Editor’s Note: Two blockbusters last week: The Feds released the Interim Final Rule regarding implementation of Dodd-Frank and Fannie Mae released a new Seller Guide for life after HVCC (Home Valuation Code of Conduct). In an exclusive interview with WRE, a Senior Attorney at the Board of Governors of the Federal Reserve helps shed some light on the meaning of the Rule and customary and reasonable fees. Next issue of WRE: release of the initial results of the Working RE/OREP.org Customary and Reasonable Fee Survey. Over 5,400 have contributed so far with data on eight different reports, including average turnaround times, in 365 metropolitan areas.
Feds Respond: Customary and Reasonable Fees
by David Brauner, Editor
Last week, the Federal Reserve Board released the Interim Final Rule (IFR) regarding implementation of Dodd-Frank (see WorkingRE.com, Sidebar: Interim Final Rule, 2010). But that doesn’t help appraiser Jason McDougal today. McDougal’s recent experience is a perfect illustration of what needs to be fixed.
“This AMC low-balled me on the fee. I asked for an increased fee and the result was to reassign it to another appraiser in seconds.” The email thread shows an AMC representative asking McDougal why he wants more (for a field review) than the usual fee of $250. McDougal answers that the Veterans Administration’s published “customary and reasonable” fee for a field review in that market area is $275. The reply from the AMC is swift: “Unfortunately we cannot go that high. I will re-assign this order. Thank you.”
McDougal said, “They asked the fee to be $229.10, which is lower than their normal fee of $250. When I emailed to get an explanation, they refused to discuss it and would not take my call. I have not received any orders from them since.”
While language supporting appraiser independence is crystal clear in the recently released IFR, as it is in Fannie’s Seller Guide, guidance on the customary and reasonable fee requirement in Dodd-Frank is opaque. In any case, compliance is mandatory as of April 1, 2011. In the IFR, the Board asks for public comments on these issues. Now is the time to read the IFR and submit your comments (see below).
Framework for Change: Customary and Reasonable Fees
The good news in the IFR is that the Board clearly is aware of the many unintended consequences of the Home Valuation Code of Conduct (HVCC), as reported via appraiser feedback, including from the WRE/OREP.org, HVCC Appraiser Talkback Survey. The authors comprehend what is going on in the marketplace and seem to understand the issues from an appraiser’s perspective. Regarding implementation of the customary and reasonable fee requirement, however, the Board in this document is circumspect, laying out issues and providing a framework rather than setting rigid rules in place. Aside from the complexity of the issue, the starting point is that regulators can’t set fees, as a Senior Attorney; Division of Consumer and Community Affairs, Board of Governors of the Federal Reserve System tells WRE in an interview after release of the IFR (Reserve Board policy is that staff not be quoted by name). Therefore, what happens with customary and reasonable fees may be a process that is worked out over time.
The IFR notes that the “marketplace should be the primary determiner of the value of appraisal services, and hence the customary and reasonable rate of compensation for fee appraisers,” similar to HUD’s stance, but there are many pages of qualifications, which seem to acknowledge that “letting the market decide” is not an adequate solution by itself. The report states, for instance, that under-market AMC fees should not be considered “customary and reasonable,” even if there are appraisers willing to accept them. The document also states and restates that for fees to be customary and reasonable they must be free of “anticompetitive influences.” The AMCs must “not be engaged in any anticompetitive actions, in violation of state or federal law, that affect the appraisal fee, such as price-fixing or restricting others from entering the market.” In another place they write, “The Board recognizes that if some creditors or AMCs dominate the market through illegal anticompetitive acts, ‘recent rates’ may be an inaccurate measure of what a ‘reasonable’ fee should be.”
In broad terms, “customary” means recent fees (within one year) and “reasonable” means adjusted as necessary for issues such as geographic location, complexity/type of property, scope of work, the time in which the appraisal services are required to be performed, the appraiser’s qualifications, experience, professional record and the quality of work. The Senior Attorney told WRE that AMCs and others will have to have some basis for not accepting an appraiser’s fee other than the fact that someone is willing to take something lower. There are two parts to the equation, she said: first is the customary and reasonable component as defined above, which takes into consideration the type of appraisal, location, appraiser’s experience, etc. The second part is the use of a recent fee study that excludes AMC appraisals.
If McDougal were unhappy, he could submit a complaint to the appropriate regulator, according to the Senior Attorney. AMCs that are challenged under this rule will have to document the basis for the fees they are paying. If the AMC was working for a national bank, for instance, the complaint would go to the Office of the Comptroller of the Currency. If the AMC were “free standing,” the complaint would go to the Federal Trade Commission.
Where the Rubber Hits the Road
The concept of customary and reasonable fees is complicated; appraisers can’t agree that it is valid or even possible. Many bristle that it will limit their compensation rather than increase it or object to further government intrusion into their business. The IFR spends many pages considering all aspects of the issue, however, clearly allowing for higher fees given the complexity of the assignment and the experience and “quality” of the appraiser.
The main issue will be one of enforcement. In the wake of Dodd-Frank’s customary and reasonable fee requirement and despite the 132-page IFR, it is still unclear whether AMCs will be permitted to continue to shop for the lowest fees, over the objections of appraisers such as McDougal, who request higher fees based on what is customary and reasonable, such as the VA schedule. According to the Senior Attorney, under this rule, AMCs would have to show some basis for the fees they offer or turn down.
About the Author
David Brauner is Editor of Working RE magazine and Senior Broker at OREP.org, a leading provider of E&O Insurance for appraisers, inspectors and other real estate professionals in 49 states (OREP.org). He has covered the appraisal profession for over 16 years. He can be contacted at email@example.com or (888) 347-5273. Calif. Insurance Lic. #0C89873.
Submit Comments on Interim Final Rule
You may submit comments, identified by Docket No. R- 1394 and RIN No. AD-7100-56, by any of the following methods:
· Agency Web Site: http://www.federalreserve.gov. Follow the instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
· Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments.
· E-mail: firstname.lastname@example.org. Include the docket number in the subject line of the message.
· Fax: (202) 452-3819 or (202) 452-3102.
· Mail: Address to Jennifer J. Johnson, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue, N.W., Washington, DC 20551.
All public comments will be made available on the Board’s web site at www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as submitted, unless modified for technical reasons.