OCC Responds to Agreements between OFHEO, the NYAG, and Fannie Mae and Freddie Mac

The Office of Federal Housing Enterprise Oversight (“OFHEO”), the regulator of Fannie Mae and Freddie Mac, announced it had executed “Home Valuation Protection Program and Cooperation Agreements” (the “Agreements”) with the Attorney General of the State of New York (“NYAG”) and Fannie Mae and Freddie Mac.  A “Home Valuation Code of Conduct” (“Code”) accompanies the Agreements.  The objective of the Agreements and Code, which were entered into to settle the NYAG’s investigation of Fannie Mae and Freddie Mac, is to enhance appraisal and evaluation services relating to mortgages that Fannie Mae and Freddie Mac buy or guarantee.  The Agreements and Code seek to accomplish this goal by imposing property appraisal conditions on lenders that sell loans to Fannie Mae and Freddie Mac, including, among other requirements, the elimination of broker-ordered appraisals and the restriction of the use of appraisals prepared in-house or through affiliate appraisal management companies in underwriting mortgages. 

In a letter (the “Letter”) dated May 27, 2008 to the Director of OFHEO, the Comptroller of the Currency (“Comptroller”) sets out the views of the OCC regarding the Agreements and Code.  The Letter states that the OCC does not concur with the Agreements and Code and believes that they should be withdrawn because of their likely unintended adverse consequences for the safe, sound, and efficient operation of national banks’ residential mortgage lending activities and because they violate or conflict with Federal law in fundamental respects. 

Unintended Consequences.  The unintended consequences of the Agreement and Code noted in the Letter include the following: 

• Major portions of the Code would undermine, rather than enhance, the quality and reliability of appraisals. 
• Forcing lenders to change their appraisal processes and to adopt less efficient, and potentially less reliable, processes could significantly increase lenders’ origination costs, resulting in an unnecessary increase of the cost of mortgage loans for consumers without a corresponding enhancement of protections and other consumer benefits. 
• Compliance with the Code will likely disrupt the mortgage appraisal processes that generally are functioning well for depository institutions and consumers.  For example, the Code will restrict lenders’ ability to use appraisals obtained from certain appraisal providers, which will lead to market inefficiencies and higher origination costs, as well as unnecessary delays and possible job terminations. 
• Implementation of the Code will likely reduce, or at best slow, the availability of soundly written mortgage credit, which will undermine the various ongoing federal efforts to restore credit availability and confidence in the housing and mortgage markets.

Legal Issues.  The Comptroller also states in the Letter that the Agreements and Code present substantive legal issues.  The Comptroller asserts that, together, the Agreements and Code constitute a “rule,” as defined in the federal Administrative Procedures Act (“APA”), establishing binding norms of wide applicability that should have been adopted pursuant to the processes required by the APA and other federal statutes that govern federal agency rulemaking, including notice-and-comment procedures and cost-benefit analyses.  Furthermore, it is the OCC’s view that the de facto rulemaking process represented by the Agreements and Code exceeds the scope of authority of OFHEO and the NYAG.  The Agreements and Code conflict with the OCC’s exclusive authority under 12 U.S.C. § 371 to regulate and supervise national banks’ real estate lending activities, which encompasses national banks’ arrangements and procedures for assessing the value of the collateral securing their loans.  Moreover, the Comptroller states that the Agreements and Code embody an impermissible sharing by OFHEO of authority with the NYAG.  Accordingly, the OCC believes that the National Bank Act prevents the Agreements and Code from being applied to, or enforced against, national banks.  The Letter states that “[i]f new national standards are needed to supersede the standards based on current Federal law, we believe those new standards should be determined by Congress, not imposed as the result of the settlement of private litigation between parties.”