RESIDENTIAL 

APPRAISALS

Regulators Should Take 

Actions to Strengthen 

Appraisal Oversight

Statement of William B. Shear, Director 

Financial Markets and Community Investment

Testimony 

Before the Subcommittee on Insurance, 

Housing and Community Opportunity, 

Committee on Financial Services, House 

of Representatives

For Release on Delivery 

Expected at 10:00 a.m. EDT

Thursday, June 28, 2012

GAO-12-840T

United States Government Accountability Office

GAO
United States Government Accountability Office

Highlights of GAO-12-840T, a testimony 

before the Subcommittee on Insurance, 

Housing and Community Opportunity, 

Committee on Financial Services, House of 

Representatives.

June 2012 

RESIDENTIAL APPRAISALS

Regulators Should Take Actions to Strengthen 

Appraisal Oversight 

Why GAO Did This Study

Real estate valuations, which 

encompass appraisals and other 

estimation methods, have come under 

increased scrutiny in the wake of the 

recent mortgage crisis. The DoddFrank Act codified several 

independence requirements for 

appraisers and requires federal 

regulators to set standards for 

registering AMCs. Additionally, the act

expanded the role of ASC, which

oversees the appraisal regulatory

structure established by Title XI of 

FIRREA. The act also directed GAO to 

conduct two studies on real estate 

appraisals. This testimony discusses

information from those studies, 

including (1) the use of different real 

estate valuation methods, (2) policies 

on appraiser conflict-of-interest and 

selection and views on their impact, 

and (3) ASC’s performance of its Title 

XI functions. To address these 

objectives, GAO analyzed government 

and industry data; reviewed academic 

and industry literature; examined 

policies, regulations, and professional 

standards; and interviewed industry 

participants and stakeholders. 

What GAO Recommends

GAO previously recommended that 

federal regulators consider key AMC 

functions in rulemaking to set minimum 

standards for registering these firms. 

The regulators agreed with or said they 

would consider this recommendation. 

GAO also recommended that ASC 

clarify the criteria it uses to assess 

states’ compliance with Title XI and 

develop specific policies and 

procedures for monitoring the federal 

banking regulators and the Appraisal 

Foundation. ASC is taking steps to 

implement these recommendations.

See GAO-11-653 and GAO-12-147.

What GAO Found

Data GAO obtained from Fannie Mae and Freddie Mac (the enterprises) and five 

of the largest mortgage lenders indicate that appraisals—which provide an 

estimate of market value at a point in time—are the most commonly used 

valuation method for first-lien residential mortgage originations. Other methods, 

such as broker price opinions and automated valuation models, are quicker and 

less costly but are viewed as less reliable. As a result, they generally are not 

used for most purchase and refinance mortgage originations. Although the 

enterprises and lenders GAO spoke with did not capture data on the prevalence 

of approaches used to perform appraisals, the sales comparison approach—in 

which the value is based on recent sales of similar properties—is required by the 

enterprises and the Federal Housing Administration. This approach is reportedly 

used in nearly all appraisals.

Conflict-of-interest policies have changed appraiser selection processes and the 

appraisal industry more broadly, raising concerns about the oversight of 

appraisal management companies (AMC), which often manage appraisals for 

lenders. Recent policies, including provisions in the Dodd-Frank Wall Street 

Reform and Consumer Protection Act (Dodd-Frank Act), reinforce prior 

requirements and guidance that restrict who can select appraisers and prohibit

coercion. In response to market changes and these requirements, some lenders 

have turned to AMCs. Greater use of AMCs has raised questions about oversight 

of these firms and their impact on appraisal quality. Federal regulators and the 

enterprises said they hold lenders responsible for ensuring that AMCs’ policies 

and practices meet their requirements but that they generally do not directly 

examine AMCs’ operations. Some industry participants voiced concerns that

some AMCs may prioritize low costs and speed over quality and competence. 

The Dodd-Frank Act requires state appraiser licensing boards to supervise AMCs 

and requires the federal banking regulators, the Federal Housing Finance 

Agency, and the Bureau of Consumer Financial Protection to establish minimum 

standards for states to apply in registering them. Setting minimum standards that 

address key functions AMCs perform on behalf of lenders could provide greater 

assurance of the quality of the appraisals that AMCs provide. As of June 2012, 

federal regulators had not completed rulemaking to set state standards.

The Appraisal Subcommittee (ASC) has been performing its monitoring role 

under Title XI of the Financial Institutions Reform, Recovery, and Enforcement 

Act of 1989 (FIRREA), but several weaknesses have potentially limited its 

effectiveness. For example, ASC has not clearly defined the criteria it uses to 

assess states’ overall compliance with Title XI. In addition, Title XI charges ASC 

with monitoring the appraisal requirements of the federal banking regulators, but 

ASC has not defined the scope of this function—for example, by developing 

policies and procedures—and its monitoring activities have been limited. ASC 

also lacks specific policies for determining whether activities of the Appraisal 

Foundation (a private nonprofit organization that sets criteria for appraisals and 

appraisers) that are funded by ASC grants are Title XI-related. Not having 

appropriate policies and procedures is inconsistent with federal internal control 

standards that are designed to promote the effectiveness and efficiency of 

federal activities. 

View GAO-12-840T or key components.

For more information, contact William B.

Shear at (202) 512-8678 or shearw@gao.gov. 
 

Page 1 GAO-12-840T 

Chairman Biggert, Ranking Member Gutierrez, and Members of the 

Subcommittee:

I am pleased to be here today to discuss our work on residential real 

estate valuations and the role of the Appraisal Subcommittee (ASC) of 

the Federal Financial Institutions Examination Council (FFIEC) in 

monitoring requirements for real estate appraisals and appraisers.1 Real 

estate valuations, which encompass appraisals and other value 

estimation methods, play a critical role in mortgage underwriting by 

providing evidence that the market value of a property is sufficient to help 

mitigate losses if the borrower is unable to repay the loan. However, 

turmoil in the mortgage market raised questions about mortgage 

underwriting practices, including the quality and credibility of some 

valuations. An investigation into industry appraisal practices by the New 

York State Attorney General led to an agreement in 2008 between the 

Attorney General, Fannie Mae and Freddie Mac (the enterprises), and the 

Federal Housing Finance Agency (FHFA), which regulates the 

enterprises, that included the Home Valuation Code of Conduct (HVCC).2

HVCC set forth certain appraiser independence requirements for loans 

sold to the enterprises and took effect in 2009. Although the Dodd-Frank 

Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) 

declared HVCC no longer in effect, it codified several of HVCC’s 

provisions.3

 

1

FFIEC is a formal interagency body empowered to prescribe uniform principles, 

standards, and report forms for the federal examination of financial institutions by the 

Board of Governors of the Federal Reserve System, the Federal Deposit Insurance 

Corporation, the National Credit Union Administration, the Office of the Comptroller of the 

Currency, and the Bureau of Consumer Financial Protection and to make 

recommendations to promote uniformity in the supervision of financial institutions.

The Dodd-Frank Act also amended Title XI of the Financial 

2

The enterprises purchase mortgages that meet specified underwriting criteria from 

approved lenders. The enterprises bundle most of the mortgages they purchase into 

securities and guarantee the timely payment of principal and interest to investors in the 

securities. On September 6, 2008, the enterprises were placed under federal 

conservatorship out of concern that their deteriorating financial condition and potential 

default on $5.4 trillion in outstanding financial obligations threatened the stability of 

financial markets. 

3

Pub. L. No. 111-203. Congress enacted the Dodd-Frank Act in July 2010. The DoddFrank Act stated that HVCC ceased to be effective as of the date the Board of Governors 

of the Federal Reserve System (Federal Reserve) issued interim final rules covering 

appraiser independence. Dodd-Frank Act § 1472(a) (codified at 15 U.S.C. § 1639e(j)). 

The Federal Reserve issued these rules on October 28, 2010. 75 Fed. Reg. 66554. The 

enterprises have incorporated many of the other provisions of HVCC into their 

requirements.

 
 

Page 2 GAO-12-840T 

Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), 

which made reforms to address the quality of appraisals and appraiser 

qualifications and created ASC to monitor Title XI’s implementation. 

Among other things, the Dodd-Frank Act gave ASC additional 

responsibilities and authorities.

The Dodd-Frank Act also directed us to perform two studies concerning 

real estate appraisals.4 The first, which we issued in July 2011, included 

an examination of real estate valuation methods, including appraisals, 

and conflict-of-interest and appraiser-selection policies.5 The second, 

which we issued in January 2012, included an assessment of ASC’s 

monitoring functions and discussed challenges that ASC faces in 

implementing its new responsibilities and authorities.

6

My statement today is based on information from those two reports. 

Specifically, I will discuss (1) the use of different valuation methods for 

single-family residential mortgages and the advantages and 

disadvantages of each method, (2) policies on appraiser conflict-ofinterest and selection and views on the policies’ impact on industry 

stakeholders and appraisal quality; and (3) ASC’s performance of its Title 

XI functions that existed prior to the Dodd-Frank Act and challenges that it 

faces in implementing additional responsibilities under the act. To do this 

work, we analyzed proprietary data we obtained from the enterprises, 

lenders, and a mortgage technology company on the use of different 

valuation methods and appraisal approaches.7

 

4

Dodd-Frank Act § 1476. 

We reviewed academic 

and industry literature on real estate valuation and examined federal 

regulations and policies, as well as lenders’ and appraisal management 

companies’ (AMC) internal policies on and procedures for selecting 

5

GAO, Residential Appraisals: Opportunities to Enhance Oversight of an Evolving 

Industry, GAO-11-653 (Washington, D.C.: July 13, 2011). 

6

GAO, Real Estate Appraisals: Appraisal Subcommittee Needs to Improve Monitoring 

Procedures, GAO-12-147 (Washington, D.C.: Jan. 18, 2012).

7

See GAO-11-653 for more information about the data we obtained for this study.
 

Page 3 GAO-12-840T 

appraisers.8 We also reviewed ASC’s policies and procedures, including 

its rules of operation, policy and procedures manual, Title XI policy 

statements, and compliance review manual. In addition, we reviewed 

ASC records such as its annual reports to Congress, board-meeting 

minutes, state compliance review reports, and grant documents. We 

interviewed a broad range of appraisal and mortgage industry participants 

and stakeholders, including officials from the enterprises, FHFA, the 

federal banking regulatory agencies, and ASC. Additionally, prior to this 

hearing, we interviewed federal regulators to update the status of our 

recommendations. The work that this statement is based on was 

performed from July 2010 to June 2012 in accordance with generally 

accepted government auditing standards. Those standards require that 

we plan and perform the audit to obtain sufficient, appropriate evidence to 

provide a reasonable basis for our findings and conclusions based on our 

audit objectives. We believe that the evidence obtained provides a 

reasonable basis for our findings and conclusions based on our audit 

objectives.

Before originating a residential mortgage loan, a lender assesses its risk 

through the underwriting process, in which the lender generally examines 

the borrower’s credit history and capacity to repay the mortgage and 

obtains a valuation of the property that will be the loan’s collateral. 

Lenders need to know the property’s market value, or the probable price 

that the property should bring in a competitive and open market, in order 

to provide information for assessing their potential loss exposure if the 

borrower defaults.9

 

8

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. No. 111-203) 

defines an AMC as a third party that oversees a network or panel of more than 15 

appraisers within a state or 25 or more appraisers nationally in a given year and has been 

authorized by lenders to recruit, select, and retain appraisers; contract with appraisers to 

perform appraisal assignments; manage the process of having an appraisal performed; or 

review and verify the work of appraisers. Dodd-Frank Act § 1473(f)(4) (codified at 12 

U.S.C. § 3550(11)).

Real estate can be valued using a number of 

methods, including appraisals, broker price opinions (BPO), and 

automated valuation models (AVM). Appraisals are opinions of value 

based on market research and analysis as of a specific date. Appraisals 

9

The enterprises and federal banking regulators define market value as the most probable 

price that a property should bring in a competitive and open market under all conditions 

requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and 

assuming the price is not affected by undue stimulus.

Background 
 

Page 4 GAO-12-840T 

are performed by state-licensed or -certified appraisers who are required 

to follow the Uniform Standards of Professional Appraisal Practice 

(USPAP).10 A BPO is an estimate of the probable selling price of a 

particular property prepared by a real estate broker, agent, or 

salesperson rather than by an appraiser. An AVM is a computerized 

model that estimates property values using public record data, such as 

tax records and information kept by county recorders, multiple listing 

services, and other real estate records.11

In 1986, the House Committee on Government Operations issued a 

report concluding that problematic appraisals were an important 

contributor to the losses that the federal government suffered during the 

savings and loan crisis.12 The report stated that hundreds of savings and 

loans chartered or insured by the federal government were severely 

weakened or declared insolvent because faulty and fraudulent real estate 

appraisals provided documentation for loans larger than what the 

collateral’s real value justified. In response, Congress incorporated 

provisions in Title XI of FIRREA that were intended to ensure that 

appraisals performed for federally related transactions were done (1) in 

writing, in accordance with uniform professional standards, and (2) by 

individuals whose competency had been demonstrated and whose 

professional conduct was subject to effective supervision.13

Various private, state, and federal entities have roles in the Title XI 

regulatory structure:

• The Appraisal Foundation. The Appraisal Foundation is a private notfor-profit corporation composed of groups from the real estate industry 

that works to foster professionalism in appraising. The foundation 

 

10USPAP covers both the principles appraisers must apply in developing appraisals and 

the information the appraisal report must contain.

11A multiple listing service is a database set up by a group of real estate brokers to 

provide information about properties sold and for sale.

12House Committee on Government Operations, Impact of Appraisal Problems on Real 

Estate Lending, Mortgage Insurance, and Investment in the Secondary Market, 99th 

Cong., 2nd sess., 1986, H. Rep. 99-891, 4-6. 

1312 U.S.C. §§ 3331, 3339-3345. Federally related transactions are real estate 

transactions that require the services of an appraiser and involve financial institutions 

regulated by the federal government.
 

Page 5 GAO-12-840T 

sponsors two independent boards with responsibilities under Title XI. 

The first of these, the Appraisal Standards Board, sets rules for 

developing an appraisal and reporting its results through USPAP. The 

second board, the Appraiser Qualifications Board, establishes the 

minimum qualification criteria for state certification and licensing of 

real property appraisers.14

• State-level regulatory entities. Title XI relies on the states to (1) 

implement the certification and licensing of all real estate appraisers 

and (2) monitor and supervise appraisers’ compliance with appraisal 

standards and requirements. To assure the availability of certified and 

licensed appraisers, all 50 states, the District of Columbia, and four 

U.S. territories have adopted structures to regulate and supervise the 

appraisal industry.

The foundation is funded primarily by sales 

of publications but also receives an annual grant from ASC.

15

• Federal banking regulators. Title XI places responsibility for regulating 

appraisals and “evaluations” performed in conjunction with federally 

related transactions with the Board of Governors of the Federal 

Reserve System (Federal Reserve), Federal Deposit Insurance 

Corporation (FDIC), Office of the Comptroller of the Currency (OCC), 

and the National Credit Union Administration (NCUA).

These structures typically consist of a state 

regulatory agency and a board or commission that establish 

requirements for education and experience, consistent with or in 

excess of Appraiser Qualifications Board criteria; license and certify 

appraisers; and monitor and enforce appraiser compliance.

16

 

14Certified appraisers are qualified to appraise properties of greater complexity and value

than licensed appraisers and must meet higher requirements for education and 

experience.

To meet this 

responsibility, these financial institution regulators have established 

requirements for appraisals and evaluations through regulations and 

have jointly issued Interagency Appraisal and Evaluation Guidelines. 

The federal regulators have developed procedures for examining the 

real estate lending activities of regulated institutions that include steps 

15The four territories are Guam, Northern Mariana Islands, Puerto Rico, and the Virgin 

Islands.

16Evaluations are estimates of market value that do not have to be performed by a statelicensed or -certified appraiser. The federal banking regulators permit evaluations to be 

performed (consistent with safe and sound lending practices) in certain circumstances, 

such as mortgage transactions of $250,000 or less that are conducted by regulated 

institutions.
 

Page 6 GAO-12-840T 

for assessing the completeness, adequacy, and appropriateness of 

these institutions’ appraisal and evaluation policies and procedures.

• Appraisal Subcommittee. ASC has responsibility for monitoring the 

implementation of Title XI by the private, state, and federal entities 

noted previously. Among other things, ASC is responsible for (1) 

monitoring and reviewing the practices, procedures, activities, and 

organizational structure of the Appraisal Foundation—including 

making grants to the Foundation in amounts that it deems appropriate 

to help defray costs associated with its Title XI activities; (2) 

monitoring the requirements that states and their appraiser regulatory 

agencies establish for the certification and licensing of appraisers; (3) 

monitoring the requirements established by the federal banking 

regulators regarding appraisal standards for federally related 

transactions and determinations of which federally related 

transactions will require the services of state-licensed or -certified 

appraisers; and (4) maintaining a national registry of state-licensed 

and -certified appraisers who can perform appraisals for federally 

related transactions. Among other responsibilities and authorities, the 

Dodd-Frank Act requires ASC to implement a national appraisal

complaint hotline and provides ASC with limited rulemaking authority. 

To carry out these tasks, ASC has 7 board member positions and 10 

staff headed by an Executive Director hired by the board. Five of the 

board members are designated by the federal agencies that are part 

of FFIEC—the Bureau of Consumer Financial Protection (also known 

as the Consumer Financial Protection Bureau or CFPB), FDIC, the 

Federal Reserve, NCUA, and OCC. The other two board members 

are designated by the U.S. Department of Housing and Urban 

Development (HUD)—which includes the Federal Housing 

Administration (FHA)—and FHFA. ASC is funded by appraiser 

registration fees that totaled $2.6 million in fiscal year 2011.

Available data and interviews with lenders and other mortgage industry 

participants indicate that appraisals are the most frequently used 

valuation method for home purchase and refinance mortgage 

originations. Appraisals provide an opinion of market value at a point in 

time and reflect prevailing economic and housing market conditions. Data 

provided to us by the five largest lenders (measured by dollar volume of 

mortgage originations in 2010) show that, for the first-lien residential 

mortgages for which data were available, these lenders obtained 

appraisals for about 90 percent of the mortgages they made in 2009 and 

2010, including 98 percent of home purchase mortgages. The data we 

obtained from lenders included mortgages sold to the enterprises and 

The Widespread Use 

of Appraisals for 

Mortgage Originations 

Reflects Their 

Advantages Relative 

to Other Valuation 

Methods 
 

Page 7 GAO-12-840T 

mortgages insured by FHA, which together accounted for the bulk of the 

mortgages originated in 2009 and 2010. The enterprises and FHA require 

appraisals to be performed for a large majority of the mortgages they 

purchase or insure. For mortgages for which an appraisal was not done, 

the lenders we spoke with reported that they generally relied on validation 

of the sales price (or loan amounts in the case of refinances) against an 

AVM-generated value, in accordance with enterprise policies that permit 

this practice for some mortgages that have characteristics associated with 

a lower default risk.

The enterprises, FHA, and lenders require and obtain appraisals for most 

mortgages because mortgage industry participants consider appraising to 

be the most credible and reliable valuation method, for a number of 

reasons. Most notably, appraisals and appraisers are subject to specific 

requirements and standards. In particular, USPAP outlines the steps 

appraisers must take in developing appraisals and the information 

appraisal reports must contain. It also requires that appraisers follow 

standards for ethical conduct and have the competence needed for a 

particular assignment. Furthermore, state licensing and certification 

requirements for appraisers include minimum education and experience 

criteria, and standardized report forms provide a way to report relevant 

appraisal information in a consistent format.

In contrast, other valuation methods such as BPOs and AVMs are not 

permitted for most purchase and refinance mortgage originations. The 

enterprises do not permit lenders to use BPOs for mortgage originations 

and permit lenders to use AVMs for only a modest percentage of 

mortgages they purchase. Additionally, the federal banking regulators’ 

guidelines state that BPOs and AVMs cannot be used as the primary 

basis for determining property values for mortgages originated by 

regulated institutions. However, the enterprises and lenders use BPOs 

and AVMs in a number of circumstances other than purchase and 

refinance mortgage originations because these methods can provide a 

quicker, less expensive means of valuing properties in active markets.

When performing appraisals, appraisers can use one or more of three 

approaches to value—sales comparison, cost, and income. The sales 

comparison approach compares and contrasts the property under 

appraisal with recent offerings and sales of similar properties. The cost 

approach is based on an estimate of the value of the land plus what it 

would cost to replace or reproduce the improvements minus depreciation. 

The income approach is an estimate of what a prudent investor would pay 

based upon the net income the property produces. USPAP requires 
 

Page 8 GAO-12-840T 

appraisers to consider which approaches to value are applicable and 

necessary to perform a credible appraisal and provide an opinion of the 

market value of a particular property. Appraisers must then reconcile the 

values produced by the different approaches they use to reach a value 

conclusion.

The enterprises and FHA require that, at a minimum, appraisers use the 

sales comparison approach for all appraisals because it is considered the 

most applicable for estimating market value in typical mortgage 

transactions. Consistent with these policies, our review of valuation data 

from a mortgage technology company—representing about 20 percent of 

mortgage originations in 2010—indicated that appraisers used the sales 

comparison approach for nearly all (more than 99 percent) of the 

mortgages covered by these data.17 The cost approach, which was 

generally used in conjunction with the sales comparison approach, was

used somewhat less often—in approximately two-thirds of the 

transactions in 2009 and 2010, according to these data. The income 

approach was rarely used. Some mortgage industry stakeholders have 

argued that wider use of the cost approach in particular could help 

mitigate what they viewed as a limitation of the sales comparison 

approach. They told us that relying solely on the sales comparison 

approach could lead to market values rising to unsustainable levels and 

that using the cost approach as a check on the sales comparison 

approach could help lenders and appraisers identify when this is 

happening. For example, they pointed to a growing gap between average 

market values and average replacement costs of properties as the 

housing bubble developed in the early to mid-2000s. However, other 

mortgage industry participants noted that a rigorous application of the 

cost approach might not generate values much different from those 

generated using the sales comparison approach. They indicated, for 

example, that components of the cost approach—such as land value or 

profit margins of real estate developers—could grow rapidly in housing 

markets where sales prices are increasing. The data we obtained did not 

allow us to analyze the differences between the values appraisers

generated using the different approaches.

 

17The enterprises and lenders we spoke with did not capture data on the prevalence of 

approaches used to perform appraisals.
 

Page 9 GAO-12-840T 

Recently issued policies reinforce long-standing requirements and 

guidance designed to address conflicts of interest that may arise when 

direct or indirect personal interests bias appraisers from exercising their 

independent professional judgment. In order to prevent appraisers from 

being pressured, the federal banking regulators, the enterprises, FHA, 

and other agencies have regulations and policies governing the selection 

of, communications with, and coercion of appraisers. Examples of 

recently issued policies that address appraiser independence include the 

now-defunct HVCC, which took effect in May 2009; the enterprises’ new 

appraiser independence requirements that replaced HVCC in October 

2010; provisions in the Dodd-Frank Act; and revised Interagency 

Appraisal and Evaluation Guidelines from the federal banking regulators 

that were issued in December 2010. Provisions of these and other 

policies address (1) prohibitions against the involvement of loan 

production staff in appraiser selection and supervision; (2) prohibitions 

against third parties with an interest in the mortgage transaction, such as 

real estate agents or mortgage brokers, selecting appraisers; (3) limits on 

communications with appraisers; and (4) prohibitions against coercive 

behaviors.

According to mortgage industry participants, HVCC and other factors 

have contributed to changes in appraiser selection processes—in 

particular, to lenders’ more frequent use of AMCs to select appraisers. 

AMCs are third parties that, among other things, select appraisers for 

appraisal assignments on behalf of lenders. Some appraisal industry 

participants said that HVCC, which required additional layers of 

separation between loan production staff and appraisers for mortgages 

sold to the enterprises, led some lenders to outsource appraisal functions 

to AMCs because they thought using AMCs would allow them to easily 

demonstrate compliance with these requirements. In addition, lenders 

and other mortgage industry participants told us that market conditions, 

including an increase in the number of mortgages originated during the 

mid-2000s and lenders’ geographic expansion over the years, put 

pressure on lenders’ capacity to manage appraisers and led to their 

reliance on AMCs.18

 

18Although industrywide data on lenders’ use of AMCs over time are unavailable, 

appraisal industry participants told us that between 60 and 80 percent of appraisals were 

currently ordered through AMCs. They provided varying estimates of AMC use prior to 

HVCC that ranged from 15 percent to 50 percent of mortgage originations.

Conflict-of-Interest 

Policies Have 

Changed Appraiser 

Selection Processes, 

with Implications for 

Appraisal Oversight
 

Page 10 GAO-12-840T 

Greater use of AMCs has raised questions about oversight of these firms 

and their impact on appraisal quality. Direct federal oversight of AMCs is 

limited. Federal banking regulators’ guidelines for lenders’ own appraisal 

functions list standards for appraiser selection, appraisal review, and 

reviewer qualifications. The guidelines also require lenders to establish 

processes to help ensure that these standards are met when lenders 

outsource appraisal functions to third parties, such as AMCs. Officials 

from the federal banking regulators told us that they reviewed lenders’ 

policies and controls for overseeing AMCs, including the due diligence 

performed when selecting AMCs. However, they told us that they 

generally did not review an AMC’s operations directly unless they had 

serious concerns about it that the lender was unable to address. In 

addition, a number of states began regulating AMCs in 2009, but the 

regulatory requirements vary and provide somewhat differing levels of 

oversight, according to officials from several state appraiser regulatory 

boards.

Some appraiser groups and other appraisal industry participants have 

expressed concern that existing oversight may not provide adequate 

assurance that AMCs are complying with industry standards. These 

participants suggested that the practices of some AMCs for selecting 

appraisers, reviewing appraisal reports, and establishing qualifications for 

appraisal reviewers—key areas addressed in federal guidelines for 

lenders’ appraisal functions—may have led to a decline in appraisal 

quality. For example, appraiser groups said that some AMCs selected 

appraisers based on who would accept the lowest fee and complete the 

appraisal report the fastest rather than on who was the most qualified, 

had the appropriate experience, and was familiar with the relevant 

neighborhood. AMC officials we spoke with said that they had processes 

that addressed these areas of concern—for example, using an automated 

system that identified the most qualified appraiser based on the 

requirements for the assignment, proximity to the subject property, and 

performance metrics such as timeliness and appraisal quality.

While the impact of the increased use of AMCs on appraisal quality is 

unclear, Congress recognized the importance of additional AMC oversight 

in enacting the Dodd-Frank Act by requiring state appraiser regulatory 

boards to supervise AMCs. The Dodd-Frank Act requires the federal 

banking regulators, CFPB, and FHFA to establish minimum standards for 

states to apply in registering AMCs, including requirements that 
 

Page 11 GAO-12-840T 

appraisals coordinated by an AMC comply with USPAP and be conducted 

independently and free from inappropriate influence and coercion.19

To help ensure more consistent and effective oversight of the appraisal 

industry, we recommended in our July 2011 report that the heads of the 

federal banking regulators, CFPB, and FHFA—as part of their joint 

rulemaking required under the Dodd-Frank Act—consider including 

criteria for the selection of appraisers for appraisal orders, review of 

completed appraisals, and qualifications for appraisal reviewers when 

developing minimum standards for state registration of AMCs.

This 

rulemaking provides a potential avenue for reinforcing existing federal 

requirements for key functions that may impact appraisal quality, such as 

selecting appraisers, reviewing appraisals, and establishing qualifications 

for appraisal reviewers. Such reinforcement could help to provide greater 

assurance to lenders, the enterprises, and federal agencies of the quality 

of the appraisals provided by AMCs.

20 The 

federal banking regulators and FHFA agreed with or indicated that they 

would consider our recommendation but as of June 2012 had not issued 

a rule setting minimum standards for state registration of AMCs.21

ASC has been performing its monitoring role under Title XI, but several 

weaknesses have potentially limited its effectiveness. In particular, ASC 

has not fully developed appropriate policies and procedures for 

monitoring state appraiser regulatory agencies, the federal banking 

regulators, and the Appraisal Foundation. In addition, ASC faces potential 

challenges in implementing some Dodd-Frank Act provisions.

ASC has detailed policies and procedures for monitoring state appraiser 

regulatory programs and has issued 10 policy statements covering 

different aspects of states’ implementation of Title XI requirements. The 

policy statements cover topics including submission of data to the 

 

19Dodd-Frank Act § 1473(f)(2) (codified at 12 U.S.C. § 3353(a)).

20GAO-11-653. 

21CFPB did not receive a draft of our July 2011 report in time to comment on our 

recommendation. 

Several Weaknesses 

Have Potentially 

Limited ASC’s 

Effectiveness in 

Performing Its Title XI 

Functions 

Monitoring States’ 

Compliance with Title XI
 

Page 12 GAO-12-840T 

national registry of appraisers, license reciprocity (which enables an 

appraiser certified or licensed in one state to perform appraisals in other 

states), and programs for enforcing appraiser qualifications and 

standards. ASC primarily uses on-site reviews conducted by ASC staff to 

monitor states’ compliance with the policy statements. ASC’s routine 

compliance reviews examine each state every 2 years or annually if ASC 

determines that a state needs closer monitoring. These reviews are 

designed to encourage adherence to Title XI requirements by identifying 

any instances of noncompliance or “areas of concern” and recommending 

corrective actions.22 ASC conveys its findings and recommendations to 

states through written reports. In 2010, ASC reported 34 findings of 

noncompliance, the majority of which concerned weaknesses in state 

enforcement efforts, such as a lack of timeliness in resolving complaints 

about appraiser misconduct or wrongdoing. At the completion of each 

review, ASC executive staff and board members deliberate on the 

findings and place the state into one of three broad compliance 

categories: “in substantial compliance,” “not in substantial compliance,” 

and “not in compliance.” According to ASC, in substantial compliance 

applies when there are no issues of noncompliance or no violations of 

Title XI; not in substantial compliance applies when there are one or more 

issues of noncompliance or violations of Title XI that do not rise to the 

level of not in compliance; and not in compliance applies when “the 

number, seriousness, and/or repetitiveness of the Title XI violations 

warrant this finding.”23

We found that ASC had been using the three compliance categories in its 

reports to states and annual reports to Congress (which provide 

aggregate statistics on the number of states in each category). However, 

it had not included the definitions of the categories in these reports or in 

its compliance review manual or policy and procedures manual, and its 

definition of “not in compliance” was not clear or specific.24

 

22ASC defines an area of concern as one in which the state is in compliance but could 

improve.

As previously 

23Because a state only has to have one noncompliance finding to be “not in substantial 

compliance,” this category can encompass a fairly wide range of performance. For 

example, in 2009, states in this category had from one to seven findings of 

noncompliance.

24In June 2012, ASC officials told us they had begun incorporating the definitions in ASC 

reports and policies. 
 

Page 13 GAO-12-840T 

noted, the definition states only that the category is to be used “when the 

number, seriousness, and/or repetitiveness of the violations warrant this 

finding” and does not elaborate on how these factors are weighed or 

provide examples of situations that would meet this definition. These 

shortcomings are inconsistent with our internal control standards, which 

state that federal agencies should have appropriate policies and 

procedures for each of their activities.25 Without clear, disclosed 

definitions, ASC limits the transparency of the state compliance review 

process and the usefulness of information Congress receives to assess 

states’ implementation of Title XI. Further, by not incorporating the 

definitions into its compliance review and policy and procedures manuals, 

ASC increases the risk that board members and staff may not interpret 

and apply the compliance categories in a consistent manner. To address 

these shortcomings, we recommended in our January 2012 report that 

ASC clarify the definitions it uses to categorize states’ overall compliance 

with Title XI and include these definitions in ASC’s compliance review and 

policy and procedures manuals, compliance review reports to states, and 

annual reports to Congress.26

In addition to this procedural weakness, ASC has functioned without 

regulations and enforcement tools that could be useful in promoting state 

compliance with Title XI. Prior to the Dodd-Frank Act, Title XI did not give 

ASC rulemaking authority and provided it with only one enforcement 

option—”derecognition” of a state’s appraiser regulatory program. This 

action would prohibit all licensed or certified appraisers from that state 

from performing appraisals in conjunction with federally related 

transactions. ASC has never derecognized a state, and ASC officials told 

us that using this sanction would have a devastating effect on the real 

estate markets and financial institutions within the state. The Dodd-Frank 

Act provides ASC with limited rulemaking authority and authorizes ASC to 

In June 2012, ASC officials told us that they 

had developed a revised system for rating states that included five 

compliance categories (ranging from excellent to poor), each with specific 

criteria. They said that they would soon be publishing the compliance 

categories in the Federal Register to obtain public comments and would 

include the final categories in appropriate manuals and reports.

 

25GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1

(Washington, D.C.: November 1999) and Internal Control Management and Evaluation 

Tool, GAO-01-1008G (Washington, D.C.: August 2001).

26GAO-12-147. 
 

Page 14 GAO-12-840T 

impose (unspecified) interim actions and suspensions against a state 

agency as an alternative to, or in advance of, the derecognition of the 

agency.27 As of June 2012, ASC had not implemented this new 

enforcement authority. ASC officials said that determining the interim 

actions and suspensions they would take against state agencies would be 

done through future rulemaking.

Although Title XI charges ASC with monitoring the appraisal requirements 

of the federal banking regulators, ASC has not developed policies and 

procedures for carrying out this responsibility. While ASC’s policy manual 

provides detailed guidance on monitoring state appraiser regulatory 

programs, it does not mention any activities associated with monitoring 

the appraisal requirements of the federal banking regulators. Further, 

ASC officials acknowledged the absence of a formal monitoring process. 

The absence of policies and procedures specifying monitoring tasks and 

responsibilities limits accountability for this function and is inconsistent 

with federal internal control standards designed to help ensure 

effectiveness and efficiency in agency operations.

According to ASC officials, ASC performs this monitoring function through 

informal means, primarily through its board members who are employed 

by the federal banking regulators. However, minutes from ASC’s monthly 

board meetings and ASC’s annual reports to Congress indicate that the 

monitoring activities of ASC as a whole have been limited. For example, 

our review of board-meeting minutes from 2003 through 2010 found no 

instances of the board discussing the appraisal requirements of the 

federal financial regulators.28

 

27The act also gives ASC the authority to remove a state-licensed or -certified appraiser or 

a registered AMC from the national registry on an interim basis, not to exceed 90 days, 

pending state agency action on licensing, certification, registration, and disciplinary 

proceedings. In June 2012, ASC officials told us that they had developed policies to 

implement this authority and planned to publish the policies in the Federal Register to 

obtain public comment.

Additionally, evidence of this monitoring 

function in ASC’s annual reports is limited to a summary of any new 

appraisal requirements issued by the federal financial regulators and 

HUD during the preceding year.

28The minutes indicated that on at least two occasions, the HUD representative to the 

ASC board provided updates on appraisal policies for mortgages insured by FHA.

Monitoring the Appraisal 

Requirements of the 

Federal Banking 

Regulators 
 

Page 15 GAO-12-840T 

Stakeholder views differ as to how to interpret the Title XI requirement 

that ASC monitor the requirements established by the federal banking 

regulators with respect to appraisal standards.29

In contrast, some appraisal industry stakeholders and observers have 

proposed a larger ASC role in monitoring the appraisal requirements of 

the federal banking regulators. An ASC board member who conducted a 

review of ASC’s operations in 2007 recommended a more structured and 

active monitoring role for ASC. The board member’s report—which the 

board never officially adopted—suggested that ASC staff could be 

assigned to keep abreast of federal financial regulators’ requirements and 

guidelines; the staff could then assess the impact of the requirements on 

ASC’s operations and policies. Under this proposed recommendation, 

which ASC did not implement, ASC staff would annually report the results 

of this work to the ASC board members.

Specifically, some ASC 

board members told us that they understand their monitoring role as 

maintaining an awareness of the federal financial regulators’ appraisal 

requirements. Further, one ASC board member told us that ASC’s 

monitoring of the federal financial regulators was more limited than its 

monitoring of states because (1) board members from the federal 

financial regulatory agencies are knowledgeable of the appraisal 

requirements of their agencies, (2) the federal regulators’ interagency 

process for developing appraisal guidelines (in place since 1994) has 

reduced the need for monitoring the consistency of guidelines across 

agencies, and (3) monitoring the states’ appraiser requirements requires 

in-depth review of state processes for licensing, certification, and 

enforcement.

30

 

2912 U.S.C. § 3332(a)(2).

A former General Counsel of 

ASC told us that ASC’s monitoring role should include critically assessing 

the adequacy of the federal financial regulators’ appraisal requirements 

and evaluating how well the requirements are being implemented. He 

indicated that such assessment might have helped federal financial 

regulators and policymakers address issues such as appraiser 

independence, establishing dollar-based exemptions from appraisal 

requirements, and referral of Title XI violations to state agencies. A 

representative of an appraisal industry group expressed a similar view 

30ASC adopted some of the report’s recommendations, such as creating a Deputy 

Executive Director position and allowing states to respond to preliminary compliance 

review findings prior to the issuance of final reports.
 

Page 16 GAO-12-840T 

and noted that ASC’s annual reports did not provide substantive analysis 

or critique of federal appraisal requirements.

However, appraisal industry stakeholders also noted that implementing a 

more expansive interpretation of ASC’s monitoring role would pose 

challenges. For example, existing ASC staff may not have the capacity to 

take on additional monitoring responsibilities. Even if ASC staff were able 

to independently analyze the federal regulators’ appraisal requirements, 

the analysis would be subject to review by the ASC board, which, 

because of its composition, is not independent from the agencies that 

ASC is charged with monitoring.

To better define the scope of its monitoring role and improve the 

transparency of its activities, we recommended in our January 2012 

report that ASC develop specific policies and procedures for monitoring 

the appraisal requirements of the federal banking regulators.31 In June 

2012, ASC officials told us that they recognized the need for ASC to 

perform this monitoring function, were deliberating on ways to carry it out, 

and expected to have policies and procedures in place later in the year.

As previously noted, the Appraisal Foundation is a private not-for-profit 

corporation that sponsors independent boards that set standards for 

appraisals and minimum qualification criteria for appraisers. ASC 

approves an annual grant proposal and provides monthly grant 

reimbursements to the Appraisal Foundation to support the Title XIrelated activities of the foundation and its Appraisal Standards Board and 

Appraiser Qualifications Board. The reimbursements cover the 

foundation’s incurred costs for activities under the grant. From fiscal years 

2000 through 2010, ASC provided the foundation over $11 million in grant 

reimbursements, or about 40 percent of ASC’s expenditures over that 

period.

Although ASC monitors the foundation in several ways, ASC lacks 

specific policies and procedures for determining whether grant activities 

are related to Title XI. ASC’s policies and procedures manual does not 

address how ASC monitors the Appraisal Foundation. Instead, ASC uses 

monitoring procedures contained in a memorandum prepared by a former 

 

31GAO-12-147. 

Monitoring the Appraisal 

Foundation’s Grant 

Activities
 

Page 17 GAO-12-840T 

Executive Director. The memorandum describes how the Executive 

Director reviewed the foundation’s grant activities but does not provide 

criteria for deciding what is Title XI-related. When we asked current ASC 

officials for the criteria they used, they indicated only that ASC staff 

“review submissions from the Foundation and supporting cost 

spreadsheets to determine that activities proposed in the annual grant 

request or the monthly reimbursement processes meet the requirements 

of Title XI.” They said that once staff determine whether or not a 

submission falls within these parameters, they make a recommendation 

to the ASC board. However, determinations about what activities are Title 

XI-related are not always clear-cut. For example, in 2003, the Executive 

Director at the time recommended that the foundation be reimbursed for 

certain legal expenses in connection with a complaint filed with the 

foundation’s ethics committee. However, the ASC board rejected the 

reimbursement request because the expenses “were not sufficiently Title 

XI-related.” ASC’s records do not indicate what criteria either the 

Executive Director or the ASC board used as a basis for their decisions or 

why they disagreed. Similarly, our review of ASC documents for more 

recent grants found no supporting explanations for decisions about 

whether grant activities were Title XI-related. One ASC board member 

said the board had a common understanding of what activities were 

eligible for grants but acknowledged that the basis for funding decisions 

could be better documented. As previously noted, our internal control 

standards state that federal agencies should have appropriate policies for 

each of their activities. Without policies that contain specific criteria, ASC 

increases the risk that its grant decisions will be inconsistent, limits the 

transparency of its decisions, and lacks assurance that it is complying 

with federal internal control standards. To address this limitation, we 

recommended that ASC develop specific criteria for assessing whether 

the grant activities of the Appraisal Foundation were related to Title XI 

and include these criteria in ASC’s policy and procedures manual.32 In 

June 2012, ASC officials told us that they had been developing these 

criteria and planned to finalize them by August 2012.

The Dodd-Frank Act contains 14 provisions that give ASC a number of 

new responsibilities and authorities. Some of the tasks associated with 

these provisions are complex and challenging, especially for a small 

 

32GAO-12-147. 

Implementing Dodd-Frank 

Act Provisions
 

Page 18 GAO-12-840T 

agency with limited resources. One of the more complex tasks for ASC is 

to establish a national appraisal complaint hotline and refer hotline 

complaints to appropriate governmental bodies for further action.33

Another complex task for ASC is providing grants to state appraiser 

regulatory agencies to support these agencies’ compliance with Title XI. 

Appraisal industry stakeholders cited challenges that ASC could face in 

designing the grant program and the decisions it will need to make. Some 

noted the challenge of designing grant eligibility and award criteria that (1) 

do not reward states that have weak appraiser regulatory programs 

because they use appraisal-related fee revenues (from state appraiser 

licensing and examination fees, for example) for purposes other than 

appraiser oversight and (2) will not create incentives for states to use less 

of their own resources for regulation of appraisers. In addition, ASC 

officials said they were unsure whether a January 2012 increase in the 

national registry fee—from $25 to $40 per appraiser credential—would be 

adequate to fund the grants and oversee them, especially in light of 

recent declines in the number of appraisers.

Appraisal industry stakeholders we spoke with noted that creating and 

maintaining a hotline could be costly because it will likely require 

investments in staff and information technology to fully ensure that calls 

are properly received, screened, tracked, and referred. Stakeholders 

indicated that screening calls would be a critical and challenging job 

because frivolous complaints could overwhelm the system and identifying 

valid complaints would require knowledge of USPAP.

34

As of June 2012, ASC had not implemented either the national hotline or 

the state grant program but had completed some initial steps. For 

example, ASC officials told us that they had developed initial protocols for 

handling hotline complaints and had begun work on a complaint form, 

website, and call center. In addition, ASC is in the process of hiring a 

grants manager.

 

33The Dodd-Frank Act first required ASC to determine whether a national hotline existed 

that received complaints of noncompliance with appraisal independence standards and 

USPAP. ASC completed this task in January 2011, within the statutory deadline, and 

reported that no such hotline existed. The Dodd-Frank Act requires ASC to establish and 

operate such a hotline upon making that determination.

34Although the Dodd-Frank Act also authorizes ASC to collect registry fees from AMCs, 

revenues from this source may not be available for several years because regulations for 

AMC registration must be developed and implemented first.
 

Page 19 GAO-12-840T 

Chairman Biggert, Ranking Member Gutierrez, and Members of the 

Subcommittee, this concludes my prepared statement. I am happy to 

respond to any questions you may have at this time.

For further information on this testimony, please contact me at (202) 512-

8678 or shearw@gao.gov. Contact points for our Offices of 

Congressional Relations and Public Affairs may be found on the last page 

of this statement. Key contributors to this testimony include Steve 

Westley (Assistant Director), Don Brown, Marquita Campbell, Emily 

Chalmers, Anar Ladhani, Yola Lewis, Alexandra Martin-Arseneau, John 

McGrail, Erika Navarro, Carl Ramirez, Kelly Rubin, Jerry Sandau, 

Jennifer Schwartz, Andrew Stavisky, and Jocelyn Yin.

Contacts and Staff 

Acknowledgments 

(250679)
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