How Will the Dodd-Frank Act Affect Appraisal Fees?
The motivation resulted from somewhere between the massive loan losses caused by the recent recession, the advent of the Home Valuation Code of Conduct (HVCC), complaints from appraisers, as well as lobbying conducted by appraisal, mortgage brokerage and real estate sales industry organizations. We are talking about the section of the massive, recently enacted, Dodd-Frank Wall Street Reform and Consumer Protection Act, which mandates that appraisal management companies (AMCs) register with the Feds and in each state in which the AMC operates.
The primary reason for this legislation was noble. It was to protect the public interest, particularly the interest of consumers and home loan borrowers, as well as the soundness of our banking system. As is sometimes the case, the interest of the consumer was somehow overshadowed by the landslide of special interest, which influenced the legislation. When we consider the plethora of special interests involved and the huge economic impact that the mortgage industry has on a variety of professions, this is easier to understand. There is little wonder that there are many unintended consequences from this otherwise well-intended law. Primary among the consequences is the likelihood that the Dodd-Frank Act will cause a major spike in appraisal fees to the consumer.
The concept of registration, within itself, is not necessarily onerous or impractical; however, in this case, that appears to be true. We have all heard the phrase that the devil is in the details. Never has that cliché had more meaning than it does in this instance. To add another well-known phrase, creating laws is like making sausage … it’s not a pretty sight. I am not sure which statement is more apropos; however, in addition to offering a bit of humor to an otherwise dry subject, they both contain kernels of truth.
Let us visit a few key elements of the law that resulted from those noble and well-intended goals.
►All AMCs are required to register in the states in which they do business. Those operating in 50 states must register in all 50 states. The initial cost of registration as published by states ready to begin the process is as much as $5,000 per state, per AMC. Annual renewals can be as high as $2,000 in some states.
►All AMCs are also required to register at the federal level. The eventual cost of this is unclear, but based upon the language in the legislation, it will range between $25 and $50 annually per appraiser working for AMCs. Based upon this estimate, an AMC having 5,000 appraisers will pay between $125,000-$250,000 per year in fees. Some AMCs have reported that they intend to charge the fee to the appraisers on their approved list. Most AMCs are expected to absorb the fee and incorporate it into their fee to banks.
►There will, without question, be many other costs of compliance experienced by AMCs in following all regulatory rules and regulations. While there is no way to know, as of this writing, what these costs will be, suffice it to say that they will easily pale those costs of registration outlined above.
►Each appraiser performing appraisals in federally-related transactions will be required to personally pay a fee in the amount of $40 each year. If the roughly 92,000 appraisers in the United States pay this fee, it would amount to a tax of $3.68 million. The appraisers will pass this along the chain to the consumer.
It is unclear why such high fees are necessary. Neither is it clear why it is necessary to have two layers of registration, federal and state, when one at the federal level would seem to be adequate. Also, one may ask why some states charge initiation fees of less than $500 when others charge $3,000, $4,000 and $5,000. What is clear is that those new costs, like the costs of other regulations imposed upon business and society by government, will be borne by the consumer. It is possible that many AMCs will be forced out of business by the additional costs of complying with these new regulations. As this occurs, AMCs will not disappear; the larger ones will become larger. This will create a less competitive market, placing upward pressure on appraisal fees. Some even question whether, after the advent of the new regulations, if AMC services will be any better and whether there will be less corruption, fraud or any of the other unsavory activities that the legislation was intended to prevent.
Other unintended consequences of the new law will take their toll on small AMCs in many other ways. These will be broad-ranging and will manifest themselves in the form of AMCs forgoing business in states where they cannot afford to register with budgetary constraints preventing their acquisition of technology and human resources, designed to offer national coverage.
In summary, be prepared for appraisal fees to the consumer to increase substantially when the new law is in full effect, two or three years down the road. This will happen for a number of reasons listed below.
Regulatory cost will make a huge difference
Management companies will spend much more on compliance and fees. They will have no choice other than to pass this extra cost along to the consumer.
The new law will require transparency, forcing banks to separate AMC costs from the actual cost to the appraiser
It stands to reason that banks will use this aspect of the law to recoup costs of overhead forgone in the past. This will result in many banks charging a higher fee to the customer, which covers both appraisal services and appraisal management services.
Appraisers will be paid more
Fees to appraisers have not increased much, if at all, over the past 20 years. They deserve higher fees, particularly in some areas where the competition is stiff. The language in the bill speaks to this issue. While there will be concerns about subscribing to a free market, there will also be pressure to pay appraisers more. We have fewer appraisers than we had in the past. The Appraisal Institute reports that the number of appraisers has decreased in recent years due to the recession and to what many have viewed as low fees, which some blame on management companies. The Appraisal Institute also reports that the number of certified appraisers in the United States decreased 6.6 percent from 2007 to roughly 92,000 in 2010. It also reports that nearly half of all appraisers are between the ages of 51 and 65.
Education and certification
The effect of current state appraisal certification, educational and experience requirements mandates a program that tends to take appraisal trainees between three and five years to become licensed. Therefore, there is likely to be pressure on the market to increase appraisal fees for some time to come.
Fees for appraisals to the consumer have not gone up substantially over the past few years
There are those who would say that management companies have been responsible for holding the fees down due to increased efficiency. Many appraisers will say that this is due in part to AMCs not paying them a fair fee. Whatever the reasons, fees to the customer are likely to increase.
Regulation of AMCs will not cause banks to use AMCs less
It is likely that more banks will use AMCs to service their appraisals in the future. This method of appraisal management permits a higher degree of appraiser independence, mandated by the legislation. In many cases, it will be more economical for the banks.
In the past, competition has seemed to be the primary driver of fees and has held costs to the consumer down. With the new regulations and other forces in the economy, including fewer appraisers to perform work, the cost of a traditional appraisal will increase significantly over the next two or three years. Don't be surprised if appraisal fees to the consumers go up as much as 100 percent in some markets.
For the record, U.S. Rep. Michele Bachmann of Minnesota, shortly after the 112th Congress convened, introduced a bill to repeal the Dodd-Frank Act. Ironically, Rep. Bachmann’s bill offers its own brand of consumer protection.
Charlie W. Elliott Jr., MAI, SRA, is president of Elliott & Company Appraisers, a national real estate appraisal company. He can be reached at (800) 854-5889, e-mail firstname.lastname@example.org or visit his company’s Web site, www.appraisalsanywhere.com.
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