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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.


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. 

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.


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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

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