As a la mode's in-house Chief Counsel, it is my task to translate the issues a la mode sees in the Home Valuation Code of Conduct (HVCC) as it currently stands into proposed changes to the language of the HVCC. If you have not already read Dave's article, click here to do so now to better understand the "why" behind the "what" in our proposed HVCC.
Before we get into the meat of the changes, it is important to note the process regarding the revision which will best serve the industry. Our proposed changes here are by no means carved in stone, but we do all need to be mindful of the old adage about picking our battles wisely. We tried to stay within the overall framework of the HVCC, and stuck to the five general issues Dave outlined, so that the general document still feels familiar to the parties involved in its first draft. One could start with a clean sheet approach, but in our nation's capital (where I live), issues are typically negotiated from a starting position already staked out.
The commentary period to the OFHEO comes to a close at the end of April. It is our intention to submit what we have here, while also incorporating the best suggestions from readers and customers such as you. Again, we have to limit what we change to increase our chances of influencing the outcome, and we also have to show compromise and unity as an industry. We will be circulating this draft now for suggestions (via e-mail and this publication). The more appraisers we unite behind one document, the more likely we are to effect change.
To see our proposed revised language to the actual agreement, scroll down to the bottom of the page.
Now, analyzing the proposal section by section:
I. The focus of work in this section was on changing the terminology to account for any sort of collateral valuation done, not just the strictly defined appraisal done by an appraiser from the original. The reason, as Dave points out, is that the restrictions in the current HVCC apply very narrowly to appraisers, encouraging the lender to instead utilize alternatives such as AVMs and BPOs, which are expressly exempted in other sections. In effect, the lender sees an appraiser under HVCC as having a higher "liability price tag". This terminology change, to encompass all valuations from all parties, levels the playing field and makes it less likely that a lender will choose a BPO or AVM just to skirt the regulations.
II. The changes here ensure that any and all valuations are provided to the borrower, which under the current HVCC includes only appraisals. If a lender ran multiple AVMs or ordered multiple BPOs until the number was "hit", the current HVCC would enable the lender to never disclose that information at all to the borrower. Also, this complements our language in Section I, item 9, closing the loophole by which repeated valuations were permitted if the first valuation was not an appraisal. Now, secondary valuations are restricted after any sort of primary valuation, whether it was an appraisal or not. Any type of primary or permissible secondary valuation (allowed only in case of errors or a tainted primary valuation) must be provided to the borrower along with the original.
III. In this section, we removed the focus on payment, since Section I, in items 1, 4, and somewhat in 5, already deals well with the common compensation leverage techniques that lenders have used. The original language also barred appraisers from working with any sort of mortgage broker, which unfairly restricts the appraiser's ability to choose his or her own clients, and which served as a precursor to sections IV and V, moving virtually all appraisal orders to outsourced appraisal management companies. So long as the coercion language in Section I remains intact, and as long as there is an audit trail protecting the appraiser and proving that the lender or other third party (even a mortgage broker) hasn't influenced the valuation, then the original intent of Section III (isolation of influence via compensation source) is still met by the new language without robbing the appraiser of the ability to interact with clients. (pq)
IV. In this section, we eliminated all the specific restrictions which virtually mandated the use of an AMC, and simply modified and broadened the original section's last "catch all" provision for smaller originators. The original section's last sentence was really all that was needed to address the problem: The lender must show that prudent safeguards were in place to prevent the loan production side of the business from influencing value. Together with the audit trail provision of our new Section III, and the original coercion provisions in Section I, the problem is addressed elegantly and simply, without pushing lenders to utilize outside AMCs. It's already been established that AMCs were not a shield protecting appraisers from coercion, since the original lawsuit prompting the HVCC's creation was filed against an AMC alleging that it engaged in practices of pressuring and blacklisting appraisers on behalf of a lender.
V. Section V was modified to remove the original clause numbered (2), which was redundant since the requirement for prudent safeguards against the production staff influencing the valuation process was already clearly established in section IV. Also, the education and training burden which was originally applied only to staff interacting with appraisers was extended to apply to any staff interacting with any type of valuation product. Conceivably under the original language, a lender could have the choice of untrained, inexpensive staff dealing with alternative valuations or expensive, trained staff dealing with appraisers, and would be incented therefore to either outsource the work to AMCs, or to utilize alternative valuations with no training cost.
VI. We again extended the concepts embodied in Section VI to all collateral valuation providers and methods. We also corrected an apparent mistake in parts 5 and 6, since even a single-person appraisal shop is defined as a settlement services provider under the RESPA code as referenced. The apparent intent was to avoid having multi-discipline settlement providers (those offering title, credit, flood, and so on) doing appraisal management work, since the sales function in the other components of the settlement provider's company could influence the appraisal where "bundled services" are provided. Perhaps most importantly, we removed the exceptions allowing a lender to own portions of an appraisal management company, regardless of percentage. Any percentage of ownership would reduce the independence of the valuations provided by a management company. We also removed the ability for a lender to own and operate, in whole or in part, an internal AVM. It is impossible to imagine a scenario where a lender's own internal AVM could possibly be considered an independent valuation of a property. If a lender can't utilize an appraiser or other valuation provider unless they are independent, the same should apply to AVMs. A lender would still be able to operate an AVM for quality control and portfolio analysis purposes, since that would be separate from providing the collateral valuation used in a specific mortgage origination transaction.
VII. We removed the provisions allowing the lender to serve as its own investigator, and shifted the hotline ownership to the IVPI (which can independently choose to refer cases to law enforcement authorities or any other regulatory bodies). We also strengthened the hotline notification language to apply to all parties to the transaction, and to all valuation products, instead of unfairly singling out only appraisals and appraisers for implications of potential impropriety. If the lender receives a complaint directly, the lender has 72 hours to provide the information to the IVPI.
VIII. This section was cleaned up to avoid the use of a target percentage of valuations to be statistically tested. Valid sample sizes and testing methodology are more properly determined by portfolio risk analysts.
IX. The reporting mandate in Section IX was extended to include reporting of unethical or improper conduct on the part of the lender as well.
X. The language was simply expanded to ensure that any valuation was done consistently with the HVCC, not just appraisals.
XI. In the original HVCC, this section underscored the exclusions given to alternative valuation methods and provided a subtle hint to lenders to utilize them instead of appraisals. We modified it to expand on its second half regarding the scope of work, and to reverse the implication of equality of an appraisal and alternative methods. This new language makes it clear that including an appraiser in the realm of a "valuation provider" under our modified HVCC does not cause USPAP to be applied to non-appraisers, nor does it amalgamate appraisals with alternative valuation products. The distinctions and higher standards associated with an actual appraisal prepared by a licensed or certified appraiser still remain.
The Settlement Agreement is not an altogether bad agreement; as Dave Biggers asserts, its heart is in the right place. It is our collective duty as an industry however to ensure that the Agreement serves the interest of appraisers while achieving its stated goals. We believe the key is to focus our proposed HVCC changes in these five targeted areas that blatantly harm the appraisal industry. We look forward to hearing from our readers and customers as we develop our final proposal. As stated previously, the more appraisers we unite behind one document, the more likely we are to effect change.
I. No employee, director, officer, or agent of the lender, or any other third party acting as joint venture partner, independent contractor, vendor management company, or partner on behalf of the lender, shall influence or attempt to influence the development, reporting, result, or review of a collateral valuation through coercion, extortion, collusion, compensation, instruction, inducement, intimidation, bribery, or in any other manner including but not limited to:
1) withholding or threatening to withhold timely payment for a collateral valuation 1;
(1 A collateral valuation is any real property value estimate, whether automated or produced by a human, used to support the origination and underwriting of a mortgage loan)
2) withholding or threatening to withhold future business from any valuation provider, or demoting or terminating or threatening to demote or terminate any valuation provider 2;
(2 A valuation provider is any entity producing a collateral value estimate as defined in 1)
3) expressly or impliedly promising future business, promotions, or increased compensation to a valuation provider;
4) conditioning the ordering of any collateral valuation or the payment of any fee or salary or bonus on the opinion, conclusion, or valuation to be reached, or on a preliminary estimate requested from a valuation provider;
5) requesting that a valuation provider provide an estimated, predetermined, or desired valuation in an appraisal report, or provide estimated values or comparable sales at any time prior to the completion of a valuation report;
6) providing to a valuation provider an anticipated, estimated, encouraged, or desired value for a subject property or a proposed or target amount to be loaned to the borrower, except that a copy of the sales contract for purchase transactions may be provided;
7) providing to any valuation provider, vendor management company, or any entity or person related to the valuation provider or vendor management company, stock or other financial or non-financial benefits;
8) allowing the removal of a valuation provider from a list of qualified valuation providers used by any entity, without prior written notice, which notice shall include written evidence of the improper conduct, including but not limited to violations of the Uniform Standards of Professional Appraisal Practice (USPAP) or state licensing standards, substandard performance, or otherwise improper or unprofessional behavior as provided herein;
9) ordering, obtaining, using, or paying for a second or subsequent collateral valuation in connection with a mortgage financing transaction unless there is a reasonable basis to believe that the initial collateral valuation was flawed or tainted and such basis is clearly and appropriately noted in the loan file, or unless such collateral valuation is done pursuant to a bona fide pre- or post-funding valuation review or quality control process; or
10) any other act or practice that impairs or attempts to impair a valuation provider's independence, objectivity, or impartiality.
Nothing in this section shall be construed as prohibiting the lender (or any third party acting on behalf of the lender) from requesting that a valuation provider (i) provide additional information or explanation about the basis for a valuation, or (ii) correct objective factual errors in a collateral valuation report.
II. The lender shall ensure that the borrower is provided, free of charge, a copy of any and all collateral valuations concerning the borrower's subject property immediately upon completion, and in any event no less than three days prior to the closing of the loan. The borrower may waive this three-day requirement. The lender may require the borrower to reimburse the lender for the cost of the collateral valuations.
III. The lender or any third-party specifically authorized by the lender to oversee the ordering, management, or review of collateral valuations (including, but not limited to, mortgage brokers, vendor management companies, and correspondent lenders) shall be responsible for retaining copies of all communications, whether ad hoc or automated in nature, between the lender or third party and the valuation provider. In addition, the factors considered when selecting the valuation provider must be documented and retained in the loan file as well.
IV. The lender or any third-party specifically authorized by the lender to oversee the ordering, management, or review of collateral valuations must have in place prudent safeguards to isolate its collateral valuation process from influence or interference from the loan production process.
V. Any employee of the lender or any third-party specifically authorized by the lender to oversee the ordering, management, or review of collateral valuations must be appropriately trained and qualified in the area of real estate collateral valuations.
VI. In underwriting a loan, the lender shall not utilize any collateral valuation prepared by a valuation provider employed or retained by:
(1) the lender;
(2) an affiliate of the lender;
(3) an entity that is owned, in whole or in part, by the lender;
(4) an entity that owns, in whole or in part, the lender
(5) a multi-discipline real estate "settlement services provider", as that term is defined in the Real Estate Settlement Procedures Act, 12 U.S.C.§ 2601 et seq.;
(6) an entity that is owned, in whole or in part, by a multi-discipline "settlement services provider".
Notwithstanding these prohibitions, the lender may use in-house valuation providers to order, manage, or review collateral valuations, or to provide collateral valuations in connection with transactions other than mortgage originations (e.g. loan workouts).
VII. The lender will provide to all parties involved in the transaction a notice with the telephone hotline and the email address provided by the IVPI to receive any complaints concerning the improper influencing or attempted improper influencing of valuation providers or the collateral valuation process. Each borrower, as part of a cover letter accompanying the provided collateral valuation, will be notified of the same hotline and email address of the IVPI and their purpose.
Within 72 hours of receiving any direct complaint regarding the collateral valuation or the collateral valuation process from a medium other than the IVPI hotline, the lender shall notify the Independent Valuation Protection Institute and any relevant regulatory bodies of the complaint. The name and any identifying information of the person or entity that has filed such a complaint shall be kept in strictest confidence by the office of the General Counsel, Chief Compliance Officer or other independent officer, except as required by law. The lender shall not retaliate, in any manner or method, against the person or entity which makes such a complaint.
VIII. The lender agrees that it shall quality control test, by use of generally accepted statistical methods, a statistically significant percentage of all collateral valuations used by the lender. The lender shall report the results of such quality control testing to the Independent Valuation Protection Institute and any relevant regulatory bodies.
IX. Any lender who has a reasonable basis to believe a valuation provider is violating applicable laws, or is otherwise engaging in improper or unethical conduct, shall promptly refer the matter to the Independent Valuation Protection Institute and to any relevant regulatory bodies.
Any collateral valuation provider who has a reasonable basis to believe a lender is violating applicable laws, or is otherwise engaging in improper or unethical conduct, shall promptly refer the matter to the Independent Valuation Protection Institute and to any relevant regulatory bodies.
X. The lender shall certify, warrant and represent that the collateral valuation was obtained in a manner consistent with this Code of Conduct.
XI. Nothing in this Code shall be construed to affect the acceptable scope of work, or applicability of any or all of the provisions of the Uniform Standards of Appraisal Practice (USPAP), as regards a licensed or certified real estate appraiser in connection with a particular assignment, nor shall it be construed to equate any alternative form of collateral valuation with a USPAP compliant appraisal report prepared by a licensed or certified real estate appraiser.