A Letter to the Editor

A Letter to the Editor from Nanci L. Weissgold, Partner, Alston & Bird LLP.

Hi Joan,

As an consumer finance attorney who represents several appraisal management companies that do business in Virginia, I read with interest the recent article in Appraisal Buzz written by the Virginia Coalition of Appraisal Professions titled “Customary and Reasonable Fees, Empowered to Enforce”. My comments below are my own and not on behalf of any client.

For an organization that “serve[s] to promote public confidence in the appraisal profession,” it was disappointing to read an article that appears to misconstrue the law concerning its topic – payment of customary and reasonable fees. For enforcement of customary and reasonable to be both effective and fair depends on a correct understanding of underlying federal law. Let me explain why I think they missed the boat.

The article states:

“In Virginia, an AMC can use any presumption allowed in TILA and be considered as having met the presumption of compliance.

The authors are correct that Virginia’s AMC law requires AMCs to follow the federal Truth in Lending Act.  Specifically, Virginia law provides that “[a]n appraisal management company shall compensate appraisers in compliance with § 129E(i) of the federal Truth in Lending Act (15 U.S.C. § 1601 et seq.) and regulations promulgated thereunder.” Va. Stat. Ann  § 54.1-2022.1. The article, however, conflates the two presumptions of compliance under federal law.

First, their phrase “the presumption of compliance” suggests that there is only one manner to comply with TILA’s – and Virginia’s – customary and reasonable fee requirement. The sentence immediately following underscores this point – “In order to have met the presumption of compliance, the AMC must 1) consider the type of property, 2) the scope of work, 3) the time in which appraisal services are required to be performed, 4) the appraiser’s work quality, and 5) the appraiser’s professional experience and professional record. The AMC must not engage in any anti-competitive acts in violation of state or federal law that affect the compensation paid to fee appraisers.”

TILA’s Regulation Z permits creditors and their agents (i.e., AMCs) to ensure compliance with TILA’s requirement in Section 129E(i)  by satisfying one of two rebuttable presumptions of compliance. However, a creditor or its agent need not rely on either presumption of compliance. If the creditor or its agent do not meet either presumption, compliance is determined based on all the facts and circumstances without a presumption of compliance or violation.

Under TILA, the first presumption requires that compensation must be reasonably related to recent rates paid for the comparable appraisal services performed in the geographic market of the property being appraised, while refraining from illegal, anti-competitive acts.

  • The first presumption involves a two-step inquiry:
    • To be customary, the fee must be related to recent rates for appraisal services in the relevant geographical market.
    • To be reasonable, the fee should be adjusted to account for six factors, described below, that are in addition to the geographic market that affect the level of compensation appropriate in a given transaction, such as type of property or scope of work.
    • Qualifying for this presumption does not require that a creditor or its agent use third-party information that excludes appraisals ordered by AMCs.
  • Customary
    • Recent rates – According to the Commentary to the Final Rule implementing Section 129E(i], a creditor or its agent may gather information by using a reasonable method that provides information about rates for appraisal services in the geographic area. A creditor or its agent may, but is not required to, use or perform a fee survey. The Commentary does not specify the “reasonable methods” for gathering information about the rates without the use of a fee study.
    • Appraisal services are defined as “the services required to perform an appraisal, including defining scope of work, inspecting the property, reviewing necessary and appropriate public and private data sources (MLS, tax assessment records, public land records) developing and rendering an opinion of value and preparing and submitting the appraisal report.”
    • Relevant geographical market – Depending on the facts and circumstances, the relevant geographic market may be a state, metropolitan statistical area (MSA), metropolitan division, area outside of an MSA, county or other geographical area.
  • Reasonable
    • Six Factors – (i) type of property – e.g. detached/attached single family, condo, coop, manufactured house; (ii) scope of work – type of inspection (interior/exterior), number of comparables required; (iii) the time in which the appraisal services are required to be performed; (iv) fee appraisal qualifications – state license/certification; (v) fee appraiser experience and professional record; and (vi) fee appraiser work quality, i.e., past work quality.
  • Additionally, the creditor or its agents must not engage in any anti-competitive acts in violation of state or federal law that affect the compensation paid to fee appraisers, to include: (i) entering into any contracts or engaging in any conspiracies to restrain trade through methods such as price fixing or market allocation, or (ii) engaging in any acts of monopolization such as restraining any person from entering the relevant geographic market or causing any person to leave the relevant geographic market.

The alternative (or second) presumption of compliance provides that a creditor and its agent are presumed to compensate a fee appraiser at a customary and reasonable rate if the creditor or its agent establishes a fee by relying on information that rates that is based on:

  • Objective third-party information (fee schedules, studies and surveys) prepared by independent third parties (government agencies, academic institutions and private research firms), which must exclude compensation paid to fee appraisers for appraisals ordered by AMCs; and
  • Recent rates paid (within the past year to a representative sample of providers of appraisal services in a geographic market or the fee schedules of those providers.

The article further provides “Regardless of which presumption the AMC uses to determine the fee paid to the appraiser, the burden of proof is on the AMC. They must provide the data, analysis and results of how the fee was determined in order to be in compliance. In all presumptions the fee paid to fee appraisers, as defined in 226.42(f)(4)(i) of TILA, must be excluded from the data, analysis and results.”

This is nonsensical. First, the rule provides two rebuttable presumptions of compliance. Qualifying for the first presumption does not require a creditor or its agent to use third party information that excludes appraisals ordered by AMCs. Second, if the creditor or agent do not meet either presumption, then compliance is determined based on all the facts and circumstances without a presumption of either compliance or violation. How could you look at all the facts and circumstances if you had to exclude from your analysis the fee paid to the fee appraiser?

Nanci L. Weissgold
Partner
Alston & Bird LLP
www.alston.com

Have any comments or would you like to submit content of your own? Email comments@appraisalbuzz.com.

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About Nanci Weissgold

Nanci Weissgold
Ms. Weissgold is a member of Alston & Bird’s Financial Services & Products Group and a co-leader of the Consumer Finance Regulatory Compliance team. She advises financial institutions and financial service providers on issues relating to mortgage lending and mortgage servicing, valuation, and other consumer lending issues as part of her national regulatory compliance practice. This includes: (i) counseling clients on compliance with state and federal laws that regulate consumer financial products and services, (ii) working with state regulators to obtain approvals, licenses or regulatory guidance, (iii) assisting in developing compliance programs, (iv) defending administrative enforcement actions (including state government audits, single or multi-state examinations, and investigations) and assisting in litigation involving regulatory compliance issues, and (iv) representing bank and non-bank lenders and appraisal management companies on valuation issues (including, for example, compliance with appraisal independence requirements under TILA, Interagency Appraisal and Evaluation Guidelines, FIRREA, AIR, ECOA, state AMC, appraisal and real estate broker laws).

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