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.