Elected officials, consumer advocates, industry representatives and others have diligently fretted over the numerous causes of the recent meltdown in the mortgage market, all pointing to different reasons why the market imploded. One of the causes most frequently cited includes the willingness of some appraisers of real estate to bend their appraisals of the value of a consumer’s home to the amount of the mortgage the lender wanted to originate. As a direct result of this willingness to sacrifice appraisal independence, a plethora of reform initiatives have emerged, the most prominent of which includes the agreement struck between New York Attorney General Andrew Cuomo, Fannie Mae and Freddie Mac that resulted in the Home Valuation Code of Conduct (HVCC).
The HVCC intended to eliminate a lender’s ability to exert any undue influence over the appraisal process by prohibiting a number of scare tactics used by some unscrupulous lenders to get the appraisal dollar amount to match the loan amount. In the wake of this reform, appraisal management companies (AMCs) emerged to take over the function of communicating about the appraisals lenders want with the appraisers. Such AMCs recruit appraisers to serve in a pool of appraisers available for work, negotiate the fees and service level expectations with those appraisers, track and determine the status of orders for appraisals, and engage in quality control of a completed appraisal prior to the delivery of the appraisal to the lender that ordered the appraisal. Because the AMCs act outside of state appraisal licensing laws and the HVCC as a middleman on behalf of a lender, such AMCs can potentially engage in abusive behavior that would call into question the integrity of the appraisal process. Now, professional organizations representing licensed real estate appraisers have developed a reform initiative that put the AMCs directly in the cross hairs of state regulation.
To remedy the current lack of oversight of the AMCs, the Appraisal Institute, an organization of more than 25,000 appraisers that promotes high standards of ethics and professionalism in the appraisal industry, has promulgated its “Appraisal Management Company Registration & Regulation Model Act” to rein in the AMCs and protect both consumers and appraisers against potential abuses. According to the Institute, the AMCs present themselves as appraisal service providers to the public and charge consumers appraisal fees without actually subjecting themselves to formal appraisal regulation. The model legislation promoted by the Institute brings the AMCs under the purview of state regulatory agencies and
- Requires the registration of AMCs operating in a state that order residential appraisals from independent appraisers. The model legislation provides exemptions for “in-house” appraisal departments, AMCs that order less than 10 appraisals in a state in a year, and appraisers that subcontract to other appraisers on an incidental basis;
- Prohibits individuals who have had an appraiser license or certification denied, refused, cancelled or revoked from owning an AMC;
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Requires the identification of a “controlling person” for each AMC;
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Requires AMCs to have systems in place to verify that they only utilize licensed or certified appraisers, and that all appraisals comply with the Uniform Standards of Professional Appraisal Practice;
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Enacts requirements to protect appraisers from coercion or inappropriate influence from AMCs; and
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Provides for the adjudication of disputes between AMCs and independent appraisers.
A number of states, including California, Nevada, New Mexico, Utah, Arkansas, and Louisiana, have already adopted a form of AMC regulation. Legislation or regulations are pending in a handful of other states, including Florida, Hawaii, Indiana, Kentucky, Mississippi, Missouri, Oklahoma, Virginia, Nebraska, and Ohio. The proposed legislation in these states would require registration or licensing of the AMC as well as impose substantive prohibitions on the AMCs. For example, Arizona’s Senate Bill 1351 would prohibit any employee, director, officer or agent of an appraisal management company from influencing or attempting to influence the development, reporting or review of an appraisal through coercion, extortion, collusion, compensation, instruction, inducement, intimidation, bribery or any other manner, including:
- Withholding or threatening to withhold timely payment for an appraisal.
- Withholding or threatening to withhold future business for an independent appraiser or demoting or terminating, or threatening to demote or terminate, an independent appraiser.
- Expressly or impliedly promising future business, promotions or increased compensation for an independent appraiser.
- Conditioning the request for an appraisal service or the payment of an appraisal fee or salary or bonus on the opinion, conclusion or valuation to be reached or on a preliminary estimate or opinion requested from an independent appraiser.
- Requesting that an independent appraiser provide an estimated, predetermined or desired valuation in an appraisal report or provide estimated values or comparable sales at any time before the independent appraiser’s completion of an appraisal service.
- Providing to an independent appraiser an anticipated, estimated, encouraged or desired value for a subject property or a proposed or target amount to be loaned to the borrower, except that a copy of the sales contract for purchase transactions may be provided.
- Providing to an independent appraiser, or any entity or person related to the appraiser, stock or other financial or nonfinancial benefits.
- Allowing the removal of an independent appraiser from an appraiser panel, without prior written notice to the appraiser.
We expect that states will continue to push for regulation of the AMCs to shore up the protections that fell into place in the appraisal industry as a result of the mortgage market meltdown.
Catherine Brennan is a partner in the Maryland Office of Hudson Cook, LLP. Basis Points readers can reach Cathy at 410-865-5405 or by email at cbrennan@hudco.com.