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Tuesday, February 15, 2011

The Federal Reserve is giving lenders two options for determining “customary and reasonable” appraisal fees and it appears many are moving toward the more pragmatic approach instead of relying on independent surveys.

The first option is a “two-step process” where the lender (or appraisal management company) calculates an amount that is “customary” based on recent rates and “reasonable” based on actual services performed with adjustments for each transaction, said Kerri Smith, an attorney at K&L Gates.

The second option is based on recent rates generated by third-party surveys that take into account services performed by a representative sample of appraisers in a geographic area. “In talking with our clients, it appears many creditors and AMCs would like to sit under [option] one,” Smith said during a K&L Gates webinar for clients.

Both options give lenders and AMCs a way to demonstrate their compliance with the Fed’s appraisal independence regulations that go into effect April 1.

However, there are a limited number of fee surveys available, Smith said, and it is unclear if they satisfy all of the Fed’s requirements. The surveys must exclude fees paid by AMCs to appraisers under the Fed’s rule. AMCs account for nearly 70% of all appraisals.

To adopt option one, lenders will have to identify recent rates that have been charged in a state, metropolitan area, or county. The appraisal rate is not supposed to reflect administrative or advertising costs. “The ultimate rate must be supported with data and documentation,” Smith said.

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