NAIHP Letter Regarding Appraiser Independence Regulations
An outline exposing the unintended consequences created by HVCC and the Interim Rule
February 23, 2012, Hon. Richard Cordray, Director, Consumer Financial Protection Bureau
Re: Appraiser Independence Regulations
Dear Director Cordray:
Thank you for taking the time to meet with NAIHP on January 26, 2012. We always appreciate the opportunity to meet with the CFPB and discuss issues of concern that affect consumers and small business housing professionals.
Although, our meeting covered a broad range of issues, my comments today are limited to the ongoing problems associated with “Appraiser Independence.”
Today’s interim Rule on Appraiser Independence, was built on the flawed foundation of the former Home Valuation Code of Conduct (HVCC]. As you are aware HVCC was an 18 month agreement between former N.Y. Attorney General Andrew Cuomo, the Office of Federal Housing Enterprise Oversight (now the Federal Housing Finance Agency), and the GSE’s.
Attached you will find an outline exposing the unintended consequences created by HVCC and the Interim Rule.
Lastly, NAIHP and the undersigned small business housing trade and membership organizations strongly support the attached solutions to cure the unintended consequences of Appraiser independence regulations. Furthermore, we recognize the CFPB inherited this rule, but urge you to adopt these Main Street solutions, which will restore real consumer protection and true appraiser independence.
Marc S. Savitt, President
National Association of Independent Housing Professionals
Illinois Association of Mortgage Professionals
North Carolina Association of Mortgage Professionals
New Jersey Association of Professional Mortgage Originators
The conflict of interest rules contained in the “Interim Final Rule on Appraiser Independence,” were designed to establish a firewall between a loan production department ordering valuations of residential real estate and appraisers, who perform valuations. The Federal Reserve Board (FRB), who established the Interim Final Rule to replace the Home Valuation Code of Conduct (HVCC) in October of 2010, recognized it was not always practical to separate these functions in small financial institutions, which is why the FRB created two sets of firewall requirements: one for institutions with assets of $250 million or less, and one for institutions with assets greater than $250 million.
The Interim Final Rule specifically states, the creditor must require any employee, officer or director of the institution who orders, performs, or reviews the valuation for a particular transaction, abstain from participation in any decision to approve, not approve, or set the terms of that transaction.
Like smaller financial institutions, mortgage brokers and loan originators perform the exact same functions concerning the origination and processing of residential mortgage loan applications. However, brokers and originators play no part in the approval or disapproval process, or in setting the terms of the transaction.
Furthermore, all mortgage brokers and (originators not employed by federally chartered creditors), are fully licensed under the SAFE Act. Those licensed under this Act are required to meet strict standards for licensure. When implementing the HVCC and Interim Final Rules, mortgage brokers and originators were unjustly singled out as the offenders in the unlawful influencing of appraisers.Some of these standards include, extensive background investigations, the passing of both federal and state tests, performance bonds, acceptable personal credit and more. Yet, these small business, highly regulated, licensed professionals (brokers and originators), are prohibited from ordering valuations, unless they utilize a creditor’s Appraisal Management Company (AMC).
When implementing the HVCC and Interim Final Rules, mortgage brokers and originators were unjustly singled out as the offenders in the unlawful influencing of appraisers. However, since May 1, 2009, when the appraisal ordering prohibition began for brokers and originators valuation fraud has increased significantly. This fact alone establishes, (1) Brokers and originators as an industry were NOT responsible for the unlawful influencing, and (2) The current system for ordering valuations has failed.
The background information provided below outlines the momentous harm to consumers and small business, created by the Home Valuation Code of Conduct and its replacement, the Interim Final Rules on Appraiser Independence.
The solution to ending the wide-ranging harm, which is well beyond “unintended consequences,” is to amend the Truth in Lending Act and establish new uniform standards for all institutions, including SAFE Act licensed mortgage brokers and loan originators. The above amendment provides for such standards, while protecting consumers from the current harm imposed by existing separate standards.
The Home Valuation Code of Conduct (HVCC) was an agreement between the N.Y. Attorney General, Fannie Mae, Freddie Mac and their regulator.
HVCC was born from an investigation of a federally chartered bank and an unregulated appraisal management company. The investigation revealed conflicts of interest and the influencing of appraisers to fraudulently inflate the value of real estate.
The following paragraph is an exact quote from former N.Y. Attorney General Andrew Cuomo’s own website:
“In 2007 Cuomo also announced an investigation into widespread appraisal fraud within the mortgage industry, examining practices used by some of the country’s largest banks of pressuring appraisers to artificially inflate the value of homes. As a result of these investigations, Fannie Mae and Freddie Mac, the largest purchasers of home loans, agreed to abide by new appraisal guidelines defined by the Attorney General and to fund an Independent Valuation Protection Institute to implement and monitor those guidelines.”
In March of 2003, the original (proposed) HVCC agreement prohibited banks and lenders from having more than a 20% interest in appraisal management companies (AMC). Moreover, mortgage brokers were prohibited from ordering or having any contact with the appraisal process. When the final version of HVCC was released in December of 2008, the banks 20% ownership cap was removed, allowing banks and lenders to own an unlimited percentage of interest in AMC’s.
After five meetings with Mr. Cuomo’s staff, NAIHP was informed the revisions were made at the insistence of the GSE’s regulator. NAIHP questions why Mr. Cuomo would allow the banks and lenders to continue with the exact same model that first caused him to initiate his investigation. The very banks and AMC’s from his investigation were now in control of the residential valuation system in this country. Despite the fact mortgage brokers were NOT the subject of his investigation, the December 2008 final agreement required their removal from the appraisal process.
Since HVCC went into effect on May 1, 2009, consumers have incurred substantial additional expenses when purchasing or refinancing residential properties. It is conservatively estimated those costs exceed 2.8 Billion dollars a year. This estimate is based on higher appraisal costs enacted by AMC’s and extended interest rate lock-ins, necessary due to extensive delays caused by AMC middlemen. Most importantly, HVCC has done nothing to reduce fraud, and/or conflicts of interest. In fact, statistics have shown valuation fraud increased,46% in the 3rd quarter of 2009, as compared to the same time period in 2008. In the spring of 2010 and2011, the Mortgage Asset Research Institute (MARI), reported valuation fraud had increased over 50%, year over year. This significant increase occurred despite HVCC, which included a prohibition on brokers ordering appraisals.
The agreement between the N.Y. Attorney General and the GSE’s has sunset. However, the exact same provisions within HVCC are now embedded in the GSE guidelines and in the Interim Rule written by the Federal Reserve Board.
In addition to valuation fraud increasing at alarming rates, appraiser independence (AP) has also caused thousands of appraisers to go out of business. Local small business appraisers have lost their independence to unregulated AMC’s. Appraisers can no longer set their fees. Fees are dictated by the AMC’s and often end up between 40%-60% less than what is customary and reasonable for a specific geographic area. Sometimes, appraisal assignments are put up for bid. It is important to understand consumer costs have not been reduced along with appraiser compensation. In fact, the cost of an appraisal has increased on average $200.00. The increase, along with the “haircut” taken by appraisers, has gone into the pockets of AMC’s and their partners, the big banks.
The long term outlook for the appraisal industry is even worse. Because appraiser compensation has been drastically reduced, they can no longer afford to hire an apprentice. An apprentice needs a minimum of 2000 hours working under a licensed appraiser before they can be licensed. The average age of an appraiser is 56, which means within 8-10 years the appraisal industry will be a fraction of what it is today.
Under the current system of hiring the least expensive appraiser, including those unfamiliar with a subject property’s geographic area, quality and accuracy are often absent.
Many have long believed HVCC was nothing more than a “Plea Bargain” like agreement between Andrew Cuomo and the GSE’s, with the blessings of the Banks. In reality, the agreement doesn’t make sense. Why would Mr. Cuomo and the GSE’s allow their solution to the conflicts of interest, be the exact same conflicts of interest that created the fraud?
In the spring of 2008, the GSE’s held a public comment period. NAIHP is aware tens of thousands of comment letters were received by the GSE’s, their regulator and Mr. Cuomo. However, the Federal Housing Finance Agency (FHFA) has refused to release any of the comments. NAIHP filed a FOIA request and made an I.G. complaint. Both are stalling with respect to assisting in the production of these comments.
In the spring of 2010, Acting FHFA Director Edward DeMarco wrote to Andrew Cuomo and acknowledged use of “extensive marketplace comments in the deployment and implementation of HVCC.” Although, Mr. DeMarco has acknowledged the importance of these comments, he refuses to release them. During his tenure (2005), with AMCO, Cuomo approached the GSE’s with a suggestion of implementing HVCC style rules on all GSE loans. This cover up only supports NAlHP’s contention that HVCC was a sham, designed to protect the GSE’s and increase revenue to the big banks. Only one comment letter escaped the FHFA cover up. On June 10, 2008, four regulators sent a joint comment letter to the FHFA. They warned the agency of the unintended consequences of HVCC, including the effect on consumers.
Also of major significance was Andrew Cuomo’s position with an unregulated AMC, prior to becoming N.Y. Attorney General. Mr. Cuomo was a member of the Board of Directors and Chairman of the Board of Advisors for a company known as AMCO. During his tenure (2005), with AMCO, Cuomo approached the GSE’s with a suggestion of implementing HVCC style rules on all GSE loans. The GSE’s rejected the suggestion. Had Fannie Mae and/or Freddie Mac in fact implemented the proposed guidelines, Cuomo’s employer (AMCO), stood to substantially increase their revenue.
NAIHP has long warned regulators of problems associated with appraisal management companies. Besides evidence that these unregulated entities are overcharging consumers, accepting unearned fees, splitting fees with joint venture partners and failing to disclose affiliated business arrangements, some AMC’s now appear to be engaged in tax evasion.
Many AMC’s are only registered to conduct business in a handful of states. This in itself is a violation of state laws, but it also highlights the fact these same AMC’s are flying under the radar of state tax departments. In order to receive a state tax identification number, a business must be registered with the Secretary of State. In just one example, we found a national AMC was registered in only 20 states. A complete lack of oversight allows these AMC’s to overcharge consumers, underpay appraisers and evade tax responsibilities. Moreover, any monies collected from a consumer by an AMC operating without state authority, may need to be refunded.
Substantial evidence exists, which indicates AMC practices promote further deterioration of real estate values. This is due in part to hiring appraisers with little or no knowledge of the subject market area.
NAIHP acknowledges neither HVCC nor Appraiser Independence rules require the use of AMC’s.NAIHP acknowledges neither HVCC nor Appraiser Independence rules require the use of AMC’s. However, because most banks and lenders participate in joint venture relationships with AMC’s, if not own them outright, third party originators wishing to conduct business with these lenders are required to use their AMC’s. Therefore, AMC use is required.
Solutions to the unintended consequences of Appraiser Independence Regulations:
- Absolute prohibition of AMC joint ventures, or shared ownership interest with any real estate or financial institution, including their owners, officers, directors, shareholders,employees, or relatives thereof.
- Any mortgage broker or loan origination LICENSED under the guidelines of the SAFE Act and registered with the National Mortgage Licensing System (NMLS), shall be permitted to order a residential real estate appraisal directly from a local market licensed appraiser.
- All parties to any residential real estate transaction shall be required to sign a (CFPB approved) certification form. This form shall act as an advisory on the prohibition of influencing any licensed appraiser for any reason and the penalties for said violations.