Author’s Note: In response to the publication of the below post, a representative for the Louisiana Real Estate Appraisers Board advised us that the version of the proposed rules discussed in our original post are being withdrawn. A revised version of the proposed rules, based on comments received from appraisal management companies in response to the Board’s original proposal, is scheduled for publication in the Louisiana Register on or about February 20. We will update our analysis after the revised proposed rules are published, when they will be open for further comment.
A recently proposed Louisiana Real Estate Appraisers Board (“Board”) rule has created uncertainty in the Louisiana appraisal market regarding appraiser compensation. In proposing a rule that creates obligations inconsistent with those existing under federal law and rules, the Board has ignored the intent of the federal rule, caused conflict between state and federal law, and likely increased compliance costs for appraisal management companies (“AMCs”) – costs that may be passed along to lenders and consumers.
The federal law – the Truth in Lending Act (“TILA”) – requires lenders and their agents (e.g. AMCs) to compensate fee appraisers at a rate that is “customary and reasonable for appraisal services performed in the market area of the property being appraised.” The interim final rule (the “TILA Rule”) interprets that provision, presenting two official presumptions for when compensation is “customary and reasonable.”
Under the first presumption, compensation is customary and reasonable if its amount is “reasonably related to recent rates for appraisal services performed in the geographical market of the property.” Alternatively, under the second presumption, compensation is customary and reasonable if it is established by relying on rates in the geographic market of the property being appraised. Notably, the first presumption allows a creditor to consider rates of compensation paid by AMCs to appraisers, while the second presumption requires AMC compensation rates to be excluded. As a result, appraisers strongly favor use of the second presumption, which they believe will result in higher fees.
Commentary to the TILA Rule explicitly states that the presumptions discussed above are not requirements for compliance. A creditor’s or agent’s failure to meet one of the presumptions does not automatically indicate that the fee is not customary and reasonable, and thus in violation of TILA. Rather, in that situation, whether the fee is customary and reasonable is determined “based on all of the facts and circumstances without a presumption of either compliance or violation.” In other words, an entity who does not comply with either presumption may still comply if the fee is reasonable based on all relevant facts.
The Board’s proposed rule, however, requires Louisiana-licensed AMCs to use one of the presumptions outlined above to determine its customary and reasonable rate. The Board’s proposal is based on a recently enacted Louisiana statute, which tracks the language of TILA in requiring an AMC to compensate appraisers at customary and reasonable rates, “consistent with the presumptions of compliance under federal law.” This statutory language does not suggest that the conflict between the Board’s proposed rule and the TILA Rule is necessary. However, in mandating that AMCs comply with one of the presumptions, the Board has disregarded the TILA Rule’s clear provision that the presumptions are not requirements for compliance, and that if a creditor does not meet a presumption, then customary and reasonableness is determined based on “all of the facts and circumstances.”
Further, entities choosing to comply with the first presumption face a much greater burden under the Board’s proposed rule than they do under the TILA Rule. Under the TILA Rule, creditors and agents must make determinations of reasonable compensation based on the following six factors: type of property; scope of work; time in which the appraisal services are required to be performed; fee appraiser qualifications; fee appraiser experience and professional record; and fee appraiser work quality. The Board’s proposed rule expands this requirement, requiring an AMC to “maintain written documentation that describes or substantiates all methods, factors, variations and differences used to determine the customary and reasonable fee,” including detailing the methods for determining each of the six elements required under the TILA Rule. Providing such documentation will make compliance significantly more expensive, perhaps even cost prohibitive. An AMC’s only alternative would be to use the second presumption, which excludes compensation paid by AMCs to fee appraisers from the calculation of “customary and reasonable.” The exclusion of compensation paid by AMCs to fee appraisers will skew the calculation of “customary and reasonable” fees in Louisiana, ultimately raising appraisal fees.
Though the proposed rule on its face applies only to AMCs, its potential impact on appraisal fees may extend to other parties doing business in the state with ties to the appraisal process. If the rule forces AMCs to pay higher rates to appraisers, they will be forced to charge their lender clients more in order to offset the cost of compliance. Creditors, in turn, will pass the costs on to borrowers, increasing the overall cost of credit. The Louisiana rule would negatively impact AMCs, lenders, and borrowers alike. Though the comment period for the Board’s rule ended December 11, 2012, this issue was one of those hotly criticized. Hopefully the Board will address these concerns in the final rule.