Compliance with the Interim Final Rule concerning 12 CFR Part 226 (the Rule), which deals with appraisal independence, became mandatory on April 1, 2011. Consequently, the Appraisal Independence Rules, which took effect on October 1, 2009, and the Home Valuation Code of Conduct, which took effect in December 2008, are no longer applicable.
The Rule applies to any company that extends credit or provides services in connection with a consumer credit transaction secured by the consumer’s principal dwelling. Consequently, the Rule applies to companies that originate mortgage loans as well as to appraisal management companies, appraisers, mortgage brokers, realtors, title insurers, and other firms that provide settlement services.
The Rule prohibits any person described above from engaging in coercion, bribery, or other similar actions designed to influence a person preparing a valuation of a property that is the consumer’s principal dwelling. Further, the Rule prohibits a creditor from extending credit based upon a valuation if the creditor knows at or before the closing of the loan that (i) coercion or other prohibited conduct has occurred or (ii) the person who performs valuation or valuation management services has a prohibited interest in the property or the transaction. A prohibited interest means the person performing the valuation service has a direct or indirect interest—financial or otherwise—in the property. The creditor is absolved of liability if it uses reasonable diligence to determine that the valuation is not a material misstatement of the property’s value.
Further, the Rule recognizes that some creditors will have in-house appraisers and affiliated appraisal management companies. Consequently, it provides a safe harbor for these creditors and outlines specific criteria for establishing firewalls to separate the loan production function and the appraisal function. The Rule also provides special guidance for small institutions (those with assets of $250 million or less), recognizing that it may be impossible for these creditors to completely separate appraisal and loan production staff.
The Rule also requires a creditor or its agent to pay a fee appraiser a fee that is reasonable and customary in the property’s geographic market. Two factors determine whether the fee is reasonable and customary. First, is the fee reasonably related to recent rates paid for appraisal services in the market? This factor includes analysis into the type of property and the scope of work. Additionally, it includes verifying that the creditor has not engaged in any anticompetitive actions that would affect the fee, such as price fixing or restricting other appraisal service providers from entering the market. Second, is the fee established by relying upon rates set by third party information, such as the fee schedule issued by the Veterans Administration or fee surveys and reports that are performed by an independent third party?
If a creditor or settlement service provider involved in the transaction has a reasonable basis to believe that an appraiser has not complied with ethical or professional requirements for appraisers, the creditor must report the non-compliance to the appropriate state licensing agency. But a report is only required if the non-compliance is material—it is likely to affect the value of the property. In order to have a “reasonable basis” to believe a violation has occurred, the creditor must have knowledge or evidence that would lead a reasonable person under the circumstances to believe that the appraisal service provided failed to comply with applicable rules or law.
Compliance with the Rule is mandatory and failure to comply can be extremely costly. Failure to comply with the Rule can subject the company to civil penalties up to $10,000 per day for the first violation and up to $20,000 per day for subsequent violations.
Any person or company affected by the Rule should immediately prepare a policy and procedures to comply with the Rule. These policies and procedures should include reporting responsibilities in the event of violations and determination of the circumstances that would require a new appraisal due to a lack of independence of the initial appraiser. Additionally, companies should create firewalls between loan production departments and appraisal departments, if necessary. And as is true with any new rule, law, or regulation, employee training is necessary to ensure compliance.