Managing the Appraisal Management Process
Throughout the past few years there has been a hightened sensitivity to appraisal management, and event more questions about how a bank can work best with an AMC, or how an appraiser can get on an appraisal management companies list. While there has been somewhat of a black box around the appraisal management process for some AMC's we find that the best way to work with both appraisers and banks is with transparency.
It is because of this mindset that we do not dictate the list of appraisers that we work with in our system we simply work with the bank through their pre-existing appraiser panel. Because we do appraisal management with many regional and community banks we find that there is no better way to start working with a client than through building strong relationships with the appraisers that understand their markets. Throughout this process we are able to help the bank put some key metrics around the appriasers on their panel and continue to refine it, but theprocess should be transparent
The Basics of Real Estate Evaluations: The Subsequent Transaction Exemption
By: Nathan C. Brown, Chief Legal Officer, MountainSeed Advisors, LLC
Copyright © 2012, MountainSeed Advisors, LLC. All Rights Reserved.
This post examines the last of the three appraisal exemptions where evaluations are required under the agencies’ appraisal regulations and the revised Interagency Appraisal and Evaluation Guidelines: Renewals, Refinancings, and Other Subsequent Transactions.
The classic example of a transaction that might fall into this exemption is a refinancing. But before we go down that road, there’s one last piece of terminology we need to clear up. By nature of there being an exemption for refinancings and renewals, we can deduce that the regulators view those subsequent events as new transactions for purposes of the basic rule that appraisals are required for real estate transactions. (You may want to refer back to our May 8, 2012 posts on what constitutes a transaction in the workout and modification context for a basic primer on that general rule and some thoughts on how it plays out in a less obvious context.)
But we don’t have to rely on deduction, as the definitions in the revised Interagency Appraisal and Evaluation Guidelines make it clear. The relevant section in Appendix D provides:
“Real Estate-Related Financial Transaction—As defined in the Agencies’ appraisal regulations, any transaction involving:
- The sale, lease, purchase, investment in or exchange of real property, including interests in property, or the financing thereof;
- The refinancing of real property or interests in real property; or
- The use of real property or interests in property as security for a loan or investment, including mortgage-backed securities.” (Emphasis added.)
With terminology out of the way, we can dive into the meat of the exemption. Here, unlike the first two exemptions we discussed, there is no express transaction-value threshold. And there are two alternative ways to qualify for the exemption. Satisfaction of either alternative can support a bank’s decision to obtain an evaluation instead of a full-blown appraisal. (This doesn’t apply to credit unions. To meet the exemption in the NCUA regs, a credit union must show both that no obvious and material change in market conditions has occurred and that the credit union has advanced no new money.)
No Change in Market Conditions or Physical Aspects
The first requires that there has been no obvious and material change in market conditions or physical aspects of the property that threatens the adequacy of the institution’s real estate collateral protection after the transaction. If the refinance or extension meets this test, then a bank may be able to order an evaluation, even if they are advancing new money.
To aid in the analysis, the guidelines refer us to Section XIV, covering validity of appraisals. There we get a non-exclusive list of factors to consider, as follows:
- Passage of time.
- Volatility of the local market.
- Changes in terms and availability of financing.
- Natural disasters.
- Limited or over supply of competing properties.
- Improvements to the subject property or competing properties.
- Lack of maintenance of the subject or competing properties.
- Changes in underlying economic and market assumptions, such as capitalization rates and lease terms.
- Changes in zoning, building materials, or technology.
- Environmental contamination.
Some limitations apply. For example, at the time of the extension or refinance, the current and future use of the property must match the use identified in the existing appraisal from the original transaction. If a zoning change prompts a planned change in use – even if the property has supposedly increased in value as a result – the refinance or extension requires an appraisal unless another exemption applies.
No New Money
The second alternative permits an evaluation instead of an appraisal where the bank advances no new money in connection with the refinance or extension, other than to cover reasonable closing costs. This applies even if there have been obvious and material changes in market conditions or the physical aspects of the property that threaten the adequacy of the bank’s collateral protection.
That raises an issue: what constitutes advancing new money? The regulators tell us that a bank is deemed to have advanced new money where there is an increase in the principal amount of the loan over the amount of principal outstanding before the renewal or refinancing. And they give us examples.
Example 1: 15 year loan for $3 million. In year 14, outstanding principal is $2.5 million. In the same year, year 14, the borrower seeks refinance at a lower rate and requests a loan of $2.8 million. New money? Yes. The $300,000 is considered new money.
Example 2: 2-year line of credit of $5 million. At the end of the original term, borrower has drawn only $1 million. Bank wants to renew the line for 2 years at $5 million. New money? No.
Example 3: Bank advances funds to protect its interest in the collateral, such as to repair damage. New appraisal or evaluation required? No. The funds are used to restore the damaged property to its original condition.
Validating the Existing Appraisal or Evaluation
Here’s an area where we see a great deal of confusion among bankers. Remember, satisfying one of the two alternative approaches to the subsequent transaction exemption means only that you are permitted to order an evaluation in lieu of an appraisal. But, the general rule is that you still have to order a NEW evaluation in connection with the refinance or extension. If you want to try to rely on the existing appraisal or evaluation you obtained in connection with the origination, or some other existing appraisal or evaluation in your loan file, you have to satisfy a separate test under a separate section of the guidelines. More on that in the next post.
Risk Considerations
Also keep in mind that, as with all exemptions, the regulators require banks to order a full-blown appraisal where the transaction poses some substantial risk to the bank. Note that risk may be a more frequent consideration when attempting to utilize the subsequent transaction exemption. Because there’s no express transaction value threshold or requirement, refinances and renewals may technically qualify, even on substantial, large-dollar credits and/or loans with complex properties as collateral. In those situations, risk considerations may caution against taking advantage of the flexibility in the guidelines that would permit an evaluation, but that’s a decision that is by nature project and bank specific.
DISCLAIMER: The author, Nathan C. Brown, is Chief Legal Officer at MountainSeed Advisors, LLC. MountainSeed, and its affiliates, offer valuation-related products and services to banks. The article is not legal advice. It’s for your information only. Neither the author nor MountainSeed makes any representation or warranty as to the accuracy or completeness of the content. You should always consult your regulator or a licensed attorney in your jurisdiction with questions relating to compliance with any law, guidance, rule, or regulation. Please don’t hesitate to send any questions, comments or corrections to the author at nathan@mountainseed.com.
The Basics of Real Estate Evaluations: The Real-Estate Secured Business Loan Exemption
By: Nathan C. Brown, Chief Legal Officer, MountainSeed Advisors, LLC
Copyright © 2012, MountainSeed Advisors, LLC. All Rights Reserved.
In this string of posts, we’re breaking down each of the three appraisal exemptions where evaluations are required under the agencies’ appraisal regulations and the revised Interagency Appraisal and Evaluation Guidelines. This post focuses on the second of the three: real-estate secured business loans.
The real-estate secured business loan exemption shares a key fundamental characteristic with the general appraisal threshold exemption discussed in my last post. It requires a focus on transaction value. While the general appraisal threshold is currently set at $250,000, the applicable threshold for real-estate secured business loans is set at $1 million.
Here we’ve got to dive into more terminology. You can refer to the last post for an examination of the term “transaction value” and how to determine it. But we still need to understand what constitutes a “business loan.” For that, we turn again to Appendix D in the Interagency Appraisal and Evaluation Guidelines, and we read:
“Business Loan—As defined in the Agencies’ appraisal regulations, a loan or extension of credit to any corporation, general or limited partnership, business trust, joint venture, syndicate, sole proprietorship, or other business entity. A business loan includes extensions to entities engaged in agricultural operations, which is consistent with the Agencies’ real estate lending guidelines definition of an improved property loan that include loans secured by farmland, timberland, and ranchland committed to ongoing management and agricultural production.”
Because of the scope limitations inherent in blog posting, we’ll leave it there. There are more important issues to which we must attend. For starters, unlike the general appraisal threshold, for the business loan exemption, even if you determine you’re making a business loan and the transaction value equals or falls under the current $1 million threshold, your analysis isn’t done. There is an additional requirement. The primary source of repayment must not be dependent on the sale of, or rental income derived from, real estate.
Specifically, in applying this exemption the Agencies expect the bank to determine that the primary source of repayment is “operating cash flow from the business” rather than “rental income or sale of real estate.” One important caveat – a bank should avoid attempts to apply this exemption even if the real property providing the cash flow upon which repayment depends is not the same real property in which the bank took a security interest.
We get an example in the guidelines. Where a loan is secured by real estate for one project in which the bank takes a security interest, but the loan will be repaid from real estate sales or rental income from other real estate projects, in which the bank doesn’t have a security interest, does that work for purposes of qualifying for the exemption? No.
Two additional warnings. First, if you are a credit union regulated by the NCUA, this post doesn’t apply to you. As noted in Footnote 42 of the revised Interagency Appraisal and Evaluation Guidelines, the NCUA does not recognize an exemption from the appraisal requirements specific to member business loans.
Second, like we discussed in the last post, the $1 million business loan threshold may change. Although the CFPB wouldn’t be directly involved – as they would be in the general appraisal threshold given amendments to FIRREA implemented by Dodd-Frank – the business loan threshold was addressed in the same January 2012 GAO report to Congress that we covered in the last post. The GAO noted that it was more difficult to obtain relevant data, but noted that the volume of business loans under $1 million is “substantial,” citing a Federal Reserve Bank of Richmond analysis that showed $372 billion in small business loans secured by commercial real estate were made in 2009. That said, they weren’t able to determine what percentage of those actually met the primary-source-of-repayment component to the business loan appraisal exemption. Responses from stakeholders on whether the business loan threshold should be revised fell into the same two camps as the general threshold – those that thought it should stay the same and those that thought it should be lowered. No one recommend that it be increased.
DISCLAIMER: The author, Nathan C. Brown, is Chief Legal Officer at MountainSeed Advisors, LLC. MountainSeed, and its affiliates, offer valuation-related products and services to banks. The article is not legal advice. It’s for your information only. Neither the author nor MountainSeed makes any representation or warranty as to the accuracy or completeness of the content. You should always consult your regulator or a licensed attorney in your jurisdiction with questions relating to compliance with any law, guidance, rule, or regulation. Please don’t hesitate to send any questions, comments or corrections to the author at nathan@mountainseed.com.
The Basics of Real Estate Evaluations: Transaction Values and the Appraisal Threshold Exemption
By: Nathan C. Brown, Chief Legal Officer, MountainSeed Advisors, LLC
Copyright © 2012, MountainSeed Advisors, LLC. All Rights Reserved.
In my last post, we talked terminology and reviewed what it is we mean when we talk about an evaluation. Recall that generally we’re talking about a valuation obtained by a regulated financial institution in lieu of a formal appraisal in connection with a transaction. Think loan origination or refinance – although those aren’t the only examples – as opposed to a valuation obtained for collateral monitoring or portfolio risk analysis. Also recall that we’re talking about a valuation obtained in connection with a transaction that qualifies for an exemption from the formal appraisal requirements, but specifically one that qualifies for one of the three exemptions where the federal appraisal regulations require an evaluation. Before we dive into who can prepare an evaluation, what needs to be included in an evaluation, and similar details, it’s instructive to break down each of the three appraisal exemptions where the regulators require an evaluation.
For this post, we’ll take a detailed look at the first of those three exemptions: the so-called appraisal threshold exemption. Because it’s the most commonly known appraisal exemption, we won’t spend much time on it, but we do need to cover a few basic points.
First, as most bankers know, currently the appraisal threshold is currently set at $250,000 for each of the principal federal regulators. The threshold relates to “transaction value”. So, if the transaction value equals or falls below $250,000, you theoretically qualify for the exemption.
That raises a related question. What does “transaction value” mean? For that we turn to Appendix D of the revised Interagency Appraisal and Evaluation Guidelines. We read:
“Transaction Value - As defined in the Agencies’ appraisal regulations:
- For loans or other extensions of credit, the amount of the loan or extension of credit;
- For sales, leases, purchases, and investments in or exchanges of real property, the market value of the real property interest involved; and
- For the pooling of loans or interests in real property for resale or purchase, the amount of the loan or market value of the real property calculated with respect to each such loan or interest in real property."
While it’s relatively self-explanatory, we do get a few additional bits of color on a few key points. First, in determining transaction value for loans with negative amortization, “transaction value” is the institution’s total committed amount, including any potential negative amortization. Also, if a bank enters into a transaction secured by several individual properties, the estimate of value of each individual property determines whether an appraisal is required. And there we get an example from the regulators.
If a bank makes a loan secured by seven commercial properties in different markets with two properties valued in excess of the threshold and five properties valued less than the threshold, the institution needs only to obtain an appraisal on the two properties valued in excess of the threshold, and may obtain evaluations on the five properties below the threshold, even though the aggregate loan commitment exceeds the appraisal threshold. However, note that flexibility does not extend to individual units in a so-called “tract development” – generally speaking, a tract development is a single development of five or more commercial or residential lots, detached or attached single-family homes, or residences in a condo, co-op or timeshare building.
Finally, keep in mind that, like so much else in the valuation world, the details surrounding the threshold – and especially the $250,000 number – aren’t written in stone. Dodd-Frank Section 1473(a) amended Section 1112(b) of FIRREA to require concurrence from the newly-formed CFPB that the appraisal threshold provides reasonable protection for consumers who purchase a 1-4 unit single-family residence. And existing Section 1112(c) of FIRREA permits the GAO to conduct studies of appraisals below the threshold level. Dodd-Frank also mandated two appraisal-related studies from the GAO, the second of which contemplated, in part, whether existing appraisal exemptions needed to be revised. That second study, which was released in January of 2012, noted that stakeholders had varying views, but generally fell into two camps – those that recommended leaving the threshold where it is, and those that recommended lowering it. No one recommended raising it. Apparently, regulators in at least 14 states recommended lowering it to either $50,000 or $100,000. In the CFPB’s response to the report, they confirmed that they would review any attempt to revise the threshold in connection with their authority under Dodd-Frank. The GAO also commented that while many residential mortgage loans fall under the appraisal threshold, the effect has been blunted by the involvement of Fannie and Freddie, which promulgate their own rules requiring appraisals on the loans they buy.
Rest assured that the threshold will receive attention in the future, especially if the role of the GSEs is ever pared back.
DISCLAIMER: The author, Nathan C. Brown, is Chief Legal Officer at MountainSeed Advisors, LLC. MountainSeed, and its affiliates, offer valuation-related products and services to banks. The article is not legal advice. It’s for your information only. Neither the author nor MountainSeed makes any representation or warranty as to the accuracy or completeness of the content. You should always consult your regulator or a licensed attorney in your jurisdiction with questions relating to compliance with any law, guidance, rule, or regulation. Please don’t hesitate to send any questions, comments or corrections to the author at nathan@mountainseed.com.
A Valuation by any Other Name: The Basics of Real Estate Evaluations
By: Nathan C. Brown, Chief Legal Officer, MountainSeed Advisors, LLC
Copyright © 2012, MountainSeed Advisors, LLC. All Rights Reserved.
My experience suggests that there’s some confusion in the industry surrounding the use of real estate evaluations. While there remains some uncertainty around the edges, we’d all be well served to review the basics.
Let’s start with terminology. It doesn’t help that many state appraisal acts define evaluations or refer to them – in most cases meaning something entirely different than what’s contemplated by the revised Interagency Appraisal and Evaluation Guidelines and each agency’s appraisal regulations that those guidelines interpret. We’ll deal with state law in later posts. But for now, I focus on the basic concepts from the federal regulatory agencies’ appraisal regulations and the guidelines.
What do we mean when we refer to a real estate evaluation? To answer that question, we turn to the glossary of terms in Appendix D in the revised Interagency Appraisal and Evaluation Guidelines. There, you’ll find that an evaluation is:
“A valuation permitted by the Agencies’ appraisal regulations for transactions that qualify for the appraisal threshold exemption, business loan exemption, or subsequent transaction exemption.”
So, right off the bat, when we talk about an evaluation in the purest sense of the word, we’re talking about a valuation that a regulated financial institution obtains in connection with a transaction. While sections of the revised guidelines cover issues like monitoring collateral values (Section XVII.A.) and portfolio collateral risk (Section XVII.B.), those activities are outside the scope of this initial exploration into the evaluation provisions. Do note that in certain situations, institutions may be obligated to obtain a new evaluation or appraisal as part of those monitoring activities, but in general, institutions are permitted to use a “variety of techniques” for monitoring. It’s very possible, then, for some method that doesn’t meet all the formal requirements for an evaluation, in the context of a transaction, to be more than suitable for monitoring and understanding portfolio risk. More on monitoring and risk in later posts.
This is a good time to revisit the basic underlying theme of the appraisal regulations as they were established by FIRREA and interpreted by the federal regulatory agencies. I’m oversimplifying to avoid a deep dive into the terms of art, but basically we start with the presumption that a regulated institution is required to obtain an appraisal in connection with mortgage loan originations and other real estate transactions, including subsequent transactions like refinances or extensions. And, the appraisal that they obtain is required to comply with USPAP and be prepared by an appraiser holding an appropriate credential (a license or certification, depending on the property type and transaction value) from the state appraisal board. Of course, the appraisal requirements go beyond that to address actual competency of the appraiser and ensuring the appraisal contains sufficient information to support the credit decision.
However, most bankers are generally familiar with the fact that their primary federal regulator’s appraisal regulations delineate exemptions from the basic requirement that a bank, in a real estate transaction, obtain a formal appraisal completed by a licensed or certified appraiser in compliance with the revised guidelines. There are at least 12 of those exemptions. They are summarized in Appendix A to the revised guidelines, but below is a basic listing.
Appraisal Exemptions
- Appraisal Threshold
- Abundance of Caution
- Loans Not Secured by Real Estate
- Liens for Purposes Other Than the Real Estate’s Value
- Real Estate-Secured Business Loans
- Leases
- Renewals, Refinancings, and Other Subsequent Transactions
- Transactions Involving Real Estate Notes
- Transactions Insured or Guaranteed by a U.S. Government Agency or U.S. Government-Sponsored Agency
- Transactions that Qualify for Sale to, or Meet the Appraisal Standards of, a U.S. Government Agency or U.S. Government-Sponsored Agency
- Transactions by Regulated Institutions as Fiduciaries
- Appraisals Not Necessary to Protect Federal Financial and Public Policy Interests or the Safety and Soundness of Financial Institutions
So, is that it? Check the box on of the 12 exemptions, make sure you aren’t subject to Fannie and Freddie’s appraisal requirement, VA/FHA requirements or some other regime that would require an appraisal – note you almost always would be if you’re using exemption 9 or 10 in the list above, which is why they are in italics – and then you’re clear to avoid the hassle of a real estate valuation all together? Well, it depends.
First, there is a general provision in the guidelines that requires formal appraisals for transactions where the bank for whatever reason is taking substantial risk. But even with the risk issue aside, all exemptions aren’t created equal. Why is that? Because of the evaluation requirements. We’ll use the OCC’s appraisal regulations for national banks to illustrate this, but rest assured that the FDIC and Fed have a similar requirement. While the NCUA uses different terminology, there’s something similar for credit unions, as well.
Take a look at the OCC’s appraisal regulations – that’s Subpart C in Part 34 of Title 12 of the Code of Federal Regulations. You’ll see that Section 34.43(a) starts with the basic rule that an appraisal is required, then in (a)(1) – (a)(12) lists and explains the exemptions from our list above.
But don’t forget about 34.43(b). It reads:
“(b) Evaluations required. For a transaction that does not require the services of a State certified or licensed appraiser under paragraph (a)(1), (a)(5) or (a)(7) of this section, the institution shall obtain an appropriate evaluation of real property collateral that is consistent with safe and sound banking practices.”
So, at least three of the exemptions in our list above really aren’t exemptions from the requirement to obtain a real estate valuation. They are presumably just exemptions from some of the formality and, perhaps, licensing requirements associated with formal appraisals. Which three are those? The ones in bold in our list above: (1) Appraisal Threshold, (5) Real Estate-Secured Business Loans, and (7) Renewals, Refinancings, and Other Subsequent Transactions. And we’ve arrived back where we started with the definition of “Evaluation” in the revised guidelines, hopefully with a bit more context.
We’ll dive into more helpful application in the next posts. Just remember, when we talk about evaluations in their purest form, we’re talking about a valuation obtained by a bank (i) in connection with a transaction (not monitoring or portfolio risk analysis), (ii) where that transaction qualifies for an exemption from the full-blown appraisal requirements, but (iii) where that exemption is one of the three for which an “Evaluation” is required under the OCC’s 12 CFR 34.43(b) or its counterpart in the Fed, FDIC, or NCUA regulations.
DISCLAIMER: The author, Nathan C. Brown, is Chief Legal Officer at MountainSeed Advisors, LLC. MountainSeed, and its affiliates, offer valuation-related products and services to banks. The article is not legal advice. It’s for your information only. Neither the author nor MountainSeed makes any representation or warranty as to the accuracy or completeness of the content. You should always consult your regulator or a licensed attorney in your jurisdiction with questions relating to compliance with any law, guidance, rule, or regulation. Please don’t hesitate to send any questions, comments or corrections to the author at nathan@mountainseed.com.
Complaining With Class: Reporting Appraisers to State Appraisal Boards
By: Nathan C. Brown, Chief Legal Officer, MountainSeed Advisors, LLC
Copyright © 2012, MountainSeed Advisors, LLC. All Rights Reserved.
Capping off a long string of posts on regulatory and compliance issues surrounding mandatory appraiser reporting provisions in Dodd-Frank – particularly those contained with the Interim Final Rule promulgated by the Fed, which implemented the appraisal independence requirements in TILA §129E – we take a brief look at recent comments from one particular state regulator. Keep in mind that these comments may not hold true in every state, and that the new federal Consumer Financial Protection Bureau (CFPB) likely will have the final say on interpretation issues. Specifically, this post addresses what to do after you’ve determined that Dodd-Frank’s mandatory reporting provisions apply and you’ve got to report an appraiser to the state board. How do you write the complaint?
In the January 2012 edition of IllinoisAppraiser, an official newsletter published by the Illinois Department of Financial & Professional Regulation (IDFPR), we got a look at how state regulators will deal with the influx of complaints arising out of Dodd-Frank’s mandatory appraiser reporting provisions. (Recent versions of the IllinoisAppraiser are available here.) There, the IDFPR takes actual complaints filed by a large AMC and runs through them one by one, with commentary. I take away at least one key point from that article when it comes to drafting complaints to state appraisal boards.
Separate USPAP violations from “peripheral issues”.
What does that mean? Well, if you’re citing USPAP, make sure you cite only a standard or a statement on the standard, not an FAQ. And, at least in Illinois, don’t bother citing violations of Fannie or Freddie guidelines, and certainly don’t try to cite violations of your bank’s or AMC’s private rules.
In the IDFPR’s words:
“[Referencing FAQs in a complaint] is inappropriate. The FAQs are not part of USPAP. Reviewers need to confine themselves to what the Standards and Statements on Standards tell us. . . . We’re not interested in Fannie or Freddie guidelines problems . . . or even if the AMC’s private requirements have been met.”
Then, in the February 2012 edition of IllinoisAppraiser, IDFPR gives us more insight into their thoughts on reporting issues. The takeaway there?
Keep it simple.
Once you’ve filtered out peripheral information, and you’ve identified an actual violation by an appraiser of a USPAP standard or statement on a standard, there’s a temptation to try to show how smart you are by waxing eloquent on your interpretation of USPAP. Stop. Think like a consumer. Stick to the facts. Tell them why you think the appraiser screwed up and leave the rest to the regulators.
In the IDFPR’s words:
“Consumers tell us in the simplest terms that the appraiser screwed up in their eyes. The appraiser was too high, too low, chose rotten comps, lied about the square footage, missed the basement bath, didn’t do this...didn’t do that. We love it because we get it. AMCs, lenders, compliance officers and especially other appraisers spell out complaints in USPAP‐ery. They try to spin Fannie or Freddie guidelines as USPAP fact and generally miss the mark by a country mile. Do yourselves a favor. If you’re a real estate professional...keep it simple.”
DISCLAIMER: The author, Nathan C. Brown, is Chief Legal Officer at MountainSeed Advisors, LLC. MountainSeed, and its affiliates, offer valuation-related products and services to banks. The article is not legal advice. It’s for your information only. Neither the author nor MountainSeed makes any representation or warranty as to the accuracy or completeness of the content. You should always consult your regulator or a licensed attorney in your jurisdiction with questions relating to compliance with any law, guidance, rule, or regulation. Please don’t hesitate to send any questions, comments or corrections to the author at nathan@mountainseed.com.
Tattletales: Mandatory Appraiser-Reporting Provisions in Dodd-Frank (Part 3)
By: Nathan C. Brown, Chief Legal Officer, MountainSeed Advisors, LLC
Copyright © 2012, MountainSeed Advisors, LLC. All Rights Reserved.
My last post covered supplementary information from the Fed on what violations trigger banks’ and AMCs’ mandatory reporting obligations under new Section 129E of the federal Truth in Lending Act (TILA), which was added by Dodd-Frank and implemented by additions to Regulation Z contained in the so-called Interim Final Rule promulgated by the Board of Governors of the Federal Reserve (the Fed). The new rules became effective in April of 2011. That post focused on whether the violation affected the value reported in the appraisal. As always, keep in mind that TILA §129E applies directly to consumer credit transactions secured by the consumer’s principal dwelling. It doesn’t directly apply to commercial appraisals. In later posts, we’ll examine how mandatory reporting can affect commercial appraisals through the revised Interagency Appraisal and Evaluation Guidelines and state AMC law.
In addition to the general guidance, we do get from the Fed some concrete examples of what constitutes a violation that would be subject to mandatory reporting and what types of violations a bank or AMC would not be required to report. As you might imagine, there is a wide gap between the two camps, but it’s instructive to at least look at the benchmarks.
For this analysis, we’re focused on the Official Staff Interpretations of 12 CFR 226. You can find those in 75 Fed. Reg. 66554, 66582 (Oct. 28, 2010). I present the examples in table form below.
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Fig 1. What Constitutes a material violation for TILA Section 129E’s mandatory reporting requirements? Examples from the Fed’s Official Staff Interpretations of 12 CFR 226.42(g)(1).
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Material Failures; Reporting Required
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Not a Material Failure; No Reporting Required Under TILA 129E
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Mischaracterizing the value of a consumer’s principal dwelling in violation of 12 CFR 226.42(c)(2)(i).
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An appraiser’s disclosure of confidential information in violation of applicable state law.
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Performing an appraisal in a grossly negligent manner, in violation of a rule under USPAP.
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An appraiser’s failure to maintain errors and omissions insurance in violation of applicable state law.
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Accepting an appraisal assignment on the condition that the appraiser will report a value equal to or greater than the purchase price for the consumer’s principal dwelling, in violation of a rule under USPAP.
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In later posts, we’ll examine some more specific guidance from state regulators, including actual examples, in light of the recent influx of complaints following the implementation of the Interim Final Rule. We’ll also offer some thoughts on dealing with violations of USPAP FAQs and other supplementary information published by the ASB as compared to actual rules violations. Do violations of USPAP FAQs require reporting? More on that later.
DISCLAIMER: The author, Nathan C. Brown, is Chief Legal Officer at MountainSeed Advisors, LLC. MountainSeed, and its affiliates, offer valuation-related products and services to banks. The article is not legal advice. It’s for your information only. Neither the author nor MountainSeed makes any representation or warranty as to the accuracy or completeness of the content. You should always consult your regulator or a licensed attorney in your jurisdiction with questions relating to compliance with any law, guidance, rule, or regulation. Please don’t hesitate to send any questions, comments or corrections to the author at nathan@mountainseed.com.
Tattletales: Mandatory Appraiser-Reporting Provisions in Dodd-Frank (Part 2)
By: Nathan C. Brown, Chief Legal Officer, MountainSeed Advisors, LLC
Copyright © 2012, MountainSeed Advisors, LLC. All Rights Reserved.
The appraisal independence requirements in Section 129E of the federal Truth in Lending Act (TILA), and the Fed’s implementing additions to Regulation Z known as the Interim Final Rule, contain provisions requiring banks and their AMCs to report appraisers to state regulators when the bank or AMC has a reasonable basis to believe that the appraiser violated USPAP, violated applicable law, or engaged in unprofessional or unethical conduct. Those provisions went into effect in April of 2011. Failure to comply with the reporting requirement can have serious consequences – TILA Section 129E includes provision for up to $10,000 per day civil monetary penalties (and up to $20,000 per day for subsequent violations).
My last post was a bit tongue-in-cheek – comparing the reporting requirements to a teacher incentivizing students to tattle on each other – but I think it’s helpful to start there simply to establish the point that we as an AMC don’t relish our obligation in certain cases to impact an appraiser’s career and livelihood by filing complaints with state regulators. But the requirement exists nonetheless and we have to deal with it. I promised a more academic and analytical explanation of the requirements, and have done what I can to provide that here, given the inherent limitations on scope that come with blog posting.
As with many final rules and regulations, we don’t have all the answers, but we get helpful guidance from the regulators in the supplementary information provided before the text of the rule in the original version as published in the federal register. See 75 Fed. Reg. 66554 (Oct. 28, 2010). Of course, keep in mind, as we dive into TILA, that Section 129E applies to consumer credit transactions secured by the consumer’s principal dwelling. Generally, commercial appraisals aren’t directly affected. (Although as we may discuss in later posts, the revised Interagency Appraisal and Evaluation Guidelines contain provisions regarding reporting that affect both residential and commercial appraisals, and many states’ AMC laws have incorporated reporting concepts and broadly applied them to all appraisals coordinated by AMCs.)
First, the Fed interpreted the reporting provision in TILA §129E to apply only to (1) a material failure to comply with USPAP or (2) a codified standard of ethical or professional conduct. The Fed believed that interpretation to be consistent with Dodd-Frank's purpose of preventing misstated values in appraisal reports. So, the Interim Final Rule mandates reporting failures to comply that would affect the value assigned to the dwelling.
That’s our starting point when we evaluate whether TILA mandates reporting an appraiser. Does the error constitute a violation of USPAP, and if so, did it affect the value reported in the appraisal?
That line of reasoning begs a question. What if the error affects the value by two percent (2%) or even five percent (5%)? Is there a tolerance inside of which we aren’t required to report? Maybe not.
You may know, or remember from my previous post, that the Interim Final Rule was published without public comment – thus the “Interim” title. And, it will be revisited at some point by regulators, but probably not in 2012 since the interagency workgroup is focused on other appraisal-related rules like the “super appraisal” requirements in Section 1471 of Dodd-Frank (creating new Section 129H of TILA). More on that in later posts. The reason I bring it up is that a careful reading of the supplementary information in the Interim Final Rule reveals that the Fed actually requests public comment on this very issue of tolerance as follows:
“The Board solicits comment on whether reporting should be required only if a material failure to comply causes the value assigned to the consumer’s principal dwelling to differ from the value that would have been assigned had the material failure to comply not occurred by more than a certain tolerance, for example, by 10 percent or more.” (Emphasis added.)
Suffice it to say that for now, until the comments come in and the regulators have time to focus on any revisions to the rule, it’s a grey area. Presumably the most conservative approach would be to report any violation that affects value in any way.
In later posts, we will look at relevant guidance on who may have a reasonable basis to report violations, some concrete examples of what’s a reportable offense and what isn’t, timing requirements, how reporting requirements relate to independence and coercion prohibitions, and other issues.
DISCLAIMER: The author, Nathan C. Brown, is Chief Legal Officer at MountainSeed Advisors, LLC. MountainSeed, and its affiliates, offer valuation-related products and services to banks. The article is not legal advice. It’s for your information only. Neither the author nor MountainSeed makes any representation or warranty as to the accuracy or completeness of the content. You should always consult your regulator or a licensed attorney in your jurisdiction with questions relating to compliance with any law, guidance, rule, or regulation. Please don’t hesitate to send any questions, comments or corrections to the author at nathan@mountainseed.com.
Is AMC a Four letter word?
by: Carl Streck, CEO MountainSeed
Copyright © 2012, MountainSeed Advisors, LLC. All Rights Reserved.
Throughout my travels I regularly come across lenders that have a preconceived notion about what an appraisal management company is and I have to work very hard to explain how we are different. The fact is that for years many AMC's have made it a regular practice to treat appraisers poorly either by cutting their fees from what they are used to receiving, or going so far as not paying them at all (appraiserloft) and shutting their doors when their ponzi scheme is up.
We believe that there is a right, and a wrong way to work with lenders and appraisers while assisting in their appraisal management process. When done properly you can have an efficient process that fosters best practices, at reasonable turn times with fair fees....at its worst you have the headlines we all read about regarding appraisal management companies.
When we started out in the appraisal management business as an extension of our advisory business we went to some of our community bank clients and asked them if they would consider outsourcing their appraisal process. At the time their desire was less because of regulatory concerns that came about from Dodd-Frank, but more from a time management perspective. Nearly every one of our clients expressed hesitancy in outsourcing this because they truly valued the relationships they have with their appraisers in their local markets.
This in part is what birthed our method of interaction with the appraiser community and instilled in us a great desire to maintain that healthy relationship that appraisers have with lenders.
All this sounds great in theory, or if I was selling you something, but in practice it really works!
We have set up our business process in a way that helps maintain this healthy relationship in the following ways:
- Our Service is a flat fee: this means that we have absolutely no incentive to squeeze an appraisers fee.
- We let the bank pay the appraiser: Our appraisers LOVE this. They find that they receive payment quicker, and there is transparency in fees.
- We train our review staff: All of our reviewers are appraisers and in addition to the regular review training, we make sure that in addition to reviewing appraisals we are treating the appraiser with respect in our communication.
Tattletales: Mandatory Appraiser-Reporting Provisions in Dodd-Frank
By: Nathan Brown, Chief Legal Officer, MountainSeed Advisors, LLC
Copyright © 2012, MountainSeed Advisors, LLC. All Rights Reserved.
No one likes a tattletale. So it’s no surprise that Dodd-Frank’s mandatory reporting provisions give us heartburn. What mandatory reporting provisions, you say? I’m glad you asked.
Dodd-Frank added new appraisal independence requirements as Section 129E to the federal Truth in Lending Act and tasked the Board of Governors of the Federal Reserve Board (the Fed) with developing a regulation to implement it. The Fed published what’s known as the “Interim Final Rule” – the regulation implementing Section 129E – in October of 2010. The Interim Final Rule actually amends Regulation Z – the regulation that implements TILA – to include new provisions implementing Section 129E. The new rule became effective in April of 2011.
The Interim Final Rule was promulgated without the benefit of public comment, and the regulators will eventually revisit it – but probably not in 2012 as there are several other appraisal-related rules with harder deadlines. A provision in the Interim Final Rule, which applies to appraisal management companies and the banks they serve, mandates anyone with a reasonable basis to believe that an appraiser violated recognized appraisal standards, known as USPAP, or codified professional or ethical obligations, to report the appraiser to the applicable state appraisal board within a reasonable time. If they don’t, they could face fines of up to $10,000 a day, or up to $20,000 a day for subsequent violations. And the revised Interagency Appraisal and Evaluation Guidelines, and state AMC laws, also include flavors of TILA’s mandatory reporting provision.
While later posts will take a more academic and analytical approach as to what this all means in in application, let’s start here. Imagine the playground at your everyday elementary school on Main Street in Anywhere, USA. Any teacher would tell you that on any given day you have your run of the mill Johnny-pushed-me-downs, Sally-sneezed-on-mes, Jerome-cut-in-lines, and a host of other accusations, many unfounded or imagined. Now imagine that instead of the teacher’s traditional loving but firm response: “Jim, please try to work it out with Johnny,” or “Jane, I’m sure Sally didn’t mean to,” the teacher stands up in front of the class and announces that if she learns of any misbehavior, she will conduct an investigation into whether anyone else in the class had a reasonable basis to believe that the perpetrator had violated a class rule. And what about the classmate who may have had such a reasonable basis? Well, unless they reported what they believed to be a violation to her within a reasonable time, she’ll take their lunch money, or give them detention, or make them sit out at recess. And if it happens more than once, she’ll take two days’ lunch money, or give them two hours of detention, and so on. What result? I’d venture to say that the teacher may from that point on have trouble stringing two sentences together without interruptions from some student anxious to report some imagined thought crime by his fellow classmate in case that evil look in his eye turns into a push or spitball one day in the future.
And so it is with Dodd-Frank’s mandatory reporting. OK, Ok, not exactly. The analogy breaks down a thousand ways. It’s overdramatized, and on and on. Please save that email saying how insensitive it is that I’m comparing appraisal fraud to childhood tomfoolerly. I’m not. I’m only trying to make a single point. We don’t like being tattletales. Especially not on the appraisers on which we rely to offer our bank client’s a quality product. And we do everything we can within our interpretation of the rule to give appraisers a fair shake. But the fact of the matter is that our teacher has stood up in front of the class and threatened to punish us if we don’t tattle. And instead of taking our lunch money, or an hour of detention, she can dole out $10,000 a day civil monetary penalties.
When do we have to report? What do we have to report? What steps can we take to try to make this requirement as palatable for our appraisers as we can? More on that in later posts.
DISCLAIMER: The author, Nathan C. Brown, is Chief Legal Officer at MountainSeed Advisors, LLC. MountainSeed, and its affiliates, offer valuation-related products and services to banks. The article is not legal advice. It’s for your information only. Neither the author nor MountainSeed makes any representation or warranty as to the accuracy or completeness of the content. You should always consult your regulator or a licensed attorney in your jurisdiction with questions relating to compliance with any law, guidance, rule, or regulation. Please don’t hesitate to send any questions, comments or corrections to the author at nathan@mountainseed.com.