ABA Staff Analysis: Interim Final Rule Amending Regulatin Z: Rules Regarding Appraisal Independence (75 F.R. 66554-66587) Nvember 2010 Summary The Federal Reserve Bard, n Octber 28, 2010, published interim final rules t implement the appraisal independence prvisins that were added t the Truth In Lending Act thrugh Sectin 1472 f the Ddd- Frank Wall Street Refrm and Cnsumer Prtectin Act. This appraisal independence rulemaking was cngressinally mandated t be issued within 90 days f the Ddd-Frank Act s passage. Generally, this interim rule aims t ensure that real estate appraisers use their independent prfessinal judgment in assigning hme values withut influence r pressure frm parties with interests in the transactins. In additin, the rule implements new legislative prvisins t ensure that appraisers receive custmary and reasnable payments fr their services. As per the Ddd-Frank Act, upn the prmulgatin f the interim final rule, the Hme Valuatin Cde f Cnduct will have n further frce r effect. The Bard is sliciting public cmments n varius elements f the interim final rule and is granting a 60- day windw fr submissin f such cmments. Effective Dates The interim final rule is effective December 27, 2010, except that the remval f Sectin 226.36(b) is effective April 1, 2011. 1 The Bard states that t allw time fr any necessary peratinal changes, cmpliance with this interim final rule is ptinal until April 1, 2011. The Bard is als sliciting cmments n a number f issues and prvisins, and is requesting that cmments be received n r befre December 27, 2010. Scpe The interim final rule applies t persns wh extend credit r prvide settlement services in cnnectin with a cnsumer credit transactin secured by a cnsumer s principal dwelling. See Sectin 226.42(a). The interim final rule applies t appraisals fr any cnsumer credit transactin secured by the cnsumer s principal dwelling, including hme-equity lines f credit (HELOCs). See cmment 42(a)-2. Fr purpses f this sectin ( 226.42), existing prvisins f Regulatin Z and accmpanying cmmentary apply t determine what cnstitutes a principal dwelling. See cmment 42(b)(1)-1. A persn is deemed t prvide a service if he prvides a settlement service as defined in the Real Estate Settlement Prcedures Act, 12 U.S.C. 2602(3). See Sectin 226.42(b)(1). Settlement Service includes creditrs, appraisal management cmpanies, appraisers, mrtgage brkers, realtrs, title insurers, rendering f credit reprts, prviding legal services, preparing dcuments, surveying real estate, and pest inspectins, ther. See cmment 42(b)(1)-1. 1 12 CFR 226.36(b) refers t recently enacted regulatins under Hme Ownership and Equity Prtectin Act (HOEPA) that prhibit a creditr r mrtgage brker frm cercing r influencing an appraiser t misstate the value f a cnsumer s principal dwelling. (See 73 FR 44522, 44604 (July 30, 2008)). Since Sectin 1472 f the Ddd-Frank Act t effectively cdify and add t these regulatins, the Bard is mving t remve the 226.36(b) prvisins t avid duplicatin. This remval will be effective April 1, 2011, the mandatry cmpliance date fr this interim final rule. 1
The cmmentaries clarify that the fllwing persns are nt cvered persns : (1) the cnsumer wh btains credit thrugh a cvered transactin; (2) a persn secndarily liable fr a cvered transactin, such as a guarantr; and (3) a persn that resides in r will reside in the cnsumer s principal dwelling but will nt be liable n the cvered transactin, such as a nn-bligr spuse. See Cmment 42(b)(1)-2. The rule cvers persn wh perfrm valuatin services generally, including valuatin management functins, and any valuatin f the cnsumer s principal dwelling. The rule is nt limited just t a licensed r certified appraiser, an appraisal management cmpany, r t a frmal appraisal. This sectin therefre applies bradly t acts r practices that cmprmise the independent value estimatin f the cnsumer s principal dwelling, withut regard t whether the creditr uses a licensed r certified appraiser r anther persn t prduce a valuatin. The term valuatin, as used in 226.42(b)(3), applies t an estimate f the value f the cnsumer s principal dwelling whether r nt a persn applies USPAP in preparing such estimate. Cmment 42(b)(3)-1 clarifies that a valuatin is an estimate f value prepared by a natural persn, such as an appraisal reprt prepared by an appraiser r an estimate f market value prepared by a real estate agent. The term includes phtgraphic r ther infrmatin included with an estimate f value, as well as an estimate prvided r viewed electrnically, such as an estimate transmitted via electrnic mail r viewed using a cmputer. See Cmment 42(b)(3)-1. The definitin f valuatin des nt include an estimate f value prduced exclusively using such an autmated system. See 226.42(b)(3).) The term valuatin management functins is defined t mean (1) recruiting, selecting, r retaining persns t prepare valuatins; (2) cntracting with r emplying a persn t prepare a valuatin; (3) managing r verseeing the prcess f preparing a valuatin (including by prviding administrative services such as receiving rders fr and receiving a valuatin, submitting a cmpleted valuatin t creditrs and underwriters, cllecting fees frm creditrs and underwriters fr services prvided in cnnectin with a valuatin, and cmpensating a persn that prepare valuatins); r (4) reviewing r verifying the wrk f a persn that prepares valuatins. See Sectin 226.42(b)(4). Nte: This interim final rule des nt implement TILA Sectin 129E(h), authrizing the Bard and ther federal agencies t jintly issue regulatins cncerning appraisal reprt prtability. Pub. L. 111-203, 124 Stat. 2187 (t be cdified at 15 U.S.C. 1639e(h)). Rule Prvisins Cercin and Prhibited Extensins f Credit: The Bard sets frth brad restrictins designed t guard against imprper influence. Cercin and Bribery: The rule prvides that n persn shall attempt t, r cause, the value assigned t the cnsumer s principal dwelling t be based n a factr ther than the independent judgment f a persn that prepares valuatins, thrugh cercin, extrtin, inducement, bribery r intimidatin f, cmpensatin r instructin t, r cllusin with a persn that prepares a valuatin r a persn that perfrms valuatin management functins. See Sectin 226.42(c)(1). The precise definitin fr the terms used fr thse prhibited actins have the meaning given them by applicable state law r cntract. See cmment 42(c)(1)-1. This sectin s anti-cercin prvisins may be vilated indirectly (fr example, where the creditr attempts t influence an appraiser engaged by an AMC by withhlding future business t the affiliate f that AMC). See cmment 42(c)(1)-4. 2
The rule sets ut a set f examples f practices that vilate this sectin (See Sectin 226.42(c)(1)(i)) Seeking t influence the appraiser t reprt a minimum r maximum value fr the cnsumer s principal dwelling; Withhlding r threatening t withhld timely payment because the persn des nt hit the values; Implying t the appraiser that current r future retentin f the persn depends n the amunt at which the persn estimates the value f the dwelling; Excluding a persn that prepares a valuatin frm cnsideratin fr future engagement because the persn reprts a value that des nt meet r exceed a predetermined threshld; and Cnditining appraiser cmpensatin n cnsummatin f the cvered transactin. Nte: The examples prvided under 226.42(c)(1)(i) are illustrative, nt exhaustive, and ther similar actins may vilate 226.42(c)(1). The rule and cmmentaries set ut examples f actins that d nt cnstitute unlawful cercin (See Sectin 226.42(c)(3)(i) and cmment 42(c)(1)) Requesting that a persn that prepares a valuatin take certain actins, such as cnsidering additinal, apprpriate prperty infrmatin (as such request des nt supplant the independent judgment f the persn that prepares a valuatin). Prvide incentives, such as additinal cmpensatin, t a persn that prepares valuatins r perfrms valuatin management functins, as lng as the cvered persn des nt cause the assigned value t be based n a factr ther than the independent judgment f the appraiser. Mischaracterizatin f value: The final interim rules places specific restrictins n mischaracterizing value. See Sectin 226.42(c)(2). N misrepresentatin: N persn that prepares valuatins shall materially misrepresent the value f the cnsumer s principal dwelling in a valuatin. See Sectin 226.42(c)(2)(i). A misrepresentatin is deemed material if it is likely t significantly affect the value assigned t the cnsumer s principal dwelling. A bna fide errr shall nt be a misrepresentatin. N Falsificatin r alteratin: N cvered persn may falsify a valuatin, nr materially alter a valuatin (unless the alteratin is dne by the persn that prepared the valuatin). See Sectin 226.42(c)(2)(ii). An alteratin is deemed material if it is likely t significantly affect the value assigned t the cnsumer s principal dwelling. N Inducement: N cvered persn may induce a persn t misrepresent r falsify, as set frth abve. See Sectin 226.42(c)(2)(iii). Example: A lan riginatr may nt cerce a lan underwriter t alter an appraisal reprt t increase the value assigned t the cnsumer s principal dwelling. See new cmment 42(c)(2)(iii)-1. The regulatins prvide examples f actins that wuld nt vilate the cercin r mischaracterizatin prvisins under Sectins 226.42(c)(1) r (2). See Sectin 226.42(c)(3) Asking the valuatin preparer t cnsider additinal, apprpriate prperty infrmatin, including infrmatin abut cmparables t make r supprt a valuatin; Asking the valuatin preparer t prvide further detail, substantiatin, r explanatin fr the cnclusin abut value; Asking the valuatin preparer t crrect errrs in the valuatin; Obtaining multiple valuatins fr the cnsumer s principal dwelling t select the mst reliable valuatin; Withhlding cmpensatin due t breach f cntract r substandard perfrmance f services; and 3
Taking actin permitted r required by applicable federal r state statute, regulatin, r agency guidance. Cnflicts f Interest: A persn wh prepares a valuatin r perfrms valuatin management services fr a cnsumer credit transactin secured by the cnsumer s principal dwelling must nt have a direct r indirect interest, financial r therwise, in the prperty r the transactin. See Sectin 226.42(d)(1)(i). A persn preparing a valuatin r perfrming valuatin management functins wuld be deemed t have a prhibited interest in the prperty if The persn has any wnership r reasnably freseeable wnership interest in the prperty. See cmment 42(d)(1)(i)-1. The persn r an affiliate f that persn als serves as a lan fficer f the creditr, mrtgage brker, real estate brker, r ther settlement service prvider fr the transactin, and the safe harbr cnditins fr settlement service prviders under 226.42(d)(4) (belw) are nt satisfied. See cmment 42(d)(1)(i)-2. The persn is cmpensated r therwise receives financial r ther benefits based n whether the transactin is cnsummated. See cmment 42(d)(1)(i)-2. Emplyees and Affiliates: Under the rule, an emplyment relatinship r affiliatin des nt, by itself, vilate the prhibitin. See Sectin 226.42(d)(1)(ii)(A). Mrever, the rule clarifies that a persn wh prepares a valuatin r perfrm valuatin management functins fr a cvered transactin may perfrm anther settlement service fr the same transactin withut vilating 226.42(d)(1)(i). See Sectin 226.42(d)(1)(ii)(B). In either case, whether an emplyee r affiliate has an interest that creates a prhibited cnflict under 226.42(d)(1)(i) depends n the facts and circumstances f a particular case, including the structure f the emplyment r affiliate relatinship. Safe Harbr: The interim final rule creates tw safe harbrs frm the cnflicts f interest prvisins fr persns wh prepare valuatins r perfrm valuatin management functins and are als emplyees r affiliates f the creditr. See Sectin 226.42(d). If the creditr meets these bligatins and the ther safe harbr cnditins are satisfied, the creditr generally may rely n valuatins prepared by its in-huse staff r fr which its affiliate perfrmed valuatin management functins fr any cvered transactin withut vilating the regulatin. The safe harbr applies as fllws: Transactins in which the creditr had assets f mre than $250 millin as f December 31st fr bth f the past tw calendar years ( 226.42(d)(2)) Cmpensatin t persn preparing the valuatin r perfrming valuatin management functins must nt be based n the value arrived at in any valuatin; Persn preparing the valuatin r perfrming valuatin management functins must reprt t a persn wh is nt part f the creditr s lan prductin functin and whse cmpensatin is nt based n the clsing f the transactin t which the valuatin relates; and N emplyee, fficer r directr in the creditr s lan prductin functin is directly r indirectly invlved in selecting, retaining, recmmending r influencing the selectin f the persn t prepare a valuatin r perfrm valuatin management functins, r t be included in r excluded frm a list f apprved appraisers. Transactins in which the creditr had assets f $250 millin r less as f December 31st fr either f the past tw calendar years ( 226.42(d)(3)) The cmpensatin f the persn preparing a valuatin r perfrming valuatin management functins must nt be nt based upn the value arrived at in any valuatin; and The creditr must require that thse emplyees, fficers r directrs f the creditr wh rder, perfrm, r review a valuatin fr a cvered transactin must abstain frm participating in any decisin t apprve, nt apprve, r set the terms f that transactin. 4
Safe Harbr fr prviders f multiple settlement services: The safe harbrs set frth abve, under 226.42(d)(2) and (d)(3) als apply t prtect multiple settlement service prviders (i.e., instances where persn perfrming valuatins r valuatin management functins is als perfrming anther settlement service, r whse affiliate perfrms anther settlement service). See Sectin 226.42(d)(4). Definitins Relating t Cnflict f Interest and Safe Harbr prvisins: Lan prductin functin (Sectin 226.42(d)(5)(i)): Means an emplyee, fficer, directr, department, divisin, r ther unit f a creditr with respnsibility fr generating cvered transactins, apprving cvered transactins, r bth. The term includes retail sales staff, lan fficers, and any ther emplyee with respnsibility fr taking a lan applicatin, ffering r negtiating lan terms r whse cmpensatin is based n lan prcessing vlume. A persn slely respnsible fr credit administratin r risk management is nt cnsidered part f a creditr s lan prductin functin. The cmmentaries explain that credit administratin and risk management includes, fr example, lan underwriting, lan clsing functins (e.g., lan dcumentatin), disbursing funds, cllecting mrtgage payments and therwise servicing the lan (e.g., escrw management and payment f taxes), mnitring lan perfrmance, and freclsure prcessing). See cmment 42(d)(5)(i)-1. Settlement service (Sectin 226.42(d)(5)(ii)): Defined as having the same meaning as in the Real Estate Settlement Prcedures Act, 12 U.S.C. 2601 et seq. Affiliate (Sectin 226.42(d)(5)(iii)): Defined as having the same meaning as in Regulatin Y, 12 CFR 225.62(a) ( any cmpany that cntrls, is cntrlled by, r is under cmmn cntrl with, anther cmpany ). Extensin f Credit Prhibited: The rule prhibits a creditr frm extending credit based n a valuatin if the creditr knws, at r befre cnsummatin, that (a) cercin r ther similar cnduct has ccurred, r (b) that the persn wh prepares a valuatin r wh perfrms valuatin management services has a prhibited interest in the prperty r the transactin as discussed belw, unless the creditr uses reasnable diligence t determine that the valuatin des nt materially misstate the value f the prperty. See Sectin 226.42(e). T cmply with the reasnable due diligence prvisin, the creditr must dcument that it has acted with reasnable diligence t determine that the appraisal des nt materially misstate r misrepresent the value f such dwelling. See cmment 42(e)-1. The Bard clarifies that if the creditr reasnably determines and dcuments that the appraisal had nt misstated the dwelling s value, the creditr culd extend credit based n the appraisal. The interim final rule des nt mandate specific due diligence prcedures fr creditrs t fllw when they suspect a vilatin f Sectin 226.42(c) r (d). A vilatin f Sectin 226.42(e) des nt establish a basis fr viding lan agreements. Mandatry Reprting f Appraiser Miscnduct: Creditrs r settlement service prviders invlved in the transactin that have a reasnable basis t believe that an appraiser has nt cmplied with ethical r prfessinal requirements fr appraisers under applicable federal r state law, r the Unifrm Standards f Appraisal Practice (USPAP) must reprt such failure t cmply t the apprpriate state licensing agency. See Sectin 226.42(g). This prvisin applies t creditrs, mrtgage brkers, real estate brkers, appraisal management cmpanies, and any ther persns prviding a settlement service fr a cvered transactin (but des nt apply t cnsumers). See cmment 42(g)(1)-4. Definitin f Appraiser: Fr purpses f the reprting requirements (Sectin 226.42(g)), an appraiser is a natural persn wh prvides pinins f the value f dwellings and is required t be licensed r certified under the state laws f the cnsumer s principal dwelling. See cmment 42(g)-6. The duty t reprt is limited t instances where the failure t cmply is material, r likely t affect the value assigned t the prperty. See Sectin 226.42(g)(1). Als, the breach must cncern a requirement is cdified in an applicable state r federal statute r regulatin (ethical r prfessinal requirement). 5
A persn has a reasnable basis t believe an appraiser has nt cmplied with the law r applicable standards, nly if the persn has knwledge r evidence that wuld lead a reasnable persn under the circumstances t believe that a material failure t cmply has ccurred. See new cmment 42(g)(1)-1. Time frame: A cvered persn must reprt within a reasnable perid f time after the persn determines that there is a reasnable basis t believe that such a material failure t cmply has ccurred. See Sectin 226.42(g)(2). Custmary and Reasnable Rate f Cmpensatin fr Fee Appraiser: The interim final rule requires that a creditr (and its agent) pay a fee appraiser at a rate that is reasnable and custmary in the gegraphic market where the prperty is lcated. See Sectin 226.42(f). (Nte: The custmary and reasnable rate requirement applies t cmpensatin fr tasks that the fee appraiser perfrms, nt the entire cst f the appraisal (including appraisal management functins)). See Sectin 226.42(f)(4)(ii). The rule prvides tw presumptins f cmpliance. First, a creditr (and its agent) is presumed t have paid a custmary and reasnable fee if the fee is reasnably related t recent rates paid fr appraisal services in the relevant gegraphic market, and, in setting the fee, the creditr has: Taken int accunt specific factrs, include the fllwing specifically identified factrs The type f prperty, The scpe f wrk, The time in which the appraisal services are required t be perfrmed, Fee appraiser qualificatins, Fee appraiser experience and prfessinal recrd, and Fee appraiser wrk quality. See Sectin 226.42(f)(i)(A)-(F). Nt engaged in any anticmpetitive actins in vilatin f state r federal law that affect the appraisal fee (such as price-fixing r restricting thers frm entering the market). See Sectin 226.42(f)(2). Secnd, a creditr (r its agent) wuld be presumed t cmply if, in determining the fee, it relies n rates established by third party infrmatin, such as the appraisal fee schedule issued by the Veteran s Administratin, and/r fee surveys and reprts that are perfrmed by an independent third party. See Sectin 226.42(f)(3). The Bard is nt identifying any specific surveys r studies that may be relied upn. The infrmatin relied upn fr this presumptin must meet three cnditins Must be bjective third-party infrmatin, including fee schedules, studies, and surveys prepared by independent third parties (gvernment agencies, academic institutins, and private research firms). See Sectin 226.42(f)(3)(i). Must be based n recent rates paid t a representative sample f prviders f appraisal services in the gegraphic market f the prperty being appraised r the fee schedules f thse prviders. See Sectin 226.42(f)(3)(ii). Studies and surveys r infrmatin derived frm them must exclude cmpensatin paid t fee appraisers fr appraisals rdered by an AMC. See Sectin 226.42(f)(3)(iii). Presumptins may be rebutted with cntrary evidence that the rate f cmpensatin paid t a fee appraiser is nt custmary and reasnable. (See new cmment 42(f)(3)-1). Accrding t the Bard, the requirement t pay custmary and reasnable fees is nt intended t prhibit negtiatins between a creditr and an appraiser regarding rates fr assignments in gd faith, nr is it intended t prhibit a creditr frm cmmunicating t a fee appraiser the rates that had been submitted by ther appraisers slicited fr the assignment as part f this negtiatin. Nr is the final rule intended t prevent appraisers and creditrs frm negtiating vlume-based 6
discunts in instances f multiple appraisal assignments t a fee appraiser. See new cmment 42(f)(1)-5. Definitins Relating t Reasnable Cmpensatin: Fee appraiser means: (i) state-licensed r state-certified appraisers and, generally, (ii) entities that emply state-licensed r state-certified appraisers t perfrm appraisals and are cmpensated fr the perfrmance f appraisals (as ppsed t entities that merely manage the appraisal prcess). See TILA Sectin 129E(i)(2). Appraisal management cmpany means any persn authrized t perfrm ne r mre f the fllwing actins n behalf f the creditr: (i) Recruit, select, and retain fee appraisers; (ii) cntract with fee appraisers t perfrm appraisal services; (iii) manage the prcess f having an appraisal perfrmed, including administrative services such as receiving rders and reprts, submitting cmpleted reprts t creditrs and underwriters, cllecting fees fr services prvided, and cmpensating fee appraisers fr services perfrmed; r (iv) review and verify the wrk f fee appraisers. Questins? Cntact Rd Alba fr mre infrmatin. 7