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The Federal Reserve Board published today
an interim final rule in response to revision requirements to the
Truth in Lending Act (TILA), pursuant to the mandates of the
Dodd-Frank Wall Street Reform and Consumer Protection Act. TILA
Section 129E establishes new
requirements for appraisal independence for consumer credit
transactions secured by the consumer's principal
dwelling.
The amendments ensure that real
estate appraisals used to support creditors' underwriting decisions
are based on the appraiser's independent professional judgment,
free of any influence or pressure that may be exerted by parties
that have an interest in the transaction. The amendments also seek
to ensure that creditors and their agents pay customary and
reasonable fees to appraisers.
The interim final rule applies to a
person who extends credit or provides services in connection with a
consumer credit transaction secured by a consumer's principal
dwelling. Although TILA and Regulation Z generally apply only to
persons to whom the obligation is initially made payable and that
regularly engage in extending consumer credit, TILA Section 129E
and the interim final rule apply to persons that provide services
without regard to whether they also extend consumer credit by
originating mortgage loans. Thus, the interim final rule applies to
creditors, appraisal management companies, appraisers, mortgage
brokers, realtors, title insurers and other firms that provide
settlement services.
Specifically, the interim final rule
applies to appraisals for any consumer credit transaction secured
by the consumer's principal dwelling. Covering consumer credit transactions is
consistent with the scope of TILA generally, which only applies to
credit extended for personal, family or household purposes. The
revisions provide a broader scope, as required by Section 1472 of
the Dodd-Frank Act, which does
not limit coverage to closed-end loans and also covers
HELOCs.
Finally, with a few exceptions, the
interim final rule applies to any person who performs valuation
services, performs valuation management functions, and to any
valuation of the consumer's principal dwelling, not just to a
licensed or certified ''appraiser,'' an ''appraisal management company,'' or to a
formal ''appraisal.''
The Board seeks comment on this
interim final rule.
Dates:
Effective: December 27,
2010
Compliance Date: April
1, 2011
Comments Deadline:
December 27, 2010
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HIGHLIGHTS
Coercion
and prohibited extensions of credit.
-Prohibits covered persons from engaging in
coercion, bribery, and other similar actions designed to cause
anyone who prepares a valuation to base the value of the property
on factors other than the person's independent judgment.
-Prohibits a creditor from extending credit based on a valuation if
the creditor knows, at or before consummation, that (a) coercion or
other similar conduct has occurred, or (b) that the person who
prepares a valuation or who performs valuation management services
has a prohibited interest in the property or the transaction as
discussed below, unless the creditor uses reasonable diligence to
determine that the valuation does not materially misstate the value
of the property.
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Conflicts of interest.
-Provides that a person who prepares a
valuation or who performs valuation management services may not
have an interest, financial or otherwise, in the property or the
transaction. The Dodd-Frank Act does not expressly ban the use of
in-house appraisers or affiliates. However, because the Act
prohibits appraisers from having an ''indirect financial interest''
in the transaction, it is possible to interpret the Act to prohibit
creditors from using inhouse staff appraisers and affiliated
appraisal management companies (AMCs).
-Clarifies that an employment relationship or affiliation does not,
by itself, violate the prohibition.
-Establishes a safe harbor and specific criteria for establishing
firewalls between the appraisal function and the loan production
function, to prevent conflicts of interest. Special guidance on
firewalls is provided for small institutions, because they likely
cannot completely separate appraisal and loan production staff.
Small institutions are those with assets of $250 million or
less.
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Mandatory reporting of appraiser
misconduct.
-Provides that a creditor or settlement
service provider involved in the transaction who has a reasonable
basis to believe that an appraiser has not complied with ethical or
professional requirements for appraisers under applicable federal
or state law, or the Uniform Standards of Appraisal Practice
(USPAP) must report the failure to comply to the appropriate state
licensing agency.
-Limits the duty to report compliance failures to those that are
likely to affect the value assigned to the property.
-Provides that a person has a ''reasonable basis'' to believe an
appraiser has not complied with the law or applicable standards,
only if the person has knowledge or evidence that would lead a
reasonable person under the circumstances to believe that a
material failure to comply has occurred.
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Customary and reasonable rate of
compensation for fee appraisers.
-A creditor and its agent must pay a fee
appraiser at a rate that is reasonable and customary in the
geographic market where the property is located. The rule provides
two presumptions of compliance. Under the first, a creditor and its
agent is presumed to have paid a customary and reasonable fee if
the fee is reasonably related to recent rates paid for appraisal
services in the relevant geographic market, and, in setting the
fee, the creditor or its agent has:
� Taken into account specific factors, which include, for example,
the type of property and the scope of work; and
� Not engaged in any anti-competitive actions, in violation of
state or federal law, that affect the appraisal fee, such as price
fixing or restricting others from entering the market.
-A creditor or its agent would also be presumed to comply if it
establishes a fee by relying on rates established by third party
information, such as the appraisal fee schedule issued by the
Veteran's Administration, and/or fee surveys and reports that are
performed by an independent third party (the Act provides that
these surveys and reports must not include fees paid by
AMCs).
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Federal Reserve Board
Interim Final Rule - Appraiser Independence
Federal Register, Vol. 75, No. 208
October 28, 2010
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