July 21, 2020, marked the 10th anniversary of signing the Dodd-Frank Wall Street Reform and Consumer Protection Act (aka 'Dodd-Frank') into law. The financial crisis of 2008 prompted the 350,000-word bill, which had far-reaching impacts, some foreseen and some not.
Consumer protections were grossly lacking, according to the architects of the financial crisis post-mortem. The primary intent of Dodd-Frank was to create more consumer protections across the U.S. financial system. Many will argue that the legislation was, at first, a one-size-fits-all overlay that placed (unfairly) the same guardrails on community banks as it did Wall Street investment banks. Several of those challenges have been tackled, to some degree, over the last decade.
Appraisal Management Companies (AMCs) have been around for roughly 50 years, creating a consistent and reliable operational model. Congress' passing of Dodd-Frank contributed significantly to solidifying the model's demand as much as anything prior.
Let's be very clear – Dodd-Frank does not mandate the use of AMCs. As long as the legislation's key provisions are well cared for, such as appraiser independence and reasonable and customary fees (to name a few), lenders may choose whatever appraisal model they desire.
Dodd-Frank's impacts on the appraisal industry
While the Dodd-Frank inspired changes were widespread throughout the U.S. financial system, the legislation brought seven key transformations to the appraiser industry:
- When signed into law, the bill immediately sunset the Home Valuation Code of Conduct (HVCC), the original attempt in 2009 at appraisal independence from Freddie Mac, the Federal Housing Finance Agency (FHFA), and the New York Attorney General. HVCC was gone, but appraiser independence requirements remained prominent, in place to prevent conflicts of interest and undue influence in the appraisal process – or underhandedly trying to inflate appraised values. The appraisal process is now independent of the loan production process, and regulators can now prosecute violations. Behavior modification, across the board – from lenders to appraisers – was the overall objective.
- Requiring 'Reasonable and customary' fees, whereby appraisers deliver comprehensive and accurate home valuations in return for being compensated at fair market value for the scope of work. With 'reasonable' meaning the fees are adjusted for the characteristics of the appraisal, such as the location of the subject property, the amount of time in which the appraisal services are required to be performed, and the necessary level of qualification of the appraiser for the assignment, just to name a few. In broad terms,' Customary' means the fee paid is reasonably related to recent rates paid for appraisal services, taking into geographic market dynamics.
- The birth of a new financial services regulator. Dodd-Frank revised FIRREA's independence standards by splitting residential and commercial appraisal oversight. Rulemaking and oversight for residential mortgage appraisals now fall under the Consumer Financial Protection Bureau (CFPB). Commercial real estate appraisal authority remains with FIRREA's Appraisal Subcommittee.
- Section 1471 requires a physical property visit for specific higher-risk mortgages.
- Section 1473 amended FIRREA to provide for a national registry of AMCs and set minimum requirements for AMCs. These requirements set a baseline for what the industry should expect and are suitable for the industry as a whole. They have helped repair public trust in the AMC industry, and here at United States Appraisals, we consistently far exceed the set minimum standards.
- While Dodd-Frank also addressed, at a high level, some appraiser certification and education standards, the legislation left most of the requirements to individual states.
- A section of Subtitle F requires AMCs to pay each state 'National AMC Registry' fees. States continue to improve their management of the current appraisal regulations, leveraging grants in addition to the fees paid by AMCs. Fees collected are reported to be millions more than necessary to manage the registry. However, the additional money is earmarked to explore new training systems and alternative ways to entice new appraisers into the industry. As an AMC, we feel it's important and essential, and we take pride in the fact that we are shaping the future of the industry.
In summary, the legislation appears to have met its original intent to shore-up critical aspects of our banking system. While Dodd-Frank is a significant compliance consideration, it's not alone. There are many others. If you feel you have weaknesses in your current appraisal operation, we are here to help. We are trusted by many lenders and have a proven appraisal management system that will help your business remain compliant with Dodd-Frank and other regulatory and investor requirements.
The content within this article is for informational purposes only, no warranties or representations are contained herein. It is not intended to provide legal advice.