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Decoding Customary
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Editor’s Note: Federal Reserve Board sheds new light on the Customary and Reasonable Fee provision of Dodd-Frank. Survey data may be important.  

 

Fed Board Update: Customary and Reasonable Fees

By David Brauner

 

As the April 1, 2011 implementation date for Dodd-Frank approaches, there is new light shed on Federal Reserve Board’s thinking regarding the implementation of the customary and reasonable fee provision of the legislation.

The Federal Reserve Board, tasked with implementing the landmark Dodd-Frank Financial Reform legislation passed last year, laid out its guidance in the “Interim Final Rule” published in October 2010 (find it at WorkingRE.com, Sidebar: Interim Final Rule, 2010).  Since then, appraisers have been struggling to understand how the customary and reasonable fee directive will be enforced. Authors of Dodd-Frank clearly and specifically include language guaranteeing “customary and reasonable fees” for appraisers as a vital element for assuring appraisal quality. How this will be accomplished, however, remains murky.
 

To date, appraisers have reported a few instances of appraisal management companies (AMCs) raising fees- for whatever reason. In general, appraisers report a disparity of fees paid- some fairer than others, depending on the AMC and various market factors. Some appraisers report working with AMCs that have always paid “fairly,” though what is “fair” is a contentious issue among appraisers.     

 

The Board, in the IFR, addresses the customary and reasonable fee directive by providing two distinct presumptions of compliance, saying that AMCs, lenders and others can meet the customary and reasonable fee standard by satisfying either presumption, without having to meet both. The first presumption outlines “customary,” which seems to mean “recent” or the current 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, by making compliance customary or reasonable, thus enabling the status quo, the spirit of Dodd-Frank seems to be missed. This is where we are until now.


(story continues below)

 

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(story continues)

 

New Light
In a recent interview with WRE, a Federal Reserve Board spokesperson indicates that the Board is well aware of the continued “controversy” surrounding customary and reasonable fees, as evidenced by the feedback they received during the public comment period, which ended December 27, 2010 (to view comments, visit WorkingRE.com, Sidebars: Link to IFR Comments). The spokesperson said the Board is analyzing the comments and that no decisions or changes have been made. (Federal Reserve Board policy does not permit staff to be quoted by name.) Any comments will be announced in the form of a press release, she said. 

The Board staff attorneys did provide new clarification to WRE, however, which seems to point appraisers toward an appeal process if they feel AMCs are not paying customary and reasonable fees. According to the Board spokesperson, “Someone can rebut the presumption(s) of compliance with evidence that a fee is not reasonable or customary for a reason other than a condition addressed in a presumption of compliance. What evidence supports an allegation depends on the facts and circumstances of a particular case. The rule addresses compensation paid in a particular geographic market.”

This appeal or rebuttal process may be a mechanism set in place by the Board to encourage some “self correction” by AMCs or face an onslaught of complaints that apparently will be taken seriously. This appears to be the Board’s strategy, rather than attempting the impossible task of “setting” fair fees.

 

(story continues below) 

 

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(story continues)
 

Survey Data
One potential source of data that appraisers may be able to use to challenge low fees is the OREP.org/Working RE Customary and Reasonable Fee Survey, which recently surged past the 10,000 appraiser threshold and is nearing the 11,000 mark. The survey includes 365 Metropolitan Statistical Areas nationwide plus rural areas for each state; eight products/services, including reviews and FHA reports, and turnaround times. Pressure for unrealistic turn times remains a sore point for many appraisers who complain that it is hurting appraisal quality. If you have not contributed your fee data, it is not too late. The survey is ongoing. The results are available and free to all (visit WorkingRE.com for results and to take the survey). It’s good business to know what other appraisers in your area are reporting. 

Regarding the filing of complaints, the Board spokesperson told WRE, “Violations should be reported to: (1) the creditor's federal supervisory agency (e.g., Federal Reserve Board, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, etc.), if the allegation is about a creditor that is a depository institution; (2) the FTC, if the allegation is about a person (creditor or its agent) that is not a depository institution; or (3) the state Attorney General.”

The Board spokesperson also underlined the following from the IFR, which seems to support the notion that fees currently paid by AMCs are not to be considered customary and reasonable by virtue of their acceptance in the marketplace: “[T]he 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."


(story continues below) 

 

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(story continues)

 

Authority Transfer

The Board spokesperson also points out that under the Truth in Lending Act, enforcement of Dodd-Frank transfers from the Federal Reserve Board back to the Inter Agencies (OCC, FDIC, etc.), who can then offer further changes. The designated date for “transferring authority to implement the Truth in Lending Act and other ‘enumerated consumer laws’ under Title X of the Dodd-Frank Act (see page 1597) currently is July 21, 2011.” (Find link below to the Federal Reserve Board's table of statutory deadlines for action and other information on regulatory reform.)

The discussion of the rulemaking authority is on pages 2811-2189 of Dodd-Frank and excerpted here (you can view it online at WorkingRE.com, Sidebar: Dodd-Frank Act):

‘‘(g) RULES AND INTERPRETIVE GUIDELINES.—
‘‘(1) IN GENERAL.—Except as provided under paragraph (2), the Board, the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the National Credit Union Administration Board, the Federal Housing Finance Agency, and the Bureau may jointly issue rules, interpretive guidelines, and general statements of policy with respect to acts or practices that violate appraisal independence in the provision of mortgage lending services for a consumer credit transaction secured by the principal dwelling of the consumer and mortgage brokerage services for such a transaction, within the meaning of subsections (a), (b), (c), (d), (e), (f), (h), and (i).
‘‘(2) INTERIM FINAL REGULATIONS.—The Board shall, for purposes of this section, prescribe interim final regulations no later than 90 days after the date of enactment of this section defining with specificity acts or practices that violate appraisal independence in the provision of mortgage lending services for a consumer credit transaction secured by the principal dwelling of the consumer or mortgage brokerage services for such a transaction and defining any terms in this section or such regulations. Rules prescribed by the Board under this paragraph shall be deemed to be rules prescribed by the agencies jointly under paragraph (1).

No Comment
When asked whether the two presumptions of compliance contradict each other, as one seems to permit current AMC fees while the other specially disallows current AMC fees when determining customary and reasonable, the spokesperson had no comment but reiterated that any changes will be announced publically. Neither did she comment on whether the status quo contradicts the spirit and intent of the customary and reasonable fee provision of Dodd-Frank. She would say only that the Board is “well aware” that the customary and reasonable fee provision remains “controversial.”
 

Dodd-Frank Act: Statutory Deadlines for Action: http://www.federalreserve.gov/newsevents/reform_actiondates.htm

 

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

 

 

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