The April 9 Federal Register contains the announcement for which the appraisal management industry has been waiting for months: the federal banking and finance regulatory agencies’ proposal of minimum standards for appraisal management companies (“AMCs”). Section 1473 of the Dodd-Frank Act requires the agencies – the OCC, FRB, FDIC, NCUA, CFPB, and FHFA (the “Agencies”) -to adopt standards for states to apply in their registration and supervision of AMCs.
In keeping with the Dodd-Frank Act, the Agencies’ proposal would impose on AMCs five principal requirements:
• Registration with and supervision by the state appraiser certifying and licensing agency;
• Use of only state-licensed or state-certified appraisers for federally related transactions;
• Establishment of and compliance with processes and controls to ensure the selection of independent appraisers who possess the “education, expertise, and experience necessary to competently complete the appraisal assignment for the particular market and property type”;
• Direction of appraisers to perform assignments in accordance with the Uniform Standards of Professional Appraisal Practice; and
• Establishment of and compliance with processes and controls designed to ensure compliance with the appraisal independence requirements of Section 129E(a)-(i) of TILA and implementing regulations.
With minor variation, these requirements echo the provisions of both the Dodd-Frank Act and of the majority of state AMC laws that have been enacted over the past five years, and thus should come as little surprise to the industry. A few of the Agencies’ proposed standards, however, are worth noting:
• Adoption of the standards is voluntary. The Agencies’ proposal would not require states to regulate AMCs, but it would prohibit AMCs from performing services in connection with federally related transactions in any state without a regulatory scheme.
• The proposed standards would provide a floor for state regulation, leaving open the possibility that each state could adopt different iterations of similar requirements. AMCs operating on a national basis could be subject to 50 different sets of requirements. For instance, the proposed standards would apply only to residential transactions (or securitizations thereof), whereas many states also regulate appraisal management activity with regard to commercial transactions. To that end, the Agencies are soliciting public comment on questions that are raised by any differences between the proposed standards and state laws, and whether and to what extent the Agencies should address those differences in their final rules.
• The Agencies have proposed that business entities that perform appraisals, “appraisal firms,” should not be treated as AMCs for purposes of implementing these minimum standards with the exception of a “hybrid firm” (according to the Agencies, a firm that hires appraisers as employees to perform appraisals and also engages independent contractors to perform appraisals). To that end, the Agencies are requesting comment on the manner in which “appraisal management company” and “appraiser panel” are defined, which among other issues may impact how employees and independent contractors are viewed, and whether appraisal firms are regulated as AMCs.
• Different standards would apply to AMCs that register with the states and those that are owned and controlled by federally insured depository institutions or credit unions and that are regulated by a Federal financial institutions regulatory agency. While the majority of the state requirements (other than registration) would apply to federally regulated AMCs, the Agencies’ proposal would impose different restrictions on the owners of such entities.
These are only a few of the issues on which the Agencies have requested comment, or which the proposed rules would impact. While the proposal is of principal concern to AMCs, other entities (including appraisal firms, mortgage lenders, servicers, and investors) should take note of the Agencies’ proposal, as the final rules could impact their businesses as well. Comments will be accepted until April 8, 2014.