Pending legislation to create a Consumer Financial Protection Agency would give the new agency 60 days to implement uniform appraisal rules that would supersede the Home Valuation Code of Conduct — controversial procedures governing appraisals when loans are slated for purchase by Fannie Mae and Freddie Mac.
An amendment attached to HR 3126, the Consumer Financial Protection Agency Act of 2009, would direct the agency — if it’s created — to convene a rulemaking committee and establish uniform "appraisal independence requirements" across federal agencies.
The rules would apply to all loans — not just those slated for purchase by Fannie Mae and Freddie Mac — and the Home Valuation Code of Conduct would be allowed to sunset once they were in place.
The amendment — one of a slew attached to the bill by the House Financial Services Committee in the process of approving it Thursday (see story) — includes specific direction on what the new appraisal rules must and must not require of lenders.
Licensed mortgage loan originators would be allowed to select, retain and compensate appraisers, subject to state or federal laws that make it illegal for lenders to make any payment, threat or promise with the intention of influencing their valuations.
Anyone with an interest in a residential real estate transaction would be allowed to ask an appraiser for further details substantiating a valuation, or to consider additional property information or correct errors in a report.
Finally, the new rules would include a requirement that lenders compensate appraisers "at a rate that is customary and reasonable for appraisal services performed in the market area of the property being appraised."
The amendment is a response to industry complaints about the Home Valuation Code of Conduct, which was put in place May 1 in the wake of New York Attorney General Andrew Cuomo’s investigation of alleged coercion of appraisers.
Critics say that while they support the code’s goal of protecting appraisers from coercion by lenders, they maintain the rules have also had unintended consequences that have needlessly derailed many home sales.
The code prohibits mortgage brokers or any member of a lender’s loan production staff from choosing or recommending an appraiser for an assignment, or for inclusion on a list of approved or banned appraisers.
The code also prohibits mortgage brokers or loan production staff from communicating with appraisers or appraisal management companies about issues relating to a valuation or the ordering or management of assignments.
Those rules were intended to prevent lenders from steering work to appraisers who could be coerced into adjusting their valuations to support a predetermined sale price, or withholding work from appraisers who resisted such pressures. …CONTINUED
Although the Home Valuation Code of Conduct doesn’t require lenders to use appraisal management companies, some have viewed it as the simplest way to comply with the new rules.
Critics say the transfer of work to appraisal management companies has hurt the quality of appraisals, because some companies allegedly employ appraisers with little experience in the neighborhoods they are assigned to work in.
Appraisal management companies often don’t pay enough to attract experienced appraisers or allow appraisers to put in the time needed to produce a thorough report, critics say.
The Home Valuation Code of Conduct doesn’t apply to loans not slated for purchase by Fannie and Freddie — including "jumbo" loans exceeding $729,750 or mortgages guaranteed by the Federal Housing Administration (FHA).
But FHA is scheduled to implement new rules for appraisals on Jan. 1 intended to bring FHA policies into "full alignment" with the Home Valuation Code of Conduct (see story).
If HR 3126 becomes law and a Consumer Financial Protection Agency is created, the amendment requiring the agency to draft uniform appraisal requirements would mean the process for ordering appraisals would be the same for all loans. The Home Valuation Code of Conduct would sunset once the uniform requirements were in place.
An industry group representing appraisers, the Appraisal Institute, says the proposal to replace the current "piecemeal approach" with uniform requirements is a good one.
Appraisers will still be protected from coercion, because Congress has enacted new licensing requirements for mortgage brokers and the Federal Reserve has updated the Truth in Lending Act to include strict prohibitions against coercion of appraisers, said Appraisal Institute President Jim Amorin in a press release.
National Association of Realtors spokesman Lucien Salvant said the bill as a whole, including the amendment mandating the creation of uniform appraisal rules, is "an important step in the right direction" but that the group believes there’s "still considerable work to be done."
Salvant declined to comment specifically on the amendment, noting that the bill must still be approved by the full House and Senate and remains subject to further changes.
NAR has called for a moratorium on enforcement of the Home Valuation Code of Conduct to remedy its unintended consequences and allow states to enact their own laws regulating appraisal management companies (see story).
A bill that would suspend enforcement of the code for 18 months, HR 3044, was introduced on June 25 by Rep. Travis Childers, D-Miss., and had 112 co-sponsors as of Oct. 15.
On Jan. 1, 2010, California will become the sixth state to regulate appraisal management companies, after lawmakers passed a bill requiring them to register with the state and review the work they assign to ensure that it’s performed in accordance with the Uniform Standards of Professional Appraisal Practice (USPAP).
Arkansas, Louisiana, Nevada, New Mexico and Utah passed similar bills this year, and the Appraisal Institute expects as many as 20 other states to consider such legislation next year (see story).
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