David Feldman is vice president, government affairs at CoreLogic Valuations. He sits down with HousingWire to talk about the impending deadline on appraiser fees under new regulation.
HousingWire: On April 1, the new "customary and reasonable" appraiser fees under Dodd-Frank take effect. What are they and is the industry ready?
David Feldman: According to Dodd-Frank and the Interim Final Rule, appraisers must be paid at a rate that is customary and reasonable for appraisal services in the market area of the property being appraised. The IFR interprets the language of Dodd-Frank to signify that the marketplace should be the primary determiner of the value of appraisal services.
The IFR provides two alternative ways in which lenders, their agents, and appraisal management companies will be presumed to be in compliance with the rules.
Presumption one requires that the amount of compensation is reasonably related to recent rates for appraisal services performed in the geographic market of the property. Fees paid by AMCs are specifically included in this approach. Moreover, necessary fee adjustments are to be made for type of property, scope of work and fee-appraiser qualifications, etc. In addition, there can be no anti-competitive action in violation of federal law such as price-fixing or restricting others from entering the market. This is an explicit requirement of Dodd-Frank designed to prevent collusion or market dominance among AMCs to depress appraiser fees.
Presumption two relies on objective independent, third-party information, including fee schedules, studies and surveys. This approach excludes AMC fees.
By April 1, lenders and AMC’s must decide which method or compliant combination/hybrid they will use in determining customary and reasonable fees for fee appraisers.
HW: How are your clients going to determine "customary and reasonable?"
DF: Most clients appear to be selecting presumption one and working in partnership with AMCs to support reasonableness of the fees.
In addition to a base fee by geographical region and product, Dodd-Frank allows for consideration of additional factors including property type, scope of work, time required to complete the assignment, qualifications, experience, professional record, work quality and volume-based discounts.
Some clients are allowing for a percentage approach to reflect the actual dollars. That is, an AMC pays an appraiser a percent of the client fee – say 65%, for example. That would oblige the client to pay the AMC adequate fees or the AMC would choose to take a loss since the appraiser must be paid customary and reasonable fees. From a practical standpoint, the lenders that are leaning towards this approach that work with AMCs will use a "cost-plus" model where "cost" is the fee to the appraiser, determined by either presumption one or presumption two, and "plus" is the fee to the AMC.
HW: What kind of operational issues will this create for AMCs and clients? How real are the risks of fines?
DF: There are a number of operational challenges that will have to be addressed. Lenders will choose varying approaches to determine customary and reasonable fees. This means an appraiser may receive different fees in the same geographic marketplace for similar work. In one sense, this is not surprising because it reflects the current situation and thus fits the basic definition of customary and reasonable. The risk of fines is certainly a real concern for both lenders and AMCs. However, this concern will be significantly mitigated if determination of customary and reasonable is supported by statistical data and professional analysis. In addition, clients have indicated they will probably begin an audit function to be assured that the appraiser is being paid properly.
How much will this increase the cost of appraisals and who will pay for the increase?
For lenders choosing presumption one and relying on AMC data and analysis, it is possible that there will be a minimal increase of cost to borrowers since AMC fees, assuming no anti-competitive activity, are currently the customary and reasonable fees. For lenders choosing presumption two or utilizing a variation of a "cost-plus" model, it is probable that the cost to the borrower will increase.
HW: Over time do you see appraisal business shifting to AMCs or away from them?
DF: AMCs provide essential services to lenders, especially larger lenders, and clients understand this, even if independent appraisers and critics don’t agree.
From an appraiser's perspective, the appraisal itself is the product and the deliverable and the AMC is often seen as a middleman. From a lender and AMC perspective there are a significant number of services to be performed for the lender including appraisal panel creation and maintenance, integrated technology, quality control, operational efficiencies, including reporting, turn times and communication, education of appraisers and the actual appraisal itself. Depending on which point of view you hold determines how you believe the fee should be allocated.
With continuing consolidation in lending, it is my strong belief that the services provided by AMCs will continue to be in great demand.