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1.4.7 Appraisers and Appraisal Management Companies

Most lenders require an appraisal to determine whether a property will be adequate security for a mortgage loan. Lenders, or sometimes mortgages brokers, hire appraisers or appraisal management companies to determine the value of the property. Appraisers are individuals; appraisal firms are businesses or partnerships, like law firms. And appraisal management companies (AMCs) are essentially brokers for appraisal services. They administer panels of independent appraisers to perform appraisals and frequently act as middlemen between the lender and appraiser. Lenders use them for efficiency or to help comply with federally mandated appraiser independence rules.

Most states require appraisers to be licensed. In addition, various federal regulations and statutes impose standards for appraisals used in residential mortgage transactions. These include standards for soliciting appraisals, selecting the appraiser, compensation, conflicts of interest, and appraiser independence.358 Professional standards for appraisers are set by the Appraisal Standards Board and compiled in the Uniform Standards of Professional Appraisal Practice. These standards have been incorporated by reference into federal and state law. Pursuant to the Dodd-Frank Act, the federal banking agencies have also issued minimum standards for the state regulation of appraisal management companies.359 States are free to impose broader or stricter requirements.

While consumers may hire an appraiser on their own, lenders usually insist on ordering an appraisal themselves and charging the borrower for it. Borrowers may pay for the appraisal before the closing, or the broker or lender may pay for it and require the borrower to reimburse the cost at closing or from the loan proceeds. In either case, the payment for the appraisal should be listed on the HUD-1 settlement statement or closing disclosure. Obtaining an inflated appraisal is a key element of many mortgage fraud schemes.360 Appraisal management companies usually add their own fee to the total cost of the appraisal. Their fees can sometimes be significant and are not always disclosed separately.361

The cost of appraisals and appraisal management company fees is an example of how the structure of the settlement services market can raise costs for borrowers. The lender chooses the appraisal management company or appraiser but does not pay for it. So the lender has no incentive to care about the price charged to the consumer. The consumer must pay the cost but has no control over the selection of the provider.

Footnotes

  • 358 {358} See § 6.6, infra; National Consumer Law Center, Truth in Lending § 9.4.2 (10th ed. 2019), updated at www.nclc.org/library; Dep’t of Hous. & Urban Dev., Mortgagee Letter 2009-28 (Sept. 18, 2009).

  • 359 {359} 80 Fed. Reg. 32,658 (June 9, 2015).

  • 360 {360} See § 6.6, infra (discussing appraisal fraud).

  • 361 {361} Kenneth R. Harney, Wash. Post, Paying a Lot for an Appraisal? A Middleman May Be Getting a Large Part of the Fee (Mar. 22, 2017), available at https://www.washingtonpost.com. See Dep’t of Hous. & Urban Dev., Mortgagee Letter 2009-28 (Sept. 18, 2009) (requiring separate disclosure of appraisal management company fees).