Call it an early litmus test: There’s a real estate issue pending before the federal Consumer Financial Protection Bureau that should provide important insights into just how protective of consumers’ interests this fledgling new agency intends to be.
Will it accommodate the big banks when their interests clash with the public’s right to know where money is flowing in a financial transaction? Or will it come down on the side of ordinary consumers’ right to full disclosure?
The latter was certainly the spirit surrounding the creation of the CFPB by Congress last year in the Dodd-Frank financial reform legislation.
But there are disturbing signs that, at least in one key area affecting homebuyers and real estate professionals’ wallets, the CFPB may be tilting toward the banks.
The issue involves disclosure of appraisal charges on the HUD-1 settlement form. The CFPB is working on a replacement for the HUD-1 — soon to be renamed the Settlement Disclosure Form, or SDF — and recently floated two drafts on its website.
Though the Dodd-Frank law specifically authorized the agency to separate out fees paid to appraisers from fees paid to appraisal management companies, the CFPB drafts have left the appraisal line as a single, bundled fee.
Congress included authorization for a breakout on appraisal charges for a key reason: Appraisal management companies now account for upward of three-quarters of home valuations, and they tack their often substantial fees on top of what the appraiser receives.
In addition, as most appraisers and real estate agents know firsthand, the AMC business model has cut the fees paid to the appraisers who perform the actual valuations by as much as 40 percent.
Lower fees, in turn, have caused large numbers of the most experienced appraisers to decline assignments from AMCs or even switch to commercial and other types of valuations.
Their replacements, critics including the National Association of Realtors say, often have been inexperienced appraisers who are willing to accept fees as low as $150 for assignments that are billed out to homebuyers at $450 and more.
A survey earlier this year by NAR documented widespread dissatisfaction about the quality, timeliness and cost of home valuations conducted by AMC-assigned appraisers. Nearly three-quarters of Realtors reported significant increases in the number of out-of-area appraisers unfamiliar with local trends — a major contributor to deal-wrecking lowball appraisals.
Meanwhile, 70 percent of members reported their homebuyer clients are paying more for appraisals on the HUD-1 — sometimes $100 or more compared to previous appraisal practices where no AMCs were involved.
The core problem in terms of the HUD-1 disclosure, however, is that the homebuyers paying for the appraisals are in the dark. They have no idea where their money is really going — which runs directly counter to the other detailed breakouts they receive elsewhere on the HUD-1.
Appraisers say this lack of transparency allows the biggest banks who have large AMC subsidiaries or affiliates — Wells Fargo and Bank of America are two prominent examples — to pocket extra money from the appraisal without the borrower having a clue.
One appraiser, Richard Hagar of American Home Appraisals in Seattle, said lenders don’t want disclosure of the amounts they are siphoning from appraisals because if consumers are told how much is flowing back to their lender "(they) are going to riot."
Last month, two national appraisal organizations wrote to CFPB’s Rajeev Date, a former executive at Deutsche Bank and Capital One Financial who is now running the agency, in an effort to persuade him to provide better disclosure of appraisal fees.
The Appraisal Institute and the American Society of Farm Managers and Rural Appraisers argued that CFPB should not ignore Congress’s express authorization to break out appraisal charges.
The sole potential obstacle, the groups noted, is that the Dodd-Frank law limits total fees paid to banks in a mortgage transaction to 3 percent of the loan amount. Under the current, bundled HUD-1 arrangement, the cut that banks take from appraisers is not counted toward the 3 percent cap.
In a disclosure where their compensation was clearly spelled out to consumers, however, they would have to include it in the 3 percent cap, potentially forcing them to charge less elsewhere in the transaction — something the big banks would like to avoid.
David H. Stevens, president and CEO of the Mortgage Bankers Association, acknowledged to me in an interview that "this is an issue," but said it isn’t the biggest problem with disclosure of appraisal breakouts from the lenders’ perspective.
Instead, he said, too much disclosure could become "a Pandora’s box," where consumers get more information than is of practical use to them.
Appraisal management companies themselves — at least the ones that are not owned by large banks — are not uniformly against fee breakouts.
Thomas J. Kirchmeyer, president of Kirchmeyer & Associates of Buffalo, N.Y., says he "is all for transparency of fees on an updated HUD-1" because an "educated consumer should know what the actual appraiser (who) walked through their home is getting paid" — as opposed to the large chunk of the fee that is going to a lender-owned management company.
It "seems like a bit of a conflict of interest, doesn’t it?" he said in an email. "How unbiased and impartial can the lender-owned AMCs be when ultimately they control how many loans their own parent makes, how many loans are declined, how much money to lend, and how much their bosses ultimately make in compensation or commission?"
For the time being, the entire issue is in CFPB’s court. Since the drafting process for the new settlement statement is still far from over — a final product is not expected until next year — the agency is not commenting and has not responded to the appraisal groups’ letter.
So where is appraisal fee disclosure headed? It’s probably too early to predict, but the CFPB has one escape hatch if it chooses to use it: The Dodd-Frank law allows the agency to exempt certain fees from inclusion under the 3 percent cap.
By doing that on appraisal compensation, it could serve its consumer constituents — and the spirit of the law — with full disclosure of fee breakouts to homebuyers, while simultaneously allowing lenders to pocket management fees without limit.
If CFPB can’t do something as consumer-friendly as that, Congressional critics may begin to ask: What kind of consumer protection outfit did we create here?
