September 16, 2009
Real Estate Finance Committee
Legislative Committee
This material is for discussion purposes only and has not been approved
by the Real Estate Finance, Legislative or Executive Committees or the
Board of Directors.
Issue:
Should C.A.R. sponsor legislation to increase regulation of, or restrict
lender ownership of, Appraisal Management Companies (AMCs)?
Action:
Optional
Options:
1. Do Nothing
2. Encourage the Office of Real Estate Appraisers (OREA) to assert greater
regulatory controls over AMCs without enacting new legislation.
3. Sponsor Legislation that will increase OREA's authority over AMCs.
4. Sponsor legislation that restricts the ability of a lender to use an AMC
in which it has an ownership interest that might lead to a potential
conflict of interest.
5. Postpone action until January 2010 and report on the response of OREA to
the signature or veto of pending legislation.
6. Other.
Status/Summary:
Appraisal Management Companies (AMCs) have grown enormously over the last
two years, driven primarily by the Home Valuation Code of Conduct (HVCC)
adopted by Fannie Mae and Freddie Mac. Complaints from REALTORS® about
higher costs, out of area appraisers and inability to correct errors have
grown along with the AMC dominance of the appraisal supply.
AMCs are not currently regulated. The legislature has passed (but the
Governor has not yet signed) legislation to require registration with the
Office of Real Estate Appraisers. It is unclear how far the OREA will be
prepared to assert its new authority beyond requiring registration and
background checks of owners.
Discussion:
The HVCC. The Home Valuation Code of Conduct (HVCC) is the result of
a settlement between the New York Attorney General and the GSEs (Government
Sponsored Enterprises - Fannie and Freddie) that he had threatened with
liability for allowing inadequately underwritten loans to be made and
resold. The HVCC has no force of law and was not enacted by congress, but
because the GSEs are so dominant in the marketplace, their internal rule
has effectively pre-empted practice across the country. A New York lawsuit
has thus changed the way that California lenders (and the appraisers they
hire) do business.
The stated purpose of the HVCC is to create a separation between a loan
officer or loan originator (loan broker) or sales agent and the appraiser
retained to value the property. This need for separation has fueled an
explosive growth in AMCs, which act as the intermediary that receives the
assignment from the lender and then hires the appraiser to complete it.
With limited exceptions, the HVCC calls for no contact between the lender
or sales agent and the appraiser regarding the property being appraised.
Compliance with the HVCC became mandatory June of 2009.
REALTOR® Experience. A July survey by C.A.R. indicated that after
the new rule took effect, REALTORS® have observed the following:
1. Appraisals saw an increase cost by an average of $75,
2. The time to complete an appraisal nearly doubled,
3. Use of out of area appraisers increased from 22 percent to 61
percent,
4. Validation of sales price decreased from about 63 percent to 15 percent,
and,
5. The overwhelming majority of REALTORS® thought the ability to share
appropriate "comps" or correct errors had worsened.
Possible Responses
1. "Repeal" the HVCC. Since the HVCC is not a statute, but an internal rule
of the GSEs, it does not lend itself to a change by regulation as would a
statute, and as federal entities, it is difficult to control the situation
by state law. NAR is currently advancing a proposal for an 18 month
moratorium on use of the new rule, but in the meantime it remains in
effect. C.A.R. has engaged in a series of meetings with the California
Attorney General, urging him to intervene with the GSEs and seek an
exception to the new rule for California because of its negative effect on
the market and because statutory protections for appraiser independence. An
oral progress report will be provided at the Committee meeting.
2. Regulate the AMCs. Much of the complaint about the HVCC comes from the
way that AMCs administer the process. Under current law AMCs are not
regulated, although SB 237 (Calderon) has passed the legislature and is
awaiting action by the Governor. That bill requires AMCs to register with
the Office of Real Estate Appraisers (OREA) and subjects principals in the
company to background checks. The bill also clarifies undue influence
applied to an appraiser, and retains the express ability under California
law to communicate with an appraiser to share appropriate comps and correct
errors. C.A.R. supports the bill.
SB 237 does not specifically empower OREA to regulate an AMC for the use of
out of area appraisers, or audit the timeliness or accuracy of their work
product, or prevent conflicts of interest in referrals from a controlling
lender or title company. While one could certainly argue that OREA could
impose such regulation based upon its authority over the individual
appraisers employed by the company, it is not clear that OREA is prepared
to assert such authority. Indeed, unless and until SB 237 is signed, it is
not clear that OREA has any authority over AMCs.
Should C.A.R. sponsor legislation to regulate AMCs to ensure the quality
and neutrality of the appraisals their employees generate?
Lender Referrals to affiliated AMCs. Informal research suggests that many
AMCs are owned by lenders or title companies. While the HVCC allows a
lender's underwriting department (but not the loan production department)
to retain or contact appraisers, it appears that most have elected to rely
on appraisers from an AMC. Indeed, some have suggested that lenders simply
"spun out" their old appraisal departments into affiliated AMCs that could
be used as an additional profit center as an affiliated business.
Does the ownership or control of an AMC by an affiliated lender make the
appraisal problems observed by REALTORS® (increased cost, reduced accuracy,
delay) any less likely to occur? If lenders were restricted in their
ability to "steer" or self-refer to affiliated AMCs, would they be more
inclined to keep costs down or keep the appraisal function in-house within
the loan underwriting departments? How much effect on the problems
described above would such a restriction accomplish?
Note: Any analysis should not lose sight of the fact that the appraisal is
a tool to protect the safety and soundness of lenders, and only secondarily
has the benefit of validating a buyer's purchase price.
Should C.A.R. sponsor legislation to restrict the ownership of an AMC by
lenders, or to restrict "steering" to an affiliated AMC?
Should C.A.R. postpone action until January 2010 and direct staff to
research the reaction of OREA in response to the signature or veto of SB
237?
