Following the long-delayed appointment of Director Richard Cordray, the Consumer Financial Protection Bureau (CFPB) has hit the ground running in 2012, launching investigations into PHH Corp and releasing new subprime loan metrics for lenders. Now, it’s setting its sights on appraisals, and the charges associated with the practice.
The CFPB, as explained by syndicated columnist Kenneth R. Harney in an article on the subject, is looking to add a greater level of transparency to how appraisers are compensated.
As Harney explains, appraisals are rarely as simple as paying someone $450 to $600 to assess the value of a property. Rather, a majority of the fees an appraiser charges often go to the appraisal management company that assigned the appraiser to the home, a company that may be wholly owned by either a joint venture firm or affiliate relationship with a lender.
So, as Hal Holbrook put it in All the Presidents Men, the CFPB will be following the money, and according to Harney, the CFPB will be essentially plugging up a big whole in appraisal regulation.
“Current federal settlement disclosures give you no hint of where that money is really going,” he wrote. “There is just a single line item for appraisal charges on the standard HUD-1 settlement statement. Say you’re charged $550. There is no hint that the appraiser gets $250 and the rest goes to the management company and the lender.”
The CFPB could, eventually, mandate two disclosures, one to show what the appraiser is paid and the other what the management company receives. That mandate could explain why, in a 2011 survey of is members, the National Association of Realtors found 70 percent of agent’s clients were charged higher appraisal fees at closings, while appraisers have reported a 40 to 50 percent reduction in their own compensation.
Such a discrepancy, Harney points out, could explain why so many agents have been reporting a lower quality in appraisals, some of which have compromised sales. In an e-mail to Harney, Frank Gregoire, a past chairman of the Florida Real Estate Appraisal Board, blamed management firms for many of appraisals current mishaps with extremely forceful language.
“The borrower receives no benefit from the [appraisal management] ‘service,’” Gregoire said in the email. “The lender is able to outsource a significant responsibility” — the selection of an appraiser — “to an affiliated subsidiary, and profit from that task by making the consumer and the appraiser pay for the privilege. [This] business arrangement is concealed from the consumer/borrower, and the charge is misrepresented as an ‘appraisal fee’ on the HUD-1. This is dishonest, deceitful and unfair.”
The CFPB is set to issue revisions to HUD-1 in July, and Harney thinks that appraisals will be a key sign of the agency’s aims for housing.
“How it comes down on real estate appraisal fee disclosures — more transparency for consumers or not — will be a revealing early test,” he concluded.