AI Calls for Transparency
Appraisal Institute Calls for Transparency on Home Buyers’ Forms saying that consumers deserve to know what they’re paying for, the Appraisal Institute asked the federal Consumer Financial Protection Bureau on Nov. 16 to require more transparency on home buyers’ forms.
In a joint letter with the American Society of Farm Managers and Rural Appraisers, AI asked the CFPB to separate appraisal fees from administration and processing fees on the settlement forms that consumers receive when purchasing a home. Created by Congress, the CFPB oversees consumer disclosure laws and is authorized to develop new forms to inform consumers and charges assessed in processing mortgage loans.
“We see no consumer benefit with continuing to bundle two separate services and not fully disclosing such information to borrowers,” the letter said. “We urge the CFPB to revise these forms with a separate line for Appraisal Management (or management fees in total) as Congress authorized last year when it enacted the Dodd-Frank Act.”
The Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law by President Obama in July 2010, authorized the CFPB to separate appraisal and appraisal management fees to consumers on the HUD-1 settlement statement, the standard form used in the United States to itemize services and fees charged to the borrower by the lender or broker when applying for a loan for the purpose of purchasing or refinancing real estate.
However, the proposed form issued for comment by the CFPB still combines appraisal and appraisal management fees. (Management fees are those charged by an appraisal management company for administrative services; the appraisal fee refers to the actual cost of the appraisal itself.)
In their letter, the Appraisal Institute and the American Society of Farm Managers and Rural Appraisers cited recent research from the National Association of Realtors that said borrowers are paying more for appraisal fees than they recently did, but noted that appraisers report their fees have been reduced by as much as 40 percent. This is because banks have passed through backroom administration expenses on the backs of consumers.
The CFPB… has a unique opportunity to improve transparency for borrowers by requiring full disclosure of costs incurred for appraisal services and costs for appraisal management services,” the letter said, adding “…we believe consumers deserve to know who is providing services in relation to their loan and how much was paid. This is the spirit of transparency and the core presumption with development of a consumer disclosure form.
The following are excerpt from the Appraisal Institute’s and American Society of Farm Managers and Rural Appraisers’ letter to the Consumer Financial Protection Bureau:
We also note that in previous conversations with CFPB staff some question remained over the perceived consumer protection benefit to separating the appraisal and appraisal management fees on the CDF. On this point, we believe that consumers deserve to know who is providing services relative to their loan and how much was paid. This is the spirit of transparency and the core presumption with development of a consumer disclosure form. Otherwise, why segregate any of the settlement service costs? Additionally, without itemization, the consumer does not know the level of service provided by the appraiser and may be misled to believe that a more thorough appraisal analysis was performed. The appraisal profession already faces this problem in the market today as a result of current HUD-1 interpretations, as consumers believe that higher expenses on the Appraisal line of the HUD-1 is the result of more thorough analysis or simply a fee increase by the provider who visits their property. They have no idea that an inferior appraisal may be performed with the real increase is attributable to the management fee added on top of the actual fee for the service provided. Separate disclosure of the appraisal and appraisal management fee solves this problem and provides clarity to the consumer. Simply put, separation prevents manipulation of price vs. service, which is consistent with the goal of disclosure and is clearly a consumer service.
One complicating factor in separating appraisal and appraisal management company fees on the SDF is the “3 percent points and fees cap” also established by the Dodd-Frank Act. Known as the “Merkley Amendment,” this provision caps fees paid to banks to 3 percent of the loan amount. How this affects appraisal is that several large, national banks own appraisal management companies. When the appraisal management fees are bundled with appraisal fees on the SDF, the fees fall outside of the Merkeley Amendment requirements. However, if they are separated on the SDF, the appraisal management company fees (for those owned by banks) would fall within the 3 percent cap, constricting the amount available to other areas of the loan transaction. Obviously, banks that own appraisal management companies and receive AMC fees are concerned about adverse effects this may have on their operations.
Appraisal Institute’s and American Society of Farm Managers and Rural Appraisers’ letter to the Consumer Financial Protection Bureau below: