Dodd-Frank: Another Compliance Pitfall

We received a lot of responses to our article last month, where we talked about why lenders can’t request a specific appraiser (per Appraiser Independence Requirements [AIR]). Due to questions we received about that article, we’d like to dive a little deeper into the issue of appraiser independence. It can get complicated and confusing.

Similar to AIR, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 placed regulations on the financial industry, including mortgage lending. Here’s a key paragraph:

Consistent with TILA Section 129E(b)(1), § 226.42(c)(1) provides that no person shall attempt to or cause the value assigned to the consumer’s principal dwelling to be based on a factor other than the independent judgment of a person that prepares valuations, through coercion, extortion, inducement, bribery or intimidation of, compensation or instruction to, or collusion with a person that prepares a valuation or a person that performs valuation management functions.

This has been interpreted as prohibiting loan originators, mortgage brokers, bank branch managers, and anyone whose job includes originating loans from even choosing an appraisal management company, much less an individual appraiser.

In other words, those involved in loan sales cannot select the AMC that will assign the valuation to one of their appraisers.

“Our team has been working with Triserv for many years. They do a great job building a panel for a specific local area, and stay on top of the appraisers if the appraisal is not returned in a timely manner. Easy to work with on the front and back end. This company can do appraisals anywhere in the country. Highly recommended for any mortgage company. They are massive in area covered, with a small company feel. I'm grateful to have them on our team”
- COO, Mortgage Lender, Michigan

That said, a lender’s loan processors, underwriting, and other operations (non-origination) staff can choose the AMC. However, as we discussed last month, they cannot select the individual appraiser.

Where we have seen some lender questions on this front has been in the area of whether lenders can present loan officers or branch managers (e.g., loan production staff) with a list of AMCs that they can choose from when placing an order. Whether retail or wholesale, both Dodd-Frank and AIR appear to prohibit this practice. Every lender would be well advised to take the process of “selecting the AMC” completely out of the hands of any loan originator, whether they are retail or wholesale.

For the matching FAQ on AIR Compliance, please see this link for additional answers to common questions. The GSEs tend to share these appraisal guidelines, and they mirror Dodd-Frank’s prohibitions.

  1. May a person on a lender’s staff who is not part of the loan production staff and does not receive a bonus or commission based on loan closings provide an AMC a list or panel of appraisers to use for loans involving a specific mortgage broker, real estate agent or loan officer? Answer – No! Please see Q.12 of the FAQ.
  2. Can a broker select a specific AMC if the Lender works with more than one AMC? Answer – No! Please see Q. 17 of the FAQ.
  3. May a lender direct a broker to a specifically authorized list of pre-selected, approved AMCs and have the broker initiate the appraisal process by choosing one from the list? Answer – No! Please see Q. 23 of the FAQ
  4. Can a non-commissioned employee who orders appraisals report to the same person as the loan production staff? Answer – No! Please see Q. 27 of the FAQ
  5. But doesn’t the term “broker” refer to a wholesale partner and not my retail loan officers? In our opinion – No! AIR makes no distinction between wholesale and retail loan officers; it uses the term “broker” to refer to someone originating the loans. Additionally, Dodd Frank makes no such distinction. A retail loan officer would be one of the “Covered Persons” prohibited from performing “Valuation Management Functions.”
    Lenders are advised to steer clear of having loan officers, producing branch managers and others originating loans (as well as their staff) from having anything to do with the process of selecting and retaining an AMC or appraiser for use on a loan.

We hope this helps keep your team compliant.

For resources on maintaining appraiser continuity during COVID-19, please click here.

Triserv will be releasing additional information on how COVID-19 is impacting the appraisal process. We invite you to sign up below to receive those updates. We look forward to being a resource for you in these challenging times.

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