Cuomo-GSE Deal May Get Fight in Court

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WASHINGTON — Bankers and industry groups are laying the groundwork for a legal challenge to an appraisal agreement between New York Attorney General Andrew Cuomo and the government-sponsored enterprises.

In comment letters sent to Fannie Mae and Freddie Mac this week — which were not made public but were obtained by American Banker — bankers, industry and real estate groups, and others sharply criticized the agreement and warned it would have significant unintended consequences.

Though the letters do not explicitly threaten a lawsuit, several cast doubt on the agreement's legality, calling the process that created it unusual, secretive, and overreaching.

"The agreement is in violation" of the Financial Institutions Reform Recovery and Enforcement Act "and permits the New York attorney general to unlawfully exercise authority that resides exclusively with the federal government," several industry trade groups wrote in a letter sent Wednesday. "The NYAG makes no assertion that he can directly regulate the appraisal practices of the GSEs or of national banks, and therefore the agreement is designed to achieve an unauthorized regulatory goal."

Bank of America Corp. offered a scathing critique of the agreement largely focused on its substance. But the Charlotte company also said in its letter that the agreement did not comply with the Administrative Procedures Act, which guides how federal agencies write and implement rules.

The agreement was put out for comment by the GSEs, not the Office of Federal Housing Enterprise Oversight, and was only a "mimic" of a real proposal, according to B of A.

"It contains none of the procedural or substantive guarantees of federal or state administrative law, as it is being issued only by the two parties to the agreement not subject to such rules," wrote Greg Baer, deputy general counsel for B of A's legal department. "For example, the Administrative Procedures Act requires, among other things, the establishment of a factual record or decision, a prohibition on ex parte communications, and a prohibition on arbitrary or capricious. None of these requirements applies here."

Mr. Cuomo and the GSEs reached their agreement in March, with OFHEO's consent, to set new appraisal standards for Fannie and Freddie. The agreement prohibits lenders that want to sell mortgages to the two enterprises from using in-house staff members or an appraisal company they own or control for appraisals. It also prohibits mortgage brokers from selecting appraisers.

Since the majority of lenders sell to Fannie and Freddie, the financial services industry has seen the agreement as a new de facto standard for the entire mortgage market, including national banks and thrifts normally not subject to state consumer protection laws.

To appease concerns from bank regulators and the industry, the GSEs and Mr. Cuomo agreed to a private comment period. But comments sent to the GSEs expressed doubt that much would change as a result.

"The GSEs have not agreed to consider all comments but only 'any amendments to the code necessary to avoid unforeseen consequences,'" Mr. Baer wrote.

The Office of Thrift Supervision, too, called the agreement the result of a "flawed process" and suggested that the GSEs and OFHEO rethink it.

"The documents were prepared without the benefit of appropriate industry or regulator input and do not take into account the actual and potential effects and consequences upon OTS-regulated lenders," wrote Timothy T. Ward, the deputy director of the OTS' division of examinations, supervision, and consumer protection.

Some industry groups seemed ready to challenge the agreement. The American Bankers Association, which signed the industry group letter along with the Mortgage Bankers Association, the Housing Policy Council, and the Consumer Bankers Association, submitted a separate letter saying the agreement rested on an "unsound legal foundation which may ultimately be deemed to violate federal law."

The ABA, along with several other commenters, said OFHEO, which regulates the GSEs, could not delegate its authority to Mr. Cuomo. "In short, ABA believes that OFHEO's apparent abdication of its regulatory authority in this instance to the New York attorney general violates fundamental principles of administrative law and federalism, rendering the arrangement null and void," wrote Bob Davis, the group's executive vice president of mortgage finance, risk management, and public policy.

Mr. Cuomo told American Banker that most of the response to the agreement has been positive. He also dismissed industry criticism of the code of conduct. "It is not surprising that current industry participants, many of whom have significant economic interests of their own at stake, have differing perspectives about the various provisions in the agreements," he said.

But he said he would take the comments seriously. "We intend, with OFHEO, to thoughtfully consider their suggestions, all with the goal of restoring integrity to this crucial market."

The vast majority of commenters called the plan an overreach, viewing it as a way to regulate the lending activities of national banks without passing a federal law and circumventing normal preemption protection.

The industry focused partly on process but also blasted the agreement's substance. They argued that the standards would reshape the appraisal process, drive up costs, and displace many in-house appraisers nationwide.

B of A, a large seller to the GSEs, said the agreement would make the appraisal industry less efficient and raise costs. As of February the company had 358 in-house appraisers, who handled about 50% of its appraisal work.

"If the code were adopted in its current form, lenders would be forced to unwind their appraisal structures, causing a significant displacement of in-house appraisers nationwide," Mr. Baer wrote. "This consequence would come at a time of market turmoil and a weak economy. Given our record, there is simply no basis for the parties to the code to require revolutionary changes in a way that we do business."

Another entity at risk is brokers, which the agreement prohibits from selecting appraisers. The National Association of Mortgage Brokers defended their place in the appraisal process.

"Mortgage brokers originate the majority of all home loans in this country," George Hanzimanolis, the group's president, wrote in a April 30 letter. "If the code and corresponding agreements are instituted in their current form, many mortgage brokers and independent appraisers will face extinction. Small entities will not be able to compete in a market where huge institutional entities are favored, and where these smaller entities are burdened with regulatory requirements that have been shown to devalue their services and drive customers toward their direct competitors."

Spokesmen for Freddie and Fannie said they will evaluate the comments.

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