The Federal Reserve Board has issued an interim final rule on appraisal independence requirements, implementing amendments made to the Truth in Lending Act by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The Dodd-Frank Act required the interim final rule, which was published in today's Federal Register and amends Regulation Z, to be prescribed by the Fed no later than 90 days after the law’s enactment date. Although generally effective on December 27, 2010, the interim final rule has a mandatory compliance date of April 1, 2011.
The interim final rule applies to formal and informal "valuations" made in connection with "covered transactions" (defined to include all extensions of consumer credit, whether open-end or closed-end, secured by the consumer’s principal dwelling). A "valuation" includes formal appraisals and all other estimates of value by a natural person of a consumer’s principal dwelling, other than one produced exclusively using an automated model or system.
The "covered persons" subject to the interim final rule are the creditor in a covered transaction and any person who provides "settlement services," as defined under the Real Estate Settlement Procedures Act, with respect to a covered transaction, such as mortgage brokers, appraisers, appraisal management companies, real estate agents, and title companies. Comments on the interim final rule must be filed by December 27, 2010.
The interim final rule contains the following key provisions:
- Covered persons are prohibited from engaging in coercion, bribery, or similar actions designed to cause anyone who prepares a valuation in connection with a covered transaction to base the property’s value on factors other than the preparer’s independent judgment. No person that prepares a valuation in connection with a covered transaction may materially misrepresent the property’s value; no covered person may falsify a valuation; and no covered person, other than one who prepares valuations, may materially alter a valuation.
- A person who prepares a valuation or who performs valuation management functions for a covered transaction, such as selecting an appraiser or managing or overseeing the process of preparing a valuation, may not have a direct or indirect financial or other interest in the property or transaction. In its background discussion accompanying the final rule, the Fed rejects a literal interpretation of the Dodd-Frank Act's prohibition on having a "direct or indirect interest" that would have resulted in creditors being unable to use in-house staff appraisers or affiliated appraisal management companies (AMCs) to prepare valuations or perform valuation management functions and AMCs being unable to provide both valuation management functions and other settlement services in connection with the same covered transaction. Instead, the interim rule provides that a creditor's use of an employee or affiliate or a person’s performance of multiple settlement services does not in itself result in a prohibited conflict of interest; whether a prohibited conflict of interest exists depends on the facts and circumstances of a particular case. The interim rule also establishes safe harbors for compliance that differentiate between creditors with assets greater than $250 million and creditors with assets of $250 million or less.
- A creditor is prohibited from extending credit based on a valuation if it knows at or before consummation that either of the above prohibitions has been violated, unless the creditor documents that it has acted with reasonable diligence to determine that the valuation does not materially misrepresent the property's value.
- A creditor or settlement service provider involved in a transaction who has a reasonable basis to believe that an appraiser has not complied with the Uniform Standards of Professional Appraisal Practice or ethical or professional appraiser requirements under federal or state law must report such a failure to the appropriate state licensing agency, where it is likely to significantly affect the valuation.
- A creditor and its agent must pay a fee appraiser (an appraiser who is not the creditor’s employee or an employee of an AMC hired by the creditor) at a rate that is customary and reasonable in the geographic market where the property is located. The interim rule creates a presumption of compliance where (1) the fee is reasonably related to recent rates paid for appraisal services in the relevant geographic market, and in setting the fee, the creditor or its agent has taken various specified factors into account and has not engaged in any anticompetitive acts in violation of federal or state law that affect the appraisal fee, or (2) the fee is established in reliance on rate information based on objective third-party information, such as fee schedules or surveys issued by government agencies; such information must exclude fees paid for AMC-ordered appraisals.
- Existing Regulation Z §226.36(b) contains certain prohibitions related to appraisal independence that are similar to several of those contained in the interim final rule but that apply only to creditors, mortgage brokers, and their affiliates in connection with closed-end mortgage loans. Effective April 1, 2011, the interim final rule removes §226.36(b). Regarding transactions for which the borrower's application was received before April 1, 2011, persons subject to §226.36(b) may comply with that provision or the interim final rule.
Certain provisions of the rule are consistent with appraisal independence standards established by the Home Valuation Code of Conduct (HVCC), which covers appraisals for loans sold to Fannie Mae and Freddie Mac. Under the Dodd-Frank Act, on the date the Fed promulgates the interim final rule, the HVCC shall have no force or effect.