Payment to Appraisal Management Company

Issue/Inquiry

Can a borrower pay an appraisal management company directly for the appraisal or should the Bank do so after collecting the fee from the borrower?

Response Summary

Federal guidance does not specifically address this question, but since the Bank remains responsible for compliance with the laws and regulations applicable to appraisals, even if it engages an appraisal management company to administer part of its appraisal program, it should retain control of this aspect of the process.

Response Detail

There are no federal rules or guidelines that specifically prohibit a borrower from paying an appraisal fee directly to an appraisal management company, but the better policy is for the Bank to conduct such transactions.

Under previous federal guidance, a financial institution was expected to remit payment to the appraiser, since it had engaged the appraiser for its services. As such, the institution could seek reimbursement from the borrower for the cost of the appraisal, but the borrower was discouraged from paying the appraiser directly. FDIC, Frequently Asked Questions on the Appraisal Regulation and the Interagency Statement on Independent Appraisal and Evaluation Functions, Q. 14, FIL-20-2005 (“FAQs”).

When the Home Valuation Code of Conduct went into effect on May 1, 2009, it had the protection of appraiser independence as a major objective. To a large extent, parties with an interest in the transaction were not to have contact with the appraiser, so that the appraiser could not be influenced towards obtaining a certain result. Consequently, most lenders today order appraisals through an appraisal management company, which then engages an appraiser.

Since the use of an appraisal management company is intended to insulate the appraiser from a party in interest, an argument could be made that a borrower would be as insulated from the appraiser as the lender, and, thus, that a payment to the appraisal management company directly from the borrower would not compromise the independence of the appraiser or the validity of the appraisal.

However, current federal guidance provides that the financial institution or its agent is responsible for directly selecting and engaging appraisers. It cautions that appraiser independence would be compromised when a borrower recommends an appraiser or a person to perform an evaluation. An institution that engages a third party, such as an appraisal management company, to administer any part of its appraisal program remains responsible for compliance with applicable laws concerning appraisers and appraisals.  Interagency Appraisal and Evaluation Guidelines, VI.

Given the continuing responsibility of the financial institution for the conduct of the appraisal process, the institution should determine when and whether payment should be made to the appraisal management company. Allowing the borrower to pay the appraisal management company directly may not in itself compromise appraiser independence, but it does remove an essential element of control from the institution in the exercise of its discretion.

In any situation where there is not clear guidance for a course of action, a financial institution must make a business decision, document its reasons for doing so, and then follow it consistently.

This response is for informational purposes only and is not intended for legal guidance.

This entry was posted on Tuesday, September 8th, 2020 at 8:42 am.