Effective May 1, 2009, residential mortgage lenders who sell loans to Fannie Mae/Freddie Mac must adopt and comply with the Home Valuation Code of Conduct (HVCC). Lenders who do not sell loans to Fannie Mae/Freddie Mac are not affected by the HVCC.
The HVCC is not legislative; it is a private agreement between Fannie Mae/Freddie Mac and their seller/servicers. The HVCC does not apply to FHA or VA loans.
Background:
In March, 2008, Fannie Mae/Freddie Mac entered into a settlement agreement with the New York Attorney General which was part of an ongoing investigation into mortgage lending fraud. In the words of the N.Y. Attorney General,
“Today’s agreement with Fannie Mae and Freddie Mac begins to set right what had gone so horribly wrong in the mortgage industry – rampant appraisal fraud,” said Cuomo. “The integrity of our mortgage system depends on independent appraisals. Again and again our industry-wide investigation found that banks were putting pressure on appraisers to drive up the value of loans just to make a quick buck. We believe the new standards, and the new independent monitor agreed to today, can begin to erase this problem from the industry. “
As part of the settlement, Fannie Mae/Freddie Mac agreed to amend their Seller/Servicer requirements to include the HVCC.
This new Fannie Mae requirement is not legislative and only applies to residential mortgages that are originated and delivered to Fannie Mae after May 1, 2009. The HVCC does not affect those lenders who do not sell their loans to Fannie Mae.
Lenders who intend to sell residential mortgage loans to Fannie Mae/Freddie Mac should study the requirements of the HVCC and make whatever changes are necessary to incorporate the new requirements into their mortgage lending process. The Fannie Mae website (www.eFannieMae.com) contains the text of the HVCC and answers to a number of questions that may arise regarding the new requirements.
Requirements of the HVCC:
1. Lenders, their agents and 3rd parties may not influence or attempt to influence the development, report, result or review of an appraisal.
2. Lenders must deliver a copy of the earnest money contract to the appraiser.
3. Loan production staff may not select, recommend or otherwise influence the selection of appraisers for specific assignments or for inclusion on a lender’s list of appraisers.
“Loan production staff” is defined in the HVCC as follows: ““The loan production staff consists of those responsible for generating loan volume or approving loans, as well as their subordinates. This would include an employee whose compensation is based on loan volume or the closing of a loan transaction. Employees responsible for the credit administration function or credit risk management are not considered loan production staff.”
4. Employees of the lender who choose the appraiser must be trained and qualified and must be independent of the loan production staff/process.
5. A mortgage broker may not select the appraiser.
6. Neither the mortgage broker nor borrower may pay the appraiser directly.
7. The lender may:
a. Use a preapproved list to select the appraiser, but the selections must be independent of the loan production staff/process.
b. Use an in-house appraiser if that appraiser is independent of the loan production staff/process.
c. Use an Appraisal Management Company.
d. Communicate with the appraiser and request additional information.
e. Order a 2d appraisal.
f. Use an appraiser ordered by a settlement services firm (title company).
g. Use an appraisal prepared for another lender if that prior lender complies with HVCC.
8. The borrower must be provided with a copy of the appraisal report at least 3 business days before closing.
9. The HVCC establishes the Independent Valuation Appraisal Institute, an independent organization to monitor the new appraisal guidelines. As of the date of this Law Letter, this new organization has not yet been created.
Conclusion:
Residential mortgage lenders who intend to sell loans to Fannie Mae/Freddie Mac should study and adopt the provisions of the Home Valuation Code of Conduct. Most residential mortgage lenders will need to restructure their loan processing to insure compliance with the HVCC. Whoever orders appraisals must not be part of the loan production staff.
If you have any questions or concerns about this new Fannie Mae/Freddie Mac requirement, please do not hesitate to contact us at (210) 828 5844.
Best regards,
Morton Baird
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