The Federal Reserve Board has published for public comment an interim final rule amending Regulation Z (Truth in Lending). The interim rule implements Section 129E of the Truth in Lending Act (TILA), which was enacted on July 21, 2010, as Section 1472 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. TILA Section 129E establishes new requirements for appraisal independence for consumer credit transactions secured by the consumer’s principal dwelling. The amendments are intended to ensure that real estate appraisals used to support creditors’ underwriting decisions are based on the appraiser’s independent professional judgment, free of any influence or pressure that may be exerted by parties that have an interest in the transaction. The amendments also intend to ensure that creditors and their agents pay customary and reasonable fees to appraisers. To allow time for any necessary operational changes, compliance with this interim final rule is optional until April 1, 2011.
The interim final rule applies to a person who extends credit or provides services in connection with a consumer credit transaction secured by a consumer’s principal dwelling. Although TILA and Regulation Z generally apply only to persons to whom the obligation is initially made payable and that regularly engage in extending consumer credit, TILA Section 129E and the interim final rule apply to persons that provide services without regard to whether they also extend consumer credit by originating mortgage loans. Thus, the interim final rule applies to creditors, appraisal management companies, appraisers, mortgage brokers, realtors, title insurers and other firms that provide settlement services.
The interim final rule applies to appraisals for any consumer credit transaction secured by the consumer’s principal dwelling. In addition, with a few exceptions, the interim final rule applies to any person who performs valuation services, performs valuation management functions, and to any valuation of the consumer’s principal dwelling, not just to a licensed or certified “appraiser,” an “appraisal management company,” or to a formal “appraisal.” This approach implements the statutory provisions, and is designed to ensure that consumers are protected regardless of the valuation method chosen by the creditor, and to prevent circumvention of the appraisal independence rules.
The interim final rule prohibits covered persons from engaging in coercion, bribery, and other similar actions designed to cause anyone who prepares a valuation to base the value of the property on factors other than the person’s independent judgment. The interim final rule adds examples from the Dodd-Frank Act of actions that do and do not constitute unlawful coercion. The interim final rule also prohibits a creditor from extending credit based on a valuation if the creditor knows, at or before consummation, that (a) coercion or other similar conduct has occurred, or (b) that the person who prepares a valuation or who performs valuation management services has a prohibited interest in the property or the transaction as discussed below, unless the creditor uses reasonable diligence to determine that the valuation does not materially misstate the value of the property.
The interim final rule provides that a person who prepares a valuation or who performs valuation management services may not have an interest, financial or otherwise, in the property or the transaction. The Dodd-Frank Act does not expressly ban the use of in-house appraisers or affiliates. However, because the Act prohibits appraisers from having an “indirect financial interest” in the transaction, it is possible to interpret the Act to prohibit creditors from using in-house staff appraisers and affiliated appraisal management companies. The interim final rule clarifies that an employment relationship or affiliation does not, by itself, violate the prohibition. The interim final rule also establishes a safe harbor and specific criteria for establishing firewalls between the appraisal function and the loan production function, to prevent conflicts of interest. Special guidance on firewalls is provided for small institutions, because they likely cannot completely separate appraisal and loan production staff. Small institutions are those with assets of $250 million or less.
The interim final rule provides that a creditor or settlement service provider involved in the transaction who has a reasonable basis to believe that an appraiser has not complied with ethical or professional requirements for appraisers under applicable federal or state law, or the Uniform Standards of Appraisal Practice must report the failure to comply to the appropriate state licensing agency. The interim final rule limits the duty to report compliance failures to those that are likely to affect the value assigned to the property. The interim final rule also provides that a person has a “reasonable basis” to believe an appraiser has not complied with the law or applicable standards, only if the person has knowledge or evidence that would lead a reasonable person under the circumstances to believe that a material failure to comply has occurred.
Under the interim final rule, a creditor and its agent must pay a fee appraiser at a rate that is reasonable and customary in the geographic market where the property is located. The rule provides two presumptions of compliance.