Cuomo Shakes Up Appraisal Industry
By: ERIC S. ANDERSON & TED C. KOSHIOL, Summer Associate
Also published in Minnesota Real Estate Journal, November 2008
September 2008
The biggest changes to the real estate appraisal industry since the implementation of Title XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) may take effect on January 1, 2009. That’s when New York Attorney General Andrew Cuomo’s controversial March 3, 2008 Home Value Protection Program and Cooperation Agreements (the two agreements referred to herein as the Cuomo Agreement) with Fannie Mae, Freddie Mac, and the Office of Federal Housing Enterprise Oversight (OFHEO) become fully effective. Barring action by Congress or an injunction issued upon petition by one of the organizations that have opposed the Cuomo Agreement, next year will bring major changes in the way real estate appraisals are ordered and performed, with significant impacts on the appraisal, mortgage, and banking industries.
When the “subprime” crisis hit, Attorney General Cuomo began looking into the influence lenders assert on appraisers and investigating possible conflicts of interest, fraud and other misconduct in the residential mortgage lending industry that lead to artificially-inflated home values. In November 2007, Cuomo expanded his investigation to the practices of the two government sponsored enterprises (GSEs) that purchase residential mortgages, Fannie Mae and Freddie Mac. By the end of February 2008, a settlement agreement between Cuomo and the GSEs seemed imminent, and numerous federal regulators—including the OFHEO, Federal Deposit Insurance Corporation (FDIC), the Office of Thrift Supervision (OTS), and the Office of the Comptroller of the Currency (OCC)—expressed concern that they had not been involved in the negotiations and that the agreement could have large, unforeseen consequences to the banking and financial industries. But Cuomo pressured the GSEs and OFHEO to sign the agreement, and on March 3, 2008, Cuomo announced that the Cuomo Agreement had been signed. To assure no disruption in the marketplace, the Cuomo Agreement expressly requests comment and concurrence to its terms and the timetable for implementation from the OCC, the Board of Governors of the Federal Reserve System, the FDIC, the OTS, the National Credit Union Administration and the Federal Housing Administration. Comments from some of those agencies have been submitted within the comment period allowed by the Cuomo Agreement, but the impact such comments will have on the Cuomo Agreement is unknown.
The Cuomo Agreement sets forth a new Home Valuation Code of Conduct (HVCC). In broad terms, the HVCC disallows any employee, director, officer or agent of a lender, including various third parties with contractual relationships with the lender, from influencing the development, reporting, result or review of an appraisal through coercion, extortion, collusion, compensation, instruction, inducement, intimidation, bribery, or any other manner. More specifically, the HVCC prohibits many uses of in-house appraisers and any use of appraisal companies that the lender controls or owns, unless the lender’s ownership interest is less than 20% and the lender has no involvement in the day-to-day operations or the selection of appraisers. Further, the HVCC prohibits the lender’s loan production staff from having any role in the selection of appraisers, communications with appraisers, or even working in the same organizational unit with personnel that select or communicate with appraisers. If isolating the loan production staff in a separate unit is not possible by reason of the size of the organization, the lender must still demonstrate that it has safeguards to isolate the appraisal process from the loan production process. Lenders are required to establish a hotline to receive complaints regarding improper influence of appraisers and are expected to perform quality control tests on 10% of the appraisals they use.
Under the Cuomo Agreement, by January 1, 2009, the GSEs must require any mortgage originator from which they purchase loans to warrant that such loans (other than government-insured mortgages) were originated in accordance with the HVCC. The Cuomo Agreement creates a new independent entity funded by Freddie Mac and Fannie Mae, the Independent Valuation Protection Institute (IVPI), which will monitor and study appraisal processes for independence and accuracy, and send biannual reports on its activities to the OFHEO and the New York Attorney General’s Office.
Not surprisingly, the Cuomo Agreement and the HVCC have caused a major stir in the appraisal and mortgage lending industries, and have received significant criticism from the regulators of financial institutions. The OTS noted concerns that the HVCC was ineffective and unnecessary because “a requirement that all lenders must outsource appraisals will not ensure appraiser independence and . . . sufficient laws, regulations, and guidance exist to achieve the universal goal of appraisal independence.” The Comptroller of the Currency suggested that the OFHEO withdraw from the Cuomo Agreement, indicating that the HVCC does not ensure higher quality appraisals, may raise mortgage costs for consumers, will cause disruption in the established mortgage process, and may not be legal due to noncompliance with the Administrative Procedures Act (APA). Other regulatory and many industry responses to the Cuomo Agreement were similarly critical. In the flurry of Congressional activity in response to the “subprime” housing crisis, the Cuomo Agreement has also attracted Congressional attention.
If Cuomo, the GSEs and OFHEO do not modify and Congress does not override the Cuomo Agreement, industry groups have threatened to challenge the validity of the Cuomo Agreement in court. Both the Mortgage Bankers Association and National Association of Mortgage Brokers have been considering legal action. The central question in a legal challenge would be whether the APA applies, given the nature of the parties and the Cuomo Agreement itself. Those supporting the Cuomo Agreement argue that it is simply an agreement between the Attorney General and a private company, approved by its regulator. Those arguing against the Cuomo Agreement say that it is tantamount to federal regulation of financial institutions and cannot be adopted without compliance with the APA.
While the potential for a Congressional response or a trade group lawsuit challenging the Cuomo Agreement remains, no bill stopping it from taking effect has yet been introduced and no lawsuit has yet been filed.
Takeaway
While many comments have been made by regulators and trade groups, neither Cuomo nor the GSEs have announced any plans to modify or change the implementation date for the Cuomo Agreement. Therefore, the industry should prepare for the possibility that the Cuomo Agreement will take effect January 1, 2009, significantly changing existing business practices in the appraisal and mortgage banking industries.