Congress Hears Different Views on Appraisal Regulation

by devteam June 28th, 2012 | Share

Among those testifying at a hearing of the House Committee on Financial Oversight’s subcommittee onrnInsurance, Housing, and Community Opportunity were William B.rnShear, director, Financial Markets and Community Investment, GovernmentrnAccountability Office (GAO) and SararnW. Stephens, president of the Appraisal Institute.  Shear restated GAO’s earlier recommendationsrnthat federal regulators set minimum standards for registering AppraisalrnManagement Companies (AMC) before a hearing onrnThursday while Stephens counteredrnthat non-congressionally mandated regulations are threatening to hamstring and jeopardize the real estate appraisalrnprofession altogether. </p

Shear presented results of a GAOrnstudy on appraisal oversight which confirmed that appraisals remain the mostrnpopular form of property valuation used by Freddie Mac, Fannie Mae (the GSEs) andrnmajor lenders.  While other valuationrnmethods such as broker opinions and automatic valuation models (AVM) arernquicker and less expensive, they are also considered less reliable and are notrngenerally used for loan originations.   While GAO did not capture data on thernprevalence of approaches used to perform appraisals, the sales comparisonrnapproach is required by the GSEs and FHA and is reportedly used in nearly allrnappraisals.</p

Charges of conflict of interest havernchanged the ways in which appraisers are selected and raised concerns about thernoversight of AMCs which often manage appraisals for lenders, GAO said.  The Dodd-Frank Act reinforced earlierrnrequirements and guidance about selecting appraisers and prohibiting coercionrnand this has encouraged more lenders to turn to AMCs.  This in turn has raised questions about thernoversight of these firms and their impact on appraisal quality. </p

Federal regulators and thernenterprises said they hold lenders responsible for ensuring that AMCs’ policiesrnand practices meet their requirements but that they generally do not directlyrnexamine AMCs’ operations.  Some industryrnparticipants voiced concerns that some AMCs may prioritize low costs and speedrnover quality and competence. The Dodd-Frank Act requires state appraiserrnlicensing boards to supervise AMCs and requires other federal regulators tornestablish minimum standards for states to apply in registering them. Settingrnminimum standards that address key functions AMCs perform on behalf of lendersrncould provide greater assurance of the quality of the appraisals those AMCsrnprovide GAO said, but as of June 2012, federal regulators had not completedrnrulemaking for such standards.</p

The Appraisal Subcommittee (ASC)rnestablished in 1989 by the Title XI of the Financial Institutions Reform,rnRecover, and Enforcement Act (FIRREA) has been monitoring the appraisal functionrnbut its effectiveness has been limited by several weaknesses which include failingrnto both define the criteria it uses to assess state compliance with Title XI andrnthe scope of its role in monitoring the appraisal requirements of federalrnbanking regulators.</p

ASC also lacks specific policies forrndetermining whether activities of the Appraisal Foundation (a private nonprofitrnorganization that sets criteria for appraisals and appraisers) that are fundedrnby ASC grants are Title XI-related. Not having appropriate policies andrnprocedures is inconsistent with federal internal control standards that arerndesigned to promote the effectiveness and efficiency of federal activities.</p

Appraisals and other types of realrnestate valuations have come under increased scrutiny following the mortgagerncrisis and Dodd-Frank codified several requirements for the independence ofrnappraisers and expanded the role of ASC. rnIt also directed GAO to conduct two studies which were the source of Shear’srntestimony before the committee.</p

GAO recommends that federalrnregulators consider key AMC functions in rulemaking to set minimum standardsrnfor registering AMCs, that ASC clarify the criteria it uses to assess states’rncompliance with Title XI of FIRREA and develop specific policies and proceduresrnfor monitoring the federal banking regulators and the Appraisal Foundation.  ASC and regulators are either taking steps tornimplement these recommendations or considering doing so.</p

Although she was not speaking directlyrnto the GAO report, Stephens in a written statement told committee members that,rnalthough appraising is the most heavily regulated activity within the mortgagernand real estate sectors, regulatory agencies are planning to enact furtherrnchanges that would threaten to tie the hands of appraisers, curtail innovationrnand increase regulatory burdens on appraisers and financial institutions. </p

Stephens was testifying directlyrnagainst The Appraisal Foundation’s creation of a new Appraisal Practices Board</bdelving into appraisal practice matters without Congressional authorization.rnThe Foundation does not have authority to codify appraisal methods andrntechniques, she said, and called it a dangerous and unjustified move.  "The regulatory burden for appraisers is onrnthe cusp of being expanded exponentially."</p

“Appraisal methods and techniquesrnrequire judgment by the appraiser. It is assumed that the appraiser hasrnbeen thoroughly trained to judge appropriate situations. The choice of methodsrnand techniques are the responsibility of the appraiser in the development ofrnhis/her scope of work” she said. For instance, whether to use reproduction costrnor replacement cost or when and how to adjust for sales concessions arerndependent on the actions of the marketplace and should not be mandated by arnbody such as the Appraisal Practices Board. Hard “rules of thumb” do not workrnwithin valuation because there always is an exception to the rule, she said.</p

The Appraisal Institute offered arnlong list of recommendations to Congress including that they </p<ul class="unIndentedList"<lirealign the appraisal regulatoryrnstructure with those of other industries in the real estate and mortgagernsectors </li<liProtect the independence of thernappraisal standards-setting process and require that standards for federallyrnrelated transactions be issued by an entity that does not develop or offerrneducation for appraisers. </li<liEstablish limitations around thernAppraisal Practices Board specifying that no tax dollars be used to fund thernventure, voluntary guidance be truly voluntary, and meaningful oversight overrnthe de facto regulatory action of the Foundation be established. </li<liReiterate that the Foundation doesrnnot have legislative authorization in the area of "methods and techniques" andrn"appraiser education." </li<liAuthorize the GSEs and other agenciesrnto halt purchase or guarantees of loans in states that maintain deficientrnappraiser regulatory regimes and ensure that ongoing federal support for thernGSEs or any replacement maintains consistent appraisal rules.</li</ul

The Institute said states should be restricted fromrncodifying voluntary guidance into state law or regulation and the AppraisalrnStandards Board prohibited from specificallyrnreferencing its works within the Uniform Standards of Professional AppraisalrnPractice and laws should be established to empower state boards to investigaternand prosecute complaints involving appraisers.

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About the Author


Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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