Mandatory reporting of appraiser misconduct under Dodd-Frank
Just a brief look at a lender's obligation to report an appraiser for misconduct, and an example to put it into perspective.
Happy New Year's Eve to everyone! Please refer to last week's newsletter if you're expecting some humor ... I tried last week but was informed I'd "be selling equities in Dallas" if I tried again.
As everyone knows, the regulators have continued to revamp the appraiser independence requirements. And we also know how much broader the new rules are. Once just for loans sold to Fannie/Freddie, they will now apply even to loans held in portfolio. Once only to full appraisals, they'll now apply to AVMs. And once applying only to closed-end loans, the rules now also apply to HELOCs.
Currently, there is an inter-agency interim rule in effect (adopted by all the Federal regulators, FDIC, Fed, NCUA, etc.). FYI, "interim" means we have to follow this until something new is proposed. For those readers in Massachusetts, there is also a MA law on this topic- 209 CMR 41.10(16).
But anyway, we just wanted to call your attention to something some may be surprised to hear. While the appraiser independence rules list a lot of things we cannot do, there are also some affirmative requirements in there.
For example, there is a rule requiring Reporting of Appraiser Misconduct
General Rule
Currently, a lender must report an appraiser to the State where the lender has a "reasonable basis" to believe the appraiser is responsible for a "material" compliance failure. This includes compliance with appraiser laws (state and federal), the Uniform Standards of Appraisal Practice, and ethical or professional requirements.
Only for Material Violation
At first glance, this looks pretty broad. What is "unprofessional"? What if the appraiser dresses inappropriately? But mandatory reporting is only triggered by "material" violations. This means a violation likely to significantly affect the value of a property.
Some examples given include:
Seriously mis-characterizing the value of a property
Doing an appraisal in a grossly negligent manner (Gross negligence is like super negligence. If falling asleep while driving your car was negligent because you were overtired, gross negligence would be like closing your eyes while going through a toll booth to challenge your other senses)
Accepting a job on the condition that the appraiser will value the house at the purchase price
Penalties
There are penalties of up to $10,000 for the first violation. This is specifically for failure to report. Indeed, failing to report the violation may wind up being more serious than the violation itself (with many states punishing appraisers with additional education, while others are fining in some cases).
Example
Loan officer orders appraisal directly from the appraiser, and the appraiser knows the person is acting as a loan officer for this property. This is an impermissible conflict of interest under the appraiser independence law. The head of lending discovers this, disciplines the loan officer, orders a new appraisal, and refuses to pay the appraiser.
In this situation, the lender probably has an obligation to report the appraiser - at least it seems like the smartest choice. While we can debate whether this violation is "likely" to "significantly" affect the value of a property (assuming it wasn't caught), there seems to be no risk in reporting the appraiser and considerable risk in not doing so. After all, the regulator may say, the conflict of interest limitation goes to the core of the appraiser independence rule.
But compare to ... what if, in this example, this was the loan officer's first day on the job. And that the loan officer had worked the last 10 years as a processor, regularly ordering appraisals (lawfully) from the appraiser. Assuming the appraiser had no other reason to know, we might not have a "reasonable basis" to believe the appraiser violated any rules in this case.
In other news:
The CFPB has adjusted HMDA/TILA-HPML asset-sized thresholds (although the TILA HPML exemption is limited in scope, and won't apply to most institutions). The Countrywide whistleblower will get $57.6 million. Interesting article in Harvard Business Review on overcoming biases to build a great team.
There's been a lot of compensation-related compliance work this year for us. Mostly for loan officers, but keep in mind new executive compensation rules are coming soon (another gift from Dodd-Frank) (generally applying to institutions over $1 billion).
Obviously, compensation will differ from institution to institution, business model to business model, by CEO, and by job position. And there are different theories beyond compensation. Should it be a primary motivator? Or is compensation a secondary motivator today, meaning compensation should strive to be a fair representation of the individual's contribution? Not surprisingly, there are a myriad of compensation structures in place, ranging from relatively simple to especially complex. More often we're seeing compensation agreements with increasing complexity. But does that need to be the case?
I'm not saying this is ideal in every organization, or at all, for that matter, but here's an interesting story- One of the world's largest headhunting firms, Egon Zehnder, has an extremely simple compensation plan: it uses only 2 factors, (1) seniority and (2) corporate profits. They don't track billable hours or hand out bonuses. In an effort to "guarantee total collaboration", according to Dan Meiland, the company's Executive Chairman, they have kept it very simple. I'm not sure Jack Welch would approve, but they've made it work, with years of $100 million+ profits.
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