Dodd-Frank Financial Reform

On July 21, 2010, President Obama signed H.R. 4173, which is known by its short title, the Dodd-Frank Wall Street Reform and Consumer Protection Act. It has been widely hailed as the most significant financial and lending reform since FIRREA in 1989.

Much has been made of the “appraiser-friendly” provisions in this new law; some of these are more meaningful than others. This law actually contains a series of amendments to existing federal laws, including the Truth in Lending Act (TILA), the Equal Credit Opportunity Act (ECOA), and the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA).

A comprehensive summary of all of the changes produced by this 2,319-page law is not possible here. We have attempted to provide highlights of the most meaningful provisions of this law, from an appraiser’s standpoint.

Sunset of the HVCC
The law sunsets the Home Valuation Code of Conduct within 90 days of its enactment, which means the HVCC will end on or about October 19, 2010. The original end date for the HVCC agreement was October 31, so the net effect is that the HVCC sunsets 12 days earlier than originally planned. A new federal appraiser independence standard takes its place. Some of the language in this new federal standard is similar to (and in some parts identical to) language in the HVCC.

Customary and Reasonable Fees
The Truth in Lending Act was amended to require that lenders and their agents (AMCs) must pay appraisers “customary and reasonable” fees. The law states that customary and reasonable fees are to be established by “objective third-party information, such as government agency fee schedules, academic studies, and independent private sector surveys.”  These fee studies may not include fees paid by AMCs, so effectively the “full fee” appraisal has become the law of the land. There is also an exception which permits appraisers to charge higher fees for appraisals of complex  properties.

Limits on BPOs
Some have mis-characterized this as a  prohibition on Broker Price Opinions;  this is not the case. BPOs are prohibited  for use as the “primary basis” to value a  property for a residential mortgage loan  in a federally related transaction. However,  there is nothing prohibiting a lender  from obtaining a BPO as a secondary  valuation, or as a test of reasonableness  of an appraisal. Furthermore, this law  does not apply to asset recovery or loan  modification situations, which are two  very common situations in which BPOs are  used.

Regulation of AMCs
While stopping short of a federal program  to regulate appraisal management  companies, the law does require AMCs to  register with and be subject to supervision  by state licensing and certification  agencies. AMCs also must verify that only  state-licensed or certified appraisers are  used for federally related transactions, and  that appraisals are prepared in accordance  with USPAP. A national registry of AMCs is  also established, which is to be maintained  by the ASC. AMCs are required to pay a  registry fee based on an assessment of  $25 annually for every appraiser on the  AMC’s appraiser panel.  Appraisal fees on  the HUD-1 Settlement Statement may be  broken down to show the actual fee paid  for the appraisal, and the fee paid for the  management of the appraisal process.  (Note that this says “may” and not “must”; it  is not a requirement.)

More to Come
The bill also requires new regulations to  be created by several government entities,  including new Interagency Appraisal and  Evaluation Guidelines. Many of these new  regulations will be promulgated within the next  90 days, so there are definitely more changes in the  offing.  Look for updates in our next newsletter.