The Federal Trade Commission (FTC) filed a case against the Louisiana Real Estate Appraisal Board (LREAB) assailing the Board’s rule fixing “customary and reasonable fees” for appraisal services and claiming that such rule is in violation of antitrust law because of its unreasonable restraint of price competition.
Rule 33101 Overview
Rule 33101 was implemented by the LREAB to regulate the fees to be paid to appraisers. Under the law, appraisers must be paid “customary and reasonable fees” for the services they provide.
The LREAB’s Rule states that appraisers shall be compensated at a rate that is customary and reasonable for appraisal services performed in the market area being appraised. It seeks to regulate the fees to be paid to appraisers. The rule prescribes different methods as to how the rates to be paid to appraisers are determined:
- Survey Method – by the use of “objective third-party information” such as surveys of fees that lenders have recently paid;
- Board Schedule Method – by following a fee schedule established by the LREAB;
- Six-Factor Method – by basing fees on the recently paid rates in the relevant geographic market, and adjusting this rate using six specified factors.
While the rule simply seeks to comply with the requirements of the law in order to prevent connivance among the parties during the appraisal process, it essentially takes away the freedom to negotiate and hinders competition, and the FTC alleges that such rule is in violation of antitrust laws. The rule practically gives all the power to the lender to fix prices based on the system that it prescribes.
Ramifications of the LREAB Rule
According to the FTC, the LREAB’s Rule prevents AMCs and appraisers from arriving at appraisal fees through arms-length, market-based negotiations, and is thus restrictive of their freedom to negotiate. In fact, the FTC’s complaint alleges that Rule 31101 is significantly more restrictive of competition than United States Federal Law.
Under the current system of the LREAB as provided by Rule 33101, the power to fix fees is basically in the lender’s hands. In all the methods that the LREAB has in order to determine the customary and reasonable fees, the appraisers themselves have no actual input as to how much they should be compensated for their work.
Say that you’re looking to refinance a property you’re occupying, and you need to avail of the services of an appraiser. With Rule 33101 in effect, the forms you have to sign with the lender would typically indicate a set appraisal fee that you may not negotiate, because the fees to be paid have already been predetermined by the methods prescribed by the LREAB rule.
With this system in place, the appraiser has no say in what the lender charges the borrower. It should be noted that a portion of the appraisal fee goes to the Appraisal Management Company (AMC) which acts as an agent for the lender, which means that the only a fraction of the appraisal fees that borrowers pay go to the appraisers themselves.
So, for example, if the customary and reasonable fee in a particular area for a specific type of property ranges from $650 to $1000, it is possible for a lender to have a non-negotiable fee of $675. This means that the borrower pays $675 and the $675 needs to be divided between the AMC and the appraiser.
Appraisers have no power to negotiate for a higher fee since it has already been fixed by the lender based on the system provided by Rule 33101, and therefore, considering that AMCs usually take around 40% of the appraisal fee, appraisers may get paid much less than what is customary and reasonable for the area and property type. Thus, in the example above, unless an AMC was willing to work for only $25, the appraiser will receive much less than the minimum customary and reasonable fee of $650.
In such a case, there is antitrust price fixing committed by the lender since the appraisers are deprived of their power to negotiate on the fees they should be receiving for their services and it basically eliminates competition since everything is in the hands of the lender. In reality, the requirement of the law that customary and reasonable fees for appraisal services be paid is not met since the fees paid to the appraiser can go below than what is customary and reasonable.
Bottom Line
With the present system in place, the LREAB virtually disenfranchises appraisers from their right to negotiate the fees that should be paid by them. By giving the lenders the power to fix the appraisal fees to be paid without any consultation from appraisers, the LREAB is enforcing a policy that is in violation of antitrust laws.
The federal policy of regulating appraisal fees is meant to prevent lenders and AMCs from bribing appraisers with high fees so that they may give skewed appraisals for lenders. However, the LREAB’s rule does nothing to advance this federal policy and merely deprives appraisers of their right to negotiate and puts them at a disadvantage against lenders.
