Full Skope Commercial Document Preparation Webinar, Federal Regulatory Agencies Issue Revised Flood Insurance FAQs, and more!

Question: Can someone explain why a drive-by appraisal performed by a third-party appraiser is included in the 2% fee cap of a home equity loan?

Answer: Unfortunately, drive-by appraisals are a bit of a grey area in the Texas home equity lending laws.

In 2018, the 3% fee cap was lowered to 2%, but certain charges were excluded from it including the fee for an appraisal performed by a third-party appraiser.

(E) does not require the owner or the owner's spouse to pay, in addition to any interest or any bona fide discount points used to buy down the interest rate, any fees to any person that are necessary to originate, evaluate, maintain, record, insure, or service the extension of credit that exceed, in the aggregate, two percent of the original principal amount of the extension of credit, excluding fees for:
(i) an appraisal performed by a third party appraiser;
(ii) a property survey performed by a state registered or licensed surveyor;
(iii) a state base premium for a mortgagee policy of title insurance with endorsements established in accordance with state law; or
(iv) a title examination report if its cost is less than the state base premium for a mortgagee policy of title insurance without endorsements established in accordance with state law;

The Joint Financial Regulatory Agencies then proposed rules to interpret this new 2% fee cap. The preamble of the proposed rule provided this regarding evaluations:

Similarly, the adoption preamble to the rule provided this:

Thus, an evaluation, whether performed in-house or by third-party appraiser, is not excluded from the 2% fee cap. But is an evaluation performed by an appraiser the same thing as a drive-by performed by an appraiser for purposes of Texas home equity law, and thus not excluded from the 2% fee cap? Or is a drive-by appraisal considered the same as an appraisal for purposes of Texas home equity law, and thus excluded from the 2% fee cap? Neither the constitution nor the rules interpreting it answer these questions.

This is the final rule the Commissions adopted:

(13) Exclusion for Appraisal Fee. A fee for an appraisal performed by a third party appraiser is not a fee subject to the two percent limitation. The appraisal must be performed by a person who is not an employee of the lender. The excludable appraisal fee is limited to the amount paid to the appraiser for the completion of the appraisal, and does not include an appraisal management services fee described by Texas Occupations Code, §1104.158(a)(2).

While it might be arguable that a drive-by appraisal is an appraisal for Section 50(a)(6)(E) and 153.5(13), unless and until the Joint Financial Regulatory Agencies adopt a rule or the Texas courts rule on this issue, the conservative approach is to include everything other than a full appraisal in the 2% fee cap.