Critical Appraisal Legislation in Senate Committee

June 24, 2010

Appraisal Game Changer on Horizon: HVCC Gone, BPOs, Reviews, AVMs Regulated, Greater Enforcement, Independence

Reprinted with permission from Working RE Magazine:  WRE Editor's Note: Hang in there. The Financial Reform Bill, now in Senate Committee, could be a game changer for appraisers. If signed into law, the bill would regulate the use of broker price opinions and appraiser valuation products, set new rules for appraisal reviews, beef up appraiser independence and enforcement and mitigate the effects of HVCC.

Appraisal Game Changer on Horizon: HVCC Gone, BPOs, Reviews, AVMs Regulated, Greater Enforcement, Independence  

By David Brauner, Editor

There are 61 pages of appraisal provisions contained in the base text of the Financial Reform Bill now in House-Senate Conference Committee. If passed and signed into law, the legislation could be a game changer for appraisers.

 Some highlights included in the base text are:

 ·       Sub prime mortgages to require written reports by state-licensed appraisers, including an interior inspection (no more drive-bys). Failure to obtain such an appraisal by a creditor will result in a $2,000 liability to the applicant or borrower.

·       Appraisers must be licensed in the state in which the property is located.

·       Strong appraiser independence language mirroring that of the Home Valuation Code of Conduct (HVCC), including a national complaint hotline.

·       Sweeping powers for the Appraisal Subcommittee to police state appraiser boards.   

·       Mandatory reporting requirements of appraiser malfeasance and/or discovery of Uniform Standards of Professional Practice (USPAP) violations to state appraiser boards.

·       All appraisal reviews to be in compliance with USPAP. From the base text: "Appraisal reviews by a lender, appraisal management company (AMC), or other third party organization, shall be performed by an appraiser who is duly licensed or certified by a state appraisal board." 

·       AMCs to be regulated by state appraiser boards.

·       Quality control standards required for automated valuation products.  

·       Rules for broker price opinions (BPOs): "Broker price opinions may not be used as the primary basis to determine the value of a piece of property for the purpose of a loan origination of a residential mortgage loan secured by such piece of property."

·       Broker price opinions defined: "The term 'broker price opinion' means an estimate prepared by a real estate broker, agent, or sales person that details the probable selling price of a particular piece of real estate property and provides a varying level of detail about the property's condition, market, and neighborhood, and information on comparable sales, but does not include an automated valuation model as defined in section 1125(c)."

Game Changer

According to Darwin Ernst, SRA, Montana Real Estate Appraiser Board Member and designated Residential Member of the Appraisal Institute, these changes have the potential of being significant. "The base text says appraisals and appraisal reviews need to be done by licensed appraisers," Ernst said. "This could compel the GSEs (Government Sponsored Enterprises - Fannie and Freddie) to replace the use of AVMs and/or BPOs for quality control checks with appraisal reviews by qualified (licensed) appraisers. This could be a huge change."

"This legislation (if passed) will also lead to the removal of all unqualified personnel at appraisal management companies who are calling themselves appraisal reviewers. One goal of the legislation appears to be justly aimed at getting rid of people who are not qualified to complete appraisals or appraisal reviews. 'Qualified' now means a state licensed or certified real estate appraiser."

Ernst recently returned from an Appraisal Institute-sponsored lobbying trip to Washington, D.C. where he met with staffers from various members of Congress to provide input on these issues from the perspective of appraisers (see Fighting for HVCC Reform: Mr. Ernst Goes to Washington, WorkingRE.com, Premium Content).

HVCC, Customary and Reasonable Fees

Conspicuously absent from the base text are the elimination of the Home Valuation Code of Conduct (HVCC), which is due to sunset in November 2010 unless renewed, and any mention of customary and reasonable fees for appraisers (see Demanding Customary and Reasonable Fees for Appraisers, WorkingRE.com, Premium Content). However, both issues are addressed in a proposed amendment.

The "Amendment to Title XIV" (see, WorkingRE.com, Sidebar) calls for the sunsetting of the HVCC. It also addresses customary and reasonable fees with more specificity than the FHA, which so far has failed to enforce its own mandate. The language in this amendment says: "Lenders and their agents shall compensate fee appraisers at a rate that is customary and reasonable for appraisal services in the market area of the property being appraised. Evidence of such fees may be established by objective third-party information, such as government agency fee schedules, academic studies, and independent private sector surveys. Fee studies shall exclude assignment orders by known appraisal management companies." The last sentence seems to debunk the notion that the reduced fees offered by AMC should be considered "customary and reasonable."

According to Ernst, whether or not the amendment is added, the base text of the legislation will have the De facto effect of superseding HVCC. "Most lenders will not make any changes to their current practices even when the HVCC is officially sunsetted, until they are forced by new regulations. The appraiser regulatory provisions in this financial reform legislation are such regulations. The GSEs' policies for lenders will likely have to change in order to comply with the new law," said Ernst.

According to Ernst, it is possible that this legislation, if signed into law, may also curtail the use of BPOs for valuations. "BPOs are defined here as a 'probable selling price,' as distinct from an appraisal from a qualified appraiser that provides an opinion of market value," said Ernst.

Day of Reckoning 

The base text also calls upon the Comptroller General to conduct a study to determine the effects that the changes to the seller-guide appraisal requirements of Fannie Mae and Freddie Mac, contained in the HVCC, "have on small business, like mortgage brokers and independent appraisers, and consumers, including the effect on the quality and costs of appraisals; length of time for obtaining appraisals; impact on consumer protection, especially regarding maintaining appraisal independence, combating appraisal inflation, and mitigating acts of appraisal fraud; structure of the appraisal industry, especially regarding appraisal management companies, fee-for-service appraisers, and the regulation of appraisal management companies by the states; and impact on mortgage brokers and other small business professionals in the financial services industry."