There is a proposal by various federal regulatory authorities to mandate that appraisers do home inspections of repossessed houses and bypass professional home inspectors.
The Consumer Financial Protection Bureau (CFPB), which was established by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, just issued a proposed requirement about interior inspections by appraisers on high-risk loans. We need to get these regulators to recognize ASHI and to understand what the home inspection industry brings to the risk analysis/underwriting table.
"The CFPB is a new federal agency and is not HUD," said Randy Pence of Capitol Hill Advocates, ASHI's lobbyist in Washington, D.C. "Thus, CFPB has not had the benefit of ASHI's policy briefings to HUD on home inspection. CFPB is new to these issues."
Pence added, "In the late 1990s and early 2000s, HUD was taking strongly negative actions against home inspection. ASHI has been very successful in lobbying HUD to reverse its previous policy, which is now strongly positive. In fact, HUD now leads the way in advocating home inspection.
"ASHI plans to implement a similarly robust lobbying effort with CFPB."
[Editors note: At this writing, Pence reports that the lead CFPB legal counsel have agreed to meet with ASHI for a comprehensive briefing on home inspection. Further, ASHI will lay out the legislative and regulatory history that it has established with HUD and will propose that CFPB mirror the HUD policy.]
As aptly put by Harry Rosenthal, ASHI's attorney: "There has been much written about the obvious advantages of using a professional home inspector (preferably a member of ASHI) instead of an appraiser to inspect the condition of a house.
"Another way to look at this is the significant disadvantages of not using a professional home inspector. These include:
– Homebuyer fails to get full and complete information about the condition of his/her prospective house. Sometimes the sales price can be negotiated lower or a credit extended to the buyer or a problem fixed by the seller.
– Lender also fails to obtain pertinent information about the condition of the property that secures its loan.
– Sellers and listing real estate brokers and salespeople face increased risk of liability and being named shotgun defendants because of a lack of disclosure of property conditions. Real estate brokers seek satisfied parties to the transaction."
Previously, I wrote about our concerns with the Fannie Mae & Freddie Mac Quality Ratings promulgated by the Uniform Appraisal Dataset (UAD). What I said in that case applies as well to the Bureau's proposed regulation.
We believe a requirement for the appraiser to inspect foreclosed properties will have serious, unintended consequences:
- Homebuyers and borrowers, lenders and regulatory authorities are likely to be confused and believe they can rely on the appraisal to determine property condition and quality. Such confusion has been documented by a Government Accounting Office (GAO) study.
- The use of qualified home inspections is implicitly discouraged.
- There is an inherent contradiction between this requirement and both legislative and advice published for homebuyers and borrowers by GSE, a financial services corporation created by the U.S. Congress. The Dodd-Frank Act contains a requirement that HUD-approved counselors advise homebuyers to engage a professional home inspector to check a property's condition, safety and soundness. In addition, Fannie Mae, Freddie Mac and HUD encourage purchasers to "Hire Professional Home Inspectors."
- Complying with these proposed requirements may well put lenders and appraisers in the position of circumventing various professional licensing laws in the many states that license home inspectors and appraisers.
- Appraisers are exposed to unnecessary and increased liability and potential increased insurance costs to address that liability.
The Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) and appellate case law have firmly established that the use of state-certified and licensed appraisers (for appraisal purposes) is a significant part of what Congress intended in the federal banking and lending regulatory scheme and is not federally preempted. Identical in principle is the use and recognition of state-certified and licensed home inspectors in federal mortgage and real estate financing.
Incidentally, under FIRREA, appraisers are expected to use state standards of professional practice. Typically, state licensing statutes and/or regulations for home inspectors also identify or describe professional standards of practice and exclude appraisers from holding themselves out as home inspectors unless they comply with state home inspector licensing laws.
ASHI will take steps to urge that the proposed requirement be modified as follows:
- Make clear that the actions of the appraiser do not constitute, nor replace, a home inspection;
- Make clear that the appraiser should obtain from a state-licensed (where applicable) professional home inspector a third-party home inspection in compliance with state inspector and appraiser licensing requirements.