One consumer protection regulation that will impact how you perform evaluations on the residential side is Dodd-Frank's Section 1474: Equal Credit Opportunity Act (ECOA) § 701(e), an amendment requiring a free copy of an appraisal/valuation.
The biggest change here, effective January 2014, is that the term “appraisal” was replaced with the term “valuation”.
It's important to note an appendix that was added specifically stating that internally prepared valuations must be provided to borrowers within three days before closing or, if there is no closing set, within 30 days.
Late yesterday, the CFPB published compliance guides for its ECOA Valuations Rule and the TILA Higher-Priced Mortgage Loans (HPML) Appraisal Rule. Both rules were finalized in January of this year and take effect in January of 2014.
CFPB ECOA Valuations Rule Compliance Guide
CFPB TILA HPML Appraisal Rule Compliance Guide
In publishing the guides, the CFPB's goal is to "provide an overview of the rules in a plain language and FAQ format which makes the content more accessible and consumable for a broad array of industry constiuents, especially smaller businesses with limited legal and compliance staff."
Appraiser Blacklisting and Defamation
This oversight of who is going to be taken off an approved appraiser list or placed on an exclusionary list comes from a whole host of lawsuits that have occurred regarding “blacklisting” appraisers because there was some determination made that they weren’t returning appropriate values.
Defamation actions refer to taking an appraiser off a list for a reason that is not substantiated as a violation. This comes from allegations that some banks broadcasted to the community that an appraiser on an exclusionary list had done something wrong and the appraiser sued for defamation, in some cases successfully.
See our “Best Practices for Working With Appraisers” blog post for our suggested best practices.
This blog is provided for your information only and does not constitute legal advice. It may not reflect new or recent changes in regulation. No representation or warranty is made as to the accuracy or completeness of the content.
At MountainSeed, we work with lenders to help them understand the ever-changing regulatory environment and anticipate legislative changes. We are also committed to developing sustainable, long-term solutions that are mutually beneficial to our bank clients and to the appraisal community. If you have any questions about our services or anything in this blog, please contact MountainSeed Appraisal Management at (855) 640-0905 or visit mountainseed.com.
Three Predictions for Your Next Regulatory Exam
By: Nathan C. Brown, Chief Legal Officer, MountainSeed Appraisal Management, LLC
Copyright © 2013, MountainSeed Appraisal Management, LLC. All Rights Reserved.
In December of 2010, bank regulators finalized updated guidance on regulated institutions’ appraisal and evaluation programs. Almost two-and-a-half years later, banks still find themselves tackling key compliance and business challenges related to when and how they value the real estate they own and that secures the residential and commercial real-estate loans they make. Often, finding solutions to those issues requires analysis beyond the December 2010 guidance into the dark corners of a host of federal statutes, implementing regulations and the interaction between state and federal regulators. But, ultimately, it’s how and to what extent the regulators enforce those requirements that will drive compliance challenges and force change.
In January of 2013, the Office of Inspector General inside the FDIC issued a report to Congress examining issues related to the failure of financial institutions. In that report, the FDIC devoted an entire section to appraisal. While a detailed analysis is beyond the scope of this piece, for those of us that try to stare into the crystal ball, the report provides some helpful context as banks prepare for safety and soundness exams over the next 12 months. Three predictions for regulatory exams this year:
Focus on Quality
First, regulators will pay more attention to the quality of the appraisal or evaluation itself. In the OIG Report, the FDIC OIG claims that in reviewing the results of full-scope examinations from all three primary regulators, it found evidence that examiners pulled key pieces of information from appraisals and evaluations, presumably for purposes of running ALLL models, LTV calculations and classifying loans, but less evidence that regulators challenged the assumptions and methods used by the appraiser or evaluator in reaching a value conclusion. This trend may be especially impactful in the context of evaluations -- valuations for which the federal regulations do not require a licensed appraiser because they fall into one of three exemptions – and particularly with respect to the methods and techniques used by the evaluator in reaching their value conclusion, and the experience, education and competency of the person performing the evaluation.
Enter ECOA/Regulation B
As a side note, banks will also find increasing pressure on the quality of evaluations and the competency of their evaluators, not only from their regulators, but from their borrowers. The CFPB’s new final rule under ECOA/Regulation B, published in January of this year, will require banks to provide copies of internally-prepared evaluations to borrowers on first-lien mortgage loans secured by most 1-4 family properties. That rule will apply regardless of whether it’s a business or consumer loan and regardless of whether the collateral is the borrower's principal dwelling or a rental or vacation home. And, banks will have to provide a copy of the evaluation regardless of whether the loan closes. The rule takes effect in January of 2014.
Appraiser on Board
Second, more banks will see appraisers on their regulator’s exam teams. Several different approaches surfaced from interviews with examiners summarized in the report, but at least a few examiners made reference to their teams including or being provided with an appraiser for purposes of assisting with the review of an institution’s policy and procedure, a trend that may gather some steam. At least anecdotally, the author is aware of other recent appraisal exams where the exam team included one (or more) appraisers.
Appraisal Stands Alone
Third, regulators will begin to treat the appraisal and evaluation process as a more-prominent, separate are of inquiry, rather than a less-important subset of credit administration. In its written response to the report, the OCC acknowledged that it was currently drafting new, separate appraisal sections of key mortgage and CRE handbooks, evidencing what may be a larger trend.
DISCLAIMER: The author, Nathan C. Brown, is Chief Legal Officer at MountainSeed Appraisal Management, 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 email@example.com.
In a blog post last week, we alerted you that the agencies had released a new, 211-page proposal to implement Dodd-Frank Section 1471, which added Section 129H to the Truth in Lending Act. That section imposes tougher appraisal requirements on higher-risk mortgage loans. The next day, we circulated our preliminary analysis of the proposal.
Click here to download the whitepaper.
In an earlier post -- that also appeared in National Mortgage News -- we discussed the Dodd-Frank appraisal provisions governing higher-risk mortgages and reminded you that the interagency workgroup was currently drafting a new proposed rule to implement it. Today, the agencies released that proposed rule. A copy of the rule and FDIC press release are available here:
Bankers and other stakeholders will have until mid-October to submit comments. Please check back shortly for more detailed analysis of the proposed rule.
We hosted our first of a handful of call series' today that was aimed at helping the appraisal community gain an understanding of how to complete a real estate evaluation as an appraiser. It was an awesome turnout and we are thrilled that so many participated.
I was so excited to introduce the call because as an appraisal management company owner I am excited to have the opportunity to work with the appraisal community any chance I get.
We have another call scheduled for this week with our clients and prospective clients in an effort to share some of the best practices when seeking to use an appraiser to complete an evaluation. The details for the call are https://www3.gotomeeting.com/register/711576470.
Needless to say there is so much confusion between bankers and appraisers, and broadly speaking we have not seen anyone in the Appraisal Management community adding any value to the topic. This is why we are so excited to be involved in the education for both the lending and appraiser community to futher exemplify the ways in which an appraisal management company truly can be a valuable conduit between those two industries.
I hope you can join us tomorrow!
Are Banks Bound by USPAP?
By: Nathan C. Brown, Chief Legal Officer, MountainSeed Advisors, LLC
Copyright © 2012, MountainSeed Advisors, LLC. All Rights Reserved.
We’ve heard from bankers, even chief credit officers, who have woken up in a cold sweat over their appraisal and evaluation program – particularly with respect to USPAP. So, what is USPAP and why does it matter? This post seeks to shed some light on the issue.
The Uniform Standards of Professional Appraisal Practice (USPAP) are drafted and maintained by the Appraisal Standards Board (ASB). They establish, in part, uniform guidelines for the development and reporting of real estate appraisals. The ASB is a board sponsored by the Appraisal Foundation. Although it receives some grant money from the federal Appraisal Subcommittee (ASC) – the ASC is a subcommittee of the FFIEC – the Appraisal Foundation is a private, non-profit corporation. Neither the ASB nor the Appraisal Foundation is a regulatory body. Neither has any authority to examine your bank, to penalize you, or to take any enforcement action whatsoever. For that matter, neither the ASB nor the Appraisal Foundation has any authority to force any appraiser to use or comply with USPAP.
So why should you care about USPAP? Because Congress did, and so your regulator does.
To unpack that claim, let’s start with a brief overview of the relationship between Congress and the primary bank regulatory agencies (OCC, FDIC, Fed, NCUA) when it comes to appraisal regulation. Remember, there are other statutes (TILA, ECOA, etc.) that include appraisal-related regulation, but those are not our chief concern here. For now, we’re focused on FIRREA Title XI.
As most readers will know, FIRREA arose in the wake of the S&L crisis in the late 1980s. Title XI includes FIRREA’s provisions on real estate appraisal reform.
There are several prominent features of Title XI, but for our purposes here, I draw your attention to one of them – the mandate in Section 1110 that the regulatory agencies “prescribe appropriate standards for the performance of real estate appraisals in connection with the federally-related transactions under the jurisdiction of each such agency.”
FIRREA is a statute, which means it was drafted and approved by Congress, and signed into law by the President. As with most areas of financial regulation, the authority of your regulator (and, actually, their existence) is directly derived from a statute. Here, in Section 1110, we have Congress telling the regulators to promulgate regulations to govern the appraisal process. Section 1110 is the primary authority underlying your regulator’s appraisal regulations and guidance.
As with most statutory pronouncements, Section 1110 is brief, and cedes responsibility for most of the details to the regulatory agencies. It does, however, in just over 100 words – at least in its pre-Dodd-Frank form – set forth Congress’ expectations as to the minimum requirements for those standards. To be clear, Congress specifically permitted the agencies to go further – and go further they did – but in implementing appraisal reform, Congress deemed at least two elements sufficiently important that they needed codification in the statute itself. What are those? Well, one is that the appraisal be written. That seems obvious. But the other (and actually the first as the statute reads) is that it “be performed in accordance with generally accepted appraisal standards as evidenced by the appraisal standards promulgated by the Appraisal Standards Board of the Appraisal Foundation” – in other words, the appraisal must comply with USPAP.
It should be no surprise then, when each agency promulgated regulations in response to FIRREA’s mandate, that the first requirement in the minimum appraisal standards was that the appraisal comply with USPAP. (See, for example, the OCC’s appraisal regulations at 12 CFR § 34.44(a).) And, you shouldn’t be shocked to discover that the interagency guidance issued, in part, to clarify the regulations, lists as the very first requirement in the minimum appraisal standards, that the appraisal conform to USPAP. (See Section VIII of the Interagency Appraisal and Evaluation Guidelines, 75 Fed. Reg. 77450, 77459 [December 10, 2010].)
Bottom line – appraisals that fail to comply with USPAP don’t meet the basic minimum appraisal requirements set forth in FIRREA, and won’t satisfy your regulator. In the next post, we will examine the new Dodd-Frank requirement that appraisals be reviewed for USPAP compliance, and issues surrounding its implementation. For now, suffice it to say that USPAP compliance isn’t just an issue for appraisers. Banks need to understand it, and ensure appraisals comply with it.
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 firstname.lastname@example.org.
With all the attention to the new appraisal independence requirements in Section 129E of the federal Truth in Lending Act (TILA) that became effective in April of 2011, it can be easy to forget that more Dodd-Frank-based appraisal regulations are coming. For example, Dodd-Frank’s Section 1471 amended TILA to add the new Section 129H. Section 129H imposes so-called “super-appraisal” requirements as a condition to extending credit in certain higher-risk mortgage loans, and the interagency work group is currently drafting a rule to implement the requirements...
Continue reading this post that we wrote for National Mortgage News:
Ignoring state appraisal laws may subject bank employees or third-party service providers to fines or even criminal penalties. National banks relying on federal preemption for appraisal laws should take another look at that assumption in light of Dodd-Frank.
The primary federal regulatory agencies recognize that financial institutions appreciate the flexibility in the revised Interagency Appraisal and Evaluation Guidelines permitting the use of less-formal real-estate evaluations in lieu of more-costly appraisals in certain low-risk transactions. Those guidelines do not require that an evaluation be prepared by a licensed or certified appraiser. But the appraisal acts in many states — passed in the wake of the savings and loan crisis in response to a mandate in the Financial Institutions Reform, Recovery and Enforcement Act — do not provide that flexibility...
Continue reading this article that we wrote for American Banker: