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The CFPB plans to make lenders responsible for disclosures and document integrity, even for services they farm out to third parties, such as appraisals, income verification and collections. Compliance vendors smell cash in the water.
May 31 -
A need for more re-appraisals, combined with an exodus of appraisers following the financial crisis, are causing headaches for bankers. Those factors are costing banks more money and, in some cases, potential clients.
March 27
Ignoring state appraisal laws may subject bank employees or third-party service providers to fines or even criminal penalties. National banks relying on federal preemption for appraisal laws should take another look at that assumption in light of Dodd-Frank.
The primary federal regulatory agencies recognize that financial institutions appreciate the flexibility in the
Many states created "mandatory" licensing regimes that purport to prohibit any person from attaching any opinion of value to real property without an appraiser license. Some recognized the need for banks to perform evaluations and enacted exceptions that specifically allow banks to perform and obtain evaluations using qualified but unlicensed internal staff or agents of third-party providers.
However, the exemptions in some mandatory states — including Alabama, Arkansas, Kansas, Louisiana, Minnesota, Mississippi, and North Carolina — extend only to full-time, salaried employees. Under that structure, community banks may be at a significant disadvantage against large banks with substantial in-house collateral valuation staff.
Some "mandatory" licensing states – Michigan, Connecticut, Florida, Pennsylvania and South Carolina for example — appear to make no exception for evaluations, whether performed internally by bank employees or externally by a third party. In those states, any person preparing an evaluation without a license could be subject to criminal penalties, fines, and even jail time.
Licensed appraisers are presumably the most qualified — why not offer evaluation assignments to them? Reporting requirements and scope of work rules in the uniform appraisal standards (
And what about federal preemption? FIRREA itself does not preempt state laws that regulate appraisers. To the contrary, FIRREA generally recognizes the ability of states to regulate appraisers and supervise appraisal-related activities.
So the general rule is that federal law will preempt state laws for a federally-chartered bank if the state laws "prevent or significantly interfere with" the bank's exercise of its powers. A good argument could be made that a state law which says "a lender may order XYZ type of valuation only from a state-licensed appraiser who follows USPAP" is preempted. (That said, one court has held that a law that requires a national bank to use a state-licensed appraiser does not "prevent or significantly interfere with" a national bank's exercise of its powers). However, most state laws that require state-licensed appraisers do not target the lender directly — they target the person who would perform the valuation.
Enter Dodd-Frank. Section 25(b) provides in general that neither the National Bank Act nor the Home Owners Loan Act will preempt state law for an agent of a federally-chartered bank. And Section 1465(a) applied national bank preemption standards to federal savings banks.
The thought that NBA and HOLA would not protect the agent of the national bank from prosecution under a state law, even assuming the state law is preempted for the bank, seems like a peculiar result. But courts have not yet had the opportunity to interpret the agent preemption provision in Dodd-Frank, so banks should anticipate that states might argue that there no longer is any preemption for agents.
An employee of a bank who performs a valuation for the bank in contravention of state law would appear to have an especially strong claim to be protected by the bank's "preemption umbrella." But in reality, banks might have difficulty finding people willing to risk severe personal consequences based on an abstract preemption argument. And of course, regardless of the ultimate resolution of issues surrounding preemption for federally-chartered banks, state-chartered banks will still be forced to face the issue.
Nathan Brown is the chief legal officer of MountainSeed Advisors, which provides valuation-related products and services to financial institutions.