Will Section 103 of S. 2155 Help or Hurt Rural Homebuyers?

Written By: Joel Palmer, Op-Ed Writer

Section 103 of the recently signed Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155), is less than 650 words. At most, the provision will only impact about 15 percent of all mortgage originations. 

Section 103 hasn’t received the amount of praise and criticism as other parts of the law. Yet it’s been held up by several detractors as just one example of how the law may hurt homebuyers and potentially cause a repeat of the housing collapse that contributed to the 2008 financial crisis. 

This section waives the requirement for appraisals in defined rural areas provided that all of the following are true:

•    The lender has contacted at least three state certified or licensed appraisers
•    The lender has documented that none of the appraisers contacted was available within 5 business days “beyond customary and reasonable fee and timeliness standards for comparable appraisal assignments, as documented by the mortgage originator or its agent”
•    The transaction value is less than $400,000

Its stated intent is to ensure that home transactions in rural areas aren’t held up by the inability of lenders to find a qualified appraiser. 

It’s well documented that the number of licensed appraisers has fallen since the financial crisis. The dearth of qualified professionalsis due largely to the aging of the profession and the lack of newcomers entering the field. It’s even more difficult to find appraisers in low-population areas.

Following Senate passage of the bill in March, The Appraisal Institute sent a letter to the Senate Committee on Banking, Housing and Urban Affairs advocating for “further clarifying provisions,” which included the contact of three appraisers and the five-day waiting period.

“These provisions will help ensure that banks make a good faith effort to place the appraisal with local market appraisers, consistent with the bill’s intent,” the organization’s letter said.

Without them, the institute expressed concern that lenders would use Section 103 “inappropriately…to to avoid fundamental risk management requirements altogether, for example, by attempting to contract with out of market appraisers, or presenting unreasonable or below market assignment conditions or requests.”

Even with the changes to Section 103, several organizations included it in their list of objections to the final law, including The Center for Responsible Lending, The Leadership Conference and The Center for American Progress.

The Center for American Progress stated that Section 103 “and many other provisions ignore the causes of the crisis and are solutions in search of a problem. Instead of narrowly tailoring rules to address specific concerns in the marketplace, the bill creates massive new risks in the housing market.”

The Center for Responsible Lending wrote that the section of the law “would reopen the door to abuse and inaccurate valuations, leading to homeowners (once again since the lead up to the crisis) paying higher costs for homes than they are worth or consumers losing equity on their homes.”

The organization cited the report of the Financial Crisis Inquiry Commission, which listed in great detail the causes of the 2008 financial crisis. One of the causes was appraisal fraud.

The report stated: “Some real estate appraisers had also been expressing concerns for years. From 2000 to 2007, a coalition of appraisal organizations circulated and ultimately delivered to Washington officials a public petition; signed by 11,000 appraisers and including the name and address of each, it charged that lenders were pressuring appraisers to place artificially high prices on properties. According to the petition, lenders were ‘blacklisting honest appraisers’ and instead assigning business only to appraisers who would hit the desired price targets.”

Ironically, part of Dodd-Frank was written to address that very issue with its appraiser independence requirements (AIRs). This provision was designed to prevent pressure by lenders and conflicts of interest between the two parties, to create a completely independent appraisal process.

The Appraisal Institute said it was the new regulations in Dodd-Frank that has contributed to “the business and regulatory environment for appraisers.” In its letter to the Senate, the institute pushed for “ways to make the appraisal regulatory structure more efficient and attractive to the next generation of appraisers.” The new law did not specifically address that issue.

According to the Brookings Institution, lenders originated more than 1.2 million mortgages in rural areas in 2016, which accounted for 17.5 percent of the mortgage market. More than 30 percent of rural mortgages originated in 2016 were sold to Fannie Mae and Freddie Mac.

Passage of S. 2155 came shortly after a report that Fannie Mae will be testing hybrid appraisals.
Last fall, Fannie and Freddie both announced automatic appraisals on certain new home purchases, effectively eliminating human appraisers during the mortgage origination process for qualified transactions.

About the Author

As an NAMU® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.

Opinion-Editorial (Op-Ed) Disclaimer For NAMU® Library Articles: The views and opinions expressed in the NAMU® Library articles are those of the authors and do not necessarily reflect any official NAMU® policy or position. Examples of analysis performed within this article are only examples. They should not be utilized in real-world application as they are based only on very limited and dated open source information. Assumptions made within the analysis are not reflective of the position of NAMU®. Nothing contained in this articles should be considered legal advice.