Paying appraisers

Mortgage Concepts is a recurring video series covering best practices and compliance education for California mortgage loan originators (MLOs). This video explains how lenders determine an appraiser’s reasonable compensation.

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A buffer between lender and appraiser

Fee appraisers, as a general rule of capitalism, are to be compensated by mortgage lenders and their agents at a rate reasonable to the market area of the property being appraised. But there are exceptions that effectively gut this rule. Here, the words lender’s agents include appraisal management companies (AMCs) hired or controlled by the lender to oversee the appraisal process. [12 CFR §1026.42(f)(1)]

For an initial concept of fee appraiser compensation, mortgage consumers — borrowers — may not be charged more than the actual amount received by the settlement service provider for that service. [12 CFR §1026.19(f)(3)(i)]

For clarity, a settlement service is considered any service performed in connection with a prospective or actual consumer mortgage origination. To process a borrower’s mortgage application, the lender may require an appraisal — a settlement service — for home purchase-assist mortgage-funded transactions or homeowner-occupant refinancing of purchase-assist financing, since they are consumer mortgage originations. [12 CFR §1024.2(b)]

A wide range of settlement services are provided in mortgage related transactions by:

fee appraisers;
AMCs;
mortgage lenders;
mortgage loan originators (MLOs);
attorneys;
title representatives;
escrow representatives;
real estate agents and brokers; and
any other provider of a service for which a borrower or seller pays a fee. [12 CFR §1024.2(b)]

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Conflicts of interest facing appraisers and mortgage lenders

A fee appraiser is further defined as:

a state-licensed or certified appraiser who receives a fee for performing an appraisal but is not an employee of the entity ordering the appraisal; or
an appraisal firm that employs licensed or certified appraisers and receives a fee for the appraisal, excluding AMCs, which can only act as a middleman between the lender and the fee appraiser. [12 CFR §1026.42(f)(4)(i)]

Editor’s note – The appraisal firms set out in the second bullet point above are different, to be distinguished from AMCs. The role of AMCs is not to appraise, but to act as the agent employed by lender to keep the lender in compliance with the conflict-of-interest avoidance rules for hiring appraisals set forth by Reg Z.

Further, these appraisal firms are companies who employ individual appraisers to prepare appraisals under contract with AMCs primarily. The result is two sets of middlemen who did not exist prior to 2010. These appraisal firms are classified as fee appraisers due to the need for profit margins by AMCs and appraisal firms.

Thus, a buffer is created between lender and appraiser in a purported effort to avoid lender retaliation against a fee appraiser for valuations that do not support the mortgage amount the borrower has requested. In turn, the appraisal firms are not required to pay a “customary and reasonable” fee to the appraisers they hire.

This exemption permits appraisal firms to pay appraisers on an hourly basis and provide employment benefits (e.g., health insurance) to the appraisers in their employ. In practice, these firms are not required to and do not pay each individual appraiser they employ the “full” price for an appraisal paid by the mortgage borrower to the lender. [75 FR 66575]

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The purpose of an AMC as a buffer is to perform the following actions on behalf of the lender:

recruit, select and retain fee appraisers;
contract with fee appraisers to perform appraisal services;
manage the process of the appraisal, including ordering and submitting appraisal reports to the lender and perform general accounting for the appraisal process; and
review and verify appraisals. [12 CFR §1026.42(f)(4)(iii)]

The determination by the appraisal firm of a fee appraiser’s compensation accounts for:

the type of property (e.g., attached or detached, single family residence vs. manufactured home);
the scope of work (e.g., exterior only vs. interior and exterior, or number of comparable properties);
the timeframe in which the appraisal is required to be performed;
the fee appraiser’s qualifications;
the fee appraiser’s experience and professional record; and
the quality of the fee appraiser’s work. [12 CFR §1026.42(f)(2)(i)]

Alternatively, the lender may determine the fee appraiser’s compensation based on:

fee schedules, studies or surveys of appraisal fees performed by objective third parties such as government agencies, schools or private research firms; or
rates paid to a representative sample of appraisers in the geographic market of the property.

As not being market related, fees paid to fee appraisers via an AMC are not to be included in fee schedules, studies or surveys used to determine a fee appraiser’s due compensation. [12 CFR §1026.42(f)(3)(iii)]

Further, fee appraiser compensation rules do not prohibit a lender from negotiating a volume-based discount with a fee appraiser — so long as the fees are still customary and reasonable. [Official Interpretation of 12 CFR §1026.42(f)(1)-5]

The lender is further prohibited from entering into any agreements or arrangements which violate anti-trust laws such as price fixing, market allocation or fractionalization — or engaging in any actions which restrict an appraiser from employment in a market or force an appraiser to leave a market. [12 CFR §1026.42(f)(2)(ii)]

Further, the lender prior to issuing the compulsory Good Faith Estimate (GFE) may only charge a borrower applicant a fee to cover the cost of obtaining a credit report. The issuance of a GFE may not be conditioned on payment of any fee for obtaining an appraisal, inspection or similar settlement service. [12 CFR §1024.7(a)(4)]

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