Financial Industry Regulators Seek Comment on Appraisal Management Companies Rule
The Consumer Financial Protection Bureau along with five other federal agencies recently issued a joint proposed rule (Proposed Rule) regarding Appraisal Management Companies (AMCs) as required by Section 1473 of the Dodd-Frank Act (Dodd-Frank). Under Dodd-Frank, Congress tasked federal regulators with establishing minimum requirements regarding AMC registration and supervision. The other regulators are the federal banking agencies, the National Credit Union Administration (NCUA), and the Federal Housing Finance Agency. The Proposed Rule was released on March 24, 2014; comments are due June 9, 2014.
Although the Proposed Rule does not require states to adopt a regulatory structure for AMC registration and supervision, many AMCs would be prohibited from providing appraisal management services for federally related transactions in a state where such a regulatory structure is not adopted. This raises potential concerns in states where the regulatory body tasked with adopting a regulatory scheme may choose, for any number of reasons, not to create such a scheme.
As a result, AMCs that are not considered "federally regulated AMCs" under the Proposed Rule would be unable to provide services for federally related transactions, and lenders would have fewer options to obtain compliant appraisals. A "federally related transaction" is a real estate-related financial transaction that involves an institution regulated by the Office of the Comptroller of the Currency (OCC), Federal Reserve, Federal Deposit Insurance Corporation (FDIC), or NCUA and that requires an appraiser’s services under the interagency appraisal rules. The CFPB states in the preamble that while it understands a minority of transactions are federally related transactions, it believes all states will choose to participate by adopting a regulatory structure contemplated by the proposed rule.
Federally regulated AMCs would be exempt from state registration, but would be required to register with the Federal Financial Institutions Examination Council's Appraisal Subcommittee (ASC) and meet the rule’s other minimum requirements. Registration with the ASC will be established in the near future when the ASC creates its AMC National Registry. A "federally regulated AMC" is an AMC that is owned and controlled by an insured depository institution or an insured credit union, and is regulated by the OCC, the Federal Reserve System, the NCUA, or the FDIC.
The Proposed Rule defines an AMC as an entity that:
Provides appraisal management services to creditors or secondary mortgage market participants
Provides such services in valuing a consumer’s principal dwelling as security for a consumer credit transaction (including consumer credit transactions incorporated into securitizations)
Within a given year, oversees an appraiser panel of more than 15 state-certified or state-licensed appraisers in a state or 25 or more state-certified or state-licensed appraisers in two or more states
Notably, the definition does not include commercial properties.
By including secondary market participants in the definition, the Proposed Rule conforms to Section 1121 of Dodd-Frank and captures AMCs that are contracted by investors to complete appraisal management services. "Secondary mortgage market participant" means a guarantor or insurer of mortgage-backed securities, or an underwriter or issuer of mortgage-backed securities. The definition includes individual investors in a mortgage-backed security only if they also serve in the capacity of a guarantor, insurer, underwriter, or issuer for the mortgage-backed security. This definition would not appear to include purchasers of individual loans.
"Appraisal management services" means one or more of the following:
Recruiting, selecting, and retaining appraisers
Contracting with state-certified or state-licensed appraisers to perform appraisal assignments
Managing the process of having an appraisal performed, including providing administrative duties such as receiving appraisal orders and appraisal reports, submitting completed appraisal reports to creditors and secondary mortgage market participants, collecting fees from creditors and secondary mortgage market participants for services provided, and paying appraisers for services performed
Reviewing and verifying the work of appraisers
The preamble to the Proposed Rule states that appraisal firms, those entities made up of individual appraisers that perform residential property appraisals, should not be included in the definition. These firms do not receive an explicit exemption, however. They could be included in the definition of an AMC if they are considered "hybrid" entities, as noted in the preamble, that use both employees and independent contractors to perform appraisals.
The Proposed Rule defines an "appraiser network or panel" as a network of state-licensed or state-certified appraisers who are independent contractors to an AMC. Note that this definition leaves open the possibility that AMCs could hire part-time employees to avoid being considered an AMC. The preamble to the Proposed Rule states, however, that the federal agencies will work with state regulators to monitor for such activities.
States will have 36 months following the issuance of the joint final rule to adopt a regulatory scheme implementing the minimum requirements found in the Proposed Rule, although there could be a 12-month extension in certain cases. As we have addressed previously, most states have passed or proposed model legislation regarding AMC registration and regulation.
Under the Proposed Rule, states would need to require that an AMC:
Register with or obtain a license from the state and be subject to regulatory supervision
Contract with or employ only state-certified or licensed appraisers for federally related transactions
Require that appraisals comply with the Uniform Standards of Professional Appraisal Practice
Establish policies and procedures to ensure compliance with the appraisal independence standards established under the Truth in Lending Act
Additionally, the state regulator for AMCs would need to have the power to:
Approve or deny AMC registration applications
Examine AMC books and records
Verify that AMC appraisers hold valid state certifications or licenses
Conduct investigations, discipline AMCs for noncompliance with related laws, and report violations to the ASC
Interestingly, the Proposed Rule does not provide for additional federal registration fees to be paid to the ASC in connection with registration on the ASC’s National Registry. The 36 states that currently license or register AMCs impose fees at the state level ranging from $125 to $5,000. Individual appraisers must also pay fees to be listed on the ASC's Appraiser National Registry. Under the Proposed Rule, an AMC would be responsible for determining the AMC National Registry fee in accordance with ASC procedures. The ASC retains the ability to impose AMC registration fees once it establishes the AMC National Registry, as authorized by Dodd-Frank. Note that the Bureau, in its cost benefit analysis, suggested that a $125 registration fee and $250 annual renewal fee would reasonably cover the expenses of establishing an AMC National Registry.
Federal Preemption Does Not Preclude State Law Claim Based on Alleged HAMP Violations, Minnesota Supreme Court Holds
The Supreme Court of Minnesota last week reversed the dismissal of a borrower’s action against a loan servicer arising out of the servicer’s alleged breach of its Servicer Participation Agreement (SPA) with Fannie Mae under the federal Home Affordable Modification Program (HAMP). The court rejected the argument that HAMP federally preempted the state law cause of action asserted by the borrower.
The borrower contended that a Minnesota statute gave him a private right of action against a loan servicer for the servicer’s alleged failure “to perform in conformance with its written agreements with borrowers, investors, other licensees, or exempt persons.” After initially concluding that the statute did create a cognizable cause of action under state law, the Minnesota Supreme Court then turned to whether federal law preempted the state law claim.
The servicer argued for application of the doctrine of “implied conflict preemption.” Under this doctrine, federal law preempts state law either because it is impossible for a private party to comply with both the state and federal requirements, or because the state law stands as an obstacle to the accomplishment and execution of the purpose and objective of Congress. Specifically, the servicer argued that the Minnesota law posed an obstacle to the federal objective under HAMP of increasing servicer participation and lowering foreclosure rates because allowing a private right of action to borrowers would have a chilling effect on servicer participation due to fear of exposure of private lawsuits.
The Minnesota Supreme Court disagreed. Initially, the court noted that “[u]nder the terms of the SPA, servicers who violate their SPAs are already open to suit for breach by the other contracting parties.” Consequently, the court reasoned, the Minnesota law providing borrowers with a private right of action “does not impose any obligations on servicers beyond those that contracting parties can enforce and it does not require that servicers do more than what they have already undertaken in their written agreements.” Because the state law did not impose additional duties on servicers inconsistent with those set forth in HAMP or the SPA, the court concluded, the Minnesota state law does not frustrate congressional purposes.
As part of its analysis, the court further observed that HAMP regulations specifically require that programs be implemented in compliance with state law and that the Secretary of the Treasury “expressly instructed mortgage servicers to comply with state laws when the Secretary promulgated administrative guidance for the HAMP program.”
Finally, the court rejected the servicer’s argument that, because HAMP did not provide a private right of action, permitting a state remedy would be an “end-run” around Congress’s decision not to provide a federal right of action. Noting that the issue is whether federal law bars remedies otherwise available, rather than whether there is a federal right of action, the court reasoned that “Congress, by not providing a federal remedy, could have determined that widely available state causes of action provide appropriate relief for injured borrowers.” Accordingly, the court held, the absence of a federal remedy does not support the proposition that HAMP preempts the private right of action provided by Minnesota law.
This recent decision adds to a still-developing body of state law permitting borrowers to predicate state law causes of action on alleged HAMP violations, even though no private right of action exists under federal law for HAMP violations.
- Joel E. Tasca and Ethan Chernin
Lenders and Servicers: Be Aware of How Trustees Handle Excess Proceeds from HOA Foreclosure Sales in Nevada
Lenders and servicers have been addressing the issue of some Nevada courts ruling that a foreclosure sale by a homeowners association (HOA) "wipes out" a senior deed of trust. Since the date of our last legal alert on this issue in March 2013, litigation on that issue has exploded, with various courts, lenders, and servicers all taking different approaches.
There is another, related issue that is beginning to arise, of which lenders, servicers, and any parties with lien interests in Nevada properties should be aware. That issue is what happens when there are excess proceeds garnered through a foreclosure sale: are the foreclosing trustees fulfilling their statutory duties in disbursing funds?
In the context of an HOA foreclosure sale, the open-ended question (currently unanswered by the Nevada Supreme Court) is whether an HOA foreclosure sale extinguishes a senior deed of trust. If the senior deed of trust is extinguished, it is entitled to the excess proceeds. If it is not extinguished, and it remains senior and intact, then it is not entitled to such proceeds, because only "junior" interests that were extinguished are entitled to make a claim to funds.
Some foreclosing trustees are taking advantage of the judicial uncertainty of HOA "super lien" priority to pursue additional fees and costs from excess proceeds that would otherwise be unavailable to them if they simply follow the applicable statute. For example, in the HOA foreclosure context, the HOA's foreclosing trustees are using the interpleader device to protect themselves from liability because they do not know whether the senior deed has or has not been extinguished by the foreclosure.
Foreclosing trustees in other contexts, however, are simply not following procedural devices in clear instances with no disputed claims over excess funds and are instead opting to file interpleader lawsuits. They do this even though, by statute, they can make written demands upon claimants to prove their claim, and if claimants do not respond, their claims are considered waived. Filing suit to interplead under the auspices that conflicting demands to proceeds exist—even without checking to see if there actually are competing claims—offers such trustees an incentive to interplead rather than follow statute, and to gain a potential windfall at the cost of rightful claimants to funds. The reason? By bringing an interpleader, there is a general presumption that the trustee and its lawyers are entitled to additional fees and costs directly out of the funds they have on hand to interplead.
Lenders, servicers, and lienholders should be aware of this trap for the unwary by knowing the statutes governing distribution of funds, the current status of their deed of trust, or other real estate liens. They should also be aware of any correspondence they receive from a trustee inquiring about lien or claim status, because a failure to timely respond may operate as a waiver of an otherwise enforceable right to funds.
- Abran Vigil
Virginia Enacts Transitional MLO Licensing Law for Out-of-State MLOs
Last month, Virginia Governor Terry McAuliffe signed Senate Bill 118, creating a transitional mortgage loan originator (MLO) license. Specifically, the law authorizes Virginia's State Corporate Commission to issue a transitional MLO license to individuals who are either licensed as an MLO in another state, or (to the extent permitted under the SAFE Act, or any rule, regulation, interpretation, or guideline thereunder) formerly registered loan originators who worked for depository institutions. The new transitional MLO license will allow an individual to engage in the business of an MLO while completing the requirements necessary to obtain a state license. The temporary license will be valid for up to 120 days and cannot be renewed.
To qualify for this transitional license, an eligible individual must provide an application, surety bond, and complete an FBI criminal background check. Further, the person must never have had an MLO license revoked, and must not have been convicted of or pled guilty or nolo contendere to a felony in a domestic, foreign, or military court during the seven-year period preceding the application for licensing and registration, or at any time preceding the date of the application if the felony involved an act of fraud, dishonesty, breach of trust, or money laundering. Applicants must pay an application fee for the license as well as fees for a credit report and criminal background check.
As we previously reported, the Virginia Senate and House of Delegates unanimously passed the legislation, and David H. Stevens, President and CEO of the Mortgage Bankers Association (MBA), strongly voiced the MBA's support for the bill. The creation of the transitional MLO license will allow out-of-state and registered loan originators to more quickly begin engaging in the business of mortgage loan originating in Virginia.
The legislation is effective July 1, 2014.
- Marc D. Patterson
New York State To Require Title Agents To Be Licensed
With the passage of the New York 2014-15 budget, New York becomes one of the last states in the country to license title agents. The budget includes measures that authorize the Department of Financial Services (DFS) to regulate and issue licenses to title insurance agents for the first time. Among other requirements, the regulations will require title agents to provide certain disclosures to consumers and meet qualification standards and continuing education requirements. According to a press release from Governor Andrew Cuomo's budget office, the DFS will have "the authority to monitor abuse by agents and to revoke licenses accordingly, as well as help root out conflicts of interest that drive up costs for homeowners."
New York has some of the highest title insurance costs in the country, and the new reforms will reportedly save consumers money. According to the budget office, the regulations DFS will issue "are expected to result in a 20 percent reduction in title insurance premiums and closing costs for new home purchases and a more than 60 percent reduction in costs on refinancing transactions."
The law will take effect October 1, 2014.
Maine Moves Closer to Adopting the National SAFE MLO Test
Last month, Maine state lawmakers passed legislation that became law without Governor Paul LePage's signature that removed statutory language to facilitate the adoption of the Uniform State Test (UST) by the Maine Bureau of Financial Institutions. The legislation also removed references to specific topics that were required to be covered in pre-licensing education, testing, and continuing education for mortgage loan originators (MLOs).
As we previously reported, 39 state regulators have adopted the UST. In addition to Maine, California (Senate Bill 1459) and Ohio (House Bill 483) are also considering legislation that would implement the UST.
- Marc D. Patterson
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- Amy M. McClain and Lila Shapiro-Cyr
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