Testimony 

Before the Subcommittee on Housing and 

Transportation, Committee on Banking, 

Housing, and Urban Affairs, U.S. Senate

United States General Accounting Office 

GAO

For Release on Delivery 

Expected at 2:30 p.m. EST 

Wednesday, March 24, 2004 REGULATORY PROGRAMS

Opportunities to Enhance 

Oversight of the Real Estate 

Appraisal Industry 

Statement of David G. Wood, Director 

Financial Markets and Community Investment 

GAO-04-580T 
www.gao.gov/cgi-bin/getrpt? GAO04-580T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact David G. Wood 

at 202-512-8678 or woodd@gao.gov. 

Highlights of GAO-04-580T, a testimony 

before the Subcommittee on Housing and 

Transportation, Committee on Banking, 

Housing, and Urban Affairs, U.S. Senate 

March 24, 2004

REGULATORY PROGRAMS 

Opportunities to Enhance Oversight of 

the Real Estate Appraisal Industry 

Title XI created a complex oversight structure for real estate appraisals and 

appraisers that involves private, state, and federal entities. Two private 

entities under the Appraisal Foundation establish uniform rules for real 

estate appraisals and set minimum criteria for certifying appraisers. State 

regulatory agencies certify appraisers based on these criteria. In addition, 

states (1) implement licensing of real estate appraisers and (2) monitor and 

supervise compliance with appraisal standards and requirements. The 

federal financial regulators oversee financial institutions’ use of appraisals, 

and a federal agency, the Appraisal Subcommittee, monitors the functions of 

the entities. As part of its oversight activities, the Appraisal Subcommittee 

performs field reviews of the state appraiser regulatory agencies. GAO 

found that these reviews and their resulting reports could be more useful if 

based on clear and consistent criteria for assessing states’ compliance with 

Title XI requirements. 

All of these entities except the federal financial regulators identified 

potential impediments to carrying out their Title XI responsibilities. The two 

private entities stated that fund limitations could impede their ability to 

ensure that development of standards and qualifications evolve with 

changing conditions. State agencies said that funding shortfalls hindered 

their ability to enforce compliance. Appraisal Subcommittee staff reported 

that rule-making authority and additional enforcement sanctions could 

facilitate its oversight of state compliance with Title XI. The lack of funding 

and resources cited by state appraiser regulatory agencies and the two 

private entities, which establish appraisal standards and appraiser 

qualification criteria, could affect their future ability to fulfill their Title XI 

responsibilities. At the same time, the Appraisal Subcommittee has 

accumulated an operating surplus of almost $4 million from fees levied and 

collected by the states on behalf of the federal government. 

Industry participants raised concerns about aspects of the Title XI regulatory 

system for appraisers. They cited differences in state regulation that affect 

both lenders and appraisers, gaps in Title XI’s coverage—for example, 

transactions of less than $250,000 do not require an appraisal, high fees and 

burdensome processes for having appraiser education courses approved, 

and weak enforcement and complaints processing. Some industry 

participants felt that states, traditionally involved in regulating professions, 

should solely regulate the appraisal industry. Others felt that the current 

structure needed a significant overhaul to become effective. GAO found no 

clear consensus among the state regulatory agencies it surveyed or other 

industry participants regarding the need for or impact of possible changes to 

the Title XI regulatory structure. 

The appraisal and mortgage lending 

industry has changed dramatically 

since the passage of Title XI of the 

Financial Institutions Reform, 

Recovery, and Enforcement Act of 

1989. Some have concluded that 

the problems Title XI was intended 

to address—the risk to the federal 

deposit insurance funds and the 

lack of uniform standards and 

qualifications—no longer exist. 

This statement is based on GAO’s 

May 14, 2003, report and discusses 

the roles of private, state, and 

federal entities that oversee the 

appraisal industry; the challenges 

that Title XI presented to these 

entities; and industry participants’ 

concerns about the effectiveness of 

the Title XI regulatory structure. 

In its report, GAO suggested that, 

among other things, the Chairman 

of the Appraisal Subcommittee 

should: 

• develop and apply consistent 

criteria for determining and 

reporting states’ compliance 

levels with Title XI; 

• explore potential options for 

assisting states in carrying out 

their Title XI activities, 

particularly for investigating 

appraiser complaints; and 

• explore alternatives for 

providing future Title XI grant 

funding to the Appraisal 

Foundation and its two boards. 

The Appraisal Subcommittee 

generally agreed with our 

recommendations and has taken 

actions to address them. 
Page 1 GAO-04-580T Real Estate Appraisal Oversight 

Mr. Chairman and Members of the Subcommittee: 

I appreciate the opportunity to be here today to discuss our report on 

federal oversight of the real estate appraisal industry.1

 In response to 

concerns that faulty and fraudulent appraisals played a major role in the 

savings and loans crisis of the 1980s, Congress enacted Title XI of the 

Financial Institutions Reform, Recovery, and Enforcement Act of 1989 

(FIRREA). Among other things, Title XI requires that real estate appraisals 

used in connection with federally related transactions be performed in 

writing, in accordance with uniform professional standards, and by 

individuals whose competency has been demonstrated and whose 

professional conduct is subject to effective supervision.2

My statement today, which is based on our May 2003 report, discusses (1) 

the specific responsibilities of the entities that comprise the Title XI 

oversight structure, (2) factors which these entities identified as potential 

impediments to carrying out their Title XI responsibilities; and (3) 

concerns expressed by the entities and industry participants about the 

effectiveness of the existing regulatory structure. In preparing our report, 

we reviewed FIRREA and its legislative history; interviewed officials from 

the entities involved in the Title XI regulatory structure; and surveyed 

appraiser regulatory agencies in the 50 states, the District of Columbia, 

and U.S. territories.3

 Additionally, we met with officials and 

representatives of Fannie Mae and Freddie Mac, government sponsored 

enterprises (GSEs) that establish standards for appraisals associated with 

mortgages they purchase; the Department of Housing and Urban 

Development (HUD), which establishes appraisal requirements for its 

 1

U.S. General Accounting Office, Regulatory Programs: Opportunities to Enhance 

Oversight of the Real Estate Appraisal Industry, GAO-03-404 (Washington, D.C.: May 14, 

2003). 

2

As defined in Title XI, federally related transactions are real estate transactions involving 

financial institutions regulated by the federal government. These include banks, thrifts, and 

credit unions. Real estate transactions of mortgage bankers, brokers, pension funds, and 

insurance companies are not included. 

3

The territories included in our survey are Guam, Northern Mariana Islands, Puerto Rico, 

and the Virgin Islands. The only other U.S. territory—American Samoa—did not have a 

regulatory oversight structure for appraisers. We received responses from all but one 

survey recipient (U.S. Virgin Islands). In this testimony, the term “states and territories” 

refers to the 50 states, the District of Columbia, Guam, the Northern Mariana Islands, and 

Puerto Rico. 
Page 2 GAO-04-580T Real Estate Appraisal Oversight 

insured mortgages; trade groups representing appraisers and mortgage 

lenders; appraiser education providers; and academic experts. 

In summary, we found the following: 

Title XI created a complex regulatory system that relies upon the actions 

of private, state, and federal entities to help assure the quality of appraisals 

and the qualifications of appraisers used in federally related transactions. 

• Two private entities—the Appraisal Standards Board and Appraiser 

Qualifications Board—respectively establish (1) uniform rules for 

preparing and reporting real estate appraisals and (2) minimum 

qualification criteria for certified real estate appraisers. Certified real 

estate appraisers are one of the two categories of appraisers listed in Title 

XI, the other being licensed real estate appraisers. 

• States establish the minimum qualification criteria for licensed real estate 

appraisers. In addition, states (1) implement the certification and licensing 

of all real estate appraisers and (2) monitor and supervise compliance with 

appraisal standards and requirements. The states and territories have 

established structures typically consisting of a state regulatory agency 

coupled with a board or commission to establish education and 

experience requirements, license and certify appraisers, and monitor and 

enforce appraiser compliance. 

• The Board of Governors of the Federal Reserve System (FRS), Federal 

Deposit Insurance Corporation (FDIC), Office of the Comptroller of the 

Currency (OCC), Office of Thrift Supervision (OTS), and National Credit 

Union Administration (NCUA)—hereinafter referred to as “the federal 

financial institution regulators”—are responsible for ensuring that real 

estate appraisals used by federally insured depository institutions comply 

with Title XI. The regulators have (1) adopted rules and policies specifying 

transactions for which regulated financial institutions are required to 

obtain an appraisal by a certified or licensed appraiser, (2) developed 

examination procedures to ensure that regulated financial institutions are 

in compliance with Title XI, and (3) appointed agency representatives to 

the Appraisal Subcommittee. 

• The Appraisal Subcommittee, which was created by Title XI, is responsible 

for monitoring the implementation of Title XI by all parties—private, state, 

and federal. The subcommittee monitors the efforts of the federal financial 

institution regulators in developing and adopting appraisal-related 

regulations and policies, conducts periodic reviews of each state’s 

licensing and certification program, monitors and reviews the Appraisal 
Page 3 GAO-04-580T Real Estate Appraisal Oversight 

Foundation, and provides grants to the Foundation to support the Title XIrelated activities of its two boards—Appraisal Standards Board and 

Appraiser Qualifications Board. 

Entities involved in the Title XI regulatory structure described a number of 

factors that they believe constrain their ability to perform more effectively 

and efficiently. For example, officials of the Appraisal Standards Board 

and the Appraiser Qualifications Board told us that insufficient federal 

grant funding may impede their ability in the future to ensure that 

standards and qualifications evolve with changing conditions, such as how 

to appraise contaminated or polluted properties. State appraiser 

agencies—which are funded at the state level—reported resource 

limitations as the primary impediment in carrying out their oversight 

responsibilities. For example, of the 54 states and territories that 

responded to our survey, 26 reported that the current number of 

investigators was insufficient for meeting the states’ regulatory 

responsibilities, 37 cited a need for increasing the staff directed at 

investigations, and 22 cited a need for more resources to support litigation. 

The five federal financial institution regulators reported no major 

impediments to carrying out their Title XI responsibilities. The Appraisal 

Subcommittee reported that rule-making authority and additional 

authority to ensure state compliance with Title XI could facilitate its 

monitoring of state compliance with Title XI. Subcommittee officials 

stated that the only mechanism available under Title XI for effecting state 

compliance is to decertify a state, which would prohibit all licensed or 

certified appraisers from that state from performing appraisals in 

conjunction with federally related transactions and have a devastating 

effect on the real estate markets and financial institutions within that 

state. However, the Appraisal Subcommittee stated that it has always been 

able to achieve states’ compliance under the current enforcement and 

regulatory structure. 

Officials of the regulatory agencies, appraiser trade groups, education 

providers, the mortgage industry, HUD, and the GSEs voiced concerns 

about Title XI’s regulatory structure. However, we noted no clear 

consensus on the need for or impact of possible changes. Some industry 

participants stated that a growing number of real estate transactions, such 

as those placed through mortgage brokers and those falling below a dollar 

threshold set by the federal financial institution regulators, are not 

universally subject to Title XI appraisal requirements. In addition, some 

industry participants cited concerns with the lack of a national 

qualification criteria for the licensed real estate appraiser category. 

Education providers and appraiser trade groups expressed concerns about 
Page 4 GAO-04-580T Real Estate Appraisal Oversight 

the Appraiser Qualifications Board’s fees and requirements for instructor 

certification and course approval. Federal and state regulatory officials 

expressed concern about the apparent reluctance of lending institutions to 

make referrals or complaints regarding questionable appraisals they 

identify. HUD and GSE officials expressed concerns about a lack of 

consistent and effective enforcement actions by the states on referred 

cases and the adequacy of the Appraisal Subcommittee’s oversight of state 

programs. 

We made four recommendations to the Appraisal Subcommittee intended 

to enhance the effectiveness of the existing regulatory structure. As of 

March 17, 2004, the Appraisal Subcommittee reported that it has taken 

action on three of the recommendations: to (1) develop and apply 

consistent criteria for determining and reporting states’ compliance with 

Title XI; (2) explore options, including drawing on its surplus, for 

addressing Appraisal Foundation grant shortfalls; and (3) provide nonfinancial assistance to aid the states in carrying out their Title XI 

responsibilities. The Appraisal Subcommittee reported that it attempted 

but has not been successful regarding our fourth recommendation, which 

was to coordinate with Fannie Mae, Freddie Mac, and HUD to improve the 

process of referring problem appraisals to state appraiser agencies for 

enforcement. 

An appraisal is an opinion of the value of a property as of a specific date. 

Appraisers generally consider a property’s value from three points of 

view—cost, income, and comparable sales—and determine an estimated 

value based upon weighing the three valuation methods. The comparable 

sales approach, which compares and contrasts the property under 

appraisal with recent offerings and sales of similar property, is usually 

considered most appropriate for estimating the value of residential real 

estate. 

The primary role of appraisals in the mortgage loan underwriting process 

is to provide evidence that the collateral value of property is sufficient to 

avoid losses on loans if the borrower is unable to repay the loan. 

Consumers often mistakenly assume that appraisals are intended to 

validate the purchase price of the property in question. Furthermore, 

appraisals are sometimes confused with home inspections, which are 

intended to warn consumers about serious defects in the home being 

purchased that should be repaired. In a loan transaction, the lender rather 

than the borrower engages the appraiser, and this usually occurs after the 

borrower has agreed to purchase the property. 

Background 
Page 5 GAO-04-580T Real Estate Appraisal Oversight 

The primary purpose of the appraisal reforms contained in Title XI was to 

assist in protecting the federal deposit insurance funds—and, by 

extension, mortgage lenders—from avoidable losses. Officials of the 

federal financial institution regulators noted that faulty and fraudulent real 

estate appraisals have been associated with losses incurred by federally 

insured financial institutions and have resulted in financial harm to 

individual consumers. However, all of the regulators stated that real estate 

appraisals have not been a major factor in the failure of depository 

institutions since the passage of Title XI. 

Private, state, and federal entities have responsibilities under the Title XI 

regulatory structure. Private entities—the Appraisal Standards Board 

(ASB) and the Appraiser Qualifications Board (AQB)—establish minimum 

standards for the development and reporting of real estate appraisals and 

minimum qualification criteria for certified appraisers. States are 

responsible for certifying appraisers, using education and experience 

requirements that, at minimum, meet AQB criteria, and for enforcing 

compliance with appraisal standards. States may also license appraisers 

using state-established licensing criteria. (For those states that had both, 

experience and education requirements for certified real estate appraisers 

exceeded those for licensed real estate appraisers.) The federal financial 

institution regulators establish appraisal requirements for the insured 

depository institutions under their jurisdiction and monitor compliance 

with their regulations. Lastly, the Appraisal Subcommittee has primary 

responsibility for monitoring and reviewing the actions of the private, 

state, and federal entities as they relate to Title XI. 

The Appraisal Foundation, a nonprofit educational organization composed 

of groups from the real estate industry, provides the organizational 

framework for the ASB and AQB to carry out their Title XI-related 

responsibilities.4

 The ASB is responsible for setting standards for 

appraisals, which are contained in its Uniform Standards of Professional 

Appraisal Practice (USPAP). Under Title XI, these minimum standards 

apply to all federally related transactions for which an appraisal is 

required. The standards cover both the steps appraisers must take in 

 4

The 2002 sponsors of the Appraisal Foundation consisted of eight appraisal organizations, 

four affiliate organizations (representing primarily the users of appraisal services), and one 

international appraisal organization. In addition, over 80 organizations, corporations, and 

government agencies are affiliated with the Appraisal Foundation. 

Title XI Created a 

Complex Oversight 

Structure 

Appraisal Foundation’s 

Boards Establish Appraisal 

Standards and Minimum 

Appraiser Certification 

Criteria 
Page 6 GAO-04-580T Real Estate Appraisal Oversight 

developing appraisals and the information the appraisal report must 

contain. 

The AQB establishes the minimum education, experience and examination 

requirements for real estate appraisers that are set out in Real Property 

Appraiser Qualification Criteria and Interpretations of the Criteria. The 

AQB’s criteria cover four categories of appraisers—certified general, 

certified residential, licensed, and trainee—each with specific education, 

experience, examination, and continuing education requirements. Title XI 

does not require states to adhere to AQB criteria for licensed appraisers or 

for trainees. 

The ASB and the AQB regularly evaluate USPAP and the appraiser 

qualification criteria to determine whether revisions are needed. 

According to the Appraisal Foundation, both boards solicit comments 

from appraisers, users of appraisal services, and the public before making 

final changes. Since the AQB set its original criteria in 1991, for example, it 

has issued numerous interpretations and approved two revisions of its 

criteria. 

Under Title XI, states may establish agencies to certify and license 

appraisers. At the time of our survey, all 50 states, the District of 

Columbia, and 4 of the U.S. territories had established such agencies, 

which typically oversee the activities of appraisers for all types of 

transactions, including those that are federally related. All of the states 

and territories had established programs for certifying appraisers, and 

nearly 70 percent reported that they had introduced qualifications in 

addition to those established by the AQB. 

At the time of our review, 6 states did not provide for licensed appraisers, 

according to the Appraisal Subcommittee. Those that did and responded 

to our survey reported a variety of licensing requirements. For example, 

some states did not require licenses unless appraisers planned to work 

with federally related transactions, while other states required appraisers 

to be either licensed or certified to perform real estate appraisals, even for 

transactions that are not federally related. The states’ programs typically 

included temporary and reciprocal licensing provisions, though as 

discussed below, the provisions varied. (Title XI requires states to 

recognize on a temporary basis real estate appraisers who have been 

certified or licensed by another state if certain conditions are met, and 

encourages states to develop reciprocity agreements that readily authorize 

State Agencies Oversee the 

Licensing and Certification 

of Real Estate Appraisers 
Page 7 GAO-04-580T Real Estate Appraisal Oversight 

appraisers who are licensed by and in good standing with their home state 

to perform appraisals in other states.) 

In addition to conducting certification and licensing activities, states with 

certifying and licensing agencies are required under Title XI to provide the 

Appraisal Subcommittee with the names of those appraisers who become 

certified or licensed in accordance with Title XI, and to collect from them 

an annual registry fee that goes to the subcommittee. All of our survey 

respondents reported that they approve courses for appraisers’ education 

or training, enforce state regulations concerning appraisals, and 

investigate complaints. Over half of the states reported that they had 

adopted appraisal standards in addition to those set by the ASB. 

Although the states are responsible for the certification and licensing of 

appraisers, the Appraisal Subcommittee has a role in ensuring that state 

qualifications satisfy Title XI objectives. Under Title XI, the federal 

financial institution regulatory agencies are to accept a state’s 

certifications and licenses unless the Appraisal Subcommittee issues a 

written finding that the state certifying and licensing agency has failed to 

recognize and enforce the standards, requirements, and procedures of 

Title XI; does not have enough authority to carry out its functions under 

Title XI; or does not make decisions on appraisal standards and 

qualifications or supervise appraiser practices in a way that carries out the 

purposes of Title XI. 

Title XI requires that the federal financial institution regulators prescribe 

the categories of federally related transactions that should utilize a state 

certified appraiser and those that should utilize a state licensed appraiser. 

The statute provides that certified appraisers must be used for federally 

related transactions having a value of $1,000,000 or more. The federal 

financial institution regulators generally require the use of certified 

appraisers for commercial transactions of $250,000 or more and “complex” 

residential transactions of $250,000 or more. The regulators are 

responsible for determining whether other types of transactions warrant 

the use of a certified appraiser. All other federally related transactions, 

Federal Regulators 

Determine Which 

Transactions Require 

Appraisals and Establish 

Compliance Standards for 

Depository Institutions 
Page 8 GAO-04-580T Real Estate Appraisal Oversight 

unless subject to an exemption as authorized under Title XI, may utilize a 

state-licensed appraiser.5

Also, under Title XI the federal financial institution regulators may 

establish a threshold transaction amount at or below which neither a 

certified or licensed appraiser is required. As of March 15, 2004, each of 

the five regulatory agencies had regulations in place setting this threshold 

at $250,000. Thus, for federally-related mortgage loan transactions of 

$250,000 or less, financial institutions have the option of obtaining either 

an appraisal or some other form of an evaluation of the property’s value.6

The regulators have issued guidelines to the institutions under their 

jurisdiction that specify the requirements for evaluating real estate 

collateral for those transactions that do not require an appraisal. 

Title XI also requires the federal financial institution regulators to ensure 

that real estate appraisals used in connection with federally related 

transactions are performed in accordance with standards developed by the 

ASB. The regulators require that all appraisals for federally related 

transactions (1) conform, at a minimum, to USPAP, (2) be written, and (3) 

contain sufficient information and analysis to support the institution’s 

decision to engage in the transaction. 

The federal financial institution regulators may take informal and formal 

enforcement actions, including memorandums of understanding, removal, 

prohibition, and cease and desist orders and the imposition of civil money 

penalties, against institutions that violate their appraisal regulations. These 

actions can apply to contract (fee) appraisers as well as appraisers who 

are employees of the institutions and institution-affiliated parties. 

Moreover, pursuant to the FDIC Improvement Act of 1991, the federal 

financial institutions regulators can take action against institutionaffiliated parties such as appraisers. 

 5

Although the states are responsible for establishing and administering licensing 

qualifications, Title XI authorizes the federal financial institution regulators to establish 

additional qualification criteria. 

6

For more information on real estate evaluations, see U.S. General Accounting Office, Bank 

and Thrift Regulation: Better Guidance Is Needed for Real Estate Evaluations, 

GAO/GGD-94-144,(Washington, D.C.: May 23, 1994). In addition, the federal financial 

institution regulators issued Interagency Appraisal and Evaluation Guidelines on October 

27, 1994. 
Page 9 GAO-04-580T Real Estate Appraisal Oversight 

Title XI created the Appraisal Subcommittee within the Federal Financial 

Institutions Examination Council and established it as the principal federal 

agency responsible for monitoring the activities of the other components 

of the real estate appraisal industry oversight structure.7

 The 

subcommittee has six board members—designated by the five financial 

institution regulatory agencies that make up the Federal Financial 

Institutions Examination Council, and HUD—and seven staff members. 

The subcommittee funds its activities through a portion of the fees 

assessed by the states against individual appraisers for licensing and 

certification.8

Among other things, the subcommittee is responsible for: 

• Monitoring and reviewing the practices, procedures, activities, and 

organizational structure of the Appraisal Foundation, including making 

grants in amounts that it deems appropriate to the Appraisal Foundation 

to help defray costs associated with its Title XI activities. According to 

subcommittee officials, the subcommittee monitors the Appraisal 

Foundation by attending all significant meetings and events associated 

with its Title XI activities and reviewing all proposed changes or additions 

to its appraiser qualifications criteria or USPAP-related documents. In 

addition, the subcommittee reviews the Appraisal Foundation’s grant 

requests to ensure that the requested funds will only be used for activities 

related to Title XI. 

• Monitoring the requirements established by the states, territories, and the 

District of Columbia and their appraiser regulatory agencies for the 

certification and licensing of appraisers. Accordingly, the subcommittee 

performs on-site field reviews of state agency programs and maintains 

communications with appraisers, state and federal agencies, and users of 

appraisal services. The reviews cover open and closed complaints, 

approved and disapproved education providers and courses, state statutes 

and regulations on certifying and licensing appraisers, minutes of board 

meetings, appraiser registries and fees, temporary practice and 

reciprocity, and topical issues such as predatory lending, fraud, and illegal 

 7

The Federal Financial Institutions Examination Council is a formal interagency body 

empowered to prescribe uniform principles, standards, and report forms for the 

examination of financial institutions by the FRS, FDIC, OCC, OTS, and NCUA. 

8

Title XI authorizes the Appraisal Subcommittee to charge an annual registry fee of not 

more than $25. However, the Federal Financial Institutions Examination Council may 

approve fees up to $50 per year. As of March 15, 2004, the annual registry fee was $25. 

Appraisal Subcommittee 

Monitors Title XI 

Regulatory Activities 
Page 10 GAO-04-580T Real Estate Appraisal Oversight 

real estate flipping.9 The subcommittee issues the states letters at the 

conclusion of the reviews, identifying concerns, discussing whether the 

previous review’s concerns have been resolved, and making general 

conclusions about the state’s compliance with Title XI and Appraisal 

Subcommittee policy statements. 

Our analysis of the Appraisal Subcommittee’s state field review letters 

from 1992 to 2002 found that the letters provided some information to the 

state regulatory agencies but lacked evidence of transparent criteria for 

how the subcommittee determined and reported states’ compliance levels. 

For example, state field review letters were sometimes inconclusive about 

whether the state regulatory program was in compliance. Further, when 

the letters contained determinations of compliance, the rationale for the 

decisions was not always given. For example, some states with identified 

concerns were deemed compliant, while others with identified concerns 

were deemed noncompliant. Accordingly, we recommended that the 

subcommittee develop and apply consistent criteria to assess states’ 

compliance with Title XI requirements. 

• Monitoring the requirements established by the federal financial 

institution regulators regarding appraisal standards for federally related 

transactions and determinations of which federally related transactions 

will require the services of state-licensed or state-certified appraisers. The 

subcommittee carries out this responsibility primarily through informal 

channels. For example, all six Appraisal Subcommittee board members 

are involved in the offices responsible for appraisal regulation in their 

individual agencies and provide input from the subcommittee informally to 

the agencies. The subcommittee also provides technical assistance on 

proposed regulations on appraisal issues. 

• Maintaining a national registry of state-licensed and state-certified 

appraisers who may perform appraisals in connection with federally 

related transactions. 

 9

Illegal real estate flipping is a scheme where a real estate speculator buys a house, usually 

in a poor neighborhood, and obtains an inflated appraisal and other fraudulent financial 

documents to trick a lender into making a loan that exceeds the fair market value. The 

house is sold again at an inflated price to a second buyer. The seller has then made a large 

profit on the inflated value of the property. If the second buyer defaults on the loan, the 

mortgage lender may not be able to recoup the amount of the loan and will therefore 

experience a loss. 
Page 11 GAO-04-580T Real Estate Appraisal Oversight 

The private, state, and federal entities involved in the oversight of the real 

estate appraisal industry identified a number of factors that they believe 

could constrain their ability to fulfill their Title XI responsibilities. ASB 

and AQB officials stated that an impediment that they may face in the 

future is inadequate federal funding, which would hinder their ability to 

ensure that appraisal standards and qualification criteria keep pace with 

changes in the mortgage industry and marketplace. State appraiser 

agencies reported that they often lack funding to revise their regulations 

with every USPAP update and to cover the increasing cost of 

administering the licensing and certification processes. The federal 

financial institution regulators did not identify any major impediments to 

fulfilling their Title XI responsibilities, but noted that reaching consensus 

on regulatory standards was difficult because of the number of entities 

involved in the appraisal industry. Appraisal Subcommittee officials 

reported that rule-making authority and additional enforcement sanctions 

could facilitate the subcommittee’s oversight of state compliance. 

ASB and AQB officials told us that expected future funding shortfalls may 

limit the activities they believe enhance the quality, timeliness, and 

usefulness of standards and qualifications. For example, the AQB chair 

commented that funding is needed to update their “body of knowledge,” 

which outlines the concepts, theories, and applications of the real 

property appraisal profession and delineates the skill necessary to 

practice. According to ASB and AQB officials, the ultimate impact of 

funding shortfalls could be a weakening in the protections intended by 

Title XI because appraisal standards and appraiser qualifications may not 

keep pace with changes in the marketplace. 

Since 1991, the Appraisal Subcommittee has allocated the Appraisal 

Foundation a total of over $9 million in grants to defray the costs of the 

two boards’ Title XI-related activities. These grant allocations typically 

have been less than the amounts requested. For example, the ASB and 

AQB requested a total of over $9 million in grant money between 1994 and 

2003, but less than $7 million was approved. However, the Appraisal 

Foundation has sources of revenue other than the Appraisal 

Subcommittee grants. For example, the largest source of revenue for the 

Appraisal Foundation in 2001 was $1.1 million from publication sales; in 

comparison, the $870,373 grant from the Appraisal Subcommittee 

represented approximately 36 percent of the Foundation’s total revenue. 

Also, subcommittee officials noted that the ASB and AQB had not used the 

entire amounts of grant funds provided in past years. 

Entities Cited 

Potential 

Impediments to 

Fulfilling Their Title 

XI Roles 

The Appraisal Standards 

and Appraiser 

Qualifications Board Cited 

Concerns about Federal 

Funding 
Page 12 GAO-04-580T Real Estate Appraisal Oversight 

The Appraisal Subcommittee told us that it did not have the current-year 

funds to fully meet the ASB’s and AQB’s grant requests over the past 3 

years. However, the subcommittee had a $3.9 million surplus as of 

December 2003. Subcommittee officials reported that the surplus built up 

in its early years when revenues exceeded its expenses and grants. They 

added that as its expenses have increased—primarily due to inflation and 

monitoring activity expenses—the amount of funds available for grants to 

the ASB and AQB from current-year funds has become limited. They 

further explained that it has not been Appraisal Subcommittee policy to 

use the surplus to provide grants to the ASB and AQB. 

Appraisal Subcommittee officials also stated that they expect the boards’ 

expenses to increase by up to 5 percent per year. Given that the number of 

appraisers has remained static for the last several years, subcommittee 

officials did not anticipate their revenues, which are based primarily on 

licensing and certification fees, to increase. As a consequence, future ASB 

and AQB grants are expected to fall unless the subcommittee uses its 

surplus, raises the $25 fee that states collect from appraisers on the 

subcommittee’s behalf, or both. Accordingly, we recommended that the 

Appraisal Subcommittee explore potential options for providing future 

grant funding, including drawing on its surplus if necessary, to the 

Appraisal Foundation and its two boards in support of their Title XI 

activities. 

In responding to our survey, most of the states identified funding and 

staffing deficiencies as the most serious challenges they faced in carrying 

out their Title XI duties. According to Appraisal Subcommittee officials, 

the subcommittee’s general counsel analyzed whether the subcommittee 

could provide grants to the states to help provide funding for their Title XI 

activities, and determined that it lacked the necessary legal authority. 

Based on survey data, the average state agency had about 3 staff members, 

who were responsible for overseeing almost 2,000 appraisers. Many of 

these state agencies reported that they needed to share resources—

administrative staff, office space, investigators, or all three—with other 

state agencies in order to perform their Title XI duties. The survey results 

indicated that investigations of complaints about problem appraisers 

suffered most from these shortages. The majority of states sharing 

resources were sharing investigators, who often had no real estate 

appraisal experience. One state official explained that without adequate 

funding states could not effectively administer their appraiser certification 

programs or investigate and dispose of disciplinary cases in a timely 

States Cited Funding 

Limitations and Frequent 

USPAP Updates as 

Impediments 
Page 13 GAO-04-580T Real Estate Appraisal Oversight 

manner. Another state official noted that his agency knew that more 

enforcement and faster turnaround times in investigating complaints were 

needed but that limited resources hindered it. We recommended that the 

Appraisal Subcommittee explore potential options for funding or 

otherwise assisting the states in carrying out their Title XI activities, 

particularly the investigation of complaints against appraisers. 

Seventy percent of the state appraiser regulatory agencies indicated that 

USPAP updates were too frequent. One state reported that frequent 

changes to USPAP have made processing complaints difficult because 

staff members have to determine what appraisal standards were in place 

at the time of the questionable appraisal. According to ASB officials, 

USPAP has been in place for only 15 years, and annual updates have been 

needed because so many changes have occurred in the appraisal industry. 

Moreover, they told us that many of the changes that have been 

incorporated into USPAP are a result of requests from state regulators. 

The officials explained that over the years the ASB has experimented with 

different formats for updating USPAP but has found that issuing an annual 

publication has been the best way to ensure that everyone is using the 

same standards. The ASB and the Foundation are working on developing a 

future publishing schedule of having USPAP issued biennially. In addition, 

ASB officials stated that they have recently started providing state 

regulators with newsletters that highlight any changes, modifications, or 

clarifications to USPAP or appraiser qualification criteria. 

According to subcommittee officials, the lack of rule-making authority and 

limited enforcement powers make achieving the uniformity and 

standardization intended by Title XI more difficult. In addition, the 

officials noted that because the 55 state appraiser regulatory agencies took 

a variety of approaches to implementing Title XI, expanding the 

subcommittee’s role to allow it to issue regulations would help ensure 

greater consistency among the states in credentialing appraisers and 

enforcing the most current version of USPAP. However, giving the 

Appraisal Subcommittee rule-making authority would also change the 

subcommittee’s role under Title XI from a monitoring to a regulatory 

function. 

Subcommittee officials stated that currently the only the only means for 

ensuring state compliance with Title XI is to decertify a state. 

Decertification would prohibit all licensed or certified appraisers from that 

state from performing appraisals in conjunction with federally related 

transactions. Because this action is so severe and could significantly affect 

Appraisal Subcommittee 

Stated That Rule-Making 

Authority and 

Enforcement Options 

Could Facilitate Its 

Oversight of States 
Page 14 GAO-04-580T Real Estate Appraisal Oversight 

a state’s real estate market, the subcommittee has never used it, and its 

impact has not been tested. (In addition, the decertification action can be 

taken only for the limited purposes specified in Title XI and is subject to 

proof requirements and judicial review.) 

The Appraisal Subcommittee noted that its oversight of the states could be 

strengthened if it had more enforcement authority—for example, the 

authority to assess monetary penalties or to require that a state stop an 

activity or practice. However, in commenting on a draft of our report, the 

subcommittee stressed that it has always been able to ensure that states 

are complying with Title XI within the current supervisory and 

enforcement structure. 

Representatives of federal and state regulatory agencies, appraiser trade 

groups and education providers, and the mortgage industry expressed 

various concerns and conflicting viewpoints about the Title XI regulatory 

structure. However, there was no clear consensus regarding the need for 

or impact of possible changes. 

According to many of the groups we contacted, Title XI’s most significant 

shortcoming is the provision that leaves the criteria for licensed appraisers 

to each state, including decisions such as how often appraisers should be 

licensed and whether they should be licensed at all. According to an 

official from the Appraisal Subcommittee, Title XI’s intent was to ensure 

that appraisers for federally related transactions met minimum 

requirements for experience and education and had been examined in 

order to ensure a minimum level of competency. But Title XI specifically 

provides that the Appraisal Subcommittee will not set requirements for 

licensing and that any subcommittee recommendations are nonbinding. 

Some groups believe that this provision has led to a lack of uniform 

qualifications in licensing across the country (for example, in education 

and experience) and may also have helped to create an environment 

conducive to mortgage fraud. 

At the time of our review, officials from the Appraisal Subcommittee 

reported that most states have adopted provisions requiring that licensed 

appraisers meet AQB recommended criteria. However, six states did not 

have a state-licensed appraiser category, and six had licensing 

requirements that were less stringent than the AQB’s. As a result, 

Industry Participants 

Raised Various 

Concerns about the 

Title XI Oversight 

Structure 

Differences Among State 

Licensing Programs 
Page 15 GAO-04-580T Real Estate Appraisal Oversight 

subcommittee officials said, some licensed appraisers may not meet 

recommended qualifications criteria. For example, in 2002, one state 

passed legislation that eliminated the experience requirement for its 

licensed appraisers; and, in 2001, another state revised its licensing criteria 

to comply with AQB requirements but at the same time “grandfathered” in 

several hundred licensed appraisers. 

According to two regulatory officials, problems related to the lack of 

uniformity in licensing appraisers are compounded by the fact that Title XI 

also makes licensing voluntary at the state level. Voluntary licensing 

means that the state does not have a legislative requirement that 

appraisers be licensed or certified. However, the volunteer states do 

provide the opportunity for an appraiser to become licensed or certified in 

order to perform federally related transactions. As of March 2003, 10 states 

were classified as being in the voluntary licensing category. Some 

regulators, as well as one appraiser trade group, view voluntary licensing 

as a serious flaw in the industry’s regulatory structure and a probable 

contributor to mortgage fraud. Moreover, voluntary licensing may 

indirectly place the onus on financial institutions to ensure that appraisers 

for federally related transactions have the appropriate qualifications. One 

federal financial institution regulator reported that most of the mortgage 

fraud problems it has encountered have occurred in states where licensing 

is voluntary. An earlier Federal Bureau of Investigation testimony at a 

special congressional hearing on predatory lending in March 2000 echoed 

this view. According to that testimony, the most egregious property 

flipping problems have occurred in states where licensing is voluntary for 

transactions that are not federally related. 

Industry participants also cited a lack of uniformity in the way states grant 

temporary and reciprocal licenses. Because a state may not recognize the 

credentials from another state, appraisers often have to carry multiple 

state licenses. The Appraisal Subcommittee has issued policy statements 

on temporary practice and encouraging reciprocity. However, our survey 

indicated that state regulatory agencies continue to vary widely on these 

issues. For example, of the 53 states and territories that responded to this 

question, 40 issued temporary licenses for single assignments, 16 allowed 

an appraiser only one temporary license at a time, and 15 limited the 

number of temporary licenses an appraiser could receive annually. Six of 

the 54 respondents to our survey indicated that visiting appraisers are 

required to pass a state exam in order to receive a reciprocal license. This 

practice is inconsistent with the Appraisal Subcommittee’s guidance 

recommending that states accept licenses or certification from other 

states meeting AQB requirements. 
Page 16 GAO-04-580T Real Estate Appraisal Oversight 

Industry participants also voiced concerns about the fact that Title XI does 

not cover all financial institutions and that mortgage brokers are not 

subject to federal regulation. When Title XI was enacted, federally 

regulated lending institutions (banks, thrifts, and credit unions) made 

most mortgage loans. Today, other financial institutions, such as mortgage 

bankers and finance companies, account for a substantial share of the 

mortgage marketplace. Many of these financial institutions that are not 

federally regulated, as well as an increasing portion of regulated financial 

institutions, use mortgage brokers to originate loans, so that these brokers 

now originate about 50 percent of all mortgage loans. These entities and 

individuals may have state licenses, but they are not monitored by federal 

or state entities through, for example, examinations or audits.10 Appraisers 

have anecdotally reported that these originators pressure them the most to 

appraise properties at or near the purchase price to assure that the 

mortgage transaction will occur. 

Some industry participants have said that the $250,000 real estate 

appraisal threshold established by the federal financial institution 

regulators undercuts efforts to protect consumers. These groups believe 

that oversight of real estate appraisals should be geared toward the 

interests of consumers, who should be able to expect an unbiased, 

objective third-party opinion of the value of real property offered as 

security for a loan. However, Title XI was enacted in response to the 

impact of appraisal problems on federally insured depository institutions, 

and federal financial institution regulators have identified few problems or 

risks to depository institutions associated with loans valued below the 

$250,000 threshold. 

Several state regulators and education providers expressed concerns 

about the expenses and lack of uniformity in the processes associated 

with approving instructors and courses for appraisers’ continuing 

education. A representative of an appraisers’ trade group noted that 

gaining approval for a course and an instructor in one state does not 

necessarily translate into approval in other states. As a result, the trade 

group spent around $30,000 having courses for a July 2000 training 

conference approved in all jurisdictions. Some appraisal industry 

 10Fannie Mae officials noted that when an appraisal is required for a mortgage that will be 

delivered for sale to the GSE, mortgage brokers must use appraisers that are state-licensed 

or certified in accordance with Title XI. 

Transactions Not Covered 

by Title XI 

Costs and Lack of Uniform 

Approval Processes for 

Appraiser Education 

Courses 
Page 17 GAO-04-580T Real Estate Appraisal Oversight 

participants believe that the added cost and procedures involved in 

acquiring approval in each state is overly burdensome. 

AQB officials told us that the board has set up a voluntary national system 

for approving courses and that these concerns had influenced their 

project. According to the AQB, the course approval program was designed 

to be a convenience for both course providers and state regulators while 

helping to ensure quality appraisal courses. However, AQB’s course and 

instructor approval programs have met opposition in some quarters. For 

example, some state officials and other industry participants stated that 

requiring AQB approval for all USPAP refresher courses and instructors 

and restricting course materials and examinations to AQB publications—

for which AQB charges a royalty fee—represent a conflict of interest. In 

addition, some education providers have stated that the fees charged by 

the AQB for its course and instructor approval are excessive. On the other 

hand, some state and federal financial institution regulators believe that 

the Appraisal Foundation and its boards possess expertise and resources 

the states do not have and thus are needed to ensure that the quality of 

appraiser education and training is not compromised. 

Similarly, some states and educators have expressed concern that the AQB 

and Appraisal Subcommittee have encroached upon state authority in 

setting certain appraisal standards and appraiser qualifications. For 

example, the regulatory agency and an education provider in one state 

objected to certain AQB education requirements for certified appraisers, 

in particular a requirement that education providers be certified through 

the AQB’s instructor certification program. As part of its industry 

monitoring function, the Appraisal Subcommittee reviewed those 

standards and determined that the AQB had acted appropriately in 

adopting them. The Appraisal Subcommittee also requested a legal opinion 

from the Legal Advisory Group of the Federal Financial Institutions 

Examination Council on the scope of AQB’s authority to adopt educationrelated standards for certified appraisers; the scope of the Appraisal 

Subcommittee’s responsibility in monitoring the AQB; and the Appraisal 

Subcommittee’s authority to oversee state regulators’ implementation of 

AQB standards.11 In a June 2002 opinion, the Legal Advisory Group 

concluded that the AQB’s and Appraisal Subcommittee’s actions appeared 

to be consistent with and authorized by Title XI. 

 11The Legal Advisory Group consists of the general or chief counsels of the FDIC, FRS, 

OCC, OTS, and NCUA. 
Page 18 GAO-04-580T Real Estate Appraisal Oversight 

Some industry participants reported a lack of uniformity in processing 

complaints and taking disciplinary actions against those problem 

appraisers that were referred to state regulatory authorities. We analyzed 

data states submitted to the Appraisal Subcommittee and found that the 

number of disciplinary actions taken differed widely. For example, one 

state reported taking only a single disciplinary action, while two other 

states accounted for over 25 percent of the 4,360 disciplinary actions 

reported as of October 31, 2002. 

Several entities reported that states’ complaint filing requirements ranged 

from simple to onerous. For example, some states require simply that 

complainants submit information on an allegation, while others accept 

complaints only on a specific form, or require that complaint documents 

be notarized or that complainants provide witnesses and testify against 

appraisers. Other concerns included: 

• The length of time needed to resolve complaints. For example, one state 

required 1 to 2 years, potentially allowing the appraiser to continue what 

might be fraudulent or questionable practices. 

• Statutes of limitations that pose an obstacle in penalizing appraisal 

violators. For example, statutes in at least three states prohibit both 

investigations into and punitive actions for unlawful appraisal activities 

that allegedly took place more than 3 to 5 years earlier. 

In addition to concerns about the complaint process, industry participants 

reported misgivings about outcomes, including disciplinary actions and 

feedback. For example, Fannie Mae officials commented that they had 

been dissatisfied with some state decisions on punitive actions and with 

the lack of feedback on actions that had actually been taken. The officials 

added that some states do not penalize appraisers for multiple violations if 

the appraisers have already been disciplined or do not tell complainants 

what action was taken. As an example, they noted that some states 

appeared to perform meaningful investigations and took appropriate 

actions while others appeared unwilling to investigate similar cases with 

comparable support and documentation. HUD officials echoed this view, 

saying that states typically do not take action when they are notified that 

an enforcement action has been taken against an appraiser. Another 

industry participant reported that there is little incentive to make referrals 

given the fact that there is no assurance that the state will take action. 

According to Appraisal Subcommittee officials, a number of states have 

told them that the referral information that Fannie Mae and HUD have 

Variations in State 

Regulatory Agencies’ 

Enforcement of Title XI 

Requirements 
Page 19 GAO-04-580T Real Estate Appraisal Oversight 

provided to the states is frequently in a format or manner that they cannot 

readily absorb or use. For example, some of the states indicated that they 

received over a hundred referrals from Fannie Mae as one group, which 

overwhelmed the states’ ability to review and investigate the referrals in a 

timely basis. Other states stated that the referrals were for real estate 

transactions for which the state’s statute of limitations had already 

expired. To improve the process for referring problem appraisals by 

entities that oversee or use real estate appraisals to the state appraiser 

agencies for possible enforcement actions, we recommended that the 

Appraisal Subcommittee work with Fannie Mae, Freddie Mac, and HUD to 

ensure that the referral of problem appraisals (1) are provided in a format 

that is useful to the state appraiser agencies and (2) facilitate the 

subcommittee’s efforts to monitor decisions made by the states regarding 

the supervision of appraiser practices. 

Among the various representatives of trade groups, education providers, 

and other industry participants that we contacted, there were differing 

opinions as to what, if any, changes were necessary to Title XI. Likewise, 

the responses to the survey that we sent to the state appraiser agencies did 

not indicate a clear consensus regarding states’ views of the impacts of 

eliminating some of the central aspects of the Title XI regulatory structure. 

Some officials from state appraiser agencies have expressed strong 

viewpoints regarding the need for changes to Title XI. For example, an 

official from one of the state appraiser regulatory agencies stated that the 

states are now in a position to oversee the real estate appraisal industry 

without any federal involvement, much as they do other professions. He 

suggested that Congress eliminate the Appraisal Foundation and the AQB 

and make the ASB independent and self-supporting. An official from 

another state regulatory agency said that to correct the present system’s 

problems, Congress would need to completely restructure the Title XI 

structure. He recommended eliminating the Appraisal Subcommittee and 

the Appraisal Foundation, replacing them with a new board at the federal 

level. The new board would represent the appraisal industry more broadly 

and have strong Congressional accountability. He also suggested that 

Congress clearly designate the states as having sole responsibility for 

administering and enforcing Title XI. 

However, our survey of the state appraisal agencies showed a wide variety 

of views. For example, 22 states and territories (41 percent) said that 

eliminating the Appraisal Subcommittee would enhance their ability to 

regulate appraisers, while 17 (31 percent) responded that eliminating the 

No Clear Consensus 

Regarding the Need for 

Changes to the Title XI 

Regulatory Structure 
Page 20 GAO-04-580T Real Estate Appraisal Oversight 

subcommittee would be a hindrance. The remaining states felt that not 

having the subcommittee would neither help nor hinder regulation. 

Similarly, 31 and 23 states, respectively, indicated that eliminating the ASB 

and AQB would hinder their efforts to regulate appraisers, while 10 and 21 

states, respectively, indicated that eliminating the ASB and AQB would be 

helpful. 

In conclusion, Title XI brought about significant changes in the real estate 

appraisal industry. According to federal financial institution regulators, 

real estate appraisals have not been a major factor in the failure of 

federally insured financial institutions since the passage of Title XI. 

However, opportunities exist to enhance the effectiveness of the current 

regulatory system to help ensure that federally related transactions are 

based on accurate assessments of the value of properties used as 

collateral for loans. 

Mr. Chairman, this concludes my prepared statement. I would be happy to 

answer any questions at this time. 

For further information on this testimony, please contact David G. Wood 

at (202) 512-8678, or Harry Medina at (415) 904-2000. Individuals making 

key contributions to this testimony included Alexandra Martin-Arseneau 

and Paul Thompson. 

Contacts and 

Acknowledgments 

(250193) 
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