The Federal Reserve has published an interim final rule amending Regulation Z to establish new requirements for appraisal independence for any consumer credit transaction that is secured by the consumer’s principal dwelling, as required by the Dodd-Frank Act. The interim final rule released on October 18 prohibits coercion, bribery and other similar actions in connection with a real estate appraisal. The interim final rule also prohibits appraisers and appraisal management companies from having financial interests in the property or credit transaction, and prohibits a creditor from extending credit if it knows, before closing, of a violation of the prohibition on coercion or conflict of interest. The interim final rule requires that parties involved in the transaction report appraiser misconduct to state appraiser licensing authorities. It also requires that a creditor pay only reasonable and customary compensation to a “fee appraiser”—an appraiser who is not employed by the creditor or the appraisal management company hired by the creditor. The interim final rule becomes effective on December 27, 2010, but compliance is optional until April 1, 2011 to allow time for any necessary operational changes. The interim final rule also causes the Home Valuation Code of Conduct to have no further force or effect. Comments on the interim final rule are due by December 27, 2010.
Nutter Notes: A creditor is presumed to have paid reasonable and customary compensation to a fee appraiser if the fee is reasonably related to recent rates paid for appraisal services in the geographic market and the creditor has taken into account certain factors, such as the type of property and the scope of work, and has not engaged in any anti-competitive actions, such as price fixing or restricting others from entering the market. Additionally, a creditor is presumed to have paid a reasonable and customary fee if the creditor relies on rates established by independent third parties. The interim final rule applies to any person who performs valuation services or valuation management functions and to any valuation of a consumer’s principal dwelling, not just to licensed or certified appraisers. Institutions with both an appraisal function and loan production function are not by definition conflicted, but must establish firewalls and other safeguards between these two functions in order to qualify for a safe harbor from the conflict of interest provisions. The interim final rule provides guidance for both small institutions (defined as having assets of $250 million or less) and larger institutions regarding the specific criteria for establishing firewalls and other safeguards. A creditor may make a loan based on a valuation known to be either coerced or conflicted if the creditor uses reasonable due diligence to determine that the valuation does not materially misstate the value of the property.