HR
1295: Protecting the Consumer? The
Proposed HR 1295 Bill and Its Impact by
Leigh W. Budlong, MAI Referred to as the Responsible Lending Act and the Truth in Lending Act (TILA), this bill, designed to protect consumers from scam sub-prime loans, also proposes changes for all appraisal activities involving a mortgage borrower, including language to FIRREA (also known as the S&L Bail Out Bill). Why should anyone except a sub-prime borrower or appraiser care about this bill? Because the credit bubble is getting bigger by the day as real estate prices “hit ‘news’ highs” with “no end in sight.” How do you think that is possible without a direct link to better jobs and household income? Readers, it is a speculative real estate market with these loans being rolled off the banks’ book onto Wall Street. I don’t see this ending well, especially for the appraisal community. The focus of this article is the Appraiser Activities section in HR1295. There is no way to address the underlying issue, which is public trust, without re-evaluating the role of the appraiser and the constraints on the profession. The Appraisal Institute (AI), “an international membership association of professional real estate appraisers, with more than 18,000 members and 99 chapters throughout the United States, Canada and abroad” is a proponent of the bill, urging its members with a series of emails to back this bill. After taking the time to read the actual HR1295 bill, not the Summary Bill sent by the AI, line for line, I will not give my support. Going along with it would go against the cornerstone of the profession, which is to give an unbiased opinion. Other groups, most notably the Center for Responsible Lending, a nonprofit, nonpartisan research and policy organization, have voiced their objections to HR1295 claiming “the setting of weak federal standards” would take away already existing and viable state-wide program to stop abusive sub prime lending activities. Further, the bill, as described by their analysis, has having numerous “loopholes that undercut the stated purpose of the bill”. A three page synopsis of the major objections to HR1295 may be found at this link in pdf format. The bill reads: To protect consumers against unfair and deceptive practices in connection with higher cost mortgage transactions, to strengthen the civil remedies available to consumers under existing law, to provide for certain uniform lending standards, to improve housing counseling, to better mortgage servicing, to enhance appraisal standards and oversight, to establish licensing and minimum standards for mortgage brokers, and for other purposes. Not to be too flippant, but for anyone who watches The Sopranos, borrowing money has all kinds of consequences. While this bill in its legalese might purport to want to help those who fall in the sub-prime category, a group that has grown in size over the last 3 to 4 years, for the most part Tony (the banker) is not going to lose money. The five-parts include discussions on each topic with my commentary in italics: Higher Cost Mortgages – the definition of “higher risk borrower” applies to those getting “loans eight points in excess of the Treasury security”. The legislators want to offer a booklet written in easy to understand language to explain complex terms like prepayment penalty, workout situations and “balloon payment” and adjustable interest rates. This will be published in multiple languages and would be requirement that lenders distribute. Housing Counseling – designed to cover the HUD product line with a promise of more pamphlets in multiple languages as well as a study as to the “root cause” of defaults; the idea of a counselor is also introduced as is the $75 million in grant money available to cover such service. Mortgage Services – who can charge what and when includes a discussion of those pesky impound accounts. Good news, there are ways around it, but the way I read the language, few will get out of this unless putting more than 10% down. Again, more pamphlets are promised to explain the different options. Requirements for Mortgage Brokers – this covers the concept of licensing mortgage brokers and requiring such strenuous education requirements as 24 hours and a written exam. There will be follow up education – 12 hours every 2 years (biennial), a criminal check and a database that will need building and monitoring (all for fees). The definition for mortgage broker is: “a person who engages for compensation, either directly or indirectly, in the acceptance of applications for mortgage loans for others, solicitation of mortgage loans on behalf of borrowers, or negotiation of terms or conditions of loans on behalf of borrowers or lenders.” Exemptions include financial institution lenders and government agencies; the rationale for this was not explained. In my field, whether you work in the bank or run your own business, you are required to be licensed and are heavily regulated. This might explain some of the staffing at many banks today. They don’t have mid-to-large sized appraisal departments as they once did (and where most training for the industry as a whole was done) and many reviewers are not educated in valuation techniques. I actually heard from a fellow appraiser of receiving a call from a reviewer asking “what is a gas-wall heater?” The reviewers are often called loan processors. HR1295 has a focus on the sub-prime lending market vis-à-vis Appraisal Activities, but that is a relatively small component relative to the language that targets “appraisers involved with properties involving all mortgage borrowers.” This bundles the majority of appraisers – both residential and commercial – together with the exceptions being non-lender work appraisers (those in the litigation and private practice work). The bill is a springboard for the proponents of the bill (lenders) to launch changes to the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), also known as the S&L Bail-Out Bill. (For the record, the appraisal community had adopted, prior to FIRREA, the Uniform Standards of Professional Appraisal Practice (USPAP) to create a set of rules for appraisers to play by. Though not technically law, USPAP has the connections to enforce its rules and regulations as though it were. It applies to all appraisers – real property, personal property and intangibles.) Now, 16 years later, the legislators behind HR1295 want to edit the law to require more education and more oversight as well as to address appraiser independence, a topic that is being revisited time and time again in the press because people are getting worried. I wouldn’t have an issue with a revamping of FIRREA, if it made sense – it doesn’t. Read on… The next paragraph is taken directly from HR1295, Summary version, sent to the Appraisal Institute members to gain their support for its passage. Appraiser Independence “To enhance the independence of appraisers and help to ensure that they serve as an unbiased arbiter of a property’s value for the buyer, seller, lender, investor and others, subsection (h) prohibits the parties interested in a real estate transaction involving an appraisal from improperly influencing or attempting to improperly influence, through coercion, extortion, or bribery, the development, reporting, result, or review of a real estate appraisal. No such requirement for appraiser independence currently exists under Federal law, but several States have adopted or are considering a similar standard.” Now, compare this with the language directly from the bill because what is missing is the Exceptions language: “No mortgage lender, mortgage broker or bank, real estate broker, nor any other person with an interest in a real estate transaction involving an appraisal shall improperly influence or attempt to improperly influence, through coercion, extortion or bribery the development, reporting, result or review of a real estate appraisal sought in connection with a mortgage loan. Exceptions: The requirements of paragraph 1 shall not be construed as prohibiting any of the above named parties form asking an appraiser to provide 1 or more of the following services: 1) consider additional, appropriate property information 2) provide further detail, substations, or explanation for the appraiser’s value conclusion 3) correct errors in the appraisal report.” Appraisal regulations were designed to protect consumers by providing unbiased opinions in an ethical manner. How can appraisers be objective and independent when fees are held until a report is viewed “acceptable”? And what about additional information that can used to lead the appraiser to support the value the lender and/or mortgage broker is looking for? When the Appraisal Institute (AI) representative in D.C. was contacted to comment, the response furthered my view that this bill should not be supported by any group other than the lenders. The AI endorsement of the bill shows how deep the lenders tentacles reach bringing to light potential conflicts of interest between the organization and the lending community. For the public good and to preserve what integrity remains intact for the appraisal profession, HR1295 should be seen as a wake-up call. It does a fine job of announcing there are problems without solving anything and actually creates additional room for improprieties. What truly is needed is a hard look at issues facing the profession that include: 1) Automated Valuation Model (AVM), designed to replace most appraisal work. It is cheaper, more predictable and can be more easily monitored and controlled by the party with the most clout, the banking industry. 2) As a whole and in very general terms, the appraiser psyche is fraught with insecurities about what is and what is not allowed and who has authority to require they submit what to whom. Lacking clear leadership to give purpose and direction to the profession is not only a detriment to appraisers; it spills over into the “public good arena.” What is the result of neglect? We, as a profession, could easily be the scapegoat for what will go down as the largest collapse of the financial market when this housing bubble bursts. It has had the time (since 2000 stock market crash with the last 2 years of double digit so-called “appreciation”), nationwide participation in real estate mania (we are at the highest home ownership level ever), and newly designed loans have been created to entice buyers [borrowers]. Greg Harding from the OREA, Office of Real Estate Appraisers, spoke at an Appraisal Institute chapter meeting in Pleasanton, CA earlier this year. What he reports about the complaints filed support that the years of carefree money making are going to cost the appraisal community. These are some of the biggest infractions noted: poor mentoring, limited due diligence, succumbing to lender/client pressure (who control the appraiser), poor education, fraudulent activities (abuse of electronic signatures) and assembly line appraisal shops leading to the poor quality reports. Appraisers are working in a vacuum environment with minimal peer contact yet USPAP has a “peer test” interwoven into the fabric of USPAP regulation. Like most professions, appraisers used to meet voluntarily, not for state hours credit to discuss matters that impacted their work. There was a level of camaraderie healthy to any profession, but definitely one as multi-faceted as appraisal. This is taken directly from 2005 USPAP 7-hour Update Class and refers to “Scope of Work”, a topic promising to be the next Waterloo for the industry. Appraisers have an “acceptability test” concerning scope that is two-fold: i) “the expectations of participants in the market for the same or similar appraisal services; and ii) what the appraiser’s peers’ actions would be in performing the same or a similar assignment in compliance with USPAP.” This would presumably encourage appraisers to want to hold discussions and share ideas, concepts and theories about what should the market expect. But the way it actually plays out is this…appraisers don’t have to think for themselves. Clients give them their required formats and these include narrative style reports as well as the standard form reports from the likes of Fannie Mae, Freddie Mac, HUD, and VA et cetera. 3) While state licensing has “leveled the playing field” for others to join in, it has also brought with it a level of inexperience and lack of technical valuation knowledge. Where are most of the new appraisers working? They are not working with attorneys or title companies – they work for lenders. HR1295 includes language that addresses professional designations, but only goes so far as to say consideration be given. There is no incentive to go through the expense both monetarily and time to join a profession. The AI has struggled with its membership for years… What can be done? Three areas that would benefit from a new view on an old profession include:
As a professional appraiser, I can’t support HR1295. Can you? More importantly, will they, the public, ever trust us again? Leigh
W. Budlong, MAI
About the Author:
In 1998, she became self-employed creating a hybrid position that blended brokerage, investment, interior design/construction and advisory services. With a well rounded background and a passion to make appraisal fun and informative, the foundation was laid for Beyond Value. Credentials: Member of the Appraisal Institute (MAI), California State broker, AG Licensed Appraiser, approved assistant instructor for the Appraisal Institute. Editor’s Commentary: Appraisers are the low-men on the totem pole that take the flack from their more powerful and influential counterparts in the real estate and lending communities [Federal Banking Cartel]. If their job is to be impartial, they need to be truly independent. That S&L Scandal was an expensive clean up effort paid for by us, the tax payers, at a tune of $8,000 for every man, woman and child in this country – one of the greatest financial scams in economic history. With a record deficit, on-going war(s) and state and municipalities crying poor, and the sheer mass of personal debt, this clean up is going to be significantly more expensive. While the appraisers were the scapegoats in the S&L Bailout, my fervent hope is that the real culprits, the ones setting the credit policies get the blame they deserve [Federal Banking Cartel]. FIRREA was designed to prevent this (market collapse) from ever happening again, but the actual impact of FIRREA is a sham. Appraisers lost their profession. Those in leadership of the industry have ties to the lending community and the Federal Banking Cartel – hence, these leaders’ group manipulation endorsement for a bill that so clearly goes against benefiting either the consumer or the realty appraiser. Rules are now to be made for, and endorsed by, the fox both guarding and wanting to rob the hens in the henhouse – all under the pretext of the Rule of Law. If it weren’t so dangerous a situation, such a preposterous arrangement would be humorous. So many Americans feel safe from a real estate collapse, believing there are safeguards in place like a “Chinese Wall” separating the lenders from the appraisers. That is not the case. Can the Fed help? The Fed has no control from preventing real estate from diving into a dire straits situation [Excuse, me, Alan! The Plunge Protection Team or the Working Group on Financial Markets won’t work in real estate implosions.] The disparity between two professions – the accountants and their fall from grace post the Enron meltdown and the appraisers post the S&L bailout scam – is night and day. How come reform to the appraisal industry can’t have the positive effects the Sarbanes-Oxley Act has had on accountants? You would think the accountants would be in trouble but no…Smaller and mid-size companies are actually facing difficulty getting a Big Four accounting firm to audit their books. The Sarbanes-Oxley Act has, in effect, created a “chronic shortage of public certified accountants”. Why? Because Big Four firms are doing “liability risk assessments” and deciding some companies aren’t worth it. Or, they are making them pay significantly higher fees. Once dropped by a Big Four, it “traditionally” has raised a red flag with the federal Securities and Exchange Commission as well as stockholders. Can you appraisers out there imagine if you could say “no” to certain Big Boy lenders viewed as “too big a risk” for an appraiser to take on as a liability? And, if so 1) the fees would reflect the greater risk and 2) by declining the assignment, it would send a message to the market at large? Obviously, the accounting lobbyist groups are much more powerful than the appraisers... I urge our readers of Realty Reality to pester their Congress Folks to oppose this legislative fraud, especially you honest appraisers out there who have been kicked around, lied to and told to keep quiet under Delphi, Cognitive Dissonance, and Group Manipulation Tactics. From California to New York… from Alabama to Montana … from Maine to New Mexico and all points in-between! – including Alaska and Hawaii – make an effort to be heard! It’s time to stir up the pot under the Rule of Law. We are the good guys. – Ole Bear, Editor |
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