Appraisers, REALTORS® And Appraisal Management Companies: Coexisting In The New Marketplace
Author(s): Richard K. "Dick" Clark
Published: 07/01/2009
The credit and financial crises have spawned new laws and procedures, some good and some bad. One of these, the Home Valuation Code of Conduct ("HVCC") has caused confusion in Colorado.
The HVCC is the result of a joint agreement in March, 2008 among parties including the Federal Housing Finance Agency and the New York State Attorney General. It has been applied to govern the conduct of appraisers, lenders and mortgage brokers in the appraisal of property for Freddie Mac and Fannie Mae loans after May 1, 2009. A thorough discussion of the HVCC requirements is beyond the scope of this article but REALTORS need to understand that one of its purposes is to prohibit lenders and certain third parties from influencing or attempting to influence the development, result or review of an appraisal report. Thus, the HVCC requires absolute independence between the lender and the appraiser. For example, a lender's loan production staff is prohibited by the HVCC from being involved in the selection of the appraiser, or having any substantive communications with an appraiser about valuation.
Apparently from this prohibition, some lenders, appraisers and mortgage brokers have suggested that the HVCC precludes appraisers from communicating with real estate brokers about valuation. Such a statement is incorrect. In order for appraisers to perform due diligence, they often need to communicate with real estate brokers on matters related to the property or comparables. The HVCC does not prohibit these communications.
The confusion probably stems from Subsection III.B. of the HVCC which indicates that any person who is compensated on a commission basis "on the successful completion of a loan" is forbidden from selecting or having substantive communications with an appraiser about the appraisal. While a mortgage broker may be compensated on a commission basis upon the successful completion of a loan, the REALTOR®'s commission is dependent upon the successful completion of a sale, not a loan. Subsection III.B. does not apply to real estate brokers. A licensee serving in the dual status of a mortgage broker and real estate broker in the same transaction may be precluded from having any substantive communications with the appraiser about the appraisal of that property.
One of the outgrowths of the HVCC is the creation of appraisal management companies ("AMC") which are being established across the U.S. including Colorado to select appraisers and communicate with them about the appraisal. The lender contracts with an AMC, the AMC selects the appraiser in connection with generating the loan, and the appraiser submits the appraisal through the AMC to the lender. Some of these AMC's are creating nightmares for appraisers. Complaints about AMC's at the Colorado Division of Real Estate (Board of Real Estate Appraisers) include appraisers being blacklisted, geographical competency issues, unrealistic reporting requirements, USPAP noncompliance, and AMC's taking a substantial portion of the appraiser's fee (the borrower pays $450, the appraiser receives $250 for the appraisal and the AMC pockets $200).
Similar complaints about AMC's have reached NAR. At its May 16, 2009 meeting, NAR's Board of Directors adopted a policy concerning AMC's:
That NAR support the empowerment of federal mortgage regulators to adopt standards for real estate appraisal management companies and promulgate licensing requirements of said companies to the states through the Financial Institutions Reform and Recovery Enforcement Act (FIRREA) and other similar legislation.
NAR's rationale is to advocate federal legislation relating to the operation of AMC's. Currently, AMC's are not regulated at the federal level and regulation at the state level varies. In Colorado, AMC's are not regulated. From NAR's perspective, regulation would ensure that AMC's operate within the same basic guidelines and standards as independent appraisers. Further, NAR's approach will allow AMC's to be regulated within the existing appraisal regulatory structure, which avoids the need to create additional layers of bureaucracy.
As with any new law or procedure, there can be periods of uncertainty and confusion. It will take awhile for the real estate industry to become familiar with the requirements of HVCC's and for the federal or state governments to address AMC's. Expect more discussion and actions concerning AMC's but in the meantime appraisers are not precluded from communicating with REALTORS® about the appraisal.
Dick Clark rclark@rothgerber.com or 303-628-9531 (direct) is a lawyer at Rothgerber Johnson & Lyons LLP, a regional law firm having a diversified practice in most major areas of law from offices in Denver, Colorado Springs and Casper. He and the firm have served as legal counsel to CAR since 1990. The firm regularly advises and represents brokers and brokerage firms to avoid liability and assure compliance with Commission rules.
This Article appeared in the Colorado REALTOR® Magazine, July/August 2009 issue, and is published for general information purposes only. The content should not be construed as legal advice or opinion. You are urged to contact a lawyer concerning your specific legal situation. Determination of the need for legal services and the choice of a lawyer are extremely important decisions and should not be based solely upon advertisements or self proclaimed expertise.