As we roll on with TILA-RESPA Integrated Disclosures (“TRID”) preparation … investigating, researching, implementing, complaining(?) … there are many strategic issues to be addressed. One that comes up is how to handle appraisals. Here’s what our consulting work has shown us to be some of the issues to consider.
Appraisals Will Now be 0% Tolerance
Under TRID, appraisal fees will be subject to a 0% tolerance. (Technically, the Rule allows for 10% if borrowers were allowed to shop … but the Appraiser Independence Rules don’t allow for this so too bad!). This leads to a problem for many lenders that has to be addressed.
- This is particularly bad for lenders who ….
Don’t have a closed appraiser list, use many different appraisers, and don’t use an Appraiser Management Company (“AMC”). Perhaps a lender with broad geographic reach that simply can’t whittle down the number of appraisers to a reasonable number.
- This won’t be so bad for lenders who …
Operate in a small geographic area and use only a small number of appraisers from a closed list. Or lenders that already limit appraisers to a set flat fee. Or lenders that use an AMC to manage all appraisers.
Some Ideas to Think About
1. Flat Fee
If possible, negotiate a flat fee with appraisers to take effect when TRID comes into play. Here, the borrower will always pay the same flat fee, and appraisers will always receive the same flat fee. You may establish different categories, e.g. “$350 for single family and $550 for multi-family.” For lenders with a broader outreach, you could also add categories based on geographical area–zip code, State, or other area. For example, “$350 for single family in Cape Cod, $450 for single family in Nantucket.”
This is easier for lenders to negotiate where there are a small number of appraisers that they use exclusively (closed list), or for lenders that rely on an AMC (this isn’t an endorsement to use an AMC … the pros/cons for an AMC go way beyond how they may affect this one particular compliance requirement). If you fall in this category, get your appraisers in a room (or talk to your AMC rep) and set out your plan to shift to a flat fee. Explain that you’ll have 0% tolerance and can’t exceed the original estimate provided to the borrower. Allow them time to provide you with a cost estimate-they’ll need to settle on a number where they may “lose” on some appraisals but “win” on others. Let them know that this is in exchange for your loyalty to them.
If you have too many appraisers, or they aren’t willing to agree to a flat fee (or you simply want the freedom to use whatever appraiser you want, e.g. an open list), you may consider using an estimate. In this scenario, you will always charge borrowers the same flat fee for an appraiser, but the appraisers will receive whatever their actual charge is. This is an estimate that you (the lender) create based on how much appraisers typically charge you.
The regulations provide specific instructions to follow on how to do this without getting into trouble. Basically, you’ll need to ensure you’re not making a profit on this–that your estimates are sound. This will often require varying the flat fee charged to borrower based on geography and type of appraisal.
3. Coordination with Appraisers Beforehand
Whatever you decide, you’ll need to start planning this soon. You’ll want to meet with them and settle this issues in plenty of time before the Rule actually takes effect in August … they may need time to review their costs and settle on what fees to charge. Appraisers can’t be trusted to take care of this for you (it doesn’t matter to them!) … solicit feedback and see if there’s any way to work together on this problem.
4. Prepare for Small Losses (at least initially)
It won’t be surprising if there’s some confusion when TRID first takes effect. Just remember that this is a 0% tolerance and you can’t pass along an additional $1.00 if the appraiser demands to be paid. The lender may need to absorb these small losses … and that may be acceptable at least initially. Absorbing this at first (but making sure to fix this going forward) is going to be a lot better than absorbing a fine or criticism for violations–remember TRID has reorganized the liability associated with mortgage disclosures under TILA (rather than previously where some violations fell under the more forgiving RESPA penalty section).
5. Don’t Forget Changed Circumstances!
Sometimes the initial appraisal estimate is inaccurate only because of a changed circumstance. The borrower fails to disclose the existence of an apartment or … well, you can think of a million better examples! Remember the same Changed Circumstances exception that applies now will apply in the future under TRID. A Changed Circumstance resets the amount and allows you to charge the additional amount for the appraisal.
“That’s all for today folks!” Hopefully this is helpful … and we’ll try to keep being helpful, but feel free to write in requests so that we can post about things that are relevant to all of us.
Ben Giumarra is a regulatory consultant for Spillane Consulting Associates, Inc. out of Braintree, MA. SCA has provided Consulting, Professional Staffing, and Quality Control services to New England financial institutions since 1991, with a primary focus in residential lending. On the Consulting side of the business, they have people specializing not only in regulatory compliance but also Systems/Technology and Operational/Workflow.