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Thursday, April 9, 2015

Ordering Appraisals prior to Submission of Application

QUESTION
We are a residential mortgage lender. Customers are asking us if we can order an appraisal prior to their submission of an application to us so that they are sure that the property will appraise sufficiently. We are aware that if a customer orders an appraisal we would not be able to accept it, as it will not be in our name and our investors do not allow for a transfer of the appraisal. We would like to accommodate our customers by offering this service and helping them avoid paying for an appraisal twice.

We envision that we will order the appraisal with the customer paying for the appraisal at the time it is done. The appraisal report will come directly to us as the lender and then we will provide a copy of the appraisal to the customer. If the customer then wants to proceed, we will use the same appraisal to support the loan. Is the foregoing procedure permissible and, if so, are there any risks to proceeding in this manner?

ANSWER
While it is understandable that the customer does not want to pay for an appraisal twice and you as the lender want to accommodate your customers,  for the reasons set forth below, it is recommended that a lender does not order the appraisal prior to issuing initial disclosures and obtaining an intent to proceed. Your scenario is fraught with RESPA, Fair Lending and UDAAP implications.

You state that the potential applicant will pay for the appraisal “at the time it is done”. If the idea is that the customer will pay the appraiser directly at the time he does the appraisal, and if the appraisal is to be later used to support the loan, this is not permissible. Appraiser Independence requirements do not permit an appraiser to collect payment directly from the borrower. The lender or its designated third party must select, retain, and provide for all compensation to the appraiser. So, if the appraisal is to be used in the loan origination process, the lender must be the party that orders the appraisal and pays for same.

Similarly, it is not permissible for the customer is to pay the lender upfront with the lender remitting payment to the appraiser, as this scenario constitutes a RESPA violation. In order to collect payment from the applicant, the lender must charge the applicant the cost of the appraisal. Under RESPA, a lender, cannot charge a potential loan applicant any fee, including an appraisal fee, prior to issuing the GFE and the applicant indicating an intent to proceed. Although RESPA does not prevent a lender from ordering the appraisal prior to the issuance of the GFE and receipt of an intent to proceed, in the event the potential applicant does not proceed with an application or the transaction does not close, the lender runs the risk it will not be able to seek reimbursement from the potential applicant.

Even if the lender is willing to assume the risk of non-payment, this scenario presents many other issues, including possible TILA and RESPA disclosure violations. The lender needs to determine what information it has in its possession. If the loan originator has enough information from the potential applicant to identify the property and is willing to order an appraisal (and take the risk of not being paid for the appraisal), it is probable that the LO has sufficient information from the applicant to have an application triggering disclosure obligations.

Additionally, although a lender may look at absorbing the cost of the appraisals that do not close as a “cost of doing business”, this scenario may subject a lender to fair lending implications. It is difficult to justify having one set of applicants who are required to pay for appraisals up front (after giving an intent to proceed) but never close the transaction for whatever reason, and another group of applicants who obtain “free” appraisals because the application fails to close. If a non-protected group is receiving the benefit of these “free” appraisals, while a protected group is not receiving this benefit, there will be a fair lending issue.

In addition to fair lending concerns, Unfair Deceptive or Abusive Acts and Practices (UDAAP) should be considered. If a loan officer tells the potential applicant (who has not received a GFE or other disclosures) that the lender will order the appraisal which the applicant can pay for at a later date, the lender may be creating an impression in the applicant’s mind that the applicant is obligated to proceed with the transaction notwithstanding that he has not received the GFE or other disclosures. The purpose of the GFE is to allow the applicant to compare offers, understand the real cost of the loan, and make informed decisions in choosing a loan. In ordering the appraisal, the LO may be creating the impression that the applicant is not permitted to shop and compare loans, and must continue with the application, irrespective of the fact that the applicant has not been given sufficient information to make an informed decision in choosing a loan. This could be viewed as a deceptive practice.

The bottom line is that the appraisal ordered by the lender is for the lender’s benefit. If the potential applicant wants an appraisal to verify value prior to bidding on a property, refinancing, etc., it is best that he directly contract for his own appraisal.

Joyce Wilkins Pollison
Director/Legal & Regulatory Compliance
Lenders Compliance Group