Working RE News: C&R Fees: Why it isn't Working... Yet

"The guarantee of customary and reasonable fees, enshrined into law, is today just a bad joke for many appraisers, some five months after the provision in Dodd-Frank took effect. Why? A recent phone conversation with a well-intentioned state regulator sheds some light."

Editor’s Note: The concept of ensuring one group of professionals a “fair” fee is unprecedented, which is why no one has figured out a way to make it work- yet.

The guarantee of customary and reasonable fees, enshrined into law, is today just a bad joke for many appraisers, some five months after the provision in Dodd-Frank took effect. Why? A recent phone conversation with a well-intentioned state regulator sheds some light.

This highly-placed state appraisal board official is grappling with proposed appraisal management company (AMC) legislation in his state. He wants to include customary and reasonable fee language for appraisers but can’t find a way to make it work (and like so many others these days wishes to remain unidentified).

AMC licensing regulation at the state level, as mandated by Dodd-Frank, is the new frontier and offers great hope for the profession. Appraiser-friendly AMC licensing laws can address many ills, such as guaranteeing timely payment by AMCs, the competency/licensing of AMC staff, making third-party indemnification agreements illegal and making AMCs demonstrate proper cause, when challenged, for the removal of an appraiser from a fee panel. But what it can’t do, it seems, is solve the customary and reasonable fee conundrum.

The issue of customary and reasonable fees did not exist before the Home Valuation Code of Conduct (HVCC) catapulted AMCs to dominance in the marketplace. Before HVCC, appraisers could compete without restriction. Today, the moniker “independent fee appraiser” rings with a bitter irony; many appraisers (and ex-appraisers) will tell you they became much less independent after HVCC. But what’s the fix?

The concept of ensuring one group of professionals a “fair” fee is unprecedented, which is why no one has figured out a way to make it work- yet. Think of the mountains that were moved to get such a provision into law, over the opposition of the powerful banks. But on this issue lawmakers clearly did side with those advocating appraiser interests and agreed that a radical fix (C&R fees) is required to redress an equally unprecedented consequence: by edict of one attorney general in one state, many appraisers found themselves suddenly unable to do business with their own clients and competing for work from anonymous AMCs, not based on their reputation, work product or competency but, in many cases, on speed and price. This it turns out, is not so good for consumers, who also are paying more for appraisals since HVCC.

So what went wrong? According to Darwin Ernst, SRA, who sits on the Montana State Appraiser Board and participated in the lobbying efforts that led to the appraiser sections of Dodd-Frank, the current state of affairs is an unfortunate mistake. “The Interim Final Rule provides AMCs with two ways by which they are presumed to comply with the requirements for the payment of a customary OR reasonable fee,” said Ernst. “Unfortunately, one of the presumptions allows AMCs to use the fees they were paying prior to Dodd-Frank as the basis for customary and reasonable. This was an unfortunate misinterpretation of the amendment to the Truth in Lending Act (TILA) by the bank regulatory agencies that were under intense pressure by lobbyists to maintain the profit margins of AMCs. Ultimately, the customary and reasonable fee provision intended to help protect the public trust was watered down to the current interpretation of compliance, which has allowed AMCs to keep their profit margins and not pay appraisers customary AND reasonable fees.”

But Ernst sees hope. “The Consumer Financial Protection Agency (CFPA), now in charge, needs to make the changes to these rules, so that compliance includes a customary and reasonable fee to fulfill the intent of Dodd-Frank and protect consumers,” Ernst says. “I believe they will eventually do the right thing, but who knows how long it might take. They have a daunting task but the implementation of rules that meet the intent of the customary and reasonable fee provision will go a long way toward correcting a major mistake by the drafters of the interim rules. Everyone knows there is a difference between the words ‘or’ and ‘and.’ Let's just hope the CFPA recognizes the error and makes a change sooner rather than later.”

The Montana AMC licensing statute, which Ernst helped write, requires that AMC fee-panel appraisers, "Be compensated at a customary and reasonable rate when the appraisal management company is providing services for a consumer credit transaction secured by the principal dwelling of a consumer..." But what does that mean? This brings us back to the frustrated appraisal board official trying to enact a similar provision in his state. The regulator says he can’t get to first base with customary and reasonable fees because mandating a fee is unprecedented for any trade or profession. Critics ask him: why stop at appraisers? Why not dictate how much a haircutter should be paid or a car mechanic?

While the language did pass in Montana, the miss-interpretation of “customary” or “reasonable” makes enforcement convoluted, according to Ernst. The customary and reasonable fee provision within Dodd-Frank was included as an amendment to TILA. Because it is an amendment the regulatory oversight rests partially with the various state attorneys general and not the state appraiser boards (or commissions). For now, Ernst says, state agencies that wish to support the concept of customary and reasonable fees are forced to rely on the state attorneys general to enforce any infraction. The result is that state agencies that receive complaints regarding C&R fees will likely refer them directly to their state attorney general. It is possible that the state appraiser boards can be involved in the investigation of complaints, Ernst says, but the actual enforcement has to come from the state attorney general and/or a federal agency.

It appears appraisers are in a transition period with respect to the enforcement of the customary and reasonable fee provision of Dodd-Frank; in neutral until someone can figure a way to give it some gas. Many appraisers report AMC fees creeping up, however, due to “market driven forces” - they are digging in and refusing to work less.

Appraisers also report that filing complaints gets results, at least if one is having trouble getting paid at all. If you’re filing a complaint of any kind and you know it’s a federally-regulated bank, you can file with the Office of the Comptroller of the Currency (OCC): http://www.mortgagesfinancingandcredit.org/mortgages/complaints-regulatory/occ2.htm.

If you’re not sure where to file, (former) Federal Reserve Board employees with this expertise are now at the CFPA, according to a Fed Board spokesperson. At press time, it could not be confirmed from the CFPA that they are the place for information on where and how to file complaints, now that authority has transitioned to them from the Fed Board. You can call the CFPA at (202) 435-7000. Their complaint page is: http://www.consumerfinance.gov/get-help-now/consumer-questions-and-complaints/.

You can post your experiences with filing C&R Fee complaints at the OREP.org/Working RE Challenging Low Fees Blog. You can learn about the good, bad and ugly AMCs at the AMC Rater Blog, also sponsored by OREP.org/Working RE.

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 dbrauner@orep.org or (888) 347-5273. Calif. Insurance Lic. #0C89873.