New York State expected to unveil landmark appraisal management company rules in June

Draft legislation would be first step in regulating controversial third-party firms
By Adam Pincus | April 11, 2013 04:00PM

With an eye on an approaching federal deadline, New York State is drafting legislation that would require appraisal management companies — the firms that mortgage lenders enlist to hire appraisers — to register with the state. Despite their critical role in the generally highly regulated residential real estate industry, the companies currently have no oversight.

However, even as the state Board of Real Estate Appraisal is moving forward with developing the proposed legislation, it would not provide proposed language. Nevertheless, the federal legislation has several requirements. For example, states must license the firms; they must ensure that the appraisers working for the firms are licensed; and determine that no owner of such a firm has ever had an appraiser’s license revoked or denied in any state.

However, despite the new licensing, the proposed rules will likely have little impact on the companies’ place in the industry, which remains full of potential conflicts of interest, insider sources said.

State regulators are expected to present the proposed measure at a June meeting of the Board of Real Estate Appraisal, a quasi-governmental entity that advises the New York Department of State and helps craft regulations. The board could approve the language at that time, board member Carol DiSanto said at the most recent meeting on April 3.

Once approved by the board, the bill will go to the state legislature. A new law is expected to be approved by 2014, Stephen Roefaro, board chairman, said at the meeting. DiSanto and Roefaro’s statements were made as individuals, not as representatives of the board, a DOS spokesperson said. The DOS regulates appraisers, real estate brokers and will ultimately regulate appraisal management companies, known as AMCs.

States are required to regulate AMCs under the Dodd-Frank Act, the landmark financial reform legislation passed in 2010. Though the deadline is inexact, states are expected to have laws in place by 2015. Several dozen states have already passed similar legislation. New York’s Department of State regulates and licenses individual appraisers, but not AMCs.

AMCs grew in importance with the passage of Dodd-Frank, which was intended to place a firewall between banks and mortgage brokers on the one hand, and appraisers on the other.

Before the financial crisis, banks and mortgage brokers would reach out directly to appraisers or firms that employed appraisers to obtain a valuation on a home. But in 2009, the federal Home Valuation Code of Conduct took effect, prohibiting banks from contacting appraisers directly in an effort to remove conflicts of interest that were seen as a cause of the housing bubble and subsequent collapse. The Dodd-Frank rules supersede the 2009 law.

Now, banks reach out to the third-party AMCs which are intended to act as an unbiased intermediary that selects an individual appraiser based on price, turnaround time and sometimes market knowledge.

Yet, AMCs are not regulated and, insiders say, some of them are partly owned by affiliates of large national banks, posing yet another potential conflict of interest.

Jonathan Miller, CEO of appraisal firm Miller Samuel, said this legislation was a necessary but very small first step.

“You have to have this, like a license to drive a car, it is a bare minimum,” he said. “But the idea that they [have been able to] conduct business and not be subject to any kind of licensing when we just came out of the worst financial services crisis in the modern era — is odd.”