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Friday, November 18, 2011

Appraisal Institute: Seeks Clarity in Settlement Disclosure Form

On November 16, 2011, the Appraisal Institute, in a joint letter with the American Society of Farm Managers and Rural Appraisers, asked the Consumer Financial Protection Bureau (CFPB) to separate appraisal fees from administration and processing fees on the settlement forms that consumers receive when purchasing a home.

We have been following the CFPB’s development of the new mortgage disclosure form as its has been updated through several reviews. The purpose of the new form – which will consolidate both the Good Faith Estimate and the Truth in Lending Disclosure – is to inform consumers regarding the charges assessed in processing mortgage loans. 

However, the CFPB’s proposed revisions to the HUD-1 Settlement Statement, now called the Settlement Disclosure Form (SDF), is now at issue. In the letter, the Appraisal Institute expresses its opposition to the proposed SDF released for public comment by the Consumer Financial Protection Bureau on November 11, 2011.

Outline

The following bulleted outline is the Appraisal Institute’s position:

  • The CFPB has proposed two versions of the new SDF, both of which continue to bundle appraisal fees with fees paid to appraisal management companies.
  • The Dodd-Frank Act authorized separation of appraisal and appraisal management fees, and doing so would fully inform borrowers of actual costs paid.
  • There is no consumer benefit with continuing to bundle two separate services and not fully disclosing such information to borrowers.
  • Thus: the CFPB should revise these forms with a separate line for Appraisal Management (or management fees in total) as required by  Dodd-Frank Act.
  • Consumers deserve to know who is providing services relative to their loan and how much was paid.
  • Therefore:
    • Itemization is needed, among other things: so that the consumer knows the level of service provided by the appraiser; to assure that the consumer is not misled to believe that a more thorough appraisal analysis was performed.
    • Itemization is warranted because: consumers deserve to know who is providing services relative to their loan and how much was paid.
    • Itemized prevents, among other things: manipulation of price versus service, which is consistent with the goal of disclosure and is clearly a consumer service.
The Dodd-Frank Act does authorize the CFPB to separate appraisal and appraisal management fees to consumers on the HUD-1 Settlement Statement, the standard form used in the United States to itemize services and fees charged to the borrower by the lender or broker when applying for a loan for the purpose of purchasing or refinancing real estate. 

However, the proposed form issued for comment by the CFPB still combines appraisal and appraisal management fees. A “Management fee” is the fee charged by an appraisal management company (AMC) for administrative services, and an “appraisal fee” refers to the actual cost of the appraisal itself. 

Bundling
 
The fact is, consumers are now paying for appraisal management company fees through the appraisal line of the HUD-1. Indeed, recent consumer research indicates that consumers are paying higher costs for appraisal fees as reported on the Appraisal line of the HUD-1

Traditionally, appraisal management fees were allocated as part of loan processing or administration fees or through the interest rate. But this has changed over the years, as more lenders have outsourced appraisal functions to third party management companies. 

This was enabled by interpretations of the Real Estate Settlements Procedures Act (RESPA) - the foundation of which date back to the origins of the HUD-1 in 1974, prior to the existence of the appraisal management business model. The current arrangement allows the bundling of appraisal and appraisal management expenses when appraisal management companies are used. 

In their letter to the CFPB, the Appraisal Institute and the American Society of Farm Managers and Rural Appraisers cited recent research from the National Association of Realtors. That research seems to indicate that borrowers are paying more for appraisal fees than they recently did, but noted that appraisers reporting their fees have seen those fees reduced by as much as 40 percent. 

The Appraisal Institute alleges that this is due to the fact that banks have passed through the administration expenses to the consumers. 

Thus, the letter requests that the form be broadened to assure transparency with respect to appraisal services and the costs for appraisal management services. 

Banks That Own AMCs
 
The so-called “Merkley Amendment” of Dodd-Frank caps fees paid to banks to 3 percent of the loan amount. Separating the appraisal fee and appraisal management company fee on the SDF affects the 3 percent cap mandate on points and fees.

Certain large, national banks own appraisal management companies. So, when the appraisal management fee is bundled with the appraisal fee on the SDF, the fees fall outside of the Merkley Amendment requirements. 

If the fees are separated on the SDF, the appraisal management company fee, with respect to those AMCs owned by banks, would fall within the 3 percent cap, thereby constricting the amount available to other areas of the loan transaction. 

Obviously, banks that own appraisal management companies and receive AMC fees are concerned about adverse effects this may have on their operations.

On this point, the Dodd-Frank provides that the CFPB may exempt fees from the 3 percent cap on points and fees. Therefore, the Appraisal Institute urges the CFPB to exempt appraisal management company fees from the Merkley Amendment.

Library

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Appraisal Institute
American Society of Farm Managers and Rural Appraisers

Letter to Consumer Financial Protection Bureau
Opposing the bundling of appraisal fees
with appraisal management company fees:
CFPB’s proposed Settlement Disclosure Form
November 16, 2011

Tuesday, November 8, 2011

CFPB Issues “Early Warning Notice” Procedures

On November 7, 2011, the Consumer Financial Protection Bureau (CFPB) issued its Bulletin 2011-04 (Enforcement), announcing plans to provide early warning of possible enforcement actions.

This CFPB bulletin outlined plans to provide advance notice of potential enforcement actions to individuals and firms under investigation, through a public notice process, called the Early Warning Notice.

The Early Warning Notice process is meant to allow the subject of an investigation to respond to any potential legal violations that CFPB enforcement staff believes have been committed before the Bureau ultimately decides whether to begin legal action.

OVERVIEW

The CFPB claims that the Early Warning Notice process is modeled on similar procedures that have been successful at other federal agencies.

The process begins with the Office of Enforcement explaining to individuals or firms that evidence gathered in a CFPB investigation indicates they have violated consumer financial protection laws.

Recipients of an Early Warning Notice are then invited to submit a response in writing, within 14 days, including any relevant legal or policy arguments and facts.

In July, the CFPB’s Office of Enforcement made public its rules regarding the initiation and execution of enforcement investigations.

The Early Warning Notice is not required by law, but CFPB believes it will promote even-handed enforcement of consumer financial laws. The decision to give notice in particular cases is discretionary and will depend on factors such as whether prompt action is needed.

EARLY WARNING NOTICE LETTER - SAMPLE

Before the Office of Enforcement recommends that the CFPB commence enforcement proceedings, the Office of Enforcement may give the subject of such recommendation notice of the nature of the subject's potential violations and may offer the subject the opportunity to submit a written statement in response.

The decision whether to give such notice is discretionary, and a notice may not be appropriate in some situations, such as in cases of ongoing fraud or when the Office of Enforcement needs to act quickly.

The objective of the notice is to ensure that potential subjects of enforcement actions have the opportunity to present their positions to the CFPB before an enforcement action is recommended or commenced.

RESPONDING TO THE “EARLY WARNING NOTICE” LETTER

The primary focus of the written statement in response should be legal and policy matters relevant to the potential enforcement proceedings.

Any factual assertions relied upon or present in the written statement must be made under oath by someone with personal knowledge of such facts.

Submissions may be discoverable by third parties in accordance with applicable law.

GUIDELINES FOR LETTER'S FORMAT
The written statement must:
-Be submitted on 8.5 by 11 inch paper
-Double spaced
-At least 12-point type
-No longer than 40 pages
-Be received by the CFPB no more than 14 calendar days after the Notice.
The written response statement should be sent to the CFPB staff conducting the investigation, and must clearly reference the specific investigation to which it relates.

If the Office of Enforcement ultimately recommends the commencement of an enforcement proceeding, the written statement will be included with that recommendation.

Persons involved in an investigation who wish to submit a written statement on their own initiative at any point during an investigation would follow the relevant procedures described above.

LIBRARY

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Consumer Financial Protection Bureau

Early Warning Notice
Bulletin 2011-04
November 7, 2011

Sample Early Warning Notice
Bulletin 2011-04
November 7, 2011