Mortgage Banking Alert
March 2008
Authors:
Laurence E. Platt
+1.202.778.9034
larry.platt@klgates.com
Lorna Neill
+1.202.778.9216
lorna.neill@klgates.com
K&L Gates comprises approximately
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represents capital markets participants,
entrepreneurs, growth and middle market
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please visit www.klgates.com.
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NYAG Leapfrogs Feds In Targeting
Appraisals
Rather than waiting around for Congress or the Federal Reserve Board to complete their
consideration of appraisal reform, New York Attorney General Andrew M. Cuomo announced
on March 3, 2008 the execution of cooperation agreements (the “Cooperation Agreements” or
“Agreements”) with Fannie Mae, Freddie Mac, and the Office of Federal Housing Enterprise
Oversight (OFHEO) that will require significant changes in appraisals for residential mortgage
loans on a nationwide basis.1
The Cooperation Agreements come in the wake of a sudden and steep decline in residential
property values in many parts of the country that has resulted in many “underwater” subprime
loans where the outstanding principal balance exceeds the value of the mortgaged property.
Clearly, the underwater nature of many subprime borrowers has prevented them from escaping
loans that are becoming unaffordable as the loans are adjusting to rising interest rates, leading
to the current subprime mortgage crisis. While policymakers’ can discuss the combined
effects of declining property values and rising interest rates, can they nonetheless attempt to
pin the current crisis (with its resulting market correction of tightened underwriting guidelines,
decreased consumer demand, and the general unavailability of residential credit) upon faulty
appraisals at the time of origination?
Whatever the actual reasons may be, federal and state legislators and regulators have focused
on an alleged lack of appraiser independence and standards as a contributing cause of the
current mess. The New York Attorney General, however, has leapfrogged Congress and the
Federal Reserve Board by “encouraging” the execution of the Cooperation Agreements, which
address many of the same substantive issues. The result is the codification of an appraiser
code of conduct by contract, if arguably under duress, rather than by law or regulation.
We have written three recent Client Alerts regarding other aspects of these mortgage reform
proposals. The first Alert dealt with the ability to repay and net tangible benefit requirements
contained in mortgage reform bills in Congress.1 The second Alert dealt with the imposition
of duty of care requirements and anti-steering prohibitions upon mortgage originators.2 The
third addressed the proposed remedies for a violation of the new mortgage reform proposals,
and the extent parties (including the wrongdoer and those who committed no violation) would
be legally responsible for those violations.3 This Alert discusses the proposed appraiser
independence and standards of care in the New York Attorney General’s Agreements, the bills
proposed in Congress, and the Federal Reserve Board’s recent proposed rule.
I. APPRAISER INDEPENDENCE – AN HISTORICAL PERSPECTIVE
The foundation of a sound residential mortgage loan is a valuation of the secured property
that is as accurate as possible, and the integrity of an appraisal depends upon the objectivity
of the appraiser. The appraiser must be free from improper or undue influence or pressure by
parties with a direct financial interest in the loan transaction. Research shows that significant
perceived pressure on appraisers has come from virtually all participants in the mortgage
food chain – largely from mortgage brokers and real estate agents/brokers, but also from
consumers, lenders, and appraisal management companies.2
Mortgage Banking Alert
However, is all input from or exchange with interested
parties improper? The appraisal process is certainly
not a perfect science. Overly-conservative valuations
can scuttle transactions that are beneficial to lenders
and borrowers. Lenders review appraisals, and
appropriately so, to ensure that appraisers have
considered all relevant data, and may legitimately
ask an appraiser to reconsider his or her valuation.
Exchange of information between mortgage industry
participants can be a healthy part of the appraisal
process, actually leading to better appraisals with
fewer errors, and a more vibrant and sturdy mortgage
market.
While “undue” pressure is a bad thing, at what point is
a claim of undue pressure a pretext to defend against
lenders’ concerns of appraisal quality? How does one
distinguish between proper and improper pressure on
appraisers?
A. F
ederal Efforts to Ensure Appraiser
Independence and Competence
Serious concerns about appraiser independence are
not new. The issue attracted significant attention of
policymakers during the fallout of the savings and
loan crisis of the 1980s. In response to that crisis,
Congress enacted the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 (FIRREA).3
FIRREA instituted a complex scheme of appraisal
reforms designed to enhance the quality and integrity
of appraisals for mortgage loans, including the
establishment by the federal banking agencies of federal
appraisal standards that meet the Uniform Standards of
Professional Appraisal Practice (USPAP). Subsequent
banking agency regulations and guidelines4 prescribed
rules concerning the selection and monitoring of
appraisers, market value approaches that an appraiser
should use, when the lender may engage an appraiser to
perform a limited as opposed to a complete appraisal,
and which transactions do not require an appraisal, as
such.5
Federal banking agency regulations under FIRREA
attempted to address appraiser independence, but
those regulations are broadly and simply worded.
They require that appraisers be “independent,” and
“have no direct or indirect interest” in the property,
but generally give lenders latitude to determine how
to comply.6 The agencies subsequently determined
that the appraiser independence requirements should
be bolstered and issued additional guidance in 1994.
The 1994 Interagency Appraisal and Evaluation
Guidelines emphasized “non-preferential and
unbiased” evaluations, by persons with the requisite
education and expertise.7 This Interagency Guidance
clarified that if a financial institution could not achieve
“absolute lines of independence” between its appraisal
function and loan production and collection functions,
the institution “must be able to clearly demonstrate
that it has prudent safeguards to isolate its collateral
evaluation process from influence or interference from
the loan production process,” or at least must prohibit
any loan officer or director who performs a property
appraisal evaluation from voting whether to approve
or deny credit in the transaction.8
The 2003 efforts of the agencies once again to address
defective property valuation concerns resulted in a
joint statement on independent appraisal and evaluation
functions,9 which warned that bank examiners will
review financial institutions’ appraiser independence
procedures, and that violators of the guidelines could
be subject to enforcement actions.10 Finally, in 2005,
the agencies jointly issued more guidance for selecting
and ordering appraisals, accepting outside appraisals,
reviewing appraisals, and selecting individuals to
perform evaluations as opposed to appraisals.11
Additional measures to promote appraiser independence
can be found in a number of other sources, including
the guidelines of Fannie Mae, Freddie Mac, and the
Federal Housing Administration (FHA).
Given all these rules and guidance, why have Attorney
General Cuomo, Congress, and the Federal Reserve
Board reached in to set new standards for appraisers?
First, while the interrelationship of the various appraiser
overseers is certainly complex, the states have not been
vigorous in enforcing appraiser standards in response
to complaints. According to the most recent Annual
Report to Congress of the FIRREA-created Appraisal
Subcommittee, at least 60 percent of the state appraiser
regulatory agencies failed to uphold their 2006
enforcement responsibilities.12 At a symposium on
mortgage fraud held by the Appraisal Foundation, a
panelist from Fannie Mae stated that a third of the
states respond well to cases alleging appraisal fraud,
approximately one-third of them can take up to three
years to respond to a referral, and another third do
nothing.13 Inadequate resources and insufficient
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Mortgage Banking Alert
authority of the Appraisal Subcommittee over state
appraisal boards are commonly considered key reasons
for this enforcement shortfall.14 However, in the past
several years a number of state legislatures have passed
legislation prohibiting appraiser coercion,15 and many
have considered or are considering similar measures.16
With Attorney General Cuomo’s setting an example,
it is likely that states will be more empowered, and
will have a greater mandate, to oversee appraiser
problems.
Second, federal policymakers traditionally focused on
appraisals in connection with commercial mortgage
loans (which have a larger impact on their safety and
soundness, and were considered important risk factors
during the savings and loan crisis), and not appraisals
for smaller, more highly regulated residential mortgage
loans. Not until 2005 did the agencies expressly
clarify in published FAQs that their appraisal guidance
applies to both residential and commercial mortgage
loans.17 Third, the federal banking agencies’ appraisal
regulations apply only to depository institutions and
their operating subsidiaries, and not to state chartered
or regulated lenders. While the appraisal standards
of Fannie Mae, Freddie Mac, and FHA may cover the
activities of those lenders, not all states have sought
to replicate the requirements imposed on federally
chartered institutions, particularly in connection with
the appraisers themselves.
II. APPRAISAL REFORM
In light of the belief that faulty appraisals are in
part responsible for the large number of underwater
borrowers during this mortgage credit crisis, and in
response to the perceived void in appraiser controls, in
the fall of 2007 both houses of Congress have proposed
legislation amending the federal Truth in Lending Act
(a law otherwise largely aimed at disclosing the cost
of consumer credit) to impose appraiser independence
requirements and standards of care. Around that
time, Attorney General Cuomo was reportedly
conducting investigations into a large real estate
appraisal management company regarding pressured,
collusive, and/or inflated appraisals, and filed suit
against that company. Attorney General Cuomo then
issued subpoenas to Fannie Mae and Freddie Mac and
demanded an Independent Examiner to review all the
appraisals for mortgages purchased by those entities
from one of their largest customers.
While the U.S. House of Representatives has sent its
appraiser reform bill (discussed below) to the Senate,
and the Senate continues to consider its own reform bill,
the Federal Reserve Board several weeks ago issued a
proposed rule to amend its regulations under the Truth
in Lending Act, including provisions on appraiser
coercion. That rule is open for public comment until
April 8, 2008, and after considering those comments,
the Federal Reserve can finalize those provisions.
However, Attorney General Cuomo decided not to
wait for the outcome of those efforts, announcing last
week that he had entered into Cooperation Agreements
with Fannie Mae, Freddie Mac, and OFHEO, in which
the entities agreed they will buy loans only from
lenders that meet new standards designed to ensure
independent and reliable appraisals.
The principal focus of all four appraisal reform
proposals (the two bills in Congress, the Federal Reserve
proposed rule, and the Cooperation Agreements) is
to strengthen the independence of appraisers from
any improper, coercive influences of loan transaction
insiders. They also, at least to some degree, touch upon
the perceived problems with federal appraisal policy
discussed above – weak enforcement at a state level,
lack of focus on residential mortgage loans, and lack
of rules for non-depository, state chartered entities.
Notably, however, none of the proposals conditions a
violation on the production of an inaccurate appraisal
(although as described below, one proposal contains
fairly severe consequences to the loan holder for such
inaccuracies).
In this Alert, we first examine the appraiser provisions
of each proposal, and then review what each proposal
would offer to enforce them.
A. F
annie Mae/Freddie Mac Cooperation
Agreements
The Cooperation Agreements have two major
components. First, Fannie Mae and Freddie Mac must
implement a new Home Valuation Code of Conduct
(the “Valuation Code” or “Code”),18 which articulates
standards designed to ensure the independence of
appraisers from undue influence by interested parties.
With a few minor exceptions for select requirements, all
lenders making loans to be purchased by Fannie Mae or
Freddie Mac (and not just those lenders in New York,
or loans to residents or secured by property in the state)
must adhere to the Code in order for their loans (other
March 2008 | 3
Mortgage Banking Alert
than government-insured loans) to be eligible for sale
to or securitization with Fannie Mae and Freddie Mac.
The new rules are scheduled to take effect January 1,
2009, after a comment period for “market participants.”
The Agreements commit Fannie Mae and Freddie Mac
to a “good faith review” of comments submitted and
to “consider any amendments to the Code necessary
to avoid any unforeseen consequences.”
Unlike the other governmental proposals on appraisal
reform discussed in this Alert, the proposed Valuation
Code would proscribe not only certain types of conduct,
but also certain relationships that the New York
Attorney General has determined, rightly or wrongly,
may give rise to undue influence on appraisers. These
prohibited relationships would violate the proposed
Code regardless of whether the relationships actually
result in inappropriate pressure in a particular instance
or in an inaccurate appraisal. For example, lenders
would not be able to rely upon appraisers “selected,
retained, or compensated in any manner” by mortgage
brokers, real estate agents, or any other third party.
Lenders also could not use appraisers employed by
the lender or any of its affiliates or from an affiliated
appraisal management company, even if the company
merely retains appraisers under independent contracts
(rather than under full employment. While not free
from doubt, lenders apparently could use appraisals by
contract appraisers retained by an unaffiliated appraisal
management company, but not by appraisers employed
by the company.
Second, Fannie Mae and Freddie Mac must fund
a new Independent Valuation Protection Institute
(the “Valuation Institute” or “Institute”), tasked
with implementing, monitoring, and (as needed)
proposing amendments to the Valuation Code. In
addition, the Institute must establish a nationwide
complaint hotline for consumers concerned that the
appraisal in connection with their home mortgage loan
suffered from a lack of independence. The Institute
is authorized to mediate consumer and appraiser
complaints, refer those complaints to federal or state
regulators, or forward them to state or federal law
enforcement agencies for possible investigation or
prosecution. The Institute will be governed by an
independent Board of Directors to be approved by the
New York Attorney General’s Office and OFHEO.
1. Applicability
The Cooperation Agreements expressly apply to
single-family mortgage loans intended for sale to
Fannie Mae or Freddie Mac. In addition, the specific
appraiser independence measures of the proposed
Valuation Code would apply not only to lenders
(with the exception of “small banks” under certain
circumstances), but also to any “employee, director,
officer, or agent of the lender, or any other third party
acting as joint venture partner, independent contractor,
appraisal management company, or partner on behalf
of the lender.”19 As a result, the Agreements broaden
the application of appraiser independence rules beyond
commercial mortgage loans, and beyond federally
chartered depository institutions and their operating
subsidiaries.
2. Requirements and Prohibitions
The proposed Valuation Code would prohibit a broad
range of actions that “influence the development,
reporting, result, or review of an appraisal.”20 Thus
prohibited conduct could include not only certain
communications with appraisers, but any action that
could be construed as an inappropriate attempt to
influence appraisal results. Specifically, the Code
provides as follows:
No employee, director, officer, or agent of
the lender, or any other third party acting as
joint venture partner, independent contractor,
appraisal management company, or partner on
behalf of the lender, shall influence or attempt
to influence the development, reporting, result,
or review of an appraisal through coercion,
extortion, collusion, compensation, instruction,
inducement, intimidation, bribery, or in any other
manner.21
Of the terms used to describe prohibited conduct,
“coerce,” “extort,” and “bribe” are recognizable legal
terms commonly appearing in state and federal criminal
codes. Thus, for example, California’s recently enacted
appraiser independence provision is more limited,
prohibiting “improperly influencing” an appraisal
through “coercion, extortion, and bribery.”22 However,
even those three terms in California and under the Code
are vulnerable to intractable interpretative battles, and
the other Code terms are as well. The prohibition
on “instruction,” for instance, may be particularly
March 2008 | 4
Mortgage Banking Alert
worrisome. Lenders routinely review appraisals to
ensure that they reflect all relevant data, and may ask
an appraiser to reconsider the valuation. At what point
would this type of legitimate and beneficial exchange
constitute prohibited “instruction”?
The Code partially tempers those vagueness concerns
with a lengthy list of examples of prohibited conduct,
as follows:
in the loan file, or unless the appraisal or
automated valuation model is done pursuant
to a bona fide pre- or post-funding appraisal
review or quality control process; or
• A ny other act or practice that impairs or
attempts to impair an appraiser’s independence,
objectivity, or impartiality.24
• Withholding or threatening to withhold timely
payment for an appraisal report or future
business for an appraiser;
Also, the proposed Valuation Code specifies a few
activities that would not be considered a violation,
which could give lenders and others more comfort in
taking at least these named actions:
• E xpressly or impliedly promising future
business or increased compensation for an
appraiser
• Requesting that an appraiser provide additional
information or explanation about the basis for
a valuation; or
• Demoting or terminating or threatening to
demote or terminate an appraiser;
•Requesting that an appraiser correct objective
factual errors in an appraisal report.25
• Conditioning the ordering of an appraisal or
the payment of a fee on the valuation to be
reached;
While those examples are an attempt to allow certain
communications with appraisers, they are narrow, and
it is unclear whether they would allow, for example, a
lender to provide the appraiser with additional objective
information important to the valuation conclusion.
• Requesting estimated, predetermined, or desired
valuations prior to the appraiser’s completion
of an appraisal report;
• P roviding to an appraiser a desired value
or a target amount to be loaned (although a
copy of the sales contract may be provided, if
applicable); (Under USPAP, an appraiser must
ascertain a sale price.);27
• Providing to an appraiser or person related
to the appraiser stock or other financial or
nonfinancial benefits;
• R emoving an appraiser from a qualified
appraiser list without prior written notice,
which notice must include written evidence of
the appraiser’s illegal conduct, a violation of
USPAP or state licensing standards, substandard
performance, or otherwise improper or
unprofessional behavior; (Does this mean that
a lender cannot terminate a contract appraiser
without cause?);
• Ordering, obtaining, using, or paying for a
second or subsequent appraisal or automated
valuation model in connection with a
mortgage financing transaction, unless there
is a reasonable basis to believe that the initial
appraisal was flawed and that basis is noted
3. Relationship Restrictions
Sure to be especially controversial are several provisions
of the proposed Valuation Code that restrict lenders’
use of appraisals from certain sources. As mentioned
above, lenders may not accept an appraisal report
by an appraiser “selected, retained, or compensated
in any manner” by any third party not “specifically
authorized” by the lender – “including mortgage
brokers and real estate agents.”26 This restriction
has the potential to stymie mortgage brokers in some
of their most basic functions. Mortgage brokers
typically shop loans among a number of lenders.
Prudent lenders generally cannot commit to making
a brokered loan without an appraisal. Thus, brokers
typically order an appraisal so that they can prepare
the full loan packages they normally present to their
various lenders. If the onus to undertake the appraisal
is solely on the lender, the broker may be limited in its
shopping efforts and thus limited in the options it can
offer to potential borrowers. This restriction raises
questions under the federal Real Estate Settlement
Procedures Act (RESPA), as well, since that statute
requires mortgage brokers to perform certain functions
– such as “initiating/ordering appraisals” – to justify
receiving compensation.27
March 2008 | 5
Mortgage Banking Alert
In addition, a lender also may not underwrite a loan
using an appraisal report prepared by an appraiser
employed by: (1) the lender, (2) an affiliate of the
lender, (3) an entity owned wholly or partially by the
lender, (4) an entity that wholly or partially owns the
lender, (4) a “settlement services” provider (as defined
under RESPA28), or (5) an entity owned wholly or
partially by a “settlement services” provider.29 “Small
banks” are not required to adhere to items (1)–(4),
above, subject to Fannie Mae’s or Freddie Mac’s
determination that “undue hardship” would result.30
The prohibition on appraisals by an appraiser
“employed by” a “settlement services” provider sweeps
in everyone involved in the process of originating
a mortgage loan, including appraisal management
companies (AMCs). In effect, lenders selling to Fannie
Mae or Freddie Mac could not use appraisers employed
by AMCs, whether or not affiliated with the lender.
The proposed Valuation Code treats contract appraisers
differently from employee appraisers. First, the
Code expressly disallows using any appraisal report
obtained by or through an affiliated AMC, regardless of
whether the appraiser is an employee or an independent
contractor.31 This restriction applies unless the lender’s
ownership percentage in the AMC is under 20 percent,
the lender has no involvement in the AMC’s dayto-day business operations, the AMC is operated
independently, and the lender has no involvement in
selecting individual appraisers or panel of approved
appraisers used by the AMC. 32 Second, at first
glance it appears that lenders would be permitted to
use appraisals by appraisers “retained” (presumably
as independent contractors) by unaffiliated AMCs.33
Undermining this conclusion, however, is the outright
prohibition on a lender accepting an appraisal report
completed by an appraiser retained by any third
party not “specifically authorized by the lender.”34
What is required to “specifically authorize[]” a third
party? Given this lack of clarity, it is possible that this
provision could in practice prohibit the use of AMCs.
While in-house staff appraisers cannot perform
appraisals for the lender, they can order appraisals,
review appraisals (pre-funding or post-funding),
develop or use internal automated valuation models,
or prepare appraisals in connection with transactions
other than mortgage origination transactions (e.g., loan
workouts).35
With all these restrictions on the relationship between
a lender and an appraiser, it’s difficult to see who is
left to perform the work. The industry likely will
give Fannie Mae and Freddie Mac an earful on these
provisions during the proposed comment period.
Neither the Attorney General’s press release announcing
the Cooperation Agreements nor the Agreements
themselves provides any meaningful support for
the position that the performance of appraisals by
or through employees of the lender or any affiliated
AMC materially increases the likelihood of faulty
appraisals in any systematic or material way. Indeed,
federal appraisal regulations have not opposed such
arrangements in the past, instead focusing on the
clear separation of the production side of the business
from the valuation side. Proposed federal regulations
would trigger the notice and comment requirements
of the Administrative Procedures Act to provide
public debate of the merits of the proposed action.
Proposed federal law likely would be accompanied
by Congressional hearings and the opportunities
for meetings with Congressional staffers to test the
premise. The execution of a cooperation agreement in
lieu of publicly reported threats of a lawsuit provides
no meaningful opportunity to challenge the underlying
premise.
4. Likely Impact of Cooperation Agreements
Several aspects of the Cooperation Agreements are
unclear, including how long members of the Institute’s
Board of Directors will serve and how the Institute
will be funded after the first five years of Fannie Mae/
Freddie Mac start-up contributions. In addition, most
of the requirements of the Agreements (all except those
related to the Institute, such as the five-year funding
obligation) are set to terminate 28 months from the date
of the Agreements (i.e., by July 2010). Thus, while
Fannie Mae and Freddie Mac will have amended their
guidelines to reflect the Code and using the eligibility
requirements in purchasing loans since January 1,
2009, they will apparently be able to reverse those
guidelines and purchase restrictions after essentially
a year-and-a-half.
In essence, the Cooperation Agreements represent a
decisive repudiation of the effectiveness of current
federal appraisal rules and Fannie/Freddie appraisal
guidelines to stem the alleged tide of inflated
appraisals. Nonetheless, the new Valuation Code likely
March 2008 | 6
Mortgage Banking Alert
will not supplant the USPAP, which provides detailed
guidelines on how appraisals must be conducted and
is primarily directed to appraisers. Similarly, it is
doubtful the new Institute will supplant the appraisal
bodies established in connection with FIRREA (the
Appraisal Foundation, Appraisal Standard Board, and
the Appraisal Subcommittee of the Federal Financial
Institutions Examination Council), although their roles
will certainly change. Overall, the significance of the
Cooperation Agreements and the companion Valuation
Code cannot be understated, given that Fannie Mae
and Freddie Mac purchase a substantial number of
home loans originated in the United States (and their
market share may increase, at least temporarily, with
the significant raise in their loan limits under the recent
economic stimulus package).36
B. The Frank Bill
Congress is not likely to discontinue its appraisal
reform efforts as a result of the New York Attorney
General’s initiative with Fannie Mae and Freddie Mac.
One of the proposals that has progressed the farthest
is part of the Mortgage Reform and Anti-Predatory
Lending Act (H.R. 3915), which was sponsored by
Rep. Brad Miller and co-sponsored by Rep. Barney
Frank, Chairman of the House Committee on Banking,
Housing, and Urban Affairs) (the “Frank Bill”). The
Frank Bill has passed the House of Representatives and
is under consideration in the Senate.
1. Applicability
Like the Cooperation Agreements, the Frank Bill’s
appraisal requirements expressly apply to residential
mortgage loans (specifically, to consumer creditor
transactions secured by the consumer’s principal
dwelling), although several of the Bill’s appraisalrelated provisions apply only to high-cost loans subject
to the federal Home Ownership and Equity Protection
Act (HOEPA). Another appraiser independence
measure in the Bill, which appears intended to be
free-standing and not necessarily part of the Truth
in Lending Act, apply even more broadly, to any
“real estate transaction involving an appraisal.”37 In
addition, the Frank Bill requires the federal banking
agencies to reevaluate their threshold level ($250,000)
for transactions requiring appraisals and to determine
“in writing that the threshold level provides reasonable
protection for consumers who purchase 1-4 unit
single-family residences.”38 This could result in more
residential loan transactions being subject to a full
appraisal rather than a less rigorous “evaluation.”39
Also like the Cooperation Agreements, the Frank Bill
broadens the application of its appraiser independence
rules beyond federally chartered depository institutions
and their operating subsidiaries. In this regard, the
Frank Bill is the most expansive of the four proposals,
applying strictures against appraiser coercion to
“mortgage lenders, mortgage brokers, mortgage
bankers, real estate brokers, appraisal management
companies, employees of appraisal management
companies, and any other person with an interest in a
real estate transaction.”40
2. Requirements and Prohibitions
The Frank Bill’s appraiser independence language
is similar to that of the proposed Valuation Code for
Fannie Mae and Freddie Mac in content and breadth.
For loans secured by the borrower’s principal dwelling,
the Frank Bill defines the following as “unfair and
deceptive practices” by one of the persons identified
above:
Any appraisal of a property offered as security for
repayment of the consumer credit transaction [] in
which a person with an interest in the underlying
transaction [indicated above] compensates,
coerces, extorts, colludes, instructs, induces,
bribes, or intimidates a person 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.41
Similarly, for any “real estate transaction” generally,
no person listed above may do the following:
[I]mproperly influence, or attempt to improperly
influence, through coercion, extortion, collusion,
compensation, instruction, inducement,
intimidation, non-payment for services rendered,
or bribery, the development, reporting, result,
or review of a real estate appraisal sought in
connection with a mortgage loan.42
Like the proposed Valuation Code, the Frank Bill
provides three specific prohibited actions to the general
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Mortgage Banking Alert
“catch-all” provision, applicable to transactions secured
by a borrower’s principal dwelling:
• M i s c h a r a c t e r i z i n g o r s u b o r n i n g a
mischaracterization of the appraised value of
the securing property;
• Seeking to influence the appraiser or otherwise
to encourage a targeted value to facilitate the
making or pricing of the transaction; and
• Failing to timely compensate an appraiser for a
completed appraisal regardless of whether the
transaction closes.43
Second, the Frank Bill, like the proposed Valuation
Code, lists actions that would not constitute a violation,
namely, asking an appraiser to provide one or more of
the following services:
• C onsider additional, appropriate property
information, including the consideration of
additional comparable properties to make or
support an appraisal;
•P rovide further detail, substantiation,
or explanation for the appraiser’s value
conclusions; or
• Correct errors on the appraisal report.44
3. L ikely Impact of the Frank Bill’s Appraiser
Requirements
As described above in connection with the proposed
Valuation Code language, the Frank Bill’s appraiser
independence language is expansive. Could a lender’s
request that the appraiser consider additional data
be considered an attempt to make the appraiser base
the appraised value on “any factor other than [the
appraiser’s] independent judgment”? Indeed, what if
the independent judgment is simply and objectively
wrong – what course of action is available to the
lender?
C. THE DODD BILL
The Senate also is considering its own appraiser
independence requirements and standards, in
connection with its Homeownership Preservation and
Protection Act (S.B. 2452, introduced and sponsored
by Sen. Christopher Dodd, Chairman of the Senate
Committee on Banking, Housing, and Urban Affairs)
(the “Dodd Bill”). The appraiser independence
provisions of the Dodd Bill share certain characteristics
of the Cooperation Agreements and the accompanying
proposed Valuation Code, as well as the Frank Bill.
1. Applicability
Like the other provisions discussed above, the Dodd
Bill’s appraisal provisions would expressly apply to a
“home mortgage loan,” defined as “a credit transaction
secured by a home, used or intended to be used as a
principal dwelling, regardless of whether it is real
or personal property, or whether the loan is used to
purchase the home.”45 The Dodd Bill would similarly
broaden the application of appraiser independence
rules beyond federally chartered depository institutions
and their operating subsidiaries. However, the Dodd
Bill is markedly less inclusive than any of the other
three proposals we address in this Alert. The Dodd
Bill applies appraiser coercion prohibitions only to
“lenders and loan servicers,”46 neither of which the
Bill defines.
2. Requirements and Prohibitions
In general, the Dodd Bill would give lenders and
others somewhat more latitude in communicating with
appraisers than does the proposed Valuation Code or the
Frank Bill. As noted above, the Dodd Bill’s appraiser
independence provisions would apply only to “lenders
and loan servicers.” It is unclear why the Dodd Bill
addresses “loan servicers,” as they are not typically
among those involved in the appraisal process. At
the same time, the Dodd Bill does not address certain
persons identified in some studies as greater sources
of appraiser pressure – mortgage brokers, real estate
agents, and consumers.
In addition, the Dodd Bill would actually prohibit
comparatively little conduct. Specifically, the Dodd
Bill provides that no lender or loan servicer may, with
respect to a home mortgage loan, in any way:
• Seek to influence an appraiser or otherwise
encourage a targeted value to facilitate the
making or pricing of a home mortgage loan;
or
• Select an appraiser on the basis of an expectation
that the appraiser will provide a targeted value
to facilitate the making or pricing of the home
mortgage loan.47
The Dodd Bill focuses on conduct directed at achieving
a “targeted value” for the securing property. While the
prohibition on seeking to “influence” or “otherwise
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Mortgage Banking Alert
encourage” a targeted value is prohibited under
the Frank Bill, the Dodd Bill’s second prohibition
expressly addresses a separate issue (also addressed
under the proposed Valuation Code) – the selection of
an appraiser based on an expectation that the appraiser
will arrive at a desired value for the home.
The Dodd Bill does not specify permitted actions as do
the Valuation Code and the Frank Bill (as well as the
FRB Proposed Rule, discussed below). The sponsors
or drafters may not have deemed this necessary given
the limited scope of the Bill’s appraiser independence
provisions.
Finally, at odds with the goal of favoring open
communication between appraisers and others, the
Dodd Bill would prohibit including the requested loan
amount, “or any estimate of value for the property
[], express or implied,” in an appraisal order.48 As
discussed above, that provision would reverse the
longstanding recognition that the contract price can be
an important and legitimate consideration in valuing
property, including the policies of USPAP.
D. The FRB Proposed Rule
Clearly under pressure from Congress and others for
not doing enough to forestall or correct the mortgage
crisis, the Board of Governors of the Federal Reserve
published in January a proposed rule offering
amendments to the regulations under the Truth in
Lending Act (the “FRB Proposed Rule”). 49 The
FRB Proposed Rule could be viewed as articulating
a middle ground between the breadth and vagueness
of the proposed Valuation Code and the appraiser
independence language in the Frank Bill on the one
hand, and the Dodd Bill’s minimalist approach to
appraiser regulation on the other.
1. Applicability
In line with all the other proposals, the FRB Proposed
Rule applies to residential mortgage loans – specifically,
all “consumer credit transactions secured by the
consumer’s principal dwelling.”50 Likewise, the FRB
Proposed Rule broadens the application of appraiser
independence rules beyond federally chartered
depository institutions and their operating subsidiaries.
Here, the FRB Proposed Rule is more inclusive than the
Dodd Bill, but less so than the proposed Cooperation
Agreement or Frank Bill. The FRB would apply its
appraiser independence provisions to any “creditor
or mortgage broker” or its affiliates.51 Interestingly,
while the FRB Proposed Rule would expressly address
mortgage brokers, it would not reach real estate agents,
appraisal management companies, consumers, or other
potentially interested parties.
The FRB Proposed Rule’s list of expressly proscribed
conduct is not as long as that of the Frank Bill, but
more inclusive than that of the Dodd Bill. Specifically,
a creditor or mortgage broker, or an affiliate of a
creditor or mortgage broker, would be prohibited
from directly or indirectly coercing, influencing, or
otherwise encouraging an appraiser to misstate or
misrepresent the value of the dwelling.52
The prohibited activities listed in the FRB’s proposed
appraiser independence provisions are broad,
encompassing any action to “directly or indirectly
coerce, influence, or otherwise encourage an appraiser”
to misrepresent a property value. Unlike the proposed
Valuation Code or Frank Bill, however, the FRB
Proposed Rule (and the Dodd Bill) would more
narrowly apply to appraisers’ conduct, rather than
lenders’ (or servicers’).53 However, the Frank Bill
would prohibit a wider range of enumerated conduct
toward, applicable not only to a person “conducting”
an appraisal, but anyone “involved in an appraisal.”
The FRB Proposed Rule follows other proposals by
providing specific examples of prohibited conduct. The
FRB presents “examples” of violations, as follows:
• Implying to an appraiser that retention of the
appraiser depends on the amount at which the
appraiser values the consumer’s home;
• Failing to compensate an appraiser or to retain
the appraiser in the future because the appraiser
does not value a consumer’s principal dwelling;
or
• Conditioning an appraiser’s compensation on
loan consummation.
Finally, the FRB Proposed Rule includes examples
of actions that are not violations of the anticoercion provision. Those examples are much more
comprehensive than those in the Frank Bill (though
not as extensive as in the proposed Valuation Code),
potentially giving lenders and brokers more leeway in
their conduct with appraisers. FRB examples of actions
that do not violate the above provision include:
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Mortgage Banking Alert
• Asking an appraiser to consider additional
information about a consumer’s principal
dwelling or about comparable properties;
• Requesting that an appraiser provide additional
information about the basis for a valuation;
• Requesting that an appraiser correct factual
errors in a valuation;
• Obtaining multiple appraisals of a consumer’s
principal dwelling, so long as the creditor
adheres to a policy of selecting the most reliable
appraisal, rather than the appraisal that states
the highest value;
• Withholding compensation from an appraiser for
breach of contract or substandard performance
of services as provided by contract;
Terminating a relationship with an appraiser for
violations of applicable federal or state law or breaches
of ethical or professional standards; or
Taking action permitted or required by applicable
federal or state statute, regulation, or agency
guidance.60
III. Enforcement
All four proposals addressed in this Client Alert would
strengthen the enforcement of appraiser independence
by expressly prohibiting coercive communications with
and treatment of appraisers, and by including additional
the enforcement measures, described below.
A. F
annie Mae/Freddie Mac Cooperation
Agreements and Proposed Valuation
Code
The Cooperation Agreements are obviously not
designed to provide consumers with a private right of
action against any party to the transaction. Instead,
the principal enforcement measures of the Cooperation
Agreements relate to the new Valuation Institute’s
powers. The Institute is charged with, among other
responsibilities, establishing and maintaining a
nationwide “complaint hotline” for consumers with
appraisal concerns, and serving as a contact point for
appraisers with concerns that “their independence
has been threatened in some way, including by undue
pressure.”54 As mentioned above, the Institute may
mediate consumer and appraiser complaints itself, refer
them to federal or state regulators, or forward them to
state or federal law enforcement agencies for possible
investigation or prosecution.55
In addition, lenders selling to Fannie Mae or Freddie
Mac must establish telephone hotlines and email
addresses to receive complaints from appraisers,
borrowers, and other persons or entities about improper
influence of appraisers.56 Lenders must disclose to
appraisers and borrowers the existence and purpose
of the complaint telephone lines and email addresses,
and must comply with deadlines to begin investigating
the complaint reporting improper conduct to the
Valuation Institute and “any other relevant regulatory
bodies.”57 Finally, lenders with reasons to believe an
appraiser is violating applicable laws or engaging in
other unethical conduct must promptly report it to the
Valuation Institute and the applicable state appraiser
certifying and licensing agency.58 Of course, it is not
clear whether either entity will be more responsive
to the complaints than in the past, although perhaps
attention to the current crisis will increase scrutiny on
follow-up and enforcement.
B. The Frank Bill
The Frank Bill also includes a number of administrative
reforms aimed principally at tightening enforcement of
federal appraisal rules and guidelines, and increasing
resources available to fund enforcement. 59 It
appears that violations of the appraiser independence
requirements could subject creditors to private rights of
action by consumers for actual and statutory damages
with the standard civil liability section of the TILA.60
In addition, for a first violation of those provisions (in
a dwelling-secured transaction), a person would be
subject to a civil penalty of $10,000 for each day the
violation continues. For any subsequent violations, a
person would be subject to a civil penalty of $20,000
each day the violation continues.61 Administrative
enforcement is also authorized.62
The Frank Bill requires any person with an interest
in any real estate-secured mortgage transaction to
report suspicious appraisal activity to the appropriate
state regulator.63 Finally, federal regulators must issue
regulations necessary to carry out the anti-coercion and
mandatory reporting provisions.64
C. The Dodd Bill
The Dodd Bill’s enforcement-related provisions are
much more limited, although they would impose a
unique provision requiring a holder to modify a loan
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Mortgage Banking Alert
that was over-valued, as explained below. Otherwise,
the Dodd Bill imposes civil damages, but only on
appraisers. This effectively means that the Bill would
authorize no civil damages for those who are found to
have coerced appraisers. Specifically, appraisers who
violate any appraisal-related provisions of the Dodd
Bill could be liable to consumers for actual damages,
an amount of “not less than $5,000,” or costs of the
action and attorneys’ fees.65 (One can guess the “or” in
that provision may have been intended as an “and.”)
that this “qualifying bond” would be overly expensive
and burdensome, forcing appraisers to pass the expense
on to consumers, or under a worst-case scenario, to be
driven out of business entirely. Further, the provision
in fact does not propose a mechanism for collecting or
administering these bonds, or assign to any regulatory
agency the responsibility of implementing this
requirement.
Private plaintiffs and state attorneys general are
expressly authorized to bring an action under the Dodd
Bill.66 Indeed, they may have grounds to do so fairly
easily, as the terms “influence” and “encourage” under
the Bill (and under other proposals) are sufficiently
broad terms to support a range of allegations. Plaintiffs
could, however, have a difficult time prevailing, as
they would have to show not only evidence that the
prohibited “influence,” “encourag[ment]” (or appraiser
“select[ion]”) occurred, but also that a specific targeted
value motivated the conduct. In addition, what specific
consequences violators might face is unclear – the
Dodd Bill does not provide for any specific civil or
criminal penalties against “lenders or loan servicers” for
violations of the appraiser independence provisions.
In keeping with TILA 69 enforcement provisions,
the FRB Proposed Rule would permit public and
private civil actions for violations of the appraiser
independence provisions, but only against creditors
(and, for HOEPA loans, their assignees).70 Consumers
bringing actions against creditors may be eligible
for: (1) actual damages; (2) statutory damages in
an individual action of up to $2,000, or, in a class
action, total statutory damages of up to $500,000 or
one percent of the creditor’s net worth, whichever is
less; (3) special statutory damages up to the sum of all
finance charges and fees paid by the consumer; and (4)
court costs and attorneys’ fees.71
As mentioned above, a highly controversial measure in
the Dodd Bill requires holders of a loan to modify and
recast the loan – to retroactively lower the loan amount
– when a retrospective appraisal shows inaccuracies
above a certain tolerance (set at 10 percent, which
tolerance level may be adjusted at regulator discretion),
without regard to whether the lender or holder in any
way acted inappropriately or illegally.67 The Bill does
not indicate when retrospective appraisals might be
required or appropriate, but the responsibility for loan
recasting and modification would fall to holders and
their loan servicers. The holder must recast the loan
from the beginning to a loan amount that is the same
loan-to-value ratio that the original loan purported
to be, and to apply all payments made prior to the
recasting to the reduced loan amount. In practice, this
provision – effectively a loan forgiveness, regardless
of who was at fault – might influence holders to
avoid retrospective appraisals wherever possible, thus
weakening a tool for appraiser accountability.
Another measure in the Dodd Bill raising concerns
among appraisers is a requirement that appraisers post
a bond that could be used to compensate borrowers
and lenders for faulty appraisals.68 Appraisers fear
D. The FRB Proposed Rule
IV. Duty of Care
The question of whether an appraiser (or a lender
employing or retaining an appraiser) owes a duty of
care to the borrower, and thus could be held liable to the
borrower for a faulty appraisal, remains unresolved by
the courts. Unfortunately, the current federal appraisal
reform proposals we discuss in this Alert, including the
Fannie Mae and Freddie Mac Cooperation Agreements,
do not answer the question, and in fact send a mixed
message. The lack of legal clarity on this point could
lead to exponentially greater litigation costs for the
industry, as that question becomes central to the
growing number of appraisal fraud cases.
The appraisal has historically been intended for use by
the lender in determining whether to extend credit and
how much to extend. Accordingly, the appraiser’s legal
duty of care has most often been construed by courts
and federal regulators as being to the lender, not to the
borrower/purchaser.72 A minority of courts, however,
have held that the appraiser has a duty to the borrower
and thus can be held liable to the borrower for a bad
appraisal. Those courts have based their decisions on
determinations that borrower reliance on the appraisal
was foreseeable and/or that the borrower in fact relied
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Mortgage Banking Alert
on the appraisal, as well as interpretations of state and
federal appraisal laws.73
traditional views that the appraisal is strictly for the
lender’s benefit.
Regardless of whether the current proposals expressly
define an appraiser’s (or lender’s) duty of care, measures
that permit consumers to collect money damages could
effectively make defining the duty of care less relevant.
As explained above, the Cooperation Agreements and
the proposed Valuation Code do not (and by their legal
nature could not) authorize consumers to bring suits for
money damages against alleged violators of the Code.
The Frank Bill, on the other hand, enables consumers to
sue violators of the appraisal independence provisions
for money damages.74 Empowering consumers in
that way indicates that those involved in the appraisal
process are answerable to consumers.
In effect, all of the requirements in the Valuation Code
can be read as intended to further consumer protection
goals. However, of those expressly relating to
consumers, worth mentioning again is the requirement
that the lender must establish a complaint hotline for
borrowers and must investigate and address these
complaints within specified time periods.79 In addition,
the lender must provide a copy of the appraisal to the
borrower “immediately upon completion” and at least
3 days prior to closing the loan transaction.80 This
appraisal disclosure requirement could diminish both
appraiser and lender reliance on the defense that he or
she could not have foreseen that the consumer would
rely on or be harmed by the appraisal.
The Dodd Bill, which states broadly that appraisers
must “act with reasonable skill, care, diligence, and
in accordance with the highest standards,” and that
they must “act in good faith and fair dealing in any
transaction,” does not expressly provide to whom
they owe those duties. However, the Dodd Bill allows
consumers to collect money damages against appraisers
for violations of the appraisal provisions, and no
other parties.75 This too points to a de facto duty of
appraisers to consumers. Finally, the FRB Proposed
Rule does not explicitly impose on appraisers a duty of
care to consumers, but it provides that consumers may
enforce violations by claims for money damages under
the general civil liability provisions of TILA.76
Below, we address appraiser duties under the four
proposals in detail.
A. F
annie Mae/Freddie Mac Cooperation
Agreements and Proposed Valuation
Code
Neither the Cooperation Agreements nor the companion
Valuation Code expressly states that an appraiser
or lender has a duty of care to the consumer in the
appraisal process. However, the dominant tenor of
the Agreement and Code is clearly one of consumer
protection: “[The New York Attorney General’s
Office] believes reforms are necessary . . . to protect
consumers. . . .”77 More to the point, another express
basis of the Cooperation Agreements is the assertion
that, “The appraisal [] provides important information
for consumers to consider in determining their best
financial interest.”78 This statement directly counters
The Equal Credit Opportunity Act81 (ECOA) already
requires the creditor to give the borrower either a copy
of the appraisal or notice of his or her right to receive
a copy of the appraisal.82 However, under ECOA the
creditor has the option of requiring the borrower to
request the appraisal in writing up to 90 days after
receiving notice of the creditor’s credit decision. After
receiving the borrower’s written request, the creditor
then has 30 days to provide the appraisal – which could
be well after the loan transaction occurs.83 In short,
borrower reliance on the appraisal is less foreseeable
under ECOA than under the Valuation Code.
B. The Frank Bill
The Frank Bill does not explicitly provide that an
appraiser has a duty to the consumer, although it
allows consumers to collect money damages against
violators of the appraiser independence provisions.
It also redefines the FIRREA/FFIEC Appraisal
Subcommittee’s “mission” to include not only guarding
the safety and soundness of financial institutions,
but also “protect[ing] the consumer from improper
appraiser practices and the predations of unlicensed
appraisers.”84
In addition, the Frank Bill requires creditors to
“provide” or “make available” a copy of the appraisal
to the consumer at least three days before closing.85 As
discussed above, the Frank Bill’s appraisal disclosure
requirement could diminish appraiser and lender
reliance on the defense that he or she could not have
foreseen that the consumer would rely on or be harmed
by the appraisal.
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Mortgage Banking Alert
On the other hand, however, the Frank Bill cuts
against expanding appraiser liability to consumers by
including a requirement that for HOEPA loans, lenders
give consumers notice that the appraisal is expressly
for the lender, but that the consumer may obtain an
appraisal on her own if she wishes.86 To fend off
consumer claims based on a faulty appraisal, lenders
and appraisers could point to this disclosure. Still,
courts could look past this disclosure if, for example,
the facts of a given case indicate that consumer reliance
on the lender-ordered appraisal was reasonable.
C. The Dodd Bill
Aside from allowing consumers to collect money
damages against appraisers, the Dodd Bill sheds little
light on the scope of an appraiser’s duty of care. The
Bill includes language defining an appraiser’s “standard
of care” and “duties,”87 as mentioned above, but it
does not define the various broad terminology used to
explain those duties, nor does it specify to whom those
duties are owed.
Similar to the Valuation Code and Frank Bill, the Dodd
Bill requires the “lender or loan servicer” in dwellingsecured loans to provide a copy of the appraisal to the
applicant of a home mortgage loan, whether credit is
granted, denied, or the application was withdrawn.
The Bill does not specify timing for providing the
appraisal copy, however, weakening arguments that
this requirement could render a borrower’s reliance on
the appraisal foreseeable.
D. The FRB Proposed Rule
The FRB Proposed Rule does not explicitly impose a
duty of care on appraisers to consumers, but again, it
does allow consumers to enforce violations by claims
for money damages under the general civil liability
provisions of TILA. It also prohibits a creditor from
extending credit if the creditor “knows or has reason
to know” at or before closing of a violation of the
above provision in connection with the transaction.88
However, the creditor may extend credit on the original
terms if it exercises “reasonable diligence” to confirm
that the tainted appraisal was in fact accurate.96 The
proposed Commentary clarifies that “reasonable
diligence” means that the creditor must obtain a new
appraisal. Thus, a lender may not be permitted to
consummate a transaction but it does not have any
specifically articulated duty of care to consumers.
*
*
*
*
*
Establishing a uniform standard for appraiser
independence could reduce or eliminate the burden
of complying with multiple state law independence
standards, as well as give greater legal clarity to
appraisers, other mortgage industry insiders, and
consumers. However, the proposals do not provide
for federal preemption of state law appraiser standards,
to the extent they exist or to the extent they are enacted
in the future.
One major challenge in establishing a uniform
appraiser independence rule, however, is striking a
balance between outlawing clearly harmful conduct
on the one hand, while leaving room for the healthy
communications between appraisers and lenders (and
other interested parties) that can lead to better appraisals
for a stronger mortgage credit market. Notably, none
of the key appraisal proposals contain a “no harm/no
foul” rule excluding liability where it ultimately is
determined that an appraisal by an allegedly “coerced”
appraiser in fact was materially correct. For all of
the hullabaloo about undue pressure on appraisers,
most large lenders have detailed appraisal review
procedures to reduce the risk that an appraisal will be
materially inaccurate – regardless of the circumstances
under which the appraiser produced the appraisal.
There might be lots of anecdotal information about
allegedly undue appraisal pressure, but that is a far
cry from establishing that the appraisals in fact were
inaccurate.
Appraiser independence clearly is a “hot button” topic
these days as part of the larger debate to understand
what led to the subprime crisis and what should be
changed to avoid future problems. Notwithstanding
Fannie Mae’s and Freddie Mac’s heightened attention to
appraisal fraud, it is not at all clear that undue pressure
on appraisers or the routine production of materially
inaccurate appraisals is systemic – particularly in
connection with “prime” mortgage loans. What seems
clear, however, is that many states have been unable
to develop effective mechanisms to resolve complaints
concerning appraisals within their state. Rather than
deal with the specific state issues that may exist, the
Cooperation Agreements try to develop a national
solution, but without involving the states (other than
New Y ork) in the process. For their part, the Frank
Bill, Dodd Bill and FRB Proposed Rule demonstrate
ways in which the federal government is trying to fill
the state void.
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Mortgage Banking Alert
The coming months will be critical for establishing new
appraisal rules that could impact the mortgage industry
for decades to come. Comments on the Valuation
Code will be fielded by Fannie Mae, Freddie Mac,
and OFHEO. Congress will continue to negotiate
and modify current legislative measures. The FRB
comment period on the FRB Proposed Rule is still
open (until April 8, 2008).
While these three proposals in final form may conform
closely to the Code, the fear of lenders is that the
government effectively will empower each of the
appraisers to cry “wolf” every time a lender questions
the quality of their work and consumers to sue lenders
every time an appraisal proves to be inaccurate. Will
a scheme designed to promote quality institutionalize
mediocrity instead? Will lenders become guarantors of
the value and condition of homes selected for purchase
by consumers? Time will tell, but, ironically, under
the Code and the federal proposals, the ultimate
accuracy of the appraisal is irrelevant in determining
the occurrence of a violation.
If you would like to weigh in on shaping new
appraisal policies, K&L Gates can assist you.
Please contact Larry Platt (202-778-9304; larry.platt@
klgates.com) or Lorna Neill (202-778-0217; lorna.
neill@klgates.com).
1 See
Home Value Protection Program and Cooperation
Agreements among the New York Attorney General’s Office,
Fannie Mae & Freddie Mac (respectively), and OFHEO,
March 3, 2008 (together, the “Cooperation Agreements”),
including the proposed Home Valuation Code of Conduct
(the “Valuation Code” or “Code”) available on the Internet
at
http://www.fanniemae.com/newsreleases/2008/4291.
jhtml?p=Media&s=News+Releases
Kris D. Kully & Laurence E. Platt, Regulating Wrongful
Lending: Protecting Borrowers from Themselves,
Mortgage Banking and Consumer Credit Alert, January
23, 2008.
http://www.klgates.com/newsstand/Detail.
aspx?publication=4242
3
Laurence E. Platt, R. Bruce Allensworth, Phoebe S. Winder,
Andrew C. Glass, David D. Christensen, Consumers Clog
Courts with Codified Care Claims, Mortgage Banking and
Consumer Credit Alert, January 30, 2008. http://www.
klgates.com/newsstand/Detail.aspx?publication=4260
4 L
aurence E. Platt, Kristie D. Kully, Kerri M. Smith, Was
Chicken Little Right?, Mortgage Banking and Consumer
Credit Alert, February 15, 2008. http://www.klgates.com/
newsstand/Detail.aspx?publication=4319
5 See Statement of Alan Hummel, Chair, Government
Relations, Appraisal Institute, “Ending Mortgage Abuse:
Safeguarding Homebuyers,” Hearing before the Subcomm.
on Banking, Hous., and Comm’y Dev. of the S. Comm. on
Banking, Hous. and Urban Affairs, 110th Cong. 4 (June
26, 2007) (citing the October Research Corporation’s 2007
National Appraisal Survey).
6 Pub. L. No. 101-73, 103 Stat. 183 (1989).
7 S
ee, e.g., 12 C.F.R. Part 34, subpart C; 12 C.F.R. § 208.18,
Part 225, subpart G; 12 C.F.R. Part 323; 12 C.F.R. Part
564; OCC, FRB, FDIC, OTS, Interagency Appraisal and
Evaluation Guidelines (Oct. 27, 1994); OCC, FRB, FDIC,
OTS, NCUA, “Frequently Asked Questions on the Appraisal
Regulations and the Interagency Statement on Independent
Appraisal and Evaluation Functions” (March 22, 2005).
8 “ Appraisal” is defined as “a written statement independently
and impartially prepared by a qualified appraiser setting
forth an opinion as to the market value of an adequately
described property as of a specific date(s), supported by the
presentation and analysis of relevant market information.”
12 C.F.R. §§ 225.62(a), 323.2(a), 34.42(a), 564.2(a).
Appraisals of regulated institutions must meet certain
minimum standards. See 12 C.F.R. §§ 225.64, 323.4, 34.44,
564.4. However, for certain transactions, the federal banking
agencies have determined that “[a] formal opinion of market
value prepared by a State licensed or certified appraiser is
not always necessary.” See, e.g., 12 C.F.R. §§ 225.63(b),
323.3(b), 34.43(b), 564.3(b); see also Interagency Appraisal
and Evaluation Guidelines (Oct. 27, 1994) (Anyone with
“real estate-related training or experience and knowledge
of the market relevant to the subject property” can perform
an “evaluation” and the financial institution is permitted
to determine in advance how comprehensive it wishes the
evaluation to be).
9 See 12 C.F.R. §§ 225.65, 323.5, 34.45, 564.5.
10 O
CC, FRB, FDIC, OTS, Interagency Appraisal and
Evaluation Guidelines (Oct. 27, 1994).
11 Id.
12 S
ee OCC, FRB, FDIC, OTS, NCUA, “Interagency Statement
on Independent Appraisal and Evaluation Functions” (Oct.
28, 2003).
13 See id.
14 S
ee OCC, FRB, FDIC, OTS, NCUA, “Frequently Asked
Questions on the Appraisal Regulations and the Interagency
Statement of Independent Appraisal and Evaluation
Functions” (March 22, 2005).
15 S
ee Appraisal Subcommittee, Federal Financial Institutions
Examination Council, Annual Report 2006 (delivered to
Congress on March 23, 2007), p. 7. Based on 23 on-site
state reviews, the Appraisal Subcommittee found that 14
states “did not resolve complaints expeditiously or did not
adequately document enforcement files”; two states did not
forward disciplinary actions to the Appraisal Subcommittee
March 2008 | 14
Mortgage Banking Alert
as the law requires; one state sanctioned appraisers on an
inconsistent basis; and one state failed to take appropriate
action on a complaint involving a person with a state
agency position.
Murphy (February 2006). http://www.klgates.com/files/
Publication/ba3e8cdf-bac7-4d84-8fcf-258043d76714/
Presentation/PublicationAttachment/abf01d6e-b78e-4560ad47-0cebc940ab2c/MBC0206.pdf
16 S
ee Lew Sichelman, “Most Fraud Charges Not Investigated,”
Realty Times (summarizing comments by Mark Simpson,
Director of Property Standards, Fannie Mae) (Oct. 18, 2006).
Of 860 cases that Fannie Mae reported to state regulators
during an 18-month period between 2001 and 2002, 469
cases had not been addressed as of October 2006.
21 S
ee OCC, FRB, FDIC, OTS, NCUA, “Frequently Asked
Questions on the Appraisal Regulations and the Interagency
Statement of Independent Appraisal and Evaluation
Functions” (March 22, 2005), Question #1.
17 S
ee Statement of Alan Hummel, Chair, Government
Relations, Appraisal Institute, “Ending Mortgage Abuse:
Safeguarding Homebuyers,” Hearing before the Subcomm.
on Banking, Hous., and Comm’y Dev. of the S. Comm. on
Banking, Hous. & Urban Affairs, 110th Cong. 4 (June 26,
2007).
22 See supra note 1.
23 Valuation Code, Part I.
24 Id.
25 Id. (emphasis added).
26 S
ee Cal. S.B. 223 (codified at Cal. Civ. Code § 1090.5) (eff.
Oct. 5, 2007).
18 S
ee, e.g., Ark. Code Ann. § 23-39-513; Cal. Civ. Code §
1090.5; Colo. Rev. Stat. §§ 6-7-717, 12-61-910.2; Iowa
Code § 543D.18A; Mich. Comp. Laws § 445.1634; Minn.
Stat. § 609.822; N.C. Gen. Stat. § 53-243.11; Ohio Rev.
Code §§ 1322.07, 1345.031, 4763.12; Tenn. Code Ann. §
45-13-108; W.Va. Code § 31-17-8; Wy. Stat. § 40-23-117.
27 U
SPAP Advisory Opinion 19 (AO-19: Unacceptable
Assignment Conditions in Real Property Appraisal
Assignments (Sept. 15, 1999) (emphasis added).
19 A
dditional states that have considered or are considering
appraiser independence measures include, among others,
Delaware, Georgia, Illinois, Missouri, New Hampshire,
and New York.
31 Id. Part III.
20 E
ven before yesterday’s announcement of the Cooperation
Agreements, attorneys general in Ohio and New York
had gained recent attention for pursuing actions against
alleged appraisal quality issues, although questions remain
regarding the substance of the allegations. See, e.g., Ohio
Office of Attorney General Marc Dann, 2007 Press Releases,
“Dann Targets Brokers and lenders for undue influence”
(June 7, 2007), http://www.ag.state.oh.us/press/07/06/
pr070607.asp (visited Feb. 24, 2008); Office of the New
York State Attorney General Andrew M. Cuomo, 2007
Press Releases, “NY Attorney General Sues First American
and Its Subsidiary for Conspiring with Washington Mutual
to Inflate Real Estate Appraisals” (Nov. 1, 2007), http://
www.oag.state.ny.us/press/2007/nov/nov1a_07.html
(visited Feb. 24, 2008). Perhaps the most influential state
enforcement action prior to the Cooperation Agreements
was the Ameriquest Settlement Agreement of 2006. This
Agreement between Ameriquest Mortgage Company (and
related affiliates) and state attorneys general and financial
regulators contained numerous provisions on appraiser
independence. See Settlement Agreement between ACC
Capital Holdings Corporation et al. and State Attorneys
General, State Financial Regulators and California District
Attorneys (Jan. 23, 2006), pp. 22-29; see also “Visions of
Mortgage Reform Underlie Multi-State Attorneys General
Settlement”, Mortgage Banking/Consumer Finance
Alert, by Ronald W. Stevens, Laurence E. Platt, Erin E.
29 Valuation Code, Part I.
30 See id.
32 HUD Statements of Policy 1999-1 and 2001-1.
33 RESPA defines “settlement services” as
[A]ny service provided in connection with a real estate
settlement including, but not limited to, the following:
title searches, title examinations, the provision of title
certificates, title insurance, services rendered by an
attorney, the preparation of documents, property surveys,
the rendering of credit reports or appraisals, pest and
fungus inspections, services rendered by a real estate agent
or broker, the origination of a federally related mortgage
loan (including, but not limited to, the taking of loan
applications, loan processing, and the underwriting and
funding of loans), and the handling of the processing, and
closing or settlement.
12 U.S.C. § 2602 (emphasis added).
Regulation X, implementing RESPA, defines “settlement
services” as
[A]ny service provided in connection with a prospective or
actual settlement, including, but not limited to, any one or
more of the following:
(1) Origination of a federally related mortgage loan
(including, but not limited to, the taking of loan applications,
loan processing, and the underwriting and funding of such
loans);
(2) Rendering of services by a mortgage broker (including
counseling, taking of applications, obtaining verifications
March 2008 | 15
Mortgage Banking Alert
and appraisals, and other loan processing and origination
services, and communicating with the borrower and
lender);
(3) Provision of any services related to the origination,
processing or funding of a federally related mortgage
loan;
(4) Provision of title services, including title searches,
title examinations, abstract preparation, insurability
determinations, and the issuance of title commitments and
title insurance policies;
(5) Rendering of services by an attorney;
(6) Preparation of documents, including notarization,
delivery, and recordation;
(7) Rendering of credit reports and appraisals;
(8) Rendering of inspections, including inspections
required by applicable law or any inspections required by
the sales contract or mortgage documents prior to transfer
of title;
43 See id. § 703.
44 See supra note 8.
45 H.R. 3915, §§ 702, 703(m) (emphasis added).
46 H
.R. 3915, § 702 (emphasis added). A “qualified appraiser”
is defined as a state certified or state licensed appraiser who
performs appraisals in conformity with USPAP and Title XI
of FIRREA. See id. § 701.
47 Id. § 703(m) (emphasis added).
48 I d. § 702 The Bill also instructs federal agencies (the FRB,
OTS, OCC, FDIC, NCUA, and FTC) to issue regulations
that further specify “unfair and deceptive practices.” See
H.R. 3915, § 702.
49 See id. §§ 702, 703(m).
50 S.B. 2452, § 401.
51 Id.
52 Id. § 401 (emphasis added).
(9) Conducting of settlement by a settlement agent and any
related services;
53 Id.
(10) Provision of services involving mortgage insurance;
55 Id. at 1701, 1726.
(11) Provision of services involving hazard, flood, or other
casualty insurance or homeowner’s warranties;
56 I d. For purposes only of the FRB’s proposed appraisal
measures, “mortgage broker” is defined as a person who
“for compensation or other monetary gain arranges,
negotiates, or otherwise obtains an extension of consumer
credit, but is not an employee of a creditor,” and expressly
includes any person meeting this definition who “makes
use of ‘table funding.’” Id. at 1726, 1734.
(12) Provision of services involving mortgage life,
disability, or similar insurance designed to pay a mortgage
loan upon disability or death of a borrower, but only if such
insurance is required by the lender as a condition of the
loan;
(13) Provision of services involving real property taxes or
any other assessments or charges on the real property;
(14) Rendering of services by a real estate agent or real
estate broker; and
(15) Provision of any other services for which a settlement
service provider requires a borrower or seller to pay.
24 C.F.R. § 3500.2 (emphasis added).
34 Valuation Code Part VI.
35 See Cooperation Agreements, Part I.1.
36 See Valuation Code, Part VI.
37 See id.
38 See id. Parts III and V.
39 Id. Part III.
40 See id. Part VI.
41 S
ee Economic Stimulus Act of 2008, H.R. 5140 (enacted
Feb. 7, 2008).
42 See H.R. 3915, § 703(m).
54 73 Fed. Reg. 1672-1735 (Jan. 9, 2008).
57 Id. at 1726 (emphasis added).
58 “ Appraiser” is defined as “a person who engages in the
business of providing assessments of the value of the
dwellings” and includes persons that employ, refer, or
manage appraisers and their affiliates. See id. at 1701,
1726.
59 Id.
60 Id.
61 Cooperation Agreements, Part II.5.
62 Id.
63 See Valuation Code, Part VII.
64 Id.
65 Id. Part IX.
66 S
ee H.R. 3915, §§ 703-704. These include, among others,
broadening the enforcement mandate of the Appraisal
Subcommittee to include protecting consumers from
improper appraisal practices; requiring the Appraisal
Subcommittee to detail its audits of, and actions against,
state appraisal agencies; increasing enforcement resources
March 2008 | 16
Mortgage Banking Alert
by raising the annual appraiser national registry fee; and
requiring federal regulators to undertake a study of how to
improve appraisal rule compliance and enforcement. See
id.
67 See id. § 702.
68 S
ee id.; see also id. § 701 (creditors who “willfully” fail to
obtain an appraisal for a HOEPA loan in accordance with
the requirements of Section 701 are liable to the consumer
for $2,000).
69 S
ee id. §§ 702 (for dwelling-secured mortgage loans in
particular) and 703(m) (for real estate mortgage loans in
general).
83 S
ee 73 Fed. Reg. 1672-1735, 1716-1717 (citing 15 U.S.C.
§§ 1639, 1640).
84 C
ooperation Agreements, “Whereas” clauses (emphasis
added).
85 Id.
86 See Valuation Code, Part VII.
87 Id. Part II.
88 S
ee 15 U.S.C. §§ 1691 et seq. (implemented by Regulation
B, 12 C.F.R. Part 202).
89 See 12 C.F.R. § 202.14.
70 See id. § 703(m).
90 See id.
71 See id.
91 See H.R. 3915, § 703(a).
72 See S.B. 2452, § 401.
92 F
or HOEPA loans, the Frank Bill requires creditors to
give consumers one free copy of the appraisal at least “3
days” before closing. Id. § 701. For any other extension
of credit secured by an interest in real estate (presumably
including all other residential mortgage loans), the Frank
Bill requires the creditor or “other mortgage originator” to
“make available” to the applicant a copy of all appraisal
valuation reports no later than “3 business days” prior to
closing. Id. § 705.
73 See id.
74 S
ee id. If a retrospective appraisal shows that the original
appraisal exceeded the true market value of the home by
10 percent or more, the holder of the loan must recast the
loan to a loan amount that is at the same loan-to-value
which the original loan would have been. The holder must
apply any excess payments made prior to the recasting to
the reduced loan amount. See id. The “regulatory agency
which oversees appraisers in the jurisdiction in which the
collateral is located” may issue rules permitting the 10
percent tolerance level to deviate by 2 percent “where local
conditions warrant.” Id.
75 S
ee id. Under the Dodd Bill, no appraiser could charge,
seek, or receive compensation for an appraisal unless the
appraisal is covered by a “qualifying bond” of not less than
one percent of the aggregate value of all homes appraised
by the appraiser for home mortgage loans in the calendar
year preceding the date of the transaction. See id.
76 See 15 U.S.C. §§ 1601 et seq.
93 S
ee H.R. 3915, § 701. At the time of the initial mortgage
application, creditors must provide consumers a notice that
“any appraisal prepared for the mortgage is for the sole
use of the creditor,” and that the consumer may choose to
have a separate appraisal conducted at the consumer’s own
expense. Id.
94 S
.B. 2452, § 401. The Dodd Bill defines the appraiser
“Standard of Care” as follows:
• For each home mortgage loan transaction, each appraiser
must act with reasonable skill, care, diligence, and in
accordance with the highest standards.
77 S
ee 73 Fed. Reg. 1672-1735, 1716-1717 (citing 15 U.S.C.
§§ 1639, 1640).
• Each appraiser must act in good faith and with fair
dealing in any transaction, practice, or course of business
associated with the transaction.
78 See id.
Id.
79 See, e.g., U.S. v. Neustadt, 366 U.S. 697 (1961).
Appraiser “Duties” are identified as follows:
80 S
ee, e.g., Larsen v. United Fed. Sav. & Loan Ass’n of Des
Moines, 300 N.W.2d 281, 283-284 (Iowa 1981); Costa v.
Neimon, 366 N.W.2d 896, 900 (Wis. App. 1985); Rubin
v. Century 21 Peterman Real Estate, Inc., 857 P.2d 1059,
1061-1062 (Wash. App. 1993)
• All home mortgage loan appraisals must be accurate and
reasonable.
• An appraiser cannot have any direct or indirect interest
in the property to be appraised, the real estate transaction
prompting the appraisal, or the home loan involved in the
transaction.
81 S
ee H.R. 3915, § 702; see also id. § 701 (creditors who
“willfully” fail to obtain an appraisal for a HOEPA loan in
accordance with the requirements of Section 701 are liable
to the consumer for $2,000).
95 73 Fed. Reg. 1672-1735, 1726.
82 See S.B. 2452, § 401.
96 Id.
Id.
March 2008 | 17
Mortgage Banking Alert
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