<DOC>
[108 Senate Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:24197.wais]
S. Hrg. 108-869
THE REAL ESTATE APPRAISAL INDUSTRY
=======================================================================
HEARING
before the
SUBCOMMITTEE ON HOUSING AND TRANSPORTATION
of the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
ON
CERTAIN PRIVATE ENTITIES AS OUTLINED IN TITLE XI OF THE FINANCIAL
INSTITUTIONS REFORM, RECOVERY, AND ENFORCEMENT ACT OF 1989, THAT
ESTABLISH UNIFORM RULES FOR REAL ESTATE APPRAISALS AND SET MINIMUM
CRITERIA FOR CERTIFYING APPRAISERS
__________
MARCH 24, 2004
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
Available at: http: //www.access.gpo.gov /senate /senate05sh.html
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
RICHARD C. SHELBY, Alabama, Chairman
ROBERT F. BENNETT, Utah PAUL S. SARBANES, Maryland
WAYNE ALLARD, Colorado CHRISTOPHER J. DODD, Connecticut
MICHAEL B. ENZI, Wyoming TIM JOHNSON, South Dakota
CHUCK HAGEL, Nebraska JACK REED, Rhode Island
RICK SANTORUM, Pennsylvania CHARLES E. SCHUMER, New York
JIM BUNNING, Kentucky EVAN BAYH, Indiana
MIKE CRAPO, Idaho ZELL MILLER, Georgia
JOHN E. SUNUNU, New Hampshire THOMAS R. CARPER, Delaware
ELIZABETH DOLE, North Carolina DEBBIE STABENOW, Michigan
LINCOLN D. CHAFEE, Rhode Island JON S. CORZINE, New Jersey
Kathleen L. Casey, Staff Director and Counsel
Steven B. Harris, Democratic Staff Director and Chief Counsel
Mark A. Calabria, Senior Professional Staff Member
Jonathan Miller, Democratic Professional Staff
Jennifer Fogel-Bublick, Democratic Counsel
Sarah A. Kline, Democratic Counsel
Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
George E. Whittle, Editor
______
Subcommittee on Housing and Transportation
WAYNE ALLARD, Colorado, Chairman
JACK REED, Rhode Island, Ranking Member
RICK SANTORUM, Pennsylvania DEBBIE STABENOW, Michigan
ROBERT F. BENNETT, Utah JON S. CORZINE, New Jersey
LINCOLN D. CHAFEE, Rhode Island CHRISTOPHER J. DODD, Connecticut
MICHAEL B. ENZI, Wyoming THOMAS R. CARPER, Delaware
JOHN E. SUNUNU, New Hampshire CHARLES E. SCHUMER, New York
RICHARD C. SHELBY, Alabama
Tewana Wilkerson, Staff Director
Kara Stein, Democratic Staff Director
(ii)
C O N T E N T S
----------
WEDNESDAY, MARCH 24, 2004
Page
Opening statement of Senator Allard.............................. 1
Opening statements, comments, or prepared statements of:
Senator Reed................................................. 2
Senator Miller............................................... 2
Senator Sarbanes............................................. 3
WITNESSES
David G. Wood, Director, Financial Markets and Community
Investment, U.S. General Accounting Office..................... 5
Prepared statement........................................... 29
Response to written questions of Senator Reed................ 61
Steven D. Fritts, Chairman, Appraisal Subcommittee, Federal
Financial Institution Examination Council, Associate Director,
Risk Management/Examination Support, Division of Supervision
and Consumer Protection, Federal Deposit Insurance Corporation. 7
Prepared statement........................................... 39
Charles Clark, Real Estate Commissioner, Georgia Real Estate
Commission, on Behalf of the Georgia Real Estate Appraiser
Board.......................................................... 9
Response to written questions of Senator Reed................ 62
David S. Bunton, Executive Vice President, The Appraisal
Foundation..................................................... 10
Prepared statement........................................... 41
Alan Eugene Hummel, SRA, Immediate Past President, The Appraisal
Institute, Chief Executive Officer, Iowa Residential Appraisal
Company, on Behalf of the Appraisal Institute and American
Society of Farm Managers and Rural Appraisers.................. 12
Prepared statement........................................... 50
Eugene G. Kaczkowski, President, American Society of Appraisers,
Accredited Senior Appraiser, American Appraisal Associates,
Inc............................................................ 14
Prepared statement........................................... 56
Additional Material Supplied for the Record
Chart referred to by Alan Eugene Hummel, SRA, Immediate Past
President, The Appraisal Institute, Chief Executive Officer,
Iowa Residential Appraisal Company, on Behalf of the Appraisal
Institute and American Society of Farm Managers and Rural
Appraisers entitled, ``Appraisal Regulatory Structure''........ 64
Letter from Charles Clark, Real Estate Commissioner, Georgia Real
Estate Commission to Senator Allard dated April 5, 2004........ 65
Statement of Francois K. Gregoire, Chairman, Florida Real Estate
Appraisal Board................................................ 67
Letter from Robert A. Keith, Administrator, Oregon Appraiser
Certification and Licensure Board dated March 26, 2004......... 89
Letter from Stewart A. Leach, Program Administrator, Colorado
Board of Real Estate Appraisers to Senator Allard dated March
18, 2004....................................................... 90
Statement of the National Association of Realtors<SUP>'</SUP>.... 92
(iii)
THE REAL ESTATE APPRAISAL INDUSTRY
----------
WEDNESDAY, MARCH 24, 2004
U.S. Senate,
Subcommittee on Housing and Transportation,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Subcommittee met at 2:33 p.m., in room SD-538, Dirksen
Senate Office Building, Senator Wayne Allard (Chairman of the
Subcommittee) presiding.
OPENING STATEMENT OF SENATOR WAYNE ALLARD
Senator Allard. The hearing will come to order.
I would like to welcome the panel, and as you can tell, we
have some interest here on the Subcommittee about your subject
matter today. We are looking forward to this afternoon and
hearing from the panel. I would like to thank everyone for
attending today's oversight hearing on the real estate
appraisal industry.
Similar to the Global Crossing and Enron scandals of recent
years, the 1980's brought the savings and loan scandal squarely
before Congress. While the causes were numerous, the role of
bad real estate appraisals could not be dismissed. Accordingly,
when Congress drafted the Financial Institutions Reform,
Recovery, and Enforcement Act, FIRREA, it included Title XI to
create a new structure for the real estate appraisal industry.
It is certainly appropriate for Congress to become involved
in the appraisal industry because of the clear Federal
interest: Taxpayer dollars are at stake. In fact, the purpose
of the law is to protect Federally insured financial
institutions, not consumers. While a healthy industry can be of
assistance to both, we must be ever mindful of protecting
taxpayer dollars.
The new law looked at both sides of the industry for
addressing both real estate appraisals and real estate
appraisers. To do so, it utilized a complex relationship
between Federal, State, and private entities. This relationship
seems to have worked well in that it has stemmed the worst
problems of the 1980's. However, that does not mean the law
cannot be improved.
We are here today to get an update from the key players
regarding the functioning of Title XI as well as their general
views on the state of the industry.
First, we will hear from Dave Wood of the General
Accounting Office. GAO completed a report on the real estate
appraisal industry last year. He will be discussing their
findings.
Next, we will hear from Steve Fritts, who will be
testifying on behalf of the Appraisal Subcommittee of Federal
Financial Institutions Examination Council. The Subcommittee is
responsible for monitoring Title XI compliance by all Federal,
State, and private entities.
We will hear from Charles Clark, who is the Georgia Real
Estate Commissioner and is here on behalf of the Georgia Real
Estate Appraisers Board.
We will then hear from Dave Bunton of the Appraisal
Foundation. The Appraisal Foundation is the private nonprofit
entity charged with establishing uniform minimum criteria for
appraiser certification and uniform standards for appraisal
practice.
The next witness will be Alan Eugene Hummel, testifying on
behalf of the Appraisal Institute. And finally, we will receive
testimony from Eugene Kaczkowski on behalf of the American
Society of Appraisers.
Before we begin, I would like to take a few moments to
acknowledge my colleague from Georgia, Senator Miller. Senator
Miller has been very interested in the issue of real estate
appraisals for some time and has been quite active. In fact, I
should point out that the GAO report I mentioned earlier was
done at his request, along with that of Senator Sarbanes. I
appreciate my colleague's dedication to a vigorous, healthy
real estate appraisal industry, and I commend him for his work.
I am pleased to have him here today, and I would defer to him
for opening comments if he would like to make a more formal
introduction of Mr. Clark, but first I would like to recognize
Senator Reed and other Members. We all work under the 5-minute
rule here, which is standard in the Banking Committee.
STATEMENT OF SENATOR JACK REED
Senator Reed. Thank you very much, Mr. Chairman. Let me
commend you for holding the hearing, and also commend Senator
Miller for his very aggressive and tenacious efforts to have
this whole area looked at and reviewed.
Title XI of FIRREA, as the Chairman points out, was created
to oversee the real estate appraisal industry after the savings
and loan collapse of the 1980's. In the last 15 years, it has
been in operation. It is appropriate now to examine whether it
is still working, whether improvements should or could be made
to the regulatory structure set up for the real estate
industry.
I look forward to the witnesses' testimony, and again, let
me commend both the Chairman and Senator Miller for addressing
this very important issue, and I yield my time.
Senator Allard. Senator Miller.
STATEMENT OF SENATOR ZELL MILLER
Senator Miller. Thank you, Mr. Chairman. I would like to
thank you, and I would also like to thank Chairman Shelby for
holding this hearing today on the Real Estate Appraisal Reform
Amendments.
As has been said, Title XI was adopted in response to
faulty and fraudulent appraisals that contributed to the losses
that the Federal Government suffered during the savings and
loan crisis of the 1980's. Not long after I came to Washington
in 2000 or early 2001, Mr. Steve Patton, with Lee and Grant in
Atlanta, first brought the real estate appraisal issues to my
attention. Mr. Patton was concerned that the Appraiser
Qualification Board, set up under Title XI, was setting fees
too high for training real estate appraisers. Mr. Patton
contacted the Georgia Real Estate Appraisers Board and they too
were concerned.
States have the discretion to regulate the training,
licensure, and discipline of professions that have an impact
upon health and safety, such as nurses and physicians, but when
it comes to licensing appraisers, Title XI imposed many more
demands upon the States. This is one of the issues we asked the
GAO to look into during its study, and I look forward to
hearing what the GAO found.
Also Mr. Charles Clark, as you mentioned, Mr. Chairman, the
Georgia Real Estate Commissioner, will discuss Mr. Patton's fee
issue as well as other concerns of the Georgia industry.
Since Title XI was enacted, no one has looked at the State
and Federal real estate appraisal systems and the effectiveness
of the current structure. That is why Senator Sarbanes and I
requested the GAO study and why we asked the Committee to
evaluate whether a Federal protection is still necessary for
real estate appraisers, whether the regulatory structure has
become perhaps too complex and too burdensome. I believe the
time has come to examine and debate the issues affecting the
real estate appraisal industry. I am pleased that the
Subcommittee has taken the time to hold this very important
hearing today.
Finally, Mr. Chairman, I would like to welcome my fellow
Georgian, Mr. Charles Clark, the Georgia Real Estate
Commissioner, who will be testifying on this panel, and I thank
all of you for being here who are going to testify.
Thank you, Mr. Chairman.
Senator Allard. I would like to recognize Senator Sarbanes,
who is the Ranking Member on the Full Committee.
Senator Sarbanes.
STATEMENT OF SENATOR PAUL S. SARBANES
Senator Sarbanes. Thank you very much, Mr. Chairman. First
of all, I want to thank you and Senator Reed for holding this
very important hearing, and also I want to thank Senator Miller
for his strong interest in this issue. I joined with him in
asking the GAO to do this study, and you will be hearing about
that shortly.
I also want to express my appreciation to the members of
the panel.
Unfortunately, I am not going to be able to stay because,
as we all well know, I have conflicting engagements, but I did
want to come if just briefly and make a statement because of
the importance I attach to this issue of home appraisals.
In Baltimore City, which I am pleased to represent, and in
fact where I live, we have been plagued by the problem of
property flipping joined with predatory lending. This extremely
noxious combination has resulted in neighborhoods that have
been decimated by high levels of foreclosures and
disinvestment, leaving the families who have been victimized by
this scandal, families often headed by low-income, single,
working mothers, without a place to live and with a credit
profile that has been destroyed.
Regrettably, Baltimore has suffered from this problem at a
scale greater than most other cities in large part because of
the role of some unscrupulous appraisers. Testimony given by
the Assistant U.S. Attorney Joe Evans to the Baltimore
Predatory Lending Task Force has been clear on this point. Mr.
Evans said that bad appraisers are the enablers of this
destructive and criminal process.
We are in the course of cleaning it up, thanks to the
Predatory Lending Task Force and the very active work of the
U.S. Attorney's Office.
This, in short, is how it works. An investor buys a
foreclosed property for very little money, perhaps $20,000 or
$25,000. He then makes very superficial repairs, if he makes
any repairs at all; finds an unsuspecting homebuyer, often a
person who cannot really afford or is not really prepared for
homeownership. At the center of the scam is the unscrupulous
appraiser, who is in on the fraud and appraises the property
for $65,000, or $70,000. With that appraisal in hand, the
investor helps the buyer qualify for a loan.
As soon as a problem pops up, a boiler breaks, a roof
leaks, or the like, the homeowner finds herself in deep trouble
and often defaults on the loan. The house is then sold at
foreclosure sale for far less than the sales price, obviously,
and the whole process starts again, resulting in further
community disinvestment.
According to the U.S. Attorney's Office, once these
property flippers identify an appraiser who is willing to
participate in this outrageous behavior, that appraiser is then
used in property after property by one bad investor after
another. Now, these people are being prosecuted as they should
be.
Further, I have spoken to a number of very reputable
appraisers in Maryland who abhor and condemn this process, and
who are working hard to eliminate these bad actors from their
midst, but they need help.
Mr. Chairman, I commend you and Senator Reed for
undertaking this hearing. We need to get a handle on this
problem. I appreciate the work that the GAO has done to look at
this issue. It is clear the current system is not fully
adequate to the task, and I look forward to reviewing the
testimony and the record of this hearing to see what steps may
be appropriate for us to take at the Federal level, and what
additional steps State and local authorities may take, and
indeed, what steps the industry itself can take to, in effect,
carve this pernicious behavior out of its midst. It is strongly
condemned by all the reputable people in the appraisal industry
as you would expect it to be, and I welcome that condemnation,
but we have to figure out how we can get at these really bad
apples, so they not only do not exploit people and tarnish them
and victimize them, but also do not tarnish the workings of the
many, many very able and dedicated people who are in the
appraisal field.
Thank you very much, Mr. Chairman.
Senator Allard. I would like to call on the panel members,
and as I mentioned in my opening comments, Mr. Wood, we will
start with you, Director of Financial Markets and Community
Investments with the U.S. General Accounting Office.
STATEMENT OF DAVID G. WOOD, DIRECTOR
FINANCIAL MARKETS AND COMMUNITY INVESTMENT
U.S. GENERAL ACCOUNTING OFFICE
Mr. Wood. Thank you, Mr. Chairman. I apologize for my
voice. I am getting over a bad cold.
Senator Allard. We will give you some relief on that voice.
We will ask you to limit your testimony to 5 minutes, and then
the rest of your statement, we will just submit that for the
record.
Mr. Wood. That will not be a problem.
My statement is based on our May 2003 report, which
addressed three broad objectives: first, to describe specific
responsibilities of each entity involved in the oversight
structure established by Title XI; second, to determine what
factors, if any, these entities identify as potential
impediments to carrying out those responsibilities; and third,
to identify concerns of the entities or industry participants
about the effectiveness of the existing regulatory structure.
Regarding the first objective, Title XI specifies roles for
private, State, and Federal entities. Instead of tasking a
Federal agency to establish standards for appraisals or
competency requirements for appraisers, Title XI recognized the
work of two private organizations. These are the Appraisal
Standards Board and the Appraiser Qualifications Board, which
operate as part of the nonprofit Appraisal Foundation.
The Standards Board publishes uniform standards for the
conduct and writing of appraisals. Title XI provides for all
appraisals used in Federally related transactions to be
prepared in accordance with these uniform standards.
The Qualifications Board establishes education, experience,
and examination requirements for several categories of
appraisers. Title XI does not require that all appraisers
involved in Federally related transactions meet the
Qualifications Board's criteria. Rather, it requires, with some
exceptions, that such appraisers be either certified or
licensed. The Qualifications Board's minimum criteria are used
to certify appraisers.
Under the Title, States have the important responsibility
of licensing and certifying appraisers. The States establish
their own licensing criteria. The States are also responsible
for monitoring and supervising compliance with appraisal
standards.
At the Federal level, the five financial institution
regulatory agencies are responsible for ensuring that the
banks, thrifts, and credit unions they supervise comply with
Title XI requirements. Among other things, these regulators
specify which Federally related transactions require the
services of certified appraisers, licensed appraisers, or
neither.
And finally, another Federal agency, the Appraisal
Subcommittee, is responsible for monitoring the implementation
of Title XI by all parties, private, State, and Federal. Among
other things, the Subcommittee periodically reviews each
State's certification and licensing program, is authorized to
make grants to the Appraisal Foundation to help defray the cost
of the two boards, and is required to monitor the practices,
procedures, and activities of the Appraisal Foundation.
Regarding our second objective, officials of these entities
described several factors that could constrain their ability to
carry out their Title XI responsibilities. For example,
officials of the Standards Board and the Qualifications Board
stated that insufficient Federal grants could impede their
future ability to ensure that standards and qualifications
evolve with changing marketplace conditions.
State appraiser agencies, which we surveyed with a
questionnaire, reported resource limitations as their primary
impediment. As an example, 26 States reported having an
insufficient number of investigators.
Finally, the Appraisal Subcommittee reported that
additional enforcement sanctions could help its efforts to
oversee State compliance. We did not assess the extent to which
these factors would impede the goals of Title XI, but did add
contextual information where possible.
In response to our third objective, we identified a number
of concerns, including: The lack of a national qualifications
standard for licensed real estate appraisers and other
differences among State licensing programs; the cost and lack
of uniform approval processes for appraiser education courses;
the potential reluctance of lending institutions to make
referrals of questionable appraisals they identify to the
States for action; and a lack of consistent and effective
enforcement actions by the States on cases that are referred.
Many of these concerns reflect the almost inevitable
tension that exists when a statute attempts to balance both
Federal and State interests. We noted no clear consensus on the
need for or impact of possible changes to the overall
regulatory structure. However, we did identify actions that we
believe could enhance the effectiveness of the existing
structure.
Accordingly, we recommended that the Appraisal
Subcommittee, among other things, develop and apply consistent
criteria for determining and reporting the States' compliance
with Title XI, explore options, including drawing on its
surplus, if necessary, for future grants to the Appraisal
Foundation, and to coordinate with Fannie Mae, Freddie Mac, and
HUD to improve the process of referring problem appraisals to
the States for enforcement. The Subcommittee has reported that
it is acting on these recommendations.
Mr. Chairman, that concludes my prepared statement. I will
be happy to take questions.
Senator Allard. Thank you. You stayed pretty well within
our 5-minute limit. The timer that we have up here, when the
caution light turns on--you have one there on your table--it
gives you about a minute to wrap up. It turns at four, and then
at five.
Mr. Fritts, you are next. Mr. Fritts is Associate Director
of Risk Management/Examination Support Division of Supervision
and Consumer Protection, Federal Deposit Insurance Corporation,
and you are testifying as Chairman of the Appraisal
Subcommittee of the Federal Financial Institutions Examination
Council.
Mr. Fritts.
STATEMENT OF STEVEN D. FRITTS
CHAIRMAN, APPRAISAL SUBCOMMITTEE,
FEDERAL FINANCIAL INSTITUTIONS EXAMINATION COUNCIL
ASSOCIATE DIRECTOR,
RISK MANAGEMENT/EXAMINATION SUPPORT,
DIVISION OF SUPERVISION AND CONSUMER PROTECTION,
FEDERAL DEPOSIT INSURANCE CORPORATION
Mr. Fritts. Good afternoon, Chairman Allard and Members of
the Subcommittee. Thank you for the opportunity to discuss the
current state of the appraisal industry and its Federal and
State oversight. On behalf of the Appraisal Subcommittee, which
I currently chair, we commend your Subcommittee's initiative to
assess the industry.
The Appraisal Subcommittee oversees the real estate process
as it relates to Federally related transactions. Its membership
includes the representatives from each of the five members of
the Federal Financial Institutions Examination Council, which
includes the FDIC, the Federal Reserve, the Office of the
Controller of the Currency, the Officer of Thrift Supervision,
and the National Credit Union Administration. Also a
representative of Housing and Urban Development serves on the
Subcommittee.
Following the financial crisis of the 1980's, Congress
passed the Financial Institutions Reform, Recovery and
Enforcement Act of 1989, informally known as FIRREA. Title XI
of FIRREA addressed the weaknesses regarding real property
appraisals used in connection with Federally related
transactions. Prior to FIRREA, appraisals for Federally related
transactions and the appraisers who
performed them, were, for the most part, unregulated at either
the Federal or State level. During the financial crisis in the
1980's, poor quality appraisals were a contributing factor to
the numerous bank and savings and loans failures. Title XI
sought to address the situation.
Title XI created a unique system. As noted in GAO's report,
Title XI created a complex oversight structure for real estate
appraisals and appraisers that involve, private, State, and
Federal entities. First, two private entities within the
Appraisal Foundation establish uniform rules for real estate
appraisals and set minimum criteria for certifying appraisers.
Second, State regulatory agencies certify appraisers based on
these criteria and regulate the industry within their State.
Third, the Federal financial regulatory agencies oversees the
financial institutions' use of appraisals.
Title XI charged the Appraisal Subcommittee with five
legislative mandated responsibilities: First, monitor the
requirements established by the States, territories, and
District of Columbia and their appraiser regulatory agencies;
second, monitor the requirements established by the Federal
financial regulatory agencies regarding appraisal standards;
third, to maintain a national registry of State-licensed and
certified appraisers; fourth, monitor and review the activities
of the Appraisal Foundation; fifth, transmit an annual report
to Congress regarding these responsibilities.
The Appraisal Subcommittee is funded by a $25 a year fee
for an appraiser to be listed on the national registry.
Although the Appraisal Subcommittee has the authority to
increase that fee to $50, we have maintained the registry fee
at the same $25 that was established in 1989. The annual
operating budget of the Appraisal Subcommittee is currently
$2.1 million. Through automation and efficiencies, the
Appraisal Subcommittee has reduced its staffing from 9
employees to 7 over the 15 years of its operation, as it
attempted to maintain a high level of operating effectiveness.
Perhaps the most important point I would like to make in
this testimony is that generally States do a good overall job
of enforcing compliance with Title XI given the resource
limitations facing most States. Although some States have areas
that need improvement, we have found the great majority of
States are generally complaint with Title XI. Our primary tool
for evaluating State compliance is a 3-year on-site review
cycle. Appraisal Subcommittee staff performs an on-site review
of approximately 18 States or territories a year, plus
conducting several follow-up reviews. Once we have completed
field reviews and formally transmitted our findings to the
States, we work with the States to ensure correction of noted
areas of concern. Most States address our concerns in a timely
manner. Currently, the most common problematic area involves
complaint investigation and resolution.
Because this area requires specialized personnel and
expertise, it is one of the more complex and costly functions
for State appraisal regulatory agencies. Consequently, some
States are not as timely in their complaint investigation and
resolution as they should be. Each year, we provide a summary
of significant areas of concern identified in our field reviews
in our report to Congress.
Another one of the Appraisal Subcommittee's primary
responsibilities is maintenance of the registry. During the
past several years, we have made the registry available via the
Internet to States and to the public. We added sections
reserved for the States' only access to facilitate State
efforts in areas such as researching the license authority of
appraisers and determining whether an appraiser is in good
standing in another State. We have added automated e-mail
notification to States, lenders, and other parties when
appraiser credentials are revoked, suspended, or when they
expire.
Senator Allard. Are you about ready to wrap up your
comments there? Summarize quickly, and then we will submit the
rest of it for the record.
Mr. Fritts. We would offer these final comments. Some
contend that the need for Federal law and Federal oversight of
the appraisal regulatory system no longer exists. Given the
difficulties we have experienced in achieving some level of
consistency among States to better facilitate interstate
lending and appraisal activities, we believe that a lack of
Federal law and oversight would allow the system to become
increasingly fragmented to the overall detriment of the
appraisal industry.
Considering the complexity inherent in the appraisal
regulatory structure, this system functions reasonably well. At
15-years-old, the appraisal regulatory system is relatively
young. We expect continued adjustments and challenges as the
system matures.
Thank you.
Senator Allard. Thank you, Mr. Fritts.
Now we will call on Mr. Clark, Real Estate Commissioner,
Georgia Real Estate Commission. It is always nice to have local
elected officials come and visit us here.
STATEMENT OF CHARLES CLARK
REAL ESTATE COMMISSIONER,
GEORGIA REAL ESTATE COMMISSION
ON BEHALF OF
THE GEORGIA REAL ESTATE APPRAISERS BOARD
Mr. Clark. Thank you, Mr. Chairman, Members of the
Committee. Thank you for the opportunity to present the views
of the Georgia Real Estate Appraisers Board on how Congress
should amend Title XI. Many other State regulators share our
views.
Enacted with good intentions, Title XI today unnecessarily
imposes on appraisers an unwieldy Federal regulatory
superstructure not imposed on other trades or professions. We
urge Congress to replace that superstructure with a traditional
less costly framework, one that is more consistent with the
Tenth Amendment to the Constitution.
Our board believes Title XI needs to change for three
reasons. First, the Appraisal Subcommittee has met its goals.
Title XI charged the Appraisal Subcommittee primarily, to see
that all States regulate appraisers, and to oversee the
development of the Uniform Standards of Professional Appraisal
Practice. It has done so. Congress should now commend the
Appraisal Subcommittee for a job well done and sunset its
operations.
Second, States can provide better regulation. States have
many advantages over the Federal Government in regulating
appraisers. We cite but four here: The States have over a
century of experience in successfully regulating businesses and
professions that affect the public interest; a State's
regulatory mistake has negative repercussions only Statewide,
not Nationwide as does a Federal mistake; because the States
investigate and discipline appraisers, they can identify and
act on problems requiring regulatory attention quicker than can
the Appraisal Subcommittee and the Appraisal Foundation; and
the Appraisal Subcommittee and the Appraisal Foundation have
chosen to make policy decisions in closed-door meetings, as
they strive, directly or indirectly, to impose one-size-fits-
all policies on the 55 regulatory jurisdictions and
approximately 90,000 appraisers. Such secrecy is not only
inappropriate, but is also counterproductive because it causes
a loss of public confidence in both the decisionmakers and the
regulatory process.
Our third reason for seeking change is that the negative
unintended consequences of Title XI outweigh the positive
results. We cite five of those here: Inhibiting the
effectiveness of market controls in preventing poor appraisals;
increasing the cost of regulation; requiring State governments
to enforce criteria and standards developed by a private entity
over which no government asserts much influence or control;
denying over 90,000 appraisers the stakeholder rights in
regulating their own profession that other State-regulated
professions enjoy; and finally, profiteering by the Appraisal
Foundation. We cite but one example here. Georgia's appraisal
schools tell us that they must pay the Appraisal Foundation at
least $38 each time an appraiser takes a course on appraisal
standards. Under its putative Title XI authority, the Appraisal
Qualifications Board, a Foundation subsidiary, forces all
appraisers to take that course as a condition for becoming or
remaining classified. By using its regulatory authority to
enhance its financial position, the Appraisal Foundation has
misused and abused its regulatory role to reap nearly $2
million a year from appraisers. The Appraisal Foundation
adopted this profiteering scheme despite the fact that the
Appraisal Subcommittee has already paid it over $9 million in
taxes collected from appraisers to develop appraiser criteria
and appraisal standards.
Redressing these problems will require redirecting the
focus of Title XI. Thus, the Georgia Board respectfully asks
that Congress examine broader issues than those addressed in
the GAO's report, and amend Title XI, as we have suggested in
Exhibit A of the written report that we have tendered to you
today.
Congress should not yield to the sirens' song that
``continuing Federal regulation will lead to increased quality
in real estate appraisals.'' Quality of work product only
improves significantly through the individual practitioner's
effort under the stimulus of the marketplace. State regulation
can effectively establish minimum entry requirements and is
removing dishonest and incompetent practitioners.
Thus, we ask Congress to end the unintended negative
consequences of Title XI by sunsetting the Appraisal
Subcommittee and turning appraisal regulation over to the
States.
Mr. Chairman, we appreciate your Committee's time and
consideration of our views.
Senator Allard. We will now call on Mr. Dave Bunton,
Executive Vice President of the Appraisal Foundation.
STATEMENT OF DAVID S. BUNTON
EXECUTIVE VICE PRESIDENT, THE APPRAISAL FOUNDATION
Mr. Bunton. Thank you, Mr. Chairman, and Members of the
Committee. The Appraisal Foundation appreciates the opportunity
to present its perspective at this hearing this afternoon.
Our organization serves as the private sector resource in
our Nation's real estate appraiser regulatory system. By way of
background, we are not a membership-based trade association,
but rather a not-for-profit educational organization that
serves as an umbrella group for organizations with an interest
in valuation.
The appraisal profession in the United States has
traditionally been somewhat fragmented. In the interest of
promoting consistency and uniformity in the areas of
professional standards and qualifications, eight national
appraisal organizations created the Appraisal Foundation in
1987. Our mission is to promote professionalism in appraising
in two important ways, first by setting the qualifications that
one must meet to become an appraiser, and second, by
establishing standards for how an appraisal should be
performed. This is relevant because in 1989, through the
enactment of Title XI of FIRREA, the Congress gave the
Appraisal Foundation three specific responsibilities relating
to the regulation of appraisers: First, that all appraisals
performed for Federally related transactions must be in
conformance with the standards promulgated by the Appraisal
Standards Board of the Appraisal Foundation; second, that
State-certified real estate appraisers must meet the
education, experience, and continuing education requirements
established by the Qualifications Board of the Appraisal
Foundation; and last, the examinations used by the States to
certify our real estate appraisers must be reviewed and
approved by our Appraiser Qualifications Board.
In evaluating how Title XI has performed to date, one of
the most tangible measurements is to review the disciplinary
action take by the States for the period of 1992 to 2002.
During that time a total of 4,360 disciplinary actions were
reported by the States to the Appraisal Subcommittee, and of
these, over 1,250 were serious violations which resulted in the
suspension, revocation, or voluntary surrendering of an
appraiser's State credential.
In the event that existing that alternatives to the
existing structure of Title XI are given consideration in the
future, it is important to keep several factors in mind. First,
the Federal Registry of Real Estate Appraisers, maintained by
the Appraisal Subcommittee, currently contains over 95,000
names, accounting for individuals who hold a credential in more
than one State, the total number of real estate appraisers is
estimated to be approximately 80,000. We have several fine
national appraisal organizations, and two of them are at the
table here with us today. However, it is important to note that
the majority of real estate appraisers in the United States are
not affiliated with any professional appraisal organization.
Accordingly, absent the current system, any type of self-
regulating alternative is virtually impossible due to the fact
that most appraisers are not subject to peer-review procedures.
Second, regarding the possible elimination or dilution of
the Federal oversight component of Title XI in the future, it
is important to remember that Title XI was enacted not as
consumer protection legislation, but rather from a safety and
soundness perspective to ensure the integrity of the Deposit
Insurance Fund. Absent Federal oversight, States would be free
to establish very low threshold levels or perhaps none at all.
Without credible enforcement, there could be a detrimental
impact on the safety and soundness of the Nation's lending
institutions.
The current hybrid system of private sector expertise,
State administration and Federal oversight ensures three
things. One, minimum levels of competency. Two, it provides
administrative latitude to each of the 55 States and
territories. And three, it ensures overall accountability.
While we believe Title XI is generally working as intended
and should remain intact, the following recommendations are
offered as suggested enhancements: First, provide greater
regulatory latitude for the Appraisal Subcommittee and its
oversight responsibilities; second, require State-licensed
appraisers to meet the qualification and examination
requirements of our Appraiser Qualifications Board, as State-
certified appraisers currently do; and third, to facilitate
interstate commerce, reciprocity among the States should be
mandated.
In conclusion, when recently confronted with concerns about
the accounting profession, the Senate Banking Committee
addressed the issue by increasing Federal oversight through the
creation of the Public Company Accounting Oversight Board.
Similarly, with the revelations about financial reporting
variances at Freddie Mac, this Committee is pursuing options
for greater Federal oversight of the Government Sponsored
Enterprises. Fifteen years ago, when faced with a deposit
insurance crisis, your colleagues opted to create a regulatory
system that includes Federal oversight of the State regulatory
programs, programs that credential the individuals who
determine the value of the underlying assets of our financial
institutions. To dilute or remove Federal oversight at this
time would be sending the wrong message at the wrong time.
Mr. Chairman, thank you for the privilege of appearing
before you this afternoon, and we look forward to answering any
questions that you may have.
Senator Allard. Thank you, Mr. Bunton.
Mr. Alan Eugene Hummel, Chief Executive Officer, Iowa
Residential Appraisal Company, welcome. We always appreciate
small business people showing up. I assume it is a small
business.
Mr. Hummel. That is correct, sir.
Senator Allard. I know it is hard sometimes to get away
from your business. Appreciate you being here.
STATEMENT OF ALAN EUGENE HUMMEL, SRA
IMMEDIATE PAST PRESIDENT, THE APPRAISAL INSTITUTE
CHIEF EXECUTIVE OFFICER,
IOWA RESIDENTIAL APPRAISAL COMPANY
ON BEHALF OF
THE APPRAISAL INSTITUTE AND THE AMERICAN SOCIETY
OF FARM MANAGERS AND RURAL APPRAISERS
Mr. Hummel. Thanks you, Senator, and Members of the
Subcommittee.
A good appraisal is important to consumers and our economy.
The S&L scandal led Congress to pass FIRREA, recognizing the
importance of reliable and honest appraisals in real estate
financing. Today, the appraisal is being swept to the
sidelines, treated as a nuisance rather than essential. Some
lenders propose to bundle the appraisal with other services in
cut-rate financing packages. Others intend to off-shore that
function. No matter how good a computer whiz, a kid in Calcutta
cannot provide the insightful evaluations on par with
professional appraisers who intimately know our communities.
Whether you are buying a ranch in Durango or moving to Macon,
you want to know that a professional who knows the territory is
involved.
So 15 years after FIRREA, how are we doing? Only 28 percent
of the users we surveyed saw improvement, while fully half say
that appraisal quality has declined. Before State licensing, 84
percent selected appraisers based on professional designations
and experience. Now almost 90 percent of the users find State-
certified appraisers less qualified than those with
professional designations, yet they assign them more and more
of the business.
I am afraid that the system's report card rates 5 D's and
an F.
Direction is the first D; we do not have it. Our chart here
depicts the regulatory structure resembling a circular
perpetual motion machine. Who, individually, is responsible for
setting direction? Who, in rotating bureaucratic chairmanship,
is the stakeholder in charge? Is it any wonder that States
routinely ignore this flailing machinery?
Disclosure is the second D, and again, we do not have it.
The Appraisal Subcommittee and their civil servants hold secret
meetings with neither input from nor access for professionals
working in the industry. Their tardy reports to Congress are
mere financial summaries. They do not tell us what they do,
only how much they are billing us. They resemble the Wizard of
Oz, warning us not to look behind the curtain.
Discrimination is the third D. By favoring less-
credentialed newcomers, FIRREA bizarrely discriminates against
seasoned professionals, discouraging advanced career
development. The professional organizations foster superior
training ethics, yet with no incentive to excel, appraisers
have been dropping out. Fewer than 40 percent now belong. This
is like an employer snubbing college graduates to hire
dropouts. Under FIRREA, ignorance is bliss.
Discipline also fails. Left alone, the States can disregard
appraiser discipline as a potential Federal mandate. Take New
York, which reinstated an appraiser convicted of fraudulently
scamming millions. At the very time the ASC was approving New
York's program, Newsday was reporting the State routinely
neglected or dismissed complaints. We know of similar scandals
throughout the country.
Duress, our fifth D, flourishes. Without effective
enforcement, financiers still pressure appraisers to come up
with the ``right numbers'' for their deals, just as they did in
the freewheeling 1980's.
The ASC's worst grade is an F for Federal/State relations.
The ASC has no one in charge or accountable. The Federal entity
lacks practical input from the field and effective contact with
States. It does nothing to foster interstate reciprocity and
little toward temporary practice licensing, an appropriate
Federal role.
Finally, the ASC has no real leverage to encourage State
compliance. Its only inducement for the States to police bad
appraisal practices have been dubbed ``the atomic bomb'' that
would effectively blow up all Federally financed mortgages in
the State. Nobody is going to use that and everybody knows it.
What happens to a 15-year-old with a flunking report card?
You might pack the kid off to military school to get some
discipline, but yet better, how can we help them earn some A's?
Assets, enough to do the job; access to agencies' proceedings;
advancement of appraisers' professional qualifications;
aggressiveness in disciplining bad appraisers while protecting
the independence of good ones; authority to do its job; and
most of all, accountability of State and Federal oversight to
the public.
Since 1935, the Appraisal Institute has advanced the
standards of our industry, saving buyers, sellers, and
taxpayers millions. We are now ready to work with you to craft
a simple cost-effective and transparent legislative remedy so
FIRREA can earn straight A's. Our system is floundering.
Discipline and direction can help it make the grade.
Thank you.
Senator Allard. Now we will call on Mr. Eugene G.
Kaczkowski, Accredited Senior Appraiser, American Appraisal
Associates, Inc, here representing the American Society of
Appraisers.
STATEMENT OF EUGENE G. KACZKOWSKI
PRESIDENT, AMERICAN SOCIETY OF APPRAISERS
ACCREDITED SENIOR APPRAISER,
AMERICAN APPRAISAL ASSOCIATES, INC.
Mr. Kaczkowski. Thank you very much, Senator. First of all,
you should know that the American Society of Appraisers is a
multidiscipline professional appraisal society. That is, we
represent more than real estate appraisers. We also include
business valuation appraisers, machinery and equipment
appraisers, fine arts and antique appraisers, and gems and
jewelry appraisers. About one-fifth of our membership is real
estate appraisers.
The American Society of Appraisers believes that the state
of the real estate appraisal profession and the profession in
general is generally good, and that the enactment of FIRREA
continues to be a positive force in professionalizing the
Nation's real estate appraisers.
Today's real estate appraisers are far better educated, far
more competent, and held to a higher standard of ethics and
accountability than pre-FIRREA days.
We also believe that there is room for improvement. There
are problems with Title XI; it needs to be modernized and
tightened in order to correct some problems that we see. Some
of them have already been addressed by other panel members.
We see seven issues or problems. First, the current
membership of the Appraisal Subcommittee is drawn primarily
from housing and banking interests. We think that is too
narrowly drawn and lacks representation from a host of
nonbanking Federal agencies that have a major stake in the
integrity of real estate appraisals. These include the
Department of Interior, the Department of Transportation, the
IRS, the Securities and Exchange Commission, to name a few.
They all have an interest in real estate appraisal issues.
Problem No. 2. Regulation of appraisers by States,
territories, and the the District of Columbia has been uneven,
and in some cases, even ineffectual. How to correct the
problem? Give the Appraisal Subcommittee rulemaking authority.
Problem No. 3. What rulemaking powers are necessary? What
we would do is have the GAO study this particular issue and
determine how we can correct the problem of uneven and
ineffectual regulation.
Problem No. 4. Some States continue to resist having
reciprocity agreements with neighboring States and to resist
issuing temporary practice permits to duly credentialed
appraisers. What is the solution? Have the appraiser who is
credentialed in one State be automatically credentialed in
another State, in other words, have a driver's license
approach.
Problem No. 5. Because Federal bank regulatory agencies
have limited the mandatory application of Title XI's
professional
appraisal requirements to loans above $250,000 for residential
property and $1 million for commercial property, the so-called
de minimis rule, safety and soundness have been seriously and
needlessly jeopardized. Once again, the GAO should be
commissioned to analyze the effects of the de minimis rule.
Problem 6. Two years after the enactment of Title XI there
were amendments, and the Appraiser Qualifications Board of the
Appraisal Foundation found itself in the anomalous position of
having authority to establish qualification requirements for
State-certified appraisers, but not for licensed appraisers in
Federally related transactions. We believe that the Appraiser
Qualifications Board should have the ability to set
qualifications for licensed appraisers also.
Last, because each State's appraiser licensing board
currently must approve all primary and continuing education
courses offered to its appraisers, hardships are imposed on
those who offer the courses, appraiser societies, and regional
and national education providers, who have to have these
courses approved and registered by each jurisdiction. This
poses an administrative hardship when the same course has to be
approved 50 or more times. We say that a central clearinghouse
should be established so that these courses can go to one group
and have the necessary national approval. A good place to have
that clearinghouse is the Appraisal Foundation.
The report that you have expands all of these issues in
greater detail, but I will stand for any questions you might
have.
Senator Allard. Thank you all for your testimony, and now
we will proceed with questions from the Members on this
Committee.
Mr. Kaczkowski, you have a fifth of the appraisers in your
association that are also in real estate. What percentage of
the total real estate appraisers do you think that represents
in the country? Do you have any idea?
Mr. Kaczkowski. The only numbers I have are those that are
provided by Mr. Bunton. I have heard those numbers before, and
the thought is that----
Senator Allard. Four percent?
Mr. Kaczkowski. We have 1,000 or 1,200 appraisers out of
approximately 95,000 that would be part of our organization.
Senator Allard. I will be darned.
Mr. Kaczkowski. As compared to my compadre here from the
Appraisal Institute, we are a smaller group of real estate
appraisers, but again, we are a multidiscipline society.
Senator Allard. What about the Institute?
Mr. Hummel. The Appraisal Institute represents
approximately 24 percent of the licensed appraisers. In
conjunction with the American Society of Farm Managers and
Rural Appraisers, who we are testifying with, we accomplish
probably about 30 percent.
Senator Allard. I would suppose that those who are more
qualified and do the better job of appraising are likely
members of both of your groups. Would that be a fair
assessment?
Mr. Kaczkowski. We think so.
Mr. Hummel. That would be a fair assessment. We have shown
through surveys and looking at the ASC's results of those being
disciplined, we find that those that do not belong to
professional organizations have a higher likelihood of being
disciplined than those that do belong to professional
associations.
Senator Allard. I see. I want to get to the fees. Mr.
Hummel, you are an appraiser, so what are your fees that you
pay to the Foundation and is there a separate fee to the
Appraisal Subcommittee also? Give me a total of what you pay on
fees.
Mr. Hummel. Every time I pay my license fee for every State
in which I am licensed, I have a $25 tax that goes to the
Appraisal Subcommittee out of that----
Senator Allard. So if you are, in four States, licensed
then you pay $100 to the Federal agency or foundation; is that
right?
Mr. Hummel. To the Appraisal Subcommittee, that is correct.
Senator Allard. Oh, the Subcommittee for each license,
okay.
Mr. Hummel. That is correct.
Senator Allard. Is there any assessment from the Foundation
or any other group here that you deal with?
Mr. Hummel. No, sir. As an individual appraiser I can
voluntarily belong to the Appraisal Foundation publications,
but that is voluntary.
Senator Allard. I understand, and then there is a fee for
that publication.
Mr. Hummel. That is correct.
Senator Allard. Mr. Fritts, what have the Subcommittee's
revenues been in recent years and what does it generally cost
for the Subcommittee to operate? Can you share those figures
with us?
Mr. Fritts. Yes, sir. Our current budget for this year is
$2.1 million. Our revenues are expected to slightly be below
that expenditure amount.
Senator Allard. what is slightly, $100,000, $500,000?
Mr. Fritts. About $50,000 I believe.
Senator Allard. So you have a $50,000----
Mr. Fritts. Shortfall.
Senator Allard. You mean you collect $50,000 less than the
cost of running your----
Mr. Fritts. Than our operation and the grant to the
Appraisal Foundation, is approximately $900,000 this year.
Senator Allard. Then you give $900,000 to the Foundation.
Mr. Fritts. That is right, out of that $2.1 million.
Senator Allard. And so the $50,000, where do you make up
the difference on that?
Mr. Fritts. We have reserves of several million dollars
that have been built up over the years, $5 million that is the
current reserve.
Senator Allard. So the interest off of that reserve makes
up the difference; is that the way that works or do you pull it
right out of the reserve?
Mr. Fritts. We just pull it right out of the reserve.
Senator Allard. Does the reserve make any money? Is it
invested anywhere?
Mr. Fritts. I believe it is with the Treasury. I do not
believe it is interest bearing.
Senator Allard. It is not interest bearing. So the Federal
Government uses that at no cost?
Mr. Fritts. That is my understanding.
Senator Allard. That is interesting. You did not have a
surplus this last budget year, but you have had surpluses in
the past?
Mr. Fritts. That is correct, sir.
Senator Allard. Let us put aside the issue of surpluses. Is
it generally the Subcommittee's policy that in a single year
the entire difference between revenues and its own operating
expenses should be used as a grant to the Foundation?
Mr. Fritts. No, sir, that is not how it works. Basically,
the Foundation presents us a proposal in the fall of the year,
which we review carefully. In past years we have sometimes
approved less than that proposal, or sometimes we have approved
it in its entirety. One of the GAO's recommendations was that
we closely evaluate their proposal in light of their review,
and if possible and appropriate, go into our reserves to help
fund that request. This request last year, we did fully fund
their request at $900,000, and that will result, at least in
our budgetary process, a slight shortfall.
Senator Allard. Do you expect the shortfall to increase in
future years?
Mr. Fritts. If we do not increase the fee, the $25 fee,
which has been the same since 1989, that is entirely possible.
Yet, with our reserve that we have there, that is still some
time away.
Senator Allard. Senator Reed.
Senator Reed. Thank you very much, Mr. Chairman.
Thank you, gentlemen, for your excellent testimony.
One of the basic questions here is whether this authority
and responsibility should devolve back to the States. Mr. Wood,
in your study, GAO study, you found that the biggest constraint
on all the regulatory bodies was a lack of funding I believe.
Is that accurate?
Mr. Wood. That is what the States reported was their
biggest impediment, a lack of resources.
Senator Reed. Which raises a question of not only the
willingness but also the capacity of States to take up this
extra--do you have any comments in terms of that from your
review about the capacity of the States to do this work, not
just one or two States that may be well prepared, but across
the board?
Mr. Wood. In terms of the capacity to actually do the job
the Title requires them to do, I would say the Subcommittee is
probably in a better position to answer you because they do
annual reviews of the States on a rotating basis. But there are
some data in our report that amply lays out shortfalls they are
experiencing.
Senator Reed. Mr. Fritts, let me raise the question with
you about the capacity of not individual States, which I am
sure they are well prepared, but the range of States.
Mr. Fritts. Yes, sir. We are certainly concerned about the
current budgetary issues, and that is one thing we are
monitoring when we are doing our reviews. Many States are under
budgetary pressures. We have found, however, over the 15 years,
that States have done a very effective job. Our report results
show that. Out of all the States that we have, we put States in
three tiers of classification as to their compliance, and there
are only four States and territories that meet less than really
what we consider reasonable compliance and reasonable quality
of their programs. That is our current statistic.
Senator Reed. So that in your view, they do have the
capacity?
Mr. Fritts. Based on past experience, we believe they do.
Senator Reed. Let me ask another question, Mr. Fritts.
Apparently, the only real sanction you have is decertification
of a State.
Mr. Fritts. That is right, sir. I will say it is a very
powerful sanction, and just the threat of it we believe is a
very powerful inducement. We have I think a good cooperative
relationship with the States, and our experience is that when
we find problems, the States correct them generally in a timely
fashion.
Senator Reed. So you do not believe there is a need for a
range of sanctions or authorities, that this decertification is
adequate and sufficient and not too much?
Mr. Fritts. I think our experience shows that it has been
adequate up to this point.
Senator Reed. Mr. Clark, you clearly have espoused the
notion that Title XI should be dispensed with and these duties
devolve back to the States. Are there any recommendations short
of that that you would support, any other fixes to the system,
or your position is it so broken and it has to be done away
with?
Mr. Clark. Senator, we think it is broken, but we would not
recommend doing away with all of it. Our proposal specifically
identifies the things that we would do, and while we would
sunset the Appraisal Subcommittee and have the States to handle
all the education and experience requirements and the
examination requirements, there are things in Title XI that we
think are important to retain, simplified to some degree.
For example, we think that we should authorize lenders to
use any classified appraiser they choose so long as that
appraiser is classified in a State. So, for example, a lender
who is making loans across the country on large buildings, for
example, might hire one appraiser who happens to be licensed in
one State, and that appraiser could do work wherever the lender
wanted them to do, to get over this hurdle of fighting between
the States about whether you can go across a State line or not.
We think that Title XI should require that lenders utilize
appraisers classified by State regulatory agencies in all
Federally related transactions. That assures that every State
will have an entity to license and certify appraisers. If Title
XI did not require that, some State might decided, hey, we just
do not want to do this. So it would be a stimulus to see that
it is done.
We think that all appraisals should be conducted on
Federally related transactions in accordance with USPAP, and we
see an important role for the Standards Board of the Appraisal
Foundation to continue to play in establishing those standards.
We think they should be working more directly with the
financial institutions to accomplish that, rather than being
paid by appraisers through the current payment system. So we
think there are a number of things in Title XI that are very
valuable that should remain.
We are concerned that the regulation should go back to the
States.
Senator Reed. Thank you, Mr. Clark, thank you.
My time has expired. Mr. Chairman, I assume that the
witnesses will be available for written questions?
Senator Allard. Absolutely. In fact, if you have other
questions you will not get a chance to ask here, we will have
you send those to the panel. And then if the panel would
respond within 10 days, we would certainly appreciate it. It
would be very helpful.
Senator Reed. Thank you, Mr. Chairman.
Senator Allard. Senator Miller.
Senator Miller. Thank you, Mr. Chairman, and thank the
panel.
Let me ask my first question of Mr. Wood. Do you think the
fees for training and the qualifications for licensure are
appropriate and consistent across the country?
Mr. Wood. The fees for licensing of course are set by each
State. We did not collect that information. However, we did get
information from the Subcommittee which maintains that. There
is quite a bit of variation, and it varies depending on what
category of appraiser we are talking about, whether it is
licensed, a certified residential, or a certified general.
There is a good deal of variation in terms of the time period
that a license covers. I can just give you a flavor of some of
the ranges that we found.
Senator Miller. I would think the answer is no though, is
it not? Your answer would be no, they are not consistent.
Mr. Wood. That is correct, it is not consistent across the
country.
Senator Miller. How about the word that I used also,
``appropriate?''
Mr. Wood. I guess appropriate, you know, in----
Senator Miller. To the job.
Mr. Wood. In passing Title XI the Congress left this up to
the State, so my response would be if the State finds it
appropriate, then I find it appropriate.
Senator Miller. Do you think they are appropriate and
consistent as compared with other State-licensed professional
groups as far as your information is concerned?
Mr. Wood. We did not compare the appraisers to any other
professional groups.
Senator Miller. You got a guess?
Mr. Wood. I really do not. I am sorry.
Senator Miller. Who is responsible for the oversight of the
fee structure?
Mr. Wood. Again, for licensed appraisers, it is the States.
And actually the States also set their fees for certification.
The Subcommittee can review them, but it has no real power over
them.
Senator Miller. Mr. Fritts, as we all know, Title XI was
designed to protect the Federal Deposit Insurance Funds from
faulty and fraudulent appraisals. On a scale of 1 to 10, is
there still a need to protect the Deposit Insurance Funds?
Mr. Fritts. I believe there is a need. The scale, of
course, being a full-time employee of the Federal Deposit
Insurance Corporation for 28 years, I feel pretty strongly
about that, the need to protect depositors. So, I guess I would
rate that as a 10.
Senator Miller. Let me ask this question of Commissioner
Clark. From your knowledge of this, and I know it is
considerable, what other States that you know of agree with
your view on amending Title XI, to the extent that you would
like to see it amended?
Mr. Clark. In the GAO report, there were some numbers that
we found interesting, and that was, I believe, if I recall them
correctly, there were 15 States that felt like the Appraisal
Subcommittee needed to continue. There were 23 States, I
believe, that sided with our view, and then 15 States that were
on the fence on that particular issue.
I suspect there has been some shift in that. This last
year, for example, the Appraisal Qualifications Board doubled
the entry requirements for licensed and certified appraisers
beginning in the year 2008, and I suspect there will be some
negative reaction to that.
In terms of the States that I am aware of, people that I
have personally spoken to, regulators in the following States
tell me that they support our position--the States of
Washington, Oregon, Utah, Wyoming, Colorado, Kansas, Texas,
Arkansas, Mississippi, Alabama, Florida, South Carolina, North
Carolina, Kentucky, Vermont and Maine.
I cite all of those States because I think they represent a
pretty broad spectrum of the types of States that we are
dealing with, smaller States that will have more difficulty in
funding their operations, as well as larger States who are not
confronted with that difficulty, but regulators in all of those
States have indicated to me personally that they support our
general position.
Senator Miller. I like leaving things up to the States, as
you can probably imagine, but how would you--well, my time is
up. Can I go ahead and ask this question or I can get it in the
next round.
Senator Allard. Go ahead. We will have another round.
Senator Miller. How would you ensure consistency across the
States for programs if the Federal Government gave up its role
or is there a need for consistency?
Mr. Clark. I think there is a need for consistency, but I
think that takes place naturally. If you look at all of the
other professions that are regulated and move from State to
State, they have generally consistent requirements. Doctors and
lawyers, despite the fact that they were all developed in 50
different States, have come to essentially the same body of
knowledge.
I would imagine that suppose we just stopped tomorrow and
pulled out Title XI altogether, I would imagine that all of the
States would keep in place the current requirements. There
would be some experimenting with that, and there should be some
experimenting with that. As new ideas come along, you want to
try those and operate differently, and that is one of the
values of State regulation. If an individual State can try
something new, if it works, everybody adopts it. If it does not
work, nobody else is hurt by it. But I would fully expect the
general requirements to stay approximately where they are now.
Senator Miller. Thank you.
Senator Allard. Mr. Clark, I am going to follow up on
reciprocity. I belong to a profession, and we do national
testing.
Mr. Clark. Yes, sir.
Senator Allard. When you graduate from school, you take a
national test, and then the States decide whether they are
going to accept the national test. In addition to that, there
are orals that we take, and then, as a veterinarian, we pay the
fees for the tests. Also, in our profession, it is usually
decided at the State level, the State decides on whether or not
they want to have reciprocity with their neighbors.
Do you want to move toward national testing or mandates
from the Federal Government, setting down some minimum
standards on the States? I am trying to figure out how we can
make this reciprocity work.
Mr. Clark. I do not want national testing. I think it is
important to have the flexibility of the States administering
their own exams, and I think that is a very important thing to
retain. However, I certainly do believe in reciprocity, and one
of our provisions, the Georgia Board's provisions, would assure
that reciprocity by saying that if an individual has an
appraiser classification in Colorado, then he can be hired to
work in Michigan, he can be hired to work in Georgia,
California, anywhere, as long as he is classified in that
State. That would be the stimulus from the Federal Government
to assure the ability to work Nationwide.
Senator Allard. But all States do not require licensing.
Mr. Clark. It is my understanding that the Appraisal
Subcommittee has set up licensing Nationwide. And if you are
going to appraise in a Federally related transaction, you must
be certified or licensed.
Senator Allard. But there are some appraisers out there
that would not be licensed necessarily because they would not
be dealing with a Federal program; is that right?
Mr. Clark. That is correct in some States. In many States,
all appraisers are required to be classified.
Senator Allard. I see.
Mr. Fritts, are the Subcommittee meetings open to the
public?
Mr. Fritts. As far as I am concerned, they are.
Senator Allard. I know you may be concerned and want it to
happen, but are they open to the public?
[Laughter.]
Mr. Fritts. There is no Government sunshine notices for the
meetings. We meet monthly. Since I have been chairman, this
issue has come up, invited a number of the members in the
appraisal industry, I think maybe even some people here at this
table, to attend our meetings, and I certainly would not voice
concern about moving toward that.
Senator Allard. Are public notices put out so the public
knows and the press knows that you have these meetings?
Mr. Fritts. We could put it on our website.
I will say the only part that we probably would not want
public is where we go over the reviews of each State's
evaluation.
Senator Allard. You mean the State's evaluation is not made
public? These are public officials.
Mr. Fritts. Yes, the State report is, but in the
discussion, the discussion of the report and the proper----
Senator Allard. Because it involves individuals; is that
right?
Mr. Fritts. It involves individuals, and it is deliberative
relative to what our responses will be.
Senator Allard. I think that is understandable, but it
seems to me like you could advertise them, like you say, put
them on the Internet or something so people know that----
Mr. Fritts. I have invited a number of people to come to
our meetings. I certainly have no problem with it. None have
ever taken me up on that offer.
Senator Allard. If you have a way of putting a public
notice out there, I would encourage you to do it. I think it
would help.
Now, let me see, the GAO report indicates that most
mortgage fraud problems occur in States where licensing is
voluntary. Mr. Wood, would you please elaborate, and do you
believe we should move to a mandatory system?
Mr. Wood. First of all, the data are very anecdotal, and I
think that is one of the areas that I would say, coming out of
our work, deserves further study. No one really knows, for
example, how many mortgage transactions are even covered by
Title XI; in other words, how many are Federally related. So, I
would say that deserves more study.
Senator Allard. Any other members on the panel that would
like to comment on having voluntary licensing in some States,
and do you think we should move toward a mandatory system?
Mr. Hummel. The mandatory system concerns me under our
current structure. If we had a mandatory system in which we had
the Appraisal Subcommittee overseeing everything, I would have
concerns only because the Appraisal Subcommittee has not been
properly held accountable or provided the authority, quite
honestly, to do their job. And so if we had mandatory licensing
in which all of a sudden every time I did an estate appraisal
versus a mortgage appraisal, and I was held under the Appraisal
Subcommittee's thumb, I would be uncomfortable, and I think the
State would also.
Until that is remedied, I would not suggest mandatory
licensing.
Senator Allard. Senator Reed.
Senator Reed. Thank you very much, Mr. Chairman.
Mr. Bunton, in your testimony, you pointed to the
disciplinary actions of the States between 1992 and 2002 as a
measure of how well Title XI is doing. Do you have comparative
data prior to the adoption of Title XI or prior to 1992 so that
we can put that in context?
Mr. Bunton. I do not, but it is important to note that
prior to 1989, I believe there were only three States that were
regulating appraisers. This was the catalyst that changed the
landscape as far as regulating appraisers. Before that, it was
if you belonged to a professional society, you had peer review.
So there really is no data before this. I think Nebraska,
Louisiana, and perhaps Florida were the only three that were
regulating appraisers in any way.
Senator Reed. Given this information that there are active
States that are identifying and disciplining appraisers who are
violating rules and regulations, I mean, one of the real
concerns that we have is that there are, as there is in every
line of endeavor, people who just do not follow the rules. Is
it your opinion the States are doing an adequate job of
enforcing their regulations or this number that you cited is
good, but it is just the tip of the iceberg?
Mr. Bunton. I think the GAO at one of the tables in their
report gives a State-by-State breakdown. And if you look at
that and the various disciplinary options available to each
State, you can see there is a a philosophy with each State
board. Certain States will give an awful lot of education
instead of fines or suspensions. Others are very quick to
suspend. That is one of the problems we have. We do not really
have consistency in enforcement.
Senator Reed. Again, I guess in the context of a Federal
superstructure, at least, are you urging more consistency in
enforcement, and this is an example of where----
Mr. Bunton. Very much so. In fact, just from our
organization's point of view, we put together a compilation of
court cases and administrative rulings. We have done two
editions now and disseminated it to the States just to show
States how similar situations are being handled in neighboring
jurisdictions.
Senator Reed. Thank you.
Mr. Hummel, thank you again for your testimony. Do you have
any comments on this line of inquiry about the capacity of the
States, financially, to take a more prominent role? I think Mr.
Clark was quite eloquent in saying we do not want all of Title
XI gone, but we want the States to have a more prominent role.
Also the issue of are the States actively playing that role
today?
Mr. Hummel. The States, it varies across the board, and I
will use an example, the State of Iowa. The funds that are
collected from the license fee go into the general fund, not
into that specifically for enforcement, and because of that,
they are woefully lacking, not that they do not try. There are
very good individuals on those State boards, the Executive
Committee is very good, but they do not have the funds to do
the prosecution. Many times they choose not to do the
prosecution because it is just too costly.
We have other States that actually have attorneys that are,
by nature, part-time to that particular board, and they are
charged for their pro rata share, and the attorneys are not
interested in going forward. So it is not always a matter of
money, but sometimes a practicality of having the
administrative staff available.
Senator Allard. Thank you.
Mr. Kaczkowski, your comments.
Mr. Kaczkowski. As I mentioned earlier, the regulation, as
we see it, has been uneven, inconsistent, and something can be
done about it. Give the Appraisal Subcommittee a rulemaking
authority to settle some of these issues on just what needs to
be done. How do you get uniformity? Some oversight board needs
to provide that impetus.
We have not seen uniformity in the States on the issue of
reciprocity, much less the driver's license idea, and also, as
I mentioned, on the education issue, where all of the States
seem to want to approve the same course independently. There is
no need for that. There is a better way of doing it, and that
is why I am a little bit reluctant to provide too much power,
if you will, to individual States because then for appraisers
who are not local, who are not operating only in a single
State, it becomes a relative administrative nightmare for them
to do their job.
For example, we operate internationally in our firm. In
trying to comply with State licensing or certification--we do
not have licensed appraisers, we have only certified general
appraisers--it is very, very difficult to have an appraiser who
is certified in 15 or 20 States.
Senator Reed. Thank you very much.
Thank you, gentlemen.
Senator Allard. Senator Miller.
Senator Miller. Let me ask this question of Mr. Wood and
Mr. Fritts.
Does Title XI bring Federal protection to real estate
appraisals, especially now when so much appraisal fraud, we are
told, is increasing?
Mr. Wood. We do not have any data before--we cannot compare
before and after Title XI.
Senator Miller. We do not know?
Mr. Wood. So, I could not say on that basis.
Senator Miller. Do you know, Mr. Fritts?
Mr. Fritts. I cannot say with a degree of certainty. I
would say the fact that over 1,100 appraisers have been
disciplined significantly in the last 13 years indicates that
Title XI and the system that it built does have some good
checks and balances and has improved the quality of the
industry over that time period.
Senator Miller. I guess this is a question for both of you,
also, and if anybody wants to jump in and answer it and say
what you think, let me know, also.
What kind of data is out there on the scope of complaints
about appraisals per appraiser?
Mr. Wood. Actually, we have a table in our report, that I
think was referred to earlier, that shows the different
complaints by State. There is a total of about 4,000 or so
complaints in there.
Senator Miller. Is that what you were going to refer to,
Mr. Clark?
Mr. Clark. No, sir. I would point out something a little
different in that line. One of the things we hope the GAO
report would do would identify exactly how many transactions go
on that require appraisals, and apparently that was beyond the
scope of the report.
But two snapshots I think are important in this. The
Georgia Department of Banking Finance tells us that in the year
2000, banks in the State--that is all banks, both Federally
related and others--made 270,560 loans that required
appraisals.
Senator Miller. How many?
Mr. Clark. It was 270,560 in the year 2000. Our board has
received 83 complaints out of those 270,000. Fannie Mae filed
860 complaints with State agencies in I think it was 2002 to
2003 or 2001 to 2002 out of 11,700,000 mortgages they hold. So,
if there were only 860 appraisals that they had concerns with,
that is less than one-ten-thousandth of 1 percent. And I think
that says that appraisers are generally doing a good job. I am
not sure that the problem is quite as large as we may think it
is. Clearly, we still have a flipping problem, but I think the
States are acting on that, as it says in the report.
Senator Allard. Mr. Fritts.
Mr. Fritts. I agree that the industry, by and large, does a
good job and that the problems of seriously bad appraisals is a
relatively small minority, but any bad appraisal has serious
consequences.
Senator Allard. Mr. Hummel.
Mr. Hummel. The statistics are a wonderful thing, but we
have to be very careful because Fannie Mae did, in fact, send
in 870 complaints, and then they stopped because they found
that, out of those 870 complaints, such a minuscule amount were
actually being handled by the State boards. They found that the
State boards would not communicate with them as to what
disposition those complaints had, either that or they would ask
for information or personal testimony, so that the
infrastructure of handling those complaints at the State level
was so frustrating that they stopped turning them in.
Senator Miller. While you are talking, let me follow up and
ask you if you care to elaborate any more about there being
enough funding and resources at the State level to meet the
requirements of Title XI.
Mr. Hummel. In fact, I believe that there is not sufficient
funding.
Senator Miller. What can be done?
Mr. Hummel. Pardon?
Senator Miller. That is what I want you to elaborate on. I
gather that, but if not, and you believe there is not, what can
be done? What would you suggest?
Mr. Hummel. I would suggest----
Senator Miller. I liked your idea of, a while ago, moving
to Macon. If you were talking about moving to Macon, Georgia,
that would be a very good idea.
[Laughter.]
Mr. Hummel. And while I was in Macon, what I would do is
ask Congress to look at FIRREA and, importantly, two things I
would ask them to look at is, one, the Appraisal Subcommittee
does have certain influences. I talked about, you know,
basically we have given them a tablet of paper and an atomic
bomb, and that is all they have to enforce the rules with.
They need something in between, and they need to be held
accountable by Congress to making certain that the State boards
are properly functioning. With $5 million in the kitty right
now, it is possible that there might be some way that they can
help with the enforcement--again, given proper oversight and
then give them the authority to go in and the tools to make
certain States are using their enforcement powers.
Second, one thing that we could do, and the change would be
repealing Section 1122 of FIRREA. Section 1122 is bizarrely
called ``the Antidiscrimination Clause,'' and what it does is
it discriminates against individuals of higher-level education
and training, and states, you know, that they should not be the
ones chosen to do the services. We need to recognize and
encourage the use of designated appraisers with qualifications
beyond the certified and licensed levels.
Senator Allard. Senator Miller, we are going to have
another round with the Committee. I would make it the last
round, if that is all right with the Senators here.
I have one question. I just want to follow up on the issue
that Senator Sarbanes brought up and get your response to that.
The Committee has heard a number of concerns with seller-
assisted downpayment programs, in which the seller makes a
contribution to a charitable organization, which then makes a
gift to the purchaser for a downpayment and closing costs.
Apparently, this is a problem in Maryland, which Senator
Sarbanes represents. According to information I have received,
many properties sold through these programs are financed for
more than their market value.
Mr. Clark, have you seen this problem in Georgia?
Mr. Clark. Yes, sir. We have had two or three cases of that
were brought to the attention of the board, and the board has
disciplined the appraisers involved in those situations.
Senator Allard. And you think you have the situation well
under control in Georgia?
Mr. Clark. In the sense that we could respond to it when we
identify it, but I think that there is a bigger problem there,
and that is the banking standards that would allow them to make
loans when they recognize these gift situations occurring. I
think there is some responsibility for the bank there, as
opposed to necessarily the appraiser. We just happen to know of
two or three cases in Georgia where the appraiser obviously
inflated the value.
Senator Allard. I see.
Mr. Hummel and Mr. Kaczkowski, how can we ensure that
appraisals are not inflated in such programs? Maybe you two
could respond.
Mr. Hummel. The situations I have seen that occur, quite
honestly, we had individual appraisers that were incompetent.
They did not understand the proper methodology to analyze that
particular property and the financing inherent in it. And so
one of the solutions, again, is to recognize that we should not
be solely selecting the minimally qualified licensed and
certified appraiser, but giving some type of endorsement and
encouragement to making certain that the appraiser who is best
qualified does that particular service.
Senator Allard. You believe it is a matter of ignorance and
not a matter of intentionally trying to be part of a program to
defraud?
Mr. Hummel. There are certain individuals out there,
without question, that choose to commit fraud. There are others
that, again, because of their incompetence, provide false
appraisals.
Senator Allard. So what can we do to ensure that it is not
inflated?
Mr. Hummel. Again, I would suggest the repealing of Section
1122 of FIRREA because so many lenders have read that and said,
``What this says is that I should not look at the highest
qualified. I am supposed to go to simply the certified or
licensed individual, even if I know there are individuals out
there with higher qualifications and education that would
competently perform this assignment for me.'' My suggestion
would be to repeal Section 1122 of FIRREA.
Senator Allard. Mr. Kaczkowski, do you want to add
anything?
Mr. Kaczkowski. Yes, there is one issue, and that involves
the de minimis rule.
Senator Allard. Yes.
Mr. Kaczkowski. That says that appraisals are required for
a residential property over $250,000. So, if you want to cheat,
I suppose you should cheat on those properties that are under
$250,000.
Senator Allard. Or less than $1 million on commercial
property; is that----
Mr. Kaczkowski. A million dollars on commercial, that is
correct. So that is one way of doing it. Other than having
competent and conscientious appraisers who are aware of the
situation report these unethical and criminal acts, I do not
know if there is any systematic way of doing it.
Certainly, a competent appraiser who has access to selling
data would know that there would be, let us say, unusual buying
and selling activity. There are certain rules that require the
appraiser to consider all sales that have been made of a
property over a certain period of time. If that information is
reported properly, competently, that is part of an appraiser's
responsibility. If you choose not to accept that
responsibility, and lie and cheat, the only way that you are
going to be found out is if someone will report you. I do not
know how you legislate that.
Senator Allard. Would a credit score from the bank reflect
that? Maybe in some instances.
Mr. Kaczkowski. I do not, offhand, see how that would.
Senator Allard. I mean, if you have one individual scoring,
doing a lot of loans and whatnot, the credit score that is the
only place I could think of where it might show up.
Senator Reed.
Senator Reed. I have no questions.
Senator Allard. Senator Miller.
Senator Miller. This is my last one, and I do not mean to
start this hearing all over again, but let me ask this of each
one of you, just go down the line and start with Mr. Wood all
the way through.
I know you could speak a long time on it, as you already
have and with your testimony, but I would suggest you try to
respond somewhere between the answer ``it would be a disaster
or not anything.'' And my question is what would be wrong with
the Federal Government allowing States to regulate appraisers
in the same way they do other professions?
You do not have to answer that the way I suggested, but in
your own words. But what I was pointing out was somewhere in
between those two extremes.
Mr. Wood. The only experience that I can point to is, of
course, pre-FIRREA, where it was clearly seen to be a mistake
or a weakness. Whether that disaster would repeat itself, I do
not know, but that is certainly what we are trying to avoid.
Mr. Fritts. I would echo Mr. Woods' comments. My own
personal experience, having closed many banks and thrifts, I
can speak personally to the fact that the poor quality of the
appraisal products pre-FIRREA clearly had a contributory factor
in the result of all of those failures, not all of them, but
many of them.
Senator Miller. You just cannot trust those States?
Mr. Fritts. Oh, I think we can trust those States. I think
the States do a good job. Pre-FIRREA, most States did not
regulate the appraisal industry.
Senator Miller. Mr. Clark.
Mr. Clark. I am generally in agreement with Mr. Fritts on
this issue. I think the States can do it, and should do it, but
I think there is a need for Title XI to say that banks are
going to have to use a State-licensed or certified appraisal.
That will force all States to see to it that they do it.
Mr. Bunton. The States can do it, but it is the Federal
oversight that is the glue that holds this all together.
We do not have--Mr. Clark mentioned the medical community
or the legal profession--we do not have a bar association or an
AMA. Most appraisers, we pointed out, do not belong to an
organization. And before FIRREA, only three States were
licensing and certifying. I think that it would go in 55
different directions.
Mr. Hummel. From personal experience, I was at one time
licensed in five different States. I chose not to be licensed
in five different States because, even as an instructor of
appraisal education, I was still required to sit five different
times for the same course because I carried licenses in five
different States.
I believe that States can do good work within their
boundaries, but we must have the Federal oversight to pull it
all together, and, again, that Federal oversight being properly
accountable and properly funded.
Mr. Kaczkowski. I would not like the appraisal profession
to be lumped in with the accounting profession because of
recent events.
[Laughter.]
But we have seen fit to put together a Public Company
Accounting Oversight Board, and it seems to me that, just by
analogy, what we have going for us right now is a pretty good
thing, that we do need some coordinating and oversight board
for the appraisal profession.
And the one other thing I cannot quite reconcile in my own
mind right now is that Title XI relates to Federal interest. I
am not clear how the States would protect the Federal interest
without Title XI.
Senator Miller. Do you agree with that, Mr. Clark?
Mr. Clark. No, sir. I think it is very clear how Title XI
can protect the Federal interest, but still allow the States to
do the regulation. That is why I outlined the things that I
think Title XI needs to remain in. It needs to have a clear
statement that the States will do this regulation. It needs to
have a clear statement that if you have a license in one State,
you can appraise in any State. Those are things I think are
very appropriate at the Federal level.
But in terms of establishing the minimum requirements, in
terms of regulating the persons involved, that should be a
State function.
Senator Miller. Does anyone else want to add anything to
this discussion?
[No response.]
Thank you very much. I thank the panel very much.
Senator Allard. Yes, thank you. I would like to thank all
of you for taking time from your jobs to be here and discuss
this important issue with the Subcommittee.
At this time, I would ask unanimous consent to enter into
the record a letter from Stewart Leach, who is the Program
Administrator of the Colorado Board of Real Estate Appraisers.
Senator Allard. The record will be held open for 10 days
should any other Member wish to submit a statement or
questions. I would ask that the witnesses promptly answer any
questions that may be submitted.
Again, I want to thank you all for coming, and this hearing
is adjourned.
[Whereupon, at 4:03 p.m., the hearing was adjourned.]
[Prepared statements, response to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF DAVID G. WOOD
Director, Financial Markets and Community Investment
U.S. General Accounting Office
March 24, 2004
Mr. Chairman and Members of the Subcommittee, I appreciate the
opportunity to be here today to discuss our report on Federal oversight
of the real estate appraisal industry.\1\ In response to concerns that
faulty and fraudulent appraisals played a major role in the savings and
loans crisis of the 1980's, Congress enacted Title XI of the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA).
Among other things, Title XI requires that real estate appraisals used
in connection with federally related transactions be performed in
writing, in accordance with uniform professional standards, and by
individuals whose competency has been demonstrated and whose
professional conduct is subject to effective supervision.\2\
---------------------------------------------------------------------------
\1\ U.S. General Accounting Office, Regulatory Programs:
Opportunities to Enhance Oversight of the Real Estate Appraisal
Industry, GAO-03-404 (Washington, DC: May 14, 2003).
\2\ As defined in Title XI, federally related transactions are real
estate transactions involving financial institutions regulated by the
Federal Government. These include banks, thrifts, and credit unions.
Real estate transactions of mortgage bankers, brokers, pension funds,
and insurance companies are not included.
---------------------------------------------------------------------------
My statement today, which is based on our May 2003 report,
discusses (1) the specific responsibilities of the entities that
comprise the Title XI oversight structure, (2) factors which these
entities identified as potential impediments to carrying out their
Title XI responsibilities; and (3) concerns expressed by the entities
and industry participants about the effectiveness of the existing
regulatory structure. In preparing our report, we reviewed FIRREA and
its legislative history; interviewed officials from the entities
involved in the Title XI regulatory structure; and surveyed appraiser
regulatory agencies in the 50 States, the District of Columbia, and
U.S. territories.\3\ Additionally, we met with officials and
representatives of Fannie Mae and Freddie Mac, Government Sponsored
Enterprises (GSE's) that establish standards for appraisals associated
with mortgages they purchase; the Department of Housing and Urban
Development (HUD), which establishes appraisal requirements for its
insured mortgages; trade groups representing appraisers and mortgage
lenders; appraiser education providers; and academic experts.
---------------------------------------------------------------------------
\3\ The territories included in our survey are Guam, Northern
Mariana Islands, Puerto Rico, and the Virgin Islands. The only other
U.S. territory--American Samoa--did not have a regulatory oversight
structure for appraisers. We received responses from all but one survey
recipient (U.S. Virgin Islands). In this testimony, the term ``States
and territories'' refers to the 50 States, the District of Columbia,
Guam, the Northern Mariana Islands, and Puerto Rico.
---------------------------------------------------------------------------
In summary, we found the following:
<bullet> Title XI created a complex regulatory system that relies upon
the actions of private, State, and Federal entities to help assure
the quality of appraisals and the qualifications of appraisers used
in federally related transactions.
<bullet> Two private entities--the Appraisal Standards Board and
Appraiser Qualifications Board--respectively establish (1) uniform
rules for preparing and reporting real estate appraisals and (2)
minimum qualification criteria for certified real estate
appraisers. Certified real estate appraisers are one of the two
categories of appraisers listed in Title XI, the other being
licensed real estate appraisers.
<bullet> States establish the minimum qualification criteria for
licensed real estate appraisers. In addition, States (1) implement
the certification and licensing of all real estate appraisers and
(2) monitor and supervise compliance with appraisal standards and
requirements. The States and territories have established
structures typically consisting of a State regulatory agency
coupled with a board or commission to establish education and
experience requirements, license and certify appraisers, and
monitor and enforce appraiser compliance.
<bullet> The Board of Governors of the Federal Reserve System (FRS),
Federal Deposit Insurance Corporation (FDIC), Office of the
Comptroller of the Currency (OCC), Office of Thrift Supervision
(OTS), and National Credit Union Administration (NCUA)--hereinafter
referred to as ``the Federal financial institution regulators''--
are responsible for ensuring that real estate appraisals used by
federally insured depository institutions comply with Title XI. The
regulators have (1) adopted rules and policies specifying
transactions for which regulated financial institutions are
required to obtain an appraisal by a certified or licensed
appraiser, (2) developed examination procedures to ensure that
regulated financial institutions are in compliance with Title XI,
and (3) appointed agency representatives to the Appraisal
Subcommittee.
<bullet> The Appraisal Subcommittee, which was created by Title XI, is
responsible for monitoring the implementation of Title XI by all
parties--private, State, and Federal. The Subcommittee monitors the
efforts of the Federal financial institution regulators in
developing and adopting appraisal-related regulations and policies,
conducts periodic reviews of each State's licensing and
certification program, monitors and reviews the Appraisal
Foundation, and provides grants to the Foundation to support the
Title XI-related activities of its two boards--Appraisal Standards
Board and Appraiser Qualifications Board.
Entities involved in the Title XI regulatory structure described a
number of factors that they believe constrain their ability to perform
more effectively and efficiently. For example, officials of the
Appraisal Standards Board and the Appraiser Qualifications Board told
us that insufficient Federal grant funding may impede their ability in
the future to ensure that standards and qualifications evolve with
changing conditions, such as how to appraise contaminated or polluted
properties. State appraiser agencies--which are funded at the State
level--reported resource limitations as the primary impediment in
carrying out their oversight responsibilities. For example, of the 54
States and territories that responded to our survey, 26 reported that
the current number of investigators was insufficient for meeting the
States' regulatory responsibilities, 37 cited a need for increasing the
staff directed at investigations, and 22 cited a need for more
resources to support litigation. The five Federal financial institution
regulators reported no major impediments to carrying out their Title XI
responsibilities. The Appraisal Subcommittee reported that rulemaking
authority and additional authority to ensure State compliance with
Title XI could facilitate its monitoring of State compliance with Title
XI. Subcommittee officials stated that the only mechanism available
under Title XI for effecting State compliance is to decertify a State,
which would prohibit all licensed or certified appraisers from that
State from performing appraisals in conjunction with federally related
transactions and have a devastating effect on the real estate markets
and financial institutions within that State. However, the Appraisal
Subcommittee stated that it has always been able to achieve States'
compliance under the current enforcement and regulatory structure.
Officials of the regulatory agencies, appraiser trade groups,
education providers, the mortgage industry, HUD, and the GSE's voiced
concerns about Title XI's regulatory structure. However, we noted no
clear consensus on the need for or impact of possible changes. Some
industry participants stated that a growing number of real estate
transactions, such as those placed through mortgage brokers and those
falling below a dollar threshold set by the Federal financial
institution regulators, are not universally subject to Title XI
appraisal requirements. In addition, some industry participants cited
concerns with the lack of a national qualification criteria for the
licensed real estate appraiser category. Education providers and
appraiser trade groups expressed concerns about the Appraiser
Qualifications Board's fees and requirements for instructor
certification and course approval. Federal and State regulatory
officials expressed concern about the apparent reluctance of lending
institutions to make referrals or complaints regarding questionable
appraisals they
identify. HUD and GSE officials expressed concerns about a lack of
consistent and effective enforcement actions by the States on referred
cases and the adequacy of the Appraisal Subcommittee's oversight of
State programs.
We made four recommendations to the Appraisal Subcommittee intended
to enhance the effectiveness of the existing regulatory structure. As
of March 17, 2004, the Appraisal Subcommittee reported that it has
taken action on three of the recommendations: to (1) develop and apply
consistent criteria for determining and reporting States' compliance
with Title XI; (2) explore options, including drawing on its surplus,
for addressing Appraisal Foundation grant shortfalls; and (3) provide
nonfinancial assistance to aid the States in carrying out their Title
XI responsibilities. The Appraisal Subcommittee reported that it
attempted but has not been successful regarding our fourth
recommendation, which was to coordinate with Fannie Mae, Freddie Mac,
and HUD to improve the process of referring problem appraisals to State
appraiser agencies for enforcement.
Background
An appraisal is an opinion of the value of a property as of a
specific date. Appraisers generally consider a property's value from
three points of view--cost, income, and comparable sales--and determine
an estimated value based upon weighing the three valuation methods. The
comparable sales approach, which compares and contrasts the property
under appraisal with recent offerings and sales of similar property, is
usually considered most appropriate for estimating the value of
residential real estate.
The primary role of appraisals in the mortgage loan underwriting
process is to provide evidence that the collateral value of property is
sufficient to avoid losses on loans if the borrower is unable to repay
the loan. Consumers often mistakenly assume that appraisals are
intended to validate the purchase price of the property in question.
Furthermore, appraisals are sometimes confused with home inspections,
which are intended to warn consumers about serious defects in the home
being purchased that should be repaired. In a loan transaction, the
lender rather than the borrower engages the appraiser, and this usually
occurs after the borrower has agreed to purchase the property.
The primary purpose of the appraisal reforms contained in Title XI
was to assist in protecting the Federal deposit insurance funds--and,
by extension, mortgage lenders--from avoidable losses. Officials of the
Federal financial institution regulators noted that faulty and
fraudulent real estate appraisals have been associated with losses
incurred by federally insured financial institutions and have resulted
in financial harm to individual consumers. However, all of the
regulators stated that real estate appraisals have not been a major
factor in the failure of depository institutions since the passage of
Title XI.
Title XI Created a Complex Oversight Structure
Private, State, and Federal entities have responsibilities under
the Title XI regulatory structure. Private entities--the Appraisal
Standards Board (ASB) and the
Appraiser Qualifications Board (AQB)--establish minimum standards for
the development and reporting of real estate appraisals and minimum
qualification criteria for certified appraisers. States are responsible
for certifying appraisers, using education and experience requirements
that, at minimum, meet AQB criteria, and for enforcing compliance with
appraisal standards. States may also license appraisers using State-
established licensing criteria. (For those States that had both,
experience and education requirements for certified real estate
appraisers exceeded those for licensed real estate appraisers.) The
Federal financial institution regulators establish appraisal
requirements for the insured depository institutions under their
jurisdiction and monitor compliance with their regulations. Lastly, the
Appraisal Subcommittee has primary responsibility for monitoring and
reviewing the actions of the private, State, and Federal entities as
they relate to Title XI.
Appraisal Foundation's Boards Establish Appraisal Standards and Minimum
Appraiser Certification Criteria
The Appraisal Foundation, a nonprofit educational organization
composed of groups from the real estate industry, provides the
organizational framework for the ASB and AQB to carry out their Title
XI-related responsibilities.\4\ The ASB is responsible for setting
standards for appraisals, which are contained in its Uniform Standards
of Professional Appraisal Practice (USPAP). Under Title XI, these
minimum standards apply to all federally related transactions for which
an appraisal is required. The standards cover both the steps appraisers
must take in developing appraisals and the information the appraisal
report must contain.
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\4\ The 2002 sponsors of the Appraisal Foundation consisted of
eight appraisal organizations, four affiliate organizations
(representing primarily the users of appraisal services), and one
international appraisal organization. In addition, over 80
organizations, corporations, and Government agencies are affiliated
with the Appraisal Foundation.
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The AQB establishes the minimum education, experience, and
examination requirements for real estate appraisers that are set out in
Real Property Appraiser Qualification Criteria and Interpretations of
the Criteria. The AQB's criteria cover four categories of appraisers--
certified general, certified residential, licensed, and trainee--each
with specific education, experience, examination, and continuing
education requirements. Title XI does not require States to adhere to
AQB criteria for licensed appraisers or for trainees.
The ASB and the AQB regularly evaluate USPAP and the appraiser
qualification criteria to determine whether revisions are needed.
According to the Appraisal Foundation, both boards solicit comments
from appraisers, users of appraisal services, and the public before
making final changes. Since the AQB set its original criteria in 1991,
for example, it has issued numerous interpretations and approved two
revisions of its criteria.
State Agencies Oversee the Licensing and Certification of Real Estate
Appraisers
Under Title XI, States may establish agencies to certify and
license appraisers. At the time of our survey, all 50 States, the
District of Columbia, and 4 of the U.S. territories had established
such agencies, which typically oversee the activities of appraisers for
all types of transactions, including those that are federally related.
All of the States and territories had established programs for
certifying appraisers, and nearly 70 percent reported that they had
introduced qualifications in addition to those established by the AQB.
At the time of our review, 6 States did not provide for licensed
appraisers, according to the Appraisal Subcommittee. Those that did and
responded to our survey reported a variety of licensing requirements.
For example, some States did not require licenses unless appraisers
planned to work with federally related transactions, while other States
required appraisers to be either licensed or certified to perform real
estate appraisals, even for transactions that are not federally
related. The States' programs typically included temporary and
reciprocal licensing provisions, though as discussed below, the
provisions varied. (Title XI requires States to recognize on a
temporary basis real estate appraisers who have been certified or
licensed by another State if certain conditions are met, and encourages
States to develop reciprocity agreements that readily authorize
appraisers who are licensed by and in good standing with their home
State to perform appraisals in other States.)
In addition to conducting certification and licensing activities,
States with certifying and licensing agencies are required under Title
XI to provide the Appraisal Subcommittee with the names of those
appraisers who become certified or licensed in accordance with Title
XI, and to collect from them an annual registry fee that goes to the
Subcommittee. All of our survey respondents reported that they approve
courses for appraisers' education or training, enforce State
regulations concerning appraisals, and investigate complaints. Over
half of the States reported that they had adopted appraisal standards
in addition to those set by the ASB.
Although the States are responsible for the certification and
licensing of appraisers, the Appraisal Subcommittee has a role in
ensuring that State qualifications satisfy Title XI objectives. Under
Title XI, the Federal financial institution regulatory agencies are to
accept a State's certifications and licenses unless the Appraisal
Subcommittee issues a written finding that the State certifying and
licensing agency has failed to recognize and enforce the standards,
requirements, and procedures of Title XI; does not have enough
authority to carry out its functions under Title XI; or does not make
decisions on appraisal standards and qualifications or supervise
appraiser practices in a way that carries out the purposes of Title XI.
Federal Regulators Determine Which Transactions Require Appraisals and
Establish Compliance Standards for Depository Institutions
Title XI requires that the Federal financial institution regulators
prescribe the categories of federally related transactions that should
utilize a State-certified appraiser and those that should utilize a
State-licensed appraiser. The statute provides that certified
appraisers must be used for federally related transactions having a
value of $1,000,000 or more. The Federal financial institution
regulators generally require the use of certified appraisers for
commercial transactions of $250,000 or more and ``complex'' residential
transactions of $250,000 or more. The regulators are responsible for
determining whether other types of transactions warrant the use of a
certified appraiser. All other federally related transactions, unless
subject to an exemption as authorized under Title XI, may utilize a
State-licensed appraiser.\5\
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\5\ Although the States are responsible for establishing and
administering licensing qualifications, Title XI authorizes the Federal
financial institution regulators to establish additional qualification
criteria.
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Also, under Title XI the Federal financial institution regulators
may establish a threshold transaction amount at or below which neither
a certified or licensed appraiser is required. As of March 15, 2004,
each of the five regulatory agencies had regulations in place setting
this threshold at $250,000. Thus, for federally related mortgage loan
transactions of $250,000 or less, financial institutions have the
option of obtaining either an appraisal or some other form of an
evaluation of the property's value.\6\ The regulators have issued
guidelines to the institutions under their jurisdiction that specify
the requirements for evaluating real estate collateral for those
transactions that do not require an appraisal.
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\6\ For more information on real estate evaluations, see U.S.
General Accounting Office, Bank and Thrift Regulation: Better Guidance
Is Needed for Real Estate Evaluations, GAO/GGD-94-144,(Washington, DC:
May 23, 1994). In addition, the Federal financial institution
regulators issued Interagency Appraisal and Evaluation Guidelines on
October 27, 1994.
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Title XI also requires the Federal financial institution regulators
to ensure that real estate appraisals used in connection with federally
related transactions are performed in accordance with standards
developed by the ASB. The regulators require that all appraisals for
federally related transactions (1) conform, at a minimum, to USPAP, (2)
be written, and (3) contain sufficient information and analysis to
support the institution's decision to engage in the transaction.
The Federal financial institution regulators may take informal and
formal enforcement actions, including memorandums of understanding,
removal, prohibition, and cease and desist orders and the imposition of
civil money penalties, against institutions that violate their
appraisal regulations. These actions can apply to contract (fee)
appraisers as well as appraisers who are employees of the institutions
and institution-affiliated parties. Moreover, pursuant to the FDIC
Improvement Act of 1991, the Federal financial institutions regulators
can take action against institution-affiliated parties such as
appraisers.
Appraisal Subcommittee Monitors Title XI Regulatory Activities
Title XI created the Appraisal Subcommittee within the Federal
Financial Institutions Examination Council and established it as the
principal Federal agency responsible for monitoring the activities of
the other components of the real estate
appraisal industry oversight structure.\7\ The Subcommittee has six
board members--designated by the five financial institution regulatory
agencies that make up the Federal Financial Institutions Examination
Council, and HUD--and seven staff members. The Subcommittee funds its
activities through a portion of the fees assessed by the States against
individual appraisers for licensing and certification.\8\
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\7\ The Federal Financial Institutions Examination Council is a
formal interagency body empowered to prescribe uniform principles,
standards, and report forms for the examination of financial
institutions by the FRS, FDIC, OCC, OTS, and NCUA.
\8\ Title XI authorizes the Appraisal Subcommittee to charge an
annual registry fee of not more than $25. However, the Federal
Financial Institutions Examination Council may approve fees up to $50
per year. As of March 15, 2004, the annual registry fee was $25.
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Among other things, the Subcommittee is responsible for:
<bullet> Monitoring and reviewing the practices, procedures,
activities, and organizational structure of the Appraisal
Foundation, including making grants in amounts that it deems
appropriate to the Appraisal Foundation to help defray costs
associated with its Title XI activities. According to Subcommittee
officials, the Subcommittee monitors the Appraisal Foundation by
attending all significant meetings and events associated with its
Title XI activities and reviewing all proposed changes or additions
to its appraiser qualifications criteria or USPAP-related
documents. In addition, the Subcommittee reviews the Appraisal
Foundation's grant requests to ensure the requested funds will only
be used for activities related to Title XI.
<bullet> Monitoring the requirements established by the States,
territories, and the District of Columbia and their appraiser
regulatory agencies for the certification and licensing of
appraisers. Accordingly, the Subcommittee performs on-site field
reviews of State agency programs and maintains communications with
appraisers, State and Federal agencies, and users of appraisal
services. The reviews cover open and closed complaints, approved
and disapproved education providers and courses, State statutes and
regulations on certifying and licensing appraisers, minutes of
board meetings, appraiser registries and fees, temporary practice
and reciprocity, and topical issues such as predatory lending,
fraud, and illegal real estate flipping.\9\ The Subcommittee issues
the States letters at the conclusion of the reviews, identifying
concerns, discussing whether the previous review's concerns have
been resolved, and making general conclusions about the State's
compliance with Title XI and Appraisal Subcommittee policy
statements.
\9\ Illegal real estate flipping is a scheme where a real estate
speculator buys a house, usually in a poor neighborhood, and obtains an
inflated appraisal and other fraudulent financial documents to trick a
lender into making a loan that exceeds the fair market value. The house
is sold again at an inflated price to a second buyer. The seller has
then made a large profit on the inflated value of the property. If the
second buyer defaults on the loan, the mortgage lender may not be able
to recoup the amount of the loan and will therefore experience a loss.
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Our analysis of the Appraisal Subcommittee's State field review
letters from 1992 to 2002 found that the letters provided some
information to the State regulatory agencies but lacked
evidence of transparent criteria for how the Subcommittee
determined and reported States' compliance levels. For example,
State field review letters were sometimes inconclusive about
whether the State regulatory program was in compliance.
Further, when the letters contained determinations of
compliance, the rationale for the decisions was not always
given. For example, some States with identified concerns were
deemed compliant, while others with identified concerns were
deemed noncompliant. Accordingly, we recommended that the
Subcommittee develop and apply consistent criteria to assess
States' compliance with Title XI requirements.
<bullet> Monitoring the requirements established by the Federal
financial institution
regulators regarding appraisal standards for federally related
transactions and determinations of which federally related
transactions will require the services of State-licensed or State-
certified appraisers. The Subcommittee carries out this
responsibility primarily through informal channels. For example,
all six Appraisal Subcommittee board members are involved in the
offices responsible for appraisal regulation in their individual
agencies and provide input from the Subcommittee informally to the
agencies. The Subcommittee also provides technical assistance on
proposed regulations on appraisal issues.
<bullet> Maintaining a national registry of State-licensed and State-
certified appraisers who may perform appraisals in connection with
federally related transactions.
Entities Cited Potential Impediments to Fulfilling Their Title XI Roles
The private, State, and Federal entities involved in the oversight
of the real estate appraisal industry identified a number of factors
that they believe could constrain their ability to fulfill their Title
XI responsibilities. ASB and AQB officials stated that an impediment
that they may face in the future is inadequate Federal funding, which
would hinder their ability to ensure that appraisal standards and
qualification criteria keep pace with changes in the mortgage industry
and marketplace. State appraiser agencies reported that they often lack
funding to revise their regulations with every USPAP update and to
cover the increasing cost of administering the licensing and
certification processes. The Federal financial institution regulators
did not identify any major impediments to fulfilling their Title XI
responsibilities, but noted that reaching consensus on regulatory
standards was difficult because of the number of entities involved in
the appraisal industry. Appraisal Subcommittee officials reported that
rulemaking authority and additional enforcement sanctions could
facilitate the Subcommittee's oversight of State compliance.
The Appraisal Standards and Appraiser Qualifications Board Cited
Concerns about Federal Funding
ASB and AQB officials told us that expected future funding
shortfalls may limit the activities they believe enhance the quality,
timeliness, and usefulness of standards and qualifications. For
example, the AQB chair commented that funding is needed to update their
``body of knowledge,'' which outlines the concepts, theories, and
applications of the real property appraisal profession and delineates
the skill necessary to practice. According to ASB and AQB officials,
the ultimate impact of funding shortfalls could be a weakening in the
protections intended by Title XI because appraisal standards and
appraiser qualifications may not keep pace with changes in the
marketplace.
Since 1991, the Appraisal Subcommittee has allocated the Appraisal
Foundation a total of over $9 million in grants to defray the costs of
the two boards' Title XI-related activities. These grant allocations
typically have been less than the amounts requested. For example, the
ASB and AQB requested a total of over $9 million in grant money between
1994 and 2003, but less than $7 million was approved. However, the
Appraisal Foundation has sources of revenue other than the Appraisal
Subcommittee grants. For example, the largest source of revenue for the
Appraisal Foundation in 2001 was $1.1 million from publication sales;
in comparison, the $870,373 grant from the Appraisal Subcommittee
represented approximately 36 percent of the Foundation's total revenue.
Also, Subcommittee officials noted that the ASB and AQB had not used
the entire amounts of grant funds provided in past years.
States Cited Funding Limitations and Frequent USPAP Updates as
Impediments
The Appraisal Subcommittee told us that it did not have the
current-year funds to fully meet the ASB's and AQB's grant requests
over the past 3 years. However, the Subcommittee had a $3.9 million
surplus as of December 2003. Subcommittee officials reported that the
surplus built up in its early years when revenues exceeded its expenses
and grants. They added that as its expenses have increased--primarily
due to inflation and monitoring activity expenses--the amount of funds
available for grants to the ASB and AQB from current-year funds has
become limited. They further explained that it has not been Appraisal
Subcommittee policy to use the surplus to provide grants to the ASB and
AQB.
Appraisal Subcommittee officials also stated that they expect the
boards' expenses to increase by up to 5 percent per year. Given that
the number of appraisers has remained static for the last several
years, Subcommittee officials did not anticipate their revenues, which
are based primarily on licensing and certification fees, to increase.
As a consequence, future ASB and AQB grants are expected to fall unless
the Subcommittee uses its surplus, raises the $25 fee that States
collect from appraisers on the Subcommittee's behalf, or both.
Accordingly, we recommended that the Appraisal Subcommittee explore
potential options for providing future grant funding, including drawing
on its surplus if necessary, to the Appraisal Foundation and its two
boards in support of their Title XI activities.
In responding to our survey, most of the States identified funding
and staffing deficiencies as the most serious challenges they faced in
carrying out their Title XI duties. According to Appraisal Subcommittee
officials, the Subcommittee's general counsel analyzed whether the
Subcommittee could provide grants to the States to help provide funding
for their Title XI activities, and determined that it lacked the
necessary legal authority.
Based on survey data, the average State agency had about 3 staff
members, who were responsible for overseeing almost 2,000 appraisers.
Many of these State agencies reported that they needed to share
resources--administrative staff, office space, investigators, or all
three--with other State agencies in order to perform their Title XI
duties. The survey results indicated that investigations of complaints
about problem appraisers suffered most from these shortages. The
majority of States sharing resources were sharing investigators, who
often had no real estate appraisal experience. One State official
explained that without adequate funding States could not effectively
administer their appraiser certification programs or investigate and
dispose of disciplinary cases in a timely manner. Another State
official noted that his agency knew that more enforcement and faster
turnaround times in investigating complaints were needed but that
limited resources hindered it. We recommended that the Appraisal
Subcommittee explore potential options for funding or otherwise
assisting the States in carrying out their Title XI activities,
particularly the investigation of complaints against appraisers.
Seventy percent of the State appraiser regulatory agencies
indicated that USPAP updates were too frequent. One State reported that
frequent changes to USPAP have made processing complaints difficult
because staff members have to determine what appraisal standards were
in place at the time of the questionable appraisal. According to ASB
officials, USPAP has been in place for only 15 years, and annual
updates have been needed because so many changes have occurred in the
appraisal industry. Moreover, they told us that many of the changes
that have been incorporated into USPAP are a result of requests from
State regulators. The officials explained that over the years the ASB
has experimented with different formats for updating USPAP but has
found that issuing an annual publication has been the best way to
ensure that everyone is using the same standards. The ASB and the
Foundation are working on developing a future publishing schedule of
having USPAP issued biennially. In addition, ASB officials stated that
they have recently started providing State regulators with newsletters
that highlight any changes, modifications, or clarifications to USPAP
or appraiser qualification criteria.
Appraisal Subcommittee Stated That Rulemaking Authority and Enforcement
Options Could Facilitate Its Oversight of States
According to Subcommittee officials, the lack of rulemaking
authority and limited enforcement powers make achieving the uniformity
and standardization intended by Title XI more difficult. In addition,
the officials noted that because the 55 State appraiser regulatory
agencies took a variety of approaches to implementing Title XI,
expanding the Subcommittee's role to allow it to issue regulations
would help ensure greater consistency among the States in credentialing
appraisers and enforcing the most current version of USPAP. However,
giving the Appraisal Subcommittee rulemaking authority would also
change the Subcommittee's role under Title XI from a monitoring to a
regulatory function.
Subcommittee officials stated that currently the only means for
ensuring State compliance with Title XI is to decertify a State.
Decertification would prohibit all licensed or certified appraisers
from that State from performing appraisals in conjunction with
federally related transactions. Because this action is so severe and
could significantly affect a State's real estate market, the
Subcommittee has never used it, and its impact has not been tested. (In
addition, the decertification action can be taken only for the limited
purposes specified in Title XI and is subject to proof requirements and
judicial review.)
The Appraisal Subcommittee noted that its oversight of the States
could be strengthened if it had more enforcement authority--for
example, the authority to assess monetary penalties or to require that
a State stop an activity or practice. However, in commenting on a draft
of our report, the Subcommittee stressed that it has always been able
to ensure that States are complying with Title XI within the current
supervisory and enforcement structure.
Industry Participants Raised Various Concerns about the Title XI
Oversight Structure
Representatives of Federal and State regulatory agencies, appraiser
trade groups and education providers, and the mortgage industry
expressed various concerns and conflicting viewpoints about the Title
XI regulatory structure. However, there was no clear consensus
regarding the need for or impact of possible changes.
Differences Among State Licensing Programs
According to many of the groups we contacted, Title XI's most
significant shortcoming is the provision that leaves the criteria for
licensed appraisers to each State, including decisions such as how
often appraisers should be licensed and whether they should be licensed
at all. According to an official from the Appraisal Subcommittee, Title
XI's intent was to ensure that appraisers for federally related
transactions met minimum requirements for experience and education and
had been examined in order to ensure a minimum level of competency. But
Title XI specifically provides that the Appraisal Subcommittee will not
set requirements for licensing and that any Subcommittee
recommendations are nonbinding. Some groups
believe that this provision has led to a lack of uniform qualifications
in licensing across the country (for example, in education and
experience) and may also have helped to create an environment conducive
to mortgage fraud.
At the time of our review, officials from the Appraisal
Subcommittee reported that most States have adopted provisions
requiring that licensed appraisers meet AQB recommended criteria.
However, six States did not have a State-licensed appraiser category,
and six had licensing requirements that were less stringent than the
AQB's. As a result, Subcommittee officials said, some licensed
appraisers may not meet recommended qualifications criteria. For
example, in 2002, one State passed legislation that eliminated the
experience requirement for its licensed appraisers; and, in 2001,
another State revised its licensing criteria to comply with AQB
requirements but at the same time ``grandfathered'' in several hundred
licensed appraisers.
According to two regulatory officials, problems related to the lack
of uniformity in licensing appraisers are compounded by the fact that
Title XI also makes licensing voluntary at the State level. Voluntary
licensing means that the State does not have a legislative requirement
that appraisers be licensed or certified. However, the volunteer States
do provide the opportunity for an appraiser to become licensed or
certified in order to perform federally related transactions. As of
March 2003, 10 States were classified as being in the voluntary
licensing category. Some regulators, as well as one appraiser trade
group, view voluntary licensing as a serious flaw in the industry's
regulatory structure and a probable contributor to mortgage fraud.
Moreover, voluntary licensing may indirectly place the onus on
financial institutions to ensure that appraisers for federally related
transactions have the appropriate qualifications. One Federal financial
institution regulator reported that most of the mortgage fraud problems
it has encountered have occurred in States where licensing is
voluntary. An earlier Federal Bureau of Investigation testimony at a
special Congressional hearing on predatory lending in March 2000 echoed
this view. According to that testimony, the most egregious property
flipping problems have occurred in States where licensing is voluntary
for transactions that are not federally related.
Industry participants also cited a lack of uniformity in the way
States grant temporary and reciprocal licenses. Because a State may not
recognize the credentials from another State, appraisers often have to
carry multiple State licenses. The Appraisal Subcommittee has issued
policy statements on temporary practice and encouraging reciprocity.
However, our survey indicated that State regulatory agencies continue
to vary widely on these issues. For example, of the 53 States and
territories that responded to this question, 40 issued temporary
licenses for single assignments, 16 allowed an appraiser only one
temporary license at a time, and 15 limited the number of temporary
licenses an appraiser could receive annually. Six of the 54 respondents
to our survey indicated that visiting appraisers are required to pass a
State exam in order to receive a reciprocal license. This practice is
inconsistent with the Appraisal Subcommittee's guidance recommending
that States accept licenses or certification from other States meeting
AQB requirements.
Transactions Not Covered by Title XI
Industry participants also voiced concerns about the fact that
Title XI does not cover all financial institutions and that mortgage
brokers are not subject to Federal regulation. When Title XI was
enacted, federally regulated lending institutions (banks, thrifts, and
credit unions) made most mortgage loans. Today, other financial
institutions, such as mortgage bankers and finance companies, account
for a substantial share of the mortgage marketplace. Many of these
financial institutions that are not federally regulated, as well as an
increasing portion of regulated financial institutions, use mortgage
brokers to originate loans, so that these brokers now originate about
50 percent of all mortgage loans. These entities and individuals may
have State licenses, but they are not monitored by Federal or State
entities through, for example, examinations or audits.\10\ Appraisers
have anecdotally reported that these originators pressure them the most
to appraise properties at or near the purchase price to assure that the
mortgage transaction will occur.
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\10\ Fannie Mae officials noted that when an appraisal is required
for a mortgage that will be delivered for sale to the GSE, mortgage
brokers must use appraisers that are State-licensed or certified in
accordance with Title XI.
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Some industry participants have said that the $250,000 real estate
appraisal threshold established by the Federal financial institution
regulators undercuts efforts to protect consumers. These groups believe
that oversight of real estate appraisals should be geared toward the
interests of consumers, who should be able to expect an unbiased,
objective third-party opinion of the value of real property offered as
security for a loan. However, Title XI was enacted in response to the
impact of appraisal problems on federally insured depository
institutions, and Federal financial institution regulators have
identified few problems or risks to depository institutions associated
with loans valued below the $250,000 threshold.
Costs and Lack of Uniform Approval Processes for Appraiser Education
Courses
Several State regulators and education providers expressed concerns
about the expenses and lack of uniformity in the processes associated
with approving instructors and courses for appraisers' continuing
education. A representative of an appraisers' trade group noted that
gaining approval for a course and an instructor in one State does not
necessarily translate into approval in other States. As a result, the
trade group spent around $30,000 having courses for a July 2000
training conference approved in all jurisdictions. Some appraisal
industry participants believe that the added cost and procedures
involved in acquiring approval in each State is overly burdensome.
AQB officials told us that the board has set up a voluntary
national system for approving courses and that these concerns had
influenced their project. According to the AQB, the course approval
program was designed to be a convenience for both course providers and
State regulators while helping to ensure quality appraisal courses.
However, AQB's course and instructor approval programs have met
opposition in some quarters. For example, some State officials and
other industry participants stated that requiring AQB approval for all
USPAP refresher courses and
instructors and restricting course materials and examinations to AQB
publications--for which AQB charges a royalty fee--represent a conflict
of interest. In addition, some education providers have stated that the
fees charged by the AQB for its course and instructor approval are
excessive. On the other hand, some State and Federal financial
institution regulators believe that the Appraisal Foundation and its
boards possess expertise and resources the States do not have and thus
are needed to ensure that the quality of appraiser education and
training is not compromised.
Similarly, some States and educators have expressed concern that
the AQB and Appraisal Subcommittee have encroached upon State authority
in setting certain appraisal standards and appraiser qualifications.
For example, the regulatory agency and an education provider in one
State objected to certain AQB education requirements for certified
appraisers, in particular a requirement that education providers be
certified through the AQB's instructor certification program. As part
of its industry monitoring function, the Appraisal Subcommittee
reviewed those standards and determined that the AQB had acted
appropriately in adopting them. The Appraisal Subcommittee also
requested a legal opinion from the Legal Advisory Group of the Federal
Financial Institutions Examination Council on the scope of AQB's
authority to adopt education-related standards for certified
appraisers; the scope of the Appraisal Subcommittee's responsibility in
monitoring the AQB; and the Appraisal Subcommittee's authority to
oversee State regulators' implementation of AQB standards.\11\ In a
June 2002 opinion, the Legal Advisory Group concluded that the AQB's
and Appraisal Subcommittee's actions appeared to be consistent with and
authorized by Title XI.
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\11\ The Legal Advisory Group consists of the general or chief
counsels of the FDIC, FRS, OCC, OTS, and NCUA.
---------------------------------------------------------------------------
Variations in State Regulatory Agencies' Enforcement of Title XI
Requirements
Some industry participants reported a lack of uniformity in
processing complaints and taking disciplinary actions against those
problem appraisers that were referred to State regulatory authorities.
We analyzed data States submitted to the Appraisal Subcommittee and
found that the number of disciplinary actions taken differed widely.
For example, one State reported taking only a single disciplinary
action, while two other States accounted for over 25 percent of the
4,360 disciplinary actions reported as of October 31, 2002.
Several entities reported that States' complaint filing
requirements ranged from simple to onerous. For example, some States
require simply that complainants submit information on an allegation,
while others accept complaints only on a specific form, or require that
complaint documents be notarized or that complainants provide witnesses
and testify against appraisers. Other concerns included:
<bullet> The length of time needed to resolve complaints. For example,
one State required 1 to 2 years, potentially allowing the appraiser
to continue what might be fraudulent or questionable practices.
<bullet> Statutes of limitations that pose an obstacle in penalizing
appraisal violators. For example, statutes in at least three States
prohibit both investigations into and punitive actions for unlawful
appraisal activities that allegedly took place more than 3 to 5
years earlier.
In addition to concerns about the complaint process, industry
participants reported misgivings about outcomes, including disciplinary
actions and feedback. For example, Fannie Mae officials commented that
they had been dissatisfied with some State decisions on punitive
actions and with the lack of feedback on actions that had actually been
taken. The officials added that some States do not penalize appraisers
for multiple violations if the appraisers have already been disciplined
or do not tell complainants what action was taken. As an example, they
noted that some States appeared to perform meaningful investigations
and took appropriate actions while others appeared unwilling to
investigate similar cases with comparable support and documentation.
HUD officials echoed this view, saying that States typically do not
take action when they are notified that an enforcement action has been
taken against an appraiser. Another industry participant reported that
there is little incentive to make referrals given the fact that there
is no assurance that the State will take action.
According to Appraisal Subcommittee officials, a number of States
have told them that the referral information that Fannie Mae and HUD
have provided to the States is frequently in a format or manner that
they cannot readily absorb or use. For example, some of the States
indicated that they received over a hundred referrals from Fannie Mae
as one group, which overwhelmed the States' ability to review and
investigate the referrals in a timely basis. Other States stated that
the referrals were for real estate transactions for which the State's
statute of limitations had already expired. To improve the process for
referring problem appraisals by entities that oversee or use real
estate appraisals to the State appraiser agencies for possible
enforcement actions, we recommended that the Appraisal Subcommittee
work with Fannie Mae, Freddie Mac, and HUD to ensure that the referral
of problem appraisals (1) are provided in a format that is useful to
the State appraiser agencies and (2) facilitate the Subcommittee's
efforts to monitor decisions made by the States regarding the
supervision of appraiser practices.
No Clear Consensus Regarding the Need for Changes to the Title XI
Regulatory Structure
Among the various representatives of trade groups, education
providers, and other industry participants that we contacted, there
were differing opinions as to what, if any, changes were necessary to
Title XI. Likewise, the responses to the survey that we sent to the
State appraiser agencies did not indicate a clear consensus regarding
States' views of the impacts of eliminating some of the central aspects
of the Title XI regulatory structure. Some officials from State
appraiser agencies have expressed strong viewpoints regarding the need
for changes to Title XI. For example, an official from one of the State
appraiser regulatory agencies stated that the States are now in a
position to oversee the real estate appraisal industry without any
Federal involvement, much as they do other professions. He suggested
that Congress eliminate the Appraisal Foundation and the AQB and make
the ASB independent and self-supporting. An official from another State
regulatory agency said that to correct the present system's problems,
Congress would need to completely restructure the Title XI structure.
He recommended eliminating the Appraisal Subcommittee and the Appraisal
Foundation, replacing them with a new board at the Federal level. The
new board would represent the appraisal industry more broadly and have
strong Congressional accountability. He also suggested that Congress
clearly designate the States as having sole responsibility for
administering and enforcing Title XI.
However, our survey of the State appraisal agencies showed a wide
variety of views. For example, 22 States and territories (41 percent)
said that eliminating the Appraisal Subcommittee would enhance their
ability to regulate appraisers, while 17 (31 percent) responded that
eliminating the Subcommittee would be a hindrance. The remaining States
felt that not having the Subcommittee would neither help nor hinder
regulation. Similarly, 31 and 23 States, respectively, indicated that
eliminating the ASB and AQB would hinder their efforts to regulate
appraisers, while 10 and 21 States, respectively, indicated that
eliminating the ASB and AQB would be helpful.
In conclusion, Title XI brought about significant changes in the
real estate appraisal industry. According to Federal financial
institution regulators, real estate appraisals have not been a major
factor in the failure of federally insured financial institutions since
the passage of Title XI. However, opportunities exist to enhance the
effectiveness of the current regulatory system to help ensure that
federally related transactions are based on accurate assessments of the
value of properties used as collateral for loans.
Mr. Chairman, this concludes my prepared statement. I would be
happy to answer any questions at this time.
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PREPARED STATEMENT OF STEVEN D. FRITTS
Chairman, Appraisal Subcommittee
Federal Financial Institution Examination Council
Associate Director, Risk Management/Examination Support,
Division of Supervision and Consumer Protection,
Federal Deposit Insurance Corporation
March 24, 2004
Introduction and Background
Good afternoon, Chairman Allard and Members of the Subcommittee.
Thank you for the opportunity to discuss the current state of the
appraisal industry and its Federal and State oversight. On behalf of
the Appraisal Subcommittee (ASC), I commend your Subcommittee's
initiative to understand the current state of the industry and assess
the current regulatory structure and its ability to ensure that Federal
financial and public policy interests in real estate related financial
transactions are protected, consistent with Title XI of the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989, as amended
(Title XI).
I am the Chairman of the Appraisal Subcommittee. The Chairmanship
of the Appraisal Subcommittee, which was created on August 9, 1989,
pursuant to Title XI, rotates bi-annually among the Subcommittee
membership. I also serve as Associate Director at the FDIC, where my
responsibilities involve safety and soundness of bank examination
policy.
In general, the ASC oversees the real estate appraisal process as
it relates to Federally related transactions--any real estate related
financial transaction entered into on or after August 9, 1990, that a
Federal banking agency or any regulated depository institution engages
in or contracts for, and requires the services of an
appraiser. The ASC membership includes representatives from each of the
five members of the Federal Financial Institutions Examination Council,
and from the Department of Housing and Urban Development.
Following the financial crisis of the 1980's, Congress passed the
Financial Institutions Reform, Recovery, and Enforcement Act of 1989
(FIRREA). Title XI of FIRREA addressed the identified weaknesses
regarding real property appraisals used in connection with federally
related transactions. Prior to FIRREA, appraisals for federally related
transactions and the appraisers who performed them, were, for the most
part, unregulated at either the Federal or State level. In most States,
the only legal requirement to become an appraiser was that the
individual obtain a business license from the county or other local
jurisdiction. During the financial crisis of the 1980's, poor quality
appraisals were a contributing factor to the numerous bank and savings
and loan failures. Title XI sought to address this situation.
Title XI created a unique system. As noted in the General
Accounting Office (GAO) May 2003 report titled, Opportunities to
Enhance Oversight of the Real Estate Appraisal Industry, Title XI
created a complex oversight structure for real estate appraisals and
appraisers that involves private, State, and Federal entities. Two
private entities within the Appraisal Foundation establish uniform
rules for real estate appraisals (that is, the Uniform Standards of
Professional Appraisal Practice (USPAP)) and set minimum criteria for
certifying appraisers (that is, The Real Property Appraiser
Qualification Criteria). The Appraisal Standards Board and the
Appraiser Qualifications Board, respectively, establish these rules and
criteria. State regulatory agencies (that is, 50 States, the District
of Columbia, and five territories) certify appraisers based on these
criteria. The Federal financial regulatory agencies (Agencies) oversee
financial institutions' use of appraisals.
Responsibilities of the Appraisal Subcommittee
Title XI sets out the ASC's general responsibilities:
<bullet> Monitor the requirements established by the States,
territories, and the District of Columbia and their appraiser
regulatory agencies (State agencies) for the certification and
licensing of appraisers. The ASC reviews each State's compliance
with the requirements of Title XI and is authorized by Title XI to
take action against noncomplying States;
<bullet> Monitor the requirements established by the agencies regarding
appraisal standards for federally related transactions and
determinations of which federally
related transactions will require the services of State-licensed or
State-certified appraisers;
<bullet> Maintain a national registry of State-licensed and certified
appraisers who may perform appraisals in connection with federally
related transactions;
<bullet> Monitor and review the practices, procedures, activities, and
organizational structure of the Appraisal Foundation; and
<bullet> Transmit an annual report to Congress regarding the activities
of the ASC during the preceding year.
The ASC is funded by a $25 per year fee for an appraiser to be
listed on the National Registry of State-Certified and Licensed
Appraisers (Registry). States collect these fees as part of their
licensing, certification, and renewal activities and remit the registry
fees to the ASC. Although the ASC has the authority to increase the fee
up to $50, we have maintained the registry fee at the same $25 that was
established in 1989. The annual operating budget of the ASC is $2.1
million. Through automation and contracting out, the ASC has reduced
staffing from nine employees to 7 over the last 15 years and has
attempted to maintain a high level of operating efficiency.
Status of State Compliance with Title XI
Generally, States do a good overall job of enforcing compliance
with Title XI, given the resource limitations facing most States.
Although some States have areas that need improvement, we have found
most States generally compliant with Title XI.
Our primary tool for evaluating State compliance with Title XI is a
3-year on-site review cycle. Given Title XI's 56 jurisdictions, ASC
staff performs on-site reviews of approximately 18 States per year,
plus conducting several follow-up reviews. Once we have completed the
field review and formally transmitted our findings to the State, we
work with the State to ensure correction of noted areas of concern.
Most States address our concerns in a timely manner. Currently, the
most problematic area involves complaint investigation and resolution.
Because this area requires specialized personnel and expertise, it is
one of the more complex and costly functions for State appraiser
regulatory agencies. Consequently, some States are not as timely in
their complaint investigation and resolution efforts as they should be.
Each year, we provide a summary of significant areas of concern
identified during our field reviews in our annual report to Congress.
National Registry of State-Certified and Licensed Appraisers
One of the ASC's primary responsibilities is maintenance of the
registry. During the past several years, the ASC has made the registry
available via the Internet to States and the public. We added sections
reserved for State-only access to facilitate State efforts in areas
such as researching the license history of appraisers and determining
whether an appraiser is in ``good standing'' in another State. We have
added automated e-mail notification to States, lenders, and other
parties when appraiser credentials are revoked or suspended and when
they expire. We continue to evaluate the registry to add features that
improve its value to the States, lenders, and the general public.
Appraisal Foundation
The ASC monitors the activities of the Appraisal Foundation and its
Appraiser Qualifications Board and Appraisal Standards Board to ensure
that their actions are reasonable, not arbitrary or capricious, and
otherwise consistent with law. As authorized by Title XI, the ASC also
provides funding, via annual grants, to the Foundation and its boards
to support their Title XI-related activities.
Challenges Ahead for the Appraiser Industry
In many cases, it is difficult for appraisers licensed or certified
in one State to appraise properties in other States. Title XI requires
that States issue temporary practice permits to appraisers on a single
assignment basis, but imposes this requirement only for federally
related transactions. Also, the appraiser must apply each time he or
she wishes to perform an assignment in that State. Often, delays in
completing the temporary practice approval process conflict with the
timing needs of the parties involved in the real estate transactions.
While Title XI requires States to offer temporary practice for
federally related transactions, it only encourages States to offer
license and certification credentials via reciprocity agreements with
other States. To enter into such agreements, some States require formal
written agreements with other States, while other States' laws prohibit
them from entering into such formal agreements. Some States have
developed methods of informally offering reciprocity to appraisers.
Nonetheless, impediments to interstate movement of appraisers are a
concern repeatedly expressed to us by lenders and appraisers with
regional or national operations.
With 56 Title XI jurisdictions issuing implementing statutes and
regulations, there is a considerable amount of conflict and overlap
among the States. For example, appraisers who hold appraiser
credentials in multiple States might have to take the same continuing
education course multiple times to meet the continuing education
requirements of various States. Additionally, a continuing education
course that is acceptable to one State might not be acceptable to
another.
Another issue, which was raised in the GAO report, is the
applicability of Title XI to residential mortgage transactions handled
by mortgage brokers. These entities were not captured by Title XI as
most mortgage brokers are not regulated at the Federal or State level.
The ASC raises this issue as we have received a number of comments on
appraisal abuse by mortgage brokers. Many estimates indicate that
mortgage brokers originate as much as 50 percent of all residential
mortgage loans.
Other issues that the industry and regulators are grappling with
include the appropriateness of automated evaluation methodologies and
the rapidly increasing market values of residential properties in some
markets.
Conclusion
Some contend that the need for Federal law and Federal oversight of
the appraiser regulatory system no longer exists. Given the
difficulties we have experienced in achieving some level of consistency
among States to better facilitate interstate lending and appraising
activities, we believe that a lack of Federal law and oversight would
allow the system to become increasingly fragmented to the overall
detriment of the appraisal industry.
Considering the complexity inherent in the appraiser regulatory
structure and the weaknesses discussed above, the system functions
reasonably well. At 15 years, the appraiser regulatory system is
relatively young. We expect continued adjustments and challenges as the
system matures.
This concludes my testimony. I will be happy to answer any
questions the Subcommittee might have.
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PREPARED STATEMENT OF DAVID S. BUNTON
Executive Vice President, The Appraisal Foundation
March 24, 2004
Introduction
Mr. Chairman, The Appraisal Foundation appreciates the opportunity
to appear before the Subcommittee on Housing and Transportation of the
Senate Committee on Banking, Housing, and Urban Affairs and offer its
perspective on Title XI of the Financial Institutions Reform, Recovery,
and Enforcement Act (FIRREA), 15 years after enactment.
Background
My name is David Bunton and I serve as the Executive Vice President
of The Appraisal Foundation. Our organization plays a somewhat unique
role in that it serves as the private sector resource to appraiser
regulators. We are not a membership-based trade association, but rather
a not-for-profit educational organization that serves as an umbrella
group for organizations with an interest in valuation. We refer to
these groups as Sponsoring Organizations, a listing of which is
attached to this testimony as Attachment #1.
The appraisal profession in the United States has traditionally
been somewhat fragmented. In the interest of promoting consistency and
uniformity in the areas of professional standards and qualifications,
eight national appraisal organizations created The Appraisal Foundation
in 1987. Our mission is to promote professionalism in appraising by
setting qualifications that one must meet to become an appraiser and
establishing performance standards for how an appraisal should be
performed.
Our Congressionally Authorized Responsibilities
In 1989, through the enactment of Title XI of FIRREA, the Congress
gave The Appraisal Foundation specific responsibilities relating to the
regulation of appraisers. All appraisals performed for federally
related transactions must be in conformance with generally accepted
appraisal standards, which are known as the Uniform Standards of
Professional Appraisal Practice (USPAP) and are promulgated by the
Appraisal Standards Board of The Appraisal Foundation. It is these
standards which are used by the State appraiser regulatory agencies for
disciplinary purposes.
In addition, Title XI mandates that State-certified real estate
appraisers must meet the minimum qualifications established by the
Appraiser Qualifications Board of The Appraisal Foundation. These
qualifications include education, experience, and continuing education
requirements.
Finally, in order to become a State-certified real estate
appraiser, an individual must achieve a passing grade on a State
certification examination that has been reviewed and approved by the
Appraiser Qualifications Board.
A Unique System for a Unique Task
There is no question that Title XI established a rather unique
relationship between Federal regulators, State regulators, and the
private sector. However, given the unique task at hand, it is working
quite well.
The Appraisal Foundation establishes the minimum qualification and
performance thresholds that ensure a base level of competency. The 55
States and territories regulating appraisers then use these thresholds
and, if they so choose can raise them to facilitate the specific needs
of their jurisdiction. The Federal oversight entity, the Appraisal
Subcommittee, ensures each of the 55 jurisdictions is operating in a
manner that is consistent with Congressional intent. The Appraisal
Subcommittee also monitors the activities of The Appraisal Foundation
to ensure that it is fulfilling its Title XI responsibilities. This
hybrid system (a) ensures that minimum levels of competency are met,
(b) provides administrative latitude to each of the States, and (c)
ensures overall accountability.
In addition, this regulatory system does not operate with annual
Congressional appropriations. Rather it is funded by appraisers through
an annual ``registry fee,'' currently $25.00, which is paid to the
Appraisal Subcommittee. This fee offsets the operating expenses of the
Appraisal Subcommittee, as well as a significant portion of the
expenses of the Appraisal Standards Board and the Appraiser
Qualifications Board.
One of the ancillary benefits of this system is that over the past
decade a very productive working relationship has developed between the
three entities. Foundation representatives participate in all State
regulator conferences and we have conducted training sessions
specifically for State appraiser investigators. We also have frequent
meetings with Appraisal Subcommittee representatives. From our
perspective, the input we have received from the States and the
Appraisal Subcommittee has been invaluable in ensuring that the work of
our Boards continues to meet the needs of the regulatory community and
the marketplace.
What Has Been Accomplished
Over the past 15 years, The Appraisal Foundation has taken its
Congressionally authorized responsibilities very seriously. As I
previously indicated, our work has focused on two areas: Appraiser
qualifications and standards of professional practice.
Appraiser Qualifications
During the implementation period of Title XI, the lending community
expressed strong concerns that, if the qualifications for appraisers
were set too high, there would be a subsequent shortage of appraisers
which would impede lending. This concern was coupled with the fact that
there was very little, if any, demographic information available about
appraisers.
With this in mind, the Appraiser Qualifications Board initially set
relatively modest thresholds for education, experience, and examination
requirements to become a State-certified real estate appraiser. The
philosophy of the Board then, as it is now, was to periodically
increase the qualifications over time to ensure continued appraiser
competency and reflect changes in technology and the needs of the
marketplace. Subsequent increases in appraiser qualifications became
effective in 1998 and 2003, with another increase scheduled for
implementation in 2008.
For some time, Federal and State regulators had shared their
concerns with The Appraisal Foundation about deficiencies in USPAP
education (the quality of the course materials as well as the
competency of the instructors). Very few would argue that sound
education is an essential component of understanding USPAP due to the
complexities of the document and its evolving nature.
In response to this problem, in 2000 the Appraiser Qualifications
Board (AQB) adopted new criteria intended to improve the overall
quality of USPAP education. The changes, which became effective on
January 1, 2003, include:
<bullet> Consistent Course Content: USPAP courses taken for qualifying
and continuing education must be the National USPAP Courses or
their equivalent. For 2004, 11 courses developed by educational
providers have been deemed to be equivalent to the National USPAP
Courses.
<bullet> Instructor Competency: In order for an appraiser to receive
State credit for attending a USPAP course, it must have been taught
by an AQB Certified USPAP Instructor and State-certified appraiser.
In order to become an AQB Certified USPAP Instructor, an individual
must attend a 2-day course and receive a passing grade on a
comprehensive examination. As of this date, 462 individuals have
become AQB Certified USPAP Instructors.
<bullet> Increased USPAP Continuing Education Requirement: Continuing
education requirements for real property appraisers were modified
to require 7 hours of USPAP instruction every 2 years. There was
previously no specific requirement for USPAP continuing education.
The Appraiser Qualifications Board is also responsible for the
content of the examinations used by the States to certify appraisers.
With the assistance of an outside psychometric consultant, the Board
has developed and updated examination content outlines for use in the
review and approval of State examinations. The AQB conducted
comprehensive reviews of the State appraiser examinations in 1991,
1995, and 2002.
Standards of Professional Practice
Since the enactment of Title XI, the distribution of the generally
accepted appraisal standards, USPAP, has received wide dissemination,
increasing from 10,000 copies annually in the early 1990's to 80,000
copies in 2003. With this increased exposure has come a considerable
increase in the number of inquiries to the authors of USPAP, the
Appraisal Standards Board. Accordingly, the Appraisal Standards Board
has offered a significant amount of guidance to appraisers on
performing appraisals in conformance with these standards.
The Board conducts public meetings around the Nation and publicly
exposes all proposed changes to USPAP. Any changes to USPAP must be
adopted in a public meeting. The Board has issued 27 Advisory Opinions
to date and publishes Questions and Answers on USPAP every month on the
Foundation website (www.appraisalfoundation.org). The USPAP document is
available to the general public on the Foundation website and all
appraiser regulators are granted permission to reproduce the document
free of charge.
At the time of enactment of Title XI, USPAP was revised
periodically throughout the year (as often as quarterly). The standards
were subsequently published in a format that was revised twice a year
and for the past several years have been published on an annual basis.
It is our hope to publish USPAP once every 2 years in the near future.
In order to promote consistent USPAP enforcement among the States, the
Foundation has published two editions of a publication entitled A
Digest of Court Cases and Administrative Rulings Citing USPAP.
Advisory Councils
In order to ensure that the work product of our two Boards
continues to reflect the needs of the regulatory community and the
marketplace, we have established two advisory councils. One council,
known as The Appraisal Foundation Advisory Council, has over fifty
members that are either nonprofit organizations or Government agencies.
The membership of this diverse group ranges from the American Bankers
Association and the National Association of Realtors to the U.S.
Department of Justice and the Internal Revenue Service.
Our other advisory council, the Industry Advisory Council, provides
valuable input from the for-profit sector. Members of this council
include such companies as the Bank of America, Deloitte & Touche,
Washington Mutual, Prudential Insurance, and Wells Fargo. Membership
listings of both advisory councils are included with this testimony as
Attachments #2 and #3.
Government Assignments Beyond Title XI
In recent years, The Appraisal Foundation has also provided
assistance to the Federal Government outside of its specific Title XI
responsibilities. Because we are viewed as an objective, unbiased
resource, we have been approached by several Federal Government
agencies to perform evaluations on their behalf. We have been engaged
by the U.S. Forest Service, the Bureau of Land Management, the
Inspector General of the Department of Interior, and the Office of
Special Trustee for American Indians to perform evaluations of their
appraisal policies and procedures.
Title XI Is Working as Intended
One of the most tangible measurements of how Title XI has performed
is a review of the disciplinary action taken by the States for the
period of 1992-2002. During that time period, a total of 4,360
disciplinary actions were reported by the States to the Appraisal
Subcommittee. Of these, over 1,250 were serious violations which
resulted in the suspension, revocation, or voluntary surrendering of an
appraiser's State credential; over 1,200 individuals that, due to
competency or conduct, were no longer permitted to make value
determinations in federally related transactions.
As to alternatives to the existing structure of Title XI, it is
important to keep several factors in mind. First, the Federal Registry
of real estate appraisers maintained by the Appraisal Subcommittee
currently contains over 95,000 appraisers. Accounting for individuals
who hold a credential in more than one State, the total number of real
estate appraisers is estimated to be approximately 80,000. There are
several fine national appraisal organizations, including the Appraisal
Institute and the American Society of Appraisers in attendance today.
However, the majority of real estate appraisers in the United States
are not affiliated with any professional appraisal organization.
Accordingly, absent the current system, any type of ``self-regulating''
alternative is virtually impossible due to the fact that most
appraisers are not subject to peer review procedures.
Regarding the elimination or dilution of the Federal oversight
component of Title XI, it is important to remember that Title XI was
enacted, not as consumer protection legislation, but rather from a
safety and soundness perspective to ensure the integrity of the deposit
insurance fund. That need continues to exist today and should not be
delegated exclusively to the 55 States and territories regulating
appraisers.
For example, the States currently adhere to the minimum standards
and qualification thresholds established by The Appraisal Foundation
because they are required to by law. Absent that requirement, States
would be free to establish very low threshold levels or none at all.
This could severely impact the competency of appraisers and meaningful
enforcement in certain States and have a significant negative effect on
consistency among all of the States. Without credible enforcement,
there could be a detrimental impact on the safety and soundness of the
nation's lending institutions.
Recommendations
As stated above, we believe that Title XI is generally working as
intended and should remain intact. However, in the event that specific
improvements were sought, The Appraisal Foundation would offer the
following recommendations:
<bullet> Greater Regulatory Latitude for the Appraisal Subcommittee:
The Appraisal Subcommittee should be given a series of graduated
regulatory options for oversight of the State appraiser regulatory
programs; as opposed to the single option it now is provided.
<bullet> State-Licensed Appraisers Should Meet the Qualification and
Examination Requirements of the Appraiser Qualifications Board: The
State licensure category was a last minute addition to Title XI. It
appears that not including the State licensed classification along
with the State certified classifications was an oversight.
<bullet> Mandate Reciprocity Among the States: With the ongoing
consolidation of the lending community, it is in the interest of
improved interstate commerce that artificial barriers to practice
be removed. At present, the Appraisal Subcommittee is charged with
only ``encouraging'' reciprocity.
Conclusion
Mr. Chairman, when recently confronted with concerns about the
accounting profession relating to Enron, Worldcom, and Arthur Andersen,
the Senate Banking Committee addressed the issue by increasing Federal
oversight through the creation of the Public Company Accounting
Oversight Board (PCAOB). Similarly, with the revelations about
financial reporting variances at Freddie Mac, this Committee is
pursuing options for greater Federal oversight of the Government
Sponsored Enterprises (GSE's).
Fifteen years ago, your colleagues were faced with a deposit
insurance crisis and opted to create a regulatory system that includes
Federal oversight of the State regulatory programs that credential the
individuals who determine the value of the underlying assets of our
financial institutions. To dilute or remove Federal oversight at this
time would be sending the wrong message at the wrong time.
Again, we appreciate the opportunity to share our perspective with
you today and would be pleased to answer any questions.
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PREPARED STATEMENT OF ALAN EUGENE HUMMEL, SRA
Immediate Past President, The Appraisal Institute
Chief Executive Officer, Iowa Residential Appraisal Company
On Behalf of
The Appraisal Institute and
The American Society of Farm Managers and Rural Appraisers
March 24, 2004
Chairman Allard and Members of the Subcommittee, I am Alan Eugene
Hummel, President of Iowa Residential Appraisal Company in Des Moines,
Iowa, and Immediate Past President of the Appraisal Institute. I am
pleased to be here today on behalf of the Appraisal Institute and the
American Society of Farm Managers and Rural Appraisers, which together
represent more than 20,000 real estate appraisers in the United States.
Thank you for holding this hearing on the effectiveness of Federal
requirements established approximately 15 years ago that marked the
beginning of Federal involvement in State-licensing and certification
requirements for real estate appraisers in the United States.
Real estate appraisers play a strategic role in our country's real
estate financing system. A professional appraiser's objectivity,
training, experience, and ethics are fundamental characteristics that
help participants in residential and commercial real estate mortgage
transactions assess the value of real estate and understand the risks
involved in collateral lending. Trillions of dollars are invested in
real estate in the United States, so it is of paramount importance that
appraisers be qualified and adequately trained and have sufficient
experience in the type of property under consideration. Also important
is a system of enforcement with the authority to help ensure that
appraisers are properly educated and experienced.
Both the appraisal profession in general and our professional
organizations in particular have been directly impacted by the
implementation of Title XI of the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 (FIRREA). We have serious
concerns with how the law and subsequent regulation is affecting the
profession. We are concerned with the quality of appraisals being used
in our Nation's mortgage financing system today. A fundamental goal of
FIRREA was to raise the professionalism of appraisers involved in
federally related real estate transactions; yet we have concluded that
this goal has not been met. In fact, the result has been to promote a
system that lessens the professionalism of appraisers rather than
strengthens it. Having provided for only ``minimum'' qualification
requirements and meager oversight authority, the implementation of
FIRREA has failed to offer incentives to appraisers to seek additional
training, education, and experience. In addition, many State appraiser
licensing boards and the Federal oversight authority allow bad actors
to remain in the system.
Competent and qualified real estate appraisers serve as a crucial
safeguard in our banking system, but lax enforcement and ineffective
Federal oversight serve to diminish this safeguard. Thus, we are here
to alert Congress that the system FIRREA envisioned is broken and needs
to be fixed if we are to avoid a financial crisis on the scale of the
Savings and Loan disaster of the 1980's or the accounting scandals in
the 1990's.
Appraiser Regulatory Structure
As you know, the Savings and Loan crisis of the 1980's led Congress
to enact FIRREA. Title XI, the ``Real Estate Appraisal Reform
Amendments,'' was enacted to protect Federal financial and public
policy interests in real estate related transactions by requiring that
real estate appraisals be performed by individuals with demonstrated
competency in both education and experience. FIRREA mandated licensing
or certification pursuant to national standards, but the resulting
regulatory structure has become tangled and overly complex. The system
involves:
<bullet> Licensing and certification boards in all States and
territories, each with differing interpretations of FIRREA, as well
as differing agendas and funding;
<bullet> Minimum qualifications criteria established by the Appraiser
Qualifications Board of The Appraisal Foundation, a nonprofit
education organization;
<bullet> Appraisal standards (the Uniform Standards of Professional
Appraisal Practice) established by the Appraisal Standards Board of
The Appraisal Foundation; and
<bullet> Federal oversight by the Appraisal Subcommittee of the Federal
Financial Institutions Examinations Council.
Unfortunately, FIRREA and its resulting complexity have adversely
affected the appraisal profession and, in our view, put consumers, the
States and the Federal insurance funds at risk. Much of the complexity
was identified by the General Accounting Office (GAO) in its
investigation last year. We believe the problems are in four
categories:
<bullet> Lack of accountability;
<bullet> Ineffective and counter-productive State enforcement programs;
<bullet> Minimum qualifications and discouragement of professional
development; and
<bullet> Inadequate appraiser independence safeguards
The Multi-Pronged System Lacks Accountability
Title XI created the Appraisal Subcommittee to oversee the
activities of the States and many of the activities of The Appraisal
Foundation. The Appraisal Subcommittee is essentially a junior subset
of the Federal Financial Institutions Examinations Council. The
Appraisal Subcommittee funds a portion of The Appraisal Foundation's
expenses. Ironically, individual State-certified and licensed
appraisers fund the Appraisal Subcommittee operations through license
fees collected by the States. Individual appraisers are assessed a $25
annual fee passed through to the Appraisal Subcommittee, which has
amassed a sizable reserve fund for no identified purpose.
Effective Oversight of the Appraisal Subcommittee
We are concerned with the lack of oversight for the Appraisal
Subcommittee. By and large, the Appraisal Subcommittee is operating in
an insulated environment without any practical accountability measures.
Providing Federal oversight over an activity traditionally
regulated by the States (licensing), the Appraisal Subcommittee is a
hybrid Federal agency that has conducted much of its business in the
dark and with no direct input from the appraisal profession. The
Appraisal Subcommittee board is composed of staff bank examiners and
program staff from the five Federal financial institution regulators
and one from the Department of Housing and Urban Development. It meets
quarterly in Washington, but does not allow for public access or
participation to their activities and meetings.
The Appraisal Subcommittee staff performs audits of State appraiser
boards on a 3-year rotation cycle, and works with State boards on Title
XI compliance. The Appraisal Subcommittee posts some of the results of
its audits on its website and a portion of this information is released
in its Annual Report to Congress. Section 1103 of Title XI requires the
Appraisal Subcommittee to issue an annual report to Congress no later
than January 31 of the following year. The report itself historically
has been little more than a financial statement, containing sparse
information on the audits that were conducted with few compliance
statistics. In addition, it is now nearly April and the 2003 Annual
Report apparently has yet to be issued to Congress. Similar delays have
occurred the past, like last year when the 2002 Annual Report was not
issued until April 16.
Appraisal Subcommittee Oversight of States
Not only are the Appraisal Subcommittee's operations insular, but
their powers are also impotent. Recommendations from the Appraisal
Subcommittee are routinely disregarded by State appraisal boards,
contributing to a cycle of ineffective enforcement. The only real power
the Appraisal Subcommittee has over State appraisal boards is the
authority to ``decertify'' a State if it is found to be out of
conformance with Title XI. This specific power has generally become
known as the ``atomic bomb,'' because if it were to be invoked,
virtually all mortgage lending in that State would cease. The Appraisal
Subcommittee has never used this power, although it has threatened to
do so. Such an unrealistic threat is an ineffective way to promote
sound processes in the States.
According to the latest annual report issued by the Appraisal
Subcommittee, a full 43 percent of the State appraisal regulatory
agencies reviewed in 2002 either failed to resolve complaints against
real estate appraisers expeditiously or were inconsistent in applying
disciplinary sanctions; failed to pursue all alleged violations of the
Uniform Standards of Professional Appraisal Practice; or did not
adequately document enforcement-related files. In addition, one State
failed to forward disciplinary actions to the Appraisal Subcommittee,
which is required by Title XI and Appraisal Subcommittee Policy
Statement 9. The fact that so many State appraisal boards failed to
resolve complaints against appraisers in an expeditious manner is
deeply troubling.
Examples of State appraisal board actions that have occurred
without consequence from the Appraisal Subcommittee include:
<bullet> Hundreds of appraisers in Oklahoma who failed to meet the
minimum requirements for licensing and certification were ``grand-
fathered'' under a new licensing law passed by the Oklahoma
Legislature and endorsed by the Oklahoma Real Estate Appraiser
Board Division;
<bullet> Failure of the New York Division of Licensing Services to
revoke an appraiser's license following a guilty plea for ``filing
false documents,'' leading to 2 years probation and over $100,000
in fines and restitutions, because his certification would ``not
involve unreasonable risk to the safety and welfare of the general
public.'' \1\
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\1\ Christian Murray, ``Appraising the Appraisers,'' Newsday,
August 9, 2002.
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<bullet> Complaints against appraisers in multiple States that have
gone unresolved up to 8 years.
Inadequate Structure and Regulatory Slights of Hand
In practice, FIRREA has weighed heavily on the development of
appraisal practices in nonfederally related transactions, such as
appraisal consulting and market analysis. When States implemented their
FIRREA requirements for State licensing and certification, many of them
wrote their laws to include all appraisal services performed in their
State. These so called ``mandatory'' States require appraisals to be
performed by licensed or certified appraisers and in conformance with
the Uniform Standards of Professional Appraisal Practice. However, even
in so called ``voluntary'' States, where nonlicensed or certified
appraisers are allowed to ``appraise'' property, a de facto requirement
to be licensed and certified exists. As a result, transactions outside
of traditional mortgage lending are effectively being dictated by
policies written and enforced by bank examiners (the Appraisal
Subcommittee). We believe the Appraisal Subcommittee should have a more
diverse membership since it will likely continue to impact
practitioners delivering a wide range of appraisal and valuation
assignments.
Finally, when implementing FIRREA, the five Federal financial
institution regulators failed to take the licensing and certification
requirement seriously. Through regulation, the law was effectively
modified to exempt nearly 90 percent of all transactions in the
residential mortgage market from being appraised by licensed and
certified appraisers. As originally contemplated, all transactions
greater than $15,000 would be required to be appraised by a licensed
and certified appraiser, but with a regulatory slight of hand the
threshold was raised to $250,000 before a licensed or certified
appraiser was required. As a result, a significant portion of the real
estate valuation work throughout the country takes place in the form of
``evaluations,'' or ``broker price opinions'' (BPO's), or through
``competitive market analysis'' (CMA) reports. In many cases,
evaluations are done by staff of organizations that have a vested
interested in a real estate transaction. This negates the benefit of
having an independent third party involved in the real estate
transaction, while omission of a licensing or certification requirement
for properties under $250,000 creates a disruptive gap in the
enforcement of appraisal standards.
Ineffective and Counter-Productive State Enforcement
While there are many dedicated individuals on State appraiser
boards, many times their ability to carry out their charge is
compromised due to lack of funding or administrative support. Too
often, complaints against real estate appraisers in States are not
reviewed by State appraiser boards, leading to a lack of disciplinary
action against poorly performing appraisers. Some State boards have
been known to spend inordinate time and research and collect fines for
inconsequential offenses, leaving little time for enforcement of major
issues.
Concerns with State enforcement agencies include:
<bullet> Failure to review complaints in a timely manner or review them
at all;
<bullet> Failure to apply appraisal review procedures consistently;
<bullet> Failure to proscribe disciplinary action against appraisers
for poor performance; and
<bullet> Failure to provide adequate resources to investigate
complaints as licensing fees are often commingled with the State's
general fund and not used for oversight purposes as intended.
Neglectful Supervision and Administration
Since Title XI was enacted, it has been difficult to achieve
necessary consistency among the States for enforcement of both
standards and certification requirements. Whether through a lack of
resources or a lack of will by those charged with providing oversight,
the current system allows some unscrupulous and unqualified appraisers
to continue practicing and has little or no recourse for their actions.
In fact, some of these very appraisers have been linked to mortgage
fraud schemes throughout the country.
For example, within the last year, a real estate appraiser in New
York was found guilty and convicted of a felony for grossly inflating
appraisals. His State license was revoked, and he served a jail
sentence for 1 year. Upon his release, he challenged the State
appellate court to be regranted his license. The court overturned the
ruling of license revocation, determining that he had served his time
sufficiently and that he must return to becoming a ``beneficial member
of society.'' Amazingly, this fraudulent appraiser charged with
participating in numerous land scam schemes is now a practicing
appraiser--sanctioned--in New York.
New York is not alone in handling such cases carelessly, as a
similar case was brought to light last month in Maryland. In June 2003,
an appraiser who pled guilty to appraisal fraud admitted that the
Government lost between $500,000 and $800,000 due to his actions. In
the fall, he applied to renew his license. On the online application,
he answered ``no'' to the question of whether or not he had ever been
convicted of a felony. According to his attorney, he ``honestly''
answered no, because in the Federal system, one is not convicted until
sentenced, and the appraiser was not sentenced until last month, in
February. Thus, the Maryland Commission of Real Estate Appraisers and
Home Inspectors renewed his license last October for another 3 years. A
spokesperson for the Maryland Commission said to the Baltimore Sun,
``all we have to go by is the honesty of the licensee. We are not
required to perform background checks; moreover, the financial and
personnel resources are not available at this time.'' \2\
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\2\ John B. O'Donnell, ``Real Estate Appraiser Faces Sentencing in
Property Flipping Plot; Man Still Holds License Despite Pleading
Guilty,'' Baltimore Sun, February 27, 2004.
---------------------------------------------------------------------------
Deficiencies with State appraisal complaint systems were noted in
the GAO Report, most notably in relation to a Government Sponsored
Enterprise (GSE) that recently began making referrals of poor
appraisals to State appraiser boards. Eight hundred and sixty referrals
were made to 45 different State regulatory agencies between August 2001
and August 2002. Officials from the GSE commented to the GAO that they
had been dissatisfied with some State decisions on punitive actions and
with the lack of feedback on actions that had actually been taken. The
officials added that some States do not penalize appraisers for
multiple violations if the appraisers have already been disciplined or
do not tell complainants what action was taken. The officials reported
that they have observed a lack of consistent and effective
investigation and enforcement by some of the States. As an example,
they noted that some States appeared to perform meaningful
investigations and took appropriate actions while other States appeared
unwilling to investigate similar cases with comparable support and
documentation.
While FIRREA's complexity is causing problems with State
enforcement, it is also placing a significant burden on appraisers
working in more than one State. For example, a member of the Appraisal
Institute from Virginia recently applied for a license in the State of
Indiana. This individual is currently certified in Virginia, Maryland,
New Jersey, West Virginia, Ohio, and Tennessee. After submitting the
lengthy documentation on education and experience, the appraiser was
notified that his application was to be tabled for 6 months due to his
education not meeting their standards. This individual has taken
virtually all of the courses offered by the Appraisal Institute and
regularly teaches advanced curriculum courses across the country and in
other countries.
Appraisers are paying a heavy price for redundant licenses while
being denied others because of the bureaucratic nightmare created by
FIRREA. A substantial percentage of real estate appraisers in this
country are asked to perform real estate appraisal assignments that are
not in their home State. This was not a major problem prior to the
enactment of FIRREA; however, with its implementation each State must
now take appropriate measures to facilitate the work of out-of-State
appraisers who do business in multiple States. Our organizations
believe that there are two appropriate methods for handling interstate
appraisal work. The first method, ``Temporary Practice,'' is mandated
by Title XI, but unfortunately this fact was overlooked by many States
and this provision of Title XI has not as yet been properly implemented
throughout the country.
The second method, ``Reciprocity,'' is not mandated by Title XI but
in most cases will provide the maximum benefit to the public with the
least amount of difficulty for the State regulators. In many parts of
the country, the geographic areas for an appraiser's day-to-day
business may lie within two or three States. In such cases, the
``temporary practice'' provisions are not appropriate to handle the
appraiser's out-of-State business and the appraiser may be forced to
become licensed or certified in two or more States. This means that
several States may be required to administer the same process over and
over again with no demonstrable benefit. In this situation, reciprocity
agreements make a great deal of sense because they avoid duplication of
effort and, in doing so, lessen the administrative burden on each of
the
various States involved and the appraiser. To date, 12 jurisdictions
have no reciprocal agreements in place, and those that do are not
universal between all States. Virtually no new reciprocal agreements
have been drafted since the early 1990's.
Minimum Qualifications and Discouragement of Professional Development
An important goal of FIRREA was to ensure that appraisals are
performed by competent appraisers. However, in practice, FIRREA has had
the opposite effect because it stresses minimum qualifications. This
emphasis has severely curtailed the continuing development of a true
appraisal profession.
This is explained well by users of appraisal services, who are in
the best position to speak to changes in quality of appraisal services
since the passage of FIRREA. In a poll conducted recently by the
Appraisal Institute of significant users of appraisal services,\3\ 50
percent responded that the quality of appraisal services and appraisal
reporting has declined, whereas only 28 percent said appraisal services
and reporting have improved. This is consistent with discussions our
organizations have had with users of appraisal services for the past
several years.
---------------------------------------------------------------------------
\3\ ``Appraisal Quality Post-FIRREA,'' A Survey of the Appraisal
Institute's 2000-2004 Client Advisory Committee Members, March 21,
2004.
---------------------------------------------------------------------------
As we reflect upon FIRREA, it is clear that the requirements for
licensing and certification were set too low. Unfortunately, many
clients see the possession of a license to be the only necessary
qualification and stop short of fully considering the issue of
competency for a particular appraisal. Likewise, many appraisers feel
it is enough merely to meet the minimum requirements. What the FIRREA
legislation missed is recognition that attaining the minimum level of
education and experience for a license or certification does not
necessarily qualify the licensee as competent to appraise.
While our professional organizations maintain high standards and
strict codes of ethics and effective peer review, less than 40 percent
of all licensed and certified appraisers choose to be affiliated with
such organizations. Currently, there are approximately 80,000 licensed
and certified appraisers in the United States; out of this total;
approximately 50,000 appraisers do not belong to professional appraisal
organizations.
Those appraisers that have only met State licensing and
certification requirements tend to be less experienced and qualified
than appraisers with professional designations; 84 percent of users of
appraisal services say this is the case. Ironically, after FIRREA was
passed, our organizations saw appraisers retreat from professional
organizations, as the Federal Government dictated that minimum levels
were all that were necessary to perform appraisals in federally related
transactions. As an example, in the case of the Appraisal Institute,
from the early to late 1990's, membership dropped from over 35,000
members to slightly more than 16,000 members. The Appraisal Institute
was not alone in this troubling circumstance.
Particularly problematic is a bizarre discrimination provision
formulated against designated appraisers contained in Section 1122 of
FIRREA, the ``Anti-Discrimination'' clause. This section states:
``Criteria established by the Federal financial institutions
regulatory agencies . . . for appraiser qualifications in
addition to State certification or licensing shall not exclude
a certified or licensed appraiser for consideration for an
assignment solely by virtue of membership or lack of membership
in any particular appraisal organization.''
In this case, the mischaracterized ``discrimination clause'' of
FIRREA actually promotes discrimination against appraisers who have
practiced appraisal for years and have achieved the highest credentials
the industry offers. This section of FIRREA has been read to mean one
need not be a member of a professional organization to be an appraiser.
While this statement may be true, making such a statement is much like
saying that consumers seeking medical care should not seek board-
certified physicians or that a school prefers to hire people with GED's
over those with Ph.D.'s. Fundamentally, it fails to recognize the
intense work and diligence that thousands of professional appraisers
have put into earning and maintaining their status as the most
competent and experienced appraisers in the profession. The public and
the real estate community should be aware that there are professional
organizations that confer designations to appraisers who have advanced
themselves significantly beyond the minimum requirements of FIRREA.
For decades it has been the professional organization and societies
that have developed and maintained the basic principles and
methodologies used by today's practitioners. Without professional
organizations, the fundamental body of knowledge of real estate
valuation would not exist. To dismiss this segment of the lifeblood of
the profession is a grave oversight with serious repercussions.
Inadequate Appraiser Independence Safeguards
While FIRREA did provide for some separation between real estate
appraisal and loan production inside financial institutions, FIRREA
failed to adequately address the issue of appraiser independence.
Although Federal agencies issued the Interagency Appraisal and
Evaluation Guidelines in 1994, recent bank examinations have indicated
that this separation is failing to curb pressure to coax real estate
deals along by influencing the independent judgment of appraisers. In
October 2003, the five financial institution regulators issued an
interagency statement reminding financial institutions that the 1994
Guidelines require that borrowers and loan production staff to not
exert influence over the selection of appraisers. However, our members
report that this is a regular occurrence. In fact, some financial
institutions, mortgage brokers and others require a predetermined value
to be met by an appraiser in order to receive future assignments from
that institution. Such comments are often backed up by threats of
coercion and nonpayment for services. FIRREA was established to avoid
such circumstances, yet they are occurring every day under its purview.
There are relatively few options that appraisers have when
confronted by inappropriate client pressure:
<bullet> First, the appraiser could turn down the assignment, or just
say no. Many appraisers do this; however, given the dilution of the
licensed appraiser market, our members report that it is likely
that a financial institution will find an appraiser who is willing
to bend to their request.
<bullet> Second, the appraiser could tell the individual ordering the
appraisal that national uniform standards and State and Federal law
require appraisers to perform assignments ethically and competently
and that they would like to discuss and resolve any remaining
concerns or issues. Appraisers and clients have such conversations
on a regular basis, but appraisers are oftentimes faced with having
to meet a predetermined value. This is particularly the case with
many mortgage brokers and others whose compensation is driven by
production.
<bullet> Third, the appraiser could report the activity to the
appropriate enforcement authority. However, when doing so, the
appraiser would have to ensure it was sent to the proper agency.
Complaints against national banks would have to be sent to the
Office of the Comptroller of the Currency; credit unions to the
National Credit Union Administration, etc. Many parties, such as
some mortgage brokers, are completely outside of a regulatory
system. In these cases, the appraiser is simply forced to lose a
client.
In some cases, bank examinations have uncovered unscrupulous
activities. Oftentimes, the activities go unchecked an unreported. A
particular problem appears to revolve around the fact that those who
have a vested interest in the closing of the deal are ordering the
appraisals. The 1994 Interagency Guidelines and the 2003 Interagency
Statement call for a separation of loan production and credit analysis.
However, full separation has never been realized, particularly in the
areas of mortgage lending and brokerage. We believe that this is an
inherent weakness of FIRREA that should be addressed immediately.
Legislative Recommendations
The Appraisal Institute urges Congress to explore the following
suggestions as a starting point for addressing current deficiencies.
These suggestions emphasize improving State appraisal board complaint
processes, inserting accountability measures over the Appraisal
Subcommittee and promoting consumer awareness and professionalism.
Consider:
<bullet> Requiring the Appraisal Subcommittee to report to Congress
annually their assessment of the effectiveness of each State's
enforcement processes as part of their Annual Report, including
results of all audits performed that year and a performance rating
for all State appraisal boards.
<bullet> Requiring adequate funding for State appraisal boards for
disciplinary functions enforced by the Appraisal Subcommittee.
<bullet> Modifying the makeup of the Appraisal Subcommittee to reflect
broader representation, including an industry advisory council.
<bullet> Requiring the Appraisal Subcommittee to issue guidance to
States addressing common deficiencies.
<bullet> Requiring the Appraisal Subcommittee to conduct public
meetings.
<bullet> Requiring the Appraisal Subcommittee to consult and interview
industry participants when conducting field reviews of State
appraisal board operations.
<bullet> Requiring the Appraisal Subcommittee to share information from
the National Registry with other Federal agencies, including the
Federal Bureau of Investigation for antifraud purposes.
<bullet> Requiring the head of the Appraisal Subcommittee be confirmed
by the U.S. Senate.
<bullet> Ensuring accountability of the Appraisal Subcommittee, and
only then, providing it with authority to sanction consistent with
its responsibility to monitor the activities of State appraisal
boards.
<bullet> Granting the Appraisal Subcommittee authority for reciprocity
of qualifications among licensing jurisdictions.
<bullet> Extending authority to the Appraisal Subcommittee for uniform
temporary practice among licensing jurisdictions.
<bullet> Recognizing and encouraging the use of designated appraisers
with qualifications beyond merely licensed and certified.
<bullet> Providing penalties for engaging in appraiser coercion and
creating adequate resources for appraisers to report instances of
such.
<bullet> Encouraging State appraiser boards to recruit the best
qualified candidates to participate on board activities, regardless
of membership in professional appraisal organizations.
<bullet> Requiring all regulated financial institutions to retain
copies of all appraisals in loan files, even appraisals that are
NOT used in the decision to lend.
Conclusion
There is an immediate need to find solutions to deficiencies in the
system and our organizations are committed to assisting you in this
effort. We look forward to working with you to identify solutions to
solve the problems associated with the current appraiser regulatory
structure.
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PREPARED STATEMENT OF EUGENE KACZKOWSKI
President, American Society of Appraisers
Accredited Senior Appraiser, American Appraisal Associates, Inc.
March 24, 2004
Introduction
Chairman Allard, Ranking Member Reed, and Members of the Housing
and Transportation Subcommittee, the American Society of Appraisers
(ASA) greatly appreciates the opportunity to provide its views to the
Subcommittee on ``The Real Estate Appraisal Industry.'' We also
appreciate the Subcommittee's interest in examining the impact of Title
XI of FIRREA on the real estate appraisal profession, particularly with
regard to protecting Federal financial interests and assuring the
safety and soundness of real estate-related financial transactions in
our marketplace. My name is Eugene Kaczkowski, and I serve as President
of the American Society of Appraisers. I am an Accredited Senior
Appraiser in the business valuation discipline and a Vice President
with American Appraisal Associates, a full-service valuation consulting
firm.
ASA is our Nation's only multidiscipline professional appraisal
society that teaches, tests, and credentials its members in every major
field of the appraisal profession, including residential property and
commercial real property valuation; business enterprise valuation;
machinery and technical specialties; and valuations of fine arts,
antiques, gems and jewelry. Attached to my testimony is a fact sheet
providing additional information on ASA.
Summary of Views
The American Society of Appraisers believes that the state of the
real estate appraisal profession is generally good and that enactment
of Title XI of FIRREA in 1989 was, and continues to be, an
indispensable and positive force in professionalizing the Nation's real
estate appraisers. We are convinced that today's real estate
appraisers, as a group, are far better educated, more competent and are
held to a higher standard of ethics and accountability than their pre-
FIRREA predecessors. Having said that, ASA also believes that there are
some serious problems in the regulated environment in which today's
real estate appraisers function and that Title XI needs to be
modernized and tightened in order to correct those problems.
The Pre-FIRREA World of Real Estate Appraisers
Before discussing these problem areas and recommending some
approaches to addressing them, I would like to take just a moment to
revisit the conditions that made up the real estate appraisal industry
prior to the enactment of Title XI. Pre-FIRREA, almost anyone could
perform real estate valuations merely by declaring that they were
competent to do so. At that time, there were few, if any, Federal
requirements specifying the education, training, experience, and other
skill sets necessary for an individual to estimate the market value of
real estate collateralizing residential and commercial loans--sometimes
totaling millions of dollars--made by federally insured financial
institutions, guaranteed by Federal agencies like the FHA and VA or
sold to investors in the secondary financial markets by the GSE's or
their private sector counterparts. Only a handful of States had
appraiser licensing programs of any kind. For the few that did,
qualification requirements were inconsequential and nonlicensed
individuals could continue to value real estate for virtually all
transactions. These were the conditions that added billions of dollars
in bailout costs to U.S. taxpayers when the savings and loan and
banking industry crises occurred in the mid-to-late 1980's. What
Congressional oversight committees, the General Accounting Office
(GAO), and investigative reporters found when they examined the causes
and consequences of the collapse was that in a shockingly large
percentage of cases, the collateral for billions of dollars in
defaulted real estate loans had been grossly overvalued by appraisers,
sometimes because of incompetence and sometimes because they were
pressured by lenders or developers to manufacture values sufficiently
high to make the deal go.
An important component of Congress' package of responses to the
debacle and to the role of faulty and fraudulent real estate appraisals
was the enactment of FIRREA and its Title XI system of State appraiser
certification and licensing.
What is Working in the Current Title XI System
ASA believes that there is much good public policy incorporated
into Title XI. We think that the certification and licensing system
correctly balances the interests and the roles of State and Federal
Governments and the private sector in professionalizing real estate
appraisers and making them accountable for their actions. Under the
current system, States are responsible for certifying and licensing
appraisers and for disciplining them when they are found to be
incompetent or dishonest. Title XI invests in the not-for-profit
Appraisal Foundation, which is responsible for promulgating uniform
appraisal standards (the Uniform Standards of Professional Appraisal
Practice or USPAP) and for establishing uniform qualification
requirements for the certification of appraisers. Finally, because the
integrity and accuracy of real estate appraisals impact so many
important Federal programs and financial interests, Title XI leaves to
the Federal Government, through the Appraisal
Subcommittee, responsibility for overseeing the effectiveness of the
State appraiser regulatory programs and standards-setting work of the
Appraisal Foundation.
With a few noteworthy exceptions, which I will address, ASA
believes Title XI's real estate appraiser certification and licensing
system is working well. Today, there are more than an adequate number
of State-certified and licensed real estate appraisers providing the
uniform valuation services that are essential to our Nation's economy
and to the cost-efficient operation of Federal programs. Under the
current system, these appraisals are being performed in what we believe
is a timely and cost-effective manner, utilizing valuation
methodologies that are uniform across every region of our country.
What Needs Correcting in the Title XI System
Although we believe that Title XI is accomplishing its intended
public policy purposes, there are some serious problems with the
current system that ASA finds troubling and that we wish to bring to
the Subcommittee's attention--including the failure of a small number
of important Federal agencies to take advantage of it. Some of these
problem areas fall within the clear jurisdiction of the Senate Banking
Committee; others may require the attention of other Committees of the
Congress. These are our concerns.
(1) Problem: The current membership of the Federal Appraisal
Subcommittee is too narrowly drawn. The Subcommittee lacks
representation from nonbanking and nonhousing Federal agencies that
administer programs or have regulatory responsibilities that rely on
the competency of real estate appraisers and the appraisals they
perform. The Department of Interior (for example, land exchanges and
sales, and conservation easements), the Department of Transportation
(for example, right-of-way issues), the Internal Revenue Service (for
example, charitable contributions of real estate and real estate assets
in estate and gift tax returns) and the Securities and Exchange
Commission (for example, financial reports of public companies where
real estate holdings are material) are examples of Federal agencies
whose activities regularly intersect the world of real estate
appraisals.
Recommended solution: Although this issue needs to be analyzed in
some depth, ASA believes that expanding the membership of the Appraisal
Subcommittee would more accurately reflect the range of Federal
interests in the work of real estate appraisers--and greatly maximize
the benefits that the Federal Government receives from professional
real estate appraisals.
(2) Problem: The Appraisal Subcommittee lacks appropriate
rulemaking powers necessary to ensure that States regulate appraisers
in a way that is uniform and fully consistent with Title XI
requirements. Time and experience have demonstrated that the authority
of the Appraisal Subcommittee to ensure compliance with Title XI needs
to be enhanced. Under existing law, the Subcommittee only has two
options with respect to its enforcement of Title XI: De-certifying a
State's entire appraiser certification program or jawboning its
licensing agency to take actions required to put it into Title XI
compliance. Neither option is adequate. Rulemaking authority is a time-
tested, fair and cost-effective way not only to ensure State agency
compliance with Title XI requirements but also to ensure reasonable
enforcement uniformity among the States (see Problem 3 below).
Recommended solution: Give the Subcommittee rulemaking authority.
(3) Problem: The regulation of appraisers by the States has been
uneven. The regulation of real estate appraisers by the licensing
boards of the 50 States, the territories, and the District of Columbia
has been disturbingly uneven and, in some cases, borders on
ineffectual. Title XI contemplated a reasonable degree of uniformity
and certainty in the way States would enforce compliance with the
ethics, competency and other protocols of professional appraisal
practice. Based on reports from our real estate valuation members, this
is not happening to an adequate degree.
Recommended solution: Ask the GAO, which did a good job fleshing
out the landscape of Title XI's regulatory environment, to examine this
issue and make recommendations on what States and the Federal
Government need to do to improve the consistency and effectiveness of
State compliance efforts.
(4) Problem: Improvements in State reciprocity agreements and
temporary practice permits are required.
(a) Some States make the issuance of temporary practice permits
difficult and very costly to obtain. Title XI recognized that real
estate-related financial transactions requiring appraisal services are
national (and often international) in scope, often requiring appraisers
to travel from State-to-State on temporary practice assignments for a
client. As a result, Title XI required States not to erect barriers to
the issuance of temporary practice permits. Although local appraisers
generally perform valuations of single-family properties in connection
with mortgage financings, there are many instances in which national
and regional mortgage lenders, real estate developers, insurance
companies, and real estate investment trusts/partnerships hire major
valuation firms or appraisers with a valuation specialty niche (for
example, hotels, strip shopping malls, and office buildings) to
appraise the market value of real estate in many States.
Notwithstanding the efforts of the Appraisal Subcommittee to break down
the barriers of some States to temporary practice, the problem remains.
Recommended solution: A consensus is developing between appraisers
and major users of their services in support of a ``driver's license''
approach to temporary practice. Title XI should be amended to provide
that appraisers duly certified or licensed and in good standing in one
State must have their credentials honored in all other States for
legitimate temporary practice purposes only.
(b) Reciprocity still needs improvement. In many areas of the
country, real estate appraisers regularly practice on a
multijurisdictional basis. The District of Columbia Metropolitan Area
(DC, Maryland, and Virginia) is a typical example of a situation where
an appraiser certified or licensed in one jurisdiction is likely to
have clients in the other two jurisdictions. Because States frequently
differ in their qualifications requirements for licensing or
certification and because each State has its own fee structure, it is
impractical and inefficient for an appraiser to obtain an original
certification/license from each jurisdiction. Title XI contemplated
easy reciprocity between and among States in situations where
appraisers live and practice near borders with other jurisdictions.
Recommended solution: Title XI should be amended in a way that
requires States to enter into mutually beneficial reciprocity
agreements that facilitate interstate commerce.
(5) Problem: Because each State's appraiser licensing board
currently must approve all primary and continuing education courses
offered its licensees and licensee applicants, hardships are imposed on
national education providers and practitioners. Professional appraisal
societies offer their members and other qualified individuals a wide
range of valuation course work. Providing continuing education to its
members from across the country is a central feature of ASA's annual
conferences. The hardship on education providers is created when ASA--
and other national appraiser education providers--must seek approval
from each of the home States of its members in order for their
continuing education credits to be accepted.
Recommended solution: A central clearinghouse should be established
for the purpose of approving appraiser education course work for all
States.
(6) Problem: The Appraiser Qualifications Board of the Appraisal
Foundation lacks authority to establish qualification requirements for
licensed appraisers in federally related transactions. An amendment to
Title XI, approved approximately 2 years after its enactment, severely
limited the authority of the Appraisal Foundation to establish
qualifications for licensed appraisers in federally related
transactions. The result is an anomalous public policy situation in
which the foundation is able to establish qualifications for certified
appraisers but not for the lesser-skilled licensed appraisers.
Recommended solution: ASA respectfully urges the Banking Committee
to amend Title XI by restoring the foundation's authority to set
minimum qualification requirements for licensed appraisers. The
limitation on that authority was driven by a concern--among some
mortgage market players--that the Qualifications Board would set
qualification requirements so high that a shortage of appraisers would
be created. Although that concern was highly dubious when it was made a
decade ago, it has no validity today. Ironically, the concern today
within the professional appraisal community and for many government
officials is that qualifications for licensed appraisers in a number of
States are inadequate. And, it is long past the time to end the
illogical public policy disconnect between the Qualifications Board's
authority to set standards for certified appraisers but not for
licensed appraisers.
(7) Problem: The Federal bank regulatory agencies, by rulemaking,
have limited the application of Title XI's professional appraisal and
uniform standards requirements to loans above $250,000 for residential
property and $1 million for commercial property. When Title XI was
enacted in 1989, it included a de minis of $15,000. Although federally
insured financial institutions and the GSE's are free to apply Title
XI's provisions to transactions below the ``de minimis'' levels (and
many do), ASA regards their establishment as unnecessarily jeopardizing
``safety and soundness.'' The Uniform Standards of Professional
Appraisal Practice permit certified and licensed real estate appraisers
to tailor their services to meet their customers' needs as to speed and
cost, without violating USPAP's ethics provisions. Accurate valuations
of the collateral for loans by federally insured financial institutions
are an indispensable safety and soundness component of a federally
related real estate transaction.
Recommended solution: ASA urges the Banking Committee to request a
GAO study of the de minimis issue, including an analysis of its safety
and soundness consequences.
Conclusion
The American Society of Appraisers believes that the real estate
appraiser certification and licensing system established by Title XI is
working successfully to protect not only Federal financial interests
but also the interests of consumers and the appraisal profession as
well. ASA looks forward to working with the Senate Banking Committee to
build on the current system for the purpose of strengthening it and
correcting current weaknesses. I would be glad to answer any questions
you may have.
Attachment
American Society of Appraisers: Fact Sheet
The American Society of Appraisers (ASA) is the only appraisal
society in the United States that represents appraisers of all types of
property--real, personal, and intangible. ASA has more than 6,000
professional members committed to providing consumers the best
valuation expertise available. An international organization, ASA was
founded in 1936 and is currently headquartered outside of Washington,
DC, in Herndon, Va.
For nearly 70 years, ASA has fostered professional excellence.
<bullet> ASA accredits members only after they complete a rigorous
testing and evaluation process that requires years of study,
training, and peer review;
<bullet> ASA ensures that its accredited appraisers provide consumers
and businesses with independent opinions of value;
<bullet> ASA provides continuing education programs and training
opportunities to members;
<bullet> ASA maintains a strong role in the Appraisal Foundation, a
nonprofit organization recognized by the U.S. Congress as the sole
source for uniform appraisal standards and qualifications; and
<bullet> ASA requires all its members to subscribe to the Appraisal
Foundation's Uniform Standards of Professional Appraisal Practice
(USPAP) and ASA's Principles of
Appraisal Practice and Code of Ethics, which the society enforces
through a grievance process that allows clients to challenge
appraisals rendered by ASA members.
ASA members come from all 50 States, Puerto Rico, the U.S. Virgin
Islands, and 44 foreign countries (including Canada, Mexico, China, and
the Philippines) and represent the following disciplines:
<bullet> Appraisal Review and Management: This discipline requires
practitioners to manage multidiscipline appraisal practices, review
appraisals performed by others and report the results of those
reviews.
<bullet> Business Valuation (BV): Business valuation appraisers value
intangible assets--patents, trademarks, copyrights, intellectual
property; provide independent, unbiased opinions of values for
businesses; and prepare merger and acquisition analysis and other
studies. BV appraisers work for large accounting and financial
consulting firms.
<bullet> Gems and Jewelry: ASA appraisers and Master Gemologist
Appraisers assess every kind of gem and jewel, from mineral
specimens and rough stones to art, designer, antique, and period
jewelry.
<bullet> Machinery and Technical Specialties: Professional appraisers
value machinery and equipment, cost surveys, aircraft, boats, oil
and gas, mines and quarries, public utilities, IT property, and
natural resources. They provide appraisals for Fortune 500 and
other companies for the purposes of sale, acquisition, ad valorem
tax, eminent domain, collateralization, or insurance.
<bullet> Personal Property: In this discipline, appraisers value art,
antiques, books, automobiles, and residential contents, including
every possible type of property from African sculpture to wines.
<bullet> Real Property: These appraisers may specialize in property
that is urban, residential, ad valorem, rural, or timberland
(including the land, improvements and all associated structures and
additions). ASA appraisers can produce appraisals for acquisition
or disposition, mortgages, insurance, estate taxes, etc.
Many ASA members are widely recognized experts and pioneers in
their fields. They include:
<bullet> the founders of the business valuation appraisal profession,
which comprises valuers of business and business interests of all
sizes, from sole proprietorships to Fortune 500 companies;
<bullet> the personal property appraisers called on to appraise highly
visible and valuable items such as gifts given to the First Family
by foreign dignitaries and a collection of Princess Diana's
dresses;
<bullet> the foremost expert in the field of ``celebrity valuation,''
which involves appraising the value of a celebrity's brand and
image along with his or her physical possessions;
<bullet> virtually all appraisers accredited in the appraisal of
machinery and equipment and technical properties; and
<bullet> dozens of experts hired to appraise the value of the
businesses, real property, personal property, machinery and
equipment, and jewelry destroyed in the September 11 attack on the
World Trade Center.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED
FROM DAVID G. WOOD
Q.1. Do you believe that the Appraisal Subcommittee should have
rulemaking authority? If so, why is that necessary and what do
you see as the benefits?
A.1. During the review that resulted in our May 2003 report on
the real estate appraisal industry, officials of the Appraisal
Subcommittee stated that the lack of rulemaking authority, as
well as limited enforcement powers, made achieving the
uniformity and standardization, intended by Title IX, more
difficult.\1\ They further noted that allowing the Subcommittee
to issue regulations would help ensure greater consistency
among the States in credentialing appraisers and enforcing the
most current version of the Uniform Standards of Professional
Appraiser Practice. However, in commenting on our draft report,
the Subcommittee stressed that the lack of additional authority
has not been an impediment to achieving compliance with Title
XI. Because our study did not encompass making independent
assessments of compliance, we have no basis to question the
Subcommittee's comments. However, our analysis of the
Subcommittee's reports of its periodic field reviews--during
which Subcommittee staff review the practices and activities of
each State's appraiser regulatory organization--led us to
recommend that the Subcommittee develop and apply clear and
consistent criteria for assessing and reporting on State
programs.
---------------------------------------------------------------------------
\1\ See U.S. General Accounting Office, Regulatory Programs:
Opportunities to Enhance Oversight of the Real Estate Appraisal
Industry, GAO-03-404 (Washington, DC: May 14, 2003).
---------------------------------------------------------------------------
As we noted in our report, giving the Appraisal
Subcommittee rulemaking authority would change the
Subcommittee's role under Title XI from a monitoring to a
regulatory function. This would have significant implications
that Congress would need to consider. A fundamental question is
who the Subcommittee would regulate and take enforcement
actions against. For example, Title XI does not now mandate
that States establish appraiser licensing or certification
programs, but rather says that the States ``may'' establish
such programs. (Obviously, by creating certain requirements for
federally related transactions within the State, the Title
gives the States a strong incentive to establish such
programs.) Authorizing the Subcommittee to regulate and take
enforcement actions against States could raise Constitutional
questions.
Q.2. Do you believe that the Appraisal Subcommittee needs
enforcement options other than decertification? If so, what
specific measures would you recommend and why?
A.2. As noted in the response to question 1 above, officials of
the Appraisal Subcommittee stated during our review that its
limited enforcement powers made achieving the uniformity and
standardization, intended by Title IX, more difficult. However,
as noted, in commenting on the draft report the Subcommittee
stressed that it has been able, within the existing statutory
framework, to achieve compliance with Title XI. The
Subcommittee further wrote it has been unable to identify other
powers that would effectively improve its enforcement
authority. We did not identify evidence indicating that the
lack of additional enforcement authorities has adversely
impacted the Appraisal Subcommittee's ability to achieve
compliance with Title XI.
Q.3. Mr. Fritts' testimony indicates that half of all
appraisals originate with mortgage bankers and that Title XI
does not regulate these appraisals. Do you believe that Title
XI should be amended to capture appraisals originated by
mortgage brokers?
A.3. Title XI was enacted primarily to protect federally
insured depository institutions from losses and by extension
the Federal deposit insurance funds. The term ``mortgage
bankers'' is most often used to describe financial institutions
that are not federally insured depository institutions.
Mortgage brokers typically act as middlemen between borrowers
and lenders; the lenders may or may not be federally insured
depository institutions.
Title XI requirements are applicable to all federally
related transactions entered into by a federally insured
depository institution, whether or not they involve mortgage
brokers. As such, the central issue is whether the appraisal
standards and appraiser qualifications that Title XI requires
for federally related transactions should be extended to real
estate mortgage transactions entered into by non-federally
insured depository institutions.
GAO has previously identified issues and concerns with
respect to Federal oversight of non-federally insured mortgage
lending institutions, most recently in our January 2004 report
on predatory lending.\2\ However, amending Title XI to cover
appraisals used in transactions by non-federally insured
mortgage lending institutions--including their transactions
involving mortgage brokers--would represent a fundamental shift
in focus. Title XI would not have strictly the purpose of
protecting the Federal deposit insurance funds, but rather a
broader consumer protection aspect. This would likely raise
additional Federal-State jurisdiction issues, as mortgage
bankers and brokers are licensed and supervised by the States.
Such a change would also raise issues of implementation and
enforcement. Currently, Title XI requirements in effect apply
to the depository institutions that are federally supervised;
the requirements are implemented through regulations that the
five Federal financial institution regulators promulgate and
enforce. It is unclear who, using what means, would enforce
requirements among lenders that are not currently supervised by
Federal regulators.
---------------------------------------------------------------------------
\2\ U.S. General Accounting Office, Consumer Protection: Federal
and State Agencies Face Challenges in Combating Predatory Lending, GAO-
04-280 (Washington DC: January 30, 2004).
---------------------------------------------------------------------------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED
FROM CHARLES CLARK
Q.1. Do you believe that the Appraisal Subcommittee should have
rulemaking authority? If so, why is that necessary and what do
you see as benefits?
A.1. The Board does not believe that the responsibilities of
the Appraisal Subcommittee as currently outlined in Title XI
warrant rulemaking authority. Their responsibilities are
clearly outlined in the law and require no special
interpretations by rule. Only if Title XI were amended to give
the ASC final authority over the criteria for appraisers and
the standards for appraisals would they have need for
rulemaking authority.
Further, the Board believes that the ASC has successfully
discharged its fundamental requirements under Title XI to
oversee the development of State regulatory programs and the
creation of the Uniform Standards of Professional Appraisal
Practice. Thus, Congress should sunset its operations.
Finally, as the GAO report notes, giving the ASC rulemaking
authority would convert it from a monitoring agency to a
regulatory agency. Doing so, could result in court challenges
to the Federal Government's overstepping the Constitutional
limits of the Tenth Amendment.
Q.2. Do you believe that the Appraisal Subcommittee needs
enforcement options other than decertification? If so, what
specific measures would you recommend and why?
A.2. No. As the ASC indicated in its response to the GAG's 2003
Study, they could identify no other ``powers that would
effectively improve their enforcement authority.'' We concur.
Their reviews of State operations and policy of issuing
statements appear sufficient.
Q.3. Mr. Fritts' testimony indicate that half of all appraisals
originate with mortgage bankers and that Title XI does not
regulate these appraisals. Do you believe that Title XI should
be amended to capture appraisals originated by mortgage
brokers?
A.3. To the extent that a mortgage broker is acting on behalf
of a lender regulated by a member of the Federal Financial
Institutions Examination Council, the Georgia Board believes
that they are
regulated by the provisions of Title XI. If the mortgage broker
is working for a lender not regulated by a FFIEC member, then
the mortgage broker should not be covered by Title XI.
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STATEMENT OF THE NATIONAL ASSOCIATION OF REALTORS<SUP>'</SUP>
March 24, 2004
Mr. Chairman, Members of the Subcommittee, the National Association
of Realtors<SUP>'</SUP> (NAR) appreciates the opportunity to submit
written testimony regarding the Real Estate Appraisal Industry and
Title XI of the Financial Institutions Reform, Recovery and Enforcement
Act of 1989 (FIRREA). NAR is the Nation's largest professional trade
association with almost a million members and is comprised of over
1,500 realtor associations and boards at the State and local levels.
NAR membership includes brokers, salespeople, property managers,
appraisers, and counselors, as well as others engaged in every aspect
of the real estate industry.
NAR commends the Subcommittee for its leadership in recognizing
that the real estate industry has changed, and also in asserting your
proper role to examine the effectiveness of the current Federal and
State regulatory structure as set forth in Title XI of FIRREA. NAR also
applauds the Subcommittee for highlighting the General Accounting
Office's (GAO) report on enhancing oversight of the real estate
appraisal industry. The GAO report points out that Federal, State, and
private entities face impediments in carrying out essential activities
called for in Title XI of FIRREA. In addition to impediments, agency
regulatory officials, mortgage industry representatives, the Department
of Housing and Urban Development and Government Sponsored Enterprises
such as Fannie Mae and Freddie Mac all raised concerns about the
regulatory structure created by Title XI. NAR believes that the current
regulatory structure is overly complex, inconsistent from State-to-
State and in need of thorough review and examination by Congress.
Title XI of FIRREA
Lack of Consistent Enforcement
Title XI of FIRREA was enacted to protect Federal financial and
public policy interests in real estate related transactions by
requiring that real estate appraisals be performed by individuals with
demonstrated competency. Since FIRREA was passed 15 years ago, and
because it mandated State licensing under Federal standards, the
regulatory structure for appraisers has evolved into a unique and
complex system. It involves licensing boards in the various States,
qualification criteria and uniform standards set by the Appraisal
Foundation, and Federal oversight by the Appraisal Subcommittee of the
Federal Financial Institutions Examinations Council. State licensing
boards license, certify and provide oversight and enforcement of
nationally recognized standards (the Uniform Standards of Professional
Appraisal Practice) and State laws.
Since Title XI was enacted, it has been difficult to achieve
necessary consistency among the States for enforcement of both
standards and certification requirements. With a patchwork of State
laws and ineffective Federal oversight allowing for only ``minimum''
qualifications criteria for licensing and certification in some cases,
States and the Federal oversight bodies have too often not carried out
their specific intended responsibility to enforce the standards as
required by the Federal law. Too often, complaints against real estate
appraisers in some States are not reviewed by State appraiser boards,
leading to a lack of disciplinary action against poorly performing
appraisers. Other boards have been known to spend inordinate time and
research and collect fines for inconsequential offenses, leaving little
time for enforcement of major issues.
The lack of consistent enforcement among the States is due in part
to the fact that many States do not adequately fund enforcement and
licensing. As a result, certification boards are forced to choose the
cases that are investigated based on the nature of the violation, as
opposed to investigating each complaint thoroughly. Additionally, there
is no consistent requirement among the States that either appraisers or
lenders report erroneous appraisals to the State enforcement board.
Also, some States see the requirement to certify licensing as an
unfunded Federal mandate, and with many of them facing budget
restraints it is not difficult to see why there is not uniform
enforcement.
Even though adequate funding of the licensing, certification,
investigation, and disciplinary activities may be a problem in some
States, it is by no means universal or pervasive. States actually do
license and certify appraisers and evaluate, approve, and disapprove
prelicensing educational offerings. States do evaluate, approve, and
disapprove continuing education course offerings and require regular
continuing education of their licensees. States receive complaints,
investigate, and prosecute appraisers for violations of their license
law and the Uniform Standards of Professional Appraisal Practice
(USPAP). However, one of the major problems is that States rarely
receive complaints from the federally regulated lenders, HUD, VA,
Fannie Mae, and Freddie Mac. These entities too often fail to inform
States of poor appraisals, poor practitioners, or fail to file
complaints with the appropriate State-licensing agency or if they do
so, do it in an incomplete and lackadaisical manner.
Lack of Qualified Appraisers
Many State appraisal boards fail to resolve complaints against real
estate appraisers in an expeditious manner. Whether through a lack of
resources or a lack of will by those charged with providing oversight,
the current system allows some unscrupulous and unqualified appraisers
to continue practicing with little or no recourse for their actions.
One of the fundamental goals of Title XI was to raise the
professionalism of appraisers involved in federally related
transactions, however, this has not been met. Having provided for only
``minimum'' qualification requirements, the implementation of FIRREA
has failed to offer incentives for appraisers to seek additional
training, education, and experience. We believe the public would be
better served by a system that encourages appraisers to excel through
appropriate professional development because many appraisers see
acquiring a license as the be-all and end-all of becoming an appraiser.
NAR supports a licensed or certified appraisal for all federally
related transactions. NAR believes that relying on appraisals more
often will lead to better loan underwriting. NAR believes that
appraisals performed by certified and licensed practitioners with
higher than minimal qualifications will help protect consumers from
unscrupulous lenders and inflated transactions.
Lack of Purpose and Direction for the Appraisal Foundation, Appraisal
Standards Board, Appraisal Qualifications Board, and Appraisal
Subcommittee
NAR is concerned about the direction and purpose of the Appraisal
Foundation, the Foundation's Appraisal Standards Board (ASB), and the
Foundation's Appraiser Qualifications Board (AQB). NAR questions the
propriety of a private organization (Appraisal Foundation) promulgating
standards for appraisals and qualifications of appraisers, which must
then be adopted and enforced by State regulatory agencies. These
standards and criteria have the effect of law but they have been
adopted completely outside the State legislative process. Appointed
individuals without any type of Government control or oversight have
the power to promulgate these standards. Even though the standards and
criteria are issued for public comment, they are nonetheless discussed,
debated, decided, and mandated by independent and autonomous Boards of
the Appraisal Foundation in nonpublic meetings. This is in direct
contradiction to some State laws.
NAR also questions the lack of responsiveness and accountability
from the Appraisal Foundation, its ASB, and its AQB to their
professional association sponsors. There is a significant amount of
concentrated power given to a relatively small number of individuals
where the sponsoring organizations have no means of appointing or
providing oversight. For example, NAR has tried for several years to
limit the USPAP to ``Appraisal Practice'' by asking that Standards 4
and 5 be removed from the document because we believe, along with other
groups, that Title XI pertains to appraisals, not consulting
assignments. We contend that the mandate to the States in Title XI was
to license, certify, and regulate appraisers, not counselors.
In some States, the Appraisal Foundation, the ASB, and the AQB have
exceeded their authority and have, in effect, acted as regulatory
bodies over the State regulatory agencies. For example, the AQB has
previously restricted the licensing authority of some States. They have
disapproved a number of State-approved prelicensing and continuing
education courses because of minor technical differences and have
imposed their own arbitrary criteria.
The AQB has adopted a number of arbitrary requirements, which could
be construed as conflicts of interest. For example, the national USPAP
course mandated by the AQB requires either AQB approval or use of their
course and examination with royalty paid to the AQB. The national USPAP
update course and examination has a similar approval structure. Also,
the AQB requires all USPAP instructors to meet their standards and only
instructors taking an Instructor Certification Course can meet the
standards. The only approved Instructor Certification Course is
presented by the ASB and taught by ASB members.
The purpose of the Appraisal Subcommittee is to provide control and
oversight of the Appraisal Foundation, the ASB and AQB, and to protect
the public, appraisers, and instructors from these conflicts. However,
the Appraisal Subcommittee often remains silent and thus conveys the
impression that they are working in concert with the Appraisal
Foundation and the members of its ASB and AQB. NAR recommends that an
appeal process to an independent third party be established and courses
and instructors be approved by either the State Licensing Board or the
AQB.
NAR believes that there is a lack of consistent and effective
oversight of State appraisal boards by the Appraisal Subcommittee.
Oversight of all State regulatory boards is vested in the Appraisal
Subcommittee; however, the Appraisal Subcommittee is made up of
representatives of the lending and banking industry--designees of the
heads of the Federal financial institutions regulatory agencies. In our
opinion, the current oversight of the Appraisal regulatory structure is
more vested toward the lending industry. The problem is that these
regulatory agencies are the ones that regularly propose and pass rules
to increase the de minimus level. By increasing the de minimus level,
they reduce the consumer protections that Title XI of FIRREA was
intended to provide by requiring appraisals for all federally related
transactions. As the de minimus level is increased it negates the need
for an appraisal thus denying protections to the consumer.
Appraisals and the De Minimus Level
Over time, most residential real estate transactions have been
exempt from obtaining an appraisal because the de minimus level, in
which a certified or licensed appraisal would be required, has been
raised to $250,000. NAR has had long standing policy that the de
minimus level for residential property should not exceed $100,000.
There are a large number of transactions that could avoid the appraisal
process altogether because the median sales price in many major markets
and smaller markets is below $250,000.
NAR recognizes that there are cases when an appraisal for a
mortgage loan transaction should not be a requirement, but relying
solely on the dollar amount of the transaction as the determinant is a
poor measure. There are other factors such as loan-to-value,
predominant value in the region, qualifications of the borrower,
strength of the real estate market and its trend that should be
considered as well.
Recognizing that the de minimus level in all likelihood will not be
lowered back to $100,000 for residential loans, NAR believes that
lenders should be required to inform a borrower of the methods used to
value a property to determine the amount of the mortgage loan, and that
borrowers should have the right to be provided with a copy of each
value estimate or value opinion obtained. Many buyers, particularly
first-time buyers, are not aware of their options and rights. They do
not fully understand the purpose of the appraisal or value estimate and
may not be taking full advantage of the safety, security, and utility
of an independent, third party opinion of value. NAR firmly believes a
full appraisal report, prepared by a State-certified or licensed
appraiser, may be useful to the buyer in assuring them of the validity
of the price paid for the property and securing the proper amount of
insurance.
Further, lenders often obtain multiple estimates or opinions of the
value of the collateral. In the event that more than one estimate is
obtained on behalf of the borrower, NAR believes that the consumer
should be provided with all of the value estimates or opinions of
value. In this way, the purchaser can be assured that the value
estimate supports the price of the property.
Lender Pressure
There are some participants in the mortgage process that pressure
appraisers in order to ensure that their estimates of the fair market
value of collateral property are sufficient to make predetermined loan
amounts. Increasingly, there is evidence that the use of such pressure
is widespread in the appraisal field. These pressures are beginning to
erode the independent judgment of appraisers, and are contributing to
the ability of unscrupulous individuals to engage in improper loan
practices, including property flipping and predatory lending schemes.
While the most immediate victims of these practices are the elderly,
lower-income families, and other vulnerable consumers, they also damage
mainstream lenders and Federal housing assistance programs.
Conclusion
NAR believes that the oversight of the appraisal regulatory
structure should be geared toward the interests of consumers and the
protections the consumer should expect from an independently developed,
unbiased, objective third party opinion of value of the real property
offered as security for a loan. The Uniform Standards of Professional
Appraisal Practice (USPAP) were originally developed by professional
appraisal organizations to ensure public trust in the appraisal
profession. We believe the standards should concentrate on their
original purpose, which is to ensure trust in the appraisal practice.
Finally, the failure to report faulty appraisal reports and deficient
appraisers to the appropriate State regulatory boards continues to be a
serious problem.
NAR appreciates the opportunity to share its views and observations
and we stand ready to work with the Subcommittee to improve
effectiveness of the current Federal and State regulatory structure as
set forth in Title XI of FIRREA.