Editor’s Note: Here’s what no one is saying openly: when it comes to customary and reasonable fees, the Interim Final Rule released last October is not in the spirit of the Dodd-Frank legislation it is intended to implement.
Decoding Customary and Reasonable Fees
by David Brauner, Editor
Congress, recognizing that quality reports are dependent on paying appraisers “fairly,” wrote a customary and reasonable fee provision into Dodd-Frank, and going further, stipulated that any independent studies to determine such fees should specifically not take into consideration fees paid by appraisal management companies (AMCs), suggesting their acknowledgment that AMC fees are artificially low.
The Interim Final Rule (IFR), provides two distinct presumptions of compliance, with respect to customary and reasonable fees under Dodd-Frank, saying that AMCs, lenders and others can meet the standard by satisfying either presumption, without having to meet both. The first presumption outlines “customary,” which seems to mean “recent” fees paid to appraisers by AMCs- the status quo in other words. The second presumption, which outlines “reasonable,” calls for the use of independent fee studies which specifically exclude fees paid by AMCs. So not only do the two presumptions of compliance contradict each other but by making compliance, in effect, customary or reasonable, the spirit of Dodd-Frank seems to be missed, if the status quo is upheld. (Find Interim Final Rule, 2010 at WorkingRE.com, Sidebar Info.)
Senior Counsel at the Federal Reserve told WRE that reliance on the first presumption of compliance alone- that is, fees that appraisers are currently accepting, is not a “safe harbor” if an AMC is challenged over customary and reasonable fees. (Federal Reserve Board policy does not permit staff to be quoted by name.) She points to this language in the IFR: “The Board understands that some AMCs have begun requiring fee appraisers to agree that the fee is customary and reasonable as a condition of obtaining the appraisal assignment. In these situations, the Board believes that an appraiser’s agreement that a fee is customary and reasonable is an unreliable measure of whether the fee in fact meets the statutory standard.”
The Board has collected comments from appraisers and will release a Final Rule, on or before the April 1, 2011 implementation date.
Passing the Smell Test
It is estimated that AMCs controlled about 10-15 percent of mortgage appraisals prior to the Home Valuation Code of Conduct (HVCC) and about 70-80 percent immediately thereafter. Many question whether this represents natural market forces at work. Bill Garber, Director of Government and External Relations, Appraisal Institute, told WRE, “The actions of some firms may be bordering on anti-competitive. When roughly 70 percent of the business falls in the hands of a handful of firms who have nearly the same business model, some questions need to be asked, at a minimum. To me, it’s shocking to hear that banks don’t know how much they’re paying for AMC services. Bank management should be deeply concerned about potential RESPA violations, as charges assessed on consumers must be consistent with actual services performed. I doubt a situation where an AMC, that is conducting an administrative function that is largely automated, and that charges more than an actual appraiser who’s providing a professional service, passes the smell test.”
There is anti-competitive language in the IFR, which appraisers may be able to hang their hats on. Garber also notes that State Attorneys General have been empowered under the regulation to enforce its provisions, which effectively “puts 50 more cops on the beat.”
The following, which illustrates part of the problem faced by appraisers, is excerpted from comments by Margo Henson, IFA sent to the Federal Reserve Board during the current comment period: “A homeowner saw my website and contacted me to do her appraisal. I give a $50 coupon if you order online. I told her she couldn’t designate me as the appraiser anymore but she insisted that I call her lender. The lender also thought I could call the AMC that they use, so I persisted and phoned two or three times until I reached someone. They informed me that neither the homeowner nor the lender could pick me and that they pay under $250 and ‘have lots of appraisers who will work for that amount.’ So, all my marketing and relationships are gone- I can’t negotiate my fees. AMCs are setting my fees.”
Everybody Knows What’s Right
Over 8,100 appraisers have completed the OREP/Working RE Customary and Reasonable Fee Survey and at least that many have viewed the results, which are now available free at WorkingRE.com, Surveys (the survey is closed). WRE has not received a single complaint disputing any of the results. The take away may be that appraisers completed the survey truthfully and in good faith and that, within a range, there is fairly broad agreement among appraisers about what is customary and reasonable in a specific market area for a particular report. Indeed, you will find the survey results to be largely clustered in the same fee categories for a given product and area. This is not to suggest that “setting” fees or restraining competition is appropriate but it does seem to support the notion that a baseline fee structure as per Dodd-Frank is possible.
The truth is, most appraisers have adjusted to the new world and many have more business than they can handle at the moment, even if they are working harder and longer for less money. That said, it does not mean that the current situation is good for the profession or the public, who is overpaying for appraisal services and may be receiving reports of diminished quality due to fee and turnaround time pressures, according to results from the Working RE/OREP HVCC Talkback Fee Survey (HVCC Hits: Appraisers Talkback, at WorkingRE.com, Library, Issue 22).
AMCs are evolving and the best will survive. Some leverage will swing back to appraisers as their ranks continue to thin and those with unique knowledge and expertise find their services in higher demand. Communication between AMC staff and appraisers will improve as things become more standardized and fees will rise for appraisers who position themselves correctly. But if you’re an appraiser, it would be nice to have the intent of the law enforced today.
You can find the Interim Final Rule 2010 at WorkingRE.com, Sidebar Info.