Fee Transparency, Pivotal Point for Appraisers
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…appraisers may finally have a chance at making the goal of fee transparency a reality…
Keep your eyes open, events are happening fast.
Ever since the passage of the Home Valuation Code of Conduct (HVCC) in 2010 and the monumental rise of Appraisal Management Companies (AMCs), one of the main issues appraisers have pressed for is transparency for consumers in terms of the fee split between appraisers and AMCs. Specifically, how much of the actual “Appraisal Fee” being paid by the consumer goes to the licensed real estate professional and how much is withheld by the AMC “manager.”
Now, over nine years later, appraisers may finally have a chance at making the goal of fee transparency a reality.
Passed the House
H.R.3619, the Appraisal Fee Transparency Act of 2019, is a new piece of legislation that has already passed the House of Representatives and is currently being reviewed by the Committee on Banking, Housing, and Urban Affairs in the United States Senate.
The primary provisions of the bill accomplish the following:
(A) SEC. 2: Allows the Appraisal Subcommittee to establish a new formula for fees in regards to the AMC Registry.
(B) SEC. 3: Requires appraiser trainees to be placed on the ASCs registry.
(C) SEC. 4: Requirement to Disclose Appraiser Fees. Amends the Real Estate Settlement Procedures Act (RESPA) of 1974 (12 U.S.C. 2603(c)), striking “may” and inserting “shall”.
(D) SEC. 5: Adds a designee from the Department of Veteran Affairs to the ASC.
Section 2 of this new legislation allows the ASC flexibility in determining AMC registry fees, whereas Dodd-Frank mandates a single formula for determining the fees that must be strictly followed. This provision is intended to allow the ASC to create an alternative formula to determine AMC Registry Fees, if they deem necessary.
Section 3 mandates that Trainees be placed on the ASC registry and is intended to help alleviate lender pushback that licensed appraisers sometimes encounter when employing trainees. Mark Schiffman, the Executive Director for the Real Estate Valuation Advocacy Association (REVAA), a national coalition for AMCs, says that this is something REVAA supports because many (not all) lenders prohibit an individual who is not credentialed by a state from working on an appraisal assignment. “Therefore, without a credential, an appraiser supervisor can’t use a trainee to do work for assignments from those lenders. By placing Trainees on the Registry, they will have a verifiable credential that should eliminate the aforementioned barrier to lenders allowing the use non-credentialed trainees,” says Schiffman.
Each of H.R.3619’s provisions is significant in its own way, but perhaps none affects real estate appraisers more than its Section 4: Requirement to Disclose Appraiser Fees.
RESPA was originally passed in 1974 but was modified by the Dodd-Frank Act in 2011 to include a seldom discussed provision 2603(c) which states:
Disclosure of fees
c) The standard form described in subsection (a) may [emphasis added] include, in the case of an appraisal coordinated by an appraisal management company (as such term is defined in section 3350(11) of this title), a clear disclosure of-
(1) the fee paid directly to the appraiser by such company; and
(2) the administration fee charged by such company.
The legislation passed by the House and currently being considered by the Senate would only change a single word, striking the word “may” and inserting “shall,” effectively making it mandatory to include a breakdown of appraiser and AMC fees in mortgage loan disclosure documents for consumers.
Richard Hagar, SRA and nationally-recognized appraisal instructor (How to Support and Prove Your Adjustments and Adjustments II: Solving Common Problems), says that he fully supports the Bill as it is good for consumers to see the separate fees being paid to both the appraiser and the AMC. “The goal here isn’t to brand the AMCs as the bad guys, they’re not, but we want everybody’s portion of the transaction to be stated and transparent. AMCs should have to negotiate their own fees with the lender. Additionally, disclosing the AMC fee and the appraisal fee to consumers upfront may help discourage much of the predatory, low-fee shopping that takes place in the industry,” says Hagar.
Hagar continues, “We’ve seen plenty of appraisal fees being offered by AMCs where the AMC takes 50%-60% of the appraisal fee. This demonstrates the need for transparency—it’s something that consumers need to see. Consumers might start questioning these fees when they find out they are paying $250-$350 just to ‘manage’ the appraiser, while the licensed appraisal professional is only taking home $300-$350. The consumer deserves to know what they are paying for,” argues Hagar.
Transparency is also important in terms of how the “appraisal fee” is defined. Many lenders have complained that in some markets appraisal fees are “out of hand” and “too high,” but what is being represented to the public and even to lenders is not strictly the appraisal fee, but the appraisal and AMC fees combined. Yet, too often, appraisers are the ones who are blamed, according to Hagar.
Appraisal Institute Efforts
Bill Garber, Director of Government and External Relations at the Appraisal Institute (AI), reports that AI has worked heavily to positively shape and advance HR 3619. “Fee transparency is something that we’ve been fighting for years for and it was originally going to be part of the Dodd-Frank Act of 2010. RESPA was amended by the House of Representatives that AMC Fees should be disclosed by mandate but when the bill reached the Conference committee at the Senate the wording was changed from ‘Shall’ to ‘May’ at the last minute. Some of the Senate staff at the time had concerns that consumers would get confused by multiple lines on the disclosure form and that it might not be a benefit to consumers. As a result of the law and subsequent rule making, lenders have continued to bundle AMC Fees with Appraisal Fees and the consumer is unaware of what’s being paid to AMCs,” says Garber.
One of the challenges is that while it was envisioned to apply only to Closing Disclosure form, it may end up being interpreted to apply to the Loan Estimate as well. In fact, that is exactly how many are understanding the legislation. Nanci Weissgold, a law Partner at Alston and Bird specializing in national regulatory compliance, writes in her blog that HR3619 will “require the disclosure of the appraisal management fee separate from the appraisal fee on the loan estimate and closing disclosure.”
Both the Loan Estimate and the Closing Disclosure are governed by TRID (TILA-RESPA Integrated Disclosure) rules. The Closing Disclosure is the final loan document the consumer must sign to consummate a mortgage loan. The Loan Estimate, on the other hand, is the initial mortgage disclosure the consumer is presented with when evaluating a mortgage loan.
The new TRID rule now classifies appraisal fees in the zero-percent tolerance category-along with all the other fees that consumers cannot shop for. The result is that, except in very specific circumstances, the original appraisal fee quoted to the borrower cannot be changed. While it is conceivable that the AMC Fee and Appraisal Fee could be itemized on the Closing Disclosure as an extrapolation of the original “Appraisal Fee” listed on the Loan Estimate, it remains unclear whether such a “fee extrapolation” would be compliant with TRID or if TRID would be modified in some way.
The ultimate passage of the bill is not guaranteed and it may be modified further as the Senate considers it. “It’s more likely that the Senate will take up a Senate introduced version of the Bill than work with the one passed by the House. I wouldn’t be surprised if the fee transparency portion of the Bill is removed or modified from the Senate bill. There isn’t currently consensus around that provision and typically they tend to favor bills with provisions that have broad consensus,” says Garber.
Appraisal Orders: Robo-Bidding
How the current Bill ends up being modified and interpreted with respect to the fees presented on the Loan Estimate and Closing Disclosure will have a significant impact on the appraisal industry. One positive effect of requiring the separate, upfront disclosure of the appraiser and AMC fees on the Loan Estimate is that it may discourage the practice of robo-bidding or “order by email blast,” that appraisers frequently encounter. This occurs when an AMC sends out an email blast to all appraisers in a given area, detailing a particular property, and either offering a specific fee for the assignment or asking the appraisers to quote their “fee and turn time,” effectively creating a bidding situation where too often the lowest bid wins the order.
Such practices are widely criticized by appraisers as a “race to the bottom” to find those appraisers who are willing to work for the lowest fees possible, instead of selecting appraisers based on relevant professional metrics, such as quality of work, professionalism, experience, and geographic competency.
According to Pat Turner, IFA, President of Virginia Coalition of Appraisal Professionals, this zero-sum framework allows the “appraisal fee” paid by consumers to be split in a non-transparent way between AMCs and appraisers. This incentivizes AMCs to search for those appraisers who are willing to perform the assignment at the lowest fee, instead of finding the best, most competent appraiser for the job. The lower the fee paid to the appraiser, the more the AMC makes on that particular order. The zero-sum basis of this model prioritizes finding the cheapest appraisers, not the best appraisers, according to Turner. “The problem with focusing on finding the lowest bidding appraiser is that it ignores the quality and geographical competency of the appraiser who accepts the bid, and the result is low quality, poor appraisals,” warns Turner. “The current lack of fee transparency doesn’t protect the public trust, and it threatens the safety and soundness of the financial system around the world.”
(Real) Turn Times
Speed is another potential benefit of having transparency of appraisal and AMC fees. When AMCs are incentivized to find the lowest bidding appraiser, the search adds extra time. Many appraisers testify to seeing low-bid orders circulated for weeks before someone accepts it or the AMC raises the fee. In a world where lenders want to close mortgage loans in one to two weeks, having the AMC take a few days, to a few weeks to shop for the lowest appraisal fee slows down the mortgage process and leads stakeholders in the lending industry to blame appraisers for the delays.
With the recent national alarm regarding an existing or impending “appraiser shortage,” lenders have been pressuring regulators to expand appraisal waiver programs and pass legislation that would alleviate delays in the mortgage process due to what they claim is an “antiquated” appraisal process. (See Bifurcated Appraisingfor more.)
“We see situations all the time where the ‘appraisal fee’ actually being paid by the consumer is $600 or $650, but the AMC begins bidding out the job at $275 or $300,” Turner says. “They may solicit appraisers via email for days with this low fee, even having their administrative staff call appraisers urging them to accept the assignment. After a few days of not being able to find an appraiser to take the low fee, the AMC might up it to $350, then $400 and so on. In some cases, the order is actually passed to a second or third AMC as they are all unable to place the order at the lower fees. We have seen certain assignments make the rounds for several weeks. If the Customary and Reasonable (C&R) fee for a given assignment is $500, but the AMCs are only offering $300 to pad its profit margins, a lot of time is spent finding the appraiser who will do it for the cheapest,” says Turner.
In many ways, some advocates of the bill are making identical arguments to those that have been made by proponents of the Cost-Plus Model of appraisal and AMC fees. The cost-plus or “full fee” AMC model is one where appraisers and AMCs are compensated separately; the appraiser receives the full “Appraisal Fee” and the lender/mortgage broker pays the AMC an additional fee for its management services (See WRE: Fee Solution: Cost-Plus Model?). Dart Appraisal, a national AMC which is in favor of a Cost-Plus model, explains the benefits of Cost-Plus in its January 3, 2018 blog here.
REVAA Position on Fee Transparency
Schiffman says that REVAA, the largest and most influential coalition of AMCs in the country, is not opposed to fee disclosure and is in favor of transparency. “A significant majority of states regulating AMCs already either: (i) require an AMC to report all fee split information to its customer; (ii) prohibit an AMC from restricting the appraiser’s disclosure of their fee in an appraisal report; or (iii) require an appraiser to include in the appraisal report their fee and the AMC’s fee. However, REVAA is not in favor of this provision of H.R.3619 because it does not believe it is a correct way to accomplish fee transparency,” says Schiffman.
In a world where appraisers are being blamed for long turn times and accused of charging exorbitant appraisal fees, Turner says that H.R.3619 is exactly what both the appraisal industry and public need.
Turner urges appraisers to write, email and call the Senate representatives in the Committee on Banking, Housing, and Urban Affairs, where the Bill is currently being considered. “If there was ever a piece of legislation that has the potential to improve the industry standards for boots-on-the-ground appraisers, this is it! This is a pivotal point for appraisers. Please call and email your representatives and encourage them to make the right decision. The American Banker’s Association (ABA) and REVAA are currently against this provision of the bill and are trying to get it removed, so appraisers need to stand up and let their voices be heard,” urges Turner. “I urge every professional appraiser to contact their Senator and explain why this transparency is fair, balanced, and needed for the protection of the American homebuyer.”
Editor’s Note: At press time, HR 3619 is being considered in the Senate and no action has yet been taken.
Reprinted with permission from Working RE magazine and published by OREP, a leading provider of real estate appraiser E&O insurance nationwide.