of $10,000 per day under the new law.
Refusing to pay appraisers a customary and reasonable fee will be a violation of the Fed’s new appraisal standards, which will apply to all residential mortgage transactions including Fannie and Freddie loans. The new law also blocks AMCs like LPS from negotiating fees with appraisers.
Appraisers view this provision as vindication of their claims that AMCs hire appraisers based on price, as opposed to experience and knowledge of local markets. AMCs deny that as well as allegations they take a slice of the appraiser’s usual fee.
“AMCs are providing a legitimate service for lenders,” Garber said. “But the lenders should pay them for that. It is a separate and distinct service from what is being done by the appraiser,” he said in an interview.
The AMCs are urging the Fed to delay the appraiser fee portion of the interim final rule. “The industry does not have a valid survey of these fees,” Blanchard said.
The AMCs and lender trade groups have hired an independent auditor to conduct a survey. “But that will take time,” he added.
The industry also has to figure out how to implement the new rules and rework the contracts with their appraisers. Based in Jacksonville, Fla., LPS works with 20,000 appraisers nationwide.
The penalties pose a “serious risk and I am afraid it will have unintended consequences for the industry. We really need some time to get this right,” Blanchard said an interview.
The Department of Veterans Affairs has a panel of approved appraisers. Appraisal groups are urging the Fed to use the VA fee schedule in drafting the interim final rule. The Appraisal Institute also would support the Fed if it does not include a ban on loan officers and brokers selecting appraisers.
Since HVCC was adopted, all mortgage brokers and nonbank loan officers must be licensed by the states, meet education requirements and undergo a criminal background test. Most states have adopted appraisal independence rules. In addition, the Dodd-Frank Act gives state attorneys general and the new Consumer Financial Protection Bureau the authority to enforce the TILA rules.
“There are different layers of oversight that didn’t exist before the HVCC,” Garber said.
