CUNA Comment Letter

Home Valuation Code of Conduct

April 30, 2008

Attn: Senior Vice President, Credit Risk Oversight
Freddie Mac
1551 Park Run Drive, Mail Stop D2Z
McLean, VA 22102-3110

RE: Re: Home Valuation Code of Conduct

To Whom It May Concern:

The Credit Union National Association (CUNA) appreciates the opportunity to comment on the new Home Valuation Code of Conduct (Code), which will apply to all loans originated after January 1, 2009 that are purchased by Freddie Mac and Fannie Mae. CUNA represents approximately 90 percent of our nation’s 8,400 state and federal credit unions, which serve approximately 90 million members.

The Code is a result of the recent agreement between the New York Attorney General, the Office of Federal Housing Enterprise Oversight, Freddie Mac and Fannie Mae (hereinafter referred to as the “Agreement”). The Agreement requires Freddie Mac and Fannie Mae to buy loans only from financial institutions that meet new standards designed to ensure independent and reliable appraisals. The significant provisions of the Code include: (i) prohibiting mortgage brokers from selecting appraisers; (ii) prohibiting lenders from using “in-house” staff appraisers to conduct initial appraisals; (iii) prohibiting lenders from using appraisal management companies that they own or control; (iv) requiring lenders to maintain a telephone and email hotline to address appraisal complaints; and (v) requiring lenders to test a random sample of appraisals.

Summary of CUNA’s Comments

CUNA’s Comments

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Freddie Mac and Fannie Mae have become significant mortgage loan providers, and this role has grown as a result of the recent subprime mortgage crisis, due to the significant restriction of mortgage credit from other sources. Both Freddie Mac and Fannie Mae together account for a record high 75% of new mortgage financing in 2007, which is twice the percentage that was financed in 2006.

This growing role in the mortgage market demonstrates that any new requirements, such as those included in the new Code, will become an industry-wide standard that will apply throughout the mortgage lending industry. The impact, therefore, will be similar to a new regulatory requirement issued by a federal agency with jurisdiction over mortgage lending, such as those issued by the federal financial institution regulators and the Department of Housing and Urban Development.

Telephone Hotline will be Burdensome

Although we support the intent of the Code and many of its provisions, there are a number of implementation issues that we want to bring to your attention. One very significant implementation issue is the requirement to establish a telephone hotline and email address to receive complaints regarding the possible improper influencing of the appraisal process, along with the requirement to disclose this information to borrowers and appraisers and to investigate any complaints that are received.

Although we appreciate the benefits this may provide to borrowers and others within the mortgage lending industry, this will impose significant new burdens for credit unions and other small lenders. These burdens will include developing new disclosures, new procedures, and will require additional staff training to both implement this new system and to investigate any complaints that are received.

As a result, these new requirements will impose significant, additional costs for lenders, including credit unions. This would include hiring and training additional staff or imposing significant new responsibilities on current staff. As not-for-profit financial institutions, credit unions will have no choice but to pass these significant, additional costs on to their members, which will further increase the cost of mortgage credit. This will be especially unfortunate during the current mortgage crisis in which both the cost and availability of mortgage loans have been adversely impacted.

Under the Agreement, both Freddie Mac and Fannie Mae will provide funding for the Institute, which will be a newly-formed independent entity that will operate a consumer complaint telephone hotline to address appraisal problems. To require lenders to also maintain such a hotline would be duplicative and unnecessary. The better approach here would be to only require lenders to disclose information about the Institute’s telephone hotline and to encourage lender’s to cooperate with the Institute in their efforts to investigate the problems that arise. If this requirement is not eliminated, we urge Freddie Mac and Fannie Mae to clarify that an existing phone number or email address of a current compliance staff member would suffice, as opposed to requiring a new phone number or email address that would be dedicated solely to the purpose of receiving these complaints.

Clarification Needed on the Selection of the Appraiser

Another implementation issue under the Code is the provision in which the lender’s loan staff, or others who are not independent of the loan staff or who are compensated based on the successful completion of the loan, will not be permitted to be involved in the selection of the appraiser or communicate with the appraiser. The staff will also not be permitted to work with others who select and communicate with the appraiser. Smaller lenders may be exempted from these requirements, provided they implement appropriate safeguards to ensure independence between the appraiser and the loan staff.

These provisions are broad and vague as to who is not authorized to select or communicate with the appraiser. These provisions should further clarify who would be considered “independent of the loan production process” for purposes of being able to participate in the appraisal process and should also include examples of those who would be authorized to participate.

Alternatively, we suggest limiting this prohibition to the originating loan officer and allowing others to perform these functions. Otherwise, credit unions may need to hire and train additional staff that would be independent of the lending department in order to meet these new requirements. Unless revised, another potential consequence of these provisions would be an increase in the time it takes to process a loan. For example, if the only staff who can communicate with the appraiser is the staff that orders the appraisal, the result may be a delay in others in the lending department from completing their individual tasks, such as underwriting the loan.

We appreciate the flexibility that is provided under these provisions to smaller lenders that have limited staff. We believe this would include a significant number of credit unions that simply do not have the staff to ensure that those who order and review the appraisals would not otherwise be involved in the lending process.

However, we are concerned that the Code does not provide sufficient guidance as to which lenders would qualify for this exemption. The Code only states that the exemption applies “if absolute lines of independence cannot be achieved as a result of the originator’s small size and limited staff,” without further guidance as to who and on what basis this determination would be made.

We believe the lenders themselves should be able to make this determination as they would be in the best position to determine if they are able to completely segregate the appraisal function from the other aspects of the lending process. Allowing the lender to make this decision would not compromise the intent of the Code, since the exemption still requires the smaller lender to implement the appropriate safeguards to ensure the independence of the appraisal process.

Alternatively, there needs to be further clarification regarding the small lender exemption. At a minimum, the guidance should clarify whether the exemption would be based on asset size, number of real estate loans originated, or other factors and should indicate the threshold that is to be used. The guidance also needs to specify the safeguards that would be required for the smaller lenders that would qualify for this exemption.

Under the Code, lenders will not be permitted to use “in-house” appraisals or use an appraiser who is affiliated with the lender or with an entity that is owned by or which owns the lender, although we understand there will be an exception for appraisal management companies owned by the lender if the ownership interest is 20% or less, as long as they act independently of the lender. The Agreement allows Freddie Mac and Fannie Mae to provide exceptions for financial institutions with assets of $250 million or less. However, the Code itself does not mention this possible exception, and we urge both Freddie Mac and Fannie Mae to specifically state at this time that the exception will apply to these provisions of the Code.

Delay in the Effective Date

The implementation issues described above, as well as other provisions of the Code, such as the requirement to perform quality tests of a randomly selected percentage of appraisals, will require new procedures and additional staff training. For these reasons, we request a delay as to when the Code will be in effect, which is currently scheduled for loans originated after January 1, 2009. We believe an additional one-year period will be necessary to prepare for these new requirements and, therefore, we request that the Code should apply to loans originated after January 1, 2010.

Because the Code represents a significant new requirement for credit unions and other financial institutions, we urge both Freddie Mac and Fannie Mae to review the implementation of the Code after it has been in effect for one year and to announce at this time that such a review will take place. Freddie Mac and Fannie Mae should also solicit public comment at the time it conducts this review.

As a result of the significant role that Freddie Mac and Fannie Mae have assumed within the mortgage market, we believe the federal financial institution regulators will be reviewing this Code carefully and may consider including certain of these provisions within their own regulatory requirements or other future guidance. We believe a review of the implementation of the Code after one year will uncover any unforeseen problems, which will not only be helpful for the regulators that may be considering new rules and guidance, but will be useful for Freddie Mac and Fannie Mae to determine if the Code should be amended at that time.

Thank you for the opportunity to comment on the new Code. If you have questions about our comments, please give Deputy General Counsel Mary Dunn or me a call at (202) 638-5777.

Sincerely,

Jeffrey Bloch
Senior Assistant General Counsel