New Appellate Decision – LREAB v FTC
- Lender Liability for a Negligent Appraisal? - October 26, 2022
- CFPB Investigations in Alleged Appraisal Discrimination - August 9, 2022
- Price-Fixing Case May Reach Supreme Court - December 15, 2020
FTC’s price-fixing enforcement action against LREAB…
A federal appellate court – the U.S. Court of Appeals for the 5th Circuit – has issued a decision in the long-standing fight between the Louisiana Real Estate Appraisers Board (LREAB) and the U.S. Federal Trade Commission about “customary and reasonable” appraisal fees. I’m venturing here to provide a short, understandable, unbiased summary of the litigation and what this latest court decision means.
What did the Court of Appeals decide?
Here’s the very short summary: The Federal Trade Commission (FTC) is pursuing an administrative complaint it filed in 2017 against LREAB, contending that LREAB’s “customary and reasonable” rule unlawfully restrains competition and that LREAB’s enforcement of the rule amounts to illegal price-fixing. LREAB has challenged certain of the FTC’s preliminary rulings by filing a lawsuit in federal court and obtained a stay of the FTC’s proceeding until resolution of that challenge. On October 2, 2020, however, the Fifth Circuit Court of Appeals held in favor of the FTC. It ruled that the order by the lower federal court staying the FTC’s price-fixing enforcement action against LREAB should be reversed and that the lower federal court did not have jurisdiction to hear LREAB’s present challenge to the proceedings before the FTC. The result is that, barring any further appeal, the FTC’s enforcement action against LREAB can go forward before the commissioners of the FTC.
Please read below for a history of how the FTC and LREAB got to this point and what the ramifications of the decision may be.
A short history of the litigation between the FTC and LREAB.
Dodd-Frank and the federal requirements regarding customary and reasonable fees. The Dodd-Frank Act requires that lenders and their agents (i.e., appraisal management companies) compensate real estate appraisers “at a rate that is customary and reasonable for appraisal services performed in the market area of the property being appraised.” (15 U.S.C. § 1639e(i)(1).) This “customary and reasonable fee” requirement only applies to appraisal services for consumer credit transactions secured by the consumer’s principal dwelling.
The federal regulations (entitled the “Final Rule on Minimum Requirements for Appraisal Management Companies”) implementing this part of Dodd-Frank establish that there are two specific, but non-exclusive, ways for lenders and AMCs to show that fees paid to appraisers are “customary and reasonable.” (12 C.F.R. § 226.42(f)(2) & (3).) If a lender or AMC can show that the fees are set in either of the following manners, then the fees are presumed to meet the “customary and reasonable” requirement: (1) that the fees are reasonably related to recent rates paid for comparable appraisal services performed in the same geographic market, as adjusted by various factors, or (2) that the fees paid are based on fee schedules prepared by independent third parties, such as government agencies, academic institutions or independent private surveys. An important legal point – in the FTC’s view – is that these two options are not exclusive, meaning that a lender or AMC can still show that their fees are reasonable if they can show that they paid appraisal fees set by the free market.
LREAB’s AMC rule relating to customary and reasonable fees. Like every other state, Louisiana has enacted an appraisal management company registration act. Not all state AMC acts address the subject of customary and reasonable fees, but Louisiana’s act does, and it expressly requires that AMCs pay appraisal fees consistent with the Dodd-Frank requirements. Based on the state’s AMC act, LREAB then adopted a more specific rule to implement the law. The problem here, in the FTC’s view, is that LREAB’s rule regarding appraisal fees (La. Admin. Code, title 46, rule 31101) negated the ability of AMCs to show that they base their fees on free market negotiation. As the FTC alleges, LREAB’s customary and reasonable fee rule requires that reasonableness be measured by one of three tests:
- A third-party fee study (such as an academic study or government schedule, like the VA fee schedule) – this is essentially the second presumption in the federal rule discussed above,
- A fee schedule adopted by LREAB, or
- A evaluation of each appraisal assignment with the fee then based on, at minimum, the following elements: type of property, scope of work, time, appraiser qualifications, appraiser experience and appraiser work quality – this is essentially the first presumption in the federal rule.
By locking AMCs into these three alternatives exclusively, the FTC contends that LREAB’s rule prevents AMCs from showing that the fees they pay are simply the product of negotiating fees through arms-length, market-based negotiations.
The litigation between the FTC and LREAB. In 2017 (and notably after two AMCs had been disciplined by LREAB over fee issues), the FTC commenced an administrative complaint against LREAB, contending that LREAB’s rule unlawfully restrains competition and that LREAB’s enforcement of the rule effectively sets a fee floor – i.e., that LREAB is engaged in price-fixing. This type of administrative proceeding takes place before the Federal Trade Commission itself, meaning that it is decided by the FTC’s appointed commissioners after a period of litigation between the parties.
On top of the issue with LREAB’s rule itself, the FTC also asserted that LREAB was coercing AMCs to adhere to an academic fee study that LREAB had commissioned, and that this coercion was taking place because LREAB’s membership was dominated by real estate appraisers with an interest in fixing appraisal fees above the free market. As the FTC wrote in its complaint: “in subsequently enforcing its regulation, the Board has unlawfully restrained price competition, effectively requiring AMCs to match or exceed appraisal rates listed in a published survey.”
One of the key defenses relied on by LREAB in its defense of the FTC administrative proceeding has been something called the “state-action doctrine.” This defense asserts that LREAB’s activities with respect to regulating appraisal fees are protected and are not illegal anti-trust actions because they are being carried out and overseen by the state government. The FTC’s counter argument is that the defense does not apply because LREAB consists of “market participants” – namely, LREAB’s members include a majority of real estate appraisers who have personal interests in seeing appraisal fees fixed at higher levels. In April 2018, the Commissioners of the FTC decided that LREAB’s state-action defense was invalid and that the proceeding should go forward.
LREAB sues the FTC in federal court. In 2019, after other unsuccessful attempts to challenge the Commission’s decision on LREAB’s state-action and related defenses, LREAB filed a lawsuit in federal court (U.S. District, M.D. La.). In this case, LREAB sought to overturn the Commission’s decision. Until it could resolve the case, the federal district court issued a stay of the FTC’s administrative action.
The FTC’s appeal. The FTC then appealed the district court’s decision to the applicable federal appellate court (the U.S. Court of Appeals for the 5th Circuit) and further appealed on the issue of whether the district court even had jurisdiction.
This finally brings us to where we are now. As mentioned already, on October 2, 2020, the Court of Appeals held in favor of the FTC. It ruled that the order by the district court staying the FTC’s price-fixing enforcement action against LREAB should be reversed and that the district court did not have jurisdiction to hear LREAB’s present challenge to the proceedings before the FTC. The result is that, barring any further appeal, the FTC’s enforcement action against LREAB can go forward before the commissioners of the FTC. This is bad news, of course, for LREAB.
Ramifications of the ruling and future events.
The ultimate outcome of the FTC’s action, if the FTC is successful, will likely be a cease and desist order (or consent order) against LREAB in connection with its alternative customary and reasonable fee rule. The ramifications would likely go beyond that, however. Even without a final order on the issue of whether LREAB engaged in unlawful price-fixing, state appraiser boards in other states already seem to have been hesitant with regard to aggressive application of their own customary and reasonable fee rules/regulations. This appears particularly true in other states in which “market participants” – appraisers – serve on boards with power to discipline AMCs.
The demonstrated weakness of the state action “immunity” doctrine as a defense for appraiser/AMC licensing boards with “market participants” also creates the potential for individual board member liability, perhaps further dissuading aggressive enforcement attempts. Indeed, sitting in the wings is a separate lawsuit (iMortgage Services v. LREAB, et al.) that was filed in December 2019 by one of the AMCs disciplined by LREAB for violations of its customary and reasonable fee rule. This lawsuit alleges that LREAB and its eight individual appraiser members injured the AMC by engaging in the price-fixing conduct alleged by the FTC. In particular, the AMC alleges that it “experienced damages in the form of lost revenue and lost opportunity where former customers ceased ordering appraisals” as a result of LREAB’s and its appraiser-members’ actions. The case has been stayed pending the outcome of the overall litigation between the FTC and LREAB. Once the litigation is resolved, the AMC’s claim for damages, including a potential for treble damages, may go forward.
They don’t even know what this issue is about and have ruled in favor of powerful corporations over independent workers whom have no regress or representation against the ongoing abuses. No recognition of the spirit of the C&R rule which was to stop the predatory behavior of amc’s, which is ongoing to this day. Missing the IVPI proposal yet?
And I think they just nullified the concept of the VA Panel set fees in the process. These same lenders and amc companies have no problem paying the VA panel fees, then turn around and drive the fee down to a third of that with non VA work. But now they’ll have legal grounds to challenge the VA fee schedule too. Appraisers that work with amc’s are part of the problem, not the solution.
The game is rigged. The government is going after LREAB for implementing a law that the government passed. But they won’t go after the AMCs? It’s obvious that FTC is in the pocket of REVAA!
Isn’t it a curious event that they fished out the 2010-2012 letters regarding the call to action for the CFPB’s interm final rule and standards of compliance? They presented those, but none of the appraisers letters.
That’s why in relation to these egregious rulings which were predictable, I fished out some of the appraisers letters from that time. In the link from my first post above. There was in fact, at least a 20 to 1 ratio if not far greater than that, of voices against the CFPB’s 1st safe harbor position. “Kindly advise when the fictional “Option 1” now in the published Interim Final Rule will be removed.”
Support piece, interest piece. The C&R rule was vanquished with the CFPB ruling on the final interim rule. This has been the quintessential argument point for amc’s since the interim rule, the 1st position of safe harbor compliance with C&R rules. (Just FYI, there had been no mention of such an approach until the CFPB stepped in with the safe harbor rule on C&R, effectively nullifying the spirit of the Dodd Frank Reg Z rule on C&R compensation for independent appraisers.) When arguing, the ‘spirit of the law’ is a valid argument point. C&R was clearly and unequivocally conceived, written, and passed as a response to amc predatory billing practices. Without a doubt, it’s irrefutable that is why the C&R rule was implemented. One could also argue that the actions amc’s engage in would be RESPA violations if any other companies structured billing and engagement that way. (RESPA link in the above linked post also.) And there is also the Dodd Frank compliance points on ‘recent rates’, ‘experience factors’, and ‘volume discounts’, all possible argument points. It appears to me people are considering this case without actually understanding the RegZ text, or at least they are not utilizing the principals set in the spirit of those regulations. It’s twilight zone, as if everything that led up to the CFPB interim final rule never existed and time started when the 1st safe harbor rule for C&R was installed by the CFPB. Is the CFPB flawless like a god, unable to make interpretive mistakes? Who exactly wrote that portion of the CFPB text for safe harbor compliance, where are they today, and what relationship did they have to lenders, amc,’s or the appraisal industry then? At the time it was rumored the C&R safe harbor rule came by way of pressure from RELS lobbyists. Also it was rumored the same lobbyists were supposedly responsible for the new HUD1 disclosure forms, for not having clearly separated line items for the amc fee and the appraisers fee.
It’s time to face facts: The only way to stop the predatory behavior of amc’s, is to force them to bill separately and have their own independent fee, for their own distinctly different service. Amc’s are not appraisers. They do not provide appraisals. They therefore, have no business co mingling their fees with appraisers fees. It would be easier to get a separated billing rule through than to go against CFPB. There is always the notion of DoddFrank being retired and replaced but certainly that framework would guide new regs, so it’s important to at least separate the billing now. Remove the financial incentive to drive down appraisers fees and pocket the difference without returning cost savings to consumers. This is fee skimming, unearned fee raking, and collusion by persons and companies to provide a thing of value to be the preferred selectee, in violation of FDIC guidance rules on appraiser selection, as published in the Federal Register.
‘Interagency Appraisal & Evalation Guidelines’. Notice the absence of C&R and safe harbor provisions. That is because these guidelines came shortly before the CFPB’s fictitious installation of the safe harbor of compliance. They wrote these rules without those concerns since theoretically it was assumed that C&R fees would be paid and predatory amc behavior for fee raking was already a managed issue with the advancement of the RegZ C&R provision. Does this prove the spirit of the law?
Pg 9. Draw up an outline of the requirements for maintaining an appraisal panel, validating qualifications and experience, and assignment methods. Tell me a decade later that these compliance points are respected and prioritized. The amc industry is clearly rouge without respect for regulatory guidelines in regards to appraiser selection, billing practices, and fair order distribution. If you’re an amc appraiser hoping to somehow wrangle these companies in for a fair shake, keep dreaming, and keep waiting. Your only relief will be to avoid amc’s and find completely different clients. It’s been over 10 years and look at where we are now. The C&R rule came by way of 2008 and before arguments, appraisers fought fiercely to get C&R language into DoddFrank texts. The industry heads sent their lobbyists to Washington and nullified an entire industries efforts to stop these predatory practices. We’d have been better off with HVCC in place, because at least then these companies would have had to find a written reason to remove appraisers from panels and take them out of rotation. These days there is no rotation, they add, remove, skim, penalize, and otherwise discriminate against appraisers without a second thought or even a remote worry about substantive penalties.
“Appraisers that work with amc’s are part of the problem, not the solution.”* [Mr. B]
*In particular, those affected by the “circus elephant syndrome” and are willing to work for peanuts…..
EXAMPLE: Bifurcated appraisal done in Georgia by an appraiser from Indiana.
AMC fee—$250 Appraiser’s fee—$25.00
Very easy to fix this issue. Don’t accept a fee less then 450. Everyone wins. Unfortunately there will be that “special kinda stupid” appraiser willing to accept below market rates which in turn hurts the entire profession.
One of the best case explanations I’ve read. Let me attempt to summarize further.
1. LREAB may not enforce their existing rules, Those laws need to be rewritten to widen the types of analyses available or recognized.
2. FTC’s original complainants (case originators) will seek to have the rates paid by AMCs to appraisers considered to be representative open market transactions.
Number One above is not a great obstacle. It is however one where industry lobbying will dictate the final wording.
Number Two is tougher. Nowhere in published information on the case is there any recognition or acknowledgment that the AMCs methods of calculating C&R fee is NOT reflective of an open market negotiation, but is instead a result of its own price-fixing with the connivance between both lenders and AMCs.
Circa 2014 Brian Coester and Coester VMS originated what was then known as a one size fits all national appraisal management fee. They would contract with a bank and say for $450 (or so), agree to take on all appraisal assignments for that lump sum.
Banks could then tell their Loan Officers to advise customers when quoting loan fees that the appraisal fee would be $450.00. Period. At that point no one had ever spoken to a specific appraiser about a specific property in order to determine its complexity; or the time and related costs necessary to complete it properly and in accordance with USPAP.
The only ‘competition’ that took place was between AMCs seeking to out-hustle each other. If CVMS was willing to do it for $450 then XYZ AMC would do it for $415. and ABC Svcs would do it for $399.00. While this normally didn’t come out of the bank’s pocket, it allowed them to in turn cite lower overall fees for their products to consumers.
Of course, on top of the direct fee competition among banks and AMCs who do in fact engage in price-fixing, was the undisclosed ‘kickback’ practice which used to result in per order fees of $35 to $50 (& sometimes much more) being paid under the table by the AMCs to the ‘decision-makers’ at the banks who selected the AMC to be used.
Again, all this took place and still takes place before a specific appraiser is contracted for a specific property with proper consideration of its complexities.
Appraisers were given take it or leave it options by AMCs if they wanted to work. Either stated as “This is what our client pays (almost universally an outright lie since it neglected to disclose the management portion)”, or they were asked to provide their own fee list…with no work at all until they lowered it enough ‘to compete’ with other bottoms of the barrel low fee appraisers. It was a trial & error process to see how low they had to go before they magically fell into the range the AMCs had guaranteed to their bank clients.
There was a good reason why AMC-bank fees were never considered qualified indicators of fair market or C&R fees.
Whatever Reasonable & Customary Fee determination methods (as Dodd-Frank actually reads) is ultimately decided upon by states, they must FINALLY incorporate a requirement that such fees be related to assignment complexity and necessary time to properly complete. Assignments dictating certified appraisers by their complexity must provide for higher fees due to greater exposure; more stringent training & expertise and time dictated.
If past experience is any indicator, states will simply avoid the issue unless we start lobbying for C&R fees ALL OVER AGAIN.
Circa 09/20154 or 2015 I submitted a complex proposal for state by state national fee structures based upon appraiser experience and assignment complexity generally following then existing civil service guidelines for comparable work.
Federal agencies did not adopt it because they left fee decisions up to the states (despite DF).
Our own fellow appraisers didn’t support it at significant state levels, and some self-serving special interest ‘appraisers’ argued that “no one should be able to tell any appraiser how little they can charge.” The Commonwealth of Virginia considered it before adopting the easier to follow VA schedule advocated by VaCAP & secondarily supported by AGA. LREAB & NC passed their own C&R fees. Few others did in any meaningful way.
The resistance of appraisers was and is primarily why C&R fees are not adopted today. It was a real eye-opener for me to learn how many high-powered national reputation appraisers had a vested interest in either maintaining low fees or avoiding rules which dictated fee minimums for GSE work.
TAF has played around with supposedly improving appraiser competency while they were carrying the water for the Mortgage Bankers Association & Large Title Companies seeking to become the monopolies that exist today.
Despite the federal laws that recognized substandard work was tied to substandard fees, TAF never once took up the cause of assuring fee (hence time) adequacy for proper appraisal performance. They only reiterated that appraisers were responsible for quality no matter what fee was paid. They turned a blind eye to the greed that caused appraisal factories to proliferate, or the natural temptation for family providers to put the welfare of their families first.
Instead, they advocated dealing with varied and numerous red herrings to eliminate appraisal deficiencies, such as requiring college degrees; designations (using PC euphemisms), & enhanced enforcement as solutions, while eroding our core standards every two years.
When I first started posting on AppraisersBlogs.com I was figuratively ‘handed my head’ by many appraisers for even suggesting such a thing as a fee minimum. This predated my affiliation with the Appraisers Guild (union) I believe.
Now, six years later I find that we all have to start reinventing the wheel. We have new legislators across America. Regardless of party, they will have to be re-educated.
The lessons are simple. Appraisals are bad due to either:
1. Corporate fraud, that promotes phony systems ‘better than or almost as good’ as real appraisals;
2. Individual appraisers are either lazy or dishonest;
3. Pressure to hit numbers & avoid disclosing negative property characteristics is greater than before FIRREA and Dodd-Frank.
The solution is surprisingly simple. Too simple for many if not most bureaucrats to comprehend.
1. Punish dishonesty.
2. Pay a fair fee.