The TILA-RESPA Integrated Disclosure rule identifies three types of loan costs. One is origination charges. Another category is expenses the borrower is allowed to shop for, such as a pest inspection fee, a survey fee, or a closing agent fee. Because the borrower has the right to shop around, those charges might change—are allowed to change—from what you put down on the Loan Estimate form. The third type is expenses the borrower can’t shop for, such as a credit report fee, a flood determination fee, or a lender’s title policy. Those costs are fixed once they’re disclosed on the Loan Estimate, which must be provided within three days of application.
Your borrower can’t shop for the appraisal. The appraisal fee (and appraisal management company fee, if applicable) has to be set in stone on the Loan Estimate three days after application.
However, you can’t order the appraisal at least until the Loan Estimate has been finalized and disclosed and the borrower has indicated she wants to move forward. All you’re allowed to charge for before the borrower agrees to the Loan Estimate is a credit report. The appraisal fee will truly have to be an estimate.
So what are you going to put down as the appraisal fee?
Whatever you put down, you’re stuck with. If the borrower provided you with inaccurate information, or something happened to increase the appraisal fee after the disclosure, or—arguably—if the appraisal turned out to be more complex than anticipated, you might be able to re-issue the Loan Estimate. But the vast majority of the time, you’re sticking with whatever you disclose as the fee.
I don’t have to tell you how much appraisal fees can vary. Your average appraiser can offer upwards of forty different products, each priced uniquely. Even if you’re sure you’re talking about a plain vanilla 1004, complex assignments can raise the cost, as can appraisals on rural properties, appraisals on unique properties, appraisals in areas not covered by a lot of appraisers, appraisals in areas without a lot of recent sales activity, and so on.
According to observed fees for Mercury Network orders, the median fee charged by appraisers in Maricopa County, Arizona is $425. That means half of appraisals will cost more than that and half less. The average fee is $406.87. You can generally count on spending anywhere from $372 to $441 for an appraisal report there. So what will you estimate? $425? You’ll be low half the time. $441?
There are almost exactly the same number of appraisers covering Gwinnett County, outside Atlanta, Georgia as there are covering Maricopa County. But there the median fee is $365. The average is $374.76. You can generally expect to pay between $336 and $413 there. What will you put down on the Loan Estimate?
What if you don’t do enough business in a certain county, or market area, or state, to have reliable historical appraisal fees to look at? To arrive at our data, we looked at more than a thousand Gwinnett County appraisal transactions over a year’s time, and almost four thousand Maricopa County appraisal transactions. Do you have enough historical data in an area to reliably estimate?
And what if you do have enough raw data? What about the dozens of factors that influence how much an appraisal report will cost? Geography is the big one. Say you have a good handle on appraisal fees in both Kane and McHenry Counties, in suburban Chicago. According to our data, the median fee in Kane County is $375, in McHenry County $325. The range you can expect to pay in Kane is around $310 to $410, the range in McHenry about $300 to $375. Now say your borrower’s property is in Huntley, Illinois, which straddles the border between Kane and McHenry Counties. Where does that leave you?
Then you have to consider area coverage, mileage, recent sales activity, and so many more factors that can influence an appraisal fee. They can turn what was a routine assignment into something more complex, or turn what looked like a run-of-the-mill appraisal into something more expensive. The vast majority of these factors aren’t likely to reveal themselves until after you’ve had to disclose the appraisal fee to the borrower. With the new Loan Estimate form, you simply aren’t going to be able to take all of these factors into account in the three days after an application comes in.
What does the CFPB expect you to do about it? It seems as though it wants you to find out your costs in advance. “Two national consumer advocacy group commenters asserted that the final rule should require the creditor to… obtain pricing information [in advance] from third-party vendors with which the creditor frequently works,” the CFPB said in its commentary to the final rules. “The Bureau believes the…rules…incentivize creditors to” do just that. Do you need to obtain commitments from your vendors on pricing well in advance? Can you? Your vendors, dealing with all the same variables described above, are going to run into the same problems you do in trying to estimate an appraisal fee before getting a close look at the assignment.
Consider too that if you use an AMC, trying to nail down advance pricing is liable to start a tug-of-war between the AMC and its appraisers over who gets saddled with any overage on a particular property. All the rules make clear is that it’s not the borrower who will have to bear that burden.
Say you estimate $400 for an appraisal fee. Your AMC agrees to the $400 charge. After the appraisal is ordered, you find out that unique features of the property, unknown and unknowable in the first three days after the loan application came in, lead the appraiser to charge the AMC $600 for the job.
Can you rescind your Loan Estimate and re-issue another? It depends on the reasons for the fee change. If the complexity of the assignment was not discoverable with due diligence, you may be able to re-do your Loan Estimate to account for the additional $200. However, this is a tough sell. In its Small Entity Compliance Guide, the CFPB gives three examples of “changed circumstances” warranting a change in settlement service fees: a natural disaster, a vendor going out of business, or a neighbor disputing the property boundary. None of those are in the same class as “the appraisal turned out to be more work than we thought.”
Now let’s say you disclosed the appraisal fee as $400. It turns out that in the market where the property resides, appraisers generally charge $600 for standard properties, and you or your AMC can’t find a reliable vendor to do it for less.
Who loses out? Not the borrower. In this case, the appraisal fee the borrower pays cannot exceed $400, once it’s been included on the Loan Estimate.
If you used an AMC, will it hold firm and only pay the appraiser the estimated $400? If so, will the appraisal get done, or at least get done on time? Will the AMC have to eat the extra $200, paying the appraiser his $600 and then receiving only the estimated $400 from the borrower? How many times can your AMC do that before they start getting shy about advance pricing commitments?
With the uncertainty around what appraisal-related “changed circumstances” will allow a Loan Estimate to be re-issued, what we’re likely to see is a lot of over-estimates of the appraisal fee. A service can cost less than the estimate disclosed on the Loan Estimate without getting you in trouble. Beware though of a pattern of overestimating costs on the Loan Estimate. Creditors are required to act in good faith and exercise due diligence in obtaining information necessary to complete the Loan Estimate. Cost estimates must be consistent with the best information reasonably available at the time of disclosure. Constantly building in “cushions” to the appraisal fee might run afoul of the spirit of the disclosure requirements, in the opinion of your regulator.
Remember, too, that your Loan Estimate is a marketing document as much as it’s anything else. If you throw a Hail Mary each time you disclose the appraisal fee and put down, say, $750, your competition down the street might be able to pin the same appraisal down at $600 or less because they have better data and better relationships. Here, data will be worth its weight in gold. A company that estimates lower fees and can deliver at the estimated prices will be more attractive to potential borrowers.
The TRID rules are meant to make costs more transparent and a complicated process easier. They do just that, when it comes to borrowers. But life for lenders who order appraisals is about to get more complicated. And more interesting.
How is your company planning to provide reliable, realistic estimates of the appraisal fee on the Loan Estimate? Let us know at info@MercuryVMP.com. I’m interested in how the industry is approaching this issue.
About The Author
Matt Barr is General Counsel and Compliance for Mercury Network, LLC. He is a former Communications Director and Associate General Counsel for a real estate technology company and Managing Editor for a publisher of settlement services market intelligence. A graduate of Chicago-Kent College of Law/Illinois Institute of Technology, he is admitted to practice in Illinois. He is local to the Atlanta area, where he lives with his wife and daughters.