The Dodd-Frank Wall Street Reform and Consumer Protection Act. The Appraisal-Related Impact of the Dodd-Frank Act

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1 The Dodd-Frank Wall Street Reform and Consumer Protection Act The Appraisal-Related Impact of the Dodd-Frank Act FNC, Inc. Web Conference August 25, 2010 August 25, 2010

2 Program FNC, Inc. General Overview of the Act Bureau of Consumer Financial Protection Appraisal Activities Questions 2

3 Speakers David Work FNC, EVP of Corporate Development Neil Olson FNC, Chief Legal Officer Carol Luitjens Chief Marketing Officer, FNC 3

4 Questions Chat box submission 4

5 Conference Web Page Today s PowerPoint Audio Questions 5

6 Dodd-Frank Wall Street Reform and Consumer Protection Act: General Overview of the Act and Parts Of Title IX David Work EVP of Corporate Development August 25, 2010

7 History of Financial Reform Federal Reserve Act of pages Glass Stegall Act of pages Interstate Banking Efficiency Act of pages Gramm Leach Bliley Act of pages Sarbanes Oxley Act of pages Dodd Frank Act of ,319 pages 7

8 Dodd-Frank Wall Street Reform $30 billion to implement 44 studies 243 new rule makings required 12 new regulatory bodies Financial Services Oversight Council Consumer Financial Protection Bureau Federal Insurance Office Office of Investor Advocate Office of Housing Counseling 8

9 Titles of Dodd-Frank I. Financial Stability II. III. IV. Orderly Liquidation Transfer of Powers Regulation of Advisors to Hedge Funds V. Insurance VI. VII. Improvements to the Regulation of Bank Holding Company Wall Street Transparency & Accountability 9

10 Titles of Dodd-Frank VIII. IX. Payment, Clearing, and Settlement Supervision Investor Protections & Improvement to the Regulation of Securities X. Bureau of Consumer Financial Protection XI. XII. XIII. Federal Reserve Provisions Improving Access to Mainstream Financial Institutions Pay it Back Act 10

11 Titles of Dodd-Frank XIV. Mortgage Reform & Anti-Predator Lending Act XV. Miscellaneous XVI. Certain Swaps, Etc. 11

12 Title IX Investor Protections and Improvements to the Regulation of Securities

13 Title IX, Subtitle C Improvements to the Regulation of Credit Rating Agencies As University of San Diego law professor Frank Partnoy has written: Credit ratings continue to present an unusual paradox: rating changes are important, yet they possess little information value. Credit ratings do not help parties manage risk, yet parties increasingly rely on ratings. Credit rating agencies are not widely respected among sophisticated market participants, yet their franchise is increasingly valuable. 13

14 Title IX, Subtitle C Enhanced Regulation, Accountability, and Transparency of Rating Agencies Broadens SEC s power to regulate Examinations by new SEC regulator Internal requirement Annual attestation requirement New focus on employees/conflict of interest 14

15 Title IX, Subtitle C Transparency of Ratings Performance Publicly disclose information on initial ratings Publicly disclose subsequent changes to ratings Disclose content performance information Disclose rating was an independent evaluation of risks and merits 15

16 Title IX, Subtitle C Transparency of Rating Methodologies and Information Reviewed Qualitative content Quantitative content Disclose the data on which they relied Provide information that can be used by investors and others to better understand the ratings Extent to which 3 rd party due diligence services have been used 16

17 Various Studies SEC study on strengthening credit rating agency independence GAO study on alternative business models Creation of an independent analyst organization Study and rule making on assigned ratings 17

18 Repeal of Rule 436 (g) of the SEC Agencies liable for the quality of their ratings decisions 18

19 Title IX, Subtitle D Subtitle D Improvements to the Asset-Backed Securitization Process 19

20 Title IX, Subtitle D Risk Retention Requirement Minimum 5% Exceptions or Exemptions: Qualified mortgage loans Public interest and protection of investors Guaranteed by US or agency of US Guaranteed by any state or political subdivision Asset of or guaranteed by Farm Credit Administration. 20

21 Title IX, Subtitle D Not Considered an US Agency Federal National Mortgage Association Federal Home Loan Mortgage Corporation Federal Home Loan Banks 21

22 Title IX, Subtitle D Disclosure and Reporting Requirements Issuer will disclose information for each tranche or class Includes disclosing asset or loan-level data May have ongoing reporting requirements Issuer must review the assets of the ABS 22

23 Title IX, Subtitle D Reps and Warrants in ABS Offerings Issuer must disclose repurchase requests Rating agencies must disclose reps and warrants Prohibits material conflicts of interest 23

24 Title X, Sec Treasury Study on Ending the Conservatorship of Fannie, Freddie, and Reforming the Housing Finance System Gradual wind-down and liquidation of such entities Privatization of such entities Incorporation into a federal agency Dissolution of Fannie and Freddie into smaller companies Any other measures deemed appropriate 24

25 Title X, Sec 1074 Analysis to Include: Government s role in supporting a housing finance system How current structure can be improved Access to 30-year, fixed-rate, simple-term loans Impact on secondary market liquidity Role of standardization in the Housing Finance System Options for transition to a reformed system 25

26 Title XIV Mortgage Reform & Anti-Predatory Lending Act Residential loan origination standards Minimum standards for mortgages Defines high-cost mortgages Office of Housing Counseling 26

27 Dodd-Frank Wall Street Reform and Consumer Protection Act: Selected Provisions Bureau of Consumer Financial Protection and Appraisal Activities Neil Olson, Chief Legal Officer

28 Top Issues Dodd-Frank Wall Street Reform and Consumer Protection Act ( Dodd-Frank ) Title I, Subtitle A Financial Stability Oversight Council Title X, Bureau of Consumer Financial Protection Title XIV, Subtitle F Appraisal Activities 28

29 Title I Subtitle A Financial Stability Oversight Council 29

30 Title I--Financial Stability Oversight Council SEC FINANCIAL STABILITY OVERSIGHT COUNCIL ESTABLISHED. (a) ESTABLISHMENT. Effective on the date of enactment of this Act, there is established the Financial Stability Oversight Council. (b) MEMBERSHIP. The Council shall consist of the following members: (1) VOTING MEMBERS. The voting members, who shall each have 1 vote on the Council shall be: (A) the Secretary of the Treasury, who shall serve as Chairperson of the Council; (B) the Chairman of the Board of Governors; (C) the Comptroller of the Currency; (D) the Director of the Bureau; (E) the Chairman of the Commission; (F) the Chairperson of the Corporation; (G) the Chairperson of the Commodity Futures Trading Commission; (H) the Director of the Federal Housing Finance Agency; (I) the Chairman of the National Credit Union Administration Board; and (J) an independent member appointed by the President, by and with the advice and consent of the Senate, having insurance expertise. 30

31 Financial Stability Oversight Council (a) PURPOSES AND DUTIES OF THE COUNCIL (1) IN GENERAL. The purposes of the Council are: (A) to identify risks to the financial stability of the United States that could arise from the material financial distress or failure, or ongoing activities, of large, interconnected bank holding companies or nonbank financial companies, or that could arise outside the financial services marketplace; (B) to promote market discipline, by eliminating expectations on the part of shareholders, creditors, and counterparties of such companies that the Government will shield them from losses in the event of failure; and (C) to respond to emerging threats to the stability of the United States financial system. 31

32 Financial Stability Oversight Council SEC REVIEW OF BUREAU REGULATIONS. (a) REVIEW OF BUREAU REGULATIONS. On the petition of a member agency of the Council, the Council may set aside a final regulation prescribed by the Bureau, or any provision thereof, if the Council decides, in accordance with subsection (c), that the regulation or provision would put the safety and soundness of the United States banking system or the stability of the financial system of the United States at risk. 32

33 Title X Bureau of Consumer Financial Protection 33

34 Title X - Bureau of Consumer Financial Protection SEC ESTABLISHMENT OF THE BUREAU OF CONSUMER FINANCIAL PROTECTION. (a) BUREAU ESTABLISHED.There is established in the Federal Reserve System, an independent bureau to be known as the Bureau of Consumer Financial Protection, which shall regulate the offering and provision of consumer financial products or services under the Federal consumer financial laws. 34

35 Bureau of Consumer Financial Protection Section 1002 Definitions (15) FINANCIAL PRODUCT OR SERVICE. (A) IN GENERAL.The term financial product or service means: (i) extending credit and servicing loans, including acquiring, purchasing, selling, brokering, or other extensions of credit (other than solely extending commercial credit to a person who originates consumer credit transactions); As well as: leasing or brokering leases equivalent to purchase finance arrangements providing real estate settlement services, other than insurance or electronic conduit services performing appraisals of real estate or personal property deposit-taking, money transmitting, or money services selling, providing, or issuing stored value check cashing, check collection, and check guaranty services financial data processing and transmission services providing financial advisory services, including providing credit counseling to consumers collecting, analyzing, maintaining, or providing consumer report information * debt collection related to a consumer financial product or service;* and such other product or service as defined by Bureau regulation (but does not include the business of insurance or electronic conduit services). 35

36 Bureau of Consumer Financial Protection (6) COVERED PERSON. The term covered person means: (A) any person that engages in offering or providing a consumer financial product or service; and (B) any affiliate of a person described in subparagraph (A) if such affiliate acts as a service provider to such person. 36

37 Bureau of Consumer Financial Protection (26) SERVICE PROVIDER (A) IN GENERAL. The term service provider means any person who provides a material service to a covered person in connection with the offering or provision by such covered person of a consumer financial product or service, including a person who: (i) participates in designing, operating, or maintaining the consumer financial product or service; or (ii) processes transactions relating to the consumer financial product or service (other than unknowingly or incidentally transmitting or processing financial data in a manner that such data is undifferentiated from other types of data of the same form as the person transmits or processes). 37

38 Bureau Of Consumer Financial Protection (12) ENUMERATED CONSUMER LAWS Except as otherwise specifically provided in section 1029, subtitle G or subtitle H, the term enumerated consumer laws means (A) the Alternative Mortgage Transaction Parity Act of 1982 (12 U.S.C et seq.); (B) the Consumer Leasing Act of 1976 (15 U.S.C et seq.); (C) the Electronic Fund Transfer Act (15 U.S.C et seq.), except with respect to section 920 of that Act; (D) the Equal Credit Opportunity Act (15 U.S.C et seq.); (E) the Fair Credit Billing Act (15 U.S.C et seq.); (F) the Fair Credit Reporting Act (15 U.S.C et seq.), except with respect to sections 615(e) and 628 of that Act (15 U.S.C. 1681m(e), 1681w); (G) the Home Owners Protection Act of 1998 (12 U.S.C et seq.); (H) the Fair Debt Collection Practices Act (15 U.S.C et seq.); (I) subsections (b) through (f) of section 43 of the Federal Deposit Insurance Act (12 U.S.C. 1831t(c) (f)); 38

39 Bureau Of Consumer Financial Protection (12) ENUMERATED CONSUMER LAWS. (cont d) (J) sections 502 through 509 of the Gramm-Leach- Bliley Act (15 U.S.C ) except for section 505 as it applies to section 501(b) [PRIVACY]; (K) the Home Mortgage Disclosure Act of 1975 (12 U.S.C et seq.); (L) the Home Ownership and Equity Protection Act of 1994 (15 U.S.C note); (M) the Real Estate Settlement Procedures Act of 1974 (12 U.S.C et seq.); (N) the S.A.F.E. Mortgage Licensing Act of 2008 (12 U.S.C et seq.); (O) the Truth in Lending Act (15 U.S.C et seq.); (P) the Truth in Savings Act (12 U.S.C et seq.); (Q) section 626 of the Omnibus Appropriations Act, 2009 (Public Law 111 `8); and (R) the Interstate Land Sales Full Disclosure Act (15U.S.C. 1701). 39

40 Bureau of Consumer Financial Protection (A) QUALIFIED MORTGAGE. The term qualified mortgage means any residential mortgage loan (i) for which the regular periodic payments for the loan may not (I) result in an increase of the principal balance; or (II) except as provided in subparagraph (E), allow the consumer to defer repayment of principal; (ii) except as provided in subparagraph (E), the terms of which do not result in a balloon payment, where a balloon payment is a scheduled payment that is more than twice as large as the average of earlier scheduled payments; (iii) for which the income and financial resources relied upon to qualify the obligors on the loan are verified and documented; (iv) in the case of a fixed rate loan, for which the underwriting process is based on a payment schedule that fully amortizes the loan over the loan term and takes into account all applicable taxes, insurance, and assessments; (v) in the case of an adjustable rate loan, for which the underwriting is based on the maximum rate permitted under the loan during the first 5 years, and a payment schedule that fully amortizes the loan over the loan term and takes into account all applicable taxes, insurance, and assessments; (vi) that complies with any guidelines or regulations established by the Board relating to ratios of total monthly debt to monthly income or alternative measures of ability to pay regular expenses after payment of total monthly debt, taking into account the income levels of the borrower and such other factors as the Board may determine relevant and consistent with the purposes described in paragraph (3)(B)(i); (vii) for which the total points and fees (as defined in subparagraph (C)) payable in connection with the loan do not exceed 3 percent of the total loan amount; (viii) for which the term of the loan does not exceed 30 years, except as such term may be extended under paragraph (3), such as in high-cost areas; 40

41 Bureau of Consumer Financial Protection (4) EXCLUSIVE RULEMAKING AUTHORITY. (A) IN GENERAL. Notwithstanding any other provisions of Federal law and except as provided in section 1061(b)(5), to the extent that a provision of Federal consumer financial law authorizes the Bureau and another Federal agency to issue regulations under that provision of law for purposes of assuring compliance with Federal consumer financial law and any regulations there under, the Bureau shall have the exclusive authority to prescribe rules subject to those provisions of law. 41

42 Title XIV Subtitle F Appraisal Activities 42

43 Title XIV, Subtitle F Appraisal Activities New 129H. Property appraisal requirements (higher-risk mortgages) There are more strenuous appraisal requirements for higher-risk mortgages Interior inspection 180-day rule about sale and resale (at higher price) second appraisal required Higher risk mortgage is one that is not a qualified mortgage and the interest rate is higher by 1.5% - 2.5% of the Freddie Mac prime offer rate (depending on LTV) 43

44 Appraisal Independence 129E. Appraisal independence requirements (a) Truth in Lending Act amended to include (a) IN GENERAL. It shall be unlawful, in extending credit or in providing any services for a consumer credit transaction secured by the principal dwelling of the consumer, to engage in any act or practice that violates appraisal independence as described in or pursuant to regulations prescribed under this section. Why does it matter that it is in Truth in Lending? falls under the purview of the Bureau 44

45 Appraisal Independence Statute recites many (but not all) of the same appraisal independence obligations as in the Home Valuation Code of Conduct (and much of which is already in Truth in Lending) (b) APPRAISAL INDEPENDENCE. For purposes of subsection (a), acts or practices that violate appraisal independence shall include (1) any appraisal of a property offered as security for repayment of the consumer credit transaction that is conducted in connection with such transaction in which a person with an interest in the underlying transaction compensates, coerces, extorts, colludes, instructs, induces, bribes, or intimidates a person, appraisal management company, firm, or other entity conducting or involved in an appraisal, or attempts, to compensate, coerce, extort, collude, instruct, induce, bribe, or intimidate such a person, for the purpose of causing the appraised value assigned, under the appraisal, to the property to be based on any factor other than the independent judgment of the appraiser; 45

46 Appraisal Independence (b) APPRAISAL INDEPENDENCE. For purposes of subsection (a), acts or practices that violate appraisal independence shall include [continued]: (2) mischaracterizing, or suborning any mischaracterization of, the appraised value of the property securing the extension of the credit; (3) seeking to influence an appraiser or otherwise to encourage a targeted value in order to facilitate the making or pricing of the transaction; and (4) withholding or threatening to withhold timely payment for an appraisal report or for appraisal services rendered when the appraisal report or services are provided for in accordance with the contract between the parties. This list is not as comprehensive as the HVCC 46

47 Appraisal Independence Communication with Appraisers (c) EXCEPTIONS. The requirements of subsection (b) shall not be construed as prohibiting a mortgage lender, mortgage broker, mortgage banker, real estate broker, appraisal management company, employee of an appraisal management company, consumer, or any other person with an interest in a real estate transaction from asking an appraiser to undertake 1 or more of the following: (1) Consider additional, appropriate property information, including the consideration of additional comparable properties to make or support an appraisal. (2) Provide further detail, substantiation, or explanation for the appraiser s value conclusion. (3) Correct errors in the appraisal report. This is intended as an expanded franchise to contact the appraiser. Note how expansive the list is; it is not limited to lenders 47

48 Appraisal Independence (d) PROHIBITIONS ON CONFLICTS OF INTEREST. No certified or licensed appraiser conducting, and no appraisal management company procuring or facilitating, an appraisal in connection with a consumer credit transaction secured by the principal dwelling of a consumer may have a direct or indirect interest, financial or otherwise, in the property or transaction involving the appraisal. (e) MANDATORY REPORTING person involved in a real estate transaction involving an appraisal in connection with a consumer credit transaction secured by the principal dwelling of a consumer who has a reasonable basis to believe an appraiser is failing to comply with the Uniform Standards of Professional Appraisal Practice, is violating applicable laws, or is otherwise engaging in unethical or unprofessional conduct, shall refer the matter to the applicable State appraiser certifying and licensing agency. 48

49 Appraisal Independence (g) Rules and regulations (2) INTERIM FINAL REGULATIONS. The Board shall, for purposes of this section, prescribe interim final regulations no later than 90 days after the date of enactment of this section defining with specificity acts or practices that violate appraisal independence in the provision of mortgage lending services for a consumer credit transaction secured by the principal dwelling of the consumer or mortgage brokerage services for such a transaction and defining any terms in this section or such regulations. Rules prescribed by the Board under this paragraph shall be deemed to be rules prescribed by the agencies jointly under paragraph (1). Note that the FRB has already issued TILA regulations governing appraisal independence (July 2008) so has some experience in issuing regulations on this topic. July 21, 2010 (date of enactment) plus 90 days is October 19,

50 Appraisal Independence (g) Rules and regulations (1) IN GENERAL. Except as provided under paragraph (2), the Board, the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the National Credit Union Administration Board, the Federal Housing Finance Agency, and the Bureau may jointly issue rules, interpretive guidelines, and general statements of policy with respect to acts or practices that violate appraisal independence in the provision of mortgage lending services for a consumer credit transaction secured by the principal dwelling of the consumer and mortgage brokerage services for such a transaction, within the meaning of subsections (a), (b), (c), (d), (e), (f), (h), and (i). This amounts to a reconstitution of the interagency group of regulators. The OTS was dropped and the FHFA and the Bureau were added, which will make joint rule making even more complicated. 50

51 Appraisal Independence (h) Appraisal report portability Consistent with the requirements of this section, the Board, the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the National Credit Union Administration Board, the Federal Housing Finance Agency, and the Bureau may jointly issue regulations that address the issue of appraisal report portability, including regulations that ensure the portability of the appraisal report between lenders for a consumer credit transaction secured by a 1-4 unit single family residence that is the principal dwelling of the consumer, or mortgage brokerage services for such a transaction. Likely to see some guidance on this in the Interim Final Regulations, but they may defer until the interagency group is constituted (including the new Bureau). 51

52 Appraisal Independence (i) Customary and Reasonable Fee (1) IN GENERAL. Lenders and their agents shall compensate fee appraisers at a rate that is customary and reasonable for appraisal services performed in the market area of the property being appraised. Evidence for such fees may be established by objective third-party information, such as government agency fee schedules, academic studies, and independent private sector surveys. Fee studies shall exclude assignments ordered by known appraisal management companies. (2) FEE APPRAISER DEFINITION. For purposes of this section, the term fee appraiser means a person who is not an employee of the mortgage loan originator or appraisal management company engaging the appraiser and is (A) a State licensed or certified appraiser who receives a fee for performing an appraisal and certifies that the appraisal has been prepared in accordance with the Uniform Standards of Professional Appraisal Practice; or (B) a company not subject to the requirements of section 1124 of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (12 U.S.C et seq.) that utilizes the services of State licensed or certified appraisers and receives a fee for performing appraisals in accordance with the Uniform Standards of Professional Appraisal Practice. (3) EXCEPTION FOR COMPLEX ASSIGNMENTS. 52

53 Appraisal Independence (i) Customary and Reasonable Fee While this seems relatively straightforward, the concept of fees and how they are set in the marketplace is much more complex than it appears on its face. Some open questions. How do you account for: Scope of work (different clients have different expectations regarding the appraisal, how to prepare the forms and to what quality standards) Purpose (purchase v. refinance defaults and foreclosure appraisals are not included since they are not considered transactions and nonowner occupied properties are not consumer transactions) Market competition, including newcomers in a market who may offer reduced fees to gain market share Who pays for various costs and services (e.g. appraisal delivery fees, cost of review, variations on quality and so on) Expect to see appraisers required to certify that they received a customary and reasonable fee as part of the assignment. 53

54 Appraisal Independence (j) SUNSET. Effective on the date the interim final regulations are promulgated pursuant to subsection (g), the Home Valuation Code of Conduct announced by the Federal Housing Finance Agency on December 23, 2008, shall have no force or effect. 54

55 Appraisal Regulation (not consumer legislation) 55

56 Additional Regulation SEC AMENDMENTS RELATING TO APPRAISAL SUBCOMMITTEE OF FFIEC, APPRAISER INDEPENDENCE MONITORING, APPROVED APPRAISER EDUCATION, APPRAISAL MANAGEMENT COMPANIES, APPRAISER COMPLAINT HOTLINE, AUTOMATED VALUATION MODELS, AND BROKER PRICE OPINIONS. 56

57 Additional Regulation (a) THRESHOLD LEVELS. Section 1112(b) of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (12 U.S.C. 3341(b)) is amended by inserting before the period the following:, and receives concurrence from the Bureau of Consumer Financial Protection that such threshold level provides reasonable protection for consumers who purchase 1 4 unit single-family residences. Query: does this mean that the issue of the threshold level (currently $250,000) must to be reviewed or not? The guess is that we are unlikely to see any regulations until the Bureau is formed and in operation. 57

58 Appraisal Subcommittee Appraisal Subcommittee Provide an annual report to Congress Open meetings (except for confidential issues) Regulatory powers granted (limited to certain items and uses an advisory committee of various industry representatives) Monitor AMC regulation by the States and maintain a national registry of AMCs 58

59 Appraisal Review (e) APPRAISAL REVIEWS AND COMPLEX APPRAISALS. (3) that such appraisals shall be subject to appropriate review for compliance with the Uniform Standards of Professional Appraisal Practice. Added to Current language (1) that real estate appraisals be performed in accordance with generally accepted appraisal standards as evidenced by the appraisal standards promulgated by the Appraisal Standards Board of the Appraisal Foundation; and (2) that such appraisals shall be written appraisals. Federal regulators encouraged this provision since it elevates the requirement for review to a regulatory level. 59

60 Appraisal Management Companies Joint rules (by the new interagency group) to establish minimum standards for appraisal management companies Such requirements shall include a requirement that such companies: (1) register with and be subject to supervision by a State appraiser certifying and licensing agency in each State in which such company operates; (2) verify that only licensed or certified appraisers are used for federally related transactions; (3) require that appraisals coordinated by an appraisal management company comply with the Uniform Standards of Professional Appraisal Practice; and (4) require that appraisals are conducted independently and free from inappropriate influence and coercion pursuant to the appraisal independence standards established under section 129E of the Truth in Lending Act. 60

61 Appraisal Management Companies (b) RELATIONSHIP TO STATE LAW. Nothing in this section shall be construed to prevent States from establishing requirements in addition to any rules promulgated under subsection (a). (c) FEDERALLY REGULATED FINANCIAL INSTITUTIONS.The requirements of subsection (a) shall apply to an appraisal management company that is a subsidiary owned and controlled by a financial institution and regulated by a Federal financial institution regulatory agency. An appraisal management company that is a subsidiary owned and controlled by a financial institution regulated by a Federal financial institution regulatory agency shall not be required to register with a State. Which suggests that they will not be subject to the more onerous state requirements, but we will have to see what the regulations say. 61

62 Appraisal Management Companies Appraisal management companies will have 36 months after adoption of the final rules to comply. (1) IN GENERAL. No appraisal management company may perform services related to a federally related transaction in a State after the date that is 36 months after the date on which the regulations required to be prescribed under subsection (a) are prescribed in final form unless such company is registered with such State or subject to oversight by a Federal financial institutions regulatory agency. Regulations are unlikely to be issued in the near future since they require Bureau participation 62

63 What is an appraisal management company? (11) APPRAISAL MANAGEMENT COMPANY. The term appraisal management company means, in connection with valuing properties collateralizing mortgage loans or mortgages incorporated into a securitization, any external third party authorized either by a creditor of a consumer credit transaction secured by a consumer s principal dwelling or by an underwriter of or other principal in the secondary mortgage markets, that oversees a network or panel of more than 15 certified or licensed appraisers in a State or 25 or more nationally within a given year (A) to recruit, select, and retain appraisers; (B) to contract with licensed and certified appraisers to perform appraisal assignments; (C) to manage the process of having an appraisal performed, including providing administrative duties such as receiving appraisal orders and appraisal reports, submitting completed appraisal reports to creditors and underwriters, collecting fees from creditors and underwriters for services provided, and reimbursing appraisers for services performed; or (D) to review and verify the work of appraisers.. 63

64 Appraisal Management Companies Registry fees (i) in the case of such a company that has been in existence for more than a year, $25 multiplied by the number of appraisers working for or contracting with such company in such State during the previous year, but where such $25 amount may be adjusted, up to a maximum of $50, at the discretion of the Appraisal Subcommittee, if necessary to carry out the Subcommittee s functions under this title If you are on the appraisal management company s list but have not received any assignments, are you working for or contracting with such company? 64

65 Appraisal Subcommittee Again Authority to make grants to assist in enforcement and in reporting of current license status It is not clear how this will work since it is not unusual for a state to reduce the budget of a state regulatory agency by the amount of any other income it receives ASC will have the authority to remove a licensed or certified appraiser or appraisal management company from the national registry for up to 90 days This is an extraordinary power ASC will also have the authority to impose additional sanctions (read fines and so on) on the states that do not comply with the ASC dictates. 65

66 The Appraisal Foundation Appraiser Qualifications Board will now set minimum qualifications for trainees and supervisory appraisers (where those categories exist) (e) MINIMUM QUALIFICATION REQUIREMENTS. Any requirements established for individuals in the position of Trainee Appraiser and Supervisory Appraiser shall meet or exceed the minimum qualification requirements of the Appraiser Qualifications Board of The Appraisal Foundation. The Appraisal Subcommittee shall have the authority to enforce these requirements. 66

67 Additional Provisions Reciprocity rules with respect to appraisers working in different jurisdictions appear to be much more rational now and much simpler Consideration of Professional Appraisal Designation. Membership in a nationally recognized professional appraisal organization may be a criteria considered, though lack of membership therein shall not be the sole bar against consideration for an assignment under these criteria. 67

68 Appraisal Subcommittee Appraisal complaint national hotline If, six months after the date of the enactment of this subsection, the Appraisal Subcommittee determines that no national hotline exists to receive complaints of non-compliance with appraisal independence standards and Uniform Standards of Professional Appraisal Practice, including complaints from appraisers, individuals, or other entities concerning the improper influencing or attempted improper influencing of appraisers or the appraisal process, the Appraisal Subcommittee shall establish and operate such a national hotline, which shall include a toll-free telephone number and an address. 68

69 Automated Valuation Models SEC [FIRREA]. AUTOMATED VALUATION MODELS USED TO ESTIMATE COLLATERAL VALUE FOR MORTGAGE LENDING PURPOSES. (a) IN GENERAL. Automated valuation models shall adhere to quality control standards designed to: (1) ensure a high level of confidence in the estimates produced by automated valuation models; (2) protect against the manipulation of data; (3) seek to avoid conflicts of interest; (4) require random sample testing and reviews; and (5) account for any other such factor that the agencies listed in subsection (b) determine to be appropriate. 69

70 Automated Valuation Models (b) ADOPTION OF REGULATIONS. The Board, the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the National Credit Union Administration Board, the Federal Housing Finance Agency, and the Bureau of Consumer Financial Protection, in consultation with the staff of the Appraisal Subcommittee and the Appraisal Standards Board of the Appraisal Foundation, shall promulgate regulations to implement the quality control standards required under this section. While this section is part of FIRREA, the Act gives this a consumer component by including the BCFP 70

71 Broker Price Opinions SEC BROKER PRICE OPINIONS. (a) GENERAL PROHIBITION. In conjunction with the purchase of a consumer s principal dwelling, broker price opinions may not be used as the primary basis to determine the value of a piece of property for the purpose of a loan origination of a residential mortgage loan secured by such piece of property. This was intended to more or less follow Freddie Mac s current policies. 71

72 Broker Price Opinions (b) BROKER PRICE OPINION DEFINED. For purposes of this section, the term broker price opinion means an estimate prepared by a real estate broker, agent, or sales person that details the probable selling price of a particular piece of real estate property and provides a varying level of detail about the property s condition, market, and neighborhood, and information on comparable sales, but does not include an automated valuation model, as defined in section 1125(c). 72

73 Equal Credit Opportunity Act (e) COPIES FURNISHED TO APPLICANTS. (1) IN GENERAL. Each creditor shall furnish to an applicant a copy of any and all written appraisals and valuations developed in connection with the applicant s application for a loan that is secured or would have been secured by a first lien on a dwelling promptly upon completion, but in no case later than three days prior to the closing of the loan, whether the creditor grants or denies the applicant s request for credit or the application is incomplete or withdrawn. Compare to HVCC: The lender shall ensure that the borrower is provided a copy of any appraisal report concerning the borrower s subject property promptly upon completion at no additional cost to the borrower, and in any event no less than three days prior to the closing of the loan. The borrower may waive this three-day requirement. The lender may require the borrower to reimburse the lender for the cost of the appraisal. Any and all does mean any and all appraisals and valuations (which includes AVMs, BPOs, appraisal reviews, anything where there is an estimate of value ) 73

74 Appraisal Fees on HUD-1 Section 4 of the Real Estate Settlement Procedures Act of 1974 is amended by adding at the end the following new subsection: (c) The standard form described in subsection (a) may include, in the case of an appraisal coordinated by an appraisal management company (as such term is defined in section 1121(11) of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (12 U.S.C. 3350(11))), a clear disclosure of: (1) the fee paid directly to the appraiser by such company; and (2) the administration fee charged by such company. 74

75 And Finally, the Studies SEC GAO STUDY ON THE EFFECTIVENESS AND IMPACT OF VARIOUS APPRAISAL METHODS, VALUATION MODELS AND DISTRIBUTIONS CHANNELS, AND ON THE HOME VALUATION CODE OF CONDUCT AND THE APPRAISAL SUBCOMMITTEE. 75

76 The Studies (a) IN GENERAL. The Government Accountability Office shall conduct a study on: (1) the effectiveness and impact of: (A) appraisal methods, including the cost approach, the comparative sales approach, the income approach, and others that may be available; (B) appraisal valuation models, including licensed and certified appraisals, broker-priced opinions, and automated valuation models; and (C) appraisal distribution channels, including appraisal management companies, independent appraisal operations within mortgage originators, and fee-for-service appraisers; (2) the Home Valuation Code of Conduct; and (3) the Appraisal Subcommittee s functions pursuant to Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of

77 Questions Today s Questions Chat Function education@fncinc.com CollateralVision.com On-going discussion (blog) 2010 FNC, Inc. 77

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