Insurance and Real Estate Committee

JOINT FAVORABLE REPORT

Bill No.:

SB-13

Title:

AN ACT CONCERNING REAL ESTATE APPRAISAL MANAGEMENT COMPANIES.

Vote Date:

3/18/2010

Vote Action:

Joint Favorable Substitute

PH Date:

2/16/2010

File No.:

SPONSORS OF BILL:

Insurance and Real Estate Committee

Co-Sponsor Lonnie Reed 102nd

SUBSTITUTE LANGUAGE:

LCO No. 2633

REASONS FOR BILL:

Appraisals play a significant role in the real estate lending process. Appraisal Management Companies (AMC's) have played a more prominent role in the appraisal process since a lawsuit filed by New York Attorney General Andrew Cuomo against Fannie Mae and Freddie Mac. Part of the settlement was the Home Valuation Code of Conduct (HVCC) which is intended to serve as a buffer between the lender and the appraiser. The Appraisal Management Companies as an unintended consequence became an influence in regard to appraisal fees and assignments. Currently AMC's are not required to register in Connecticut. This bill would provide registration and regulation.

RESPONSE FROM ADMINISTRATION/AGENCY:

Richard Blumenthal, Office of the Attorney General, State of Connecticut: This bill would require Appraisal Management Companies to register with the Department of Consumer Protection. It would preserve the independence and integrity of appraisers from Appraisal Management Companies (AMC's) who may wish to direct a particular outcome of an appraiser. A system of fair compensation would be required for appraisers and there would be due process for removal of an appraiser from an approved list.

The Home Valuation Code of Conduct is intended to serve as a buffer between the appraiser and the lender. Thus enter into the lending process the unregulated AMC. The AMC's may low-ball appraiser commissions, profiting by charging the bank full price and pocketing the difference. They also hire appraisers who may not have the full understanding of the market when they are requested to do an appraisal. Regulation of these companies will ensure that the Home Valuation Code of Conduct, the cure for influencing appraiser decisions does not simply replace one source of bad influence with another. I am in support of this bill.

NATURE AND SOURCES OF SUPPORT:

Ralph Biondi, Chairman of the Legislative Affairs Committee of the Connecticut Chapter of the Appraisal Institute: Appraisal Management Companies (AMC) are business entities that administer networks of independent appraisers to fulfill real estate appraisal assignments on behalf of lenders. AMC 's are third party brokers of appraisal services who sit between banks and other mortgage originators and licensed or certified appraisers who perform real estate appraisals. The AMC recruits, qualifies, verifies licensure, negotiates fees and service level expectations with a network of third party appraisers. In some cases, the AMC is also responsible for many tasks associated with the collateral valuation process to include appraisal review, quality control, market value dispute resolution, warranty administration and record retention.

AMC's have been in existence for many years and afford lenders the option of outsourcing the administration of the appraisal function. However, the industry has experienced explosive growth in the past year since the implementation of the Home Valuation Code of Conduct.

AMC's are the only entity in the real estate sale and financing transaction who are not licensed or regulated. All other participants, be they banks, mortgage companies, real estate appraisers, attorneys, title companies, home inspectors and real estate agents are licensed or certified by either federal or state regulatory agencies. AMC's are the notable exception. Six states have passed legislation regulating AMC's, California being the most recent.

It is my understanding that another thirty states are considering some form of regulation of Appraisal Management Companies. Additionally, HR-4173 the Wall Street Reform and Consumer Protection Act of 2009, passed by the United States House of Representatives, includes a provision for mandating the regulation of appraisal companies within the next three years.

Rob Clermont, Connecticut Association of Real Estate Appraisers (CARA): The primary function of the Appraisal Management Company (AMC) is to locate appraisers who are able to fulfill appraisal assignments for their clients who are typically mortgage brokers, mortgage lenders and or banks. The underlying goal of the AMC is to locate an appraiser who will perform the appraisal assignment at the lowest fee thereby ensuring the greatest profit margin for the AMC. They will be typically compensated for their service in one of three ways:

1) They collect a referral fee directly from the appraiser

2) They markup the cost of the appraisal to the bank/lender

3) They charge the homeowner a fee for the appraisal which is greater than the fee charged by the appraiser for their service

In some instances appraisers have reported seeing AMC's mark up the cost of the appraisal by as much as 100% for doing nothing more than locating an appraiser over the internet. Moreover, appraisers are instructed not to discuss fees with the homeowner or the end lender. Such a request is only for the purpose of concealing the true cost of the appraisal from the homeowner and or lender. These practices remove transparency from the lending process and to the actual costs associated with mortgage financing.

The same sort of steering, markups, bird dog fees, kick backs and referral fees have become prohibited practices in Connecticut with respect to the insurance, real estate and legal profession Such negative practices lead to higher and unnecessary costs that are eventually passed on to the consumer.

Proposals for inclusion:

1) The only one who can charge a fee for an appraisal is a licensed/certified appraiser

2) Real Estate appraisers may only share a few with a properly licensed/certified appraiser

3) All appraisers must include w/their appraisal an invoice reflecting the actual cost

4) All appraisers must provide the homeowner/borrower with an invoice reflecting the actual fee charged by the appraiser

Bill Ethier, Chief Executive Officer, Home Builders Association of Connecticut, Inc.:

Home builders have experienced severe lending issues as a result of the financial collapse and restructuring that has taken place in our economy. We testified before a joint invitational hearing of the Banks and Commerce Committees last December to highlight the issues our members have faced. This testimony can be found on our home page at www.hbact.org.

We do not want to paint a broad brush but some of these credit crisis issues relate to poor appraisals conducted through appraisal management firms.

The common complaint has been that some management companies hire appraisers from outside the area who are not familiar with the municipality and the neighborhood. The result is bad appraisal and lost sales. The cramming down of appraisal fees paid to certain appraisers and the demand for very quick turn-around may also result in the use of poor comparables and a “rushed “ job, producing poor appraisals. Nationally, we have urged better guidance be sent out regarding the HVCC rules ( or amendments to same) to all parties so that reasonable , permissible and necessary conversations and information exchange can take place between appraisers and interested parties to a transaction. State governments can also do their part to address these issues.

At this point, we are comfortable with the direction being taken with the group's negotiations and potential amendments to the bill's language, but reserve comment until we see final language.

We believe that the registration of appraisal management companies is necessary to ensure accountability to the citizens of Connecticut.

1) Registration would create a framework for appraisal competency.

2) To achieve the accountability desired, minimal regulation through clear, objective standards may be necessary to accompany registration.

3) The Home Builders Association of Connecticut, Inc. is not interested in market share or fee disputes between appraisal firms and appraisal management companies. We are only interested in appraisal competency.

John Galvin, MAI, Andrews & Galvin Appraisal Services, LLC :Members of the Appraisal Institute are not only bound by the requirements of the Uniform Standards of Professional Appraisal Practice, which are appraisal standards written by the Appraisal Foundation ( a quasi-government board) but also our own Code of Ethics and additional standards in order to assure “Public Trust” that we routinely perform a credible and quality appraisal analysis and clearly communicate the appraisal analysis and/or value in a manner that is not misleading.

This bill is simply intended to get the Appraisal Management Companies (AMC's) to register in Connecticut. Currently they are the only part of the lending process that is not regulated. This bill is necessary to assure appraisal reports are competently completed by qualified appraisers appropriately certified. This bill is not just necessary to protect those relying on the value estimates reported to make competent purchases and finance decisions but also to assure loans are sufficiently collateralized to maintain stability within the banking and secondary mortgage markets.

This bill provides one more level of protection to assure that the credible real estate appraisal industry can continue to provide data and unbiased value opinions to allow consumers to make competent business decisions. This Connecticut effort is being matched by six states passing similar legislation last year and approximately more than 30 more proposing legislation this year.

Ken DelVecchio, Past President, Connecticut Association of Realtors ; As a result of the Home Valuation Code of Conduct (HVCC) and it's intended purpose to create a buffer between the lender and appraiser the challenge became how to use and employ individual appraisers. The answer became the Appraisal Management Companies to assign appraisal jobs. This bill is needed to correct the unintended consequences of the HVCC. The people intended to be protected were now being hurt by the process. AMC's have a lot of influence, not only in assigning jobs to appraisers, but over what the AMC will charge the lender and what the AMC will pay the appraiser. Consumers who are paying for the appraisal are kept in the dark as to the actual fee paid to the appraiser.

AMC's are not regulated yet they have increased influence in the marketplace. There is lack of federal regulation despite the benefit they derive from these “quasi-federal “rules (HVCC).

Damage is being done to the consumer in the real estate lending process in many instances, including lost sales and favorable interest rates.

Properly licensed real estate appraisers must increasingly depend on receiving assignments from appraisal management companies. Last year 39% of appraisers surveyed by the National Association of Realtors reported more than half their business came through AMC's.

That is nearly triple the amount compared to before the new rules. Yet, these new “guardians” of appraiser independence in effect have no one watching over them.

Nora King, The Connecticut Association of Real Estate Appraisers, (CARA): The following issues need to be addressed with this bill;

1) Fee issues. No one but a certified appraiser should be setting fees. Hud clearly states that full disclosure of fees must be made to the borrower. Instead the AMC's place on the appraisal order the statement “Do not discuss or disclose fees to the borrower”. Anti-trust laws are being broken by AMC's setting fees and stopping competitiveness. The AMC's rarely ask for qualifications just the lowest price.

2) Each appraisal management company must have a CT certified appraiser doing the review and assignment of work.

3) Appraisers should set their own limits on payment. Fifteen days is an acceptable time for payment since most management companies collect the payment upfront. It is not the appraisers' responsibility to float their business. Many appraisers have financially been suffering due to lack of regulation of large banks like Chase, BOA and large

Appraisal Management Companies (Rels, LSI, Quantrix etc.). The tax dollars should

be kept in the ST of CT & the appraiser should be collecting fees that are paid for a

service within their state.

4) No AMC should be allowed to alter reports by adding or removing data.

Scott E. P. Kelland, President, Kelland Capital Management, Inc: This bill is one I support with superior language that has been adopted by other states in their successful litigation to regulate AMC's. This critical language clears some of the ambiguity in current proposed draft as well as includes specific language omitted. I have provided by separate attachment a document that that includes inserts and comments to the bill. The current bill lacks key essential components. I have provided a link for the North Carolina proposed legislation as it is an extremely well drafted document. I also suggest the newly signed into law New Mexico and the completed legislation of Oregon and Indiana.

Appraisal Management Companies (AMC's) nationwide have had significant negative impact on the collateral risk evaluation process and have been defendants of several major national lawsuits. Many states have adopted regulation or in the process of adopting laws to clearly identify what defines an AMC and exactly how AMC's may interact with Certified/Licensed appraisers that are individually regulated within the states. Stories of rampant abuse are well chronicled in law suits filed against Wells Fargo & Rels Valuation it's AMC affiliated company as well as the infamous case brought by Attorney General Andrew Cuomo, People of New York against First American Corporation & e-Appraiseit an AMC and its association with Washington Mutual. The Cuomo suit promptly resulted in settlement by both Fannie Mae and Freddie Mac and resulted in the creation of the Home Valuation Code of Conduct (HVCC). The above mentioned complaint is a must read by any individual wishing to get a better understanding about AMC's and the conflicts and potential abuses they create. They are well written and easy to understand for the layman. Links for down load are provided:

New York, Cuomo:

http://www.ag.ny.gov/media/2007/nov/EA%20Complaint.pdf

Wells Fargo:

http://www.hbsslaw.com/files/Wells%20Fargo%20SComplaint1239756118659.pdf

North Carolina

http://www.ncga.state.nc.us/Sessions/2009/Bills/Senate/HTML/S829v3.html

NATURE AND SOURCES OF OPPOSITION:

Tony Homicki, Assessor Town of Darien and Co-Chair Legislative Committee of the Connecticut Association of Assessing Officers: I am offering a friendly amendment to this bill. As municipal officials, my colleagues and I are often required to assign a variety of appraisals. These appraisals assist us in our determination of value, as well as in our defense of values in court. The Connecticut Association of Assessing Officers requests that you consider adding a sentence to the bill that would exempt Assessors, along with revaluation companies that are certified by the Office of Policy and Management from its provisions. This would eliminate potential duress that might be raised while we are performing our duties at the local level. You might want to consider extending the exemption to all federal, state and local agencies or departments.

Connecticut Bankers Association (CBA): This bill would establish a state registration system for Appraisal Management Companies (AMC's). The concept of registering with the Department of Consumer Protection is good but CBA is very concerned about some of the substantive restrictions. Those restrictions would likely have a negative impact on residential mortgage transactions.

Although the Home Valuation Code of Conduct (HVCC) does not require a lender to use an

AMC, many financial institutions have turned to AMC's to ensure the requisite degree of independence in the appraiser selection and management process.

The outgrowth of the AMC's can play a valuable role in the mortgage origination process. As active providers of mortgages in Connecticut, banks are very concerned with two aspects of the appraisal process; namely quality and cost. AMC's can help to promote the quality of appraisals by ensuring that parties involved in the mortgage transaction do not engage in improper coercion. AMC's can also help to manage the cost of appraisal through volume-based competitive contracts with appraisers. This is of benefit to Connecticut consumers, because consumers often pay for the cost of the appraisal, in connection with a mortgage loan.

We are concerned with the provisions that restrain legitimate competition within the appraisal industry. We are also strongly opposed to any provision that attempts to regulate the cost of appraisals. Recent changes in federal law ( i.e.; HUD's amendments to RESPA) are creating opportunities for banks and others involved in the mortgage transaction, to lower the cost of obtaining a mortgage( by creating greater transparency in the cost of the various service providers that help to originate a mortgage). HUD over the years has never engaged in fee setting and they continue with that philosophy.

These new RESPA provisions hold great promise for consumers across the State and in America. We believe the rate regulation provision within this bill would serve to undercut the benefits of these new RESPA provisions by restraining the competitive marketplace for appraisal services.

Reported by: Laureen M. Rubino

Date: March 26, 2010