There is some very good news for appraisers regarding fulfillment of the promise of customary and reasonable fees, as envisioned by the framers of Dodd-Frank. For now, the good news extends only as far as the borders of the state of Louisiana but new legislation has the potential to change the rules of the game nationwide. As most appraisers know, the concept of “Customary and Reasonable” appraisal fees was written into Dodd-Frank legislation, only to be neutered by the Interim Final Rule, which interpreted the concept of customary and reasonable (C&R) as the lowest fee an appraisal management company (AMC) can persuade an appraiser to accept (find link to related story below). With the passage of new regulations, low-fee bidding, in Louisiana at least, may be a thing of the past. Louisiana is not the first state to pass AMC regulation that addresses C&R fees, but it is the first to empower its Real Estate and Appraisal Board to determine whether a fee meets the C&R threshold and if not, to sanction the offending AMC. While it remains to be seen if other states will follow, the latest regulations passed in Louisiana should be of interest to appraisers nationwide. How It Works Joseph Mier, SRA and an Louisiana appraiser over 20 years, has been actively involved with industry partners such as the Louisiana Home Builders Association, Louisiana Realtors Association, Louisiana Banker’s Association, and the Real Estate Board, to craft the new AMC rules that passed in November of last year. Mier says that complaints have already been filed reporting AMCs for not paying C&R fees. “Appraisers have been notifying the Real Estate Board when they find a company they feel is not paying a customary and reasonable fee. For example, when a firm offers $200 for a full 1004 UAD appraisal, and then, when questioned about it by an appraiser for being too low, just sends the order to a different appraiser,” says Mier. The Executive Director of the Louisiana Real Estate Board, Bruce Unangst, previously a Market-Area President for a Louisiana based bank, confirmed that the Board is currently investigating several complaints relating to C&R fees. “I can’t comment on the complaints we have received because they are not public record and we may find that no wrongdoing has occurred. However, I suspect you will see some enforcement actions relating to C&R fees over the coming year,” says Unangst. When someone reports an AMC to the State Board for not paying a C&R fee, the Board contacts the AMC to inquire how its fees are determined. “The first thing we do when we receive a complaint,” said Unangst, “is to write the AMC stating the allegations against them and giving them a timeframe to respond. Once we get all the facts, we can determine whether we need to audit their activities, inspect their records, or take other actions such as fines or license suspension or revocation.” According to Unangst, the Board has the authority to fine AMCs up to $5,000 per violation and up to $50,000 aggregate per year. Unangst says that the Board is doing its best to educate AMCs about what the requirements are. “We did not pass these rules to be punitive and our goal is voluntary compliance. With that said, these rules do give us the tools we need. If we have an AMC that would seek to gain unfair competitive advantage by not paying C&R fees, we plan to take enforcement action,” says Unangst. In addition to empowering the state board to enforce C&R fee requirements, the new Louisiana AMC regulations have also empowered the board to conduct “full or partial compliance audits…to determine compliance with all provisions of applicable law and rules.” This provision is meant to assist the Board in conducting investigations and ensuring AMC compliance.
Fee Survey Said Just like under Dodd-Frank, AMCs may choose between two presumptions of compliance. The first presumption, clarified in the Louisiana legislation, is “Evidence for such fees may be established by objective third-party information such as government agency fee schedules, academic studies, and independent private sector surveys. Fee studies shall exclude assignments ordered by appraisal management companies.” To assist in the determination of what constitutes a C&R fee, a statewide survey was conducted by the Southeastern Louisiana University Business Research Center (SLUBRC). The survey focused on fees being paid by banks, not AMCs, to determine the C&R fees for specific assignments in specific areas. The survey also included appraiser input for comparison, based on their work with banks and other non-AMC clients. The table below represents the median appraisal fee reported in the survey paid by banks directly to appraisers. (Read the complete fee survey report here.)
*n represents the number of orders surveyed.
The result, in many cases, is that AMCs are simply using the fees from the statewide survey conducted by the SLUBRC. “A lot of very reputable AMCs are now paying the fees outlined in the survey and we have had AMCs change their fee structure to be in compliance,” said Mier. “I really think AMCs want to do the right thing now, but they are also under pressure because they don’t want to tell the bank that they need to pay more than they’ve been paying because they fear the bank will go elsewhere.” Under the second presumption of compliance, AMCs have an option of not using a third-party fee survey, but they must then provide extensive documentation and justification for paying fees other than those supported in the surveys. Unangst reiterates that the fee survey is not a mandated fee schedule. “The survey was done because one of the complaints that many out-of-state AMCs had was that there is nothing out there giving them an indication of what C&R fees are in our state. Our rules simply state that if an AMC chooses to establish C&R fees that are not based on an independent fee study, they can as long as they verify certain quality provisions. There are six factors an AMC must consider in determining C&R fees under the second presumption of compliance. These conditions are required at the federal level and we simply wrote them into our state law,” says Unangst. How It Began According to Mier, the momentum for the new rules began in 2012, as many AMCs were rapidly entering the appraisal market with few regulations on how they should be conducting business. “It was a free-for-all and no one was following Dodd-Frank, so a group of fee appraisers approached our Real Estate and Appraisers Boards in Louisiana and asked them to take a look at what was going on,” says Mier. Mier says that what started as a dialogue between fee appraisers frustrated with what was happening in the appraisal industry, soon became a statewide discussion that involved real estate professionals from many different fields. Mier describes how he and other fee appraisers began reaching out to not only the Louisiana Appraisers Board, but also to the state’s Realtors Association, Home Builders Association, and Bankers Association. “We told them ‘Look, this is hurting our industry as a whole because low fees are causing geographic competency to be compromised.’ AMCs are just looking for the cheapest appraisal fee in general, regardless of geographic competency. And one of the problems we recognize is that there were no policies in place to enforce the provisions of Dodd-Frank,” says Mier. Louisiana appraisers found common allies among Realtors, bankers, and home builders, each of whom has an interest in quality appraisals that are compliant with federal laws. “We called in the other associations and partners in our industry. None of us were happy with the way some AMCs were doing business in the state. Realtors and builders were not happy with the way appraisals were being ordered because they had appraisers coming into their market who weren’t geographically competent,” says Mier. According to Unangst, the issue of low appraiser fees was one that adversely affected appraisal quality. “I read an article in Working RE a few months ago regarding low-bid appraisal ordering and that’s exactly what we were dealing with here in Louisiana. Speaking strictly in terms of residential appraisals, what we saw happening was that more experienced appraisers, who weren’t dependent on AMCs, were declining assignments when they felt they couldn’t do an adequate quality job for the fee being offered. So the bottom 20 percent of appraisers in terms of experience, quality, and geographic competence were getting a lot of the residential work and it resulted in a lower quality product. Some AMC’s argue that price has no bearing on quality. However, our experience in Louisiana, working with the Banker’s Association and Realtor’s Association, is that price does have a significant impact. We were getting appraisers who lacked geographic competency, experience, and didn’t put time into doing quality appraisals,” says Unangst.