When Customary Fees Become Unreasonable

[hastalavista]

From a practical matter, I think it is a tough sell (whether one thinks it is a good idea or not) to get regulators to raise fees that are ultimately paid by the consumer when every focus is ensuring that the consumers are not "over charged".

So tough a sell that I don't think it will ever happen.

It is a tough sell because the lenders can point to what is really occurring and say,
"In markets where there are not a lot of appraisers, we pay more. In markets where there are a lot of appraisers, we pay less. We put jobs out for bid and we get those jobs accepted. If you tell us you want to raise the rate for appraisal services above what we are paying now, fine... we'll do that. However, for those of us who pass on that cost directly to the consumer, they will be paying for it directly. And, for those of us who use our own in-house staff, we will have a competitive advantage because those rates are not subject to C&R. We still are going to use a centralized appraisal management process (AMC) and there is nothing in the law that prohibits them from being profitable; so, any increase in price for their services will be passed on to the consumer as well.
Go ahead, tell us we are required to pay a rate across the board that will affect more than half of the appraisals we order. You set the price for us. That way, when will bill the consumer, we can tell them this wasn't our decision, it was yours. We can work with a system like that... especially those of us who use staff appraisers rather than contract appraisers."

What regulator is going to say, "Well, we think it is more important for the small group of appraisers to be paid a higher rate than it is for the large group of consumers to not pay more than what they have up to now because there has been a sufficient number of appraisers willing to provide their services at a lower fee."

I don't think any regulator is going to go along with that. And, as a consumer, I'd be outraged.

So not on a political, not on a fundamental economic, not on a theoretical, but on a practical level, how realistic is it that the government is going to increase the fee paid by a consumer when there is no reason to do so other than appraisers demanding a higher fees?

The retort to the sentence above, naturally, is, "Well, C&R mandates it!"
Again, as Terrel and others have pointed out, there is no schedule for what is customary or reasonable that anyone can enforce. C&R is de facto what the market will bear.

I'd rather see the focus be on aggressive auditing of the lender process and aggressive auditing of the quality of the appraisal reports they are relying on. If quality is so bad because of low fees (a position I don't subscribe to) or due to quick turn-times (a position I do subscribe to), then those lenders who rely on low fees/quick turn-times should get the regulatory penalties (You want to see a bank's stock drop? Watch what happens when you see a regulatory investigation announced or disclosed in their 10K. You want to see a bank's stock go up? Watch what happens when the regulatory issue has been settled and the bank makes changes so it will sin no more).

If, after aggressive auditing and enforcement, it turns out that low fees and quick turn-times were the culprit, fees and turn-times will naturally go up to a level that is consistent to what that service is worth to meet the requirements. This isn't an artificial price level, this is a market price level.
If, after aggressive auditing and enforcement, it turns out that there is no significant difference in the fee or the turn-time, but quality has improved, then there is absolutely no reason for an artificial fee increase because it will be proven that higher fees are not necessary to ensure quality reports.

No regulator or regulation is going to increase consumer fees by $200 to $350 because appraisers think they should be paid more.
Current C&R has so many holes in it, there is no practical way to determine what that fee should be and what, if any, variance should be allowed.
An increase in fees is not going to change the turn-time dilemma; indeed, it will put more pressure on appraisers who to provide a quicker turn-time ("we're paying you more, what's your problem?"). And those who have constructed a system to produce quick turn-times without having to worry about quality levels will be rewarded for their pseudo "efficiency".

Mike, best of luck on your endeavor. No doubt you are putting your heart and soul into this.
To all others who think this is the answer, good luck as well. I don't think it is, and if I've learned anything over the last 10-years with appraisal changes, it is every new change seems to have created a bigger problem. What I have noticed is when things don't turn out like some were hoping they would, then that just increases the level of bitterness, resentment, and negativity. Some become depressed over it because (in my view) what they were hoping for was a significant overreach.
But I might be wrong and you might be right.

 

[SpartanAG]

It is a tough sell because the lenders can point to what is really occurring and say, "In markets where there are not a lot of appraisers, we pay more. In markets where there are a lot of appraisers, we pay less. We put jobs out for bid and we get those jobs accepted. If you tell us you want to raise the rate for appraisal services above what we are paying now, fine... we'll do that. However, for those of us who pass on that cost directly to the consumer, they will be paying for it directly. And, for those of us who use our own in-house staff, we will have a competitive advantage because those rates are not subject to C&R. We still are going to use a centralized appraisal management process (AMC) and there is nothing in the law that prohibits them from being profitable; so, any increase in price for their services will be passed on to the consumer as well. Go ahead, tell us we are required to pay a rate across the board that will affect more than half of the appraisals we order. You set the price for us. That way, when will bill the consumer, we can tell them this wasn't our decision, it was yours. We can work with a system like that... especially those of us who use staff appraisers rather than contract appraisers."

This is an excellent example of the "Law of unintended consequences." And to add a point or two:

• By establishing a minimum, say $685, makes it feasible for lenders to hire more staff appraisers. The lenders will be able to pay their staff the equivalent of $400 per report in salary, benefits and bonuses and pocket the other $285 on top of an additional fees they charge for processing the loan.
• The likely increase in staff appraisers will only hurt the independent appraisers as work that used to go to them will now be given to a lender staff appraiser. I'm already seeing this with in-house appraisals in my market area as fees have increased.

 

[Meandering]

Actually,

The fee to the consumer should go down when someone stops to realize that the AMC cut is far too large for any potential service they are offering that is not already performed by software.

That there is the problem.

Not what the consumer is being charged, but what the AMC is keeping, and has monopolized the market for GSE lending work which gives them an unfair advantage over appraisers.

Something your argument fails to realize.

Borrowers are being fairly charged, usually, the banks make sure of that. It is the UNEARNED, not bona fide fees that the AMCs are keeping, providing the cheapest service available to the consumer that paid a fair fee, instead of the fairest service commensurate with the fee they are paying.

If borrowers were paying $250 for the appraisal fee, you might have an argument. But they are not. They are paying $600 and up, with the possible exception of low fee cutters trying to gain market share AMCs.

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[SpartanAG]

Actually,

The fee to the consumer should go down when someone stops to realize that the AMC cut is far too large for any potential service they are offering that is not already performed by software.

That there is the problem.

Not what the consumer is being charged, but what the AMC is keeping, and has monopolized the market for GSE lending work which gives them an unfair advantage over appraisers.

Something your argument fails to realize.

Borrowers are being fairly charged, usually, the banks make sure of that. It is the UNEARNED, not bona fide fees that the AMCs are keeping, providing the cheapest service available to the consumer that paid a fair fee, instead of the fairest service commensurate with the fee they are paying.

If borrowers were paying $250 for the appraisal fee, you might have an argument. But they are not. They are paying $600 and up, with the possible exception of low fee cutters trying to gain market share AMCs.

The AMC will still need to get paid for its "service". Lets assume that an AMC offers fees in the $350 to $400 range to the appraiser. The borrower pays $600 for the appraisal and AMC "service". That would be $200 to $250 to the AMC. If a minimum fee to the appraiser is mandated at $685, the AMC still needs to get paid for its "service".

Using a static model with the AMC making $200 to $250 per appraisal, the borrower would be paying $685 + $200 (to $250) = $885 to $935.
Using a percentage based model with the AMC charging between 33% and 42% of the appraisal fee, the borrower would be paying $911 to $973.

Both the appraiser and AMC must be paid. The lender isn't going to eat either cost. Both the appraiser and AMC cost will be passed on to the borrower.

 

[Meandering]

Who said $200 per report is a bona fide fee for the AMC?

If you do the report for $300 and I do it for $200 - the AMC performed no additional service by sending me the assignment instead of you.

The $100 difference is not refunded to the borrower.

3rd party fees are limited to bona fide for the services performed. Excessive profits is an indication that fees are in excess of bona fide.

What is the time spent by an AMC on a single appraisal report?

It is really bona fide that the AMC is entitled to $400 an hour while you are the licensed and educated professional only earn $35 an hour?

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[SpartanAG]

Who said $200 per report is a bona fide fee for the AMC?

If you do the report for $300 and I do it for $200 - the AMC performed no additional service by sending me the assignment instead of you.

The $100 difference is not refunded to the borrower.

3rd party fees are limited to bona fide for the services performed. Excessive profits is an indication that fees are in excess of bona fide.

What is the time spent by an AMC on a single appraisal report?

It is really bona fide that the AMC is entitled to $400 an hour while you are the licensed and educated professional only earn $35 an hour?

Who said $200 per report is a bona fide fee for the AMC?

As a private business aren't AMC's entitled to charge as much for their services as they wish...just like appraisers? And who determines what a "bona fide" fee is for the AMC?

If you do the report for $300 and I do it for $200 - the AMC performed no additional service by sending me the assignment instead of you.

No, they didn't provide any additional service, but they did find a what to maximize profit. There is nothing legal about that; it's what businesses do.

The $100 difference is not refunded to the borrower.

Nor should it be. The borrower willing engaged in the transaction. They were willing to pay zzz amount to obtain an appraisal. How those funds are disturbed once paid, are none of the borrowers concern.

3rd party fees are limited to bona fide for the services performed. Excessive profits is an indication that fees are in excess of bona fide.

Who is the determining authority regarding bona fide and excess profits? How do you define that? Who is the determining authority?

What is the time spent by an AMC on a single appraisal report?

I'm sure it varies from report to report and AMC to AMC. If you are suggesting that AMC should be paid based on how much time they spend per report, logic would dictate that appraisers should also be paid by the hour. Who is the determining authority for the property hourly rate is for AMC's and appraisers?

It is really bona fide that the AMC is entitled to $400 an hour while you are the licensed and educated professional only earn $35 an hour?

Just because the AMC business model may be more efficient than some appraisers, doesn't make it wrong or illegal. There are plenty of professions that earn more than appraisers and there are plenty that earn less. Nothing is wrong with earning a profit.

Would you recommend a ceiling on how much AMC's can charge for their services? What would you cap that ceiling at and why?

 

[Meandering]

Maybe that is a plausible explanation to you, and those who want to believe they are in a "free market"

However, the law, in place, negates your plausible opinion.



Title 12 → Chapter X → Part 1024 → Subpart B → §1024.14

Title 12: Banks and Banking
PART 1024—REAL ESTATE SETTLEMENT PROCEDURES ACT (REGULATION X)
Subpart B—Mortgage Settlement and Escrow Accounts


§1024.14 Prohibition against kickbacks and unearned fees.

(a) Section 8 violation. Any violation of this section is a violation of section 8 of RESPA (12 U.S.C. 2607).

(b) No referral fees. No person shall give and no person shall accept any fee, kickback or other thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or part of a settlement service involving a federally related mortgage loan shall be referred to any person. Any referral of a settlement service is not a compensable service, except as set forth in §1024.14(g)(1). A company may not pay any other company or the employees of any other company for the referral of settlement service business.

(c) No split of charges except for actual services performed. No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed. A charge by a person for which no or nominal services are performed or for which duplicative fees are charged is an unearned fee and violates this section. The source of the payment does not determine whether or not a service is compensable. Nor may the prohibitions of this part be avoided by creating an arrangement wherein the purchaser of services splits the fee.

(d) Thing of value. This term is broadly defined in section 3(2) of RESPA (12 U.S.C. 2602(2)). It includes, without limitation, monies, things, discounts, salaries, commissions, fees, duplicate payments of a charge, stock, dividends, distributions of partnership profits, franchise royalties, credits representing monies that may be paid at a future date, the opportunity to participate in a money-making program, retained or increased earnings, increased equity in a parent or subsidiary entity, special bank deposits or accounts, special or unusual banking terms, services of all types at special or free rates, sales or rentals at special prices or rates, lease or rental payments based in whole or in part on the amount of business referred, trips and payment of another person's expenses, or reduction in credit against an existing obligation. The term “payment” is used throughout §§1024.14 and 1024.15 as synonymous with the giving or receiving of any “thing of value” and does not require transfer of money.

(e) Agreement or understanding. An agreement or understanding for the referral of business incident to or part of a settlement service need not be written or verbalized but may be established by a practice, pattern or course of conduct. When a thing of value is received repeatedly and is connected in any way with the volume or value of the business referred, the receipt of the thing of value is evidence that it is made pursuant to an agreement or understanding for the referral of business.

(f) Referral. (1) A referral includes any oral or written action directed to a person which has the effect of affirmatively influencing the selection by any person of a provider of a settlement service or business incident to or part of a settlement service when such person will pay for such settlement service or business incident thereto or pay a charge attributable in whole or in part to such settlement service or business.

Can you say upload fee??
Can you say background check??

(2) A referral also occurs whenever a person paying for a settlement service or business incident thereto is required to use (see §1024.2, “required use”) a particular provider of a settlement service or business incident thereto.

(g) Fees, salaries, compensation, or other payments. (1) Section 8 of RESPA permits:

(i) A payment to an attorney at law for services actually rendered;

(ii) A payment by a title company to its duly appointed agent for services actually performed in the issuance of a policy of title insurance;

(iii) A payment by a lender to its duly appointed agent or contractor for services actually performed in the origination, processing, or funding of a loan;

(iv) A payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed;

(v) A payment pursuant to cooperative brokerage and referral arrangements or agreements between real estate agents and real estate brokers. (The statutory exemption restated in this paragraph refers only to fee divisions within real estate brokerage arrangements when all parties are acting in a real estate brokerage capacity, and has no applicability to any fee arrangements between real estate brokers and mortgage brokers or between mortgage brokers.);

(vi) Normal promotional and educational activities that are not conditioned on the referral of business and that do not involve the defraying of expenses that otherwise would be incurred by persons in a position to refer settlement services or business incident thereto; or

(vii) An employer's payment to its own employees for any referral activities.

(2) The Bureau may investigate high prices to see if they are the result of a referral fee or a split of a fee. If the payment of a thing of value bears no reasonable relationship to the market value of the goods or services provided, then the excess is not for services or goods actually performed or provided. These facts may be used as evidence of a violation of section 8 and may serve as a basis for a RESPA investigation. High prices standing alone are not proof of a RESPA violation. The value of a referral (i.e., the value of any additional business obtained thereby) is not to be taken into account in determining whether the payment exceeds the reasonable value of such goods, facilities or services. The fact that the transfer of the thing of value does not result in an increase in any charge made by the person giving the thing of value is irrelevant in determining whether the act is prohibited.

(3) Multiple services. When a person in a position to refer settlement service business, such as an attorney, mortgage lender, real estate broker or agent, or developer or builder, receives a payment for providing additional settlement services as part of a real estate transaction, such payment must be for services that are actual, necessary and distinct from the primary services provided by such person. For example, for an attorney of the buyer or seller to receive compensation as a title agent, the attorney must perform core title agent services (for which liability arises) separate from attorney services, including the evaluation of the title search to determine the insurability of the title, the clearance of underwriting objections, the actual issuance of the policy or policies on behalf of the title insurance company, and, where customary, issuance of the title commitment, and the conducting of the title search and closing.

http://www.ecfr.gov/cgi-bin/text-id...51e08a7&mc=true&node=se12.8.1024_114&rgn=div8

As I said,

It's not an issue that requires an opinion.

It is the LAW that is IN EFFECT.

And USPAP REQUIRES you follow the law, as an assignment condition to GSE lending.


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[Meandering]

How Appraisers claim to produce USPAP compliant GSE lending reports,

while being ignorant of the laws pertinent to those reports,

then make up their own silly stories for how the world works,

is beyond my comprehension.

CE that covers the laws applicable to GSE lending work is what appraisers need more than anything else.

There is a USPAP minefield out there too many are dancing through, and not to gingerly I might add.

.

 

[SpartanAG]

Banks contract with AMC's to perform a service to manage the process of obtaining an appraisal so the lender can make a lending decision. The lender feels that service is worth the fee they pay. Appraisers are paid out of the fee paid to the AMC. There is nothing illegal about that business model; it happens all the time with general contractors and sub-contractors. The lender saves money by not having to staff a department dedicated to handling the loan process. Since it costs the bank less to contract out to AMC, the fee paid to the AMC would be considered reasonable. The service provided by the AMC would be considered necessary because if the AMC didn't do it, the lender would have to. It is a function that must be performed and that function has a cost. Since the lender is paying less than it would cost them to perform the same function, the fee to the AMC would be considered reasonable. And since the appraisers have a choice to accept, reject or counter the fee offered by the AMC, the AMC is doing nothing wrong by trying to maximize profits...it's what businesses do. These are the arguments that would be presented to a governing authority, and I would bet they would stand up without question. Although, we won't know until the issue is brought before said authority if ever.

 

[Meandering]

The laws are in place to regulate those fees.

Mortgaging is not a "free market" activity.

We are required to follow the laws in place.

If you chose not to follow the law in place, and make up your own stories of how the world works,

you do so at your own peril.

Not mine.

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