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APPRAISAL OVERSIGHT: THE REGULATORY 

IMPACT ON CONSUMERS AND BUSINESSES 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

INSURANCE, HOUSING AND 

COMMUNITY OPPORTUNITY 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

JUNE 28, 2012 

Printed for the use of the Committee on Financial Services 

Serial No. 112–140 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

BARNEY FRANK, Massachusetts, Ranking 

Member 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

JAMES H. CLINGER, Staff Director and Chief Counsel 

(III) 

SUBCOMMITTEE ON INSURANCE, HOUSING AND COMMUNITY OPPORTUNITY

JUDY BIGGERT, Illinois, Chairman 

ROBERT HURT, Virginia, Vice Chairman 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

PATRICK T. MCHENRY, North Carolina 

LYNN A. WESTMORELAND, Georgia 

SEAN P. DUFFY, Wisconsin 

ROBERT J. DOLD, Illinois 

STEVE STIVERS, Ohio 

LUIS V. GUTIERREZ, Illinois, Ranking 

Member 

MAXINE WATERS, California 

NYDIA M. VELA ́ ZQUEZ, New York 

EMANUEL CLEAVER, Missouri 

WM. LACY CLAY, Missouri 

MELVIN L. WATT, North Carolina 

BRAD SHERMAN, California 

MICHAEL E. CAPUANO, Massachusetts 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

June 28, 2012 .................................................................................................... 1 

Appendix: 

June 28, 2012 .................................................................................................... 41 

WITNESSES 

THURSDAY, JUNE 28, 2012 

Berenbaum, David, Chief Program Officer, National Community Reinvestment Coalition (NCRC) ........................................................................................ 16 

Bunton, David S., President, The Appraisal Foundation ..................................... 18 

Gregoire, Francois K., President, Gregoire & Gregoire, Inc., on behalf of 

the National Association of REALTORS® (NAR) ............................................. 20 

Kelly, Donald E., Executive Director, Real Estate Valuation Advocacy Association (REVAA) on behalf of REVAA and the Coalition to Facilitate Appraisal 

Integrity Reform (FAIR) ...................................................................................... 21 

Mann, Karen, President, Mann & Associates, on behalf of the American 

Society of Appraisers (ASA) and the National Association of Independent 

Fee Appraisers (NAIFA) ...................................................................................... 23 

Park, James R., Executive Director, Appraisal Subcommittee (ASC), Federal 

Financial Institutions Examination Council (FFIEC) ....................................... 8 

Rodgers, Donald T., President, Association of Appraiser Regulatory Officials 

(AARO) .................................................................................................................. 6 

Shear, William B., Director, Financial Markets and Community Investment, 

U.S. Government Accountability Office (GAO) .................................................. 5 

Stephens, Sara W., President, the Appraisal Institute ........................................ 26 

APPENDIX 

Prepared statements: 

Berenbaum, David ............................................................................................ 42 

Bunton, David S. .............................................................................................. 71 

Gregoire, Francois K. ....................................................................................... 85 

Kelly, Donald E. ................................................................................................ 103 

Mann, Karen ..................................................................................................... 118 

Park, James R. .................................................................................................. 131 

Rodgers, Donald T. ........................................................................................... 149 

Shear, William B. ............................................................................................. 157 

Stephens, Sara W. ............................................................................................ 180 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Biggert, Hon. Judy: 

Written statement of Edward J. Pinto, Resident Fellow, the American 

Enterprise Institute ...................................................................................... 199 

Letter to Federal Reserve Chairman Ben Bernanke and Consumer Financial Protection Bureau Director Richard Cordray from the American 

Guild of Appraisers, dated February 21, 2012 ........................................... 248 

Written statement of the Dallas/Ft. Worth Association of Mortgage Brokers (DFWAMB) ............................................................................................ 269 

Biggert, Hon. Judy, and Miller, Hon. Gary: 

Letter from Leading Builders of America, dated June 27, 2012 .................. 270 

Biggert, Hon. Judy: 

Written statement of the Mortgage Bankers Association ............................. 274 

Page

VI 

Biggert, Hon. Judy, and Miller, Hon. Gary: 

Written statement of the National Association of Home Builders ............... 279 

Green, Hon. Al: 

Letter from the Houston Association of REALTORS®, dated June 28, 

2012 ................................................................................................................ 284 

Miller, Hon. Gary: 

Written statement of the IMPACT Mortgage Management Advocacy and 

Advisory Group (IMMAAG) .......................................................................... 285 

(1) 

APPRAISAL OVERSIGHT: THE REGULATORY 

IMPACT ON CONSUMERS AND BUSINESSES 

Thursday, June 28, 2012 

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON INSURANCE, HOUSING

AND COMMUNITY OPPORTUNITY, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:02 a.m., in room 

2128, Rayburn House Office Building, Hon. Judy Biggert [chairwoman of the subcommittee] presiding. 

Members present: Representatives Biggert, Miller of California, 

Capito; Gutierrez, and Sherman. 

Chairwoman BIGGERT. This hearing of the Subcommittee on Insurance, Housing and Community Opportunity will come to order. 

Without objection, all Members’ opening statements will be made 

a part of the record. And I will yield myself as much time as I may 

consume for an opening statement. 

Good morning. I want to welcome our witnesses. Today’s hearing 

is entitled, ‘‘Appraisal Oversight: The Regulatory Impact on Consumers and Businesses.’’ 

I would just say that timing is everything, and I think that hopefully some of our Members will be here shortly after they find out 

what is going on in other places. 

We are examining how appraisal-related provisions in the DoddFrank Act and other regulatory initiatives have affected consumers 

and the real estate industry. This hearing is a continuation of the 

subcommittee’s oversight work related to the mortgage origination 

process. 

A key element of a vibrant and sound housing market is effective 

appraisal regulation. Regulation should facilitate robust competition among industry participants; it should ensure transparency 

and integrity throughout the mortgage origination process, while 

giving law enforcement officials the necessary tools to weed out bad 

actors; it should avoid placing unnecessary burdens on businesses; 

and most importantly, it should benefit consumers. 

During today’s hearing, we will examine the Federal and State 

roles in appraisal regulation. We will also explore suggestions to 

improve the appraisal regulation structure and regulations. For example, can we make more efficient, consistent, and effective appraisal oversight by streamlining regulations and redundant efforts 

to monitor the appraisal industry? 

Finally, some mortgage industry participants have raised concerns about concentration in the appraisal industry as well as the 

2 

quality and accuracy of appraisals. How could regulations enhance 

integrity among appraisers and ensure accuracy in appraisal evaluations? 

Given the broad interest in the issue of appraisal regulations, I 

would like to hold at least a second hearing during the 112th Congress on this subject to hear from other stakeholders. 

So with that, I look forward to hearing from today’s witnesses. 

I hope that today’s hearing will provide members of the subcommittee with a variety of ideas as to how appraisal regulation 

can be improved for both consumers and businesses. 

I would like to recognize our ranking member, the gentleman 

from Illinois, Mr. Gutierrez, for his opening statement. 

Mr. GUTIERREZ. Thank you very much for yielding, Madam 

Chairwoman, and thank you for holding this hearing. 

As we proceed with profound systemic and comprehensive financial system and housing finance reform, it is becoming increasingly 

clear that we will benefit greatly from a clearly defined, fair, sound, 

and well-regulated system of property appraisal. In other words, all 

of the industries involved in the real estate market, from builders 

to consumers, will benefit from a clear and level playing field in the 

appraisal system. 

I look forward to hearing about the GAO—what the GAO found 

in its two studies on this issue, specifically the several weaknesses 

that it identified that have limited the Appraisal Subcommittee’s 

effectiveness in discharging its duties, specifically weak enforcement tools and reporting procedures, and in addition, whether the 

ASC is fully addressing the requirement to create and operate a 

national hotline to receive complaints of noncompliance with appraisal independent standards and uniform standards of professional appraisal practices. 

I look forward to learning more about the concerns of appraisers 

and the representative organizations on the impact appraisal management companies are having not only on the ability of experienced appraisers to make a living but on the quality of the appraisals as they impact the housing and financial, specifically consumers. 

Madam Chairwoman, it is important to understand the concerns 

of other stakeholders, such as REALTORS® and mortgagers regarding this and other aspects of appraisal issues. But most important to me and I think to many of our colleagues on this side of 

the aisle, I want to learn how these appraisal issues are affecting 

consumers, including whether or not consumers are receiving their 

money’s worth in terms of quality of appraisal they pay for. Are 

they being fully informed of what they are paying for and are they 

protected from fraud, and do they have the proper means to address their grievances? 

I understand there is much to cover in this hearing and this is 

only another step in the examination of this critical issue. Therefore, I thank you, and I yield back the balance of my time. 

Chairwoman BIGGERT. Thank you, Mr. Gutierrez. 

The gentlelady from West Virginia is recognized for 2 minutes. 

Mrs. CAPITO. Thank you. Thank you, Madam Chairwoman, and 

Ranking Member Gutierrez. 

3 

I thank everybody for being here today. There is just nothing 

going on in Congress today, so I am glad we are here to talk about 

appraisals. 

I would like to thank the chairwoman for looking into this. It is 

important. 

And I am going to keep this brief. I wanted to take a few moments to address an issue that I have heard many complaints 

about in my State of West Virginia. 

I believe that the appraisal process is absolutely essential and so 

important to the mortgage process because, as we know, a sound 

regulatory structure in which the industry can operate and serve 

the consumer is of prime importance. I hope to get a better clarification today as to whether the Appraisal Subcommittee can handle this role or whether it would be better left to the States to act 

as the primary regulator. 

My main focus, though, has been to have a marketplace for the 

consumer that the consumer can access. I represent a State where 

home values are relatively low. We don’t have a lot of foreclosures; 

we didn’t get out over our skis, like a lot of other places. 

And so, purchasing a home may appear to be very affordable. It 

still strains a lot of the home budgets, and I am concerned because 

I hear of folks who—of rising costs of appraisals and that appraisers in some cases are unfamiliar with the area in which they are 

making the appraisals—local markets. Even in a small State like 

West Virginia, it might not sound like much, but if you are coming 

from Elkins to appraise a home in Charleston, it is a totally different market. It is also 130 miles away. 

And so, if this is the case, I know that the AMCs have had an 

increased market share since 2008 and I am curious to know if this 

has contributed by putting another layer, a middle layer or a more 

increased middle layer, has that increased the cost of the appraisal 

to the consumer? I am really concerned about the cost of the appraisal to the consumer and the accuracy of the appraisal. It is essential. 

And so, I am interested to know if Dodd-Frank provisions have 

absolutely created a more consumer-friendly process or not. 

So I appreciate the chairwoman for holding this hearing, and I 

welcome our panelists to the committee room. Thank you. 

Chairwoman BIGGERT. The gentleman from California, Mr. Miller, is recognized for 2 minutes for an opening statement. 

Mr. MILLER OF CALIFORNIA. Thank you, Chairwoman Biggert. I 

want to thank you for having this hearing today. It is extremely 

important. 

The appraisal process was broken, and to some degree, it is still 

broken. After HVCC passed the Dodd-Frank Act, I remember arguing vehemently about the process and the direction that we are 

heading, and it proved to be right; it was a disaster and we repealed most of that. 

But there is a lot lingering after that process that we are still 

having to deal with. Out-of-area appraisals are a significant problem we are dealing with. Using distress sales as comparables—it 

oftentimes creates more problems than it does benefit because an 

appraiser who is not a local appraiser doesn’t understand the difference between the distressed property and the rehab that is necVerDate Nov 24 2008 18:39 Nov 29, 2012 Jkt 076111 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 K:\DOCS\76111.TXT TERRI
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essary to take place to make that a comparable property and a 

property that is not a rehab, what they are dealing with in those 

areas. 

So there is a lot of confusion and ambiguity and the process, I 

think, has to be dealt with. New home construction is another good 

example. You are trying to compare a new home to a piece of property that sold for less than sticks and bricks. They are not comparable; they don’t meet the new standards, new compliances required by local agencies and States that pass these mandates on 

energy efficiency. 

Green Home in California is another one that is having to deal 

with it. Builders are putting costs into homes. Many areas are 

mandated to do that and they can’t even use the cost of those improvements as part of the appraisal. 

I would like to enter into the record a letter from the National 

Association of Home Builders, and a second letter from Leading 

Builders of America. 

Chairwoman BIGGERT. Without objection, it is so ordered. 

Mr. MILLER OF CALIFORNIA. Thank you. But when you talk to 

different groups and individuals, you don’t hire an electrical contractor to bid concrete work, and you don’t hire an out-of-town appraiser to do local appraisals. You are getting them in areas sometimes where they don’t have any expertise and you can’t just necessarily, not knowing an area, go to a computer and pull up an 

equivalent square footage home and say, ‘‘It equates to what we 

are trying to sell here.’’ It doesn’t. 

We found out the situation with HVCC when they first passed, 

and Congressman Kanjorski proposed that, my argument was that 

perhaps New York is the most problematic State in the Nation, but 

49 other States don’t have those problems, and we need to allow 

more local control. Being able to take an appraisal and use it, 

again, is not available during the old process we had where you required a lender to basically do the appraisal. That appraisal could 

not be taken to another lender to do the work. 

So there are areas that we need to deal with that I don’t think 

we have. We are in a recovering market and we need to do what 

we can to make sure that the market has an opportunity to recover. And I think until we fix the appraisal process, that is not 

going to happen. We are not doing a service to people who sell their 

home nor are we doing a service to people who buy the home, and 

we are doing a complete disservice to the people who are trying to 

finance homes and sell homes. 

So I thank you for your generous time, and I am looking forward 

to the testimony. 

Chairwoman BIGGERT. Thank you. 

The gentleman from Texas, Mr. Green, is recognized for 1 

minute. 

Mr. GREEN. Thank you, Madam Chairwoman. And I sincerely 

thank you, Madam Chairwoman, for hosting this hearing. 

This is an important hearing and I would like to associate myself, if I may say so, with Mr. Miller’s comments. I did not hear 

them in their entirety, so I won’t associate myself with all of them, 

but what I did hear, I associate myself with. 

5 

I would also like to enter into the record a letter from the Houston Association of REALTORS®. This letter is signed by Mr. Shad 

Bogany, who is the Federal coordinator and also the State chairelect, as well as Mr. Wayne Stroman, who is the chair of the board 

for 2012. 

Chairwoman BIGGERT. Without objection, it is so ordered. 

Mr. GREEN. Thank you. 

Madam Chairwoman, I think that Mr. Miller has made some salient points. We find ourselves with people making decisions that 

are not entirely familiar with the empirical evidence. I do believe 

that we have to revisit some of these issues so as to tweak the system that we have in place. 

My belief is that this is something that is salvageable, and is 

something that is doable. I think that we just have to find a way 

to work on this project and focus on the question before us. 

I have had an opportunity to talk to REALTORS® so I have 

some first-hand information about what is going on in my city— 

first-hand information. I have talked to many REALTORS® about 

this concern. I have even gone so far as to talk to people who do 

the actual appraisals, and they too have some concerns. 

So I thank you for hosting this hearing. I am looking forward to 

hearing much of the evidence—and I have to say much of it because, as you know, there are many things happening today, without getting into all of what is going on, and I am being pulled in 

many different directions. But I have to be here for this because 

of the importance associated with it. 

Thank you again, and I yield back the balance of my 3 seconds. 

Chairwoman BIGGERT. Thank you, Mr. Green. 

We are delighted to have our panelists here today. We are going 

to have two panels, and so we will start with panel number one. 

We have: Mr. William B. Shear, Director of Financial Markets 

and Community Investment for the U.S. Government Accountability Office; Mr. Don Rodgers, President, Association of Appraiser 

Regulatory Officials; and Mr. James R. Park, Executive Director, 

Appraisal Subcommittee, Federal Financial Institution’s Examination Council. 

Thank you all so much for being here. And without objection, 

your written statements will be made a part of the record. You 

each will be recognized for a 5-minute summary of your testimony. 

We will begin with Mr. Shear. 

STATEMENT OF WILLIAM B. SHEAR, DIRECTOR, FINANCIAL 

MARKETS AND COMMUNITY INVESTMENT, U.S. GOVERNMENT ACCOUNTABILITY OFFICE (GAO) 

Mr. SHEAR. Thank you. 

Chairwoman Biggert, Ranking Member Gutierrez, and members 

of the subcommittee, I am pleased to be here today to discuss our 

work on real estate appraisal issues. My statement today is based 

on information from two reports we issued in response to mandates 

in the Dodd-Frank Act. 

The first, which we issued in July 2011, included an examination 

of real estate valuation methods, including appraisals, as well as 

conflict of interest in appraiser selection policies. The second, which 

we issued in January 2012, included an assessment of the ApVerDate Nov 24 2008 18:39 Nov 29, 2012 Jkt 076111 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 K:\DOCS\76111.TXT TERRI
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praisal Subcommittee’s monitoring functions and certain challenges 

faced by ASC. 

In summary, we found that, first, 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. While data on different approaches for conducting appraisals 

are limited, we found that the sales comparison approach is required by Fannie Mae, Freddie Mac, and FHA, and is reportedly 

used in nearly all appraisals. We also found that the cost approach, 

in which an estimate of value uses data on land value and what 

it would cost to replace or reproduce a residence, is often used in 

conjunction with a sales comparison approach. 

Second, conflict of interest policies have changed appraisal selection processes and the appraisal industry more broadly. Specifically, the policies have led to increased use of appraisal management companies. 

In our July 2011 report, we concluded that setting minimum 

standards that address key functions AMCs perform on behalf of 

lenders would enhance oversight of appraisal services and provide 

greater assurance of the credibility and quality of the appraisals 

provided by the AMCs. Therefore, we recommended that these regulators consider addressing several key areas, including criteria for 

selecting appraisers, as part of their joint rulemaking under the 

Dodd-Frank Act to set minimum standards for States to apply in 

registering AMCs. 

Now, I will briefly discuss our evaluation of the Appraisal Subcommittee. It has been performing its monitoring role under Title 

XI authority, FIRREA. We found that several weaknesses, which 

are generally associated with the lack of established policies and 

procedures and clear definitions, have potentially limited ASC’s effectiveness. 

We 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. 

Chairwoman Biggert and Ranking Member Gutierrez, this concludes my prepared statement. I would be happy to answer any 

questions. 

[The prepared statement of Mr. Shear can be found on page 157 

of the appendix.] 

Chairwoman BIGGERT. Thank you so much. 

Mr. Rodgers, you are recognized for 5 minutes. 

STATEMENT OF DONALD T. RODGERS, PRESIDENT, 

ASSOCIATION OF APPRAISER REGULATORY OFFICIALS (AARO) 

Mr. RODGERS. Chairwoman Biggert, Ranking Member Gutierrez, 

and members of the subcommittee, thank you for the opportunity 

to testify today. I am the executive director of the North Carolina 

Appraisal Board and I am currently the president of the Association of Appraiser Regulatory Officials, which is comprised of the 

real estate appraiser licensing agencies. 

My testimony today will focus on issues that are particularly relevant to State regulators. 

7 

First, lack of resources: State appraiser licensing programs were 

established as a result of FIRREA to issue appraiser credentials 

and oversee compliance by appraisers with standards and State 

laws. Some programs are part of an umbrella agency that handles 

all occupational licensing of the State. They often use a pool of investigators and assign legal counsel on a per-case basis. 

Others are stand-alone agencies that handle appraising and/or 

real estate. They may have contract or staff investigators and fullor part-time legal assistants. 

Finally, there are States such as North Carolina that have an 

autonomous board set up by State statute. These boards do not receive State funding and typically hire their own staff. 

Programs that share staff may lack sufficient resources and may 

not be able to comply with Federal requirements. State officials do 

not understand why this program must be given priority when the 

backlog for other agencies is just as great. 

Second, appraisal fraud: An appraisal is an opinion of value, 

which makes it difficult to show that the appraiser intended to deceive someone. For this reason, law enforcement officials often shy 

away from bringing fraud charges against appraisers. Although 

State and Federal law enforcement have joined task forces with 

State regulators, they are often not able to share information due 

to concerns that their investigations could be compromised. 

Appraisers are not usually the originator of fraud schemes but 

are brought into it with the promise of future assignments instead 

of large payments, which would provide the smoking gun tying 

them to the fraud. 

Third, appraisal management companies: AMCs have existed for 

many years. As a result of the Home Valuation Code of Conduct 

many more AMCs were established. There were, however, no regulations in place defining AMCs or controlling who could own or operate an AMC. 

Often appraisers are prohibited from speaking with brokers, 

builders, or borrowers. This creates consumer frustration directed 

toward appraisers as consumers are not aware of the role of the 

AMC in the appraisal process. 

Appraisers have their own issues with AMCs, including numerous assignment conditions, requests to go outside of their market, 

and delays in receiving payment. A frequent problem for regulators 

is that they must license two entities whose interests are often at 

odds. 

Each group may attempt to change laws and rules that impact 

the other’s ability to function. As complaints increase against 

AMCs, States may lack the resources to investigate out-of-State 

companies who have substantial legal resources. 

Fourth, alternate valuation services: Broker price opinions and 

other evaluation products are generally not regulated by appraiser 

licensing boards. Consumers do not realize the difference and may 

think they are receiving an appraisal when an appraiser was not 

involved in the process. There is limited authority to discipline brokers for errors in the development of these valuations and they are 

not sufficiently regulated. 

Fifth, evaluation of the appraisal regulatory system: Some of the 

cooperative efforts between State boards, the ASC, and the ApVerDate Nov 24 2008 18:39 Nov 29, 2012 Jkt 076111 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K:\DOCS\76111.TXT TERRI
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praisal Foundation are an investigator training program provided 

at no cost to the States’ task forces on trainee supervision and consistent enforcement. The Foundation issues exposure drafts and requests comments when there are proposed changes to USPAP or 

the appraisal qualification criteria and schedules meetings to coincide with AARO conferences. The ASC staff attends AARO and 

Foundation meetings and assists the States in drafting rules and 

legislation. 

There continue, however, to be areas that show the need for improvement. State regulators should be represented on the Appraisal Subcommittee as well as on the Foundation’s boards. There 

should be a national repository for appraiser and AMC records, either through expansion of the national registry or a system similar 

to the National Mortgage Licensing System. 

Current ASC meeting procedures discourage the public from attending. Universal application and complaint forms have been discussed but are difficult to achieve absent a Federal requirement. 

The ASC has been in the process of changing its policy statements for several months, but States have not had the opportunity 

to see a draft or to comment. 

The lack of enforcement sanctions was a serious omission from 

FIRREA and created a situation where derecognition was the only 

penalty available to the ASC for violations. The Dodd-Frank Act 

has given the ASC broader enforcement options, the ability to 

make grants to the States, and oversight of the AMC registration 

process. It remains to be seen what effects these new tools will 

have on the oversight of the State appraiser programs. 

Thank you for the opportunity to testify before you today. I will 

be glad to answer any questions. 

[The prepared statement of Mr. Rodgers can be found on page 

149 of the appendix.] 

Chairwoman BIGGERT. Thank you. 

Mr. Park, you are recognized for 5 minutes. 

STATEMENT OF JAMES R. PARK, EXECUTIVE DIRECTOR, APPRAISAL SUBCOMMITTEE (ASC), FEDERAL FINANCIAL INSTITUTIONS EXAMINATION COUNCIL (FFIEC) 

Mr. PARK. Good morning, Chairwoman Biggert, Ranking Member 

Gutierrez, and members of the subcommittee. Thank you for the 

opportunity to update you on the work of the Appraisal Subcommittee, also known as the ASC. 

Title XI of FIRREA created the ASC as an independent agency 

within the Federal Financial Institution’s Examination Council 

(FFIEC). Title XI was passed following the savings and loan crisis 

of the 1980s to address weaknesses regarding real property appraisals used in connection with federally-related transactions. 

Title XI called for the establishment of State programs to credential and supervise appraisers and created a unique regulatory 

framework that involves Federal, State, and private entities. At the 

Federal level, we have the ASC; at the State level, the State appraiser regulatory agencies; and on the private side, the Appraisal 

Foundation. 

The ASC is made up of seven members designated by the heads 

of the Federal Financial Institution’s regulatory agencies as well as 

9 

HUD, FHFA, and the CFPB. This past January, the CFPB appointed its first representative to the ASC. Effective April 1st, the 

FFIEC appointed the HUD representative as the new chairman, 

who is also a certified appraiser and the first appraiser to chair the 

ASC. 

The member agencies remain committed to fulfilling the ASC’s 

statutory responsibilities. As part of its core responsibilities, the 

ASC monitors the State appraiser regulatory programs for compliance with Title XI. The ASC completed 27 reviews in 2011 and 31 

are planned for 2012. 

The ASC also maintains the National Registry, comprised of appraisers eligible to perform appraisals for federally-related transactions. The registry contains just fewer than 105,000 credentials, 

down almost 14 percent from its peak in 2007. With the registry 

fee being the ASC’s sole source of revenue, the reduction in the 

number of credentials comes at a particularly challenging time as 

the scope of responsibility is increasing due to the Dodd-Frank Act. 

In monitoring the Foundation, ASC staff attends all public and 

private meetings of the Foundation boards. For Fiscal Year 2012, 

the ASC approved a grant of approximately $900,000 to the Foundation. The grant includes funds for the State investigator training 

program, which has been beneficial to the States. 

Through our monitoring, the ASC is aware that the Foundation 

is currently working on a new strategic plan. The ASC played no 

role in the development of the strategic plan. However, when made 

public, the ASC will review and possibly comment on matters related to ASC responsibilities. 

The ASC continues to make progress in addressing the DoddFrank Act requirements. Last fall, the ASC approved a plan to establish the Appraisal Complaint National Hotline and a great deal 

of work has been completed towards its implementation. 

ASC member agencies are currently working to finalize the details for internal complaint intake and disposition. Launch of the 

hotline is anticipated before the end of 2012. 

The Dodd-Frank Act also required the GAO to conduct a study 

of the ASC. In its report issued last January, the GAO made three 

recommendations. 

First, GAO recommended that the ASC clarify definitions used to 

categorize States’ compliance with Title XI. In response, the ASC 

has clarified the definitions, which are now incorporated into all 

appropriate documents. 

The ASC also drafted revised policy statements that have been 

approved for publication in the Federal Register to solicit public 

comment. The revisions included new findings and definitions to 

further address this GAO recommendation. 

Second, GAO recommended that the ASC develop specific policies 

for monitoring appraisal requirements developed by the Federal Financial Institution’s regulators. Finally, GAO recommended that 

the ASC develop specific policies for determining whether the 

Foundation’s grant activities are related to Title XI. Staff is drafting policies for ASC approval to address these last two recommendations. 

Other ASC priorities include fulfilling the authority and responsibilities conferred by the Dodd-Frank Act in such areas as State 

10 

grants and rulemaking. Regarding State grants, many State appraisal programs do not control their funds. Therefore, the ASC 

will focus on ensuring grant funds are used to support the program. 

While the ASC has not yet formally addressed rulemaking, the 

proposed policy statements would implement the interim sanctioning authority given to the ASC by the Dodd-Frank Act to remove appraisers from the National Registry for up to 90 days. Use 

of any additional interim sanctioning authority would require rulemaking. 

In conclusion, I again appreciate the opportunity to appear before 

the subcommittee, and I look forward to addressing your questions. 

Thank you. 

[The prepared statement of Mr. Park can be found on page 131 

of the appendix.] 

Chairwoman BIGGERT. Thank you, Mr. Park. 

This is a time when the members of the committee will ask questions. I will start, and yield myself 5 minutes. 

Mr. Shear, do you think that the ASC has made efforts to reform 

its policies and procedures for determining whether the activities 

of the Appraisal Foundation are Title XI-related? 

Mr. SHEAR. As Mr. Park said, we followed up and we are—we 

know that they have made progress in this area as far as coming 

up with a definition—that would be, how do you define Title XI activities? So we know they are making progress in this area. 

Chairwoman BIGGERT. So you think that they are moving ahead 

enough for— 

Mr. SHEAR. Yes. We are very glad that they agreed with our recommendation and that they are putting things down in a formal 

way to address these issues. 

Chairwoman BIGGERT. Okay. According to your testimony, and 

based on your July 2012 report, the Appraisal Subcommittee has 

not clearly defined the criteria it uses to assess a State’s overall 

compliance with Title XI. Could you expand on this assertion? 

Mr. SHEAR. I would be glad to. One thing that we have observed 

over the years is that the oversight of State compliance with requirements has been enhanced over the years, so we see that and 

we see the establishment of many policies and procedures that are 

clearly stated. 

But from an internal controls standpoint, we just dealt with a— 

three different categories that it would bring great clarity and it 

would provide for more kind of robust oversight if these three categories—or whatever categories they had—were more clearly stated 

and defined, and we understand that they are making progress in 

this area. 

Chairwoman BIGGERT. Okay. Thank you. 

And, Mr. Rodgers, you provide some suggestions on how the appraisal regulatory structure can be improved at the State and national level. Can you describe and explain some of those suggestions for this committee in a little more depth? 

Mr. RODGERS. Yes, ma’am. I would be glad to. 

In looking at the areas of improvement, as Mr. Park said in his 

testimony, the policy statements—which are given to the States to 

follow to show compliance with Title XI—are in the process of 

11 

being revised. We have not at this point—understand that process 

has been going on for several months—had any exposure to the 

States nor do we have the States’ comments. 

When the Appraisal Foundation makes changes to their—the 

standards or either the criteria there is a very robust exposure and 

vetting process and it allows a lot of unintended consequences to 

get out there. So I would encourage the subcommittee to get those 

to the States for comment as soon as possible. 

Also, we believe that the States should have representation both 

on the subcommittee as either a member or through some sort of 

liaison, and they also should have the same representation on the 

standards and qualifications boards. These boards directly affect 

policies, rules for each of the States, and for them to understand 

what impact or what unintended consequences might come by the 

result of changes to rules or regulations is essential, so we think 

that is a very essential point. 

With regards to the public meetings of the Appraisal Subcommittee, the process is very rigorous to try to attend. You have 

to register in advance, and have a photo ID. You go through a security process that is more extensive than getting in this building, 

and you have to be escorted to and from the meeting site. 

This is largely because they are held in the offices of the Federal 

financial institutions, so it is understandable the level of security 

needed in those buildings. We would suggest that they should be 

held somewhere the public could come without preregistration or 

identification. In our State, you come to a public meeting and you 

can walk right in. And so, we would suggest that, as well. Those 

are just some of my suggestions. 

Chairwoman BIGGERT. Thank you. 

I yield myself such time as I may consume for additional questions. 

Mr. Rodgers, there seem to be a great number of the appraisal 

industry participants who claim that real estate appraisal fraud is 

significantly increasing. As a State regulator, does your appraisal 

fraud data reflect or dispute this claim? 

Mr. RODGERS. Just speaking for my individual State, we have 

not seen a large increase in appraisal fraud. I think a lot of the 

flipping schemes that were taking place in the early part of this 

last decade—they are just difficult to perpetrate given the financial 

climate we are in now. The rapidly inflated markets made it easier 

to perpetrate, where now that certainly doesn’t take place. 

We have heard of issues of what is now called flopping schemes, 

where it is misrepresented to the lending institution what the property is worth. They short-sell for a low amount and then some of 

the real estate professionals, in turn, sell the property at a large 

profit, so kind of a reverse of the flipping scheme. 

We have seen some cases in our State which were right in the 

middle of the transition to the economy falling where there were 

subdivisions where a lot of promises were made, no money down 

type investments. A lot of people bought lots for investment type 

properties and then the market crashed in the middle of it. So 

some of these were fraud in the fact that they were trying to entice 

people into making poor investment choices, but the actual market 

fell out from under them, which was not part of a fraud scheme. 

12 

Chairwoman BIGGERT. Thank you. 

Then, Mr. Park, it is my understanding that the Appraisal Subcommittee was created in response to the savings and loan crisis 

in the late 1980s and early 1990s. In light of significant changes 

over the past 20 years, what is the relevance of the ASC in today’s 

market? 

Mr. PARK. The relevance of the ASC is the Federal oversight that 

we provide for the States as well as the monitoring of the Appraisal 

Foundation and the grants that are provided to the Appraisal 

Foundation for the work of the Appraisal Standards Board and the 

Appraiser Qualifications Board. The original— 

Chairwoman BIGGERT. The question is, is the model outdated or 

do you think you are in the 21st Century, as far as the Federal 

oversight? 

Mr. PARK. Title XI, as originally enacted, had some flaws in it. 

The Dodd-Frank Act attempted to correct some of those flaws, providing more authority and responsibility to the Appraisal Subcommittee, and while many of those provisions of the Dodd-Frank 

Act are still being put into place, they should assist the subcommittee in providing greater regulatory oversight for the appraisal regulatory system. 

Chairwoman BIGGERT. Mr. Shear, do you think that there should 

be a complete overhaul of that to make sure that it is in the 21st 

Century? 

Mr. SHEAR. We didn’t look at various options for restructuring, 

so I can’t answer your question directly, but we did look at how 

Dodd-Frank changes the role of the Appraisal Subcommittee and 

the new authorities and responsibilities, and we think the Appraisal Subcommittee has some huge challenges ahead. As they 

move forward in implementing our recommendations and taking 

other actions, I would expect that this committee and others will 

be taking a very close look to see whether the Appraisal Subcommittee has the resources and the right type of structure to 

carry out these additional responsibilities, especially pertaining to 

monitoring the Federal financial regulators. 

Chairwoman BIGGERT. Okay. 

Mr. Park, obviously the ASC failed to detect a significant amount 

of appraisal fraud during the financial crisis. A lot of other people 

made a lot of mistakes too, but do you think because of that, the 

States could assume some of the role of the ASC? 

Mr. PARK. The role of the ASC is not to detect appraisal fraud; 

that is really the realm of the States. They are the enforcement 

mechanism of the system. 

The ASC’s role is to create an environment where fraud can be 

easily detected and then the States have the ability to enforce disciplinary actions for fraud or lesser offenses—misleading appraisals, incompetent appraisals, and so forth. 

Chairwoman BIGGERT. Was there a problem with the environment then, that the ASC created at the time of the financial crisis? 

Mr. PARK. The ASC has to work within the confines of Title XI, 

within the authority that is given. One of the inherent problems 

with Title XI that Dodd-Frank tried to correct is the fact that the 

only disciplinary authority that the Appraisal Subcommittee had to 

use against States that were out of compliance was non-recognition 

13 

of the State program. Non-recognition of the State appraisal program would, in effect, shut down mortgage lending in the State. 

So while it has been addressed with several States, and States 

know that is a potential outcome of compliance reviews, they also 

know that it is a very draconian measure. 

Chairwoman BIGGERT. The ASC oversees the States, and you 

said that you don’t detect the fraud, but has the ASC put out any 

information about fraud trends and worked with the States to better address fraud? 

Mr. PARK. During the compliance review process, our policy managers who actually conduct the compliance review talk to the 

States, gather information about what they are doing related to 

fraud. More and more States, we have found, are getting involved 

in various mortgage fraud committees and working with the FBI, 

and Federal and State Government officials to address the problem 

of mortgage fraud and appraisal fraud. 

Chairwoman BIGGERT. Okay. 

Mr. Rodgers, do you think that this is—has this happened in 

your State? Has this been a help? 

Mr. RODGERS. I do agree that there have been efforts both on the 

level of AARO and with the subcommittee reviews that issues that 

occur in other States are certainly made available and aware of 

other States. Again, the joint investigator training that has been 

alluded to allowed three regulators from each State to attend at no 

cost and to focus on some of these issues that you may see. 

As I pointed out in my testimony, in dealing with law enforcement officials, one thing is they have to have a fairly substantial 

threshold of financial harm before they can become interested in a 

fraud perpetration, and when they have participated in a task 

force, which I think has been useful in helping identify players in 

some of these mortgage frauds, it is sometimes difficult for the information to be shared both ways because they are in a criminal 

investigation and sometimes they fear that the advancement of a 

licensing investigation may compromise their criminal investigation. 

Chairwoman BIGGERT. Thank you. 

I have exceeded my time, and so there will be some leeway for 

Mr. Gutierrez. Mr. Gutierrez? 

Mr. GUTIERREZ. Thank you so much. You are so kind. 

I am in a very generous mood. My prescriptions are ready at the 

drugstore. 

I want to let the panelists know that if you have an appointment, 

you can keep it. Preexisting conditions will not be counted against 

you. If you have your kids on health care, it is okay. I guess it is 

the law of the land now, so I feel pretty good about that. Sorry for 

that little aside, but I thought you might want to know what the 

Supreme Court has decided, especially since you were all—I know 

not on your— 

[laughter] 

Note, I am not talking to the rest of you, who I know are very 

well-informed of what happened, but not our three very distinguished and welcomed witnesses here this morning. 

So, Mr. Shear, as we continue to look at comprehensive housing 

finance reform, a key element missing from the debate is comVerDate Nov 24 2008 18:39 Nov 29, 2012 Jkt 076111 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 K:\DOCS\76111.TXT TERRI
14 

prehensive appraisal reform. I think our goal should be to establish 

an appraisal system that produces accurate values through all 

phases of the housing cycle. And the agency guidelines that became 

effective in December 2010 were a vast improvement over 2004 

guidance but the scope was limited. 

As we confront the major systemic hurdles to appraisal reform, 

specifically the fragmented and what some of us consider dysfunctional nature of the appraisal system and regulatory oversight the 

question is, who has the authority and, more importantly, the ability to coordinate and implement the changes we need to accomplish? 

Mr. SHEAR. You raise really good questions and our work can address some of those questions. There is room for improvement with 

the Appraisal Subcommittee, and in particular, the new authorities 

and responsibilities provided by Dodd-Frank allow the Appraisal 

Subcommittee to do a better job of trying to oversee the State regulators. 

We also think it is very important and also a huge challenge for 

the Appraisal Subcommittee to try to come up with a way of monitoring the Federal financial regulators, given their structure and 

their small size. So there is an awful lot that seems to be riding 

on what the Appraisal Subcommittee is capable of doing. 

But I think the types of questions you ask are very good questions because even if the Appraisal Subcommittee does successfully 

implement new procedures, implements new authorities, and takes 

on new responsibilities, there still is the question as far as how 

comprehensive a system we have. And based on our work, I can say 

those are very good questions that become very much a part of the 

whole fabric of mortgage reform under Dodd-Frank. 

Mr. GUTIERREZ. Mr. Rodgers, could you help us a little more 

than— 

Mr. RODGERS. Yes— 

Mr. GUTIERREZ. —across the country. 

Mr. RODGERS. I think there are two questions with regards to 

what happens on the State level. The question has been raised 

about dealing with appraisal fraud and joint work with law enforcement. Largely, the complaints and the comments I have heard 

from the Members here today have more to do with the accuracy 

of valuation, helping to recover from the housing crisis, and situations like that. 

Unfortunately, on the State level you are dealing with a complaint system where the board receives a complaint, then it falls 

under a due process system. For example, in our State, immediately the respondent has 30 days to respond to the complaint before we even initiate the investigation. 

What you are hearing a lot from participants in the marketplace 

is they need somebody that once an appraisal does not meet their 

needs they need some sort of ability to appeal or to get it revisited 

or reviewed. I think that will have to be handled largely in the 

lending community. 

Mr. GUTIERREZ. Mr. Park? 

Mr. PARK. Could I ask you to restate your question? 

Mr. GUTIERREZ. The effectiveness of the system, and to change 

and to improve, and to have new effective standards across the 

15 

country—we have changed them. How do you see those standards 

changing? Are they changing quickly enough? Are they being 

adopted quickly enough? 

Mr. PARK. The changes to the appraisal regulatory system have 

occurred very slowly. The Dodd-Frank Act contained the first significant changes since it was enacted back in 1989. So there has 

been—but the Dodd-Frank Act did install quite a few significant 

changes that we talked about earlier in terms of the subcommittee’s authority— 

Mr. GUTIERREZ. But you think they are actually being carried out 

effectively? 

Mr. PARK. Yes. We are in the process of enacting the different 

provisions that the changes—the amendments to Title XI that were 

part of the Dodd-Frank Act, and we have already made changes in 

terms of—for example, the subcommittee did not have the authority other than to comment on but we had no authority during the 

compliance review process to look at the funding and staffing of a 

State program. Dodd-Frank gave the subcommittee the authority to 

do that as part of our compliance review process. 

Mr. GUTIERREZ. My time has expired. Thank you so much. We 

will have more questions for you, and I thank you for the testimony 

today because maybe it is just my imagination but I have only met 

two appraisers—I have had appraisers—more than two homes appraised. 

But I remember meeting one about 25 years ago, and it is like 

if your car—you tell the mechanic what you think might be wrong 

with it, right? Contractor comes over to fix something you might 

tell him where you—and it was like the last time I had the appraiser come over, I almost felt like I was doing some criminal act 

by telling her about the beautiful tile, how expensive it was before 

I installed it and trying to tell her what it was about my home that 

made my home unique so that she could do a better appraisal, I 

thought. 

When I talk to the mechanic, he kind of listens to me and then 

does whatever he has to do to fix my car, but he doesn’t treat me 

like a criminal in trying to tell him what I think is wrong or good 

or bad about my car, and I hope we don’t get to the point where 

you get into an adversarial relationship between homeowners and 

their most prized possession, right, and what it is we think it is 

worth. In the end, they are going to make an objective determination but you can still get good information, I think, from the American public as you make a decision about what something is worth. 

I thank all of you, and I look forward to the next panel. 

Chairwoman BIGGERT. Thank you, Mr. Gutierrez. 

And I would like to thank the panel for their expert testimony 

and for being here. It has been very helpful to us. 

With that, we will excuse the panel, but first of all, let me just 

say that the Chair notes that some Members may have additional 

questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

for Members to submit written questions to these witnesses and to 

place their response in the record. 

Thank you very much. 

And with that, we will have the second panel come forward. 

16 

I would like to recognize the second panel, and thank you all for 

being here. And let me just go through the list. 

We have: Mr. David Berenbaum, chief program officer, National 

Community Reinvestment Coalition; Mr. David Bunton, president, 

Appraisal Foundation; Mr. Francois Gregoire, the 2011 chair, National Association of REALTORS® Appraisal Committee; Mr. Don 

Kelly, executive director, Real Estate Valuation Advocacy Association, REVAA, on behalf of REVAA and the Coalition to Facilitate 

Appraisal Integrity Reform; Ms. Karen J. Mann, president, Mann 

and Associates Appraisers, on behalf of the American Society of Appraisers; and Ms. Sara Stephens, president, Appraisal Institute. 

Thank you all for being here. 

We will now begin with the testimony. Without objection, your 

written statements will be made a part of the record. You will each 

be recognized for a 5-minute summary of your testimony, and with 

that, we will start with Mr. Berenbaum. 

You are recognized for 5 minutes. 

STATEMENT OF DAVID BERENBAUM, CHIEF PROGRAM OFFICER, NATIONAL COMMUNITY REINVESTMENT COALITION 

(NCRC) 

Mr. BERENBAUM. Thank you. 

Good morning, Chairwoman Biggert, Ranking Member Gutierrez, 

and other distinguished members of the subcommittee. My name is 

David Berenbaum, and I am the chief program officer for the National Community Reinvestment Coalition. 

On behalf of our Coalition, I am honored to testify before you 

today from both the consumer protection and the safety and soundness perspective in order to discuss options for improving the regulatory oversight of stakeholders in the home valuation and housing 

finance industry. NCRC is an association of more than 600 community-based organizations that promote access to basic banking services, including credit and savings, to create and sustain affordable 

housing, job development, and vibrant communities for America’s 

working families. 

Today, the U.S. economy is mired in the worst economic crisis in 

more than half a century and valuation issues remain front and 

center in the financial reform debate. Our current economy has 

clearly earned its moniker of a ‘‘Great Recession’’ and this is not 

an equal opportunity recession. 

NCRC calls upon policymakers, the Appraisal Subcommittee, and 

regulators to act swiftly to enforce Title XI of FIRREA, embrace the 

reforms included in the Dodd-Frank Act, and implement the following 10 recommendations that will help all Americans, but particularly assist low- to moderate-income communities, communities 

of color, and communities impacted by the foreclosure crisis who 

are working to realize or sustain the American dream of homeownership. 

To accomplish this end, we propose the following: first, to develop 

a more modern appraisal reporting process and utilize more robust 

and uniform reporting that can be tailored to today’s needs. The recent changes by the FHFA regarding the uniform appraisal data 

set have only added further confusion to the already inadequate 

mandated four. 

17 

Second, require full appraisals by licensed appraisal profes- sionals for all residential mortgages above $50,000, regardless of if 

they are originated or ensured by the private sector or Fannie Mae, 

Freddie Mac, or the FHA. The current limitations associated with 

the so-called de minimis value of a quarter of a million dollars are 

out of touch with today’s realities. 

Third, the role and impact of appraisal management companies 

must be critically reviewed by the ASC to ensure that they are not 

negatively affecting appraisal quality. Congress should immediately 

investigate the emerging practice of mortgage originators assigning 

or requiring that AMCs or appraisal professionals they engage with 

for business assume the buy-back risk from the secondary market 

or insurer claims related to loan origination. 

Fourth, appraisal professionals enhance safety and soundness 

and protect the interests of all parties to a mortgage transaction, 

including and especially consumers, and they must be appropriately compensated under any usual and customary fee standard 

that is developed. 

Fifth, the banking regulators—Fannie Mae, Freddie Mac, and 

FHA—should not escape Appraisal Subcommittee evaluation, safety and soundness review, and enforcement. 

Sixth, while automated valuation models serve as a useful and 

cost-competitive compliance tool and an effective check against 

fraud, they should never replace the use of appraisal by a licensed 

appraiser for all mortgages that exceed $50,000. 

Seventh, there is a need for more effective consumer protection, 

transparency, and education, including a dedicated consumer complaint hotline managed by the CFPB in collaboration with not-forprofit organizations. 

Eighth, responsible appraisal practices ensure and expand housing opportunities in open society. It is unfortunate today that we 

still see issues of the age of housing, predominant value, and use 

of comparables, coupled with subjective remarks with regard to the 

quality of housing in America’s low-income or minority communities. 

Ninth, inappropriate appraisal undervaluation is equally damaging to homeowners, communities, the taxpayers, investors, and 

insurers. We are seeing widespread undervaluation through the 

use of broker price opinions, and the short-sale process, or general 

reluctance to recognize that in some communities, the market is beginning to return. 

And tenth, States must suspend the inappropriate action of redirecting funds intended for appraisal compliance, professional development, licensing, and oversight to their general funds. 

In conclusion, it is imperative for Members of Congress, the 

CFPB, the prudential regulators, and the Appraisal Subcommittee 

to work in conjunction with one another to ensure that consumers 

and industry stakeholders benefit from a system of regulation that 

helps ensure the independence and integrity of the appraisal process. To accomplish this end, we urge you to consider the recommendations that we have made today. 

Thank you. 

[The prepared statement of Mr. Berenbaum can be found on page 

42 of the appendix.] 

18 

Chairwoman BIGGERT. Thank you so much. 

Mr. Bunton, you are recognized for 5 minutes. 

STATEMENT OF DAVID S. BUNTON, PRESIDENT, THE 

APPRAISAL FOUNDATION 

Mr. BUNTON. Thank you very much, Madam Chairwoman. The 

Appraisal Foundation greatly appreciates the opportunity to appear 

before you today to offer our perspective on the regulation of real 

estate appraisers. 

By way of background, I have served as a senior staff member 

of the Appraisal Foundation for the past 22 years, and prior to that 

I had the privilege of serving as the chief of staff of one of your 

former colleagues. I should point out that I am not an appraiser. 

There are many misperceptions about the Appraisal Foundation, 

and let me start off by saying what the Appraisal Foundation is 

not. It is not a government agency, it is not a regulatory body, it 

wasn’t created by Congress, it is not an appraisal trade association, 

and we have no individual members. 

What are we? We are a 501(c)(3) not-for-profit education organization. 

We were founded by eight national appraisal organizations, 25 

years ago, before the enactment of FIRREA. We are an umbrella 

organization composed of over 100 organizations and government 

agencies with an interest in valuation. We have attached a list of 

those organizations to our testimony. And we were created primarily to foster professionalism in appraising. 

What the Appraisal Foundation is, is the private sector expertise 

in the real property appraiser regulatory system under Title XI of 

FIRREA. The Foundation does not have any regulatory authority, 

but we provide the tools to the regulatory community. 

Specifically, we set the minimum education and experience requirements for someone to become a State-certified or State-licensed real estate appraiser. We are the authors of the National 

Uniform Exam that all 55 States and territories use. And we are 

the authors of the generally recognized standards of professional 

conduct known as the Uniform Standards of Professional Appraisal 

Practice (USPAP), that all State-licensed and certified real estate 

appraisers must adhere to. 

With the work of our boards, we understand the very importance 

of public trust. In fact, the words ‘‘public trust’’ appear in our mission statement. And we have learned over the years that one way 

to build and maintain public trust is to promote transparency 

wherever and whenever possible. 

All of our boards conduct public meetings. They adopt their work 

product in open sessions. They issue exposure drafts, often numerous times. And all comment letters we receive are posted on our 

Web site. In fact, the people who serve on our boards—we interview them in a public setting. 

In addition, as part of our commitment to promoting the public 

trust, we have worked with several U.S. Government agencies at 

their request on developing specific recommendations to improve 

their internal appraisal operations, to assist them in their investigative work regarding valuation, and to assist them in developing 

new policies and procedures. 

19 

As Mr. Rodgers pointed out in the previous panel, the Appraisal 

Subcommittee, AARO, and the Foundation have had a very close 

relationship over the past few years. State investigator training, 

with over 300 State investigators now having been trained. We are 

producing several training videos. At a time of tight State budgets, 

State regulators can receive training at their desk without having 

to fly anywhere. 

And then, because all 55 States and territories are using the 

same document for enforcement, USPAP, we have created something called a voluntary disciplinary action matrix, and what that 

is, it lists specific violations of USPAP and then recommended disciplinary action. It also lists aggravating and mitigating circumstances. It is completely voluntary; it is simply a tool for States 

to use. 

I have been asked to touch on two internal Foundation issues. 

One of them is the Foundation’s strategic plan. It is premature to 

get into the details of the plan because it will not be presented to 

our board of trustees until next month. 

Assuming it is accepted by our board, the Foundation will publicly expose the draft plan, as it did with its current plan, to all 

stakeholders for 90 days. This November, the board of trustees will 

take into account public comments received and make a final determination on approving the strategic plan. 

I was also asked to comment on the Appraisal Practices Board. 

There is a lot of misinformation about this newest board that was 

constituted in July 2010. This essentially is the how-to board, if 

you will. How do I appraise it with foreclosed properties, and short 

sales, and things like that? 

There are four things I want to mention about the APB. First, 

the Appraisal Practices Board does not have any congressional authority. Adherence to the guidance is strictly voluntary. 

Second, the APB does not operate with any public funds or any 

grant money. 

Third, the APB valuation advisories do not establish new valuation methods or techniques. They rather are a compilation of existing ones into one place. 

And fourth, the APB valuation advisories are available to anyone 

at no cost. 

Earlier, we heard from the Government Accountability Office, 

and over the past decade, there have been 16,000 disciplinary actions, 2,300 revocations, and 1,800 suspensions. The States have 

been very active. 

Title XI, while certainly unique without its flaws, is the glue that 

holds these 55 jurisdictions together and, it is important to remember, without the use of any appropriated funds. 

Madam Chairwoman, the Appraisal Foundation stands ready to 

assist in any way you believe the subcommittee can help this effort. 

Thank you. 

[The prepared statement of Mr. Bunton can be found on page 71 

of the appendix.] 

Chairwoman BIGGERT. Thank you so much. 

Mr. Gregoire, you are recognized for 5 minutes. 

20 

STATEMENT OF FRANCOIS K. GREGOIRE, PRESIDENT, 

GREGOIRE & GREGOIRE, INC., ON BEHALF OF THE NATIONAL ASSOCIATION OF REALTORS® (NAR) 

Mr. GREGOIRE. Good morning. Thank you, Chairwoman Biggert, 

Ranking Member Gutierrez, and members of the subcommittee for 

the opportunity to testify on behalf of the National Association of 

REALTORS® about appraisal and the regulatory impact on consumers and businesses. NAR represents more than 1 million real 

estate professionals, including approximately 30,000 licensed and 

certified appraisers. 

My name is Francois K. Gregoire. I go by Frank. I do not speak 

French. 

I am a REALTOR® but I earn my living as a real estate appraiser. My qualifications are fully detailed in my written testimony. 

NAR believes a strong and independent appraisal profession is 

important to consumers and the real estate industry and vital to 

restoring faith in the mortgage origination process. Appraisals are 

one of the most critical components necessary for the housing market recovery. 

There is no question about the importance of appraisals in real 

estate and mortgage transactions. A credible valuation by a competent, licensed or certified professional provides benefits to the 

lender, borrower, and secondary markets. Public trust in the real 

estate profession is enhanced. 

There are obstacles to preventing the realization of these benefits. Among the obstacles is weakened appraiser competency. 

Despite good intentions, litigation, legislation, and regulation has 

diminished the importance of appraiser competency as criteria for 

appraiser selection and retention. The insertion of appraisal management companies between loan originators and appraisers results in a focus on fee and turnaround time rather than appraiser 

competency and experience. 

The most common concern expressed by our members, whether 

a broker or an appraiser, is knowledge of the local market or geographic competency. The Uniform Standards of Professional Appraisal Practice requires appraisers to have competency or to acquire competency to understand the nuances of a particular market. 

The current AMC model tends to disregard this necessary focus 

on competency. Appraiser competency may be enhanced with education and communication. 

Communication between appraisers and real estate agents and 

their clients is not prohibited and should, in fact, be encouraged. 

Of course, efforts to intimidate, bribe, or coerce an appraiser are 

and should continue to be prohibited. 

Some AMCs provide legitimate services for reasonable fees but 

many contribute to problems in the appraisal business and the 

overall housing market. Contrary to their claims, there is evidence 

that appraiser independence is often compromised by the AMC. 

Assignment conditions, such as unreasonable turnaround times 

and unrealistic scope of work for reduced fees, interferes with the 

decision-making process necessary for a credible appraisal. Experienced appraisers refuse these assignments. Instead of selecting the 

21 

best appraiser for the job, the assignment is often awarded to the 

appraiser who responds first to a mass e-mail—not the best selection method. 

The independent judgment of appraisers is compromised when 

AMC reviewers unreasonably question comparable sales selection. 

Non-appraiser AMC staff with only a cursory knowledge of valuation interfere by insisting that specific information be included or 

excluded from appraisal reports. 

The altered business relationships between appraisers and their 

clients, unreasonable completion time requirements, diminished 

fees, and interference in the appraisers’ independence all contribute to the failure to recognize positive movement in prices and 

values in many market areas. 

NAR did not support the Dodd-Frank language that regulates 

AMCs on two different tracks. We believe exempting some AMCs 

from State registration has aggravated the problems. NAR believes 

that all AMCs should be registered with State regulatory agencies. 

Additional appraisal challenges include limitations of the current 

standard forms, the reporting format, lagging market information, 

discrepancies in market definitions, privacy concerns, the funding 

structure of appraisal programs, and the declining number of appraisers. NAR is the only real estate trade association able to 

speak with authority on appraisals and alternative valuation products. We have long been proactive in ensuring credible valuation of 

real property for our industry and embrace an all-encompassing approach. 

Appraisals are certainly the gold standard for mortgage origination but there is a role for broker price opinions, comparative market analyses, and automated valuation models. Through our subsidiary, REALTORS® Property Resource, and our valuation committee, NAR is able to provide comprehensive data sets and tools 

to assist in determining credible home values. 

Thank you for holding this hearing to examine an issue which is 

paramount to restoring confidence in the U.S. housing market. 

NAR is dedicated to the idea that homeownership matters. It contributes to our Nation, benefitting individuals, families, and communities. Our efforts are directed at ensuring that the dream of 

homeownership is available to the next generation. 

We look forward to working with the committee on this issue, 

and I am anxious to answer your questions. 

[The prepared statement of Mr. Gregoire can be found on page 

85 of the appendix.] 

Chairwoman BIGGERT. Thank you, Mr. Gregoire. 

Mr. Kelly, you are recognized for 5 minutes. 

STATEMENT OF DONALD E. KELLY, EXECUTIVE DIRECTOR, 

REAL ESTATE VALUATION ADVOCACY ASSOCIATION (REVAA) 

ON BEHALF OF REVAA AND THE COALITION TO FACILITATE 

APPRAISAL INTEGRITY REFORM (FAIR) 

Mr. KELLY. Thank you, Madam Chairwoman. I am delighted to 

be here again. It is good to see you. I believe that you and your 

staff have hit a homerun here. If you look at the panels that have 

been put together here, a tremendous amount of experience, so 

many of us have known each other in this business for so long— 

22 

and I won’t say how long, just to protect the innocent here. And 

despite some of our disagreements, I must say that on behalf of 

REVAA and the FAIR Coalition, I will say that personally, I love 

appraisers. I have been working with appraisers for 30 years and 

they have tremendous professionalism and it has been a delight to 

work with them. 

My members love appraisers as well because without good appraisers, there would be no appraisal management companies. 

Allow me to summarize my testimony. First, regarding appraisal 

management company operations, REVAA and FAIR members provide necessary services to financial institutions as well as benefits 

to appraisers and consumers in the course of a mortgage transaction. 

Second, in regard to regulation, we are working proactively with 

the Federal Government and the States to implement the regulatory requirements of the Dodd-Frank Act and State legislation. 

Third, we encourage the Consumer Financial Protection Bureau to 

continue to rely on the reasoning utilized by the Federal Reserve 

Board for payment of customary and reasonable fees. 

To my first point, our members manage the production and the 

delivery of real estate valuation products. They have been responsible for advancements in technologies that benefit mortgage investors, servicers, originators, appraisers, and ultimately consumers. 

AMCs typically operate national networks of employee-based and 

independent contractors for the completion of appraisal reports. Because mortgage lending is a national undertaking, AMCs act as a 

centralized resource for mortgage lenders and servicers that operate nationwide. 

There are approximately 315 AMCs in operation today, owing to 

the diversity of the lending industry and the competitive marketplace. AMC has worked to match assignments with qualified local 

appraisers. The average appraiser utilized by an AMC has 15 years 

of experience and typically travels less than 13 miles on any given 

assignment. 

AMCs perform extensive administrative and quality control functions on behalf of both the appraiser and the lender to ensure delivery of high-quality reports. Member companies rely on competent 

and qualified appraisers and work diligently to ensure quality. 

As part of the selection criteria, our members typically confirm 

the physical location of the appraiser’s office. That location is what 

they call ‘‘geo-coded’’ and used to calculate the distance to subject 

properties and other metrics. In addition, objective metrics are applied to an appraiser’s performance and appraisals are reviewed by 

quality assurance teams who specialize in product development 

and review. 

Contrary to what some have suggested, appraisers directly benefit by working with an AMC by having an advocate to ensure appraisal independence, to make sure that no attempt is made to improperly influence the appraisal process. In addition, AMCs provide 

significant value-added services to appraisers, such as quality control, review, marketing, insurance, technical support, and billing 

processes. 

23 

With loan rate lock-ins and time-sensitive negotiations, AMCs 

help consumers by reducing the time required for appraisal delivery. 

To my second point regarding regulation, AMCs are subject to 

new regulatory requirements under Dodd-Frank, and prior to passage of the Act, several States had begun the process of enacting 

laws to require registration of AMCs. We have been actively involved with the States from the inception of these registration laws 

and have long supported transparency and independence in the appraisal process. 

We believe it is important to work towards consistency and uniformity in State laws and regulations to ensure that AMCs can effectively operate on a national basis. We believe the Appraisal Subcommittee and the relevant banking agencies can and should contribute to ensuring a consistent set of national requirements in this 

regard. 

Finally, Dodd-Frank requires that lenders and their agents, 

AMCs, compensate appraisers at a customary and reasonable rate 

for appraisal services. We believe the Federal Reserve Board acted 

appropriately and logically to implement the congressional intent 

in this provision. 

The board has recognized that appraisal services are not onesize-fits-all and has created a compliance structure for fees that reflects market realities and ensures that the appraisal cost borne by 

consumers will remain competitive and fair. While the board’s interim final rule remains effective without further finalization, we 

believe the CFPB should maintain the criteria articulated by the 

Federal Reserve Board. To reconsider the issue could result in additional confusion and even lead to setting a fixed fee which may 

not reflect local market and industry conditions. 

Since we last met, States have been active in establishing registration programs for AMCs. By and large, States have been diligent with consistently required registration for a set fee, background checks for AMCs and employees, surety bonds, minimum 

education requirements, and built-in protections for appraisers engaged by AMCs. 

However, because mortgage lending is national in scope, we believe it is important to work towards greater consistency and uniformity in State AMC laws and regulations. We support reasonable 

and appropriate laws and standards to improve the appraisal industry as a whole, but we also believe the Federal banking agencies should provide clarification and guidance for the industry. 

Thank you for the opportunity to testify. I look forward to your 

questions. 

[The prepared statement of Mr. Kelly can be found on page 103 

of the appendix.] 

Chairwoman BIGGERT. Thank you, Mr. Kelly. 

Ms. Mann, you are recognized for 5 minutes. 

STATEMENT OF KAREN MANN, PRESIDENT, MANN & ASSOCIATES, ON BEHALF OF THE AMERICAN SOCIETY OF APPRAISERS (ASA) AND THE NATIONAL ASSOCIATION OF INDEPENDENT FEE APPRAISERS (NAIFA) 

Ms. MANN. Thank you very much. 

24 

Good morning, Chairwoman Biggert, Ranking Member Gutierrez, 

and members of the subcommittee. My name is Karen Mann, and 

I am an appraiser. I have been an appraiser for 32 years and I am 

currently the president of my firm, Mann and Associates, in Northern California. 

Today, I am here to testify on behalf of the American Society of 

Appraisers, ASA, and the National Association of Independent Fee 

Appraisers, NAIFA. I am speaking on their behalf today. 

The current appraisal regulatory structure is a dramatic improvement over what was in place prior to the savings and loan debacle. Prior to that, you could own a clipboard, you get a business 

card, get a tape measure, and you go out and call yourself an appraiser. The problem is it became like the Wild West where people 

thought that they could be an appraiser at any time. 

Thanks to the implementation of Title XI, we found that there 

were rules and regulations that appraisers had to follow, and it 

was good. That doesn’t mean we always wanted to follow the rules, 

but we had to, and that makes a more organized society. It is very 

important. 

The role of the appraiser had to recognize that the appraisal industry had changed over the years. As a result of that, we needed 

something that was a foundation for us, a basis. 

So now we have a standard of accountability, and this standard 

of accountability was—the basis was Title XI, and now with augmentation of the Dodd-Frank Act, we will have a fine-tuning of 

that original standard format. 

We also believe that the Appraisal Foundation has been and continues to be an indispensible and positive factor in the growth of 

the appraisal profession. Currently, some 65 percent of practicing 

appraisers are not a part of a professional appraisal organization 

for guidance. The Appraisal Foundation has been an important element for these appraisers. 

Professional appraisal organizations have been around since the 

1930s. However, the presence of approximately 65,000 licensed and 

certified appraisers relying on some source of a foundation requires 

the use and the implementation of the Appraisal Foundation guidance. 

It is important to note that the Foundation decisions involving 

standards, best practices, and qualifications are made in a transparent manner and are open for comment, review, and recommendation by appraisers and stakeholders. 

Improving the current system is currently in process with the 

proposed implementation of the appraisal portion of the DoddFrank Act. The current regulatory system is adequate, however, we 

recognize, like anything that is being developed, one must tweak 

it, one must go in and improve it. 

So we agree with the 2012 GAO report regarding the need for 

greater effectiveness at the Appraisal Subcommittee. However, we 

also believe the Appraisal Subcommittee is showing improvement. 

They are trying to increase their skill sets and to be more effective 

and more efficient. 

We have several issues facing appraisers in today’s environment: 

first and foremost, as an appraiser, customary and reasonable fees. 

With the implementation of the AMCs—we don’t disagree that havVerDate Nov 24 2008 18:39 Nov 29, 2012 Jkt 076111 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 K:\DOCS\76111.TXT TERRI
25 

ing an AMC is appropriate or could be appropriate, but the problem is that the experienced appraisers don’t want to work for the 

AMCs because the fees are so low. 

The AMCs typically will charge—and it is customary for the V.A. to publish that fees for appraisers are approximately $450. The 

AMCs keep between 30 and 40 percent, which means that the remainder goes to the appraiser. The appraiser then has a lower fee. 

In today’s business practice, having a lower fee when your expenses 

are the same or increasing, makes it very difficult to stay in business. 

A lot of the newer and less experienced appraisers are choosing 

to work for the AMCs, which is not a good thing for consumers because the consumers may not be getting necessarily the most qualified appraiser. I hear this every day from homeowners who contact 

me and say, ‘‘This person came from Fresno and they are appraising a property in San Francisco.’’ That is 400 miles and that is a 

long distance. Completely different markets. 

The next item we have to recognize is that the Dodd-Frank reform has not yet fully been implemented. So the fact that it hasn’t 

been fully implemented—we are working on the presumption that 

it is going to happen, but once it is implemented we anticipate that 

the improvement to the entire process will be accelerated immensely. 

The good faith estimate and settlement form mortgage disclosures do not disclose that the appraisal fee paid by the consumer 

is actually two pieces. One piece is what goes to the AMC and the 

remainder goes to the appraiser. 

The homeowner—the property owner—should really know which 

part goes to which because they think that—when we go out there 

they say, ‘‘We paid you $500 for this appraisal,’’ and when they 

find out that the appraiser is only getting $300 of it, the homeowner feels deceived and they wonder what is going on with the 

process. 

One other factor that has been a bone of contention for appraisers for years is eliminated the—and reducing the de minimis. Currently, the de minimis means that properties with a price—a value 

less than $250,000 for residential properties and a million dollars 

for commercial properties do not necessarily need a—the typical appraisal and other types of valuation products may be used. We 

firmly believe that that compromises the system and it compromises the homeowner—the consumer—of properties worth less 

than $250,000, which is a considerable amount when you consider 

the average price of the home in the United States. 

Finally, we have other issues with day-to-day operations, but we 

don’t think that your subcommittee should worry about our minor 

little issues. We will try to endeavor to participate and encourage 

and to try to develop processes that work and help the committee 

and each other improve our system so that we have a professional 

appraisal group of professional appraisers for every single consumer. 

Thank you for allowing me to represent my organizations. 

[The prepared statement of Ms. Mann can be found on page 118 

of the appendix.] 

Chairwoman BIGGERT. Thank you, Ms. Mann. 

26 

Ms. Stephens, you are recognized for 5 minutes. 

STATEMENT OF SARA W. STEPHENS, PRESIDENT, THE 

APPRAISAL INSTITUTE 

Ms. STEPHENS. Thank you. 

Chairwoman Biggert, Ranking Member Gutierrez, my name is 

Sara W. Stephens and I am president of the Appraisal Institute, 

the largest association of real estate appraisers in the United 

States, representing 23,000 professionals and more than half of all 

professionally designated appraisers in the United States. 

In 2007 Chief Justice Roberts, writing for a unanimous U.S. Supreme Court stated, ‘‘Valuation is not a matter of mathematics. 

Rather, the calculation of true market value is an applied science, 

even a craft. Most appraisers estimate market value by employing 

not one methodology but a combination. These various methods 

generate a range of possible market values, which the appraiser 

uses to derive what he considers to be an accurate estimate of market value based on careful scrutiny of all data available.’’ 

These words are so true. Appraisal methods and techniques require judgment by the appraiser. The choice of methods and techniques are the responsibility of the appraiser. 

For instance, in valuing a parcel of residential and commercial 

real estate, appraisers are trained to decide whether or not to use 

replacement cost and when and how to adjust for seller sales concessions. These decisions by the appraiser are dependent on the actions of the marketplace and should not be mandated. Sadly, this 

tenet is at risk. 

Established under a false premise that timely guidance on appraisal methods and techniques does not exist, the Appraisal Practices Board of the Appraisal Foundation is attempting to assert 

itself as the authority over appraisal methodology, a move that flies 

in the face of the decision of the Supreme Court case that I just 

quoted. Despite having no authorization from Congress in this 

area, proponents of the Appraisal Practices Board are attempting 

to dictate appraisal methodology. 

In fact, even though the Appraisal Foundation maintains that 

the guidance documents are voluntary, the Appraisal Foundation is 

now encouraging States to adopt them as compulsory. Furthermore, the Appraisal Foundation has professed to reference them in 

the latest document edition of the Uniform Standards of Professional Appraisal Practice, essentially codifying them into State law. 

We believe that Congress should exercise oversight over this insidious attempt to confuse the public by subtly abusing existing 

congressional authority. The appraisal process is not aided by more 

rules. Instead, the appraisal profession is at risk of having innovation curtailed. 

Furthermore, the Appraisal Institute supports realigning the appraisal regulatory structure with those of other industries in the 

real estate and mortgage sectors. As a model, we believe Congress 

could turn to the national mortgage licensing system for mortgage 

loan originators, which is mandated by the SAFE Act and is overseen by the Consumer Financial Protection Bureau. 

This is not a self-regulatory organization but one that is owned 

and operated by the State bank regulators. We see several benefits 

27 

to a realignment of the appraiser and certification system, including enhanced communication among regulators and reduced red 

tape for appraisers. 

Congress saw reason to authorize this body to assist others within the real estate sector. So, too, can it be for appraisers and appraisal regulators. 

Congress also should remain engaged on the issues involving appraisal procurement and appraisal management companies, including the payment of customary and reasonable fees and consumer 

disclosure of fees paid to appraisal management companies. We 

often hear from real estate agents, homebuilders, and others that 

poorly performed appraisals are killing deals and/or holding back 

economic recovery. These accusations are unfounded and misguided, as appraisers do not make the market; they report the market. 

The purpose of an appraisal is not to support a contract sales 

price but instead is an integral part of lender risk management. 

Any crisis of confidence regarding appraisals is a direct result of 

the way in which lenders under the oversight of bank regulatory 

agencies procure appraisals today. 

Here, the predominant factors in the appraisal hiring decision 

are often price and turnaround time of the appraisal, not quality 

of service or geographic or market competency of the appraiser. 

The dumbing down of appraisals cannot continue and we ask Congress for its continued oversight. 

Lastly, we know nothing is perfect. The regulatory system that 

appraisers operate with today is 20 years old and we believe it is 

time for a fresh look. 

Appraisers do not need a set of arbitrary rules. As the Supreme 

Court has stated, ‘‘The careful scrutiny of data should be at the 

forefront of the appraisal process and is essential to maintaining 

its integrity.’’ We ask for your oversight of these matters. I thank 

you very much for the opportunity to be here and I would be glad 

to answer your questions. 

[The prepared statement of Ms. Stephens can be found on page 

180 of the appendix.] 

Chairwoman BIGGERT. Thank you, Ms. Stephens. 

We will now proceed to questions, and I will yield myself 5 minutes. 

The Appraisal Subcommittee is in the process of developing the 

new standards or rules as required by the Dodd-Frank Act, and 

Dodd-Frank was enacted in 2010, almost 2 years ago. This question 

is for all of you: Do you believe that the Appraisal Subcommittee 

has been effective by taking more than 2 years, and counting, to 

comply with the Dodd-Frank Act? 

Let’s start with you, Mr. Berenbaum, and just go down the line. 

Mr. BERENBAUM. Thank you. I think that is a very important 

question. We are anxious for the Appraisal Subcommittee to move 

ahead very quickly in this phase, particularly with regard to monitoring the activities of the other prudential regulators. We have 

raised issues such as flopping, such as the quality of appraisal compensation, such as issues with regard to expanded use of automated valuation models to, in fact, the prudential regulators. 

28 

And despite the lessons that should have been learned in this financial crises, it appears to us, working with consumers across the 

country, that the prudential regulators are not acting quickly 

enough. And so, the ASC will and should be playing a critical role 

in that space as well as, frankly, working with the FHA, as well. 

Chairwoman BIGGERT. Thank you. 

Mr. Bunton? 

And please be brief, because I have some other questions, too. 

Mr. BUNTON. I think they are doing much better. The Appraisal 

Subcommittee today is a far different organization than it was just 

7 months ago. I believe 4 of the 7 members were not serving 7 

months ago. They are new; they are higher level policy people. For 

the first time, you have a Chair who is an appraiser. 

I attend every one of their public meetings and the difference between it then and now is night and day. 

Chairwoman BIGGERT. Thank you. 

Mr. Gregoire? 

Mr. GREGOIRE. The National Association of REALTORS® does 

not have a specific policy related to your question. However, I can 

tell you that unlike a lot of other Federal agencies, the ASC operates without an appropriation; they operate on an appraiser tax. So 

they don’t have the flexibility or the funds to move in the same way 

that a lot of Federal agencies do. 

And I believe that has to be taken into account. The folks who 

are funding the operation of the Appraisal Subcommittee are actual 

licensed and certified appraisers, and as Mr. Park testified, that 

number of folks is diminishing. 

Chairwoman BIGGERT. Thank you. 

Mr. Kelly? 

Mr. KELLY. Thank you. We would like to see the ASC move a little quicker. As I testified, States are already proceeding with registration and other standard development, and so I believe that the 

ASC could be helpful with moving along with their agenda. 

Chairwoman BIGGERT. Ms. Mann? 

Ms. MANN. Thank you. There is a pressing need for speedy implementation by rulemaking of many of the Dodd-Frank appraisal 

provisions, which have yet to be addressed. 

These provisions involve enormously important issues, including 

supervision, registration of AMCs, development of quality control 

standards for AVM, that is automated valuation models, establishment of an appraisal complaint hotline, and the CFPB’s consideration of whether the banking agencies’ existing dollar threshold, or 

the de minimis, is adequate. So we look forward to this. 

Chairwoman BIGGERT. Okay. Thank you. 

Ms. Stephens? 

Ms. STEPHENS. Yes, I think that one of the biggest problems we 

see is that the current structure really assumes that the States are 

not capable of administering this entire process of certification and 

entire process of overview. We would like to see that changed. And 

that is one of the reasons we make the suggestion that a good look 

be taken at the way that our whole entire system is set up. 

Chairwoman BIGGERT. Thank you. 

29 

Now, I have two questions that are just a yes-or-no answer, so 

the first one is—and we will start with you, Ms. Stephens, and go 

the other way. Is the Appraisal Subcommittee effective? 

Ms. STEPHENS. In my opinion, no. 

Chairwoman BIGGERT. Ms. Mann? 

Ms. MANN. I believe it is, and it is going to get better. 

Chairwoman BIGGERT. Mr. Kelly? 

Mr. KELLY. Yes. 

Chairwoman BIGGERT. Mr. Gregoire? 

Mr. GREGOIRE. Somewhat. 

Chairwoman BIGGERT. Mr. Bunton? 

Mr. BUNTON. It needs improvement. 

Chairwoman BIGGERT. Mr. Berenbaum? 

Mr. BERENBAUM. [Off mike.] 

Chairwoman BIGGERT. Okay. 

Now, another question, yes or no: Should Congress consider a 

complete overhaul of appraisal regulations and improve it for consumers and businesses alike? 

Mr. Berenbaum? 

Mr. BERENBAUM. I think there is a serious need to look at how— 

Chairwoman BIGGERT. Yes or no? 

Mr. BERENBAUM. Yes or no? There is a need to look at it. 

Chairwoman BIGGERT. Mr. Bunton? 

Mr. BUNTON. [Off mike.] 

Chairwoman BIGGERT. Mr. Gregoire? 

Mr. GREGOIRE. [Off mike.] 

Chairwoman BIGGERT. Okay. 

Mr. Kelly? 

Mr. KELLY. We should continue to look at it, yes. 

Chairwoman BIGGERT. Okay. 

Ms. Mann? 

Ms. MANN. Improve the existing system. 

Chairwoman BIGGERT. Okay. 

Ms. Stephens? 

Ms. STEPHENS. Yes. 

Chairwoman BIGGERT. Okay, thank you. 

All right. My time has expired. 

Mr. Sherman, from California, is recognized for 5 minutes. 

Mr. SHERMAN. Thank you, Madam Chairwoman. 

Mr. Gregoire, the GSEs have created this new uniform appraisal 

database, the UAD, which is used on all GSE appraisals, also for 

the FHA. How is it all working out? 

Mr. GREGOIRE. Fortunately, because of the work that I do, I have 

not had to complete one of those reports. However, I have heard 

from dozens if not hundreds of appraisers about their experience, 

and also from consumers. The UAD method of reporting was not 

implemented to enhance the quality or the credibility of an appraisal report. What it does enhance is data-gathering. 

It does not improve an appraiser’s performance or ability to accurately or credibly estimate an opinion of value. And in fact, I believe that it makes the appraisal report more confusing and less 

useful to the consumer. 

Granted, the consumer is not an intended user of an appraisal 

that is completed for mortgage finance transaction. However, the 

30 

wording in the form clearly anticipates that the borrower will be 

placing some credence in that, and the report, according to Federal 

law, is required to be provided to the borrower prior to the closing 

of the transaction. 

That UAD does not improve the usefulness of that report to the 

consumer. 

Mr. SHERMAN. So at a very minimum, we need to change how it 

is presented so that the consumer can understand it? 

Mr. GREGOIRE. I believe that the reporting format that is instituted by the GSEs is not designed to result in a more accurate estimate of value; it is designed for the convenience of the GSEs. And 

things that make things more useful to consumers are very often 

excluded from the report due to the manner in which the report is 

delivered to the GSEs. 

And there are also privacy concerns. The GSEs are now insisting 

on a whole slew of interior photographs and the borrower and the 

seller and the lender don’t control the distribution of that appraisal 

report, and a lot of our members are very concerned about privacy. 

Mr. SHERMAN. The only thing I have been told about real estate 

is that it has something to do with location, and location, and location. What can we do to make sure that the appraisers actually understand the neighborhoods that they are appraising, Mr. 

Gregoire? 

Mr. GREGOIRE. Thank you, again. Unlike some of the discussion 

here concerning geographic competency, I don’t believe that geographic competency is determined solely by the appraiser’s proximity to the property that is being appraised. Geographic competency is determined by the appraiser’s knowledge of a particular 

market or knowledge of a particular neighborhood or of a particular 

location. It is also determined by the appraiser’s knowledge of a 

particular property type. 

And competency can be—it is not absolutely, positively necessary 

at the time the appraiser accepts the assignment as long as the appraiser takes the steps necessary to acquire the competency. But 

you don’t acquire competency in a manner of minutes or hours, and 

I believe that appraisers are fully capable of gaining the necessary 

competence if they are given the appropriate and the necessary 

time to spend in a market, interview the folks necessary to gather 

market information, and given the time necessary to appropriately 

complete the appraisal report. 

Mr. SHERMAN. But even a very competent appraiser who is given 

just one job in some community he doesn’t know, he is only paid 

a few hundred dollars so he can’t spend hours and hours studying 

everything. That competent appraiser, if he is only going to do one 

appraisal in that neighborhood is probably going to miss some 

things. 

Mr. GREGOIRE. I agree, and I think that the Uniform Standards 

for Professional Appraisal Practice provides the appraiser guidance 

as what to do in such a circumstance, and that is to decline the 

assignment. And I believe that we have to hold appraisers to that 

standard. They have to know when it is appropriate for them to accept an assignment and when it is appropriate for them to decline 

the assignment. 

31 

Mr. SHERMAN. If I can squeeze in one more question, how are appraisals and valuations affecting the housing recovery, or what we 

hope to be a housing recovery? 

Mr. GREGOIRE. That is a pretty broad question, but I believe the 

concern of the National Association of REALTORS® is that there 

is interference in an appraiser’s independence to call things the 

way they see it. I have plenty of anecdotal evidence of appraisers— 

and I work and appraise in Pinellas County, Florida. It is a county 

which is not monolithic. There are areas that are improving—some 

dramatically, some not so much—and areas that are stable. There 

are appraisers who have identified improving areas, and as a result 

of their data and analysis in reaching an opinion that an area is 

improving have reported that to their clients, and they have made 

the appropriate positive adjustments to comparable sales to make 

sure that those comparable sales are adjusted to reflect what they 

would have sold for on the effective date of the appraisal. The result that has been reported is that you better rethink those dateof-sale time adjustments. That is interference with an appraiser’s 

independence and it results in a misleading appraisal report and 

an appraisal report that does not reflect a current and an improving market in a specific area. 

Chairwoman BIGGERT. The gentleman yields back. 

The gentleman from California, Mr. Miller, is recognized for 5 

minutes. 

Mr. MILLER OF CALIFORNIA. Thank you, Madam Chairwoman. 

So the problem I have, and I guess this panel really doesn’t—we 

really don’t have a mortgage broker on here; we don’t have—these 

problems, but the data I have seen, 80 percent of all the appraisals 

being done are refinances, so let’s put those in one category. That 

is just somebody refinancing their home, whatever. 

HVCC was so efficient at changing the landscape that even 

though Congress came back and said, ‘‘No, we don’t like that,’’ 

FHFA and FHA never listened. They are still implementing the 

concept of HVCC, which was a disaster. There was a time, like ordering an appraisal when a mortgage broker, now called an originator, could do something. 

But they are excluded from participating in the appraisal process 

as they were in the past, and many times trying to represent a client—a REALTOR® comes in with a client, mortgage broker, they 

try to figure out what the house is going to sell for, how the buyer 

is going it buy it, and they could do an appraisal and they could 

go out and go to a lender, if the lender’s appraisal didn’t come in 

the same line they could say, why are there differences in the appraisals? Is there an error in the appraisal? Are there different 

issues we need to consider here? 

Those are off the table, and in Dodd-Frank I made sure the language included in there that said appraisal would be portable, but 

they are not. They are just not being done. You go to one lender 

and they do an in-house appraisal, and they are not giving their 

appraisal to the other lender. So now somebody has to go back and 

pay for two appraisals or three appraisals when it could have been 

done the first time by understanding what the house is really 

worth based on somebody’s understanding of what an appraisal 

should be and who should do an appraisal. 

32 

And, geography, should that matter? I think it does if an—and 

I think appraisals are wonderful. I have no problem with that. But 

if he is 2 hours away, and he has one appraisal in a neighborhood, 

that makes it really tough. And when you are dealing with a marketplace that is tough, is an appraiser likely to say, ‘‘I think I 

should forego taking this job when I can go on a computer and 

come up with something and present an appraisal?’’ 

So I think there is an inherent conflict in the industry when you 

put that onus on the individual to say, ‘‘No, I am going to turn the 

work down.’’ It has been a bad market. It has been tough. People 

are trying to grow their businesses back. 

But portability is huge, and it is not taking place. And a problem 

I have is, especially in the industry today you are appraising many 

distressed homes at a value and unless the appraiser is out there 

on site looking and making sure he knows it is distressed versus 

when it is not distressed they really don’t know. So you have to actually drive up to the door and actually look and understand what 

you are dealing with. 

And especially when it applies to new marketplace today, when— 

I don’t believe this country’s economy is going to come back until 

the housing industry comes back. I just don’t believe it. There is 

nothing showing me that it is going to happen until the industry 

comes back full swing and this economy turns around. 

So you have builders in communities that are buying lots basically through this down marketplace in the recent years for less 

than it costs to do the improvements. So you have an appraiser 

who is going out there appraising it on values less than it would 

cost to do the improvements today and buy land today. Land is 

supposed to be free but it is not, and even all the new requirements 

placed on them aren’t being considered in appraisal value. 

And I am not impugning appraisers. I don’t mean that at all. It 

is just very tough and you have to have somebody local who understands it, understands the issue, understands the market and can 

come up with a realistic value of that home based on current market conditions. 

And if that doesn’t happen, you are going to continue to distress 

the marketplace. New product can’t be built today unless you are 

using realistic values of what fair market value is for that home 

in today’s market. 

But when you have a buyer willing to buy and a seller willing 

to sell and the appraiser comes down here everybody is looking at 

each other scratching their heads saying, ‘‘What do we do?’’ And 

that is where the problem is today. 

You need to be able to say, ‘‘I think you made some mistakes in 

your appraisal here,’’ but you are excluded from that now. You 

can’t do that. It is a conflict of interest almost, the way they are 

looking at it. 

You have to get back to some realistic approach to the concept 

of value at market rate and putting a lender together with that 

buyer and seller to be able to move forward in the marketplace. 

And I think we are hurting ourselves and hurting this economy by 

not realistically looking at that. 

I guess when you look at the State appraiser expected to be selected from individuals assigned based on completely the performVerDate Nov 24 2008 18:39 Nov 29, 2012 Jkt 076111 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 K:\DOCS\76111.TXT TERRI
33 

ance of an appraisal, knowledge of an areas, and type of a product, 

Ms. Stephens, is that happening? If not, what steps are being 

taken to make sure that appraiser understands what they are looking at? 

And I am not impugning appraisers. I am just saying that we restricted it through HVCC and that we have not come full circle in 

correcting it. 

Ms. STEPHENS. We are hearing from many of our appraisers and 

many of their clients that this is not happening, that we are not 

sending people into an area who are familiar. And one of the big 

problems is, again, that most of the function of today’s residential 

lending market is vested in hiring people based on fee and turnaround time. 

We are not saying that all of the AMCs that are working out 

there are not doing a good job, but we are saying that there are 

instances where people are traveling great distances to work on a 

residential assignment when there are qualified people—professional people—in the area who would do that job if the fee were 

commensurate with their— 

Mr. MILLER OF CALIFORNIA. And the problem with traveling that 

great distance is it is a cost factor for the appraiser. They are traveling; they are not doing something else. It is time lost in the car 

when they could do two appraisals somewhere else. 

And I think the inherent conflict being placed on the industry 

today is that nobody wants to turn a job down, and I don’t blame 

them. But there is not adequate compensation based on the impact 

associated with what they have to do to get the appraisal done to 

expect a reasonable approach to the appraisal process. 

And I know you have been generous, Madam Chairwoman, and 

my time is way up. I had eight more questions, but I yield back. 

Thank you very much. 

I ask unanimous insert to insert into the record a written statement by William Kidwell, president of Impact Mortgage Management Advocacy and Advisor Group, IMMAAG. 

Chairwoman BIGGERT. Without objection, it is so ordered. 

Mr. MILLER OF CALIFORNIA. Thank you, Madam Chairwoman. 

Chairwoman BIGGERT. Mr. Miller, I am going to ask a few more 

questions, so if you would like to— 

Mr. MILLER OF CALIFORNIA. I can finish. Yes I would love— 

Chairwoman BIGGERT. All right. 

Mr. MILLER OF CALIFORNIA. Mr. Gregoire, an out-of-area appraiser is one of the most common complaints. I know I just said 

that. But what can be done, in your opinion, to fix that problem? 

The chairwoman gave me the time. Go for it. 

Mr. GREGOIRE. I just had an e-mail forwarded to me from a Tallahassee appraiser. This appraiser is in Tallahassee and he wanted 

to let me know about an assignment that he was given yesterday. 

They are a nationwide appraisal management company, has a conventional 1004 MC appraisal for a purchase located on a property 

in Karo, Georgia. I don’t know where Karo, Georgia is, but it is in 

Georgia, not in Florida. 

‘‘If you are interested in working with us on this and future appraisals please reply to this e-mail with your estimated turnaround 

time and fee.’’ 

34 

This appraiser is licensed—actually, is certified in Florida, not in 

Georgia. That is an example. And I don’t know how many other appraisers in Florida received the same e-mail. 

That is a primary driver of a lot of AMCs’ determination as to 

who gets the assignment—the turnaround time and the fee. No 

question here whether or not he even is certified in Georgia or 

what his qualifications are, whether or not he is a designated appraiser. The— 

Mr. MILLER OF CALIFORNIA. And the problem with that—and I 

do like appraisers. I am not impugning anybody. Please don’t anybody mischaracterize. What I am saying is everybody shopping for 

business today, and when a lender receives an estimate from this 

appraiser that says, ‘‘We will do your appraisals for this amount 

of money,’’ and the lender says, ‘‘That is a good deal,’’ it doesn’t 

matter if they are 800 miles away. 

Mr. GREGOIRE. Thank you. 

Now, as to how it can be corrected, first off, I believe that consumers should be entitled to an appraisal report that is commensurate with the fee that the consumer pays for the appraisal report. 

They are not getting that now. 

They are getting only a fraction of what they are paying for because the bulk of the fee is going to a party other than the person 

who is completing the assignment. The bulk of the fee is going to 

an organization, a company, that adds no value to the transaction. 

They are strictly a broker, strictly a middleman, and despite all 

the claim of the quality control and the adherence to the appraiser’s qualifications, in most cases it is not. It is simply a means of 

siphoning off money. Very often, the appraisal management company is associated with or affiliated with the lender, and it is a 

means for the lender to increase his bottom line. 

Mr. MILLER OF CALIFORNIA. Done on a contract basis? 

Mr. GREGOIRE. Yes. 

Mr. MILLER OF CALIFORNIA. Yes. 

Mr. GREGOIRE. So we have to think that the consumer needs to 

get what they are paying for, and if the lender wants to use the 

services of an appraisal management company to broker these 

valuation services—the AMCs claim that they are operating as an 

agent for the lender. Well, by golly, let the lender pay for that service, don’t make the appraiser pay for it or don’t make the consumer 

pay for it. The lender is the one that is getting the benefit; make 

the lender pay for that benefit. 

Mr. MILLER OF CALIFORNIA. I agree. 

I guess I am admitting I am getting old, but I have been in the 

real estate and building industry for over 40 years and I really 

have tremendous respect for appraisers, especially when I used to 

make application to a bank to build a subdivision and they relied 

on their usually in-house appraiser to go out and give a fair market 

appraisal because they were taking a risk lending me the money, 

so—and the individual actually went out and did what I considered 

a fair market appraisal. They did a good job. 

And when we would buy or sell the house they would take and 

go and appraise the individual house and they based it on—they 

appraised the house the block away and they appraised the house 

a mile down the road, and they really understood the area. And 

35 

what we did with HVCC was overturn the apple cart to such a degree that nobody has figured out, even though we have directed 

them, how to put it back the way it was. 

Government doesn’t change rapidly. For some reason, they did 

with HVCC, but coming back the other way, it has not done a good 

job. 

I think it has done a disservice to the appraisers in this country 

who do excellent work. It has hurt them. It has created a situation 

where the lenders are no longer having appraisals to compare with 

theirs and they can’t deal with the issues of errors like we could 

in the past, having multiple appraisals, and the appraisal can’t be 

used somewhere else because one person has already paid for it 

and it is proprietary. 

And we have created a situation where they are putting out and 

they are bidding these things on a bulk basis and whoever gives 

them the best price is going to get all of them, irrespective of the 

letter you read to me about geography. 

I took notes on what you said earlier, and you talked about geography, you talked about fully capable, and you talked about guidance. Every one of them was followed with an if, and proximity 

doesn’t matter if, fully capable if, provide guidance if. The problem 

is defining if. I had—Bill Clinton of what the definition of is is, but 

‘‘if’’ opens up a huge problem that we started and we have to correct. 

Now, the REALTORS® are out trying to provide a service to a 

buyer and seller. The mortgage brokers are trying to provide a 

service to the buyer, seller, REALTOR®. And the appraisers are 

trying to provide service to everybody. And we have put them in 

such a difficult situation that it is just not working, and we have 

put them in a situation where it is, I believe, in some fashion stifling the ability of the economy to recover because we have decimated value in homes out there with this downturn in the economy 

that we are not doing what is necessary that we have hit a bottom 

to start building it back up or letting it come back on a natural 

basis. 

We are stepping it steps and we are stopping it right there because we have mandated things that don’t work. And now I hope 

somebody is starting to listen that, ‘‘Hey, we are not happy with 

what we did; we messed up. But we are also not happy with you 

not listening to us wanting you to correct what we did wrong,’’ and 

that is a problem today. 

We have to fix it. It has to be done, and somebody needs to listen. 

And, Madam Chairwoman, you have been more than generous. 

I would yield back my time twice. Thank you. 

Chairwoman BIGGERT. Thank goodness. 

Mr. KELLY. Madam Chairwoman? 

Chairwoman BIGGERT. Mr. Kelly? 

Mr. KELLY. Might I just respond quickly to Congressman Miller’s—I appreciate your summary and the description of the plight 

and I agree with much of what you said. However, I don’t believe 

that you should consider legislating on the basis of anomalies or 

hearsay. 

I have heard the stories, too, about— 

36 

Mr. MILLER OF CALIFORNIA. And I didn’t mean to do that— 

Mr. KELLY. I know you wouldn’t, and I appreciate that. But 

AMCs—there are 350 of them in the country. Are they all the best 

and good? No. Are there good and great ones? Yes, there are, and 

I think they are associated with my association. But they do, indeed, provide real value to the process, and the reputable AMCs indeed do help protect the appraiser but they also allow for the types 

of transactions that you are talking about to be facilitated. 

We mentioned in our testimony earlier that BPOs, ABMs, and 

other methodologies can be utilized to either check appraisals or to 

give a sense of what the trends are in any given neighborhood or 

any given property, and those sorts of tools are very much available and in use in today’s world. 

I was delighted to see my friend Karen Mann using an iPad to 

give her testimony today. And as you know from your real estate 

experience, the big technology of the day back in our day was the 

memory card in a Selectric typewriter. 

So things have changed. Things are, indeed, available— 

Mr. MILLER OF CALIFORNIA. Sure. 

Mr. KELLY. —today that can help, I think, go to the issues that— 

Mr. MILLER OF CALIFORNIA. Ms. Stephens, what is your opinion 

on what he just said? 

Ms. STEPHENS. I think that there are a couple of things that are 

incumbent on all of us and that we need to make sure change, and 

one of those is that lenders are held accountable for these appraisals and for the opinions and for their actions. But we also need to 

make sure that people who are regulating this industry, who are 

the regulators who are coming in, are well-versed and that we have 

a sufficient staff to take care of the problems that are coming and 

to make sure that what is happening in the appraisal business is 

well-maintained and understood as they try to do their job. 

Mr. MILLER OF CALIFORNIA. Madam Chairwoman, if you give me 

1 second—Mr. Kelly, I agree with—I am not disagreeing with what 

you said. What I was saying is we all make mistakes. We did. Congress did. And we came back and tried to correct that. 

But what we did was exclude everybody from being able to be involved and participating in this appraisal process—use matching 

appraisals dealing with areas we think that were done wrong, errors that might have been made. And they happen in appraisals. 

They just do. Happens in every business. 

But we have taken and excluded that ability to be competitive, 

comparative, and being to deal with mistakes that just occur. And 

that is what I am saying is where we have messed up. It is not 

impugning any appraiser anywhere. It is saying, let’s get back to 

a system of accountability and portability and reliability. 

And that was all I was saying, so if anybody in any way took any 

statement impugning anybody it was never intended to be that 

way. I am saying we goofed up. And other people make mistakes, 

too. Let’s get back to a system where we can correct those mistakes 

and come up with something that is really good for everybody. 

And thank you, Madam Chairwoman. 

Chairwoman BIGGERT. Thank you. 

I will recognize myself for 5 minutes. 

37 

In that line of thinking, Ms. Stephens, you have offered an alternative regulatory structure for real estate appraisers. How would 

this structure differ from the one we have today? 

Ms. STEPHENS. Let me start by emphasizing that what the Appraisal Institute is speaking about and what we are proposing is 

not a self-regulatory organization, like some have mentioned. Selfregulatory organizations involve industry, whereas the national 

mortgage licensing system is owned and operated by bank regulators, in this case State bank supervisors. 

Those are the fundamentals of the State appraiser certification 

and licensure and adherence to enforceable Uniform Standards of 

Professional Appraisal Practice would remain unchanged. At a high 

level, as I alluded to before, the current regulatory structure assumes that States are not capable of administering a system of certification, creating a specific agency to intervene with the process. 

The mortgage licensing system assumes that a State can assume 

the responsibility and administer State certification, maintaining a 

Federal presence out of a last resort. 

For many years, Congress and others have sought a way to advance regulator communication, and this mortgage licensing system has developed a solution. We understand that they are offering 

the system to State regulators outside the mortgage loan origination business, and as there are common problems that all State 

regulators face. So it would not be elite appraiser regulators to participate in this system. 

Thank you. 

Chairwoman BIGGERT. Thank you. 

And then, just one last question. Ms. Mann, on page 2 of your 

testimony, you call a Federal Reserve rule on customary and reasonable fees as required by Dodd-Frank, ‘‘stunning and completely 

inappropriate,’’ and you also mention that this rule creates a loophole. Could you expound on these points? 

Ms. MANN. Let me catch up with you here. 

Chairwoman BIGGERT. Okay. Page 2. 

Ms. MANN. It creates a loophole whereas the AMCs were allowed 

to go out and check customary fees, but within the scope of their 

investigation they used AMC fees as part of the equation, as part 

of the array. We feel that customary fees should be outside of the 

AMC realm and it should be from the general marketplace. 

For instance, V.A., FHA, appraisals done for other purposes, 

whether it be for dissolution or for estate work, just to get an ideas 

as to what the customary fee is for an independent appraiser in the 

field trying to make a living in their small business. 

Chairwoman BIGGERT. Okay. 

Mr. Kelly, do you have a response to that? 

Mr. KELLY. Yes, I do. We believe that appraisers should be paid 

appropriately. Fees for appraisers—compensation for appraisers— 

has always been set by the market. It is a supply and demand 

equation, quite frankly. Appraisers indeed deserve a reasonable, 

customary fee to be paid for the services that they provide. 

The notion that AMCs are somehow driving down fees for appraisers I think is really mistaken. We don’t set fees for appraisers; 

we work for lenders. We are the agents of the lender. We are doing 

the risk assessment pieces of what the lenders have traditionally 

38 

done. We provide, as I indicated in our testimony, services for lenders and for appraisers. 

One of the things that I have been told in all the years that I 

was with the Appraisal Institute is that one of the largest costs for 

appraisers was marketing. That in addition to the risk—no insurance and warranties and those types of things are real costs for appraisers, say, doing retail assignments. 

Much if not all of that has been offloaded to the AMCs, and so 

there is a sharing of that compensation. That risk and those duties 

are no longer done by the traditional appraiser and the consequent 

fee that they get is one that they agree to and have been negotiated 

with to say, ‘‘Will you go do this assignment on 123 Maple? It is 

a 1004, etc., etc. What is your fee?’’ They say it is $300 or whatever 

it might be, and you strike an agreement. 

So there may be anomalies on that, just like we have talked 

about anomalies on traveling, but those are truly anomalies, as far 

as I can tell. I haven’t seen any evidence of that— 

Chairwoman BIGGERT. Thank you. 

Would anyone else like to comment on that? 

Mr. Berenbaum? 

Mr. BERENBAUM. Thank you very much. 

I think it is very important to distinguish the importance of what 

has happened over the past 8 years. At the height of the market, 

60 percent of mortgages were originated by mortgage brokers, the 

majority of whom were professional lenders. 

However, we all know that we saw many problematic nontraditional, subprime loans. We also saw issues where appraisers were 

working exclusively with companies such as Ameriquest or brokers 

and they were overvaluing properties. 

The intent of the Home Valuation Code of Conduct was to ensure 

that arm’s length transaction, which was part of USPAP. We agree 

it should be changed. 

The reality today, jumping forward to today, is some of the unintended consequences of efforts to improve performance in the marketplace. Appraisers tell us, when we ask them about valuations 

given to consumers, with regard to accuracy issues, in the past 

they would have a day or more to produce an appraisal for a lender. Today, AMCs expect them to do two to three appraisals in the 

same time period. 

The fact of the matter is, appraisers are leaving the practice, the 

profession, in droves because they can’t make ends meet. That is 

not a product of quality. These appraisers are committed to providing quality products. 

But it is a product, unfortunately, of a changing marketplace, 

and what we are not seeing, and I hope we do see, back to the purpose of this hearing, is that we do see, in fact, the subcommittee 

working with the CFPB, working with the prudential regulators, to 

ensure safety and soundness and the return of robust lending. 

Thank you. 

Chairwoman BIGGERT. Thank you. 

I ask unanimous consent to insert the following material into the 

record: a June 28, 2012, statement from the National Association 

of Home Builders; a June 28, 2012, statement from the American 

Enterprise Institute; a June 28, 2012, statement from the AmerVerDate Nov 24 2008 18:39 Nov 29, 2012 Jkt 076111 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 K:\DOCS\76111.TXT TERRI
39 

ican Guild of Appraisers; a June 28, 2012, statement from the 

Mortgage Bankers Association; a June 28, 2012, statement from 

the Dallas-Fort Worth Association of Mortgage Brokers; and a June 

28, 2012, statement from the Leading Builders of America. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 30 days 

for Members to submit written questions to these witnesses and to 

place their responses in the record. 

With that, I would really like to thank you for your expertise 

that you have brought to this panel, and for helping us as we move 

forward. And so, I thank you all for being here. 

And with that, this hearing is adjourned. 

[Whereupon, at 12:06 p.m., the hearing was adjourned.] 

(41) 

A P P E N D I X 

June 28, 2012 

42 


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76111.002

NATIONAL 

COMMUNITY 

REl:-iVEST;\1ENT 

COALITION 

Testimony 

Of 

David Berenbaum 

Chief Program Officer 

National Community Reinvestment Coalition 

On the topic 

of 

Appraisal Oversight: The Regulatory Impact on Consumers and Businesses 

Submitted to the 

United States House of Representatives 

Committee On Financial Services 

Subcommittee on Insurance, Housing & Community Opportunity 

Room 2128 

Rayburn House Office Building 

Thursday, June 28th, 2012 

National Community Reinvestment Coalition 2 
44 


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Introduction 

Good morning Chairman Biggert, Ranking Member Gutierrez and other distinguished Members 

of the Committee. My name is David Berenbaum and I am the Chief Program Officer for the 

National Community Reinvestment Coalition (NCRC). On behalf of our coalition, I am honored 

to testify before you today from both a consumer protection and a safety and soundness 

perspective in order to discuss options for improving the regulatory oversight of stakeholders in 

the home valuation and housing finance industry. 

NCRC is an association of more than 600 community-based organizations that promote access 

to basic banking services, including credit and savings, to create and sustain affordable housing, 

job development, and vibrant communities for America's working families. 

Members of the Committee, today the U.S. economy is mired in the worst economic crisis in 

more than a half century and valuation issues remain front and center in the financial reform 

debate. And while few would conclude the current economic environment is comparable to the 

Great Depression, today's economy has clearly earned its moniker, the Great Recession. Our 

housing markets are currently experiencing a self-perpetuating cycle wherein (1) foreclosures 

drive down home values; (2) sinking home values erode bank assets and household wealth; (3) 

loss of wealth leads to lower consumer spending and less lending activity by banks; (4) this, in 

turn, leads to lower productivity; (5) that creates more unemployment; and (6) more 

unemployment causes more foreclosures. The most dispiriting aspect of the current crisis is 

that we have yet to meaningfully address the cause of the foreclosure crisis, the core problems 

that caused the financial system to implode and drove the economy into a ditch. 

National Community Reinvestment Coalition 3 
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This is not an equal opportunity recession. Although the national unemployment rate is an 

uncomfortable 8.2 percent as of May, that rate for African Americans exceeds 13.6 percent, 

and for Latinos unemployment is now 11 percent. The unemployment rate for non-Hispanic 

whites, by comparison, remains at 7.4 percent1 

Because African Americans and Latinos have comparatively few savings, they are poorly 

positioned to survive a lengthy bout of unemployment. The median wealth of white 

households is 20 times that of black households and 18 times that of Hispanic households, 

according to a Pew Research Center analysis from 2009. As a result, potentially millions of 

African-Americans and Latino households could find themselves falling out of the middle class 

by the time the economy recovers. This has been compounded by the dual lending market and 

valuation issues that have infected every residential community in America but have, in 

particular, metastasized in African American, Latino and low to moderate income communities. 

Moreover, African Americans and Latinos were targeted disproportionately for deceptive high 

cost loans and non-traditional toxic prime option ARM loans coupled with home equity lines of 

credit at 110 to 120 percent loan to value. The result is that blacks and Latinos are overrepresented in the foreclosure statistics. Pew Research analysis found that, in percentage 

terms, the bursting of the housing market bubble in 2006 and the recession that followed from 

late 2007 to mid-2009 took a far greater toll on the wealth of minorities than whites. From 

2005 to 2009, inflation-adjusted median wealth fell by 66% among Hispanic households and 

53% among black households, compared with just 16% among white households. 2 

I United States Department of Labor Bureau of Labor Statistics, May 2012 

2 Kochhar, Fry & Taylor "Wealth Gaps Rise to Record Highs between Whites, Blacks, Hispanics," Pew Socia! & Demographic 

Trends. July 26, 2011. www.pewsocialtrends.org 

National Community Reinvestment Coalition 4 
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Equally troubling are the following statistics: 

Roughly 11 million homes, 22.5% of homeowners, are currently mortgaged for more 

than they are now worth. 3 

According to Zillow, the number is even higher -15.7 million people, or one in three 

Americans owe more then their home is currently worth. Collectively this is 1.2 trillion 

dollars in debt. 4 

Approximately 3.5 million homeowners are behind on their payments (RealtyTrac) 

Nearly 1.5 million homes are already into the foreclosure process (RealtyTrac) 

3.6 million foreclosures will take place over the next two yearsS 

The time has come for members of Congress, the prudential regulators, the Appraisal 

Subcommittee and the Consumer Financial Protection Bureau to work collaboratively to ensure 

that consumers and all the industry stakeholders involved in the home buying and refinance 

process will benefit from a system of regulation that helps ensure the independence and 

integrity of the appraisal process. These efforts will promote equal access to responsible and 

sustainable credit and a robust mortgage marketplace that meets our nations immediate 

housing finance needs. 

In June 2005, the National Community Reinvestment Coalition released our report "Predatory 

Appraisals - Stealing the American Dream" exposing appraisal overvaluation as both a 

significant consumer protection and safety and soundness issue. While appraisal professionals 

did not appreciate the use of the word "predatory," the report brought sunshine to a previously 

3 Coreiogic Reports Negatlve Equity Increase In 04 2011, March 1

st, 2012. See www.corelogic.com/about~ 

us/researchtrends/asseCupload_file360_l443S.pdf 

4 Zillow Negative Equity Report, May 24'h, 2012. See http://www.zillow.com/blog/research/20l2/0S/24/despite-home-valuega ins-u nderwater -ho meowne rs-owe-l-2 -trjllion~more-tha n-homes-worth/ 

5 William C Dudley, President & CEO, Federal Reserve Bank of New York, Remarks at the New Jersey Bankers Association 

Economic Forum, January 6th, 2012. See http://www.newyorkfed.org/newsevents/speeches/2012/dud120I06.html 

National Community Reinvestment Coalition 5 
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unexposed issue and brought significant public policy attention to the underlying valuation 

issues impacting on loan origination, securitization and consumers alike. To quote from the 

studies executive summary - "".appraisal practices, combined with consumer protection 

loopholes and the absence of meaningful industry standards, is facilitating the theft of equity 

from homeowners nationwide, and, in the process, threatening the safety and soundness of the 

market. Further, these predatory appraisals destroy entire communities, leave the secondary 

market in extreme risk and endanger the marketplace as a whole. These abuses must end 

before the American dream of homeownership is stolen from the entire nation." Despite 

NCRC's repeated calls upon the prudential regulators, the Federal Financial Institutions 

Examination Council (FFIEC), Appraisal Subcommittee (ASC), the not for profit Appraisal 

Foundation and related state regulatory agencies to use the full force of their authority under 

Title XI of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), 

USPAP and related Federal and state laws to address the significant issues in our report, our 

requests for broad reform and enforcement were largely ignored. 

In 2006, NCRC founded The Center for Responsible Appraisals and Valuations, representing 

borrowers, appraisers and responsible financial service providers. The Center's mission was to 

encourage mortgage finance professionals to adopt an official "code of conduct" pledging to 

ensure fair and accurate appraisals for borrowers and to advocate for public policy on the 

federal and state level. The Center eventually created a national Code of Conduct as a voluntary 

industry best practice for all industry participants. In order to curtail the valuation abuse, each 

"signatory" agreed to comply with the guidelines of FIRREA as well as other local, state and 

federal rules and regulations. The Center Code of Conduct was devised in an effort to avoid 

conflicts of interest for loan officers and others who would have an interest in inflating real 

estate values. 

NCRC staff, including myself, personally met with over one hundred public and private sector 

leaders to request that they voluntarily accept the best practices that we had developed in 

cooperation with the appraisal, mortgage finance, and securitization industry. 

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Despite our best efforts, only a handful of responsible appraisers, AMC's and lenders joined the 

effort. Many industry trade associations actively pushed back against our efforts and preferred 

to support the status quo that was produCing routine overvaluations that often were more than 

20% above the actual value. The work of The Center concerning the Code of Conduct was 

ultimately superseded by the adoption of the Home Valuation Code of Conduct, which has been 

generally acknowledged by the New York State Attorney General's Office and the other parties 

to the agreement to be inspired by the NCRC Center's Code of Conduct. 

Prior to 2008, 60% of all appraisals were ordered by mortgage brokers. 6 Because of this, in 

2007, the New York Attorney General's Office began conducting investigations into whether 

lenders had been asserting undue influence on real estate appraisers to encourage them to 

inflate home values. Attorney General Cuomo believed that there may have been collusion 

between lenders and appraisers, for which they could be prosecuted. In late 2007, Cuomo 

expanded his investigation to include the Federal National Mortgage Association (Fannie Mae) 

and the Federal Home Loan Mortgage Corporation (Freddie Mac), the two giants of the 

secondary mortgage market. The purpose of the investigation was to determine whether or 

not these two corporations were complicit with other financial institutions in illegally inflating 

home values. Though neither corporation ever admitted to any wrongdoing, on March 3 rd, 

2008 an agreement was struck between the NY AG, Fannie Mae/Freddie Mac and their primary 

regulator, the Office of Federal Housing Enterprise Oversight (OFHEO). The NY AG agreed to 

end its investigation into Fannie Mae and Freddie Mac in exchange for these two industry 

giants agreeing to a new policy of only purchasing mortgages from banks that would abide by a 

new set of appraisals standards known as the Home Valuation Code of Conduct (HVCC).7 

6 Testimony of Sara W. Stephens, MAl, eRE. "Mortgage Origination: The Impact of Recent Changes on Homeowners and 

Business." July 13, 2011. House Committee on Financial Services, Subcommittee on Insurance, Housing & Community 

Opportunity 

7 Ted C. Koshiol, "Should the HVCC Settlement Be Treated As An Agency Ru!emaking7" Apri! 2009. 

http://works.bepress.com/cgi/viewcontent.cgi7artic1e=1000&context=ted_koshio! 

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The purpose of the HVCC was to prevent Fannie Mae and Freddie Mac from purchasing loans 

from sellers that had not adopted the code with respect to single-family mortgages (except 

government-insured loans) originated on or after May 1,2009. This regulation prevented 

banks' staff and mortgage brokers from directly overseeing the appraisal process. The HVCC 

was devised in an effort to avoid conflicts of interest for loan officers and others who would 

have an interest in inflating real estate values 8 

Under the HVCC agreement, lenders were not allowed to use in-house staff for initial appraisals 

and are prohibited from using appraisal management companies that they own or control. The 

HVCC encouraged banks to engage third-party appraisal management companies (AMC's), in an 

effort to keep the appraisal process independent from mortgage brokers, banks, etc. The HVCC 

also required GSEs to set up a complaint hotline for consumers and industry alike and funded 

the creation of a new "institute" known as the Independent Valuation Protection Institute 

(IVPI), to study the issue further. Though Fannie and Freddie implemented the HVCC, as a 

result of the GSE's failure and conservatorship the "institute" was never funded. This is 

unfortunate, because the Institute was originally envisioned and intended to address many of 

the issues that the House Financial Services Committee Subcommittee on Insurance, Housing & 

Community Opportunity is examining today. 

Unfortunately, the issues and related "contagion" of greed and malfeasance that inspired the 

creation of the HVCC at the height of the market, including appraisal independence, valuation 

fraud, rampant industry pressure upon appraisal professionals, open blacklisting or cherry 

picking of valuation professionals, and the absence of arms length transactions - coupled with 

the use of inaccurate and growing reliance on automated valuation systems in refinance 

lending - continue to infect our markets today even during a time of declining values and 

conservative underwriting. Instead of "flipping," the practice of overvaluing properties, we 

8 lbid. 

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now have "flopping," a deceptive practice in which there is instead widespread pressure to 

undervalue by real estate agents and many Appraisal Management Companies are implicit in 

the process. In addition, there has been an over reliance on foreclosures as "comps" or the use 

of broker price opinions. Further, the appraisal industry is in crisis, with respected and expert 

licensees leaving the trade due to inadequate compensation for the critical valuation services 

they provide. The answer that many suggest - use inaccurate AVM's and/or create a national 

valuation database to compensate for the shortage of qualified and licensed appraisers. 

Compounding this is the fact that a majority of states are diverting revenues that are sorely 

needed to recruit and train valuation professionals to their general funds. Of course, many of 

these factors are market driven, but most, if not all, could have been addressed by FFIEC 

Subcommittee and the prudential regulators if they fulfilled their mandate. 

Another core issue that has yet to be addressed is the fact the lenders and specifically end 

investors, such as Fannie Mae and Freddie Mac, provide the definition of Market Value that the 

appraiser must use in fulfilling an assignment for loans directed to them and presented on the 

GSE mandated form. This definition is based on providing a point-in-time value in current 

market conditions. Meaning what the house is selling for today makes sense in current 

conditions. Many professional appraisers have continued to offer counsel that a more prudent 

definition would be lending value. And, that this lending value, drawing on long standing 

principals in valuation, includes a consideration of market rents, carrying costs and other 

economic factors besides just comparable sales to determine if the property can sustain the 

collateral burden represented by the proposed loan. Appraisers either accept the assignment as 

presented by the lender client and fulfill to those requirements, or pass on the assignment. The 

lending value approach is helpful as many homes being sold as a result of foreclosure or short 

sale are now being rented by former homeowners or working families who are opting to rent 

rather then purchase and this approach will help sustain the tax base and comparable values in 

our nations communities. 

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The National Community Reinvestment Coalition calls upon policy makers to act swiftly to 

enforce Title XI of FIRREA, embrace the reforms included in the Dodd-Frank Act and implement 

the following ten recommendations that will help all Americans, but particularly assist low to 

moderate income communities, communities of color, and communities impacted by the 

foreclosure crisis, who are working to realize or sustain the American Dream of 

homeownership. 

1. Review and define a more modern, robust appraisal reporting process and not accept 

the Uniform Residential Appraisal Report form by the GSEs but rother to call on the 

industry to define more robust and standardized reporting that can be tailored to the 

lending situation. The recent changes by FHFA regarding the Uniform Appraisal Dataset 

have anly added further confusion ta the already inadequate mandated appraisal farm. 

2. Require full appraisals by licensed appraisal prafessianals for all residential mortgages 

abave $50,000 regardless if they are ariginated ar insured by the private sectar or Fannie 

Mae, Freddie Mac, ar Federal Hausing Agency. 

3. The role and impact of Appraisal Management Campanies (AMC) must be criticolly 

reviewed by the ASC ta ensure that they are not negatively affecting appraisal quality 

and further Cangress shauld immediately investigate the emerging practice af martgage 

originators assigning ar requiring that Appraisal Management Campanies and/ar 

appraisal professianals they engage far business assume the buy-back risk from the 

secondary market ar insurer claims relating ta laan ariginatian. 

4. Appraisal professianals enhance safety and saundness and protect the interests af all the 

parties to a martgage transaction-including consumers-and they must be 

appropriately compensated under any usual & custamary fee standard that is develaped 

5. The banking regulatars, Fannie Mae, Freddie Mac and the FHA shauld nat escape 

AppraisalSubcammittee valuation safety and soundness review and enfarcement. 

6. While Automated Valuatian Models (AVM's) serve as a useful and cost campetitive 

compliance taal and an effective check against fraud, they shauld never replace the use 

af an appraisal by a licensed appraiser for all mortgages that exceed $50,000. 

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7. There is a need for more effective Consumer Protection, Tronsparency & Education. 

8. Responsible Appraisal Practices Ensure and Expand Housing Opportunities in an Open 

Society. 

9. Inappropriate appraisal undervaluation is equally damaging to homeowners, 

communities, the tax base, investors & insurers. 

10. States must suspend redirecting funds intended for appraisal campliance, prafessional 

development and licensing, to their general funds. 

Reguiring Professional Appraisals Regardless of What Institution Originated the Loan: 

The United States Government Accountability Office (GAO) found in its 2012 report to Congress 

entitled, "Real Estate Appraisals - Appraisal Subcommittee Needs to Improve Monitoring 

Procedures" that more then seventy percent of the residential mortgages made from 2006 

through 2009 were $250,000 or less (See Report Chart 4, reproduced below) - the current 

regulatory threshold at or below which appraisals are not required for transactions involving 

Federally regulated lenders'" 

t:\,~;;;;:'-~~I Mortgages S150,00Q or le55 

D Mortgages 5150,001 to $250.000 

_ Mortgages mote !hM S250,OOO 

SOUIl:'" G/~O ilna!Y$ts oJ HOM!, d(ll<, 

9 "Real Estate Appraisals-Appraisal Subcommittee Needs to Improve Monitoring Procedures." The United States Government 

Accountability Office (GAO). 2012. 

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Mae, Freddie Mac, and the Federal Housing Administration have voluntarily required 

;als for mortgages both above and below the threshold. However, since these appraisals 

ndated on the forms they defined, they are still limited and self-serving. A more robust 

rd for defining the appraisal requirement suitable for specific lending situations could be 

~d by broad industry and consumer cooperation. 

hese entities currently dominate the mortgage market, many of the proposed Federal 

vate sector plans to scale them back could lead to a more privatized market, and 

~r this market would impose similar requirements is unknown. Therefore, it is NCRC's 

nendation to the House Financial Services Committee that valuations conducted by 

d appraisal professionals should be required for i!l! real estate guaranteed loans - public 

lte - for transactions above $50,000. This will ensure meaningful consumer protection 

educing risk to all of the parties involved with originating, servicing, insuring or 

teeing the mortgage transaction. 

" the National Community Reinvestment Coalition agrees with the position of the 

an Guild of Appraisers, which notes in its recent petition to the Federal Reserve Board 

~ CFPB that the real estate appraiser is the only participant in a loan transaction who is a 

'ested expert and whose only incentive is to provide as accurate as possible an estimate 

~ of the propertylO Appraisals, when performed competently and honestly, are a 

< against problematic and irresponsible lending practices that victimize borrowers and 

ely burden the American taxpayer when financial institution safety and soundness is 

lized. 

can Guild of Appraisers Petitions Federal Reserve Board." February 28, 2012. 

'w.opeiu.org/Home/tabid/37 /ctI/Articleview/mid/1886/articleld/300/American-Guild-of-Appraisers-Petitions-

~sel\le-Board.aspx 

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In contrast, the Guild notes real estate agents, lenders and mortgage brokers are all 

incentivized by the size ofthe loan and sale price of the property, which in some cases may 

prompt participants to advocate that the consumer buy more home then they can afford. 

Similarly, consumers are encouraged by mortgage or real estate professionals who are more 

interested in a personal gain than ethical professional practice, to apply for a larger mortgage, 

refinance, or obtain a reverse mortgage for a larger amount then they need. Of course, we 

acknowledge that most industry participants are ethical and professional, yet millions of 

Americans are now upside down in their home due to irresponsible practices across the nation, 

as is evidenced by the chart below. 

Figure 1: Percent of Homes ',\lth a Mortgage in Negative Equity across the Nation by County 

Percent 01 Homes v,;!h Mortgages in Negative Equity. Color scale I. cente;oo at 31.4%. the national average. Blue counties have 

fewer Ondef"'.vatar homes than the naUona! av-eraga, while red counUes have more underv,,-at$ .homes. 

2.5% __ l~,((j,~~~'i_ 84.6""" 

11 

This incentive may also lead some of the stakeholders to attempt to influence the appraisal. 

This undermines the very purpose of an independent, objective and accurate valuation. For the 

marketplace, investors and insurers, determining the true market value is critical to sustain safe 

& sound lending. As incentivized players advocate for an inflated value - or, often in the case 

11 Zillow Negative Equity Report, May 24, 2012. See http://www.zillow.com/blog/research/2012/0S/24/despite-home-valuega lns-u nderwater -homeowne rs-owe-l-2" trililon-more-tha n-homes-worth/ 

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of short sales or REO today, lower values to move properties off the books of servicers, this 

leads to riskier lending and compromised protection for the consumer or where there is no 

equity in the real estate leading to higher loan losses. Alternatively, it also lowers property 

values in impacted communities and undermines the tax base. The unintended consequences 

of this tampering behavior are readily observable in that as Congress has found time and again 

it leads to price bubbles, crashes, increased loan losses, loss of confidence and a weakened, 

unsustainable system. This is not a blue, red or purple issue - it has affected all Americans and 

communities and Congress must act to ensure that stakeholders enforce and are accountable 

to the law. 

Role and Impact o{Appraisal Management Campanies: 

Greater use of AMCs has raised serious questions about oversight of these firms and their 

impact on appraisal quality. 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 having demonstrated competency in the profession. However, the 

regulatory framework that developed as a result of the Dodd Frank Act has become more 

complex, inconsistent from state to state, and is in need of a thorough review by the ASC and 

the CFPB. In particular, there are growing concerns about the role of national AMC's and how 

they are conducting business under existing prudential regulators both Federal and State -

and how some may be negatively impacting upon FIRREA, US PAP, and the Dodd-Frank 

legislations mandate. 

Despite NCRC's well-intentioned effort of making the appraisal industry truly autonomous, our 

Center's Code of Conduct and the subsequent HVCC received heavy criticism from industry 

trade associations and other governmental agencies. Critics of the HVCC were concerned that 

the HVCC imposed significant changes on the mortgage industry as a whole but still would not 

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lead to an increase in appraiser independence. 12 Today, we must acknowledge that while the 

HVCC has realized many of its goals to ensure responsible underwriting, some of the concerns 

may have been warranted as there were a number of unintended consequences as a result of 

the HVCC including the emergence of AMC's that are owned by lenders and title companies, as 

well as, expanded use of Broker Price Opinions (BPO's) by mortgage servicers, which will be 

addressed later in this testimony. 

AMC's now order more than 80% of all appraisals13 The indirect effect ofthis policy is that the 

AMC's typically take a percentage of the appraisal fee, as well as, the bank or other lender that 

owns the AMC, resulting in the individual appraiser being paid less. With little incentive to 

perform to the highest standards, the appraisers' quality of work has greatly diminished as they 

are now faced with covering larger market areas and completing more paperwork for less 

money. The tacit concern is how do the aforementioned affect the homebuyer or seller? With 

shoddy appraisal work, the mortgage lender is more frequently requesting "second appraisals;" 

this means that not only is the home buyer responsible for the cost of the initial appraisal 

(generally a few hundred dollars), they are then responsible for a second appraisal, which 

requires the appraiser to start from scratch. 

NCRC is very concerned that many AMCs are gaming the original intent ofthe HVCC and now 

Dodd-Frank, to ensure an arms length transaction and that they are prioritizing low costs and 

speed over quality and competence even under the scrutiny of the GSE's and the FHA. While 

there are many responsible AMC's who celebrate compliance with FIRREA, USPAP, and the 

HVCC and Dodd-Frank, overall, the growing number of complaints from industry and not for 

profit providers alike indicate emerging compliance and safety and soundness issues that need 

to be addressed. It is NCRC's position that neither the ASC nor the prudential regulators are 

12 Ted C. Koshiol, "Should the HVCC Settlement Be Treated As An Agency Rulemaking?" April 2009. 

http://works.bepress.com/cgi/viewcontent.cgi?a rtic!e= 1000&co ntext::::ted _ koshiol 

13 Kate Berry, "Fed's Appraisal-Fee Revamp Befuddles Mortgage Industry." April 23, 2012. 

www.activerain.com/blogsview/3177693/ co nfusion-a bout -a p praisa I~feesNational Community Reinvestment Coalition 15 
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adequately supervising the AMCs, the GSE's or the FHA. While NCRC notes that Title XI of the 

Act places the day-to-day supervision of AMCs with state appraiser licensing boards 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 

AMCs, the ASC can be much more effective in establishing national standards and holding the 

AMC's and the states to those standards. For example, NCRC has become aware that some 

appraisers who do business with AMC's are renting mailing addresses to fraudulently represent 

that they have an office and are doing business in areas that AMC's are seeking valuation, when 

in reality they have little or no actual knowledge of the community and its valuation nuances. 

Further, though they accept a lower fee for their services from the AMC, they also produce a 

defective product. 

Five years ago professional appraisers would spend a full day or more researching and 

completing a valuation package on behalf of a lender. Today, many AMC's expect them to 

produce two or more reports in one day. Valuation professionals are fearful that AMC's and 

lenders will inappropriately report them to the CFPB or other regulators if they voice their 

concerns, or place them on "do not use" lists. It is critical that the ASC, the (FPB and the 

prudential regulators establish an even playing field with clear rules for every stakeholder in the 

mortgage transaction. 

Notably, it was also never the HVCC's intent to create AMC's to be appraisal gatekeepers. The 

ASC should consider recognizing or certifying state or regional appraisal companies as local 

providers who can serve as AMC proxies in their communities with appropriate national and 

state rule substantial equivalence. While a number of states began regulating AMCs in 2009, 

the regulatory requirements vary. Setting minimum standards and a goal of national and state 

"substantial equivalence" that address key functions performed by AMCs would enhance 

oversight of appraisal services, provide greater assurance to lenders, the enterprises, and 

others ofthe credibility and quality ofthe appraisals provided by AMCs. 

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Specific areas of concern that have been brought to NCRCs attention regarding AMCs include 

1) Inadequate ASC and prudential regulator AMC oversight; 2) AMC selection of appraisers for 

assignments who are not familiar with the communities where the property is located; 3) 

Limited or insufficient knowledge or sensitivity of Federal, State and local fair housing laws; 4) 

Review and inappropriate rejection of completed appraisal reports; 5) Inappropriate placement 

of licensed professionals as a means of coercion on AMC "do not use" lists; 6) Establishing 

artificial qualifications for appraisal reviewers; 7), Reliance on inaccurate or illegal use of broker 

price opinions in short sales or other transactions and 8), Paying the appraisers who perform 

appraisals a fraction of what would fairly be considered a reasonable and customary fee in 

violation of Dodd Frank. 

Further, many AMCs are directly or partially owned by mortgage wholesalers, large national 

banks, or title companies raising serious and ongoing conflict of interest questions. These 

originators cloak themselves behind the firewall of an independent AMC company, but if they 

own that company, either in whole or as a partial investor, undue influence can be exerted. 

Many appraisal management companies are also deemphasizing the critical role and 

importance ofthe home valuation checks and balances while profiting from AMC appraisal fees 

or the up sale and marketing of related settlement products, such as title insurance, filing 

services, etc. 

To quote one NCRC Center advisory board member, "imagine needing a medical doctor and 

having to go through an intermediary tasked with deciding which doctor you may visit, and that 

doctor is chosen primarily on his fee charged, not expertise." 

In addition to the aforementioned concerns, it is imperative for Congress and prudential 

regulators to immediately investigate the emerging practice of mortgage originators assigning 

or requiring that Appraisal Management Companies and/or the appraisal professionals they do 

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76111.018

business with, assume the buy-back risk from the secondary market or insurer claims relating to 

loan origination. 

The FDIC, as receiver for the failed lender Washington Mutual, sued appraisal management 

company, LSI Appraisal and its corporate parent Lender Processing Services, for breach of 

contract and gross negligence on May 9, 2011. '4 The lawsuit relates to hundreds of thousands 

of appraisals managed by LSI for WaMU between June 2006 and May 2008. The FDIC alleges 

that at least 220 of the reports it has analyzed were faulty and seeks more than $lS0 million in 

damages based only on those appraisals. As a result of this case, many lenders are requesting 

that AMC's assume all risk for the work of independent appraiser contracts, accepting the 

FDIC's proposition that these individuals are, in fact, "agents" of the AMC's when they do 

business.!S The policy response from appraisers and AMCs is that they simply cannot afford to 

hold, pay for, or insure, originators claims or secondary market buy back provisions. DoddFrank does create a duty of care for appraisers and AMC's, but in the absence of fraud or 

negligence, NCRC's position is that in most cases it is inappropriate to transfer liability from an 

originator to a third party contractor, unless the AMC is a division or affiliate of the lender, or 

fraud, discrimination, negligence or related consumer protection issues are present. 

Compensation for Approisol Professionals: 

The Dodd-Frank Act requires that Appraisal Management Companies (AMCs) pay "customary 

and reasonable fees" to their appraisers. Responding to evidence that appraisal management 

companies have been dominating the market and pressuring appraisers to accept assignments 

with unreasonable requirements and unreasonably low fees, the law specifically prohibits 

basing fees on the current practices of appraisal management companies. 

1LI "The FDIC Suffers a Setback in Case Against Lender Processing Services and LSI Appraisal." Peter Christensen. November 3, 

2011. http://www.03ppralserlawblog.comI2011/11/fd ic-suffers-setback -in-case-a gal nst html 

is Ibid. 

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Unfortunately, the Federal Reserve Board recently adopted a rule that will allow appraisal 

management companies that control up to 80 percent of residential appraisals to pay 

appraisers a fraction of what a customary and reasonable fee would be as defined in the lawsometimes as much as 50 percent or more below the prevailing rates. 16 As a result, industry 

experts report, the problems that Congress sought to address have been exacerbated and the 

reliability of residential real estate appraisals is once again subject to question. The American 

Guild of Appraisers has filed a petition with the Federal Reserve Board (Fed) and the CFPB, 

requesting that the Fed and CFPB take immediate action to prohibit AMC practices that under 

compensate appraisers in violation of Dodd Frank. 

Appraisal professionals who support the work of the Center for Responsible Appraisal and 

Valuation have repeatedly informed NCRC that this structure has forced many experienced 

appraisers away from the trade and limited the ability of a new generation of talent to become 

licensed who are unwilling to do more work for much less money. 

To quote the American Guild of Appraisers - "The profession is struggling to attract and 

maintain a vibrant base of qualified individuals because the fees are too low to support even a 

modest income and because of the unsustainable pressures under which appraisers are forced 

to work. The impact on the consumer can be dramatic in the form of lesser quality appraisal 

outcomes resulting in lost sales, lost financing opportunities and lost equity. The beachhead 

that professional appraisers have been able to secure over the years as an independent voice to 

protect the consumer is eroding dramatically as evidenced by the increasing number of 

seasoned appraisers leaving the work force and the diminishing number of new appraisers 

entering the field.'7" 

11:i "American Guild of Appraisers Petitions Federal Reserve Board." February 28, 2012. 

http://www.opeiu.org/Home/tabid/37 /ctIlArtic!eView!mid/1886/articield/300!American-Guild-of-Appraisers-PetitionsFed e ral-Rese rYe-Boa rd .as px 

17 The American Guild of Appraisers. "Consumer Protection Afforded by Professional Real Estate Appraisers." June 2012. 

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Certainly fees are a component of the issue but so is the fact that the mandated appraisal forms 

created by the GSEs and widely used have turned appraisers into merely form-fillers. And while 

the forms accommodate addendum commentary, the FHFA/GSE UAD does not digitize this 

portion of their appraisal report. Only the first 6 template pages are digitized in the UAD 

stream for analytics and revi.ew purposes. 

While NCRC is sensitive to the fact that any new requirement to pay appraisers a customary and 

reasonable fee could increase consumer costs, we believe that such a result is far from 

inevitable. Since the appraiser who performs an appraisal is legally required to assume full 

responsibility for compliance with all appraisal standards under USPAP, the AMCs cannot be 

adding material value to the appraisal work product. If lenders value the administrative 

services that AMCs provide to lenders, they should decide how much value such services 

provide and pay for them accordingly. In most markets, when an appraisal is ordered through 

an AMC, the fees for the appraisal paid by lenders and ultimately passed on to the borrower, 

are generally the same as when the appraisal is ordered directly from an appraiser. If lenders 

value additional services provided by AMCs, they are free to contract for them but such fees 

should be separated from the appraisal fee and not be the responsibility of the borrower. 

There are many in the industry that doubt that the AMCs are generally adding significant value. 

NCRC believes that the importance of arms length valuation in the absence of conflict of 

interest is critical, but that the current approach should be improved upon through new 

rulemaking. 

Currently, AMC profits result from under compensating the appraisers who do the work. 

Further, it is our hope that with greater mortgage disclosure or new substantially equivalent 

rules for local appraisal companies, AMC's will be prompted to lower their fees in order to 

make their services more efficient and competitive while ensuring reasonable and customary 

fees are paid to the licensed appraiser in the community. 

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Fannie Mae & Freddie Mac Should Not Escope Appraisal Subcommittee Review and 

Enforcement: 

In the January 2012 Appraisal Sub-Committee report, the GAO reported that Federal regulators 

and the enterprises represented that they hold lenders responsible for ensuring that AMCs' 

policies and practices meet their requirements for appraiser selection, appraisal review, and 

reviewer qualifications. While ambitious, the truth is that they generally do not directly 

examine the AMCs' operations. This presents a major safety and soundness risk to the market 

as a whole and does a disservice to licensed appraisers and the diverse communities & 

neighborhoods that they serve across the country. 

Limited Use ofAVM's: 

The Automated Valuation Model or AVM technology emerged in the late 1990's and was used 

primarily by institutional investors to determine risk when purchasing collateralized mortgage 

loans. Given the wavering state of the housing market and economy alike, many mortgage 

companies, banks, lenders, etc., began looking for ways to cut costs and improve their 

operational efficiency, leading to the increased use ofthe AVM in the appraisal process. 

An AVM is a residential valuation report that can be obtained in mere seconds. AVMs are 

statistically based computer programs that typically calculate the value of particular properties 

using a combination of hedonic regression and repeat sales index data. The results of this are 

weighted/ analyzed and then reported as a final estimate of value based on a request date. 

Due to the many limitations of AVMs, the Interagency Guidelines for Real Estate states: "An 

institution should establish standards and procedures for independent and ongoing monitoring 

and model validation, including the testing of multiple AVMs, to ensure that results are 

credible. An institution should be able to demonstrate that the depth and extent of its 

validation processes are consistent with the materiality of the risk and the complexity of the 

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transaction. An institution should not rely solely on validation representation provided by an 

AVM vendor.'8 The guidelines illuminate and stress the importance of using AVMs as a 

supplement to a traditional walk-through appraisal conducted by an unbiased, competent 

individual appraiser. 

NCRC's major concern with the use of an AVM is that the age of the data that undergoes the 

AVM analysis is not always clear. Many AVMs use transactional data that may lag anywhere 

from three to six months thus, automated valuation tools cannot clearly indicate the 

differences between the value of a home in 2005 versus its current value in 2012. 19 

Furthermore, AVMs often provide inaccurate reports, as it is possible, in fact probable, for an 

AVM to come up with a value based on a previous foreclosure sale or short sale, or to produce 

a value based on a property that was sold to a family member at a price far below the market 

value-when, in fact, the true value ofthese homes may be thousands of dollars more.'o 

Though AVMs are increasingly being used by mortgage lenders to determine the value of a 

property in order for them to lend against the valuation, and they present helpful real estate 

sales data, fraud alerts, and compliance indicators, they will never replace a full walk through, 

but have the potential to complement a full walk through appraisal. Until "I Robot" becomes 

reality rather then fiction, 1) An AVM cannot determine whether or not a property actually 

exists; 2) An AVM does not include the condition of the property which is necessary information 

for an effective valuation; and 3) An AVM cannot tell a requester if a specific property is located 

in an area with a declining market or an area that is becoming increasingly more popular. 

18 Interagency Guidelines for Real Estate. Interagency Guidance, 75 Fed. Reg. at 77, 469. 

19 George Demopu!os. "The Good, The Bad And The Fuzzy: Where AVMs Score And Miss," October 2010. www.sme-online.com 

~o Ibid. 

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A Need for More Effective Consumer Protection, Transparencv & Education: 

While the ASC is charged with developing a new complaint portal, it is targeted at industry 

stakeholders and whistle blowers. It is NCRC's position that a new and objective consumer 

complaint process should be developed by the Consumer Financial Protection Bureau in 

cooperation with a not-far-profit organization such as the Center for Responsible Appraisal & 

Valuation and/or the Appraisal Foundation. This concept was included in the recent GSE 

agreement but defunded when Fannie Mae and Freddie Mac entered receivership. Further, 

NCRC applauds the CFPB's efforts to develop simpler mortgage disclosure forms, and notes that 

the latest concept requires that appraisal AMC and Professional Fees be appropriately disclosed 

to consumers. Other recent policy changes aim to provide lenders with a greater incentive to 

estimate costs accurately and require lenders to provide consumers with a copy of the 

valuation report prior to closing. NCRC is also collaborating with the Appraisal Guild and the 

Appraisal Foundation to develop new educational tools for consumers and the trade alike. A 

well-informed consumer is one of the benefits of a transparent process in the appraisal process. 

The homeowner has the biggest stake in the process and they should have the ability to 

understand what they read in an appraisal report. Consumers need to have a greater 

understanding and appreciation for the role of the professional real estate appraiser as an 

independent voice in the valuation process that protects them from abuse from other 

interested parties. It is a benefit to consumers for the appraiser to discuss with the homeowner 

improvements, remodels, and even other sales in the area, e.g. the home across the street that 

sold for a significantly lesser price may have been due to a distressed relocation. Encouraging 

direct communication between the appraiser and the consumer alleviates the need to have a 

middleman tacking on higher costs to the consumer and ensures that the information that the 

consumer perceives to be material is communicated directly to the professional conducting the 

analysis. 

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Responsible Appraisal Practices Ensure and Expand Housing Opportunities in an Open Society: 

The National Community Reinvestment Coalition celebrates the Appraisal Foundation's, the 

ASC and the prudential regulators commitment to fair lending and a market free of 

discrimination, but more work needs to be done with the private and public sector industry, 

Appraisals that use descriptive terms such as "low pride of ownership," "lack of marketability" 

or an assessment ofthe "desirability" ofthe neighborhood should be scrutinized for 

discrimination. Similarly, an imbalance of positive and negative comments on the area or a 

consideration of inappropriate factors for the type or property and price range of the housing 

may indicate discrimination on the part of the appraiser. The amenities considered and the way 

they are valued should be consistent with the neighborhood and its needs. In lower income 

neighborhoods, convenient access to commercial areas and public transportation is a strong 

positive not a neutral or negative factor. 

The age of homes, predominant value, and use of com parables should be considered very 

carefully under our nation's fair housing laws, 

~ The age ofthe housing stock can have a realistic relationship to value, However, it can 

also be used inappropriately to devalue property based on the residents of the neighborhood. 

This has been a factor in redlining cases filed against Homeowners Insurance providers. Because 

minority neighborhoods tend to be older housing stock, a negative treatment of older housing 

stock can have the effect of devaluing minority neighborhoods. How an appraiser treats 

improvements in an older neighborhood can indicate whether discriminatory perceptions were 

taken into account, Some appraisals allegedly devalue improvements based on the average 

value of the neighborhood in which they are located, By limiting the value of improvements 

because of their relative value to other housing in the neighborhood, the appraiser puts an 

artificial cap on values there. 

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Predominant value: Like many American markets, the housing market is measured against a 

norm. Appraisers, underwriters, and even the secondary market prefer that the property in 

question fit into a recognizable slot. This leads to what many find as a depressing sameness of 

products - and of neighborhoods. One aspect of valuation is to consider how the property 

relates to its setting - the neighborhood. To do this, the age, style, and value of the property are 

compared. When a newly improved property is compared to the rest of the neighborhood, the 

lower value of the neighborhood can put a ceiling on the value of the improved property, 

effectively discounting the value of the improvements. This practice can have a negative effect 

on neighborhood renewal and may also have an impact on a prohibited basis. 

Comparables: The comparables should be taken as closely as possible from the same price 

range, age, and location as the property being appraised. Choice of com parables can have a 

significant effect on the valuation of the property. Fair housing advocacy groups have alleged 

that appraisers have chosen com parables to reflect a lower value for the property being 

appraised. 

Inappropriate Approisal Undervaluation is Egually Damaging To Homeowners, Communities, 

the Tax Base, and investors & insurers: 

The National Community Reinvestment Coalition has previously testified twice before the 

House Oversight and Government Reform in 2010 concerning the widespread use of broker 

price opinions and the growing trend of "flopping." Unfortunately, these issues persist in broker 

short sales and servicer real estate owned transactions post foreclosure. Owners of REOs are 

eager to dispose of REOs because they are costly to maintain and attract vandalism and crime. 

These REO owners have enlisted real estate brokers to issue BPOs for the value ofthese 

properties. The real estate brokers, acting as agents of the REO owners, develop hasty and 

inaccurate BPOs that underestimate the values of the REOs. Undervaluation is often 

destructive to local markets and depresses the value and equity of neighbors of REO properties. 

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Also, NCRC has documented numerous instances where real estate brokers have intentionally 

undervalued short sale or REO properties in order to facilitate a purchase by a colleague in the 

same office who later sells it for its true fair market value - aka flopping. NCRC has requested 

the prudential regulators to address this issue and called upon industry trade associations to 

police and educate their own members to prevent this troubling activity that inhibits the return 

of strong real estate markets. 

Regarding mortgage servicing and REO, the Government Accountability Office in a report issued 

in November 2011 recommended that federal regulators require the mortgage servicers they 

oversee to obtain updated valuations before initiating foreclosures 2l The report also pointed to 

the shortcomings of automated valuation models and broker price opinions. "Simply using a 

BPO or AVM without consideration of up-to-date property or neighborhood conditions may 

result in abandoned foreclosures because the actual resale value and accurate expected 

proceeds from foreclosure sale may not be reflected in the valuation," read the report. 

The GAO's monthly report notably cites the need to prevent abandoned foreclosures from 

blighting neighborhoods. This finding has particular resonance in urban and suburban 

communities were foreclosure is prevalent, such as Metro Chicago, Baltimore, Cleveland, 

Detroit, Las Vegas, and several California metro areas. According to the report, servicers 

typically abandon a foreclosure when they determine that the cost to complete the foreclosure 

exceeds the anticipated proceeds from the property's sale - which is usually determined after a 

loan has been delinquent for 90 days22 The GAO however, found that most servicers 

interviewed were not always obtaining updated property valuations before initiating 

foreclosure. "Fewer abandoned foreclosures would likely occur if servicers were required to 

obtain updated valuations for lower-value properties or those in areas that were more likely to 

experience large declines in value," read the GAO report. Specifically, the GAO recommended 

that the Federal Reserve and the Office of the Comptroller ofthe Currency require servicers, 

21 The United States Government Accountability Office (GAO). November 201L 

22lbid. 

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under their jurisdiction, to adopt new valuation requirements. The report noted that the Fed 

neither agreed nor disagreed with these recommendations while the OCC has yet to comment. 

last, the issue of AMC undervaluation and rejection of reasonable valuation reports is well 

known in the building, real estate and appraisal trades, and HUD Certified Housing Counselors 

are documenting the issue while working with consumers to facilitate short sales in lieu of 

foreclosure or who are attempting to refinance their existing mortgage. In one recent matter 

that NCRC documented, an African-American couple who resided in Prince George's County, 

Maryland, was approved for the refinance of their home and planned to use the loan proceeds 

to payoff the existing loan that was in foreclosure. The appraisal valued the property at 

$464,000. The borrowers had substantial equity in the property and although closing of the 

new loan had been scheduled, and the documents were signed by the borrowers in a timely 

manner to achieve disbursement prior to the foreclosure date, the servicer opted to move to 

foreclosure after receiving a lower and inaccurate broker price opinion (BPO). The bid price by 

the lender at foreclosure was $350,000. This resulted in the homeowners' suffering a loss of 

$114,000, or one could fairly say, the investor profited at the expense of the homeowner due to 

an inaccurate BPO. This case is now in litigation. 

States Must Suspend Redirecting Funds Intended for Appraisal Compliance, Professional 

Development and Licensing to their General Funds: 

The GAO reports that most state regulatory entities do not have sufficient funding, staff, or 

other resources to enforce the basic regulatory provisions of FIRREA. The problem is not a lack 

of money. The problem is that the states are siphoning off appraiser registration and regulatory 

funding fees. Appraiser regulatory fees are put into state general funds for other expenditures 

instead of the enforcement of the federal mandate to regulate real estate appraisers and 

appraisal activities. This practice must stop. 

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Conclusion 

In conclusion, I reiterate that the time has come for members of Congress, the prudential 

regulators, the Appraisal Subcommittee and the Consumer Financial Protection Bureau to work 

collectively to ensure that consumers and all the industry stakeholders involved in the home 

buying and refinance process will benefit from a system of regulation that helps ensure the 

independence and integrity of the appraisal process while promoting equal access to 

responsible and sustainable credit and a robust mortgage marketplace that meets our nations 

immediate housing finance needs. To accomplish this end, it is crucial to consider the following 

recommendations: 

1. Review and define a more modern, robust appraisal reporting pracess and not accept 

the Uniform Residential Appraisal Report form by the GSEs but rather to call on the 

industry to define more rabust and standardized reporting that can be tailored to the 

lending situation. The recent changes by FHFA regarding the Uniform Appraisal Dataset 

have only added further confusion to the already inadequate mandated appraisal form. 

2. Require prafessional appraisals by licensed appraisal professionals for all residential 

mortgages above $50,000 regardless if they are originated or insured by the private 

sector or Fannie Moe, Freddie Mac, or Federal Housing Agency. 

3. The rale and impact of Appraisal Management Companies (AMC) must be criticolly 

reviewed by the ASC to ensure that they are not negatively affecting appraisal quality 

and further Congress should immediately investigate the emerging practice of mortgage 

originators assigning or requiring that Appraisal Management Companies and/or 

appraisal prafessionals they engage for business assume the buy-bock risk fram the 

secondary market or insurer claims relating to loan origination. 

4. Appraisal prafessionols enhance safety and soundness and pratect the interests of all the 

parties to a mortgage transaction-including consumers-and they must be 

opprapriotely compensated under any usual & customary fee standard that is developed 

5. The bonking regulators, Fannie Mae, Freddie Mac and the FHA should not escape 

Appraisal Subcommittee valuation safety and soundness review and enforcement. 

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6. While Automated Valuation Models (AVM's) serve as a useful and cost competitive 

compliance tool and on effective check against fraud, they should never replace the use 

of on appraisal by a licensed appraiser for off mortgages that exceed $50,000. 

7. There is a need for more effective Consumer Protection, Tronsporency & Educotion. 

8. Responsible Appraisal Proctices Ensure and Expand Housing Opportunities in on Open 

Society. 

9. Inappropriate appraisal undervaluation is equally damaging to homeowners, 

communities, the tax bose, investors & insurers. 

10. States must suspend redirecting funds intended for appraisal compliance, professional 

development and licensing, to their general funds. 

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Testimony of 

David S. Bunton, President 

The Appraisal Foundation 

Appraisal Oversight: 

The Regulatory Impact on 

Consumers and Businesses 

u.s. House of Representatives 

Committee on Financial Services 

Subcommittee on Insurance, Housing and 

Community Opportunity 

June 28, 2012 

I THE APPRAISAL FOUNDATION 

I i Authorized ky Congress as the Source of AppraiJaf 

~ Standards and AppmiJer Qualifications 

The Appraisal Foundation 

115515th Street, NW 

Suite 1111 

Washington, DC 20005 

202-347-7722 

www.appraisalfoundation.org 
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INTRODUCTION 

Madame Chair and members of the Subcommittee, The Appraisal Foundation greatly 

appreciates the opportunity to appear before you today to offer our perspective on the 

regulation of real estate appraisers. 

There are many misconceptions about The Appraisal Foundation and let me begin by 

stating that the Foundation is not: 

a government agency or regulatory body; 

created by Congress; 

an appraisal trade association. 

Rather, The Appraisal Foundation: 

is a non-profit 501 (c) 3 educational organization; 

was founded by eight national appraisal organizations 25 years ago; 

serves as an umbrella organization representing over 100 organizations 

and government agencies with an interest in valuation (see attached list); 

was created to foster professionalism in appraising. 

We are the private sector expertise in the real property appraiser regulatory system. 

The Foundation was given specific authority by Congress in 1989 (Title Xl of FlRREA) 

regarding the real property appraiser regulatory system. The Foundation does not have 

any regulatory authority, but it provides tools for the regulatory community. 

Specifically: 

individuals seeking to become a trainee appraiser, supervisory appraiser, 

state licensed appraiser or state certified appraiser must meet the 

minimum qualification requirements established by the Foundation's 

Appraiser Qualifications Board; 

all states and territories must use licensing and certification examinations 

either issued or endorsed by the Foundation's Appraiser Qualifications 

Board; and 

all state licensed and certified real estate appraisers must adhere to certain 

standards of conduct (the Uniform Standards of Professional Appraisal 

Practice) written by the Foundation's Appraisal Standards Board. 

Before addressing the specific topics on which you are seeking our perspective, I would 

like to provide some additional background on the Foundation and its work to date. 

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FOUNDATION STRUCTURE 

The Appraisal Foundation is governed by a 25 member Board of Trustees. The Board of 

Trustees appoints members to the Foundation's independent Boards, secures funding 

for Foundation operations and provides oversight of the Foundation's advisory councils 

and independent Boards. The three independent Boards are: 

Appraiser Qua lifica tiolls Board (AQB) 

The AQB sets the minimum education, experience and examination requirements for 

trainees, state licensed appraisers, state certified residential appraisers and state 

certified general appraisers. These AQB established minimums are collectively known 

as the Real Property Appraiser Qualificatioll Criteria ("Qualification Criteria"). State 

regulatory agencies must meet the threshold set by the AQB and may exceed that level 

if they so choose. 

First offered in 2008, the AQB National Uniform Licensing and Certification 

Examination is currently used by all 55 states and territories that license and certify 

appraisers. States and examination vendors may opt to develop their own 

examinations that must be approved by the AQB, but at the present time none have 

chosen to do so. 

Approximately every five years the AQB reviews the Qualification Criteria to determine 

what, if any, revisions should be made. Their most recent revision will go into effect on 

January 1, 2015 and, for the first time a college degree will be required for the state 

certified classifications. Even with four significant Qualification Criteria revisions over 

the past twenty years, the US. still has the distinction of having one of the lowest sets of 

qualifications for appraisers in the industrialized world. For example, in Mexico an 

individual must first become all. architect or engineer before they can subsequently 

become an appraiser (known as a "valuer" in most other countries). 

Appraisal Standards Board (ASB) 

The ASB sets forth the rules for developing an appraisal and reporting its results 

through the Unifonn Standards of Professional Appraisal Practice (USP AP). USPAP 

contains the recognized standards of practice for real estate, mass appraisal, 

personal property and business appraisal and is considered one of the finest sets of 

domestic valuation standards in the world. 

The authority of USP AP extends beyond FIRREA. Since 1992, the Office of 

Management and Budget (OMB) has required federal land acquisition and direct 

lending agencies to use appraisals in conformance with USP AP. In addition, many 

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states require appraisals performed for any purpose to be USPAP-compliant and 

completed by state licensed or certified appraisers. 

In addition to containing the Standards, USP AP also provides guidance in the form 

of Advisory Opinions and over 300 Frequently Asked Questions. Originally 

updated quarterly, USPAP is now published every two years. USPAP is a living 

document that reflects the ever-changing needs of the marketplace. For instance, 

the srowing presence of Appraisal Management Companies (AMCs), alternative 

valuation products and the e1ech"onic transmission of appraisal reports in recent 

years has resulted in numerous inquiries to the ASB from appraisers, appraiser 

regulators and users of appraisal services. 

Appraisal Practices Board (APB) 

The APB was created by the Foundation in 2010. This board offers voluntary guidance 

to appraisers, regulators and users of appraisal services on recognized valuation 

methods and techniques for aU valuation disciplines. For lack of a better term, it is our 

"how to" board. 

The genesis of the APB was the collapse of the housing market in 2008. For many 

appraisers this was the first time that they were confronted with declining prices, short 

sales and foreclosures. Because a majority of appraisers do not belong to any 

professional appraisal organization, the question became "Where do appraisers get 

guidance for their practice?" The Foundation established the APB to fill an existing void. 

The APB armuaUy solicits stakeholders to identify topics where additional guidance 

appears to be needed. Teams of experts are then selected to work with the APB in 

developing the appropriate guidance. This guidance is known as a Valuation Advisory 

and may include more than one recognized method or technique that addresses the 

specific issue. 

Valuation Advisories issued to date include: 

TIle Identification of Contributory Assets and the Calculation of Economic Rents 

(Business Valuation) 

Adjusting Comparable Sales for Seller Concessions 

Residmtial Appraising in a Declining Market 

Valuation Advisories currently under development include: 

Jdentifying Comparable Properties 

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Appraising Green Buildings Background Competence 

The Valuation of Customer-Related Assets (Business Valuation) 

• Control Premiums for Financial Reporting (Business Valuation) 

Contingent Consideration (Business Valuation) 

It should also be noted that this f,uidance is available to appraisers, regulators and the 

general public at no charge and there is no requirement to use or adhere to the 

guidance. 

PUBLIC TRUST AND TRANSPARENCY 

A cornerstone of the work of the Foundation lies in building and maintaining public 

trust in the appraisal profession. In fact, the words "public trust" appear in our mission 

statement: 

The Appraisal Foundation is dedicated to promoting professionalism and ensuring 

public trust in the valuatioll profession. This is accompliShed through the promulgation 

of standards, appraiser qualifications, and guidance regarding valuation methods and 

techniques. 

One important way to build and maintain public trust is to promote transparency 

whenever and wherever possible. Our Boards conduct public meetings and adopt their 

work product in that setting. The Boards issue exposure drafts of pending work and 

post all public comments received on our website. We also conduct public interviews of 

candidates seeking to serve on our Boards. 

In addition, as part of our commitment to promoting the public trust, we have worked 

with several U.s. government agencies, at their request, on developing specific 

recommendations to improve their internal appraisal operations, to assist in their 

investigative work relating to valuation or to assist in developing new policies and 

procedures. Over the past several years we have worked with the following 

government agencies: 

u.s. Department of Agriculture, Forest Service 

U.S. Department of Interior, Bureau of Land Management 

Office of Special Trustee for American Indians 

• U.S. Department of the Interior, Minerals Management Service 

U.s. Department of Agriculture, Natural Resources Conservation Service 

• U.s. Department of Energy 

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FOUNDATION PROJECTS TO IMPROVE 

THE REAL PROPERTY APPRAISER REGULATORY SYSTEM 

In recent years we have had an excellent working relationship with the Association of 

Appraiser Regulatory Officials (AARO). The real property appraiser regulatory system 

is an unfunded federal mandate which has resulted in many states facing significant 

personnel and financial challenges. As a part of the appraiser regulatory system, the 

Foundation has made it a priority to assist state appraiser regulators whenever possible. 

The following are some examples of collaborative efforts benefitting state appraiser 

regulators. 

State Investigator Training 

State appraiser regulatory agencies investigate complaints using a variety of methods. 

Some states have full-time appraiser investigators, some share investigators with other 

professions and trades, some use state board members and others contract with 

appraisers. 

To help promote consistency in investigations of appraisal complaints, AARO and the 

Foundation developed a 2 1/2 day course focusing on USPAP, fundamental investigative 

and interviewing techniques and reporting the findings. 

Since 2009 we have conducted ten State Investigator Training Course offerings attended 

by more than 360 state investigators. Nearly 240 investigators have taken the entrylevel course and over 125 have gone on to take the 2 1/2 day advanced course. This year, 

we are offering the entry-level course in June and the advanced course in August. The 

Foundation, with a grant from the Appraisal Subcommittee (ASC), covers all of the 

travel and lodging expenses for the attendees so that state budgetary restrictions do not 

limit participation. 

[n addition, in December 2011 we filmed a four-hour "investigator update" at the Mock 

Court Room of George Washington University Law School. This update is for those 

who have taken both the entry-level and advanced courses. It is our belief that this 

video will have a shelf life of at least five years and can be viewed from the 

investigators home or office. 

This project is a great example of how the Foundation, AARO and the ASC can 

cooperatively produce a successful program that benefits the public in the form of a 

more efficient and consistent nationwide appraiser regulatory system. 

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Foundation eLibrary/Training Videos 

The Appraisal Foundation has produced a series of video training sessions, some 

designed specifically for state appraiser regulators and others for all appraisers. These 

training videos are located in the eLibrary on the Foundation's web site. 

Some of the videos currently included in the eLibrary are of specific interest to state 

appraiser regulators, including: 

USPAP Summary of Actions for the 2012-13 Edition 

A brief summary of the most recent changes to USP AI> provided by the ASB 

Chair and Vice Chair. 

2012-13 USPAP Update for State Regulators 

A presentation by the ASB Vice Chair on the most recent changes to USPAP 

geared specifically for state regulators. 

• Mock Administrative Hearing 

A four-hour Mock Administrative Hearing that includes a question and answer 

session with state regulators. 

• An Introduction to Green Buildings and their Valuation 

A panel discussion induding representatives from the White House, the U.s. 

Department of Energy, the U.S. Green Building Council and Cushman & 

Wakefield. 

• Appraisal Regulaton} Investigator Update 

An update for participants who have completed the entry level and advanced 

level of the State Investigator Training filmed at the George Washington 

University Law School. 

This August we are filming the following videos that will be of interest to state 

appraiser regulators: 

• Understanding the Real Property Appraiser Regulatory System 

The AQB Real Property Appraiser Qualification Criteria Changes Effective 2015 

The Role and Responsibilities of the Appraisal Practices Board 

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Consistent Enforcement 

Many jurisdictions have differing enforcement philosophies, with some placing more 

emphasis on fines, education or probation. However, they are all enforcing the same 

document, USPAP, so there should be consistency in enforcement. 

The Foundation appointed a task force composed of state and federal appraisal 

regulators to develop recommended voluntary disciplinary guidelines for the states. In 

August 2010 the Foundation issued a Voluntary Disciplinary Action Mntrix for use by 

state appraiser regulatory agencies. The matrix cites specific violations of USPAP and 

recommended disciplinary action. The matrix also contains a list of aggravating and 

mitigating circumstances to consider. The matrix is updated with each edition of 

USPAP and is made available to all state regulators. 

SPECIFIC COMMENTARY REQUESTED BY THE SUBCOMMITTEE 

1) Please provide a summary of and the challenges of the new strategic plan of The 

Appraisal Foundation and a review of the evolution of the Appraisal Practices Board 

(APB). 

The Proposed Strategic Plan o/The Appraisal Foundation 

The Strategic Plan Task Force was established in 2011 by the Chair of the Board of 

Trustees. With 2012 marking the 25th Anniversary of The Appraisal Foundation, the 

leadership of the Board of Trustees agreed that the time was right to take a close look at 

where The Appraisal Foundation is heading as it moves into its next 25 years. The Task 

Force, which is composed of appraisers, users of appraisal services and regulators, with 

representation from the many appraisal organizations and stakeholders, was charged 

with reviewing the history of The Appraisal Foundation (where it started, where it is 

now and where it will go in the future). 

Since May of 2011, the Task Force met numerous times via conference call and held in 

person sessions in September 2011 and January 2012. The January meetings culminated 

in an initial briefing with the Executive Committee of the Board of Trustees. Since that 

meeting, the Task Force held several conference calls to refine its initial 

recommendations. These draft recommendations were presented to the Board of 

Trustees and the Sponsors of the Foundation on May 17 and May 18 in conjunction with 

the Spring Board of Trustees meeting. 

It is anticipated that the proposed Strategic Plan of the Task Force will be submitted to 

the Board of Trustees next month. Assuming it is accepted by the Board of Trustees, it 

will be publicly exposed to nil stakeholders for ninety dnys. This November the Board of 

Trustees will take into account public comments received and make a final 

determination on approving the Strategic Plan. 

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The main elements of the plan include: 

1) Revised Foundation Vision and Mission Statements 

2) Outreach and Communications 

3) Interaction with State and Federal Regulators 

4) Future Educational Role of The Appraisal Foundation 

5) Potential Future Funding Sources 

6) Future Role of Foundation Sponsors 

7) Proposed Foundation Structure 

8) Staying Abreast of Changing Valuation Products 

9) Reaching out to Young and New Professionals 

10) Future Foundation Relationship with Academia 

11) Branding of The Appraisal Foundation 

Following the briefing to the Trustees in May on the above items, the Board voted to 

revise the Vision and Mission Statements as suggested by the Task Force because they 

were viewed by the Trustees as being merely clarifying in nature. A National 

Education Partnership Task Force was also appointed to further define and look into the 

feasibility of draft recommendation #4, which included a joint effort to develop 

educational course materials with the Sponsors of the Foundation. 

The Evolution of The Appraisal Practices Board 

The genesis of the APB was the collapse of the housing market in 2008. For 

many appraisers this was the first time that they were confronted with declining 

prices, short sales and foreclosures. Because over two thirds of appraisers do not 

belong to a professional appraisal organization, the question became "Where do 

appraisers get guidance for their practice?" ·fhis was first brought to the attention of 

the Foundation at a meeting with the Appraisal Subcommittee in December 2008. 

At that meeting some members of the Appraisal Subcommittee expressed 

concern about the fact that the Foundation was not providing guidance to 

appraisers regarding valuation methods and techniques. They stated that, given 

our public charge, the Foundation has a responsibility to be of assistance. 

This discussion was brought to the attention of the Executive Committee of the 

Foundation's Board of Trustees by Foundation staff the following month. It was 

the determination of the Trustees that a task force should be appointed to 

determine: 

1) Does a void currently exist regarding the issuance of guidance on 

valuation methods and techniques? 

2) If such a void exists, is the Foundation the appropriate organization to 

fill the void, or is there another vehicle (or entity)? 

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Following several months of deliberations, the Task Force on Recognized 

Valuation Methods and Teclmiques recommended that the Foundation Board of 

Trustees give consideration to creating a third independent Board charged with 

issuing recognized valuation methods and techniques. 

In October 2009 the Board of Trustees approved the creation of the Appraisal 

Practices Board (APB). It was constituted on July 1, 2010. 

The APB annually solicits stakeholders to identify topics where additional 

guidance appears to be needed. Teams of experts are then selected to work with 

the APB in developing the appropriate guidance. This guidance is known as a 

Valuation Advisory and may include more than one recognized method or 

technique that addresses the specific issue. 

In summary, it is important to note the following about the APB: 

(1) The APB does not have any Congressional authority and adherence to 

the guidance is strictly voluntary; 

(2) The APB does not operate with any publici grant funds; and 

(3) The Foundation does not charge for the Valuation Advisories issued by 

the APB. 

2) Please provide a summary of and the challenges to the Uniform Standards of 

Professional Appraisal Practice (USPAP). 

The Unifoml Standards of Professional Appraisal Practice (USP AI') are promulgated 

by the Appraisal Standards Board of The Appraisal Foundation. They are the 

generally recognized set of valuation performance standards in the United States 

and are considered one of the best sets of domestic standards in the world. In 

addition to real estate, USP AI' also covers, mass appraisal, personal property and 

business valuation. 

Promulgating USP AI' has several challenges. The first is that it must be flexible 

and broad enough to address the myriad of valuation problems confronting 

appraisers while at the same time being definitive enough to be an effective 

enforcement document for appraiser regulatory officials to use in their 

disciplinary proceedings. This is one of the primary reasons that the Foundation 

has established such a close and productive relationship with the Association of 

Appraiser Regulatory Officials (AARO) over the years. AARO shares concerns 

the regulators have about USP AI' and we have the opportunity to share the 

rationale and intent of the Appraisal Standards Board in drafting the Standards. 

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The ever changing conditions of the marketplace present another challenge 

for the Appraisal Standards Board in promulgating USPAP. For instance, 

the growing presence of Appraisal Management Companies (AMCs), 

alternative valuation products and the electronic transmission of appraisal 

reports in recent years has resulted in numerous inquiries to the ASB from 

appraisers, appraiser regulators and users of appraisal services. 

As far as the effectiveness of the Appraisal Standards Board in issuing standards, 

the Government Accountability Office (GAO) report issued in January of this 

year (Report 12-147) contained a survey of state appraiser regulatory agencies. 

One question asked about the effectiveness of the Appraisal Standards Board in 

setting standards for the way appraisals should be conducted. The results were 

as follows: 

Very /Somewhat Effective: 74% 

Somewhat/Very Ineffective: 6% 

Neutral/Don't Know: 20% 

3) Please provide an overview of the regulatory actions taken by The Appraisal 

Foundation and the Appraisal Subcommittee. 

The Appraisal Foundation 

As previously stated, the Foundation does not have any regulatory authority but 

does provide the tools for the appraiser regulatory community to perform its 

duties. The Dodd-Frank Financial Reform Act gave additional Congressional 

authority to the independent Boards of the Foundation. 

States who have a state licensed residential appraiser classification must now 

meet the AQB Real Properh} Approiser Qualification Criteria for that classification. 

In addition if a state has a trainee appraiser classification, it must meet the AQB 

Qualification Criteria for trainee appraiser as well as for supervisory appraisers. 

The AQB adopted revisions to the Qualification Criteria for these and other 

classifications in December 2011, with an effective date of January 1, 2015. 

The Dodd-Frank Financial Reform Act also calls for the Federal financial 

regulatory agencies to consult with the Appraisal Standards Board regarding 

quality control standards for automated valuation models (AVMs). While we 

have not been contacted to date, we stand ready to assist. 

Paee I 11 
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The Appraisal Subcommittee 

We believe that the increased regulatory authority granted to the Appraisal 

Subcommittee as a result of the enactment of the Dodd-Frank Financial Reform 

Act enhances and clarifies the role of the Appraisal Subcommittee. Grants to the 

states, the establishment of a national appraisal hot line, the ability to promulgate 

regulations and the future regulation of Appraisal Management Companies 

(AMCs) all are improvements to Title XI. 

4) Please outline any other industry related Federal activities that are of importance 

to your organization. 

We have two areas of industry related Federal activities that are of importance to 

the Foundation: 

Recommendation Regarding Appraisal Subcommittee Grants to the States 

The Dodd-Frank Financial Reform Act authorizes the Appraisal Subcommittee 

to: 

"make grants to state appraiser certifijing and licensing agencies in accordance 

with policies to be developed by the Appraisal Subcommittee, to support the 

efforts of such agencies to comply with this title, including the complaint process, 

complain t investigations and appraiser enforcement activities of such agencies." 

Providing grants to individual jurisdictions may prove to be problematic due to 

issues relating to defining specific needs, tracking funds and grant 

administration. We recommend that consideration be given to using the funds 

to train numerous states concurrently. This could be done through the classroom 

format used for state investigator training or through videos and/ or webcasts. 

While we may never achieve uniformihj in all 55 states and territories regulating 

appraisers, this would go a long way to help promote consistency among the 

states. Topics for such training could include: 

1. Legal Staff Training 

2. Board Member Training 

3. Administrative Staff Training 

4. Understanding the Complaint Process 

5. Promoting Consistent Enforcement 

The Appraisal Foundation stands ready to assist in administering these training 

sessions, as it has with the state investigator training sessions. 

Page I 12 
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Recommendation Regarding The Feasibility of Establishing a Self-Regulatory 

Organization System for Appraisers in the U.S. 

It has been brought to our attention that there may be a proposal offered at the 

hearing to replace the current appraiser regulatory system as mandated by Title 

XI of FIRREA with a Self-Regulatory Organization (SRO) system, operated by a 

trade association. 

For the past two decades the Foundation has been working with non-profit 

organizations and governments around the world regarding appraiser 

regulatory systems. In countries where there is one principal appraisal trade 

organization, such as in Great Britain and Australia, the system can work quite 

well. It can also work well in countries or regions where the valuation profession 

is just developing. We assisted groups in Russia and the League of Arab States 

in the Middle East in this regard. 

However, in many countries it can be problematic and the U.s. is one of those 

countries. The Appraisal Institute is the largest trade association in the U.s., yet 

over two-thirds of state licensed and certified appraisers are not members. In 

addition, there are over fifteen national and regional appraiser organizations. 

Due to this fragmentation, an SRO doesn't appear to be feasible. 

In addition, there is the question of effective enforcement. According to the 

Government Accountability Office (GAO) report issued in January of this year 

(Report 12-147), state appraiser regulatory agencies, often with limited resources, 

have been very active over the past ten years. They have issued almost 16,000 

disciplinary actions, including almost 2,300 revocations and voluntary 

surrenders and over 1,800 suspensions. 

We don't believe an SRO system would produce anywhere near the diligence 

and enforcement record that has occurred in the 55 jurisdictions currently 

regulating appraisers. In addition, it is important to note that Title XI was in 

large part enacted because the trade associations did not adequately police their 

own members. 

CONCLUSION 

The Title XI real property appraiser regulatory system, while certainly unique and not 

without its flaws, has made a very real difference. It is the glue that holds the 55 

jurisdictions together and every effort should be made to further refine and improve a 

system that has demonstrated effectiveness without the use o[npproprillted funds. The 

Page 113 
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Appraisal Poundation stands ready to assist with this effort in any manner you believe 

is appropriate. 

Again, The Appraisal Foundation appreciates the opportunity to share its perspective 

with you today and we urge this Subcommittee and all members of Congress to 

continue to use the Foundation as a fair, impartial and objective resource on 

valuation-related issues. 

Page 114 
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76111.044

IB NATIONAL 

ASSOCIATION of 

REALTORS* REALTOR" 

www.feal!o[~.org!g()yernm,'ntafralrs 

STATEMENT OF THE 

l\.!auncc "Moe" \'('l~si 

20 12 P~t'sldcnt 

GOVERNME:';T ,\FFA.IHS 

Jell")' GJoY:lOleHo. Senior VICt;' Prc~ld('nt 

NATIONAL ASSOCIATION OF REALTORS® 

SUBMITTED FOR THE RECORD TO THE 

UNITED STATES HOUSE OF REPRESENTATIVES 

COMMITTEE ON FINANCIAL SERVICES 

SUBCOMMITTEE ON INSURANCE, HOUSING AND 

COMMUNITY OPPORTUNITY 

HEARING REGARDING 

APPRAISAL OVERSIGHT: THE REGULATORY IMPACT 

ON CONSUMERS AND BUSINESSES 

JUNE 28, 2012 

REALTOR" is a registered collective membership mark 'Which may be used only by real estate 

professionals who are members of the NATIONAL ASSOCIA nON OF REALTORSolJ 

and subscribe to its strict Code ofI:thics. 
86 


76111.045

INTRODUCTION 

Madam Chait, Ranking Member Gutierre", and members of the Subcommittee, I am Francois 

(Frank) K. Gregoire, President of Gregoire & Gregoire, Inc., based in St. Petersburg, Florida. I 

tbank you for the opportunity to participate in this hearing on behalf of the one million members of 

the National Association ofRE;\I.TORS" (NAR). NJ\R is America's largest trade association, 

including its eight affiliated Institutes, Societies and Councils. REALTORS" are involved in all 

aspects of the residential and commercial real estate industries and belong to one or more of some 

1,400 local associations or boards, and 54 state and territory associations of REALTORS". N,\R 

represents a wide variety of housing industry professionals, including approximately 30,000 licensed 

and certified appraisers, committed to the development and preservation of the nation's housing 

stock and making it available to the widest range of potential homebuyers. 

I have been involved in appraising real property since 1977. I am a state-certified residential 

appraiser in Florida and have been awarded the Residential Accredited Appraiser (RAA) Designation 

by NAR and the Independent Fee Appraiser (IFA) Designation by the National Association of 

Independent Fcc Appraisers. As a member of the Board of Directors of the Florida REALTORS@ 

and NAR, T have been involved in lheir public policy committees since 19<)2. While serving on the 

Florida Real Estate Appraiser Board, I represented Florida on the Appraisal Foundation State 

Regulator Advisory Group and as a member of the Association of Appraiser Regulatory Officials 

Board of Directors. Specializing in one-four unit family residential properties, Gregoire & Gregoire 

offers a variety of services from appraisals for mortgage loans to providing expert testimony in 

administrative and judicial courts for disciplinary proceedings and litigation. 

NAR believes a strong and independent appraisal industry is vital to restoring faith in the mortgage 

origination process. In my testimony today I would like to address a number of issues impacting the 

credible valuation of real property, which is one of the most critical and overlooked aspects of the 

recovery of our industry. The challenges faced in the appraisal industry can be broken into three 

areas: 1) challenges facing the appraiser; 2) challenges in the appraisal process; and 3) concerns in 

regulatory oversight. There arc a myriad of issues hindering the appraisal process and, while we will 

offer some solutions, it is important to note that there is no "silver bullet" remedy. As we see 

2 
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markets stabilizing and improving across the country it is also parat110unt that we discuss tl1c [uhue 

of valuing real property. 

\Vc thank the House l"inancial Services Committee for holding this hearing on an issue that is 

paramount to restoring confidence in the U.S. housing market. 

APPRAISAL ISSUES AND CHALLENGES 

There are a myriad of circumstances and issues w01'king to hinder the recovery of the nation's 

housing market. Among them, and often overlooked, are those related to the credible valuation of 

real property. A credible valuation provided by a licensed 01' certified professional 1) ensures the real 

property value is sufficient to collateralize the mortgage, 2) protects the mortgagor, 3) allows 

secondary markets to have confidence in the mortgage products and mortgage backed securities, and 

4) builds public trust in the real estate profession. However, in today's world there arc many road 

blocks in the way of valuing property and, as a result, allowing for a healthy recovery of the broader 

real estate industry. Because there arc many roadblocks there is no one, "silver bullet" solution. 

Appraiser Compelfl1CY, I\n important component of the Uniform Standards of Professional Appraisal 

Practice (USPAP) is the Competency Rule. The rule requires the appraiser to be competent, acquire 

competency, or decline the appraisal assignment. Competency requires the appraiser to have the 

ability to identify the valuation problem to be solved, the knowledge and experience to complete the 

assignment cOlTIpetendy) and to have a recognition of and c01npliancc ''''ith, laws and rcgulations 

that apply to the appraiser and the assignment. Absent the competency required, the appraiser must 

disclose their lack of knowledge or expertise to the client before accepting the assip,ment, take all 

necessary or appropriate steps to complete the assignment properly, and make necessary disclosures 

in the appraisal report. The term "Competency" refers to a number of factors. Among them are 

familiarity with a specific property type, a specific market, a geographic area, specific laws and 

regulations, an intended use, and analyticalmcthods. 

Legislation and regulation in the 1980's forced changes to the real estate appraisal profession; many 

of them positi\'e. Litigation, legislation, and regulations in the 2000's also have forced changes to the 

3 
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76111.047

real estate appraisal business. Despite the good intent, the changes have diminished the importance 

of appraiser cotTIpetcncy as a requjretnent for appraisal assignlTICllts to the detriment of the 

enterprises, lenders, mortgage insurers, and consumers. The insertion of middlemen or hrokers of 

appraisal services between loan originators and appraisers resulted in a focus on fcc and turn-around 

time rather than the appraiser's competency, knowledge, professional designations, and experience. 

Clearly, this was not the intent but it appears to be an unintended consecluence. 

Knowledge of the local market, more commonly referred to as geographic competency, is the most 

common concern cited hy our members. l.!SPAl' reguires appraisers to spend sufficient time in a 

local market to understand the nuances of a particular location. It is important to note that l.!SPAP 

docs NOT limit the distance an appraiser may travel to an assignment. \Vhile a distance traveled 

limit sounds like a simple solution it is far from efrective. This is because markets vary widely ~ an 

appropriate distance limit in an urban market may not be appropriate in a nearby rural area. What is 

important is that clients retain services from appraisers with a level of geographic competence 

sufficient to complete the assignment with credibility 

NAR offers some recommendations to address concerns with competency. The most effective 

solution to appraiser competency may he improved communication between the appraiser and 

others involved with the appraisal report. Communication between appraisers and real estate agents 

and their clients is not prohibited and should, in fact, be encouraged. Appraisers should feel 

compelled to offer their competency to stakeholders. Real estate agents and their clients should ask 

questions to get a better understanding of the appraiser's qualifications, education, experience, and 

professional designations. While conununication should be encouraged; coercion and other attempts 

to influence value are, and should continue to be, prohibited. Another solution is enhanced 

education requirements for appraisers. NAR has long supported this as the key to ensure appraisers 

maintain the necessary skills to provide their critical services. 

AppraiJal Management CompanieJ. According to the Dodd-Frank Wall Street Reform and Consumer 

Protection Act (public Law No. 111-203), an appraisal management company (AMC) is 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; 

contracts with appraisers to perform appraisal assig111nents; manages the process of having an 

4 
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appraisal performed; or review anc] verify the work of appraisers.!'1 Services provided by "\l\1Cs may 

include identifYing appraisers, reviewing appraisal reports as part of quality control, and managing 

the appraisal process. 

1\(any AMCs provide legitimate services for legitimate fees, but a large number of AMCs are 

contributing to problems in the appraisal business, the appraisal profession, and the housing market. 

Although many loan originators have contracted with these third party brokers of ,"aluation services 

in an attempt to comply with their Dodd-Frank related regulatory obligations to ",-oid conflicts of 

interest and ensure appraiser independence, there is evidence that appraiser independence is often 

being compromised by the AMC itself. 

Some of our appraiser members ha\"e reported that working with a quality A1\IC, even for a slightly 

reduced fee, may be wortllwhile because they offer a steady stream of work, offer competitive fees, 

promote and respect appraiscr independence, and treat appraisers appropriately. I-lowe\"er, thcse 

AMCs are not the problem. More often than not our appraiser members report that AMCs, 

particularly those owned by, or affiliated with lending institutions, arc insisting appraisers provide 

appraisal reports with an unacceptable turnaround time, a burdensome scope of work, and for a 

si6'1lificantly reduced fcc. Less experienced appraisers are accepting these assignments and are often 

willing to skirt competency requirements in the process; expcrienced appraisers will not accept these 

assignments. The end result is a stain on the profession and home values that are not credible. 

Lenders and consumers are being underservcd. 

Prior to the fL>;:ation on perceived conflicts of interest related to appraiser selection and retention 

initiated by the Home Valuation Code of Conduct (HVCC), most licensed and certified appraisers 

typically maintained a wide and often diverse clicnt basco As a service business. appraisers and finns 

competed on tl,e basis of knowledge, skill, competency, reputation, price and service. Although 

market driven ebbs and flows affected the firm's client base, the principals cultivated their clients 

and business relationships. Contrary to the belief of many, most of thesc relationships were not 

sinister and based solely on an appraiser's willingness to compromise their ethics and professional 

responsibility by producing appraisal reports to "hit the number". Most appraisers value their 

license, arc serious about their profession, their duty to the public, and would strive to produce well 

111 Dodd-Frank Act § 1473(1)(4) (codified at 12 U.s.c. § 3550(11». 
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documented, credible appraisal reports. II. large, di,'erse client base allowed the appraiser to be 

independent and to concentrate on profcssionalislll. 

The appraiser-client business relationships built on the foundation of knowledge and tmst have 

been shattered over the past few years. According to a recent C;1.0 study, the market share of AMe 

appraisal business has increased from 15 percent (0 60 - HO percent'. An appraiset's disagreement 

that might have resulted in the loss of one client prior to HVCC or Dodd·Frank might now 

represent the loss of 20 - 60 percent or more of the appraiser's business. In the place of well· 

cultivated business relationships arc panels of appraisers maintained by a relatively few ;"1.1\[Cs, the 

largest of which are owned by the nations' biggest lenders. For the most part, the" \I\fC is interested 

in a vendor rather than a professional. Their vendor is offered appraisal assignments often based on 

their willingness to accept a lower fee than a competing vendor, or their promise to deliver the 

completed appraisal report faster. For tl,e more unscmpulous AMCs, their vendor must only meet 

the millinmm standards of 1) having a license or certification as an appraiser, and 2) showing proof 

of errors and omissions insurance. Instead of selecting the best appraiser to complete the appraisal 

assignment on the basis of experience, knowledge and competency, the assignment is often awarded 

to tl,e vendor responding first to an email blast sent to dozens or hundreds of appraisers that 

happen to be on the AMC panel in that state. Is it any wonder appraiser competency and appraisal 

quality is questioned when such tactics are employed? 

Tn a stable market, with an abundance of arm's length transactions, it might be possible to quickly f.tII 

in the blanks on a form, decide on an opinion of value, and be reasonably accurate. Unfortunately, 

taday's housing tnarkct is anything but stable and is replete with transfers of property tajntcd by 

circumstances that may have an effect on the eventual sales price; such as bank-o\vned properties, 

short sales, and tax sales. The development of a credible opinion of value requires research, 

verificat10n, knowledge, analysis, skill and time. It is much more than merely filling blanks on a 

form. Often, the pressure on the appraiser to meet deadlines makes the research and analysis 

necessary for credible results impossible. At times, comparable sales tainted by distress are included 

in the appraisal report and fail to provide a reliable indication of the value of the property appraised. 

I Residential Appraisals' Opportunilles 10 Enhance Oversight of al1 EvolVing [llduStlY. US Government Accountability Office. 

July 2011. 

6 
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In short, unreasonably short time of c01l1plction requiremcnrs unposed by sa1ne Al\lCs contributes 

to unacceptable appraisal quality. 

The independent judgment of the appraiser is compromised when AMC "reviewers" unreasonably 

question the usc, or failure to use, specific transactions as comparable sales in an appraisal report, 

question individual adjustments made to the Comparable Sales, or suggest what would be considered 

"acceptable" adjustments. f\l\IC personnel, who arc often non-appraisers with only a cursory 

knowledge of valuation, and working from a checklist or printout from an automated valuation 

model (A VM), interfere with appraiser independence by asking or insisting that specific observations 

about the property, comparable sales, or market be excluded from the appraisal report. ln one recent 

instance, an Al\1C re,\'riewer's reaction to an appraiser's positive adjustment to comparable sales for 

an appreciating market was "you'd better retbink those date of sale/time adjustments". Other 

examples abound, but the day-to· day experience of appraisers in the field makes it clear the Clainl 

that f\MCs ensure appraiser independence is a myth. 

The altered business relationships between appraiser's and their clients, unreasonable completion 

time requirements, diminished appraisal fees, and interference in the appraiser's independence all 

contribute to the most recent issue identified as an obstacle to housing market recm'ery - the failure 

to recognize positive movement in prices and values in many market areas. Accurately estimating 

market value in a dynamic market has always been challenging, but not inlpossib1c. Unfortunately, 

the events of tl,e past few years and the current regulatory environment tend to encourage lenders, 

underwriters, mortgage loan insurers, and AMes to question an appraiser if the opinion of value is 

higher than that of a sirnilar property six montlls earlier. Too many involved in the lending decision 

have forgotten that prices and values do actually rise. This is particularly true when inventories arc 

low, demand is steady or high, and financing at reasonable rates is a\'ailable. Competent appraisers 

are capable of extracting proof of an impro\-ing market, applying that proof by making adjustments 

to recently closed sales, and developing an estimate of value consistent with an inlproved market. 

This universe of competent appraisers is diminished when their independence is compromised, or 

when they choose to leave the business or abandon mortgage lending appraising because of 

unreasonable fees, unreasonable completion requirements, unacceptable assignment conditions, or 

scope creep. 

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Nj\R generally supported the appraisal provisions in the Dodd··Frank Wall Street Reform and 

Consumer Protection Act. NAR did not support the language that effectively regulates }\!'.fCs on 

two different tracks. The two-track approach has exacerbated many of the problems. l\MCs not 

owncd by a lender are required to register with the state appraisal regulatory body. However, DoddFrank exempts Ai'viCs from the registration requirement if the AMC is a subsidiary owned and 

controlled by a frnancial institution that is regulated by a federal frnancial institution regulatory 

agency. Though it would require a legislative change, NAR continues to believ'e thar all AMCs 

should be required to register with state appraisal regulatory bodies where they arc providing 

appraisal management services. Further, NAR believes that lenders should be prohibited from 

retaining the services of an AMC where the lender maintains any lev-c1 of ownership. 

Credible Va/ualiolls ill ReCOlI/?JiI"~ Markel.r. Perhaps the single biggest valuation issue that will hinder or 

help the recovery of real estate and the nation's economy is valuing real property in markets that arc 

no longer declining. As mentioned earlier, it has always been a challenge for appraisers to identify 

v-alue and support their opinions of market trends where neighborhood prices arc in a state of 

transition. Identification of the transition and trend is possible if the appraiser is competent, and is 

afforded the opportunity to conduct the appropriate research, complete the necessary market data 

verification, and conduct the proper analysis. Roadblocks to housing recovery are erected when 

lenders, underwriters, mortgage loan insurers, and A MCs interfere with the appraiser's 

independence, and neglect to recognize their market derived opinions and conclusions. 

StOpe oflVork is Crilical. Scope of Work refers to the type and extent of research and analysis 

conducted by an appraiser to complete an appraisal assigntncnt. At a tninimum, the Scope of Work 

must include the research and analysis necessary to develop a credible opinion of value, and meet or 

exceed 1) the expectations of parties who are regularly intended users for such appraisal 

assignments, and 2) what the appraiser's peers would do when completing a similar appraisal 

assignment. j\lthough the expectations and requirements of the client and regular intended users are 

considered by appraisers in deciding on the appropriate Scope of Work, interference in appraiser 

independence is possible when client-imposed conditions either define or limit the scope of work to 

a degree that assignment results (opinion of value) are not credible. The Appraisal Standards Board 

of the ;\ppraisal Foundation advises appraisers that "while it is common and reasonable for the 
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client to prm'ide input to the appraiser regarding a desired scope of work, the responsibility for 

cletermining the appropriate scope of work resides with the appraiser."z 

Some appraisers arc leaving the industry because of unwarranted scrutiny and scope of work creep. 

This is a symptom of a larger buyback issue facing lenders. Lenders report that mortgages that are 

backed by the federal government arc often required to go through additional review because the 

currently regulatory environment indicates that lenders will be requirecl to re-purchase or buyback 

any loans with underwriting errors of any kind. Lenders have said that in the past it was accepted 

practice that loans that defaultecl after three years generally did not default because of poor 

underwriting. 

Lenders, underwriters, mortgage loan insurers, and the gOVCl:01Dcnt sponsored enterprises generally 

are tl1C parties who are regularly intended users of appraisals completed for mortgage loans. These 

parties expect sales used as comparables to be recent and to reflect current market conditions. 

Appraisal guidelines published by the enterprises specify broad selection criteria and specifically 

allow use of comparable sales that have been settled or closed up to 12 monrl1s prior to the effecti,'c 

date of the appraisal. The same published guidelines specifically state that "Time adjustments must 

reflect the difference in market conditions between the contract date of the comparable and rl1e 

effective date of appraisal for the subject property. The adjustment may be either positive or 

. ,,3 negative. 

The unfortunate reality is that some lenders and AMes impose assignment conditions that may 

prevent the appraiser from producing an independently developed, credible opinion of value. Clients 

can stipulate conditions in the appraisal development which can influence the appraisal conclusion. 

This means lenders may instruct an appraiset· to include or exclude certain data such as short sales or 

other distressed sales as comparables. It is not uncommon for lenders and AMes to in1properly 

instruct an appraiser to include or exclude certain data such as short sales or other distressed sales as 

comparables. Appraiser members tell us that the scope of work requires upwards of 6 comparable 

sales located within a couple of blocks of the property and must be less than 90 days old. After 

receiving the repott, lenders and AMes are asking for additional comparables and analysis. 

, 

- Unrjorm Standards of ProfessIOnal AppraIsal Pracfu..'e. 2012. Advisory Opinion 28 ~ Scope of Work Decision, Perromlance, and Disclosure 

3 Fanl1le Mac Sellmg GUIde ~ 5!J 5/201 2. Date ofSak and Time Adjustments, Page 581 

9 
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Eventually, an appraiser has no choice but to include the distressed property regardless of whether i1 

is appropriate for the subject property. The Appraisal Foundation warns that when a "client 

stipulates the inclusion or not of a particular type of comparable, the appraiser may have to revisit, 

with the client, the type of "alue de\'c!oped,,12I This will help ensure that a misleading analysis or 

assignment result is not reported. In other words, the opinion of value developed under such 

conditions may not be Market Value. Lenders, underwriters, and the enterprises, however, expect a 

f\larket Value opinion when evaluating the collateral for a mortgage loan. 

AMes often require appraisers to accept any and all liability if a loan defaults if there is any claim 

related to the value of the property. Appraisers should bear the responsibility for producing credible 

appraisal reports based on reliable data and strong analysis. Insisting the appraiser accepts all liability 

for a process that is otherwise out of their control negati\'cly impacts the appraiser's ability to 

complete a credible report. This also adds unnecessary risk to the mortgage transaction and to the 

broader real estate market's still fragile recovery. 

NAR supports the independence of the appraisal process and belie\'es tins independence should be 

strengthened to ensure that appraisals are based on sound and fair appraisal principles. Federal rules 

and regulations from Truth in Lending (TILA) to guidelines published by the government 

sponsored enterprises (GSE) 4 to Interagency Guidelines work to ensure independence in the 

valuation process. In practice, there is little independence in valuatioll of real property. Appraisers 

are beholden to their clients, fear being black listed, and are often improperly blamed for loan 

defaults and other losses. 

J\ ppraisal pressure undermines the integrity of the mortgage lending process if the result is a 

mortgage loan made based on inaccurate property valuation. Such interference with appraiser 

independence must cease. 

Establishing a Trend Statirtiral Toohfor AnaIYJiJ-. Identifying and proving a trend has always been a 

challenge for appraisers because most of the data is retroactive. Housing price indexes published by 

government agencies, trade groups, and data aggregators arc helpfu~ but have significant lag times, 

[2} APB Valuation AdvIso/» #3: ReSidential Apprmsmg in a Declining A1arket. The Appraisal Foundation. May 7, 2012 

4 Government sponsored enterprises (GSE) refers to Fannie Mae and Freddie Mac 

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and rarely have the specificity to identify trends in incredibly local, granular housing markets. It takes 

time to develop a trend spotting a trend and proving it arc very different things. 

Identifying trends can be assisted with technology. Recent publications have noted that appraisers 

increasingly have access to automated valuation models (A V!'.!) or Computer' ;\ssisted Mass~ 

,\ppraisal (CAMJ\) models. This technology can allow appraisers to access and develop their own 

statistical tools to support opinions about market trends. NAR offers REJ\LTORS" Property 

Resource (RPR) as a member benefit, wbich includes tools specific to appraisers. J\dvanced 

reporting features offered by RPR allow the REALTOR'" to create custom reports to provide to 

clients and customers. These reports, sourced from a rich database of public and private multiple 

listing service information, will be available to all NAR members, regardless of their professional 

specialty. We expect our appraiser members will use these reports to provide more credible, and well 

supported, appraisal reports and valuation products. 

IilllitaliollS of FomlJ and AppraiJai Rep0l1 Delil'ery. In a dynamic market the intended users of the 

appraisal ate looking to the information and conclusions stated in the Market Conditions (MC) 

Addendum form to support the appraiser's opinions about demand, supply, inventory mix, and 

price trends. Unfortunately, because the Market Conditions Addendum fonn was developed and 

implemented to identify declining markets, it appears there is reluctance to accept tbe form might 

reveal the opposite. Ni\R's Valuation Committee anticipated this problem, and has been working 

with RPR to develop a means to auto-populate the Market Conditions Addendum foml. The initial 

approach was to do it "by tbe book" and stick to populating the fields that are provided in tbe form. 

According to Comn1ittcc members, the overall itnp1cn1{~ntation RPR was proposing - the possibility 

of extracting different types of analytics from the RPR site to create graphs and charts to clearly 

illustrate and "make the case" to lenders, underwriters and AIV1Cs would make the appraisal report 

much more useful to lenders, underwriters, AMes, and comumers. This discllssion clearly illustrated 

the limitations of the current reporting format. 

Our efforts to enable our appraiser members to provide more information and make graphical 

content more useful and meaningful to clients and consumers may not have the intended effect. 

Appraisers routinely supplement the standard appralsal fonn and Market Conditions Addendum 

with narrative comments, explaining the cbaracteristics and conditions of the market in detail. Some 

11 
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are already supplementing their narratiYe with spreadsheets and graphs to further illustrate not only 

the trend, but the data and analysis considered in developing the appraiser's conclusion. It is 

unfortunate that tIlls additional information is often ncycr delivered to the AMC, lender, or 

underwriter due to the limitat.ions imposed by some of the appraisal report delivery portals. In othel· 

,vords, in tnany cases, it 1S not uncomn1on for the intended user to receive an appraisal report 

containing less information and supporting documentation than the appraiser produced. TIlls 

shortcoming must be corrected. 

DejlJ1itiollJ May ItJJpatt Value. The scopc of work for most mortgage loan valuations requires the 

appraiser to indicate if the market is declining, stable, or increasing. The appraiser's opinions and 

conclusions arc often measured or tested by lenders, mortgage insurers and AMCs by comparison to 

a published national or proprietary index of complied data. These often lag actual market trends and 

are not specific to the market or neighborhood identified by the appraiser in the report. Pressure on 

the appraiser to make their report conform to old data and published conclusions is inappropriate, 

interferes with appraiser independence, and ",ill produce nllsleading results. 

There are often discrepancies betwccn areas identified as "markets" by publishers of information 

and appraisers. It's not uncommon for published sources to identify broad areas such as MSAs, 

regions, counties, zip codes and census tracts. Appraisers may define the market by neighborhood, 

school district, geographic boundaries, or property type. With varying defmitions of "markets" it's 

casy to understand how an appraiser's obsen"ations, opinions and conclusions are sometllncs at 

odds with what some lenders, underwriters, mortgage loan insure", and AMCs believe. 1be actual 

market may be imprO\-ing, despite a published index stating a different trend. 

FUlldi'\g Stale Regulators. One of the most significant challenges to the regulation of appraisers is the 

current funding structure of appraisal programs at the state level. In most states and jurisdictions, 

licensing and certification fees paid by the appraisers to the state are to be used for funding state 

appraisal boards. However, in many cases these fees are directed to a state's general fund, causing 

the state appraisal board to compete with other state discretionary programs for funding. Inadequate 

funding of state appraisal boards means that recommendations offered by ASC through site visits 

and Compliance Reviews are difficult, if not impossible, to implement. States are struggling 

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financially but reducing funds for appraisal regulatory agencies results in insufficient protection for 

the public. 

The regulatory burden imposed on state appraiser regulatory agencies is also affected by regular and 

constant changes to appraisal standards. The Uniform Standards of Professional Appraisal Practice 

has been amended and new versions published nineteen times since 1990. To maintain compliance 

with the financial Institutions Reform, Recovcty, and Enforcement Action of 1989 (FIRREA) and 

avoid sanctions by the Appraisal Subcommittee some state regulatory agencies must seek regular 

legislative action to incorporate the modifications. Resources devoted to lcgislati\~e activity teduce 

those dedicated to their mission of appraiser regulation and consumer protection. Banks, lenders, 

underwriters, the public and appraisers might be better served if the standards were standard. 

I ["mall Capital TtfrnOl'er. "Inc number of appraisers in the industry is in decline. According to the 

Appraisal Subcommittee" the number of credentialed appraisers is down more than 5,000 since the 

peak in 2006. The Subcommittee notes that it is not uncommon for appraisers to hold multiplc state 

credentials, and the number of individuals is likely down even more. NAR appraiser members report 

tbat their colleagucs are leaving the industry for many rcasons. Perhaps the most cited reason is that 

experienced appraisers refuse to work under the current AMC imposed climate. 

The level of scrutiny and blame being placed on appraisers is unprecedented. The scope of work 

continues to expand while fees and turnaround times are diminishing. After a report is submitted it 

is often compared against an automated valuation model (AVlvI) or a broker price opinion (BPO). If 

the report is not within the threshold determined to be acceptable by the client it is the appraiser and 

their report facing the scrutiny, regardless of whether the report is or is nor credible. The appraiser is 

thc party expected to justify their work with additional sales, additional listings, explanations, and 

data. Experienced appraisers are choosing retirement or new fields of work. 

At the same time, it is more difficult than ever to become an appraiser. Individuals interested in 

becoming appraisers must meet cducation requirements, experience requirements, and pass state~ 

administered national examinations. To become a state~certified appraiser individuals are required to 

takc 200 hours of education coursework and complete 2,500 hours of experience within a 24 month 

5 Appraisal Subconlmittee Annual Report 2011. Appendix D_ NatIOnal Appraiser Credential Statistics. 

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period. These arc minimum standards as established by the Appraisal Foundation's Appraisal 

Qualifications Board. States may require additional training. The experience requirement, which is 

effectively an apprentice program, is extremely difficult to meet. Simply stated, the apprentice system 

is in need of reform. Experienced appraisers are often unwilling to train young appraisers because 

the trainer assumes all liability for work completed by the trainee. 

\'Vhile "JAR does not have an official position on appraiser turnover, it may be time for the industry 

to explore alternatives. The Appraisal Foundation continues to discuss a four year college degree as 

an alternative to some or all of the education requirements. In fact, some college education 

enhancements have already been incorporated by the Foundation. Perhaps similar alternatives can 

be created that would offer greater opportunity for trainees to meet the experience requirements. 

Any altcrnati\"Ts to the experience reclulrcment must continue to meet the current standards required 

by the Appraisal Foundation. 

NAR ROLE IN VALUING REAL PROPERTY 

While some organizations focus on appraisals only, the National Association of REALTORS@is the 

only real estate trade association that can speak with authority on appraisals and alternative valuation 

products. Some of our members provide broker price opinions (BPO) and comparative market 

analyses (ClvlA). Some of our members are appraisers and provide the full range of appraisal 

services. NAR's subsidiary, REALTORS@ Property Resource (RPR), offers all AVM. NAR is 

positioned, along with its RPR subsidiary, to provide one of the Inost comprehensive sets of data 

and tools for determining home values. 

NAR has long been proactive in seeking to ensure credible valuation of real property for our 

industry. In 2007, we adopted the Responsible Lending Polic), that included policy positions on 

appraisals. The policy recotnlnendations include the following measures to strengthen the appraisal 

process: 

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Require lenders to inform each borrower of the method used to yalue the property in 

connection with the mortgage application, and give the borrower the right to receive a copy 

of each appraisal. 

Enhanced penalties against those who improperly influence the appraisal process. Those 

with an interest in the outcome of an appraisal should only request the appraiser to consider 

additional information about the property, provide further detail, substantiation, or 

explanation for the appraisal; and correct errors. 

Federal assistance to states to strengthen regulatory enforCClllcnt ach'\'iucs related to 

appraisals. 

Support for enhanced education requirements for appraisers. 

Beginning in 2010, NAR embtaced an all-encompassing approach to real property valuation. NAR 

Leadership recognized the shifting landscape within the industry and the demand for alternative 

valuation products and seNices. Today, NAR believes there arc a variety of valuation products, each 

with a critical role to play in the future of homeownership. Appraisals are the "gold standard" for 

mortgage origination but there is an important role for EPOs, C~L\s, and A VMs as well. 

In February 2012, NAR adopted the Responsible Valuation Policy, which seNes as our statement of 

federal policy on nluing real property. It serves as a guide for members and staff in advocacy efforts 

for federal legislation and regularory policy. As a reminder to all members who provide these 

services, the policy document contains Standards 1 I-I and 11-2 of the 2012 National Association of 

REALTORS" Code of Ethics. These standards ensure that services "REALrORS" provide to their 

clients and customers shall conform to the standards of practice and competence which are 

reasonably expected in the specific real estate disciplines in which they engage." 

According to industry estimates, more than 10 million EPOs are performed annually. BPOs provide 

critical information for decisions, and have been widely adopted as a valuation tool in the mortgage 

industry and increasingly for government programs intended to aid t11e economy and help 

homeowners avoid foreclosure. Among other uses, these non-appraisal seNices can help determine 

listing prices and are used to estimate potential selling prices of a property. Evaluating properties 

depends more than e\'er on professional expertise and competence, the best use of technology, and 

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a commitment to approach the valuation assih>nment from all pertinent perspectives. N!\ R now 

offers the Broker Price Opinion Resource (TIPOR) Certification for members providing this 

valuable service. "BPOs: The Agent's Role in the Valuation Process" is a course specifically designed 

to help residential real estate agents and brokers enhance their skills in creating BPOs, reducing risk, 

and applying alternative valuation techniques. 

BPOs and comparative market analyses (CMA) performed by REAlTORS" contain, at a minimum, 

the information specified in Standard of Practice 11-1 of our Code of Ethics except where the party 

requesting the opmion requests a specific type of report or different data set, or where the opinion is 

developed in pursuit of a listing or to assist a potential purchaser in formulating a purchase offer. 

Except where exempted or prohibited by our Code of Ethics, state, local or federal law, a BPO 

should include the disclosure of a review of the suhject property, subject neighhorhood review and 

analysis, local and regional market information and trends, and a description of comparahle 

properties tbat are similar to the subject property. NAR policy states that any BPO or CM.1\ that 

docs not provide the aforementioned components shall be disclosed by the provider of the service. 

Non-appraisal opinions must make it clear to the intended user that it is not an appraisal. Per our 

Responsihle Valuation Policy: 

• Non-appraisal opinions, such as BPOs, shall be prepared hy a real estate licensee or 

registered, licensed or certified appraiser. A licensee completing these services for a client is 

not necessarily assured of receiving the listing of the property. 

Generally, in conjunction with the purchase of a consumer's principal dwelling, BPOs may 

not be used as the primary basis to determine the value of real property for the purpose of a 

loan otigination of a residential mortgage loan secured by such property. 

\Vhen not restricted by law, non-appraisal opinions may he appropriate for many real estate 

transactions) such as short sales, foreclosures, and loan modifications. 

In adhering to Article 11 of the REALTORS® Code of Ethics, consideration must be given 

to the intended use and intended user when developing any valuation. 

• A CMA is generally used to provide information to sellers or buyers in determining listing 

price or offering price. 

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"JAR's policy with respect to A VMs applies to individuals, organizations, or cOlporations that 

de\-c!op A'lM software and related algorithms. The end user, whether a consumer or REALTOR", 

should not be held liable for the product or results provided by any A VM owned or developed by a 

third party. Individuals or companies that create AVMs should ensure that AVl\Is: 1) protect against 

the manipulation of data, including disassembly and redistribution without explicit authorization; 2) 

employ appropriate quality control measures, including disclosure of a confidence score calculated 

using a statistical methodology, such as forecast standard deviation; 3) utilize only data which has 

been explicitly licensed and authorized; 4) avoid conflicts of interest; 5) reguire random sample 

testing and reviews; and 6) not be used as the principle method of valuation in mortgage origination. 

The unique value of RPR's AVM is that it incorporates real-time market information from more 

than 400 Multiple Listing Services (MLS) nationwide, comprising approximately two··thirds of 

NAR's membership. Much of this MLS data contains more than 10 years history on most 

properties. RPR's AVM, known as the REALTORS'" Valuation Model (RVM), is more accurate 

than most other AVMs when tested on both the national and local levels. Incorporation of MLS 

data combined with accuracy allows the R'lM to offer the strongest value proposition in today's 

market. Here are some highlights of its value: 

Captures loan performance data including delinguencies, short-sale status and REO 

(transparency for the REALTOR" and consumer). 

Provides extensive reporting capabilities and comparable analysis. 

• Provides recent trend data on home prices in both macro and micro markets. 

• Uses properties sold not currently listed for sale. 

• Data is refreshed freguently to keep pace \\-1th changing markets. 

Through RPR, REALTORS@ have access to comprehensive tools to improve comparable property 

selection to determine the tradeoff between days on market and price. Thi., also allows for improved 

disposition of distressed properties based on local trends and connections to REALTORS" 

equipped to sell t11ese unique properties. RPR is an investment in capabilities that ensure a 

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R EALrORS@ expertise in local markets remains a critical component in improving and enabling a 

viable housing finance SYStCll1 ftom the point-of-sale to the mortgage investor. 

As a demonstration of thcir commitment to appraiser members, ,'aluation, and the importancc of 

competency, since 1993 :\JAR has encouraged their appraiser members to demonstrate their 

professional competence by earning one or both of their appraisal designations. The Residential 

Accredited Appraiser (RAA) and General Accredited Appraiser (GAA) designations arc awarded to 

certified appraisers with education and experience in excess of the minimum qualifications specified 

by the Appraiser Qualifications Board of thc Appraisal Foundation for state-certification. 

RAA and GAA designated appraisers arc kept up to date on valuation policy and regulation with 

regular correspondence developed by :\J AR and provided opportunities to participate in exclusive 

NAR providcd education and seminars. 

CONCLUSION 

Developing and reporting property values more accurately is critical to market performance, 

reducing risk, and strengtllening the housing finance system. There arc no easy, "silver bullet" fixes 

to the problems facing credible valuation of real property. The issues mentioned in this testimony 

are further complicated by a market that nationally appears to be slowly recovering but with many 

local markets less healthy than others. 

The National Association of REALTORS'" believes that homcownership matters. We sce a bright 

future for thc housing market and the overall economy. However, our members are well aware that 

the future we sec resrs on the industry'S and the economy's ability to successfully navigate some 

continuing and persistent obstacles. Congress and the housing industry must maintain a positive, 

aggressi,-e, forward looking partnership if we are to ensure that housing and national economic 

recoveries are sustained. NAR stands ready to work with you on this mosr important issue. 

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JOINT TESTIMONY OF THE 

REAL ESTATE VALUATION ADVOCACY ASSOCIATION (REVAA) 

AND 

COALITION TO F ACILIT ATE ApPRAISAL INTEGRITY REFORM (FAIR) 

BY 

DON KELLY, EXECUTIVE DIRECTOR, REV AA 

FOR THE HEARING ON 

"ApPRAISAL OVERSIGHT: THE REGULATORY IMPACT ON 

CONSUMERS AND BUSINESSES" 

BEFORE THE U.S. HOUSE OF REPRESENTATIVES 

COMMITTEE ON FINANCIAL SERVICES 

SUBCOMMITTEE ON INSURANCE, HOUSING, AND COMMUNITY 

OPPORTUNITY 

JUNE 28, 2012 
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STATEMENT OF DON KELLY BEFORE THE SUBCOMMITTEE ON INSURANCE, 

HOUSING, AND COMMUNITY OPPORTUNITY OF THE HOUSE COMMITTEE ON 

FINANCIAL SERVICES 

Introduction and Summary 

I am Donald E. Kelly, Executive Director of the Real Estate Valuation Advocacy 

Association ("REV AN'). I appreciate the opportunity to provide testimony on behalf of 

REV AA and the Coalition to Facilitate Appraisal Integrity Reform CF AIR") for the Insurance, 

Housing, and Community Opportunity Subcommittee's hearing on Appraisal Oversight: The 

Regulatory Impact on Consumers and Businesses. 

With this testimony, I hope to: 

describe the important role that REVAA and FAIR members play in the valuation 

industry; 

explain why the appraisal management company ("AMCs") industry exists and 

how the services provided by AMes benefit appraisers, lenders, investors, and 

most importantly, homeowners. 

• describe the existing federal and state regulatory structure governing AMCs, as 

well as our industry's proactive efTorts to work collaboratively with the relevant 

federal agencies as they develop rules establishing minimum standards fo, AMCs, 

and the states as they implement registration and regulatory requirements for 

AMCs; and 

• provide insight from our industry regarding the regulatory implementation ofthe 

"customary and reasonable" compensation requirement contained in the DoddFrank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act"). 

Background on REV AA and FAIR 

REV AA is a real estate valuation industry trade association that promotes education, high 

ethical standards, political awareness, and the professional development ofthe real estate 

valuation industry. 

REV AA believes that homeowners, the mortgage lending industry, and the economy as a 

whole are best served by a diversified array of real estate valuation products. With growing 

complexity regarding real estate valuation in today's challenging market, it is vital that end-users 

have the ability to select the most appropriate valuation service to meet their specific needs. 

REV AA members have committed to heing proactive in efforts to promote and expand 

the industry. Our members produce and deliver rcal estate valuation products including 

Appraisals, Broker Price Opinions (BPOs), Automated Valuation Models (AVMs), and other 

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innovative valuation methods that benefit mortgage investors, servicers, originators, and 

borrowers. 

FAIR is a coalition of five of the nation's largest AMes,1 which operate networks of 

individual appraisers and appraisal finns for the completion of appraisal reports. FAIR members 

have become leaders in the industry by adopting responsible polices and procedures to protect 

appraiser independence, promote quality appraisals, and scrve lender-client nccds in a timely 

manncr for the ultimate benefit of homeowners. 

AMC's Role in the Industry and Overview of their Functions 

AMCs operate regional and national networks of employee appraisers, indcpendent 

eon tractor appraisers, and appraisal companics/firms for the completion of appraisal reports. In 

addition to pre-qualifying these appraisers and receiving appraisal orders from lenders and other 

clients, AMCs facilitate and manage the entire appraisal delivery process, including tracking the 

progress of the order, managing all communication between the lender and the appraiser, 

reviewing specific clements of appraisal reports for quality and compliance with applicable laws, 

cnsuring prompt delivery of completed appraisals, and collecting and paying the appraisers' fees 

for their services. Today, there are approximately 315 AMCs operating in the United States. 

AMCs act as a centralized appraisal source for mortgagc lenders that operate on a wide 

geographic basis. Rather than contacting hundreds of individual appraisers in cach state or 

jurisdiction, most lenders obtain appraisals through a centralized AMC model. AMCs recruit 

and qualify vendors for their networks, by verifying appraisal licensure and/or certification, 

checking references, perfonning background checks, performing examinations, and auditing 

work samples. AMCs also negotiate service level expectations and maintain service level 

agrcements with individual vendors. 

Once contacted by a lender for an assignment, the AMC then works to match the 

assignment with a qualified, geographically compctent appraiser. This selection is based on a 

numher of factors, including the appraiser's geographic proximity to the subject property, and 

performance metrics such as the quality of an appraiser's work. The sclected appraiser thcn 

performs the physical inspection of the property and issues an appraisal report containing the 

appraiser's opinion of property value. During this process, the AMC performs extensive quality 

control functions on behalf of both the appraiser and the lender to ensure a high quality appraisal 

report is delivered to the client. 

In addition to managing networks of independent, third-party service providers, AMCs 

also manage all of the ordering, tracking, quality control and delivery tasks associated with the 

appraisal process. Below are some of the specific functions that an AMC provides: 

I The five AMCs are: (1) LSI, a division of Lender Processing Services, Inc.; (2) Service Link Valuation Solutions, 

LLC, a Fidelity National Financial, Inc. company; (3) Valuation Information Technology, LLC d/b!a Rels 

Valuation, an affiliate of CoreLogie, Inc. and Wells Fargo Bank; (4) CoreLogic Valuation Services; and (5) 

PCV/Murcor. 

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Assume loan-level administrative duties for thc large numbers of transactions in 

their pipelines, including (i) performing order entry and assignment, (ii) tracking 

order status, (iii) updating clients on progress or delays, (iv) performing both preand post-delivery quality control, (v) transmitting preliminary and final hard 

copies of appraisal reports to clients, (vi) handling accounts payable and 

receivable, (vii) engaging in dispute resolution between lenders and appraisers, 

(viii) providing and administering warranties and errors and omissions insurance, 

and (ix) ensuring proper record retention; 

Offer advanced technology interfacing specializing in the assignment, tracking, 

and reviewing of appraisal reports and the electronic delivery of reports consistent 

with the needs of the lender and/or investor; 

Warrant the quality of the final appraisal product to supplement the errors and 

omissions insurance carried by appraisers; 

Maintain a platform for the administration of appraisals unifornlly across 

jurisdictions; and 

Provide a single point of contact for lenders. 

Importantly, by acting as the sole point of contact between the lender and appraiser, 

AMCs insulate the individual appraiser from any influence or coercion by the lender. This 

singular issue has been the primary goal of most recent appraisal-related regulation and a key 

reason for the growth of the AMC model. Imprudent mortgage underwriting practices, including 

the quality and credibility of some valuations, led to the recent housing collapse. Overzealous 

mortgage brokers and lenders were partly to blame for overvalued properties and inflated 

appraisals values, as thcy used the promise of future business in a booming market and higher 

appraisal prices to influence the ultimate valuation conclusions made by licensed and certified 

appraisers. Unfortunately, too many appraisers chose to follow the temptation of additional work 

and preferences in exchange for suspect and faulty valuations. This undue pressure and coercion 

led to a series of regulatory reforms specifically targeting the appraisal practices of mortgage 

lenders and brokers designcd to insulate individual appraisers and their valuation conclusions 

from improper influence. 

Most notable is ilie Home Valuation Code of Conduct ("HVCC"), which resulted from a 

March 2008 settlement betwecn the Federaillousing Finance Administration, the New York 

Attorney General, and Fannie Mae and Freddie Mac. The HVCC, which took effect May 1, 

2009, applied to all conventional mortgage loans sold to Fannie Mae and Freddie Mac and 

prohibited mortgage lenders and their agents irom influencing the independent judgment of 

appraisers through collusion, coercion, and bribery.2 It, therefore, was no surprise that the DoddFrank Act sought to make appraisal independence standards penn anent by amending the Truth in 

Lending Act ("TILA'') statutes. 

2 See e.g., Freddie Mac, Home Valuation Code of Conduct, 

http://www.freddiemac.com/singlefamily/pdflhvcc _746.pdf 

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The HVCC also first introduced prohibitions on a lender's reliance on appraisers 

selected, retained, or compensated by mortgage brokers, real estate agents, or other third parties. 3 

In response to these requirements, lenders sought to order appraisals through intennediaries to 

ensure a layer of insulation between those responsible for loan production and independent 

appraisers. Although AMCs existed long before the HVCC, they became the preferred 

intennediary for mortgage lenders to distance themselves from individual appraisers and to 

ensure compliance with new appraisal independence standards. 

In addition to providing appraisal services, many AMCs also provide alternative 

valuation products such as Automated Valuation Models (AVMs) and Broker Price Opinions 

(8POs). While appraisals remain the primary method for assessing a property's value in 

connection with a loan origination, alternative valuation products have a proven track record of 

accuracy and efficiency and are commonly used in the mortgage lending industry to assess and 

validate appraisals, to conduct due diligence reviews of loan portfolios, to assess loss mitigation 

strategies for distressed loans, and to establish eligibility for government-sponsored foreclosure 

alternative programs. In particular (i) banks use BPOs and A VMs to determine the sales price of 

real estate owned (REO) properties, to approve proposed short sale transactions, and to modify 

distressed loans and avoid foreelosure; (ii) investors use BPOs and A VMs to conduct due 

diligence on loans that they are buying or selling; and (iii) government-sponsored enterprises 

(GSEs) utilize BPOs and AVMs to establish the eligibility of distressed loans for the Home 

Affordable Modification Program (HAMP) and the Home Affordable Foreclosure Alternatives 

Program (HAF A). 

Most states recognize the use ofBPOs and AVMs for these purposes, and many states 

have updated their statutes in recent years to specifically pennit the use of BPOs in the mortgage 

lending industry. The Dodd-Frank Act likewise permits the use ofBPOs in all contexts other 

than as the primary basis for a mortgage origination decision in connection with the purchase of 

a consumer's primary dwelling. The Interagency Appraisal and Evaluation Guidelines specify a 

wide range of transactions that do not require a traditional appraisal, and provide standards for 

the alternative use of non-appraisal evaluation products. Finally, BPO Standards and Guidelines 

(BPOSG) have been widely adopted in the valuation industry to provide a comprehensive 

framework for the preparation of BPOs on a national level. In each case, there is recognition of 

the essential role that alternative valuation products play in today's mortgage lending industry, 

and AMCs have been instrumental in the development and distribution of these products. 

The Benefits of Working With an AMC 

There are significant benefits for appraisers, lenders, and homeowners when appraisals 

are ordered and delivered by an AMC. 

AMes Benefit Lenders 

AMCs benefit lenders by: maintaining an appraiser panel of competent, licensed and/or 

certified appraisers; engaging a real estate appraiser; perfonning the administrative functions 

'See lIl.A. of the HVCC, available at: 

https://www.efanniemae.com/sllguides/ssgirelatedseJlinginfo/appcode/pdflhvcc.pdf 

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involved in the appraisal ordering, tracking, and delivery process; perfonning quality control 

functions; and handling the invoicing and payment of the appraiser. 

AMCs' promote high quality appraisals. Lenders have no incentive to hire an AMC that 

fails to provide high quality appraisals. In an era where appraisals are the foundation for many 

repurchase demands from secondary market paItieipants, a lender must place additional 

emphasis on the quality of its underwriting and its valuations. Since preventing potential 

repurchase demands is of vital importance to an AMC's client, those AMCs that fail to prioritize 

the quality of their appraisals are weeded out of the market. AMCs implement strong internal 

controls around recruiting, order placement, tracking, and delivery to provide greater assurance 

to lenders of the credibility of the appraisals they provide. 

Notably, AMCs playa crucial role in ensuring the selection of experienced and qualified 

appraiscrs. They ensure that only licensed, insured, experienced and qualified appraisers perfonn 

appraisals. This is particularly important because it is extremely difficult to distinguish a "bad" 

appraisal from a "good" appraisal at a transaction level. Even with all of the technology tools 

available today, it is still possible to have a "bad" appraisal that passes all inspections and quality 

control checks in the process. This is why lenders bave turned to AMCs, which focus on 

appraisIT management and not just appraisill management. The AMC model recognizes that the 

only way to ensure good quality appraisals is to carefully manage the panel of appraiscrs 

completing thcm. 

When selecting appraisers for a specific assignment, many AMCs use an automated 

system that identifies the most qualificd appraiser based on criteria such as the requirements for 

the assignment, the appraiser's geographic proximity to the subject property, and perfonnance 

metrics, such as the quality of an appraiser's work. Many AMCs will only compare fees when 

two appraisers are equally qualified for an assignment. 

Although some have alleged that AMCs routinely select appraisers without regard to 

familiarity with the relevant neighborhood, AMCs note that real estate appraisers have a 

professional duty under Unifonn Standards of Professional Appraisal Practice ("US PAP") to 

accept only assignments they have the knowledge and expcrience to complete competcntly, to 

disclose any lack of competency to clients, aIld to take all necessary steps to achieve such 

competency prior to completing the assignment. AMes encourage appraisers to comply with 

USPAP and do not stand in the way of their professional duty. 

AMCs also require appraisers to satisfY rigorous qualification criteria, including 

submitting a sampling of their work for review and submitting reference and background checks 

before admitting them to the networks. AMCs also often offer ongoing continuing education 

courses that keep appraisers infonned of changes in the market and current federal, state, and 

lender guidelines. If appraisers fail to continuously meet these qualifications or are deemed to 

produce substandard appraisals, AMCs will remove these appraisers from the networks. 

AMes Benefit Appraisers 

An appraiser benefits from working with an AMC by having a firewall and an advocate 

to ensure that no inappropriate or improper attempt is made to influence the appraiser process. 

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76111.068

Appraisers also rely on AMes to market the appraisers' services, generate work, manage client 

relations, collect fees from lenders, and offer continuing education. Prior to the proliferation of 

AMes, appraisers spent a large portion of their time marketing and soliciting husiness or 

working for an appraisal firm. Because AMes provide these functions, appraisers have the 

opportunity to spend more time actually appraising as opposed to performing the back-office 

work that is associated with the appraisal profession. Not unlike the traditional model for 

appraisal firms, where the firm splits the fee with the appraiser in exchange for continued work 

and marketing, AMCs provide similar stability for qualified appraisers. 

In addition to these services, AMes also have created and/or provided technological 

innovations in the appraisal industry, including the development of electronic appraisal delivery 

and the development of supplemental addend urns and products to complement the current 

standardized appraisal forms. AMCs have also provided expertise in the development of the 

MISMO XML standards and other "landmark" technological developments in the appraisal 

industry over the past 15 years. These technological advances reduce the time that appraisers 

spend fixing errors and resolving underwriting suspensions and help to limit appraisers' buyback 

exposure. 

The majority of appraisers are individual proprietors who have no realistic ability - other 

than through AMCs to benefit from having third-party quality control processes performed on 

their appraisal reports. 

AMes Benefit Homeowners 

In addition to the benefits provided by AMCs to appraisers and lenders, it is important to 

also note the benefits enjoyed by homeowners when an appraisal is procured by a lender through 

an AMC. AMCs eliminate conflicts of interest by standing hetween the lender and the appraiser. 

Additionally, the AMC model, which has been utilized by many large lenders for over twenty 

years, promotes high quality appraisals and provides efficiencies to the appraisal process that 

allow mortgage transactions to close in less time and help ensure that services are performed at 

competitive, market-based prices. 

The success of the AMC business model has been seen throughout the industry 

with the result heing that nearly 70% of all residential appraisals ordered and produced 

nationwide are provided through an AMC. Government entities (e,g.. the Federal Housing 

Administration or "FHA") have also recognized the presence and importance of AMes in the 

appraisal industry and have provided specific guidance to lenders that utilize AMes (e.g., 

Mortgagee Letter 2009-28).4 

The Regulatory Structure Applicable to AMes 

AMCs are suhject to multiple regulatory requirements - at both the federal and state 

level. First, AMes are the subject of new federal regulatory requirements, including new 

minimum standards and a national registry applieahle to AMCs under the Dodd-Frank Act. 

4See Mortgagee Letter 2009-2&, available at: http://www.hud.gov/offiees/admlhudclips/letters/mortgagce/files/09-

28ml.pdf 

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76111.069

Second, existing banking regulatory standards arc imposed on AMCs as the agents of federally 

regulated banks and lenders. Third. AMCs are subject to registration requirements and 

operational standards under state laws. Finally, because mortgage lenders are the AMCs' 

clients, any appraisal reforms targeted at lenders also have a direct effect on the operations of an 

AMC. 

Regulatory Requirements Prior to the Dodd-Frank Act 

Twenty-one years ago, Congress enacted Financial Institutions Reform, Recovery, and 

Enforcement Act of 1989 CFlRREA") in response to the Savings and Loan Crisis. FIRREA 

instituted appraisal reforms designed to enhance the quality of appraisals but did not cover 

AMCs. Prior to the Dodd-Frank Act, Title XI of FlRREA's purpose was to "provide that 

Federal financial and public poliey interests in real estate transactions will be protected by 

requiring that real estate appraisals utilized in connection with federally related transactions are 

performed in writing, in accordance with uniform standards, by individuals whose competency 

has been demonstrated and whose professional conduct will be subject to effective supervision."s 

Before the enactment of Title XI, there were no universally accepted appraisal content standards, 

no system of licensing appraisers, no appraiser education and experience qualification standards, 

and no laws requiring the usc of appraisals. Title XI created a regulatory framework that 

includes federal bank regulatory agencies, a federal agency with authority to monitor state 

activities (the Appraisal Subcommittee of the Federal Financial Institutions Examination 

Council), a nonprofit appraisal organization (Appraisal Foundation), and state agencies that 

license and certify appraisers (state appraisal boards). 

New Regulatory Requirements Under the Dodd-Frank Act 

The Dodd-Frank Act amends and expand~ Title XlojPIRREA to establish a real estate 

appraiser regulatory system involving an interrelationship among the federal government, the 

states. and the Appraisal Subcommittee. As well. the Dodd-Frank Act gives the Appraisal 

Subcommittee broad new powers and responsibilities to implement a regulatory ji-amework to 

supervise the appraisal industry, including AMes. The Appraisal Subcommittee is now 

authorized to: 

Monitor State Appraisal Boards. (I) Monitor the states' registration and 

supervision of the operations of AMCs; (2) Determine whether the state 

completes investigations, appropriately disciplines sanctioned appraisers and 

AMCs, and reports complaints to the national registries on a timely basis; and (3) 

Determine whether the state has adopted etTeetive laws aimed at maintaining 

appraiser independence. 6 

• Maintain National Registry for AMCs. Impose an annual registry fee for AMCs, 

and grants the Appraisal Subcommittee the authority to impose a minimum 

registry fec to protect against AMC underreporting. 

5 12 U.S.C. 3331. 

"See the Dodd-Frank Act, Pub. L. No. 111-203, § 1473(1)(1) (2010). 

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Take Disciplinary Action. (I) Remove an appraiser or a registercd AMC from a 

national registry on an interim basis pending state action; and (2) Impose 

sanctions against state appraisal boards that fail to have "effective appraiser 

regulatory programs."; 

Issuc Regulations. Prescribe regulations on topics such as temporary practice, 

national registry, infonnation sharing, and enforcement. 

Establish Complaint Hotline and Encourage Appraiser Education. (I) Encourage 

statcs to accept pre-approved courses; (2) Establish an appraisal complaint hotline 

ifit determines within 6 months that no national hotline exists; and (3) Follow up 

complaint referrals to state appraisal boards and federal regulators. 

Additionally, under the new regulatory tramework for AMCs, the federal agencies 7 must 

jointly by rule establish minimum requirements to be applied by a state in its AMC registration. 

At a minimum, they must require that the AMC: 

register with and be subject to supervision by a state appraisal board in each state 

where the company operates (except a subsidiary which is owned and controlled 

by a federal financial institution); 

• verify that only licensed or certified appraisers are used for federally related 

transactions; 

• require that appraisals coordinated by the AMC comply with the lJSPAP; and 

require that appraisals are conducted independently and free from inappropriate 

infl~ence any c~e~cion fursuant to the appraisal independence standards under 

SectIOn 129E of lILA. 

In addilion to the minimum requirements noted above, the Dodd-Frank Act also imposes 

a restriction that an AMC cannot be registered by a state or included on the national registry if 

the company, in whole or in part, directly or indirectly is owned by any person 11'ho has had an 

appraisal license or certificate refused, denied, cancelled, surrendered in lieu of revocation, or 

revoked in any state. Owners o(more than 10 percent of the company are subject to 

background investigations and must be of good moral character. as determined by the slate 

appraisal board, although it is unclear ilthis restriction applies to owners of AMes that are not 

subject to state rcr;istratiol1. Overall, fhe Dodd-Frank Act attempts to ensure that those who 

commit appraisalfi'aud or those who lose their licenses or certificates cannot establish AMes. 

Existillg Ballkillg Regulatory Stalldards 

7 The Board of Govemors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of the 

Comptroller of the Currency, Office of Thrift Supervision, and National Credit Union Administration, Federal 

Housing Finance Administration and the Bureau of Consumer Financial Protection. 

8 See id. § 1473(1)(2). 

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Although the federal agencies do not directly examine AMC operations, regulatory 

standards are imposed on AMCs as the agents of federally regulated banks and lenders. For 

example, the latest Interagency Appraisal and Evaluation Guidelines devotes a section to the due 

diligence procedures for selecting a third party for valuation functions (such as an AMC) 

including an effective risk management system and internal controls. The federal banking 

agencies review a lender's policies and controls for overseeing AMCs, including the 

performance expectations outlined in contracts, and processes for assessing appraisal quality. 

Ultimately, the AMC must act in con[orn1ity with the applicable regulatory standards to maintain 

their business relationships with their federally-regulated lender clients. Further, as potential 

service providers to banks and non-banks supervised by the Consumer Financial Protection 

Bureau ("CFPB"), AMCs will be required to comply with all applicable federal consumer 

financial laws. 9 

Registration Requirements and Other Comprehensive Standards of Conduct 

under State Laws 

Although the Dodd-Frank Act requires a state to implement a regulatory scheme for 

AMCs within thrce years of the federal agencies finalizing their rules establishing minimum 

requirements (subject to an extension by the Appraisal Subcommittee), the majority of states 

have elected to act sooner. Even prior to the passage of the Dodd-Frank Act, several states had 

begun the process of enacting AMC laws to require the registration of AMCs and regulate the 

activities of AMCs. By our count, 33 states have enacted AMC registration laws, and an 

additional eight states have such laws pending. Many of these laws either already encompass the 

minimum standards that are in the Dodd-Frank Act or are now in the process of amending their 

laws to ensure they reflect the minimum standards enumerated in the Dodd-Frank Act. 

Many of the state laws contain common elements, including rcquiring AMCs to have 

processes in place for adding appraisers to their panels, reviewing appraiser's work, keeping 

records of appraisal orders and activities, and complying with appraisal independence standards. 

For example, many state provisions specify the following to fully regulate the activities of 

AMCs, to: 

Require an AMC operating in that state to register with the state appraisal board, 

post security bonds, pay a registration fee, and submit to background checks 

before issuing an license; 

Designate a "controlling person" as a main point of contact; 

Set minimum education and liccnsing requirements for certain employees of an 

AMC; 

• Prohibit a person who has had an appraiser license or certificate refused, denied, 

canceled or revoked from performing certain activities: 

9 Consumer Financial Protection Bureau, Service Providers, CFPB Bulletin 2012-03, (Apr. 13,2012), available at: 

http://fiies.consumerfinance.govlf/201204_ cfpbbulletin_ service-providers. pdf 

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Require an AMC's oversight of the appraisers it engages to conduct appraisal 

services, including: 

o Requiring that appraisers confirm in wTiting that the appraiser is competent 

and licensed and/or certified in the jurisdiction of the property. 

o Prohibiting an AMC from removing an appraiser from its appraisal panel or 

otherwise refusing to assign requests for appraisal services to an appraiser 

without providing writing notice (identifying the alleged violation) and an 

opportunity to respond; 

Regulate fees by prohibiting an AMC from knowingly; 

o failing to separate and disclose any fees that it charges a client for the 

completion of an appraisal from the fees its eharges a lender, client, or other 

party providing appraisal management services; 

o prohibiting an appraiser from recording the fee its was paid by the AMC 

within the appraisal report; 

• Regulate AMCs conduct by imposing restrictions, such as: 

o Require an AMC to ensure that all appraisals are provided independently and 

free from inappropriate influence and coercion, as required by the appraisal 

independence standards of Section 129E of TIL A; 

o Require AMCs to pay appraisers reasonable and customary fee, consistent 

with the presumptions of compliance defined under federal law; and 

o Prohibit: (a) requiring an appraiser to prepare an appraisal report ifthc 

appraiser, in his or her own professional judgment, believes he or she lacks 

the necessary expertise for the specific geographic area; (b) requiring an 

appraiser to prepare an appraisal report under a time frame that the appraiser, 

in his or her own professional judgment, believes does not afford the appraiser 

the ability to meet all relevant legal and professional obligations; or (c) 

prohibiting or inhibiting communication between an appraiser and a lender, 

real estate licensee, or any other person from whom the appraiser in his or her 

own professional judgment, believes infommtion would be relevant. 

• Provide authority to promulgate regulations and authorize state appraisal boards 

or other state agencies to enforce the state AMC laws. 

AMCs have been actively involved with the states from the inception of these registration 

laws and have long supported transparency and independence in the appraisal process and the 

registration of bona fide AMCs. AMCs also are working proactively and collaboratively with 

state regulatory agencies to eraft regulations to implement these laws and ensure that the most 

effective processes are in place to achieve the goals ofthe registration laws. These laws are 

designed to protect the credibility of AMCs and the reliability of the appraisal process. 

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AMes provide valuable services in the course of a real estate appraisal, and it is 

important to us that appraisals are ordered from reputable and sound AMCs that are committed 

to transparency in the process, full compliance with all registration laws, and delivering the 

highest-quality appraisal products. REV AA and FAIR support reasonable requirements that 

balance consumer protection with responsible appraisal management services. 

We also believe it is important to work towards consistency and uniformity in state AMC 

laws and regulations to ensure that AMes can effectively implement the necessary compliance 

procedures to operate on a national basis. The degree of variation between existing state laws 

creates considerable challenges for AMCs trying to develop a reliable compliance program 

without materially increasing costs to consumers. We will continue to support the states' efforts 

to implement reasonable and appropriate laws and standards to improve the appraisal industry. 

We will also continue to support the federal banking agencies by providing clarifying 

infonnation about the industry for their use in promulgating minimum and unifonn standards for 

AMes. 

The Dodd-Frank Act "Customary and Reasonable" Appraiser Compensation 

Requirements 

As noted above, AMes provide valuable services to various parties in the appraisal 

process. AMCs have contractual agreements with lenders and are compensated by the lender for 

the appraisal and the services provided in the process ofiacilitating the completed appraisal 

report. The fees are combined on the HUD-I appraisal statement as dictated by the Real Estate 

Settlement Procedures Act, which pern1its the appraisal fee to include both the appraiser's and 

the AMes services. to 

The Dodd-Frank Act amended TILA by adding Section 129E to require adherence to 

appraisal independence standards and also to require that lenders and their agents (including 

AMCs) compensate appraisers at a "customary and reasonable" rate for appraisal services in the 

market area of the property being appraised. The Dodd-Frank Act also provided that "evidence 

for such fees may be established by objective third-party infonnation, such as government 

agency fee schedules, academic studies, and independent private sector surveys'· (Emphasis 

added.) Fee studies, however, are required to "exclude assignments ordered by known appraisal 

management companies." II 

The Federal Reserve Board ("Board") was charged with promulgating interim final 

regulations to implement Section 129E. These interim final regulations became effective April 

1, 20 II. The Board established two alternative presumptions of compliance for lenders and their 

agents to satisfy thc "customary and reasonable" rate requirement. 

REV AA and FAIR believe that the appraiser compensation standards promulgated by the 

Board are in compliance with the Dodd-Frank Act, and they reflect the variations in actual 

10 See 12 USC § 2603. 

II See Section 129E(i)(1) ofTILA. 

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services and other factors that exist in the marketplace. Appraisal services arc not one-size-fitsall, and we bclieve the Board has created a compliance structure for thc payment of "customary 

and reasonable" appraisal fees that reflects market realities and ensures that prices paid by 

consumers will remain competitive. 

The first presumption permits lenders and their agents to rely upon recent rates actuallv 

llilli! for appraisal services (including rates paid by AMCs) in the relevant geographic market, 

adjusted as necessary to account for six other factors, such as type of property or scope of work. 

Although the term "customary and reasonable" was undefined in the Dodd-Frank Act. the Board 

recognized that the Dodd-Frank Act language is identical to the Department of Housing and 

Urban Development's requirement obligating FHA lenders to ensure that appraisers are paid "at 

a rate that is customary and reasonable for appraisal services performed in the market area of the 

property being appraised." Consistent with HUD's approach within Mortgagee Letter 2009-28, 

the Board concluded that the marketplace should be "the primary determiner of the value of 

appraisal services, and hence the customary and reasonable rate of compensation for fce 

appraisers. " 

The second presumption pennits reliance on objective third-party infonnation, including 

fee schedules, studies and surveys prepared by independent third parties such as government 

agencies, and academic institutions and private research firms, provided they arc based on recent 

rates paid to a representative sample of appraisers in the geographic market of the property being 

appraised (but excluding compensation paid to appraisers for assignments ordered by an AMC). 

REVAA and FAIR believe that the Board correctly implemented Congress' plain 

language and intent by establishing two presumptions - one that relies on the recent rates 

actually paid in the marketplace and one that relies on objective third-party fee survcys that 

exclude fees charged by AMCs. There are currently very few third-party fee surveys in the 

marketplace, none are comprehensive enough to include all of the differences in geographic 

areas/markets, and they do not fully encompass all of the appraisal products offered by AMCs. 

The Board did not issue a "final" rule before its rulemaking authority was transferred to 

the CFPB. While the interim final rule remains effective without such "finalization," AMCs are 

concerned that some appraisers may seek reconsideration hy the CFPB with the intention to 

mandate a higher level of compensation for appraisers than is supported by current market rates. 

Under this scenario, consumers would he subjected to higher appraisal fees that would often 

exceed the market rate; however, consumers would not be gaining additional services in return 

for these higher fees. Instead, they would be paying higher costs for the same services, and it is 

most certainly the case that these higher costs will ultimately be passed along to homeowners. 

Furthermorc, guaranteeing a higher fee for appraisers would not ensure better 

performance, as decades of experience has shown that higher appraisal fees do not necessarily 

correspond to higher quality appraisals. Appraisers are required by USP AP to ensure that 

appraisals meet minimum requirements regardless ohhe fee or the nature ohhe assignment. 

Prior to recent regulatory reforms, higher appraisal fees were the custom for many appraisers 

who, in partnership with overzealous mortgage brokers and lenders, produced appraisal reports 

that were impacted by inappropriate influence and coercion. The resulting appraisals often 

reflected inflated values and certainly did not constitute "high quality" appraisals. The members 

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of REV AA and FAIR respectfully suggest that Congress and the CFPB should resist calls from 

those appraisers to mandate increased rates for appraisals as opposed to allowing the marketplace 

to dictatc appraisal rates. 

Certain industry groups allege that higher fees would benefit the appraisal industry by 

attracting better qualificd appraiscrs to thc profession. These groups suggest that quality and 

price are somchow linked. There is no empirical evidence to suggest a correlation bctwcen 

quality and price. That is, it is not necessarily the case that an appraiser who asks for the highest 

compensation will deliver a better quality appraisal than an appraiser who asks for less 

compensation. 

The conclusion that paying higher fees to appraisers would generate an influx of new 

appraisers to the industry is misplaced. Rather, one ofthe main reasons that the industry has 

difficulty attracting new appraisers is not a function of compensation, but of the state appraisal 

laws that impose a particularly steep barrier to entry.12 Most states require applicants for 

licensure or certification to submit an experience log that lists, with some specificity, each of the 

appraisals claimed [or experience credit. In some instances, states may require a person to 

complete 3,000 work hours. 13 Before then, they are just "trainees." Fannie Mae and Freddie 

Mac, however, which make up a majority o[the market, prohibit hiring a trainee on a loan they 

purchase. Arduous qualification criteria for licensed appraisers is the real impediment to the 

industry'S growth and attraction of new appraisers to the profession. 

In addition to the items discussed previously regarding the potential negative impacts on 

consumers by mandating a higher level of compensation, it is also important to note that there is 

no single standard or uniform price for appraisals throughout the country. Instead, appraisal fees 

are set by the competitive marketplace and reflect variations in the scope of work performed by 

appraisers; the nuances of individual transactions, such as the type and location of the property; 

the costs associated with producing appraisals in different markets; how quickly the lender has 

required the report; and the appraiser's level of efficiency in performing an assignment. 

Indeed, while Section l29E(i) of TILA provides that lenders and their agents may 

generally rely on fee studies created by objective third parties to form the basis for "customary 

and reasonable rates," no reliable and objective fee studies exist across the appraisal spectrum. 

In fact, two studies that are referenced most actively in the appraisal community to support 

uniform highcr fces demonstrate significant difference between fees within those two surveys tor 

the same areas, do not represent the appraisal industry as a whole, and do not account for the fact 

that appraisals have multiple uses and multiple markets. Further, we are concemed that undue 

reliance on fee studies may result in increased collusion among some appraisers to set their fees 

" See Justin T. Hilley, Licensed Appraisers in Mass. Shrink 39% Since 2007, Housing Wire (Jun. 8,2012) available 

at: http://www.housingwlre.com/news/massachusetts-appraisers-shrinks-nearly-40-2007 

13 For example, to become a Certified General Appraiser, the Appraisal Qualifications Board's Real Property 

Appraiser Qualification Criteria requires 3,000 hours of experience accumulated during no fewer than 30 months. 

of which 1,500 hours must be non-residential. Many states have adopted this critera. See 

http://www.dpor.virginia.gov/dporweb/AQB_Rea1]roperty _ Appraiser Qualification _ Criteria. pdf 

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at artiiicially high rates, thus influem:ing fee studies in their area and ensuring that inflated 

appraisal prices are paid for years to come. 

We are also concerned that states may promulgate appraiser compensation requirements 

that are inconsistent with federal appraisal law. For example, Kentucky previously introduced a 

proposed rule regulating AMCs that would require an AMC to compensate Kentucky appraisers 

at a fec mutually agreed upon, provided the fee is at least equal to the amount set in the V A fee 

schedule for comparable properties in the same geographic areas. Kentucky's one-size-fits-all 

approach not only was contrary to the Board's conclusion that a single standard price for 

appraisers cannot exist, but also had the effect of circumventing the federal scheme. While this 

proposed rule was not ultimately adopted, we are concerned that it may exemplify a trend of 

overreaching by state appraisal boards. 

Because of the services and many eJ1icicncies provided by AMCs on behalf of individual 

appraisers, appraisers are willing to set their appraisal prices at a lower rate lor orders accepted 

from AMCs due to the benefits an appraiser received by working with an Al\,1C. The efficiencies 

and technological advances that AMes have introduced into the appraisal report process reduce 

costs. Additionally. AMCs go to great lengths to ensure that only the most qualified and 

experienced appraisers belong to their networks, with many relationships existing over a 10-15 

year period or longer. Appraisers recognize and utilize the extensive quality control processes 

provided by AMCs to increase the quality of appraisal reports that they produce. Accordingly, 

while appraisers may set !heir prices lower when utilizing AMCs, AMes produce high quality 

appraisals by ensuring that inappropriate influence does not occur during the appraisal process 

and by having multiple layers of quality control. 

We hope that the CFPB, in issuing final regulations to implement the appraiser 

compensation standards required by the Dodd-Frank Act, will maintain the complial1ce structure 

lor the payment of "customary and reasonable" appraisal rates that the Board established. 

Conclusion 

In sum, REV AA and FAIR members play an important role in the housing market and 

provide significant benefits to lenders, appraisers, and homeowners. As well, AMes are subject 

to multiple federal and state regulatory requirements, and AMes arc working collaboratively 

with the relevant federal and state regulators to establish minimum standards and to develop and 

implement registration and regulatory requirements. Finally, we believe that the FRB correctly 

implemented Congress' plain language and intent in creating a compliance structure for the 

payment of "customary and reasonable" appraisal fees that reflects market realities and ensures 

that prices. 

Thank you for the opportunity to provide testimony and insight in support of !he 

important work of Congress. We hope that the Subcommiuee will continue to look to us as a 

resource as you continue your efforts to reform the mortgage origination process. 

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76111.077

JJ;.merican 

I i Society. of Appralsers@~ 

ASAJ; 

TESTIMONY OF KAREN MANN 

On Behalf Of 

THE AMERICAN SOCIETY OF APPRAISERS 

and the 

NATIONAL ASSOCIATION OF INDEPENDENT 

FEE APPRAISERS 

Before The 

Subcommittee On Insurance, Housing And Community Opportunity, 

Committee On Financial Services, U.S. House of Representatives 

June 28, 2012 Hearing On 

"Appraisal Oversight: The Regulatory Impact on Consumers and Businesses" 
119 


76111.078

I. Introduction 

Chairwoman Biggert. Ranking Member Gutierrez and members of the Subcommittee, my name 

is Karen MaIm and I am the president of Mann & Associates, a residential and commercial real 

estate appraisal firm, established in 1983. with otIices in the San Francisco Bay Area and the 

California Central Valley. I hold a California Certified General Appraiser credential, a Nevada 

real estate appraiser license and have earned a Real l'ropetiy professional appraiser designation 

from the American Society of Appraisers, on whose behalf! am testifying today. In addition, I 

am also testifying on behalfofthe National Association oflndependcnt Fee AppraisersI I am 

also a member of two other professional appraisal organizations. 

I want to thank the Subcommittee and particularly Congressman Guticrrez, for providing the 

American Society of Appraisers and the National Association of Independent Fee Appraisers an 

opportunity to testify at today's important appraisal oversight hearing. 

II. Executive Summary Of Testimony 

The current appraisal regulatory structure, tiered across federal and state governments 

and the private sector, is a dramatic improvement over the "Wild West" environment in 

which appraisers operated prior to the Savings and Loan Crisis of the 1980's and the 

enactment of Title Xl ofFiRREA. Pre-Title XI. appraisers operated without minimum 

appraiser qualifications, minimum appraisal standards, and patchwork oversight. The 

regime institutcd by Title XI of FIR REA continues to be an effective structure that 

mirrors similar regulatory approaches which apply to other professions whose members 

arc involved in federal matters, like accountancy; and has been mirrored in legislation 

designed to regulate mortgage loan originators through the SAFE Act. The appraisal 

regulatory system we now have provides consumers, government agencies and mortgage 

market participants with confidence that real estate appraisers meet minimum educational 

and experience requirements, that appraisals are subject to a set of generally-accepted 

unifonn standards, and that appraisers who fail to meet these requirements wiII be held 

accountable by their state appraisal board, as well as by any professional organization 

which has accredited them. 

We believe the Appraisal Foundation has been and continues to be an indispensable 

factor in thc growth of the appraisal profession in our country. We reject the view that the 

Foundation has engaged in "mission creep" or in any other inappropriate activity. We 

believe that the creation of the Appraisal Practices Board is a natural and necessary 

adjunct to helping professional appraisers understand and apply the appraisal standards 

promulgated by the Foundation's Standards Board. It is also important to understand that 

Foundation decisions involving standards, qualifications and best practices are made in a 

completely transparent manner with an opportunity provided to all appraisers to comment 

I ASA and NAIFA each teach, test and credential their members for professional appraisal practice and appraisal 

review in residential and commercial real property valuation. Additionally, ASA is a multi-disciplinary appraisal 

organization that teaches. tests and credentials its members for professional appraisal practice and appraisal review 

in business valuation and in personal property valuation (including machinery and equipment, fine art. antigues. 

gems andjcwclry and the contents of homes and offices). 

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on proposed actions. Such transparency and the opportunity for all stakeholders to be 

heard often stands in contrast to the way other organizations make decisions. 

• While we believe there is no need for an alternative approach to the current appraisal 

regulatory regime, we do believe that some improvements could be implemented to 

bolster the existing regulatory structure's effectiveness. We concur with the findings of 

the General Accountability Office's January 2012 study regarding the activities and 

operations of the Appraisal Subcommittee, but we also acknowledge that the 

Subcommittee has made steady improvements over the last year or two. 

• There are several concerns facing professional appraiser which, if left unaddressed, stand 

to undermine not just the appraisal profession, but the safety and soundness of the 

residential mortgage lending market and the rights of consumers. These concerns include: 

o The need for the Consumer Financial Protection Bureau, when it issues final 

appraiser independence regulations, to undo the stunning and completely 

inappropriate loophole let! in the Federal Reserve Board's original Interim Final 

Rule. That rule allows appraisal management companies to consider the fees they pay 

appraisers to justify their compliance with Dodd-Frank Act's "customary and 

reasonable fee" provisions. The Board's Interim Final Rule amounted to a unilateral 

repeal of the clear language and intent of the Act by regulatory fiat. If the loophole 

remains in the final rule, the cram down in appraiser fees it permits will continue to 

cause the most experienced professional appraisers to leave the residential appraisal 

market, denying consumers and lenders access to their expertise while forestalling 

trainee appraisers from obtaining the required apprenticeship hours -likely leading to 

a severe shortage of available appraisers. 

o Rules to implement many of Dodd-Frank's appraisal provisions have yet to be 

proposed. While we recognize that the statutory deadlines imposed on some 

provisions of the Act take preeedence, we urge the responsible federal agencies to 

propose implementing rules as early as possible so appraisers, users of their services 

and consumers all understand the "rules of the road." 

o In connection with the Consumer Financial Protection13ureau's "Know Before You 

Owe" mortgage form disclosure initiative, our organizations have urged the Bureau to 

approve a Good Faith Estimate form and a Settlement form which separate the fee 

paid to the appraiser irom the fee collected by an Appraisal Management Company 

when the appraisal is ordered through an AMC. Not only would the separate 

disclosure comport with the Bureau's own efforts to "protect and empower" 

consumers, but it affords consumers with critical information as to the true cost of 

appraisals, as well as the available universe of options for hiring an appraiser both in 

terms of cost and qualifications. In many cases, failure to separately disclose appraisal 

fees and AMC fees leads consumers to default into using an AMC, which often leads 

to higher consumer costs while obtaining an appraisal from a less experienced, less 

geographically competent appraiser - essentially, paying more while receiving less. 

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o The ever-increasing threshold de nzinimus levels established by the federal banking 

agencies deny consumers and market participants the significant safety and soundness 

and consumer protections provided by an appraisal, as opposcd to a less expensive 

but inhercntly unreliable and far less infonnativc valuation product, like an automated 

valuation model. We strongly believe that thc current threshold levels ($250,000 for a 

residential loan, $1 million for a commercial loan) should be eliminated or 

substantially reduced, GAO estimates that 70% of residential mortgages made from 

2006 - 2009 were below the threshold. But, in many neighborhoods across the 

country in today's economy, the $250,000 threshold would excludc virtually 100% of 

financed residential propcrtics. 

III. Relevant Background 

In connection with thc specific subject mattcr oftoday's hearing, I think it is useful to revisit for 

a brief moment the statc of our residential mortgagc and mortgage lending markcts in the mid1980s which caused Congress to enact the real estate appraiser licensing provisions of Title XI of 

the Financial Institutions Reform Recovery and Enforcement Act of 1989 (FIRREA). As we all 

know, FIRREA was Congress's principal response to the S&L crisis of the I 980s, a crisis whosc 

total cost to resolve was $153 billion the vast majority of which was borne by U.S. taxpayers2 

According to Congressional studies and virtually all analyses, the banking problems of that 

period "came primarily from unsound real estate lending." An FDIC analysis concluded that in 

many cases, prudent underwriting standards were not observed and neccssary documents and 

controls wcrc not put in place. It went on to say that real cstatc lending "was appraisal driven and 

was oftcn based on the overly optimistic assumption that property valucs would continue to 

rise. 

To the cxtent that faulty and fraudulent appraisals contributed to the losscs of the S&L debacle-, 

and they did - the principal cause was the "Wild West" environment in which appraisers 

operated in that era3 While many appraisers were thoughtful, conscientious and did good work, 

many did not and there is little mystery as to why: 

First, there were no generally-recognized appraiser qualifications that providers of 

appraisal services had to meet. A relatively small number of residential appraisers held 

legitimate credentials from a few professional appraisal organizations; some earned 

illegitimate credentials from diploma mills; and others had no meaningful valuation 

credentials at all; 

Second, there wcre no generally-accepted, unifonn appraisal standards that all 

practitioners werc required to observe. Some appraisers operating in that era adopted 

whatevcr valuation approachcs and methodologics suited the valuation conclusions 

needed to create the illusion that a real estate loan was adequately collateralized; 

2 The thrift cleanup was Congress's response to what many have characterized (at least until the subprime and 

related financial meltdown of the past few years) as the greatest collapse of U.S. financial institutions since the 

1 930s. The FSLIC and the Resolution Trust Corporation closed 1,043 institutions holding $519 billion in assets and 

resulted in a massive restructuring of the number offirms in the industry. From January I, 1986, through year-end 

1995, the munber of federally insured thrift institutions in the United States declined 50 percent from 3,234 to 1,645. 

3 See, for example, House Committee on Government Operations, Impact of Appraisal Problems on Real Estate 

Lending, Mortgage Insurance. and Investmenl in the Secondary Market. 99'h Cong., 2"d Sess., 1986, H.Rep. 99-981. 

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Third, there was no elTeetivc system of appraiser accountability. At the time Title XI was 

enacted into law, most states had little or no authority to oversee or sanction appraisers 

operating in their states; and, with very few exceptions, rederal agencies with an interest 

in reliable valuations had requirements that were inelTectual or ignored; and, 

Fourth, there were no effective laws in place either at the state or federal levels that 

protected appraisers from the enonnous pressures on them at that time, to reach a predetennined fair market value. 

The enactment of Title XI and the regulatory framework it established for federally-related 

transactions changed all that; and, together with the important appraisal reform provisions of the 

Dodd-Frank Act, changed things in a way that ensures the competence and independence of 

appraisers; effectively safeguards taxpayer interests; and provides consumers with critical and 

independent information on the fair market value of property collateralizing the most important 

financial transaction they will ever enter into - their mortgage loans. 

Notwithstanding the giant leap forward which Title XI represents, it is not the position of the 

American Society of Appraisers and the National Association ofIndependent Fee Appraisers that 

every real estate appraisal perf()nned today is flawless or that the current appraisal regulatory 

system - including its several component parts"- is perfect and cannot be improved. It can be 

improved and should be. However, it is our unequivocal view that the overall competence and 

independence of our nation's 100,000 plus real estate appraisers are dramatically better than 

before Title Xl's enactment; and, that the current regulatory framework - which is financed by 

the appraisal profession- is fundamentally sound and very much a success story that benefits 

taxpayers and consumers. 

IV. Responses To The Issues Raised In The Subcommittee's June 22nd Letter Of 

Invitation 

We believe that the issues raised in the tirst two bullet points of the Subcommittee's letter of 

invitation are interrelated. Accordingly, our response treats them together: 

"Views regarding the federal role in appraisal regulation" and "Options for improving 

the appraisal regulatory structure, including alternative systems of oversight that 

would improve efficiency and reduce duplicative regulations in the real estate appraisal 

industry" -

We believe that the federal role in appraisal regulation is indispcnsible since the mortgage 

markets are national in scope and since it is federally-related transactions and federal 

taxpayer dollars which the appraisal regulatory system is designed to protect. INbile we agree 

that some components of the tripartite appraisal regulatory structure can and should be 

improved, we regard the overall framework as fundamentally sound. 

While some have described the appraisal regulatory framework as byzantine or convoluted, 

we strongly disagree and think it is long past time to address this misconception. The division 

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of responsibility involving the federal governmcnt, state govcrnments and the private scctor 

is straightforward, sensible and, in fact, similar to regulatory arrangements involving other 

professionals, such as accountants, who often play important roles in federally-related 

transactions. Under the Title XI structure: 

The 50 states and tcrritories have exclusive responsibility for licensing real estatc 

appraisers and for disciplining them if their perfonnance is unprofessional or unethical, 

including the loss or suspension of their licensc to practice; 

The federal goverrunent, principally through the Appraisal Subcommittee (ASC), is 

responsible for overseeing state appraiser licensing systems to ensure that they mect 

minimum "safety and soundness" and effectivencss standards and that the appraisers they 

license are competent and independent when their appraisals involve federal financial 

interests. Federally agencies, whose regulatory or administrative responsibilities include 

oversight of collateral valuations (such as thc banking agencies; !IUD; IRS in relation to 

tax-related valuations; and the SEC in connection with mortgage-backed sccurities), 

sometimes and appropriately establish additional valuation requirements they believe are 

necessary to carry out their missions. But even agencies which add appraisal 

requirements still rely on Title Xl to ensure real estate appraiser competence and 

indcpendence; 

The private sector, principally The Appraisal Foundation (T AF), promulgates generallyaccepted appraisal standards (i.e., the Uniform Standards of Professional Appraisal 

Practice or USPAP) and minimum education, experience and testing qualification 

requirements for appraisers whose valuations involve federally-related transactions. 

States are able to establish requirements which exceed those ofTAF. Additionally, 

private professional appraisal organizations, such as ASA and NAIFA, are able to 

establish educational, testing and experience requirements which exceed those ofTAF or 

state licensing cntities for individuals who wish to earn a professional appraiser 

designation from them. 

The structure described above for appraisers is not dissimilar to the regulatory structures of 

other professions that interact with government, such as accountancy. Accountants are 

licensed andlor certified by state boards of accountancy and are subject to discipline by thcm 

(similar to the role of state appraiser boards). The Financial Accounting Standards Board 

(FASB) is the designated private sector organization for establishing standards of financial 

accounting that govern the preparation of financial reports and its standards are officially 

recognized by the SEC and other federal agencies (similar to the role of the Appraisal 

Foundation's boards whose work is recognized by federal agencies). While the federal 

government does not maintain a body to oversee the activities of the state accountancy 

boards (in the same way the Appraisal Subcommittee oversees state appraiser licensing 

agencies), the Securities and Exchange Commission and the Public Company Accounting 

Oversight Board exercise a form of indirect authority over the state boards of accountancy. It 

is also worth noting that the SAFE Mortgage Licensing Act of2008 (which licenses and 

registers individuals who engage in the business of residential mortgage loan originations for 

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federally-regulated financial institutions) established an organizational structure that is 

roughly comparable to the Title XI system for appraisers. 

In short. the overall regulatory structure which exists for the appraisers (i.e., state licensure; 

federal oversight; and, reliance on an independent. non-profit private sector entity to establish 

professional standards and qualifications) is neither novel nor even unusual. We are 

convinced that it is a tried and true structure that works well. 

Accordingly (and in direct response to the Subcommittee's question), the American Society 

of Appraisers and the National Association ofIndependent Fee Appraisers do not believe 

there are any realistic "options for improving the overall appraisal regulatory structurc, 

including alternative systems of oversight that would improve cfficiency and reduce 

duplicative regulations in the real estate appraisal industry." More importantly, we do not 

believe any alternative structures are necessary or desirable. 

Nevertheless, we believe that individual components of the current system should be 

strengthened so that thev operate more effectively. Specifically, we concur with the findings 

and recommendations of the General Accountability Office (GAO) in its January 2012 report 

regarding the need for additional resources and greater efficiency relative to the operations 

and activities of the Appraisal Subcommittce.4 While the Subcommittee faces significant 

future challenges in conncction with its additional Dodd-Frank responsibilities, we want to 

acknowledge our belief that it has substantially improved its effectiveness over the past two 

years. 

"Concerns facing real estate appraisers" -

There are several major areas of concern facing the real estatc appraiser profession. They 

range from very important to critical, as follows: 

(1) CUSTOMARY AND REASONABLE FEES - The Federal Reserve Board's Interim 

I<'inal Rule on Dodd-Frank's "Customary and Reasonable" Appraiser Fee Provision 

Violates Congressional Intent and the Clear Language of the Statute: While our 

organizations found many oftbe Federal Reserve Board's proposed regulations 

implementing the appraiser independence provisions of Dodd-Frank to be faithful to the 

letter and intent of the statute particularly those that prohibit pressure on appraisers we 

were stunned by the manner in which the Board proposed to implement the law's "customary 

and reason_<.tble" appraiser fee provisions. By permitting Appraisal Management Companies 

to factor the compensation they pay appraisers into the calculation of what constitutes 

"customary and reasonable" fees under Dodd-Frank (which the Fed's Interim Rule 

commentary says they can do), the Board turned Congressional intent on its head. If the 

Consumer Financial Protection Bureau (CFPB), which now has jurisdiction over the Interim 

Rule, allows it to become final with the Fed loophole intact, the agencies will have 

effectivelv repealed the law by unilateral, regulatory fiat. 

4 Rea! Estate Appraisals: Appraisal Subcommittee Need, to Improve Monitoring Procedures, GAO-12-147, January 

2012. 

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The "customary and reasonable" lee provision was included in Dodd-Frank in recognition of, 

and in response to, thc practice of many of the largest AMCs to cramdown fees that had been 

customarily paid dircctly to appraisers by mortgage lendcrs and other users oftheir services. 

The vast majority of appraisal assignments are now ordcred by mortgage lenders through 

AMCs (the estimates range from 60 - 80 percent). The experience of onr residential 

members in the marketplace indicates that AMCs typically take for themselves about 30 35 

pcrcent of the appraisal fec consumers pay. This means that for a typical residential appraisal 

assignment for which the appraiser is paid $450.00,' the AMC would take between $ 135.00 

and $158.00 leaving the appraiser with a fce of between $292.00 and $315.00 an amount 

far below what is financially necessary for appraisers with established practices and 

significant experience to make a living from that book of business. 

Given the huge book of business controlled by AMCs, the fee-splitting arrangement between 

appraisers and AMCs is driving many of the nation's most experienced and competent real 

estate appraisers out of the market cntirely. It is not an exaggeration to say that ifthc Fedcreated loophole is not closed by the CFPB when it issues the final appraiser independence 

rule, the pool of experienced professional appraisers available to perform residential 

valuations will shrink to unacceptable levels. If that is allowed to happen, the professional 

appraisal community will sufter and confidence in our mortgage markets by consumers and 

secondary markct investors will be seriously undemlined. 

While we acknowledge that AMCs can sometimes make it easier for national and rcgional 

mortgage Icnders to order and process large numbers of appraisals, onr experience is that 

AMCs do not add meaningful safety and soundness value to appraisals; and, they do not 

reduce the cost of an appraisaL Indeed, there is cvidence that an increasing nnmber of 

appraisals ordered through AMCs are more costly than those ordered by lenders dircctly 

from appraisers or appraisal firms. In today's computer and information technology age, even 

large lenders can readily meet their appraisal requirements by ordering directly from 

appraisers in the relevant housing markets. 

The cramdown of appraisal fees to well below customary markct levels by many AMCs has 

been disruptive of and deeply troubling to the community of professional residential 

appraisers. But, it should be equally troubling to consumers because the cram down has 

caused many of the nation's most experienced and qualified appraisers to retuse AMC 

assignments. As a result, many of the appraisers willing to accept AMC assignments have 

less expericnce, less knowledge of the collateral property's markct area and have fewer 

overall professional credentials than their counterparts who are retained directly by lenders. 

In short, AMC-ordcred appraisals do not save any money for consumers and may in fact cost 

them more, but in both cases consumers are likely to get the appraisal from the least 

experienced appraisers in their communities. 

(2)IMPLEMENTA nON OF REMAINING APPRAISAL REFORM PROVISIONS OF 

DODD-FRANK: With the important exception of Dodd-Frank's appraiser independence 

provisions, most of the law's appraisal reform provisions have yet to be proposed, let alone 

5 '[be Department of Veteran Affairs' appraiser fee schedules demonstrate that a S450 fcc for a non-complex singlefamily appraisal is typical in most areas ofthe country. 

-7 -
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implemented, through rulemaking. These provisions involve enormously important issues 

including, for example, Property appraisal requirements in connection with extensions of 

credit; Supervision and registration of Appraisal Management Companies by states and the 

federal govennnent; Development of quality control standards for Automated Valuation 

Models (A VMs); Establishment of an appraisal complaint hotline; Establishment of 

qualification requirement for appraiser trainees: Requiring CFPB concurrence that the 

banking agencies' existing dollar thresholds for residential and commercial property below 

which an appraisal is not required ,"provide reasonable protection for consumers who 

purchase 1-4 unit single-family residences" ; and, the establishment oflimits on the 

permissible use of broker price opinions to value collateral property. 

Our organizations recognize that Dodd-Frank imposes significant and far-reaching 

rulemaking responsibilities on a relatively small number of Executive Branch and regulatory 

agencies, some of which include statutory deadlines which must take precedence over those 

which do not. We also appreciate the fact that the agencics are working on drafts of some of 

these potential rules. Nevertheless, the Act's appraisal provisions are of enormous 

consequence not only to our members and the entire community of professional appraisers, 

but also to consumers and, ViC believe, to the efficient and fair functioning of the nation's 

collateralized credit markets. Accordingly, we respectfully urge the banking agencies, the 

Appraisal Subcommittee and the state licensing agcncies (0 propose implementing rules at 

the earliest possible opportunity for all of Dodd-Frank's appraisal reforms that fall within 

their areas of responsibility. 

(3)SEPARATING THE APPRAISER FEE FROM THE AMC FEE IN MORTGAGE 

SETTLEMENT DISCLOSURE DOCUMENTS: Given the dominance ofAMCs in the 

appraisal ordering process, we believe consumers are entitled to know who receives the 

money they pay during the mortgage loan application and underwriting process for an 

appraisal of the valuc ofthc propcrty they are purchasing. Beginning late last year, the 

Bureau requested comment on its "Know Before You Owe" mortgage disclosure forms 

initiative. The Bureau requested commcnt on the success of its efforts to design a new Good 

Faith Estimate (GfE) form and a mortgage disclosure Settlement form that consolidates, in 

one place, information about the costs, terms and conditions of a mortgage loan; and, does so 

in a way that is readily understandable by consumers and the mortgage industry. The CFPB 

asked whether the different iterations of the forms it was testing in several mortgage markets 

would provide borrowcrs with a clear understanding of the final costs, terms and conditions 

of a mortgage loan; and, allow thcm to compare these costs, terms and conditions with the 

information in the Good Faith Estimate provided to them during the loan application and loan 

settlement process. 

Our comments urged the agency to adopt GFE and Settlement forms that disclose to 

mortgage applicants that when the appraisal of the collateral property is ordered through an 

AMC, a substantial portion of the appraisal fee shown on both forms does not go to the 

person who actually performs the appraisal but instead pays for the backroom administrative 

services of the AMC - a company that is sometimes an affiliate of the mortgage lender 

making the loan. We pointed out that while there is nothing improper about an appraisal 

being ordered through an affiliate ofthc borrower's mortgage lender, this arrangement does 

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represent an undisclosed, even a hidden, consumer payment to that lender. When an AMC is 

utilized to order the appraisal, we believe that the absence of infonnation on the GFE and 

settlement forms disclosing this fee splitting arrangement is harnlful to consumer interests for 

two integral reasons; 

First, it violates the basic premise of the Bureau's "Know Before You Owe" policy to 

"protect and empower" consumers in what the CFPB correctly characterizes as "one of 

the biggest financial decisions a consumer can make"; and, it undennines the agency's 

ohjective of making mortgage-related costs "clear at aU stages of the mortgage process." 

Second, it deprives consumers of important infonnation that would allow them to make 

infcllmed decisions about the valuation componcnt of the mortgage lending process. Our 

organizations are concerned that with the rapid increase oflender reliancc on AMCs, 

there has hecn an accompanying decrease in consumer understanding of the appraisal 

function, including who is actually performing the appraisal and what it actually costs. 

When the GFE or settlement forms conflate the appraiser's fee with the AMC's fee, 

consumer choice relative to the appraisal has been effectively dcnicd - that is, borrowers 

are deprived of crucial infonnation that would open up options availahle to them if they 

understood the possible ditTerences in the range of costs of a professional appraisal as 

well as the range of qualifications and depth of experience of those likely to be 

performing them, depending on whether the appraisal is or is not ordered through an 

AMC. 

While the cost of an appraisal ordered through an AMC can be comparable to one 

ordered by a lender directly from an independent appraiser or appraisal finn, the AMC 

ordered appraisal can also be more expensive. When lenders contract dircctly with an 

independent appraisers or appraisal finn to value collateral property, the backroom 

administrative costs that are added on hy an AMC are avoided and the overall cost to 

consumers is sometimes reduced. However, if the Good Faith Estimate fails to disclose 

that the appraisal will be ordered through an AMC and fails to separately identify the 

portion of the consumer's payment that goes to the AMC, the borrower will have heen 

deprived of essential information bearing on the likely qualification level of the appraiser 

pcrfonning it and, quite possibly, on the cost of the appraisal. 

Without a breakout of the appraisal fee from the administrative fee on the disclosure 

forms, a borrower will have no reason to ask the lender to consider ordering the appraisal 

directly from an appraiser practicing where the collateral property is located rather than 

from an AMC - a process that was commonplace prior to the explosive grov.1h of AMCs 

and the one most likely to produce an appraisal by a highly experienced and skilled 

appraiser. Without this breakout, borrowers are unknowingly locked into what can be a 

more costly appraisal process that is overly dependent on less experienced appraisers who 

are willing to work for fees substantially below what is customarily and reasonably paid 

to appraisers who are independent of AMCs. 

The CFPB is testing various iterations of GFE and Settlement forms in several mortgage 

markets, Some of those iterations do, in fact, separate the appraiser fec from the AMC fce 

when the appraisal has been ordered through an AMC; other iterations do not. Our 

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organizations are urging the Bureau to adopt the forms which separate the fees because we 

strongly believe they benefit consumers and their right to know how their dollars are being 

spent. 

(4) ELIMINATION OF OR SUBSTANTIAL REDUCTION IN THE BANKING 

AGENCIES THRESHOLDS FOR LOANS ON COLLATERALIZED RESIDENTIAL 

AND COMMERCIAL PROPERTIES: Section 1473 of Dodd-Frank requires the CFPB to 

consider whether the banking agencies' existing dollar thresholds for residential property 

($250,000) and commercial property ($1 million) "providcs reasonable protection for 

consumers who purchase 1-4 unit single-family residences". Collateralized loans below the 

thresholds are exempted from the agencies' appraisal requirements. If the Bureau concludes 

that either or both thresholds do not reasonably protect consumers, then the banking agcncics 

would bc required to eliminate or reduce their thresholds, thereby empowering consumers to 

have appraisals of the fair market value of their purchases. 

Our organizations believe that professional appraisers scrve critical safcty and soundness and 

consumer protection purposes. We concur with the view expressed by the GAO in its July 

20 II "Residential Appraisals" report to thc House Financial Services Committee and the 

Senate Banking Committce that appraisals 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." We believe that competent and independent real 

estate appraisals are as important to the safety and soundness of a collateralized mortgage 

loan as the creditworthiness of borrowers. We recognize of course that the fair market value 

of property collateralizing a mortgage loan can move up or down, sometimes at a rapid pace. 

We also rccognize that borrowers - even those with sterling credit scores can lose their jobs 

and, with that loss, their creditworthiness. As a consequence, collateral valuations and 

crcditworthiness are both important to the safcty and soundness of a mortgage loan. We do 

not believc that one measure is inherently more or less important than the other. Instead, they 

complement each other. 

Moreover, because profcssional appraisers are independent of all parties to a real estate 

transaction (i.e., sellers and lenders) appraisals provide a significant consumer protection 

function by giving buyers objective information about the fair market value of property thcy 

may be purchasing and financing, in relation to comparable properties in the neighborhood. 

But, the safety and soundness and consumer protection attributes of appraisals arc rendered 

moot by the ever-increasing threshold levels established by the banking agencies since Title 

Xl's enactment in 1989. Even before the collapse ofthc residential real estate markets in 

most parts of the country over the last several years, the residential threshold level of 

$250,000 established by the banking agencies frequently results in a denial of the protections 

afforded by appraisals to millions of home buyers. Today, tens of millions of home buyers are 

adversely affected by the threshold level, which GAO estimatcs as covering 70% of all 

residcntial mortgage financings between 2006 and 2009. That percentage is likely to be 

considerably higher in today's deprcssed mortgage markets; and, in many neighborhoods 

across the country, it is likely that 100% of residential properties would be covered by the 

threshold exemption. 

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76111.088

Given the substantial safety and soundness and consumer protection bcnefits which 

appraisals provide, we strongly believe that the $250,000 threshold levels for collateralized 

residential loans and the $1 million dollar threshold for commercial loans collateralized by 

real estate, should be eliminated or, at a minimum, substantially rcduced to properly reflect 

not only currcnt real cstate markets but the heightened sense which now exists of the need for 

much greater consumer protections in mortgage transactions. 

V. Issues Relating To The Appraisal Foundation And The Appraisal 

Subcommittee 

Our Organizations Strongly Support the Indispensible Roles Played By the Appraisal 

Foundation (T AF) and the Federal Appraisal Subcommittee (ASC) In The Continuing 

Growth Of Appraiser Professionalism and To The Growing Acceptance - By Federal and 

State Agencies, By the Private Sector and By The Courts - of the Uniform Standards of 

Professional Appraisal Practice (USPAI') As The Generally-Recognized Standards of the 

Appraisal Profession: We believe that the appraisal standards and appraiser qualifications 

promulgated by Boards of The Appraisal Foundation are critical to professional appraisal 

practice in America. We reject the view expressed by some that TAF has engaged in 

inappropriate "mission creep" by establishing the Appraisal Practices Board (APB) and that the 

establisrunent of the APB infringes on the prerogatives of the professional appraisal 

organizations. The establislunent of the APB for the purpose of drilling down on the meaning of 

certain USP AP provisions and addressing complex appraisal issues in the marketplace was 

widely requested; and, we believe serves important functions. 

While ASA and NAIF A have active educational programs which teach USPAP and Best 

Practices to our members, we believe that the APB' s best practices guidance is a logical and 

necessary adjunct to understanding how practitioners should implement USPAP's provisions 

(which are sometimes general in nature and require more detailed explication of the relevant 

valuation methods and techniques that should be applied). We also recognize that while the 

professional appraisal organizations have a vital role to play in contributing to the development 

of best practices, we are able to accomplish that role both through the voluntary service of our 

members on the APB and by providing the Board with our comments when it publicly exposes 

its proposed best practices guidance for stakeholder comment. We also recognize the need for 

uniformity in best practices so that the nation's real estate appraisers - most of whom do not 

belong to any professional appraisal organization - will apply the methods and techniques 

necessary to adhere to the provisions of US PAP, in a unifonn and coherent way. 

With respect to the Appraisal Subcommittee (ASC), we concur in the findings of GAO relative 

to the challenges facing the Subcommittee, most of which derive from thc important additional 

responsibilities imposed on the agency by Dodd-Frank. We do believe that the ASC has become 

a more effective and responsive operation over the past year or two. 

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The American Society of Appraisers and the National Association of Independent Fee 

Appraisers greatly appreciate the Subcommittee's investment of time and effort to ensure that 

Title Xl's real estate appraiser licensing system is working effectively on behalf of America's 

taxpayers and consumers. Thank you again for the opportunity to testify. 

12 -
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76111.090

Embargoed Until Delivery 

10:00 a.m. EDT 

June 28,2012 

ST A TEMENT OF 

EXECUTIVE DIRECTOR JAMES R. PARK 

APPRAISAL SUBCOMMITTEE 

OF THE 

FEDERAL FINANCIAL INSTITUTIONS EXAMINATION COUNCIL 

BEFORE THE 

HOUSE FINANCIAL SERVICES SUBCOMMITTEE ON 

INSURANCE, HOUSING AND COMMUNITY OPPORTUNITY 

HEARING ON 

APPRAISAL OVERSIGHT: TIlE REGULATORY IMPACT ON 

CONSUMERS AND BUSINESSES 

JUNE 28, 2012 

The Appraisal Subcommittee, as a matter of policy, disc/aims responsibility for any 

private publication or statement by any of its Subcommittee members, officers, or 

employees. The views expressed herein are those of the author and do not necessarily 

reflect the views of the Subcommittee. 
132 


76111.091

I. Introduction 

The Appraisal Suhcommittee CASC) appreciates the opportunity to provide an update on the 

ASC's current activities and future priorities. This statement will first provide general 

background and history of the ASC, including its creation in response to the savings-and-Ioan 

crisis of the 1980s, up to and including the ASC's expanded mission and authority pursuant to 

the Dodd-Frank Wall Street Refonn and Consumer Protection Act (Dodd-Frank Act). Next., the 

statement will discuss ongoing responsihilities o[ the ASC pursuant to Title XI ofthe Financial 

Institutions Re[orm, Recovery, and Enforcement Act of 1989, as amended (Title XI), including 

its monitoring of the Appraisal Foundation. The Dodd-Frank Act amendments to Title XI. 

authored by Chairman Biggert and former Congressman Kanjorski, changed numerous 

provisions related to the ASC's operations, role. and responsibilities. This statement will also 

address the ASC's Compliance Review process for evaluating State! appraiser regulatory 

programs' compliance with Title XL as well as other ongoing responsibilities. Finally, the 

statement will address actions taken by the ASC to fulfill Dodd-Frank Act amendments to Title 

Xl. 

II. History ofthe ASC 

Title XI created the ASC as an entity within the Federal Financial Institutions Examination 

Council (FFlEC). In general, the ASC operates independently ofthe FFIEC. lIistorically. the 

primary role of the ASC. pursuant to Title XI, has been to monitor the requirements by States 

and the Federal financial institutions regulatory ageneies2 regarding minimum appraiser 

qualifications and appraisal standards in connection with federally related transactions. The 

1 "State" refers to the 50 States, the District of Columbia, and four territories (Commonwealth of Puerto Rico, Commonwealth of the Northern 

Mariana Islands, Guam, and United States Vtrgm Islands), 

2 The Federal financial institutions regulatory agencies consist of the Board of Governors of the Federal Reserve System, the Federal DepOSIt 

lnsurance Corporation. the National Credit Union Administration, and the Office of the Comptroller of the Currency. 

Page 20[18 
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Federal and State appraisal regulatory framework governing federally related transactions 

inclndes any real estatc-related financial transaction that a Fedcrallinancial institution's 

regulatory agency engages in, contracts for, or regulates, and that requires the services of an 

. 3 apprmser. 

Following the savings-and-Ioan crisis of the 1980s, Congress passed Title XI to address 

identified weaknesses in the appraisal profession and the quality of real property appraisals 

supporting the lending activity offcderally regulated institutions. Title XI recognized the need 

for uniform appraisal standards and minimum qualification criteria for appraisers. Prior to Title 

XI, appraisers were, for the most part, unregulated at either the Federal or State level and there 

was no unifonn set of appraisal standards. The federal financial institutions regulatory agencies 

had broad safety and soundness guidelines requiring regulated financial institutions to consider 

the nature and value ofa loan's collateral value. Therefore, Title XI sought to address this 

situation with an emphasis on the importance of appraisals to support safe and sound rcal estate 

lending activity of federally regulated institutions and to protect Federal financial and public 

policy interests in real estate transaetions. 

Title XI crcated a unique regulatory framework for real estate appraisals and appraiscrs that 

involves Federal, State and private entities: 

At the Federal level, the ASC provides Federal monitoring, support and oversight to both 

the private and State entities; while the Federal financial institutions regulatory agencies 

arc responsible for prescribing appropriate standards for the perfonnanee of real estate 

appraisals in connection with federally related transactions under their jurisdiction. 

• At the State level, State regulatory agencies are responsible for the certification, licensing 

and supervision of appraisers. 

3 TItle Xl § ! 121 (4), J2 u.s.c. 3350, as amended. 

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On the private sidc, thc Appraisal Foundation (Foundation), a privatc non-profit 

corporation, is responsible for promulgating uniform appraisal standards and minimum 

real property appraiser qualification criteria. Thc Foundation scrves as the parent 

organization for two boards established to accomplish this mission: the Appraisal 

Standards Board (ASH) and the Appraiser Qualifications Board (AQB). These boards 

respectively promulgate and maintain the Uniform Standards of Professional Appraisal 

Practice (USPAP) and the Real Property Appraiser Qualification Criteria (AQB 

Criteria).4 

The ASC is made up ofscven members as designated by the heads orthe Federal financial 

institutions regulatory agencies, the Department of Housing and Urban Development, and, 

pursuant to the Dodd-Frank Act, the Federal Housing Finance Agency and the Consumer 

Financial Protcction Bureau. The ASC currently has a staff of ten. The ASC is hiring three 

additional staff to support the added responsibility given to the ASC by the Dodd-Frank Act. 

III. Responsibilities of the ASC Pursuant to Title XI 

The Dodd-Frank Act includcd an emphasis on consumer and residential mortgage lending, 

recognizing that appraisals provide important infom13tion on a property, including its market 

value, that assists consumers in making informed borrowing decisions, as well as providing 

important information for the lender to understand the risk in a real estate loan. With the 

enactment of the Dodd-Frank Act, the amendments to Title XI expanded the ASC's mission and 

authority and provided additional tools for the ASC in carrying out its responsibilities 5 

Pursuant to Title XI as amended, the ASC monitors the requirements established by States 

for the certification and licensing of appraisers qualified to perform appraisals in connection with 

4. The AQB Criteria establish the minimum requirements for crcdentiaiing or appraisers qualified to perronn appraisals for federally related 

transactions, including education ([or initial qualification and continuing), experience and examination. 

5 Title Xl § 1103 

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federally related transactions (including a code of professional responsibility). Specifically, 

States must adopt and/or implement all relevant AQB Criteria for the certification and licensing 

of appraisers. 

Title Xl requires the ASC to monitor both the requirements established by the Federal 

financial institutions regulatory agencies with respect to appraisal standards for federally relatcd 

transactions under their jurisdiction and the agencies' determinations as to which federally 

related transactions under their jurisdiction require the services of a State certified or licensed 

appraiser. 

The ASC is required to maintain a National Registry (Registry) of State certified and licensed 

appraisers who are eligible to perform appraisals for federally related transactions. Through the 

Registry, State and Federal regulators, lenders, and consumers can determine whether an 

appraiser holds an active credential in good standing with the State, the type of credential and the 

State disciplinary history for that appraiser. 6 The Registry became operational in 1992 and is 

available on the ASC website (viww.asc.gov). Over the years, system enhancements have been 

made to the Registry to improve public access. In March 2010, an updated Registry system and 

ASC website were implemented. The updated Registry allows authorized and properly trained 

personnel from each State to update in real time a State's Registry submission and disciplinary 

actions taken against its licensed or certified appraisers. The Registry contains fewer than 

105,000 appraiser credcntials7

, down almost 14 percent from the peak in 2007. With the 

Registry fee being the ASC's sole source of revenue, the reduction in the number of credentials 

6 The National Registry indudes the following disciplinary action history for each credential: suspensions, revocations and surrendered in lieu of 

the aforementioned actions. See Appendix A .- Appraiser Disciplinary ActIOns Reported by States for a Jist of State disciplinary actions since 

1992. 

7 Some appraisers arc licensed or certified in more than one State. Therefore the number of credentials is higher than the actual number of 

licensed and certifj~d appraisers. There are approximately 88,000 distinct appraisers on the Registry 

Page 5 of 18 
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on the Registry places additional challenges on the ASC to budget and plan for additional 

responsibilities arising from the Dodd-Frank Act mandates. 

The ASC is required to transmit an annual report to Congress not later than 1une 15 of each 

year that describes its activities during the preceding year. The 20 II Annual Report has been 

submitted to Congress and is available on the ASC website (www.asc.gov). 

The ASC is further required to monitor and review the practices, procedures, activities and 

organizational structure of the Foundation. In monitoring the Foundation, ASC stafTattends all 

public and private meetings of the Foundation boards, including their Board of Trustees. ASC 

staff also reviews and, at times, comments on proposed and final published documents regarding 

the AQB Criteria and USPAP. ASC stalTalso attends meetings of the Appraisal Practices Board 

(APB) as part of the responsibility to monitor activities of the Foundation. No grant funds are 

awarded to the APB as Title XI only authorizes grants to the Foundation for the work of the ASB 

andAQB. 

In 2011 the Foundation appointed a Strategic Plan Task Force to review and update its 

Strategie Plan. The Task Force held briefings for the Appraisal Foundation Board of Trustees 

and sponsoring organizations which were attended by ASC staff. Foundation staff indicated that 

the proposed Strategic Plan will be published this summer for a 90-day public comment period. 

Once the proposed Strategic Plan is published, the ASC will review it and provide comments. 

The ASC anticipates submitting comments to the extent that it affects the Title XI related work 

of the Foundation. 

Pursuant to Title XI, amounts appropriated for or collected by the ASC shall be used, among 

other things, "to make grants in such amounts as it deems appropriate to the Foundation, to help 

defray those costs of the Foundation relating to the activities of the Appraisal Standards and 

Page 6 of18 
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76111.096

Appraiser Qualifieations Boards:'s Since making its first grant in 1992, the ASC has provided 

over $16 million in grant lunds to the Foundation. The Foundation submits an annual grant 

request to the ASC for grant-related activities of the ASB and AQB. To receive reimbursement 

for those activities, the Foundation presents monthly reimbursement requests specifying the 

grant-related activities undertaken in a given month. ASC staff reviews the grant reimbursement 

requests and makes recommendations to the ASC as to whether the requests should be approved 

in total, in part, or denied. The ASC reviews the requests along with staff recommendations and 

approves or denies, in total or in part, the requests during the monthly public mectings. Further, 

the ASC engages an independent public accounting finn to review the Foundation's grant-related 

activities and the monlhly reimbursement requests. For fiscal ycar (FY) 2012, the ASC approved 

an annual grant of approximately $900,000 to the Foundation and its boards, which includes 

funds for the State Investigator Training Program. The grant also defrays the expenses of grant 

eligible activities of the ASH and AQB such as the development and maintenance of US PAP and 

the AQB Criteria, and maintenance of the Uniform State Appraiser Examinations. The ASC 

provides the Foundation grant funds for the development, presentation, and hosting of State 

Investigator Training Courses. Thc program provides training to assist States in investigating 

complaints against appraisers. The courses, developed jointly by the Foundation, the States, and 

the ASC staff, fill a void for States that would not otherwise have access to these professional 

development opportunities, particularly at a time when many States have limited tinancial 

resources. In total, 63 State employees attended the training in 20 11, bringing the total number 

of State employees to 330 that have attended the courses over the past three years. The training 

promotes more effective complaint investigation and resolution by State appraiser regulatory 

programs. The training covers topics such as USPAP and proper investigative techniques, and 

8 Title Xl § 1109 (b) (4),12 tJ.'s,c. 333!L as amende-d. 

Page 70f18 
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76111.097

provides resources to aid the States in their processing of complaints against appraisers. In 

response to the positive feedback from participating States, the ASC approved funding for 

additional investigator courses for 2012. 

A key part of the ASC's role is to monitor and assess State appraiser regulatory programs 

relative to Title XI. State appraiser regulatory programs are reviewed every two years, at a 

minimum, through an on-site Compliance Review process. Compliance Reviews are scheduled 

to coincide with a meeting of a State appraiser regulatory program's decision-making body 

whenever possible, and arc conducted over a two- to four-day period. ASC staff assesses the 

State appraiser regulatory programs for compliance with Title XI, ASC Policy Statements 9 and 

AQB Criteria. The ASC's Compliance Review of the State appraiser regulatory programs 

focuses on three key components of Title XI: (1) implementation and enforcement of US PAP 

and the AQB Criteria; (2) adequacy of the State's statutory or regulatory authority, funding and 

staffing to successfully carry out Title XI-related functions; and (3) consistency with Title XI in 

the decisions of the State appraiser regulatory programs. 

The ASC issues a final Compliance Review Report and letter to the State with a 

determination regarding the State's compliance with Title XI. State appraiser regulatory 

programs are found to be either: (I) in substantial compliance; (2) not in substantial compliance; 

or (3) not in compliancelO• 

The general areas of non-compliance with Title XI and the number of States experiencing 

those problems are presented in the 2011 Annual Report available on the ASC website 

(vvww.asc.{wv). A summary of those findings over the past three years is also included in 

9 The ASC periodically issues Policy Statements to assist the States in understanding the ASCs expectations for Stare appraiser regulatory 

programs. The Policy Statements reflect the general framework that the ASC uses in the Compliance Review process. 

HI In Substantial Compliance - Applies when no issues of non-compliance or violations of Titie XI. ASC Polky Statements or AQR Cnteria are 

ldcntitled. Not in Substantial Compliance Applies when there are one or more issues ofnon~compliance or violations of Title XL ASC Policy 

Statements and/or AQE Criteria but the concerns do not rise to the level of "not in compliance:' Not in Compliance - Applies when the number, 

seriousness or repctitivness of tile Title Xl, ASC Policy Statements and/or AQB Criteria violation warrant this finding 

Page 8 of18 
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76111.098

Appendix B of this statemcnt. Timeliness of the invcstigation and resolution of complaints 

against appraisers continues to be the most common area of non-compliance for the States. 

In 2011, ASC staff conducted 33 on-site visits: 27 of those were full Compliance Reviews; 3 

were Follow-up Reviews; 3 were on-site Priority Contact visits. These Priority Contacts provide 

ASC staff the opportunity to mect with a State that may pose a relatively high risk to the 

appraisal regulatory system, such as a State with a large population of appraisers, a State with 

major changes to the State appraiser regulatory program leadership, or a State with past 

compliance concerns. 

As rep0l1ed in the 2011 ASC Annual Report, the following 12 States collectively represented 

over 50 percent of the appraiser credentials on the National Registry: California, Florida, 

Georgia, Illinois, Michigan, New York, North Carolina, Ohio, Pennsylvania, Texas, Virginia, 

and Washington (listed alphabetically). 

Title XI authorizes the ASC to take action against a State in the case of non-compliance, with 

an order of non-recognition. Such an order would effeetively mean that federally regulated 

financial institutions would be unable to conduct real estate lending in a non-compliant State as 

institutions would be unable to employ the State's appraisers for appraisals in federally related 

transactions. The Dodd-Frank Act gave the ASC the authority to take interim action against a 

State in the case of non-compliance with Title Xl (as an alternative to, or in advance of nonrecognition). With regard to any future ASC rulemaking, the Dodd-Frank Act directs the ASC to 

establish an advisory committee of industry participants, induding appraisers, lenders, consumer 

advocates, real estate agents, and government agencies, and hold meetings as necessary to 

support the development of such regulations. 

Page 9 of18 
140 


76111.099

IV. Current Activities and Future Priorities 

Since the passage of the Dodd-Frank Act in 2010. the ASC completed numerous tasks 

associated with the amendments to Title XI including: 

• Holding ASC meetings in open session after notice in the Federal Register 

I ssuing Bulletins to State appraiser regulatory agencies noticing them on: 

o Increased National Registry fees from $25 to $40 (the fee of $25 was established 

in 1992 and had not changed since.) 

o Implementation of the new AQB minimum qualification requirements for State 

licensed appraisers. trainees, and supervisors 

o New State reciprocity requirements 

o Requirement to maintain adequate funding and staffing 

• Providing Annual Reports to Congress by June 15. 

In January, the ASC underwent significant change with the OCC, FRB and FDIC appointing 

new representatives. In addition, the CFPB member who had been acting in an advisory capacity 

became a voting member, and effective April I", the FFIEC appointed the HUD representative to 

a two-year term as the new ASC Chairman. The first meeting with the new members was held in 

February. Since then, the ASC has held five monthly public Meetings and ten Briefings. 

Substantial progress is being made in a number of areas, as discussed below. 

Last fall the ASC voted to deploy the Appraisal Complaint National Hotline. Since that time, 

a website has been developed, a call center has bcen designed, and an overall process for 

handling complaints has been drafted. ASC member agencies are eUlTently working to finalize 

the details for how they will handle the referral of a complaint from the Hotline. This effort 

Page 10 of18 
141 


76111.100

involves interagency coordination and information shariog. Launch of the I-Iotline is anticipated 

before the end of 2012. 

The ASC approved revised Policy Statements for publication in the Federal Register for 

public comment. This is the first complete rewrite of the Policy Statements since 1992, and 

incorporates changes to Title XI brought about by the Dodd-Frank Act. The ASC anticipates 

reviewing and considering the public comments and publishing adopted Policy Statements 

before the end of2012. 

Other ASC priorities include fulfilling the authority and responsibilities conferred by the 

Dodd-Frank Act in such areas as State grants and rulemaking. Many State appraiser regulatory 

programs do not control their funding, and, as referenced in the GAO study (discussed more 

fully below), can have their appraisal program funds sweptll into the general fund. To provide 

broad support of all States the ASC currently funds the State Investigator Training Program, 

which pays travel and education related expenses for at least three individuals from each State to 

attend educational offerings on effective complaint investigation and prosecution techniques. 

While the ASC has not yet formally addressed rulemaking, the proposed Policy Statements 

would implement the interim sanctioning authority given to the ASC by the Dodd-Frank Act to 

remove appraisers from the National Registry for up to 90 days.ll Use of any additional interim 

sanctioning authority would require rulemaking. If the ASC determines that there is a need for 

rulemaking the ASC will establish an advisory committee as required in the Dodd-Frank Act. 

The Dodd-Frank Act also required the GAO to conduct a study of the ASC. The GAO 

conducted its study throughout 2011 and issued its report last January. The GAO made three 

! 1 .\1any State legislatures and or governors offices have the authority to "sweep" funds from State agencies. Sweeping the funds refers to taking 

the funds for use in other areas of the State government or borrowing the funds. In some ca<;cs borrowed funds are never returned 

J2 The Dodd·Frank Act also gave the ASC similar interim sanctioning authority for appraisal management companies. At such time that the 

ASC establishes the Appraisal Management Company National Registry, it wi!! be necessary to revise the Policy Statements to implement the 

intenm sanclioning authonty for appraisal management companies 

Page 11 ofl8 
142 


76111.101

recommendations, which the ASC is currently working to address. Following are the GAO 

recommendations and ASC progress in responding to them: 

1. Clarify the definitions used to categorize States' overall compliance with Title XI and 

include them in ASC's compliance review and policy and procedures manuals, 

compliance review reports to States, and annual reports to Congress. 

:.- Added current compliance review findings definitions to the Policy and 

Procedures Manual, State Compliance Review reports, and are included in the 

20J I Annual Report to Congress. 

:.- Drafted revised Policy Statements to include redefined Compliance Review 

findings and definitions that more specifically define States' level of compliance 

with Title XI, ASC Policy Statements and AQB Criteria. 

2. Develop specific policies and procedures for monitoring the appraisal requirements of the 

federal financial institutions regulators and inelude them in the ASC's Policy and 

Procedures manual. 

:.- The ASC staff is drafting a policy to address this recommendation and will submit 

the draft policy to the ASC for approval. Additionally, ASC staff met with the 

interagency group working on appraisal-related regulations required by the DoddFrank Act, as well as the interagency group addressing the complaint hotline 

processes. 

3. Develop specific criteria for assessing whether the grant activities of the Foundation are 

Title XI-related and include these criteria in ASC's Policy and Procedures manual. 

Page 12 of 18 
143 


76111.102

y The ASC staiT is drafting a policy to ensure that both the type and level of 

approved grant funding are appropriate and will submit the draft policy to the 

ASC for approval. 

An overview of the ASC's completed, current and 2013 priorities is included in Appendix 

C of this statement. 

V. Conclusion 

In conclusion, the Dodd-Frank Act made significant amendments to Title XI that will take 

several years to tully implement. Given the significant additional responsibility and authority 

provided to the ASC, staffing and other resources arc being carefully analyzed and monitored to 

ensure the ASC has the proper resources to fulfill its Title XI requirements. The ASC is 

dedicated to carrying out its new and existing Title XI mandates transparently and efficiently. 

Page 13 of 18 
144 


76111.103

Appendix A - Appraiser Disciplinary Actiolls Reported by States * 

January I, 1991 through December 31, 2011 STATE OR Revocation SUspension Voluntary Downgr ... Fine Additioo31 Offidal Warnings, Other Total 

USTERRrrORY Surrender Education Reprimand Corrective 

Actions 

ALASKA 7 26 

AU-BAMA 44 17 15 12 16 129 

A.RK<\.~SAS ARlZ01'\A 40 22 27 4 +==1='53 _-:c:::t __ c:26+ __ +_--:-:+_=-74+--:~309:3 361 549 

~C:C'A:::II::.m:::R:::N::"IA-=-___ + __ ''''3''13f-__ 6'''2+-_tl 503 92 140 43 1.138 

COLORAl)() 37 56 3 42 200 179 11 623 

(,Ol'<~a"'TlCur 6 6 145 36 ! 207 

DlSTRICfOFCOUMBIA 5 9 19 2 39 

n[LAWARE ~f-_-:-:=13+-_-=:I-_-'+-_-:::T_-:::'f-_-::'4'f-_-'l:'13 ---:t---t--::-.:35Z FLOruOA ~ 18~ 27 f:{)7 S70 125 1,797 GIDRGIA 283r--""13"'S+--~3"1t--~+---=+--""+---=+--+---T--C:3::S3t-~':80::::12 

HAWAII 13 20 

IOWA 17 33 54 47 138 19 326 

IDAHO 18 70 163 117 36 426 

ILLl!'\OIS 138 108 21 94 13 11 660 1,057 

~TnANA 88 100 10 154 24 IS 5S 73 526 

KANSAS 32 16 16 104 80 165 18 432 

KENll.'Ck.,\' 3 43 19 153 85 314 

U)lJlSlAl"OA 2 13 23 24 62 

MASSACJlHSElTS 23 18 53 76 120 4 200 6 500 

~t;\RYLA:'il" 12 40 3 79 39 13 189 

MAINE 21 18 15 104 61 58 15 306 

MIClUGAN 89 29 35 373 129 659 

M}Nl"IilfSOTA 66 66 331 36 28 21 18 567 

MISSOURI 99 130 17 259 2 52 561 

Ml'iSJSSlrrl 10 18 26 39 278 319 

MO:"<ITA;\A 9 8 25 38 3S 2 126 

:"IORnICAROL~A 17 175 S1 203 79 536 

NORlli DAKOT4. 2 11 16 43 

NEBR-\SKA 21 9 66 34 145 

NE\\' IUI\'fPSHlRE 11 53 36 104 

NE\V JERSEY 17 71 12 37 176 4< 74 438 

NEW MEXICO 13 7 2 3 28 Y 11 14 138 

"",EVAD;\, 36 26 36 13 10 107 IS: 386 

NE'W YORK 139 85 137 _21 49 443 

OHIO 30 158 20 164 262 75 715 

OKlAHO.'\1A 376 171 18 15 138 39 213m 

ORfoX'.DN 16 40 27 335 22 27 24 495 

Pf.1\"~'SYLVANLA 49 22 35 243 184 14 555 

J'l'lRTO RICO 8 2 20 

RTJODElSlAND ~2 16 11 45 

tIS~OlL~~'C~AR~O~U~NA~ __ -4 ____ ~1~6~___ ~1~4t-__ -,~ __ ~73t-__ ~13~4r-__ ~Sl+-__ -777t-____ 1-__ -:r-__ ~~~3 

!SQUIlI D:\KOTA 6 3 50 45 44 4 171 

t,~~;~:~~~s~rn~'--------4---~~~~t----~Sl ~4~2f---~r----=~t---~~:=9r---~~=~T---~,:t---~~1---~~~or---~:~~1 

urAH 17 32 13 155 69 22 320 

VIRGINlA 32 82 8 117 251 

WASHf:'oi"GTO!\" 58 45 82 65 16 34 308 

WL':ICONSIN 16 61 46 127 220 103 12 10 603 

WPST VfRGISIA 3 29 2S 37 36 6 3 150 

WYOMlNG 1 6 27 

Total 2,320 2,.345 911 51 2,137 5,455 3,418 909 1,366 1,541 20,559 

*Puhlic disciplinal)' actions on the National Registry are those State actions currently in effect that affect an appraiser's ability to 

appraise: revocations, suspensions or voluntary surrenders in lieu of discipline. No disciplinary aetions havc been reported by 

Guam, :vIariana Islands Of Virgin Islands. 

Page 14 of 18 
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76111.104

Appendix B - 201 I Compliance Review Findings 

2009 

Statutes, Regulations, 

Policies and Procedures: 

21 States Reviewed 

4 

26 States Reviewed 32 States Reviewed 

26 States Reviewed 32 States Reviewed 

The table above documents the 2009, 2010, and 2011 Compliance Review findings by 

requirement and areas of guidance. 

s lale C .. amp, zance s tatus 2007 - 2011 

;,<><, 

ZOl1 20iO lOO9 2008 2001 

27 States 26 States 32 States 265tates 30 State. 

Reviewed Reviewed Reviewed Reviewed Reviewed 

In Substantial Compliance 15 9 14 5 4 -- Not in Substantial Compliance 11 17 18 20 26 

Not in Compliance 1 0 0 1 0 

% In Substantial Compliance 56% 35% 44% 19% 13% 

Page IS of18 
146 


76111.105

Title XI as 

Amended 

§ 1104 (b) 

Open Meetings 

§ 1109 (a) 

Re gistry Fees 

Modified 

§ lOll 

Amendments to 

Appraisal 

Subcommittee 

§ §1116 (c) 

Criteria 

§ 1118 

Monitoring of State 

Appraiser 

CertifYing and 

Licensing 

Agencies 

§ 1122 (b) 

Reciprocity 

§ 1122 (h) 

Appraiser 

Education 

Summary of Task(s) 

o ASC to hold meetings in 

public. 

o Notice of meetings to be 

published in the Federal 

Register. 

o Amend ASC Rules of 

Operation and Policies & 

Procedures. 

Issue ASC Bulletin to States to 

implement. 

Amend Rules of Operation. 

CFPB and the FHF A added as 

ASC member agencies. 

Requires one ASC member be 

a licensed or certified appraiser 

or hold a professional 

desi nation. 

Issue ASC Bulletin to States to 

implement. 

AQB Criteria mandatory for 

State Licensed Appraisers, and 

Trainee and Supervisory 

A raisers. 

Issue ASC Bulletin to States to 

implement requirement for 

State Programs to maintain 

adequate funding and staffing 

to carry out Title XI-related 

duties. 

Issue ASC Bulletin to States to 

implement new reciprocity 

requirements. 

Encourage States to accept 

courses approved by the AQB 

Course Approval Program. 

Issue Bulletin to States. 

Current Status 

Completed. 

Open Meetings began July 2010. 

ASC Rules of OperationIPolicies & 

Procedures amended December 201 O. 

Completed. 

ASC Bulletin issued October 14,2010. 

AMC Registry fees will follow timeline 

of AMC registration with States. 

Completed. 

FHF A designated member representative 

in November 2010. 

o CFPB designated member representative 

in November 2011. 

o Completed. 

o ASC Bulletin issued March 18,2011. 

o Ongoing ASC monitoring of State 

Programs. 

o Completed. 

ASC Bulletin issued March 18,2011. 

o Ongoing ASC monitoring of State 

Programs. 

o Completed. 

ASC Bulletin issued March 18,2011. 

o Ongoing ASC monitoring of State 

Programs. 

o Completed. 

ASC Bulletin issued March 18, 201 I. 

o Ongoing as part of Compliance Review. 

Page 16 oft8 
147 


76111.106

§ 1103 (a) 

Annual Report 

§ 1I22(i) 

Appraisal 

Complaint Hotline 

(N ot Title XI) 

Dodd-Frank Act 

§ 1476 

GAO Study 

§ 1118 

Monitoring of State 

Appraiser 

Certirying and 

Licensing 

Agencies 

§ 1109 (b) 

Grants and Reports 

Transmit Annual Report to 

Congress June 15. 

ASC to determine whether 

hotline exists that satisfies 

provisions of Dodd-Frank Act. 

If ASC determines no such 

hotline exists, ASC to establish 

and maintain appraisal 

complaint national hotline. 

GAO study required. 

Interim sanction authority to 

remove appraisers from the 

National Registry for up to 90 

days; due process 

considerations addressed in 

revised Policy Statements. 

Make grants to State agencies 

in accordance with policies to 

be developed by the ASC to 

support State Program 

compliance with Title XI. 

2011 Report submitted timely. 

• 2010 Report submitted timely. 

• January 12,2011, ASC determined no 

hotline exists to satisfy provisions of 

Dodd-Frank Act. 

• Hotline deployment plan approved 

November 2011. 

Website and call center in final stages of 

development. 

Interagency working group finalizing 

agency processing of complaints and 

information sharing. 

• Phase One launch anticipated prior to 

end of2012. Launch date dependent on 

a encies' readiness. 

Study completed. 

• ASC addressing 3 GAO 

recommendations. 

• Recommendations to be addressed prior 

to end of2012. 

• Draft revised Policy Statements in 

process. 

Publish Policy Statements for comment 

in Federal Register w/in 30 days. 

Currently providing funding for State 

Investigator Training through the 

Appraisal Foundation grant process. 

• Draft policies for additional grant 

activities in progress. 

• Hiring of grant specialist in progress 

• Ongoing development of State grant 

olicies antici ated. 

Page 17 of 18 
148 


76111.107

Amended 

§ 1122 (g) 

Appraiser 

Independence 

Monitoring 

§ 1106 

Regulations 

Amended 

§ 1124 

Appraisal 

Management 

Companies 

(AMCs) 

§ 1109 (a) 

State Agency 

Reporting 

Issue ASC Bulletin to States to 

implement. 

• Monitor State Programs to 

determine if policies, practiccs 

and procedures are consistent 

with maintaining appraiser 

independence, and whcthcr 

State has adopted and 

maintains laws, rcgulations 

and policies aimed at 

maintaining appraiser 

inde endence. 

• Regulatory authority granted in 

the following arcas: 

(I) temporary practice; 

(2) National Registry; 

(3) infornlation sharing; and 

(4) enforcement. 

ASC shall establish an 

advisory committee to support 

development of regulations. 

• Issue ASC Bulletin to States 

implement. 

• Monitor States' adoption and 

implementation ofminimuffi 

requirements established by 

DF A Interagency Group for 

re istration of AMCs. 

• Issue ASC Bulletin to States to 

implement. 

• New reporting requirements for 

AMCs. 

Currently, ASC staff gathers information 

from State Programs regarding laws, 

regulations and policies in place 

governing appraiser indepcndence 

during the Compliance Revicw. 

• ASC Bulletin to be issued during 

FY2013 to formalize ASC monitoring 

function. 

• Initial research on rulemaking (APA) 

and advisory committee (F ACA) 

completed. 

Preliminary fiscal analysis on advisory 

committee completed. 

• ASC will form advisory committee once 

the need for specific rulemaking is 

identified. 

DFA Interagency Group to prescribe 

regulations by January 21, 2013. 

Once regulations are in final form and 

implemented by States, ASC will begin 

monitoring function. 

• DFA Interagency Group to prescribe 

regulations by January 21, 20J3. 

Once regulations are in final form and 

implemented by States, ASC will begin 

monitorin function. 

Page 18 of 18 
149 


76111.108

Statement of 

Donald T. Rodgers, President 

Association of Appraiser Regulatory Officials (AARO) 

Before the 

Subcommittee on Insurance, Housing and Community Opportunity 

U.S. House of Representatives 

June 28, 2012 

Introduction 

Chairwoman Biggert, Ranking Member Gutierrez, and Members of the House Financial Services 

Subcommittee on Insurance, Housing and Community Opportunity, I thank you for the 

opportunity to testify today on Appraisal Oversight and Regulation. 

My name is Donald T. Rodgers, and I am the Executive Director of the North Carolina Appraisal 

Board. I am currently the President of the Association of Appraiser Regulatory Officials 

(AARO). AARO is an organization which represents the real estate appraiser licensing and 

certification agencies of U.S. States and Territories. 

The mission of the Association of Appraiser Regulatory Officials is to improvc the 

administration and enforcement of real estate appraisal laws in member jurisdictions. AARO 

does this in [our ways: 

Facilitating communication and cooperation between and among appraiser regulatory 

otlicials and others concerned with appraiser and appraisal issues. 

Conducting research and obtaining inforn1ation relative to appraisal matters. 

Participating in educational programs on appraisals and assisting with instructions. 

administration, and regulation of appraisal education for regulatory officials and others. Tn 

addition, AARO continually strives toward raising the level of competence and 

professionalism of all appraiser regulatory officials. 

Developing and encouraging cooperation with all other organizations whose objective is 

similar in nature to its objectives and purposes. 

My testimony today will focus on issues that are partiCUlarly relevant to state regulatory officials. 

Challenges Facing State Appraisal Boards 

Enforcement 

States established appraiser licensing and certification programs as a result of the Financial 

Institution Reform, Recovery and Enforcemcnt Act (FIRREA) of 1989. These agencics issue 
150 


76111.109

appraiser licenses and certifications to those individuals who possess the education and 

experience requirements promulgated by the Appraiser Qualifications Board of The Appraisal 

Foundation. The agencies also oversee compliancc by appraisers with the Uniform Standards of 

Professional Appraisal Practice (USPAP), state law and agency rules. These programs have 

been set up in a variety of ways; however, most fall into one of the following categories. Some 

states have an umbrella licensing agency that handles all occupational licenses for the state. 

Others have a stand-alone agency that handlcs real cstate broker and/or appraiser licensing. 

Finally, there are states, such as North Carolina, that have an autonomous board set up by statute. 

Appraisal boards are funded in different ways. In an umbrella agency, licensing fees are sent to 

the state, and the state manages its personnel and funds its operation. In a stand-alone agency, 

fees are collected by the state and the agency then receives an appropriation to meet its budgetary 

nceds. Most autonomous boards keep the fees they receive, and do not receive any state funding. 

Since there are territories and small states that have a few hundred or fewer appraisers, while one 

state has over ten thousand, the large disparity in the numbers of appraisers makes it difficult to 

establish one method to operate state appraisal programs. 

There are also different approaches with regard to staffing. Most programs have an administrator 

or executive director that manages day-to-day opcrations; however, based on the number of 

appraises licensed by the board, it may be necessary for the administrative stafTto manage 

multiple licensing programs to maximize economies of scale. States also use different 

approaches for investigations. Some have a pool of investigators available to all licensing boards. 

Others contract with appraisers on a per-case basis to assist staff. Some appraisal boards have 

staff investigators who in some cases are former law enforcement officers, while other states use 

appraisers who have been trained in investigations. State programs generally have legal 

representation provided by their state attorney general's office. Some of these attorneys arc 

assigned on a per-case basis, while others providc a part time or full time attorney that deals 

solely with appraisal board cases. Attorneys who are not assigned solely to the appraisal board 

may have a case load involving cosmetologists, funeral homes and plumbers in addition to 

appraisers. Boards who have administrators, investigators and attorneys who are not trained in 

real estate appraisal are dealing with specific standards of practice and appraisal methodology. 

Even though they may obtain training in appraisal standards and methodology, it is difficult to 

sustain a level of competence when not dealing with these types of cases on a lull-time basis. 

State legislaturcs do not understand that appraisal boards have requirements that other 

occupational licensing boards do not have. For example, the Appraisal Subcommittee (ASC) 

issues Policy Statements that reflect the general framework they usc when they review a state for 

compliance with Title XI. Policy Statement 10 states that "State agencies need to process 

complaints of appraiser misconduct or wrongdoing on a timely basis. Absent special documented 

circumstances, final State agency administrative decisions regarding complaints should occur 

within one year of the complaint filing date." States where the appraiser program is housed 

within an umbrella agency may not be able to comply as they are not provided with suflicient 

resources to resolvc cases. Often state officials do not undcrstand why this one licensing agency 

must be givcn priority when the state's backlog for other occupations is just as great. Although 

the ASC often points out that it is a state issuc and not just an agency issue, when states are 

facing the significant funding problems that they have today, appraiser programs may face a 

reduction in funds and may be subject to having their funds swept into the state treasury for other 

uscs. 
151 


76111.110

Difficulty Detecting fraud 

Likc most regulatory agencies, appraisal boards respond to complaints; tbey don't generally 

initiate investigations. An appraisal is an opinion of value, and it is difficult to dispute someone's 

opinion. Appraisal fraud involves the intent to deceive someone in tbe making of an appraisal, or 

at least some cvidence of conspiracy. It is nearly impossiblc to prove an appraiser's intent to 

defraud by looking at an appraisal report. For that reason, law enforcement officials have oftcn 

sbied away from involving appraisers in a civil or criminal fraud case. In addition, to get them to 

pursue such a case, a fairly high financial threshold of harm must be present. They are more 

likely to pursuc other players in a fraud scheme, such as mortgage brokcrs, developers and 

attorneys. 

Several states have created or participate in task forces to deal with mortgagc fraud. These task 

forces have banking, appraisal and real estate regulators, as well as state and federal law 

enforcement. This helps the members identify common participants in different fraud schemes, 

and to offer support to each other in prosecution of these individuals. Statc and federal law 

enforcement agencies, however, often are not able to share information with state appraisal 

boards and other regulators due to confidentiality laws and the concern that their investigation 

could be compromised. As a result, the task force is more bcncficial to law enforccment in 

obtaining information than it is to regulators in the investigation of their own cases. 

A big obstacle for appraisal boards is that often problems with loans and appraisals do not 

emerge until several years after a loan was made, when properties go into foreclosure or 

homeowner attempts to sell or refinance. It becomes more difficult to investigate an appraisal 

when a significant amount of time has passed, as an appraisal is an opinion of value as of a 

specific datc in time. There may be changes in the property's condition and in market forces; 

also, data available to the appraiser at the time of the appraisal may no longer be available, and 

the appraiser may have destroyed his records (US PAP only requires that an appraiser keep his 

records for fivc years). Complaints were often not originated at the time the appraisal was 

pcrformed, as many of the participants who are now complaining about low appraised values did 

not see a problem when values were meeting or exceeding sales prices. 

Appraisers found to be involved in mortgage fraud schemes often didn't realize what they had 

gotten into. Thcy may have drawn into schemes orchestrated by other unscrupulous players who 

withheld information from them or deliberately gave them erroneous information. Often they did 

not receive any additional fee or payment for participating in a fraud scheme; they were brought 

into it with the promise of a number of future assignments. In one instance in North Carolina, 

the investigator discovered that the appraiser had received a large payment that was noted on the 

HUD-l settlement statement. This helped the appraisal board revoke the appraiser's license, and 

they were successfully prosecuted in federal court; however, it is seldom that this type of 

"smoking gun" is present. Although there is always a potential for mortgage fraud, the 

significant increase in scrutiny in underwriting of appraisals makes it difficult to perpetrate many 

of these schemes; however, it has also resulted in tightened guidelines for appraisers and loan 

requirements for borrowers. 

Appraisal Management Companies 

Appraisal management companies (AMCs) have existed for many years. In March 2008, Fannie 

Mae entered into an agreement with the New York Attorney General's office to adopt certain 
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policies relating to appraisals for loans delivered to them. This agrecment cstablished the I [orne 

Valuation Code of Conduct (HVCC). As part of the HVCC, loan originators on commission 

wcre forbidden from selecting an appraiser for a pat1icular appraisal assignmcnt or from having 

any substantive communications with an appraiser relating to valuation, including ordcring or 

managing an appraisal assignment. As a result of the HVCC, many morc AMCs were 

established, and appraisers performing appraisals for residential loans were, for the most part, 

required to sign up with AMCs in order to obtain assignments. It is our understanding that in 

some cases, the AMCs were established or opcrated by former mortgage brokers or appraisers 

who had been sanctioned or lost their license to practice. There were no laws or regulations in 

place that prohibited these individuals or those with criminal backgrounds from setting up and 

managing these companies, cven as they became such an integral part of the mortgage process. 

As a result of the Dodd-Frank Wall Street Rcform and Consumer Protection Act, all states will 

now have to register and supervise AMCs. A majority of states already have implemented a 

registration progranl, and issues havc begun to surfacc. One is how to dctermine whether a 

company actually is an AMC. There arc several electronic or portal companies that recruit, 

manage, send assignments, review appraisals, send appraisals back to the appraiser for changes, 

and transmit payment to the appraiser. Many traditional appraisal firms use subcontractors to 

perfornl assignments rather than have appraisers employed by the company. This has raised the 

issue as to whether these appraisal firms are acting as an AMC and must be registered as one. 

Various state legislatures have taken a strict vicw and required appraisal companies to register, 

while others have tried to limit registration to those who perform the filll spectrum of appraisal 

management functions. In discussion with the staffofthe Consumer Financial Protection Bureau 

(CFPB), it was obvious that it is very difficult to define an AMC for purposes oflegislation and 

ru lemaking. 

Although AMCs do largely create the firewall envisioned by the HVCC, it has created the 

situation where it is hard for consumers, real estate brokers, builders and other users of appraisal 

scrviees to provide necessary information to the appraiser and to express concerns with the 

appraisal itself. As AMCs have become more an integral part of the appraisal process, many 

consumers do not understand or are not aware of their role. Consumers may pay the AMCs 

invoice, which they consider to be substantial for an appraisal, but they do not understand that 

the appraiser receives only a part of that payment. It is not uncommon for AMCs to prohibit 

appraisers from speaking with any pm1ies to the process, such as brokers, builders or borrowers. 

After the inspection is performed and the appraisal is transmitted to the AMC, the AMC may 

send the appraiser several requests for information, which can delay the transmission of the final 

appraisal to the lender. These situations increase consumer frustration, and this hostility is 

directed towards the appraiser. As a rcsult of this misunderstanding, a consumer may file a 

complaint with the appraisal board. 

Appraisers have their own concerns in dealing with AMCs. One AMC has numerous pages of 

instructions to the appraiser as to how to pertorm the appraisaL Another AMC tells appraisers 

what to wear when inspecting propcrties. Some appraisers are receiving assignments to appraise 

properties that are out of their market area. Even though they are requircd by USP AP to be or to 

become geographically compctcnt to perform an appraisal, they feel pressured to accept these 

assignments in order to continue to receive work from the AMC, as well as the financial pressure 

of needing the income from these assignments. Some AMCs are slow to pay appraisers, even 

when faced with state laws giving them time limits for payment. There are instances wherc an 

AMC will automatically remove an appraiser from their panel if the appraiscr has any fonn of 
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disciplinary action, including a reprimand or the requirement of additional education which is 

based on a technical violation ofa state's rules. Appraisers who do not comply with the AMC's 

requirements or who complain against an AMC tear removal from the AMC panel, which could, 

in tum, limit their ability to receive work from other AMCs and result in a large loss of income. 

State appraiser boards have their own issues with ovcrsight of AMCs. An overlying problem for 

boards is that they must license two entities, appraisers and AMCs, whose interests are often at 

odds. Each group may attempt to get legislators and state boards to adopt laws and enact rules 

that impact the other's ability to function. Most state legislation to date focuses on registration of 

AMCs, not regulation. Boards have limited ability to oversee the functions of an AMC unless 

there is evidence of a violation of appraiser independence. When complaints are received, it will 

likely be difficult for agencies with limited funds and personnel to investigate corporations that 

usually are not domiciled within their state. For example, in North Carolina, there are 144 AMCs 

registered, but only 6 are headquartered in the state. 

Hopefully, once rules are adopted by the CFPB and minimum requirements for states are defined 

by the Appraisal Subcommittee, many of these issues with regard to AMCs will become clearer. 

Oversight of Alternative Valuation Services 

Automated Valuation Models (A VMs), Broker Price Opinions (BPOs) and other cvaluation 

products are generally not regulated by appraiser licensing boards, unless they are performed by 

an appraiser in violation of state licensing laws. In many instances consumers do not realize tbe 

difterence between these products and may think they are receiving an appraisal, when an 

appraiser is not actually involved in the process. The North Carolina Appraisal Board received a 

complaint from a eonsumer earlier this year regarding what she thought was an appraisal. The 

letter valuing property gave her an estimate o[what the property was worth, and she wa~ charged 

$450 for the valuation. It turned out that this was not an appraisal, but was a statement of worth 

from a real estate broker. Although the Appraisal Board referred this matter to the North 

Carolina Real Estate Commission, there are currently no standards of practice for BPOs and 

therc is limited authority to discipline brokers for errors in the development of a value. 

Some states have no restrictions on the preparation or use of BPOs, while others have laws that 

severely limit the use of BPOs to traditional brokerage services such as listing or selling 

properties. If a BPO is not done by an appraiser, state appraisal boards don't regulate this 

product and there is no requirement that the pcrson performing the BPO conform to the Uniforn1 

Standards o[Professional Appraisal Practice (USPAP). Many states that allow BPOs have no 

minimum education or expcrience requirements to perform this service, and have not adopted 

guidelines or standards for brokers to follow in the preparation of this product. BPOs and other 

alternative valuation products, therefore, are not sufficiently regulated. 

Potential Improvement to the Appraisal Regulatory System 

What Works Well 

In order to look at where the system can be improved, it is helpful to look at what elements are 

working well. There have been several joint efforts of the three components of the regulatory 
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structure (state appraisal boards, the Appraisal Subcommittee and The Appraisal Foundation). 

Some of these are: 

An investigator training program was prescntcd to state regulators at no cost to their 

agencies. This program was developed by AARO membcrs, administered by The 

Appraisal Foundation and funded by the ASC. 

• A task force of these three groups explored issucs surrounding the supervision of trainees. 

Since that time the Appraiser Qualifications Board (AQB) o[The Appraisal Foundation 

has devcloped criteria that will bc mandatory for states in licensing and overseeing 

trainees and their supervisors as of January 2015. 

Another task force o[the three groups developed a Voluntary Consistent Enforcement 

Matrix to provide guidance to states as to how various types of USPAP violations could 

be sanctioned. 

• The groups developed, filmed and have made available to states a Mock Administrative 

Hearing as an education tool [or appraisal board members and staff. This hearing was 

done at an AARO conference with many state regulators in attendance. 

• The ASC and The Appraisal Foundation have made themselves freely available to AARO 

conferences and meetings. 

The Appraisal Foundation has scheduled meetings of its boards (the Appraisal Standards 

Board and the Appraiscr Qualifications Board) in conjunction with AARO mcetings in 

order to allow state regulators to attend the meeting and encourage participation in 

AARO. 

• The Appraisal Foundation also put together a Statc Regulators Advisory Group (SRAG) 

in order to provide direct input to the Foundation. The SRAG meeting is another 

opportunity for the three groups to work together as the ASC participates in that meeting 

as well. These meetings are also held in conjunction with AARO conferences. 

Thc Appraisal Foundation issues exposure drafts and requests comments when there arc 

proposed changes to USPAP or the appraiser qualification criteria. This results in these 

being thoroughly vetted and minimizes unintcnded consequences. 

The ASC provides assistance to statcs as needed when the states are drafting rules, and 

when there are potential changes in legislation that could impact the state's ability to 

comply with FIRREA. 

Suggestions for Improvement 

After twenty years of the current system which combines private policy, state enforcement and 

federal oversight, several areas have shown need for improvcment. A few of the larger issues 

are: 

A representative of the appraisal industry and/or the appraiser regulatory community 

should be given a seat on the Appraisal Subeommittce. There should also be an appraiser 

regulator on both the Appraiser Qualifications Board and Appraisal Standards Board of 

The Appraisal Foundation. Having a state regulator on these groups will allow them to 

receive direct input as to how their decisions will affect implementation and enforcement 

of requirements. 

• Explore the possibility of having a national repository for each appraiser's records. This 

would include qualifying education, continuing education, the date and types of 

examinations passed, a comprehensive background check and licensing history, including 
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documentation of any disciplinary action. This could be accomplished either through 

cxpansion of the ASC National Rcgistry database or a systcm similar to thc National 

Mortgage Licensing System. An appraiser should only have one rccord on the National 

Registry, not a separate one for each state in which the appraiser is licensed and for each 

credential which the appraiser has held. A similar repository should be established for 

appraisal management companies (AMCs). Funding for developing and administering 

such a system may be available through grants from the ASC or as part of a statc's 

licensing and renewal process. 

• Current ASC meeting procedures do not encourage attendancc by the public and should 

be changcd. In the past, a large portion of each meeting was held in closed session. 

Recently the mcetings have become more opcn, but there are still impediments to the free 

flow of information to the ASC at their meetings. Anyone wishing to attend must 

preregister in advance. Participants must have a valid govcrnmcnt issucd photo 

identification, and go through a security screening, in addition to being personally 

escorted to and from the meeting area. Although it is undcrstandable that some level of 

security is necessary, meetings should not be held in buildings that rcquire this procedure. 

These are public meetings, and the public should not be discouraged from attending, even 

if they choose to attend without advance registration. Registration could be required to 

address the ASC. 

• There needs to be a method where a state can ask the ASC for guidance without fear of 

repercussions. A state may be reluctant to request assistance or information out of 

concern that asking a qucstion will be flagged for the next ASC rcview of the state. It is 

possible that a state could have had several reviews, but if something is later discovered 

and the statc asks for guidance, the ASC will still cite this as an area of concern in a 

future review. State boards and appraiscrs should be able rely on their procedures if a 

review have found them to be in compliance. If the ASC later determines the state's 

rules are out of compliance, the state should be able to correct the issue without a finding 

against the state and the potential removal or suspension of an appraiser's credential. 

• Policies that are necessary for consistency across states must be mandatory by federal 

law. The developmcnt of a universal complaint form and of an AMC application form 

have been discussed, but will be difficult to achieve absent a federal mandate that all 

states accept a particular form. Some states require that a complaint be notarized and 

completed on a state-specific form, while others can accept anonymous complaints. If 

universal forms are truly essential for the oversight of appraisal regulation, this nceds to 

be addressed in federal law. This issue also applies to rcciprocity where there are clear 

mandates for temporary practice, but no such requirements for reciprocallicenscs. 

• The policies and procedures of the ASC need to be more transparent. There is little or no 

input allowed by stakeholders, such as state regulatory officials and the appraisal 

industry. The Appraisal Foundation's Boards, the AQB and the ASB, each have a lengthy 

and thorough exposure draft and commcnt system where comments are actively solicited 

and revised drafts are issued for furthcr comment. ASC Policy Statements, bulletins, 

memoranda and review criteria should havc similar exposure and commcnt. Currently, 

we understand that ASC Policy Statements are under review and are in the process of 

being changed. Although this process has been underway for several months, states and 

members of the appraisal industry still have not had the opportunity to see a draft or to 

have an opportunity to comment. 
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The Appraisal Subcommittee 

The Dodd-Frank Wall Street Refonn and Consumer Protection Act has given the ASC more 

enforcement tools, the ability to make grants to the states, and oversight of the AMC registration 

process. The lack of enforcement tools was a serious omission from FIRREA and created a 

situation where derecognition was the only penalty available to the ASC for violations. Given the 

devastation it would have had to a state's real estate industry, the ASC has never used this tool, 

and states have realized that such drastic a measure was unlikely to be utilized. Now that the 

ASC has these new tools, it remains to be seen what eifect this will have on the oversight ofthe 

state appraiser programs. 

Thank you again for the opportunity to testify before you today. I will be glad to answer any 

questions. 
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GAO 

For Release on Delivery 

Expected at 10:00 a.m. EDT 

Thursday, June 28, 2012 

GAO-12-840T 

United States Government Accountability Office 

Testimony 

Before the Subcommittee on Insurance, 

Housing and Community Opportunity, 

Committee on Financial Services, House 

of Representatives 

RESIDENTIAL 

APPRAISALS 

Regulators Should Take 

Actions to Strengthen 

Appraisal Oversight 

Statement of William B. Shear, Director 

Financial Markets and Community Investment 

GAO 

Accountability * Integrity· Reliability 
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'Pm·u'f 

RESIDENTIAL APPRAISALS 

Regulators Should Take Actions to Strengthen 

Appraisal Oversight 

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 ru!emaking 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 intemal control 

standards that are designed to promote the effectiveness and efficiency of 

federal activities. 

_____________ United States Government Accountability Office 
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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, playa 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 The Dodd-Frank Act also amended Title XI of the Financial 

1 FFIEC is a forma! 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 

2The 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. 

3pub. 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. § 163geU» 

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 1 GAO-12-840T 
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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 Xl'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' 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.' 

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 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 

40odd-Frank Act § 1476. 

5GAO, Residential Appraisals: OpportunWes to Enhance Oversight of an Evolving 

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

6GAO, Reaf Estate Appraisals: Appraisal Subcommittee Needs to Improve Monitoring 

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

7See GAO-ii-653 for more information about the data we obtained for this study 

Page 2 GAO-12-B40T 
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Background 

appraisers. B 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 thai 

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 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 dale. Appraisals 

8The 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 pane! 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)) 

9The 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 aU 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. 

Page 3 
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76111.121

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

to follow the Uniform Standards of Professional Appraisal Practice 

(USPAP).'D 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." 

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. '2 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 

lOUSPAP covers both the principles appraisers must apply in developing appraisals and 

the information the appraisal report must contain. 

l1A multiple listing service is a database set up by a group ofreal 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 4 GAO·12·a40T 
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sponsors two independent boards with responsibilities under Title XL 

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 The foundation is funded primarily by sales 

of publications but also receives an annual grant from ASC. 

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. 15 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. 

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).16 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 

1<1Certified appraisers are qualified to appraise properties of greater complexity and value 

than licensed appraisers and must meet higher requirements for education and 

experjence. 

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. 

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The Widespread Use 

of Appraisals for 

Mortgage Originations 

Reflects Their 

Advantages Relative 

to Other Valuation 

Methods 

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 refiect 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 

Page 6 GAOw12·840T 
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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 

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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 201 O-indicated that appraisers used the sales 

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

mortgages covered by these data." 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 com parison 

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 perfonn appraisals. 

Page B 
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76111.126

Conflict-of-Interest 

Policies Have 

Changed Appraiser 

Selection Processes, 

with Implications for 

Appraisal Oversight 

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-defune! HVCC, which took effee! in May 2009; the enterprises' new 

appraiser independence requirements that replaced HVCC in October 

2010; provisions in the Dodd-Frank Ae!; 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 

18A!though industrywide data on lenders' use of AMes over time are unavailable, 

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

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

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

Page 9 GAO~12·840T 
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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 10 GAO-12-840T 
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Several Weaknesses 

Have Potentially 

Limited ASC's 

Effectiveness in 

Pcrfonning Its Title XI 

Functions 

Monitoring States' 

Compliance with Title XI 

appraisals coordinated by an AMC comply with USPAP and be conducted 

independently and free from inappropriate influence and coercion." 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. 

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. 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 

"Dodd-Frank Act § 1473(D(2) (codified at 12 U.s.C. § 3353(a)). 

2OGAO-11-653. 

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

recommendation. 

Page 11 GAO~12-B40T 
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76111.129

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, andlor repetitiveness of the Title XI violations 

warrant this finding."" 

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 As previously 

defines an area of concem as one in which the state is in compliance but could 

improve. 

23Secause 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. 

241n June 2012, ASC officials told us they had begun incorporating the definitions in ASC 

reports and policies. 

Page 12 GAO·12-840T 
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76111.130

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 lirnits the transparency of the state cornpliance review 

process and the usefulness of information Congress receives to assess 

states' irnplementation of Title XI. Further, by not incorporating the 

definitions into its compliance review and policy and procedures manuals, 

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

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

these shortcomings, we recornrnended 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 June 2012, ASC officials told us that they 

had developed a revised systern for rating states that included five 

cornpliance categories (ranging frorn excellent to poor), each with specific 

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

categories in the Federal Regis/erto obtain public comrnents and would 

include the final categories in appropriate manuals and reports. 

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 rule making authority and authorizes ASC to 

25GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-OD-21 ,3,1 

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

Tool, GAO·01·100BG (Washington, D.C.: August 2001). 

"GAO·12-147. 

Page 13 GAO-12-840T 
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76111.131

Monitoring the Appraisal 

Requirements of the 

Federal Banking 

Regulators 

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 rule making, 

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 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, 

27The act also gives ASC the authority to remove a state-licensed or ~certjfied 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. 

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. 

Page 14 GAO"12-840T 
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76111.132

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 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. 

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. 30 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 

"12 U.S.C. § 3332(a)(2). 

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 15 GAO-12-840T 
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76111.133

Monitoring the Appraisal 

Foundation's Grant 

Activities 

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 XL 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 

Page 16 
175 


76111.134

Implementing Dodd-Frank 

Act Provisions 

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. 

Page 17 GAO-12-840T 
176 


76111.135

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 

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. 

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. 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 hotllne existed 

that received complaints of noncompliance with appraisal independence standards and 

USPAP. ASC completed this task in January 2011, within the statutory deadlfne, 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 coHect registry fees from AMes, 

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

AMC registration must be developed and implemented first 

Page 18 
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76111.136

Contacts and Staff 

Acknowledgments 

(250679) 

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. 

Page 19 GAO-12-840T 
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76111.137

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IIII Appraisal 

.11 1111, Institute® 

Profe8siona/s Providing 

Real Estate Solutions 

Appraisal Oversight: The Regulatory Impact on 

Consumers and Businesses 

Testimony of Sara W. Stephens, MAl, CRE 

Before the Subcommittee on Insurance, Housing and Community Opportunity 

House Committee on Financial Services 

June 28,2012 
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June 28, 2012 

Madam Chairman Biggert, Ranking Member Gutierrez, and members of the Subcommittee on Housing and 

Community Opportunity, thank you for the opportunity to share our concerns regarding "Appraisal Oversight: The 

Regulatory Impact on Consumer and Businesses" on behalf of the more than 23,000 members of the Appraisal 

Institute, the largest professional association of real estate appraisers in the United States. 

Today, residential appraisers face ever-mounting challenges that place the future of residential appraisal at risk. 

The appraisal regulatory structure has become almost entirely a "rules-based," as opposed to a "principlesbased," system. As such, it has become a burden to appraisers and, in our view, has failed to improve overall 

appraisal quality or appraiser oversight and enforcement 

While appraising arguably is the most heavily regulated activity within the mortgage and real estate sectors, we 

warn Congress that a new and excessive regulatory regime is on the cusp of being enacted by appraiser 

regulatory agencies without Congressional review or authorization. This is a dangerous and unjustified move that 

risks hamstringing and jeopardizing the real estate appraisal profession altogether. 

At a very basic level, the appraiser regulatory struclure lacks fundamental accountability measures. In its report to 

Congress, the Government Accountability Office identified significant violations of internal control standards by 

entities that claimed such standards were designed to promote effectiveness and efficiency, and to promote 

accountability. We commend the GAO for these findings, yet, there are even more concerns that require further 

investigation and action by Congress. 

Additionally, residential appraisers report that increased regulatory and investor requirements, coupled with client 

demands for cheaper and faster appraisals, have forced many highly qualified appraisers out of the mortgage 

appraisal business, or out of the profession altogether. Failures by bank regulators and financial institutions to 

enforce and adhere to basic appraiser independence requirements have turned the appraisal procurement 

system upside-down, revealing core, underlying weaknesses that place a drag on appraisal quality. 

We believe that there is a better way forward but it requires engagement and action by Congress. To date, 

Congress has chosen to review the appraisal regulatory structure only once in 20 years. This cannot continue, as 

the regulatory structure of today is nothing like what Congress enacted more than 20 years ago. Professional real 

estate appraisers throughout the country are united in calling on Congress to enact structural reforms that realign 

appraisal regulations to focus oversight and declining enforcement resources where they are needed most; to 

eliminate or curtail rules that hamstring the appraisal process; and to support full consumer disclosure of fees 

relating to appraisal management processes. 

Part 1. The Appraisal Regulatory Structure 

Appraisers Are Overwhelmed bv Rules and Regulation 

Real estate appraisers apparently have the most complicated and convoluted regulatory structure of any 

profession in the United States. While certification and licensure are common for many industries, in 1989, 

Congress enacted a federal overlay that created a federal agency called the Appraisal Subcommittee (ASC), and 

then authorized a private organization, The Appraisal Foundation (TAF), to promulgate federally-funded standards 

and qualifications. For the past 20 years, every state has established an appraiser regulatory agency to conduct 

licensing and oversight activities. State appraiser licensing requirements must satisfy those imposed by the 

Appraiser Qualifications Board of TAF, and states also must enforce appraisers utilizing the Uniform Standards of 

Professional Appraisal Practice (USPAP), which is codified in every state and published by the Appraisal 

Standards Board of TAF. To complete nearly all residential mortgage appraisals, an appraiser must be certified or 

licensed in a state, and must adhere to USPAP. Failure to do so can lead to disciplinary action by state appraisal 

boards andlor criminal prosecution by law enforcement agencies. Often, a complaint or accusation alone 

submitted to a state appraisal board is sufficient for a client to remove an appraiser from their approved appraiser 

list. 

On top of these requirements, the Government Sponsored Enterprises (GSEs), Federal Housing Administration 

(FHA) and other federal agencies maintain supplemental requirements that are imposed on lenders selling or 

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delivering loans to those agencies. For instance, Fannie Mae and Freddie Mac each have Seller/Service 

Guidelines that contain specific requirements for lenders relating to appraisals. As one example, the 

Seller/Servicer Guidelines require that comparable sales be no more than 12 months old. These requirements are 

often supplemented further by individual investor requirements that seek to comply with guidelines issued by the 

GSEs or FHA, or others in the secondary market. The imposition of several investor requirements has resulted in 

some lenders now requiring appraisers to include gjgb! or nine comparable sales, where only three are required 

by the GSE seller/servicer guidelines. These requests for more information often are not found in the original 

scope of work, and appraisers therefore are not paid for the time and effort involved in conducting additional 

research. In recent years, appraisers have referred to this phenomenon as "scope creep," and their frustration is 

heightened given that many of requirements to add comparable sales just to satisfy lender requirements provides 

little or marginal benefit to the assignment results. 

Further, over the past year, Fannie Mae and Freddie Mac have embarked on the Uniform Appraisal Dataset 

(UAD), which attempts to mine data from appraisals and perform cursory reviews prior to funding decisions. The 

UAD was established, in part, because the GSE's have admitted that their previous processes relating to 

appraisals failed. Fannie Mae or Freddie Mac only saw an appraisal if the loan went into foreclosure. While 

lenders are expected to conduct a thorough review of all appraisals prior to funding loans, that same expectation 

did not exist for the GSEs. The only information relating to the appraisal that the GSEs obtained prior to making a 

loan funding decision was the property's address and its market value. In essence, Fannie Mae and Freddie Mac 

delegated all of the appraisal review functions to lenders who were selling loans to the GSEs, and who were 

making loan decisions without all of the information relating to the collateral offered. UAD attempts to address this 

by establishing a system of quick quality control review of appraisals prior to making funding decisions. 

Additionally, the system is being used to track the performance of appraisers, for example, checking to see if 

Quality or Condition Ratings of properties used in multiple appraisal reports are consistent 

Of course, the new UAD comes with a set of rules that appraisers must adhere to for the loan to be eligible for 

sale to Fannie Mae and Freddie Mac. Among other things, the UAD requires appraisers to select responses to 

predetermined and defined fields within the Uniform Residential Appraisal Report (URAR), a form also 

established and maintained by Fannie Mae and Freddie Mac that is now considered the industry standard for 

most residential appraisals delivered to lenders or to the secondary market For example, the UAD established a 

new ratings system for property condition and quality. Properties are now rated by appraisers on a scale of 1-6 for 

both condition and quality. Elsewhere within the URAR, appraisers are asked to make selections from 

predetermined drop-down boxes, with all of this information being captured by the GSE's for review of the 

information within the appraisal and performance measures of the appraisers. 

Appraisal Practices Board 

On top of all of the requirements established above, the regulatory burden for appraisers is on the cusp of being 

expanded exponentially because of a decision by TAF and the ASC to create something called an "Appraisal 

Practices Board" (APB). Congress restricted authorizations for TAF to the areas of appraisal standards and 

appraiser qualifications - Congress ~ authorize TAF to codify appraisal methods and techniques.This new 

board's supposed purpose is to establish what TAF claims are "voluntary guidelines" for appraisers and state 

regUlatory agencies. Some state Agencies already may have assumed that they must incorporate the APB 

positions into law. 

The APB concept is a major departure from the consensus between the Federal government and the appraisal 

profession in the late 1980s. The stakeholders and Congress agreed that Federally Related Transactions needed 

a mandatory set of standards to increase confidence in the valuation of properties for federally related lending. 

Leading organizations in the profession contributed their existing standards to form a basis for a mandatory 

standard to be known as The Uniform Standards of Professional Appraisal Practice (USPAP). The contributed 

standards still form the core of USPAP. The understanding at that time, between Congress and the stakeholders, 

was that TAF would maintain the mandatory standards but voluntary guidance and voluntary standards relating to 

methods and techniques, along with educational offerings related to the body of knowledge would remain in the 

domain of the profession and academia. This consensus worked for almost 20 years. Unfortunately promotion of 

the Appraisal Practices Board by ASC and TAF dangerously casts consensus aside. 
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In order to understand this issue fully, some explanation of the difference between appraisal standards and 

appraisal methods and techniques is required. Appraisal "standards" are guiding mandatory principles, and they 

are "standard," meaning their application does not change much, if at all, with the situation. They involve broad, 

general concepts. Appraisal standards (I.e .. USPAP in the United States) define such things as ethics and 

general steps needed for credible appraisal development and reporting. Conversely, "methods and techniques" 

are fluid. In other words, what they are and how they are applied is highly dependent on the specific 

circumstances. Those circumstances may be described as "best practices;" however, by its very definition, "best 

practices" are voluntary and cannot be codified. 

Appraisal methods and techniques require judgment by the appraiser. It is assumed that the appraiser has been 

thoroughly trained to judge appropriate situations. The choice of methods and techniques are the responsibility of 

the appraiser in the development of hislher scope of work. Whether to use reproduction cost or replacement cost 

or when and how to adjust for sales concessions are dependent on the actions of the marketplace and should not 

be mandated by a body such as the APR Real estate property types and markets are both extremely diverse. As 

a result, hard "rules of thumb" do not work within real estate appraisal because there always is an exception to the 

rule. What is more important is for the analysis conducted by the trained appraiser to be thorough and credibly 

supported. 

Ever since the US. real estate appraisal profession was formally established some 80 years ago, appraisal 

methods and techniques have been Wmited to the academic community and professional appraisal organizations, 

not government agencies or those given certain authorizations by Congress. This was an important distinction 

established by Congress when it enacted the current appraisal regulatory structure in 1989. 

Professional Appraiser Concerns 

Even if the profession were to adopt a new trend of voluntary standards, TAF does not appear to have the 

capability to comply with cardinal rules of voluntary standard development. One need only examine the mission 

of longstanding Voluntary Standards Organizations such as the American National Standards Institute (ANSI). to 

note significant divergence. 

From ANSI: 

Q: How does ANSI conduct its business? 

A: Overall, the Institute provides and promotes a process designed to protect the rights and interests of 

every participant through a set of four "cardinal principles." 

Openness - The ANSI process is fair and open. Any materially affected and interested party shall 

have the ability to participate. 

Balance Participants should represent diverse interests and categories, and no single group should 

have dominance in standards development. 

Due Process - All objections shall have an attempt made towards their resolution. Interests who 

believe they have been treated unfairfy have a right to appeal. 

Consensus - Agreements are reached when more than a majority, but not necessarily all, of the 

participants concur on a proposed solution. 

TAF and its APB are severely deficient in these areas. 

In July 2011, the Appraisal Institute submitted testimony to this Committee outlining concerns regarding the 

decision to establish the APB, particularly the involvement of the ASC in its establishment and the virtually 

limitless authority of the new board Over the past year, our concern about the negative impact of this board has 

only grown. 

TAF, through its APB, is attempting to assert itself as the ultimate authority over all appraisal methods and 

techniques. This is problematic because the APB is not authorized by Congress, even though the average person 

would never know this because TAF consistently mentions it in the same breath as the "Authorized by Congress" 

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AQB and the ASS. We believe that Congress should exercise oversight over this insidious attempt to confuse the 

public by subtly abusing existing Congressional authority. 

There are several reasons for our concern over the Appraisal Practices Board, as follows: 

1. The establishment of the Appraisal Practices Board evidently was directed by the ASC or some of its 

influential members. When Congress established licensing and certification requirements for appraisers, it 

did not intend for the valuation process to be dictated by bank regulatory agencies, who, frankly, are not 

sufficiently staffed to delve into appraisal standards, let alone appraisal methodology. Here, it is worth 

noting that certification and licensing requirements apply to all types of federally related transactions, 

including residential and commercial real estate, so the impacts of this new entity truly impacts, and 

potentially creates a host of unintended consequences for, the entire profession. 

2. The Appraisal Practices Board was established, despite strong objection from at least one federal bank 

examination agency representative on the TAF Task Force on Best Practices. According to a memo from 

a subject matter expert from the Federal Reserve of Atlanta that was sent prior to the release of the Final 

Report: 

"However, it is neither my recommendation to the Board staff as an assigned "technical 

resource," nor the Board staff's position that the Federal Reserve would be in favor of the creation 

of a separate 'Best Practices" Board. The structure of ASB and AQB being solely liaisons to this 

Board are also problematic and something I would advise against as a "technical resource. ,,1 

We understand that this position was agreed to by at least one other federal agency, in addition to the 

regional banks of the Federal Reserve. Further, it is worth noting that Federal funds were approved for 

reimbursement by the ASC to TAF for the purposes of this Task Force's activities. 

3. The APB was established under a false premise that timely guidance materials on appraisal methods 

and techniques do not exist for appraisers. On the contrary, ample guidance and education materials are 

widely available to all appraisers in the United States. As just one example, the Appraisal of Real Estate, 

13th Edition is cited in more than 700 court decisions in the United States. As another, the Appraisal 

Institute developed a residential seminar - "Appraisal Challenges: Declining Markets and Sales 

Concessions" - prior to the market crash in 2007, and delivered this seminar to thousands of appraisers 

throughout the country. Other cutting edge and timely seminars have been developed and made available 

to the entire profession on such issues as declining commercia! real estate valuation and use of statistics 

and new technology within appraisal practice. While the Appraisal Institute has 23,000 members, our 

education is available to all appraisers. In fact, the vast majority of appraisers have taken education from 

the Appraisal Institute is recent years. 

4. Codifying appraisal methods and techniques will curtail innovation within the industry, and stunt the 

development of new methods and techniques, essentially putting the profession at risk. If such 

requirements had been in place 50 years ago, the development and integration of discounted cash ftow 

techniques within the income approach of appraisal would have been difficult, if not impossible to do, as 

only those methods that are recognized would be allowed by law. This decreases the ability of appraisers 

to integrate new technological developments and to respond to and develop solutions that address actual 

market conditions. 

5. Codifying appraisal methods and techniques exponentially increases the regulatory burden on appraisers 

and their clients. Having to adhere to a USPAP that changes every two years is enough, let alone 

adhering to agency and investor requirements. However, having to follow guideline documents as long as 

50 pages in length dramatically increases compliance costs on appraisers and consumers of appraisal 

services. Further, codification of methods and techniques places far too much emphasis over the 

performance of methods and techniques (following the letter of the law) than applying appraisal principles 

to given situations. 

6. Codifying methods and techniques increases the unlevel playing field real estate appraisers have with 

other valuation professionals, including CPAs and others involved in business and personal property 

1 Memo from K.C. Conway to David Wilkes regarding "Response to Draft Task Force Report to the Appraisal 

Foundation Board of Trustees," August 17, 2009. Available at http://www.appraisalinstitute.org/bg-pdfs/aug17-09-

memo-aug21-best-practices. pdf 

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valuation. The guidance documents under development by the Appraisal Practices Board are multidisciplinary, meaning they may be developed for real estate appraisal, but also, for business and personal 

property appraisal. Unlike real estate appraisers, CPAs, business and personal property appraisers have 

no certification or licensing requirements, nor any governmentally enforceable standards. As a result, 

adding an additional layer of rules and regulations around appraisal methods and techniques serves to 

place real estate appraisers at a competitive disadvantage where these sectors compete. This includes 

advisory services, valuation for financial reporting, and the valuation of hotels and motels and special 

purpose properties, such as convenience stores and car washes, 

7. If the APB "Valuation Advisories" to date are any example, at least from a real property perspective, they 

generally add nothing new to the appraisal body of knowledge. For the most part, APB Valuation 

Advisories 2 and 3 mostly quote the previously referenced The Appraisal of Real Estate and USPAP. 

8. Attempting to codify appraisal methods and techniques "flies in the face" of judicial discretion and 

Supreme Court rulings. By proposing to codify specific methods and techniques within USPAP, TAF is 

proposing to limit the types of evidence courts and regulatory bodies may consider. This is contrary to a 

recent Supreme Court ruling which affirmed that courts have the ability to determine whether valuation 

methodologies are reliable in any given instance or case. Further, this decision correctly states that 

appraisal is an applied science, even a craft.' Further, there is no list of what makes expert testimony 

credible. Expert testimony exists to educate the court, and courts have the discretion to decide for 

themselves what credible support for their education is'. 

Role oflhe ASC in the Creation of/he APB 

As we stated before this Committee last year, we have firm grounds to believe that the creation of the APB was 

inappropriately directed by the ASC, a move that is well beyond the statutory authority granted to the ASC by 

Congress. 

Last year, this Committee received testimony from the ASC that it played no role in the establishment of the 

Appraisal Practices Board' This statement contradicts the plain facts, which establish that the ASC was very 

much involved and participated in a highly orchestrated and concerted effort to create the Appraisal Practices 

Board. (A timeline of events may be found below.) 

In December 2008, the ASC held a board meeting where the issue was discussed and at least two 

members of the board of the ASC encouraged TAF to undertake efforts to address appraisal methods 

and techniques (effectively driving a wedge between TAF and the Appraisal Institute). The meeting 

minutes acknowledge that such a move would be viewed negatively by professional appraisal 

organizations, so TAF successfully sought the support of the ASC in pursuit of the endeavor, stating: 

V Gibbs and S. Gardner discussed their desire to have the USPAP include more direction on 

appraisal methodology. D. Bunton expressed a concern that encroaching on areas like 

methodology and instruction could potentially be viewed as "mission creep," particularly by 

Appraisal Foundation sponsoring organizations. S. Gardner stressed the need to venture into 

these areas to improve on concerns the ASC member organizations are seeing in the appraisals 

2 See CSX Transportation, Inc. v. State Board of Equalization ofthe State of Georgia. "Valuation is not a matter of 

mathematics, as if the district court could prevent discriminatory taxation simply by double checking the State's 

assessment equations. Rather, the calculation oftrue market value is an applied science, even a craft. Most 

appraisers estimate market value by employing not one methodology but a combination. These various methods 

generate a range of possible market values which the appraiser uses to derive what he considers to be an 

accurate estimate of market value, based on careful scrutiny of a/l the data available." Available at 

http://www.appraisalinstitute.org/bg-pdfs/CSKpdf 

3 See Daubert v. Merrell Dow Pharmaceuticals, a rule of evidence regarding the admissibility of expert witness 

testimony. 

, At the July, 2011 hearing, Chairman Biggert asked what role, if any, the Appraisal Subcommittee played in the 

establishment of the Appraisal Practices Board. Mr. Park stated: 'The Appraisal Subcommittee played no role in 

the creation of the practices board. " 

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provided to their member banks and institutions. S. Guilfoil requested assurance that the ASC 

would support ASB efforts in this regard. S. Gardner provided the assurance and indicated the 

ASC would issue a letter, if necessary, with its specific request for this change in USPAP' 

On January 21,2009, TAF sent an email explaining that the ASC "expressed a strong concern" to 

TAF that timely guidance to appraisers does not exist This email also advised that members of the 

ASC would help comprise a task force to explore the issue"' 

On January 27, 2009, the TAF President sent an email explaining the make-up of the task force. 

stating, "Since the genesis of this issue came from the ASC, they will be appointing two 

representatives. 7

,. 

On February 9,2009, TAF sent a letter warning the Appraisal Institute that inquiries regarding the 

ASC concerns were a "private matter" involving TAF and the ASC'. 

In April 2009, TAF advanced an amendment before this Committee for TAF to codify "best practices" 

and to be the authority for appraisal methods and techniques. The ASC participated in meetings with 

TAF as it sought the support of AI for the amendment Ultimately, this amendment was not offered 

during the Dodd-Frank deliberations and was not considered by the Committee'. 

In late April or early May 2009, two ASC board members were removed from the task force and 

replaced by two individuals, one from the Federal Reserve Bank of Atlanta and the other from a 

regional field office of the Office of Thrift Supervision, reportedly, because of legal and conflict of 

interest concerns. 

In the sumrner of 2009, the Federal Reserve Bank of Atlanta official participated in a phone 

conversation with the executive director of the ASC and the ASC board rnember frorn the Federal 

Reserve to discuss the task force and appraisal methods and techniques. The parties discussed 

funding options for development of "best practices" and TAF involvement in the development and 

delivery of education, including coordination for how TAF would issue Requests for Proposals. 

On August 17, 2009, the new task force representative from the Federal Reserve Bank of Atlanta 

expressed concerns in writing over the recommendations of the task force. 

In September 2009, the task force released its recommendations, which called for a panel to be 

established by TAF to develop recognized methods and techniques. In September 2009, the ASC 

approved a funding reimbursement request for activities related to the task force that led to the 

Appraisal Practices Board. In addition, the TAF chairrnan of the board presented to the ASC a grant 

funding request to fund methods and techniques activities for $275,000 in 2010. According to the 

Public Meeting Minutes, "0. Bunton said that the grant request should be finalized by the Foundation 

Board of Trustees in November and available for approval by the ASC meeting in December. He said 

that the Foundation is estimating the grant request will be in the area of $2.3 million. This is an 

increase of approximately $335,000 over the 2009 grant. Approximately $275,000 of/his increase will 

be for the Recognized Methods and Techniques Panel (RMATJ on real property valuation."lO 

In October 2009, TAF Board of Trustees approved the establishment of a third board - the Appraisal 

Practices Board - ipnoring the task force's recommendation to establish a Recognized Methods and 

Techniques panel' . According to the Task Force's report, "At this time, and for purposes of 

5 From the ASC Meeting Minutes, Decernber 200B, 

https:l/www.asc.gov/Documents/MeetingMinutes/ASC%20Bd%20Mtg%20Minutes%2012.11 .200B. pdf 

6 From the ASC Meeting Minutes, December 200B, 

https:l/www.asc.govlDocurnents/MeetingMinutes/ASC%20Bd%20Mtg%20Minutes%2012.11.200B.pdf 

I From Email frorn David Bunton. Available at http://www.appraisalinstitute.org/bg-pdfs/GenesisASC.pdf 

8 Letter from Appraisal Foundation to Appraisal Institute, February 9, 2009. Available at 

http://www.appraisalinstitute.org/bg-pdfs/privatematter.pdf 

9 Frorn Appraisal Foundation Letter to the Subcomrnittee on Capital Markets. April 22, 2009. Available at 

http://www.appraisalinstitute.org/newsadvocacy/downloads/TAFbestpracticesproposal.pdf 

10 From the Task Force Report to the Board of Trustees, September 11, 2009, available at 

http://www.appraisalinstitute.org/newsadvocacy/downloadslT askForceMemo BOT 091109.pdf 

11 Memo frorn Paul Welcome, Chair of TAF Board of Trustees to Sponsoring Organizations, October 26,2009. 

Available at http://www.appraisalinstitute.org/bg-pdfs/diversion.pdf 

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expediency, we suggest that the RMAT be constituted in the form of a panel; with time and proper 

funding, the panel may develop into or report to a third "board" under BOT oversight (similar to AQB 

and ASB) that oversees recommended methods and techniques in various appraisal disciplines." 

Further, leaders of the Appraisal Institute were informed directly by the TAF President that TAF was 

"told to do it" by the ASC. Appraisal Institute leadership will provide affidavits to these comments, if 

deemed to be helpful. 

On September 15, 2010, the 2010 TAF Chairman conducted a media interview where he stated to 

"The Housing Helix" pod cast, 'The Appraisal Practices Board is a good example ... we were asked by 

the ASC to do this, not informally, but its members expressed an interest in the Foundation doing this 

at least." 

In November 2009, TAF officially commenced the Appraisal Practices Board with a solicitation for members of this 

board. In July 2010, the Appraisal Practices Board began its operations and, on December 22, 2011, released its 

first exposure draft. In May 2011, the ASC reported to this Committee that TAF had established the Appraisal 

Practices Board. 

/iQQraisal Subcommittee Authority 

Any directive by the ASC and its members to establish a new board - without Congressional authorization - goes 

beyond the ASC's legal mandate to monitor and review activities of TAF related to standards and qualifications as 

authorized under Title XI. The ASC does not have the authority to direct TAF to take certain actions. Specifically, 

according to correspondence from the Appraisal Subcommittee, "Although Title XI does mandate that the ASC 

'monitor and review the practices, procedures, activities, and organizational structure of the Appraisal Foundation' 

and the AQB, Congress did not provide the ASC with the authority or the power to direct or overrule the 

operations or structure of these private entities. 12 Our organization is not aware of the ASC advising Congress of 

any concerns regarding areas of appraisal practice and recognized rnethods and techniques, as well as any 

perceived disconnect between appraisal standards and appraisal practice. Expression of such concerns in the 

ASC's Annual Report or in other forms of correspondence would have been an appropriate conveyance of the 

ASC's monitoring and review authorization; yet none can be found in any public Report to Congress 13. 

Regardless of whether the ASC directed or only expressed interest in the establishment of the Appraisal Practices 

Board, we believe Congress should be concerned that such orchestration would continue to occur without any 

authorization in this area. In our view, this orchestrated event is enabled by a regulatory structure that lacks 

appropriate Congressional oversight and accountability. 

GAO Findings and Recommendations 

In January 2012, the Government Accountability Office (GAO) released a report citing the need for the ASC to 

establish policies and procedures related to TAF funding eligibility. Specifically, the GAO report cited the ASC for 

not having specific policies for determining whether activities of TAF (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 intern a! control standards designed to promote effectiveness 

and efficiency and limits the accountability and transparency of the ASC's activities. 

The GAO report cites a concem that the Appraisal Institute has shared for many years - that the relationship 

between the ASC and TAF has insufficient accountability measures. Outside of preparing an annual report to 

Congress, oversight of the ASC is virtually non-existent. We note that the agency does not have an inspector 

general who can conduct independent assessments of the ASC's programs and operations. 

Further, it is interesting to note that one day after the public release of the GAO report, the former chair of the 

ASC was replaced. Although no explanation has been given to date, the timing of these replacements implies a 

direct relationship with the public release of the GAO report. 

12 From Appraisal Subcommittee correspondence with George R. Harrison, Ph.D., September 11, 2002, available 

at https:l/www.asc.gov/documents/othercorrespondencelltr%20harrison%20request%2009.11.02.pdf 

13 ASC Annual Reports are available at https:llwww.asc.gov/About-the-ASC/AnnuaIReports.aspx 

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In essence, the ASC reshuffled its board, but the basic lack of fundamental oversight and accountability measures 

remains. By the actions described above, the relationship between the ASC and TAF has become far too cozy 

and perhaps even a bit incestuous. As an example, a former TAF employee - who worked directly for the TAF 

president - was hired as the ASC executive director and is now charged with overseeing/monitoring its 

operations, including its relationship with TAF. 

Original Plan ofthe ASCfTAF Advances Without Congressional Authorization 

Even though Congress did not authorize TAF to be the source for appraisal methods and techniques, or "best 

practices," during the Dodd-Frank deliberations, this has not impeded that plan from being executed. Over the 

past six months, the Appraisal Practices Board has begun publishing "valuation advisories," which claim to 

produce "voluntary guidance" for appraisers on such issues as what types of comparable sales are used or how 

to adjust for sales concessions in the market. 

During the exposure draft period for the valuation advisories, we requested that the Appraisal Practices Board 

clarify and confirm that the advisories are purely voluntary in scope and canot be used for discipline or 

enforcement purposes. To date, this request has been plainly ignored or denied. In addition to TAF's proposal to 

Congress to codify "best practices," the basis for this concern is that the Appraisal Practices Board is speaking 

inconsistently. On the one hand, TAF claims the documents are voluntary; while on the other, they invite their 

codification. Specifically, the valuation advisory documents state' Compliance with such guidance is voluntary, 

unless mandated through applicable law regulation or policv. 

Meanwhile, TAF representatives now are encouraging states to make valuation advisories from the Appraisal 

Practices Board compulsory. At the April 2012 meeting of the Appraisal Qualifications Board, representatives from 

TAF encouraged state appraiser regulatory agencies to use the valuation advisories when bringing enforcement 

actions against appraisers. Additionally, appraisers were warned at the April 2012 meeting of the Association of 

Appraiser Regulatory Officials (AARO) that veering from the valuation advisories could result in a disciplinary 

action. 

Further, the Appraisal Standards Board of TAF released a proposal on May 24, 2012, that effectively would codify 

the works of the Appraisal Practices Board within USPAP itself. Specifically, the Appraisal Standards Board has 

proposed to define appraisal methods and techniques within the USPAP Scope of Work Rule, citing the Appraisal 

Practice Board directly. USPAP has been published for more than 20 years without any specific reference to 

appraisal methods and techniques. Is it simply a coincidence that the first time this is advanced is immediately 

following the first release of valuation advisories from the Appraisal Practices Board? Comparatively, the 

Appraisal of Real Estate, 13th Edition, the most widely published tex1 in the world illustrating appraisal methods 

and techniques, has never been referred to within USPAP, despite strong recognition throughout the judicial 

system. 

The USPAP proposal raises serious concerns and questions about the independence of the Appraisal Standards 

Board which, according to TAF's bylaws, is not to take any direction from the TAF Board of Trustees" This 

proposal shows that the Appraisal Standards Board now may be doing the bidding of the TAF Board of Trustees 

to assert control over the entire appraisal process 

This is not the first time that we have seen or heard such a concern regarding the independence of the Appraisal 

Standards Board. Specifically, several former members of the Appraisal Standards Board (ASB) privately have 

expressed concern that the independence of the ASB may have been compromised by TAF's Board of Trustees 

in recent years. According to TAF By-Laws, the ASB is to operate independently from TAF's Board of Trustees 

with regard to the terms and content of USPAP. 15 Former members of the ASB report that members of TAF's 

Board of Trustees directly interfered with the ASB's duties and obligations, directing it to take certain actions or 

avoid taking others. We believe it is worth noting that members of the Board of Trustees and executive-level staff 

14 "Except as otherwise provided in these Bylaws or by resolution of the Board of Trustees, the Standards Board 

shall have and exercise all authority and power and perform all functions of the Foundation and the Board of 

Trustees in respect to establishing improving and promulgating the terms and content of the Uniform Standards of 

Professional Appraisal Practice." Available at http://wwwappraisalinstitute.orglbg-pdfsltafbv/aws.pdf 15 Ibid 

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of TAF and the ASC attend meetings of the Appraisal Standards Board that are closed to the public. Regarding 

this practice, as well as the situation involving the Task Force on Best Practices, we encourage Congress to 

speak with former members of the ASB to determine whether any actions by the ASC or TAF's Board of Trustees 

may have jeopardized or compromised the independence of the ASB. 

Potential Explanations for the APB 

There are several potential explanations for the establishment of the Appraisal Practices Board, as follows: 

1. Federal funding. An original intent behind establishing the Appraisal Practices Board appeared to have 

been to position TAF to receive additional federal funding from the ASC, as a funding request 

immediately was made of the ASC by TAF. TAF revenues have declined substantially in recent years, so 

new funding streams had been sought by TAF to help offset recent losses. TAF leadership openly 

expressed its desire to seek federal funding for the APB, having advanced a legislative amendment to 

this effect that sought specific funding from the ASC in September 2009. TAF leadership also stated 

publicly that federal funding of the APB could follow a course similar to that of the ASB and AQB, which 

were created prior to Congressional authorization in Title XI" 

2. Education Development. Ultimately, it has been AI's long-held view that TAF's main goal was to enter into 

direct competition with private organizations in offering appraisal education. When TAF was formed in the 

1980s, it was done with the understanding that it would not offer education, delegating that responsibility 

to professional appraisal organizations and academia. Contrary to any assertions made by TAF and the 

ASC, this process has worked well, as professional appraisal organizations have delivered timely 

education and guidance to the market. For example, courses relating to valuation in declining markets, 

sales concessions, and the valuation of "green" and/or energy-efficient features in properties were 

developed by the Appraisal Institute to fully prepare appraisers for emerging issues 17 TAF's current 

policies appropriately limit TAF's development or delivery of education to appraisers on methodological 

issues. However, these policies are on the cusp of being dramatically revised. This follows a previous 

move into the USPAP education arena, a step taken by TAF approximately 10 years ago. At that time, 

TAF embarked on an initiative to develop education relating to USPAP. It was explained that this course 

was developed as a "benchmark" to which TAF could compare other organizations' courses for 

consistency with US PAP. Yet TAF does not require such "comparison" for any other courses developed 

by other organizations. 

16 Presentation by David Bunton, President ofTAF before the Association of Appraiser Regulatory Officials, May 

1,2010. 

17 We believe that Congress should be aware of a recent Memorandum of Understanding (MOU) between TAF 

and the Department of Energy (DOE) regarding "green" appraisal issues. This MOU helps to illustrate concerns 

regarding TAF's involvement in appraisal education and practice issues, while being the exclusive standardssetting organization for the appraisal profeSSion. Among other things, the MOU outlines how DOE plans to 

develop an education course curriculum for appraisers based on works of the APB. A recent article from Valuation 

Review highlights what is planned with the APB: 

The Department of Energy wants to develop educational course curriculum for appraisers in valuating 

energy performance and sustainability in buildings. The appraiser practices board issues guidance in that 

area, which it would use as the basis for the Course and then send it through the AQB course-approval 

program. The program would likely be an extra certification, in the way of continuing education offered by 

the Appraisal Qualifications Board (AQB). The board has added green buildings as one of its continuing 

education topics, and it may include green building valuation as a part of the primary qualifications criteria 

down the line, according to Bunton. After a/l that, it's not hard to imagine lenders engaging appraisers 

who have completed the Department of Energy curriculum. 

It is important to note that professional appraisal organizations already have responded with green appraisal 

education and credentialing programs. For instance, the Appraisal Institute has invested considerable resources 

to develop a three-part series, professional development program that specifically focuses on high performance 

(green) building valuation. The program provides appraisers with various methods and techniques that then can 

be utilized to analyze energy-efficient features in buildings. 

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Procedurally, TAF, despite numerous public denials, currently develops online USPAP education in concert with a 

private education provider, issuing a request for proposals and then licensing the education through this entity. 

While other organizations are welcome to develop their own USPAP courses, if they can afford it, such USPAP 

courses are judged in comparison to TAF's "benchmark," often resulting in cost-prohibitive changes. Thus, if the 

cost of trying to develop such proprietary courses is not cost-effective, TAF will "license" its benchmark course to 

that organization, provided that TAF receives compensation for each individual use. Please note that all 

appraisers must take a USPAP update course at least every two years. 

Of greater concern is that TAF also is on the cusp of expanding its education to all areas of appraisal, including 

appraisal methods and techniques. It is apparent that TAF intends to pursue a path similar to what it did in 

entering USPAP education with regard to appraisal methods and techniques. Specifically, TAF recently formed 

another task force to help it develop a strategic plan. This task force, according to a verbal report delivered by the 

TAF President earlier this month, has recommended that TAF "develop education for appraisers." 

This development is not surprising, given that one apparent motive to create an Appraisal Practices Board is to 

develop a "body of knowledge" of its own, even though one already exists within academia and the private sector. 

Twenty years ago, TAF did not develop guidance related to appraisal methods and techniques beyond any advice 

of the Appraisal Standards Board, nor did it offer education. It now does both, competing directly with private 

professional organizations that do not have the advantage of a Congressional imprimatur. TAF has done so while 

confusing and abusing authorizations from Congress, claiming implied consent from Congress that TAF is the 

source for appraisal methods and techniques. Such abusive behavior confuses the public and stands to further 

harm the appraisal profession. 

We believe that Congress must establish limitations or parameters regarding TAF's work outside of its standards 

and qualifications responsibilities. Limitations relating to the APB should ensure that the appraisal profession is 

not handcuffed by procedural rules. Appraisers do not need more rules, but rather a return to fundamental 

principles that support market expertise and sound judgment. Conversely, if appraisers are going to have more 

rules to follow, clarity is needed for the roles of the parties involved in establishing those rules, how those rules 

are to be developed, and what limitations need to be imposed for TAF's involvement in other areas of professional 

activity and practice. As a private organization, we do not have the privilege or benefit of a "stamp of approval" 

from Congress, and yet we are faced with the proposition of having to compete in the area of education with such 

an entity. This is grossly unfair and not contemplated, nor authorized, by Congress. 

Enhancing Oversight and Enforcement 

One of the purported intentions for the establishment of the Appraisal Practices Board was to assist state 

regulators with conducting oversight and enforcement. According to the Final Report of the Task Force that led to 

the creation of the Appraisal Practices Board, "We also believe that this name will encourage appraiser regulatory 

agencies to reference the work product of this group.,,18 However, even here, We believe that relying on the 

Appraisal Practices Board to conduct enforcement is misguided, and ignores more significant issues that impede 

enforcement processes by states 

In fact, while the APB has only begun to publish guidance materials, we already have identified at least one error 

that would result in inappropriate disciplinary action against appraisers. Further, should appraisers treat the 

document as if it were compulsory, it actually would lead to a rash of inaccurate appraisals 19 

18 From the Task Force Report to the Board of Trustees, September 11,2009, available at 

http://www. appraisalinstitute.org/newsadvocacy/downloads/T askForceMemo BOT 091109 .pdf 

19 Specifically, the valuation advisory, "Adjusting Comparable Sales for Seller Concessions," explains that if sales 

concessions are paid by the seller in virtually all sales transactions (bold for emphasis), an adjustment may not 

be necessary since it would be typical ofthe market. This is referenced on pages 9,10,13 and 14 within the 

document. The purpose of adjusting comparable sales for concessions is to provide an indication of value of the 

subject property based on the definition of value. Even though the sales concession might be "typical" of the 

market and paid by the seller in virtually all transactions, the sale price is impacted by the concession. 

Furthermore, if the concessions are related to financing, the properties purchased with cash are atypical of the 

market and must be adjusted accordingly. Failing to adjust for sales or financing concessions, even though (cant). 

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In reality, the biggest challenge faCing state appraiser regulatory officials is the lack of financial resources to hire 

qualified investigators to review complaints against appraisers and assist with prosecution. Often today, 

investigators share time with other licensing boards, ranging from barbers and beauticians to home inspectors 

and morticians. This places limitations on investigations involving appraisers, diluting the effectiveness of the 

state appraiser regulatory agencies in conducting oversight and enforcement 

One way to address this is to ensure that appraiser licensing fees are used by state appraiser regulatory agencies 

for appraiser oversight and enforcement through dedicated funds. Often, appraiser licensing fees are swept by 

state governors to help fill budget shortfalls or support non-appraiser oversight functions. Over the past year, the 

Appraisal Institute led an effort in the state of Maryland to dedicate appraiser licensing fees to appraiser oversight 

and enforcement We have established model legislation for other states approximately 15 - that are at risk of 

having funds swept for other uses. 

Beyond state budgeting complexities, under the current structure, state appraisal boards send $40 for every 

licensed appraiser to the ASC, which uses this money to fund its operations and grants to TAF. The Dodd-Frank 

Act authorized the ASC to provide grants to state appraiser regulatory agencies for enforcement purposes, 

however, no details for that program have been released. It would appear to us that appraiser licensing fees 

would be better spent directly by state appraiser regulatory agencies to hire qualified investigators and review 

appraisers to enforce and regulate. 

Other challenges for oversight and enforcement include ensuring that those who oversee state regulatory boards, 

particularly their enforcement staff members, have the necessary appraisal education and/or familiarity with the 

appraisal body of knowledge. In some cases, members of these staffs do not have the qualifications to review 

appraisals submitted for enforcement Those who oversee state regulatory agencies ("Policy Managers" at the 

ASC) should have the ability to determine not only the adequacy of enforcement in terms of expedition, but also 

the quality of the work being reviewed and the reviews themselves. While this mayor may not require state 

licensure or certification, it should include the necessary education to achieve a license. 

Also, both the standards-setting entity (ie., ASB) and the oversight and enforcement agency need to monitor 

state regulatory boards so that enforcement over appraisers is consistently applied in every state/territory where 

USPAP is in effect There is more than sufficient anecdotal evidence that different regulatory boards enforce 

USPAP in different ways. 

We believe that Congress must establish laws that empower state appraisal boards to do thorough and fair 

investigations and to prosecute meaningful complaints involving appraisers. However, too often, it appears that 

the state appraisal regulatory agencies simply are attempting to clear a backlog of complaints to pass inspection 

by the ASC. State regulators appear to focus more on ministerial violations than on harder-to-prove ethics and 

competency violations. Here, we believe codifying the works ofthe Appraisal Practices Board compounds these 

problems, as it is likely that state appraisal boards will turn to these documents to demonstrate compliance to the 

ASC. Again, so-called voluntary guidance materials are at risk of being misused by enforcement agencies to the 

detriment of the appraisal profession and the public. 

This challenge is not unique to real estate appraiser regulatory agencies, as appraisers are in fact well beyond 

most in the real estate and mortgage sector in actually establishing and maintaining an enforcement regime. 

However, other industries have established more efficient systems that share resources amongst agencies and 

focus financial resources where they are needed most One such system is the National Mortgage Licensing 

System established by the Conference of State Bank Supervisors. This system is a cooperative amongst state 

licensing agencies for mortgage brokers and mortgage loan officers. Now recognized by Congress, the system 

enables mortgage originators to fill out a single application and to apply for licensure in multiple states. On the 

enforcement side, the NMLS allows state agencies to share information and track individuals moving or doing 

seller-paid concessions might be prevalent in the market, is not proper guidance when the definition of value 

includes a price unaffected by sales or financing concessions. Further, it is a strong example for why voluntary 

guidance materials should never be used as compulsory documents. 

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business across state lines. And it does this without convoluted federal layers that drain precious resources that 

could be used for state oversight and enforcement. 

Part 2. Appraisal Independence and Procurement 

We often hear from real estate agents, home builders and others that appraisals are "killing deals," andlor holding 

back the economic recovery. These accusations are unfounded and misguided, as appraisers do not "make the 

market," but rather "reflect or report the market." To this point, appraisals are an important risk management 

activity to be conducted by banks in making safe and sound lending decisions. Appraisals are not meant to simply 

support contracts - they are obtained to help lenders assess their overall risk. Fundamentally, it does neither the 

borrower nor lender any good to enter into a mortgage for more than the value of the property. 

Still, there is a significant inconsistency found in Title XI of the Financial Institutions Reform, Recovery and 

Enforcement Act of 1989. FIRREA requires certification or licensure for appraisers, but it also prohibits banks 

from establishing appraiser hiring policies that recognize credentials beyond the minimum requirements. In a time 

when home builders and others are requesting the use of professionally designated appraisers, lenders are 

actually prohibited by law from seeking out the most qualified appraisers. One purpose behind this provision was 

to help establish certification and licensure by states. At the time of enactment, some were concerned that 

allowing lenders to require certain professional designations would impede development of a pool of appraisers. 

This provision has long out-lived its useful purpose, and we believe it should be reconsidered in an effort to 

promote higher quality appraisals. 

Beyond this, to the extent that there is a crisis of confidence regarding appraisals, this is a direc! result of the way 

in which lenders, under the oversight of bank regulatory agencies, procure appraisals today. Here, the 

predominant factors in the appraiser hiring decision often are price and turnaround time of the appraisal, not 

quality of service, or geographic or market competency of the appraiser. Mortgage lenders have it within their 

ability to address these concerns, and we urge them to do so immediately. 

However, we remain deeply concerned with the overall approach taken by federal regulatory agencies and 

financial institutions in supporting independent appraisal functions within financial institutions and procedures 

utilized by lenders to procure appraisals. Several significant problems are apparent: 

1. Federal regulatory agencies are deeply understaffed to deal with examination issues involving appraisals. 

At one point in the 1 990s, each federal regulatory agency had competent appraisers on staff helping to 

support examination teams. Today, there are a total of two professional designated real estate appraisers 

supporting examination functions in all four of the major examination agencies. While the OCC recently 

published an appraisal support position at headquarters, the response of other bank regulatory agencies 

is woefully deficient and must be enhanced to deal with the various collateral valuation challenges facing 

regulators and financial institutions today. 

2. Federal bank examiners have identified widespread problems with the way in which many banks have 

handled appraisal administrative duties. A recent review by the Appraisal Institute of Material Loss 

Reports indicates that 75 percent of now-failed banks had been previously cited for various appraisal 

violations, often failing to obtain appraisals where required, or having insufficient resources within the 

bank to manage and oversee the appraisal function. 

3. Generally, most banks have failed to take responsibility or ownership of the appraisal function, electing to 

outsource appraisal operations to mortgage brokers, who have a vested interest in the transaction, or to 

third party appraisal management companies, that offer a layer of insulation from coercive pressure, but 

apply new business pressures that put constraints on appraisal quality. This is evidenced by a slew of 

lawsuits, settlements and other regulatory actions that cite widespread deficiencies regarding appraisal 

independence and appraisal quality, including the Ameriquest settlement with 48 state attorneys general; 

the Home Valuation Code of Conduct, resulting from a settlement agreement with the New York Attorney 

General's office; various lawsuits from the Federal Housing Finance Agency and Federal Deposit 

Insurance Corporation; and out of court settlements with "whistleblowers" who attempted to report 

apparent violations of appraisal rules within banks, but faced threats and retaliation from their employers. 

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As a result of these and other issues, the natural reaction of many banks and financial institutions has been to 

establish a hard firewall between loan production and risk management functions and appraisal. Such a firewall 

inhibits communication between the underwriting staff and the appraiser to the point that causes more damage to 

the process than it helps. Many are under the mistaken impression that federal rules now require the use of 

appraisal management companies (AMCs) to comply with basic appraisal independence requirements. This is not 

the case, as banks can manage the appraisal ordering and review internally. Many banks, upon learning that 

federal rules allow banks to take back the appraisal function, have reestablished appraisal departments with 

independent reporting structures as an alternative to utilizing appraisal management companies. Depending on 

the size of the bank, this can be accomplished with a functioning appraisal department, or hiring an appraiser on 

staff, or utilizing several available software programs in the market that enable risk management staff to oversee 

appraisal orders and reviews. 

This is a best practice that more banks should follow. Too few resources have been devoted to appraisal staff 

within financial institutions, as evidenced by Material Loss Reports, which often cite banks for failure to devote 

staff to obtaining credible appraisals. Moving forward, we believe that incentives, such as higher marks on 

CAMELS ratings, should be established for banks to maintain rigorous risk management positions in support of 

collateral risk management. 

This is not to say that all AMCs are performing poorly, because some place the quality of service at the forefront 

of their business model; it is just that the business model employed by many appraisal management companies 

has significant failures. Our biggest concern is the propensity to make appraiser hiring decisions on speed (or 

turnaround times) or price, rather than quality or competency (both market and geographic). Here, many 

institutions appear to ignore federal guidelines that clearly state that price and turnaround time should not be the 

predominant factor in the appraiser hiring decision. Yet, as cited above, bank regulatory agencies appear 

understaffed to enforce this provision, helping to enable substandard appraisal procurement by banks 

The viability of the predorninant business utilized by appraisal management companies may not be sustainable. In 

fact, several large appraisal management companies have failed recently, stiffing appraisers for millions of dollars 

in appraisal fees. Last month, a Phoenix judge concluded that a large AMC failed to pay appraisers in Arizona at 

least 171 times within the past 18 months. The judge recommended that the Arizona Board of Appraisal fine the 

company $850,000 and revoke the company's registration as an appraisal rnanagement company. 

One positive from this situation was that a major client of the failed appraisal management company (Appraiser 

Loft) made good on the appraisal fees that were owed to appraisers, paying appraisers who had unpaid invoices. 

Commendably, the chief appraiser of this bank (MetLife) was quoted in a media report as follows: 

It's not the appraiser's fault that AppraiserLoft didn't pay them. If an appraiser did the work and we made 

a decision based on the appraisal provided - the appraiser should be paid20 

Unfortunately, it's more common that these bills go unpaid when an appraisal management company fails. One 

infamous case involves Taylor Bean Whitaker (TBW), who once was one of the largest wholesale lenders in the 

country, but ceased its operations after a raid by the Federal Bureau of Investigation and a suspension by the 

FHA TBW owned an appraisal management company - Security One Valuation Services - which left numerous 

appraisers with unpaid invoices. This trend does not appear to be ceasing, as evidenced by a letter that we 

received from a member earlier this week. 21 

It should be noted that rnany banks are using the AMC as profit centers at the expense of the appraiser. Some of 

the largest AMCs are owned by banks. Prior to the recent advent of AMCs, banks either reviewed all appraisals 

by staff or outside contract. Now, the banks establish an AMC, order and review all appraisal through the AMC, 

and reduce the fee to the appraiser while keeping the AMC fee (typically as much as half of what they pay 

appraisers) for themselves. 

20 From Appraiser Talkback Blog, March 15, 2012, available at http://www.orep.org/wordpress2.7/wordpressf?p=521 

" Letter to Sara Stephens from Stephen P. Kurilchyk, SRA, June 20, 2012. Available at 

http://www.appraisalinstitute.org/bg-pdfs/kurilchyk-sra-Ietter.pdf 

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Interim Final Rule & Customary and Reasonable Fees 

The Dodd-Frank Act contains a provision requiring "customary and reasonable" fees be paid to appraisers to 

reflect what an appraiser would typically earn for an assignment absent the involvement of an appraisal 

management company (AMC). Under the Act, evidence for such fees may be established by objective third-party 

information, such as government agency fee schedules, academic studies, and independent private sector 

surveys. This issue is extremely important given evidence that indicates wide divergence between fees paid to 

appraisers through appraisal management companies and those retained directly by financial institutions. While 

some AMCs pay full fees and charge for their services on a "cost-plus" basis, many do not. 

This provision required the Federal Reserve to develop a rule within a very short time period. The Federal 

Reserve published an Interim Final Rule for comment, but took no action there further. As a result, the Interim 

Final Rule became effective on April 1, 2011. We do not believe the Interim Final Rule is consistent with the plain 

language and intent of the Dodd-Frank Act. 

Under the Interim Final Rule amending Regulation Z (Truth in Lending), lenders and their agents are provided 

with two presumptions of compliance. The first option states that lenders will be presumed to comply if the amount 

of compensation is reasonably related with recent rates (last 12 months) for appraisal services performed in the 

geographic market of the property. The creditor or its agent must identify recent rates and make any adjustments 

necessary to account for specific factors, such as the type of property, the scope of work, and the fee appraiser's 

qualifications; and the creditor and its agent do not engage in any anticompetitive actions in violation of state or 

federal law that affect the rate of compensation paid to fee appraisers, such as price- fixing or restricting others 

from entering the market. The Fed's commentary on the first presumption states that AMC fees are an acceptable 

component of the factors used by creditors and their agents to establish compliance with the statute's customary 

and reasonable mandate. As stated above, our organizations strongly object to this feature of the IFR and have 

urged its removal. 

Under the second presumption of compliance, a lender or agent is presumed to comply if it establishes a fee by 

relying on rates in the geographic market of the property being appraised or established by objective third-party 

information, including fee schedules, stUdies and surveys prepared by independent third parties such as 

government agencies, academic institutions and private research firms. The interim final rule follows the statute in 

requiring that fee schedules, studies and surveys, or information derived from them, used to qualify for this 

presumption of compliance must exclude compensation paid to fee appraisers for appraisals ordered by appraisal 

management companies. 

We believe that the two presumptions of compliance are inconsistent with one another. While the second 

presumption specifically excludes assignments ordered by known appraisal management companies, the first 

presumption specifically does not require that a creditor use third-party information that excludes appraisals 

ordered by AMCs. While this statement could be read to clarify the previous comment found in that paragraph that 

stipulates use of a fee surveyor study is not required, a literal interpretation of this statement would create a 

significant departure from the intent of the legislation defining customary and reasonable fees as appraisal 

assignments absent the involvement of AMCs. 

As such, we are not surprised to hear that the first presumption of compliance has been initially interpreted by 

some large banks and AMCs to mean the current business model employed by many banks and AMCs today is 

thought to be satisfactory. Unfortunately, all available evidence suggests this arrangement is totally inconsistent 

with the second presumption of compliance, as explained below. 

The Inlerim Final Rule is inconsistent, ineffective and contrary to the spirit of the Dodd-Frank Act. The very 

existence of the customary and reasonable fee provisions of Dodd-Frank, together with the mandated exclusion 

of AMC fees in calculating what's customary and reasonable, results from Congressional recognition of the 

inftuences of AMCs on fee appraisers and their harmful impact on appraiser independence and the integrity of 

valuations in our mortgage lending markets. 

Consumer Disclosure FormIHUD-1 

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These problems are masked by consumer disclosure rules that currently allow co-mingling of appraisal and 

appraisal management company fees on the Appraisal line of the HUD-1 Settlement statement. Recent consumer 

research indicates that consumers are paying higher costs for appraisal fees as reported on the Appraisal line of 

the HUD-1 statement". This co-mingling mistakenly confuses consumers into believing that they are paying 

appraisers more for services today, when in fact, compensation has declined as much as 40 percent 

As you know, the Dodd-Frank Act authorized separation of appraisal and appraisal management fees. We 

support this provision and believe separate disclosure should be required to fully inform borrowers of actual costs 

paid with regard to the appraisal process. This includes both the performance of the appraisal and any 

administrative and review functions. We see no consumer benefit with continuing to bundle two separate services, 

as is current practice today. 

Traditionally, appraisal management fees were allocated as part of loan processing or administration fees or 

through the interest rate. However this has changed over the years as more lenders have outsourced appraisal 

functions to third party management companies. This is enabled by interpretations of the Real Estate Settlement 

Procedures Act, the foundation of which dates back to the origins of the HUD-1 in 1974, long before the current 

appraisal management business model was established. This allows the bundling of appraisal and appraisal 

management expenses when appraisal management companies are used. A change here is long overdue. 

However, the CFPB, through the establishment of a new Consumer Disclosure Form and as authorized by the 

Dodd-Frank Act, has a unique opportunity to improve transparency for borrowers by requiring full disclosure of 

costs incurred for appraisal services and costs for appraisal management services. The CFPB has issued 

several drafts of the proposed Consumer Disclosure Form. We applauded a recent draft that was posted to the 

CPFB website for review in February, which includes clear disclosure of any fee paid to a "Local Appraisal 

Company" and to an "Appraisal Management Company" ("AMCs") (found in both the "Hemlock" and "Butternut" 

versions). 

Part 3. Legislative Reform Options 

As Congress reviews appraisal issues, we suggest several reforms to help improve appraiser oversight and 

enforcement, as well as the overall quality of appraisals. 

With regard to the appraisal regulatory structure, we offer the following suggestions: 

1. Realign the appraisal regulatory structure with those of other industries in the real estate and 

mortgage sectors. One model to turn to is the National Mortgage Licensing System (NMLS), which 

is a cooperative amongst state agencies overseen as a last resort by the Consumer Financial 

Protection Bureau (CFPB). 

Comments: This is not a proposal to tum the appraisal regulatory structure over to a self-regulatory 

organization (SRO). SROs typically mean a regulatory scheme that is administered by industry. Here, the 

NMLS is owned and operated by regulators. In addition, the entire NMLS is overseen by a federal agency 

(the CFPB). 

This would simplify the appraisal regulatory structure and make it consistent with others in the real estate 

and mortgage sectors. Authorizing the appraisal profession to utilize the NMLS for its certification and 

licensing regime would enable state appraiser regulatory agencies to benefit from enhanced 

communication with other state agencies, including those outside of appraisal, such as state banking 

regulatory agencies, This enhanced communication among state licenSing agencies has been sought 

after for many years by Congress and other observers. Such a system would help state licensing 

agencies track individuals and firms that may be moving in and out of states after a disciplinary action. 

22 See "NAR Survey Shows HVCC Impacting Housing Markets," available at 

http://www. realtor.org/wps/wcm/connecUb83165804efOb3338f18af2db4a 1 e62f/government affairs hvcc researc 

h results. pdf?MOD-AJPERES&CACHEID-b83165804efOb3338f18af2db4a 1 e62f 

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For example, state appraiser regulatory agencies in Illinois would be alerted immediately if an appraiser 

was applying for licensure after a disciplinary action was taken in Connecticut. Likewise, state appraiser 

regulatory agencies would be alerted if a mortgage broker lost his or her license and was subsequently 

applying for licensure as an appraiser, 

Realigning the appraisal regulatory structure with the NMLS also would provide a common system in 

which appraisers and appraisal management companies could submit applications for licensure in 

multiple states, Today, appraisers and AMCs that wish to earn and carry licenses in multiple states must 

apply in each state separately, significantly adding to administrative requirements and obligations, For 

instance, appraisers with multiple state licenses must adhere to each state's unique timing requirements 

and often take the 7-hour USPAP class three or four time a year in order to comply with all the state's 

requirements, Unlike the appraisal regulatory structure, the NMLS has a common application protocol 

which is accessed by all of the applicable state licensing authorities, 

Interestingly, other industries besides mortgage loan originators are utilizing the NMLS for the very 

purpose described here, We understand that the NMLS is now accepting other state regulatory agencies 

into the NMLS, This is because state regulatory information-sharing is not unique to appraisal, but is a 

widespread problem with many industries, The NMLS has addressed this by offering a solution that can 

be used by multiple industry regulators, 

Lastly, should the NMLS fail in its responsibilities to manage appraisal oversight, the CFPB could step in 

and administer the appraisal oversight functions, Just as it is authorized to do for mortgage loan 

originators today, This provision established a strong incentive for the NMLS to maintain meaningful 

programs and operations, 

2. Congress must protect the independence of the appraisal standards-setting process and require 

that appraisal standards for federally related transactions be issued by an entity that does not 

directly or indirectly develop or offer education to appraisers. 

Comments: Standards-setting organizations typically go to great lengths to protect the independence of 

the standards-setting process, However, the decision now before TAF to enter into competition with 

private education providers would Jeopardize the independence of this process, as changes made to 

standards may have additional motivations beyond those serving the profession or users of professional 

appraisal services, It is worth noting that TAF is not the only appraisal standards-setting organization in 

the world, In fact, the International Valuation Standards Council, based in London, produces the 

International Valuation Standards, which are adopted in more than 70 countries and are required for 

Appraisal Institute members conducting appraisal work internationally, In contrast to TAF, the IVSC does 

not currently directly or indirectly develop education for appraisers", This is similar to other standardssetting organizations such as the Financial Accounting Standards Board and the International Accounting 

Standards Board, both of which also restrict them in the area of direct education, 

3. Congress must establish limitations around the Appraisal Practices Board of TAF. 

a, No tax dollars should be used to fund this venture. 

b, Voluntary guidance should be just that - voluntary, 

c, States should be restricted from codifying voluntary guidance into state law or regulation 

and the Appraisal Standards Board should be prohibited from specifically referencing 

works of the Appraisal Practices Board within USPAP. 

d, Establish meaningful oversight over the de facto regulatory actions of TAF. 

23 "Tom Boyle suggested a new project relating to real estate and the misunderstanding of nonconforming 

uses and the highest and best use principle, However other Board members considered that this would bring the 

IVSC into an educational role, which is not its remi/." From Minutes of the Meeting of the IVSC Standards Board 

Held in Hong Kong on 3 November 2011, Available at: 

http://www,ivsc,org/meetings/2011/1103/sb/minutes ivsb 20111103 pdf 

17 
197 


76111.156

Comments: The prohibition of treating voluntary guidance as compulsory should apply to the Appraisal 

Practices Board and any "Advisory Opinions" or "Frequently Asked Questions" published by the Appraisal 

Standards Board. Already, at least seven (7) states have inappropriately adopted Advisory Opinions and 

Frequently Asked Questions issued by the Appraisal Standards Board into their regulations; even though 

both clearly state that they are to be voluntary and to be used for information purposes only. Barring 

action by Congress, a similar course has been laid out for the Appraisal Practices Board. 

4. Congress should reiterate that TAF does not have legislative authorization in the area of 

"methods and techniques" and "'appraiser education." Congress should not allow TAF to abuse 

the authorities granted to it for appraisal standards and qualifications, nor should TAF be allowed 

to compete with private education providers in the area of appraisal methods and techniques. 

Comments: There is a precedent for Congress to establish limitations in the area of education for private 

organizations that have direct authorizations from Congress. When it authorized the National Mortgage 

Licensing System, Congress established a limitation for the NMLS not to directly or indirectly develop or 

offer any qualifying or continuing education to those whom they oversee24 This is an appropriate 

comparable to the situation involving TAF, not just because it maintains a Course Approval Program that 

enables education providers to seek a single approval of education in all 50 states, but also because of 

the imprimatur as "the source" for appraiser standards and qualifications. We encourage Congress to 

enact similar parameters for the appraisal profession. 

5. Congress should establish laws that empower state appraisal boards to do thorough and fair 

investigations and to prosecute meaningful complaints involving appraisers. Further, Congress 

should ensure that appraiser licensing fees are used by state appraiser regulatory agencies for 

appraiser oversight and enforcement through dedicated funds. 

Comments: Often, appraiser licensing fees are swept by state governors to help fill budget shortfalls or 

support non-appraiser oversight functions. Over the past year, the Appraisal Institute led an effort in the 

state of Maryland to dedicate appraiser licensing fees for appraiser oversight and enforcement We have 

established model legislation for other states - approximately 15 - that are at risk of having funds swept 

for other uses. 

6. Authorize Fannie Mae, Freddie Mac and other agencies, such as the Federal Housing 

Administration and the Veterans Administration, to halt purchase or guarantees of loans in states 

that maintain deficient appraiser regulatory regimes. This would serve as a strong incentive for 

states to maintain meaningful appraiser oversight and. enforcement systems. 

Comments: Today, the ASC has the authority to "de-certify" a state appraiser regulatory structure if it 

finds states are not able to enforce Title XI of the Financial Institutions Reform, Recovery and 

Enforcement Act of 1989. The ASC has never used this authority for a variety of reasons. The DoddFrank Act authorized the ASC to establish intermediate sanctions, such as fines and suspensions. To 

date, it has not established any policies in this area. 

7. Congress also should prepare for the future of Fannie Mae and Freddie Mac with regard to 

appraisal policy. Any ongoing federal support or role for either agency or a future related 

organization should maintain consistent appraisal rules like sister agencies such as FHA and VA. 

Further, we support the establishment of a rulemaking process that would clarify how appraisal 

services may be used in "subsequent transactions" such as refinancing and loan modifications. 

Comments: Today, loan servicers often utilize alternative valuation services, such as broker price 

opinions, out of confusion Or a lack of understanding regarding the flexibility of appraisal standards. At the 

same time, agencies appear unable or unwilling to establish procedures for lenders or loan servicers to 

24 The SAFE Act limits the National Mortgage Licensing System established by the CSBS from directly or 

indirectly offering education for qualifying or continuing education for mortgage originators. See 12 usc. 

5104(c)(3) http://www.law.comell.edu/uscode/htmlluscode12/uscsec1200005104----000-.html. 

18 
198 


76111.157

engage qualified real estate appraisers to perform more streamlined, or "limited scope" appraisal 

assignments. Many believe that there is only one type of "appraisal," when, in fact, there are an unlimited 

number of the types of appraisals, given the ability to tailor the scope of work to a particular client need. If 

lenders only require a quick update of an original appraisal, appraisers can do this. If obtaining both the 

market value and the liquidation value of the property would assist with loan review and determining 

whether to foreclose or work out the loan that too can be completed by an appraiser in a cost-effective 

manner. The agencies should have the ability to establish parameters for obtaining such services from 

appraisers. 

With regard to appraisal procurement, we encourage Congress to: 

1, Eliminate the Section 1122(d) of Title XI of FIRREA regarding member if nationally recognized 

professional appraisal organizations 

Comments: This would eliminate one more requirement imposed on lenders, while promoting 

professional development and participation in ethics and counseling programs that serve as additional 

layers of oversight and enforcement. 

2, Monitor the expected proposed rule from the Consumer Financial Protection Bureau on the 

Consumer Disclosure Form regarding implementation of Sec, 1475 of the Dodd-Frank Act, which 

authorizes the separation of appraisal and appraisal management company fees, 

Comments: We believe that the separation of appraisal and appraisal management company fees is a 

central component of efforts to improve appraisal quality. We hope the upcoming proposed rule from the 

CFPB provides for a separation of the Appraisal and Appraisal Management Company fees with a 

requirement for its disclosure. Barring this, we urge Congress to utilize its oversight function in this area. 

3, Monitor the implementation of the Interim Final Rule on Truth in LendingfAppraisallndependence, 

Comments: We also believe that it is central to the related provision in Dodd-Frank requiring the payment 

of customary and reasonable fees to appraisers. In this regard, we also call on Congress to utilize its 

oversight functions should a final rule regarding appraisal independence by the Consumer Financial 

Protection Bureau fail to commence in the coming year. We believe that Congress should demand that 

the CFPB issue a final rule that makes consistent the two presumption of compliance regarding 

compliance with customary and reasonable fee requirements. 

19 

76111.158

Subcommittee on Insurance, Housing and Commun

Opportunity 

House Financial Services Committee 

Hearing: Appraisal Oversight: The Regulatory Impact 

Consumers and Businesses 

Is 

e u 

The ViCII'i5 ore author not 

76111.159

Part 1: Real Estate Cycles and Bubbles 

Part 2: Government Interventions Are Almost 

Always Pro-cyclical and Exacerbate the Nature a

Duration of the Real Estate Boom - Bust Cycle 

Part 3: In Property Valuation, Market Fundamen

Matter 

Part 4: Property Valuation: A Return to Market 

Fundamentals 

Part 5: Recommendations 
201 


76111.160

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76111.161

The real estate cycle in five stages: 

2. Coofidence 

1. Improvement 

'\. 

<I. ConlJuision 

/p'reSSllre 

5. Quiescence 

Sources: S. J. Loyd (Lord Overstone), "Tracts and Other Publications on Metalic and Paper Currency,", 18

Edward Chancellor, "Between Errors of Optimism and Pessimism", GMO White Paper, 2011 

76111.162

What is a bubble? 

• "A bubble is when current home prices (or price of any 

asset) substantially deviates from its fundamental value

• "A sharp rise in the price of an asset or range of assets i

continuous process, with the initial rise generating 

expectations of further rises and attracting new buyers

generally speculators interested in profits from trading 

rather than its use or earnings capacity. The risk is then 

followed by a reversal of expectations and sharp decline 

price, often resulting in severe financial crisis-in short, 

bubble bursts. * * 

'FRB of San Francisco Economic Letter, October 1, 2004 ** Charles Kindleberger, "Bubbles," 1987 

76111.163

Observation: Real estate is cyclic

• Except for the Great Moderation, over the last 60 years re

house prices have followed 10 year cycles: 

u.s. Housing Follows 3 More or Less Regular Cycle 

u.s. Median House Price Z-Score 

2 +---------------------------------------1"1---------------------------------.-------------------------------1\+1 

E 

o 

'1 " 

N 

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c 

E 0 

Iill 

" 

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17-Year Cycle 

-2 +-----------------1t-------------------------------------------------------.----------------------------------------------1 

1963196819731978 1983 19881993 1998 2003 2008 

Sowce, Bureau otrhe Censvs, GMO As of 6130/11 

The 17-year cycle's peak is at 2.3 standard deviations or the 98th percentile. 

Source: Edward Chancellor, "Between Errors of Optimism and Pessimism", GMO White Paper, 20

76111.164

Observations: Length of real estate uptu

and downturns 

• Internationally upturns last an average of 6 years (U.S. 3.5 

years) and downturns an average of 4.5 years (U.S. 5 year

Complete upturns Complete + ongoing upturns 

Complete dovmtums Complete + ongoing eio'Allturns 

Sample 

49 

55 

49 

62 

Duration (quarters) 

Mean 

24.1 

28.0 

18.2 

18.4 

StDev 

14.8 

20.6 

8.7 

12.5 

Amplituce 

Mean StDev 

61.3 563 66.7 6D.1 

30.7 28.4 

28.8 27.5 

• The U.S.' last upturn lasted 11.75 years. IMF Working Pap

How Long Do Housing Cycles Last?, October 2011 

76111.165

Part 2: Government Interventions A

Almost Always Pro-cyclical and 

Exacerbate the Nature and Duration 

the Real Estate Boom 

- Bust Cycle 

76111.166

u.s. - the world leader in distortionary housing policy interven

• An alphabet soup of institutions -FHA, GNMA, Fannie, Freddie, and FHlBs 

• Affordable housing mission - FHA, Fannie/Freddie affordable housing goals

National Homeownership Strategy, eRA, and HUD's Best Practices Initiative 

Overleverage and excessive reliance on debt: 

National Homeownership Strategy: eliminate downpayments, promote loosened cre

FHA's low down payment lending HUD, a social welfare agency, as regulator of the GSE's affordable housing mission. 

Fannie/Freddie's leverage, preferred stock advantages, and favorable risk based capit

Favorable rules for 2nd lien lending (as to capital and 1st mortgage lender can't prohib

Tax deductibility of interest 

30 year fixed rate mortgage/interest only loans/negatively amortizing loans 

Over reliance by the Fed on lower rates as its weapon of choice 

Miscellaneous 

Limited use of prepayment penalties 

De jure and de facto limits on recourse/deficiency judgments 

Liberal capital gains exemption 

Pro-cyclical loan loss reserving and FDIC premium policies 

Widespread use ofthe GSEs' automated underwriting systems 

Nationalization of the GSEs' emasculated appraisal principles 

Extensive use of ARMs as an affordability tool 

Extensive reliance on originate to distribute and securitization 

Freely pre-payable 30 year fixed rate loan promoted huge volatility in origination vol

In 2000 originations totaled $1 trillion versus $4 trillion in 2003. About 50% of all mortgages outsta

12.31.03 were originated in 2003. Delinquency rates were suppressed by raising prices and refinanc

Homes became ATMs. 

76111.167

An explicit policy to eliminate downpaymen

% of home purchase volume with an LTV 

or ClTV >=97% 

30.000/0 

25.CO% 20.CO% 

15.00% 

10.000/0 

5.000/0 

0.00% 

o Q m 0 N a q 

00 00 ro m m moo 

0 

M N 

--% of home pllrchase 

volume with an LTV or (LTV 

• A loan's equity represents the margin provided by a borro

Debt/equity = leverage 
209 


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76111.169

• 

• 

A return to market fundamentals is needed 

precisely because real estate is cyclical 

Drivers of the real estate cycle: 

Demand created by population growth and family formation 

- Growth in income and jobs: 

- Natural lags - demand tends to grow faster than supply 

Problem areas 

Accelerating growth and ease of credit 

Pro-cyclical government policies 

Human psychology and bubbles 

A view of this time is different 

Current value practices have devolved; no longer adding value to the financial tran

• Unique market events cause price bubbles 

While policies promoting the elimination of down payments and increased investo

leverage, delinquencies were muted. 

Homes as ATMs supported the Great Moderation 

• While a bubble's deviation from fundamental value relationships is difficu

observe, benchmarks provide valuable insight: 

Market value-to-rent ratio 

Market value-to-replacement cost 

Home price-to-median income ratio 

76111.170

Market-value-to-rent ratio: deviatio

from fundamental value 

Price-to-Rent: Case-Shiller and Core logic House Prices 

-CoreLogic HPI (NSA) -Case-Shiller Composite 20 

2.0 

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76111.171

2.5 

1.5 

0.5 

Market value-to-replacement cost ratio: 

deviation from fundamental value 

Ratio of National Real Home Price Index and Real Building Cost 

Index (Source: Shiller) 

--Ratio of Rea! Home Price Index and 

Cost Index 

o 
213 


76111.172

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Market value: deviation from the mean 

200 

175 

150 

125 

100 

75 

• Compiled from Robert Shiller's updated historical housing market data used in his book

Irrational Exuberance (Princeton University Press, 2000; Broadway Books, 2001; 2nd ed

2005). Data available at 

76111.174

Booms and busts: reversion to the me

• It impossible to predict when a real estate peak will be reached 

with certainty, only that a reversion to mean will likely occur. 

• Common characteristics include: 

Real estate valuations two standard deviations above the long-te

trend 

• Market value-to-rent and market value-to-replacement cost deviations f

mean are indicators 

• Median home sales price-to-median household income is also an indicat

Above trend credit growth 

• This serves to perpetuate growth 

Appearance or reappearance of new or more leveraged forms of 

lending 

High levels of construction 

Speculative purchases that ignore fundamentals like rents vs. exp

Increasing levels of fraud 

Rising early payment defaults - this can be late in the game 

76111.175

Market value-to-rent ratio: reversio

to the mean 

Price-la-Rent: Case-Shiller and Corelogic House Prices 

""" Recession -Cotetoglc HPI (NSA) -Cese-Shllier Composite 2.0 

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76111.176

2.5 

Market value-to-replacement cost

reversion to the mean 

Ratio of National Real Home Price Index and Real Building Cost 

Index (Source: Shiller) 

--Ratio of Real Home Price Index and 

Cost Index 

76111.177

Media home price-to-median income: 

reversion to the mean 

The National Median Price·to·lncome Ratio Has Returned to Its Long-Run Average 

II 

76111.178

Market value and mortgage debt: reversio

to the mean 

• Reversion to the mean: we are getting close on house prices but have a 

way to go on mortgage debt: 

2/)0% 

180'}1 

14<m 

UO% 

100% 

Q. 80% 

60% 

40% 

20% 

()X 

• Will the losses be massive? Yes. The remaining questions are when wil

be taken, in what form, and by whom? 

76111.179

Booms and busts: feedback loops and 

reversion to the mean 

• The role of feedback loops: 

Feedback loop definition: the return to the input of a part ofthe ou

• A self-reinforcing loop, that steadily grows in strength, supporting the up o

trend. 

- An event influenced by positive feedback will tend to deviate from a mean. 

- If only positive feedback mechanisms are governing a system, this positive loop is ca

"exploding". 

- Uncontrolled feedback - a boiler without a thermostat 

• A self-correcting or limiting loop, that reduces in strength until the trend sy

comes to rest. 

- An event influenced by negative feedback will tend toward a mean. 

- All other things being equal, negative feedback loops are auto-regulating. 

- Needs to be self-correcting, not reliant on an ad hoc decision 

- Controlled feedback a boiler with a thermostat 

• Policies need to be evaluated as to whether they are pro-cyclical 

(positive or self-reinforcing feedback lor counter-cyclical (negativ

limiting feedback): 

Pro-cyclical policies reinforce both a boom and a bust. 

- Counter-cyclical policies dampen both a boom and a bust. 

• During this bubble all policies were pro-cyclical. 

* http://www.economicswebinstitute.org/glossary/feedback.htm 

76111.180

• • 

The role of pro-cyclical policies: 

Supports/reinforces the cycle 

Generally: 

Underwriting standards and loan products 

Loan loss reserve provisioning 

Deposit insurance premiums 

Fair value accounting rules - marked-to-market of illiquid assets 

• Economic or intrinsic value 

"An increase in house prices, whether driven by demand momentum or 

effects of governmental policies or institutional changes, can have a colla

feedback effect: once collateral values increase, lenders are willing to len

even more to households, feeding the housing price boom."* 

In the U.s. "relaxation in lending standards was higher in areas with faster rates o

price appreciation."* 

• Appraisals 

Market value - if prices rising, values are rising, if prices are falling, value

falling 

Between new sales and cash out refinances, a large portion of the mark

(including illiquid refinances)is constantly being "marked-to-market" 

• Stabilized or mortgage lending value based on price trends, fundamentals, and ec

value (value as a rental and replacement cost) 

*IMF Research Bulletin March 2010 
222 


76111.181

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Fundamentals of modern appraising: 

• When modern appraisal practice was developed in th

1930s and 1940s, determining a property's value 

required the reconciliation of four valuation principle

- "The principle of replacement: The estimated cost of 

replacement fixes an upper limit of valuation. 

- The principle of substitution: the cost of acquiring an 

equivalent substitute [or comparable] property fixes the up

limit of valuation whether accomplished by (1) constructing 

identical or equivalent improvements on an equivalent site 

(2) purchasing an already completed equivalent property at 

price at which an effective supply of equivalent properties 

available on terms assumed in the valuation [today this is c

comparable value]. 

- The principle of income capitalization: A properly made 

capitalization of expected income [rents] fixes an upper lim

valuation. 

- The principle of suitability or appropriateness: Unless 

proposed new building improvements will be appropriate t

site and neighborhood, valuation cannot be as high as 

replacement cost." 

76111.184

Leverage and valuation methodolog

• Property valuation is not unique in the 

challenges it faces and must learn from oth

disciplines and relearn from its past: 

- Margin requirements on stocks and other 

securities. 

- Common stock valuation 

• Current stock price vs. price to earnings vs. balance 

sheet/cost to replicate 

- Valuing securities holdings 

• Mark-to-market vs. stream of income 

76111.185

Appraisal methodology has morphed into a pos

feedback loop divorced from fundamentals 

• Over time the principles of replacement and income capitaliza

came to be relied on less and less until they were made option

and eventually ignored, leaving comparable sales as the sole 

determinant of value. 

- Even when used, they were largely derived from market value 

• In the lead up to the mortgage meltdown, appraisal methodol

had but one input leading to one inevitable output: 

- Boom induced comparable sales prices led to a predictable output: a b

induced value for the subject property. 

• The appraiser is left with determining "the price at which a property m

sold", not its value or more importantly, its value for lending purposes

• Capacity to generate rental income and a property's replaceme

cost are fundamental determinants of stabilized value. 

- The long-term relationship of market value to key fundamentals should be tracked, 

evaluated, and stabilized. 

76111.186

Fundamentals of appraising: feedback loop

and reversion to the mean 

• Experience demonstrates that a high percentage of the 

correction needed to revert to the mean is the result of price 

drops, not increasing rents, rising incomes, or higher replace

costs. 

• Alternatively, a stabilized value could also be provided. 

"[t]he value of a property as determined by a prudent assessment o

future marketability of a property taking into account long term 

sustainable aspects of a property, the normal and local market cond

and the current use and alternative appropriate uses of a property. 

Speculative elements shall not be taken into account in the assessm

the mortgage lending value. The mortgage lending value shall be 

documented in a clear and transparent manner."* 

Unlike market value, stabilized value cannot be determined solely on the ba

comparable sales. 

Speculative elements tie directly to excessive speculation, market value-to-

deviations, and market value-to-construction cost deviations. 

Tracking fundamental relationships over time is the key to determining a sta

or non-speculative value . 

• Source: Definition of Mortgage Lending Value: International Valuation Standards Council, Implementation of Bas

Standards in the EU, 2006 

76111.187

Mortgage Lending Value (MLV) 

• Conservative valuation of real estate 

Assessment of the MLV on the basis of detailed statutory and regulatory crit

Based on long-term sustainable features of the property 

Market value (comparable method) is the upper limit for the MLV 

Considers normal regional and local market conditions and fundamentals 

• Does not take into account economically induced fluctuations in value or speculative e

Takes into account long-term nature of property loan 

• MLV applies throughout the entire life of the loan. 

• Market value relates to a point in time 

• MLV and market value are two different value concepts and are calculated independe

Grateful thanks to Reiner Lux, Managing Director, HypZert GmbH, Berlin for MLV background material 

76111.188

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Mortgage Lending Value (MLV) 

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76111.189

• 

Role played by market value-to-rent relationsh

Practical basis - the price of housing is determined by supply and 

demand: 

All things being equal - a rising population, income growth, supply limita

and geographic desirability affect rents and home prices in a similar man

• "The fundamental value of a house is the present value of the future housin

service cash flows [in lieu of rents] that it provides to the marginal buyer. In 

functioning market, the value of the housing service flow should be approxi

by the rental value of the house." FRB of San Francisco, October 1, 2004 

• The direct substitution for owning a home is renting 

• The price to rent ratio measures this relationship. As standards loosen durin

boom, marginal households switch from renting to owning, driving up home 

& reducing rental demand. 

• When a deviation in the ratio occurs: liThe majority of the movement of the 

rent ratio come from future returns, not rental growth rates. This [is not 

comforting], as it implies that price-rent ratios change because prices are ex

to change in the future, and seemingly out of proportion to changes in renta

values .... If the ratio is to return to its average level, it will probably do so thr

slower house price appreciation." FRB of San Francisco, October 1, 2004 

76111.190

Role played by market value-to-rent relations

• Practical basis - the market value of housing is 

determined by supply and demand: 

When things are not equal: 

• Low rates, readily available credit and loosened credit standard

(higher leverage) can increase home purchase demand 

- Increased leverage causes a greater effect on home prices than rents 

» The same amount of savings can by a more expensive house 

» The same income can buy a more expensive house » These stimuli do not increase the ability to pay higher rents » By moving demand from rentals to purchase, rents can be kept 

• Owner occupied homes have an "ownership premium" 

- This premium goes up when owning or investing in a home is viewed 

favorably compared to renting. This psychological change can help 

promote a bubble. 

• High levels of speculative investing - either by disclosed invest

or through fraud 

- An investment based on fundamentals or speculation based on depa

from fundamentals. 

- If the back up plan is renting out, does it cash flow or require a subs

- Ultimately rents determine value - "rush to the exits" 

76111.191

Role played by market value-to-rent relations

• Theoretical basis: 

Asset valuation (such as a security): two fundamental measures of 

value 

• Economic or intrinsic value 

- Challenges: estimating future cash flows and calculation of a discount rate 

• Current market value 

- Challenges: may not be fungible or liquid, subject to "artificial" 

supply/demand imbalances, and liquidity squeeze 

Normally these give substantially similar results, but they can and d

diverge, sometimes by substantial amounts 

• Valuation of "opaque" securities during illiquid distressed markets

Fair value accounting (FVA or mark-to -market) rules force the 

liquidation at fire sale prices, creating a vicious cycle. Cash flow wa

initially ignored, causing market prices to fall below long-term 

realizable economic value. 

• During bubbles credit spreads tighten and higher risk assets gain 

value, allowing FVA to feed the expansion of bubbles. More levera

increases demand for risky assets and can further narrow spreads. 

of these effects are highly pro-cyclical. 

By decoupling market values from rents, a similar result occurred 

during the bubble. Market values greatly exceeded economic valu

76111.192

Role played by market value-to-rent relations

• Theoretical basis: 

- Over time, the value of an asset is determined by the inco

can generate 

• While the relationship between price and rent can deviate, overtim

this relationship is fairly consistent, meaning it reverts to the mea

- Automatically corrects for normal inflationary distortions 

• When a deviation in the ratio occurs: "The majority of the movem

the price-rent ratio come from future returns, not rental growth ra

This [is not comforting], as it implies that price-rent ratios change 

because prices are expected to change in the future, and seeming

of proportion to changes in rental values .... If the ratio is to return 

average level, it will probably do so through slower house price 

appreciation." FRB of San Francisco, October 1, 2004 

- The ratio of market values to rents has reverted to its long

average four times between 1970 and the mid-1990s [197

1975,1983, and 1995]. Between 2000 and 2006, the ratio 

dramatically above the long-run average and has been mo

back toward it ever since then. IMF Research Bulletin, March 2010 

76111.193

Market value-to-rent relationship: empirical eviden

Annual 

Rent! 

Sales 

Price 

(2005.)* 

HPI 

Change 

** 

3.1% 

-21% 

Nat City +35 

(2005) 

*** 

4.1% 4.6% 4;9% 

-31% -32% -14% 

+44 +54 +18 

5% 6;1% 7.6% 9.3% 9.5%10

-47% -22% -5% +1% -18% -

+65 +21 +12 -16 +2 -

*Smith & Smith, 2006, "Bubble, Bubble, Where's the Housing Bubble?" Comparable properties with sales price and ren

** OFHEO/FHFA MSA HPls Q2:2006-Q2:2011, http://www.fhfa.gov/Default.aspx?Page-216&Type-summary 

*** National City"s over value/under value index based on a regression analysis of house prices, income, density, and 

interest rates as reported in "Bubble, Bubble, Where's the Housing Bubble?" 

76111.194

Role played by market value-to-replacem

cost relationship 

• "The principle of replacement: The estimated cost of 

replacement fixes an upper limit of valuation. 

- While the relationship between sales price and construction 

replacement cost (excluding land) can deviate, overtime this 

relationship is fairly consistent, meaning it reverts to the mean. 

- When a boom induced deviation in the market value-to-replacem

cost ratio occurs, it is followed by reversion to the mean. 

- After a boom induced deviation, the majority of a reversion comes from 

house price declines, not replacement cost declines (unless the boom is 

followed by a broad based deflationary period)." 

• On a national indexed basis the ratio of house prices to 

replacement costs reverted to its long-run average three 

times between the early 1970s and the mid-1990s [197

74, 1983, and 1994]. In the early- to mid-2000s, the rati

rose dramatically above the long-run average and since 

2005-2006 has been reverting to this average. 

76111.195

450.0 400.0 

350.0 

300.0 

250.0 200.0 

150.0 

100.0 

50.0 

0.0 

450.0 400.0 

350.0 

300.0 

250.0 200.0 

150.0 100.0 

50.0 

0.0 

500.0 

400.0 

300.0 

200.0 

100.0 

0.0 

Atlanta Boston Charlotte 

1000.0 450.0 

--MarshaH- 400.0 --Ma

Swift 800.0 Swift 350.0 

construction construction 300.0 cost index 600.0 cost index 250,0 (1978=100) (1978=100) 200.0 

400.0 

--FHFA home --FHFA home 150.0 --FH

price index 200.0 price index 100.0 

(1978=100) (1978=100) 

50.0 

0.0 0.0 00 N a 00 N W a 00 N W a 00 N W a 

00 00 m m a a 00 00 m m m a a 00 N W a 00 N W a 

m m m m m a a a O"l 0') 0') 0') 0'1 0"1 a a a 00 00 0') 0') 0') a a M M rl N N N 

M M M M c1ivelan"'d 0') mO')O') 0') 0') a a a rl rl .--t M rl rl N N N Chicago Dallas 

350.0 

--Marshal!- 300.0 

Swift 250.0 construction 

cost index 200.0 

(1978=100) 150.0 

--FHFAhome 100.0 

price index 

(1978=100) 50.0 

0.0 

00 "' g] gg "-on 0') 0'1 a a 

M rl rl N N 

Denver 

--Marsha!!- 400.0 

Swift 350.0 

constructio 300.0 

n cost index 250.0 

(1978=100) 200.0 

150.0 

--FHFAhome 100.0 price index 

(1978=100) 50.0 

0.0 

co m co M 00 m co 

1'-- 00 00 0') 0'100 

;::: ;::: 2 

00 N <:t 00 N \.D a 

0"1 0') a a rl 0'1 0'100 a 

N 

00 (r) co nl 00 i"r") 00 

r--- 00 00 O'l 0') a a 

;::: ;::: 

--Marshal!-

Swift 

300.0 

250.0 

constructiorT200.0 

cost 'Index 

(1978=100) 150.0 

--FHFA home 100.0 -F-.-.. ---.-----.-.... -. 

price index 50.0 +--_ .... -...... -_ .. -...... -

(1978=100) 0.0 

00 rn 00 nl 00 rn 00 

r--- 00 00 (J') (J') a a 

(J') (J') (J') (J') (J') a a 

rl ..... rl ..--4 ..--4 N N 

--Marsh

Swi

concos

(19

--FHFA

pric

(19

las Vegas 

--MarshallSwift 600.0 500.0 

cons truction400.0 cost index (1978=100) 300.0 

--FHFA home 200.0 

price index 100.0 

(1978=100) 

0.0 

00 N a 00 N a 

r--- 00 00 (J') (J') (J') a a ..--4 

--Mar

cc(

--FH

p

(

76111.196

Los Angeles Miami Minneapolis 

1000.0 800.0 500.0 --Marshal!- " --Marshall- Swift 700.0 Swift --Mars

800.0 400.0 

construction6OO,O construction c

600.0 cost index 500.0 cost index 300.0 c

(1978=100) 400.0 I (1978=100) (

400.0 300.0 200.0 

--fHfA home 200.0 ",......,/ --FHFAhome --FHF

200.0 price Index price index 100.0 p

(1978=100) 100.0 (1978=100) (

0.0 0.0 0.0 

00 rr) 00 rn 00 m 00 "' co 00 co 00 co "' 00 N 0 q 00 N 0 r-- 00 co 0') O'l 0 0 00 00 '" '" a a 00 00 0') 0') 0') a a 0) 0) 0) 0) 0) 0 0 '" '" '" a a 0) 0) 0) 0) 0) 0) a a a rl rl rl rl N N rl rl rl N N rl rl rl rl rl N N N 

New York Phoenix Portland, OR 

1200.0 --Marshall- 600.0 600.0 1000.0 Swift 500.0 --Marshall-SwiftSOO.O --Mars

construction400.0 f\ construction 400.0 c

800.0 

cost index J \ cost index c

600.0 (1978=100) 300.0 (1978=100) 300.0 (1

200.0 400.0 --fHfA home 200.0 --FHFA home --FHF

200.0 price index 100.0 price index 100.0 p

(1978=100) (1978=100) 0.0 (

0.0 0.0 00 N 0 00 N 0 

00 rn 00 rn 00 m co 00 N 0 00 N a r-- 00 00 0) 0) 0) a a rl 

r-- 00 co 0'1 0'\ 0 a r-- 00 00 0) 0) 0) 0 0 rl 0) 0) 0) 0) 0) 0) a a 0 

0) 0) 0) 0'1 0'\ a a 0) 0) 0) 0) 0) 0) 0 0 0 rl rl rl rl rl rl N N N rl rl rl rl rl N N rl rl rl rl rl N N N 

San Diego San Francisco Seattle 

800.0 800.0 

700.0 --Marshal!- 1000.0 --Marshall· 700.0 --M

600.0 Swift 

construction 800.0 Swift 600.0 

500.0 construction 

cost index 500.0 

400.0 600.0 cost index (1978=100) (1978=100) 400.0 

300.0 --FHFAhome 400.0 300.0 

200.0 --FHFAhome --FH

price index price index 200.0 

100.0 (1978=100) 200.0 (1978=100) 100.0 

0.0 

"' co "' co co "' 0.0 0.0 "' "' '" a a "' co § :J\ co "' "' M "' co co "' '" '" '" '" 00 a a r- oo "' '" a a ,.., ,-< ,-< rl ;':l '" '" a rl rl N 

76111.197

Tampa 

600.0 

500.0 

400.0 I 

300.0 L/ 

200.0 100.0 -t" 

0.0 

00 rl 0 m m N 00 

r---OOOOOOO'lCTlCTlCTlOOO 

m CTl O'l m m m m moo 0 

rl rl rl rl rl rl rl rl N N N 

--Marshall-Swift 

construction cost 

index (1978=100) 

--FHFA home price 

index (1978=100) 

Washington, DC 

800.0 

600.0 

400.0 

200.0 

0.0 -h;-"-'TI"TnT""TrrnTrn 

00 M 0 m N 00 

00 00 00 m m m CTl 000 

m O'l m m m m m CTl 0 0 0 

rl rl rl rl rl rl rl rl N N N 

---Marsha

const

index 

---FHFA 

index 

Source for construction cost data: Marshall & Swift/Boeckh 's Residential Construction Cost Index provide

author by Marshall & Swift 

76111.198

Land use restrictions may keep HPI/Cost 

relationship above the norm 

Demographia Land & Regulation Cost Index 

NEW DETACHED HOUSING: 2018 

Manti! Dallas San Diego 

DaJli."FcriVi'orth 

H:n.ston 

Mmneapoh,·St 

300.0 

250.0 200.0 

800.0 

--Marshall· 700.0 

5wift 600.0 construction 

cost index 500.0 

PortlJnd 150.0 +-/I'..;;JiI"' ......... .... . (19780 100) 400.0 

--Ma

Falelgh·Cllrharfl 

SL 

SanOiego 

St=attl .. 

Wilsringtor-6altimore 

10 12 

100.0 

14 

50.0 

0.0 

Demographia Land & Regulation Cost Index 

NEW ATTACHED HOUSING: 2010 

H 0 to n 

Pi!\01 

St louts 

5.11> Diego 

co m co m C() M co 

o 0 o 0 

'" N 

--FHFAhome 

price index 

(19780 100) 

300.0 

200.0 

100.0 

0.0 

C() (T) co M co m co 

r-- co 00 0'1 moo 

Estimated Land & Regulation Costs 

NEW DETACHED HOUSING: 2010 

Atlanta 

Oallas·fortWorth 

!ndhHl<lpol,s 

Mino€,lpolis·$t,Paul 

Portland 

R,l1eigh·Ourham 

$tlOllh 

SaflDlego 

Seattle 

--FH

SO S)O,OOO SIOO.COO $150.000 S200.000 moooo 

76111.199

Using fundamentals to estimate 

overvaluation 

• IHS Global Insight's Over/Under Valuation Index (form

Nat City Index) demonstrates the correlation between 

fundamentals and home prices at the MSA level using

- House prices, interest rates, household incomes, populat

densities, and any historical premiums or discounts over 

Price 

Over Change 

ValllaUon (%) 

200C,10 

:LLJO:"'04 2UU!ol 

Los Angeles, CA 05.9 -29,$ 

Sacramento. CA -1'1,9 

Mi;jlfli, FL 19/1 35,8 

O<lkl<UIU, CA 16,7 39,9 

SUfi Ju:.;u, C/\ 4U3 -20,0 

PhOonix, AZ -:30.5 

Wll:.;liillglull, DC 38,3 -I e" 1 

San Diogo, C/\ 313,$ -31,5 

I ;1C, \/(}<]Ilr. NV .1'" ."1 -ri71 

nP.lroil. MI ?,4/ -elfd) 

Source: HIS Global Insight, House Prices in America: 4th Quarter 2009 Update 

76111.200

Using fundamentals to estimate 

overvaluation 

• For 330 tracked MSA, overvaluation and price 

change was highly negatively correlated at -0.8

with higher valuations closely associated with 

larger price declines. 

Map l' House Price Valuation. Fourth Quarter 2005 Map 2: Change in Median Price, 2005Q4 to 

'. 

{} 

co'" 4 • " c) 

Source: IHS Global Insight, House Prices in America: 4th Quarter 2009 Update 

76111.201

Comparing fundamentals 

COst Index 

IHS -3 25 -11 16 4 § 34 35 56 49 2< 26 39 34 37 3

Global Over 

Value 

Annualrent/ 9.5 4.9 nla 6.1 n/a 9.3 o/a nla n/a 4.6 nla nla nja n/. n/a n/a n/a nla 

FHFA HPI -13 -13 -8 -18 -11 -1 -3 -35 -54 -30 -40 -19 -13 -43 -18 -30 -IB ·10 

Change 

FHFA HPI/Marshali & Swift Cost Index: 14 positives for price drops>=10%, positives for minor price dro

misses. false positive 

IHS: 15 positives for price drops>=10%, positives for minor price drops, 2 misses, false positive 

Rent/sales price: 4 positives, 1 miss 

Spread data as of Q4:05, Rent/Price data as of 2005, FHFA HPI percentage change from peak to Q4:10 
243 


76111.202

Vl 

C 

o 

.-

+-' 

ro 

-0 

C 

OJ 

E 

E 

o 

u 

OJ 

c::: 

• • 

76111.203

Where and how to start: reporting a sales price ra

• Conclusion: in order to not start with the answer (sales price) 

requires reporting a sales price range: 

In a 1990 field test, 210 exterior valuations were conducted on recently sold homes. The ev

was not provided with the sales price, but was given a broad range of reference sales with a 

bedroom count from the same subdivision. Eighty percent were performed by non-apprais

The distribution was normal and 48% were within +/-5% & 76% were within +/-10%. 

60 

50 48 210 Appraisal sample 

40 

'ro 

... 

g; 30 

<:C 

.... 

0 20 

"* 10 

2' 1 

0 

-16t020% -l1tol9% -6 to 10% -Sto 5 0/. 61010% 11to19% >20% 

Difference between exterior appraisal versus actual 

76111.204

Where and how to start: comparable selection proc

• Comparable (comp) selection process must be transparent to the use

The current process starts with the sales price and uses it to narrow the 

selection of appropriate comps - generally ending up with 3 properties. 

• Under the best of circumstances, this process eliminates many of the most app

comps. 

• In unscrupulous hands, this allows the use of inappropriate comps to support an 

inflated value. 

- In a 1991 study of industry appraisal practices investigated whether selected comps were 

appropriate. 

» In a review of 14 appraisals, a total of 48 comps were selected and used by the appr

After a thorough database search, 65 potential appropriate comps were found. Eac

appraisal was desk and field reviewed for appropriateness of the 48 appraiser selec

comps. Only about half of the appraiser selected comps were found among the 65. 

(23) were found to be clearly inappropriate (if in doubt it was rated appropriate). 

• Information was shared with Fannie Mae's credit policy department. They ha

conducted a similar review and also found a high degree of inappropriate com

- In 2002 Fannie Mae issued Guide Announcement 02-02 pointing out the most common a

deficiencies. Virtually all involved the selection or reporting of comps: 

» Unsupported opinions of value; 

» Improper selection (or creation) of comparable sales; » Unsupported adjustments in the sales comparison approach; » Inadequate reporting of the sales history for the subject property and comparable s» Misrepresentation of the physical characteristics of the subject property, improvem

comparable sales. 

- In 2011 (eRN), Fannie states the biggest problem continues to be inappropriate comp sele

• Use statistical techniques to help the appraiser select and reconcile a

appropriate comps (and in the process eliminate inappropriate comps

76111.205

Where and how to start 

• Market value using comparable method sets t

upper limit for mortgage lending value 

- Report a sales price range 

- More robust and transparent comparable selectio

process 

• A stabilized value should also be provided: 

- Consider normal regional and local market conditions and 

fundamental relationships 

- Growing investor share would also be an indicator of increasing 

speCUlative activity - however this tends to be a symptom of a 

bubble, not a predictor. 

• A collateral expert at the lender should 

determine loan terms based on a review and 

analysis of market and stabilized values. 

76111.206

Conclusion 

• Only by taking steps such as these can 

property appraising be returned to its statu

as a profession and to its core function: 

- Assisting lenders in determining the maximum 

amount that may be prudently lent on a prope
248 


76111.207

[EJs: • 

s .... B...J 

GAR V E Y 5 C HUB E R T BAR E R 

February 21, 2012 

The Honorable Ben Bernanke 

WASHINGTON, D.C, OFfiCE. 

fifth flaar 

flallT mill building 

1 000 potom.ac .street IHI} 

w(JshinGton, d.e. 20007-3501 

TEL 202 965 7880 ,AX 202 965 1729 

OTHER OFFICES 

beijing, r:hinu 

new york, new york 

portland, aregon 

lieattle. wfl$hing£on 

GSGI..AW.CDM 

Please reply to MATTHEW R. SCHNErDER 

mschllcider@gsb/all'.com TEL "EXT 1787 

Chainnan, Board of Governors of the Federal Reserve System 

20th St. and Constitution Avenues, NW 

Washington, D.C. 20551 

Richard Cordray 

Director, Consumer Financial Protection Bureau 

1500 Pennsylvania Ave. NW 

(Attn: 1801 L Street) 

Washington, DC 20220 

Re: Petition for Reconsideration and Rulemaking: Interim Final Rule hnplementing the Appraisal 

Independence Provisions of Section 1472 of the Dodd-Frank Wall Street Reform and Consumer 

Protection Act 

Dear Chairman Bernanke and Director Cordray: 

We represent the American Guild of Appraisers, a membership organization of real estate 

appraisers. We write to you in connection with the interim fmal rule ("IFR", 75 Fed. Reg. 66554) 

implementing the appraisal independence provisions of section 1472 of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act ("Dodd-Frank"). As explained in detail in the attached "Petition 

for Reconsideration and Rulemaking", the Federal Reserve Board has contradicted the clear intent of 

Congress and failed to comply with the basic requirements of the Administrative Procedures Act. 

Briefly, Congress intended to insure that appraisals would be free from undue influence and 

competently performed, in part, by requiring that appraisers be compensated fairly with "customary and 

reasonable fees." The law prohibits using studies or surveys of fees paid to appraisers by Appraisal 

Management Companies as a basis to detennine what a customary and reasonable fee is. Yet, the IFR 

implementing this provision of Dodd Frank appears to pennit that which is prohibited in the law. As 

the GAO has found, while lendets generally pay AMCs and appraisers at the same rate, the ratcs paid to 

appraisers by AMCs are lower by at least 30%. Up to 80% of appraisals are ordered through AMCs. 

Congress could not have intended to establish two alternate methods of compliance that result in 

"customary and reasonable" fee standards for the same properties in the same geographic areas that 

differ by 30% or more. Moreover, in failing to provide prospective notice and opportunity to comment 

and response to comments in connection with the promUlgation of the IFR, the Federal Reserve Board 
249 


76111.208

;;::® 

s .... G 

B...J 

A R V E Y 5 C Ii U B E R T R ARE R Ben Bernanke 

Richard Cordray 

February 21, 2012 

Page 2 

acted in violation of the requirements of the Administrative Procedures Act. In this case, the defect goes 

to the heart of the requirements of the Administrative Procedures Act. 

The issuance of the IFR in its current form, without reasonable prior opportunity for notice and 

comment, has resulted in degradation in the quality and reliability of appraisals and injury to the 

appraisal industry. Pursuant to 5 U.S.C. § 553( e), and for the reasons set forth in the attached Petition, 

the American Guild of Appraisers hereby requests that immediate action, as set forth in the Petition's 

request for relief, be taken to prohibit reliance on information about fees paid by AMCs in determining 

what fees are customary and reasonable, consistent with the intent of Congress. 

~ Matthew R. Schneider 

Attachment 
250 


76111.209

Petition for Reconsideration and Rulemaking 

Submitted to 

The Federal Reserve Board and Consumer Financial Protection Bureau 

On Behalf of 

The American Guild of Appraisers 

Executive Summary 

Over the course of the last decade, as the volume of home mortgages increased, the 

percentage of appraisals ordered through Appraisal Management Companies (AMCs) 

dramatically increased. Currently, between 60 to 80% of all residential appraisals are ordered 

through AMCs, rather than directly from appraisers. 

When an appraisal is ordered through an AMC, the fees for the appraisal paid by lenders, 

and ultimately passed on to the borrower, arc generally the same as when the appraisal is ordered 

directly from an appraiser. However, a significant portion of the fee is retained by the AMC 

middleman. As a result, the fees actually paid to the appraiser hy AMCs are on average more 

than 30% lower than when the appraiser is hired by a lender directly, despite the fact that the 

effort required of the appraiser is the same in either case. In addition, AMCs frequently require 

inordinately short tum-around times for appraisals, placing an additional burden on appraisers, 

and often utilize appraisers from different locations who are unfamiliar with the subject 

property's neighhorhood. As the percentage of appraisal orders passed through AMCs has 

increased, appraisers have been forced to do more for less under conditions that compromise the 

integrity and quality of the appraisal process and threaten to drive many qualified appraisers 

from the profession. 

In response to concerns about the effect this situation was having on the reliability of 

home valuations, when Congress enacted the Dodd-Frank Wall Street Reform and Consumer 

Protection Act ("Dodd Frank") it required the Federal Reserve Board (the "Board") to 

promulgate appraisal independence regulations that include a mandate that creditors and their 

AMC agents "compensate fee appraisers at a rate thaI is customary and reasonable for appraisal 

services being performed in the market area being appraised." In particular, while Dodd Frank 

permitted customary and reasonable fees to be determined based upon objective third party 

infomlation such as fee studies, it explicitly provided that these studies exclude rates paid by 

AMCs. This provision reflected Congress' concern that the lower fees paid by AMCs, who have 

a dominant share ofthe market, would distort the detem1ination of what fecs are customary and 

reasonable, thereby undermining the intent of the requirement. 

Pursuant to Dodd Frank's direction, on October 28,2010 the Board published its interim 

final rule on appraisal independence (the "IFR"), which took effect December 27, 2010. In 

addressing thc Dodd-Frank mandate thaI appraisers be paid a customary and reasonable fee for 

appraisals, the Board created two alternate presumptions of compliance with this requirement. 

Under one presumption of compliance, creditors and their agents are presumed to comply if the 

fee they pay an appraiser is based on objective third-party information, provided iliat this 

infOlmation excludes fees paid by AMCs as required by Dodd-Frank. 
251 


76111.210

Petition for Reconsidcration and Rulcmaking 

February 21, 2012 

Page 2 

Under the other presumption of compliance, creditors and their agents are presumed to 

comply ifthe rates paid are "reasonably related" to recent rates paid for services in the same 

geographic market. In order to determine the rates recently paid in a geographic market, the IFR 

specifies that creditors and their agents may, but are not required to, perform a fee survey. 

However, this provision does not explicitly require that such a survey exclude rates paid by 

AMCs. In fact, in the preamble to the IFR, the Board specifically stated that "qualifying for this 

presumption of compliance does not require that a creditor use third-party information that 

excludes appraisals ordered by AMCs." In other words, under this presumption of compliance 

AMCs appear to be permitted to rely on the very same, significantly lower fees that they 

themselves pay appraisers-the very fees excluded under the first presumption of compliance 

and excluded by Congress in Dodd-Frank. The inclusion of this presumption of compliance as it 

currently is interpreted in the preamble to the IFR is, therefore, arbitrary, capricious and contrary 

to law. 

In addition, in issuing the IFR, the Board did not follow the standard notice-and-comment 

procedure required by the Administrative Procedure Act. Instead, the Board claimed that there 

was "good cause" to forgo the notice-and-comment requirements and, instead, provided a postpromulgation period in which the public was invited to submit comments. In rcsponse, tlle 

Board received over 1000 comments, many of which addressed the two conflicting presumptions 

of compliance with the customary and reasonable fee provisions. However, to date neither the 

Board nor any of the other federal agencies charged with development and oversight of the 

appraisal independence rules have responded to the comments received. Furiliermore, there has 

been no indication when, if ever, the IFR will be revised or replaced by a non-interim, fmal rule. 

In failing to provide prospective notice and opportunity to comment the Board acted in 

violation of the requirements of the Administrative Procedure Act. Moreover, the promulgation 

of a presumption of compliance that permits AMCs to rely on the low rates they themselves pay 

appraisers, which is contrary to law, is a dcfect that could have been timely cured if the Board 

had permitted the affected appraisal industry opportunity to provide meaningful input on the 

rules prior to their implementation. This is exactly the sort of misguided rulemaking that the 

notice-and-comment requirements are designed to avoid. 

In light of these concerns, pursuant to 5 U.S.C. § 553(e) the Ameriean Guild of 

Appraisers respectfully requests that the IFR be revised immediately to prohibit reliance on 

information about fees paid by AMCs in determining what fees are customary and reasonable, 

consistent with the intent of Congress. 

I. Background 

Generally, with a few specified exceptions, federal regulations require that an appraisal 

conducted by a state licensed or certified appraiser be performed for real estate related 

transactions. See, e.g., 12 C.F.R. § 323.3 (applicable to FDIC-regulated institutions). 

Historically, lenders have obtained appraisals either by using in-house appraisers, contracting 

with independent appraisers or appraisal firms, contracting with third party appraisal 

management companies ("AMC"s) who in tum subcontract with appraisers, or by relying on 
252 


76111.211

Petition for Reconsideration and Rulemaking 

February 21, 2012 

Page 3 

appraisals contracted for by the borrower's mortgage broker. United States Government 

Accountability Office Residential Appraisals: Opportunities to Enhance Oversight of an 

Evolving Industry 7 (July 20 II) ("GAO Report"). The cost of these appraisal services are 

generally then charged to the consumers obtaining the mortgages. !d. at 22. See also 12 C.F.R. 

§ 226.4(b)(4). 

In the mid-2000s, allegations arose that mortgage brokers and loan officers were 

pressuring appraisers into overvaluing properties in order to secure mortgage approvals. Id., at I. 

In the midst of the burgeoning foreclosure crisis, the Attorney General of New York filed a 

lawsuit alleging that Washington Mutual had inappropriately pressured an AMC to ensure that 

appraisers were used that would inHate property values. Id. The associated investigation 

ultimately led to an agreement between the New York Attorney General, Fannie Mae and 

Freddie Mac-who had purchased many of the Washington Mutual mortgages-and the Federal 

Housing Finance Agency ("FlIFA"), which regulates Fannie Mae and Freddie Mac. Id., at 2. 

As a part of this agreement, the llome Valuation Code of Conduct ("HVCC") was adopted, 

specifYing that loans sold to either Fannie Mae or Freddie Mac must meet certain requirements 

for appraisal independence. Id. 

Under the HVCC, either the lenders themselves or specifically authorized third parties, 

such as an AMC, were responsible for selecting and compensating appraisers, meaning that 

mortgage brokers and real estate agents were not permitted to select or compensate appraisers. 

In addition, the lenders' loan production staffs were prohibited from: 

(l) selecting, retaining, recommending, or inHuencing the selection of any 

appraiser for a particular appraisal assignment or for inclusion on a list or panel of 

appraisers approved to perform appraisals for the lender or forbidden from 

performing such work; and (2) having any substantive communications with an 

appraiser or appraisal management company relating to or having an impact on 

valuation, including ordering or managing an appraisal assignment. 

HVCC, § III (B). 

Though some lenders, as a result of capacity and operational pressures, had already 

switched to relying on AMCs prior to the HVCC becoming effective, the percentage of 

appraisals ordered through AMCs prior to 2009 when the HVCC went into effect was less than 

half. GAO Report, supra, at 32. After the advent of the HVCC, however, compliance concerns 

by lenders have increased the percentage of appraisals ordered through AMCs to somewhere 

between 60 and 80%. Id. Historically, independent appraisers and appraisal firms relied on local 

relationships with loan originators in order to secure appraisal jobs, but, in the post HVCC-era, 

most appraisals are now assigned through AMCs. Id.; see also letter from Daniel Drelich, 

President, NJ Chapter of the American Guild of Appraisers OPEIU!AFL-CIO, to the Federal 

Reserve Board (Dec. 23, 2010), 

http://www.federalreserve.gov/SECRS/2011/Januarv/20110120/R-I 394/R1394 122910 58913 332574998363 I.pdf. As a result of this shift, many small appraisal firms 

went out of business, some independent appraisers joined AMC panels in order to make a living, 
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while others switched to performing nonresidential appraisals or left the industry entirely. GAO 

Report at 32-33. 

While the fees paid by consumers for appraisals can vary significantly based upon the 

complexity ofthe appraisal and the regional market, industry estimates suggest that the average 

costs fall between $300 and $450 depending on location. Id. at 22. According to the mortgage 

industry, however, appraisal fees paid by borrowers are generally the same, regardless of 

whether the appraisal is ordered through an AMC. Id., at 24. In the case of appraisals for which 

appraisers are engaged by lenders directly, the entirety ofthe fee goes to the appraiser or 

appraisal firm. Jd. When appraisals are ordered through AMCs, however, AMCs keep at least 

30% ofthe fee. Id. As a result, appraisers forced to join AMC panels in order to obtain sufficient 

work found themselves being asked to perform the same amount of work for significantly less 

money. Jd. at 33. In addition, in some cases, AMCs apply pressure on the appraiser to guide the 

appraiser's value conclusion and insist on their meeting unreasonable deadlines. Jd. 

In testimony before the House of Representatives Committee on Financial Services, Jim 

Amorin, President of the Appraisal Institute, characterized the effect of the AMC industry (thcn, 

largely unregulated) on the appraisal process, stating: 

AMCs charge 'appraisal management fees,' the details of which are not fully 

disclosed to the consumer. Consumers unwittingly believe that this includes a 

quality appraisal when in fact it is typically a cut-rate substitute. Because AM Cs 

and lenders cram into these fees other undisclosed management charges, 

consumers are short-changed by quick valuations by AMC contractors paid a 

fraction of the normal compensation. 

H.R. 1728, The Mortgage Reform and Anti-Predatory Lcnding Act of2009: Hearing Before the 

H. Committee on Financial Services, III th Congo 72 (2009) (statemcnt of Jim Amorin, President, 

Appraisal Institute). 

II. Dodd-Frank Act Provisions 

In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 

111-203 (2010) ("Dodd-Frank"), revised Chapter 2 of the Truth In Lending Act, 15 U.S.c. § 

1631 et seq, to add requirements intended to ensure appraisal independencc. Dodd-Frank § 

1472. When the bill was introduced and passed by the House of Representatives in 2009, it 

included a provision requiring the Director of the proposed Consumer Financial Protection 

Bureau ("CFPB") to lead a Negotiated Rulemaking Committee to promul~ate appraisal 

independence requirements for residential loan purposes. H.R. 4173, II ot Congo § 4312 (as 

introduccd in the House of Representatives, Dec. 2, 2009). This provision required that the 

regulations promulgated pursuant to § 4312 "shall include a requirement that lenders and their 

agents compensate appraisers at a rate that is customary and reasonable for appraisal services 

performed in the market area ofthe property being appraised." Id., § 4312(b)(2). 
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When the Senate considered the House-passed version of RR. 4173, it approved an 

amendment in the nature of a substitute, which substituted a substantially different Senate 

version of the bill which did not contain a provision similar to § 4312. RR. 4173, II oth Cong. § 

4312 (as engrossed in the Senate with amendment, May 20,2010). When the joint conference 

met to reconcile differences between the House and Senate versions of the bill, however, thc 

conference added a substantially lengthier and more detailed section on appraisal independence. 

RR. 4173, 1I0th Cong. § 1472 (enrolled bill, final as passed both House and Senate.) The 

confercnce provisions specified that: 

Lenders and their agents shall compensate fee appraisers at a rate that is 

customary and reasonable for appraisal services performed in the market area of 

the property being appraised. Evidence for such fees may be established by 

objective third-party information, such as government agency fcc schedules, 

academic studies, and independent private sector surveys. Fee studies shall 

exclude assignments ordered by known appraisal management companies. 

Id. § 1472 (i)(l), Pub. Law 124 Stat 2192, § 129E(i)(l) codified at 15 U.S.C. § 163ge. Undcr 

subpart (3) of this provision, in the case of complex assignments, the required reasonable and 

customary fee should "reflect the increased time, difficulty, and scope ofthe work required for 

such an appraisal and include an amount over and above the customary and reasonable fee for 

non-complex assignments." Id. § 1472 (i)(3). 

The appraiser independence provisions of Dodd-Frank reflect Congress' cognizance that 

AMCs that order the vast majority of appraisals are agents of the lenders, and that the fees AMCs 

and lenders pay to independent, non-AMC employee appraisers for their appraisal services have 

an important bearing on the integrity and competence of appraisals. Accordingly, the 

legislation's definition of "Appraisal Management Company" reflects the AMCs' agency 

relationship with lenders (AMC defined as " ... external third party authorized either by a 

creditor .... or underwriter or other principal in the secondary mortgage market" to "recruit, 

select and retain" and "contract" with appraisers)(id, § 1 I 24(f)(4)(1 I)), and the term "fee 

appraiser" for purposes ofthe "reasonable and customary" fees provisions "means a person who 

is not an employee of the mortgage loan originator or appraisal management company engaging 

the appraiser." Id. § 1472 (i)(3). Further, the legislation reflects that Congress was aware of the 

fact that fees charged for appraisals coordinated by AMCs typically include more thanjust the 

fees paid by AMCs to appraisers. Accordingly, Congress amended RESPA to provide that the 

standard disclosure form may include clear disclosure of both the "fee paid to the appraiser" and 

the "administration fee" paid to the AMC. Id. § 1475. 

Thus, in adopting "reasonable and customary fee" requirements as an integral part of 

provisions intended to assure appraisal independence, Congress recognized the potential for 

harm to the public interest inherent in the AMCs' power: to retain and contract with appraisers; 

to determine how much to pay them; to disfavor individual appraisers who are independent and 

unwilling to bow to pressure; and to determinc what to charge their principals for the "package" 

of appraisal services performed by independent appraisers and "administrative" services 

performed by the AMC itself. Section 1472(i)(3)'s exclusion of appraisal assignments ordered 
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by AMCs as the basis of fee studies relied upon to establish compliance with "customary and 

reasonable" fee requirements can only be understood as reflecting Congress' awareness of the 

potential for harm inherent in the facts that the AMCs' current position as the major source of 

appraisal engagements gives AMCs an ability to control fees actually being paid to appraisers 

and degrade the appraisal process and that AMCs are essentially agents of their lender principals. 

To assure robust enforcement ofthe appraisal independence provisions, seetion 1472 

authorized the Federal Reserve Board (the "Board"), the Comptroller of the Currency, the 

Federal Deposit Insurance Corporation, the National Credit Union Administration Board, the 

Federal Housing Finance Agency, and the Consumer Financial Protection Bureau (the "Bureau") 

to "jointly issue rules, interpretive guidelines, and general statements of policy with respect to 

acts or practices that violate appraisal independence," within the meaning of § 1472. ld. § 

1472(g)(l). However, in addition to this pemlissive authority, section 1472 required the Board 

to: 

prescribe interim tinal regulations no later than 90 days after the date of 

enactment of this section defining with specificity acts or practices that violate 

appraisal independence in the provision of mortgage lending services for a 

consumer credit transaction secured by the principal dwelling ofthe consumer or 

mortgage brokerage services for such a transaction and defining any terms in this 

section or such regulations. Rules prescribed by the Board under this paragraph 

shall be deemed to be rules prescribed by the agencies jointly under paragraph (I). 

ld. § 1472(g)(2). 

III, Interim Final Regulations 

a) Procedural History 

Pursuant to the statutory requirements of Dodd-Frank § 1472(g)(2), on October 28, 2010 

the Board published an interim final rule ("IFR") implementing the appraisal independence 

provisions of section 1472. See Truth In Lending: Interim Final Rule, 75 Fed. Reg. 66554 (Oct. 

28,2010) (codified at 12 C.F.R. pt. 226.42). The Federal Register notice specified that "[t]his 

interim final rule is effective December 27, 2010." ld., at 66654. However, it also provided that 

"[t]o allow time for any necessary operational changes, compliance with this interim final rule is 

optional until April I, 20 II ," at which time the pre-existing appraisal independence rules at 12 

C.F.R. § 226.36(b) would be removed. ld. 

While the IFR would become effective as published, the Board nevertheless requested 

public comments, which it stated "must be received on or before December 27,2010." ld. In 

justifying its issuance ofthe IFR without complying with the notice and comment requirements 

of the Administrative Procedure Act, 5 U.S.c. §553, the Board relied upon the good cause 

exception at 5 U.S.C. §553(b)(B). Truth In Lending: Interim Final Rule, 75 F.R. at 66556. 
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Specifically, the Board found "that for this interim rule there is 'good cause' to conclude 

that providing notice and opportunity to comment would be impracticable and, therefore, is not 

required." [d. Its rationale was based on the faet that "Congress imposed a 90 day deadline for 

issuing the interim final rule" and that "90 days does not provide sufficient time for the Board to 

prepare and publish proposed regulations, provide a period for comment, and publish in the 

Federal Register before the statutory deadline." Id. The Board further expressed its belief that: 

Id. 

the Dodd-Frank Act's mandate that the Board issue interim final rules that will be 

effective before the issuance of permanent rules also supports the Board's 

determination that notice and comment are impracticable. Ifthe legislation had 

contemplated a notice and comment period, the rules issued by the Board could 

have been referred to as "final rules" rather than "interim final rulcs. 

b) Fair Compensation Provisions 

In order to implement the requirement in section 1472(i)(l) of Dodd-Frank that 

appraisers be paid a customary and reasonable fee, the IFR provides that: 

In any covered transaction, the creditor and its agents shall compensate a fee 

appraiser for performing appraisal services at a rate that is customary and 

reasonable for comparable appraisal services performed in the geographic market 

ofthe property being appraised. For purposes of paragraph (f) of this section, 

"agents" ofthe creditor do not include any fee appraiser as defined in paragraph 

(f)(4)(i) of this section. 

Truth In Lending: Interim Final Rule, 75 F.R. at 66582 (codified at 12 C.F.R. 226.42(f)(1)). 

The IFR provided that, in order to comply with the "customary and reasonable" fee 

requirement, creditors and their agents could rely on two alternative presumptions. Under the 

first, a creditor and its agents are presumed to comply if they "compensate the fee appraiser in an 

amount that is reasonably related to recent rates paid for comparable appraisal services 

performed in the geographic market of the property being appraised." Id., (codified at 12 C.F.R. 

226.42(f)(2)). The IFR further specified that, in determining this amount, creditors shall take 

into account the type of property, the scope of work, the time in which the appraisal services are 

required to be performed, the appraiser's qualifications, the appraiser's experience and 

professional record, and the appraiser's work quality" and shall make adjustments as necessary 

to ensure that compensation is reasonable. Id. 

In the supplement to part 226 providing the Board's staff interpretations, the Board 

clarified that for the purposes of meeting this presumption of compliance, creditors and their 

agents: 
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may gather information about recent rates by using a reasonable method that 

provides information about rates for appraisal services in the geographic market 

of the relevant property; a creditor or its agent may, but is not required to, use or 

perform a fee survey. 

!d. at 66586 (codified at Supplement I to Part 226, Comment 42(f)(2)(i)(2)). 

In order to be eligible for this first presumption of compliance, neither creditors nor their 

agents may "engage in any anticompetitive acts in violation of state or federal law that affect the 

compensation paid to fee appraisers." !d. Examples of the sort of prohibited anticompetitive 

acts include price fixing, market allocation, restricting individuals from entering the relevant 

geographic market or causing individuals to leave the relevant geographic market. !d. 

In addition to this first presumption of compliance, the IFR also provides a second 

alternative presumption, under which creditors and their agents are presumed to comply with the 

fee requirements if they base their determination on information about rates that: 

(i) Is based on objective third-party information, including fee schedules, studies, 

and surveys prepared by independent third parties such as government agencies, 

academic institutions, and private research firms; 

(ii) Is based on recent rates paid to a representative sample of providers of 

appraisal services in the geographic market of the property being appraised or the 

fee schedules of those providers; and 

(iii) In the case of information based on fee schedules, studies, and surveys, such 

fee schedules, studies, or surveys, or the information derived therefrom, excludes 

compensation paid to fee appraisers for appraisals ordered by appraisal 

management companies, as defined in paragraph (1)(4)(iii) of this section. 

!d., (codified at 12 C.F.R. 226.42(1)(3)). This presumption of compliance is consistent with the 

statutory language of section 1472 of Dodd-Frank which permits the use of objective, third-party 

evidence of reasonable and customary fees, such as studies, provided that "studies shall exclude 

assignments ordered by known appraisal management companies." Dodd-Frank § 1472 (i)(I). 

Under these two alternatives then, the information about fee appraisal rates on which 

creditors and their agents-including AMCs acting on creditors' behalf-rely may either be 

related to recent rates in the area, including those paid by AMCs, under presumption 1, or, under 

presumption 2, be based on aggregated third party data that excludes rates paid by AMCs. This 

discrepancy between the two presumptions was made explicit in the Board's explanation to 

Comment 42(f)(2)(i)-2 in the preamble to the lFR, which stated regarding the first presumption: 

As indicated by this comment, qualifying for this presumption of compliance does 

not require that a creditor use third-party information that excludes appraisals 
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ordered by AMCs, for example, as required to qualifY for the presumption of 

compliance available under § 226.42(f)(3), discussed below. 

Truth In Lending: Interim Final Rule, 75 F.R. at 66572. 

Thus, the interim final rule promulgated by the Board appears to permit reliance under 

the first presumption of compliance on fees paid by AMCs to appraisers, which is expressly 

prohibited under the second alternative. 

c) Post-Publication 

Following publication of the IFR, the Board received approximately 1300 public 

comments. Federal Reserve Board, Comments: Regulation Z - Truth In Lending Act [R-1394J, 

http://www.federalreserve.gov/generalinfo/foialindex.cfm''doc id=R1394&doc ver=I&ShowAll=Yes (last accessed December 5, 2011). In addition to hundreds of 

submissions by appraisers from across the country, these submissions included comments from 

Daniel Drelich, President of the New Jersey Chapter of the American Guild of Appraisers, which 

detailed the reduction in average appraiser fees that have accompanied AMC dominance of the 

market for appraisal services. Letter from Daniel Drelich to Federal Reserve Board, 1-2. In 

expressing the Guild's concern regarding the fee provisions of the IFR, he stated his agreement 

with the statement of Ann O'Rourke and Appraisal Buzz that: 

The existence of Presumption 1 is in conflict with the Congressional intent of 

Title 14 of the Dodd-Frank Act. In order to protect lenders and consumers, 

Congress recognized the critical importance of engaging appraisers at a fee that 

allows for thorough analysis and diligence by the most competent appraiser. Not 

engagement based on lowest fee and rushed completion expectations. 

Id., at 3. In order to reconcile the Board's regulations, Mr. Drelich recommended either 

removing presumption I, or if that was not an option, clarifYing that 100% of the charge to the 

consumer for an appraisal be paid to the appraiser, with any additional fees for AMC services 

paid by the lender. Id. 

Following the close of the comment period, though the regulations became effective 

December 27,2011 and mandatory on April II, I 2011, the Board has not responded to public 

comments, nor initiated any follow-up rulemaking processes for the purpose of promulgating a 

final rule. On July 7, 2011, the Board published its "Semiannual Regulatory Flexibility Agenda" 

in the Federal Register, which provided a timetable for further action on the IFR by "06100/11". 

Semiannual Regulatory Flexibility Agenda, 76. F.R. 40201 (July 7, 2011). Subsequently, 

however, primary responsibility for these regulations was transferred to the Consumer Financial 

Protection Bureau. See Identification of Enforceable Rules, 76 F.R. 43569, 43570 (July 21, 

20 II). The Board and the other named agencies still retain joint rulemaking authority under 

Dodd-Frank. Dodd-Frank § 1472(g)(I). The Board has indicated, however, that given the 

current volume of other pending regulatory action required by Dodd-Frank, several of which 
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have statutory deadlines in January of20 13, it is unlikely that any further action will with regard 

to the IFR will be fortheoming in the near future. Email from Lorna Neill, Division of Consumer 

and Community Affairs, Federal Reserve Board to Peter Vidi, National President, Amcrican 

Guild of Appraisers (Jan. 13,2012) (on file with author). 

Ill. The Board's Issuance of Interim Final Rules Without Notice and Comment 

Violates the Administrative Procedure Act 

The Administrative Procedure Act (the "AP A") requires that, prior to the promulgation of 

rules by a federal agency, "[g]eneral notice of proposed rule making shall be published in the 

Federal Register, unless persons subject thereto are namcd and either personally served or 

otherwise have actual notice thereof in accordance with law." 5 U.S.c. § 553(b). Furthennore, 

the AP A requires that: 

After notice required by this section, the agency shall give interested persons an 

opportunity to participate in the rule making through submission of written data, 

views, or arguments with or without opportunity for oral presentation. After 

consideration of the relevant matter presented, the agency shall incorporate in the 

rules adopted a concise general statement of their basis and purpose. 

5 U.S.c. § 553(c). The purpose of these requirements is to ensure the ability of affected parties 

to participate in the rulemaking process. As the Circuit Court of Appeals for the D.C. Circuit has 

explained: 

Section 553's notice and comment requirements are essential to the scheme of 

administrative governance established by the APA. These procedures reflect 

Congress' "judgment that ... infonned administrative decisionmaking require[s] 

that agency decisions be made only after affording interested persons" an 

opportunity to communicate their views to the agency ... Equally important, by 

mandating "openness, explanation, and participatory democracy" in the 

rulemaking process, these procedures assure the legitimacy of administrative 

nonns. 

Air Transport Ass'n a/America v. Department o/Transp., 900 F.2d 369, 375 (D.C. Cir. 1990) 

(quoting Chrysler Corp. v. Brown, 441 U.S. 281, 316 (1979)). 

Section 553 ofthe APA provides limited exceptions to the requirement for notice and 

comment, which pennit agencies to forego this process "when the agency for good cause finds 

(and incorporates the finding and a brief statement of reasons therefor in the rules issued) that 

notice and public procedure thereon are impracticable, unnecessary, or contrary to the public 

interest." 5 U.S.C. § 553(b)(B). However, as 

[t]he Senate Committee responsible for the APA warned: 
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"The exemption of situations of emergency or necessity is not an "escape clause" 

in the sense that any agency has discretion to disregard its terms or the facts. A 

true and supported or supportable finding of necessity or emergency must be 

made and published. "Impracticable" means a situation in which the due and 

required execution of the agency functions would be unavoidably prevented by its 

undertaking public rule-making proceedings." 

State of N J., Dept. ()( Environmental Protection v. Us. Environmental Protection Agency, 626 

F.2d 1038, 1046 (D.C. CiT. 1980) (quoting S.Doc. No. 248, 79th Cong., 2d Sess. 200 (1946». 

Consistent with this intent, in reviewing the use of these exceptions courts have 

repeatedly emphasized that "circumstances justifYing reliance on this exception are 'indeed rarc' 

and will be accepted only after the court has examined closely proffered rationales justifying the 

elimination of public procedures." Council of Southern Mountains. Inc. v. Donovan, 653 F.2d 

573,580 (D.C. CiT. 1981) (internal quotes omitted). See also New Jersey, Dep't of 

Environmental Protection v. United States Environmental Protection Agency, 626 F.2d 1038, 

1045 (D.C. CiT. 1980) ("it should be clear beyond contradiction or cavil that Congress expected, 

and the courts have held, that the various exceptions to the notice-and-comment provisions of 

section 553 will be narrowly construed and only reluctantly countenanced."); Coalition/or 

Parity, Inc. v. Sebelius, 709 F.Supp.2d 10, 19 (D.D.C. 2010) ("the 'good cause' exception to 

notice and comment rulemaking is to be 'narrowly construed and only reluctantly 

countenanced''') (quoting Jifty v. FAA, 370 F.3d 1174, 1179 (D.C. CiT. 2004); NRDC v. Evans, 

316 F.3d 904, 911 (9th CiT. 2003) ("the good cause exception goes only so far as its name 

implies: It authorizes departures from the APA's requirements only when compliance would 

interfere with the agency's ability to carry out its mission"). 

In issuing the IFR the Board based its finding that there was good cause to bypass notice 

and comment procedures on the fact that "Congress imposed a 90 day deadline for issuing the 

final rule." 75 F.R. 66556. This fact alone is not sufficient justification for bypassing notice and 

comment procedures. Rather, a long history of federal court cases: 

make clear that the exception is confined to emergency actions which are indeed 

rare and that the mere existence of deadlines for agency action does not in itself 

constitute good cause. In fact, courts have routinely declined to sanction recourse 

to the exception because of an impending deadline. 

Union of Concerned Scientists v. Nuclear Regulatory Com'n, 711 F.2d 370, 382 (D.C. CiT. 1983) 

(internal quotes and citations omitted). See also Methodist Hospital of Sacramento v. Shalala, 

38 F.3d 1225, 1236 (D.C. CiT. 1994) ("as a general matter, strict congressionally imposed 

deadlines, without more, by no means warrant invocation of the good cause exception." (quoting 

Petry v. Block, 737 F.2d 1193, 1203 (D.C. Cir 1984»; Air Transport Ass'n of America v. 

Department o(Transp., 900 F.2d 369, 379, (D.C. CiT. 1990) ("we have explained that statutory 

time limits do not ordinarily excuse compliance with the APA's procedural requirements") 

(emphasis in original); Us. Steel Corp. v. Us. E.P.A., 595 F.2d 207, 213 (5th CiT. 1979) ("the 
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mere existence of deadlines for agency action, whether set by statute or court order, does not in 

itself constitute good causc for a 553(b) (B) exception"), 

In those cases in which courts have sustained agencies' use of the good cause exccption 

there have been significant other factors, beyond simply the difficulty of meeting a statutory 

deadline, For example, in Philadelphia Citizens In Action v, Schweiker, 669 F,2d 877 (3d Cir. 

1982), the court upheld a challenge to a Department of Health and Human Services ("DHHS") 

interim final rulemaking implementing cuts made to family welfare bencfits as a part ofthc 

Omnibus Budget and Reconciliation Act of 1981 ("OBRA"). Under the OBRA, passed on 

August 13,1981, these cuts became effective October I, 1981. !d" at 878, In sustaining the 

DHHS' use ofthe good cause exception the court relied on a numbcr of contcxtual factors 

including: a) the urgency expressed by both Congress and the President in passing OBRA, b) thc 

requirement for the states that administer the program to have clcar fcderal guidancc prior to the 

effective dates ofthe cuts, c) the stringency of the 49-day time pcriod bctwcen passage of thc act 

and the effective date, d) the fact that delay in issuing interim final regulations would postpone 

nationwide implementation ofthc budget cuts bcyond thc Congressionally determined datc, e) 

the fact that DHHS had specified that the interim final rules would only be in place until a final 

rule was issued on November 20, 1981, during which time public comments would be solicited 

and considered, and e) the fact that DHHS was only obligated to follow notice and comment 

procedures by virtue of its own internal policy, as rulemakings regarding public benefits are 

expressly excluded from the APA notice and comment provisions under 5 U,S.C. § 553(a)(2), 

Id., at 881-886. 

Similarly, in Coalition/or Parity, Inc, v, Sebelius, 709 F,Supp.2d 10 (D,D.C. 2010), the 

court upheld a challenge to joint interim final regulations issued by DHHS and the Departments 

of Labor and Treasury (the "Departments") without notice and comment, in order to implement 

provisions of the Mental Health Parity and Addiction Equity Act of2008 ("MHPAEA"). The 

primary basis given by the Departments for bypassing notice and comment procedures was the 

need for prompt guidance to the regulated industry in light of the effective date of the MHP AEA 

!d., at 20, In scrutinizing the use of the good cause cxception in this context, the court made note 

ofthe fact that the Departments had first issued a request for information ("RFl"), in response to 

which they had received over 400 comments, including comments from plaintiff organizations 

expressing the same concerns at issue in thc lawsuit, which were considered by the Departments 

prior to issuing the interim final rules, ld. at 14-15. The court further notcd that, subsequent to 

the receipt of responses to the RFl, the Departments received a letter from 26 senators, as well as 

a similar letter from 73 members of the House of Representatives urging the Departments to 

quickly consider the comments received in response to the RFI and issue implementing 

regulations "to avoid misreprescntation of the law and to ensure access to these critical services," 

[d., at 22, 

Similarly, additional justifYing factors, beyond a mere statutory deadline, have generally 

been necessary to sustain use of the good cause exception in other cases where statutory 
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timelines were at issue.] In the case of the appraisal independence IFR, however, no such 

additional factors support suspension of notice and comment procedures. 

Unlike, the cases described above, the regulations at issue do not implement significant 

statutory revisions to complex, state-implemented federal benefit programs subject to a statutory 

compliance deadline. Neither is there potential for disruption to critical services without prompt 

issuance of regulations. Nor is there in this case any "surrogate" for notice and public comment, 

which was a factor in other cases. The Board did not issue a public Request For Information to 

solicit public input which it considered prior to issuing the IFR, nor did it make clear that the IFR 

would only be effective for a limited, specified time frame, after which it would promulgate 

replacement final rules. (In fact, to date there is no indication when, or even if, the IFR will be 

displaced by a final rulemaking.) The sole factor upon which the Board based its determination 

that the notice and comment process should be dispensed with as "impracticable" is its belief that 

the notice and comment process is too cumbersome for it to execute in the context of a 90 day 

deadline. This is clearly insufficient to meet the narrow construction of section 553(b )(B) 

intended by Congress and consistently reinforced by the courts. 

The Board observed that Section 1472 of Dodd-Frank "mandates that the Board issue 

interim final rules that will be effective before the issuance of permanent rules." Truth In 

Lending: Interim Final Rule, 75 F.R. at 66556. But this point lends no additional support to the 

Board's justification for dispensing with public notice and comments. The only rulemaking 

expressly mandated by Congress is contained in the section requiring to promulgation of the IFR. 

All other rulemaking referenced is not mandatory, but rather general and discretionary authority 

granted jointly to the Board, Bureau, FDIC, etc. providing that they "may issue rules, interpretive 

guidelines and general statements of policy with respect to the acts or practices which violate 

appraisal independence." Dodd-Frank § 14 72(g)(l). 

I See e.g Methodist Hospital of Sacramento v. Shalala, 38 F.3d 1225 (D.C. Cir. 1994) 

(upholding DHHS bypass of notice and comment procedures when bypass was specifically 

authorized by Congress in order to "prepar[e 1 regulations to implement a complete and radical 

overhaul of the Medicare reimbursement system" in slightly over four months); Petry v. Block, 

737 F.2d 1193 (D.C. Cir. 1984) (upholding Department of Agriculture regulations implementing 

OBRA cuts to administrative reimbursements under a child food benefit program based on the 

complexity of the reimbursement program, short time-frame in which the regulations were to be 

promulgated, and urgency and volumc of collective requirements placed on the Department by 

OBRA); National Women, Infants and Children Grocers Association v. Food and Nutrition 

Services, 416 F. Supp.2d 92 (D.D.C. 2006) (upholding an interim final regulation implementing 

cost containment provisions of a federal food program's reauthorization act, where the interim 

regulation was needed to provide states with guidance by the deadline for state implementation, 

Food and Nutrition Services acted with due diligence, and the interim final regulations would 

only be in effect for 6 months due to Congressionally mandated a deadline for a final regulation). 
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In any cvent, the mandate to promulgate an interim rule along with a grant of authority to 

promulgate other rules docs not amount to an express indication of Congress' intent that the 

agency dispense with public notice and comment. A "statutory deadline [does] not constitute 

good cause to forgo notice and comment absent "'any express indication'" by Congress to this 

effect." Air Transport Ass'n, 900 F.2d at 379 (quoting New Jersey v. EPA, 626 F.2d at 1043, 

and Sharon Steel Corp. v. EPA, 597 F.2d 377, 380 (3d Cir. 1979)). See also Asiana Airlines v. 

FAA, 134 F.3d 393, 397 (D.C. Cir. I 998)("the Supreme Court has held that exemptions from the 

terms of the Administrative Procedure Act are not lightly to be presumed in view of the 

statement in [§ 559] that modifications must be express") (quoting Marcello v. Bonds, 349 U.S. 

302,310 (1955)). 

The bare requirement that the Board issue interim final rules within 90 days, 

accompanied by no other requirements or procedural specifications stands in stark contrast to 

cases where courts have found express indications that Congress intended to alter the standard 

notice and comment requirements. For example, Asiana Airlines concerned regulations issued 

under a provision of the Federal Aviation Reauthorization Act enacted on October 9, 1996 in 

which Congress required that the Federal Aviation Administration "shall publish in the Federal 

Register an initial fee schedule and associatcd collection process as an interim final rule, 

pursuant to which public comment wiIl be sought and a final rule issued." Asiana Airlines, 134 

F.3d at 395 (quoting 49 U.S.C. § 453(1). Similarly, the regulations at issue in Methodist 

Hospital o/Sacramento werc issued pursuant to a provision of the Social Security Amendments 

of 1983 which stated that: 

[t]he Secretary shall cause to be published in the Federal Register a notice of the 

interim final DRG prospective payment rates ... no later than September I, 1983, 

and allow for a period of public comment thereon. Payment on the basis of 

prospective rates shall become effective on October 1, 1983, without the necessity 

for consideration of comments received, but the Secretary shall, by notice 

published in the Federal Register, affirm or modify the amounts by December 31, 

1983, after considering those comments. 

Methodist Hospital o/Sacramento, 38 F.3d at 1236, n.18 (quoting Pub. L. No. 98-21 § 604(c)). 

In each of these cases Congress not only required issuance of an interim final rule, but 

expressly specified a procedure other than the standard notice and comment period and explicitly 

required that it be followed by a final rule to either confirm or displace the provisions of the 

interim rule. This clearly demonstrates that when Congress wishes to require an interim final 

rulemaking process that forgoes standard notice and comment procedures it knows how to do so. 

In the case at hand, however, Congress said nothing to indicate that it wished to waive 

notice and comment requirements. Rather, it simply set a deadline for promulgation of interim 

final rules. Dodd-Frank § 1472(g)(2). Moreover, in Coalition/or Parity the Court rejected the 

argument "that Congress must have intended to displace the APA's normal procedures because 

otherwise the grant of interim final rulemaking authority is meaningless." Coalition/or Parity, 

709 F.Supp.2d at 19: 
264 


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Petition for Reconsideration and Rulemaking 

February 21, 2012 

Page 15 

the grant of interim Hnal rulemaking authority is not susceptible to only one 

construction. The statute may be rcad to require that interim final rules be 

promulgated cither with notice and comment or with "good cause" to forcgo 

notice and comment. 

Id. Applicable decisions suggest that when Congress intends to overridc AP A notice and 

comment requirements it will do so expressly. Absent such expression, the normal standards for 

evaluating usc of the good cause exception apply. 

Finally, in the preamble to the IFR, the Board suggested that its failure to provide the 

public with a notice and comment period is mitigated because "[i]nterested parties will still have 

an opportunity to submit comments in response to this intcrim final rule before permanent final 

rules are issued." Truth In Lending: Interim Final Rule, 75 F.R. at 66556. While this may have 

bccn asserted in all good faith at the time the lFR was published, it seems wholly without merit 

in light of the facts that a) it is unclear whether a final rule making process has been, or even will 

be, initiated, and b) over a year has passed and neither the Board, nor the Bureau, nor any of the 

othcr jointly tasked parties have provided any response to the public's comments. As noted by 

the D.C. Court of Appeals, "dialogue is a two-way street: the opportunity to comment is 

meaningless unless the agcncy responds to significant points raised by the public." Home Box 

Of lice, Inc. v. FCC, 567 F.2d 9, 35-36 (D.C. Cir. 1977) (citing Portland Cement Ass'n v. 

Ruckelshaus, 486 F.2d 375, 393-394 (D.C. Cir. 1973)). 

Moreover, in general, a period for submission of post-promulgation comments is not an 

adequate substitute for an agency's failure to allow pre-promulgation notice and comment 

procedures. See e.g. Sharon Steel, 597 F.2d at 381 ("a period for comments after promulgation 

can not substitute for the prior notice and comment required by the APA [because] [i]f a period 

for comments after issuance of a rule could cure a violation of the AP A's requirements, an 

agency could negate at will the Congressional decision that notice and an opportunity to 

comment must precede promulgation.") 

In some circumstances, courts have found that a post-promulgation comment period can 

partially mitigate failure to follow standard procedures, where a final rule is issued in a prompt 

fashion which responds to submitted comments. See e.g. Universal Health Services of McAllen, 

Inc. v. Sullivan, 770 F.Supp. 704, 721 (D.D.C. 1991) (finding that the Secretary's failure to 

engage in pre-promulgation notice and comment was at least partially cured by allowing the 

opportunity for post-promulgation comment, where final rules were issued within 9 months 

along with a response to comments received). Furthermore, the Administrative Conference of 

the United States has recommcnded that, when an agency has properly invoked the good cause 

cxception, it should provide a post-promulgation comment period and 

should then, and as expeditiously as possible, respond to any significant adverse 

comments and make any changes that it determines are appropriate. Agencies 

should consider including in the initial notice either a deadline by which they will 
265 


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Petition for Reconsideration and Rulemaking 

February 21, 2012 

Page 16 

respond to comments and make any appropriate changes or a "sunset" or 

tcrmination date for the rule's effectiveness. 

Adoption of Recommcndations, Recommendation 95-4, Procedures for Noncontroversial and 

Expedited Rulemaking, 60 F.R. 43110 (August 18, 1995) (emphasis added). In this case, 

however, more than a year since publication ofthe IFR no final rule has been issued and the 

agency has not only not considered or responded to any comments critical of the IFR it received, 

but has indicated that it has no intention to do so, for an indefinite period of time. Instead, 

despite the fact that the Board justified dispensing with notice and comment requirements, in 

part, on its assurance that there would be a permanent final rule, prior to whieh affected parties 

would be afforded an opportunity to be heard, the regulated parties are currently-and for the 

indefinite future will be-subject to substantive regulations upon which thcy have not been 

afforded an opportunity to provide meaningful input. This runs completely contrary to the 

affected parties' rights under the AP A. 

Moreover, the harm caused by the agency's improper deviation from the AP A's notice 

and comment rulemaking requirements goes far beyond a mere procedural defect. Because, for 

the reasons stated below, the IFR is contrary to law and Congress' intent, the ageney's failure to 

solicit, consider and address the comments of appraisers, coupled with its intention not to 

propose a permanent final rule for an indefinite period, have now converged to produce 

immediate and substantial injury to appraisers. As a direct result oflFR's failure to implement 

properly the mandate ofthe legislation, appraisers are not receiving the "reasonable and 

customary fee" Congress required. 

IV. The Customary and Reasonable Fee Provisions' First Presumption of Compliance is 

Contrary to Legislative Intent 

When Congress enacted section 14 72(i)(1 ) requiring that lenders and their agents pay fee 

appraisers at a rate that is customary and reasonable, it explicitly provided a method for 

establishing what rates were customary and reasonable-reliance on objective third-party 

information. Dodd-Frank § 1472(i)(I). Notably, this method required that the information relied 

upon must exclude rates paid by AMCs. ld. At a minimum, this reflected a concern and 

Congress' conclusion that rates paid by AMCs would distort the information relied upon and, 

hence, the fees ultimately paid to appraisers would be less than the "customary and reasonable" 

rates the law requires. This is consonant with appraiser concerns expressed at a hearing before 

the House Committee on Financial Affairs that: 

appraisal management companies usually focus on two things, who can do it the 

quickest and who can do it the cheapest. We believe comers will be cut as a 

result ofthat. At the end of the day, the consumers are going to be getting lesser 

quality appraisals than they should. 

H.R. 1728, The Mortgage Reform and Anti-Predatory Lending Act of 2009: Hearing Before the 

H. Committee on Financial Services, 111 th Congo 82 (2009) (testimony of Jim Amorin, 

President, Appraisal Institute). 
266 


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Petition for Reconsideration and Rulemaking 

February 21, 2012 

Page 17 

As noted previously, the marketplace rcalitics thc Board confronted in promulgating the 

IFR included that AMCs: (a) are the predominant source of cngagements of independent 

appraisers; (b) generally include charges for their own "administrative" services in the 

"appraisal" fees charged to lenders; and (c) act under authority oflenders, as their agents. The 

potential for AMCs to use their power to select appraisers and attempt to retain for the AMC the 

greatest portion possible of the appraisal fee charged, thus driving down below "reasonable and 

customary" rates the fees actually paid to AMC-selected appraisers is manifest. 

Excluding, as a matter offcderallaw, fees for AMC-assigned appraisals from data used 

to detcrmine "customary and reasonable" rates renects Congress' understanding that 

countenancing reliance on the fees AMCs pay to appraisers they select, under conditions 

currcntly prevailing in the mortgage marketplace, could result in depression of fees paid to 

independent appraisers, below the reasonable and customary rates Congress deemed cssential to 

ensure the integrity and quality of independent appraisals. Confronted with lowcr rates caused 

by AMCs increasingly retaining a greater portion of customary appraisal fecs for themselves, 

appraisers have little choice but to either exit the market, or increase their dependence on AMC 

assignments to generate the volume necessary to survive, thus reinforcing a cycle resulting in 

dcprcssion offccs actually paid to "independent" appraisers and comprising the integrity of the 

integrity of the appraisal proccss. 

Accordingly, in issuing the IFR, the Board recognized that "the statute supports a 

presumption of compliance if the creditor or agent based the fee paid to a fee appraiser on 

objective, third party market information regarding recent rates for appraisal services that meet 

the statutory requirements." Truth In Lending: Interim Final Rule, 75 F.R. at 66569. The Board 

further understood that section 1472's prescription that "[f]ee studies shall exclude assignments 

ordered by known appraisal management companies", Dodd-Frank § 1472(i)(I), extended to fee 

surveys and fee schedules as well, as it was "not aware of a rationale consistent with the statute 

that would treat fee studies differently from fee surveys or fee schedules." Truth In Lending: 

Interim Final Rule, 75 F.R. at 66574. 

Consistent with this, the Board implemented correctly the clear intent of Congress in the 

form of a presumption of compliance at 12 C.F.R. § 226.42(f)(3) for lenders and their agents 

who base their fees on objective third-party information so long as "any fee schedule, surveyor 

study relied on to qualify for this presumption of compliance may not include fees for appraisals 

ordered by companies that publicly hold themselves out as appraisal management companies." 

Id., at 66569. 

At the same time, however, in direct contradiction to the intent of Congress, the Board 

also created another presumption of compliance, which permits lenders and their agents to rely 

on fee surveys that do not exclude rates paid by AMCs. Specifically, the Board created a 

presumption of compliance at 12 C.F.R. § 226.42(f)(2), which requires that the rates lenders and 

their agents pay appraisers are "reasonably related to recent rates for services performed in the 

geographic market of the property being appraised." Id., at 66582 (codified at 12 C.F.R. § 

226.42(f)(2)). In order to determine the recent rates to which payment must relate, the Board 
267 


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Petition for Reconsideration and Rulemaking 

February 21, 2012 

Page 18 

clarified that "[f]or purposes of the presumption of compliance under paragraph (f)(2) [ ... ] a 

creditor or its agent may, but is not required to, use or perform a fee survcy," id., at 66586 

(codified at Supplement I to Part 226, Comment 42(f)(2)(i)(2», and that that "qualifying for this 

presumption of compliance does not require that a creditor use third-party information that 

excludcs appraisals ordered by AMCs," id. at 66572. 

In other words, although Congress specified a method of compliance that explicitly 

excluded from consideration ratcs paid to appraisers by AMCs, the Board has adopted a 

presumption of compliance that permits lenders and their AMC agents to consider those very 

same fees. This stands in direct conflict with the statutory requirement prohibiting reliance on 

fce information that includes rates paid by AMCs. 

As noted in the July 2011 GAO report to Congress on appraisal oversight, while lenders 

generally pay appraisers and AMCs the same rate, the rates paid to appraisers by AMCs are 

lower by "at least 30%." GAO Report at 24. The effect ofthis is that, in a geographic area 

where 60 to 80% oflenders' appraisals are ordered through AMCs, (id. at 32), in order to meet 

the second presumption of compliance, an AMC would be required to rely on studies that include 

only rates paid directly to appraisers by lenders. Obviously, those rates would not have been 

diminished by AMCs retaining a portion of the fees for their own "administrative" services, 

which currently exceed 30% of the appraisal fee charged to the lender. However, under the IFR 

as issued, the AMC may alternately opt to conduct its own fee surveyor some less formal 

analysis, which includes the rates paid by it and other AMCs. This would allow the AMC to 

establish a presumption, under alternative I, that a rate more than 30% lower than the rates 

paid to appraisers by non-AMes complies with the mandate of Dodd-Frank. Congress can 

certainly not have intended to establish two alternate methods of legal compliance that result in 

"customary and reasonable" fee standards for the same properties in the same geographic area 

that diffcr by 30% or more. 

The fact that Congress explicitly excluded AMC-paid rates from consideration in the 

objective third party information on which it authorized creditors to rely in determining 

customary and reasonable rates clearly evinces its intention to prevent cut-rate AMC fees from 

being the basis for a "customary and reasonable" determination. If this was not its intent, there 

would simply be no reason for such exclusion. It would completely defeat the purpose of 

excluding these fces from objective third party data if creditors and their AMC agents could 

simply choose to base their determination of what is "customary and reasonable" on the 

diminished fees that AMCs have paid to appraisers. For this reason, the first presumption of 

compliance under the IFR as it currently stands runs manifestly contrary to the statutory scheme 

enacted in Dodd-Frank § I 472(i) and must be revised to prohibit use of the fees paid by any 

AMC as a reference point for what is deemed reasonable and customary. 

V. Conclusion and Relief Reguested 

In adopting the appraisal independence provisions of Dodd-Frank, Congress was seeking to 

ensure the quality and integrity ofthe appraisals on which the underwriting of home mortgages 
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Petition for Reconsideration and Rulemaking 

February 21, 2012 

Page 19 

are based. As a part of this effort, Congress included provisions rcquiring that appraisers be paid 

fairly for their services, which specifY that any objective information relied upon to establish 

these rates can not include the substantially lower rates that most AMCs currently pay appraisers. 

Implemented propcrly, this provision can help to mitigate the distorting effect on the appraisal 

services market that, in the wake of the IfVCC, the growth of AMCs has had. With the inclusion 

of the first presumption of compliance in its current formulation, however, the IFR issued by the 

Board fails to accomplish this, instead providing regulatory cover to AMCs' practice of under 

compensating appraisers. This is a fatal flaw in thc IFR's rules on appraiser compensation and 

must bc corrected. 

Accordingly, pursuant to 5 U.S.c. § 553(e), the American Guild of Appraisers requests that 

the Federal Reserve Board and/or the Consumer Financial Protection Bureau review, consider 

and respond to comments received after promulgation of the IFR and, if necessary, open the IFR 

to further public comments to reflect the experience in thc marketplace since implementation of 

the IFR, and either: 

1. Amend the IFR to make it clear that fees paid to appraisers used to provide support for 

fec awards as customary and reasonable may not consider or include fees paid to 

appraisers by AMCs, or; 

2. ClarifY that the Board did not intend the IFR to permit the consideration of fees paid 

by AMCs to appraisers as support for fee awards as customary and reasonable. 

Respectfully Submitted, 

American Guild of Appraisers 

By: 

Matthew R. Schneider 

Benjamin J. Larnbiotte 

Garvey Schubert Barer 
269 


76111.228

President 

Marty Sisk 

(469) 767 7577 

Vice President! 

Treasure 

Bob Neville 

(817) 716-3214 

Secretary 

Michael Morrow 

(214) 363-7987 

Directors 

Norma Minnis 

(214) 887-9544 

Connie Hearn 

(972) 991-0080 

Robert Gray, Jr. 

(972) 392-9600 

Malcolm Duke 

(972) 392-9600 

Joanne Tucker 

(817) 329-3487 

Legal Counsel 

Tom Kapioltas 

(214) 764-9232 

~ CHARTERED 1988 

Dallas Fort Worth Association of Mortgage Brokers 

The Brokers' Choice 

Affiliated with: National Federation of Mortgage Professionals, Washington, D.C. 

REGULATORY IMPACT ON CONSUMERS and BUSINESSES REGARDING ORDERING and 

OBTAINING FAIR VALUE of RESIDENTIAL APPRAISALS 

As President of Dalias/Ft.Worth Association of Mortgage Brokers I represent in excess of one thousand 

mortgage professionals ordering residential appraisals for consumers purchasing or refinancing homes. 

This equate in excess of forty thousand (40,OOO} appraisals ordered for consumers each year in a 

six county area including Dallas, Texas. Currently refinances are sixty {60%) percent of the transactions, 

the remaining forty (40%) are home purchases. 

Because of the restrictions placed on the ordering of appraisals and the random selection process of 

appraisers, fair market values have been challenging to obtain. The decline of market value due to the 

economic downturn has added to these challenging conditions. The restriction placed on the ordering of 

appraisals can be cured with Congress acting. The downturn is improving with historic low rates. 

There is one major and significant glaring inequity that is fixable in the ordering of residential appraisals 

to determine fair market value. Since the implementation of HVCC (Home Value Code of Conduct) in 

May 2010, ordering an appraisal for a purchase requires a copy of the sales contract which includes 

the property sales price. This influences the appraiser in determining the value. If the value is lower 

than the sales price, either the borrower will have to pay more or the seller will have to reduce his price. 

This then creates a challenge for all parties concerned because they have agreed upon a price. Why put 

the pressure on the appraiser to make the fair market value equal to or greater than the sales price? 

Let the appraiser determine fair market and the buyer and seller can work out any differences? 

This is exactly what is done when the consumer does a refinance of his existing home loan. There is no 

seller and no realtor involved. Usually only a mortgage broker or bank loan officer orders the appraisal 

for the consumer. The loan originator is not allowed to influence the appraiser with any information 

regarding value of the house. He must strictly give the address of the house and request the date he 

wishes the appraisal to be finished. No desired values. no com parables, no improvements or any other 

information may be furnished. The appraisal associations have lobbied Congress to eliminate this 

influence. 

RESULTS: many refinances do not make value and the borrower has paid for a useless appraisal. 

A dialogue needs to exist between the loan originator, the prospective appraiser and the home owner 

BEFORE an appraisal is ordered. 

There are three fixes: 

1. Allow the loan originator to order the appraisal and have a dialogue with all parties. 

2. Prohibit furnishing the sales purchase price and the sales listing price on all purchases. 

3. The HVCC created a middle man between the ordering ofthe appraisal by the loan originator 

and the selecting of the appraiser by the AMC {Appraisal Mortgage Co). Previously appraisals 

cost approximately $37S. Currently appraisals cost approximately $450 with the AMC keeping 

$250 and the appraisers receiving approximately $200, approximately one half of their former 

Income. Just like mortgage brokers, appraisers are samll businessmen who are suffering because of 

the inequalities of Dodd~Frank legislation and agreements such as HVCC, 

This is a blatant inequity which penalizes many consumers from taking advantage of these historic low rates and 

stimulating the economy with the surplus savings on their mortgages. Small businesses are suffering. The 

information outlined above would go a long way in restoring confidence and equality in lending. 

Dallas/Fart Worth Association of Mortgage Brokers is a non-prafit professional organ/lotion dedicated to advancing the 

mortgage broker profession through the promotion of education, ethical practices, consumer fairness and political activism. 

Member mortgoge blokels and loan afficels are not only licensed by the State of Texl7s and registered with the National 

Mortgage Ucensing System but are required to take continuing education coulses and subscribe to Q strict cade aJ ethics. 

P.O. Box 803552 Dallas, Texas 75380 

www.DFWAMB.ORG 
270 


76111.229

June 27, 2012 

The Honorable Judy Biggert 

LEADING 

BUILDERS 

:/AMERICA 

The Honorable luis V. Gutierrez, Il, Ranking Member 

Subcommittee on Insurance, Housing and Community Opportunity 

House Committee on Financial Services 

2129 Rayburn House Office Building 

Washington, DC 20515 

Dear Congresswoman Biggert, Ranking Member Gutierrez and Members of the Committee: 

I am writing on behalf of leading Builders of America, a trade association representing twenty of the 

nation's largest homebuilders which collectively build over 30% of all new homes built in the United 

States. We thank you for convening a hearing to explore the issues surrounding real estate appraisals. 

As the housing market struggles to emerge from the biggest downturn since the Great Depression, we 

are experiencing a number of frustrations with the current a ppraisal process. These issues are holding 

back the pace of recovery. 

Appraisals are the basis on which homes are financed so when appraisals are artificially too high or too 

low, it creates market disruption and frustration for buyers and sellers alike. The appraisal process 

needs to be free from undue influence, however when appraisals are inaccurate there should be 

mechanisms in place to have them reviewed and if necessary, adjusted. 

Due to the downturn when real estate values plummeted, appraisals in declining markets have 

artificially lowered home values. There are a number of factors contributing to this affect including 

distressed sales being used as "comparable sales" for non-distressed properties, energy efficient 

features not being properly valued and inconsistency among appraisers -- particularly Veteran Affairs 

(VA) appraisers. 

The following is a series of very practical suggestions that could address some of the issues we 

experience in the marketplace every day. 

1. Federal agencies should require appraisers to use only "ordinary course" sales as comps and 

prohibit the use of distressed sales in appraisals for federally backed loans. 

With so many foreclosures on the market, appraisers are using foreclosed and distressed sales 

to determine the value of re-sales and new homes. This is an apples-to-oranges comparison 

because distressed sales are involuntary sales and as a result are artificially low and not suitable 

to determine values in a voluntary sale. This creates a downward spiral as every appraisal that 

artificially lowers a home price will be used as a new lower comp for the next home sale. What 

leading Builders of America, Inc .• Ken Gear, Executive Director. 202-621-1816 
271 


76111.230

makes the situation worse is when foreclosures are used and the "declining market" designation 

is applied causing a double hit to the home's value. Use of distressed sales should be eliminated 

(or limited) as comps for non-distressed sales. 

2. Require Visual Inspection. 

If a distressed sale is used as a comparable sale, the appraiser should be required to perform a 

visual inspection of both homes. Today, many appraisals are done from a computer with square 

footage being the primary measure of likeness. A visual inspection will allow the appraiser to 

more accurately determine condition, added features and maintenance issues. Distressed 

homes often are in a state of disrepair, have missing appliances and systems, drywall damage, 

overgrown landscaping, etc. All of which impact the value of the property far more than a 

simple square footage comparison. 

3. Suspend use of automatic "declining market" reductions. 

Today, appraisers can check a box on the appraisal if they are in a "declining market," this 

simple check mark causes an automatic 5% reduction in value. This has a spiral effect because 

each artificially low appraisal today will be a lower comp for the next sale tomorrow. With 

prices across the nation having already fallen dramatically over the past 6 years, the declining 

market has already been factored into to home values. Prices alone should be enough of an 

indicator of a declining market without applying an additional penalty. 

4. Energy Efficient features should be properly valued during appraisals. 

A framework needs to be put in place that will allow buyers, lenders and borrowers to maximize 

the energy efficiency of homes. Today, while energy efficient features substantially reduce the 

operating costs of owning a home, they generally are aSSigned little or no value by appraisers. 

Federal housing agencies could adopt a process which instructs lenders to account for expected 

energy costs (as measured by a HERS energy rating) in the debt-to-income qualifying ratios. 

These ratios typically value Principal, Interest, Taxes and Insurance (PITI), to measure the 

borrower's ability to afford regular monthly mortgage payments. Recognition of a reduction in 

monthly utility bills would allow the purchaser of a more efficient home to qualify to finance the 

costs of energy saving improvements. Lenders could then add the net present value (NPV) of 

expected energy savings when calculating the loan-to-value ratio. This will help ensure that the 

underwriting process consistently and accurately captures the added value of energy saving 

features, allowing homeowners to finance the cost of efficiency improvements as part of their 

mortgage. 

5, Enhance the appraisal review process to utilize third party oversight. 

Today's appraisal review process, which is the mechanism used to facilitate reconsideration of 

lower-than-expected appraisals, requires the seller to convince the original appraiser to change 

his appraisal. This doesn't allow for an objective review, A third party, which could be another 

appraiser, should be charged with making an objective determination of the proper market 

value of the home. 

Leading Builders of America/Inc. _ Ken Gear. Executive Director. 202-621-1816 
272 


76111.231

6. Appraisals rules for VA loans should conform to appraisal rules for other federal loan 

programs. Many appraisal problems are created by VA loan appraisal rules which are 

inconsistent with those of the rest of the industry creating delay, confusion, last minute 

appraisals and surprising results for buyers, sellers and lenders. VA appraisers should be 

selected from a pool of approved appraisers, appraisals should be performed within a 7 days 

(instead of 19 days), appraisals on new construction should be allowed to be performed prior to 

house being 95% complete, and VA appraisers should be required to share the comps they rely 

on so if an appraisal is disputed, the seller must not have to guess which properties were used 

as comps. 

7. The time frame that FHA and VA appraisals are "attached" to a property address should be 

shortened from six months to one month. 

Currently, an appraisal for an FHA orVA loan performed within the prior 6 months must be used 

by any future lenders. This is typically an issue when an appraisal comes in below the desired 

selling price and the deal falls through. In many cases the seller will then make enhancements 

or modifications to the property to increase its value but the 6-month rule prevents them 

realizing any appraised value from those investments. (i.e. added fencing, landscaping, 

hardwood flooring, enclosed loft to make 4th bedroom, etc.). This forces the seller to delay the 

sale for 6 months. 

8. Allow direct comparables to be used for up to one-year 

Builders of new home communities typically build several different home plans within each 

community. If a buyer purchases a new to-be-built home with a design plan that hasn't been 

built within the prior six months, the appraiser may not use as comps any of the homes in the 

community with the same design plan. In today's market conditions, it is not uncommon that a 

design may not have been sold within six months and it's unreasonable to eliminate a 

comparable sale in the same community with the same plan just because it's more than 6 

months old. This 6-month rule should be changed to one-year. 

9. In new home communities, allow appraisers to use homes under contract as comps. 

Homes in backlog are those where the selling price and features have been agreed to by the 

builder and the buyer, a contract has been signed and a deposit has been received, but 

construction is not completed. These home contracts reflect the most up-to-date market 

conditions and accurately reflect current market value for a given community. Allowing 

appraisers to use contracts as comps will allow a more accurate comparison to very similar 

homes often with similar features. New communities may have an eight-month build cycle, this 

rule artificially suppresses the market during the entire eight-month construction cycle until the 

first home closes. 

10. Provide predetermined values for certain upgrades to new homes 

Appraisers provide no guidelines of value for the hundreds of options/upgrades a buyer can 

select. For instance, a typical case is where a buyer selects an upgraded energy efficient 

refrigerator for which the builder charges the market price of $3,300 (same price as a big box 

store) and at closing the appraiser only values it at $2,300 even though she couldn't buy the 

leading Builders of America, Inc .• Ken Gear, Executive Director • ZOZ~6Z1-1816 
273 


76111.232

refrigerator anywhere for $2,300. If the seller and builder knew what the value of the upgrade 

would be upfront they could make better decisions about whether or not to add it. 

11. Allow lenders to communicate with appraisers on non-value issues. 

While recent rules prohibit lenders from communicating with appraisers, strict adherence to the 

rules has made the process for settling "non-value" issues unnecessarily difficult and has 

delayed closings for many buyers. Non-value issues include simple errors or omissions such as 

the misspelling of a name; address incorrect; appraisal incomplete because a box was not 

checked. Once the value has been determined, communication on these types of issues should 

be allowed for a smoother process. 

Again, we thank you for exploring these issues and we urge the committee to take steps to address 

these issues to make appraisals more consistent and more accurate which will unlock a stronger housing 

recovery. 

Sincerely, 

Kenneth Gear 

Executive Director 

Leading Builders of America,lnc. • Ken Ge~rJ Executive Director. Z02~621-1g16 
274 


76111.233

MORTGAGE 

BANKERS 

ASSOCIATION 

Investing in communities 

Statement for the Hearing Record 

Mortgage Bankers Association 

u.S. House of Representatives 

Committee on Financial Services 

Subcommittee on Insurance, Housing and 

Community Opportunity 

"Appraisal Oversight: The Regulatory Impact on Consumers 

and Businesses" 

June 28, 2012 
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The Mortgage Bankers Association (MBA) 1 appreciates the opportunity to submit this 

statement for the hearing of the House Financial Services Subcommittee on Insurance, 

Housing and Community Opportunity entitled "Appraisal Oversight: The Regulatory 

Impact on Consumers and Businesses." 

Property values are in a period of dramatic fluctuation, with some areas of the country 

experiencing significant declines, while others are showing signs of recovery. Now, 

more than ever, it is critical for property appraisals to be undertaken in an unbiased 

manner for both consumer protection and safety and soundness reasons. 

The appraisal industry has undergone tremendous change since 2008 and the 

establishment of the Home Valuation Code of Conduct (HVCC) for government 

sponsored enterprise (GSE) mortgages. HVCC required appraisal independence and 

accuracy by limiting outside influences on appraisers and it prohibited the GSEs from 

purchasing mortgages from any lender that did not adhere to the HVCC's requirements. 

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

repealed the HVCC and required that it be replaced with similar, federal regulations, 

further solidified these changes, as did the Federal Reserve's Interim Final Appraisal 

Rule (the Interim Rule), which became mandatory on April 1, 2011. Final rules from the 

Bureau of Consumer Financial Protection (CFPB) are anticipated later this year. 

The changes that have already occurred have, in MBA's view, been extremely 

beneficial to consumers and the mortgage industry that serves them. Homebuyers can 

be more confident that the value of their homes have been objectively assessed before 

closing and lenders can also be more confident that the appraisal was arrived without 

undue pressure through an independent appraiser, an appraisal management company 

(AMC), or through a separate in-house appraiser panel. 

Currently, the full range of legislative, regulatory and industry-based measures work in 

concert with each other to provide a comprehensive framework for ensuring appraisers 

are protected from undue influence. These measures include: 

Provisions of the Dodd-Frank Wall Street Reform and Consumer Protections Act, 

Home Ownership and Equity Protection Act, and Truth in Lending Act; 

• Supervisory guidance issued by the federal banking agencies; 

• Appraisal requirements issued by the Federal Housing Administration; 

The Uniform Standards of Professional Appraisal Practices; and 

1 The Mortgage Bankers Association (MBA) is the national association representing the real estate 

finance industry, an industry that employs more than 280,000 people in virtually every community in the 

country. Headquartered in Washington, D.C., the association works to ensure the continued strength of 

the nation's residential and commercial real estate markets; to expand homeownership and extend 

access to affordable housing to all Americans. MBA promotes fair and ethical lending practices and 

fosters professional excellence among real estate finance employees through a wide range of educational 

programs and a variety of publications. Its membership of over 2,200 companies includes all elements of 

real estate finance: mortgage companies, mortgage brokers, commercial banks, thrifts, Wall Street 

conduits, life insurance companies and others in the mortgage lending field. For additional information, 

visit MBA's Web site: www.mortgagebankers.org. 

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• The aforementioned Interim Rule, 

MBA has long supported efforts to require residential property valuation practices that 

minimize opportunities for fraud, coercion or undue influence in the loan approval 

process, Appraisals that overstate or understate the market value of properties are 

harmful to unsuspecting consumers and ultimately increase consumer borrowing costs, 

Lenders have a vested interest in obtaining an accurate appraisal because appraisals 

serve as the primary valuation tool for lenders' collateral. When a home is overappraised, lenders are left with a security interest that is unlikely to satisfy the debt in 

the event of foreclosure, Fannie Mae and Freddie Mac customarily use inaccurate 

appraisals to require lenders to repurchase mortgages sold to them upon defaultregardless of how minor the inaccuracy is, and even if the inaccuracy is immaterial to 

the default. Additionally, the high rate of GSE loan repurchases is preventing many 

qualified borrowers from obtaining a mortgage, 

For these reasons, we strongly endorse the following principles underlying existing 

appraisal-related requirements: 

• Clear, distinct firewalls should exist between the appraiser and those who will be 

compensated based on the outcome of the transaction for which the appraisal 

was prepared, including mortgage brokers, real estate sales personnel, and loan 

officers directly involved in the transaction, 

• As long as sufficient firewalls are established, lenders should be permitted the 

option of utilizing in-house appraisers, independent appraisers and/or appraisal 

management companies, 

These principles are embodied in MBA's positions on key appraisal issues: 

MBA strongly supports efforts to promote residential property valuation practices 

that minimize opportunities for fraud, coercion or undue influence, 

Current compliance requirements comport with many of MBA's principles for ensuring 

the validity of property valuations and the integrity of those who conduct such 

valuations, MBA strongly endorses policies to ensure that appraisers conduct property 

valuations in a manner that is free from the influence of any party to a real estate 

transaction that has a financial interest in its outcome, including real estate agents, title 

agents, mortgage brokers, loan officers, sellers and buyers, Allowing a party with a 

material interest in the completion of the loan transaction to influence an appraiser 

undermines what must be an arms-length collateral valuation process, Appraiser 

independence is critical to protecting the lender and the borrower from valuations that 

misrepresent the true market worth of a property, 

Lenders have adjusted their business models to support these new compliance 

requirements and have utilized a variety of methods to ensure compliance, including 

using Appraisal Management Companies (AMCs), independent appraisers, in-house 

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appraisal staff, and automated valuation models. MBA strongly believes lenders should 

have all of these options to properly assess the risk that lenders ultimately hold. 

MBA supports the "reasonable and customary fee" provision as long as it is 

sensibly applied. 

Key provisions in Dodd-Frank and the Interim Rule require appraisers to be paid 

"customary and reasonable fees." With respect to this provision, MBA supports the 

Federal Reserve's determination that the marketplace should be the primary determiner 

of the value of appraisal services. This test adopted by the Board in the Interim Rule is 

logical, fair, and objective. It best protects consumers from excessive fees and allows 

the marketplace to create efficiencies which ultimately result in lower consumer 

borrowing costs. 

MBA supports regulation of appraisal valuation standards by a strong, single, 

federal entity, rather than a patchwork of state laws where separate and 

conflicting state requirements create confusion and costly compliance burdens 

for lenders. 

The proliferation of legislative activity in the states regarding the regulation of the 

appraisal industry and AMCs is an area of particular concern. Many states have 

considered a range of legislative proposals aimed at dictating how appraisal/vendor 

management companies should operate their businesses. This activity has resulted in 

myriad laws that have unnecessarily increased the regulatory burden on lenders 

requiring them to comply with often conflicting state regulations. Some proposals for 

appraisal/vendor management company governance have presented conflicts of 

interest and inconsistencies and would bring unintended consequences. Generally, 

these proposals would neither improve the industry nor safeguard the consumer. 

In an effort to provide reasonable and effective oversight and consistent policies, MBA 

recommends that instead the regulation of appraisal valuation standards be carried out 

by a strong, single, federal entity, rather than through a patchwork of state laws where 

separate and conflicting state requirements create confusion and costly compliance 

burdens. 

MBA believes that strong, uniform national supervision of the appraisal industry is 

critical to achieving consistently high standards to serve consumers. One possible 

approach that deserves consideration would be for the Appraisal Subcommittee of the 

Federal Financial Institutions Examinations Council (FFIEC) to serve in that capacity. 

Effective national regulation would assist in rebuilding trust and confidence in the 

appraisal and mortgage industries and provide protection against unscrupulous actors 

who taint the home buying process and place both lenders and consumers at financial 

risk. 

Importantly, AMCs owned by insured depository institutions, independent national 

institutions and agents acting on behalf of the depository institution, including joint 

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ventures, should be exempt from state regulation and instead be subject only to federal 

oversight. Small AMes, not working on behalf of lenders, who are typically local or 

regional companies, would still be under state regulation, This federal oversight would 

ensure the standardization and consistency of high quality appraisals and consistent 

expectations and experiences for consumers. 

MBA appreciates the opportunity to present the above points for your consideration and 

we stand ready to serve as a resource as you study this issue further. 

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STATEMENT OF THE 

NATIONAL ASSOCIATION OF HOME BUILDERS 

Hearing Entitled: 

"Appraisal Oversight: The Regulatory Impact on 

Consumers and Businesses" 

Subcommittee on Insurance, Housing and Community Opportunity 

United States House of Representatives 

Committee on Financial Services 

June 28, 2012 

The National Association of Home Builders (NAHB) appreciates the opportunity to submit this 

statement to the Subcommittee on Insurance, Housing and Community Opportunity on 

"Appraisal Oversight: The Regulatory Impact on Consumers and Businesses." NAHB is a 

Washington-based trade association representing over 140,00 member firms involved in home 

building, remodeling, multifamily construction, property management, housing finance, building 

product manufacturing and other aspects of residential and light commercial construction. 

The ongoing stress in the housing and mortgage credit markets has brought greater focus to the 

importance of accurate appraisals. In response to criticism that lax appraisals contributed to the 

financial crisis, more restrictive appraisal policies have been implemented by lenders, federal 

banking regulators, the Federal Housing Administration (FHA), the Department of Veterans 

Affairs (VA), the United States Department of Agriculture (USDA), and Fannie Mae and Freddie 

Mac (the Enterprises). However, the pendulum has swung too far, producing a downward bias 

in the home valuation process. The problem has been exacerbated by improper appraisal 

practices, a shortage of experienced appraisers and inadequate oversight of the appraisal 

system. 

It is difficult to come to a conclusion other than appraisal standards are not clear, best practices 

have not been well communicated, and enforcement is not occurring in a consistent manner. 

For all sectors that interact with appraisers consumers, home builders, realtors, lenders, the 

government-sponsored enterprises, mortgage insurers - appraisal quality and appraiser 

competence remain tremendous challenges. The problem is an urgent one, yet throughout the 

extended housing recession little attention has been focused on the fundamental problems. 

Until today. NAHB thanks the Subcommittee for this hearing, hopefully the first of many, which 

will explore the impact of inaccurate appraisals on the flow of mortgage credit and the housing 

recovery. 
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Background 

Appraisals remain a major problem for the housing industry. The process has gone seriously 

wrong due to a breakdown in appraiser education and qualifications as well as dysfunctional 

federal and state regulatory oversight and enforcement. Other challenges facing the appraisal 

industry include shortcomings in appraiser training and experience in dealing with new 

construction and green building. Additionally there is insufficient new construction, energy 

efficient and green building data available to appraisers and current valuation practices do not 

provide a process for expedited appeals of inaccurate or faulty appraisals. 

Too often, due to faulty appraisal practices, the builder's house winds up with an appraised 

value less than the cost of construction. In an NAHB survey of builders, nearly two-thirds of the 

respondents (64 percent) said that they had an appraisal that was below the agreed-upon 

contract sales price for a house, and one-third of the respondents indicated they had lost a sale 

because of a low appraisal. NAHB is not advocating that appraisals should be higher than the 

real market. Rather, our goal is to establish an appraisal system that produces accurate values 

through all phases of the housing cycle. 

A key concern is that is some appraisers are using distressed sales - many of which have been 

neglected and are in poor physical condition - as comparables in assessing the value of brand 

new homes, without accounting for major differences in condition and quality. Without such 

adjustments, the two are not comparable. Appraisers don't typically enter and inspect these 

fixer-upper homes; if they did, they would likely recognize the substantial differences between a 

foreclosure and a state-of-the-art new home. The inappropriate manner in which distressed 

sales are utilized is distorting home valuations. Use of the cost and income approaches in 

conjunction with the comparable sales approach would mitigate such distortions. 

The dramatic increase in the use of Appraisal Management Companies (AMCs) is another 

factor contributing to inaccurate appraisals. Some AMCs have reduced appraiser compensation, 

which has led to more activity by appraisers with less training and experience, and shortened 

turnaround times for valuations to as little as 48 hours. These changes have had a significant 

adverse effect on appraisal quality. 

Regulatory Structure 

Regulatory oversight of the appraisal industry is a dysfunctional patchwork of federal and state 

regulations. At the federal level, the Appraisal Subcommittee (ASC) of the Federal Financial 

Institutions Examination Council (FFIEC) sets appraisal practices and procedures through The 

Appraisal Foundation (TAF). TAF is a private, non-profit entity which through its Appraisal 

Standards Board (ASB) establishes appraisal practices through the Uniform Standards of 

Professional Appraisal Practice (USPAP). Oversight of appraiser qualifications and appraisal 

practices falls to the individual states, and many jurisdictions have inadequate resources to 

adequately perform this function. In some states, fees collected for appraiser licensing and 

certification are swept into a general fund and are not utilized in appraisal/appraiser oversight 

and enforcement. 

In January, The Government Accountability Office (GAO) released a report, Real Estate 

Appraisals - Appraisal Subcommittee Needs to Improve Monitoring Procedures, which identified 

several weaknesses that have limited the ASCs effectiveness, including weak enforcement tools 

and reporting procedures; inadequate policies and procedures for monitoring appraisal 

requirements; no written policies to determine if TAF's activities are consistent with the statutory 

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mandates; and not fully addressing the requirement of the Dodd-Frank Act for the ASC to 

establish and operate a national hotline to receive complaints of noncompliance with appraisal 

independence standards and USPAP. 

In conjunction with the report, the GAO conducted a survey that supports the conclusion that 

appraisal quality and appraiser competence remain a tremendous challenge. The survey asked 

state appraisal regulators to evaluate the effectiveness of the current real property appraiser 

regulatory system, the effectiveness of T AF, state agency structure and resources and the 

appraisal complaint process. The complete survey can be found at 

http://www.qao.qov/special.pubs/qao-12-198sp/. 

In NAHB's opinion the results of the GAO survey indicate there is much work to be done. For 

example, the GAO's findings show that: 

Less than 40 percent of state regulatory officials rated TAF, ASB and the Appraisal 

Qualifications Board (AQB) as very effective in: 

o Setting standards for the way appraisals should be conducted; 

o Establishing the qualifications needed to become an appraiser; 

o Setting requirements for appraisers' continuing education; and, 

o Approving courses for appraisers' education or training. 

Less than 25 percent of respondents rated TAF, ASB and AQB as very effective in 

determining the qualifications needed by instructors who teach courses to appraisers and 

providing guidance on disciplining appraisers. 

Less than six percent rated the newly formed Appraisal Practices Board (APB) as very 

effective in improving the quality of appraisals. 

Less than 50 percent found the AQB's qualifications for appraiser education and experience 

mostly adequate. 

The survey supports NAHB's concerns with diminished appraisal quality, the need for a fair and 

timely process to appeal appraisals and to ensure the competency and qualifications of the 

appraiser community. 

The failures in the process noted by GAO perpetuate the cycle of declining home values, drive 

more home owners under water, negatively affect housing demand and are obstacles to the 

recovery of the housing market. Major reforms in appraisal practices and oversight are needed 

to ensure that appraisals accurately reflect true market values and do not contribute to price 

volatility. 

Solutions 

NAHB has been a leading advocate for correcting the valuation process and has undertaken a 

number of actions to raise awareness and address the adverse impacts inaccurate appraisals 

are having on the housing sector. NAHB has conducted four Appraisal Summits (two in 2009, 

one in 2010, and one in 2011) to provide opportunities for the agencies and organizations that 

establish appraisal standards and guidelines to join housing stakeholders in a constructive 

dialogue on major appraisal topics of concern. The goal of the Appraisal Summits is to identify 

recommendations and solutions that participants can jointly pursue to improve the appraisal 

process. 

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Through the Appraisal Summits and feedback from builders and others in the field, NAHB has 

identified the following key areas of focus to improve current appraisal requirements and 

practices: 

Strengthen Education, Training and Experience Reguirements for Appraisers of New Home 

Construction, including: 

The establishment of greater education, training and experience requirements for those 

who are assigned appraisals of new construction to ensure that lot values and building 

costs, including those for energy efficient, green building and other evolving new 

construction techniques and mortgage products, are fully considered in valuation of new 

home construction. 

The incorporation of the qualifications for appraisers of new construction into appraisal 

regulations and guidelines of the bank regulatory agencies, Fannie Mae, Freddie Mac, 

FHA, VA and USDA. 

The prompt implementation of federal legislation directing the federal financial regulators 

to establish minimum state requirements for the regulation and licensing of appraisal 

management companies. 

Improve the Quantity and Quality of Data for New Construction through: 

Establishment of an appraisal data base system for new construction. 

Standardization of loan level valuation data by Fannie Mae, Freddie Mac, FHA, VA and 

USDA in their Uniform Appraisal Dataset (UAD). 

Expansion of the UAD to include new construction, energy efficient and green building 

data standards. 

Develop New Appraisal Standards and Best Practices for Conducting Appraisals in Distressed 

Markets by: 

Modifying current appraisal practices and procedures to consider all three approaches to 

value -- cost, income and sales comparison in appraisals of residential properties to 

mitigate distortions and volatility. 

Giving greater weight in distressed markets to alternative means of valuation, such as 

the cost-based approach to value. 

Revising banking agency guidelines to require the appraisal entities used by financial 

institutions to avoid the use of distressed sales as comparables for new construction 

sales and, if distressed sales are the only comparables available appropriate, to make 

adjustments to accurately reflect possible condition and stigma issues associated with 

distressed properties. 

Develop Processes for Expedited Appeals of Inaccurate or Faulty Appraisals through: 

Federal agency adoption of an appeals structure similar in design to that of the 

Department of Veterans Affairs Loan Guaranty Service Home Loan Program. 

The establishment of more efficient, timely and effective processes for state and local 

appraisal oversight. 

The establishment of a timely value dispute resolution process that is fair, balanced and 

appropriate to allow interested parties to appeal appraisal values when appraisal 

assumptions are incorrect. 

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Strengthen Oversight of Appraisal Activities through: 

Full implementation of appraisal mandates in recent federal legislation addressing: 

o Appraisal independence 

o Customary and reasonable fees 

o Mandatory reporting of appraisal standards violations 

o Strengthening of state appraisal oversight and enforcement of regulations. 

o Dispute resolution 

o Valuations other than appraisals 

Establishment of best practices for effective and consistent appraisal practices, policies 

and procedures. 

Creation of an effective state and federal regulatory system for appraisal oversight. 

NAHB stands ready to work with appraisal, housing and financial stakeholders to address the 

real challenges we face in restoring the public trust in how we build, transfer, value and finance 

the American consumer's most valuable asset. We must work together to reform appraisal 

practices that support accurate and sustainable values. Solving these issues, in the short and 

long term, is a critical step toward restarting the housing industry and America's economy. 

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June 28, 2() 12 

The Ilonorable Judy I31p:ger! 

Chairwoman, SubcoJlllllittee ,Hl Insurant:c, 

Housing lind Community Development 

United Stutes I-Ioust: of Representatives 

2129 Rayburn I louse Ot1icc Building 

W,-lshingtoll, D.C. 2051:'i 

Dear Chail'wol1l,-\!l Biggcrt and Rnnking Member Gutierrez: 

The H0l10t'Hbtc l.uls Gutierrez 

Ranking Member. Subcommittee on Insu!'lmce. 

I-lousing and Community Devdoplnclll 

\ Jnited Slates House of Rcprescntnfivcs 

2129 Rayburn! 10u:.c ornee lJuilding 

Washington, D.C. 20515 

On behalf or the 24,000 members or the Iiouston Association or REA{,'!'ORS@ (\-1/\R), we arc wl'iting to 

thalll, you for scheduling loday's hC<lrillg on appraisal oversight. We believe that restoring conlidencc in thc 

U.S. hotl!'ing mnrket is crilic{ll to our nntion's overall economic recovery. This hearing on appraisal oversight 

is (111 lmporl::lIl{ slep in restoring !>uch confidence. 

I-IAI{ would also like to thank Representative A! Clreen or I!ouston, a member of the U.s. 1·louse Committee 

on Financia! Services. ror working with you to schedule this important hearing. Congrcssm<ln Grecn has 

iistened to the concerns or his REALTOR@ constitucnts and HAR greatly appreciates the positive relationship 

we huvc with the Congre5sInan and his dcdic..1tcd stnff. 

I-JAR is the largest individual membership trade association in Houston. and the largest local 

AssClciation/Boal'd of REALTORS@ in the Unitcd Stales. I-J/\R represents a wide variety of housing industry 

prorcssionals, including over 200 licensed and certified appraisers. In conjunction with the National 

Association of REALTORS® (NAR). our association is committed to the development and preservation of the 

nation's housing stock and making it available to the widest range of potential homebuycrs. 

We would like to voice Ollr support and concurrence with the comments [lnd recommendations from f.rank K. 

Gregoire, the 20 J [ Chair ofNAR's Appraisal AdvisOlY Committee and President orGregoire & Grcguirc, Inc. 

As Congress works to re!-;olve issues regarding appraiser competency. appraisal managenH'!l1t companies, 

credible valuations ofrelll propcl1y, and state regulation of the uppraisal profession. HAR thanks you for your 

effort5 find stands rC<ldy to work with YOll in any way we can. 

Sincerciy. 

W~M ql' ____ ~ 

Wayne Stroman 

2012 Chairman of the Ronrd 

I lOllston Association of REA I ,TORSQ{) 

cc: Represemativt' A! Gre-en 

~k!~ Shod Bogany 

Federal Political Coordinator for Rep. AJ Green 

2012 Chajr~E!ccl, Tcx(lS Association or 

REALTORS@ 
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Written Statement of William F. Kidwell, Jr. 

President - IMPACT Mortgage Management Advocacy and Advisory Group (IMMAAG) 

"Appraisal Oversight: The Regulatory Impact on Consumers and Businesses" 

Hearing before the House Financial Services Committee 

Subcommittee on Housing and Community Opportunity 

Thursday, JUlie 28,2012 

Chairwoman Biggert, Ranking Member Gutierrez and Members of the Subcommittee, the following 

statement is offered for the record and I thank you for the opportunity to submit the statement. The 

thousands of state licensed mortgage loan originators not directly represented at today's important hearing 

depend on IMMAAG' to provide them information and occasionally to speak for them. Those 

professionals are central to the Congress's stated desired solutions (0 make the mortgage delivery 

processes more efficient, simpler, clearer and understandable to consumers. Today's hearing is 

particularly relevant to those goals in as much as the subject stands as an icon for how not to oversee 

market activities. 

Somewhere over time it seems that the idea of why appraisals are needed has been lost. The fact 

is that the value of any asset is determined by the price a willing buyer pays a willing seller in an 

ami's length sales transaction. The idea of appraisals was borne to assist buyers and sellers with 

an estimate of what a fair value might be. As it relates to real propeliy, primarily due to the 

financial size of the transaction and the fact that most buyers could not pay cash for the home 

they wanted to purchase, lenders began asking for appraisals to determine the likelihood that the 

amount loaned could be recovered by the sale of the underlying collateral if the even to occurred 

that the borrower no longer paid. Then as it became apparent that homes were investments with 

appreciating value which created paper equity but not liquidity, the appraisal became a method to 

value the asset so an owner could exchange paper equity for cash or access to a credit facility to 

increase liquidity. 

So, there are actually two different reasons for an appraisal to be desired and each of those 

reasons drives a different set of expectations and motivations and needs. In the first, the purchase 

, IMMAAG is a Colorado for profit information company founded in 2008 to provide the tens of thousands of small 

and independent mortgage brokers and originators a clearing house and information source regarding legislative and 

regulatory activity affecting their business and customers and with 2,900% growth in registered users since January 

2010 has evolved into a centcr for advocating their common causes. 
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of a home, the seller is interested in an appraised value that supports the asking price, It would be 

naive to believe the seller wants a lower value when trying to sell. On the other hand the buyer, 

even though few act this way, really wants a value that is as low as possible, but buyers generally 

operate as though they simply want a value that supports their emotional desire to buy a home, In 

the sales transactions, everything else being equal the buyer stands mostly on the sidelines with 

respect to the appraisal process and valuation. The lender simply wants accuracy so they are 

confident that the loan to value they believe they have will be adequate to recover the loan 

balance and costs associated with recovery. 

On the other hand, the majority of appraisal transactions today do not support a purchase / sale. 

In fact, based on the Mortgage Banker Association's most recent report, refinances comprise 

almost 80% of the weekly applications for mortgages. In a refinance there are only two 

participants and their objectives are not congruent. The borrower wants the highest appraised 

value possible and the lender continues to want accuracy. This is a pure financial transaction, not 

a real estate transaction. I point this out because on today's panel the subcommittee will hear 

from a trade association representing the real estate community, but will take no testimony from 

stat~ licensed mortgage brokers who represent a material portion of the delivery process 

affecting this huge segment of the transactions requiring appraisal. 

The committee is seeking answers to the regulatory impact of appraisal oversight on consumers 

and business and wiII not have the advantage of hearing from the professionals who live and 

work in the local market and must process the transactions which have been negatively affected 

by reactions based on misinformation and misunderstanding. 

Possibly more than any single change, the unilateral action taken by then New York State 

Attorney General Andrew Cuomo to threaten a law suit against Fannie Mae and Freddie Mac 

which resulted in a negotiated settlement leading to the Home Valuation Code of Conduct has 

harmed the housing market, cost consumers the loss of paper equity and net worth to the tune of 

trillions of dollars and has resulted in a process that has become imbedded so deeply that even 

when the Dodd Frank Act terminated the policy, the FHF A and FHA refused to change their 

HVCC inspired policies. 

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It is one thing for oversight when there is proof of haml, inefficiency or ineffectiveness. It is 

another thing entirely for powerful people to use their position to unilaterally influence industry 

based on anecdotal information and unsupported allegations. For all intents and purposes it is 

this cause that has led to existing appraisal processes which not only harm consumers through 

artificial value suppression, but harms the appraisers it ostensibly was designed to protect. 

The Home Valuation Code of Conduct was a draconian flexing of the muscles of a single state's 

attorney general. It was so effective in changing the landscape that even after the Congress 

terminated it through the passage of the Dodd Frank Act, FHF A and FHA refuse to change the 

policies implemented specifically to support HVCC. 

To address the committee's questions I will simply bullet point some of the impact of the 

regulatory oversight of the appraisal process. Unfortunately, with the exception of elevating the 

public awareness one power oriented official's stature the reeent misdirected actions with respect 

to appraisals has produced only negative results: 

Fraud: A driving reason for HVCC and resulting regulation is to reduce valuation 

fraud. According to MARl reports since HVCC's inception valuation fraud, to the extent it can 

be truly measured or estimated has not improved. 

Transportability: One of the elements of the Dodd Frank Act in Section 1472(h) direeted the 

regulators to insure appraisal transportability between lenders. This aspect of the law continues 

to be ignored and has not been addressed to date by regulation and the result is to make mortgage 

delivery ineffieient, delay closings and increase consumer costs because generally while lenders 

pay lip service, transportability is not a widely supported practice. 

Appraiser Competence: One of the most dramatic consequences of regulatory oversight, 

and I include the HVCC in that category in spite of the fact that it was a forced policy, not 

regulation per se, is the fact that thousands of eompetent, experienced appraisers have been 

driven out of the industry due to the oncrous requirements supported by HVCC and the Dodd 

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Frank Act. You will hear about this from loday's witnesses. Not only has the competence of the 

appraiser community generally declined, with respect to geographic competence, since many of 

the AMC's are out of the state in which the property is, often the appraiser selected because they 

are willing to work for less and be subject to the rules of the AMC, is without the local expertise 

necessary to truly provide the value insights of a particular community. 

Appraiser Compensation and Consumer Cost: Because of the practically mandatory use of 

a new middle man, the AMC, two things have happened in tandem, both negative. Appraisers 

whose fees have always been driven to competitive levels by the market have been reduced by 

rcquiring revenue for the AMC. At least a portion of this change has been borne by the consumer 

in the form of higher prices. In addition, when combined with the ineffective application of 

transportability, which was less frequently needed when local experts, the loan originators, 

ordered appraisals from local experts, the appraiser; many more redundant appraisals are 

necessary today leading to increased consumer cost and delayed closing or failed transactions. 

Inefficiency and Complexity: The result of the myth-based reaction to a perceived, but 

unproven market issue, instead of achieving the stated goals of simplicity, clarity and accuracy 

the current regulated processes have led to market inefficiency and a level of complexity that 

fruSIfafes sellers, buyers, lenders and leads to increased costs and failed transactions. 

Housing Recovery: Possibly the most significant bottom line impact of the overzealous, 

misdirected and draconian intrusion in the market is the suppression on housing prices and 

recovery. 

The committee will hear a variety of other insights from the witnesses, but IMMAAG believes 

that while there is value in regulatory guidanee and it is difficult to escape an overreaction due to 

the depth of this century's financial crisis, this committee needs to send a message to the 

regulators that HVCC has been terminated and it is time to allow industry and the distribution 

system to return to the local, on the ground delivery mechanisms which were effective for 

decades and only failed when artificially overheated housing appreciation combined with a glut 

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of unproductive, pent up capital led to excesses driven to convert locked up brick and mortar, 

paper net worth to spendable net worth. 

There is no easy answer, but the chosen path has proven it is an obstacle to, not a solution for the 

problem the regulators feel they need to solve. Appraisal regulation has become the poster child 

for the wrong approach. Hopefully, our regulators and Congress can learn from that and reset the 

course by engaging industry in designing an effective solution. 

In closing, I would like to make one final observation for the committee. Mortgages are 

delivered locally. Mortgage brokers (now called originators) were excluded from participating in 

the appraisal order process due to HVCC. Even in the face of congrcssional attempts to reverse 

that inappropriate reaction and even with the October 2010 termination ofHVCC, the FHFA and 

the FHA have continued in their Appraiser Independcnce Requirements (A.LR) to refuse to 

change the processes. They continue to refuse to allow the most expert, most professional control 

source to be a participant in what is arguably the most empirically based tool a lender has to 

assess its understands its exposure in a purchase or refinance. In October 2010 I personally spoke 

with the attorney at thc Federal Reserve Board who managed the Board's drafting and 

implementation of the Dodd Frank Act's rcquired appraisal independence rule and was told by 

·<Ms. Kathleen Ryan that the Board did not intend the interim final rule to exclude mortgage 

brokers from the appraisal ordering or delivery process. I thcn spoke with management at both 

FHF A and FHA and was told that thcy did not care and intended to simply continue in the spirit 

of HVCC. A bad, questionably motivated local threat of litigation has become the foundation of 

the process that is central to managing housing finance risk and the regulators have done nothing 

to address. IMMAAG asks the Congress and this committee to take on that task and offers our 

expertise and the expertise of the thousands of state licensed mortgage loan originators who have 

not had a voice in this process to help. 

Thank you for accepting IMMAAG's comments. I look forward to the opportunity to assist. 

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